B-156049, MAY 4, 1965, 44 COMP. GEN. 683

B-156049, MAY 4, 1965, 44 COMP. GEN. 683

DEPARTMENTS AND ESTABLISHMENTS - SERVICES BETWEEN - REIMBURSEMENT - ACTUAL COST REQUIREMENT. APPROPRIATIONS - FISCAL YEAR - AVAILABILITY BEYOND - CONTRACTS - LONG TERM THE SALE OF ELECTRIC POWER BY THE TENNESSEE VALLEY AUTHORITY (TVA) TO OTHER GOVERNMENT AGENCIES UNDER THE AUTHORITY VESTED IN THE TVA BOARD TO DETERMINE THE CONDITIONS AND RATE FOR THE PARTICULAR TYPE OF SERVICE IS NOT SUBJECT TO SECTION 601 OF THE ECONOMY ACT OF 1932, 31 U.S.C. 686, WHICH REQUIRES THE FURNISHING OF SERVICES BETWEEN GOVERNMENT AGENCIES ON AN ACTUAL COST BASIS AND, THEREFORE, THE FIXING OF A RATE FOR THE POWER IN ACCORDANCE WITH THE CRITERIA IN SECTION 15D (F) OF THE TENNESSEE VALLEY AUTHORITY ACT, AS AMENDED BY THE ACT OF AUGUST 6, 1959, 16 U.S.C. 831N-4 (F) IS PROPER. THE AUTHORITY FOR CONTRACTS FOR PUBLIC UTILITY SERVICES FOR PERIODS BEYOND A FISCAL YEAR BUT NOT IN EXCESS OF 10 YEARS IN SECTION 201 OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, AS AMENDED, 40 U.S.C. 481, WHICH AUTHORITY HAS BEEN DELEGATED TO THE SECRETARY OF DEFENSE AND REDELEGATED, PERMITS THE DEPARTMENT OF THE ARMY TO ENTER INTO AGREEMENTS WITH THE TENNESSEE VALLEY AUTHORITY FOR ELECTRIC ENERGY FOR PERIODS NOT IN EXCESS OF 10 YEARS; HOWEVER, SUCH AGREEMENTS WOULD NOT OBLIGATE FUNDS OF THE DEPARTMENT OF THE ARMY BEYOND THE EXTENT OF AVAILABILITY OF A FISCAL YEAR APPROPRIATION.

TO THE SECRETARY OF THE ARMY, MAY 4, 1965:

LETTER DATED JANUARY 29, 1965, AND ENCLOSURES, FROM GENERAL JOHN A. GOSHORN, DIRECTOR OF PROCUREMENT, DEPARTMENT OF THE ARMY, CONCERN CERTAIN DIFFERENCES BETWEEN YOUR DEPARTMENT AND THE TENNESSEE VALLEY AUTHORITY (TVA) WITH RESPECT TO THE RATES AND CONDITIONS OF SERVICE FOR ELECTRIC POWER FURNISHED BY TVA AT ARMY INSTALLATIONS.

SEVERAL QUESTIONS HAVE BEEN PROPOUNDED (WHICH WILL BE SET FORTH BELOW) WHICH INVOLVE ESSENTIALLY THE ARMY'S POSITION THAT TVA IS NOT FURNISHING SERVICE AT AN ACTUAL COST RATE AS CONTEMPLATED BY SECTION 601 OF THE ECONOMY ACT OF 1932, 47 STAT. 417, AS AMENDED, 31 U.S.C. 686. THE DIRECTOR OF PROCUREMENT STATES THAT AS THE "ACTUAL COST" RATE OF A UTILITY SERVICE TO ANY ONE CUSTOMER CANNOT BE DETERMINED DUE TO JOINT COSTS INVOLVED, A REASONABLE EQUIVALENT TO ACTUAL COST WOULD BE TVA'S WHOLESALE RATE (WITH TAX ADJUSTMENT); THAT SUCH A RATE WOULD BE DEFINITELY COMPENSATORY TO TVA; AND THAT TVA IS REFUSING TO RECOGNIZE THAT THE ARMY, EVEN THOUGH IT IS ANOTHER GOVERNMENT AGENCY SHOULD BE ENTITLED TO THE LOWEST COMPENSATORY RATE IN LIEU OF THE PRESENTLY APPLIED RETAIL RATE.

THE DIRECTOR EXPLAINS THAT TVA ALSO REFUSES TO CONCEDE THAT CERTAIN PENALTIES AND SURCHARGES, WHICH ARE INVOKED AGAINST COMMERCIAL AND INDUSTRIAL USERS, ARE NOT APPROPRIATE FOR CHARGING AGAINST ANOTHER GOVERNMENT AGENCY; AND THAT OTHER INCIDENTAL QUESTIONS HAVE ARISEN AND SHOULD BE RESOLVED. FOR EXAMPLE, HE REPORTS THAT SERVICES ARE PRESENTLY COVERED UNDER "MEMORANDUMS OF UNDERSTANDING" WHICH TVA INSISTS ARE CONTRACTUAL OBLIGATIONS OF THE ARMY AND MUST BE CONSIDERED LEGALLY BINDING FOR TERMS OF 10 YEARS UNDER THE PRESENT RETAIL RATE, OR FOR 20 YEARS IN THE EVENT THE WHOLESALE RATE IS APPLIED. THE ARMY POSITION IS THAT BETWEEN TWO GOVERNMENT AGENCIES THE MEMORANDA OF UNDERSTANDING ARE NOT CONTRACTS AND DO NOT OBLIGATE FUNDS OF THE ARMY BEYOND THE EXTENT OF AVAILABILITY OF THE FISCAL YEAR'S APPROPRIATION. IN THE ENCLOSURES YOUR DEPARTMENT EXPRESSES THE VIEW THAT THE "SALES OF SURPLUS POWER AT PROFIT" REFERRED TO IN THE TVA ACT (16 U.S.C. 831M) ARE SALES OTHER THAN TO AGENCIES OF THE UNITED STATES, I.E. SALES OF SURPLUS POWER UNDER SECTION 14 (16 U.S.C. 831I).

THE DIRECTOR STATES THAT THE DIFFERENCES OF OPINION BETWEEN THE TWO AGENCIES ARE SUCH THAT A RESOLUTION OF THE MATTER BY OUR DECISION IS ESSENTIAL WITH RESPECT TO FUTURE NEGOTIATIONS IN THE POWER PROCUREMENT FUNCTION OF THE CHIEF OF ENGINEERS. ACCORDINGLY, OUR DECISION IS REQUESTED AS TO WHETHER THE ARMY IS ENTITLED TO THE LOWEST COMPENSATORY RATE WITH ATTENDANT ELIMINATION OF PENALTIES OR SURCHARGES, AND WHETHER THE ARMY POSITION IS CORRECT AS TO OTHER PROBLEMS CONSIDERED, WHICH ARE SET FORTH IN THE "ADMINISTRATIVE REPORT" ENCLOSED WITH THE DIRECTOR'S LETTER.

THE SPECIFIC QUESTIONS PRESENTED FOR DECISIONS, AS SET FORTH IN THE "ADMINISTRATIVE REPORT," ARE AS FOLLOWS:

"A. ARE THE PAYMENTS FOR ELECTRIC SERVICE RECEIVED BY DA FROM TVA TO BE AT THE TVA'S LOWEST RATE COMMENSURATE WITH ACTUAL COST AS CONTEMPLATED BY THE PROVISIONS OF THE ECONOMY ACT OF 1932, 47 STAT. 417 (31 U.S.C. 686) FOR SERVICES FURNISHED BY ONE DEPARTMENT OR AGENCY OF THE GOVERNMENT TO ANOTHER?

"B. IF THE ECONOMY ACT OF 1932 IS APPLICABLE, WHICH ONE OF THE TVA RATE SCHEDULES AND WHAT CONDITIONS OF SERVICE HEREINAFTER CONSIDERED, MAY BE ACCEPTED IN DETERMINING REASONABLE ACTUAL COST OF SERVICE? IN THIS CONNECTION IT IS CONSIDERED THAT THE ACTUAL COST OF SERVING ANY ONE CUSTOMER OF A UTILITY SYSTEM CANNOT BE DETERMINED IN VIEW OF JOINT COSTS INVOLVED.

"C. DOES THE TENNESSEE VALLEY AUTHORITY ACT OF 1933, 48 STAT. 58 AS AMENDED, 16 U.S.C. 831, PRECLUDE THE APPLICATION OF THE INTERAGENCY ACTUAL COST PRINCIPLES OF THE ECONOMY ACT OF 1932, CONCEDING THAT ACTUAL COST OF ELECTRIC ENERGY SUPPLIED TO DA OR A REASONABLE EQUIVALENT MUST BE DETERMINED UNDER THE TVA ACT OF 1933, PARTICULARLY SECTION 13 THEREOF WHICH EXCLUDES FROM COST ALL PAYMENTS TO STATE AND LOCAL GOVERNMENTS IN LIEU OF TAXATION, AND SECTION 15 WHICH ESTABLISHES RATE MAKING CRITERIA. WHILE ACTUAL COST OF SERVING ANY ONE CUSTOMER OF TVA CANNOT BE DETERMINED DUE TO THE JOINT COSTS INVOLVED, IT IS CONSIDERED THAT THE LOWEST RATE OF TVA IS COMPENSATORY AND WOULD BE THE BASIS FOR THE CHARGE TO DA.

"D. IF THE ECONOMY ACT OF 1932 IS NOT APPLICABLE IN VIEW OF THE PROVISIONS OF THE TVA LEGISLATION CITED IN C ABOVE, IS THE DA ENTITLED TO A LOW WHOLESALE RATE IN LIEU OF CURRENT " RETAIL INDUSTRIAL RATE?

"E. IS THE DA REQUIRED TO ENTER INTO LONG TERM "CONTRACTS" FOR PERIODS OF 10 OR 20 YEARS WITH TVA OR IS A MEMORANDUM OF UNDERSTANDING BETWEEN THE TWO UNITED STATES AGENCIES, PREDICATED UPON DA FISCAL YEAR APPROPRIATION AVAILABILITY, THE PROPER MEANS OF PROCUREMENT BETWEEN THE TWO AGENCIES OF THE UNITED STATES?

"F. IS THE DA REQUIRED TO PAY CERTAIN RATE AND POWER FACTOR PENALTIES AND SURCHARGES WHEN A ,CONTRACT DEMAND" IS EXCEEDED AS UNDER THE TVA RETAIL INDUSTRIAL RATE AND PAY FOR A POWER ,CONTRACT DEMAND" WHICH IS NOT REQUIRED OR USED?

"G. IS DA ENTITLED TO RATE ADJUSTMENT FOR TAXES AND FOR OWNERSHIP OF ITS OWN SUBSTATION IN LIEU OF TVA OWNED SUBSTATION AND IS A CREDIT ALLOWANCE PROPER FOR TVA'S USE OF DA SUBSTATION AND DISTRIBUTION SYSTEM SERVING DA INDUSTRIAL LESSEES AT DA INSTALLATIONS?

SECTION 9A OF THE TVA ACT, AS AMENDED, 16 U.S.C. 831H-1, PROVIDES AS FOLLOWS:

"THE BOARD IS DIRECTED IN THE OPERATION OF ANY DAM OR RESERVOIR IN ITS POSSESSION AND CONTROL TO REGULATE THE STREAM FLOW PRIMARILY FOR THE PURPOSES OF PROMOTING NAVIGATION AND CONTROLLING FLOODS. SO FAR AS MAY BE CONSISTENT WITH SUCH PURPOSES, THE BOARD IS AUTHORIZED TO PROVIDE AND OPERATE FACILITIES FOR THE GENERATION OF ELECTRIC ENERGY AT ANY SUCH DAM FOR THE USE OF THE CORPORATION AND FOR THE USE OF THE UNITED STATES OR ANY AGENCY THEREOF, AND THE BOARD IS FURTHER AUTHORIZED, WHENEVER AN OPPORTUNITY IS AFFORDED, TO PROVIDE AND OPERATE FACILITIES FOR THE GENERATION OF ELECTRIC ENERGY IN ORDER TO AVOID THE WASTE OF WATER POWER, TO TRANSMIT AND MARKET SUCH POWER AS IN THIS CHAPTER PROVIDED, AND THEREBY, SO FAR AS MAY BE PRACTICABLE, TO ASSIST IN LIQUIDATING THE COST OR AID IN THE MAINTENANCE OF THE PROJECTS OF THE AUTHORITY.'

IT IS CLEAR THAT UNDER THIS PROVISION OF LAW TVA IS AUTHORIZED TO PROVIDE FOR THE GENERATION OF ELECTRIC ENERGY FOR THE USE OF ALL GOVERNMENT AGENCIES.

SECTION 9 (B) OF THE TVA ACT, AS AMENDED, 16 U.S.C. 831H (B) PROVIDES, IN PART, THAT:

"* * * SUBJECT ONLY TO THE PROVISIONS OF THIS CHAPTER (TVA ACT) THE CORPORATION IS AUTHORIZED TO MAKE SUCH EXPENDITURES AND TO ENTER INTO SUCH CONTRACTS, AGREEMENTS, AND ARRANGEMENTS, UPON SUCH TERMS AND CONDITIONS AND IN SUCH MANNER AS IT MAY DEEM NECESSARY * * *.'

THE TVA ACT AS AMENDED, WAS AMENDED BY THE ACT OF AUGUST 6, 1959, 73 STAT. 280, TO PERMIT TVA TO SELL BONDS BACKED ONLY BY TVA'S POWER REVENUES (16 U.S.C. 831N-4 (A) AND (B) (, AND TVA WAS DIRECTED THEREIN TO CHARGE RATES FOR POWER SUFFICIENT TO COVER VARIOUS ITEMS. SECTION 15D (F) CONCERNING RATES (ENACTED IN 1959) READS AS FOLLOWS (16 U.S.C. 831N-4 (F)

"/F) THE CORPORATION SHALL CHARGE RATES FOR POWER WHICH WILL PRODUCE GROSS REVENUES SUFFICIENT TO PROVIDE FUNDS FOR OPERATION, MAINTENANCE, AND ADMINISTRATION OF ITS POWER SYSTEM; PAYMENTS TO STATES AND COUNTIES IN LIEU OF TAXES; DEBT SERVICE ON OUTSTANDING BONDS, INCLUDING PROVISION AND MAINTENANCE OF RESERVE FUNDS AND OTHER FUNDS ESTABLISHED IN CONNECTION THEREWITH; PAYMENTS TO THE TREASURY AS A RETURN ON THE APPROPRIATION INVESTMENT PURSUANT TO SUBSECTION (E) OF THIS SECTION; PAYMENT TO THE TREASURY OF THE REPAYMENT SUMS SPECIFIED IN SUBSECTION (E) OF THIS SECTION; AND SUCH ADDITIONAL MARGIN AS THE BOARD MAY CONSIDER DESIRABLE FOR INVESTMENT IN POWER SYSTEM ASSETS, RETIREMENT OF OUTSTANDING BONDS IN ADVANCE OF MATURITY, ADDITIONAL REDUCTION OF APPROPRIATION INVESTMENT, AND OTHER PURPOSES CONNECTED WITH THE CORPORATION'S POWER BUSINESS, HAVING DUE REGARD FOR THE PRIMARY OBJECTIVES OF THE CHAPTER, INCLUDING THE OBJECTIVE THAT POWER SHALL BE SOLD AT RATES AS LOW AS ARE FEASIBLE. * * *"

THERE IS NOTHING IN THE ABOVE-QUOTED SECTION OR ELSEWHERE IN THE TVA ACT OR ITS LEGISLATIVE HISTORY, TO INDICATE THAT THE LAST QUOTED SECTION IS NOT FOR APPLICATION TO SALES OF TVA POWER TO GOVERNMENT AGENCIES. IN FACT THE LEGISLATIVE HISTORY OF THE 1959 ACT DISCLOSES THAT THE CONGRESS WAS AWARE AT THE TIME THAT "APPROXIMATELY 52 PERCENT OF THE ENERGY (THEN GENERATED BY TVA) IS SOLD TO FEDERAL AGENCIES" (PAGE 3 OF SENATE REPORT NO. 470, 86TH CONGRESS, 1ST SESSION). TVA EXPRESSES THE VIEW THAT SINCE THE PURPOSE OF THE AMENDMENT WAS TO PERMIT TVA TO SELL ON THE MARKET BONDS BACKED ONLY BY TVA'S POWER REVENUES, AN EXCEPTION COVERING OVER HALF OF TVA'S POWER SALES WOULD HAVE MADE THE LEGISLATION UNWORKABLE. IN ANY EVENT, NOTWITHSTANDING WHAT THE LAW MIGHT HAVE BEEN PRIOR TO 1959, IT IS OUR VIEW THAT SECTION 15 (D) (F) OF THE TVA ACT, AS AMENDED (16 U.S.C. 831N-4 (F) (, APPLIES TO RATES FOR TVA POWER GENERALLY, AND NOT JUST TO "SURPLUS POWER," WHATEVER THAT TERM AS USED IN THE ACT MAY MEAN.

ALSO, IN CONNECTION WITH RATES WE NOTE THAT SECTION 15D (A) OF THE TVA ACT, AS AMENDED IN 1959, 16 U.S.C. 831N-4 (A), PROVIDES, IN PART, AS FOLLOWS:

"* * * THE CORPORATION IS AUTHORIZED TO ENTER INTO BINDING COVENANTS WITH THE HOLDERS OF SAID BONDS--- AND WITH THE TRUSTEE, IF ANY--- UNDER ANY INDENTURE, RESOLUTION, OR OTHER AGREEMENT ENTERED INTO IN CONNECTION WITH THE ISSUANCE THEREOF (ANY SUCH AGREEMENT BEING HEREINAFTER REFERRED TO AS A "BOND CONTRACT") WITH RESPECT TO THE ESTABLISHMENT OF RESERVE FUNDS AND OTHER FUNDS, ADEQUACY OF CHARGES FOR SUPPLY OF POWER, APPLICATION AND USE OF NET POWER PROCEEDS, STIPULATIONS CONCERNING THE SUBSEQUENT ISSUANCE OF BONDS OR THE EXECUTION OF LEASES OR LEASE-PURCHASE AGREEMENTS RELATING TO POWER PROPERTIES, AND SUCH OTHER MATTERS, NOT INCONSISTENT WITH THIS CHAPTER, AS THE CORPORATION MAY DEEM NECESSARY OR DESIRABLE TO ENHANCE THE MARKETABILITY OF SAID BONDS. * * *"

WE ARE ADVISED BY TVA THAT PURSUANT TO THIS AUTHORITY TVA HAS ENTERED INTO COVENANTS BINDING IT TO MAINTAIN RATES SUFFICIENT TO MEET IN EACH FISCAL YEAR THE REQUIREMENTS OF 15D (F) 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 15D (F) FOR THE SERVICE INVOLVED. TVA STATES THAT IT COULD NOT, THEREFORE, FIX RATES ON A LOWER BASIS WITHOUT BOTH ITS STATUTORY OBLIGATIONS AND ITS COMMITMENTS TO BONDHOLDERS.

IN ANY EVENT, CONSIDERING THE ABOVE-QUOTED PROVISIONS OF SECTION 9 (B) 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 15D (F). 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 15D (F) 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 15D (F) AND WE HAVE NO BASIS FOR QUESTIONING THAT DETERMINATION.

QUESTIONS A, B, C, D, F AND G ARE ANSWERED ACCORDINGLY.

QUESTION E RAISES THE ISSUE AS TO WHETHER THE DEPARTMENT OF THE ARMY HAS THE AUTHORITY TO ENTER INTO A CONTRACT OR AGREEMENT FOR A PERIOD EXTENDING BEYOND THE END OF THE FISCAL YEAR FOR WHICH THE APPROPRIATION INVOLVED WAS MADE. IN CONNECTION WITH THE MATTER THERE IS FOR CONSIDERATION SECTION 201 OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, AS AMENDED, 40 U.S.C. 481 WHICH PROVIDES, IN PERTINENT PART, THAT---

"/A) THE ADMINISTRATOR SHALL, IN RESPECT OF EXECUTIVE AGENCIES, AND TO THE EXTENT THAT HE DETERMINES THAT SO DOING IS ADVANTAGEOUS TO THE GOVERNMENT IN TERMS OF ECONOMY, EFFICIENCY, OR SERVICE, AND WITH DUE REGARD TO THE PROGRAM ACTIVITIES OF THE AGENCIES CONCERNED---

"/3) PROCURE AND SUPPLY PERSONAL PROPERTY AND NONPERSONAL SERVICES FOR THE USE OF EXECUTIVE AGENCIES IN THE PROPER DISCHARGE OF THEIR RESPONSIBILITIES, AND PERFORM FUNCTIONS RELATED TO PROCUREMENT AND SUPPLY SUCH AS THOSE MENTIONED ABOVE IN SUBPARAGRAPH (1) OF THIS SUBSECTION: PROVIDED, THAT CONTRACTS FOR PUBLIC UTILITY SERVICES MAY BE MADE FOR PERIODS NOT EXCEEDING TEN YEARS * * *.' PURSUANT TO THE AUTHORITY VESTED IN THE ADMINISTRATOR BY THE ABOVE-CITED ACT HE DELEGATED TO THE SECRETARY OF DEFENSE (WITH AUTHORITY TO REDELEGATE) AUTHORITY TO ENTER INTO CONTRACTS FOR PUBLIC UTILITY SERVICES FOR PERIODS EXTENDING BEYOND A CURRENT FISCAL YEAR BUT NOT EXCEEDING TEN YEARS UNDER CERTAIN CIRCUMSTANCES, INCLUDING WHERE IT IS NECESSARY TO DO SO TO OBTAIN LOWER RATES, LONGER DISCOUNTS OR MORE FAVORABLE CONDITIONS OF SERVICE. 16 F.R. 8309. WE UNDERSTAND THAT AN APPROPRIATE REDELEGATION OF SUCH AUTHORITY HAS BEEN MADE BY THE SECRETARY. ACCORDINGLY, WHETHER THE AGREEMENTS FOR ELECTRIC ENERGY BETWEEN TVA AND THE ARMY BE CONSIDERED CONTRACTS OR MEMORANDA OF UNDERSTANDING, SUCH AGREEMENTS MAY EXTEND FOR A PERIOD NOT EXCEEDING TEN YEARS, ALTHOUGH THE AGREEMENTS WOULD NOT OBLIGATE FUNDS OF THE ARMY BEYOND THE EXTENT OF AVAILABILITY OF THE FISCAL YEAR'S APPROPRIATION INVOLVED.

QUESTION E IS ANSWERED ACCORDINGLY.

FOR YOUR INFORMATION THERE IS SET FORTH BELOW THE COMMENTS ON TVA CONCERNING THE RATES AND CONDITIONS OF SERVICE FOR ELECTRIC POWER FURNISHED THE ARMY:

"NEXT, THE SUGGESTION IS ADVANCED THAT THE SCHEDULE A WHOLESALE RATES APPLICABLE IN THE CASE OF SALES TO MUNICIPALITIES AND COOPERATIVES WOULD BE COMPENSATORY FOR SALES TO ARMY INSTALLATIONS. THIS IS NOT THE CASE. THE COSTS OF SERVICE TO INSTALLATIONS SUCH AS REDSTONE ARSENAL AND FORT CAMPBELL ARE SUBSTANTIALLY HIGHER THAN THE COSTS OF SERVING MUNICIPALITIES AND COOPERATIVES, AND, INDEED, HIGHER THAN THE COSTS OF SERVING LARGE PRIVATE INDUSTRIAL CUSTOMERS. APPLICATION OF THE SCHEDULE A RATES TO SERVICE TO ARMY INSTALLATIONS WOULD BE NON-COMPENSATORY.

"THERE ARE SEVERAL REASONS FOR THIS. PART OF THE COST OF SERVICE TO ANY CUSTOMER IS THE RISK INVOLVED AS TO THE LEVEL OF OPERATION AND THE TERM OF SUPPLY. IN THE CASE OF MUNICIPALITIES AND COOPERATIVES, THE DIVERSITY OF DEMAND AMONG RESIDENCES, FARMS, COMMERCIAL AND INDUSTRIAL ESTABLISHMENTS IS SUCH THAT VARIATIONS IN THEIR OVERALL LOADS ARE RELATIVELY MINOR; THEIR CONTRACTS ARE LONG-TERM, AND AS A PRACTICAL MATTER SUBJECT TO VIRTUALLY AUTOMATIC RENEWAL; THE GROWTH OF THEIR DEMANDS FOR POWER HAS BEEN CONSISTENT IN THE PAST AND IS READILY PREDICTABLE FOR THE FUTURE. AS A RESULT, TVA CAN SCHEDULE GENERATION AND TRANSMISSION INVESTMENT TO PROVIDE SERVICE TO THEM ON THE MOST ECONOMICAL BASIS AND WITH COMPLETE ASSURANCE AS TO PAY-OUT. MOREOVER, TVA'S HYDRO POWER (ITS LOWEST COST POWER) IS ASSIGNED TO MUNICIPALITIES AND COOPERATIVES FOR RATE-MAKING PURPOSES IN RECOGNITION OF THEIR STATUS AS PREFERENCE CUSTOMERS UNDER SECTION 10 OF THE TVA ACT.

"LARGE LIGHTING AND POWER LOADS SERVED DIRECTLY BY TVA ARE ALSO RELATIVELY DEPENDABLE. THEY, TOO, ARE SERVED UNDER CONTRACTS OF FAIRLY LONG DURATION (PRESENTLY 10 YEARS), AND NO LARGE INDUSTRY HAS THUS FAR SHUT DOWN OR REDUCED ITS CONTRACT DEMAND BELOW THAT INITIALLY TAKEN. WHILE SUCH LOADS DO NOT HAVE THE SAME DEGREE OF PREDICTABILITY AS THOSE OF MUNICIPALITIES AND COOPERATIVES, THE DEGREE OF RISK WHICH THEY ENTAIL IS RELATIVELY SMALL.

"FEDERAL DEFENSE AGENCY POWER LOADS, ON THE OTHER HAND, ARE IN THE HIGHEST DEGREE UNCERTAIN, WITH NUMEROUS EXAMPLES OF DISCONTINUANCE OR REDUCTION IN ORIGINAL DEMANDS AS A RESULT OF ADMINISTRATIVE DECISIONS. FOR EXAMPLE, LOADS ONCE SERVED BY TVA AT COURTLAND AIR BASE, A DEFENSE SUPPLIES CORPORATION INSTALLATION AT MUSCLE SHOALS, ALABAMA, MILAN ORDNANCE WORKS, GULF ORDNANCE WORKS, AND VOLUNTEER ORDNANCE WORKS HAVE BEEN WHOLLY ELIMINATED, AND THE LOAD AT THE ARMY'S MUSCLE SHOALS PHOSPHATE DEVELOPMENT WORKS HAS BEEN REDUCED FROM 25,000 KW TO 1,000 KW. SUCH REDUCTIONS OR ELIMINATIONS IN LOADS CAUSE SUBSTANTIAL LOSSES BECAUSE GENERATING AND TRANSMISSION FACILITIES HAVE ALREADY BEEN INSTALLED TO SUPPLY THEM. HAD THE DEFENSE AGENCIES CONCERNED INSTALLED THEIR OWN FACILITIES TO SUPPLY THE LOADS MENTIONED ABOVE, THE COSTS OF SHUTDOWN WOULD HAVE BEEN VERY HIGH.

"AT REDSTONE ARSENAL THERE ARE SPECIAL FACTORS WHICH MAKE COSTS EVEN HIGHER. WE ARE SURPRISED THAT THE DIRECTOR OF PROCUREMENT SHOULD CITE CONDITIONS AT REDSTONE AS A BASIS FOR LOWER RATES, SINCE TVA HAS BENT OVER BACKWARDS IN KEEPING THE RATES THERE AT THE PRESENT LEVEL IN THE FACE OF SPECIAL FACTORS WHICH WOULD JUSTIFY HIGHER RATES. AT REDSTONE, CONTRARY TO TVA- USUAL PRACTICE, WE HAVE COMBINED DELIVERIES AT TWO DELIVERY POINTS FOR BILLING PURPOSES, THUS GIVING THE ARMY THE BENEFIT OF DIVERSITY IN DEMAND; TVA DOES NOT BILL THE ARMY FOR THE TRANSFORMATION LOSSES IN CONVERTING VOLTAGE FROM 161-KV AT THE DELIVERY POINTS TO THE ARMY'S DISTRIBUTION SYSTEM VOLTAGES; AND TVA CREDITS THE ARMY FOR LOSSES ON ITS DISTRIBUTION SYSTEMS CAUSED BY DELIVERIES OF POWER TO THREE OF THE ARMY'S LESSEES SERVED DIRECTLY BY TVA AND A DISTRIBUTOR OF TVA POWER EVEN THOUGH THE CONTRACTS WITH THE LESSEES SPECIFY THAT THE POINTS OF DELIVERY FOR THIS POWER ARE AT THE HIGH SIDES OF THE ARMY'S SUBSTATIONS AND THAT THE LESSEES SHALL MAKE THEIR OWN ARRANGEMENTS WITH THE ARMY TO GET THE POWER TO THEIR PLANTS. THESE SPECIAL FACTORS AT REDSTONE RESULT IN SUBSTANTIAL SAVINGS TO THE ARMY AND, IN ADDITION, AFFORD THE ARMY UNUSUAL FLEXIBILITY IN THE UTILIZATION OF POWER WHILE AT THE SAME TIME DECREASING THE LIKELIHOOD OF EXCESS TAKINGS CHARGES AND THE FREQUENCY OF MINIMUM BILLS.

"THE DIRECTOR SUGGESTS THAT ANY RATES CHARGED THE ARMY SHOULD BE REDUCED BY FIVE PERCENT TO REFLECT THE LACK OF A REQUIREMENT FOR IN LIEU TAX PAYMENTS ON POWER SOLD BY TVA TO ANOTHER FEDERAL AGENCY. THE APPLICATION OF THE BGA RATE SCHEDULE WITHOUT SUCH A REDUCTION SIMPLY OFFSETS IN PART THE UNCERTAINTIES AND HIGH COSTS ASSOCIATED WITH THE ARMY LOADS.

"IT IS NEXT SUGGESTED THAT TVA SHOULD COMPENSATE THE ARMY FOR PROVIDING SUBSTATION FACILITIES. THIS WOULD NOT BE IN ACCORDANCE WITH TVA'S NORMAL PRACTICE. SUCH PRACTICE IS EITHER TO DELIVER POWER AT TRANSMISSION VOLTAGE AVAILABLE TO SERVE THE LOAD, WITH THE CUSTOMER FURNISHING STEP- DOWN SUBSTATIONS AS THE ARMY DOES, OR ELSE TO FURNISH THE SUBSTATIONS AND APPLY A FACILITIES RENTAL CHARGE WHICH ACHIEVES THE SAME FINANCIAL RESULT. AS TO THE FURTHER SUGGESTION THAT TVA SHOULD COMPENSATE THE ARMY FOR USE OF THE ARMY'S SUBSTATION AND DISTRIBUTION FACILITIES IN THE SALE OF POWER TO THE LESSEES, THE POINTS OF DELIVERY BY TVA TO THE LESSEES, AS NOTED ABOVE, ARE ON THE HIGH SIDE OF THE ARMY'S SUBSTATIONS, NOT AT THE LESSEES' PLANTS. THE ARMY IS AT LIBERTY TO MAKE ANY CHARGE TO THE LESSEES IT WISHES FOR USE OF ITS FACILITIES BETWEEN THE POINTS OF DELIVERY AND THE LESSEES' PLANTS.

"THE DIRECTOR MENTIONS CHARGES FOR POWER MADE BY TVA TO IT OWN OFFICE OF AGRICULTURAL AND CHEMICAL DEVELOPMENT (WHICH HAS FIRST CALL ON TVA POWER UNDER THE ACT) AS A POSSIBLE MEASURE OF WHAT CHARGES SHOULD BE TO THE ARMY. THE POWER DELIVERED TO THE TVA CHEMICAL PLANTS IS A COMBINATION OF INTERUPTIBLE POWER AND SEMI-FIRM POWER (I.E., FIRM POWER SUBJECT TO INTERRUPTION PRIOR TO INTERRUPTION OF FIRM-POWER DELIVERIES UNDER CONTRACTS BY TVA WITH ANY OTHER CUSTOMER). THE ARMY'S LOADS AT REDSTONE AND FORT CAMPBELL ARE MADE UP ENTIRELY OF FIRM POWER. ALSO, THE TVA CHEMICAL PLANTS HAVE A MUCH HIGHER LOAD FACTOR THAN DO REDSTONE AND FORT CAMPBELL. COMPARISONS BASED ON AMOUNTS REALIZED PER KWH ARE THEREFORE MEANINGLESS.

"IT SHOULD BE NOTED, MOREOVER, THAT POWER IS SUPPLIED BY TVA TO ITS CHEMICAL PLANTS UNDER LONG-TERM ARRANGEMENTS APPROVED BY THE TVA BOARD WHICH ARE COMPARABLE TO CONTRACTS WITH OTHER PARTIES. SUCH ARRANGEMENTS INCLUDE A TEN-YEAR TERM; A FACILITIES RENTAL CHARGE FOR STEPPING THE POWER DOWN FROM TRANSMISSION VOLTAGE TO DELIVERY VOLTAGE AT AN OFFICE OF POWER SUBSTATION; A DEMAND INTERVAL OF 30 MINUTES; A POWER FACTOR OF 95 PERCENT; AND MINIMUM BILL PROVISIONS--- TO ALL OF WHICH THE ARMY OBJECTS. PROVISIONS OF THIS TYPE ARE APPLICABLE IN CONNECTION WITH EVERY RATE SCHEDULE TVA HAS, AS THEY ARE SIMILARLY APPLICABLE UNDER THE RATE SCHEDULES OF PRIVATE UTILITY COMPANIES. THEY ARE AN INTEGRAL PART OF THE RATES; IF THEY WERE ELIMINATED THE DEMAND AND ENERGY CHARGES WOULD HAVE TO BE INCREASED, OR OTHER ADJUSTMENTS MADE, TO COMPENSATE.

"FINALLY, THE DIRECTOR SUGGESTS THAT A CONTRACT BETWEEN THE ARMY AND TVA IS NOT REALLY A CONTRACT AT ALL, AND THAT IN ANY CASE THE ARMY CANNOT CONTRACT FOR MORE THAN A SINGLE FISCAL YEAR. THE ARMY'S POWER TO CONTRACT FOR MORE THAN ONE YEAR IS NOT A MATTER ON WHICH WE ARE IN A POSITION TO PASS. CERTAINLY, IF THE ARMY IS NOT IN A POSITION TO ENTER INTO A BINDING COMMITMENT FOR MORE THAN A YEAR, WE NEED TO KNOW THAT FACT SINCE OUR BGA RATES ARE NOT MADE AVAILABLE ON A YEAR-TO-YEAR BASIS TO LOADS OF THE SIZE OF THOSE OF REDSTONE AND FORT CAMPBELL. IF WE ARE TO ASSUME NOT ONLY THE NORMAL RISKS ASSOCIATED WITH ARMY CONTRACTS, BUT ALSO THE FURTHER RISK OF CONTRACTS FOR LOADS OF THIS MAGNITUDE UNDER WHICH EVEN MINIMUM BILL PROVISIONS WILL BE OF THIS MAGNITUDE UNDER WHICH EVEN MINIMUM BILL PROVISIONS WILL BE APPLICABLE FOR ONLY ONE YEAR, COSTS AND RATES WILL NEED TO BE REASSESSED ACCORDINGLY.'