Job of electrifying farms nearly complete Today the job of electrifying rural America is almost complete. More than 98% of the farms in the United States have electric service available.* In Montana, nearly 96% of the rural customers are being served and 44% of such customers in our service area are being supplied directly by The Montana Power Company. In addition, as I previously have noted, we have been the major supplier of electric power to most of the co-operatives in our service area. Because rural America now has such complete saturation of service by the co-operatives and the investor-owned utilities, the future function of the REA program should be one of providing these co-operatives with adequate funds to maintain their systems and provide for normal load growth in the areas they serve within the purview of the original intent of the REA Act. Proposed legislation creates entirely new concept Instead, the legislation before this Committee proposes to create an entirely new public power program, a program that will create a war between the public and private sectors of the electric utility industry, a program that will enormously reduce Federal and state tax revenues and a program that will be an enormous burden on the Federal treasury. The proposed Federal Electric Bank for Co-operatives, with its subsidized operations and unrealistic interest rates, could provide funds for rural electric co-operatives at interest rates below the cost of money to the Government itself, thus enabling the co-operatives to build generation and transmission facilities that would duplicate and eventually supplant generating plants and transmission lines which the investor-owned utilities would otherwise build. This would result in a very important loss of tax revenues to state and local governments and school districts. It never was contemplated in the REA Act that subsidized rural electric cooperatives would take substantial amounts of business from investor-owned utilities on the sole basis of being able to hold out the offer of lower electric rates because of the tax and interest subsidies which the co-operatives enjoy. Not only was this never contemplated but, as a matter of sound fiscal policy, it never should be allowed. The intent of the REA Act was well enunciated by one of the authors of the original Act, the Honorable Sam Rayburn, who said: "We are not in this bill intending to go out and compete with anybody. By this bill, we hope to bring electricity to people who do not now have it. This bill was not written on the theory that we are going to punish anybody or parallel their lines or enter into competition with them." 5 The proposal for a Federal Electric Bank for Cooperatives, now before this Committee, not only runs counter to the principle stated by Mr. Rayburn, but it negates the stated philosophy of the National Rural Electric Co-operative Association, as set forth in newspaper and magazine advertisements. In the May 17, 1966, issue of Look Magazine, an advertisement, sponsored by the National Rural Electric Co-operative Association, stated: "But rural electrics have never wanted to be giants. They were organized in the first place-not for profit, not to replace existing electric companies-but to serve their member-owners with adequate, efficient, economical electric service. "Yes, rural electrics are small in an era of bigness. But bigness is not the same as greatness. In their own way, rural electrics try to achieve a special kind of greatness *** the kind that comes from providing a necessary service, and providing it continuously, economically, and dependably-but with very little fanfare. "Rural electrics will probably never serve a much larger percentage of the American people than they do today, but that's all right. With the help of Rural Electrification Administration loans, rural people created the rural electrics to serve themselves and their neighbors, and this is what they will continue to do. "They like it that way." Legislation does not follow intent of REA Act The legislation before this Committee departs completely from the intent and purpose of the REA program and the philosophy expressed in the NRECA advertisement to which I have just referred. Supplement to REA Quarterly Statistical Bulletin #288. December, 1965. 5 Congressional Record, 74th Congress, 2nd Session, April 9, 1936, p. 5283. 70-671-66- -36 A Federal Electric Bank would embark the rural electric co-operatives on an uncontrolled and unregulated program of expansion without regard to demonstrated need and without regard to the duplication of existing facilities, all contrary to the provisions of the REA Act. The present provisions of the Act, as you know, limit loans to the furnishing of electricity in rural areas which do not otherwise have central station service and prohibit service in any city, town, village or borough having a population of more than 1,500 persons. These limitations represent sound policy and should be maintained as the criteria for rural electric cooperatives' activity as subsidized electric suppliers. If these criteria are maintained and if co-operatives have available wholesale power in adequate supply to meet their needs from existing electric suppliers, there is absolutely no need for this legislation. REA loan history demonstrates Federal bank not needed I attach herewith, as Chart No. I, a study of the loans made by REA during the last 30 years. This chart shows that REA to date has loaned approximately $3.8 billions for distribution facilities and more than $1.8 billions for generating and transmission facilities but that distribution loans are steadily becoming smaller each year while G & T loans are increasing. In 1965, for example, distribution loans amounted to only 39.6% of the total loans made by REA while G & T loans had climbed to 60.3% of the total. This chart points to a serious problem from the standpoint of tax revenues. In light of the enormous tax loss which results for Federal, state and local governments when generating plants and transmission lines are built by co-operatives, thereby preventing investor-owned utilities from making these investments, there should be no REA G & T loans except in rare cases where the rural electric co-operatives could not otherwise obtain a source of power at reasonable rates and under reasonable conditions. The chart also demonstrates that, if REA loans were made only on the basis of the original intent of the Act and criteria established by Congress, an annual loan authorization of between 150 and 200 million dollars would be completely adequate to meet the present and future needs of the rural electric co-operatives. Enormous loan potential of Federal bank not necessary The National Rural Electric Co-operative Association has made repeated statements that the rural electric co-operatives of the Nation will need $9.5 billions for new plant and facilities by 1980.6 NRECA has never, to my knowledge, presented a justification of this figure, and there is no way of knowing the basis on which this estimate was made. The real reason for a Federal electric bank When we recognize that 98% of the Nation's farms now are receiving electric service, we must ask the question: Why do we need a greatly expanded REA program that contemplates spending as much money as is involved in this proposed program? I believe the answer is obvious. The rural electric co-operatives which developed this program and now support it are dissatisfied with the limitations placed on them by the REA Act, and they are concerned about the growing criticism in Congress to their activities which are beyond the original intent and the legal restrictions of the Act. They want to use their tax and interest subsidies to compete with the investorowned utilities for urban and suburban markets, to take over commercial and industrial customers now being supplied by the investor-owned utilities and to build generation and transmission facilities which they cannot build at the present time because of restrictions in the REA Act and the exercise of control by the Congress. They want to embark on an uncontrolled program of direct, subsidized competition against the investor-owned utilities. This is not a function of the REA program, and it should not be made a function by this legislation. Detrimental effect on tax revenues, taxpayers I call your attention to Chart No. II, which is attached to my statement and which compares The Montana Power Company with all Montana co-operatives for the year 1964, the last year for which information is available on the cooperatives. "Supplemental Financing Program for Rural Electrification," National Rural Electric Cooperative Association, January, 1966, et al. This chart shows that more than 10 times as much of Montana Power's revenues go into taxes for the support of government at all levels than do the revenues of the co-operatives. You will note that Montana Power's 1964 taxes amounted to more than $83 per customer, compared with $6.37 per customer paid by the co-operative. Unlimited expansion of the REA program, as this legislation would provide, would: 1st-Result in the construction of enormous amounts of property on which no Federal taxes would be paid and on which state and local taxes would be far less than would be paid by the investor-owned utilities on identical property; 2nd-Prevent the investor-owned utilities from building similar generation and transmission facilities, thus reducing the tax base and reducing the tax revenues that would otherwise be channeled into state and local governments and school districts, and 3rd-Increase the burden of supporting government services on the individual taxpayers of the Nation. Loss to Federal Government by reason of interest-free use of Federal funds The interest-free subsidy of $750,000,000, which the Federal Government puts into Class A stock, represents a direct loss to the Federal Government, assuming payback in 35 years after 1981 of $3,466,704,800. The derivation of that sum is shown on Chart No. III, attached. Electric company consumers adversely affected The proposed Federal Electric Bank also would adversely affect the customers of the investor-owned utilities. The construction of larger and more economical generating stations and larger transmission lines and interconnections has enabled the investor-owned utilities to lower their operating costs and pass these benefits along to their customers in the form of the lowest possible rates. The duplication of facilities and the invasion of residential, commercial and industrial markets now being served by these utilities will result in higher operating costs and will greatly hamper the investor-owned utilities in their efforts to maintain low rates for their customers. If this legislation is passed, you can quickly see that it will have a devastating effect on government tax revenue sources, on individual taxpayers and on the consumers of the investor-owned utilities. Resources of existing suppliers should be used to maximum Wherever possible, the supply of wholesale electricity for the rural electric co-operatives should come from existing suppliers. The investor-owned utilities, as one group of those suppliers, have consistently demonstrated their ability to supply power at wholesale at lower rates than the co-operatives could achieve by self-generation or purchases from REA-financed suppliers. REA funds and Federally-supported and guaranteed funds in the form of Federal Electric Bank debentures should not be used to build generation and transmission facilities unless an adequate supply of wholesale power is not available to the cooperatives from existing suppliers at reasonable rates. Since the Federal Power Commission takes the position that it has jurisdiction over practically all wholesale contracts, it appears unlikely that rural electric co-operatives cannot obtain an FPC determination as to the reasonableness of their wholesale rates. In this way, the rural electric co-operatives can amply serve their intended function without loss of urgently-needed tax revenues to Federal, state and local governments. This legislation does not follow the recommendations of Kuhn, Loeb Report I believe it is important to realize that the proposed Federal Electric Bank is drastically different than the recommendations of the Kuhn, Loeb & Co. Report. That report recommended loans by the Bank to rural electric co-operatives at the full rate of interest carried by the debentures issued by the Bank, plus 2 of 1% to cover expenses of the Bank. The total capitalization and borrowing power of the Bank under the Kuhn-Loeb Report was one billion dollars, as compared to seventeen billion dollars under S. 3337 and some eight billion dollars under S. 3720. The report further required substitution of borrowers' stock for Government stock from the beginning of operation under the Bank. These are vast differences from the provsions of either S. 3337 or S. 3720. It should be further noted that both of these bills put an obligation upon income which has not been considered by Mr. Norman Clapp in his testimony on how the Bank will operate in the black. It is obvious that if Class C and D stock is to be sold. it must offer some inducement to the investor of a return on the investment. The payment of that return is left to the discretion of the Bank Board under S. 3337, without limitation as to amount. Under S. 3720, such dividends must come out of income and cannot exceed the current average rate payable on electric debentures. Paying dividends on C and D stock comparable to the cost of money on debentures and reloaning that money at 3% or 4% interest only serves to eat further into the possibility of operating in the black. Yet, by issuing Class C and D stock, the Bank increases its capitalization and borrowing power without any practical limitation. Conclusion. I am convinced that the record will demonstrate that the rural electric cooperatives of America have, under terms of the REA Act, an adequate source of funds to fulfill their intended and legal function of supplying rural America with electricity. The record also will demonstrate that generation and transmission facilities can and are being provided by existing suppliers at costs as low or lower than the co-operatives could achieve if they were to provide their own facilities. The record also will show that the job of electrifying rural America is nearly complete and that there is no sound fiscal basis for the enormous expansion program which would be made possible by the proposed Federal Electric Bank. I respectfully submit to this Committee and to the Congress the following points: 1. The rural electric program should be kept within its original intent, as provided in the present REA Act. 2. The rural electric co-operatives should not be allowed to embark on a program of uncontrolled, subsidized competition with investor-owned, taxpaying utilities solely on the basis of their being able to offer lower rates because of the tax and interest subsidies they enjoy. 3. The rural electric co-operatives should nto be granted the use of Federal Government credit without control by Congress, as this legislation proposes, in order to carry out a program of expansion never intended by the REA Act. 4. The rural electric co-operatives should not be given carte blanche to build at will generation, transmission and distribution facilities which duplicate existing facilities, thus reducing the revenues of the investor-owned utilities and increasing the burden on the customers of these utilities, and which prevent the construction of such facilities by the utility companies under conditions that will produce maximum tax revenues to all levels of government. 5. If the rural electric co-operatives will limit their function to that of supplying rural areas not otherwise receiving central station service, and meeting the normal load growth of those customers, there is no need for the enormous sums of money which they seek in the legislation before this Committee, and their total requirements can be met through the legislative process with appropriate Congressional supervision and control. |