[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]




 
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


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



                     U.S. GOVERNMENT PRINTING OFFICE
46-194 PDF                 WASHINGTON DC:  2009
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001

              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director


                            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


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 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 self-dealings.
    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:]

    [GRAPHIC] [TIFF OMITTED] T6194.001
    
    [GRAPHIC] [TIFF OMITTED] T6194.002
    
    [GRAPHIC] [TIFF OMITTED] T6194.003
    
    [GRAPHIC] [TIFF OMITTED] T6194.004
    
    [GRAPHIC] [TIFF OMITTED] T6194.005
    
    [GRAPHIC] [TIFF OMITTED] T6194.006
    
    [GRAPHIC] [TIFF OMITTED] T6194.007
    
    [GRAPHIC] [TIFF OMITTED] T6194.008
    
    [GRAPHIC] [TIFF OMITTED] T6194.009
    
    [GRAPHIC] [TIFF OMITTED] T6194.010
    
    [GRAPHIC] [TIFF OMITTED] T6194.011
    
    [GRAPHIC] [TIFF OMITTED] T6194.012
    
    [GRAPHIC] [TIFF OMITTED] T6194.013
    
    [GRAPHIC] [TIFF OMITTED] T6194.014
    
    [GRAPHIC] [TIFF OMITTED] T6194.015
    
    [GRAPHIC] [TIFF OMITTED] T6194.016
    
    [GRAPHIC] [TIFF OMITTED] T6194.017
    
    [GRAPHIC] [TIFF OMITTED] T6194.018
    
    [GRAPHIC] [TIFF OMITTED] T6194.019
    
    [GRAPHIC] [TIFF OMITTED] T6194.020
    
    [GRAPHIC] [TIFF OMITTED] T6194.021
    
    [GRAPHIC] [TIFF OMITTED] T6194.022
    
    [GRAPHIC] [TIFF OMITTED] T6194.023
    
    [GRAPHIC] [TIFF OMITTED] T6194.024
    
    [GRAPHIC] [TIFF OMITTED] T6194.025
    
    [GRAPHIC] [TIFF OMITTED] T6194.026
    
    [GRAPHIC] [TIFF OMITTED] T6194.027
    
    [GRAPHIC] [TIFF OMITTED] T6194.028
    
    [GRAPHIC] [TIFF OMITTED] T6194.029
    
    [GRAPHIC] [TIFF OMITTED] T6194.030
    
    [GRAPHIC] [TIFF OMITTED] T6194.031
    
    [GRAPHIC] [TIFF OMITTED] T6194.032
    
    [GRAPHIC] [TIFF OMITTED] T6194.033
    
    [GRAPHIC] [TIFF OMITTED] T6194.034
    
    [GRAPHIC] [TIFF OMITTED] T6194.035
    
    [GRAPHIC] [TIFF OMITTED] T6194.036
    
    [GRAPHIC] [TIFF OMITTED] T6194.037
    
    [GRAPHIC] [TIFF OMITTED] T6194.038
    
    [GRAPHIC] [TIFF OMITTED] T6194.039
    
    [GRAPHIC] [TIFF OMITTED] T6194.040
    
    [GRAPHIC] [TIFF OMITTED] T6194.041
    
    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:]

[GRAPHIC] [TIFF OMITTED] T6194.042

[GRAPHIC] [TIFF OMITTED] T6194.043

[GRAPHIC] [TIFF OMITTED] T6194.044

[GRAPHIC] [TIFF OMITTED] T6194.045

[GRAPHIC] [TIFF OMITTED] T6194.046

    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:]

    [GRAPHIC] [TIFF OMITTED] T6194.047
    
    [GRAPHIC] [TIFF OMITTED] T6194.048
    
    [GRAPHIC] [TIFF OMITTED] T6194.049
    
    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 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 
information 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:]

    [GRAPHIC] [TIFF OMITTED] T6194.050
    
    [GRAPHIC] [TIFF OMITTED] T6194.051
    
    [GRAPHIC] [TIFF OMITTED] T6194.052
    
    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 co-op 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 Sarbanes-Oxley 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.
    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:]

    [GRAPHIC] [TIFF OMITTED] T6194.053
    
    [GRAPHIC] [TIFF OMITTED] T6194.054
    
    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 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 co-ops 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.
    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 co-op 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 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 co-ops' 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 co-ops 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.
    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?

    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.
    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 co-op. 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 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:]

    [GRAPHIC] [TIFF OMITTED] T6194.055
    
    [GRAPHIC] [TIFF OMITTED] T6194.056
    
    [GRAPHIC] [TIFF OMITTED] T6194.057
    
    [GRAPHIC] [TIFF OMITTED] T6194.058
    
    [GRAPHIC] [TIFF OMITTED] T6194.059
    
    [GRAPHIC] [TIFF OMITTED] T6194.060
    
    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 co-op. 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.
    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:]

    [GRAPHIC] [TIFF OMITTED] T6194.061
    
    [GRAPHIC] [TIFF OMITTED] T6194.062
    
    [GRAPHIC] [TIFF OMITTED] T6194.063
    
    [GRAPHIC] [TIFF OMITTED] T6194.064
    
    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.
    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:]

    [GRAPHIC] [TIFF OMITTED] T6194.065
    
    [GRAPHIC] [TIFF OMITTED] T6194.066
    
    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 
Co-op 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 co-op.
    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 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 
by-laws, 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:]

    [GRAPHIC] [TIFF OMITTED] T6194.067
    
    [GRAPHIC] [TIFF OMITTED] T6194.068
    
    [GRAPHIC] [TIFF OMITTED] T6194.069
    
    [GRAPHIC] [TIFF OMITTED] T6194.070
    
    [GRAPHIC] [TIFF OMITTED] T6194.071
    
    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 
participation. 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:]

    [GRAPHIC] [TIFF OMITTED] T6194.072
    
    [GRAPHIC] [TIFF OMITTED] T6194.073
    
    [GRAPHIC] [TIFF OMITTED] T6194.074
    
    [GRAPHIC] [TIFF OMITTED] T6194.075
    
    [GRAPHIC] [TIFF OMITTED] T6194.076
    
    [GRAPHIC] [TIFF OMITTED] T6194.077
    
    [GRAPHIC] [TIFF OMITTED] T6194.078
    
    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?
    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.
    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----
    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 jazzy hotel lounge in New Orleans and hotel bars at the 
Four Seasons 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 co-ops 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.
    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.
    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.
    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.
    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.
    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.
    I looked at all 17 directors, 7 voting directors and 10 
advisory directors. Every single one of those 17 people were 
originally appointed to the board by the board. In other words, 
a vacancy occurred 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. Short of that, you don't have real democratic 
governance for the co-op.
    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.
    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.
    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 non-profits. 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 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.
    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.
    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.
    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 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 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, 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:]

    [GRAPHIC] [TIFF OMITTED] T6194.079
    
    [GRAPHIC] [TIFF OMITTED] T6194.080
    
    [GRAPHIC] [TIFF OMITTED] T6194.081
    
    [GRAPHIC] [TIFF OMITTED] T6194.082
    
    [GRAPHIC] [TIFF OMITTED] T6194.083
    
    [GRAPHIC] [TIFF OMITTED] T6194.084
    
    [GRAPHIC] [TIFF OMITTED] T6194.085
    
    [GRAPHIC] [TIFF OMITTED] T6194.086
    
    [GRAPHIC] [TIFF OMITTED] T6194.087
    
    [GRAPHIC] [TIFF OMITTED] T6194.088
    
    [GRAPHIC] [TIFF OMITTED] T6194.089
    
    [GRAPHIC] [TIFF OMITTED] T6194.090
    
    [GRAPHIC] [TIFF OMITTED] T6194.091
    
    [GRAPHIC] [TIFF OMITTED] T6194.092
    
    [GRAPHIC] [TIFF OMITTED] T6194.093
    
    [GRAPHIC] [TIFF OMITTED] T6194.094
    
    [GRAPHIC] [TIFF OMITTED] T6194.095
    
    [GRAPHIC] [TIFF OMITTED] T6194.096
    
    [GRAPHIC] [TIFF OMITTED] T6194.097
    
    [GRAPHIC] [TIFF OMITTED] T6194.098
    
    [GRAPHIC] [TIFF OMITTED] T6194.099
    
    [GRAPHIC] [TIFF OMITTED] T6194.100
    
    [GRAPHIC] [TIFF OMITTED] T6194.101
    
    [GRAPHIC] [TIFF OMITTED] T6194.102
    
    [GRAPHIC] [TIFF OMITTED] T6194.103
    
    [GRAPHIC] [TIFF OMITTED] T6194.104
    
    [GRAPHIC] [TIFF OMITTED] T6194.105
    
    [GRAPHIC] [TIFF OMITTED] T6194.106
    
    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 co-op 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--
--
    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 by-laws 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----
    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----
    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.
    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 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.
    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 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 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.
    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 repeatedly, 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, 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.
    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.
    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 
co-ops 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.
    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 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.
    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.
    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 mis-filled 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 tax-exempt 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----
    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:]

[GRAPHIC] [TIFF OMITTED] T6194.107

[GRAPHIC] [TIFF OMITTED] T6194.108

[GRAPHIC] [TIFF OMITTED] T6194.109

[GRAPHIC] [TIFF OMITTED] T6194.110