ting rates, and promulgating and enforcing standards of service for the telephone companies operating within our jurisdiction. I must stress that the viewpoint I will express is that of the Arkansas Public Service Commission alone and that I do not speak for the National Association of Regulatory Commissioners. I think, however, that while the solutions taken by various States differ and the degree of problems, the problems themselves are much the same. My statement, prepared statement, is long and I will not read it. If possible, I will go through and

The CHAIRMAN. Without objection, it will be printed in the record. Mr. SMITH. I am sorry, sir?

The CHAIRMAN. I say without objection it will be printed in the record.

Mr. SMITH. Thank you, sir.

Telephone service in Arkansas, by the accepted standards of comparison, is not good. We have 31 telephones per 100 people as compared to a national average of 48. This is fourth from the bottom in the scale of States and it may be of interest to some members of the committee that two of those below Arkansas on the scale are South Carolina and Mississippi.

We have some 20 REA borrowers and they service some 10 percent of the total phones in Arkansas. However, in terms of geographic area that they must service, a little more than 50 percent of the total land area depends on these 20 companies for their service. They have some 42,000—I am sorry-37,000 miles of cable, of line, of aerial fixtures, and only 5 percent of this total is buried which points up a problem that I will attempt to bring out a little bit later.

During the past year the Arkansas Public Service Commission has received a tremendous number of complaints; 109 of these were eightparty users, the quality of service; 285 of these written complaints constituted appeals for any kind of telephone service. Numbers are deceptive because frequently one complaint will be signed in one instance here recently by 216 people. It was a service complaint. The subject of the complaint was a REA-financed company.

The time of the Arkansas Public Service Commission is spent more than any other single thing in processing these complaints. Our hearing times with companies, REA companies, are grossly out of proportion to the number of other activities that we carry on.

For example, one-third of the total time is spent on the 10 percent of telephones or the 10 percent of areas that are to be serviced by our 20 REA borrowers.

We may have something of a problem in our Arkansas historical practice of assigning a specific territory to a specific utility. If a company is given a full county area, then they provide service there or no one else does. The interesting thing in reviewing the patterns of complaints in the past few years is that the conclusion is inescapable that people now feel they have a right to some sort of telephone service and they more and more feel they have a right to good telephone service. They are willing in most instances to pay for this service to the extent of their capability.

When a company has conclusively indicated that it cannot and will not provide the service that we believe necessary, the device, the legal device used, is to revoke their certificate of convenience and necessity.

That means this company can no longer service the area it had been assigned.

This is an extremely drastic result and several things can happen. One, you might be forcing a sale at distressed prices and this, I think, to a company which is financially stronger and can comply with the demands imposed upon it by the commissioner's order.

An alternative, of course, is they go out of business and no one services the given area. Neither alternative is pleasant.

When a company has no financing available to it, then these two alternatives are presented. REA borrowers in Arkansas are reaching critical problems in that service demands are growing. The State is growing. You have in many instances before the commission now cases where such companies need money immediately to commence extending services or improving services. I think you have had adequate testimony to the effect that the present 2-percent REA funds are oversubscribed and they are slow in forthcoming. I think the average process time is at least 2 years and probably it will increase rather than decrease.

Where the only reasonable alternative for a company to obtain financing is REA, because of its particular structure and financial condition, the situation becomes particularly acute when the company operates in a capital-starved area. There is nowhere they can go. In some instances in my judgment, the problem is not so much of the unattractiveness of the company to a private lender or investor. It is a question of accessibility. There is not that much capital in the State and frequently the local management of a given small company does not have the contacts and does not himself know how to go to where the money is available, and, of course, in most instances it is available back East.

Well, from the standpoint of the Public Service Commission you are confronted with a rising public demand which is legally frequently before you in terms of a docketed case. The demands are for upgrading service.

Now our eight-party circuits are felt by most people to be inadequate service. It is felt by subscribers more and more to be inadequate service.

There is a trend toward undergrounding. Many State commissions are beginning to require that all of the construction be underground, and in many instances the initial cost of placing a facility underground is considerably high. They complain when the circuits are overloaded or when the repairman is slow getting there. They complain about operator times. And these, may I stress, are legitimate complaints.

Any number of States have passed certain service standards. One State is seriously considering shooting in the reasonably near future for one-party service throughout the State. One State has required a 5-year progression to five-party service and this requirement has been judicially upheld.

In Arkansas we are considering a very similar requirement, that the company submit a plan showing the manner in which they will be able to convert eight-party users to a four-party situation within the same 5 years.

We have had a number of hearings on this and the objection in almost each instance is we want to do it, we know that our service

could be greatly improved; however, there is no place we can go to get the money to do so.

To attempt to provide some illustration of a particular problem, I selected from the files of the Public Service Commission a company which services some 160 square miles. It is an REA borrower. The area in which it has its service responsibility is comprised of people whose per capita income is much lower than $1,500 a year. It is mountainous and, of course, very sparsely populated.

It commenced in 1951-it was one of the companies made possible only because of the REA program, and they incorporated with about $30,000.

I have outlined the progression through which it moved from community to community, again let me remind you providing for the first time service to these communities in these areas in our State, until it has reached a point at which it has a total of one and a half million dollars in REA borrowing.

Now, the interesting thing is that during the course of this progression since 1951 to the point it is today, the attitude of the customers-I think initially they were overjoyed because there might be one telephone at a neighbor's house that they had access to and this was much better than they had before. However, in the late fifties the files in the Commission reflect a marked increase in the demands for service by people in areas not previously reached.

In some instances we had communitywide expressions of unhappiness with the quality of the service where the service exists. These complaints outstripped the growth of the area. In other words, there were people who were there before who had telephone service, but immediately after they began seeing the benefits of it, they began to want a better telephone service.

A hearing was held in 1966 on an application by a number of people requiring that the Public Service Commission order service extended immediately. In the period from 1964 to 1966 the files reflect that group after group in small community after small community in this 160-mile area commenced filing complaints with us. As an interim measure at one point the company installed a radiotelephone unit to deal with emergency situations.

Also during this period of time citizens would petition to be included in the service area of another public utility and asked that they be taken away from the one that they were currently in. Nobody wanted them. No other utility could extend service on any basis better than the one that currently had it.

The answer in each instance by the company was, We know that the extension would be economically feasible in terms of what is traditionally-standards traditionally used in the extension of service, but we have no money. We will extend as soon as we get REA funds.

In this particular situation, after the 1966 hearing at which the order was that service be extended to the complaining parties as soon as REA funds would become available, and at the time the company and the Commission thought the funds would be available in the near future. They were not. A period of a year or so passed. The Commission then ordered the company, irrespective of REA funds, to extend service to this critical area. The company did so.

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To do so it used all its cash reserves and all it could borrow, which amounted to $35,000. At this very precarious financial period in the life of the company, the REA funds became available. The situation was alleviated and service was extended to a number of other communities and a number of cross-country connections were made.

If we look at the present condition of the company, the complaints are still coming in. It still needs to extend considerably. It cannot borrow elsewhere. After its last loan its equity-debt ratio was 6.5 and commercial borrowers are not in the least interested in making a loan to companies of this sort. It cannot procure a line of credit from banks and there are no banks in the area which have anywhere close to the resources necessary to provide any sort of interim financing for it. Its cash flow is small. Its rates are low because the people are poor. This type of company, until it becomes financially mature, and this point may not be reached until the economy of the area grows, depends upon REA financing. It is a creature of REA financing. It has served precisely the need that you envisioned when you created the program. Where is such a company to go? Well, if we have a hearing, for example, on the servicing problems, we might order extensions and improvements which the companies simply cannot meet. They cannot meet it because they cannot get funds.

What happens to it then? Well, the problem presents itself as to whether it is the type of company anyone wants to buy.

Now, in line with some of the questions asked of earlier witnesses, ordinarily a hearing is held before an acquisition is approved. At the hearing you examine the needs of the company at that particular time and then make the purchaser show that it has the financial capability of supplying those needs.

It may well be that this would be an unattractive situation for the purchaser.

Are we then to tell the company it must go out of business or in fact are we in the position to tell the company that you cannot provide the service, sell it to someone who can?

I was interested several days ago in some of the States which have taken an extremely forthright position on service requirements and looked at some of the hearings at which they imposed considerable demands upon a given company to improve service or extend service. I called to check the ultimate result of such opinions, of such rulings by these State public service commissions, and was told that in two out of three I selected, a sale was made quite rapidly thereafter. There was nothing the company could do.

Now, our job as public service commissioners, is not to protect telephone companies. Our job is to our first obligation is to the users. However, the idea of realizing that increased service requirements upon these companies will result in their being absorbed is not a pleasant one when you are in the position of having to make a decision. My commission believes that H.R. 7, which is before you, provides an intelligent alternative to the problems facing the companies, REA borrowers. The long-range progression of a company out of the 2percent requirement into the bank situation, and then finally, I suppose, into a competitive commercial market situation, is good. We are contemplating if the bill passes that the 2-percent-only type of company file such a plan with long-range rate estimations which will result in

their being out of the category of the company which has to have 2-percent money to live.

We think as a commission that we will be able to deal intelligently with the progression program that the bank envisions and recommend it to you.

Mr. Chairman, I will attempt to answer any questions you might

have.

The CHAIRMAN. Thank you very much, Mr. Smith.

Are there any questions of Mr. Smith? If not, we are very much obliged to you for your statement. And may I, off the record

(Discussion off the record.)

The CHAIRMAN. We appreciate your attendance here.

(Mr. Smith's full statement follows:)

STATEMENT OF DON S. SMITH, COMMISSIONER, ARKANSAS PUBLIC SERVICE

COMMISSION

Mr. Chairman, members of the committee, my name is Don S. Smith. I am one of three members of the Arkansas Public Service Commission, and reside in Little Rock, Arkansas. Accompanying me today is Mr. Emon Mahony, Jr., of Little Rock, a consulting attorney for my Commission. I wish to thank you on behalf of the Arkansas Public Service Commission and the state Administration for permitting me to express to you the view of one of the state Commissions charged with the responsibility of regulating, setting rates, and promulgating and enforcing standards of service for the telephone companies operating within our jurisdiction. I must stress that the viewpoint I will express is that of the Arkansas Public Service Commission alone and that I do not speak for the National Association of Regulatory Commissioners. I think, however, that while the solutions and degrees vary, the problems faced by other states are similar. Telephone service in Arkansas, by most standards of compraison, is well below the national average. The national average for telephones per 100 population is 48. Arkansas, with 31 telephones per each 100 citizens, is fourth from the bottom on this scale. Of Arkansas' three-quarters of a million telephones, 10% are supplied by 20 REA financed cooperatives and REA commercial borrowers. Since Arkansas assigns specific geographic areas in which a telephone utility has the full responsibility for providing service through the device of granting certificates of convenience and necessity, the rural geographic area in which we require service by these 20 companies exceeds 50% of the total area. These 20 companies service seventy thousand telephones and maintain thirty thousand miles of aerial and buried cable wiring. Forty two thousand, five hundred eighty-one of these telephones are on eight-party circuits.

During the past year the Arkansas Public Service Commission received 285 appeals for assistance in obtaining any grade of telephone service. One hundred and nine complaints were by eight-party users as to the quality of service. The numbers of complaints do not reflect the fact that a number of them are petitions signed by several people, a neighborhood group, or in some instances, by hundreds of customers. Some of these petitions, interestingly enough, are sent by the management of plants which have moved to undeveloped areas. These appeals are both on behalf of their employees, and on their own behalf in that incompetent service hinders plant operation. While the Arkansas Public Service Commission regulates all utilities, a minimum one-third of the time of the Commission staff is spent in dealing with problems of rural telephone companies and users.

As pointed out earlier, our problems may be compounded by our practice of assigning to telephone utilities, including the Bell System independents and cooperatives, circumscribed geographic areas in which they exclusively operate. The Public Service Commission considers that each company has utility responsibility to provide complete service in that area, according to standards established by the Commission. We have historically assumed the duty of promoting both the availability and quality of telephone service to all customers within realistic economic limitations. The device used by the Commission in instances where a company has conclusively demonstrated its inability to provide the minimum quality and extent of service demanded by the public interest in its