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"(3) Each member of the Federal Telephone Bank Board elected pursuant to sections 604 (b), 604 (c), and 604(d) of this title shall have one-half vote except as provided for in section 611.

Any Federal Telephone Bank Board member may continue to serve after the expiration of the term for which he is elected until his successor has been elected and has qualified. Federal Telephone Bank Board members shall receive $100 for each day or part thereof, not to exceed one hundred days per year, spent in the performance of official duties, and shall be reimbursed for travel and other expenses in such manner and subject to such limitations as the Federal Telephone Bank Board may prescribe.

"(f) The Federal Telephone Bank Board shall prescribe bylaws, not inconsistent with law, regulating the manner in which the Federal Telephone Bank's business shall be conducted, its directors and officers elected, its stock issued, held and disposed of, its property transferred, its bylaws amended, and the powers and privileges granted to it by law exercised and enjoyed.

"(g) The Federal Telephone Bank Board shall meet at such times and places as it may fix and determine, but shall hold at least four regularly scheduled meetings a year, and special meetings may be held on call of the Chairman or any group of directors having a total of at least four votes.

"SEC. 605. CAPITALIZATION.-(a) The Federal Telephone Bank's capital shall consist of capital subscribed by the United States, by borrowers from the Federal Telephone Bank, and by corporations eligible to become borrowers from the Federal Telephone Bank. Beginning on July 1, 1966, and thereafter, the United States shall furnish capital to the Federal Telephone Bank, in an amount equal to all net collection proceeds, until the total capital so furnished by the United States reaches $250,000,000. As used in this section, the term 'net collection proceeds' shall be deemed to mean payments from and after July 1, 1966, of principal and interest on loans heretofore or hereafter made under section 201 of this Act, less an amount representing interest payable to the Secretary of the Treasury on loans to the Administrator for telephone purposes pursuant to section 3(a) of this Act.

"(b) The capital stock of the Federal Telephone Bank shall consist of three classes, class A, class B, and class C, the rights, powers, privileges and perferences of the separate classes to be as specified, not inconsistent with law, in the bylaws of the Federal Telephone Bank. No dividends shall be payable on class A and class B stock. Class B and class C stock shall be voting stock, but no holder of said stock shall be entitled to more than one vote, nor shall class B and class C stockholders, regardless of their number, which are owned or controlled by the same person, group of persons, firm, association or corporation, be entitled in any event to more than ten votes.

"(c) Class A stock shall be issued only to the Administrator of the Rural Electrification Administration on behalf of the United States in exchange for capital furnished to the Federal Telephone Bank pursuant to subsection (a) of this section 605, and such class A stock shall be redeemed and retired by the Federal Telephone Bank as soon as practicable, but only to the extent that the Federal Telephone Bank Board determines that such retirement will not unduly impair the operations of the Federal Telephone Bank.

"(d) Class B stock shall be issued to and held only by recipients of loans under section 610 of this act. Borrowers receiving loan funds pursuant to section 610 shall be required to invest in class B stock 5 per centum of the amount of loan funds so provided, and all borrowers shall be entitled to patronage refunds in class B stock or in cash under terms and conditions to be specified in the bylaws of the Federal Telephone Bank.

"(e) Class C stock shall be available for purchase and shall be held only by borrowers, or by corporations eligible to borrow, under section 610 of this Act. The dividends on class C stock shall be specified by the Federal Telephone Bank Board.

"SEC. 606. BORROWING POWER.-(a) The Federal Telephone Bank is directed to obtain sufficient funds to meet requests for loans and is authorized to obtain funds through the public or private sale of its bonds, debentures, notes, and other evidences of indebtedness (hereinafter collectively called 'telephone debentures'). Telephone debentures shall be issued at such times, bear interest at such rates, and contain such other terms and conditions as the Federal Telephone Bank Board shall determine after consultation with the Secretary of the Treasury: Provided, however, That the amount of telephone debentures which

may be outstanding at any one time pursuant to this subsection (a) shall not exceed ten times the paid-in capital and surplus of the Federal Telephone Bank. The Federal Telephone Bank shall insert in all its debentures appropriate language indicating that such debentures, together with interest thereon, are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any agency or instrumentality thereof other than the Federal Telephone Bank. Such debentures shall be lawful investments and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority and control of the United States or any officer or officers thereof. The issues of the Federal Telephone Bank will be exempt from the requirements of the Securities Act.

"(b) If, as determined by the Federal Telephone Bank, there are insufficient funds in the assets of the Federal Telephone Bank available for the purpose to pay interest or principal on its telephone debentures, the Federal Telephone Bank shall obtain funds for this purpose by making and issuing notes to the Secretary of the Treasury. Such notes shall bear interest at a rate determined by the Secretary of the Treasury, but not in excess of the minimum rate of interest payable on Federal Telephone Bank loans pursuant to section 610(b) (2) of this title, and shall have such maturities as the Federal Telephone Bank Board may determine with the approval of the Secretary of the Treasury. The Secretary of the Treasury is authorized and directed to purchase any notes issued by the Federal Telephone Bank pursuant to this subsection (b) and for such purchases may use as a public debt transaction the proceeds from the sale of any securities issued under the Second Liberty Bond Act, as amended, and the purposes for which such securities may be issued under such Act, as amended, are hereby extended to include any such purchases.

"SEC. 607. USE OF DEPARTMENT OF AGRICULTURE FACILITIES AND EMPLOYEES.— In order to perform its responsibilities under this title, the Federal Telephone Bank may utilize the facilities and the services of employees of the Rural Electrification Administration or of any other agency of the Department of Agriculture, without cost to the Federal Telephone Bank, except to the extent that administrative expenses are recovered by the Federal Telephone Bank under section 610(b) (2) of this title.

"SEC. 608. ANNUAL REPORTS; FISCAL AGENT.—(a) The Governor of the Federal Telephone Bank shall make an annual report to Congress on the administration of this title VI and any other matters relating to the effectuation of the policies of title VI, including recommendations for legislation.

"(b) The Federal Telephone Bank when designated for that purpose by the Secretary of the Treasury shall act as fiscal or other agent of the United States and when acting as such shall perform such duties as shall be prescribed by the Secretary of the Treasury.

"(c) At best once each year and at such other times as the Federal Telephone Bank Board deems necessary, the financial transactions of the Federal Telephone Bank shall be audited by auditors designated by the Board.

"SEC. 609. TAX EXEMPTIONS.-The Federal Telephone Bank shall be deemed to be an instrumentality of the United States, and as such, its property, franchise, capital, reserves, surpluses, and other funds, and its income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority; except that any real property and any tangible personal property of the Federal Telephone Bank shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed.

"SEC. 610. LENDING POWER.-(a) The Governor of the Federal Telephone Bank is authorized on behalf of the Federal Telephone Bank to make loans, in conformance with policies established by him, to corporations which have received a loan or loan commitment pursuant to section 201 of this Act, (1) for the same purposes for which loans may be made under section 601 of this Act, and (2) for the purposes of financing, or refinancing, the construction, improvement, expansion, acquisition, and operation of telephone lines, facilities, or systems, and for other related purposes, in order to improve the efficiency, effectiveness, or financial stability of telephone systems of such corporations financed under sections 201 and 610 of this Act, subject, as to the purposes set forth in (2) hereof, to the following provisos: That in the case of any such loan for the acquisition of telephone lines, facilities, or systems, the location and character thereof shall be such as to improve the efficiency, effectiveness or financial stability of the telephone system of the borrower, and the size thereof shall be

not greater than the borrower's existing system taking into account the number of subscribers served, miles of line, and plant investment; and, That in the case of any such loan for the improvement, expansion, construction and operation of telephone lines, facilities or systems in any city, village, or borough having a population in excess of one thousand five hundred inhabitants, a loan under sections 201 or 610 shall have previously been made to provide telephone service in such city, village, or borough, or such telephone lines, facilities, or systems shall be a reasonably appropriate means of furnishing or improving telephone service in rural areas.

"(b) Loans under this section shall be on such terms and conditions as the Governor of the Federal Telephone Bank shall determine, subject, however, to the following restrictions:

"(1) No loan may be made hereunder for a period exceeding fifty years.

"(2) Intermediate interest rate loans shall bear interest at a rate equal to (i) the computed average interest rate on all interest bearing obligations of the United States, or reported by the United States Treasury at the end of the preceding fiscal year, or (ii) 3 per centum per annum, whichever is lower. Loans at the intermediate interest rate shall be made by the Governor of the Federal Telephone Bank in accordance with criteria established by him. Such criteria shall reflect the purpose and objectives of the Federal rural electrification program. All other loans made hereunder shall bear interest at a rate to be determined by the Federal Telephone Bank Board.

"(3) Loans shall not be made unless the Governor of the Federal Telephone Bank finds and certifies that in his judgment the security therefor is reasonably adequate and such loan will be repaid within the time agreed.

"(4) No loan shall be made in any State which now has or may hereafter have a State regulatory body having authority to regulate telephone service and to require certificates of convenience and necessity to the applicant unless such certificate from such agency is first obtained. In a State in which there is no such agency or regulatory body legally authorized to issue such certificates to the applicant, no loan shall be made under this section unless the Governor of the Federal Telephone Bank shall determine (and set forth his reasons therefor in writing) that no duplication of lines, facilities, or systems, providing reasonably adequate services will result therefrom.

"(5) As used in this section, the term 'telephone service' shall have the meaning prescribed for this term in section 603 (a) of this Act, and the term 'telephone lines, facilities, or systems' shall mean lines, facilities, or systems used in the rendition of such telephone service.

"(c) The Governor of the Federal Telephone Bank is authorized to adjust the schedule of payments of interest or principal of loans made under this section upon his determination that with such readjustment there is reasonable assurance of repaying: Provided, however, That no adjustment shall extend the period of such loans beyond fifty years: Provided, further, That loans made by the Federal Telephone Bank will be secured on an equal basis with prior liens of the United States under loans made pursuant to title I of the Rural Electrification Act.

"SEC. 611. CONVERSION OF FEDERAL TELEPHONE BANK TO PRIVATE OWNERSHIP, CONTROL AND OPERATION.-(a) Whenever, after retirement of class A stock issued to the United States has begun pursuant to section 605 (c) of this Act, the total amount of class B and class C stock exceeds the amount of class A stock

"(1) the voting strength of the elected members of the Board shall be increased from one-half to one vote each;

"(2) all powers and authority granted to the Administrator by this title IV, other than powers and authority arising from his membership on the Board pursuant to section 604(a)(2) shall vest twelve months thereafter in the Federal Telephone Bank, and shall be exercised and performed through the Governor and such other employees as the Board may designate; "(3) the authority of the Federal Telephone Bank to utilize the facilities and the services of employees of the Rural Electrification Administration or of any other agency of the Department of Agriculture under section 607 shall terminate twelve months thereafter;

"(4) the Federal Telephone Bank shall continue to be obligated to retire class A stock in accordance with the requirements of section 605 (c): Provided, however, That class A stock may thereafter be retired from the proceeds of the sale of class B or class C stock as well as from earnings of the Federal Telephone Bank available therefor.

"(b) Until all class A stock has been retired by the Federal Telephone Bank, all sections of title IV, as modified by subsection (a), shall remain applicable to the Federal Telephone Bank, its operations, and its property. Whenever all class A stock issued to the United States has been retired pursuant to sections 605 (c) and 611(a) (4) of this Act—

“(1) the Federal Telephone Bank shall cease to be an agency or instrumentality of the United States, but shall continue in existence in perpetuity as a banking corporation with borrowing and lending powers, operating under the control of its class B and class C stockholders;

"(2) the members of the Board who are employees of the United States shall cease to be members of the Board, and the number of its members shall be accordingly reduced;

"(3) the following sections of this title shall no longer apply to the Federal Telephone Bank, its operations or its property: sections 601, 603, 604 (a) and (b), 607, and 609;

"(4) the following sections of this title, as modified by the provisions in this section 611, shall continue to apply to the Federal Telephone Bank, its operations and its property; sections 602, 604 (a), (c), (d), (e), (f), (g), 605, 606, 608, and 610.

"SEC. 612. Borrowers from the Rural Electrification Administration which have received loans under this section that have not been repaid shall have their operations, generating plants, electric transmission and distribution lines or systems subject only to the jurisdiction of the Administrator, and of State authorities even though any of these facilities and operations are involved in interstate commerce.

"SEC. 613. CUMULATIVE NATURE OF TITLE VI; AMENDMENTS THERETO.-Notwithstanding anything in this Act, powers and authority provided for in this title VI shall be cumulative, and nothing herein shall be deemed to limit powers and authority provided for in any other title of this Act. The right to repeal, alter, or amend this title VI at any time is expressly reserved."

SEC. 4. 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 Federal Bank for Rural Electric Systems and the Federal Bank for Rural Telephone Systems" immediately before the period at the end.

SEC. 5. The second sentence of subsection (d) of section 303 of the Government Corporation Control Act, as amended (31 U.S.C. S68), is amended by inserting "the Federal Bank for Rural Electric Systems, the Federal Bank for Rural Telephone Systems," immediately following the words "shall not be applicable to".

SEC. 6. This Act shall take effect July 1, 1966.

DEPARTMENT OF AGRICULTURE,
Washington, D.C., May 31, 1966.

Hon. HAROLD D. COOLEY,

Chairman, Committee on Agriculture,
House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: This is in reply to your request of March 30, 1966, for a report on H.R. 14000, a bill "to amend the Rural Electrification Act of 1936, as amended, to establish REA electrification and telephone loan accounts and Federal banks for rural electric and rural telephone systems to provide supplemental financing for the rural electrification and rural telephone programs, and for other purposes."

This Department is in full accord with the objectives of the bill which are the same as those contained in a similar Administration proposal sent to the Congress on April 13, 1966, and introduced in the House on May 3, 1966, as H.R. 14837. For the reasons stated herein, we recommend enactment of H.R. 14837 rather than H.R. 14000.

The following provisions are common to both bills. They provide for the creation of two Federal banks under the supervision of the Secretary of Agriculture, one for rural electric systems and one for rural telephone systems, to supplement the 2 percent loan programs now administered by the Rural Electrification Administration with other sources of financing.

Each bank will be managed by a board of directors which includes officials of the Department of Agriculture and representatives of electric or telephone systems. The REA Administrator will serve as the chief executive officer

("Governor") of each bank; the personnel and facilities of the banks may be drawn from REA or other agencies of the Department of Agriculture, without cost to the bank except for the administrative expenses obtained from the bank's borrowers on loans made at rates other than the "intermediate loan" rate.

Equity capital will be furnished each bank by the United States and by borrowers and elgibile borrowers from each bank. The Government investment in the banks' Class A capital stock would be furnished from "net collection proceeds" of the 2 percent REA electric and telephone loan programs. Stock held by the United States will be retired by each bank as soon as practicable. Borrowers from each bank will be required to invest 5 percent of their loan funds in non-dividend-bearing Class B bank stock, but such borrowers will be entitled to patronage refunds. Dividend-bearing Class C bank stock will be available for purchase by both borrowers and potential borrowers, and, in the case of the electric bank, by electric consumers of such actual or potential borrower (Class D stock).

Each bank is authorized to obtain borrowed funds through the sale of its debentures, up to 10 times the amount of paid-in capital and retained earnings (or surplus) of the bank. Treasury back-up will be provided for the payment of interest and principal on the bank's debentures.

Bank loans, not exceeding a period of 50 years, may be made to eligible borrowers at an “intermediate loan" rate, based on a formula relating to yield or interest rate on securities of the United States, but with an interest ceiling. Provision is made for loans at other interest rates. The purposes for which bank loans may be made include the same purposes governing REA 2 percent loans, as well as improving the efficiency, effectiveness or financial stability of borrowers' systems.

After the Government's investment has been fully retired by each bank, provision is made for the conversion of the bank to fully private ownership, control and operation.

The bills also establish Rural Electrification and Telephone Accounts into which will be transferred appropriations, assets and collections of the REA 2 percent loan programs and from which will come funds for the 2 percent loan programs, for the payment of principal and interest on loans from the Secretary of the Treasury for the 2 percent loan programs, and for Federal investments in the electric and telephone banks' Class A stock.

Enclosed is a listing of the significant differences between the bills and our comments thereon which support our view that H.R. 14837 provides the more orderly and effective program for the emergence of REA-financed electric and telephone systems from their present state of dependence on the existing two percent loan program.

The basic 2 percent 35-year REA loan authority would be retained unchanged under both bills. However, H.R. 14837 more clearly provides a progression from the basic loan program through intermediate bank loans to a bank loan program reflecting the full cost of bank operations. H.R. 14837 appropriately provides for Government control of the banks until the Government investment is retired. It permits Congressional supervision during the period of Government operation which is absent from H.R. 14000. H.R. 14837 also imposes a lesser burden upon the Treasury while providing sufficient Treasury support to make the supplemental financing program of the banks viable.

In this Department's letter of April 13, 1966, transmitting the Administration proposal to the Congress and recommending its enactment, we reviewed the background of and need for this legislation. We request that the contents of

that letter be considered as part of this report.

The Bureau of the Budget advises that there is no objection to the presentation of this report and that enactment of the provisions of H.R. 14837, as recommended herein, would be consistent with the Administration's objectives. Sincerely yours,

ORVILLE L. FREEMAN,

Secretary.

SIGNIFICANT DIFFERENCES BETWEEN H.R. 14000 AND H.R. 14837, PROVIDING SUPPLEMENTAL FINANCING FOR RURAL ELECTRIFICATION AND RURAL TELEPHONE PROGRAMS, AND U.S. DEPARTMENT OF AGRICULTURE COMMENTS THEREON

Amount of Government investment in Class A stock of the banks.-H.R. 14837 provides $50 million annually to the Electric Bank and $20 million annually to the Telephone Bank for fifteen years, for total investments of $750 and $300 million

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