WITHOUT APPROVAL THE JOINT RESOLUTION (S. J. RES. 49) ENTITLED "A JOINT RESOLUTION TO PROVIDE FOR THE NATIONAL DEFENSE BY THE CREATION OF A CORPORATION FOR THE OPERATION OF THE GOVERNMENT PROPERTIES AT AND NEAR MUSCLE SHOALS IN THE STATE OF ALABAMA; TO AUTHORIZE THE LETTING OF THE MUSCLE SHOALS PROPERTIES UNDER CERTAIN CONDITIONS; AND FOR OTHER PURPOSES

FEBRUARY 17 (calendar day, MARCH 3), 1931.-Read; ordered
to lie on the table and be printed

To the Senate:

I return herewith, without my approval, Senate Joint Resolution 49, "To provide for the national defense by the creation of a corporation for the operation of the Government properties at and near Muscle Shoals in the State of Alabama; to authorize the letting of the Muscle Shoals properties under certain conditions; and for other purposes."

This bill proposes the transformation of the war plant at Muscle Shoals, together with important expansions, into a permanently operated Government institution for the production and distribution of power and the manufacture of fertilizers.

Disregarding for the moment the question of whether the Federal Government should or can manage a power and fertilizer manufacturing business, we should examine this proposal from the point of view of the probabilities of success as a business, even if efficiently managed. Such an analysis involves a consideration of the capital invested, the available commercial power, the operating costs, the revenue to be expected, and the profit and loss involved from this set-up. The figures and estimates given herein are furnished by the War Department upon the authority of the Chief of Engineers.

VALUE OF THE OLD PLANT AND FURTHER CAPITAL OUTLAY REQUIRED

The following properties and proposed extensions are embraced in the proposed project:

(a) Wilson Dam and its hydroelectric equipment valued at $37,000,000 being the original cost of $47,000,000 less $10,000,000 applicable to navigation.

(b) The steam power plant at Muscle Shoals valued at $5,000,000 being a reduction for depreciation of $7,000,000 from the original cost of $12,000,000.

(c) Proposed further additions to the electrical plant at Muscle Shoals costing $9,000,000.

(d) Proposed construction of Cove Creek Dam with hydroelectric plant with transmission line to Wilson Dam $41,000,000 of which $5,000,000 may be attributed to flood control and improvement of navigation or, say, $37,000,000.

(e) Proposed construction of transmission lines for wholesale distribution of power within the transmission area--$40,000,000.

(f) Nitrate plants, quarries, etc., at Muscle Shoals which originally cost $68,555,000 but upon which no valuation is placed at present.

The total valuation of the old property to be taken over for the power portion of the project is therefore $42,000,000 after the above deductions from original cost. The new expenditures from the Treasury applicable to the power business are estimated at $90,000,000, less $5,000,000 which might be attributable to flood control, or a total of $127,000,000 of capital in the electrical project. This sum would be further increased by accumulated interest charge during construction. As shown later on several millions further would be required for modernizing the nitrate plants. The total requirement of new money from the Federal Treasury for the project is probably $100,000,000 even if no further extensions were undertaken.

AMOUNT OF POWER AVAILABLE FROM THIS PROJECT

Assuming the additional power given by the construction of the Cove Creek Dam and the use of steam power for five months in the dry season each year, and taking the average load factor from experience in that region, about 1,300,000,000 kilowatt-hours of continuous power could be produced annually. Considered as a general power business a portion of this must be held in reserve to protect consumers, leaving a net of about 1,000,000,000 kilowatthours annually of salable power. This amount would be somewhat increased if a large proportion of 24-hour load were applied to fertilizer manufacture.

The secondary power for a period of less than seven months in the year is not regarded as of any present commercial value.

OPERATING COSTS

The following is the estimated annual overhead and operating cost of the electrical end of the project including the steam plant necessary to convert 7-month secondary power into primary power as stated above:

Interest at 4 per cent per annum on capital of $127,000,000__.
Amortization ---.

Operating and maintenance cost of hydroelectric plant..
Operating and maintenance cost of steam plant----
Operation and maintenance cost of transmission lines..

Total_____

$5,080, 000

1, 890, 000

775,000

850,000

550,000

$9, 145, 000

The estimated cost of production and distribution is, therefore, about 9.1 mills per kilowatt-hour. If only part of the transmission lines were constructed it would decrease capital and operating charges but would not comply with the requirement of equitable distribution through the transmission area.

ESTIMATED GROSS INCOME

The purpose of the bill is to provide production and wholesale distribution of surplus power and to give preference to States, municipalities, and cooperative organizations. It further provides that the policy of the Government must be to distribute the surplus power equitably amongst States, counties, and municipalities within transmission distance of Muscle Shoals and provides for the construction of transmission lines to effect this purpose. Such a transmission. system for wholesale purposes only is estimated to cost $40,000,000. If it is proposed to sell power at retail to householders, then there would need be a great increase in the estimates of capital outlay and operation costs for such distribution.

The average gross income of the power companies in that territory, including retail as well as wholesale power, is about 12 mills per kilowatt-hour. This includes retail residential power averaging something over 50 mills per kilowatt-hour. Miscellaneous industrial power realizes about 10 mills per kilowatt-hour. The power sold wholesale to other companies and those engaged in municipal distribution averages about 7.2 mills per kilowatt-hour.

It is impossible to compute Muscle Shoals income under this project upon a basis which includes retail power sales, as this is a project for wholesale distribution only. It is impossible to compute it upon the basis of miscellaneous industrial rates as sales for industrial purposes from Muscle Shoals would presumably be mainly for manufacture of fertilizers and it would not be possible to average 10

mills per kilowatt-hour. A rate of not over 2 mills would be a large charge for such power. While the load factor would be improved by large use for this purpose, the net result, however, would be to diminish the gross income below the above rates from municipal and miscellaneous industrial services.

Assuming that the whole 1,000,000,000 kilowatt-hours should be sold to municipalities or other power distributors, it would on the basis of the realizations of the private companies of 7.2 mills yield a gross annual income to this project of about $7,200,000, or a loss upon this basis of nearly $2,000,000 annually. This territory is now supplied with power and to obtain such an income it would be necessary to take the customers of the present power companies. To secure these customers it would be necessary to undercut the rates now made by them. It is difficult to estimate the extent to which it would be necessary to go in such rate cutting in order to secure the business. In any event it would of course diminish estimated income and increase the losses.

It is obvious that any estimate of income contains a large element of conjecture as the proportions of industrial and municipal load can not be foretold. But any estimate of the income of the project as set up by this legislation will show a loss.

FERTILIZER MANUFACTURE

The plants at Muscle Shoals were originally built for a production of nitrates for use in war explosives. I am advised by the War Department that the very large development in the United States by private enterprise in the manufacture of synthetic nitrogen now affords an ample supply covering any possible requirements of war. It is therefore unnecessary to maintain this plant for any such purposes.

This bill provides that the President for a period of 12 months may negotiate a lease of the nitrate plants for fertilizer manufacture under detailed limitations, but in failure to make such a lease the bill makes it mandatory upon the Government to manufacture nitrogen fertilizers at Muscle Shoals by the employment of existing facilities or by modernizing existing plants or by any other process. I may state at once that the limitations put upon lessees in the bill are such that this provision is of no genuine importance. Inquiries have been made of the most responsible and experienced concerns that might possibly undertake such lease and they have replied that under the conditions set out in the bill it is entirely impractical for them to make any bid. The leasing provision is therefore of no utility; it may at once be dismissed. In consequence the project we have to consider under this bill is the manufacture of fertilizers by the Federal Government.

The Department of Agriculture reports that these plants are now more or less obsolete and that with power at even 2 mills per kilowatthour, with proper charges included, could not produce the products for which they are constructed as cheaply as these products are now being sold in the wholesale markets. Therefore, it would be necessary to modernize the equipment at an unknown cost in millions. There is no evidence as to the costs of nitrogen fertilizers by the newer equipment, and there is therefore no basis upon which to estimate the results to the Government from entering upon such a competitive business. It can, however, be stated with assurance that no chemical industry with its constantly changing technology and equipment, its intricate problems of sales and distribution, can be successfully conducted by the Government.

PROPOSED ADMINISTRATION

The first essential of all business is competent management. Although the bill provides for the management by three directors, the Congress must from the nature of our institutions be the real board of directors and with all the disadvantages to a technical business that arise from a multitude of other duties, changing personnel, changing policies, and regional interests. These three directors are to have political qualifications, as it is stipulated that not more than two shall be of one political party. They are to receive $50 per diem, but are limited to $7,500 each for the first year and $5,000 annually thereafter. The act provides that:

"All members of the board shall be persons that profess a belief in the feasibility and wisdom, having in view the national defense and the encouragement of interstate commerce, of producing fixed nitrogen under this act of such kinds and at such prices as to induce the reasonable expectation that the farmers will buy said products, and that by reason thereof the corporation may be a self-sustaining and continuing

In other words, they are to say that they believe in Government manufacture of fertilizers, and that it can be made a success on this set-up. We are thus supposed to appoint business administrators on the basis of their beliefs rather than their experience and competency. These directors are manifestly to have a political complexion and apparently the entire working force is likewise to have such a basis of selection, as the usual provision for the merit service required by law in most other Federal activities is omitted. Three men able to conduct a one hundred and fifty million dollar business can not be found to meet these specifications.