On the other hand, however, there is no requirement for low-cost loan financing in populous and prosperous areas. In these instances, it is clearly feasible to provide adequate telephone service because the revenues will support loans obtained from conventional private

sources.

There is a middle group between these two extremes, however, where the telephone companies cannot finance the construction of adequate facilities through conventional private sources. Consequently, these companies are confronted with the dilemma of sacrificing the quality of their service or of jeopardizing the financial stability of their business. On the other hand, the needs of these companies are not so great as to warrant granting them the full Government subsidy of 2 percent REA loans.

Many of the companies in this middle group have borrowed large sums from the REA because they were unable, and in some cases unwilling, to obtain all of the funds they required from private sources. A large portion of these funds would undoubtedly have been borrowed from private sources if only that portion of their property for which the REA loan was obtained was required as collateral for that loan. rather than all of their property. The amounts Congress appropriates for 2 percent telephone loans could be much smaller if these companies were not, in effect, "locked in" to REA financing.

The ease with which companies in this middle group have been able to obtain 2 percent REA loans has enabled some of them to purchase and install modern telephone plant and equipment solely for the purpose of converting their companies into salable commodities in a "sellers market". Aside from the fact that the existing REA loans continued after the companies were sold, additional 2 percent loans were obtained by the acquiring companies.

The advantages of 2 percent debt money in the capitalization of a highly leveraged company are obvious. The amounts of loan funds Congress is asked to appropriate would be greatly lessened if all companies were required to make full use of their abilities to obtain private capital to meet the needs of their operations and of the oper ations of any companies they own.

The annual requirements for telephone loans could be further reduced if REA borrowers were not required, as conditions of receiving an REA loan, to provide facilities for higher grades of service than the standards established by the regulatory authorities in the various States or, for that matter, a higher grade of service than the telephone subscribers want. It goes without saying that this results in higher rates than the economies of the areas can reasonably support. Some such companies find themselves required to borrow much more money than they need, and to install more facilities than necessary to meet their service requirements. Greater emphasis on meetin real telephone service requirements at the lowest practical cost would reduce the amount of REA loans required even by companies with a justifiable need for 2 percent money.

The elimination of this and the other shortcomings we have mentioned would substantially reduce the amounts that Congress is asked to appropriate for the REA telephone loan program. Correction these faults in the telephone loan program would require changes i both the act and the administration of the act. It would be impractica in our estimation to attempt to make the necessary corrections by amending the act to prescribe the loan procedures in detail.

We believe that the needed corrections can best be made through passage of H.R. 12066 provided the following three basic considerations are incorporated in the bill: (1) to insure that the proposed rural telephone bank is oriented toward the segment of the telephone business it is designed to serve; (2) to insure that the telephone bank's loan policies and conditions will be established by people who have knowledge of the public purposes and obligations as well as the economics of the telephone business; and (3) to insure that the telephone bank will be independent of the need for Government funds at the earliest possible date.

To incorporate these three basic considerations, we urge the Committee to adopt certain specific changes in H.R. 12066. We firmly believe that the changes which we now recommend will clarify and I facilitate the intent of the bill and overcome the weaknesses in the present telephone loan program:

1. Preamble, page 1: We believe there may be fewer telephone companies actually requiring financing under title II of the act than is indicated by loan requirement studies available to the committee. We suggest the Preamble be changed by substituting the word "some" for the word "many" in line 9.

2. Section 302(b), (1), page 4: We suggest that it is the intent of H.R. 12066 that the REA Administrator grant section 201 loans only when the applicant cannot reasonably afford to borrow money from the rural telephone bank or pay the going rate of interest on telephone bank loans, whichever is applicable. Therefore, we suggest the intent of this bill can be clarified in lines 13 and 14, by striking out all of the last phrase, "the amounts so" and ending with "until expended."; and substituting in its stead the phrase, "and no such loans shall be made if the applicant for a loan under Section 201 can qualify under the policies, terms, and conditions established for rural telephone bank loans by the telephone bank board."

3. Section 403(b), page 8: The full administrative costs of the bank's activities should be borne by the bank. This can be made clear in line 10, by striking out the last two words, "without cost", and in their stead inserting, "and the cost of such facilities and services shall be charged."; and in line 11, by striking out the words, "without charge to", and in their stead inserting, "shall be"; and in line 13, by striking out, "but", and inserting, "and", in its stead. 4. Section 405(b), page 10: We believe Congress should give the President the right to select telephone bank board members from the Treasury, Bureau of Budget, Comptroller General, and other governmental departments, as well as the Department of Agriculture, in the interest of obtaining the most qualified personnel to assist in establishing and managing the bank. This would be accomplished in lines 3, 4, and 8, by striking out, "Department of Agriculture", and substituting, "Federal Government".

5. Section 405(d), page 11: We believe that the bank board representation should be in proportion to the relative number of commercialtype and cooperative-type REA borrowers. At present there are three commercial-type borrowers for every one cooperative-type borrower. We suggest the bill recognize this differential in:

Line 5, by striking out, "three", and substituting, "two", in its stead;

Line 8, by striking out, "three", and substituting, "four", in its stead;

Line 17, by striking out "three", and substituting, "two", in its stead; and

Line 20, by striking out, "three", and substituting, "four", in its stead.

6. Section 406(c), page 14: Hopefully, the full $300 million in class A stock will be subscribed by 1977, at which time, we believe, it is the intent of Congress to encourage the conversion of ownership, control, and operation of the rural telephone bank to the private sector of the economy. We recommend in:

Line 20, changing the date from "1982" to "1977";

Lines 24 and 25, and page 15, line 1, striking out "and after the amount of class A and B stock issued totals $400,000,000".

7. Section 406(c), page 15: To emphasize the intent of Congress to make the rural telephone bank self-sustaining, we believe the wording should be changed in:

Lines 3, 4, and 5, by striking out the remaining portion of the sentence after the word "income" on line 3, and substituting therefor, "at a rate determined by the Secretary of the Treasury, to equal the average market yield on marketable obligations of the United States issued during the month of May preceding the fiscal year in which the class A stock was issued."

8. Section 407, page 17: Because the telephone bank debentures would not be guaranteed by the United States, in our opinion it would not be in the public interest, or consistent with the intent of Congress to make the bank-self-sustaining, to permit investment of fiduciary, trust, and public funds in such debentures. It is our opinion that the language should be changed in:

Lines 20, 21, 22, 23, and 24, by striking our the last sentence beginning on line 20 with the words "Telephone debentures" and ending with the words "officers thereof", on line 24.

9. Section 408(a), page 18: We do not believe that either the Secretary or the Administrator should be put in the position of being the sole judge in determining whether the proposed acquisition of other telephone lines, facilities, and systems by an REA borrower with REA money would result in improving the efficiency, effectiveness, or financial stability of the resultant combined telephone system. We are convinced that it is in the best interests of all concerned to give the telephone bank board a voice in matters of such significance in order to prepare for an orderly conversion of the telephone bank to private ownership, control, and management. Even though we believe that as a matter of general principle no "acquisitions" should be made with money provided by the Government, we recognize that some acquisitions may sufficiently involve the public interest to justify financing them with loans under section 201 or section 408. Therefore, we suggest that this provision be clarified in:

Line 18, by inserting between "the" and "Secretary", the phrase "Telephone Bank Board and the", so that this provision will read, "the Telephone Bank Board and the Secretary".

10. Section 408(b), (1), page 19: Technical and economic obsoles cence are more pronounced now in the operation of telephone companies than in any other public utility industry. Despite this situation. REA loans today extend for 35 years, which is longer than the expected life of the property serving as collateral for the loans. If additional loans are made to finance replacement of obsolete equip

ment before the original loans on such equipment are repaid, the total of the original and supplemental loans will exceed the value of the borrower's plant and property. This situation already exists with respect to many of the present REA borrower telephone companies. H.R. 12066 provides for extending loans for even longer than 35 years. Therefore, we suggest amending this section in: line 5, by changing "50" to "35".

11. Section 408(b), (2), page 19: Experience indicates that private capital has been used profitably to furnish telephone service meeting the standards of the regulatory bodies in the various States, and reflecting the grade and quality of service desired by the subscribers even though the average subscriber density may be as low as three per square mile. One such case is specifically cited in exhibit 1.

I would ask you to turn to the exhibit which is on the backside of the testimony. This exhibit is of our own Pioneer Telephone Co., in North Dakota. I would like to briefly go through some of the highlights in this exhibit.

Line 1, the number of exchanges, the number is 10.

Line 2, we show the total area served in square miles. In 1950, it was 1,031; by 1966, this had increased to 1,291, and that is the square miles served today.

Line 3, the average subscriber density per square mile. In 1950, it was 2.4; in 1966, 3.3.

Under "Operations results", I would just like to point out a few items that will emphasize several things. First, it will emphasize the need that existed in 1950 for our REA program.

Looking down to the bottom you will see the rate of return: In 1950, it was 2.66. The plant in service, at the very top, was $388,959. Now, you will notice, going down to item 4, "Revenues" under "Operations results", the exchange revenue on a telephone basis per station was $34.15, and toll revenue was $6.27 per station, or $40.59 total for the station.

Now, we move over, going along the top line, and you will notice that the investment increased from $388,959 to $983,517 in 1955; to $1,282,789 in 1960, to $1,789,319 in 1965, and at the end of 1966, it was $1,908,356.

Going straight down under "1966", you will find that the total revenues per telephone in 1966 were $25.62. The difference between $6.27 and $25.62 is a very important factor as to the difference between independent telephone operations in rural areas in 1950 and in 1966. This $25.62 has made a great difference in our operations.

Now, to prove the point, look down to the bottom line and you will find that in 1955 we earned a rate of return on the rate base of 5.51, in 1960, the dial conversions were completed and we earned: 7.49; 7.66 in 1965, and 7.85 in 1966.

Also, I would like to call your attention to the importance of a good corporate citizen like this, even though it is operated in a relatively marginal area with 3.3 subscribers per square mile.

Under "Operating expenses", item 5, note the item "(c) Taxes". The taxes paid by the operation of 4,238 main stations was $95,330, or $18.28 per station.

I offer that as proof that a great change has taken place in rural telephony between the years 1950 and 1966.

(Exhibit 1 submitted by Mr. Bollinger is as follows:)

84-234-67- -3