themselves. If they put them together, they would have to put all of their companies together, and most of them would have to reduce their individual telephone rates. They could operate a bigger company with a bigger profit individually by keeping themselves as a holding company, and if they put them both together, they could not charge as high

rates.

Mr. BELCHER. All I know about telephones is that at one time, for about 4 months, I worked for the Southwestern Bell Telephone Co. as a student. I do know something about regulatory bodies. I know something about corporation commissions, so far as Oklahoma is concerned. I may be completely wrong.

Mr. MOTT. You are not.

Mr. BELCHER. I cannot understand why, in the far-out areas of the country, it makes any difference whether they get it from company "A" or from company "B." If the territory justifies the 2-percent money, it ought to justify it for company "A" as well as for company

"B."

The CHAIRMAN. We still have to hear from Mr. Peterson.

We are very much obliged to you for your appearance here today, Admiral Mott.

Mr. MOTT. Thank you.

The CHAIRMAN. We will now be glad to hear from you, Mr. Peterson. Mr. Peterson is executive director and counsel of the National REA Telephone Association of Chisago City, Minn.

STATEMENT OF A. HAROLD PETERSON, EXECUTIVE DIRECTOR AND COUNSEL, NATIONAL REA TELEPHONE ASSOCIATION, CHISAGO CITY, MINN.

Mr. PETERSON. Thank you, Mr. Chairman and members of the committee. I know that the time is running short for the hearing this morning.

I merely want to reiterate one or two points which I hope that the committee will bear in mind, in considering the need for this type of bill.

These points have not been mentioned this morning, much of the time being taken up with these other matters that you have discussed and have asked questions about.

I do want to reiterate the primary reason why there is an REA telephone bank being discussed. It is simply this: 2 or 3 years ago, it became quite apparent that the amount of money that would be needed for the REA telephone loan program was going to greatly exceed that which had been appropriated in past years.

To give you some idea of what that relationship is, in terms of what has happened over the last several years, I just want to recite a few brief figures.

In 1963, the amount of unapproved loan applications on hand in the REA at the end of the fiscal year was $58.3 million. In 1964, this amount had increased to $84.7 million. In 1965, it was $122.2 million. In 1966, it was $197.1 million. And on June 30, at the end of this fiscal year 1967, the fiscal year just ended, the total amount of unapproved telephone loan applications on hand in the REA amounted to $251,

971.000.

During the last 3 years the amount of the appropriations for this program have been increased. For instance, in 1965, it was $70 million; in 1966, it was $97 million; and in the year just ended, it was $117 million.

The point that I am making is that in spite of the increased annual appropriations, the amount of unapproved loan applications on hand at the end of the fiscal year is being compounded as each year passes with nothing being done about it, except the increases in the appropriations process, which I have just detailed.

What do you do about a situation like this?

Two years ago this month, I had a conference with the Director of the Bureau of the Budget and outlined these same facts, as they existed at that time. He said to me, "Mr. Peterson, I appreciate the problem that faces the telephone borrowers, but," he said, "one thing that you ought to keep in mind is this, that the Federal budget process is now reaching the point where we simply cannot meet this kind of total need purely out of annual appropriations, and I think that your people ought to investigate the possibility of supplemental financing of another nature."

Gentlemen of the committee, this is precisely the reason why H.R. 12066 is now before you.

The need for this money to meet the problem of capital financing for REA telephone borrowers is very grave. The amount of money that will be needed in the next 16 years of this program will be double that of the past 16 years.

This is in consonance with what is happening in the entire industry. Let us reflect just for a moment on the financial ability of these REA companies. In spite of the discussion which has transpired here this morning in terms of holding companies, stocks, buying and selling, the stark fact remains that today, considering all of the REA telephone borrowers there is only 2 percent of them who have a net worth as a percentage of total assets of over 40 percent.

What chance have they ever got to go to a bank or any kind of lending institution and getting money? They are facing the same kind of financial vacuum that existed in 1949 when the REA telephone amendment was passed.

I should like to recite one more figure: 371% percent of all of the REA telephone borrower companies have less than 1,000 subscribers. In terms of density-and I think that I presented these figures to the committee before the Bell System enjoys over 40 subscribers per mile of line.

The independent industry, including General, United, Continental, and all of the rest of them, as well as the REA telephone borrowers, enjoy a density of 16 customers per mile. But when we get down to the REA telephone companies, we get a figure of 3.7 subscribers per mile of line. This is precisely the reason why this program came into being in the first place, because it was in these thin areas that the Congress of the United States decided that telephone service ought to be made available, and they have made it possible with this program.

In terms of miles of line, the Bell System enjoys revenues of over $10,000 per mile of line. The independent industry, as a whole, enjoys approximately $2.500 per mile of line in revenues. And the REA borrowers, less than $500 per mile of line in revenue.

Gentlemen, in considering how to meet the needs, we would merely like to reiterate once more that in discussing H.R. 12066 in executive session, we respectfully ask that you keep in mind three basic objectives:

No. 1. There ought to be adequate debt capital to meet the needs at usable interest rates.

No. 2. There ought to be built-in incentives in the bill, so that eventually the bank will come into the ownership of the companies themselves.

And, lastly, there ought to be sufficient latitude to permit the telephone companies to meet their industry responsibilities as the years go by.

I think with that I shall close my statement; I shall be very happy to answer any questions that you may have.

The CHAIRMAN. Thank you, Mr. Peterson.

Are there any questions of Mr. Peterson?
Mr. Myers.

Mr. MYERS. You meant to say that the companies would own the bank, rather than the bank own the companies?

Mr. PETERSON. That is right.

Mr. MYERS. I believe that I understood you to say that the banks should own the companies.

Mr. PETERSON. No; I did not mean that.

Mr. MYERS. Thank you. That is all.

The CHAIRMAN. Mr. Wampler.

Mr. WAMPLER. As I read the bill, in trying to interpret it, the criteria that the bank board will use in deciding who would be eligible for the 2-percent loans and who would be eligible for the going rate of interest loans, is not very clearly spelled out, is it?

Mr. PETERSON. That is true.

Mr. WAMPLER. Let me ask you this hypothetical question: Assuming that company "A" has a 2-percent REA loan, and they decide to sell to company "B," and company "A" has grown-circumstances have changed, it is now able to pay more than 2 percent for money, what would be wrong with requiring, upon the sale of all of the REA financed companies, that the loan then be immediately due and payable, and to make them reapply, and let them pay the going rate of interest?

Mr. PETERSON. In answering your question, I would agree with the statement made here this morning, that if such an amendment was put into the bill I think that it would restrict the future loans, just as Mr. Wilbourn has indicated. I would agree with his statement."

Mr. WAMPLER. What would limit them?

Mr. PETERSON. I think that it would impair the sale of the company at some date, for whatever reason, contemplation of death being the predominant reason in a family owned company.

Mr. WAMPLER. Of course, if you are able to pay the prevailing rate of interest, you ought to be paying it. I understand that is one of the objectives behind the bill, is it not?

Mr. PETERSON. Yes.

Mr. WAMPLER. Would this not make available more 2-percent money for the companies that need it, where it is not available? It would require some to pay off and go to the bank and pay the prevailing rate of interest.

Mr. PETERSON. Well, maybe I misunderstood your question. If an amendment were put in this bill which would provide that a company, if sold, that the entire debt must be repaid?

Mr. WAMPLER. Yes. They can go to the bank and pay the prevailing rate of interest, or receive a continuation of the 2-percent loan if they cannot afford the prevailing rate of interest.

Mr. PETERSON. If you have such an amendment, again, I reiterate what other witnesses have already indicated, that it would, I think, necessarily restrict future loans. I do not think that they would be coming in for future loans.

Mr. WAMPLER. If they are able to pay the prevailing rate, they should not be coming in for 2-percent loans, should they?

Mr. PETERSON. Yes; that is true.

Mr. WAMPLER. Thank you.

The CHAIRMAN. Mr. Dole.

Mr. DOLE. You are not suggesting that all telephone companies would be eligible for 2-percent money if we passed the bank bill?

Mr. PETERSON. I would think that any company, regardless of size, would be eligible for 2-percent money if they agreed to go into an unserved territory and provide telephone service not presently there, which was the case in 1949, and which provided that the Bell System or anyone else could go into the territories and obtain the 2-percent money to do that.

They did not choose to do so, however. To me, it is a plain question of economics. It costs money to bring the service out there, when you have the kind of density in those REA areas of 3.7, compared to over 40 for the Bell System. It is a question of what the subscriber will ultimately have to pay for his service and what you pay for interest rates affects the subscriber.

The CHAIRMAN. Will you yield?

Mr. DOLE. Yes.

The CHAIRMAN. Under the present law, the Bell Telephone Co. has the same right to borrow 2-percent money that the smallest telephone company in the United States has. I think that they are good loans. I am for them. We did not pass that law for the purpose of helping the Bell System, nor helping Mr. Bain's system. We passed that law for the purpose of helping the rural people to get telephone service, regardless of who brought it to them.

Mr. PETERSON. That is right.

The CHAIRMAN. I do not think that we ought to say that nobody should make a profit out of the telephone business or any other business. That you are evil, or some such thing, if you make a profit. I do not think that. I hope that everyone does make a profit in business. But I am interested in seeing these people get telephone service.

And if you make it so that the man who serves the rural areas cannot sell out readily, there will be less incentive to serve the thin areas. And it is getting thinner all of the time in some areas.

Mr. MYERS. I would like to make one statement. I am very sure that I am very much in agreement with that. I voted for it the last time, and I hope to vote for it again. What most of our concern is about, and the thing that interests me, and I have asked this a half a dozen times, and nobody has told me? Mr. Poage, and several others, have said that they did not want to go back into the rural areas to build these telephone services.

Mr. PETERSON. Yes, that is correct.

Mr. MYERS. Why should they be so interested to purchase them, now? When they are the same areas-why are they interested in buying the companies when we get them financed?

Mr. O'NEAL. It may be that some of them have grown. For instance, in connection with the telephone companies mentioned before in my State, I do not know how large these companies were at the time that they got the 2-percent money, but in one instance, it is a town of about 16,000 people now.

Mr. MYERS. Okay, then. It is a new area, is it not? And we have voted several times in this committee to get increased yearly reviews of appropriations. That is all we are suggesting. I do not know how I will vote on this. I have not made up my mind.

Mr. O'NEAL. If you will yield further, I think that we are confusing the liquidity of the company with the need and the density of the community in population. If we are going to have any restrictions, I think that they should be directed at the needs and the density of the community, rather than to the liquidity of the companies.

Mr. MYERS. This is a new area. I am not sure whether this is right or not. That is why we are having hearings to decide whether it is the right way. And a review would not hurt anything. Even after the original law was passed, for some reason, as has been said here, the company that did not originally build there, has a new look in the area they are interested now. They may be interested in paying a

better rate.

Who is paying for this money? The subscribers are paying for it in the form of taxes.

Mr. O'NEAL. I am sure that the telephone company in Statesboro was eligible, for still they have loans.

Mr. MYERS. They should go back to the bank.

Mr. O'NEAL. They may be owned by a mixed company.

Mr. MYERS. They would still be eligible to go into the bank.

Mr. O'NEAL. I do not know that they would. I think they have grown out of it.

Mr. MYERS. I am not saying that this is right. This is a possibility. Mr. DOLE. Would you yield?

Mr. PETERSON. I was going to make one additional statement concerning the question, "Why are the other companies so anxious to buy?" I am not so sure that it is a case of the companies being anxious to buy, as much as it is that certain conditions, which are inherent in the commercial companies in the REA program have changed. Admiral Mott alluded to them. Many of these companies are owned by families. Many of these companies were started at the turn of the century.

Mr. Baine here, for instance, is serving down in Texas. He is the third generation operating a telephone company started by his grandfather. There does come a time when the family considerations come into play such as estate planning, and I think this is one of the conditions which is precipitating what is happening in the selling of companies-not the question of somebody trying to gobble them up.

Mr. MYERS. As Mr. Poage and Mr. Belcher both said, they would both be eligible-they would be eligible for REA loans.

Mr. DOLE. Would you yield?

Mr. MYERS. Yes.