and this community decided under Wisconsin law that they would rather be served by a cooperative that can sell its power cheaper, it is free to do so. Mr. HAGEN. And you subtract that from your system, and that weakens your economic position, and you might be forced to sell? Mr. GRUHL. Right. That is why the absence of arm's length. Mr. HAGEN. Thank you. Mr. POAGE. Any other questions? Mr. GRUHL. Thank you, Mr. Chairman. Mr. POAGE. Just a minute Mr. McLean. I would like to ask you about a statement you have on page 2 of your statement where you say, "Our customers pay about five times as much in taxes on their electric bills as their neighbors in the co-ops." You heard the testimony of the gentleman from Virginia this morning, I believe, Mr. Gibson, and I believe there was someone else testifying to the effect that-the gentleman from Montana just testified-to the effect that they did not pass taxes on to their customers. Does your company pass taxes to the customers? Mr. McLEAN. Taxes are not kept out in a separate account and passed directly on to the customers. They are part of the cost of doing business. They are not always passed on. Some of the increase in taxes have not been passed on. Some of the decrease in rates that my company has achieved has been done without decreases in taxes. And therefore this cannot be separated out as a separate item. It is a part of the cost of doing business, and lumped in with the total cost of doing business. Mr. POAGE. Then let's understand your statement that "our customers"-I suppose you mean the customers of the company you represent the Wisconsin Michigan Power Co., "our customers pay about five times as much in taxes on their electric bill as their neighbors in the co-ops." Mr. McLEAN. Part of the total cost to the customer-included in the total cost to the customer-along with all other costs, are about five times as much in taxes. Mr. POAGE. Then you must have passed those taxes on to your customers, or they could not have paid it, is that right? Mr. McLEAN. They are not passed on directly. But it is part of the cost. Mr. POAGE. I don't know just how much more directly you could pass them. You say on their electric bill. I don't know how it could be more directly than to be in the electric bill. And you have just said that they paid about five times as much on their electric bill. Mr. McLEAN. The rate provides makes provision for running on costs, including taxes. Mr. POAGE. That is right. I am not arguing that. I think that is an exact correct statement of fact. Now, you said substantially the same thing, Mr. Gruhl. You said, "Our electric service customers who last year paid some $18 million in Federal income taxes through their electric service bills." Mr. GRUHL. Yes. Mr. POAGE. You pass your taxes on to your customers, don't you? Mr. GRUHL, We are talking about the difference between the legal incidence of taxes and the ultimate effect. Mr. POAGE. We are not talking about any differences. I am just asking you for the facts-don't you pass your taxes on to your customers? Mr. GRUHL. Not as far as the legal incidence, but the effect of the taxes come through the dollars that customers pay, without any question. Mr. POAGE. I agree with you a hundred percent. But you heard the gentleman from Virginia say that wasn't true this morning, did you not? Mr. GRUHL. The gentleman from Virginia may have been talking from the standpoint of the legal incidence of taxation. From this standpoint, what he said is true. Mr. POAGE. No; he wasn't talking about some fine-spun theory, because I asked him if his bill didn't have to be a little greater, because of taxes, and because of interest. And he said "No." Mr. GRUHL. Well, I did not understand. I would say that the bill would have to be greater if Mr. POAGE. I appreciate your frankness. I think you gentlemen have laid it out here, and laid out the true facts. Mr. GRUHL. If I may add this one part-that if the rates are such that they are compensatory enough to include taxes, they do include them. We have rates, however, and have had it in the past-part of our operations have been a street railway utility, and part of them in the past have been a manufactured gas utility. And I can say definitely there that the taxes were not passed on to the customer because there wasn't enough left. Mr. POAGE. That obviously would be true, and that would be true of a great many of the electric co-ops-that they could not pass taxes on, because there isn't enough income to pass them. Mr. GRUHL. Well, I am not familiar with the country as a whole. In Wisconsin this is a different situation. Mr. POAGE. I agree-Wisconsin is in pretty good shape. Mr. GRUHL. Co-ops there have earned, according to the public service commission-I have their report here on a matter of returnif this is a matter of moment Mr. POAGE. I think we are all in agreement that Wisconsin is in pretty good shape. But if you were doing business where you had one or two customers per mile, as we have had described here, you would find it a little more difficult, would you not? Mr. GRUHL. Very definitely. Mr. POAGE. Is there anything further? Thank you very much, gentlemen. Mr. GRUHL. Thank you. Mr. POAGE. Thank both of you gentlemen. Now we will call Mr. Walter Bouldin. We are glad to hear from you. STATEMENT OF WALTER BOULDIN, PRESIDENT, ALABAMA POWER CO., BIRMINGHAM, ALA. Mr. BOULDIN. Thank you, Mr. Chairman and members of the committee, for this opportunity to appear in opposition to H.R. 14837 and similar bills. I understand my statement will be made a part of the record. To avoid repetition, I will undertake to summarize my prepared statement. The first point I would like to make is that the extension of the distribution system of the electric co-ops requires no such undefined billions as would be available under this bill. In the last 10 years, the REA loans for such systems have averaged about $138 million a year, and in 1965 the loans for that purpose were $150 million. Contrasted to that, the repayments of principal and interest on co-op loans in the year 1965 totaled more than $222 million. It is, therefore, evident that if the American taxpayers are willing to continue to devote their $3.2 billion investment in co-ops to the legitimate needs of the co-ops distribution systems, the repayments on their present investment is ample for such purpose. Other witnesses have established the fact that this bill before us would make available billions of dollars for virtually unrestricted building of generation and transmission facilities. It should be borne in mind that every generation and transmission facility that is built under the provisions of this bill will displace an investor-owned, taxpaying facility. Investor-owned companies build electric facilities to supply the public needs for electricity. For that purpose, our companies make careful forecasts of what the needs will be, then they build facilities to meet those needs with a margin of safety. If a part of the public need is supplied by tax-exempt facilities, the building of taxpaying facilities will be reduced by just that much. The next section of my written statement documents the basic policy that I think has been established, that the original REA Act was not intended to displace taxpaying facilities. And so I won't quote that part of my statement. The next section of my statement is devoted to pointing out the abuses of that basic policy that have occurred in the making of generation and transmission loans. As an example of that abuse, I can personally testify about the $20.4 million generation and transmission loan that was granted by the REA to Alabama Electric Cooperative, Inc., a generating and transmitting co-op in Alabama. This loan was, of course, made without any giving our company a hearing notwithstanding the proposed project would make electric service available to no one to whom central station service was not already available, notwithstanding there was in effect a contract with our company to furnish the co-op an unlimited supply of electricity for its needs at a very low cost, notwithstanding the operation of the proposed plant would duplicate many miles of our transmission lines, and that the co-op project would take from us co-op customers which we had served for many years, and would actually increase the costs of power to those co-op customers of ours. At a later hearing in Alabama, in which the facts were disclosed, it was proved without dispute that the cost to the taxpayers of this generating loan was far in excess of any savings claimed by the co-ops for their customers. The next section of my statement is devoted to giving references to testimony of other witnesses before the Appropriations Committees about similar abuses of the REA authority to make generation and transmission loans in other States. I make reference to Indiana, Kentucky, Louisiana, Mississippi, Colorado, and Florida. The next section of my statement is devoted to quoting from excerpts from Appropriations Committee reports. Following the testimony I just referred to, these committee reports have reiterated the basic policy of the REA Act, that it was not intended for these generation and transmission facilities to displace investor-owned facilities. I would like to invite the attention of this committee to only one short excerpt from those committee reports. The Senate Committee on Appropriations in 1962 said: We make bold to suggest that the Committee on Agriculture and Forestry may wish to carefully reexamine this aspect of the program. I mention that because of a suggestion which I will make later on to this committee. It has already ben pointed out that this bill does not in any measure get the REA off the taxpayer's back. The added burden that would be put on the taxpayers by this bill would be measured only by the amount of expansion of the generating and transmission facilities. which would be built under it. Every dollar that these generating and transmitting facilities escape in taxes has to be paid by some other taxpayer. Just as an indication of the magnitude of the burden that that would be cast upon the taxpayers of America, Edison Electric Institute has estimated that in the year 1964, with electric plant in service of about $4.5 billion, the co-ops paid $195,515,000 less in taxes than would have been paid had those facilities been investor owned. When you multiply that $4.5 billion of electric plant now in service for the co-op by the indefinite number of billions that would be invested under this bill, you can see the magnitude of the burden that would be cast on the American taxpayer under the provisions of this bill. We are not seeing ghosts, gentlemen, when we speak of unlimited expansion of generation and transmission facilities under this bill. An example of the type of facilities which would probably be financed under this legislation has been indirectly referred to by other witnesses, but I will refer to it specifically. It is the so-called YankeeDixie project. Mr. POAGE. Mr. Bouldin, do you have any idea how much longer you want to proceed? Mr. BOULDIN. About 5 minutes, or less. Mr. POAGE. Will you suspend just a minute. The Chair wants, in behalf of the members of the committee, to welcome our clerk. She has been ill. The committee has been much concerned. We are delighted to see Mrs. Gallagher back. I want you to know that all of the members join in welcoming you back to the committee. And we hope that you are going to be able to be with us from here on. We are just glad to have you back. [Applause.] Mrs. GALLAGHER. I hope I am back to stay this time. Mr. BOULDIN. As I said, the type of expansion of generation and transmission facilities which we greatly fear under this bill is typified by the so-called Yankee-Dixie project. That project has been seriously advanced and has been widely publicized. It is being sponsored by many prominent advocates of co-op generation and transmission facilities. This project, as conceived by its sponsors, includes three huge power stations of 2 million kilowatts each, with connecting extra-high-voltage transmission lines and radial transmission lines that extend from Maine to Florida, and cover much of the Eastern United States. I have taken a map from the brochure which has been widely circulated by this association and attached it to my testimony. I would appreciate you gentlemen referring to the map to see the magnitude of the facilities which this project involves. The project would cost over a billion dollars, and it would, of course, be tax exempt. And this is only one of the many such projects that this bill could bring into being. Gentlemen, we don't need legislation to extend the authority to build these tax-exempt generating and transmitting facilities. We need other types of amendments to the act, to the Rural Electrification Act as it stands as was suggested by the Senate Appropriations Committee. One primary and extremely urgently needed amendment would require the REA Administrator, before making these G. & T. loans, to hold a hearing; an open hearing. As this committee doubtless knows, all applications for G. & T. loans are processed in complete secrecy before the Administrator. A second area of amendment that is badly needed would require that loans for generation and transmission facilities not be made when the resulting cost to the taxpayers of those facilities is greater than the estimated savings to the co-op customer. There is certainly no valid reason why taxpayers should pay more than the co-op customers saved. So I respectfully submit for your consideration the following amendment to the Rural Electrification Act: When an electric energy supply is available from an alternate source, loans for electric generation or generation and transmission facilities shall not be made when the resulting cost to taxpayers is greater than the estimated savings to customers of such facilities. The annual resulting cost to the taxpayers shall be computed by the Administrator as the sum of (1) the difference in interest rate on the proposed loan at 6 per cent multiplied by the amount of such loan. and, (2) the Federal income taxes foregone. Federal income taxes foregone shall be calculated by multiplying the amount of the loan by that percentage the Federal income taxes paid by class (A) and (B) investor-owned electric utility companies bore to the net electric plant investment of such companies as shown by the latest reports filed by such companies with the Federal Power Commission. Any determination required under this Act to be made by the Administrator shall be made in accordance with the procedures and subject to review under the provisions of the Administrative Procedure Act. Gentlemen, the device of interest subsidy and the tax exemption that is inherent in this bill would destroy any enterprise competing against it, whether that enterprise be an electric utility, a newspaper, a steel, chemical, or any other taxpaying enterprise. So on behalf of the millions of taxpayers of America, the millions of investors in our industry, we invoke the golden rule-you would not have this done to you. |