Despite all that has been done, I still want to say this to anyone who has legitimate reservations about any specific provision: I invite them to help us write language that meets their point. Our only aim, as I have said before, is to get a plan that is workable for the rural electrics, to obtain a sound, workable credit system.

We want no legislation to take advantage of anyone. On the other hand, we don't want legislation that will expose us to new obstacles, restrictions and harassment.

Surely it must be possible to draft provisions that will meet both of these objectives.

I would like to have it underscored in the record of this hearing that we are willing and anxious to explore the possibilities of eliminating legitimate objections.

I hope this Committee will write and recommend to Congress a bill that will help solve Rural America's power problem. We think we have told you how it can be done. If you can find a better way we would welcome it.

Mr. Chairman, that concludes my statement and I would like to call upon Mr. Anderson to discuss the provisions of the bills before the Committee.

Thank you.

Mr. ELLIS. I would like to present three of our people to continue with their statements.

The CHAIRMAN. You have 10 minutes in which to continue-not more than 10 minutes remaining.

Mr. ELLIS. Then, I would like to present Mr. Harry L. Oswald, general manager of the Arkansas Electric Cooperative Corp. and the Arkansas Electric Cooperatives, Inc.

The CHAIRMAN. Thank you very much, Mr. Ellis. We will be delighted to hear now from Mr. Oswald, but first we will incorporate the joint statement by T. W. Hunter, Melvin Ouse, and Hobart Adams, president, vice president, and secretary-treasurer, respectively, of NRECA, previously offered.

(The joint statement referred to follows:)

STATEMENT OF THE NATIONAL RURAL ELECTRIC COOPERATIVE PRESENTED BY T. W. HUNTER, PRESIDENT; MELVIN OUSE, VICE PRESIDENT; AND HOBART ADAMS,

SECRETARY-TREASURER

Mr. Chairman and members of the Committee, my name is T. W. Hunter. I am President of the National Rural Electric Cooperative Association and attorney for Newberry Electric Cooperative, Inc., Newberry, S.C. This statement is presented on behalf of myself and the other officers of our Association-our Vice President, Mr. Melvin Ouse of Rothsay, Minn., who is President of the Board of Directors of Lake Region Cooperative Electrical Association of Pelican Rapids, Minn., and also Treasurer of the Minnesota Association of Electric Cooperatives; and Mr. Hobart C. Adams, our Secretary-Treasurer, who is Manager of Jackson Purchase Rural Electric Cooperative Corporation in Paducah, Ky.

We today represent the 979 rural electric cooperatives which make up the membership of the National Rural Electric Cooperative Association. On behalf of these member cooperatives and the 20-million rural Americans they serve, we wish to express our appreciation to the Comittee for allowing us to testify on the important legislation you have before you.

We shall present to the Committee the history of the development of the supplemental financing plan as developed by our Association. Following that, we will discuss some of the many reasons why this legislation is badly needed and the effect the lack of capital for electric cooperatives will have on our rural areas. We also will submit a brief analysis of the bills before you-H.R. 1400 introduced by W. R. Poage, the distinguished Chairman of this Committee, and its identical companion bills-and give our reasons and recommendations for certain changes in these bills.

1967 RESOLUTION

Mr. Chairman, we are pleased to advise you and the members of this Committee that last month at NRECA's 25th Annual Meeting in San Francisco, delegates

representing our members systems unanimously adopted a resolution calling for a supplemental financing plan similar to that which is embodied in H.R. 1400. That resolution reads as follows:

"Whereas studies and investigations over the past few years have established the need for supplemental sources of capital for the rural electric systems in addition to the present REA 2 percent 35-year loan program; and

"Whereas legislative proposals have been made to fill this need, and hearings have been held on the proposals in both the Senate and the House of Representatives; and

"Whereas there is now before the Congress a number of bills which could solve the future financing problems of rural electric systems: Now, therefore, be it "Resolved, That we urge the Congress to enact legislation that will supplement the long-established 2 percent, 35-year loan program through a sound and viable rural electric credit system embodying the following:

"1. Continue the present REA 2 percent, 35-year loan program for those systems which must have it.

"2. Provide a mechanism which, with sufficient assistance from the Federal government, including capital investment, will give the rural electric systems access to the private money market.

"3. Enable the rural electric systems to borrow funds at terms and interest rates and for purposes that will permit the systems to meet their responsibilities as rural electric utilities."

The decision embodied in that resolution was not one which was arrived at lightly. Much study and discussion has gone into it.

As the members of this Committee know, the only source of capital now open to the rural electric cooperatives is the REA 2 percent loan program. It has served the cause of rural electrification well in the past and will continue to be an absolute necessity in the years ahead for many of the rural electrics which are serving thinly settled rural regions.

However, it appears to be unrealistic to expect the Congress to appropriate all of the ever-increasing amounts of money which the rural electrics will need to meet their future load growth. Furthermore, the rural electric systems, as locally owned and operated private enterprises, do not wish to remain forever as "wards" of the Federal government. What they seek is a credit ladder by which, as they grow in financial strength and maturity, they can move from complete dependence on Federal financing to eventual self-sufficiency.

DEVELOPMENT OF THE SUPPLEMENTAL FINANCING PLAN

These facts prompted delegates at each of the ten NRECA regional meetings held in the fall of 1963 to adopt resolutions urging the NRECA Board of Directors to authorize an objective study of possible supplemental sources of financing for the rural electrification program. The resolutions noted that such a study should include an investigation of rates of interest which would be required if such supplemental financing should be available, the ability of the rural electric systems to pay these rates in the future, and assurances needed that such supplemental capital could be utilized in the most efficient manner to carry out the purposes and objectives of the rural electrification program.

A number of the 1963 NRECA regional resolutions also contained the following qualifying statement: "Be it further resolved that we recognize that the present 2 percent interest rate on REA loans is essential to the program, and we anticipate it will be vital for most systems in the foreseeable future."

Addressing the 1964 NRECA annual meeting, REA Administrator Norman Clapp estimated that all of the electric systems of America-cooperative, private and public-would need more than $140-billion of new capital for expanded plant facilities to meet the growing demand for electricity by 1980. He later estimated the REA borrower systems' share of that capital need would be more than $8-billion between 1965 and 1980. Both estimates are conservative ones. In discussing the proposed NRECA study, Administrator Clapp agreed that it would be in the interest of the rural electric systems to explore the possibilities of supplemental financing in the private money market. He proposed that REA undertake a study of a type of intermediate financing for its rural electric borrowers.

Delegates to the 1964 NRECA Annual Meeting approved a resolution calling on NRECA and REA to conduct studies in depth of the rural electrics' future

capital requirements and means of meeting them, including "an examination of the feasibiilty of obtaining funds in private money markets, and an appraisal of the modifications (if any) which should be sought in REA financing."

To carry out this resolution of its membership, NRECA contracted with the investment firm of Kuhn, Loeb and Co., Inc., of New York City to conduct a study on the possibilities of the rural electric systems borrowing money on the open market for supplemental financing. This particular firm was chosen because of its experience in the development of private generation and transmission financing for the Ohio cooperatives and because Kuhn, Loeb has demonstrated throughout its 100-year history a successful capability for pioneering the development of new capital plans in various industries.

As the preliminary work progressed, however, it soon became apparent that a study of the private market potential for supplemental funds would be inadequate in view of the broad and complex problems faced by the rural electrics in the area of future financing. Consequently, at the 1965 NRECA annual meeting, the board of directors and the membership authorized a broadening of the study to include all types of financing-private, public and mixed.

The result of two years of work in this area is the comprehensive 208-page Rural Electric Financing Study Report. Starting with a chapter on the objectives of the rural electrification program, the report covers financial capabilities of the rural electric systems; their present status and future prospects; rural electrification in relation to the new technology of the electric industry; capital requirements for the future; the present REA electric loan program; the loanfund account proposal; the REA intermediate financing proposal; self-financing from revenues; analyses of the Farm Credit System and of various guaranteed and insured loan programs; the Ohio plan; the public agency and nonprofit corporation approach; and the Kuhn, Loeb report.

At the 1965 summer meeting of the NRECA board, the directors made a comprehensive review of the Rural Electric Financing Study Report and unanimously adopted a resolution recommending that the report be presented to the rural electric systems across the nation for their consideration. During the fall and winter, the report was thoroughly discussed at state meetings of rural electric leaders as well as at the ten NRECA regional meetings.

Many of the recommendations brought forward at those meetings were ultimately incorporated in the NRECA supplemental financing plan. During the period in which it was being developed, numerous conferences were held with REA officials and with Kuhn, Loab financial experts. The specifics of the resulting proposal were detailed in the publication, Supplemental Financing Program for Rural Electrification, which was furnished to all rural electric systems for their consideration prior to the 1966 NRECA annual meeting.

At that meeting, rural electric leaders approved this supplemental financing plan by an overwhelming majority. The resolution adopted took note of the fact that the REA 2 percent interest loan program must be continued for those rural electric systems which cannot adequately serve their consumer-members without such financing. It also endorsed the establishment of a rural electric credit system as a source of supplemental capital for those cooperatives which can meet rural electrification program objectives while paying a higher rate of interest on their borrowings.

These concepts were contained in the supplemental financing bill-H.R. 14000introduced last year by the distinguished legislator who is now your Chairman, Rep. W. R. Poage of Texas. Throughout the lengthy hearings on supplemental financing held by this Committee last summer-and subsequent meetings of its Subcommittee on Conservation and Credit-Rep. Poage and others, who feel that this legislation is a significant milestone on the road of progress in rural electrification, worked long and hard to develop compromises which would meet the objections of those who opposed the legislation for one reason or another. Throughout the period of evaluation, re-evaluation and compromise, NRECA and its member rural electrics kept an open mind to suggestions for changes that would satisfy opponents without destroying the effective operation of the proposed rural electric credit system. The result of this sifting and winnowing process is the bill you are considering today-H.R. 1400, introduced by Chairman Poage on the opening day of the 90th Congress. This legislation goes a long way toward meeting the principles the membership of our Association has adopted. It does, however need improvements on certain points which will be discussed later.

ADMINISTRATION SUPPORT

As has been repeatedly pointed out, the Administration strongly supports supplemental financing legislation. Throughout the development of the supple. mental financing proposal, President Johnson has shown a personal as well as an official interest in this plan under which the rural electrics could obtain a portion of their growth capital needs from sources other than the Federal treasury.

In a letter the General Manager of our Association, Clyde T. Ellis, received early this year, President Johnson had this to say about supplemental financing: "I am convinced that our proposals would be a major step forward, not only for your Association, but also for the Nation you serve. Let us hope that we will take that step together and soon."

The Administration's budget recommendations for the coming fiscal year looks to the enactment of supplemental financing for rural electric and rural telephone systems in this session of Congress. Of the $314-million in new appropriations recommended as essential to meet critical program needs in fiscal 1968, $150-million would be placed in a contingency reserve. These reserve funds would be used only if the supplemental financing legislative proposal is not enacted. (In time to provide that portion of the capital needs of the rural electric systems.)

Speaking at the 1967 NRECA annual meeting, Vice President Hubert Humphrey reiterated the Administration's position on rural electrification and the supplemental financing bill. He said:

"I know a founder of an electric cooperative in Johnson City, Tex., who is one of your strongest supporters. His name is Lyndon Johnson.

"He may turn out the lights in the White House, but he wants them kept on in rural America.

"In his budget message to the Congress, President Johnson made it clear that he considers the passage of this legislation vital-vital to the rural electrics, to rural America and to the entire Nation."

A DYNAMIC RURAL AMERICA

Mr. Chairman and members of the Committee, you are all abundantly familiar with the agricultural revolution which has been underway for some time nowand its attendant problems of unemployment and underemployment in rural America. The rural electric systems share your concern over the resultant outmigration to our already overcrowded cities of farmers and farm workers who no longer can make a living on the land. Like you, we recognize the need for a prosperous and dynamic rural economy, not only for the social and economic benefit of those people who live in rural America, but for the benefit of the Nation as a whole.

Each of this country's major depressions have been farm led and farm fed. And in this day and age of mechanization and specialization, the rural economy and the urban economy are more interdependent than ever before.

Sound rural electric co-ops are essential for a sound and modern rural economy. The very word “electric" represents modern living and modern farming; it represents industrial progress; it represents the power for economic and community developments.

Agriculture has always been and continues to be the economic base for rural America. An adequate supply of low-cost electricity is essential if our farmers are to continue to produce the abundance of food and fiber needed by our own people and the hungry people of the underdeveloped countries of the world. Today's farmer uses an average of 9,000 kilowatt hours of electricity a year. Tomorrow's farmer will be utilizing even more electrical helpers, for the increasingly complex and mechanized nature of his farming operation will place an even higher premium on time and labor-saving equipment.

Adequate electric and telephone service in rural areas is essential to the success of our efforts to revitalize the nonfarm segment of the rural economy. The rural electric cooperatives are leaders in the drive to stem the rural outmigration by encouraging industrial, commercial and recreational developments in rural America. But industries and small businesses will not locate-nor are tourist dollars likely to be spent-in rural areas that lack good electric and telephone service.

Secretary of Agriculture Orville Freeman, speaking at the 1967 NRECA annual meeting, made note of the fact that rural electric and rural telephone systems have sponsored nearly 2,100 rural areas development projects since the RAD program was launched in mid-1961. Some of these projects have been in agriculture, some in forestry and others in recreation, community facilities and industrial development. They have created 180,000 new jobs in rural Americamany of which would have otherwise gone to already over-crowded metropolitan

areas.

Both Secretary Freeman and Vice President Humphrey, at our San Francisco meeting, urged the rural electrics to devote even more of their time and talents to the development of the potentials of rural America.

The Vice President told the rural electric delegates: "From Washington, we can provide the resources, the fuel for the tractor. But the hand on the wheel, and the brain behind it, must be supplied by you in your communities."

As an integral part of the rural areas they serve, the rural electrics are glad to accept the challenge to do more to improve their service areas. But they can do very little indeed except struggle to stay alive if they are starved for growth capital, which is the lifeblood of the electric utility industry.

ECONOMIC CHARACTERISTICS OF PUBLIC UTILITIES

In order to give the members of this Committee a better understanding of why rural electric systems-along with the rest of the electric industry-are facing a great need for capital funds, we would like to discuss a few of the characteristics of the industry and present some similarities and contrasts between the rural electric segment and the industry as a whole.

Natural monopoly

The outstanding economic characteristic of public utilities is that they operate at the greatest efficiency as monopolies. It has long been recognized that it is in the public interest to allow only one public utility the exclusive right to provide service in a particular area. The public, however, had to be protected from being forced to pay the prices monopolies could charge for their indispensable service. Thus public regulation of investor-owned utilities came to be regarded as the substitute for competition and the instrument which should protect the consumer from exorbitant, monopolistic prices.

The basic relationship is determining regulatory policies for an investor-owned utility is the stockholder versus the consumer. This relationship is nonexistent in a rural electric cooperative because the consumer and the owner are the same person.

Over the years it was discovered that, for various reasons, regulation was unable to produce the same results as competition. It was felt that some form of competition or alternative was needed to establish performance standards for the investor-owned utilities. This alternative became known as the yardstick principle. Availability of power from Federal hydroelectric facilities and the distribution performance of municipal and rural electric systems help provide the yardstick level.

The demand for electric service

Electric utilities in general are required to serve whatever reasonable demands the consuming public places on them. Rural electric cooperatives, under the areacoverage covenant with REA, are required to serve all who desire service without charging the customer for construction costs.

The demand for electric service fluctuates widely throughout the year. Since electricity is nonstorable, electric utilities must have enough plant capacity to enable them to serve the maximum or peak demand in any year. In addition, they need to have standby capacity to insure continuous service in case of a breakdown. This means that a considerable portion of the utility plant will be idle a large part of the time.

Lately, many of you have heard of power pooling and interconnection of utilities. These pools and interconnections enable the utilities to assist one another in meeting peak demands without the need of increasing plant size as much as would otherwise be necessary.

Large capital investment

One of the most important characteristics of electric utilities is their comparatively large capital investment. Utilities generally need to invest about $4 in