retirement, as the case may be, first, of all liabilities; second, of all class A stock at par; third, of all class B stock at par; fourth, of all class C stock at par; then any surpluses and contingency reserves existing on the effective date of liquidation or dissolution of the telephone bank shall be paid to the holders of class A and class B stock issued and outstanding before the effective date of such liquidation or dissolution, pro rata, and any remaining surplus and contingency reserves shall be distributed to those entities to which they are allocated on the books of the bank at the time of the liquidation or dissolution." SEC. 2. (a) Subsection (f) of section 3 of the Rural Electrification Act of 1936, as amended, is amended by inserting "rural electrification" immediately following the words "interest on" in both places where it appears in said subsection and by inserting the words "for rural electrification purposes" after the words "Secretary of the Treasury" the second time they appear in said subsection. (b) Section 201 of the Rural Electrification Act of 1936, as amended, is amended by inserting ", to public bodies now providing telephone service in rural areas", immediately after the word "areas" in the first sentence and also immediately after the word "areas" in the first proviso of the second sentence. SEC. 3. Section 201 of the Government Corporation Control Act, as amended (31 U.S.C. 856), is amended by striking "and" immediately before "(5)” and by inserting", and (6) the Rural Telephone Bank" immediately before the period at the end. SEC. 4. The second sentence of subsection (d) of section 303 of the Government Corporation Control Act, as amended (31 U.S.C. 868), is amended by inserting "the Rural Telephone Bank," immediately following the words "shall not be applicable to". SEC. 5. The right to repeal, alter, or amend this Act is expressly reserved. STATEMENT OF HAROLD R. BOLLINGER, PRESIDENT OF PIONEER Mr. BOLLINGER. Mr. Chairman and members of the committee, before I read my testimony, I would like to introduce my associates who are here with me. On my right is Hugh Barnhart, president of the Rochester Telephone Co., of Indiana, and on my left is Mr. Robert Fegan, president of the Junction City Telephone Co., of Kansas. And I am Harold R. Bollinger. All three of us have had a long and continuing, and very sincere, interest in the telephone industry-the independent telephone industry. We welcome this opportunity to appear here before you to present our facts on this legislation, this proposed bill. As it is presently drafted we would be opposed to it, but with minor amendments, which we will comment on here shortly, we would support this bill. Also associated with us are the companies listed as follows: Pioneer Telephone Co., Minnesota. Central Telephone Co. and affiliates. Ellensburg Telephone Co., Washington. General Telephone & Electronics Corp. Geneseo Telephone Co., Illinois. Illinois Consolidated Telephone Co., Illinois. Junction City Telephone Co., Kansas. Lincoln Telephone & Telegraph Co., Nebraska. Rochester Telephone Co., Inc., Indiana. Urban Telephone Corp., Wisconsin. These companies also support the position which we will present to you. Mr. Barnhart, on my right, operates the Rochester Telephone Co., Inc., of Indiana, and he has in this one exchange 4,600 telephones. Mr. Bob Fegan, on my left, operates the Junction City Telephone Co., of Kansas, and he has five exchanges of 9,000 telephones. Both of these gentlemen have long and continuing interest in the business: Mr. Barnhart since the early 1930's, and Mr. Fegan since the 1920's. Also Mr. Fegan's father started the telephone company in Junction City in 1910. Both of these gentlemen have been active in the association's affairs, both in their own States and in the national association. Mr. Fegan served as a director of our national association for a number of years. Mr. Barnhart is presently a member of the board of directors of our national association and also a past president. My own company operates in Minnesota and North Dakota, and we have 52 exchanges. We operate 54,000 telephones. I will now proceed with my prepared statement. Mr. Chairman, members of the committee, I am Harold R. Bollinger, president of Pioneer Telephone Co., a Minnesota corporation, which will become a United Utilities, Inc., subsidiary later this year. With me today are Robert Fegan, president of Junction City Telephone Co., of Kansas; and Hugh Barnhart, president of the Rochester Telephone Co. of Indiana. I have been president of Pioneer since 1963. Between 1945 and 1963, I was vice president and general manager, the chief operating executive, of Pioneer. My telephone career started in June of 1922, and between that date and 1963 I worked principally in rural telephone exchanges in Minnesota, Iowa, Illinois, and Wisconsin. In keeping with my longstanding interest in the independent telephone industry which serves principally the smaller communities and rural areas of America, I was president of the Minnesota Telephone Association in 1954 and 1955, and was president of the U.S. Independent Telephone Association (USITA) for the 1962-63 term. The telephone companies which I have already named and which appear on the cover sheet of this prepared testimony have asked me to present to you this statement on behalf of all of us. After you have heard my presentation, if any of the committee members have questions concerning our position on any aspect of this proposed legislation, as related to rural telephone company operations, we will attempt to answer them for you. Mr. Chairman, first let me assure you we are not here to oppose the broad objectives of H.R. 12066. We are here to suggest and recommend some clarifying changes and some amendments to the bill which, we believe, will better serve the interest of the public and rural telephony. The Rural Electrification Act provides a needed source of financing for telephone companies which serve the more sparsely populated rural areas. Certainly, low-cost loan funds are necessary if adequate service is to be provided in exchange areas where there may be three or fewer subscribers per square mile and a low level of economic activity and development. On the other hand, however, there is no requirement for low-cost loan financing in populous and prosperous areas. In these instances, it is clearly feasible to provide adequate telephone service because the revenues will support loans obtained from conventional private sources. There is a middle group between these two extremes, however, where the telephone companies cannot finance the construction of adequate facilities through conventional private sources. Consequently, these companies are confronted with the dilemma of sacrificing the quality of their service or of jeopardizing the financial stability of their business. On the other hand, the needs of these companies are not so great as to warrant granting them the full Government subsidy of 2 percent REA loans. Many of the companies in this middle group have borrowed large sums from the REA because they were unable, and in some cases unwilling, to obtain all of the funds they required from private sources. A large portion of these funds would undoubtedly have been borrowed from private sources if only that portion of their property for which the REA loan was obtained was required as collateral for that loan, rather than all of their property. The amounts Congress appropriates for 2 percent telephone loans could be much smaller if these companies were not, in effect, "locked in" to REA financing. The ease with which companies in this middle group have been able to obtain 2 percent REA loans has enabled some of them to purchase and install modern telephone plant and equipment solely for the purpose of converting their companies into salable commodities in a "sellers market". Aside from the fact that the existing REA loans continued after the companies were sold, additional 2 percent loans were obtained by the acquiring companies. The advantages of 2 percent debt money in the capitalization of a highly leveraged company are obvious. The amounts of loan funds Congress is asked to appropriate would be greatly lessened if all companies were required to make full use of their abilities to obtain private capital to meet the needs of their operations and of the operations of any companies they own. The annual requirements for telephone loans could be further reduced if REA borrowers were not required, as conditions of receiving an REA loan, to provide facilities for higher grades of service than the standards established by the regulatory authorities in the various States or, for that matter, a higher grade of service than the telephone subscribers want. It goes without saying that this results in higher rates than the economies of the areas can reasonably support. Some such companies find themselves required to borrow much more money than they need, and to install more facilities than necessary to meet their service requirements. Greater emphasis on meeting real telephone service requirements at the lowest practical cost would reduce the amount of REA loans required even by companies with a justifiable need for 2 percent money. The elimination of this and the other shortcomings we have mentioned would substantially reduce the amounts that Congress is asked to appropriate for the REA telephone loan program. Correction of these faults in the telephone loan program would require changes in both the act and the administration of the act. It would be impractical in our estimation to attempt to make the necessary corrections by amending the act to prescribe the loan procedures in detail. We believe that the needed corrections can best be made through passage of H.R. 12066 provided the following three basic considerations are incorporated in the bill: (1) to insure that the proposed rural telephone bank is oriented toward the segment of the telephone business it is designed to serve; (2) to insure that the telephone bank's loan policies and conditions will be established by people who have knowledge of the public purposes and obligations as well as the economics of the telephone business; and (3) to insure that the telephone bank will be independent of the need for Government funds at the earliest possible date. To incorporate these three basic considerations, we urge the Committee to adopt certain specific changes in H.R. 12066. We firmly believe that the changes which we now recommend will clarify and facilitate the intent of the bill and overcome the weaknesses in the present telephone loan program: 1. Preamble, page 1: We believe there may be fewer telephone companies actually requiring financing under title II of the act than is indicated by loan requirement studies available to the committee. We suggest the Preamble be changed by substituting the word "some" for the word "many" in line 9. 2. Section 302(b), (1), page 4: We suggest that it is the intent of H.R. 12066 that the REA Administrator grant section 201 loans only when the applicant cannot reasonably afford to borrow money from the rural telephone bank or pay the going rate of interest on telephone bank loans, whichever is applicable. Therefore, we suggest the intent of this bill can be clarified in lines 13 and 14, by striking out all of the last phrase, "the amounts so" and ending with "until expended."; and substituting in its stead the phrase, "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." 3. Section 403(b), page 8: The full administrative costs of the bank's activities should be borne by the bank. This can be made clear in line 10, by striking out the last two words, "without cost", and in their stead inserting, "and the cost of such facilities and services shall be charged."; and in line 11, by striking out the words, "without charge to", and in their stead inserting, "shall be"; and in line 13, by striking out, "but", and inserting, "and", in its stead. 4. Section 405(b), page 10: We believe Congress should give the President the right to select telephone bank board members from the Treasury, Bureau of Budget, Comptroller General, and other governmental departments, as well as the Department of Agriculture, in the interest of obtaining the most qualified personnel to assist in establishing and managing the bank. This would be accomplished in lines 3, 4, and 8, by striking out, "Department of Agriculture”, and substituting, "Federal Government". 5. Section 405(d), page 11: We believe that the bank board representation should be in proportion to the relative number of commercialtype and cooperative-type REA borrowers. At present there are three commercial-type borrowers for every one cooperative-type borrower. We suggest the bill recognize this differential in: Line 5, by striking out, "three", and substituting, "two", in its stead; Line 8, by striking out, "three", and substituting, "four", in its stead; Line 17, by striking out "three", and substituting, "two", in its stead; and Line 20, by striking out, "three", and substituting, "four", in its stead. 6. Section 406(c), page 14: Hopefully, the full $300 million in class A stock will be subscribed by 1977, at which time, we believe, it is the intent of Congress to encourage the conversion of ownership, control, and operation of the rural telephone bank to the private sector of the economy. We recommend in: Line 20, changing the date from "1982" to "1977"; Lines 24 and 25, and page 15, line 1, striking out "and after the amount of class A and B stock issued totals $400,000,000". 7. Section 406 (c), page 15: To emphasize the intent of Congress to make the rural telephone bank self-sustaining, we believe the wording should be changed in: Lines 3, 4, and 5, by striking out the remaining portion of the sentence after the word "income" on line 3, and substituting therefor, "at a rate determined by the Secretary of the Treasury, to equal the average market yield on marketable obligations of the United States issued during the month of May preceding the fiscal year in which the class A stock was issued." 8. Section 407, page 17: Because the telephone bank debentures would not be guaranteed by the United States, in our opinion it would not be in the public interest, or consistent with the intent of Congress to make the bank-self-sustaining, to permit investment of fiduciary, trust, and public funds in such debentures. It is our opinion that the language should be changed in: Lines 20, 21, 22, 23, and 24, by striking our the last sentence beginning on line 20 with the words "Telephone debentures" and ending with the words "officers thereof", on line 24. 9. Section 408(a), page 18: We do not believe that either the Secretary or the Administrator should be put in the position of being the sole judge in determining whether the proposed acquisition of other telephone lines, facilities, and systems by an REA borrower with REA money would result in improving the efficiency, effectiveness, or financial stability of the resultant combined telephone system. We are convinced that it is in the best interests of all concerned to give the telephone bank board a voice in matters of such significance in order to prepare for an orderly conversion of the telephone bank to private ownership, control, and management. Even though we believe that as a matter of general principle no "acquisitions" should be made with money provided by the Government, we recognize that some acquisitions may sufficiently involve the public interest to justify financing them with loans under section 201 or section 408. Therefore, we suggest that this provision be clarified in: Line 18, by inserting between "the" and "Secretary", the phrase "Telephone Bank Board and the", so that this provision will read, "the Telephone Bank Board and the Secretary". 10. Section 408(b), (1), page 19: Technical and economic obsolescence are more pronounced now in the operation of telephone companies than in any other public utility industry. Despite this situation, REA loans today extend for 35 years, which is longer than the expected life of the property serving as collateral for the loans. If additional loans are made to finance replacement of obsolete equip |