Subsection (d) requires each borrower from the bank to invest in Class B stock 5% of the amount of loan funds obtained. There is nothing in the bill to prevent a borrower from obtaining 105% of its capital needs and investing 5% in Class B stock. Since, under section 406 (a), the bank can sell debentures up to 10 times the paid-in capital, each loan made by the bank enables it to increase its capital 10 times 5%, or 50% of the value of the loan.

Subsection (e) provides that borrowers may also purchase Class C stock. This, also with the factor of 10 multiplier, would permit increase of bank capital. Subsection (f) provides that consumers of borrowers may purchase Class D stock and this similarly permits increase in bank capital.

Subsection (g) is an attempt to circumvent state laws. It provides that if a firm, association, corporation or public body is not authorized under its state laws to acquire stock in the electric bank, it may pay an equal sum into a special fund and receive equivalent rights and status as a stockholder.

Subsection (h) provides for payment of interest and dividends on Class C and D stock before payment of any dividends to Class A stock.

Section 406 concerne the borrowing power of the bank and authorizes it to obtain funds by the sale of electric debentures up to 10 times the paid-in capital and retained earnings of the electric bank. It states that the bank shall insert in its debentures language indicating that such debentures "are not guaranteed by the United States and do not constitute a debt or obligation of the United States ***" However, this provision is rendered meaningless by the authority of the bank in subsection 406 (b) to obtain funds by writing notes to the Secretary of the Treasury. Electric debentures would also, under this section, be lawful investments for public trust funds, permitting trust and public funds to be invested in such debentures.

Subsection (b) provides that if there are insufficient funds in the assets of the bank to pay interest or principal on its debentures, the bank may obtain funds for this purpose "by making and issuing notes to the Secretary of the Treasury." Furthermore, the Secretary of the Treasury is "authorized and directed to purchase" any such notes. Thus, the bank is granted a free license to use Treasury funds, and the debentures receive a "back door" guarantee.

Section 407 provides that the electric bank may utilize the facilities and services of employees of the REA or any other agency of the Department of Agriculture "without cost to the bank," except to the extent that administrative expenses may be recovered by interest on loans other than intermediate loans. This continued subsidy of administrative costs of the bank, as well as the direct loan program, contrasts with the operations of the 37 agricultural credit banks, which pay all of their own administrative costs, as well as those of the supervisory Farm Credit Administration. In fiscal year 1965, the administrative costs of the REA for electric borrowers under the direct loan program was over $6.3 million.

Section 408 provides that the Governor shall make an annual report, and shall act as fiscal agent of the United States when so designated by the Secretary of the Treasury.

Section 409 provides that the property, franchise capital, reserves, surpluses, security holdings, and other funds, and the income of the electric bank shall be exempt from all taxation "now or hereafter imposed by the United States or by any State, territorial, or local taxing authority." A proviso permits the bank to make payments of property taxes after acquisition of property.

Section 410 concerns the lending power of the bank. Subsection (a) provides that the Governor is authorized to make loans, "in conformance with policies established by him," to borrowers under section 4 or to corporations or public bodies which are owned or controlled by section 4 borrowers. Thus, the bill contemplates creation of super-cooperative organizations to obtain loans from the bank. The loans may be (1) for the same purposes as under section 4, and (2) "for the purposes of financing, or refinancing, the construction, improvement, expansion, acquisition, and operation of electric generating plants and electric transmission and distribution lines or systems, in order to improve the efficiency, effectiveness, or financial stability of such corporations or public bodies ***" Thus, the Administrator-Governor could make loans for any purpose he believes

would "improve the efficiency, effectiveness or financial stability of the borrower." It is difficult to conceive of a loan to a borrower which would not improve the "effectiveness" or the "financial stability" of the borrower, and thus the Administrator would be free to make any loan he might desire. This language is the same as that promulgated by the Administrator in 1962 as "the third criterion" for section 4 loans, but never recognized by statute. It would give the Administrator-Governor broad authority to make loans for expansion and acquisition by bank borrowers of properties now owned by private companies or municipal corporations. The present restrictions in the REA Act concerning service to persons in rural areas would not be applicable to loans from the bank under section 410. Thus under this bill, the Administrator-Governor would obtain his long-sought freedom from Congressional "restrictions."

Section 410 contains three provisos, each of which could be used by an aggressive Administrator-Governor as a basis for expansion of the cooperative movement rather than as a restriction upon his lending power.

The first proviso contemplates loans for acquisitions, and states that the cumulative size of the electric system "shall not be greater than the borrower's existing system at the time it receives its first loan from the electric bank * * *" This proviso, if honored, would prevent cooperatives from more than doubling their size at one time, but could be easily evaded by individual cooperatives amalgamating before obtaining a "first" bank loan to make an acquisition. After acquisition, but before applying for another loan, the resulting organization could then form a new legal entity, and thus become a new borrower eligible for another "first" loan.

The second proviso contemplates loans for exchange of properties.

The third proviso contemplates loans for the construction of generating and transmission facilities. It provides that the resulting capacity of such facilities shall not be in excess of power requirements of the ultimate consumers of the borrower, its members, and members of members "projected over the estimated life of such facilities," which might be up to 40 years. Under this authority, loans could be made to construct a generating facility 5 to 10 times larger than that needed at the time of construction.

Subsection (b) provides that loans from the bank shall be subject to certain "restrictions". It authorizes a loan period of 50 years, in contrast to 25 years in the original 1936 Act, and 35 years for current section 4 loans. This is longer than the period of depreciation for practically all electric facilities, and the facilities in most cases would be worn out or abandoned before the loan would be repaid.

Subsection 410(b)(2) provides for two types of loans: intermediate loans at a maximum interest rate of 4%; and, "other" loans which would bear interest at a rate which reflects the current average rate payable by the electric bank on its electric debentures, and administrative expenses and estimated losses of the electric bank, all as determined by the Governor. The bill provides no meaningful criteria to separate grants of intermediate loans from grants of "other" loans. It states that intermediate loans shall not be made if the Governor determines, under standards established by the Secretary, that the borrower is capable of paying the higher rate and "achieving the objectives of the Federal rural electrification program."

Subsection (c) permits the Governor to adjust the schedule of payments of interest or principal on loans from the bank.

Section 411 provides that any receipts from the activities of the banks shall be available for all obligations and expenditures of the electric bank, thus giving the Administrator-Governor broad discretionary authority.

Section 412 provides that the Secretary shall transmit to the President for transmission to the Congress recommendations for legislation for conversion of the electric bank to private ownership "as promptly as practicable" after all

Class A stock has been retired. However, since there is no requirement of retirement of the Class A stock, this section is unimportant.

Section 413 provides that the authority provided in Title IV (concerning the bank) shall be cumulative, not to limit authority provided elsewhere in the act. Thus, the Administrator-Governor can continue also to make 2% loans.

Titles V and VI concern the telephone loan account and the telephone bank. It need only be noted that the telephone bank would involve less Federal subscription ($300 million vs. $750 million) and the loan authority would be more restricted. Section 610 (b) (4) provides that in States where there is no agency or regulatory body legally authorized to issue certificates of convenience and necessity to an applicant, no loan shall be made unless the Governor of the telephone bank shall determine (and set forth his reasons therefor in writing) that "no duplication of lines, facilities, or systems providing reasonably adequate service will result therefrom."

Section 3 of the bill would repeal subsection 3 (f) of the RE Act, which requires that repayment of section 4 and 5 loans shall go into the Treasury as miscellaneous receipts.

Section 4 of the bill would establish the electric and telephone bank as subject to certain provisions of the Government Corporation Control Act of 1945. Section 5 of the bill would provide that the Act shall take effect July 1, 1966. REA loans-By purpose, 1935-65

STATEMENT OF R. K. HANSON, MANAGER, SUN RIVER ELECTRIC COOPERATIVE,

FAIRFIELD, MONTANA

In testimony presented to the House Committee on Agriculture in opposition to H.R. 14000, and H.R. 14837 by Mr. J. E. Corette, President of the Montana Power Company, there is a statement on pages 3 and 4 pertaining to the "Company's Position Regarding Rural Electric Cooperatives" in which Mr. Corette alleges that REA Administrator Clapp had erroneously reported to the House Appropriations Subcommittee "that The Montana Power Company has demonstrated a policy of denying additional power to the cooperatives for loads the Company felt it should serve". He also alluded that Montana Power's policy is one of offering long-term power contracts which would guarantee to provide all of the power needs of the electric cooperatives.

To support this statement he attached, as Exhibit No. 1, a copy of a letter sent to all of the rural electric co-operatives in the Company's service area, which supposedly restated their policy. This letter, written on May 6, 1966 is not only in contradiction to the only other written statement of policy which we have received from the Montana Power Company but also in contradiction with the terms and conditions of their existing and proposed wholesale power contracts with the rural electrics.

We are attaching hereto the following:

Exhibit No. 1, Montana Power Company letter of Dec. 31, 1960

Exhibit No. 2, Montana Power Company proposed power contract

Exhibit No. 3, Montana Power Company letter of May 6, 1966 (also contained in Mr. Corette's statement)

Exhibit No. 4, Sun River Electric Cooperative reply to May 6, 1966 letter dated May 12, 1966

Exhibit No. 5, Montana Power Company reply to Sun River Electric letter dated May 13, 1966

As a result of the May 1966 correspondence a meeting was held on May 18, 1966 at which Vice President W. W. Talbott and Division Manager, H. K. Dickinson of the Montana Power Company and Manager R. K. Hanson of the Sun River Electric Cooperative were present. Mr. Talbott agreed to clarify the Company's position on the guarantee of power needs and other questions raised by the Cooperative pertaining to rates and terminology and inform them as to such position by no later than June 6, 1966.

To date no such information has been forthcoming. We are of the opinion that the Montana Power Company's May 6, 1966 letter was written with the specific intention of creating an instrument for submission to the House Committee on Agriculture and not as a bona fide intent of future policy. As of this date we certainly have not seen any evidence from the Company to indicate otherwise. Their proposed power contracts definitely do not include any language which spells out such assurance and the past experience of the rural electric cooperatives most certainly do not indicate such assurance.

EXHIBIT No. 1

Mr. R. K. HANSON,

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

THE MONTANA POWER CO., Butte, Mont., December 31, 1960.

DEAR ROD: Pursuant to our discussion in Butte Friday afternoon, I wish to inform you of The Montana Power Company's position in connection with electric service for the proposed Minuteman Missile sites and to specify for your information the sites that are involved.

Throughout the years, we have taken the firm position that we would not wholesale power to any customer for the purpose of enabling that customer to enter into competition with us for service to a customer or load which we are ready and willing to serve. We have invoked this policy from time to time over a period of many years.

This policy has been applied in the past in connection with our wholesale service to REA cooperatives and is involved at the present time in the question of wholesale supply to the Sun River Electric Cooperative to serve certain Minuteman Missile sites.

It is our position that our wholesale rate to REA Cooperatives was developed and is being offered to assist the Cooperatives in carrying out the purpose for which the Montana REA Act was adopted, which is the furnishing of electric energy to persons in rural areas in which electrical current and service is not otherwise available.

Certain of the missile sites are clearly in REA territory and in areas where we do not have service available. We are prepared to supply wholesale power to the Sun River Electric Cooperative to enable it to serve such missile sites. However, we must advise you that we will not supply wholesale power to enable you to serve missile sites which we are ready and willing to serve.

We realize this creates a controversial situation but one which we do not feel can be avoided in the light of our basic policy.