were given the REA Administrator in the various hearings over the last few years that are in the records of the hearings of the Appropriations Committees of the House and Senate. And various friends in the Congress told us over the years, the last few years, that they did. not expect us to be able to continue indefinitely to get the 2-percent money from the Congress. The administration pressed us to come up with some ideas to change the interest rate and/or the source of funds. Now, this has gone through three administrations, the Johnson administration, the Kennedy administration, and the Eisenhower administration. The Eisenhower administration proposed a higher rate of interest. David Hamil, who was REA Administrator, predicted that the needs were going to go to a billion dollars a year in a few years, the needs of the rural electric systems. And we thought he was right. And we still think he is right. They are now almost two-thirds of a billion dollars. I believe he said that we would reach the billion dollars per year level within 15 years, in the speeches he made in our regional meetings around the country.

This whole picture became a bit too gloomy to us. And so our people set in motion the study. Out of the study, of course, came alternatives. But we always got back to going somewhat the route of the farm credit system, which seemed to have worked so well, which rural people know something about, and understand. Not all of our people have agreed 100 percent on this bank arrangement. But most of them have. This was discussed at great length in our 10 regional meetings covering the whole country last fall. I presented it myself at the first two. And then I became ill, and Jerry Anderson and the staff presented it to the rest of them.

I was present at our national meeting last February

Senator TALMADGE. Mr. Ellis, if I may interrupt, we will have to leave now to go and record our vote, but we will continue when we get back.

(Whereupon, there was a short recess.)

Senator TALMADGE. You may proceed, Mr. Ellis.

Mr. ELLIS. Mr. Chairman, I was in the process of trying to communicate to the committee the strong feeling that our people have throughout rural America about our power supply in the future, as reflected in the resolution which they, not quite but almost unanimously, passed at our last national meeting in February, where more than 8,000 of our leaders from all over the United States gathered and studied and discussed further this supplemental financing problem for power supply and for the distribution systems as well for several days.

And I offer for the record the resolution which the rural electric systems passed at that meeting.

Senator TALMADGE. Without objection, it will be inserted in the record at this point.

(The resolution above-referred to, follows:)

RESOLUTION No. C-5

Whereas the rural electric systems, in order to provide adequate and reliable service for their members, need increasing quantities of growth capital, estimated to total $92 billion in the next 15 years; and

Whereas in recent years the amounts of loan funds budgeted by the Administration and authorized by the Congress have not kept up with the growing requirements, causing a critical build-up of applications backlog; and

Whereas the loan fund shortage is an immediate problem affecting the future prospects of every rural electric system that needs to build additional capacity to keep up with the rising electric power needs of their consumers; and

Whereas, most rural electric systems are still not financially strong enough, while meeting program objectives, either to operate successfully without the REA 2 percent, 35-year loans or to go individually to the private money market for the capital they need: Now, therefore, be it

Resolved, That we urge the Administration and the Congress in the interests of a sound and ultimately financially independent rural electrification program to help us alleviate the rural electric loan fund shortage now upon us and provide for increasing capital for future growth by adopting a Supplemental Financing Program substantially in accordance with the proposal set forth in the report entitled Supplemental Financing Program For Rural Electrification dated January 1966 and published by NRECA which would:

(1) Continue the traditional 2 percent, 35-year REA loan program with adequate funding for those systems requiring such loans to meet program objectives:

(2) Establish a Federal Bank for Rural Electric Systems which initially will be in USDA and will operate with Federal government assistance but which, as the systems grow in maturity and invest more of their own funds in the Bank, will shift from government to borrower ownership and control;

(3) Provide loans with sufficient flexibility of interest rates, amortization requirements and maturities to enable systems to achieve program objectives; be it further

Resolved, That we urge the Administration and the Congress to make available to REA during fiscal years 1966 and 1967 sufficient funds to dispose of the accumulated loan applications and those yet to be received by REA, in order that the rural electric systems may move steadily onward with construction programs so vital to rural consumers, and in order that the Bank may initiate operations on an orderly basis without gigantic loan demands exceeding its capabilities in the early years of its operation.

Mr. ELLIS. As I think every member of this committee knows, both the rural homes and the rural establishments throughout the Nation are every year more dependent on electricity for their operations. This is true of the home freezer. It is true of the home water system. As the water table continually falls in most of our States, the water has to be pumped from longer distances, either from straight up or from storage areas. Automatic water supply is very important to the home, to a chicken-industry operation, to a dairy, to a hog-feeding operation, or a cattle-feeding operation. This includes feed grinding and mixing, the automatic feeders, with the automatic watering systems.

One of the principal factors in production in rural America, still going up at relatively less cost, is electricity. Electricity is replacing the farmhands. There are just so many ways that they couldn't have imagined years ago. For instance, nearly every farm operation today has its own electric welders and other electrically controlled equipment to repair machinery. This is a big factor now in operations.

By the way, we can't depend on that power 24 hours a day. People are scared to go away from home. They are scared that their whole year's savings or profits might be wiped out with a power failure. By the very nature of things, the rural areas are more exposed to the elements than the city areas. They are more apt to get lightning, storm, and wind outages, fire outages, trucks or tractors running into the poles that carry the wires, damage from floods; many, many causes for outages occur in the rural areas that do not exist generally in the city areas.

So often we are just supplied by one single line from somewhere. Everywhere now we are trying to get at least two-way feeds into

all areas. This is really the same principle as power pooling, which we believe has got to come now to all of America. The power companies are beginning to go into pooling on a big scale, and we want the opportunity to participate. We want to tie our systems into those pools, be of what help we can in them, and also get our share of the benefits from vast pooling.

There are no outages in the Tennessee Valley area. This is because they have pooled a vast area, and have many sources of generation tied in, so that in any part of the Tennessee Valley power is being fed in from several directions and from several generators.

Furthermore, the power companies are tied into TVA wherever they come together, or TVA is tied into them, and they exchange and rely upon each other's capacity. This is something we have generally not been able to do.

This is also true in the Pacific Northwest, where the Northwest power pool has been in operation many years. They generally use the Bonneville Power Administration's Federal lines as the bank under that pool. It has worked. They are not going to have such outages, I don't think, as we have experienced in the New York area, where co-ops were hit also because they were dependent upon the companies that were involved.

Any time that a particular company, a particular area, is dependent upon one line, one facility, like the one whose outage caused the blackout recently in Nebraska or New York, both the municipal areas involved and the rural areas are subject to be blacked out. And we want to help eliminate this all over the country as fast as we can. (The prepared statement of Mr. Ellis is as follows:)

Mr. Chairman and Gentlemen of the Subcommittee, my name is Clyde T. Ellis. I am General Manager of the National Rural Electric Cooperative Association. With me are Jerry L. Anderson, Assistant General Manager; Robert D. Partridge, Senior Legislative Representative; Robert D. Tisinger, General Counsel; and Jerome S. Katzin, First Vice-President, Kuhn, Loeb & Co., Inc., New York City.

As one who has been closely associated with rural electrification for a quarter of a century, it is my firm conviction that the need for supplemental financing is critical-the most crucial need facing the REA program today. Without it, many of the nearly 1,000 rural electric systems will not be able to meet their responsibilities to the more than 20 million people which they serve in 46 states.

In my opinion, the pile-up, or backlog, of loan applications at REA is reaching unmanageable proportions. The funds which the House and Senate approved for REA for this fiscal year are only about two-thirds enough to meet the backlog plus the needs of fiscal 1967, despite the fact that they are considerably more than requested by the Administration.

Paradoxically, the very success of rural electrification now threatens to destroy it unless a new and additional source of loans is forthcoming. A Federal Bank for Rural Electric Systems as proposed in this legislation can provide this new source, and do it effectively with the minimum necessary level of Federal assistance. We know of no other practical way to meet this need.

While the bill before this Committee and the one presently before the House Committee differ in several respects, they are similar in concept. They would establish a bank which eventually would be owned and controlled by the rural electric systems themselves, and would furnish adequate capital to insure their orderly and necessary growth-mostly vertical growth. In addition, both bills recognize the need for continuing the present 2% loan program for those systems which must have 2% financing to survive. Generally, these are the systems which serve in thinly-populated, or lowest income areas of the nation, or in some instances systems needing to build their own generating and/or tiein transmission facilities.

70-671-669

There is nothing really new in the idea which is being proposed here. For many decades Congress has helped people to pool their collective credit, and the collective credit of rural electric systems is excellent. As of January 1, 1966 rural electric borrowers had repaid almost $2.4-billion on their REA loans including $1.3-billion in principal and $275-million of principal ahead of schedule, and $762million in interest. Only slightly more than $100,000 in repayments were overdue. The total amount of loan funds advanced by REA as of January 1 was $4.9-billion, but as of that time only $3.3-billion was outstanding.

At the present, rural electric systems generally have no other place to borrow except from REA. For the past several years their requirements for growth capital have been far above the amounts available from REA. The rural electric systems have been extremely concerned with this problem. And so have the leadership of both major parties. The Republicans during the Eisenhower Administration, the Democrats during the Kennedy years and now during President Johnson's Administration, have pressed us to agree to some plan that would provide loan funds outside of the Treasury. This we have done. We are hopeful that Congress will also agree. What I think it boils down to is whether Congress wants rural electric to borrow on the open market through a bank, or whether Congress wants rural electrics to continue to rely upon the Treasury for loans. The rural electrics have been working on this problem intensively for over three years. In 1963 at the ten Regional Meetings of NRECA, they authorized us to undertake a study of possible sources of supplemental financing. The following year, the delegates to the 1964 National Annual Meeting directed us by resolution to examine in depth "the feasibility of obtaining funds in private money markets, and an appraisal of the modifications (if any) which should be sought in REA financing." Following that Annual Meeting, NRECA contracted with the investment banking firm of Kuhn, Loeb and Co., Inc. of New York City to undertake one phase of the study—namely, the possibility of cooperatives borrowing money on the open market. At its 1965 Annual Meeting, the NRECA Board of Directors and the membership directed us to broaden the scope of the study to include all aspects of the financing problem: private, public, and mixed.

Experts on the NRECA staff in cooperation with a representative committee of the membership undertook the expanded phases of the study. We were in constant consultation with experts both within and outside the Government. The completed study took 2 years. It clearly established (1) that there is a continuing need for the present 2% program; (2) that adequate financing is not available under the present REA program; and (3) that a mechanism such as a bank for rural electric cooperatives was needed to supply additional loan funds and to provide for the transition from complete dependency upon Government sources to eventual ownership by the rural electric systems of their own credit facility.

The Rural Electric Bank concept was endorsed overwhelmingly by our mem-bership at the 1966 Annual Meeting.

While we are grateful for the generosity of Congress throughout the years, all of us recognize that the mounting pressures on the national budget make it unlikely that the Administration or Congress will authorize anywhere near sufficient loan funds that we must have in order to keep up with the rapidly increasing demands for electricity on the part of some 20-million rural people. We must continue to heavy-up our systems, and this requires investment of capital far in excess of what we can realistically expect Congress to provide.

Unfortunately, it is not usually possible to postpone capital investments in the electric utility business. This is true for both investor-owned systems as well as member-owned, rural electric systems. When the members of a rural electric system turn on the lights and motor switches, they expect the lamps to shine brightly and the motors to turn, not heat. When they turn the water spigot, they expect the electric water pump to work. When they turn on the TV set, they expect it to do something more than stare back at them. In short, they expect all of the appliances for which they have paid out considerable sums of money to provide good service. We have more than our share of blackouts in Rural America at best, and we are going to have many more if we don't get a practical source of supplementary financing.

It is axiomatic that rural electrics plans their expansion within their service areas to meet the increased consumption of electricity as it occurs. They have no alternative, unless it is rationing of electricity and that, I am sure, is an alternative that none of us in this room would endorse. Therefore, our rural electric systems must carry on a systematic schedule of capital investments.

Now to comment briefly on a few of the major changes that have been levelled against this legislation, mainly by the commercial power companies and their allies. Mr. Anderson will cover them and others in detail in his statement, but I would just like to highlight them.

The charge is made that rural electrics would displace the commercial power companies as a result of this legislation. There is absolutely no possibility of that ever happening.

Rural electrics could do no more than hold their own, if that. They would continue to own approximately the same ratio of the nation's electric facilities as they do today. Total investment, if the entire capability of the Bank were used, plus $300-annually of 2 percent funds, would be about $13.7-billion by 1981, compared to an anticipated investment of $185-billion by the power companies, or a 14 to 1 ratio.

The charge that this legislation is a threat to the power companies' predominant position in the generation of power is equally without basis. The legislation puts a definite ceiling on the percentage of the generation capacity that rural electrics can own. It cannot exceed 5 percent of the total capacity of the nation.

Moreover, loans for generation cannot be made unless it can be proved that the power produced would be cheaper than rural electrics could purchase it for from other sources, including commercial power companies. Further, Congress would retain substantial control over the Bank.

I would like to add that most of the loans for generation will go to heavy-up existing G T systems, not to start new ones. Rural electrics do not want to build generating plants unless they have to. At present they produce only about 18 percent of their own power compared to 38.2 percent they buy from commercial utilities. Collectively, they constitute the largest single customer of the power companies. Last year they bought $121.3-million worth of electricity from the companies.

There is the charge that the rural electrics will be able to take over the urban areas. This could never happen. To allay the groundless fears of the power companies, the legislation stipulates that acquisitions by a borrower of the Bank cannot exceed 5,000 connections within a non-rural area.

In conclusion, I should like to point out that the members of the rural electric systems are not looking for hand-outs. They have clearly demonstrated over the years their willingness to pay their own way, and, I believe, want only the chance to do more in the future. For instance, the members have invested in their systems, out of their own pockets, more than $2-billion. ($1.5-billion principal payments; $500-million in plant; $275-million prepayments.) Incidentally, they get no interest at all on this investment.

It was my privilege to participate in the studies and preliminary plans from which the rural electric bank concept evolved. I am convinced that it is a sound concept, and one that will furnish the growth capital that rural electrics must have in the years ahead. And, at the same time, it will open the door to eventual ownership and control of their own credit system and relieve the U.S. Treasury and the taxpayers of the burden of supplying our necessary capital.

Mr. ELLIS. At this point, Mr. Chairman, I would like to defer to Jerry Anderson, who is the assistant general manager, who presented the study to the regional meetings, and to our national meeting, and who headed up the team of experts that developed the proposals that are under consideration here.

Senator TALMADGE. You may proceed, Mr. Anderson.

STATEMENT OF JERRY L. ANDERSON, ASSISTANT GENERAL MANAGER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

Mr. ANDERSON. Thank you, Mr. Chairman.

My name is Jerry L. Anderson. I am assistant general manager of the National Rural Electric Cooperative Association, which Mr. Ellis has already identified for the committee.

I appear today in support of legislation which would amend the Rural Electrification Act of 1936, to establish a mixed ownership bank