Mr. HARMON. The United States Independent Telephone Association is pretty close to 70 years old and basically we represent 92 percent of all of the independent telephones in the United States. I mean, not members of the Bell System. Naturally, we have as members nonREA borrowers. We have big companies. We have small companies. We have REA borrower companies and we have cooperatives. Mr. QUIE. You have 420 REA borrowers?

Mr. HARMON. Well, over 1,000 companies.

Mr. QUIE. Well, most all of those are in the 324?

Mr. HARMON. I believe that it is 54 commercial and 66 that are telephone cooperatives. I am sorry-it is 366 or 354 and 66. Mr. QUIE. 354?

Mr. HARMON. Are commercial companies.

Mr. QUIE. That borrow from the REA?

Mr. HARMON. No, sir; no, sir. They are borrowers from the REA. The 420 are all borrowers from the REA out of 1,000 companies. And then of those 420, 354 are commercial and 66 are cooperative telephones.

Mr. QUIE. How many of those commercial concerns, of those private concerns, were there at the time of the loan-compared with the cooperatives; that is, to the independents?

Mr. HARMON. Very few. I could not give you the exact number. It is very few. The earlier trend in the REA telephone program was for commercial companies. And that is the reason why the percentage of REA borrowers will be roughly 70 percent commercial and 30 cooperative.

Mr. JONES of Missouri. How many REA cooperative telephone companies are there?

Mr. FULLARTON. There are 226.

Mr. POAGE. Mr. Hagen?

Mr. HAGEN of California. This question came up earlier with the electrical bank. As I understand it, loans are available from the REA to privately owned power companies as they are to privately owned telephone companies.

Mr. PETERSON. We are working under the same statute.

Mr. HARMON. We are working under the same statute.

Mr. HAGEN of California. How do you account for the fact that, apparently, if it is a fact, there is more utilization by the privately owned telephone companies than by the power companies?

Mr. HARMON. I think that goes quite a ways back. Back in 1949 there was a considerable contest over the establishment of the telephone amendment. After the amendment was passed the United States Independent Telephone Association, together with the officials of the REA, worked quite closely in drawing up the various contracts and agreements and smoothed out some of the rough spots, and at that time the United States Independent Telephone Association advocated to its smaller members that they get in on the REA, because the rural telephone situation in America at that time was pretty poor and needed capital badly. And I think following the recommendation

of the association there were more commercial companies going into it at the beginning than there were cooperatives.

Mr. POAGE. May I point out in that connection that the Bell System, for practical purposes, at least, does not participate in the REA loans. I have understood that possibly one or two Bell companies have made loans, is that right, sir?

Mr. HARMON. I am not sure. It is beyond me in history, but as of now there are no Bell telephone systems that I know of that have REA loans.

Mr. POAGE. That is my understanding, too. At the present time there are no Bell companies that have REA loans, not that they are prohibited by law from having them. They have exactly the same right that you have or any of you have to borrow from the REA. They have the same rights that the power companies have, but for the same reasons that the power companies have, which are their own reasons, neither the Bell System nor the power companies, generally, have used these loans. There have been a few power companies that have made loans from REA, but by and large the private power industry and the Bell Telephone System do not avail themselves of the REA loans and it is not because the law prohibits it, but it is because they themselves do not want to do so.

Mr. HAGEN of California. In that connection, part of it would be an REA loan and part of it would be a private loan, would it not? Mr. HARMON. With regard to our REA boards, I think that you will find that most of them are about 100 percent REA loans. In other words, in the early days when they started these companies they went into the REA with almost no equity at all. You will find that some companies since that time have been able to generate some internal funds and, perhaps, for a smaller portion of their loans they probably go some place else, but basically it is REA financing.

Mr. HAGEN of California. As I gather it, the cooperative has certain tax advantages which are not available to the privately owned companies?

Mr. HARMON. That is correct. However, the REA telephone borrowers, that is, the commercial borrowers, paid over $28 million in taxes last year.

Mr. HAGEN of California. If REA loans are available to privately owned telephone companies, why didn't they seek them to serve new areas?

Mr. HARMON. What we are really talking about now are two philosophies of doing business. One on a commercial, family held or private investment type concept. And the other, on a cooperative type concept. You are talking now about the philosophy of doing business, rather than the operation of the company.

Mr. FULLARTON. May I comment on that, too?

One of the factors here is who receives what, which is, of course, similar to what exists in the electric power industry, and that is the lucrativeness of the area. Commercial companies, I guess, having witnessed the experience of the power companies, became very much involved. They are required to meet the criteria.

Mr. HAGEN of California. At this point what are those criteria? Mr. FULLARTON. Area coverage.

Mr. HAGEN of California. What is "area coverage"-that is a new phrase.

Mr. FULLARTON. To serve everybody in the service area.

Mr. HAGEN of California. Take the case of the State of California. Is the whole State divided up by some public agency into service areas?

Mr. FULLARTON. That is what we mean when we say that we have territorial integrity.

Mr. HAGEN of Čalifornia. So that when you get into an area that is unserved you have to take the whole area?

Mr. FULLARTON. Or we cannot get an REA loan.

Mr. HAGEN of California. Or you cannot get the loan. That is one of the considerations that probably made it unattractive to the private companies.

Mr. FULLARTON. It is true in the telephone business, to a certain extent. The cooperatives have only added 2.4, while the commercial borrowers have added slightly in excess of 5, showing that when they go in they could go in with REA money, and when they did that, they did use REA money, but they still left an awful lot of territory unserved.

Mr. HAGEN of California. Have the private borrowers had any more difficulty in getting loans from the REA out of this rather limited fund?

Mr. FULLARTON. Not to my knowledge. The cooperatives have used approximately 36 percent of the loan funds loaned, whereas the commercial borrowers, or the cooperatives, represent something like 28 percent of the total borrowings. The cooperatives are a little bit larger on the average than the commercial and more willing to go out and serve everybody they can get their hands on.

Mr. PETERSON. I would like to make one further comment in relation to Mr. Hagen's question, and that is that there is a historical reason why there are more commercial REA telephone borrowers than there are cooperatives. That goes back to the turn of the century when most of the little telephone companies were formed. We used to have hundreds upon hundreds of them at the turn of the century and soon thereafter. And when 1949 came along this outdated kind of system was practically withering on the vine, and with new technology coming in, something had to be done, and when they could not go to the private money market for their money, this is when the REA program came into the picture and provided this wonderful opportunity to serve.

In spite of the advances that they have been made in the REA telephone program in the last 15 years we should not, by any stretch of the imagination, feel that suddenly we can go into the private money market as some previous witnesses have indicated can be done on the electric side of the REA program. The simple facts of life are that 99 percent of all of the REA telephone borrowers today have a net. worth as a percentage of total assets of less than 40 percent. And the average American banker will take a dim view of making any loan under those kind of circumstances.

Mr. HAGEN of California. I want to say that you have made a better case than your counterpart in the electric REA end. You have made a better case, because the load factor on the average farm has gone up

so that they are pretty good customers today whereas he can probably only use one telephone. You have presented a better picture, whereas in the electric end of it, because of the farm technology change and the increased use of electricity on the farm, they have had an increased opportunity to offset the effect of a small number of customers per line. Mr. PETERSON. Our financial maturity is, of course, one half as much in terms of years as electric side, and it is hoped as we progress and we are all allowed to take part in the dynamic change which is occurring in the industry, that added revenues can be obtained and substantial financial footing finally achieved.

Mr. HAGEN of California. Thank you.

Mr. POAGE. May I suggest that not every witness will be heard before we recess at noon.

I will now recognize Mr. Olson.

Mr. OLSON. I would like to attempt to clarify the position of the entire independent telephone industry. Are all of the independent telephone companies more or less rural? Do they exist in less favorable areas from a standpoint of profit and attractiveness?

Mr. FULLARTON. The independents, sir, no, sir. Companies like General and Continental are independent who serve very large areas. Mr. OLSON. I understand, then, that most of what you said does not pertain to those companies?

Mr. FULLARTON. Ño, sir.

Mr. OLSON. You are speaking in regard to the other companies that are basically rural, and though independent, they could not serve their areas without help.

Mr. PETERSON. I think this can be summarized very briefly by indicating to the committee that there are approximately 3,000 independent telephone companies in the United States. And of this number 848 are REA telephone borrowers. In considering their financial ability, Mr. Fullarton has already pointed out that the cooperative type REA companies have a density per mile of about 2.4 subscribers. The commercial (private) type borrowers in the REA program have somewhere between 4.5 and 5 subscribers per mile. But if you take the whole independent telephone industry, the subscriber per mile density is approximately 15.

Then if you go to the Bell System, they have over 40 subscribers per mile.

I hope that gives the committee an indication of where we sit in this financial ability picture.

Mr. OLSON. One other question. I would like to expand on Mr. Hagen's line of questioning regarding why there are more commercial or noncooperatives in the telephone areas. Do you have any trouble with the cooperatives or the people trying to form a cooperative where you are providing adequate service through a private commercial company

Mr. PETERSON. One of the prime reasons-as a matter of fact, I would say the prime reason, we have no trouble is that in the telephone industry today there is territorial integrity. The regulatory commissions of every State except two determine who shall serve where. This is the reason the finest relationships exist in the telephone industry from the giant Bell Telephone System, on the one hand, down to the smallest telephone company.

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Mr. OLSON. What about the customers? Are they asking for anything but good service? Do they want to change the structure by which that service is provided to them, or are they primarily concerned about the service?

Mr. PETERSON. They want better service. They all have said better service.

The CHAIRMAN. Thank you very much, gentlemen.

I will now call Mr. Harlee Branch, Jr., president of the Southern Co.

STATEMENT OF HARLLEE BRANCH, JR., PRESIDENT, THE SOUTHERN CO., ATLANTA, GA.

Mr. BRANCH. Mr. Chairman and members of the committee, I have a prepared statement which I would like to ask permission of the committee to be inserted in full in the record as if read. I am going to undertake to briefly summarize that statement in the interest of time.

The CHAIRMAN. Very well, it will be made a part of the record at this point.

(The statement referred to follows:)

STATEMENT OF HARLLEE BRANCH, JR., PRESIDENT, THE SOUTHERN Co.

Mr. Chairman: My name is Harllee Branch, Jr. I reside in Atlanta, Georgia. I am President of The Southern Company, which through its four operating subsidiaries (the Alabama, Georgia, Gulf and Mississippi Power Companies) supplies electric power to nearly two million farm, residential, commercial and industrial customers in most of the State of Georgia, four-fifths of the State of Alabama, the southeastern quadrant of Mississippi and the so-called panhandle section of northwest Florida.

I appear today to express my serious concern over the adverse impact which the bills being considered by this Committee would have not only on the investors, employees and customers of our system companies and of other investor-owned electric companies, but also the mischievous consequences which would flow to the entire national economy of which our industry is a significant part.

Since the three bills under consideration by this Committee are in essence quite similar, my remarks will apply to all of them although, in my testimony, I shall be referring particularly to H.R. 14837.

In my judgment, these bills represent the most serious threat to the continued growth and viability of the investor-owned electric utility industry in its history. I have been a part of that industry for the past 35 years. I am proud of what that industry has done to help make America the most productive nation in the world.

I have no quarrel with rural electrification, and no quarrel with REA co-ops so long as they fulfill the functions and adhere to the conditions prescribed for them by the Congress. Indeed, our companies were pioneers in the field of rural electrification and today I would suspect that we serve proportionately as many farm and rural customers as almost any investor-owned electric system in the country; and through our wholesale contracts with co-ops and the wheeling arrangements we have made with the Southeastern Power Administration, we probably deliver more power and at lower prices for farm and rural consumption than many governmental organizations specifically created for that purpose. As a purely personal footnote, it may interest you to know that as a young lawyer in the 1930's, I assisted counsel for the REA in drafting the Georgia Rural Electrification Act, one of the first and most liberal state statutes designed to promote rural electrification ever enacted in our country. That statute is the basic Act under which rural electric cooperatives were established and have prospered in my State.

My objections to H.R. 14837 and the other bills now pending before this Committee can be stated quite simply as follows: