Mr. CORETTE. This is true in some States, but not in others; and I believe you cannot generalize on it. In our State it is not true.

Mr. CALLAN. I think it is true in the majority of States-that before a co-op or a private utility can build a generating facility, they have to get State permission first.

Mr. CORETTE. I am sorry I cannot answer your question as to a majority of the States. I know there are some Štates that require such a certificate.

Mr. CALLAN. If this is true, then the very fact that this bank existed in the States that did have those laws, this would mean that a co-op isn't going to come in there and take over all the generation and transmission unless this local State agency gives them the OK— wouldn't that be true?

Mr. CORETTE. This would only apply if the State commission had jurisdiction over the co-ops as well as the private utility, and if the State law required this type of certificate.

Mr. CALLAN. I think it would be good to have in the record what areas what States have total control over distribution of electricity. And I think we will try to find that.

We have talked a lot about subsidies.

You have the 7-percent-tax credit.

Mr. CORETTE. Surely, we are eligible for the credit but not the 7 percent. There was discrimination, in my opinion, against the utility industry. Electric utility companies have only 3 percent.

Mr. CALLAN. Now, you don't as an individual, do you? On your Federal income tax return, you get a deduction. But the individualany individual business or corporation gets a 3-percent credit or 7, right?

Mr. CORETTE. Yes. But an individual in business would get the same 7-percent credit.

Mr. CALLAN. Does the co-op get a tax credit?

Mr. CORETTE. It doesn't have to, because it pays no taxes.

Mr. CALLAN. My point is, is the 3-percent-tax credit a subsidy or not?

Mr. CORETTE. No, I don't consider it a subsidy. It was definitely a provision of the tax law-the investment credit applied to all business. It wasn't a subsidy. It was merely a provision of the tax law which was enacted for the purpose of encouraging all businesses to modernize their property and replace old property with new, and build more property.

Mr. CALLAN. It was a subsidy over what it was before.

Mr. CORETTE. I don't look at it as a subsidy at all. It was just a provision of the tax law. If they reduced the taxes 1 percent, it would have been the same kind of thing.

Mr. CALLAN. Is there accumulated deferred tax-do you have a deferred tax?

Mr. CORETTE. Are you talking about liberalized depreciation?
Mr. CALLAN. What they call a deferred tax.

Mr. CORETTE. I think liberalized depreciation is what you mean. That is, you can take more depreciation on your property in the early life of it, and less in the later life, if you want, and then call that a deferred tax. You have the same depreciation over the life of the property.

Mr. CALLAN. Does this mean under that deferred tax you keep more money is that right-keep it on demand?

Mr. CORETTE. Well, in the early life of the property, you would claim more depreciation which would reduce your tax, you would have more money left in your business during the early life of the property. Mr. CALLAN. So it is your opinion that the tax credit, deferred taxes, and all these things are not a subsidy, but the 2-percent REA money is a subsidy, because it costs the Government-it costs them 4 percent or 412 percent to get the money, and then loan it out at 2. But you take a deferred tax, and you keep it, you keep that money-so that is not a subsidy, is that right?

Mr. CORETTE. That is exactly right. I look at liberalized depreciation as a provision of the tax law that applies to all business, and certainly not a subsidy.

Mr. CALLAN. Do you have any idea how many dollars you are holding as a deferred tax?

Mr. CORETTE. I don't have.

Mr. CALLAN. I notice here-1964-Virginia Electric Power Co. had total accumulated deferred tax of $34.8 million. Do they have that on hand?

Mr. CORETTE. No.

Mr. CALLAN. Where is it? Have they paid it?

Mr. CORETTE. I am not at all familiar with that company. But that is the difference, as I understand it, between the depreciation they did take and would have taken, and they have to pay that out later in tax. Mr. CALLAN. But with a deferred tax-they had $34.8 million on hand-which means he must not have paid it to the Government, is that right?

Mr. CORETTE. It means they have to pay higher taxes on that property later on in the life of the property.

Mr. CALLAN. Do they have this $34.8 million deferred tax they can use?

Mr. CORETTE. What you are saying in effect is that by reason of taking more depreciation in the early life that the company has more cash left for its own purposes. That is true. You do have more cash left for other purposes, and you spend it.

Mr. CALLAN. If this $35 million were in the Treasury of the United States at 4-percent interest, this would be for the U.S. Government. Mr. CORETTE. Just the same as if the taxes had not been reduced a couple of years ago.

Mr. POAGE. Thank you.

(The additional materal furnished by Mr. Corette for inclusion in the record follows:)

RURAL ELECTRIC PEOPLE SERVE THEIR NEIGHBORS AND LIKE IT THAT WAY

In an age of bigness, rural electrics stand out by being small.

Only about 10 percent of the American people receive electric power through the rural electric cooperatives and consumer-owned power districts which serve the rural areas of the nation. Commercial electric companies serve eight times as many.

But rural electrics have never wanted to be giants. They were organized in the first place-not for profit, not to replace existing electric companies--but to serve their member-owners with adequate, efficient, economical electric service. Yes, rural electrics are small in an area of bigness. But bigness is not the same as greatness. In their own way, rural electrics try to achieve a special kind of

greatness... the kind that comes from providing a necessary service, and providing it continuously, economically, and dependably-but with very little fanfare.

Rural electrics will probably never serve a much larger percentage of the American people than they do today, but that's all right. With the help of Rural Electrification Administration loans, rural people created the rural electrics to serve themselves and their neighbors, and this is what they will continue to do They like it that way.

Mr. R. K. HANSON,

Manager, Sun River Electric Cooperative, Inc.,
Fairfield, Mont.

THE MONTANA POWER CO.,
Butte, Mont., May 6, 1966.

DEAR MR. HANSON: In recent weeks there has been considerable publicity given in Montana papers to a statement, attributed to Rural Electrification Administrator Norman M. Clapp, which accuses Montana Power Company of refusing to sell power to rural electric cooperatives which are seeking to serve new customers. Mr. Clapp is supposed to have said that the co-ops were buying power from the Bureau of Reclamation because of power supply problems with this Company.

We feel that Mr. Clapp's erroneous statements may be accepted by the people in your Cooperative as the policy of this Company and, for that reason, we would like to clarify and restate our position.

The position and policy of The Montana Power Company with respect to supplying power to your Cooperative was clearly identified by meetings held with your Board and representatives of Montana Power Company, namely, Harold Dickinson, Dick Setterstrom and Geo. W. O'Connor, in the year of 1964, at which time we offered to furnish on a long-term basis the power needs of your Cooperative. This position has not changed since that time. We renew the offer as of this date.

If you are desirous of writing a 10-, 20- or 30-year contract with The Montana Power Company, to buy all of your power requirements from this Company, we will guarantee to provide your power needs.

The only reservation we would incorporate is that we would retain the right to compete for new power loads that we thought we could serve, and we would continue to exercise our prerogative to litigate any disputes over the right of the Cooperative to serve certain loads, as expressed in the Federal and State laws. However, if you were to run service to a load over which there was a dispute, we would continue to serve you power during the time that the dispute was being litigated.

Thus, it must become apparent to your Cooperative that Montana Power Company has and will have adequate power to serve the loads of your Cooperative. This wholesale supply is available to you.

We hope this will clear up any confusion that the erroneous statements, attributed to Administrator Clapp, might have created.

Sincerely,

GEO. W. O'CONNOR.

The Montana Power Co. and Montana rural electric cooperatives, calendar 1964

Source: Montana Power 1964 Report to Stockholders; 1964 Financial and Operating Report; 1964 Annual Statistical Report of REA, pp. 22-29.

SECTION-BY-SECTION ANALYSIS OF H.R. 14837

Section 1 of the bill would have Congress declare that "the growing capital needs" of the rural electric and telephone systems "require" the establishment of a Federal Bank for Rural Electric Systems and a Federal Bank for Rural Telephone Systems. However, the rural electric systems do not have "growing capital needs" to the extent contemplated by this bill unless they intend to take over customers now served by other utility systems which have capacity available for continued service to these customers. The bill states the banks would furnish "assured and viable sources of supplementary financing" with the objective that said banks will become entirely privately owned, operated and financed corporations. However, there is no assurance in the bill that the Federal Government will ever be repaid its subscription to the proposed electric bank. The word "supplementary" in line 8, and the word "additional" in the title of the bill, are contrary to the President's budget message for fiscal year 1967, in which the President stated that efforts were underway to develop "alternative" means of financing the rural electrification program.

Section 2 of the bill would amend the Rural Electrification Act of 1936 by adding four new titles. Title III concerns the electric loan account, and Title IV the electric bank. Titles V and VI concern the telephone systems.

Section 301 would establish in the Treasury of the United States an account to be known as the rural electrification account.

Clause (1) would place in the account all notes, bonds, obligations and property now held by the Administrator on loans heretofore or hereafter made under sections 4 and 5 of the act. On June 30, 1965, there were approximately $3.2 billion of such outstanding loans made by the Administrator.

Clause (2) would place in the account the undisbursed balances of electrification loans made under sections 4 and 5. As of June 30, 1965, there were over $900 million of loans approved by the Administrator, but on which no advance had been made.

Clause (3) would place into the account all collections of principal and interest received on or after July 1, 1965, on outstanding loans under sections 4 and 5. At the present time, such repayments are being made at the rate of about $220 million per year (approximately $155 million toward repayment of principal and the balance represented 2% interest payments). The retroactive provision would give the account the collections due in fiscal year 1966 as a source of ready cash.

Clause (4) would place into the account all appropriations for loans made under section 3 of the act, and the unexpended balances of funds available for loans under sections 4 and 5 of the act. Thus, any future appropriations by Congress for direct loans would go into the loan account.

Clause (5) would place in the account shares of capital stock in the electric bank acquired by use of the account, and monies received from the bank upon retirement of such shares. The $750 million of Class A stock of the bank to be bought by the Government would thus become an asset of the account.

Section 302 concerns the liabilities and uses of the account, and subsection (b) provides that the assets shall be available for (1) loans under sections 4 and 5 to the extent authorized in annual appropriation acts (or available pursuant to section 3 of the act), (2) payment of interest on the 2% loans, (3) investment in the capital stock of the bank in accordance with section 405 (a), and (4) payment of principal on the 2% loans.

Section 303 provides that monies in the account shall remain on deposit in the Treasury of the United States until disbursed.

Under the proposed loan account, Congress would have less control over the actions of the Administrator-Governor, who would have large amounts of money and obligations available in the loan account.

Section 401 would establish the electric bank "subject to the supervision and direction of the Secretary of Agriculture." Once established, the bank could continue to exist and make loans unless and until Congress might disestablish it by statute. Such establishment of the bank inside the Department of Agriculture is in contrast to the 37 agricultural credit banks (the Federal land banks, the Federal intermediate banks, and the banks for cooperatives) which are supervised by the Farm Credit Administration, an independent agency.

Section 401 also states that the general purposes of the bank shall be to obtain an adequate supply of suplemental funds "to the extent feasible" from non-Federal sources, to utilize said funds in the making of loans under section 410, and to conduct its operations "to the extent practicable" on a self-sustaining basis. These words "to the extent feasible" and "to the extent practicable" indicate that the bank will be neither non-Federal nor self-sustaining. It will be subsidized indefinitely by funds diverted from the Federal Treasury, but still operate virtually free of Congressional controls or surveillance.

Section 402 concerns the general purposes of the bank and contains mostly boiler plate provisions. Subsection (g) provides that the bank shall have the power to "determine the character of and the necessity for its obligations and expenditures, and the manner in which they shall be incurred, allowed, and paid, subject to provisions of law specifically applicable to Government corporations." This would largely free the bank and its loans from review by the Comptroller General except that he might make a business-type audit of the bank's finances. A proviso states that the bank shall undertake no new types of activities not included in the annual budget program. This proviso is not a basis for Congressional control, however, because the budget program is prepared by the Executive Branch and the Bureau of the Budget, not by the Congress. Moreover, it should be noted that this proviso to section 402 (concerning general powers of the bank) does not restrict the lending powers of the bank under section 410.

Section 403 would establish a Board of Directors consisting of 7 members, 4 designated by the Secretary of Agriculture from among the employees of his Department, and 3 initially appointed by the Secretary, but thereafter elected by borrowers from the bank. Thus, the Board will be controlled by the Department of Agriculture, in direct contrast to the Farm Credit Board (which has supervisory responsibility over the 37 agricultural credit banks) which consists of 13 members, 12 of whom are nominated by the 12 farm credit districts, and only 1 by the Secretary of Agriculture.

Section 404 would provide that the REA Administrator shall serve as the chief executive officer of the bank and be called "the Governor." Thus, the REA Administrator would have "two hats," and would be able to make section 4 loans at 2% interest, and also loans from the bank capital. If an applicant could not meet the restrictions of the RE Act, then the Administrator could put on his "other hat" and make loans from the bank. The bill sets forth no criteria to guide the Administrator-Governor as to which type of loan he should grant to individual applicants. He would have immense power and authority, with very little Congressional control over his actions and policies as Governor.

Section 405 concerns the capitalization of the bank, and provides that the United States shall furnish capital to the bank at a rate of $50 million per fiscal year for 15 years, unless an appropriation act shall specify another amount. Thus, $750 million would be automatically diverted from the Federal Treasury and furnished to the bank, unless Congress takes the intiative in some future year. The bank would make no payment for the use of this capital, in contrast to the 25% franchise tax on net operating revenues paid by the agricultural credit banks to the Government so long as Government stock is outstanding in the bank.

Subsection (a) contains a proviso that the Secretary shall make a report by July 1, 1971, on the status of the capitalization of the bank with recommendations concerning "the continuation thereafter of such capitalization.”

Subsection (b) would establish the four classes of A, B, C and D stock. Only B and C would be voting stock.

Subsection (c) provides that the Class A stock shall be issued only to the REA Administrator (who thus becomes principal stockholder and chief executive officer of the bank). It provides further that the Class A stock shall be redeemed and retired by the electric bank "as soon as practicable after June 30, 1981, but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank." Thus, the Board, can determine when, if ever, it would repay the Federal subscription, and the Federal involvement could continue indefinitely.