companies provide service to all who desire it within their area, the need for Government loans is reduced. And to the extent that [such] companies make power available to REA borrowers at fair and reasonable rates, and on terms which permit them to serve all eligible customers within their service areas, the need and justification for loans for generating facilities disappears

***

The REA for its part has a responsibility to see that Government funds are not loaned unnecessarily. In making a loan for generating facilities, it should investigate very carefully the need therefor. Public hearings may not be the way to do this, but *** open and aboveboard consideration of loans * * * would preclude the possibility of charges that such loans were unjustified. Secrecy, on the other hand, might well tend to induce doubt that responsible action was taken.19

Similarly a House committee in 1964, after commending the REA Administrator "for his cooperation in formulating and issuing regulations in accord with the directives in last year's reports of the House and Senate committees," stated:

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.20

Other examples might be cited of instances when congressional committees have had occasion to remind REA of the constraints imposed by the act and of the importance of fiscal responsibility. Based on my own experience in Government service I am convinced that, no matter how well-intentioned and conscientious the agency may be, continuing surveillance of its operations by the Congress serves as a highly essential check upon such human frailties as extravagance, aggrandizement, and empire building, and tendencies to deviate from the legislative intent toward other objectives.

Later in this statement I shall point out specifically the ways in which I believe the pending bills would alter or erode these two key features of the present program. Before doing so, however, I should like to discuss briefly some of the more important developments which have occurred in rural electrification since REA was established.

DEVELOPMENTS IN RURAL ELECTRIFICATION

First and most important, in terms of the purpose of the program, the objective of bringing electricity to the farm has been substantially attained. The percentage of farms having central station service has risen from 11 percent in 1935 to over 98 percent in 1965, and this progress has been quite generally distributed over the country. According to the latest figures available from REA, 98 percent or more of the farms have such service in 31 States.21 These are listed in my notes, and are taken from exhibit 1. In 10 additional States the percentage is 97 percent or over.22 Of the nine States remaining, five 23

19 87th Cong., 2d sess., S. Rept. No. 1365, "Report of the Committee on Agriculture and Forestry on S. 3225, Food and Agriculture Act of 1962." Apr. 27, 1962, pp. 23-24. 20 88th Cong., 2d sess., House of Representatives, Rept. No. 1387, "Report of the Committees on Appropriations on H.R. 11202, Department of Agriculture and Related Agencies Appropriation Bill, 1965," May 8, 1964, p. 44.

21 Arkansas, California, Connecticut. Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana. Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon. Pennsylvania, Rhode Island. Tennessee, Utah, Vermont, Virginia, Washington, and Wisconsin. See appendix, exhibit 1.

22 Alabama, Arizona, Colorado, Delaware, Idaho, Kansas, North Dakota, South Carolina, South Dakota, and Texas. Ibid.

3 Maine, Mississippi, Montana, West Virginia, and Wyoming. Ibid.

showed at least 95 percent of their farms electrified, while in only four, Alaska, Hawaii, Nevada, and New Mexico, did the figure fall below 95 percent. That is from the same source.

This is a truly remarkable achievement. The rapidity of the progress in the last 15 years is shown by the fact that as recently as 1950 only 14 States could boast of the fact that 90 percent or more of their farms were receiving central station service, while in 1965 only 3 States were under this figure.25 These are the same that I mentioned above.

For these accomplishments REA is entitled to a full measure of credit. But the contributions of the investor-owned utilities must also be recognized. At present, as I think Mr. Person pointed out, they furnish service to about 43 percent of the roughly 32 million electrified farms, as compared with 51 percent served by REA cooperatives and the balance from other sources, such as municipal utility systems and public power districts.26 Furthermore, these companies furnish at low wholesale rates-on the average about 30 percent below most standard industrial rates-over 38 percent of the energy purchased by the REA cooperatives. Some 42 percent of the energy is supplied by such Federal agencies as the Tennessee Valley Authority and the marketing agencies of the Department of the Interior. REA borrowers generate nearly 122 percent of the requirements of the cooperatives, with the balance coming from other sources.27

These data, gentlemen, and Mrs. May, are based on my exhibit No. 3 which shows these data through the years 1946-65 and is drawn from REA Bulletin No. 111-2.

In support of the REA's share of this contribution to rural electrification, Federal loans had been approved in the aggregate amount of over $5.6 billion, of which more than $434 billion had been advanced by the end of fiscal 1965.28 I have another exhibit, No. 4, which gives these data from the annual reports of the REA, both annually and cumulatively over the period. Repayments of principal to that date, 1965, amounted to over $12 billion, and payments of interest to almost three-quarters of a billion dollars-all covered into the Treasury as miscellaneous receipts.29 Some $334 billions of loans remained outstanding.30 These data are shown in another exhibit, likewise on an annual and cumulative basis, from data drawn from the REA annual reports showing the annual and cumulative amounts on these.

SUBSIDIES AND YARDSTICKS

Although these Federal loans are self-liquidating, their extension since 1945 as the fixed interest rate of 2 percent involves an enormous subsidy at the expense of the taxpayer. Previously the interest rates charged REA borrowers were based upon the average cost to the Government of borrowings for 10 years or more during the preceding year. Although the borrowers enjoyed the advantages of low-cost Federal credit, their payments were at least designed to reimburse the Treasury

31

for its average cost of borrowing. Since 1945, however, such Federal borrowing costs have steadily risen, until in 1964 and 1965 they averaged in the order of 42 percent, or more than twice the interest rate charged to REA borrowers. This is in No. 6, exhibit No. 6, which will give the interest rate to the REA borrowers and the cost of the borrowing to the Government. The aggregate amount of this direct subsidy at taxpayer expense in the period 1945-64 was approximately $518 million.32 This is computed by adjusting annually the interest paid by the REA borrowers to the ratio of 2 percent as provided in the act as to the average interest rate paid by the Government on the borrowings mentioned earlier.

In addition, REA borrowers, as noted earlier, are generally exempt from the payment of Federal income taxes. There are indications that they also enjoy some measure of State and local tax concessions. Since taxes forgone increase the needs for public revenues from other sources, this likewise must be viewed as a subsidy paid for by the taxpayer at large. If REA borrowers had paid taxes at rates comparable to those paid by the investor-owned utilities (amounting to about 5 percent of their utility plant in service), their aggregate tax bill from 1952 through 1964-this being the period for which data are now available-would have amounted to nearly $1.9 billion.33 And this figure likewise is shown in the tabulation, in my appendix.

Taking into account these elements of subsidy, and allowing further for the fact that utility long-term debt normally costs substantially more than the interest rates on public borrowing, it is obvious that the REA cooperatives enjoy an advantage over the investor-owned utilities in their overall costs of service. This has been calculated to be in the order of 30 percent. Although it is sometimes suggested that REAfinanced generating plants are needed as a yardstick in terms of which the reasonableness of the charges of investor-owned companies may be measured, it is clear that no fair and valid comparison may be drawn without adjustment for these differences.

In other words, without the elimination of the handicaps which were mentioned by the previous witness with respect to that.

Now, as to the future role of REA which we think is of great importance:

With the task of rural electrification so largely completed, the questions of the future of REA is brought into sharp focus. To bring central station service to the remaining 2 percent of the Nation's declining number of farms which are now without it might require an outlay of as little as about $155 million,34 an amount approximating the average annual loans granted during the 3 fiscal years, 1963-65, for distribution facilities.35 That figure, I would like to explain. It is actually one that comes out to $153,825,000. It is derived by applying to the $61,530 farms remaining unserved as shown in my exhibit No. 1 and assuming one customer per mile of line, a cost of $2,500 per mile, which multiplies out to nearly $154 million. As to the one cus

31 See appendix, exhibit 6.

32 Interest paid by REA borrowers adjusted annually by the ratio of 2 percent to the average interest rate on marketable securities with maturies of 10 years or more. 33 See appendix, exhibit 7.

24 $153,825,000, based on the 61,530 unserved farms indicated by the tabulation in appendix, exhibit 1, and assuming 1 customer per mile of line at a cost of $2,500 per mile. $154,900,000, see appendix, exhibit 8.

tomer per mile, as it compares with the REA customer per mile of 134 in 1936 and 31⁄2 in 1965; as to the cost of $2,500 compared with the REA figures of $1,061 in 1936, and about $2,412 in 1965. Since I have no desire to try to mislead the committee in any way, I think that I should supplement what appears in my prepared statement on this score, by pointing out that this is somewhat of an understatement, for it does not take into account outlays which no doubt will be required to service new nonfarm customers along newly constructed lines as well as to strengthen the facilities to serve more adequately the needs of existing customers. But, nevertheless, I think that the figure has some relevance as an indication of the reasonable attitude of the present program. Should the electric program of REA, therefore, like its loans, be geared to self-liquidation? Although this would seem consonant with the original basic purposes of the program, I could hardly say to you in good conscience or with a straight face that I expect this to happen very soon. But the question, in the light of recent developments in connection with the purposes for which loans are being granted, and also in view of certain features of the proposed legislation, is, I think, deserving of some serious consideration.

As I see it, REA now stands at the crossroads: either it will shortly complete its basic task or it will embark upon an even larger program of extending loans for generating and transmission facilities which will graetly, unnecessarily, and wastefully enlarge the realm of public power. Under the proposed legislation this would be both sanctioned and freed upon effective and continuing control by the Congress.

During the last 10 years an increasing proportion of the REA loans granted have been for generating and transmission facilities. By fiscal 1961 this ratio had risen to over 55 percent; for the 5 years, 196165 it averaged 53.5 percent; and for fiscal 1965 it reached more than 60 percent. Mr. Person alluded to this. The data are contained in my exhibit No. 8, showing the distribution uses of these loans as to this point.

36

Although no doubt there may be exceptional cases, overall I can see no need for the extensive use of public funds for these purposes― that is, G. & T. As pointed out earlier, the private companies now supply a large proportion of the energy requirements of the REA cooperatives at special low wholesale rates. There is no indication that they will lack the capacity or the will to meet these needs on reasonable terms in the future. Furthermore, their average wholesale prices to REA cooperatives are substantially (more than 10 percent) below the rates paid by the latter to the subsidized generating and transmission cooperatives (hereinafter referred to as G. & T.'s).37

This is clearly inconsistent with the statement of Senator Norris quoted earlier, regarding the only conditions under which REA loans would be made available for generating plants and with not the infrequent admonitions of congressional committees on the subject. Nor is it constant with sound economic practices aimed at bringing electricity to the consumer at the lowest reasonable cost. Efficient procureinent requires the securing of energy at the lowest overall cost at which it is available, indeed, if cost to the taxpayer is to be taken into account, the provisions of a recent Budget Bureau circular,38 to which

3 Ibid.

See appendix, exhibit 9.

3 Bureau of the Budget, Circular No. A-76, Mar. 3, 1966.

65-357--66-17

Mr. Person referred, requiring that taxes foregone be counted in comparing prices bid on Government procurement contracts, might well be applied to purchases of electricity by the REA cooperatives. Finally, there appears to be no compelling reason or justification for the diversion of large amounts of badly needed Federal funds to further subsidize giant systems paralleling in function and threatening the position of the investor-owned utilities, which have served the Nation well in their traditional role of furnishing the major portion of our electric energy requirements.

In his letter transmitting to the Vice President a bill identical to H.R. 14837, the Secretary of Agriculture refers to the low customer density and revenues per mile of the REA rural line as compared with the same data for class A and class B electric companies on their total operations-not with rural. He continues:

39

Other handicaps include the lack of diverse and large loads, pockets of chronic poverty, rugged terrain, and isolation from sources of low-cost power. This is in the Secretary's letter of April 13, 1966. These factors may justify subsidy to rural distributions lines, but have little, if any, application to loans to G. & T's.

Coming now finally to the pending bills and our specific objections to them, which requires some comparisons of them and some specific discussion of the rather complex provisions which they contained, it is apparent that their basic purposes are virtually identical. They are so closely similar that I believe I can conserve your time by limiting my discussion of them.

The CHAIRMAN. May I interrupt you right there? Unless you can finish within a very few minutes, we will have to ask you to come on later.

Mr. SMITH. That is perfectly satisfactory to me.

The CHAIRMAN. The House will be in session in about 8 minutes. Mr. SMITH. I shall hurry along. If you should like for me to complete my statement, I certainly should like to do it, but I shall be very glad to meet your convenience.

The CHAIRMAN. Please proceed.

41

Mr. SMITH. It should be noted that H.R. 14000 is even more liberal in its arrangements for REA. For example, the contribution of public funds to the stock of the proposed Federal electric bank is very much higher, $1 billion as against $750 million,40 and hence the initial ceiling on borrowing by that bank would be pyramided correspondingly to $10 billion as compared with $7 billion. Other differences, of varying degrees of significance, include: (1) the lower interest ceiling on "intermediate" loans (3 percent versus 4 percent); 42 (2) the crediting of 2 percent interest on electrification loan account moneys deposited in the Treasury until disbursed; 43 (3) the even wider latitude allowed in the use of loans to acquire facilities under both

39 Letter of Secretary Freeman to Vice President Humphrey, dated Apr. 3. 1966.

40 All "net collection proceeds" from the REA electrification loan account until the total reaches $1 billion, under H.R. 14000, sec. 405(a); at the rate of $50 million annually for 15 years from such net collection proceeds or from appropriations, under H.R. 14837, sec. 405 (a).

41 Secs. 406(a) of both bills authorize the issuance of debentures in amounts not to exceed 10 times the paid-in capital and retained earnings (H.R. 14837) or surplus (H.R. 14000).

42 Cf. secs. 410(b) (2) of H.R. 14000 and H.R. 14837.

43 Cf. sees. 303 of H.R. 14000 and H.R. 14837.

"Apparently limited to "electric facilities" under H.R. 14837. sec. 410(a), but extended to include "other related purposes" by the language of H.R. 14000, sec. 410 (a).