RAPID AMORTIZATION IN REGULATED INDUSTRIES TUESDAY, MAY 21, 1957 UNITED STATES SENATE, SUBCOMMITTEE ON ANTITRUST AND MONOPOLY OF THE COMMITTEE ON THE JUDICIARY, Washington, D. C. The subcommittee met, pursuant to notice, at 10:35 a. m., in the caucus room, Senate Office Building, Senator Estes Kefauver presiding. Present: Senators Kefauver (chairman) and O'Mahoney. Also present: Carlile Bolton-Smith, counsel to Senator Wiley; Peter Chumbris, counsel for the minority; Philip Layton and George Clifford, attorneys; Tom Collins, professional staff of Judiciary Com mittee. Senator KEFAUVER. The committee will come to order. Mr. Radin was scheduled to testify last Friday, but because we had to hear outof-town witnesses, he agreed to defer his testimony until a later time. So we have set aside this morning for Mr. Radin, and for Mr. Shipman, representing the National Farmers Union. Mr. Radin is speaking for the American Public Power Association. Mr. Radin, we will be glad to hear you now. STATEMENT OF ALEX RADIN, GENERAL MANAGER, AMERICAN Mr. RADIN. My name is Alex Radin. I am general manager of the American Public Power Association, 1025 Connecticut Avenue NW., Washington, D. C. The American Public Power Association is a national trade organization which represents more than 800 local publicly owned electric utilities in 40 States, Alaska, and Puerto Rico. I am pleased to have this opportunity of presenting the views of the association on the accelerated amortization program because we believe that a fundamental issue posed by the operation of this program in the electric utility field is one within the purview of this subcommittee, namely, monopoly. It is our understanding that the Congress, in enacting section 124A of the Internal Revenue Act of 1951 and section 168 of the act of 1954 intended to provide an incentive to industry for the construction of defense facilities. As we read the record of this program, we find no evidence that all or even a major portion of the electric utility projects assisted by grants of certificates of necessity were constructed primarily for defense purposes. Nor does any incentive seem to have been necessary since it appears that most of the projects aided by this program had to be constructed to meet the electric-energy requirements of power-company consumers, quite apart from considerations either of tax benefits or national defense. What this program has done, in our opinion, is provide Federal subsidies to private monopoly in the electric utility industry. This is poor fiscal policy hardly calculated to aid the national defense, and ultimately could have serious repercussions for all electric consumers. Certificates of necessity for rapid amortization for tax purposes issued to electric utilities by the Office of Defense Mobilization have been found by the Federal Power Commission to have "the precise effect of a grant by our Government to a certificate holder of an intrest-free loan." That is opinion No. 264, issued December 1953. Senator KEFAUVER. Mr. Radin, do you object to questions as we go along? Mr. RADIN. No, sir, I do not. Senator KEFAUVER. In this opinion 264 that you have just referred to, what was the title of that case, and will you tell us how the issue came up? Mr. RADIN. I don't believe I have the brief with me, Senator, but the purpose of this case was to determine the method to be used for tax accounting purposes insofar as grants of these certificates to electric utilities and other utilities were concerned. Senator KEFAUVER. All right; that is sufficient. Mr. RADIN. Last December a report prepared by the staff of the Joint Committee on Internal Revenue Taxation at the direction of the chairman of the Senate Committee on Finance, Senator Byrd, stated the situation more directly. The report declared that the rapid tax writeoffs are "bluntly, a subsidy." That report also focused attention on the monoply aspect of the rapid writeoffs by private power companies. One conclusion of the report was: "A striking thing about the tax amortization program in the electric-power field is that it is an incentive that operates only for private taxable utilities, and not for the publicly owned companies." Thus, the rapid amortization certificates are a subsidy which is being provided only to one portion of an industry, in this case to the private power companies, but not the local publicly owned electric systems and rural electric cooperatives. When we consider that approximately 4 of every 5 electric consumers in the Nation today are served by privately owned power companies, and that these companies alone may enjoy the benefits of these subsidies, it appears that this program may well result in the extension of an already imposing domination of the electric-utility industry to 100-percent monopoly. We can only view this program as a means of seriously weakening, if not abolishing, the competitive influence of the local consumer-owned electric systems-local publicly owned utilities and rural electric cooperatives. In short, if this program were permitted to continue to its logical conclusion, electric consumers and, indeed, the entire Nation-would be faced with one of the most powerful private monopolies ever known. Senator KEFAUVER. Mr. Radin, at that point, what is the proportion of service rendered by privately owned as against publicly owned utilities at the present time? Mr. RADIN. They serve about 80 percent of all electric consumers, Senator Kefauver. Senator KEFAUVER. And locally owned, or federally owned or State owned, or REA, serve the other 20 percent? Mr. RADIN. That is correct. Senator KEFAUVER. All right, sir. Mr. RADIN. The most flagrant example of how rapid writeoffs for private power companies are issued in direct conflict with the apparent intent of the law came last month. I refer, of course, to the certificates issued by the Office of Defense Mobilization to the Idaho Power Co. for two of its proposed dams in the Hells Canyon reach of the Snake River. Fast writeoff certificates were issued to Idaho Power for the Brownlee and Oxbow Dams on April 25 of this year. That was just last month-but let's go back in the record nearly 4 years. On July 7, 1953, in his opening statement before a Federal Power Commission examiner, counsel for Idaho Power declared: The applicant is here before you asking the privilege of constructing solely with its own money and without 1 cent of cost to the taxpayers of the United States a great multipurpose project along with an integrated hydroelectric project of large capacity. Senator KEFAUVER. Mr. Radin, who was the counsel for the Idaho Power Co. who made this statement, and was this the official statement of the position of the Idaho Power Co. ? Mr. RADIN. The counsel was Mr. Parry, and that was an official statement by an official representative of the company. Senator KEFAUVER. All right, Mr. Radin. Mr. RADIN. Does that sound as though the incentive of tax certificates was required to encourage the company to proceed with these dams? Does this sound as though the company felt it would need a subsidy? In December, after the company had applied for the certificates, but 40 months before they were granted, the president of Idaho Power Co. testified that benefits accruing from rapid amortization had not been figured in the company's planning, which he assured the Federal Power Commission was more than adequate for the contemplated construction of the proposed projects. Senator KEFAUVER. Mr. Radin, who is the president of the Idaho Power Co.? Is it Thomas E. Roach? Mr. RADIN. Yes; that is correct. It is interesting to note that, in response to a question concerning the possible percentage of the costs of the dams which might be approved for certificates, he concluded that it might be anything from 10 percent to, I suppose, 50 percent or-I don't know whether they have a ceiling on it now or not. In issuing the certificates last month for 65 percent of the cost of the dams, ODM apparently exceeded the highest hopes of the president of the Idaho Power Co. when the applications for certificates were filed. Some 20 months before ODM issued the certificates, the Federal Power Commission, in its order issuing a license to the company for the projects, formally found that Idaho Power "has shown the ability to finance" the dams. And in justifying its failure to recommend construction of a single high Hells Canyon Dam, the Commission listed the objectives of the projects and asserted that 94133-57-pt. 1-11 these public purposes will be realized without expense to the United States to the extent that the projects are constructed by a non-Federal entity. Senator KEFAUVER. Mr. Radin, at that point you are referring to the order of the Commission granting the certificate of convenience and necessity to the Idaho Power Co., as against the objection of the Hells Canyon Association? Mr. RADIN. That is correct. That was in the order granting alicense to the company to construct the project. Senator KEFAUVER. Who signed the opinion of the Federal Power Commission? Mr. RADIN. The chairman, Mr. Kuykendall. Senator KEFAUVER. Can you give us the date of that opinion, for the record? Mr. RADIN. I don't believe I have that with me, Senator, but I will be glad to supply that for the record at this point. Senator KEFAUVER. Was it about August 1955? Mr. RADIN. Yes; that is correct. Senator KEFAUVER. All right. Mr. RADIN. The record is clear. Idaho Power Co. did not predicate its application for a license for the dams upon the possibility of a Federal subsidy, and the Federal Power Commission in granting the application did not contemplate that any subsidy would be provided. By the same token, there is no showing in the record that these dams were related to national-defense requirements. On the contrary, what findings are in the record point in the other direction. Thus, the Federal Power Commission presiding examiner, in his opinion on the Idaho Power Co. application for licenses for these projects, pointed out that there is "crying need for firm power in the Northwest" and, he said One of the seemingly attractive aspects of the Idaho Power proposal and one which has been exploited and publicized was that Idaho Power would without cost to the taxpayer relieve this need to a substantial extent. Whether power costing 6.6 mills is marketable on a firm basis is open to serious question in spite of the power deficiency in prospect. Six point six mill power is fancypriced power in the northwestern area. The examiner in that case was Mr. Costello. Thus, the examiner doubted whether the projects would help meet a deficit due to normal demands, let alone provide salable extra capacity for emergency defense needs. A letter of August 4, 1955, from FPC Chairman Kuykendall to Senators sponsoring Federal Hells Canyon legislation in fact made it quite clear that the purpose of the projects was "to assure consumers in the company service areas of an adequate power supply." He made no mention of national-defense needs or extra capacity. The Idaho Power dams for which the Office of Defense Mobilization has issued certificates of necessity for rapid amortization for tax purposes are not defense projects. Nor in any event do the certificates issued many months after the start of construction represent any incentive to their construction. But the shocking significance of the situation is not simply that ODM provided an ex post facto incentive to a nondefense project. It is rather that these certificates would provide a subsidy for wasteful exploitation of a national resource. The proposed high dam at the Hells Canyon site would generate 1,124,000 kilowatts of prime power available at all times, as opposed to only 680,000 kilowatts of prime power from the smaller dams planned by Idaho Power Co. Senator KEFAUVER. What do you mean by prime power? Mr. RADIN. That is power that is available at all times. Mr. RADIN. There is also firm power and peaking power. Senator KEFAUVER. Prime power is available 24 hours a day, in all seasons of the year? Mr. RADIN. That is correct. The difference of 444,000 kilowatts is approximately equivalent to the prime power output of the Bonneville Dam on the Columbia River. Without impugning the motives of any persons advocating the lesser plan, we would like to suggest that the company dams appear to represent an odd contribution to national defense. If anything, the Idaho Power Co. dams, by comparison with the high Hells Canyon Dam, represent a loss to the national security. The comparison of flood-control benefits is no prettier in terms of national defense, or the public interest. High Hells Canyon would provide useful water storage of 3,880,000 acre-feet as opposed to 1 million acre-feet under the company scheme. The loss of this lifesaving flood-control capacity hardly appears consonant with national defense. For the loss of nearly three-fourths of the floodwater storage of high Hells Canyon Dam and nearly half the prime power, the Office of Defense Mobilization has authorized benefits to the Idaho Power Co. which exceed the costs of the company's smaller dams and approach the cost of the high dam. Senator KEFAUVER. Do you want to present some figures in explanation of that statement? Mr. RADIN. Yes, sir; I have those figures just a little bit later in my statement, Senator. Senator KEFAUVER. All right, Mr. Radin. Mr. RADIN. Since Idaho Power is a client of Ebasco Services, Inc., it is appropriate in calculating the benefits of the rapid tax writeoff to employ the method used by the manager of the tax department of Ebasco Services. That method was outlined in a letter of June 10, 1954, to the Mississippi Power & Light Co., and the letter appears in published hearings of this subcommittee in 1954. Senator KEFAUVER. Do you have a copy of the letter here? Mr. RADIN. The letter is included in the printed hearings, of which I have a copy here, Senator. Senator KEFAUVER. Is it a lengthy letter? Mr. RADIN. No; it is only about one page, with an accompanying table. Senator KEFAUVER. Where does it appear? Mr. RADIN. It appears as exhibit 15, on page 746 of the hearings entitled "Power Policy, Dixon-Yates Contract, Hearings Before a Subcommittee of the Committee on the Judiciary, United States Senate, 83d Congress, 2d Session-Investigation Concerning the Charges of Monopolistic Influences in the Power Industry, Part 2." Senator KEFAUVER. I think it might be well to have that letter appear in the record of this hearing. I will ask the staff to put it in. |