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Mr. HARMON. Yes, sir. We have over 2 million REA-financed telephones tied into the Bell System-tied into all of the other independents, and it is just a good working operation.

Senator ELLENDER. Thank you.

Senator TALMADGE. Senator Holland?

Senator HOLLAND. Senator Ellender asked a question a while ago which maybe you can answer.

What is the variance in rates between the lowest and the highest, if you know, of the independent companies to the individual subscribers for one phone?

Mr. HARMON. I could not possibly give it to you off the cuff, because there are so many factors involved. It is a one-party or an eight-party service system? When you pick up your telephone, can you talk to 1 million people, or are you limited to 500 or 600 people? How many extensions do you have in the house, and so on. However, it is my recollection, sir, that there was a study made by our comptroller which was put into a sort of manual form that gives the comparable rates throughout the country as best they could. I can make that available to you.

Senator HOLLAND. Will you supply for the record in terse form your figures from your lowest to your highest?

Mr. HARMON. I am sure I can do that.

(The information follows:)

The lowest telephone rate for the commercial type independent telephone companies is $1.75 for resident rural service and the highest rate is $23 for business single party with extended area service.

The average rates among commercial type independent telephone companies are a minimum of $3 for rural residential service and a maximum of $15 for business one party service.

It is pointed out that in the telephone industry all rates are regulated by State or local regulatory commissions.

Senator HOLLAND. On this matter of the setup of the board of directors, under the setup that you suggest, if the independents were inclined to do so, they could elect all of the directors. I can see why you would object to an even division, because you have a much larger stake than the cooperatives, but it occurs to me that some other figure would correctly represent the relative weight of each group and that the directors should come from the two groups, in accordance with that distribution which would be more acceptable all the way around than the one which would allow one group to completely control the directorate.

What do you think about that?

Mr. HARMON. We would be delighted. In fact, we would look forward to that. We would want the cooperatives on this board. The only objection we have raised is because of the disparity of the numbers and the disparity of the telephone service, that the board of directors be specified 50-50 by statute.

Senator HOLLAND. About 4 to 2?

Mr. HARMON. It would be perfectly satisfactory. As a matter of fact, I would suggest that the language of the previous paragraph in this bill be considered. The previous paragraph relating to appointed instead of elected directors says that this will be done with due regard to fair representation. Specify fair representation in the overall statute and then have the bylaws of the bank spell it out specifically.

Right now, we just do not know what is going to happen in 10, 15, or 20 years, and to specify specifically in the statute that the numbers be such and such we feel is inappropriate.

Senator HOLLAND. I have had considerable experience in connection with the farm credit units. We have had to amend the requirements from time to time with reference to setting up the board of directors and other questions in regard to the internal management. It has never been difficult to do that. It would occur to me that here is something for you and the cooperatives to get together on, and I am simply suggesting the 4 and 2 basic, because that is more roughly in accord with the general situation, and if you can get together with them, advise the committee, because it would seem to me that the even distribution required by this act is properly subject to objection by you under the present state of things.

I am just suggesting 4 and 2.

Mr. HARMON. I can say right now that that would be perfectly satisfactory with us.

Senator HOLLAND. All right. Suppose that you get together with the cooperatives and see if you can help the committee in that regard? Mr. HARMON. Yes, sir.

Senator HOLLAND. Thank you, Mr. Chairman.

Senator TALMADGE. Senator Cooper, any questions?

Senator COOPER. I would like to say that I think your statement has been comprehensive and very helpful.

Mr. HARMON. Thank you very much.

Senator COOPER. Today, the independent telephone companies do have access to funds other than the 2-percent loans from the REA? Mr. HARMON. You mean the overall independents rather than the REA borrowers? Yes, they do, Senator, and I might add

Senator COOPER. But at least some of them may have difficulty in raising capital funds?

Mr. HARMON. Depending upon their financial structure. I would like to point out that in some instances the REA borrowers have been able to go to the local banks. I would like to point out, also, that this has been almost exclusively limited to their day-by-day working capital, rather than the long-term utility loans that are required for the telephone business as such. In other words, it is for their working capital.

Senator COOPER. Do you know approximately what percentage of the independent companies are able to issue long-term obligations in order to secure capital?

Mr. HARMON. The independent companies?

Senator COOPER. Yes.

Mr. HARMON. As opposed to the REA borrowers?

Senator COOPER. No. I mean those independent companies who are REA borrowers.

Mr. HARMON. It would be a guess. I would say, well, that is roughly 10 percent-it would be roughly that.

Senator COOPER. I think it would be helpful if you could provide to the committee information as to what percentage of the independent companies have been able to go into the market to secure funds on their long-term obligations.

Mr. HARMON. Yes, sir.

Senator HOLLAND. Along that same line, do the independent REA borrowers have to give a first mortgage to the Government on the whole system or only that part of the system that is extended?

Mr. HARMON. They have to give a mortgage. The mortgage reads to the effect that it is applicable to the property under the current loan and all future acquired property. It is not only a matter of how many companies can qualify in the limited public money market-but you already have this existing first mortgage, and, then, in addition, if you are going to add to plant, the first mortgage takes priority over that plant addition, too, so that under these conditions it is really difficult to go out in the commercial money market and get money.

(The information follows:)

As best we can determine, apart from short-term working capital, there have been only three commercial-type REA telephone borrower companies that have been able to obtain financing in the commercial money market on top of their REA loans. This represents one-half of 1 percent of the 625 commercial-type borrowers. These companies obtained unsecured-type debenture financing. They are part of a holding company and it is assumed that they were able to obtain this unsecured financing based upon the credit standing of the parent company.

Senator COOPER. You think, then, that most of the independent companies that now go to the REA for funds would not go there if they were able to issue their own obligations?

Mr. HARMON. If they could get out from under it, I think that they would much desire to do so, but, as I point out in my paper, Senator Cooper, the thing that is hurting the cooperatives and hurting the poorer REA borrowers is the fact that the money can only be loaned at 2 percent, and yet you may have a company that probably could pay 4 percent and they have a priority project to carry out the purpose of the act. They get the money at 2 percent which takes it from the amount which would normally be available for loaning at 2 percent. If there was 4-percent money available for them, or if they could go into the bank, this would not happen.

Senator COOPER. Thank you; that is all.

Senator TALMADGE. Thank you very much, Mr. Harmon, for your contribution.

Mr. HARMON. Thank you, Senator.

Senator TALMADGE. At this point in the record, I would like to insert a statement by Senator Ralph Yarborough, of Texas, one of the cosponsors of this legislation.

(The statement is as follows:)

STATEMENT OF HON. RALPH YARBOROUGH, A U.S. SENATOR FROM THE STATE

OF TEXAS

Mr. Chairman and members of the Subcommittee, I appear in support of the two bills, S. 3337 and S. 3720, of which I am one of the co-authors, which are before you to create a Rural Electric Bank as a source of supplemental financing for the nearly 1,000 rural electric cooperatives now operating in Texas and 45 other states. Let me take just a few minutes to explain.

As a member of the Senate Appropriations Committee, I am familiar with the problems troubling our rural electric cooperative systems. Our committee gives these problems a careful and detailed hearing every year before the Agriculture Appropriations bill is marked up and sent to the Senate floor. The rural electric cooperative systems are facing a critical situation, and I am pleased to support the solution which they are recommending to you in these two bills. As you know, the demands of rural electric consumers for electricity are doubling every eight to 10 years. But the amount of money available to finance

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heavier lines, more substations, and bigger plants is practically standing still. The only source of capital for these systems is the Rural Electrification Administration which must compete for funds in the national budget with all other Federal departments and agencies. In the past few years, the annual authorization for REA electric loans has been held right around $375-million.

But studies conducted by REA and the rural electric co-ops themselves show they are going to need between $8 billion and $9.5 billion in new capital during the next 15 years just to keep up with the power demands of their consumers. I want to emphasize that that much money is almost twice as much capital as the rural electric co-ops invested in their systems over the past 30 years.

And there is no question but what they are doing a good job, a job vital to the continued strength of this country and the development of our rural areas. The 99 REA borrowers in my state-79 of them are rural electric cooperatives—are providing service to nearly 400,000 consumers over 169,000 miles of line. They serve only 2.5 consumers per mile of line, and they get only $334 annually in revenue per mile of line, but the average use of electricity in the rural electric co-ops more than doubled in the past 10 years, from 237 to 554 kilowatt hours a month per user.

I might just mention that commercial power companies in Texas serve 32.5 consumers per mile of line, and the average annual revenues amount to more than $8,000 per mile of line. You can see that the rural electric co-op systems operate under severe handicaps insofar as consumers and revenues per mile are concerned.

The great majority of our rural electric cooperative systems have decided, and I must say I agree with them, that the Congress in the years ahead just isn't going to be able to authorize all of the new capital the rural electrics are going to require. The financial demands upon the Federal budget already are tremendous, and they are increasing. A supplemental source of financing for these cooperatives must be found.

That is the central purpose of S. 3720. The bill would establish a Rural Electric Bank and a Rural Telephone Bank.

To use the rural electric bank as an example, the capital would be raised through a pooling of funds from the Federal Government, from the electric co-ops, and from money borrowed in the private money markets. The Federal Government would invest a maximum of $50 million a year for 15 years. Its total would be $750 million. This would come from repayments of existing 2 per cent, 35 year loans.

The money from the electric co-ops will be in the form of a minimum investment of 5% of the amount that the co-op borrows from the bank.

And the private funds would be raised through open market borrowing of up to eight times the bank's paid-in capital. The bank would issue debentures, which would currently sell for about 5%.

The loans to co-ops would be made at two different rates: up to 3% for those which can afford more than the 2% loans but which cannot afford the full market rate; and for those systems which can afford to pay the market rate, loans would be made at the same rate of interest which the bank paid on its debentures.

Control of the bank resides in the Federal Government throughout the period that the Federal Government is a majority stockholder of the equity capital of the bank. When the point is reached at which the borrowers have contributed a majority of the equity capital, then they assume control of the bank.

I urge your favorable consideration of this bill so that our rural electric systems may continue to provide service to the rural areas they have worked so efficiently to develop.

Senator TALMADGE. Also, I would like to insert in the record at this point a letter dated August 15, 1966, addressed to me by Mr. William N. Bannard of the Investment Bankers Association of America. (The letter referred to follows:)

NEW YORK, August 15, 1966.

Hon. HERMAN E. TALMADGE,
Chairman, Subcommittee on Agricultural Credit and Rural Electrification,
Senate Committee on Agriculture and Forestry, Senate Office Building,
Washington, D.O.

DEAR SENATOR TALMADGE: The proposals in this bill would authorize broad and important programs of financing for rural electric and telephone systems which would seriously affect both cooperative systems and private systems.

The hearings which were recently completed by the House Agriculture Committee on H.R. 14000 and H.R. 14837 indicated that there is considerable uncertainty and disagreement on the need or desirability of the proposed legislation. Our Association would like to consider these proposals carefully and perhaps submit constructive suggestions to your committee and we believe that other interested parties and members of the committee would find it helpful to have additional time to consider the proposals carefully before action is taken on them.

Accordingly, we respectfully urge that consideration of these bills be postponed until the next session of Congress in 1967 to afford an opportunity for careful consideration of them, and request that this letter be included in the record of the hearings.

Respectfully,

WILLIAM N. BANNARD, Chairman, Public Utility Securities Committee, Investment Bankers Association of America.

Senator TALMADGE. And finally, for insertion, the statement prepared by John J. Meehan on behalf of the Chamber of Commerce of the United States.

(The statement referred to follows:)

STATEMENT OF JOHN J. MEEHAN, GROUP MANAGER, COMMUNITY, REGIONAL, NATURAL RESOURCES DEVELOPMENT GROUP, CHAMBER OF COMMERCE OF THE UNITED STATES

The Chamber of Commerce of the United States recommends that the portion of S. 3337 and similar bills, providing for supplementary financing of rural electrification be rejected.

It is recommended instead that studies be initiated by the Committee which would develop legislation to phase out the Rural Electrification Administration program for financing rural electrical cooperatives by providing a transitional federal program leading to private financing of all rural electric cooperative activity.

The new federal bank for rural electric systems as proposed by S. 3337 would create a new nationwide system of federally-subsidized financing for public power systems. This proposal would continue the existing rural electrification program and establish a new financing system without any meaningful congressional limitations. This new system would open sources of capital to borrowers, Imost of whom have a tax-free status, to build, own, and operate facilities in direct competition with other suppliers for customers virtually everywhere.

S. 3337 would establish (1) a Rural Electrification Account in the Treasury with most of the earmarks of a revolving fund, and (2) a Federal Bank for Rural Electric Systems available to those who had been previous REA borrowers under Section 401 of the Act.

The bank would obtain funds for its activities by issuing stock to the government, to those eligible to borrow from the bank, and to electric consumers of borrowers, and through debentures to be sold in the private money markets. Debentures would be authorized up to 10 times the paid-in capital and retained earnings of the bank, which, considering the government's authorized initial subscription of $1,000,000,000 to the bank's stock alone, would give the bank a potential lending capacity of substantially more than $11,000,000,000.

In essence, S. 3337 would (1) continue the present REA 2% electrification loan program unabated, unmodified, and without any statutory limit on expenditures; (2) authorize $1.000,000,000 of federal funds for the capitalization of the bank to be established by this plan; (3) provide no specific date for repayment of this money; (4) provide the bank with a potential lending capacity of up to 10 times its paid-in capitalization and retained earnings which, when coupled with the amounts to be subscribed by borrowers and others, could be in excess of $17,000,000,000; (5) allow the bank to operate without limitation as to areas to be served by borrowers or the types of facilities to be financed by loans from the bank; (6) allow loans to be made without proof of actual need and regardless of whether borrowers would duplicate the existing facilities of electric companies, a policy which could result in broad economic waste; and (7) allow the bank to operate free of the restrictions that Congress has written into REA appropriations reports concerning unnecessary duplicate facilities.

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