Mr. Clapp has commented on S. 3720 in letters to Chairman Talmadge dated August 19 and August 23. We concur in and adopt Mr. Clapp's views.

We emphasize that no need has been shown for the lending authority requested, that it would be the means of seriously eroding local, state and federal tax revenues and that it would be irreparably destructive to the taxpaying electric utility industry.

STATEMENT OF JOHN H. MCLEAN, ASSISTANT VICE PRESIDENT, WISCONSIN MICHIGAN POWER Co., APPLETON, WIS.

My name is John McLean. I am assistant vice president of Wisconsin Michigan Power Company with offices in Appleton, Wisconsin. I have worked for this company for thirteen years. My present responsibilities include all aspects of sales, including sales of electricity throughout our extensive rural areas.

As I drive through our service area and that of our neighboring cooperative associations, I see no particular differences between them. The people, the type of homes, the filling stations, and restaurants all seem much the same. But there are differences. Those people who receive service directly from us pay in their bill for electricity their fair share of the cost of federal government, for the war in Viet Nam, for the war on poverty, for aid to education, and for the space program. Their neighbors who get electricity from the same generators and the same transmission lines do not have equal tax costs included in their monthly electric bill. Our customers pay about five times as much in taxes on their electric bill as their neighbors in the coops.

Furthermore, our neighboring cooperatives are privileged to buy poles and wire with money borrowed from the federal government at two per cent, while our customers must be charged rates that reflect interest on money borrowed in the open market.

I doubt that most of the individual people served by these cooperatives are seeking a tax advantage over their neighbors. The legislation being considered by your committee would greatly magnify the present discrimination between those people served by us and the people served by the tax-exempt coops.

You are being tempted to open an electric Pandora's box. From these bills can spring an entirely new form of electric utility organization-giant G & Ts-a new special privileged class of citizenship—a new attack on private industry. Indeed, the proposed electric bank many be an incentive to extend the areas served by cooperatives and spark territorial conflicts where there is now harmony.

You have been told that the original purpose of the R.E.A. was to bring electricity at reasonable rates to America's farmers who did not then have central station service. You have been told that this job has been virtually completed by rural cooperatives and by companies such as mine. Advocates of the bills you are considering claim they will lessen the dependency of the cooperatives on federal subsidies. But even now, after thirty years of financing subsidies and tax exemptions, the cooperatives insist that two per cent financing is still necessary because some cooperatives claim to need this money to carry out their programs. You know there will always be somebody who claims to need such subsidies. You are asked to further supplement these loans by asking the taxpayers to provide a kitty of 750 million to a billion dollars. Rather than weaning themselves, the coops want a fresh cow-still keeping a firm hold on the present two per cent financing. Dependency on the federal treasury is increased; not decreased. Ironically, companies such as mine will be asked to help collect part of this billion dollars from our customers.

We at Wisconsin Michigan Power Company are not afraid of bogy men in the dark. On March 25, 1966, the R.E.A. administrator, Norman M. Clapp, explained the proposed federal electric bank to representatives of the Wisconsin Electric Cooperative meeting in Milwaukee. Among its purposes, he said, was a "*** greater freedom to consummate acquisitions ***". Stripped of its deceptive phrasing, this means freedom to take over companies such as mine. This is the publicly avowed purpose of the administrator who would be the governor of the electric bank. He also asked for a "*** greater freedom of electric generation and transmission systems to pool needs with non-rural sys**" Since non-rural tems in exploiting the economy of large-scale capacity * areas are those in villages and cities and since all of our villages and cities in Wisconsin and Michigan already have electric service, we must consider these bills a threat of encroachment or even complete take over of present investorowned electric systems. The bills would enable cooperatives to build and put

their name on large generating plants and transmission systems whether they are needed or not. Then, to utilize these large inxestments efficiently, they would have to market the electricity in non-rural areas already served by investorowned companies. The bills you are considering have no effective control over such take over-but, rather, would encourage it. Nor would the proposed bills prevent generating plants and transmission lines that duplicate facilities of companies such as ours. This duplication can only result in a higher true power cost to all ultimate consumers, regardless of whether they are served by us or by cooperative associations,

To adopt a program that can only be designed to establish an entirely new electric system with its own electric generation and transmission facilities is to create a privileged class of electric customers. It would serve no established social or economic need. It would not serve a single farmer now deprived of the advantages of electricity's convenience. It would. certainly, disrupt the electric industry's current efforts to plan for better service and lower rates in the years to come. The proposed legislation has the clear purpose of increasing subsidies to cooperatives and to escape congressional scrutiny.

These bills would be poor government at any time. At this time, the bills are a danger to our economy. Certainly, with our nation committing our manpower and economic resources to the war in Viet Nam, this is hardly the time for cooperatives to attack our treasury. With inflation sending the cost of living ever higher to the very great concern of American citizens, this is not the time to commit more millions for unneeded projects. This is the time for government to limit spending, not increase it.

STATEMENT OF A. D. MUELLER, EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, INDIANA STATEWIDE RURAL ELECTRIC COOPERATIVE, INDIANAPOLIS, IND.

Mr. Chairman and Gentlemen of the Subcommittee, my name is A. D. Mueller. I am Executive Vice President and General Manager of Indiana Statewide Rural Electric Cooperative, Inc., the association of electric cooperatives in The Hoosier State. Because our member-owned systems were organized under the provisions of the Indiana Rural Electric Membership Corporation act of 1935, they have become known by the initials REMC as a short form for rural electric cooperatives.

The purpose of my statement to this subcommittee of the Senate is to put into the record that Indiana's electric cooperatives are solidly in favor of legislation, such as the Cooper Bill, S. 3720, that will permit establishing a Federal Bank for Rural Electric Systems. Such a bank urgently is needed to assure adequate growth capital for our rural systems to meet the rapidly increasing demands for electricity from over 700,000 rural people now being served by their REMC facilities through 190,000 meters in 90 of our 92 counties.

Just as Indiana was among the first states to benefit from loans from the Rural Electrification Administration, permitting farm and rural families to put aside their kerosene lamps and become free of the awful drudgery that characterized Rural America before it had central station electricity, so Indiana's REMC leaders were in the vanguard of those who believed that some REA borrowers could pay higher interest rates for needed capital if a sound plan could be designed that would permit them to do so.

Our Indiana REMCS were unanimously in favor of having a study made by our National Rural Electric Cooperative Association, with assistance and consultation from Kuhn, Loeb & Company, as the first step toward developing a new fiancing plan. When this study was completed. Indiana's REMC leaders again were unanimous in supporting the recommendation that a new bank for men.ber-owned electric systems be established at the earliest practicable time. We have vigorously supported the concept of such a bank and we have adopted resolutions to put ourselves on record in favor of legislation that would make such a bank a reality. Copies of our resolutions have been sent to the Indiana delegation in Congress. We have discussed this proposed supplemental financing plan with our Senators and Representatives, informally at every opportunity, and at a special luncheon meeting with them here in Washington last May, when a full-scale presentation of our views was given them.

On several occasions we have prepared and presented testimony to committees of the Congress urging enactment of legislation that will permit creating a new Federal Bank for Rural Electric Systems. We now urge your subcommittee to act with all possible speed to report favorably on S. 3720 so that another

step will be taken toward providing supplemental financing that will enable our REMCS to meet the great demands of their members for more and more electric energy in rural Indiana.

Although I want to keep this statement as brief as possible, permit me to make one more point to emphasize the importance of early enactment of supplemental financing legislation.

Over the years those who have vigorously fought the Rural Electrification Administration loan program and even more vigorously opposed our memberowned electric systems, have loudly denounced the low interest rate charged for REA loans. Many systems will need to continue REA financing at 2 percent, but there are a number of systems in Indiana and throughout the country, not only able, but ready and willing to pay higher interest rates if they are permitted to borrow capital funds from a bank established specifically to meet their financial needs.

This legislation that would create such a bank also would provide for the eventual ownership and control of this financial institution by the electric systems themselves. Ultimately this will lead to their complete independence of REA and the U.S. Government in obtaining the great sums of money that will be absolutely necessary to the normal growth, efficiency and security of America's electric cooperative systems.

Indiana's REMC leaders strongly support such a proposal. They are close to the "grass roots" membership being served by their electric cooperatives. They know that the people out along the electric lines are willing for their REMCS to pay a higher interest rate if Congress only will permit them to do so through their own banking institution.

The supplemental financing legislation being considered by your subcommittee must be enacted into law to permit those who are able and willing to pay higher interest for essential capital, to do so. Such legislation will open the way for America's farm and rural families eventually to be independent of major assistance on financing through our Federal Government. This in itself would justify enactment without further delay.

It is sound legislation in every respect and deserves early approval. We sincerely hope that prompt action will be taken, by this subcommittee, and by the Congress, to enact such legislation into law.

STATEMENT OF DR. ROBERT T. PATTERSON, ECONOMIST, NATIONAL ASSOCIATED BUSINESSMEN

As Economist for National Associated Businessmen, Inc., I wish to make the following statement for the record of the Committee on Agriculture and Forestry regarding S. 3337 and S. 3720, bills to amend the Rural Electrification Act of 1936, as amended.

At the outset, I would like to acquaint you with our Association. It was organized in 1946 and has been in continuous operation since that time. Its principal purpose is to make every possible effort to get the Federal Government out of any kind of business operation that is in direct competition with American taxpaying companies or individuals. Our membership is composed of both corporate organizations and individuals, representing many different industries throughout the country.

The declared purposes of S. 3337 and S. 3720 are (1) to meet "the growing capital needs of the rural electric and telephone systems" by establishing Federal Banks that would be sources of supplementary financing for those systems, and (2) to make those Banks eventually "entirely privately owned, operated, and financed." We contend (1) that under any concept of the REA system that is consonant with established principles of free competitive enterprise, the assumption that there are "growing capital needs" of any great magnitude is not valid, and (2) that the bill, as it is presently written, would unnecessarily delay for a long period of time the expressly stated goal of private ownership and control.

The following statement is limited to the proposed Federal Bank for Rural Electric Systems, although a part of what is said would be equally applicable to the proposed Federal Bank for Rural Telephone Systems.

We question the need for large amounts of additional funds for financing REA growth and expansion. In fact, the original purpose of the REA has been practically fulfilled. More than 98 percent of the nation's farms now have central station electricity. The cooperatives that serve farms directly (often referred to

as distribution cooperatives) by retailing electric power to them now have for the most part, earnings and an internal flow of funds sufficient to support their With farm territory now so well served, the need for funds on the part of the distribution cooperatives is mostly for improvements and extensious 10 serve additional cusLOMLETS.

Thus, the supposition of “growing capital needs" of the rural electric systems is apparently predicated upon plans for a broad expansion in the generating and transmission field, which would to a large extent duplicate the already existing systems of power supply. It is in this area that a substantial increase in REA loans has occurred in recent years. Yet the generating and transmission cooperatives, which wholesale electric power to the distributing cooperatives, were not envisioned in the original REA concept, except where power was actually not avaliable.

In view of the fact that most farms now have electricity and that power is available to the rural electric cooperatives from the wholesale suppliers, both cooperative and noncooperative, the question arises as to whether or not the rural electric systems need the large amount of new capital that S. 3337 and $. 3720 assume. To a great extent the present generating and transmission cooperatives overlap or have displaced noncooperative electric power companies in the areas they serve. The supposed need for any further establishment of

such cooperatives is certainly not of a caliber with the great need that once existed for the distribution cooperatives that have brought electricity to millions of family farms and whose expansion now is due largely to the extension of services to persons, businesses, and institutions in non-rural areas and to nonfarm customers in rural areas.

It is vitally significant that to a large extent the generating and transmission cooperatives are in competition with noncooperative power companies. These latter, unlike their cooperative competitors, are fully subject to the income tax and other taxes and also must borrow to meet their capital needs at market rates of interest rather than at the greatly reduced rates provided to the cooperatives by the Federal Government. The competitive advantages of this tax exemption and cheap financing can be enormous for the cooperatives, especially the generating and transmission cooperatives. Moreover, such advantages can conceal uneconomic situations.

Most distribution cooperatives could pay the income tax and the market rate of interest for capital funds and continue to provide service to their customers at rates as favorable as those provided by similar noncooperative power companies, because presumably they are equally efficient in their operations. The obligations of cooperatives that are sufficiently efficient units to pay their way without any subsidization would be, of course, highly acceptable to conservative private investors. Most generating and transmission cooperatives, however, do not operate as efficiently as similar noncooperative suppliers of electric power. Power purchased by the distribution cooperatives from the noncooperative companies has declined in cost during the past five years from an average of 7.8 mills to 7.4 mills per kilowatt hour, but power produced by the generating and transmission cooperatives in 1965, cost the distribution cooperatives an average of 8.3 mills per kilowatt hour. Although this inability of the generating and transmission cooperatives to produce power as cheaply as the noncooperative companies may prevent such cooperatives from having access to the capital markets, this is no justification for their subsidization through tax exemption and low interest rates charged by the Treasury. Because wholesale power is generally available and can be supplied more cheaply by noncooperative companies, it seems fair to ask why any proposed legislation should be concerned with the supposed "growing capital needs" of the generating and transmission cooperatives, which despite tax exemption and a low-interest-rate borrowing privilege at the Treasury are higher cost producers. The paramount fact in all of this is that the interest of the consumer is at stake, whether he purchases electric power from a cooperative or a noncooperative company. It should be obvious that for the consumers sake, if for no other reason, the distribution cooperatives should obtain their power from those sources that offer them the best prices.

The concept that the REA nationwide power system must be financed through a special Bank that eventually will be "entirely privately owned, operated, and financed" overlooks alternative methods by which REA distribution systems and even generating and transmission facilities could be privately financed. S. 3337 and S. 3720 assume that supplemental capital must be made available

through the Government in such magnitude that it would be impossible for the Bank even to approach private ownership for some fifteen years. In effect, it contemplates private ownership only as a desired objective and merely lays down some guidelines that would be helpful in evolving a plan in 1981. As the bill is drawn, it is even questionable whether the Bank would make any progress during the intervening fifteen years in the desired direction, for nothing in the bill actually requires REA borrowers to pay the market rate of interest for private investment funds. Two percent Government money would still be available from the Rural Electrification Administration. At the same time a ceiling rate of three or four percent would be placed on what are termed intermediate loans to be made by the Bank. The Bank would also have authority to make additional loans at the full cost of money in the open market plus a small charge for administrative costs. However, there are no requirements for determining which type of cooperative would receive loans at which rate.

One alternative to the establishment of a Bank (which might seem extreme from some points of view but which would serve the public interest most fully when all the ramifications of the problem are taken into consideration) would be to encourage the sale of rural electric cooperatives to the noncooperative power companies, which have access to capital markets and bear their fair share of the tax burden. Such integration would be to the advantage of the present patronowners of the cooperatives because of the resulting economies of scale and because of public utility commissions' supervision of services and establishment of suitable rates. Such integration would also help to resolve the problems of those electric cooperatives that are not at present operating as efficient units. The biggest objection that has been raised with regard to the REA cooperatives for many years, namely, the great burden placed on all taxpayers because of the cooperatives' special tax exemption and their use of Government funds at a high interest cost differential to the Government, would be removed. This, we contend, would serve the public interest better and more fully than any alternative way of bringing about the private ownership and control of the REA system.

It is important to note in this connection a long-range transitional development that has apparently been overlooked by practically everyone on both sides of the controversy between the cooperative and the noncooperative electric power interests. What once had been a quite clear distinction between rural and urban areas, which seemed to give justification to a dual system of electric power supply, is rapidly disappearing. For example, for REA purposes the original definition of a rural area included towns of 1500 or less population. In today's vast spread of suburban areas this definition has lost much of its usefulness, as the many controversies on "territorial integrity" attest. This development is also reflected in the fact that the present extension of distribution lines adds three or more new non-rural customers to REA systems for each new farm customer. The rural-urban distinction, for whatever it was once worth, is no longer very realistic, and within a decade or two it may have no significance whatever. Nevertheless, the present proposal of a Federal Bank for Rural Electric Systems assumes the continuing need for the two distinct kinds of power system-one for rural areas and one for urban areas. The necessity for this can be challenged on the grounds that investor-owned power suppliers primarily operating in urban areas now serve about 40 percent of all farm customers, and the REA cooperatives operating primarily in rural areas are increasingly serving a proportionately greater number of non-farm customers.

Another alternative that would provide for private financing of existing REA systems would be one that follows closely recent legislation that authorizes the pooling of obligations held by Government agencies and the subsequent sale of debentures to the investing public. This type of financing could largely eliminate the Government's investment in cooperatives quickly and at a moderate cost. It would not, however, eliminate the present subsidy represented by the difference between the 2% interest charged the cooperatives and the interest paid on the participation debentures. Under this method, legislation would probably be sought so that 2% money would continue to be provided to those cooperatives that are unable to operate at a profit, but such legislation should also provide that future loans to cooperatives for replacement and expansion of existing facilities would be made at the current interest cost of the participation certificates plus a small charge for administration.

If, instead of these alternatives, it is decided that a Bank must be established to provide the capital estimated to be needed by the REA electric systems over the