192 MULTIPLE PURPOSE RIVER DEVELOPMENT 



requirement that Alabama Power Company provide for flood 

 protection equal in amount and effectiveness to the Howell Mill 

 Shoals project. 



Side Issues and Unanswered Questions 



Whether or not the amount of flood control storage required by 

 Public Law 436 is economically efficient, other questions of signifi- 

 cance remain. If the amount of flood control storage proposed by 

 Alabama Power Company exceeds the amount necessary to offset 

 the effects of natural storage displaced by its reservoirs, issues arise 

 in connection with (1) efficiency in the distribution of project 

 output, (2) consistency with some other provisions of the legisla- 

 tion, and (3) equity in sharing the nonreimbursable portion of 

 the project's costs. 



Unless Alabama Power Company is compensated for the extra 

 cost it incurs (either directly by the beneficiaries in the flood plain 

 or by some public body for undertaking what would be a public 

 responsibility), the flood control costs will be embedded in the 

 investment that makes up its power rate base. The electric utility 

 industry, as a franchised monopoly, is permitted a rate structure 

 calculated to recover the original investment as well as to provide 

 a reasonable rate of return. Power rates would have to average 

 higher if Alabama Power Company were required to absorb the 

 cost of flood protection. Unless the flood control costs could be 

 grafted on to the inframarginal ranges of a set of discriminatory 

 rate schedules, the added price on power to cover these costs would 

 be similar to an excise on power and would adversely affect the 

 marginal conditions for efficient distribution.^* 



It is not clear from Public Law 436 what is intended in connec- 



kilowatts of installed generator capacity, as well as some flood control. If we 

 capitalize the annual flood control benefits of the Howell Mill Shoals project 

 ($7.8 million) and deduct this from the investment, the generator capacity costs 

 will exceed $450 per kilowatt, as compared with about $250 for the Alabama 

 Power Company. This much more favorable relation between factor inputs 

 and project output for the Alabama Power Company plan suggests why it can 

 undertake such a development with money costs exceeding 5 per cent, whereas 

 the Corps' Howell Mill Shoals project is unable to show economic justification. 

 "See our discussion of market mechanics and efficiency criteria in Chapter ii. 



