"(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, as 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 203 (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: Provided, however, That the terms "telephone service" and "telephone lines, facilities, or systems" shall, for the purposes of this section, be deemed also to include all types of community antenna television system services or facilities."

It is recommended that the following sentence be added to section 610(c): "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 II of this Act.

SECTION 612. CONVERSION OF TELEPHONE BANK TO PRIVATE, OWNERSHIP, CONTROL AND OPERATION

It is recommended that section 611 be changed to read as follows:

"SEC. 612. 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 VI, other than powers and authority arising from his membership on the Board pursuant to section 604 (b) shall vest twelve months thereafter in the Federal Telephone Bank and shall be exercized 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).

"(b) Until all class A stock has been retired by the Federal Telephone Bank, all sections of title VI, 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 Board 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 (b) and (c), 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), (d), (e), (f), (g), (h), 605, 606, 608, and 610."

This provides for the specifics of conversion to private ownership, control and operation as an added incentive to investment by borrowers.

Mr. FULLARTON. The National Telephone Cooperative Association serves the Nation in that it provides service to over one-half million establishments in 31 States.

I would like to shift the attention of the committee away from the REA electric power and to the REA telephone program. The telephone program is a tried and proven one. Although it is relatively noncontroversial and not much in the public eye, it has quietly made a significant contribution to rural American and to the economy at large.

There are two facts which probably best illustrate the reason and the necessity for the REA telephone program: system density and revenues of the borrowers. Telephone cooperatives serve 2.4 subscribers per mile of line as compared to the Bell System's in excess of 40 subscribers per mile of line. Telephone cooperatives realize annual revenues of $261 for each mile of line as compared to $2,300 per mile for other non-Bell, or independent companies. Comparable statistics for the Bell System are not available, although they are considerably higher.

Mr. POAGE. How much was the Bell?

Mr. FULLARTON. We do not know, sir. It is not available to us, The objectives of the REA telephone program have not been reached. Some 32 million rural establishments are still without telephone service. It is the position of this association that loan funds under the present 2 percent, 35-year terms must be continued if these objectives are to be achieved. We believe that language to the effect that "Congress finds that many telephone systems continue to require financing under the terms and conditions provided in titles I and II of the act and that nothing in any subsequent legislation shall be construed" should be included in the enacting clause of any supplemental financing legislation.

We find desirable provisions in all of the bills pending before this committee. We do not find, however, that all of the provisions of any of the bills meet the needs of rural telephone systems. Our specific recommendations are contained in exhibit A to my prepared statement. I will outline briefly our major concerns.

First, we believe that the specifics as to the conversion of the telephone bank to private ownership, control, and operation should be included in the legislation and thus support H.R. 14000 in this regard. We believe that section 610(b) (5) of H.R. 14837, page 37, lines 15 to 22, which defines telephone service is a mandatory part of any supplemental financing legislation.

The administration, we believe, has taken the proper course of ac tion in not continuing for the purposes of title VI the exclusion of loan funds for CATV. To clarify this point, the nature of CATV transmission system is such that it is more adaptable to many of the new

communications services becoming available, such as data transmission, than is the normal telephone network. To allow a competing communications system within the service territories of REA telephone borrowers is to make less feasible their already difficult operations. We believe, as does almost every operating telephone system, that it should provide all communications services in its service territory. Not to include this broadened definition of telephone service in supplemental financing legislation will prevent the telephone borrowers' growth and development, which this legislation is supposed to enhance.

Also, we predict that a significant part of the capital usable at market rates over the next 15 years would be used in this category. We would suggest to the committee that without this provision supplemental types of financing is not even appropriate for a large portion of the telephone borrowers. One further comment on this subject: The REA telephone program was necessary and was enacted in the first place partially because of cream skimming: that is, service to lucrative areas and not to others, on the part of large telephone companies. To preclude REA telephone borrowers from providing these services would be to encourage further cream skimming.

The intermediate lending program in the telephone bank is of great concern to telephone cooperatives. H.R. 14837 would establish 4-percent intermediate programs for both the telephone and electric borrowers. We are not knowledgeable as to the considerations that went into the administration's proposals for the electric borrowers, but we do know that there are significant differences in the financial conditions of the telephone borrowers. Their ability to absorb higher interest rates, and to continue to meet program objectives, and their ability to get other sources of capital are very much less.

For instance, telephone borrowers have debt as a percentage of total capitalization of 87.6 percent compared to the electrics' 75.4 percent. The present average interest coverage for telephone cooperatives is 1.67 plus, a position the electric borrowers occupied in 1952, some 14 years ago. We believe that a 3-percent intermediate program is absolutely necessary if any significant number of telephone borrowers are to be able to participate in it. We support the provisions of H.R. 14000 in this respect.

An adequate, realistic and usable intermediate lending program. of course, requires adequate funding. The volume of the intermediate program will be determined by the Administrator (under this legislation) according to the needs of the borrowers. But there are other factors which affect the allowable volume of an intermediate program, including the rate at which the bank must borrow money on the private money market, the amount of Government capital, and the intermediate interest rate. Our studies show that REA telephone borrowers will require $3.6 billion in debt capital over the next 15 years. We estimate that through borrower development 5 percent of the total capital requirements in 1967, increasing to 30 percent in 1982, could be used at market rates. The balance of the capital required, some $3 billion, would have to be obtained through a combination intermediate lending program and the present 2-percent, 35-year-loan program. We are recommending Government capital of $500 million for the telephone bank under the provisions of H.R. 14000.

I said a moment ago that our studies substantially agree with those of the firm of Kuhn, Loeb & Co. Here we have an exception to this. The total capital requirements estimated are approximately the same as made by them; however, you will hear later today, Kuhn, Loeb is recommending a Government capital of $35 million. They do this, because in making this recommendation they do contemplate an intermediate program.

As I said, we are recommending Government capital of $500 million for the telephone bank under the provisions of H.R. 14000. At an average market rate of 5 percent over the next 15 years, this could make approximately $14 billion available in the intermediate program. The balance needed would have to come from the REA 2-percent, 35-year program and would require annual appropriations of approximately $115 million per year. As you can see, even $5 million in Government capital does not leave any margin for error.

H.R. 14837 and H.R. 14000 contain different provisions for the makeup of the board of directors. In both bills, however, these provisions are the same for both telephone and electric. A board of directors structure that is equitable and offers fair representation to electric borrowers is not necessarily appropriate nor does it necessarily offer the same representation to telephone borrowers. We support the provisions for the telephone bank board which are contained in a bill introduced in the Senate which is very similar to H.R. 14000, S.

3337.

Our recommendations are all spelled out in detail in our prepared

statement.

Although great progress has been made in rural telephony in the last 17 years, the future will generate even greater demands on the Nation's rural telephone systems. To meet these demands will require adequate capital financing. Rural telephone is on the rise, but there is no guarantee that it will continue in the same direction. Those familiar with the history of rural telephone systems know that there were more farms with telephones in the 1920's than in the 1940's. The primary reason for this decline was lack of adequate capital to maintain and improve service. We don't want this to happen again and so support supplemental financing for REA telephone borrowers.

Mr. POAGE (presiding). I wonder if we will not save time by hearing the next witness, Mr. Eugene J. Harmon, director, USITA-REÄ telephone program?

But before hearing Mr. Harmon, the prepared statement of James L. Bass, general counsel, National Telephone Cooperative Association will be incorporated in the record as to follow the statement of Mr. Fullarton.

(The prepared statement of James L. Bass follows:)

STATEMENT OF JAMES L. BASS, GENERAL COUNSEL, NATIONAL TELEPHONE COOPERATIVE ASSOCIATION

Mr. Chairman, members of the committee, I would like to express my appreciation for being given the opportunity to appear before this distinguished committee, and to speak briefly on the accomplishments of the REA telephone program.

I know I speak for the people of rural Tennessee and no doubt residents of other parts of rural America when I say that the REA telephone program has

added another dimension to life on the American farm. The first phase of the REA telephone program-extending basic telephone service to rural residentsis almost 80% accomplished. The second phase, and undoubtedly just as important, is the extension of adequate telephone service to this part of the nation. At present, almost half the homes being served by REA borrowers are receiving 8 and 10 party service. As this committee knows, the telephone as a tool to modern living is an ineffective tool when it has to be shared with 8 or 9 other families. The subscribers who suffer most from this type of service are, of course, rural businessmen . . . farmers and ranchers. The telephone is as important to the farmer as it is to the merchant in the city. Indeed, in many cases it is more important.

With this in mind, I feel assured that this committee will come up with a legislative proposal that will take into account the communication needs of rural America, for both today and the coming years.

STATEMENT OF EUGENE J. HARMON, DIRECTOR, USITA-REA TELEPHONE PROGRAM, U.S. INDEPENDENT TELEPHONE ASSOCIATION; ACCOMPANIED BY HAROLD G. PAYNE, CHAIRMAN, REA BORROWERS COMMITTEE, USITA

Mr. HARMON. Mr. Chairman, and members of the committee, my name is Eugene J. Harmon, and I am director of the U.S. Independent Telephone Association-REA telephone program, and with me is Mr. Harold Payne, who is one of the board members of the board of directors of the U.S. Independent Telephone Association and also chairman of our REA borrowers committee.

The U.S. independent telephone industry operates in 49 of the 50 States and serves Hawaii and Alaska, as well as Puerto Rico and the Virgin Islands in their entirety.

The U.S. Independent Telephone Association has well over 1,000 member companies representing 92 percent of all of the independent telephones in the United States, and when I say "independent" I have reference to companies other than those in the Bell System.

The U.S. Independent Telephone Association has among its membership 420 REA telephone borrower companies, and of these 354 are commercial companies and 66 are telephone cooperatives.

It is important to know that the electric program has been in existence for 31 years whereas the telephone program has been in existence for only 16 years. As the result, the REA telephone borrowers have not reached the maturity, either financially or in the telephone area coverage.

Mr. Chairman and members of the committee, there are tremendous forces working in the United States to increase the growth of the telephone industry. For example, we have the population growth. The report of our Census Bureau indicates that 65 percent of these will be between the age groups of 18 and 25. These are our new homemakers, our new subscribers.

There has been a tremendous shift in population, not only geographically but from the urban to the suburban to the rural. And the usage habits of the American people, with regard to telephones has tripled due to the direct-distance dialing and other technical improvements, plus their own telephone usage habits. These usages increase and make obsolete the old 10- and 8-party lines. We have demands from new subscribers. We have tremendous demands for upgrading.