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The demand for service requires large amounts of funds to invest in new facilities, but the companies are not yet able to generate a large portion for these funds themselves. Neither is it likely that the REA will be able to supply their total future demand. Consequently, a method of obtaining supplemental capital is of vital importance for REA telephone borrowers.

The Kuhn Loeb report advocates the establishment of a separate telephone bank coupled with a vehicle to make available loans at an intermediate rate of interest which would have the effect of assisting companies who can afford to pay more than 2% interest but cannot afford to pay commercial rates.

The ideal solution to this problem of REA telephone financing from the standpoint of financial experts, the REA companies, the subscribers, and the government would be to:

(1) Make available 2% money where necessary

(2) Set up buffer between the commercial money market and the individual REA telephone borrowers in the form of a telephone bank, and

(3) An intermediate financing vehicle with interest rate less than that charged on the commercial market but at no additional cost to the government.

Both HR 14000 and HR 14837 now under consideration by this Committee would achieve these objectives with the additional advantage of eventually converting the financing of the REA telephone program from government to private control.

The passage of legislation involving the concept of intermediate financing and a separate telephone bank is vital if modern telephone service is to be part of the life of rural America.

For this reason the U.S. Independent Telephone Association strongly supports the passage of legislation which would supply the supplemental financing provided for in both HR 14000 and HR 14837.

Capital is the lifeblood of rural telephony. If it is in short supply, rural telephony will become anemic; without capital, it will die. We feel that the proposed legislation will supply the mechanism to provide the circulation of capital in sufficient amount to not only sustain life, but to provide for the health, growth, development, and advancement of rural telephony which in turn will provide communication service for rural America on a par with all parts of this country, despite the handicaps of rough terrain and sparsely settled areas. In addition, it has the desirable feature of eventually substituting private for government financing.

With regard to the major differences in HR 14000 and HR 14837, we would like to indicate which versions we support.

HR 14837 provides for seven members on the Board of Directors-four appointed from Agriculture, three non-government-all seven to be initially ap pointed by the Secretary of Agriculture. HR 14000 provides for ten members of the Board of Directors-five from Agriculture and five appointed by the President of the U.S. from among REA borrowers on a geographical basis. We support the provisions of HR 14000 in this regard because we feel that ten Directors are more desirable than seven and that further, the appointment of the minority of the Board by the President of the U.S. would give them added prestige.

With regard to capitalization provisions, HR 14837 provides for a total capitalization of $300 million at the rate of $20 million per year for 15 years. HR 14000 provides for a total capitalization of $250 million. However, the financial study made by Kuhn Loeb of the REA telephone borrower companies indicates that a total capitalization of $350 million would be the amount required to adequately finance the telephone bank.

The report as mentioned above shows that $3.5 billion will be needed over the next fifteen years. The $350 million total capitalization, therefore, assumes that the proposed telephone bank will be able to borrow up to the statutory limit of 10 to 1. We ask that the Committee raise the total, capitalization of the telephone bank up to $350 million.

HR 14837 requires annual authorization from Congress for the purchase of Class A telephone bank stock. HR 14000 does not require annual authorization to purchase Class A stock. We suport the provisions of HR 14000 in this regard. The requirements for annual authorization implies the possibility that it would

not be granted and might seriously hamper the ability of the bank to obtain sufficient funds in the commercial money market.

With regard to the retirement of Class A stock, we support the provision in HR 14000 indicating that this stock should be retired "as soon as possible" rather than the provision in HR 14837 indicating that Class A stock should be retired as soon as practicable after June 30, 1981.

As to Class C stock dividends, we support the provisions of HR 14000 which indicates that the dividends should be specified by the bank Board rather than the provisions of HR 14837 which limits Class C stock dividends by statute to the current average rate payable on the bank's telephone debentures. It would seem to be better banking procedure to leave dividend rates to the discretion of the bank Board rather than fix them by statute.

HR 14000 provides that the Class A stock shall be non-dividend bearing. HR 14837 provides that the Class A stock shall earn dividends to be paid into the miscellaneous receipts of the treasury. We support the provision of HR 14000 on the theory that if the Class A stock is non-dividend bearing, it can be retired at a more rapid rate.

HR 14000 sets a ceiling of 3% on intermediate loans while HR 14837 sets the ceiling at 4%. We support the 3% provision of HR 14000. The intermediate loan is designed to wean borrowers from 2% money to the bank rate of interest. It would seem logical that more borrowers would qualify for an intermediate loan at the rate of 3% than would qualify at an intermediate rate of 4%, leaving more 2% money available for companies having need for it and at the same time steering more borrowers in the direction of the financial maturity which would make them eligible to become borrowers from the bank. We feel the Committee should also consider vesting the Board of Directors of the Telephone Bank with authority to charge more than 3% interest where it is demonstrable that the borrower can afford to pay a higher rate.

We also support the provisions of HR 14837 which extends the definition of telephone service to include CATV. If our REA borrower telephone companies are to fulfill the objective of total communications, they must be authorized to provide this communication service. Due to the nature of television transmission,

its reception is usually limited and of poor quality in areas remote from the transmitter or blocked by mountainous and hilly terrain. These conditions are found most commonly in the rural areas served by our REA telephone companies. The statute that brought rural telephones to rural America by making it economically feasible should not be a vehicle to hinder the expansion of CATV into the same rural areas.

The bills differ at the point in time where control will pass from government to private control. HR 14837 provides that the transfer of control will occur after all Class A stock is retired. HR 14000 provides that the point of transfer of control will arrive, without further legislation, when the total of B and C stock exceeds the A stock. We support HR 14000 in this regard because we feel that it provides an opportunity for private control at an earlier point in time and will tend to stimulate private investment in the telephone bank as well as achieve the budgetary objective of getting the government out of the loan business as soon as possible.

Mr. Chairman and Members of the Committee, I wish to express our appreciation and the appreciation of the U.S. Independent Telephone Association's REA telephone borrowers for the opportunity to appear before the Committee and to urge that the supplemental financing legislation be reported favorably out of Committee and that it will be supported to successful passage.

Mr. POAGE. Thank you very much.

Mr. Olson will introduce the next witness, and then we will hear from the next witness.

Mr. OLSON. I would like to introduce to the committee Mr. A. Harold Peterson. He is a native of the State of Minnesota and both Mr. Quie and I know him. He is a distinguished former member of the State Legislature of Minnesota and now the executive director and counsel of the National REA Telephone Association.

We are very pleased that he is here to present testimony on behalf of the National REA Telephone Association.

Mr. POAGE. We will be delighted to hear from you now, Mr.

Peterson.

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

Mr. PETERSON. Mr. Chairman and members of the committee, I appreciate very much the introduction on the part of Congressman Olson. The hour having passed noon, I am not going to take any more of the committee's time other than what I feel is necessary. My name is A. Harold Peterson, and I appear here today in the capacity of executive director and counsel for the National REA Telephone Association.

At this time, Mr. Chairman, I shall ask that there be included in the record the statement which I have prepared and which has been given to the staff of the committee.

Mr. POAGE. Without objection, it will be made a part of the record at this point.

(The statement referred to follows:)

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

Mr. Chairman, Members of the Committee: My name is A. Harold Peterson and I reside at Chisago City, Minnesota. I am engaged in the practice of law at Chisago City and Minneapolis. Since 1955 I have been a director of the Chisago Lakes Telephone Company, an REA financed company, which serves eight small villages and the surrounding area in rural East Central Minnesota. I appear here today as Executive Director and Counsel of the National REA Telephone Association whose membership is comprised solely of REA telephone borrowers, mainly the commercial type.

On behalf of the members of the National REA Telephone Association may I say that we are grateful to the House Committee on Agriculture for your courtesy in permitting a personal appearance to testify, as well as to place into the record of your proceedings a prepared statement to support the passage of legislation which will provide supplemental financing for the REA telephone program.

EVENTS LEADING TO ENACTMENT OF REA TELEPHONE PROGRAM

A brief review of the REA telephone program since its inception in 1949 will, in our estimation, provide the background for a clearer understanding of the problems facing REA telephone borrowers today, as well as in the foreseeable years ahead. In 1949 much of rural America had already received electric service under the REA program. While this electric progress was being achieved, rural America was still being served by hundreds of antiquated telephone systems. For the most part they were either family owned or locally owned. In many instances, lines known as farmer switcher lines, owned by the farmers themselves, were connected to the small company systems. Twenty to twentyfive subscribers per line were prevalent in many rural areas. Service was less than adequate. Rural folks, in many instances drove their car into town to talk; they could no longer suffer such poor service from worn out and outdated rural telephone systems. On the other hand, America's cities and larger urban areas were gaining the benefits of modern telephony.

Having witnessed the successful experience of the REA electric program, the Congress in 1949, passed the telephone amendment to the Rural Electrification Act, stating "It is declared to be the policy of the Congress that adequate telephone service be made generally available in rural areas through the improve

ment and expansion of existing telephone facilities and the construction and operation of such additional facilities as are required to assure the availability of adequate telephone service to the widest practical number of rural users of such service."

From the date of inception of the REA telephone program to March 31, 1966, loans totaling $1,227,962,621 had been made to 848 companies in 46 states. 39% of America's farms had telephone service in 1949. Today 80% of America's farms have modern dial service, thanks to the financial and technical assistance furnished through the REA telephone program. Today over 2,000,000 subscribers receive telephone service as a result of this program. It is now abundantly clear that any future rural development is directly dependent on two basic requirements, electricity and telephone, without which, rural development can never succeed.

CREDIT REA FOR FIRST GREAT TRANSFORMATION IN RURAL TELEPHONY

Eight telephone subscribers per rural line was the standard set by REA when the program started. Upgrading of service from twenty to twenty-five subscribers per line to a limit of eight subscribers per rural line represented the first great transformation in rural telephony and REA can proudly take the credit for it. The second great transformation in rural telephony is now taking place, namely, upgrading of service from eight to four subscribers per rural line and, where economic feasibility can be shown, only one subscriber per rural line. The farmer is using this modern telephone system so much more than the old system of twenty to twenty-five subscribers per rural line, that the eight party line is now more difficult to get to use than was the old system.

As a result of this desire on the part of rural people for more and better service it is interesting to note that over 50% of all loan fund requirements for the REA telephone program for fiscal year 1966 will be used for upgrading of service. In this connection it ought to be stressed that the timetable for the Bell operating companies indicates that one party service will be furnished to 90% of their subscribers by 1975. Today less than 24% of REA telephone subscribers enjoy one party service. For REA telephone companies this means simply that in the not too distant years ahead the third great transformation in rural telephony will take place. When that day arrives every REA telephone subscriber in America can have one-party service.

COOPERATION BRINGS RESULTS IN TELEPHONE INDUSTRY

The rural REA subscriber who could not call his neighbor prior to 1949 can now reach 97% of the world's telephones. The question may be asked, how was this accomplished in such a short span of time? The answer is very simple. The finest of relationships exist between telephone companies to bring better communication to their subscribers. This includes the entire gamut of the industry from the giant Bell system to the smallest REA company. We know of no other industry where finer cooperation may be found.

Large and small telephone companies, working together, have brought about the finest telephone network in the world. We cite the following illustration as one among many: All number calling (ANC) permits a telephone user to call another person faster and more efficiently. REA recognized the benefits of ANC early; it is now the standard in the industry. ANC is a key factor in the international dial program. This type of progress is impossible without total industry cooperation. REA telephone companies are proud to be a part of this dynamic industry and want to continue to give more and better service to meet public demands.

HIGH DEBT CAPITAL NEED DUE TO SECOND GREAT TRANSFORMATION

Having briefly reviewed the history of the REA telephone program let us now turn our attention to the greatest problem facing this program today. It can be stated very simply. There is a very urgent need for adequate debt capital in order to accomplish program objectives. Here are the facts. The second great transformation in rural telephony, namely, upgrading of service, has resulted in a huge backlog of unapproved loan applications on hand which has reached an all-time high. On May 31, 1966, REA had 304 unapproved telephone loan appli

cations on hand totaling $199,987,000. The following is a breakdown of these applications by states:

Unapproved REA telephone loan applications on hand May 31, 1966

[graphic][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed][subsumed]

$24,544,000

At the end of this month Fiscal Year 1966 will be history. (remainder of fiscal year 1966 appropriation) is available to offset to some extent the nearly 200 million dollars of unapproved loan applications on hand on May 31, 1966 as cited above. However, more applications will be forthcoming during this month of June. We estimate there will be close to 190 million dollars of unapproved telephone loan applications on hand as we begin fiscal year 1967. This represents 68 million dollars more unapproved loan applications on hand than at the end of fiscal year 1965. The House has passed the REA telephone appropriation for the new fiscal year 1967 in the amount of 97 million dollars. The need for additional debt capital is extremely urgent.

CONTINUING NEED FOR 2% LOANS

Before embarking on a discussion of the supplemental financing proposals, it should be clearly stated that there is and will be a continuing need for 2% direct loan financing for REA telephone companies for some years to come. This program is only sixteen years old and the companies have not attained the degree of financial maturity found in the electric program. The following will illustrate the point:

Net worth of telephone borrowers as Percent of Assets December 31, 1964 (latest available figures)1

Negative net worth..
Less than 5 percent..
Less than 10 percent.
Less than 15 percent..
Less than 20 percent_
Less than 25 percent-

Less than 30 percent.
Less than 35 percent.
Less than 40 percent_

Less than 45 percent..

Less than 50 percent..

Less than 80 percent---

1 These figures would be virtually the same for December 31, 1965.

Percent of

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