cooperation with all segments of the electric industry and with the colleges and extension service. These groups are working together under auspices of the Inter-Industry Farm Electric Utilization Council and their effort promises great dividends not only to our borrowers but to their farmer-consumers and also to the Government by enhancing its loan security.

ADEQUATE POWER SUPPLY

Major progress has been made in improving the supply of electric power in rural areas. We have worked with our borrowers in meeting power supply needs as they occurred and in forestalling power supply emergencies before they

occur.

Loans for generation and transmission facilities were made where required as a means to lower cost of electricity for farmers. During 1954 they amounted to slightly more than $40 million and will add something over 100,000 kilowatts to borrowers' generating capacity. Important developments have occurred in interconnecting and integrating borrowers' facilities with neighboring facilities to minimize the higher costs usually associated with isolated systems of relatively small capacity.

The wholesale cost of power has dropped and more important, the average cost per kilowatt-hour of power to the residential consumer, both farm and nonfarm, dropped from 3.22 cents in 1953 to 3.06 cents in 1954. At the same time, net

margins of electrification borrowers went up nearly 40 percent.

Looking to the future, appropriate and effective steps have been taken to assure participation by the rural electric systems in any cost reductions that the use of atomic energy may bring about.

BORROWER SELF-RELIANCE

The rural electrification program is free enterprise. The REA borrowers own and operate their rural electric systems; their relationship with REA is that of a borrower. In their initial organization and their early days of operation, REA provided considerable assistance to them. As they have gained operating experience and financial strength, REA assistance in engineering, accounting and management has been gradually decreased. Today, most of the electric borrowers are providing for themselves most of the services formerly provided by REA. The assistance to borrowers being provided by REA at the present time is limited almost entirely to working with those borrowers who have financial difficulties at present, or who will apparently have financial difficulties as their debt payments increase in the future.

EFFICIENT ADMINISTRATION

We have given continuous attention to improved administration of the program. Wherever possible, changes that will improve efficiency and reduce administrative costs have been made. We have made organizational changes and procedural changes which have resulted in improved efficiency during the past year and, at the same time, we effected a substantial savings in administrative costs.

We have reduced the time required for handling electric loan applications. The loan process has been cut to a minimum for those borrowers which are well established and have good operating records. Applications under the simplified procedure are being processed in about 50 percent of the time formerly required. About one-third of the present applications are in this category and we are currently working on other improvements which may raise this percentage as high as 45 percent. This has helped to cut down the backlog of loan applications to just about half of what it was 2 years ago. To my knowledge, we have not turned down or delayed a single loan application that was complete and feasible.

BACKGROUND OF STATE FORMULA

This matter of the loan allotment formula is directly related to our ability to meet the loan needs of the borrowers.

As it now stands, the State allotment formula provides that 50 percent of the amount made available annually by Congress for electric loans must be reserved for loans in the several States in the proportion which the number of their unelectrified farms bears to the total number of unelectrified farms in the United States. Of the remaining 50 percent, and of any funds carried over from a previous year, not more than 10 percent may be loaned in one State.

I want to point out that the amount set up for each State under this formula is not a guaranty that that amount will be loaned within the State. Loans can be made only if valid applications are submitted.

This formula was one of the first items of business which confronted us in April 1953. The 1954 budget recommendations for the Agriculture Department were then under consideration by the House Appropriations Subcommittee. The budget recommended that the $60 million electrification contingent loan authorization be made available free of the limitations contained in section 3 of the Rural Electrification Act except that not more than 20 percent could be distributed in any one State. On April 22, 1953, witnesses representing the National Rural Electric Cooperative Association requested the subcommittee to eliminate the formula entirely.

When the 1954 appropriation bill reached the floor of the House on May 19-20, an amendment to free the contingent loan funds entirely from the section 3 formula was stricken on a point of order. When the bill reached Senate floor

on June 15, Senator Young offered an amendment similar to that recommended in the budget. It too was stricken on a point of order. During the debate the suggestion was made by Senator Knowland that this was a matter for the proper legislative committee, where of course it now is.

We had this allotment matter looked into and found that it had been the subject of discussion in the Senate as far back as the spring of 1949. We also learned that the Budget Bureau had suggested its elimination in the 1952 budget and that the National Rural Electric Cooperative Association had been supporting this action sincere early in 1951.

By the fall of 1954 after a full year of experience with the allotment formula and its limitations, it was apparent that it was in the interests of an effective rural electrification loan program to recommend elimination of the formula from the

act.

We are here today to urge passage of legislation which so provides.

HOW THE STATE ALLOTMENT FORMULA WORKS

The purpose of the State allotment formula was to insure a uniform rate of extension of central station electric service to farms throughout the United States. The formula has served this purpose quite well; by June 30, 1955, roughly 95 percent of the Nation's farms will have been connected, and it appears that in at least 40 States the electrified farms will exceed 90 percent of the total farms in each of those States. The State allotment formula was of particular importance during the early states of the program, when the extension of electric service in many areas was very difficult and required the organization and development of borrowers. The reservation of funds to each State under the formula was desirable, since it stimulated the efforts of REA and of local groups in all sections of the country.

In future years, the State allotment formula will not be needed for that purpose, and it is doubtful that it will serve to speed the completion of area coverage. Completion of area coverage will depend almost entirely on the financial ability of already existing borrowers to extend their lines. Further, most of the farms unelectrified at June 30, 1955 will pose difficult problems of feasibility, and the availability of loan funds under the State allotment formula will not assure their connection. In any event, the loan funds required in succeeding years can be made available more advantageously through administrative discretion than through the increasingly cumbersome State allotment formula.

The loan requirements of the borrowers are changing as the program nears area coverage. System improvements, generation, and transmission are requiring increasing proportions of the total loan funds. Continuation of the State allotment formula will result in inequitable distribution of loan funds among the States, and the inequity will increase with time.

Present estimates indicate that in fiscal year 1956, loan requirements for distribution facilities exclusive of system improvements will be about 35 percent of the total electric loan requirements. In fiscal year 1957, distribution facilities exclusive of system improvements will be only about 25 percent of the total loan requirements, and in succeeding years the percentage will drop still further. It appears illogical that half of the loan funds authorized by Congress in future years should be made available to the States on the basis of their number of unelectrified farms, when these will require much less than half of the loan funds. System improvements and generation and transmission loan requirements bear no relationship to the number of unelectrified farms.

62162-55-2

I can illustrate this by citing the State of Mississippi. Mississippi happens to be a State in which there are numerous rural electric systems but where many rural people, for economic and perhaps other reasons, are not taking service. In 1952, with almost 11 percent of all unelectrified farms, Mississippi received only one-tenth of 1 percent of the loans made in that year. In 1954, with 14.4 percent of all unelectrified farms, it received only 4 percent of the loans made in that year. The largest percentage of our annual loans received by any one State in recent years was 13.7 percent received by Kentucky in 1952. In that year, Kentucky had only 6 percent of the Nation's unelectrified farms. Similar disparities exist nearly every year among the various States. In my opinion, they demonstrate quite conclusively that the percentage of unelectrified farms is no longer an accurate measure of loan needs.

EFFECT OF THE FORMULA ON LOAN FUND REQUIREMENTS

The contingency loan fund appears to have been devised to offset the effect of the State allotment formula. It first appeared in the 1950 REA appropriation when $150 million was provided for electrification loan funds, in addition to the $350 million regularly provided, "to be borrowed under the same terms and conditions if and to the extent that the Secretary of Agriculture shall certify, from time to time, to the Secretary of the Treasury that such additional amounts are required during the fiscal year 1950, under the then existing conditions, for the expeditious and orderly development of the program."

During fiscal 1950, $120 million of this amount was drawn down in order to provide enough funds under the formula to make loans of approximately $10 million which could not otherwise have been made in that year because of formula limitations. It is important to note there was a carryover of about $140 million of electrification loan funds from fiscal 1950 into fiscal 1951. For fiscal 1951, the Congress again made available a contingent loan fund which was not used.

As I have already stated, the 1952 budget recommended elimination of the State allotment formula so that loan needs could be met without the necessity for drawing down contingent loan funds far in excess of actual needs. recommendation was not adopted.

This

For fiscal 1952, a contingent loan fund of $75 million was provided; for fiscal 1953, $50 million. No part of these funds was drawn upon. Of the $45 million contingent loan authorization appropriated for fiscal 1954, $38 million was drawn to permit loans of slightly more than $2 million; $47 million of electrification loan funds were carried over from fiscal 1954 into 1955. It looks as if we shall draw the full $35 million of contingent loan fund authorization for fiscal 1955 in order to permit loans of slightly under $2 million which could not otherwise be made only because of the allotment formula limitations. Most of the contingent funds drawn down in fiscal 1955 will probably be carried over into fiscal 1956.

It is quite obvious that the large contingent loan fund authorizations have been required only because of the now artificial, unrealistic limitations of the State allotment formula and have not been related to actual loan needs. This is clearly proven by the fact that the loan fund carryover each year when contingent funds were drawn upon consistently exceeded the total amount drawn.

One trouble with continuing to operate on this basis is that it distorts for the public the size of the REA loan fund request in the Federal budget. Another problem is that with the large carryovers that are created, Congress largely loses its year-to-year control over the size of the loan program.

Abandonment of the State allotment formula would permit material reductions in the contingency or reserve fund requests if not their complete elimination. There would be no "freezing" of funds in some States where they cannot be loaned, and the carryover of unused loan funds from one year to the next would be substantially reduced. The loan authorizations requested of Congress could be based on actual loan needs, rather than the larger amounts which must inevitably be requested so long as the State allotment formula remains a part of the act.

ANNUAL DETERMINATION OF NUMBER OF UNELECTRIFIED FARMS

Section 3 (c) specifically requires that the Administrator make a determination of the number of unelectrified farms within 90 days after the beginning of each fiscal year. Annually a survey is conducted commencing shortly after July 1. Information is solicited from borrowers, electric companies, municipal and other suppliers, State regulatory bodies, and trade associations. The electric company records reflect the number of meters served and these exceed the number of farms

due to multiple-dwelling units. In addition, few electric companies classify their farm consumers as such, and even the REA borrowers, who have a farm classification, cannot be certain that the consumers they classify as "farm" meet the census definition of a farm. As a result, there are undoubtedly errors in the estimates. These problems are not unique to REA; I am told the Edison Electric Institute has experienced the same difficulties in its estimates.

As the State estimates approach 100 percent and consequently change very little from year to year, it becomes increasingly important because of the operation of the State allotment formula that the estimates be accurate, and at the same time, it becomes increasingly difficult to make estimates which are accurate and consistent from one year to the next. Changes in the classification of consumers, changes in the actual number of farms as contrasted with the last census, and other related problems are magnified in their effect on the estimates. There is support in some quarters for retention of the provision for an annual determination of the number of unelectrified farms even if the State allotment formula is abandoned. This is, of course, the difference between the two bills before this committee today. H. R. 2138 would eliminate the requirement for the annual determination; H. R. 5376 would preserve it. We will, of course, do whatever the Congress decides. Just what use would be made of the figures is something I do not know. We can make much better use of the time and effort involved. In our opinion, the census count made every 5 years furnishes accurate information on rural electrification progress.

In conclusion, I want to say that we support this legislation and urge its adoption. We think it is significant that the 1949 telephone loan amendment of the Rural Electrification Act, title II, makes no provision for annual determination of unserved farms or for a State allotment formula. I have heard no complaint over this or over the administration of telephone loan funds after 51⁄2 years of telephone loan experience. It seems to me that the formula and the estimate of unelectrified farms can be dispensed with for rural electrification loans.

Mr. STRONG. The prepared statement is similar to the remarks recently made by Administrator Nelsen before the Senate Committee on Agriculture and Forestry in respect to S. 153, which likewise proposes to remove the State-allotment formula from the Rural Electrification Act.

The general idea of the amendment is to remove the State-allotment formula provided in paragraphs c, d, and e of section 3 of the act. This formula was incorporated in the act to provide, in the early days of the rural electrification program, an equitable means of allotting available loan funds among the several States on the basis of need, and to provide in orderly fashion for fair play among the several States in the progress of the program.

Under the formula, half of all newly authorized funds provided by the Congress are required to be distributed, or allocated, I should say, among the several Ŝtates in the same proportion that the number of unelectrified farms in each State bears to the total number of unelectrified farms in the whole Nation. The other half of newly authorized funds is made available to REA for allotment at the discretion of the Administrator among the several States but with a limit of 10 percent to any individual State; that is, 10 percent of that remaining half of newly authorized funds.

By newly authorized funds I refer to contingency authorizations as well as the basic authorizations. Carryover funds, unexpended balances from the preceding year, or funds obtained by rescission of loans previously made but determined later to be unneeded or unwanted, are subject only to the 10-percent limitation, 10 percent to any one State.

In the early days of the program that formula served a useful purpose by providing equality as between States in the advancement of the program. It is our feeling in REA, on the basis of the experience

we have had in the last 2 years and after a very careful examination of the progress of the program and the status of electrification, that this formula is today not only unneeded but tends to work in the opposite direction from equality.

Today we estimate that by the end of this fiscal year in 40 of the 48 States more than 90 percent of the farms will have been electrified; that is, will have been connected with central station electric power. Our estimate is, nationwide, that by June 30 approximately 95 percent of the farms of the country will have central station electricity. The need, therefore, is not for distributing funds on the basis of the unelectrified farms, but rather to provide for the heavying up and for additional power generation needs of those States already well served with lines carrying power out to the farms. In some States at the present time, under the operation of this formula, funds are allocated to their use which they cannot use. In other States the formula restricts the ability of REA to allot to that State, to make loans, to a degree which hampers the orderly progress of the program. The outstanding example of that, I believe, this year is Colorado.

Under their operation of the formula it is necessary at times to draw upon the contingency funds-to draw down from them almost 20 times as much money as is needed in any one State over and above the regular funds authorized and distributed according to the formula provisions. We feel, therefore, that removal of the formula will not only provide for the orderly progress of rural electrification, but will make it unnecessary for the Congress to authorize each year an overall amount for loan purposes far in excess of the dollars actually needed.

We feel that the Administrator of REA, with the program at its present state of development, should have the authority, the discretionary power, without this formula restriction, to allot those funds made available by the Congress in such amounts to the several States as may actually be needed, rather than by means of an arbitrary formula that does not meet the needs of the day.

That, gentlemen, I think pretty well covers the situation with one possible exception, and that is a little more detail on the manner in which the first half of the formula is brought into being. Each year REA is required by the act to determine the number of unelectrified farms. Experience in recent years with the percentage of electrification up near the 100 percent mark is that it is a practical impossibility to accurately determine within a percentage point the true extent of electrification. That comes about by reason of natural errors coming in checks made by the Bureau of the Census, by power companies serving in the rural areas, by REA itself, and by several agencies of the Government having to do with such determination. Such errors sometimes give rise to rather ridiculous situations. For example, in the State of Maine this past year, and in many other States, the survey showed an apparent decrease in the number of farms served with electricity, percentagewise. Obviously, farms were not abandoning electric service. That apparent decrease in the number of farms served was just an apparent and not an actual decrease, a discrepancy brought about by the errors that are bound to result when, with 95 percent of the farms served, we attempt to determine how many remain to be served. The rural electric cooperatives are doing a magnificant job of extending their lines out to carry service to the