TENNESSEE WATER-POWER RESOURCES AND MUSCLE SHOALS

[Extension of remarks of Hon. Finis J. Garrett, of Tennessee, in the House of Representatives Friday, February 3, 1928]

LETTER FROM FORMER SENATOR JOHN K. SHIELDS RELATING TO WATER-POWER RESOURCES

Mr. GARRETT of Tennessee. Mr. Speaker, under the leave to extend my remarks in the RECORD I include the following letter from former United States Senator John K. Shields upon the subject of Tennessee water-power resources and Muscle Shoals:

Hon. FINIS J. GARRETT,

Washington, D. C.

KNOXVILLE, TENN., January 25, 1928.

MY DEAR SIR: When we discussed the Madden bill (H. R. 8305), and especially the provisions providing for the construction of dams on the Clinch River, some days ago, I had not read the bill and was unable to express any opinion of how these provisions affected the sovereign and property rights of the State and people of Tennessee, but have since carefully considered the copy you gave me and come to a definite opinion in regard to these matters.

I have also carefully read the letter concerning the same matters which you received from the railroad and Public Utilities Commission of Tennessee, in which the commission ably presents the sovereign powers, rights, and interests of the State and the people in streams, in which I agree with them in the abstract, but I do not think that the opinions expressed and authorities referred to are applicable to dams constructed or authorized to be constructed by the Congress for the improvement of navigation and the national defense.

The object of the Madden bill is to authorize and direct the Secretary of War, for the United States, to execute to the Air Nitrates Corporation and American Cyanamid Co. a lease of property of the United States known as the Muscle Shoals development at Muscle Shoals on the Tennessee River, Ala., to be operated and maintained primarily for the purpose of generating and manufacturing air nitrates to be used for the national defense and agricultural fertilizers, the lessees obligating themselves to manufacture, distribute, and sell fertilizers, and for the improvement of navigation. These were the purposes for which the Muscle Shoals development was constructed by the United States.

It has been ascertained since the construction of the Wilson Dam that in dry seasons there was not sufficient water to assure the production of sufficient power and that the construction of other dams in the Tennessee River and its tributaries is necessary.

The Clinch River has been surveyed under the direction of the Secretary of War and navigation dams and storage reservoirs located which when constructed will improve navigation upon that river as well as upon the entire Tennessee River, and supply the necessary water power at Muscle Shoals in dry seasons, and therefore the United States contracts in the lease to construct the Cove Creek Dam and authorizes the Air Nitrates Corporation and American Cyanamid Co., through a subsidiary corporation, to construct three navigation dams upon this river, the power produced by the Cove Creek Dam to be covered by the lease and that produced by the other three dams to be used, owned, and enjoyed by the lessee. These four dams are all to be constructed for improvement of navigation, the national defense, and incidental power production.

The three dams below Clinton: Congress has the unquestioned power to authorize the construction of these dams for the improvement of navigation and incidental power production by persons or corporations at their own expense. This power has been frequently exercised for many years and never challenged. The Hales Bar Dam in the Tennessee River, the Keokuk Dam in the Mississippi River, Dam No. 12 in the Coosa River, and many other large dams have been constructed under acts similar to the provisions granting the lessee licenses to construct these dams. It has been a favored way of improving navigation of streams as well as developing water-power resources without cost to the United States. The permits and licenses granted under the provisions of the Madden bill are to be governed by the provisions of the Federal water power act in all things, but the lessees are to have preference over all applicants to the Federal Water Power Commission for licenses to construct them.

The incidental power generated by these dams, its distribution and sale, however, will be subject to the laws and constituted authorities of Tennessee, no question of interstate commerce being involved in the generation, use, and

sale of hydroelectric power. This is conceded by the provision in the bill that the lessee shall "construct, operate, and maintain such dam or dams subject to the applicable State and Federal laws."

Section 9 of the Federal water power act under which they are to be constructed provides, in section (b), that each applicant for a license hereunder shall submit to the commission

"(b) Satisfactory evidence that the applicant has complied with the requirements of the laws of the State or States within which the proposed project is to be located with respect to bed and banks and to the appropriation, diversion, and use of water for power purposes and with respect to the right to engage in the business of developing, transmitting, and distributing power, and in any other business necessary to effect the purposes of a license under this act."

The Madden bill does not undertake to enable the licensee at these dams to override the authority of the State but merely provides that after the lessee has complied with the laws of the State, then, so far as the Federal Government is concerned, he shall have his preliminary permit and consequent license if desired. The time allowed the lessees to construct the dams is less than that which the Water Power Commission is authorized to allow power companies applying to it for permits and licenses.

The Cove Creek Dam: Congress has the power to construct dams for navigation improvement and the national defense as here contracted and to lease the water power produced. This has been done in a number of cases. The act of Congress providing for the construction of the Sault Ste. Marie navigation improvement by the United States authorized the water power incidentally produced to be leased or disposed of, and it was sustained by the Supreme Court of the United States in the case of the United States v. Chandler, Dunbar Co. (229 U. S. 53).

The pertinent provisions of the contract of the United States to construct the Cove Creek Dam are as follows: The lessor, for the purpose of navigation improvement, national defense, incidental flood control, and to secure the maximum production of fertilizers at Muscle Shoals in time of peace, covenants and agrees to acquire and construct with reasonable promptness Cove Creek Dam on Clinch River approximately 8 miles north of Clinton; the lessor covenants and agrees to acquire by good and marketable title, free from all defects and encumbrances, all such lands, rights, easements, and servitudes as may be necessary for the construction, operation, and maintenance of said dam, and to complete the construction thereof in good faith, and with reasonable diligence, the property when completed to become a part of the properties leased.

The power produced, its distribution and sale by the lessees, is subject to the control and regulation of the laws and constituted authorities of Tennessee as in all other cases, which I think is admitted by the provisions of the lease.

With these views of the meaning and proper construction of the provisions of the proposed lease concerning dams on the Clinch River, I am of the opinion that they do not violate any of the sovereign powers, rights, and interests of the State and people of Tennessee and are constitutional and valid. If you have any doubt of this, you could offer an amendment to the bill that no provision of the lease shall violate any of the sovereign rights of the State, which will doubtless be accepted, because if it is done they will be void.

The lease contains a contract by the United States that it will not construct or allow to be constructed a dam on the Tennessee River or its tributaries that will materially impair the full enjoyment by the lessees of the property leased, which is objectionable and should be stricken out. Congress had no power to make such a contract, because it does not relate to or affect navigation, but solely to the private business of the lessees. However, it is void, meaningless, and harmless, and entitled to no serious consideration.

The chief objection, it is understood, to the Madden bill comes from the power companies, and especially those that have made application to the Federal Water Power Commission, but not to the railroad and public utilities commission of Tennessee, for permits and licenses to construct the dams on the Clinch River, as well as dams on other rivers in Tennessee, which will doubtless be granted by the Federal Water Power Commission if the Madden bill is not enacted granting such licenses to the Air Nitrates Corporation and American Cyanamid Co. by the United States.

In other words, the contest is between the United States in its effort to improve navigation and provide for the manufacture of fertilizers for the use of farmers and nitrates for national defense, and the Cyanamid Co., which owns the process for the manufacture of nitrates on the one part, and the power companies which

desire by their application more than 20 dams on the Tennessee River and its tributaries in east Tennessee for power purposes, the granting of which will give them power to dispose of the hydroelectricity produced and transmitted to other States almost in their absolute discretion.

The water-power companies have long opposed the generation and sale of hydroelectricity by others than themselves. They opposed the completion of the Wilson Dam; they opposed and by delay defeated the proposition of Henry Ford to lease the Muscle Shoals development, and it is said the Fertilizer Trust joined them in this fight. The 13 associated power companies opposed a similar bill to the present one and had a bill introduced granting them a lease, although they owned no processes for the manufacture of air nitrates and their proposition to do so was of doubtful construction. They have introduced no bill to the present Congress, doubtless because of the Walsh resolution pending in the Senate for the investigation of the power companies; but there are two bills for Government operation or lease, and it is probable that they will gain control of the electric power under these if the Madden bill is not enacted. It is also quite certain if the Madden bill is not passed in the present Congress there will be no proposition from a company manufacturing fertilizers in the future, and the Muscle Shoals power will all pass into the hands of the power companies and be lost to the agricultural interests of the country.

There is another point I would call your attention to: The Air Nitrates Corporation and the American Cyanamid Co. are chemical manufacturing companies and not water-power companies. The construction of the dams on the Clinch River will assure ample power at Muscle Shoals all the year to conduct their business to produce the maximum amount of fertilizers provided for in the lease. They must dispose of the power produced by the dams on the Clinch River, and it will be more profitable for them to sell it to manufacturing companies located near the dams, which will be of very great advantage to Tennessee in the increase of population and taxable property. They in all probability will have no expensive distribution lines to transmit it a distance or out of the State.

It do not wish anything I have said in this letter to be construed as a criticism upon the members of the Railroad and Public Utilities Commission of Tennessee, for they are all gentlemen of integrity and ability and are patriotically asserting and defending the sovereign rights of Tennessee and the people in the waterpower resources of Tennessee and are not and can not in any way be influenced in the discharge of their duties contrary to the interests of the people of the State by anyone. I favor and approve their assertion of the State's rights which the power companies have ignored and are now attacking by a bill in the chancery court of Nashville.

I have written you quite at length about this matter because I am deeply interested in the manufacture of cheap fertilizer at Muscle Shoals, the provisions for the national defense, and the development of the water-power resources of the Tennessee River for the benefit of the people of Tennessee.

Yours truly,

JOHN K. SHIELDS.

(Thereupon, the committee adjourned to meet to-morrow, Friday, February 10, 1928, at 10.30 o'clock a. m.)

The committee met in executive session at 10.30 o'clock a. m., Hon. John M. Morin (chairman) presiding.

The CHAIRMAN. Mr. Bell, we would be glad to hear anything further you may have to say.

STATEMENT OF W. B. BELL, PRESIDENT, AMERICAN CYANAMID CO.-Resumed

Mr. BELL. I appreciate this opportunity to come before the committee and make one further suggestion which possibly may improve the proposed lease.

This suggestion is along this line, that if the fertilizer operation should be closed down at any time after the fifteenth year, and should remain closed down over a period, we will say, of 18 months out of 36, then the farm board should certify that in their judgment there is no likelihood of starting up again-in other words, that the operation was probably closed down for an extended period of time beyond which no one could perceive the probability of resumption, in that case a board of arbitrators should be appointed, of which one member should be appointed by the Secretary of War to represent the Government, one should be appointed by the company, the lessee, and the third by the two so appointed or, failing anybody's appointment, why, then, the judge of the northern district of Alabama should appoint to whatever vacancies exist, and these arbitrators should determine the then fair rental value of the premises, and that should be the basis of rental, with this proviso, that in no event would their adoption of the fair rental result in an increase of more than 1 per cent, or 5 per cent in all, on those sums on which the lessee would be responsible under the lease as drawn, for 4 per cent. In other words, the arbitrators could fix the value of the premises at less or the same amount or more, but they could not set it at a rental which make the total rental exceed 5 per cent where it now reads 4 per cent.

There would be this further provision, however, that if at any time the lessee should determine to resume the fertilizer operation, and should so resume, then the rent would be put back on the original basis of 4 per cent, plus the various items of amortization, and so on -in other words, a provision which is intended, should we reach a point at which we were satisfied we could again work out the fertilizer proposition, to give us the benefit of the original rental value in order to enable us to have the power at the old price and go ahead with that situation and tackle the fertilizer proposition from this new angle.

The point about it is that this plan leaves us in possession of the premises so that we are not compelled to forfeit our investment in the fertilizer operation. It still leaves us the opportunity to work out our fertilizer situation and yet, at the same time, during the period of the suspension of the fertilizer operation under the subject of those conditions, it gives the board of arbitrators an opportunity to readjust the rental, and if that is of any interest to the committee-and it seems to me that it to a considerable extent removes the difficulties that have been raised here, both from the standpoint of the Government and from the standpoint of the company which is putting the money in-I should be very glad to submit it to the committee for such consideration as it merits.

Mr. JAMES. Who decides on the forfeiture-the farm board?

Mr. BELL. The lease would contain the forfeiture clause as now drawn. In other words, if there were any defaults under the lease as now drawn with this amendment, then the forfeiture would result in proceedings brought just as now provided in the Federal Court for the Northern District of Alabama. It would not give the arbitrators a right to throw the company out, or anything of that sort.

Mr. JAMES. But the farm board has nine members, if I remember correctly, and two of them you would appoint?

Mr. BELL. Yes.

Mr. JAMES. Would they have anything at all to say about the period during which you closed down, or would it be left to the seven appointed by the President?

Mr. BELL. Under the proposition as I have it here outlined, it would be left to the vote of four or more of the seven appointed by the President and confirmed by the Senate, to determine whether in their judgment the operation of the fertilizer plant was probably suspended for an extended period of time. If they rendered a cercertificate stating in their judgment that that was the fact that is the seven members, excluding the two whom we appoint-and rendered that certificate to the Secretary of War, then the Government would appoint one of these arbitrators and we would appoint one, and the two so appointed the third or, failing such appointment, the Federal judge would appoint to whatever vacancies there were in the board of arbitration, and then these arbitrators would take evidence as to what was the fair rental value of all these properties covered by the lease; and, having fixed that rental, then we would go on that basis; subject, however, to the proviso that if at any time we resumed operation of the fertilizer plant, then the rent would go back to the old rent so that we could go on with the fertilizer operation as it had been originally intended.

Mr. WURZBACH. In other words, the original forfeiture clause in section P is not affected by this new proviso at all?

Mr. BELL. No.

Mr. WURZBACH. And a majority of the seven members of the farm board shall determine whether or not this new provision shall come into operation?

Mr. BELL. Yes. In other words, their determination, resting on their judgment as to this fact: The preliminary period of some 15 years having elapsed, and there being in fact a suspension in the aggregate of 18 months out of the 36, then, if they believe that that suspension indicates a permanent suspension, they certify to the Secretary of War that such is the fact, whereupon these arbitration proceedings begin with a view to determining what is the then fair rental value of the property.

Mr. WURZBACH. In other words, you think, then, that if there should be a failure to manufacture fertilizer for any reason, the fact that there might not be any sale for it or whatever may be the cause of it, this is a recapture clause to the extent that the Government will then receive returns on that investment?

Mr. BELL. Yes. That is to say, the Government will then, through this board of arbitration, obtain a readjustment of the fair rental value of the premises. That is the thought.

Mr. WURZBACH. I think it is an improvement on the original proposal.

Mr. WRIGHT. Would there be objection right there in stipulating that the rental should not be less than 4 per cent? I realize that the 5 per cent mentioned there as the maximum would be the minimum if the arbitrators were to rewrite it, but would there be an objection to putting in there that in any event it should not be less than 4 per cent but not exceed 5 per cent?

Mr. BELL. Judge Wright, I do not see any objection. In other words, we are willing to take this property on the basis of 4 per cent, although I do call your attention to this fact, that members of the