to who will get the 2% money and who will get the 4% intermediate credits and who will pay the full market rate on the Debentures over 5% in today's market. Does not this problem indicate a conflict of interest between classes of REA borrowers who, under the Bank bill would have no choice but to accept the terms prescribed for them by an agency which acts as fiscal agent for the borrower whether he likes it or not and also acts for the lender.

The alternative of direct financing in the market place would give the borrower the opportunity to bargain at arms length and as REA loans were paid off, the cooperatives could become completely independent of government control.

EFFECTS OF INCREASED COMPETITION

The proponents of H.R. 1400 give as their primairy reason for the creation of the Rural Electrification Bank the need to supplement present sources of financing to take care of the growth of the cooperatives serving rural areas, and that the primary reason for expanding the purposes of the Bank as a lender is to obtain for the rural systems the economies of scale. Now, it is well known among knowledgeable utility managers that the greatest benefits can best be obtained by the construction of an optimum size of plant for economical production near the important load centers. The economical size of plant today would have a capacity of 650 to 750 megawatts depending upon whether it is fossil fueled or nuclear.

It is obvious that the subsidized construction of plants of the size required to achieve the economies of scale will ultimately displace loads which otherwise would be served by tax paying investor-owned utility companies. Although H.R. 1400 has protective provisions in Sec. 405 (J) and Sec. 408 (a) (2) not contained in prior Bills, these provisions expire when all of the Class A stock of the Bank is retired. In the meantime could not many towns and cities of 20,000 population or less be induced to hold elections and seek cheaper subsidized power from the larger plants contemplated under this Bill? And, would not many new industrial plants located in rural areas be lost by private utilities to the new plants of cooperatives supplying large quantities of subsidized power at rates lower than the investor-owned utilities can quote because of the tax factor?

As I have pointed out in previous testimony, the "Truth in Securities" provisions of the Securities and Exchange Act requires that public utility companies and ourselves as underwriters set forth in prospectuses all material facts. Therefore, a complete statement concerning competition by government financed power projects must be included in the prospectuses of utilities so affected to guard against recision suits under the law. The unpredictable elements and uncertainty introduced by the greatly expanded scope of G & T financing of the cooperatives under the "expanded purposes" of the Rural Electrification Bank as authorized by H.R. 1400 will make an accurate description of potential competition more difficult. More and more frequently such statements are appearing in the prospectuses of utility issues and financial officers of public utilities are being subjected to increasingly penetrating questioning in due diligence meetings on the subeject of competition by tax sheltered REA cooperatives and municipal corporations. Rating agencies also require a full statement on competition before their bond ratings are released and this factor is reflected in their ratings.

As investment bankers, our role is to find the capital required for the vast expansion of utility plant which will be required in future years to meet the expanding needs of our economy. The most reliable estimate I have found calls for an expenditure of about $108 billion for new construction by the investorowned utilities by 1980. This would require between $43 and $50 billion of outside capital. In addition to this we estimate that about $10 billion principal amount of B to Aaa rated utility bonds will mature between 1971 and 1980 for which funds must be provided.

In our experience, institutional lenders are quick to seize upon any adverse factor to demand a higher return on the securities they purchase. In my opinion the threat of increased competition made possible by the expanded purposes and resources of the Electric Bank will make our job of finding the new capital needed at the same low rates as in the past more difficult. To the extent that the threat of such competition increases the cost of capital, ultimately these cost increases must be passed on to the consumer in the form of increased charges for service.

General Comment

As an investment banker, I have become increasingly concerned as to the longterm effect on U.S. Government credit due to the increasing proliferation of agencies of the U.S. Government borrowing outside of the government debt limit, again increased this year to $366 billion. As at the end of 1965, the Federal Government debt was $320.9 billion and Federal agency debt was $38.3 billion or 11.9% of direct obligations of the U.S. At the end of 1966 the direct debt had increased to $329.8 billion. The borrowing power of the Electric Bank could increase the agency debt by a minimum of $6.75 billion or about 17%. These figures represent gross debt which is a figure more representative of government promises to pay than net debt since the difference largely reflects obligations held as a reserve against other liabilities under the Social Security Act.

We are often consulted as advisors to State, Municipal, Foreign Government and other political entities as to the best means of preserving a high credit rating on their obligations so as to obtain the lowest possible interest cost on their borrowings. Like most conservative investment bankers, we would advise that the best means of maintaining a high credit standing is for the government, state or other political entity to restrict its borrowings to the extent possible to general obligations protected by the full faith and credit of the political entity and constituting a first lien on its general fund.

If asked as to the effect of borrowings by instrumentalities of the state or other political entity which may be guaranteed by the entity or protected by pledge of revenues we generally apply the following criteria :

1. The borrowings of agencies or instrumentalities must not constitute a substantial and increasing percentage of total debt of the state or borrowing entity.

2. The agencies or instrumentalities must be self-supporting.

3. The terms, size of issue, timing and method of marketing of the obligations of agencies should at all times be subject to full control and final approval of the Treasurer of the state, government or other political entity. 4. The sources of revenues of the state or other borrowing entity in the form of income, sales, franchise taxes or other revenues available to the general fund should not be reduced or otherwise impaired by the issue of agency bonds and,

5. The obligations of the agencies or instrumentalities should not bear the direct or indirect guarantee of the state or government entity if it is possible for the agency to stand on its own feet without such guarantee. It may be readily seen that the obligations of the Electric Bank which could be issued under H.R. 1400 do not meet all of the above tests.

1. While the size of Federal Agency debt in relation to the direct debt is not large, still it is increasing and the Bank's Debenture obligations would accelerate the increase.

2. It cannot be said that the Electric Bank will be self-supporting since its capital is donated by the U.S. Treasury from government borrowings interest free and the lending and borrowing procedures may result in a loss on its 4% intermediate loans and on its long-term loans. Moreover, the Treasury picks up the tab if earnings are not enough to pay interest and amortization.

3. Nor can it be said that the terms, size of issue, timing and marketing of Electric Bank Debentures will at all times be under the control of the U.S. Treasury under H.R. 1400. No representative of the U.S. Treasury Department is to be on the Board of the Electric Bank.

4. To the extent that generating and transmission facilities are constructed or acquired under H.R. 1400 property will not be on the tax rolls and Federal Income taxes will be reduced. Moreover, to the extent that repayment of REA debt is diverted to capital contributions an increase in Federal obligations on which interest must be paid will result and,

5. A minimum of $6.75 billion of additional Federal agency obligations will be issued guaranteed in effect by the U.S. Government.

I am further concerned as to the possibility of losses which may result from the method of financing by the Bank whose Debentures, I note, like those of the Bank for Cooperatives, shall be lawful investments for all fiduciary, trust and public funds under Sec. 407 (a). The question should be asked as to what the position of the Bank would be if it borrows in the open market on short-term obligations as in the case of Federal agencies such as the Bank for Coopera

tives (for 6 to 8 months) in a period of low interest rates and then makes a longterm loan up to 50 years to an REA borrower on a G & T project at the average of those rates and then in a period of higher interest rates must meet maturing short-term borrowings at a higher interest cost? If interest rates go down the cooperative can refund but if rates go up will not the Bank be caught with a loss?

CONCLUSION

After making a careful review of all of the testimony presented upon a similar Bill, $3720, before the Senate Committee in August, 1966, and after a further study of H.R. 1400, I have come to a firm conclusion that there is no clearly established need for the greatly expanded powers of the Rural Electrification Administration under H.R. 1400 because:

1. There are sound alternative methods of providing the supplementary financing needed for the normal growth of the rural electric cooperatives without placing additional burdens on the U.S. fiscal position in the form of subsidy payments, increased Federal agency debt, and a possible impairment of tax revenue sources of the Federal government.

2. The economies of scale sought under H.R. 1400 are presently available to the cooperatives through the purchase of progressively cheaper power from the investor-owned utility companies who are in a much better position than the Rural Electrification Administration systems to bring the benefits of optimum size of plants located near major load centers and the benefits of interties to the rural users of electric service without increasing the burden of tax costs on the large majority of our citizens who live and work in our burgeoning urban centers.

The CHAIRMAN. Our next witness is Mr. Arthur C. Kreutzer, executive vice president, National LP-Gas Association of Chicago, Illinois.

We will be glad to hear from you now, Mr. Kreutzer.

STATEMENT OF ARTHUR C. KREUTZER, EXECUTIVE VICE PRESIDENT, THE NATIONAL LP-GAS ASSOCIATION, CHICAGO, ILL.; ACCOMPANIED BY ROBERT R. STONE, JR., WASHINGTON MAN

AGER

Mr. KREUTZER. Mr. Chairman and members of the committee, my name is Arthur C. Kreutzer. I am executive vice president of the National LP-Gas Association, and I am accompanied today by Mr. Robert R. Stone, Jr., of our Washington office.

I request that my written statement be placed in the record and I will attempt to summarize it.

The CHAIRMAN. Without objection, that may be done.

(The prepared statement submitted by Mr. Kreutzer reads in full as follows:)

STATEMENT OF ARTHUR C. KREUTZER ON BEHALF OF NATIONAL LP-GAS
ASSOCIATION

My name is Arthur C. Kreutzer. I am Executive Vice President of the National LP-Gas Association. The National LP-Gas Association is a national trade association, having as members the producers of liquefied petroleum gas, the manufacturers of equipment and appliances using liquefied petroleum gas, and the distributors and dealers. The Association has over 3000 member companies and 40 affiliated states. The membership represents approximately 85% of the industry's volume of business. Its membership is predominantly at the distributor and dealer level. The Association's position as set out in this statement would also reflect the position of other industry copanies including some 25,000 small dealers who may not be engaged fulltime in LP-gas sale but who are equally concerned with the problem, in that they handle some LP-gas as part of their busi

ness in their stores of various types. The employment and economic well-being of over 75,000 employees more directly employed is also intimately involved in the LP-gas dealers business and the problem presented. When we add to those directly employed, the personnel of our product and equipment suppliers, well over a million receive all or part of their livelihood from this industry. The LP-gas industry plays an important part in the American economy. In serving nearly 12 million customers-families and businesses-it brings the modern living comfort of gas to over 40 million people. It represents a private investment of an estimated $6.5 billion segment of the nation's capital. Of America's sources of energy only versatile LP-gas serves the public in so many ways.

I am appearing before this Committee on behalf of this industry and the LPgas dealers to state our position with respect to H.R. 1400, a bill to amend the Rural Electrification Act of 1936, and similar legislation. To avoid repetition of earlier testimony, I will direct our comment to the particular predicament of the LP-gas dealer, as a businessman and taxpayer, as related to today's competition in the farm fuel market, the influence of REA, and the general effect of the bill. We note that earlier witnesses have presented a detailed financial analysis of REA and the REA Co-op position. We will not attempt repetition. We do consider that this detailed data supports our general conclusion and it should be so related and considered. The comments of the investor owned utilities in the main relate to urban REA expansion, our concern is in rural areas. However, the same factors and principals in general apply, as modified by local conditions. While our position on this legislation may substantially coincide with the utility, the LP-gas dealer also faces vigorous competition from the investor owned utility. but that competition does not present governmental subsidy also aligned against us. We're sure it isn't the intent of Congress to take sides in a competitive industry fight, but that's the effect of subsidy. We suggest that Congress remove the finger of government on the competitive scale and be more concerned with protecting the equality of tax paying business effectively serving the same purposes. We would first emphasize that we are not dedicated to the destruction of any program of bringing electricity to the farm or rural home. Our LP-gas dealers are often rural citizens and are equally aware of the benefit that this program has bestowed. In many instances they may be REA Co-op members. Our customers are many times REA Co-op members, who also favor and enjoy the benefits of gas on the farm. We are not trying to take anything away from them, but we have no particular sympathy for the REA Co-op as a competing business that is "buying" our customers with our tax dollars.

To first explain the LP-gas industry's more particular concern the product liquified petroleum gas, commonly known as LP-gas of "bottled" gas, is a fuel or energy source used in the household, on the farm and in a variety of commercial and industrial usages for heat, power or refrigeration. Approximately 50% of total use is in the household or on the farm. It is used for the same purposes and in the same appliances as the natural gas of the city systems, although its versatility serves many other farm uses, such as a tractor fuel, and for thermal agriculture. The LP-gas dealer competes with the REA Co-op in serving the rural community in many uses. LP-gas has demonstrated in these uses, at a minimum, equal economy and adaptability.

We do suggest that it is time for a complete re-evaluation of the REA program and question the need for further government subsidy except for the "weaker" co-ops. This maturity has also been recognized in various governmental studies as will hereinafter be noted. We are in sympathy with and support the general principle of elimination of governmental financial support and subsidization of REA cooperative programs as presented in the pending legislation. We believe that the original praiseworthy purposes requiring Federal loans have been met. As taxpayers, it is disturbing to us to see the rural electrification program go far beyond this. As taxpayers, and competing businessmen, it is doubly disturbing to see the REA Co-op competing with the aid of government subsidization through 2% loan financing and tax exemption. We draw this conclusion in noting that over 98% of the farms are now electrified, two-thirds of the present customers are nonfarmers, and the greater part of new loans are going to non-farm use. In the three decades of REA's existence $4.5 billion dollars have been made available to bring electricity to the farm. It is time for a move toward private financing. We do not believe that H.R. 1400, or similar pending legislation fully accomplish this objective. We do not find assurance that the taxpayers money will not be further used-or abused as appears to be the case in many instances.

The REA Co-ops with the aid of Federal subsidy have carried on intensive programs of unfair disparagement of LP-gas and its service, of give-away promotional offers on appliances, and have even gone to the extreme of offering prospective customers a cash bounty to switch from LP-gas.1 A more recent example is to be found in Kentucky where the South Kentucky Rural Electric Cooperative Corporation offers (1) a cash bonus of $25 to any member who buys and installs an electric, 40 gallon or larger, water heater during the months of Aug., Sept., and Oct., 1966; (2) a cash bonus of $75 for switching to electric heat; and (3) a cash bonus of $50 for rewiring a home from 60 amp to 200 amp service.2

That this type of competitive attack is not unique is demonstrated by a Member Services Guide of the National Rural Electric Cooperative Association entitled "LP-Gas Fast Rising Threat". This publication among other things advised the REA Co-op to increase its efforts in electric appliance promotion, to advance by improving positions in the home heating market, to go into merchandising electric appliances, or to work out cooperative promotional plans with local appliance dealers, to create special incentives such as cash or appliance awards, free installation of large appliances, gift coupons, etc., and to attack the areas of high concentration of LP-gas. This competitive attack on private taxpaying enterprise apparently dedicated to the destruction of the LP-gas dealer is now fostered with Federal lending.

Again, this report expresses alarm at the LP-gas share of farm fuel market. "The 1960 NRECA survey of members revealed that a high percentage of memberowners use gas appliances for both home and farm use. This survey is still valid and the statistics have changed little. The most serious implication of that study was that less than one percent of our members who use gas appliances had definite plans for switching those appliances over to electrical appliances." The report continues to urge action to eliminate a fuel that the farmer obviously finds better and more economical. Further demonstrating this philosophy a 1966 Farm Electrification Council bulletin says now is the time to "gundown" LP-gas.

Is it to the farmers interest to subsidize this type of competitive persuasion? Is it the purpose of Congress to make farm electrification possible, or put muscle in the persuasion of the farmer in his fuel selection? We hope not the later. We urge that the farmer be given a free choice of fuel without the artificial sweetener of subsidy through REA. In this same sense we consider that our opposition to further subsidy better serves the farmer in encouraging a free selection and market based on overall fuel merit. That's all we ask.

We favor legislation that would enable the REA Co-op to stand on its own feet. In our viewpoint the basic objective for Congress is to move toward getting the government out of competition with its supporting taxpayers. With this in mind our question is does H.R. 1400 and similar legislation effectively phase out unnecessary subsidy, or are these measures piling on an additional burden for taxpaying private enterprise. We think it does the later.

By its express language the objective of H.R. 1400 is to provide "additional" sources of financing, to furnish "supplemental" financing, and it further declares that "nothing in this Act shall be construed to change the loan purposes, terms and conditions authorized in titles I and II." Further than this declaration of intention to continue 2% loans, without any effective curb, the bill creates a "rural electrification account" which in essence is a dedicated and perpetual care revolving fund of existing REA lendings and appropriations. The net effect is to more deeply entrench and at the same time relax Congressional conrtol of 2% REA loans.

While the theory surrounding the creation of the "electric bank" may be to phase out 2% loans there is neither incentive, nor directive, in the bank itself. Its provisions appear to pile on additional and less controlled subsidy. Subsidy appears in furnishing $750 million of capital without provision for interest or return, the guarantee of $6 billion or more in debentures, subordination of existing REA lendings, tax exemption, and free use of governmental facilities.

Lack of Congressional control appears in the banks almost unlimited discretion in lending funds. While Section 405 (i) states the bank must make an

1 Illustrations of these activities appear in Volume 3, Hearings Before the Committee on Ways and Means, House of Representatives, 87th Congress, May, 1961, on President's 1961 Tax Recommendation.

2 Source: Co-op News (October 1966), a publication of the South Kentucky Rural Electric Cooperative Corporation.