to operate on a self-sufficient basis, and at the same time would meet every reasonable future need of the REA borrowers.

RURAL ELECTRIFICATION ACCOUNT

The plan or approach which we support begins with a major concession on the part of our industry. A few years ago many of us appeared in opposition to the establishment at that time of a revolving or loan account because it would have provided broad administrative discretion without adequate congressional controls. Today we believe a loan account can be implemented with safeguards and congressional controls that eliminate our earlier objections.

We, therefore, support an amendment of the Rural Electrification Act of 1936, as amended, to establish a loan account on the following basis:

The loan account would have generally the same assets as provided in title III of H.R. 1400: notes now held by the Administrator on existing loans; undisbursed balances of loans previously approved; unexpected balances of funds previously appropriated but not yet advanced; and future collections of principal and interest on outstanding loans.

The loan account would have initial assets of over $4.4 billion, and would receive future payments of principal and interest on outstanding loans from REA. These are estimated in the budget at $234 million in fiscal year 1967 and $243 million in fiscal year 1968.

A study conducted by the Edison Electric Institute, which will be presented later by Mr. Thornborrow, indicates that there would be sufficient liquid assets in the loan account to meet the needs of those distribution borrowers who would be financed by direct loans. Congress should authorize, in the Agriculture Appropriation Act each year, the aggregate amount of funds that might be used by the REA Administrator to make direct loans from the loan account.

AMENDMENTS TO THE BASIC ACT

Certain amendments to the present act would be appropriate in connection with the creation of the loan account and a supplementary financing program.

Section 4 should be amended to provide that future REA direct loans be for distributiton purposes only. It also should provide that such loans be made only to borrowers which the Administrator determines, in accordance with statutory criteria, cannot afford to pay the interest and premium charged under the insured loan program (which I shall describe later) and continue service at rates equivalent to those in contiguous and comparable areas. Loans for generation and transmission (G. & T.) purposes would be obtained from private lending institutions under the insured loan program.

The statute should provide for a flexible interest rate, ranging from 2 percent up to a rate sufficient to cover the cost of money and administration to the Government. The Administrator should examine the financial ability of each distribution applicant, and, in accordance with the statutory criteria mentioned above, charge the full rate unless

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the applicant could demonstrate that it could not afford to pay the full rate and continue service at rates equivalent to those in contiguous and comparable areas.

Since the loan account would be self-sufficient, section 3 of the present act authorizing future appropriations should be repealed. Section 5 of the present act, authorizing loans for wiring of premises and acquisition of applicances should also be repealed. The demands for electric energy in rural areas have been increasing steadily, and this stimulus is no longer needed.

SUPPLEMENTARY FINANCING THROUGH INSURED LOANS

In addition to his authority to make direct loans to many distribution borrowers, the Administrator should be granted new authority, under appropriate statutory criteria, to facilitate private supplementary financing by insuring loans obtained from private sources. In all cases, the insurance program would be available only to further the historical objective of the rural electrification program-to finance the furnishing of electric energy "to persons in rural areas who are not receiving central station service." This program would be patterned after the one administered by the Farmers Home Administration.

I feel sure that many members of this committee are cognizant of the effective way the Farmers Home Administration has met its objectives through a combination of direct and insured loans. I feel sure that the same combination could be successful in the REA program.

All future applications for generation and transmission (G. & T.) purposes would be handled by the Administrator under this supplementary financing program. In addition, there should be a gradual transition by the distribution borrowers from the direct loan program to the insured loan program whenever the distribution borrowers achieve a degree of financial strength which will enable them to finance under the insured loan program.

The cooperatives would be able to borrow from private lending institutions, since the loan would be covered 100 percent by insurance from the Federal Government if the statutory criteria are met. Without such insurance, many cooperatives admittedly would have difficulty in obtaining funds from private lenders. But with such insurance, our discussions with private lenders indicate that the cooperatives would have no difficulty whatsoever.

An insurance fund to cover any losses under the insurance contracts would be established. The initial appropriation by Congress would be $1 million, and the borrower would pay an insurance premium into the fund. The initial premium would be not less than one-half of 1 percent per year of the outstanding balance of each insured loan.

The statute should provide criteria to govern the Administrator. In the case of applications for insurance of loans for G. & T. purposes, the criteria should provide that Federal insurance should not be provided when an adequate supply of electric energy at reasonable rates from existing suppliers is available to consumers in the area to be served. A rate would be deemed reasonable if regulated by a Federal

or State regulatory commission. If not so regulated, a rate comparison would be made, after adjusting the borrower's estimated rate for differences in Federal, State, and local taxes paid by the borrower's proposed facilities would produce a lower rate. Such criteria would avoid duplication, and prevent construction of unnecessary and expensive generation and transmission facilities.

Applications for insurance contracts for G. & T. loans should be reviewed at a public hearing at the request of any interested party who might be insured by the loan, including competing suppliers. Decisions by the Administrator on these applications would also be subject to review by an objective regulatory agency and by the courts. As with direct loans, Congress should authorize the total amount of loans which might be insured by the Administrator each fiscal year. The program, however, would be self-supporting, and except for the initial $1 million to begin the insurance fund, would not require funds from the Federal Treasury.

THE BENEFICIARIES UNDER THIS PLAN

Mr. Chairman and members of the committee, I said earlier that this plan should receive wide acceptance.

The cooperatives, under this plan, would have ample funds to meet their real needs, present and future. This program could be put into effect immediately.

The distribution borrowers should clearly prefer this plan, because the funds in the loan account would be reserved for their benefit, and the low-interest rate loans could be made only to them.

The President and the Bureau of the Budget should prefer the insured loan approach because it removes REA financing from the annual budget. The direct loans would be funded from the loan account. The insured loan program would also be self-sufficient, since the premium charged for insurance would cover administrative costs and a reserve for losses.

The REA Administrator, considering this proposal objectively, should recognize that it has considerable merit from his point of view. The insured loan program would be administered solely by the Administrator, and, as shown by the experience of the FHA which makes both direct and insured loans, it could be done easily and efficiently. The administration would be simplified because the statute would place all G. & T. applicants in the insured loan program, and would provide a financial test to guide distribution borrowers as to whether they qualify for a direct loan or should go the insured loan route. Local privately owned financial institutions should obviously prefer this plan, both from a philosophical and a practical point of view. The insured loan program would utilize local lenders and the private money market; the Federal Government would act only in the role of an insurer. In time, many borrowers would not even need the Government insurance and could obtain their new capital requirements directly from private lenders.

All the taxpayers should appreciate this proposal.

The insured loan program would not involve any further Federal funds, except for the initial appropriation of $1 million for the in

surance fund. The local account program would also not require any new funds from the Treasury.

The Congress should prefer this plan because it resolves the annual controversies over REA appropriations and the thorny problem of supplemental financing for REA borrowers, and yet provides for adequate congressional controls.

Under this plan, the Congress would specify two figures each fiscal year: the aggregate amount of direct loans for distribution purposes which might be made by the Administrator, and the aggregate amount of private loans which might be insured by the Administrator. This would enable Congress to review the program each year, and to provide the necessary funds under congressional oversight.

This plan would assist the cooperatives in achieving their legitimate purposes under the existing statute-that is, to provide service "to persons in rural areas not receiving central station service." It would provide ample funds from the loan account for distribution purposes, and would provide the funds for financing G. & T. facilities that meet the statutory criteria.

CONCLUSION

The plan I have described meets the paramount test of the overall public interest. It protects the needy REA distribution borrowers; it provides a means for immediately infusing private funds into the REA program for use by financially strong distribution borrowers and G. & T. borrowers; it provides statutory criteria which would protect other suppliers of electric energy and their customers; it would be easily and efficiently administered; it would protect the Treasury and benefit the taxpayers; and, finally, it would provide for meaningful congressional controls.

We respectfully urge this committee to give careful consideration to the plan I have described. We specifically request that no final action be taken on H.R. 1400 until this concept can be fully heard and understood.

The CHAIRMAN. We thank you, Mr. Harris.

Mr. TEAGUE of California. Mr. Chairman, might I have permission to insert into the record H.R. 7392, with a brief explanation?

This bill in essence embodies the recommendations that Mr. Harris has made.

I make that request.

The CHAIRMAN. I do not want to be technical about these things. I thought that we had agreed some time ago that we would not insert bills into the record.

Mr. TEAGUE of California. I understand that the other bills that are listed have been inserted into the record.

The CHAIRMAN. They are? I think that this has been the precedence of the committee. I think it has been a bad precedent of inserting the bill which is under consideration into the record. I think that is a mistake, one that we ought to correct, because I can see no purpose in the world of reprinting a bill in the record when the bills are already printed and are available.

I think that we ought to adopt some plan here about that.

But this is not the proper time, I think, to take up the time of these gentlemen to discuss this.

I do not think personally that any of the bills ought to be inserted into the record.

Mr. TEAGUE of California. I will put it this way: If H.R. 1400 is printed in the record, that H.R. 7392 also be printed in the record. The CHAIRMAN. The committee might discuss this whole matter, as to what bills ought to go into the record. I do not think that any of them ought to go into the record.

Mr. TEAGUE of California. Thank you.

The CHAIRMAN. Mr. Clapp, if you will proceed?

Mr. CLAPP. Next is Mr. Cohn.

STATEMENT OF HERBERT B. COHN, VICE PRESIDENT AND CHIEF COUNSEL, AMERICAN ELECTRIC POWER SERVICE CORP.

Mr. COHN. Mr. Chairman, Mrs. May, and gentlemen of the committee, my name is Herbert B. Cohn. I am vice president and chief counsel of American Electric Power Service Corp. I am also a vice president of each of the operating electric companies in the American Electric Power System, which provides electric service in the States of Michigan, Indiana, Ohio, Virginia, West Virginia, Kentucky, and Tennessee.

The American Electric Power System has a deep and abiding interest in rural electrification. We provide electric power, directly and indirectly, to approximately 261,000 rural customers. We provide such service directly to approximately 140,000 farm customers. In addition, we supply the wholesale power requirements of 21 distribution cooperatives in Ohio, Indiana, and Michigan.

In 1963, Ohio Power Co., and AEP operating subsidiary, took the lead in negotiating arrangements with 28 distribution cooperatives serving in Ohio under which Ohio Power has designed and is completing the construction of two 615,000 kilowatt generating units at the Cardinal powerplant in Ohio, one of which is to be owned by the group of cooperatives and the other by Ohio Power Co. These arrangements include provisions under which Ohio Power Co. will agree to back up any deficiency in power supply to the cooperatives when the cooperatives' unit is out of service, and Ohio Power will agree to purchase surplus power from the cooperatives' unit when such surplus is available. In addition, Ohio Power Co. and the other electric utilities in the State have agreed to wheel power over their transmission facilities from the cooperatives' generating unit to the cooperatives' load centers. The 28 distribution cooperatives will finance the approximately $65 million required for their unit by providing $7 million of equity capital from their funds which these cooperatives have accumulated as retained earnings and by borrowing approximately $58 million longterm money in the public marketplace.

This project is, I think, particularly significant, and relevant to these hearings. It illustrates, first, that there are many prosperous cooperatives which can provide out of their own retained earnings a material equity base for debt financing and, second, that with imagination, ingenuity, and initiative it is now possible for the more prosperous cooperatives to obtain and pay for large amounts of capital in the marketplace.