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Probably a majority of our members obtain electric power through rural electric cooperatives. Many of farm bureau's volunteer leaders are now serving, or have served, as officers or directors of rural electric cooperatives.
Rural electric service cooperative and others-has made a tremendous contribution toward easing the drudgery of farm work, increasing of production, and improving living standards of farm families.
This past December, recommendations from member State farm bureaus were reviewed by a national resolutions committee of elected representatives from each of the State organizations. Policy recommendations drafted by the resolutions committee were then considered, amended, and adopted by the elected voting delegates of the member State farm bureau.
The policies with respect to rural electrification and telephone service adopted by this process are as follows:
We support rural electric and telephone cooperatives organized and operated in accordance with accepted cooperatives principles and practices.
Local ownership by well informed members is the best safeguard for true cooperative principles.
It is time to make certain that the members of rural electric cooperatives can obtain full and complete member ownership and control. Ownership and control should be clearly secured in the hands of the patrons. We recommend that member equities be made transferable to eligible persons on the books of the cooperative at any time under rules prescribed by the cooperative.
We urge members of rural electric cooperatives to study the by-laws of their associations and to make certain that they contain provisions that make it mandatory to (1) allocate the equities of individual members and inform each member of the amount in his equity account and (2) require approval by a majority of patrons before the principal assets and business of the cooperative can be sold.
We support sound, economic developments to assure farm people adequate electric service.
We urge power producers and distributors to expand their facilities to meet the increasing demand of farm people at reasonable cost. We urge that an effort be made on the part of rural electric cooperatives and other private power companies to reach agreements that will be in the best long-time interest of all concerned.
If satisfactory agreements cannot be reached for necessary amounts of energy for farm use at competitive rates, we support the use of Rural Electrification Administration funds to finance the generation and transmission facilities farmers need. We oppose any efforts to change the present law which makes this possible.
Where further expansion or improvement of power production is contemplated, serious consideration should be given to the possibility of seeking funds for the program on an investment basis from members of the cooperatives. If revisions in legislation or regulations are needed in order to permit such procedures, we will support the necessary changes.
Rural electric cooperatives have performed a valuable service for rural America, but many factors affecting their operations have changed materially since Congress authorized their establishment. Any future loans made by the Rural Electrification Administration to established rural electric or telephone cooperatives and other borrowers should be made at not less than the cost of money borrowed by the federal government.
We commend the members of rural electric cooperatives for their study of alternate means of meeting their financial needs.
We urge that these basic objectives be attained in future financing:
(1) A sound financial structure which will provide access for rural electric cooperatives to established sources of private capital.
(2) Independent ownership of credit institutions created to serve their needs in providing electric and telephone service, and positive provision for
eventual majority control by the members through their cooperatives in the management of these credit institutions.
We oppose any plan or effort to convert rural electric cooperatives into a public power system.
Rural electric cooperatives should not participate in financing programs and activities other than those for which they were organized.
The above policy clearly states our current position with regard to several aspects of the legislation under consideration. Our interest in, and support of, efforts to develop private sources of credit to supplement Government funds available to rural electric cooperatives goes back over 20 years. As early as 1944 our delegate body recommended that electric cooperatives move toward less dependence on Government financing. We are pleased to note the increasing understanding that exclusive dependence by any cooperative on Government funds for capital is unsound and unreliable.
We share with rural electric coperative leaders pride in the progress made in providing electric service to rural people. Ninety-eight percent of the farms in the United States are now receiving centralstation electric service and more than half of them are served by rural electric cooperatives. The net worth of rural electric cooperatives that have borowed money from the Rural Electrification Administration (REA) is over $1 billion. Of the 1,099 borrowers, 102 have repaid in full, 2 were foreclosed, and 955 were active borrowers as of June 30, 1965. The two foreclosures-the only ones from the inception of the program-have resulted in a net loss of only $44,478 to the Government. This was from a total of $5.5 billion loaned to borrowers as of June 30, 1965.
We favor legislation to provide rural electric cooperatives an opportunity to create a member-owned and member-controlled financial structure. We believe the bills before the committee should be improved in several respects to assure the accomplishment of this objective.
These bills do not deal with the question of ownership of rural electric cooperatives. We think they should. Therefore, we recommend that this legislation include a provision requiring that an electric copeorative borrower, in order to be eligible for loans from the bank, must establish each member's proportionate share of ownership in the cooperative. Each member's share would be proportional to his contribution to the net worth of the cooperative. Such shares would be negotiable to the extent that they would be transferable to eligible persons on the books of the cooperative under conditions prescribed in the bylaws of the cooperative.
The so-called capital credits plan used by many electric cooperatives does not establish member ownership and control. In most cases, the capital credits for all patrons on the books of the cooperatives add up to less than the net worth of the cooperatives, thus leaving unsettled the ownership of the equity other than that in capital credits accounts. In practice, the capital credits plan often weakens rather than strengthens the financial structure of rural electric cooperatives. Something better is long overdue. When a workable device for clearly establishing ownership is developed and put into operation, provision should also be made for members to invest additional funds in their cooperatives. This is as it should be.
With respect to the capital structure of the banks, we are relatively less concerned with the alternative methods of getting Government capital into the banks and relatively more concerned with provisions relating to its retirement. The proposals before the committee appear to be based on the assumption that Government capital will be retired; however, there is no timetable in either of the bills for the retirment of such capital. In fact, there is little incentive in either bill to retire Government capital. We believe the legislation should contain more specific requirements relative to the retirement of Government capital, using the farm credit laws as a guide.
With respect to the membership of the board of directors during the period when Government capital constitutes more than half of the bank, we favor a board consisting of seven directors-four appointed by the President with the advice and consent of the Senate and three elected by the borrowers, each with an equal vote. Further, we recommend that the legislation require that Presidential appointees shall not be full-time Government employees and that only members who are not managers or other employees of the electric cooperative borrowers shall be eligible to serve as elected members of the board of directors of the bank.
It has been our thought that the supplementary credit needs for rural electrification and rural telephones could best be met through an expanded farm credit system. We still believe this approach has merit.
The farm credit system has had invaluable experience and has achieved outstanding success in helping farmers and their cooperatives to meet their expanding capital requirements. It began as a Government controlled and financed system, but it has evolved into a system which is largely owned and controlled by borrowers. Each year farmers and cooperatives raise about $6 billion in the private money market to provide financing for production, marketing, and farmownership purposes. This evolution has been a slow process over three decades. It has been aided by various enactments initiated by this committee, which we have welcomed the opportunity to support. We envision a similar evolutionary process for the financing of rural electric and telephone service. This would be facilitated and speeded up if the banks were placed under the general guidance of the Farm Credit Administration.
In formulating a financial structure for rural electric and telephone borrowers-whether within or outside the Farm Credit structurewe question the need for two separate banks administered by two staffs performing similar credit functions. One bank could be established, with one board of directors, one administrator, and two accounts-one for the electric cooperative borrowers and one for the telephone borrowers. This would minimize overlapping and duplication of effort.
The proposed legislation would provide for three classes of loans at different rates of interest and for repayment schedules which would be different for various classes of borrowers. One class of borrowers would borrow funds from the bank at market rates of interest; the second class would be eligible for bank loans at intermediate interest rates and a different repayment schedule; and the third class would
be those new borrowers and others eligible for 2-percent loans from REA.
We favor revision of the legislation to provide two classes of loans: (1) those made available through the bank on a nonsubsidized basis at the cost of money, and (2) those made at subsidized rates of interest by REA.
As noted in the above-quoted policy resolution, we support loans to borowers for generation and transmission facilities where satisfactory arrangements cannot be made for the purchase of power by distribution cooperatives at competitive rates. We believe such loans should be made only where it is clearly determined that an adequate source of power at reasonable rates is not available. We believe that future generation and transmission loans should be made through the bank and that proposals for generation and transmission facilities should be sufficiently sound to be financed on an economic basis by means of loans made available through the newly created bank on the basis of the cost of money.
Legislation providing for supplemental financing for rural electric borrowers should make it clear that the new bank will not duplicate other efforts to meet rural credit needs. Electric power consumers have little difficulty in obtaining loans for the purpose of financing the purchase of facilities through nongovernmental lending agencies, such as banks and production credit associations. In this connection, we urge the committee to lay down guidelines that will minimize such duplication as exists today and, more importantly, to avoid the duplication inherent in this legislation.
In conclusion, we reiterate our support of a sound financial structure to provide the rural electric and telephone borrowers access to established sources of private capital. We support legislation designed to help meet the necessary capital requirements. The sugges tions we have made with regard to the legislation now before the committee are made to clearly establish member ownership, strengthen borrower control, and make possible sound growth of these services so vital to the future of American agriculture.
The CHAIRMAN. We thank you, Mr. Shuman, for your well-prepared
Mr. HARVEY of Indiana. I want to compliment Mr. Shuman on his statement. I want, however, particularly at this point, to compliment your statement on page 4 in which you deal with member ownership, and to remind the committee that this is an issue on which, incidentally, I introduced legislation dealing with that last year.
Mr. SHUMAN. Thank you.
Mr. HARVEY of Indiana. I think that is all. Thank you.
Are there any further questions?
Mr. STALBAUM. Mr. Shuman, just to clear one point. In your statement on page 5 where you make reference to the composition of the board of directors, it appears that you are following the pattern in the administration bill-the Cooley proposal, H.R. 14837-is that not correct?
Mr. SHUMAN. That is substantially correct.
Mr. STALBAUM. However, to make it clear for the record, are you aware that in that proposal, the four Government members of the board would continue to hold office until all of the Government stock was retired?
Mr. SHUMAN. Yes; that is my understanding of it.
Mr. STALBAUM. And you favor changing that to a transition at such time as over one-half of the stock is owned by the cooperatives? Mr. SHUMAN. Yes, sir.
Mr. STALBAUM. Thank you.
The CHAIRMAN. Mr. Callan.
Mr. CALLAN. Mr. Shuman, do I understand from your statement, as noted at the bottom of page 2, where you say:
Any future loans made by the Rural Electrification Administration to established rural electric or telephone cooperatives and other borrowers should be made at not less than the cost of money borrowed by the Federal Government.
Does that suggest that you want to eliminate the 2-percent provision? Mr. SHUMAN. No. That says, "Any future loans made by the REA to established rural electric or telephone cooperatives." The word "established" is interpreted in the discussion as being those which could be determined as being on an economic basis. It is not to be interpreted as being opposed to the use of the 2-percent money for beginning borrowers or those who are struggling.
The CHAIRMAN. Thank you very much.
Mr. SHUMAN. Thank you.
The CHAIRMAN. I will call the next witness out of order, because it is a case of hardship, a gentleman who is a long ways from home and who would like to get back. And for that purpose, I recognize Mr. Burton.
Mr. BURTON. Thank you, Mr. Chairman.
I would like to call to the witness stand Mr. R. A. Hedquist, business manager of Local Union 57 of the International Brotherhood of Electrical Workers, Salt Lake City, Utah.
As I explained to you, he has a difficult problem to meet, and I appreciate your allowing him to present his statement at this time. The CHAIRMAN. We will be very glad to hear you right now, Mr. Hedquist.
STATEMENT OF R. A. HEDQUIST, BUSINESS MANAGER, LOCAL UNION NO. 57, INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS, SALT LAKE CITY, UTAH
Mr. HEDQUIST. I appreciate your consideration in allowing me to come up at this time, since it is necessary for me to return to Salt Lake City today.
My name is R. A. Hedquist. My address is 1743 West North Temple Street, Salt Lake City, Utah.
I am business manager of Local Union No. 57, International Brotherhood of Electrical Workers and represent approximately 1,800 taxpaying union members in the States of Utah, Idaho, Wyoming, and Colorado.