Heat, Light & Power

This week the Joint Atomic Energy Committee of Congress will begin considering the Dixon-Yates contract, under which private utilities would build a $107 million steam plant and sell the electric power it produces to the Government. The hearings should shed some light on an issue that so far has generated only political heat. This is the basic Dixon-Yates story, which Administration witnesses will unfold this week:

Why Dixon-Yates? The Dixon-Yates contract meets a challenge posed by President Eisenhower's budget message last January. The Atomic Energy Commission needed power, he said: could private enterprise do the job? The idea of an AEC contract for private power was not new: the Truman Administration negotiated two big contracts with private-power groups, one with Electric Energy, Inc. and another with Ohio Valley Electric Corp.

AEC is the world's largest power consumer; its Oak Ridge plant alone uses more electricity than the entire state of Texas. The Dixon-Yates contract came about because by 1957 the AEC will need another 600,000 kw. of power for plants in the mid-South. The Administration had a choice of adding a $100 million steam plant to the Tennessee Valley Authority power system or of calling on private enterprise to provide the power.

The President decided against expanding TVA for reasons both of principle and of practical budget problems. He felt that TVA, a billion-dollar federal power system originally planned to aid an underdeveloped section of the U.S., had served that purpose and was large enough. Building a new TVA plant would add $100 million to the national debt. Instead, the President ordered AEC to seek private power.

The AEC negotiated the contract with two companies having subsidiaries in the region where the plant will be built (West Memphis, Ark.). The two companies: Middle South Utilities, Inc. (Edgar H. Dixon, president) and The Southern Co. (Eugene A. Yates, chairman). The AEC did not call for bids because power contracts of that type and size are normally negotiated with regional utilities.

The Truman Administration negotiated power contracts for AEC plants in Paducah, Ky. and Pike County, Ohio with regional utilities (without calling for competitive bids) for the same basic economic reasons: as AEC's power requirements rise and fall, local power companies can supply the added demand by production in their other plants or can absorb excess power through their network to other customers in the area.

What Profit? Under the contract, the Government will pay the Mississippi Valley Generating Co. (formed by Dixon-Yates to build the proposed plant) $519 million for power in the next 25 years. Every penny has been calculated to represent estimated costs: $243 million for coal, $76 million for amortization of debt, $62 million for labor, maintenance, insurance and supplies, $61 million for taxes, $58 million for interest on debt, $12 million for return on the company's equity and $7,000,000 for replacements.

Despite reports of a guaranteed 9% annual return, the contract does not guarantee any profit at all. If plant construction or costs of operation run higher than estimated, the company might make no profit and could take a loss. The rates are calculated to return 3 1/2% on borrowed funds, which represent 95% of the total capital costs. A return of 9% was estimated but not guaranteed on the remaining funds, consisting of equity or risk capital.

In 1953 the power industry as a whole earned 10% on equity capital and about 6% overall on all invested funds. The overall Dixon-Yates return will be about 4%--if costs are kept in line. If not, a big enough jump in construction and operating costs might wipe out profits for the next 25 years. According to the contract estimates, at the end of 25 years the company will own an aging plant and still owe a debt of about $25 million.

By normal contract standards, Dixon-Yates is a good deal for the Government. In previous AEC contracts for power negotiated under the Truman Administration, the Government had to pay most of the increase if costs ran over the estimate.

Under the Dixon-Yates terms, the company will be largely liable if costs run high, and the Government can cancel out if the power is no longer needed.

The terms have been approved by AEC, the Attorney General, the Acting Comptroller General and TVA. But the contract cannot become effective until the Joint Atomic Energy Committee considers it for 30 days while Congress is in session, a provision of law which could delay the contract until the next Congress meets.

The Joint Committee, which will consider the contract this week, has the right to waive the waiting period and thereby allow AEC to go ahead. At his news conference last week, President Eisenhower made it clear that he intends to stand solidly behind the contract terms. He said the Government was perfectly and splendidly protected.

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