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Re H.R. 14000, Mr. Poage; H.R. 14837, Mr. Cooley.
Hon. HAROLD D. COOLEY,
OHIO EDISON, CO., Akron, Ohio., May 26, 1966.
Chairman, House Committee on Agriculture, Washington, D.C.
DEAR MR. COOLEY: We understand that hearings are to commence on the bills referred to above on May 31, 1966, and we respectfully request that this letterstatement be filed as part of the record.
Ohio Edison Company opposes passage of either H.R. 14000 or H.R. 14837. These bills propose federally subsidized loans to rural electric and telephone cooperatives and public bodies from an electric bank and a telephone bank capitalized principally with Federal funds. The proposed subsidized lending would be in addition to the lending program of the Rural Electrification Administration. Our principal objections to this legislation are:
Ninety-nine per cent of the nation's farms now have electric service. Most of the other 1 per cent have service available to them. Only a few farms isolated in remote areas do not have service available. (The foregoing is in accord with information furnished by the Edison Electric Institute.) No need can possibly be shown for additional Federal investment in and subsidy of rural electrification under this new program. The existing loan program of the Rural Electrification Administration is adequate to meet any foreseeable requirements.
Under the provisions of these bills, loans could be made wastefully to duplicate electric facilities for generation, transmission and distribution where investorfinanced facilities already exist and are available for service. "Duplication of existing facilities" is not made a basis of denying loans or even a relevant area of inquiry under either proposal.
Under the provisions of these bills, loans could be made for non-rural extensions, acquisitions and construction of facilities. The present law under which the Rural Electrification Administration operates restricts the purpose of electrification loans to "the furnishing of electric energy to persons in rural areas who are not receiving central station service", to refinancing T.V.A. loans incurred to serve "persons in rural areas", and to financing wiring and acquisition and installation of electrical appliances for "persons in rural areas". "Rural area" is defined as including communities not exceeding 1,500 in population. Loans can be made only with the consent of state authorities having jurisdiction. (Sections 4, 5, and 13 of the Rural Electrification Act) No such limitation as to the concept of rural electrification is placed on loans under the proposed program except that borrowers must at some time have received a loan or loan commitment under Section 4 of the Act in order to be eligible to borrow under the proposed program, or be owned and controlled by such eligible borrowers. In the absence of any such limitation the proceeds of loans made under the proposed programs could be used for the acquisition or construction of facilities serving urban areas (regardless of size) or the extension of the existing facilities of a rural electric cooperative into such urban areas.
No need can possibly be shown for Federal subsidies for urban electrification unless it be the intent of the Congress to supplant existing investor-owned, taxpaying systems with cooperative or governmental systems that would pay no Federal income taxes, and in many instances, no property or excise taxes. That the Congress should have any such intent seems completely unthinkable, and indeed shocking, irrespective of what controls the Congress may impose, by way of amendment to the present provisions of the bills.
Very truly yours,
D. BRUCE MANSFIELD.
STATEMENT OF PORTLAND GENERAL ELECTRIC COMPANY, PORTLAND, Oregon Portland General Electric Company appreciates the opportunity to submit this statement of our views regarding HR 14000 and HR 14837.
Portland General Electric Company is an investor-owned electric utility serv ing the lower Willamette Valley of the State of Oregon. It provides electric service to about one million persons in an area covering 4,236 square miles. The City of Portland, the Oregan Capital City of Salem, and 46 other cities and towns are located in the Company's service territory. The Company serves at uniform "postage stamp" rates. The average rate per kilowatthour is one cent,
which is the lowest of any investor-owned utility in the United States. Its rural areas and farms are completely electrified, and the rate schedules to rural areas are identical to those in urban areas.
The State of Oregon has a utility area certification law which tends to restrict electric utility agencies to specified geographical areas. In view of this statute, it is unlikely this legislation will seriously affect Oregon utility agencies. The general nature of the proposed bills, however, is sufficiently significant to justify substantial national discussion of the basic issues involved.
The bills here considered would change the concept of public subsidy for rural electrification to public subsidy for expanded competition between rural electric cooperatives and municipally owned and investor-owned utility systems. The legislative history of the statute which authorized REA makes it clear that the intent and purpose of the law was to encourage rural electrification through the vehicle of federal loans at publicly subsidized rates of interest. The goal of the original low was to electrify areas of the United States which for reasons of economics could not receive central station service from existing municipal or private utilities. This much desired goal has been almost fully achieved.
We recognize, however, that even though rural electrification is an accomplished fact, there are many cases where economic assistance continues to be needed. There are areas in Oregon, for example, notably in the southeastern portion of the state, where continued public subsidy of rural electrification is required. The Central Electric Cooperative, the Mid-State Electric Cooperative, the Harney Electric Cooperative, and the Surprise Valley Electric Cooperative serve almost one-fourth of the state's 96,541 square miles. Within this area, however, there resides only one percent of the state's electric customers. Electric rates in these areas range from 40 to 260 percent higher than those of Portland General Electric. Obviously, these cooperatives need publicly subsidized financing.
This justifiable federal activity does not, however, need to be distorted to the degree envisioned by this legislation. The proposed bills would create a federal electric bank capitalized by the United States Treasury. The purpose of the bank would be to provide unlimited sources of funds to electric cooperatives or municipal agencies for any purpose approved by the governor of the bank, who under the terms of the bill would be the administrator of REA. No criteria for loans is established in the legislation, and the recipients of the loans could use the funds for any purpose, including competitive activity, duplication of facilities, and acquisition of municipal or investor-owned electric systems. It is highly undesirable for the instrument of public subsidy to be used for these purposes.
The most significant flaw in the proposed legislation is the elimination of Congressional control of REA activities. The mechanism of Congressional control through the appropriations process is destroyed.
If REA-financed cooperatives become reasonably able to provide service without federal subsidy, some alternative means of financing construction of facilities should be developed. In principle, this alternative means of financing would remove the cooperatives from access to public funds. The legislation under consideration here does not meet the goal.
If the Congress decides that portions of the REA program be removed from public subsidy, consideration should be given to transition to complete nonfederal financing. Municipal corporations currently finance their utility programs through revenue bonds or other senior debt, plus retained earnings and cash made available by depreciation. Investor-owned utilities acquire their capital through internally generated cash, sale of equity, and sale of debt. When an REA-financed cooperative achieves financial maturity, it should also use conventional financing methods.
Criteria could be established which would dictate when the cooperative should convert from REA financing. Criteria such as revenue per square mile, customers per mile of line, or population density would be accurate indicators. The budgetary requirements of the United States are such that additional unwarranted subsidies are not in the public interest. In certain cases, federal expenditures for rural electrification are in the public interest, and in these cases, such public assistance should continue. It is unnecessary and undesirable, however, for such assistance to continue where the purpose is clearly expansion and competition rather than rural electrification.
THE POTOMAC EDISON CO., Hagerstown, Md., May 27, 1966.
Hon. HAROLD COOLEY,
Chairman, House Committee on Agriculture, 2409 Longworth Office Building,
DEAR CONGRESSMAN COOLEY: We respectfully request that this statement of our views concerning H.R. 14000 and H.R. 14837 be made a part of the record in connection with your current hearings on these bills. Copies of this letter are enclosed for distribution to members and staff personnel of the Committee. We oppose the financing plans proposed by these bills because:
1. They make a major change in public policy concerning the role of the Rural Electrification Administration by indirection without any forthright justification for the new role.
2. They commit substantial Federal funds to a program without providing either adequate criteria or continuing Congressional surveillance for the use of the funds.
THESE BILLS CHANGE THE PURPOSE OF THE REA
The Rural Electrification Act was passed to assist in bringing electric service to the rural-farm areas of our country. The Rural Electrification Administration has done a good job in fulfilling the purpose of the Act. According to the National Power Survey, 98% of the farms in America are now receiving electric service. With this job substantially accomplished, the REA and its borrowers understandably desire to undertake a new role for the future. We question the necessity for the role they have chosen. Certainly that role should not be subsidized by the Federal Government.
The new role envisioned by cooperatives appears to be complete generation, transmission and distribution of their own power, with facilities subsidized by the government, to customers regardless of reasonably priced alternative sources of power and regardless of the character of the area served. Both bills embody this new role which represents a drastic change in the purpose of the REA. For example, H.R. 14837
Assumes money requirements of borrowers on a scale so vast that it must include financing of major generation and transmission projects;
Specifically includes the so-called third criterion established by administrative action in 1961 to broaden the circumstances under which generating loans might be made;
Omits prior requirements of the Senate and House Appropriation ComImittees that attempts be made to secure reasonable wholesale contracts before beginning generating projects;
Omits safeguards against duplicate facilities;
Omits the prior legal restriction that loans must be for "rural areas"; Subsidizes loans by Federal subscription of stock and by power to borrow from the United States Treasury without limitation to cover operating deficits; and
Gives complete tax exemption to proposed bank and continues present Federal tax exemption for cooperatives.
Proponents have not proven the need for their new role. On the contrary, there is no reason to believe major subsidized G & T projects are necessary for their future. Indeed, such projects would frequently displace planned facilities of private tax-paying utilities who intend to continue providing adequate, lowcost wholesale power at reasonable rates supervised by the Federal Power Commission. The power to make loans with complete disregard of such private facilities, even where adequate power is available at a cheaper price, is an economic luxury which can be justified only by a drastic change in Congressional policy concerning the REA. Similarly, complete disregard of the "rural areas" requirement drastically alters the economic justification for continued Federal subsidies. Such major policy changes should not be lightly or hurriedly made. We hope such major decisions will not be obscured by the complex details of the financing plans under consideration.
INADEQUATE CONTROL FOR USE OF FEDERAL FUNDS
Even assuming that the Congress finds the new role of the REA to be in the public interest, these bills establish program involving substantial Federal expenditures without providing adequate controls for the use of these funds. For example, H.R. 14837
Does not provide any meaningful criteria for making bank loans:
Provides no criteria to determine which borrowers receive which of the several interest rates available;
Provides no continuing control or surveillance by Congress :
Provides no statutory limit on amount of funds which the bank could lend in any one year;
Provides no definite requirement for repayment of the Federal investment;
Does not provide for mandatory payment of interest or dividends on the Federal share of the bank's capital;
Provides no public forum to challenge uneconomic or unwise bank loans;
Requires no showing of financial necessity by borrowers;
those cooperatives which have become financially self-sufficient should not be eligible for loans.
Proponents of these bills have proven no need to have a program established by Federal funds but free of any meaningful criteria or controls for the use of those funds. We believe such unrestricted use of funds is unwise, especially where it can operate to finance wasteful duplication of utility facilities to the detriment of our pluralistic power economy.
We appreciate the opportunity of presenting our views on these bills and will be pleased to furnish any information supporting these views which may be requested by the Committee.
A. J. BOWEN, Vice President.
STATEMENT OF SAN DIEGO GAS & ELECTRIC COMPANY
San Diego Gas & Electric Company opposes the enactment of H.R. 14000 and H.R. 14837 for the reasons that they are in derogation of the defense effort; they are against the public interest; they will deprive the Congress of its announced intention to maintain a strict surveillance over loans made under the Rural Electrification Act; and this legislation would foster unfair competition.
The following remarks are addressed to the creation of a Loan Account for and the establishment of a Federal Electric Bank:
1. In derogation of the defense effort
"Your Government is determined to resist this aggresion at the minimum cost to our own people, to our allies, and to the world.
"We shall stand with honor. We shall stand with courage. We shall stand with patience, and that is the stand Congress has taken and that is the stand we shall continue to take. It is the stand that the vast majority of Americans demand. It is the stand that free people of the world respect."
Such is President Lyndon B. Johnson's commitment on Vietnam to the peoples of the world. It is of paramount importance. The diversion of any funds to implement legislation of the nature proposed by H.R. 14000 and H.R. 14837 would seriously hamper the defense program. The foregoing commitment is of overriding importance to the considerations of the subject now before this honorable Committee.
In speaking about a similar bill, Senator Jack Miller of Iowa stated in part: "... If we are to avoid further inflation, any new federal financial commitments must conform to the requirements of a reasonably balanced budget, taking into account demands placed upon our Government by the war in Vietnam." The proposed bank would be started with a nest egg of $1 billion in government funds. Through its borrower power, this could be extended to $11 billion without limitation as to source.
Tax-exempt electric operations will be increased, replacing or displacing taxpaying systems and thereby proportionally reducing Federal revenues. This
severe impact on the economy by needlessly draining revenues would have a tremendously adverse effect on the defense budget and the consequent defense effort.
The present 2% REA loan program will be continued with no ceiling on Congressional loan authorizations. It is reported that in 1964, $245,965,000, and in 1965, $299,790,000 of new loan funds were used by the REA for this program. Borrowers have proposed that $365 million annually should be additionally provided for the continuance of the present program.
The siphoning of $1 billion to $11 billion for H.R. 14000, the diversion of another $750 million to $71⁄2 billion for H.R. 14837, would amount to $17 billion under H.R. 14837 and $211⁄2 billion under H.R. 14000 over the programmed fifteen years. This total of $381⁄2 billion does not include Class C and D bank stock nor sale of debentures.
President Johnson's pledge, quoted at the outset of this statement not only announces his determination to resist the aggression. He promises that it will be". . . at the minimum cost to our people . . .'
It is difficult to reconcile a pledge by the President of economy in the defense effort with wasteful expenditure of more than $381⁄2 billion on the domestic front. We can only arrive at the conclusion that the diversion of these billions of dollars to finance this legislation would nullify the economy programs and would be in derogation of the defense pledge by President Johnson.
2. Against the public interest
The nest egg of authorized government capital would be available to the REA cooperatives at interest rates of 3% or less for building generating plants and transmission lines, and for other purposes.
The additional $10 billion of federal funds may be obtained by the Federal Electric Bank if necessary to pay interest or principal on its unsecured electric loans. These additional funds could be obtained by making and issuing notes to the Secretary of the Treasury at an interest rate not to exceed 3%. This rate is lower than what it costs the Treasury to borrow.
At the same time, in issuing and selling debentures on the open market, the Federal Electric Bank would be authorized to borrow up to $10 billion.
By providing capital at bargain interest rates, the proposed bank would increase and federally subsidize competition between REA cooperatives that pay no federal income tax and private utilities whose annual income tax bill is some $2.9 billion.
Approximately two weeks ago, inquiry was made by the White House for an estimate of the amount by which investor-owned utilities could reduce their budgets for 1966.
In his reply of May 11, 1966, Mr. Robert T. Person, President of Edison Electric Institute, pointed out that utilities, because of long range advance planning. are committed to capital expenditures several years in advance. The response did state that the utilities, in coperation with the President's efforts to alleviate inflationary pressures, could cut an estimated $200 to $225 million in such expenditures without materially impairing the requirements of the customers. It is impossible to reconcile the inconsistency of the two positions.
On the one hand, the Chief Executive is requesting curtailment to keep down inflation. On the other, this legislation would issue a blank check to accelerate inflation.
3. Congress would be deprived of control.
We understand that on February 9, 1966, at a hearing of the Agricultural Subcommittee of the House Appropriations Committe relating to the budget for the REA, the Honorable Robert H. Michel, Representative from Illinois, stated in substance to Mr. Norman M. Clapp, representing the Secretary of Agriculture: "I might say before moving on the next area that I thought the Chairman when he began this hearing put it very well what the concerns of individual members of this Committee have been, whether individually or collectively, on some of the practices of REA. We are always most anxious to see whether or not our warnings are being heeded and our suggestions are being followed.
"You noticed that the House and Senate Appropriations Committees include language in their reports on the Agriculture and Related Agencies Appropriations bill in the 88th Congress instructing you before making loans for generation and transmission facilities to first attempt to obtain a reasonable power supply contract from existing suppliers and to make such a loan only when reasonable contracts cannot be obtained . . ."