STATEMENT OF DANIEL W. CANNON, POLICY EXECUTIVE, INDUSTRIAL ENVIRONMENT DEPARTMENT, NATIONAL ASSOCIATION OF MANUFACTURERS, NEW YORK, NY. This statement is submitted on behalf of the National Association of Manufacturers, a voluntary association of business enterprises which account for some 75 per cent of the nation's manufacturing production and about the same per cent of manufacturing employment.

The National Association of Manufacturers endorses the objective of shifting the financing of the appropriate activities of rural electric cooperatives from a subsidized government source to private sources. By "appropriate" activities. we mean "the furnishing of electric service to persons in rural areas who are not receiving central station service," as set forth in the Rural Electrification Act of 1936. We do not mean the construction of generation and transmission facilities where an adequate supply of power is already available to the borrower at rates which, after making due allowance for the tax components included therein, are as favorable or more favorable than those which would result from the facilities to be financed by the proposed loan.

Such a shifting of financing would be entirely in accord with the official stated policy of the Association on "Federal Lending Operations." This policy statement advocates that steps be taken to reduce the scope of, and ultimately terminate, federal lending activities, but that the method used should avoid sudden or undue hardship to those sectors of the economy which have become dependent on this form of government support. Some of the suggested methods are (1) Transferring to private ownership such agencies as can be so transferred: (2) Making all credit operations, which are not readily transferable to private ownership and operations, self-supporting by appropriate increases of fees, interest, premiums or other charges; and (3) Increasing the risk of borrowers and beneficiaries as a condition of securing government financing help.

It is in this light that we would like to examine S. 3720 and the draft bill of the Department of Agriculture, bills to amend the Rural Electrification Act of 1936. Both bills are lengthy and complicated. However, the following is a brief summary of the bills as they apply to rural electric cooperatives:

1. The bills would establish a Rural Electric Bank (S. 3720) or a Federal Bank for Rural Electric Systems (draft bill) to make loans to rural electric cooperatives. Under S. 3720, the President of the United States would initially appoint 12 members of a 13-member Electric Bank Board, three from the Department of Agriculture, three from the general public, and six representing the rural electric systems. The Administrator of the Rural Electrification Administration would also be a member of the Board and would serve as the chief executive officer (Governor) of the Bank.

2. Funds for the Bank's capital stock would come from the U. S. Government— $750 million at the rate of $50 million per year for 15 years-with no provision for payment of interest on this money or any timetable for its repayment.

3. The Bank would be authorized to borrow, by issuing debentures, up to eight (S. 3720) or ten (draft bill) times its paid-in capital and retained earnings. This could be $8-10 billion or more. It has been estimated that the total program over 15 years could involve more than $17 billion.

4. The present REA 2% loan program would be continued. In addition, the Bank would be authorized to make so-called "intermediate loans" at 3% (S. 3720) or 4% (draft bill). Loans at a higher rate designed to cover the Bank's cost would also be authorized, but it appears problematical whether any loans would be made at that rate as long as "intermediate loans" or 2% REA loans were available. Loans could be made for the construction of generating and transmission facilities, as well as for distribution facilities. Loans could also be made for the acquisition of facilities owned by municipalities or investorowned electric companies.

The duration of the loans would be as high as 50 years, and the schedule of payments of interest and principal could be adjusted by the Bank's Governor (REA Administrator). Loans could cover 100% of the cost of the facilities to be constructed or acquired, with no equity required of the borrower. The restriction on REA 2% loans that they be limited to service for persons not already receiving central station service in places of less than 1,500 population would not apply to loans made by the Bank.

5. The property and income of the Bank would be exempt from "all taxation now or hereafter imposed by the United States, or by any State, territorial, or local taxing authority. . .' Under S. 3720, this tax-exempt status would appar

ently continue in perpetuity since the Bank would continue to be an instrumentality of the United States even after so-called "Conversion" under Section 410.

6. If the Bank did not have sufficient funds to pay interest or principal on its debentures, it could borrow money from the U.S. Treasury without an appropriation by Congress. Section 407(b) of S. 3720 authorizes this as a "public debt transaction," which is popularly known as "back-door spending."

7. A "rural electrification account" would be established in the U.S. Treasury, and it would have as assets the $3.34 billion of evidences of debt presently held by the REA; $883 million of "undisbursed balances" of electrification loans; all collections of principal and interest received on and after July 1, 1966 (S. 3720); all future appropriations for electrification loans and for the administrative expenses of REA; and shares of the Bank's capital stock. This account would resemble a revolving fund because money placed in it could be used for designated purposes without further appropriation by the Congress. Thus, these money outlays would not have to be reflected in the Federal Budget submitted by the President to the Congress each year.

It is clear that the bills as such do not accomplish a transfer to private ownership. There is a declaration of policy objective that the Bank will become entirely privately owned, operated, and financed . . .” Also, there is a provision in Section 406 (c) of S. 3720 and Section 405 (c) of the draft bill that the class A stock (the stock issued in exchange for the capital furnished by the United States Government) “shall be redeemed and retired by the electric bank as soon as practicable after June 30, 1981, but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank." And there is a provision in Section 412 of the draft bill that "As promptly as practicable after all class A stock issued to the United States has been retired pursuant to section 405 (c) of this title, the Secretary shall transmit to the President for submission to the Congress recommendations for such legislation as may be necessary or desirable to make appropriate provisions for the transfer to class B, class C and class D stockholders of the ownership and control of the electric bank in order that its operations may thereafter be carried on as a privately owned, operated and financed banking corporation." Section 410 of S. 3720 puportedly provides for some sort of "Conversion" of the Bank through a shift of powers to the Board (although the Bank would continue in perpetuity "as an instrumentality of the United States") "Whenever after retirement of Class A stock . . . has begun . . . the total amount in stated value of Class B and Class C stock outstanding equals two-thirds of the total amount of Class A, Class B and Class C stock outstanding . . ."

However, even these provisions seem to be in the category of pious hopes because they do not really establish any schedule, program or procedure for the retirement of Class A stock. In any event, the retirement would not even begin until 1981 and there is no timetable or deadline set at all. It appears that a considerable amount of such stock must be outstanding for many years after 1981 in order to provide the subsidy involved in the intermediate loans to be made by the Bank. Thus, it is not possible to estimate when, if ever, the Government's stock would be retired. Perhaps transfer to private ownership could not be attained for at least 65 years. Consequently, for all practical purposes, the bills must be evaluated as a proposal to create a new Government corporation to engage in the banking business rather than as a proposal for transfer to private ownership.

Viewed as such, the bills should be analyzed to determine whether they move in some other way to reduce the scope of federal activities. The first point to be noted in this connection is that the Bank lending program would in no way displace the present REA 2 per cent lending program. The bill title refers to "additional" sources of financing and the declaration of policy refers to "supplementary" financing. The amendments to the Act are set forth in the form of new titles, so that they would in no way modify the existing authority of REA to make 2 per cent loans should Congress continue to provide the necessary funds. Section 411 of S. 3720 and Section 413 of the draft bill make it very explicit that "powers and authority provided for in this title IV shall be cumulative..." Therefore, in this respect, the bills make no contribution whatsoever toward reducing the scope of federal activities.

Section 408 of S. 3720 and Section 410 of the draft bill would authorize the making of "intermediate" loans with no annual total dollar limitation. Since these loans would also involve subsidy (a 3 per cent interest rate in S. 3720 and

4 per cent in the draft bill), this program would constitute an enlargement of the federal activity rather than a reduction.

These sections would also authorize the making of loans at a rate "which reflects the current average rate payable by the electric bark on its electric debentures, and administrative expenses and estimated losses of the electrie bank in respect of such other loans, all as determined by the Governor of the electric bank." This appears to be a step in the right direction, but, as previously indicated, the pressures on the Administrator-Governor to make 2 per cent REA loans or "intermediate" loans rather than the at-cost beans would be great. No really meaningful criteria are set forth to guide Bank polley in this regard. Further, in the draft bill, there are no stated limitations on the "intermediate" and at-cost loans so it is quite possible they could be used for the construction of generating and transmission facilities to serve other than truly rural areas. Section 405 (1) of S. 3720 makes a gesture toward limitation with a provision for bids and comparison of costs under the proposed loan and under the lowest bid, "Prior to approval of an initial loan for the construction of generating facilities which displace an existing wholesale power supply arrangement with a supplier which is not a borrower from the Rural Electrification Administration or the electric bank..." However, it does not appear that there would be any allowance for the tax components included in the rates of regulated, investor-owned electric companies. The loan applicant would set the terms and conditions which the bids would have to meet. The exact meaning of the restriction of the limitation to "initial" loans is obscure. And, the determinations made by the Electric Bank Board, six members of which would be representing the borrowers, "shall be final and conclusive and shall not be subject to challenge or review." Consequently, in still another aspect, the bills move in the direction of enlargement of the scope of federal activities rather than reduction.

The same observation could be made about the provision which calls for a maximum loan period of 50 years for Bank loans rather than the 35 year period of present 2 per cent REA loans; about the fact that no interest need be paid on the capital advanced by the United States Government to the Bank, whereas REA must pay 2 per cent interest on the notes it presently gives to the U.S. Treasury to cover loan authorizations; about the fact that collections of principal and interest on outstanding loans would be paid into a rural electrification account rather than into the U.S. Treasury as miscellaneous receipts (when deposited as miscellaneous receipts, they cannot be used again without a subsequent appropriation); and about the fact that the Bank would be able to borrow money, without limit and without Congressional appropriation, from the U.S. Treasury whenever it was unable to meet the payments of principal and interest on its debentures.

As to increasing the risk of the borrows, this is not an element of the present bills. REA loans can now be made up to 100 per cent of the cost of the facility, and this would also be true of "intermediate" and at-cost loans.

Therefore, although we endorse the objective of shifting the financing of the appropriate functions of rural electric cooperatives from a subsidized government source to private sources, we can not support the bills before the Subcommittee since they do not incorporate any effective steps in that direction but, to the contrary, move greatly in the direction of further massive federal involve ment in this type of lending activity. This defect is aggravated because such greater involvement would not be subjected to adequate budgetary and appropriations processes, and the Administrator-Governor would become an extremely powerful official dealing with billions of dollars and subject to little Congressional surveillance and control. Moreover, there is no indication that the appropriate functions of rural electric cooperatives over forthcoming years would require financing on the scale contemplated in these bills. The pressures and temptations to use this money to build giant tax-exempt generating and transmission facilities which would unfairly compete with tax-paying electric companies would be well-night irresistible.

Consequently, we respectifuly urge the distinguished Subcommittee on Agricultural Credit and Rural Electrification not to report S. 3720 or the draft bill.

STATEMENT OF J. R. COBB, GENERAL MANAGER, TEXAS ELECTRIC COOPERATIVES, AUSTIN, TEX.

I am the General Manager of Texas Electric Cooperatives, Inc. which is the statewide service organization of the rural electric cooperatives of Texas. This is a voluntary association, owned and controlled by the Texas rural electric systems. Seventy-nine rural electric systems are members of Texas Electric Cooperatives, Inc. These systems represent over 425,000 consumer-members.

Over the period of several months, the rural electric systems of this state have carefully considered the Supplemental Financing for Rural Electric Cooperatives as embodied in the Cooper bill, S. 3720, and have voiced their support of this legislation on numerous occasions. These systems continue in their support of S. 3720 and urge its adoption.

At the annual meeting of the Texas Rural Electric Cooperatives, held in San Antonio, Texas, August 17-19, 1966, the matter of the pending legislation to establish a Bank for Rural Electric Cooperatives was the subject of primary concern and interest. At that meeting the rural electric cooperatives of Texas unanimously adopted the attached resolution reaffirming their strong support for the supplemental financing plan as amended in the Cooper bill, S. 3720.

Therefore, I take this opportunity to submit this statement and the attached resolution to the Subcommitee on behalf of the rural electric systems of Texas and respectfully urge this Subcommittee to promptly and favorably report S. 3720.

RESOLUTION No. 9-SUPPLEMENTAL FINANCING PROGRAM

Whereas in recent years, the amounts of loan funds budgeted and authorized by Congress have not kept up with the growing requirements of rural electric systems to provide adequate and reliable service for their members; and Whereas the loan fund shortage has caused a critical buildup of applications backlog and is an immediate problem affecting the future prospects of rural electric systems to build additional capacity to keep up the rising electric power needs of their customers; and

Whereas most rural electric systems are still not financially strong enough, while meeting the program area coverage requirements, either to operate succesfully without the present REA 35-year loans or to go individually to the private money market for the capital they need; and

Whereas legislation is now pending in the United States Congress in the form of the Poage-Mills Bills, the Cooley Bill and the Bass-Cooper Bill, and in the revised REA proposal incorporating provisions of the Poage-Mills Bills and the Cooley Bill, for the establishment by Congress of a Federal Bank for electric cooperatives and embodying the principles set forth in the Supplemental Financing Program for Rural Electrification approved by the electric cooperatives of this nation at their Annual Meeting in 1966: Now, therefore, be it

Resolved by the seventy-nine (79) representatives of the rural electric systems in Texas, That we individually make known to members of Congress our strong and unwavering support for the supplemental financing plan as embodied in the above described pending legislation as a means of providing capital for the future. need of the rural electric program; that we emphasize the great necessity for such legislation to be passed in this session of Congress; and that copies of this resolution be sent to every member of the Texas delegates in the United States Congress; be it further

Resolved, That we urge the Congress to make available to REA sufficient loan funds to provide for the growth requirements of rural electric cooperatives until such time as the bank is able to meet such requirements.

NEW YORK, N.Y., August 29, 1966.

Hon. HERMAN E. TALMADGE, Chairman, Subcommittee on Agriculture Credit and Rural Electrification, Committee on Agriculture and Forestry, U.S. Senate, Washington, D.C. DEAR SENATOR TALMADGE: Because it was my understanding that the time available was limited, I did not ask to testify at hearings on the above bills, but I respectfully request that the following statement, submitted on behalf of