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(6) With the correspondingly heavy demands on the United States Treasury as the result of the Vietnam conflict, space programs, expanded social welfare programs, et cetera, it appears undesirable and unreasonable to further add to the taxpayers burden by initiating a costly program for which no real need has been demonstrated nor declared in the purpose of this legislation.
(7) This legislation would actually inspire conflict and generate problems for the future because of the establishment of three different interest rates that apparently would be in effect for rural electric borrowers. No specific standards are established to guide the bank's administrator in determining what borrower or what loan requires 2%, 3% or 4%.
In summary, the legislation proposed is contrary to the original stated purpose of the REA program; no provision has been made for future effective Congressional control; facilities and services provided by tax-paying companies would without doubt be duplicated; protection for consumers that does exist would be weakened; no need for such an ambitious and expensive program has been demonstrated, nor has any argument been presented for expanding the original purpose of the Rural Electrification Act of 1936; criteria or standards for granting loans appears to be totally absent; and no guide-lines are included to assist the administrator in deciding who is to receive lower or higher interest rates on the loans to be made.
Monongahela Power Company believes that the legitimate financing needs of the REA should be met to enable it to continue as a distribution organization. However, to set up a banking institution of the magnitude proposed and allow it to make loans to facilitate the construction of generation and transmission facilities is totally unrealistic. It is our contention that the invesor-owned utility industry has demonstrated that it can and will adequately supply all REA needs. To adopt this legislation will sap the economic strength of the nation througb wasteful duplication of facilities and needless commitment of tax dollars.
Very truly yours,
D. M. KAMMERT.
STATEMENT OF NATIONAL ASSOCIATION OF MANUFACTURERS
This statement is submitted on behalf of the National Association of Manufacturers, a voluntary association of business enterprises which account for some 75 per cent of the nation's manufacturing production and about the same per cent of manufacturing employment.
The National Association of Manufacturers endorses the objectives of shifting the financing of the appropriate activities of rural electric cooperatives from a subsidized government source to private sources. By "appropriate" activities, we mean "the furnishing of electric service to persons in rural areas who are not receiving central station service," as set forth in the Rural Electrification Act of 1936. We do not mean the construction of generation and transmission facilities where an adequate supply of power is already available to the borrower at rates which, after making due allowance for the tax components included therein, are as favorable or more favorable than those which would result from the facilities to be financed by the proposed loan.
Such a shifting of financing would be entirely in accord with the official stated policy of the Association on "Federal Lending Operations." This policy statement advocates that steps be taken to reduce the scope of, and ultimately terminate, federal lending activities, but that the method used should avoid sudden or undue hardship to those sectors of the economy which have become dependent on this form of government support. Some of the suggested methods are (1) Transferring to private ownership such agencies as can be so transferred; (2) Making all credit operations, which are not readily transferable to private ownership and operations, self-supporting by appropriate increases in fees, interest, premiums or other charges; and (3) Increasing the risk of borrowers and beneficiaries as a condtion of securing government financing help.
It is in this light that we would like to examine H.R. 14000 and H.R. 14837, bills to amend the Rural Electrification Act of 1936. Both bills are lengthy and complicated. However, the following is a brief summary of the bills as they apply to rural electric cooperatives:
1. The bills would establish a Federal Electric Bank (H.R. 14000) or a Federal Bank for Rural Electric Systems (H.R. 14837) to make loans to rural electric
cooperatives. Under H.R. 14837, a seven-member Electric Bank Board would be appointed by the Secretary of Agriculture, four from the Agriculture Department and three representing the rural electric systems. The Administrator of the Rural Electrification Administration would serve as the chief executive officer (Governor) of the Bank.
2. Funds for the Bank's capital stock would come from the U.S. Government$1 billion under H.R. 14000; $750 million under H.R. 14837 at the rate of $50 million per year for 15 years-with no provision for payment of interest on this money or any timetable for its repayment.
3. The Bank would be authorized to borrow, by issuing debentures, up to ten times its paid-in capital and retained earnings. This could be $8-10 billion or more. It has been estimated that the total program over 15 years could involve more than $17 billion.
4. The present REA 2% loan program would be continued. In addition, the Bank would be authorized to make so-called "intermediate loans" at 3% (H.R. 14000) or 4% (H.R. 14837). Loans at a higher rate designed to cover the Bank's costs would also be authorized, but it appears problematical whether any loans would be made at that rate as long as "intermediate loans" or 2% REA loans were available. Loans could be made for the construction of generating and transmission facilities, as well as for distribution facilities. Loans could also be made for the acquisition of facilities owned by municipalities or investorowned electric companies. The duration of the loans would be as high as 50 years, and the schedule of payments of interest and principal could be adjusted by the Bank's Governor (REA Administrator). Loans could cover 100% of the cost of the facilities to be constructed or acquired, with no equity required of the borrower. The restriction on REA 2% loans that they be limited to service for persons not already receiving central station service in places of less than 1,500 population would not apply to loans made by the Bank.
5. The property and income of the Bank would be exempt from "all taxation now or hereafter imposed by the United States, or by any State, territorial, or local taxing authority
6. If the Bank did not have sufficient funds to pay interest or principal on its debentures, it could borrow money from the U.S. Treasury without an appropriation by Congress.
7. A "rural electrification account" would be established in the U.S. Treasury, and it would have as assets the $3.34 billion of evidences of debt presently held by the REA; $883 million of "undisbursed balances" of electrification loans; all collections of principal and interest received on and after July 1, 1965 (this retroactive provision would give the account about $193 million of collections due in fiscal 1966 as a source of ready cash); all future appropriations for electrification loans and for the administrative expenses of REA; and shares of the Bank's capital stock. This account would resemble a revolving fund because money placed in it could be used for designated purposes without further appropriation by the Congress. Thus, these money outlays would not have to be reflected in the Federal Budget submitted by the President to the Congress each year.
It is clear that the bills as such do not accomplish a transfer to private ownership. There is a declaration of policy objective that the Bank "will become entirely privately owned, operated, and financed. . ." Also, there is a provision in Section 405 (c) that the Class A stock (the stock issued in exchange for the capital furnished by the United States Government) "shall be redeemed and retired by the electric bank as soon as practicable after June 30, 1981, but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank." And there is a provision in Section 412 that "As promptly as practicable after all class A stock issued to the United States has been retired pursuant to section 405 (c) of this title, the Secretary shall transmit to the President for submission to the Congress recommendations for such legislation as may be necessary or desirable to make appropriate provisions for the transfer to class B, class C and class D stockholders of the ownership and control of the electric bank in order that its operations may thereafter be carried on as a privately owned, operated and financed banking corporation." However, these provisions seem to be in the category of pious hopes because they do not really establish any schedule, program or procedure for the retirement of Class A stock. In any event, the retirement would not even begin until 1981 and there is no timetable or deadline set at all. It appears that a considerable
amount of such stock must be outstanding for many years after 1981 in order to provide the subsidy involved in the intermediate loans to be made by the Bank. Thus, it is not possible to estimate when, if ever, the Government's stock would be retired. Perhaps transfer to private ownership could not be attained for at least 65 years. Consequently, for all practical purposes, the bills must be evaluated as a proposal to create a new Government corporation to engage in the banking business rather than as a proposal for transfer to private ownership.
Viewed as such, the bills should be analyzed to determine whether they move in some other ways to reduce the scope of federal activities. The first point to be noted in this connection is that the Bank lending program would in no way displace the present REA 2 per cent lending program. The bill title refers to "additional" sources of financing and the declaration of policy refers to "supplementary" financing. The amendments to the Act are set forth in the form of new titles, so that they would in no way modify the existing authority of REA to make 2 per cent loans should Congress continue to provide the necessary funds. Therefore, in this respect, the bills make no contribution whatsoever toward reducing the scope of federal activities.
Section 410 would authorize the making of "intermediate" loans with no annual total dollar limitation. Since these loans would also involve subsidy (a 3 per cent interest rate in H.R. 14000 and 4 per cent in H.R. 14837), this program would constitute an enlaregment of the federal activity rather than a reduction. Section 410 would also authorize the making of loans at a rate "which reflects the current average rate payable by the electric bank on its electric debentures, and administrative expenses and estimated losses of the electric bank in respect of such other loans, all as determined by the Governor of the electric bank." This appears to be a step in the right direction, but, as previously indicated, the pressures on the Administrator-Governor to make 2 per cent REA loans or “intermediate" loans rather than the at-cost loans would be great. No really meaningful criteria are set forth to guide Bank policy in this regard. Further, there are no stated limitations on the "intermediate" and at-cost loans so it is quite possible they could be used for the construction of generating and transmission facilities to serve other than truly rural areas. Consequently, in still another aspect, the bills move in the direction of enlargement of the scope of federal activities rather than reduction.
The same observation could be made about the provision which calls for a maximum loan period of 50 years for Bank loans rather than the 35 year period of present 2 per cent REA loans; about the fact that no interest need be paid on the capital advanced by the United State Government to the Bank, whereas REA must pay 2 per cent interest on the notes it presently gives to the U.S. Treasury to cover loan authorizations; about the fact that collections of principal and interest on outstanding loans would be paid into a rural electrification account rather than into the U.S. Treasury as miscellaneous receipts (when deposited as miscellaneous receipts, they cannot be used again without a subsequent appropriation); and about the fact that the Bank would be able to borrow money, without limit and without Congressional appropriation, from the U.S. Treasury whenever it was unable to meet the payments of principal and interest on its debentures.
As to increasing the risk of the borrowers, this is not an element of the present bills. REA loans can now be made up to 100 per cent of the cost of the facility, and this would also be true of "intermediate" and at-cost loans.
Therefore, although we endorse the objective of shifting the financing of the appropriate functions of rural electric cooperatives from a subsidized government source to private sources, we can not support the bills before the Committee since they do not incorporate any effective steps in that direction but, to the contrary, move greatly in the direction of further massive federal involvement in this type of lending activity. This defect is aggravated because such greater involvement would not be subjected to adequate budgetary and appropriations processes, and the Administrator-Government would become an extremely powerful official dealing with billions of dollars and subject to little Congressional surveillance and control. Moreover, there is no indication that the appropriate functions of rural electric cooperatives over forthcoming years would require financing on the scale contemplated in these bills. The presures and temptations to use this money to build giant tax-exempt generating and transmission facilities which would unfairly compete with tax-paying electric companies would be well-nigh irresistible.
Consequently, we respectfully urge the distinguished Committee on Agriculture of the United States House of Representatives not to report H.R. 14000 or H.R. 14837.
NEW ENGLAND ELECTRIC SYSTEM,
Boston, Mass., May 13, 1966.
Federal bank for rural electric systems (H.R. 14000 and H.R. 14837).
HOUSE COMMITTEE ON AGRICULTURE,
GENTLEMEN: I urge you to reject the pending bills to establish a Federal Bank for Rural Electric Systems. With equal conviction, I urge you to explore alternatives that will permit the rural electric systems to take their proper place in the American economy as they reach maturity.
I wrote not only from the point of view of my own company but also from the point of view of the consumers we serve. Under the pending bills, the taxes would be used to subsidize the bills of electric consumers in other parts of the country.
I need not labor the history of the rural electrification program, which is fully familiar to your Committee. It was established in the depression years of the 1930's with the twofold purpose of providing a stimulus to a lagging national economy, and of bringing benefits of electricity to rural areas. The darkened farm of the 1930's has disappeared from the American scene and the national economy no longer requires a continuing stimulus of Federal subsidy in this sector.
The rural electrification program has been an outstanding success, in part through the Federally-financed efforts of the rural electric cooperatives, and in part through the independent efforts of the established utilities. The question before your Committee today is not whether these gains shall be scrapped; rather it is whether, and how, the rural electric cooperatives can be brought to full maturity and placed on an independent footing. The pending bills to establish a Federal Bank for Rural Electric Systems will not do this.
1. Does the Federal Bank program involve a subsidy to qualified borrowers? There can be no doubt that this is so.
First, the bills will continue the 2% loan program which makes expansion funds available at less than the cost of money to the Federal Government. Your Committee, and the Congress generally, has long sought to limit such loans to cases of legitimate need. Congressional control should be continued. Subsidies from the Federal Treasury are justified only when they serve important national needs. They should not be available on an indefinite basis or as a matter of right, but only under close and constant supervision by Congress.
Second, the bills will provide "intermediate loans" from funds contributed by the Federal Government, either directly or by earmarking funds that were intended to liquidate earlier 2% loans made from the Federal Treasury.
Third, the bills provide "full cost loans" from funds obtained by the sale of the new Bank's debentures. But, these are funds that could not be obtained from the private money market without Government support. The ten-to-one ratio of loans to capital of the new Bank is possible only because of the underlying pledge of Federal credit and the tax exemption granted to the Bank. In simplest form, the Bank represents a means of pooling revenue bonds to be issued by the rural electric cooperatives with Federal backing.
2. Does the Federal Bank program involve a subsidy to a special group of taxpayers? There can be no doubt that this is so.
The proposed Bank is authorized to make loans only to systems which in the past have qualified for 2% loans. This, in turn, means only those systems which were established twenty to thirty years ago to bring electricity to rural areasareas without central station electricity lying outside established villages of 1,500 inhabitants or more.
Today there are no longer any significant areas where new rural electric systems can be established. As a result, there can be no new applicants who would qualify for 2% loans. The proposed Bank, therefore, will be established solely to serve an existing clientele consisting of the rural electric systems formed in the 1930's and 1940's, together with a smaller group of cooperatives originally set up to take over the distribution systems served by the Tennessee Valley
Authority. The special loans to be provided by the Bank will not be available to other utilities, whether investor-owned or municipally-owned. In simplest form. the program will result in subsidizing the electric bills of a favored group of taxpayers.
3. Is a Federal subsidy necessary to insure continued service by the rural electric systems?
In a few hardship cases there can be no doubt that the financial well-being of individual rural electric systems requires continued Federal support. In the great majority of cases, however, the rural electric systems have already grown to maturity and should be freed from Federal tutelage.
The pending bills recite the "growing capital needs" of the rural electric systems. These capital needs surely exist, for the rural electric systems share, in common with the established utilities, the obligation of meeting the growing demands of the American public for electric power. But the very size of their capital needs is a measure of the maturity of the rural electric systems.
Details of these capital needs should be spread on the record of the Committee hearings. If the record of past hearings is a reliable index, they will fall into two distinct categories:
First, funds to finance the expansion of distribution capacity in established service areas. This is a true need of the individual rural electric systems, but one which in most instances can be met without subsidy from the proposed Bank.
Second, funds to finance the expansion of generation and transmission systems. This is seldom a true need of the rural electric systems, since adequate central station service and the necessary transmission to rural load centers is readily available from the established utilities. Reasonable rates for these services are assured by the vigilant exercise of its rate jurisdiction by the Federal Power Commission. Only if there is a national interest in providing central station service at subsidized rates can there be any demonstrable need for continued generation and transmission loans from Federal funds. On the other hand, if such a national interest exists, the benefits of Federally-subsidized financing should be made available to consumers in all areas of the country, and not solely those served by the rural electric systems.
4. What alternative program should be adopted?
The analogy of the growing child is persuasive. In the first few years of life, the young child is totally dependent upon his parents. In adolescence he has a right to look to his parents for continued support and a suitable education which will lead to maturity and independence. But there comes a time when the choice must be made between mature independence and a subsidized life as a perpetual student.
The case of the rural electric systems is not different. They were fully supported in the early years when the extension of electrical service to rural areas required Federal assistance. They have, for the most part, now been brought to maturity and should be reaching full independence. The tutelage of the Federal government should be withdrawn in order to permit the rural electric systems to take their proper place in the national economy, ultimately standing independent of Federal support.
An alternative program, in lieu of continued subsidy, would have the following objectives:
(a) The gradual liquidation of the outstanding 2% loans in order that future financing can be accomplished within the private investment sector of the economy.
(b) The gradual building up of the equity investment of the rural electric systems, to permit them to obtain private loans on conveniental terms.
(c) The gradual withdrawal of tax exemptions after the necessary equity investment has been achieved.
(d) The substitution of conventional utility regulation by Federal and State commissions, upon withdrawal from the tutelage of the Rural Electrification Administrator.
I have put my thoughts in letter form in view of the limited hearing schedule on these bills announced by your Committee. I should be happy to elaborate on these views in testimony if the Committee should so desire.
Yours very truly,
ROBERT F. KRAUSE.