SEPARABLE COST-REMAINING BENEFIT METHOD

The Federal Power Commission, too, is using the separable costremaining benefits method. The Department of the Interior and the corps are now holding a series of meetings with the objective of working out mutually satisfactory procedures for applying this cost allocation method to the projects of both agencies. I expect that very soon all three agencies will be on a fully comparable and uniform basis. In fact, I feel sure that before long this whole knotty problem of cost allocation will have been resolved to the satisfaction of your committee.

Senator MCCLELLAN. Can you give us this formula you have adopted that you refer to as "the separable cost-remaining benefit method"? Is there a predescribed formula, something definite on that?

General STURGIS. It is a very complex approach but it is an accurate one. It has been evolved by the Federal Basin Interagency Committee. What it does is figure the separable costs of each function and sets those aside as chargeable directly to those functions. The remaining, or joint costs, are then apportioned among the several functions in proportion to the remaining benefits or savings. The separable cost of any function is obtained by subtracting what it would cost to build the project without that function from the actual cost of the project as figured and as proposed to be built.

Senator KNOWLAND. It sounds as complicated as farm parity.

General STURGIS. I can assure you it is a very complex method, but it is one that works out so that the allocation that is made, as in the case of power, actually reflects the costs of putting power into that project.

Senator KNOWLAND. I wonder if you could have prepared for the committee a concise statement-not that yours was not-so that we may have it here to go over. I want to be sure this procedure is at least understandable to someone other than the engineers. We would like to know, because it may affect our own decisions on the thing.

Senator HOLLAND. I agree thoroughly that that should be done, but I think it can be done better by enclosing an illustration applied to a multipurpose project of how the separable costs for each of the functions-power, flood control, reclamation, navigation-were arrived at and how the benefits applicable, the remaining benefits, are computed with reference to that particular project at the particular stage on which your statement is based. I wonder if you could not take a multipurpose project and give us the complete picture of that to illustrate this system.

General STURGIS. Yes, sir. We can do that, Senator, and we will. I think we will try to make a simple case instead of taking a project with 4 or 5 functions, which would make it very complex. We will take 1 with 2 functions, and that will show the general method of doing it. We will make a description and follow with an example, as desired by Senator Holland.

Senator KNOWLAND. I think that is all right, except that we do not want to have it so simplified that it would be difficult to follow on some of these projects that have more than two features to them. I think we ought to know just what we are faced with on these various allocations.

Senator MCCLELLAN. I was very interested in this because, as I understand, in the past possibly the Department of Interior or the Reclamation Bureau has used one approach to determine benefits as against cost to develop and establish the ratio between them, and the Corps of Engineers has probably used a different formula to establish their figures as to cost and benefit ratio. Is that correct?

General STURGIS. There have been different methods. We have made allocations very close to this separable cost-remaining benefits method in the past. However, the Department of Interior has not. They have gone to the incremental method where incremental costs over and above what the basic cost of the dam would be for putting in power and flood control.

Senator KNOWLAND. I do not know whether it is going to be feasible! for other agencies such as the Reclamation Bureau to use the same standard or not, but as one who serves on both committees, as some of the other Senators do, and all of us who serve on the full Appropriations Committee, it would seem to me that there would be a great deal of merit if a system could be devised which would work in the Bureau of Reclamation as well as in the civil functions branch of the Army engineers so that we have a standard yardstick, more or less, and not one that is 3 or 4 inches shorter than the one being used by the engineers or the Bureau. That is confusing to the committee and I think to the Congress itself.

APPLICABLE FORMULA NEEDED

Senator MCCLELLAN. We have had this problem in the past, as I recall. The Corps of Engineers would place a much higher cost on power facilities. They would charge far more to the project for the cost of power facilities than would the Bureau of Reclamation. In other words, they would take a position, well, you are going to build the dam anyhow. All you should charge to power is the cost of installation of the generators and so forth; whereas, you people thought that a part of the basic construction should also be charged to power because you could not provide the power unless you built the base. There was a wide difference in the two agencies. I think it is important to us, particularly in this time of tight money and when we are reviewing a lot of these projects, that we get some formula that will be generally applicable to both agencies, one that the Congress can understand. Then we will know when we come up with a project and say that benefits are 50 as against 1.

We know if that statement comes from the Corps of Engineers or if it comes from Reclamation that it is arrived at on the same general formula. We have been confused, I know, many times by these reports on cost ratio. I know there have been differences in opinion between the Corps of Engineers and between other agencies with respect to what part of the cost of a project should be charged to power and what should be charged to flood control and navigation.

Senator KNOWLAND. While the Bureau of Reclamation does not come under this particular subcommittee, it so happens that Senator Cordon serves on that and is chairman of the Senate Interior Subcommittee. I will talk this out with them and maybe we can address a communication to both agencies and see if it is not possible to work out a standard yardstick. If not, maybe the Senate and House Appro

priations Committees will work out a yardstick that will be applicable to both.

TVA AS EXAMPLE

Senator ROBERTSON. In that connection, a New York lawyer who had a lot to do with TVA in its early days wrote a book that was published last fall, and he had three chapters in there on TVA and the concept that TVA was primarily to be a yardstick as to the proper cost of power and the proper price for the sale of power. He made a definite assertion in his book that there had been allocated in TVA too much collateral benefit that did not deal directly with power. He also claimed TVA could not sell its power at 4 or 5 mills if it had paid interest on everything that had been appropriated for power. He claimed they never did, and if they had not made too much of an allowance for the costs of flood control and other benefits, navigation and whatnot, in the breakdown on what the power was actually costing.

I would like to ask the general one question: What is the new rule in estimating the ratio of benefits to costs?

Senator KNOWLAND. He is going to give us a breakdown on that.

POLLUTION BENEFITS

Senator ROBERTSON. I wanted to know about pollution.

General STURGIS. I do not believe, sir, that generally a function such as pollution, which is relatively minor, and is not a specific purpose of a project, is considered. In other words, you will get a benefit there that is not specifically envisioned in the project and the legislation, but is a byproduct of the project.

Senator ROBERTSON. But it was considered in computing the ratio of benefits to costs on the Gathright Dam. Then I was informed that a new rule had been adopted by the engineers-and I do not know who promulgated it, and that is what I want to find out-that pollution benefits could no longer be considered an element of benefits.

I was given to understand that when pollution benefits were eliminated from the Jackson River project in the vicinity of the town of Covington and especially from the West Virginia Pulp & Paper Co., which puts out a large discharge of sulfite liquor, which is about the worst type of pollution you put in any type of stream-when pollution was left out, the ratio of benefits to costs on the Gathright Dam fell below 1 to 1. Therefore the engineers did not ask for any appropriation in the present budget for Gathright Dam and, of course, there is no appropriation in there for it.

General STURGIS. The overall benefits to cost ratio would not necessarily be affected by the method used for allocating the costs to purSo I believe if the benetfit cost ratio fell below unity, it was poses. due to the fact that the benefits figured for pollution were not as great as originally expected to be and that might have reduced it below 1 to 1. But the method of allocation would not be affected.

Senator ROBERTSON. Then I understand there has been no change in the methods that you use or no order issued that pollution benefits shall no longer be considered. Do I understand in figuring the Gathright Dam you still figure the benefits for pollution elimination, or did you not? Let us have that cleared up.

General STURGIS. I would like General Chorpening to answer that. Senator ROBERTSON. It has been here for some years. The Senate committee put it in once and listed it in West Virigina. Then the Senator from West Virginia said he did not want it and put it in a committee report and it went out. It was out before I knew it was out, because I did not know it was in the report. Then we put in planning money in the amount of $50,000 in 1 year. Last year we put in $100,000 I believe. Both times it was in the budget. Neither time did the House allow either of them, but they finally accepted it. Now this year it is out again.

I understood it is out because under some new ruling you could not consider the benefit of a regulated flow that would relieve the pollution menace. I did not just pick that up out of the air; I got that from somebody in your outfit. I do not know who it was, but somebody ought to be able to tell me whether you figured pollution

in or not.

General STURGIS. I will ask General Chorpening to answer.

General CHORPENING. I have not recently reviewed the detailed situation existing on Gathright. We are going to discuss, later on in the hearings, all the planning projects. If I could have the permission of the chairman of the committee, I would like to at that time fully discuss the ramifications as they apply to Gathright. We do have more recent instructions on the application of all benefits. Senator ROBERTSON. Who issued those instructions?

General CHORPENING. The Bureau of the Budget in circular A-47, which we have. As to the application or any application of those specifically to the Gathright Dam, I do not have the details in my possession today. I did not think that was going to come up. I will have that when we get into the planning projects later.

Senator KNOWLAND. If you can get the specific answer to the question that Senator Robertson wants, which I think is perfectly reasonable and that he is entitled to a complete answer, we will appreciate it.

Senator ROBERTSON. That will be entirely satisfactory.
Senator KNOWLAND. You may proceed, then.

COOPERATION WITH OTHER AGENCIES

General STURGIS. Senator McClellan described, in fundamental language, the difference between our approach on the separable costs and remaining benefits method and the incremental approach, when he described the incremental costs or additional cost of simply putting power into the dam as opposed to paying for its share as a major feature of the dam. But I would also like to say in connection with your reference to the Bureau of Reclamation that later in my statement I shall refer to the very close cooperation that we have had and have maintained and are increasing month to month with the Department of Interior. That is why I said I felt we would resolve that problem ourselves. We made great progress this year, as I will illustrate later.

Senator KNOWLAND. I think that is fine. I think that should be the situation between departments of the Government, but that condition still might prevail and you might have a yardstick which was perfectly sound and logical and satisfactory to you. They might have a yardstick which was very sound and satisfactory to them. The

two of them would be different and it would not present to this committee or to the House Appropriations Committee a fair comparison between these several projects.

NEED FOR STANDARD YARDSTICK

That is what I hope: That either the Bureau of the Budget or the 2 agencies, of their own volition or stimulation from the 2 appropriations committees, will get a standard yardstick so when we are either on this subcommittee or the other one or the full Appropriations Committee and they bring in certain cost-benefit ratios, we will know the figures are comparable regardless of the type of public works involved. Is that not basically what we are seeking?

Senator MCCLELLAN. That is right. My remarks were not critical of either the Corps of Engineers or the other agencies at all. They have been using different standards or methods for arriving at these cost-benefit ratios. After all, any appropriation comes out of the taxpayers. For us to intelligently appropriate funds and know what we are doing in authorizing these projects and appropriating money for their construction, I think the Government should use a uniform standard in measuring those benefits. Then we are not always confused by an argument that this was taken into account or something else. Once the Congress understands it and you come here and say the benefits are 112 to 1, we know what is involved and what has been taken into account. I believe the general says that progress is being made toward working out a uniform standard with the other agencies. General STURGIS. In making my reply, I was not at all interpreting any of your remarks as critical. I was only anxious to indicate to the committee what very fine progress had been made and how the feeling is reciprocal and mutual as far as the Bureau and ourselves are concerned. This matter of cost allocation is under discussion. We have had several meetings and we are in the middle of a series of meetings to come out with a common answer.

Senator MCCLELLAN. You feel progress is being made?
General STURGIS. Yes, sir.

Senator ROBERTSON. I will say to the Senator from Arkansas that the book to which I have just referred compared the method used for TVA with the one used at Bonneville and the other dams in the West which he said were quite different. He said that he was assured they would be on a self-liquidating basis on the proper allocation to power, reclamation, and whatnot.

I hope when the general gives us the information he will go into that question and see in what way the principal yardstick is different from the rule being applied in the West and now being applied on a little project in Virginia. We never did have but two. One is Buggs Island, and the other is the Gathright Dam.

General STURGIS. I can assure you we have always allocated our costs on the basis of power and each function bearing its fair share. It has not been true, as has been brought out, that in the marketing of power those allocations have always been followed because the marketing has not been under our control. But I believe from my experiences and my close association this year with the Department of Interior that Secretary McKay and Under Secretary Tudor and Assistant Secretary Aandahl are equally aware of the problem of the