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tional loan authorization of $21,929,000, making a total of $38 million at a 2-percent interest rate, with which to construct a generating plant of more than twice the capacity and many more miles of transmission lines than had been covered by the $16 million allocation. The co-op has asked the Commission to amend its present certificate to authorize the larger plant, and hearings thereon have not yet begun.

Prior to and since the loan allocation for the G. & T. co-op was made, we have sought earnestly and sincerely to negotiate with the REA cooperatives that are the proposed customers of the G. & T., a power supply contract acceptable to all parties. We have discussed the matter with the Administrator and still have been unable to secure consideration of such an alternative by the co-ops. I have reached the inescapable conclusion that there is no desire to negotiate a contract, but a determination to construct a G. & T. no matter what the cost.

There can be no doubt that the co-op members could continue to benefit from the lower power costs available to the distribution cooperatives if they continued to puchase power at wholesale from our company. On the other hand, they would have to bear the burden of higher costs if power is purchased from the G. & T.

Our company has provided sufficient facilities to supply all co-op requirements proposed to be served by the enlarged plant, but still the requests for funds to build unnecessary generating plants and transmission systems continue to grow at an amazing rate. Since the originally stated objective of rural electrification is no nearly completed, the real purpose of such requests can only be to build a tax exempt federally subsidized power empire to replace existing investor-owned and taxable facilities.

The REA financed facilities are subsidized interest wise and are practically tax free at all levels of government, whereas the investorowned facilities are financed by the sale of securities to the public, and are fully taxed.

The situation which I have described in Mississippi, regarding the use of federally provided funds for unnecessary duplication of facilities, would be greatly aggravated by financing operations permissible through the Federal Bank for Rural Electric Systems under the pro

ed legislation. The cost to taxpayers of continuing to provide loans for construction of unnecessary and unwarranted tax exempt facilities at ridiculously low interest rates would not be reduced by the proposed legislation. The bills under consideration by your committee, rather than reducing the taxpayer's burden will create a vast new federally financed or sponsored power program which, in my judgment, is not only inappropriate but dangerous.

For reasons enumerated by preceding witnesses and many of which are included in my complete statement on pages 6, 7, and 8, I do not believe the legislation under discussion to be in the public interest.

Passage of the bill will seriously endanger the future of the investorowned electric industry while its defeat will not impair the REA program as it exists today. I therefore respectfully but earnestly request that the legislation be defeated. Thank

you for the opportunity of expressing my views, not only as the responsible officer for a substantial investment but as a taxpayer.

(The prepared statement submitted by Mr. Watson reads in full as follows:)

STATEMENT OF A. J. WATSON, JR., PRESIDENT, MISSISSIPPI Power Co., GULFPORT,

Miss.

Mr. Chairman and Members of the Committee, I am A. J. Watson, Jr., president of the Mississippi Power Company with general offices located in Gulfport, Mississippi. We operate in the southeast quarter of Mississippi, supplying electrie power directly to approximately 126,000 customers, and in addition, furnishing all of the requirements, at wholesale, through 39 delivery points, of four electric power associations, and a substantial portion of the requirements of two others. We have a gross plant account of $176,000,000 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 HR 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.

However, the appropriations committees of both houses of Congress have ex. pressed their concern over the administration of certain aspects of the existing program and have sought to establish certain controls on the use of taxpayer's funds by the Administrator. In my opinion the impact of the bills under consideration would be to perpetuate the existing subsidy program and at the same time make available to the cooperatives vast additional funds which could be used by them in a virtually unrestricted fashion.

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 Electri. fication 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 in succeeding years. I think we will all agree that this is the history of practically all government sponsored programs.

In our Company we have experienced, first hand, 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. approximately one-half of our electric power system to TVA, municipalities and REA 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 transinission 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-ons in other parts of Mississippi and adjoining states. Revenue received by Alabama Electric Cooperative from REA distributing co-ops averages nearly 3070 more per kilowatt hour 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% 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 yet have any facilities, is not yet in actual business, and whose membership 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% 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 cost of producing and delivering power from this project to the participating member co-ops would increase their power costs approximately 30% 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 additional loan authorization of $21,929,000, making a total of $38,000,000 at a 2% interest rate, with which to construct a generating plant of more than twice the capacity and many more miles of transmission lines that had been covered by the $16,000,000 allocation. The co-op has asked the Commission to amend its present certificate to authorize the larger plant, and hearings thereon have not yet begun.

Prior to and since the loan allocation for the G&T co-op was made, we have sought earnestly and sincerely to negotiate with the REA cooperatives that are the proposed customers of the G&T, a power supply contract acceptable to all parties. We have discussed the matter with the Administrator, and still have been unable to secure consideration of such an alternative by the co-ops. I have reached the inescapable conclusion that there is no desire to negotiate a contract, but a determination to construct a G&T no matter what the cost.

There can be no doubt that the co-op members could continue to benefit from the lower power costs available to the distribution cooperatives if they continued to purchase power at wholesale from our Company. On the other hand, they would have to bear the burden of higher costs if power is purchased from the G&T.

Our Company has provided sufficient facilities to supply all co-op requirements proposed to be served by the enlarged plant, but still the requests for funds to build unnecessary generating plants and transmission systems continue to grow at an amazing rate. Since the originally stated objective of rural electrification is so nearly completed, the real purpose of such requests can only be to build a tax exempt federally subsidized power empire to replace existing investorowned and taxable facilities.

The National Rural Electric Cooperative Association has asserted that REA co-ops during the next fifteen years will need for growth capital, about nine and a half billion dollars, nearly twice the total amount spent since the beginning of the program in the 1930s. Annual statistical reports of the Rural Electrification Administration show that requirements for G&T loans up to December 31, 1949, were approximately $327,420,834, or 16% of the total loans made to that date. Through December 31, 1964, however, this figure had multiplied over five times to $1,688,561,718, or 30.8% of the total loans made since the beginning of the REA program. Furthermore, the loans during the fiscal year 1965 as reported by the Administrator, were $150,436,564, or 39.6% for distribution facilities, and $229,091,436, or 60.3% for generation and transmission facilities. This clearly illustrates that the construction of generating plants and transmission lines is receiving rapidly increasing emphasis in the REA program. This means that in 1965 alone, the $229,091,436 loaned for G&T purposes will to a great extent duplicate or otherwise make unnecessary an approximately equal expenditure by investor-owned companies. The REA financed facilities are subsidized interest-wise and are practically tax free at all levels of government, whereas the investor-owned facilities are financed by the sale of securities to the public, and are fully taxed.

65-357-66

The situation which I have described in Mississippi, regarding the use of federally provided funds for unnecessary duplication of facilities, would be greatly aggravated by financing operations permissible through the Federal Bank for Rural Electric Systems under the proposed legislation. The cost to taxpayers of continuing to provide loans for construction of unnecessary and unwarranted tax exempt facilities at ridiculously low interest rates would not be reduced by the proposed legislation. The bills under consideration by your Committee, rather than reducing the taxpayer's burden will create a vast new federally financed or sponsored power program which, in my judgment, is not only inappropriate but dangerous. Although these bills outline a plan to ultimately make the Bank completely independent of the Department of Agriculture and the REA Administrator, it does not appear at all likely that such could thereby be accomplished within the foreseeable future, and there is no time requirement or objective in the proposed legislation. There are many features that I could question in these bills but, in addition to those already expressed, several other notable objections are:

(1) The proposed legislation would not solve the problem of the taxpayer subsidizing loans for REA borrowers, since the present method of congressional appropriation for REA loans is proposed to be continued.

(2) It would confer upon the Administrator of REA, in his capacity of Governor of the proposed Federal Bank for Rural Electric Systems, the completely unfettered discretionary powers which the Congress has heretofore denied him and, through the proposed bank, would in effect repeal existing limitations on his actions which the Congress has heretofore imposed.

(3) The proposed Federal Bank for Rural Electric Systems would be author. ized to grow into the largest federally chartered banking operation and would be permitted to operate without regard to the historical principles and procedures imposed upon other federally chartered banks in order to insure their conduct as sound and successful operations.

(4) The taxpayer will continue to subsidize loans made by this Bank because the proposed interest rate of four percent for “intermediate" loans is still below the current cost of money to the federal government. Further, the Bank is authorized to borrow from the Treasury, without any limitation as to amount, to meet its deficits, and the Department of Agriculture is to pay all administrative costs of the Bank.

(5) The proposed legislation, through the guise of a rural electrification account to be created in the Federal Treasury, accomplishes through the back door what the Congress has historically refused to provide on direct request—a revolve ing fund for use in providing financing to cooperatives.

(6) Under the proposed legislation the Administrator in his capacity as Gov. ernor of the Bank could provide federal financing for projects which the Congress has repeatedly declined to authorize, and in these actions the Administrator would be free of congressional control. Through funds available from both direct congressional appropriations and the Administrator's actions with respect to the Bank, there could be effected vast projects embracing both steam and hydro facilities and transmission networks which public power advocates have long desired as a significant step toward the nationalization of the electric industry. An illustration of one such project is the so-called “Yankee-Dixie Project" where it is proposed to construct large mine-mouth coal fired generating plants, a 500 Kv transmission system extending from New England to Florida and to Illinois and serving many towns and cities now being supplied by investor-owned utilities.

(7) The proposed legislation would vest in the Administrator as Governor of the Bank discretionary powers of such magniture that arbitrary or capricious exercise thereof could affect the economic development and well being of vast areas of the United States either favorably or unfavorably.

The proposed legislation under consideration by this Committee does not proide a means of supplemental financing for REA cooperatives free from federal ubsidy but establishes a vast new federally sponsored program which, for the easons previously expressed, I do not believe to be in the public interest. Pasage of this bill will seriously endanger the future of the investor-owned electric ndustry while its defeat will not impair the REA program as it exists today. I herefore respectfully but earnestly request that it be defeated. Thank you for the opportunity of expressing my views. Mr. Poage. Thank you very much, Mr. Watson. Are there any questions of Mr. Watson?

Mr. ABERNETHY. Mr. Chairman, I do not care to ask Mr. Watson any questions, but before he leaves there is another witness here that while he was on the original list to be heard, his name seems to have been inadvertently omitted from this particular list, a representative of Mississippi Power & Light Co. Mr. Wilson was originally scheduled to testify and is replaced by Mr. Alex Rogers. Is Mr. Rogers present. I just wanted to call attention to the fact that his name was on the previous list, but I think it was inadvertently omitted on this list.

I would like to express a personal welcome to Mr. Watson, a fellow Mississippian.

Mr. CALLAN. I would like to insert a statement into the record at this point.

Mr. Poage. Without objection, it will be inserted in the record at this point.

(The statement submitted by Mr. Callan follows:)

A. J. Watson is the last of The Southern Company's presidents to appear, having been preceded by Mr. Harllee Branch, who heads up the parent holding company; President Walter Bouldin of Alabama Power Co.; President C. A. Lilly of Gulf Power Co.; and President Edwin I. Hatch of Georgia Power Co.

Only the Southern Electric Generating Company member of this family has not been here. This is the cooperative venture of the Alabama and Georgia Power Companies which according to its annual reports filed with the Federal Power Commission and summarized in FPC's annual publication of Statistics of Electric Utilities, has had revenues exceeding $132 million since it commenced operations in 1960 but has not paid one cent of income taxes thereon. However, it has been able to “defer" Federal income taxes in its initial five years of operation totalling more than $8 million. These deferred taxes are at least an interest-free loan from the Government, and at most, may be termed a subsidy. Figures for each of the five years are as follows:

Southern Electric Generating Co.

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1 Commenced operations on May 1, 1960.
Mr. Poage. Are there any further questions of Mr. Watson?
If not, we are very much obliged to you, Mr. Watson.
Mr. Watson. Thank you, sir.

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