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"(11) Names of State agencies and commissions having jurisdiction over the applicant borrowers.

"With respect to each generation and transmission loan application, processed by REA in accordance with the foregoing procedures, the Administrator should, in order to avoid dilatory tactics or protracted delays on the part of either party in such negotiations establish a publicly announced period of time during which the survey, determinations, and negotiations will be carried on prior to a definite cutoff date set by the Administrator.

"The committee is opposed to the imposition of dual rates in power supply contracts and believes that the cooperatives should state their needs clearly and concretely, and that the suppliers of power should in turn clearly set forth the terms and conditions of power supply contracts.

"The committee expects the Administrator to examine into all complaints which may come to his attention concerning territorial disputes between REA cooperatives and commercial power companies, except in States having adequate statutory provisions for determining territorial and service rights, and report to the committee in January of each year the salient facts involved, the disposition of the complaints, and the basis for such dispositions.

"The committee instructs the Administrator of REA to report to both the Senate and House Appropriations Committees in writing 60 days in advance of approving allocations of funds for acquiring or building generating plants of over $2 million and major transmission lines, and such other information as the committee may request.

"SECTION V. LOANS

"The committee concurs in the recommendations in the House committee report that the Administrator of REA should not make section V loans in competition with private sources of credit, or as a replacement or substitution for loan funds available under the Area Redevelopment Act, Public Law 87-27. Such loans should be very limited. The committee requests the Administrator of REA to provide it with a summary of pending section V loan applications as well as a copy of his certification to the Secretary on the necessity for making these loans." (Source: Senate Agricultural Appropriations Committee, fiscal 1964. Report No. 497. September 12, 1963.)

"The managers on the part of the House disagree with the statements in the Senate report on pages 28 and 29 which require the Administrator (1) to certify to the Comptroller General and the Congress and (2) to give notice of applications to the committees 60 days in advance of approval. They agree that any REA cooperative which is an applicant for a generation or transmission loan shall be made a party to any subsequent negotiations between the Administrator and the power supplier on contract arrangements."-(Source: House and Senate Conference report on Agricultural Appropriations budget for fiscal 1964. House Report No. 1088. December 21, 1963.)

"The Administrator of REA is to be commended for his cooperation in formulating and issuing regulations in accord with the directives in last year's reports of the House and Senate committees. In connection with last year's report of this Committee, it should be clearly understood that the directives contained therein were intended to apply to generation and transmission loans to G&T cooperatives and not to relatively small transmission loans to distribution cooperatives. The regulations issued recently pursuant to these directives should be interpreted and administered on this basis.

"The Committee feels that loan funds provided to REA should not be used for power generation loans where the feasibility is based soley 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.

"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 ap plication is for purposes directly related to the distribution, generation or transmission of electrical energy."—(Source: House Agricultural Appropriation Committee, fiscal 1965. House Report No. 1387. May 8, 1964.)

"The committee expects the power surveys conducted in connection with the consideration and appoval of generation and transmission loans to be limited to the purposes and be limited to the general directions contained in the committee report last year."-(Source: Senate Agricultural Appropriations Committee, fiscal 1965. Report No. 1331. August 7, 1964.)

"This committee, in conjunction with the House committee, in Report No. 497, 88th Congress, 1st session, imposed certain duties and responsibilities upon the REA Administrator to its borrowers and their power suppliers to be complied with before approving loans for generation and transmission facilities.

"The committee directs the REA Administrator's attention to this action and the regulations promulgated thereunder and reiterates its instructions that every effort be made to obtain reasonable wholesale power supply contracts before lending public funds for generation and transmission facilities."-(Source: Senate Agricultural Appropriation Committee, fiscal 1966. Report No. 423. July 6, 1965.)

"The primary function of the rural electrification system is to provide and The distribute electricity to rural and farm customers at reasonable rates. construction of power generating facilities is a secondary function considered to be necessary to preserve the bargaining position of REA cooperatives in securThe Administrator ing power at reasonable rates and under reasonable terms. of REA is expected to observe these basic concepts in carrying out his responsibilities under the law. The Congress has always attempted to protect the bargaining power of the REA with respect to negotiation of power contracts with private utility companies, through the approval of adequate loan funds to provide REA-financed power generation facilities where alternative sources of power are not available on proper terms. It charges the Administrator with the responsibility, in turn, to make certain that every reasonable and practical effort is made to secure power from private sources prior to approving loans for new power generation construction."-(Source: House Agricultural Appropriations Committee, fiscal 1967. April 22, 1966.)

(Exhibit B. Comptroller General's letter of transmittal to the President of the Senate and the Speaker of the House of Representatives covering a report of the Comptroller General of the United States, 1963, follows:)

EXHIBIT B

COMPTROLLER GENERAL OF THE UNITED STATES,

Washington, D.C., November 22, 1963.

To the President of the Senate and the Speaker of the House of Representatives: Herewith is our report on possibilities for reducing Federal expenditures under the electric loan program and other matters pertaining to the Rural Electrification Administration, Department of Agriculture.

On the basis of our examination, we believe that in certain circumstances Federal expenditures under the electric loan program could be reduced without adversely affecting the accomplishment of program objectives. To avail itself of these possibilities, the Rural Electrification Administration should, in determining the need for granting loans and in establishing loan repayment periods, consider the availability of funds expected to be generated by borrowers' incomeproducing operations.

In arriving at its decision to approve or disapprove requests for loans, the Rural Electrification Administration does not consider the funds expected to be generated by the borrowers' income-producing operations except to determine whether the borrowers will be able to repay the proposed loans within the required period. Neither does it consider such funds from the standpoint of establishing the feasibility of a repayment period shorter than 35 years. Therefore, it is possible for borrowers to obtain loans at a rate of 2 percent a year for the maximum 35-year repayment period even though it appears that their financial needs could be satisfied from funds expected to be generated by their operations in ensuing years or that the borrowers have the financial ability to repay the loans in less than 35 years without endangering their financial position or their capacity to provide electricity at reasonable rates.

We noted, for example, a loan approved in May 1962 for $6.7 million to a cooperative for the construction of generation facilities. On the basis of the borrower's own forecast of annual cash margins expected to be generated over the years during which the generating plant financed by the Rural Electrification Administration is to be constructed, and after considering the estimated annual amounts required for plant additions during these years, it appeared that the borrower's financial needs could have been readily satisfied

without the $6.7 million loan at that time and without detriment to the rural electrification program objectives. On the basis of the differences between the interest cost incurred by the Treasury around the time of loan approval, for money obtained from outside sources for long-term marketable obligations, and the 2 percent interest paid to the Rural Electrification Administration by its borrowers, we estimate that the excess interest cost to the Federal Government on this 35-year loan will be about $3.6 million.

In another case, we noted where a borrower received a 35-year loan in June 1962 for $974,000. On the basis of the borrower's estimated cash margins from future operations, as shown by its financial forecast, and after allowing for the increase in debt service because of the $974,000 loan and for a reduction in electric rates which became effective subsequent to the date of the REA loan, it does not seem that the increased amount of annual repayments that would have been required if the loan had been made for a shorter period of 30 or 25 years would cause a financial hardship to the borrower, require consumers to pay more for their electric power than they now pay, or prevent the borrower from further reducing its electric rates. A loan repayment period of 30 years would have reduced the excess interest cost to the Government on the $974,000 loan by about $83,000, and a loan repayment period of 25 years would have reduced the Government's excess interest cost by about $162,000.

To place the Rural Electrification Administration in position to encourage and bring about the fullest use of a cooperative's own capital in lieu of Government loan funds, when warranted, and thereby effect savings in interest costs incurred by the Government, we are recommending that the Secretary of Agriculture institute appropriate action to provide that the agency impose a requirement upon borrowers to prepare and submit long-range financial plans and forecasts in support of loan applications. Our recommendation includes a provision for careful analysis by the agency of such plans and forecasts before approving loans or granting loans for the maximum authorized 35-year repayment period, giving particular attention to the availability of funds expected to be generated by borrowers' income-producing operations and to the financial policies governing the planned disposition of borrowers' expected operating margins. We believe that such financial policies should be carefully weighed by the Rural Electrification Administration with due regard to the rightful interests of the borrowing cooperatives and the consumer public and also to the possibilities of effecting economies in the expenditure of Federal funds.

The comments of the Rural Electrification Administration on our proposals aimed at reducing Federal expenditures under the electric loan program without adversely affecting the attainment of program objectives are recognized and discussed in appropriate sections of the report and appear in detail in appendix II. The agency expressed complete agreement with the desirability of accomplishing rural electrification program objectives at the lowest cost to the Government and stated that it was considering certain action which it felt would be in line with the purpose of our recommendation. However, it did not agree to consider the availability of funds expected to be generated by borrowers' income-producing operations in determining the need for granting loans and in establishing loan repayment periods.

Other matters covered in the report include the need for full consideration by the Rural Electrification Administration of all offers by existing power suppliers to provide power requirements of its borrowers before making generation and transmission loans, the large increase in recent years in electric loan funds used to finance the construction of generating plants and transmission lines, the general funds of electric borrowers, and data concerning the composition of beneficiaries under the rural electrification loan program.

Copies of this report are being sent to the President of the United States, the Secretary of Agriculture, and the Administrator of the Rural Electrification Administration.

RALPH CAMPBELL, Comptroller General of the United States.

The CHAIRMAN. We thank you very much, Mr. Person, for your statement; I am certain that the committee will give it careful consideration.

You mention on page 18 of your statement that this bill was not in keeping with the President's statement or compatible with his views,

but the bill that I introduced came from the executive department with an executive communication outlining this further need, and I, therefore, introduced it.

The Secretary of Agriculture appeared here and spoke in behalf of the bill and urged its adoption. Perhaps, there might be some conflict between the White House and the Department of Agriculture, I was not aware of that. I still doubt very much that there is any difference between the President and the Secretary of Agriculture, because the Secretary of Agriculture would not have come here and testified in behalf of the bill if it was not in keeping with the President's wishes.

You have presented a very comprehensive statement. I think you have stated the facts very well, and I compliment you on the manner in which you have presented your statement.

If there are no questions I will, on behalf of the committee, thank you for your appearance, and we will next call Mr. Smith as our next witness.

Mr. FINDLEY. Mr. Chairman, will there be an opportunity to ask Mr. Person questions later on?

The CHAIRMAN. Do it right now. We have 50-some witnesses waiting here.

Mr. FINDLEY. You have indicated that the private utilities in 1965 paid almost $3 billion in Federal, State, and local taxes?

Mr. PERSON. Yes, sir.

Mr. FINDLEY. Could you give us an estimate of how much of that sum was for Federal taxes?

Mr. PERSON. About one-half of it would be Federal.

Mr. FINDLEY. I note also in your statement that you say that the private utilities now serve about 40 percent of the farm population. Mr. PERSON. Yes.

Mr. FINDLEY. Can you give us any information comparing the rates paid to the private utilities by farmers and the rates paid by farmers who are served by the cooperatives?

Mr. PERSON. I might not be able to give you that in detail at this time. I can reflect upon the condition that existed in Colorado with which I am most intimately familiar, and, generally speaking, they are comparable, approximately the same.

Mr. FINDLEY. They are about the same?

Mr. PERSON. In some categories of the commercial rates they will run lower in some instances, but, as a general observation, in our particular territory they are quite comparable. As far as the industry as a whole is concerned, if you would like to have that information supplied on a little broader basis for the record, I am sure we can do that.

Mr. FINDLEY. I think that it would be helpful.

Mr. PERSON. Very well.

(The information requested is contained in a letter from Mr. Person dated June 30, 1966. See p. 228.)

Mr. FINDLEY. Mr. Person, you referred to the rate basis which applied in the years between 1936 and 1944, which was later changed to 2 percent. If we were to revert to the rate definition of that earlier period, would the private industry then feel that this is satisfactory?

Mr. PERSON. I would say that as a general comment that this would be considered an improvement. Assuming that the basic concept of the act were followed in terms of lending and continuing to render good service for rural America and that there would not be duplication in the process. In other words, that current Government borrowings, with which you probably are more familiar than I am, would be something in the order of 412- to 434-percent interest rate on longterm money, and if the percentage was provided as in the original act and conformed broadly to that condition, it would be an improvement, it seems to us. And, as I say, operating within the scope of the basic principles embodied in the REA Act.

Mr. FINDLEY. Mr. Person, the cooperatives argued that the availability of money for G. & T. purposes as well as the operational function of cooperative-owned generating plants have resulted in lower rates to the farm customers than otherwise would have occurred. What would be your answer to that argument?

Mr. PERSON. I quite naturally would not accept that as a valid argument. I do not think that the history indicates that this is the case. I also happen to have the feeling if they are all going to run away, that we all ought to run the same distance. It may be possible to spot somebody a few yards one way or the other, but if we want to run a 100-yard dash for example, it should be 100 yards, and that we should all be able to compete in the race.

To answer your question more directly, I do not think it has been a yardstick process. The utilities over the United States are subject, as you well know, to regulation. This includes the various commissions in the States as well as certain regulatory bodies of the U.S. Government. I do not regard that as a valid argument. We are trying to make the various types of technological improvements, the coordination of systems, the advancement of systems, and the like, so that the average investment can be reduced; and, therefore, our energy can be sold at as low a cost as possible. We share the pride and objective of doing that. And, also, they hope that by so doing more of our energy can be sold in the future. These, to me, are the primary motivating factors that have nothing whatsoever to do with whether or not an existing REA rate or some odd rate that might be charged by another governmental entity enters into the picture. I think that this could be rather clearly demonstrated.

Mr. FINDLEY. That is all. Thank you, Mr. Chairman.

Mr. HAGEN of California. I have one brief question.

The CHAIRMAN. Mr. Hagen.

Mr. HAGEN of California. Mr. Person, it has been indicated in several instances that distribution cooperatives have purchased their power at higher rates from generating cooperatives than they could secure it from the private suppliers or in the alternative built their own higher cost facilities. Why would they do that?

Mr. PERSON. It is a little bit difficult for me to understand, but I think that the record shows that this has happened and it has been admitted in several cases in hearings revolving around these loans. The case that I cited in Alabama, for example, is one case.

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