For those projects which have a peculiarly national significance or which can be constructed economically only by the United States, the Commission is of the opinion that the power should be offered for sale to States, municipalities, cooperatives, and private utilities on terms that would protect the Federal interest. In this connection, hydroelectric power now, in large part, and increasingly as time passes, is being used for peaking purposes, a use wherein it has its greatest value in coordination with fuel plants which are generally used for base loads. The inclusion of power in most multiple-purpose projects during project formulation generally depends for its justification on the peaking value of the proposed installation. For the return of the investment allocated to power, therefore, power marketing must take cognizance of this situation. The Commission believes that this procedure is consistent with the provisions of section 5 of the 1944 Flood Control Act. The requirement in section 5 that the disposition of such power and energy shall be "in such manner as to encourage the most widespread use thereof at the lowest possible rates to consumers, consistent with sound business principles," includes use by preference customers, but is not confined to that use. It is the Commission's view that, in general, there should be reasonable assurance that the market for the power will produce revenues sufficient to recover the allocated power costs before the construction of a Federal power project is undertaken. The Commission, however, does not believe that as a rule it should be a requirement that firm contracts be negotiated prior to project construction. E. POLICY RELATIVE TO CHARGING DOWNSTREAM PROJECTS FOR BENEFITS FROM UPSTREAM STORAGE The Commission believes that the matter of equitable sharing by downstream projects in the cost of upstream reservoir storage benefits is germane to the objectives of Senate Resolution 281, and that the problem should be given serious consideration in the formulation of any overall Federal water power policy. The Commission is now charged with the duty, under section 10 (f) of the Federal Power Act, of making determinations of benefits received by the owners of non-Federal downstream powerplants from upstream storage reservoirs, and assessing charges against those downstream owners. In this connection it should be emphasized that any such charges are not for the water, but rather are a sharing of the costs of facilities which make the water available when it can be utilized. When a Federal powerplant receives water that has been stored at an upstream development and the Federal plant can utilize that water for generating power, there is no provision at present for the reimbursement of the non-Federal owner of the upper storage resevoir for any part of the cost of his reservoir, notwithstanding the benefits derived therefrom by the lower Federal powerplant, and not withstanding the fact, as pointed out above, that under the Power Act such an owner can now be required to pay part of the costs of an upper storage reservoir providing similar benefits. The Commission believes that the Federal Power Act should be amended to provide authority for the payment by Federal hydroelectric developments for headwater benefits received from non-Fed eral resource projects. Such a proposal is believed to be sound in principle and essential to the more effective carrying out of the purposes of existing Federal water-power legislation. Congress has followed the policy heretofore of requiring that those consumers served by federally constructed powerplants shall bear all of the power costs. The only exception to this policy, and one which should be corrected by legislation, is the inequitable situation which arises from the failure to require that consumers of power from Federal projects likewise share in the cost of headwater reservoir improvements and facilities which benefit those Federal developments by making the water available when it can be utilized for power generation. CONCLUSION The Commission supports the basic purposes and objectives of this resolution to establish a comprehensive and particularized set of standards and overall criteria for the evaluation of all proposed projects for the conservation and development of land and water resources. The Commission has repeatedly joined in the efforts of Federal agencies concerned with water-resource development which have resulted in significant contributions in the direction of achieving these objectives, insofar as it has been possible under existing laws. This is specifically indicated, as above pointed out, by the agency studies undertaken in connection with the report of the Subcommittee on Benefits and Costs of the Federal Interagency River Basin Committee on proposed practices for economic analysis of river-basin projects, and the agreement of March 12, 1954, adopted by the Departments of the Army and the Interior and the Federal Power Commission with respect to evaluation, cost allocations and related matters. The Commission believes that Congress, in formulating policies and procedures in these matters, will want to take cognizance of the combined thinking and views which have resulted from these cooperative interdepartmental efforts by agencies concerned with the administration of laws pertaining to the development and utilization of the Nation's land and water resources. The Federal Power Commission is the only agency of the Federal Government having complete and continuing records and information on practically all segments of the power industry, publicly and privately owned, its capacity, operations, requirements, loads, locations and interconnections from which intelligent and sound planning can be projected in accordance with the statutory directives of Congress. The Commission, therefore, in accordance with its established practice stands ready to cooperate with the congressional committees and interested Federal agencies concerned with the joint endeavor being undertaken pursuant to Senate Resolution 281. FEDERAL POWER COMMISSION. Chairman. 2 On April 26, 1956, the Senate Committee on Interior and Insular Affairs reported favorably on S. 1574 with an amendment in the nature of a substitute (S. Rept. No. 1865, 84th Cong., 2d sess.) which would have provided for the same sharing of headwater improvement costs by the federally constructed hydroelectric developments that is now required by non-Federal projects under the Federal Power Act. The Commission recommended passage of S. 1574, as amended (S. Rept. No. 1865, pp. 5-6). DEPARTMENT OF THE ARMY, OFFICE OF THE SECRETARY OF THE ARMY, Hon. JAMES E. MURRAY, Washington, D. C., November 2, 1956. DEAR SENATOR MURRAY: In your letter of July 31, 1956, you requested, in behalf of the chairmen of the Senate Committees on Interior and Insular Affairs and on Public Works and the chairmen of the Subcommittees on Irrigation and Reclamation and on Flood Control, objective information and suggestions by November 1, 1956, for the information and guidance of the committees in discharging their responsibilities under Senate Resolution No. 281, 84th Congress. In subsequent letters dated August 8, 1956, and August 16, 1956, you requested specific information on cost allocations and on benefit-cost practices. These requests have received careful attention within the Department of the Army. As you know, representatives of the Department have participated in or contributed to several intensive studies during recent years on the subject of policies and procedures applicable to conservation, development and use of water and related land resources. These include the May 1950 report of the Federal Interagency Committee's Subcommittee on Benefits and Costs, the December 1950 report of the President's Water Resources Policy Commission, the June 1955 report on Water Resources and Power by the Commission on Organization of the Executive Branch of the Government and, most recently, the December 1955 report of the Presidential Advisory Committee on Water Resources Policy. The results of the Department's objective consideration of all of the problems involved, including the interrelation of the activities of all agencies concerned, both Federal and non-Federal, are reflected in the foregoing reports, particularly in the report of the Presidential Advisory Committee on Water Resources Policy. The cost allocation data requested in your letter of August 8, 1956, are transmitted herewith, and I hope that these data will prove satisfactory and useful to your committees. Data on benefit-cost practices, in response to your letter of August 16, 1956, will be furnished by November 15, 1956, as requested. Upon request, I shall be pleased to furnish any additional information available in the Department. Sincerely yours, Hon. JAMES E. MURRAY, United States Senate, WILBER M. BRUCKER, DEPARTMENT OF THE ARMY, OFFICE OF THE ASSISTANT SECRETARY, Washington, D. C. DEAR SENATOR MURRAY: In response to your request of August 16, there is furnished herewith information on the benefit-cost practices used by the Department of the Army in its civil-works program. This supplements our letter of November 2, 1956, to you on the general subject of your activities in the conservation and development of water and land resources under Senate Resolution 281, 84th Congress. Over a period of years dating back to 1946 the Department of the Army has participated with other Federal agencies in a joint endeavor to define principles and formulate mutually acceptable procedures for determining the benefits and costs of water-resources projects. In May 1950 this effort resulted in the publication by the Subcommittee on Benefits and Costs of the Federal Interagency River Basin Committee of a report, Proposed Practices for Economic Analysis of River Basin Projects. The Department of the Army in 1954-55 also participated in studies for the Presidential Advisory Committee on Water Resources Policy which led to its recommendations on principles and standards for project evaluation. The views of the Department of the Army on benefit-cost evaluations are summarized in the paragraphs which follow. Basically, we believe that the evaluation of water-resources projects is subject to the same economic concepts and principles which are fundamental to all economic activity. The legislative and administrative policies and procedures which might be applied to waterresources development cannot change these basic economic principles, and therefore, they cannot increase nor decrease the inherent economic justification of projects. This can be determined only by application of the basic principles. Nevertheless, policies and procedures do have a significant effect on phases of project evaluation such as reimbursement and cost-sharing arrangements which may be patterned to serve various objectives of public policy. This Department feels that Federal evaluations of water-resources projects should be made from the viewpoint of the Nation as a whole rather than from any one of a number of more restricted viewpoints such as that of a single specific purpose, an individual beneficiary, a geographic area, or one segment of the economy. From the broad public viewpoint, a project is economically justified only if the wealth of the Nation as a whole over the long run will be greater with the project than it would be without the project. Viewed in this light, the benefits are the increases in goods and services attributable to the project by whomsoever realized and the project costs are all resulting decreases in goods and services by whomsoever suffered. For purposes of economic justification, benefits attributable to a project must take account of the offsetting benefits that would be realized from alternative use in the economy of the resources required for the project. The economic formulation of each project, by itself and in combination with other projects, should seek to accomplish maximum net benefits from the investment of goods and services in the project and should utilize the least costly of available means in achieving the project purposes. We sincerely believe that the benefit-cost ratio provides an important criterion in judging the desirability of Federal water-resource developments. But it is not the sole criterion. In varying degree these projects may also give rise to important intangible values such as the protection of human life and increased national security. These effects which cannot be expressed in monetary terms are often important and must also be considered in arriving at final decisions. The foregoing reflects the broad basis for benefit-cost evaluations used in the civil-works programs of this Department. Application of these principles in the measurement of specific benefits and costs by the Corps of Engineers are detailed in table 2, pages 74-81 inclusive of the May 1950 report, referred to above, of the Interagency Subcommittee on Benefits and Costs. Changes have been made in certain of these items since publication of that report. These changes are explained in the attached statement. Sincerely yours, EDWARD A. BACON, Deputy Assistant Secretary of the Army. CHANGES IN EVALUATION PRACTICES OF CORPS OF ENGINEERS FROM (Item numbers refer to table 2 of referenced report) 1. Item No. 4 Price levels. It is recognized that the prices appropriate for use in benefit-cost studies are those expected to prevail at the time the costs are incurred and the benefits realized after eliminating long-term inflationary or deflationary changes in the value of the dollar. Where acceptable price projections are available they are used in corps. studies; otherwise prices current at the time of the analysis are used. 2. Item No. 5 Conversion of nonuniform benefits to annual equivalent basis.Depending on conditions in the area under study, an interest rate falling within a range of 4 to 6 percent has been used for this purpose. 3. Item No. 9 Power benefits.-There are now included, in addition to the items. previously included, the value of interruptible capacity and deferred installations. 4. Item No. 10 Navigation benefits. It is recognized that the savings in the cost of transportation are the measure of navigation benefits, but in certain. situations, where comparative costs cannot be readily determined, rates to shippers have been used as an approximation of costs. 5. Item No. 15 Recreation benefits.-The benefits of small-boat harbor improvements are partially measured by the net return on the average value of the using craft. 6. Item No. 19 Price level for calculating costs.-Some comment as under 1 above. 7. Item No. 20 Interest rates. For Federal and non-Federal public costs an interest rate of 212 percent is currently used. |