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return on class A stock, administrative expenses, reserves and estimated losses. Intermediate loan rates will not be available to borrowers which are capable of both paying the higher bank rate and achieving Federal program objectives. The purposes for which bank loans may be made include the same purposes governing REA 2 percent telephone loans, as well as improving the efficiency, effectiveness, or financial stability of borrowers' systems; special limitations are specified in respect of bank loans for acquisitions.

The bill also establishes a rural telephone account into which will be transferred appropriations, assets and collections of the REA 2 percent telephone loan program and from which will come funds for the 2 percent telephone loan program and for Federal investments in the telephone bank.

Three substantive legislative objectives necessary:

This legislation is of major import. In our judgment the following overriding objectives should be sought:

1. A telephone bank which is capable of providing adequate debt capital at usable interest rates:

2. Built-in incentives to encourage eventual private ownership of the telephone bank by the telephone borrowers;

3. Sufficient latitude for telephone borrowers to meet industry responsibilities in the future.

Before closing, we would like to add our voice to those who advocate a dynamic rural development program for America. In our judgment, it has already started. Its future potential is unlimited. In such a program lies the solution to some of the problems that plague our large cities and urban centers. We believe in rural development—it is urgently needed. REA telephone companies are ready to continue to provide a basic requirement to that development, namely, modern communication, if they are furnished the tool of adequate financing. Without it, there can never be successful rural development.

Mr. Chairman and members of the committee, we again thank you for this opportunity to appear and testify. We hope we have been helpful.

The CHAIRMAN. Thank you very much, Mr. Peterson. That is a very helpful statement. I hope that this will tend to put this thing in proper perspective and that all those who are interested will understand that what this legislation will do will be to reduce the dependence of the industry on the U.S. Government, and while it will not completely move all the financing into private hands, it will partly move the financing into private hands and we hope an ever-increasing portion of the financing will be moved into private hands.

Are there questions? Mr. TEAGUE. Yes, I have one or two, Mr. Chairman. The CHAIRMAN. Go right ahead Mr. TEAGUE. Mr. Peterson, I gather from your statement that most of your membership consists of commercial corporations organized for profit, is that correct? Mr. PETERSON. That is correct, sir.

Mr. TEAGUE. How many company memberships do you have as a whole, in its entirety?

Mr. PETERSON. I would estimate approximately 175.
Mr. TEAGUE. 175 ?

Mr. PETERSON. Yes, sir.
Mr. TEAGUE. Are any of those cooperatives?
Mr. PETERSON. Some are cooperatives; yes, sir.
Mr. TEAGUE. About how many!
Mr. PETERSON. It would be less than 10.

Mr. TEAGUE. Roughly how many telephone companies, both cooperatives and commercial companies, are there in the United States as a whole?

Mr. PETERSON. There are 874, divided 642 for commercial companies and 232 of the cooperative type.

Mr. TEAGUE. So that by a considerable margin, most of these companies engaged in rural telephone business are companies operated for profit?

Mr. PETERSON. That is correct, sir.
Mr. TEAGUE. I think I only have one other question.

I want to get this in the record. You stated, I think quite correctly, in analyzing the bill that the expected total of $300 million to be invested by the Federal Government in class A stock will be retired by the bank as soon as practicable after June 30, 1984.

Mr. PETERSON. Yes, sir.

Mr. TEAGUE. Now, I am sure it is your intention and the hope of the proponents of the bill that it will be retired, but is it not true that as soon as practicable could mean never? There is no guarantee that the Federal Government will get this money back; is that not true?

Mr. PETERSON. I don't suppose there could be an "absolute” guarantee in this proposal. I could only point out for the committee's appraisal what has happened in the total REA program since its first inception, first as an REA Electric Act and, secondly, as a telephone section of the act. Whereas many people at the outset, in the early 1930s, felt that the REA program was going to be a complete boondoggle and that the Federal Government would never receive any of its loan moneys back, I think that the record has proved in an unquestionable manner not only the integrity of the people involved in the program, but their ability to carry through in accordance with the law of the land. I, therefore, see no reason why this rural telephone bank will not operate in the same efficient and laudatory manner.

Mr. TEAGUE. Well, I am sure that is your opinion. Mr. ABERNETHY. Will the gentleman yield to me? Mr. TEAGUE. Yes, I will. Mr. ABERNETHY. What do you base your statement on that in the beginning, there was an opinion that the probabilities are that the REA moneys would not be paid back, or that it would be a complete boondoggle?

Before you answer, I might say that I have read the hearings and debates on the creation of the REA, first the Executive order of President Roosevelt, and subsequently, the hearings of the Interstate and Foreign Commerce Committee, I believe it was, where the program was made a permanent, going program of the Government. There was not the least suggestion from any witness, as I recall, that the moneys would not be paid back. I think it was the faith that the Congress had in the ability of these people to pay back that accounted very largely for the enactment of the program.

Mr. PETERSON. Mr. Abernethy, in my statement, I did not mean to imply that there was a large-scale opinion to that effect, but in my own conversations over the years, I have been led to the conclusion that at the time the REA Act was proposed, there was serious doubt in the minds of quite a few people as to whether or not this was a sound proposal.

Mr. ABERNETHY. But that was not the general opinion?
Mr. PETERSON. No, sir.
Mr. ABERNETHY. Thank you.
Mr. TEAGUE. Just one more question, Mr. Chairman.

Mr. Peterson, do I understand correctly that you and the companies you represent are not proposing that the telephone bank, should Congress approve it, be a substitute for the present 2-percent loan program, but that it be an additional program, something extra? Is that correct? Mr. PETERSON. That is correct, sir. Mr. TEAGUE. No further questions.

The CHAIRMAN. May the Chair just comment on your statement there a moment? Mr. ABERNETHY. Yes, sir.

The CHAIRMAN. I think the record shows that there was only one witness who appeared when Congress approved the REA bill.

Mr. ABERNETHY. Yes.

The CHAIRMAN. And, obviously, there was not any general expression of opinion one way or the other at that time as to confidence in it. I think it is clear, as Mr. Teague points out, and as Mr. Peterson points out, that there were opinions at that time—there were all kinds of opinions at that time, just as there are now--as to whether this thing would work. Some did not think it would work at all. Others said it would be a great success.

But I would like to point out one or two further similarities or facts which I think ought to be considered in connection with that. In the first place, there has been almost $2 billion repaid by the rural electric cooperatives, is that not right?

Mr. PETERSON. I do not have the exact figures, Mr. Chairman, at the top of my head, but I think this is correct.

The CHAIRMAN. I think it is something like almost $2 billion that has been repaid by the REA to the Treasury.

Mr. TEAGUE. But that is the electric cooperatives.

The CHAIRMAN. That is the electric cooperatives, I would point out. I would also point out that the whole farm credit system on which this is based, of course, is now completely paid out. There is not one dollar of Government money in the whole farm credit system of the United States. The land bank has been paid out since 1948, or for 20 years. The intermediate credit banks and the banks for cooperatives were paid out the first of January this year and they are now completely farmerowned without any Government money whatsoever. They were paid out by exactly the same formula which we use here of allowing the banks to issue debentures and requiring the borrowers to buy at least 5 percent of stock in the case of each loan, which was used to pay off

Mr. TEAGUE. May I ask the chairman a question along that line ? The CHAIRMAN. Yes.

Mr. TEAGUE. If the poor old farmers with the terrible time they have had through the years are able to pay off these loans at a going rate of interest, why do we have to give the telephone companies a subsidized interest at 2 percent?

The CHAIRMAN. They did not pay it off at the going rate of interest. That is why we established the farm credit system. These institutions have always offered a rate of interest which has been 1 or 2 percent lower than the going rate. That is the reason they were able to do business.

Mr. TEAGUE. But when the current interest rate is—I suppose it is 6 or 7 percent, is it not?

The CHAIRMAN. Around 8 percent in my county. It is, of course, so high that I think we ought to realize that if we are going to base any normal projections on the current interest rate, if the interest rate should stay as high as it is now for the next 20 years, I think we would find a vast change in all American business. It would have to change in order to meet the present interest rates.

But the whole purpose of this whole cooperative credit has always been to enable them to provide credit and to do so at something less than the general interest rate. This would enable these telephone systems to borrow for something less than the present current interest rate, but the rate would probably be so high at the present time that I do not think it would have a great deal of effect, even with this legislation. As long as interest rates remain 8 percent, I do not think that anybody is going to be very anxious to put much risk capital into these kinds of investments, because they have to pay such a high return in order to pay that interest that they will probably not be profitable. And the higher your interest rates go, of course, the larger the amount of Government subsidy you have to put into any marginal enterprise if you want to make that enterprise operate successfully and do the kind of thing that we believe, or many of us believe, the rural electric and rural telephone systems have done for our country,

We have helped them because we found it a great deal cheaper to do this thing through the advance of credit than it was to have the U.S. Government go out and do it.

A great many governments of the world have themselves built electric lines and have themselves built telephone lines, and do themselves serve people, both rural and urban. We have felt that it was a good deal better for the Government to make it possible for private enterprise, whether cooperative or corporate, to carry on this business.

Again, I want to make it plain, because we do have at least two new members present today, a thing that has been repeated so many times that is so greatly misunderstood, that under both the electric and the telephone provisions of the REA setup, privately owned companies organized for profit have exactly the same opportunity and rights to borrow as do cooperative organizations. And on the telephone side of the REA, there have been more than twice as many loans to the companies that were organized for profit as have been to the Co-ops.

In the electric end, practically all of the money has been loaned to cooperatives simply because the electric companies decided long ago that they would not borrow from REA. It is a boycott on the part

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of the companies rather than anything in the law or the administration that prevents it.

There are actually nine loans that have been made, I believe. I believe nine is the correct figure that have been made to private companies, private electric companies, by the REA.

But I think it must always be remembered that this is a system which is available to the private companies on exactly the same terms and at the same rates as it is available to the cooperatives.

On the one hand, the companies have availed themselves; on the other hand, they have not.

Excuse me for taking up so much time.
Mr. ABERNETHY. We will excuse you. [Laughter.]

The CHAIRMAN. Having gotten excused, who else wants to ask a question?

Mr. PETERSON. Mr. Chairman, if there are no more questions, I do want to make one further statement before I leave the witness table. I know that the members of the committee share as much as anyone else the concern that most of us have for what is happening in our country. We are all trying to figure out ways and means of solving our problems.

This question of rural development which I have alluded to in the conclusion of the statement in a rather short manner does not mean that I do not have a tremendous concern about the possibilities that exist in rural America to develop it so much greater than it has been to date, and in so doing, alleviate some of the problems that face us in the large urban centers. Before any program of that type of development can ever begin to take place, you have to have some absolute essentials going for you first. You have to have modern electricity, you have to have modern communications, you have to have good highways. These are all very basic.

And I can tell you from my own personal experience what has happened in these communities throughout America which have provided modern telephone service to the areas around them. There are many REA telephone companies, for instance, in Mr. Zwach's congressional district. There are many in Mr. Sebelius' district. If you were to add up today all of the factories, all of the new schools, new hospitals and business enterprises that have gone into these areas where it was possible for them to go because these basics were provided, you would see an outstanding example of what can be done. And it is for this reason that the REA telephone companies throughout the land would like to continue the effort. But in order to do it, they simply must have more capital. And as much as many people like to equate the modern money market trend with just one of those things that happens and not too much can be done about it, the stark fact remains that no banker is going to be lending money to REA telephone companies for the kind of capital expansion that is needed here, with the kind of net worth that is behind them. It is for this reason that we hope that this solution will eventually evolve so that these companies can continue to build

Thank you very much.
The CHAIRMAN. Thank you.
Mr. TEAGUE. May I ask this one question?
The CHAIRMAN. Mr. Teague.

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