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so doing, that the very urgent need for H.R. 7 will be clearly demonstrated.

Prior to the enactment of the REA telephone amendment in 1949, only 39 percent of America's farms had telephones. In the areas which were receiving telephone service, hundreds upon hundreds of small telephone companies were rendering poor service, in many instances, the service was next to nothing. The underlying cause for this condition is simple to explain. Most of these companies had their beginnings at the turn of the century, and within the following 20 years. By 1949, most of them were still using the original plant, which was getting to be 40 to 50 years old and wearing out. Meanwhile, telephony in the urban areas of America was making significant strides in terms of technological improvement. The time of physical and economic peril had arrived in the life of these rural telephone systems. They tried in vain to attract debt capital in the private money market. They found that broken down telephone plants, long outdated, did not provide the kind of equity that was attractive to either a banker or insurance company for loan purposes. It looked like a near hopeless situation for these companies, which, for the most part, were small, locally or family owned enterprises.

By the same year, 1949, much of rural America had received electric service under the REA program, which by that time had clearly proved its merit. 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

policy of the Congress that adequate telephone service be made generally available in rural areas through the improvement 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 services.

It is interesting to read the history of those early days. The program became effective on October 28, 1949. Within 30 days after the application forms and bulletins became available, REA had received 144 signed applications. In the first 90 days, ŘEA received 1,117 inquiries about the program from all over the United States.

When one considers the desperate conditions facing rural telephone companies in those days of 1949 and 1950, it is clear why there was this deluge of inquiries and applications for loans just described. After the program was instituted, a short period of uncertain but steady implementation followed.

Now, some 20 years later, it is of interest to note that from the date of inception of the REA telephone program to January 31, 1969, loans totaling $1,584,272,744 had been made to 869 companies in 46 States. Whereas in 1949 only 39 percent of America's farms had telephone service, today 80 percent have modern dial telephone service, thanks to the financial and technical assistance furnished through the REA telephone program. Over 2 million rural subscribers or some 6 million people enjoy the benefits of modern telephony.

It is of further interest to note that as of September 30, 1968, REA telephone companies have paid on their loans, principal in the amount of $165,120,976 and interest of $146,666,661. They have made advance payments of $21,334,650. To the question, are there any delinquent accounts, we are proud to say there are only six companies who are delinquent more than 30 days and the amount involved is only $134,597 of principal and $68,429 of interest.

When the Congress passed the REA telephone amendment, the day of dark despair for rural telephony was ended. The financial vacuum that plagued hundreds of small telephone companies throughout America began to be filled. The program has proved to be unusually sound and is a credit to the entire telephone industry and to the Congress who made it possible.

Eight telephone subscribers per rural line was the standard set by REA when the program started. Upgrading of service from 20 to 25 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. Although this was a giant step forward in the industry, you will be interested to know that 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 rural subscriber is using this modern telephone system so much more than the old system of 20 to 25 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 60 percent of all loan fund requirements for the REA telephone program for fiscal year 1969 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 percent of their subscribers by 1975. It is estimated that 52 percent of all REA telephones will be one party by 1975 compared to 29 percent today. REA estimates that in 1975 only 4 percent of the subscribers will be on eight-party service, compared to 36 percent today.

The rural REA telephone subscriber who could not even call his neighbor in 1949 can now call 97 percent 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 within the telephone industry to bring better communication to all of America. 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 wrought the finest telephone network in the world. We cite the following example to illustrate what we mean: All number calling (ANC) permits à 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.

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. On January 1, 1969, REX had 327 unapproved telephone loan applications on hand totaling $296,453,000. The following is a breakdown of these applications by States.

Mr. Chairman, I shall not read the breakdown of unapproved telephone loan applications by States. I merely point it out to the committee.

The CHAIRMAN. Without objection, it will appear in your statement. (The breakdown referred to follows:)


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4 4

9 9 1 11 8 8


7 $11, 350,000 Nevada.
1 173, 000 New Hampshire.
2 3,676,000 New Jersey -
9 6,047,000 New Mexico.
2 800, 000 New York..
4 1,676,000 North Carolina,

North Dakota.

4 7,359,000 Oklahoma..
8 5, 579, 000 Oregon..

1 350,000 Rhode Island.
9 3,619,600 South Carolina.
8 3, 506, 000 South Dakota.
14 6,160,000 Tennessee.
9 6,775,000 Texas.
8 11, 285,000 Utah..
7 7,909,000 Vermont.
4 2,667,000 Virginia.
1 2,000,000 Washington,

West Virginia
8 6,779, 000 Wisconsin.
26 23,665, 400 Wyoming-

4 6,002,000 Puerto Rico.
10 8, 349,000

8 4, 815, 000 Total.. 11 8, 591, 000


9 10 24 2

5,684,000 1,935, 000 5,012,000 15,554, 000 15,400,000

300,000 5,418,000 5,436,000 7,228,000 17,922, 000

8,082, 000 10, 420,000 23, 437,000 1, 160,000 4,690,000 2,746,000 1,400,000 25, 071, 000


4 7 1 30 3

327 296,453,000

Mr. PETERSON. The need for additional debt capital for the REA telephone program is extremely urgent. With the 296.5 million of unapproved telephone loan applications on hand January 1, 1969, added to the applications which can be expected for the remainder of this fiscal year, we are looking at a present debt capital requirement of over $325 million. If this need is not met in some manner, the problem will continue to be compounded. We cannot overemphasize the extremely serious position of the REA telephone borrowers in its need for more debt capital.

The financial plight of REA telephone companies has worsened over the past 6 years in spite of the fact that the amount of loan appropriations has increased. The following shows the level of appropriations for the years 1964 through 1969:

REA telephone appropriations

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Before embarking on a discussion of H.R. 7, the telephone bank bill, it should be clearly stated that there is and will be a continuing need for 2-percent direct loan financing for many REA telephone companies for some years to come. This program is only 19 years old and the companies have not attained the degree of financial maturity found in the electric program. The following will illustrate the point.

There, I should like to call the committee's attention to a table showing the net worth of telephone borrowers as percent of assets for December 31, 1967, which, incidentally, is the latest figures available.

You will note that 69 percent of the telephone borrowers have a net worth of less than 20 percent and 96 percent of them have a net worth of less than 40 percent.

(The table referred to follows:) Net worth of telephone borrowers as percent of assets, Dec. 31, 1967 (latest figures available)

Percent of Net worth as a percent of assets :

borrowers Negative net worth_

6 Less than–5 percent

19 10 percent--

34 15 percent-

53 20 percent-

69 25 percent-

83 30 percent.

91 35 percent.

94 40 percent

96 45 percent

98 50 percent

98 95 percent---

100 1 These figures would be virtually the same for Dec. 31, 1968.

Mr. PETERSON. Combining all REA telephone companies together, net worth as of December 31, 1967, was 15.1 percent of assets.

From the above table it should be noted that 96 percent of the telephone borrowers have a net worth as a percent of assets, of less than 40 percent. Note that 69 percent of them have a net worth of less than 20 percent. What chances have these companies got to go into the private money market and get their needed debt capital? The answer is obvious—they have little or no chance at any interest rate.


Now that we know what the urgent debt capital needs of today are, what about the years that lie ahead. We point out that in the previous record of this committee nearly 3 years ago there was testimony from competent sources, including REA, and the Kuhn, Loeb & Co. report, that the capital needs for the REA telephone program in the next 15 years would be over $3 billion. This is a stark contrast to the $1.2 billion of loan authorizations for the REA telephone program for the first 15 years. We concur in this appraisal of future capital needs for REA telephone borrowers. It is my personal judgment that this appraisal is on the minimum side. This need must be met. The question is how.

In discussions with the budget people, we had been advised that we cannot continue to rely solely on an annual congressional appropriation to meet the need. We verily believe it is necessary to seek a supplemental source of financing, above and beyond the 2-percent needs. It appears that the 1969 appropriation for direct 2-percent loans in the amount of $125 million will scarcely meet 38 percent of the $325 million need mentioned heretofore. In our judgment all of this money will be needed for 2-percent direct loans.

What about direct loans from the private money market? Can REA telephone borrowers find the answer there? It would appear not for two basic reasons. First, the United States has a first mortgage on these companies which virtually, precludes the private market from even considering such a possibility. Secondly, even though the United States would agree to subordinate itself to the position of a second mortgage, not many REA telephone borrowers could afford to go into the private money market due to their low net worth position outlined to you a moment ago. It would appear that the problem must be solved within the framework of the Federal structure within which these REA telephone companies now receive their debt capital.

We believe that the best solution in getting into the private money market lies in the establishing of a rural telephone bank within the structure of the U.S. Department of Agriculture. This concept is an essential ingredient in H.R. 7, and we support it. H.R. ? was not hastily conceived or concocted. It represents long study and thought on the part of the Department of Agriculture, the Rural Electrification Administration and by REA borrowers and their associations. It has been heard before this committee in two previous Congresses.

This bill creates a rural telephone bank, initially under the supervision of the Secretary of Agriculture and ultimately to be converted to the non-Federal ownership, operation and control of its borrowers.

Equity capital for the bank will be furnished by the United States by investment in class A bank stock, with 2 percent annual return, from the net collection proceeds of 2 percent REA telephone loans in amounts not exceeding $30 million annually until the Federal investment totals $300 million; and by borrowers from the bank who will be required to invest 5 percent of their loans in nondividend bear. ing class B stock. Dividend bearing class C stock will be available for investment by borrowers and potential borrowers. Class A stock. held by the United States will be retired by the bank as soon as practicable after June 30, 1984.

The bank is authorized to obtain borrowed funds through the sale of its debentures, up to eight times the amount of paid-in capital and retained earnings of the bank. Debentures will not be guaranteed by the United States. Until conversion to borrower control, Treasury approval of debenture issues is required.

Bank loans, to be fully amortized over a period not exceeding 50 years, may be made to eligible borrowers: (1) until June 30, 1984, or until bank conversion, if earlier, at an intermediate loan rate, reflecting the current average market yield on marketable securities of the United States having comparable maturities, but with a 4-percent interest ceiling; or (2) at an interest rate reflecting the average cost of moneys to the bank, including interest on the bank's debentures,

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