In North Carolina the electric companies and the rural electric cooperatives reached an accord last year on territorial matters and a state law was agreed upon by both groups to provide for allocation of territories by the North Carolina Utilities Commission. The amicable cooperation between the two groups of suppliers is exemplified by two recent events when the companies and co-ops jointly sponsored a farm machinery and materials handling equipment exposition at North Carolina State University and jointly entertained 2,000 community leaders who gathered in two eastern cities to promote the total development of the state. In South Carolina the situation is not as well advanced as in North Carolina and there remains a sharp divergence of positions. In North Carolina, for all practical purposes, the co-ops are taxed at the state and local level like the power companies, and are subject in some respect to commission regulation. In South Carolina, the co-ops are free from state and local taxes and are unregulated.

In North Carolina, about 67 percent of the rural electrification job has been done by the companies, about 26 percent by the co-ops and 7 percent by municipal systems. In South Carolina, the companies and co-ops have contributed about equally in electrifying rural areas.

The co-op systems in both states are well constructed and are ably managed. We recognize their need for financing their future growth and we join with the co-ops in their stated objective to work out a way to terminate their dependence upon government financing. We are opposed to extension of government financing to borrowers not eligible under the present law and for purposes not now permitted by the existing law and not now authorized by the limitations laid down by the Appropriations Committees of the House and Senate.

In dealing with the degree of subsidy involved in REA financing, it is necessary that I speak briefly of the economic phenomenon which is peculiar to the electric industry. Unlike all other industry in our economy-in the electric utility industry it is necessary to invest in facilities to serve customers about $4 for each $1 of annual sales of KWH. By comparison, it takes only $0.75 in plant equipment or capital investment for all manufacturing enterprises of the nation to produce $1 in annual sales. In the automotive industry, only $0.43 of investment will yield $1 in annual sales. In the iron and steel industry it takes $1 of investment to produce $1 of annual sales.

This heavy 4 to 1 investment/sales ratio makes the cost of capital a very large part of the cost of electric service. Today the cost of capital to the average electric utility is at least 6.75 percent. This means that out of every $1 of gross income from electric sales $0.27 must be used to pay rent on capital supplied by investors. When co-ops get all their capital at 2 percent a large part of the normal cost of electric service is borne by the taxpayer. In 1964, all co-op borrowers from REA collected in operating revenues $838 million with $3.4 billion invested in facilities-roughly the 4 to 1 investment/sales ratio. But, instead of 6.75 percent cost of capital they got nearly all of it at 2 percent; and instead of $0.27 of every $1 of sales revenue going to investors, only about $0.08 was required to service capital-a saving of 19 percent of gross income from electric sales.

This heavy investment ratio of 4 in investment to 1 in annual sales revenue accounts for another large part of the normal cost of electric service taxes. About half of this capital must come in the form of common and preferred stock or risk capital. This results in about 13 cents out of every sales dollar going to Federal Income Tax. By reason of being financed 100 percent by loans from the Federal Government, the rural electric cooperatives did not have to raise risk capital and were enabled to operate in the so-called nonprofit cooperative form and avoid the heavy impact of Federal Income Tax. The taxpayers have borne all of the risk without any weighting of the cost of money for this economic factor. This relieved the co-op consumers of about 13 percent of the normal cost of electric service.

Thus, through the government assistance of 2 percent financing, the taxpayers have borne about 32 percent of the cost of electric service which the consumers would otherwise have to pay.

Under the proposed legislation, new money lent to borrowers will not be required to bear the free market cost of money for an electric utility enterprise. No compensation is provided for the use of the government's investment in stock. While the bills provide that the evidences of indebtedness of the "Bank" shall contain language indicating that the obligation is not guaranteed by the United States, if the "Bank" is unable to meet its obligation, it may borrow funds from

the Treasury for that purpose and the Secretary of the Treasury is required to provide the funds. In fact, the Secretary of Agriculture openly stated before the House Committee on Agriculture in hearings which began on May 31, 1966, that the indebtedness of the “Bank” would be "guaranteed" by the United States. Thus, the suppliers of capital to the “Bank” would be given assurances by the Congress equal to a guarantee by the government. The taxpayers bear the risk of the enterprise and the cost of loans from the "Bank” will be priced on that basis. Thus, the cost factor in financing relating to risk bearing is eliminated from loans by the "Bank." This risk is borne by the taxpayers without any compensation for doing it.

Under S. 3720, the Rural Electrification Administrator is authorized to make loans from the "Bank" at 3 percent interest. So, by the above illustration of the annual cost of capital, on loans made by the "Bank" co-op consumers get a reduction from the free market cost of capital for electric utilities today equal to 3.75 percent of each $1 investment. This constitutes a subsidy of $0.15 out of each $1 of sales revenue.

Remember, however, that this bill is predicated upon retaining 2 percent financing in an unpredictable quantity to be administered by an undefined policy. The proposed revolving fund and new appropriations by Congress could keep 2 percent money available in amounts comparable to the trend over the past 30 years. Thus, it becomes of great interest to this Committee to more clearly spell out the policy of Congress as to what use is to be made of 2 percent money and whether or not the rate should remain at 2 percent. On that point, gentlemen, I would suggest to you that the job of extending electric lines to rural areas has been virtually completed. Very little of future funds will be required by extension of service to "persons in rural areas who are not receiving central station service." Possibly one reasonable basis for use of 2 percent money in the future would be to assist in constructing new lines to provide electric service for the first time to "persons in rural areas who are not receiving central station service." This would make a distinction between new line extensions and the "heavying up" of established lines which have such a volume of business that additional facilities should be financed at the full cost of money.

The real question before this committee is: In light of social and economic conditions prevailing in 1966 (as distinguished from 1935), to what extend should money be extracted from the taxpayers and applied to the electric bills of a preferred group of electric consumers? To answer that question, it becomes necessary to raise some other questions. Who is this "preferred group of electric consumers"? During recent years among new consumers connected by co-ops only one out of five has been a farmer. Four out of five have been nonfarm suburban dwellers, commercial and industrial establishments. Then, to what extent is there any social or economic necessity for the taxpayers' paying a part of the cost of electric service for these people? These consumers do not ask you to do it. There are ambitious co-op professionals and bureaucrats who come to Congress seeking all they can get and support their requests by subtle and complex devices such as contained in these bills before you. But, is this really sound government?

I am authoritatively informed that recently one co-op director in North Carolina who has been associated with the rural electric cooperative movement since its beginning stated: "We should have been paying local and state taxes long ago and we simply cannot justify the use of 2 percent government loans."

Why are these bills here? The plain truth is that the use of 2 percent money has been abused in several ways. Public criticism has been sharp and caustic when REA 2 percent money has been used to build ski slopes. In South Carolina a $30 million loan was made for a generating plant after the power companies serving the state offered to supply power at no greater cost than would be incurred from operation of the new plant. The local, state and federal governments lost $1,065,000 per year in tax revenues while the consumers were saved absolutely nothing. Power produced by REA-financed generation cost the co-ops an average of 8.8 mills per KWH in fiscal 1965 (with no Federal Income Tax built into the rate) while power purchased from taxpaying electric companies cost the co-ops only 7.4 mills per KWH, and the same companies paid, on average, about 13 percent of every revenue dollar, including co-op sales, into the Federal Treasury as income taxes.

The point I seek to make here is that abuses of 2 percent money have already blighted the good reputation of the rural electrification movement. I suggest that some advocates of public power have attempted to use the fiscal power of

this nation to extend the traditionally popular and good program of rural electrification into expansions beyond the sound and good purposes it was set up to serve.

Some of the professional leadership of the rural electric co-op movement and some government bureaucrats seek through this subtle guise, hidden in deep complexity, to use the REA to further extend subsidized, tax-exempt power, wholly unrelated to rural electrification, where the taxpayers have no need or obligation to pay a part of the cost of electric service.

Obviously, the approximately 1,000 cooperatives borrowing from REA need to be able to finance their normal and proper future growth. In the aggregate, they are able to pay the full free market cost of money. With REA holding a

first mortgage on their properties you will need to take some action to assist in the transition. I would suggest two approaches to the matter:

First, you could authorize the Administrator to appropriately subordinate the REA's mortgage to permit the co-ops to borrow in the free money market. The co-ops, on average, have about 24 percent of their capitalization in ownership or equity capital. The Administrator should have responsibility for passing on the need for new loans before subordinating his first mortgage. This would leave the co-ops relatively free to go into the free money markets of the land and pay the going rate. They would be standing on their own feet-which most of them are capable of doing on this basis. The government would put its outstanding loans at some greater risk, but not as great as when the program started. It would be about ten years before the co-ops would have more than half their capital at free mrket rates with 2 percent cost on the oher half.

To implement this approach requires a good bit of study. It would be expected that there are a very limited number of situations where some additional subsidy is as supportable now as in 1935. There may be a few small co-ops serving such sparse areas in remote territories that full cost of money would raise the price of electric service beyond the willingness of consumers to pay. In the spirit of the national policy to which we are already committed, to implement this approach would call for searching out these co-ops and examining their retail service rates in light of the economy of the area; and you would need to write new loan criteria for these borrowers and determine the future interest rate for their loans. This could be done in a self-liquidating manner, however, so that when these co-ops reach a predetermined ability they will move to free market financing. Second, if it seems to the Committee more desirable to try to deal with the "Bank" approach-considerable revision of the pending bills would be essential. I shall not undertake the monumental task of rewriting bills that have so many intolerable features. I will only mention some of the major matters in principle rather than details.

The revolving fund or loan account should be eliminated. It is proposed solely because REA and its borrowers do not want to be put to the normal legislative process to justify annual appropriations. To eliminate the annual scrutiny and inspection of the REA's accounting for its stewardship is not in the public interest. This is where revelation of the abuses has taken place and where efforts have been made to correct the abuses by Committee Report language. suggest that REA is distinguishable from other Agricultural Loan Accounts in that similar abuses have not been experienced in the other accounts. This experience alone is sufficient reason for eliminating the loan account.

I

As I have indicated already, there can be no justification for more than a very limited amount of government assistance in rural electric co-op financing in the future. I believe that the sponsorship of this pending legislation establishes that this is a proper time in history for a constructive review of existing congressional policy on rural electrification. In continuing any loans by which the taxpayers relieve co-op consumers of any part of normal full cost of electric service, the Congress should set clearly defined criteria for the making of reduced interest loans.

The provisions relating to the creation of a "rural electric bank" should be appropriately amended to clearly provide that the only borrowers who are and will be eligible to use taxpayer assistance are those who can now borrow from the Rural Electrification Administration.

Further, it should clearly provide that the loans made by the "Bank" may be only for the purposes for which the present Act makes loans available. I submit that this program should be held to rural electrification and only rural electrification. REA should not be expanded into an enlarged and unlimited general public power program.

The "Bank” should be allowed to charge only one interest rate—that is, the cost of money to the Bank" and the cost of administration of the "Bank." including the government's cost for the capital it supplies to the "Bank." The provisions which give an effective guarantee of the "Bank's" indebtedness by the government should be eliminated.

So long as the government provides any assistance through the "Bank." strict criteria such as contained in the Committee Report language of the House and Senate Appropriations Committees in recent years should be spelled out in statutory language governing the making of generating and transmission loans. Furthermore, the loss of Federal taxes should be a required consideration.

Mr. Chairman and Gentlemen of the Committee, I suggest that it is the function of this Committee to keep its eye on the agricultural ball. If the proponents of public power want to divert your attention by promoting legislation to expand government-subsidized power facilities not related to rural electrification, you should admonish them to stay out of the rural electrification program you have sponsored and nurtured. The legislation before you goes far beyond any reasonable requirements of the traditional rural electrification program established by Congress. It would establish an enlarged public power program from which government involvement would never be extricated. It involves a great deal more than the great body of American farmer consumers served by rural electric cooperatives would ask you to do. Some action in the direction of eliminating rural electric co-op dependence upon government financing is clearly indicated but the public interest might be far better served if you would undertake to do it by an entirely new approach in a completely different bill.

May I express to you my sincere thanks for the time you have given me and your courteous attention.

STATEMENT OF ALBERT V. HARTL, PRESIDENT, OTTER TAIL POWER Co., FERGUS FALLS, MINN.

My name is Albert V. Hartl. I am President of Otter Tail Power Company, an electric utility supplying energy to almost 500 communities in Minnesota, North Dakota and South Dakota, plus helping to supply 21 rural electric cooperatives at 95 points of connection.

My company has supported the growth of and worked with the rural electric cooperatives in our area ever since they came into being. It is our intention and desire to continue this amicable, mutually beneficial relationship.

However, it is our considered opinion that the so-called Federal Electric Bank Bill under consideration by this Committee would not only destroy this relationship for the future but also endanger the very existence of our company. Consequently, the purpose of this statement is to indicate the opposition of Otter Tail Power Company to S. 3337 and any other similar bills that may be before this Committee.

Our basic objections to this proposed legislation are five. First of all. the legislation is unnecessary; complete rural electrification is being fully accomplished by the investor-owned utilities and rural electric cooperatives under conditions that presently exist. Second, absolutely no discernable guidelines are stated under which loans would be granted, giving virtual dictatorial power to the administrator. Third, the wise Congressional supervision which now assists the rural electrification program would be eliminated. Fourth, the proposed legislation would favor the poorly managed and, consequently, unprofitable cooperative over the well-managed, solvent enterprise. Lastly, tremendous sums of taxpayers' money would be absorbed to start a new type of financial institution at a time when the Nation's resources are alreadly strained to meet rising defense demands and existing domestic programs.

In my opinion this and related bills are not "private financing" and the publie is being misled by such labeling.

It is my further opinion that the cause of both rural electrification and the entire electric industry would be better served by defeat of this proposed legislation.

STATEMENT OF EDWIN I. HATCH, PRESIDENT, GEORGIA POWER CO., ATLANTA, GA.

My name is Edwin I. Hatch. I am President of Georgia Power Company. I appreciate the opportunity to submit this statement on what is a matter of vital importance to my company.

Georgia Power generates and distributes electric energy through 97.7 percent of Georgia. We serve about 57,000 of the State's 59,000 square miles, supplying electric power at retail in 645 towns and communities and at wholesale to 39 REA cooperatives and 50 municipalities having their own distribution systems. My statement is occasioned by the bills before you, S. 3337, S. 3720, and the Administration draft bill, all of which would greatly expand loans available to electric cooperatives by establishing an electric bank, at the same time retaining the present REA loans obtained through Congressional appropriations at a rate of 2 percent. I hope to show what the present situation is, particularly as it pertains to my own company, and why we cannot help but be unalterably opposed to the provisions of these bills, which we think will be injurious not only to our company but to the whole electric utility industry.

Let me first mention that far from opposing the electric cooperative program we have fully cooperated in its development in Georgia and up to the present have a close and effective working arrangement with the cooperatives in the States. After the REA Act was passed in 1936, our company provided much assistance to them in organizing and getting started. We participated in drafting the original act passed by the Georgia Legislature covering the formation and operation of cooperatives. We helped them with their preliminary surveys. We established a new rate for them, one of the lowest in the nation, and which presently works out to be lower than most of our other wholesale rates. We worked with them on the development of rural line cost and construction standards and with them designed a type of line construction which since then has been found to be highly satisfactory. To avoid their investment in substations, we furnished, and still supply, substations at their many service points at our own expense and furnished their power requirements at the voltages they desired. During the early period, we advertised that we would help establish rural electric cooperatives with a full page advertisement entitled, "For an Electrified Georgia-Where We Ourselves Can't Build, We Will Help Others To Build." Presently, the cooperatives supply about 23 percent of Georgia consumers, the wholesale towns 13 percent, and we directly supply about 64 percent of consumers in Georgia, our number of customers being 846,000. The electric cooperatives obtain about 30 percent of their power from the Federal Government and 70 percent from us. We wheel the federal power to them and firm up the remainder of their needs with our own power. The cost to them of the power we supply is about 6.5 mills per kilowatt-hour. We have contracts with each of them which are thoroughly satisfactory to all parties.

The retail and wholesale rates to our customers are regulated by the Georgia Public Service Commission while our wholesale for resale rates to the cooperatives and municipalities are regulated by the Federal Power Commission. The cooperatives themselves are not regulated. We pay federal and state income taxes and state, county, and city property, franchise, and sales taxes. Our total tax bill for 165 was about $40 million. The cooperatives generally pay only token property taxes.

We expect that the increasing needs of the cooperatives for power will be taken care of both by the new hydroelectric projects the Federal Government is planning or building in Georgia and by our own construction program which anticipates both additional thermal and hydroelectric capacity. There is no question but that their future needs will be met. Our company's construction program for this year is $114 million and we are planning programs for the next three years that will cost a total of about $360 million.

Parenthetically, I should like to note there that Mr. Clyde Ellis, testifying before this Subcommittee on August 15, 1966, stated that difficulties of getting power were "looming up again in the Georgia area". This statement is completely unfounded. Last year we completed negotiations for new contracts with the thirty-nine cooperatives that we serve. Both the cooperatives and the company joined in urging the Federal Power Commission's approval of these contracts, which was secured. On our part, we contemplate furnishing the needs of the cooperatives for power, over and above what the Government furnishes them, at reasonable rates for the foreseeable future. On the part of the Georgia cooperatives, Mr. Walter Harrison, General Manager, Georgia Electric Membership Corporation, said in a statement printed in the House Hearings, Committee on Agriculture, on the REA Legislation (Serial LL, Page 181) that the GEMC did not anticipate any need for funds whereby they would build generation and transmission within Georgia and that thus far they had been able to work out their problems across the conference table.