they require one and four party service. This upgrading and system improvement such as Direct Distance Dialing will take large sums of loan funds at a reasonable rate of interest. The Rural Electric and Rural Telephone program is one of the best programs ever sponsored by the Federal Government. As the projects continue to grow in years to come the Federal Bank will be a solution for our financial problems. Again we solicit your continued support of the Federal Bank for the R.E.A. Program Telephone and Electric. Sincerely, Hon. LEE METCALF, JIM TURNLAND, Manager. MID-RIVERS TELEPHONE COOPERATIVE, INC., Senate Office Building, Washington, D.C. DEAR SENATOR METCALF: We would like to add our encouragement to the other telephone companies in requesting your favorable consideration of Senate Bill #3337. It seems desirable from our standpoint that any legislation for the telephone bank would be broad enough to permit lending funds for all communication purposes such as toll facilities, acquisitions, and CATV systems. As mentioned to you on previous occasions, we are still anxious to modify the Act establishing the bank for cooperatives so that they could finance telephone cooperatives. We have just received an extension from DCA to submit our proposal for the AUTOVON Switch until July 15. This extension was made necessary because the Automatic Electric Company has been unable to provide us with a quotation. They have now advised us that our quotation will be forthcoming about July 1. We will keep you advised as to our progress. Thank you very much for your assistance. Sincerely yours, W. B. VAN FLEET, Manager. GRASS RANGE, MONT., June 9, 1966. Hon, LEE METCALF, Washington, D.C. DEAR MR. METCALF: We understand that hearings are currently being held concerning a bill authorizing REA funds. Because of our coop service in this area. we are especially interested in seeing that continued funds are available. Montana Power is, of course, opposing this bill, and their witnesses (along with others from "investor-owned" utilities) can be persuasive. However, we in this area know that electricity would not, even now, be for our use if it had been left to Montana Power. "Economically unfeasible" was the term used This basic attitude, plus an intensified publicity and paternalistic campaign by the Company, has given rise to concern on our part. If successful, this campaign could leave us in a monopolistic squeeze that is definitely not free enterprise. In Lewistown, particularly, the court decision affecting the Fergus Elec tric Co-op has caused us grave concern, and we hope to take decisive action there. Please put your influence and vote to work for the continuance of REA moneys and consequent co-op services. Very truly yours, BARBARA B. KRUGER. KALISPELL, MONT., June 13, 1966. Senator LEE METCALF, Senate Building, Washington, D.C. Rural electric cooperatives are in serious need of added sources of financing and urge your support of legislation creating a REA bank. FLATHEAD ELECTRIC COOPERATIVE, INC. We are Mr. POAGE. We are delighted to have had you with us. always glad to have you come over, and anytime that you want to appear before this committee and visit us, so that we can see that you are still one of us, we will be delighted to have you do so. Senator METCALF. Thank you, Mr. Chairman. I feel as if I am one of you, too. Mr. POAGE. Our next witness is Congressman Battin. I had hoped that we might dispose of these witnesses without any questioning until we got through with all of them, which is the only way we are going to get to all of them. Of course, if you want to take another week or two, all we can do is to stay here and do that, and we will do it if necessary. Mr. ÅBERNETHY. Is it the pleasure of the chairman that we hear from all of these witnesses first, before we ask any questions? Mr. POAGE. That was the hope, but if you have any questions that you feel should be asked at this time, go ahead. Mr. ABERNETHY. I have one or two questions. Mr. POAGE. We will stay here as long as necessary for those who want to ask questions. Mr. JONES of Missouri. I have just one question. Mr. POAGE. Mr. Jones. Mr. JONES of Missouri. You made some comment about the excessive earnings of the utilities. I have heard this discussed before. What is a fair return on an investment today? Senator METCALF. Generally, it is conceded that these monopoly utilities Mr. JONES of Missouri. I am talking about what is a fair return on the investment, regardless of who gets it. I do not think that we should have two standards. If I invest money, I think that I am entitled to a fair return. What is a fair return? Senator METCALF. I think that it makes a lot of difference whether it is a high-risk investment, such as in the electronic industry where there is a lot of competition, or a monopoly where there is no competition and there is no risk. I think that you should have lower return on investment that is sure to pay back the interest and the cost and the principal than on one where you take a chance and have an even-money opportunity of losing all of your funds. I should say that we should continue with the concept of about a 6-percent return on the utility, and let competition take care of these other high-risk industries. Mr. JONES of Missouri. So that 6 percent would be your conception of a fair return on the investment in a utility company? Senator METCALF. Yes. Mr. JONES of Missouri. I noticed that the other day, about the A.T. & T., that they were asking for a larger increase in their rate of return. Would you place them in the same category as the other electric utilities? Senator METCALF. Yes, the A.T. & T. has, by and large, a monopoly in most of the areas, although their relationship with the cooperatives in the local telephone companies, in the local areas, has been one of greater cooperation than that of the electric utilities. Mr. JONES of Missouri. Just one other question. You mentioned the fact that the 2 percent. money-and I will agree with you—is needed. The only thing that I have difficulty in trying to adjust my thinking on is that if 2 percent was a reasonable rate, back in the middle thirties. every other cost of operating a cooperative has gone up, labor and material, everything has gone up except the interest rate, and it would seem to me there needs to be some adjustment there if every other cost of operation has gone up, that they could add just an increase in the interest rate. Senator METCALF. I will say that even back in the thirties 2 percent was admittedly a subsidy to help these people get telephones, and before that electric utility lines, into the various sparsely populated areas, and that is still needed in the areas that are still sparsely settled. It is even needed more, because some of the better areas have already been reached by the REA lines, and we need to help with this 2 percnt money and this subsidy to finish the job. Mr. JONES of Missouri. Thank you. Mr. POAGE. Mr. Abernethy. Mr. ABERNETHY. Senator Metcalf, I want to welcome you back to this side of the Capitol. Senator METCALF. Thank you. Mr. ABERNETHY. How many REA cooperatives are there in Montana? Senator METCALF. Twenty-four. Mr. ABERNETHY. Are any of those cooperatives in a position to pay more than 2 percent interest? Senator METCALF. I think probably some of them may be, yes, but Mr. ABERNETHY. About how many of them? Senator METCALF. I would not know. I gave you some very general figures, however, that indicated that the cooperatives in Montana are even worse off than the national average. Mr. ABERNETHY. I can agree with you on that, because your popu lation per square mile is quite thin compared with many of the other States. You did say, however, that you favored the continuation of the 2percent provision, because of the tremendous need in your own area. Senator METCALF. Or other States that are similarly situated. Mr. ABERNETHY. Yes, of course. This bill provides for a continuation of that. There is no effort being made to repeal it. Senator METCALF. Yes, that is right. Mr. ABERNETHY. And if this bill would fail, you still would have the 2 percent money. Senator METCALF. Then, I went on to say that I feel that we do need the supplemental provisions in this bill. Mr. ABERNETHY. That is not my point. The point I am making is that there is no effort being made here to repeal the 2-percent provision. Senator METCALF. That is correct. Mr. ABERNETHY. That is right. Now, the bill also provides that if a cooperative in Montana or in any other State would borrow from the bank, for example, $100,000, that it would get $95,000 in money and $5,000 in stock, unless you qualified for a 2-percent loan; and as I understand it, most of your cooperatives you feel would qualify for the 2-percent loan? Senator METCALF. I think most of our cooperatives would qualify. I regret to have to say that, because I wish they were in good enough financial condition so that they would not qualify. Mr. ABERNETHY. What cooperatives are there in Montana which now could take $95,000 for a $100,000 loan and pay 4 percent interest on it? Senator METCALF. The only one that I can think of that would be able to do it is the Hill Country Electric Cooperative which does serve an area that has a closer knit population than most of the others. Mr. ABERNETHY. That is one out of-how many, did you say? It was 23, was it not? Senator METCALF. Twenty-four, I think. Mr. Chairman and Congressman Abernethy, I want to point out that at the National REA as well as the State of Montana, its cooperatives did oppose this kind of financing. Mr. ABERNETHY. At their convention? Senator METCALF. I put in the record some of the recent letters, so that they have come around to accept it and to support it. Mr. ABERNETHY. But there is only one that you know of that would qualify, that is doing well enough to pay 4 percent interest on its loans? Senator METCALF. I think that is correct. Mr. ABERNETHY. So for all intents and purposes, your cooperatives in your State would continue to function, you hope, under the 2 percent loans unless the Secretary assigned them to the 4 percent categorythey will continue to get the 2-percent money? Senator METCALF. I would hope so. Mr. ABERNETHY. And would not have to go to the bank, if the bank is established? Senator METCALF. Yes, sir. Mr. ABERNETHY. Then, so far as the intents and purposes of this bill are concerned, it really does not mean anything in Montana, does it? Senator METCALF. We would hope that as it continued to develop, that we would be able to take advantage of this other financial system. Mr. ABERNETHY. That is all, Mr. Chairman. Thank you. Mr. POAGE. Thank you. There being no further questions, we are very much obliged to you. Mr. OLSON. I have just one question. Mr. POAGE. All right. Mr. OLSON. Would there be any validity to the point that perhaps there would be more 2-percent money in Montana if there were other cooperatives around the country who might be able to afford to pay the higher interest rates for financing? Senator METCALF. I think that is a valid point. I am not as familiar with the cooperative situations in the Midwest areas as I am with the Montana situation where we do have this sparse population, but most of the support for this has come from the bigger and the greater population of the Midwest-in support of this legislation. Of course, if they are willing and able and ready to go ahead with it, that does, as you point out, mean that the 2-percent money will go to those needy cooperatives that have to have this to survive. Mr. POAGE. Thank you very much. We are very much obliged to you, Senator Metcalf. Senator METCALF. I am very grateful to all of the members of the committee. Mr. HAGEN of California. I would like to make a parliamentary inquiry. Can we submit material for the record at some later time before the formal conclusion of the hearings? I have a statement that I would like to submit on the taxes paid by cooperatives. Mr. POAGE. The present occupant of the chair is not going to pass upon what the chairman of the full committee will rule at some later date. You can submit anything that you want at this time. You can ask for permission now, but I am not going to pass upon what the chairman is going to do next week. Mr. HAGEN of California. I would like to ask permission to insert in the record a statement, at this point. Mr. POAGE. Without objection, the statement will be made a part of the record at this point, in accordance with Mr. Hagen's request. (The statement follows:) STATEMENT RE SPECIAL TAX CONCESSIONS APPLIED TO REA FINANCED COOPERATIVES, BUT NOT TO FARMERS' COOPERATIVES INQUIRY Inquiry has been made as to whether REA financed electric cooperatives enjoy special federal income tax concessions which are not applicable to farmers' cooperatives. RESPONSE TO INQUIRY The Internal Revenue Service by administrative ruling has determined that cooperative associations, such as the REA financed electric cooperatives, furnishing electric power to members are exempt from the federal income tax. Accordingly, earnings of such cooperatives are not taxed to the cooperatives and, therefore, may be accumulated without taxing their patrons in respect thereof and without any reduction for federal income tax. The Revenue Act of 1962 dealing with the taxing of earnings of farmers' cooperatives and cooperatives in general, specifically excluded from the organizations which were the subject of such taxing law, cooperatives engaged in furnishing electric energy. Farmers' cooperatives, on the other hand, are subjected to the same federal income tax as corporations in general except that, in effect, additional deductions in computing such tax are allowed for qualifying patronage dividends, amounts paid out as dividends on their capital stock and qualifying non-patronage distributions relating to earnings derived from business done for the U.S. Government or from sources other than patronage, such as investment income. Thus, unlike the earnings of REA financed electric cooperatives, earnings of farmers' cooperatives to the extent they reflect business activity are taxed when generated to either the cooperatives or to their patrons depending upon whether the earnings are accumulated or distributed by the cooperatives. This result of taxing current earnings of cooperatives in general was accomplished by amending the Internal Revenue Code by means of the enactment of the Revenue Act of 1962. BASIS FOR RESPONSE TO INQUIRY REA financed electric cooperatives REA financed electric cooperatives are not defined in the Internal Revenue Code of 1954. Such cooperatives, however, are organizations doing business in corporate form organized under the laws of the various states. They are not Government corporations. The statutory language of the Internal Revenue Code does not specifically state that REA financed electric cooperatives are exempt from the federal income tax. However, the predecessor of section 501(c)(12) of the Internal Revenue Code has been interpreted by the Internal Revenue Service as granting such an exemption. Section 501(c) (12) provides an exemption from federal income tax for the following described organizations: |