the transition by the federated cooperatives from the original arrangements to the agreed long-range solution.

These encouraging negotiations have, insofar as the cooperatives are concerned, been undertaken on their own initiative. Tentative decisions thus far made, such as those with respect to the scope and limitations of proposed contractual agreements, have been their decisions with REA acting in an advisory capacity (with due regard, of course, for REA's security and program interests). It is, of course, proper that this should be the case. This course of action will continue without any effort on the part of REA to dictate the specific terms of any agreement which may be reached between the negotiating parties.

The wholehearted dedication by all of the parties-cooperative, commercial companies, and the Government-in achieving the mutually advantageous (bjective represented by the proposed permanent solution cannot fail to bring about the most effective and economic utilization of their power facilities for the greatest benefit of the consumers of the area.

SUPPLEMENT TO REVIEW OF POWER PROBLEMS OF REA-FINANCED FEDERATED COOPERATIVES IN SOUTHWESTERN POWER ADMINISTRATION AREA TO JULY 15, 1954 1. Scope of supplement

The review to which this is a supplement outlined, in general, (a) the background of the power supply problems facing FEA-financed federated cooperatives in Missouri and Oklahoma. (b) the objectives of REA's endeavors in connection with the current negotiations, and the means proposed to accomplish them, (c) the complexities faced in the negotiations, and (d) the status of the individual group negotiations in the respective geographical areas as of June 1, 1954. In the 6 weeks' period since issuance of the review, there have been a number of developments in connection with the negotiations directed toward a long-range solution, as well as in connection with the arrangements during the so-called interim period to permit continued operation of the cooperatives' facilities which are physically complete pending the putting into effect of a permanent solution. It is the purpose of this supplement to review these developments from June 1, 1954, to July 15, 1954, so that a clear picture of what has transpired in the various individual group negotiations during this period may indicate the nature of the efforts necessary or desirable to keep negotiations moving toward the successful conclusion all parties are seeking. Before setting forth the résumé of individual group negotiations for the permanent solution, the recent developments in connection with the interim period will be briefly noted.

2. Interim contracts

On June 23, 1954. representatives of Central Electric Power Cooperative, Sho-Me Power Corp., Northwest Electric Power Cooperative, KAMO Electric Cooperative, and Western Farmers Electric Cooperative met with representatives of the Interior Department, Southwestern Power Administration, and REA to consider the nature of the contracts to be developed between the cooperatives and SPA for the interim period pending effectuation of the permanent arrangements with the companies. Drafts of such interim contracts were reviewed and, in general, agreed upon by the parties, contingent upon the necessary congressional appropriations being made. The drafts, for the most part, were similar to the contracts in effect during the fiscal year 1954 between the cooperatives and SPA, with such modifications as seemed to be required because of the completion of additional cooperative facilities. In form, the arrangements were embodied in: (a) a joint contract between Northwest and Central and SPA; (b) a separate contract between KAMO and SPA; and (c) a contract between Western and SPA. Because of the interconnected facilities, both transmission and generation, involved in the contracts referred to above in (a) and (b), it was agreed that the overall economic effect should be the same so far as SPA was concerned as if separate contracts had been entered into by SPA with each of the federated cooperatives concerned, leaving to them as a group the working out of the equitable division of costs and payments among them. It was emphasized by Interior representatives that the carrying into effect of the interim arrangements contained in these drafts was dependent upon congressional appropriations being made in the amounts required to enable SPA to make the purchases of thermal energy and pay wheeling charges contemplated in the drafts.

On June 25, 1954, the conferees on the Interior Department Appropriation Act of 1955, filed their report with the following recommendation :

"Of the amount recommended by the conference committee, $1,140,000 is for the purpose of implementing 'interim' contracts between the Southwestern Power Administration and certain generating and transmission cooperatives in the area. Its expenditure is limited to March 1, 1955, unless permanent contracts have been completed by that time. The committee urgently insists that permanent contracts be completed between the Southwestern Power Administration, the rural electric generating and transmission cooperatives, and private electrical utilities in the area at the earliest possible date, so that this appropriation for 'interim' contracts will be sufficient to carry through the period of both contract negotiations and construction of necessary physical connections."

The amount which had been requested by the cooperatives was based upon computations of SPA purchases of thermal power from and payment of wheeling charges to the cooperatives in the amount of $1,712,000 for the fiscal year 1955. The sum of $1,140,000 made available by the conferees until March 1, 1955 represents an amount sufficient for the 8-months' period, assuming the same rate of expenditure as that contemplated by the cooperatives in their request for $1,712,000. The bill, as recommended by the conferees, was enacted and the Interior Department forwarded to the cooperatives for execution contracts for the interim period with rates and compensation substantially as agreed upon at the June 23 meeting. The term of the proposed Interior contracts, however, is 90 days in each case instead of the 8-months' period which it was estimated the amount appropriated would last if expended at the rate contemplated in the contract drafts. The question of extension of the term of the contract beyond 90 days, it was stated by Interior Department representatives, would be reviewed at that time on the basis of the situation then existing.

In the light of the developments in connection with the interim contracts, including the express directive from Congress that "permanent contracts be completed between Southwestern Power Administration, the rural electric generating and transmission cooperatives and private electrical utilities in the areas at the earliest possible date,” the limited time during which the appropriation is available for expenditure (March 1, 1955, unless permanent contracts are completed prior thereto) and the still shorter period which the proposed interim contracts will be effective at least initially, the urgency of getting on with the negotiations for permanent contracts is apparent.

3. Résumé of individual group negotiations (June 1, 1954, to July 15, 1954)

(a) Central Electric Power Cooperative, Sho-Me Power Corp.-Union Electric Co. of Missouri, Missouri Power & Light Co.-Representatives of Central, ShoMe, Union, Missouri Power & Light, Interior, SPA, and REA met in Jefferson City, Mo., on July 8, 1954, and discussed the following matters:

(i) The physical arrangements required by the proposed interconnections, including splitting the bus at Bull Shoals for a 3-year period, and interconnecting Central and Union at Freiburg by the installation of a 100,000-kilovolt-ampere substation.

(ii) Operating-policy provisions including protection against either party's taking existing or "potential" (with 300 feet) customers of the other.

(iii) Service to several distribution cooperatives (which had applied for membership but had not been accepted by Central) as part of these arrangements. (iv) Operation by the agency of the 161-kilovolt facilities of Central, including a possible alternative for operation by Central if Central would assume the financial burden resulting from outages.

(v) Rate and compensation provisions, in connection with which Central expressed its inability to agree to the amounts quoted by Union. A committee of one representative from each party was set up to work further on the rate and compensation provisions with meetings scheduled shortly after July 13.

(b) Northwest Electric Power Cooperative-Kansas City Power & Light Co.On July 12, 1954, representatives of Northwest, Kansas City Power & Light, Interior, SPA, and REA met in Kansas City discussing minor revisions of the working draft of agreement between Northwest and Kansas City Power & Light. Except for rate and compensation provisions (which were not discussed at this meeting), the draft of the contract appears to be nearly complete, there remaining to be developed provisions for maintenance and replacement, for dealing with the industrial-load problem and for scheduling and paying for the output of the Northwest generating plant. Kansas City Power & Light stated it would submit

to Northwest proposals on these outstanding matters, including rates, in the near future.

A matter which may, to some extent, affect the expected prompt conclusion of the Northwest-Kansas City Power & Light contract was the suggestion by Kansas City Power & Light of a possible new approach to the problem of serving KAMO. Heretofore, it had been assumed that KAMO's hydroelectric purchase from SPA would be delivered to Kansas City Power & Light and KAMO's purchase of continuous energy would be from Empire District Electric Co. The contracts had been drafted on this assumption insofar as the cooperatives were concerned. The arrangements between Kansas City Power & Light and Empire or any other companies affected, it was thought, would be left to the companies involved and not be a part of the general negotiations. As will appear in the following section dealing with the KAMO-Empire developments, there appears to be a need for resolution of these intercompany matters concerning service to KAMO. At the conclusion of the Kansas City meeting on July 13, Kansas City Power & Light stated that prior to the next meeting it would make available a complete form of contract on the basis of the revised approach.

(c) KAMO Electric Cooperative, Empire District Electric Co., Missouri Public Service Co.-On July 14, 1954, representatives of KAMO, Empire, Missouri Public Service, Interior, SPA and REA met in Joplin, Mo. Empire suggested revising the approach contemplated in the drafts of contracts heretofore developed in the negotiations between KAMO and Empire and Northwest and Kansas City Power & Light so that KAMO could deliver to Empire, instead of Kansas City Power & Light, KAMO's hydroelectric purchases from SPA. KAMO representatives expressed willingness to proceed on this revised approach if it is desired by the companies, the matter being principally between the companies. Empire also reviewed with the groups represented at the meeting certain estimated cost figures designed to show KAMO's power cost without integrating with Empire and the cost to Empire of the integration if enery were made available to KAMO at 8.5 mills per kilowatt-hour for a 10-year period. There was some discussion of minor revisions of the existing draft of contract. At the conclusion of the meeting a small group was named to meet on July 19 or 21 to analyze further the figures submitted by Empire.

(d) Western Farmers Electric Cooperative, Oklahoma Gas & Electric Co., Public Service Co. of Oklahoma.-On July 15, 1954, representatives of Oklahoma Gas & Electric Co., Public Service, Interior, SPA, REA, and Western met in Oklahoma City. Company representatives proposed certain tentative rates for the purchase of the output of Western's generating plant and for sale to Western of continuous energy. The results of these figures in terms of net overall power cost to Western could not be evaluated at this time because further figures are required from the companies for the payments to be made by the companies for the use of Western's transmission facilities by the companies and for the value of hydroelectric power and energy which may possibly be furnished by Western if a contract is developed between Western and SPA. Evaluation of this latter factor, moreover, is dependent upon not only the amount of hydroelectric power and energy which Western may obtain but also the rate which SPA may establish for it.

It was agreed that within approximately 30 days the engineering studies should be completed with respect to allocation between Western and the companies of costs of facilities for interconnection of the systems. Shortly thereafter, it is contemplated a meeting will be held to (a) consider a revised draft of the Western-Company contract, to be prepared by the companies and (b) to work further on evaluation of the hydroelectric power and energy and use of Western's facilities by the companies.

(e) SPA hydro contract.-As has been indicated in the review, the arrangements being worked on contemplate contracts between SPA and the federated cooperatives for the purchase of hydroelectric power and energy (principally peaking power) by the cooperatives, the resale of such hydroelectric power and energy by the cooperatives to the companies along with the thermal power and energy released by the cooperatives, and the purchase by the cooperatives from the companies of continuous power and energy. It is, therefore, essential to the continuance of progress in the negotiations that detailed provision of the so-called hydro contracts between SPA and the cooperatives be prepared concurrently with the preparation of the contracts between the companies and the cooperatives in order that the many interrelationships, both from a physical engineering and operational viewpoint as well as economically and financially. may be properly articulated.

Initial efforts have been made toward preparation of a draft of hydro contract and it is hoped that further progress will be made in this direction in the near future. On July 13, the representatives of Kansas City Power & Light, Empire, Missouri Public Service, KAMO, Central, Union, Interior, SPA, and REA met in Kansas City to begin preparation on a working draft of contract between Northwest and KAMO and SPA for the purchase of hydroelectric power and energy as part of the permanent arrangements. The SPA and Interior representatives made some preliminary comments. A further meeting of the operating personnel of the parties concerned met in St. Louis on July 19 to consider numerous and complex technical operating problems to be dealt with in the draft. Further work on the hydro contract draft was performed at meetings in Tulsa on July 22 and 23 with further meetings scheduled for the week of July 26 in Kansas City.

SUPPLEMENT TO REVIEW OF POWER PROBLEMS OF REA-FINANCED FEDERATED COOPERATIVES IN SOUTHWESTERN POWER ADMINISTRATION AREA TO JANUARY 15, 1955

The purpose of this supplement is to review the developments which have taken place since July 15, 1954, as respects (a) the effecutation of long-term arrangements between REA-financed cooperatives, commercial companies, and SPA in Missouri and Oklahoma, and (b) interim arrangements between SPA and the federated cooperatives. In view of their immediate significance, the developments concerning the interim arrangements will be summarized first.

1. Interim contracts

As pointed out in the July 15 supplement, the 1955 Interior Appropriation Act made available $1,140,000 for SPA purchases of thermal power from and payment of wheeling charges to the cooperatives, with expenditure period limited to March 1, 1955, "unless permanent contracts have been completed by that time." Three-month contracts were entered into, inasmuch as the Department of Interior considered it desirable that the question of extending the term beyond 90 days should be reviewed at that time on the basis of the situation then existing. The continuing drought in the area seriously reduced the hydroelectric energy which it was assumed would be available to SPA. Accordingly, it became necessary for SPA to purchase thermal energy from the cooperatives in amounts which exceeded substantially the estimated rate of purchase assumed in connection with the appropriation for such purchases and wheeling payments. As a consequence, shortly after October 1, the cooperatives and SPA undertook negotiations directed towards extending the original 1955 contractual arrangements, as renewed through October, with a view to utilizing the remainder of the funds ap propriated by Congress until March 1, on a basis most consistent with SPA's needs, and with an equitable division of funds among the cooperatives. At meetings held in New Orleans, on November 3, and in Tulsa on November 16 and 24, revised arrangements were agreed upon and these have been embodied into contracts which extend to February 1, 1955. Contracts for the month of February will be prepared in the light of the situation existing at the end of January. Expenditures during February, proportionate to those provided for in the contracts extending through January, will exhaust the $1,140,000 appropriated by Congress by March 1, 1955.

2. The long-range solution

(a) SPA hydro contract.-As was noted in the review and the July 15 supplement, the development of hydro contracts between SPA and the cooperatives, satisfactory as to amounts of power to be made available as well as rates, is an essential element of the long-range solution. Accordingly, since the meetings referred to in the July 15 supplement, intensive efforts have been devoted to this phase of the problem. It was determined that the hydro contract between SPA and Northwest Electric Cooperative, Inc., would serve as a pattern, and Northwest and Kansas City Power & Light Co. have taken the lead in the negotiations with SPA and the Department of Interior. All the other cooperatives and companies have been consulted and kept informed by Northwest and Kansas City Power & Light Co.

Successive drafts of contracts were developed by Northwest and Kansas City Power & Light during August and September, with the advice of representatives of SPA, REA, and the other cooperatives and companies. During the early part 60498-55-2

of October, a form of contract was submitted by Northwest and Kansas City Power & Light to the Department of Interior which represented their formal proposal. Toward the end of October, the Department submitted for study a draft of contract with basic differences from the Northwest-Kansas City Power & Light proposal as to significant matters, including the contemplated Government commitment as to the amount of firm energy, the sale of secondary energy, rate classifications (with provision added for periodic review and redetermination of rates) and the dependence on congressional appropriations.

The rates included in Northwest-Kansas City Power & Light proposal were the preliminary rates suggested in the Department's January 5, 1954, letter referred to in the review. The Department's October draft of contract revised the rate classifications, but did not specify any rates.

Meetings were held at the Department of Interior during November with a view to arriving at a mutually satisfactory form of contract. Thereafter, additional working drafts were prepared by representatives of the Department, Northwest and Kansas City Power & Light, which were submitted for study to the other interested cooperatives and companies and REA. In December, the Department filed new rate schedules for approval by the Federal Power Commission. We are advised that Northwest and Kansas City Power & Light will shortly submit another formal proposal to the Department.

The complexities necessarily inherent in working out interrelated hydro arrangements to form the basis for integration of the operations of the cooperatives and companies in a sound technical and economic manner have naturally been increased by the serious reduction in the firm energy caused by the drought. Thus, on October 8, 1954, the Department of Interior notified the cooperatives that an engineering study made in September disclosed that future estimated firm energy from the hydroelectric projects serving the area would be approximately 76 percent of past estimates; that, as a result, only 30 million kilowatthours of firm energy annually with 130,000 kilowatts of power was then available for sale to the cooperatives, after taking into account the Department's existing contractual commitments; and that, consequently, the Department was undertaking to obtain amendments of outstanding contracts that would make available for the cooperatives 234 million kilowatt-hours of firm energy annually. The conclusion of final satisfactory hydro arrangements with the cooperatives will, of course, necessarily depend on the results of the negotiations as respects the revision of the Department's existing contracts. In the meantime, negotiations between the companies and the cooperatives have continued on the assumption, suggested by the Department of Interior, that 234 million kilowatt-hours annually will be available for sale to the cooperatives.

(b) Negotiations between cooperatives and companies.-During this period, meetings have been held between representatives of the respective cooperatives and companies for the purpose of developing definite plans for integration, including rates and other compensation features. Substantial progress has been made in connection with physical arrangements, including matters relating to interconnection and operation and maintenance.

Following evaluation of cost estimates submitted by the companies during the early part of this period, Central submitted to each of the other cooperatives in Missouri (Northwest, Sho-Me, and KAMO) an alternative plan which it considered might achieve lower delivered power costs for the cooperatives. As indicated in the review and July 15 supplement, the original plan contemplates the following means of effectuating integration: (a) purchase by the cooperatives of peaking hydroelectric power and energy from the Interior Department, (b) sale thereof to the companies, together with the output of the cooperatives' thermal generating plants, (c) purchase by the cooperatives from the companies of the electric requirements of the member distribution cooperatives, and (d) use by the companies of surplus transmission capacity which might exist from time to time in the cooperatives' systems. In essence. Central's alternative plan for Missouri contemplated the formation of a marketing and pooling agency through which the Missouri cooperatives would (a) purchase the cooperatives' allotments of hydroelectric power and energy from the Interior Department, (b) supply the power requirements of the cooperatives from their combined hydro and thermal resources over the 161 kilovolt lines of Central and Northwest, and certain of SPA's transmission and substation facilities, the capacities of which would be made available to the cooperatives and operated and maintained at their expense, (c) sell to interested companies the power and energy of the cooperatives in excess of the requirements of their member distribution cooperatives, and (d) make available to these companies surplus transmission