greatness. . . the kind that comes from providing a necessary service, and providing it continuously, economically, and dependably-but with very little fanfare. Rural electrics will probably never serve a much larger percentage of the American people than they do today, but that's all right. With the help of Rural Electrification Administration loans, rural people created the rural electrics to serve themselves and their neighbors, and this is what they will continue to do They like it that way.

Mr. R. K. HANSON,

Manager, Sun River Electric Cooperative, Inc.,
Fairfield, Mont.

THE MONTANA POWER Co.,
Butte, Mont., May 6, 1966.

DEAR MR. HANSON: In recent weeks there has been considerable publicity given in Montana papers to a statement, attributed to Rural Electrification Administrator Norman M. Clapp, which accuses Montana Power Company of refusing to sell power to rural electric cooperatives which are seeking to serve new customers. Mr. Clapp is supposed to have said that the co-ops were buying power from the Bureau of Reclamation because of power supply problems with this Company.

We feel that Mr. Clapp's erroneous statements may be accepted by the people in your Cooperative as the policy of this Company and, for that reason, we would like to clarify and restate our position.

The position and policy of The Montana Power Company with respect to supplying power to your Cooperative was clearly identified by meetings held with your Board and representatives of Montana Power Company, namely, Harold Dickinson, Dick Setterstrom and Geo. W. O'Connor, in the year of 1964, at which time we offered to furnish on a long-term basis the power needs of your Cooperative. This position has not changed since that time. We renew the offer as of this date.

If you are desirous of writing a 10-, 20- or 30-year contract with The Montana Power Company, to buy all of your power requirements from this Company, we will guarantee to provide your power needs.

The only reservation we would incorporate is that we would retain the right to compete for new power loads that we thought we could serve, and we would continue to exercise our prerogative to litigate any disputes over the right of the Cooperative to serve certain loads, as expressed in the Federal and State laws. However, if you were to run service to a load over which there was a dispute, we would continue to serve you power during the time that the dispute was being litigated.

Thus, it must become apparent to your Cooperative that Montana Power Company has and will have adequate power to serve the loads of your Cooperative. This wholesale supply is available to you.

We hope this will clear up any confusion that the erroneous statements, attributed to Administrator Clapp, might have created.

Sincerely,

GEO. W. O'CONNOR.

The Montana Power Co. and Montana rural electric cooperatives, calendar 1964

Source: Montana Power 1964 Report to Stockholders; 1964 Financial and Operating Report; 1964 Annual Statistical Report of REA, pp. 22-29.

SECTION-BY-SECTION ANALYSIS OF H.R. 14837

Section 1 of the bill would have Congress declare that "the growing capital needs" of the rural electric and telephone systems "require" the establishment of a Federal Bank for Rural Electric Systems and a Federal Bank for Rural Telephone Systems. However, the rural electric systems do not have "growing capital needs" to the extent contemplated by this bill unless they intend to take over customers now served by other utility systems which have capacity available for continued service to these customers. The bill states the banks would furnish "assured and viable sources of supplementary financing" with the objective that said banks will become entirely privately owned, operated and financed corporations. However, there is no assurance in the bill that the Federal Government will ever be repaid its subscription to the proposed electric bank. The word "supplementary" in line 8, and the word "additional" in the title of the bill, are contrary to the President's budget message for fiscal year 1967, in which the President stated that efforts were underway to develop "alternative" means of financing the rural electrification program.

Section 2 of the bill would amend the Rural Electrification Act of 1936 by adding four new titles. Title III concerns the electric loan account, and Title IV the electric bank. Titles V and VI concern the telephone systems.

Section 301 would establish in the Treasury of the United States an account to be known as the rural electrification account.

Clause (1) would place in the account all notes, bonds, obligations and property now held by the Administrator on loans heretofore or hereafter made under sections 4 and 5 of the act. On June 30, 1965, there were approximately $3.2 billion of such outstanding loans made by the Administrator.

Clause (2) would place in the account the undisbursed balances of electrification loans made under sections 4 and 5. As of June 30, 1965, there were over $900 million of loans approved by the Administrator, but on which no advance had been made.

Clause (3) would place into the account all collections of principal and interest received on or after July 1, 1965, on outstanding loans under sections 4 and 5. At the present time, such repayments are being made at the rate of about $220 million per year (approximately $155 million toward repayment of principal and the balance represented 2% interest payments). The retroactive provision would give the account the collections due in fiscal year 1966 as a source of ready cash.

Clause (4) would place into the account all appropriations for loans made under section 3 of the act, and the unexpended balances of funds available for loans under sections 4 and 5 of the act. Thus, any future appropriations by Congress for direct loans would go into the loan account.

Clause (5) would place in the account shares of capital stock in the electric bank acquired by use of the account, and monies received from the bank upon retirement of such shares. The $750 million of Class A stock of the bank to be bought by the Government would thus become an asset of the account.

Section 302 concerns the liabilities and uses of the account, and subsection (b) provides that the assets shall be available for (1) loans under sections 4 and 5 to the extent authorized in annual appropriation acts (or available pursuant to section 3 of the act), (2) payment of interest on the 2% loans, (3) investment in the capital stock of the bank in accordance with section 405 (a), and (4) payment of principal on the 2% loans.

Section 303 provides that monies in the account shall remain on deposit in the Treasury of the United States until disbursed.

Under the proposed loan account, Congress would have less control over the actions of the Administrator-Governor, who would have large amounts of money and obligations available in the loan account.

Section 401 would establish the electric bank "subject to the supervision and direction of the Secretary of Agriculture." Once established, the bank could continue to exist and make loans unless and until Congress might disestablish it by statute. Such establishment of the bank inside the Department of Agriculture is in contrast to the 37 agricultural credit banks (the Federal land banks, the Federal intermediate banks, and the banks for cooperatives) which are supervised by the Farm Credit Administration, an independent agency.

Section 401 also states that the general purposes of the bank shall be to obtain an adequate supply of suplemental funds "to the extent feasible" from non-Federal sources, to utilize said funds in the making of loans under section 410, and to conduct its operations "to the extent practicable" on a self-sustaining basis. These words "to the extent feasible" and "to the extent practicable" indicate that the bank will be neither non-Federal nor self-sustaining. It will be subsidized indefinitely by funds diverted from the Federal Treasury, but still operate virtually free of Congressional controls or surveillance.

Section 402 concerns the general purposes of the bank and contains mostly boiler plate provisions. Subsection (g) provides that the bank shall have the power to "determine the character of and the necessity for its obligations and expenditures, and the manner in which they shall be incurred, allowed, and paid. subject to provisions of law specifically applicable to Government corporations." This would largely free the bank and its loans from review by the Comptroller General except that he might make a business-type audit of the bank's finances. A proviso states that the bank shall undertake no new types of activities not included in the annual budget program. This proviso is not a basis for Congressional control, however, because the budget program is prepared by the Executive Branch and the Bureau of the Budget, not by the Congress. Moreover, it should be noted that this proviso to section 402 (concerning general powers of the bank) does not restrict the lending powers of the bank under section 410.

Section 403 would establish a Board of Directors consisting of 7 members, 4 designated by the Secretary of Agriculture from among the employees of his Department, and 3 initially appointed by the Secretary, but thereafter elected by borrowers from the bank. Thus, the Board will be controlled by the Department of Agriculture, in direct contrast to the Farm Credit Board (which has supervisory responsibility over the 37 agricultural credit banks) which consists of 13 members, 12 of whom are nominated by the 12 farm credit districts, and only 1 by the Secretary of Agriculture.

Section 404 would provide that the REA Administrator shall serve as the chief executive officer of the bank and be called "the Governor." Thus, the REA Administrator would have "two hats," and would be able to make section 4 loans at 2% interest, and also loans from the bank capital. If an applicant could not meet the restrictions of the RE Act, then the Administrator could put on his "other hat" and make loans from the bank. The bill sets forth no criteria to guide the Administrator-Governor as to which type of loan he should grant to individual applicants. He would have immense power and authority, with very little Congressional control over his actions and policies as Governor.

Section 405 concerns the capitalization of the bank, and provides that the United States shall furnish capital to the bank at a rate of $50 million per fiscal year for 15 years, unless an appropriation act shall specify another amount. Thus, $750 million would be automatically diverted from the Federal Treasury and furnished to the bank, unless Congress takes the intiative in some future year. The bank would make no payment for the use of this capital, in contrast to the 25% franchise tax on net operating revenues paid by the agricultural credit banks to the Government so long as Government stock is outstanding in the bank.

Subsection (a) contains a proviso that the Secretary shall make a report by July 1, 1971, on the status of the capitalization of the bank with recommendations concerning "the continuation thereafter of such capitalization."

Subsection (b) would establish the four classes of A, B, C and D stock. Only B and C would be voting stock.

Subsection (c) provides that the Class A stock shall be issued only to the REA Administrator (who thus becomes principal stockholder and chief executive officer of the bank). It provides further that the Class A stock shall be redeemed and retired by the electric bank "as soon as practicable after June 30, 1981, but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank." Thus, the Board, can determine when, if ever, it would repay the Federal subscription, and the Federal involvement could continue indefinitely.

Subsection (d) requires each borrower from the bank to invest in Class B stock 5% of the amount of loan funds obtained. There is nothing in the bill to prevent a borrower from obtaining 105% of its capital needs and investing 5% in Class B stock. Since, under section 406 (a), the bank can sell debentures up to 10 times the paid-in capital, each loan made by the bank enables it to increase its capital 10 times 5%, or 50% of the value of the loan.

Subsection (e) provides that borrowers may also purchase Class C stock. This, also with the factor of 10 multiplier, would permit increase of bank capital. Subsection (f) provides that consumers of borrowers may purchase Class D stock and this similarly permits increase in bank capital.

Subsection (g) is an attempt to circumvent state laws. It provides that if a firm, association, corporation or public body is not authorized under its state laws to acquire stock in the electric bank, it may pay an equal sum into a special fund and receive equivalent rights and status as a stockholder.

Subsection (h) provides for payment of interest and dividends on Class C and D stock before payment of any dividends to Class A stock.

Section 406 concerne the borrowing power of the bank and authorizes it to obtain funds by the sale of electric debentures up to 10 times the paid-in capital and retained earnings of the electric bank. It states that the bank shall insert in its debentures language indicating that such debentures "are not guaranteed by the United States and do not constitute a debt or obligation of the United States * However, this provision is rendered meaningless by the authority of the bank in subsection 406 (b) to obtain funds by writing notes to the Secretary of the Treasury. Electric debentures would also, under this section, be lawful investments for public trust funds, permitting trust and public funds to be invested in such debentures.

Subsection (b) provides that if there are insufficient funds in the assets of the bank to pay interest or principal on its debentures, the bank may obtain funds for this purpose "by making and issuing notes to the Secretary of the Treasury." Furthermore, the Secretary of the Treasury is "authorized and directed to purchase" any such notes. Thus, the bank is granted a free license to use Treasury funds, and the debentures receive a "back door" guarantee. Section 407 provides that the electric bank may utilize the facilities and services of employees of the REA or any other agency of the Department of Agriculture "without cost to the bank," except to the extent that administrative expenses may be recovered by interest on loans other than intermediate loans. This continued subsidy of administrative costs of the bank, as well as the direct loan program, contrasts with the operations of the 37 agricultural credit banks, which pay all of their own administrative costs, as well as those of the supervisory Farm Credit Administration. In fiscal year 1965, the administrative costs of the REA for electric borrowers under the direct loan program was over $6.3 million.

Section 408 provides that the Governor shall make an annual report, and shall act as fiscal agent of the United States when so designated by the Secretary of the Treasury.

Section 409 provides that the property, franchise capital, reserves, surpluses, security holdings, and other funds, and the income of the electric bank shall be exempt from all taxation "now or hereafter imposed by the United States or by any State, territorial, or local taxing authority." A proviso permits the bank to make payments of property taxes after acquisition of property. Section 410 concerns the lending power of the bank. Subsection (a) provides that the Governor is authorized to make loans, "in conformance with policies established by him," to borrowers under section 4 or to corporations or public bodies which are owned or controlled by section 4 borrowers. Thus, the bill contemplates creation of super-cooperative organizations to obtain loans from the bank. The loans may be (1) for the same purposes as under section 4, and (2) "for the purposes of financing, or refinancing, the construction, improvement, expansion, acquisition, and operation of electric generating plants and electric transmission and distribution lines or systems, in order to improve the efficiency, effectiveness, or financial stability of such corporations or public bodies * * Thus, the Administrator-Governor could make loans for any purpose he believes

would "improve the efficiency, effectiveness or financial stability of the borrower." It is difficult to conceive of a loan to a borrower which would not improve the "effectiveness" or the "financial stability" of the borrower, and thus the Administrator would be free to make any loan he might desire. This language is the same as that promulgated by the Administrator in 1962 as "the third criterion" for section 4 loans, but never recognized by statute. It would give the Administrator-Governor broad authority to make loans for expansion and acquisition by bank borrowers of properties now owned by private companies or municipal corporations. The present restrictions in the REA Act concerning service to persons in rural areas would not be applicable to loans from the bank under section 410. Thus under this bill, the Administrator-Governor would obtain his long-sought freedom from Congressional "restrictions."

Section 410 contains three provisos, each of which could be used by an aggressive Administrator-Governor as a basis for expansion of the cooperative movement rather than as a restriction upon his lending power.

The first proviso contemplates loans for acquisitions, and states that the cumulative size of the electric system "shall not be greater than the borrower's existing system at the time it receives its first loan from the electric bank * This proviso, if honored, would prevent cooperatives from more than doubling their size at one time, but could be easily evaded by individual cooperatives amalgamating before obtaining a "first" bank loan to make an acquisition. After acquisition, but before applying for another loan, the resulting organization could then form a new legal entity, and thus become a new borrower eligible for another "first" loan.

The second proviso contemplates loans for exchange of properties.

The third proviso contemplates loans for the construction of generating and transmission facilities. It provides that the resulting capacity of such facilities shall not be in excess of power requirements of the ultimate consumers of the borrower, its members, and members of members "projected over the estimated life of such facilities," which might be up to 40 years. Under this authority, loans could be made to construct a generating facility 5 to 10 times larger than that needed at the time of construction.

Subsection (b) provides that loans from the bank shall be subject to certain "restrictions". It authorizes a loan period of 50 years, in contrast to 25 years in the original 1936 Act, and 35 years for current section 4 loans. This is longer than the period of depreciation for practically all electric facilities, and the facilities in most cases would be worn out or abandoned before the loan would be repaid.

Subsection 410(b)(2) provides for two types of loans: intermediate loans at a maximum interest rate of 4%; and, "other" loans which would bear interest at a rate which reflects the current average rate payable by the electric bank on its electric debentures, and administrative expenses and estimated losses of the electric bank, all as determined by the Governor. The bill provides no meaningful criteria to separate grants of intermediate loans from grants of "other" loans. It states that intermediate loans shall not be made if the Governor determines, under standards established by the Secretary, that the borrower is capable of paying the higher rate and "achieving the objectives of the Federal rural electrification program."

Subsection (c) permits the Governor to adjust the schedule of payments of interest or principal on loans from the bank.

Section 411 provides that any receipts from the activities of the banks shall be available for all obligations and expenditures of the electric bank, thus giving the Administrator-Governor broad discretionary authority.

Section 412 provides that the Secretary shall transmit to the President for transmission to the Congress recommendations for legislation for conversion of the electric bank to private ownership "as promptly as practicable" after all