Revenue per dollar of investment of privately owned class A and B electric utilities in the United States, 1963 and 1964

Source: Data from 1964 Statistics of Electric Utilities in the United States, Privately Ownded. (Federal Power Commission, FPC S-175.)

Revenue per dollar of investment of electric distribution cooperatives, calendar year 1965

Source: Data from 1965 Annual Statistical Report of Rural Electrification Borrowers (U.S. Department of Agriculture Rural Electrification Administration, REA Bulletin 1-1).

78-690-67-20

Analysis of rates to REA cooperatives, fiscal year ended June 30, 1965

Source: 27th Annual Report of Energy Purchased by REA Borrowers.

STATEMENT OF D. J. TUEPKER, PRESIDENT, PUBLIC SERVICE COMPANY OF OKLAHOMA

My name is D. J. Tuepker. I am president of Public Service Company of Oklahoma which furnishes electric service to 286,000 customers in 237 communities, 200 of them under 1,500 population. I submit this statement in opposition to enactment fo a rural electric bank as proposed in H.R. 1400.

Proponents of the federal electric bank originally stated that their aim was to relieve the government of 2 per cent financing for rural electric co-ops by giving them access to the private money market.

Had the bill embracing such a plan been limited to this purpose, I would not be taking the committee's time to state this objection.

Instead, the new legislation would completely change the character of the REA loan program as we have known it for 30 years.

Co-ops are now limited to rural areas not receiving central station service or communities under 1,500 population. The new bill proposes that they be granted authority to absorb urban areas with up to 5,000 "connections."

Existing congressional restrictions on use of funds to build REA generation and transmission systems are either eliminated or rendered unenforceable. When these objections were raised in house and senate committee hearings last year, proponents said such matters were a subject for state or local regulatory authorities.

It should be emphasized that in Oklahoma rural electric co-ops are singularly exempt from regulation as well as the payment of taxes, in lieu of a 2 per cent levy on gross revenue.

For many years, the co-ops have insisted they are entitled to this largesse because they serve sparsely settled areas with only nominal revenue per pole mile. This yardstick has completely lost its validity.

Farm customers are in the minority among the nation's rural electric co-ops today. Industrial, commercial and urban customers provide the bulk of their

revenue.

A more accurate measure is the amount of revenue for each dollar invested. Nationwide figures show the RECs' revenue averaged 19.6¢ per dollar in investment in 1965 (REA Statistical Report) compared to 22.5 cents for class A and B electric utilities (FPC).

Co-ops' prosperity approaches that of tax-paying, investor-owned companies and in some cases exceeds it. Many of them pay "patronage dividends" or profits to customers to prove it. Others invest surplus funds in U.S. government securities.

We do not oppose a legitimate program of supplemental financing which will free the government from the burden of borrowing funds at 5 per cent to loan them to co-ops at 2 per cent.

We do object to this shallow subterfuge which would (1) vastly broaden the scope of the so-called "rural" electric program (2) permit the 2 per cent loan program to continue and (3) tap the treasury for an additional $750 million with vague reference to payment of interest or principal.

Revenue per dollar of investment-Oklahoma REA distribution of cooperatives and others, year 1965

On March 13 of this year, Caddo Electric Cooperative will be 30 years old. The co-op has accomplished the "impossible," or so it was said.

During the past 30 years, the co-op has brought electricity to farms, rural residences, businesses, schools, to resort cabins. It has placed electrical service to 8,105 sites through 3,300 miles of line beginning the first of this year.

The cooperative:

Employs 57 full time and eight part time workers.

Pays $22,000 monthly in salaries.

Operates 31 system owned vehicles.

Has eight sub-stations.

Has an average monthly billing of $12.95 per member.

Purchases an average of 5,020,840 KWH monthly.

Has borrowed Section 4 Funds from REA of $7,446,630 through December of 1966.

Has repaid $2,063,166 in principal and $1,409,662 in interest.

Has an advance payment of $2,063,166 through December of 1966.

Has invested $210,500 in U.S. bonds and bills and $96,361 in FHA mortgages. Has returned $84,620 to members in capital credits.

Wouldn't you as a member of Caddo Electric Cooperative consider this as a sound business enterprise, business managed?

STATEMENT OF SAN DIEGO GAS & ELECTRIC COMPANY

San Diego Gas & Electric Company opposes the enactment of H. R. 1400 for the reasons that are more particularly enumerated, as follows:

1. The Congress, by adopting H. R. 1400, would default its appropriating power and its overseeing of the expenditure of funds of gigantic proportions. H. R. 1400 does not retain in Congress adequate nor effective Congressional control of the funds to be made available by the bank.

Under Section 406 (a), the United States would automatically purchase $50 million of stock in the bank each year. After 15 years, once the bank has received its $750 million subsidy, and issued billions of dollars of debentures, Congressional control over the amount of funds to be loaned by the bank or the type of loans to be made, would be practically non-existent.

The various reports to the Congress required by the bill are no assurance of adequate supervision, particularly after conversion takes place under Section 410. Loans by the bank would not be subject to the basic restrictions of the 1936 Act, and could be made for such broad and all-encompassing purposes as "to improve the efficiency, effectiveness or financial stability" of the borrowers' systems. This would allow the bank to make unlimited loans for unlimited purposes free from any Congressional review.

2. Bank loans would not be subject to the existing statutory restrictions. The loans from the bank would not be subject to the basic restrictions of the Rural Electrification Act, since it provides that loans can be made only to provide electric service "to persons in rural areas who are not receiving central station service."

Prior to May 31, 1961, the REA used two criteria for approving G&T loans: (1) and adequate and dependable source of power was not available, or (2) the rates offered by existing power suppliers would result in higher cost of power than the projected cost from an REA-financed facility. In 1961, through administrative action, a so-called third criterion was introduced by the Administrator providing that loans for generation and transmission would be approved if required "to protect the security and effectiveness of REA-financed systems." This has never been given statutory approval by Congress.

Section 408(a) of the bill would: (1) expand this agency criterion to include distribution; (2) broaden its provisions by substituting the word "improve" for "protect", the words "financial stability" for "security", and by adding the word "efficiency"; and (3) establish the criterion in law.

Since virtually any proposed loan could meet this criterion, H.R. 1400 is being used not merely to finance the now authorized activities, but as a vehicle to expand the basic REA program.

3. Large amounts of funds would be provided for unparalleled expansion by rural electrification borrowers by the establishment of an untested and unwieldy Federal Electric Bank.

Under this proposal, the United States Government would be directed to furnish $750 million initial capital to a newly established and untried Federal electric bank, with no assurance of any return to be paid by the bank on the Government's subscription.

The bank could sell debentures in amounts up to eight times its paid-in capital and retained earnings. Depending on the amount of stock sold, the bank could finance over $15 billion in expansion during the first 15 years of its operation, and could continue to expand thereafter. Additionally, the Rural Electrification Administrator could make 2% loans from a newly established "loan account". This loan account would receive initially over $4.5 billion in assets plus future repayments of principal and interest from borrowers. These payments are estimated in the 1968 Budget at $234.8 million in fiscal year 1967, and $243.5 million in fiscal year 1968.

4. H.R. 1400 basically assumes a need which has not yet been proven. The financial needs of rural electric cooperatives have been provided largely by direct loans from the Rural Electrification Administration, and since 1949 have carried a 2% interest rate. When the Rural Electrification Act was established in 1936, only 11% of the farms in the United States received electricity, while today 98% of them are served by electric power.

During the past 30 years, the REA loaned approximately $6 billion for electrification purposes. For the past ten years, loans for generation and transmission purposes have been on the rise, while the loans for distribution purposes have leveled off at about $150 million per year. The statements by the proponents of the bank bills that the borrowers "need" $8 to $15 billion over the next 15 years are not accompanied by any corresponding justification of this great increase. Unless REA is contemplating an ambitious generating and transmission (G&T)

program, including expansion into non-rural areas and acquisition of municipal and investor-owned systems, the amounts made available by H.R. 1400 are

unnecessary.

5. In effect, H.R. 1400 is designed to promote construction of large-scale generation and transmission facilities.

Section 408 (a) would authorize loans for construction of generation facilities of a capacity to meet the power requirements of ultimate consumers "projected over the estimated life of such facilities." Assuming that history will repeat itself, power requirements will continue to double every ten years, and if the plant had a 50-year life (corresponding to the maximum loan period under the bill), loans might be made to construct a generating plant 32 times larger than presently needed. A borrower needing a loan for a 100,000 kilowatt capacity plant, could obtain a loan for a 3,200,000 kilowatt capacity plant.

Thus, the bank bills, by authorizing the bank to make subsidized loans to cooperatives for this vast amount of "surplus" power would enable the cooperatives to expand their territories and acquire properties and systems of other suppliers of electricity, including municipalities and investor-owned systems. This "pirating" of customers from other suppliers would lead to recurring controversies between cooperatives and other segments of the electric utility industry which would be unparallel in the annals of the REA program.

6. H.R. 1400 is really no compromise.

H.R. 1400 is being put forward as a "compromise" bill. Actually, it is worse than the last version of the bank bill considered by the House Agriculture Subcommittee, Committee Print No. 3 of H.R. 1400 in the 89th Congress, which the subcommittee refused to report.

Under Committee Print No. 3, REA could not have made any section 4 (2%) generation loans, but under H.R. 1400, the REA's authority to make such loans would be unchanged. The juridical review of generation loans under Section 405 (j) of Committee Print No. 3 covered fraudulent, arbitrary, or capricious action by the board in administering this subsection, whereas such review would be restricted to the record of proceedings before the bank's board and would be based solely on the issue of substantial evidence under H.R. 1400.

Under Section 408(a) of Committee Print No. 3, loans by the bank to finance acquisitions could be made to serve not in excess of 5,000 additional "population" in non-rural areas for each borrower, whereas under H.R. 1400 loans for acquisitions could be to serve not more than 4,000 additional "connections" for each borrower irrespective of the number of people actually to be served. Also, in Committee Print No. 3, it was provided that loans should not be made under Section 4 to any borrower having a net worth in excess of 35% of its assets, with three exceptions. H.R. 1400, on the other hand, in Section 408 (d), raises the figure from 35% to 40%, and adds a fourth broad exception, thereby weakening the subsection.

H.R. 1400 is no compromise designed to correct objectionable features of last year's bill.

7. There are other specific hazards and dangers inherent in the H.R. 1400 concept.

a. Borrowing to acquire properties of other electrical utilities

Section 408 (a) would authorize loans to acquire properties in rural areas without any limitations. Furthermore, acquisitions could be made in non-rural areas, the cumulative size of which does not exceed "four thousand connections". Such limitation that the cumulative size of the areas not exceed "four thousand connections" is relatively meaningless; a single "connection" might be an apartment house, a large industrial plant or a shopping center. Thus, a few so-called "connections" could be sufficient to serve a large municipality.

In effect, the financing provided by H.R. 1400 would promote extensive expansion by the borrowers from rural into suburban and urban areas.

b. No public hearings

No public hearings prior to granting loans are required by the bill. The judicial review provisions (Section 405 (j)) are limited to a small category of loans and permit appeal on limited issues only to the United States District Court of