Some few still show deficits in their net worth; a somewhat larger number have net worth in excess of 50 percent of their total assets; most are still painfully and slowly building their net worth.

Some few serve relatively densely populated, prosperous rural areas. Others serve less than one consumer a mile and economically disadvantaged areas.

Some have stable service areas in which they serve all establishments; others are under constant attack and encroachment.

Some of the electric systems have stable low-cost power supply arrangements; others are at the mercy of their wholesale suppliers who use their wholesale power contracts as economic bludgeons.

These systems represent a broad spectrum of economic, social, geographic conditions in the rural areas they serve. This is reflected in the diversity of their financial needs.

With such diversity of financial needs there is a corresponding need for some diversity in the financing alternatives. To fit all borrowers into the present 2-percent mold undoubtedly gives assistance to some beyond their actual financial need. Likewise to force all rural systems into a single mold at a higher rate of interest would cause severe hardship in many other cases.

Maximum equity and maximum economy, as well as maximum effectiveness in accomplishing the purposes of the rural electrification and rural telephone programs, will come from a suitable range of available interest rates. This is the significance of the credit ladder such as H.R. 1400 provides by which rural systems may move in attainable steps away from dependence upon the REA 2-percent-directloan program toward the ultimate goal of financing at market rates without further Government financial assistance.

We estimate that approximately 30 to 35 percent of our electric borrowers, for instance, could afford to move to the intermediate rate of 4 percent on their next loans without jeopardizing their accomplishment of program objectives. If the step had to be to a loan at 5 or 6 percent interest, the number of borrowers which could make it without sacrificing program objectives would, of course, be correspondingly reduced.

And then finally there is a need for a kind of financing which will give the rural systems, primarily the electric systems, greater flexibility in operation and development than they now have under the REA direct loan program.

The present 2-percent-financing program carries restrictions which sometimes impede the most efficient development of the borrower's system. Efficient development is necessary if most borrowers are to pay a higher rate of interest. The soundest road to constructive economy in the REA programs lies in strengthening the rural systems themselves to make them better able to pay the full cost of capital and to make them less dependent on Government assistance. Financing with less stringent restrictions is necessary to accomplish this as speedily and as fully as is desirable.

Rural systems ought to have available to them the same growth options other utility systems enjoy. Even with the more flexible financing of H.R. 1400, the rural systems, as a practical matter, will still be far short of the opportunities available to the giants of the industries

which have long enjoyed and grown strong on the choice service areas of the Nation.

This needed flexibility I speak of refers to the need of rural systems to finance desirable acquisitions and exchanges of existing facilities for which REA loans are not permitted under the law. It refers also to the need for greater latitude in the sizing of generation and transmission facilities in line with industry practices. Assistant Secretary Baker referred to these matters in his statement.

As Mr. Baker said, H.R. 1400 and its companion bills offer a realistic and constructive solution to the problem of supplemental financing for both the rural electric and rural telephone programs. They offer a solution which is generally sensitive to the special aspects of the problem which I have endeavored to outline to you this morning.

H.R. 1400 makes separate provision for financing the electric and telephone programs. This reflects the differences in the programs and looks forward to the future when each of the programs will have separate financial institutions owned and controlled by the systems which supplied their equity capital.

Titles III and IV are the electric program titles; titles V and VI are the telephone program titles. In most respects the provisions of titles III and V are identical as are titles IV and VI.

Titles III and V each establish loan accounts, having some of the characteristics of revolving funds. They provide for the payment into each account of collections on basic 2-percent loans heretofore and hereafter made by REA. These funds will be available for additional basic 2-percent loans in amounts prescribed by the Congress in annual appropriation bills. When so used, they have the effect of reducing new obligational authority that would otherwise be required and thereby lessening the burden on the Federal budget. They will also be used for investment in the equity capital of the banks established by titles IV and VI in the amounts prescribed in the bill unless the Congress in annual appropriations acts prescribes lesser amounts. This investment is to be retired by the banks primarily with funds invested by borrowers in the banks' capital stock. Funds in the loan accounts are also to be used to pay the principal and interest of Treasury loans to the REA Administrator for REA loans to electric and telephone borrowers.

Titles IV and VI establish the Rural Electric Bank and the Rural Telephone Bank, respectively. Funds in the loan accounts will be invested over a 15-year period in the banks' capital stock, $50 million annually in the Electric Bank, and $20 million annually in the Telephone Bank unless the Congress determines a lesser amount for any year. Borrowers from each Bank are required to purchase class B stock in amounts equivalent to 5 percent of each loan. Borrowers, and electric consumers of borrowers, and potential borrowers from the Electric Bank, may also invest voluntarily in other classes of stock.

Each Bank is authorized to raise money from outside sources by the issuance of its debentures up to eight times the amount of its paidin capital and retained earnings. Treasury support is provided for debentures issued during the initial 15-year period.

Bank loans may be made, for periods not exceeding 50 years, to eligible borrowers at two interest rates. An intermediate loan rate,

with a ceiling of 4 percent, will be available to the borrowers which are not capable of paying a rate, which we will call the market rate, reflecting the average rate payable on the banks' debentures plus administrative expenses and estimated loses, and achieving RÊA program objectives.

Loans at the intermediate rate are to be made possible without impairment of the banks' capital by a mix of funds raised from the sale of bank stock and the funds raised by sale of bank debentures. For example, for the initial year of operation, the 1968 budget contemplates total Electric Bank loans in the amount of $150 million. This will require supplementing the $50 million of Government invested capital by funds from outside sources of $100 million. If, for example, the $100 million is borrowed at a cost of 512 percent, the mix of Government capital and borrowed money will produce a total interest cost to the Electric Bank of $5.5 million, or 3.667 percent on the entire $150 million.

Bank loans will be made for the same purposes as are provided for the basic 2-percent loans, and for improving the efficiency, effectiveness, or financial stability of borrower systems. Special restrictions are prescribed for both Electric and Telephone Bank loans and the Banks will operate under Government control until they are converted to borrower ownership upon retirement of the Government investment. This, in brief, is what the supplemental financing plan is and what it does.

H.R. 1400 supplies a realistic and workable program for obtaining from outside sources capital that is required for growth by those systems which no longer need completely depend on the basic REA 2-percent loans to achieve the program objective of area coverage service on terms and conditions and of a quality comparable to those available to urban users while still preserving their financial and operational stability.

It will provide a degree of flexibility in loan purposes which will contribute to the strengthening of the borrowers and progressively reduce their need to rely on basic 2-percent financing, and thereby lessen the demands of the REA programs on the Federal budget.

It will provide a diversity of financing which can be administered to match the diverse needs of borrowers.

I thank you, Mr. Chairman and the committee, for this opportunity to make these comments.

The CHAIRMAN. We are very much obliged to you, Mr. Clapp. We are always delighted to have you with us. We appreciate your

statement.

We will now hear from the National Rural Electric Cooperative Association.

If there is any time for questioning of the witnesses we will certainly indulge in that. We have about six more witnesses to dispose of this morning.

Mr. ÅBERNETHY. I just wanted to know if we would have an opportunity to discuss this.

The CHAIRMAN. Unfortunately, with the limited amount of time which we have available, there is no way whereby we can stop for that purpose.

If we stop right now, we will never finish with the questioning by 12 o'clock.

Mr. BELCHER. When was the deadline of 12 o'clock set to consider this very, very important subject? That is just a few hours to consider this whole thing on behalf of all these

The CHAIRMAN. I would like to continue with my statement, please. The power companies, private power companies, who will be heard tomorrow will have the same amount of time-they will be given exactly the same amount of time that the Government witnesses and the proponent witnesses have had.

There is a meeting of a subcommittee of this committee scheduled for tomorrow afternoon. There may be an opportunity to hold a meeting this afternoon. We could hear these witnesses this afternoon, but if we give these witnesses this additional time, we would have to give the power company witnesses the same amount of time, and if we run over today, for that purpose, we will be forced to cut off the power company witnesses tomorrow-which would be unfair-and we are not going to do that.

That is the reason for this.

We will now hear from the National Rural Electric Cooperative Association.

Mr. Ellis and his associates will come to the witness table.

Mr. BELCHER. Well, what do we do tomorrow then, and Friday? Mr. TEAGUE of California. What do we do then, tomorrow and Thursday, and April, May, June, July, August, and September.

The CHAIRMAN. Tomorrow, we will hear the power companies for exactly the same length of time that we are hearing these witnesses today, and on Thursday we will hear the representatives of the telephone companies both for and against the bill.

And the first meeting day that we will have after Easter will be Wednesday, I believe. We will have 3 days that week. The last day will be devoted to an executive session. That announcement has been made time and again in the committee; it has been made publicly; it has been published. Everybody has received that announcement several times. Mr. BELCHER. You cannot expect any cooperation whatsoever from this side of the aisle if you are going to do this in 4 days.

The CHAIRMAN. We have 6 days set aside for this, and any date you want to bring in any witnesses, you may. You said that you did not want to bring in any witnesses. I asked you, Mr. Belcher, and you said that you did not have any witnesses.

Mr. BELCHER. If we are not going to get to cross-examine any witnesses who are brought here by the proponents of the bill, that is not fair to the members of this committee.

The CHAIRMAN. We are going to have all of the time that we can have as quickly as we can finish these statements here-and we will then give what time remains for cross-examination or questions. We are not going to stop the proceedings and bring this thing to a sudden halt, because everyone of us knows that we can stop all proceeding by cross-examination. We could go right on until June doing that. We have done that sort of thing. This committee has other work to do. This committee has a great deal of work to do, other than REA. Mr. BELCHER. More important than REA?

The CHAIRMAN. I do not think so, but I did not hear any protest made when we began cutting off hearings on other activities.

Now, we are going to give you all of the time we can for crossexamination, and we will have more cross-examination if we can expeditiously hear the witnesses and we will have less time if we do not

move on.

Mr. BELCHER. If you think that, you are going to have some difficulty.

Mr. ABERNETHY. May I make one inquiry of the Chair?

The CHAIRMAN. Yes, you may.

Mr. ABERNETHY. I do this in all respect, Mr. Chairman. I do not care to cross-examine any witness. I merely want to ask a question so as to be informed about this. After all, I do not know everything. The CHAIRMAN. We hope that you will be informed.

Mr. ABERNETHY. I would like to ask the Chairman if the other 34 members of this committee have any voice at all in the procedure of the committee? That is all I want to know.

The CHAIRMAN. We have tried to follow the rules.

Mr. ABERNETHY. That does not answer my question. I want to know if the other 34 members of this committee are going to have any voice at all in this procedure; that is all I want to know.

The CHAIRMAN. I do not think that you have any voice in the procedure. I think that the Chair's duty is to carry out the procedures under the rules, and we are trying to do that.

Mr. ABERNETHY. All right.

Mr. TEAGUE of California. By just having 2 hours on this?

The CHAIRMAN. We will next hear from Mr. Ellis of the National Rural Electric Cooperative Association.

Mr. ANDERSON. Mr. Chairman, I am Jerry L. Anderson, assistant general manager of the NRECA. Mr. Ellis apparently is not in the room at the moment. If agreeable with you, we could go ahead.

The CHAIRMAN. We will be glad to have you proceed, Mr. Anderson. STATEMENT OF JERRY L. ANDERSON, ASSISTANT GENERAL MANAGER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

Mr. ANDERSON. Mr. Chairman and members of the committee, I am sure that Mr. Ellis will be here by the time I finish my statement. We would like to present our testimony this morning in four parts. Mr. Ellis will discuss the background of the financial proposal and our support of it, and the need for a program of this kind.

I would like to direct my testimony to some of the specific provisions of H.R. 1400 and the companion bills that are before the committee. Then, we would like to have two of our managers, one of a generation and transmission cooperative and one of a rather large distribution system present brief statements to the committee.

If you do not take too much time, we will hear them.

Our time today is limited.

Mr. ABERNETHY. Why does he not just insert his prepared statement in the record?

The CHAIRMAN. You may take such time as you care to take. You can control that.