THREE SUBSTANTIVE LEGISLATIVE OBJECTIVES NECESSARY

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

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 this supplemental financing legislation. 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 of H.R. 1400 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. Mr. Chairman and members of the committee, I consider it a privilege to once again have the opportunity to appear before this committee, as I did last year, to discuss the supplemental financing proposal for the REA telephone companies.

I would like to merely summarize a few of the points which I feel are of major import in the consideration of the bills you have before

you.

I do not want to take much time, because I realize that the Congress is recessing for the Easter holidays at noon, and I do not want, in any way, to hinder the expeditious workings of this committee or of the Congress.

I think that it is vitally important for the members of the committee to have a thumbnail description of what the conditions were in rural telephony prior to the passage of the REA telephone amendment in 1949. It is quite an interesting history.

Many hundreds of rural telephone systems were started at the turn of the century and the approximate 20 years following. By 1949 these systems were 40 to 50 years old, and were becoming broken down. Actually, there were less telephones in rural America in 1949 than there were in 1920, which is a rather hard thing to believe. They found themselves in a position where they were trying to operate a system of equipment that was put in at the turn of the century while, at the same time, urban America was being revitalized in its telephone communications by rather dramatic efforts in technological improve

ments.

The time came when something had to be done. When these rural telephone companies tried to secure adequate debt capital financing they suddenly realized that they were not the attractive types of risk that either a banker or an insurance company cared to deal with. And,

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so, we had a financial vacuum so far as the ability of the rural telephone companies at that time to obtain financing to rebuild and improve their systems.

At the same time the REA electric program had already proved itself, and so, in 1949, an amendment to the REA Act was proposed to the Congress to try to help cure this situation for rural America.

You will recall, Mr. Chairman, as will the other Members who are still serving on this committee who were in the Congress at that time— Mr. Jones of Missouri was here, as I recall, and Mr. Abernethy and Mr. Gathings and Mr. Abbitt and Mr. McMillan-you were serving on that subcommittee, and you heard the testimony with respect to what the conditions were at that time.

Out of that testimony came the passage of the telephone amendment in 1949. I think the best manner in which we may describe the anxiety with which these companies operated at that time is to recall what Mr. Claude Wickard, the REA Administrator reported to the subcommittee in his testimony of January 1950, bearing in mind that this program was only adopted in October 1949, and that memorandums were only sent out in January. When he testified-it was on January 31, I believe he reported to the subcommittee that they had received over 1,100 inquires about the program since its passage in October, and that within those 30 days or so in January, 144 telephone loan applications reached his desk.

What has been the result to date of this program?

Whereas only 39 percent of our American farms had telephone service in 1949, today approximately 80 percent have telephones. The REA telephone companies are operating the most modern dial system in America. They are cooperating with the entire telephone industry to see that this modern type of service is furnished.

This program has also proved itself.

But once again, they have come to a crossroad where they need more debt capital. I would like to reiterate what Mr. Fullarton and Admiral Mott have said about the needs of the program.

Debt capital is really just as much of a need today as it was before 1949, and the reason for it is that the amount of money that will be required in the next 15 years is double that of the last 15 years. This is hard to believe but there is a justifiable reason for it. The reason is that upgrading of the service is taking place within this industry in rural America.

Back in the early days, the standard of REA was eight parties on a rural line. We are finding out, especially within the past 2 years, that rural America is not satisfied with this eight-party service, and so a tremendous amount of upgarding is taking place, upgrading to the extent that those eight-party lines are now being reduced to fourparty lines, and where economic feasibility can be proved, one-party per line.

The Bell System feels that they can have 90 percent of their entire system converted to a one-party system by 1975, and, certainly, it would not be well for rural America to lag far behind in the furnishing of this kind of service, especially when the people demand itand this is what is taking place.

Over 50 percent of the loan applications which have been received by the REA in the past 2 years have been for this upgrading of the service.

When this committee considers the needs of the telephone portion of this program, there are certain things that I feel that the committee ought to bear in mind, because in this legislative process it might become very easy for the telephone portion to be submerged in the same kind of thinking and equating of conditions that exist in the electric program.

So, I would just like to briefly point out some differences which I think are rather dramatic and which the committee is asked to bear in mind.

Yesterday, you heard testimony from a Mr. Thornborrow of the Edison Electric Institute, a financial analyst, who, among other things, gave you some figures on interest coverage in the electric program. We merely want to point out that the interest coverage in the telephone program is quite different from that in the electric program. It is not as high. And there is a reason for that. The telephone program is younger than the electric program. In point of years of experience, we are 14 years behind; and in point of financial ability, it appears that we are possibly 10 years behind. To give you some idea of the conditions that face these companies and what their financial ability is, I would just like to reiterate two or three facts which I feel are very important.

No. 1 is what we call density, which is the number of telephone subscribers per route mile of line.

In the REA telephone program I will divide the cooperative telephone companies from the commercial telephone companies.

In the cooperative telephone companies, there are only 2.5 subscribers per mile. In the commercial companies there are 4.7 subscribers per mile.

Now, if you take the whole independent telephone industry (that is, non-Bell) and lump it together, it has about 15 or 16 subscribers per mile. And then if you take the next step and go to the Bell System, we find that they have over 40 subscribers per mile.

I think this gives you some idea of the tremendous financial handicaps which are faced by these companies in trying to give modern telephone service to rural areas.

There is one other thing that I think is very noteworthy.

In the presentation of the electric side, it was noted that quite a number of the electric companies have a net worth of over 40 percent, and, therefore, are in a better financial situation to go into the private money market.

Let us examine that approach with respect to the telephone portion of this program.

At the end of December 1965, less than 2 percent of the REA telephone companies had a net worth, as a percentage of total assets, of over 40 percent; 98 percent of them had a net worth, as a percentage of total assets, of less than 40 percent. As a matter of fact, 88 percent of them had a net worth, as a percentage of total assets, of less than 25 percent. And 62 percent of them had a net worth, as a percentage of total assets, of less than 15 percent.

The debt/capitalization ratio is quite different also.

In the telephone program there is approximately an 87-percent debt/capitalization ratio. So, you see that we are operating under quite different financial conditions.

I merely point this out to the members of the committee, so that the telephone program will not suffer from applying in the same manner the same yardstick on their side as on the electric side, because I do not believe that it would be sound if that were done.

In conclusion, Mr. Chairman, I should like to reiterate also again what the previous witnesses have testified to, and that is that the major legislation objective that we feel ought to be considered in this bill is: No. 1, adequate debt capital at usable interest rates; No. 2, built-in incentives to encourage the eventual private ownership of this telephone bank by the borrowers, themselves, and, No. 3—and just as important is permitting these companies to have a sufficient amount of latitude so that they may meet the industry needs of the future without being hampered in any way.

This is a most dramatic industry in which tremendous technological changes have been wrought in the past 10 years. If we are going to continue to provide this kind of service to America and its rural areas, we must be afforded this opportunity to keep pace with the industry.

And, finally, Mr. Chairman, I should like to make a personal aside in connection with what this and the electric program means to rural America. One can hardly imagine what would have had happened to our food and fiber capability in World War II had America's farms not been electrified to the extent that they were at that time.

Electricity and telephones are two very basic essentials that must of necessity be considered in any rural development of America's future. I live in a small town in Minnesota, and I like the people there, and I think that our area, as well as many thousands of other areas of rural America can provide an answer to a lot of the problems that face us today. I think, eventually, some kind of proposal will be made to provide major rural development and it will be as dramatic as the electric and telephone programs were at the time of their inception.

I have a lot of faith in rural America. This REA program, certainly, is one that has proved itself throughout America, and is one that the Congress can look to with a great deal of pride.

I think, Mr. Chairman, I shall conclude my remarks at this point, and I will be very happy to answer any questions that you may have. The CHAIRMAN. Thank you, Mr. Peterson.

We are delighted to have had you with us.

Now, we will hear from Mr. Fred McGehee, president, Organization for the Protection & Advancement of Small Telephone Companies, and president of the West Florida Telephone Co., Marianna, Fla. Mr. BURKE. I would ask permission to introduce the next witness to the committee, if I may.

The CHAIRMAN. We will be delighted to have you do this.

Mr. BURKE. I want to ask permission to present Mr. McGehee. I told him that this committee, inasmuch as he had never appeared before this committee, was like those he had appeared before.

The CHAIRMAN. We will be delighted to hear from you now, Mr. McGehee.

STATEMENT OF FRED McGEHEE, PRESIDENT, ORGANIZATION FOR THE PROTECTION & ADVANCEMENT OF SMALL TELEPHONE COMPANIES, AND PRESIDENT OF THE WEST FLORIDA TELEPHONE CO., MARIANNA, FLA.

Mr. McGEHEE. Mr. Chairman and members of the committee, let me say that the committees that we appear before in our section of the country usually wear overalls. I appreciate what Congressman Burke has stated. He is a fellow Floridian. I wonder if he is not a little bit selfish. We are 400 miles apart, but he might be running in my district next time under the one-vote rule.

I appreciate this opportunity to appear before you. I would like to make my statement a part of the record. I would like to congratulate you for seeing and recognizing the need for a bill such as this bill. And I would also be glad to make myself available to answer any questions that you might have later.

My name is Fred S. McGehee. I am president and owner of West Florida Telephone Co., a company of about 4,800 telephones. I represent the third generation of family ownership. My company is located in the Panhandle area of rural Florida. I am not a REA borrower, but do my financing through commerical institutions. I appear in support of a bill creating the REA bank.

I decided several years ago that something needed to be done in order to preserve the independent segment of the telephone industry. I had seen the 4,000 independent telephone companies shrink to the presently 2,000. These 2,000 companies presently represent a market of 3 million-plus stations. I had seen the noncaptive independent suppliers of central office equipment dwindle down from six to the presently two suppliers. We still have many hundreds of small manufacturers and suppliers furnishing us material and tools to carry on our everyday business. I was concerned, as were others, with the 2,000 companies shrinking to the point that the market we represented no longer presented a profitable field.

Hence a group of us formed an organization called Opastcothe Organization for the Protection & Advancement of Small Telephone Companies. I appear here as president of this comparatively new organization.

We are not a trade organization, but a group of small telephone company operators that believe that the existence of numerous small telephone companies, as contrasted to full control by one company or a few large companies, will continue to produce further widespread benefits and that the advancement and preservation of such small companies is in the best interest of present and future subscribers of both small and large companies. Our survival also gives people like yourselves a yardstick by which to measure our industry.

We believe that the small company can best enhance its position by associating itself with other small companies, jointly taking stands and passing on knowledge and experience to the other.

In Opastco we class all companies with 25,000 stations or less as small companies.

If you remove 100 of the largest telephone companies from the approximately 2,000 operating companies, you have left approximately