bank with intermediate financing. However, it seemed to me or, at least, it was my impression of yesterday's testimony, that all parties concerned have come into agreement with the broad objectives of H.R. 12066 and what this committee is trying to accomplish by coming out with an REA bank bill with intermediate financing.

We have a policy directive in our association, the United States Independent Telephone Association, which gives authority to the REA Borrowers Committee, which is chaired by Mr. Payne to my left, and we have a quorum of that committee present here in the hearing room today, in coordination with the chairman of the legislative committee, Mr. Kingman, to go into the various bills and the amendments and pick and choose among them in the interests of the REA borrower companies and in the interests of the Independent Telephone.

So after the amendments were submitted by Mr. Bollinger yesterday, this group, the REA Borrowers Committee and the chairman of the legislative committee went over the amendments in detail and insofar as time permitted-and we did not have much time. We have submitted to the committee, and you have it before you, the comments of this group on these amendments. It is not my purpose to go into detail or to testify in detail, Mr. Chairman.

We have submitted the statement to the committee. We would prefer to rest there, unless there are questions that you would like to ask of any of our people.

The CHAIRMAN. Your statement will be made a part of the record at this point.

(The complete prepared statement of the United States Independent Telephone Association follows:)

STATEMENT OF THE UNITED STATES INDEPENDENT TELEPHONE ASSOCIATION

The United States Independent Telephone Association like any other trade association must follow the current policy directives of its Board of Directors. As explained to the committee in our last appearance before it on March 23, 1967, our Board of Directors resolved at its meeting in April, 1966—again in October, 1966 and finally in April, 1967, that it supported "legislation which will provide supplemental financing for REA telephone companies in the form of intermediate financing and a telephone bank."

The committee may recall that we stated at our last appearance that the Independent telephone industry was not completely unanimous in its thinking with respect to all of the provisions of the bill (H.R. 1400) then under consideration (record, page 343). The committee has in its files certain telegrams and letters which would at the time they were sent give the indication that some of our members were opposed to a bank bill, and specifically H.R. 12066, in any form. However, yesterday happily it developed that there now seems to be no dissent from our Board of Directors objective and directive to "support legislation which will provide supplemental financing for REA telephone companies in the form of intermediate financing and a telephone bank." I refer to the statement of Mr. Harold Bollinger on his behalf and on behalf of some eleven other Independent telephone companies in which he assured you,, Mr. Chairman, that he was in favor of the broad objectives of H.R. 12066, which objectives we believe include supplemental financing through intermediate financing and a telephone bank. The committee heard testimony from Mr. Bollinger and others yesterday which proposed certain specific amendments to H.R. 12066 which would in the witness's words "clarify and facilitate the intent of the bill and overcome the weaknesses in the present telephone loan program." Most of these amendments have been the subject of discussion before the committee in one form or another on many previous occasions and perhaps no further words from the United States Independent Telephone Association on the subject are needed. However, the views of the Association, in accordance with its policy directives, are submitted here

with for use by the committee in considering its action on the proposed amendments.

For the record we should state that our Board of Directors has by resolution directed our REA Borrowers Committee in coordination with the Chairman of our Committee on Legislation to pick and choose where differences appear in various bills and to support those features which, in the opinion of the committee, are in the best interests of the REA borrower companies and Independent telephony.

The chairman will appreciate that the REA Borrowers Committee and the Chairman of our Committee on Legislation have had very little time—in fact less than twenty-four hours-to consider all of the amendments proposed by Mr. Bollinger. However, they have caucused and have the following comments to make on the proposed amendments as they understand them.

Amendment No. 1, p. 1, line 9—changing the word “many” to the word "some". Comment: The committee accepts this amendment on the ground that getting help to the needy companies is what is important and not their numbers. Amendment No. 2, p. 4. lines 12, 13 and 14, after the word "act;" insert the words "and no such loans shall be made if the applicant for a loan under Section 201 can qualify under the policies, terms, and conditions established for Rural Telephone Bank loans by the Telephone Bank Board."

Comment: Our committee has no objection to the insertion since it believes that with present budgetary pressures the REA Administrator would administer the loan program in the suggested manner anyway. There would be little enough money in the direct loan program to satisfy those who need 2% money and certainly anyone who could qualify for either the intermediate rate or the full bank rate ought not to be allowed to tap the 2% fund.

While the committee agrees to the addition of the proposed language after the at the end of line 12. it believes it should be followed by a ":" and the clause in lines 13 and 14 left in the bill. It can see no reason for striking this language and indeed can find none given in the testimony which advocates the excision. It believes sound fiscal administration demands the retention of lines 13 and 14.

Amendment No. 3, p. 8, lines 10 through 13.

Comment: Here it is proposed that costs of all labor (full or part-time) and all "facilities" shall be charged to the administrative cost of the bank. It is very difficult to comment objectively on such a proposal until it is priced out. Certain it is that charging "all" costs instead of just the salary of full-time employees and the administrative expenses of the bank would increase the interest rate which would have to be charged to the customers of this fledgling institution. If the interest rate is driven up so high that customers cannot avail themselves of the bank then a useless entity has been created and the broad objectives of supplemental financing through the use of a bank has been frustrated-broad objectives which the witnesses yesterday stated they supported.

It is the feeling of the REA Borrowers Committee of the USITA and the Chairman of its Committee on Legislation that during the early years of this bank when it is trying to fulfill the needs of borrowers at rates of interest they can afford, that the administrative costs and salary costs to the bank should be left in the bill as is. There is going to come a time when the bank passes to private hands when all expenses including he salaries of everyone concerned as well as the facilities and services will have to be assumed by the bank.

Amendment No. 4, p. 10, lines 3, 4 and 8.

Comment: We have no objection to the substitution of the words "federal gov ernment" for "Department of Agriculture". They give the President a wider choice but don't restrict him in any way.

Amendment No. 5, p. 11, lines 5, 8, 17 and 20.

Comment: This amendment relates to the relative number of commercial type REA borrowers to cooperative type REA borrowers on the bank board. The USITA has heretofore testified that it believes no fixed percentage should be set in the bill but only the best men from the industry selected. However, we would have no objection if it is the wisdom of the House Agriculture Committee to set the relationship in accordance with the actual percentage breakdown of the industry.

Amendment No. 6. p. 14, lines 20, 24 and 25 and p. 15, lines 1 and 2. Comment: In this amendment it is proposed to advance the date after which Class A stock shall be redeemed and retired by the Telephone Bank as soon as practicable-by five years, i.e.. from June 30, 1982 to June 30, 1977. We do not

believe that it would be possible to reach the full $300 million capitalization by the earlier date for the simple reason that the $30 million a year authorized to be expended for Class A stock must come out of repayments-the principal amount of which would probably not exceed $20 million a year at the beginning. In other words, the repayments of which the Class A stock must be bought will be insufficient. While we have no objection to advancing the date per se so long as discretion is left to the Telephone Bank Board that early retirement would or would not impair the operations of the Telephone Bank we feel that the mandatory provision in lines 23-25 on page 14 and lines 1 and 2 on page 15 for retirement of Class A stock is impractical, if not impossible, of attainment. Therefore we feel that the date 1982 should be left as is and that the proposed deletion in lines 24 and 25, page 14 and lines 1 and 2, page 15 should not be made. Amendment No. 7, p. 15, lines 3, 4 and 5.

Comment: The purpose of this amendment is to increase the return on Class A stock from 2% per annum to cost of money to the government. This is another amendment which would increase the cost of money to the bank and thus increase the interest rate which must be charged to prospective borrowers. The effect of charging higher that 2% on Class A stock would be to so affect the "mix" that it is doubtful that an intermediate fund charging cost of money to the government could be established in effective amounts. If the interest rate of the bank is pegged so high that the borrowers cannot use it then the objectives of H.R. 12066 are defeated.

Amendment No. 8, p. 17, lines 20, 21, 22, 23 and 24. ¿

Comment: This amendment would delete language making the telephone debentures lawful investments for fiduciary trusts and public funds under the control of the United States. As we understand the language now in the bill it is not so much for the purpose of qualifying government trust funds for investments as it is to introduce often used words of art to qualify private funds, i.e., certain insurance companies and trust funds, for purchase of the debentures.

Kuhn-Loeb and Company and the Trust Department of Riggs National Bank→ the banker for USITA-advised us of the effect of excising this language on the marketability of the debentures. The opinion of both institutions was that it would limit the number of private investors who would be able to purchase the debentures and thus drive up the price at which they could be sold. This in turn would drive up the interest rate the bank would have to charge.

Amendment No. 9, p. 18, line 18.

Comment: We have no objection to requiring approval by the Telephone Bank Board as well as the Secretary on loans for acquisitions.

Amendment No. 10, p. 19, line 5 would change the period for amortization of the bank loans from a maximum of fifty years to a maximum of thirty-five years. Comment: Economic feasibility studies in consideration of telephone bank loans or indeed any kind of REA loans normally take into consideration the fact that the average service life of the facilities may be less than a fifty year term or even less than a thirty-five year term. A loan has not been approved in the past and would not be approved in the future unless these studies indicated that the proposed system could be expected to obtain sufficient revenues to meet all normal operating expenses, including maintenance of the system, make interest and principal payments on the loan, and provide funds required to finance replacement of plant components as their useful service life expired. Thus the service life of the components of the physical property and amortization period of the loans are unrelated in terms of loan security. It is our belief that the period of fifty years for a bank loan at a rate of interest substantially higher than 2% has as its objective the provision of an amortization period which will allow repayment of the loan and still leave enough money for needed maintenance and additions. This simply follows the pattern of conventional loans to public utilities. Amendment No. 11, p. 19, line 9.

Comment: This amendment would substitute a new and untried measurement of subscriber density from "three or fewer per linear mile" to "three or fewer per square mile". All utilities base their costs on a measurement of linear miles and therefore the density has to be measured in the same way.

We have no objection to the substitution of the word "may" for the word "shall" because we think the Administrator should have discretion as to any loan he makes regardless of density.

Amendment No. 12, p. 19, lines 14, 20 and 21.

Comment: This amendment would eliminate the alternative rate of interest for the intermediate fund, i.e., cost of money to the government or 4% whichever is lower. The Board of Directors of USITA voted at its most recent meeting in

April, 1967 that the bill's supplemental financing provisions should call for a rate of interest at least equal to the cost of money to the Government. Therefore we concur in the proposed deletion in amendment No. 12.

Amendment No. 13, p. 20, line 12.

Comment: For reasons given with respect to Amendment No. 6, we feel that the date 1982 should be left as is.

Amendment No. 14, p. 20, line 17.

Comment: We have no objection to the substitution of the words "after the date of such report" in line 17 for the word "thereafter".

Amendment No. 15, p. 22, line 3.

Comment: This amendment would substitute the Secretary of Agriculture and the Telephone Bank Board for the Administrator in granting discretion to approve sales of a borrower's property.

We have no objection to the thought involved since we believe the Secretary is the alter ego of the Administrator and can be substituted for him at any time and we don't have any objection to the Telephone Bank Board having the power over Section 408 loans but we think the power should be given in the alternative instead of the conjunctive. The Secretary has power over Section 201 loans but not at all times over 408 loans. The Telephone Bank Board never has any authority over Section 201 loans. Therefore we think the language should read "without approval of the Secretary of Agriculture with respect to Section 201 loans or the Telephone Bank Board with respect to Section 408 loans." Amendment No. 16, p. 22, line 5.

Comment: This would eliminate the words "to a holding company" and thus broaden the class of vendees who would be restricted by the language of the subsection. We have no objection to this change.

Amendment No. 17, p. 22, line 16.

Comment: This amendment would substitute thirty-five for fifty years and for reasons given earlier in connection with Amendment No. 6 we believe this to be unworkable.

Mr. Chairman, this completes our statement on the amendments to H.R. 12066 proposed by Mr. Bollinger et al. We appreciate the opportunity you have given us to comment.

The CHAIRMAN. Are there any questions?

Mr. TEAGUE of California. I have not had a chance to analyze in detail your statement regarding the amendments presented by Mr. Bollinger. It would appear hurriedly that your association agrees with some of his suggestions.

Mr. MOTT. Yes, sir.

Mr. TEAGUE of California. Particularly, those that I considered at first glance to be minor, and you disagreed with some that are more major in character; is this a fair statement?

Mr. MOTT. It is difficult to generalize, sir, but we feel that some of these amendments-and when I say, "we feel," I mean the gentlemen who are charged with the responsibility in passing on these amendments, feel that some of them would tend to drive the interest rates so high that you would create a very nice paper entity which would not be used.

Mr. TEAGUE of California. Therein lies your principal difference with Mr. Bollinger?

Mr. MOTT. That is correct. By the way, one of the amendments which was suggested we think is technically defective.

Mr. TEAGUE of California. I am trying to get into those matters. Unless the chairman wants to go into that; otherwise, I do not want to go into them now, however. I do not want to go through them item by item.

You have stated that there must be some differences of opinion within the USITA, because Mr. Bollinger testified on behalf of his company and other companies, which I am informed represent about

50 to 70 percent of the rural telephones in the country, that is, some 11 other companies?

Is that correct?

Mr. MOTT. I would not say 50 percent of the rural telephones, but they might add up to 50 percent or better of the independent system. Mr. TEAGUE of California. Yes?

Mr. Mort. However, I do not think that there is any basic difference any longer, if I understand Mr. Bollinger's statement, on the basic objectives of the bill.

Mr. TEAGUE of California. I think we are agreed on that.

Mr. MOTT. Yes, sir; we are agreed.

Mr. TEAGUE of California. In this connection, I have one more question, Mr. Chairman. Mr. Payne, I have here what purports to be a letter signed by you as chairman of the REA Borrowers Committee to President Johnson in June of 1965. The purpose of the letter was to support the repeal of the excise tax, but this statement also appears: Mr. President, two percent money for telephone loans, definitely, is necessary in many instances if the intent of Congress is to be carried out.

And then you go on to say:

However, there are instances, especially, when supplemental loans are required for updating and expanding additional facilities where the borrowers could afford to pay a rate somewhat higher, including, in some cases, interest rates comparable to the cost of money to the United States Government.,

Is that still your opinion?

Mr. PAYNE. Yes, sir.

(The letter referred to above follows:)

The PRESIDENT,

The White House,

Washington, D.C.

JUNE 1, 1965.

DEAR MR. PRESIDENT: I am addressing this communication to you because of your strong support and interest in the rural people of our great country. Nowhere has this been better exemplified than in your courageous recommendation to repeal the excise tax on telephone service-an onerous tax which bears so heavily on country people.

The 1949 Telephone Amendment to the Rural Electrification Act has provided over 800 telephone companies the necessary long term monies, under a very favorable lending program, to carry out the intent of Congress to bring telephone service to rural people. The result of the passage of this amendment has enabled these companies to bring to some two million rural families (some for the first time) the blessings, economic and personal, of telephone communications heretofore enjoyed only by city people. While great strides have been made there is still a need in some rural areas to continue the kind of loans and assistance contemplated by Congress in the Telephone Lending Amendment.

This brings me to the purpose of this communication authorized by the Board of Directors of the United States Independent Telephone Association.

Mr. President, two percent (2%) money for further telephone loans is absolutely necessary in many instances if the intent of Congress is to be carried out. However, there are instances, especially when supplemental loans are required for upgrading and expanding existing facilities, where the borrower could afford to pay a rate somewhat higher including, in some cases, an interest rate comparable to the cost of money to the United States Government.

The terms of the Rural Electrification Act, however, are such that the Rural Electrification Administrator has absolutely no discretion as to the interest rate charged when making a loan. He has been put in a legislative straight jackethe must lend money at two percent (2%) and at no other rate.

Our national telephone association, through its board of directors, feels that considerable criticism of the Independent telephone industry and of the Administration could be alleviated by a change in the law whereunder the Ad