RURAL ELECTRIC AND RURAL TELEPHONE SUPPLEMENTAL FINANCING WEDNESDAY, MARCH 22, 1967 HOUSE OF REPRESENTATIVES, The committee met, pursuant to recess, at 10 a.m., in room 1301, Longworth House Office Building, Washington, D.C., Hon. W. R. Poage (chairman) presiding. Present: Representatives Poage, Gathings, McMillan, Abernethy, Abbitt, Jones of Missouri, Stubblefield, Purcell, Foley, Vigorito, Jones of North Carolina, Dow, Nichols, Montgomery, Brasco, Stuckey, Rarick, Belcher, Teague, Mrs. May, Dole, Hansen, Wampler, Goodling, Miller, Burke, Mathias, Mayne, Zwach, Kleppe, Price, and Myers. Also present: Christine S. Gallagher, clerk; Hyde H. Murray, assistant counsel; Fowler C. West, assistant staff consultant; and Francis LeMay, consultant. The CHAIRMAN. The committee will please come to order. We are met this morning to continue the hearings on H.R. 1400 and related bills. Yesterday, we heard from the Government witnesses and as many of the proponent witnesses as we had time for. Actually, I believe we only heard from about three, but we heard from as many as we could in the time available. This morning, we have representatives of the power companies, and we will ask all of the representatives of the power companies who desire an opportunity to be heard to consult with Mr. William J. Clapp who is arranging the appearance of the witnesses representing the power companies. I notice from the list that has been supplied me, it shows Mr. Clapp and three other witnesses who will testify as a panel, I am told. And then there are some 13 other witnesses on this list. I do not know whether these are some that Mr. Clapp has made arrangements with to testify, or whether they are just people who have asked to be heard and who have not communicated with Mr. Clapp but have communicated with this office. Would you comment on that, Mr. Clapp? Mr. CLAPP. I have a copy of that list. The CHAIRMAN. Are these 13 other witnesses interested in the panel that you are arranging or are they just people who have asked for time? Mr. CLAPP. We think that they are a part of our group. The CHAIRMAN. All right. We will be glad to do what we can to accommodate them. I just want to get it clear here. We will, of course, if there is time available after the panel has spoken, listen to these other witnesses, but I think what we will do right now, since there are several witnesses present here whom several Congressmen would like to introduce as their constituents, I am going, at this time, to suggest that we have them introduced. Mr. Duncan is the first one on this list. And I understand that Mr. Stubblefield is going to introduce him. Mr. STUBBLEFIELD. Thank you, Mr. Chairman. It is a real pleasure to welcome Mr. Bill Duncan to this committee. We e are delighted to have you here with us, and we are pleased to have your associates with us also. The CHAIRMAN. We have your statement. We are glad to have you here. Mr. DUNCAN. I will appreciate an opportunity to present the statement personally, if possible. The CHAIRMAN. If we have the time, we will be glad to have you do so. Next, Mr. McMillan. Mr. MCMILLAN. Mr. Chairman, I am delighted to have the opportunity to introduce Mr. C. Griffith, Jr., to the members of our committee. Mr. Griffith is the son of one of South Carolina's most outstanding circuit judges and he is one of our leading citizens representing Duke Power Co. I only wish the committee had the time to hear you present your statement. However, I will read it thoroughly when the hearings are printed. Mr. GRIFFITH. If I may, I would like to file a statement. I do not care to orally present it. The CHAIRMAN. You may file the statement. (The statement of W. B. McGuire, president, Duke Power Co., submitted by Mr. Griffith, follows:) STATEMENT OF W. B. MCGUIRE, PRESIDENT OF DUKE POWER CO., CHARLOTTE, N.C. I am W. B. McGuire, President of Duke Power Company, Charlotte, North Carolina. On behalf of my Company express appreciation to the Committee for the opportunity to present these views on H.R. 1400 (the Federal Electric Bank Bill). BACKGROUND Duke Power Company is an electric utility serving over 850,000 customers in the area known as the Piedmont Carolinas. We serve a 20,000 square mile area in North and South Carolina which extends from the North CarolinaVirginia border on the north southwestward to the South Carolina-Georgia border on the south. Duke Power Company has a present installed generating capacity of 4,832,000 kilowatts. In addition, we have under construction and committed 4,115,000 kilowatts of generating capacity. Also, we have selected and already own sites for future generating plants having a total capacity of 15,300,000 kilowatts. We are able today to meet all of the needs of our service area with ample reserve and we are planning ahead to meet the growing needs of this area in the future. SERVICE TO CO-OPS Among Duke Power's customers are 11 electric cooperatives in North Carolina and 5 electric cooperatives in South Carolina, with which we have contracts for service at 100 different delivery points. Depending upon use and load factor, our rates for power to these cooperatives ranged in 1966 from a high of 0.75¢ per kilowatt hour to a low of 0.67¢ per kilowatt hour. In 1966 our average revenue per kilowatt hour from all of the energy sold to electric cooperatives was 0.722¢ per kilowatt hour. None of these 16 electric cooperatives has its own generation and Duke Power Company has supplied their total requirements except for some power which they purchase from the Southeastern Power Administration which Duke Power wheels for them. Our Company has present plant constructed to serve these cooperatives and our plans for future generating plants include continued service to them. TAXES PAID In 1966 Duke Power paid $64,353,000 in taxes. Of this more than $34,000,000 was federal income tax and over $28.6 million was state and local tax. In South Carolina electric cooperatives are totally tax exempt. In North Carolina beginning in 1967 cooperatives will pay all state and local taxes except North Carolina income tax. Of course, all electric cooperatives are exempt from federal income tax. CONCEPT OF REA, PAST AND PRESENT The original concept of REA, to make electricity available in rural areas which were without it, was admirable and sound. In our opinion, REA has been one of the most productive and beneficial government programs ever conceived. REA, through electric cooperatives, provided service to certain rural areas that electric utilities, with their cost of capital and taxes, could not provide. It must be remembered, however, that electrification of rural America was made possible because the Federal Government provided the total financing at low interest rates and because the instrumentalities chosen to accomplish the task (electric cooperatives) were totally exempt from federal income tax and either totally or largely exempt from state and local taxes. Under the original concept of REA, the Congress still may properly have concern that electricity is available to all of our citizens. This involves the construction of distribution lines to connect new customers and the heavyingup of existing lines to meet growing loads. Except in the rarest instance, making electricity available does not require the use of government funds and tax exemption to construct electric co-op generating plants. In practically all areas of the country, and certainly in the Duke Power service area, taxpaying electric utilities stand ready to meet the power needs of the electric cooperatives. Yet, in the last few years REA has given primary emphasis to making loans for co-op generating plants. During the past 6 years (1961-1966), REA has made almost a billion dollars (actual total: $940.8 million) in generating and transmission loans. This was over 51% of all loans made during that period. The following are the percentages in each year of all loans which went for this purpose: 1961 1962 1963 G&T loans 55.3 1964 G&T loans (percent) 39.0 60, 3 38. 2 A number of these generating loans were totally unnecessary and were monuments to govermental waste. Such a loan was made to construct a generating plant at Conway, South Carolina. We are very familiar with the facts surrounding this loan, and it serves to illustrate the over-all problems. THE CONWAY, S.C. STEAM PLANT In 1963 a $32.9 million loan was made to Central Electric Cooperative in South Carolina for a generating plant and related transmission lines. Central obtained all its power from the South Carolina Public Service Authority, a state agency. The electric utilities in South Carolina offered to supply power to the South Carolina Public Service Authority at a rate which would afford Central the same power rate as could be obtained from its proposed steam plant. (The companies could make this offer because of the efficiency of their large generating units, even though they must pay full taxes and higher capital cost. The two co-op units were small and inefficient having a capacity of only 75,000 kw. Duke now has under construction two units of 680,000 kw. and has on order another two units of 874,000 kw. The companies' offer was rejected and the plant was built and leased to the South Carolina Public Service Authority. Central and the distribution co-ops which it serves gained nothing by the construction of the plant. But the Federal Government lost in two ways: first through the heavy subsidy of the low rate REA loan ($5 million loss in the first 10 years), and second the loss of federal income taxes which the power companies would have paid as a result of supplying this power ($3,150,000 in the first 10 years). Since electric cooperatives are totally tax exempt in South Carolina, state and local governments will lose approximately $2,500,000 in taxes during the first 10 years of this plant's existence. COMMENT ON H.R. 1400 H.R. 1400 contemplates that the present 2% REA loan program will continue. If REA loans are made only for distribution lines rather than for unnecessary generating plants, the present program may well meet the real needs of rural electrification without the necessity of a Federal Electric Bank. We at Duke Power do not want electric cooperatives to be without the capital to build needed distribution lines and to heavy-up present distribution lines in order to serve their customers. But it does not seem that the billions of dollars available to the Federal Electric Bank under H.R. 1400 will be necessary for distribution loans. It is a virtual certainty that many if not the majority of the Bank's loans will go for unnecessary generating plants which will displace existing taxpaying plants of electric utilities. This not only will add to the tax burden of present taxpayers, but will require our rate payers to carry through their electric bills the capital costs of our facilities which have been duplicated. The Congress has for 30 years supported the concept of getting electric service to all our people. We heartily endorse that concept. But, the Congress certainly should not encourage the construction of unneeded electric generating plants which will not contribute to the Federal Treasury to help support the heavy costs of both defense and domestic programs. This is exactly what can result from the passage of H.R. 1400 in its present form and this, as we see it, is the chief defect in H.R. 1400. The proponents of H.R. 1400 may contend that there are safeguards against unnecessary co-op generating plants written into Section 405 (j) of the bill. This section does state certain prerequisites for a generating loan, but the Federal Treasury and the taxpaying utilities can find little comfort in these provisions. Section 405 (j) requires only that prior to the Bank's making a generating loan, in certain cases the co-op must advertise for bids for its power supply. If the power rates quoted to the co-op are higher than the rate at which the co-op can generate power from its own proposed plant, the Bank loan would be made for the plant. But in the utilities' rate there is built in the element of full federal, state and local taxes. The cooperative is totally exempt from federal taxes and perhaps totally or largely exempt from state and local taxes. Consider a hypothetical case: Suppose that H.R. 1400 were law and a group of electric cooperatives in a state where they are tax exempt proposed to obtain a Bank loan to build a $100 million generating plant. If an electric utility owned such a plant, it would pay annually on the plant and its operations (using Duke Power's present tax rates) approximately $3.5 million in federal income tax and $2.6 million in state and local taxes, or a total annual tax payment of $6.1 million. The co-ops would pay no taxes. If the utility offered to supply the co-ops' power needs, it would have to do so at a rate which would include these tax payments. If the co-ops obtained the Bank loan, built the plant and thus replaced the utility's service, the co-ops would do so on the basis that the cost of the utility's power was higher only because the utility does not have the governmentally granted advantages of tax exemption and government-backed capital. Certainly, this is an illogical, unsound and wasteful basis upon which to construct a co-op generating plant. Surely, it is not the purpose of the Congress in this or any other legislation to facilitate such unnecessary damage to the treasuries of the federal, state and local governments. RECOMMENDATION We do not believe the Congress intends to have co-op generating plants built where there is power available from a taxpaying source and where the chief difference in the cost of power between the co-op plant and the other source is taxes not paid by the co-op to federal, state and local governments. Accordingly, we recommend that if any co-op supplemental financing plan is adopted it include a provision that no loan will be made for a generating plant unless the plant will produce power cheaper than an alternative source, after making full allowance for the taxes paid by the alternative source to federal, state and local governments. We have not undertaken here to comment in detail on H.R. 1400 or to suggest an alternative means of accomplishing additional financing for electric cooperatives. Testimony in this regard has been presented to the Committee by Mr. Herbert B. Cohn and Mr. Shearon Harris, and we fully concur in and adopt the views they expressed. The CHAIRMAN. Mr. Montgomery wants to introduce Mr. Watson, I believe. Mr. MONTGOMERY. It is a pleasure to present Mr. A. J. Watson, Jr., president of the Mississippi Power Co. of Gulfport, Miss. You do have a statement? Mr. WATSON. I have a statement that I would like to file for the record and if possible I would like a few minutes for a brief oral summary. The CHAIRMAN. If time permits, you may have that privilege. Without objection, your statement will be made a part of the record at this point. (The statement referred to follows:) STATEMENT OF A. J. WATSON, JR., PRESIDENT, MISSISSIPPI POWER COMPANY, GULFPORT, MISS. Mississippi Power Company, with general offices located in Gulfport, operates in the southeast quarter of Mississippi, supplying electric power directly to approximately 129,000 customers, and in addition, furnishes all of the requirements of four electric cooperatives and a substantial portion of the requirements of two others through 48 delivery points. The Company has a gross plant account of $190 million that is invested for the purpose of supplying these energy requirements and is fully taxed, investor-owned company. For reasons which will be covered in some detail, I do not believe that the proposal for supplemental financing of the rural electrification program as embodied in H.R. 1400 and other similar bills is in the public interest. It is distinctly possible that enactment of this legislation would be detrimental to the interests of the member-consumers of the cooperatives, and there can be no doubt that its passage would be most harmful to our company, customers, employees, and stockholders. This committee is well aware of the fact that the appropriations committees of both houses of Congress have in recent years expressed their concern over the administration of certain aspects of the existing rural electrification program and have sought to establish certain controls on the use of public funds by the Administrator. Under this legislation Congress would retain only a slight degree of control and restraint over the actions of the Rural Electrification Administration and the existing subsidy program would not only be perpetuated but also enlarged. My remarks are not intended as a criticism of the original concept of rural electrification, nor are they designed to minimize the contribution that the REA cooperatives have made and are now making to the comfort and prosperity of their customers in rural areas. Nor will these remarks duplicate the testimony which was offered last year in opposition to similar bills to which I respectfully invite your attention. It was mentioned earlier that Mississippi Power Company serves all or a portion of the electric power requirements of six cooperative associations at 48 |