that comes up today. It is the sort of problem we anticipate we may be facing in Nebraska under the law passed by the legislature there last year. It is the sort of problem we face in Oregon under its present law. It will came up in other States.

Question: Section 410 in the analysis contemplates construction of generation and transmission facilties. Please explain how this provision might work. Why should the size limitation "be projected over the estimated life of such facilities"?

Here, again, I simply point out that in building generating facilities-and to some extent this is going to be true of transmission facilities, high-voltage transmission facilities-there are great economies in size. Without getting away from the necessary justification of these facilities for rural electrification purposes, it is desirable to relax the load growth period which is used to justify the size of the facility eligible for supplemental financing as compared to the rule we have had to follow in considering applications for the present 2-percent financing for generation and transmission facilities. The Buckeye proposition is a case in point. In this instance the cooperatives will be getting into a size of plant that is very economical. It will be needed over a period of years to meet their own loads. There is a ready market for all of the power which this plant will put out in the meantime under an arrangement with the Ohio Power Co. in the American Electric Power Co. system. The power produced will be withdrawn as the cooperative loads require it. By getting into a size plant which will not be fully loaded with the cooperatives loads for 17 years and which, therefore, would be ineligible for loans under our present rules, the cooperatives will achieve some very significant economies which will redound to the benefit of the rural people in the rural areas that they serve. We think this is desirable and financing should be made available for such arrangement. It is not proposed that it be a completely unrestricted authority in this bill. There is a very definite restriction provided, but we feel that it is a restriction that is consistent with the advancing technology of the industry. Such financing is necessary to enable the rural system to do as good a job, as efficient a job in sizing their generating capacity, as do the other segments of the industry. We thing it is necessary and desirable to enable the rural systems to take a proper place in the industry with other power suppliers. From these power pools, all of the power suppliers benefit, not just the cooperatives but the other suppliers as well.

Question: Section 410(b) (page 4 of the analysis) contemplates "loans to a period of 50 years." How can you justify this, when the current act is only for 35 years?

It is true that the authorization in the present act is only for loans extending to a maximum period of 35 years. I have pointed out, however, that by extending the period of repayment-because the intermediate loans would also be amortized, not just requiring the payment of interest but the principal, too-we are able to cushion the effect of doubling the interest rates. This is a usable step forward for a significant number of borrowers who would be able to make use of it, moving away from 2-percent financing without jeopardizing the program objectives.

The 50-year period is not an unreasonable period, so far as projecting the life of electric facilities is concerned.

Question: In section 410(b), what criteria are there to distinguish between "intermediate" and "other" loans? Will the interest rate on "other" loans be high enough to retire the Federal subscription?

I would like to point out, first that it is not expected that the Federal subscription of stock will be retired out of the earnings of the banks. The Federal stock subscription will be retired by private stock subscriptions, as the borrowers' investment in the bank grows. We anticipate it would be possible, under this legislation, that the loans other than the intermediate loans could be both amortized and unamortized. If you make the market rate loan an amortized loan, this adds an estimated 12 percent or more to the effective debt service rate. This would mean that the debt service would run, based on a 5.5-percent interest rate, somewhere in the neighborhood of 6 percent.

The other than intermediate financing will, in most cases, be restricted to an unamortized loan with debt service in the amount indicated on the chart. At the same time, if the bank makes an unamortized loan, it would probably require the borrower to meet certain net worth and equity requirements which are common for this type of financing in the utility industry. This might be a net worth requirement somewhere between 30 and 50 percent. There are not very many of our electric borrowers who have reached that percentage of net worth. The average of all of these systems is about 24 percent at the present time.

The unamortized market rate of financing is designed to be comparable to conventional utility financing. This is the type of financing that the utility industry uses. There would probably be similar requirements established by the bank that the borrower would have to meet to qualify for this type of financing: sinking funds, reserves for losses, as well as net worth requirements.

Question: How much money could the bank lend in 15 years? First, you will have $750 million. You speak of $8 billion, while others mention $12 billion of class A stock against which you can issue 10 times as much debentures. Does the total of these two items give you $8,250 million?

I am not sure whether this question was mixed up in typing or not. I do not know of anyone who has mentioned the possibility of $8 billion or $12 billion of class A stock.

The next question: Now, borrowers would have to buy class B in the bank up to 5 percent of any loan. Would this not mean $412,500,000 could be lent again since it would be received from the sale of class B stock?

Further, the bank could issue debentures up to 10 times the paidin capital and retained earnings. Would not the class B stock purchased by borrowers be a part of the paid-in capital of the bank? Could not the bank issue additional debentures to 10 times the cost of class B stock issued and purchased? Is not the total of all of these items over $12 billion?

Again, Mr. Chairman, we come back to the fact that we estimate that the total capital requirements of the electric borrowers to be about $8 billion between now and 1981, of which about $7 billion will be required from loans. Depending upon the size of the continuing 2-percent loan program, the bank might be called upon to supply from $3 billion to $4 billion of this total. The amount of money which the bank will be able to lend will naturally be limited by the

amount which the borrowers need and are able to borrow. It is true that the bank is authorized to issue debentures up to 10 times the paidin capital and retained earnings. The paid-in capital will be the total of the class A, class B, class C, class D stocks. It is not anticipated, however, that the operations of the bank would exceed the levels I have indicated.

Question: Is it the intention that intermediate loans should be amortized during their life like REA loans?

The answer is, "Yes."

Question: Is it not true that under section 410 (c) of H.R. 14837, loans can be ordinary term loans on which no capital payments need be made until maturity? Are interest-free periods contemplated for any loans made under the administration bill?

As I have indicated, it is possible and we would expect that loans other than intermediate loans could and would be made subject only to interest and payment at maturity. We do not contemplate any interest-free periods for the loans that would be made under this bill. Under our present 2-percent financing, we have gotten away from interest-free periods.

Question: Under section 410 (a) loans can be made for refinancing. Does this mean that when a 50-year unamortized loan of the bank reaches maturity the bank could refinance (renew) it for as long as another 50 years?

There is nothing in the legislation which would prevent this. However, I would anticipate that the bank would probably not make the unamortized loans for a 50-year period, to begin with, and, in any event, it will be a number of years before this question comes up for any specific decision on the matter of renewal.

Question: In fiscal 1965 some Federal land bank debentures had an effective interest rate of as high as 4.98 percent. What rate would the electric bank probably have to pay on the debentures floated at the present time?

We believe that the bank, under current assumptions and the best assumptions we are able to make as to what the conditions will be, should not have to pay more than 5.25 percent on its debentures. In this connection, we note that the land banks recently issued some 2year bonds bearing a rate of 5.25 percent, and some 12-year bonds bearing a rate of 51% percent interest.

Question How would the electrifictaion account be created by title III differ from the revolving fund requested by the administration in 1962, and again in 1965?

The essential differences are that the earlier recommendation of the loan account provided for only one loan account out of which both the electric and the telephone programs would be handled; and, secondly, this present recommendation makes provision for the purchase of capital stock in the electric and telephone banks out of the loan

account.

Question From 1949 through fiscal 1965, how much did the budget request for REA electric loan authorizations?

From 1949 through fiscal 1965, how much did Congress make available for the REA for electric loans?

How much of this in the form of contingency reserves?

How much of the contingency reserves provided by Congress from 1949 through 1965 was unused?

What was the total amount of electrification loans made from 1949 through 1965?

Mr. Chairman, I have a table here which I would like to submit for the record which gives this information by year from 1949 to 1965, showing total loan authorizations for the period requested in the budget of $4,045,300,000; total loan authorizations made available by the Congress of $4,789,682,305; and total loans approved in the period of $4,360,331,624.

The CHAIRMAN. Without objection that may be placed in the record at this point.

(The detailed table follows:)

Q. From 1949 through fiscal 1965 how much did the Budget request for REA electric loan authorizations?

From 1949 through fiscal 1965 how much did Congress make available for the REA for electric loans?

How much of this was in the form of contingency reserves?

How much of the contingency reserves provided by Congress from 1949 through 1965 was unused?

What was the total amount of electrification loans made from 1949 through 1965?

1 Funds available for loans from 1949 through 1965 consisted of new loan authorizations made available by the Congress during the period, a carryover of unused loan funds from the fiscal year 1948, and funds that became available during the period as the result of rescissions of prior-year loans.

2 Includes contingency reserve of $150,000,000 for 1950; $75,000,000 for 1952; $50,000,000 for 1953; $45,000,000 for 1954: $35,000.000 for 1955; $100,000,000 for 1956: $25,000,000 for 1957 (the $414,000,000 made available for 1957 consisted of $214,000,000 in the regular appropriation plus $200,000,000 in a supplemental appropriation; $20,000,000 for 1958; $25,000,000 for 1959; $25,000,000 for 1960; $60,000,000 for 1961; $70,000,000 for 1962; $100,000,000 for 1963 (for use in either the electric or telephone loan program); $150,000,000 for 1964; and $90,000,000 for 1965. 3 Congress authorized a new loan authorization of $350,000,000. However, the Appropriation Act included a provision requiring that reductions be made in various appropriations and loan authorizations included in the act, and under subsequent legislation the authorization for electric loans was reduced to $264,500,000. In addition to the $264,500,000 in firm authorization the Congress authorized a contingency reserve of $39,182,305 making a total of $303,682,305 in new loan funds available for the year. The unusual amount of $39,182,305 in contingency reserve funds resulted from language in the Appropriation Act that provided a contingency reserve of $150,000,000 less the uncommitted balance of $110,817,695 in contingency reserve funds carried forward from the prior year.

Includes contingency reserve of $50,000,000 for 1953; $60,000,000 for 1954; $35,000,000 for 1955; $35,000,000 for 1956; $25,000,000 for 1957 (the 1957 budget request for $370,300,000 consisted of $170,300,000 in the regular budget and $200,000,000 in a supplemental request); $20,000,000 for 1958; $25,000,000 for 1960; $75,000,000 for 1964; and $65,000,000 for 1965 (to be used in either the electric or telephone program).

Printed budget submission included request for $345,000,000. Budget amendment increased the request to $400.000.000 to be offset by a decrease of like amount in the request for telephone funds. Includes contingency reserves of $390,000,000.

7 Includes contingency reserves of $1,059,182,305 of which $463,000,000 was utilized. The balance of $596,182,305 was not utilized.

The CHAIRMAN. You may proceed.

Mr. CLAPP. Question. What are the major differences, not similarities, between the proposed Federal electric bank and the existing agricultural credit banks?

The first major difference is the purpose for which loans can be made. These are rural electrification purposes.

The second one is the eligibility of the borrowers who can borrow from the electric bank. This is restricted to those rural electric organizations which have established their eligibility as rural systems under the requirements of section 4 of the existing act and new organizations owned by them.

Each group of eligible voters of each district of the farm credit. setup elects two persons to serve on the district farm credit board. I have outlined the arrangements, the way these boards are constituted. This is different from the way the electric bank's board is constituted under the proposed legislation, H.R. 14837.

The Government receives through certain franchise taxes a minority of the margins of the farm credit system banks, but a heavy majority of the margins of the electric bank. The earnings of the electric bank would be divided between the Government and the borrowers in the same proportion as the class A stock stands relative to the class B stock.

Another difference is that the banks in the farm credit system meet the expenses of the Farm Credit Administration, and in the case of the electric bank, the REA is authorized and expects to meet, without reimbursement, the expenses of the electric bank applicable to intermediate loans. It is expected that there will be a charge for administration levied in connection with the market rate loans of the bank.

Question. Will the electric bank pay anything for the use of the Federal subscription ($750 million or one thousand million dollars) comparable to the franchise tax on net earnings paid by the agricultural banks?

The answer is, "Yes." The earnings are to be divided with the Federal Government receiving its proportionate share, as I said, based upon the ratio of class A stock to class B stock.

The intermediate credit banks and the banks for cooperatives pay a so-called franchise tax, consisting of 25 percent of the net earnings, after certain authorized deductions are made, not exceeding however a rate of return on the Government's capital in the bank calculated at a rate equal to the computed average annual rate of interest on all public issues of public debt obligations of the United States, issued during the fiscal year ending next before such tax is due.

Question. Will the electric bank charge high enough interest rates to obtain revenues to retire the Federal stock, as the land banks have done and the banks for cooperatives are doing?

It is expected that the electric bank will retire the Federal stock in due time, but this will not be done through the earnings of the bank. It will be done, rather, through the replacement of Government stock by the private stock which accumulates as the loans are made.

Question. When do you estimate the Federal stock in the electric bank will be retired?