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ing companies and some 290 manufacturer associate members. There are over 470 REA borrower companies which are members of the association, including some 70 which operate as cooperatives.
We have a broadly based board of directors comprised of some 30 operating company presidents or executive officers and including one cooperative member from the State of Minnesota.
Again, for the benefit of new committee members, I should like to say that this is the third year and the fourth time that our association has appeared before the Committee on Agriculture to support legislation which would provide supplemental financing for the REA telephone borrower companies in the form of a telephone bank with intermediate financing
For the record, our previous testimony in support of supplementāl financing in the form of a bank bill is to be found on pages 354 through 372 of the hearings before this committee on June 2, 1966. This testimony was followed by an appearance before the Subcommittee on Conservation and Credit of the House Committee on Agriculture on September 14, 1966, pages 32 through 46 of the hearings. Again on March 23, 1967, I appeared before this committee with the gentlemen who accompany me today, in support of supplemental financing through an RŁA bank bill. That testimony appears at pages 341 through 345 and 361 through 377 of the hearings before the Committee on Agriculture in the 90th Congress, first session, on H.R. 1400, et cetera.
Finally, I appeared before this committee on August 24, 1967, again to support the broad objectives of an REA bank bill with intermediate financing. In that last appearance I was in the unhappy position for a trade association executive of being required to comment on some amendments proposed by certain of our member companies, which amendments differed in some respects from the position taken by the association's board of directors. This is never a happy position for a trade association executive.
But today I am very pleased to be able to report to the committee that whatever differences existed at the time of that last experience have now been resolved and the independent telephone industry is able to present a united front in favor of the passage of H.R. 7. In a moment I shall detail three simple amendments to the bill which our association proposes.
The long record of hearings before this committee on a telephone bank bill is replete with evidence of the great need for supplemental financing for REA companies. If there were not seven new members on this committee I would deem it unnecessary to even mention this need. Very briefly, there exists at the beginning of fiscal year 1969 a backlog at the Rural Electrification Administration of some $300 million in telephone loan applications. During fiscal year 1969 an additional $200 million in new loan applications is anticipated. To meet this estimated and resultant $500 million in loan requirements there exists only $125 million in direct appropriations from the Congress. So you see, we are like the boy who tried to climb out of the well, advancing 1 foot every day and falling back 2 feet every night.
Unhappily the REA-financed companies have found it difficult, if not impossible, to obtain supplemental money in the commercial markets because of low equity status and a first mortgage on their exist
ing property and property to be acquired which first mortgage is held by the Government of the United States. If something is not done to relieve the money shortage many of these companies will face financial starvation.
We think that H.R. 7 is the best vehicle yet devised to make available to REA borrowers supplemental financing at interest rates they can afford to pay. It will relieve the pressure on direct appropriations and remove an economically unconscionable situation where, under present law, borrowers who can afford to pay a much higher rate of interest pay only 2 percent, because that is all the law allows. Let me hasten to add that many REA borrowers can afford to pay more than 2 percent and are perfectly willing to do so. I might suggest that if there are any questions on this score that they be directed to Mr. Payne, the chairman of our association's REA Borrowers Committee, or Mr. Wilbourn, the chairman of our association's committee on legislation, both of whom are REA borrowers.
Now, as to the three amendments we wish to propose for the consideration of this committee. We are, as I have already stated, a trade association and our policy on all legislative matters is set after consideration in depth by our board of directors. This board represents small companies as well as large when formulating policy for the whole industry. The number of stations represented by the board's individual members varies from 1,000 in rural Wyoming—that happens to be Mr. Howard Woody—to over 8 million telephones in the case of our largest member, General Telephone & Electronics.
Incidentally, as a point of interest for the committee, that 8 million telephones of General Telephone & Electronics represents about the same number of telephones as they have in Soviet Russia to serve 230 million people.
The member on our board representing the largest company has no greater voice in the formulation of policy than the member representing the smallest.
The first amendment relates to the question of representation on the bank board by telephone company representatives. The present bill at page 11, lines 5 to 10, arbitrarily and artificially prescribes that the telephone representatives shall be split three and three between cooperative type entities and commercial type entities.
Such an artificial provision is wrong in principle and will not assure that the best experienced men in the industry will be available to serve on the bank board.
We in the United States Independent Telephone Association feel a respectable case could be made if we wanted to establish artificial limits for putting four or five commercial type entities on the board as opposed to two or one cooperative type entity. The facts are simply that 75 percent of the REA telephone borrowers are commercial type entities and only 25 percent are co-ops. The arithmetic is inexorable.
We do not, however, Mr. Chairman, propose such artificial provisions as exist in section 405(d) at lines 5 through 10, because we think they would not yield the best men for the board. Any board for a telephone bank should be made up from the best and most experienced men in the industry regardless of whether they happen to work for a commercial borrower or a co-op borrower.
I have yet to hear any reason bottomed in logic advanced by any witness or by any member of this committee which justifies this artificial provision.
USITÀ recommends that H.R. 7 be amended to provide that the members of the board of directors of the telephone bank be elected without reference to whether they be commercial or cooperative type operation. This can be accomplished-I will not go into the technical details of amendment, but we have one which would simply eliminate that language and allow these people to be selected regardless of the type of entity they are.
This can be accomplished by striking in H.R. 7 all of the words after “a two-year term” on page 11, line 5 through line 10, ending with the words "by such entities”, on line 10 and again on page 11, line 17, after the word "stock", and by striking lines 18, 19, 20, 21 and 22 in their entirety. Sections 405(d) and (e) will then read as follows:
Section 405(d): Within 12 months following the appointment of the six members of the initial Board as provided in subsection (c), the Governor of the telephone bank shall call a meeting of all entities then eligible to borrow from the telephone bank and organizations controlled by such entities for the purpose of electing members of the Telephone Bank Board. Each such entity and organization shall be entitled to notice of and shall have one noncumulative vote at said meeting. Six members of the Telephone Bank Board shall be elected for a two-year term. These six members shall be elected by a majority vote of the entities and organizations eligible to vote and such entities and organizations may vote by proxy.
Section 405(e) : Thereafter, in accordance with the bylaws of the telephone bank, the six members of the Telephone Bank Board shall be elected by holders of Class B and Class C stock. These six members shall be elected by majority vote of the entities and organizations eligible to vote and such entities and organizations may vote by proxy.
The second amendment which the United States Independent Telephone Association once again proposes relates to the rate of interest to be charged for the so-called intermediate loans. Our board of directors has many times considered this particular provision and feels that the present provision of H.R. 7 in section 408(b)(3), line 24 of page 19, which sets up an interest rate for intermediate loans in the alternative, that is to say, a rate reflecting the cost of money to the Government or 4 per centum per annum, whichever is lower, is neither necessary nor desirable. We are convinced that pegging the intermediate interest rate to cost of money would make more money available for loans from the intermediate fund. Furthermore, it would remove the entire operation of the REA telephone bank from a charge of Government subsidy insofar as interest rates are concerned.
In order to accomplish elimination of the alternate language in section 408(b) (3), we recommend that a period be substituted for the comma after the word “loans,” in line 24 on page 19 and that the words following the word "loans," "or (ii) four percentum per annum, whichever is lower," be stricken from the bill.
The third and last amendment which our association wishes to propose relates to an issue which more than any other has caused up to this time a lack of unanimity in our industry, the independent telephone industry, in support of supplemental financing. I believe everyone in
our industry is convinced of the need for supplemental financing but some of them have not been convinced, up to this point, that creation of the bank would relieve the pressure for direct loans at 2 percent. When I say "relieve the pressure," I mean the pressure on the REA to grant such loans, the pressure on the House Appropriations Committee to continue to provide increased levels of appropriations for 2percent loans, and pressure on individual members of Congress to make a case for such loans for their constituent companies.
All we want in substance, Mr. Chairman, is a provision in this bill which will eliminate 2-percent money as a source of financing for all except those who can show cause that they cannot afford to borrow from the bank this bill would create.
My colleague, Mr. McCarthy, will have more to say about this when he testifies.
We believe that a simple amendment to section 302(b) (1) of the bill would accomplish the purpose we seek. We would simply add after the word "Act,” in line 12 of page 4, the words "and no such loan shall be made if the applicant for a loan under section 201 can qualify under the policies, terms, and conditions, established for the rural telephone bank loans by the Telephone Bank Board."
We think this would mean that companies which can afford to borrow at bank rates of interest would be forced to do so, leaving the 2-percent money for the very low density, low equity companies eligible to borrow directly from the REA.
Mr. Chairman, this completes my testimony, but we would be happy to answer any questions which you or the members the committee
The CHAIRMAN. We are very much obliged to you, Admiral Mott, for this informative statement and we appreciate the suggestion of the amendments.
Of course, you are aware that the committee discussed a great many amendments last year and the bill which is now pending is the compromise which was reached last year in connection with all of these matters.
I think there is a good deal of merit in some of the amendments you suggested but I do not know that we would gain anything by going through all of those proposals which were made last year and rehashing them, but certainly this Chair is not going to deny members of the committee the opportunity to consider any amendments they want to.
I think there is much to be said for the suggestions that have been made here if they can be carried out without opening up discussion which will last here for months, which I think would be rather fruitless.
Most of these things are the result of compromise in the committee. Of course, the committee may have a different view this year. As members get more information they sometimes have different views and we have almost a fourth of this committee comprised of new men. I have not had any expression of their views yet. So, it is entirely in order to make the suggestions you made. We appreciate having them.
Now, are there any questions either of Admiral Mott or any of his associates with him?
Mr. TEAGUE. Yes, Mr. Chairman. Either he or one of his associates. You stated that you have about 1,000 member operating companies.
How many of those are commercial-type corporations organized for profit?
Mr. Mort. Probably 95 percent.
Mr. TEAGUE. Do you have any information at all as to the dividend policy or record of these companies? What I am getting at, do they рау.
dividends? Mr. Mort. I think that mostMr. TEAGUE. I am sure General does, but I wonder about the rest.
Mr. Mott. I think most of them pay dividends. Mr. Payne's company pays dividends. Mr. Wilbourn's company pays dividends. Now, there are some of them that operate in the rural areas, low density, that probably do not make enough money to pay dividends, but by and large most of our commercial-type companies would pay
dividends; yes, sir. But they vary widely.
Mr. TEAGUE. Oh, I can understand that, of course.
Would not it be possible for these companies to go to the appropriate regulatory commissions in their States and get an increase in rates to pay for-telephone rates, to pay for necessary expansion or renovation work?
Mr. Mort. Well, it would be within the realm of possibility, but you could not generate enough money that way, Mr. Teague, to take care of the great demands that technology and expanding population have put upon the telephone companies. You just simply could not generate enough money internally, which is what you are talking about, to do the job.
Now, I would like to have Mr. Wilbourn comment further on that.
Mr. WILBOURN. I can speak only, Congressman Teague, in general about Arkansas, that the rates now being charged by the some 20 borrowers that serve nearly 60 percent of the geographical area of our State, that these rates are the highest in the State already because of the need for money to serve the areas that they are in.
Mr. TEAGUE. We had some testimony last year and the year before, and I am a little hazy on it and I have been so busy with some problems in connection with some oil offshore in my congressional district to look it up, but we had some discussion, I believe some testimony, that there have been some rather large merger operations whereby some of the larger independent telephone companies have been acquiring at a rather rapid rate some of the small independent telephone companies. Is that still going on?
Mr. Mort. From the standpoint of an association executive, I am happy to say that this has slowed down considerably in recent months. I appeared before the Society of Security Analysts in Chicago with Mr. Weldon Case, who is the head of Midcontinent, one of our larger holding companies, and he made the statement that the acquisition and merger rate had slowed down.
Mr. Wilbourn here is one of the people who has tried to help to make it slow down and I think maybe he had better comment on what he is doing.
Mr. TEAGUE. While he is doing that, it was alleged that much of this acquisition by the larger companies, the one particular company as I recall
, which was making good money, was in good financial shape, was in order to get the advantage of 2-percent money which had been borrowed by the smaller companies and thereby inure to the benefit of the more prosperous larger company.