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bama Electric Cooperative to Choctawhatchee Electric Cooperative (Chelco) in Northwest Florida in 1958, and (3) the rendering of service by Chelco and Alabama Electric to a radar installation at the Eglin Air Force Base reservation in Northwest Florida. Like a broken record, we have heard these statements and charges many, many times either before Committees of Congress, the Alabama Director of Finance, the Alabama Public Service Commission, the Federal Power Commission, the Circuit Court of Montgomery County (Alabama), the Supreme Court of Alabama, the Federal District Court for the Southern Division of Alabama, and the U.S. Fifth Circuit Court of Appeals.

As to the making of a $20,350,000 loan to Alabama Electric Cooperative in 1961, virtually all of Mr. Bouldin's charges were completely refuted by our Mr. John Hill or myself in testimony before the House Committee on Agriculture, Part 2, 87th Congress, 2nd Session, (pp. 996–1008) in 1962, and before the House Subcommittee of the Committee on Appropriations, Part 5, 88th Congress, 1st Session (pp. 609-618) in 1963, as well as by the REA Administrator before the House Subcommittee of the Committee on Appropriations in 1963, Part 5, 88th Congress, 1st Session (pp. 2471-2474). They were also argued before the Alabama Director of Finance during a long, expensive and open hearing to determine whether or not Alabama Electric should be authorized to borrow this money from REA, in which both Alabama Power Company and Gulf Power Company appeared and bitterly opposed the approval of the loan. As revealed by the Alabama Supreme Court's decision upholding the order of the Director of Finance consenting to the loan (Alabama Electric Cooperative vs. Alabama Power Company, 176 So. 20 483), the evidence before the Director of Finance showed that (a) the need and demand for electric power is growing in Alabama and an additional power supply was beneficial to the State, (b) many elected public officials and other citizens testified that the proposal was in the public interest and there were numerous resolutions of county and city governing bodies, industrial development boards, civic clubs and farmer associations to like effect, (c) the distribution cooperatives to be served with the additional facilities expressed their desire to serve themselves rather than to be dependent on Alabama or Gulf Power Companies, who were considered to be unfriendly sources of wholesale power, (d) the construction of the facilities would provide a payroll of approximately $5,000,000 during construction and create 25 to 30 new permanent jobs and that the new plant would consume about 225,000 tons of Alabama coal annualy, (e) Alabama Electric would save $5,445,000 over ten years if it supplied its own energy rather than purchase its deficiencies from Alabama Power Company, and (f) any duplication of Alabama Power Company's system would be of a minimal nature. The Court said “it is impossible to read the testimony presented to the Finance Director in behalf of the application and not hold that there was substantial evidence ... that the issuance of the bonds in question would serve some public need and be in the public interest."

The point of this summary recitation of facts, as well as the above citations to testimony before Congressional Committees by the Administrator, Mr. Hill and myself, is simply to demonstrate that Alabama Power Company and Gulf Power Company have had all the forums and all the hearings that could conceivably be desired by any reasonable person as to the merits of the making of this loan, and that Mr. Bouldin's contentions that they are being denied some substantive right by not being permitted a full blown administrative hearing before the REA Administrator are utterly ludicrous. Under Mr. Bouldin's concept of The Golden Rule, Alabama Power Company has had a sufficient opportunity to “do unto others."

Mr. Lilly contends that while negotiations were taking place in 1958 between his Company and Chelco, the Cooperative was building a line to take service from Alabama Electric Cooperative without the Company's knowledge and that the electric service rendered by Alabama Electric to Chelco was more expensive than similar service rendered by Gulf Power. As disclosed by Mr. John R. Pentecost, General Manager of Chelco, in a statement submitted in hearings of the Senate Subcommittee of the Committee on Appropriations on H.R. 6754, 88th Congress, 1st Session, pp. 270-273, in 1963 :

"Prior to 1958, our cooperative, although a long-term member of Alabama Electric Cooperative, purchased all its power requirements from Gulf Power Company at four delivery points. On March 17, 1958, the President of Gulf Power Company delivered to me a letter canceling all contracts at all delivery points upon the respective dates of expiration of their current terms. ... Similar letters of cancelation were delivered to the other three rural electric cooperatives which they served. Our first delivery point affected was at Laurel Hill, Fla., on Septeinber 20, 1958; the second was Baker, Fla., on December 20, 1958. On July 3, 1958, we received a new proposal from Gulf Power Company which would have increased the average cost per kilowatt-hour at Laurel Hill from 7.586 mills to 9.978 mills, and at Baker from 7.435 mills to 9.874 mills. This is an increase of over 35 per cent.

"Since the expiration dates of the terminated contracts were rapidly approaching, we accepted the proposal of Alabama Electric Cooperative (affording a savings of 21 percent and 16 percent, respectively, at Baker and Laurel Hill as compared with the proposal of Gulf Power Co.). By working day and night we managed to get service to these two delivery points by the dates the contracts were terminated by Gulf Power Co."

Gulf Power's asserted discrepancy between its rates and Alabama Electric's power rates was refuted also by Mr. Clapp before the Subcommittee of the Committee on Appropriations, U.S. Senate, on H.R. 6754, in 1963, p. 58. He pointed out that such comparisons were not at all accurate and that the 1962 Gulf Power Company true cost of power to Chelco was 9.05 mills as compared with an 8.2 mill average cost to Chelco from our system.

Mr. Lilly would have your Committee believe that Gulf Power Company's proposal to the Air Force for service to the radar station near Portland, Florida, would save the taxpayers' money. He also leaves the impression that Gulf Power had facilities in the immediate area which would have been used to serve this load. The proposed method of Gulf Power service to this radar station is illustrated by a map appearing on page 159 of the hearings before the Subcommittee of the Committee on Appropriations, U.S. Senate, 88th Congress, 1st Session on H.R. 6754. As pointed out by Mr. Pentecost on page 272 of the same hearing record. Gulf Power would have had to build 81 miles of 115,000 volt transmission line to serve this load which is located in a rural area Chelco has served for over 20 years. Moreover, Mr. Pentecost stated that the United States would save $33,750 net per year under Chelco's proposal, giving consideration to Gulf Power's income tax.

Executives of Alabama Power Company have repeatedly testified in hearings held in this State that they considered the entire State of Alabama south of the TVA service area as their service area. At one of the many fruitless negotiating sessions between that Company and the cooperatives in this State, one of their chief attorneys made the statement that "We are out to gut you” and that statement has not yet been refuted by the Company. When your Commitee takes into consideratiul such statements, I am sure that you will see wherein the real interests of Alabama Power Company and The Southern Company lie.

Please do not hesitate to call on me if I can supply any additional information to your Committee. Yours very truly,

BASIL THOMPSON, General Manager.



Mr. Chairman and gentlemen of the Committee, you gave us permission to answer the power companies' charges before your Committee against the rural electrification program and you requested of us certain further information.

This is our refutation and the information,

My name is Jerry L. Anderson. I am Acting General Manager of the National Rural Electric Cooperative Association.

In general, the testimony of the power company representatives expressed similar views both in respect to the legislation and to the rural electrification program. I would like to comment briefly on some of the major points they raised.

They questioned the need of rural electric systems for additional growth capital.

We find their position extremely illogical in view of the fact of their own announced plans to spend $115-billion to expand their own facilities in the next 15

years. Yet they claim that our projected needs for growth capital are greatly exaggerated. Kuhn-Loeb studies show the rural electric need at $942-billion in the next 15 years. REA's studies estimate it at over $8-billion.

We have no idea on what basis the power companies seem to reject these studies made by recognized experts in favor of their own judgment which has often been colored with considerable prejudice when it comes to matters affecting rural electrification.

There is a basic relationship between our being able to obtain adequate capital and the continuation of area coverage rural electric service. Surely the power companies understand this elementary fact of the electric business. For example, one witness, Mr. Shearon Harris, president of the Carolina Power and Light Co. underscored this point when he reported that electric utilities require about $4.00 investment in plant to produce $1.00 in revenue. I think he would agree that this heavy investment applies to the rural electric segment of the industry as well.

Another elementary fact that we believe the power companies are as aware of as we are is that there is little likelihood rural electrics will be able to obtain these large amounts of capital through the present REA program.

The need for supplemental financing is well-established, and in our opinion, the most practical and efficient way of supplying this need is through a bank for rural electric systems designed to bring private capital into the program.

Most rural electrics have not yet reached the stage in their development where they can make an overnight transition from 2 per cent loans to the open market money rate, now about 512 per cent. But rural electrics which are able to pay more than 2 per cent are asking for the opportunity to begin the transition to complete financial independence of the Federal government.

In their efforts to substantiate their claim that supplemental financing is unnecessary, power company witnesses charged that the job of rural electrification is finished.

This claim is just as unrealistic as it was 30 years ago when the power companies first used it, at a time when only 11 per cent of the nation's farms had central station service.

We are confident that the 512-million families served by REA-financed systems would dispute the claim. They are buying electric appliances at a rate of over $1-billion annually and continue to use electricity in ever-increasing amounts. They expect their rural electric systems to be able to keep up with their demands for more and more power. To do so, rural electrics must have sufficient capital. Moreover, rural electrics are connecting to their lines 145,000 consumers every year. The job of rural electrification is no more finished than is the job of urban electrification.

Power company witnesses expressed the opinion that a Bank for Rural Electric Systems would lead to the gradual take-over by rural electrics of the power companies.

We would second REA Administrator Clapp's characterization of the charge as “preposterous."

The power company witnesses used this charge as a spring-board to repeat their attacks against cooperative generation and transmission systems. We have heard these same charges annually during appropriations hearings over the past several years. They are untrue and without foundation. We auswered them previously and we will answer them again. Detailed rebuttal statements by representatives of the G-T systems that were singled out are being submitted for the record. The power companies would have you believe that REA-financed G-T systems will be able to put them out of business if G-T loans are available through the Bank. Under the proposed legislation such a development could never happen.

The picture they painted was a distorted one. The G-T co-ops now generate slightly less than 1 per cent of the nation's total eletricity, compared to 76.9 per cent for the power companies.

Actually, of the $9142-billion capital that our studies show will be required in the next 15 years, approximately 47 per cent will be for G-T systems. This level of G-T financing will result in just about the same proportion of total input into co-op lines by G-T co-ops as presently exists-about 18 per cent, and will result in rural electric systems owning about the same percentage of the nation's generating capacity as of today. Much of the capital requirements of the G-T's will have to continue to come from the existing REA loan program.

We would like to stress that most of the capital for G-T systems will go to heavy-up existing systems, not for loans to start new ones.

In our opinion, the power companies' attack on cooperative generation is a smokescreen hiding their true motives. We believe they seek to destroy the G-T program, which they have traditionally opposed. If they are successful, they will, in effect, control the destinies of the rural electric systems. The inevitable result of this loss of rural electric bargaining power would be increased wholesale power costs and further restrictive clauses in power contracts.

The availability of G-T loans has provided rural electric systems with effective bargaining leverage in negotiating wholesale power supply contracts with hostile power companies. The instances of power companies demanding exorbitant wholesale rates are numerous. The right of cooperatives to borrow for generation facilities has been a basic factor in reducing wholesale rates. Furthermore, most of the REA-financed G-T plants would not have been constructed if the power companies had agreed to furnish adequate power at reasonable rates and without hampering restrictions.

The power companies claimed that they can supply power to rural electrics below the cost that our G-T systems are producing it for.

They avoided, however, mentioning some of the considerations which must be weighed in order to get an accurate cost comparison. I would like to mention a few of these.

In the first place, REA does not grant a loan for generation and/or transmission until after the existing power supplier has had an opportunity to submit an offer as to rates and terms. Therefore, one must examine the rates and terms offered by the power companies prior to approval of the G-T loan to make a valid judgement of the feasibility of a G-T loan. The wholesale rates at which the power companies now say they would supply power to the rural electric cooperatives, and the rate at which they were willing to do so originally, are usually poles apart.

Another consideration as important as the wholesale rate are the terms under which power is to be provided.

Many power companies have exercised effective control over the loads cooperatives can serve through the device of the dual rate clause. The clause provides for one rate for the electricity cooperatives purchase to serve small consumers and a much higher-often prohibitive rate for larger, more lucrative loads. The effect is to prevent cooperatives from serving the better loads in their areas and to permit invasion of the territories by power companies to pirate these better loads. Such restrictions impose severe handicaps on the ability of cooperatives to develop financial stability.

Other considerations that must be weighed to obtain an accurate comparison between the cost of wholesale power from the power companies and from G-T cooperatives are how and where it is delivered. The G-T systems, which are owned and controlled by the distribution cooperatives they serve, deliver the power to load centers and on the low side of the substations, which the G-T builds and maintains. The power companies, however, generally deliver at the point most convenient to them, which frequently makes it necessary for the cooperatives to construct expensive transmission line to pick it up, and also to absorb line loss. Amortization of the transmission line, substations, maintenance, and line loss must therefore be added to the wholesale rate charged by the power companies.

A less tangible consideration, but of major significance, is continuity of service. We believe the Northeast Blackout dramatically emphasized the primary importance of this factor. When power blackouts occur, the usual procedure is for the power companies to restore service first to their retail customers and last to our systems. Besides the inconvenience which the extra delay causes our member-consumers, there is substantial loss of revenue when the electricity is off. Cooperatives served by their own G-T systems do not have this problem.

The power companies have expressed fear as to their future prosperity if supplemental financing legislation is approved.

This, too, is a groundless fear and one they have been expressing for more than a quarter-century. Since the inception of the REA program, the power companies have prospered as never before. Their profits has risen steadily from $72-billion in 1937 to $2.3-billion in 1964. Their dividends have increased from $432-million in 1937 to $1.68-billion in 1964.

With the tremendous increase in population occurring mainly in their urban service areas, they can look forward to continued growth. All population experts

predict rapid expansion of metropolitan areas. No one seriously believes that rural electric cooperatives could serve the millions of people in metropolitan complexes. Nor that the amount of funds which the Bank will be able to loan will enable rural electrics to finance service to urban centers even if they wanted to do so, and they do not.

Rural electrics do not have the power of eminent domain. It is preposterous to believe power companies would sell them lucrative urban power markets, or that regulatory commissions would approve any such proposed sales.

Much was alleged by the power companies regarding invasion by rural electrics of power company territories as support for their contention that we are out to take them over including the cities they serve.

The truth is just the opposite. They are invading our territories. In some instances, they are gobbling up entire rural electric systems.

When cities extend their boundaries (as so many of them have been doing recently) to take in portions of our service areas, the power companies franchised to serve the cities demand that rural electrics pull up their lines and get out. When the rural electrics refuse, they claim we are invading their areas. These were formerly rural areas which had no electric service until our systems brought it. If we are required to give up the loads that we pioneered at considerable expense in the rural areas adjacent to the cities and along the highways, and if the number of farmers continues to decline, rural electrics will have a difficult time surviving. The loss of even a few hundred members is a very serious one for the average rural electric which serves only about 5,000 consumers.

In some states, the cooperatives and the power companies have been able to work out mutually satisfactory territorial agreements. However, too many states still have no statutory protection for the service territories developed by rural electric cooperatives. In this regard, it was ironic to bear the President of the Montana Power Company complain that co-ops in his state are invaders. His state does not have territorial legislation mainly because his company opposes it.

During 1965, the rural electrics in Montana supported two territorial integrity bills. One failed to pass the State Senate by a vote of 29 to 28. The second was approved by both houses of the State Legislature, but was vetoed by the governor.

The Montana Power Company strongly opposed enactment of both of these measures.

We want to emphasize that we are much more concerned with the territorial problem than are the power companies. We want to settle it and welcome any opportunity to work with them towards this end. If they are truly fearful that rural electrics are out to take them over, it would seem to us that they would be willing to support state legislation that would give them and us protection against invasion.

The power companies charged that the Bank will have carte blanche authority to make loans.

This is untrue. Loans could be made only to previous REA borrowers engaged in rural electrification or associations owned by these borrowers, and for the purposes of rural electrification.

In an apparent effort to discredit rural electric cooperatives, the power companies had much to say about the large amount of tares they clainv to pay as compared to the amount our systems pay.

Here again they gave a distorted picture. In fairness to the rural electrics, the matter should be put in proper perspective.

Even the power companies admitted that rural electric systems, with few exceptions, are subject to the same taxes as the power companies with the exception of Federal corporate income taxes.

The reason for the latter exemption is that rural electric cooperatives are nonprofit organizations. They do not have income on which to pay Federal income taxes.

If the power companies chose to operate on a non-profit basis they, too, would be exempt. We doubt that they would since they have benefitted substantially by being allowed to keep a sizeable portion of the taxes they collect from their customers as part of the charge for electricity. As of the end of 1964, the amount retained by the nation's larger power companies for their own use was $1.8-billion. These are called deferred income taxes.

Moreover, according to a Federal Power Commission report, these power companies also accumulated $94.4-million in investment tax credits during 1964 of

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