able to nearly 99 per cent of the farm families in the state. Electric cooperatives in Illinois have over 47,000 miles of line, serve nearly 148,000 members and employ over 1,000 people.

Not a single electric cooperative in Illinois has defaulted on its loans from the Rural Electrification Administration. They are recognized as a significant part of the business community in the areas in which they serve and as an integral part of the electrical industry in Illinois. In 1965, the Illinois General Assembly enacted the Electric Supplier Act, which established administrative and legal machinery for resolving territorial disputes between electric cooperatives and public utilities. This gives reasonable assurance that electric cooperatives will have the opportunity to serve the territories they have developed.

The outstanding record that electric cooperatives have made in Illinois could not have been accomplished without loans from the Rural Electrification Administration. Much of the growth of electric cooperatives in Illinois occurred after the adoption of the Pace Act by Congress in 1944. However, it is recognized that the financial position of electric cooperatives has changed in Illinois, as it has in other states, during the past several years.

For several years the rural electrification leaders in the state have been cognizant of the need to review the financing program for rural electric systems. The electric cooperatives in Illinois will need large amounts of capital for development in future years. It was questionable whether Congress would, or could, provide the needed capital for such development from appropriations. Leaders were aware that certain cooperatives would need loans at a two per cent interest rate to adequately serve their members, while a number of others could borrow money at an interest rate in excess of two per cent without adversely affecting their ability to adequately serve their members. As an indication of this thinking. below is an excerpt from a statement of philosophy adopted by the Board of Directors of Corn Belt Electric Cooperative, Inc., of Bloomington, on January 22, 1964:

"The interest rate charged by REA was set by Congress at 2% along with the requirement that co-ops render area coverage so that all rural people could have the benefits of electricity. We believe that today Corn Belt Electric Cooperative does not need any subsidy which might be afforded by 2% money and in conformity with such beliefs have refrained from borrowing from REA. Initially when we borrowed from REA the cost of money to the government was less than 2% and, therefore, our loans were not a subsidy. Today there are areas where this low rate of interest is still necessary to support and insure area coverage." While the Board of Directors of Corn Belt Electric Cooperative stated that it had no need for additional loans at two per cent interest, they recognized that some cooperatives still had this need. This policy was adopted even though the Board of Directors had no assurance that they could borrow large amounts of capital from any institution other than the Rural Electrification Administration. Clearly the Federal Electric Bank is needed for cooperatives in this position.

At the National Rural Electric Cooperative Association Region V meeting in 1963, delegates from the electric cooperatives in Illinois supported a resolution which called for a study of possible supplemental sources of financing for rural electric systems. In 1964, delegates to the annual meeting of the NRECA from the electric cooperatives in Illinois strongly supported a resolution which states in part: "we approve the proposal that NRECA and REA conduct studies in depth of the future capital requirements of rural electrification and means of meeting them, including an examination of the feasibility of the modifications (if any) which should be sought in REA financing."

A strong effort was made to disseminate information on the results of the Rural Electric Financing Study by Kuhn, Loeb & Co. and related studies by the NRECA among electric cooperative leaders and members throughout Illinois. The results of the study was explained at many meetings of electric cooperative members in Illinois. The provisions of the supplemental financing program developed by the National Rural Electric Cooperative Association, based on the Kuhn, Loeb & Co. study, was given wide distribution and discussed at many member meetings. The supplemental financing program, developed by the NRECA to which I am referring, is substantially embodied in H.R. 14000, now under consideration by this Committee.

The Board of Directors of the Association of Illinois Electric Cooperatives is comprised of 30 members. There is one member representing each electric cooperative in Illinois. At its regular meeting on January 20, 1966, the Board of Directors unanimously adopted the following resolution: "*** that the Board of Directors of the AIEC go on record in support of the principles embodied in

the Supplemental Financing Program proposed by the NRECA and that the delegate and alternate delegate from the AIEC to the 1966 NRECA annual meeting be instructed to support the principles embodied in the plan. * * *"

At the annual meeting of the National Rural Electric Cooperative Association in Las Vegas, Nevada, on February 14 through February 17, 1966, the delegates from Illinois strongly supported the resolution adopted by the delegation on supplemental financing for rural electric systems. Mr. Harold Whitman of Cameron, Illinois, a member of the Board of Directors of McDonough Power Cooperative of Macomb, Illinois, and Mr. Robert R. Wagner of Burnside, Illinois, a member of the Board of Directors of Western Illinois Electrical Coop. of Carthage, Illinois, both made statements in support of the resolution.

Because the provisions of the supplemental financing program for rural electric systems and the provisions of H.R. 14000 (and similar bills) have been thoroughly discussed and explained by other witnesses before this Committee, to avoid repetition, I have purposely refrained from discussing them in detail. Instead, I have endeavored to present information on how the adoption of the supplemental financing program would affect electric cooperatives in Illinois, and to clearly indicate to the Committee that electric cooperative leaders and a great majority of the electric cooperative members in Illinois support the principles embodied in the Supplemental Financing Program and in H.R. 14000.

The following statements are respectfully submitted in support of H.R. 14000: 1. It will relieve Congress of the necessity of providing money, by appropriations, for capital improvements for many rural electric systems. Congressional appropriations will be required only for systems that are not in a financial position to borrow money from the Federal Electric Bank.

2. The Federal Electric Bank will be similar to the Banks for Cooperatives. It will be a credit institution for rural electric systems which they will eventually own and operate to meet their credit requirements. It is generally agreed that the Banks for Cooperatives have been of great benefit to the cooperatives they serve, to their members and to the general public. There is every reason to believe that the Federal Electric Bank will have the same successful experience.

3. Rural electric systems borrowing money from the Federal Electric Bank will be in a better position to serve their members because they will not be subject to the restrictions that accompany loans from the Rural Electrification Administration.

4. The public image of rural electric systems will be greatly improved. Electric cooperatives have probably received more criticism for the loans they have received from government than any of the numerous other business entities receiving similar assistance. It is interesting to note that they have been subject to more criticism for receiving loans at an interest rate of two per cent than other entities and agencies that have received outright grants.

5. Because the Federal Electric Bank will be a strong financial institution, many rural electric systems will have capital available from the open money market through it which would never be available to them on an individual basis. In our opinion, the establishment of the Federal Electric Bank will be in the public interest and will definitely be to the benefit of the rural electric systems in the United States and the members they serve. In the long run it will enable the great majority of rural electric systems to provide their members adequate electric service at a reasonable cost, without government assistance.

On behalf of the Association of Illinois Electric Cooperatives, the 30 member cooperatives of the Association and their member-owners, I respectfully urge the members of this Committee to take favorable action on the supplemental finaneing program for rural electric systems embodied in H. R. 14000.

NORTHERN ELECTRIC COOPERATIVE, INC.,
Aberdeen, S. Dak., June 3, 1966.

Mr. JERRY ANDERSON,

Acting Manager, National Rural Electric Cooperative Association,
Washington, D.C.

DEAR MR. ANDERSON: The Board of Directors of Northern Electric Cooperative are deeply concerned about the shortage of loan funds for the Rural Electrification Program.

At the last Board Meeting, the following resolution was unanimously passed.

WHEREAS, the directors of Northern Electric Cooperative, Inc. recognizing that the current shortage of loan funds have a serious effect on achieving the adequate development of the Rural Electrification Program, and the crucial need for funds by the Rural Electric Systems, now therefore, it is

RESOLVED that the Administration release the impounded 1966 authorized loan funds of $95,000,000.00 forthwith: that adequate appropriations for 1967 be made in accordance with the request of NRECA, and, that we encourage action on supplemental financing legislation for the Rural Electric program by endorsing and supporting the passage of the Poage-Mills Bill and Bass-Cooper Bill presently before the Congress.

We urge you to continue your efforts in behalf of this great program.

Yours very truly,

A. U. HAUGEN, Manager.

The CHAIRMAN. We will next hear from Mr. Francis J. O'Rourke, legislative counsel of the National Associated Businessmen, Inc., who desires to submit a statement on behalf of Prof. Harry G. Guthmann. STATEMENT OF FRANCIS J. O'ROURKE, LEGISLATIVE COUNSEL, NATIONAL ASSOCIATED BUSINESSMEN, INC.

Mr. O'ROURKE. Mr. Chairman and members of the committee, I wish to submit a statement for the record. My name is Francis J. O'Rourke, and I am legislative counsel for the National Associated Businessmen, Inc. This statement is on behalf of Prof. Harry G. Guthmann, emeritus professor of finance, Northwestern University School of Business. His statement was prepared for submission to the committee on June 3, but he was unable to remain over another day; so, instead, I am submitting his statement, together with a summary of the statement that he himself prepared. That is all I have. The CHAIRMAN. Very well.

Without objection, they will be made a part of the record at this point.

(The prepared statement and summary covering of Harry G. Guthmann follow:)

A SUMMARIZING STATEMENT OF HARRY G. GUTHMANN, EMERITUS PROFESSOR OF FINANCE, NORTHWESTERN UNIVERSITY, SCHOOL OF BUSINESS

I favor the two objectives stated for the bill: namely, to enable REA borrowers to go to the investment market for funds and to speed the day when they will be independent of Treasury financing.

My chief suggestions for insuring the success of the Electric Bank and building a credit standing that will minimize interest costs are:

First, that the Bank shall make all distribution-type loans as well as generationtype loans. The greater financial strength and earning power of the distribution borrowers will increase the credit standing of the Bank's debentures. Combined earnings of distribution borrowers now equal 6 percent on their debt. The claim that the distribution co-ops will be handicapped if they cannot continue to borrow at 2 percent ignores the fact that their present earnings are already at a rate higher than even the present high market rate of interest. They will continue to enjoy this margin on present borrowings and pay more only on new borrowings. Because this new money will be mostly for additional customers, largely non-farm, on lines already built, or for more power to existing customers, they should continue to increase their customer density and earning power. Second, in order that all co-ops, including non-borrowers, have a permanent interest in the Bank, ownership of Class C stock should be compulsory rather than optional. The purchase of stock equal to only one percent of the total loans made by REA in the past would provide a capital of about $45 million. In the absence of compulsory ownership by all co-ops, investors in Bank debentures might fear that in the future the stronger co-ops would free themselves of debt and cease to be stockholders.

Third, investors' confidence would be strengthened by stating more clearly some things referred to by the bill:

(a) The machinery for settling territorial integrity problems should be made clear as it was when the Tennessee Valley Authority was launched on its course of public financing.

(b) The procedure for making generating loans should insure that the distribution co-ops will benefit from lower priced power than from existing sources. Investors will regard generating plants as poor security if they do not provide a supply of power at a lower cost than can be had from investor-owned utilities in a given locality.

To hasten the independence of the Electric Bank, the investment of the Treasury should be limited to what is needed to support the Bank's debentures and then it should be repaid when the need is past. The bill provides for an investment of $50 million per year by the Treasury in Class A stock, or a total of $750 million over 15 years. The maximum financing projected for this period is $9,500 million. Borrowers are required to buy stock equal to 5 percent of their borrowings. Consequently only another 5 percent, or $475 million, of Treasury financing would be needed to permit Debenture financing for the full $9 billion under the ten-for-one limitation set in the bill. And even this need would be met, at least in part, by the sale of other stock provided for in the bill and by retained earnings. If the drain on the Treasury is to be minimized and the transition to co-op ownership hastened, the Treasury purchase of stock should be limited each year to the support actually needed.

To increase the usefulness of the Bank, it could be made the depository of its members' excess cash. Such cash could be used to make supplementary loans to other members. Upon the recommendation of the Rural Electrification Administration, co-ops have been encouraged and in many cases have accumulated cash reserves equal to 15 percent of total utility plant.

Some people are concerned as to the ability of co-op borrowers to pay the increased cost of borrowing from the Bank. An appropriate remedy might be loans, or even grants, to individual distribution co-ops unable to earn enough to meet the interest obligation without raising their rates to an unreasonable level. Certainly it would be less expensive for the Treasury to meet the deficiency of individual co-ops unable to earn the market rate of interest than to provide 2 percent money for all, both the rich and the poor. Moreover, by pinpointing its assistance and putting it on a year by year basis, the Treasury could expect the burden would lighten as the trend to higher earnings continues. Under the existing system, the burden of 2 percent money continues for a 35-year period regardless of need.

In short, the present bill would seem likely to provide the proposed Electric Bank with a better basis for investment success and greater assurance of a more rapid transition to independence by limiting the amount of Treasury aid to the sum actually needed, by insuring the soundness of its loans, especially those for generating and transmission purposes, and by stating the specific steps whereby the Bank shall move to independence.

STATEMENT OF HARRY G. GUTHMANN, EMERITUS PROFESSOR OF FINANCE, NORTHWESTERN UNIVERSITY SCHOOL OF BUSINESS

Mr. Chairman and members of the Committee, my name is Harry G. Guthmann and I live at 718 Noyes Street in Evanston, Illinois. I am an emeritus professor of finance, Northwestern University in their School of Business, where I taught from 1927 until last June. I have taught in other places, such as the University of California at Berkeley, the University of Texas, and Syracuse University.

I appreciate very much the opportunity of appearing before your Committee to testify upon a bill which has such an important bearing upon the future of the Rural Electrification Administration. I might add that this testimony represents material that I have gathered myself. The views are my own and not necessarily those of the University with which I have been affiliated or of anyone else.

The two purposes stated in the preamble of H.R. 14837, introduced by Representative Cooley to amend the Rural Electrification Act of 1936 and provide for a Federal Bank for Electric Systems, should meet with general approval. They are to provide (1) a beginning of public financing to replace the present

dependence upon the federal Treasury and (2) the objective that this bank and a similar one for rural telephone systems shall become entirely privately owned, operated, and financed corporations.

This statement is one of analysis and commentary on the Electric Bank only, which is the larger and more complex institution. The Rural Electrification system already greatly exceeds the Tennessee Valley Authority in electric utility assets, revenues, and earnings. The Electric Bank proposed in this bill opens the prospect of an institution larger than any of the existing farm credit agencies. The first part of my testimony suggests changes that might improve the credit standing of the Bank and lead to a more ready acceptance of its securities by investors and lead to the earlier independence and complete ownership of the Electric Bank by its cooperative members.

Finally, brief reference will be made to certain features that are referred to in the bill, which, while they may not be essential to maximizing its financial standing and minimizing the cost of its credit, nevertheless deserve attention. Suitable provisions would bring the proposed Electric Bank more nearly into line with practices that have been found acceptable in other federal farm credit agencies. They would also accord with the general philosophy of such agencies of moving steadily away from an initial dependency upon support during the period of their promotion and uncertain financial standing towards independence as their successful performance established their ability to stand on their own feet.

Part I. Changes proposed to maximize the credit standing of the Electric Bank 1. All lending for the acquisition of property for both generating and distribution co-ops should be channeled into and be made by the Electric Bank. While the bill is not specific, there is a general implication that the Bank is primarily to serve the demand for generating and transmission loans and that distribution co-op loans may continue to be made from 2 percent advances from the U.S. Treasury. To continue the latter loans would ignore:

First, the increased security which the distribution loans would give to any Debentures issued by Electric Bank. They diversify the security behind the Debentures. Moreover, the distribution co-ops show the larger earnings relative to interest charged and they have accumulated a more substantial surplus of assets over debt.

Second, it would ignore the ability of the distribution borrowers to pay going market rates of interest. The distribution borrowers have shown increasing earnings and are earning substantially more than the 2 percent they now pay. As a system, they now earn six percent on their present debt. They should continue to enjoy a surplus over the present low 2 percent on existing loans and will only pay higher rates for loans to finance new utility property. Because they have substantially covered their respective areas, new customers will represent increased customer density and higher demand per customer both of which should be served at decreasing costs from those for the existing business. The favorable earnings situation for the distribution co-ops is reflected in the following figures. For the power-type co-ops, earnings have grown but at a less rapid pace than debt.

The problem of the co-op unable to earn interest charges is faced below. Third, to exclude the distribution co-ops would ignore the fact that the bulk of their new customers, who made additional funds necessary, are nonfarm customers. Some are rural but many are small town, suburban, commercial and industrial. Because they are added to an existing system, they should require little, or no, subsidy.