It should be further noted that both of these bills put an obligation upon income which has not been considered by Mr. Norman Clapp in his testimony on how the Bank will operate in the black. It is obvious that if Class C and D stock is to be sold, it must offer some inducement to the investor of a return on the investment. The payment of that return is left to the discretion of the Bank Board under S. 3337, without limitation as to amount. Under S. 3720, such dividends must come out of income and cannot exceed the current average rate payable on electric debentures.

Paying dividends on C and D stock comparable to the cost of money on debentures and reloaning that money at 3% or 4% interest only serves to eat further into the possibility of operating in the black. Yet, by issuing Class C and D stock, the Bank increases its capitalization and borrowing power without any practical limitation.

Conclusion.

I am convinced that the record will demonstrate that the rural electric cooperatives of America have, under terms of the REA Act, an adequate source of funds to fulfill their intended and legal function of supplying rural America with electricity. The record also will demonstrate that generation and transmission facilities can and are being provided by existing suppliers at costs as low or lower than the co-operatives could achieve if they were to provide their own facilities. The record also will show that the job of electrifying rural America is nearly complete and that there is no sound fiscal basis for the enormous expansion program which would be made possible by the proposed Federal Electric Bank.

I respectfully submit to this Committee and to the Congress the following points:

1. The rural electric program should be kept within its original intent, as provided in the present REA Act.

2. The rural electric co-operatives should not be allowed to embark on a program of uncontrolled, subsidized competition with investor-owned, taxpaying utilities solely on the basis of their being able to offer lower rates because of the tax and interest subsidies they enjoy.

3. The rural electric co-operatives should nto be granted the use of Federal Government credit without control by Congress, as this legislation proposes, in order to carry out a program of expansion never intended by the REA Act.

4. The rural electric co-operatives should not be given carte blanche to build at will generation, transmission and distribution facilities which duplicate exist ing facilities, thus reducing the revenues of the investor-owned utilities and increasing the burden on the customers of these utilities, and which prevent the construction of such facilities by the utility companies under conditions that will produce maximum tax revenues to all levels of government.

5. If the rural electric co-operatives will limit their function to that of supplying rural areas not otherwise receiving central station service, and meeting the normal load growth of those customers, there is no need for the enormous. sums of money which they seek in the legislation before this Committee, and their total requirements can be met through the legislative process with appropriate Congressional supervision and control.

The Montana Power Co.-Montana rural electric cooperatives, calendar 1964

Sources: Montana Power 1964 report to stockholders; 1964 financial and operating reports; 1964 annual statistical report of REA, pp. 22-29.

Federal bank for Rural Electric Systems-Estimated unreimbursed interest cost to the United States, 1st 50 years of operation

STATEMENT OF W. B. MCGUIRE, PRESIDENT, DUKE POWER COMPANY,

CHARLOTTE, N.C.

2, 218. 0456 2,298. 2091 2, 382. 0768 2,469.8286 2, 561. 6370 2,657. 6916 2, 758. 1887 2, 863. 3338 2,973. 3419 3,088. 4378 3,208.8569

3,334, 8374

3, 466. 7048

Duke Power Company serves a 20,000 square mile area of North Carolina and South Carolina generally referred to as the Piedmont Carolinas. The area extends from Virginia on the North to Georgia on the South. The Company supplies electric service to over 800,000 customers and supplies two out of every three rural customers in the area. The published report of the U.S. Department of Agriculture shows that as of June 30, 1965, 98.8% of the farms in North Carolina and 97.1% of the farms in South Carolina have central station electric service. We believe that electricity is available to 100% of the farms in the Duke Power service area.

(R) 21. 43

257.11

98.0498

(R) 21.43

235.68

(R) 21. 43

214. 25

(R) 21. 43

192.82

(R) 21. 43

171.39

(R) 21. 43

149.96

(R) 21. 43

128.53

(R) 21. 43

107.10

126. 5751

The Company supplies electricity to 16 rural electric cooperatives at 133 points of delivery. Rates for this service are regulated by the State Utility Commissions in each state and by the Federal Power Commission. The average cost of service per Kwh to these customers is lower than the average cost of service to any other classification of Duke Power Company customers. In 1965 the Company received over $18,000,000 of revenue from sales to these customers. Duke Power Company pays local, state and federal taxes on all its operations including the revenue from these REA Cooperatives and the facilities used to supply them. These taxes amount to approximately 24¢ out of each $1.00 of gross revenue and were over $57,000,000 in 1965.

We respectively suggest that the proponents of the Federal Electric Bank have not demonstrated a need for the vast lending power which would be created by this legislation. Loans made by the Rural Electrification Administration in recent years for extending and strengthening distribution systems amounted to less than one-half of the lending authority available to REA. Loans for generation and transmission systems were more than 50% the total during the fiscal years 1961 through 1965. In the area served by our Company any generation and transmission capacity built by REA Cooperatives would supplant or displace generation and transmission built by our Company. Our Company has supplied all power requested by the REA Cooperatives it serves and the Company's plans for the future contemplate meeting all their future requests for power.

The vast lending authority contemplated by the proposed Federal Electric Bank seems certain to result in almost unlimited expansion of generation and transmission systems by the REA Cooperatives throughout the nation. Since the REA Cooperatives pay no federal income taxes, this expansion of generation would displace large amounts of federal tax revenue realized from sales of electricity to the REA Cooperatives by the taxpaying companies. There would also be a loss of state and local tax revenues. None of these governmental units, local, state or federal can afford this erosion of their tax base and tax revenue. We point out that in some states REA Cooperatives do pay varying proportions of state and local taxes. In North Carolina beginning January 1, 1967, REA Cooperatives will pay all state and local taxes except state income tax. In South Carolina the REA Cooperatives pay no state or local taxes.

We respectfully suggest that if the proposal for a Federal Electric Bank is to be pursued further by the Congress, a careful study should be made of the needs of the REA Cooperatives for funds. Inherent in this is a determination as to the type of facilities to be built and the need for such facilities. If it should then be determined that the REA Cooperatives need additional funds, we respectfully suggest that the following minimum provisions should be included in any legislation for that purpose:

1) So long as federal money or assistance is provided at least all present policies and restrictions which have been formulated by Congress should be applied.

2) Federal funds or federal assistance for generating and transmission facilities should be provided only where it is established that there is not otherwise available to the borrower an adequate supply of power (or transmission facilities) at rates which, after making due allowance for the different tax components included therein, are at least as favorable as the cost of power (or transmission) which would be produced from the facilities to be financed by the proposed loan. 3) If Federal funds are made available the borrower should be required to pay the government its cost in providing the funds.

4) Where there is disagreement on the question of availability of power or compliance with any other restriction imposed by Congress the administrative decision thereon should be subject to review by an objective regulatory agency or by the courts.

The statement made by Mr. W. J. Clapp, President of Edison Electric Institute and his letter of August 9, 1966, to Chairman Talmadge referred to in Mr. Clapp's statement, cover in greater detail provisions which are suggested should any additional lending authority be found necessary after a full study. Rather than burden the Committee with a repetition of these suggestions, we will merely state that we fully subscribe to what Mr. Clapp has said.

S. 3720 makes clear that the purpose of the proponents of the Federal Electric Bank is not to supply electricity to persons who cannot otherwise get it but rather to expand by 400% the generation of tax free electricity, which would otherwise be produced by taxpaying companies and sold to REA Distribution Cooperatives.