Appeals in the District of Columbia. The Administrator through secret consultations with the borrowers could continue to disburse public funds without disclosing publicly the considerations which supposedly justified the loans.

c. Conflicts of interest

Employees of organizations controlled by entities eligible to borrow from the bank would be permitted to serve on the board pursuant to Section 405 (c) and (d). Employees of national and statewide organizations of borrowers could serve on the board even though the organizations had little or nothing to do with actual utility operations. The Administrator-Governor would also be on the board.

Therefore, ten of the thirteen board members could be either Department of Agriculture employees, directors or employees of borrower organizations, or employees of organizations controlled by the borrowers. The bill does not indicate any other qualifications for eligibility for membership on the board of directors of the bank.

d. Needed reforms not supplied

The bill does not provide for the needed reforms to the existing REA program of direct loans under Sections 4 and 5 of the 1936 Act. Future Section 4 loans should be limited solely to distribution purposes, and then only to borrowers who cannot afford to pay unsubsidized rates of interest.

8. Future financing through an Insured Loan Program is a decidedly preferable alternative,

A superior method to provide for the future financing of the electrical cooperative would be through a privately financed insured loan program, adopting the concept embodied in H.R. 7390.

Today, many REA borrowers are financially stable and are able to pay a higher rate of interest. Increasing uses and demands for electrical energy will mean the capital requirements for distribution purposes in the rural areas will continue to increase. It is apparently desired by many of the cooperatives, to the extent they are able, to switch gradually from all-Government financing toward private financing.

This program would be set up along the following lines: (1) a loan account to fund direct loans to distribution borrowers; and (2) an insured loan program for generation and transmission borrowers (and for some distribution borrowers) under appropriate statutory criteria.

The Rural Electrification Act of 1936, as amended, should be further amended to provide a revolving loan account, subject to appropriate Congressional controls. This loan account would be similar to the assets provided in Title III of H.R. 1400; i.e., all notes now held by the Administrator on existing loans, undisbursed balances of loans previously approved, all future collections of principal and interest on outstanding loans, and all unexpended balances of funds previously appropriated but not yet advanced by the REA. The initial assets of such a loan account would be over $900 million, and in addition, the account would receive more than $200 million each year in payments on outstanding loans.

This loan account would be used solely to pay interest and principal on REA loans from the Treasury, and to meet the needs of distribution borrowers. Since distribution loans have averaged less than $150 million over the past ten years, the assets in the account would be more than adequate to cover REA's obligation to the Treasury, as well as provide the necessary funds for distribution borrowers. Under this system the Administrator could continue to make direct direct loans to distribution borrowers at a rate of interest deemed appropriate by Congress.

The Congress should continue some control over the REA program by authorizing the total amount of direct distribution loans that would be available from the loan account each fiscal year. On the other hand, no new funds would be needed from the Treasury, because the loan account would have sufficient assets to meet the legitimate requirements of the distribution borrowers.

Also, there should be another amendment to the Rural Electrification Act of 1936, as amended, to establish an insured loan program, similar to the program of the Farmers Home Administration. This program would administer all future applications for generation and transmission (G&T) purposes, in addition to

the pending applications for direct G&T loans which have been announced but not yet funded. There should also be a gradual transition by the distribution borrowers from the direct loan program to the insured loan program. The future requirements of the financially sound distribution borrowers could also be handled under the insured loan program.

Under the insured loan program, the cooperatives would be able to borrow from private lending institutions, since the loan would be 100% Federally insured if the statutory criteria are met.

An insurance fund would be created with an initial appropriation by Congress of $1 million, to cover any losses under the insurance contracts. The Administrator would charge the borrower a premium for the insurance which would go into the fund. As in the FHA program, the premium would not be less than onehalf of 1% per year of the outstanding balance of each insured loan.

Criteria governing insurance of loans for generation and transmission purposes should be provided in the statute, to assure that Federal insurance not be provided when an adequate supply of electric energy at reasonable rates from existing suppliers is available to consumers in the area to be served. A rate would be deemed reasonable if regulated by a Federal or State regulatory commission. If not so regulated, a rate comparison would be made, after adjusting the borrower's estimated rate for differences in Federal, State and local taxes paid by the competing supplier. Such criteria would avoid duplication, and prevent construction of unnecessary and expensive generation and transmission facilities.

All applications for insurance contracts for G&T loans should be reviewed at a public hearing at the request of any interested party who might be injured by the loan, including competing suppliers. Decisions by the Administrator on such applications should be reviewable by an objective regulatory agency and by the courts.

Similar to the direct loan, the total amount of loans which might be so insured by the Administrator each fiscal year would be authorized by Congress. This program, however, would be self-supporting, and the only funds required from the Federal Treasury would be the initial $1 million for the insurance fund.

9. Specific advantages of an Insured Loan Program.

a. Better protection for the distribution borrowers

The direct and insured loan program, by making future direct loans available from the loan account for the benefit of distribution borrowers only, would afford better protection to the distribution borrower. The loan account would contain substantial assets and would provide ample funds to meet the future requirements for distribution purposes.

Under the bank proposals, the distribution cooperatives would be in the same position as the "super-co-ops" which desire ever-increasing amounts of Federallysubsidized funds for G&T purposes. These bills would allow the AdministratorGovernor to favor G&T applicants over distribution applicants, forcing the distribution applicants to pay the highest rate of interest.

b. Less Federal bureaucracy

The direct and insured loan program would not require a new Federal superstructure, and would utilize existing private financial institutions.

The President's Committee on Federal Credit Programs, in its 1962 report, pointed out the advantages of utilizing private lending institutions as follows: "Wherever consistent with the achievement of the essential purposes of the program, the Federal credit aids chosen should be designed to encourage and supplement private lending activities rather than to substitute for them. This emphasis is essential not only to preserve and strengthen the ability of the private market in our free enterprise system to allocate resources efficiently, but also to avoid placing unnecessarily large and complex administrative burdens on Federal agencies." [Italic added.]

c. Less burden on taxpayers

The bank bills would continue direct loans at 2% and would permit "intermediate" loans at 4% or less. They would divert $750 million from the United States Treasury to subsidize the bank. The taxpayers would be paying for the services of REA employees processing the "intermediate" loans. The Treasury would also be required to "back up" the debentures to be issued by the Federal Electric Bank.

The effect of these subsidies would be to increase the involvement of the Federal Government in the rural electric program for decades in the future.

The insured loan programs, by contrast, would not involve subsidy, except for the initial appropriation of $1 million for the insurance fund, and the loan account program would not require any new funds from the Treasury.

d. Better protection for other suppliers of electric energy

The insured loan program would assist the cooperatives to achieve their legitimate purpose under the 1936 Act, that of providing service "to persons in rural areas not receiving central station service." Ample funds for distribution purposes would be provided, but the desires of some cooperative leaders and Government officials to finance construction of duplicating G&T facilities would be controlled by statutory criteria.

e. A more genuine move toward private financing

The insured loan program would utilize local lenders and the private money market with the role of the Federal Government reduced solely to that of insurer. In time, many cooperatives would not even need the Government insurance and could obtain their capital requirements directly from private lenders.

The Federal Credit Program Committee report in 1962 described the insured loan approach as the "first alternative" as follows:

"Government guarantees or insurance of private loans should usually be the first alternative considered. This device uses the experience of existing local lenders and their knowledge of the needs in their own geographic areas to limit the administrative burdens otherwise placed on Government lending agencies. It can also be an important stimulus to competition in private markets."

Under the bank bills, a huge Federal bank would be established which would be in direct competition with existing financial institutions. The Federal Electric Bank would sell debentures in competition with other Federal and private financial institutions. The result would be that the cooperatives would remain dependent on Washington, and the Administrator-Governor, rather than dealing with local, privately-owned financial institutions.

f. More consistent with Federal credit program goals

In 1962, a special committee composed of leaders in the executive branch of the Government was appointed by the late President Kennedy to study Federal credit programs. That committee, in its Report*, recommended that "Federal credit programs should, in the main and whenever consistent with the essential program goals, encourage and supplement, rather than displace private credit. . . . More can be gained in the end, therefore, if Federal credit programs by working through the private money market, help to make it stronger and more competitive, than if they completely pre-empt functions that private parties can potentially perform effectively. . . ."

The Report was transmitted by the President to all Departments and credit agencies in the executive branch and suggested that they should be "guided by the principles outlined in the Report in administering their present programs and especially in proposing any new or expanded credit authority." The President requested the Director of the Bureau of the Budget to take the lead in assuring an effective and equitable application of these guidelines.

The Federal Electric Bank bills are not consistent with the guidelines because the bank would preempt functions that private lending institutions could perform effectively. The insured loan program would utilize existing private financial institutions, and is, therefore, more consistent with the policies approved by the President in 1962.

g. More adequate congressional controls

Under the direct and insured loan program, the Congress would specify two figures each fiscal year: the total amount of direct for distribution purposes to be made by the Administrator; and the total amount of loans to be insured by the Administrator. This would enable Congress to review the program each year,

Report of the Committee on Federal Credit Programs to the President of the United States, dated Feb. 11, 1963. The Committee members were Douglas Dillon, Secretary of the Treasury, Chairman; David R. Bell, Director of the Bureau of the Budget: Walter W. Heller, Chairman of the Council of Economic Advisors; and William McC. Martin, Jr., Chairman of the Board of Governors of the Federal Reserve System.

and to provide the necessary funds under Congressional oversight. The only funds needed from the Treasury would be the initial $1 million for the insurance fund.

For the foregoing reasons, which to us are most compelling, H.R. 1400 should be defeated.

We have advanced an alternative, constructive program of Insured Loans which we commend to your favorable action.

STATEMENT BY BIRUM G. CAMPBELL, VICE PRESIDENT, CONSUMERS POWER COMPANY, JACKSON, MICHIGAN

I am Birum G. Campbell, Vice President of Consumers Power Company which has its headquarters at Jackson, Michigan. On June 14, 1966 it was my privilege to appear before this Committee in opposition to Bills H.R. 14000 and H.R. 14837. We have since carefully reviewed Bill H.R. 1400 which you are presently considering, and wish to submit this statement.

Consumers Power Company has been conducting a public utility business in Michigan since 1915. The Company presently serves some 979,000 electric customers. All of the Company's utility operations are confined to the State of Michigan. While much of its service area is devoted to manufacturing, other activities, such as agriculture and the tourist and resort business, rank high among the businesses served by the Company. The Company also sells electricity at wholesale to other electric systems within the State of Michigan, including a number of investor-owned public utilities, municipally operated utilities and rural electric cooperatives.

As the economic tempo in Michigan has quickened, we have kept pace by expanding and improving our system to provide dependable electric service at a reasonable cost. For instance, the Company's installed generating capacity has increased nearly 100% in the last ten years. A report recently issued by the Federal Power Commission ranked the Company's steam electric generating system as the third most efficient among all systems in the United States in 1964 in terms of thermal, efficiency, i.e., based on the amount of heat used to generate a net kilowatt-hour of electricity.

Our determination to operate efficiently is reflected in our charges to our customers and over the years our average revenue per kilowatt-hour of electricty sold to residential customers has regularly been below the national average for all similar companies. Early in 1965 the Company voluntarily reduced several of its electric service rates, including a 19% reduction in electric space heating rates. Further voluntary reductions in 1965 and 1966 reduced the cost of electricity to our customers by approximately $7,400,000 per year. All of our retail rates, as well as the terms and conditions of our electric service, our accounting procedures, our issuance of securities, and other matters, are thoroughly regulated by the State Public Service Commission.

Since the 1920's the Company has taken an active role in rural electrification and has received national recognition for its pioneering efforts in this field. One of the most noticeable of these efforts was the historic Mason-Dansville experimental farm line energized on February 4, 1927. This first rural electric line was a joint effort by Consumers Power Company and Michigan State University to determine the economic feasibility of rural electrification. This seven-mile line made electric service available to 33 farms; however, only 12 of the farmers were willing to cooperate by wiring their buildings and signing contracts for service the other 21 rejected the opportunity to take part in the project.

Through the cooperation of a group of manufacturers, the homes of the 12 participating farmers were equipped with a variety of electrical appliances, each separately metered. As the months passed the meters gave proof that electricity, far from being expensive, was about the cheapest thing a farmer could buy. Farmers and educators came from every county, every state and from many foreign countries to see the line and talk with the participating farmers and their wives.

The gospel of electricity on the farm was spread further through a demonstration truck that Michigan State University, with financial assistance from Consumer Power Company and another large Michigan utility, sent through rural districts to familiarize farm families with the latest in labor-saving appliances. Since this historic beginning the Company has remained a leader in the field

of rural electrification. By 1935 when the REA Act was passed by Congress, the Company had already constructed some 7,056 miles of rural electric lines to serve 26,700 farms. By 1949 we had constructed over 23,000 miles of rural lines and connected our 100,000th farm customer-a feat recorded in the Congressional Record on Monday, October 10, 1949, by Representative Earl C. Michener. The number of farms served reached a peak of 105,802 in 1951 which represents an achievement never since reached by any other single power supplier in the United States. Since that date, the number of farms has shown a gradual decrease due to farm consolidation, urbanization of former rural areas and acquisition of farm lands for State highway construction and other purposes. From the very beginning of its historic rural electrification program, and as is the case today, the Company did not differentiate between rates charged its farm customers and those charged its city or urban customers.

Consumers Power Company is opposed to the creation of a Federal Electric Bank or a Federal Electric Bank for Rural Electric Systems as proposed by H.R. 1400. We are convinced that in order to continue to meet the electrical requirements of their customers, the rural electric distribution cooperatives in Michigan do not require any means of financing in addition to those presently available to them. Furthermore, we believe that the adoption of the proposed legislation would encourage the rural electric generating and transmission cooperatives in Michigan to continue to undertake uneconomical and needless expansions of their generating and transmission facilities as, the record indicates, they have done in the past. And we believe such legislation would also encourage those cooperatives to continue to extend their facilities in order to sell wholesale electric power to cities rather than to provide service in rural areas as contemplated by the law.

At present, there are 13 rural electric distribution cooperatives operating in Michigan. As of the end of 1965, they had a total of about 98,000 customers and the total amount of loans that had been advanced to them at that time by the Rural Electrification Administration aggregated approximately $62,000,000. Since the State of Michigan is now adequately served with electricity and inasmuch as electric facilities extend now to essentially all areas of the State, it is reasonable to assume that there will be little need for further service area expansion of the rural electric distribution cooperatives in the State. Accordingly, although we recognize that the distribution cooperatives will need additional funds in order to meet any increase in electrical requirements of their existing customers and the requirements of any new customers within their present service areas, the presently available sources of funds seem more than adequate to meet these reduced requirements for additional funds. Clearly, the asserted need for additional sources of financing on the part of the rural electric cooperatives is not reflected by the situation in Michigan. Hence, we oppose the creation of a Federal Electric Bank.

As I have indicated, our opposition is also based upon an experience of uneconomical and needless expansion of generating and transmission facilities by the cooperatives in that part of the State in which Consumers Power Company renders electric service. In the lower peninsula of Michigan where the Company operates, there are two generating and transmission cooperatives and ten distribution cooperatives. Of the latter, two cooperatives purchase their entire power requirements and one purchases substantially all of its requirements from the investor-owned utilities in the area. The other seven distribution cooperatives have joined together to form the two generating and transmission cooperatives, which are called Northern Michigan Electric Cooperative and Wolverine Electric Cooperative, and receive all of their electricity from them.

In 1950, when Northern Michigan and Wolverine Electric were formed, Consumers Power Company offered to provide wholesale power at costs which the record has shown to be substantially lower than costs actually experienced by the seven cooperatives who obtained their power from Northern Michigan and Wolverine. Thus, if these distribution cooperatives had purchased their power from Consumers Power Company during the years 1950 through 1965 at a cost equal to the average rate paid by all of the Company's wholesale customers, the seven distribution cooperatives would have realized a direct savings in power costs of $6,770,881 during the 16-year period. This is shown in Exhibit A accompanying my statement. As a matter of fact, the present cost of power to those distribution cooperatives is among the highest experienced by rural electric co