Supplemental Financing of REA Programs

Enclosure (4)

H.R. 14837-Electric bank maximum loanable funds (1st 15 years of operation)

This is submitted in answer to the Committee's request for information relating to the Committee's concern that the investor owned utilities in the State of South Dakota failed to offer to supply power, and thus, it was necessary for the cooperatives to construct a generating plant. This concern resulted from a statement to that effect made to the Committee by Arthur Jones, President of Basin Electric Power Cooperative and also President of East River Electric Power Cooperative, Inc.

In 1939, the first rural electric cooperative with which Northern States Power Company had contact in South Dakota-the Sioux Valley Empire Electric Association of Colman-was organized, and plans were made for it to serve rural areas in Moody, Minnehaha, Lake and McCook counties. Northern States Power Company agreed to provide all of the cooperative's power requirements and began doing so in December, 1940.

In the succeeding nine years, Northern States Power Company signed contracts with four other South Dakota rural electric cooperatives eventually formed in its general area of service to provide all their electric requirements. These were the Lincoln-Union Electric Company-Elcester, which began receiving Northern States Power Company power in November, 1945; Turner-Hutchinson Electric Cooperative, Marion, energized in August, 1947; Clay-Union Electric Corp., Vermillion, which Northern States Power Company began serving in October 1948; and McCook Electric Cooperative, Inc., Salem, which received power from Northern States Power Company beginning in January 1949.

The amount of power that Northern States Power Company provided to the cooperatives grew steadily during the 40's. By the end of 1949, the total cooperative demand from Northern States Power Company in South Dakota was 6,447 kilowatts, and with that capacity the cooperatives were serving an estimated 10,500 rural customers in the southeastern part of the State.

Northwestern Public Service Company, Otter Tail Power Company, MontanaDakota Utilities Co., and several municipal systems also supplied the requirements of the cooperatives in the early days.

In 1949, twenty-one rural electric cooperatives east of the Missouri River in South Dakota joined to form the East River Electric Power Cooperative, Inc., a super-cooperative that would obtain the power requirements for all twenty-one members and transmit the power to them. East River's organizers asked the company for 20,000 kilowatts of electricity to serve all of its members cooperatives' needs. This was three times as much power as Northern States Power Company was providing to its five electric cooperative customers in South Dakota, and the request included power for sixteen additional cooperatives with which Northern States Power Company had no geographical contact.

Northern States Power Company, however, readily agreed in a commitment dated October 18, 1949, to supply the 20,000 kilowatts of firm power to East River. East River, however, quickly revised its estimated power needs ... and asked that Northern States Power Company commit itself to provide up to 50,000 kilowatts of electricity to the cooperative, an amount 21⁄2 times the original request.

By this time, construction of Fort Randall dam, the first Federal hydroelectric project in South Dakota, had begun and rural electric cooperatives had been assured that they would be given preference in the purchase of power from this Federal project. The East River Electric Power Cooperative, Inc., had been formed principally to serve as the purchaser and distributor of Federal power to the cooperatives east of the river, but its formation in 1949 occurred well before any power would be available from Fort Randall. This meant that East River had to look elsewhere for its members' power requirements during at least part of the interim when the cooperatives' members' needs would be mounting steadily. The amount of electricity sold to East River would increase steadily to a substantial total-until Fort Randall dam began producing power. Then East River would get its power requirements from Fort Randall under preference, leaving the original supplier without one kilowatt of rural electric load.

In July 1952, Northern States Power Company began supplying the entire requirements of East River. The cooperative's demands grew rapidly in the following months, until at the end of 1953 it reached a peak of more than 38,000 kilowatts-more than required for the City of Sioux Falls and the surrounding

area.

After January, 1954, East River's demands for power from Northern States Power Company dropped off steadily as Federal power became available from Fort Randall dam. Provisions had been made in the Northern States Power Company-East River contract for a reduction of East River's purchases from the company with proper notice, but East River had been unable to predict accurately when its reductions of Northern States Power Company would begin or foresee how rapidly it would want to drop its purchases from the company. Northern States Power Company agreed to the power cutbacks as East River requested them, without penalty to the cooperative, even though substantial financial penalties could have been invoked by Northern States Power Company under the terms of the contract. East River's purchases from Northern States Power Company decreased steadily during 1954 until November 16 of that year, after which all twenty-one of East River's member cooperatives, including the five originally served by Northern States Power Company, received their full power requirements from Federal dams. At the peak of East River's purchases from the company, power from Northern States Power Company was going to approximately 45,000 farms in South Dakota east of the Missouri River. The average cost of power to East River during this period was less than 9 mills per kilowatt hour, rather than the 16-19 mills estimated by Mr. Jones in his testimony.

In January, 1955, the Rural Electrification Administration advised Northern States Power Company that by 1958 East River Electric Power Cooperative, Inc., might require additional power over and above that furnished by the Bureau of Reclamation. As a result, conferences were held with East River. East River requested an offer from Northern States Power Company for 5,000 kilowatts commencing in 1959 and increasing to a maximum of 25,000 kilowatts in 1962. By letter dated November 14, 1955, Northern States Power Company firmly committed power in the amounts requested and at the rates that power was supplied during the earlier period. Contracts were submitted to East River but East River never executed them since the Bureau of Reclamation was able to continue to supply the entire requirements of East River, and consequently, the need for additional power never materialized.

By a letter dated August 17, 1959, East River requested Northern States Power Company to up-date its 1955 proposal to supply power to East River with the anticipated power requirements seen for the years 1961 through 1965 with a maximum requirement of 30,000 kilowatts. By a letter dated August 28, 1959, Northern States Power Company again firmly committed power in the amounts requested. However, East River was able to continue to receive is entire requirements from the Bureau of Reclamation and again the anticipated need for power did not materialize.

The investor-owned utilities in South Dakota were never requested to supply power in lieu of the Basin Electric Power Cooperative generating plant. This is the REA plant referred to in Mr. Jones' testimony as being necessary since the

investor-owned utilities in South Dakota were not able to supply the coopera

tives.

In fact, the Basin plant was not needed. Although no request was made for the supply of the forecast power requirements of the cooperatives, which were used to justify the REA loans for the Basin plant, all the investor-owned utilities in South Dakota were part of an offer known as the "14 Local Electric Systems Firming Offer" to fully firm the Federal hydroelectric generating plant on the Missouri River. Under this offer, the Bureau of Reclamation could have increased the firm power it had for sale by 50% for continued supply to the preference customers in the Missouri basin without expenditure of any Federal funds for the increased capacity. This offer was rejected by the Bureau of Reclamation in favor of a plan offered by Basin Electric Power Cooperative to construct a generating plant which required $36 million of Federal funds from the REA. The Basin plant is now in operation and, as Mr. Jones stated in his testimony, the cooperatives are paying 5.6 mills per kilowatt hour. Today, the Bureau of Reclamation has excess power from which it could be supplying the power requirement of Mr. Jones' G&T cooperative in South Dakota, at approximately 4 mills. As a consequence of the unwillingness to consider the offer of the "14 Local Power Suppliers" East River Electric Power Cooperative, Inc., is paying higher cost for this power, and likewise the Bureau of Reclamation is being denied of revenue from the Missouri Basin development which it would be receiving.

As a comparison of the delivered cost of Bureau of Reclamation power to preference customers supplied from the transmission system of Northern States Power Company to the delivered cost of Bureau of Reclamation power to the East River distribution cooperative, it is noted that Mr. Jones testified the cost to the East River members is 7 to 8 mills per kilowatt hour. Bureau power is delivered to a distribution cooperative serving from Northern States Power Company's system at a delivered cost of approximately 6.3 mills per kilowatt hour. Northern States Power Company is presently connected with Lyon-Lincoln Electric Cooperative, Inc., a distribution cooperative that joined East River Electric Cooperative, Inc., in 1963. The delivered cost to East River of Bureau power for this cooperative from Northern States Power Company is approximately 6.3 mills per kilowatt hour. East River, in turn, charges the cooperative approximately 7.5 mills per kilowatt hour. Still East River is attempting, through use of REA funds, to build transmission facilities which would duplicate the facilities of Northern States Power Company for the purpose of furnishing the same transmission service to Lyon-Lincoln Electric Cooperative, Inc. This wasteful use of REA funds is documented in the General Accounting Office report referred to by Senator Holland during the August 17 hearing.

In summary, in the early 50's Northern States Power Company did supply the entire requirements of the G&T cooperative covering the entire eastern half of South Dakota until power became available from the Bureau of Reclamation. Further, Northern States Power Company firmly committed power supply in the amounts requested in answer to every request. The "14 Local Electric Systems Firming Offer" would have permitted the Bureau of Reclamation to continue to supply the entire requirements of East River Electric Power Cooperative, Inc., and the $36 million REA loan for the Basin plant was not necessary.

Northern States Power Company, and the other investor-owned electric utility companies in the region, are ready today, as in the past, to supply power to meet all the needs of the rural electric cooperatives in the State of South Dakota. Mr. CLAPP. Mr. Chairman, Mr. Waterman, who is one-fifth of this panel has his testimony directed particularly to 3720.

Senator TALMADGE. Senator Cooper thinks that he can get permission to sit until 1 o'clock. First that has to be obtained.

In view of the fact that Mr. Branch cannot be here tomorrow, I had hoped to proceed with him next.

Mr. CLAPP. All right.

Senator TALMADGE. Can you be here tomorrow, Mr. Waterman? Mr. WATERMAN. Yes, I can.

Senator TALMADGE. We will take Mr. Branch first, then, because business and his health requires him to return home.

Mr. CLAPP. I did not mean to disturb the order.

STATEMENT OF HARLLEE BRANCH, JR., PRESIDENT, SOUTHERN CO., ATLANTA, GA.; ALSO REPRESENTING THE EDISON ELECTRIC INSTITUTE

Mr. BRANCH. Mr. Chairman, gentlemen of the committee, I do want to thank you for your additional indulgence. I will be as brief as I can.

For the record, my name is Harlee Branch, Jr. I reside in Atlanta, Ga. I am president of the Southern Co., which through its four operating subsidiaries (the Alabama, Georgia, Gulf, and Mississippi Power Cos.) supplies electric power to nearly 2 million farm, residential, commercial, and industrial customers in most of the State of Georgia, four-fifths of the State of Alabama, the southeastern quadrant of the State of Mississippi and the so-called panhandle section of northwest Florida.

I appear today to express my serious concern over the adverse impact which the bills being considered by this committee would have on the investors, employees, and customers of our system companies and of other investor-owned electric companies; and also to point out some of the mischievous consequences which this legislation could produce in the national economy of which our industry is a significant part.

May I say parenthetically, while I have had only an opportunity for a very cursory examination of S. 3720, it is my judgment that the basic concerns that I have, and others associated with me, about this Federal bank legislation will apply to the principles which are still carried forward in the new bill, S. 3720. I have noted that there are some changes embodied in S. 3720, which clear up, perhaps, some areas of concern. I note, however, that that bill would provide a 3-percent limit instead of a 4-percent limit on intermediate loans. That certainly does not meet the objection to the loan. Even with the changes that the chairman referred to, S. 3720 still leaves the Rural Electrification Administrator, and the Electric Bank Board with broad discretion in making G. & T. loans. If the amendment proposed, as the chairman has pointed out, in the House subcommittee, makes the determination of the Board subject to judicial review, we must not overlook, as those of us who have been engaged in administrative law practice are aware, that the review thus afforded in overcoming a broad discretionary power given to an administrative officer and the sheer standing in the courthouse to contest that is less than a complete assurance. All of the bills provide for the creation of additional financing which I believe has not been shown to be necessary and which I believe is not necessary except for duplicative generation and transmission facilities. These bills provide for a continuation of the 2-percent loans as presently embodied in the REA Act. I believe that the present procedure with full congressional opportunity for surveillance is adequately embraced in existing legislation.

Even the members of the co-ops-Mr. Jones, whom I heard testify this morning-are concerned lest any disturbance be made to the 2-percent financing. All these bills are doing is making available, whether it is, $18 billion or $20 billion, resources in a bank which can be used to duplicate existing taxpaying facilities. Even if it is $17 billion it is not very comforting. It is a question, it seems to me, as to whether you are

investor-owned utilities in South Dakota were not able to supply the coopera

tives.

In fact, the Basin plant was not needed. Although no request was made for the supply of the forecast power requirements of the cooperatives, which were used to justify the REA loans for the Basin plant, all the investor-owned utilities in South Dakota were part of an offer known as the "14 Local Electric Systems Firming Offer" to fully firm the Federal hydroelectric generating plant on the Missouri River. Under this offer, the Bureau of Reclamation could have increased the firm power it had for sale by 50% for continued supply to the preference customers in the Missouri basin without expenditure of any Federal funds for the increased capacity. This offer was rejected by the Bureau of Reclamation in favor of a plan offered by Basin Electric Power Cooperative to construct a generating plant which required $36 million of Federal funds from the REA.

The Basin plant is now in operation and, as Mr. Jones stated in his testimony, the cooperatives are paying 5.6 mills per kilowatt hour. Today, the Bureau of Reclamation has excess power from which it could be supplying the power requirement of Mr. Jones' G&T cooperative in South Dakota, at approximately 4 mills. As a consequence of the unwillingness to consider the offer of the "14 Local Power Suppliers" East River Electric Power Cooperative, Inc., is paying higher cost for this power, and likewise the Bureau of Reclamation is being denied of revenue from the Missouri Basin development which it would be receiving.

As a comparison of the delivered cost of Bureau of Reclamation power to preference customers supplied from the transmission system of Northern States Power Company to the delivered cost of Bureau of Reclamation power to the East River distribution cooperative, it is noted that Mr. Jones testified the cost to the East River members is 7 to 8 mills per kilowatt hour. Bureau power is delivered to a distribution cooperative serving from Northern States Power Company's system at a delivered cost of approximately 6.3 mills per kilowatt hour. Northern States Power Company is presently connected with Lyon-Lincoln Electric Cooperative, Inc., a distribution cooperative that joined East River Electric Cooperative, Inc., in 1963. The delivered cost to East River of Bureau power for this cooperative from Northern States Power Company is approximately 6.3 mills per kilowatt hour. East River, in turn, charges the cooperative approximately 7.5 mills per kilowatt hour. Still East River is attempting, through use of REA funds, to build transmission facilities which would duplicate the facilities of Northern States Power Company for the purpose of furnishing the same transmission service to Lyon-Lincoln Electric Cooperative, Inc. This wasteful use of REA funds is documented in the General Accounting Office report referred to by Senator Holland during the August 17 hearing.

In summary, in the early 50's Northern States Power Company did supply the entire requirements of the G&T cooperative covering the entire eastern half of South Dakota until power became available from the Bureau of Reclamation. Further, Northern States Power Company firmly committed power supply in the amounts requested in answer to every request. The "14 Local Electric Systems Firming Offer" would have permitted the Bureau of Reclamation to continue to supply the entire requirements of East River Electric Power Cooperative, Inc., and the $36 million REA loan for the Basin plant was not necessary.

Northern States Power Company, and the other investor-owned electric utility companies in the region, are ready today, as in the past, to supply power to meet all the needs of the rural electric cooperatives in the State of South Dakota.

Mr. CLAPP. Mr. Chairman, Mr. Waterman, who is one-fifth of this panel has his testimony directed particularly to 3720.