Senator TALMADGE. Do you know which cooperative this was in Georgia? Mr. McDONALD. No, Mr. Chairman: I do not. Senator TALMADGE. Was he trying to act in the capacity of one who prescribes rates or was he trying to act in the capacity of a lender who wanted to recover the loan? I can understand the lender wanting a sufficient rate level to assure the repayment of the loan plus interest, but I think that would be Mr. Clapp's only interest, as I understand the law. I do not think that he has any ratemaking authority, whatever. Do you know of any, Senator Holland? Senator HOLLAND. I do not know. Mr. McDONALD. As I understand Mr. Clapp's position in this matter, his regional man down there his name I do not remember—was to the effect that no rate reduction would be allowed, regardless of the final result of the study, because the adjacent utility rates were about the same. Senator TALMADGE. We will ask Mr. Clapp for his comment on that. (Additional information submitted by the Department of Agriculture is as follows:) COMMENT ON RETAIL RATE REVIEW BY REA REA Bulletin 2-1 (Electric) and 301-1 (Telephone) set forth policy concerning the basic relationship of the Rural Electrification Administration with its borrowers in achieving the objectives of the REA program. These objectives are stated therein as follows: "The objectives of the Rural Electrification Administration program are to provide, through self-liquidating loans, pursuant to the Rural Electrification Act of 1936, as amended, and through technical assistance, adequate, dependable electric and telephone service on an area coverage basis to beneficiaries of this Act, both farm and non-farm, in rural areas under rates and conditions comparable to those available in neighboring urban communities." (Italic supplied.) Other portions of these bulletins stress recognition of the independence of borrowers and their responsibility for the efficient and effective management of their affairs and the repayment of REA loans. REA does not require prior approval of retail rate schedules other than those proposed at the time of initial energization of a new system. Thereafter borrowers are requested to inform REA of any proposed changes in advance of their adoption to permit joint consideration of the effect of such changes. In considering rate schedules submitted for consideration, REA considers comparability of borrowers' rates with those of neighboring urban systems to be a desirable objective. Undercutting of rates of other systems is not an objective. Where rate schedules generate funds which are not required for working capital and reserve purposes, REA recommends first that they be used for advance payment on REA loans in an amount equal to two times the maximum annual debt service requirements, next for capital credit retirements and/or rate reductions (consistent with bylaw provisions, agreements with REA, requirements of regulatory bodies, and prudent financial management), and thirdly, for additional advance payments, retirement of debt, or additions to plant. (REA Bulletin 1-7.) Most REA-financed systems are still short of the recommended goal of rates comparable wtih those charged by neighboring urban systems. In those instances where comparability has been achieved, it is felt that revenues generated by such rate schedules in excess of working capital and reserve needs would most effectively be utilized in retiring the REA indebtedness and in investment in plant, thus relieving the system, to the extent thereof, from dependence on the special Federal assistance involved in REA loans. The Georgia system referred to in the testimony had not at time of its proposed rate schedule change made advance payments in the full amount recommended (twice maximum annual debt service requirement). (The bulletins referred to above are as follows:) UNITED STATES DEPARTMENT OF AGRICULTURE RURAL ELECTRIFICATION ADMINISTRATION REA Bulletin 2-1 (Electric) SEPTEMBER 2, 1965. (Supersedes 5/18/54.) Subject: Guiding Statement of REA Policy Concerning Its Relationship With Borrowers. I. Purpose: To set forth policy concerning the basic relationship of the Rural Electrification Administration with its borrowers in achieving the objectives of the REA program. II. Program Objectives: The objectives of the Rural Electrification Administration program are to provide, through self-liquidating loans, pursuant to the Rural Electrification Act of 1936, as amended, and through technical assistance, adequate, dependable electric and telephone service on an area coverage basis to beneficiaries of this Act, both farm and non-farm, in rural areas under rates and conditions comparable to those available in neighboring urban communities. III. Policy: In its relationships with borrowers to accomplish program objectives, REA activities will be based on the following considerations: A. Each borrower as an independent corporate body, subject to applicable laws and the REA loan security documents, is responsible for the efficient and effective management of its affairs and the repayment of the REA loans. B. The establishment of terms and conditions in loan security documents and of policies and procedures to assure their proper implementation is a responsibility of REA. C. As required for the achievement of program objectives, REA will render technical assistance to borrowers on an efficient and economical basis. D. REA activities will be carried on in such a way as to develop the ability of borrowers to handle their own affairs effectively, and in the case of cooperative borrowers to encourage active participation of members in the affairs of their organizations, for the purpose of assuring maximum benefits for their users and service in the development of rural communities. Borrowers will be encouraged and assisted to provide services essential to their operations through their own resources and consistent with the achievement of program objectives. E. REA will assist borrowers to develop the basic strength necessary to accomplish program objectives and to assure their future security and permanence. As this basic strength is developed, the need for Federal assistance will diminish accordingly. NORMAN M. CLAPP, Administrator. Senator TALMADGE. You may proceed, please. Mr. McDONALD. I am sorry that I am unable to give further information on this point, but I am sure that Mr. Clapp can and that his associates can give further information. I referred to this matter in the House hearings. Senator TALMADGE. I have not been aware of such a controversy. Of course, there is a great volume of correspondence and documents that come through my office, and it is utterly impossible for me to read them all, but if there has been any such problem in my State, I am unaware of it. Mr. McDONALD. I discussed, as I said before, this matter with Mr. Clapp, and he pointed out that in the Midwest, where we are primarily interested, and in the Northwest, that the adjacent rates were considerably higher than the rural electric cooperatives. However, some of our people out there said that there were cooperatives, relatively small ones, who could make reductions in rates if they were allowed to do so. They had the impression that they would not be allowed to reduce their rates. Senator HOLLAND. May I ask a question, Mr. Chairman? Senator TALMADGE. Certainly. Senator HOLLAND. I note that this particular statement may be keyed to a single purpose that you described, because the last sentence in that paragraph of Mr. Dechant's statement is: It is well known that the volume of power used for such purposes as electric heating is dependent on low rates. Was this a problem that you talk about keyed to any desire on the part of rural electrics to lower the rates for heating purposes? Mr. McDONALD. I believe that is included, Senator Holland, in some of their statements, the so-called promotion schemes to bring this about, to give special rates, that is, to cover a large amount of power at the low rates, and it is contemplated that if they could sell a sufficiently large amount of power that the rate would be low enough, so that they could install electric heating and other facilities which consume relatively large amounts of power. Senator HOLLAND. My question is: Was this related to the desire of this particular REA cooperative to give a low rate for that purpose only? Mr. McDONALD. I do not know. Senator HOLLAND. It would seem to me, from looking casually at the statement of Mr. Dechant, that that would be a possible explanation of the situation there. At any rate, we have it in the record. Senator TALMADGE. Yes. Mr. McDONALD. I would think that as to the TVA, I suppose that this particular sentence that you referred to, I have been told authoritatively that the TVA rates are so low that they are enabled to use electric heating to a greater degree than in any other area in the United States. Senator HOLLAND. We have a statement on that, I am sure, from the Administrator. It simply appeared to me that this argument might have been with reference to a rate reduction for that purpose alone, that is, for heating. If so, I wish that we would find that out. Senator TALMADGE. Yes. Mr. McDONALD. We suggest several other amendments to the legislation under consideration here. We suggest that language be inserted in the forepart of the bill, to the effect that the old 2-percent program should not be disturbed by the new program in any way. We feel, as I pointed out, that in many areas, such as in North Dakota, in the foreseeable future, we are going to need the 2-percent program, because they only have one or two consumers per mile. Senator ELLENDER. The fact is that we do not supersede the present law but simply amend it, and that would, it would seem to me, cover the point there. Mr. McDONALD. I discussed this, Senator Ellender, with the National Rural Electrification people, and they thought that it was implicit in the bill-I am talking about the Poage bill now, which I think is the same as S. 3720. That it was implicit that the old 2-percent program would not be disturbed, but we urged them to go along with us, and they agreed to put in the front part of the bill something to make it explicit, to spell it out, so that nobody can misunderstand that the old 2-percent program should go on. Senator ELLENDER. That is our intention-at least insofar as I am concerned, it is-so that we can assist the farmer in that respect. Senator TALMADGE. The House Subcommittee on Conservation and Credit has been working steadily on the same proposal. It had agreed to vote yesterday. As I understand it, the outcome of the vote was 5 to 5 not to report the bill to the full House Committee on Agriculture. Prior to that vote, the subcommittee did adopt several amendments. Because many of the amendments go to some of the questions that have been discussed here, including the main areas of controversy, I think it would be appropriate to include in our record an explanation of these amendments. They will be made available later by the House Committee in its print No. 3. I shall include in the record at this point the memorandum referred to. (The document dated August 18, 1966, follows:) STAFF SUMMARY OF AMENDMENTS TO COMMITTEE PRINT No. 2 ON H.R. 14837 APPROVED PRIOR TO 5-5 TIE VOTE IN SUBCOMMITTEE ON CONSERVATION AND CREDIT The following amendments were adopted: 1. A prohibition against using any portion of a loan made under the Act for financing partisan political activities. Prior to the making of any loan a borrower would be required to agree not to engage in partisan political activities during the term of the loan. If the bank board found a violation of this agreement, the loan would become due and payable in full 30 days after notification. 2. A prohibition against the making of any further loans under section 4 of the Act (2 percent loans) for the financing, construction, improvement, expansion, acquisition, or operation of electric generating plants. 3. A requirement that electric bank loans to cooperatives will be made only if the by-laws of these borrowers (1) require the issuance of certificates of ownership to each member establishing the member's proportionate share of ownership in the net worth of the cooperative and (2) provide that these certificates of interest be transferable to other members of the cooperative. 4. A requirement that no loans will be made under section 4 of the Act (2 percent loans) to borrowers which during the preceding year had a net worth in excess of 35 percent of its assets unless the Administrator finds or (1) That the territorial integrity of the borrower would be jeopardized, (2) That an adequate supply of power at reasonable prices would not be available to the borrower, or (3) That the borrower's electric plant is not in satisfactory operating condition. 5. A limitation on electric bank loans restricting the cumulative size of acquisitions by borrowers to communities of 5,000 population or less in non-rural areas. 6. Application of the review and bidding procedure carried out by the electric bank board to any generating facility loan (except pre-scheduled loans for the expansion or improvement of existing generating facilities). 7. A provision for review by U.S. district courts of a complaint by any party in interest who alleges under oath that the bank board acted in a fraudulent, arbitrary, or capricious manner in administering the review and bid procedure applicable to certain generating facility loans. Amendments rejected by the subcommittee: 1. To limit total U.S. generation capacity of all borrowers under the REA Act to 3 percent (Print carries 5 percent limitation). 2. To prohibit certain loans under the Act unless there had been a finding that such loans would not duplicate existing facilities. 3. To provide for review of certain loans by the Federal Power Commission. 4. To remove the U.S. Treasury guarantee on debentures issued by the electric bank. Senator TALMADGE. You may proceed. Mr. McDONALD. I have mentioned the criteria, particularly the comparable rate criteria, sometimes referred to as the reverse yardstick. We would like for the legislation to contain a provision which would require the Administrator to submit annually his criteria to the Congress, so that the Congress could take a look at it, criticize it, possibly suggest amendments to it and other additions to it. We would like to see something in the legislation in regard to the Congress overseeing this criteria that the Administrator has come out with without, so far as I know, consulting the Congress or the organizations, so that we can get all of this out in the open and everybody can look at it and change it if necessary. Senator HOLLAND. If Congress is to supervise this, have supervision over the criteria, why is it not wiser to put the criteria into the bill itself? Mr. McDONALD. Well, I discussed that with a very eminent attorney, Mr. Wise. I had thought that the criteria should be in the bill, and he thought it was unwise legislatively to put the criteria in the bill, to tie the hands of the Administrator too closely. Senator TALMADGE. You are referring to the criteria, meaning the terms and the conditions upon which he would make the loans? Mr. McDONALD. That is correct. I discussed it with Mr. Clapp, and he pointed out that in some instances the determining factor was not the number of consumers per mile, that there were other factors, and that if you put these in and tied his hands and said "You have got to give a loan where the consumers are less than 10 a mile," that it would be bad legislation, and Senator TALMADGE. We have had considerable testimony relating to the point that you have raised. Of course, this bill contemplates a possible loan rate at three different levels, at 2 percent, and then 3 or 4 percent, and then the market price. Several Senators have been quite inquisitive about what the conditions might be that might apply to these individual rates. That is something that the committee already has before it, and it is going to be a very complex process trying to reach a solution on it. Mr. McDONALD. As I understand the legislation, there would be no restriction as to the higher interest rates; that is, the cooperative could go into a city if it was able to swing the deal. That is my understanding. Perhaps I am wrong on that. Senator ELLENDER. Where would it get the money? Mr. McDONALD. They would get the money in the private money market, not from the Congress. Senator ELLENDER. And not from the bank, either. Senator TALMADGE. This bill, Mr. Chairman, provides in a certain provision that if the REA's borrow from the bank, then they can operate anywhere that they wish to operate. Senator ELLENDER. Either from the Government, being free from it? Mr. McDONALD. Yes; from the electric bank. Senator COOPER. Would you repeat that, please, Mr. Chairman? Senator TALMADGE. Under the terms of this bill, if they borrow money under the electric bank method then they could serve any area in America that they wanted to serve. |