THE POTOMAC EDISON Co., Hon. HAROLD COOLEY, Chairman, House Committee on Agriculture, 2409 Longworth Office Building, Washington, D.C. DEAR CONGRESSMAN COOLEY: We respectfully request that this statement of our views concerning H.R. 14000 and H.R. 14837 be made a part of the record in connection with your current hearings on these bills. Copies of this letter are enclosed for distribution to members and staff personnel of the Committee. We oppose the financing plans proposed by these bills because: 1. They make a major change in public policy concerning the role of the Rural Electrification Administration by indirection without any forthright justification for the new role. 2. They commit substantial Federal funds to a program without providing either adequate criteria or continuing Congressional surveillance for the use of the funds. THESE BILLS CHANGE THE PURPOSE OF THE REA The Rural Electrification Act was passed to assist in bringing electric service to the rural-farm areas of our country. The Rural Electrification Administration has done a good job in fulfilling the purpose of the Act. According to the National Power Survey, 98% of the farms in America are now receiving electric service. With this job substantially accomplished, the REA and its borrowers understandably desire to undertake a new role for the future. We question the necessity for the role they have chosen. Certainly that role should not be subsidized by the Federal Government. The new role envisioned by cooperatives appears to be complete generation, transmission and distribution of their own power, with facilities subsidized by the government, to customers regardless of reasonably priced alternative sources of power and regardless of the character of the area served. Both bills embody this new role which represents a drastic change in the purpose of the REA. For example, H.R. 14837 Assumes money requirements of borrowers on a scale so vast that it must include financing of major generation and transmission projects; Specifically includes the so-called third criterion established by administrative action in 1961 to broaden the circumstances under which generating loans might be made; Omits prior requirements of the Senate and House Appropriation Committees that attempts be made to secure reasonable wholesale contracts before beginning generating projects; Omits safeguards against duplicate facilities; Omits the prior legal restriction that loans must be for "rural areas"; Subsidizes loans by Federal subscription of stock and by power to borrow from the United States Treasury without limitation to cover operating deficits; and Gives complete tax exemption to proposed bank and continues present Federal tax exemption for cooperatives. Proponents have not proven the need for their new role. On the contrary, there is no reason to believe major subsidized G & T projects are necessary for their future. Indeed, such projects would frequently displace planned facilities of private tax-paying utilities who intend to continue providing adequate, lowcost wholesale power at reasonable rates supervised by the Federal Power Commission. The power to make loans with complete disregard of such private facilities, even where adequate power is available at a cheaper price, is an economic luxury which can be justified only by a drastic change in Congressional policy concerning the REA. Similarly, complete disregard of the "rural areas" requirement drastically alters the economic justification for continued Federal subsidies. Such major policy changes should not be lightly or hurriedly made. We hope such major decisions will not be obscured by the complex details of the financing plans under consideration. INADEQUATE CONTROL FOR USE OF FEDERAL FUNDS Even assuming that the Congress finds the new role of the REA to be in the public interest, these bills establish program involving substantial Federal expenditures without providing adequate controls for the use of these funds. For example, H.R. 14837 Does not provide any meaningful criteria for making bank loans: Provides no criteria to determine which borrowers receive which of the several interest rates available; Provides no continuing control or surveillance by Congress : Provides no statutory limit on amount of funds which the bank could lend in any one year; Provides no definite requirement for repayment of the Federal investment; Does not provide for mandatory payment of interest or dividends on the Federal share of the bank's capital; Provides no public forum to challenge uneconomic or unwise bank loans; Requires no showing of financial necessity by borrowers; those cooperatives which have become financially self-sufficient should not be eligible for loans. Proponents of these bills have proven no need to have a program established by Federal funds but free of any meaningful criteria or controls for the use of those funds. We believe such unrestricted use of funds is unwise, especially where it can operate to finance wasteful duplication of utility facilities to the detriment of our pluralistic power economy. We appreciate the opportunity of presenting our views on these bills and will be pleased to furnish any information supporting these views which may be requested by the Committee. Sincerely yours, A. J. BOWEN, Vice President. STATEMENT OF SAN DIEGO GAS & ELECTRIC COMPANY San Diego Gas & Electric Company opposes the enactment of H.R. 14000 and H.R. 14837 for the reasons that they are in derogation of the defense effort; they are against the public interest; they will deprive the Congress of its announced intention to maintain a strict surveillance over loans made under the Rural Electrification Act; and this legislation would foster unfair competition. The following remarks are addressed to the creation of a Loan Account for and the establishment of a Federal Electric Bank: 1. In derogation of the defense effort "Your Government is determined to resist this aggresion at the minimum cost to our own people, to our allies, and to the world. "We shall stand with honor. We shall stand with courage. We shall stand with patience, and that is the stand Congress has taken and that is the stand we shall continue to take. It is the stand that the vast majority of Americans demand. It is the stand that free people of the world respect." Such is President Lyndon B. Johnson's commitment on Vietnam to the peoples of the world. It is of paramount importance. The diversion of any funds to implement legislation of the nature proposed by H.R. 14000 and H.R. 14837 would seriously hamper the defense program. The foregoing commitment is of overriding importance to the considerations of the subject now before this honorable Committee. In speaking about a similar bill, Senator Jack Miller of Iowa stated in part: "... If we are to avoid further inflation, any new federal financial commitments must conform to the requirements of a reasonably balanced budget, taking into account demands placed upon our Government by the war in Vietnam." The proposed bank would be started with a nest egg of $1 billion in government funds. Through its borrower power, this could be extended to $11 billion without limitation as to source. Tax-exempt electric operations will be increased, replacing or displacing taxpaying systems and thereby proportionally reducing Federal revenues. This severe impact on the economy by needlessly draining revenues would have a tremendously adverse effect on the defense budget and the consequent defense effort. The present 2% REA loan program will be continued with no ceiling on Congressional loan authorizations. It is reported that in 1964, $245,965,000, and in 1965, $299.790,000 of new loan funds were used by the REA for this program. Borrowers have proposed that $365 million annually should be additionally provided for the continuance of the present program. The siphoning of $1 billion to $11 billion for H.R. 14000, the diversion of another $750 million to $72 billion for H.R. 14837, would amount to $17 billion under H.R. 14837 and $211⁄2 billion under II.R. 14000 over the programmed fifteen years. This total of $381⁄2 billion does not include Class C and D bank stock nor sale of debentures. President Johnson's pledge, quoted at the outset of this statement not only announces his determination to resist the aggression. He promises that it will be". . . at the minimum cost to our people. It is difficult to reconcile a pledge by the President of economy in the defense effort with wasteful expenditure of more than $38% billion on the domestic front. We can only arrive at the conclusion that the diversion of these billions of dollars to finance this legislation would nullify the economy programs and would be in derogation of the defense pledge by President Johnson. 2. Against the public interest The nest egg of authorized government capital would be available to the REA cooperatives at interest rates of 3% or less for building generating plants and transmission lines, and for other purposes. The additional $10 billion of federal funds may be obtained by the Federal Electric Bank if necessary to pay interest or principal on its unsecured electric loans. These additional funds could be obtained by making and issuing notes to the Secretary of the Treasury at an interest rate not to exceed 3%. This rate is lower than what it costs the Treasury to borrow. At the same time, in issuing and selling debentures on the open market, the Federal Electric Bank would be authorized to borrow up to $10 billion. By providing capital at bargain interest rates, the proposed bank would increase and federally subsidize competition between REA cooperatives that pay no federal income tax and private utilities whose annual income tax bill is some $2.9 billion. Approximately two weeks ago, inquiry was made by the White House for an estimate of the amount by which investor-owned utilities could reduce their budgets for 1966. In his reply of May 11, 1966, Mr. Robert T. Person, President of Edison Electric Institute, pointed out that utilities, because of long range advance planning, are committed to capital expenditures several years in advance. The response did state that the utilities, in coperation with the President's efforts to alleviate inflationary pressures, could cut an estimated $200 to $225 million in such expenditures without materially impairing the requirements of the customers. It is impossible to reconcile the inconsistency of the two positions. On the one hand, the Chief Executive is requesting curtailment to keep down inflation. On the other, this legislation would issue a blank check to accelerate inflation. 3. Congress would be deprived of control. We understand that on February 9, 1966, at a hearing of the Agricultural Subcommittee of the House Appropriations Committe relating to the budget for the REA, the Honorable Robert H. Michel, Representative from Illinois, stated in substance to Mr. Norman M. Clapp, representing the Secretary of Agriculture: "I might say before moving on the next area that I thought the Chairman when he began this hearing put it very well what the concerns of individual members of this Committee have been, whether individually or collectively, on some of the practices of REA. We are always most anxious to see whether or not our warnings are being heeded and our suggestions are being followed. "You noticed that the House and Senate Appropriations Committees include language in their reports on the Agriculture and Related Agencies Appropriations bill in the 88th Congress instructing you before making loans for generation and transmission facilities to first attempt to obtain a reasonable power supply contract from existing suppliers and to make such a loan only when reasonable contracts cannot be obtained . . ." Section 903 (a) of the Rural Electrification Act, as amended, provides: "This Secretary of the Treasury is authorized and directed to make loans to the Administrator, upon the request and approval of the Secretary of Agricu'ture, in such amounts in the aggregate for each fiscal year, commencing with the fiscal year ending June 30, 1948, as the Congress may from time to time determine to be necessary (Emphasis added.) Section 903 (b) of the same Act states: "There are authorized to be appropriated such sums as the Conrgess may from time to time determine to be necessary for the purposes of this chapter as hereinafter provided." (Emphasis added.) Neither H.R. 14000 nor H.R. 14837 provides for the extension of any such controls by Congress. According to our interpretation of the provisions of H.R. 14000 and H.R. 14387, the following present Congressional limitations on the existing REA electrification loan program would not apply to loans made by the Bank. These limitations include: (a) Loans are not to be made to serve customers who have central station service. (b) Loans are not to be made to serve customers in places with a population of 1,500 or more. (c) Generation facilities to be financed by loans are subject to State approval. (d) Generation and transmission loans are to be made only when the Administrator cannot obtain a reasonable contract. It is our further understanding that Section 412, to be added to the Rural Electrification Act would provide that the operations, generating plants, transmission and distribution lines of borrowers from REA who have received loans under this section that have not been repaid would be subject only to the jurisdiction of the Administrator and of State authorities. This would apply even though many of these facilities and operations are involved in interstate commerce. This unavoidable conclusion follows: Once Congress has set up the Loan Account and the Electric Bank, it loses control. This control could not be recovered except by separate legislation. Such a recovery would be subject to delays and vagaries of political reality. 4. Unfair competition Although the REA was set up originally to bring electric service to the rural areas of the United States more quickly than could be done otherwise under the circumstances at that time, in recent years the emphasis has changed to the financing of generating and transmission facilities. Loans are made to G&T cooperatives at 2%-less than half the cost of money to the Federal Government-and no federal income taxes are paid. We understand that five out of six new cooperative customers are not farmers-they include suburban residents, businesses, manufacturing plants, and petroleum operations. We believe that it was never intended by the original REA act that government-subsidized power plants paying no federal income taxes should compete with existing tax-paying electric power suppliers. Congress in the last few years has been increasingly critical of loans for G&T purposes. As has been mentioned above, Congress has directed that such "loans should be made only where reasonable contracts cannot be obtained" for power supply. The power supply facilities which the G&T's and other borrowers would duplicate or displace would be those of the investor-owned tax-paying electric power companies which serve some 80% of the nation's people. These companies operate under regulations at all levels-local, state, and federal. The G&T's do not. The unfair subsidized competition represented by the proposals for a Federal Electric Bank not only threatens to nationalize the electric industry which has established America as the world leader in electric power supply, but in so doing could seriously affect the structure of the nation's entire economic system. We respectfully submit that H.R. 14000 and H.R. 14837 should be defeated. STATEMENT BY W. C. MACINNES, PRESIDENT, TAMPA ELECTRIC COMPANY, TAMPA, FLORIDA My name is William C. MacInnes, President of the Tampa Electric Company, Tampa, Florida. I am presenting this statement in opposition to H.R. 14000 and H.R. 14837. The Tampa Electric Company serves 182,000 customers in the vicinity of Tampa, Florida, located in Hillsborough, Pasco, Polk and Pinellas counties. Our service to the municipalities in our area is provided under the terms of franchises approved by the authorities in the respective city or county governments. The territorial boundaries of our company are adjacent to, or in some cases, overlapping with other power companies, municipal power systems, and electric cooperatives. The electric rates of the adjacent power companies are regulated by the Florida Public Service Commission and the Federal Power Commission. The electric rates of the municipal power system are regulated by the governmental authorities in that jurisdiction. However, the rates of the electric cooperatives are set by the cooperatives themselves without regulation by any governmental authority. With the gov ernmental subsidy provided in the past by the use of 2% loans, the electric co operatives have been able to provide service to their customers at competitive rates and have been able to build very healthy business enterprises. The electric cooperatives can now compete with other power suppliers in every respect. They have been able to provide for their power supply at extremely favorable rates either from power companies, governmental agencies, or their own resources. The electric cooperatives are now using the benefits of their favorable interest rates and almost unlimited funds to compete with other power suppliers who are heavy tax payers and who are subject to the effects of very high interest rates. Their cost of money is the key to the cost of electric energy and the competitive position of a power supplier. Therefore, a subsidy by way of lower interest rates than those prevailing in the open market and availability of unlimited capital which is provided the electric cooperatives under the terms of this legislation, gives the electric cooperatives a completely unfair advantage which will be financed by the tax paying public. This advantage is amplified by the exemption from taxation of cooperative enterprises. Should this legislation become law, the door will be wide open for electric cooperatives to compete for all customers on a very favorable basis to them but completely unfair to their competitors. This will be particularly true in the areas of commercial and industrial customers as has been proven by such agencies as the Tennessee Valley Authority and Bonneville Power Administration. This legislation will have the effect of permitting creatures of the government. which were set up to serve farmers, to become free agents and grasping unregulated monopolists with unlimited funds at below cost interest rates. It is easy to visualize the ultimate effect of this legislation. In the first place, it will permit electric cooperatives to secure non-farm customers at the expense of tax paying suppliers. Then the farm areas of our country, which we all want to preserve for their beauty and productivity, will become more desirable territories for commercial development. The blight of existing metropolitan areas will be accentuated because of this new form of subsidy to attract industry away from cities. In Florida and in the United States, we have electric systems, including electrie cooperatives, quite capable of raising their own funds for expansion. We see no possible need for the government to subsidize such an unnecessary bank as that proposed in H.R. 14000 and H.R. 14837 since electric cooperatives are quite capable of financing their own expansion if given the opportunity. Respectfully submitted. STATEMENT OF TYRE TAYLOR, GENERAL COUNSEL, SOUTHERN STATES INDUSTRIAL COUNCIL On May 25, 1966, at its annual meeting at Sea Island, Georgia, the Board of Directors of the Council unanimously approved the following statement: "The Council opposes government competition with taxpaying private enterprise in all fields of endeavor, including but not limited to transportation, home building, home financing, banking, consumer financing, insurance, fertilizer, and other manufactures. In particular, the Council opposes government encroach |