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bills to be given specific statutory authority for the first time—without any limitation upon the size of the acquired property; 45 (4) the elimination of the requirement of prior State consent in the use of loans for generating plants, which is required by section 110(b) (4) in H.R. 14837, but is omitted from H.R. 14000. The previous provision is in H.R. 14837 ut not in H.R. 14000. (5) the size and composition of the board of directors of the bank; 47 and (6) the broader discretionary authority bestowed upon its Governor. s' The net result of these differences is to make my objections to H.R. 14837 apply with even more force to H.R. 14000.

DECLARATION OF POLICY

The declaration of policy contained in H.R. 11837 refers to growing capital needs for rural electrification which, it is stated, require supplementary financing through a Federal bank for rural electric systems (hereinafter termed electric bank) established “* * * with the objective that [it] will become entirely privately owned, operated, and financed ***

To the extent that the quoted language may suggest that the essence of what is proposed is the early conversion of a governmentally subsidized program into a self-supporting privately financed operation, it might carry an immediate appeal to those who are seeking, like myself, a reduction of unnecessary Federal outlays. Unfortunately, however, such a simplistic impression would be quite misleading. When the proposed legislation is viewed in its entirety, it becomes evident that what is actually provided for is not only the continuation, but the enormous and unnecessary enlargement, of Federal assistance, with no real assurance as to when if ever—the direct contribution of public funds will be repaid. Furthermore, it would so revise longestablished congressional policy as to entail drastic departures from what I have referred to earlier as key characteristics of the rural electrification program to date-namely, its limited purpose of bringing electricity to the unserved farm, and the continuing control by the Congress over its dimensions, direction, and cost. A brief review of the major features of the proposal will, I believe, fully support these assertions. I have a review of the sections of the bills which I think it fully supports this overall summary of its impact, and I hope that I may have the opportunity to develop this with you gentlemen and Mrs. May.

CONTINUATION AND CONVERSION OF THE PRESENT PROGRAM

The provision for supplementary financing does not supplant or terminate the present 2-percent loan program, which is to be continued

45 Under H.R. 14837, sec. 410(a) (2), the “cumulative size" of such acquisitions "shall not be greater than the borrower's existing system at the time it receives its first loan from the electric bank . . ." H.R. 14000 contains no such limitation.

4* Required by H.R. 14837, sec. 410(b) (4); omitted from H.R. 14000. 47 CP. H.R. 14000, sec. 404, and H.R. 14837, sec. 403.

** E.g., although both bills authorize the Governor to make loans for the acquisition of facilities, such acquisitions require the approval of the Secretary of Agriculture under H.R. 14837, sec. 410 (a) (2), but not under H.R. 14000,

Similarly, while under both bills the specific eligibility of REA borrowers for low interest rate "intermediate loans" is determined by the Governor of the bank in accordance with the purposes of the rural electrification program, the “criteria" to be used are established by him under H.R. 14000, sec. 410(b) (2), but by the Secretary of Agriculture under H.R. 14837, sec, 410 (b) (2).

through the use of a new rural electrification account. This account, which bears some similarity to a revolving loan fund-is to be established in the Treasury from all funds remaining available to REA at the effective date of the act. In addition, all collections of principal and interest received from July 1, 1965, on outstanding loans-heretofore required to be covered into the Treasury—are to be paid into this account, which is also to be credited with the shares of stock in the electric bank acquired by the account and any moneys received from the retirement of such stock.49 This is section 310 of H.R. 14837. It may also be supplemented by further congressional authorizations and appropriations as at present.

The assets of the account are to be used for the payment of principal and interest on loans from the Treasury to REA, for loans under sections 4 and 5 of the act limited in any year to the amounts previously authorized by Congress, and for the purchase of class A stock in the electric bank, section 302.50 With funds outstanding in the amount of about $314 billion at the end of fiscal 1965 and payments of principal and interest during that year of nearly $156 million and over $6724 million, respectively. The account would show starting assets, prior to any payments of interest or principal to the Treasury or purchases of electric bank stock, of close to $312 billion, 51 in addition to undisbursed cash balances. This, again, refers to the material in my exhibit No. 5.

SOURCES AND USES OF ELECTRIC BANK FUNDS

The supplementary financing to be provided under the new program is to be handled by the electric bank to be established under the general supervision of the Secretary of Agriculture.52 This is in section 401. He is to designate the initial seven members of its Board of Directors, of whom four would continue to be officers or employees of the Department of Agriculture.53 This is section 403. The REA Administrator is made Governor of the bank 54_section 404—and as its chief executive officer will have broad discretionary authority over its operations.

The capital of the bank is to be provided initially and principally from funds in the rural electrification account over a period of 15 fiscal years at the rate of $50 million annually, in exchange for which class A stock is to be issued to the Administrator. Borrowers from the bank are required to buy class B stock equivalent to 5 percent of their loans. Class C and class D stocks are available for purchase by borrowers and eligible borrowers, and by their consumers, respectively.

For present purposes it is unnecessary to go into the dividend and voting provisions pertaining to each of these classes of stock. What is significant is the fact that any claim for a return to the taxpayer on his $750 million contribution to the capital of the bank is subordinated to other prior claims 55_section 405 --and, perhaps even more important, no definite provision is made for the repayment of this investment. It is provided only that the class A stock representing this contribution "*** shall be redeemed and retired by the electric bank as soon as practicable after June 30, 1981”—and I emphasize this"but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank;" 56– section 405 (c)--"and, further, that as promptly as possible after the retirement of all such stock * * * the Secretary shall transmit to the President for submission to the Congress recommendations for such legislation as may be necessary or appropriate” to terminate borrowing from the Treasury and to effect the transfer of the bank to private ownership and contro1,57 section 412.

49 HR. 14837, sec. 301. 50 H.R. 14837, sec. 302. 61 See appendix, exhibit 5. 69 H.R. 11837, sec. 401, 68 H.R. 14837, sec. 403. 54 H.R. 14837, sec. 404. 65 H.R. 14837, sec. 405.

To obtain further funds for its loan program, the electric bank is authorized to sell its debentures to the public, upon terms determined by its Board with the approval of the Secretary of the Treasury, equal to 10 times its paid-in capital and retained earnings (unless another amount is specified in appropriations which are now authorized) 58 (section 406). While it is to be specified that such debentures are not guaranteed as to principal or interest by the United States, the fact remains that, if the bank's funds are insufficient for these purposes, the Secretary of the Treasury is directed to provide the necessary money at rates reflecting current costs for comparable Federal borrowings 59 (section 406). Thus supported by Federal credit, it cannot be doubted that loanable funds up to the permissible limit ($7.5 billion plus 10 times the amount of class B stock, or a multiplier equal at any time to 50 percent of the outstanding loans) will be available to the Administrator upon terms more favorable than the investor-owned companies are likely to be able to secure.

The Administrator, in turn, as Governor of the electric bank, is authorized to lend these funds, under policies determined by him without further congressional authorization or control, not only for the purposes presently authorized under sections 4 of the act, but also to—and here I am quoting section 410(a)-** * *

“* * * improve the efficiency, effectiveness, or financial stability of electric systems * * *" of REA borrowers, subject to the requirement that any acquisitions must be approved by the Secretary of Agriculture, and that, among other conditions, the acquired facilities must not exceed the size of the borrower's system 60-section 410(a)--and that, in the case of loans for generating facilities, their construction, operation, or enlargement must first be authorized by the State authority having jurisdiction. This is section 410(b) (4). Permissible maturities are extended to 50 years 62 (section 410(b) (1)).

Two types of bank loans are provided for under the bill 63 (section 410(b) (2)). One may be termed the minimum subsidy type since it is to bear interest reflecting the current average rate paid by the bank on its debentures, administrative costs, and estimate losses-allas

54 H.R. 14837. sec. 405 (c). [Italics supplied.] 57 HR. 14837, sec. 412. 5 H.R. 14837, sec. 406. 58 Ibid.

H.R. 14837, sec. 410 (a). € H.R. 14837, sec. 410(b) (4). 8 H.R. 14837, sec. 410(b) (1). * H.R. 14837, sec. 410(b) (2).

* *

determined by the Governor-and hence the subsidy enjoyed by the borrower is limited to its tax exempt status and the fact that its use of federally supported credit results in a lower borrowing cost than it might otherwise have to bear. The second type is what the bill calls "intermediate loans," which are not available to borrowers determined by the Governor under standards established by the Secretary

* to be capable of both paying the interest rate applicable (to other loans) and achieving the objectives of the Federal rural electrification program.

Intermediate loans are to carry interest at rates comparable to current Federal borrowing costs as determined by the Secretary of the Treasury, or 4 percent, whichever is lower. Obviously, the amount of additional subsidy provided under such loans at taxpayer expense will depend directly on the size of this interest rate differential. And it is equally clear that determination by the Governor of the eligibililty of REA borrowers for such preferential loans—as well as for the 2percent loans which remain available under the continuation of the present program-endows him with both enormous power and grave responsibility.

NECESSITY AND RESULTS OF NEW PROGRAM

It is apparent that the amounts to be made available for loans under the new program would be many, many times greater than anything which could conceivably be required to compete the basic job of bring; ing central station electric service to the Nation's farms. As indicated earlier in this statement, extension of such service to all the presently unserved farms—a number which, if current trends continue, can scarcely be expected to increase greatly-would probably require outlays not in excess of the amounts which would be made available through the continuation of the present relatively modest program for a few more years at recent loan and authorization levels. Much more, therefore, must be intended. What, then, is the magnitude and nature of the “growing capital needs” referred to in the preamble of H.R. 14837 ?

Some enlightening inferences can fairly be drawn, both from specific provisions of the bill itself and from statements made by advocates of the new program in one form or another. Thus, the Secretary of Agriculture in his transmittal to the Vice President refers to a need on the part of REA electric borrowers for $8 billion of capital over the next 15 years--without, however, disclosing the basis of this estimate 64 Likewise, the acting general manager of the National Rural Electric Cooperative Association, in his foreword to a pamphlet supporting the legislative proposals embodied in H.R. 14000, refers to a need on the part of the rural electric systems for new capital totaling $9.5 billion between 1965 and 1980.65 A tabulation in the same document shows total estimated growth capital requirements, 1967–80, of $8.7 billion.66 The text indicates that the estimates were made by Kuhn Loeb & Co., Inc. but again we are given neither the basis for the total

84 Letter of Apr. 13, 1966, op. cit., p. 3.

66 Supplemental Financing Program for Rural Electrification, National Rural Electric Cooperative Association, January 1966.

08 Ibid., table 1.

tion.67

estimate nor any breakdown showing the specific uses to which the funds would be put.

In context, however, it requires no great feat of the imagination to perceive that the huge sums to be provided could only be utilized for the granting of loans to G. & T.'s on a very large scale. Furthermore, certain provisions of the bill indicate that this a major purpose of the proposal. For example, the extension of the permissible terms of loans to 50 years would be more appropriate in the case of longer lived generating facilities than for distribution plant, where service lives of approximately 35 years are generally used for purposes of deprecia

This is shown by the FPC report on electrical facilities depreciation.

În view of the objections and instructions regarding loans to G. & T.'s frequently voiced by congressional committees in the past in connection with REA loan authorizations clearly of greatest significance is the elimination of any opportunity for the Congress to exert such guidance or restraint in the future. Once established the electric bank will be given loan funds free from the necessity of securing congressional authorization or appropriations. Within the very broad and somewhat vague guidelines laid down in the bill, the electric bankfor all practical purposes, its governor, the REA Administrator-will be able to extend G. & T. loans as he sees fit, regardless of the views of the Congress concerning their necessity or desirability.

Cnder these circumstances it is easy-though disturbing to foresee the likely result if either of the pending bills should be enacted. The program developed to assist in the distribution of electricity to rural areas would be turned into a device whereby large integrated electric systems, sheltered from Federal taxation and supported by the use of Federal credit at or below its cost to the Government, and with no assurance of repayment, would be enabled to compete for customers and loads with investor-owned companies which must pay their full share of taxes, market rates for their borrowings, and returns to their stockholders.

Not only would such extension of the subsidy program be productive of competition and comparisons which would be unfair, because of the different rules applying to the respective parties, it would also be without economic point, purpose, or justification. As shown earlier, the investor-owned companies will continue anxious and able to provide adequate supplies of electricity to REA borrowers upon fair and reasonable terms. They are doing so now at rates generally below those paid on the average for power produced by the G. & T.'s, and with these rates subject to either State or Federal regulation the cooperatives are assured of fair treatment.

No need has been demonstrated for the vast expansion of G. & T. loans free from congressional control which would be permitted, and appears to be intended, under the proposed new program. The investor-owned utilities have definitely planned capital outlays which will increase their investment in electric utility plant from some $60 billion at the end of 1965-mentioned by previous witnesses to $162 billion in 1980, with about one-third of this total representing pro

67 "Electric Utility Depreciation Practices," Federal Power Commission, 1961, pp. 3–5.

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