with a combined capacity of 5.8 million kilowatts have been placed in commercial operation. It is also significant that 54.3 per cent of the new 1966 generation equipment and that on order or under construction is in units of 500,000 kilowatts or larger.

I cite these figures to illustrate the great and dynamic strength of our nation's electric power industry. About 75 percent of the capacity is on the systems of the investor-owned, tax-paying electric companies. One percent is in REA cooperatives and about 24 percent in government-owned systems.

There are no voids in our nation's electric power program and certainly no foreseeable insufficiency that would justify such a drastic departure from the purposes and limitations of the original REA Act of 1936.

Today more than 98 percent of the farms in our nation receive central station electric service and the original purpose of the Rural Electrification Act of 1936 has been virtually accomplished.

It is said by proponents of S. 3720 and other similar bills that the REA co-ops require a large infusion of new capital to serve today's customers and those of tomorrow. This can only mean a desire to invest heavily in generation and transmission facilities on REA systems since funds appropriated by the Congress under present law can meet further distribution and miscellaneous requirements.

The REA has for some years evidenced a broad ambition to go into power generation in a large way-an ambition that has been restrained again and again by congressional action. If the Electric Bank is created, the REA will escape from the budgetary control traditionally exercised by the Congress and be enabled to embark upon a career of wasteful expenditure and duplication of electric generation facilities now in being or planned by the investor-owned companies and major electric energy producers of the federal government. Such a move would upset the carefully developed balance in the field of electric energy. The tail would begin to wag the dog-in fact to whip it.

There are so many demands today upon our nation's capital and productive energies that we can ill afford to waste resources. The investor-owned, tax-paying utilities represent one of the most important sectors of our national economy. The industry has more than $60 billion invested in power facilities and is adding between $4 and $5 billion annually. By 1980 the Edison Electric Institute predicts this will rise to some $12 billion a year.

Our operations are on a scale that can meet fully and economically the energy requirements of REA cooperatives. In 1964 the average wholesale price paid by cooperatives to the investor-owned companies was 7.5 mills per kilowatt hour, whereas the price cooperatives paid to G&T's was about 8.8 mills.

I mentioned that generating units today are trending to sizes upwards of 500,000 kilowatts. To justify the expense and capacity of such units, many customers must be served and the electric companies are evolving ever larger interconnected systems and power pools to utilize them fully. To achieve competitive wholesale prices for energy, the G&T's would have to turn to the proposed Flectric Bank to build units on a similar scale-and then seek customers and area additions to achieve an adequate use factor. Where could they turn except toward customers and areas now fully served by others?

The EEI Electric Power Survey shows that peak loads for the total industry through 1969 are estimated to increase at a 6.7 per cent annual rate of growth, maintaining reserve margins of about 20 per cent each year. The industry as presently constituted is fully prepared to do the job and requires no new, expanded program by REA. Insofar as distribution capital needs are concerned, the present 2 per cent REA lending program is sufficient, and under this program the Congress retains a very necessary control over the borrowing practices and expansion plans of rural cooperatives.

The Detroit Edison Company serves 7600 square miles in Southeastern Michigan. Our operations are in many ways typical of the investor-owned industry. At the close of 1965 we had a generating capability of 4.2 million kilowatts. We plan to meet customer requirements many years in advance. By the end of 1972 we will increase our capability by 76 per cent to some 7.4 million kilowatts. The four major units which we plan to add in that period range in size from 520,000 kilowatts to 750,000 kilowatts. The Consumers Power Company, with which we have a pooling and joint operation agreement, has similar plans for capacity expansion.

For some years before 1965 we provided the Thumb Electric Cooperative, the only co-op in our service area, with about half of its energy requirements. In February 1965 we signed an agreement with the Thumb Electric Cooperative

to provide 85 per cent of their power at about two-thirds of the cost that they would incur by self-generation. They maintain their two diesel plants as a matter of policy and to shave peaks. Obviously we could provide for their full requirements just as easily and to their benefit. Our operations are on such a scale that we can serve them most effectively. There is a most friendly relationship between us, and I think similar arrangements are the best way for rural cooperatives to meet their energy requirements economically. This is in the best interests of the farmer and our nation as a whole.

There is the additional advantage to the public that investor-owned companies pay local and federal taxes and pay the full cost on the money they borrow. They also pay fair dividends to millions of Americans who are shareholders. All these payments by the investor-owned companies help to support the national economy and the national purpose.

I regret to say that even the suggestion of the proposed Electric Bank is alarming to investors, as I know from personal experience as President of Detroit Edison. The Electric Bank cannot be interpreted as anything but a threat to the future of the investor-owned companies which serve the nation so faithfully and so well.

I thank this Committee for the opportunity to express my deep misgiving over the proposed Electric Bank, which is wholly contrary to the American system, to economic realities and to the control that the Congress must retain and vigilantly exercise over the ambitions of federal agencies.

STATEMENT OF C. A. LILLY, JR., PRESIDENT, GULF POWER Co., PENSACOLA, FLA.

Mr. Chairman, my name is Clyde A. Lilly, Jr. I reside in Pensacola, Florida. I am president of Gulf Power Company which supplies electric service in that area of Northwest Florida lying west of the Apalachicola River. I appreciate very much the opportunity of appearing before your committee. My appearance is in opposition to S. 3337 and related bills.

These bills if enacted would be very damaging to Gulf Power Company and to other investor-owned taxpaying electric utility companies. Because it was never intended that Government subsidized electric power cooperatives should compete with taxpaying electric power suppliers, committees of Congress have consistently opposed use of the basic 2% REA loans to finance steam plants and high voltage transmission lines which would duplicate existing adequate power supplies. The establishment of the Electric Bank under the legislation proposed does not eliminate the present REA program of 2% loans. It makes available to the cooperatives billions of dollars of additional funds free from Congressional controls. The Bank borrowers could serve municipalities and suburban areas irrespective of size and present service, while continuing free from control by such Federal regulatory agencies as the Federal Power Commission even though they may be in interstate commerce.

These suplemental financing bills tend to give the appearance that the cooperatives would be financing in the free market, but in fact, either bill under review by this Committee would materially increase Federal subsidies.

The Electric Bank as proposed would also make loans at interest rates below the cost of money to the Government just as REA presently does.

The electric supply facilities which the borrowers would duplicate or displace would be those of the strictly regulated investor-owned taxpaying electric power companies which serve some 80% of the nation's power requirements.

Our Company is not without experience in supplying power to rural areas nor in dealing with rural electric cooperatives. Approximately 40 years ago, years before the REA cooperatives were formed, the Company was extending electric service into and developing rural areas. As the REA cooperatives were formed the Company supplied their electric requirements at wholesale rates below the national average, and for over 25 years the Company and the cooperatives worked together to supply and develop the rural areas of Northwest Florida. As a result of these efforts of the Company and cooperatives, almost every person in Northwest Florida actually desiring electric service is supplied.

Several years ago with most of the persons in rural areas supplied with electric service, the REA controlled cooperatives began to deviate from the purposes for which they were created by Congress.

I would like to recite three occurrences in Northwest Florida which conflict with the intent which the late Speaker Sam Rayburn expressed in urging the 70-671-66-35

passage of the original REA Act when he said, "May I say to the gentlemen that we are not, in this bill, intending to compete with anybody. By this bill, we hope to bring electricity to the people who do not now have it. This bill was not written on the theory that we were going to punish somebody or parallel their lines or enter competition with them."

In 1958 the Company entered into negotiations with Choctawhatchee Electric Cooperative for a new contract covering the continuation of its supply of the electric power requirements at the four delivery points of the cooperative. The Florida Public Service Commission during an investigation of the Company's earnings had indicated concern that the Company's other customers were being penalized because of the low rates to the cooperatives. The then existing rates to cooperatives, designed in 1947, had been in effect ten years and are the same rates in effect today for the four cooperatives Gulf Power Company serves. In preparation for active negotiations, the Company submitted a proposal with a rate schedule reflective of current and projected costs and about a one-third increase over existing rates.

During these negotiations, and without our knowledge, the cooperative was constructing a transmission line from the system of the Alabama Electric Cooperative to supply the electric power requirements of two of its delivery points. Both of these delivery points were disconnected from Gulf Power Company and connected to the Alabama Electric Cooperative system in December, 1958 even though Choctawhatchee was to pay more for the electrical energy from Alabama Electric Cooperative and still is paying more. The "27th Annual Report of Energy Purchased By REA Borrowers" for the fiscal year ending June, 1965 (REA Bulletin 111-2) shows that Choctawhatchee Electric Cooperative paid Alabama Electric Cooperative 8.8 mills per kilowatt-hour for power at these delivery points as contrasted with 6.6 mills per kilowatt-hour for power supplied at its other delivery points by Gulf Power Company.

The Alabama Electric Cooperative, a Generating and Transmission Cooperative, operating in South Alabama adjacent to Northwest Florida, was granted a loan by the REA Administrator in 1961 to build a generating plant in South Alabama and transmission lines extending into Northwest Florida. The transmission lines extending into Northwest Florida were for the purpose of supplying the electric power requirements of the Escambia River Electric Cooperative and the Choctawhatchee Electric Cooperative both of which are served by the Gulf Power Company. Before the Alabama Electric Cooperative could make a loan for the construction of the plant and lines, it was required to secure the approval of the Finance Director of the State of Alabama. The Alabama Power Company and Gulf Power Company, in hearings before the Finance Director opposed the approval of the loan. Testimony by REA Cooperative witnesses established that the cost of power to be purchased from the Alabama Electric Cooperative by the two Florida cooperatives would be approximately 12% higher than they were paying Gulf Power Company. Gulf Power Company witnesses testified that the Company was willing to supply the electric power requirements of these cooperatives, for purposes originally intended by Congress, under a long-term contract, at the existing low rates. Nevertheless, the duplicating uneconomical Government subsidized plant is under construction.

Within the 7,400 square mile area served by Gulf Power Company is located Eglin Air Force Base reservation with an area of approximately 800 square miles. Gulf Power Company has furnished all the electric power requirements of this base since its inception prior to World War II and has several millions of dollars invested in lines, substations and other facilities. In October, 1962, the Air Force invited Gulf Power Company and Choctawhatchee Electric Cooperative to submit proposals to furnish the electric power requirements (4,000 KW) of a radar tracking research installation to be installed by the Bendix Corporation and designated as a SPADAT "A" system. The specifications required a 115,000 volt line to the site with a capacity of 15,000 KVA and substation capacity of 7,500 KVA initially. The Air Force advised that service requirements were very critical as to variations of voltage and frequency and interruptions could not be tolerated. The cooperative had no 115,000 volt lines and had never operated such a high voltage system. At that time Gulf Power Company had approximately 900 miles of such lines. Three separate Gulf Power Company 115,000 volt lines already served the Air Force Base loads. We had such lines along the north, east and west boundaries of the Eglin reservation as shown by the sketch attached.

Bids were submitted by both the Company and the REA Cooperative. Company representatives met with the Air Force answering technical questions relative to its proposal and pointing out that it could furnish one, two or three lines as needed to the site, together with duplicate substation equipment thus providing the best assurance of uninterrupted service. All facilities were to be furnished by the Company at no cost to the Government or the taxpayers. The Company proposed service at its standard published rates for the class of service as approved by the State Commission. The Company suggested that the Air Force, in analyzing the bids, take into consideration the cost to the taxpayer of the difference between the 2% interest rate paid by the cooperative and the 4% cost to the Government and in addition the income tax payments foregone in the case of service from the cooperative. It was pointed out to the Air Force that the only 115,000 volt lines available to the REA were those of the Alabama Electric Cooperative located over 50 miles distance in Alabama and that the most conservative minimum cost of this line and substation, using the cooperative's own cost figures as revealed in testimony before the Finance Director of the State of Alabama, making no allowance for the cost of generating capacity devoted to this service, would be $1,150,000. A conservative estimate of the direct interest cost of the taxpayer during the initial five years of operation would be approximately $23,000 per year and would total $478,000 over the 35-year period of the loan. It was also pointed out that at the rates proposed by the Company the cost of service to the Air Force was estimated to be $275,700 and of this amount a minimum of $43,500 would be returned annually to the U.S. Government in the form of income taxes paid by the Company.

We have subsequently learned the cooperative's proposed rate was 7.55 mils per kilowatt-hour. If consideration had been given to interest cost and taxes foregone to the Government, the Company's rate would have been 7.43 mils and the lowest cost to the taxpayer. The Company was informed that since there is no statute requiring the Air Force to give consideration to the interest cost and the taxes foregone that the cooperative had the lowest bid and was being awarded the contract. The Company protested this award with the Comptroller General as not being in the best interest of the taxpayers, but he found himself without statutory authority to offset the subsidies granted to the cooperatives by Congress.

Ironically, despite the fact that the coperatives spent $1 million for the construction of a gas turbine-generator on the SPADAT site to provide backup power for their transmission line, we are told the Air Force now finds it needs to construct an additional $3 million generating plant in an attempt to secure adequate service. None of these expenditures of tax dollars would have been required if the multi-source supply offered by Gulf Power Company had been accepted.

The proposed legislation, by providing an additional source of tax-subsidized financing, can serve only to encourage further unnecessary duplication of facilities such as the examples I have outlined and which are not in the public interest. Since the territory served by Gulf Power Company, and for that matter the entire country, is already electrified, and since the supplemental financing proposals are of magnitudes appreciably above that being appropriated by Congress each year under the present law, the increased financing is obviously for generating and transmission facilities and not for normal growth of cooperative distribution systems. This is further borne out by the fact that over one-half of the money appropriated for electric cooperatives in the last five years has been for generating and transmission facilities, duplicating existing facilities. This duplication is not only wasteful of our resources because of duplication itself, but the smaller sized generating equipment purchased by the cooperatives has inherently much lower efficiency than existing utility units and is therefore wasteful of our country's fuel resources. This waste is surely not in the public interest. These funds for wholly unnecessary and duplicating generating plants and transmission lines do not supply service to a single customer not now being served.

The establishment of a Federal Electric Bank would, in the manner stated earlier, threaten to nationalize the electric power industry which has established America as the world leader in electric power supply, and in so doing, weaken the structure of the nation's entire economic system.