So we had a record of cooperation and encouragement of cooperatives until the day that the cooperatives started taking customers that we stood ready and willing to serve, and started moving back into our areas. And from then on, we have had open competition for every

customer.

Mr. POAGE. Well, now, would you explain something I don't understand. I live in possibly the only State that doesn't have any such thing as territorial rights.

Mr. CORETTE. We don't have any such thing.

Mr. POAGE. I thought you had a commission. You have a commission but it doesn't assign areas; is that right?

Mr. CORETTE. The commission has no jurisdiction over cooperatives, none whatsoever, by specific provision of the Montana law.

Mr. POAGE. And therefore you have no assignment of territory? Mr. CORETTE. That is right-no assignment of territory.

Mr. POAGE. The commission does have jurisdiction over your territory; is that right?

Mr. CORETTE. Complete jurisdiction over our company-rates and services and extension policies, everything.

Mr. POAGE. And territories that you can serve.

Mr. CORETTE. We are obligated under law to serve all territories. The commission could require us to serve any customer that we refused

to serve.

Mr. POAGE. The commission doesn't require you to serve any customer in Montana, does it? When you say any customer, you mean within some kind of defined territory?

Mr. CORETTE. Within the part of the State that we serve. We serve about two-thirds of Montana.

Mr. POAGE. In other words, they do assign you territory?

Mr. CORETTE. No, they don't. There is no assignment. That is just the area of the State that we serve. Montana Dakota Utilities and Pacific Power & Light serve the other areas. And neither company has ever gone into the area served by the other. But the commission would insist that one of the utilities serve any customer in its territory. And we serve, Mr. Chairman, at a postage stamp rate, the rural customer pays the same rate as the customer in our larger cities.

Mr. POAGE. But you don't make the same profit.

Mr. CORETTE. Oh, I am sure we don't make the same profit from any

two customers.

Mr. POAGE. Well, you could not make the same profit from 2 customers who lived on a 10-mile line as you can from a 1-mile line with 10 customers on it, could you?

Mr. CORETTE. We never break our system down that way, but I think it is obvious your statement is right. But in our State, our commission, for 50 years, has been dedicated to a postage-stamp rate to every customer in the entire service area. We are primarily a hydro company. At the city of Great Falls, Mont., we have five hydroplants. It is obvious if you sectionalize the system, that the cost of power in that city would be lower than any other place on the system. Now, if you take the community farthest from the powerplant with the longest transmission, of course, there the cost of power would be higher, and consequently your theory is we make a greater profit in Great Falls, and I guess the answer is "Yes, we do."

Ι

Mr. BURTON. Mr. Corette, on page 10 of your statement you say "they" meaning REA

They want to use their tax and interest subsidies to compete with investorowned utilities for urban and suburban markets, to offer the commercial and industrial customers now being supplied by investor-owned utilities, and to build generation and transmission facilities which they cannot buld at the present time. They want to embark on an uncontrolled program of direct subsidized competition against investor-owned utilities.

Now, those are some serious charges to make against the REA's. I doubt that they would probably stipulate to it.

My question to you is, Do you have any evidence to support this conclusion?

Mr. CORETTE. None, except the general activity which I see going on throughout the Nation.

Mr. BURTON. Have they attempted to move into your urban or suburban markets or buy out municipalities?

Mr. CORETTE. There has been no buying out of municipalities, but they have attempted to move into and have moved into some of our urban and suburban market. They have definitely attempted to take industrial customers that we were offering to serve. These are straight distribution co-ops. We have no generation and transmission co-ops in our area except one which doesn't have any property and is not active.

Mr. BURTON. Thank you.

Mr. POAGE. Thank you, Mr. Burton.

I hate to prolong this. But I just found out that the co-ops have sought to secure your industrial customers. Have you sought to secure theirs?

Mr. CORETTE. They have none that are existing customers. We have had direct competition for industrial customers.

Mr. POAGE. You have sought to get customers that were under their lines, and they sought to get customers under yours; is that it? Mr. CORETTE. To some extent; yes.

Mr. POAGE. I agree it is a bad situation for everybody concerned. But I have an idea that it works both ways. These things usually do. Mr. CORETTE. Our only point on that is because of the taxes we pay, it is very important to both the U.S. Government and to the State government that we serve those customers that we are ready and willing to serve because of the revenue that comes to the Federal and State government by reason of the taxes we pay. We think this was a basic concept of the REA Act as it now exists.

Mr. POAGE. In other words, you mean that it is your feeling that it is the concept of the REA Act that you should have all of the better customers?

Mr. CORETTE. No; I don't say better customers.

Mr. POAGE. The more profitable customers?

Mr. CORETTE. No. Whether they are more or less profitable-if they are customers that are in the area where we serve, and if we have facilities available to serve them, and are willing to serve them, my concept of the act is that it was always intended that they should be served by the taxpaying investor-owned company, and not by subsidized REA's.

Mr. POAGE. You know, I sort of thought that back there that long ago there was still some concept of States rights. I have rather come

to the conclusion we have lost all that concept over the years. But I had an idea that we had some such concept, and it was the idea of the Congress at that time that we would leave that matter up to the State, and if the State wanted to prescribe it, certainly under the law as it existed then, the State had a right to, and if the State didn't want to, it didn't have to. And I sort of thought that was a pretty good idea. Do you think it was a bad idea?

Mr. CORETTE. I thought it was the right idea, and that was done, by Montana law in 1935, which still stands on the books.

Mr. POAGE. What was done?

Mr. CORETTE. Just what you indicated. The State legislature passed a law which created rural cooperatives, and said they were created to render rural electric service to customers to whom service was not available from central station companies.

Mr. POAGE. Has Montana changed their law?

Mr. CORETTE. No, it is on the books today.

Mr. POAGE. Well, it would seem to me, then, that your recourse is in the courts of Montana.

Mr. CORETTE. It is, and we have exercised it. There are two Supreme Court decisions and many district court decisions in our favor. Mr. POAGE. It seems to me like you have things pretty well under control.

Mr. CORETTE. We think we have done fairly well, Mr. Chairman. Mr. POAGE. It seems to me you have things your way.

Thank you very much.

Mr. CALLAN. Mr. Chairman.

Mr. POAGE. Mr. Callan.

Mr. CALLAN. Do you have any municipalities besides the 25 cooperatives?

Mr. CORETTE. We have no municipal electric operations in Montana. Mr. CALLAN. I have been looking at some rates and I noticed that you have regulated public electric utilities in Montana. The 25 cooperatives are in Montana and the Bureau of Reclamation is there; is that correct?

Mr. CORETTE. Yes; with very extensive power.

Mr. CALLAN. I notice your rate of return was the highest of any public utility in the United States; 10.92.

Mr. CORETTE. It is not quite the highest, but it is among the highest. Mr. CALLAN. Up to this point, anyhow, these cooperatives have not hurt the return that you have got on your investment?

Mr. CORETTE. I believe that is right, Mr. Callan. It is not a large enough part of our business.

Mr. CALLAN. Is your concern under this legislation these cooperatives are going to encroach on your territory? Is that one of the things?

Mr. CORETTE. Very much so.

My concern is that this would be the beginning of the co-ops becoming a nationwide public utility industry of their own, without restriction as to the type of service they could render or the type of customer they could serve.

Mr. CALLAN. Isn't it true that most States have a regulatory body of some kind, and that before anybody can build a generating plant, say, they have to get approval from the State first; is that right?

Mr. CORETTE. This is true in some States, but not in others; and I believe you cannot generalize on it. In our State it is not true.

Mr. CALLAN. I think it is true in the majority of States-that before a co-op or a private utility can build a generating facility, they have to get State permission first.

Mr. CORETTE. I am sorry I cannot answer your question as to a majority of the States. I know there are some States that require such a certificate.

Mr. CALLAN. If this is true, then the very fact that this bank existed in the States that did have those laws, this would mean that a co-op isn't going to come in there and take over all the generation and transmission unless this local State agency gives them the OK— wouldn't that be true?

Mr. CORETTE. This would only apply if the State commission had jurisdiction over the co-ops as well as the private utility, and if the State law required this type of certificate.

Mr. CALLAN. I think it would be good to have in the record what areas what States have total control over distribution of electricity. And I think we will try to find that.

We have talked a lot about subsidies.

You have the 7-percent-tax credit.

Mr. CORETTE. Surely, we are eligible for the credit but not the 7 percent. There was discrimination, in my opinion, against the utility industry. Electric utility companies have only 3 percent.

Mr. CALLAN. Now, you don't as an individual, do you? On your Federal income tax return, you get a deduction. But the individualany individual business or corporation gets a 3-percent credit or 7, right?

Mr. CORETTE. Yes. But an individual in business would get the same 7-percent credit.

Mr. CALLAN. Does the co-op get a tax credit?

Mr. CORETTE. It doesn't have to, because it pays no taxes.

Mr. CALLAN. My point is, is the 3-percent-tax credit a subsidy or not?

Mr. CORETTE. No, I don't consider it a subsidy. It was definitely a provision of the tax law-the investment credit applied to all business. It wasn't a subsidy. It was merely a provision of the tax law which was enacted for the purpose of encouraging all businesses to modernize their property and replace old property with new, and build more property.

Mr. CALLAN. It was a subsidy over what it was before.

Mr. CORETTE. I don't look at it as a subsidy at all. It was just a provision of the tax law. If they reduced the taxes 1 percent, it would have been the same kind of thing.

Mr. CALLAN. Is there accumulated deferred tax-do you have a deferred tax?

Mr. CORETTE. Are you talking about liberalized depreciation?
Mr. CALLAN. What they call a deferred tax.

Mr. CORETTE. I think liberalized depreciation is what you mean. That is, you can take more depreciation on your property in the early life of it, and less in the later life, if you want, and then call that a deferred tax. You have the same depreciation over the life of the property.

Mr. CALLAN. Does this mean under that deferred tax you keep more money is that right-keep it on demand?

Mr. CORETTE. Well, in the early life of the property, you would claim more depreciation which would reduce your tax, you would have more money left in your business during the early life of the property. Mr. CALLAN. So it is your opinion that the tax credit, deferred taxes, and all these things are not a subsidy, but the 2-percent REA money is a subsidy, because it costs the Government-it costs them 4 percent or 412 percent to get the money, and then loan it out at 2. But you take a deferred tax, and you keep it, you keep that money-so that is not a subsidy, is that right?

Mr. CORETTE. That is exactly right. I look at liberalized depreciation as a provision of the tax law that applies to all business, and certainly not a subsidy.

Mr. CALLAN. Do you have any idea how many dollars you are holding as a deferred tax?

Mr. CORETTE. I don't have.

Mr. CALLAN. I notice here-1964-Virginia Electric Power Co. had total accumulated deferred tax of $34.8 million. Do they have that on hand?

Mr. CORETTE. No.

Mr. CALLAN. Where is it? Have they paid it?

Mr. CORETTE. I am not at all familiar with that company. But that is the difference, as I understand it, between the depreciation they did take and would have taken, and they have to pay that out later in tax. Mr. CALLAN. But with a deferred tax-they had $34.8 million on hand-which means he must not have paid it to the Government, is that right?

Mr. CORETTE. It means they have to pay higher taxes on that property later on in the life of the property.

Mr. CALLAN. Do they have this $34.8 million deferred tax they can use?

Mr. CORETTE. What you are saying in effect is that by reason of taking more depreciation in the early life that the company has more cash left for its own purposes. That is true. You do have more cash left for other purposes, and you spend it.

Mr. CALLAN. If this $35 million were in the Treasury of the United States at 4-percent interest, this would be for the U.S. Government. Mr. CORETTE. Just the same as if the taxes had not been reduced a couple of years ago.

Mr. POAGE. Thank you.

(The additional materal furnished by Mr. Corette for inclusion in the record follows:)

RURAL ELECTRIC PEOPLE SERVE THEIR NEIGHBORS AND LIKE IT THAT WAY

In an age of bigness, rural electrics stand out by being small.

Only about 10 percent of the American people receive electric power through the rural electric cooperatives and consumer-owned power districts which serve the rural areas of the nation. Commercial electric companies serve eight times as many.

But rural electrics have never wanted to be giants. They were organized in the first place-not for profit, not to replace existing electric companies-but to serve their member-owners with adequate, efficient, economical electric service. Yes, rural electrics are small in an area of bigness. But bigness is not the same as greatness. In their own way, rural electrics try to achieve a special kind of