At Basin Electric's annual meeting in November, 1966, the members of the Cooperative reaffirmed their position on rural electrification financing. I have attached a copy of the resolution which I respectfully request be entered into the record as part of my testimony.

The Basin Electric resolution says in part:

We unequivocally support the 2%, 35-year REA loan program as essential to the rural economy and as necessary for meeting the needs of the rural electric cooperatives, both the distribution systems and the G & Ts, in the Missouri River basin. We oppose any attempts to separate the G & T program from the distribution cooperative program.

The G&T program is vital to the continuation of effective rural electrification, even to those systems that do not now belong to G & Ts. We therefore urge that any financing legislation fully include the G & T systems as an integral part of the rural electrification program.

Our membership resolution on rural electrification went on to say:

We believe that the lowest cost power possible is vital to American agriculture and therefore we believe that no REA 2% loan should be denied a rural electric cooperative because of the rates it charges.

We believe that such a provision is essential to any supplemental financing legislation. We recommend that any such legislation clearly require the administering official-whether it is the REA Administrator or another government official-to judge eligibility for 2% loan funds on bases other than the rates that a rural system charges.

Another provision of proposed legislation being considered by this Committee, is judicial review of loans for rural electrification. We fully support the National Rural Electric Cooperative Association in its strong opposition to this provision. Judicial review of loans would subject rural systems to costly and needless harrassment by private power companies and further increase the cost and delay the progress of rural electrification. The courts have repeatedly rejected the judicial review of REA loans. To break with this precedent in the case of loans made by an Electric Bank would undo the essential protection afforded the rural electric systems by the courts up to this time.

Court decisions on judicial review of REA loans were recently reaffirmed in the case of a loan to East River Electric Power Cooperative, Madison, South Dakota, a member of Basin Electric. In the opinion of the United States Court of Appeals for the Eighth Circuit:

The studied expertise of the Administrator, the Comptroller General and Congress as to comparative cost studies, efficiency, flexibility and overall utility should remain in their capable hands and not the courts. The decisions entail engineering know-how and accounting procedure which the executive and legislative branches of government are better equipped to handle than the judiciary. The exercise of judgment by the Administrator, Congress or the Comptroller General invokes far more than performing a ministerial act . . . The promulgation of the regualtions in question unequivocally demonstrates that the Administrator relies upon Congessional guidance and sanction. Although we doubt that Congress and the Comptroller General will desire to review every loan made by REA they do possess the machinery and the ability for review . . .

In the matter of requiring rural electric cooperatives to issue transferable certificates of ownership, as provided in HR 1400 and other bills, we fully support the position of NRECA in opposing this provision. The accomplishments of rural electrification in this country were made by non-profit cooperatives in which each member has an equal voice. The strength of the cooperatives is in their one-member-one-vote organization. It would be tragic to allow them to come under the control of special interests.

Throughout the four years of discussion among rural electric cooperatives about supplemental financing, the question of criteria by which eligibility for 2% interest REA loans will be determined has been of central importance. REA and NRECA officials have stated that 75% of the nation's rural electric would still need 2% loan funds. We have been concerned about loan eligibilty criteria and were pleased when the membership of NRECA unanimously adopted a resolution at this year's annual meeting calling for a study of criteria by a committee of NRECA members, with special attention to the concept of "parity of service."

NRECA can do a valuable service for its members and the Congress by studying this important matter. The idea seems fundamental to the question

of which rural electric systems will continue to be eligible for 2% loan funds, or intermediate loans. It also bears on the question of what amount of funds will be needed in the next fifteen years to provide rural electric service that is comparable to that received by urban people.

For example, rural people in my area periodically have had to go without electric service for from five to seven days when hundreds of miles of electric lines were brought down by severe ice storms or blizzards. These lines have to be built more strongly, and more "loop feeds" will be needed, before these rural people approach parity of service with urban people. This task will require loan funds at low interests rates.

Another challenge to the rural ssytems in our region is that of meeting the power needs of increasingly intensive farming as net income per unit of product declines while demand for food increases. Lift pump irrigation for example, has developed to some degree in the Dakotas and is sure to develop to a much greater degree. The importance of irrigation to the semi-arid Great Plains goes without elaboration.

All of this new load will exist in rural areas where the cooperatives serve. To provide "modern, high quality" electric service for these loads on an area coverage basis will require rural electric systems to reach out from their substation with bigger lines-with three-phase service that requires more wires heavier poles, and bigger transformers and to have an expanded supply of wholesale power at low cost. This job cannot be done on the Great Plains without 2% REA loan funds.

There are many other instances where the quality of rural electric service should be up-graded to achieve parity of service with that available in cities. We respectfully urge the members of this Committee to consider this important aspect of the future of rural electrification as NRECA develops their studies for your consideration.

Five points summarize Basin Electric's position on the legislation dealing with financing of rural electrification:

1. Any bill should provide for the continued eligibility of distribution and generation and transmission cooperatives for 2% interest, 35-year REA loans, and these systems should not be barred from receiving such loans because of the rates they charge.

2. Any legislation dealing with supplemental financing should not change in any way the present REA Act. Two per cent, 35-year, REA loans should be preserved for rural electric cooperatives (both distribution cooperatives and G & Ts) serving sparsely settled areas. H.R. 7521 recognizes this concept but seems too limiting in its definition of sparsely settled areas.

3. Basin Electric categorically opposes any legislation that provides for judicial review of loans or loan expenditures.

4. Legislation should not require the rural electrics to change their time. honored organization by issuance of transferable stock ownership certificates. 5. The results of the study of "parity of service" and other criteria being made by an NRECA membership committee should be given careful consideration by the Congress in connection with developing any supplemental financing legislation.

In conclusion Mr. Chairman, I respectfully urge that the members of the Committee give full weight to the social values of rural electrification in their deliberations upon a plan for supplemental financing and to assure themselves that the legislation they approve will not mean taking away a vital equalizer for the rural people who have enjoyed a much smaller share of the nation's prosperity than most. Surely there can be some positive assurance to rural people that at the very time they are being asked to produce more food and fibre for their nation and the world, that the cost of farming is not going to be increased because of increased interest costs on rural electric facilities. It is a hand-out that the farmers of the Missouri Basin ask for, but a measure of equity in an economic system which has left the farmer with little bargaining power and a dwindling share of the nation's prosperity. The decline in parity of farm income in the past year from 82% to 74% is ample evidence of this fact. We respectfully urge that in acting upon this legislation to change the financing of rural electrification, Congress will provide adequate safeguards to preserve the low interest loan program so necessary to the majority of rural electric systems.

We appreciate very much the opportunity you have afforded Basin Electric to present its comments on the financing of rural electrification.

BASIN ELECTRIC POWER COOPERATIVE, PROVIDENT LIFE BUILDING, BISMARCK, N. DAK., SIXTH ANNUAL MEETING, NOVEMBER 10, 1966

RESOLUTION

Financing rural electric cooperatives

During the past three years, the rural electric cooperatives of the nation have engaged in numerous discussions about future financing. At the National Rural Electric Cooperative Association annual meeting in February, 1966, in Las Vegas, members of the Association took action authorizing the presentation of legislation to Congress which would provide for a source of financing supplemental to the 2%, 35 year REA loan program.

A bill to establish an Electric Bank was introduced to Congress during the past session. Many rural electric cooperatives, including Basin Electric, which serve in sparsely settled areas where revenues from electric service are very small compared to investment, have urged legislative protection of the essential 2%, 35 year loan program as a part of proposed amendments (establishing supplemental sources of financing) to the REA Act.

Since the efforts to pass supplemental financing legislation in the 89th Congress were not successful, Basin Electric again states its basic position on financing rural electric cooperatives.

As an association of 106 rural electric cooperatives which have taken various positions on supplemental financing legislation, Basin Electric members in their Annual meeting, November 10, 1966, reaffirm the following positions concerning financing of rural electric cooperatives:

1. We unequivocally support the 2%, 35 year REA loan program as essential to the rural economy and as necessary for meeting the needs of the rural electric cooperatives, both the distribution systems and G & T's, in the Missouri River Basin. We oppose any attempts to separate the G & T program from the distribution cooperative program.

2. We believe that the lowest cost power possible is vital to American agriculture and, therefore, believe that no REA 2% loan should be denied a rural electric cooperative because of the rates it charges.

3. We recognize that rural electric cooperatives in other parts of the country may have different financing needs which lead them to seek future financing at higher interest rates.

4. We urge Mid-West Electric Consumers Association, the statewide associations in the eight states served by our members, and NRECA to work for the continuation of the 2% REA loan program and to oppose any amendments to the REA Act which would threaten the continuation of this loan program for all rural electrics.

5. We direct the Basin Electric Board of Directors and management to continue to study future financing requirements and future financing methods, in cooperation with its Class A members and other G & T's, to the end that lowcost financing for Basin Electric and the transmission and generation facilities of other G & T's will be available, without restriction, and which will also provide financing for the needs of all rural electric cooperatives.

The CHAIRMAN. Our next witness will be Mr. Alfred E. Borneman, vice president and director, Kidder, Peabody & Co., Inc., New York City.

We will be glad to hear from you now.

STATEMENT OF ALFRED E. BORNEMAN, VICE PRESIDENT AND DIRECTOR, KIDDER, PEABODY & CO., INC., NEW YORK, N.Y.

Mr. BORNEMAN. Mr. Chairman and members of the committee, my prepared testimony has been filed with the committee and I will attempt to summarize the testimony in the 6 minutes that is allotted. My name is Alfred E. Borneman. I was born in St. Peter, Minn., although I am not a farmer.

Since 1928 I have been continuously associated with Kidder, Peabody & Co. as vice president and director.

Kidder, Peabody & Co., Inc., was among the top five investment banking firms in the United States ranked in order of total number of corporate public offerings managed or comanaged during the past 5 calendar years, not including private placements. During the 5 years, 1962-66, our firm managed or comanaged public offerings amounting to $858,651,000 for electric and combination electric and gas companies, and $255,973,000 for communication companies.

My responsibility in this area is that of vice president in charge of our public utility finance department.

In June 1966 I appeared before the committee and presented a statement in which I opposed favorable action by the committee on either H.R. 14000 or H.R. 14837, which were under consideration at that time.

The provisions contained in H.R. 1400 are not such as to remove the major objections to the creation of the rural electric bank as set forth in that testimony before this committee in 1966; therefore, I, again, recommend that this committee does not approve H.R. 1400 in its present form because of the reasons given in my previous testimony which are amplified and supplemented here in this testimony which I have filed with the committee.

In brief, these reasons are the following:

1. There are fiscally sound alternatives which would accomplish the main objective of providing supplementary financing for the cooperatives without placing additional heavy burdens on the fiscal position of the U.S. Treasury in the form of subsidy contributions of $750 million and a further proliferation of agencies issuing debt up to a minimum of $6.75 billion by the bank in effect guaranteed by the Treasury.

2. The organization, financing procedures, and lending policies of the REA bank as set up under H.R. 1400 are unsound and may result in conflict of interest between lender and borrower and perhaps among various types of borrowers.

3. The vastly increased area of expanded purposes for which loans may be made under sections 4 and 408 under H.R. 1400 and the lifting of restrictions which were included in the 1936 act, would create a greatly increased threat of serious competition to the investor-owned taxpaying utilities not only by REA G. & T. projects but by public power projects and power systems to be acquired which would be eligible to borrow under the act with the result that the cost of capital to the investor-owned utilities and, consequently, the cost of power nationwide may be affected.

Fortunately, the staff of the Edison Electric Institute has undertaken a very detailed financial analysis of the 936 distribution cooperatives on which information was reported by the REA for the year 1964. And, further, they have made an estimate of the capital requirements of distribution cooperatives for the years 1966 through 1975. The results of this study have been placed in the record of this committee by Mr. John Thornborrow of the Edison Electric Institute.

On page 4 of the study there is a tabulation of cooperatives having a ratio of funded debt to net tangible assets of 60 percent or less and an interest coverage of three times or better which shows that there are 157 cooperatives whose debt ratio was 50 percent or under, and that

there are 238 cooperatives whose debt ratio was 60 percent or less with an interest coverage of three times or more.

The members of our public utility corporate finance department have made an examination of the study of distribution cooperatives prepared by the Edison Electric Institute, and we have agreed upon an opinion that the 238 cooperatives whose ratio of debt to net tangible assets are 60 percent or less and whose interest-earned ratio is three times or more could finance through the sale of mortgage bonds in the open market. This opinion assumes that the Rural Electric Administrator and the U.S. Treasury would approve a change in the mortgages now held by the Treasury to permit the lien of the new securities sold in the open market to rank paripassu with the old mortgage outstanding.

The CHAIRMAN. Your time has expired.

Mr. BORNEMAN. Thank you.

(The prepared statement submitted by Mr. Borneman reads in full as follows:)

STATEMENT OF ALFRED E. BORNEMAN, VICE PRESIDENT AND DIRECTOR, KIDDER, PEABODY & Co., INC., NEW YORK, N.Y.

Mr. Chairman and members of the committee, my name is Alfred E. Borneman and I am a resident of Rockville Centre, L.I., New York. I was born in St. Peter, Minnesota, and was graduated from Gustavus Adolphus College in 1926 after which I attended the Harvard Graduate School of Business Administration, receiving an M.B.A. degree in 1928.

Since 1928 I have been continuously associated with Kidder, Peabody & Co., becoming a General Partner in 1953 and a Vice President, Director and a Stockholder of Kidder, Peabody & Co. Incorporated in 1964.

Kidder, Peabody & Co. Incorporated was among the top five investment banking firms in the U.S. ranked in order of total number of Corporate Public Offerings Managed or Co-Managed during the past five calendar years, not including private placements. During the five years 1962-66 our firm managed or co-managed public offerings amounting to $858,651,000 for electric and combination electric and gas companies and $255,973,000 for communication companies. In the same period we raised $169,836,000 of new capital for electric companies and $200,500,000 for telephone companies by the private placement method. During the last five years, we arranged 397 private placements of security issues ranging in size from $95,000 to $100,000,000. The private placement method would be the best method of financing qualified REA Cooperatives by direct sales to the public. My responsibility in this area is that of Vice President in charge of our Public Utility Finance Department. In this position I am called upon to advise with financial officers and chief executive officers of various public utility client companies on future financing plans and the best methods which can be used to obtain their capital requirements at the lowest possible cost.

In June, 1966, I appeared before the Committee of the 89th Congress and presented a statement in which I opposed favorable action by the Committee on either H.R. 14000 or H.R. 14837 for reasons summarized as follows:

1. The Bills would not give adequate recognition to the strong financial condition of many of the rural electric cooperatives. By alternative means the resources of the cooperatives could be utilized in such a manner as to eliminate the huge claim on the U.S. Treasury for the $750 million of subsidy contributions of capital for the banks, and to eliminate the need for an indirect government guarantee on the seven and one-half billion dollars of debentures which could be issued by the banks.

2. The Bills would not give the rural electric cooperatives the independence and freedom from government paternalism and control which the better managed cooperatives desired.

3. The Bills would lift the restrictions which George Norris and Sam Rayburn wisely included in the Rural Electrification Act of 1936 as to borrowings from the U.S. Treasury to build distribution system in rural areas.