all areas. This is really the same principle as power pooling, which we believe has got to come now to all of America. The power companies are beginning to go into pooling on a big scale, and we want the opportunity to participate. We want to tie our systems into those pools, be of what help we can in them, and also get our share of the benefits from vast pooling.

There are no outages in the Tennessee Valley area. This is because they have pooled a vast area, and have many sources of generation tied in, so that in any part of the Tennessee Valley power is being fed in from several directions and from several generators.

Furthermore, the power companies are tied into TVA wherever they come together, or TVA is tied into them, and they exchange and rely upon each other's capacity. This is something we have generally not been able to do.

This is also true in the Pacific Northwest, where the Northwest power pool has been in operation many years. They generally use the Bonneville Power Administration's Federal lines as the bank under that pool. It has worked. They are not going to have such outages, I don't think, as we have experienced in the New York area, where co-ops were hit also because they were dependent upon the companies that were involved.

Any time that a particular company, a particular area, is dependent upon one line, one facility, like the one whose outage caused the blackout recently in Nebraska or New York, both the municipal areas involved and the rural areas are subject to be blacked out. And we want to help eliminate this all over the country as fast as we can. (The prepared statement of Mr. Ellis is as follows:)

Mr. Chairman and Gentlemen of the Subcommittee, my name is Clyde T. Ellis. I am General Manager of the National Rural Electric Cooperative Association. With me are Jerry L. Anderson, Assistant General Manager; Robert D. Partridge, Senior Legislative Representative; Robert D. Tisinger, General Counsel; and Jerome S. Katzin, First Vice-President, Kuhn, Loeb & Co., Inc., New York City.

As one who has been closely associated with rural electrification for a quarter of a century, it is my firm conviction that the need for supplemental financing is critical-the most crucial need facing the REA program today. Without it, many of the nearly 1,000 rural electric systems will not be able to meet their responsibilities to the more than 20 million people which they serve in 46 states.

In my opinion, the pile-up, or backlog, of loan applications at REA is reaching unmanageable proportions. The funds which the House and Senate approved for REA for this fiscal year are only about two-thirds enough to meet the backlog plus the needs of fiscal 1967, despite the fact that they are considerably more than requested by the Administration.

Paradoxically, the very success of rural electrification now threatens to destroy it unless a new and additional source of loans is forthcoming. A Federal Bank for Rural Electric Systems as proposed in this legislation can provide this new source, and do it effectively with the minimum necessary level of Federal assistance. We know of no other practical way to meet this need.

While the bill before this Committee and the one presently before the House Committee differ in several respects, they are similar in concept. They would establish a bank which eventually would be owned and controlled by the rural electric systems themselves, and would furnish adequate capital to insure their orderly and necessary growth-mostly vertical growth. In addition, both bills recognize the need for continuing the present 2% loan program for those systems which must have 2% financing to survive. Generally, these are the systems which serve in thinly-populated, or lowest income areas of the nation, or in some instances systems needing to build their own generating and/or tiein transmission facilities.

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There is nothing really new in the idea which is being proposed here. For many decades Congress has helped people to pool their collective credit, and the collective credit of rural electric systems is excellent. As of January 1, 1966 rural electric borrowers had repaid almost $2.4-billion on their REA loans including $1.3-billion in principal and $275-million of principal ahead of schedule, and $762million in interest. Only slightly more than $100,000 in repayments were overdue. The total amount of loan funds advanced by REA as of January 1 was $4.9-billion, but as of that time only $3.3-billion was outstanding.

At the present, rural electric systems generally have no other place to borrow except from REA. For the past several years their requirements for growth capital have been far above the amounts available from REA. The rural electric systems have been extremely concerned with this problem. And so have the leadership of both major parties. The Republicans during the Eisenhower Administration, the Democrats during the Kennedy years and now during President Johnson's Administration, have pressed us to agree to some plan that would provide loan funds outside of the Treasury. This we have done. We are hopeful that Congress will also agree. What I think it boils down to is whether Congress wants rural electric to borrow on the open market through a bank, or whether Congress wants rural electrics to continue to rely upon the Treasury for loans.. The rural electrics have been working on this problem intensively for over three years. In 1963 at the ten Regional Meetings of NRECA, they authorized us to undertake a study of possible sources of supplemental financing. The following year, the delegates to the 1964 National Annual Meeting directed us by resolution to examine in depth "the feasibility of obtaining funds in private money markets, and an appraisal of the modifications (if any) which should be sought in REA financing." Following that Annual Meeting, NRECA contracted with the investment banking firm of Kuhn, Loeb and Co., Inc. of New York City to undertake one phase of the study-namely, the possibility of cooperatives borrowing money on the open market. At its 1965 Annual Meeting, the NRECA Board of Directors and the membership directed us to broaden the scope of the study to include all aspects of the financing problem: private, public, and mixed.

Experts on the NRECA staff in cooperation with a representative committee of the membership undertook the expanded phases of the study. We were in constant consultation with experts both within and outside the Government. The completed study took 2 years. It clearly established (1) that there is a continuing need for the present 2% program; (2) that adequate financing is not available under the present REA program; and (3) that a mechanism such as a bank for rural electric cooperatives was needed to supply additional loan funds and to provide for the transition from complete dependency upon Government sources to eventual ownership by the rural electric systems of their own credit facility.

The Rural Electric Bank concept was endorsed overwhelmingly by our membership at the 1966 Annual Meeting.

While we are grateful for the generosity of Congress throughout the years, all of us recognize that the mounting pressures on the national budget make it unlikely that the Administration or Congress will authorize anywhere near sufficient loan funds that we must have in order to keep up with the rapidly increasing demands for electricity on the part of some 20-million rural people. We must continue to heavy-up our systems, and this requires investment of capital far in excess of what we can realistically expect Congress to provide.

Unfortunately, it is not usually possible to postpone capital investments in the electric utility business. This is true for both investor-owned systems as well as member-owned, rural electric systems. When the members of a rural electric system turn on the lights and motor switches, they expect the lamps to shine brightly and the motors to turn, not heat. When they turn the water spigot, they expect the electric water pump to work. When they turn on the TV set, they expect it to do something more than stare back at them. In short, they expect all of the appliances for which they have paid out considerable sums of money to provide good service. We have more than our share of blackouts in Rural America at best, and we are going to have many more if we don't get a practical source of supplementary financing.

It is axiomatic that rural electrics plans their expansion within their service areas to meet the increased consumption of electricity as it occurs. They have no alternative, unless it is rationing of electricity and that, I am sure, is an alternative that none of us in this room would endorse. Therefore, our rural electric systems must carry on a systematic schedule of capital investments.

Now to comment briefly on a few of the major changes that have been levelled against this legislation, mainly by the commercial power companies and their allies. Mr. Anderson will cover them and others in detail in his statement, but I would just like to highlight them.

The charge is made that rural electrics would displace the commercial power companies as a result of this legislation. There is absolutely no possibility of that ever happening.

Rural electrics could do no more than hold their own, if that. They would continue to own approximately the same ratio of the nation's electric facilities as they do today. Total investment, if the entire capability of the Bank were used, plus $300-annually of 2 percent funds, would be about $13.7-billion by 1981, compared to an anticipated investment of $185-billion by the power companies, or a 14 to 1 ratio.

The charge that this legislation is a threat to the power companies' predominant position in the generation of power is equally without basis. The legislation puts a definite ceiling on the percentage of the generation capacity that rural electrics can own. It cannot exceed 5 percent of the total capacity of the nation.

Moreover, loans for generation cannot be made unless it can be proved that the power produced would be cheaper than rural electrics could purchase it for from other sources, including commercial power companies. Further, Congress would retain substantial control over the Bank.

I would like to add that most of the loans for generation will go to heavy-up existing G T systems, not to start new ones. Rural electrics do not want to build generating plants unless they have to. At present they produce only about 18 percent of their own power compared to 38.2 percent they buy from commercial utilities. Collectively, they constitute the largest single customer of the power companies. Last year they bought $121.3-million worth of electricity from the companies.

There is the charge that the rural electrics will be able to take over the urban areas. This could never happen. To allay the groundless fears of the power companies, the legislation stipulates that acquisitions by a borrower of the Bank cannot exceed 5,000 connections within a non-rural area.

In conclusion, I should like to point out that the members of the rural electric systems are not looking for hand-outs. They have clearly demonstrated over the years their willingness to pay their own way, and, I believe, want only the chance to do more in the future. For instance, the members have invested in their systems, out of their own pockets, more than $2-billion. ($1.5-billion principal payments; $500-million in plant; $275-million prepayments.) Incidentally, they get no interest at all on this investment.

It was my privilege to participate in the studies and preliminary plans from which the rural electric bank concept evolved. I am convinced that it is a sound concept, and one that will furnish the growth capital that rural electrics must have in the years ahead. And, at the same time, it will open the door to eventual ownership and control of their own credit system and relieve the U.S. Treasury and the taxpayers of the burden of supplying our necessary capital.

Mr. ELLIS. At this point, Mr. Chairman, I would like to defer to Jerry Anderson, who is the assistant general manager, who presented the study to the regional meetings, and to our national meeting, and who headed up the team of experts that developed the proposals that are under consideration here.

Senator TALMADGE. You may proceed, Mr. Anderson.

STATEMENT OF JERRY L. ANDERSON, ASSISTANT GENERAL MANAGER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

Mr. ANDERSON. Thank you, Mr. Chairman.

My name is Jerry L. Anderson. I am assistant general manager of the National Rural Electric Cooperative Association, which Mr. Ellis has already identified for the committee.

I appear today in support of legislation which would amend the Rural Electrification Act of 1936, to establish a mixed ownership bank

through which REA-financed systems could bridge the gap between their anticipated need for capital during the next 15 years and the realistic capability of the present 2-percent, 35-year REA loan pro

gram.

In terms of invested capital, electric utilities constitute the largest and one of the most rapidly growing industries in the United States. The American people are currently doubling their consumption of electricity every 10 years. In fact, for years the load on rural consumers has been going faster than the load on industry generally.

Thus, notwithstanding the fact that central station electric service has been available to virtually all of the Nation's urban and suburban areas for half a century, the investor-owned segment of the industry plans to increase its capital investment from $70 billion, as of 1965, to more than $170 billion by 1980. Most of our rural areas, by contrast, have enjoyed central station service only since 1936. The weighted average would be for less than that. Thus, to an even greater extent than is the case with the urban and suburban areas, very large amounts of growth capital will be required to establish and maintain reliable central station electric service for the rural segment of our population during the next 15 years.

Finding the ways and means by which to provide this needed capital is a matter which has long concerned NRECA and its member systems. Our support of the legislation now pending before this subcommittee follows and is based upon exhaustive study and consideration, including repeated consultations with officials of the Department of Agriculture and the Rural Electrification Administration and with leading authorities on agricultural economics and utility system financing.

More than 22 years ago, NRECA at the direction of our membership first retained the investment banking house of Kuhn, Loeb & Co. of New York to study the nature of the problems involved, to determine their magnitude and to propose solutions. NRECA has since that time continuously retained Kuhn, Loeb & Co. throughout the long formative period of this legislation in order to be certain that the proposals embodied in the final product are financially sound and practical of application.

In its initial report submitted to NRECA in June of 1965, entitled, "A Survey of Methods for Financing Rural Electric Cooperatives in the Capital Market," Kuhn, Loeb concluded that during the next 15 years REA-financed electric systems will require growth and development capital in the amount of from $8.2 to $9.5 billion, compared to total present investment of approximately $5 billion. Independent estimates developed by REA and by NREČA agree closely with this figure.

Since its inception in 1936, Congress has been most sympathetic in authorizing 2-percent, 35-year loan funds for the rural electrification program. REA loan funds advanced now total approximately $5 billion. We do not believe, however, that Congress can be expected to make available, under the 2-percent, 35-year program exclusively, the additional $8.2 to $9.5 billion of capital which rural electric systems will require during the next 15 years.

Nor is such future capital, we are told by Kuhn, Loeb, likely to be available in the open market without Government assistance, for the following reasons:

(1) The Rural Electrification Administration holds a first mortgage on all of the presently held and after acquired property of its borrowers.

(2) Rural electric systems, unlike investor-owned systems, enjoy no exclusively franchised territory in many States. Thus, potential private investors are exposed to substantial risk.

(3) The debt structure of an investor-owned utility is of a semipermanent nature, being constantly renewed with company expansion. The debt is, in fact, never retired. Their large depreciation and amortization cash flow develops substantial equity money with which to finance plant investment.

The FPC, in its national power survey, states that 59 percent of power company construction funds are now internally generated from retained earnings, depreciation, and deferred taxes. This figure is corroborated by the February 21, 1966, issue of Electric World, the leading industry magazine, which acknowledges that, during 1965, the companies financed over 60 percent of the $4.2 billion construction program with internally generated cash. Such depreciation and amortization cash as is generated in the case of a rural electric system is generally required to repay existing indebtedness to the REĂ. This also adds to investor risk.

(4) The companies themselves concede that rural service is not profitable; the REA-financed systems serve 3.5 consumers per mile of line whereas the investor-owned companies serve 34 consumers per mile of line. The REA systems average $516 of annual revenue per mile of line; the class A and B investor-owned companies-and this includes most of them-average $7,820 of revenue per mile. And,

(5) The diversification of load for a rural electric system is substantially less.

For all these reasons, Kuhn, Loeb concludes that the availability to rural electric systems of open-market financing without Government assistance is highly doubtful.

The Kuhn, Loeb report states:

Direct financing of individual cooperatives by means of mortgage bonds similar to REA loans and standard investor-owned utility financing, is, except in a very few cases, therefore, an unlikely method for financing the co-ops at least at this time. ** * Regardless of the actual financing method chosen, some transition period will be needed for the co-ops to move from REA loans to capital market loans.

These conclusions are based on Kuhn, Loeb's long and successful experience with utility financing. It is obvious that any supplemental financing program undertaken to meet the needs of the rural electric systems in the years immediately ahead must include, as an indispensable element, some measure of Government assistance to constitute a workable program.

Senator TALMADGE. Would you yield at that point, Mr. Anderson? Mr. ANDERSON. Yes.

Senator TALMADGE. Have any of the electric cooperatives ever borrowed private capital?

Mr. ANDERSON. I believe there have been very few cases where some outside money has been borrowed, Senator. Although their bonds have not been sold yet, the most outstanding example of this is probably in the State of Ohio, where our cooperatives there have joined with the power companies in the State in jointly constructing a very large gen