This does not mean we have not had our differences. However, we believe most of these differences have been intelligently resolved. The R.E.A. cooperatives have done a good job for their customers in carrying electric service to the nation's farms; so good, in fact, that through the joint efforts of the cooperatives and the investor-owned companies the number of farms having electric service is nearing the 100% mark. However, I should like to stress that the accomplishments of the electric cooperatives have been made possible only because of the built-in subsidies of the present R.E.A. Act. The taxpayers of this nation have carried the costs by providing the necessary funds. In the 30 years since the Congress created the R.E.A., almost 51⁄2 billion dollars in loans have been made, most of it at 2% interest costs. And now, if this proposed legislation is passed, a loan account with a nucleus of another 4.2 billion dollars will be made available. With 98.5% of the farms now receiving central station service, it is difficult to see the need to call on the taxpayers for such a sharp increase in loan funds. Five out of six new cooperative customers currently are not farmers. They include suburban residents, businesses, manufacturing plants and other industries. Legislation such as contemplated in H.R. 14837 goes far beyond any previous concept of government in business. And what is equally as great a danger is that it removes R.E.A. financing from the surveillance of Congress. For any agency to have funds of this magnitude at its disposal without continued contact and supervision through the appropriation process would not be in the public interest. Our entire system of government is based on the premise that Congress has the responsibility to oversee how the public's tax dollars are spent. This legislation would do away with that safeguard. The borrowers from the multi-billion-dollar fund would pay no Federal income tax. Conversely, the investor-owned electric utility industry is the nation's largest taxpayer. This would be at a time when the nation's taxpayers face increased government expenditures for such vital purposes as defense, when the actuality of marked inflation is causing widespread concern and when the government is seeking to hold down unnecessary expenditures. The conclusion I draw is that these added billions of dollars would be employed to build facilities which would duplicate or displace existing power facilities, thereby creating an insurmountable hazard to the investor-owned, electric utility industry. I ask your indulgence, therefore, to bring into sharp focus the over-all problem of the untenable competitive situation that exists if cooperatives and investor-owned companies are required to compete in the same area. Suppose under the authority of the proposed bill an electric cooperative uses some of these funds to extend its service into a community served otherwise by a company such as Texas Power & Light Company, or even assume such a community extends its city limits to take in an area served by a cooperative. Under the laws of Texas each municipality is a regulatory agency. We would find cooperative facilities and those of an investor-owned company serving portions of the same municipality, possibly with the electric lines of the one on one side of a street and the electric lines of the other on the opopsite side. The rates charged by Texas Power & Light Company will have been established and approved by the local municipality. Such rates must provide sufficient income to the Company to permit it to pay all the normal costs of doing business, and must further provide a fair return (usually around 6%) on the fair value of the Company's property used, but in no case to exceed the limit set by the State of 8% per annum. Such rates, therefore, must provide for the Company's tax expense, must provide for the interest payments on borrowed money, and also must provide fair and reasonable dividends to those individuals, insurance companies, pension funds, foundations and others who have invested their savings in the Company's capital stock. Across the street, the electric cooperative's rates must also be established and approved by the local government, providing likewise not more than 8% per annum return. In 1965, Texas Power & Light Company paid $24,147,289 in Federal, state and local taxes. This was 23.69 cents out of every dollar received in revenue, which is about in line with the national average of investor-owned utilities. On the other hand, the 77 electric cooperatives in Texas paid only a total of $1,211,973 Due to in taxes. This was less than 2 cents per dollar of their total revenues. taxes alone, the differential amounts to almost 22 cents per dollar of revenue. Also, investor-owned utilities must seek investment funds in the open market, while this new legislation will supply government funds to the cooperatives substantially below open market cost. The investment cost of the physical facilities for supplying service in the company's service area is approximately $4.50 for each dollar of annual revenue, which, again, is about an average figure for the industry. The large difference of some 22 cents per dollar of revenue in tax costs plus the differential in money costs would create a differential of some 40 cents per dollar of revenue where the cooperative has 2% money costs, and some 30 cents per dollar of revenue where the cooperative has 4% money costs. Also, the cooperative would not be able to establish its rates within the corporate limits of the municipality at a level that would equalize them with the Company's level of rates because the effect of these subsidies is so great the cooperative would then be earning more than the 8% permitted as the maximum under state law. The logical question here is how long would residents on one side of the street be willing to pay 30 to 40 per cent more for electric service than their neighbors? How long could the city fathers hold out against the pressure to franchise the electric cooperative on both sides of the street? When this happens, how long could an investor-owned, tax-paying, profit-making company retain its business and continue operations? Another damaging possibility arises in the case of the generation and transmission cooperatives. Under present limitations of the R.E.A. Act, investorowned companies are protected from direct take-over of their operating areas by generation and transmission cooperatives. However, in the amendment to the R.E.A. Act proposed by H.R. 14837, no such limitations would be in effect. The loans these generating and transmission cooperatives obtain could be used to build systems adjacent to towns served by Texas Power & Light Company. They could offer to sell wholesale power to the towns and displace Texas Power & Light Company upon expiration of our franchises. Due to the tax and money cost subsidies involved, this would undoubtedly prove to be an attractive proposition to the citizens and local governments of these towns. I know that some cooperatives in Texas have become self-sufficient and no longer need to rely on public funds. When cooperatives reach this status, they should operate under the same rules as any other public utility and have a revenue responsibility sufficient to cover market costs of money and taxes, including Federal income taxes. Yet, with H.R. 14837, the cooperatives will become increasingly dependent upon the Federal Government. The influx of these new government funds would create subsidized competition which would seriously threaten the investor-owned electric utility industry and have serious side effects on the nation's economic progress. Some of the problems facing the investor-owned industry as well as Congress with respect to H.R. 14837 (insofar as it applies to the Rural Electric Cooperatives), may, therefore, be summarized in brief form as follows: 1. The bill would permit broad-scale operations, subsidized by the taxpayer, and with no continuing governmental controls by any agency of Congress. 2. Loans obtained from the bank could be used for various purposes without the restrictions that exist in present legislation. 3. The Bank would be free of all taxes except property taxes. 4. The bill sets up a vehicle which with its various ramifications would leave the heavy-taxpaying, investor-owned, electric utility industry in an untenable position. The bill makes no provisions as to which cooperatives will receive the 2% regular loans, which will receive the 4% intermediate loans and which the loans at rates reflecting the cost of money to the bank. It appears 2% loans should be reserved solely for electric distribution cooperatives where such a rate is needed to enable them to extend facilities to rural areas still not receiving electric service. These, then, are some of the realities which must be faced in considering this legislation. I have tried to make it clear that, in my opinion, the legislation being considered by this committee in its present form is drastically inconsistent with the aims and purposes of the R.E.A. Act, and that this legislation would be detri 65-357-66- -48 mental and injurious to the investor-owned electric utility industry and, ultimately, to the nation's entire economic system. I should like to express appreciation for the opportunity of presenting my views to the committee. STATEMENT OF R. G. MACDONALD, PRESIDENT OF WEST PENN POWER COMPANY My name is Robert G. MacDonald. I am President of West Penn Power Company which is an investor-owned electric utility producing and selling electric energy in 17 counties of western Pennsylvania. West Penn is an operating subsidiary of the Allegheny Power System. My Company has interconnections with Duquesne Light Company, Ohio Power Company and Pennsylvania Electric Company and with Monongahela Power Company, an affiliated company in the Allegheny Power System. It also has minor transmission facilities for the sale of electric energy in Pennsylvania at wholesale to the Central Electric Cooperative, Inc. and the Tri-County Rural Electric Cooperative, Inc. I have requested permission to present this statement because I am concerned about the effect of H.R. 14837. My concern is that it will subsidize competition with investor-owned electric companies, including my own. I am concerned also because I believe it will impose an unfair tax burden on all Federal tax payers, including my Company. The present Federal Rural Electrification program is based on the Rural Electrification Act which Congress adopted in 1936. This Act permits the Federal Government, through the Rural Electrification Administration, to lend money "for rural electrification" to rural electric cooperatives and others for the purpose of furnishing "electric energy to persons in rural areas who are not receiving central station service". This Act defines "rural area" to mean any area "not within the boundaries of any city, village or borough having a population in excess of fifteen hundred inhabitants * * *". The purpose of these limitations was to prevent wasteful and unnecessary duplication of facilities and to prevent competition with existing utilities. Since 1936, the Rural Electrification Administration has lent $4.7-billion to rural electric cooperatives on 35-year loans at a 2% interest rate. This program was intended to foster rural electrification by giving financial assistance and subsidies to rural electric systems. The cooperatives have been and are heavily subsidized. They receive substantial subsidies of two types. First, they pay no Federal income taxes. Second, they borrow money from the Rural Electrification Administration at 2% interest although the cost of money to the Federal Government is over 4%. Despite the fact that the cooperatives are non-profit organizations which pay no income tax, it is my understanding that some 977 borrowers from the Rural Electrification Administration had built up a total net worth by 1964 of $1,057,940,000 arising from retained earnings and representing some 24.8% of their assets. There is no doubt that the two cooperatives which purchase power from West Penn Power Company are thriving, prosperous and expanding organizations. I believe that the rural electrification program has now fulfilled its purpose of bringing electricity to rural areas. Over 99% of all farms in this country have electric service from either rural electric cooperatives, investor-owned electric companies, or other types of power suppliers. The remaining one percent of the Nation's farms have electric service available with negligible exceptions. Despite this fulfillment of purpose, the REA loan subsidy program continues to grow. Each year the cooperatives request greater appropriations for the rural electrification program. My industry has noted with concern that in the last few years the Rural Electrification Administration has been shifting the principal purpose of the loans which it makes from that of providing distribution facilities to that of providing generation and transmission facilities. In 1965, over 60% of REA loans were made for generation and transmission facilities. The growing use of REA loans for generation facilities represents a definite competitive threat to the investor-owned electric industry because the effect is to displace or replace electric energy which the rural electric cooperatives have been buying or would buy from investor-owned electric companies. From my standpoint, it is alarming that this shift has continued even though the average cost of power pur chased by the cooperatives from investor-owned companies is substantially lower than the average cost of power generated by the cooperatives themselves. The continuing expansion of the REA program and its growing emphasis on loans for generation facilities have caused criticism in Congress over continued Federal loans to the cooperatives at subsidized rates. As a reaction to this criticism, the cooperatives are now suggesting to Congress and to the public that new legislation-such as the Cooley Bill-would pave the way for the rural electric cooperatives to become free of reliance on Federal loans at 2% interest and would permit transferring the burden of their financing from the tax payers' shoulders to the private money markets. However, as I understand the Cooley Bill, it contains little that would lessen the cooperatives' dependence on government subsidies. I do not pretend to be an expert on rural electric cooperative financing. I am neither a lawyer nor an economist. However, as a layman who is heading a business enterprise which has two rural electric cooperatives operating in some of the same territory as my Company does, I am acutely aware of certain basic features of H.R. 14837 that threaten harm to the investor-owned electric utility industry as well as to all Federal tax payers. I cannot help but note that H.R. 14837 would actually continue unchanged and undiminished, and for an indefinite future, the existing program of furnishing subsidized loans to the rural electric cooperatives at 2% interest. It would supplement it, not replace it, with an additional loan program to be administered by a proposed Federal Electric Bank. Not only would the proposed bill continue all existing subsidies, it would also create new ones. In addition, loans made under the supplemental program would be free of important limitations written in the existing law and would also be free of any annual Congressional review and effective Congressional control. As I understand it, the proposed electric bank would obtain capital from three sources. The first and most important source would be a Federal governmental subscription of $750-million to Class "A" stock. This money would be raised by creating a rural electrification loan account in the United States Treasury and by diverting to the purchase of Class "A" stock of the bank, to the extent of $50-million a year for 15 years, payments made by the REA to the Treasury on REA loans heretofore or hereafter granted. A second source of capital for the proposed bank would be stock of other classes subscribed by the Bank's borrowers and their customers. The third source of capital would be the proceeds from the sale of debentures which the Bank would be empowered to issue. These debentures could be issued in amounts up to ten times the amount of the Bank's paid-in capital and surplus. This means that the Bank could have a lending capacity of well over $8-billion, which to me is a rather staggering sum. The Bill provides no certain requirement that the Federal contribution of $750-million to the Bank's capital be repaid. As I understand it, repayment would be at the discretion of the Bank's directors. Moreover, the Bill contains no definite requirement that the government be paid a return on this capital by way of interest or dividends. The Bill provides that the debentures which the Bank may issue are not guaranteed by the Federal Government, but to my layman's way of thinking they would be guaranteed in practical effect. This result comes about because the proposed Bill provides that if the Bank decides that it has insufficient funds to pay interest or principal on its debentures, it can get the funds needed by issuing notes to the Secretary of the Treasury. This provides a very unusual and effective backup for the debentures by resorting to Federal funds. I am told that no comparable provision exists with respect to the debentures of the other Federal agricultural credit banks after which the proposed Electric Bank is supposed to be patterned. Loans made by the proposed Bank to rural electric cooperatives would be for a 50-year period and would be of two types: (1) So-called "intermediate loans" which could not bear interest over 4%, and (2) other loans which would bear interest at a rate reflecting the current average cost of money to the bank. While the Bill does set up certain limitations for these two types of loans, it sets up no clear-cut criteria to be used by the Bank's Governor in determining which type of loan can be made in a given case. It is true that the Bill provides that intermediate loans should not be made to a borrower who is determined by the Bank's Governor, under standards to be established by the Secretary of the Treasury, to be "capable of both paying the interest rate applicable * * * to loans other than intermediate loans and achieving the objectives of the Federal rural electrification program”, but the test is so illusory that the choice of which type loan would seem to be left largely to the discretion of the Bank's Governor. Although some limitations are provided for loans made by the Bank, the Bank's loans are freed of certain limitations as to purpose or area which are written in the existing law. I am frankly concerned by the fact that the Bank's loans can be made for any type of electric generating, transmission or distribution facilities, and for use in any geographical area without regard to its nature and without regard to the presence or absence of existing electric facilities from which adequate electric service may be obtained at reasonable rates and on reasonable terms. The Bank's loans are in no way limited to rural areas or to serve persons not receiving central station service. In fact, they are not even limited to the supposed purpose of rural electrification. I feel that this legislation is wrong in principle and contrary to the public interest for several reasons: (1) I do not believe that any showing has been made or indeed that any showing can be made that a Federally financed and subsidized bank is needed to finance the continued expansion of the rural electric cooperatives. (2) The proposed program creates additional subsidies for the cooperatives because the so-called "intermediate" loans will largely be made below the cost of money to the Federal Government. A large element of the subsidy exists also in the fact that the United States Treasury's contribution to the Bank's capital-$750 million-would be made without being subject to any definite requirement of earning a return or even of being repaid. (3) The proposed program would be free of effective Congressional scrutiny and control and free from the loose controls which exist in the present REA loan program. (4) The proposed program would produce further and constantly increasing losses of Federal tax revenues. The rural electric cooperatives pay no Federal income taxes, whereas investor-owned electric companies as a group comprise the Nation's largest income tax payers. To the extent that the cooperatives conduct business operations which can be or are performed by tax-paying companies, the Federal Treasury loses income tax revenue and the burden of running the government is unfairly shifted to other taxpayers, including the investor-owned electric companies. As the business operations of the cooperatives grow, so do the tax losses. In effect, the program would subsidize an increase in the loss of Federal tax revenues. In conclusion, it is my belief that the present rural electrification program needs modification. I believer, however, that the change needed is not one of granting further Federal subsidies to the cooperatives, but rather one of eliminating or restricting drastically the present subsidized loan program. ALABAMA ELECTRIC COOPERATIVE, INC., AIR MAIL Hon. HAROLD COOLEY, Chairman, House Agriculture Committee, DEAR SIR: I have continued to read with some amazement the statements of the above gentlemen as most recently submitted to the Committee on Agriculture, House of Representatives, with respect to certain aspects of Alabama Electric Cooperative's operations and actions, as well as those of REA. I say "“continued” because erroneous and misleading statements of similar content have been made over the past four or five years by these gentlemen to Congressional Committees whenever rural electric legislation has been under consideration. I hope that by the inclusion of this letter in the hearing record, the Committee will be reminded of certain facts already established with respect to these charges and allegations. The facts that I wish to present at this time may be found in the published records of the House and Senate Committees on Appropriations, and in other public documents. The allegations of these gentlemen encompass: (1) the making of an arbitrary, useless and duplicating loan for generation and transmission purposes to Alabama Electric by REA in 1961, (2) the extension of "expensive" service by Ala |