mental and injurious to the investor-owned electric utility industry and, ultimately, to the nation's entire economic system.

I should like to express appreciation for the opportunity of presenting my views to the committee.

STATEMENT OF R. G. MACDONALD, PRESIDENT OF WEST PENN POWER COMPANY

My name is Robert G. MacDonald. I am President of West Penn Power Company which is an investor-owned electric utility producing and selling electric energy in 17 counties of western Pennsylvania. West Penn is an operating subsidiary of the Allegheny Power System.

My Company has interconnections with Duquesne Light Company, Ohio Power Company and Pennsylvania Electric Company and with Monongahela Power Company, an affiliated company in the Allegheny Power System. It also has minor transmission facilities for the sale of electric energy in Pennsylvania at wholesale to the Central Electric Cooperative, Inc. and the Tri-County Rural Electric Cooperative, Inc.

I have requested permission to present this statement because I am concerned about the effect of H.R. 14837. My concern is that it will subsidize competition with investor-owned electric companies, including my own. I am concerned also because I believe it will impose an unfair tax burden on all Federal tax payers, including my Company.

The present Federal Rural Electrification program is based on the Rural Electrification Act which Congress adopted in 1936. This Act permits the Federal Government, through the Rural Electrification Administration, to lend money "for rural electrification" to rural electric cooperatives and others for the purpose of furnishing "electric energy to persons in rural areas who are not receiving central station service". This Act defines "rural area" to mean any area "not within the boundaries of any city, village or borough having a population in excess of fifteen hundred inhabitants * * *". The purpose of these limitations was to prevent wasteful and unnecessary duplication of facilities and to prevent competition with existing utilities.

Since 1936, the Rural Electrification Administration has lent $4.7-billion to rural electric cooperatives on 35-year loans at a 2% interest rate.

This program was intended to foster rural electrification by giving financial assistance and subsidies to rural electric systems. The cooperatives have been and are heavily subsidized. They receive substantial subsidies of two types. First, they pay no Federal income taxes. Second, they borrow money from the Rural Electrification Administration at 2% interest although the cost of money to the Federal Government is over 4%.

Despite the fact that the cooperatives are non-profit organizations which pay no income tax, it is my understanding that some 977 borrowers from the Rural Electrification Administration had built up a total net worth by 1964 of $1,057,940,000 arising from retained earnings and representing some 24.8% of their assets. There is no doubt that the two cooperatives which purchase power from West Penn Power Company are thriving, prosperous and expanding organizations.

I believe that the rural electrification program has now fulfilled its purpose of bringing electricity to rural areas. Over 99% of all farms in this country have electric service from either rural electric cooperatives, investor-owned electric companies, or other types of power suppliers. The remaining one percent of the Nation's farms have electric service available with negligible exceptions. Despite this fulfillment of purpose, the REA loan subsidy program continues to grow. Each year the cooperatives request greater appropriations for the rural electrification program.

My industry has noted with concern that in the last few years the Rural Electrification Administration has been shifting the principal purpose of the loans which it makes from that of providing distribution facilities to that of providing generation and transmission facilities. In 1965, over 60% of REA loans were made for generation and transmission facilities. The growing use of REA loans for generation facilities represents a definite competitive threat to the investor-owned electric industry because the effect is to displace or replace electric energy which the rural electric cooperatives have been buying or would buy from investor-owned electric companies. From my standpoint. it is alarming that this shift has continued even though the average cost of power pur

chased by the cooperatives from investor-owned companies is substantially lower than the average cost of power generated by the cooperatives themselves.

The continuing expansion of the REA program and its growing emphasis on loans for generation facilities have caused criticism in Congress over continued Federal loans to the cooperatives at subsidized rates. As a reaction to this criticism, the cooperatives are now suggesting to Congress and to the public that new legislation-such as the Cooley Bill-would pave the way for the rural electric cooperatives to become free of reliance on Federal loans at 2% interest and would permit transferring the burden of their financing from the tax payers' shoulders to the private money markets. However, as I understand the Cooley Bill, it contains little that would lessen the cooperatives' dependence on government subsidies.

I do not pretend to be an expert on rural electric cooperative financing. I am neither a lawyer nor an economist. However, as a layman who is heading a business enterprise which has two rural electric cooperatives operating in some of the same territory as my Company does, I am acutely aware of certain basic features of H.R. 14837 that threaten harm to the investor-owned electric utility industry as well as to all Federal tax payers.

I cannot help but note that H.R. 14837 would actually continue unchanged and undiminished, and for an indefinite future, the existing program of furnishing subsidized loans to the rural electric cooperatives at 2% interest. It would supplement it, not replace it, with an additional loan program to be administered by a proposed Federal Electric Bank. Not only would the proposed bill continue all existing subsidies, it would also create new ones. In addition, loans made under the supplemental program would be free of important limitations written in the existing law and would also be free of any annual Congressional review and effective Congressional control.

As I understand it, the proposed electric bank would obtain capital from three sources. The first and most important source would be a Federal governmental subscription of $750-million to Class "A" stock. This money would be raised by creating a rural electrification loan account in the United States Treasury and by diverting to the purchase of Class "A" stock of the bank, to the extent of $50-million a year for 15 years, payments made by the REA to the Treasury on REA loans heretofore or hereafter granted.

A second source of capital for the proposed bank would be stock of other classes subscribed by the Bank's borrowers and their customers.

The third source of capital would be the proceeds from the sale of debentures which the Bank would be empowered to issue. These debentures could be issued in amounts up to ten times the amount of the Bank's paid-in capital and surplus. This means that the Bank could have a lending capacity of well over $8-billion, which to me is a rather staggering sum.

The Bill provides no certain requirement that the Federal contribution of $750-million to the Bank's capital be repaid. As I understand it, repayment would be at the discretion of the Bank's directors. Moreover, the Bill contains no definite requirement that the government be paid a return on this capital by way of interest or dividends.

The Bill provides that the debentures which the Bank may issue are not guaranteed by the Federal Government, but to my layman's way of thinking they would be guaranteed in practical effect. This result comes about because the proposed Bill provides that if the Bank decides that it has insufficient funds to pay interest or principal on its debentures, it can get the funds needed by issuing notes to the Secretary of the Treasury. This provides a very unusual and effective backup for the debentures by resorting to Federal funds. I am told that no comparable provision exists with respect to the debentures of the other Federal agricultural credit banks after which the proposed Electric Bank is supposed to be patterned.

Loans made by the proposed Bank to rural electric cooperatives would be for a 50-year period and would be of two types: (1) So-called "intermediate loans" which could not bear interest over 4%, and (2) other loans which would bear interest at a rate reflecting the current average cost of money to the bank. While the Bill does set up certain limitations for these two types of loans, it sets up no clear-cut criteria to be used by the Bank's Governor in determining which type of loan can be made in a given case. It is true that the Bill provides that intermediate loans should not be made to a borrower who is determined by the Bank's Governor, under standards to be established by the Secretary of the Treasury, to be "capable of both paying the interest rate applicable *** to

loans other than intermediate loans and achieving the objectives of the Federal rural electrification program", but the test is so illusory that the choice of which type loan would seem to be left largely to the discretion of the Bank's Governor. Although some limitations are provided for loans made by the Bank, the Bank's loans are freed of certain limitations as to purpose or area which are written in the existing law. I am frankly concerned by the fact that the Bank's loans can be made for any type of electric generating, transmission or distribution facilities, and for use in any geographical area without regard to its nature and without regard to the presence or absence of existing electric facilities from which adequate electric service may be obtained at reasonable rates and on reasonable terms. The Bank's loans are in no way limited to rural areas or to serve persons not receiving central station service. In fact, they are not even limited to the supposed purpose of rural electrification.

I feel that this legislation is wrong in principle and contrary to the public interest for several reasons:

(1) I do not believe that any showing has been made or indeed that any showing can be made that a Federally financed and subsidized bank is needed to finance the continued expansion of the rural electric cooperatives.

(2) The proposed program creates additional subsidies for the cooperatives because the so-called "intermediate” loans will largely be made below the cost of money to the Federal Government. A large element of the subsidy exists also in the fact that the United States Treasury's contribution to the Bank's capital-$750 million-would be made without being subject to any definite requirement of earning a return or even of being repaid.

(3) The proposed program would be free of effective Congressional scrutiny and control and free from the loose controls which exist in the present REA loan program.

(4) The proposed program would produce further and constantly increasing losses of Federal tax revenues. The rural electric cooperatives pay no Federal income taxes, whereas investor-owned electric companies as a group comprise the Nation's largest income tax payers. To the extent that the cooperatives conduct business operations which can be or are performed by tax-paying companies, the Federal Treasury loses income tax revenue and the burden of running the government is unfairly shifted to other taxpayers, including the investor-owned electric companies. As the business operations of the cooperatives grow, so do the tax losses. In effect, the program would subsidize an increase in the loss of Federal tax revenues.

In conclusion, it is my belief that the present rural electrification program needs modification. I believer, however, that the change needed is not one of granting further Federal subsidies to the cooperatives, but rather one of eliminating or restricting drastically the present subsidized loan program.

ALABAMA ELECTRIC COOPERATIVE, INC.,
Andalusia, Ala., June 21, 1966.

AIR MAIL

Hon. HAROLD COOLEY,

Chairman, House Agriculture Committee,
Longworth House Office Building,
Washington, D.C.

DEAR SIR: I have continued to read with some amazement the statements of the above gentlemen as most recently submitted to the Committee on Agriculture, House of Representatives, with respect to certain aspects of Alabama Electric Cooperative's operations and actions, as well as those of REA. I say “continued” because erroneous and misleading statements of similar content have been made over the past four or five years by these gentlemen to Congressional Committees whenever rural electric legislation has been under consideration.

I hope that by the inclusion of this letter in the hearing record, the Committee will be reminded of certain facts already established with respect to these charges and allegations. The facts that I wish to present at this time may be found in the published records of the House and Senate Committees on Appropriations, and in other public documents.

The allegations of these gentlemen encompass: (1) the making of an arbitrary, useless and duplicating loan for generation and transmission purposes to Alabama Electric by REA in 1961, (2) the extension of "expensive" service by Ala

bama Electric Cooperative to Choctawhatchee Electric Cooperative (Chelco) in Northwest Florida in 1958, and (3) the rendering of service by Chelco and Alabama Electric to a radar installation at the Eglin Air Force Base reservation in Northwest Florida. Like a broken record, we have heard these statements and charges many, many times either before Committees of Congress, the Alabama Director of Finance, the Alabama Public Service Commission, the Federal Power Commission, the Circuit Court of Montgomery County (Alabama), the Supreme Court of Alabama, the Federal District Court for the Southern Division of Alabama, and the U.S. Fifth Circuit Court of Appeals.

As to the making of a $20,350,000 loan to Alabama Electric Cooperative in 1961, virtually all of Mr. Bouldin's charges were completely refuted by our Mr. John Hill or myself in testimony before the House Committee on Agriculture, Part 2, 87th Congress, 2nd Session, (pp. 996-1008) in 1962, and before the House Subcommittee of the Committee on Appropriations, Part 5, 88th Congress, 1st Session (pp. 609-618) in 1963, as well as by the REA Administrator before the House Subcommittee of the Committee on Appropriations in 1963, Part 5, 88th Congress, 1st Session (pp. 2471-2474). They were also argued before the Alabama Director of Finance during a long, expensive and open hearing to determine whether or not Alabama Electric should be authorized to borrow this money from REA, in which both Alabama Power Company and Gulf Power Company appeared and bitterly opposed the approval of the loan. As revealed by the Alabama Supreme Court's decision upholding the order of the Director of Finance consenting to the loan (Alabama Electric Cooperative vs. Alabama Power Company, 176 So. 2d 483), the evidence before the Director of Finance showed that (a) the need and demand for electric power is growing in Alabama and an additional power supply was beneficial to the State, (b) many elected public officials and other citizens testified that the proposal was in the public interest and there were numerous resolutions of county and city governing bodies, industrial development boards, civic clubs and farmer associations to like effect, (c) the distribution cooperatives to be served with the additional facilities expressed their desire to serve themselves rather than to be dependent on Alabama or Gulf Power Companies, who were considered to be unfriendly sources of wholesale power, (d) the construction of the facilities would provide a payroll of approximately $5,000,000 during construction and create 25 to 30 new permanent jobs and that the new plant would consume about 225,000 tons of Alabama coal annualy, (e) Alabama Electric would save $5,445,000 over ten years if it supplied its own energy rather than purchase its deficiencies from Alabama Power Company, and (f) any duplication of Alabama Power Company's system would be of a minimal nature. The Court said "it is impossible to read the testimony presented to the Finance Director in behalf of the application and not hold that there was substantial evidence . . . that the issuance of the bonds in question would serve some public need and be in the public interest."

The point of this summary recitation of facts, as well as the above citations to testimony before Congressional Committees by the Administrator, Mr. Hill and myself, is simply to demonstrate that Alabama Power Company and Gulf Power Company have had all the forums and all the hearings that could conceivably be desired by any reasonable person as to the merits of the making of this loan, and that Mr. Bouldin's contentions that they are being denied some substantive right by not being permitted a full blown administrative hearing before the REA Administrator are utterly ludicrous. Under Mr. Bouldin's concept of The Golden Rule, Alabama Power Company has had a sufficient opportunity to "do unto others."

Mr. Lilly contends that while negotiations were taking place in 1958 between his Company and Chelco, the Cooperative was building a line to take service from Alabama Electric Cooperative without the Company's knowledge and that the electric service rendered by Alabama Electric to Chelco was more expensive than similar service rendered by Gulf Power. As disclosed by Mr. John R. Pentecost, General Manager of Chelco, in a statement submitted in hearings of the Senate Subcommittee of the Committee on Appropriations on H.R. 6754, 88th Congress, 1st Session, pp. 270-273, in 1963:

"Prior to 1958, our cooperative, although a long-term member of Alabama Electric Cooperative, purchased all its power requirements from Gulf Power Company at four delivery points. On March 17, 1958, the President of Gulf Power Company delivered to me a letter canceling all contracts at all delivery points upon the respective dates of expiration of their current terms. . . . Similar

letters of cancelation were delivered to the other three rural electric cooperatives which they served. Our first delivery point affected was at Laurel Hill, Fla., on September 20, 1958; the second was Baker, Fla., on December 20, 1958. On July 3, 1958, we received a new proposal from Gulf Power Company which would have increased the average cost per kilowatt-hour at Laurel Hill from 7.586 mills to 9.978 mills, and at Baker from 7.435 mills to 9.874 mills. This is an increase of over 35 per cent.

*

"Since the expiration dates of the terminated contracts were rapidly approaching, we accepted the proposal of Alabama Electric Cooperative (affording a savings of 21 percent and 16 percent, respectively, at Baker and Laurel Hill as compared with the proposal of Gulf Power Co.). By working day and night we managed to get service to these two delivery points by the dates the contracts were terminated by Gulf Power Co."

Gulf Power's asserted discrepancy between its rates and Alabama Electric's power rates was refuted also by Mr. Clapp before the Subcommittee of the Committee on Appropriations, U.S. Senate, on H.R. 6754, in 1963, p. 58. He pointed out that such comparisons were not at all accurate and that the 1962 Gulf Power Company true cost of power to Chelco was 9.05 mills as compared with an 8.2 mill average cost to Chelco from our system.

Mr. Lilly would have your Committee believe that Gulf Power Company's proposal to the Air Force for service to the radar station near Portland, Florida, would save the taxpayers' money. He also leaves the impression that Gulf Power had facilities in the immediate area which would have been used to serve this load. The proposed method of Gulf Power service to this radar station is illustrated by a map appearing on page 159 of the hearings before the Subcommittee of the Committee on Appropriations, U.S. Senate, 88th Congress, 1st Session on H.R. 6754. As pointed out by Mr. Pentecost on page 272 of the same hearing record. Gulf Power would have had to build 81 miles of 115,000 volt transmission line to serve this load which is located in a rural area Chelco has served for over 20 years. Moreover, Mr. Pentecost stated that the United States would save $33,750 net per year under Chelco's proposal, giving consideration to Gulf Power's income tax.

Executives of Alabama Power Company have repeatedly testified in hearings held in this State that they considered the entire State of Alabama south of the TVA service area as their service area. At one of the many fruitless negotiating sessions between that Company and the cooperatives in this State, one of their chief attorneys made the statement that "We are out to gut you" and that statement has not yet been refuted by the Company. When your Commitee takes into consideration such statements, I am sure that you will see wherein the real interests of Alabama Power Company and The Southern Company lie. Please do not hesitate to call on me if I can supply any additional information to your Committee.

Yours very truly,

BASIL THOMPSON, General Manager.

STATEMENT OF JERRY L. ANDERSON, ACTING GENERAL MANAGER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION, REFUTING CHARGES MADE BY POWER COMPANY WITNESSES BEFORE THE HOUSE AGRICULTURE COMMITTEE JUNE 1966

Mr. Chairman and gentlemen of the Committee, you gave us permission to answer the power companies' charges before your Committee against the rural electrification program and you requested of us certain further information. This is our refutation and the information.

My name is Jerry L. Anderson. I am Acting General Manager of the National Rural Electric Cooperative Association.

In general, the testimony of the power company representatives expressed similar views both in respect to the legislation and to the rural electrification program. I would like to comment briefly on some of the major points they raised.

They questioned the need of rural electric systems for additional growth capital.

We find their position extremely illogical in view of the fact of their own announced plans to spend $115-billion to expand their own facilities in the next 15