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One cooperative has $339,051 available for interest and has unpaid loans of only $742. Another earns 6 percent interest on all of its debt eight times over. Of the 47 cooperatives, 40 cover their interest requirement at 6 percent at least once. No one is suggesting, as far as I know, that the cooperatives be required to pay 6 percent interest on their present debt. But, I submit, these studies of Iowa cooperatives demonstrate that many cooperatives have an equity base on which they could borrow without Government subsidy and that they have demonstrated earning capacity to pay market interest rates on any future additional capital needs.
În conclusion, we submit that the creation of such a Federal instrumentality carries with it a threat to the replacement of private enterprise utility operations with Federal or federally supported ones in economic circumstances which demonstrate no need for such a facility. There is a diminishing need for the support of some cooperatives by federally subsidized loans through the Rural Electrification Administration. That need is passing if the experience of Iowa cooperatives is a measure and any legislation modifying the Rural Electrification Act should contain provisions to establish selectively the need for subsidized Federal aid. These proposed bills have no such provision and by such omission create the hazard described by many witnesses to the free enterprise system. If the performance by the free enterprise, business-operated utility industry were subject to criticism, if its production of electricity were insufficient to meet the demands of the Nation, some congressional substitute such as that contained in these bills might be justified. In view of the industry's performance and its substantial tax support to the Federal Government, the creation of a bank which would tend to constructor destroy such a resource is unjustified.
(The document submitted by Mr. Waterman follows:) Example of basis upon which determination has been made of ratio of equity
to total capital required and interest-paying ability of cooperatives in Iowa
Iowa-2 Siour Electric
tion, Orange City Utility plant in service (line 1).
$1, 784, 283 Current liabilities (line 34)
$11, 760 Less other property and investments (line 22)
($220, 026) Current and accrued assets (line 23).
($156, 657) Advance payments (line 14)
Calculated capital requirements..
$1, 147, 477
Equity capital (total lines 27 to 31, inclusive)
905.757 Percentage of equity capital 1,147,477Long-term debt (line 33)
78.9 $719, 244
6 percent interest on $719,244..
Net margins (line 54).
Available for interest charges.
97,940 Interest coverage at 6 percent-rate 43,154.-
2. 27 times NOTE.—Line references, 1964 Annual Statistical Report, Rural Electrification Borrowers REA Bulletin 1-1, p. 83.
Mr. Poage. Thank you very much, Mr. Waterman.
Mr. CALLAN. I would like to point out that I do not believe that the rurals are going to be your problem, but the municipal systems might be. I might point out to you that Iowa, everywhere the municipal system is operating, the rate of the municipal system is about $6 per month cheaper than what you have. I should like to point further, for instance, that in Omaha, Nebr., the 1,000-kilowatt-hour rate in Omaha is $15.50, and right across the river in Council Bluffs, Iowa, the rate is $20.50. I would like to point out, too, that in two other communities, in Scotts Bluff, served by Consumers, it is $17.32, compared to Davenport, which is served by your company, where the rate is $22.57. And in the city of Hastings, Nebr., which is comparable to Clinton-as a matter of fact, a little smaller--the rate is $16.15 compared to that of your company of $22.78.
My point is that when these communities find out what they can do with their own utility, I think that the threat to you is greater from them than from the rurals.
Mr. WATERMAN. May I respond briefly?
Mr. WATERMAN. I would like to point out two things, Mr. Callan. One of them is that these bills provide for the acquisition by loans from this bank, for municipal operations, and other type of utility operating systems, if they qualify and are qualified loan applicants. It is only limited by the fact that they cannot acquire more than double their own size. So that if the loans are made to the facilities that we are concerned about, it may aggravate the situation that you point out.
I would like also to point out that, as I understand it, the income tax factor of the utilities is 21 percent of their revenue, and you would factor that into the comparison of the rates to determine whether the REA rates are higher or lower.
Mr. CALLAN. I agree with you. My point is that the threat to private power is not from the rurals—the threat you may be meeting may come from the municipalities who would have the same tax benefits as the rurals. If they find out what they can do with their own municipal systems, they might condemn your system and take it over themselves. This, I think, is where your problem will arise, because if the people for instance, at Algona and at Clinton, Iowa-if they find, for example, at Algona, Iowa, 1,000-kilowatt-hours cost $16.41, and at Anamosa it is $23 by the electric power company, this would be a saving of almost $7 à month by having their own system. All I want to point out is I do not think that it is a question of the rurals. The threat may be from the municipalities.
Nr. WATERMAN. That Lehigh Tile example was an explicit example of a threat from the rurals.
Mr. Poage. Are there any other questions?
Mr. STALBAUM. Mr. Chairman, before you call your next witness, I would like to ask to put this statement into the record. It is by Carl J. Forsberg, chairman of the board of the Wisconsin Power & Light Co. While I may not agree with the entire statement, out of courtesy I would like to have it inserted into the record at this point.
Mr. Poage. Without objection, it will be included in the record at this point.
(The prepared statement of Carl J. Forsberg follows:)
STATEMENT OF CARL J. FORSBERG, CHAIRMAN OF THE BOARD, WISCONSIN POWER
AND LIGHT CO., MADISON, Wis.
These "Federal Electric Bank” bills are so far reaching in departing from the established business concept of our country that this statement is made to express and register opposition to them.
This legislation authorizes, for the first time, unrestricted, subsidized Government competition to the free enterprise American business system without any effective congressional control or restrictions. Therefore, its implications and precedence goes way beyond being contined to the electric utility business alone.
The program changes the entire concept of the “Rural Electrification" program which now is a supplemental activity to bring the benefits of central station electric service to those unserved.
REA would be a tax exempt, subsidized federal electric utility program in direct competition with and replacing the investor-owned, tax paying enterprises under this legislation. All types of electric users, whether now supplied or not, could be supplied with subsidized capital provided by the new "Federal Electric Bank" with a loaning capability of about $21 billion $21,000,000,000)-one of the largest of such banks in the world.
The REA administrator, NRECA representatives, and other Public Power advocates are using the “Rural Electrification" program to expand way beyond the purposes it was set up to serve. Hidden in the deep complexity of these bills, they seek thru subtle guise to use the REA reputation to further extend subsidized, tax exempt Federal Power, wholly unrelated to rural electrification, where there is no need or obligation for taxpayers to pay part of the costs of electric service. They have made it clear, through their testimony, that this legislation is designed to get away from the restrictions on loans for building of generating and transmission systems, and purchasing operating electric systems whether municipally or investor owned.
This proposal would not serve the purpose of reducing Federal expenditures as has been put forth, but on the contrary will actually increase the Federal burden. The taxpayers would pay dearly by (a) continuation of present 2% REA program, (b) provide $750 million to $1 billion of bank capital without interest or return and (c) pay for bank operating costs and deficient interest costs to supply subsidized loans. These loan funds which could be used to purchase established taxpaying electric utilities, would eliminate entirely the taxes existing utilities now pay and would pay in the future.
Wisconsin Power and Light Company serves five co-operatives at 25 different locations. Our working relations with the co-operatives are very good.
In summary, this legislation would attack and jeopardize the very bedrock of our American economy without any meaningful restrictions or congressional control on how these immense sums of public funds may be spent.
Therefore, the best public interest of all the American people would be best served by your Committee refusing to report these bills out.
Mr. Poage. The next witness is Mr. A. J. Watson, Jr., president, Mississippi Power Co., Gulfport, Miss. We will be glad to hear from you now.
STATEMENT OF A. J. WATSON, JR., PRESIDENT, MISSISSIPPI
POWER CO., GULFPORT, MISS.
Mr. WATSON. Mr. Chairman, I have heard your remarks about your desire to expedite these hearings to every reasonable extent. I have a prepared statement that I would like to have included in the record in its entirety, and I will brief it if I may.
Mr. Poage. Without objection, your complete statement will be included in its entirety in the record, and you may brief it as you see fit, Mr. Watson. Thank you for cooperation.
Mr. WATSON. Mr. Chairman and members of the committee, I am A. J. Watson, Jr., president, Mississippi Power Co. with general offices located in Gulfport, Miss.
We operate in the southeast quarter of Mississippi, supplying electric power directly to approximately 126,000 customers, and, in addition, furnishing all of the requirements, at wholesale, through 39 delivery points, of 4 electric power associations, and a substantial portion of the requirements of 2 others. We have a gross plant account of $176 million that is invested for the purpose of supplying these energy requirements and are a fully taxed, investor-owned company.
I very much appreciate the opportunity to appear before your committee and express my views with reference to H.R. 14837 as well as the several other similar bills that have been introduced to afford supplemental financing for the Rural Electrification Administration program.
My remarks are not intended as a criticism of the original concept of rural electrification, nor are they designed to minimize the contribution that the REA cooperatives have made and are now making to the comfort and prosperity of their customers in rural areas.
My study of these bills leads me to the conclusion that they are not in the best interest of the citizens of this Nation and could have a devastating impact upon the future of my company and most other investor-owned electric utilities. And when we consider the vastly enlarged concept of the mission of the Rural Electrification Administration as enunciated in 1936 and as practiced today, our concern is further heightened by the probability that this proposed plan, far reaching as it is, will be greatly expanded in scope of succeeding years. This, I believe, is the history of practically all Government-sponsored programs.
In our company we have experienced, firsthand, the threat of federally owned and subsidized electric power programs. We were forced to sell for approximately 50 cents on the dollar, in two separate transactions in 1934 and 1939, aproximately one-half of our electric power system to TVA, municipalities and RÉA-financed cooperatives, under threat of immediate duplication of our facilities by systems financed with Federal money in the form of outright grants and loans at a very low rate of interest.
Despite this experience we, from the beginning, made every effort to assist the cooperatives that were organized in southeast Mississippi in providing electric service to the rural area. We established our first delivery points to REA-financed electric cooperatives in 1938. As these six cooperatives mentioned earlier have grown, we have provided at their request additional power sources from our transmission system which relieves them of the heavy investment and operating responsibility of transmission lines. As our transmission system has been strengthened by the addition of interconnecting lines and loop feeds, we have provided them at all but three of their delivery points with at least two sources of power, thus affording them service with a high degree of reliability.
This service has been provided at low rates which averaged 6.83 mills per kilowatt-hour in 1965. Our review of REA statistical reports shows that this cost of wholesale power to the co-ops we serve is well in line with costs from investor-owned utilities to co-ops in other parts of Mississippi and adjoining States. Revenue received by Alabama Electric Cooperative from REA distributing co-ops averages nearly 30 percent per kilowatt-hour more than we receive from co-ops we serve.
Under State law enacted in 1956, certificated areas of service have been allocated to the cooperatives and to our company with the result that in more than 90 percent of the areas where our company operates it has been denied the right, which it previously had, to serve industries and other large users at all points from or along the company's transmission lines. Service contracts negotiated with the cooperatives since 1959 have provided for an additional reasonable charge for that portion of a cooperative's purchases from us which is resold to such type of users. The impact of this additional charge on the average kilowatt-hour cost of energy to the co-ops is not now known, primarily because the co-ops have failed to furnish billing information necessary for making such charges which they agreed to by contract. The contract provision has been questioned in a proceeding brought by the Federal Power Commission. Our company defends this charge on the ground, among others, that it is the most equitable manner for dealing with this problem, and will permit a continuation of our practice of serving at lower cost, the power which the cooperative distributes to its farm, home, and other users.
A decision in the Federal Power Commission proceeding has not yet been rendered.
In 1958, while we were attempting to negotiate new wholesale power contracts with the cooperatives, the REA Administrator authorized a loan to South Mississippi Electric Power Association—a generating and transmission cooperative that does not have any facilities, is not yet in actual business, and whose membershiip includes the co-ops we are now serving-of $13,971,000, which together with an old allocation of $2,100,000 made available a total of $16,071,000 at 2 percent interest for the construction of a generating plant and transmission system that would serve all of the requirements of three of the co-ops which we now serve and part of the requirements of another. The G. & T. co-op would be exempt from State and Federal income taxes and its physical properties exempt from ad valorem taxes.
In hearings before the Mississippi Public Service Commission in which the G. & T. co-op sought authorization for the construction of the facilities covered by this REA loan, we proved that even with such tax and interest subsidies the costs of producing and delivering power from this project to the participating member co-ops would increase their power costs approximately 30 percent over their present costs from the company. In spite of this, the Commission granted a certificate to build the duplicating facilities. Upon appeal the Mississippi courts upheld the Commission and we have now appealed to the Supreme Court of the United States.
While the case was in the Mississippi court an application was filed by South Mississippi EPA with the REA Administrator for an addi