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1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949. 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965

$823, 262 11, 864, 836 60, 040, 810

122, 339, 824 $2,358, 921 $2,358.921 $432, 404 $432, 404 221, 287, 287 $2, 520.343 $2,520, 343 6, 162, 086 8, 521, 007 2,784, 542 3, 201, 866 296, 392, 717 2, 898. 280 5, 418, 623 2, 690, 343 11, 211, 350 2, 202, 562 5, 404, 428 346, 031, 542 7, 712, 720 13, 131, 343 13, 280, 908 24, 492, 258 7, 259, 359 12. 663. 787 343, 287, 347 10, 856, 737 23,988, 080 15, 068, 119 39, 560, 377 4, 143, 467 16.807, 254 342, 491, 192 11, 421, 863 35, 409. 943 10, 689, 644 50, 250, 021 2, 466, 930 19, 274, 184 377, 116, 717 8, 928, 597 44, 338, 540 11,078, 746 61,328, 767 687, 260 19, 961, 444 453, 291, 077 9, 246, 209 53, 584, 749 13, 550, 123 74, 878, 890 -92, 920 19, 868, 524 629, 826, 811 8, 951, 248 62, 535, 997 21, 263, 232 96, 142, 122 -931, 156 18, 937, 368 854, 799, 536 9,619, 742 72, 155, 739 22, 640, 889 118, 783, 011 344, 626 19, 281, 894 1, 153, 445, 515 12, 755, 747 84, 911, 486 26, 742, 417 145, 525, 428 3,685, 301 22, 967, 195 1, 413, 361, 750 13, 748, 265 98, 664, 751 36, 947, 192 182, 672, 620 10, 553, 621 33, 530, 816 1, 644, 545, 216 14, 785, 444 113, 450, 195 48, 619, 568 231, 092, 188 14, 391, 742 47,912, 558 1, 823, 499, 677 17, 356, 322 130, 806, 517 48, 796, 910 279, 889, 098 8,855, 295 56, 767, 853 | 1,982, 336, 703 20, 316, 806 151, 123, 323 58, 995, 599 338, 884, 697 12, 234, 590 69, 002, 443 | 2, 104, 869, 636 26, 179, 882 177, 303, 205 74, 392, 423 413, 277, 120 15, 939, 151 84, 941, 5942, 187, 219, 148 32. 033, 065 209, 336, 270 79, 867, 399 493, 144, 519 10, 928, 767 95, 870, 361 2, 262, 054, 056 36, 793, 035 246, 129, 305 84, 291, 426 577, 435, 945 13, 031, 910 108, 902, 271 2, 363, 740, 252 39, 342, 578 285, 471, 883 97, 185, 987 674, 621, 932 19, 749, 647 128, 651, 918 2, 471, 886, 561 42, 487, 294 327, 959, 177 99,872, 122 774, 494, 054 17,781, 828 146, 433, 746 2,583, 731, 775 45, 038, 137 372, 997, 314 100, 192, 161 874, 686, 215 13, 962, 268 160, 396, 044 2, 706, 160, 628 49, 021, 711 422, 019, 025 100, 874, 589 975, 560, 804 8.998, 373 169, 394, 387 | 2, 788, 699, 080 52, 827, 739 474, 846, 674 122, 277, 950 1,097, 838, 754 16, 462, 456 185, 856, 8432, 862, 228, 257 57, 553, 802 532, 400, 566 147, 302, 9701, 245, 141, 724 30, 192, 017 216, 048, 860 2,960, 679, 404 61, 689, 924 594, 090, 490 134, 598, 315 | 1,379, 740, 039 20,955, 744 237, 004, 604 3, 072, 045, 578 64, 639, 727 658, 730, 217 155, 900, 193 1,535, 640, 232 30,878, 099 267, 882, 7033, 215, 934, 819 67, 572, 967 726, 303, 184

1 Includes advance payments. Source: Annual reports of REA.

EXHIBIT 6

Interest rates cost to REA borrowers, cost to Government

(In percent)

Year

Interest 2 rates
charged REA

borrowers

Average interest

rate on : * marketable securities with maturities of 10 years or

more

Year

Interest ' rates
charged REA

borrowers

Average interest

rate on 34 marketable securities with maturities of 10 years or

more

1936. 1937 1938. 1939 1940. 1941 1942. 1943. 1944 1945. 1946. 1947. 1948. 1949. 1950.

3.00 2. 77 2. 88 2. 73 2. 69 2. 46 2. 48 2.57

2. 67 32.00 2. 00 2.00 2.00 2. 00 2.00

2. 77 2.88 2.73 2.69 2. 46 2. 48 2. 57 2. 67 2.25 2.25

2. 375 0 2.375 * 2. 375 62. 375 * 2. 375

1951. 1952 1953 1954 1955 1956. 1957. 1958. 1959 1960. 1961. 1962. 1963. 1964 1965.

2. 00 2.00 2.00 2.00 2. 00 2. 00 2.00 2.00 2.00 2. 00 2.00 2.00 2.00 2.00 2. 00

6 2. 375 • 2.375 3. 25 3. 25 3. 00 3. 00 3.00 3.50 4.00 4.25 6 4. 25

4.00 7 4.00 7 4.25 74. 25

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 Ys of 1 percent.

* Treasury Department through 1962.
5 Rate was 2.49 percent through Sept, 20, 1944.
Estimated by EEI.
? No issues of 10 years or more (previous year rate used).

EXHIBIT 7 Estimated taxes unpaid by REA cooperative borrowers, 1952–64

2.1 2.1 2.1 2,2 2.1 2,1

2.1

$13, 415, 453 47, 646, 261 51, 411, 686 57, 289, 360 58, 134, 580 61, 699, 276 65, 405, 840 73, 728, 465 81, 647, 901 86,013, 927 90, 866, 624 101, 902, 239 107,887, 034

$8,585, 462

9,689, 047
10, 958, 760
12, 180, 647
13, 111, 059
14, 603, 332
15, 934, 915
17, 959, 760
20, 292, 041
22, 189, 832
25, 204, 867
27, 441, 615
29, 248, 862

$34, 829, 991 37, 957, 214 40, 452, 926 45, 108, 713 45, 023, 521 47,095, 944 49, 470, 925 55, 768, 705 61, 355, 860 63,824, 095 65, 661, 757 74, 460, 624 78, 638, 172 699, 648, 447

$100, 986, 872 108, 292, 171 113, 898, 192 128, 438, 691 133, 609, 547 135, 237, 768 136, 678, 712 152, 956, 227 160, 753, 305 168, 536, 702 172, 331, 273 184, 854, 717 195, 515, 793

2. 2 2.3 2.3 2.3 2. 4 2.4

927, 048, 646

227, 400, 199

1,892, 089, 970

Percent Federal income

Electric plant

in service 1

Less taxes paid

Year

Estimated taxes other

than
Federal in

come

Estimated

Federal in-
come taxes un-

paid

Percent
taxes
other

than
Federal
income 3

Estimated
taxes other
than Federal
income unpaid

Estimated
tax loss to
Government

tax 2

$2,067, 402, 540
2, 268, 869, 571
2, 448, 175, 531
2,604, 061, 806

768, 313, 315
2, 938, 060, 784
3, 114, 563, 828
3, 351, 293, 852
3, 549, 908, 739
3, 739, 735, 964
3, 950, 722, 797

, 245, 926, 642
4, 495, 293, 012

1952
1953.
1954.
1955.
1956.
1957
1958
1959
1960
1961
1962
1963.
1964.

3. 2
3.1
3.0
3. 2
3. 2
3.0
2.8
2.9
2.8
2.8
2.7
2. 6
2. 6

$66, 156, 881
70, 334, 957
73, 445, 266
83, 329, 978
88, 586, 026
88, 141, 824
87, 207, 787
97, 187, 522
99, 397, 445
104, 712, 607
106, 669, 516
110, 394, 093

116, 877, 621
1, 192, 441, 523

Total.

1 Includes only electric plant in service for years prior to 1961.
2 Equivalent to ratio of Federal income tax bill to electric plant in service and construc-
tion work in progress (construction work not available in 1952) of class A and B utility
companies.

3 Equivalent to ratio of taxes other than Federal income taxes to electric plant in service and construction work in progress (construction work not available for 1952) of class A and B utility companies.

Note.-Revised from page used in February 1965, REA items. Data not available from REA to compute unpaid taxes previous to 1952.

Sources: FPC statistics of electric utilities in the United States privately owned through 1963. Data for 1964 is based on FPC release No. 14173, Dec. 28, 1965. REA annual statistical reports.

EXHIBIT 8

REA loans-by purpose, 1935-65

[graphic]

1935 1936. 1937 1938 1939. 1940 1941. 1942. 1943. 1944. 1945. 1946. 1947 1948 1949. 1950 1951. 1952. 1953. 1954. 1955. 1956. 1957 1958 1959 1960 1961 1962 1963. 1964. 1965

.1 .1 .5 2.3 1.0 1.9 1.2 2.5 2.4 1.8 1.6 1.8 .9 .8 .9 .7

Source: Senate Agriculture Appropriation Hearings, 1964; annual reports of REA.

EXHIBIT 9

Cost of energy purchased by REA borrowersby supplier, 1946–65

Average cost per kilowatt-hour in cents)

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1 Includes both co-op generation and purchases for resale! Source: REA Bulletin 111-2.

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. ŠMITH. 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 wregulated.

In North ('arolina, 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 $t 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 capitas 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 berne by the taxpayer. In 1964, all co-op borrowers from REI collected in operating revenues $838 million with $3.4 billion invested in facilities--roughly, the 4-to-1 investmert 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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