Corn Belt has no intention or desire to take over other systems or the loads of other systems. We want to cooperate with them for best service to all consumers involved. Our record speaks for itself.

All of the above-mentioned interconnections and pooling agreements have been made in order to make all reductions possible in the high power cost existing in Iowa. This high power cost is primarily due to the high cost of fuel, particularly in Central Iowa. On our system the cost of transportation of coal from the mine to our generating plants is equal to, or more than, the cost of the coal itself. Since the fuel cost is about 4 tenths of one cent in the cost of our electricity, it can be seen that about one-half of this cost, or 2 tenths of a cent, is due to the cost of transportation of the fuel. Thus electric systems with ready access to fuel could reduce their cost by 2 tenths of a cent below our cost. While we do have access to some low-cost, federally-produced power through the United States Bureau of Reclamation, the amount is limited and the source is quite distant from our system. To utilize such power, large investments in transmission facilities are required in order to transport this power into our area.

As a comparison of power costs in various areas of the country, we have taken figures from the Annual Report of Energy Purchased by R.E.A. borrowers, as prepared by the Rural Electrification Administration. This shows that distribution systems in Tennessee, with access to energy from the Tennessee Valley Authority, can purchase power for less than 5 tenths cents per kilowatt hour. Systems in Washington State, with access to power from the Bonneville Power Administration, purchase for about 3 tenths of a cent per kilowatt hour. Systems in South Dakota, with power from the United States Bureau of Reclamation readily available, pay about 8 tenths of a cent per kilowatt hour at wholesale. Even in Iowa those systems which lie entirely within the marketing area of the United States Bureau of Reclamation have a wholesale cost of under 1 cent per kilowatt hour. This compares with a wholesale power cost in our area from the Corn Belt system of approximately 1.3 cents per kilowatt hour. In the area which we serve as firm load, covered by our 14 rural members distribution systems, we have no large concentrations of population, nor do we have any large industry. Therefore, our capital costs in generation and transmission plant are relatively high on a per-member basis. We need many more miles of line to serve the members in the sparsely populated rural areas than do systems located in metropolitan and urban areas.

Rural distribution systems in this area serve about 2.7 customers per mile and receive about $470 per mile per year of revenue; while the Investor-owned Utilities in this state serve about 30 customers per mile on the average and receive a return of about $7,000 per mile of line per year. From the above, it can be seen that the cost of capital is a very large factor in our cost. Even small or moderate increases in the cost of money for financing additions to our system would require unreasonably higher rates in the future unless we can secure urban and industrial loads. High rates would undoubtedly slow down the trend toward higher usage of electricity, which in turn, has the effect of raising unit costs on a year to year basis. Many of our other costs are increasing each year. These include such items as labor, fuel, property taxes, and maintenance materials. We are also faced with the declining purchasing power of the dollar. Up to the present time, we have been able to off-set increases in costs and the declining value of the dollar; but this would come to a halt and would undoubtedly begin to rise on a unit basis, should our cost of money be increased. In order to obtain an estimate of the effect of higher cost money on a long range, over-all power cost, we have made some long range calculations based on very broad assumptions. Of necessity, these are based on future load growth projections, together with investment required to serve such growth. While these estimates do not necessarily reflect the path which we will follow, it is felt that actual results in future years would show the same general effect, but of different magnitude, depending on the actual load and investment made. We have prepared several exhibits showing the result of these calculations. The first, Exhibit A, shows the cost of $1.000 in capital investment based on the actual cash payment of debt service each year under various load conditions. At present, we borrow money from the Rural Electrification Administration at 2% interest for a 35 year period, with the principal payment deferred the first

three years. The total costs of a $1,000 loan is $1,416 after 35 years, at which time the loan is fully repaid. This includes payment of $416 interest.

If the interest rate were raised to 3% over a 35 year period, the total interest paid would be $617, or nearly a 50% increase in interest. With a 4% loan over a 35 year period, the total interest payment would be $863, or more than double our present rate.

The above comparisons are based on a 35 year repayment schedule. If the term were 50 years, then money at 3% would require a lower annual payment, but the payments would continue for a 50 year period, amounting to a total interest payment of $933. With 4 or 5% interest, the situation would be even worse as far as cash payments are concerned.

It can be seen that the total cost of a loan increases tremendously with the higher interest rates, requiring 50% or more increase in payment of interest. With 50 year money, the annual payments do not show the comparable increase over a 35 year loan. However, any money borrowed must be looked at in terms of the total repayment schedule. While 3% interest money would show a saving in dolar cost over the first 35 years, we would have to continue payments on the equipment for another 15 years. This is unrealistic, since much of the equipment in the electric industry becomes obsolete and fully depreciated in periods of 35 years or less. The present trend in generation equipment has tended to make it obsolete in 20 or less years, and its useful life should be considered as such. Thus to look at the cost of equipment on a 50 year period would be comparable to paying for an automobile with a 10 year loan. The equipment has been used up and is probably no longer in service before the final payment is made. Replacement equipment would have been purchased, and payments would have been made on it during this period. Therefore, we believe that comparisons in the cost of money must reflect the total cost of such money over a long period of time. To compare the costs in future years, we have assumed a loan and generation expansion pattern. This assumes the installation of a 100 MW generating unit at year zero for our system, with such year falling probably between 1970 and 1980. At that time we have estimated our load to be 400 million kilowatt hours of firm energy sales per year. After that time the load is estimated to increase at the rate of 40 million kilowatt hours per year, each year for the next 50 years. We have assumed a generation expansion pattern of adding a 100 MW unit every 10th year thereafter. The assumed capital cost of each generating unit is $100 per kilowatt, or $10 million added for each ten year period. We believe that the assumed expansion pattern would be conservative, since the growth in later years could be higher than estimated. However, higher loads would mean larger or more frequent additions of generating capacity and would require a corresponding increase in capital investment. The low cost per kilowatt of added efficient capacity requires participation in generating units with other electric systems in order to take advantage of higher efficiency and lower per unit cost of the large, modern units which are being installed today. Such participation in generating units would necessitate larger capital investment in transmission facilities in order to transmit the electric power.

We have prepared Exhibit B to show the debt service based on the investment required for generating units. Under the present 2% money conditions the debt service for the assumed expansion pattern would be $200,000 for the first three years, and $423,840 for the following seven years. With the installation of the second unit, the total debt service would rise to approximately $624,000 for three years, and to $848.000 for the 14th through the 20th years. With the addition of the third unit, the debt service would rise to $1,048,000 in the 21st year and to $1,272,000 in the 24th year. This would carry on until the next unit is added in the 31st year. The debt service would then go to $1,472,000 for three years and then to $1,695,000 through the end of the 35th year. At the end of the year 35, debt on the first unit would have been paid off. Therefore, the cost of this money would be dropped out of the debt service which would go to $1,272,000, and remain there until the next unit is added in the 41st year. Debt service would then follow a ten year cycle.

If the cost of money were 3% on a 35 year debt (not shown), the cost for each $10 million addition would be about $462,000. This would show the same gen

eral pattern as the 2% money with the reduction being made after the 35th year when the first debt was paid off.

With 4%, 35 year money the initial payment would be $532,000 per year per generating unit, with a drop at the end of 35 years.

Also shown on the chart are the accumulative costs of 50 year money at 3, 4, and 5%. This illustrates the lower debt service payment with the 3%, 50 year money during the early years; but it also shows the step effect which continues for the full 50 year term.

In order to compare the total system power costs in the future, we have made a further assumption that our investment in transmission and other equipment would equal that in generating units. Large blocks of heavy transmission lines would need to be built, along with the generating units, in order to transmit the power from remote points. While some additional transmission would need to be added each year, this method has been used for simplification. We have also assumed that our power costs under present money conditions would be 1 cent per kilowatt hour sold. This would be the wholesale power cost and the retail price would need be higher.

Exhibit C has been prepared showing the base 1 cent cost in the future and comparing the over-all power costs with the investment made at various interest rates in the future. These costs are based on 10 year averages using the average cost in the 10 year interval between installation of generating units. It can be seen that the cost of money borrowed for a 50 year term makes a sharp increase between the 30th and 40th year. This is due to the fact that we would continue paying debt service on such money for the full 50 years, and would be affected by the compounding factor. A more reasonable comparison is looking at the money for a 35 year period. Here it can be seen that a 3% interest rate would increase our cost from 12% to 2%. With 4% interest rate, our cost would be increased from 4 to 5%, over all.

The dollar effect on the assumed expansion pattern is shown on Exhibits D and E. These tabulate the total operating costs, again using the assumed 1 cent base power cost under present money conditions, and demonstrate graphically the increase in total dollar cost of the system.

We believe that the result of the long range estimate discussed above shows that we must compare interest rates on borrowed money on the over-all effect and terms of such money. These results demonstrate that while longer term money may appear to be very favorable in early years of a loan, it is the final result that must be measured. We believe that the end result of long term money would be considerably higher power costs for our members in the future.

If the loan program of the Rural Electrification Administration is to continue with its present restrictions, we feel that money at 2% for a 35 year period must be made available to systems in the high cost areas, such as ours, in order to maintain reasonable and equitable cost of power for our members. If the cost of capital is increased, we would need restrictions lifted in order that we might continue to serve all expanding loads in our service area. If the load in our area should increase faster than it has in past years, together with industrial growth in rural areas as it has in many other states, then we might reasonably support a 3% rate of interest and be able to absorb 11⁄2 to 2% increase in costs. However, if the interest rates were 4% or more, we would need to be able to serve large, concentrated load areas in order to maintain stable rates. We must have a considerable amount of added revenue for each investment dollar to support the higher cost of capital.

We have an excellent working relationship with all other electric systems in our area. We have cooperated in the past in an attempt to secure the lowest cost possible for all customers in this state, and hope to continue to do so in the future. We do not desire to take over customers being served by any existing utility; but only ask that we could be assured that we could continue to serve the area we presently cover and to maintain reasonable rates in that area.

In order to continue cooperation with other electric systems, and in order to benefit in the large, efficient-sized generating units now being installed, we would need to share in ownership in such units. To do this, we would need to be able

to invest money along with the other systems. This would require that certain mortage requirements, now existing on Rural Electrification Administration loans, be subordinated in order that we might participate in partnership arrangements.

We do not attempt to speak for other areas of the country where power costs are considerably less than in Iowa. Such areas, particularly if low-cost federal power is readily available, may be able to support considerably higher capital costs. The reasonably priced electric service needed by our customers can only be provided if the capital necessary for prudent investment is available at the lowest possible cost. If such capital is available, we have demonstrated that we can overcome the other problems of high fuel cost, and a sparsely settled rural, agricultural area.

The statement has been made that Cooperatives are not union organized and are unfair to organized labor. Corn Belt employees have, since 1950, been represented by Local 234 of the International Union of Operating Engineers. Our relations with the Union and our employees have been excellent. Attached is a copy of a letter from the Business Manager of the Union representing our employees.

The question of subsidies has been raised. We do not feel that low interest rates constitute a subsidy, when we have agreed to serve all areas which did not have adequate central station service, regardless of revenue potential.

One big and significant difference is that the membership of the R.E.C.s have, by their own action, requested a way to finance their operation by the formation of a bank. This is an unusual and almost unprecedented action. We also realize it may be years, if ever, before all electric cooperatives can do without 2% money.

We agree, we pay no income tax. The reason is simple; we have no profit. We operate on a cost of service basis and any money left after payment of costs is the property of, and is returned to, the member in the form of Patronage Refunds. We pay all other taxes any other utility pays. Corn Belt's property tax in 1965 was 13.7% of our revenue.

The statement has been made that our job is done, since 99% of the farms are electrified. As cooperatives, we are proud of our part in getting service to these farms. The areas we serve are the skim milk areas with, in our case, about 2.3 members per mile of line. This was the area no Investor-owned Utility wanted. They said it wasn't profitable to serve. They were right, they couldn't, and still make the profit they wanted. The R.E.C.s, with the help of R.E.A. and Congress, do serve these consumers and do it at a reasonable rate.

We know our job is not finished. It is just started. We have developed this marginal territory and furnished the power needed. Our members now have the benefits of modern living. According to all projections, their loads will increase to four times the present in the next 20 years. To handle this, we must install bigger transmission lines and generating equipment. This takes adequate financing. A pact was made between Congress and the R.E.C.S. We were to extend service to all who request it, in return for adequate financing. We have kept our part. We feel it is an obligation of Congress to continue as they have in the past to furnish 2% funds for those who need it, and request they establish a bank based on reasonable criteria for those who can use it.

Lack of adequate financing is slow death to any business. We must maintain the G & Ts where needed in the areas where federal power is not available in adequate amounts to supply our needs. Without it, we would be unable to make reasonable negotiations. Some of the areas we have developed are now looked on with envy by others. If, because of inadequate financing for us, they are allowed to take this over, they will get the cream, and we will again be left with skim milk, and will be unable to do our job.

In our own case, our studies show we need 2% money for some years to come. Ours is an agricultural load with no big industries. 98% of our load is the farm and farm home. This type of load gives us a poor load or use factor for our equipment, which we hope to improve as industry moves into our area. We then should be able to pay higher rates of interest and use bank funds.

We want to go on record as supporting 2% funds for those of us who need it. We support the stand of N.R.E.C.A. on the supplemental financing bill, especially

the H.R. 14,000, which we feel will, with 3% intermediate financing, more nearly meet the needs of the Cooperatives. We, personally, have no objection to congressional review of the bank and its operation.

We thank the Congress for your cooperation and assistance in the past for making it possible, through legislation and appropriations, for me and my neighbors to have an adequate supply of electricity and to serve the unserved in Rural America. We also thank you for the opportunity to appear and testify before this Committee.

NORTH IOWA MUNICIPAL ELECTRIC COOPERATIVE ASSOCIATION,

To Whom It May Concern:

Spencer, Iowa, June 6, 1966.

More than a year ago fourteen Municipal Electric Utilities in north Iowa realized our small generating plants were becoming obsolete and to be competitive with large investor-owned utilities, we had to consolidate our efforts together. At the last Iowa Legislature, legislation was passed which is "Chapter 83, Acts of the 61st General Assembly" (also known as "An Act to Authorize Joint Exercise of Governmental Powers by Public Agencies") which gave us the authority to form an agency and work together.

We formed a cooperative under Chapter 499, Code of Iowa, 1962, to be known as North Iowa Municipal Electric Cooperative Association. Since the fourteen members of NIMECA are interconnected through Corn Belt Power Cooperative, we petitioned the G & T for membership in their cooperative with full knowledge that no REA loans or Corn Belt Power Cooperative funds could or would be used to finance any facilities for NIMECA.

The members of NIMECA understand and believe that through coordinating future power requirements that financing of facilities, such as transmission and/ or generation, NIMECA will finance its portion by means of municipal revenue bonds and the REC's their portion through REA financing. We believe that through coordinated efforts as stated above, low cost power will continue to be supplied to both rural and municipal patrons.

One of the requirements for membership in NIMECA as stated in the by-laws is as follows: "Requirements for Membership: Any municipal electric utility operating electric transmission of distribution lines and owning a generating plant capable of meeting their demand for the year previous to application, may become a member of the Association."

Yours very truly,

BRUCE C. JOHNSTON, President.

INTERNATIONAL UNION OF OPERATING ENGINEERS, LOCAL 234,
Des Moines, Iowa, June 8, 1966.

CORN BELT POWER COOPERATIVE,
Humboldt, Iowa

(Attention of Mr. Richard Buckner, General Manager).

DEAR MR. BUCKNER: Relative to our recent telephone conversation pertaining to our relationship with the number of Rural Electric Cooperatives we have under Labor Manegement Agreements, this is to advise we have just recently completed negotiations with a number of Cooperatives for a two year agreement with substantial increase in wages and other fringe benefits.

We have had Labor Management Contracts with these Cooperatives for many years, one in particular since 1950. We have found the Directors and Managers to be fair and realistic to do business with. Once an agreement is consummated and ratified by both parties, they have lived up to their commitments religiously.

I trust this answers your inquiry and if we can be of further service at any time please feel free to call on us.

With kindest personal regards, I remain,

Sincerely,

E. A. (BUD) MAHANNAH, Business Manager-Financial Secretary.