the ultimate consumer. As late as 1955, for example, 73 percent of all loans made by REA were for distribution facilities, while by 1965 this ratio had almost reversed itself, as less than 40 percent of the loan funds were utilized for distribution purposes, and in excess of 60 percent were for generation and transmission facilities. The great majority of these loans were made to the super co-ops for the construction of generating plants. As I will point out, these plants were completely unnecessary and unneeded, and actually displaced perfectly adequate, existing generating facilities in the immediate

area.

Within the past few years, loans have been made to finance the construction of large generating plants in Alabama, Indiana, Kentucky, Louisiana, Mississippi, and Colorado. In each case, central station power was available from other suppliers to serve rural electrification purposes without the expenditure of Federal funds. Construction of these generating plants would not provide central station service to a single customer who did not then have it, and the loans represented direct federally subsidized competition with existing, taxpaying power suppliers in the respective areas involved.

In Kentucky, for instance, REA loan funds were authorized for the construction of a large generating plant for the principal purpose of supplying subsidized power to an aluminum company, and thus precluding the investor-owned utility in the area from serving this load. This kind of loan is not only obviously beyond the contemplated purpose of the Rural Electrification Act of 1936, but, in addition, constitutes a severe blow to the taxpaying public. Every dollar of funds advanced by REA is a direct charge to the American taxpayer because it costs the Government more than twice as much to borrow the money than REA pays the Government for the use of these funds. When the funds are then utilized to compete with taxpaying enterprises, the taxpayers suffer another loss in that the Federal Treasury is deprived of the income tax which the taxpaying supplier would have paid if it had obtained the business instead of the REA borrower.

The recent Bureau of the Budget Circular A-76 relating to a restatement of the Government's general policy of relying on the private enterprise system to supply its needs discloses that the Bureau of the Budget is as concerned over this eroding of our tax structure as I am. This Congress has also recognized that the use of public funds to finance a tax-exempt organization to compete with, replace, or displace a taxpaying organization is detrimental to the economy of this country. For instance, see the Report 1387 of the House Agriculture Appropriations Committee dated May 8, 1964, where the committee admonished REA as follows:

The Committee feels that loan funds provided to REA should not be used for power generation loans where the feasibility is based solely on the cheaper power rate resulting from the lower interest rate paid by REA cooperatives than is available to private investor companies unless essential to get area coverage at reasonable rates.

The generation and transmission loans in Indiana, Alabama, Mississippi, and Louisiana were for the sole purpose of replacing investorowned, taxpaying electric facilities with tax-exempt, federally financed electric facilities owned and operated by a cooperative.

As I previously noted, this abuse of the lending power of the Federal Government has caused committees of Congress to instruct REA to more carefully evaluate the need for these expenditures. Without referring to all of these committee reports, I direct your attention to the following language contained in the House Agriculture Appropriations Committee Report 355 dated June 3, 1963, where the following appears:

Before public funds are loaned for power generation or transmission, a majority of the committee believes the REA Administrator, in connection with any such loan, should make a survey, determine wherein the existing contract for power or the proposed contract is unreasonable, advise the supplier wherein such contract is unreasonable and attempt to get such contract modified to make it reasonable. Loans should be made only when reasonable contracts cannot be obtained.

With regard to any further generation and transmission loan approved, the Administrator should certify to the Secretary of Agriculture that each of these steps has been taken and that the private supplier had been given an opportunity to make the contract reasonable, specifying the details, and had refused or failed to do so.

The enactment of either of these two bills pending before this committee would authorize and sanction the use of public funds in direct circumvention of these instructions of committees of Congress, these instructions setting forth certain guidelines.

In many instances, loans have been made by REA for the purpose of cooperatives buying out taxpaying investor-owned utilities. When this occurs, again the American taxpayer bears the brunt of the initial loan, as well as the loss of taxes which would result from the displacement of the taxpaying utility.

This

Under section 5 of the present Rural Electrification Act, loans are authorized for the purpose of aiding prospective users of electric energy in financing the wiring of premises and the purchase of electrical appliances and equipment to utilize the electric energy. portion of the act was deemed necessary in 1936 to enable people in rural areas to find the necessary funds so that they could hook up to the REA lines. This provision has been so perverted in recent years that large loans have been made to cooperatives which, in turn, advanced these funds to commercial and industrial enterprises as an inducement to locate their place in business within REA territory. Examples of this type of loan include the financing of snowmaking machines for a ski resort, gravel-crushing machines, and other types of industrial plant equipment, of which I am sure this committee is fully aware.

Again, with respect to section 5 abuses, REA was called to task by a committee of Congress. The House Agriculture Appropriations Committee, Report 1387 of May 8, 1964, instructed the Administrator as follows:

In connection with Section 5 loans, the majority of the Committee feels that the REA should investigate each request prior to approval to see that the application is for purposes directly related to the distribution, generation or transmission of electrical energy.

As I have previously noted, when these abuses have been called to the attention of the House and Senate Appropriations Committees from time to time, the reaction of those committees has been to instruct REA, by committee report language, to confine its activities to

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the direct intent and purposes of the act rather than to engage in an all-out program to compete with and take away the business of other electric suppliers. I attach as exhibit A to this statement extracts of committee reports of Congress which substantiate that abuses of the REA program have been prevalent in recent years and Congress has been concerned enough that it has endeavored to place some limitations on REA consistent with the original understanding of the act. Committees of Congress are not the only governmental officials which have criticized the current operations of the Rural Electrification Administration. In 1963, the Comptroller General of the United States, in a lengthy and documented report to Congress, observed that REA does not always require its borrowers to adequately demonstrate a need for loan funds, that loans were made when the need was questionable, and that the repayment period of 35 years was in many instances excessively long in view of the obvious ability of the borrower to repay within a shorter time. Recommendations were made by the Comptroller General on how the Federal expenditures could be reduced in connection with the REA program. A copy of the Comptroller General's letter of transmittal to the President of the Senate and the Speaker of the House of Representatives accompanying this report is attached as exhibit B.

It seems a strange answer, indeed, for those who are advised to make loans for a shorter term than 35 years to ask Congress to enact legislation authorizing them to make loans for a 50-year term as provided in the proposed bills.

The Comptroller General also, by decision No. B-157547 of December 17, 1965, advised the chairman of the Senate Agriculture Appropriations Subcommittee that in a recent large generation loan REA had not followed the committee instructions to attempt to negotiate a power contract with existing suppliers before authorizing a loan. Instead of following committee wishes and directives, it is now proposed by these bills that REA be placed above and beyond specific directions of committees of this Congress.

Recent court decisions involving rural electric activities have also resulted in criticism of the current lending program. As an example the Colorado Supreme Court, in early 1966, held that REA had advanced in excess of $20 million for the construction of a totally unneeded and unnecessary generating plant, and had advanced its funds in disregard of the State judicial review process and in violation of the Rural Electrification Act itself. In its decision the court observed that the construction of the generating plant duplicated existing, adequate facilities of investor-owned companies and the Bureau of Reclamation.

The President of the United States has also recognized that REA should concentrate on spending less, rather than more, public funds for the construction of generating plants. In his budget message to Congress of January 24, 1966, he stated that the negotiation of reasonable power contracts from other suppliers "will reduce the need for generation and transmission loans."

Gentlemen, I submit to you that it is high time REA was made to live within the four corners of the act of 1936, abide by the instructions. of congressional committees, and cease making loans which represent a

waste of public funds. For Congress, in the face of this official criticism of REA, to make almost unlimited funds available for REA to further a program of improvident loans, in my opinion, constitutes an endorsement of waste of public funds.

There is still another matter associated with the vast expenditures of public funds contemplated by the proposed bills. The Federal Government of the United States, recognizing the current inflationary tendencies, has taken many steps to reduce the level of capital expenditures which would contribute to the inflationary tendencies. Only a short time ago the electric utility industry was requested to make such reductions in proposed capital expenditures as were consistent with the ability of the industry to continue to meet the electric demands of the public. The creation of a Federal bank having a lending power in excess of $10 billion to finance unneeded electric facilities and the continuation of 2-percent loans would result in a source of capital funds in the next 15 years in excess of $15 billion. This is hardly consistent with the efforts of the President to confine capital expenditures.

In view of what I have just related, it seems inconceivable that these proposed bills would warrant any consideration whatever. The proponents of these two bills have suggested a cure or a remedy for the ills which have beset REA in the past which is contrary to and inconsistent with the remedies suggested by the President of the United States, the Comptroller General of the United States, and various appropriations committees of Congress.

Any fair analysis of these bills will readily show that-

(1) The provision of the Rural Electrification Act providing for loans to provide service to persons in rural areas not receiving central station service would not be applicable to loans made by the proposed bank;

(2) Loans for the purpose of constructing generation and transmission facilities could be made without regard to the Rural Electrification Act or the Appropriations Committee reports requiring bona fide negotiations with existing electric suppliers prior to making any such loan:

(3) The federally subsidized, low-interest rates available from the bank and from the continuation of 2-percent program could be utilized for the purpose of displacing the services of existing taxpaying power suppliers;

(4) The recommendation of the Comptroller General that many loans should be made for a period of less than 35 years would be ignored and, to the contrary, loans could be made for a period of 50 years. This, incidentally, in many cases, would be in excess of the useful life of the property financed by the loan;

(5) The observation of the President of the United States that REA demands upon the Treasury could be cut if more power were purchased from existing suppliers would not be heeded and the bank would be free to make whatever loans it desired, regardless of the availability and price of alternative power sources;

(6) The prerogatives of the Congress of the United States to control public expenditures would be swept aside in favor of carte blanche authority vested in the board of directors of the Federal bank;

(7) The efforts of the Comptroller General of the United States to point out how REA could reduce its yearly appropriation requests

would be disregarded by the authorization of either $750 million or $1 billion gratuity from the taxpayers of the United States;

(8) The established policy of the appropriations committees and the Bureau of the Budget that Federal funds should not be utilized to displace the private enterprise system would be replaced by a policy of unleashing over $10 billion at an early date for this very purpose, with the attendant loss in tax revenues to the U.S. Treasury and other State and local taxing authorities; and

(9) The President of the United States' plea to business and industry to reduce wherever possible capital expenditures as a deterrent to inflation would be given a deaf ear, and tremendous sources of funds could be utilized for the purpose of making unneeded and unnecessary capital expenditures.

Edison Electric Institute unequivocally opposes this proposed legislation for the reasons I have stated to you. We submit these reasons are sound and in the public interest. This is particularly true when one considers that we are here dealing with the electric utility industry which is under full governmental regulation.

In excess of one-half a century ago most States adopted statutes providing for some form or another of public utility regulation. These statutes were adopted because it had been recognized that the public interest of the United States would best be served if free and unbridled competition between public utilities were prevented. As a result, regulation instead of competition between public utilities became the accepted manner of providing utility service, thereby reducing to a minimum the duplication of utility systems.

The reasoning behind this fundamental concept of regulation of utilities and prevention of duplication was that experience had disclosed that there was an enormous waste of capital funds in the construction by competing utilities of unneeded and unnecessary facilities. Thus, almost all regulatory authorities prevent what is commonly referred to as "duplication of public utility facilities" and require strict proof of public need before new facilities are constructed which the public must support through the rate structure of the utility involved. This whole theory of regulation is founded on the wellestablished assumption that the consuming public should not be burdened with supporting any more public utility investment than is absolutely needed to render the required service to the public. In other words, if existing utility systems will suffice to meet the public need, there is no sense or necessity in expending additional funds to construct duplicating systems.

This concept of preventing duplication of public utility facilities and investment has further been refined in the electric business by voluntary action between adjoining utility systems, such as joint coordination of the planning, construction, and integration of facilities so that one system will operate in harmony with another with economic benefits to all concerned. In the electric utility industry, for example, it is common knowledge that almost all systems, public and private, whether municipal or governmental, are interconnected in various areas throughout the country. This type of coordinated operation between industrial systems creates great savings in generation and transmission investment, and the resulting public benefit in