initial decision in the case before the Federal Power Commission found (a) that the Cooperative is engaged in an endeavor to actively compete with Alabama Power Company for wholesale customers and (b) that the uniform wholesale rates of Alabama Power Company are just, reasonable and lawful and (c) that the Cooperative's complaint before the Federal Power Commission was "without merit." The Presiding Examiner's initial decision is now before the full Com

mission on exceptions filed by the Cooperative.

REA Pressure on Distribution Cooperatives

In 1965 and 1966 Pea River Electric Cooperative, Inc., which was being served partially by Alabama Power Company and partially by Alabama Electric Cooperative, Inc., requested Alabama Power Company to extend service to four new delivery points under its uniform rate schedule applicable to cooperatives in Alabama. These rates have been approved by the Alabama Public Service Commission and have been accepted for filing by the Federal Power Commission. In response to such request Alabama Power Company entered into two power supply agreements with Pea River Electric Cooperative, Inc., constructed the required transmission line and substation facilities and commenced to serve such cooperative at two of the designated delivery points when it received word from Pea River that at the instigation of Alabama Electric Cooperative, Inc., REA had instructed Pea River to discontinue purchasing power from Alabama Power Company at such delivery points and instead to purchase its requirements from Alabama Electric Cooperative, Inc. This instruction was given to Pea River even though its cost of power from Alabama Electric Cooperative, Inc., is approximately 9 mills as compared to approximately 6 mills from Alabama Power Company.

In recent weeks Alabama Power Company has obtained an injunction in the state court of Alabama restraining Alabama Electric Cooperative, Inc., from interfering with the power supply contracts between Alabama Power Company and Pea River and this matter is now being litigated.

(The appendixes attached to Mr. Bouldin's statement are on file with the committee.)

STATEMENT OF D. L. BROUSSARD, FINANCIAL VICE PRESIDENT, UTAH POWER & LIGHT CO., SALT LAKE CITY, UTAH

I am D. L. Broussard, financial vice president of Utah Power & Light Company serving customers in Utah, and parts of Idaho and Wyoming; and of The Western Colorado Power Company serving customers in southwestern Colorado. Earlier this year, I appeared before the Subcommittees of the House and Senate Appropriations Committee in support of the continued financing of the basic function of the REA which is to serve customers in rural areas who cannot obtain central station service through existing REA or investor-owned electric utility systems. This function of REA, we believe, is necessary and appropriate. We do, however, vigorously oppose the authorization of the funds for REA to build large generating plants and transmission lines which are not only unnecessary, but are far-afield from the legitimate and legal aims of the Rural Electrification Act. The proposed legislation, S. 3337, S. 3720, and other similar bills, would not only perpetuate the problems and abuses of lending authority now being encountered, but would open the door to an unlimited, uncontrolled, and unregulated spending spree in direct competition with long-established American industry. It would lay the existing systems of the free-enterprise electric utilities open to pirating by Federally financed and subsidized rural electrics through placing in their hands unlimited funds at rates far below competitive money market costs and uncontrolled lending authority. It would abandon any effec tive Congressional control of money and surveillance of REA policies.

The combination of freedom from most taxes, unlimited money, little, if any, regulatory control, coupled with the present expansionary effort on the part of REA, invites a takeover under Federal financing of all electric service in an area. In the West, there are large areas in which there is no electric service because there are no customers. Our companies extend service as needed under a Commission-approved extension policy. REAS are attempting to obtain certificates to pre-empt almost all of the unserved area, limiting our companies only to customers and areas now being served. In some cases, an REA serving only 2% of a county area is asking for 100% of the area. To encourage this would saddle

the taxpayer with subsidizing the cost of all future extensions in virgin territory and halt the expansion of investor utilities. It would also jeopardize investments already made.

More than adequate electric service is now available at economic rates to all REAS and rural consumers in the area served by our company. There will be a need for a modest amount of money to extend distribution facilities and continue the REA program as it now exists, but absolutely no need for any large generating and transmission loans. On the other hand, current abuses of lending authority and misuse of already available Federal funds by the REA Administrator, gives adequate cause for concern for any further increase in REA loan funds or extension of lending authority.

The Colorado-Ute Electric Association's Hayden Plant is a prime example of the misuse of REA G & T funds and of illegal lending policy. The Colorado-Ute generation and transmission cooperative in February, 1963, received a loan from REA of almost $23 million to build a 150,000 kw plant in western Colorado. In authorizing the loan, the Administrator ignored the fact that adequate electric service was available to each of the REA members of Colorado-Ute from no less than three alternate sources at rates less than the cost from Colorado-Ute. The Colorado Public Utilities Commission and the State courts all agreed that adequate power was available at reasonable rates, yet, even though the State Commission's order approving construction was being litigated in the State courts, the Administrator authorized the loan and the plant was built. The Supreme Court of Colorado declared the construction of the Plant illegal on February 14, 1966, and pointed out that the Administrator violated REA Law (USCA 7 8 904) by not obtaining final permission of State authority having jurisdiction before granting the loan. REA's own criterion was violated. Bulletin 20-6 requires that no loan be made if an alternate dependable source of power at lower cost to consumers be available. Not only did Colorado-Ute avoid negotiations with electric utilities in the area, but, under direction of the Administrator, all eleven distribution cooperatives abandoned their rights to Bureau of Reclamation power and other sources by signing 40-year exclusive supply contracts with Colorado-Ute. Colorado-Ute's current report shows the eleven distribution cooperatives being charged from 10 to 111⁄2 mills/kwh for power they could buy from the USBR for 6 or 7 mills. This was accomplished with the full support and active, aggressive participation of the Department of Interior and Bureau of Reclamation. By giving up these important customers of reclamation power plants, Interior seriously damages the reclamation project's ability to repay its costs and construct new projects. In 1965, the Colorado project lost $32 million and has more than 150,000 kw of surplus power looking for a market. It is significant that the sale of 150 mw of power would bring in $42 million a yearmore than enough to clear the deficit.

The principal beneficiary from the Colorado-Ute-Hayden Plant and a strange partner to what is supposed to be rural electrification is the Salt River Agriculture and Power District of Phoenix, Arizona. By the simple expedient of prepaying its power bill for a number of years, Salt River paid Colorado-Ute approximately $9 million and became the beneficiary of two-thirds of the REAfinanced power plant initially and one-third of the output for 40 years. This means that most of the 2% money subsidy flows to the benefit of power users in metropolitan Phoenix.

The costly results of this G & T loan are these:

The Federal government has some $23 million invested at 2% which cost it, perhaps, 4% or more, which loan has been declared illegal. Taxpayers will pay the cost.

REA cooperatives are paying 10 to 11 mills for power that they could buy for 6 or 7 mills.

Colorado-Ute G & T has accumulated an operating deficit of $1,690,000 by November 1965, and the trend shows it to be getting worse.

Bureau of Reclamation gained a steam plant it wanted to justify a Federal grid system and stabilize its production plants, but gave away a large segment of its much-needed customers and revenue.

Salt River Power District, though not qualified for an REA loan, gets its power from a plant financed with REA money at less than one-half of the cost of money had it constructed its own facility.

The actual and potential loss to power suppliers of REA and Federal loads as a result of the Hayden Plant, will be in excess of $2,000,000 annually.

The cities of Trinidad and Walsenburg, Colorado, lose $190,000 annual revenue. Loss in taxes of almost three-quarter million dollars annually resulting from the displacement of this amount of private investment by REA-financed, taxfree power is another large, but sadly neglected consideration.

The REA Bank Bills, S-3337, S 3720, and others, now being considered by the Senate and House Committees, would authorize acquisitions of existing utility systems. This authorization goes far beyond the original purposes of the REA Act. Unleashing this type of lending power would legalize piracy not only of customers, but entire electric systems. REA has already overextended its reach in this direction. As an example, my company was recently negotiating the purchase of Uintah Power & Light Company, a small electric utility in eastern Utah. Moon Lake REA entered negotiations, and in direct competition with our offer, by paying the stockholders far in excess of its fair value, bought this investor-owned electric utility. Because of the protests from the cities, towns, and customers of Uintah Power & Light, and my company, the REA delayed loaning Moon Lake the funds necessary to make the purchase and the transaction was made by a temporary loan from an insurance company. A year later, REA advanced Moon Lake money to refinance the cost of this illegal acquisition. This little power company had adequate central station service and was directly adjacent to additional service from my company's interconnected system. Moon Lake's rates were 40% higher than Uintah's and Uintah's rates were 20% higher than Utah Power & Light Company's-thus, the taxpayers loaned an REA $1,500,000 at subsidized interest rates in order to deprive the customers in that area of a large reduction in power costs and the improved service they would have immediately received had my company purchased the system at fair and reasonable costs. The acquisition was alleged to be necessary to provide service to customers not receiving central station service. However, the only customers that were reached was a cluster of summer cottages that were much nearer to REA existing lines than to Uintah Power's. Under pressure of the competition, the rates have since been reduced to our rates and the Moon Lake REA and its subsidiary power company reports, show the result. In 1965, on its investment in Uintah of $1.5 million, Moon Lake REA earned only 1%, only half the interest cost. Moon Lake's own operation shows a loss of $38,000.

Moon Lake REA is now planning a scheme similar to the Hayden Plant of Colorado-Ute. This REA, with a present load of approximately 22,000 kilowatts, has announced that it will build a 100,000 kilowatt steam plant-almost 5 times its present load. There is still power available from the Colorado River Project of the USBR at lower rates and unlimited power is available to Moon Lake at published, Commission-approved, economic rates from Utah Power & Light Company. There is no need for any additional REA funds to build any generation or large transmission lines in our territory. There is an abundance of power available now at very reasonable rates to serve every need and the utilities and public agencies in the western area are planning and building ahead to meet the future growth. The job is being done now and can be done in the future within the framework of presently available financing sources. However, this type of misuse of REA funds continues in our area.

We are currently negotiating with a small power company serving some 2300 customers in and near Ely, Nevada, which wishes to sell its system. The stockholders want an exchange of stock instead of cash because of the income tax effect. A regulated utility is allowed to earn only on the net depreciated plant of the company so there is a definite limit to the price that can economically be paid for the property. The Area Field Representative of REA has now entered negotiations with the Company. His statements in the Ely case have disclosed the philosophy which resulted in the excessive price paid in the earlier Uintah Power & Light acquisition. He stated that REA could offer a cash purchase price which would cover the Income Tax obligation of the stockholders and pointed out that REA evaluates property acquisitions differently than investor utilities. He said that REA would base the price on reconstruction cost new; going concern value; and estimated growth potential. A regulated utility would not be allowed a fair return on such an inflated price. The rural electric cooperative which the Administrator is using to attempt the purchase of the Power Company is not even an operating REA—it is only a paper organization formed about 1962.

From the record of these hearings and from all of the reported facts, it is apparent that many rural electric cooperatives have matured to the point where they not only desire to finance their operation in the public market, but are entirely capable of doing so.

There has been considerable testimony before committees of Congress contending that the rural electric customers do not have the ability to pay rates which would be necessary to make the transition to the free competitive moneymarket. The facts do not support such a general conclusion. Most of the objection to higher interest rates was directed toward the cooperatives' inability to pay higher rates on existing loans. To my knowledge, this is not being proposed. Only on new and future financing is it suggested that REAS pay a going rate of interest and that only those strong enough, make the transition. Many are now that strong and more will be in the future.

For example, the average rate for service to residential and rural customers of all REAs in 1964 was 2.23 cents/kwh or about 10% less than the 2.45 cents/ kwh of investor companies. This means that on the average, REA customers could stand a 10% increase and still be paying only what the rest of the country pays. Keeping that in mind, if all new money needs for distribution type borrowers were obtained at the competitive money-market rate of, say 6%, it would require an increase of only 0.6% per year in rates and ultimately only a total of some 10% to 12%. Since there are many struggling REAS which admittedly cannot make the transition, it means that the remainder are in a stronger position and can even more easily absorb the increased cost. In fact, the REA statistical report shows that the average REA could absorb the increased cost within their present operating margin without increasing rates. In testimony before this Committee, great emphasis has been placed on the ratio of customers to miles of line. This ratio has no significant meaning. It is most important to consider that the ratio of dollars invested in plant to each gross revenue dollar received for all distribution REAS is $5.12 for $1.00 of revenue and in my company, it is $5.27 for $1.00 of revenue, almost identical. In other words, REAs are getting a little more revenue per investment dollar than my company receives.

The Administrator's 1964 report shows all REAS have a total equity in the business of 25%. Forty percent have 30% equity and one-quarter have over 40%. By comparison, the average investor-owned electric company has common stock equity of 37%. This means that some REAs have a stronger capital ratio than the average investor company. At the end of 1964, REA members owned $1,058,000,000 equity in the REA systems and owned $3 billion to the Federal government. This equity more than doubled in six years from $515 million in 1958 to $1,058,000,000 in 1964. REAS are taking about 15% of gross revenues down to net income and have practically none of their own risk capital invested. Thirty-five percent of my company's capital is risk capital, and we take down about the same percent. The big difference is that we pay about a 50% Income Tax on those earnings and the REA's pay none.

It is entirely feasible to finance most of these REAS in the open competitive market without introducing a new Federal financing agency with all the associated overhead costs and control problems. Available REA funds exceeded the amount actually advanced on loans by $576 million in 1960, increasing every year to $884 million in 1964. This certainly does not bear out the contention that there is a need for increased funds to meet an alleged "backlog" of loan requirements. On the other hand, it shows that those needing Federal assistance can adequately be served under present law, and that appropriations could be reduced.

As each REA becomes strong enough to compete in the market place with investor utilities, as many are now doing, then they should be financed as private utilities; operate as such; and assume the responsibilies of utilities. These responsibilities include accepting State and Federal regulation, paying a fair share of taxes and charging rates which will pay the cost of hiring money from investors.

STATEMENT OF J. C. BROWN, JR., EXECUTIVE MANAGER, TARHEEL ELECTRIC MEMBERSHIP ASSOCIATION, RALEIGH, N.C.

Mr. Chairman and Gentlement of the Committee, my name is J. C. Brown. I am Executive Manager of Tarheel Electric Membership Association, whose membership is made up of 31 electric cooperatives headquartered in North Caro

lina and one out-of-state cooperative which serves far western North Carolina. These corporations operate more than 45,000 miles of line from which they serve 228,000 households, businesses, and institutions. These 32 cooperatives and Tarheel Electric are also members of the National Rural Electric Cooperative Association, whose spokesmen have discussed in depth the legislation under consideration.

Tarheel Electric Membership Association would like to be recorded as supporting fully the supplemental financing plan which was based upon a lengthy study by N.R.E.C.A. and Kuhn-Loeb and presented to our membership upon a number of occasions, including our mid-year directors meeting at Durham in August of 1965, our regional meeting of the national association at Raleigh in the fall of 1965, at a meeting of managers and others at International Inn in Washington in December, 1965, and at the February national meeting of N.R.E.C.A., which was attended by approximately 200 North Carolina co-op directors and managers. In addition, the N.C. Farm Bureau Federation in its annual convention at Raleigh last fall adopted the following resolution:

"We support the rural electric cooperatives in their efforts to find new sources of supplemental private financing, necessary to meet the rapidly increasing demand for electric power. We also recognize that many rural electric cooperatives continue to serve thinly-populated areas and therefore are not yet able to provide electric service at rates on a parity with those of urban people. For these electric systems, we urge the Congress to continue to make available REA loans at a rate as low as practical."

The N.C. State Grange at its convention, also held in Raleigh last fall, and the National Grange at its convention in Topeka, Kansas, adopted strong resolutions giving full support to the rural electric cooperatives in their efforts to develop sources of supplemental financing.

I don't believe any proposition has ever been presented to the Congress that has been more thoroughly studied, understood and supported by a large segment of the population than this one, which is represented by S. 3720. We specifically support this measure.

We appreciate the opportunity to present our views on this bill.

STATEMENT BY BIRUM G. CAMPBELL, VICE PRESIDENT, CONSUMERS POWER COMPANY, JACKSON, MICH.

I am Birum G. Campbell, Vice President of Consumers Power Company which has its headquarters at Jackson, Michigan.

Consumers Power Company has been conducting a public utility business in Michigan since 1915. The Company presently serves some 954,000 electric customers. All of the Company's utility operations are confined to the State of Michigan. While much of its service area is devoted to manufacturing, other activities, such as agriculture and the tourist and resort business, rank high among the businesses served by the Company. The Company also sells electricity at wholesale to other electric systems within the State of Michigan, including a number of investor-owned public utilities, municipally operated utilities and rural electric cooperatives.

As the economic tempo in Michigan has quickened, we have kept pace by expanding and improving our system to provide dependable electric service at a reasonable cost. For instance, the Company's installed generating capacity has increased nearly 100 percent in the last ten years. A report recently issued by the Federal Power Commission ranked the Company's steam electric generating system as the third most efficient among all systems in the United States in 1964 in terms of thermal efficiency, i.e., based on the amount of heat used to generate a net kilowatt-hour of electricity.

Our determination to operate efficiently is reflected in our charges to our customers and over the years our average revenue per kilowatt-hour of electricity sold to residential customers has regularly been below the national average for all similar companies. Early in 1965 the Company voluntarily reduced several of its electric service rates, including a 19 percent reduction in electric space heating rates. In July 1965 further voluntary reductions in rates went into effect, reducing the cost of electricity to our customers by approximately $3,000,000 per year. We contemplate that we will continue to reduce our rates in the future as we are able to effect further economies in our production and sale of electricity. All of our retail rates, as well as the terms and conditions of our