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GOVERNANCE AND FINANCIAL ACCOUNTABILITY

OF RURAL ELECTRIC COOPERATIVES: THE

PEDERNALES EXPERIENCE

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JUNE 26, 2008

Serial No. 110–107

Printed for the use of the Committee on Oversight and Government Reform

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Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

——— ———

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

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C O N T E N T S

Page

Hearing held on June 26, 2008 ............................................................................... 1

Statement of:

English, Glenn, CEO, National Rural Electric Cooperative Association ..... 122

Fraser, Troy, Chair, Business and Commerce Committee, Texas Senate;

Patrick Rose, Texas House of Representatives; John Watson, member

of Pedernales Electric Cooperative; Carlos Higgins, member of

Pedernales Electric Cooperative; and Juan Garza, current general manager of Pedernales Electric Cooperative ..................................................... 69

Fraser, Troy ............................................................................................... 69

Garza, Juan ............................................................................................... 95

Higgins, Carlos .......................................................................................... 88

Rose, Patrick .............................................................................................. 78

Watson, John ............................................................................................. 84

Letters, statements, etc., submitted for the record by:

Braley, Hon. Bruce, a Representative in Congress from the State of

Iowa, prepared statement of ........................................................................ 172

Cooper, Hon. Jim, a Representative in Congress from the State of Tennessee, prepared statement of ..................................................................... 57

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of ........................................................................ 62

English, Glenn, CEO, National Rural Electric Cooperative Association,

prepared statement of ................................................................................... 125

Fraser, Troy, Chair, Business and Commerce Committee, Texas Senate,

prepared statement of ................................................................................... 72

Garza, Juan, current general manager of Pedernales Electric Cooperative,

prepared statement of ................................................................................... 97

Higgins, Carlos, member of Pedernales Electric Cooperative, prepared

statement of ................................................................................................... 90

Rose, Patrick, Texas House of Representatives, prepared statement of ...... 80

Sali, Hon. Bill, a Representative in Congress from the State of Idaho,

prepared statement of ................................................................................... 51

Souder, Hon. Mark E., a Representative in Congress from the State

of Indiana, prepared statement of ............................................................... 174

Watson, John, member of Pedernales Electric Cooperative, prepared

statement of ................................................................................................... 86

Waxman, Chairman Henry A., a Representative in Congress from the

State of California:

Information concerning a policy essay ..................................................... 3

Prepared statement of ............................................................................... 45

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GOVERNANCE AND FINANCIAL ACCOUNTABILITY OF RURAL ELECTRIC COOPERATIVES: THE PEDERNALES EXPERIENCE

THURSDAY, JUNE 26, 2008

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10:12 a.m. in room

2154, Rayburn House Office Building, Hon. Henry A. Waxman

(chairman of the committee) presiding.

Present: Representatives Waxman, Towns, Cummings, Kucinich,

Clay, Watson, Braley, Cooper, Sarbanes, Welch, Davis of Virginia,

Burton, Souder, Duncan, Issa, Marchant, Westmoreland, Foxx,

Sali, and Jordan.

Staff present: Phil Schiliro, chief of staff; Phil Barnett, staff director and chief counsel; Karen Lightfoot, communications director

and senior policy advisor; Greg Dotson, chief environmental counsel; David Rapallo, chief investigative counsel; John Wiliams, deputy chief investigative counsel; Brian Cohen, senior investigator

and policy advisor; Jeff Baran, counsel; Gilad Wilkenfeld, investigator; Caren Auchman and Ella Hoffman, press assistants; Leneal

Scott, information systems manager; Rob Cobbs and Miriam

Edelman, staff assistants; Lawrence Halloran, minority staff director; Jennifer Safavian, minority chief counsel for oversight and investigations; Keith Ausbrook, minority general counsel; Ali Ahmad,

minority deputy press secretary; Larry Brady, minority senior investigator and policy advisor; Alex Cooper and Adam Fromm, minority professional staff members; Mary Pauline Jones, minority

staff assistant; Patrick Lyden, minority parliamentarian and member services coordinator; and Brian McNicoll, minority communications director.

Chairman WAXMAN. The committee will come to order.

Today’s hearing focuses on an important issue that has received

little attention: electric cooperatives and the billions of dollars they

control.

Electric cooperatives are unique structures that provide electricity to millions of customers in rural and suburban areas. They

are nonprofit utilities that are owned by their customers, and at

least in theory are supposed to be democratically controlled. Nationwide there are 930 co-ops serving over 17 million customers.

What isn’t widely known is that these co-ops control over $30 billion in customers’ equity. In many cases, even the consumers don’t

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realize it is their equity and don’t know how the co-ops are spending their money.

I want to thank my colleague and friend, Jim Cooper, for bringing this issue to the committee’s attention. It is exactly the kind

of issue the oversight committee should be looking at, and from

what we have already found this is an area in strong need of accountability. In fact, two of the witnesses we wanted for this hearing have refused to attend. They declined to appear voluntarily,

and they have evaded Federal Marshals who tried to serve them

with subpoenas. The Federal Marshals believe one of the witnesses

is now hiding in a remote New Mexico ranch.

These two witnesses essentially ran the Pedernales Electric Cooperative in the Texas Hill country. This co-op has a proud history,

having been created in 1938 by a young Congressman by the name

of Lyndon Johnson. It is now the largest co-op in the United States.

But Benny Fuelberg, the former Pedernales general manager,

and Bud Burnett, the former Pedernales president, aren’t reflecting

the co-op’s proud history by refusing to explain their apparent selfdealings.

There is compelling evidence that the Pedernales Co-op used its

customers’ private equity as a private piggy bank. Mr. Fuelberg,

Mr. Burnett, and the Pedernales board paid themselves well. In

2007 Mr. Fuelberg received over $1 million in salary, benefits, and

bonuses. In just 5 years Mr. Fuelberg and the board spent

$700,000 to stay in five-star hotels like the Ritz Carlton and Four

Seasons, dine at expensive restaurants, and buy themselves fancy

chocolates and Celine Dion concert tickets. They also spent millions

of dollars in an unsuccessful legal battle against their own customers.

We will learn more about all of this from our witnesses, which

include Pedernales Co-op members, two members of the Texas Legislature, and the newly hired general manager of Pedernales. But

the questions about the potential abuses of co-ops aren’t limited to

the Pedernales Co-op, and that brings us back to the $30 billion in

customer equity I mentioned a few moments ago.

The Pedernales experience tells us we need to examine whether

co-ops are being run in a truly democratic fashion, and we need to

take a close look at whether there are adequate financial protections for the investments customers have in these entities.

The 17 million co-op customers’ equity investments are worth an

average of $2,000 apiece, but there appears to be little transparency and accountability for how co-ops use these funds.

I know co-ops have done a tremendous amount of good for millions of Americans, and I know it is unfair to suggest the potential

wrongdoing at the Pedernales Co-op is typical for all co-ops. Congressman Cooper has done a real service by setting the right balance for these issues in a recent article in the Harvard Journal on

Legislation, and I ask unanimous consent to include it in the hearing record. Without objection, that will be the order.

[The information referred to follows:]

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Chairman WAXMAN. I am looking forward to the testimony of our

witnesses and learning more about this important issue.

[The prepared statement of Chairman Henry A. Waxman follows:]

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Chairman WAXMAN. I now want to recognize for his opening

statement any Member who wishes to make an opening statement.

Mr. Sali.

Mr. SALI. Thank you, Mr. Chairman. I want to thank you for

calling this important hearing about the governance and financial

accountability of rural electric cooperatives. We will hear here

today that the Pedernales incident in Texas is indicative of the conduct of rural electric cooperatives across the country. I anticipate

we will hear remarks that most rural electric cooperatives are poorly managed and may need further regulation.

Certainly in Idaho—I would presume in many areas of the country—rural electric cooperatives serve a critical and positive role in

our communities, providing service to rural areas at an affordable

rate.

In the northern part of my District in Idaho, if you will look at

the map there, there are several electric cooperatives providing

electricity to just over 100,000 residential and business consumers.

These electric cooperatives serve some of the most isolated, rural

consumers in our Nation. On average, the electric cooperatives in

Idaho serve 6 customers per mile of wire, in contrast to the 20 customers per mile of wire for the investor-owned utilities.

I have serious concerns if, by holding this hearing today, this

committee is suggesting that we must impose more stringent regulations on the rural electric cooperative industry due to the mismanagement of one cooperative. Regulations already exist at the

cooperative board level and at the State level, and the cooperatives

in northern Idaho already have transparency policies in place

where consumers can review all financial data on a Web site.

Most cooperative consumers in Idaho receive a capital credit refund. In the case of Clearwater Power—that is the green area on

the map—General Manager Dave Hagen stated, ‘‘Our consumers

have received capital credit refunds since 1988 amounting to the

total of $5 million.’’

Additional regulations imposed at the Federal level will only increase the cost of electricity to our rural communities and small

businesses, which are already struggling to get by as they struggle

with high food prices and high gas prices.

My constituents cannot afford higher electric bills with the cost

of gasoline and food on the rise, as well. New regulations and higher utility bills are an unnecessary burden, especially for my constituents in north Idaho who receive electricity from a cooperative

because their per capita income is just $18,555, and they have an

average household income of $6,000 less than the other utility consumers in my State. This would be a tremendous burden for them.

For these reasons, Mr. Chairman, I respectfully will oppose any

new regulatory burden that would increase the cost of doing business for the rural electric cooperative industry. I would ask my colleagues to do the same.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Bill Sali follows:]

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Chairman WAXMAN. Thank you, Mr. Sali.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

I really regret that we must have this hearing today. I love electric co-ops and I don’t want to see any of them harmed. But I also

love co-op customers. So far, I have not introduced any legislation

because my only goal is to return co-ops to their roots. I don’t even

want to draw attention to co-ops because I know how publicity shy

they are.

My father helped start a rural electric cooperative and I have

represented roughly 20 electric co-ops, or at least their customers,

and that is perhaps more than any other Member.

I started learning about electric co-ops almost two decades ago

when I first attended a co-op annual meeting. For almost 10 years

I have been talking privately with various co-op leaders, speaking

at co-op conventions, both State and national, to warn them about

problems that even I could see as a co-op observer.

I worked hard for many years to solve co-op problems within the

co-op family, but I was rebuffed at almost every turn, so here we

are today with one, the largest co-op in America, in serious scandal; two, its former leaders hiding from Federal Marshals; and,

three, loads of other co-op problems bubbling publicly to the surface.

For much of the last 10 years I didn’t really know for sure

whether my co-op worries were justified, but then I saw the outstanding reporting of Margaret Newkirk of the Atlanta Journal

Constitution and of Claudia Grisales of the Austin American

Statesman chronicling the abuses of Georgia and Texas co-ops. I

also found that TVA, the Tennessee Valley Authority, Inspectors

General had been complaining about Tennessee co-op misbehavior

for a long time, but, due to co-op pressure, hiding the report from

Congress and, as the IG put it in writing, from shrill media attention.

I also stumbled upon the National Co-op Trade Association’s own

secret, password-protected Web site and discovered that some of

my worst fears about co-ops were substantiated by the Trade Association, itself, and NRECA, the same organization that had been

stonewalling me.

That is when I decided to write a law review article that the

chairman mentioned. If you have got to wash your dirty laundry

in public, you might as well get it cleaned.

I want to make seven quick points: No. 1, if you think Pedernales

is the only electric co-op scandal in America, then you believe that

there can only be one cockroach. If such abuses can happen in the

largest co-op in the country founded by a former U.S. President

within sight of the regulators in the State capital in Austin, TX,

then I think it can happen anywhere.

Co-ops serve portions of 47 States. They serve 75 percent of the

land area of America, and I am thankful for that. Overall, they

have done a superb job. But we already know of separate, unrelated, major co-op scandals outside of Atlanta and Birmingham and

Fort Worth. Is your State next? How could you even know unless

you have seen the audited co-op financials? Or are you willing just

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to take the co-op lobbyist’s word for it? Our friends in the Texas

Legislature did that for too many years.

Point No. 2: co-ops don’t have to be mired in scandal to still have

serious problems. It doesn’t take a spike in temperature to have a

sick patient. A chronic, low-grade fever can be just as damaging.

The NRECA has been issuing reports for over 30 years warning all

co-ops in the country that they need to be refunding more money

to customers, because if they don’t they risk losing their tax-exempt status. For decades too many co-ops have turned a deaf ear

to their own trade association on this and other important issues

involving their precious tax-exempt status.

Why would NRECA go to so much trouble and pay for such expensive secret reports as this one that can only be found on their

password-protected Web site unless they were really worried about

an IRS crackdown under current law? Ironically, much of this hearing will be spent just reinforcing NRECA’s own message to its own

members.

Point No. 3: are co-op customers being treated fairly today? Remember here that co-ops were founded under Franklin Roosevelt’s

New Deal to be probably the most pro-consumer organizations in

America. Co-ops always brag about the ‘‘co-op difference.’’ Yet,

NRECA, itself, has written that countless co-op customers, particularly in the most rural areas, pay an extra $220 a year. Why? Just

so that their own co-op can remain inefficient.

This is the NRECA book. According to the NRECA, itself, if

small co-ops simply merged with other co-ops they could save their

customers’ 2 months of electricity bills a year. Wouldn’t it be nice

to give customers a 2-month holiday from their light bills?

Point No. 4: private property rights. Co-op customers really do

own their co-op. This isn’t any theoretical interest like taxpayers

who may have an undivided interest, say, in the Smithsonian Museum. Co-op customers literally have or will have legal title in their

own name to a piece of the $30-plus billion in co-op equity. That

is about as much stock as Amazon.com has. It averages out to

$1,824 per customer, an amount comparable to the economic stimulus checks that Congress voted for just a couple of months ago.

Here’s the picture. Yet, how many co-op customers have ever been

told exactly what is in their co-op account? Have any? I have not

found one yet except for one top power company executive who got

all of his money out every time he moved from one co-op to another.

Why can’t regular co-op customers get this benefit? Or is it reserved for VIPs? After all, internal co-op software calculates individual ownership to the penny, yet co-ops somehow run out of ink

on the monthly bills before they disclose your ownership stake.

All this leads me to conclude that this $30 billion plus may be

the largest lost pool of capital in America. I estimate that co-ops

could safely return between $3 billion and $9 billion of customers’

own money to them. This money could help millions of rural ratepayers today who are having a hard time in a soft economy. And

it is not a Government handout; this is just a return of the customers’ own money.

Chairman WAXMAN. Mr. Cooper, thank you very much for your

opening statement. We will allow you to submit additional informaVerDate 11-MAY-2000 13:57 Jan 30, 2009 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 C:\DOCS\46194.TXT KATIE PsN: KATIE
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tion and material in the opening statement. It is not fair, because

you know more about co-ops than anybody else on this committee,

so I am reluctant to invoke a time limit on you, but I see other

Members are seeking recognition, as well.

Mr. COOPER. Thank you.

[The prepared statement of Hon. Jim Cooper follows:]

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Chairman WAXMAN. Mr. Davis.

Mr. DAVIS OF VIRGINIA. Thank you.

Let me just thank Mr. Cooper for bringing this up to the committee’s attention.

We are here because questions have been raised about the vulnerability and even the relevance of a venerable business model

that helped modernize post-Depression rural America and today

serves over 41 million consumers in 47 States. Rural electric cooperatives, member-owned power generation and distribution companies, bring the power of economic development and growth to diverse communities who might otherwise languish off the national

grid.

But the apparent plundering of one large co-op, the Pedernales

in Texas, by entrenched directors and officers has caused some to

ask more broadly whether these tax-exempt, federally subsidized

organizations are governed democratically, managed efficiently,

regulated effectively, or operated transparently enough to prevent

self-dealing and abuse.

In the Pedernales case, millions of dollars of capital owned by coop members was misspent on excessive compensation packages,

phantom employees, first-class travel, and luxury hotel expenses.

High-living insiders even paid $2,000 for Celine Dion tickets.

So it is fair to ask, as our committee colleague, Representative

Cooper, does, if this useful New Deal tool has become a potentially

bad deal for taxpayers and customers. In this post-Enron SarbanesOxley era of strengthened corporate governance accountability and

transparency, it is worth asking what rural electric co-ops are

doing to keep pace with regulatory standards and governance reforms in the increasingly complex and changing electric industry.

At the same time, there is little to suggest the abuses uncovered

at Pedernales are symptomatic of widespread fiscal profligacy

throughout the national network of 931 electric co-ops. That critical

infrastructure transmits power over 75 percent of the Nation’s vast

geography. At every juncture, co-op member owners have the legal

rights and powers under State and corporation and utility regulation laws to police or replace irresponsible directors and managers.

Eventually, Pedernales customers regained control of their company and co-op democracy remains the most potent safeguard

against mismanagement and waste. But in the face of global energy pressures and modern mandates to diversify co-op activities

for economic and social reasons, the quaint old ways of doing business that worked in the 1950’s and 1960’s can begin to look a bit

threadbare. Even newly expanded IRS disclosure requirements for

non-profits may not give co-op members, regulators, or taxpayers

enough timely information to prevent the next Pedernales from

blooming in the crevices of a patchwork regulatory and oversight

system.

So we need to know how safeguards can be strengthened and

how rural electric co-ops can continue to fulfill their potential as

stable, responsible drivers of economic development and community

growth.

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We appreciate the testimony of our witnesses this morning as we

explore these important issue.

Thank you.

[The prepared statement of Hon. Tom Davis follows:]

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Chairman WAXMAN. Thank you, Mr. Davis.

Let me ask unanimous consent that all Members’ opening statements be inserted in the record. I will recognize Members who feel

that they still want to say a few words of their opening statement

before we actually begin.

I will go to this side. I think Mr. Clay came in first.

Mr. CLAY. Thank you, Mr. Chair. I have a very brief opening

statement and I appreciate your holding this hearing.

While I represent an urban area, I am aware that there are 47

rural electric co-ops in Missouri that serve nearly 1.5 million customers. The Quiver River Electric Cooperative serves approximately 65,000 Missouri customers living close to my District. Since

1976 Quiver has distributed $51.5 million in capital credits to its

members. In 2008 Quiver’s board of directors authorized a distribution of $3.8 million in refunds.

Quiver also conducts elections where the co-op’s members select

the board of directors. In 2007 the elections were held in August

and involved 4 of the 12 board members.

Finally, Quiver prepares an annual report that is available to its

members. This report explains the financial conditions of the co-op,

as well as the assets that the co-op owns. Based on this report and

other information, the members are notified about the co-op’s activity.

The problems involving capital credits and board of directors and

general manager abuses that existed at the Texas electric co-op

have not occurred at Quiver. While there are individual bad actors

in every industry, I hope that this is an isolated situation.

Mr. Chairman, I yield back my time.

Chairman WAXMAN. Thank you, Mr. Clay.

Mr. Marchant.

Mr. MARCHANT. Thank you, Mr. Chairman. I will be brief.

I would just like to bring greetings to Senator Fraser and Representative Rose. It was my privilege when I was a member of the

Texas House to serve with both of them, and I have the utmost

confidence in their ability. Senator Fraser has been involved in the

co-op part of legislation for many years, and I, myself, am a co-op

customer. I do business with three different co-ops. It is still my

belief that the governance of co-ops should stay at the local level

and at the State level. I believe the actions that the State took to

correct the Pedernales problem were appropriate, and I believe that

they have a handle on it.

I deeply appreciate you guys coming up today and participating

in the hearing, because I think in the long run this will be a good

day for the co-ops and a day where the co-ops will be able to explain to the public and answer some of these allegations.

Thank you.

Chairman WAXMAN. Thank you, Mr. Marchant.

Mr. Kucinich.

Mr. KUCINICH. Thank you, Mr. Chairman, for holding this hearing, and thanks, Mr. Cooper, for bringing it to the attention of the

committee.

We put this in the context of rural America, where you see the

physical infrastructure of rural America fraying, the telecommunication infrastructure where people are paying more for less, water

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rights are under attack in rural areas. Now we see co-ops, in this

case one that is under inspection, exploiting the resource of the

members.

You have to remember, let’s go back historically, why we saw

rural electrification and why these co-ops were created: to make

sure the people in rural areas had reliable access to electricity at

a low cost, because the big energy companies didn’t want to spend

the money and invest in infrastructure, didn’t want to do that. So

our mission as a committee, I hope, is going to be to find a way

to not just call these particular individuals to an accounting, as we

should and must, but to find a way to make sure that we protect

the philosophical underpinnings of rural electrification and of rural

co-ops so that people can have access to electricity at a low cost,

so that rural areas can find a way to survive in these very troubled

economic times.

Thank you.

Chairman WAXMAN. Thank you.

Mr. Duncan.

Mr. DUNCAN. Thank you, Mr. Chairman. Thank you for calling

this hearing. It is very appropriate, considering the scandal that

has gone in in Texas with this largest co-op in the United States.

First of all I want to say that I have the greatest respect for my

colleague, Congressman Cooper, who is a good friend of mine, and

I salute him for raising these concerns and asking these questions.

He used to represent a very rural District in Tennessee, and he has

studied this issue and these co-ops for many years and I have not,

so he knows far more about this than I do. He and I now represent

the two fastest-growing areas in Tennessee. He represents the

Nashville area and I represent primarily an urban/suburban District in and around Knoxville. Only about 12 percent of my constituents are served by co-ops, but overall I understand that about

one-third of the people in Tennessee are served by co-ops, so this

is very important to Tennessee.

I am told that the average profit per member in Tennessee, the

annual profit is around $82 per member for a year. I also have

learned that, under agreements with TVA, since the Tennessee coops are supplying TVA power, that TVA requires that, rather than

rebate money, that these co-ops do one of three things, are limited

to three things: keeping rates low, paying down debt, or investing

in the infrastructure. They couldn’t, I suppose, do all three in any

1 year.

Those seem like good things to me. I haven’t read any articles

about any co-ops in Tennessee doing anything even remotely close

to what has happened in Texas, but there is certainly nothing

wrong about looking into this and making sure that the customers

or members are treated fairly and honestly, and that co-ops any

place are not making investments in things that they should not

be investing in. So I thank you for calling this hearing and for allowing me to participate.

Chairman WAXMAN. Thank you, Mr. Duncan.

Other Members who wish to make opening statements? Ms. Watson.

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Ms. WATSON. Thank you, Mr. Chairman. And thank you for holding today’s hearing where we will be examining the managerial

practices of Pedernales Electric Cooperative.

Co-ops were created during the era of President Roosevelt’s New

Deal, and their purpose was to supply millions of Americans who

lived in under-developed, rural communities with electricity.

Presently, the conditions of modern and rural areas are not in

the dire situation they experienced during the Great Depression,

but 70 years later 930 co-ops are still responsible for providing electricity for the 17 million Americans across the country.

Pedernales has been providing reliable electrical service to rural

Texans for over 70 years; however, recently there have been numerous allegations ranging from excessive personal spending of coop funds by board members, unearned compensation for former

board members, improper election methods, non-beneficial investment practices, and numerous IRS reporting infractions.

Even though this hearing is focusing mainly on the questionable

practices of Pedernales, it is important to find out if the problems

are widespread throughout the cooperative industry.

Mr. Chairman, I hope that we will consider holding a future

hearing that will examine the nature of financial practices of other

cooperatives. In the end, what this committee desires to uncover is

why Pedernales and board members allegedly took advantage of

other member customers, how these practices were carried out with

the use of company funds, and if the practices of the board members could plausibly be repeated in other electric cooperatives

around the country.

So I look forward to hearing from the panel, and especially the

testimony of Mr. Glenn English, the CEO of the National Rural

Electric Cooperative Association. I hope that he can provide more

insight on the co-op industry and give us a general overview on the

use of co-op funds in the industry as a whole.

Mr. Chairman, I thank you. I yield back.

Chairman WAXMAN. Thank you very much, Ms. Watson.

Any other Members seek to make an opening statement? Mr.

Sarbanes.

Mr. SARBANES. Very quickly, Mr. Chairman, thank you.

You know, we talk about expertise on the part of fellow Members

of Congress, but Congressman Cooper’s expertise in this area is so

deep that he would easily be qualified by a judge in any court case

as an expert witness, based on all of the research that he has done

in his own personal and professional experience with co-ops.

A hearing like this predictably will produce a response among

sort of three categories of actors. There will be those who have engaged in outrageous practices who had better start quickly figuring

out how to fix the situation. There will be those who maybe could

do better than they have done and ought to look at that. And then

there will also be those who have acted in a responsible manner.

I don’t have any electric cooperatives in my district. In Maryland

we have one in southern Maryland called the Southern Maryland

Electric Cooperative, from my understanding, one of the more responsible actors in this drama, but I would assume that the responsible folks would step up within whatever the association is to

make the case that others need to clean up their act and improve

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their own sort of self-regulation. But I think Mr. Cooper bringing

this issue to light as he has points us to examining whether there

ought to be more oversight and regulation from third parties, including Government oversight. That will be part of the discussion

today, so I want to thank him for making all of us look carefully

at this issue.

I yield back my time.

Chairman WAXMAN. Mr. Welch.

Mr. WELCH. We have two excellent co-ops in Vermont of that category that my colleague, Mr. Sarbanes, was just talking about.

They take their democratic duties seriously. Service on the board

is much a sacrifice; it is not a bonanza. And they are doing tremendous work on alternative energy, providing real leadership in the

State. That is the Vermont Electric Co-op and the Washington

Electric Co-op.

Mr. Chairman, if there is no objection, I would like to introduce

their newsletters into the record.

Chairman WAXMAN. Without objection, they will be made a part

of the record.

Mr. WELCH. But those of us who support co-ops have the major

responsibility to root out when it is being abused, because if we are

going to allow there to be continued support to do the good work,

we have to make certain there is no latitude to make this into a

rip-off, and I really applaud Congressman Cooper and would like

to yield him at least part of the balance of my time, Mr. Chairman.

I know we are short, but to finish a couple of points that he has,

if that is possible.

Mr. COOPER. I thank my friend for yielding.

Two points that haven’t been made so far: this year some giant

energy companies in America are trying to take advantage of coops’ strong balance sheets and tax-exempt borrowing authority to

get co-ops to issue billions of dollars worth of bonds for new power

generation, particularly coal-fired units. They want co-ops to generate more power, to increase pollution, and to issue these bonds.

The last time co-ops fell for such a sales pitch was in the 1970’s

and 1980’s, and many co-ops went bankrupt as a result. I think coops should make energy conservation their first priority, and then,

once they have helped reduce customer bills, focus on other ventures.

Also, you all know that sunshine is the best disinfectant. Without

full disclosure, co-op democracy is a sham. Did you know that in

the official biography of the official lending arm to co-ops, the CFC,

they state explicitly that it was formed to tell Wall Street how rich

co-ops are so that NRECA can at the same time tell us how poor

they are.

Did you know that the PAC associated with NRECA gives almost

as much money to Congress as Boeing Corp.? Why are they spending all this money to defend motherhood and apple pie organizations? Is it just a narcotic to make sure that we, the watchdogs,

stay asleep.

So thank you, Mr. Chairman.

You have the best staff on the Hill. Co-op customers get electricity today, but they don’t have power and they are being kept

in the dark.

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Chairman WAXMAN. Thank you very much, Mr. Cooper and Mr.

Welch.

Unless our witnesses want to yield the rest of their time to Mr.

Cooper, we are going to hear from you. [Laughter.]

I am pleased to welcome them to our hearing today.

The first panel is going to focus on the Pedernales Electric Cooperative.

The Honorable Troy Fraser is a member of the Texas Senate and

a member of the Pedernales Co-op. He chairs the Texas Senate’s

Business and Commerce Committee and has chaired a hearing on

the co-op’s business practices.

The Honorable Patrick Rose is a member of the Texas House of

Representatives. He also is a member of the Co-op and has been

investigating business practices at the Pedernales.

Mr. John Watson is a member of the Pedernales Co-op.

Mr. Carlos Higgins is a member of the Pedernales Co-op and recently ran for a position on its board of directors.

Mr. Juan Garza is the new general manager of Pedernales. Before he started at Pedernales in February 2008 he was the general

manager of the publicly owned Austin Energy.

I want to thank all of you for traveling to be with us today.

I would like to note again the absence of two invited witnesses,

Mr. Bennie Fuelberg was a long-time general manager of

Pedernales. He is not present today because he is evading service

of the committee’s subpoena. His attorney advised committee staff

that he would assert his fifth amendment right against self-incrimination if he did appear.

Mr. Bud Burnett was a long-time president of Pedernales. He is

also evading service of the committee’s subpoena. His attorney advised committee staff that he would assert his fifth amendment

right against self-incrimination if he did appear.

They don’t have to assert it. They are not here.

We are pleased to have you with us. It is the practice of this committee that all witnesses who testify do so under oath. I would like

to ask, if you would, to please stand and raise your right hands.

[Witnesses sworn.]

Chairman WAXMAN. The record will indicate that each of the witnesses answered in the affirmative.

Your prepared statements will be in the record in their entirety.

What I would like to ask each of you to do is to limit your oral

presentation to around 5 minutes. We will have a clock that will

indicate green, and then the last minute will turn yellow, and then

when the time is up it will turn red. If you see red on the clock,

we would welcome you to summarize your testimony.

Mr. Fraser, why don’t we start with you?

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STATEMENTS OF TROY FRASER, CHAIR, BUSINESS AND COMMERCE COMMITTEE, TEXAS SENATE; PATRICK ROSE, TEXAS

HOUSE OF REPRESENTATIVES; JOHN WATSON, MEMBER OF

PEDERNALES ELECTRIC COOPERATIVE; CARLOS HIGGINS,

MEMBER OF PEDERNALES ELECTRIC COOPERATIVE; AND

JUAN GARZA, CURRENT GENERAL MANAGER OF

PEDERNALES ELECTRIC COOPERATIVE

STATEMENT OF TROY FRASER

Mr. FRASER. Mr. Chairman, I am extremely honored to be here

in your committee today. Also other Members, thank you for being

here, especially Representative Marchant. He served with distinction in Texas, and we are very proud of Mr. Marchant and the

service he has given to the great State of Texas. Thank you for

being here.

Members, I currently serve as chairman of the Texas Committee

on Business and Commerce. That gives me oversight over the electric industry. I also, along with Representative Rose, am a member

of the Pedernales Electric Cooperative.

I would like to emphasize, first of all, that I have been and continue to be a strong supporter of the rural electric cooperatives.

These cooperatives brought electricity to many parts of Texas and

the Nation that no one else wanted to serve.

I also believe that the beauty of the electric co-op system is that

co-ops are designed so that member owners can determine how best

to run the system through the election of board of directors. If

members don’t like the policies that are being set by the board of

directors, they can and they should vote them out of office.

In 1995 the Texas Legislature allowed cooperatives to opt out of

retail rate regulation by majority vote of the members, and a vast

majority of the 66 distribution co-ops did that, but the wires and

the transmission lines continue to be regulated by the State of

Texas and the Public Utilities Commission.

I want to be clear that I believe that the best way to control a

cooperative is through the democratic participation of members;

however, the members of Pedernales Electric Cooperative over the

last year have raised many concerns that they did not have a voice

in their cooperative. Many of these customers are also mine and

Representative Rose’s constituents.

Late last spring the constituents began contacting the office to

complain about the closed nature of the board of directors. Specifically, concerns were raised over the nomination and election process, the lack of transparency by the board of directors and senior

management by prohibiting members from even attending board

meetings or accessing cooperative information, the failure of the cooperative to return excess profits by paying capital credits, and the

extreme levels of compensation and benefits received by board

members and senior management.

In May 2006 a group of Pedernales members filed a civil lawsuit

against the cooperative and the board of directors, making the

same claims I just mentioned. Basically, these members were suing

themselves over perceived wrongdoings of the cooperative and the

board. A settlement to the lawsuit has been reached, but it is currently under appeal.

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This lawsuit, the watchful eye of the media, and the legislative

scrutiny by Representative Rose and myself have led also to an ongoing criminal investigation that is being led by the District Attorney but with the assistance of the Texas Attorney General’s office.

It became apparent that the inability to elect anyone except the

board’s hand-picked candidates allowed Pedernales Electric to become a self-governed entity with no way to be controlled. With no

one to look over their shoulders, abuses occurred.

First of all, as was mentioned, Mr. Chairman, the president of

the board not only received the perks of being a board member; he

also paid himself $190,000 a year annually as an employee, making

him eligible for retirement benefits, but he also had no real duties

or also a severe lack of knowledge of what was going on in the coop. He currently today, after leaving, is receiving $10,000 per

month in retirement benefits, and we just discovered in IRS filings

that, as he was leaving, he was paid an additional $600,000 retirement package that they had voted in in 2001, again without our

knowledge. The general manager, Bennie Fuelberg, was being paid $390,000

annual salary. In addition, the board secretly voted to give him an

additional $2 million in deferred compensation over a 5-year period, and then they gave him another $375,000 what they called a

signing bonus, in order to sign the $2 million bonus contract.

Last year Bennie Fuelberg, his last year at the company, made $1.4 million. None of this additional pay was disclosed to the members. It is also alleged that the board and management falsified the

990 report to the IRS and all reports prior to 2006 by not reporting

the general manager’s total compensation and bonuses.

We know the PEC board had paid themselves excessive salaries totaling over $1 million per year. All board members, including

non-voting members, were given free lifetime health insurance for

themselves and dependents. They received free $3,000 physicals for

the members and spouses at the Cooper Health Clinic Spa in Dallas. The board also created policies that, when you left the board,

you would become eligible for $1,500 per month retirement as an

emeritus status and free lifetime insurance for not only the members but all dependents.

The board, senior management, and their spouses and girlfriends

traveled first-class to destinations all over the world. They stayed

at luxury hotels, as you said, Ritz Carlton, the Four Seasons, and

the like, when traveling on Cooperative business, with no approval

process.

Mr. Chairman, as you said, we have identified $700,000 in credit

card bills that were paid without any approval process of whether

those expenses were legitimate cooperative business.

Additionally, almost all cooperative expenditures were not competitively bid, and the value of those expenditures is not known

and is currently under audit.

Compounding these abuses, board meetings were not publicized

or open to members. Members could not know or attend meetings.

I personally attempted to attend a board meeting on January 3,

2008, and I was denied entrance into the board meeting.

I could go on, but the fact that Pedernales Electric, if they had

had an open election process, probably these abuses would not have

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occurred. Texas removed regulatory oversight over cooperatives in

1999 because we thought it was redundant. We thought the members could determine how to run the cooperative through the election process. If the members were unhappy, they should be able to

vote them out of office.

The failures to have true and honest elections at Pedernales is

the reason the Senate Committee on Business and Commerce is

currently looking at all electric cooperatives to make sure that

what happened at Pedernales is not happening in other parts of

the State with those 66 co-ops.

There have been reforms this year at Pedernales. Juan Garza is

going to outline the things that have happened this year. We just

had an election where five new members were elected.

I will conclude with that and I will open up for questions after

the rest of the testimony.

Thank you.

[The prepared statement of Mr. Fraser follows:]

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Chairman WAXMAN. Thank you very much, Mr. Fraser.

Mr. Rose.

STATEMENT OF PATRICK ROSE

Mr. ROSE. Mr. Chairman, Mr. Marchant, it is a pleasure to be

with you. I am sorry that we have to be with you today.

Since 2003 I have represented Johnson City and the Pedernales

Electric Cooperative headquarters in the Texas House of Representatives. It is impossible to represent this District and not recognize PEC’s rich history and foundational role in central Texas.

As an elected official representing thousands of members and employees of this organization, it is my duty to ensure its long-term

success, and that is why I am here before you today.

As the co-op navigates these turbulent times, I am committed to

reforms that strike the balance between statutory oversight and

local control. PEC members need and deserve a co-op that is open

and transparent. We can do that with the right reforms at the

State level, and Senator Fraser and I, working closely together over

this last year and as we approach next session, are committed to

do just that.

With the cost of energy continuing to rise at an alarming rate,

our constituents rely on us to guarantee that the price we pay for

gas at the pump and for the electricity we use to heat and cool our

homes is reasonable and fair. We must provide those we represent

the security of knowing that they are not paying unwarranted

prices for basic necessities, and when we find that those we have

entrusted to deliver these essential services have wasted PEC

members’ resources for their own gain, it is the role of government

to step in and fix this problem.

Bloated overhead, lavish expense accounts, full-time employees

who never showed up to work all were common practice at the old

PEC. The PEC board and senior management have clearly taken

advantage of its employees and members. PEC employees are doing

their job, and customers have excellent service at a cost that is considerably lower than investor-owned utilities in the State of Texas.

We must end the PEC board’s and senior management’s high salaries and lavish spending in order to protect ratepayers in our coop. We need to implement laws that regulate co-op boards and at

the same time protect customers from high electricity costs.

I believe that statutory changes are the only way to ensure that

PEC keeps its electric rates low and shares its profits with its

members today and in the future. This starts by overseeing the

Navigant audited PEC that was mandated as part of the settlement proceedings of the lawsuit of which the Senator spoke. We

must learn what went wrong in order to craft legislation that prevents mismanagement in the future.

The results of the Navigant audit are expected in August, and

nothing short of a complete retrospective look at past practices and

transactions, as well as an analysis of appropriate benchmarks and

standards to apply to PEC’s operations prospectively, nothing short

of both will be acceptable.

Should Navigant fall short, I will statutorily require an audit to

be conducted by the State Auditors Office when the Legislature reconvenes in January 2009.

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Mr. Chairman, public power only works when it is transparent,

and without transparency there is no meaningful local control.

During the next legislative session I am prepared to file legislation

that will require all electric cooperatives in Texas to comply with

the open meetings and open records laws, to submit annual audits

to the PUC for their review, the Public Utilities Commission for

their review, and ensure fair and open elections at all co-ops in

Texas.

The intent of this legislation is to promote transparency and informed member participation in all co-ops in Texas. I believe this

is the only way to fully prevent mismanagement and fraud, guarantee low rates for our members, and ensure the long-term success

of one of central Texas’ greatest assets.

Thank you for allowing us to be here today.

[The prepared statement of Mr. Rose follows:]

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Chairman WAXMAN. Thank you very much, Mr. Rose.

Mr. Watson.

STATEMENT OF JOHN WATSON

Mr. WATSON. Chairman Waxman and Ranking Member Davis, I

appreciate the opportunity to offer a member’s perspective on the

questionable and abusive practices at the Pedernales Electric Cooperative. I will describe how those abuses led to a member uprising

and reforms. In spite of the problems, I want to leave no doubt as

to my strong support for electric distribution co-ops and public

power.

As a PEC member, I had attended annual meetings and asked

for increased efforts toward greater energy conservation and increased reliance on renewable energy. I had urged greater transparency and openness. Those pleas produced no meaningful results.

In January 2007 the San Antonio Express News ran an article

detailing PEC Director compensation as disclosed on the form 990

from the year 2000. This report triggered a series of events that

I believe can rightly be called a member uprising. We began to organize. Other newspapers began to investigate and report on the

PEC. A class action lawsuit was filed alleging abusive practices.

Elected officials were besieged by constituents and began demanding more information and reforms.

Among the abusive practices uncovered at PEC were excessive

compensation and benefits for Directors and senior management; a

closed nominating and election process leading to a self-perpetuating board with an average tenure of 22 years; closed board meetings; absolute refusal to return capital credits to members; refusal

to provide information on the wholly owned subsidiary, Envision,

and an utter lack of transparency and openness.

Through the lawsuit discovery, we later learned of still more serious lapses in fiduciary responsibility and ethical conduct.

In January 2007 a small group of members decided to take coordinated and decisive action to establish co-op member control, the

core co-op principle. We continued to attempt to work within the

existing framework. I called the former general manager, Bennie

Fuelberg, and asked to appear before the board’s nominating committee. Seven members attended and presented three candidates.

All were highly qualified, but the committee renominated the directors whose terms were expiring so they were unopposed on the

proxy ballots mailed to members.

Next, a group of members attended the March 2007 board meeting and presented a by-law amendment to change the nominating

and election process. Again, we were ignored.

In May 2007 the class action lawsuit was filed. Throughout the

summer and fall we continued to voice our demands. By now, those

demands included the resignation of all directors.

In November 2007, after plaintiff’s deposition of senior co-op

management and directors, several rapid developments occurred.

The general manager, Mr. Fuelberg, and the president of the

board, Mr. Burnett, announced their retirements. New nominating

and voting procedures were adopted. The return to members of

$7.3 million of capital credits was announced.

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In January 2008 Mr. Juan Garza was hired as the new general

manager. The local District Attorney launched a criminal investigation. The board meetings were open to members for the first time.

In March 2008 settlement of the class action lawsuit was announced. In May, despite almost 300 objections protesting the

terms of that settlement, the judgment was entered. That judgment

is now on appeal.

Most members I think believe strongly in electric co-ops and public power. We are convinced that the efforts of activated members

such as myself and Mr. Higgins; the press, especially Claudia

Grisales of the Austin American Statesman and Jodi Lehman of

the Horseshoe Bay Beacon; elected officials such as Senator Fraser

and Representative Rose; and the lawsuit have combined to begin

the process of establishing control of our co-op by its members.

Quite frankly, we were asleep at the switch for far too long.

Mr. Garza has committed to work for many of the reforms we

have long sought, including bringing PEC into the provisions of the

Texas Open Meetings and Open Records Act; however, I endorse it

being embedded in the legislation.

Transparency and openness, combined with fair elections leading

to reduced director tenure, could have prevented many of the

abuses we suffered at Pedernales. Much remains to be done, and

we intend to remain active and vigilant. Working with Mr. Garza

and the five newly elected directors, we will push until we have a

co-op that is truly responsive to its members and complies fully

with the co-op principles.

Thank you for this opportunity to tell part of our story. I will be

pleased to answer any questions that the Members might have.

[The prepared statement of Mr. Watson follows:]

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Chairman WAXMAN. Thank you very much, Mr. Watson.

Mr. Higgins.

STATEMENT OF CARLOS HIGGINS

Mr. HIGGINS. Mr. Chairman and Members, I am Carlos Higgins

from Austin, TX. When you look at the name of our co-op, you

would naturally try to pronounce it Pedernales. Those of you who

knew President Johnson probably see him saying Perdinalis. That

is the way it is pronounced down there. It is along the Perdinalis

River.

This is my message, though: we know it was a big mistake now

to trust that general manager and our board. We don’t know yet

what all they have done to us or how much it is going to cost us.

It took that expensive class action lawsuit to get where we are now

to find out that we had serious problems, and the pending settlement of that lawsuit is awful.

What can you do for our co-op and other co-ops? I do have a suggestion. First, what went wrong here with our co-op, we had a general manager who became so powerful he was able to hand pick the

board, get-along board members who just merely did as they were

told, apparently. The board members ignored their fiduciary obligations to the co-op owners and they apparently did not know they

were not the general manager’s employees or his amen chorus.

They were quick to help themselves, though, to lucrative compensation and perks, but gave us little to not oversight of our co-op.

My wife and I have been members of the Pedernales Electric Coop for 34 years now. Our co-op has grown immensely in those

years, but we have been completely satisfied with the service and

the rates all that time. We do get reliable service.

We are like the majority of the owners: we lead fairly busy lives,

and we thought we had no reason to worry about our co-op’s operations. Board members seemed to be among the pillars of their

communities, so trusting them seemed to be a reasonable thing to

do. We were wrong.

A small group of owners had their suspicions about what was

going on, especially when they got totally brushed off by the general manager and the board. They persisted and finally filed this

lawsuit, and that shed some light on what was going on at our coop.

This is clear: the board members are guilty of self-dealing and

pretty much being asleep at the wheel when it comes to their oversight responsibilities. The is what the lawsuit did for us: all of the

attention and publicity about the misdeeds at the PEC gave us

some reforms, mainly letting the membership actually vote for its

own board members.

So is everything OK now? Not at all. The lawsuit is far too expensive. It is costing about $4 million. As to the settlement of that

lawsuit, it was forced on the membership. I challenge any of you

to read through this settlement agreement and then stand up and

say, well, not so bad. It is really bad.

More than 200 members took time to strenuously object to provisions in this settlement. The court ruled that three of our members, the plaintiffs in the lawsuit, were competent and able to

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speak for all 223,000 members. It is fiction to claim that they even

came close to representing the views of the rest of us.

In this settlement we, the members, forgive anyone and everyone

and their attorneys for anything they may have done at the PEC,

whether their deeds are known or unknown. We specifically forgive

even any oral agreements that may have been made and any trusts

that may have been set up. That arouses my suspicions right away.

What might all this forgiveness cost us? We don’t have a clue.

We don’t know. Some people tried to defend the settlement on the

basis that it gave us good reforms at the PEC. That is not exactly

so. What gave us those reforms is the discovery in the lawsuit and

the subsequent publicity, the spotlight of the press revealing misdeeds and who the culprits are.

I doubt that this is a widespread problem among other co-ops. It

is probably just ours, and we don’t really want all the other co-ops

and their members to be burdened because our manager and board

messed up. Co-op owners are also, of course, co-op customers, and

so that is an idea that ought to be protected and preserved. I really

believe that. We have been punished enough at our PEC, so we

don’t want a bunch of other regulations to come down that burden

us further and punish us any more.

So what is the solution? We had a general manager grow so powerful he could run our co-op like it was his personal fiefdom. It took

that expensive and awkward lawsuit to penetrate his barriers. We

need a better tool.

I think if we had had any authority at all under our own bylaws, a way to get through there and make some changes, we could

have reigned these people in a whole lot sooner with a whole lot

less fuss and cost. In our by-laws, all the power resides in our

board. All of it. If the board chose to do so right now, legally and

quickly they could do away with all of the reforms that have gone

on before. So we really need some tools. That is what I recommend:

that as a minimum, that the by-laws of co-ops be required to give

members some ultimate control.

You have to be careful about how you structure the by-laws, but

members have to have some tools. They can be as vigilant as all

get-out, but they have to have the tools that allow them to do

something about it, so that is my recommendation.

One more thought, Mr. Chairman. Thank you very much for allowing me to speak. We like our new general manager, Juan

Garza. He is getting our co-op back on course, but it is not that

easy. The problem is for at least one more year he is working for

this board, the majority of them who got us into this mess, so he

is not really the guy that you need to ask the tough questions to.

Those two and others are out there hiding some place. You really

need to bring them in and make them answer some of these questions.

Thank you very much.

[The prepared statement of Mr. Higgins follows:]

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Chairman WAXMAN. Thank you, Mr. Higgins.

Mr. Garza.

STATEMENT OF JUAN GARZA

Mr. GARZA. Mr. Chairman, as the son of a migrant farm worker,

Alejandro and his wife Maria, I am deeply, deeply honored to be

here. Thank you so much for inviting us.

President Johnson taught school in Cotulla, my home town, and

even though he did teach there, we never were able to teach him

that the proper way to pronounce Pedernales is Pedernales.

[Laughter.]

As general manager of Pedernales, I have been selected to lead

the Nation’s largest electric cooperative, serving over 225,000 members, which was 219,000 when I started just in February.

PEC has a rich and proud heritage of providing reliable election

service to its members. Historically, PEC has focused on providing

outstanding customer service, strong system reliability, financial

stability, and fair rates. This focus has resulted in PEC being rated

No. 1 in the country in customer service and No. 5 of all utilities

in the country in overall customer satisfaction by J.D. Power.

Throughout the service territory, as I have toured it since I have

been appointed, I hear about the quality of the employees at PEC.

They are the backbone of this company, and they carry out the mission of the corporation in a manner that makes me proud, indeed,

to be their general manager.

The people on this panel, especially Senator Fraser and Representative Rose, have been directly involved in helping to bring

about dramatic and long-lasting changes to PEC. I know they are

here today because they are interested in the future well-being of

the cooperative.

For the past 18 months Pedernales Electric has been faced with

the challenge of responding to the concerns of its members regarding openness, transparency, and governance issues; however, I am

here today to testify that these challenges have resulted in significant changes at PEC.

In short, the cooperative system of local member control I believe

has worked. Under the leadership of Mr. E.B. Price, the PEC’s

board has made these major changes: Our election system was revised to be more democratic and open. This past Saturday we had

58 candidates vying for five board positions. Over 30,000 members

voted in that election.

The position of coordinator, which is a paid chairman’s position,

the director emeritus, and the honorary director positions have all

been eliminated and abolished.

Our Web site now includes an array of business and governance

information, including board meeting agendas, our IRS 990 filings,

and other critical information.

We have implemented a credible policy that includes expenses of

the board being reviewed by a newly created expense and audit

committee and made public. I want to add that even though I was

at the game last night, I paid for that out of my pocket and I also

used the Metro system.

The monthly board meetings are now open to the public,

videotaped, and posted online to allow for greater member particiVerDate 11-MAY-2000 13:57 Jan 30, 2009 Jkt 000000 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 C:\DOCS\46194.TXT KATIE PsN: KATIE
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pation. A board compensation committee has been appointed to

make recommendations for adjusting compensation, which will be

retroactive to March 10th when the settlement was first announced

of the lawsuit.

On March 10th a settlement agreement of the lawsuit brought by

our members was reached. Judge Dietz, who presided, approved

the agreement in April. PEC will comply with the terms of the settlement agreement, even though it is currently under appeal by a

couple of our members.

As part of the settlement agreement and as a condition of my

employment, Navigant Consulting and Cox, Smith, Matthews, in

cooperation with the Public Utility Commission of Texas, are conducting an investigation into the cooperative’s operations over the

last 10 years. The results will be reported to our members.

On the issue of capital credits, it is important to note that capital

credits are not held in a fund; rather, they have been invested in

electric infrastructure of a growing cooperative. This investment of

capital credits reduces the need for borrowing, thereby lowering our

rates. While the cooperative industry averages a percentage of assets at just over 40 percent, PEC’s corresponding ratio is about 35

percent, and for all but the last 2 years it has hovered at or below

30 percent. This fact should dispel the myth that PEC has been

hoarding dollars and not paying capital credits.

The disbursement or reinvestment of capital credits is a local

business decision that should be made annually, given the financial

and operational status of the cooperative, with input—emphasize

input—from the members and full disclosure of the decision annually.

The PEC has made dramatic and long-lasting changes. As we

strive to adhere to these new policies of openness and transparency, we will also strive to be a national model for the principles upon which the cooperative was originally formed. We will

continue to strengthen our relationships with our members, elected

officials, and other interested parties. We hold ourselves accountable to the new standards our members have set because they are

the reason PEC exists. As member owners they have the right to

a voice in the process, and we have a sacred obligation to ensure

that their voice is being heard and acted upon.

This has been a very difficult year for the PEC, but when you

step back and look at the relatively rapid change in policies and

the result of our historic election, I want this committee to know

that the co-op system of member control works, at least I believe

that has been our experience at PEC.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Garza follows:]

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Chairman WAXMAN. Thank you, Mr. Garza.

We are now going to go to the Members’ questions at 5 minutes

each, and I will start off with myself.

What you have described is really astounding. Here is a co-op—

co-op, the name sounds like everybody is part of it and it is going

to serve everybody’s interests, and they are delivering the power.

There doesn’t seem to be any question about that. They are doing

their job of getting electricity to their customers. But it is a closed

system, very much like any undemocratic institution around the

world. I think Mr. Mugabe could probably learn some things from

Mr. Fuelberg. It is a closed system.

Now, I could go through all these things that you have outlined:

the expenses for travel, the self-dealings and pensions, the chocolates, the girlfriends traveling around, their wives getting

physicals. It is just plain self-dealing, and I am sure in their minds

they rationalized it. They had been working there for so long and

they are delivering the electricity, and why not a few little perks,

and who is going to ever know because they are never going to let

it out publicly.

It took a lawsuit, it took courageous and crusading journalists,

it took members of the legislature to try to get information about—

forgive my pronunciation—the Pedernales Co-op. And even then, as

Mr. Higgins points out, we don’t know that it might not revert back

until some of the board members who perpetuated all of this are

replaced, or at least they are on notice that what they do is going

to be made public.

It is what we have heard on this committee over and over again.

We have heard from investors who tell us that the board of directors set the salary and compensation of their executives, and they

walk away with huge bonuses, even when the corporations go in

the tank and people are losing their money who owned the corporation and people are losing their jobs that worked for the corporation and the CEOs walk away with a huge amount of money.

It seems to me that President Bush should be going back to

Texas to try to democratize the co-ops. It would be a chance for

more success there, I think, than some of the places where we are

making a huge military commitment.

Mr. Garza, how do you respond to what Mr. Higgins said about

the settlement? Do you think it was the best settlement just to

avoid throwing more money into the lawsuit and didn’t really resolve all the issues?

Mr. GARZA. Your Honor, it was my considered opinion that it

was. The lawsuit was draining the energy of the co-op and the

focus away from doing our job, and I felt that we needed to bring

this to as quick a halt as we could. The minimum price for those

lawyers was something like $500 an hour, and every hour just

keeps mounting the cost.

Chairman WAXMAN. Who paid for the lawyers?

Mr. GARZA. The insurance company is paying for a portion, $2.4

million, and the co-op membership is paying the remainder of it,

$1.6 million, for a total of $4 million.

Chairman WAXMAN. Were co-op members paying for both sides

in the lawsuit, the plaintiff and the defendants?

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Mr. GARZA. In effect, that is basically what it amounts to, Your

Honor.

Chairman WAXMAN. I am just a chairman, not an Honor, but

thank you. [Laughter.]

Well, that sounds like public financing of lawsuits. A lot of people

say we shouldn’t allow these lawsuits because so much money goes

into attorneys’ fees. Well, that is absolutely right. They shouldn’t

be necessary. But if you didn’t have that lawsuit, Mr. Higgins, I

suppose a lot of these facts never would have gotten out. Is that

your assessment?

Mr. HIGGINS. Absolutely. That is the only way that we were

going to learn what was going on there was this lawsuit.

Chairman WAXMAN. You had to force the information out. Do you

think if we had a requirement in all of these co-ops around the

country—we don’t know if any other co-op is acting the way

Pedernales has, but if we had at least a requirement of more openness with the by-laws allowing members to get information, try and

eliminate the iron curtain that blocks out what the investors and

the owners of the co-op should know, do you think that would be

helpful?

Mr. HIGGINS. Absolutely, but you need two things. You need at

least some of the members that are vigilant, paying attention, and

trying to find out what is going on, but they need the tools to work

with in order to do anything about it, and we did not have the tools

here, and that is what I am a strong advocate for. Give us the tools

to work with. We don’t have them yet really. We have some reforms, but they can be reversed.

Chairman WAXMAN. I would like to get from you in more detail

some of your recommendations for what you think the Federal Government might do by way of legislation.

Mr. HIGGINS. Yes, sir. I would be happy to.

Chairman WAXMAN. I say that, I want to make it very clear. We

don’t want to regulate these. We don’t want to put extra burdens

on them financially. We are not talking about that. I would just

like to make sure that there is an openness in co-ops so that when

the pillars of the community tell our members that they are certainly running honest co-ops, not like those Pedernales people, we

don’t know if that is true or not.

Mr. HIGGINS. And one other thing there. When you look at how

much they have siphoned off, whatever amount that is, we don’t

know, but whatever it is, when you spread it among 223,000 or

more people or households, then it is not going to make or break

any individual, and it may not be enough to get our attention to

know that there is something going wrong there, but whatever

amount it is spread among it ought to be stopped. It is the principle of the thing.

It is repugnant to have people like this get in and abuse our

trust in these positions, siphon off an awful lot of money to feather

their own nest at our expense.

Chairman WAXMAN. Thank you very much.

I think Mr. Marchant is the one I would call next to pursue questions.

Mr. MARCHANT. Thank you, Mr. Chairman.

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Mr. Rose, you have outlined a prospective legislative package if

the Navigant audit does not come back the way you think it ought

to. Do you have the same kind of agreement with the Senate as far

as their willingness? Senator Fraser, are you willing to enter into

the same kind of legislative package?

Mr. ROSE. I will begin by saying the three legislative proposals

that I outlined in the opening remarks I want to have occur however that Navigant audit turns out. We need open meetings and

open records to apply to all co-ops across the State. We need all of

our co-ops to submit third-party, independent audits to the Public

Utility Commission annually, in my opinion. We also need minimum standards of governance so that good people can run for the

board and have a fair shot at being elected.

Unless those three things occur, I don’t think we have real local

control. If we have real local control, we have over 200,000 highly

qualified, very intelligent, very able members of the co-op who are

going to be able to make sure that goes well.

So the Navigant audit, Congressman, it is important for us to

monitor, it is important for us to see just what happened so that

we can figure out what is needed in the way of reform. If that

Navigant audit stops short of disclosing everything it needs to do

from past practices and policies and abuses, then I believe the

State ought to step in, and I believe we ought to mandate the same

State audit that the Senator and I spoke about earlier this year requiring of the co-op.

Mr. MARCHANT. Senator, what course would you plan on taking

in your committee?

Mr. FRASER. I think Representative Rose has outlined it exactly

right, the things that we have to do is to put a little sunshine on

this, that open records, open meetings are a must, and I think it

will have broad support, bipartisan support in both the Senate and

the House. But we have also got to ensure fair elections and also

have the ability to audit.

One of the things that we are going to be looking at is a sunset

review. They are the equivalent of a quasi-State agency, and the

State has to know what they are doing, of which obviously in the

past we haven’t had the ability to do that. So it is going to depend

a lot on what happens between now and November, but we have,

as you know, the authority in Texas the any regulatory authority

that we need, even to the point of dismissing the current board if

needed.

Mr. MARCHANT. Thank you. It is a little bit like being in high

school again, being in Congress. They ring the bells. We have votes.

Thank you, Mr. Chairman.

Mr. ISSA. Would the gentleman yield?

Mr. MARCHANT. Yes. Absolutely.

Mr. ISSA. Thank you. If the gentleman would yield, I just want

to followup on the gentleman’s statement. He knows more about

Texas than I do, but I just want to understand. You have the ability essentially to regulate this and any corporation, and if you

choose to you can create all the transparency that you want to

within State law; is that correct?

Mr. FRASER. I am going to clarify. You used the word corporation, and regulating the corporation is not——

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Mr. ISSA. Let me rephrase. I will take the corporation out. What

Federal assistance, if any, would you need because you lack the authority within the State of Texas to create the transparency you

need?

Mr. FRASER. We appreciate the input of this committee looking

at it, but Texas has all the authority we need and actually are

moving forward in making sure that we exercise that authority, so

there is nothing in the regulatory spectrum that Texas does not

have.

This is a quasi-State agency. It was created by the State, and we

believe we have sufficient authority to do anything we need, even

to the point of full regulation.

Mr. ISSA. So today the things we should realize are: don’t mess

with Texas, and let’s get on to providing low-cost electricity in a

time of incredible spiraling energy costs, natural gas, coal, and all

other forms.

Mr. FRASER. And we believe this is the State’s issue and we have

sufficient authority. We are not asleep at the wheel. We are aggressively going after this and we will address this. I am making sure.

This happened once; I want to make sure it is not happening other

places. In Texas we have 66 co-ops. We are looking at all of them.

Mr. ISSA. Excellent. Thank you.

Mr. Chairman, I would also ask unanimous consent that my

opening statement be made a part of the record.

Chairman WAXMAN. That is already agreed to.

Have you already adopted your legislation, or are these just proposals?

Mr. FRASER. We have not been in session since this is going on.

We go into session January 8th of next year, and Patrick is going

to carry the legislation on the House side, I will be carrying it on

the Senate side. And so the answer is no, it has not been adopted,

but I have an interim study going that we are in the process of

meeting on right now, so it is being formulated.

Chairman WAXMAN. Well, I wish you all the best.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

I think Mr. Clay wanted to go ahead. I yield to him.

Chairman WAXMAN. Mr. Clay, I will recognize you.

Mr. CLAY. Thank you, Mr. Cooper, and thank you, Mr. Chairman.

The leadership of Pedernales didn’t just spend co-op money on

hotels and flights for themselves and their spouses; they also

charged Pedernales for thousands of dollars worth of meals and

drinks. One group dinner at a San Antonio steak house cost $3,500.

Another steak house meal cost $2,900. We have the co-op credit

card statements and receipts for a lobster dinner for two and a trip

to an oyster bar in New Orleans.

Here is a bill from Morton’s Steak House, 7 rib-eyes, 20 mini

crab cakes, 20 salmon pinwheels, even 3 callosal shrimp Alexanders. Those were $59 each.

We also know the co-op was paying for bar tabs when Bennie

Fuelberg and the board of directors drank while traveling for conferences and meetings. The members were paying for alcohol at a

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sons and the Ritz Carlton in St. Louis, Big Sky Resort in Montana,

and I could go on.

Mr. Garza, was this kind of spending or fancy meals and drinks

excessive to you?

Mr. GARZA. Yes, it was.

Mr. CLAY. Will the new expense policy allow the directors to

charge the co-op for their fine dining?

Mr. GARZA. No, it will not.

Mr. CLAY. You have changed that policy in a way that what will

happen? Will they pay their own meals?

Mr. GARZA. Theoretically it could happen. Yes.

Mr. CLAY. And they will pay for their own bar tabs?

Mr. GARZA. Yes. The policy does not allow paying for alcohol.

Mr. CLAY. Let me ask Mr. Watson, Mr. Watson, were you surprised when you learned that you and the other co-op members

were footing the bill for these steakhouse dinners?

Mr. WATSON. Yes, sir, I was.

Mr. CLAY. And the former general manager also charged thousands of dollars to his co-op credit card for Godiva chocolates. Apparently he had Godiva chocolates in his office for select staff and

visitors. Is that accurate, Mr. Garza?

Mr. GARZA. That is correct.

Mr. CLAY. And I assume the co-op is no longer spending thousands of dollars on chocolates?

Mr. GARZA. That is correct.

Mr. CLAY. All right. I am glad to hear that these abusive practices have been stopped. What concerns me is that the excessive

spending on meals, alcohol, and chocolates went on for years and

years without being detected, and they could be going on at other

co-ops. It is the absence of oversight and true member control that

allows this kind of behavior to go undetected for decades.

I will yield to the gentleman from Indiana.

Mr. BURTON. I just have one question. Well, two really. Who won

the ball game last night?

Mr. GARZA. The Nationals.

Mr. BURTON. I was just kidding.

Mr. GARZA. The Nationals, bottom of the ninth.

Mr. BURTON. OK. All right. Do you have a Public Service Commission in Texas? I presume you do.

Mr. GARZA. Yes, we do.

Mr. CLAY. I am going to reclaim my time and yield back. Thank

you so much, Mr. Chairman.

Mr. BURTON. I just have one or two questions real quick.

Mr. CLAY. The gentleman has time. Why doesn’t he yield?

Mr. BURTON. We have votes on and I am not going to take all

the time.

You have a Public Service Commission. I am just curious. The coops are regulated or overseen by the Public Service Commission,

aren’t they, in Texas?

Mr. FRASER. No, they are not.

Mr. BURTON. They are not?

Mr. FRASER. The wires and transmission is regulated by rate. We

have a postage stamp rate.

Mr. BURTON. OK.

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Mr. FRASER. But the rate authority is not overseen. They are unregulated.

Mr. BURTON. So I presume your legislation is going to give the

Public Service Commission some oversight authority there?

Mr. FRASER. We are going to determine what is needed. We believe that if you put sunshine on the process where we allow open

meetings, open records where the members can see what is going

on and you have fair elections, we solve a lot of that.

Mr. BURTON. Well, Senator, the only reason I ask that is in any

State it seems to me that if there is a question of abuse there

ought to be a regulatory agency they can go to immediately and

start raising the issue so that there can be an investigation. I don’t

know if it is that way in Indiana. I am going to check after having

heard your testimony.

Mr. FRASER. The place of appeal on this, we didn’t have a place

for them to go for appeal. I agree with you.

Mr. BURTON. Thank you.

Thank you, Mr. Chairman.

Chairman WAXMAN. We do have some votes on the House floor.

We will recess. I think we can get back here in 15 or 20 minutes,

so let’s recess until 11:50.

[Recess.]

Chairman WAXMAN. The hour of 11:50 having come and gone, I

would like to reconvene the meeting. I am sorry it took a little

longer than I had hoped it would.

To pursue further questions, I want to recognize Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

Mr. Garza, does Pedernales belong to the National Rural Electric

Co-op Association?

Mr. GARZA. Yes, it does.

Mr. COOPER. Are you aware that Mr. English, the head of the Association, who will be testifying on the next panel, has at least

stoutly claimed to me—and I think this is an official position of the

Association—that co-ops are not public power?

Mr. GARZA. I have heard the argument. If you look at

Pedernales, we buy 99 percent of our power from the LCRA. We

are accountable to our members, which essentially is the public. To

me that pretty much defines public power. But I understand there

is another argument here.

Mr. COOPER. But Representative Rose, Mr. Watson, and perhaps

some others stoutly stress in their testimony that they believe in

their co-op, they believe in public power, and yet you belong to a

trade association that says you are not public power?

Mr. GARZA. That is correct.

Mr. COOPER. Why do you pay dues for an organization that

doesn’t uphold your beliefs?

Mr. GARZA. Because we come from the same roots as the rest of

the co-ops in the country.

Mr. COOPER. This is the opposite. You say you are public power;

they say you are not. Who is right?

Mr. GARZA. I believe that I am right.

Mr. COOPER. But you are paying your ratepayers’ money to an

organization that says you are wrong.

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Mr. GARZA. If you go beyond that fundamental difference of opinion—and I understand that it is a difference—and you look at the

technical problems that we face as distribution co-ops, how to deal

with the——

Mr. COOPER. I agree on engineering and things like that.

Mr. GARZA. We can share good information.

Mr. COOPER. But on the fundamental, philosophical point of what

your organization is, as you say, there is a fundamental disagreement, so why do you belong to it?

Mr. GARZA. For the purpose of sharing information on how to

best serve our members, and especially sharing technical information on how to best design and implement the most modern innovations that we can use to serve our members.

Mr. COOPER. Would you belong to a communist organization that

had good engineering capabilities?

Mr. GARZA. Absolutely not.

Mr. COOPER. But one that denies the existence of public power

for co-ops is OK?

Mr. GARZA. Even though it is a fundamental difference, I consider it something that is outweighed by the value that they bring

in terms of the exchange of technological knowledge.

Mr. COOPER. Senator Fraser.

Mr. FRASER. Yes. I think the clarification you are trying to make,

I actually agree with the concept that they are not public power because they are a distribution. Really they are a resale and a billing

operation as a co-op. If they were generation, as we have nine generation co-ops, they are part of the power generators. And so I

would say that Pedernales, I don’t think they are public power. I

think they are a distribution and a billing entity as a co-op.

Mr. COOPER. So you are contradicting your colleague, Representative Rose, and Mr. Watson——

Mr. FRASER. Well, I won’t speak for Representative Rose.

Mr. COOPER [continuing]. In their sworn testimony before this

committee?

Mr. FRASER. I am giving my opinion that I believe that it is a

distribution company.

Mr. COOPER. So this is a fundamental difference of opinion. Another fundamental issue—and I don’t want to unsettle your settlement down there, but I am a little worried that you all may have

been hoodwinked and perhaps sucker punched by this, because everyone wants full disclosure, right?

Mr. FRASER. And, Representative Cooper, I appreciate that. I

have oversight over the industry, and the industry—this is a co-op

distribution company, and I personally see that——

Mr. COOPER. But, Senator, in response to Congressman Burton’s

question it was revealed that there was no one to complain to in

Texas State government about co-op problems because you all had

abjured your jurisdiction, apparently.

But this other fundamental disagreement we need to get into is

this: everyone is for disclosure. Why hasn’t anyone told you it has

been a Federal tax law since 1972, a long time, that every electric

co-op shall keep open books and records accessible to members at

any time? That was a ruling from 1972. All we need to do is enforce existing Federal law.

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Mr. WATSON. May I comment on that?

Mr. COOPER. Yes, sir.

Mr. WATSON. I am aware of that law. I will say about the

NRECA, last year when I began looking into capital credits I became aware that there was something called the Task Force Report

on Capital Credits that had been prepared under the auspices of

the NRECA. I called the NRECA and talked to, I would say, about

six or seven people attempting to get a copy of that report, and

they would not give it to me. They asked me, are you a board member? I said, no, I am merely the person that pays your salary. I am

a member of a co-op that is a member of the NRECA. Yet they

stonewalled me on attempting to get that.

Now, on public power I finally did get it through the Blue Bonnet

Electric Co-op in Texas, of which I am also a member. But I disagree with Senator Fraser. I believe it is public power, although we

are in a shady area here.

I think when Texas deregulated utilities they let the co-ops slide

into a netherland; yet, on the other hand, with all due respect to

our elected representatives here, I have observed Texas government for many, many years. I am 71 years old. I worked in the government when I was in law school. Regulatory agencies in Texas

are all too often the captive of the regulated industries. It would

not lend comfort to me to think that the PUC was all we could rely

on. Please do not accept assurances that the State of Texas can

take care of its own problems. We have often demonstrated that,

in fact, we cannot do that in Texas.

Mr. COOPER. Representative Rose.

Mr. ROSE. Congressman, I appreciate all the work that you have

done on this issue. I read your article on the plane write-up here

last night. I will say this: the Senator and I both agree that it is

important for us to have meaningful local control at the co-op level,

and ultimately that is the best check and balance on decisions at

the board and senior management level in co-ops.

I do believe in statute we can require open meetings and open

records. I do believe we can require an annual report to the PUC.

And I do believe we can set minimum standards for governance. If

we do that, I believe we have taken a long step forward toward correcting these problems moving forward. And on those three points

we absolutely agree.

Mr. COOPER. I heard that you favor a State audit. It is my impression that Pedernales rejected a State audit because that would

have been——

Mr. ROSE. Yes, sir. The Senator and I formally requested that

earlier this calendar year. I believe the more light we can shine on

these past practices the better for our co-op and our membership

so that we can figure out exactly what is needed in the way of reform and statute as we move forward. This Navigant audit, we are

working very closely, the Senator and I both are, with Navigant

and with the PUC as they oversee and review. I said it in my opening remarks and I will say it again: if that Navigant audit stops

in any manner, shape, or form short of where they need to get totally to get the answers to the co-op membership, the questions

that we have, I will move forward next session and require a State

audit.

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Mr. COOPER. Last question, because I see my time has expired.

Is Pedernales today telling every customer what is in his or her

capital accounts?

Mr. WATSON. No.

Mr. COOPER. Why not?

Mr. WATSON. I don’t know. It is required by law, and yet they

are not.

Mr. COOPER. So this is private property that citizens are not allowed to know about?

Mr. WATSON. Well, at least it is not being reported to us on an

annual basis, which is my understanding of what the Internal Revenue Code requires.

Mr. COOPER. After all the turmoil and upset you all have gone

through, all the $4 million in legal fees, members still don’t know

exactly what they own?

Mr. WATSON. That is correct. And I will also say that 2 weeks

ago I requested the opportunity to come to the headquarters of the

PUC in Johnson City and read the minutes from January 2007

through the current date. Those minutes were not made available

to me, couldn’t be made available to me because they are being redacted. There was even a scrivener’s error or correction in connection with this lawsuit, if you can believe that old term. Mr. Garza

is working hard to open up. Mr. Garza I hope has become a friend

of mine, but he understands that I am still extremely critical.

We have four hold-over board members from the old regime who

have the nerve to think that they can constitute a Compensation

Committee to correct the mistakes they made themselves, who are

undermining, in my view, Mr. Garza’s efforts to open up this. I am

doubtful now whether there is a majority on the board as it currently exists to voluntarily come under the Open Records Act,

which is what we had all been hoping for pending legislation, perhaps in the session which will begin in January. We want it to

begin now.

Mr. COOPER. When did Texas stop believing in private property?

I thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Cooper.

I want to pursue some further questions.

Mr. Watson, you have expressed your view that you don’t think

the State law in Texas, as good as it may be, that is being offered

by Mr. Fraser and Mr. Rose is going to be enough. Is that a correct

statement?

Mr. WATSON. Well, I am not certain it is going to be enough. It

is easier to kill a legislative proposal in the State of Texas than it

is to pass one.

Chairman WAXMAN. That is true here, too.

Mr. WATSON. And it is possible that these are highly skilled legislators and influential legislators, and so it is quite possible that

the good legislation that I am sure they will draft and introduce

will, in fact, wend its way through committees and stalling and go

to other committees, the calendars committee and so forth and so

on. It is a very convoluted process. I am trying not to be too pessimistic about it; however, I am not sure that will fully take care of

it.

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It worries me. The practices of the PEC—and I have said this for

almost 3 years now—I believe jeopardized the tax-exempt status of

the PEC, hoarding and building up permanent equity, which is not

permitted; not complying with the disclosure about property ownership, as Congressman Cooper pointed out. So some of these may be

more national issues or issues related to matters that are more

under the purview of the committee.

Chairman WAXMAN. Mr. Higgins, what are your thoughts on

that?

Mr. HIGGINS. Well, I tend to agree with Mr. Watson here, but I

would just add to that there is one PEC here in one area of the

State, and the members of the legislature in that area are very concerned and determined to do something. At the same time, legislators in other areas of States with their own co-ops will probably

have a different view about added regulation. So it is a huge barrier to overcome to get to the point that legislation is, in fact, enacted to become law to regulate all of the co-ops.

Chairman WAXMAN. Does anybody on the panel know how many

States that have co-ops also have laws like that being proposed?

Mr. Fraser. Mr. Rose.

[No response.]

Chairman WAXMAN. We don’t know that.

Well, I must share my concern also that even when you have regulatory agencies that are supposed to be watching over the industries to be regulated, they often become captive of the industries,

themselves, although at least you have some place to go when you

have a complaint with the regulatory agency.

A root cause of the problems at Pedernales appears to be the undemocratic process it had for selecting its board members. In theory, the board of directors is directed by the members and members

are able to hold the board accountable through the electoral process, but that is not what happened at Pedernales. Until recently,

incumbent directors selected a nominating committee, which in

turn endorsed the preferred slate of incumbent directors, in some

cases family members of the incumbent directors were placed on

the nominating committee, so the son or brother of a director would

be on the nominating committee and, surprise, that director would

be nominated for another term. Only the slate of candidates approved by the nominating committee appeared on the ballot, so

there was a ballot with just one name for each open position. It

was all but impossible for anyone but hand-picked members to be

elected to the board.

Mr. Watson, when you and other members tried to get some new

candidates on the ballot what happened?

Mr. WATSON. When we appeared before the Nominating Committee in March 2007 we presented three candidates that we asked be

placed on the ballot. We didn’t say, don’t place your own other people on the ballot. By the way, it is my understanding that those

seven appointees, one from each of the seven voting directors, that

constituted that committee were paid a stipend for serving on that

committee.

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curred during a term—I think that is the way they arranged it—

and a new member was appointed by the board, who then became

the incumbent when the election rolled around. Not that it would

have mattered, because there was never any competition.

But they absolutely refused. In fact, when we were leaving the

committee hearing that day at the headquarters at the PEC, Mr.

Fuelberg walked us down to the lobby, and we asked him specifically, is there anything in your view in the by-laws that would prevent the nominating committee from nominating more than one

person for a position? In other words, setting up, oh my goodness,

an election that actually had two people or three. He said no, but

it had never been done in his memory, and his memory went back

about 40 years. And we said, well, do it this time, please. Of

course, they didn’t do it.

Chairman WAXMAN. Well, as I understand it, you say 40 years.

My information was no one successfully challenged the slate picked

by the board’s nominating committee for 30 straight years, maybe

longer, and when write-in candidates challenged the official slate

the sitting directors exercised thousands of proxy votes to defeat

them. There were even prize give-aways for members who signed

their votes over to the board’s proxy committee. The prizes, which

were donated by vendors, ranged from TVs to gift certificates.

Is that correct?

Mr. WATSON. That is correct.

Chairman WAXMAN. And, Mr. Garza, you wouldn’t say this was

a fair or democratic system for electing directors, would you?

Mr. GARZA. No, I would not.

Chairman WAXMAN. Under your State law would that be prohibited or change, Mr. Rose?

Mr. ROSE. Congressman, when this began to come to light a year

ago, the Senator and I both became engaged because we had members and our constituents and ourselves were all alarmed by what

was going on. This is a statement of the obvious, but, just to be

clear, unless your name is on the proxy ballot that is mailed to the

membership, you don’t have a chance to win that vote. There aren’t

enough people who show up at the meeting, itself, to vote. You are

overwhelmed by the votes that come in by mail.

The old PEC process was such that, as Mr. Watson says, nobody

other than the hand-picked Nominating Committee designated candidates were in the proxy ballot in the mailbox. So on September

4th of last year I wrote to the PEC and requested five changes or

reforms. One of them was to reform the election process so that

folks could access that proxy ballot, members could access the

proxy ballot by petition. Some co-ops do that today in Texas.

I want to praise the co-op board for having made that change

and what resulted in 58 candidates running this time. When I received the ballot in the mail as a member, I had those names on

my ballot and I could cast, as a mail-in ballot—I attended the

meeting, but as a mail-in voter I could choose any of them.

I think as we look toward governance changes next session—the

Senator and I have been talking about it—we are going to work on

it as we approach the January session. We have to have a signature-based or petition-based avenue to the proxy ballot guarantee.

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Short of that, you don’t have real democratic governance for the coop.

Chairman WAXMAN. Thank you.

Mr. Cooper, I want to recognize you.

Mr. COOPER. Thank you, Mr. Chairman.

We have focused just on Pedernales, but let’s talk about another

Texas co-op. It is outside of Fort Worth, got tired of being in the

co-op business, so it decided to go in the hotel and golf course business, borrowed a billion dollars—billion with a B—and went bankrupt. This is in the jurisdiction of the great State of Texas. Any

opinion on that? Is that proper co-op behavior? You want to sanction Pedernales going into the hotel/golf course business like the

Fort Worth co-op did?

Mr. FRASER. If you will allow me to answer that, Mr. Cooper,

Federal law very clearly says that 85 percent of the business has

to be in the resale of power. We did have a renegade that took off.

I actually would take it one step further and say I don’t believe

a distribution company should even be in the generation business.

I don’t believe they should be getting in outside businesses. I think

they should concentrate only in the sale of the resale of electricity.

So no, that is not acceptable behavior.

Mr. COOPER. My memory is not perfect, but I think the committee memo for this hearing said that under investigation 50 percent

of the co-ops that have gone into other businesses have exceeded

the 15 percent threshold. That is a 50 percent error rate. That is

a very high percentage. For anyone to borrow a billion and put at

risk the good faith of their customers who signed up for electricity

business, not a hotel business/golf course business, that is amazing.

Let’s look at some others outside of your State. There is a co-op

outside of Atlanta, Cobb, that subcontracted out its entire operation—every truck, every light pole—to a for-profit subsidiary secretly owned by co-op managers. So if you think you have a scandal

at Pedernales, Godiva Chocolates and Celine Dion seems a little bit

tame in comparison to this master plan. And it has been under way

and is still underway for the last 10 years.

Mr. FRASER. One of the things that I plan to pursue is a prohibition against the co-ops getting into other sideline businesses. One

of those would be generation of power. We have a concern about

using capital credits to invest in power generation. At least it is my

opinion that co-ops in Texas should not be doing that, and that is

not a good use of capital credit money.

Mr. COOPER. What about our friends in Alabama who did not

have a board of directors election for their co-op for 38 years? So

as great as the Texas Legislature is, you all don’t have jurisdiction

outside of the State boundaries. These problems seem to be mounting in a number of different areas, but it all depends on an enterprising reporter like Margaret Newkirk, like Claudia Grisales, and

there was another one you mentioned, Mr. Watson, that I don’t remember.

Mr. WATSON. Jodi Lehman from Horseshoe Bay.

Mr. COOPER. Those have become the watchdogs of democracy.

The legislature was asleep, we were asleep, and those few intrepid

reporters, sometimes relying on inside tips, were able to blow the

whistle and help shine the light where it needed to be shined.

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I thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Cooper.

Mrs. Foxx.

Mrs. FOXX. Thank you very much, Mr. Chairman.

Let me say that I am a long-time member of a rural cooperative.

Both my electricity and my telephone services come from co-ops. I

am very dependent on those for my energy and my phone. In fact,

I think my phone service is superior to phone service I could get

anywhere else.

But I am not a fan of the Federal Government getting involved

in things that it doesn’t need to get involved in. I have made many

speeches in this committee, on the floor, and in other committees

about that.

I was the only member of North Carolina State Senate that voted

against allowing co-ops to compete with private enterprise in North

Carolina, because I have great concerns about that, too. I told the

head of my co-op, with whom I have spoken recently, that I would

be happy to come to this hearing and talk about my concern about

the Federal Government not getting involved, but would also express my concerns that I have expressed in the past about the role

of co-ops.

I guess one of the questions I would like to ask Mr. Fraser or

others on a panel is: how do you think that the problems that have

been exposed by this panel and by Mr. Cooper should be dealt with

if not dealt with by the Federal Government? What do you think

should be done? And if you could make fairly short answers, then

I would like to make a couple of other comments.

Mr. FRASER. Madam Representative, we believe the State of

Texas has sufficient authority to solve this problem. We have full

regulatory control that we can exercise if needed, and we are in the

process to determine that. I appreciate, as I said in my opening

comments, that the Federal Government is looking at this. We appreciate their interest, but the State of Texas has sufficient authority and we need no other additional authority from the Federal

Government to address this issue.

Mr. COOPER. Would the gentlelady yield for just a second?

How about on disclosure of private property in Texas? Do you

need any help on that issue?

Mr. FRASER. Disclosure of private property? Give me a——

Mr. COOPER. That is what we were discussing earlier. Pedernales

is still not telling each member what he or she owns in the cooperative. That is private property.

Mr. FRASER. You missed the conversation I had with Juan Garza,

general manager. Starting within the next billing cycle, he is going

to be putting on all the bills everyone’s capital credit issue. I have

been advised by the Association of Co-ops in Texas that the bulk

of those are doing it, but it is something that I am going to pursue

that every month on their bill it will say that in Pedernales I have

$2,342 in equity in that company.

The thing you are asking is something we have the ability to do,

and it is just a matter of we didn’t have it done, but it is going to

get done.

Mr. COOPER. Thank you.

Mrs. FOXX. Mr. Rose.

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Mr. ROSE. Congresswoman, thank you for your interest and your

service in North Carolina. I have read up a little bit about you. I

don’t know how the North Carolina Senate and House operate, but

Senator Fraser and I have been commenting back and forth today.

It is strange to sit here and look at one party on one side of this

dias and the other party on the other side of this dais, the majority

and minority reports, and all those things. I wish it wasn’t that

way. It is not that way in Texas.

One thing that I might suggest that we all would agree on, on

both sides of this room, would be that the Federal Government

needs to enforce the laws that exist on the books. To the extent

that we have co-ops spending more of their capital and resources

outside of their core mission, if that violates Federal statute you all

ought to do something about it.

To the extent that you need to make sure that open meetings

and open records are being followed and that comports with their

nonprofit, tax-exempt status, you have to do something about it.

What we can do in the State of Texas—and we talked about this

a good bit, but I will just mention—we have to make sure that

every co-op in the State of Texas follows open meetings, open

records. We have to make sure that every co-op in Texas submits

at least an annual audit report to the Public Utility Commission

every year. Part of that might be a very clear statement about the

capital credit accumulation in that co-op, and that is something

that I would like to consider as we move forward next session. But

also, and finally, the third point, we have to make sure that there

are minimum standards of democratic governance where members

can seek, through fair elections, a membership on their board.

Mrs. FOXX. Mr. Watson, go ahead.

Mr. WATSON. Yes, Congresswoman Foxx. Thank you.

One of the things that inhibited us members from learning about

the workings of the PEC was that they filed inadequate and really

incomplete form 990’s, which are the forms required by all nonprofits. The IRS, from what I read in the press, has been starved

of enforcement money, so I would urge you to, as a Congressman,

vote to beef up that enforcement, for one thing.

The other problem that we faced was the advisors, the professional advisors to the co-op. They worked for Mr. Fuelberg. They

did not work for me as a member. They didn’t work for any of us

220,000 members. I am going to name them. KPMG, the accounting firm, signed off on audits and on form 990’s that were incomplete on their face.

The law firm of Clark Thomas, which has represented the PEC

for 70 years probably, one of their lawyers Mr. Fuelberg reported

in public or in the press had said there was a loophole in the Internal Revenue code that allowed him not to put in a key employee

compensation, which is clearly called for on the form and in the instructions. So I asked the lawyer, I said, are you glad now that you

advised him that way? And he sort of gave me a sheepish look. But

I understood at the time that about 40 percent of all Texas co-ops

were failing to accurately and correctly report on the form 990.

That is the only instrument which is publicly available to members such as myself to learn about the compensation and perks

that are being paid to co-op employees, key employees, and the

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board. So I implore you, talk to the Internal Revenue Service. I understand that within the last year they have let it be known that

they intend to begin finally looking at non-profits and enforcing the

requirements for 990’s, but it just simply takes away the only tool

that we had.

Mrs. FOXX. Mr. Chairman, I know——

Chairman WAXMAN. I think Mr. Higgins had a comment.

Mrs. FOXX. OK. Go ahead.

Mr. HIGGINS. When you talk about the co-op that went bankrupt

getting into the golf course business, that is a surprise to me. I

don’t think that co-ops ought to be in any business except the business that they are supposed to be in. When you say there is 15 percent latitude, I wonder about that.

The first red flag that caught my attention was that apparently

nobody was minding the store there enforcing it. The second big

red flag that catches my attention is if you merely say to the IRS,

Enforce these provisions, I am afraid that you may punish the people who have already been punished if they put our nonprofit status in jeopardy. So they need to be enforced, but don’t come down

on us and take away the advantages, whatever they are, of having

a co-op to begin with.

Mr. COOPER. Will the gentlelady yield just for one quick point?

Of co-ops, 93 percent are in other businesses, 93 percent, according to the NRECA, itself, so we have a lot more work to do in this

regard.

Mrs. FOXX. Thank you, Mr. Chairman, for your latitude. I appreciate it.

I do want to say again that we have excellent service from our

co-op. We had over 900 people at our annual meeting about a

month ago. I have attended every annual meeting for 15 years. I

realize that it is the members who have the control over what happens in the co-ops. If they want to have things done, they can have

things done. But I have to say the capital credits are being paid

out by our co-op in I think a reasonable manner. I have not investigated the books, but I have no doubt that things are being done.

We have excellent people on our board.

I want to say that I know there are co-ops that are operating

very effectively and very well, but I think it worries all of us in

Congress when there are problems with some co-ops. As with other

things, it taints everyone involved. I think that it is in the interest

of the co-ops to make things better so that people aren’t tainted.

It is just like us in Congress. If we have a Member of Congress

who performs badly, all of us get tainted with that, all of get accused of being bad. So I would hope that the message from this

hearing would be that if there are problems, the co-ops, themselves,

and the States, themselves, would start looking at where the problems are. I don’t want to see an Enron kind of situation develop

here because the kinds of comments you have made—and I have

only heard a few of them, and I apologize, because I had voting in

another committee and testifying in an other committee, so I apologize for being here only part of the time, but I do want to caution

you on that.

I again thank the chairman for his latitude.

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Chairman WAXMAN. I thank the gentlelady for her comments

and questions.

Mr. Westmoreland.

Mr. WESTMORELAND. Thank you, Mr. Chairman.

I think it is good that we have this hearing, and I appreciate the

chairman having it, and Mr. Cooper’s asking for it, but I am a little

bit perplexed, having listened to some of the testimony and having

read some of the different things. I can’t fully grasp why the membership of these EMCs—and I belong to an EMC. I buy my electricity from an EMC and I go to the annual meetings where new

board members are elected, and there is probably anywhere from

1,500, 2,500 people there.

Why they don’t govern themselves? I know from experience we

have had some problems, or at least some complaints, about an

EMC in Georgia. I believe it is the Cobb EMC. Yet, over the past

8 or 10 years, their electricity bills have come down, actually

dropped about 7 percent, versus where the national average has

gone up about 20 percent. So in Georgia I guess we oversee ours,

I think, and I am not sure what the Senator from Texas could say

about it, but it looks to me like this is a State issue, and not really

a Federal issue.

But I would like to ask the Senator a question, if I could. From

one of the press releases after you attended a cooperative meeting

at the United Cooperative Services you lauded the group and said

the cooperative spirit of rural Texans created this system which

electrified rural Texas is the same spirit that allows the majority

of cooperatives to continue to operate efficiently and effectively for

their members.

Senator, would you say that you have acknowledged that

Pedernales situation is an isolated incident?

Mr. FRASER. We do believe that Pedernales was an isolated incident. We have not found any indication at the other 65 distribution

co-ops in Texas that there is a problem. That doesn’t mean we are

not looking, and we have an ongoing investigation, but I sent a letter to every member of the legislature asking them to research the

co-ops in their area. We have not found anything else, so we believe

yes, it was isolated.

We are addressing the Pedernales problem, but I am not in favor

of throwing the baby out with the bath water and totally abandoning the system, because co-ops in Texas are needed. I am still a

strong proponent, and yes, I agree, this is a State’s issue and we

have the ability to address.

Mr. WESTMORELAND. Senator, wouldn’t you want to keep that

ability to address it without having the Federal Government come

in and try to do it that might preclude you from addressing and

legislating those things that are inside your State?

Mr. FRASER. Absolutely. The problem I always see with State

and Federal Government is you are trying to do a one size fits all.

It doesn’t work. Texas has a unique system in the way we do our

independent system operator. We are the only State that is totally

defined in one network, the ERCOT, and because of the way we

govern, we take care of our own business. I think it would be a

mistake for the Federal Government to try to intervene or to dictate a one size fits all policy.

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I agree with Representative Rose: if we will enforce Federal law

that is on the books today, that should be done; but other than

that, the regulatory authority should lie with the State.

Mr. WESTMORELAND. Thank you. And just keep in mind that we

have two speeds up here, knee-jerk and stop. This is one of those

knee-jerk speed things.

Thank you, Mr. Chairman. I yield back.

Chairman WAXMAN. Thank you, Mr. Westmoreland.

Mr. Jordan, do you have some questions?

Mr. JORDAN. Thank you, Mr. Chairman. This is the first time I

have ever walked in and got to go right away. I appreciate that.

The timing works out nice.

Let me just go to the two members of the General Assembly, if

I could, Senator Fraser and Representative Rose. I apologize, this

may have been asked, but I just read some information from one

of our largest co-ops in our District and how dissimilar they do

things compared to how Pedernales’s board and their CEO handled

things. People I think are, as has been said earlier, very pleased

with the treatment they get from their co-op and how it functions,

and we certainly are in Ohio.

When you did your investigation of Pedernales, did you look at

others, as well, in your State? Was this just totally an isolated incident, or did you see in your investigation other co-ops around

Texas, or, for that matter, around the country who were engaged

in similar practices?

Mr. FRASER. The last hearing we had with the Senate Committee

of Business and Commerce, we addressed Pedernales, but we did

exactly the same as the chairman is doing here. The second portion

was the co-ops, as a whole. We had the co-op association, of which

we had one of the people from the Texas Association here today,

Eric Craven, which is their political arm and their lawyer, and we

instructed them to go out and look at the other 65, determine if

there is a problem, and bring us back the data. I also requested

the same thing of the other members of the legislature.

To this point, we have not uncovered anything other than there

have been several small changes in the way that they elect members of the co-op, some of the reimbursement, travel policies, some

of the capital credits going out. They realize that they are being

watched and are correcting some of the small problems.

Mr. JORDAN. In your professional judgment as the chairman of

the committee that oversees this industry, you felt this was just

one co-op in your State that had a problem?

Mr. FRASER. We believe that. Unfortunately, it was the co-op

where Patrick and I live, and the largest in the Nation, so yes, we

believe that they were a renegade, one co-op, and we believe that

most problems were just in that co-op.

Mr. COOPER. Would the gentleman yield for a moment?

Mr. JORDAN. I would be happy to.

Mr. COOPER. We discussed the Fort Worth co-op borrowed a billion dollars to go into the hotel and golf course business and then

went bankrupt, so there must be at least one other Texas co-op

that has had significant problems, unless you view in Texas a billion dollars as not being a lot of money.

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Mr. FRASER. And, Representative, we are referencing what is

happening during current periods, which is the last few years. The

incident you are talking about was not in the current period, I

don’t believe, and we are looking at what has happened in the last

current period. Of the current, ongoing co-ops that are doing business in Texas, we believe Pedernales right now is the only one we

have identified that are still doing business in Texas.

Mr. JORDAN. Mr. Representative.

Mr. ROSE. Congressman, thank you for your question. I think it

would ill suit us to just focus on the question is there one co-op

who has acted poorly. I think for us as we move forward we have

to make sure that each Texan who lives in a co-op and is a member

of a co-op has certain basic assurances.

I have said it before today, but I will say it again: I would challenge anybody to disagree with the notion that open meetings and

open records aren’t appropriate in a co-op setting. I challenge anybody to disagree with the notion that we ought to have a democratic election that is fair for the board. I would also challenge anybody to say that we ought not have our co-ops report to the Public

Utility Commission a basic accounting of their books, and perhaps

also, Representative Cooper, a snapshot of capital credits and

where that co-op is from that standpoint.

No disrespect, Congressman Westmoreland, but knee-jerk and

stop, neither one of those speeds is appropriate in this situation as

we approach it from the Texas legislature. We have to be mindful

to keep this balance of statutory oversight and local control. I think

those three reforms next session can do that.

Mr. JORDAN. I thank the chairman.

Chairman WAXMAN. Thank you for your questions.

I want to thank this panel. You have been very patient, sitting

here for quite a long time, but very responsive to the questions that

we have been asking, and also sharing with us your insights about

this whole problem that you have experienced, and I think it has

been very, very helpful. Thank you so much for being here.

We have another panel, but I want to take a short break of 5

minutes, and then we will hear from Mr. English.

[Recess.]

Chairman WAXMAN. I am pleased to welcome to our committee

hearing today a former member of this committee and a classmate

of mine when I was first elected to Congress. Mr. Glenn English

is the CEO of the National Rural Electric Cooperative Association,

which is the electric co-op trade association. For years he represented the sixth Congressional District in Oklahoma.

I am pleased to have you here. Before you sit down, you might

as well continue to stand and take the oath.

Mr. ENGLISH. That is the reason I was standing, Mr. Chairman.

[Witness sworn.]

Chairman WAXMAN. The record will indicate that was an affirmative answer.

Mr. ENGLISH. Yes, it was. It was, indeed. But I have been mistaken a couple of times in my life, Mr. Chairman. Just a couple of

times.

Chairman WAXMAN. The full statement that you have submitted

to us will be in the record. We will have a clock to let you know

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when 5 minutes is up, and would like you to be mindful of that,

and then we can pursue questions from members of the panel.

Let’s hear from you.

STATEMENT OF GLENN ENGLISH, CEO, NATIONAL RURAL

ELECTRIC COOPERATIVE ASSOCIATION

Mr. ENGLISH. Again, first of all, let me just say I am delighted

to be back to this committee. I have many fond memories here of

this committee, and am certainly happy to come back and talk

about electric cooperatives.

The first thing, I guess, that I am struck by as I looked over the

witness list, Mr. Chairman, is I wondered where the Administrator

of the Rural Utilities Service was. I know each time that I ever had

a hearing here in this committee dealing with electric cooperatives,

I always invited the Administrator of the Rural Utilities Service.

I got to thinking about that a little bit, and it made sense to me.

Golly, gee, I guess I am here in place of the Administrator of the

Rural Utilities Service, and that I think says something.

I would like to point out, Mr. Chairman, I think you and I made

a big, big mistake 25 years ago, a big mistake. If you look at the

Rural Utilities Service today, we ended up through those years of

cutting out two-thirds of the staff at RUS, and if you look at many

of the issues that we are talking about here today, the Rural Utilities Service still has rules and regulations on the books to be able

to deal with those issues, but they don’t have the staff and don’t

have the funding. They have pretty much been neutered, to be honest about it, when we talk about regulation. Probably that is the

reason we are raising questions, and we have some folks here that

obviously are not operating in the way that their membership

thinks that they should have operated. I think that has become

very, very obvious.

I think that is something that we have to weigh and take into

consideration. Maybe that is something the Congress would want

to do, maybe go back and rectify that mistake and bring the Rural

Utilities Service up to full funding and put them in a position to

where, in fact, they are able to carry out all their duties.

I wasn’t aware at the time—maybe you are—the Rural Utilities

Service still has the authority to remove a CEO. They are supposed

to be going in each year and auditing the books of every co-op. We

have an apparatus here that has fallen into disuse simply because

of the fact that the folks don’t have the resources. This was all a

part of the changes that took place, Democratic and Republican administrations and Democratic and Republican Congresses. We pretty much, as I said, neutered this agency.

Second point I would like to make, Mr. Chairman, is the fact

that—and I have been struck by this for some time—that the directors of electric cooperatives are elected officials, and as we look at

them as elected officials, I would suspect that the members of this

committee and certainly in the Congress should feel a great deal

of empathy with some of the challenges and difficulties that they

face. They are not dissimilar.

I think that you and I have both seen, as we have moved through

the last 30 years or so, that people really make up the institution.

It is not the institution, itself. This democratic process of ours is

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good. It is good as far as the Congress and our Government, it is

good as far a electric cooperatives are concerned. It is the people

that we get involved. And so we run into some of those issues with

regard to people, and people, well, they damage everybody. Everybody gets painted with the same brush.

I think that is important for us to keep in mind. You made mention of that, that it would be unfair to just say everybody is the

same. I think that is true.

As we have seen, whenever individuals stub their tow or perhaps

don’t move in the direction that the public thinks they should, then

the public brings about changes. Sometimes it takes time. I have

seen an awful lot of elected officials in this body from time to time

who probably were not operating in a way that their constituents

thought they should, but sooner or later their constituents took action and they dealt with that. I think we have the same thing here.

In these days, everyone should be sensitive of the fact of the

smell test. I know each and every elected official, they are always

mindful of that, particularly these days. I know the Congress is

particularly sensitive about it. I was when I was on the Congress.

And you are always looking at this thing. Golly, how would this

read on the front page of the newspaper? What kind of a headline

would this make? Maybe you are not doing anything wrong, but

the appearance of impropriety is bad enough and that damages you

if you are an elected official, and I think that is what we are talking about.

So whether you are an electric cooperative director or a Member

of Congress, we face the same constituency. These are the same

people that elect us. Whether we agree or disagree with the wisdom of their decision as to who they pick, we have to work together, and that is true within the electric cooperative program, as

well. We all try to work together, and you do it in the Congress,

and this is a struggle as to how do we deal with it.

I think it really comes down to this question, bottom line: how

do we come to grips with this with our peers? How do other electric

cooperative directors deal with it, other electric cooperative CEOs,

how do Members of Congress deal with it with their peers? It is

not easy. It is not an easy thing to do.

So I appreciate your having the hearing, and certainly appreciate

the fact that we have had this little airing here with regard to one

property that got off track and obviously did some things wrong.

As I understand it, there may even be the consideration of criminal

penalties against some that committed some wrongs.

I will be very straightforward with you: if there are any violations of the law, we ought to prosecute. That ought to be true for

Members of Congress. It ought to be true with CEOs or directors

of cooperatives. That is one line.

Second line I think we come into is this question of it may not

be illegal, but it may not be something that is very commendable.

Those are issues that I think are going to have to be taken care

of by the local people that they represent, just as they take care

of any disagreements they might have with their elected officials.

And I think we also come down to the bottom line, Mr. Chairman, that we all want a fair and open process. We want everyone

engaged in competition. We want everyone doing the right thing,

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and we want all of the voters, whether they are voting for Members

of Congress or voting for directors of electric cooperatives, to be involved in that process.

Thank you very much.

[The prepared statement of Mr. English follows:]

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Chairman WAXMAN. Thank you very much, Mr. English.

Let me start off. It seems to me that what you said was an oversimplification. We face our constituents, but it looks like some of

these co-op board members don’t face anybody. The elections, as we

heard in this Pedernales case, were rigged. Do you know if the elections in other co-ops are similarly undemocratic?

Mr. ENGLISH. Well, keep in mind I have nothing other than my

own anecdotal information and the surveys that we have conducted, things that we have seen, because, again, the RUS would

be the ones that should have that information.

Chairman WAXMAN. Let me ask you a question you might know.

How many States where there are co-ops have regulations like that

which was discussed earlier being proposed for Texas?

Mr. ENGLISH. As far as open meetings and things of that sort?

Chairman WAXMAN. Open board meetings and elections.

Mr. ENGLISH. I would have to supply that for the record. I don’t

have that handy.

Let me just say, though, I can say, Mr. Chairman, that in the

last few years we have had over 40 percent of all the election coop representatives, all the board members have turned over, so you

have over 40 percent new board members that have come in in the

last few years. If I recall correctly, that date is somewhere in the

neighborhood of since 2001.

I was comparing that, I believe, with Members of Congress, and

I don’t think we have had near that kind of turnover, even with

the elections of 2006, so I don’t think you have had a similar turnover within the Congress.

Chairman WAXMAN. Turnover, by itself, doesn’t really impress

me if it is a rigged deal, because if the father can pass it on to the

son or the uncle or someone else, it is just going to follow the same

policies.

Mr. ENGLISH. And we have that in Congress. How many of our

colleagues do we know, Mr. Chairman, that find themselves in

similar situations.

Chairman WAXMAN. Let me move on, because it seems to me

that you are indicating to us there is very little Federal oversight

any longer by the Rural Utilities Service. It looks like in Texas

there wasn’t oversight at all that we can tell. Maybe there wasn’t

a way to have it. But if the co-ops were designed to be self-governing through a democratic process, I just think we have heard a

good example of how that process does not work. The Pedernales

Co-op is an example. Its board election process was rigged. They

failed to have competitive elections for over 30 years, maybe 40.

Meanwhile, the directors who were in charge were enriching themselves at the co-op expense.

Would you agree that the typical process that provides accountability at co-ops failed at Pedernales?

Mr. ENGLISH. What I would say, Mr. Chairman, is obviously the

people down there were not happy with the situation. Obviously,

the situation that developed within Pedernales went on for some

time. Obviously, the people locally at Pedernales did not take action until recently. But let me just say——

Chairman WAXMAN. They couldn’t. They couldn’t take action.

Mr. ENGLISH. Well, to the contrary. They did. The system——

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Chairman WAXMAN. They had to file a lawsuit.

Mr. ENGLISH. Sure.

Chairman WAXMAN. It took some enterprising reporters to go out

and break the story. Finally some members of the legislature

looked at it. But there are a lot of places where the press is not

so vigorous because of all the cutbacks in journalism. There are a

lot of places where people don’t want to file lawsuits because it is

so expensive. And there are a lot of places where the legislators

think that the heads of the co-ops are just the powerful local people

that are very prominent and maybe there is nothing going on because they haven’t heard any complaints because there is no press

reporting them.

Mr. ENGLISH. Let me just first of all say that I am going to defend the actions taken by the people in Pedernales in making a

change in the leadership in that co-op. I want to defend, Mr. Chairman, their right to do so. I am going to defend the fact that they

have a right to have as their representatives on their board who

they may choose. And I will certainly agree with you that the process should be free and open and we should encourage as many people to participate as possible. An I will agree with you, Mr. Chairman, that went on far too long without those kinds of situations

coming to bear.

Chairman WAXMAN. Have you looked at the transparency in

other co-ops in your trade association? Does anybody look at that

or know about it?

Mr. ENGLISH. Well, we look at the rules and regulations in which

they operate, the by-laws in which they operate and what those bylaws provide. But this comes back again, Mr. Chairman, I make

this point, to people. Now, for instance, here——

Chairman WAXMAN. It does come down to people, and I must say

my view of human nature is if you give somebody the opportunity

to go and take a lot of money and use it for their own purposes,

there is unlimited ability to rationalize doing it.

Mr. ENGLISH. That is true.

Chairman WAXMAN. That is part of human nature. That is why

you need some checks on this abusive power.

Mr. ENGLISH. If I could respond, Mr. Chairman.

Chairman WAXMAN. Sure.

Mr. ENGLISH. I would make the point that is absolutely right. We

have seen it. I saw it here when I was a Member of this body. We

saw those individuals taking advantage of the situation. We had

rules and regulations and laws on the books. We had new rules

that were proposed and change, things that came about, but we

still had those individuals come through. You have always got to

be vigilant.

As I say, those are the people, I think, that if there are criminal

violations then we should prosecute. There is no excuse not to.

Chairman WAXMAN. OK.

Mr. ENGLISH. And I think, in fact, we have to recognize it is not

an easy situation to go in and prevent someone from violating the

law or doing wrong. We have tried many times in this body.

Chairman WAXMAN. But transparency could help.

Mr. ENGLISH. And we have an Ethics Committee in this

Congress——

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Chairman WAXMAN. Transparency could help.

Mr. ENGLISH [continuing]. That doesn’t stop that sort of activity.

Chairman WAXMAN. I know. Does transparency help?

Mr. ENGLISH. Certainly, and I wholeheartedly agree.

Chairman WAXMAN. OK. Let me move on to Mr. Westmoreland,

because he is next on the line of questioning and the red light is

on.

Mr. ENGLISH. Very good. Great.

Mr. WESTMORELAND. Thank you, sir.

Mr. English, it could be the case that an elected official could be

under indictment under Federal charges and still be re-elected by

his constituents; is that not true?

Mr. ENGLISH. Well, that is my understanding, and that is always

the case, and that is the delicacy, I think, of the problem that we

are facing here. You have two bodies of elected officials. You have

the Congress and you have the directors of local electric cooperatives. That is the reason I think there should be a certain amount

of empathy.

Mr. WESTMORELAND. The membership can elect anybody they

want to.

Mr. ENGLISH. That is the situation.

Mr. WESTMORELAND. Whether they are convicted felons or whatever. That is up to the membership to elect them.

Mr. ENGLISH. And it is up to the folks to correct the problem if

they disagree with the representation they are getting, whether it

is their Congressman or their local director at the local co-op. But

there has to be, no matter whether you are talking about government or whether you are talking about privately owned electric cooperatives, under any circumstance the people are the ones who

must take charge and deal with that problem.

Mr. WESTMORELAND. I have heard it said that the cooperatives’

governance activities are not transparent, but I was looking

through your written testimony here and I noticed that you had

some IRS forms attached to it. Are these typically made public to

the membership, these IRS forms?

Mr. ENGLISH. These are the new forms and I thought that the

committee would like to see that. Obviously, they are very extensive, far more extensive than you have for any corporation in this

country, even after Sarbanes-Oxley and Enron. Yes, they are, and

each cooperative is required to make that available to any of their

members who wish to look at it, and certainly it is available. I

think it is even published on the Internet.

Mr. WESTMORELAND. So you are saying that really, as far as

checks and balances, as far as the EMC goes you have actually the

local control of the membership, you have the Rural Utilities Service, although under-funded and not really functioning as it should.

It is there as a check and a balance.

Mr. ENGLISH. Right.

Mr. WESTMORELAND. And also you have the Federal Government

in the form of the IRS that takes a look at your paperwork.

Really, do you know if all electric memberships have these annual meetings that I am accustomed to going to and having all this

information printed, or is that——

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Mr. ENGLISH. They are supposed to have annual meetings. They

are supposed to have elections. And certainly these elections are

supposed to be free and open.

Now, when we get into some situations, just as we have sometimes in Congress and other elected offices, the system doesn’t always work the way it should. Any time that happens we ought to

make corrections.

Mr. WESTMORELAND. I have seen situations in Congress, Mr.

English, where they won’t even take a vote out of fear of losing.

Mr. ENGLISH. I am not going to go there.

Mr. WESTMORELAND. I don’t know.

Some have charged that electric cooperatives are no longer rural.

Could you just give us some of the characteristics of what an electric cooperative is as far as average size, density, amount of space

they cover, or population-wise?

Mr. ENGLISH. Well, we cover 75 percent of the land mass of the

United States. We have 12 percent of the consumers in the country

own electric cooperatives or are members of electric cooperatives.

And obviously that is a tremendous amount of territory for a few

people. We have nearly 43 percent of all the infrastructure on the

distribution side is owned, so you have 12 percent of the population

having to maintain and own nearly 43 percent of all the distribution infrastructure of this country.

Roughly the average size is around 21,000, give or take. The

smallest is less than 200. Pedernales is the largest, I believe, at

230 I believe is the last thing I heard as far as the number of members that they have at that cooperative. Obviously these are very

resource intensive entities in that they have to maintain all that

infrastructure, so it is a heck of a struggle, but I think they have

done extremely well. Most cooperatives have great service.

Mr. WESTMORELAND. Let me give you a report from Georgia.

Mr. ENGLISH. OK. Great.

Mr. WESTMORELAND. The agencies are doing well.

Mr. ENGLISH. OK.

Mr. WESTMORELAND. And having been a member of one for probably and different ones for probably the last 25 years, they do a

good job in servicing their customers. They work hand in hand with

the Southern company, Georgia Power, Oglethrope Power, other

companies in providing Georgians with good electric service, dependable electric service, and I am proud to say that in Georgia our

electric rates are probably 15 to 20 percent below the national average. I am glad to have the participation of all the power providers in the State of Georgia, and your organization is doing a good

job.

Mr. ENGLISH. Thank you very much. That is usually the kind of

testimonials we are used to hearing about electric co-ops all over

the country, so I am happy to say that what you find in Georgia

is not unusual in the rest of the country, and even the State of

Texas.

Chairman WAXMAN. Thank you, Mr. Westmoreland. Your time

has run out.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

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Glenn, as a former colleague and friend, I am sorry we disagree

on these issues, but it was actually his kind invitation to let me

speak at the national convention that first led me to do enough research to understand some of these things. Now I know that your

PAC gives as much money to politicians as Boeing Corp., so that

has a lot of influence. It has a lot of influence in States, too. You

pretty much draft whatever legislation you want and get exempted,

you know, so there is no oversight.

But I am delighted my friend from Georgia is here, because we

were talking about Cobb Electric earlier, and he was seeming to

say that, well, things are fine, you are doing a fine job, everything

is hunky-dory. Well, Cobb is one of the most notorious examples in

all of America, because is it OK for a non-profit electric co-op to

subcontract out its entire operation to a for-profit subsidiary secretly owned by co-op managers and still pretend to be a non-profit? That is a little bit like subcontracting out the entire Pentagon

to Blackwater. This is an amazing thing. How can you pretend this

is a nonprofit if it is really run entirely by a for-profit? What standards does the NRECA have if you think that is OK behavior?

Mr. ENGLISH. Is that the question?

Mr. COOPER. Yes.

Mr. ENGLISH. OK. Well, let me try to answer that. You had a

number of questions that were tied up in it.

First thing, let me just say we are very proud of our PAC, and

we have made contributions to friends, and you have received quite

a few of those contributions along the way, and we were pleased

to do it. You were previously very supportive of electric cooperatives.

Mr. COOPER. I still am.

Mr. ENGLISH. Well, we disagree on that for sure.

Mr. COOPER. I still am.

Mr. ENGLISH. I guarantee you we disagree big time on that one.

Now let me finish the question here. The issue you come down

to is I could have some very serious disagreements with the way

the Congress has been contracting out a whole number of services

as far as——

Mr. COOPER. Mr. English, the question is——

Mr. ENGLISH. You asked me the question.

Mr. COOPER [continuing]. Standards that NRECA——

Mr. ENGLISH. Mr. Cooper, you asked——

Mr. COOPER. Mr. English, you are no longer a Member here.

Mr. ENGLISH. Let me finish my question.

Chairman WAXMAN. Both of you——

Mr. ENGLISH. Let me finish my answer.

Chairman WAXMAN. If you will cease for a minute, we can’t have

both of you talking. This is the time, as you may recall—or if you

don’t—this is a time when Members ask questions and expect answers to their questions.

Mr. ENGLISH. Mr. Chairman, if you——

Chairman WAXMAN. No, no.

Mr. COOPER. Let me rephrase my question. Would it be OK for

every co-op in America to subcontract out its entire operation to a

for-profit subsidiary secretly owned by co-op management and still

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pretend to be a nonprofit? Is that tolerable behavior under NRECA

guidelines?

Mr. ENGLISH. Let me just say this. I would not personally recommend that. That is not something I would do. But I am not an

elected representative of the membership in that particular area of

the State of Georgia. Those people, whatever business decisions

they make, have to be held accountable. And as I understand it at

the present time they are being held accountable, because there is

serious disagreement down there among that membership, as you

well know, raising these various issues. There may even be legal

questions involved. That has been taken before the courts. That is

the process that needs to be followed.

Now, what Glenn English thinks and what the directors in the

State of Georgia think, I don’t have their constituency. And when

I was a Member of this body people in western Oklahoma may not

have agreed with what the people in Tennessee thought, and you

and I didn’t always vote the same way. That is the same thing

here.

Mr. COOPER. Mr. English, so there is no co-op misbehavior that

would be so bad that would prevent them from being members of

NRECA as long as a local vote ratified the decision?

Mr. ENGLISH. I will go back again. We have the same situation

here. I don’t know if the behavior of Members of Congress that prohibit them from being members of this body.

Mr. COOPER. Mr. English——

Mr. ENGLISH. NRECA is a trade association.

Mr. COOPER. I have limited time. Next question.

Mr. ENGLISH. NRECA is a trade association, and our members

belong on that basis. It is up to their members to decide whether

their conduct is appropriate or not.

Mr. COOPER. So you will take anyone. Mr. English, we mentioned

in the first panel CFC, the lending arm of co-ops, was set up, according to its official biography, to tell Wall Street how rich co-ops

are; meanwhile, NRECA’s purpose is to tell Congress how poor you

are. Which story is correct?

Mr. ENGLISH. Probably both. On one hand, CFC was set up in

1969 whenever it appeared that the administration at that time

was going to do away with the REA program. In fact, if you recall,

Richard Nixon did.

Mr. COOPER. Mr. English, how can you be rich and poor at the

same time?

Mr. ENGLISH. If I can’t complete my answer, Congressman, if you

just want to make statements, that doesn’t make much sense to

ask me questions.

The point that I would make is this: electric cooperatives are

very proud of the fact that our bond rating on Wall Street is very

good. We are considered to be in great financial condition. In fact,

in some cases we are in better condition than some of the big power

companies of this Nation.

If you look at the cost of power because of the infrastructure that

we have, because of the fact there is only 7 co-op members per mile

versus 35 for an investor-owned utility, we have a huge amount of

infrastructure we have to keep up. And we have some of the poorest people in this country that we must serve.

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Percentage-wise, I would dare say that we have a larger percentage than anyone else in this Nation, and so from that standpoint

I would point out that yes, electric cooperatives are representing

some of the poorest members of this country and they are owned

by those folks.

Mr. COOPER. Mr. Chairman, I see that my time has expired. I

hope that we have time for another round of questions, but I see

that my colleague is here from Iowa.

Chairman WAXMAN. We will give a second round to any Member

who wishes.

Mr. Braley.

Mr. BRALEY. Thank you, Mr. Chairman.

Mr. English, I am here as a long-time member of the Tama Iowa

Poweshiek Rural Electric Cooperative located in Brooklyn, IA,

which is run by my good friend, Darryl Heatland, who went to

church with me when I was growing up in high school, and I have

to tell you that there is a real big disconnect going on between my

experience and perception of how RECs are run and operated in

Iowa and some of the information that Mr. Cooper has shared with

the committee about other parts of the country.

I guess the opening comment that I would make is a comment

that I would share with anyone in your position as a head of any

type of a trade association or professional association, and that is:

oftentimes where there is smoke there is fire. I think that all of

those great rural electric cooperatives that I represent in Iowa,

those 75,000 constituents of mine who depend upon RECs to take

care of them, to take care of their power needs, to be there for them

in the ice storm disaster that we faced in February 2007 where

they responded with admirable dispatch all over my district, when

we went through this terrible tornado that we just had, the largest

tornado in the United States this year, and the RECs were out in

full force taking care of my constituents, the flooding that we are

dealing with right now, it is the type of constituent service that I

would be proud of to have my staff performing.

But I also know that you are only as good as your weakest link

as a trade association, and some of these concerns we are talking

about are very disturbing. So what I would like to do is ask you

at the outset, from your perception and the perception of the member co-ops you represent, what should be the No. 1 guiding principle of how those co-ops service the members that they take care

of?

Mr. ENGLISH. First of all let me say, as I said before, unfortunately, as Members of Congress are well aware, you get tarred with

the same brush. That is just a part of it. And you are dealing with

a lot of people.

What we are supposed to be governed by are those seven cooperative principles. That is the basis on which we have our tax-exempt

status with the Internal Revenue Service. It is the basis on which

we make our claim that we are, indeed, different, and the basis on

which we are a consumer organization.

But at the same time, we fully recognize and understand that

when you bring people into a process, 7,000 directors, 1,000 managers, yes, your chances of running into somebody who doesn’t

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quite operate in the manner that we would like to see, then we all

get tarred with that brush.

This is a trade association. We have no authority. We can encourage our members. We can provide our members with education. We can provide our members with what their peers think.

But as far as being able to come down and mandate and say, you

shall do such and such, we are not a corporation headquarters.

That is the point that I was making to the chairman early on.

Whenever we gutted the Rural Utilities Service—and we did it over

a number of years after 1980—that took care of a lot of that regulatory basis on which I think members of this committee seem to

be searching for. That was deregulation.

Mr. BRALEY. In the materials you provided the committee there

is something called the Board Leadership Certificate.

Mr. ENGLISH. Right.

Mr. BRALEY. Which looks like a number of continuing education

types of programs that are available to member co-ops to help them

become the best and most effective type of cooperative that we expect from our co-ops in Iowa. Can you give us some sense of what

type of participation you get from your member co-ops in those

types of leadership training opportunities? And is it having the desired effect that the cooperatives would expect it to?

Mr. ENGLISH. Right. First of all, what we would encourage our

members to do is get their credentials. We are looking for

credentialed directors. That is their first step after they get elected.

And we have good participation in that. We have over half of the

cooperatives—and keep in mind we have over 40 percent new directors in the last several years—moving through that process.

We do, in fact, offer higher advanced training, which gets into

power supply and a number of other more complicated issues. We

encourage our directors to participate in that, as well.

But our real focus, and the focus, I think, on the hearing that

we are talking about today comes under the grounds of the

credentialed director and, quite frankly, having a good dose of common sense, and recognizing and understanding that whatever behavior you are going to be following—and I don’t think any amount

of education would have taken care of that under the example that

we have seen before us today—that comes down to just plain, bottom-line common sense and recognizing and understanding that

you have to be held to a higher standard, and you are going to be

under scrutiny, and you had better be prepared to answer for it.

That is what they are being required to do is answer for it.

Mr. BRALEY. And you also supplied us with these form 990’s, Return of Organization Exempt from Income Tax forms, which do require organizations to put detailed information in on executive and

board of directors compensation. Are you personally aware of what

type of oversight the Internal Revenue Service has been performing

on monitoring these forms to ensure their accuracy, their completeness, and to achieve the desired transparency that this law is supposed to?

Mr. ENGLISH. Well, the only thing I think I can say about that

is this is a new form, and it is to a degree that we have never seen

before and, as I said, no other business is being required to do. I

can only assume by this that the IRS plans a much higher level

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of scrutiny and involvement in the proper filling out of form 990’s

than we have had in the past.

Has everyone filled it out exactly as they should? As we heard

some of the testimony before us, a lot of it gets done on the advice

of accountants, and some of it gets done on the advice of attorneys.

Quite frankly, I don’t think some of them have gotten good advice.

Chairman WAXMAN. Thank you, Mr. Braley.

Mr. McHenry, do you wish to ask questions?

Mr. MCHENRY. Thank you, Mr. Chairman.

I am sorry. I have been kept away with other business today.

This hearing is interesting to most of us. My experience with my

co-ops in North Carolina has been a pretty reasonable one. We

have Duke Energy in North Carolina, and that consumed a lot of

the attention of public policy when I was in the State House, but

co-ops have been pretty well managed in my State in my experience in the State House. But this one is interesting to me, Mr.

English, this hearing.

Mr. ENGLISH. It has been interesting to me, too.

Mr. MCHENRY. Can you give me some background on why we are

here today? I mean, I understand Mr. Cooper has an experience in

Tennessee, and that is sort of a little history on that?

Mr. ENGLISH. Well, I know Mr. Cooper and I have had our disagreement with regard to this issue, and I think it started with the

issue in Tennessee. I think that is fair to say. And it has to do with

the fact that cooperatives in Tennessee are unique and different

from cooperatives elsewhere in the country. For instance, they buy

their power from TVA, and with a longstanding contract that TVA

has had, it has prohibited the payment of capital credits. What

TVA co-ops are expected to do is to reduce their rate; in other

words, to charge less for the power, as opposed to sending a check

back to an individual for any margins or excess over and above the

cost of doing business.

TVA has reiterated, in fact, I think back in the 1970’s underscored again that this was the directive. I assume the reason for

this is because they provide power both to municipalities and to

electric co-ops and they want to keep it roughly the same as far as

the cost for both entities. But anyway, that is the contract.

Mr. Cooper has disagreed with that, and he wants me to participate and tell him the cooperatives in Tennessee should pay those

capital credits. Perhaps he wants me to tell TVA that they

shouldn’t require this contract. Whatever. But anyway, that is

where it started out. Now it has ballooned and I think expanded

to all the cooperatives all across the United States that we have

a disagreement over.

Mr. MCHENRY. So is that regulated, this going back and——

Mr. ENGLISH. TVA?

Mr. MCHENRY. No. Co-ops distributing money that is in excess

of their——

Mr. ENGLISH. The capital credits?

Mr. MCHENRY. Yes.

Mr. ENGLISH. That is a part of the requirements that you have

for electric cooperatives through this process. Again, you go back to

the form 990’s and the requirements that they provide this information and make it available.

162

Now, the issue that I think we are into, as well, here before us

today is this question of how much is available. Even Mr. Cooper

agrees that the $31 billion that he talks about in the way of equity,

that most of that is tied up in buildings and infrastructure and

things of that sort. If you are talking about actual cash that all the

cooperatives across the country have on hand, you are talking

about roughly $3.8 billion.

This is a very intense industry from a resource standpoint, and

this is about 45 days’ operating expenses, which on an average on

co-ops around the country, and it is my understanding that is pretty much in line with what is being recommended as any kind of

prudent business practice.

Mr. MCHENRY. OK. So the Texas Legislature addressed this particular issue that is the subject of the hearing today, did they not?

Mr. ENGLISH. The Texas Legislature is focusing on the governance and open meetings, and I think they are looking elsewhere at

how they can ensure that the kind of situation that took place at

Pedernales won’t happen again. As you heard them testify, they

seem to feel that this is a local matter and that they have it under

control.

I have to admit I personally have not run into situations like we

had in Pedernales, and so it is rather unique, I think.

Mr. MCHENRY. And how are the co-op boards elected?

Mr. ENGLISH. They are elected by the same folks that elect Members of Congress, the same constituents, so that is where it comes

from.

Mr. MCHENRY. Do they do a better job of electing Members of

Congress?

Mr. ENGLISH. Well, I guess that is up for every Member to make

judgment on that.

Mr. MCHENRY. I am just kidding.

Mr. ENGLISH. I have to say when I was a Member of this body

there were times that I questioned the judgment of some in other

parts of the country, but no one sitting on this panel.

Mr. MCHENRY. All right. Any other comments about this Tennessee experience of Mr. Cooper’s?

Mr. ENGLISH. Mr. Cooper could probably do better to address

that than anything else, but that is certainly where he and I personally had a disagreement.

Mr. COOPER. I would be happy to jump in if the gentleman would

yield.

Mr. ENGLISH. So I am sure he will want to talk about that some

more.

Mr. MCHENRY. Sure, I am happy to yield.

Mr. COOPER. I thank the gentleman.

Is Tennessee unique and different? In a way. We do have TVA.

We are thankful for that. But Pedernales, the subject of this hearing, the largest co-op in America, had never paid a refund in 70

years, despite having a major surplus. So if the largest co-op in

America could behave like ours in Tennessee, that got me worried.

Now, regarding the Tennessee case, co-ops in Tennessee have so

much political power that one line in the 1935 power contract, the

TVA Board is reluctant to take it out because they don’t want to

be unpopular with their distributors. The TVA IGs have repeatVerDate 11-MAY-2000 13:57 Jan 30, 2009 Jkt 000000 PO 00000 Frm 00166 Fmt 6633 Sfmt 6633 C:\DOCS\46194.TXT KATIE PsN: KATIE
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edly, since 1994, found that 50 distributors in the Tennessee Valley, A, have embarrassing amounts of money on hand and, B, are

raising rates at the same time in violation of this one sentence in

the contract that we have talked about.

So we have a double whammy in our area, but it is hitting the

rest of the country, too, like with Pedernales.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman.

It is good to see you.

Mr. ENGLISH. Indeed, Mr. Towns. It is good to see you, sir.

Mr. TOWNS. Happy to know there is life after this place.

Mr. ENGLISH. Well, it has been a long time since I have been

back.

Mr. TOWNS. Let me just ask you, when a co-op’s revenue exceeds

its expenditures, it builds equity?

Mr. ENGLISH. Right.

Mr. TOWNS. Well, when a cooperative refunds in the form of capital credits to their customers, is this situation in Texas cooperative

unusual? Is this unique? I mean, if this is——

Mr. ENGLISH. It is most unusual. It is most unusual. The overwhelming majority of our members refund capital credits. Really,

the judgment in the case that has to be made, and, again, this gets

back to that business of a decision of the local board, and a lot of

it has to do with how conservative they are. I had one—and certainly Mr. Cooper is going to strongly disagree with this, because

we have had this discussion before—I have had one co-op that has

told me that they want to have 100 percent equity. That is probably going way beyond, well, I know it is going way beyond what

the average co-op has, which is about 40, 41 percent. But that is

a decision on their part, because they have very conservative directors, and it is their directors’ idea, we don’t want any debt, and we

want to make sure that we can cover whatever cost we are without

going out and borrowing a lot of money.

That is a local decision. It is a very conservative board. As long

as that is made available to the membership that they represent,

then obviously that is a local decision.

We have others that have far less, but it is a local decision by

elected representatives who have been elected by their membership

to make such judgments, just as Members of Congress have been

elected to make judgments with regard to the budget and deficits

and everything that Members of Congress deal with. It is similar.

Mr. TOWNS. Well, do you think they should be doing a better job

of communicating to their members?

Mr. ENGLISH. Well, I think we all need to do a better job of communicating with the members. I think we can all do better on that.

Mr. TOWNS. Right. Would you agree that co-op members ought

to have a say in what their co-ops are doing with the equity?

Mr. ENGLISH. I think they certainly should, and that goes, again,

they need to participate in their local cooperative elections. They

need to pay attention to the business that is taking place at their

cooperatives. They need to pay attention to what is going on here

in Congress. They need to participate in the election of Members

of Congress. The election on an off-year for Members of Congress,

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if I remember correctly, is about 36 percent, and the election nationwide for directors of electric cooperatives is about 31 percent.

I think we both would agree that it ought to be three-quarters or

better. We ought to have far more participation in the democratic

process of government, and certainly in the process of co-op governance. That is something that we wholeheartedly agree.

One point I would make—and, Mr. Chairman, I want to lay this

on the record, too—an awful lot of co-ops go to great lengths to try

to encourage people to participate. I know of one electric cooperative—and it is a rather large electric cooperative—every year just

brings folks in to make sure that they come into this thing. They

will even give away a new car. It is a drawing. That is it. You have

to be at the meeting. You come in, you sign up as a member, and

they have a drawing. They give away scholarships to the local

folks. I know of some others that give away old pickups that the

co-op might have. Some of you may have experienced that. In others they give away a frying pan.

But they are trying to get folks in to participate in this process,

contrary to what I think the impression has been created today

that no one, no co-op wants people to show up at their meeting.

Well, that is not true, and it is completely contrary to the experiences I have had in the last 14 years in working with electric cooperatives across this country. They go to great lengths on that.

I think there is no question we would like to see far greater participation, and I am sure that you would, too, in your District, people coming to the poll.

Mr. TOWNS. No doubt about it. Especially to vote for me.

Mr. ENGLISH. Especially. And I am sure they would, because

they are smart folks up there. No question.

Mr. TOWNS. Let me ask you, what are you doing to encourage

that participation? Are you doing any of that?

Mr. ENGLISH. The one thing I think that we are trying to do is

to help our members improve their overall communications with

their membership. One of the things that we are doing right now

is to engage them in something known as, Our Energy, Our Future, which is to make three points. We are trying to get them to

talk to you all, and the first point is to make sure that they are

aware, not just election cooperatives, but the whole electric utility

industry is pretty much out of capacity. We built up excess capacity

in the late 1970’s and early 1980’s. We are out of that.

Second thing is to understand, from a standpoint of technology,

that far greater investment needs to be made in technology so that

we can meet any climate change objectives that the Congress may

set. If we don’t, then we are probably going to run into situations

where we are not going to have enough power, we are going to

have rates that are excessive, and that is a train wreck none of us

want to see.

The third point is the fact that we also need to understand that

electric rates, particularly those people that we serve—and I would

suggest a lot of the folks that you serve—there is a real question

in the future as to whether electric power in this country is going

to be affordable to all Americans. Low-income people may not be

able to live with the promise that was created in 1936 with the creation of the REA and affordable electric power.

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Mr. TOWNS. Thank you very much.

Chairman WAXMAN. Thank you, Mr. Towns.

All Members have completed a round of questions, and some

Members have requested a second round. Are you ready to go?

Mr. ENGLISH. Yes, I am ready. Ready, Mr. Chairman.

Chairman WAXMAN. All right.

Mr. Westmoreland.

Mr. WESTMORELAND. Thank you, Mr. Chairman.

My good friend Mr. Cooper down there, I know that he wants

this what is best for his constituents. It may not go along——

Mr. ENGLISH. Well, he won’t be an elected official long if he

doesn’t.

Mr. WESTMORELAND. No, I understand, but I know that he wants

to do that. I just hope he doesn’t mess up what is going on in Georgia by trying to fix what is going on in Tennessee. In fact, the comment about the PAC is almost laughable, that because you have a

PAC you can get anything you want up here. If that was true, big

labor and trial lawyers would be getting anything they wanted.

Mr. ENGLISH. And if I recall correctly, that is bribery, is it not?

Mr. WESTMORELAND. Well, it is.

Mr. ENGLISH. And you are supposed to be prosecuted if you have

bribes. Isn’t that right, Mr. Chairman?

Mr. WESTMORELAND. Let me say this: I have never seen a voter

turnout method like the EMCs that I am used to use, whether it

is health screenings, giving away a pickup truck, rides for the kids,

a whole variety. They spend a lot of money trying to get those people out to vote where I am from.

Let me ask you this. Mr. Cooper mentioned the Cobb EMC case.

Were there any laws broken there?

Mr. ENGLISH. Well, that is the issue that I think there is between some members and some of the officials at Cobb. That is

being dealt with, as I understand it, within the courts and within

the membership, so at this point I have no information.

Mr. WESTMORELAND. But if it was a law broken, it is being dealt

with in the court today, isn’t it?

Mr. ENGLISH. It is being dealt with. Yes. That is right. It is in

the courts.

Mr. WESTMORELAND. And that is what kind of system we have.

We are a country of laws, right?

Mr. ENGLISH. Right.

Mr. WESTMORELAND. If you feel like there has been a law broken,

then you have a remedy in the court system?

Mr. ENGLISH. Exactly.

Mr. WESTMORELAND. And that is exactly where this is being

taken, I am assuming.

Mr. ENGLISH. That is the way I was always taught.

Mr. WESTMORELAND. Yes. And so I am assuming that if there are

laws being broken somewhere, that they are being taken to court.

I am not familiar with the situation in Tennessee, but from what

I heard you say, it is a contractual agreement between the TVA

and the electric membership cooperative that is at question about

why they can’t do these rebates or refunds.

Mr. ENGLISH. Got to lower the rate.

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Mr. WESTMORELAND. They have to lower the rate for all users,

and that is a contractual thing. And so if the EMC decided not to

do that, that would be a contractual issue that could be taken to

court.

Mr. ENGLISH. In fact, it is my understanding the issue has been

taken to court. They had some folks take it to court that you all

are not giving us back our capital credits. And it is my understanding it was thrown out of court.

Mr. WESTMORELAND. OK.

Mr. ENGLISH. The court didn’t even take it up, or if they did the

judge came down and said this is a contractual issue and——

Mr. WESTMORELAND. So there has been some type of adjudication

or something in this case?

Mr. ENGLISH. There has been adjudication already on the matter,

yes.

Mr. WESTMORELAND. And the case that we are having the hearing on today?

Mr. ENGLISH. Well, I think that would be a little unfair to Mr.

Cooper, because I think what he is talking about and what we are

having the hearing on is Pedernales, but that is, I think, a part of

this discussion, yes. I think that is a part of what we are talking

about.

Mr. WESTMORELAND. Yes, sir.

Mr. Chairman, I thank you for doing the second round. I appreciate it, and I yield back the balance of my time.

Chairman WAXMAN. Would you yield to me?

Mr. WESTMORELAND. I would.

Chairman WAXMAN. I just want to get something very clear. As

far as Federal regulation of the electric co-ops, it is only the IRS

requirements; is that correct?

Mr. ENGLISH. No. As it stands right now, anyone who is an RUS

borrower also then comes——

Chairman WAXMAN. Anyone who is an RUS?

Mr. ENGLISH. Borrower. Borrows from the Rural Utilities Service.

Chairman WAXMAN. I understand that only 50 percent of the coops actually——

Mr. ENGLISH. No, you have about two-thirds of the co-ops have

an RUS loan.

Chairman WAXMAN. OK. Then what regulation do they have

under RUS?

Mr. ENGLISH. As I say, there is a multitude of different regulations pertaining to the loan, but also pertaining even to the point

that if they feel the activities of the co-op—if the CEO, for instance,

is carrying out activities—and I think you could probably stretch

what was happening down in Pedernales—they would have the authority to remove the CEO.

Chairman WAXMAN. So they have regulatory power, but they also

don’t have the staff or resources to exercise it?

Mr. ENGLISH. Exactly. Now, let me take this just a——

Chairman WAXMAN. And you are not a regulator?

Mr. ENGLISH. I am not.

Chairman WAXMAN. You are the head of the trade association.

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Mr. ENGLISH. Not unless you make me one, Mr. Chairman. Now,

if you want to give me that authority, then we will talk some more.

Chairman WAXMAN. I don’t think you’d want that authority. If

you have to keep all the members of your trade association happy,

you don’t want that authority.

Mr. ENGLISH. That is true. That makes it a little more difficult.

Chairman WAXMAN. You answered my question.

Mr. ENGLISH. Let me add one point.

Chairman WAXMAN. Yes.

Mr. ENGLISH. There is one little part. That one-third that is not

borrowing from the Rural Utility Service, during that period of

time that I am talking about, most of those going into the early

1980’s were borrowers. They dropped off because of the limitations

that you had staff-wise. They could not get a timely loan. So you

get big co-ops such as the Pedernales situation in which they are

growing very rapidly, and they said, RUS has been cut back so far

we can’t get this in time to meet the needs to provide the electric

power for our membership. They got out.

So the whole point is: if you and I had maintained those levels

and kept RUS regulating like they should throughout the 1980’s

and 1990’s, I doubt that we would be here today.

Chairman WAXMAN. Does RUS regulation, if it were ever enforced, preclude a co-op from taking money from the co-op and investing in hotels and other enterprises?

Mr. ENGLISH. Well, that is another little thing. Unfortunately, I

have to take a big share of that, although you get a little piece. The

big share comes back in 1987 on the Agriculture Committee Ed

Jones, chairman of the subcommittee, Conservation Credit, we

came up and figured out, hey, we have no money for rural development programs. We are out of luck. I mean, that is when we were

having tight budgets and all that stuff.

So what we did at that time is, well, we have all these electric

cooperatives scattered all around the country that are getting RUS

loans. We ought to ask them to do more. So that is when we made

the move in saying you guys ought to be involved in developing the

economies of——

Chairman WAXMAN. So we don’t stop it. In fact, you think we

have encouraged those?

Mr. ENGLISH. We encouraged it. In fact, we have an Inspector

General report that condemns us for not doing enough.

Chairman WAXMAN. You answered my question. I appreciate

that.

Mr. ENGLISH. Yes.

Chairman WAXMAN. Mr. Cooper.

Mr. COOPER. I thank the Chair not only for holding this hearing

but for your extraordinary patience.

I think the main NRECA argument is, well, there may be one

bad apple. If we had had this hearing last year, they probably

wouldn’t have agreed even to one bad apple, but at least today we

know there is one bad apple and it is called Pedernales.

Mr. ENGLISH. Don’t put words in our mouth now.

Mr. COOPER. OK. From the limited research I have been able to

do—and I wish there were more data. I wish there were more

transparency. I wish there were more disclosure, because I believe

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these are public power entities founded in the New Deal owned by

the people, and information should be widely available. But the

best I can tell, it is not one bad apple; it is at least 10 percent of

the 930 co-ops in the country, and it may be a lot more than that.

I hope that is not true.

I am sorry my friend from Georgia had to leave, but remember,

very few co-ops tell you exactly the private property that you own.

And I thought this was a country built on private property. I cited

the NRECA’s own material to point out that small co-ops are

charging their customers an extra $220 a year, 2 months of light

bills, just so they can remain small. All this is completely legal.

That worries me.

So I think it would be a complete mistake for this committee or

for Members to dismiss Pedernales as a rare aberration. For example, Pioneer, the co-op in Alabama hadn’t had a board of directors

election in 38 years. You were just talking about how there is great

attendance at elections and stuff. How many decades does it take

not to have a board of directors election before that should affect

their co-op status? Are you willing to accept people that a half century or 100 years of no board of directors election? There has to be

some minimal standard to join the NRECA.

Mr. ENGLISH. Well, there is an awful lot of accusations in there,

and first one I would say is this: you are saying bad apples. You

know, as I pointed out, any group you have bad apples. You have

bad apples in the Congress, and we have had them all the way

through. I can start ticking them off if you want me to name them.

And I would dare say that we do not have any greater percentage

of problems along those lines than you have in Congress. This is

anybody, group of people elected by the general public, you are

going to have bad apples.

Second issue, you are talking about the issue of public power.

Mr. COOPER. How many bad apples are there in co-op land?

Mr. ENGLISH. How many are there in Congress?

Mr. COOPER. I ask the questions.

Chairman WAXMAN. Would the gentleman yield to me?

Mr. ENGLISH. And if I could, the courts——

Chairman WAXMAN. Would the gentleman yield?

Mr. COOPER. I would be delighted.

Mr. ENGLISH. The courts have determined——

Chairman WAXMAN. Excuse me. Excuse me, Mr. English. He controls the time.

Mr. ENGLISH. OK.

Chairman WAXMAN. Look, I don’t think this is a fair question to

ask a man who is the head of the trade association. He is not the

regulator. I think your question should be a rhetorical question, because he is not going to be able to give you an answer. He is not

the regulator. If we had a regulator, we could find out what they

would say.

Mr. ENGLISH. Well, you have one but you don’t fund it.

Mr. COOPER. Mr. Chairman, a fair point, but I have met the regulator at RUS. He is a very nice gentlemen whose name is Jim Andrews. He is a former head of NRECA.

Mr. ENGLISH. That is not right either.

Mr. COOPER. This is a family organization.

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Mr. ENGLISH. That is not right either. He was president of the

Board of Directors at NRECA a few years ago. He was not the head

of it.

My second point is——

Mr. COOPER. President of the board of directors——

Mr. ENGLISH. The courts have stated, Mr. Cooper, the courts

have stated that it is not public power. Now, that is the courts

have said that, not me. What they have said is privately owned.

It is owned by the membership and it is privately owned. They may

buy public power—in fact, they do from TVA—but they are not

public power.

Mr. COOPER. Perhaps you can explain that to your members like

Pedernales and Representative Rose and others.

Mr. ENGLISH. No one is here defending the management of

Pedernales, Mr. Cooper.

Mr. COOPER. It is public power.

Mr. ENGLISH. No one is defending that.

Mr. COOPER. Would the gentleman yield?

Mr. ENGLISH. If you knew the experiences I had with Pedernales

you wouldn’t be asking me that question. You wouldn’t even raise

that.

Mr. COOPER. Would the gentleman yield?

Mr. ENGLISH. Certainly. Always yield.

Mr. COOPER. The co-op family is a very small one. It is a very

precious one. There is a great bond of intimacy between co-op members because it is a very important institution in America. It is a

little bit like a church. Word travels fast.

Mr. ENGLISH. That is going a little far.

Mr. COOPER. Word travels fast. Usually if something is going on

in co-op country people hear about it. I would like to know when

you first found out, you personally, that there were serious problems in Pedernales.

Mr. ENGLISH. In Pedernales? Well, let me just say this, that the

relationship that I had with the former CEO was not close.

Mr. COOPER. But he was your largest member, right, or

Pedernales?

Mr. ENGLISH. He was a member. There is no single member of

NRECA that is going to dictate what our association does. It is governed by our resolutions.

Mr. COOPER. But he was your largest member.

Mr. ENGLISH. He was a large member, but no, as far—he was the

largest distribution cooperative in the country. He was the largest

member from the standpoint—he was not the largest dues-paying

member.

Mr. COOPER. When did you first find out there were serious problems at Pedernales?

Mr. ENGLISH. When I first heard about serious problems was

whenever I heard about the newspaper articles that were coming

out about it.

Mr. COOPER. When did you first find out there were serious problems at Cobb?

Mr. ENGLISH. Well, I heard about the controversy at Cobb, because I think that has not been settled by the courts nor by the

membership as to whether they are disagreeing.

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Let me again go back to the point. What we are talking about

here are policies—they are adopted by the board of directors—that

the membership disagreed with. What we talked about with regard

to what you and I, I think, would agree is excessive—staying at the

Ritz Carlton and so on and so forth. I don’t do that. But the point

that it comes down to is that was board policy that allowed that.

That was the direction of the directors. They allowed that to happen.

The accountability comes with regard to those directors with the

membership, as it should, and those are the people that have taken

action and those are the people that took action in Alabama and

those are the people that, if they are going to take action, will take

it in Georgia, as well.

Mr. COOPER. Mr. Chairman, I see that my time has expired, but

one last question.

Mr. ENGLISH. I will yield the gentleman some extra time, Mr.

Chairman, if you don’t mind.

Mr. COOPER. I appreciate the former Member yielding.

I don’t think it has been acknowledged in this hearing the fact

that if you look at the NRECA’s real Web site, the secret, password-protected one, they offer lots of legal or quasi-legal advice.

For example, through the Electric Co-op Borrower Association and

other entities, there are elaborate slide shows, for example, that

tell you how to fill out the 990 form. In the earlier panel they

talked about how in Texas some 40 percent of those forms are misfilled out.

So I think a trade association, to the extent it tries to give legal

advice, should take some responsibility for practices, board practices and other practices that may not adhere to the high ethical

standard that I think the average co-op member back home wants

their co-op to adhere to, because these were not ever intended to

be average. These were supposed to be idealistic organizations that

did the most to serve the consumer interests by cutting their light

bills, and not to have organizations that raised rates unnecessarily,

as the TVA Inspector General has found that too many of ours

have done.

So would the gentleman care to inform us on the slide shows and

other information materials on the secret, password-protected Web

site like this document that he refused to give to my office or to

Mr. Watson or anyone else who inquired, even though this is superb legal research, it is extraordinarily well done, and it backs up

the premise that co-ops need to behave in order to retain their taxexempt status?

Mr. ENGLISH. Mr. Chairman, I am sorry that Mr. Cooper raised

this issue and asked me this question. I was hoping we were going

to be able to avoid this.

The reference that he made was with regard to a private Web

site, and gave even a Web site that provides access to members’

401(k)’s and also retirement benefits. NRECA’s counsel has advised

me that Mr. Cooper is currently under investigation by the Federal

Bureau of Investigation for his unauthorized access and

downloading of information from NRECA’s password-protected Web

site, and that is in violation of the Federal Computer Fraud and

Abuse Act. These abuses——

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Mr. COOPER. Would the gentleman yield?

Mr. ENGLISH. These accesses occurred on a house.gov IP address

on December 10, 11, 12, and 14, 2007, and in order to not jeopardize that investigation I would prefer not to answer any questions

with regard to those matters that were downloaded.

Mr. COOPER. Would the chairman give me a moment to respond?

Chairman WAXMAN. Yes.

Mr. COOPER. I had authorization to use the Web site from someone who gave me their password and information.

Mr. ENGLISH. The only people that could give you authorization

is myself or others at NRECA, a limited number. Like I said, this

is a matter under investigation by the FBI. You can take it up with

them.

Chairman WAXMAN. All right. I think we have explored this issue

at great length, but I think there are still some matters yet to be

resolved. We will continue to pursue what, to an urban guy like

me, is a very interesting and surprising turn of events.

We I think have concluded the hearing for today and we stand

adjourned.

[Whereupon, at 2:04 p.m., the committee was adjourned.]

[The prepared statements of Hon. Bruce Braley and Hon. Mark

E. Souder follow:]

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