The danger presented by the "bank" proposals is that they aid in accomplishing the worst and are not necessary to the accomplishment of the best.

TOOLS (SOMETIMES WEAPONS) EMPLOYED

There were only two tools which Congress found it necessary to employ to enable the REA co-ops to perform at their best in the legitimate sphere of their rural electrification objective-tax shelter and subsidized interest rates. In recent years these same two tools have been turned by the REA into weapons to enable them to succeed in performing at their worst in the sphere of illegitimate activities unrelated to the serving of unserved rural areas.

The tools, both important, are not of equal seriousness from the standpoint of potential danger, however:

Interest subsidies.—Much is heard about one of these two tools-the subsidized interest rate and it is so thoroughly understood that it will not be labored here. It is by far the less dangerous of the two weapons.

Tax shelter-As to the other weapon, however, the tax shelter, there is a general lack of understanding. We will develop this subject in some detail because we believe an understanding of it is essential to an understanding of the over-all problem created by REA in the United States economy of 1966. The discriminatory taxation which results when the REA co-ops enter the takeover phase is economically crucial and decisive where it is allowed to persist.

CONTROL

So much for the REA's legitimate and illegitimate aims and the tools used to accomplish both.

The main subject of this letter is Control-control by Congress of this program which it created and which it has supervised and kept supplied with funds now for thirty years. The control which has been exercised by Congress annually, as it considered REA's requests for appropriations, has been the only control which has been or can be exerted to keep the co-ops within their legitimate sphere and out of their illegitimate sphere. It is the only control which can keep REA within the limits of its rural electrification function and prevent it from embarking on further extensions of its efforts, in no wise related to rural electrification, to displace and destroy tax-paying industry.

It is the elimination of this control by Congress that is sought by all the present REA "bank" bills. Such bills all, in one way or another, seek to throw off the supervising and restraining hand of Congress. Moreover, the effect of such bills would be to eliminate all Congressional surveillance and scrutiny.

If the REA proponents are able to carry out this legislative coup they will have created an autonomous, self-perpetuating monster which will be in an enviable position with respect to the three key elements of the problem: 1. Tax shelter weapon-unaffected.

2. Interest subsidy weapon-restricted slightly but relatively unimportant anyway.

3. Congressional control-eliminated.

It is in this context that the elimination of Congressional control-whether under the guise of an REA "bank" bill or otherwise becomes so important.

We recognize, however, that the reader of this letter might not understand or agree with us that it is important and might have a number of fair questions to ask. We will anticipate several of these questions and attempt to answer them ahead of time:

Question No. 1

Why do you say that the tax shelter weapon is so important-isn't the reason for the difference the fact that the co-ops are nonprofit associations?

The answer to this question can become very complicated but it need not be. In the first place, the tax-paying industries with which the co-ops "compete" do not really pay taxes themselves. Their profits (or "returns"), as public utili. ties, are fixed after taxes so that all taxes, like other "cost-of-service" items, are actually paid by the customer. This may be easily seen by assuming different Federal income tax rates-the allowable profit or return of a utility would be unaffected but the customers' rates would be changed up or down to reflect the difference. An idea of the quantum of the difference between what the taxpaying investor-owned companies must collect from their customers for such purpose and what the co-ops must collect from their customers may be seen from the comparison on the next page:

The chart below shows the comparisons of the relative "overburden" for taxes and interest as between all the cooperatives in the United States and the seven major investor-owned utilities in Texas, both for 1964. (For details see Exhibit A attached.)

(*MECHANICAL COST, AS USED HEREIN, MEANS ALL COSTS OTHER THAN TAXES AND INTEREST)

In the second place, the idea that a co-op is a nonprofit association of farmers is properly applicable only to those co-ops which have remained in the legitimate sphere of rural electrification activities. Such a contention is a travesty when it is applied to a co-op that is aggressively seeking to take industrial plants and defense installations away from existing electric suppliers.

The bar chart above represents not only the decisive economic nature of the tax shelter, from a customer's standpoint (because he must pay it), but also the relative unimportance of the interest subsidy.

Question No. 2

Why is Congress' control so essential? Can't the people who are hurt by the illegitimate activities of the REA go into court and prevent them?

The answer to this question has been long and consistently announced by the courts: the tax-paying industry which is being destroyed by the REA's illegitimate activities has no "standing to sue"-it must seek redress, if any, in the halls of Congress.

Question No. 3

Isn't the real purpose of the REA "bank" to allow the co-ops to borrow more money to build more lines as needed in rural areas?

The answer to this question lies in the understanding of "G & T's". Generating and transmission co-ops, the so-called G & T's, and generating plants and transmission lines built by ordinary, theretofore purely distribution co-ops, have been the battlegrounds over which the issue of control by Congress has been fought in recent years. Almost without exception the generating plants and transmission lines are unneeded, duplicative of existing facilities and wasteful

of public money in addition to the eventual elimination of tax-paying industry that results.

If Congress were to refuse to allow the construction of further such G & T's there would be absolutely no need for any "banks”—additional lines in rural areas could be easily taken care of under existing laws.

Question No. 4

Isn't electric industry opposition to co-ops simply an effort to prevent competition?

The bar chart above (on page 5) furnishes the answer to this question with little comment being necessary. A co-op, having to collect only 12 cents for taxes and interest from its customers for each one dollar of mechanical costs, can hardly be spoken of as being in "competition" with an ordinary utility, which must collect 63 cents from its customers for each one dollar of mechanical costs. The existing electric utilities do not fear-in fact they welcome-true competition with competitors who must play by the same rules. If some of the co-ops are ready to leave their legitimate sphere of rural electrification and enter the fray of competition for such customers as industrial plants, they should not only be required to obtain their borrowings in the commercial money markets but their customers should also be required, as the customers of other utilities are required, to contribute their pro rata part to the national budget. This could be accomplished simply by forcing these co-ops which seek to supply industrial and other non-member loads to drop their guise of nonprofit activity, reorganize as ordinary business corporations, and relinquish their tax exemption and Federal subsidy.

Question No. 5

Isn't it true that the construction of power generating facilities by co-ops is necessary to preserve the "bargaining position" of the co-ops in "securing power at reasonable rates and under reasonable terms"?

Translated into understandable English this means that if the co-ops and their customers are going to absolutely avoid their share of contribution to the national budget (contributions like the ordinary consumers of electricity have to make, that is) then the co-ops are going to have to generate their own electricity because if they buy it from tax-paying utilities the co-ops will (as all customers of tax-paying utilities do) have to contribute, partially and indirectly, to this national budget. Isn't it much more "reasonable" if the co-ops and their customers simply leave all such taxes to the electric companies and their customers? What could be more "reasonable"?

Returning to the element of control by Congress-the essential element to be considered in all the REA "bank" proposals because it is that control which the "bank" proposals seek to throw off-it is our plea that Congress tighten such control rather than relinquish it, that Congress force the co-ops and the REA to remain within (and return to if they have strayed from) their original legitimate task of rural electrification and, finally, that Congress enact a set of standards to accomplish such purpose, which standards would be subject to judicial review on petition by any person who is injured by the departure from such standards of either the REA or the individual co-ops.

Within its sphere of legitimate concern the REA has no financing problem which requires the creation of "banks" or other exotic and autonomous vehicles. Such "banks" are needed only if the REA is to be able to realize its aim of a Federally-controlled public power take-over of the electric industry to the extent that it is presently made up of tax-paying (or tax collecting, from the customers, would be more correct) companies.

We do not believe that the REA's aim is the aim of Congress and we do not believe the Congress will, if it understands the true purposes of such "banks," approve them to further such aims.

We appreciate this opportunity to express our views and we respectfully urge that H.R. 14837 and H.R. 14000 and other such measures be defeated.

Respectfully yours,

HOUSTON LIGHTING & POWER CO.,

By P. H. ROBINSON, President.

EXHIBIT A.-Comparison of costs, 7 large investor-owned electric utilities in Texas with all 922 REA cooperatives in the United States, year 1964

Source: Federal Power Commission Statistics of Electric Utilities in the United States 1964, Privately Owned. Rural Electrification Administration, U.S. Department of Commerce 1964 Annual Statistical Report, Rural Electrification Borrowers.

STATEMENT OF ROBERT H. SHORT, VICE PRESIDENT, PORTLAND GENERAL ELECTRIC COMPANY, PORTLAND, OREG.

Portland General Electric Company appreciates the opportunity to submit this statement of our views regarding S. 3720, S. 3337 and H.R. 14837.

Portland General Electric Company is an an investor-owned electric utility serving the lower Willamette Valley of the State of Oregon. It provides electric service to about one million persons in an area covering 4,236 square miles. The City of Portland, the Oregon Capital City of Salem, and 46 other cities and towns are located in the Company's service territory. The Company serves at uniform "postage stamp" rates. The average rate per kilowatthour is one cent, which is the lowest of any investor-owned utility in the United States. Its rural areas and farms are competely electrified, and the rate schedules to rural areas are identical to those in urban areas.

The State of Oregon has a utility area certification law which tends to restrict electric utility agencies to specified geographical areas. In view of this statute, it is unlikely this legislation will seriously affect Oregon utility agencies. The general nature of the proposed bills, however, is sufficiently significant to justify substantial national discussion of the basic issues involved.

The bills here considered would change the concept of public subsidy for rural electrification to public subsidy for expanded competition between rural electric cooperatives and municipally owned and investor-owned utility systems. The legislative history of the statute which authorized REA makes it clear that the intent and purpose of the law was to encourage rural electrification through the vehicle of federal loans at publicly subsidized rates of interest. The goal of the original law was to electrify areas of the United States which for reasons of economics could not receive central station service from existing municipal or private utilities. This much desired goal has been almost fully achieved. We recognize, however, that even though rural electrification is an accomplished fact, there are many cases where economic assistance continues to be needed. There are areas in Oregon, for example, notably in the southeastern portion of the state, where continued public subsidy of rural electrification is required. The Central Electric Cooperative, the Mid-State Electric Cooperative, the Harney Electric Cooperative, and the Surprise Valley Electric Cooperative serve almost one-fourth of the state's 96,541 square miles. Within this area, however, there resides only one percent of the state's electric customers. Even with the subsidy of 2% money, electric rates in these areas range from 40 to 260 percent higher than those of Portland General Electric. Obviously, these cooperatives need continued public support.

If REA-financed cooperatives become reasonably able to provide service without federal subsidy, some alternative means of financing construction of facilities should be developed. In principle, this alternative means of financing would remove the cooperatives from access to public funds. The legislation under consideration here does not meet the goal.

If the Congress decides that portions of the REA program be removed from public subsidy, consideration should be given to transition to complete nonfederal financing. Municipal corporations currently finance their utility programs through revenue bonds or other senior debt, plus retained earnings and cash made available by depreciation. Investor-owned utilities acquire their capital through internally generatel cash, sale of equity, and sale of debt. When an REA-financed cooperative achieves financial maturity, it should also use conventional financing methods.

Criteria could be established which would dictate when the cooperative should convert from REA financing. Criteria such as revenue per line mile, customers per mile of line, or population density would be accurate indicators.

This same method could be applied to determine when a cooperative should pay interest to the federal government at a rate higher than 2%, but below the cost associated with the non-federal money market.

PGE suggests that the committee consider appointment of a select committee, outside the electric industry, to determine the financial requirements of the cooperatives, and to establish criteria to be used to establish interest rates. Three separate kinds of financing seem reasonable:

(1) Federal loans at 2%.

(2) Federal loans at the current cost of federal debt having a maturity of 15 years or more.

(3) Acquisition of funds from the private money market.

The budgetary requirements of the United States are such that additional unwarranted subsidies are not in the public interest. In certain cases, federal expenditures for rural electrification are in the public interest, and in these cases, such public assistance should continue. It is unnecessary and undesirable, however, for such assistance to continue where the purpose is clearly expansion and competition rather than rural electrification.

Portland General Electric Company appreciates the opportunity to submit its views to the Committee.

STATEMENT OF JOSEPH F. SINNOTT, PRESIDENT, SAN DIEGO GAS & ELECTRIC

COMPANY, SAN DIEGO, CALIF.

San Diego Gas & Electric Company opposes the enactment of S. 3337 to establish a Federal Electric Bank for the reasons that it is in derogation of the defense effort; it is against the public interest; it will deprive the Congress of its announced intention to maintain a strict surveillance over loans made under the Rural Electrification Act; and this legislation would foster unfair competition.

The following remarks are addressed to the creation and establishment of a Federal Electric Bank:

1. In derogation of the defense effort

"Your Government is determined to resist this aggression at the minimum cost to our own people, to our allies, and to the world.

"We shall stand with honor. We shall stand with courage. We shall stand with patience, and that is the stand Congress has taken and that is the stand we shall continue to take. It is the stand that the vast majority of Americans demand. It is the stand that free people of the world respect."

Such is President Lyndon B. Johnson's commitment on Vietnam to the peoples of the world. It is of paramount importance. The diversion of any funds to implement legislation of the nature proposed by S. 3337 would seriously hamper the defense program. The foregoing commitment is of overriding importance to the considerations of the subject now before this honorable Committee.

In speaking about this bill, Senator Jack Miller, of Iowa. stated in part:

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** if we are to avoid further inflation, any new Federal financial commitments must conform to the requirements of a reasonably balanced budget, taking into account demands placed upon our Government by the war in Vietnam." The proposed bank would be started with a nest egg of $1 billion in government funds. Through its borrowing power, this could be extended to $11 billion without limitation as to source.

Tax-exempt electric operations will be increased, replacing or displacing taxpaying systems and thereby proportionally reducing Federal revenues. This severe impact on the economy by needlessly draining revenues would have a tremendously adverse effect on the defense budget and the consequeent defense effort.