Mr. HAGEN of California. What is "area coverage"-that is a new phrase.

Mr. FULLARTON. To serve everybody in the service area.

Mr. HAGEN of California. Take the case of the State of California. Is the whole State divided up by some public agency into service areas?

Mr. FULLARTON. That is what we mean when we say that we have territorial integrity.

Mr. HAGEN of California. So that when you get into an area that is unserved you have to take the whole area?

Mr. FULLARTON. Or we cannot get an REA loan.

Mr. HAGEN of California. Or you cannot get the loan. That is one of the considerations that probably made it unattractive to the private companies.

Mr. FULLARTON. It is true in the telephone business, to a certain extent. The cooperatives have only added 2.4, while the commercial borrowers have added slightly in excess of 5, showing that when they go in they could go in with REA money, and when they did that, they did use REA money, but they still left an awful lot of territory unserved.

Mr. HAGEN of California. Have the private borrowers had any more difficulty in getting loans from the REA out of this rather limited fund?

Mr. FULLARTON. Not to my knowledge. The cooperatives have used approximately 36 percent of the loan funds loaned, whereas the commercial borrowers, or the cooperatives, represent something like 28 percent of the total borrowings. The cooperatives are a little bit larger on the average than the commercial and more willing to go out and serve everybody they can get their hands on.

Mr. PETERSON. I would like to make one further comment in relation to Mr. Hagen's question, and that is that there is a historical reason why there are more commercial REA telephone borrowers than there are cooperatives. That goes back to the turn of the century when most of the little telephone companies were formed. We used to have hundreds upon hundreds of them at the turn of the century and soon thereafter. And when 1949 came along this outdated kind of system was practically withering on the vine, and with new technology coming in, something had to be done, and when they could not go to the private money market for their money, this is when the REA program came into the picture and provided this wonderful opportunity to serve.

In spite of the advances that they have been made in the REA telephone program in the last 15 years we should not, by any stretch of the imagination, feel that suddenly we can go into the private money market as some previous witnesses have indicated can be done on the electric side of the REA program. The simple facts of life are that 99 percent of all of the REA telephone borrowers today have a net worth as a percentage of total assets of less than 40 percent. And the average American banker will take a dim view of making any loan under those kind of circumstances.

Mr. HAGEN of California. I want to say that you have made a better case than your counterpart in the electric REA end. You have made a better case, because the load factor on the average farm has gone up

so that they are pretty good customers today whereas he can probably only use one telephone. You have presented a better picture, whereas in the electric end of it, because of the farm technology change and the increased use of electricity on the farm, they have had an increased opportunity to offset the effect of a small number of customers per line. Mr. PETERSON. Our financial maturity is, of course, one half as much in terms of years as electric side, and it is hoped as we progress and we are all allowed to take part in the dynamic change which is occurring in the industry, that added revenues can be obtained and substantial financial footing finally achieved.

Mr. HAGEN of California. Thank you.

Mr. POAGE. May I suggest that not every witness will be heard before we recess at noon.

I will now recognize Mr. Olson.

Mr. OLSON. I would like to attempt to clarify the position of the entire independent telephone industry. Are all of the independent telephone companies more or less rural? Do they exist in less favorable areas from a standpoint of profit and attractiveness?

Mr. FULLARTON. The independents, sir, no, sir. Companies like General and Continental are independent who serve very large areas. Mr. OLSON. I understand, then, that most of what you said does not pertain to those companies?

Mr. FULLARTON. No, sir.

Mr. OLSON. You are speaking in regard to the other companies that are basically rural, and though independent, they could not serve their areas without help.

Mr. PETERSON. I think this can be summarized very briefly by indicating to the committee that there are approximately 3,000 independent telephone companies in the United States. And of this number 848 are REA telephone borrowers. In considering their financial ability, Mr. Fullarton has already pointed out that the cooperative type REA companies have a density per mile of about 2.4 subscribers. The commercial (private) type borrowers in the REA program have somewhere between 4.5 and 5 subscribers per mile. But if you take the whole independent telephone industry, the subscriber per mile density is approximately 15.

Then if you go to the Bell System, they have over 40 subscribers per mile.

I hope that gives the committee an indication of where we sit in this financial ability picture.

Mr. OLSON. One other question. I would like to expand on Mr. Hagen's line of questioning regarding why there are more commercial or noncooperatives in the telephone areas. Do you have any trouble with the cooperatives or the people trying to form a cooperative where you are providing adequate service through a private commercial company?

Mr. PETERSON. One of the prime reasons-as a matter of fact, I would say the prime reason, we have no trouble is that in the telephone industry today there is territorial integrity. The regulatory commissions of every State except two determine who shall serve where. This is the reason the finest relationships exist in the telephone industry from the giant Bell Telephone System, on the one hand, down to the smallest telephone company.

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Mr. OLSON. What about the customers? Are they asking for anything but good service? Do they want to change the structure by which that service is provided to them, or are they primarily concerned about the service?

Mr. PETERSON. They want better service. They all have said better service.

The CHAIRMAN. Thank you very much, gentlemen.

I will now call Mr. Harlee Branch, Jr., president of the Southern Co.

STATEMENT OF HARLLEE BRANCH, JR., PRESIDENT, THE SOUTHERN CO., ATLANTA, GA.

Mr. BRANCH. Mr. Chairman and members of the committee, I have a prepared statement which I would like to ask permission of the committee to be inserted in full in the record as if read. I am going to undertake to briefly summarize that statement in the interest of time.

The CHAIRMAN. Very well, it will be made a part of the record at this point.

(The statement referred to follows:)

STATEMENT OF HARLLEE BRANCH, JR., PRESIDENT, THE SOUTHERN Co.

Mr. Chairman: My name is Harllee Branch, Jr. I reside in Atlanta, Georgia. I am President of The Southern Company, which through its four operating subsidiaries (the Alabama, Georgia, Gulf and Mississippi Power Companies) supplies electric power to nearly two million farm, residential, commercial and industrial customers in most of the State of Georgia, four-fifths of the State of Alabama, the southeastern quadrant of Mississippi and the so-called panhandle section of northwest Florida.

I appear today to express my serious concern over the adverse impact which the bills being considered by this Committee would have not only on the investors, employees and customers of our system companies and of other investor-owned electric companies, but also the mischievous consequences which would flow to the entire national economy of which our industry is a significant part.

Since the three bills under consideration by this Committee are in essence quite similar, my remarks will apply to all of them although, in my testimony, I shall be referring particularly to H.R. 14837.

In my judgment, these bills represent the most serious threat to the continued growth and viability of the investor-owned electric utility industry in its history. I have been a part of that industry for the past 35 years. I am proud of what that industry has done to help make America the most productive nation in the world.

I have no quarrel with rural electrification, and no quarrel with REA co-ops so long as they fulfill the functions and adhere to the conditions prescribed for them by the Congress. Indeed, our companies were pioneers in the field of rural electrification and today I would suspect that we serve proportionately as many farm and rural customers as almost any investor-owned electric system in the country; and through our wholesale contracts with co-ops and the wheeling arrangements we have made with the Southeastern Power Administration, we probably deliver more power and at lower prices for farm and rural consumption than many governmental organizations specifically created for that purpose. As a purely personal footnote, it may interest you to know that as a young lawyer in the 1930's, I assisted counsel for the REA in drafting the Georgia Rural Electrification Act, one of the first and most liberal state statutes designed to promote rural electrification ever enacted in our country. That statute is the basic Act under which rural electric cooperatives were established and have prospered in my State.

My objections to H.R. 14837 and the other bills now pending before this Committee can be stated quite simply as follows:

(a) These bills will not bring electric power to a single customer not already being served or capable of being served either by a tax-paying, investor-owned electric company or a co-op or other publicly-financed power organization;

(b) These bills will not remedy any power shortage in the U.S., for there is no power shortage in this nation. More than 98% of all U.S. farms are now electrified and our nation enjoys a substantial power surplus. The U.S. has always been the world's most abundantly electrified nation;

(c) These bills will not eliminate governmental subsidies and tax-exemptions in favor of co-ops and other so-called "public power" groups or reduce their dependence on tax-financing, as has been claimed by proponents of the legislation, but on the contrary will greatly expand and enlarge that dependence;

(d) These bills will not help to balance the federal budget or reduce deficit financing but, in a real sense, will increase the imbalance and add to the deficits;

(e) What these bills will do is effectively eliminate Congressional control over REA and its lending policies, and create a federal bank of unprecedented scope and resources not to finance "rural electrification" but electric service to every type of electric consumer-industrial and commercial as well as residential-in direct competition with investor-owned, tax-paying, governmentallyregulated electric companies; thereby endangering billions of dollars of private savings invested in those companies, the livelihood and retirement benefits of hundreds of thousands of their employees and the fiscal position of towns, counties and states in which the taxes paid by these companies are a major tax

resource.

It seems to me that the Congress would be reluctiant to enact legislation, which without remedying any present or foreseeable need and without curing any inequity, would nevertheless launch our government into an unparalleled competition not only with investor-owned electric companies but with private banks as well; endangering not only the individual savings of millions of Americans and the private employment of hundreds of thousands of other citizens but also posing a serious threat to the nation's overall economy.

Our companies and the several hundred other companies which comprise the investor-owned electric utility industry represent, indeed, a significant and vital segment of the national economy. Our industry's present investment in electric plant is over $60 billion and that investment, unless inhibted by disruptive though well-intentioned legislation, is expected to grow to $88 billion by 1970 and $176 billion by 1980. My company alone has invested nearly $2 billion in power facilities in the Southeast-most of it in the two decades since World War II. No other single organization, public or private, has poured as much capital into productive resources in our four-state service area-and every dollar of our investment has been supplied by private citizens out of their individual savings.

The total net capital investment of investor-owned electric utility companies today constitutes approximately 12 percent of all capital invested in U.S. business and, according to the latest available figures, some 4,000,000 Americans are the direct owners of these companies-making them one of the most publicly owned enterprises, if not the most, in the nation. In addition, more than 120,000,000 Americans have a substantial investment in electric utility securities as indirect investors through their holdings of life insurance policies, investment fund shares, pensions, and savings bank accounts. Among our investors are hospitals, universities and numerous other eleemosynary institutions.

Let there be no mistake about it: Anything that endangers the viability and survival of this investor-owned industry will directly and adversely affect all these millions of our citizens and someday, I trust before it is too late, they will want to know why.

A previous witness has pointed out specific ways in which the proposed legislation poses a threat to our industry and the extent to which it will increase, rather than diminish, the reliance of public power groups on government subsidies and government financing. To say that this legislation is designed to eliminate 2% interest rates or to assume that it will affect the tax exemptions and other governmental favors currently enjoyed by some 20% of the nation's power consumers-many of them industrial and commercial-as against the 80% served by our industry, is ridiculous. The plain language of the bills-and the repeated statements of those in the co-op and public power movements primarily responsible for the pressure to enact this legislation-makes that abun

dantly clear. What is being sought here is the perpetuation and enlargement of the existing subsidies, with greater freedom from Congressional restraints so as to expand the operations of these organizations into every category of the electric power business in direct duplication of investor-owned services and facilities.

Such duplication has occurred already, and is presently being pushed forward. I can tell you, from personal experience, that when it occurs it results in a real, not an imaginary, loss to investors. I recall, for example, that in Mississippi some years ago one of our operating companies was compelled to sell a large part of its facilities at fifty-cents on the dollar of actual investment when confronted with the threat of governmentally-subsidized and tax-favored competition.

I think no one in our industry would oppose real private financing for co-ops and other public power groups, provided such financing was on the same basis and subject to the same tax, regulatory and other public responsibilities as those imposed upon our companies. This legislation does not do that, and in my opinion, any amendments truly aimed in that direction would be quickly condemned and unremittingly opposed by those who now clamor for passage of these bills. Mind you, I am talking about amendments of the sort that would really take these organizations off "the taxpayers' back" and make those of their customers not truly "rural and farm customers", in the sense intended by the Congress, bear the same tax burdens as the 80% of Americans served by the investor-owned companies. It is my conviction, and I believe it is shared by some devoted co-op members, that if this legislation should pass, launching the publicpower groups into even greater subsidized competition with investor-owned companies-with virtual freedom from Congressional controls-there will come a day when the great body of American voters will demand that these organizations be stripped of their unwarranted subsidies and preferences. Unfortunately, such a demand may come too late to avoid the loss of savings invested in our companies and too late to prevent unhappy consequences to the national economy. When it comes, as I think it surely will, it may result in removing the legitimate aids and subsidies which the Congress originally intended should be made available to farm and rural consumers having no central station electric service available to them.

That the Rural Electrification Administration has departed from the original concepts of the REA Act is well known to members of this Committee. Over the past several years, under a veil of secrecy, without any clear demonstration of need or compliance with the plain intent of the Act, the percentage of loans made for generation and transmission facilities has increased drastically. For example, the Rural Electrification Administrator reported to the Secretary of Agriculture in 1965 that loans for distribution purposes in that year-the kind of loans apparently consistent with the original intent of the REA programamounted to 150.4 million dollars; whereas loans for generation and transmission facilities amounted to 229 million dollars, or more than 60% of the total. Generation and transmission loans have comprised an increasing percentage of total REA loans in the last five years in spite of an observation made by the Comptroller General of the United States in his November, 1963, report to the Congress, to the effect that "federal expenditures under the (REA) electric loan program could be reduced without adversely affecting the accomplishment of program objectives."

As this Committee knows, the basic 2% REA loan program was designed to extend electricity to persons in rural areas not receiving central station service. Over the years Congress has consistently questioned the use of these loans to finance steam plants and high voltage transmission lines where power is available at reaonable rates from other sources. The bills now before this Committee, establishing the potentially largest Federally-owned banking institution in history, would provide the Administrator, as the Governor of that bank, with power to nullify Congressional intent by using funds made available to the Bank to duplicate the facilities of investor-owned companies, even perhaps to finance a so-called Yankee-Dixie generating and transmission grid covering the Eastern Seaboard of the U.S. from New England to Florida. No need has been demonstrated for such additional funds and nothing could be more completely unnecessary and wasteful.

In view of the subversion of Congressional intent through the administrative addition in 1961 of a so-called and all-embracing "third criteria" that loans