Mr. CLAPP. Yes, sir. And the reference in the present act is to towns, cities, and boroughs. I can give you the exact language. This is section

13

As used in this Act the term "rural area" shall be deemed to mean any area of the United States not included within the bounaries of any city, village or borough having a population in excess of 1500 inhabitants.

Here, you are talking about something that has boundaries, and it is a little easier to count the number of people in that situation than it is to count the number of people involved in a diversity of con

nections.

Mr. MAYNE. Well, I just returned from my district in Northwest Iowa, and I talked to a good many people out there, and our concept of what is rural electrification seems to be a great deal more in line with the idea of a community of less than 1,500 in population.

Frankly, to many of our citizens the idea of rural electrification serving a community of 10,000 people with 4,000 connections at 21⁄2 persons is quite shocking. There is only one community in my whole district that has more than 10,000 people.

I would just like your reaction to that very strong feeling in my area, that to go into a community of that size would be a great extension of the idea of serving a rural area.

Mr. CLAPP. Bear in mind, Congressman Mayne, that this limitation on these new connections is a cumulative one, not a one-shot proposition. As a practical matter, this total could be made up over a period of years of different additions; and, so, I would suspect it would be very remote that in any of these systems this authority would be used to finance the acquisition of a system in a town of 10,000 population. Mr. MAYNE. Why, then, have it in the bill?

Mr. CLAPP. It was put in there as a limitation, just to make sure, I think, because there was some discussion here in this committee last year, that this authority could not be so construed that it would enable a cooperative to join together with another cooperative and buy the utilities in Kansas City or other urban centers. Such a prospect is, of course, ridiculous, but it was to put at rest any such argument that this limitation was put into the bill.

Mr. MYERS. Will you yield?

Mr. MAYNE. Yes.

Mr. MYERS. What happens to a city that is rapidly growing? Say that you move into a 9,000 population community and make a hookup of less than 4,000 connections, and then all of a sudden it multiplies to 20,000 people. What would be your disposition to take care of that? How are you going to get around providing electricity to it?

Mr. CLAPP. The answer would depend on what the State law provides. If the State law provides that the rural system that is within the incorporated limits of this town is entitled to stay there and continue to serve additional families, then, under the terms of this bill, this would be permitted.

There is a section in here that provides connections to new consumers shall be in accordance with State law.

Mr. MYERS. In other words, this provision provides that you can, after you get in there, regardless of the size of the city, do this? Mr. CLAPP. If the State law permits it.

The CHAIRMAN. I now recognize Mr. Abernethy.
Mr. ABERNETHY. I will yield to Mr. Wampler.

Mr. WAMPLER. Are you familiar with the Yankee-Dixie project now under study by certain cooperatives and others?

Mr. CLAPP. Only in a very general way, Mr. Wampler.

Mr. WAMPLER. As you understand it and as you understand the provisions of H.R. 1400, could such a project as the Yankee-Dixie project be financed by the bank under this bill?

Mr. CLAPP. If you look at the Yankee-Dixie as a unit, I think that the answer is definitely "No." There is authority under this bill for financing limited amounts of facilities that might be contributed to an overall system, such as Yankee-Dixie, but these would only be differ ent pieces of the overall plan.

Yankee-Dixie is a plan for the coordinated development of a power system in which rural systems, rural electric cooperatives, munícipalities, commercially owned utilities and any other power system in that general area could participate if they saw fit to take advantage of the economies of larger scale generation and larger scale bulk transmission. The rural systems would only be a part of this, under any circumstance. The financing that is available under this bill is restricted to the rural systems and their facilities.

Mr. WAMPLER. There is nothing under the provisions of H.R. 1400 that would preclude a rural cooperative from building its own generation and distribution facility; is that correct?

Mr. CLAPP. That is correct-nothing that would preclude a rural system from doing this.

Mr. WAMPLER. Thank you.

The CHAIRMAN. Will you yield there, right at that point?
Mr. WAMPLER. Yes.

The CHAIRMAN. There is a very clear, and I think important provision in this bill providing that no system could be financed, wherever it is, for generation unless they make a bid and submit those bids to the bank, and the board of directors of the bank finds that the construction of the new facility would be producing cheaper power than the power companies offer so I think that there is a definite limitation upon it. The directors have to make a finding that it would result in cheaper power, and that is appealable to the courts. If the board of directors were to seek to make an incorrect finding, or a dishonest finding, it would be so held by the court, it seems to me. There is a strict regulation and limitation where the money can be loaned for generating purposes in rural areas or anywhere else.

Mr. Wampler has the floor.

Mr. WAMPLER. I appreciate the chairman's observation.

Let me ask one other question.

Is there anything in the provisions of H.R. 1400 that would preclude the bank from financing transmission loads?

Mr. CLAPP. From other generating facilities?

Mr. WAMPLER. From other generating facilities, either cooperative or private?

Mr. CLAPP. When we speak of distribution, we are speaking of retail service.

Mr. WAMPLER. Distribution from a generating facility, a major generating facility, to the system-that is what I had in mind.

Mr. BAKER. We have that breakdown. I will ask Mr. Clapp to put it in the record now, or we will supply it for the record, Congressman Gathings.

Mr. GATHINGS. I wish that you would supply that.

Would you comment on it at this time, however? (The information requested follows:)

Estimates of capital needs of electric borrowers

2 Projected by REA in accordance with the trends in the EEI projection for 1966-75.

Mr. CLAPP. Congressman Gathings, these estimates are arrived at by applying a rate of growth figure to the existing utility plant of the rural systems as of today. This rate of growth which was applied to these facilities is approximately the same rate of growth that is applied to the electric industry generally.

This growth factor is applied to all facilities, distribution, transmission, and generation.

I am not familiar with the statement made yesterday, but judging from the general position which has been taken in the past by witnesses from the Edison Electric Institute, I suspect that their estimates do not cover anything other than distribution.

Mr. GATHINGs. I think that you are right. I questioned the witnesses yesterday. It was based upon the limitations contained in the act of 1936.

But with reference to your estimate that it would total $8 billionplus for the next 15 years, I just wondered whether or not that was in keeping with H.R. 1400's provisions without amendments?

Mr. CLAPP. The provisions of H.R. 1400 would provide sufficient loan capital to meet the growth needs that we have projected.

Mr. GATHINGS. I realize that there are replacements and added needs for growth, to update the lines, and that there is maintenance and there is depreciation, and so on, which are all necessary, and that these requirements, no doubt, will increase over the years.

Mr. CLAPP. I might point out to the committee, Congressman Gathings, that this projected additional capital we have calculated for the rural segment of the industry is completely in line and consistent with the anticipated future capital needs of the electric industry generally. We project a need of something around $8 billion of new capital for the rural systems with which we work now over the 15-year period. The investor-owned companies project, I believe, a need of some $112 billion over the same period of time.

The proportion of the REA-financed rural plant to the investorowned utility plant is now, roughly, 1 to 14; $8 billion of new capital requirements as compared to $112 or $115 billion of new capital requirements for the investor-owned utilities, is also roughly in the proportion of 1 to 14.

Mr. GATHINGS. And the $8 billion estimate could include acquisition of cities with up to 4,000 connections?

Mr. CLAPP. It is based upon the present normal rate of growth for both the rural systems and the industry.

Mr. GATHINGS. Thank you, Mr. Chairman. That is all.

The CHAIRMAN. Would it be a fair statement that the estimate of growth made by the investor-owned utilities, as such, is the one which you used in applying the same rate of growth to your rural system?

Mr. CLAPP. I would say, Mr. Chairman, that we have calculated the rate of growth for the rural systems on the basis of our experience with them, but it does coincide very closely with the rate of growth of the investor-owned utilities.

The CHAIRMAN. Even though you arrive at a figure by a different approach, you get the same result or substantially the same result that you would have gotten had you simply applied the same rate of growth to the rural system that the investor-owned systems have applied to their own systems?

Mr. CLAPP. That is correct.
The CHAIRMAN. Thank you.
Mr. Kleppe?

Mr. KLEPPE. Mr. Clapp, as you are aware I am sure, you know that I represent a very rural area in North Dakota-probably the most rural area in the United States. And when you look over this territory, you can realize the benefits that have come to this area because of REA.

The cooperatives in my area are concerned over this approach in H.R. 1400 and similar bills that represent substitute financing instead of supplemental financing. I could imagine that their concern comes from the fact that generation and transmission are involved and that maybe the real purposes for the 2-percent money from the Government could be lost in the shuffle. I wonder if you would comment on this particular difference between "substitute money" and "supplemental money"?

Mr. CLAPP. I would be glad to, Congressman Kleppe.

The whole approach, of course, of this administration, and I am sure the approach of the rural electric cooperatives to this proposal, has been on the basis of developing supplemental financing, not substitute financing except where there is a capability of paying higher rate of interest, so that the various rates of interest applied

they are fully liquid, and, secondly, that they must be kept where they are fully protected.

This means, as a practical matter, investment in guaranteed securities of one sort or another. It does not mean going into the stock market; it does not mean speculating in land or anything of that sort.

It is, no doubt, true that there are investments of these reserve funds in Government bonds that bear something more than 2 percent. I point out, however, that even though, from a straight business standpoint, it represents some sacrifice on the part of the cooperatives, our borrowers have invested $24 million in Government bonds which bear 2 percent interest, even though they could buy bonds at 4 percent or better. They do this simply out of a sense of responsibility and an eagerness to cooperate with the same Government that is making their operation possible through the REA program, and this investment is mounting.

Mr. GOODLING. Getting back to the answer to my question, I asked whether you had any knowledge that any utility is using 2-percent money to reinvest in U.S. Government bonds.

Mr. CLAPP. Taking the question strictly

Mr. BAKER. The answer to that question is "No."
Mr. GOODLING. You do not know of any?

Mr. BAKER. There are not any. It is illegal to invest loan funds. Mr. GOODLING. One of the members of the Appropriations Committee made the statement that that was being done. I was wondering if that is being done and whether those REA's must pay the same income tax to Uncle Sam as you and I, if we did that. You say that you have no knowledge that that is being done.

Mr. CLAPP. Not only "no knowledge," but taking your question in the very narrow sense that you state it, loan funds when they are advanced have to be used for strictly the purposes for which they are loaned, which is the construction of facilities or the purchase of equipment. They are placed in special accounts which are carefully audited by the REA's periodically. It is not possible for them to take loan funds and reinvest them otherwise.

Mr. O'NEAL. Would you yield at that point?

Mr. GOODLING. Yes.

Mr. O'NEAL. It would be difficult to tell what funds were used for

what purpose, if you reserve 15 percent to be invested in liquid assets. Mr. CLAPP. So far as loan funds are concerned, they are kept in separate special accounts.

Mr. O'NEAL. And that would release more to be put in the reserve investment; would it not?

Mr. CLAPP. Well, if you were to assume that if they did not get the loan, they would have to use their general funds

Mr. O'NEAL. That is what I mean.

Mr. CLAPP. Yes. I suppose that you could look at it this way.

Mr. O'NEAL. Well, now, let me ask you this question along that line. As I understand it, a cooperative can borrow from the bank and would be required to invest 5 percent of that loan in Government-owned stock in the bank. Is that correct?

Mr. CLAPP. That is correct.

Mr. BAKER. No, no.