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provided in section 406(c), and on class C stock, the Telephone Bank Board shall annually set aside the remaining earnings of the telephone bank for patronage refunds in accordance with the bylaws of the telephone bank.

“SEC. 407. BORROWING POWER.—The telephone bank is authorized to obtain funds through the public or private sale of its bonds, debentures, notes, and other evidences of indebtedness (herein collectively called 'telephone debentures'). Telephone debentures shall be issued at such times, bear interest at such rates, and contain such other terms and conditions as the Telephone Bank Board shall determine: Provided, however, That the amount of the telephone debentures which may be outstanding at any one time pursuant to this section shall not exceed eight times the paid-in capital and retained earnings of the telephone bank. The telephone bank shall insert in all its telephone debentures appropriate lauguage indicating that such telephone debentures, together with interest thereon, are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any agency or instrumentality thereof other than the telephone bank. Telephone debentures shall not be exempt, either as to principal or interest, from any taxation now or hereafter imposed by the United States, by any territory, dependency, or possession thereof, or by any State or local taxing authority. Telephone debentures shall be lawful investments and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority and control of the United States or any officer or officers thereof.

“SEC. 408. LENDING POWER.—(a) The Governor of the telephone bank is authorized on behalf of the telephone bank to make loans, in conformance with policies approved by the Telephone Bank Board, to corporations and public bodies which have received a loan or loan commitment pursuant to section 201 of this Act, (1) for the same purposes and under the same limitations for which loans may be made under section 201 of this Act, (2) for the purposes of financing, or refinancing, the construction, improvement, expansion, acquisition, and operation of tele phone lines, facilities, or systems, in order to improve the efficiency, effectiveness, or financial stability of borrowers financed under sections 201 and 408 of this Act, and (3) for the purchase of class B stock required to be purchased under section 406 (d) of this Act but not for the purchase of class C stock, subject, as to the purposes set forth in (2) hereof, to the following provisos: That in the case of any such loan for the acquisition of telephone lines, facilities, or systems, the acquisition shall be approved by the Secretary, the location and character thereof shall be such as to improve the efficiency, effectiveness, or financial stability of the telephone system of the borrower, and in respect of exchange facilities for local services, the size of each acquisition shall be not greater than the borrower's existing system at the time it receives its first loan from the telephone bank, taking into account the number of subscribers served, miles of line, and plant investment.

“(b) Loans under this section shall be on such terms and conditions as the Governor of the telephone bank shall determine, subject, however, to the following restrictions:

“(1) All loans made hereunder shall be fully amortized over a period not to exceed fifty years.

“(2) Notwithstanding any other provision of law, all loans made pursuant to this Act for facilities for telephone systems with an average subscriber density of three or fewer per mile shall be made under section 201 of this Act; but this provision shall not preclude the making of such loans from the telephone bank at the election of the borrower.

“(3) Intermediate loans shall bear interest at a rate equal to (i) a rate determined by the Secretary of the Treasury, taking into consideration the current average market yield, during the month of May preceding the fiscal year in which the loans are made, on outstanding marketable obligations of the United States with remaining periods to maturity comparable to the average maturities of such loans, or (ii) 4 per centum per annum, whichever is lower. All other loans made hereunder shall bear interest at a rate which shall reflect the average cost of moneys to the telephone bank, including (a) interest on its debentures, and (b) the return on funds provided by the United States for the purchase of class A stock pursuant to section 406(a) of this Act, and (c) administrative expenses, and (d) reserves, and (e) estimated losses of the telephone bank. Intermediate loans shall not be made to a borrower which is determined by the Governor of the telephone bank, under standards to be established by the Secretary, to be capable of both paying the interest rate applicable hereunder to loans other than intermediate loans and achieving the objectives of the Federal rural telephone loan program. The authority to make intermediate loans hereunder shall terminate on June 30, 1984, or such earlier date as conversion take place under section 410(a): Provided, That on or before July 1, 1974, the Secretary shall make a report to the President for transmittal to the Congress on the status of the intermediate loan program with recommendations concerning its continuation thereafter.

“(4) Loans shall not be made unless the Governor of the telephone bank finds and certifies that in his judgment the security therefor is reasonably adequate and such loan will be repaid within the time agreed.

"(5) No loan shall be made in any State which now has or may hereafter have a State regulatory body having authority to regulate telephone service and to require certificates of convenience and necessity to the applicant unless such certificate from such agency is first obtained. In a State in which there is no such agency or regulatory body legally authorized to issue such certificates to the applicant, no loan shall be made under this section unless the Governor of the telephone bank shall determine (and set forth his reasons therefor in writing) that no duplication of lines, facilities, or systems, providing reasonably adequate services will result therefrom.

“(6) As used in this section, the term 'telephone service shall have the meaning prescribed for this term in section 203(a) of this Act, and the term 'telephone lines, facilities, or systems' shall mean lines, facilities, or systems used in the rendition of such telephone service.

(7) No portion of any loan made under this Act shall be used to finance any political activities prohibited under sections 600, 601, 610, 611, and 612 of title 18, United States Code, and prior to the making of any loan the borrowing entity shall agree in writing not to engage in any such prohibited political activities during the term of such loan. If the Telephone Bank Board finds a violation of this provision to have occurred, it shall so notify such borrower in writing and thirty days thereafter such loan shall become due and payable in full.

“(8) Notwithstanding any other provision of law, (i) no borrower of funds under section 201 of this Act shall, without approval of the Administrator, sell or dispose of its property, rights, controlling interest, or franchise until all indebtedness, including all interest and charges, to the Rural Electrification Administration shall have been repaid, and (ii) no borrower of funds under section 408 of this Act shall, without approval of the Telephone Bank Board, sell or dispose of its property, rights, controlling interest, or franchise until all indebtedness, including all interest and charges, to

the telephone bank shall have been repaid. "(c) The Governor of the telephone bank is authorized under rules established by the Telephone Bank Board to adjust, on an amortized basis, the schedule of payments of interest or principal of loans made under this section upon his determination that with such readjustment there is reasonable assurance of repayment: Provided, however, That no adjustment shall extend the period of such loans beyond fifty years.

"SEC. 409. TELEPHONE BANK RECEIPTS.-Any receipts from the activities of the telephone bank shall be available for all obligations and expenditures of the telephone bank.

"SEC. 410. CONVERSION OF OWNERSHIP, CONTROL AND OPERATION OF TELEPHONE BANK.-(a) Whenever after retirement of class A stock issued to the United States has begun pursuant to section 406 (c) of this title, the total amount in stated value of class B and class C stock outstanding equals two-thirds of the total amount in stated value of class A, class B, and class C stock outstanding, as determined by the Secretary

“(1) The power and authority of the Governor of the telephone bank granted to the Administrator of the Rural Electrification Administration by this title IV shall vest in the Telephone Bank Board, and may be exercised and performed through the Governor of the telephose bank, to be selected by the Telephone Bank Board, and through such other employees as the Telephone ank Board shall designate;

(2) the five members of the Telephone Bank Board designated by the President pursuant to section 405 (b) shall cease to be members, and the number of Board members shall be accordingly reduced to eight unless other provision is thereafter made in the bylaws of the telephone bank;

“(3) the telephone bank shall cease to be an agency of the United States, but shall continue in existence in perpetuity as an instrumentality of the l'nited States and as a banking corporation with all of the powers and limitations conferred or imposed by this title IV except such as shall have

lapsed pursuant to the provisions of this title. “(b) When all class A stock has been fully redeemed and retired, loans made by the telephone bank shall not continue to be subject to the restrictions prescribed in the provisos to section 408 (a) (2).

"(c) Congress reserves the right to review the continued operations of the telephone bank after all class A stock has been fully redeemed and retired.

"SEC. 411. LIQUIDATION OR DISSOLUTION OF THE TELEPHONE BANK.—In the case of liquidation or dissolution of the telephone bank, after the payment or retirement, as the case may be, first, of all liabilities; second, of all class A stock at par; third, of all class B stock at par; fourth, of all class C stock at par; then any surplus and contingency reserves existing on the effective date of liquidation or dissolution of the telephone bank shall be paid to the holders of class A and class B stock issued and outstanding before the effective date of such liquidation or dissolution, pro rata, and any remaining surplus and contingency reserves shall be distributed to those entities to which they are allocated on the books of the bank at the time of the liquidation or dissolution."

SEC. 2. (a) Subsection (f) of section 3 of the Rural Electrification Act of 1936, as amended, is amended by inserting “rural electrification" immediately following the words "interest on” in both places where it appears in said subsection and by inserting the words "for rural electrification purposes" after the words “Secretary of the Treasury' the second time they appear in said subsection.

(b) Section 201 of the Rural Electrification Act of 1936, as amended, is amended by inserting “, to public bodies now providing telephone service in rural areas”, immediately after the word "areas" in the first sentence and also immediately after the word "areas" in the first proviso of the second sentence.

SEC. 3. Section 201 of the Government Corporation Control Act, as amended (31 U.S.C. 856), is amended by striking "and" immediately before “(5)” and by inserting “, and (6) the Rural Telephone Bank” immediately before the period at the end.

SEC. 4. The second sentence of subsection (d) of section 303 of the Government Corporation Control Act, as amended (31 U.S.C. 868), is amended by inserting “the Rural Telephone Bank,” immediately following the words "shall not be applicable to”.

SEC. 5. The right to repeal, alter, or amend this Act is expressly reserved.
SEC. 6. This Act shall take effect upon enactment.

The CHAIRMAN. Conoressman Kleppe, who is presently detained at the Republican caucus, has prepared a statement which he asked to be inserted in the record.

Without objection, it will be inserted at this point.

(The statement referred to, and a statement by Congressman O'Konski, follow :)



Mr. Chairman, I deeply appreciate this opportunity to appear in support of legislation to provide additional sources for financing the rural telephone program through establishment of a rural telephone bank. The bill I have introduced to accomplish this (H.R. 4020) is identical with the one (H.R. 7) introduced by the distinguished chairman and also identical with the measure approved, 23 to 5, by our committee during the 90th Congress.

As you will recall, on February 7, 1968, the House Rules Committee voted 8–6–1 to defer action on the bill.

Although there was considerable controversy over the proposal to establish a Rural Electric Bank at that same time, there appeared to be a rather broad consensus in support of the Rural Telephone Bank. Along with most of the other Members of this Committee, I supported the concept of a Rural Telephone Bank.

Primarily, H.R. 7 and other identical bills which have been introduced at this Session, are designed to bring funds from the private money market into the rural telephone program. They authorize sales of RTA debentures up to an amount not exceeding eight times the capital subscribed by the government itself. "The Federal Government would furnish capital to the telephone bank at a rate of $30 million annually, not out of U.S. Treasury funds but from repayments of outstanding rural telephone loans, until the total reached $300 million. The bank would pay 2 percent interest on money provided by the government.

"Bank loans would be made to both cooperatives and privately-owned telephone systems which previously received REA 2 percent loans, at a rate reflecting cost of money. This would be a nd of the cost of government-advanced capital and the funds derived from the sale of debentures in the private money market. With interest rates currently at sky high levels, this will represent no bonanza for borrowers.

“The legislation does not change present authority to make direct 2 percent loans to qualified borrowers operating in areas with a low density of telephones. This, I would emphasize, is essential if telephone service is to be provided to subscribers in areas such as the District I represent where farms and ranches may be miles apart.

Telephone service is essential in the day to day business operations of farmers and ranchers. It is far more than a social convenience. It is a must in the strictly business sense. It is as essential to farmers and ranchers in the conduct of their buying and selling operations as it is to the businessman in the town or city.

"Enormous strides have been made in recent years in the expansion of telephone service to rural subscribers. The job is by no means completed. It seems to me that the Rural Telephone Bank provides the most feasible approach to continued expansion of this vitally needed service."



Mr. Chairman, I appreciate the opportunity to present testimony in support of H.R. 7, the legislation to provide for additional sources of financing for the rural telephone systems. I know that you are vitally interested in the legislation, since you introduced H.R. 7 on the opening day of Congress. On January 23, I introduced an identical bill, H.R. 4192.

If we are to reverse the trend of outmigration from our farms to crowded cities, we must provide for a dynamic Rural America. The rural telephone program, initiated in 1949, is essential to the development and revitalization of Rural America—to make it an attractive and prosperous place for new industries and business, and the families which go with them. It is just not reasonable to expect that industry and people in this modern day and age will either settle or stay in communities where they cannot enjoy quality telephone service. And when farms prosper, all America prospers.

The REA telephone loan program has made an enviable record in my home State of Wisconsin. When the program was authorized by Congress in 1949, only 59.2 percent of the farms in Wisconsin had telephones and much of this service was obsolete. Today, 91 percent of the State's 116,000 farms, rural homes and business establishments have telephones. In addition, the REA telephone program has been achieving its continuing objective of providing rural subscribers with modern dial telephone service under rates and conditions comparable to those in towns and cities, with single-party rural service a long-range goal,

I am proud that the first REA telephone loan in the State of Wisconsin went to a 10th District borrower, the Cream Valley Telephone Company at Hawkins, Wisconsin, which was approved on October 2, 1950. From that time until January 1, 1969. REA has approved $76,624,745 in loans to 65 borrowers in Wisconsin, including 55 commercial companies and 10 cooperative associations. These loans have helped to provide an estimated 128,617 rural subscribers with modern telephone service over 25,350 miles of line.

The average rural subscriber on an REA financed system is making three times as many calls as he did when he first obtained dial service. Likewise, the demand for single-party service continues to increase. There still remains the unfinished job of reaching the estimated 18 percent of the rural establishments which do not have telephone service and to modernize those which are using outmoded, inadequate and multi-party telephone lines and equipment.

It is imperative that we update the phone system for Rural America. It is estimated that REA telephone borrowers who received loans of $1.5 billion since the beginning of the telephone program will need more than twice this amount in the next fifteen years to meet the demands of modern communications service in their areas.

In Wisconsin alone, there is a backlog of 26 loan applications pending with REA, amounting to over $26 million in funds. The average subscriber density for all REA telephone borrowers is 3.8 per mile, compared with 16 telephone subscribers per mile for the independent industry generally, and an estimated 40 subscribers per mile for Bell System companies. Latest figures show that annual revenues average about $400 per mile for REA borrowers, compared with $2,538 per mile for the independent industry.

If we are to fulfill the mandate of Congress when the Rural Telephone program was authorized—“to assure the availability of adequate telephone service to the widest practicable number of rural users of such service"—we must provide a flexible system of financing. H.R. 7 and the other bills being heard today provide for a Rural Telephone Bank, which will become an entirely privately owned, operated and financed corporation to furnish loans from the private money market.

In the 90th Congress, the House Agriculture Committee favorably reported a similar bill, H.R. 12066, on October 6, 1967. I sincerely hope that this Committee will again take favorable action on the Rural Telephone Bank bill and that Congress will approve the legislation to assure continued progress for Rural America in meeting its quality telephone needs for now and the future.

The CHAIRMAN. Our second scheduled witness this morning is the Honorable Harold Peterson, executive director and counsel of the National REA Telephone Association.

We will be glad to hear from you now, Mr. Peterson.



Mr. PETERSON. Thank you, Mr. Chairman.

Mr. Chairman and members of the committee, my name is A. Harold Peterson, attorney-at-law, and my residence is at Chisago City, Minnesota. I appear here today as executive director and counsel of the National REA Telephone Association, whose membership is comprised solely of REA financed telephone companies, mainly the commercial, privately owned, type. We are grateful to the House Committee on Agriculture for the opportunity you have afforded us to appear per. sonally and testify in support of H.R. 7, the rural telephone bank bill, which is of such vital concern to the 847 REA telephone companies throughout 46 of our 50 States.

This subject matter is not new. It has received a most thorough airing in both the 89th and 90th Congresses by this committee. H.R. 7 is an identical bill to H.R. 12066, which was overwhelmingly passed by the House Agriculture Committee in the 90th Congress. We are, therefore, somewhat reluctant to impose on your time again. On the other hand, we feel that a record must be made. In addition, there are seven new members of this committee who are entitled to know what this bill is all about and why it is so important for rural America.

We would like, therefore, to briefly review the history of the REA telephone program so that it may be brought into proper perspective. This discussion will include: (1) the circumstances surrounding the original passage of the telephone amendment to the REA Act in 1949; (2) what the REA telephone program has accomplished for the people of rural America; and (3) what problems REA telephone borrowers have been facing in recent years as well as the problems that will be encountered in the foreseeable years ahead. It is our hope in

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