tomer per mile, as it compares with the REA customer per mile of 134 in 1936 and 31⁄2 in 1965; as to the cost of $2,500 compared with the REA figures of $1,061 in 1936, and about $2,412 in 1965. Since I have no desire to try to mislead the committee in any way, I think that I should supplement what appears in my prepared statement on this score, by pointing out that this is somewhat of an understatement, for it does not take into account outlays which no doubt will be required to service new nonfarm customers along newly constructed lines as well as to strengthen the facilities to serve more adequately the needs of existing customers. But, nevertheless, I think that the figure has some relevance as an indication of the reasonable attitude of the present program. Should the electric program of REA, therefore, like its loans, be geared to self-liquidation? Although this would seem consonant with the original basic purposes of the program, I could hardly say to you in good conscience or with a straight face that I expect this to happen very soon. But the question, in the light of recent developments in connection with the purposes for which loans are being granted, and also in view of certain features of the proposed legislation, is, I think, deserving of some serious consideration. As I see it, REA now stands at the crossroads: either it will shortly complete its basic task or it will embark upon an even larger program of extending loans for generating and transmission facilities which will graetly, unnecessarily, and wastefully enlarge the realm of public power. Under the proposed legislation this would be both sanctioned and freed upon effective and continuing control by the Congress. During the last 10 years an increasing proportion of the REA loans granted have been for generating and transmission facilities. By fiscal 1961 this ratio had risen to over 55 percent; for the 5 years, 196165 it averaged 53.5 percent; and for fiscal 1965 it reached more than 60 percent.36 Mr. Person alluded to this. The data are contained in my exhibit No. 8, showing the distribution uses of these loans as to this point. Although no doubt there may be exceptional cases, overall I can see no need for the extensive use of public funds for these purposesthat is, G. & T. As pointed out earlier, the private companies now supply a large proportion of the energy requirements of the REA cooperatives at special low wholesale rates. There is no indication that they will lack the capacity or the will to meet these needs on reasonable terms in the future. Furthermore, their average wholesale prices to REA cooperatives are substantially (more than 10 percent) below the rates paid by the latter to the subsidized generating and transmission cooperatives (hereinafter referred to as G. & T.'s).37 This is clearly inconsistent with the statement of Senator Norris quoted earlier, regarding the only conditions under which REA loans would be made available for generating plants and with not the infrequent admonitions of congressional committees on the subject. Nor is it constant with sound economic practices aimed at bringing electricity to the consumer at the lowest reasonable cost. Efficient procurement requires the securing of energy at the lowest overall cost at which it is available, indeed, if cost to the taxpayer is to be taken into account, the provisions of a recent Budget Bureau circular,38 to which Mr. Person referred, requiring that taxes foregone be counted in comparing prices bid on Government procurement contracts, might well be applied to purchases of electricity by the REA cooperatives. Finally, there appears to be no compelling reason or justification for the diversion of large amounts of badly needed Federal funds to further subsidize giant systems paralleling in function and threatening the position of the investor-owned utilities, which have served the Nation well in their traditional role of furnishing the major portion of our electric energy requirements. In his letter transmitting to the Vice President a bill identical to H.R. 14837, the Secretary of Agriculture refers to the low customer density and revenues per mile of the REA rural line as compared with the same data for class A and class B electric companies on their total operations not with rural. He continues: Other handicaps include the lack of diverse and large loads, pockets of chronic poverty, rugged terrain, and isolation from sources of low-cost power. This is in the Secretary's letter of April 13, 1966. These factors may justify subsidy to rural distributions lines, but have little, if any, application to loans to G. & T's. Coming now finally to the pending bills and our specific objections to them, which requires some comparisons of them and some specific discussion of the rather complex provisions which they contained, it is apparent that their basic purposes are virtually identical. They are so closely similar that I believe I can conserve your time by limiting my discussion of them. The CHAIRMAN. May I interrupt you right there? Unless you can finish within a very few minutes, we will have to ask you to come on later. Mr. SMITH. That is perfectly satisfactory to me. The CHAIRMAN. The House will be in session in about 8 minutes. Mr. SMITH. I shall hurry along. If you should like for me to complete my statement, I certainly should like to do it, but I shall be very glad to meet your convenience. The CHAIRMAN. Please proceed. Mr. SMITH. It should be noted that H.R. 14000 is even more liberal in its arrangements for REA. For example, the contribution of public funds to the stock of the proposed Federal electric bank is very much higher, $1 billion as against $750 million,40 and hence the initial ceiling on borrowing by that bank would be pyramided correspondingly to $10 billion as compared with $72 billion. Other differences, of varying degrees of significance, include: (1) the lower interest ceiling on "intermediate" loans (3 percent versus 4 percent): 42 (2) the crediting of 2 percent interest on electrification loan account moneys deposited in the Treasury until disbursed; 43 (3) the even wider latitude allowed in the use of loans to acquire facilities -under both 39 Letter of Secretary Freeman to Vice President Humphrey, dated Apr. 3, 1966. 40 All "net collection proceeds" from the REA electrification loan account until the total reaches $1 billion, under H.R. 14000, sec. 405 (a); at the rate of $50 million annually for 15 years from such net collection proceeds or from appropriations, under H.R. 14837, sec. 405 (a). 41 Secs. 406(a) of both bills authorize the issuance of debentures in amounts not to exceed 10 times the paid-in capital and retained earnings (H.R. 14837) or surplus (H.R. 14000). 42 Cf. secs. 410(b) (2) of H.R. 14000 and H.R. 14837. 43 Cf. secs. 303 of H.R. 14000 and H.R. 14837. 44 Apparently limited to "electric facilities" under H.R. 14837. sec. 410(a), but extended to include "other related purposes" by the language of H.R. 14000, sec. 410 (a). bills to be given specific statutory authority for the first time-without any limitation upon the size of the acquired property; 5 (4) the elimination of the requirement of prior State consent in the use of loans for generating plants, which is required by section 410(b) (4) in H.R. 14837, but is omitted from H.R. 14000. The previous provision is in H.R. 14837 ut not in H.R. 14000. (5) the size and composition of the board of directors of the bank; and (6) the broader discretionary authority bestowed upon its Governor.48 The net result of these differences is to make my objections to H.R. 14837 apply with even more force to H.R. 14000. DECLARATION OF POLICY 47 The declaration of policy contained in H.R. 14837 refers to growing capital needs for rural electrification which, it is stated, require supplementary financing through a Federal bank for rural electric systems (hereinafter termed electric bank) established "*** with the objective that [it] will become entirely privately owned, operated, and financed *** " To the extent that the quoted language may suggest that the essence of what is proposed is the early conversion of a governmentally subsidized program into a self-supporting privately financed operation, it might carry an immediate appeal to those who are seeking, like myself, a reduction of unnecessary Federal outlays. Unfortunately, however, such a simplistic impression would be quite misleading. When the proposed legislation is viewed in its entirety, it becomes evident that what is actually provided for is not only the continuation, but the enormous and unnecessary enlargement, of Federal assistance, with no real assurance as to when-if ever-the direct contribution of public funds will be repaid. Furthermore, it would so revise longestablished congressional policy as to entail drastic departures from what I have referred to earlier as key characteristics of the rural electrification program to date-namely, its limited purpose of bringing electricity to the unserved farm, and the continuing control by the Congress over its dimensions, direction, and cost. A brief review of the major features of the proposal will, I believe, fully support these assertions. I have a review of the sections of the bills which I think it fully supports this overall summary of its impact, and I hope that I may have the opportunity to develop this with you gentlemen and Mrs. May. CONTINUATION AND CONVERSION OF THE PRESENT PROGRAM The provision for supplementary financing does not supplant or terminate the present 2-percent loan program, which is to be continued 45 Under H.R. 14837, sec. 410 (a) (2), the "cumulative size" of such acquisitions * "shall not be greater than the borrower's existing system at the time it receives its first loan from the electric bank * H.R. 14000 contains no such limitation. 46 Required by H.R. 14837. sec. 410(b) (4); omitted from H.R. 14000. 47 Cf. H.R. 14000, sec. 404, and H.R. 14837, sec. 403. 48 E.g., although both bills authorize the Governor to make loans for the acquisition of facilities, such acquisitions require the approval of the Secretary of Agriculture under H.R. 14837. sec. 410 (a) (2), but not under H.R. 14000. Similarly, while under both bills the specific eligibility of REA borrowers for low interest rate "intermediate loans" is determined by the Governor of the bank in accordance with the purposes of the rural electrification program, the "criteria" to be used are established by him under H.R. 14000, sec. 410 (b) (2), but by the Secretary of Agriculture under H.R. 14837, sec. 410 (b) (2). through the use of a new rural electrification account. This accountwhich bears some similarity to a revolving loan fund-is to be established in the Treasury from all funds remaining available to REA at the effective date of the act. In addition, all collections of principal and interest received from July 1, 1965, on outstanding loans-heretofore required to be covered into the Treasury-are to be paid into this account, which is also to be credited with the shares of stock in the electric bank acquired by the account and any moneys received from the retirement of such stock.49 This is section 310 of H.R. 14837. It may also be supplemented by further congressional authorizations and appropriations as at present. The assets of the account are to be used for the payment of principal and interest on loans from the Treasury to REA, for loans under sections 4 and 5 of the act limited in any year to the amounts previously authorized by Congress, and for the purchase of class A stock in the electric bank, section 302.50 With funds outstanding in the amount of about $314 billion at the end of fiscal 1965 and payments of principal and interest during that year of nearly $156 million and over $67% million, respectively. The account would show starting assets, prior to any payments of interest or principal to the Treasury or purchases of electric bank stock, of close to $3 billion,51 in addition to undisbursed cash balances. This, again, refers to the material in my exhibit No. 5. SOURCES AND USES OF ELECTRIC BANK FUNDS The supplementary financing to be provided under the new program is to be handled by the electric bank to be established under the general supervision of the Secretary of Agriculture.52 This is in section 401. He is to designate the initial seven members of its Board of Directors, of whom four would continue to be officers or employees of the Department of Agriculture.53 This is section 403. The REA Administrator is made Governor of the bank 54-section 404 and as its chief executive officer will have broad discretionary authority over its operations. The capital of the bank is to be provided initially and principally from funds in the rural electrification account over a period of 15 fiscal years at the rate of $50 million annually, in exchange for which class A stock is to be issued to the Administrator. Borrowers from the bank are required to buy class B stock equivalent to 5 percent of their loans. Class C and class D stocks are available for purchase by borrowers and eligible borrowers, and by their consumers, respectively. For present purposes it is unnecessary to go into the dividend and voting provisions pertaining to each of these classes of stock. What is significant is the fact that any claim for a return to the taxpayer on his $750 million contribution to the capital of the bank is subordinated to other prior claims 55-section 405 and, perhaps even more im 49 H.R. 14837, sec. 301. 50 H.R. 14837. sec. 302. 62 H.R. 14837, sec. 401. portant, no definite provision is made for the repayment of this investment. It is provided only that the class A stock representing this contribution "*** shall be redeemed and retired by the electric bank as soon as practicable after June 30, 1981"-and I emphasize this"but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank;" 56section 405 (c)"and, further, that as promptly as possible after the retirement of all such stock *** the Secretary shall transmit to the President for submission to the Congress recommendations for such legislation as may be necessary or appropriate" to terminate borrowing from the Treasury and to effect the transfer of the bank to private ownership and control,57 section 412. To obtain further funds for its loan program, the electric bank is authorized to sell its debentures to the public, upon terms determined by its Board with the approval of the Secretary of the Treasury, equal to 10 times its paid-in capital and retained earnings (unless another amount is specified in appropriations which are now authorized) 58 (section 406). While it is to be specified that such debentures are not guaranteed as to principal or interest by the United States, the fact remains that, if the bank's funds are insufficient for these purposes, the Secretary of the Treasury is directed to provide the necessary money at rates reflecting current costs for comparable Federal borrowings 59 (section 406). Thus supported by Federal credit, it cannot be doubted that loanable funds up to the permissible limit ($7.5 billion plus 10 times the amount of class B stock, or a multiplier equal at any time to 50 percent of the outstanding loans) will be available to the Administrator upon terms more favorable than the investor-owned companies are likely to be able to secure. **** The Administrator, in turn, as Governor of the electric bank, is authorized to lend these funds, under policies determined by him without further congressional authorization or control, not only for the purposes presently authorized under sections 4 of the act, but also to-and here I am quoting section 410(a)-"*** improve the efficiency, effectiveness, or financial stability of electric systems of REA borrowers, subject to the requirement that any acquisitions must be approved by the Secretary of Agriculture, and that, among other conditions, the acquired facilities must not exceed the size of the borrower's system 60-section 410 (a)-and that, in the case of loans for generating facilities, their construction, operation, or enlargement must first be authorized by the State authority having jurisdiction.61 This is section 410(b) (4). Permissible maturities are extended to 50 years 62 (section 410 (b) (1)). Two types of bank loans are provided for under the bill 63 (section 410(b) (2)). One may be termed the minimum subsidy type since it is to bear interest reflecting the current average rate paid by the bank on its debentures, administrative costs, and estimate losses-all as |