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By reason of being financed 100 percent by loans from the Federal Government, the rural electric cooperatives did not have to raise risk capital and were thereby enabled to operate in the so-called nonprofit cooperative form and avoid the heavy impact of Federal income tax. The taxpayers have borne all of the risk without any weighting of the cost of money for this economic factor. This relieved the co-op consumers of about 13 percent of the normal cost of electric service.

Thus, through the Government assistance of 2 percent financing, the taxpayers have borne about 32 percent of the cost of electric service which the consumers would otherwise have to pay.

Under the proposed legislation, new money lent to borrowers will not be required to bear the free-market cost of money for an electric utility enterprise. No compensation is provided for the use of the Government's investment in stock. While the bill provides that the evidences of indebtedness of the bank shall contain language indicating that the obligation is not guaranteed by the United States, if the bank is unable to meet its obligations, it may borrow funds from the Treasury for that purpose and the Secretary of the Treasury is required to provide the funds.

Thus, the suppliers of capital to the bank would be given assurances by the Congress equal to a guarantee by the Government. The members of the committee will recall that the Secretary in his testimony here on Tuesday simply directly referred to the fact that the debentures or other evidences of indebtedness issued to the bank to investors from the bank would have their obligations guaranteed by the United States.

The taxpayers bear the risk of the enterprise and the cost of loans from the bank will be priced on that basis. Thus, the cost factor in financing relating to risk bearing is eliminated from loans by the bank. This risk is borne by the taxpayers without any compensation for doing it.

The Rural Electrification Administrator is authorized to make loans from the bank at 4 percent interest. So, by the above illustration of the cost of capital, on loans made by the bank, co-op consumers get a reduction from the free-market cost of capital for electric utilities today equal to 2.75 percent of each $1 investment. This constitutes a subsidy of $0.11 out of each $1 of sales revenue.

Remember, however, that this bill is predicated upon retaining 2percent financing in an unpredictable quantity to be administered by an undefined policy. The proposed revolving fund and new appropriations by Congress could keep 2-percent money available in amounts comparable to the trend over the past 30 years.

Thus, it becomes of great interest to this committee to more clearly spell out the policy of Congress as to what use is to be made of the 2-percent money and whether or not the rate should remain at 2 percent.

On that point, gentlemen and Mrs. May, I would suggest to you that the job of extending electric lines to rural areas has been virtually completed. Very little of future funds will be required by extension of service to "persons in rural areas who are not receiving centralstation service."

Possibly one reasonable basis for the use of 2-percent money in the future would be to assist in constructing new lines to provide electric

service for the first time to "persons in rural areas who are not receiving central-station service." This would make a distinction between new line extensions and the "heavying up" of established lines which have such a volume of business that additional facilities should be financed at the full cost of money.

The real question before this committee is: In the light of social and economic conditions prevailing in 1966 (as distinguished from 1935), to what extent should money be extracted from the taxpayers and applied to the electric bills of a preferred group of electric consumers? To answer that question, it becomes necessary to raise some other questions.

Who is this "preferred group of electric consumers"? During recent years among new consumers connected by co-ops only one of five has been a farmer. Four out of five have been nonfarm suburban dwellers, commercial and industrial establishments. Then, to what extent is there any social or economic necessity for the taxpayers' paying a part of the cost of electric service for these people? These consumers do not ask you to do it. There are ambitious co-op professionals and bureaucrats who come to Congress seeking all they can get and support their requests by subtle and complex devices such as contained in these bills before you. But, is this really sound government?

I am authoritatively informed that recently one co-op director in North Carolina who has been associated with the rural electric cooperative movement since its beginning, stated: "We should have been paying local and State taxes long ago and we simply cannot justify the use of 2-percent Government loans."

Why is this bill here? The plain truth is that the use of the 2percent money has been abused in several ways. Public criticism has been sharp and caustic when REA 2-percent money has been used to build ski slopes. In South Carolina a $30 million loan was made for a generating plant after the power companies serving the State offered to supply power at no greater cost than would be incurred from operation of the new plant. This plant cost the local, State, and Federal Governments $1,065,000 a year while the consumers were saved absolutely nothing. Power produced by REA-financed generation cost the co-ops an average of 8.8 mills per kilowatt-hour in fiscal 1965-with no Federal income tax built into the rate-while power purchased from taxpaying electric companies cost the co-ops only 7.4 mills per kilowatthour, and the same companies paid, on average, about 13 percent of every revenue dollar, including co-op sales, into the Federal Treasury

as income taxes.

The point I seek to make here is that abuses of 2-percent money have already blighted the good reputation of the rural electrification movement. I suggest that some advocates of public power have attempted to use the fiscal power of this Nation to extend the traditionally popular and good program of rural electrification into expansions beyond the sound and good purposes it was set up to serve.

Some of the professional leadership of the rural electric co-op movement and some Government bureaucrats seek through this subtle guise, hidden in deep complexity, to use the REA to further extend subsidized, tax-exempt power, wholly unrelated to rural electrification,

where the taxpayers have no need or obligation to pay a part of the cost of electric service.

Obviously, the approximately 1,000 cooperatives borrowing from REA need to be able to finance their normal and proper future growth. In the aggregate, they are able to pay the full free market cost of money. With REA holding a first mortgage on their properties you will need to take some action to assist in the transition. I would suggest two approaches to the matter:

First, you could authorize the Administrator to appropriately subordinate the REA's mortgage to permit the co-ops to borrow in the free money market. The co-ops, on average, have above 24 percent of their capitalization in ownership or equity capital.

The Administrator should have responsibility for passing on the need for new loans before subordinating his first mortgage. This would leave the co-ops relatively free to go into the free money markets of the land and pay the going rate. They would be standing on their own feet-which most of them are capable of doing on this basis.

The Government would put its outstanding loans at some greater risk, but not as great as when the program started. It would be about 10 years before the co-ops would have more than half their capital at free market rates with 2-percent cost on the other half.

To implement this approach requires a good bit of study. It would be expected that there are a very limited number of situations where some additional subsidy is as supportable now as in 1935. There may be a few small co-ops serving such sparse areas in remote territories that full cost of money would raise the price of electric service beyond the willingness of consumers to pay.

In the spirit of the national policy to which we are already committed, to implement this approach would call for searching out these co-ops and examining their retail service rates in light of the economy of the area; and you would need to write new loan criteria for these borrowers and determine the future interest rate for their loans. This could be done in a self-liquidating manner, however, so that when these co-ops reach a predetermined ability they will move to free market financing.

Second, if it seems to the committee more desirable to try to deal with the bank approach-considerable revision of the pending bill would be essential. I shall not undertake the monumental task of rewriting a bill that has so many intolerable features. I will only mention some of the major matters in principle rather than details.

The revolving fund or loan account should be eliminated. It is proposed solely because REA and its borrowers do not want to be put to the normal legislative process to justify annual appropriations. To eliminate the annual scrutiny and inspection of the REA's accounting for its stewardship is not in the public interest. This is where revelation of the abuses has taken place and where efforts have been made to correct the abuses by committee report language. I suggest that REA is distinguishable from other agricultural loan accounts in that similar abuses have not been experienced in the other accounts. This experience alone is sufficient reason for eliminating the loan account.

As I have indicated already, there can be no justification for more than a very limited amount of Government assistance in rural electric

co-op financing in the future. I believe that the sponsorship of this pending legislation establishes that this a proper time in history for a constructive review of existing congressional policy on rural electrification. In continuing any loans by which the taxpayers relieve co-op consumers of any part of normal full cost of electric service, the Congress should set clearly defined criteria for the making of reduced interest loans.

The provisions relating to the creation of a "rural electric bank” should be be appropriately amended to clearly provide that the only borrowers who are and will be eligible to use taxpayer assistance are those who can now borrow from the Rural Electrification Administration. Further, it should clearly provide that the loans made by the bank may be only for the purposes for which the present act makes loans available. I submit that this program should be held to rural electrification and only rural electrification. REA should not be expanded into an enlarged and unlimited general public power program. The bank should be allowed to charge only one interest ratethat is, the cost of money to the bank and the cost of administration of the bank, including the Government's cost for the capital it supplies to the bank. The provisions which give an effective guarantee of the bank's indebtedness by the Government should be eliminated. So long as the Government provides any assistance through the bank, strict criteria such as contained in the committee report language of the House and Senate Appropriations Committees in recent years should be spelled out in statutory language governing the making of generating and transmission loans. Furthermore, the loss of Federal taxes should be a required consideration.

Mr. Chairman, lady and gentlemen of the committee, I suggest that it is the function of this committee to keep its eye on the agricultural

ball.

If the proponents of public power want to divert your attention by promoting legislation to expand Government-subsidized power facilities not related to rural electification, you should admonish them to stay out of the rural electrification program you have sponsored and nurtured.

The legislation before you goes far beyond any reasonable requirements of the traditional rural electrification program established by Congress. It would establish an enlarged public power program from which Government involvement would never be extricated. It involves a great deal more than the great body of American farmer consumers served by rural electric cooperatives would ask you to do. Some action in the direction eliminating rural electric co-op dependence upon Government financing is clearly indicated but the public interest might be far better served if you would undertake to do it by an entirely new approach in a completely different bill.

May I express to you my sincere thanks for the time you have given me and your courteous attention.

The CHAIRMAN. Thank you very much, Mr. Harris. I just want to ask you one question. How many customers per mile do you have on your lines? And how many does the REA have?

Mr. HARRIS. Mr. Chairman, I do not have a specific figure in my mind. I will say this. We mentioned in this testimony that the com

panies and our company has done as well as any of them-the companies in North Carolina serve 67 percent of the rural customers in the State. Now, we have any number of miles of line that are as thin as any of the REA lines on average for these that are counted as rural customers-we have more customers on our lines than the co-ops have on average, on theirs.

This figure that has been referred to occasionally in publications, about this usually takes all of the company's customers, including the very thickly settled urban areas and says, how many customers we have per mile on all lines.

The CHAIRMAN. The reason I asked the question is, someone told me that, out in some sections of the country, they only average one customer to the mile and some areas, as much as one-half of a customer per mile.

Mr. HARRIS. In North Carolina, I think a fair average would be five per mile. This is the figure they generally use.

The CHAIRMAN. What about the C.P. & L.!

Mr. HARRIS. If you want to take the same figures that they do, everything that is outside of the incorporated municipalities, in excess of 1,500, I do not have a precise figure on. I will be very happy to get at what our customers are per mile for the 67 percent that I referred to and file that with the committee.

The CHAIRMAN. I was, of course, very happy when the power companies and the co-ops got together and fixed the territories which each of them were to serve so as to avoid the constant competition. We are very glad to have had your views and I am sure the committee will give careful consideration to your views in our further deliberations. Mr. Poage.

Mr. POAGE. Mr. Harris, following along the lines the chairman mentioned, you do serve rural areas, your power company does? Mr. HARRIS. Yes, sir.

Mr. POAGE. How thin can you get and still make a profit? I mean how many customers per mile must you have to make your service profitable?

Mr. HARRIS. Mr. Poage, we do not calculate what it takes to make a profit in extending a single mile or two miles of rural line. Our company does not have any charge for extending lines into the areas in which we are franchised for residential consumption.

Mr. POAGE. But there must be some point at which there is not a profit. You will extend the line even though it is 2 miles out to the house. I doubt that that will be profitable in most cases.

Mr. HARRIS. As a general rule, we would look at it on the basis of whether it is on a road and whether there is some further expectation of the territory building up.

But as a matter of policy, our company will not charge a residential customer who applies for power, regardless of where we have to go to get it if he is in territory for which we have assumed utility responsibility.

Mr. POAGE. In other words, that is the "area coverage" philosophy which is applicable under the REA Act.

Mr. HARRIS. It is precisely the policy that we follow, yes, sir.

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