By the late 1950s, electric co-ops had lighted nearly every nook and cranny of rural America and were experiencing tremendous kilowatt-hour sales growth, close to 10 percent a year in some regions.

They were a huge success—and this was creating problems.

Always in the sights of the investor-owned utilities (IOUs), which hated any competition, co-ops were becoming an even bigger target now that they were forming generation and transmission co-ops (G&Ts) in a big way. A massive lobbying campaign by the IOUs against the federal Rural Electrification Administration (REA) left NRECA General Manager Clyde Ellis deeply worried. A bad political turn could take down the existing 2 percent direct loan program for distribution co-ops as well as the G&Ts.

REA Administrator Dave Hamil, a good friend of co-ops, was concerned about a capital shortage. “It became apparent to me that if REA borrowers were going to do what they told me they wanted to do … they were going to need more money than we were ever going to be able to convince Congress to make available,” he told an industry gathering in 1958.

Twelve years later, on September 15, 1970, electric co-ops opened the door to the National Rural Utilities Cooperative Finance Corporation (CFC): their own cooperative lender. They would never again be at the mercy of Congress and REA for capital to grow their systems.
The road to CFC began at NRECA’s Regional Meetings in the fall of 1963, when a resolution was adopted directing the association’s board of directors to explore what private capital markets could do for co-ops.

Two years later, this initiative morphed into the Federal Bank for Rural Electric Systems, or FBRES, a proposal for a quasi-governmental institution owned and controlled by the co-ops. Legislation was introduced in both the U.S. House and Senate but was soon crippled by IOU-supported amendments and died in 1967.

flashbacks
J.K. Smith, the first Governor of CFC

In August of that year, NRECA formed a 30-member Long-Range Study Committee, and tasked it with finding new ways for electric cooperatives to secure supplemental financing. The committee approached the borrower-owned Farm Credit System but was given the cold shoulder. The Farm Credit governor at the time claimed the system wasn’t in a position to expand, and IOU opposition stirred by FBRES had made the co-ops too “politically controversial.” (Today, CoBank, a branch of the Farm Credit System, is a major co-op lender.)

“[After that], it was our opinion that we should look outside the federal government for a way to help ourselves,” said J.K. Smith, president and general manager of Kentucky Rural Electric Cooperative Corporation (statewide) and chair of the study committee. “We considered this an act of good citizenship.”

By November 1968, it was decided that creation of a nonprofit financing cooperative based in the District of Columbia—to be named CFC—was the best solution.

Jerome Katzin, an investment banker who had helped Ohio’s Buckeye Power find $62 million in private financing to buy into the Cardinal Power Station, posed a unique structure for CFC similar to a mortgage or finance company, but with loans made only to member systems. The organization—established through cooperatives’ own efforts and under their own control—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, the new lender would need a sizeable amount of equity. To generate it, he urged electric cooperatives to stop making prepayments on REA notes and instead invest those funds as startup capital for CFC. The new entity would bolster equity by requiring additional subscriptions from borrowers for each loan and would pay a return in excess of the 2 percent co-ops’ prepayments were earning from REA.

After 18 months of monthly meetings, the final session of the Long-Range Study Committee was held in Atlantic City on March 17, 1969, just hours before NRECA delegates officially approved the organization with only 20 dissenting votes. On April 10, CFC formally filed its incorporation papers. On July 31, Smith was named CFC’s first governor.

Smith’s top priority was finalizing negotiations with REA on loan policies and procedures that would allow CFC and the primary cooperative lender to exist in concert.

“CFC must have a common mortgage that would give our lien equal status with REA,” Smith said. “A first mortgage was essential.”

Back at the REA helm for a second tour of duty in 1969, Administrator Hamil pledged the agency’s backing for CFC.

“REA has endorsed CFC,” Hamil wrote in a memo to his staff. “CFC right now is our best hope to bring urgently needed capital into our electric program.”

Co-ops jumped at the opportunity to invest in CFC. In November 1970, Smith reported to his board that 751 co-ops had pledged $115 million in subscriptions, with $46 million already in hand. The new organization, housed in leased space in downtown Washington, D.C., just two blocks from REA’s offices, was ready to make its first loan: $500,000 to Warren Rural Electric Cooperative Corporation in Bowling Green, Ky. By the fall of 1972, CFC had approved loans totaling nearly $50 million. It entered the capital markets for the first time on October 12, 1972, with a $50 million bond issue.

During the 1980s and ’90s, CFC grew rapidly and provided expanded financing options. Its financial strength combined with the co-ops’ stellar credit history won the confidence of investors in the capital markets, so much so that more recently, during the Great Recession of 2007 to 2009, CFC was able to raise funds when most other businesses could not.

Over the course of its 45 year history, CFC has grown from that initial pool of member investments to more than $22 billion in assets. Today, about 20 percent of CFC’s total debt funding comes from electric cooperative members and owners, 52 percent from capital markets, and the rest from government-related facilities.

This article is based on CFC: 45 Years of Service, Integrity and Excellence, published by CFC in 2014.

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