I think this means that, if we were all left alone and cooperatives could continue to obtain what loans they actually need through Congressional appropriations, we could get along quite well in Georgia. This is not the case however. All electric cooperatives in the United States, except a few that have paid up their loans, are closely controlled by the Rural Electrification Administration in Washington. The Administration holds a mortgage on all their property, determines their accounting and bookkeeping standards and procedures, and has the right to veto their managers, their attorneys and their engineering firms as it so desires. Mr. Norman Clapp, the REA Administrator, said in hearings for the Department of Agriculture appropriations in 1964 that this right is exercised very sparingly. Nevertheless, it is there and the REA thus can set electric cooperative policy on a national scale. Naturally, most all cooperatives belong to the National Rural Electric Cooperative Association, REA's well financed lobby, which can reach millions of American homes. With this setup it is easy to understand how the REA has been able to keep its 2 percent rate of interest, after 99% of farm properties have been electrified or have electric service available to them, and how it can sponsor bills such as we are discussing here.

Let us see how this affects the electric utility industry. The Rural Electrification Program is continuing to ask for large annual authorizations. There has been a shift in the way loan funds are being utilized by borrowers. From 1935 to 1965, over 68 percent of the funds loaned were for distributing power. In 1960, some 40.0 percent were for generation and transmission facilities and this has increased to 60.3 percent for G. & T. in fiscal 1965. In the latter year, approximately $229 million was approved for G. & T. as compared to $150 million for distribution. These G. & T. facilities often displace or replace energy furnished to distribution cooperatives by private companies.

Power purchased by cooperatives from power companies, according to the Administrator's most recent annual report, has declined in cost over the past 5 years from an average of 7.8 mills per kilowatt-hour to 7.4 mills. Power generated by G. & T. cooperatives in 1964, the latest year for which figures are available, cost an average of 8.3 mills. The percentage of power purchased from companies by cooperatives is dropping. In 1949, companies furnished 53.2 percent of the cooperatives' total requirements; and 1964 the figure had dropped to 36.3 percent. Despite the higher average cost of power generated by G. & T. cooperatives, even with the government subsidies involved, the REA has continued to push the G. & T. program at a loss to the Government of the subsidy and also the taxes that would have been paid by the companies. This subsidized and uneconomic competition is already adversely affecting many companies.

The bills before you differ in only relatively minor details. There follows some contrasts as between the present situation and that which would obtain under the bills:

1. The 1936 Act was passed with a specific goal in mind, to electrify farms and other rural areas. There was no question but what such rural electrification was desirable and that Government assistance was needed to do it. However, in the present case, there has been no real showing that a need exists and the objectives are variously stated to be the extension, improvement, strengthening, and stabilizing of rural electric systems by supplying them more money, or simply to supply them more money.

2. From 1935 to the present day, REA has loaned a total of $4,751,612,000 and 99 percent of the farms have been electrified by companies, cooperatives, and others. However, in the present case, the federal contribution to the bank's capitalization and debenture sales alone would create a lending power of $11,000,000,000 under S. 3337 and $8,250,000,000 under the Administration bill and S. 3720. As other securities are sold, the lending power of the bank could be much higher. In fact, no ceilings are set by the bills.

3. Presently, the borrowers pay no federal income taxes. This exemption would continue in spite of the changed nature of the program under the bills. The bank would be exempted from such taxes. If companies performed the services that the bills propose to finance, full taxes would be paid.

4. Under present law, treasury loans to REA are for 40 years, which includes the 5-year extension permitted by the Act. Under the proposed bills, no time limit is set when repayment must be completed.

5. Presently, payments of principal and interest by borrowers are returned to the Treasury as miscellaneous receipts. Under S. 3337 and S. 3720, these amounts would go into an REA revolving fund and the Government would incur additional costs for Treasury borrowing because of the miscellaneous receipts not received.

6. Under present law, loans are authorized for rural electrification and the furnishing of electric energy to persons in rural areas who are not receiving central station service. A rural area is defined as a place of less than 1,500 in population. No similar restrictions are placed on bank loans by the bills. Cooperatives, depending on the circumstances, could compete with and duplicate established utilities in urban areas.

7. Under present law, there is one loan program with 2 percent interest and a maximum of 40 years for repayment. The bills authorize three: the present loan program, which is generally unchanged; intermediate loans which would carry an interest rate of a maximum of 3 percent under S. 3337 and S. 3720 and 4 percent under the Administration bills; and other loans, which would be at rates reflecting the cost of money to the bank. The latter two types of loans could be made for 50 years rather than a maximum of 40 as at present. In the utility field 50 years could well be in excess of the useful life of the property financed under a loan.

8. Presently, the REA subsidizes loans to the amount of more than 2 percent, considering the cost of Government money. This subsidy would be continued under the bills, but in addition the interest-free Government subscription to the bank would be a large additional subsidy for an indefinite period.

9. During the last few years, Congressional appropriation committees have attempted by questioning of Government witnesses and by language in their reports to prevent duplication of electrical facilities and to forestall the construction of G. & T. facilities where a supply of electricity is available from an existing supplier through a reasonable contract. In S. 3337 and the Administration bill, there are no provisions to guard against the construction of duplicating facilities and no provisions to require that attempts be made to secure a reasonable contract. In S. 3720, such matters have been considered, but the safeguards provided are inadequate.

10. Presently, Congress has continuing control of the annual loan authorizations. Under the bills, it would have no control over loans by the bank once the bank was established.

11. Under present law, the Administrator is compelled to operate within the limits of loan authorizations approved annually by the Congress. Under the bills, there is no statutory limit on the amount of funds the bank could lend in any one year.

12. Presently, the REA program, except for the subsidy, must remain in the black. However, under the proposed bills, the bank could borrow from the United States Treasury without limitation in order to cover deficits. There are no comparable provisions in the case of other similar type federally sponsored agriculture banks, such as the banks for cooperatives, intermediate credit banks, or federal land banks.

13. Under present law, acquisitions of cooperatives are subject to the basic limitations of the REA Act. Under S. 3337, there is no restriction on acquisitions for which loans can be made. Under the Administration bill, the only limitation is that the cumulative size of the system to be acquired must not be greater than the borrower's existing system at the time it receives its first loan from the bank. There is nothing in the bill to prevent cooperatives from merging to form super cooperatives before obtaining a first bank loan. Under S. 3720, acquisitions in non-rural areas by borrowers are restricted to those which would not cause the cumulative number of connections in the non-rural area to exceed 5,000. As 2 or 3 connections might presently serve a whole town, this is really no valid or meaningful limitation.

14. Presently, the REA Administrator draws up his next year's loan authorization, defends it before the Congressional appropriation committees, and administers the loan program authorized. Under the bills he would have the same duties with reference to the present 2 percent loan program, but in addition he would be governor of the bank. Should the Congress question the type of loans he was making under the 2 percent program, he could simply put on his other hat, approve the loans at the higher "intermediate" rate, and thus circumvent the will of Congress as to the type of loans to be made.

The effect of a bank bill on the electric utility industry, and my company, can be understood in the light of the aforementioned upward trend in G. & T. loans and the unrestricted augmentation of lending proposed by the bank bill. On one side, you would have the numerous REA competitors fully established, generally unregulated. virtually untaxed, having to pay only 2 percent to 3 percent interest under S. 3337 and S. 3720, and 2 percent to 4 percent under

the Administration bill, for an unlimited amount of money, able to combine, and able to absorb other utilities systems. On the other side would be the investor-owned electric utility companies, heavily regulated and taxed and having to pay over 6 percent for the use of money. Add to this situation the fact that the Department of the Interior over the past five years has been seeking to increase its authority in the electric power field and to establish itself in cooperation with the REA as a federal system acting in competition with the individual electric companies of the utility industry. In the end, a setup such as this could obviously have only one outcome-the eventual nationalization of America's largest industry, which pays annual taxes in excess of $2.9 billion. The ultimate effect would be much the same in the entire United States as the TVA Act has had in Tennessee.

Although, as I have said, our company has a good relationship with the cooperatives (and municipalities having their own distribution systems) in Georgia, we could no more hold out against this flood of money and centralized federal authority than could the rest of the industry.

Not to be overlooked, in this regard, is the effect on customers of the investorowned companies. They greatly outnumber the so-called preference customers and hence for thirty years have been paying through their taxes the bulk of the out-of-pocket costs to the Government of the REA and other federal power programs. For instance, in Georgia, as hereinbefore mentioned, the preference consumers constitute 36 percent of the State's electric consumers, whereas the company's customers are 64 percent. More public power means higher taxes to our 846,000 customers. Also, the effect on these customers' rates should be considered. Georgia Power Company rates for residential customers decreased in 1965 to an average price of 1.7 cents per kilowatt-hour, which is approximately 24 percent below the national average. This was the tenth general rate reduction made by the company since its organization in 1927. Rates for commercial and industrial customers are correspondingly low. Any large increase of competition by federal power systems, and duplication of electric systems in Georgia, would be bound to increase rather than reduce costs of electricity not only to the preference customers of the Government but to our customers served directly. The same no doubt would be true country-wide.

Because of the aforementioned considerations it is evident to me that these bills are not vehicles to enhance rural electrification. They are, rather, a means by which those wanting a nation-wide public power system may achieve this end. I therefore urge, as strongly as I can do so, that you reject these bank bills. There is nothing that you can do to doctor them up so that they will not cause the greatest of harm to the investor-owned companies. Inserting restrictions as to what type of loans could be made will be no safeguard because an electric bank would be run by exactly the same people who time after time have disregarded the provisions of the present law in such flagrant ways as to cause the Congressional appropriations committees to repeatedly question the loans made and to insist on safeguards, which are themselves disregarded. The appropriation process is the only possible way to control the situation.

In place of modifying the REA Act of 1936 to create an electric bank, my recommendation is that you modify the Act to continue 2 percent loans for only those cooperatives that are determined by individual administrative findings to be unable to pay more and to provide that other cooperatives shall receive such loans as they require at the current cost of borrowing by the Government, plus the cost of overhead for administering their loan programs.

Defeat of the bank provisions and following a course such as I have indicated could do the cooperatives no harm. It would only mean that they would continue to receive the funds actually needed through the time honored method of annual Congressional appropriations and with proper and much needed Congressional supervision and control.

The Georgia Power Company earnestly requests that you adopt such a course.

STATEMENT OF GEORGE W. HATHWAY, PRESIDENT, CENTRAL ILLINOIS LIGHT CO., PEORIA, ILL.

Mr. Chairman and Members of the Committee, my name is George W. Hathway. I reside in Peoria, Illinois where I serve as President and Chairman of the Board of Central Illinois Light Company. This company is an investorowned utility rendering electric service to 103 communities in Central Illinois,

including Peoria, Springfield, Pekin and Lacon. Natural gas service is sold in 59 communities generally located in this same area.

The purpose of my statement is to express my concern over the damaging impact which proposals for a Federal Electric Bank presently under consideration by this committee could have on the investor-owned segment of the electric industry.

First, it should be made clear that as a member of the investor-owned utility industry, we do not stand in opposition to the rural electrification program. Quite the contrary. We recognize the contribution this movement has made in bringing electricity to people not receiving central station service. I believe the cooperatives have served a useful purpose in retailing electricity to farm areas since enactment of the Rural Electrification Act of 1936.

I do object, however, to any legislation which would free a Federal Electric Bank and its potential borrowers from congressional controls and provide the Bank with far reaching lending authority for generation and transmission facilities.

To the best of my knowledge, proponents of the Bank have not shown any basic need for the new program other than the assertion that more money will be required for REA in the years to come. This Committee is aware, I am sure, of the $375,000,000 appropriated to REA for the fiscal year 1967 by the Congress. Since it has been reported that requirements for extending and strengthening distribution systems of REA borrowers have leveled off at approximately $150,000,000 per year and appropriations are provided well in excess of this figure, it seems apparent this legislation is designed to secure more funds for generation and transmission facilities, the need for which has already been questioned.

The $750,000,000 which would become available to the Bank under this bill is, as you know, in addition to the sum of $375,000,000 two percent money made available to the REA and there is nothing in this bill which would reduce or eventually wipe out this annual appropriation. Thus, in reality, REA borrowers will be getting an additional source of funds at the tax-payers expense rather than cutting down.

Section 403 (g) permits the Bank to finance up to five percent of the nation's electric generating capacity at any given time in the future. This is approximately a 400% increase in present generation and once the ownership of the Bank is converted to the borrowers the limit would not apply.

Section 405 (j) attempts to place a limitation on generation loans by requiring an advertisement for bids prior to approval of an initial loan for construction of generating facilities that displace existing wholesale power arrangements. Since most of the recent G&T loans have not been initial, this in reality is no limitation whatsoever.

The applicant in advertising for bids would specify the delivery points and terms of the contract which could be made so difficult that it would be impossible for any existing supplier to met them. Furthermore, in comparing purchased power with the cost of self-generation no allowance would be required to include the cost of capital and taxes in bids.

Section 408 (a) permits loans to be made for the acquisition of existing facilities with a limitation of 5,000 connections. This would mean that any single cooperative could acquire facilities of a town 15,000-20,000 population. Furthermore, it would only take a few connections to take over a municipality that was receiving wholesale power from a company. Lacking from this entire bill is the existing 1500 population in central station limitations and no reason has been given to to why they should depart from these.

Under the provision of Section 410 (b) there is no limitation of acquisition after retirement of the Government's Bank stock.

Recognizing the aforementioned points have been reviewed with this Committee by other witnesses, I shall not take any further time to elaborate on them. My greatest concern is for the lack of meaningful congressional control over the Bank's operations. This, coupled with the apparent expansion of generating plants and transmission lines for REA cooperatives with growing government subsidies has obvious consequences.

I conclude:

Reliable and economical electric energy can be obtained by the REA cooperatives from investor-owned companies participating in large inter-connected systems. The government benefits here by receiving full tax revenues from the companies. The REA customer benefits because, generally speaking, the average

price paid by cooperatives to the investor-owned companies is less than the price paid to G&T's.

The need for government subsidies in support of such a Bank is highly questionable.

The needs of the rural electric cooperatives should be the subject of a thorough study and analysis before any action is taken.

Enactment of this proposed legislation will not serve the best interests of the people, more specifically of the garm population in Illinois and the nation.

STATEMENT OF JACK K. HORTON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SOUTHERN CALIFORNIA EDISON CO., LOS ANGELES, CALIF.

Mr. Chairman and Members, my name is Jack K. Horton, President, Southern California Edison Company, Los Angeles.

Other investor-owned electric industry witnesses have analyzed the major defects of the proposed REA supplementary financing legislation, including S3337, S3720, and similar bills.

I wish to emphasize several major points which have been made.

REA was established 30 years ago to furnish electricity to persons in rural areas. $.7 billion of U.S. Taxpayer funds have been loaned at 2% when the cost today to the U.S. is approximately 4%. During the last three years, about $365 million annually has been authorized. Ninety-nine per cent of our farms in the U.S. now have electric service. Nine out of ten new customers of the REA's are non-farm customers. The original purpose of REA now has been achieved.

The primary purpose of REA loans was to provide distribution facilities to serve farms and rural areas. Today the emphasis is on generation and transmission facilities to serve loads which any local power supplier is willing and able to supply at competitive costs which are completely regulated by state or federal regulatory agencies. The Rural Electrification Administration's current quarterly report on pending loan applications indicates that 69% is for generation and transmission purposes. Ample electric power is and has been available from existing sources. Why should the Federal Government, at a tremendous cost to the American taxpayer, supply funds to expand in areas already served by investor-owned or local public agencies?

The proposed Electric Bank is a complete end-run around the traditional Congressional controls that arise out of annual appropriation review and authorization. These electric bank bills would not only cost federal taxpayers hundreds of millions of dollars, but would reduce income to local taxing entities, including cities and schools, and would reduce income tax payments to federal and state governments.

There have been many abuses by REA's the Colorado-Ute and other generation and transmission loans where the local power companies were willing and able to serve at the same or less cost than those charges proposed by the cooperatives. This Committee knows about ski resorts, lumber mills, gravel operations and knitting mill abuses. If this legislation passes, there will be no controls over further abuses.

This legislation would put the Federal Government further into competition with taxpaying investor-owned utilities. The legislation is designed to escape Congressional controls and annual review of appropriation requests. It would open REA operations in suburban and urban areas. It does not deal with the problem of 2% subsidized loans. It would commit the Federal Government to provide up to $1 billion with no repayment date, no Congressional control, no guidelines, no requirement of need, or any review of power availability from local sources.

We submit this Committee should require an independent auditing body to prepare a detailed accounting of the financial capability of each of the 1,000 REA electric borrowers to see if there is any need for this legislation.

In 1965, of each revenue dollar received by investor-owned electric companies, 22.5 cents was paid in taxes. If REA's paid taxes on the same basis as investorowned companies, it is estimated they would have paid about $195 million in federal, state and local taxes in 1964. Why should the Federal Government subsidize these entities at the expense of the American taxpayer when these entities are trying to serve the same kind of customers or perform the same kind of proprietary functions which local regulated taxpaying utilities serve and perform.