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The objectives of the program are the same for the supplemental financing as they are for the basic 2-percent financing. Only organizations that have received loan commitments from the REA, which in the case of an electric bank includes an organization owned and controlled by the REA borrowers, can borrow from the bank. The program objectives are the same for both types of loan programs of the bank and of the REA loan programs.
Question: Could not the Governor make loans to serve persons in places with more than 1,500 population while the Administrator could
We might give the next question, too, because both can be answered together.
Question: Could not the Governor make loans to provide service to persons who already had central station service while the Administrator could not?
Under section 410 (a) (2), the answer to both of these questions is "Yes," but only to the extent that such loans are made in order to improve the efficiency, effectiveness, or financial stability of the electric. systems financed under section 4 and section 410 of this act, to which the 1,500 population limit and the central service station limitation would otherwise apply. In addition, if acquisitions of electric facilities or exchange of properties should be involved, these are subject to further restrictions stated in section 410 (a)(2).
Question: How will be the Governor-Administrator decide that on a given application he should make an intermediate loan from the bank and not a loan at 2 percent from the REA?
I think that I have indicated the answer to that question, Mr. Chair
Question: Where does H.R. 14837 provide for him any standards to assist him in making such a decision?
Again, I think my earlier comments dealt with this, Mr. Chairman. I think we have extensive administrative and legislative history on the REA program, and there will no doubt be more legislative history in the consideration of this bill which would clearly spell out the purposes of this financing and the necessary criteria that would have to be developed to make the determination.
Question: If Congress should fail to provide the AdministratorGovernor any standards, will he not be subject to great pressure from borrowers seeking loans at the most favorable terms?
Here, again, I cite the key importance of making the feasibility study on each individual loan application do the final job of determining the type of financing that the borrower requires or is entitled to. Question: What, specifically, will be the criteria or means used to determine the amount of 2-percent loan funds to be requested by the REA Administrator every year?
If this legislation is enacted, I would expect that the Administrator of the REA would make it clear, as a matter of policy, that priority for 2-percent loans would be given to applications for which it can be shown that the 2-percent financing is necessary to accomplish the program objectives which I have cited.
Then, it would be a matter of detailed and specific justification and review, going to the Budget Bureau each year, to the Congress and through the appropriation processes to indicate the amount of 2-per
cent financing to be authorized as necessary to meet those needs. This would provide in itself a key point of congressional control over the entire program, because the amount of 2-percent financing is bound to be wrapped up in the impact and role of the bank supplemental financing.
Question: What, specifically, will be the criteria and procedure for determining the interest rate charged each borrower in a three-interestrate program?
As to the procedure, I suppose that there would be various ways of doing it, but perhaps the borrower might come first to the REA to apply for the basic 2-percent loan. If the feasibility study shows that the 2-percent rate is not necessary for the successful achievement of the program objectives, the loan would be referred to the bank for consideration. Or it would be possible, I am sure, for the borrower to voluntarily choose to go to the bank first if it cared to do so. I am sure that there is need for flexibility in these procedures. The important thing is that in both the policy and the procedures pursued we not lose sight of the program objectives and the essential fact that all of this financing, whether it be at 2 percent or 4 percent or 5.5 percent, is designed to get the job of rural electrification done. Whatever financing the borrower needs should be supplied without wasting the resources of the public or providing a type of financing which is more favorable than the borrower can afford without jeopardizing the program objectives.
Question: What, specifically, is meant by "parity of rates and services," and what will be the procedure for determining this? Whether these criteria are spelled out in the bill or left to the REA Administrator, it is appropriate that the Congress know this before passage, especially in light of the Administration request for 2-percent funds this year.
Comparability or parity of rates and service is subject to a variety of measurements. We have experimented with some in our preparation for this presentation. We have made studies to determine where our borrowers stand in respect to rates at certain consumption levels. We can compare the consumer's bill for 250 kilowatt-hours purchased from an REA-financed rural system with the typical bill compiled by the Federal Power Commission for utilities in the cities. We can compare it with the typical utility bills for specific cities near that borrower, for usage of 250 kilowatt-hours, 500 kilowatt-hours, 750 kilowatthours, and so on. We can compare averages. We can compare the cost per kilowatt-hour for all power sold for farm and residential purposes, with the average cost per kilowatt-hour for residential sales in nearby urban communities. We can compare the average cost per kilowatt-hour for other than farm-residential consumers on the rural systems with that of neighboring urban systems. There is a variety of ways to compute this and project it into the feasibility study in terms of revenues to be realized from comparable rates. The important thing, of course, is that we are striving for a service to the rural consumer which is at comparable cost and of comparable quality to the service enjoyed by the urban consumers in that same general area.
Question: What specific restrictions now imposed on generation and transmission loans will not apply to the high-interest-rate loans of either bill?
With respect to present administrative practice, which I have gone into already, the capacity to be financed is restricted to a size which will be required by 10 years' growth of beneficiary loads. The administration bill, H.R. 14837, provides for generation and transmission loans for facilities which "shall be of a capacity not in excess of the power requirements of the ultimate consumers of the borrower, its members and members of the latter, in respect of which consumers loans have been made under section 4 and section 410 of this act, projected over the estimated life of such facilities." There is this greater flexibility in sizing of generation capacity and transmission capacity, based on a longer growth period.
Question: Can the Congress or the REA lending agency still expect borrowers of the higher interest rate loans to provide area coverage for their members?
Our whole approach to supplemental financing assumes that borrowers would not get financing at interest rates higher than they could afford and still accomplish the program objectives, including area
Question: What rate of interest, at today's market prices, will be required for the highest interest rate loan?
As I indicated earlier, it is expected that the bank would probably be required to pay 5.25 percent if it borrowed money in the market. If you add to this the charge of the administrative expenses allocable to the electric program which, we figure, would be a factor of another one-fifth of 1 percent, and then add to that a further increment necessary to provide a reserve against losses, we anticipate that the total cost of such market rate loans on an unamortized basis would be 5.5 percent.
Question: In the next 15 years, what does the Administration anticipate as the need for 2-percent loans?
Of course, this is something that will be determined through the budget process and through the appropriation process by the Congress. The CHAIRMAN. If I may interrupt you. Let us go off the record, for a moment.
(Discussion was had outside of the record.)
The CHAIRMAN. Back on the record.
Mr. DOLE. It would be satisfactory if he would place the answers in the record; thus we will have the record of them later then.
The CHAIRMAN. Can you prepare the answers and put them in the record?
Mr. TEAGUE of California. We will then have an opportunity to see them.
The CHAIRMAN. Let us go off the record again.
(Discussion was had outside the record.)
(The following letter was later submitted by Mr. Clapp:)
U.S. DEPARTMENT OF AGRICULTURE,
Hon. HAROLD D. COOLEY,
Chairman, Committee on Agriculture, House of Representatives. DEAR MR. CHAIRMAN: When I was called back before your Committee on June 7, 1966, to respond to questions raised concerning the REA supplemental financing bills, I endeavored to deal with the objections raised by witnesses opposing
the bills. As I pointed out, however, much of the testimony of the opposition witnesses was related to past controversies over REA loan approvals and other matters not particularly germaine to the proposed legislation under consideration, and I refrained from imposing upon the Committee's time and patience to deal with these matters.
Instead I requested that I might have an opportunity to file a written response covering these charges and allegations of the opposition witnesses merely to set the hearing record straight. You very considerately agreed to this request.
Since the close of the hearings on June 22, we have examined the complete record of testimony. In view of its already great bulk and in further consideration of the fact that the questions raised on past REA policy and loan approvals have been answered repeatedly before the Appropriations Committees of the Congress, I am reluctant now to burden the record of your Committee further.
If members of the Committee are interested in any of these matters raised which I have not dealt with in my testimony, we would, of course, be pleased to supply the information directly or from the other sources I mention.
Again, I wish to thank you and the Committee for the courtesies extended me and for the full opportunity to respond to the questions raised. I ask that this letter might be included in the hearing record in place of the detailed rejoinder for which I previously sought your permission.
NORMAN M. CLAPP, Administrator.
The CHAIRMAN. We will have to adjourn now, because the House is convening. We will ask you to come back tomorrow morning at 10 o'clock to finish up.
I want to congratulate you on the forthright manner in which you have responded to these questions. I know that it has meant a considerable amount of work on your part. We will ask you to come back tomorrow and finish this, and then we will have you come back again later for further questioning.
Mr. CLAPP. I will be glad to do so, Mr. Chairman.
The CHAIRMAN. Is there anyone of those with you who would desire to make a further statement?
Mr. CLAPP. There is no one with me who cares to make a statement now.
The CHAIRMAN. Without objection, Mr. Hansen of Idaho will be given permission to insert a statement in the record from the Idaho Cooperative Utilities Association, Inc., at this point. (The statement referred to follows:)
STATEMENT OF THE IDAHO COOPERATIVE UTILITIES ASSOCIATION, INC.
At the Idaho Cooperative Utilities Association, Inc., Board of Directors meeting. held at the Owyhee Hotel, in Boise, Idaho, on May 19, 1966, the Board of Directors went on record as supporting the Poage Bill (H.R. 14000) on supplemental financing for rural electric and rural telephone cooperatives.
The cooperatives are doing a job others either could not, or would not do. Many, even some of the smallest ones, are beginning to become financially suecessful. With financial stability, the cooperatives are voluntarily asking that legislation be passed that will eventually lead to their financial independence from the U.S. Treasury.
For years, the greatest criticism of the rural electric and telephone cooperatives was that they were allowed to borrow funds for only two per cent interest. Now through H.R. 14000 the cooperatives want to take the first step away from what has been called a government subsidy.
The Poage Bill recognizes that some of the cooperatives still must borrow two per cent money. It provides for the creation of what will become their own national bank for cooperatives. The Bill provides an average whereby the cooperatives will ultimately be no longer dependent upon the U.S. Government for finances.
It is impossible to understand why anyone who formerly criticized rural electric and telephone cooperatives for borrowing two per cent money would now oppose H.R. 14000.
Idaho Cooperatives Utilities Association, Inc., urges the passage of the Poage Bill (H.R. 14000).
The CHAIRMAN. We will recess at this time until 10 o'clock tomorrow morning.
(Whereupon, at 12 noon, the committee recessed, to reconvene at 10 a.m., Wednesday, June 8, 1966.)