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Senator ADAMS. But they do not come from the jail; they come from the court.

Mr. CARMODY. Yes; I dare say there would be some that would not meet it.

Senator HUGHES. Do you not think that either the title should be amended or a definition of "self-liquidating" be put into the bill? Mr. CARMODY. I think something of that sort ought to be worked out.

Senator BARKLEY. You will have general charge, if this bill becomes law, of the P. W. A. and public roads?

Mr. CARMODY. Yes.

Senator BARKLEY. R. E. A. is under Agriculture, so that would be under the Secretary?

Mr. CARMODY. Yes.

Senator BARKLEY. From your experience in having administered the Rural Electrification Administration up to now, do you believe it is very likely or probable that the entire $600,000,000, $100,000,000 having already been appropriated, would be absorbed and used by the people of the country in the rural sections in self-liquidating projects? Mr. CARMODY. I think so. I hope they do not do it too fast. I have said many times that the electric-utility industry was developed along very unfortunate lines in this country and had a great deal to do with overurbanization. But that is a long story that I do not want to go into here. I was conscious of the fact that only the thin territory was left, and I knew it would be only by the hardest kind of hard work in the immediate future that all of them would pay out. More of them will pay out than anybody had hoped for in the beginning.

I said a little while ago, when the Senator from Ohio (Senator Taft) was out, that private utilities and banks are now offering to go into some of these enterprises that they said 2 or 3 years ago would not pay. Senator TAFT. I would like to offer this brief for the Government in which they say they will never pay.

The CHAIRMAN. Do you want to offer it as an exhibit?

Senator TAFT. I would like to select parts of it and present them tomorrow.

Senator BARKELY. Do you think from your experience that the need exists and that there is a willingness on the part of people to embark upon these enterprises, through P. W. A., Public Roads, and Rural Electrification?

Mr. CARMODY. I am satisfied, Senator, that the need exists. I am satisfied that the decision as to whether or not they really want to do it will come when the funds are available on these new terms that are higher than the old terms.

Senator TAFT. There is already the sum of $40,000,000 appropriated for that purpose?

Mr. CARMODY. For the R. E. A.; yes. But, Senator, there was $40,000,000 last year, and Congress gave $100,000,000 additionalSenator TAFT. It has all been allotted?

Mr. CARMODY. Yes; and it will be spent and the lines will be built. The CHAIRMAN. We will adjourn until 10:30 tomorrow morning. (Whereupon, at 12:50 p. m., the committee adjourned until tomorrow, Friday, July 14, 1939, at 10:30 a. m.)

WORKS FINANCING ACT OF 1939

FRIDAY, JULY 14, 1939

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The hearing was resumed at 10:30 a. m., pursuant to adjournment on yesterday, in room 301, Senate Office Building, Senator Robert F. Wagner, chairman of the committee, presiding.

Present: Senators Wagner (chairman), Glass, Barkley, Adams, Maloney, Radcliffe, Hughes, Clark of Idaho, Downey, Townsend, Frazier, Tobey, Danaher, and Taft.

The CHAIRMAN. The committee will come to order.

Senator TAFT. Mr. Chairman, I have here a brief filed by the Government relating to the Pioneer Rural Electric Cooperative, Inc., which is the largest, I understand, of the rural electrification corporations in Ohio. The brief was filed by the tax commissioner of Ohio seeking exemption from taxation. It bears on the question of whether these projects are really self-liquidating [reading]:

It is respectfully submitted that the tentative valuation of the taxpayer's property for the year 1938 in the sum of $887,080 should be very greatly reduced. This memorandum presents the reasons of fact and of law in support of the application for reduction.

STATEMENT OF THE INTEREST OF THE RURAL ELECTRIFICATION ADMINISTRATION

The properties of the taxpayer were wholly financed by the United States, acting through the Rural Electrification Administration. The taxpayer is now indebted to the United States in the total sum of $1,184,272, evidenced by 20-year notes, bearing interest at 3 percent, and secured by a first mortgage upon all the property here involved. The notes are to be repaid in equal monthly installments, adjusted to retire the total principal amount, with interest, by December 1, 1956. The taxpayer has not at any time earned enough even to pay its operating expenses, exclusive of the debt service and exclusive of essential reserves. The only source of repayment of the indebtedness which brought this taxable property into being is the net revenues after payment of all operating expenses. The United States, therefore, is vitally interested in the maintenance of the taxpayer's property as a going concern. It is not only interested as a creditor, but it shares with the rural population of Champaign, Miami, and Shelby Counties an interest in the successful maintenance of this electric service. The enterprise of the taxpayer represents much more to the people of Ohio than an addition to the taxable property in these counties. It represents the fulfillment of many years' desire on the part of this large rural area for a service that has become an essential commonplace in urban life. The increasing gap between urban and rural standards of life has become a great public problem in the solution of which the Federal rural electrification program plays an important part.

The successful development of this enterprise is now jeopardized by the prospect of continuing deficits. This jeopardy may be relieved by an adjustment of the tax load to a level that reflects the true earning power and the true value of the property. The Rural Electrification Administration, therefore, for the reasons set forth above, joins in this memorandum.

RELEVANT FACTS CONCERNING THE BUSINESS AND PROPERTY OF THE TAXPAYER

The Pioneer Rural Electric Cooperative, Inc., is an organization of rural electric consumers, formed by a merger of three similar cooperative associations. It operates wholly in rural areas, where, for many years, the farmers had tried in vain to obtain service from existing utility companies. Service was consistently denied on the sole ground that the business would be unprofitable. The business of the taxpayer in this proceeding became possible only through the program of the Rural Electrification Administration. It was only because of the willingness of these farmers and the Federal Government to take financial risks which private capital would not take that this taxable property came into being. Those concerned in the enterprise have faith that it will become self-sustaining, but this will be possible only by an adjustment of all items of operating expense, including taxes, to the business facts of the enterprise in its early years.

The fact which is chiefly relevant to this proceeding is the present earning power of the property. In the year 1937 the gross operating revenues were $88,111.83. The operating expenses, including taxes but exclusive of interest and exclusive of any reserves for depreciation and future maintenance, were $88,084.35. Interest was $26,190.89. Reserves for depreciation and maintenance, computed at 5 percent of the book value of fixed assets, amounted to $50,567. It appears, therefore, that the first full year of operation showed a deficit of $76,731.32, equal to 87 percent of its gross revenues. These facts as to the earning power of the property are set forth in the report heretofore filed by the taxpayer. The report, however, did not include any reserved for depreciation and maintenance which proper accounting practice and the decisions of the courts require. A summary of the profit and loss statement is shown in exhibit A, attached hereto.

It is apparent that some deficit will continue for a period of years. Although there has been a slight improvement, the trend is very slow. Three thousand two hundred and thirty-one customers have been connected, including almost all of the profitable business. In exhibit B, hereto attached, is a profit and loss statement for the period from January 1937 to August 1938, inclusive. The average monthly deficit for the 2 years is as follows:

Year 1937: Average monthly deficit.
Year 1938: Average monthly deficit..

Before depreciation $2, 180

1, 702

After depreciation $6, 394

6, 194

This lack of earning power is due wholly to the "thin" character of this rural business. The property has been efficiently managed. The gross earnings are as large and the operating expenses are as low as reasonably possible. The rates at which electric energy is sold to the members of the corporation are as high as the traffic will bear, and comparable to the rates charged by power and light companies in adjacent territory. A comparison of these rates is set froth in exhibit C hereto attached. It is reasonable to assume that higher rates would result in restricting the development of new business and prolong the period of operating deficits. To have avoided a deficit for the year 1937 would have required a gross revenue 87 percent greater than that actually received. It is obvious that no such result could be obtained by any increase in rates and further discussion of this matter would seem unnecessary.

It is equally obvious that the deficit is not the result of abnormally high operating expenses. Exactly the opposite is true. The break-down of operating expenses set forth in the taxpayer's report and in exhibit A indicates an unusually low ratio of operating expenses to the book value of the property. It is apparent that every item of expense has been cut to the bone. Such items as salaries, wages, rent, and office expense are very much lower than similar items in the current practice of electric companies. It must be assumed that the usual type of utility company, privately financed and operated for profit, would show a greater deficit in the operation of this property in this area.

I only offer this to show that while these projects, I think, are very desirable, to my mind they are not self-liquidating, and they really ought to be treated like an appropriation; they ought to go before the Appropriations Committee, where the last rural electrification project went. I think the Appropriations Committee appropriated $40,000,000 this year.

Senator TOWNSEND. One hundred millions, was it not?

Senator TAFT. Forty millions, I think, this year. It seems to me that it really ought to be considered by the Appropriations Committee.

Senator BARKLEY. I would like to simply observe, in connection with what Senator Taft put into the record, that the mere fact that one of these projects out in Ohio has not up to now developed into a paying proposition is no evidence that the program as a whole is not self-liquidating. I do not know what the facts are about the contest over some taxes out in Ohio.

Senator TAFT. This is the statement of the Government attorney himself, the attorney of the Rural Electrification Administration. The project is in the best rural district in Ohio in which such a project could be operated.

Senator BARKLEY. I do not know how it is managed. Certainly one project like that is no evidence that they are all like that and that therefore the thing should not be undertaken.

Senator TAFT. No; I did not say that it ought not to be undertaken; only that they are not self-liquidating.

The CHAIRMAN. The committee will now hear from Mr. Jesse H. Jones.

STATEMENT OF JESSE H. JONES, FEDERAL LOAN ADMINISTRATOR, WASHINGTON, D. C.

The CHAIRMAN. I am going to ask that there be a little cooperation in not having outside conversation while the witness is testifying. It makes it very difficult to hear.

We have under consideration, as you know, Mr. Jones, a bill introduced by Senator Barkley, S. 2759, and the committee is very anxious to have your views with reference to the proposed legislation.

Mr. JONES. May I answer questions?

The CHAIRMAN. If you have any statement to make, we would like to hear that first. I take it the members of the committee will want to ask you some questions.

Did you want to ask me a question?

Mr. JONES. No. I thought maybe I could answer questions and save your time.

The CHAIRMAN. The first question would be, What is your opinion of the proposed legislation?

Mr. JONES. Well, I think the objective of the legislation is good, particularly the self-liquidating feature. We have had a good deal of experience in self-liquidating loans at the R. F. C., and we know that if the loans are properly made and they can be made. properly they will be self liquidating, and not cost the taxpayer or the Government any money. Such loans serve a useful purpose. They provide employment; they stimulate business; and are not confined to any section. Materials come from all over the country, and employment is distributed all over the country.

Senator TOWNSEND. What authority does the R. F. C. have now to make self-liquidating loans?

Mr. JONES. We have authority under the Glass-Steagall bill to make self-liquidating loans. We have authorized in the last year a hundred-and-fifty-odd millions of dollars of such loans.

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