ment and expansion of existing telephone facilities and the construction and operation of such additional facilities as are required to assure the availability of adequate telephone service to the widest practical number of rural users of such service."

From the date of inception of the REA telephone program to March 31, 1966, loans totaling $1,227,962,621 had been made to 848 companies in 46 states. 39% of America's farms had telephone service in 1949. Today 80% of America's farms have modern dial service, thanks to the financial and technical assistance furnished through the REA telephone program. Today over 2,000,000 subscribers receive telephone service as a result of this program. It is now abundantly clear that any future rural development is directly dependent on two basic requirements, electricity and telephone, without which, rural development can never succeed.

CREDIT REA FOR FIRST GREAT TRANSFORMATION IN RURAL TELEPHONY

Eight telephone subscribers per rural line was the standard set by REA when the program started. Upgrading of service from twenty to twenty-five subscribers per line to a limit of eight subscribers per rural line represented the first great transformation in rural telephony and REA can proudly take the credit for it. The second great transformation in rural telephony is now taking place, namely, upgrading of service from eight to four subscribers per rural line and, where economic feasibility can be shown, only one subscriber per rural line. The farmer is using this modern telephone system so much more than the old system of twenty to twenty-five subscribers per rural line, that the eight party line is now more difficult to get to use than was the old system.

As a result of this desire on the part of rural people for more and better service it is interesting to note that over 50% of all loan fund requirements for the REA telephone program for fiscal year 1966 will be used for upgrading of service. In this connection it ought to be stressed that the timetable for the Bell operating companies indicates that one party service will be furnished to 90% of their subscribers by 1975. Today less than 24% of REA telephone subscribers enjoy one party service. For REA telephone companies this means simply that in the not too distant years ahead the third great transformation in rural telephony will take place. When that day arrives every REA telephone subscriber in America can have one-party service.

COOPERATION BRINGS RESULTS IN TELEPHONE INDUSTRY

The rural REA subscriber who could not call his neighbor prior to 1949 can now reach 97% of the world's telephones. The question may be asked, how was this accomplished in such a short span of time? The answer is very simple. The finest of relationships exist between telephone companies to bring better communication to their subscribers. This includes the entire gamut of the industry from the giant Bell system to the smallest REA company. We know of no other industry where finer cooperation may be found.

Large and small telephone companies, working together, have brought about the finest telephone network in the world. We cite the following illustration as one among many: All number calling (ANC) permits a telephone user to call another person faster and more efficiently. REA recognized the benefits of ANC early; it is now the standard in the industry. ANC is a key factor in the international dial program. This type of progress is impossible without total industry cooperation. REA telephone companies are proud to be a part of this dynamic industry and want to continue to give more and better service to meet public demands.

HIGH DEBT CAPITAL NEED DUE TO SECOND GREAT TRANSFORMATION

Having briefly reviewed the history of the REA telephone program let us now turn our attention to the greatest problem facing this program today. It can be stated very simply. There is a very urgent need for adequate debt capital in order to accomplish program objectives. Here are the facts. The second great transformation in rural telephony, namely, upgrading of service, has resulted in a huge backlog of unapproved loan applications on hand which has reached an all-time high. On May 31, 1966, REA had 304 unapproved telephone loan appli

cations on hand totaling $199,987,000. The following is a breakdown of these applications by states:

Unapproved REA telephone loan applications on hand May 31, 1966

At the end of this month Fiscal Year 1966 will be history. $24,544,000 (remainder of fiscal year 1966 appropriation) is available to offset to some extent the nearly 200 million dollars of unapproved loan applications on hand on May 31, 1966 as cited above. However, more applications will be forthcoming during this month of June. We estimate there will be close to 190 million dollars of unapproved telephone loan applications on hand as we begin fiscal year 1967. This represents 68 million dollars more unapproved loan applications on hand than at the end of fiscal year 1965. The House has passed the REA telephone appropriation for the new fiscal year 1967 in the amount of 97 million dollars. The need for additional debt capital is extremely urgent.

Before embarking on a discussion of the supplemental financing proposals, it should be clearly stated that there is and will be a continuing need for 2% direct loan financing for REA telephone companies for some years to come. This program is only sixteen years old and the companies have not attained the degree of financial maturity found in the electric program. The following will illustrate the point:

Net worth of telephone borrowers as Percent of Assets December 31, 1964 (latest available figures)1

Negative net worth_
Less than 5 percent..
Less than 10 percent-
Less than 15 percent..
Less than 20 percent.
Less than 25 percent..
Less than 30 percent.
Less than 35 percent..
Less than 40 percent---
Less than 45 percent----
Less than 50 percent----

Percent of borrowers

7

23

44

66

81

90

96

98

99

99

99

100

1 These figures would be virtually the same for December 31, 1965.

Less than 80 percent---

CAPITAL NEED NEXT 15 YEARS DOUBLE THAT OF PAST 15 YEARS

Now that we know what the urgent debt capital needs of today are, what about the years that lie ahead. We point out that in the record of this committee there is testimony from competent sources, including REA, and the Kuhn, Loeb & Co. report, that the capital needs for the REA telephone program in the next fifteen years will be over 3 billion dollars. This is a stark contrast to the $1.2 billion of loan authorizations for the REA telephone program for the past fifteen years. We concur in this appraisal of future capital needs for REA telephone borrowers. It is my personal judgment that this appraisal is on the minimum side. This need must be met. The question is how.

ANALYSIS OF DEBT CAPITAL ALTERNATIVES

With the continuing heavy strain on the Federal Budget it would appear that no more than the present annual level of appropriations can be expected. In our judgment all of this money will be needed for 2% direct loans. This annual need would lessen as companies grow in financial maturity in the years ahead. What about direct loans from the private money market? Can REA telephone borrowers find the answer there? It would appear not for two basic reasons. First, the United States has a first mortgage on these companies which virtually precludes the private market from even considering such a possibility. Secondly, even though the United States would agree to subvert itself to the position of a second mortgage, not many REA telephone borrowers could afford to go into the private money market at this juncture. It would appear that the problem must be solved within the framework of the Federal structure within which these REA telephone companies now receive their debt capital.

FEDERAL TELEPHONE BANK IS A SOUND SOLUTION

We believe that the best solution in getting into the private money market lies in the establishing of a Federal Telephone Bank within the structure of the United States Department of Agriculture. This concept is an essential ingredient in all four bills, hearings about which are presently being held before this Honorable Committee. They were not hastily conceived or con cocted. They represent long study and thought on the part of the Depart ment of Agriculture, the Rural Electrification Administration and by REA borrowers and their association. This association supports the concept for sup plemental financing which is encompassed in each of H.R. 14837, H.R. 14000, H.R. 14048 and H.R. 15162.

Testimony already adduced before this committee indicates that the Department of Agriculture has made studies of, and priced out, various alternatives which, by way of Pro Forma Balance Sheet Data and Pro Forma Operating Data, indicate that the Federal Telephone Bank is a sound proposal.

LEGISLATIVE OBJECTIVES SOUGHT FOR

This legislation is of major import. In our judgment the following overriding objectives should be sought:

1. A telephone bank which is capable of providing adequate debt capital at usable interest rates;

2. Built-in incentives to encourage eventual private ownership of the telephone bank by the telephone borrowers;

3. Fair representation on the telephone bank's board of directors from among the telephone borrowers; and

4. Sufficient latitude for telephone borrowers to meet industry responsibilities in the future.

ADDITIONAL RECOMMENDATION

With the thought that it may prove helpful to the committee in its deliberations, we would like to state for the record that our association supports the provision in Section 610(b) (5) of H.R. 14837 which includes community antenna television services or facilities (CATV) within the meaning of the term 'telephone service' and the term 'telephone lines, facilities or systems'.

We point out that CATV service is carried to the homes in the same type of cable that transmit data. Data transmission is fast becoming a sizable com

munication service in the telephone industry. Telephone companies are the logical entities to own these cables from which channels may be leased for CATV services. It is felt, therefore, that telephone companies should own these cables as well as their being permitted to provide the service, if they desire to do so. We invite the committee's attention to the fact that the telephone industry is closely regulated in all but two of our states and by F.C.C. on the Federal level. Territorial integrity is guaranteed and is a key factor in the industry; it eliminates the stress and argument as to who will serve where. From their many years of experience in a now highly sophisticated electronics industry, telephone companies are in the logical position to provide CATV facilities and services.

CONCLUSION

We should like to call the committee's attention to the fact that all segments of the independent telephone industry, REA and otherwise, through their associations, have testified in support of these supplemental financing bills. To our knowledge, no one in the industry is opposed. The entire telephone industry is operating in a most cooperative atmosphere. This is in the public interest. A tremendous task lies ahead for rural telephony, and for REA telephone companies in this instance. The industry is dedicated to continuing to provide the finest in modern telephone communications for this nation. REA telephone companies are proud of their record. REA telephone companies are proud to share in this total industry effort. They want to continue the effort. It is felt that a favorable recommendation on the bills now before this Honorable Committee will enable them to do so.

Mr. Chairman and Members of this Committee, we again thank you for the privilege you have accorded us in permitting our appearance to testify. It is hoped that our testimony may prove to be helpful to the committee in its deliberations.

Mr. PETERSON. Much that I would like to say would be repetitious, having already been stated by the two witnesses who have preceded me. However, I do want to call to your attention and elaborate on one or two items which, I think, should be foremost in the committee's mind when it considers these bills.

First of all, it has been mentioned that there is complete unanimity within the telephone industry in its desire to try to provide the finest modern telephone service all over America. The telephone industry is a most pleasing atmosphere in which this committee can deliberate the needs of the REA telephone program.

I recall, having read the hearings which were conducted back in 1949 on this subject. Mr. Poage was chairman of the subcommittee. At that time most of rural America was suffering from a lack of good telephone service. Many of our farmers had no telephones at all. And for those who had telephones, in many instances the service was so bad that they could not even call their neighbor. They preferred to drive into town to communicate with each other. Today that same farmer and rural subscriber, by reason of the legislation that was passed in 1949, is now not only able to call his neighbor by a modern dial telephone, he can call everyone in the United States. And in addition, he can call 97 percent of the telephones in the entire world. I think this is a tremendous tribute to this program.

It is felt that the main factors this committee ought to consider in this bill are four in number:

First of all, the overriding objective to be accomplished by this legislation should be adequate debt capital at usable interest rates. Second, there should be built-in incentives in the legislation to encourage the eventual private ownership of the telephone bank.

Third, there should be a fair representation on the telephone bank board from among the REA telephone companies.

And, fourth, there should be sufficient latitude in this legislation to allow REA telephone companies to meet industry responsibilities in the future.

I would like to make just a passing reference to the testimony which was given here this morning by a previous witness who advocated that only one bank be used. In this connection, I should like to point out, gentlemen, that there are some essential differences between the electric side and the telephone side of this program. I would invite your attention to the Kuhn-Loeb & Co. report to see what those differences are. I think they are sufficient in magnitude, after examining the facts, that you would want to establish two banks.

Mention was made that we should use the existing farm credit system. This has already been gone into. It has been researched and it has been determined not only by the department, but by those of us who have been working on it for months that this particular approach is not structured for our use.

Gentlemen, rural development in the United States depends, we feel, on providing the two basics of electricity and telephones. We hope that the REA telephone borrowers may be afforded the opportunity to continue with this program.

I want to thank you very much for allowing me to be heard here today.

Mr. POAGE. Thank you very much. We feel that you have made a very constructive presentation here.

Mr. Quie wants to ask some questions of you.

Mr. QUIE. First, I do want to say to Harold Peterson that I appreciate your being here and to have received your testimony. And to have heard the testimony as to the cooperation among the telephone industry.

Mr. Harmon, I understand that you have 66 cooperatives in your membership. Is that right?

Mr. HARMON. That is right.

Mr. QUIE. Would some of those also be members of the National Telephone Cooperative Association?

Mr. FULLARTON. I am sure that we do not have 66 nonmembers. However, we have been unable to find out which ones belong to the other.

Mr. QUIE. You ought to get together. Then does everyone, whether independent or private and cooperative borrowers from the REA, become a member of your organization, Mr. Peterson?

Mr. PETERSON. No, sir. Our organization is comprised solely of REA telephone borrowers, mainly of the commercial [private] type. Mr. QUIE. Are all of the borrowers from REA, the telephone borrowers, members of your organization?

Mr. PETERSON. They are not.

Mr. QUIE. Not all of them are?

Mr. PETERSON. No.

Mr. QUIE. Is it just overlapping-are some of your members members of the other organization?

Mr. PETERSON. There is overlapping in all three of them, Mr. Quie.