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years. Yet they claim that our projected needs for growth capital are greatly exaggerated. Kuhn-Loeb studies show the rural electric need at $92-billion in the next 15 years. REA's studies estimate it at over $8-billion.

We have no idea on what basis the power companies seem to reject these studies made by recognized experts in favor of their own judgment which has often been colored with considerable prejudice when it comes to matters affecting rural electrification.

There is a basic relationship between our being able to obtain adequate capital and the continuation of area coverage rural electric service. Surely the power companies understand this elementary fact of the electric business. For example, one witness, Mr. Shearon Harris, president of the Carolina Power and Light Co. underscored this point when he reported that electric utilities require about $4.00 investment in plant to produce $1.00 in revenue. I think he would agree that this heavy investment applies to the rural electric segment of the industry as well.

Another elementary fact that we believe the power companies are as aware of as we are is that there is little likelihood rural electrics will be able to obtain these large amounts of capital through the present REA program.

The need for supplemental financing is well-established, and in our opinion, the most practical and efficient way of supplying this need is through a bank for rural electric systems designed to bring private capital into the program. Most rural electrics have not yet reached the stage in their development where they can make an overnight transition from 2 per cent loans to the open market money rate, now about 51⁄2 per cent. But rural electrics which are able to pay more than 2 per cent are asking for the opportunity to begin the transition to complete financial independence of the Federal government.

In their efforts to substantiate their claim that supplemental financing is unnecessary, power company witnesses charged that the job of rural electrification is finished.

This claim is just as unrealistic as it was 30 years ago when the power companies first used it, at a time when only 11 per cent of the nation's farms had central station service.

We are confident that the 52-million families served by REA-financed systems would dispute the claim. They are buying electric appliances at a rate of over $1-billion annually and continue to use electricity in ever-increasing amounts. They expect their rural electric systems to be able to keep up with their demands for more and more power. To do so, rural electrics must have sufficient capital. Moreover, rural electrics are connecting to their lines 145,000 consumers every year. The job of rural electrification is no more finished than is the job of urban electrification.

Power company witnesses expressed the opinion that a Bank for Rural Electric Systems would lead to the gradual take-over by rural electrics of the power companies.

We would second REA Administrator Clapp's characterization of the charge as "preposterous."

The power company witnesses used this charge as a spring-board to repeat their attacks against cooperative generation and transmission systems. We have heard these same charges annually during appropriations hearings over the past several years. They are untrue and without foundation. We answered them previously and we will answer them again. Detailed rebuttal statements by representatives of the G-T systems that were singled out are being submitted for the record. The power companies would have you believe that REA-financed G-T systems will be able to put them out of business if G-T loans are available through the Bank. Under the proposed legislation such a development could never happen.

The picture they painted was a distorted one. The G-T co-ops now generate slightly less than 1 per cent of the nation's total eletricity, compared to 76.9 per cent for the power companies.

Actually, of the $92-billion capital that our studies show will be required in the next 15 years, approximately 47 per cent will be for G-T systems. This level of G-T financing will result in just about the same proportion of total input into co-op lines by G-T co-ops as presently exists-about 18 per cent, and will result in rural electric systems owning about the same percentage of the nation's generating capacity as of today. Much of the capital requirements of the G-T's will have to continue to come from the existing REA loan program.

We would like to stress that most of the capital for G-T systems will go to heavy-up existing systems, not for loans to start new ones.

In our opinion, the power companies' attack on cooperative generation is a smokescreen hiding their true motives. We believe they seek to destroy the G-T program, which they have traditionally opposed. If they are successful, they will, in effect, control the destinies of the rural electric systems. The inevitable result of this loss of rural electric bargaining power would be increased wholesale power costs and further restrictive clauses in power contracts.

The availability of G-T loans has provided rural electric systems with effective bargaining leverage in negotiating wholesale power supply contracts with hostile power companies. The instances of power companies demanding exorbitant wholesale rates are numerous. The right of cooperatives to borrow for generation facilities has been a basic factor in reducing wholesale rates. Furthermore, most of the REA-financed G-T plants would not have been constructed if the power companies had agreed to furnish adequate power at reasonable rates and without hampering restrictions.

The power companies claimed that they can supply power to rural electrics below the cost that our G-T systems are producing it for.

They avoided, however, mentioning some of the considerations which must be weighed in order to get an accurate cost comparison. I would like to mention a few of these.

In the first place, REA does not grant a loan for generation and/or transmission until after the existing power supplier has had an opportunity to submit an offer as to rates and terms. Therefore, one must examine the rates and terms offered by the power companies prior to approval of the G-T loan to make a valid judgement of the feasibility of a G-T loan. The wholesale rates at which the power companies now say they would supply power to the rural electric cooperatives, and the rate at which they were willing to do so originally, are usually poles apart.

Another consideration as important as the wholesale rate are the terms under which power is to be provided.

Many power companies have exercised effective control over the loads cooperatives can serve through the device of the dual rate clause. The clause provides for one rate for the electricity cooperatives purchase to serve small consumers and a much higher-often prohibitive rate for larger, more lucrative loads. The effect is to prevent cooperatives from serving the better loads in their areas and to permit invasion of the territories by power companies to pirate these better loads. Such restrictions impose severe handicaps on the ability of cooperatives to develop financial stability.

Other considerations that must be weighed to obtain an accurate comparison between the cost of wholesale power from the power companies and from G-T cooperatives are how and where it is delivered. The G-T systems, which are owned and controlled by the distribution cooperatives they serve, deliver the power to load centers and on the low side of the substations, which the G-T builds and maintains. The power companies, however, generally deliver at the point most convenient to them, which frequently makes it necessary for the cooperatives to construct expensive transmission line to pick it up, and also to absorb line loss. Amortization of the transmission line, substations, maintenance, and line loss must therefore be added to the wholesale rate charged by the power companies.

A less tangible consideration, but of major significance, is continuity of service. We believe the Northeast Blackout dramatically emphasized the primary impor tance of this factor. When power blackouts occur, the usual procedure is for the power companies to restore service first to their retail customers and last to our systems. Besides the inconvenience which the extra delay causes our member-consumers, there is substantial loss of revenue when the electricity is off. Cooperatives served by their own G-T systems do not have this problem.

The power companies have expressed fear as to their future prosperity if supplemental financing legislation is approved.

This, too, is a groundless fear and one they have been expressing for more than a quarter-century. Since the inception of the REA program, the power companies have prospered as never before. Their profits has risen steadily from $2-billion in 1937 to $2.3-billion in 1964. Their dividends have increased from $432-million in 1937 to $1.68-billion in 1964.

With the tremendous increase in population occurring mainly in their urban service areas, they can look forward to continued growth. All population experts

predict rapid expansion of metropolitan areas. No one seriously believes that rural electric cooperatives could serve the millions of people in metropolitan complexes. Nor that the amount of funds which the Bank will be able to loan will enable rural electrics to finance service to urban centers even if they wanted to do so, and they do not.

Rural electrics do not have the power of eminent domain. It is preposterous to believe power companies would sell them lucrative urban power markets, or that regulatory commissions would approve any such proposed sales.

Much was alleged by the power companies regarding invasion by rural electrics of power company territories as support for their contention that we are out to take them over including the cities they serve.

The truth is just the opposite. They are invading our territories. In some instances, they are gobbling up entire rural electric systems.

When cities extend their boundaries (as so many of them have been doing recently) to take in portions of our service areas, the power companies franchised to serve the cities demand that rural electrics pull up their lines and get out. When the rural electrics refuse, they claim we are invading their areas. These were formerly rural areas which had no electric service until our systems brought it. If we are required to give up the loads that we pioneered at considerable expense in the rural areas adjacent to the cities and along the highways, and if the number of farmers continues to decline, rural electrics will have a difficult time surviving. The loss of even a few hundred members is a very serious one for the average rural electric which serves only about 5,000

consumers.

In some states, the cooperatives and the power companies have been able to work out mutually satisfactory territorial agreements. However, too many states still have no statutory protection for the service territories developed by rural electric cooperatives. In this regard, it was ironic to bear the President of the Montana Power Company complain that co-ops in his state are invaders. His state does not have territorial legislation mainly because his company opposes it.

During 1965, the rural electrics in Montana supported two territorial integrity bills. One failed to pass the State Senate by a vote of 29 to 28. The second was approved by both houses of the State Legislature, but was vetoed by the governor.

The Montana Power Company strongly opposed enactment of both of these

measures.

We want to emphasize that we are much more concerned with the territorial problem than are the power companies. We want to settle it and welcome any opportunity to work with them towards this end. If they are truly fearful that rural electrics are out to take them over, it would seem to us that they would be willing to support state legislation that would give them and us protection against invasion.

The power companies charged that the Bank will have carte blanche authority to make loans.

This is untrue. Loans could be made only to previous REA borrowers engaged in rural electrification or associations owned by these borrowers, and for the purposes of rural electrification.

In an apparent effort to discredit rural electric cooperatives, the power companies had much to say about the large amount of taxes they claim to pay as compared to the amount our systems pay.

Here again they gave a distorted picture. In fairness to the rural electrics, the matter should be put in proper perspective.

Even the power companies admitted that rural electric systems, with few exceptions, are subject to the same taxes as the power companies with the exception of Federal corporate income taxes.

The reason for the latter exemption is that rural electric cooperatives are nonprofit organizations. They do not have income on which to pay Federal income taxes. If the power companies chose to operate on a non-profit basis they, too, would be exempt. We doubt that they would since they have benefitted substantially by being allowed to keep a sizeable portion of the taxes they collect from their customers as part of the charge for electricity. As of the end of 1964, the amount retained by the nation's larger power companies for their own use was $1.8-billion. These are called deferred income taxes.

Moreover, according to a Federal Power Commission report, these power companies also accumulated $94.4-million in investment tax credits during 1964 of

which $93.2-million went to reduce their taxes. During the period 1962 (when the credits became available) through 1964, they accumulated a total of $237million in tax credits. Over the next 15 years, the accumulations could amount to billions of dollars.

In addition, the FPC reports that through 1964 Class A and B electric utilities accumulated deferred taxes attributable to accelerated amortization (Section 168 of the 1954 IRS Code) amounting to more than $1.1-billion, and another $711.4million by 1964 through liberalized depreciation (Section 167).

We believe that the full amount of the taxes they collect should be turned over to the government or returned to their customers in the form of rate reductions. In many cases they are using these retained taxes to invest in their plant. This is the equivalent of raising interest-free capital from their customers. То геquire the rate payer to contribute capital from which he receives no return, but upon which the power company earns future returns, is not defensible.

Power company representatives argued here that under liberalized depreciation their companies pay less in taxes in the early years and more later on. This does not happen. In 1955, Robert Eisner, a prominent utility expert, writing in the Harvard Business Review explained why:

"It should be clear from the foregoing evidence that the new methods of accelerated depreciation authorized in the Internal Revenue Code of 1954, and particularly the years-digit method, offer management the opportunity to make considerably increased annual depreciation charges for an indefinite period, and, consequently, very great tax savings. Moreover, contrary to erroneous general belief, these tax savings will be permanent-at least as long as the law remains in effect. In no legitimate sense may they be considered tax deferrals."

It was mentioned by some power company witnesses that the tax reductions were provided by the government to business to provide an incentive to expand their plants. This is true, but no such incentive was required for the power companies to build plants they would have to build anyway in order to meet their public utility responsibilities under the law. They cannot defer adding capacity to meet growing power needs.

From their statements it might be concluded that they question the right of people to operate enterprises on a non-profit basis. Their demands that rural electric cooperatives pay Federal income taxes could be so interpreted.

Certainly they must realize that there are other justifications besides profit that lead people to create organizations. One of these is service. That is the motive for which electric cooperatives were formed. Rural people were not interested in making profits from each other. They were interested in providing themselves with a service which they were not able to obtain from existing power suppliers. Whatever margins result are returned to the owner-consumers as a refund of capital which the members have contributed. The power companies do not pay taxes on their margins either since the fair return they are permitted to earn is a net figure after taxes and all other expenses are deducted.

During the hearings, some company officials tried to create the impression that rural electric cooperatives and public power are synonymous, and, as such, are not part of private enterprise. That is not so. Rural electric cooperatives are locally-owned and locally-operated private enterprises.

It is unfortunate that the power companies used these hearings as a platform from which to vilify the reputation and objectives of the nation's rural electric systems for the apparent purpose of persuading the Congress to close the door on rural electrification.

We are confident that the members of this Committee will reject these self-serving accusations in considering the legislation before them.

We are also confident that the members of this Committee understand the great benefit that rural electrification has brought to not only rural areas but to the nation as a whole. And that its continuation is important to the future of the nation, particularly to rural America. Future progress in rural America, to a great degree, depends upon rural electric cooperatives which are among the few viable rural institutions remaining. Besides providing dependable, reasonablypriced electricity, they are helping significantly in rural development and the war against poverty programs.

The ability of our systems to get on with the job which Congress assigned many years ago depends upon the establishment of a Bank for Rural Electric Systems. Mr. POAGE. If there is any other witness here who wants to be heard this morning, we will try to hear everybody who wants to be heard on

this matter. We have completed the list which is before the Chair. Is there anyone here who wants to be heard for or against this bill? If so, we will try to hear you now.

Let the record show that nobody has indicated that they wanted to be heard.

That, then, will complete the hearings on this legislation, and the committee will stand in recess until 10 a.m. in the morning.

(Whereupon, at 12:25 p.m., the hearing was concluded, and the committee recessed until 10 a.m., Thursday, June 23, 1966.)

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