"Economic Peace"

One day last week President Roosevelt had a long talk with Clyde Leroy Seavey, acting chairman of the Federal Power Commission, Administrator John M. Carmody of the Rural Electrification Administration and Ervin E. King, Master of the Washington State Grange, in whose bailiwick the Government is building the great Bonneville Dam hydroelectric project. When reporters trooped in later for the regular press conference, they found the President full of thoughts on Power. He launched into a long dissertation on the theory of utility rates. By the time the reporters were free to head for telephones, they had a front-page business story, for the President had offered peace terms in the bitterest of all the battles he has waged since the New Deal's birth --The War Against Private Utilities.

Utilities have held undisputed claim to the title of No. 1 New Deal whipping boy ever since the President tired of lambasting the bankers. Not only did the New Deal create the toothy Public Utility Act of 1935 with its famed "death sentence" for holding companies, but it has gone in for direct and indirect competition on a vast and widening scale. Government money built TVA and Bonneville. Government money has been pressed upon municipalities to buy or build their own local power systems. Government money has subsidized rural electrification. Meantime, in the past seven years, the value of U. S. utility securities has fallen some $7,000,000,000, and private powermen have brewed a peculiarly vitriolic fear and hatred of the New Deal and all its power works.

Fortnight ago at the annual convention of the Investment Bankers Association of America, Frank R. McNinch, former chairman of the Federal Power Commission, argued that the New Deal's power policy had proven fair and constructive because "the power industry showed a record of the greatest production and consumption in its history for the year ended July 31, 1937." To that the I. B. A. delegates, whose prime interest in power is selling power securities, retorted: The New Deal's attitude had held up some $3,200,000,000 of private utility spending for needed expansion--money which would have flowed into new construction had it not been for the industry's fear for the future.

This indisputable fact has lately achieved singular importance in Washington, for a flood of new construction might help stem the ebbing business tide, a notion which also occurred to Herbert Hoover in 1929. What President Roosevelt now proposed was to end the New Deal's power advance--provided the private powermen would accept his theories of rate-making. Since utilities are usually monopolistic, it is universally accepted that for the best public interest their rates should be established and regulated by law. The general theory is that rates should be only high enough to yield enough profit to attract the new capital the industry constantly needs. Rates are therefore based upon the value of the utility property involved. All methods of valuation are more or less arbitrary but they tend to run toward two extremes: 1) what it would cost to reproduce the property and 2) what the property originally cost a "prudent investor."

Liberals, led by aging Associate Justice Brandeis, currently lean toward original cost, but since the case of Smythe v. Ames in 1897 the Supreme Court has steadily upheld the principle of reproduction costs. And the utilities since 1897 have been favored by the reproduction cost theory because prices have been on the rise. But before 1897, when prices were falling, the utilities clamored for the prudent investment basis and were bitterly attacked by the late great Robert Marion La Follette and other progressives of that day for so doing.

What President Roosevelt apparently wants is for the utilities to adopt the prudent investment basis voluntarily. Among the specific cases the President gave to point his moral was a ferryman on the Thames during Queen Elizabeth's reign. Under common law she could have valued the boat at $500, if that was its worth, and based his rates accordingly. If he had paid $1,000 for the boat, it was his own error and loss. Another Roosevelt example was a run-down electric plant in Georgia with a few miles of line, a few decrepit boilers worth $50,000. When it was offered for sale fresh bidding raised the price to $200,000. But, according to the President, the new owners had a right to earn a return only on $50,000.

One of the first things that put the Government in the power business in the first place was the New Deal's inability to enforce such ideas in the face of the Supreme Court. So-called "yardstick" rates were to be based on the Government's "prudent investment." But the powermen soon found that the Government held down the original cost by the simple expedient of writing off large chunks to such things as flood control or navigation improvement. In the opinion of powermen, who must pay interest on the entire cost of their dams and plants, these write-offs made the yardstick something under 36 inches in length. The President's suggestion was to bring the two yardsticks in line--by cutting a few inches off the private yardstick. He said nothing, however, about lightening the "death sentence" on holding companies.

Franklin Roosevelt had another expedient reason besides the Recession for making his peace offer. Up in the Supreme Court last week, two days after the President's proposal was made, came another and significant test case on the old problem of utility rate-fixing. The California Railroad Commission fixed rates for Pacific Gas & Electric which the company contends did not take into due consideration the reproduction cost of the property. Since the new rates would reduce P. G. & E.'s revenue some $2,000,000, the company got an injunction which the California Railroad Commission appealed. The Federal Power Commission then intervened in the case to attempt to convert the Supreme Court to the "prudent investment" concept. This week, while the Court will be pondering the case, President Roosevelt will discuss his rate-making ideas at the White House with a platoon of potent powermen, as did Mr. Hoover in 1929.

Pundit Walter Lippmann opined: "I should have no doubt myself that the President's offer is sincere. For while he and certain of his supporters might feel at a loss during election time if they did not have the utilities for a scapegoat, Mr. Roosevelt's offer is in entire accord with his most practical political necessities. Thus, although he does not need political peace with the utilities, he very urgently needs an economic peace. . . ."

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