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STATEMENT OF THE INVESTOR-OWNED ELECTRIC UTILITY COMPANIES IN KANSAS Both the Rural Electric Cooperatives and the Investor-owned Electric Utilities in Kansas are subject to the rules and regulations of the Kansas Corporation Commission.

These two groups have worked together in substantial harmony with the Kansas State Corporation Commission, to the end that all electric requirements in the State of Kansas have been met. All of this has been accomplished under the Rural Electrification Act of 1936.

We are mindful that the electric industry is one of constant expansion. New money is always needed for replacements and growth to meet the everincreasing demands of the consuming public. This applies to both the investorowned companies, and to Rural Electric Cooperatives with equal force. The legitimate needs of the cooperatives for these purposes should be supplied, as it has been in the past, under the provisions of the Rural Electrification Act of 1936.

H.R. 14000 and H.R. 14837 are not rural electrification bills. They are Federal public power financing bills.

We, the Investor-owned Utilities in Kansas, believe that the proposed legislation is neither needed nor in the public interest. This is a brief outline of

our reasons:

1. Electric service is now available to substantially all possible customers in rural territory; and great sums of money, as proposed in this legislation, is not needed to meet the requirements of new electric service or growth in existing electric customers in rural territory now served by the Rural Electric Cooperatives.

2. These bills should be recognized as maneuvers to provide a scheme of public power financing, using the cooperatives as stepping stones; and, thereby, circumvent Congressional control. We believe Congress should control, as it has in the past, all government subsidized financing. The proposed legislation would effectively destroy all Congressional control.

3. As proposed, if either of these bills are enacted, it would herald the establishment of a nationwide Federal electric system at a cost to taxpayers of billions of dollars, without the need of a single additional Congressional enabling act. Such a system would in most places duplicate or displace the present tax-paying electric utilities. These bills have some support on the theory that the burden of Rural Electric Cooperatives' financing would be shifted from the Federal Government to the commercial money market. Actually, either bill would authorize the expenditure of billions of dollars, including government subsidies, to one segment of the industry without budgetary or Congressional control. Neither bill would effectively shift the burden of financing to the free money market. They would destroy the control, but retain the burden. The result would be to postpone indefinitely, and probably preclude, actual free money market financing.

4. Local cooperatives would lose control of their operations. With unlimited billions of dollars available to this segment of the electric industry, it is a relatively short, but realistic step to the actual take-over and control of the operations of the local cooperatives. Control of financing is equivalent to control of expansion and the plane of their operations. Thousands of subscribing patrons of cooperatives, who can justly take pride in their accomplishments, would find their cooperatives under complete domination and control of a Federal agency. State association and super co-op groups would eventually disappear. The judgment of local management and officers would be substituted for bureaucratic administrative processes of a magnitude yet unheard of. The objective would be to take over, or destroy by subsidized competition, the presently existing tax-paying independent electric utilities.

5. Approximately 80% of the consumers of electric power in the United States buy their power from investor-owned electric companies. This represents by far the largest segment of the industry. These companies should be afforded additional time to study the impact of this legislation on the industry. It is obvious that it has far-reaching implications. If given time to do so, the investor-owned companies could supply the committee with a complete and careful analysis of the effects of such legislation. Such a study would be a valuable aid to this committee in its final report on the legislation. In the interest of plain fairness, we request, and strongly urge, a reasonable time for

such a study. Even a thirty or sixty-day delay would put our industry in position to supply to the committee much valuable information, which we believe it ought to have before reporting on the legislation.



Mr. Chairman, and Members of the Committee:

My name is Edwin I. Hatch. I am President of Georgia Power Company. I appreciate the opportunity to be heard here today on what is a matter of vital importance to my company.

Georgia Power generates and distributes electric energy through 97.7 precent of Georgia. We serve about 57,000 of the state's 59,000 square miles, supplying electric power at retail in 645 towns and communities and at wholesale to 39 REA cooperatives and 50 municipalities having their own distribution systems. My appearance is occasioned by the bills before you, H.R. 14837, 14048, and 14000, all of which would greatly expand loans available to electric cooperatives by establishing an electric bank, at the same time retaining the present REA loans obtained through Congressional appropriations at a rate of 2 percent. I hope to show you what the present situation is, particularly as it pertains to my own company, and why we cannot help but be unalterably opposed to the provisions of these bills which we think will be injurious not only to our company but to the whole electric utility industry.

Let me first mention that far from opposing the electric cooperative program we have fully cooperated in its development in Georgia and up to the present have a close and effective working arrangement with the cooperatives in the State. After the REA Act was passed in 1936, our company provided much assistance to them is organizing and getting started. We participated in drafting the original act passed by the Georgia Legislature covering the formation and operation of cooperatives. We helped them with their preliminary sur

veys. We established a new rate for them, one of the lowest in the nation, and which presently works out to be lower than most of our other wholesale rates. We worked with them on the development of rural line cost and construction standards and with them designed a type of line construction which since then has been found to be highly satisfactory. To avoid their investment in substations, we furnished, and still supply, substations at their many service points at our own expense and furnished their power requirements at the voltages they desired. During the early period, we advertised that we would help establish rural electric cooperatives with a full page advertisement entitled, "For an Electrified Georgia-Where We Ourselves Can't Build, We Will Help Others To Build." Presently, the cooperatives supply about 23 percent of Georgia consumers, the wholesale towns 13 percent, and we directly supply about 64 percent of consumers in Georgia, our number of customers being 846,000. The electric cooperatives obtain about 30 percent of their power from the Federal Government and 70 percent from us. We wheel the federal power to them and firm up the remainder of their needs with our own power. The cost to them of the power we supply is about 6.5 mills per kilowatt-hour. We have contracts with each of them which are thoroughly satisfactory to all parties. The retail and wholesale rates to our customers are regulated by the Georgia Public Service Commission while our wholesale for resale rates to the cooperatives and municipalities are regulated by the Federal Power Commission. The cooperatives themselves are not regulated. We pay federal and state income taxes and state, county, and city property, franchise, and sale taxes. Our total tax bill for 1965 was about $40 million. The cooperatives generally pay only token property taxes.

We expect that the increasing needs of the cooperatives for power will be taken care of both by the new hydroelectric projects the Federal Government is planning or building in Georgia and by our own construction program which anticipates both additional thermal and hydroelectric capacity. There is no question but that their future needs will be met. Our company's construction

program for this year is $114 million and we are planning programs for the next three years that will cost a total of about $360 million.

I think this means that, if we were all left alone and cooperatives could continue to obtain what loans they actually need through congressional appropriations, we could get along quite well in Georgia. This is not the case however. All electric cooperatives in the United States, except a few that have paid up their loans, are closely controlled by the Rural Electric Administration in Washington. The Administration holds a mortgage on all their property, determines their accounting and bookkeeping standards and procedures, and has the right to veto their managers, their attorneys and their engineering firms as it so desires. Mr. Norman Clapp, the REA Administrator, said in hearings for the Department of Agriculture Appropriations in 1964 that this right is exercised very sparingly. Nevertheless, it is there and the REA thus can set electric cooperative policy on a national scale. Naturally, most all cooperatives belong to the National Rural Electric Cooperative Association, REA's well financed lobby, which can reach millions of American homes. With this setup it is easy to understand how the REA has been able to keep its 2 percent rate of interest, after 99% of farm properties have been electrified or have electric service available to them, and how it can sponsor bills such as we are discussing here.

Let us see how this effects the electric utility industry. The Rural Electrification Program is continuing to ask for large annual authorizations. There has been a shift in the way loan funds are being utilized by borrowers. From 1935 to 1965, over 68 percent of the funds loaned were for distributing power. In 1960, some 40.4 percent were for generation and transmission facilities and this has increased to 60.3 percent for G. & T. in fiscal 1965. In the latter year, approximately $229 million was approved for G. & T. as compared to $150 million for distribution. These G. & T. facilities generally displace or replace energy furnished to distribution cooperatives by private companies.

Power purchased by cooperatives from power companies, according to the Administrator's most recent annual report, has declined in cost over the past 5 years from an average of 7.8 mills per kilowatt-hour to 7.4 mills. Power generated by G. & T. cooperatives in 1964, the latest year for which figures are available, cost an average of 8.3 mills. The percentage of power purchased from companies by cooperatives is dropping. In 1949, companies furnished 53.2 percent of the cooperatives' total requirements; in 1964 the figure had dropped to 36.6 percent. Despite the higher average cost of power generated by G. & T. cooperatives, even with the government subsidies involved, the REA has continued to push the G. & T. program at a loss to the Government of the subsidy and also the taxes that would have been paid by the companies. This subsidized and uneconomic competition is already adversely affecting many companies.

The bills before you differ in only relatively minor details. There follows some contrasts as between the present situation and that which would obtain under H.R. 14837, the Administration bill:

1. The 1936 Act was passed with a specific goal in mind, to electrify farms and other rural areas. There was no question but what such rural electrification was desirable and that Government assistance was needed to do it. However, in the present case, there has been no real showing that a need exists and no objective is set forth as to what is the basic purpose of the bank other than to supply more money to borrowers.

2. From 1935 to the present day, REA has loaned a total of $4,751,612,000 and 99 percent of the farms have been electrified by companies, co-ops, and others. However, in the present case, the federal contribution to the bank's capitalization and debenture sales alone would have a lending power of $8,250,000,000. As other stock is sold and additional debentures issued, the lending power of the bank could be much higher. In fact, there is no ceiling set by the bill.

3. Presently, the borrowers pay no federal income taxes. This exemption would continue in spite of the changed nature of the program under the bill. The bank would be exempted from all federal, state, and local taxes. If companies performed the services that the bill proposes to finance, full taxes would be paid.

4. Under present law, treasury loans to REA are for 40 years, which includes the 5-year extension permitted by the Act. Under the proposed bill, repay

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ments of the federal portion of the bank's capitalization would be at the discretion of the bank's board of directors. No time limit is set but on the other hand repayment could not begin until after June 20, 1981.

5. Presently, payments of principal and interest by borrowers are returned to the Treasury as miscellaneous receipts. Under the bill, these amounts would go into the bank's revolving fund and the Government would incur additional costs for Treasury borrowing because of the miscellaneous receipts not received. 6. Under present law, loans are authorized for rural electrification and the furnishing of electric energy to persons in rural areas who are not receiving central station services. A rural area is defined as a place of less than 1,500 in population. No similar restrictions are placed on bank loans by the bill. Cooperatives, under certain circumstances, could compete with and duplicate established utilities in metropolitan areas.

7. Under present law, there is one loan program with 2 percent interest and a maximum of 40 years for repayment. The new bill authorizes three: the present loan program, which is unchanged; intermediate loans which would carry an interest rate of a maximum of 4 percent; and other loans, which would be at rates reflecting the cost of money to the bank. The latter two types of loans would be made for 50 years rather than a maximum of 40 as at present.

8. Presently, the REA subsidizes loans to the amount of more than 2 percent, considering the cost of Government money. This subsidy would be continued under the Government bill, but in addition the interest on the $750,000,000 Government subscription to the bank would be an additional subsidy until after the bank pays dividends on Class C and D Stock.

9. During the last few years, congressional appropriation committees have attempted by questioning of Government witnesses and by language in their reports to prevent duplication of electrical facilities and to forestall the construction of G. & T. facilities where a supply of electricity is available from an existing supplier through a reasonable contract. In the new bill, there are no provisions to guard against the construction of duplicating facilities and no provisions to require that attempts be made to secure a reasonable contract. On the contrary, efforts to avoid duplication and conclude reasonable contracts would be discouraged.

10. Presently, Congress has continuing control of the annual loan authorizations. Under the bill, it would have no control over loans by the bank once it was established.

11. Under present law, the Administrator is compelled to operate within the limits of loan authorizations approved annually by the Congress. Under the bill, there is no statutory limit on the amount of funds the bank could lend in any one year.

12. Presently, the REA program, except for the subsidy, must remain in the black. However, under the proposed bill, the bank could borrow from the United States Treasury without limitation in order to cover deficits. There are no comparable provisions in the case of other similar type federally sponsored agriculture banks, such as the banks for cooperatives, intermediate credit banks, or federal land banks.

13. Under present law, acquisitions of cooperatives are subject to the basic limitations of the REA Act. Under the bill, bank loans can be made for acquisition with the only limitation being that the cumulative size of the system to be acquired must not be greater than the borrower's existing system at the time it receives its first loan from the bank. There is nothing in the bill to prevent cooperatives from merging to form super cooperatives before obtaining a first bank loan.

14. Presently, the REA Administrator draws up his next year's loan authorization, defends it before the congressional appropriation committees, and administers the loan program authorized. Under the bill he would have the same duties with reference to the present 2 percent loan program, but in addition he would be governor of the bank. Should the Congress question the type of loans the Administrator was making under the 2 percent program, he could simply put on his other hat, approve the loans at the higher "intermediate" rate, and thus circumvent the will of Congress as to the type of loans to be made.

The effect of a bank bill on the electric utility industry, and my company, can be understood in the light of the aforementioned upward trend in G. & T. loans and the unrestricted augmentation of lending proposed by the bank bill. On one side, you would have the numerous REA competitors fully established, generally unregulated, virtually untaxed, having to pay only 2 percent to 4 percent for an unlimited amount of money, able to combine, and able to absorb other utilities systems. On the other side would be the investor-owned electric utility companies, heavily regulated and taxed and having to pay over 6 percent (including profit) for the use of money. Add to this situation the fact that the Department of the Interior over the past five years has used every means at its command to increase its authority in the electric power field and to establish itself in cooperation with REA as a federal system acting in competition with the individual electric companies of the utility industry. In the end, a setup such as this could obviously have only one outcome-the eventual nationalization of America's largest industry, which pays annual taxes in excess of $2.9 billion. The ultimate effect would be much the same in the whole United States as the TVA Act has had in Tennessee.

Althoug, as I have said, our company has a good relationship with the cooperatives (and municipalities having their own distribution systems) in Georgia, we could no more hold out against this flood of money and centralized federal authority than could the rest of the industry.

Not to be overlooked, in this regard, is the effect on customers of the investorowned companies. They greatly outnumber the so-called "preference customers" and hence for thirty years have been paying through their taxes the bulk of the out-of-pocket costs to the Government of the REA and other federal power programs. For instance in Georgia, as hereinbefore mentioned, the preference consumers constitute 36 percent of the State's electric consumers, whereas the company's customers are 64 percent. More public power means higher taxes to our 846,000 customers. Also, the effect on these customers' rates should be considered. Georgia Power Company rates for residential customers decreased in 1965 to an average price of 1.7 cents per kilowatt-hour, which is approximtaely 24 percent below the national average. This was the tenth general rate reduction made by the company since its organization in 1927. Rates for commercial and industrial customers are corresponding low. Any large increase of competition by federal power systems, and duplication of electric systems in Georgia, would be bound to increase rather than reduce costs of electricity not only to the preference customers of the Government but to our customers served directly. The same no doubt would be true country-wide.

An illuminating sidelight on the influence of the REA lobby in the formation of the Government bill is contained in an extract from a column by Jerry Anderson in Rural Electrification for May, 1966. Anderson is acting General Manager of NRECA during illness of Clyde Ellis and he said, "The bill the Administration sent to Congress is a far better one than it had intended to propose two weeks earlier. As the bill was shaped into form following our Las Vegas meeting, it incorporated several restrictive provisions demanded by certain forces within the Administration. It was substantially improved, however, during a series of conferences at the highest levels of the Administration. I would like to pay special tribute to the fine work done by Clyde Ellis during this period. He came down from New York, where he is continuing his therapy treatments, and worked on the bill in its final form, which reflects his effective help."

Obviously the views of moderates within the administration were rejected on the advice and with the help of the REA and NRECA lobby. These are the same people who would advise the bank.

I therefore emplore you to reject these different bank bills. There is nothing that you can do to doctor them up so that they will not cause the greatest of harm to the investor-owned companies. Inserting restrictions as to what type of loans could be made will be no safeguard because an electric bank would be run by exactly the same people who have disregarded time after time the provisions of the present law in such flagrant ways as to cause the congressional appropriations committees to repeatedly question the loans made and to insist on safeguards, which are themselves disregarded. The appropriation process is the only possible way to control the situation.

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