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area, is to revoke the certificate of convenience and necessity. Our Commission has scheduled such a hearing for next month for a locally-owned independent serving a three-county area. This remedy, if invoked, is analogous to shooting a horse with a broken leg and leaving it on the market to be picked up at deadhorse prices. It is necessitated when companies presently serving an area cannot in any manner procure financing to meet reasonable requirements imposed upon it by our Commission. You have already heard descriptions of the financial mire in which REA Borrowers are sinking. The testimony entered reflects our experience which indicates that many REA Borrowers are unable to secure sufficient funds to meet existing, and in my judgment too low, Arkansas service require ments. On September 30, 1968, 21 Arkansas applicants had six million dollars in loan applications pending before the REA. The unlikelihood of their securing any substantial portion of this sum in the near future has been demonstrated. At least this amount is needed but not applied for because of the slim prospect of success. On the same date, these Arkansas companies had 35 million dollars in approved loans. To get this 35 million dollars, these companies have in providing the first mortgage security requirements of the United States under REA locked themselves into government financing.
The staggering capital requirements of an adequate telephone system, particularly in capital-starved areas, which cause the low equity/debt ratios prevalent in REA companies, will in the future increase greatly. A problem exists for an Arkansas independent telephone company, in its effort to raise capital, beyond the low sex appeal in today's private capital suppliers of business enterprises with the typical REA financial structure. This problem is one of accessibility and proximity to money sources. An independent telephone company servicing three rural Arkansas counties may be a fine company, but when its management makes its way East and seek Yankee dollars they frequently cannot communicate with New York financiers with any more success than they can with New York taxi drivers.
Thus, the Arkansas Public Service Commission is faced with either tolerating poor, inadequate, or nonexistent services or, in the face of rising public demand and expectations imposing standards on REA Borrowers which they cannot meet. Imposition of upgrading requirements is not only desirable and necessary but is occurring now in almost every state. One state Commission has expressed an intention to require one-party service in the reasonably near future. Others are requiring a scheduled transition to five-party service, and its requirement has been judicially upheld. The Arkansas Commission has held a series of hearings and has before it a regulation which gives companies five years in which to eliminate eight-party service and provide four-party facilities. It is worthy of note that our present regulation sets an eight-party maximum, but has an emergency proviso. An informal procedure has developed whereby an elderly or seriously ill person can be added to an eight-party circuit where dictates of humanity demand. Our records reflect almost one thousand such cases since the regulation was imposed, and I suspect that local managers, with the consent of the neighbors on such circuits, have illegally made emergency additions in many unreported instances. The members of the Arkansas Public Service Commission are charged by our law with the obligation of considering the economic feasibility of the imposition of high service standards. However, our overriding mandate is to represent the public interest. We would much prefer keeping the independent telephone companies in Arkansas as local businesses, in accord with the intent and purposes of the Rural Electrification Act. This, in our judgment, is in accord with the public interest of Arkansas citizens. However, the predominant public interest is adequate telephone service to these same Arkansas citizens, and the definition of "adequate service” is subject to change.
To illustrate the problem in Arkansas I have the Commission file on an independent REA-financed telephone company. It serves an area where its customers have a per capita income of considerably less than $1,500 a year.
The area is mountainous, roads are poor, economic progress is slow and I think it no exaggeration to say that in many instances the telephonic communication system is that which more than anything else keeps our citizens in communication with the population centers from which their essential products and services must come. I further believe that their communications system is indispensable in bringing such citizens into the mainstream of modern economic and social American life.
Permit me to outline the history and present condition of this illustrative Arkansas company, its indicated needs today, the inadequacy of internally generated or externally available funds to meet these needs, and the aims of the Arkansas Commission for standards to be met in the future.
This company was incorporated in 1951. It was possible for it to be planned and to come into existence because the United States made funds available through the REA Telephone Amendment in 1949. Prior to this time, no service at all was available in this mountainous North Arkansas area. Capitalized at $35,000 it apparently borrowed a small amount of money privately and commenced a rudimentary service to one small rural community. It commenced preparing a request for $166,000 from REA which it finally submitted in August of 1954. It received funds 14 months later, made plant improvements, and extended service to one other small community, which for the first time, in 1955, had some telephone service. Its next loan application was for $17,000 in August of 1956. Funds were received two years later in June of 1958. In the interim, having its first loan, and with the expectation of the supplemental $17,000, it added a third small community and the farm houses between to its area. In March of 1959 it applied for $584,000, which became available in December of 1960. Another small town and numerous cross country connections were added, and these funds permitted the company to extend service to still another community the following year. In March of 1966 it applied for $805,000. received these funds two years later. At a hearing before the Commission in 1967 it requested a permit to create a new exchange area, to extend service beyond the present boundaries of one of its exchanges into a hithertofore unserviced area, and to extend service into other areas of its existing territory which it had been unable to reach before. All improvements were dependent on REA funds. The permit was granted, the funds received, and the extensions were made.
Let me emphasize at this point that the records reflect and management of the company believe that the ability, understanding and motivation of REA personnel for the entire history of the company was beyond reproach. The advice and service provided by REA staff extended beyond statutory duties and government working hours.
However, in the period of time described, a change can be discerned in the needs and expectations of rural telephone subscribers. The files of the Commission reflect that commencing in the late 1950's demands for service by people in previously unserviced areas began growing. In the 1960's complaints to the Commission reflected not only additional demands for service extension, but also community-wide feeling that existing services should be improved. These complaints outstrip the growth of the area, and one of several illustrative transcripts appears in the Commission files of 1966. The hearings' genesis was a letter to the Commission in the summer of 1964 written by a citizen leader in a remote area requesting an extension of service for his and 24 other households. Company surveys revealed service was feasible and the area was designated in an REA loan application as one to which serivce was to be extended. By 1965 other citizen groups in the service area joined in the demand for service and the groups petitioned the company for extensions. The REA project grew to contemplate service extensions to 1,600 new subscribers. As an interim emergency measure, the company installed a mobile radio-telephone unit to deal with critical situations. Complaining groups became swelled by the intervention of Home Demonstration Clubs and Senior Citizens Associations. Some residents felt that service could be extended by companies in adjacent service areas and requests were received by the Commission that the boundary of the company's service responsibilities be changed. Neighboring companies no better financed than our example failed to take the bait. The matter of the failure of the company to extend service to some areas culminated in the aforementioned 1966 hearing before the Arkansas Public Service Commission. Sixty complainants appeared. Citizen leaders presented the case and the principal company response was that it was unable to procure sufficient capital to provide the service. The Commission did not agree with the defense that the service was not economically feasible at the time, held that reallocation of the territory would not improve the situation, and ordered that the company begin the necessary facilities to extend service immediately upon receipt of funds from REA. Funds were not soon available and continuing pressure from the citizens and the Public Service Commission resulted in the company using all its cash reserves and all the local borrowing it was able to procure to provide the critical extension. The ensuing precarious financial condition of the company was relieved on the receipt of its REA money.
A review of the complaint files in our Commission since the resolution of that crisis reflects the same pattern. Service requests are frequently received and except where not at all feasible are met when funds become available. This company, as a result of its capital deficiency, has the highest number of emergency over-eight-party connections of any Arkansas telephone utility. At present half its service is eight-party service. It has become commonly accepted by public and our Commission that while better than no service eight-party service is inadequate service and improvement in response to either a Commission order or the company's unquestioned desire to afford the best possible service, requires funds. The problem then to be examined is whether such funds are available.
The equity/debt ratio of this company was 12.21% prior to the 1968 loan. This ratio would now be approximately 6.5%. As you are aware, a company with equity of only 6.5% would be in no position to secure external funds through normal capital markets. This impossibility is further compounded by the fact that the company would be operating at a huge deficit if its present funds were obtained through ordinary commercial channels, and its yearly earned surplus is insufficient to allow substantial increases in interest payments. REA funds, as others and I have pointed out, are becoming increasingly hard to obtain, and the built-in time lag between application and receipt is presently somewhat beyond two years. Companies in sounder financial condition can eliminate a part of this time lag by obtaining interim bank financing. One of the counties in which the company operates has only one bank with total deposits of only three million dollars, an obviously inadequate source of capital to meet this company's needs, and the financial risk would deter any bank which has no intimate interest in the progress of the company and the area which it services. The cash flow for 1967 of this company was $55,862. This was as compared to plant at the time of $951,418. These internally generated funds obviously will enable the company to do little more than stand still. This is not a company in which earnings are being siphoned by officers of the company. Its chief executive officer is paid less than a union truck driver, and its total dividends for the year 1967 were $3,530. This executive officer must constantly contend with complaints which he cannot remedy due to lack of funds as well as the other problems inherent in running a company with assets in the neighborhood of $1.5 million.
It is conceivable that the present tariffs on file with the Commission reflect a level of payment which cannot be raised substantially due to the ever-present poverty in this region. The 1968 loan application, you will recall, did not cover upgrading of present service. This involved extension of primarily eight-party service to new rural customers. In December of 1967 this company's more than four-party service constituted 50.3% of its total stations. If the company is to meet the proposed requirements of the Commission, it must be able to obtain money somewhere. Due to the fact that few of the REA Borrowers have a reasonable expectation of borrowing in the commercial market due to a combination of mortgages held by the REA and unattractive equity/debt ratios, this undercapitalized company in a poverty-stricken area must compete for REA funds with other REA borrowers who are in a more advantageous financial posi. tion. The proposed bank would enable the more financially mature telephone companies in more prosperous areas to obtain bank financing, thus freeing REA funds which could be advanced more rapidly to companies such as this. As this company's financial strength grows with the economic growth of its service area, it too can move into the intelligent progression contemplated by the Rural Telephone Bank Act.
In conclusion, it is the view of our Commission that a workable program for financing adequate telephone service to rural Arkansas does not now exist. Service standards which we and other State Commissions are obliged to require of companies operating in our states are rising. The imposition of service standards appropriate to the United States of today is possible if financing of improvements becomes available on a realistic basis. The alternatives facing a state body today—those of imposing demands on a company it cannot meet and forcing it into a distress sale, raising rates to a level out of proportion to existing services to finance extensions and improvements to future customers, accepting abandonment of services where no other way of providing them except through REA financing is feasible—would include additional solutions made possible by a Rural Telephone Bank. With the help of this Committee, our state can reward the efforts and meet the needs and expectations of rural Arkansans more satisfactorily as rural Arkansans than other governmental programs can meet their demands as residents of Northeast Washington. H.R. 7, the Rural Telephone Bank Bill, is realistic legislation, and our Commission supports its objectives and format.
The CHAIRMAN. That concludes the list of the witnesses. We have only one more witness. That will be the Administrator of REA. As I said a while ago, I hope he is confirmed. I understand the Senate committee is going to vote on it Wednesday. Probably he will not be confirmed next week in time to appear here next week, and the chairman is not going to be here the following week, and several other members I know of are not. So, a program will be announced and it will probably be the second week in March when we hear from Mr. Hamil, at which time we will conclude the testimony in connection with these bills.
The committee will stand in recess, subject to the call of the Chair.
(Whereupon, at 12:10 p.m., the hearing was recessed, subject to the call of the Chair.)