If the Congress decides that portions of the REA program be removed from public subsidy, consideration should be given to transition to complete nonfederal financing. Municipal corporations currently finance their utility programs through revenue bonds or other senior debt, plus retained earnings and cash made available by depreciation. Investor-owned utilities acquire their capital through internally generatel cash, sale of equity, and sale of debt. When an REA-financed cooperative achieves financial maturity, it should also use conventional financing methods.

Criteria could be established which would dictate when the cooperative should convert from REA financing. Criteria such as revenue per line mile, customers per mile of line, or population density would be accurate indicators.

This same method could be applied to determine when a cooperative should pay interest to the federal government at a rate higher than 2%, but below the cost associated with the non-federal money market.

PGE suggests that the committee consider appointment of a select committee, outside the electric industry, to determine the financial requirements of the cooperatives, and to establish criteria to be used to establish interest rates. Three separate kinds of financing seem reasonable:

(1) Federal loans at 2%.

(2) Federal loans at the current cost of federal debt having a maturity of 15 years or more.

(3) Acquisition of funds from the private money market.

The budgetary requirements of the United States are such that additional unwarranted subsidies are not in the public interest. In certain cases, federal expenditures for rural electrification are in the public interest, and in these cases, such public assistance should continue. It is unnecessary and undesirable, however, for such assistance to continue where the purpose is clearly expansion and competition rather than rural electrification.

Portland General Electric Company appreciates the opportunity to submit its views to the Committee.

STATEMENT OF JOSEPH F. SINNOTT, PRESIDENT, SAN DIEGO GAS & ELECTRIC COMPANY, SAN DIEGO, CALIF.

San Diego Gas & Electric Company opposes the enactment of S. 3337 to establish a Federal Electric Bank for the reasons that it is in derogation of the defense effort; it is against the public interest; it will deprive the Congress of its announced intention to maintain a strict surveillance over loans made under the Rural Electrification Act; and this legislation would foster unfair competition.

The following remarks are addressed to the creation and establishment of a Federal Electric Bank:

1. In derogation of the defense effort

"Your Government is determined to resist this aggression at the minimum cost to our own people, to our allies, and to the world.

"We shall stand with honor. We shall stand with courage. We shall stand with patience, and that is the stand Congress has taken and that is the stand we shall continue to take. It is the stand that the vast majority of Americans demand. It is the stand that free people of the world respect.”

Such is President Lyndon B. Johnson's commitment on Vietnam to the peoples of the world. It is of paramount importance. The diversion of any funds to implement legislation of the nature proposed by S. 3337 would seriously hamper the defense program. The foregoing commitment is of overriding importance to the considerations of the subject now before this honorable Committee. In speaking about this bill, Senator Jack Miller, of Iowa. stated in part: "*** if we are to avoid further inflation, any new Federal financial commitments must conform to the requirements of a reasonably balanced budget, taking into account demands placed upon our Government by the war in Vietnam." The proposed bank would be started with a nest egg of $1 billion in government funds. Through its borrowing power, this could be extended to $11 billion without limitation as to source.

Tax-exempt electric operations will be increased, replacing or displacing taxpaying systems and thereby proportionally reducing Federal revenues. This severe impact on the economy by needlessly draining revenues would have a tremendously adverse effect on the defense budget and the consequeent defense effort.

The present 2% REA loan program will be continued with no ceiling on Congressional loan authorizations. It is reported that in 1964, $245,965,000, and in 1965, $299,790,000 of new loan funds were used by the REA for this program. Borrowers have proposed that $365 million annually should be additionally provided for the continuance of the present program.

President Johnson's pledge, quoted at the outset of this statement, not only announces his determination to resist the aggression. He promises that it will be "* ** at the minimum cost to our people

It is difficult to reconcile a pledge by the President of economy in the defense effort with a wasteful expenditure of more than $11 billion on the domestic front. We can only arrive at the conclusion that the diversion of these billions of dollars to finance this legislation would nullify the economy program and would be in derogation of the defense pledge by President Johnson.

2. Against the public interest

The nest egg of authorized government capital would be available to the REA cooperatives at interest rates of 3% or less for building generating plants and transmission lines, and for other purposes.

The additional $10 billion of Federal funds may be obtained by the Federal Electric Bank if necessary to pay interest or principal on its unsecured electric loans. These additional funds could be obtained by making and issuing notes to the Secretary of the Treasury at an interest rate not to exceed 3%. This rate is lower than what it costs the Treasury to borrow.

At the same time, in issuing and selling debentures on the open market, the Federal Electric Bank would be authorized to borrow up to $10 billion.

By providing capital at bargain interest rates, the proposed bank would increase and federally subsidize competition between REA cooperatives that pay no federal income tax and private utilities whose annual income tax bill is some $2.9 billion.

Recently, inquiry was made by the White House for an estimate of the amount by which investor-owned utilities could reduce their budgets for 1966.

In his reply, Mr. Robert T. Person, then President of Edison Electric Institute, pointed out that utilities, because of long range advance planning, are committed to capital expenditures several years in advance. The response did state that the utilities, in cooperation with the President's efforts to alleviate inflationary pressures, could cut an estimated $200 to $225 million in such expenditures without materially impairing the requirements of the customers.

It is impossible to reconcile the inconsistency of the two positions.

On the one hand, the Chief Executive is requesting curtailment to keep down inflation. On the other, this legislation would issue a blank check to accelerate inflation.

3. Congress would be deprived of control

We understand that on February 9, 1966, at a hearing of the Agricultural Subcommittee of the House Appropriations Committee relating to the budget for the REA, the Honorable Robert H. Michel, Representative from Illinois, stated in substance to Mr. Norman M. Clapp, representing the Secretary of Agriculture:

"I might say before moving on to the next area that I thought the Chairman, when he began this hearing, put it very well what the concerns of individual members of this Committee have been, whether individually or collectively, on some of the practices of REA. We are always most anxious to see whether or not our warnings are being heeded and our suggestions are being followed.

"You noticed that the House and Senate Appropriations Committees include language in their reports on the Agriculture and Related Agencies Appropriations bill in the 88th Congress instructing you before making loans for generation and transmission facilities to first attempt to obtain a reasonable power supply contract from existing suppliers and to make such a loan only when reasonable contracts cannot be obtained * *

Section 903 (a) of the Rural Electrification Act, as amended, provides: "The Secretary of the Treasury is authorized and directed to make loan to the Administrator, upon the request and approval of the Secretary of Agriculture, in such amounts in the aggregate for each fiscal year, commencing with the fiscal year ending June 30, 1948, as the Congress may from time to time determine to be necessary (Emphasis added.)

Section 903 (b) of the same Act states:

"There are authorized to beappropriated such sums as the Congress may from time to time determine to be necessary for the purposes of this chapter as hereinafter provided." (Emphasis added.)

S. 3337 does not provide for the extension of any such control by Congress. According to our interpretation of the provisions of the bill, the following present Congressional limitations on the existing REA electrification loan program would not apply to loans made by the Bank. These limitations include (a) Loans are not to be made to serve customers who have central station service.

(b) Loans are not to be made to serve customers in places with a population of 1,500 or more.

(c) Generation facilities to be financed by loans are subject to State approval.

(d) Generation and transmission loans are to be made only when the Administrator cannot obtain a reasonable contract.

It is our further understanding that under the proposed addition to the Rural Electrification Act, the operations, generating plants, transmission and distribution lines of borrowers from REA who have received loans under this section that have not been repaid would be subject only to the jurisdiction of the Administrator and of State authorities. This would apply even though many of these facilities and operations are involved in interstate commerce.

This unavoidable conclusion follows: Once Congress has set up the Loan Account and the Electric Bank, it loses all control. This control could not be recovered except by separate legislation. Such a recovery would be subject to delays and the vagaries of political reality.

4. Unfair competition

Although the REA was set up originally to bring electric service to the rural areas of the United States more quickly than could be done otherwise under the circumstances at that time, in recent years the emphasis has changed to the financing of generating and transmission facilities. Loans are made to G&T cooperatives at 2%-less than half the cost of money to the Federal Governmentand no federal income taxes are paid. We understand that five out of six new cooperative customers are not farmers-they include suburban residents, businesses, manufacturing plants, and petroleum operations.

We believe that it was never intended by the original REA act that government-subsidized power plants paying no federal income taxes should compete with existing tax-paying electric power suppliers. Congress in the last few years has been increasingly critical of loans for G&T purposes. As has been mentioned above, Congress has directed that such "loans should be made only where reasonable contracts cannot be obtained" for power supply.

The power supply facilities which the G&T's and other borrowers would duplicate or displace would be those of the investor-owned taxpaying electric power companies which serve some 80% of the nation's people. These companies operate under regulations at all levels-local, state, and federal. The G&T's do not. The unfair subsidized competition represented by the proposal for a Federal Electric Bank not only threatens to nationalize the electric industry which has established America as the world leader in electric power supply, but in so doing could seriously affect the structure of the nation's entire economic system. We respectfully submit that S. 3337 should be defeated.

Hon. HERMAN E. TALMADGE,

CENTERVILLE, TENN., August 30, 1966.

Chairman, Subcommittee on Agricultural Credit and Rural Electrification,
Room 324, Old Senate Office Building, Washington, D.C.

MY DEAR SENATOR TALMADGE: May we urge your Committee to approve the Cooper bill S. 3720 on REA supplemental financing. Some reasons for your consideration are:

1. President Johnson wishes to bring outside financing into some of the programs heretofore financed exclusively by government. He has urged rural electrification leaders to present a workable plan designed to accomplish this objective

2. Investor owned utility officials have long opposed the 2% interest rate charged the co-ops. The Cooper plan will in part satisfy this complaint by allowing a higher interest rate to be paid by many of the more fully developed systems.

70-671-66-38

3. Financial forecasts show that the future financial needs of the rural electrie systems will be many times greater than the total expenditures to date. Consequently, we have grave doubts that the Congress will continue to provide this capital in the quantities needed and at the present interest rate. The continued growth and development of our cooperative area, which covers about two thousand square miles and supplies electric service to nearly fifteen thousand members, will alone require an estimated ten million dollars by 1980. Most of this money will have to come from a source outside of the cooperative.

We believe the Cooper bill provides the framework that will allow the cooperatives to progress through a transition from all government financing to a plan of partial government plus self or outside financing. This will assure adequate growth.

Many of our cooperatives have “grown up” and have reached a high state of citizenship. Their needs are the peoples needs. They are obligated to meet the electrical requirements of an expanding economy. They are meeting the challenge of serving areas that were once passed over as being "unprofitable."

Sincerely,

MERIWETHER LEWIS ELECTRIC COOPERATIVE,
J. W. SHOUSE, President.

STATEMENT OF ARVAL M. SMILEY. DIRECTOR, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION, FOWLER, IND.

Mr. Chairman and Gentlemen of the Subcommittee: my name is Arval M. Smiley. I am currently a member of the Board of Directors of the National Rural Electric Cooperative Association, representing the State of Indiana: a member of the Board of Directors of Indiana Statewide REC., Inc.; President of the Warren County Rural Electrie Membership Corporation and an Original Incorporator of this same rural electric system. I own and actively manage a 370-acre hog, cattle and grain farm in Benton and Warren Counties, Indiana.

I am writing in support of the Cooper Bill, S. 3720, on the proposed rural eleetrification supplemental financing bill. In Indiana we have forty three (43) rural electric cooperatives with a total membership of 182.000 member-consumers. In other words, 500,000 to 600,000 people benefit directly or indirectly by these electric services rendered by these electric cooperatives. All of the forty-three (43) electric cooperatives, at their annual membership meetings, are discussing this supplemental financing program and are passing resolutions in support of the entire program.

Our records show sales of electricity to member-consumers of rural electrie systems is doubling about every seven (7) years. To meet this demand on our systems, we must have additional capital for increasing the capacity of existing facilities and providing new facilities to new member-consumers. According to all studies available to us, expected allocations for the Rural Electrification Administration will not be sufficient to meet these future requirements, therefore creating a critical need for othr means of obtaining additional capital.

I. on behalf of the rural people of Indiana, ask prompt and favorable consideration by your subcomittee on S. 3720.

Hon. HERMAN E. TALMADGE.

MANCHESTER, N.H.. August 24, 1966.

Chairman, Senate Subcommittee on Agricultural Credit and Rural Electrification, Old Senate Office Building, Room 347, Washington, D.C.

DEAB CHAIRMAN TALMADGE: Public Service Company of New Hampshire is opposed to S. 3720 and S. 3337 and related bills creating a Federal Electrie Bank for the following reasons:

1. The need for such legislation to supply rural areas with electric service at reasonable rates has not been demonstrated.

2. Adequate controls consistent with those written by Congress to apply to REA loans are lacking.

3. The legislation continues the present 2% subsidized loan program and adds another subsidy by providing up to $1 billion of Federal funds on which no interest payment would be required. No date is specified on which Bank borrowers or REA borrowers would cease dependence on the Federal Government.

4. Tax-exempt electric operations would increase to the detriment of the taxpaying electric systems and our free enterprise economy.

Very truly yours,

Hon, HERMAN E. TALMADGE,

ANDALUSIA, ALA., August 29, 1966.

Chairman, Subcommittee on Agricultural Credit and Rural Electrification, Room 324, Old Senate Office Building, Washington, D.C.

DEAR SIR: On behalf of the rural electric Cooperatives of Alabama and Northwest Florida let me strongly urge your Subcommittee to seriously consider the intent and purpose of Senate Bill 3720. This bill, so strongly and unjustifiably opposed by numerous power companies, should accomplish three major objectives for our rural electric cooperatives, their rural customers, and, indeed, the public at large.

First, the Federal Electric Bank, as proposed by this bill, would, in Congressman Poage's words, allow ".. the REA cooperatives . . . where they can, to pay a higher rate of interest and escape the odium of subsidy." (Representative W. R. Poage's letter of July 8, 1966 addressed to Mr. Walter Bouldin, Vice President of the Southern Electric Generating Company, Birmingham, Alabama, re issue of private power tax shield vs. cooperative's 2 per cent rate of interest on loans). Indeed, our rural electric cooperatives would like to pay their own way. Some would be able to and some would not. However, one of the very important aspects of Senate Bill 3720 is that it provides cooperatives the opportunity of escaping "the odium of subsidy," relieving the Federal Treasury of unnecessary financial burdens, and reaching the level of financial maturity that their history has shown them to be prefectly capable of obtaining. The germane question that should be asked, at this point, is "will the passage of this bill, with its creation of a Federal Electric Bank, harm or help the national economy in general, and our rural sectors in particular?" The answer is, of course, that the general public would find financial relief over time should the electric bank be created. An examination of this legislation indicates that the long run, ultimate objective of the electric bank is to enable the REA-financed electric cooperatives to eventually become independent of Government assistance.

Secondly, in the short run perspective of the next 10 to 15 years, we find that the proposed bank would make available to the cooperatives a source of additional growth capital that will be so vitally needed for improvements in their (cooperative's) systems. It is estimated that consumers of electricity are doubling their demands every ten years. Loads continue to grow on our distribution systems regardless of the amount of money allocated yearly to Rural Electrification by the Congress. The economics of supply and demand are illustrative of our dilemma: increasing loads call forth the need for constantlyimproved systems of supply; however, we can not always be sure that sufficient capital will be available, and at the desired point in time, to meet these demands. If Congress cannot allocate the necessary funds to meet increasing demands for service, then other lines of credit must be available for our cooperatives to render the quality of service, at equitable prices, so demanded of them by their consumers. The cooperatives need, however, short run minimal assistance from the Government in order that these near-future demands for service may be met. With limited Federal assistance now-making it possible for cooperatives to borrow in the commercial money market-the long-term objective of eventual independence of the cooperatives from the Government can be a reality. Such a plan is contained in Senate Bill 3720.

Thirdly, the Federal Electric Bank would enable our rural electric cooperatives to help maintain the power "yardstick" which has been found oftentimes to be the only real effective downward influence on electric rates in a given area or State. Outside of the Tennessee Valley Authority's service area in Alabama, for example, REA cooperatives are the sole bulwark against an absolute monopoly in the retail sale of electricity. Without the influence of TVA and the cooperatives, there is little doubt but that the people in Alabama and Northwest Florida would now be paying considerably more for their electric service. The "yardstick" influence of the REA cooperatives can not be main