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On the other hand, our analysis showed that about 204 distribution co-ops (and no G&T's) would have interest coverage greater than 2 times if all their present loans were replaced by 44% borrowings. This indicates that some of these co-ops may already be in a position to sustain higher interest rates.

(4) LIMITATIONS ON OUTSIDE FINANCING

The major factors which limit cooperative access to conventional capital sources are as follows:

1. Small size

2. High debt ratio

3. Low interest coverage

4. First mortgage position of REA

5. Absence of territorial exclusiveness

6. Withdrawal of capital credits.

I have previously discussed the small size of many cooperatives. Investment laws which govern the investment policies of insurance companies, pension funds, banks and trust companies, who are the usual source of long term funds for utility enterprises, often restrict loans to companies above a certain size. A further restriction is often imposed by the lender on the minimum size issue he desires for his portfolio, due to the costs of investigation and administration. The large majority of the distribution cooperatives would, acting individually, probably fail to meet these investment standards.

The high debt ratio of many cooperatives would also be a limiting factor, since some investment laws and many investment policies would disqualify those with high debt capitalizations.

There is some question, too, as to the extent to which capital credits may be distributed. Since these credits form what is in effect the equity base under the borrowings, it would be necessary to restrict withdrawal and distribution rights in order to maintain capital intact while debt is outstanding.

Low interest coverage is a factor both of the service rate schedule and the high debt ratios. Many cooperatives would be precluded from access to the capital markets because of an inability to meet minimum protective standards required by institutional lenders.

At the present time the provisions of outstanding REA loans give to the REA a first lien on all present and after acquired property of the borrower. This prevents giving a new lender a first secured position even as to the property purchased with his loan. It would be difficult if not impossible for cooperatives to borrow funds on a basis subordinated to existing REA borrowings. At any rate it would be considerably more expensive than if a first secured position could be obtained. Accordingly, it will be necessary for REA to admit new lenders to a position equal with the one it has on the property of the borrower, so that all creditors are equally and ratably secured. The interest rate might be further improved if the REA were to subordinate its claim to the outside funds, much as was done with the government's investment in TVA. This has produced a credit instrument of very high quality and low cost.

Lastly, there is the matter of territory. In many states, particularly in those states where the regulatory commissions do not exercise jurisdiction over the cooperatives, there is no assurance of a continuing right to serve a particular geographic area. As rural areas become urbanized it is not uncommon for problems to arise between the cooperatives and investor owned companies over these customers. Since an institutional investor must rely upon the integrity of the service territory to assure ability to repay the obligation, the lack of a distinct market area can be a serious limitation to capital market financing. A solution to this continuing controversy, which implies a correlative right of the investor owned companies to be secure against intrusion into their customer area, would be most beneficial for all concerned.

These various considerations lead to the conclusion that at this stage of development only comparatively few of the cooperatives, acting individually, are of sufficient maturity and stature to be able to raise funds in the capital market at reasonable rates.

(5) METHODS OF OUTSIDE FINANCING

The deficiencies, however, could be overcome in many cases if the credits and capital requirements of a number of cooperatives were to be joined or pooled, either on a statewide or a regional basis. The Buckeye project previously

mentioned is a good example of this approach. A number of the G&T projects represent grouping of this type, although in those cases reliance continues on REA funding.

These various considerations led us to conclude that the most effective and expeditious method for the cooperatives to gain access to the capital markets is a supplemental source of financing in significant volume would be through the use of some form of central bank. Patterned upon the Central Bank for Cooperatives, such a bank could initially be founded upon a capital contribution from the federal government, which would form the equity basis for issuance by the bank of debentures and other debt obligations. Each borrower would be required to subscribe to capital of the bank in a fixed percentage of the amount of his borrowing, and in this manner, plus earnings, the bank in time would be able to repay the government's contribution and also increase its equity base for expanding operations. As the government's equity was retired the bank and the cooperatives would gradually be removed from the government's aegis, although the bank would be limited in scope and operation by the terms of its charter as defined by Congress.

A central bank offers the promise of providing funds to a larger number of co-ops than could go directly to the capital market. It represents a solution to such obstacles to financing of individual co-ops as relatively small size and high debt/equity ratios. It also offers the promise of obtaining funds from the capital market in the relatively near future, rather than awaiting a long transition period. In time it would diminish dependence upon the REA 2% program. The two bills presently before this Committee derive from our study and implement our suggestion that a capital bank provides the most expeditious way of entering the conventional capital markets for funds to supplement the 2% program. I should perhaps make clear that my firm did not draft either of these bills. We were not retained to draft a bank proposal. Our assignment was limited to a professional analysis of the subject of the availability of conventional financing to the rural electric cooperatives and the steps which should be taken to make such supplemental financing available on a sound and economic basis.

STATEMENT OF CLYDE T. ELLIS, GENERAL MANAGER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

Mr. Chairman and gentlemen of the Committee:

My Name is Clyde T. Ellis. I am General Manager of the National Rural Electric Cooperative Association. Mr. Jerry L. Anderson, who is serving as Acting General Manager during my recuperation from my recent illness, will present a detailed statement for NRECA. I am in full accord with his statement and in my judgment it accurately reflects the views of the membership of NRECA as adopted at their annual meeting in February of this year.

With your kind indulgence, I wish to add only a brief personal footnote to the testimony of our witnesses.

As one who has been closely associated with rural electrification for a quartercentury, it is my belief that the need for supplemental financing legislation is the most critical problem facing the REA program. Without it, I think the rural electric systems cannot meet their future responsibilities to their more than 5.6-million consumers.

In my opinion, the backlog of loan applications at REA is reaching unmanageable proportions. The funds which the House approved for REA in Fiscal1967-and we applaud the House for increasing the amount requested by the Administration-are approximately equal only to the backlog of applications which will be on hand at the beginning of Fiscal-1967 and therefore are really only about half enough to meet the needs next year.

Paradoxically, the very success of rural electrification now threatens to destroy it, unless a new source for loans is forthcoming. The Federal Bank for Rural Electric Systems-which the legislation before you provides can furnish this new source.

While the bills before you differ in some details, they are similar in concept. They would establish a bank which eventally would be owned and controlled by the rural electric systems. NRECA witnesses will submit recommendations in regard to the specific features of the bills.

There is really nothing new in the idea being proposed here. For many decades Congress has helped the rural people to pool their collective credit. This is the heart and soul of the Farm Credit System. And the collective credit of the rural electric systems is excellent. As of January 1, 1966, rural electric borrowers had repaid almost $2.4-billion on their REA loans including $1.3-billion in principal and $275-million of principal ahead of schedule, and $762-million in interest. Only $106,708 in repayments were overdue. The total amount of loan funds advanced by REA as of January 1 was $4.9-billion

I wholeheartedly endorse the concept proposed in the legislation before you and I sincerely urge the Committee to approve this type of approach. It seems to me that this is the kind of an approach which will enable rural electrics to keep pace with the increasing requirements of rural America for electricity, within the areas they now serve.

Unfortunately, it is not usually possible to postpone capital investments in the electric utility business. Rural electric systems are no exception. When their members turn on the lights and motor switches, they expect the lamps to shine brightly and the motors to turn, not heat. When they turn the water spigot, they expect the electric water pump to work. When they turn on he TV set, they expect it to do something more than stare back at them. And in like manner they expect all of their appliances to provide good service.

It is axiomatic that rural electrics plan their expansion, i.e. their vertical growth, within their service areas, to meet the increased consumption of electricity as it occurs. They have no alternative. Thus they must adhere to a systematic schedule of capital improvements.

It was my privilege to participate in the studies and preliminary planning from which the Federal Bank concept evolved. I have considered the matter thoroughly; I have discussed it with experts. I am convinced that it is a sound concept and one that will furnish a practical, long-term solution to furnishing rural electrics with the billions of dollars in growth capital that they will need in the years ahead. And, at the same time, it opens the door to eventual ownership and control of their own credit system.

I appreciate this opportunity to present these views to the members of this distinguished Committee.

Thank you.

Hon. HAROLD D. COOLEY,

Chairman, Committee on Agriculture,

House of Representatives,

Washington, D.C.

DENVER, COLO., May 26, 1966.

DEAR CONGRESSMAN COOLEY: I became the sixth Administrator of the Rural Electrification Administration on June 26, 1956. For 41⁄2 years thereafter it was my privilege to serve this distinguished agency in that capacity.

This was a period of tremendous expansion calling for many changes. It was during this time that the first 100,000 kilowatt unit was installed in an REA financed generating plant. This was also the era when REA made its first loan for a 230,000 volt transmission line.

It became apparent to me during my first year as Administrator that future demands for loan funds would probably exceed those the Congress might feel justified in making available under the terms of the Rural Electrification Act as it had been amended by the Pace Act in 1944. I suggested as early as 1958 that it would be well for borrowers from REA to review their position and ask the Congress to make available to them a financial entity similar to the Federal Land Bank for meeting their loan needs in the future.

Therefore I considered it a forward step when H.R. 14000 was introduced by Mr. Poage on March 24, 1966; and you offered H.R. 14837 on May 3, 1966. I have reviewed these two proposals and find they are in basic agreement with the concepts I had envisioned of such a lending agency during my term as Administrator.

I am thoroughly convinced it is in the best interest of the continued development of rural America that the Congress take favorable action on one or a combination of these proposals at this time. The electric and telephone borrowers will continue to need a readily available source of credit as far as anyone is able to look into the future.

The federal land bank system has already proved itself to be a worthwhile vehicle whereby a treasury financed program could in a period of years move

to a totally borrower-owned entity. I can foresee the same pattern prevailing for the rural electric and rural telephone systems.

My personal preference of the two bills as submitted is H.R. 14837. Nevertheless, it is my opinion that the rural electric and rural telephone systems will continue to prosper and meet their service needs under the terms of either of the two proposals. Sincerely,

DAVID A. HAMIL.

STATEMENT OF PHILIP PARKER, MANAGER, VALLEY ELECTRIC ASSOCIATION Mr. Chairman and gentlemen of the committee, my name is Philip Parker. I am Manager of the Valley Electric Association of Las Vegas, Nevada.

I appreciate the opportunity of submitting a statement regarding the legislation which this Committee is considering.

Valley Electric Association is a rural electric cooperative which serves 676 consumers over 798 miles of line, or an average of 0.85 consumers per mile compared to 26 per mile for Class A and B commercial utilities of Nevada.

Until last summer, Valley Electric operated as the Amargosa Valley Cooperative. When Amargosa merged with its neighboring co-op, White Mountain Power Cooperative 225 miles to the north which served less than a 100, the new name was adopted for the combined organizations. The Valley Electric service area is approximately 9000 square miles.

The Amargosa co-op was started only 5 years ago by the farmers and ranchers of the southwestern desert area of Nevada. For 15 years they had tried to get service from the commercial utilities without success. And when the people of the area decided to form their own electric cooperative to serve themselves, the commercial utilities opposed them with spite lines and through legal action. This delayed the progress of the cooperative by several years.

Valley Electric is a dramatic example of the value of the REA program. Had it not been for the availability of 2 per cent loans through REA, I believe the people of the area would still be without electricity. Yet despite the very low density of the population, the cooperative is proving financially feasible, and we are meeting our repayments to REA on time. Further, the consumers of the cooperative are increasing their use of electricity rapidly, and it is necessary to heavy-up our lines and to build extensions to meet our obligations as a supplier of electricity in this thinly-settled desert country. Just recently we had to build 80 miles of line to bring service to 18 consumer-members under our area coverage responsibility.

I am sure that it is apparent to the members of this distinguished Committee that sparsely-settled areas such as ours could not now be enjoying the blessings of modern electric service without 2 per cent loans from REA, and that 2 per cent funds will be required for some time to come.

There is presently a shortage of 2 per cent money. I believe that the proposed legislation as supported by our National Rural Electric Cooperative Association will help preserve 2 per cent funds for systems that must have them to stay in business. This will be accomplished by opening up additional sources of capital for systems that have the financial ability to pay higher interest rates. Moreover, the proposed Federal Bank for Rural Electric Systems will be able to supply the increasing amounts of capital that rural electrics will require in the years ahead.

I am hopeful that someday even systems such as the Valley Electric will be able to obtain financing through such a bank.

As I see it, lack of adequate growth capital is a shadow darkening the future of the rural electrification program. I believe the concept in the legislation you are considering will remove this shadow and permit the program to continue to progress.

I fully endorse the position of NRECA in regard to the legislation.
Thank you.

RESOLUTION ADOPTED BY THE EXECUTIVE COMMITTEE OF THE WASHINGTON STATE

GRANGE

According to a letter from A. Lars Nelson, Master of the Washington State Grange, the following resolution was adopted by the Executive Committee of the State Grange on May 3, 1966.

"It was moved by Silvers and seconded by Bozarth that we approve in principle the major points in the NRECA plan to (1) continue REA 2% loans for those systems not yet strong enough to use more expensive capital and (2) the creation of a Federal Bank for Rural Electrification systems patterned after the Farm Credit structure and not in conflict therewith, with eventual ownership to be obtained by the participating Rural Electrification Systems. Carried."

JERRY L. ANDERSON,

Acting General Manager, National Rural Electric Cooperative Association.

RESOLUTION OF THE BOARD OF DIRECTORS OF THE UMATILLA ELECTRIC COOPERATIVE ASSOCIATION

CERTIFICATE

I, Harry Proudfoot, Secretary of Umatilla Electric Cooperative Association of Hermiston, Oregon, do hereby certify that the following is a true and correct excerpt from the Minutes of a meeting of the Board of Directors of said corporation, duly called and held on May 17, 1966, at which a quorum was present and voting and that said Resolution was duly made and has not been amended, altered or repealed:

"RESOLUTION

"Whereas the need for capital funds to provide electric service in rural areas is rapidly increasing; and

"Whereas these requirements are exceeding amounts which it is possible to secure by means of Federal appropriations for purposes of the Rural Electrification Administration; and

"Whereas there are several proposals being advanced for a solution to this problem; and

"Whereas the National Rural Electric Cooperative Association has made extensive studies in the field of finance for rural electric cooperatives and has made a proposal for Rural Electrification finance: Now, therefore, be it

"Resolved, That the Umatilla Electric Cooperative Association does urge Congress to enact the Poage Bill or its equivalent to provide a supplemental source of finance for those rural electric cooperatives who are unable to obtain sufficient capital for their needs under the Rural Electrification Act."

In witness whereof, I have hereunto set my hand and the seal of the Corporation on this 26th day of May, 1966. [SEAL]

Secretary.

STATEMENT OF HAROLD W. EATON, MANAGER, MORGAN COUNTY RURAL ELECTRIC

MEMBERSHIP CORP.

My name is Harold W. Eaton. I am Manager of the Morgan County Rural Electric Membership Corporation (REMC) of Martinsville, Indiana. I am a member of the NRECA Legislative Committee, representing Region 5 of the NRECA; and I also speak for a group of Rural Electric Cooperatives who are faced with a special problem. That is the continued need for large amounts of growth capital with which to extend service to the increasing number of new members that apply for service, and also to add capacity to improve service to the existing members and to the new members that are added to our system. The Rural Electric Cooperatives I refer to are all very close to a metropolitan area. They are in an area where the population is moving out of the city to farms that are being subdivided to make way for their new homes. As we say, the area is not expanding, it is exploding.

These Rural Electric Cooperatives are adding from 300 to 1,000 new consumers each year. In most cases, the consumption of electric current is below the average; this is because the loads served are dwellings only, and therefore is less than the regular farm load served under normal conditions by an electric cooperative. This in turn reflects in lower earnings per member than the other electric cooperatives receive from their members.

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