Senator ELLENDER. Will you yield?

Senator HOLLAND. I will yield.

Senator ELLENDER. Suppose at the end of the year, the $50 million is put up and the $400 million is loaned to the cooperatives. The Senator from Florida has pointed out that it may be impossible to sell debentures at anything less than 5 percent. Suppose that it is at 5 percent. There is a 2-percent loss there in the interest rate. How would that be repaid? Would the Government have to put that up, or would the new bank sustain that loss?

Senator COOPER. I think we have to assume that the bank would want to operate successfully. If such a situation should develop as the two Senators have suggested, the bank would then have to loan the rest of its funds at the same rate that it sold its debentures.

Senator HOLLAND. This proposition would not have to develop. The proposition is here now. The situation is here with us, is it not? Senator COOPER. The question, though, is based on an assumption which I do not think is correct: that the loans would all be made at the intermediate rate. I have said that you could have two situations: First, where a portion of the loans which the bank feels could reasonably be made would be made at the intermediate loan rate, and the rest of the loans would be made at the current average rate paid on its debentures. The other situation, of course, would be that the bank would have to make all its loans at a rate which would enable it to operate. Senator ELLENDER. If the loan is to be made 3 percent and the debentures cannot be sold under 5 percent, who is going to suffer that difference, that loss; would the Federal Government do that, or the bank?

Senator COOPER. I believe I just answered that. If the bank cannot operate by making loans at the intermediate rate, then we would have to face the practicality of the situation.

Senator ELLENDER. We are talking about a self-sustaining bank, a bank in which the cooperatives can do this, and that poses some questions that we will have to answer when we bring this on the floor for debate. And I want to say that all of these questions are being brought by me, and, I am sure, by Senator Holland, in order to point out the difficulties that we may have in meeting the objections, as the Senator

knows.

Senator COOPER. They are good questions, and they are questions we will have to deal with during this hearing.

Senator ELLENDER. When you speak of a self-sustaining bankSenator COOPER. These are questions, also, that I am sure the Secretary of Agriculture, and representatives of the cooperatives, will want to testify to.

Senator TALMADGE. Will you yield at that point?

Senator ELLENDER. Senator Holland yielded to me.

Senator HOLLAND. I yield to you.

Senator TALMADGE. Could you suggest what we might do to amend the bill so as to provide that loans made by the bank to the members of the cooperatives will be at an interest rate not less than the cost of the debentures?

Senator COOPER. No; I am not suggesting that now. These hearings have just started, and to answer that I would like to have the testimony of the people who are going to operate this bank or will have

at least a part in operating it—the Secretary of Agriculture, Mr. Norman Clapp, and the representatives of the cooperatives themselves.

Senator MONRONEY. Is it not true that you cannot find a money market at present, that the money market at present is a very difficult money market, and we had to up it for FNMA some $2 billion to support the housing program?

And if you cannot, you will have to put the less economic loans back on the Appropriations Committee at the 2-percent interest rate. This is to relieve the burden wherever it is possible.

Senator HOLLAND. We did not suggest that FNMA could lend at 3 percent. We knew that it would be completely unrealistic to make such a suggestion.

Senator COOPER. AS Senator Monroney just said, in the event this contingency should happen, the situation would not be any different from what it is now, where all REA loans are made by the Federal Government at 2 percent.

A good many people have been wanting to get away from that, to see if an advance cannot be made in the other direction.

Senator HOLLAND. I noticed that on page 7 of your statement, you refer-as Senator Cooper has already referred to the fact that one provision of this bill limits the size of any acquisition of electrical facilities not now cooperative by cooperatives to 5,000 nonrural connections. What is the relationship between "connections" and population?

Senator MONRONEY. That would be meters, I would say, and it would depend on whether you are serving a village without any large employment in it on whether you are serving maybe a country factory that does have large employment. There is no way of measuring the population.

Senator HOLLAND. It could not be the country, because it says "nonrural connections." It would have to be something else.

Senator MONRONEY. I think that it would not be an industrial connection. There are a lot of rural plants today. It would be nonindustrial connections.

Senator HOLLAND. Would you make an estimate of the population that would be expected to have 5,000 nonrural connections in a village or in a town or in a city? Would it be 10,000, or 12,000, or what number?

Senator MONRONEY. I would say probably it could run as high as two to a meter average.

Senator HOLLAND. In other words, you think that 10,000 would be an appropriate estimate?

Senator MONRONEY. That would be possible, I would think. You see, this is a cumulative total. Supposing that you have three or four locally owned utilities faced with what I understand is a need to modernize their plant and are unable or unwilling to do this. And nobody else is interested in picking up this little independent operation. The area could up to a total cumulative of several villages and be able to accept the 5,000 nonrural connections. This is a limitation that was put in the bill by Senator Cooper against the argument that cooperatives could take over a city the size of Miami or a similar metropolitan area. This limit was designed, I think, to allow them

to take over if the service is threatened to be discontinued in these villages, to acquire several of these that would not have any other power supply.

Senator TALMADGE. The chairman is asking the majority leader for consent for the committee to sit while the Senate is in session. We will know shortly whether that is granted.

Senator HOLLAND. Do you think that the Federal Power Commission might have average figures showing what the population of a village over a town or a city would be that would be expected to have nonrural connections to the amount of 5,000?

Senator MONRONEY. I am sure that they probably have.
Senator HOLLAND. We will attempt to get that then.

Senator MONRONEY. I am sorry I do not know. I am not familiar with that.

Senator HOLLAND. Certainly, it runs way beyond the 1,500 figure maximum now permitted under the existing law to be served. That is, to be served by the REA.

Senator MONRONEY. I would think so; yes.

Senator COOPER. On that point, does the Senator not consider that jurisdiction could be determined by the State agency, too!

Senator HOLLAND. In what way?

Senator COOPER. They have these questions all the time, as to what utilities shall serve a certain area. In those States that have them, the State agencies make those determinations too, you know.

Senator HOLLAND. I understand, but here we are talking about a nonrural limitation, and most municipal plants that I know anything about do not confine their services particularly to the limits of the municipality; they serve the surrounding terrain, too.

Senator COOPER. I think one problem that has arisen

Senator HOLLAND. This limitation in the bill is 5,000 nonrural connections. We will attempt to get these figures from the Federal Power Commission.

Senator MONRONEY. That is cumulative. I think that is a very important point. It says a cooperative operating in sections of the State that would perhaps be importuned to acquire more than one of these smaller communities.

Senator HOLLAND. Well, that would be in favor of the units being small, rather than being of a maximum size, and that would preclude a population that would be served by 5,000 nonrural connections within 1 municipal area.

I notice, on page 8 of your statement, the last sentence in the next to the last paragraph, you say:

They have substantial capital needs which must be met, and due to their higher operating costs, low density, and meager revenues, they cannot pay prime bank rates at the present time.

What do you mean by that?

Senator MONRONEY. I mean that we need to continue the program we now have, which is 2 percent for the very small and sparsely populated areas which are now supplied by appropriated money, and the 3 percent proposed by Senator Cooper's bill for cooperatives able to pay that so they can heavy-up the lines or extend them into new territory or serve a new business that is wanting connections

Senator HOLLAND. You mean all REA's are unable to pay the going rate?

Senator MONRONEY. No; I do not mean that. I made the point that the third category, even for the loans from the bank, would be expected to pay the going rate. But I still doubt that the financial institutions would seek them out as prime borrowers; that is, the private banking institutions.

Senator HOLLAND. The argument has been made that some are very strong financially and should pay the commercial going rate, just like other business organizations.

One more question.

Who makes the determination under the proposed bill as to which cooperatives are entitled to the 2-percent rate and which are entitled to the 3-percent rate?

Senator MONRONEY. The Board of Governors makes that decision. This is comprised of the Administrator, and then the six directors named by the President, none of whom shall be REA employees, and six directors selected by the eligible borrowers, one to be elected at large and the others on a geographical basis. The Board would make the decision.

Senator TALMADGE. The committee has obtained permission to sit. Senator HOLLAND. I did not understand your reference a while ago to a third class of cooperatives that would pay the going rate. How are they provided for in this bill? I did not get the point that there was such a provision from the testimony of Senator Cooper.

Senator MONRONEY. As I understand, there is provided for in the bill a 3-percent rate for those going through the transition period, and a higher rate for those able to pay the market rate.

Senator HOLLAND. In other words, there would be three separate rates presented?

Senator MONRONEY. That is my understanding.

Senator HOLLAND. Under which provision of the bill is that third

rate provided?

Senator COOPER. It is on page 22, section 408 (b) (2).

Senator HOLLAND. What was that page?

Senator COOPER. Page 22. That is in S. 3720, page 22.

Senator HOLLAND. What part of page 22?

Senator COOPER. Subparagraph (2). Shall I read it?

Senator HOLLAND. I will ask that that section be placed in the record at this point.

T

Senator TALMADGE. Without objection, it will be made a part of the record at this point.

(Sec. 408(b) (2) of S. 3720 follows:)

(2) Intermediate loans shall bear interest at a rate equal to (i) a rate determined by the Secretary of the Treasury, taking into consideration the current average market yield, during the month of May preceding the fiscal year in which the loans are made, on outstanding marketable obligations of the United States with remaining periods to maturity comparable to the average maturities of such loans, or (ii) 3 per centum per annum, whichever is lower. All other loans made hereunder shall bear interest at a rate which reflects the current average rate payable by the electric bank on its electric debentures, and administrative expenses and estimated losses of the electric bank in respect of such other loans, all as determined by the Governor of the electric bank. Intermediate loans shall not be made to a borrower which is determined by the Governor of the electric bank, under standards to be established by the Secretary,

to be capable of both paying the interest rate applicable hereunder to loans other than intermediate loans and achieving the objectives of the Federal rural electrification program. The authority to make intermediate loans hereunder shall terminate on June 30, 1981, or such earlier date as conversion takes place under section 410(a): Provided, That on or before July 1, 1971, the Secretary shall make a report to the President for transmittal to the Congress on the status of the intermediate loan program with recommendations concerning its continuation thereafter.

Senator HOLLAND. I notice that there is a paragraph dealing with a fourth rate provided-or beginning at line 14 in that same section, beginning with the words:

All other loans made hereunder shall bear interest at a rate which reflects the current average rate payable by the electric bank on its electric debentures, and administrative expenses, and estimated losses of the electric bank in respect of such other loans, all as determined by the Governor of the electric bank. Does that establish a fourth rate?

Senator COOPER. You could call it a fourth rate. But if you consider them in categories, there are three. The first is the 2-percent rate, provided as at present through appropriated funds. The second deals with the intermediate rate, which would be either 3 percent as fixed by the bill I introduced, or a rate determined by the Secretary of the Treasury at the average rate on outstanding marketable oblígations, whichever is lower. That would be the rate on the intermediate loans, and I think you could properly consider them as a single category. Then third, all other loans made shall bear interest at a rate which reflects the current average rate payable by the electric bank on its debentures, and the administrative expenses and the estimated losses of the electric bank with respect to such loans, as determined by the Governor of the electric bank.

Senator HOLLAND. What is the definition of intermediate loan? Senator COOPER. Well, we have been discussing it for some time. It is a loan

Senator HOLLAND. Where is it found in the bill?

Senator COOPER. On page 22 at line 20, where it reads:

Intermediate loans shall not be made to a borrower which is determined by the Governor of the electric bank, under standards to be established by the Secretary, to be capable of both paying the interest rate applicable hereunder to loans other than intermediate loans and achieving the objectives of the Federal rural electrification program.

It is a determination to be made by the Governor and directors of the bank whether a specific cooperative could bear the higher rate and meet its obligations.

Senator HOLLAND. In other words, if the directors decide that a particular borrower is able to meet the going rate of interest, then the loan shall not be made at the intermediate loan rate?

Senator COOPER. That is correct.

Senator HOLLAND. That is all, thank you.
Senator TALMADGE. Senator Miller?

Senator MILLER. Thank you, Mr. Chairman.

I would like to ask Senator Monroney a few questions.

Referring to this matter of 5,000 nonrural connections, I can see trouble on this. There are differences among the States which might impose no problem in the State of Oklahoma but might pose a problem in the State of Iowa.