Mr. WHITTEN. Could we have some of those statements included in the record at this point?

Mr. SCOTT. Yes.

(The information requested is as follows:)

UNDER SECRETARY OF THE TREASURY,

Washington, March 11, 1958.

Mr. KENNETH L. SCOTT,

Director, Agricultural Credit Services, Administration Building,
Department of Agriculture, Washington, D. C.

DEAR MR. SCOTT: I have your request for a statement of the Treasury's opinion as to possible interest rates on borrowing by the proposed Rural Electrification Administration revolving fund.

The relation of interest rates on such borrowing to other securities would depend very largely on the terms of the legislation under which the securities are to be issued. With proper legal safeguards to insure market acceptance of the securities, the Treasury believes that under present money market conditions interest rates on the proposed revolving fund borrowing might well be in the neighborhood of one-half of 1 percent above rates which the Treasury would have to pay for comparable maturities. Because of market unfamiliarity with the securities of any Federal agency which has not borrowed before, initial issues may require a slightly higher rate, but market acceptance should bring rates on subsequent issues down to a spread of about one-half percent above Treasury securities.

This opinion is based on a comparison of borrowing costs of the Federal National Mortgage Association management and liquidation notes in recent years with comparable Treasury costs at the time those issues were put out.

In the case of both of these agencies, no Federal guaranty of principal and interest is involved. The differential will vary, of course, from time to time as market conditions change, and it will also depend to some extent on whether short-time or long-term borrowing is being done.

Sincerely,

JULIAN B. BAIRD, Under Secretary.

Mr. WHITTEN. Is this a move to require the rural users to pay increased rates, because of the interest some private utilities may have in an increase in the rate to rural subscribers; is that what was behind this move?

Mr. SCOTT. No, Mr. Chairman. I have certainly not heard that spoken of.

Mr. WHITTEN. You agree that that would be the effect?

Mr. Scort. I believe that loan funds would cost somewhere in the neighborhood of half a percent more than the cost of money to the Treasury, with the proposed revolving fund.

I do not know to what extent this might involve a rate increase to the consumers.

A great many of these electric systems have operating margins that would permit them to pay this, say 3 percent or 314 percent interest on their borrowed funds and still not have to adjust their rates upward.

Mr. WHITTEN. Under present conditions, however, Mr. Scott, if the cooperatives are operating on that kind of a base, and are making a profit, are they not under obligation now to pass that financial profit back to the subscribers by reductions in rates?

Mr. SCOTT. Certainly that is well recognized cooperative method of doing business.

Mr. WHITTEN. That is what they should do, is it not?

Mr. Scorr. I believe in them turning back to their members the earnings that they do not need; but I believe before earnings are returned on a patronage refund basis, it is generally the practice to

build up reasonable reserves and equities. Ordinarily it is the practice of well managed cooperatives, such as these electrics, to charge somewhere in the range of competitive prices and to refund unneeded margins.

We are speaking about the whole rate situation. I do not know what that is. I do believe, Mr. Chairman, that in the large number of these electric systems, that we are not proposing something here that would amount to or would require them to raise their rates to their consumers.

Mr. WHITTEN. Let's go at it a different way. Any reserve that the local cooperative builds up is a part of the security to the Government, is it not?

Mr. SCOTT. Yes, sir; that is part of their assets.

Mr. WHITTEN. That includes their lines and equipment and facilities, plus any cash on hand?

Mr. SCOTT. That is right.

Mr. WHITTEN. So that is security to the Government--all of it? Mr. Scort. Yes.

Mr. WHITTEN. And that necessarily would cause them to have to increase rates to their consumers.

Consequently, since their costs would be greater, they would either have to charge higher rates to their consumers or would meet the increased costs by reducing their reserves. That in turn would lessen the security which the Government has at the present time, would it not?

Mr. Scorr. It might work out that way, Mr. Chairman. Mr. WHITTEN. How could it work out any other way? Mr. SCOTT. For this reason-I think you cannot make a categorical answer to that for this reason: Generally the purposes of these loans are the further improvement of their capacity. The projections that often come in in support of these loan applications indicate further increase in their operating revenues as these new facilities are put to use, and the anticipated further increase in energy sales occurs. So I think it is possible to find examples where they could pay this higher rate of interest, and the benefits which would accrue to the system as a result of the added capacity might at least offset this cost.

Mr. WHITTEN. But if the costs were not increased, the added revenues would give them more profit?

Mr. Scorr. That is right. I readily agree. That is correct.

Mr. WHITTEN. I am not trying to take issue with you as an individual. This committee has the highest regard for you as an individual and for your service in the Department.

But there is a basic issue here. I would like to ask you this question: does this represent your personal recommendation to the Committee, or is this a matter of administrative policy, to which you, of course, must conform as long as you hold your present position, Mr. Scott? Mr. SCOTT. Mr. Chairman, these are administrative proposals. I think this is a step in the direction that the Congress has taken with other systems that in the past have initially been financed entirely by Federal funds. I am thinking of one such instance, the Farm Credit Administration.

It was set up and almost completely financed by the Government, until it became established and could without any detriment to its services start using private money to a greater extent. I think that there is this advantage to the electric cooperatives, Mr. Chairman: as I see this whole picture, and I certainly don't represent myself as knowing it in great detail, but from what I hear from Mr. Hamil and his associates, there is undoubtedly going to be a further increase in nonfarm loads.

I refer to the more profitable loads. I think it is in the interests of rural communties that these systems have the opportunity to serve all consumers within their territory. I think the public will expect fair competition between these systems and private utilities.

They now serve small industries and sometimes a little larger, but some of them are charged with unfair Government interest rate subsidy.

I think to the extent that these systems can use this private money and go ahead and carry out their purposes, that this would really be to their best interests. Also they would be better able to go out and scrap for the business on a fair competive basis.

Mr. WHITTEN. Let's review what you have just said.

You have said that to increase the cost of money to the cooperatives would improve their competitive situation with private utilities. I cannot believe that you believe that, Mr. Scott.

Mr. Scorт. I do not put it on that basis-the additional cost although it is involved. From my understanding of the situation, many of these good electric cooperatives are in a position to take this added cost in their stride.

Mr. WHITTEN. Do you mean to tell me that the competitive situation of REA systems, where they do compete with private utilities, would be improved by raising the cost of money to the cooperatives? You do not mean that, do you?

Mr. SCOTT. I think that there is real advantage to farmers' cooperatives being able to do business like the other merchants up and down. Main Street. We have seen a good many examples, Mr. Chairman, of the management and members of such cooperatives being mighty proud when they got to the place where they could do that. And it was not harmful to them, either.

Mr. WHITTEN. Then you would lead us to believe that this thought originated with the cooperatives-that they wanted this privilege and wanted to pay more money?

. If that is a fact, I would like to know the names of them.

Mr. Scort. I didn't mean to imply that. I didn't mean by these examples to refer to electric cooperatives. I meant other farmers' cooperatives.

Mr. WHITTEN. Of course, it would help the standing of the private utilities if the cooperatives had more cost put on them, so that they couldn't have the same competitive advantage that they now have over the private utilities; isn't that what you said?

Mr. SCOTT. I didn't have that in mind.

Mr. WHITTEN. I am not trying to put words in your mouth. It is natural for business to wish the costs of the competitors to be high. Mr. SCOTT. I would say this, Mr. Chairman, that I have seen a good many instances of farmer cooperatives that I worked with a good many

years, when the day came that they finally paid off their Government and became what they described as one of the local merchants, with the same privileges and the same responsibilities of taxpaying and other things, that was one of the biggest celebrations in that whole county, and they were mighty proud of it.

They were the same kind of fine agricultural leaders that are on the board's of these electric cooperatives. I haven't talked with many of them about this, but I think that is pretty much the way the people who are cooperative-minded feel and react to being able to go ahead and do business as their neighborhood merchants do.

Mr. WHITTEN. Mr. Scott, I would not find fault with anybody who wanted to take the position, that the REA should pay what the Government pays, or if they wished to, that REA cooperatives should pay the same rate that private utilities do, so as to have a fair competitive situation-judged from the standpoint of the utility company, I mean. But, if you take that position on this proposal, I don't believe there is any way for you to say that to raise the costs of cooperatives would help them, though of course it might help the utilities at points of real competition.

To raise the costs of the cooperatives would not help the Government, either, especially where the Government holds first lien on such REA's. Certainly, it would have the general effect of leading to increased rates to the consumer. If the co-ops had a higher cost than they now have, they would not be competitive with the private utilities, and the situation would be worse than it is now, viewed strictly on their ability to compete.

Now, if a man wants to take the view that you should raise the rates and let the public and the consumer pay it, because it is unfair for them to have reduced rates, and if a man believes that you ought to jack them up to the point where they are strictly on the same level with private utilities, I can see how he might take that position. But if he takes it, I think he ought to say so.

Mr. SCOTT. Mr. Chairman, I don't hesitate to take a position on how I feel about this, but I am not advocating any increased rates as a result of this proposed use of private funds.

I am not thinking that and I don't believe the administration contemplates that in this proposal. I am expressing to you the impression that I have, that to the extent that this private money is supposed to be used here, it can be used by many of these electric cooperatives and they can move ahead and do business in a very fine way without raising their rates.

Mr. WHITTEN. No, I can see that you don't. And I can see that the administration does not talk about that. But this is bound to result in higher costs, which means less profit, unless they have higher rates. Taken another way, it results in higher costs which depletes the reserves and lessens the Government's security.

Mr. SCOTT. Mr. Chairman, I honestly don't agree that that is the way it is going to work in every instance. As I mentioned before, I think that there will be-I don't know how many instances, but I am sure a good many where the loans provide for increased capacity and they project increased operating revenue; as a result of that, the increased revenue would offset this interest rate increase.

I haven't seen any figures that would cause me to believe that in every instance it is either going to result in a higher consumer rate or a depletion of reserves. I don't believe it would work out that way.

Mr. WHITTEN. All right, Mr. Scott, but now let's get right down to this. There is no way you can hedge on this question, at least I don't believe you can. You wouldn't tell me that a cooperative could make more money paying a 32-percent-interest rate that it could paying 2 percent, would you?

Mr. SCOTT. No, sir; and my answer is not so intended.

Mr. WHITTEN. Now, proceeding to another facet of this proposal, do I understand that not a single cooperative to your knowledge has requested this provision in the legislation. Do you know of one which has?

Mr. SCOTT. I have seen no evidence of that, Mr. Chairman.

Mr. WHITTEN. Do you know of anyone other than the private utilities which has advocated this?

Mr. Scorт. My discussions have been within administrative channels, Mr. Chairman. There has been no one talking to me about this except the people within the administration. It seems to me, however, that this is clearly a proposal that is entirely in line with actions which the executive branch and the Congress have taken in other instances and with very fine results for all concerned.

Mr. WHITTEN. Did I understand you that the outstanding indebtedness to the Government by the REA cooperatives is over $3 billion! Mr. SCOTT. I believe the total loans are $3.6 billion but I think I had better have someone else answer that more exactly.

Mr. WHITTEN. You can correct the record. I wanted it in round figures.

Mr. SCOTT. All right, sir.

RESULT OF INCREASE IN INTEREST RATES

Mr. WHITTEN. Those cooperatives are obligated to repay that at 2 percent. If you were to have a 32 percent interest, which it looks like you would probably charge if you had this legislation, have you figured out how much increased cost the REA themselves would have?

If you have the figure, I would like to have it, and if you don't have it, I wish somebody would figure it out. It would be 1 and 2 percent interest times $3,600 million.

That difference would be the profits that the private money lenders would get if this legislation were passed.

Mr. ANDERSON. It would be $54 million.

Mr. WHITTEN. It would be $54 million more that the cooperatives would owe, and a third of that would be $18 million that the private money lenders would get. They would have no risk because behind it in one case they would have a flat guaranty by the Government and on this revolving-fund approach, they would have a prior lien on all their facilities and lines that the Government now has first lien on. So this figure of $18 million is without any risk at all to them, as I see it. Is that the way you figure it?

Mr. Scort. Mr. Chairman, I haven't figured that. I think your calculations must be right.