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ness judgment, and, eventually, by this means develop to the point where the need for Federal assistance will diminish, and we hope, eventually, disappear.

This is the approach to which we are committed in REA. This is the approach to which this proposed legislation is addressed.

I think we have to remember, if I may say so, that these rural systems, in spite of all we hear about growth, are still furnishing service for only 8 percent of the consumers, and their density is 3.5 consumers per mile of line, as compared to around 30 to 40 for the industry, the class A and class B commercial utilities.

Their average revenue per year—this is the gross revenue, not net revenue-per mile of line, according to the latest figures we have, is $516. This compares with the average revenue per mile of line on the part of the class A and class B commercial utilities of $7,820. So you have a very unequal situation.

What we are faced with here today in the consideration of this legislation is a need to provide the additional capital tailored to the needs and the requirements of these systems which are still laboring under extreme handicaps. And this question of confining their future activities to areas that are rural goes to the heart of this problem. There are not many of these situations but there are some in which there will be opportunities, there will be willing buyers and willing sellers, whereby you can put together the rural area with the nucleus of a small but not rural community-a community of maybe 2,000, 3,000, 4,000 people—and out of this you get a system that is much stronger and much better able to serve both, than the two systems individually.

This improves the financial capability of the rural system and makes it able to get by with less Federal assistance.

Mr. FINDLEY. Mr. Clapp, reading the language of the proposal that is now before us, I see no requirement that the Federal stock be retired by a definite date. Presumably, this is a substantial advantage to the electric bank, that the Federal investment could go on forever, interest free. There would be obvious advantage to the management of the bank to simply leave it as is and leave the Federal money in it. Would you object to an amendment which would spell out the time when this Federal stock must be retired?

Mr. CLAPP. I think it is too early, Mr. Findley, to spell that out and to set a date. There is a provision in the bill—I am speaking of the Cooley bill—which provides for a review and a report at the end of 5 years, of the operation of the bank.

Mr. PoAGE. Will you yield there?
Mr. FINDLEY. I will be glad to yield.

Mr. Poate. In H.R. 14000, and I think that it is in the Cooley bill too, but I know that it is in H.R. 14000, there is a provision that every time that the cooperative borrows money from the bank, it has to invest 5 percent of the proceeds of the loan in the purchase of the stock of the bank and that will automatically and necessarily pass all of the stock in the bank to the cooperatives. They simply have to borrow 20 times as much money as the amount of the stock that the bank has.

Mr. FINDLEY. But this does not require that the Federal stock be retired.

Mr. Poage. If your stock in the bank is $1 billion as it is in H.R. 14000, you will get the stock in private hands by that process when the bank loans $20 billion. You will have, to begin with, $1 billion worth of stock in the beginning and the Government will own all of it, and the only way that the cooperatives will get it is by buying it.

Mr. FINDLEY. That is right. There is no requirement, however, in this act to take care of that.

Mr. STALBAUM. Will you yield?
Mr. FINDLEY. Just a minute.

It is possible for stock to be retired but I cannot see in the language of the bill now that this must necessarily be done.

Mr. Poage. Maybe if we put a provision in there that you could not issue any other, or more, stock it might help. We maybe should have such a provision, but certainly there is no provision in the bill authorizing the issuance of any additional stock.

Mr. FINDLEY. I simply raised the question.

Mr. Poage. I grant you it would seem to me that the $1 billion is enough stock. Maybe it could be that we should have a provision against the issuance of any more stock or a provision that when the co-ops buy stock that they automatically have to retire the same amount of the Government stock. Frankly, that is what I had contemplated.

If you want to, you might spell out that there cannot be more than a total of both A and B stock outstanding at any one time.

I can see no objection to going along with you in spelling that part out. If the REA has any objection I would be glad to have them explain it. I see none.

Mr. STALBAUM. Will you yield?
Mr. FINDLEY. In a minute. I have one question.
Mr. Clapp, I have just one additional question.

Do you anticipate that the electric bank will pay anything comparable to the franchise tax on net earnings that the agricultural banks now pay?

Mr. CLAPP. Mr. Findley, this is not in the bill—a franchise tax. There is a provision, of course, that the retained earnings shall be divided in proportion to the class A stock, which is the Federal Government's investment and the class B stock, outstanding in the electric bank.

Mr. FINDLEY. Thank you.
The CHAIRMAN. Mr. Stalbaum.

Mr. STALBAUM. One area was not touched upon, Mr. Clapp, and I think that we should clear it for the record and for the information of the committee, which is on the matter of the intermediate loan. Just by way of background, if I understand the procedure for rural electric, there will be three levels of loans: the present 2 percent loan which is really separate from the bank, an intermediate loan which the Cooley bill sets at a maximum interest rate of 4 percent, and a third level which is the debenture money, plus the cost of the handling of the money.

My question relates to the intermediate loan. But first let me put a preliminary question: If you were going into the money market today with your debentures, what rate do you think that you would have to pay?

Mr. CLAPP. As best we can estimate it, Mr. Stalbaum, we would figure now about 514 percent interest rate.

Mr. STALBUM. Five and a quarter per cent. Intermediate loans are to be made from these moneys with a maximum rate of 4 percent. Where do you anticipate receiving the funds to make up the difference in the interest rate?

Mr. CLAPP. This comes about through a mix.
Mr. STALBAUM. With the 2 percent money?

Mr. CLAPP. With the interest-free capital funds of the bank. If you take a dollar of class A Government capital, for instance, you can add to it a certain number of borrowed dollars, borrowed at 514 percent interest rate, and come up with a blend cost of 4 percent.

I think the multiplier factor there is for every dollar of Government capital you have available for the mix you can make available about $4 of loan funds

Mr. STALBAUM. So that the main point-
Mr. CLAPP. Available at 4 percent.

Mr. STALBAUM (continuing). That I want to get into the record is to put out this money at 4 percent is not going to either cut into your 2 percent fund or have you come back to the Congress for additional appropriations—it will not require you to do that?

Mr. CLAPP. The bank will operate in the black. We estimate for instance that with the $50 million that would be available in the first year of the bank's operation from the sale of stock to the Federal Government, if the bank should have to pay even 512 percent interest rate on its debentures, it could produce $185 million of intermediate loans for the program with that money and be in the black.

If you have $185 million of intermediate financing and you have $270 million, which is the budgeted program of 2 percent money for fiscal year 1967, this gives you a combined program of $455 million for REA electric purposes in fiscal year 1967. And you add to that a limited amount of full market rate financing which we think in the early years of the bank would be extremely limited because of the condition of the borrowers, but this would be a net loan capability, over and above that $455 million.

Mr. STALBAUM. Just so that there is no misunderstanding, am I right in assuming that you contemplate in the operation of the bank that at no time would you operate other than in the black?

Mr. ClApp. That is correct. The price out to which the Secretary referred yesterday, which is available to the committee, shows that on the basis of certain assumptions which we have to make as to how this bank will operate for the next 15 years, it is in the black every year. It ends up with something in excess of $200 million of retained earnings at the end of the 15-year period.

Mr. STALBAUM. Thank you, Mr. Chairman.
Thank you very much, Nr. Clapp.
The CHAIRMAN. Mr. Dole.

Mr. Dole. Considering the time element, I will be very happy to submit these questions to Mr. Clapp and he can submit the answers in writing for the record.

The CHAIRMAN. That will be fine. You may do that.
It will be fine if you will do it that way.

Mr. DOLE. I suggest it to expedite the hearing. I have the questions here.

Mr. CLAPP. I will be happy to do that.

Mr. DOLE. I will be happy to submit a copy of the answers to the other members of the committee.

Mr. TEAGUE of California. I have several questions which to me are major in importance. I am willing to do the same thing that Mr. Dole has suggested, however.

Mrs. May. We could come back perhaps for a later meeting with Mr. Clapp. Would it be possible for Mr. Clapp to come back later, rather than to hold up the witnesses we have before us?

The CHAIRMAN. If it is satisfactory to the committee members to submit the questions to Mr. Clapp in written form and have them inserted in the record, it will save a great deal of time.

Mr. BELCHER. We would then have to hunt up the record to see what the questions are.

Mrs. May. I would say, as a suggestion, that it would be good to hear the questions read rather than to see them later on in the record. Some question given orally would lead to other questions that might be pertinent.

Mr. ABBITT. That might bring in some more questions, yes.
Mrs. MAY. Yes.
The CHAIRMAN. We can handle that in executive session.

Mr. TEAGUE of California. I, certainly, think that the answers to the questions ought to be in the record, and I respect fully request that it be done that way–have them included in the record, together with the answers.

Mr. BURTON. I have some questions, too, that I want to ask Mr. Clapp but I am willing to go along with this procedure in the interest of saving time. I consider this very major legislation, but we have a lot of witnesses as the chairman has said. Perhaps some of them Friday afternoon could just put in their statements.

The CHAIRMAN. You will be given full opportunity to ask any question that you wish.

. Mr. BURTON. We do not want to shut this debate off.

The CHAIRMAN. I am not trying to shut it off. If you want to ask the questions you will be recognized.

Mr. Burton. I am going along with the procedure that has been suggested.

The CHAIRMAN. You and I know that Mr. Clapp will be called back in all probability for some rebuttal testimony because we have witnesses here from all over the United States a long list of them—I do not know how we will hear them all in the time we have allotted. Our next witnesses are Mr. Anderson, Mr. Katzin, and Mr. Partridge of the National Rural Electric Cooperative Association, and I think we should hear them and then we can get Mr. Clapp back up here any time that we want.

Mr. CLAPP. Any time you say will be agreeable.

The CHAIRMAN. Our next witnesses are Mr. Anderson, Mr. Katzin and Mr. Partridge.

Mrs. May. I ask unanimous consent for blanket approval for all of us to submit questions in writing to Mr. Clapp and then at a later time we can go into that.

The CHAIRMAN. Mr. Clapp will come back. I am sure that he will be back. Mrs. May. I am prepared to do it either

way. The CHAIRMAN. Why not submit them for the record ?

Mrs. May. I think that is fine, but I would like Mr. Clapp to como back at a later time.

(The questions referred to above were answered orally by Mr. Clapp on June 7 and 8, 1966; see pp. 475-518).

The CHAIRMAN. The Chair recognizes you, Mr. Anderson.

I think that you will be the spokesman for your association. We will be glad to have you and your associates present your statements, and we are glad to have you here this morning. STATEMENT OF JERRY L. ANDERSON, ACTING GENERAL MANAGER,

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION; ACCOMPANIED BY JEROME KATZIN, VICE PRESIDENT, KUHN, LOEB & Co., INC.; ROBERT D. PARTRIDGE, SENIOR LEGISLATIVE REPRESENTATIVE, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION; AND IRA SHESSER, LEGISLATIVE RESEARCH COORDINATOR; RONNIE J. STRAW, STAFF ECONOMIST; CHARLES A. ROBINSON, JR., STAFF ENGINEER AND STAFF COUNSEL

Mr. ANDERSON. Mr. Chairman and gentlemen of the committee, my name is Jerry L. Anderson. I am the acting general manager of the National Rural Electric Cooperative Association.

The National Rural Electric Cooperative Association is a national service organization of the rural electric business. We represent 980 systems throughout the country and this is 92 percent of the REA electric systems.

I have with me today our senior legislative representative, Mr. Robert D. Partridge, and Mr. Jerome Katzin, a partner in the investment firm of Kuhn, Loeb & Co., Inc., of New York City; as well as Mr. Ira Shesser, legislative research coordinator; Ronnie J. Straw, staff economist, and Charles A. Robinson, Jr., staff engineer and staff counsel.

We are very anxious to cooperate with the chairman and the committee in expediting the hearings as much as possible and if it is agreeable with you, Mr. Chairman, we would like to file the rather detailed testimony we have prepared for the record and to highlight it this morning before the committee.

The CHAIRMAN. Yes, sir; without objection, you may do that, Mr. Anderson.

Mr. ANDERSON. And in particular we would like to file a statement of Mr. Katzin in its entirety and after I have made my presentation, Mr. Partridge will make a brief presentation if that is agreeable with the committee.

The CHAIRMAN. Just a moment. Yesterday, I failed to mention that we have two additional bills before the committee, one by Mr. Schisler, H.R. 15162, and one by Mr. Mills, of Arkansas, H.R. 14048. I am sure that you are familiar with all of those bills.

Mr. ANDERSON. Yes, sir.

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