Mr. POAGE. May I just comment. In view of the apparent length of time that this is going to take with 51 witnesses here representing the power companies, with some statements running some 46 pages in length, may I simply call attention to the original hearings on this REA bill which was conducted on March 12, 13, and 14, in 1936, before the Committee on Interstate and Foreign Commerce, with Mr. Sam Rayburn serving as chairman of that committee; at those hearings there were three witnesses who were heard, Morris L. Cooke, the Administrator of the Rural Electrification Administration, the Honorable James G. Scrugham, a Representative from Nevada, and the Honorable John E. Rankin who was allowed to insert his statement in the record but was not given the opportunity to testify before the committee. The CHAIRMAN. How many pages of testimony were there? Mr. POAGE. There are 103 pages in all with the insertions and the tables, and the like. The CHAIRMAN. How much was the length of the testimony, about page and a half? Mr. POAGE. It was more than that, but much of it was inserted. Mr. POAGE. Yes. Mr. TEAGUE of California. Will you yield for this observation. Lengthier and more careful hearings, had they been held, maybe we would have had a better bill. Mr. POAGE. These people now argue that that bill was and is pretty good-Mr. Person said that a minute ago that it was fine. The CHAIRMAN. All right, Mr. Smith. STATEMENT OF NELSON LEE SMITH, PROFESSOR OF BUSINESS, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIVERSITY, NEW YORK, N.Y. Mr. SMITH. Mr. Chairman and members of the committee, my statement is not in such length as Congressman Poage has suggested, and I ask that the attachments thereto be made a part of the record. My name is Nelson Lee Smith; my address is Post Office Box 603, Madison, Conn. I appear before you on behalf of the Edison Electric Institute in opposition to H.R. 14000 and H.R. 14837. QUALIFICATIONS By way of background, let me say that my professional education and experience is as an economist. I graduated from Dartmouth College with an A.B. degree in 1921, received an M.C.S. from its Amos Tuck School of Administration and Finance in 1922, and earned the Ph. D. from the University of Michigan in 1928. Throughout most of my adult life-whether as a teacher, a public servant, or in the world of business-I have been primarily concerned with the economic aspects of the interrelationships between Government and business, particularly as they involve the regulated transportation agencies and public utilities. From 1921 to 1937 I served on the faculties of Dartmouth and Michigan-the latter from 1922 to 1924-advancing to the rank of professor of economics at Dartmouth, where I was responsible for courses in the above-mentioned areas. From 1929 to 1931 I was a member of the New England Governors' Railroad Committee, created to advise them regarding the probable impacts of various possible railway acquisitions and consolidations then under consideration upon the transportation needs and economic welfare of the six New Egland States. In 1933 I was appointed to the New Hampshire Public Service Commission, serving as its chairman from 1934 to 1941. During this period, I was president of the New England Association of Utilities Commissioners, 1935-36, and president of the National Association of Railroad and Utilities Commissioners, 1938-39. In 1941 I became Chairman of the Board of Investigation and Research established under the Transportation Act of 1940 to carry forward certain of the studies initiated by the Federal Coordinator of Transportation. I was appointed a member of the Federal Power Commission in 1943 and continued in that post until 1955, serving as the Commission's elected Chairman from 1947 to 1950. From 1955 to 1961 I was a vice president of American Airlines, Inc., my duties relating to economic planning generally and more particularly to corporate policies and procedures regarding regulatory matters. In 1960 and 1961 I was a member of the committee on industry, trade, and transportation of the New York Chamber of Commerce, and since 1960 have been a member of the advisory committee to the New York State Office of Transportation. Since 1962 I have been professor of business at the Columbia University Graduate School of Business, where I teach courses concerning business policy and business in a mixed economy-the latter devoting substantial attention to business-government interrelationships. I am coauthor-with Bruce W. Knight of a two-volume text entitled "Economics," published by the Ronald Press, New York, 1929 and 1930, and author of "The Fair Rate of Return in Public Utility Regulation," a 1928 economic prize essay published in Houghton Mifflin Co., Boston, 1932. In addition I have written numerous articles which have appeared in various economic and business journals. Recently I was retained by the Edison Electric Institute to make an independent and objective analysis of the need for and impacts of H.R. 14000 and H.R. 14837. It is upon the basis of this study, and my experience generally, that my testimony is based. My conclusion is that the proposed legislation is from an economic viewpoint neither necessary nor desirable, for reasons which I shall develop in the balance of this statement. AN OVERVIEW OF THE RURAL ELECTRIFICATION PROGRAM, 1935 TO DATE At the outset I should like to emphasize my long-standing and continuing empathy with the purposes of the rural electrification program as originally conceived. When the program was initiated in 1935 less than 11 percent of the farms in this country had central station electric service.1 This figure and others similar to it relating to farms and percentage of farms electrified comes from data in my exhibit 1 which is a compilation by States of the number of farms then electrified for the selected years 1935, 1940, 1950, and 1965, all based on 1 See appendix, exhibit 1. figures from the Department of Agriculture REA release. The desirability of greatly extending such service, both to increase agricultural efficiency and productivity and to raise the standards of rural life, was generally recognized alike by farm organizations and their leaders, enlightened electric utility managements, and public officials. In various parts of the United States efforts were afoot to promote the extension of rural lines and the increased use of electricity on the farm. In New Hampshire, for example, during my years as chairman of the Public Service Commission we surveyed the situation and its potentials in cooperation with the Grange, the Farm Bureau Federation, the Extension Service of the State university and the leading electric utilities serving the State, and we actively encouraged them in the substantial liberalization of the terms under which rural extensions would be made. The result, as I recall it, was that about 65 percent of our farms were served prior to the formation of the first electric cooperative in the State under the aegis of the Rural Electrification Administration (hereinafter referred to as REA). But, despite the progress which was being made in many areas, it was apparent that more was required if a massive nationwide assault on the problem were to be mounted. During the Great Depression farm incomes had fallen to low levels and utility earnings had likewise declined; Federal assistance was deemed appropriate. Consequently, as a part of the emergency relief program, in 1935 it was proposed to allocate $100 million for rural electrification, to be administered by the REA created by Executive order. A year later the objectives, parameters, and administrative implementation of the program of Federal assistance were formalized by the Congress in the Rural Electrification Act of 1936.3 Except for the establishment of the fixed 2-percent interest rate on loans to REA borrowers in 1944* and the inclusion of rural telephone service in 1949,5 the basic philosophy and framework of this program has continued without congressional modification until the present time." KEY FEATURES OF CONGRESSIONAL POLICY It would serve no useful purpose for me to burden this expert body with a laborious review of all the details of either the legislation or the very considerable progress of rural electrification since its enactment. There are, however, certain key features of the congressional policy, as embodied in the terms of the act and in its legislative history, which I must stress before your honorable committee because they seem to me so essential to the basic concepts of the entire program that their abandonment or substantial modification-as proposed, or at least permitted, under the pending bills-could so drastically change its character and direction as to seriously undermine its economic soundness and acceptability. In broad terms, they are: (1) The fundamental and limited purpose of the program, which was to extend the benefits of central station electric service as broadly • Executive Order 7037, May 11, 1935. * 49 Stat. 1363, 7 U.S. Code, ch. 31, approved May 20, 1936. 458 Stat. 739, approved Sept. 21, 1944. 63 Stat. 948, approved Oct. 28, 1949. Rural Electrification Act of 1936, with amendments as approved to Oct. 23, 1962, U.S. Code. Title 7, ch. 31. as practicable throughout the rural areas of the country, but only to supplement rather than to supersede, the investor-owned utilities in providing this service. The Administrator was authorized to make self-liquidating, low-interest-rate loans from Federal funds for periods of not more than 35 years' to REA borrowers (although under the act available to utility corporations, as a matter of policy loans have predominantly been to rural electric cooperative associations which are generally eligible for exemption from Federal income taxes 8). That is pursuant to section 501(C) (12) of the Internal Revenue Code of 1954. But the context of the times, as well as the plain terms of the act imposing constraints upon the purposes for which such loans can be granted and used, make abundantly clear the firm intent of the Congress to limit the program as stated above. Thus, loans for rural electrification can be made only for financing or refinancing. This is a quotation from section 4 of the act: *** the construction and operation of generating plants, electric transmission and distribution lines or systems for the furnishing of electric energy to persons in rural areas who are not receiving central station service ** ** The term "farm" is conformed to the current Census Bureau definition: "rural area" is defined as one of no more than 1,500 inhabitants; and, understandably, service is authorized to nonfarm as well as farm customers in such areas.10 This is pursuant to section 13 of the act. The cumulative effect of the legislative emphasis upon providing service to lightly populated rural areas not now served, the absence of any specific authorization of loans for the acquisition of existing utility facilities, and the proviso that here, again, I am quoting from section 4: no loan for the construction, operation, or enlargement of any generating plant shall be made unless the consent of the State authority having jurisdiction in the premises is first obtained " is to reenforce the view that the Congress conceived the program as one which would be carried forward primarily through Federal assistance in the extension of rural distribution lines, without unnecessary and wasteful duplications of facilities, and without encroachment upon markets being served adequately and reasonably by established investor-owned utilities. Ample further support for these views is contained in statements made in Congress by active and well-informed proponents of the legislation. Thus the late Speaker, Mr. Rayburn, then chairman of the House Committee on Interstate and Foreign Commerce, said: We are not in this bill intending to go out and compete with anybody. By this bill we hope to bring electricity to people who do not have it. This bill was 7 Subject to extension for not more than an additional 5 years at his discretion, ibid., sec. 12. 8 Pursuant to action by the Internal Revenue Service under sec. 501(C)(12) of the Internal Revenue Code of 1954. Rural Electrification Act of 1936, op. cit., sec. 4. [Italic supplied.] Section 5, of course, authorizes also loans for wiring, equipment, etc., but these are neither of great magnitude nor directly relevant to the present discussion except as the proposed legislation would free such loans for diverse purposes from congressional control. See the comments of Hon. Harold D. Cooley, chairman of this committee, indicating objections to loans for industrial purposes, 87th Cong., 2d sess., House of Representatives, hearings before the Committee on Agriculture, Food and Agriculture Act of 1962, pt. 2, p. 324. 10 Ibid., sec. 13. 11 Ibid., sec. 4. [Italics supplied.] not written on the theory that we were going to punish anybody or parallel their lines or enter into competition with them.12 Likewise, the bill's sponsor in the Senate, Senator George W. Norris, stated: there will not be set up an organization and money loaned to it for the purpose of electrifying an area which is now being supplied. *There is no intention of going into a farming community which is already supplied with electric current and forming farm organizations there and having them build up to go into competition ** ** 13 And, again, Senator Norris noted: REA can make loans for generating plants but we must be shown conclusively (1) That energy is not available from any existing source. (2) That the proposed generating plant can produce energy at a lower cost than it can be obtained from any other source. (3) That the output of such plants would be used mainly for supplying energy for the use of local areas.14 (2) A second, and in my opinion no less important, key feature of the congressional policy to date is the continuing surveillance and control exercised by the Congress over the financial aspects of the program, including its overall dimensions, to some degree its direction and emphasis, and also its administratve cost.15 In exhbit No. 2, I have indicated the administrative costs over the years: In fiscal 1966, fundable obligations to REA and allocated to the electric program amount to about $6,600,000, and from the time of its inception to date they have had the considerable sum of $137 million-plus. While the Administrator is given reasonable flexibility in allocating the funds available for REA loans and in determining the terms and conditions upon which they are granted and repaid, the Congress itself retains and exercises, through its authority to authorize and appropriate, control over the aggregate amounts of Federal funds which shall be made available by the Secretary of the Treasury, with the approval of the Secretary of Agriculture, to the Administrator for rural electrification loans in each fiscal year.is This is section 3(a). Sums not loaned or obligated remain available during succeeding periods." This is section 2(e). All repayments of principal and payments of interest are covered into the Treasury as miscellaneous receipts.18 This is section. 3(f). These provisions constitute appropriate safeguards against the growth of the program beyond the magnitude intended by the Congress. In addition, by virtue of its review of requests for loan authorizations, the Congress is able to give a measure of direction and desirable legislative oversight to the purposes for which loans are granted and utilized. I shall refer in my statement to some of the comments of various committees having to do with this question. Thus, in 1962, a Senate committee had occasion to reiterate the purposes of and constraints upon the REA program in the following language: REA financing may not be used to extend service to any person who already has service from an investor-owned company. To the extent that [such] 12 Congressional Record, 74th Cong., 2d sess., vol. 80, pt. 5, p. 5283. 13 Congressional Record, 74th Cong., 2d sess., vol. 80, pt. 5, p. 2751 f. 14 Ibid., p. 2823. For fiscal 1966 administrative funds obligated for the REA and allocated to its electric program amounted to $6,613,900. From the time of its inception to date they have aggregated the not inconsiderable sum of $137,372,601. See appendix, table 2. 15 Rural Electrification Act of 1936, op. cit., sec. 3(a). 17 Ibid., sec. 3 (e). 18 Ibid., sec. 3(f). |