Mr. PRICE. That is right. Of course, my understanding of the Federal land banks is that their debentures are not guaranteed by the Federal Government. Is this correct? Mr. SICKELS. I do not know. Mr. PRICE. Yet we are asking in the REA bill to give $750 million and then on top of it we are asking that the Government guarantee these debentures. Mr. SICKELS. It seems to me that this is a program that will eventually give the REA's an opportunity to build their own bank and be self-sufficient. Mr. PRICE. I do, too, but I think that it should be set up on a more substantial basis, in a more self-sustaining way. Mr. SICKELS. I do, too. Mr. PRICE. Thank you. The CHAIRMAN. Are there any further questions of Mr. Sickels? If not, are there any questions that anyone wants to propound to Mr. Townsend or Mr. McDonald? Mr. ABERNETHY. I would like to ask Mr. McDonald some questions. Mr. CHAIRMAN. Are there any questions of Mr. Townsend? If there are no questions of Mr. Townsend, we will excuse him. We will excuse you, Mr. Townsend, and we will ask Mr. McDonald to come back. Mr. ABERNETHY. You said that you are opposed to certain provisions of the bill, that you are opposed to the certificate of ownership, and a court review, and you are opposed to the 40-percent provision on page 26. I believe those were the points you directed yourself to? Is that right? Mr. McDONALD. Yes, sir. Mr. ABERNETHY. Are you opposed to any other provisions of the bill? Mr. McDONALD. We are opposed to the Congress turning the bank loose down the road; we think that there should be an oversight committee. Mr. ABERNETHY. I see. Mr. McDONALD. Such as the Appropriations Committee; and, definitely, to keep track of it. Mr. ABERNETHY. One final question. If these provisions remain in the bill, where do you stand? Mr. McDONALD. We will do our best. Mr. ABERNETHY. That is not my question. Where do you stand? Are you for or against it? Mr. McDONALD. I would put it this way, Mr. Abernethy: If these provisions were taken out of the bill, we withdraw our objections to the bill. Mr. ABERNETHY. I understood that. If they are left in the bill, what will you do? Mr. McDONALD. If they are left in the bill, we oppose the bill. Mr. ABERNETHY. Thank you. The CHAIRMAN. Thank you. Are there any other questions of Mr. McDonald? If not, we are very much obliged to you, Mr. McDonald. (The following resolution, statements, and letters were also submitted to the committee:) RESOLUTION OF INLAND GRANGE No. 780 SUPPLEMENTAL FINANCING FOR REA COOPERATIVES Whereas it is necessary for the rural electric cooperatives to apply for loan financing each year from the Congress of the United States and Whereas the needs of these cooperatives are increasing to a point where Congress is reluctant to continue to meet these demands and Whereas the cooperatives have suggested and worked toward the drafting of legislation which would permit financing through the establishment, with federal assistance, of a bank similar to that which was established for the Farm Credit System and Whereas legislation has been introduced to the House Agriculture Committee which would answer this grave need for the rural electric cooperatives Now therefore be it resolved that Inland Grange #780 endorse the action taken to establish a suitable Supplemental Financing Program for the rural electric cooperatives. We members of Inland Grange #780, Elk, Washington, on March 25, 1967, endorsed the above resolution. We hope this will assist in passage of the Supplemental Financing for the REA Cooperatives such as the Poage Bill H.R. 1400. STATEMENT OF PAUL HALLINGBY, JR., CHAIRMAN, PUBLIC UTILITIES SECURITIES COMMITTEE, INVESTMENT BANKERS ASSOCIATION OF AMERICA The Investment Bankers Association has a membership of approximately 680 firms in the United States. These firms have about 2,220 registered branch offices throughout this country. They collectively underwrite, deal in and act as brokers in all types of corporate, United States Government, state and municipal securities. The comments and recommendations in this statement are directed to the provisions of H.R. 1400 which would provide for financing through a Rural Electric Bank. They do not apply to Titles V and VI of the bill providing for financing through a rural telephone account and a Rural Telephone Bank; the proposals in those titles of the bill are still under study by the Public Utility Securities Committee of the Investment Bankers Association. PURPOSE AND ACHIEVEMENTS OF REA The Rural Electrification Administration (REA) was formed for the purpose of speeding up electrification of the nation's farms. The Federal government's rural electrification program was formalized in 1936 with the passage of the Rural Electrification Act. The REA Act states that loans may be made: "... for the purpose of financing the construction and operation of electric generating plants and electric transmission and distribution lines or systems and the extension of existing facilities, for the furnishing of electric energy to persons in rural areas who are not receiving central station service." And rural areas are defined by the Act to mean: areas of the United States not included within the boundaries of any city, village or borough, having a population of over 1,500 inhabitants." In general, this purpose has been carried out well. Today, more than 98% of the farms in the nation are receiving central station electric service from either REA co-ops or investor-owned utilities. The original purpose of the REA has been accomplished. 66 To support the REA's contribution to rural electrification, Federal loans have been approved in the aggregate amount of $5.9 billion, of which $5 billion had been advanced by the end of fiscal 1966. Repayments of principal to that date amounted to approximately $1.7 billion, and payments of interest to almost $800 million. Some $3.3 billion of loans remained outstanding. 976 electric borrowers by the end of 1965 had assets in utility plant in service valued at nearly $5 billion. Borrowers were operating 1,576,984 miles of line by 1965 and distributing electric energy to 5.6 million consumers. Sales were over 41 billion kilowatt-hours that year, and produced operating revenues amounting to about $800 million. Today, investor-owned companies supply at wholesale about 34.2 percent of the energy purchased by the cooperatives. More than 39 percent of the energy the cooperatives purchase is supplied by Federal agencies, and REA borrowers themselves generate some 19.6 percent of the cooperatives' requirements, with the balance furnished by state, district and county agencies. The power supplied the cooperatives by investor-owned companies is at special low wholesale rates which are, on the average, about 30 percent below most standard wholesale rates. In recent years, REA has deviated from its original aims and has permitted its activities to range far afield of rural electrification. It was never intended that low-cost government loans would be used through REA to finance (a) distribution facilities to serve urban areas and industrial customers and (b) generating and transmission (G&T) facilities which duplicate the facilities of existing suppliers. This use by REA of so large a proportion of its available funds to finance generation and transmission facilities (in most case where wholeale power was otherwise available) is a principal reason why REA has found funds appropriated by the Congress inadequate to finance distribution facilities in rural areas in accordance with the objectives of the REA legislation. Loans are made to REA co-ops, including the G&T co-ops, at 2 percent-less than half the cost of money to the Federal government-and no Federal income taxes are paid. The proportion of funds loaned for electric distribution purposes (the original purpose of REA) has been on a declining trend in recent years, while loans made for generation and transmission facilities (the deviation) have increased markedly. In 1955, 73 percent of the loans made by REA was for distribution facilities and 24 percent was for G&T's. By 1965 less than 40 percent was for distribution and over 60 percent was for G&T's. H.R. 1400-PROPOSED RURAL ELECTRIC BANK H.R. 1400 would authorize the establishment of a Rural Electric Bank to provide supplemental financing for rural electric systems and would authorize $750 million in subscriptions by the Federal government to the bank's capital stock. Along with additional capital authorized to be obtained from other sources, this would give the proposed Federal electric bank lending capacity of about $6.4 billion. A total of $8 billion is said to be needed for REA financing in the next fifteen years. And yet the distribution requirements of rural systems is estimated to be not more than $2.4 billion. This leaves a balance of $5.6 billion for the construction of Federal income-tax-free generating and transmission facilities. It was never the intention in the original REA Act that such facilities would be constructed where other power sources are readily available. If the proposed supplemental financing legislation were enacted, the Federal income taxes foregone would amount to an estimated $1.4 billion over the next fifteen years. It would not be in the public interest to have taxpayers' dollars applied to support the so-called electric bank. In fact, it would be unnecessary and wasteful of taxpayers' money because power facilities for the future generally can be financed in the free market without government subsidy. The investor-owned utilities, which serve some 80 percent of the American people, have an annual tax bill totaling some $2.9 billion to all levels of government. To establish a Federal electric bank which would result in serious reduction of taxes paid to support worthwhile government programs would appear most unwise. There has been no demonstration of a need for supplemental government-supported financing to supply quality electric service at reasonable rates to persons in rural areas who would not otherwise receive such service. At present, requirements for extending and strengthening distribution systems have leveled off at about $150 million per year. Congress has consistently provided appropriations to REA well in excess of this figure, and loan authorizations for the elec tric program for fiscal 1967 are $365 million. Within the very broad guidelines laid down in the proposed legislation the Federal electric bank would be able to extend G&T loans as it sees fit, regardless of the views of the Congress concerning their necessity or desirability. Under these circumstances, the program developed to assist in distribution of electricity to rural areas could be turned into a device for large REA electric systems-sheltered from Federal taxation and supported by use of Federal credit at or below its cost to the government, with no assurance of repayment— could compete in both rural areas and many non-rural areas for customers and loads with investor-owned companies. The latter must pay their full share of taxes and costs of capital in the free markets. RECOMMENDATIONS The IBA believes that REA co-ops-most of them being quite successful financially should make use of private capital markets on their own to facilitate their justifiable expansion. Specifically, we submit that: A. Distribution co-ops with adequate size and financial strength could borrow directly in the private capital market; B. Smaller and/or financially weaker co-ops could join hands on a regional basis for purposes of achieving size and financial strength needed to raise capital in private market; C. For participation in generation and transmission projects to accommodate load growth that normally would be supplied by neighboring investorowned utilities, co-ops could follow the Buckeye pattern of joining forces with such neighboring utilities; D. Co-ops could form a bank or banks of their own for raising long-term capital without Federal assistance to supplement REA loans made directly to co-ops under Congressional controls. There are certain other safeguards to the public interest which the proposed legislation does not include. For example, the IBA would advocate that if a government-supported Federal electric bank were created, the present REA lending program should be limited to (a) loans for distribution purposes and (b) loans to co-ops whose service areas do not provide financial strength for borrowing in the private capital market. Likewise, Federal electric bank legislation should include definitive provision for a fair return on the Federal government's investment in the bank and ultimately retiring that investment. Finally, Federal electric bank legislation should authorize loans only for construction projects found to be essential to provide electric service to persons in rural areas not having central station service otherwise available. For each such project a certificate of convenience and necessity should have been issued. A state public service commission, (or equivalent) and service areas of each co-op, in question should have been specifically defined by the state commission (or. equivalent). CONCLUSION In conclusion, the IBA Committee on Public Utility Securities strongly op-. poses the proposed Federal electric bank; such a bank would, in our opinion, unjustifiably increase the financial burden of REA co-ops on the taxpayers and the competitive advantages to co-ops over investor-owned, tax-paying utilities. STATEMENT OF HON. ROBERT W. SCOTT, LIEUTENANT GOVERNOR OF NORTH CAROLINA Mr. Chairman and Gentlemen of the Committee: My name is Bob Scott. I am presently serving as Lieutenant Governor of North Carolina. In several capacities, I have had an opportunity to appreciate the problems of the rural people of North Carolina in obtaining utility services and the courageous manner in which they have joined together to overcome them. One of my earliest memories was the deep involvement of my father, the late Governor and United States Senator. Kerr Scott, with the struggle of our farm people to organize their rural electric cooperatives, and then their telephone cooperatives. And I've always been grateful to the Congress for providing our people with the REA loan program, without which our state would not have progressed as rapidly as it has. As Master of the North Carolina State Grange, I was privileged to work with the electric cooperatives in their effort to obtain territorial legislation to protect their service areas. Such legislation was adopted in 1965 by the General Assembly of North Carolina. This law will protect the public, power companies and the. cooperatives from wasteful duplication of lines by assigning exclusive territories to the suppliers. If the electric consumers of North Carolina are to continue to enjoy good service and low rates, the cooperatives and other utlities must have adequate. capital to meet the demands of the areas to which they have exclusive service. rights. The hard-won victory for orderly utility development in our state will be an empty one if the cooperative utilities supplying most of the land area can't borrow sufficient money to meet their consumers' power requirements. These requirements. I understand, are doubling every seven years. Every time they double, the utility must increase its investment 50 percent. I've read that some opponents to the supplemental financing legislation are. concerned about the cooperatives continuing to have the right to borrow money. for generation and transmission systems. Our cooperatives in North Carolina have no generating plants, but a realistic loan program for this purpose has made it possible for them to negotiate satisfactory contracts with power companies. Since 1965, the public of North Carolina has been further protected against any alleged mis-use of the REA generating loan program; both the cooperatives and the power companies must obtain certificates of convenience and necessity from the N.C. Utilities Commission prior to building a plant. In the 89th Congress, I was pleased to submit a statement of support for HR 1400, which recognized the cooperatives' willingness and desire to provide for their loan requirements through their own bank. It appeared to me then, and it does now, to satisfy our desire for economizing on federal investment without jeopardizing the ability of our rural citizens to get good electric service at reasonable rates. Many of the same features are included in HR 1400, plus some restrictions which surely should satisfy the severest critics of REA and the cooperatives. I only hope that it isn't so restrictive as to deny any cooperative the use of the bank for normal utility purposes. As much as anything else, our 1965 North Carolina Utilities Act recognized the equal service obligations and abilities of both power company and cooperative power suppliers. It is no less important that the cooperatives have the same degree of freedom, and realistic access to loan money, that the power companies have. The legislation you are considering doesn't allow them that much freedom, but with some federal investment and ample protection for the Treasury, it does put them within reach of the private money market. Thank you for considering my statement of support for the supplemental financing bills before you. Hon. W. R. POAGE, ALABAMA STATE CHAMBER OF COMMERCE, Chairman, House Agriculture Committee, DEAR CONGRESSMAN POAGE: It is our understanding that the House Agriculture Committee has scheduled hearings to begin on March 21 on legislation, H.R. 1400, that would expand the financing of R.E.A. electric co-operatives. The Alabama State Chamber of Commerce wishes to record our position on the proposals contained in H.R. 1400 and we do hereby respectfully request that the following statement be given consideration and made a part of the testimony in the hearings concerning this bill. The new federal bank for rural electric systems provided for in H.R. 1400 would, in our opinion, create a national system of federally subsidized financing for public power projects and of further expansion of the Federal government into competition with investor-owned electric companies and private banking institutions. Moreover, this legislation represents a complete departure from the concept of the Rural Electrification Act of 1936. It proposes the mechanics and funds for financing of cooperative electric systems without sufficient Congressional control or any meaningful restrictions on how these public funds would be spent. The door would be opened wide for the construction of unneeded electrical facilities to duplicate or parallel those of investor-owned electric companies. We have no quarrel with the original purposes and intent of the rural electrification program. We simply feel that income-tax paying enterprises should not be displaced by income-tax free organizations in the absence of some real public interest requiring such displacement. In conclusion, we respectfully submit that the salient features of H.R. 1400 are unsound and should be rejected by Congress. Very truly yours, JAMES J. BRITTON, Executive Vice President. LUDINGTON, MICH., March 15, 1967. GUY VANDEr Jagt, House of Representatives, Washington, D.C. DEAR SIR: I have a favor to ask of you. Our Electric Cooperatives throughout the country are faced with a very grave sit |