The Willamette River Case: Costs 209 



«See Federal Power Commission, Bureau of Power, Information for Staff Use 

 in Estimating Electric Power Costs and Values, Technical Memorandum No. 1, 

 November 1955. 



•"See annual reports of Northwest publicly owned utilities to FPC, 1955. 



' Assumes power rates set by the federal establishment to return 4.5 per cent 

 on investment; for nonfederal public, assumes power rates set to earn 1.5 times 

 annual debt service; and for private utility, additional net returns required to 

 supplement dividends on common stock to provide the 6.5 per cent earnings- 

 price ratio. (See Edison Electric Institute Statistical Bulletin, op. cit.) 



Examination of the annual charges to customers reveals marked 

 differences in the accounting costs. Annual costs for the private 

 undertaking range from 60 to 90 per cent greater than for the local 

 public and federally undertaken alternatives. 



Part of the differences in annual costs can be attributed to the 

 differences in money costs. That is, the rate of interest imputed to 

 the federal undertaking is only 2.5 per cent^ as compared, for 

 example, to the earnings-price ratio of 6.5 per cent on common 

 stock of the utility. But these differences in so-called money costs 

 might appear greater than they are. For example, a private utility 

 can use a variety of kinds of securities which it seeks to arrange in 

 the least cost combination. In our example, the weighted average 

 of interest on bonds, dividends on preferred equity securities, and 

 the earnings-price ratio on common stock is only 4.5 cent — or an 

 over-all rate of return approximately equal to that rate which is 

 often achieved by federal agencies in their power operations. Fed- 

 eral agencies often follow a conservative practice in their power 

 rate schedules to ensure a rate of return substantially in excess of 

 their interest requirements.^ 



The extremely favorable rates on revenue bonds of local units 

 of government also are, to some extent, more apparent than real. 

 Partly, they are accounted for by the tax-exempt status of the 

 securities themselves and to this extent represent a substantial 

 advantage to municipal and other local governnlents. But a low 

 interest rate is largely accounted for by stipulations in the bond 

 contract requiring that returns be sufficiently high to exceed debt 



* Since this is an analysis of accounting cost only, the rate used in actual 

 accounting practice is applicable, rather than approximation of the rate reflect- 

 ing social cost derived in Chapter iv. 



*See, for example, the annual reports of the Tennessee Valley .\uthority or 

 the Bonneville Power Administration. 



