RURAL ELECTRIC AND RURAL TELEPHONE SUPPLEMENTAL FINANCING TUESDAY, APRIL 4, 1967 HOUSE OF REPRESENTATIVES, The committee met, pursuant to recess, at 10 a.m., in room 1301, Longworth House Office Building, Washington, D.C., Hon. W. R. Poage (chairman) presiding. Present: Representatives Poage, Gathings, McMillan, Abernethy, Jones of Missouri, Stubblefield, Purcell, O'Neal, de la Garza, Dow, Montgomery, Stuckey, Rarick, Belcher, Teague of California, Mrs. May, Dole, Hansen, Wampler, Goodling, Miller, Burke, Mathias, Mayne, Zwach, Kleppe, Price, and Myers. Also present: Christine S. Gallagher, clerk; Hyde H. Murray, assistant counsel; Francis LeMay, staff consultant; and Fowler C. West, assistant staff consultant. The CHAIRMAN. The committee will please come to order. The committee is met this morning for further consideration of H.R. 1400 and related bills. Our first witness is Mr. John C. Lynn, legislative director of the American Farm Bureau Federation. We have nine scheduled witnesses or groups of witnesses this morning, and we are going to start out with the idea of allowing 6 minutes to each group hoping to get through in that way and possibly to have time for a little examination and questioning of the witnesses after finishing with all of their presentations. We will go through the nine scheduled witnesses first. In that way we will accommodate everyone, and we will have some questions if time allows. We will be delighted to hear from you Mr. Lynn for 6 minutes. STATEMENT OF JOHN C. LYNN, LEGISLATIVE DIRECTOR; ACCOMPANIED BY HERBERT HARRIS II, LEGISLATIVE COUNSEL, AND CRAIG THOMAS, ASSISTANT LEGISLATIVE DIRECTOR, AMERICAN FARM BUREAU FEDERATION, WASHINGTON, D.C. Mr. LYNN. Mr. Chairman and members of the committee, I am going to ask you to reconsider your rule, because I will have to leave immediately after my testimony and will not be available for later questioning. The CHAIRMAN. We are not going to insist that anybody stay. The CHAIRMAN. You may proceed. Mr. LYNN. Mr. Chairman, in the light of the schedule you have listed, I would like to file the statement for the record. I have already circulated the statement among the members of the committee. We have specific amendments to H.R. 1400 to carry out the specific policies. The first point that we would like to make is that we approach this legislation in the spirit of trying to perpetuate and protect the rural electric and telephone programs. We have been involved in it since its inception, and we support the rural electric and telephone programs, but we think, as you so aptly expressed it, the time has come to consider a change with regard to the financing of the rural electric cooperatives. We would like for all our suggestions to be based on these sound principles. The first one has to do with ownership. We commend you, Mr. Chairman, in including in your bill, H.R. 1400, a provision dealing with this point. We offer a very simple amendment, that is, to strike from H.R. 1400 that which deals with this phrase "if permitted under State law." As far as we are aware there is only one State that is affected by this. However, we are making a survey of our States to determine whether there are any additional States that would be affected by this, but we believe that ownership is sound in principle and must be included in the legislation. A point will be raised and has been raised with regard to the TVA area. I worked in the TVA area for many years. There have been exceptions made in connection with the capital credit in the TVA area. It is an administrative decision by the Board of Directors of the TVA. We think that the ownership principle is sound, and we believe there should be no exception, whether a rural electric cooperative is using public power or private power. The ownership principle is the thing that should be stressed. The next point is loans for generation and transmission. When we appeared here before your committee last year, you will recall that we recommended that all of the generating and transmission loans be made from the bank. Our delegates reconsidered this policy last December and modified it to this extent: that all generating loans be made from the bank but that transmission loans might be made from REA (2 percent money) or from the bank and other sources. In connection with this, we recommend only one interest rate in the bank. On the assumption that the one interest rate is adopted, when you think of the generation and transmission, you have to think in these terms. You blend the 2-percent money from the Federal Treasury with money that will be borrowed, presumably at the cost of the money, at say 4.75 percent. Currently, about as much money is being spent for generating as for transmission. Then, you blend the 2 percent and the 4.75 percent, and you find that under our policy with regard to generating electricity, it will still be at a subsidized interest rate. The cost of the electricity wholesale from a hydro or a steamplant of a given size is a well-known fact. Where the rural electric cooperatives run into difficulty is in the transmission or the wheeling of this power from the source to the need co-ops. Thus, we say that a trans mission line, in order to wheel this power that is purchased wholesale to its rightful place, might get a 2-percent transmission loan, but for generation we say it must be from the bank. I emphasize that under our proposal generating would be at a subsidized rate of interest. We think that there ought to be only classes of borrowers: One class of borrowers in the bank, and then the REA 2-percent borrowers. And one would be at this blended rate of interest. Our calculation is that if you adopt this principle of only one interest rate in the bank, even with the current relatively high rates of interest, that rural electric cooperatives could borrow from the bank at, roughly, 5.25 percent today, which is a subsidized interest rate. How do you graduate people from the REA 2 percent loan to the banks? We provided a formula in our statement and in an amendment to the bill to do that. We think that only one bank should be established. If we establish two banks, we are going to have two separate institutions going out on the money market in competition with each other to sell debentures. We believe that this bank can be operated and can service both electric and telephone cooperatives from the same bank without being in competition with each other. And we believe that this can be done just as it is done in a regular banking operation. One more point, Mr. Chairman. With regard to the board of directors of the cooperative, we recommend a specific amendment to your bill dealing with the composition of the Board. The most important point about this is that we try to build on the successful experience of the Farm Credit Administration in determining the members of this board. And, specifically, we recommend against the inclusion of so many rural electric managers and Federal Government employees as is provided in H.R. 1400. Thank you. The CHAIRMAN. Thank you very much. Mr. LYNN. I would like to introduce, if I may, to the committee our legislative counsel, Mr. Harris, and Mr. Thomas, the assistant legislative director who, I hope, will help me answer questions. (The prepared statement submitted by Mr. Lynn reads in full as follows:) STATEMENT OF JOHN C. LYNN, LEGISLATIVE DIRECTOR, AMERICAN FARM BUREAU FEDERATION We appreciate the opportunity to present to the Committee the views of the American Farm Bureau Federation in regard to H.R. 1400. The policy positions of Farm Bureau have been developed by the elected representatives of the 1,703,908 family members of the 2,670 County Farm Bureaus in 49 states and Puerto Rico. We are very much aware of the contribution that has been made in rural electric and telephone cooperatives, as farmers have implemented the programs made available to them by Congress. Farm Bureau members, throughout the country, are proud of the role they have played in the development and growth of these cooperatives. Farmers and ranchers are interested in both electric and telephone systems. We feel, however, that the financing of the two is closely related and might be combined in one bank. Therefore, this statement will deal principally with a combined bank. As in the past, Farm Bureau members are ready and willing to support legislation, programs, and activities which will result in soundly financed, member-owned cooperatives able to provide high quality service at reasonable cost. 78-690-67 -26 We believe a supplemental financing program is necessary and desirable. Such a program should: 1. Provide access to sources of financing which will allow for the development of co-ops to meet the growing needs of farm and ranch users. 2. Insure member ownership and control. 3. Reduce dependence on the federal government. The policy positions of the American Farm Bureau Federation are reviewed and revised each year at annual meetings of the county, state, and national organizations. The 1967 statement was adopted last December during the annual meeting by the elected delegates of the member State Farm Bureaus. The complete text of the policy regarding rural electric and telephone service is as follows: "We support rural electric and telephone cooperatives organized and operated in accordance with cooperative principles and practices. "Local ownership by well informed members is the best safeguard for true cooperative principles. "The members of rural electric cooperatives should have full ownership and control. We recommend that member equities be transferable to eligible persons on the books of the cooperative at any time under rule prescribed by the cooperative. "We urge members of rural electric cooperatives to make certain that the bylaws of their associations contain provisions that require (1) allocation of net worth to individual members, (2) annual notice to members of their ownership interest, and (3) approval by a majority of patrons before the principal assets and business of the cooperative can be sold. "We support sound economic developments to assure farm people adequate electric service. Where expansion or improvement of power production is contemplated, consideration should be given to seeking funds on an investment basis from members of the cooperative. If revisions in legislation or regulations are needed to permit this, we support the necessary changes. "We urge that these basic objectives be attained in future financing: "(1) A sound financial structure which will provide access for rural electric cooperatives to established sources of private capital. "(2) Positive provisions for eventual borrower ownership and control of a credit institution created to serve their needs in providing electric and telephone service. "We support a supplemental financing plan for a rural electric and telephone bank patterned after the Farm Credit System and including the following features: "(1) A requirement that, to be eligible for bank loans, a cooperative must establish in its by-laws the issuance of certificates of ownership stating each member's share in the net worth of the cooperative. "(2) A provision that there be only two classes of loans: (a) those made through the bank at the same rate of interest for all borrowers; and (b) those made by the Rural Electrification Administration. "(3) A requirement that generating loans be made only through the bank. "We oppose any plan or effort to convert rural electric cooperatives into a public power system. "Rural electric cooperatives should not participate in financing programs and activities other than those for which they were organized." Our interest in, and support of, efforts to develop private sources of credit to supplement government funds available to rural electric cooperatives dates back over a period of 20 years. As early as 1944 our delegate body recommeded that electric cooperatives dates back over a period of 20 years. As early as 1944 our delegate body recommended that electric cooperatives move toward less dependence on government financing. There is increasing agreement that exclusive dependence by any cooperative on government funds for capital is unrealistic and unreliable. We favor legislation to provide rural electric cooperatives an opportunity to create a member-owned and member-controlled financial structure. We believe the bill before the Committee can be improved in several respects to assure the accomplishment of the objective. In brief our suggestions include the following: (1) Insure member ownership of cooperatives. (2) Provide for generating loans from the bank rather than from the REA fund. (3) Provide for a single loan rate in the bank. (4) Insure transition from REA to the bank for eligible borrowers. (6) Provide a more efficient board structure. (7) Insure repayment of government capital from the bank at the earliest reasonable time. We would like to discuss these suggestions in more detail. Specific amendments to carry out these recommendations are appended to this statement. 1. MEMBER OWNERSHIP OF RURAL ELECTRIC COOPERATIVES We agree with the proposal before the Committee that requires a cooperative to issue certificates of ownership to its members in order to be eligible for bank loans. The language contained in this section of H.R. 1400, "if permitted under state law", should be stricken. It is our understanding that, with the exception of a small number of states, cooperative bylaws could easily be amended to provide for certificates of ownership. In these few instances where changes of organizational structure may be needed, we believe the principle of member ownership is important enough to justify such a change. Not only would the member's interest be protected by the ownership provision, but the cooperative's abiilty to qualify for the commercial loans at some time in the future would be enhanced. Reference has been made to the restrictions on equity accumulation in the TVA supply area. We understand that certain administrative regulations have been made by the TVA Board dealing with this issue. We do not believe the ownership principle changes because an area happens to fall within the jurisdiction of the TVA. Even though equities may be small due to a "low rate" policy, evidence of ownership is no less important. This provision of the bill simply states that each cooperative must issue certificates of ownership to each patron establishing the patron's share of ownership in the net worth of the cooperative. These certificates would be transferable to members of the cooperative under conditions prescribed by the bylaws of the cooperative. The capital credits plan used by many electric cooperatives does not establish true member ownership of the net worth. In most cases, the capital credits for all patrons on the books of the cooperative add up to less than the net worth of the cooperative, thus leaving unsettled the ownership of the equity other than that in capital credits accounts. In practice, the capital credits plan often weakens rather than strengthens the financial structure of rural electric cooperatives. Every effort must be made to strengthen the structure of the individual cooperatives in order to enter the money market more effectively. As each participating cooperative becomes a part of the bank structure, allocation of member ownership will add to the stability of the bank and help to insure a ready market for its debentures. This provision by no means excludes the use of the capital credits plan or the use of a patronage dividend. Both of these methods of distributing net margins can still be used. Ownership certificates simply assure each patron of his proper share of the cooperative. 2. LOANS FOR GENERATING AND TRANSMISSION FACILITIES As noted in the policy statement, we support loans to borrowers for generating facilities through the bank. We believe such loans should be made only where it is clearly determined that an adequate source of power at reasonable rates is not available. Proposals for generating facilities should be sufficiently sound to be financed on an economic basis by means of loans made available through the newly created bank at the bank's going rate of interest. Loans for transmission facilities could be made either from the REA fund or through the bank. Generating and transmission of power are two differing needs and should be considered as such. The wholesale price of electric current from the various types and sizes of generating facilities is well known and rural electric cooperatives can determine with a great deal of accuracy the competitive price at the power source. However, transmission facilities, to the place where power is needed, has many unknown |