(The information above referred to, follows:)

The following excerpts from statements filed with this Committee by officials of several rural electric statewide organizations demonstrate that there are some systems in their respective states which can utilize higher cost capital. Excerpt from statement of Thomas H. Moore, General Manager, Association of Illinois Electric Cooperatives, to House Committee on Agriculture, June 1, 1966.

(In his statement, Mr. Moore reviewed the status of rural electrification program operations in the 27 distribution and 3 generation and transmission cooperatives in Illinois.)

"*** In contrast, Corn Belt Electric Cooperative, Inc. is in a better position to pay interest rates on money borrowed for capital improvements that will more nearly reflect the cost of money in the open money market, if there is a financial institution from which it can obtain loans. Even though Corn Belt Electric Cooperative is in a strong financial position, it is doubtful if there is a financial institution other than the Rural Electrification Administration where it could obtain loans to provide for its capital improvements in future years." Excerpt from statement of A. D. Mueller, Executive Vice President and General Manager, Indiana Statewide Rural Electric Cooperative, Inc. to House Committee on Agriculture-Wednesday, June 1, 1966.

"*** There are many other systems in more favorable circumstances. While they still may have rather heavy indebtedness, they are realizing sufficient net margins to justify paying a somewhat higher rate of interest than is charged by REA.

"A number of Indiana REMC's are in this category. Several years ago, well ahead of the time when our National Association was instructed to make a study of future financial requirements, some electric cooperative leaders in The Hoosier State were exploring various possibilities for obtaining capital from private sources."

Excerpt from statement of J. C. Hundley, Executive Manager, Tennessee Rural Electric Cooperative Association to House Committee on Agriculture-Tuesday, May 31, 1966.

*** We do have a few systems who are in a financial position to pay the full interest cost of borrowed money by the government."

Mr. FINDLEY. I will yield.

Mr. BELCHER. I was not questioning the fact that there are systems that can afford to pay higher rates of interest, but I have never had a single cooperative tell me that they were willing to pay a higher rate of interest; and, if so, if some of them have stated this, I would like to have the names of those.

The CHAIRMAN. I have had one tell me that. I will not give his name here now, of course. [Laughter.]

Mr. FINDLEY. Mr. Katzin, on page 8 of your statement, you say that 247 distribution co-ops and 21 G. & T.'s could not cover their interest charges if they paid a full 434-percent rate on their borrowings. Then, in response to a question by Mr. Burton, you indicated that of these

274

Mr. KATZIN. 247.

Mr. FINDLEY. 247, yes, were unable to pay 434 interest. What I would like to know is, in your estimate, how many of those 922 borrowers could pay more than 2 percent?

Mr. KATZIN. I make the statement a little further on, sir, that there are 204 distribution co-ops and no G. & T.'s who could cover their interest costs two times, with the common analytical standard, if all their present loans were replaced by 434-percent borrowings.

Mr. FINDLEY. Did you make any estimate in the course of your studies as to what percentage increase in the rates charged would be needed in order to meet a higher rate of interest?

Mr. KATZIN. No; we did not. That will vary from area to area.

Mr. FINDLEY. You made no investigation of this point whatever? May I ask Mr. Anderson if the association has ever made a study of what percentage increase in rates will be necessary for the cooperatives to go on the public market to get their money and to get away from the 2-percent interest rate?

Mr. ANDERSON. What interest rate they would have to pay in the market?

Mr. FINDLEY. Yes-whatever the going interest rate is.

Mr. ANDERSON. I assume that they would presently be paying in the neighborhood of 52 to 6 percent if they went into the market.

Mr. FINDLEY. Have you estimated what percentage increase you would have to charge that would be necessary in order to make this system of financing work?

Mr. ANDERSON. No, sir; we did not.

The CHAIRMAN. Mr. Burton.

Mr. BURTON. Mr. Anderson, is it not true that under the terms that this could be over a 15-year period in excess of $20 billion as a program, that you could have an outflow from the bank more than that, taking all of the programs into consideration-all of your programs that are Government financed?

Mr. ANDERSON. If the banks were fully capitalized at $750 million as provided in the bill, with the provision that, I believe, they can borrow 10 times the capital, so that would be $7.5 billion.

Mr. BURTON. That would be $7.5 billion. That does not take into account the fact that every time you lend one of the REA's in making a loan, that they have to buy 5 percent of the bank stock?

Mr. ANDERSON. No. It does not. We can supply for the record, if you would like it, the figures that we have used in pricing out the plan and using the assumptions we have made on the cooperatives' capital and give you an answer to your question.

Mr. BURTON. I would like to have that, Mr. Anderson. I would like the record to show that. My multiplication here indicates that it could be a $20 billion program in 15 years.

The information requested above follows:)

The memorandum of May 24, 1966 from NRECA staff economist, Ronnie J. Straw to Kermit Overby, Director, Legislation and Research Department, NRECA, prices-out the supplemental financing plan proposed by H.R. 14837.

Memorandum to: Kermit Overby.
From: Ronnie Straw.

MAY 24, 1966.

Subject: Price-out of the Administration's Supplemental Financing Plan (H.R. 14837).

The following are summary conclusions of my analysis of the Administration's rural electrification supplemental financing proposal (H.R. 14837):

(1) With $750 million of government capital subscribed at the rate of $50 million per year the Bank just "squeezes by" in each of the 15 years of its operation.

(2) The net margins are small in each of the 15 years under study and the accumulation of surplus reaches only $12.2 million by 1982.

(3) The earnings of the Bank after expenses and dividends are inadequate to permit any significant patronage refunds on Class A and B Stock.

(4) The Bank can pay a 4% dividend on Class C Stock up to 1981 but it cannot pay the same rate of dividend in 1982. It drops to 3.9%. The dividend rate will continue to drop from 1982 and ultimately the Bank will not be able to pay dividends on Class C Stock unless some action is taken to correct this situation. The Bank will gradually begin to incur losses and impair capital if the inter

mediate loan program is continued at levels essential to meet the borrowers' needs. In turn, this will cause the loss of incentive for borrowers to invest in Class C Stock.

(5) H.R. 14837 provides that the Bank shall be converted to private ownership, control and operation after all of the Class A Stock has been retired. In this study no provision has been made for the retirement of Class A Stock from 1968 to 1982. By 1982, the proportion of Class B and C Stock and surplus to total capital stock and surplus reaches 34.6%.

The basic assumptions and data upon which my analysis is predicated are(1) Initiation of Bank Operation.-The Bank will become operative in F.Y. 1968. The pending loan application backlog at REA will be reduced to manageable proportions by the time the Bank initiates operation.

(2) Total Capital Needs.-The total needs of the rural electric systems will be $9.5 billion for the period 1968-1982. It is assumed that $4.5 billion will be available during the 15 year period for the 2%, 35 year REA loans program. The magnitude of the required Bank program therefore is $5.0 billion. Of the $5.0 billion Bank program, $3.7 billion (or 75 percent of the Bank's lending volume) will be loaned at the intermediate rate of 4% and the remaining $1.2 billion (or 25 percent of the Bank's lending volume) will be loaned at the special development rate of 5%%. Our two year study, the Kuhn, Loeb and Company study, and the REA studies and data indicate that these proportions are consistent with maximum capabilities of rural electrics, taking all factors into consideration.

(3) Capitalization.-(a) Class A Stock shall be issued on behalf of the United States and it shall be non-voting and no dividends shall be paid thereon. The Federal government will provide $750 million of Class A Stock at a rate of $50 million per year for 15 years. No retirement or payment of patronage Class A Stock shall be made during the 15 year period.

(b) Class B Stock shall be issued to the borrowers of the Bank and no dividends shall be paid on it. Each borrower shall be required to invest 5% of the value of the loan in Class B Stock. In this study it has been assumed that the investment of 5% of the value of the loan would be spread over a 10 year period. The rural electric systems will invest $159.7 million in Class B Stock over the 15 year period.

(c) Class C Stock shall be issued and sold to any eligible borrower of the Bank. The Bank shall pay dividends not to exceed 4 per centum per annum on Class C and D Stock. In this study it has been assumed that the rural electric systems would invest $15 million per year or $225 million during the 15 year period.

(d) Class D Stock shall be available for purchase by electric consumers of borrowers, or of corporations and public bodies eligible to borrow. Class D Stock probably will represent a small fraction of the total capitalization and it has been ignored in this analysis.

(4) Earnings and Reserves of the Bank.-(a) All administrative costs of the Bank's intermediate program shall be borne by the Federal governinent. (b) The valuation for the Reserve for Losses shall equal 14 of 1% of the loans outstanding. In 1982, $12 million is shown in the Reserve for Losses. (c) H.R. 14837 provides that loans other than the intermediate loans shall cover the cost of administering such loans. In this analysis such costs were not considered because the cost of administering said loan program would be added to the interest cost of the borrowers which in turn would be paid to REA. It in no way affects the overall financial operation of the Bank. (5) Private Capital.-The Bank shall sell evidences of indebtedness (bonds, debentures, etc.) to make up the difference between the amount of funds available to the Bank from internal sources and the capital required by rural electric borrowers of the Bank. The Bank shall pay 51⁄2 per centum per annum on the debenture bonds and there shall be no retirement of debenture bonds during the 15 year period.

(6) Bank Terms.-The Bank shall make loans to rural electric systems for a 50 year repayment period at interest rates of 4% and 5%, with a three year deferment of the commencement of principal payments.

(7) Purpose.-For the purpose of this analysis all loans are made at the beginning of the year and principal, interest and dividend payments are made at the end of each year.

Tables I and II show the price-out of the Administration's supplemental financing plan.

[Millions of dollars]

NOTE.-Total may not add due to rounding.

TABLE II.-Sources of funds for proposed bank for rural electric systems according to the administration bill (H.R. 14837), 1968-82 (with 4 percent and 51⁄2 percent interest rate on loans and 51⁄2 percent interest rate on bank debenture bonds)

Mr. BURTON. In your statement, you said that by 1980 the private utilities will invest about $12 billion; is that right?

Mr. ANDERSON. That is for the year 1980 alone.

Mr. BURTON. For 1 year, or is it over a 15-year period? I wanted clarification on that.

Mr. ANDERSON. $140 billion over the 15-year period for the private utilities.

Mr. BURTON. In view of the fact that since 1935, we have had the REA going, they have now outstanding $3.2 billion, and in view of the fact that this could multiply to a $20-billion project in 15 years, it seems to me that you are asking for, probably, too modest an amount for a system that generates less than 5 percent of the power.

Mr. ANDERSON. You are assuming that the bank would, indeed, be borrowing its full sum that is authorized in the bill.

Mr. BURTON. The past history of the REA is pretty plain that that's what they would do.

Mr. ANDERSON. I am sure that the board of directors of the bank would not borrow more than their needs.

Mr. BURTON. But you and I have no assurance of that, because the bill is up to the decision of others, the policy regulations, et cetera, which are going to be made under this by the Governor.

Mr. ANDERSON. The bill does set forth the purposes, sir, and unless a loan meets the purposes set forth in the bill, then, of course, it would not be made or applied for. We have estimated the capital requirements up to 1980 at around $9 to $912 billion.

Mr. BURTON. What is that?

Mr. ANDERSON. I estimate our estimate of the capital requirements during the 15 years was $9 to $912 billion. About $912 billion.

Mr. BURTON. I think that you would agree with me that the criteria under which the loans can be made is not very restrictive. It is very broad. Do you have any objections to having this tightened up?

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