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We believe that instead of going into the details and mechanics of these bills or attempting to cope with their obvious deficiencies, the Agriculture Committee of the House of Representatives should go to the heart of the matter and make a complete investigation of the assumption from which they proceed. We know of no present or foreseeable capital needs of the rural electric cooperatives that would call for monies of the scale that is contemplated here. The original purpose of the Rural Electrification Administration loans was to facilitate the furnishing of electricity to persons in rural areas not receiving central station service. A rural area was defined as a place of less than 1500 population. This purpose has to all intents been accomplished, and one would expect that loans to rural electric cooperatives would be diminishing-certainly not that a vast new program would be undertaken.
In any case, no such new program should be authorized until Congress has thoroughly examined and debated the basic question and made a conscious determination of what the future of the Rural Electrification Administration and the rural electric cooperative systems should be.
TELEGRAM, DAY LETTER
JUNE 4, 1966.
Re H.R. 14000, H.R. 14837 and related bills.
Hon. HAROLD D. COOLEY,
Chairman, Committee on Agriculture,
House of Representatives,
To conserve the Committee's time, I have not asked to testify but respectfully request that the following statement, submitted on behalf of American Electric Power Company and its operating subsidiaries, Appalachian Power Company, Indiana & Michigan Electric Company, Kentucky Power Company, Kingsport Power Company, Ohio Power Company and Wheeling Electric Company, be made part of record in pending hearings.
We do not believe H.R. 14000, H.R. 14837 and related bills are required for the purposes of supplying quality electric service at reasonable rates to persons in rural areas who would not otherwise receive such service. We believe such bills represent an unnecessary expenditure of Federal funds and could be of great harm in authorizing Federal assistance which goes far beyond these objectives and would create major problems of legitimate concern for existing electric utilities financed with private capital; and we, therefore, strongly urge the Committee's disapproval of such bills.
These bills provide for up to $1 billion of Federal funds on which no interest payment whatever would be required; a government guarantee of the $8 to $10 billion bank debentures which may be sold to the public without even making the charge for Federal guarantees which is required under other Federal programs; surrender by REA of its existing senior mortgage interest in borrowers' property to secure the more than $3 billion of outstanding loans; staffing of the proposed bank with Federal employees to be paid with Federal funds and at no cost to the bank; and conferring upon the bank complete freedom from Federal, State and local taxes.
The $10 billion or more of funds to be made available under the bills is not to be restricted for use in providing quality electric service at reasonable rates to persons in rural areas not having central station service. Under these bills it can be used for the wholly unrelated purposes of financing borrowers in engag ing in destructive competition to supply power to persons already receiving quality electric service at reasonable rates from existing suppliers, expanding service into municipal areas, and competing for service to large industrial establishments to whom power is otherwise available.
We suggest, first, that the Committee insist on a detailed breakdown of the stated need of REA borrowers for $8 billion or more for capital financing in the next 15 years. We urge that the Committee require clarification as to whether this $8 billion is for necessary plant replacement and growth to meet the objectives of the Rural Electrification Act or whether the figure includes financing to take over customers already receiving quality service from existing suppliers or to build generation and transmission systems which would duplicate existing or planned service financed with private capital.
We believe that any legislation establishing a new bank or other instrumentality to provide supplemental financing and to provide Federal funds and other Federal assistance to such new bank should incorporate the following principles:
(1) As long as Federal funds and Federal assistance are provided, all policie and limitations which have been formulated by the Congress in prescribing the conditions under which Federal funds and Federal assistance are to be pro vided to finance rural electrification should be fully applicable. Specifically loans by the bank should be made only where required "for the furnishing of electric service to persons in rural areas who are not receiving central station services" (as is now provided in the Rural Electrification Act) and only in accordance with all other standards and conditions prescribed by the Congress as applicable to the use of Federal funds to finance rural electrification.
(2) The existing 2% lending program of REA should, in the future, be limited (a) to loans for distribution purposes, and (b) to borrowers who, because of sparse territory or the like, cannot finance their capital requirements through any other means.
(3) As long as there is any Federal investment in the bank, such bank should be under the continuing supervision and control of the Executive and Legislative branches of the government.
(4) The bank should be required to pay a fair return on the government's investment at least equal to the average interest rate on long-term government bonds, and there should be reasonable provisions for periodic repayment of the government's investment. (This would be similar to the requirements of the TVA revenue bond financing legislation.)
(5) Additional capital of the bank should be obtained, to the extent feasible from time to time, in the open market through the sale of securities which are given no special tax exemptions and no direct or indirect Federal guarantees. (6) Loans by the bank should be made at a rate of interest which will cover the fixed and operating costs of the bank including the expenses of such operating personnel as may be required.
(7) Loans by the bank to finance construction of generation and transmission facilities should be made only where it is established that there is not otherwise available to the borrower an adequate supply of power (or transmission facilities) at rates which, after making due allowance for the different tax components included therein, are at least as favorable as the cost of power (or transmission) which would be produced from the facilities to be financed by the proposed loan. Where there is disagreement on the question whether there is otherwise available an adequate supply of power (or transmission facilities) at such rates, such questions should be certified for determination by the Federal Power Commission.
Legislation embodying the foregoing principles would fully take care of all legitimate requirements of the rural electric cooperatives and would do no more than provide minimum reasonable protection for the legitimate interests of existing power suppliers.
AMERICAN ELECTRIC POWER COMPANY, INC.,
INDIANA & MICHIGAN ELECTRIC COMPANY,
WHEELING ELECTRIC COMPANY,
STATEMENT OF ROBERT G. ASHEIM, VICE PRESIDENT, BLACK HILLS POWER & LIGHT Co., RAPID CITY, S. DAK.
Black Hills Power and Light Company is an investor-owned electric utility serving the Black Hills area of South Dakota and Wyoming. The following testimony on behalf of the Company is to express opposition to the Federal Electric Bank Bills, H.R. 14000 and H.R. 14837.
At the outset, I want to remind you that Black Hills Power and Light Company has always cooperated with the REAS in an effort to solve controversial problems and provide for the orderly development of electric facilities.
For example, the REAS and Black Hills Power and Light Company developed jointly an agreement whereby two generating units were installed in our exist ing generating plants to guarantee low cost electric energy for REA consumers Recently a series of conferences by representatives of municipal electrics, REAS and investor-owned utilities held, at the request of South Dakota Governor
Nils Boe, resolved territorial controversies. This compromise agreement, enacted into law by the South Dakota legislature, is beneficial to the citizens of our state and the entire electric industry.
This fine relationship can be greatly endangered by the enactment into law of the proposed Federal Electric Bank. The need for a new method of financing is completely unnecessary at a time when virtually all rural people in the nation have central station service.
The Federal Electric Bank proposal tends to change the concept of the REA program. It bypasses congressional authority and control and substitutes extremely vague guidelines with apparent unlimited authority granted to the REA Administrator-Governor.
Criteria for authorization of loans is not specified in this proposed legislation and if enacted, can jeopardize existing facilities of existing power suppliers, including municipal electrics, REAS, investor-owned utilities and others.
Because of its possible far-reaching effects on the total electric industry and other segments of the economy, further consideration of this proposal should be delayed until such time as studies and evaluations can be completed by all concerned.
ROBERT G. ASHEIM.
Hon. HAROLD D. COOLEY,
CENTRAL HUDSON GAS & ELECTRIC CORP.,
Chairman, House Committee on Agriculture, 2409 Longworth Office Building, Washington, D.C.
DEAR MR. COOLEY: We submit herein our views concerning proposed H.R.14837 which provides for the creation of two federal banks under the supervision of the Secretary of Agriculture. One of these banks would be for co-op electric systems and the other for rural telephone co-ops.
This bill provides for a startling new departure in federal financing for electric utility facilities. It and a similar bill (H.R. 14000 by Mr. Poage) are presented by their proponents as a means to achieve private financing of rural electric systems and "get the REAS off the taxpayer's back". Unfortunately, a careful reading of the bill reveals that it will not accomplish that objective. Instead. it will
1. Divert repayments of past REA borrowings from the Treasury into a new bank which is not obligated to pay any interest or dividends to the Treasury on such money nor to repay the principal except as it is found expedient to do so.
2. Empower the bank to borrow unlimited amounts from the Treasury to cover interest and principal repayments on its private borrowings if the bank cannot meet such payments out of its own funds.
3. Empower the bank to borrow additional amounts from the Treasury to pay the interest on its Treasury borrowings if it cannot meet these payments.
4. Effectively remove the Rural Electrification Program from Congressional control without substituting regulatory control by state or federal regulatory commissions.
By conservative estimate the bill will provide the bank with the capacity to loan approximately 20 billion dollars over the next 15 years. The total investment of all REAS is currently about 5.5 billion dollars. REA itself says it will need only 8-9 billion dollars over this period and it has not said what use will be made of that amount except that it will be needed "to serve the future needs of its customers". Any bill of this kind should be supported by a careful study demonstrating the need for this financing which should then be avaliable to all interested persons for comment as to accuracy of the premises used and the conclusions reached.
A serious objection to the bill is that control of the program will be delegated to the director of the bank and Congress would relinquish a control over federal appropriations for REA purposes which it now has. We question the advisability of ceding Congressional control of such financing to an executive agency.
Should the need for such supplemental financing be satisfactorily supported it is our view that any bill then enacted should provide
1. Definite guarantees to insure timely repayment of the initial federal investment in the bank.
2. A requirement that borrowers from the bank are by law made subject to regulation by the appropriate state regulatory commission and by the Federal Power Commission where such borrowers are engaged in interstate commerce. This is particularly necessary to insure against uneconomic duplication of existing utility facilities to the detriment of the economy and the appearance of the countryside.
The extension of credit in the magnitude proposed by this bill appears to be contradictory to the present efforts to restrain inflation. Furthermore, all of the capital would be used for the construction of tax-free plants thus adding to the burden of taxpayers not benefitting from the construction. Accordingly, we request that you do not approve this bill. Respectfully submitted.
CENTRAL HUDSON GAS & ELECTRIC CORP., By LELON F. SILLIN, JR.
JUNE 13, 1966.
STATEMENT OF JOHN J. MEEHAN,' CHAMBER OF COMMERCE OF THE UNITED STATES The Chamber of Commerce of the United States recommends that the portion of H.R. 14837, and similar bills, providing for supplementary financing of rural electrification be rejected.
It is recommended instead that studies be initiated by the Committee which would develop legislation to phase out the Rural Electrification Administration program for financing rural electrical cooperatives by providing a transitional federal program leading to private financing of all rural electric cooperative activity.
The new federal bank for rural electric systems as proposed by H.R. 14837 would create a new nationwide system of federally-subsidized financing for public power systems. This proposal would continue the existing rural electrification program and establish a new financing system without any meaningful congressional limitations. This new system would open sources of capital to borrowers, most of whom have a tax-free status, to build, own, and operate facilities in direct competition with other suppliers for customers virtually everywhere.
H.R. 14837 would establish (1) a Rural Electrification Account in the Treasury with most of the earmarks of a revolving fund. and (2) a Federal Bank for Rural Electric Systems available to those who had been previous REA borrowers under Section 4 of the Act.
The bank would obtain funds for its activities by issuing stock to the government, to those eligible to borrow from the bank, and to electric consumers of borrowers, and through debentures to be sold in the private money markets. Debentures would be authorized up to 10 times the paid-in capital and retained earnings of the bank, which, considering the government's authorized initial subscription of $750,000,000 to the bank's stock alone, would give the bank a potential lending capacity of substantially more than $8,000,000,000.
In essence, H.R. 14837 would (1) continue the present REA 2% electrification loan program unabated, unmodified, and without any statutory limit on expenditures; (2) authorize $750,000,000 of federal funds for the capitalization of the bank to be established by this plan: (3) provide no specific date for repayment of this money; (4) provide the bank with a potential lending capacity of up to 10 times its paid-in capitalization and retained earnings which, when coupled with the amounts to be subscribed by borrowers and others, could be in excess of $12,000,000,000; (5) allow the bank to operate without limitation as to areas to be served by borrowers or the types of facilities to be financed by loans from the bank; (6) allow loans to be made without proof of actual need and regardless of whether borrowers would duplicate the existing facilities of electric companies, a policy which could result in broad economic waste; and (7) allow the bank to operate free of the restrictions that Congress has written into REA appropriations reports concerning unnecessary duplicate facilities.
The rural electrification loan program was first adopted by Congress in 1936. Its fundamental purpose was to provide funds for the construction of electric systems to furnish electric energy to persons in rural areas who were not receiving central station service.
1 John J. Meehan, group manager. Community, Regional, Natural Resources Development Group, Chamber of Commerce of the United States.
This limited and well-definied purpose is all that Congress intended by the adoption of the Act of 1936. We agree that this limited objective should be pursued to the fullest to insure the completion of programs to bring electric service to the Nation's farms where central station service is not available and to provide true rural ownership and local control of rural electric cooperatives. However, rural electric generation and transmission cooperatives supplying electric power for use by non-farm customers in areas where central station service is available should not, with respect to such power supply, be entitled to low interest rates, loans, free administrative services, or other forms of subsidy from the federal government. Nor should they be exempt from federal income taxes. They should be subject to the regulations to the same extent as investor-financed utlities operating under similar conditions.
This legislation represents a complete departure from the concepts of the Rural Electrification Act of 1936. It would provide the mechanics and federal funds for essentially unlimited financing of cooperative electric systems, without sufficient congressional control or meaningful restrictions on how these immense sums of public funds may be spent. The result would be a gradual displacement of taxpaying investor-owned utilities by federally-financed and subsidized cooperatives, and transformation of the rural electrification program into a vehicle capable of establishing federally-financed generation and transmission systems throughout the Nation.
This legislative proposal would not free the United States Treasury from its burdensome obligation to support rural electric programs. It is just the other way, for H.R. 14837 and similar bills would add to the financial burden of the nation's taxpayers. The bill provides that the present subsidized 2% interest rate will perpetuate the attendant substantial yearly loss to the Treasury of the United States. Further, the federal government would purchase capital stock in the electric bank with no provision for repayment of dividends or interest to the United States on its capital stock. There is no reason to believe that the United States will ever recover its principal unless the bank in its sole discretion desires to return the money to the Treasury.
The most inherently dangerous characteristic of the proposed amendment to the REA Act is the failure to provide any real guidelines or limitations on the purposes for which the funds may be spent. The restrictions, such as the rural area limitation, contained in the Rural Electrification Act are not applicable. This opens the door for the construction of unneeded electric facilities which duplicate or parallel facilities of other energy suppliers.
In the past few years the formation and operation of generation and transmission cooperatives has created considerable concern. Of particular concern are those cases where duplicate facilities have been developed to supply wholesale power to distribution cooperatives, and in some cases to other types of power suppliers, governmental agencies and private industrial organizations. These super co-ops have in recent years obtained an increasing amount of federal funds to provide federally-subsidized electric power in areas historically served by investor-owned or other types of electric suppliers. In 1965, for instance, 60 percent of the REA electrification loan funds were made available for generation and transmission facilities which displaced adequate existing generating facilities in the immediate area.
Construction of these generating plants did not provide central station service to a single consumer who did not then have it. The loans represented direct federally-subsidized competition with existing, taxpaying power suppliers in the respective areas involved.
This kind of loan is not only obviously beyond the contemplated purpose of the Rural Electrification Act of 1936, but, in addition, constitutes a severe blow to the taxpaying public. Every dollar of funds advanced by REA-at the 2% interest rate-costs the government more than twice as much to borrow than the local cooperatives have been paying the government for the use of these funds. When these funds are then utilized to compete with regulated companies, the taxpayers suffer another loss in that the Federal Treasury is deprived of the income tax which the taxpaying supplier would have paid if it had obtained the business instead of the REA borrower.
In summary, the proposed legislation is neither necessary nor desirable from an economic viewpoint. The fundamental and limited purpose of the REA electrification program was to extend the benefits of central station electric service as broadly as practicable throughout the rural areas of the country, but only to supplement, rather than to supersede, the investor-owned utilities in providing 65-357-66- -46