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Rural Electrification Administration 2% Electric Loans for Construction 1936-1980 (1966-1980 Estimates Based on REA Estimates and Kuhn-Loeb Report)


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Chairman, House Committee on Agriculture,
2409 Longworth Office Building, Washington, D.C.

PITTSBURGH, PA., May 26, 1966.

CHAIRMAN COOLEY: I regret that I will be unable to testify at the hearing announced to commence May 31 regarding bills H.R. 14000 and H.R. 14837 providing for the establishment of a federal electric bank. However, on behalf of Duquesne Light Company, which serves 493,000 customers in the greater Pittsburgh area, I urge you and the members of your committee to reject these bills. The bills do not represent a step toward private financing, but will further involve the United States Treasury to the extent of at least $4 million for an indefinite period. The bills will not help farmers because nine out of ten of the few customers of the electric cooperatives are non-farm customers. The bills will promote unrestricted expansion of the cooperatives free from Government regulations and congressional controls. They will encourage the cooperatives to build large generating plants and serve areas and customers.

Now served by investor-owned, taxpaying utilities. They will duplicate facilities and thus waste Government funds and result in higher costs to consumers. They will decrease Federal tax revenues to the extent the cooperatives displace taxpaying private companies.

I respectfully request that you make my views known to each member of your committee and that you print this telegram in the record of the hearings.


NORTHPORT, N.Y., June 14, 1966.

House Office Building,

Washington, D.C.

DEAR MR. GROVER: There is a matter of immediate national concern on which I would like to present my opinion to you.

The matter concerns the Cooley Bill, H.R. 14837, to provide additional sources of financing for the rural electrification and telephone programs now under consideration before the Committee on Agriculture.

I agree that the federal government should undertake certain programs in the national interest only where other segments of the free enterprise system are unwilling or unable to do so. There was a need when the REA's were first established in 1935 to provide electrification to rural areas and there is no question that they have done a thorough job with nearly 100% of the rural areas now electrified. However, since this task has been virtually completed, I see no need for further extension and development of REA's. Investor-owned utilities have clearly shown their desire and ability to provide electricity to all segments of the economy economically and well in advance of demand so that no shortages of electricity have occurred. I feel strongly that H.R. 14837 and its companion Bill, H.R. 14000, are designed to create and expand governmental activities for which there is no need.

Further, I am concerned over certain basic concepts contained in H.R. 14837, particularly those related to the completely inadequate controls and standards incorporated in the Bill:

(a) The Bill continues to provide 2% money for the REA loan program when the government must pay over twice this rate to obtain the funds. (b) The Bill does not place any ceiling on the availability of these 2% funds, nor does it specifically delineate who is to receive them or restrict the use to serving rural-farm areas.

(c) No provisions are made for meaningful Congressional control over the REA bank even though it is to be established with federal funds.

(d) Standards that Congress has written to apply to REA loans for generation and transmission facilities would not apply to loans by the Bank. Purposes "to improve the efficiency, effectiveness or financial stability"

(Sec. 4.10) simply provide a blank check without economic justification and without regard to available alternatives.

(e) The Bill does not specify any meaningful criteria for making bank loans but leaves loan policies up to the Governor of the Bank. Since the Governor is also the Administrator of the REA, which has actively sought to enlarge its government sponsored activities, there is little question that these policies will be most liberal.

(f) There are no positive provisions for the repayment to the government of funds provided to the bank.

All of these factors represent to me a dangerous extension of the federal government into the free enterprise sector of the economy without adequate standards or controls over the use of the taxpayers' money and without reflection of the various substantial tax revenues which will be lost because electricity and telephone service will be provided by non-taxpaying groups.

I also respectfully hope that you will convey these views to representatives of the Committee on Agriculture whenever possible.

Very truly yours,


Houston, Tex., May 31, 1966.

Re H.R. 14837 (Cooley) and H.R. 1400 (Poage).


Chairman, Agriculture Committee,

House of Representatives,

Washington, D.C.

DEAR MR. CHAIRMAN: We appreciate this opportunity to submit our views on subject bills in connection with the hearings beginning today.


What is the REA program? How do the "bank” proposals relate to this program? These are difficult questions because of the fundamental ambivalence of the program as it is presently administered:

At its best the REA program has brought needed electric service to rural areas which probably would not have obtained it any other way.

At its worst the REA program, with no further unserved rural areas to be served, has turned its no-longer-needed aggressiveness in the direction of displacing and destroying existing suppliers of electricity.

The danger presented by the "bank" proposals is that they aid in accomplishing the worst and are not necessary to the accomplishment of the best.


There were only two tools which Congress found it necessary to employ to enable the REA co-ops to perform at their best in the legitimate sphere of their rural electrification objective-tax shelter and subsidized interest rates. In recent years these same two tools have been turned by the REA into weapons to enable them to succeed in performing at their worst in the sphere of illegitimate activities unrelated to the serving of unserved rural areas.

The tools, both important, are not of equal seriousness from the standpoint of potential danger, however:

Interest subsidies.-Much is heard about one of these two tools-the subsidized interest rate-and it is so thoroughly understood that it will not be labored here. It is by far the less dangerous of the two weapons. Tax shelter.-As to the other weapon, however, the tax shelter, there is a general lack of understanding. We will develop this subject in some detail because we believe an understanding of it is essential to an understanding of the over-all problem created by REA in the United States economy of 1966. The discriminatory taxation which results when the REA co-ops enter the take-over phase is economically crucial and decisive where it is allowed to persist.


So much for the REA's legitimate and illegitimate aims and the tools used to accomplish both.

The main subject of this letter is Control-control by Congress of this program which it created and which it has supervised and kept supplied with funds now for thirty years. The control which has been exercised by Congress annually, as it considered REA's requests for appropriations, has been the only control which has been or can be exerted to keep the co-ops within their legitimate sphere and out of their illegitimate sphere. It is the only control which can keep REA within the limits of its rural electrification function and prevent it from embarking on further extensions of its efforts, in no wise related to rural electrification, to displace and destroy tax-paying industry.

It is the elimination of this control by Congress that is sought by all the present REA “bank” bills. Such bills all, in one way or another, seek to throw off the supervising and restraining hand of Congress. Moreover, the effect of such bills would be to eliminate all Congressional surveillance and scrutiny. If the REA proponents are able to carry out this legislative coup they will have created an autonomous, self-perpetuating monster which will be in an enviable position with respect to the three key elements of the problem:

1. Tax shelter weapon-unaffected.

2. Interest subsidy weapon-restricted slightly but relatively unimportant anyway.

3. Congressional control-eliminated.

It is in this context that the elimination of Congressional control-whether under the guise of an REA "bank" bill or otherwise becomes so important. We recognize, however, that the reader of this letter might not understand or agree with us that it is important and might have a number of fair questions to ask. We will anticipate several of these questions and attempt to answer them ahead of time:

Question No. 1

Why do you say that the tax shelter weapon is so important-isn't the reason for the difference the fact that the co-ops are nonprofit associations?

The answer to this question can become very complicated but it need not be. In the first place, the tax-paying industries with which the co-ops "compete" do not really pay taxes themselves. Their profits (or "returns"), as public utilities, are fixed after taxes so that all taxes, like other "cost-of-service" items, are actually paid by the customer. This may be easily seen by assuming different Federal income tax rates-the allowable profit or return of a utility would be unaffected but the customers' rates would be changed up or down to reflect the difference. An idea of the quantum of the difference between what the tax-paying investor-owned companies must collect from their customers for such purpose and what the co-ops must collect from their customers may be seen from the comparison on the next page:

The chart (p. 718) shows the comparisons of the relative "overburden” for taxes and interest as between all the cooperatives in the United States and the seven major investor-owned utilities in Texas, both for 1964. (For details see Exhibit A attached.)

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