serve as compared with neighboring urban areas, and the development of stable rural systems that not only provide present service but will give adequate assurance of the future service which the customers and consumers need, and will rely upon.

Mr. PURCELL. I have one more question.

The CHAIRMAN. The bells are ringing but I do not want to shut you off.

Mr. PURCELL. One more question. A few years ago we had a great big flap about somebody who made a loan to build a ski resort. I did not like that. It flapped around in Texas. Now, then, if we create this bank, we could not prevent you from doing that-if we get this bank going all of them would have a right to have a loan. There will not be any control of the Congress on bank loans.

Mr. CLAPP. This bill does not authorize that kind of financing. Mr. PURCELL. It did not authorize it then, did it? [Laughter.] Mr. CLAPP. There is authority of that kind in the existing act in section 5, but that authority is not carried over into this bill creating the banks.

Mr. PURCELL. All right. Thank you.

The CHAIRMAN. Mr. Hagen.

Mr. HAGEN of California. I would like to ask two or three questions of Mr. Clapp, and then one of the Secretary.

To go back to this point that Mr. Purcell and Mr. Abernethy raised, a precondition to eligibility for a bank loan is that you have to receive the 2-percent loan rate?

Mr. CLAPP. Yes.

Mr. HAGEN of California. So that all new applicants would have to go the 2-percent route; in other words receipt of a 2-percent loan is a condition precedent to any other type of loan?

Mr. CLAPP. Unless the applicant is an organization owned by a 2percent borrower.

Mr. HAGEN of California. To go back to the 25,000 population example that Mr. Abernethy raised, let us assume that the conversion to membership ownership has been completed. You would not have a thing to say about whether or not the system could absorb this private system in a city of 25,000 population, would you?

Mr. CLAPP. I think that Assistant Secretary Baker has said that this would be something that had to be covered in the legislation governing the bank when it goes under private control.

Mr. HAGEN of California. All right, under this bill, let us say an application came to you or to the bank, and this is a prosperous system-could you, under this bill, or could there be a requirement established that it would be higher-that they should retire the 2-percent rate as a condition of getting this further loan?

Mr. CLAPP. Of course, the loans that have been made are loans that have been made under contractual obligations to which the Government is a party as well as the borrower.

Mr. HAGEN of California. They have an outstanding 2-percent loan. Could not the bank say, "You pay off the Government and we will make you a 4-percent loan?"

Mr. CLAPP. I suppose that the bank could say that. It would be up to the applicant then as to whether it wanted to comply in order to get the loan.

Mr. HAGEN of California. You could not require the bank to do that? Mr. CLAPP. As administrator, I could not.

Mr HAGEN of California. Would that be your policy, or what would be your policy?

Mr. CLAPP. This could come under the criteria approved by the Secretary of Agriculture. There would have to be some general rules that would apply to all borrowers.

Mr. HAGEN of California. I would like to ask the Secretary a question. As I undersand it, Mr. Secretary, a GI fighting in Vietnam and coming back, cannot get a 2-percent loan to build a home. I understand that there is no other beneficiary of the Federal loan program who gets a 2-percent loan rate except the beneficiaries of this program. So how can you continue to justify the 2-percent loan under this program in the light of the requirements in other programs where there are beneficiaries who are equally deserving or, perhaps, more deserving?

Secretary FREEMAN. I might answer that by saying, because it will make available power to the veterans fighting in Vietnam when they come back and to the people in the irrigation districts who, through this method, will be able to get power and who, otherwise, could not get the power, and that they are getting it together collectively through the medium of a time-honored device of the cooperatives to pool their resources. And the Government, as a matter of policy, many years ago determined that it was sound that they should have a system with some special credit in cases where they are reaching out to serve people who, otherwise, would not get power at a fair price.

Mr. HAGEN of California. There are other Federal borrowers who at least equally deserving.

Secretary FREEMAN. I am not against that. If that was before the House, why, maybe, that would be a good program.

Mr. HAGEN of California. And a GI returning from Vietnam cannot buy a house-and he is in desperate need of a house-and some farmer who needs electricity, but he is in no more desperate need than the veteran.

Secretary FREEMAN. I think I would be for that, too.

Mr. HAGEN of California. And there is no provision being made for that.

Secretary FREEMAN. I know that.

Mr. HAGEN of California. You say that 99 percent of the farm homes are receiving electricity now. I do not know how much longer you can justify this.

Secretary FREEMAN. The purpose of this program is to recognize the need for additional financing to make power available and to move away from the 2-percent subsidized rate to another rate where it can be done consistent with the program objectives, and down the road to move into the money market as a private operation. At that time that will be the situation as is true of some REA borrowers now. You might say that in the future this is a phaseout program, that will operate without doing damage to current systems.

Mr. HAGEN of California. One further question. Have you given any consideration to the alternative of subsidizing private power companies to extend the electricity to other areas?

Secretary FREEMAN. No; I think a very important difference has been built up historically long before I came here. The rural areas did not have power prior to REA. In the rural areas, where the number of subscribers is much smaller, the circumstances are significantly different.

I am very pleased to note the prosperity of the private utilities and the fact that they are doing extremely well, and they are doing better every year. The fact that they are doing well, I do not think anybody begrudges, but by the same token we want to have the power to reach out through this device so that the cooperatives can do well and can meet their challenge and serve their members as well.

Mr. HAGEN of California. It may not be a total answer, but there are private power companies operating in certain areas where it is not economically feasible to run these extensions out, and rather than to create a new whole entity, it might be cheaper to authorize some form of subsidy to make to them to make these extensions. That is the thing I was thinking about.

Secretary FREEMAN. I am always open for further suggestions. Mr. HAGEN of California. Thank you.

The CHAIRMAN. Thank you very much, Mr. Secretary.

We will stand in recess until 10 o'clock tomorrow morning.

(Whereupon, at 12:30 p.m., the committee was recessed, to reconvene at 10 a.m., on Wednesday, June 1, 1966.)

REA LEGISLATION

WEDNESDAY, JUNE 1, 1966

HOUSE OF REPRESENTATIVES,
COMMITTEE ON AGRICULTURE,
Washington, D.C.

The committee met, pursuant to recess, at 10:10 a.m., in room 1301, Longworth House Office Building, Washington, D.C., Hon. Harold D. Cooley (chairman) presiding.

Present: Representatives Cooley (presiding), Poage, Gathings, Abernethy, Abbitt, Jones of Missouri, Hagen of California, Stubblefield, Purcell, Morrison, Olson, Matsunaga, O'Neal, Stalbaum, de la Garza, Vigorito, Redlin, Bandstra, Greigg, Callan, Dague, Belcher, Teague of California, May, Harvey of Indiana, Findley, Dole, Burton of Utah, Walker of Mississippi, and Resident Commis

sioner Polanco-Abreu.

Also present: Representatives Reifel, Nelsen, and Jones of North Carolina.

Martha Hannah, staff; Hyde H. Murray, assistant clerk; Francis LeMay, consultant; and Fowler C. West, staff.

The CHAIRMAN. The committee will be in order, please.
We will proceed with the further questioning of Mr. Clapp.

Will you come forward, Mr. Clapp. Mr. Findley wants to interrogate you.

But let me say before you start, that we have a long list of witnesses for this morning so that I hope you will be as brief as you can.

STATEMENT OF NORMAN M. CLAPP, ADMINISTRATOR, RURAL ELECTRIFICATION ADMINISTRATION, ACCOMPANIED BY JOHN C. BAGWELL, GENERAL COUNSEL, U.S. DEPARTMENT OF AGRICULTURE

Mr. FINDLEY. Thank you, Mr. Chairman.

Several of the representatives of rural cooperatives have been in my office, Mr. Clapp, to discuss this proposal with me and without exception they have suggested that this is a way to shift away from the 2percent money, at least to a substantial degree. Do you see this bill in that light?

Mr. CLAPP. Mr. Findley, certainly this bill is an attempt to develop some machinery whereby those cooperatives who can afford to pay a higher rate of interest without reneging on their commitments to accomplish the objectives of rural electrification, can get financing and pay the higher rate of interest.

Mr. FINDLEY. And they expected that you, as governor of the electric bank, assuming this becomes law, would set up standards which

would identify the cooperatives which would be eligible for that money and those which would not be eligible.

Do you expect to do that?

Mr. CLAPP. We would expect to do it on the basis of each individual loan application as it comes in. We would not attempt to categorize borrowers as 2 percent or 4 percent borrowers, or market rate borrowers.

Mr. FINDLEY. Can you estimate how many of the cooperatives which are now getting the advantage of 2-percent loans would be disqualified from further 2-percent money?

Mr. CLAPP. This, of course, Congressman Findley, is going to take some experience. We have attempted to make some estimates on the basis of our best studies. We would estimate that somewhere between 25 and 30 percent of the borrowers that we work with could pay the 4 percent interest rate on their next loans and still be in a position to accomplish the objectives of the rural electrification program which we define as (a) area coverage; (b) comparable rates, and service for country people as compared with the adjacent urban communities; and (c) financial stability as measured by their reserves.

Mr. FINDLEY. In this proposed measure, the Secretary indicated that the need for additional financing in the future will arise, not so much from extending the service to people in these remote areas where power is not now in supply, and this being the case, would there be any objection to an amendment to this bill which would limit the financing to the rural areas, to those which are strictly rural in character?

Mr. CLAPP. Mr. Findley, I welcome the opportunity to answer that question because I think this goes to the core of our basic problem here. I suppose there are two ways of looking at rural electrification and the REA-financed systems.

One way, of course, is to look upon them as simply caretakers of the leftover territories that are to be forever confined to what the other power suppliers are unwilling or unable to take care of and serve.

They started out with leftover territories. If you are going to continually block them either by definition of what they can serve or by a philosophy or an approach which expects them to turn over any growth areas that develop in the original areas to other suppliers, you are never going to have anything but marginal or submarginal systems to take care of the truly rural areas. If this is the case, if this is the approach, then we are never going to be out from under this need for some kind of special assistance from the Federal Government.

Now, the other approach is to acknowledge that these rural systems did start out with leftover territories. These were territories which the commercial industry felt it could not afford to serve under the economics of the day and the state of the industry at the time this decision was made.

Having started with something that took nothing away from anybody, the other approach is to strengthen these systems in any way that is possible, so that they can close this density revenue gap between the rural systems we work with and the normal urban based system, so that they can develop internal strength, take advantage of the growth that comes to their areas, do the things that are dictated by sound busi