urably to the feasibility of the bank and speed the day when retirement of the government's capital will be possible. However, specific provisions for conversion to private ownership and control are necessary if this incentive to borrowers is to be provided.

We believe that section 610(b) (5) (page 37, lines 15-22) of H. R. 14837 is a mandatory part of any supplemental financing legislation. The Administration, we believe, has taken the proper course of action in not continuing for the purposes of title VI the exclusion on loan funds for CATV presently contained in section 203 (a) of the Act. The communications industry is undergoing rapid technological change. Developments are so rapid that a group of services known as new and special services are now being offered to subscribers. These services are generally high revenue producers and can make a significant difference in a telephone system's financial stability. Many of these services are of a nature that can be better provided over CATV-type facilities than over normal telephone facilities. If REA telephone borrowers are not allowed to construct CATV facilities in their service areas, others will construct them. When the new and special services are demanded by rural subscribers, the CATV company will be in a better position to provide these services and thus deprive the REA telephone borrowers of an important revenue source and the opportunity to make their telephone systems more feasible.

The cost of local or exchange telephone service is constantly increasing, The new and special services provide a balancing factor to these increasing local service rates. If REA telephone borrowers are not allowed to provide all communications services in their territories, the day when the rural subscriber can expect service and rates more nearly equivalent to his counterparts in the city will never come. As an example of the scope and magnitude of these new and special services, the Wall Street investment firm of Kuhn, Loeb and Company has estimated that by 1971 more than 50% of the new capital needed by the Bell System will be for such services. Such modernizations and improvements are, of course, slower to come in the rural areas, and we expect that the timing for REA telephone borrowers will be quite a bit further in the future. But any supplemental financing plan is necessarily long range in nature and, we feel, must include capital for all communications services, including CATV. To preclude REA telephone borrowers from providing these services would be to encourage the "cream-skimming" that made the telephone program necessary in the first place.

The intermediate lending program in the telephone bank is of great concern to the telephone borrowers. H. R. 14837 would establish 4% intermediate programs for both the telephone and electric borrowers. It is our understanding that the supplemental financing proposals here under consideration were designed to accomplish two things: (1) to provide supplemental and additional sources of capital to meet the rapidly increasing needs of the telephone borrowers, and (2) to provide a means whereby borrowers can make a transition between the present 2%, 35-year loan terms and the requirements of the private money market, that will not detract from system growth and development. We are not knowledgeable as to the considerations that went into the Administration's proposals for the electric borrowers, but we do know that there are significant differences in the maturity and state of development of the telephone borrowers as compared to the electric borrowers. The financial condition of the telephone borrowers, their ability to absorb higher interest rates and continue to meet program objectives, and their ability to attract other sources of capital are a great deal less than those of the electric borrowers. For instance, the telephones have debt as a percentage of total capitalization of 87.6%, as compared to the electrics' 75.4%. The electric borrowers had 87.6% in 1955, over 10 years ago. Telephone borrowers have interest coverage of 2.06x as compared to the electric borrower' 2.97x. The electric borrowers were in that position in 1954. The present coverage for telephone cooperatives is 1.67x, a position the electric borrowers occupied in 1952, some 14 years ago. In terms of cash flow, the telephone borrowers have net income of 28.3% and depreciation and amortization of 71.7%. The electric borrowers have net income of 46.3% and depreciation and amortization of 53.7%. Telephone borrowers are being forced to grow at a much higher rate than the electric borrowers, an average of 11.8% annually over the past five years. The statistics on achievement of program objectives also show great disparity, particularly area coverage and parity of service.

We believe that a 3% intermediate program is mandatory if any significant number of the telephone borrowers are to be able to participate and we therefore support the provisions of H. R. 14000 in this regard.

An adequate, realistic and usable intermediate lending program of course requires adequate funding. The volume of the intermediate program is affected by the rate at which the bank must borrow on the private money market, the lending rate of the intermediate program and the amount of government capital. Fluctuations in any of these three factors will affect the amount of money available for the intermediate program. Our studies show, based on the present growth rates of REA telephone borrowers that these borrowers will require capital totalling slightly over $42 billion in the 15-year time period 1967 through 1982. Based on present trends it is expected that 80% of this total capital requirement will have to be obtained through long-term debt. It is estimated also that through borrower development 5% of the total capital requirements in 1967 increasing to 30% of the total capital requirements in 1982 could be used at market rates. The balance of the capital required, $3 billion, would have to be obtained through a combination of the intermediate lending program and the present 2%, 35-year loan program.

We recommend a contribution of government capital of $500 million. This amount under a 3% intermediate lending program would at a 5% average market rate over the next 15 years make available $12 billion in the intermediate program. The balance needed, $1.7 billion would have to come from the REA 2%, 35-year program and would require annual appropriations averaging $116 million over the next 15 years. As you can see, even $500 million in government capital does not leave any margin for error.

Both H. R. 14837 and H. R. 14000 contain provisions for the make-up of the Board of Directors which are identical as to the electric and telephone portions of the bills. Each of these bills has a different approach to the structure of the Board of Directors. It should be pointed out that a board of directors equitable, fair, and offering representation to the electric borrowers is not necessarily appropriate to the telephone borrowers. This Association supports the provisions for the telephone bank board of directors contained in S. 3337, a bill that has been introduced in the Senate and which is similar to H. R. 14000. Our recommendations for the telephone bank board of directors are outlined in detail in Exhibit A of this statement.

In conclusion, I would point out that although great progress has been made in rural telephony in the past 17 years, the second half of this century will generate even greater demands on the nation's rural telephone systems. To meet these demands, REA telephone borrowers will need adequate capital financing. I would also remind the committee that although rural telephone service has been on the rise the past 17 years, this does not guarantee that it will continue in the same direction for the next 17 years. Those familiar with the history of rural telephone service know that there were more farms with telephones in the 1920's than there were in the 1940's. The reason for this decline was lack of capital financing to maintain and improve the service. We don't want this to happen again.

RECOMMENDATIONS OF THE NATIONAL TELEPHONE COOPERATIVE ASSOCIATION AS TO SUPPLEMENTAL FINANCING LEGISLATION FOR THE REA TELEPHONE PROGRAM AS CONTAINED IN H.R. 14837

SECTION 502. LIABILITIES AND USES OF ACCOUNT

It is recommended that subsection (5) be added to section 502(b) as follows: "(5) payment of any difference in the cost of funds borrowed by the Bank through the public or private sale of its debentures under section 606(a), and the interest earned on the amount of intermediate loans made under section 610 (b), from the proceeds of such sale."

This addition would allow an intermediate loan program of a volume as determined necessary by the REA Administrator as governor of the bank.

SECTION 503. DEPOSIT OF LOAN ACCOUNT MONEYS

It is recommended that section 503 be changed to read as follows:

SEC. 503. DEPOSIT OF LOAN ACCOUNT MONEYS.-Moneys in the REA telephone loan account shall remain on deposit in the Treasury of the United States until disbursed and shall earn interest while so deposited at the rate of 2 per centum per annum, which shall be credited against interest as it accrues on loans to the Administrator from the Secretary of the Treasury for telephone purposes pursuant to section 3(a) of this Act."

This would allow loan account moneys on deposit with the Secretary of the Treasury to offset the expense of the Administrator's obligations to the Treasury.

SECTION 602. GENERAL POWERS

It is recommended that lines 8 and 9, page 26, be stricken and that lines 6 and 7 be changed to read as follows:

"and (1) exercise all such other powers as shall be necessary or incidental to carrying out its functions under this title."

SECTION 603. BOARD OF DIRECTORS

It is recommended that Section 603 be changed to read as follows: "SEC. 603. BOARD OF DIRECTORS.—(a) The management of the Federal Telephone Bank, within the limitations prescribed by law, shall be vested in a Board of Directors (hereinafter called the 'Federal Telephone Bank Board') consisting of ten members. (b) The following officials shall be voting members of the Federal Telephone Bank Board, and shall serve without compensation as such: (1) the Assistant Secretary for Rural Development and Conservation of the Department of Agriculture who shall serve as Chairman of the Federal Telephone Bank Board; (2) the REA Administrator, who shall serve as Deputy Chairman of the Federal Telephone Bank Board; (3) The Assistant Administrator-Telephone of the Rural Electrification Administration; and (4) the Assistant Administrator-Borrower Development of the Rural Electrification Administration. If any of the foregoing offices shall be eliminated, the successor member of the Federal Telephone Bank Board shall be designated by the Secretary of Agriculture. Each such member of the Federal Telephone Bank Board shall have one vote.

"(c) As soon as practicable after enactment of this title, the President of the United States shall appoint six additional members of the initial Federal Telephone Bank Board to be selected from the directors, managers and employees of any entities eligible to borrow from either the Federal Telephone Bank or from the Rural Electrification Administration and organizations controlled by such entities. The six members thus appointed shall serve until their successors shall have been duly elected in accordance with section 604 (d).

"(d) Within twelve months following the appointment of the six members of the initial board as provided in section 604 (c), the Governor shall call a meeting of all entities then eligible to borrow from the Federal Telephone Bank and organizations controlled by such entities for the purpose of electing members of the Federal Telephone Bank Board. Each such entity and organization shall be entitled to notice of and shall have one noncumulative vote at said meeting and may vote by proxy. Six members of the Federal Telephone Bank Board shall be elected for a two-year term, three from among the directors, managers and employees of cooperative-type entities entitled to vote and organizations controlled by such entities, and three from among the managers, directors and employees of commercial-type entities entitled to vote and organizations controlled by such entities.

"(e) Thereafter, in accordance with bylaws to be adopted by the Bank, the six members of the Federal Telephone Bank Board shall be elected, three from among the directors, managers and employees of cooperative-type entities and organizations controlled by such entities holding class B or class C stock; and three from among the directors, managers and employees of commercial-type entities and organizations controlled by such entities holding class B or class C stock. The above-mentioned six members of the Federal Telephone Bank Board shall be elected by majority vote of the entities eligible to vote and such entities may vote by proxy.

"(f) Each member of the Federal Telephone Bank Board elected or appointed pursuant to sections 604 (c), 604 (d), and 604 (e) of this title shall have one-half vote except as provided for in section 611.

"Any Federal Telephone Bank Board member may continue to serve after the expiration of the term for which he is elected until his successor has been elected and has qualified. Federal Telephone Bank Board members appointed or elected pursuant to (c), (d), and (e) of this section shall receive $100 for each day or part thereof, not to exceed one hundred days per year, spent in the performance of official duties, and shall be reimbursed for travel and other ex

penses in such manner and subject to such limitations as the Federal Telephone Bank Board may prescribe.

"(g) The Federal Telephone Bank Board shall prescribe bylaws, not inconsistent with law, regulating the manner in which the Federal Telephone Bank's business shall be conducted, its directors and officers elected, its stock issued, held and disposed of, its property transferred, its bylaws amended, and the powers and privileges granted to it by law exercised and enjoyed.

"(h) The Federal Telephone Bank Board shall meet at such times and places as it may fix and determine, but shall hold at least four regularly scheduled meetings a year, and special meetings may be held on call of the Chairman or any group of directors having a total of at least four votes."

This more adequately reflects conditions in the rural telephone industry and allows more equitable representation of all classifications of telephone borrowers.

SECTION 604. GOVERNOR

It is recommended that section 604 be changed to read as follows: "SEC. 604. GOVERNOR.-The chief executive officer of the Bank shall be the Governor. As long as the majority of the stock of such Bank is owned by the United States, the Governor shall be the administrator of the Rural Electrification Administration. Whenever a majority of the stock of such Bank shall cease to be owned by the United States, and thereafter, the Governor shall be chosen by a majority vote of the Board."

This would allow the bank governor to be chosen by majority vote of the Board of Directors at such time as the borrowers' investment in the bank exceeds that of the Federal Government and thus provides incentive for borrower investment in the bank.

SECTION 605. CAPITALIZATION

It is recommended that section 605(a) be changed to read as follows: "(a) The Federal Telephone Bank's capital shall consist of capital subscribed by the United States, by borrowers from the Federal Telephone Bank, and by corporations eligible to become borrowers from the Federal Telephone Bank, and by organizations controlled by borrowers from the Federal Telephone Bank. Beginning on July 1, 1966, and thereafter, the United States shall furnish capital to the Federal Telephone Bank from the REA telephone loan account created under title V of this Act, in an amount equal to all net collection proceeds, until the total capital so furnished by the United States reaches $500,000,000. As used in this section, the term 'net collection proceeds' shall be deemed to mean payments from and after after July 1, 1966, of principal and interest on loans heretofore or hereafter made under section 201 of this Act, less an amount representing interest payable to the Secretary of the Treasury on loans to the Administrator for telephone purposes pursuant to section 3(a) of this Act."

It is recommended that section 605 (b) be changed to read as follows: "(b) The capital stock of the Federal Telephone Bank shall consist of three classes, class A, class B, and class C, the rights, powers, privileges and preferences of the separate classes to be as specified, not inconsistent with law, in the bylaw of the Federal Telephone Bank. No dividends shall be payable on class A and class B stock. Class B and class C stock shall be voting stock, but no holder of said stock shall be entitled to more than one vote, nor shall class B and class C stockholders, regardless of their number, which are owned or controlled by the same person, group of persons, firm, association or corporation, be entitled in any event to more than one vote."

It is recommended that Section 605 (e) be changed to read as follows:

"(e) Class C stock shall be available for purchase and shall be held only by borrowers, or by corporations eligible to borrow, under section 610 of this Act, or by organizations controlled by borrowers or corporations eligible to borrow. The dividends on class C stock shall be specified by the Federal Telephone Bank Board."

These changes will assure an adequate intermediate lending program as determined by the REA Administrator, allow purchase of class C stock by organizations owned or controlled by borrowers, and prevent domination or control of the bank by concentrations of economic interests by limiting the voting power of any person, group of persons, firm, association, or corporation to one vote.

SECTION 606. BORROWING POWER

It is recommended that section 606 (a) be changed to read as follows: "The Federal Telephone Bank is directed to obtain sufficient funds to meet requests for loans and is authorized to obtain funds through the public or private sale of its bonds, debentures, notes, and other evidences of indebtedness (hereinafter collectively called "telephone debentures"). Telephone debentures shall be issued at such times, bear interest at such rates, and contain such other terms and conditions as the Federal Telephone Bank Board shall determine after consultation with the Secretary of the Treasury: Provided, however, That the amount of telephone debentures which may be outstanding at any one time pursuant to this subsection (a) shall not exceed ten times the subscribed capital and surplus of the Federal Telephone Bank. The Federal Telephone Bank shall insert in all its debentures appropriate language indicating that such debentures, together with interest thereon, are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any agency or instrumentality thereof other than the Federal Telephone Bank. Such debentures shall be lawful investments and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority and control of the United States or any officer or officers thereof. The issues of stock and debentures of the Federal Telephone Bank will be exempt from the requirements of the Securities Act of 1933, as amended." This exempts telephone bank debentures from the requirements of the Securities Act of 1933 as amended and provides that such debentures do not constitute a debt or obligation of the United States.

SECTION 607. USE OF DEPARTMENT OF AGRICULTURE FACILITIES AND EMPLOYEES It is recommended that section 607 be changed to read as follows:

"SEC. 607. USE OF DEPARTMENT OF AGRICULTURE FACILITIES AND EMPLOYEES.-In order to perform its responsibilities under this title, the Federal Telephone Bank may utilize the facilities and the services of employees of the Rural Electrification Administration or of any other agency of the Department of Agriculture, without cost to the Federal Telephone Bank."

The language stricken would not be applicable were the recommended changes to follow in Section 610 adopted.

SECTION 609. TAX EXEMPTIONS

It is recommended that section 609 be changed to read as follows: “SEC. 609. TAX EXEMPTIONS.—The Federal Telephone Bank shall be deemed to be an instrumentality of the United States, and as such, its property, franchise, capital, reserves, surpluses, and other funds, and its income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, territorial, or local taxing authority; except that any real property and any tangible personal property of the Federal Telephone Bank shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed."

SECTION 610. LENDING POWER

It is recommended that section 610 (a) be changed to read as follows: "(a) The Governor of the Federal Telephone Bank is authorized on behalf of the Federal Telephone Bank to make loans, in conformance with policies established by him, to corporations which have received a loan or loan commitment pursuant to section 201 of this Act, (1) for the same purposes for which loans may be made under title II of this Act, and (2) for the purposes of financing, or refinancing, the construction, improvement, expansion acquisition, and operation of telephone lines, facilities, or systems, and for other related purposes, in order to improve the efficiency, effectiveness, or financial stability of telephone systems of such corporations financed under sections 201 and 610 of this Act."

It is recommended that section 610(b) be changed to read as follows:

"(b) Loans under this section shall be on such terms and conditions as the Governor of the Federal Telephone Bank shall determine, subject, however, to the following restrictions:

"(1) No loan may be made hereunder for a period exceeding fifty years.