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rowers and virtually all the investor-owned electric companies opposed the electric bank bill as approved by a narrow majority of this committee. Enactment of a telephone bank would create an unfortunate and unwise precedent for the entire electric industry.
(3) H.R. 7 perpetuates unnecessary and excessive subsidies that have been exploited and abused in the traditional 2-percent program. Any redirection of the program at this time should eliminate all opportunities for such abuses. The basic act should be revised to bring it up to date, with due regard to present-day financial and budgetary problems of the Federal Government.
(4) The Edison Electric Institute respectfully recommends that this committee undertake a complete reassessment and reform of the existing REA 2-percent loan program before it considers "supplementary” programs to add new layers of subsidies on top of the existing program.
I. ALTERNATIVE METHODS OF FUTURE REA FINANCING
Bills were introduced during the 90th Congress by three senior members of this committee, Representatives McMillan, Teague, and Goodling, and also by Representatives Herlong, Saylor, and Haley, to provide for a program of Government-insured loans for electric borrowers. These bills were not given consideration by this committee. In the present 91st Congress H.R. 7013 and H.R. 7073 have been introduced by Representatives McMillan and Teague, to provide a program of insured loans for both REA electric and telephone borrowers. The Edison Electric Institute supports these bills because they would permit REA borrowers to move into the commercial money market, assisted where necessary by Government insurance or guarantee.
It has also been suggested that a new lending agency be established under the direction of the Farm Credit Administration. Such an agency would be a fourth banking system, in addition to the Federal land bank, the bank for cooperatives, and the production credit administration. In view of the Farm Credit Administration's fine record of accomplishment, this approach deserves serious consideration by this committee.
Another possibility is that an independent financial institution be established outside the Federal Government to provide future financing for REA borrowers. Congress should, of course, require that any such new institution stand on its own feet without any Federal financial assistance. If other Federal assistance (such as subordination of REA liens) is provided, then it should be clear that it will be extended only for the same purposes authorized by the Rural Electrification Act—i.e., to finance telephone service in rural areas.
Each of the approaches deserves serious consideration. Each of them could be adapted to the telephone program, as well as the electric program. Therefore, the institute urges this committee not to recommend legislation for the telephone program alone until it has carefully considered the merits and demerits of all the alternatives.
II. THE REA TELEPHONE AND ELECTRIC PROGRAMS SHOULD NOT BE
Of the two, the REA electric program is older, larger, and has involved greater support from the taxpayers than the telephone program. If H.R. 7 should be enacted for the telephone borrowers, would this not influence subsequent decisions for charting future programs for the electric borrowers? Would this not be a precedent to saddle taxpayers with subsidizing not only a telephone bank but also a far more expensive and far more wasteful electric bank?
It is suggested that the two programs should not be considered separately. Or, if they are, the major problem—the electric 2-percent program-should be considered first.
III. ANALYSIS OF H.R. 7
There are at least 10 major defects in the bill as now drafted and before the committee. (1) Two-percent subsidies continue
H.R. 7 is predicated upon continuing the present 2-percent program with no clear line of demarcation as to who will get 2-percent money and who has to go to the bank. The bill ignores important information developed by the hearings on H.R. 14837 in 1966 and on H.R. 12066 in 1967. In the 1967 hearing, a spokesman for the U.S. Independent Telephone Association said:
There are those who are able to pay the full cost of the money to the Govern. ment, and there are those who are able to pay what the full commercial bank rates would be under H.R. 12066.
We said, in effect, “Mr. President, under the present law, if a borrower were to go down to the REA and say, 'Look, you have got me strapped in, because you own a first mortgage on my property and I cannot go to a commercial house to borrow money, but I have proposed; my telephone company is doing very well, and I have got money falling out of all pockets, and I want to pay my government what it costs my government to borrow money,' and they would say in horror, 'I am sorry that law does not permit that. If you want to borrow any more money from us, it has to be at 2 percent.' (Page 61, record of hearings before the Committee on Agriculture, House of Representatives, on H.R. 12066, August 23 and 24, 1967.)
This bill makes no provision whatever to assist such borrowers as referred to in that quoted statement, to move out into the commercial money market.
This bill proposes to provide seed capital for the bank at 2 percent and thereby does not make provision for such borrowers to pay the full cost of money to the Government.
Most troublesome of all, who would get 2-percent money? By what standards would that judgment be made? Every Member of Congress with a borrower in his district will be interminably plagued and badgered to get into the act to get 2-percent money for his constituents. I suggest a reasonable and clear criterion for your consideration-a simple one that can be written into the bill and eliminate this problem.
On Wednesday of this week, a spokesman for the National REA Telephone Association testified before this committee as follows:
As a result of this desire on the part of rural people for more and better service, it is interesting to note that over 60 percent of all loan fund requirements for the REA telephone program for fiscal year 1969 will be used for upgrading of
service * * *. It is estimated that 52 percent of all REA telephones will be oneparty by 1975 compared to 29 percent today.
When telephone service has been established and the requested loan is for upgrading existing facilities, the project is able to bear at least the Government's cost of money. Therefore, the bill should provide that if 2-percent money is to be available at all, it should be only for financially weak borrowers, and only for extending new lines for service for the first time. (2) Free service by Federal employees
Section 403(b) would permit the bank to utilize-quoting from the bill—“the facilities and services of employees of the Rural Electrification Administration, or of any other agency of the Department of Agriculture, without cost to the telephone program **** (p. 8, lines 10–12). Any bank, if established, should reimburse the Federal Government for the services of all Federal employees, regardless of whether they are full- or part-time employees. (3) Inadequate return on Federal contribution
Section 406(a) provides that the United States shall furnish $300 million capital to the bank, and section 406(c), (p. 14, lines 4–6) provides only a 2-percent rate of return to the United States on this $300 million contribution. The rate of return to the Government on its contribution should be no less than the cost of money to the U.S. Treasury. (4) Slow repayment of Federal contribution
Section 406(c) (p. 14, line 16 through p. 15, line 8) does not require a firm schedule for prompt repayment of the Federal contribution. The $300 million should be repaid on a regular repayment schedule, and completely repaid within a reasonable period, such as 20 years which is generally comparable to the average life of telephone equipment. (5) Improper bank loan purposes
Section 408(a) (p. 18, line 11 through p. 19, line 4) would permit the bank to make loans for purposes of "financing, or refinancing, the construction, improvement, expansion, acquisition, and operation of telephone lines, facilities, or systems, in order to improve the efficiency, effectiveness, or financial stability of borrowers under sections 201 and 408 of this act." Section 201 of the basic act permits loans for "expansion" and "acquisition" under certain circumstances. But it is my understanding that loans for those purposes have resulted in many criticisms of the REA telephone program. Therefore, I suggest that before this committee authorizes similar "bank” loans, it should first hold public hearings to investigate the abuses of section 201 loans for “expansion" and "acquisition" purposes. I submit that this committee should recommend subsidies for expansion and acquisition by REA borrowers only if it is convinced that the taxpayers should again be compelled to subsidize further expansion and acquisition by REA borrowers. (6) Unreasonably long loan period
Section 408(b) authorizes the bank to make loans for periods up to 50 years (p. 19, line 19). The maximum loan period should not exceed the depreciable life of the equipment, or 35 years, whichever occurs first.
(7) Subsidized "intermediate" loans
Section 408(b) (3) would permit “intermediate” loans at a subsidized 4 percent interest rate (p. 19, lines 17-25 p. 20, lines 8-21). Bank loans should be made at a single rate of interest reflecting bank costs, including costs of administration, and a reserve for losses. The subsidized intermediate loan program should be eliminated. (8) Inadequate review of profitable sell-outs to holding companies
Section 408(b) (8) (p. 22, lines 4–15) provides that borrowers of funds from the REA administrator, and from the proposed "bank”, shall not dispose of their assets without approval by the administrator, or by the Telephone Bank Board, as the case may be. However, these provisions are inadequate in that they give the administrator, or the board, no guidance whatsoever as to the criteria to follow. Many REA telephone borrowers, utilizing subsidized 2-percent funds, have built up valuable properties, and sold them at great gain to holding companies. We submit that this committee, before recommending this bill, should hold public hearings on past sellouts at exorbitant profits to telephone holding companies, and should provide criteria to the administrator, or the board, concerning future sales to holding companies. (9) Improper early conversion to borrower control
Section 410(a) would permit conversion of the bank to ownership and control by the borrowers even though the United States might have in excess of $100 million capital still in the bank (p. 23, lines 4-10). The bank should not be turned over to borrower control until ali Government capital has been repaid. (10) Inadequate congressional controls
Section 410(c) (p. 24, lines 11-13) provides that Congress reserves the right to review the continued operations of the bank after all Class A stock has been fully redeemed and retired. This is a meaningless and inadequate provision, since Congress has the right to review any program. Congress should require that all capital furnished by the United States must be authorized by the Congress on an annual basis. In addition, all the operations of the bank should be subject to congressional supervision and control.
If this committee ultimately decides to recommend this bill, it is strongly suggested that the appropriate amendments be incorporated to eliminate the excessive subsidies and to provide appropriate controls by the Secretary of the Treasury and Congress. Federal funds are not inexhaustible nor the taxpayers' load so light that subsidies can be bestowed indefinitely, and even increased, for the benefit of one small favored group of telephone users, without regard to the Government's total commitments or to any system of rational priorities.
IV. REFORM OF THE EXISTING 2-PERCENT LOAN PROGRAM IS NEEDED
We respectfully suggest that the immediate need is not to provide additional layers of subsidies and financing for REA borrowers but to redesign and update the existing 2-percent direct loan program. Flagrant abuses have occurred in both the telephone and electric programs.
In the telephone program, companies and individuals have been permitted to receive excessive returns on invested capital, and have utilized 2 percent money to make large profits.
In the electric program, unnecessary and improper (and perhaps illegal) loans for generation and transmission purposes have been made in recent years. Loans have been made for electric facilities to provide large blocks of power to industrial users, such as Harvey Aluminum Co. in Kentucky and Dow Chemical Co. in Louisiana, rather than to farmers. In most cases, no adequate showing was made that electric energy was not available at a reasonable rate from non-Government financed suppliers. In all cases, the administrator operated in secrecy without a public hearing, and without granting other taxpaying utilities a fair opportunity to compete and to furnish the needed electric energy without Government subsidy.
We recommend that this committee conduct an exhaustive review of the existing REA program. Most REA borrowers can afford to and should pay a rate of interest more than 2 percent. Each borrower should pay a rate of interest corresponding to its ability to pay. No more generation and transmission loans should be made by REA unless it can be demonstrated that power is not available at reasonable rates for a non-Government financed supplier.
The Edison Electric Institute opposes enactment of H.R. 7 because other approaches to future REA financing should be studied before deciding upon the discarded and discredited bank approach. The new administration should be given time to study the entire REA program, both telephone and electric, and make its recommendations concerning the future direction of the program. Creation of a telephone bank might serve as an unwise precedent to establishment an even more expensive and wasteful electric bank. The bill, as drafted, contains many defects which would further burden the taxpayers for the benefit of a favored few. And finally, the existing 2-percent electric and telephone programs should be reformed before new subsidies are granted REA borrowers.
(Mr. Rarick requested that the following material be inserted at this point in the record :)
BATON ROUGE, LA., February 25, 1969. Hon. JOHN R. RARICK, Longworth House Office Building, Washington, D.C.:
Re La Fourche Telephone Co., Larose, La. Regulated utility rates in Louisiana are fixed as determined by several factors, one of which is the rate of return, or the percentage of invested capital represented by net revenues. Invested capital consists of debt and equity and where preponderance is debt at low REA rates, return on equity is correspondingly high. However the Louisiana Public Service Commission takes this situation into consideration and reduces net return on composite capital below what would be permitted were debt-equity ratio of capital nearer normal.
NAT B. KNIGHT, Chairman, Louisiana Public Service Commission.