Interest rates1 cost to REA borrowers, cost to Government

1 Source: Statement of Senator Lausche in Senate, Sept. 24, 1963 (for data through 1962).

2 1936-44 computed by REA; 1945 through 1965 as specifically provided in Rural Electrification Act, as amended.

Rate is for new issues; does not include bonds issued for advance refunding 1945-57, 1958-60, 1962 are rounded to nearest % of 1 percent.

Treasury Department through 1962.

Rate was 2.49 percent through Sept. 20, 1944.

'Estimated by EEI.

? No issues of 10 years or more (previous year rate used).

EXHIBIT 9

Cost of energy purchased by REA borrowers-by supplier, 1946-65

The CHAIRMAN. Thank you very much, Mr. Smith.

We must adjourn now, because there is a rollcall going on in the House.

Can you be back tomorrow morning?

Mr. SMITH. I will be happy to do so.

The CHAIRMAN. Fine. Be back tomorrow morning for questions and after you have finished, we will call Mr. Harris.

Mr. DOLE. Do we meet this afternoon?

The CHAIRMAN. We will meet this afternoon at 2:30, but just to hear the witnesses whom we were not able to hear yesterday.

We will now recess until 2:30 this afternoon.

(Whereupon, at 12:10 p.m., a recess was taken until 2:30 p.m., this same day.)

AFTERNOON SESSION

The CHAIRMAN. The committee will be in order, please.

I am certain that all of you are aware of the fact the committee meeting was delayed because of the rollcall in the House. The Members are now returning from the House and will be here, I am certain, within a very short time.

To accommodate one witness who has an unusually urgent situation at home, we will call first Mr. Shearon Harris, president of the Carolina Power & Light Co., Raleigh, N.C.

I want to present my friend, Mr. Shearon Harris, whom I have known for many years and represents the power company that serves the area and covers most of the district which I represent. We are very glad to have you here now, Mr. Harris.

Mr. HARRIS. I am grateful to you for allowing me to appear at this time. Your reference to our company serving the area from the district that you come from, I should like to say also that I am proud to be identified as a constituent of the distinguished chairman of this committee and, also, in having him as an electric customer.

STATEMENT OF SHEARON HARRIS, PRESIDENT, CAROLINA POWER & LIGHT CO., RALEIGH, N.C.

Mr. HARRIS. It shall be the purpose of my testimony to deal with the proposed Federal Bank for Rural Electric Systems, the subsidies involved in the proposed financing, some features of the operation of the proposed bank, and the loss of taxes involved in the kind of projects that are proposed to be financed.

Let me qualify the basis on which I make this presentation. Eightythree percent of our operation is in North Carolina and 17 percent in South Carolina. The major investor-owned electric utilities serving North Carolina are Carolina Power & Light Co., Duke Power Co., and Virginia Electric & Power Co. The major electric utilities serving the State of South Carolina are Carolina Power & Light Co., Duke Power Co., and South Carolina Electric & Gas Co.

In North Carolina the electric companies and the rural electric cooperatives reached an accord last year on territorial matters and a State law was agreed upon by both groups to provide for allocation of territories by the North Carolina Utilities Commission. The amicable cooperation between the two groups of suppliers is exemplified by two

recent events when the companies and co-ops jointly sponsored a farm machinery and materials handling equipment exposition at North Carolina State University and jointly entertained 2,000 community leaders who gathered in 2 eastern cities to promote the total development of the State.

In South Carolina the situation is not as well advanced as in North Carolina and there remains a sharp divergency of positions. In North Carolina, for all practical purposes, the co-ops are taxed at the State and local level like the power companies, and are subject in some respect to Commission regulation. In South Carolina, the co-ops are free from State and local taxes and are unregulated.

In North Carolina, about 67 percent of the rural electrification job has been done by the companies, about 26 percent by the co-ops and 7 percent by municipal systems. In South Carolina, the companies and co-ops have contributed about equally in electrifying rural areas.

The co-op systems in both States are well constructed and are ably managed. We recognize their need for financing their future growth and we join with the co-ops in their stated objective to work out a way to terminate their dependence upon Government financing. We are opposed to extension of Government financing to borrowers not eligible under the present law and for purposes not now permitted by the existing law and not now authorized by the limitation laid down by the Appropriations Committees of the House and Senate.

In dealing with the degree of subsidy involved in REA financing, it is necessary that I speak briefly of the economic phenomenon which is peculiar to the electric industry. Unlike all other industry in our economy-in the electric utility industry it is necessary to invest in facilities to serve customers about $4 for each $1 of annual sales of kilowatt-hours. By comparison, it takes only $0.75 in plant equipment or capital investment for all manufacturing enterprises generally, of the Nation to produce $1 in annual sales.

In the automotive industry, only $0.43 of investment will yield $1 in annual sales. In the iron and steel industry it takes $1 of investment to produce $1 of annual sales.

This heavy 4-to-1 investment sales ratio makes the cost of capital a very large part of the cost of electric service. Today the cost of capital to the average electric utility is at least 6.75 percent. This means that out of every $1 of gross income from electric sales $0.27 must be used to pay rent on capital supplied by investors.

When co-ops get all their capital at 2 percent a large part of the normal cost of electric service is borne by the taxpayer. In 1964, all co-op borrowers from REA collected in operating revenues $838 million with $3.4 billion invested in facilities-roughly, the 4-to-1 investment sales ratio. But, instead of 6.75 percent cost of capital they got nearly all of it at 2 percent; and instead of $0.27 of every $1 of sales revenue going to investors, only about $0.08 was required to service capital—a saving of 19 percent of gross income from electric sales.

This heavy investment ratio of four in investment to one in annual sales revenue accounts for another large part of the normal cost of electric services-taxes. About half of this capital must come in the form of common and preferred stock or risk capital for the investorowned industry. This results in about 13 cents out of every sales dollar going to Federal income tax.

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