is that such loans would not be available to Virginia Electric and Power Company, which has had a mortgage on its property since 1909 and can obtain capital in the securities markets. I would greatly appreciate your including this letter in the record and having it printed as such in order to complete my June 3d testimony on this point without taking further time of the Committee. With many thanks, I am Yours respectfully, GEORGE D. GIBSON. (The following letter was submitted by the Administrator of the Rural Electrification Administration in response to Mr. Gibson's letter of June 13, 1966:) DEPARTMENT OF AGRICULTURE, RURAL ELECTRIFICATION ADMINISTRATION, Washington, D.C., June 20, 1966. Hon. W. R. POAGE, House of Representatives, Washington, D.C. DEAR MR. POAGE: This is in response to your request for my comment on the letter dated June 13, 1966, from Mr. George D. Gibson, counsel for Virginia Electric and Power Company purporting to answer questions addressed to him at the June 3 hearing before the House Committee on Agriculture on REA supplemental financing legislation, concerning the eligibility of investor-owned electric utilities to borrow funds from the Rural Electrification Administration for rural electrification. Mr. Gibson's letter confirms your statement that section 4 of the Rural Electrification Act permits loans to "corporations." The authority to make loans for rural electrification purposes to corporations, which includes investor-owned utility corporations, has been in the Rural Electrification Act since its enactment in 1936, and has been exercised over the years. Twenty-five such corporations have received REA loans totalling almost $25 million. These companies, the dates of their first loan, and their loan totals are listed in the document I submitted at the close of the June 8 hearing, entitled "United States Department of Agriculture, Rural Electrification Administration, Cumulative REA Loans to Commercial Power Companies as of June 1, 1966." You will note that many of these loans were made in the early years of the program, including loans to a Virginia corporation, Tidewater Electric Service Co., West Point. Va., and to three corporations in the neighboring state of North Carolina. Four of the systems are still active REA borrowers. As I reported to the Committee on June 8, Mr. Morris L. Cooke, first Administrator of REA, kept the door wide open to private utility corporation applicants. Section 4 of the Rural Electrification Act does, as Mr. Gibson now says he "expected," provide that preference, in making loans, shall be given public bodies and cooperatives. However, this does not result in making loans unavailable to utility corporations such as Virginia Electric and Power Company. It applies only where there are competing applications for loans to supply electric service to the same rural consumers, which very rarely occurs. Where there are no competing applications, the peference provision has no applicability. Frankly, I am unable to understand Mr. Gibson's reasoning that the preference provision results in making REA loans unavailable to his client corporation. Mr. Gibson's letter couples the preference provision and the consequent unavailability of loans to Virginia Electric and Power Company with references to the company's 1909 mortgage and its ability to obtain capital in the securities markets. Here, too, I fail to grasp the relevance of these considerations to the discussion of eligibility of a power corporation for an REA loan. The existence of a blanket mortgage with an after-acquired property clause might disable his client from giving REA a first mortgage lien on the property financed by REA. However, other applicants which have received REA loans have, notwithstanding the existence of prior liens, been able to make suitable security arrangements with REA. All applicants for REA electrification loans must, of course, comply with the requirement that the loan proceeds be used for rural electrification purposes in accordance with the requirements of the Rural Electrification Act. I appreciate your thoughtfulness in giving me an opportunity to comment. Sincerely yours, NORMAN M. CLAPP, Administrator. The CHAIRMAN. Mr. Hagen? Mr. HAGEN of California. There is one question that I want to ask, with the change in farming, isn't it a fact that most farms would be much larger users of electricity than the average household; consequently a comparison of number of users on an individual line might not be a valid criteria for profitability or nonprofitability? Mr. GIBSON. I would not be able to make a constructive comparison on that. But I could refine my guess of a moment ago, to Mr. Poage, on the cost of money, that the average cost of money was in the neighborhood of 3.8 percent. The actual figure is 3.726 percent for all our bonds and 3.7444 percent including both bonds and debentures. That is a dependable figure, rather than any guess I might make. Mr. HAGEN of California. Are the REA cooperatives subject to any regulation by the Federal Power Commission? Mr. GIBSON. They say that they are not. The Federal Power Commission has attempted to exercise its regulatory jurisdiction over them, but under threatening observations on the part of the Interstate Commerce Committee of the Senate, has suspended proceedings, and they are awaiting the disposition of bills which are now pending in the Congress, to eliminate cooperatives from Federal Power Commission jurisdiction. Mr. HAGEN of California. One other question. It is my understanding that in some States they are also exempt from the regulations of the public utility commissions; is that correct? Mr. GIBSON. That is true. Mr. HAGEN of California. This is not true in all States, is it? Mr. GIBSON. That is also true. In Virginia, they are fully regulated as public utilities like investor-owned companies. Mr. HAGEN of California. Do they go into the co-op rate structure at all, that is, the Public Utilities Commission of Virginia? Mr. GIBSON. I am sure that they do, sir. Actually, their rates in general are higher than ours in Virginia or approximately at the same level. Mr. HAGEN of California. Thank you. The CHAIRMAN. Mr. Olson. Mr. OLSON. You stated that you furnished about 60 percent of the energy that is distributed by the cooperatives in your area. I can understand that you do have a legitimate concern that you might lose that 60 percent of energy load which you sell to the rural cooperatives. Can you tell me what percent that is of your total energy sale? Mr. GIBSON. I am sorry, I do not have it at hand. Mr. OLSON. You cannot give me a rough estimate, either? Mr. GIBSON. I am sorry. Mr. OLSON. Will you, then, tell us what the percentage of sales to the rural distribution cooperatives is to your total sales? What growth have you enjoyed in your total sales over the past few years? This would help us determine what effect these bills would have in relation to your company? Mr. GIBSON. Certainly, we will supply that for a 10-year period. Mr. OLSON. All right. (The information requested follows:) The 60 per cent of energy load that Virginia Electric and Power Company sells to the rural cooperatives represented 3.65 per cent of the total energy sold by the Company in 1965. If Mr. Olson's second question looks to a projection of future relationship, this can be best shown by comparing the total energy delivered by Vepco to the cooperatives, whether generated or wheeled by it, with total Vepco sales, since this indicates their relative growth in total load. follows: That statement Mr. GIBSON. May I add that my main point was not our solicitude at losing that business but our solicitude at losing all of our business. Mr. OLSON. Do you envision that perhaps you might have to become a customer of this new, giant, energy-supplying complex? Mr. GIBSON. Or completely being ignored. Mr. OLSON. I cannot possibly conceive of this happening, but, frankly Mr. GIBSON. I am delighted to hear that, Mr. Olson. I hope that the committee shares your views and will assure their realization. The CHAIRMAN. Mr. Callan. Mr. CALLAN. In 1954-56, your net electrical plant was $360 million; is that correct? Mr. GIBSON. I would think approximately that in 1954. Mr. GIBSON. I would think that is approximately right. Mr. CALLAN. Let us assume that is right. So, you have increased your investment about 2.4 percent? Mr. GIBSON. The figures that you bave me are more than that. Mr. CALLAN. Or 212 or 2.4 times. Mr. GIBSON. Yes, sir; about 250 percent or a little less. Mr. CALLAN. You say that the common stock dividends in 1954 were $8.4 million, and in 1964 were $25.1 million. Mr. GIBSON. On a much larger capital. Mr. CALLAN. You increased your capital 2.4, and your dividends three times; is that right? Mr. GIBSON. You are looking at the figures, and I am going to accept them as if they are true without admitting that they are true. I emphasize my previous comment, that it has been the policy of Virginia Electric & Power Co., to the extent that earnings permitted, to make gradual small incremental additions to the dividend payouts. Mr. CALLAN. I do not object to that. My point is this: I do not have any stock in your company. You have increased your oper ating income 143 percent, which means that you are doing real well, and I wish that I had some of the stock. The point is, what you have done is that you have increased your dividends to the stockholders about three times as compared to 1954 and as compared to the investment. You could have done another thing, if you had wanted to, you could have reduced the rates. Mr. GIBSON. We did that. We have done that in each year but one for the last 7 years. Mr. CALLAN. Not in comparison to the income; did you? Not by comparing the investment that you had in 1954 as compared to 1964, where you had 2.4 more invested than you had in 1954, but your dividends have gone up three times, maintaining the same ratio. That is, you could have reduced the rates if you had wanted to. Mr. GIBSON. Our rates have been reduced substantially during that period. Mr. CALLAN. What was the rate of return in 1964? Mr. GIBSON. In 1964 I could just only tell you about 612 percent. Mr. CALLAN. You mentioned a while ago that your outstanding debt was this would be 20 years certainly, because you invested about $500 million in the last 10 years. Mr. GIBSON. We have sold both debt and preferred and common stock. One of our largest series of bonds was in 1945, $59 million, and that was 21 years ago. Mr. CALLAN. Would it surprise you to know that the utilities that are operating in areas where there is the highest concentration of cooperatives in public power, that their returns are higher than the returns on the investment by private utilities that are operating where there is not public power cooperatives? Mr. GIBSON. I would not have any knowledge on that. Mr. CALLAN. I think that if you will look it up, you will find that the private utilities that were operating entirely in concentrated areas of public power had a greater return on their investment than those public utilities operating more or less away from them. Why do you think that would be? Mr. GIBSON. I have no way of knowing and the only inference I could draw would be to attribute it to the greater competitive force of other investor-owned utilities. We are constantly studying to get customers by lower rates and better service, and I think that most investor-owned utilities are engaged in the same study. Mr. CALLAN. For instance, the private utilities operating in the TVA areas have a higher return on their investment than those or most of those operating outside of the TVA area. This is where you have got a high concentration of public power. Mr. GIBSON. I have not enough knowledge on that to answer. Mr. CALLAN. That is true. The reason that it is true is that the rates in those areas are lower and, therefore, your consumption goes up, and they are using more power and, consequently, spending more money. I would suggest that when we talk about these, I think the cooperatives in the public power are here to stay, and it would seem to me that it would be to the advantage of the country, instead of coming in here and battling on every program, that we somehow get together, because I have figures to point out here that this legislation, if it goes through, the percentage of generation by the REA cooperatives between now and 1971-the percentage of generation the private utilities is not going to change. In other words you have about 2 percent right now and you would have 2 percent after passage of this legislation. There is only $50 million per year going into this over the next 10 years, and there just would not be enough money to build that gigantic empire that you are talking about. Mr. GIBSON. My figure was $20 billion. The fact is that the monstrous Yankee-Dixie system proposed to be set up in Appalachia, the 6 million kilowatt-hour generating capacity, would cost only about $1 billion. Mr. CALLAN. How much money will come into this program per year, from the Federal Government-$50 million, is it not? Mr. GIBSON. From the Treasury. Mr. CALLAN. Per year. Mr. GIBSON. More than $1 billion in the period. That is from the Treasury. Mr. CALLAN. What you are talking about is a long period of time. Mr. GIBSON. Absolutely, absolutely. Mr. CALLAN. On this $20 billion that you are talking about. Mr. GIBSON. That is the aggregate; yes. Mr CALLAN. You will be building in the meantime, will you not? Mr. GIBSON. We will have to, to give service. Mr. CALLAN. What you are talking about is this big generation thing you are talking about 30 years down the road. Mr. GIBSON. No, because it will take only $1 billion to do that. Mr. CALLAN. How long will it take to get $1 billion at $50 million a year? Mr. GIBSON. Ten times $50 million is $500 million, and 2 years would produce $1 billion. You could not build it in 1 year. Mr. CALLAN. $50 million into $1 billion, is how much? Mr. GIBSON. That is 20 years, is it not? Mr. CALLAN. It takes 20 years to get it in there; right? Mr. GIBSON. You are not including borrowings, repayments and other such items. Mr. CALLAN. You are not suggesting that you can do it in 5 years, are you? Mr. GIBSON. I think that they could provide the money as soon as the engineering capabilities would permit construction. Mr. CALLAN. That is all. Thank you. The CHAIRMAN. Thank you very much, Mr. Gibson. Mr. GIBSON. Thank you. The CHAIRMAN. Mr. Olson. Mr. OLSON. Our colleague, Mr. O'Konski, is with us this morning and has a statement for the record. The CHAIRMAN. Yes, sir; we shall be pleased to hear from you. STATEMENT OF HON. ALVIN O'KONSKI, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN Mr. O'KONSKI. Mr. Chairman and gentlemen of the committee, I know that you have a host of witnesses here, so that I will not take up your time. I think this is good legislation, and I commend the |