all of the power that you needed, and the cost would be exorbitant in a very short period of time.

Senator COOPER. That is the reason for the enactment of the REA bill.

Mr. STALEY. Yes, sir; it still exists.

Senator TALMADGE. Senator Holland?

Senator HOLLAND. I have no questions, Mr. Chairman. I think that the nature of the testimony has pointed up the difficulties of our problem. There is much difference between areas. We have not had witnesses from the heavily populated areas of the United States, because those areas are served by strong cooperatives and investor-owned utilities. There is a great difference between areas. There is no question about that at all. That points up the difficulty which this committee and the Congress is confronted with.

Senator TALMADGE. That is true.

Senator HOLLAND. There is the need for cheap financing in these different areas. At the same time, there are some that have to resort to normal financing. That is our real problem.

Senator TALMADGE. That is true.

Senator HOLLAND. This was pointed up by Mr. Staley's testimony, and the testimony of the witnesses who appeared before him. They are from and talked about areas which are not in a strong position. Senator TALMADGE. We appreciate your testimony.

Thank you.

Mr. STALEY. I would like to make one suggestion along this line: I think that the criteria has to be broad in guidelines, and then the Congress by hearings at various times can check to see if the intent is being carried out rather than trying to be all-inclusive in the type of legislation designed, because of the changing needs as well as the different needs in the various localities.

Senator TALMADGE. We appreciate your contribution, Mr. Staley. The subcommittee will stand in recess until 10 a.m., tomorrow morning.

(Whereupon, at 11:50 a.m., a recess was taken until 10 a.m., Friday, August 19, 1966.)

SUPPLEMENTAL FINANCING OF REA PROGRAMS

FRIDAY, AUGUST 19, 1966

U.S. SENATE,

SUBCOMMITTEE ON AGRICULTURAL CREDIT

AND RURAL ELECTRIFICATION OF THE

COMMITTEE ON AGRICULTURE AND FORESTRY,

Washington, D.C.

The subcommittee met, pursuant to recess, at 10 a.m., in room 324, Old Senate Office Building, Senator Herman E. Talmadge (chairman of the subcommittee) presiding.

Present: Senators Ellender, Holland, Talmadge, and Cooper.

Senator TALMADGE (presiding). The subcommittee will be in order. At the outset, I would like to insert into the record a statement by Senator Ross Bass, of Tennessee, in support of S. 3337 and S. 3720. Senator Bass is one of the original authors of S. 3337.

Also, I would like to insert a letter dated August 15, 1966, from the National Council of Farmer Cooperatives.

(The documents referred to follow :)

PREPARED STATEMENT OF HON. ROSS BASS, A U.S. SENATOR FROM THE

STATE OF TENNESSEE

Mr. Chairman and members of the Subcommittee. It gives me a great deal of pleasure to testify on behalf of the two bills pending before this Committee to provide for supplemental financing for rural electric and rural telephone systems. Since May 10, when Senator Cooper and myself introduced S. 3337 and were later joined by 28 of our colleagues in the Senate, the House Committee on Agriculture has conducted extensive hearings and held a number of executive sessions on various bills pending in the House of Representatives on such a program. Ultimately a new bill was produced which has the backing of the Administration and of the cooperatives. This bill almost wholly resolves the differences between the various bills which were previously pending.

On Friday of last week, Senator Cooper introduced this new bill on his and my behalf. The only difference in the bill produced by the House Committee and the bill introduced, S. 3720, is the fact that the interest rate for intermediate loans was retained at 3 percent as in S. 3337 rather than the 4 percent figure in the House Committee Print. Some 23 of our colleagues in the Senate, all of whom were co-sponsors of S. 3337, joined in sponsoring this new bill. It is my firm belief that this bill goes a considerable distance toward meeting many of the objections raised by the opponents of the other bills.

It has given me a great deal of satisfaction to support the REA program since I first came to Congress in 1954. However, with each succeeding year, it has been more difficult to get the necessary funds appropriated to maintain this program. This is particularly troublesome to those of us interested in this area because it has occurred at a time when the need for rural electric service is expanding at an increasing rate each year. In recent years, loan applications have far exceeded, in amount, the funds appropriated for REA's use. It therefore became obvious that a new method had to be produced with which to finance the systems if they were going to continue to expand to meet the need.

Our need for supplemental financing takes on a new aspect when considering that farm population will likely continue to fall, and it is realized that a parallel

and associated phenomenon occurs: there is increasing mechanization on the farm, which compensates for the population decline. The Federal Power Commission in a National Power Survey Report published in 1964 predicted the projected consumption of electricity per farm unit in 1980 at 16,000 kilowatt hours or nearly three times the unit use in 1960. But even this figure is deceptive. The report went on to say, "While almost every American Farm is electrified today, relatively few farmers have three phase service and this may be the key to capturing certain heavy-duty farm loads." As farms become increasingly mechanized, they will require new kinds of service such as the threephase service, needed for heavier loads. Demand therefore will be in both quantity and quality.

In my opinion the farm and rural sector of our nation must not be ignored. The comfort, convenience and general welfare of the farmer depends on a reasonable electric rate. Further, if agriculture productivity is to continue to expandand this country owes a great deal of its present affluence and prosperity to the phenomenal expansion in agriculture—we must encourage the use of energyconsuming capital farm equipment.

It would indeed be a great irony of our age if we neglected our own backyards, while we promoted growth elsewhere. The Agency of International Development, with the assistance of the NRECA, is currently sponsoring rural electrification programs in 22 developing countries. A 30-year, $450,000 Alliance For Progress Loan, for example, will finance an electric cooperative in Nicaragua. While we should assist Nacaragua in its development, it would be a great tragedy if we neglect our own welfare.

Senator Cooper in his previous testimony pointed out the major provisions of S. 3720. I will not, therefore, go into those in any detail. There are, however, a couple of points which I believe it would be good to clarify.

One of those concerns loans at the intermediate interest rate and their financing. As I understand it, the amount of funds available for loans at the intermediate rate depends on two things: First, the amount of Federal capital invested, which could be $50 million in any given year. Second, it depends on the difference between the cost of money to the Bank and the rate charged for intermediate loans by the Bank.

In effect, the Government capital and the first portion of the debentures sold by the Bank support the intermediate loans made by the Bank. When that amount is committed, all additional funds secured by the Bank through its sale of the debentures would have to be loaned to borrowers at the higher rate reflecting the cost of money. Several examples illustrate this with a little more clarification. Each of these examples assumes that $50 million in Federal funds is approved by the Appropriations Committees and enacted by Congress.

Suppose the intermediate loan rate is 3 percent, but the cost of money to the Bank is 6 percent. The Bank could sell $50 million in debentures, using the proceeds and the $50 million in Federal capital for intermediate loans. Its cost of money would be 6 percent of $50 million or $3 million. Its income from $100 million loaned the borrowers at 3 percent would be $3 million. So that is the total of the intermediate loan fund available.

The point is that the 3 percent loan rate is the same as the difference between the cost of money (6 percent) and that rate so the debentures could be issued in the same amount as the Federal investment to make up the total of the intermediate loan fund.

Another example assumes that the intermediate loan rate is 4 percent and the cost of money to the Bank is 6 percent. The Bank would then issue debentures totaling $100 million to support its intermediate loan fund. With the Federal capital of $50 million, it could loan to borrowers $150 million at 4 percent receiving income of $6 million. Its cost of money at 6 percent on $100 million would also be $6 million.

The point is that the intermediate loan rate of 4 percent is double the 2 percent difference between that rate and the 6 percent cost of money-so the Bank could issue debentures to support the intermediate loan fund amounting to twice the Federal capital.

A third example assumes that the intermediate loan rate is 3 percent and that the cost of money has gone down to 4 percent. The intermediate loan rate of 3 percent would then be 3 times the one percent difference between the rate and the cost of money. So the Bank could issue debentures to support the intermediate loans amounting to 3 times the Federal capital.

It could raise $150 million at the cost of 4 percent or $6 million. Added to the Federal capital of $50 million, it could loan to borrowers $200 million at 3 percent, receiving interest income of $6 million.

These examples show that the amount of the intermediate loan funds available would be directly proportional to the relationship between the intermediate loan rate and the difference between that rate and the cost of money. If the intermediate loan rate is kept down to 3 percent, that fund would be smaller, and more cooperatives would have to go, if they could do so, to the full cost of money. If the intermediate loan rate is 4 percent the intermediate loan fund would naturally be larger. But at all times, the size of the intermediate loan fund could be directly controlled by the Federal capital invested as determined by the Appropriations Committee.

Another area needing clarification is the limitation on the acquisition of electric facilities where the bill states ". . . the cumulative size thereof shall not exceed five thousand connections within non-rural areas. . ." The key word is "cumulative." It means that a cooperative cannot have a total of more than 5000 non-rural connections. These may encompass many small communities. But when added together they cannot all total more than the maximum number. Now a great deal of comment has been made by those who oppose these bills concerning generation and transmission facilities. The bill has been described as an attempt to finance such facilities "from border to border and from coast to coast." In order to bring this situation into the proper perspective, I would like to point out that at the present time less than two percent of the electric power generated in the entire United States is generated by cooperatives. Also, we have written a provision into S. 3720 which guarantees that this co-op generated power will never exceed 5 percent. It would therefore appear that no major or even minor assault is to be made upon this area by the terms of this bill. On the contrary, a protection is written in which the opponents do not now have. There is also an additional protection against cooperatives wading into this field. The bill requires that before a loan is made for a generating facility, there must be advertisement for firm bids and it must be determined that no other source can produce this power more cheaply than the cooperative, through its own facilities, can generate it.

It has been said that no Congressional control is retained over the Banks. I would like to point out that not only is the Secretary of Agriculture directed to report to Congress on the progress of the project, but the Federal capital must be appropriated each year and therefore the operation of the Banks can be reviewed annually. Also, specific provision is included in the bill to allow continued review of the program by Congress even after all the Federal money has been retired and the Banks assume a private nature.

Put very simply, this is not a new or radical proposal. It is the same type of program as the Intermediate Credit Bank and the Federal Land Bank. We are all aware of the outstanding success of these institutions and I am sure that at a future date we will be just as proud of the success of our Rural Electric Bank and our Rural Telephone Bank.

AUGUST 15, 1966.

Hon. HERMAN E. TALMADGE, Chairman, Subcommittee on Agricultural Credit and Rural Electrification, Committee on Agriculture and Forestry, ÚU.S. Senate, Washington, D.C. DEAR SENATOR TALMADGE: The National Council of Farmer Cooperatives wishes to express its views on S. 3337 and other similar bills pending before your subcommittee.

We support the proposed legislation which would provide additional financing for rural electric and rural telephone programs. The purposes and objectives in the proposed legislation, to establish an electric bank and a telephone bank, is in keeping with the thirty-three year support by this organization of similar financing institutions of the Farm Credit Administration.

We agree with the principle which will permit the electric and telephone banks to sell debentures on the money market and to charge interest rates based on the cost of money.

In addition, in keeping with Congressional policies developed by the financing institutions composing the Farm Credit Administration, we support the program of planned retirement of bank stock and eventual ownership of the banks by the borrowers of the system.'

We raise one point for purposes of clarification. This is in regard to the lending functions of the electric and telephone banks and the relationships with other federally-developed institutions loaning funds to borrowers in the agricultural

field.

We are not necessarily seeking statutory clarification on the types of loans to be made by the electric and telephone banks. However, we believe as a matter of legislative history, and before additional sources of financing of rural electrification and telephone programs be undertaken, the limitation of authority on the types of loans should be sufficiently stated in a manner which will alleviate competitive factors or overlapping lending authority with the Banks for Cooperatives and the other rural financial institutions composing the Farm Credit Administration.

We would appreciate this letter being made a part of the record.

Sincerely,

NATIONAL COUNCIL OF FARMER COOPERATIVES,
RICHARD T. O'CONNELL, Secretary.

Senator TALMADGE. The first witness this morning is Mr. Angus McDonald, director of research, National Farmers Union.

Mr. McDonald has appeared before our committee on any number of occasions. He has always been available and helpful in our legislative problems. We are delighted to have you here. You may proceed as you see fit.

Also, I would like to say that we have four witnesses today, with permission to sit only until 12 o'clock. The Senate is presently in session, and any extension of time will require unanimous consent. You may proceed in any way you see fit.

Mr. McDONALD. I have a statement here, Mr. Chairman, in the name of our national president, Mr. Tony T. Dechant, the newly elected president.

Senator TALMADGE. Without objection, the statement will be inserted in the record at this point, and you can highlight it and proceed in any way that you desire.

(The statement is as follows:)

STATEMENT OF TONY T. DECHANT, PRESIDENT, NATIONAL FARMERS UNION Mr. Chairman and Members of the Committee, the National Farmers Union has supported the Rural Electrification Program over a period of 30 years. Year in and year out in County, State and National meetings our members have without exception supported Rural Electrification Administration. I call attention to a resolution unanimously adopted by delegates to the 64th Convention of the National Farmers Union in Denver on March 14-17, 1966.

"Rural Telephone and Electrification Cooperatives

"We recommend legislation authorizing a factual study of the rural electrification program which would determine the economic feasibility of all areas, particularly those in areas of sparse population. Loan repayments to the Rural Electric Administration should be used as a revolving fund for the purpose of making loans to cooperatives. Additional funds needed should be appropriated by the Congress.

"We favor legislation which would result in reduced rates in states where regulatory commissions have been negligent or have cooperated with power companies in bringing about exorbitant rates.

"We are opposed to allowing power companies to charge up to consumers the cost of their propaganda campaigns. We are opposed to subsidies to power companies whether they be in the form of excessive depreciation allowances, rapid tax write-offs or other subsidies.

"We urge that every effort be made to bring about the benefits to electric consumer suggested by the National Power Survey.

"Uniform regional rates should be extended wherever possible. Relatively inaccessible areas should be electrified.