B-172089, JUN 16, 1971

B-172089, JUN 16, 1971

TVA POWER CONTRACT WITH AIR FORCE ADVISING IN CONNECTION WITH THE CONTRACT BETWEEN THE ARNOLD ENGINEERING DEVELOPMENT CENTER (AEDC), TULLAHOMA, TENN., AND THE TVA FOR THE SUPPLY OF ELECTRIC POWER UNDER WHICH THE TVA IS ATTEMPTING TO IMPOSE A UNILATERAL RATE INCREASE OF 36.4% THAT: (1) THE TVA IS NOT REQUIRED TO SHOW EVIDENCE THAT THE COST TO SERVE AEDC INCREASED NEARLY 40% IN SEVEN WEEKS (THE TIME BETWEEN THE SIGNING OF A NEW RATE CONTRACT AND THE DATE OF THE INCREASE) SINCE THE RATES ON WHICH THE CONTRACT WAS BASED WERE ALREADY 15 MONTHS OLD, THE TVA NEGOTIATED IN GOOD FAITH, AND BOTH PARTIES CLEARLY UNDERSTOOD THAT THE RATES OF THE AGREEMENT WERE SUBJECT TO CHANGE. (2) THE CONTRACT CLEARLY ALLOWS THE TVA TO REPLACE THE FUEL COST AND COST OF MONEY ESCALATORS WITH QUARTERLY ADJUSTMENT PROVISIONS. (3) THERE IS NOTHING IN THE LEGISLATIVE HISTORY OF THE TVA ACT WHICH WOULD SUGGEST THAT THE ACT IS NOT FOR APPLICATION TO SALES OF TVA POWER TO GOVERNMENT AGENCIES AND IT IS, THEREFORE, PROPER FOR IT TO CHARGE THOSE AGENCIES FOR RETURN ON APPROPRIATED FUND INVESTMENT OR FOR PAYMENTS IN LIEU OF TAXES. (4) THERE IS NO VALID BASIS ON WHICH THE BUDGETING PROBLEMS OF THE AIR FORCE RESULTING FROM THE NEW RATES WOULD AFFECT ITS OBLIGATION TO PAY SUCH RATES.

TO MR. SECRETARY:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 4, 1971, WITH ENCLOSURES, REQUESTING THAT OUR OFFICE EXPRESS AN OPINION ON A NUMBER OF QUESTIONS, SET FORTH BELOW, RELATING TO CONTRACT NO. F40650-70-C-0037 WHICH YOUR DEPARTMENT HOLDS WITH THE TENNESSEE VALLEY AUTHORITY (TVA) FOR ELECTRIC POWER PROVIDED TO THE ARNOLD ENGINEERING DEVELOPMENT CENTER (AEDC), TULLAHOMA, TENNESSEE.

THE CONTRACT IN QUESTION IS DATED MAY 27, 1970, AND IT IS THE LAST OF SEVERAL MEMORANDA OF UNDERSTANDING EXECUTED BY THE PARTIES FOR THE FURNISHING OF ELECTRIC POWER TO AEDC, AND APPEARS TO REFLECT THE CONSUMMATION OF AN AGREEMENT FOLLOWING SEVERAL BARGAINING SESSIONS THAT PRECEDED ALL SUCH AGREEMENTS. THE RECORD INDICATES THAT THE FIRST SUCH AGREEMENT (EFFECTIVE OCTOBER 12, 1952) WAS ENTERED INTO AS A "FIXED PRICE" CONTRACT PROVIDING FOR A DEMAND CHARGE WHICH WAS TO BE FIXED FOR THE LIFE OF THE AGREEMENT (DECEMBER 31, 1957) WITH ONLY THE ENERGY CHARGE SUBJECT TO ADJUSTMENT ON THE BASIS OF CHANGES IN TVA'S COAL COSTS. THE AGREEMENT WAS SUBJECT TO YEAR-TO-YEAR EXTENSIONS UPON PROPER NOTICE AND ACCEPTANCE, AND ON THE BASIS OF SUCCESSIVE REQUESTS BY THE AIR FORCE AND ACCEPTANCE BY TVA, WAS EXTENDED THROUGH DECEMBER 31, 1969.

IT IS REPORTED THAT EFFECTIVE AUGUST 1, 1967, TVA PUT INTO EFFECT A GENERAL POWER RATE INCREASE AVERAGING ABOUT SIX PERCENT FOR BOTH INDUSTRIAL AND FEDERAL CUSTOMERS. SINCE THE AFORESAID 1952 AGREEMENT WAS A FIXED PRICE CONTRACT, THE 1967 INCREASE WAS NOT APPLICABLE TO IT. IN NOVEMBER 1967, THE AIR FORCE REQUESTED THAT THE 1952 AGREEMENT BE EXTENDED FOR ANOTHER YEAR FROM DECEMBER 31, 1969, BUT TVA NOTIFIED THE AIR FORCE THAT IT WOULD NOT AGREE TO SUCH AN EXTENSION. EFFECTIVE IN MARCH 1969, TVA HAD ANOTHER GENERAL POWER RATE INCREASE AVERAGING ABOUT FIVE PERCENT FOR ALL CUSTOMERS. FOLLOWING DISCUSSIONS WITH AIR FORCE REPRESENTATIVES, TVA SENT TO AIR FORCE ON JULY 29, 1969, A PROPOSED AMENDMENT (KNOWN AS "SUPPLEMENT NO. 5") TO THE 1952 AGREEMENT TO BECOME EFFECTIVE ON JANUARY 1, 1970, AND TO EXTEND THROUGH DECEMBER 31, 1971.

SUPPLEMENT NO. 5 PROVIDED FOR RATES AND CHARGES BASED ON TVA'S THEN EFFECTIVE STANDARD INDUSTRIAL RATE SCHEDULE, INCLUDING THE 1967 AND 1969 INCREASES, KNOWN AS "GENERAL POWER RATE - SCHEDULE C-2, REVISION OF FEBRUARY 1969," WITH REDUCTIONS IN DEMAND CHARGES UNDER CONDITIONS PECULIAR TO THE AEDC LOAD. SINCE TVA HAD DISCONTINUED THE PRACTICE OF ENTERING INTO NEW FIXED PRICE CONTRACTS BECAUSE OF UNCERTAINTIES IN FORECASTING FUTURE COSTS, THE PROPOSED SUPPLEMENT NO. 5 CONTAINED THE STANDARD PREVAILING RATE CLAUSE THEN BEING INCLUDED IN NEW OR REPLACEMENT CONTRACTS WITH ITS CUSTOMERS. THIS CLAUSE PROVIDED THAT TVA WOULD HAVE THE RIGHT TO REVISE THE RATES AND CHARGES PROVIDED FOR THEREIN SO AS TO REFLECT MODIFICATIONS OR REPLACEMENTS OF SCHEDULE C 2.

WHEN THE 1952 AGREEMENT EXPIRED ON DECEMBER 31, 1969, SUPPLEMENT NO. 5 HAD NOT BEEN AGREED TO BY THE AIR FORCE. TVA, HOWEVER, CONTINUED TO FURNISH POWER TO AEDC WITH NOTIFICATION TO THE AIR FORCE ON FEBRUARY 12, 1970, THAT ENERGY BEING SUPPLIED ON AND AFTER JANUARY 1, 1970, WOULD BE CHARGED ON THE BASIS OF THE RATES CONTAINED IN SUPPLEMENT NO. 5. UPON EXECUTION OF THE INSTANT AGREEMENT, YOUR DEPARTMENT MADE PAYMENT OF $1,246,616.83 FOR THE POWER SUPPLIED AEDC DURING THE PERIOD THAT NO FORMAL AGREEMENT EXISTED, AND TVA WAIVED INTEREST CHARGES IN THE SUM OF $14,000. THE MAY 27 CONTRACT (EFFECTIVE MAY 25, 1970) IS TO CONTINUE THROUGH APRIL 30, 1980, UNLESS EARLIER CANCELLED BY THE AIR FORCE ON FIVE YEARS WRITTEN NOTICE.

ON JULY 13, 1970, TVA SENT A TELEGRAM TO THE CONTRACTING OFFICER OF AEDC, WHICH STATED IN PART:

" *** TVA WILL BE MODIFYING ITS GENERAL POWER RATE - SCHEDULE C-2, REVISION OF FEBRUARY 1969, AND IN ACCORDANCE WITH SECTION 7 OF OUR POWER CONTRACT OF MAY 27, 1970, WE REQUEST THAT AIR FORCE PERSONNEL MEET WITH US ON THURSDAY MORNING, JULY 16, FOR A DISCUSSION OF THE PROPOSED MODIFICATIONS OF THE SCHEDULE C-2 AND THE REVISION OF RATES AND CHARGES IN OUR CONTRACT WITH AEDC."

OTHER COMMUNIQUES FOLLOWED BETWEEN THE PARTIES, AND A MEETING WAS FINALLY HELD ON AUGUST 20, 1970, IN CHATTANOOGA BETWEEN PERSONNEL OF TVA AND AIR FORCE. AT THIS MEETING TVA REVEALED NEW INDUSTRIAL RATES WHICH INCREASED THE DEMAND CHARGES BY 70 CENTS PER KW PER MONTH AND THE ENERGY CHARGES BY 7/10 OF A MILL PER KWH. TVA STATED THAT THE BASIS FOR THE GENERAL RATE INCREASE WAS THE INCREASE IN THE COST OF FUEL, COST OF LABOR, DELAY IN THE COMPLETION OF A NUCLEAR POWER PLANT, AN INCREASE IN THE COST OF BORROWING MONEY, AND GENERAL OPERATING COST INCREASES. THE FOLLOWING DAY TVA FORMALLY NOTIFIED THE CONTRACTING OFFICER OF AEDC BY LETTER OF THE SAME DATE OF THE NEW RATES AND ADJUSTMENTS THAT WOULD BE APPLICABLE, EFFECTIVE WITH METER READINGS TAKEN AFTER OCTOBER 1, 1970.

YOUR LETTER OF MARCH 4 ADVISES THAT UNDER THE UNILATERAL RATE INCREASE WHICH TVA IS ATTEMPTING TO IMPOSE, AEDC COSTS OF POWER WILL INCREASE 36.4 PERCENT FROM $5,091,000 PER YEAR TO $6,943,000 PER YEAR. YOU POINT OUT THAT NO FUNDS HAVE BEEN PROGRAMMED FOR SUCH AN INCREASE, AND THAT IT WOULD THEREFORE BE NECESSARY IF THE INCREASED RATES ARE ALLOWED TO STAND, FOR AIR FORCE TO SEEK A SUPPLEMENTAL APPROPRIATION OR TO REPROGRAM OPERATIONS AND MAINTENANCE APPROPRIATIONS TO DIVERT FUNDS WHICH WERE APPROPRIATED FOR OTHER PURPOSES. YOU ARE OF THE BELIEF THAT THE ACTIONS OF TVA DESCRIBED ABOVE CONSTITUTE A BREACH OF ITS AGREEMENT WITH YOUR DEPARTMENT, AND YOU THEREFORE REQUEST OUR DECISION AS TO WHETHER THE AIR FORCE FUNDS MAY LEGALLY BE EXPENDED TO PAY THE INCREASED RATES. IN THIS REGARD YOU HAVE SUBMITTED SIX QUESTIONS FOR OUR CONSIDERATION, WHICH ARE SET OUT AND DISCUSSED BELOW.

1. IS TVA REQUIRED TO SHOW EVIDENCE THAT THE COST TO SERVE AEDC INCREASED NEARLY 40 PERCENT IN SEVEN WEEKS?

SECTION 7 OF THE 1970 AEDC AGREEMENT PROVIDES IN PART:

"IT IS RECOGNIZED THAT THE ABOVE RATES FOR POWER AND ENERGY AND THE ADJUSTMENTS THERETO ARE BASED ON TVA'S PREVAILING GENERAL POWER RATE - SCHEDULE C-2, REVISION OF FEBRUARY 1969, WHICH MAY BE MODIFIED OR REPLACED BY TVA FROM TIME TO TIME. TVA SHALL HAVE THE RIGHT, AFTER REASONABLE DISCUSSION WITH THE SECRETARY OF THE AIR FORCE OR HIS DESIGNATED REPRESENTATIVE, TO REVISE THE RATES, CHARGES, AND ADJUSTMENTS PROVIDED FOR HEREIN TO REFLECT MODIFICATIONS OR REPLACEMENT OF SAID PREVAILING RATE SCHEDULE FROM TIME TO TIME."

THIS SECTION OF THE CONTRACT ITSELF RECITES THAT THE RATES WERE BASED ON TVA'S FEBRUARY 1969 RATE SCHEDULE, WHICH BY THE DATE OF EXECUTION OF THE AGREEMENT WAS ALREADY SOME 15 MONTHS OLD. WHILE THE INITIAL NOTICE (JULY 13, 1970) OF TVA'S INTENTIONS TO RAISE THE RATES CAME WITHIN SEVEN WEEKS AFTER THE MAY 27 DATE OF THE CONTRACT, AND UNDERSTANDABLY MIGHT RAISE A QUESTION OF TVA'S GOOD FAITH IN NEGOTIATING THE CONTRACT, WE THINK IT IS COMMON KNOWLEDGE THAT INFLATIONARY FORCES HAD BEEN AT WORK BEFORE, DURING AND AFTER THE PERIOD OF NEGOTIATING THE TERMS OF THE CONTRACT. WE THINK IT HELPFUL, THEREFORE, TO DISCUSS ADDITIONAL FACTS OF RECORD REFLECTING UPON THE KNOWLEDGE OF THE PARTIES AS TO THE STABILITY OF THE RATES CONTAINED IN THE CONTRACT, AND THE EXACT MEANING OR INTERPRETATION THEY PLACED ON THE QUOTED PARAGRAPH.

THE RECORD INDICATES THAT, FOLLOWING A MEETING ON JANUARY 16, 1970, IN KNOXVILLE, WHEREIN DISCUSSIONS WERE HELD ON THE PROJECTED AGREEMENT AMONG REPRESENTATIVES OF AIR FORCE AND TVA, THE DIRECTOR OF POWER MARKETING FOR TVA WROTE TO THE CONTRACTING OFFICER OF AEDC:

"AS YOU KNOW, THE C-2 RATE IS A 'PREVAILING RATE' AND IS SUBJECT TO CHANGE FROM TIME TO TIME WHEN NECESSARY IN TVA'S JUDGMENT TO COVER CHANGES IN COSTS OF POWER SUPPLY. IF AND WHEN A CHANGE IN THE GENERAL POWER RATE IS MADE GENERALLY APPLICABLE TO CONSUMERS OF TVA POWER, THE LEVEL OF CHARGES IN THE RATES WE ARE DEVELOPING ALSO WILL CHANGE."

ANOTHER JOINT MEETING AMONG THE PARTIES WAS HELD ON MARCH 12, 1970, IN TULLAHOMA. AN AIR FORCE MEMORANDUM OF MARCH 13, 1970, REPORTING ON THE MEETING STATED IN PART:

"THE PROPOSAL PROVIDES THAT TVA HAS THE RIGHT TO INCREASE THESE RATES, WHEN WARRANTED, WITHOUT PRIOR REFERRAL TO THE AF. AEDC IS PROHIBITED BY EXISTING AFR'S FROM COMPLIANCE WITH THIS PROPOSAL. HOWEVER, THE AF REPRESENTATIVES AGREED TO PROCEED ON THE ASSUMPTION THAT HQ USAF WILL ACCEPT THIS PROPOSAL SINCE INFORMATION WAS FURNISHED THAT COLUMBUS AFB, MISS., POWER CONTRACT CONTAINS SUCH A PROVISO."

TVA'S MARCH 17, 1970, MEMORANDUM ON THE MARCH 12 MEETING STATED:

"AEDC EXPRESSED CONCERN ABOUT TVA'S ABILITY TO CHANGE 'AT ITS LEISURE' THE PREVAILING RATES.

"WE ASSURED AEDC THAT A FULL AND COMPLETE REVIEW IS GIVEN TO THE NEED FOR RATE CHANGES IN EACH CASE BY THE TVA STAFF AND BOARD AND BY THE 161 DISTRIBUTORS. WE INFORMED THE AEDC REPRESENTATIVES THAT PREVAILING RATE CONTRACTS HAD BEEN THE POLICY AND PRACTICE OF TVA FOR ABOUT 10 YEARS. PRIOR TO THIS, 'FIXED-RATE' CONTRACTS WERE DEVELOPED FROM TIME TO TIME IN SPECIAL CASES, BUT NOW THE UNCERTAINTY OF COST TRENDS SEEMS TO MAKE THIS IMPRACTICAL. FOR EXAMPLE, TODAY WE WOULD NEED TO INCLUDE A LARGE MARGIN IN A 'FIXED-RATE' CONTRACT AND INCREASE IT AT A GENEROUS RATE OVER THE ENTIRE PERIOD OF ITS TERM TO ASSURE US THAT ALL OF TVA'S COSTS WOULD BE COVERED. WE POINTED OUT THAT OUR LATEST CONTRACT WITH AEC WAS ALSO A PREVAILING-RATE CONTRACT, AND WE COULD RECOMMEND NO OTHER APPROACH IN THIS CASE."

ON MARCH 30, 1970, TVA'S DIRECTOR OF POWER MARKETING AGAIN WROTE TO THE AIR FORCE'S CONTRACTING OFFICER, TRANSMITTING COPIES OF A NEW DRAFT OF THE PROPOSED 1970 AEDC AGREEMENT, AND STATED:

"IT IS A 'PREVAILING-RATE' POWER CONTRACT AND THE RATES FOR POWER AND ENERGY AND THE ADJUSTMENTS THERETO ARE SUBJECT TO CHANGE BY TVA (AFTER DISCUSSIONS WITH AEDC) TO CORRESPOND TO CHANGES MADE IN THE PREVAILING GENERAL POWER RATE SCHEDULES FROM TIME TO TIME."

ON MAY 12, 1970, THE DEPUTY ASSISTANT SECRETARY (INSTALLATIONS) OF THE AIR FORCE WROTE TO TVA'S GENERAL MANAGER:

"WE COULD ACCEPT A PROVISION WHEREBY RATES WOULD BE SUBJECT TO REASONABLE DISCUSSION AND NEGOTIATION, AS THEY ARE IN THE CASE OF OTHER UTILITY SUPPLIERS WHERE THE AIR FORCE IS A MAJOR USER. IT SHOULD BE CLEARLY UNDERSTOOD, HOWEVER, THAT WE ARE AWARE OF RISING COSTS, AND FULLY RECOGNIZE THAT THERE WILL OCCASIONALLY BE A NEED FOR INCREASES, TO WHICH WE WILL READILY AGREE. WE WOULD BE REMISS IN CARRYING OUT OUR RESPONSIBILITY FOR PRUDENT EXPENDITURE OF PUBLIC FUNDS IF WE AGREED TO A LONG-TERM AGREEMENT CONTAINING AN ENORMOUS TERMINATION LIABILITY AND A UNILATERAL RIGHT IN THE UTILITY SUPPLIER TO INCREASE ITS RATES. THEREFORE, WE MUST INSIST THAT THE SUBPARAGRAPH UNDER DISCUSSION EITHER BE DELETED OR MODIFIED BY SUBSTITUTING 'WITH THE CONCURRENCE OF' FOR 'AFTER DISCUSSION WITH' IN THE FINAL SENTENCE OF PARAGRAPH 7."

FOLLOWING THIS LETTER, A MEETING WAS HELD IN WASHINGTON ON MAY 22, 1970, AT WHICH IT IS REPORTED THAT TVA WOULD NOT ACCEPT THE PROPOSED CHANGE. WHEREUPON AIR FORCE REQUESTED THAT RATES BE SUBJECT TO CHANGE ONLY AFTER "A REASONABLE PERIOD OF DISCUSSION" WITH THE AIR FORCE. TVA REFUSED THIS REQUEST AND AGREED ONLY TO INSERT THE WORD "REASONABLE" BEFORE DISCUSSION. AS REFLECTED BY THE QUOTED PORTION OF SECTION 7 ABOVE, THAT WAS THE LANGUAGE FINALLY AGREED TO IN THE FINAL DRAFT EXECUTED BY THE PARTIES.

FROM THE FOREGOING RECITATION OF FACTS IT SEEMS ABUNDANTLY CLEAR THAT BOTH PARTIES WERE NEGOTIATING IN GOOD FAITH, AND THAT THE PARTIES CLEARLY UNDERSTOOD AT THE TIME THE AGREEMENT WAS EXECUTED THAT THE RATES PROVIDED FOR WERE SUBJECT TO CHANGE BY TVA AT ANY TIME, AFTER REASONABLE DISCUSSION WITH THE AIR FORCE.

WHILE YOUR FIRST QUESTION MUST THEREFORE BE ANSWERED IN THE NEGATIVE, IT SHOULD BE NOTED THAT TVA HAS SUBMITTED THE FOLLOWING EXPLANATION OF THE NEED TO INCREASE ITS RATES TO AEDC, AND THE NATURE OF SUCH INCREASES:

"IN MODIFYING OR REPLACING THE GENERAL POWER RATE - SCHEDULE C-2, A SPECIAL EFFORT WAS MADE TO SO ADJUST THE DEMAND AND ENERGY CHARGES AS TO RELATE THEM AS CLOSELY AS POSSIBLE TO FIXED AND VARIABLE POWER COSTS, RESPECTIVELY, NOW BEING EXPERIENCED ON THE TVA SYSTEM. THIS RESULTED IN A RELATIVELY LARGER INCREASE IN THE DEMAND CHARGE THAN IN THE ENERGY CHARGE. THIS, IN TURN, HAS RESULTED IN A SOMEWHAT HIGHER PERCENTAGE INCREASE IN CHARGES PER KILOWATT HOUR FOR ALL LOW LOAD FACTOR CUSTOMERS, INCLUDING AEDC, THAN FOR CUSTOMERS - SUCH AS THE ATOMIC ENERGY COMMISSION - WHICH OPERATE AT RELATIVELY HIGH LOAD FACTORS. (A CUSTOMER'S LOAD FACTOR IS EQUAL TO ITS AVERAGE HOURLY USE OF ENERGY DURING ANY MONTH DIVIDED BY ITS HIGHEST PEAK DEMAND DURING THAT MONTH. A LOW LOAD-FACTOR CUSTOMER IS THUS ONE WHOSE AVERAGE LEVEL OF POWER USE IS SUBSTANTIALLY BELOW ITS PEAK POWER REQUIREMENT.) THE DIFFERENCE IN PERCENTAGE INCREASES PER KILOWATT HOUR CHARGES AS BETWEEN HIGH AND LOW LOAD-FACTOR CUSTOMERS SIMPLY REFLECTS THEIR RELATIVE EFFICIENCY IN THE USE OF POWER AND OF THE GENERATING CAPACITY WHICH MUST BE MADE AVAILABLE BY THE POWER SUPPLIER TO SATISFY THEIR PEAK DEMANDS. "THUS THE AIR FORCE IS BEING TREATED RATEWISE IN EXACTLY THE SAME WAY THAT OTHER COMPARABLE CUSTOMERS ARE TREATED. SHOULD BE POINTED OUT, HOWEVER, THAT WHILE AEDC'S CHARGES PER KILOWATT HOUR REFLECT ITS LOW LOAD FACTOR, THE OCTOBER 1970 INCREASE IN ITS RATES HAS BY NO MEANS AMOUNTED TO THE NEARLY 40 PERCENT THAT IT SUGGESTS. THE ACTUAL PERCENTAGE INCREASES OVER WHAT WOULD HAVE BEEN PAID UNDER THE OLD RATES FOR EACH OF THE MONTHS FROM OCTOBER 1970 THROUGH FEBRUARY 1971 HAVE BEEN AS FOLLOWS:

MONTH PERCENT INCREASE

OCT. 1970 28.79 NOV. 1970 28.91

DEC. 1970 28.26

JAN. 1971 28.98

FEB. 1971 30.31

"THESE FIGURES REFLECT AN IMPROVEMENT IN THE EFFICIENCY OF THE USE OF POWER BY AEDC. IF AEDC SHOULD HEREAFTER FIND IT POSSIBLE TO OPERATE AT A HIGHER LOAD FACTOR, PERCENTAGE INCREASE FIGURES WILL DECLINE."

2. MAY TVA UNILATERALLY REPLACE THE FUEL COST AND COST OF MONEY ESCALATORS, WHICH PROVIDE REASONABLE STANDARDS FOR RATE INCREASES, WITH BLANKET AUTHORITY TO RAISE RATES?

THE OCTOBER 1970 RATE REVISION, IN ADDITION TO CONSTITUTING A GENERAL UPWARD INCREASE IN POWER RATES, REPLACED THE PREVIOUSLY EXISTING FUEL AND MONEY COST ADJUSTMENT PROVISIONS WITH QUARTERLY ADJUSTMENT PROVISIONS. THE FIRST SENTENCE OF THE LAST PARAGRAPH OF SECTION 7 OF THE 1970 AGREEMENT PROVIDED:

"IT IS RECOGNIZED THAT THE ABOVE RATES FOR POWER AND ENERGY AND THE ADJUSTMENTS THERETO ARE BASED ON TVA'S PREVAILING GENERAL POWER RATE - SCHEDULE C-2, REVISION OF FEBRUARY 1969, WHICH MAY BE MODIFIED OR REPLACED BY TVA FROM TIME TO TIME."

WHILE THAT SENTENCE DOES NOT CUT OFF THE RIGHT OF REASONABLE DISCUSSION BETWEEN TVA AND AIR FORCE CONTAINED IN THE SECOND SENTENCE OF THAT PARAGRAPH, THE EXPRESS LANGUAGE QUOTED ABOVE DOES CLEARLY GRANT TO TVA THE RIGHT NOT ONLY TO RAISE THE RATES, BUT ALSO TO REPLACE THE ADJUSTMENT CLAUSES (FUEL AND MONEY COST ESCALATORS) THERETO. ACCORDINGLY, YOUR SECOND QUESTION IS ANSWERED IN THE AFFIRMATIVE.

3. HAS TVA COMPLIED WITH PARAGRAPH 7 OF THE USAF-TVA MEMORANDUM OF UNDERSTANDING, PROVIDING FOR REASONABLE DISCUSSIONS WITH THE SECRETARY OF THE AIR FORCE PRIOR TO RATE REVISION?

YOUR OFFICE CONTENDS THAT TVA DID NOT COMMUNICATE WITH YOU CONCERNING THE RATE INCREASE UNTIL JANUARY 4, 1971, AND THAT TVA WAS, OR SHOULD HAVE BEEN, WELL AWARE THAT THE REPRESENTATIVE OF THE SECRETARY OF THE AIR FORCE WAS MR. TURNER, DEPUTY ASSISTANT SECRETARY (INSTALLATIONS), WITH WHOM MR. WATSON (ASSISTANT MANAGER OF POWER FOR TVA) NEGOTIATED THE AGREEMENT THAT WAS SIGNED MAY 27, 1970. IT IS THEREFORE YOUR POSITION THAT NO REASONABLE DISCUSSION HAS EVER BEEN HELD, SINCE ONLY THE FEBRUARY 8, 1971, MEETING BETWEEN MR. TURNER AND MR. WATSON QUALIFIES AS A DISCUSSION WITH A DESIGNATED REPRESENTATIVE OF THE SECRETARY.

WHILE THE FINAL DISCUSSION PRECEDING THE EXECUTION OF THE MAY 27 AGREEMENT WAS HELD IN MR. TURNER'S OFFICE, WE THINK IT SIGNIFICANT THAT THE CONTRACT WAS NOT EXECUTED FOR THE AIR FORCE IN WASHINGTON BY MR. TURNER, BUT AT TULLAHOMA BY MR. THOMAS M. COOPER AS THE AIR FORCE'S CONTRACTING OFFICER. SECTION 14 OF THE 1970 AGREEMENT PROVIDES THAT ALL NOTICES THEREUNDER SHALL BE SENT TO AEDC AT AEDC, ARNOLD AIR FORCE STATION, TENNESSEE, WHERE MR. COOPER IS LOCATED.

THUS, THE FIRST NOTICE OF TVA'S INTENT TO MODIFY ITS GENERAL POWER RATE SCHEDULE, AND ITS REQUEST FOR A DISCUSSION UNDER SECTION 7 OF THE CONTRACT WAS CONTAINED IN ITS TELEGRAM OF JULY 13, 1970, SENT TO MR. COOPER AT AEDC. THIS TELEGRAM WAS FOLLOWED BY A TELEPHONE CALL WHEREIN TVA SUGGESTED AN ALTERNATIVE DISCUSSION DATE OF JULY 24, 1970. IN A TELEGRAM DATED JULY 17, 1970, THE AIR FORCE'S TULLAHOMA HEADQUARTERS ADVISED THAT IT WAS REFERRING TVA'S REQUEST "TO DISCUSS IMPENDING RATE INCREASE" TO THE AIR FORCE SYSTEMS COMMAND AND ASKED, IN ACCORDANCE WITH INSTRUCTIONS STATED TO HAVE BEEN RECEIVED FROM THAT COMMAND, THAT TVA FURNISH AIR FORCE WITH EVIDENCE SUPPORTING THE NEED FOR THE RATE INCREASE AND A LIST OF ALL GOVERNMENTAL INSTALLATIONS BEING FURNISHED ELECTRIC SERVICE IN THE TVA AREA, AND CONCLUDED WITH THE STATEMENT, "YOUR TELEPHONE REQUEST FOR MEETING ON AFTERNOON OF JULY 24 BEING SUBMITTED TO HIGHER HEADQUARTERS." ON JULY 24, TVA SENT A TELEGRAM TO MR. COOPER FURNISHING THE INFORMATION HE HAD REQUESTED, WITH AN INDICATION THAT A COPY WAS SENT TO COLONEL (NOW GENERAL) JOHN S. PETERS AT THE AIR FORCE'S SYSTEMS COMMAND HEADQUARTERS, ANDREWS AIR FORCE BASE, WASHINGTON, D.C.

AS INDICATED EARLIER, THE FIRST MEETING TO DISCUSS THE IMPENDING RATE INCREASE WAS HELD ON AUGUST 20, 1970. MR. COOPER, AMONG OTHERS, WAS IN ATTENDANCE ON BEHALF OF THE AIR FORCE, AND MR. COOPER WAS FORMALLY NOTIFIED THE NEXT DAY OF THE RATES AND ADJUSTMENTS THAT WOULD BE EFFECTIVE AFTER OCTOBER 1, 1970. IT IS TVA'S POSITION THAT IN EARLY SEPTEMBER 1970, GENERAL PETERS TELEPHONED MR. WATSON AND STATED THAT MR. TURNER HAD BEEN INFORMED ABOUT TVA'S PROPOSED RATE CHANGE AND WAS CONCERNED ABOUT IT, BUT NEITHER MR. TURNER, GENERAL PETERS, NOR ANY OTHER AIR FORCE PERSONNEL REQUESTED ANY FURTHER INFORMATION OR DISCUSSION.

THE RECORD BEFORE US DOES NOT REFLECT ANY MORE CONTACTS BETWEEN THE PARTIES UNTIL JANUARY 4, 1971, WHEN THE CHAIRMAN OF THE BOARD OF TVA WROTE TO YOU CONCERNING THE DELINQUENCY OF YOUR DEPARTMENT'S ACCOUNT WITH TVA FOR POWER DELIVERIES TO THE AEDC FACILITY AT THE NEW RATE, AND ENCLOSED WITH THAT LETTER COPIES OF THE DETAILED EXPLANATION, INCLUDING CHARTS AND TABLES, OF THE REASONS FOR THE RATE CHANGES, WHICH WAS THE SAME INFORMATION FURNISHED MR. COOPER AT THE AUGUST 20 MEETING. ON JANUARY 20, 1971, MR. TURNER RESPONDED TO THE JANUARY 4 LETTER, STATING IN PART, " *** I FEEL IT NECESSARY THAT WE HAVE ANOTHER MEETING TO DISCUSS SEVERAL ASPECTS OF THE TVA PROPOSAL FOR RATE CHANGES," AND FOR THE FIRST TIME, INSOFAR AS WE CAN ASCERTAIN FROM THE FACTS, STATED: "WE PROPOSE, IN VIEW OF THE ABOVE, THAT WE HAVE A JOINT MEETING BETWEEN TVA AND MYSELF, AS THE DESIGNATED REPRESENTATIVE OF THE SECRETARY OF THE AIR FORCE, ON JANUARY 29, 1971." THE MEETING WAS HELD ON FEBRUARY 8, 1971, WHEREIN AIR FORCE APPARENTLY NOTIFIED TVA THAT IT WOULD SEEK OUR OPINION ON THE PROPRIETY OF PAYING THE INCREASED RATES.

WE BELIEVE THIS DESIGNATION OF MR. TURNER AS YOUR REPRESENTATIVE COMES TOO LATE. IT IS WELL ESTABLISHED IN GOVERNMENT CONTRACT LAW, AS IN CONTRACT LAW GENERALLY, THAT NOTICE TO THE AGENT IS NOTICE TO THE PRINCIPAL. THE UNITED STATES GOVERNMENT, LIKE A PRIVATE PERSON OR CORPORATION, ACQUIRES KNOWLEDGE THROUGH ITS AGENT. UNITED STATES V HANNA NICKEL SMELTING CO., 253 F. SUPP. 784 (U.S. D. CT. ORE. 1966), AFFIRMED ON OTHER GROUNDS, 400 F. 2D 944 (9TH CIR. 1968). HAVING BEEN ADVISED BY TVA'S TELEGRAM OF JULY 13, IN ACCORDANCE WITH SECTION 14 OF THE CONTRACT, THAT TVA WISHED TO HAVE A DISCUSSION UNDER SECTION 7 OF THE CONTRACT, IT WAS INCUMBENT UPON THE AIR FORCE AT OR NEAR THAT TIME TO DESIGNATE A REPRESENTATIVE OF THE SECRETARY FOR SUCH DISCUSSION. WHEN AIR FORCE REPRESENTATIVES APPEARED FOR SUCH A DISCUSSION, WE THINK TVA HAD EVERY RIGHT TO ASSUME, IN THE ABSENCE OF INFORMATION TO THE CONTRARY, THAT THEY WERE THE DESIGNATED REPRESENTATIVES, ESPECIALLY SINCE MR. COOPER INDICATED IN HIS TELEGRAM OF JULY 17 THAT TVA'S REQUEST FOR A MEETING WAS BEING SUBMITTED TO HIGHER HEADQUARTERS. WE AGREE WITH YOUR OBSERVATION THAT THE TERM "REASONABLE DISCUSSION" IS NOT SUBJECT TO EXACT DEFINITION, BUT WE ARE OF THE OPINION THAT THE WRITTEN JUSTIFICATION FURNISHED YOUR DEPARTMENT FOR THE RATE CHANGES WAS A REASONABLE EXPLANATION OF THE NEED FOR SUCH CHANGES. WE HAVE NO REASON TO BELIEVE THAT THE MEETING OF AUGUST 20 DID NOT FOLLOW THE GENERAL TENOR OF THE INFORMATION CONTAINED IN THE WRITTEN "RATE MODIFICATION INFORMATION" DATED THE SAME DATE. IN ANY EVENT, WE FIND NOTHING IN SECTION 7 TO SUGGEST THAT AIR FORCE MUST AGREE IN ADVANCE TO ANY PROPOSED RATE CHANGES, WHICH TVA IS GIVEN BLANKET AUTHORITY TO EFFECT, BEFORE SUCH CHANGES ARE ACCOMPLISHED. THEREFORE, THE THIRD QUESTION MUST ALSO BE ANSWERED IN THE AFFIRMATIVE.

4. IS IT PROPER FOR TVA TO CHARGE ANOTHER GOVERNMENT AGENCY FOR RETURN ON APPROPRIATED FUND INVESTMENT, OR FOR PAYMENTS IN LIEU OF TAXES?

THIS QUESTION (AND YOUR ARGUMENTS TO SUPPORT A NEGATIVE ANSWER) PRESENTS THE ISSUE OF HOW RATES SHALL BE DETERMINED FOR TVA POWER SUPPLIED TO A GOVERNMENT AGENCY, WHICH WAS ANSWERED IN OUR DECISION REPORTED AT 44 COMP. GEN. 683 (1965). THERE WE STATED IN PERTINENT PART:

"WE ARE ADVISED BY TVA THAT PURSUANT TO THIS AUTHORITY (SECTION 15DA) OF THE TVA ACT) TVA HAS ENTERED INTO COVENANTS BINDING IT TO MAINTAIN RATES SUFFICIENT TO MEET IN EACH FISCAL YEAR THE REQUIREMENTS OF 15DF) QUOTED ABOVE. WE ARE FURTHER ADVISED THAT THE TVA BOARD CONSIDERS THE BGA (THE RATE CHARGED ARMY) TO BE THE LOWEST RATE WHICH WILL SATISFY THE REQUIREMENTS OF SECTION 15DF) FOR THE SERVICE INVOLVED. TVA STATES THAT IT COULD NOT, THEREFORE, FIX RATES ON A LOWER BASIS WITHOUT VIOLATING BOTH ITS STATUTORY OBLIGATIONS AND ITS COMMITMENTS TO BONDHOLDERS. (HERE TVA SUGGESTS THAT FAILURE TO INCLUDE THE RETURN ON APPROPRIATED FUND INVESTMENT IN DETERMINING RATES FOR POWER SOLD TO THE AIR FORCE WOULD REQUIRE HIGHER RATES TO OTHER CUSTOMERS, WHICH IN THEIR VIEW WOULD CONSTITUTE FLAGRANT DISCRIMINATION).

"IN ANY EVENT, CONSIDERING THE ABOVE-QUOTED PROVISIONS OF SECTION 9(B) (TVA ACT) IT IS OUR VIEW THAT THE QUESTION AS TO WHAT THE RATE (AND CONDITIONS OF SERVICE) SHOULD BE FOR A PARTICULAR TYPE OF SERVICE IS A MATTER FOR DETERMINATION BY TVA IN ACCORDANCE WITH THE PROVISIONS OF SECTION 15DF). THERE IS NOTHING IN SECTION 13 OF THE TVA ACT THAT REQUIRES A DIFFERENT CONCLUSION, SINCE THAT SECTION MERELY PROVIDES THAT IN DETERMINING IN-LIEU TAX PAYMENTS (WHICH ARE BASED ON PERCENTAGE OF 'GROSS PROCEEDS' FROM THE SALE OF POWER) AMOUNTS PAID BY GOVERNMENT AGENCIES TO TVA FOR POWER SHALL BE EXCLUDED FROM 'GROSS PROCEEDS.'

"IN VIEW OF THE ABOVE-CITED AND QUOTED PROVISIONS OF LAW IT IS CLEAR THAT TVA HAS AUTHORITY TO SELL ELECTRIC POWER TO GOVERNMENT AGENCIES WITHOUT REGARD TO SECTION 601 OF THE ECONOMY ACT OF 1932 AND IS REQUIRED TO FIX RATES (AND INCIDENT THERETO CONDITIONS OF SERVICE) FOR SUCH POWER IN ACCORDANCE WITH SECTION 15DF) QUOTED ABOVE. AS INDICATED ABOVE, TVA CONSIDERS THE RATE CHARGED THE ARMY FOR THE SERVICE IN QUESTION THE LOWEST THAT WILL SATISFY THE REQUIREMENTS OF SECTION 15DF) AND WE HAVE NO BASIS FOR QUESTIONING THAT DETERMINATION." SINCE WE CONTINUE TO BE OF THE VIEW THAT THERE IS NOTHING IN THE LEGISLATIVE HISTORY OF THE TVA ACT WHICH WOULD SUGGEST THAT THE ACT IS NOT FOR APPLICATION TO SALES OF TVA POWER TO GOVERNMENT AGENCIES, YOUR FOURTH QUESTION MUST BE ANSWERED IN THE AFFIRMATIVE.

5. IS THE AIR FORCE OBLIGATED TO PAY THE UNILATERAL INCREASE EVEN THOUGH NO BUDGETARY PROVISION WAS MADE THEREFOR?

AGAIN, WE BELIEVE OUR HOLDING IN 44 COMP. GEN. 683 (1965) IS DISPOSITIVE OF THIS QUESTION. THERE WE CONCLUDED THAT THE DEPARTMENT OF THE ARMY WAS AUTHORIZED, PURSUANT TO AUTHORITY DELEGATED UNDER SECTION 201(A)(3) OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, AS AMENDED, 40 U.S.C. 481, TO ENTER INTO AGREEMENTS, NOT TO EXCEED 10 YEARS, FOR PUBLIC UTILITY SERVICES ALTHOUGH THE AGREEMENT WOULD NOT OBLIGATE FUNDS BEYOND THE EXTENT OF AVAILABILITY OF THE FISCAL YEAR'S APPROPRIATION INVOLVED. SINCE WE HAVE CONCLUDED ABOVE THAT THE RATE INCREASE WAS PROPER, AND SINCE THERE IS NO CONTRACTUAL PROVISION MAKING PAYMENTS FOR POWER CONTINGENT ON THE AIR FORCE'S BUDGETING, WE SEE NO VALID BASIS ON WHICH BUDGETARY PROBLEMS RESULTING FROM THE NEW RATES WOULD AFFECT THE AIR FORCE'S OBLIGATION TO PAY SUCH RATES. THE FIFTH QUESTION IS THEREFORE ALSO ANSWERED IN THE AFFIRMATIVE.

6. NOTWITHSTANDING THE 5-YEAR TERMINATION CLAUSE, MAY THE AIR FORCE TERMINATE THE CONTRACT IN THE EVENT IT IS ABLE TO OBTAIN POWER FROM OTHER SOURCES AT LESSER COST?

HAVING FOUND IN OUR CONSIDERATION OF THE FIRST QUESTION THAT THERE WAS NO EVIDENCE TO INDICATE THAT TVA HAD NEGOTIATED THE TERMS OF THE 1970 CONTRACT IN BAD FAITH, THIS SIXTH QUESTION MUST NECESSARILY BE ANSWERED IN THE NEGATIVE. IN THIS CONNECTION, IT IS TVA'S POSITION THAT THE 10-YEAR CONTRACT DID NOT OFFER LONG-TERM RATE STABILITY, BUT RATHER LOWER RATES BECAUSE OF THE LENGTH OF ITS TERM. WE SEE NO BASIS ON WHICH TO DISAGREE, AND WE KNOW OF NO LEGAL PRINCIPLE APPLICABLE TO THE PRESENT SITUATION WHICH WOULD RELIEVE THE AIR FORCE FROM ITS CONTRACTUAL OBLIGATIONS AS EMBODIED IN THE MAY 27, 1970, CONTRACT.