RURAL TELEPHONE SUPPLEMENTAL FINANCING THURSDAY, AUGUST 24, 1967 HOUSE OF REPRESENTATIVES, The committee met, pursuant to recess, at 10 a.m., in room 1301, Longworth House Office Building, Washington, D.C., Hon. W. R. Poage (chairman) presiding. Present: Representatives Poage, Gathings, McMillan, Abernethy, Jones of Missouri, O'Neal, Foley, de la Garza, Vigorito, Jones of North Carolina, Dow, Nichols, Belcher, Teague of California, Dole, Hansen, Wampler, Miller, Burke, Mathias, Mayne, Zwach, Kleppe, Price, and Myers. Also present: Christine S. Gallagher, clerk; Hyde H. Murray, assistant counsel; and Francis LeMay, consultant. The CHAIRMAN. The committee will please come to order. I understand that Mr. Charles F. Avila, president of the Edison Electric Institute, desires to file a statement. Without objection, it will be made a part of the record at this point. (The prepared statement of Charles F. Avila follows:) STATEMENT OF CHARLES F. AVILA, PRESIDENT, EDISON ELECTRIC INSTITUTE The Committee having specifically reserved time for electric utility companies, Edison Electric Institute is submitting this statement for the record concerning H.R. 12066, a bill to establish a Federal Telephone Bank. The Institute recognizes that this legislation relates only to the REA telephone program—a program in which we have relatively little direct interest, and we are not purporting to speak for the telephone industry. The views contained in this statement are offered primarily because we believe that the establishment of a telephone bank or any other bank by legislation containing some of the provisions in this bill might at some future date be used as a pattern for establishing an electric bank. Witnesses for the Edison Electric Institute testified in March, 1967, before this Committee that an insured loan program would be a superior solution for future financing of the REA electric program. Details of the insured loan solution are contained in bi-partisan legislation introduced by six members of Congress, including three distinguished members of this Committee Representatives McMillan, Teague, and Goodling. We suggest now that an insured loan program for REA telephone borrowers would also be more efficient and much less costly for the nation's taxpayers than the bank approach set forth in H.R. 12066. Although Edison Electric Institute does not believe that a bank is the best way to provide supplementary financing for the telephone program, if, however, the establishment of any bank to make loans for telephone operations is to be considered by the Committee, we submit several improvements should be made. For example, such a bank should reimburse the Federal Government for the services of all U.S. Department of Agriculture personnel, regardless of whether they are full-time or part-time employees of the bank. The return to the Government on Class A stock should be no less than the cost of money to the U.S. Treasury, rather than only 2%. The Government's investment should be repaid 33 on a regular repayment schedule and completely retired within a reasonable period. Social Security and other Federal trust funds should not be used to purchase bank debentures. The operations of the bank should be subject to adequate Congressional supervision and control. The maximum loan period should not exceed the depreciable life of the equipment or thirty-five years, whichever occurs first. The bank should not be turned over to borrower control until all Government capital has been retired. The 2% program should be revised to increase the rate of interest to correspond to the ability of each borrower to pay. These points correspond to six of the nine points made in the "Additional Opposing Views" by four members of this Committee at pages 26 and 27 of House Report No. 459 on H.R. 10190. They would seem to be applicable to H.R. 12066 as well as to H.R. 10190. In addition to the above points, the loan authority of the bank should be identical to that under the 2% program. The language concerning use of bank funds for expansion and acquisition purposes should be deleted. Bank loans should be made at a single rate of interest reflecting bank costs, including costs of administration and a reserve for losses. The subsidized intermediate loan program should be eliminated. The last two points are made because this bill differs from the electric provisions in H.R. 10190. The Committee deleted use of electric bank funds for acquisitions, and the intermediate loan program. In our opinion, similar provisions should be made to any telephone program. In summary, the Edison Electric Institute recommends the bill (H.R. 12066) not be approved by the Committee for three basic reasons: (1) it would serve as an unfortunate precedent for an electric bank in the future; (2) it could be used as a vehicle for adding the electric bank provisions at some point in the legislative process; and (3) other more reasonable alternative methods of providing financing for the REA telephone program have not been explored. If the Committee, however, desires to consider the bank approach further, it is recommended that improvements along the lines of the suggestions made in this statement be incorporated in order to assure that the bank would operate on a self-sustaining basis, under appropriate Congressional controls, and for proper purposes. The CHAIRMAN. We will also make a part of the record at this point a statement by the Honorable Alvin Ē. O'Konski, together with a statement from the American Farm Bureau Federation. (The statements follow:) STATEMENT OF HON. ALVIN E. O'KONSKI, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN Mr. Chairman. I appreciate the opportunity to present testimony in support of H.R. 12066, the legislation to provide for additional sources of financing for the rural telephone systems. If we are to reverse the trend of outmigration from our farms to crowded cities with their slums and ghettos, we must provide for a dynamic Rural America. The rural telephone program, initiated in 1949, is essential to the development and revitalization of Rural America-to make it an attractive and prosperous place for new industries and business and the families which go with them. It is just not reasonable to expect that industry and people in this modern day and age will either settle or stay in communities where they cannot enjoy quality telephone service. And when farms prosper, all America prospers. I am proud that my home state of Wisconsin has been one of the pioneers in the rural telephone program, with the first REA telephone loan in the State going to a 10th District borrower, the Cream Alley Telephone Company at Hawkins, Wisconsin, in October, 1950. Statewide there are now more than 123,000 farm families who have modern telephone service over 24,000 miles of line. The success of the program is clearly shown in the 10th District where REA has approved loans to twenty telephone systems to enable these borrowers to provide new or improved service to nearly 54,000 subscribers over almost 11,000 miles of line. The average rural subscriber on an REA financed system is making three times as many calls as he did when he first obtained dial service. Likewise, the demand for single-party service continues to increase. There still remains the unfinished job of reaching the estimated 20 per cent of the rural establishments which do not have telephone service and to modernize those which are using outmoded, inadequate and multi-party telephone lines. It is imperative that we update the phone system for Rural America. It is estimated that REA telephone borrowers who received loans of $1.3 billion since the beginning of the telephone program will need more than twice this amount in the next fifteen years to meet the demands of modern communications service in their areas. In Wisconsin there is a backlog of about $20 million in loan applications. The average subscriber density for all REA telephone borrowers is 3.7 per mile, compared with 16 telephone subscribers per mile for the independent industry generally and an estimated 40 subscribers per mile for Bell System companies. Annual revenues average about $400 per mile for REA borrowers, compared with $2,538 per mile for the independent industry. H.R. 12066 will give the flexible financing needed through the Rural Telephone Bank for funds from the private money market. As one of the early sponsors of legislation to provide supplemental financing for both the rural electric cooperative systems and the rural telephone systems, I respectively urge this Committee to take favorable action on H.R. 12066. By enacting this legislation, we can assure continued progress for Rural America in meeting its quality telephone needs for now and the future. STATEMENT OF JOHN C. LYNN, LEGISLATIVE DIRECTOR, THE AMERICAN We appreciate the opportunity to again present the views of the American Farm Bureau Federation with regard to supplemental financing for the rural telephone program. On April 4 of this year we presented in detail our recommendations with regard to the provisions of H.R. 1400, dealing with the "telephone bank." Farm Bureau has a long record in support of rural electric and telephone programs. As early as 1944 our delegate body recommended that rural electric cooperatives move toward less dependence on the federal government for financing. We worked for the enactment of the rural telephone legislation in 1949. This program has meant a great deal to rural America. We are disappointed that certain segments of the rural electric cooperatives and the electric industry succeeded in persuading the Rules Committee to table H.R. 10190, which provided supplemental financing for rural electrical and telephone cooperatives through the establishment of an electric bank and a telephone bank. We would prefer to see supplemental financing provided for both these programs in the same legislation. Recognizing that many farmers and ranchers throughout America are dependent on the rural telephone program, we support the enactment of H.R. 12066 providing for supplemental financing for the rural telephone program. We hope that in considering this separate legislation for the telephone program, the Committee will continue to keep firmly in mind the needs of the rural electric cooperatives for supplemental financing and that some sound method will be developed to meet the pressing needs of the rural electric cooperatives. We shall continue to work toward this objective. The CHAIRMAN. Is there anyone else who cares to submit anything in behalf of the electric cooperatives? There is no one. We will now pass then to the telephone part. On the list of witnesses I have before me, Mr. David C. Fullarton, executive manager of the National Telephone Cooperative Association is the first on the list. He is accompanied by B. Maynard Christenson, who is president of the Dakota Cooperative Telephone Co. of Volin, S. Dak., and Robert E. Jamison, who is with the Horry Telephone Cooperative of Conway, S.C. We will be glad to hear from you gentlemen now. STATEMENT OF DAVID C. FULLARTON, EXECUTIVE MANAGER, NATIONAL TELEPHONE COOPERATIVE ASSOCIATION, WASHINGTON, D.C.; ACCOMPANIED BY B. MAYNARD CHRISTENSON AND ROBERT E. JAMISON Mr. FULLARTON. Thank you, Mr. Chairman and gentlemen. My name is David C. Fullarton. I am executive manager of the National Telephone Cooperative Association. With me today are Mr. B. Maynard Christenson of Volin, S. Dak., president of the association, and Mr. Robert E. Jamison of Conway, S.C., vice president of the association. We have no prepared statement to present, having appeared before this committee several times previously this year to support supplemental financing for REA telephone borrowers. We supported them and we fully support H.R. 12066 now. We noted with extreme interest the testimony of yesterday's witnesses and were pleased that they supported telephone supplemental financing, and a telephone bank to provide additional financial needs. However, as you are probably aware, many of those represented here yesterday are not directly involved in the REA telephone program. I am grateful for their support, but I fear they misunderstand the ramifications of some of the amendments to H.R. 12066 that they propose. For this reason, and in collaboration with the National REA Telephone Association, the organization representing the commercial REA borrowers and ably represented here today by Mr. A. Harold Peterson, the National Telephone Cooperative Association has prepared an analysis of these proposed amendments and their effect on the objectives of the telephone program. And I would request that this jointly prepared analysis be made a part of the record at this point. The CHAIRMAN. Without objection, it will be made a part of the record. (The document entitled "Analysis of Amendments," follows:) ANALYSIS OF AMENDMENTS OFFERED BY H. R. BOLLINGER TO H.R. 12066 (THE TELEPHONE SUPPLEMENTAL BILL), PREPARED BY NATIONAL REA TELEPHONE. ASSOCIATION AND NATIONAL TELEPHONE COOPERATIVE ASSOCIATION In testimony presented before the House Agriculture Committee on August 23, 1967, Mr. H. R. Bollinger offered seventeen amendments to H.R. 12066. The following analysis is presented in the order that the proposed amendments were offered by Mr. Bollinger in his prepared statement. 1. Requires that the wording of the preamble reflect that "some" rather than "many" systems require 2% financing. Comment: Although this amendment is not substantive the word "many" appears to be a more accurate description of the situation according to all currently available studies. 2. Deletes provision for carry-over of unobligated telephone loan funds. Comment: This serves no useful purpose since the estimated carry-over of funds is taken into account in establishing the loan fund level for the succeeding fiscal year. This amendment might encourage acceleration of loan approvals before the end of each fiscal year to avoid lapse of authority. This is not sound administrative practice. This amendment also prohibits 2% loans to applicants who "can qualify under the policies, terms, and conditions established" for bank loans by the bank board of directors. Comment: It is contemplated that 2% loans would not be made to applicants where the REA feasibility study indicates that a higher "bank" rate could be absorbed while still meeting program objectives. This determination should be made first, rather than in compliance with telephone bank loan policy, terms and conditions. Further, this amendment conflicts with the requirements of section 408(b) (2) that loans to applicants meeting the subscriber density criteria of 3 or fewer per mile, be made at 2% unless the applicant elects a bank loan. 3. Requires the bank to be charged and recover from borrowers the costs of REA facilities or services of employees partially or jointly used by the telephone bank. Comment: The Bill now provides for such utilization without charge to or recovery by the bank until conversion of the bank to borrower ownership and control. This is intended to soften the impact of administrative expense during the transitional period and would enhance the ability of rural telephone systems to utilize bank financing, and enable more systems to move more quickly to bank financing. 4. Authorizes Presidential appointment of Federal members of the bank board from the Federal Government generally instead of restriction appointment to Department of Agriculture employees. Comment: Section 403 (a) provides that the bank shall be an agency of the United States, subject to the supervision and direction of the Secretary of Agriculture. It is only logical therefore that the Federal board members come from the Department of Agriculture. The expertise of the Treasury Department is available, and in fact mandatory, under the provisions of section 403 (c) of the Bill. 5. Requires that two instead of three bank directors be named from cooperative-type entities, and four rather than three from commercial-type entities. Comment: The Bill provides for equal board representation for the two classifications of borrowers, thus assuring that neither will dominate or control. The effect of this provision is that all borrowers must work together toward achievement of program objectives, and it assures that the people of rural America will continue to be the beneficiaries of the program. 6. Requires retirement of Class A stock to commence as soon as practicable after June 30, 1977 rather than 1982, and deletes the provision that such retirement commence after the total of Class A and B stock reaches $400 million. Comment: The existing provision in the Bill contemplates the accumulation of $100 million in Class B stock subscriptions and their retention as part of the equity capital structure of the bank. The amendment would in effect require full and virtually immediate use of the proceeds of Class B stock and to this extent diminishes the bank's equity capital. This will adversely affect the bank's credit and its ability to market its debentures. Advancing the date for retirement of Class A stock will have the same effect. 7. Substitutes a return on Class A stock based on the average market yield on marketable obligations of the United States issued during the month of May in the preceding fiscal year for the present 2% return on Class A stock. Comment: The effect of this amendment would be to approximately double the cost to the bank of the Class A equity funds invested by the Government. It would substantially reduce the volume of intermediate loans and limit them to not more than the amount of the annual Class A stock subscription of $30 million. The 2% rate of return permits a blending of Class A funds with funds realized from the sale of debentures and thereby enables a larger volume of intermediate loans. Reducing the bank's capability to make intermediate loans limits the number of borrowers and dollar volume of loans which could be handled by the bank and would tend to hamper the orderly transition from the basic 2% financing to the intermediate step of the credit ladder provided in the Bill. 8. Deletes the provision making the bank's debentures lawful investments of certain funds under the authority and control of the United States. Comment: This would appear to be an unnecessary restraint upon the salability of bank debentures and would deprive the bank of part of the market for its debentures. Initially, this market could be very important for the telephone bank. 9. Requires approval of the Telephone Bank Board as well as the Secretary for acquisitions financed by the bank. Comment: Section 408 (a) of the Bill already provides that in the case of acquisition loans the Governor of the telephone bank is authorized to make loans in accord with policies approved by the bank board of directors and subject to the approval of the Secretary. |