Fifty years ago this week, on April 10, 1969, the National Rural Utilities Cooperative Finance Corporation—better known by its acronym, CFC—was incorporated in the District of Columbia.
The creation of CFC effectively fixed a capstone to an idea first broached in 1958 by David Hamil, head of the federal Rural Electrification Administration (REA). At the time, electric cooperatives—having largely completed the herculean task of bringing power to the last homestead in the farthest reaches of the last hollow in rural America—were embarked on aggressive efforts to extend lines, upgrade equipment and construct new generation and transmission facilities to keep power flowing as rural residents added more and more electric-using appliances and equipment. Hamil, though, cautioned that such rapid expansion meant the capital to sustain electric cooperative infrastructure would likely exceed what Congress was politically willing to appropriate through the existing 2 percent REA direct loan program.
Within a few years, electric cooperative leaders—through their nationwide service arm, NRECA—recognized that affordable financing alternatives to REA were needed. On the political front, a lobbying campaign by the nation's investor-owned utilities to eliminate REA lending to generation and transmission cooperatives as well as dry up REA loans in general, or double their interest rate, had gained traction. In response, at the 22nd NRECA Annual Meeting in Dallas, Texas, in March 1964, electric cooperatives formally endorsed exploring private-sector financing.
NRECA's resulting "Rural Electric Financing Study Report," published in 1965, recommended Congress fashion a Federal Bank for Rural Electric Systems (FBRES). "Enabling legislation would establish the basis upon which this credit institution will pass from quasi-governmental status to a borrower-owned and controlled instrumentality," the document concluded.
FBRES bills were introduced in the U.S. House and Senate in 1966. The House and Senate Agriculture Committees held hearings on the proposals, but consideration died when the 89th Congress adjourned. When the legislation was submitted again in 1967, opposition by the big power companies had stirred. Quickly, the bill was amended to the point that it became unacceptable to electric cooperatives, and was abandoned.
After the failure to enact FBRES, electric cooperatives faced two key questions: Where do we go from here, and how do we get there?
Soon, Jerome Katzin of the investment banking firm Kuhn, Loeb & Company, proposed a unique type of structure similar to a mortgage company, but with loans made only to member systems. Established through cooperatives' own efforts and under their own control, the entity would use capital markets to finance long- and short-term loans as well as issue commercial paper.
For the idea to be successful, Katzin argued, a sizeable amount of equity was necessary. To produce it, he urged electric cooperatives to stop making prepayments on REA notes, as allowed, until those loans were current. The amounts being used for prepayments could instead be funneled toward startup capital. In turn, the new company would bolster equity by enlisting additional subscriptions from borrowers for each loan and then paying a return on the equity investment.
The Long-Range Study Committee's findings were discussed and debated at NRECA regional meetings in 1968. By November, it was decided that a member-owned and controlled financing cooperative based in the District of Columbia and operating under Katzin's model was the best solution.
On January 8, 1969, the NRECA Board of Directors approved the Long-Range Study Committee's final report and directed that it be presented to the NRECA membership for action at the upcoming 27th NRECA Annual Meeting, set for mid-March in Atlantic City, New Jersey. Long-Range Study Committee members then crisscrossed the country to discuss the entity—by now named CFC—and "close the deal." Electric cooperative delegates officially ratified moving ahead on March 17.
"When CFC was formed, there were those who doubted whether or not such a never-before-tried cooperative enterprise could make it," Petersen remarks. "But our founders were confident in their vision, and not just because all the various components had been carefully considered. The key was the electric cooperative unity of purpose."
Over the ensuing decades, CFC—as a member-owned and controlled nonprofit finance cooperative—has held true to its mission: expanding the availability of private-sector capital for rural electric systems, and introducing electric cooperatives from Main Street America to banks and investors on Wall Street. In turn, CFC has grown from a zero-dollar corporation to roughly $27 billion in assets today.
"While CFC has added financial models, education and training programs and other services not originally anticipated, our ability to respond quickly to member needs has proven to be a hallmark of how we conduct business," Petersen comments.
Early on, CFC went from providing short-term loans and concurrent long-term loans with REA (now Rural Utilities Service, or RUS) to lines of credit—financing co-ops required but couldn't tap elsewhere. CFC also focused on diversifying its funding capabilities, adopting a unique approach to raising capital that includes not only member investments, but also institutional and retail investors, state investment funds and banking partners. And CFC works closely with RUS, having access to RUS-guaranteed funding through the Federal Financing Bank.
After 50 years, the CFC story continues to unfold in myriad ways, filled with the kind of can-do optimism that characterizes the electric cooperative network. "Throughout all of the economic ups and downs since our beginning, CFC has stood ready, willing and able to provide the capital that our members use to advance the quality of life across rural America," Petersen concludes.