I believe you think that the company pays the interest and taxes out of stockholders profits?

Mr. GIBSON. They do, and the economic necessities

Mr. POAGE. Let us go on quoting this. I am not making that statement; I am quoting from a power company's statement to its employees:

This is not the way it works. The entire tax burden of the company is paid by the users of our service, the customer.

That is what this power company said to its employees.

You may want to give us another theory, but that is what these people circulated to their employees, the people working for them, and they said in effect, "Go out and tell the folks that you deal with that they pay the taxes, not us." You now say that the power company made a mistake-that actually the company, not the customers, pay taxes and interest.

Mr. GIBSON. Initially and customarily we pay them, though eventually and necessarily what you quoted is correct. There must be a fair return on the investment, as a means of getting capital and maintaining our credit standing, but short of that limit, and our operations are within that limit, it is the stockholder who pays it.

The form of the quotation merely illustrates the result of the diversity of point of view that follows from the existence of some 300 investor-owned utilities of substantial size in the United States.

Mr. POAGE. Would you ask the commission of Virginia to take into consideration the taxes and the interest in establishing rates? Mr. GIBSON. Yes, sir.

Mr. POAGE. And they would give you a rate that would be high enough to pay the taxes and the interest, whatever you had to pay. If you had to pay 12 percent, they would take that into consideration, would they not?

Mr. GIBSON. Yes, sir, but there is a great difference between the rates that we would get in a rate proceeding and the return that we could have by diligence and managerial expertness.

Mr. POAGE. I would not argue that at all, but I am suggestingMr. GIBSON. Could I finish that sentence?

Mr. POAGE. That in any compensatory rate you would include all of your tax and interest payments, and you could get that?

Mr. GIBSON. The compensatory

Mr. POAGE. You do get it.

Mr. GIBSON. The additional return that can be earned by good management is what creates credit in the market and enables the company to obtain capital at cheaper costs for the benefit to the stockholders, and, eventually, the consumers.

Mr. POAGE. You made 10.2 percent last year?

Mr. GIBSON. No, sir.

Mr. POAGE. You did not?

Mr. GIBSON. No.

Mr. POAGE. It was in 1964.

Mr. GIBSON. No.

Mr. POAGE. That is what the Federal Power Commission stated. Mr. GIBSON. I believe they stated 7.2 percent, but that was computed upon an unacceptable and erroneus rate base.

Mr. POAGE. That is based on an erroneous rate base?

Mr. GIBSON. Yes, sir.

Mr. POAGE. But it is the rate base that the Federal Power Commission approved, is it not?

Mr. GIBSON. I do not think that they had any hearing, but it is the figure, or subtantially the figure that they used in their release, an exparte release.

Mr. POAGE. What then is your return?

Mr. GIBSON. I am not an expert in such matters. I think it approximated 6.5 percent.

Mr. POAGE. All right; 6.5 percent. How much of that was due to this good management?

Mr. GIBSON. I am just a plain smalltown lawyer. I could not possibly answer that.

Mr. POAGE. How much was due to this good smalltown management you have got?

Mr. GIBSON. I did not say that our management was small town. I said I was small town. [Laughter.]

Mr. POAGE. I get back to this proposition, that it is not what your management is, where you live or anything of that kind, but what rate would the commission of Virginia have given you?

Mr. GIBSON. They would have no trouble with that question. In fact, they have our earning records and our rate of return under monthly review. They know every month exactly what we are doing. They report to the other governmental authorities, too.

Mr. POAGE. What I am getting at is this-although I may be getting out of my realm-I come from a smaller town than you do, not nearly as large as Richmond, Va., but I come to the proposition that suppose you had not made 6 percent, would the utilities commission of Virginia have allowed you to raise your rates to make 6 percent? Mr. GIBSON. I think they would have, and should.

Mr. POAGE. I think that they would, too. So, your profits did not actually depend so much on good management as they might have in some other or competitive business. Even if it was under the poorest management in the world a power company in Virginia is almost sure to make a profit.

Mr. GIBSON. Excuse me, sir. If we had had the poorest management in the world, it would have been replaced by the public service commission, the corporation commission in Virginia. There have been illustratons iof that. The Virginia Public Service Co.-I do not mean to indicate any personal reflection on the management, but it might be said objectively to share the qualities you mentioned. In that instance the result was that a new directorate was installed by the State corporation commission and eventually, with the commission's encouragement, that company was merged into Virginia Electric & Power Co. and now enjoys good management. [Laughter.]

Mr. POAGE. But I am equally sure, and I am sure that you will confirm this, that the Virginia commission would have allowed an increase in rates to cover all of your interest and taxes.

Mr. GIBSON. It has to do that.

Mr. POAGE. But you do not know what you are paying in the way of interest-you do not know what rate of interest you are paying? Mr. GIBSON. Yes, the composite rate, I believe, is about 3.8 percent. Mr. POAGE. How much?

Mr. GIBSON. I think it is about 3.8 percent, but much of the debt was issued a good many years ago. Obviously we have had to pay more than the composite rate later.

Mr. POAGE. You think you can borrow the money now at that rate? Mr. GIBSON. This was some time ago.

Mr. POAGE. What can you borrow money for today?

Mr. GIBSON. I am not an expert. If you were to ask me to guess, I would guess about 512 percent, or a little less than that, 5.4.

Mr. POAGE. About 51⁄2?

Mr. GIBSON. About that. I am only a lawyer.

Mr. POAGE. And the 2 percent money is not attractive to you? Mr. GIBSON. It would be very attractive to us.

Mr. POAGE. It has not been attractive enough for you to find out whether you could get it.

Mr. GIBSON. We do not believe we can.

Mr. POAGE. You do not believe you can?

Mr. GIBSON. That is my personal belief, yes.

Mr. POAGE. You have never filed any application, have you?

Mr. GIBSON. We would be glad to do so, but we would be laughed out of court.

Mr. POAGE. Why would you be laughed out of court?

Mr. GIBSON. Because we are investor owned. If you would be our sponsor, we might be able to go in and do it.

Mr. POAGE. I do not want to foul you up. You have a right under the law, if you want to borrow the 2-percent money; you have that right.

Mr. GIBSON. So, you tell me, sir.

Mr. POAGE. You profess to be a lawyer; you are paid as a lawyer. Do you not know that the law gives your client the right to borrow at 2 percent?

Mr. GIBSON. The first two statements are correct. The third is not. [Laughter.]

Mr. POAGE. You know, I am amazed that any lawer would come here and say that he did not know any more than you do about the existing law.

Mr. GIBSON. There are a great many things I do not know.

Mr. POAGE. But this is your business. This is the reason you are here, because of the REA Act.

Mr. GIBSON. No. We would not have been here to oppose the REA Act. We are here to draw the attention of the committee in the most solemn way we can to the fact that these bills, if enacted, would create a wholly revolutionary and undreamed-of Federal power policy of unpredictably destructive effect.

Mr. POAGE. That is all.

(The following letter was subsequently submitted by Mr. Gibson :) HUNTON, WILLIAMS, GAY, POWELL & GIBSON, Richmond, Va., June 13, 1966.

Re H.R. 14000 and H.R. 14837.

Hon. HAROLD D. COOLEY,

Agriculture Committee of the House,
House Office Building, Washington, D.C.

DEAR MR. COOLEY: As Mr. Poage indicated at the hearing on June 3, 1966, I find that the statute permits R.E.A. loans to "corporations" as well as to "cooperatives" (§ 4, 7 U.S.C. § 904). But as I expected, it directs the Administrator to give "preference" to cooperatives, etc. (id.). The result, of course,

is that such loans would not be available to Virginia Electric and Power Company, which has had a mortgage on its property since 1909 and can obtain capital in the securities markets.

I would greatly appreciate your including this letter in the record and having it printed as such in order to complete my June 3d testimony on this point without taking further time of the Committee.

With many thanks, I am

Yours respectfully,

GEORGE D. GIBSON.

(The following letter was submitted by the Administrator of the Rural Electrification Administration in response to Mr. Gibson's letter of June 13, 1966:)

DEPARTMENT OF AGRICULTURE,

RURAL ELECTRIFICATION ADMINISTRATION,

Washington, D.C., June 20, 1966.

Hon. W. R. POAGE,

House of Representatives,

Washington, D.C.

DEAR MR. POAGE: This is in response to your request for my comment on the letter dated June 13, 1966, from Mr. George D. Gibson, counsel for Virginia Electric and Power Company purporting to answer questions addressed to him at the June 3 hearing before the House Committee on Agriculture on REA supplemental financing legislation, concerning the eligibility of investor-owned electric utilities to borrow funds from the Rural Electrification Administration for rural electrification.

Mr. Gibson's letter confirms your statement that section 4 of the Rural Electrification Act permits loans to "corporations." The authority to make loans for rural electrification purposes to corporations, which includes investor-owned utility corporations, has been in the Rural Electrification Act since its enactment in 1936, and has been exercised over the years.

Twenty-five such corporations have received REA loans totalling almost $25 million. These companies, the dates of their first loan, and their loan totals are listed in the document I submitted at the close of the June 8 hearing, entitled "United States Department of Agriculture, Rural Electrification Administration, Cumulative REA Loans to Commercial Power Companies as of June 1, 1966."

You will note that many of these loans were made in the early years of the program, including loans to a Virginia corporation, Tidewater Electric Service Co., West Point, Va., and to three corporations in the neighboring state of North Carolina. Four of the systems are still active REA borrowers.

As I reported to the Committee on June 8, Mr. Morris L. Cooke, first Administrator of REA, kept the door wide open to private utility corporation applicants. Section 4 of the Rural Electrification Act does, as Mr. Gibson now says he "expected," provide that preference, in making loans, shall be given public bodies and cooperatives. However, this does not result in making loans unavailable to utility corporations such as Virginia Electric and Power Company. It applies only where there are competing applications for loans to supply electric service to the same rural consumers, which very rarely occurs. Where there are no competing applications, the peference provision has no applicability.

Frankly, I am unable to understand Mr. Gibson's reasoning that the preference provision results in making REA loans unavailable to his client corporation.

Mr. Gibson's letter couples the preference provision and the consequent unavailability of loans to Virginia Electric and Power Company with references to the company's 1909 mortgage and its ability to obtain capital in the securities markets. Here, too, I fail to grasp the relevance of these considerations to the discussion of eligibility of a power corporation for an REA loan. The existence of a blanket mortgage with an after-acquired property clause might disable his client from giving REA a first mortgage lien on the property financed by REA. However, other applicants which have received REA loans have, notwithstanding the existence of prior liens, been able to make suitable security arrangements with REA.

All applicants for REA electrification loans must, of course, comply with the requirement that the loan proceeds be used for rural electrification purposes in accordance with the requirements of the Rural Electrification Act.

I appreciate your thoughtfulness in giving me an opportunity to comment.

Sincerely yours,

NORMAN M. CLAPP, Administrator.

The CHAIRMAN. Mr. Hagen?

Mr. HAGEN of California. There is one question that I want to ask, with the change in farming, isn't it a fact that most farms would be much larger users of electricity than the average household; consequently a comparison of number of users on an individual line might not be a valid criteria for profitability or nonprofitability?

Mr. GIBSON. I would not be able to make a constructive comparison on that. But I could refine my guess of a moment ago, to Mr. Poage, on the cost of money, that the average cost of money was in the neighborhood of 3.8 percent. The actual figure is 3.726 percent for all our bonds and 3.7444 percent including both bonds and debentures. That is a dependable figure, rather than any guess I might make.

Mr. HAGEN of California. Are the REA cooperatives subject to any regulation by the Federal Power Commission?

Mr. GIBSON. They say that they are not. The Federal Power Commission has attempted to exercise its regulatory jurisdiction over them, but under threatening observations on the part of the Interstate Commerce Committee of the Senate, has suspended proceedings, and they are awaiting the disposition of bills which are now pending in the Congress, to eliminate cooperatives from Federal Power Commission jurisdiction.

Mr. HAGEN of California. One other question. It is my understanding that in some States they are also exempt from the regulations of the public utility commissions; is that correct?

Mr. GIBSON. That is true.

Mr. HAGEN of California. This is not true in all States, is it? Mr. GIBSON. That is also true. In Virginia, they are fully regulated as public utilities like investor-owned companies.

Mr. HAGEN of California. Do they go into the co-op rate structure at all, that is, the Public Utilities Commission of Virginia?

Mr. GIBSON. I am sure that they do, sir. Actually, their rates in general are higher than ours in Virginia or approximately at the same level.

Mr. HAGEN of California. Thank you.

The CHAIRMAN. Mr. Olson.

Mr. OLSON. You stated that you furnished about 60 percent of the energy that is distributed by the cooperatives in your area. I can understand that you do have a legitimate concern that you might lose that 60 percent of energy load which you sell to the rural cooperatives. Can you tell me what percent that is of your total energy sale? Mr. GIBSON. I am sorry, I do not have it at hand.

Mr. OLSON. You cannot give me a rough estimate, either?

Mr. GIBSON. I am sorry.

Mr. OLSON. Will you, then, tell us what the percentage of sales to the rural distribution cooperatives is to your total sales? What growth have you enjoyed in your total sales over the past few years? This would help us determine what effect these bills would have in relation to your company?

Mr. GIBSON. Certainly, we will supply that for a 10-year period. Mr. OLSON. All right.

(The information requested follows:)

The 60 per cent of energy load that Virginia Electric and Power Company sells to the rural cooperatives represented 3.65 per cent of the total energy sold by the Company in 1965. If Mr. Olson's second question looks to a projection of future