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will be required to meet at least four times each year and make an annual report to the Congress.
Capitalization.-Federal equity capital will be furnished the bank from the net collection proceeds of the rural telephone account (Title III). This capital, for which stock will be issued, is authorized to be appropriated over a ten year period in amounts up to $30 million annually and until the total capitalization of $300 million is reached. The Federal capital contribution, evidenced by the issuance of Class A stock, will bear annual interest in the amount of 2% until repaid in accordance with the bank's charter. Borrowers from the bank will furnish equity capital through the purchase of stock in amounts equal to 5% of their borrowings.
Classes of Stock.—The capital stock of the telephone bank will consist of three classes-A, B, and C. Class B and C stock will be voting stock.
Class A stock will be redeemed as soon as practicable after an initial 15-rear period, or after the total of outstanding class A and B stock reached $400 million. The minimum amount of Class A stock then to be retired would be an amount equal to 5% of the bank loans made each year. Class A stock shall be entitled to a return, payable from income, at the rate of 2% per annum on the amounts of Class A stock actually paid into the telephone bank. Such return shall be cumulative and shall be payable annually into miscellaneous receipts of the Treasury.
Class B stock will be issued to recipients of bank loans. Each borrower will be required to invest in the bank a sum equivalent to 5% of the total amount of the loan. Holders of this stock would not receive dividends but would be entitled to patronage refunds.
Class C stock will be available for purchase by rural telephone systems eligible to borrow from the bank and organizations controlled by such borrowers. This stock will be entitled to dividends from the income of the bank, but such dividends shall not exceed the current average rate payable on telephone debentures issued by the bank.
Borrowing Power.—The telephone bank is authorized to obtain funds through public or private sal of its debentures, provided that the amount of outstand, ing debentures does not exceed eight times the paid-in capital and retained earnings of the bank. Debentures would be issued at interest rates, and with terms and conditions determined by the bank's board of directors, and approved by the Secretary of Agriculture.
Lending Power.—The bank Governor is authorized to make bank loans to corporations or public bodies which are REA telephone borrowers. Loans may be made for periods not exceeding 50 years for the same purposes for which loans are made under Section 201 of the original Act, and for financing, or refinancing, the construction, improvement, expansion, acquisition, and operation of telephone lines, facilities, or systems, in order to improve the efficiency, effectiveness, or financial stability of the borrowers. Two types of loans will be available to borrowers from the telephone bank—an intermediate type loan and a full bank rate loan. Bank borrowers unable to meet the terms of the bank rate lending program will receive loans carrying an intermediate interest rate, which rate shall be determined by the current average market yield on marketable securities of the United States having maturities comparable to those of the loans, but with an interest ceiling of 4%. Authority to make “intermediate” loans will terminate after an initial 15-year period. Full bank rate loans will be available to borrowers at interest rates reflecting the average rate payable on the bank's debentures, return on Class A stock, administrative expenses, reserves, and estimated losses. Telephone systems with an average subscriber density of three or fewer per mile would be entitled to loans under Section 201 of the Act.
Loan Limitations.-Loans to finance acquisition of telephone facilities must be approved by the Secretary of Agriculture. Such acquisitions must improve the efficiency, effectiveness or financial stability of the borrower's system and the size of any acquisition shall not exceed the borrower's existing system at the time it receives its first bank loan. Certificates of convenience and necessity from states with regulatory bodies, or a determination that there will be no duplication of facilities, is required for all telephone loans. No portion of any loan may be utilized to finance political activities.
Conversion of bank ownership and control.—When, through retirement of the government's investment and the increase in borrower investment, the amount of stock held by the government represents less than one-third of the bank's capital, the process of converting the bank to borrower control and operation will begin : The REA Administrator will cease to be the Governor; the bank will cease to be a government agency; and the board of directors will consist of the REA Administrator and the FCA Governor plus six members elected by rural telephone voting stockholders of the bank. Special limitations on loan powers are eliminated after all government-held stock has been retired. Operations of the bank will continue to be subject to Congressional review.
The National Telephone Cooperative Association endorses and strongly supports the basic concept and detailed provisions as they are now embodied in H.R. 7 and related bills.
THE NEED FOR CAPITAL FOR NEW AND SPECIAL SERVICES
The National Telephone Cooperative Association also believes very strongly that any legislation providing supplemental and additional funds for rural telephone systems should include such loan funds for construction of systems of the nature of a CATV system. To clarify this point, we don't know of very many borrowers who want to get into the CATV business; but the nature of a CATV transmission system is such that it is more adaptable to many of the new communication services coming into use, such as data transmission, than is the normal telephone network. CATV is here and will become more common in the years ahead. To allow other communications carriers to construct communications systems within the service territories of the REA telephone borrowers will make less feasible their already difficult operations.
Telephone cooperatives believe, as does every operating telephone company, that they should provide all communication services in their service territories. To exclude provisions for CATV-type loan funds in supplemental financing legislation will detract from the growth and development of the telephone borrowers. Supplemental financing legislation is intended to enhance growth and development. Also, we predict that a significant part of the capital usable at market terms and conditions over the next 15 years will be usable in this category. We suggest to the committee that without this provision supplemental financing will be usable by a considerably smaller portion of the elephone borrowers than if it were included.
The REA telephone program was necessary in the first place because of “cream skimming” on the part of large companies. To preclude REA telephone borrowers from providing these services will be simply to encourage further "cream skimming”.
SUPPORT FOR H.R. 7
Mr. Chairman and Members of the Committee, the Rural telephone systems need supplemental financing. The National Telephone Cooperative Association supports H.R. 7 and believes that favorable action on this bill will strengthen the REA Telephone program and subsequently the rural areas of the nation. I thank the Committee very much for giving me the opportunity to present the views of the membership of the National Telephone Cooperative Association.
The CHAIRMAN. Now, tomorrow we have three more witnesses scheduled which for the time being will complete all the witnesses we know of. Members will understand—this is off the record.
(Discussion off the record.)
The CHAIRMAN. The committee will stand in recess until 10 o'clock tomorrow morning.
(Whereupon, at 11:45 a.m., the hearing was recessed, to reconvene at 10 a.m., Friday, February 21, 1969.)
RURAL TELEPHONE SUPPLEMENTAL FINANCING
FRIDAY, FEBRUARY 21, 1969
HOUSE OF REPRESENTATIVES,
Washington, D.C. The committee met, pursuant to recess, at 10 a.m., in room 1301, Longworth House Office Building, Hon. W. R. Poage (chairman) presiding
Present: Representatives Poage, McMillan, Abernethy, Purcell, O'Neal, Jones of North Carolina, Montgomery, Burlison, Rarick, Belcher, Teague of California, Goodling, Miller, Mayne, Zwach, Kleppe, Price, and Sebelius.
Also present: Christine S. Gallagher, clerk; William C. Black, counsel; and John Knebel, assistant counsel.
The CHAIRMAN. The committee will please come to order.
The committee is meeting for further consideration of the bills on hand and our first witness this morning is from North Carolina, and our colleague, Mr. Jones, will introduce him.
Mr. JONES. Thank you, Mr. Chairman.
Members of the committee, it is indeed a pleasure for me this morning to introduce our first witness. He is a gentleman that I have known for many years. At one time he was a resident of my particular congressional district. Later I had the honor of serving with him in the 1955 North Carolina Legislature.
Shortly after that he made a wise decision to forsake politics and follow his own profession. As a result, today he is president of the Carolina Power & Light Co., which is one of the larger companies in the Southern States.
So, it is indeed a pleasure to present to the committee, my friend, Shearon Harris.
STATEMENT OF SHEARON HARRIS, PRESIDENT OF CAROLINA
POWER & LIGHT CO., ACCOMPANIED BY JOHN THORNBORROW, ASSISTANT MANAGING DIRECTOR, EDISON ELECTRIC INSTITUTE
The CHAIRMAN. Mr. Harris, we will be glad to hear from you. Mr. Harris has met with us before.
Mr. McMILLAN. Mr. Chairman, I would like to add to what Mr. Jones had to say about Mr. Harris. I want you all to know that the Carolina Power & Light Co. does a wonderful job down in my State. In fact, I think they have an office in every town in my district. They render a wonderful service to the people in South Carolina.
Mr. HARRIS. Mr. Chairman, gentlemen, I am deeply indebted to Congressman Jones and Congressman McMillan for their kind introduction. I am also very grateful to you, Mr. Chairman, and the members of the committee for the opportunity of visiting with you again as you made mention of the fact that I have sort of become a perennial visitor with you when we have discussed these matters about arranging for the future financing of rural electrification and now rural telephony.
The CHAIRMAN. Mr. Harris, let us get this straight. We are not discussing the financing of rural electrification as such this morning. We are discussing only rural telephones this morning. The Chair does not want to be arbitrary and will not apply the rules strictly, but hopes that you
will discuss the matter before the committee. Mr. HARRIS. Being a member of the same profession in which you have been a leader, I appreciate the rule of relevancy and I hope that I shall be able to apply it to myself with discipline without the necessity of the chairman's ruling, but you feel free to stop me if you think I have gone too far.
Mr. Chairman, seated with me at my left is Dr. John Thornborrow, assistant managing director of the Edison Electric Institute.
I am Shearon Harris, president of Carolina Power & Light Co. and I appear today on behalf of the Edison Electric Institute, the national trade association of investor-owned electric light and power companies, as chairman of its committee on rural electrification. The 181-member companies of the institute serve approximately 78 percent of the consumers of electric power in the United States, including over 40 percent of the Nation's farms. Approximately 35 percent of the electricity supplied by REA distribution cooperatives is generated by our electric companies.
The Edison Electric Institute opposes enactment of H.R. 7, the rural telephone bank bill, for the following reasons:
(1) Neither the new Congress nor the new administration should be forced to reach a hasty decision concerning the long-range future of either the REA telephone or electric programs. All alternatives which have been suggested should be deliberately and carefully studied, including (a) a program of Government insured or guaranteed loans; (b) a new lending agency under the Farm Credit Administration; and (c) a truly independent financial institution outside the Federal Government. The new administration should be given time to consider each of these other alternatives, as well as to survey the state of the present REA program. The President recognizes this need. On February 8, he directed the Director of the Bureau of the Budget to investigate the Government's direct loan and guarantee programs. The new administration may wish to recommend, and the new Congress may wish to approve, an entirely different solution to the vexing REA 2 percent direct loan problem than the “bank” approach prescribed by H.R. 7.
(2) The REA electric program is older, larger, and involves more support from the taxpayers than the REA telephone program. The two programs have been administered by the same agency. The future direction of the REA telephone program should not be irrevocably charted until the larger decision is reached—the future direction of the REA electric program. The majority of REA electric co-op bor