witnesses back for questions, if there is anyone else who wants to appear, please let us know.

Before that, however, I have two statements that I would like to have made a part of the record at this time. One is a statement of the Corn Belt Power Cooperative of Humboldt, Iowa, and the other is a statement of the National Association of Manufacturers.

Without objection, these will be made a part of the record at this point.

(The statements referred to follow :)

STATEMENT OF ELDO MEYNE, PRESIDENT, CORN BELT POWER COOPERATIVE

We, of the Corn Belt Power Cooperative, respectfully request that Congress continue the present Rural Electrification program for those who need it, and that they consider supplemental financing in order to continue the growth and progress of Rural America.

The Corn Belt Power Cooperative is a Generation and Transmission Cooperative financed by the Rural Electrification Administration. We serve about 31,000 members through 14 distribution cooperatives located in 27 counties in northern Iowa. The member systems served by Corn Belt have an average density of about 2.5 members per mile of line.

The history of Corn Belt shows a slow, but steady, progress in the gradual reduction of cost of electric service. All reductions and savings in cost are passed directly back to our members.

Corn Belt has always been an advocate of interconnections with other utilities. At the present time, we are interconnected with three investor-owned utilities, 15 municipals, and the United States Bureau of Reclamation. Such interconnections are of great value to Corn Belt, as they are to everyone else in the utility business. There are two basic principles that must be met by systems which interconnect. First, there must be benefits for each party; and second, each party must provide its fair share of the costs involved. The ratio of benefits helps determine the cost-sharing. However, in order to share the costs, adequate financing is a prime requisite. A party to interconnections must finance his share of generation and transmission facilities. One cannot expect equal benefits without equal participation. Corn Belt has always followed these principles in making interconnections; and as a result, has helped build a system of value to its members and to the area in which we operate. We are planning our generation and transmission program in conjunction with investor-owned utilities, municipals and Federal agencies in the area. This joint planning has helped eliminate duplication of facilities and provided more efficient operation.

Corn Belt is a member of the Iowa Power Pool, along with five investorowned utilities. Pooling arrangements offer cost savings and added reliability to all parties. Such a relationship would not be possible if each party were not willing and able to furnish a fair share of investment in generation and transmission. It is true, the systems of the investor-owned utilities and Corn Belt overlap. This must be when they serve the urban areas, and we serve the rural. Joint planning and pooling together is allowing all of us to make better use of facilities for the benefit of all consumers.

The above-mentioned interconnections and pooling agreements have been made in order to improve service and reduce the high power cost existing in Iowa. This high power cost is primarily due to the high cost of fuel, particularly in Central Iowa. On our system the cost of transportation of coal from the mine to our generating plants is about 4 tenths of one cent in the cost of our electricity. It can be seen that about one-half of this cost, or 2 tenths of a cent, is due to the cost of transportation of the fuel. Thus electric systems with ready access to fuel could reduce their cost by 2 tenths of a cent below our cost. While we do have access to some low-cost, federally-produced power from the United States Bureau of Reclamation, the amount is limited and the source is quite distant from our system. Large investments in transmission facilities are required to transport this power to our area.

We have an excellent working relationship with all electric systems in our area. We have cooperated in the past in an attempt to secure the lowest cost pos

sible for all customers in this state, and hope to continue to do so in the future. We do not desire to take over customers being served by any existing utility; but only ask the ability to continue to serve the area we presently cover and to maintain reasonable rates.

We need financing in order to continue adequate service to the increasing loads of our members. A pact was made between Congress and the Rural Electric Cooperatives. We were to extend service to all who requested it, in return for adequate financing. We have done our part. We have developed this marginal territory and furnished the power needed. Our members now have the benefits of modern living. However, according to projections, loads will increase four times in the next 20 years. To handle this increase, we must install heavier transmission lines and additional generating equipment. This requires adequate financing.

In our own case, our studies show we need 2% money for some years to come. Ours is an agricultural load with no big industries. 98% of our load is the farm and farm home. This gives us a poor load or use factor for our equipment, which we hope to improve as industry moves into our area. We then would be more able to pay higher rates of interest and use supplementary financing.

We want to go on record as supporting 2% funds for those of us who need it. We also support the need for supplemental financing to meet the growing needs of the Cooperatives.

We thank Congress for the cooperation and assistance in the past which made it possible, through legislation and appropriations, for us to have an adequate supply of electricity and to serve the unserved in Rural America. We also thank you for the opportunity to present this statement to this Committee.

STATEMENT OF NATIONAL ASSOCIATION OF MANUFACTURERS

THE OBJECTIVE

The National Association of Manufacturers endorses the objective of shifting the financing of rural electric cooperatives from a subsidized government source to private market sources. However, such a shift should not enable the cooperatives to expand beyond their appropriate activities. By "appropriate" activities, we mean "the furnishing of electric service to persons in rural areas who are not receiving central station service," as set forth in the Rural Electrification Act of 1936. We do not mean the construction of generation and transmission facilities where an adequate supply of power is already available to the borrower at rates which, after making due allowance for the tax components included therein, are as favorable or more favorable than those which would result from the facilities to be financed by the proposed loan.

A shifting of financing would be entirely in accord with the official policy position of the Association entitled "Federal Business-Type Activities." In pertinent part, this position states as follows:

"Substantive legislation for federal business-type activities involving credit should provide that interest rates and maturities be based on market realities, except where a subsidy is expressly specified and measured. All such federal lending programs, including those which are self-supporting, should be reviewed periodically with a view to discontinuing the activities when possible. Any lending operations caused by circumstances which are no longer present should be discontinued as soon as possible without causing sudden or undue hardship to those sectors of the economy which have become dependent on this form of governmental support. Necessary lending operations of the government should be so conducted as to avoid confusion of the activity and its purposes with political motives and purposes."

THE PROVISIONS OF THE BILL

It is in this light that we would like to examine H.R. 1400, a bill to amend the Rural Electrification Act of 1936. The bill is quite lengthy (52 pages) and extremely complicated. However, the following is a brief summary of H.R. 1400 as it applies to rural electric cooperatives:

1. The bill would establish a body corporate known as the Rural Electric Bank (referred to later in the bill as the electric bank). The management of the electric bank would be vested in a thirteen-member Electric Bank Board. The

initial board of directors would consist of the Administrator of the Rural Electrification Administration; the Governor of the Farm Credit Administration; three members designated by the President from employees of the Department of Agriculture other than employees of the Rural Electrification Administration; two members designated by the President from the general public; and six members appointed by the President from representatives of rural electric systems. Subsequently, the latter six members would be elected by eligible rural electric systems, chiefly on the basis of five geographical areas. The Administrator of the Rural Electrification Administration would serve as the chief executive officer (Governor) of the electric bank.

2. A complex capitalization structure would be created with four classes of capital stock-Class A, Class B, Class C, and Class D. The U.S. Government would furnish $750 million ($50 million per year for 15 years) with no provision for payment of interest or a fixed return on this money and with a very indefinite timetable for its repayment. This capital would be represented by Class A stock. Additional capital would be raised through the sale of Class B, Class C and Class D stock to borrowers from the electric bank; organizations controlled by such borrowers, corporations, and public bodies; and electric consumers of said corporations and public bodies. Each of these classes of stock would be subject to its own peculiar set of restrictions and privileges.

3. The electric bank would be authorized to borrow, by issuing electric debentures, eight times its paid-in capital and retained earnings. Depending upon the amounts of stock sold, the electric bank could borrow over $15 billion in the first 15 years and could continue growing thereafter. It should be noted that this $15 billion would not be subject to the maximum public debt limit. Although the bill provides that "The electric bank shall be deemed to be an instrumentality of the United States" (in perpetuity), it also provides that the electric bank debentures "do not constitute a debt or obligation of the United Sates . . ."

4. The present REA 2% loan program would be continued. In addition, the electric bank would be authorized to make so-called "intermediate loans" at 4%. Loans at a higher rate designed to cover the electric bank's costs would also be authorized, but it appears problematical whether any loans would be made at that rate as long as "intermediate loans" or 2% REA loans were available. Loans could be made for the construction of generating and transmission facilities, as well as for distribution facilities. Loans could also be made for the acquisition of facilities owned by municipalities or investor-owned electric companies. The duration of the loans would be as high as 50 years, and the schedule of payments of interest and principal could be adjusted by the Governor (REA Administrator) of the electric bank. Loans could cover 100% of the cost of the facilities to be constructed or acquired with no equity required of the borrower. The restriction on REA 2% loans that they be limited to service for persons not already receiving central station service in places of less than 1,500 population would not apply to loans made by the bank.

5. As an instrumentality of the United States, the electric bank would be exempt from Federal, State and local income taxes and from State and local real and personal property taxes. Although the electric bank would be authorized to make payments to State and local governments in lieu of property taxes, the bill would not actually require it do so.

6. If the electric bank did not have sufficient funds to pay interest or principal on its debentures, it could borrow money from the U.S. Treasury without an appropriation by Congress.

7. A rural electrification account would be established in the U.S. Treasury and it would have as assets $3.3 billion of evidences of indebtedness presently held by the REA Administrator; over $900 million of "undisbursed balances" of electrification loans; all collections of principal and interest received on and after July 1, 1966 (this would amount to more than $200 million per year); all future appropriations for electrification loans and for the administrative expenses of REA; and shares of the electric bank's capital stock. This account would resemble a revolving fund because money placed in it could be used for designated purposes without further appropriation by the Congress. Thus, these money outlays would not have to be reflected in the Federal Budget submitted by the President to Congress each year.

ANALYSIS OF THE BILL

It is clear that the bill as such does not accomplish a transfer to private ownership. There is a declaration of policy objective that the electric bank "will become

entirely privately owned, operated, and financed. . ." Also, there is a provision that the Class A stock "shall be redeemed and retired by the electric bank as soon as practicable after June 30, 1981, but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank: Provided, That the minimum amount of Class A stock that shall be retired each year after said date and after the amount of Class A and Class B stock issued totals $1,000,000,000, shall equal 5 per centum of the amount of loans made by the electric bank during such year."

Thus, the retirement of Class A stock would not even begin until 1981, or some later year depending on the amount of Class B stock issued, and it is impossible to estimate how many years would be required for total retirement at a minimum rate of 5% of the amount of loans made by the electric bank during each year. Perhaps transfer to complete private ownership could not be attained for at least 65 years. Therefore, for all practical purposes, the bill must be evaluated as a proposal to create a new Government corporation to engage in the banking business rather than as a contemporary proposal for transfer to private ownership.

Viewed as such, the bill should be analyzed to determine whether it moves in some other ways to reduce the scope of Federal activities. The first point to be noted in this connection is that the bank lending program would in no way displace the present REA 2% lending program. The bill title refers to "additional" sources of financing and the declaration of policy refers to "supplementary" financing. The amendments to the Act are set forth in the form of new titles, so that they would in no way modify the existing authority of REA to make 2% loans; and it is declared that "nothing in this Act shall be construed to change the loan purposes, terms, and conditions authorized in Titles I and II." It is also provided that "Notwithstanding anything in this Act, powers and authority provided for in this title IV shall be cumulative, and, except as otherwise specifically provided herein, nothing herein shall be deemed to limit powers and authority provided for in any other title of this Act." Therefore, in this respect, the bill makes no contribution whatsoever toward reducing the scope of Federal activities.

The electric bank would be authorized to make intermediate loans without any dollar limitation either as to individual loans or the annual aggregate amount of such loans. Since these loans would also involve subsidy (a 4% interest rate), this program would constitute an enlargement of the Federal activity rather than a reduction.

The electric bank would also be authorized to make loans at an interest rate "which reflects the current average rate payable by the electric bank on its electric debentures, and administrative expenses and estimated losses of the electric bank in respect of such other loans, all as determined by the Governor of the electric bank." This appears to be a step in the right direction, but as previously indicated, the pressures on the Administrator-Governor to make 2% loans or intermediate loans rather than at-cost loans would be great. The only criteria for eligibility for intermediate loans is that they "shall not be made to a borrower which is determined by the Governor of the electric bank, under standards to be established by the Secretary, to be capable of both paying the interest rate applicable hereunder to loans other than intermediate loans and achieving the objectives of the Federal rural electrification program." This is extremely vague language, and does not represent any truly objective or meaningful criteria. Therefore, it appears probably that the lion's share of the electric bank loans would be the subsidized 4% maximum interest rate intermediate loans.

Further, it is quite possible that both the intermediate and at-cost loans could be used for the construction of generating and transmission facilities to serve other than truly rural areas. These loans would not be subject to the basic restrictions of the Rural Electrification Act of 1936 that loans can be made only to provide service "to persons in rural areas not receiving central station service." The only purported geographical restriction relates to loans for transmission or distribution lines or facilities and to loans for acquisition of electric facilities. In these instances, a limitaton of "four thousand connectons" in nonrural areas is expressed. This limitation is meaningless because a "single connection" could be an aprtment house, a shopping center, or a large industrial plant, and a few "connections" could service a large municipality.

Thus, the bill frankly contemplates expansion by the rural electric cooperatives from rural into suburban and urban areas. Consequently, in still another aspect, the bill moves in the direction of enlargement of the scope of federal lending activities rather than reduction.

The same observation could be made about the provision that calls for a maximum loan period of 50 years for electric bank loans rather than the 35 year period of the present REA loans; about the fact that no interest or return need be paid on the capital advanced by the U.S. Government to the electric bank, whereas REA must pay 2% interest on the notes it possibly gives to the U.S. Treasury to cover loan authorizations; about the fact that collections of principal and interest on outstanding loans would be paid into a rural electrification account rather than into the U.S. Treasury as miscellaneous receipts (moneys deposited as miscellaneous receipts cannot be used again without subsequent appropriation); and about the fact that the electric bank would be able to borrow money, without limit and without Congressional appropriation, from the U.S. Treasury whenever it was unable to meet the payments of principal and interest on its electric debentures.

From the fiscal standpoint, the technique of special accounts is doing a great deal to fragment the Federal Budget, thinning it down to a net amount which is not very meaningful. The technique of agency borrowing from the U.S. Treasury is also undesirable; the "backdoor guarantee" called for in the bill is not better than other forms of "backdoor spending" which have been widely criticized.

CONCLUSION

Therefore, although we endorse the objective of shifting the financing of rural electric cooperatives from a subsidized government source to private sources, we cannot support H.R. 1400 because it does not incorporate any effective steps in that direction, but to the contrary, moves greatly in the direction of further massive Federal involvement in this type of lending activity.

This defect is aggravated because such greater involvement would not be subjected to adequate budgetary and appropriations processes, and the Administrator-Governor would become an extremely powerful official dealing with billions of dollars and subject to little Congressional surveillance and control. Even if, at some future time, the electric bank became completely privately owned, the result would be a multi-billion dollar financial juggernaut totally owned and controlled by the rural electric cooperatives and their associations, absolutely free of present statutory restrictions.

There is no indication that the appropriate functions of rural electric cooperatives over forthcoming years would require financing on the scale contemplated in this bill. Over 98 percent of the farms in the United States are now receiving electricity and many of them are served by investor-owned companies which are completely capable of meeting their present and future needs. The pressures and temptations to use this money to build giant tax-exempt generating and transmission facilities which would unfairly compete with tax-paying electric companies would be well-nigh irresistible.

Consequently, we respectfully urge the distinguished Committee on Agriculture of the U.S. House of Representatives not to report H.R. 1400.

The CHAIRMAN. Mr. Carpenter, I wonder if you would come back to the witness stand to answer any questions there may be? Are there any questions of Mr. Carpenter?

Does anyone want to question Mr. Carpenter?

Mr. Myers?

Mr. MYERS. Mr. Chairman and Mr. Carpenter.

On page 3 of your statement, Mr. Carpenter, you give some statistics which I have been working out here which give a different picture. It is about 20 poles per mile, for the REA; is that not about right?

Mr. CARPENTER. Approximately.

Mr. MYERS. You need one for every hookup.

In the cities you say there are 34 connections and that would be 34 poles per mile.