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JUNE 2, 1966

Washington, D.C.

The committee met, pursuant to recess, at 10:10 a.m., in room 1301, Longworth House Office Building, Washington, D.C., the Honorable Harold D. Cooley (chairman) presiding.

Present: Representatives Cooley (presiding), Poage, Gathings, McMillan, Abbitt, Jones of Missouri, Hagen of California, Stubblefield, Purcell, Olson, O'Neal, Stalbaum, de la Garza, Vigorito, Redlin, Bandstra, Greigg, Callan, Dague, Belcher, Teague of California, Quie, Mrs. May, Harvey of Indiana, Findley, Dole, Burton of Utah, and Walker of Mississippi.

Also present: Representative Reifel; Betty Prezioso, staff; Hyde H. Murray, assistant clerk; Francis LeMay, consultant, and Fowler C. West, staff.

The CHAIRMAN. The committee will come to order, please.

The Chair recognizes Mr. Teague.

Mr. TEAGUE of California. I cannot be here tomorrow, and in the interest of the saving of time I would submit for the record a statement of Dr. Robert T. Patterson, economist on the staff of National Associated Businessmen, Inc., and I shall only take a moment or two of your time to comment on it.

The statement is limited to the proposed Federal Bank for Rural Electric Systems. It questions the need for large amounts of additional funds for financing REA growth and expansion and also the concept that the REA nationwide power system must necessarily be financed through a special bank. It points out that the original purpose of the REA has been practically fulfilled, as more than 98 percent of the Nation's farms now have central station electricity. The supposed "growing capital needs," referred to in the bill, evidently assumes a broad expansion in the generating and transmission field, which would to a large extent duplicate the already existing systems of power supply. The advantages of tax exemption and cheap financing by the Government enjoyed by all REA cooperatives put the noncooperative power companies at a competitive disadvantage and also conceal uneconomic situations among the REA cooperatives.

Dr. Patterson suggests two alternatives to the creation of the proposed bank. One would be to encourage the sale of REA cooperatives to the noncooperative power companies. The other would be to provide for private financing by the sale to the investing public of debentures representing REA obligations held by the Government. If a


bank is to be established, he sets forth certain requirements that should be met.

With or without the proposed bank, the shrinkage of the tax base and the cost of low-interest-rate funds borrowed from the Treasury by the REA cooperatives can only be to the disadvantage of the Federal Government, and also to the disadvantage of all taxpayers who share the fiscal burden. Now that the rural electric system has reached maturity it should become an integral part of the free enterprise system by assuming its fair share of that system's responsibility and burdens.

I commend this statement to your attention.

The CHAIRMAN. Without objection, the statement will be made a part of the record at this point.

(The prepared statement of Robert T. Patterson follows:)


As Economist for National Associated Businessmen, Inc., I wish to make the following statement for the record of the Committee on Agriculture regarding H.R. 14837, a bill to amend the Rural Electrification Act of 1936, as amended. At the outset, I would like to acquaint you with our Association. It was organized in 1946 and has been in continuous operation since that time. Its principal purpose is to make every possible effort to get the Federal Government out of any kind of business operation that is in direct competition with American taxpaying companies or individuals. Our membership is composed of both corporate organizations and individuals, representing many different industries throughout the country.

The declared purposes of H.R. 14837 are (1) to meet "the growing capital needs of the rural electric and telephone systems" by establishing Federal Banks that would be sources of supplementary financing for those systems, and (2) to make those Banks eventually "entirely privately owned, operated, and financed." We contend (1) that under any concept of the REA system that is consonant with established principles of free competitive enterprise, the assumption that there are "growing capital needs" of any great magnitude is not valid, and (2) that the bill, as it is presently written, would unnecessarily delay for a long period of time the expressly stated goal of private ownership and control.

The following statement is limited to the proposed Federal Bank for Rural Electric Systems, although a part of what is said would be equally applicable to the proposed Federal Bank for Rural Telephone Systems.

We question the need for large amounts of additional funds for financing REA growth and expansion. In fact, the original purpose of the REA has been practically fulfilled. More than 98 percent of the nation's farms now have central station electricity. The cooperatives that serve farms directly (often referred to as distribution cooperatives) by retailing electric power to them now have, for the most part, earnings and an internal flow of funds sufficient to support their growth. With farm territory now so well served, the need for funds on the part of the distribution cooperatives is mostly for improvements and extensions to serve additional customers.

Thus, the supposition of "growing capital needs" of the rural electric systems is apparently predicated upon plans for a broad expansion in the generating and transmission field, which would to a large extent duplicate the already existing systems of power supply. It is in this area that a substantial increase in REA loans has occurred in recent years. Yet the generating and transmission cooperatives, which wholesale electric power to the distributing cooperatives, were not envisioned in the original REA concept, except where power was actually not available.

In view of the fact that most farms now have electricity and that power is available to the rural electric cooperatives from the wholesale suppliers, both cooperative and noncooperative, the question arises as to whether or not the rural electric systems need the large amount of new capital that H.R. 14837 assumes. To a great extent the present generating and transmission cooperatives

overlap or have displaced noncooperative electric power companies in the areas they serve. The supposed need for any further establishment of such cooperatives is certainly not of a caliber with the great need that once existed for the distribution cooperatives that have brought electricity to millions of family farms and whose expansion now is due largely to the extension of services to persons, businesses, and institutions in non-rural areas and to non-farm customers in rural areas.

It is vitally significant that to a large extent the generating and transmission cooperatives are in competition with noncooperative power companies. These latter, unlike their cooperative competitors, are fully subject to the income tax and other taxes and also must borrow to meet their capital needs at market rates of interest rather than at the greatly reduced rates provided to the cooperatives by the Federal Government. The competitive advantages of this tax exemption and cheap financing can be enormous for the cooperatives, especially the generating and transmission cooperatives. Moreover, such advantages can conceal uneconomic situations.

Most distribution cooperatives could pay the income tax and the market rate of interest for capital funds and continue to provide service to their customers at rates as favorable as those provided by similar noncooperative power companies, because presumably they are equally efficient in their operations. The obligations of cooperatives that are sufficiently efficient units to pay their way without any subsidization would be, of course, highly acceptable to conservative private investors. Most generating and transmission cooperatives, however, do not operate as efficiently as similar noncooperative suppliers of electric power. Power purchased by the distribution cooperatives from the noncooperative companies has declined in cost during the past five years from an average of 7.8 mills to 7.4 mills per kilowatt hour, but power produced by the generating and transmission cooperatives in 1965, cost the distribution cooperatives an average of 8.3 mills per kilowatt hour. Although this inability of the generating and transmission cooperatives to produce power as cheaply as the noncooperative companies may prevent such cooperatives from having access to the capital markets, this is no justification for their subsidization through tax exemption and low interest rates charged by the Treasury. Because wholesale power is generally available and can be supplied more cheaply by noncooperative companies, it seems fair to ask why any proposed legislation should be concerned with the supposed "growing capital needs" of the generating and transmission cooperatives, which despite tax exemption and a low-interest-rate borrowing privilege at the Treasury are higher cost producers. The paramount fact in all of this is that the interest of the consumer is at stake, whether he purchases electric power from a cooperative or a noncooperative company. It should be obvious that for the consumer's sake, if for no other reason, the distribution cooperatives should obtain their power from those sources that offer them the best prices.

The concept that the REA nationwide power system must be financed through a special Bank that eventually will be "entirely privately owned, operated, and financed" overlooks alternative methods by which REA distribution systems and even generating and transmission facilities could be privately financed. H.R. 14837 assumes that supplemental capital must be made available through the Government in such magnitude that it would be impossible for the Bank even to approach private ownership for some fifteen years. In effect, it contemplates private ownership only as a desired objective and merely lays down some guidelines that would be helpful in evolving a plan in 1981. As the bill is drawn, it is even questionable whether the Bank would make any progress during the intervening fifteen years in the desired direction, for nothing in the bill actually requires REA borrowers to pay the market rate of interest for private investment funds. Two percent Government money would still be available from the Rural Electrification Administration. At the same time a ceiling rate of four percent would be placed on what are termed intermediate loans to be made by the Bank. The Bank would also have authority to make additional loans at the full cost of money in the open market plus a small charge for administrative costs. However, there are no requirements for determining which type of cooperative would receive loans at which rate.

One alternative to the establishment of a Bank (which might seem extreme from some points of view but which would serve the public interest most fully when all the ramifications of the problem are taken into consideration) would be

to encourage the sale of rural electric cooperatives to the noncooperative power companies, which have access to capital markets and bear their fair share of the tax burden. Such integration would be to the advantage of the present patronowners of the cooperatives because of the resulting economies of scale and because of public utility commissions' supervision of services and establishment of suitable rates. Such integration would also help to resolve the problems of those electric cooperatives that are not at present operating as efficient units. The biggest objection that has been raised with regard to the REA cooperatives for many years, namely, the great burden placed on all taxpayers because of the cooperatives' special tax exemption and their use of Government funds at a high interest cost differential to the Government, would be removed. This, we contend, would serve the public interest better and more fully than any alternative way of bringing about the private ownership and control of the REA system.

It is important to note in this connection a long-range transitional development that has apparently been overlooked by practically everyone on both sides of the controversy between the cooperative and the noncooperative electric power interests. What once had been a quite clear distinction between rural and urban areas, which seemed to give justification to a dual system of electric power supply, is rapidly disappearing. For example, for REA purposes the original definition of a rural area included towns of 1500 or less population. In today's vast spread of suburban areas this definition has lost much of its usefulness, as the many controversies on "territorial integrity" attest. This development is also reflected in the fact that the present extension of distribution lines adds three or more new non-rural customers to REA systems for each new farm customer. The ruralurban distinction, for whatever it was once worth, is no longer very realistic, and within a decade or two it may have no significance whatever. Nevertheless, the present proposal of a Federal Bank for Rural Electric Systems assumes the continuing need for the two distinct kinds of power system-one for rural areas and one for urban areas. The necessity for this can be challenged on the grounds that investor-owned power suppliers primarily operating in urban areas now serve about 40 percent of all farm customers, and the REA cooperatives operating primarily in rural areas are increasingly serving a proportionately greater number of non-farm customers.

Another alternative that would provide for private financing of existing REA systems would be one that follows closely recent legislation that authorizes the pooling of obligations held by Government agencies and the subsequent sale of debentures to the investing public. This type of financing could largely eliminate the Government's investment in cooperatives quickly and at a moderate cost. It would not, however, eliminate the present subsidy represented by the difference between the 2% interest charged the cooperatives and the interest paid on the participation debentures. Under this method, legislation would probably be sought so that 2% money would continue to be provided to those cooperatives that are unable to operate at a profit, but such legislation should also provide that future loans to cooperatives for replacement and expansion of existing facilities would be made at the current interest cost of the participation certificates plus a small charge for administration.

If, instead of these alternatives, it is decided that a Bank must be established to provide the capital estimated to be needed by the REA electric systems over the next few years or more, it should be patterned after those Banks that have been established for other farm credit agencies. The Bank should be subject to some form of taxation, perhaps a franchise tax, during those years that the Government has capital invested in it, and it should be fully subject to the corporation income tax after its ownership has been transferred completely to private hands. The legislation establishing the Bank should also provide for its actual direction by the farmer-owners of the electric cooperatives and not by Government officials. All rules concerning the terms under which loans will be made in different categories should be clearly established and not left to determination by the Governor and the Board of Directors of the Bank. Areas in which the REA borrowers are to serve should be sharply delineated to provide territorial integrity as between the REA cooperatives and the noncooperative power companies. No loans should be made either for generating and transmission facilities or for distribution facilities without the determination by the appropriate State Utility Commission that the proposed service or plant is needed. In no event should duplication of services be permitted.

Still other alternatives, some of them quite complex, for achieving the goal of private ownership and private financing could be suggested. We believe,

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