STATEMENT OF HOWARD A. CUMMINS, EXECUTIVE MANAGER, OHIO RURAL ELECTRIC COOPERATIVES, INC. Mr. Chairman, on behalf of the rural electric cooperatives of the State of Ohio, I wish to express to you their unanimous opinion with respect to the establishment of a bank through which they may finance operations and capital requirements that cannot be met out of appropriations to the Rural Electrification Administration of the Department of Agriculture. We in Ohio who are interested in rural electrification are of the opinion that we may not expect the Congress of the United States to appropriate sufficient funds to provide for all of the capital requirements of the rural electric cooperatives in this Nation. We also realize that very few, if any, of the rural electric cooperatives are or in the foreseeable future will be able to meet such requirements on the open money market. We, therefore, unanimously and wholeheartedly support the concept of the establishment of a bank which will be authorized to provide capital to those cooperatives who are able to afford financing at an interest rate in excess of 2% but who cannot afford the financing costs of the private money market. We are of the firm conviction that the establishment of a bank as contemplated in pending legislation will enable existing and future rural electric cooperatives to find a means to finance their capital requirements without looking to direct appropriations by Congress. We are convinced that the present 2% interest loan program must be continued if many of the rural electric cooperatives in this nation are to survive and their consumers are to continue receiving an adequate electric service. A cessation of this program will inevitably result in many consumers of rural electric service going back to the coal oil lamp. We most strongly urge this Congress and the members of this committee to establish a rural electrification bank so that a large number of our rural electric cooperatives may continue to survive. We hope the day will come when many of us will have sufficient financial strength so that we may turn to the private money market for our loan needs. RESOLUTION OF THE JACKSON PURCHASE RURAL ELECTRIC COOPERATIVE CORP., PADUCAH, KY. Whereas the Jackson Purchase Rural Electric Cooperative Corporation of Paducah, Kentucky, is a rural electric system serving 11,000 member-families in the counties of McCracken, Ballard, Carlisle, Graves, Marshall and Livingston; and Whereas the Jackson Purchase RECC, in order to provide adequate and reliable service for their members, will need an estimated growth capital in plant facilities of $10 million in the next 15 years; and Whereas in recent years the amounts of loan funds budgeted by Congress has fallen far short of the growing requirements of the rural electrics causing critical back-log of applications; and Whereas the National Rural Electric Cooperative Association in Washington, D. C., which is the national service organization of REA financed rural electric systems, has studied this financing problem for approxiamtely three years to alleviate the rural electric loan fund shortage now existing and has designed a proposed Supplemental Financing Program; and Whereas the Jackson Purchase RECC supports the Supplemental Financing Program that is designed to adequately and economically meet the vast developments of the rural electric systems: Now, therefore, be it Resolved, That the Board of Directors of Jackson Purchase Rural Electric Cooperative Corporation urge all our Congressional Delegation from Kentucky and all others to support the "Bass-Cooper" S. 3337 Bill in the Senate and the "Poage" H.R. 14000 Bill in the House. We further resolve and hope you will give this Supplemental Financing Program immediate consideration and priority attention. STATEMENT OF THOMAS H. MOORE, GENERAL MANAGER, ASSOCIATION OF ILLINOIS ELECTRIC COOPERATIVES My name is Thomas H. Moore. This statement is submitted on behalf of the Association of Illinois Electric Cooperatives of which I am General Manager. I have served as General Manager of the Association since 1961. The principal office of the Association of Illinois Electric Cooperatives is at R. R. 4, Springfield, Illinois. It is a Statewide Association with all of the 27 distribution and the three generation and transmission cooperatives in Illinois as active members on a voluntary basis. Its primary function is to provide service to its member-cooperatives that they would find difficult or impossible to provide on an individual basis. The Association provides electric cooperatives and their members information on legislation and other governmental activities and functions affecting individual cooperatives. It also assists in coordinating the activities of and represents member cooperatives before legislative and administrative bodies. The 27 distribution cooperatives in Illinois serve about 148,000 members. There is considerable difference between the electric cooperatives in Illinois. One cooperative, Farmers Mutual Electric Company, with headquarters at Geneseo, has only 658 members. In contrast, Southeastern Illinois Electric Cooperative, with headquarters at Eldorado, has nearly 15,000 members. There is also considerable variance in their financial ability and financial position. For example, Spoon River Electric Co-operative, Inc., at Canton, finds it increasingly difficult to provide its members with adequate electric service at a reasonable cost. In 1964, its net margins indicated a loss of $1,308.1 Because its potential for growth is extremely limited, its present financial plight is likely to continue for a long period of time. Spoon River Electric Co-operative's membership of 3,249 consists primarily of small to medium sized farms, many of which are on rough land along the tributaries of the Illinois River. For more than a decade it has lost members in much greater proportion than other cooperatives in Illinois, due to the vacation of farms because of open-cut coal (strip) mining. A significant increase in the use of electricity in its service area is not anticipated now or in the foreseeable future. On the other hand, we have in Illinois, Corn Belt Electric Cooperative, Inc. with headquarters at Bloomington. Corn Belt serves 6,389 members. The territory served by this cooperative is in the heart of the Illinois corn belt, which is one of the most productive cash grain areas in the United States. Many of the farms it serves use large amounts of electricity. In addition, power loads have increased through the years because of the establishment of a considerable number of non-farm users of electricity in its service area. It appears that Corn Belt Electric Cooperative will experience a steady increase in the volume of electricity sold and will have little difficulty in providing its member-consumers with adequate electric service at a reasonable price in the foreseeable future. From a financial viewpoint, the other 25 electric distribution cooperatives in Illinois fall somewhere in between the two extremes outlined above. Spoon River Electric Co-operative will continue to have difficulty operating even with loans for capital improvements amortized over a period of 35 years at an interest rate of two per cent. In contrast, Corn Belt Electric Cooperative, Inc. is in a better position to pay interest rates on money borrowed for capital improvements that will more nearly reflect the cost of money in the open money market, if there is a financial institution from which it can obtain loans. Even though Corn Belt Electric Cooperative is in a strong financial position, it is doubtful if there is a financial institutions other than the Rural Electrification Administration where it could obtain loans to provide for its capital improvements in future years. Also, there are cooperatives in Illinois that could pay a rate of interest higher than two per cent on loans for capital improvements, if there was a place to borrow it, but are not, at the present stage of their development, in a position to pay interest rates that would reflect the cost of money in the open market. Therefore, if the provisions of H.R. 14000 should become law, some Illinois cooperatives would continue to need loans from the Rural Electrification Administration, amortized over a period of 35 years at an interest rate of two per cent ; some would need loans at the intermediate rate specified in H.R. 14000; and some would be in a position to repay loans with an interest rate reflecting the cost of money utilized by the Federal Electric Bank in the loan program. Illinois has a large number of successful cooperatives that provide services to their members. Electric cooperatives are a significant and important part of the overall cooperative program in Illinois. When the first electric cooperative was organized in Illinois, only a little over 12 per cent of Illinois farm families had central station electric service. Now central station electric service is avail 1 During 1964, Egyptian Electric Cooperative and Western Illinois Electrical Cooperative also operated at a loss. However, it is believed that these losses are of a temporary nature and do not indicate the long-range financial potential of these cooperatives. Electric coopera able to nearly 99 per cent of the farm families in the state. tives in Illinois have over 47,000 miles of line, serve nearly 148,000 members and employ over 1,000 people. Not a single electric cooperative in Illinois has defaulted on its loans from the Rural Electrification Administration. They are recognized as a significant part of the business community in the areas in which they serve and as an integral part of the electrical industry in Illinois. In 1965, the Illinois General Assembly enacted the Electric Supplier Act, which established administrative and legal machinery for resolving territorial disputes between electric cooperatives and public utilities. This gives reasonable assurance that electric cooperatives will have the opportunity to serve the territories they have developed. The outstanding record that electric cooperatives have made in Illinois could not have been accomplished without loans from the Rural Electrification Administration. Much of the growth of electric cooperatives in Illinois occurred after the adoption of the Pace Act by Congress in 1944. However, it is recognized that the financial position of electric cooperatives has changed in Illinois, as it has in other states, during the past several years. For several years the rural electrification leaders in the state have been cognizant of the need to review the financing program for rural electric systems. The electric cooperatives in Illinois will need large amounts of capital for development in future years. It was questionable whether Congress would, or could, provide the needed capital for such development from appropriations. Leaders were aware that certain cooperatives would need loans at a two per cent interest rate to adequately serve their members, while a number of others could borrow money at an interest rate in excess of two per cent without adversely affecting their ability to adequately serve their members. As an indication of this thinking, below is an excerpt from a statement of philosophy adopted by the Board of Directors of Corn Belt Electric Cooperative, Inc., of Bloomington, on January 22, 1964: "The interest rate charged by REA was set by Congress at 2% along with the requirement that co-ops render area coverage so that all rural people could have the benefits of electricity. We believe that today Corn Belt Electric Cooperative does not need any subsidy which might be afforded by 2% money and in conformity with such beliefs have refrained from borrowing from REA. Initially when we borrowed from REA the cost of money to the government was less than 2% and, therefore, our loans were not a subsidy. Today there are areas where this low rate of interest is still necessary to support and insure area coverage." While the Board of Directors of Corn Belt Electric Cooperative stated that it had no need for additional loans at two per cent interest, they recognized that some cooperatives still had this need. This policy was adopted even though the Board of Directors had no assurance that they could borrow large amounts of capital from any institution other than the Rural Electrification Administration. Clearly the Federal Electric Bank is needed for cooperatives in this position. At the National Rural Electric Cooperative Association Region V meeting in 1963, delegates from the electric cooperatives in Illinois supported a resolution which called for a study of possible supplemental sources of financing for rural electric systems. In 1964, delegates to the annual meeting of the NRECA from the electric cooperatives in Illinois strongly supported a resolution which states in part: "we approve the proposal that NRECA and REA conduct studies in depth of the future capital requirements of rural electrification and means of meeting them, including an examination of the feasibility of the modifications (if any) which should be sought in REA financing." A strong effort was made to disseminate information on the results of the Rural Electric Financing Study by Kuhn, Loeb & Co. and related studies by the NRECA among electric cooperative leaders and members throughout Illinois. The results of the study was explained at many meetings of electric cooperative members in Illinois. The provisions of the supplemental financing program developed by the National Rural Electric Cooperative Association, based on the Kuhn, Loeb & Co. study, was given wide distribution and discussed at many member meetings. The supplemental financing program, developed by the NRECA to which I am referring, is substantially embodied in H.R. 14000, now under consideration by this Committee. The Board of Directors of the Association of Illinois Electric Cooperatives is comprised of 30 members. There is one member representing each electric cooperative in Illinois. At its regular meeting on January 20, 1966, the Board of Directors unanimously adopted the following resolution: "*** that the Board of Directors of the AIEC go on record in support of the principles embodied in the Supplemental Financing Program proposed by the NRECA and that the delegate and alternate delegate from the AIEC to the 1966 NRECA annual meeting be instructed to support the principles embodied in the plan. * * *" At the annual meeting of the National Rural Electric Cooperative Association in Las Vegas, Nevada, on February 14 through February 17, 1966, the delegates from Illinois strongly supported the resolution adopted by the delegation on supplemental financing for rural electric systems. Mr. Harold Whitman of Cameron, Illinois, a member of the Board of Directors of McDonough Power Cooperative of Macomb, Illinois, and Mr. Robert R. Wagner of Burnside, Illinois, a member of the Board of Directors of Western Illinois Electrical Coop. of Carthage, Illinois, both made statements in support of the resolution. Because the provisions of the supplemental financing program for rural electric systems and the provisions of H.R. 14000 (and similar bills) have been thoroughly discussed and explained by other witnesses before this Committee, to avoid repetition, I have purposely refrained from discussing them in detail. Instead, I have endeavored to present information on how the adoption of the supplemental financing program would affect electric cooperatives in Illinois, and to clearly indicate to the Committee that electric cooperative leaders and a great majority of the electric cooperative members in Illinois support the principles embodied in the Supplemental Financing Program and in HR. 14000. The following statements are respectfully submitted in support of H.R. 14000: 1. It will relieve Congress of the necessity of providing money, by appropriations, for capital improvements for many rural electric systems. Congressional appropriations will be required only for systems that are not in a financial position to borrow money from the Federal Electric Bank. 2. The Federal Electric Bank will be similar to the Banks for Cooperatives. It will be a credit institution for rural electric systems which they will eventually own and operate to meet their credit requirements. It is generally agreed that the Banks for Cooperatives have been of great benefit to the cooperatives they serve, to their members and to the general public. There is every reason to believe that the Federal Electric Bank will have the same successful experience. 3. Rural electric systems borrowing money from the Federal Electric Bank will be in a better position to serve their members because they will not be subject to the restrictions that accompany loans from the Rural Electrification Administration. 4. The public image of rural electric systems will be greatly improved. Electric cooperatives have probably received more criticism for the loans they have received from government than any of the numerous other business entities receiving similar assistance. It is interesting to note that they have been subject to more criticism for receiving loans at an interest rate of two per cent than other entities and agencies that have received outright grants. 5. Because the Federal Electric Bank will be a strong financial institution, many rural electric systems will have capital available from the open money market through it which would never be available to them on an individual basis. In our opinion, the establishment of the Federal Electric Bank will be in the public interest and will definitely be to the benefit of the rural electric systems in the United States and the members they serve. In the long run it will enable the great majority of rural electric systems to provide their members adequate electric service at a reasonable cost, without government assistance. On behalf of the Association of Illinois Electric Cooperatives, the 30 member cooperatives of the Association and their member-owners, I respectfully urge the members of this Committee to take favorable action on the supplemental financing program for rural electric systems embodied in H. R. 14000. NORTHERN ELECTRIC COOPERATIVE, INC., Mr. JERRY ANDERSON, Acting Manager, National Rural Electric Cooperative Association, Washington, D.C. DEAR MR. ANDERSON: The Board of Directors of Northern Electric Cooperative are deeply concerned about the shortage of loan funds for the Rural Electrification Program. At the last Board Meeting, the following resolution was unanimously passed. dependence upon the federal Treasury and (2) the objective that this bank and a similar one for rural telephone systems shall become entirely privately owned, operated, and financed corporations. This statement is one of analysis and commentary on the Electric Bank only, which is the larger and more complex institution. The Rural Electrification system already greatly exceeds the Tennessee Valley Authority in electric utility assets, revenues, and earnings. The Electric Bank proposed in this bill opens the prospect of an institution larger than any of the existing farm credit agencies. The first part of my testimony suggests changes that might improve the credit standing of the Bank and lead to a more ready acceptance of its securities by investors and lead to the earlier independence and complete ownership of the Electric Bank by its cooperative members. Finally, brief reference will be made to certain features that are referred to in the bill, which, while they may not be essential to maximizing its financial standing and minimizing the cost of its credit, nevertheless deserve attention. Suitable provisions would bring the proposed Electric Bank more nearly into line with practices that have been found acceptable in other federal farm credit agencies. They would also accord with the general philosophy of such agencies of moving steadily away from an initial dependency upon support during the period of their promotion and uncertain financial standing towards independence as their successful performance established their ability to stand on their own feet. Part I. Changes proposed to maximize the credit standing of the Electric Bank 1. All lending for the acquisition of property for both generating and distribution co-ops should be channeled into and be made by the Electric Bank. While the bill is not specific, there is a general implication that the Bank is primarily to serve the demand for generating and transmission loans and that distribution co-op loans may continue to be made from 2 percent advances from the U.S. Treasury. To continue the latter loans would ignore: First, the increased security which the distribution loans would give to any Debentures issued by Electric Bank. They diversify the security behind the Debentures. Moreover, the distribution co-ops show the larger earnings relative to interest charged and they have accumulated a more substantial surplus of assets over debt. Second, it would ignore the ability of the distribution borrowers to pay going market rates of interest. The distribution borrowers have shown increasing earnings and are earning substantially more than the 2 percent they now pay. As a system, they now earn six percent on their present debt. They should continue to enjoy a surplus over the present low 2 percent on existing loans and will only pay higher rates for loans to finance new utility property. Because they have substantially covered their respective areas, new customers will represent increased customer density and higher demand per customer both of which should be served at decreasing costs from those for the existing business. The favorable earnings situation for the distribution co-ops is reflected in the following figures. For the power-type co-ops, earnings have grown but at a less rapid pace than debt. The problem of the co-op unable to earn interest charges is faced below. Third, to exclude the distribution co-ops would ignore the fact that the bulk of their new customers, who made additional funds necessary, are nonfarm customers. Some are rural but many are small town, suburban, commercial and industrial. Because they are added to an existing system, they should require little, or no, subsidy. |