RURAL ELECTRIC AND RURAL TELEPHONE SUPPLEMENTAL FINANCING WEDNESDAY, APRIL 5, 1967 HOUSE OF REPRESENTATIVES, The committee met, pursuant to recess, at 10:05 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, de la Garza, Vigorito, Jones of North Carolina, Dow, Montgomery, Brasco, 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; Francis LeMay, staff consultant; and Fowler C. West, assistant staff consultant. The CHAIRMAN. The committee will come to order. We are met again this morning for further consideration of H.R. 1400 and related bills. We have a number of our colleagues with us this morning. I have the witness list here which lists the Honorable Harold Johnson, of California, as our first witness. I have just been advised that Mr. Johnson probably will not be with us but that he will file a statement. It will be made a part of the record at this point. (The prepared statement of Hon. Harold T. "Bizz" Johnson follows:) STATEMENT OF HON. HAROLD T. (BIZZ) JOHNSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA Mr. Chairman, I appreciate the opportunity to appear before your able committee this morning in support of H.R. 1400, legislation providing for additional sources of financing for rural electrification and rural telephone programs. As a native and long-time resident of the Second District of California, which I have represented in the Congress since 1957, I have had the opportunity of watching small groups of rural people working in partnership with their Government to get electric service and telephones. I have seen them struggle to overcome the problems of rough terrain, weather, distance, isolation, low density and high costs to keep these services alive. I think these people deserve the opportunity to work out their problems and improve their living standards. In my opinion, H.R. 1400, with the amendments suggested by John A. Baker, Assistant Secretary of Agriculture, gives them that opportunity, and does it at a minimum cost to the Government. A sound and equitable means of providing supplemental financing for rural electric and rural telephone systems has been discussed from one end of the country to the other for more than four years. Yet, there is a striking lack of understanding surrounding it. This misunderstanding brings to mind the story of the school director who arrived late at a board meeting where the purchase of a chandelier for the auditorium was being considered. Plunging into the discussion, he declared, "I am against it for three reasons. First, we can't afford it; second, we have nobody to play it; and, third, we need more light for the auditorium." Now, I do not profess to be an electrical engineer or one of the top ten economists in the country, but I can tell you that I have watched firsthand small groups of rural people struggling along with primitive power and communications tools. I have seen them working to get electric and telephone service, and I have seen them battle the problems of weather, distance, terrain, isolation and low density to keep their service up-to-date. I think they deserve fair consideration in their quest for a better life in the rural community. My own State of California is now the most populous in the Nation. Yet, I can show you people in the Second District I represent who still do not have the elemental ingredient of 20th Century progress we call electric service. For example, there are more than 600 year-round and seasonal establishments in the Forks of Salmon area without electric service. The Rural Electrification Administration is trying to find a way to get somebody to rescue these people from the electrical no-man's-land that is retarding their living standards and the opportunities to utilize the surrounding resources. My friends in other states tell me that pockets of unserved rural people are found there too. For these reasons, among others, I am not willing to concede that the job of rural electrification has been completed. We frequently hear the assertion that REA should be phased out, now that about 98 percent of the farms of the country have electric service. Let me emphasize that the Rural Electrification Act of 1936 authorized financing for service to people living in rural areas, not just farmers. REA borrowers are connecting more than 150,000 new consumers each year. These are people who have never enjoyed the benefits of electric service at all or who have elected to build homes or businesses in the country, away from the congestion, noise, and air pollution of the cities. The success of the rural electrification program in bringing the percentage of our electrified farms up from about 11 percent at the beginning of 1935 to more than 98 percent today has created new needs and new challenges. The rural electric systems financed by REA face continued persistent demands for service from new consumers and demands for increased energy from existing consumers. Sales of electricity on REA-financed systems have more than doubled in the last 10 years, and we can expect this trend to continue. The rural telephone program, initiated nearly 15 years after the electric program, has similar needs and challenges. There remains ahead the most difficult job of reaching the 20 percent of our rural establishments which do not have any telephone service, the job of modernizing service to those who are still having to use outmoded, inadequate, multi-party telephone service, and the unexpected but pressing job of upgrading existing service to rural subscribers served by REAfinanced systems. The average rural subscriber on an REA-financed system is making three times as many calls as he did when he first obtained dial service. The demand for single-party service continues to increase. In the dynamic growing economy of our Nation, with its constantly increasing population and improvement in its standard of living, the rural electric and the rural telephone systems cannot stand still. They must make heavy capital investments to meet service demands and to upgrade service. The job becomes more difficult and more costly as time goes on, just as it does in the urban segments of the industry. President Johnson as early as 1965 pointed out the need for increased capital sources for these systems. In a message to rural electric borrowers, he said: "It is reasonable to expect that your requirements for new capital in the years ahead will exceed the amounts that can be provided through the traditional REA loan program... I also believe the Government, as part of its responsibility in this partnership that has developed the rural electrification program, must continue to work with you to develop and implement your plans for the future. I am confident that you, the Administration and the Congress will be able to develop a sensible financing program which will provide you with the opportunity to expand with the rest of the economy." Along this same line, Secretary Baker testified March 21 before this committee in support of H.R. 1400: "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 futurerendered by permanent, stable, adequately financed systems." He continued: "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 who 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," Secretary Baker emphasized, “it is imperative that new and additional sources of capital funds, at usable rates, be developed to meet the expected and needed expansion of these rural systems." I am thoroughly in agreement with the Assistant Secretary, and I know that the people responsible for the management of the rural systems concur in this viewpoint. They have, through their national associations, made a comprehensive and detailed study of the future needs of these systems and they are almost unanimous in their support of a supplemental financing plan that will enable these systems to progress from the present 2 percent interest rate for Government loans up the credit ladder to private financing at market rates. This is indeed a worthy objective. The Poage bill, I am pleased to observe, continues the 2 percent interest rate for those rural systems that need it. Certainly, there is still a substantial need for this favorable financing. In my district, the Surprise Valley Electric Corporation, at Alturas, energized the first REA-financed electric line in California. Even after 29 years of service, this system averages less than two consumers to the mile of line. When we compare this figure with the average density of 38 consumers per mile of line for the commercial power companies in the State, we can see the tremendous handicaps under which some of these rural systems operate. The manager of one of these REA borrower systems, in referring to the difficulties which his crew and the REA engineers had to overcome in bringing electricity into rural communities, had this to say: "Sometimes I wonder how we ever built some of this pole line. We have places where construction costs run three to five times the national average. In some of the canyons where we have to run lines, the slopes are too steep for a man to walk." The president of a telephone company which turned to REA for financing describes the job this way: "We have 900 subscribers along lines strung out in areas nearly as big as the State of Connecticut. This is about the roughest terrain you can imagine. These mountain ridges run up around 7,000 feet and the winter snows pack to 15 or 20 feet on the slopes where some of our lines are located. There have been times when our maintenance crew had to dig down under the snow to find the pole tops. When spring thaws come, we are plagued with slides that damage the pole lines." I am glad to report that REA financing has made it possible for this small company to convert all its toll operations to microwave, giving more dependable service without the costly construction and maintenance of pole lines. I cite these examples from my district to show the need for continued financing at usable rates. I am sure that cases of equal difficulty, though perhaps varying in type, can be found in about every state in the Nation. Abandonment of the 2 percent interest rate in financing would work a real hardship on some rural systems and means that many rural people could not enjoy the benefits of adequate rural electric and rural telephone service. The Nation cannot permit this to happen. As Norman M. Clapp, the REA Administrator has said, "Not all REA-financed systems suffer the same handicaps nor will they all be confronted with the same problems. Each is an individual establishment with its own strengths and weaknesses." I know of no better authority on rural electrification and rural telephony, and I want to quote briefly his evaluation of the variety of conditions surrounding the rural systems: "Some few are virtually out of debt to REA; many have made advance payments on the principal of their loans; virtually all are current in their debt service payments; a handful are more than 30 days overdue on their payments. "Some few still show deficits in their net worth; a somewhat larger number have net worth in excess of 50 percent of their total assets; most are still painfully and slowly building their net worth. "Some few serve relatively densely populated, prosperous rural areas. Others serve less than one consumer a mile and economically disadvantaged areas. "Some have stable service areas in which they serve all establishments; others are under constant attack and encroachment. "Some of the electric systems have stable low-cost power supply arrangements; others are at the mercy of their wholesale suppliers who use their wholesale power contracts as economic bludgeons. "These systems represent a broad spectrum of economic, social, geographic conditions in the rural areas they serve. This is reflected in the diversity of their financial needs. "With such diversity of financial needs there is a corresponding need for some diversity in the financing alternatives. To fit all borrowers into the present 2 percent mold undoubtedly gives assistance to some beyond their actual financial need. Likewise to force all rural systems into a single mold at a higher rate of interest would cause severe hardships in many other cases." The supplemental financing plan as presented by witnesses representing the rural electric and telephone systems and the Administration, in my opinion, is exactly the type that is needed in rural America. It permits sufficient flexibility to meet the needs of the rural systems at the lowest practicable cost to the Government, and it permits these systems to carry out the objectives of the REA programs, namely to provide rural people with electric and telephone service in quality and on terms comparable to that available in urban areas. The plan has sufficient Congressional controls to assure periodic review and action wherever and whenever desirable. I, as a long-time observer and friend of the REA programs, have every confidence that the legislation before the Congress will effectively serve the purpose it was designed-the provision of assured and viable sources of financing for the REA programs, supplemental to the existing source, from banks that will ultimately be owned and controlled by their borrowers. In the context of the needs of the REA programs today, its enactment could be as significant as was enactment of the Pace Act in 1944 when, by liberalizing the terms of REA loans, the Congress made it possible to move rural electric service first, and then rural telephone service, out over the country and to give real meaning to the term "area coverage". Passage at this session of legislation authorizing a supplemental financing plan would give the rural electric and rural telephone systems the tools they need to continue their efforts to build a better Rural America and, yes, a better America for all Americans. Thank you, Mr. Chairman. The CHAIRMAN. Our next witness on the list is Congressman William R. Anderson, of Tennessee. We will be glad to hear you now. We appreciate your coming to visit with us. You may proceed. STATEMENT OF HON. WILLIAM R. ANDERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE Mr. ANDERSON. Mr. Chairman and members of the committee, I appreciate very much this opportunity to make a statement relative to H.R. 1400. My purpose for being here is twofold: First, to express enthusiastic support for this excellent legislative proposal. It is badly needed. Second, to suggest a brief perfecting amendment of great importance to the electric co-ops in my section of the country that purchase their power from the Tennessee Valley Authority. May I speak briefly to the first point. The REA and the electric co-ops have done a magnificent job in making smalltown and rural America an attractive and productive place to live. They have made electricity conveniently and reliably available at reasonabe cost to remotest farm, ranch, church, school, or rural factory. This, in itself, has been a valuable deterrent to the almost overwhelming rush of people to the cities and the attendant problems of urban crowding and sprawl. Now that urban problems have reached acute proportions, it seems important to provide every possible incentive for people to live and work in rural areas. Such incentive embraces the ability, on a continuing basis, of electric co-ops to have additional capital sources to modernize and keep effectively up with the power needs of the areas served. H.R. 1400 is an excellent concept in this regard. Now, may I address myself to the second point. The language of H.R. 1400 contained in section 408 (b) (5) would pose a great problem to the co-ops in several States of the South and midsouth. We need very badly a committee amendment to the certificates-of-ownership provision in order to allay concern expressed by rural electric systems which buy their wholesale power from the Tennessee Valley Authority. Under current wording of the bill, there is grave doubt that these co-ops could qualify as borrowers from the rural electric bank. It is my understanding that a number of the rural electric systems in the TVA area interpret this section to require some form of "capital credits" or "patronage" program and that they are not able to comply with such a requirement under the contracts they enter into with TVA. These contracts require the co-ops to use any margins in the direction of rate reductions rather than patronage refunds. This not only helps to keep electric bills low but aids in TVA maintaining its yardstick function, which has proved to be so important, not only in the valley but nationwide as well. All 25 rural electric cooperatives in Tennessee purchase all of their electric power from the Tennessee Valley Authority. A total of 50 rural electric cooperative systems in the valley region-Alabama, Georgia, Kentucky, Mississippi, Tennessee, and Virginia obtain their power from TVA. The power contracts that TVA has entered into with the rural electric cooperatives include this specific preamble: The TVA Act provides that the sale of such power shall be primarily for the benefit of the people of the section as a whole and particularly the domestic and rural consumers, to whom it is desired to make power available at the lowest possible rates and in such manner as to encourage increased domestic and rural use of electricity . . . The body of the power contract contains a section concerning the uses to which a cooperative may employ its gross revenues. These include electric system operating expenses, payment of principal and interest on system indebtedness, establishment of reasonable reserves, and so forth. This section further provides that all revenue remaining |