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In place of modifying the REA Act of 1936 to create an electric bank, my recommendation is that you modify the Act to continue 2 percent loans for only those cooperatives that are determined by separate administrative findings to be unable to pay more and to provide that other cooperatives shall receive such loans as they require at the current cost of borrowing by the Government, plus the cost of overhead for administering their loan program.
Defeat of the bank provisions and following a course such as I have indicated could do REA no harm. It would only mean that REA would continue to receive the funds it actually needs through the time honored method of annual congressional appropriations and with proper and much needed congressional supervision and control.
The Georgia Power Company earnestly requests that you adopt such a course.
STATEMENT OF WILLIAM J. CLAPP, CHIEF EXECUTIVE OFFICER, FLORIDA POWER CORP.
My name is William J. Clapp. I am the Chief Executive Officer of Florida Power Corporation, an investor-owned, Federal income tax-paying electric utility furnishing electric service to 2,000,000 people in a 20,000-square-mile area of Florida. I am also Vice President of Edison Electric Institute.
I am here to speak in opposition to the REA financing Bills H.R. 14000 and H.R. 14837. Nevertheless, Florida Power Corporation enjoys a very cordial relationship with the nine REA Cooperatives which we serve at more than 50 points of delivery within our service area. I would like to emphasize the point that our Company's general policy is not to oppose the proper development of rural electric cooperatives, however, I happen to believe in the free-enterprise system, and as an American first, and a business man second, I sincerely be lieve that I have a duty to defend the free-enterprise system from direct assault on the principles which are fundamental to its survival. The proposed legislation creating a Federal Bank for Rural Electric Systems represents a direct assault on the free-enterprise system.
There are several methods in which I could speak in opposition to this proposed legislation. Specific pitfalls contained within the legislation itself could be pointed out, or the well-known evils of our pluralistic electric power economy could be renewed, or I can address myself to your sense of fair play and your basic concept of what's right and wrong. I have chosen to exercise all three methods to persuade you, as I have been persuaded, that this legislation in its present form is fundamentally contrary to American principles and traditions. The National Rural Electric Cooperative Association's present line of thinking is best exemplified in its familiar slogan, "It's time to move ahead". It would be interesting to know what they mean by "move ahead", other than to move further into open competition with the private power companies. With 99% of rural America supplied with electric service, NRECA should now be willing to say, "A job well done". Through the medium of the proposed legislation, NRECA will be encouraging its members to enlarge their operations to compete with private companies. However, it should be noted that NRECA is not willing to take this step into the competitive business arena without first being sheltered by continuing tax advantages and increased subsidies from the Federal Government.
All of the modern and sophisticated advancements in the art of electric utility operations existing in the investor-owned industry today cannot provide our consumers with low-cost, reliable service and generate adequate earnings to attract needed capital if the private utilities must openly compete with G & T systems that are tax-exempt and that can borrow money for construction and expansion at unrealistic interest rates.
The investor-owned electric utility industry represents 12% of the net capital investment by all industry in this Nation. This money acquired in open market competition between all types of industry comes from every segment of the public who are taxpayers and who are beginning to express a growing resentment to the use of their tax monies for the subsidization of Government-owned or financed proprietary functions that compete with businesses in which they have invested their savings through various vehicles such as insurance premiums,
banks and savings institutions and direct security purchase. These investors, large and small, expect their savings to grow and generate earnings-earnings that provide the source of the Government's tax revenue. We have all heard the frequent quotation, "The power to tax is the power to destroy", however, enlargement of Government subsidies to tax-exempt business ventures in direct competition with tax-paying entities helps create our serious problem of deficit financing, therefore, perhaps we should paraphrase the old quote to “The power to spend is the power to destroy". If the Federal Bank becomes a reality, the travesty perpetrated on the private utilities will be the knowledge that through the payment of taxes they have contributed to their own demise.
Editorials have quoted NRECA spokesmen as saying that without capital to expand, the rural cooperatives will have to let new business go to private power companies. Gentlemen, I have not as yet heard a satisfactory answer to what is wrong with letting new business go to tax-paying electric utilities in the freeenterprise system. The proposed legislation is not required for the orderly growth of REA, and no one has adequately explained the need for expansion beyond the original intent of REA. Additional subsidization through a Federal Bank to create a new REA program of wasteful and duplicating G & T facilities is simply not needed to provide America with the low-cost, dependable electric service it continually demands and receives. By every known measurement the job is now being done by free-enterprise companies in cooperation with REA in its present form, and we would like to continue in business. However, it must be remembered that investor-owned electric utilities, no matter how efficient they may be, cannot endure when faced with expanded competition from cooperatives possessing a multitude of inequitable advantages such as a favored tax position, enlarged Government subsidization, and virtual exemption from regulation.
There is no absence of an abundant supply of electric power in Florida, or for that matter, anywhere in America, as revealed by every known authoritative study; yet, REA's throughout the country in recent years have repeatedly sought G & T loans, in the main, they just have not justified these projects because Congress wisely provided certain restrictions. This protection will not exist under the proposed Federal Bank. I can tell you that Florida Power Corporation will have a 421 MW unit on the line in the next couple of months and a 525 MW unit has been contracted for with start-up scheduled in late 1969. That's 946 MW of power in the next three years, approximately an 82% increase in our generating capability. There will be no absence of an abundant supply of electric energy for our cooperative customers. Cooperatives in our system can neither justify a duplicate G & T system from the standpoint of a needed power source, nor from the standpoint of needed low-cost energy. Statistics of the Department of Agriculture show that those Cooperative G & T Systems which exist are not furnishing energy as economically as they can purchase energy wholesale from investorowned electric companies. I submit that the money proposed to be made available to the cooperatives through the Federal Bank simply is not needed and the enacting of this legislation will inevitably result in pure economic waste through duplication of generation and transmission facilities. A simple, rudimentary evaluation of this problem leads to the inescapable conclusion that this is not in the interest of the public that members of Congress were elected to protect.
The proposed Federal Bank does not reduce subsidies; rather, it compounds subsidization and magnifies the financial inequities existing between REA's and investor-owned electric companies. These unfair, unjustified subsidies will inevitably bring about the elimination of investor-owned, tax-paying electric utilities. At the present time the investor-owned electric utility industry is the largest industrial source of local, State and Federal taxes. Therefore, I am compelled to ask a most searching question-is our Government to be supported by means other than the payment of taxes? If I may suggest the obvious answer to this question, it would appear to be in the negative, since there is a persisting rumor that the Administration may have to ask Congress to increase tax revenues, yet, careful scrutiny of the proposed Federal Bank legislation reveals an increase in tax spending-perhaps the war in Viet Nam is not the only drain on the Treasury!
I have stated that the monies proposed to be provided by the Federal Bank are not needed and I categorically reaffirm this as true, nevertheless, I do not
with this Committee to be left with a negative impression; accordingly, I'd like to say that perhaps new legislation could be proposed that would contain reasonable safeguards. If REA's wish to compete openly with investor-owned companies and expand their programs to waste even more of the taxpayers' money through the duplicating of unneeded generation and transmission facilities, then, at least, they should do it on a more equitable basis and exercise some vestige of good business principles. For example, new legislation should, first, require REA's to go into the open money market for new capital without any Federal crutch; second, REA's should begin paying Federal income taxes and adjust their rates accordingly so that their customers will no longer be discriminating against the investor-owned power companies' customers who do pay Federal income taxes. Third, they should be subject to regulatory control. The Federal Power Commission, another agency of Congress, has recently sought to fill regulatory gaps; however, NRECA quickly sought new legislation to spell out their exemption. Fourth, feasibility criteria should be established for the granting of G & T loans. By feasibility criteria I mean detailed standards and guidelines established whereby the governor of the Federal Bank will hold G & T loan applicants to strict formal proof of need, with an opportunity for investorowned companies affected by the loan to be heard, and answerable to Congress in the final analysis. If my allegation that there is no need for the Bank is not true, then loan applicants will quickly make their point and no one will be harmed in the process. If my allegation is true, then the American public will be protected from wasteful, economically unsound duplication of facilities and bureaucratic empire-building. Certainly no one associated with the sponsorship of this legislation should be afraid of such a procedure.
There has not been ample time afforded prior to these hearings to offer more detailed constructive suggestions; accordingly, I respectfully request this Committee to continue these hearings so that the investor-owned electric utility industry may be completely heard and so that a complete record may be available to the Committee in its deliberations. Since Congress is being asked to approve and endorse a totally new concept, never envisioned nor remotely recog nizable as the original purpose of REA, it seems only reasonable that this Committee and members of Congress carefully view all aspects of the proposed legislation which, if passed, will constitute an absolute delegation of the rights and duties of Congress and completely release the cooperatives from responsibility to Congress.
STATEMENT FOR EDISON ELECTRIC INSTITUTE BY W. J. CLAPP, VICE PRESIDENT, EDISON ELECTRIC INSTITUTE AND PRESIDENT, FLORIDA POWER CORP.
The Rural Electrification Administration (REA) was formed for the worthy purpose of speeding up the electrifiction of the nation's farms. In general, this purpose has been carried out well. Today, virtually all the farms in the nation— more than 98 percent-are receiving central station electric service, and the original purpose of the REA has been accomplished.
In light of this outstanding achievement in farm electrification, it is unfortunate that the REA has allowed itself to become contraversial issue before the public-a subject for debate among thoughtful citizens and their elected representatives. Why has this occurred? It has occurred because the REA has deviated from its original aims and has permitted its activities to range far afield of rural electrification.
It was never intended that low-cost government loans would be used through the REA to finance unnecessary electric generating and transmission (G&T) facilities which duplicate the facilities of existing suppliers. And yet in recent years an increasing percentage of REA loans has been made for G&T's.
Committees of the Congress have registered concern over this abuse of public funds, and have set down certain restrictions to be followed by the REA so as to keep its loan activities in line with the purposes for which it was founded.
Now, in an effort to free itself from Congressional controls and to expand its loaning power for generation and transmission facilities and for other purposes, the REA is proposing a new method of financing to be accomplished through a Federal bank which would be subsidized by the government and which would
sell securities in the market.
The formation of such a bank would create a new type of subsidized electric power program vastly different from the REA ruralfarm electrification program as it has been known in the past. If it were allowed to come into being, the proposed bank could become within 15 years the largest Federal banking institution in the nation, involving a sum of money in the $20 billion range.
The Edison Electric Institute opposes the formation of such a bank and, therefore, opposes H.R. 14837. We believe that the concept of such a bank goes far beyond any previous idea of government in business. We believe that such a bank would be completely unnecessary and wasteful of taxpayers' money because electric power supply is ample throughout the United States, and power facilities for the future can be financed in the free market without government subsidy.
To comprehend the ultimate and real significance of the legislation being proposed in H.R. 14837, it is necessary to examine the facts, to review the activities of the REA and observe in what respects it has been deviating. It is also important to review some of the facts about the over-all electric utility industry so that the REA's position in it can be properly assessed with respect to the financing plan being proposed.
The activities of the REA can be divided into two main parts. The first has to do with loans made for building electric power facilities-fundamentally distribution lines-to furnish energy to people not receiving central station service. The second concerns loans made for building large generating plants and transmission lines (G&T's) to serve non-farm customers and industries as well as farm customers.
The real and worthy purpose of REA was that called for in the first part. During the middle 1930's only about 11 percent of the farm customers were connected for electric service. To bring about more rapid rural electrification, a government subsidy was made available to cooperatives in the form of loans made by REA at an interest rate below the market value of capital, and by freeing cooperatives from paying Federal income taxes. The subsidy amounted to about 30 percent in the cost of furnishing service.
The cooperative borrowers were not alone in the nation's efforts to bring electricity to the farm. The electric power companies favored the REA movement and assisted it. In addition, the companies carried forward their own rural electrification program. Today, with more than 98 percent of the country's farms electrified, about 51 percent of the farm customers are served by rural electric cooperatives; 43 percent by investor-owned electric utility companies; and the balance by such suppliers as municipal electric utility systems and public utility districts.
During the early years, the investor-owned companies which had the power plants and transmission lines available provided energy to the cooperatives. Today, the companies supply at wholesale about 38 percent of the energy purchased by the cooperatives. More than 42 percent of the energy the cooperatives purchase is supplied by Federal agencies, and the REA borrowers generate some 12.4 percent of the cooperatives' requirements, with the balance supplied by state, district, and county agencies.
Granted the approval of state regulatory bodies, the companies cooperated by making available special low wholesale rates to the cooperatives so that the rural areas could be developed more quickly. The power supplied the cooperatives by investor-owned companies today is at special low wholesale rates which are, on the average, about 30 percent below most standard industrial rates.
The Rural Electrification Administration and the rural electric cooperatives working in harmony with the other sectors of the power industry have done a good job in accomplishing their original aim-central station electric service for all the farms in the nation. And they continue to serve a good purpose in retailing electricity to farms.
However, in recent years, the emphasis of REA has changed to the financing of generating and transmission (G&T) facilities, and it is in this respect that the REA has made a controversy of itself, and in this respect it has received Congressional criticism.
Loans are made to G&T co-ops at 2 percent-less than half the cost of money to the Federal government-and no Federal income taxes are paid. Five out of
six new co-op customers are not farmers-they include suburban residents, businesses, manufacturing plants and petroleum operations. It was never intended in the original REA Act that government-subsidized power plants paying no Federal income taxes should be complete with existing taxpaying electric power suppliers. In order to understand how REA is deviating from its original purpose, it is necessary to refer to the 1936 Rural Electrification Act. The REA Act states that loans may be made:
". . . for the purpose of financing the construction and operation of electric generating plants and electric transmission and distribution lines or systems and the extension of existing facilities, for the furnishing of electric energy to persons in rural areas who are not receiving central station service." Rural areas are defined by the Act to mean :
". . . areas of the United States not included within the boundaries of any city, village or borough, having a population of over 1500 inhabitants."
While the Act does permit the REA to make loans for the building of generation and transmission facilities, the idea was that there might be a few areas in which generating facilities were not available. In such cases, REA could make loans for generation and transmission to serve the needs of "persons in rural areas who are not receiving central station service." But it was never the intention of the Act that the REA would lend money to cooperatives to construct large G&T's which duplicate the facilities of and compete with the investor-owned companies. Underscoring this point, the late Sam Rayburn said, in urging passage of the Act:
"We are not in this bill intending to go out and compete with anybody. By this bill we hope to bring electricity to people who do not now have it. This bill was not written on the theory that we were going to punish anybody or parallel their lines or enter into competition with them.
Senator Norris, sponsor of the bill in the Senate, said:
". . . There will not be set up an organization and money loaned to it for the purpose of electrifying a rural area which is now being supplied . . . If (existing electric companies) have supplied a certain locality this bill would not authorize the Government Agency to go into that locality... There is no intention of going into a farming community which is already supplied with electric current and and forming farm organizations there and having them build up to go into competition..."
An indication of how far the REA has strayed from its original purpose is seen by examining the chart on the following page (6A). It is readily apparent that the proportion of funds loaned for distribution facilties (the original worthy purpose of REA) has been on a declining trend, while loans made for generation and transmission facilities (the deviation) have increased markedly in proportion.
Since REA has largely completed its task of extending electric service into rural areas not receiving central station electric service, it has deviated into other fields and is extending a government subsidy into fields which were never intended to be subsidized. This is not in the public interest.
Originally, these were the criteria used to determine whether a cooperative should receive a loan for generation and transmission facilities:
"The Rural Electrification Administration will make loans to finance the initial construction of generation facilities and transmission facilities only under the following conditions:
"(a) where no adequate and dependable source of power is available in the area to meet the borrower's needs, or
"(b) where the rates offered by existing power sources would result in a higher cost of power to the borrowers than the cost from facilities financed by REA." In May 1961, a new criterion was established:
"... where generation and transmission facilities are necessary to protect the security and effectiveness of REA-financed systems."
The effect of this criterion was to make it easier for REA to build G&T facilities financed with 2 percent public funds, and free from Federal income taxes. Furthermore, the loans were made in secret so that no one outside the REA could see the analyses upon which a loan was based.