Images de page

to all of us that we realize that the proposed Federal electric bank is drastically different than the recommendations of the Kuhn, Loeb & Co. report. In order to show the difference, I have had prepared a sheet which is before every member of the committee, which I would like to ask you to take a quick look at.

This sheet is entitled “Difference Between Kuhn, Loeb Report and Present Bills.” Of course, the basic difference is that the Kuhn, Loeb report recommended that the Federal electric bank, if created, should sell debentures at the market and should loan the money to the co-ops at the full rate of interest on the debentures plus one-half of 1 percent to cover the cost of the Federal electric bank. This is the difference which makes this bill as different as night is from day as compared to the Kuhn, Loeb report.

I ask that there be included in the record, please, this one sheet which shows the differences between the Kuhn, Loeb report and the present bill.

Mr. PoAGE. Without objection.
(The document referred to follows:)

[blocks in formation]

$500,000,000 (p. 175,
Rural Electric
Financing Study

Substitution of bor.

rowers' stock for
Government stock.
Borrower required
to buy 1 percent of

loan as bank stock.
Cost of capital from

debentures plus
one-hall percent for
operating expenses.

Interest to be charged

on loans.

Intermediate loans, 3

percent; others at
discretion of bank
board 50-year loans.


(Not covered).

Class A, none; class B,

none; class C, as
specified by bank
board; class D, as
specified by bank

Intermediate loans available to

1981, 4 percent; others, average rate payable on deben. tures plus administrative expenses and estimated

losses. Class A, percent of earnings

after expenses and dividends on C and D stock, reserve, and taxes, as A bears to B stock; class B, no dividend: class C and D, as specified in bylaws of bank, only out of income, and not to exceed current average rate payable

on debentures. Percent of earnings after ex

penses and dividends on C and D stock, reserve, and taxes as A bears to B stock.

Patronage refund...

(Not covered).

Available to borrower

as specified in
bylaws of bank.

Mr. CORETTE. One of the bills before you provides that the intermediate loans which will be the principal loans made by the bank to the REA shall be at 3 percent, and the other bill at 4 percent. In view of this, I have had placed before each of you a statement showing losses or deficits that would be incurred by the Federal electric bank if total authorized debentures were sold, and if total amount realized from the sale of debentures and stock was loaned to rural electric cooperatives at 4 and 3 percent. And I have computed this on a 10-to-1 basis of debentures to stock as provided in the bill, on a 4-to-1 basis, on a 3to-1 basis, and on a 2-to-1 basis. And I ask, Mr. Chairman, if this sheet could be included in the record. Jr. Poage. Without objection. (The document referred to follows:)

Statements showing losses or deficits that would be incurred by Federal

Electric Bank if total authorized debentures were sold and if total amount realized from sale of debentures and stock was loaned to rural electric co-ops at 4 percent and at 3 percent

(In thousands of dollars)

[blocks in formation]

10-to-1 arrangement:

Federal participation.
Authorized sale of bonds
5 percent of loans invested in stock..
Authorized sale of bonds on this..
Bank loans at 4 percent.
Bank loans at 3 percent.

4-to-1 arrangement:

Federal participation
Authorized sale of bonds.
5 percent of loans invested in stock
Authorized sale of bonds on this.
Bank loans at 4 percent.
Bank loans at 3 percent-

3-10-1 arrangement:

Federal participation
Authorized sale of bonds.
5 percent of loans invested in stock
Authorized sale of bonds on this.
Bank loans at 4 percent.
Bank loans at 3 percent.


[blocks in formation]

2-10-1 arrangement:

Federal participation
Authorized sale of bonds.
5 percent of loans invested in stock.
Authorized sale of bonds on this.
Loans at 4 percent.
Loans at 3 percent..

[blocks in formation]
[blocks in formation]

NOTE.-From the above it is my opinion that only limited amounts of debentures would be salable.

Mr. CORETTE. To take a very quick look at this sheet, if you would, please, you will see on the 10-to-1 basis the bank loss, if the loans to the co-ops were made at 4 percent, would be $170 million per year, and if the loans were made at 3 percent, the loss would be $341 million per year. And if you go down to the 4-to-1 arrangement, you will see $17,500,000 loss if the loans were made at 4 percent, and $125 million if the loans were made at 3 percent. And if you drop clear down to the 2-to-1 arrangement, you will see that if the loans were made to the co-ops at 4 percent, the loss would be $6,500,000, and at 3 percent, $53 million.

Now, who would pay for this loss? I said a short time ago that there would be a battle, and that as usual the cost of it would paid by the U.S. Government. This would have to be paid by the United States, because the bill itself provides that the bank may obtain from the U.S. Treasury money to meet its principal or interest pay. ments on these debentures, so that the bill would have to be picked up by the United States.

The other way that this could be handled is that the debentures themselves, under the provisions of the bill, could be sold to the trust funds of the United States, such as the trust for social security.

I believe that it is vitally important that all of us realize that the proposed Federal electric bank is drastically different than the recommendations in the Kuhn Loeb report.

This last exhibit that I have mentioned to you indicates to me that to stay in the black and ultimately pay expenses the bank would have to maintain a very low ratio of total debentures to invested capital. The ratio, of course, would depend on the interest rate on the debentures, and on the interest rate charged to the cooperatives.

Because under present and probable market conditions the interest rate on the debenture will be greater than the 3 or 4 percent interest charged to the cooperatives, a loss will be incurred on every dollar that is raised from the sale of debentures, and the money from those debentures then loaned to the cooperatives. This is the strange method of Government that creates that kind of a situation in the event this bill should pass.

The only other income which the bank would have is the interest which it receives from the cooperatives on the invested capital that it loans to the cooperatives. This interest of 3 percent under one bill and 4 percent under the other bill is substantially less than the presentday cost of long-term Federal money.

The net result is that the dividends, if any, paid to the Federal Government on its stock, will always have to be far less than the interest which the Government is paying on the money raised to make that investment, and that there will be nothing left over which can be used by the bank to purchase the Federal stock.

I cite these examples to show the impracticability of the Federal electric bank program which is now before this committee.

These bills introduce a new concept of Government in business. It it a complete change in the Federal Government policy by allowing tax-subsidized agencies to compete with fully taxpaying business.

These bills are vitally important, both because of the fundamental change in concept of Government competition with business, and also because of the very vital effect they would have on the tax revenues of the Nation and every one of the States, counties, and school districts. I believe these bills should not be enacted into law, and that the Federal financing of legal and appropriate REA requirements should remain as it is at the present time.

That completes my statement, Mr. Chairman, and I appreciate greatly your giving me this opportunity to present this verbal statement in addition to my written statement.

Mr. Poage. We thank you for cooperating in trying to speed this matter along, Mr. Corette.

Now I wonder if the Montana Power Co. borrowed any money from the Federal Government?

Mr. CORETTE. We do not.
Mr. Poate. Do you operate any rural lines?
Mr. CORETTE. Yes, extensively.
Mr. PoAGE. Why do you not borrow the money?

Mr. CORETTE. Because we are not in a position to under the regulations of the Rural Electric Administration. We went into that, Mr. Chairman, and we found in order to borrow from the REA, we would have to give a first mortgage on all of our property, and that the mortgage requirements of REA were such that it was absolutely impossible for us to borrow money.

Mr. Poage. They don't require a different situation in the way of mortgage from you than that which they required from the cooperatives; did they?

Mr. CORETTE. They did not. But the cooperatives, being new businesses and borrowing all of their money there, were in a position to give a first mortgage on all their property. But with the mortgages which utility companies have on their property, it is impossible for them to meet the mortgage requirements of the Rural Electrification Administration.

Mr. Poage. That raises an interesting point. I have often hear it said that utility companies never paid off a debt. I don't mean they don't pay their debts—but that they never retire an outstanding debt. They simply borrow again, and carry that money. Is that substantially correct?

Mr. CORETTE. No, I consider that to be false, Mr. Chairman, for this reason: Utility companies do retire their debt-both their mortgages and their debentures, but the growth of utilities is so great that when we pay off a debt, we are at the same time, or even before, raising new money for new construction. Consequently, our overall debt does not decline-it actually increases year by year. What we actually do is that we endeavor to maintain a reasonable debt ratio, a reasonable ratio of the amount of debt as compared to total capitalization. So that ratio doesn't decline. But we certainly pay our debt.

Mr. Poage. Wouldn't that also be true of an electric cooperative doing business in rural areas?

Mr. CORETTE. Well, I understand from my knowledge of that they pay off their debt, just like a utility company does, and that they continue to borrow more money, like a utility does, to take care of their new construction.

Mr. Poage. And they do need to borrow more money; do they not?

Mr. CORETTE. They do. And under the present program, our company, and I think every company, recognizes that to continue to supply the load growth of their present customers they may need more money in the future. They get it, and we believe they should get it, from the Rural Electrification Administration under the present program and under the complete control of Congress.

Mr. Poage. In other words, you think that the Appropriations Committee should appropriate more money year by year for the 2-percent loans?

Mr. CORETTE. To the extent that the co-ops require the money, I think it should be made available to them. Now, there are some that I believe do not require it, and I think that they should be required

to go into the open market and raise their money at going interest rates. But I think they still should be subject to the limitations that are in the present Federal law.

Mr. Poage. If they go into the open market and raise their money there, what will be the difference in their operations from yours?

Mr. CORETTE. There would be a major difference. And that is why I think they should continue to be subject to the limitations, and that is they are still free of Federal income taxes, State income taxes, and of a substantial amount of State property tax. I just plainly think that is unfair competition, and I think it is destructive competition, and I think it is destructive of the basic economy of the United States.

Mr. Poate. Well, if these cooperatives could serve in cities as well as in rural areas, they could pass these taxes on to their customers, could they not?

Mr. CORETTE. I don't look at utilities as passing taxes on to their customers.

Mr. Poage. Obviously it is an expense of doing business, is it not?

Mr. CORETTE. It is an expense of business, just exactly as it is in the grocery business or the mercantile business or any other business.

Mr. Poate. I don't know anybody that is buying and selling that doesn't add to the cost of their product their taxes and their interest and their wages that they pay.

Mr. CORETTE. Every expense is certainly in the price of every product that is sold, including electricity;

Mr. Poage. That is right. Or else the supplier would go broke quickly.

Mr. CORETTE. He would be out of business very shortly.

Mr. Poate. But as long as you have got some substantial cities, you can pass those costs on, but if you have nothing but this very thin territory, doesn't it sometimes become impossible to pass it on? That is one of the reasons you stayed out of that rural territory so long, is it not?

Mr. CORETTE. I think I should answer both parts of the question. We have very thin territory, as I described to you in my statement.

Mr. Poage. That is right. But you did not go into that thin territory until 1936, did you?

Mr. CORETTE. No. Our whole territory is thin. Our company has about one-third as many customers per mile of line as the average utility, and we serve this enormous area. My first work for this company in the early 1930's was in the extension of rural lines, and in the establishment of rates for this extension. We were engaged in rural activities prior to 1935. But as was described by the Rural Electrification Administration people, the load of the rural customer then was very small, and there were limitations on how far we could go. Because of those limitations, we supported the rural electrification program, we drew the articles and bylaws of rural electric cooperatives, we had two of our sales personnel devote a couple of years of their time to organizing cooperatives and arranging for the estension of their facilities, and we made what has now proven to be a serious mistake of sitting down with cooperatives and agreeing with them that we would in effect turn over to them areas in which we had plans already made to extend our rural lines, so that we would be giving them better business than they otherwise could get.

« PrécédentContinuer »