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found the directors and managers to be fair and realistic to do business with. Once an agreement is consumated and ratified by both parties, they have lived up to their commitments religiously. I trust this answers your inquiry. If we can be of further advice at any time, please feel free to call on us.

This was written by E. A. Mahana, business manager of the International Union of Operating Engineers.

Mr. CEJKA. The question of subsidies has been raised. We do not feel that low interest rates constitute a subsidy, when we have agreed to serve all areas which did not have adequate central station service, regardless of revenue potential.

One big and significant difference is that the membership of the REC's have, by their own action, requested a way to finance their operation by the formation of a bank. This is an unusual and almost unprecedented action. We also realize it may be years, if ever, before all electric cooperatives can do without 2-percent money.

We agree, we pay no income tax. The reason is simple; we have no profit. We operate on a cost of service basis and any money left after payment of costs is the property of, and is returned to, the member in the form of patronage refunds. We pay all other taxes any other utility pays. Corn Belt's property tax in 1965 was 13.7 percent of our revenue.

The statement has been made that our job is done, since 99 percent of the farms are electrified. As cooperatives, we are proud of our part in getting service to these farms. The areas we serve are the skim milk areas with, in our case, about 2.3 members per mile of line. This was the area no investor-owned utility wanted. They said it wasn't profitable to serve. They were right, they couldn't, and still make the profit they wanted. The REC's, with the help of REA and Congress, do serve these consumers and do it at a reasonable rate. We know our job is not finished. It is just started. We have developed this marginal territory and furnished the power needed. Our members now have the benefits of modern living. According to all projections, their loads will increase to four times the present in the next 20 years. To handle this, we must install bigger transmission lines and generating equipment. This takes adequate financing. A pact was made between Congress and the REC's. We were to extend service to all who request it, in return for adequate financing. We have kept our part. We feel it is an obligation of Congress to continue as they have in the past to furnish 2 percent of funds for those who need it, and request they establish a bank based on reasonable criteria for those who can use it.

Lack of adequate financing is slow death to any business. We must maintain the G. & T.'s where needed in the areas where Federal power is not available in adequate amounts to supply our needs. Without it, we would be unable to make reasonable negotiations. Some of the areas we have developed are now looked on with envy by others. If, because of inadequate financing for us, they are allowed. to take this over, they will get the cream, and we will be again left with skim milk, and will be unable to do our job.

In our own case, our studies show we need 2-percent money for some years to come. Ours is an agricultural load with no big industries.

Ninety-eight percent of our load is the farm and farm home. This type of load gives us a poor load or use factor for our equipment, which we hope to improve as industry moves into our area. We then should be able to pay higher rates of interest and use bank funds.

We want to go on record as supporting 2-percent funds for those of us who need it. We support the stand of NRECA on the supplemental financing bill, especially the H.R. 14,000, which we feel will, with 3-percent intermediate financing, more nearly meet the needs of the cooperatives. We, personally, have no objection to congressional review of the bank and its operation.

We thank this committee and the Congress for your cooperation and assistance in the past for making it possible, through legislation and appropriations, for me and my neighbors to have an adequate supply of electricity and to serve the unserved in rural America. We also thank you for the opportunity to appear and testify before this

committee.

Thank you.

Mr. POAGE. Thank you very much. You have made a good

statement.

(The complete statement of Mr. Cejka follows:)

TESTIMONY OF R. R. CEJKA, PRESIDENT OF CORN BELT POWER COOPERATIVE

Mr. Chairman and members of the House Agriculture Committee, I am R. R. Cejka, President of the Board of Directors of the Corn Belt Power Cooperative of Humboldt, Iowa. I have been a farmer all my life, livestock being my principle agricultural production. I have been intimately acquainted with Rural Electrification Administration and its program since its inception. I helped organize our distribution cooperative, Pocahontas Rural Electric Cooperative, in 1936, and have been a member of its Board since that time. I helped organize and served on the Board of Central Electric Federated Cooperative Association, one of the parent G & Ts, which later formed Corn Belt, and have been a member of the Corn Belt Board since its organization in 1948. I have been President of the Corn Belt Board since 1961 and a member of the Iowa State Board of Rural Electric Cooperatives since 1957. As one of the pioneers of Rural Electrification, and with my experience as a Board Member of one of the oldest G & Ts in the United States, I feel I am qualified to speak about Rural Electric Cooperatives and their operation.

When the R.E.A. Act of 1936 was first passed, it was the opinion of most people that this money would be borrowed by the then existing power suppliers to serve the rural areas. While a few did do this, most Investor-owned Utilities felt is would never be profitable to serve the sparsely populated rural areas. If a farmer wanted service, he was told, "Yes, we will serve you, if you will pay the construction costs for the line and transformers needed and then deed them to the company." This meant the cost of central station service was too expensive for all but a few who lived on or very near an existing line. All others were left out, with no hope of service at a cost which would afford them a standard of living equal to that enjoyed by people in urban communities. The idea of Cooperatives was then suggested by R.E.A. through the County Extension Service. It was the intent to build the distribution systems and buy power from Investor-owned utilities or Municipals to serve the members. It was soon found that it was impossible to buy power at a price a member could afford and meet the criteria set forth by the R.E.A. Administrator.

The two parent G & Ts were not formed from choice; but out of necessity. The distribution cooperatives had, with the help of their engineers and R.E.A., made every effort to obtain a wholesale rate from the Investor-owned Utilities which would allow them to operate and sell to their members at a price they could afford to pay. When it was found this could not be done, the decision was reluctantly made to form G & Ts to supply the necessary energy. These

two parent G & Ts operated diesel plants and used the 12.5 Kv distribution lines as transmission lines. As loads of the members continued to grow, the decision to merge the two G & Ts was made. In 1948 the merger was made, and Corn Belt was formed. At this time a steam plant was built at Humboldt and a 69,000 volt transmission system started to carry power to our members. Since that date, Corn Belt has continued to strengthen its generating and transmission system, as needed, to meet it members' requirements.

The history of Corn Belt shows a slow, but steady, progress in the gradual reduction of cost of electric service. All reductions and savings in cost are passed directly back to our members. We serve a firm load of 14 Member Rural Distribution Cooperatives, who in turn, serve approximately 30,000 rural families and small industries.

Corn Belt has always been an advocate of interconnections with other utilities. An interchange agreement was signed in 1942 between Central Electric, a parent of Corn Belt, and the Town of Alta, a municipal generating system, from which we used to buy power. Since this time we have continued to make interconnections. At the present time we are interconnected with two Investor-owned Utilities (and will soon add a third), 15 Municipals, and the United States Bureau of Reclamation. We would be the first to agree that these interconnections are of great value to Corn Belt, as they are to everyone else in the utility business.

There are two basic principles that must be met by any two systems which interconnect. First, there must be benefits for each party; and second, each party must provide its fair share of the costs involved. The ratio of benefits helps determine the cost-sharing. One of the prime requisites is adequate financing. A party to interconnections must finance his share of generation, substations, and transmission facilities. You cannot expect equal benefit without equal participation. Corn Belt has always followed these principles in making interconnections; and as a result, has helped build a system of value to its members and the area in which we operate. We are planning our generation and transmission program in conjunction with Ivestor-owned Utilities, Municipals, and Federal agencies in the area. We must make our fair contribution to the generation and transmission needs of the area based on benefits received and service required. This joint planning has helped eliminate duplication of facilities in our area, and provided more efficient operation.

Corn Belt is a member of the Iowa Power Pool. The membership of the Pool includes five Investor-owned Utilities and one Rural Electric Cooperative. Corn Belt. I am a member of the Executive Committee of this Pool. We are one of the relatively few Cooperatives who are a Pool member, and we enjoy a beneficial and profitable relationship. This relationship would not be possible if we were not willing and able to furnish our fair share of investment in generation and transmission. It is true the system of the Investor-owned Utilities and Corn Belt overlap. This must be when they serve the urban areas, as we serve the rural. Our joint planning, however, has allowed all of us to make the best use of facilities for the benefit of all consumers. Without adequate funds to furnish our fair share, this cooperation with others would obviously be impossible.

In 1965, 14 Municipals, which have long been interconnected with Corn Belt, formed North Iowa Municipal Electric Cooperative Association, known as N.I.M.E.C.A. This organization was formed in accordance with laws enacted in the 61st General Assembly of Iowa, which allows Municipals to join together to perform services they can do better as a group. Since these Muncipals were all interconnected with Corn Belt, they petitioned Corn Belt for membership. and became a member as of January 1, 1966. They will, through municipal bonds, finance their share of transmission and generation, and will not be entitled to the direct benefits derived from R.E.A. funds. The By-Laws of this organization limit membership to Municipals which have their own power sup ply. Attached is a statement from the President of N.I.M.E.C.A. setting forth these principles. Working with N.I.M.E.C.A. is but a continuation of our policy to work together for better service

N.I.M.E.C.A. and Corn Belt are independent, consumer-owned systems who want to work together for the benefit of all consumers. This urban-rural cooperation, one of the first of its kind, will open a new avenue of benefits for all concerned.

Corn Belt has no intention or desire to take over other systems or the loads of other systems. We want to cooperate with them for best service to all consumers involved. Our record speaks for itself.

All of the above-mentioned interconnections and pooling agreements have been made in order to make all reductions possible in the high power cost existing in Iowa. This high power cost is primarily due to the high cost of fuel, particularly in Central Iowa. On our system the cost of transportation of coal from the mine to our generating plants is equal to, or more than, the cost of the coal itself. Since the fuel cost is about 4 tenths of one cent in the cost of our electricity, it can be seen that about one-half of this cost, or 2 tenths of a cent, is due to the cost of transportation of the fuel. Thus electric systems with ready access to fuel could reduce their cost by 2 tenths of a cent below our cost. While we do have access to some low-cost, federally-produced power through the United States Bureau of Reclamation, the amount is limited and the source is quite distant from our system. To utilize such power, large investments in transmission facilities are required in order to transport this power into our area.

As a comparison of power costs in various areas of the country, we have taken figures from the Annual Report of Energy Purchased by R.E.A. borrowers, as prepared by the Rural Electrification Administration. This shows that distribution systems in Tennessee, with access to energy from the Tennessee Valley Authority, can purchase power for less than 5 tenths cents per kilowatt hour. Systems in Washington State, with access to power from the Bonneville Power Administration, purchase for about 3 tenths of a cent per kilowatt hour. Systems in South Dakota, with power from the United States Bureau of Reclamation readily available, pay about 8 tenths of a cent per kilowatt hour at wholesale. Even in Iowa those systems which lie entirely within the marketing area of the United States Bureau of Reclamation have a wholesale cost of under 1 cent per kilowatt hour. This compares with a wholesale power cost in our area from the Corn Belt system of approximately 1.3 cents per kilowatt hour. In the area which we serve as firm load, covered by our 14 rural members distribution systems, we have no large concentrations of population, nor do we have any large industry. Therefore, our capital costs in generation and transmission plant are relatively high on a per-member basis. We need many more miles of line to serve the members in the sparsely populated rural areas than do systems located in metropolitan and urban areas.

Rural distribution systems in this area serve about 2.7 customers per mile and receive about $470 per mile per year of revenue; while the Investor-owned Utilities in this state serve about 30 customers per mile on the average and receive a return of about $7,000 per mile of line per year. From the above, it can be seen that the cost of capital is a very large factor in our cost. Even small or moderate increases in the cost of money for financing additions to our system would require unreasonably higher rates in the future unless we can secure urban and industrial loads. High rates would undoubtedly slow down the trend toward higher usage of electricity, which in turn, has the effect of raising unit costs on a year to year basis. Many of our other costs are increasing each year. These include such items as labor, fuel, property taxes, and maintenance materials. We are also faced with the declining purchasing power of the dollar. Up to the present time, we have been able to off-set increases in costs and the declining value of the dollar; but this would come to a halt and would undoubtedly begin to rise on a unit basis, should our cost of money be increased. In order to obtain an estimate of the effect of higher cost money on a long range, over-all power cost, we have made some long range calculations based on very broad assumptions. Of necessity, these are based on future load growth projections, together with investment required to serve such growth. While these estimates do not necessarily reflect the path which we will follow, it is felt that actual results in future years would show the same general effect, but of different magnitude, depending on the actual load and investment made. We have prepared several exhibits showing the result of these calculations. The first. Exhibit A, shows the cost of $1.000 in capital investment based on the actual cash payment of debt service each year under various load conditions. At present, we borrow money from the Rural Electrification Administration at 2% interest for a 35 year period, with the principal payment deferred the first

three years. The total costs of a $1,000 loan is $1,416 after 35 years, at which time the loan is fully repaid. This includes payment of $416 interest.

If the interest rate were raised to 3% over a 35 year period, the total interest paid would be $617, or nearly a 50% increase in interest. With a 4% loan over a 35 year period, the total interest payment would be $863, or more than double our present rate.

The above comparisons are based on a 35 year repayment schedule. If the term were 50 years, then money at 3% would require a lower annual payment, but the payments would continue for a 50 year period, amounting to a total interest payment of $933. With 4 or 5% interest, the situation would be even worse as far as cash payments are concerned.

It can be seen that the total cost of a loan increases tremendously with the higher interest rates, requiring 50% or more increase in payment of interest. With 50 year money, the annual payments do not show the comparable increase over a 35 year loan. However, any money borrowed must be looked at in terins of the total repayment schedule. While 3% interest money would show a saving in dolar cost over the first 35 years, we would have to continue payments on the equipment for another 15 years. This is unrealistic, since much of the equipment in the electric industry becomes obsolete and fully depreciated in periods of 35 years or less. The present trend in generation equipment has tended to make it obsolete in 20 or less years, and its useful life should be considered as such. Thus to look at the cost of equipment on a 50 year period would be comparable to paying for an automobile with a 10 year loan. The equipment has been used up and is probably no longer in service before the final payment is made. Replacement equipment would have been purchased, and payments would have been made on it during this period. Therefore, we believe that comparisons in the cost of money must reflect the total cost of such money over a long period of time. To compare the costs in future years, we have assumed a loan and generation expansion pattern. This assumes the installation of a 100 MW generating unit at year zero for our system, with such year falling probably between 1970 and 1980. At that time we have estimated our load to be 400 million kilowatt hours of firm energy sales per year. After that time the load is estimated to increase at the rate of 40 million kilowatt hours per year, each year for the next 50 years. We have assumed a generation expansion pattern of adding a 100 MW unit every 10th year thereafter. The assumed capital cost of each generating unit is $100 per kilowatt, or $10 million added for each ten year period. We believe that the assumed expansion pattern would be conservative, since the growth in later years could be higher than estimated. However, higher loads would mean larger or more frequent additions of generating capacity and would require a corresponding increase in capital investment. The low cost per kilowatt of added efficient capacity requires participation in generating units with other electric systems in order to take advantage of higher efficiency and lower per unit cost of the large, modern units which are being installed today. Such participation in generating units would necessitate larger capital investment in transmission facilities in order to transmit the electric power.

We have prepared Exhibit B to show the debt service based on the investment required for generating units. Under the present 2% money conditions the debt service for the assumed expansion pattern would be $200,000 for the first three years, and $423,840 for the following seven years. With the installation of the second unit, the total debt service would rise to approximately $624,000 for three years, and to $848.000 for the 14th through the 20th years. With the addition of the third unit, the debt service would rise to $1,048,000 in the 21st year and to $1,272,000 in the 24th year. This would carry on until the next unit is added in the 31st year. The debt service would then go to $1,472,000 for three years and then to $1,695,000 through the end of the 35th year. At the end of the year 35, debt on the first unit would have been paid off. Therefore, the cost of this money would be dropped out of the debt service which would go to $1,272,000, and remain there until the next unit is added in the 41st year. Debt service would then follow a ten year cycle.

If the cost of money were 3% on a 35 year debt (not shown), the cost for each $10 million addition would be about $462,000. This would show the same gen

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