before this can be implemented. Has the legislation been prepared? Has it been submitted?

Mr. ZOLLER. It is my understanding the legislation has been submitted to the Congress. I do not know the date but it has been submitted to the Congress.

Mr. DEWHURST. It was submitted sometime last week.

REDUCTION IN FFB PROGRAM

Mr. NATCHER. Beginning with fiscal year 1982 you plan to go to direct guaranteed loans rather than using the Federal Financing Bank. Just what will this accomplish?

Mr. ZOLLER. This will remove the amounts that currently FFB borrows from Treasury to fund those loans which it is making. It will remove these amounts from the national debt. Through the 100 percent guarantee means, a borrower can obtain those funds from the private sector.

Mr. NATCHER. Will these loans have a 100 percent federal guarantee?

Mr. ZOLLER. Those loans will continue to provide a 100 percent full faith and credit guarantee of the Federal Government.

Mr. NATCHER. What do you anticipate will be the premium that will be paid on these loans as a guarantee rather than a loan through the Federal Financing Bank?

Mr. ZOLLER. That is really uncertain right now. It will depend on when the first loan guarantee really goes to the private sector and what reception it receives. Based on discussions I have had, there are estimates of from 50 basis points to 150 basis point more. Mr. NATCHER. Will these loans not be in competition, at least indirectly, with Treasury borrowing?

Mr. ZOLLER. Borrowers may be going to the private sector for borrowing at the same time Treasury is going to the market for some of its capital needs. In that sense it would be in competition.

Mr. NATCHER. To what extent would these loans be looked upon more favorably by borrowers than Treasury bills since these guarantees would pay a higher interest rate?

Mr. ZOLLER. We would expect that the 100 percent guarantee full faith and credit of the Government would be able to attract investors and supply the needs of the electric systems without too much additional cost.

Mr. NATCHER. Will not the elimination of the Federal Financing Bank transactions put us back in exactly the same position with exactly the same problems that the Federal Financing Bank was established to solve?

Mr. ZOLLER. I do not believe it is going to put us back there. We are beginning in-house studies to determine how best to use the guarantee authority in fiscal 1982 if the FFB is not available on October first.

COAL CONVERSION

Mr. NATCHER. What is the current status of the conversion to coal within the REA system?

M ZOLLER. You mean converting certain plants over to coal?

Mr. NATCHER. Yes. What has been done along this line? What are you doing?

Mr. ZOLLER. We have a few plants of such size that it would appear it might be an economical conversion over to coal. I would have to provide additional information to you. I do not recall specifically but there have been studies made of certain of our gasfired plants and whether it would be economical to convert those over to coal-fired units.

Mr. NATCHER. Provide that for the record, please, and also give us your estimates of how much oil has been saved so far and how much oil will be saved once all systems are converted to the use of coal that can be converted.

[The information follows:]

CONVERSION FRom Gas and OIL

The following table indicates the installed capacity and energy generated in 1979 by fuel source and type of unit for the operating generating plants owned by REA borrowers:

When the gas fueled plants were placed into operation, many of them were used for base load energy production. Since that time, the cost and availability of gas has resulted in many of these units being converted to also burn oil. Most of the REA borrowers with these units have now or are in the process of constructing coal-fired units. These coal units will become the primary source of energy and will limit, to a considerable extent, the need for energy generation by the liquid-fueled units. The role of the liquid fueled units will then become basically for capacity purposes at times of system peak demands or for contingency operation. The characterisitics of liquid fueled plants are such that conversion to coal fired operation is not practical. Many of these plants are constructed on limited sites which are not conducive to the addition of coal handling facilities and flue gas treatment for desulferization and particulate removal. The age and efficiency of these are such that the large expenditures for conversion to coal firing is not feasible. Because of these reasons, none of the REA borrowers are considering converting any of their liquid fueled units to coal-fired units.

Mr. NATCHER. What has happened to electric rates within the REA system within the past 12 months, and what impact has this had on future growth of the REA system? This is, as you know, an important question now.

Mr. ZOLLER. We will provide that for the record. [The information follows:]

ELECTRIC RETAIL RATE CHANGES

During calendar year 1980, REA electric borrowers reported 364 base rate increases placed into effect, representing an additional $216.1 million in revenues on an annual basis. During calendar year 1979, REA electric borrowers reported 291 base rate increases, representing an estimated annual increase of $125.6 million.

77-802 0-81--38

During 1980, there were also 3 rate reductions placed into effect, representing a decrease of $68,380 compared with 4 reductions in 1979, with an estimated annual decrease of $333,370. These base rate reductions represent mainly realignment or adjustments of various rate schedules of the same type or load in order to make them uniform.

The effect of these changes, plus power cost and other automatic cost adjustments, raised the average residential revenue per kWh from 3.8 cents in 1978 to 4.2 cents in 1979. Final figures are not yet available for 1980, but, from preliminary analysis, we expect a comparable increase, largely attributable to cost of wholesale power. Over the past two years the rate of growth in kWh sales has declined. The effect of price increases as compared with various conservation measures and weather variables is difficult, if not impossible, to measure. In 1979, for the first time in REA history, average use per residential consumer declined, from 937 to 919 kilowatthours per month. Typical increases in recent years equaled 3.5 percent. Preliminary estimates for 1980 indicate a similar increase. Increase in new consumers has slowed from over 3 percent per year to approximately 2 percent. This may result from a slowing in housing construction.

Decline in growth, whether by construction measures or price, has a temporary negative financial effect upon borrowers because of lowered sales volume. In the longer view however, it may help reduce future cost increases because of slower addition of newer and higher cost generation facilities.

U.S. TREASURY BORROWING

Mr. NATCHER. Mr. Lewis.

Mr. LEWIS. Thank you. If I could follow up on a couple of questions you were asking. Mr. Natcher was making a very good point. The movement from direct loans on the part of Treasury versus loan guarantees essentially throws those two sources of money out into the marketplace. The government is out borrowing money to meet their obligations anyway and when the government goes out with 100 percent of their banking or their assurance and asks for money they compete with all, the whole marketplace public and private, looking for private money for lending purposes. I think Mr. Natcher was making the point if what you are doing is making a transfer in paper the Treasury is not borrowing quite so much because they are assuring the loan and the borrower at the local level who would normally use the Treasury for REA purposes is going to the marketplace themselves instead. There is apparently a differential in interest rate, though, that they would have to pay so that local persons, rural electrification service at the local level, local consumers paying the bill must pay a difference in the interest rate. So what we are really asking them to do I guess is to participate a little bit more in the cost of delivering that service. The impact on the marketplace or dollars being borrowed is probably a slight differential on the long range impact of the increased interest rate; is that right?

Mr. ZOLLER. We would expect there would be some difference. As I indicated the actual difference could only be determined when you take that first guaranteed loan to the private sector in the investment community. We would expect it to be at a higher cost than currently being charged by FFB.

Mr. LEWIS. So if I were going to add a borrower, if I were going to publicly or privately express concern about this shift in policy, if you were screaming today it might be that I really did not have an understanding of the fact that you are doing the same kinds of borrowing only from different channels. There might be a slight differential but the differential might be much less than I might annate if I were a private borrower; is that right?

Mr. ZOLLER. The program objective, of course, is to reduce overall federal credit, reduce the subsidy being provided to bring down inflation amd bring down interest costs generally. In the context of the President's program, lower interest rates and and lower inflation rates provide direct benefits to the rural consumer or rural system being required to obtain its funding through guarantees.

Mr. LEWIS. If you really want to move to the private sector you would say no direct loans, no guarantees-let us remove the services entirely, have the individual services compete on its own without the Feds being involved. That is the next step one might take if you were going to get government out of the federal level, but that might be too much pain for the market to bear is that right? Mr. ZOLLER. I think.

Mr. LEWIS. The gentleman to your left is shaking his head with hand carefully over mouth. Is that correct?

Mr. VELLONE. There would be a bigger repercussion, yes, sir. Mr. LEWIS. Thank you.

Mr. NATCHER. We have several questions from Mr. Robinson which we will insert in the record at this point.

[The questions and responses follow:]

IMPLEMENTATION OF GAO REPORT

Mr. ROBINSON. In a recent GAO report dated November 28, 1980, it was suggested that the power suppliers, with their overall responsibility for power planning and supply, could be better used in the effort of directing the distribution system. They suggested that power suppliers, as part of their planning effort, should be required to perform in-depth system-wide studies of all reasonable supply options, including conservation, load management, renewable energy sources, purchased power, power pooling and joint projects. Has the REA attempted to implement these suggestions? RESPONSE. Many of the actions recommended by GAO in that report had already been undertaken by REA prior to its issuance.

REA has been active in encouraging the type of power supply planning effort suggested by GAO in its November 28, 1980, report. Power supply borrowers have been receptive to such initiatives and have vigorously pursued system-wide study efforts. RÊA provides financing assistance for conservation studies and other efforts through its Section 12 program. REA Bulletin 20-2 requires REA borrowers to develop a conservation education and technical assistance capability.

Last year we recognized that there is a great deal of confusing debate on the economic and technical suitability of renewable and other emerging technologies as part of power supply systems. Consequently, REA entered into a contract with Battelle Columbus Laboratories to review the status of various alternative energy technologies and their potential applicability to rural power systems. The study, which is near completion, will aid REA borrowers by identifying those questions and issues that must be adequately answered on emerging technologies.

LOAN APPLICATION REVIEW

Mr. ROBINSON. Has there been any emphasis in makng and guaranteeing loans on examining the borrowers' ability to repay their loans?

RESPONSE. The Administrator is charged in the RE Act with determining that the security on loans is reasonably adequate to assure repayments and REA prides itself on the repayment record of its borrowers. The development of loan applications by borrowers through coordination with the REA staff and the final review of such within REA has always been strong. We are continually looking at ways to improve loan security and are not afraid to make changes to do so. The ADP system that is being obtained by REA will be of considerable assistance in this effort.

PRIVATE SECTOR INVOLVEMENT IN GUARANTEE PROGRAM

Mr. ROBINSON. What efforts are being made to encourage more private credit sector involvement in the guaranteed loan program?

RESPONSE. The elimination of direct loans by the Federal Financial Bank under an REA guarantee would encourage the private financial markets to become more

involved in the loan guarantee program. It is felt that, with the continuation of the REA guarantee, borrowers will not have any difficulty obtaining necessary funds at affordable terms and conditions.

GAS AND OIL FIRED GENERATION

Mr. ROBINSON. Last year in response to a question, I learned that, of the generation projects financed the last three years, the total oil or gas amounted to 5.6 percent. Can you tell me if any coal or nuclear units came into operation this past year, and if so, what the percentage of oil-fired and dual fuel capacity decreased to? What part did REA renewable resource projects play in this?

RESPONSE. During 1980, REA electric borrowers added more than 1,000,000 kilowatts of coal-fired generating capacity. Although only 5.6 percent of generating capacity financed over the past 3 years was gas and/or oil fired, 32.3 percent of the installed capacity as of January 1, 1980, utilized these fuels. This decreased to 30.2 by January 1, 1981. In calendar year 1979, 20.2 percent of the total energy generated by the rural electric cooperatives was from the oil and gas generating capacity. The amount for calendar year 1980 is not available at this time.

SUPPLEMENTAL RENEWABLE ENERGY SOURCES

Mr. ROBINSON. Can you describe any progress which has been made in solar, geothermal, sunflower husks or wind resources projects?

RESPONSE. Progress by rural electric systems to the use of supplemental and renewable resources for meeting a portion of their energy requirements has been exemplary. To date, REA electric borrowers have expressed interest in 190 different projects, with generation capability of 3,600 megawatts and 16,000 gigawatthours. This is equivalent to 27.5 million barrels of oil a year. Because of numerous existing dams and currently available technology, the interest in and short-term potential of hydroelectric facilities represents the largest share; 153 projects totaling 2,700 megawatts of capacity.

REA and its borrowers are currently investigating 37 non-hydroelectric projects with a capacity of 900 megawatts. These are comprised of 17 wind projects, 13 biomass projects, 3 geothermal projects, 3 storage projects, and 1 solar project. In addition, many borrowers either have or are planning to employ solar space and hot water heating facilities in their headquarters buildings and are working with local groups and individuals in solar applications such as crop drying.

Also, to date, 153 borrowers have requested participation in REA's Energy Resources Conservation Loans Program. This program permits borrowers to extend certain scheduled principal payments to REA to make funds available to their members of energy conservation purposes.

Mr. NATCHER. Mr. Zoller, we want to thank you and your associates for appearing before the Committee at this time on behalf of the request now pending. The Committee will now adjourn until 1 o'clock tomorrow afternoon.

[Supplemental information follows:]