Nations as well as well as individuals, caught up in a maze of important problems requiring immediate consideration and action, almost necessarily tend to neglect long time issues. In the war with Spain a patrol-boat captain, on being told that one of the crew had fallen overboard and that his craft had both sprung a leak and caught on fire, for the moment permitted the larger considerations of the blockade to recede into the background. It was a current saying in Washington during the Great War that a bad toothache would make even a Chief of Staff less conscious of the battlefront. There does appear to be a deep significance back of the fact that in recent years, punctuated as they have been by distractions of a major sort—by industrial unrest, widespread unemployment, catastrophic fluctuations in values and by sinister international events—the public interest in power has not only grown, but seems to be based increasingly on fundamental considerations.
At the outset possibly the question of rates—or rather of a single rate thought to be out of line with cost—is responsible for citizen interest in electric power. But the demand for cheap, plentiful and widely distributed electricity evinces a growing appreciation on the part of great masses of people that this way lies the elimination of drudgery and the growth of a freer life.
And now in this fourth decade of the twentieth century, through dust storms, gullying hillsides, eroding fields, floods and the lowering levels of subsurface waters, our people are gradually becoming aware that all is not well as to our basic resources of soil and water. We are warned that the United States is not a permanent country that unless we change our ways it may have less than a century left of virile national existence.
Conservation of natural resources is obviously a long-time issue. But unless it can be fostered immediately with action as energetic and insistent as in the case of war or famine or drought, the eventual ruin of all but a negligible percentage of our agricultural lands is in sight. We must learn to control waters as they fall on the land from the clouds and as they flow over our fields and in our streams. In the handling of these waters both upstream and downstream by methods we know now, and by others yet to be devised, the development and expenditure of hydro-electric power will be on a scale quite beyond the outlook of present-day financial accounting, but fully justified from the standpoint of social accounting.
The Necessary Power Policy.—These vast resources of electric power, lawfully possessed by the national government through a program of navigation improvement, conservation and national survival should be utilized. This utilization requires the immediate formulation of a national power program. Although these power resources came into being largely as a by-product in the furtherance of other and primary purposes, their use must involve all considerations affecting the public interest. Wherever a government acts, the public interest must be the touchstone of its action. A national power policy, therefore, should take into account fair rates based on cost and the development of an available culture for all the people, both urban and rural.
A power policy for the United States must recognize that the government, in the lawful exercise of its rights as a proprietor of property, remains always a government essentially charged with responsibility for the public welfare. In the use of vast resources of water power and in the disposal of the electric energy they produce, considerations of policy run far beyond mere proprietorship and must embrace the public functions for which governments exist.
When the United States acts in any field over which its authority extends, its actions must not only be consonant with its responsibility as a government, but must be commensurate, in conception and in execution, with the scope of that responsibility. New and grave problems, unknown even a generation ago, face the people of the United States. Throughout the whole area of constitutional authority, public action must be ruled by demonstrated social need. The Constitution itself is a living and growing thing. Its interpretation from time to time as an instrument of practical government requires an appropriate setting in political and sociological realism. Nearly one hundred and twenty years ago Mr. Chief Justice Marshall declared: "The subject is the execution of those great powers on which the welfare of a nation essentially depends. It must have been the intention of those who gave these powers to ensure, as far as human prudence could ensure, their beneficial execution. This could not be done by confining the choice of means to such narrow limits as not to leave it in the power of Congress to adopt any which might be appropriate, and which were conducive to the end. This provision is made in a constitution intended to endure for ages to come, and consequently, to be adapted to the various crises of human affairs."
Current cultural trends demand the immediate formulation of a national policy governing the application of electric energy to social purposes, whatever the sources from which it may be derived. The flexibility of this type of energy has made it a peculiarly vital factor in all our activities, in industry and in our homes. Making electric energy generally available at the lowest cost has become as important to the cultural life of the American people as are the services of communication and transportation. Although the possession of power resources has usually been an incident of other and primary purposes, the revenue from the generation and sale of power may be the critical factor that will pay for a comprehensive, coordinated program of conservation and the development of necessary public works.
Paramount Right.—Constitutional authority for the activity of the federal government in this field is referable either to the commerce clause of the Constitution or to the so-called general-welfare clause, or both. In most of the public works constructed to date, the possession of electric-power resources is a by-product of the construction of dams for the regulation of streams and improvement of navigation under the authority of the commerce clause. The courts have recognized the paramount right of the federal government to erect such dams in the general public interest even when it became necessary to destroy dams or power plants or canals built by private interests for private ends. "In such matters," the Supreme Court has held, "there can be no divided empire." The Court recently emphasized "the dominant authority of the federal government in the interest of navigation to erect dams and avail itself of the incidental water power."
The scope of that dominant authority has widened steadily with our developing knowledge of the factors which enter into the regulation of stream flow. Originally it was assumed that the public purpose could be attained by the construction of isolated flood-control dams and other works for the regulation of stream flow. Experience and scientific research have demonstrated that, to effect fully the public purpose of navigation, control of the influence of precipitation on stream flow must extend back through feeders, both on the surface and underground, even to the utmost sources of that flow—to the raindrops falling on the land. Dust storms, erosion, siltation, floods and low water are but the corollaries of navigation, and their control is essential to the proper promotion of navigation.
Courts and lawyers have usually referred to the commerce clause and the power thereunder to promote navigation as the basis of federal authority in the construction of dams and the resulting development of electric power. Certain wide activities, however, in the use and control of streams are referable to the power of Congress to tax and spend for the "general welfare." The conservation and proper use of land and water involve grave matters which have placed in jeopardy the very foundations of our national life. It is obvious that flood control, reclamation, changes in land use and prevention of soil erosion are not only within the power of the national government to promote the general welfare, but are within its solemn duty. Under the general-welfare clause the government is obviously limited to the spending of money and a jurisdiction reasonably incident to such expenditure. Recent decisions of the Supreme Court, however, have indicated the wide scope of this power and its availability for the solution of some of our greatest national problems.
Just as unemployment, the necessities of old age, reclamation and the protection of agriculture are proper objects of the general welfare, so a broadly conceived program of water and soil conservation in the interest of national survival falls clearly within this sphere of federal authority. The federal government may make loans and grants of moneys for these purposes and it may also regulate the use of the moneys, provided the regulation is not a coercive exercise of the police power reserved to the states.
Ownership and operation by the federal government of property resulting from such expenditures for the general welfare present certain other legal questions. The courts have had little occasion to date to survey and stake this area of federal authority. But there would seem to be no constitutional difficulty in justifying the device of government operation when this is the only practicable means of carrying forward an adequate conservation program.
The Government and Property Values.—In the construction of dams and other public works for navigation improvement, flood control, prevention of soil erosion, land reclamation and other conservation of natural resources, the government comes into possession of property of enormous value and potentiality. Included among these property values are water power and electric energy. The Supreme Court in a recent case upholding the constitutionality of the Tennessee Valley Authority Act in respect of the right of the Authority to sell energy generated at Wilson Dam, held that the lawful possession of this property carried with it the right to utilize the water power for the generation of electric energy and the right to sell the energy. The Court also held that it need not be sold at the generating plant but may be transmitted by the government to “seek a wider market.”
In the utilization of these property values by the sale of water, water power and electric energy, reasonable discretion reposes in Congress and the Executive. The government, although acting as a proprietor, must act also as custodian of a highly integrated public interest which runs far beyond a comprehensive program of water and soil conservation and must include the conservation of human values. When a government disposes of its property, both the characteristics of that property and the mode of its disposition may have a unique effect upon the public welfare. The disposition of electric energy is not a circumstance of relinquishing property once and for all time it is a continuous process of releasing energy and making it generally available. Federal power policy should be directed to the maximum development and the widest distribution of electric energy compatible with sound economy; and in defining "sound economy," primary account must be taken of the economic and social effects of that policy on the public welfare.
A Transmission Policy.— The electricity produced by multiple-purpose federal works should be transmitted by lines designed to become ultimately part of an integrated transmission system operated or effectively controlled by the appropriate agency or agencies of government. Whatever the instrumentalities—public or private—by which any part of a transmission system is constructed and operated, the ultimate direction and effective control must be in public hands.
The quantity, firmness and flexible availability of power provided by any transmission system operated or controlled by a federal agency should be promoted by inclusion of all public sources of energy, and so far as public interest justifies by interchange arrangements with favorable private sources of energy that might exist within the transmission area.
It is essential if maximum public benefit is to be realized from such surplus power, that it have right of access to the market, to all types of customers in the market, to necessary facilities for transmission and distribution, and to auxiliary facilities for firming it up and promoting its availability, usability and salability; and that there be no restriction of such rights through the activities of other agencies serving the market.
Private enterprises in this field exist as instruments of public service by virtue of grants and franchises of government—local, state and federal, acting within their respective spheres—and as licensees have no inherent rights or privileges antecedent to those granted them for the public benefit. In any policy for making available the electric energy produced in connection with public works, government in its relations with and influence on private enterprise should be restricted only by considerations relating to the maximum social serviceability of the works. These may lead to arrangements with private enterprise in order to utilize physical instruments already available for public service. Such arrangements must always be governed by the requirements of the public welfare as the essential consideration in all government action. The inherent nature of government and historic circumstances do not permit even momentary consideration of a partnership of equal powers in making appropriate arrangements.
Federal agencies will usually not undertake distribution to ultimate consumers when other adequate distribution service at reasonable schedules can be assured.
They may more effectively sell at wholesale to local distributing agencies, with such exceptions, however, as sales to consumers taking large quantities directly from the transmission system for industrial or similar purposes, and as sales for promotion of rural electrification. In making contracts, preference should be given to efficiently managed governmental and cooperative distributing organizations, and to such other distributing organizations as are legally in a position to agree to stipulations designed to assure maximum benefits to ultimate consumers.
As a general principle energy should be provided to all competent applicant distribution agencies—public, cooperative and private—within a transmission area, and to no one type exclusively except in accordance with the principle of preference already noted. In so far as costs of extension of transmission facilities and similar factors at any particular time set limits and compel selection, such selection should aim at the development of integrated distribution areas. However, so long as the government does not engage in distribution activities and depends on local agencies, integration of areas should not be made a condition precedent to the sale of energy. It would be inequitable to withhold service to one locality because contiguous localities are not disposed to cooperate; and under such conditions to make the principle of integration dominant would ignore present realities and sacrifice certain public interests that could and should be served— in fact, might negative any efforts towards an integrated system of widely distributed cheap power.
Price Criteria.—Federal policy should recognize the distinction between the establishment of general pricing policy and the actual determination of the rate schedule for a particular transmission area. In accordance with principles of organization and by agencies mentioned later, a general pricing policy should be determined for the entire United States, and there should be a separate and particular application of that general policy in making the rate schedule for each transmission area.
Service at the lowest reasonable cost to consumers, with the benefit of any favorable conditions attached to federal ownership and operation, should be the pricing principle of national power policy. This objective should be sought both in establishing wholesale rates and in stipulations influencing retail distribution rates. Lowest reasonable cost involves:
Rational allocation of the costs of multiple-purpose projects.
Amortization of the allocated cost of construction during the life of the property.
Taxes, as under the TVA, where a percentage of gross is paid to the states.
Cost of maintenance.
Cost of operation (administrative, commercial, technical) ; and cost of direct promotion of more extensive and more intensive use.
Exceptions to this governing principle, in the form of sale at less than cost as computed by conventional accounting methods, should be allowed only on special occasion in a particular area as a means toward achievement of some objective important to the national welfare, to gain which would effect a proper relation between costs and benefits in terms of social accounting.
The latter method represents a principle common to private enterprises. In private business that principle is to consider the profits and costs of items by groups— the combined profits and the combined costs—and to allocate overhead and other joint costs to each item in such manner that the result represents the maximum profits. In a business the problem of allocating joint costs is approached by consideration of ultimate net profits, and makes the allocation serve the purpose of private enterprise—all the profits the traffic will bear.
The same policy of pricing may be employed under an entirely different motivation—the social interest. In place of maximum money profits accruing to private ownership, the objective of public enterprise is maximum social benefits widely and equitably distributed. The allocations and costing formula applied to a particular situation will change as the social values change. Obviously any "final" allocation in the case of a unified river development is impossible until the improvements are virtually completed.
In making the wholesale rate schedule for any particular transmission area the principle of a common rate schedule for all sections of the area should govern, but its application should be within measurable limits. Generally, in any rational system of extension, the factor of volume and variety of consumption is a more important influence on unit costs than the factor of cost of transmission facilities. The more distant consuming increments in such a rational system of extension, in the large and in the long run, will reduce unit costs for all consumers by the added increments of their consumption, more than the costs of facilities to serve them will increase the unit costs. Furthermore, from the long-run social point of view it is desirable that the rate schedule be a decentralizing rather than a centralizing force in its influence on the distribution of population and of occupations. This will not prevent some price differential being allowed at and near the power site for a part of the output.
Yardstick Value.—The sale of surplus energy from multiple-purpose public works can be made to serve a useful purpose as a means of appraising alternative policies of production and distribution, measuring the relative efficiency of various operating methods and stimulating improvement generally in the technology of the industry and utilization of its product.
The advantages of public enterprise as a yardstick cannot be realized by attempting to set up a public enterprise in such manner as to duplicate a private enterprise in every detail, and then comparing the two. They are essentially different kinds of institutions, with different objectives. Comparison of the costs of identical component parts of technical operations by a uniform system of cost accounting can indeed be useful j but comparison of the costs of a public enterprise in its entirety with those of a private enterprise in its entirety is neither realistic nor practicable because of the variables involved. For instance, public agencies obtain their money at low rates and almost without exception amortize their investments. The private utilities, by their failure to amortize capital-debt, laid themselves open to the recent collapse of equity values.
It is a recognition of and experiment with the variables that is important. A public enterprise can make experiments and comparisons on many fronts that private enterprise cannot or will not make. It can explore such things as the advantages and disadvantages of mass consumption at low rates, the extent to which electricity can be used advantageously on farms, and the influence on productivity and costs of good wages and superior working conditions. It can explore the part to be played by electricity as the "coordinating agent" in the promotion of a comprehensive conservation program.
Its Administration.—The following principle of organization should be followed: (1) central determination of national power policy and central administration of conformity to general policy; but (2) regional operation and business management, and regional application of general policy (including the making of rate schedules) to regional circumstances. While it is essential that national policy be observed, if we allow these considerations to deprive regional authorities of the flexibility necessary to their realistic operation, we fall into the same centralization mania that has made the holding companies a liability to the utility industry. It is perhaps better to have electricity operations director from Washington than from New York. But that is not the choice. On the other hand, unless the regional agencies have a considerable measure of managerial direction, they will lose the vitality that results from dose contact with local conditions.
The transmission area of each particular major generating point, or of a combination of generating points within a natural region, should be considered an individual operating region. The boundaries of such a region should not be exclusively delimited by geographical definition, but should be determined by the relation among physiographic factors, market factors and the state of the technique of economical transmission of energy, and should be expanded or contracted according to circumstances.
Each region should be administered and managed by a quasi-autonomous public agency (an individual, a board or a commission) authorized to promote and manage and make contracts for the sale of electric energy generated as a by-product of public works in the region, to determine the rate schedule for the region in conformity with recognized national policy, and in general to pursue activities appropriate to the principles and policies hereinbefore discussed.
There should be established a central agency, or an existing agency should be utilized, to formulate general policy; audit the conformity of regional policies, rate schedules and operations to general policy and in general serve as an agency to establish general conformity to national policy and coordination among regional agencies, but not to serve as an operating, business or regional rate-making agency.
After twenty-five years of close association with the power field one cannot but be aware of the difficulties attending the putting into effect of any comprehensive national power policy. But those interested may well have in mind rather the growing intelligence and capacity of the American people—especially as we come to realize that our very life as a virile nation is tied up with conservation policies and that these in turn depend on power as the integrating factor.