RECOMMENDATION

We do not believe the Congress intends to have co-op generating plants built where there is power available from a taxpaying source and where the chief difference in the cost of power between the co-op plant and the other source is taxes not paid by the co-op to federal, state and local governments. Accordingly, we recommend that if any co-op supplemental financing plan is adopted it include a provision that no loan will be made for a generating plant unless the plant will produce power cheaper than an alternative source, after making full allowance for the taxes paid by the alternative source to federal, state and local governments.

We have not undertaken here to comment in detail on H.R. 1400 or to suggest an alternative means of accomplishing additional financing for electric cooperatives. Testimony in this regard has been presented to the Committee by Mr. Herbert B. Cohn and Mr. Shearon Harris, and we fully concur in and adopt the views they expressed.

The CHAIRMAN. Mr. Montgomery wants to introduce Mr. Watson, I believe.

Mr. MONTGOMERY. It is a pleasure to present Mr. A. J. Watson, Jr., president of the Mississippi Power Co. of Gulfport, Miss.

You do have a statement?

Mr. WATSON. I have a statement that I would like to file for the record and if possible I would like a few minutes for a brief oral summary.

The CHAIRMAN. If time permits, you may have that privilege. Without objection, your statement will be made a part of the record at this point.

(The statement referred to follows:)

STATEMENT OF A. J. WATSON, JR., PRESIDENT, MISSISSIPPI POWER COMPANY, GULFPORT, MISS.

Mississippi Power Company, with general offices located in Gulfport, operates in the southeast quarter of Mississippi, supplying electric power directly to approximately 129,000 customers, and in addition, furnishes all of the requirements of four electric cooperatives and a substantial portion of the requirements of two others through 48 delivery points. The Company has a gross plant account of $190 million that is invested for the purpose of supplying these energy requirements and is fully taxed, investor-owned company.

For reasons which will be covered in some detail, I do not believe that the proposal for supplemental financing of the rural electrification program as embodied in H.R. 1400 and other similar bills is in the public interest. It is distinctly possible that enactment of this legislation would be detrimental to the interests of the member-consumers of the cooperatives, and there can be no doubt that its passage would be most harmful to our company, customers, employees, and stockholders.

This committee is well aware of the fact that the appropriations committees of both houses of Congress have in recent years expressed their concern over the administration of certain aspects of the existing rural electrification program and have sought to establish certain controls on the use of public funds by the Administrator. Under this legislation Congress would retain only a slight degree of control and restraint over the actions of the Rural Electrification Administration and the existing subsidy program would not only be perpetuated but also enlarged.

My remarks are not intended as a criticism of the original concept of rural electrification, nor are they designed to minimize the contribution that the REA cooperatives have made and are now making to the comfort and prosperity of their customers in rural areas.

Nor will these remarks duplicate the testimony which was offered last year in opposition to similar bills to which I respectfully invite your attention.

It was mentioned earlier that Mississippi Power Company serves all or a portion of the electric power requirements of six cooperative associations at 48

delivery points. We have provided them at all but three of these delivery points with at least two separate sources of power, thus affording them service with a high degree of reliability.

Our service has been provided at low rates which averaged 6.83 mills per kilowatt hour in 1965 and 6.68 mills per kilowatt hour in 1966. Our review of REA statistical reports shows that this cost of wholesale power to the co-ops we serve is well in line with costs from investor-owned utilities to co-ops in other parts of Mississippi and adjoining states. By comparison, revenue received in 1965 from REA distributing co-ops by the Alabama Electric Cooperative, an REA financed generating and transmission co-op averaged over 30 percent more per kilowatt hour than Mississippi Power Company received from the co-ops it serves.

Under state law enacted in 1956, rigid certificated areas of service have been allocated to the cooperatives and to our Company with the result that in more than 90 percent of the areas where our Company operates it has been denied the right, which it previously had, to serve industries and other large users at all points from or along the Company's transmission lines. Service contracts negotiated with the cooperatives since 1959 have provided for an additional reasonable charge for that portion of a cooperative's purchases from us which is resold to such type of users. The impact of this additional charge on the average kilowatt hour cost of energy to the co-ops is not now known, primarily because the co-ops have declined to furnish billing information necessary for calculating such charges. The contract provision has been questioned in a proceeding brought by the Federal Power Commission. Our Company defends this charge on the ground, among others, that it is the most equitable manner for dealing with this problem, and will permit a continuation of our practice of serving at lower cost, the power which the cooperative distributes to its farm, home, and other users. Hearings before the Federal Power Commission have not been completed.

In recent years, another situation has developed in southeast Mississippi which indicates the need for a tightening rather than loosening of congressional control of the administration of the rural electrification program.

In 1958, while we were attempting to negotiate new wholesale power contracts with the cooperatives, the REA Administrator authorized a loan to South Mississippi Electric Power Association (a generating and transmission cooperative that has not yet built any facilities, but whose membership includes the co-ops we are now serving) of $13,900,000, which together with an old allocation of $2,100,000 made available a total of $16,000,000 at 2% interest for the construction of a generating plant and transmission system that would serve all of the requirements of three of the co-ops which we now serve and part of the requirements of another. The G&T co-op would be exempt from state and federal income taxes and its physical properties exempt from ad valorem taxes.

In hearings before the Mississippi Public Service Commission in which the G&T co-op sought authorization for the construction of the facilities covered by this REA loan, we proved that even with its substantial tax and interest subsidies the member co-ops proposing to buy its power would suffer approximately a 30% increase over their present power costs from our Company. In spite of this, the Commission granted a certificate to build the duplicating facilities. Upon appeal, the Mississippi courts upheld the Commission and the Supreme Court of the United States refused to review the case.

While the case was in the Mississippi courts, the REA Administrator authorized an additional loan of $20,000,000, making available a total of $36,000,000 at a 2% interest rate, with which to construct a generating plant of more than twice the capacity and many more miles of transmission lines in lieu of the initial project covered by the $16,000,000 allocation. The Commission has amended the old certificate to authorize the larger plant, and the matter is on appeal in the Mississippi courts.

Prior to and since the loan allocation for the G&T co-op was made, we have sought earnestly and sincerely to negotiate an acceptable power supply contract with the REA cooperatives that are the proposed customers of the G&T. We have discussed the matter with the Administrator and still have been unable to secure consideration of such an alternative by the co-ops. I have reached the inescapable conclusion that there is no desire to negotiate a contract, but a determination to construct a G&T no matter what the cost, and the costs will be substantial to all concerned.

We find it incredible that the four distributing co-ops, which would purchase power from the G&T co-op, have entered into forty-year contracts under which they would have paid the G&T co-op over $500,000 more for their service than they actually paid us for that service in 1966.

The tax exempt status of the G&T co-op facility, at tax rates applicable to our Company, will deprive Mississippi cities, counties, school districts, and the state treasury of over $15 million in tax revenues over the next 35 years.

The exemption of the G&T from federal income taxes will cause the federal government to lose over $14 million in income taxes over the next 35 years.

The present loan allocation of $36 million will bear an interest rate of two percent while the United States must pay four percent for the money it borrows. This loan, therefore, will cause a direct loss to the taxpayers of this nation of another $15 million in interest costs alone.

When this entire amount is totaled, it is obvious that the decision by the Rural Electrification Administration to lend $36 million of public funds will not only deprive the federal treasury of the use of that money until it is repaid but will also cost taxpayers at all governmental levels an additional $44 million.

It is completely illogical that through taxes paid by Mississippi Power Company directly, and its customers indirectly, it should be forced to help pay for the subsidies which enable the co-ops to enlarge their scope and encroach upon areas and types of service for which there has never been a justification or need. The rural electrification program was not created for this purpose or given its subsidies to achieve it. A deviation from its original course through administrative action or through legislation such as this would only be pursued by those who wished to build a publicly subsidized and tax exempt empire regardless of the

cost.

The situation which has been described in Mississippi, regarding the use of federally provided funds for unnecessary duplication of facilities, would be greatly aggravated by financing operations permissible through the Federal Electric Bank under the proposed legislation. There are many features of the bills which could be questioned, but the most notable are:

(1) The proposed legislation would confer upon the Administrator of REA, in his capacity of Governor of the proposed Federal Electric Bank, vast discretionary powers which the Congress has heretofore denied him and, through the proposed bank, would in effect repeal existing limitations on his actions which the Congress has heretofore imposed.

(2) The proposed Federal Electric Bank would be authorized to grow into the largest federally chartered banking operation and would be permitted to operate without regard to the historical principles and procedures imposed upon other federally chartered banks in order to insure their conduct as sound and successful operations.

(3) The taxpayers will continue involuntarily to subsidize loans made by this Bank because the proposed maximum interest rate of four percent for "intermediate" loans is still below the current cost of money to the federal government. Further, the Bank is authorized to borrow from the Treasury, without any limitation as to amount, to meet its deficits, and the Department of Agriculture is to pay all unrecovered administrative costs of the Bank.

(4) Under the proposed legislation, the Administrator in his capacity as Governor of the Bank could provide federal financing for projects which the Congress has repeatedly declined to authorize, and in these actions the Administrator would be free of congressional control. With funds available under this bill, there could be effected vast projects embracing both steam and hydro facilities and transmission networks which public power advocates have long desired as a significant step toward the nationalization of the electric industry.

(5) The proposed legislation would vest in the Administrator as Governor of the Bank discretionary powers of such magnitude that arbitrary or capricious exercise thereof could affect the economic development and well being of vast areas of the United States either favorably or unfavorably.

(6) These bills will not provide electric service now or in the future to any person to whom it would not otherwise be available.

Failure to enact H.R. 1400 or any other bill to establish a Federal Electric Bank would not, as some co-ops are trying to lead their customers to believe, plunge their customers into darkness or deprive them of service that they are now enjoying.

Yet, there seems to be a pressing need to relieve the taxpayers of this nation of the burden of subsidizing those REA distributing co-ops, which are finan

cially able to pay a higher rate of interest. There is no valid reason why the building of generating plants and transmission systems should be subsidized and there is sufficient justification for limiting these projects to ones which do not duplicate the facilities of investor-owned utilities.

I would like to urge this committee to give serious and favorable consideration to H.R. 7390, which would provide financing of REA co-ops through a loan account and an insured loan program. By drawing on the resources of private lending institutions, ample funds would be available for legitimate co-op expansion. The customers of financially weak co-ops would be protected, and necessary Congressional control would be retained to keep the rural electrification program within its historical and proper boundaries.

Thank you for the opportunity of presenting my views.

The CHAIRMAN. Are there any others who want to introduce constituents?

We will now recognize Mr. William J. Clapp, president of the EEI and president of the Florida Power Corp., St. Petersburg, Fla. He has met with us on numerous occasions before.

We are delighted to have you back with us, Mr. Clapp.

We will be glad to have you take over and handle your witnesses, as you see fit.

STATEMENT OF WILLIAM J. CLAPP, PRESIDENT OF EDISON ELECTRIC INSTITUTE, AND PRESIDENT OF THE FLORIDA POWER CORP., ST. PETERSBURG, FLA.

Mr. CLAPP. My name is William J. Clapp, I am president of the Edison Electric Institute and president of the Florida Power Corp. I appear today on behalf of the Edison Electric Institute.

However, in compliance with the chairman's wishes, let me state that about 80 percent of the gentlemen who desired to present testimony have agreed to file their statements.

The other 13 companies that are represented here today on this list, however, do have information that is not repetitive to any great extent but is of special interest to the subject, and we have requested time for their oral presentation if possible.

Those who cannot be heard today have offered to return at the convenience of the committee.

All witnesses will make themselves available for questions at the convenience of the committee, whenever the time is set.

The Edison Electric Institute is the national trade association of the investor-owned elctric light and power companies in this country. These companies serve about 80 percent of all electric customers in the United States. EEI members serve about 98 percent of the customers served by investor-owned companies. It is estimated that during 1967, investor-owned power companies will invest about $5.9 billion in new plant and equipment, which will be about 9 percent of all business expenditures for new plant and equipment this year. The investor-owned power companies are among the leading industries in providing local, State, and Federal Government with income through the taxes they

pay.

That is to say, this industry plays a substantial role in the economic life of the Nation in addition to its primary role as a supplier of energy for some 150 million people in this country. I do not want to dwell on this point, except to say that we are proud of our record.

Over the years, electric service has been brought to nearly everyone in the Nation. The reliability of the service has increased, and the price has been decreased while the cost of practically all other commodities has been rising.

Research, innovation, vigorous sales efforts, and good government regulations have all played a part in building this record.

As an industry, we are deeply involved in rural electrification. About 43 percent of the farms in the Nation are served from our lines. In addition, in 1965 over 38 percent of the energy purchased by REA borrowers was supplied at special low rates by investor-owned electric utility companies.

We believe that electricity will become increasingly important to the farming industry as more and more farmwork is done by machines, and electric motors. Rural electric cooperatives and investor-owned companies have a big job ahead. The best interests of the farmers of the Nation, and of the Nation as a whole, will be served if cooperatives and companies can work together in harmony to increase the utilization of electricity.

Last year, representatives of our industry appeared before this committee to testify on the problem of supplemental financing for REA cooperatives. The record of the testimony is available, as is the record of our testimony before the Senate Committee on Agriculture and Forestry. There is no need for us to go over the ground covered in last year's hearings. Rather, we have come in support of a fresh viewpoint and positive suggestion as to how the problem of supplemental financing might be met in the public interest.

One of the points emphasized last year was the need for a study in depth of the financial requirements of the cooperatives. Since last summer, some of the best people in the industry have made such a study. We intend to report on it to you today.

We hope to present our views concisely without undue repetition of material already in the record, but in a form which will be of help to those members who were not part of this committee last year.

Our suggestions today will be made with a few principles in mind: that the distribution cooperatives should continue strong and healthy, that the cooperatives should continue to receive the benefits of purchasing low-cost electricity from interconnected power systems, and that the Federal Government should have an opportunity to reduce its expenses where possible and avoid losing tax income as a result of displacement of taxpaying companies by REA-financed plants.

I have with me three colleagues to help in this task. Each has a brief statement, presenting a particular aspect of our views.

Mr. Shearon Harris, president, Carolina Power & Light Co., will give you our suggestions for a financing plan which we believe will be workable.

Mr. Herbert Cohn, vice president, American Electric Power Co., will analyze H.R. 1400 and indicate some of the difficulties we see in it. Mr. John Thornborrow, assistant managing director of the Edison Electric Institute, will describe the detailed study of the financial needs of the cooperatives which I mentioned a moment ago.

If it is agreeable with the committee, I will call on each of these gentlemen in turn. You may find it helpful to listen to all of their statements before asking questions.