estimates were made by the staff and we would have to take and analyze them to determine just what the differences in the individual items were. (The following information was supplied later:) EXPLANATION OF REVISED REVENUE ESTIMATE In early 1945 the Administration issued a preliminary pay-out schedule in which annual revenues of the Bonneville Power Administration were estimated for each of the fiscal years during the period of amortization of the investments in Bonneville and Grand Coulee plants and the corresponding transmission system. The load estimates for that report were prepared in the fall of 1944, at which time the European war was at its height and load estimates were necessarily based upon a continuation of war conditions. In order to reflect the probable effect of reconversion on the Administration's revenues, the following assumptions were made in preparing those load estimates: 1. That the European war would end by July 1, 1945. 2. That the Japanese war would end by July 1, 1947. At the time the estimates were prepared, it was known that the maximum possible production of aluminum from the reduction plants on the Administration's system would be more than enough to carry on the war with Japan after the European war was finished. The assumption, therefore, was taken that the Administration's industrial load would decline in 1946 and that in 1948 there would be a further reduction in load when the reconversion was at its maximum. The recovery period was assumed to run from 1949 to 1953 at which time it was estimated the entire output of the two power plants would be sold. On February 2, 1946, a completed rate pay-out study was issued by the Bonneville Power Administration entitled "Report on Repayment of Operating Expenses and Construction Costs," in which revised estimates were presented. The load estimates for this report were prepared in the latter part of December 1945. In the interim, both the European war and the Japanese war ended and there were 4 months of experience with the reconversion period. Full advantage was taken of this opportunity to revise the former estimates of loands to bring them into line with future prospects under peacetime development. Owing to the earlier termination of the wars, utilization equipment became available to domestic users 2 years earlier than had been anticipated in the 1944 estimates, and, as a result, the public agency load and the domestic load distributed by the private utilities are shown to build up quite rapidly. Thus, by 1952, with a somewhat smaller new industrial load, the full output of the two plants is expected to be sold. As a result, the gross load in the final report contains a larger proportion of general-utility load than in the 1944 estimates. This is, in general, load of a lower load factor so that the total aggregate maximum demands for the 1946 report are somewhat larger than those for the preliminary schedule. This is reflected in the accompanying tabulation in which the revenues from the different customer groups for the two estimates are compared. The final revenue estimate for distributors for 1953 is $1,366,804 greater than preliminary estimates. Part of this increase is due to an increase in the amount of space heating and irrigation power that will be sold. The Administration has been actively investigating these two load possibilities. These studies indicate somewhat greater loads in these categories than have been previously estimated. Under "Railroads," the 1946 report estimates revenues $245,400 per year less than the preliminary estimate. This is the result of a more conservative estimate of the rate at which electrification of the roads in the area will be accomplished. The railroad electrification rate schedule has not yet been approved. The revised revenue estimate for prospective industry load is $1,603,400 less than in the preliminary estimate inasmuch as the amount of power available from the Bonneville and Grand Coulee plants for such load has been reduced accordingly by the increases in the loads of the other customer groups as explained above. In other words, the additional industrial load will have to be supplied by power to be developed at other projects. Because of these shifts in the character of the load as estimated in 1946, a lower load factor results than that in the previous estimates, and the amount of secondary power that will be available for sale was necessarily reduced thereby. Instead of being able to sell 375,000 kilowatts of secondary energy as was estimated in 1944, there will be only 275,000 kilowatts available, as shown in the 1946 report. The reduction in revenue from this group of power consumer is $693,180. Reflecting a further study of the sale of dump energy, the revenue from that group was increased in the 1946 report by $192,500. The net result of these changes in load assumptions is to increase the annual revenues for the completely loaded plants as shown in fiscal year 1953 from $28,164,200 as shown in the 1944 estimates to $28,394,325 as shown in the 1946 report-a net increase of $230,125. These amounts, which represent the revenues when the entire output is sold, are reduced 10 percent to obtain a conservative estimate of the average revenue that may be expected over a long period of years. When rounded off, the average estimated annual revenues in the 1946 report total $28,550,000 compared with $28,350,000 in the 1944 estimates, or an increase of $200,000. Comparison of estimated revenues from the total output of Bonneville and Grand Coulee plants as shown in the preliminary pay-out schedule and final pay-out report Space heating and irrigation loads are included with distributor's loads in the preliminary estimate. TOTAL ASSETS OF BONNEVILLE POWER ADMINISTRATION Mr. JONES. What is the total figure for all of the assets of the Bonneville Power Administration? Mr. OSTRANDER. The total assets of the Bonneville Power Administration on June 30, 1945, were $88,417,142.67, as shown on schedule 6 of the auditor's report. Mr. JONES. $88,417,142.67? Mr. OSTRANDER. Yes, sir; that is right. Mr. JONES. Now, I notice in the pay-out schedule you have a Government investment in that year, in column 13 of $77,152,323. Explain the difference in the two figures. Mr. OSTRANDER. That is explained in detail in the pay-out report on page 66. In the first place I want to point out that the figure that I just gave you of $88,417,000 is the total assets including plant investment, also including cash and accounts receivable and materials and supplies. In the pay-out report the plant investment is $77,152,323, compared with the book figure before depreciation of $82,486,994. The difference arises from the elimination of work in progress, primarily. The work in progress is not included in that page because it accrues interest during construction until it goes into service. That plan is all explained in the report. Provision is made for the working capital, that is, cash requirements and the materials and supplies are in a separate column in the pay-out report, so that it is included in the interest bearing base. That is one of the columns in schedule A-1. Specifically the column is column 19 of schedule A-1. The pay-out report reconciles those figures right down to the last dollar. Mr. JONES. I wish you would put a statement in the record on that at this point. Mr. ÒSTRANDER. All right, sir. (The matter referred to is as follows:) COMPARISON OF ASSETS AS SHOWN IN THE BALANCE SHEET WITH PAY-OUT SCHEDULE A-1 The balance sheet (audit schedule 6) shows total assets as of June 30, 1945, in the amount of $88,417,143. Pay-out schedule A-1 shows transmission plant of $77,152,323 plus allowance for working capital of $3,009,385, a total of $80,161,708. The two items are not directly comparable inasmuch as the balance sheet item (1) is net after depreciation reserve, and (2) includes special deposits and funds, accounts receivable, deferred charges and after-asset items not pertinent to the pay-out schedule. The plant account of $82,486,994, before depreciation reserve, per the balance sheet is pertinent to the pay-out schedule and is reconciled to the latter in table XII beginning at page 66 of the pay-out report. Part II of that table is as follows (but reference should be made also to the other parts of the table if further detail is desired): Part II. Reconciliation of plant account per books with pay-out schedule, Deduct net work in progress ?. Add back acquisition adjustment transferred to depreciation reserve in fiscal year 1945 3 3,882, 336 490, 188 3,290, 471 Deduct original cost of plant depreciated on use basis ^. Total 70, 883, 990 Deduct unliquidated obligations adjustment. 78, 558, 186 1,914, 130 Total. Add miscellaneous income deductions, construction items, to be amortized ". Total plant investment for "Initial investment and annual additions," 1 Retirements are restored inasmuch as the gross investment is to be repaid. The salvageable portion of retired properties is not included since the salvage goes back to stock and is later returned as part of subse quent plant additions which enter into the amortization base. 2 Work in progress is deducted from the total plant account because the amounts in this work in progress account form part of the subsequent plant additions. In the interim, the carrying charges on the work in progress account are met inasmuch as it accumulates interest during construction. A reconciliation of the net work in progress shown here to work in progress per books as shown in part I above is given in part III below. 3 The nature of the acquisition adjustment account was explained in the comments relative to part I above. This credit item must be taken off the total plant account per books inasmuch as the latter exceeds the actual investment by the amount of this adjustment account. The original cost of tools and work equipment is deducted because future plant additions or future operating expenses will reflect the cost of such equipment as it is charged into the cost of plant and operations by depreciation charges computed on a use basis. Beginning in 1945, the Administration established its accounts on an obligation basis in accordance with its plan for integrating its cost and fiscal accounting requirements into a single system. As of June 30, 1945, total obligations recorded in the plant account were $3,845,856. Of this amount, the auditors eliminated $1,931,726 (as indicated in part IV of this table) because, while representing obligations in the fiscal sense, this portion of the obligations was deemed not to represent true liabilities as of June 30, 1945. For example, orders placed for future delivery of material, while representing obligations in the fiscal sense, do not become liabilities until the vendor bills the Administration; hence, this sum has been deducted in arriving at the total plant per books of $82,486,994, but it is necessary to eliminate the remainder of the obligations, such remainder being $1,914,130 inasmuch as such unliquidated obligations are not properly in the amortization base until the work in progress which they represent is completed and added to the plant in service. The portion of miscellaneous income deductions, representing costs of preliminary surveys and investigations on projects not ultimately carried through, is in accordance with the accounting system requirements charged off in the income account. For the purpose of the pay-out study, these construction items are included among the construction costs to be amortized. For further detail see the reconciliation given in table X. RESERVE FOR DEPRECIATION Mr. JONES. I notice there is a reserve here for depreciation of $8,025,868 on schedule 6, out of the $82,486,993 base. Will you identify that in the pay-out schedule? Mr. OSTRANDER. That is the depreciation reserve which is deducted on the balance sheet from the gross book value of the plant investment. The pay-out schedule is not based upon depreciation but upon amortization, which is given in column 10 of the pay-out report, column 10, schedule A-1. Mr. JONES. Now, column 10, schedule A-1 shows $7,380,000 amortization, and column 14 shows no replacements as of that year. Now, will you justify your statement made earlier that you figured out amortization on the basis of 4.71 percent of the Government investment. Mr. OSTRANDER. As we pointed out a while ago, Mr. Jones, the 4.71 percent relates to the period after full development and it represents. interest plus amortization of the actual construction cost plus amortization of the replacements. Mr. JONES. Well, now, I am trying to work out the basis to justify schedule 6 which shows depreciation of $8,025,000 plus set up on your books, and the amortization in column 10, schedule A-1 of the pay-out schedule of $7,380,000, and which shows nothing for replacements. Mr. OSTRANDFR. I can explain that in general terms, Mr. Jones, and then I have a detailed schedule on it if you would care to have it. In general, the reason for the larger figure on the balance sheet is that this reserve includes the total amounts credited to it less the amounts of retirements. Now, there is a good amount of depreciation that is credited to the reserve, but it is charged to the expenses of operations. For example, take the cost of operating a truck. As that is used it is depreciated, and the depreciation is charged into operating expenses and the amount of that depreciation is credited to the reserve. So, there are two places from which you recover depreciation, so to speak, and one is through operating expenses, and one is through amortization. I have a detailed table on that which I should be glad to give you if you would like to have it. Mr. JONES. All right; I would like to have it inserted in the record at this point. Mr. OSTRANDER. Yes, sir. (The matter referred to is as follows:) Depreciation reserve The depreciation reserve as of June 30, 1945, was $8,025,868.29 derived as follows: 1. Credits to reserve for amounts debited to depreciation expense. $6, 830, 430. 50 2. Credits to the reserve for amounts debited to clearing and other accounts and thus recovered through payment of operation expenses or charged to cost of plant and recovered through subsequent amortization of plant investment. 3. Credits to the reserve for amounts charged on leased lines and debited against rentals. 4. Credits to reserve for amounts of depreciation on purchased properties and debited to plant account.. Total... 1, 104, 152. 48 2, 216. 42 341, 333. 26 8, 278, 132. 66 Depreciation reserve-Continued 5. Less net retirements charged to reserve. 6. Reserve remaining at June 30, 1945, per schedule 6 of $252, 264. 37 8,025, 868. 29 The total amortization of $7,380,000.00 to June 30, 1945, shown in column 10, schedule A-1, of the pay-out report thus exceeds depreciation expense (item 1 above) and consists of: Depreciation expense, as above.. Miscellaneous income deductions, construction items, per table X of pay-out report. Advance amortization as shown in schedule 1 of audit report.. Total. ALLOWANCE FOR REPLACEMENT OF EQUIPMENT IN PAY-OUT SCHEDULE Mr. JONES. Now, I note that you have a request here for something like $30,000 for replacement of automobiles. Column 14 of schedule A-1 does not carry any replacements as of this date for the fiscal year 1947 for any amount of money like that. How can you justify that with your pay-out schedule? Mr. OSTRANDER. Just as mentioned a moment ago, sir, that operating equipment is treated through the expense accounts. The cost of equipment that is used in the operation and service equipment is an operating expense rather than a depreciation expense. Mr. JONES. So you carry that in the operation and maintenance column? Mr. OSTRANDER. That is right. Mr. JONES. In the pay-out schedule? Mr. OSTRANDER. That is required by the accounting system we must follow under the law. Mr. MARLETT. The replacement column is headed, "Transmission system investment to be amortized," and that was set up in the system, and not for the miscellaneous capital items. Mr. JONES. Do you have any estimates of the amount of replacements along the line of automobiles that you do not charge off as purely transmission load over the life of the project? Mr. OSTRANDER. Another provision for depreciation is the use of automobiles charged in the expense account or the construction account when they are used on construction. In the table on page 66 which I mentioned one of the items that is eliminated is equipment that is depreciated on a use basis in order to get the net basis for the plant account in the pay-out report. Mr. JONES. Have you had any replacements of actual transmission equipment to date? Mr. OSTRANDER. Yes; I imagine there have been some minor ones, probably mostly through maintenance expense, nothing very major that I know of. Mr. SCHULTZ. We had a river crossing down near Albany, and we had to replace some arms on some of our lines. Mr. OSTRANDER. All of those items have been included in column 13 in the amount of investment. It makes no difference whether you call an item replacement or actual construction cost. Under the accounting system that we have to follow they are both treated the same. |