"We urge continuation of the two per cent interest rate.

"The established right of rural electric cooperatives to serve patrons other than farmers should be fully protected from encroachment by private power companies."

As members of this Committee know, changes on American farms resulting from the Rural Electrification Program have been revolutionary. Farm men and women now enjoy the benefits of electricity both in the home and on the farm. There have also been drastic changes in regard to the price paid for electricity today as compared to the prices charged in the 1920s and early 1930s. According to one report: "In 1924 Senator Norris found that for 334 kilowatt hours, a consumer in Ontario paid $3.55 a month. For the identical number of KWH in Washington, D.C., the price was $23.18. Almost seven times as much." But even more dramatic was the story of the lighting of the International Bridge at Niagara Falls. Norris said: "The same number of lights, the same bridge, the same river, the same method of production. All alike, the power coming from steam under the bridge ***. The Canadian publicly-owned company charged $8.43 per month. The American private corporation charged $43.10 per month, on the average."

Our criteria for any federal electric program has been power furnished at the lowest possible cost consistent with the interest of the United States. We have also supported the idea of preference which simply means that the owners of the rivers from which hydroelectric power comes have a prior right to purchase power generated by means of federal investment. We also support federal programs because we strongly feel that government competition is the best safeguard against monopoly.

Congress enacted many laws over a long period of years which set forth these criteria. Congress not only was mindful of these criteria but stated in a number of laws that electric power facilities should be built where feasible.

Cooperatives were repeatedly protected in regard to preference in the following Acts: Reclamation Act of April 16, 1906; the "Raker Act" of December 19, 1913; Federal Water Power Act of 1920; Boulder Canyon Act of 1928; Tennessee Valley Authority Act of 1933; Rural Electrification Act of 1936; Bonneville Act of 1937; Fort Peck Act of 1938; Reclamation Project Act of 1939; Flood Control Act of 1944.

Congress was also explicit in regard to the sale of power at the lowest possible rates. In the Tennessee Valley Authority Act of 1933, the Bonneville Act of 1947, the Fort Peck Act of 1938, and the Flood Control Act of 1944, it was stated that power shall be sold at the lowest possible rate consistent with sound business principles. The same Acts emphasized that one of the purposes of Congress in passing such legislation was to prevent monopoly.

State Commissions have been, we believe, somewhat lax in regard to supervision by rates charged by private utilities. Regulatory agencies became to some extent servants of the industries which they are supposed to regulate. This is indicated by a study made by the National Rural Electric Cooperative Association several years ago in which it found that overcharges by 38 electric utilities, based on taxes actually paid during 1956–1960 amounted to $1,259,043,000. These overcharges were based on rates found reasonable and fair by state commissions..

During the last few years the Administration and those administering the programs seem to be getting away from criteria which we think are basic and necessary if consumers of power are to enjoy the benefits of electricity consistent with policies set forth in the laws referred to. Our attention has been called to a situation in Georgia involving the potential refusal of the Rural Electric Administration to allow a rural electric cooperative to lower its rates. It is well known that the volume of power used for such purposes as electric heating is dependent on low rates.

Specifically, we object to the so-called parity of rates or comparable rates concept although rates in the areas where our members enjoy the benefits from the rural electric program are somewhat higher than rates in adjacent cities. We are hopeful that in years to come the rural electric cooperatives will be able to institute economies and technical efficiencies which will enable them to benefit from rates which are even lower than the rates in urban areas. Apparently. this criteria which we are told has never been actually formalized into a rule or regulation will prevent co-ops from meeting the low cost power criteria. We feel strongly that no administrator should stand in the way of a co-op giving

its members as low a rate as possible; therefore, we suggest the following amendment:

"No applicant for funds shall be denied funds or use of such funds under any section of this Act because its rates are comparable or lower than those of an adjacent or neighboring utility or because of any difference between operating costs or rates of interest paid by such applicants and such adjacent or neighboring utility."

These amendments we feel are necessary because we want it made crystal clear that the supplemental financing plan shall change nothing in the purposes, terms and conditions authorized in the 1936 Act and because the Congress should periodically review the criteria of the administrator.

"The Congress further finds that many rural electric and telephone systems require financing under the terms and conditions provided in Titles I and II and declares that nothing in this Act shall be construed to change the loan purposes, terms and conditions authorized in Titles I and II.

"The initial and subsequent policy and criteria determinations made by the Governor shall become effective 30 days after their submission to the Congress." As indicated, our primary concern is that the two per cent rate by one device or policy or another may be phased out over a period of years. Attention is called to the President's budget for the Fiscal Year 1967. Only $12 million of new obligational authority was recommended for the electrification and telephone program for 1967. The recommendations suggested that loan and interest payments should be used to finance the program. Then the budget goes on to say, and I quote:

"Efforts are under way to develop alternative means of financing the Rural Electrification Program."

Certain statements by members of the Congress indicate that it is planned to do away with the two per cent program altogether. Senator Ross Bass indicated in a recent press release that the new banks to be created by his bill would, and I quote:

"Provide the funds for these systems and that these banks will eventually become privately operated by the subscribers themselves."

Senator Gaylor Nelson, in sponsoring supplemental financing legislation, said: "The new banks would provide a credit ladder by which borrowing co-ops could advance to paying full market costs by many for their financing.'

There is no doubt that at least as far as the Director of the Budget is concerned, the Administration is determined to get the government out of the lending business. Budget Director Schultze repeatedly stated to the Banking and Currency Committees in both Houses that he wanted to liquidate all lending programs; that the government should not have been in the banking or lending business in the first place.

We are not in accord with this view. We feel that government lending agencies are necessary to furnish competition and to provide a yardstick for industry not only in regard to government electric power programs but in regard to interest rates which all consumers must pay. We deplore this trend in Administration circles and the trend in interest rate increases brought about by the Federal Reserve Board.

It seems obvious that debentures supposed to be sold under these bills will saddle members of electric power cooperatives with unduly high interest rates. Certificates of deposit now in the large banks in New York City stand at 51⁄2 per cent. It is highly probable that interest rates which cooperatives must pay in the competitive money market will be considerably above this figure. Our attention is called to two articles in the May 13, 1966 Wall Street Journal, titled: "Rates on Large-Denomination CDS Raised by Additional Big Banks in New York City." "Federal Reserve apparently Acting to Tighten Credit."

Finally, we stress the point that the Rural Electrification Program not only is of economic but of social benefit to those who live on farms and in rural communities. Perhaps a highway which is in part paid for by those who reside in areas not adjacent to the road may be compared to a rural electric line. This facility not only gives enjoyment and benefit to those living in the areas traversed by the line but benefit to those living in cities hundreds of miles away. Electric power enables the farmer to produce better and cheaper food just as a modern hard-surfaced road enables him to bring his products to market.

Rural people traditionally do not enjoy the same advantages and opportunities available to city people. Farm income, most will agree, is low compared to income of those living in cities. Farm prices stand at 80 percent of parity. We

feel strongly that Congress should not enact this legislation without safeguards indicated in this statement. We also feel that the proposed rural electrical bank should not be turned over to private groups. We feel that the bank should be supervised by the Administrator of the Rural Electrification Administration and other officers in the Department of Agriculture even after a majority of the stock is owned by the cooperatives. Other lending agencies, according to our information, which have served as a model for this legislation are supervised by the Secretary of Agriculture. We think that, inasmuch as those living in sparsely populated areas constitute a minority, they should not be at the mercy of the more prosperous cooperatives. Attention is called to provisions of the legislation providing that a majority of the Rural Electric Board will make all decisions.

STATEMENT OF ANGUS McDONALD, DIRECTOR OF RESEARCH, NATIONAL FARMERS UNION

Mr. McDONALD. Thank you, Mr. Chairman and members of the subcommittee.

I would like to emphasize again here the long-time interest of the Farmers Union in the rural electrification program. We have supported this program since 1935. We have also supported other programs which are complementary and supplementary to the REA program; that is, the Federal power programs, the TVA program, and the programs in the Northwest, and so on, because we thought that unless the Federal Government, by means of these large organizations, provided a yardstick it would be impossible for the farmers to buy power at reasonable prices.

Of course, the program has worked wonderfully well, and you, Mr. Chairman, and the others who have supported this program over the years should be proud of it.

We feel strongly that the Congress will support and should continue to support the old programs. That is evidenced by the recent action of the comimttees in regard to the appropriations made by the Con

gress.

The Budget Bureau recommended only $12 million of new money and to use some of the old money, a total of, I believe, $200 or $220 million, but the Congress, contrary to the statements in the press and other places, was very generous.

It was predicted that the Congress would stop the 2-percent loan program, but the Congress went ahead, and I understand that it is now about $375 million

Senator TALMADGE. The Senate bill was $375 million and the House bill was $365 million.

Mr. McDONALD. So, we believe the Congress believes in this program and will continue to support it. All of the evidence points in that direction.

My own organization in the counties, States, and national meetings, by resolution, supported this program, and I have here quite a long resolution in this statement.

We have a resolution just passed in March of this year, which I shall not read, pertaining to the rural telephone and electrification cooperatives.

I would like to make two points, Mr. Chairman:

One is the peculiar position of the farmers in regard to electrification. As everyone knows, the farmers, particularly in the sparsely settled territories, are unable to pay high electric power rates.

In North Dakota, for example, where we have a large membership, I believe there are only about 1.3 consumers per mile. As I recall, there are about 3 per mile in the rural areas throughout the United States, as compared to, oh, 30 or 40 consumers per mile in other areas. Another point that I would like to make is that the Congress make available this program at low interest rates, as it has and the States have followed up and have said that this program should be restricted to towns of 1,500 population or less. In other words, the rural electric cooperatives are precluded from going into the prosperous areas, and that is one of the reasons why the Congress did, and I believe will continue, support this program, because I do not believe that in the future the revenues from rural electrification are going to be any greater or as great as in the past, due to the fact that the farm population has declined about 50 percent since 1940 and that means that 50 percent less customers will be paying electric charges in the

rural areas.

So, I emphasize this point: Our organization and our people insist that the Congress continue to support the program as I have emphasized, and I am sure that the Congress will do so.

We have not been too pleased in some respects with the criteria as set forth by the present Administrator. I point to the so-called parity of rates, or the comparable rate concept which has been referred to in speeches by Mr. Clapp, but I do not believe has been set forth in any formal regulation. This means that rural electric cooperatives will not be allowed to reduce their rates to the farmers if that reduction would cause them to be below the adjacent areas' rates.

We have suggested an amendment here at the bottom of page 3 of Mr. Dechant's statement which would allow the rural electric cooperatives, if they put into effect efficiencies, to reduce their rates as much as they could without being handicapped by this comparable-rate formula, and that they may be able to do so.

The amendment at the bottom of page 3 is as follows:

No applicant for funds shall be denied funds or use of such funds under any section of this act because its rates are comparable or lower than those of an adjacent or neighboring utility or because of any difference between operating costs or rates of interest paid by such applicants and such adjacent or neighboring utility.

We are, of course, well aware that, particularly in areas where the Farmers' Union has a large membership, the adjacent city rates are considerably higher, but just the same, we feel that that rule should not be applied by the Administrator, and we feel that in certain so-called rich areas, that the rural electrics may be able to bring down the rates lower than the adjacent city rates.

I call attention to a study which was made by the National Rural Electrification Association which concluded that there were $1,259,043,000 overcharges in the years 1956-60 by 38 electric utilities, and I am sure, Mr. Chairman, that your attention has been called to this document before. This is a very well-known study. Insofar as I know, it has not been refuted in any way—that is, to say, you have the private utilities overcharging in large amounts that is, the rates are much higher than they should be, and yet the Administrator comes along and says that the rural electric rates in all instances must come up or be at least equal to the rates the private utilities are charging.

Senator TALMADGE. You mean by that observation, a higher rate than the utilities are charging rather than a misreading of the meter or wrong billing?

Mr. McDONALD. That is correct.

Senator TALMADGE. Is not the rate function that of the particular public service commission or utilities commission, as the case may be, within the State involved?

Mr. McDONALD. According to this study, these estimates were based on the estimates of the regulatory agencies in the States, and, as I recall, usually, they decide that 6 percent is a fair guaranteed profit— that 6 percent is a fair rate of return. In States like Montana, you might have 11 or 12 percent rate of return, and there is a considerable overcharge there.

Senator TALMADGE. That, however, is a function of the State regulatory agency, and what you are stating is that the REA Administrator will not permit the REA cooperative to reduce the rates lower than the private utility rates in the area; is that your point?

Mr. McDONALD. That is my point exactly.

Senator TALMADGE. That is the position you take?

Mr. McDONALD. That is the position, as I understand it.
Senator TALMADGE. I am unaware of that.

Mr. McDONALD. I have discussed this matter with Norman Clapp, and he has said to me:

Well, you cannot justify the 2-percent subsidy interest rate if you let the rural electrics have lower rates.

Senator TALMADGE. I know that the REA's in my State, to a very substantial degree, in many instances, are charging lower rates than some of the private utilities, particularly where they have municipal ownership, as many of them do. They will buy the power wholesale from the REA and then, in turn, retail it to their people who live within the prescribed area which in turn yields a source of revenue. In many instances, the rates are substantially higher than those of the REA's, and I believe that in many other instances the rates that they charge the municipal power company are higher than those charged the REA's.

Mr. McDONALD. I am, of course, referring to just the rural electric program and not the municipal part.

Senator TALMADGE. Let me ask you about this: In your statement which has been submitted by Mr. Dechant, from which I quote, there appears on page 3 the following:

Our attention has been called to a situation in Georgia involving the potential refusal of the Rural Electric Administration to allow a rural electric cooperative to lower its rates.

You say "potential refusal." Does that mean that he has refused or is threatening to refuse or might refuse?

Mr. McDONALD. As I understand it-I saw this correspondenceat least some of it-in which it was proposed to make a study, a preliminary study, and the preliminary study indicated that the rural electric would be able to meet its obligations, and so forth, even though it lowered its rates slightly. The study was preliminary in intent, and my conclusion was, after talking to people about this, that they had not definitely turned it down flat.