REMC will use its retained funds-funds retained from its profits although it is a nonprofit organization. Section 410(a)(2) of H.R. 14837 will provide almost unlimited funds for REMC's to purchase electric systems in urban areas. Subsidized by tax money invested in the electric bank, REMC's will be able to pay outlandish prices for systems they were never intended to serve. If this is going to happen, they should be required to function in our economy in the same manner as an investor-owned utility. They should pay the going market cost of money, pay Federal income taxes, and be regulated in the same fashion as other electric utilities. Government subsidies of rural electric cooperatives have been based on the social desirability of bringing electricity to rural areas. But when the objective becomes the bringing of electricity to urban areas, there is no justification or need for the subsidies and they should be abandoned. Thank you very much for this opportunity, Mr. Chairman. Mr. POAGE. Thank you very much, Mr. Blanchar. We appreciate the expeditious way in which you presented your statement. (The complete statement of Mr. Blanchar follows:) STATEMENT OF CARROLL H. BLANCHAR, PRESIDENT OF PUBLIC SERVICE Co. Mr. Chairman and Members of the Committee, my name is Carroll H. Blanchar, and I am President of Public Service Company of Indiana, Inc. I am appearing to oppose House Bill 14000 and 14837. Public Service Indiana is an electric public utility which serves more than 400,000 customers in 68 of the 92 counties in Indiana, including approximately 71,000 customers in rural areas and 31 rural electric cooperatives (called "REMCS" in Indiana) at 172 delivery points. At the end of 1965 Public Service Indiana had $464,000,000 of net investment in its utility plant, of which approximately $45,000,000 was devoted to serving the 31 REMCS. At the outset I want to make it clear that, in opposing this proposed legislation, I am not opposing the 31 REMCs that we serve. The REMCs have done and are continuing to do a good job of serving their members. They are customers of ours. Last year they purchased $9,017,000 of electricity from us. We have a joint advertising program with several of the REMCs and have almost daily contacts with one or more of them concerning operating problems. We have opposed, and continue to oppose, subsidies to the REMCs by the Federal Government where such subsidies are no longer necessary, and loans by REA for generation and transmission systems that are not necessary because the local REMCs are already receiving reasonably priced central station service. In our opinion, the proposed legislation extends these sudsidies unnecessarily and will permit loans for the construction of generation and transmission systems that duplicate existing facilities which will result in higher costs of power to coop members and customers of investor-owned utilities. 1. Financial situation of REMCs in Indiana At the end of 1964 the 43 REMCs in Indiana had $68,433,038 invested in net utility plant, had $21,378,780 in cash or other current assets including U.S. Government securities, deposits with savings and loan associations and other de posits, had $50,229,591 in retained margins or profits, and $33,449,770 of long term debt. In 1964 these same REMCs had electric operating revenues of $29,042,521 from sales to 186,286 members, had a utility operating margin of $4,780,486, had interest payments of $653,565, and had a net operating margin of $4,552,108. The utility operating margin is equivalent to a rate of return of 6.93% on their net investment in utility plant plus materials and supplies. A summary of the combined financial position and earnings of these REMCs for the year 1964 which was compiled from reports on file with the Public Service Commission of Indiana is attached hereto as Exhibit A. It is obvious that, with a combined net operating margin of $4,552,108 in 1964 and interest charges of only $653,565, these REMCs do not need any inter est subsidy from the Federal government, either directly from REA or indirectly through the proposed Federal Bank for Rural Electric Systems (electric bank). They could pay 6% on their long term debt and still have more than $3,000,000 of net operating margin in 1964 without raising rates to their members. If we compare the $51,969,027 that these REMCs had in their capital accounts in 1964 with the $33,449,770 of long term debt, we find that these REMCS actually have 60% equity and 40% debt. Our Company now has about 50% equity and 50% debt, and it is able to attract capital for expansion without interest subsidies from the Federal government. In addition to having this favorable financial position, the REMCs are reselling electric energy sold to them by the five Indiana investor-owned utilities at rates which are comparable to the rates charged by Public Service Indiana to its 71,000 rural customers. Our density of rural customers per mile is about the same as the density of customers per mile served by the REMCs. 2. Continued subsidies for generation and transmission loans will result in the construction of more uneconomic and unneeded electric systems As I understand the general objectives of the bills now being considered by this committee, Title III of the proposed acts establishes a loan account for the Rural Electrification Administration from which the Administrator can continue to make 2% loans under sections 4 and 5 of the act, and Title IV of the acts establishes the electric bank from which the Administrator can make intermediate loans at a maximum rate of 4% and other loans at the current average rate payable by the electric bank on its debentures plus administrative expenses and estimated losses of the electric bank on other loans. This gives the Administrator of REA, acting in his dual capacity as Administrator and Governor of the electric bank, many billions of dollars in the aggregate to make loans for the construction of uneconomic and unneeded generation and transmission systems-generation and transmission systems that will duplicate existing systems and result in higher electric rates. We have an example of this in Indiana right now. On June 15, 1961 the Administrator made a $60,225,000 loan commitment to Hoosier Cooperative Energy, Inc. (Hoosier) which loan was transferred in 1962 to Indiana Statewide Rural Electric Cooperative, Inc. (Indiana Statewide). With the proceeds of this loan Hoosier (and then Indiana Statewide) proposed to construct a 198,000 kilowatt generating station and a transmission system in 38 counties in southern Indiana. According to the Statistical Services Section of REA, 99.5% of the farms in Indiana were receiving central station service on June 30, 1961, just 15 days after the loan of $60,225,000 was committed to Hoosier. Section 4 of the Rural Electrification Act authorizes the Administrator to make loans "for the purpose of financing the construction and operation of generating plants, electric transmission lines and distribution lines or system for the furnishing of electric energy to persons in rural areas who are not receiving central station service." There can be no question that the Administrator violated the intent and purpose of the law when he made the Hoosier loan. Since 1937 each of the 16 REMCs and their members who are to be served by Hoosier have received central station service from the Indiana investor-owned utilities and are receiving central station service today. Then in December 1965, before any significant construction had been started on the Hoosier project, the Administrator made an additional loan to Indiana Statewide in the amount of $11,150,000, bringing the total amount to $71,375,000 that will be spent on the generating and transmission system to duplicate $25,000,000 invested by Public Service Indiana, Southern Indiana Gas and Electric Company and Indianapolis Power and Light Company to serve the same customers. In other words, Indiana Statewide will invest almost 3 times as much in its electric plant as the investor-owned companies have invested in order to serve the same 16 REMCs, and the total investment in electric facilities to serve the 16 REMCs will be about four times the amount now invested. The Administrator stated in December 1965 that the Indiana Statewide generating plant, now to be 200,000 kilowatts, will cost $33,766,000 or $168.50 per kilowatt. We are now constructing a 356,000 kilowatt unit at our Wabash River Station which will cost $108 a kilowatt. This expensive investment can only result in higher electric rates in southern Indiana. Throughout the long, five-year history of the controversy over this loan, the Administrator has contended that the loan was justified because it will provide lower cost electricity to the 16 REMCs than Public Service Indiana is providing. As late as December 1965, he estimated that the cost of electricity from the Hoosier project would be 8.04 mills per kilowatt hour for distribution delivery. Against this wishful estimate we now have service available to these REMCS at an average rate of 8 mills per kilowatt hour for distribution delivery and 71⁄2 mills per kilowatt hour for transmission delivery. Our rate has been approved by REA and by the Public Service Commission of Indiana, and is available to all REMCS served by Public Service Indiana. Actually the rate that will have to be charged by Indiana Statewide, according to independent studies, will be about 10 mills per kilowatt hour. The energy from the Indiana Statewide project will cost the 16 REMCs and ultimately their members approximately $2,000,000 more per year than they would have to pay under the established rate of Public Service Indiana. Although Indiana Statewide is not in a position to supply power to any of the 16 REMCs, the rate contained in the contracts between Indiana Statewide and each of the 16 REMCS is 8.3 mills per kilowatt hour for distribution delivery, or about 3.7% higher than the rate of Public Service Indiana which has been available to them since 1960. A comparison of the rate to the 16 REMCS from Indiana Statewide and from Public Service Indiana is attached as Exhibit B. By any economic standards that can be applied, the loan to Indiana State wide should not have been made. Legally the Administrator violated the central station service limitation in Section 4 of the Rural Electrification Act in making the loan. Nothing is contained in the proposed legislation that will remedy these abuses. As we understand the legislation, it will result in the Administrator having abundantly more money with which to make more of the same mistakes that have been made in the past and to pour more money into past mistakes to keep them operating.. If legislation is enacted, we recommend to the committee that they investigate thoroughly these abuses by the Administrator and amend the Rural Electrification Act so as to prevent their recurrence. 3. REA Administrator has made a loan to Indiana Statewide for construction of G. & T. system without complying with the directors of House and Senate subcommittees and with REA Bulletin 111-3. The REA Administrator on December 29, 1965 authorized a $11,150,000 generation and transmission loan to Indiana Statewide without making any effort to obtain the power and energy requirements of the 16 REMCS from existing power suppliers. This loan appears to be in direct violation of Senate Report No. 497 accompanying the Department of Agriculture and Related Agencies Appropriations Bill for 1964, which stated in part: "Before public funds are loaned for power generation or transmission, the Rural Electrification Administrator, in connection with any such loan, should: "(1) Make a survey and determine wherein the existing contract for power or the proposed contract is unreasonable; "(2) Advise the supplier wherein such contract is unreasonable; and "(3) Attempt to get such contract modified to make it reasonable. "Loans should be made only when reasonable contracts cannot be obtained." Furthermore, the REA Administrator, in reply to point 6 on page 28 of the Senate Report, which requires the Administrator to provide "a summary of the efforts made by the applicant and by REA to obtain the applicant's power and energy requirements from existing power suppliers and the reason why such efforts have not been successful," stated "Because of the benefits and flexibility of the pool arrangement (an arrangement whereby the facilities of Indiana Statewide would be pooled with the Big Rivers Cooperative in Kentucky and the Southern Illinois Cooperative) no alternative arrangement has been made to provide increased power needs of the borrower's members." Also, the Administrator certified to the President of the Senate on December 29, 1965 that, in connection with the proposed loan to Indiana Statewide, he has "caused a survey to be made in accordance with REA Bulletin 111-3, 'Power Supply Surveys.'" The Administrator is required by this bulletin to do, among other things, the following: "Certification of each generation or transmission loan in excess of $2 million shall be accompanied by the following information: "5. Comparison of the estimated costs of generation by the applicant with the cost of power available from existing suppliers, including the final offer by the private supplier including terms and conditions he offered to meet applicant's long-term energy needs. "6. Summary of the efforts made by applicant and REA to obtain the ap plicant's power and energy requirements from existing power suppliers and the reasons why such efforts have not been successful." In answering these questions, the Administrator ignored the facts and emphasized the benefits of a future pooling arrangement between Indiana Statewide, Big Rivers RECC and Southern Illinois Power Cooperative-a pooling arrangement that only exists on paper as Indiana Statewide's G. & T. System is not even constructed. For example, in making the comparison of power costs called for in subparagraph 5 quoted above says: "This loan (The $11,150,000) is to the existing supplier under power contracts entered into in 1960 with the member distribution cooperatives, and supported by previous REA loans to the supplier." The truth is that Indiana Statewide has never generated to this day one kilowatt of power, has never owned a transmission or distribution line, and has never sup plied one kilowatt hour of energy to anyone. On the basis of contracts made between Hoosier and the 16 REMCS in 1960, the Administrator concludes that Indiana Statewide is the supplier of the 16 REMCS and not Public Service Indiana, Southern Indiana Gas & Electric Company and Indianapolis Power & Light Company. Furthermore, these contracts have not been approved by the Indiana Commission as required by law and, until they are so approved, the legality of such contracts is open to serious question. To claim, as the Administrator has done, that Indiana Statewide is an "existing supplier" is to indulge in a fiction that is totally misleading. From their inception to date these 16 REMCs have been supplied by the investor-owned utilities and Indiana Statewide has never supplied, and has never been in a position to supply, them with any power during their existence. The commendable efforts of the House and Senate Subcommittee on Appropriations to correct the making of uneconomic generation and transmission loans have been circumvented by the Administrator, and it now appears that the only way to remedy the situation is to amend the Rural Electrification Act so as to compel him to refrain from making improper loans and to give someone the authority to enforce the Rural Electrification Act in court. As you know, the attempts by various utilities to force the Administrator by actions in Federal court have failed, not on the merits, but because the Federal courts have dismissed the suits on the grounds that the utilities have no standing to sue. This has resulted in the Administrator being able to make loans as he pleases without regard to the provisions of the Rural Electrification Act. 4. Standards for making loans by electric bank are vague and unprecise Other witnesses have testified with respect to the vague and unprecise standards contained in the proposed legislation, and I shall not take the committee's time in covering the same ground except to emphasize the point by showing you an absurd application of Section 410 of H.R. 14837. In 1939 one of the predecessors of Public Service Indiana, Central Indiana Power Company, obtained a rural electrification loan under Section 4 of the Rural Electrification Act. As we read the first part of Section 410 the Administrator as Governor of the electric bank would be authorized to make loans, in conformance with policies established by him, to corporations or public bodies which have received a loan or loan commitment pursuant to Section 4 of the Rural Electrification Act. As successor to all of the rights and obligations of Central Indiana Power Company as the result of a consolidation in 1941, presumably Public Service Indiana would qualify as eligible to receive a loan from the electric bank. Whether or not the Governor of the Electric bank could prevent us from obtaining such a loan on the basis of policies established by him is not clear. The words "in conformance with policies established by him" may grant him only power to establish loan requirements, such as the terms and conditions of the loan, the amount of the loan, and so forth, or the language may grant him the power to pick and choose borrowers to whom the electric bank will make loans. It is certainly one example of the vagueness of the standards imposed throughout the proposed legislation. 5. H.R. 14837 would authorize use of electric bank funds to purchase other electric utilities serving urban areas Section 410 (a)(2) of H.R. 14837 authorizes the Administrator acting as Governor of the electric bank to make loans for the purpose of acquiring electric systems in urban areas, a definite extension of the intent and purpose of the Rural Electrification Act which was the purpose of bringing electricity to rural America. This job of rural electrification is now practically completed and the effort now is to expand the rural cooperatives into urban areas that are already receiving adequate central station service. We have such an effort going on at the present time. Several months ago the Town of Brooklyn, in Morgan County, Indiana, approached us and asked us to make a bid for its municipal electric system. We have been supplying energy to this municipality at wholesale for many years. It has a population of about 900. The town board asked for bids from Morgan County REMC and from us. When the bids were opened, the bid of Morgan County REMC was $78,500 and our bid was $150,000. The court appointed appraisers set the value at $140,000. Instead of dropping the matter at this point, Morgan County REMC then offered $170,000 for the Brooklyn property and told the town board that if any other bidder should top this amount, the REMC would like to negotiate further. The meaning is quite clear. The REMC is willing to pay whatever it takes to acquire the property without any reference to utility values. Such an irresponsibel approach can only result in inflated investments in utility plant and higher rates to the public. Public Service Indiana's bid of $150,000 is a sound one and we do not propose to get into an auction contest with anyone. This would be unsound utility operation and could only harm the public which we serve. As we understand the Rural Electrification Act, the Administrator is not authorized to make loans for the purchase of municipal systems. Then how does Morgan County REMC get the funds to make such a bid? This apparently is no problem. The REMC will use its retained funds-funds retained from its profits although it is a non-profit organization. An editorial in the Martinsville Daily Reporter, April 20, 1966, summed it up this way: "Of course, the two per cent loans and REMC retained funds all go into different sections of the same pot, which they fill like water bubbles up in an artesian well." Section 410 (a) (2) will provide unlimited funds for REMCs to purchase electric systems in urban areas, an unreasonable extension of the intent and purpose of the Rural Electrification Act. Subsidized by tax money invested in the electric bank, REMCS will be able to pay outlandish prices for systems they were never intended to serve. If this is going to happen, then they should be required to function in our economy in the same manner as an investor-owned utility. They should pay the going market cost of money, pay Federal income taxes, and be regulated in the same fashion as other electric utilities. Government subsidies of rural electric cooperatives have been based on the social desirability of bringing electricity to rural areas. But when the objective becomes the bringing of electricity to urban areas, there is no justification or need for the subsidies and they should be abandoned. 6. Summary There are many other reasons why H.R. 14000 and H.R. 14837 should not be enacted into law. In the interest of time I have only presented to you the ones that appertain to the situation in Indiana. I urge you to investigate the application of these bills very carefully in the light of the abuses that have occurred in the past in the making of generation and transmission loans and in the light of the extension of the rural electrification subsidies into fields unrelated to rural electrification. EXHIBIT A Summary of combined financial position for all Indiana rural electric membership corporations for the year ended Dec. 31, 1964 Assets: Utility plant-- Less reserve for depreciation___. Net utility plant_----. Other investments, restricted funds, and temporary cash investments: U.S. Government securities____ Cash, savings and loan associations and other deposits-- $103,995, 890 35, 562, 852 68, 433, 038 5,940, 305 5,769, 070 1, 042, 269 12, 751, 644 323, 410 8, 627, 136 542, 295 90, 677, 523 |