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period various arrangements whereby the companies would purchase the cooperative's excess capacity from a proposed generating plant and for wheeling over the companies' facilities with standby from either the companies or SPA were discussed in detail with all parties. None of the companies supported such possibilities other than the basic one wherein the cooperative would construct a generating plant and sell the entire output to the companies for their use and resale to the distribution cooperatives. During this period the basic concept of an independent G. & T. system began to emerge as the most logical alternative power supply plan.

The companies began to make individual offers for continued power supply to the distribution cooperatives at new rates without new fuel escalations. During the remainder of 1962 the possibility of joint construction and operation or interconnection arrangements with the companies were eliminated and on September 18, 1962, the three major companies stated their position that they found the cooperatives' proposed arrangements both vague and unfavorable to the companies and the economic impact on the companies wholly unacceptable.

The companies also stated that their offer of power at 6.5 mills could not in their opinion be matched by a G. & T. system and that they were still willing to negotiate.

On July 27, 1962, the Louisiana Electric Cooperative was officially incorporated and submitted a loan request to REA to implement its proposed gener. ation and transmission plan.

Beginning in May 1962 the companies had offered power to individual cooperatives at 6.5 mills per kilowatt-hour without fuel adjustment on the basis of a 10-year contract term.

There followed various exchanges of letters between individual cooperatives, the G. & T. and the various companies. In May of 1963 all three of these companies reduced the 6.5-mill rate by a new offer which would average 6.25 mills per kilowatt-hour. In this revision Louisiana Power & Light Co. took the initiative after the cooperatives pointed out to the companies that their 1962 offer of 6.5 mills per kilowatt-hour was actually higher than the rate presently paid by the cooperatives.

NEGOTIATIONS SUBSEQUENT TO JULY 1, 1963 The congressional hearings, with regard to the REA appropriation for fiscal year 1964, resulted in establishment of certain basic procedures with respect to REA participation in negotiations with wholesale power suppliers as a part of the consideration of loan applications. Although the precise language of an REA Bulletin 111-3, was not developed and promulgated until February 24, 1964, the Administration and the staff of REA were responsive to the indicated requirements of the Congress during the intervening period between the hearings and the final issuance of the bulletin.

Although there were communications between the parties during the period from July 1 to December 1963, no significant developments occurred for which documentary references have been included.

On February 13, 1964, the Administrator wrote the three companies and defined the basic requirements for satisfactory power supply arrangements from the Administartor's point of view. On February 28 the Administrator notified each of the companies of the establishment of a cutoff date of May 1, 1964, in relation to the power supply survey as set forth in REA Bulletin 111-3 dated February 24, 1964.

After additional exchanges of communications, the companies eventually filed definite contract proposals prior to March 15, 1964. An evaluation of these new proposals indicated that no substantial improvement in the position of the electric cooperatives taking power from these companies was available in the proposals, other than the rate level already offered some months previous was confirmed.

On March 26, 1964, Administrator Clapp wrote the power companies and all the interested electric distribution cooperatives announcing a meeting to be held in Washington in his offices with the cooperatives first on April 6, and then with the companies also on April 8, 1964. This letter was in response to the companies' letter dated March 13, 1964, requesting a meeting of all parties. Administrator Clapp's letter of March 26, 1964, to the power companies, established the basic premise that the discussions to be held on April 8 would be primarily restricted to an exploration of means to assure territorial protection for the cooperatives prior to full discussion of other contract matters.

On April 8, 1964, representatives of the power companies operating in Louisiana met with representatives from the cooperatives in Washington. These representatives were told that solution of the problem of territorial protection for the cooperatives would be a necessary prerequisite to final evaluation of the reasonableness of the companies' contracts.

On April 10, 1964, the Administrator wrote to all the power companies reviewing the discussions of the meeting held in Washington on April 8, 1964.

In a letter dater April 17, 1964, the companies set forth a series of exceptions to the right of a cooperative to serve any load within its service area. The statement was also made that a precondition to any concept of territorial protection should be complete regulation of the cooperatives by the Louisiana Public Service Commission, paying what the companies deem normal interest rates, and paying all local, parish, State, and Federal taxes.

On April 30, 1964, the Administrator replied to the April 17, 1964, letter from the companies stating that REA attorneys would be made available to partici. pate in a meeting with the companies' and the cooperative's attorneys. The companies were urged to take the initiative in contacting the cooperatives to arrange for a meeting of legal representatives to discuss possible legislation. The power supply survey cutoff date previously set for May 1 was also extended to May 18 with the understanding that any further extension would require unmistakable evidence of progress with respect to the problem of territorial security for the cooperatives.

A letter dated May 6, 1964, to Administrator Clapp indicated willingness of the companies to discuss possible legislative measures to provide the cooperatives' with territorial protection.

A telegram of May 12, 1964, from Administrator Clapp to all three power companies stated that the companies failed to recognize the cooperative's rights to serve all loads in all areas or to implement territorial protection arrangements in their letter of May 6.

A letter dated May 28, 1964, from Administrator Clapp to all companies stated that the meetings of attorneys for the cooperatives and the companies have not resulted in a satisfactory solution of the question of territorial integrity for the Louisiana cooperatives.

A letter dated June 22, 1964, to Administrator Clapp from all the power companies indicated that the companies had placed a bill before the Louisiana Legislature for action. This bill represented the companies' point of view only.

A letter of July 10, 1964, from Administrator Clapp to all the power companies stated that the action of the Governor of Louisiana in vetoing the legislation introduced by the companies with regard to commission jurisdiction over the cooperatives had rendered moot the differences of opinion between the parties as to the efficacy of the legislation.

Administrator Clapp expressed regret that the companies had not made a greater effort to reach a mutually satisfactory solution of territorial protection,

7. Explanation of the applicant's reasons for seeking an REA loan.

(a) The stated philosophy of the present power suppliers for the member electric distribution cooperatives of this generation and transmission cooperative is that the cooperatives should be restricted in their role as power suppliers to that of providing service for farms and small rural loads in the general area in which they operate.

As a corollary of this the companies claim the right and exercise the position as primary power suppliers to compete, to preempt by infiltration of cooperative service areas the areas of existing loads and of possible new development, and to conduct promotional and advertising campaigns which adversely affect the security and effectiveness of the rural electric distribution cooperatives.

(b) The present power suppliers have refused after continued negotiations and strenuous efforts on the part of the cooperatives and REA to develop any mutually satisfactory arrangement either by contract or through legislative action which will protect the position of the distribution electric cooperatives and insure territorial integrity to these cooperatives.

(c) Although the primary power suppliers have during a continued period of negotiations since 1960 reduced the apparent rate level through three distinct offers presented in a manner designed primarily to destroy the joint negotiation effort of the distribution cooperatives, the cost of power from such suppliers is still higher than that available from a self-owned G. & T. system when a proper comparison is made including the cost of necessary related transmission facilities which the distribution cooperative must construct in order to take service from the present suppliers.

8. The amount of electric energy which the applicant will cease to purchase from present power suppliers upon construction of the generating plant for which REA financing is being sought.

The energy the applicant will cease to purchase in the initial year of generation is estimated as shown by suppliers in the following tabulation : Supplier:

Megawatt-hours Louisiana Power & Light

328, 000 Gulf States Utilities--

162, 000 Central Louisiana Electric

61, 000 New Roads.----

4,000 Total.----

555, 000 9. Explanation of the extent to which the feasibility of the requested loan for generation and transmission facilities depends upon the use of a portion of the facilities by others (including Federal power-marketing agencies).

The proposed plan of operation of the facilities for generation and transmission involved in the requested loan includes an interconnection standby, pooling and interchange agreement with the Southwestern Power Administration. The proposed agreement between the G. & T. cooperative and SPA requires a dedication of 10 percent of the thermal generating capability in the cooperative owned steamplants for use in the combined cooperative-SPA pool operation. In return for this 10-percent dedication of capacity for reserve purposes, SPA will provide continuous standby protection for the largest unit of the cooperative (100 megawatts) for all emergency and maintenance operation situations which can reasonably be anticipated. The amounts of energy involved in the use by SPA of the reserve thermal generation capacity will be approximately balanced off by cooperative use of SPA energy during periods when the maintenance or emergency situations prevail in the generating plant of the cooperative.

10. Details of the applicant's plans to sell or otherwise make available any of the power and energy from the proposed generation facilities to others (including Federal power marketing agencies).

The proposed contractual arrangement between the G. & T. cooperative and the Southwestern Power Administration includes a firm commitment from SPA to purchase an average of 27 megawatts per year of surplus capacity, as available, in the generating stations of the cooperative over the initial 10-year period of operation. The firm price to be paid by SPA for such surplus capacity has not been finally negotiated but will range between $10 and $12 per kilowatt. Surplus energy will be hold to SPA at 3 mills per kilowatt-hour.

11. Names of State agencies and commissions having jurisdiction over the applicant borrowers: None.

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PREVIOUS APPEARANCE BEFORE COMMITTEE Mr. MORRISON. I wish now to make a short oral résumé of the material submitted.

Senator HOLLAND. You may proceed.

Mr. MORRISON. Mr. Chairman, my name is J. J. Morrison. I am chairman of the board of Gulf States Utilities Co. and I am here as spokesman for the five investor-owned utilities operating in the State of Louisiana.

On June 30, 1964, I appeared before your honorable body and testified as to a then pending application to REA by Louisiana Electric Cooperative, Inc., for a generation and transmission loan in the amount of some $56,521,000.

At that time, in order to bring the record up to date, it was necessary to file and present a considerable volume of testimony. However, since we wish to avoid duplication and repetition in the maximum degree, we shall this year file and present only such testimony as seems necessary to refocus your attention on the principal issues and to bring you up to date on developments since June 30 of sast year.

I have a carbon copy of this oral statement for your reporter if this will assist in following my statement.

Senator HOLLAND. Yes.

NEGOTIATIONS WITH LOUISIANA COOPERATIVES

Mr. MORRISON. The companies in Louisiana have been in negotiation with the Louisiana cooperatives more or less continuously since mid1959. These negotiations finally led to an offer by the companies which, when applied to the combined consumption of these cooperatives for the 12 months ended June 1964, would have produced a price of 6.04 mills per kilowatt-hour.

This price, I submit to you, Mr. Chairman, especially in view of the elimination of any fuel escalation for a term of 10 years, was certainly one of the lowest in the Nation. This is evidenced by official REA reports in the matter issued from year to year.

On February 13, 1964, the REA Administrator entered our negotiations for the first time through a letter to the companies (1) notifying us that he was undertaking a survey; and (2) inviting the companies to supplement or amend any existing proposals, if they so desired. The letter also listed certain very general contractual objectives such as (a) lowest possible price; (6) short term; (c) availability of adequate power where and when needed; and (d) assurance of REC territorial integrity.

APPROPRIATION COMMITTEES REQUIREMENTS

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Please note, Mr. Chairman, that since Mr. Clapp's letter did not submit one single specific criticism of the companies' proposals and since House Appropriations Committee Report No. 355 and Report No. 497 of your committee both specifically required “Advise the supplier wherein such contract is unreasonable,” wherein, please note, we immediately wrote the Administrator a letter requesting that, before we submit any new proposal, we be advised wherein our existing proposals were unreasonable in respect of any standards enumerated in his letter.

Although the Administrator's reply, dated February 28, actually acknowledged our "requested clarification,” other than to indicate a preference for a 5-year contract term, his reply not only completely failed to meet our request for specific information, as to wherein our proposals were unreasonable in respect of his standards, but his letter even failed to state that any of our proposals were so deficient. Repeated future requests for such information were ignored both by the Administrator and the REC's with whom we were dealing.

WASHINGTON CONFERENCE

The next step was a conference in Washington, April 8, between Mr. Clapp, the REC's, and the companies relating to amended proposals submitted by the companies. At the very start of the con ference, Jr. Clapp announced that the principal purpose of the conference was to discuss "territorial integrity based upon his notions of “total area concept" because unless this could be agreed upon “no useful purpose would be served by considering other aspects of the companies' proposals.'

LETTER TO LOUISIANA COMPANIES

From this date forward, Mr. Chairman, negotiations, if such they could be called, took an entirely new "tack.” Mr. Clapp's injection of his notions of exclusive service areas become controlling, and discussing the merits of any condition in the contract upon which the companies could legally negotiate was at an end. To establish this critical fact, I quote from the record as follows, from page 2, paragraphs 2 and 3 of Mr. Clapp's letter of April 10 to the Louisiana companies (p. 335 of vol. II, “Agricultural Appropriations for 1965"):

**** 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 enforceable protection of their right in their service areas. This protection must include a full recognition of their rights 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."

TERRITORIAL INTEGRITY AND PROTECTION From the last sentence of Mr. Clapp's May 1, 1964, telegram—talking about territorial integrity (pages 338 and 339 of volume II,“Agricultural Appropriations for 1965”):

“In the meantime I see no purpose in undertaking discussions of the other points outlined in my letter of February 13, until there is a significant progress on this one.”

Mr. Chairman, amazingly enough, even in Mr. Clapp's letter of September 12 to Senator Hayden certifying the loan approval and that a survey had been made in accordance with the requirements of your Report No. 497, the supporting data "Information Relating to A' Loan" admits as follows:

Page 2, paragraph 5, second sentence:

"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 contract proposals."

Page 3, last sentence of that same document: "The inability of the parties to reach any satisfactory arrangement on territorial protection for the cooperatives has precluded negotiation on the other terms and conditions of the contract proposals."

TERRITORIAL INTEGRITY A MATTER OF STATE LAW From the very beginning, Mr. Chairman, the companies argued strongly that the matter of territorial integrity was strictly a matter of State law and could not be determined contractually between the companies and the REC's, but rather, that any such agreement would very likely be in conflict with the Louisiana constitution as it relates to utility regulations and also, violative of both Federal and State antitrust statutes.

Senator HOLLAND. May I ask a question there? Mr. Morrison, does Louisiana State law have any provision for the fixing of territorial statutes for a public utility?

46-950—65-pt. 2

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