Admiral Mott testified that he had heard no witness nor any member of the committee justify why there should be an arbitrary split in the telephone borrower representation on the board of directors and as you know, H.R. 10266 last year and the four bills now before the committee, all contain this provision. The provision is for equal representation of two groups of a slightly different orientation. The commercial borrowers as you have been discussing this morning are, of course, profit oriented. The cooperatives being nonprofit member service oriented corporations operated on a nonprofit basis. These are obviously two different and deliberate business objectives. I believe that the 3-3 split of borrower representative on the board of directors was put in by the committee, not to favor one group or the other, or not to deny one group or the other, but simply to create an equal representation on the board of directors for the basic reason that the bank is not proposed here to serve companies as such. It is proposed to serve the rural people of the Nation. I think the language that is in H.R. 7 and related bills is good language. I think it ought to remain and I would urge this committee to reendorse the concept of equal representation on the board of directors as in the best interests of the people of rural America when it acts on the present bills. The intermediate lending program and the statements of the previous witnesses thereon have created a certain amount of confusion in my mind. The cost of money to the Government is a factor which affects the Government's costs. It is also in a certain sense an indicator of the economy or the general interest rate levels. On the other hand, the intermediate lending rate has no relation to the Government's costs. It is a cost of the bank. The Government's costs in putting in seed money in order to build up a lending program are provided for elsewhere in the legislation. They are provided for as we were discussing earlier in that the bank will be required to pay 2percent interest on the Government's investment in class A stock. Again, the intermediate rate has no relationship to that. Why, then, should witnesses wish that this intermediate lending rate be tied to the cost of money to the Government? I was interested in Admiral Mott's statement-and considering his membership, I can understand it-that it would remove subsidy or charge of subsidy from the bank legislation. Only one who completely misunderstood the legislation could relate subsidy to the intermediate interest rate, because as I pointed out earlier, the Government's cost is provided for elsewhere in the bill. I would also like to point out for the committee's benefit what the interest costs of telephone companies are in general. The independent industry as a whole, and this includes General and United and everybody else, on the average-I believe these figures are a few years oldon the average the independent industry paid out 7.7 percent of its operating revenues for interest. The telephone cooperatives in the same year paid out 11.4 percent. Any single percentage point increase in the interest rate they pay would thus increase the amount of their operating revenues they pay in interest a proportionate amount more because, of course, they are paying more out to begin with. I would have to disagree with Mr. McCarthy's statement that changing the intermediate rate to the cost of money to the Government would not make any fewer companies eligible for the bank. I think every fraction of a percent of change in the lending program would prohibit one or more companies from participating, and the reason that we support the 4-percent statutory ceiling on the intermediate rate is so that more companies, more co-ops, will be able to use bank financing and for no other reason. Finally, the comments on the procedure for the processing of loans, and what the amendment, if I understand it, suggests, it is that all loans would have to go to the bank board of directors and if they turned it down, then perhaps they could be made at 2 percent. The reasons given, as I understand them, were to make it very clear through the specific language recommended, that this was designed to afford financing at higher rates for those people who can afford it. It is my opinion that the very enactment of this legislation emphasizes and states that policy. I do not think the specific amendment recommended is needed. Second, and I am not sure that I know all there is to know about this, but I understand that the REA Administrator at present is required by law to see that rural telephone service is extended to all those who need it and at rates they can afford. This is specifically his responsibility as an agent of the executive branch and in his stewardship to the legislative branch. It would seem to me that the amendment recommended would both distort and confuse the, at present, very heavy and very broad responsibility that the REA Administrator has, and, to my very best knowledge, has always been able to carry out. I believe that H.R. 7 and its related bills are good bills. I believe they represent legislation that is not only in the best interests of rural America, but of the Nation at large. I have said this before. Maybe it is appropriate that I say it again. When you put a telephone in a rural area, you have benefited everybody who has a telephone, no matter where they live, because then they, too, can call. Gentlemen, I thank you for your time and for your attention. I will be happy to supply any additional information that you think is required. I would also be happy to answer questions as would the people who are accompanying me, if that is your desire. The CHAIRMAN. Thank you, Mr. Fullarton. Are there questions of Mr. Fullarton? Yes, Mr. Zwach. Mr. ZWACH. Mr. Fullarton, near the bottom of the first page of your testimony you say: "As a group, telephone cooperatives have the lowest subscriber density in the entire telephone industry, just 2.4 subscribers per mile of line." What is the lowest subscriber density of any of your cooperatives? Mr. FULLARTON. I believe that the lowest subscriber density of any of our cooperatives exists in the State of South Dakota. The location of the system is Bison, the density is slightly above three-quarters of a subscriber mile of line or one every mile and a half. Mr. ZWACH. Less than one per mile. Mr. FULLARTON. Yes, sir. There are several, by the way, that are less than one. Montana has several also. Mr. ZWACH. It would then follow that income per subscriber would be much lower, would it not? And also investment per subscriber would be higher. Mr. FULLARTON. Yes, sir. Those statistics are both correct. Mr. ZWACH. And I presume this is the reason for the need for lower interest money if we are ever going to serve these areas. Would that be your position? Mr. FULLARTON. Yes, sir; I believe it would. Mr. ZWACH. Thank you. The CHAIRMAN. Are there other questions of Mr. Fullarton or any of this group? Mr. Fullarton, you have made a persuasive statement. Members would argue with you if you had not done so well. So, we appreciate your statement and we are glad to have all of you before us. Now, that completes the list of witnesses for today. Mr. GOODLING. Mr. Chairman, may I make one brief statement? The CHAIRMAN. Certainly. Mr. GOODLING. I did not want to create the impression that General is not giving good service in my area. [Laughter.] Since General acquired my wholly owned family company some years ago, I have graduated from a nine-party to a five and now to a private line and that is progress. The CHAIRMAN. We want to see that all over the country. The CHAIRMAN. Thank you. (Mr. Fullarton's full statement follows:) STATEMENT OF DAVID C. FULLARTON, EXECUTIVE MANAGER, NATIONAL TELEPHONE COOPERATIVE ASSOCIATION, BEFORE THE HOUSE COMMITTEE ON AGRICULTURE, FEBRUARY 20, 1969 My name is David C. Fullarton. I am Executive Manager of the National Telephone Cooperative Association. NTCA is the national service organization for the nation's 230 telephone cooperatives. These telephone cooperatives provide service to more than 600,000 rural establishments in 31 states. The member systems of NTCA obtain their long-term capital financing through the present REA direct loan program and thus have an immediate and vital interest in legislation affecting this program. It is through REA that more than 50% of the present subscribers of telephone cooperatives first could obtain telephone service. The REA direct loan telephone program has been one of the most successful undertakings of the Congress. Telephone cooperatives and other REA borrowers have made remarkable progress over the past 18 years in bringing telephone service to the rural areas of the nation. As recently as 1960 only 54% of the farms in the United States had service available. This figure is now close to 80%. Telephone cooperatives and other borrowers have in many areas not only kept pace with the industry but have taken the lead in extending the best in communication services to rural areas. RURAL TELEPHONE STATISTICS Statistics as to the nation's telephone cooperatives are probably the best means of illustrating the reason and necessity for the REA telephone loan program. As a group, telephone cooperatives have the lowest subscriber density in the entire telephone industry; just 2.4 subscribers per mile of line as compared to 16 subscribers per mile for the other independents and something in excess of 40 subscribers per mile for the Bell System. In terms of operating revenues per mile of telephone line, cooperatives realize $264 per mile; REA commercial borrowers $580 per mile; the other independents $2,774 per mile and the Bell System something over $12,000 per mile. In terms of investment per subscriber, telephone cooperatives average $812 per subscriber; REA commercial borrowers $672 per subscriber; independents $705 per subscriber and the Bell System somewhere around $700 per subscriber. The rural member subscribers of the nation's telephone cooperatives appreciate the telephone service that they have as well as the understanding and sympathy of the Congress in making REA telephone loans available to provide this service. Although not many people realize it, the nation's telephone cooperatives have the lowest amount of uncollectable accounts per subscriber in the nation. This figure for telephone cooperatives is only 46 cents per subscriber as compared to 96 cents for the independent telephone industry and somewhere between 90 cents and a dollar for the Bell System. Of course, in the cooperative way of doing business, the users of the service not only control the business but have and feel responsibility for its success. Telephone cooperatives and the REA telephone program have performed magnificently, not only for rural areas, but also for the nation as a whole since the inception of the program. However, we believe that an even bigger job lies ahead; a job which points up the need for a basic 2%, 35 year loan program and a supplemental financing program, such as embodied in HR-7 and similar bills. This can best be illustrated in the following table which shows the type of telephone service available in rural areas during the year 1963, 1966 and projected for the year 1980. PERCENT OF SUBSCRIBERS BY GRADE OF SERVICE-REA TELEPHONE BORROWERS If one-party service and service to all who desire it in rural areas is to someday become a reality in this country, this Association believes that the 2% loan program must serve as the foundation upon which supplemental financing legislation is based. REA telephone borrowers are faced with a critical shortage of long term debt capital. As of 6-30-68, there were telephone loan applications at REA for $302 million for which no funds were available. The stimulation and impetus given the rural telephone industry by the 1949 amendment to the Rural Electrification Act has resulted in a continually increasing demand for growth capital to build the facilities necessary to provide modern telephone communications in rural areas. Since 1949, REA has loaned a total of $1.6 billion to 869 rural telephone systems. The borrowers have used these funds to build and improve 523,000 miles of outside plant to serve 2.3 million subscribers. The future capital requirements of the telephone borrowers over the next 15 years are almost double the total loans made by REA during the past 15 years for the low estimate of about 3 billion and almost four times as great for the high estimate of $6 billion. Enactment of this legislation will assure rural telephone systems access to reasonable cost growth capital through private sources by establishing a supplemental credit mechanism to which the borrower systems may turn for all or a part of their future capital requirements, thereby reducing the drain on the Treasury both for loan funds as well as subsidies. The proposed bank is patterned after the Federal Land Banks, which have successfully operated for more than 50 years and have long since reimbursed the Treasury for all government investments, and become totally borrower owned and controlled. Legislation of this type is not uncomplicated. Many people who are not intimately acquainted with the legislation have difficulty in understanding exactly how the telephone bank will work. For this reason I have attempted in the following paragraphs to summarize the essentials of the bill. ADEQUATE FUNDS AND USABLE RATES The National Telephone Cooperative Association supports HR-7 and related bills as a suitable means of supplying those supplemental and additional funds which REA telephone borrowers will require to complete the task assigned to them. There are, however, two aspects of supplemental financing legislation which must be kept firmly in mind. Whatever mechanics are set up to provide the needed supplementary, additional long-term debt capital, must provide adequate funds to meet the needs of REA telephone borrowers and must provide these funds under terms and conditions which are usable by the REA telephone borrowers. CAPITAL NEEDS OF THE TELEPHONE BORROWERS Estimates of the future capital requirements of the REA Telephone borrowers indicate that they will need between $3 billion and $6 billion to carry out their full utility responsibility over the next 15 years. These capital estimates are based on studies prepared by REA and the New York investment firm of Kuhn, Loeb and Company. The estimates of capital needs are shown in the following table. Capital needs of the rural telephone program REA estimate_. Kuhn, Loeb & Co. estimate____. REA estimate (adjusted)‒‒‒‒ Kuhn, Loeb & Co. estimate (adjusted)_. 1 Based on annual rate of growth of 5.7 percent. 2 Based on annual rate of growth of 11.8 percent. 3 Based on annual rate of growth of 5.7 percent plus 5 percent of plant in 1971 required for special services increasing to 50 percent by 1980. Based on annual rate of growth of 11.8 percent, plus 5 percent of plant in 1971 required for special services increasing to 50 percent by 1980. TELEPHONE SUPPLEMENTAL FINANCING LEGISLATION The Rural Electrification Act of 1936, as amended, presently has two titles. Title I established the Rural Electrification Administration and provided for the present 2% rural electrification loan program. Title II provided for the present 2% rural telephone loan program. The proposed supplemental financing bill is drafted as an amendment to the original Act and includes Titles III and IV which deal with financing for rural telephone systems. The essential features of the telephone bank bills introduced in the House of Representatives this year are summarized for your information: Rural telephone account Title III establishes in the Treasury of the United States a "rural telephone account". Into this account would go all REA assets, undisbursed loan balances, principal and interest payments from the present 2% REA telephone loan program, appropriations, and shares of capital stock of the Rural Telephone Bank. The funds in the account would be used for advances on REA telephone loans, payment of interest and principal on borrowings from the Secretary of the Treasury, and investments in the Rural Telephone Bank. Rural Telephone Bank Title IV establishes a Rural Telephone Bank with the general purpose of obtaining an adequate supply of supplemental funds from non-Federal sources to be used in making loans to organizations which are telephone borrowers of REA. The telephone bank would be an instrumentality of the United States and would have a general corporate power. As long as the telephone bank is an agency of the United States it would be authorized to use the REA services, facilities and employees, be subject to the supervision of the Secretary of Agriculture, and to specified provisions of various Federal laws. Governor.-The Administrator of REA serves as chief executive officer'Governor of the telephone bank. Board of Directors.-Management of the telephone bank is vested in a 13member board of directors which includes the REA Administrator, the Governor of the Farm Credit Administration, and five members to be designated by the President, three of whom shall be from the Department of Agriculture, and two from the general public. The six other members of the board will be selected from the directors, managers, and employees of rural telephone systems. Initially these six will be appointed by the President but later will be elected, three from among the cooperative rural telephone borrower systems and three from among the commercial rural telephone borrower systems. The Board will prescribe by-laws, regulate the manner in which the bank shall conduct its business, and |