however, in respect of electric bank loans for construction in nonrural areas, for acquisitions of facilities, for the exchange of facilities and for generation and related transmission facilities, and competitive bids on power supply are required before certain types of generation loans displacing non-REA power suppliers are made. With respect to the telephone bank, special restrictions can imposed on acquisition loans, and loans for commercial CATV facilities are barred.

When, through retirement of the Government's investment and increase in non-Government investment, the amount of stock held by the Government falls below approximately one-third of the banks' capital, the process of converting the banks to private control and operation will begin: The REA Administrator will cease to be Governor, the banks cease to be Government agencies, and their boards of directors will consist of the REA Administrator and FCA Governor plus 6 members elected by the non-Government stockholders. Special limitations on loan powers and competitive bid requirements for power supply are eliminated after all Government-held stock has been retired.

The Bill also establishes Rural Electrification and Telephone Accounts into which will be transferred appropriations, assets and collections of the REA 2 percent loan programs and from which will come funds for the 2 percent loan programs and for Federal investments in the electric and telephone banks.

Finally, the Bill provides that REA 2 percent loans may not be made to eletric borrowers with over 40 percent net worth unless one or more stated criteria are found to exist, and the existing REA legislation is amended to authorize the making of 2 percent telephone loans to public bodies engaged in providing rural telephone service.

The CHAIRMAN. The Chair wants to announce that our time is very limited. We are going to hear this morning from the Department. The Department will be represented by the Assistant Secretary, Mr. John A. Baker, and by the Administrator of the REA, Mr. Norman Clapp.

We will also hear this morning from the National Rural Electric Cooperative Association and from the manager of two of the associations.

We will complete the testimony of the electric systems this morning. Tomorrow, we will hear for the same length of time from the power company witnesses, and on Thursday we will hear from the representatives of the telephone interests, both those who are in favor and those who are against the legislation.

Our first witness this morning will be Mr. John A. Baker, Assistant Secretary of Agriculture. We are delighted to have you here, Mr. Baker. We are always glad to have you before our committee. Mr. Baker has been before our committee for a great many years, both in his official capacity and in his previous capacity when he represented the National Farmers Union.

STATEMENT OF HON. JOHN A. BAKER, ASSISTANT SECRETARY OF AGRICULTURE; ACCOMPANIED BY NORMAN M. CLAPP, ADMINISTRATOR, RURAL ELECTRIFICATION ADMINISTRATION; AND HOWARD V. CAMPBELL, ASSISTANT GENERAL COUNSEL, U.S. DEPARTMENT OF AGRICULTURE

Mr. BAKER. Mr. Chairman and members of the committee, I have with me, if it pleases you, sirs, Mr. Norman Clapp, Administrator of the REA, who will supplement my statement, and Mr. Howard V. Campbell, Assistant General Counsel.

I want to acknowledge and thank your committee for the considerable time and attention you gave this subject last year. You spent

weeks patiently listening to proponents and opponents. While the proposal did not progress to enactment, the time was well spent. We all profited from it. This year's bill incorporates ideas and suggestions from many sources. It reflects a conscientious effort to give effect to the views of those who supported the principal objectives of last year's bill, but who had reservations as to certain provisions or ideas for different procedures.

Your committee has the Department's formal report on the bill. We recommend enactment with some amendments which are spelled out in the report. The need of America's rural electric and telephone systems for an assured source of additional funds for capital outlay grows more urgent as the demands on them continue to expand.

I would like to take a little time to state the reasons why this legislation is needed and to point out some of the restrictions and safeguards that have been put into it.

While I shall speak in terms of the rural electric title, the rural telephone title is parallel and my comments are similarly applicable to its provisions.

The bill before you will help build a better America through building stronger, more attractive, more prosperious rural communities.

Our country has witnessed in the past few decades a constantly growing concentration of its population in its metropolitan centers. There has been a steady, undesirable tide of migration from rural America to urban America. This development has multiplied the sore problems with which our cities are beset.

The Department of Agriculture as directed by Congress and the President is dedicating its resources in many ways to the task of stemming and reversing this tide. The success of our effort will be measured by our ability to make rural America an attractive and prosperous place to live, to rear our children and to earn our livelihoods.

An important feature of the effort to restore and maintain a balance between rural and urban America is to see to it that our rural areas have the amenities and facilities of modern living-the development of resources that are needed to attract people and hold them and encourage them to locate new businesses and industries there.

We must provide in rural America the services which people cannot or will not do without today-roads, schools, and reasonably priced water, sewer systems, recreational facilities, and modern and dependable electric and telephone service. These efforts have been encouraged and assisted by landmark legislation originated in your committee.

It is just not reasonable to expect that there can be substantial rural area redevelopment without adequate, dependable and economical electric and telephone service. The rural power and telephone systems financed by REA supply their indispensable utility services to more than 20 million Americans scattered across the 97 percent of our land which is rural. Each year the electric systems add 150,000 new consumers; the telephone systems annually supply new or improved service to 100,000 subscribers.

The job of these systems has reached a new threshold. They must now be prepared to meet the demands for service placed upon them by a reawakening and redeveloping rural America. Moreover, they must give assurance that these services will be there not only today

but in the future-rendered by permanent, stable, adequately financed systems.

Rural America cannot grow unless these basic services grow with it; in fact, ahead of it. Growth is costly. It is estimated that the REAfinanced electric systems will, in the next 15 years alone, need to invest more than $8 billion to meet the service needs in their areas. This is more than twice the amount they borrowed from REA in the past 15 years. REA telephone borrowers which received loans of $1.3 billion since the beginning of the telephone program in 1949, will need more than twice this amount in the next 15 years to meet demands for modern communications service in their areas.

With the diverse demands upon the Federal Treasury, it is imperative that new and additional sources of capital funds, at usable interest rates, be developed to meet the expected and needed expansion of these rural systems.

The supplemental financing plan provided in H.R. 1400 is an effective and reasonable means of supplying these funds. Modeled after the farm credit system, which has stood the test of time and changing agricultural and economic conditions, it establishes an electric bank and a telephone bank through which funds are brought in from outside sources as required. Through it, the systems will progress to freedom from dependence on direct Federal financing. Ultimately, these banks will be wholly owned and controlled by the systems themselves.

The plan is designed to provide funds in amounts which reflect realistic estimates of the system's needs. These estimates contemplate a growth rate which is proportionately comparable to growth`estimates for the investor-owned systems. Aggregate net utility plant of the class A and B power companies, which account for more than 98 percent of the investor-owned segment of the power industry, is today roughly 14 times that of the REA-financed systems. The projected plant investment of the class A and B power companies in the next 15 years is estimated by the industry itself at $112 billion, against 14 times the $8 billion estimate of the rural electric systems.

Section 407 (a) of the bill places a limit on outstanding debentures which the bank may issue of eight times paid-in capital and retained earnings of the bank. Coupled with the requirement of section 406 (c) that Government capital be retired, when the total of class A and B bank stock reaches $1 billion in a minimum amount equal to 5 percent of bank loans annually, the bill, in effect, places a ceiling of about $8 billion on outstanding debentures.

In the comparable cooperative farm credit system, the banks for cooperatives may borrow eight times their combined capital and surplus and a land bank may borrow 20 times its capital and surplus. The authorization for intermediate credit banks was raised in recent years from 10 to 12 times the banks' surplus and paid-in capital.

The ability of rural electric systems individually to enter the private money market for their future financing needs has been explored and discussed with representatives of private financial institutions. No real interst has developed. The result of a thorough study by a competent consultant firm for NRECA was not encouraging.

The borrowing ability of the rural systems cannot be equated with that of the large commercial power systems. The systems are very

dissimilar. In 1964 the average class A and B company had 57 times the total assets, 44 times the number of consumers served, and 61 times the annual revenues of the average REA electric borrower.

The finance needs of the typical REA-financed system are for loans of longer terms and for larger amounts than a local country bank can furnish; the individual needs of these rural systems are too small or margins are too thin to interest the investment bankers who handle class A and B company paper.

Section 408 (a) of the bill authorizes loans for the same purposes as were provided in section 4 of the Rural Electrification Act from the enactment in 1936. These purposes specifically include generation and transmission facilities as well as distribution facilities.

Except as I will discuss in a moment, there is no differentiation between REA authorization and the bank's authorization for these loan purposes. The continued availability of section 4 loans at the basic 2-percent interest rate is vital to the achievement of the basic program objectives. It is just as important for a rural system to have access to 2 percent financing for generation and transmission facilities as for distribution facilities. Unless the system has the means to assure its consumers an adequate, dependable, reasonably priced power supply, by the construction of its own bulk power supply facilities if necessary, it cannot function effectively.

With respect to bank loans for generating and related transmission facilities under section 408 (a) (2), the proviso to this subsection requires that the facilities so financed shall be utilized in reciprocal power or energy arrangements with other power suppliers. Their capacity is limited to the estimated power requirements, over the life of the facilities, of consumers who receive service from facilities financed by REA or bank loans.

Until conversion of the bank to borrower control, loans for generating facilities whether made at the basic 2-percent rate or at the bank rates of interest-may not result in financing more than 5 percent of the total electric generating capacity in service in the United States at one time. Moreover, the bank board is required, before financing generating facilities which would displace an existing supplier, to take bids and determine that the cost of power from the proposed facilities is lower than that offered in the lowest bid. As in the case of loans under section 4 of the existing law, borrowers must obtain the consent of the State authority having jurisdiction for generating facility loans.

In addition, you may wish to consider different language requiring the cooperatives to set up on their books identifiable evidences of ownership by patrons to facilitate the transition to ultimate, complete private financing. This will have to take into account the varying provisions of the different State laws.

The power industry has entered a new era-an era of large-scale generation and transmission which requires investment on a large scale but which also returns vast benefits in terms of lower costs and more dependable service. Maximum realization of these benefits requires participation in reciprocal bulk power arrangements through pooling and interconnection of facilities.

The problem of the smaller electric systems is aptly stated in the following excerpt from chapter 16 of FPC's national power survey. I quote from page 267:

The small systems in the electric power industry are understandably concerned about their future welfare as elements of the complex industry structure which serves America's electric consumers. They fear that the growing emphasis on the economies of scale in generation and transmission will reduce their opportunities for the orderly expansion of their own generating capacity, and perhaps even threaten their survival.

The interests of the small systems are a matter of vital concern in this National Power Survey. Small systems must recognize the need for obtaining their power supply from low cost sources and there must be opportunity for them to do so.

Participation of the small systems in the benefits of coordination and a continuous search for means of broadening this participation are fundamental if these systems are to continue to provide low cost power to their consumers and make the most efficient use of our fuel and capital resources. Reduction in the cost of generation of the larger systems through more extensive adoption of the concepts discussed in the survey, can and must provide attractive sources of power for the use of the small systems, rather than serve as a threat to their existence.

The CHAIRMAN. If I may interrupt, may I suggest that those who desire to insert statements into the record have permission to do so without going through procedural steps each time. If there is no objection we will proceed that way.

Mr. BAKER. To build the large-scale-electric facilities to serve beneficiaries of the REA Act demanded by today's technology and economics requires large investment. The supplemental financing plan furnishes to eligible borrowers a source of the needed capital and minimizes the burden on the Treasury. But, to serve their purpose, these facilities must be interconnected with other systems and power sources. And the bill that you developed so requires.

Section 408(a) of the bill recognizes this. The authority granted therein is tailored to the needs of today and tomorrow. These facilities will not duplicate existing adequate plants; they will supplement them and contribute to the realization of the economies and dependability of power predicted in the national power survey.

Section 408 (a), also, includes a limited authorization of loans for the acquisition of existing facilities. This authorization relates primarly to distribution facilites, those utilized to furnish servce at retail. The cumulative size of acquisitions of facilities in nonrural areas which may be financed by the bank under the bill is limited to 4,000 connections. The opportunities for exercise of this authorization are, however, limited. Existing properties can be acquired only where there is a willing seller and then usually only with State commission approval or, in the case of municipally owned properties, with voter approval. There are approximately 200 class A and B electric utilities, those that have annual operating revenues of $1 million or more.

They represent more than 98 percent of the assets and revenues of the investor owner, commercial power industry. It is extremely improbable that any of these could or would be acquired by the rural electric systems.

There are also over 200 smaller privately owned systems. Occasionally the owners of some of the 200 smaller investor-owned companies seek to dispose of these properties. In those cases where there is a rural