Veto of the Muscle Shoals Resolution.

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 from 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 kilowatt-hours 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 $5, 080,000

Amortization 1,890,000

Operating and maintenance cost of hydroelectric plant 775,000

Operating and maintenance cost of steam plant 850, 000

Operation and maintenance cost of transmission lines 550, 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 kilowatt-hour, 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 item, 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 success."

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.

GENERAL CONSIDERATIONS

I am firmly opposed to the Government entering into any business the major purpose of which is competition with our citizens. There are national emergencies which require that the Government should temporarily enter the field of business, but they must be emergency actions and in matters where the cost of the project is secondary to much higher considerations. There are many localities where the Federal Government is justified in the construction of great dams and reservoirs, where navigation, flood control, reclamation or stream regulation are of dominant importance, and where they are beyond the capacity or purpose of private or local government capital to construct. In these cases power is often a by-product and should be disposed of by contract or lease. But for the Federal Government deliberately to go out to build up and expand such an occasion to the major purpose of a power and manufacturing business is to break down the initiative and enterprise of the American people; it is destruction of equality of opportunity amongst our people; it is the negation of the ideals upon which our civilization has been based.

This bill raises one of the important issues confronting our people. That is squarely the issue of Federal Government ownership and operation of power and manufacturing business not as a minor by-product but as a major purpose. Involved in this question is the agitation against the conduct of the power industry. The power problem is not to be solved by the Federal Government going into the power business, nor is it to be solved by the project in this bill. The remedy for abuses in the conduct of that industry lies in regulation and not by the Federal Government entering upon the business itself. I have recommended to the Congress on various occasions that action should be taken to establish Federal regulation of interstate power in cooperation with State authorities. This bill would launch the Federal Government upon a policy of ownership and operation of power utilities upon a basis of competition instead of by the proper Government function of regulation for the protection of all the people. I hesitate to contemplate the future of our institutions, of our Government, and of our country if the preoccupation of its officials is to be no longer the promotion of justice and equal opportunity but is to be devoted to barter in the markets. That is not liberalism, it is degeneration.

This proposal can be effectively opposed upon other and perhaps narrower grounds. The establishment of a Federal-operated power business and fertilizer factory in the Tennessee Valley means Federal control from Washington with all the vicissitudes of national politics and the tyrannies of remote bureaucracy imposed upon the people of that valley without voice by them in their own resources, the overriding of State and local government, the undermining of State and local responsibility. The very history of this project over the past 10 years should be a complete demonstration of the ineptness of the Federal Government to administer such enterprise and of the penalties which the local community suffers under it.

This bill distinctly proposes to enter the field of powers reserved to the States. It would deprive the adjacent States of the right to control rates for this power and would deprive them of taxes on property within their borders and would invade and weaken the authority of local government.

Aside from the wider issues involved the immediate effect of this legislation would be that no other development of power could take place on the Tennessee River with the Government in that field. That river contains two or three millions of potential horsepower, but the threat of the subjection of that area to a competition which under this bill carries no responsibility to earn interest on the investment or taxes will either destroy the possibility of private development of the great resources of the river or alternately impose the extension of this development upon the Federal Government. It would appear that this latter is the course desired by many proponents of this bill. There are many other objections which can be raised to this bill, of lesser importance but in themselves a warranty for its disapproval.

It must be understood that these criticisms are directed to the project as set up in this bill; they are not directed to the possibilities of a project denuded of uneconomic and unsound provisions nor is it a reflection upon the value of these resources.

I sympathize greatly with the desire of the people of Tennessee and Alabama to see this great asset turned to practical use. It can be so turned and to their benefit. I am loath to leave a subject of this character without a suggestion for solution. Congress has been thwarted for 10 years in finding solution, by rivalry of private interests and by the determination of certain groups to commit the Federal Government to Government ownership and operation of power.

The real development of the resources and the industries of the Tennessee Valley can only be accomplished by the people in that valley themselves. Muscle Shoals can only be administered by the people upon the ground, responsible to their own communities, directing them solely for the benefit of their communities and not for purposes of pursuit of social theories or national politics. Any other course deprives them of liberty.

I would therefore suggest that the States of Alabama and Tennessee who are the ones primarily concerned should set up a commission of their own representatives together with a representative from the national farm organizations and the Corps of Army Engineers; that there be vested in that commission full authority to lease the plants at Muscle Shoals in the interest of the local community and agriculture generally. It could lease the nitrate plants to the advantage of agriculture. The power plant is to-day earning a margin over operating expenses. Such a commission could increase this margin without further capital outlay and should be required to use all such margins for the benefit of agriculture.

The Federal Government should, as in the case of Boulder Canyon, construct Cove Creek Dam as a regulatory measure for the flood protection of the Tennessee Valley and the development of its water resources, but on the same bases as those imposed at Boulder Canyon--that is, that construction should be undertaken at such time as the proposed commission is able to secure contracts for use of the increased water supply to power users or the lease of the power produced as a by-product from such a dam on terms that will return to the Government interest upon its outlay with amortization. On this basis the Federal Government will have cooperated to place the question into the hands of the people primarily concerned. They can lease as their wisdom dictates and for the industries that they deem best in their own interest. It would get a war relic out of politics and into the realm of service.

HERBERT HOOVER

The White House,

March 3, 1931.