convenience and necessity to construct and operate the proposed G. & T. system in 38 counties in southern Indiana for the purpose of supplying energy to the 16 REMC's. It also asked for permission to borrow the $60,225,000 from REA and use the funds to build the G. & T. system, and for approval of the REA loan and the notes and mortgage by which the loan was to be secured. Public Service, Indiana, and four other invester-owned electric utilities in Indiana promptly requested leave to intervene in the proceeding before the Indiana Commission to oppose the granting of the Hoosier petition. On February 23, 1962, the Indiana Commission entered an order directing Hoosier to "file responsive pleadings directed solely to the right of intervention" of the companies by April 25, 1962. Hoosier filed no responsive pleadings, but on April 24, 1962, filed a motion to dismiss its petition, which motion the Indiana Commission sustained and the petition was dismissed. Hoosier then assigned, with the consent and approval of REA, the $60,225,000 loan commitment to Statewide, presumably based on the theory that the approval of the articles of incorporation of Statewide by the Indiana Commission on July 12, 1935, eliminated any approval of the construction of the generating facilities. On February 13, 1965, Hoosier executed a deed conveying its generating station site in Pike County, Ind., to Statewide, and 5 days later Statewide executed and delivered to REA its promissory note in the amount of $5 million and its mortgage to secure the repayment of this note and other notes to be issued by Statewide. The plan entered into by REA. Statewide, and Hoosier was for the purpose of attempting to avoid submitting to the Indiana Commission the issue of whether public convenience and necessity warranted the construction of the G. & T. system for the purpose of supplying energy to the 16 REMC's customers now being served by Public Service, Indiana, Southern Indiana Gas & Electric Co., and Indianapolis Power & Light Co., and the issue of the approval of the financing arrangements by the Indiana Commission. The concerted and deliberate effort by REA, Statewide, and Hoosier to avoid going to the Indiana Commission also involves additional violation of Indiana law that is not within the intent and spirit of the Rural Electrification Act requirement. In its petition filed with the Indiana Commission requesting a certificate of public convenience and necessity and approval of the REA financing, Hoosier admitted it was a public utility under Indiana law. The transfer to Statewide of its loan agreement with REA and its generating site at Petersburg was done without the approval of the Indiana Commission as required by the provisions of the Indiana Public Service Commission Act. The action of REA in making the $60,225,000 loan is based on two transactions that are illegal under Indiana law and amounts to a violation of the Rural Electrification Act. The $60,225,000 loan is also based on 40-year power supply agreements between Statewide and each of the 16 REMC's. Without such agreements REA would not have made the loan. To this day Statewide has not filed this agreement with the Indiana Commission and obtained its approval of this agreement as required by the Indiana Rural Electric Membership Corporation Act, the Indiana Public Service Commission Act and the rules and regulations of the Indiana Commission. Again, REA made the loan without the Indiana Commission approving the rate contract on which the loan depends, and this amounts to a violation of the Rural Electrification Act. (c) The $60,225.000 loan was made by REA without adequate security and assurances that the loan will be repaid The last sentence of section 904 of the Rural Electrification Act provides: "Loans under this section and section 905 of this title shall not be made unless the Administrator finds and certifies that in his judgment the security therefor is reasonably adequate and such loan will be repaid within the time agreed." At the present time there are two lawsuits seeking to enjoin Statewide from constructing and operating the G. & T. system, one brought by Southern Indiana Gas & Electric Co. which is now in the process of being appealed in the Indiana courts, and the second by Public Service, Indiana, which is now pending in the Shelby County circuit court. Early this year it was announced that REA had released the $60,225,000 to Statewide on the basis of the decision of the Hancock County circuit court which is now being appealed. If either or both of these cases ultimately are decided against Statewide and while these cases are pending Statewide goes ahead with its announced plans to construct the G. & T. system, REA will find itself with $60,225,000 invested in a G. & T. system which cannot be used and which cannot earn any money for the repayment of the loan. Certainly these lawsuits present a serious question as to the security for the loan and a serious doubt as to whether the loan will ever be repaid. REA has always contended that it is primarily a lending agency. If this is true, it is difficult to imagine any responsible lending agency in this country advancing any part of the $60,225,000 to a borrower when the right of that borrower to do business is being questioned in the courts. If this is not a violation of the Rural Electrification Act, certainly the loan to Statewide is an obvious error in judgment on the part of the REA staff in prejudging the decision of the higher courts of Indiana. While recognizing that the REA loan to Indiana Statewide has been accomplished and that the ultimate determination of whether Statewide's G. & T. system is built rests with the courts, I have related the facts to you to demonstrate that appropriations for generation and transmission loans by REA can be substantially reduced without harming rural electrification. The Indiana situation is not an isolated one. The same elements are found in many of the generation and transmission loans. Too many loans are made for the construction of duplicating generation and transmission facilities that result in higher electric rates to rural electric cooperatives and their members. In many cases loans have been made in violation of the commonsense meaning of the central station service limitation of the Rural Electrification Act and of the loan requirements of the Rural Electrification Act. Public Service Indiana has negotiated reasonable contracts with REMC's in Indiana for almost 30 years-contracts that since 1937 have been approved by REA and the Indiana Commission. But this has not prevented the making of the $60,225,000 loan to Statewide. While I am cognizant of the constructive efforts that the committee has made in the last 2 years with respect to generation and transmission loans, I am convinced that the appropriations for such loans can be substantially reduced without any harm to rural electrification. Indeed, such reduction, if it prevents REA from making loans similar to the one in Indiana, will constructively help the rural electrification program. Senator HOLLAND. You don't have any edifying statement of your own to make to the committee? Mr. CAMPBELL. No, no statement. I will answer any questions. Senator HOLLAND. I congratulate you for showing restraint. That is a trait not possessed by any Senators that I know anything about. The Gulf State Utilities I understand will be heard through Mr. J. J. Morrison, chairman of the board. Is Mr. Morrison here? Mr. CISLER. Thank you very much, sir. Senator HOLLAND. Thank you, sir. We are glad to hear you. GULF STATES UTILITIES Co., BATON ROUGE, La. STATEMENT OF JOHN J. MORRISON, CHAIRMAN OF THE BOARD PREPARED STATEMENT Mr. MORRISON. Thank you, Mr. Chairman. Senator HOLLAND. Mr. Morrison, I see you have quite a book of testimony prepared here. Do you wish this whole statement placed in the record? Mr. MORRISON. Yes, sir. I have here a copy of the material which we wish to file and have made a part of the record. The committee copies were filed yesterday with the clerk. Senator HOLLAND. Your full statement will be placed in the record. (The statement referred to follows:) GULF STATES UTILITIES CO., Baton Rouge, La., April 29, 1965. Re Louisiana Electric Cooperative, Inc., generation and transmission loan. DEAR SENATOR HOLLAND: On September 12, 1964, Mr. Norman M. Clapp, Administrator of the Rural Electrification Administration, forwarded to Senator Carl Hayden a letter announcing that a loan was approved to the Louisiana Electric Cooperative, Inc., in the amount of $56,521,000 for the financing of certain generation and transmission facilities. Enclosed are copies of Mr. Clapp's letter of certification and the required additional information statement as submitted to Senator Hayden. In his letter, the Administrator certified that he had made a power supply survey in accordance with REA Bulletin No. 111-3, and stated that he had complied with the provisions of Senate Report 497, Department of Agriculture and related agencies appropriation bill, 1964. He also certified that the loan was necessary because existing and proposed power supply contracts were found to be unreasonable, that each supplier had been advised of the unreasonableness, that REA had attempted to have such contracts made reasonable, and that the power suppliers had refused to make such contracts reasonable. Those certifications are inaccurate, erroneous, and do not comply with the congressional directives or Bulletin 111-3 issued pursuant to the 1964 agencies appropriations hearings in the following respects: (a) No power supply survey was made, the Administrator having taken the position that the companies would be required to agree to an unregulated territorial monopoly arrangement before he would consider the power supply proposals. (See p. 2 of attached letter of objections to Senator Hayden dated Apr. 29, 1965.) (b) The Administrator made as a further condition precedent to consideration of the reasonableness of power supply proposals, a prerequisite that the power suppliers enter into a conspiracy of territorial allocation in municipalities contrary to the laws of Louisiana. (See p. 3 of attached letter of objections to Senator Hayden dated Apr. 29, 1965.) (c) The Administrator stated that no State agency or commission had jurisdiction over the applicant, although the Administrator knew, or should have known, that the Arkansas Public Service Commission and the Louisiana Public Service Commission both had jurisdiction in the premises, portions of the proposed facilities being in both States. (See p. 6 of attached letter of objections to Senator Hayden dated Apr. 29, 1965.) (d) A major factor in the approval of the subject loan was a proposed interconnection with Southwestern Power Administration. The Administrator violated a directive of Congress in predicating this loan approval on that factor. (See p. 5 of attached letter of objections to Senator Hayden dated Apr. 29, 1965.) (e) The Administrator stated that the cost of power under the G. & T. plan would be 6.80 mills per kilowatt-hour as compared with an average cost of 7.16 mills per kilowatt-hour under a plan of continued purchase from present power suppliers. The fact is that the average cost of the last offer by the companies to the cooperatives is 6.04 mills per kilowatthour-not 7.16 mills per kilowatt-hour. (See p. 7 of attached letter of objections to Senator Hayden dated Apr. 29, 1965.) Our opposition to the Administrator's certification elaborates upon the above errors. We are enclosing a copy of that opposition for your ready reference. You will notice that we have given parenthetical reference points to this opposition after each of the points noted above. On the basis of the foregoing, we request that your committee direct the Administrator to recall and declare null his loan approval. Alternatively, we request that the Comptroller General be directed to withhold the disbursement or approval of disbursement of any funds under the subject loan approval until such time as the Comptroller General has conducted an investigation of the subject loan and reported on such investigation to your committee. Respectfully, CENTRAL LOUISIANA ELECTRIC F. H. COUGHLIN, President. GULF STATES UTILITIES CO., J. J. MORRISON, Chairman of the Board. LOUISIANA POWER & LIGHT CO., G. C. RAWLS, President. LOUISIANA POWER & LIGHT Co., Hon. CARL HAYDEN, President pro tempore of the Senate, DEAR SENATOR HAYDEN: Please refer to a letter dated September 12, 1964, by Mr. Norman M. Clapp, Administrator of REA, in which you were informed in accordance with the provisions of Senate Report 497 that the Administrator that day approved a loan to Louisiana Electric Cooperative, Inc., of New Roads, La., in the amount of $56,521,000 for the financing of certain generation and transmission facilities. In addition to informing you of the loan approval, Mr. Clapp certified that in connection with the proposed loan he has caused a survey to be made in accordance with REA Bulletin 111-3, "Power Supply Surveys." Mr. Clapp further certified that based on such survey, the approved loan is needed because existing and proposed contracts to provide the facilities or service to be financed were found to be unreasonable, each supplier involved was so advised, REA attempted to have such contracts made reasonable, and the existing or other proposed suppliers had failed or refused to do so within the time set by the Administrator. Mr. Clapp attached to the certification an information statement concerning the loan, as required by Senate Report 497. We have reviewed Mr. Clapp's certification and his information statement and both were found to contain many inaccuracies and omissions. Consequently, it is believed that the Administrator's approval of this loan is illegal, violative of our rights, and that the consummation thereof will result in duplication of the companies' services, transmission lines, and generating facilities by the proposed G. & T. Cooperative, resulting in a loss by the companies of a large portion of their property improvements and revenues and, accordingly, the Administrator's approval of this loan should be declared null and void. Item 1: Mr. Clapp's certificate of September 12, 1964, states: "I hereby certify that in connection with the proposed loan, I have caused a survey to be made in accordance with REA Bulletin 111-3, "Power Supply Surveys." As a matter of fact Notwithstanding the directives of Congress and the resultant REA Bulletin 111-3, the Administrator did not make a survey in accordance with the directives and did not attempt to determine whether the companies' existing or proposed electric contracts were reasonable. The Administrator did not advise the companies wherein existing or proposed contracts with the Rural Electric Cooperatives were unreasonable except insofar as to state that all existing or proposed contracts would be considered unreasonable unless they guaranteed to the REC's, which claim to be unregulated by any public body, the exclusive right to serve electricity in a designated geographical area, including the right to continue to serve electricity in an area which might become annexed by a municipality in which another supplier of electricity may have franchise rights. This "condition precedent" position on the part of the Administrator is clearly set out on page 3 of the statement attached to his letter of September 12, 1964, headed "Information Relating to the 'A' Loan Application of Louisiana Electric Cooperative, Inc., of New Roads, La.," where he says, "The inability of the parties to reach any satisfactory arrangement on territorial protection for the cooperatives has precluded negotiations on the other terms and conditions of the contract proposals." This position was also clearly defined in the Administrator's letter of April 10, 1964, addressed to Louisiana Power & Light Co., when the Administrator wrote: "I stated at our April 8 meeting that if your power supply proposal and the others affecting the Louisiana cooperatives are to be considered reasonable, a situation must be developed in which the rural electric cooperatives can be given assurance that they will have enforcible protection of their rights in their service areas. This protection must include a full recognition of their right to serve any and all electrical loads in their respective service territories without qualification either as to size or nature of the load and the development of such recognition and protection on the basis of an area concept. "I stated, too, that an important aspect of such area protection should be protection of the right of an electric distribution system to continue to serve its area even though that area becomes annexed to a municipality in which another supplier has franchise rights." The most efficient statement of the Administrator's position on this matter of "territorial protection" comes from page 2 of his information statement where he says, "The Administrator stated clearly that the solution of the problem of territorial protection for the cooperatives would be a necessary prerequisite to final evaluation of the reasonableness of the companies' contract proposals." Thus, by the Administrator's own admission, it is altogether plain that it was his position that an agreement on territory would be a necessary condition precedent to any survey or evaluation by him of the reasonableness of the companies' power supply proposals. The companies could not legally agree by contract to guarantee the REC's exclusive territorial monopoly which the Administrator has required as a condition precedent to considering the companies' existing or proposed contracts reasonable. Nevertheless, prior to approval of this loan the Administrator has used his office and position in an effort to coerce the companies into so doing. This demand was made even though it was not enumerated as a standard of reasonableness in the congressional directives or in REA Bulletin 111-3 and even though it cannot be done legally by the companies. As recently as March 29, 1965, the Louisiana Public Service Commission held as follows: "We can enjoin or disallow the extension of a utility's lines upon a showing that such extension is imprudent and constitutes an unnecessary burden upon the other customers of the utility, but we cannot enjoin such an extension merely because it appears to invade territory which might conveniently be served by another utility but where no actual customer has been taken. "If we did so, we would be taking upon ourselves the power to grant exclusive franchises, for which there appears to be no warrant. On the contrary, the Louisiana Supreme Court has expressed the view, in Richland Gas Co., Inc. v. Hale (169 La. 300, 120 So. 130), that the commission does not have the power to grant franchises. Thus, it should be noted, construction of generation and transmission facilities by the REC's will not accomplish territorial protection for cooperatives. Item 2: The Administrator in his information statement concerning this loan states on page 1, paragraphs 2 and 3, that the loan includes funds for two-100-megawatt gas-fired steam units, 627 miles of 161-kilovolt line, 1,066 miles of 69-kilovolt line, and related substations and communications facilities costing $56,521,000. As a matter of fact It is obvious from paragraph 4 of this statement that this $56,521,000 represents only a small portion of the ultimate cost of the proposed G. & T. since the Administrator states that between 1973 and 1976 approximately $17 million additional funds will be required. Item 3: The Administrator further states in paragraph 3 that this loan includes funds for "82 miles of 161-kilovolt line in Arkansas to allow the cooperative to interconnect with the oSuthwestern Power Administration." In paragraph 9 of his statement, the Administrator explains the extent to which the feasibility of the requested loan for generation and transmission facilities depends on interconnection with SWPA. He says it includes "an interconnection standby, pooling and interchange agreement with Southwest Power Administration." As a matter of fact The proposed interconnection with SWPA when used to justify the loan violates the directives of Congress. The SWPA interconnection is cited in the statement as one of the factors which influenced the Administrator's decision to grant the loan. Yet, since in paragraph 11 of his statement, the Administrator has incorrectly certified that there are no State agencies or commissions having jurisdiction over the G. & T. cooperative, it becomes obvious that no certificate of public convenince and necessity has been obtained from the Arkansas Public Service Commission or the Louisiana Public Service Commission, nor has authorization and approval been secured from the Federal Power Commission. The interconnection with SWPA and the use of this interconnection to make the loan appear more feasible both violate directives of the Congress which are clearly set out in the Congressional Record, Senate Volume 109, No. 204, Thursday, December 12, 1963, on pages 23243 and 23244, where Senator Ellender states "During the consideration of the public works appropriation bill, H.R. 9140, by the Senate, I discussed the meaning of the Senate committee language on the SPA continuing fund item. This language reads as follows: "The committee directs that no part of the continuing fund be used to purchase power or lease transmission lines which are not immediately needed for the proper and efficient operation of the Southwestern Power Administration; or to contract with a generation, transmission, or distribution cooperative organized under Federal o |