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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 im ible, 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 dini. There might be a slight differential but the differential might be much less than I might anticipate 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. REA 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 kilo watts 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:)

RURAL ELECTRIFICATION ADMINISTRATION
STATEMENT OF JOE S. ZOLLER, ACTING ADMINISTRATOR

RURAL ELECTRIFICATION ADMINISTRATION
BEFORE THE HOUSE SUBCOMMITTEE ON APPROPRIATIONS
FOR AGRICULTURE, RURAL DEVELOPMENT AND RELATED AGENCIES

Mr. Chairman and members of the Subcommittee, I appreciate this opportunity to

present the 1982 REA budget.

Before we get into the specifics of the budget, I would like to discuss with you the

role of REA borrowers in rural America. We estimate that between 25 to 30 million

rural people now receive their electricity from REA-financed electric systems. Between

13 and 16 million people receive telephone service from REA telephone borrowers; with most of them receiving one-party service. More recently, and on a much smaller scale, funding through the Consolidated Farm and Rural Development Act for the provisions of CATV and other wideband services to 60,000 rural families was approved in fiscal year

1980.

The REA program has improved and continues to improve the lives of many millions of rural Americans. Further, in terms of national goals, the electric loan and guarantee programs finance the production and distribution of energy which strengthens the rural. economy and improves rural productivity; the telephone programs finance communications which reduce transportation energy needs and imrpove rural America commerce. Because the borrowers are utilities and take that responsibility seriously,

increasing population, new housing, and growing industry in rural areas create a

continuing demand for the debt capital, part of which has been provided through loans and loan guarantees. Providing utility services to rural areas is, as in urban areas, a

continuous undertaking.

A Need for Change

The proposed changes in the 1982 budget are important elements of the President's

Program for Economic Recovery. To quote from Secretary Block's statement, "The

present unacceptable high interest rates and high inflation rates -- both in real and

psychological terms -- are directly linked to the present level of Federal borrowing required to support Federal loan activities and to finance continuing deficits in the

Federal budget. The major mechanism for lowering inflation, reducing interest rates, increasing business investments, and enhancing economic growth is to reduce the overall

level of Federal activity and to encourage private economic activity.

The REA Budget

The Electric Loan and Loan Guarantee Program

REA now makes some insured loans to generation and transmission borrowers as well as distribution borrowers. The loans to distribution borrowers are made for

distribution facilities and in some cases for generation, and transmission facilities.

Because the loan demands for generation and transmission facilities have exceeded $5 billion recently, it is obvious that insured loans for power supply facilities--generation and transmission--could only meet a very limited portion of these needs. Generally, the agency has exercised this responsibility by limiting such loans to construction of low voltage transmission lines that feed distribution systems, and more recently to

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