I think that every member of this committee is genuinely concerned in seeing that rural America has modern and adequate telephone service.

I have been disturbed for some time about the alleged use of Government subsidies for the purpose of speculating in the telephone business. It certainly is my present intention to support the legislation before us, provided that we can add some amendments.

I want to commend you on the amendments that you have proposed to this committee for its consideration. I think that many of them are very fine. I think we should have legislation that would close these loopholes. If we make additional financing available, or make financing easier for the telephone cooperatives, there may have to be some limitations. This is really one of the problems of rural America today, as I see it, in having adequate telephone service.

Mr. BOLLINGER. Definitely so.

Mr. WAMPLER. Thank you. That is all.

The CHAIRMAN. Mr. Mayne?

Mr. MAYNE. Would you please identify the investment bulletin which you referred to? You did not tell us the name or issue of it. Mr. BOLLINGER. It was issued by Piper, Jaffray & Hopwood, dated July 11, 1966.

Mr. MAYNE. Is that a regular investment bulletin that is sent out to all of their customers?

Mr. BOLLINGER. No. It is a confidential bulletin.

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Mr. MAYNE. It is a confidential bulletin, and we would not then be able to verify it through any other source?

Mr. BOLLINGER. I can give you a copy of it.

Mr. MAYNE. I think that since you are quoting something, we should have access to it, or that we should have it. It should be a part of the record. I am a little suspicious of somebody who says, "And I quote," and then never reveals the source of the quotation. That would seem to me not to be very good practice.

Mr. BOLLINGER. I will be glad to introduce this as an exhibit, if you wish.

The CHAIRMAN. I would suggest that that be put in the files of the committee.

That will be done.

Mr. MAYNE. That will be satisfactory.

(The document referred to will be found in the files of the committee.)

The CHAIRMAN. Are there any further questions?

Mr. Miller?

Mr. MILLER. It seems to me that, in the statement made by Mr. Bollinger a few minutes ago, he had some information but was unable to clarify it 100 percent, and I can understand why. A company would not be able to pay off the REA in order to take a loan from private enterprise. It seems to me that companies working with a debt limitation to plant investment somewhere above the 50 percent, but less than 70 percent, could not afford to pay off a large REA loan that they are now paying 2 percent on. They could not pick up all of the money at the money-market price today, because of the profit that they are making. So the REA would be locking these people in and forcing them to go back to the REA for an additional loan. It appears that we are locking in some of these and should give

further consideration to Mr. Bollinger's problems, and, in some way, clear the air in that area.

But I also have a question, if I may, Mr. Chairman.

I have had information conveyed to me that many of the rural telephone companies still have eight-party lines and that many more applications are in today, dollar-volume-wise, than what is available under the 2-percent operation that the REA has today. I understand that this is the reason for wanting an additional telephone bank, because then there would be additional funds available. This information has been conveyed to me that many of the applications are asking for money to reduce the eight-party circuits down to single-party circuits. This would undoubtedly require additional lines and other control equipment. This seems to be the plan to reduce from eight- to oneparty systems. We do not even have that in all of our municipalities today. Have you found that this is the intent, to reduce it all down now from eight- to one-party lines?

Mr. BOLLINGER. There is a good deal of activity in that direction in Minnesota, to go from eight- to one-party lines.

We are not considering it in our own company. We are offering oneparty service to those who wish to pay the additional charge for it, but we are planning to upgrade from eight- to four-party lines. We presently have that program in effect.

Incidently, we have started in North Dakota with that most marginal operation of ours.

When you go to the one-party line, you are obsoleting a very large percentage of your telephone property. And many of these properties that will be involved with this one-party service with REA loans have been built in the last 10 years. And most all of the outside plants of the rural telephone systems will be entirely obsoleted, because they will be replaced. This is what brings on that high debt ratio that I talked about and the danger of excessive debt money.

I would just like to give you an idea. This, again, refers to the State of North Dakota. Here, we operate in 10 towns, and in those towns 10.2 percent of the businessmen have two-party service. This is their own choice. They can have one-party service. The one-party rate is $8.50, and the two-party rate is $7.50. Of the residence subscribers, 42.8 percent choose one-party service; 1.92 percent, twoparty service; 55.3 choose four-party service. One-party service is available to all of them at $5, and four-party service at $3.75.

It is our company's policy to respond to the wishes, the needs of the public. This is the way we hope to keep our company in tune with the times, to supply service on that basis.

Mr. MILLER. My intention was to try to find out if the reason for addition funds is to try to bring all lines and switch-gear equipment down to a single-party system.

Mr. BOLLINGER. It simply has to be a very large percentage of it, of the increased need, because, you see, quite generally throughout the United States conversion has been made to the dial service of an eightor ten-party basis, so that this additional need of capital has got to be associated with the program you have described.

Mr. BARNHART. If I may add here: Quite a few State commissions do not encourage us to do this, to go to the one-party system, because it does not give the subscribers a choice of rates. If they want to pay a

lower rate, they cannot do so. A great many of the commissions oppose the single-party system. !

Mr. MILLER. Thank you. That is all.

The CHAIRMAN. Mr. Price?

Mr. PRICE. I would like to ask Mr. Bollinger one question:
On page 11 of your testimony, in the last paragraph, you say:

In addition to presenting these recommendations for your consideration, we sincerely hope that your Committee will devote further study to the advisability of an “insured loan program" as a possible acceptable alternative to the establish, ment of a rural telephone bank.

Do you think that the insured loan approach in the bill that we have before us is the best for the country, in the financial condition we are in today?

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Which program would actually solve the problem that is before us in financing the telephone business in your opinion, which approach do you think would be better?

Mr. BOLLINGER. To answer your question broadly either would help the situation or the problem. It is certain that the bank would do so. If the amendments are not acceptable, then we would suggest that the insured-loan program be considered. We sincerely hope that the amendments we have offered are acceptable and that the bill would be adopted. We think that this bill would do the job if it is very carefully administered.

Mr. PRICE. Do you think that the insured loan program, if it were adopted, would give you the money needed?

Mr. BOLLINGER. It would not give all of the money that has been applied for. Certainly, the program would be delayed. We will get to those things someday. Our company intends to wait for developments of the art to get to the one-party rural telephone service. We definitely plan on providing all one-party rural service in our company someday. So, we will delay that investment. We know it will be less if we wait for the development that we know is coming. So, I think that the insured-loan program would do a reasonably good job. My own feeling is that it would not be quite as good as the bank.

Mr. PRICE. Thank you.

That is all.

Mr. BARNHART. Could I say a word here?

The CHAIRMAN. All right, go ahead.

Mr. BARNHART. I have in mind a case in North Carolina, about an order issued by the North Carolina Utilities Commission on a matter of a loan, which tells, in a few words, what sometimes happens. This is relative to the application of the Eastern Rowan Telephone Co., Inc., for the establishment of reasonable and just rates, and the commission found and issued this order-this is just a brief summary that I made of it, which I would like to read:

1. The company had an outstanding balance owed to REA at 2 percent interest of $624,000 and had pending an application for an additional loan of $467,000. Its equity capital consisted of $92,408, or an 11 percent equity ratio. At the same time, the company held as corporate assets investments in the common capital stock of various corporations with no relationship to its telephone operations at original cost of $89,792. While the company was enjoying 2 percent loans from REA, an amount almost equivalent to its total equity investment had been withdrawn from company operations and invested in outside activities.

2. Even though an amount almost equal to the equity capital had been withdrawn and diverted to nontelephone investments, the equity capital of the corporation enjoyed earnings during the test year (1961) of more than 20 percent.

I would like to make reference to the fact that the General Accounting Office has made investigations of REA borrowings, and the committee might wish to seek out information from it concerning some of the cases available that will give you examples of loans that have been made.

The CHAIRMAN. Mr. Teague?

Mr. TEAGUE of California. Mr. Bollinger, I thank you for having given us a very constructive statement and suggestions. I think they deserve the full consideration of this committee. I do not have any questions.

Personally, I have a closed mind on this subject. I am not convinced that there is any need at all for a telephone bank. It seems to me that the money can be obtained through the bank for cooperatives or through commercial sources.

Nevertheless, I do thank you for your contribution today.
The CHAIRMAN. Are there any further questions?

Mr. Zwach?

Mr. ZWACH. Just one brief question.

I will say, Mr. Bollinger, that I am happy to have a Minnesotan here displaying some good astute management. You said a number of times that you believed in small independent operations, and that Minnesota has a lot of them. I see in your testimony that you say and you have a good reputation in our State, but you say that you will shortly become a subsidiary of United Utilities, Inc. This is the opposite of a small independent operation. Is this for personal reasons or for business reasons? Would you mind answering that question? Mr. BOLLINGER. I will answer that. Our company has two quite large substantial stockholders. They have become elderly and have wanted to get their estates in shape for retirement. In our case, it was for personal reasons.

Mr. ZWACH. For personal reasons?
Mr. BOLLINGER. Yes, sir.

Mr. ZWACH. Thay you. That is all.

The CHAIRMAN. If there are no further questions, we are very much obliged to you, Mr. Bollinger and your associates. We appreciate your attendance here today.

The document which you referred to concerning the North Carolina case will be made a part of the record at this point.

(The document referred to follows:)

STATE OF NORTH CAROLINA, UTILITIES COMMISSION, RALEIGH

Docket No. P-62, Sub 13

Before the N.C. Utilities Commission In the Matter of Application of Eastern Rowan Telephone Company, Inc., for the establishment of reasonable and just rates.

ORDER DENYING INCREASE AND DISMISSING ACTION

Heard in: Raleigh, North Carolina, on June 14, 1962.

Before: Chairman Harry T. Westcott, and Commissioners Sam O. Worthington, Clarence H. Noah, Themas R. Eller, Jr. and R. Brookes Peters.

APPEARANCES

For the Applicant: Nelson Woodson, Woodson & Woodson, Attorneys at Law, P.O. Box 144. Salisbury, North Carolina.

James L. Woodson, Woodson & Woodson, Attorneys at Law, P.O. Box 144, Salisbury, North Carolina.

For the Commission's Staff: Charles W. Barbee, Jr., Assistant Attorney General N.C. Utilities Commission, Raleigh, North Carolina.

Worthington, Commissioner: By application filed with the North Carolina Utilities Commission (Commission) on March 26, 1962, Eastern Rowan Telephone Company, Inc. (Company), seeks to increase its present rates and charges in accordance with schedule attached to the application sufficient to produce approximately $13,538.40 additional gross revenue annually. The application was scheduled for hearing, and the Company was required to publish notice in the local newspaper setting forth the place and time for hearing and showing the comparison of the existing rates with those proposed as such increase relates to each type of service. No formal protest was filed with the Commission. Correspondence was had with certain individuals and organizations expressing dissatisfaction at the proposed increase in rates. The Mayor of the Town of Rockwell, accompanied by two other citizens, appeared at the hearing held in the Hearing Room of the Commission, Library Building, Raleigh, North Carolina, on June 14, 1962, and was permitted to participate and offer what objection they had. The Company was present through its officers and counsel.

Testimony through witnesses for the applicant indicates that the Company acquired the properties of the Rowan Telephone Company in 1949 which was then serving about 400 subscribers. In October, 1952, it installed a new dial exchange on U.S. Highway 52 between Granite Quarry and Rockwell in the eastern part of Rowan County with service to 1,000 subscribers. In order to finance construction of this plant it borrowed $343,000 from Rural Electrification Administration. The demand for telephone service increased to the extent that 1,408 subscribers were being served by December 31, 1953. It was necessary to expand facilities, and in order to do so additional funds were borrowed from Rural Electrification Administration exceeding in total amount more than $800,000, of which it now owes approximately $624,000.

The Company now serves the municipalities of Faith, Granite Quarry, Rockwell and Gold Hill, together with the surrounding territory to the extent of about 38 square miles, serving approximately 2,000 subscribers. It now has pending an application to Rural Electrification Administration for an additional loan of $467,000 with which to further expand and improve its facilities. Extended area service is available to Salisbury, an exchange in the Southern Bell territory, with approximately 17,000 subscribers. The average gross cost per main station of the Company is $367. The Company has no held orders nor any pending requests for upgrade in service.

Gross operating revenues as per Company books for the calendar year 1961, test period used by the Commission's Accounting Staff for its report, were $138,261.84, adjusted to a total of $138,843.84. The proposed increase in rates is calculated to produce additional gross revenue of $13,538.40. Net operating revenue for return for the calendar year of 1961 was $23,478.58. Dividend income from total investment in common stock of other companies in amount of $89,792, was $3,535. Other income (interest of $986) produced a total of $28,000 in income available for fixed charges. Average fixed charges were $12,368. Actual fixed charges paid were $11,856. Dividends totalling $3,000 were paid during the period. After payment of fixed charges and dividends $13,144 was available for surplus. Earnings on average common equity were 20.99 percent. Under exactly the same operating experience the proposed increase in rates would have resulted in common equity earnings of 29 percent and $19,312 available for surplus.

Testimony of witnesses for the Company indicates additional operating expense in the amount of $1,200 for loss in mileage charge due to the elimination from its tariff of mileage charge on multi-party service; $2,500 expense for pension plan being inaugurated for five full-time employees and two-part time employees of the Company; and $1,000 to provide wage increase for employees for total additional expense not included in the 1961 operating experience of $4,700. If this additional expense had been incurred in 1961, present rates and charges would still have produced $10,051 for surplus and common equity earnings of 16.97 percent on average common equity of $76,928. The $3,000 in dividends equates to a 5 percent dividend on par value of the 600 shares of common stock of the Company of the par value of $100. If the dividends had been 10 percent instead of 5 there would still have been available for surplus $7,051 with the additional expense and $10,144 under 1961 actual operations. These determinations are a result of an investigation and report by the Accounting Staff of the Commission. Officers of the Company, as witnesses, agreed to the correctness of these figures and that they represent Company operations.

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