telephone organization you will have to pay a market rate of interest and if you are a cooperative type, you will have to pay only 5 percent on an insured loan and in many instances that is much too high for the cooperative sector.

I might point out that there are 262 REA telephone companies today with less than 1,000 subscribers. Two hundred and one of those companies are commercial companies. So, by the Secretary of Agriculture's actions, what he is doing is using a discriminatory practice against 76 percent of the small companies that need low-cost money the most.

In addition, there are many companies today that will continue to need low-cost money and we think they ought to be protected. The action of the Secretary makes no consideration for them and there are many of them.

REA has the expertise and can inform the committee how many there are and what their needs are.

In addition, there are 57 applicants, new applicants, who have applications pending in REA and they have no place to go, because one of the requisites of getting into the telephone bank is that you must first be a borrower under the 201 program. You must first be an REA borrower.

In many instances, for a new applicant it has been the practice of REA to perhaps give them $20,000 out of a 201 loan and the remainder of the rural telephone bank at an interest rate ranging from 4 to 8 percent. These people have absolutely no place to go. Obviously they cannot afford a market rate or they wouldn't have been here in the first place as an applicant.

These are just three areas I want to discuss in regard to the detrimental aspects.

I think what it clearly shows is that this is what happens when you try to impose a law which was never intended to be applied to this sort of situation. I think that any fair-minded individual in the administration would recognize that fact.

Now, as far as the third item, suggestions for continued implementation of the telephone program, we feel that the rural telephone bank is a basic structure that has been instituted since 1971, to accomplish the very thing that the President and the administration want to do

now.

For those companies who have financial maturity and are able to pay a higher rate of interest, they should be required to and the legislation does just that. As a matter of fact, from January 21, 1972, which was the first date on which a loan was made, until the end of that fiscal year, some 89 loans were made, totaling about $90 million.

And from the first 6 months of fiscal year 1973, more loans have been made out of the bank, so in fiscal year 1973 there will be approximately $126 million loaned from the bank.

Now, under the administration's proposal, they talk about $145 million being available under their proposal here for fiscal year 1973. For the record, and while Senator Young is here, I do want to point out that that $145 million did not come easily because the administration had a lower figure in their budget.

Were it not for people like Senator Young and the other members of the Appropriations Subcommittee, who have looked at this kind

of program for years and years, we would not have had $145 million authorized by the Congress today.

I think the record ought to indicate that.

Senator YOUNG. I wish to thank you for your kind comments and tell you that I was a cosponsor of the original Telephone Act. I believe the chief sponsor was Senator Lister Hill, if I remember correctly. How many years ago was that?

Mr. PETERSON. 1949.

Senator YOUNG. And you have been testifying most of that time, haven't you?

Mr. PETERSON. Well, it is a pleasure to testify about a program such as this.

Senator HUMPHREY. These Minnesota boys are durable.

Mr. PETERSON. Mr. Chairman, we think the way to approach this is to sit down and work out a process whereby we can increase the capability of the bank.

For instance, the lending authority of the bank today is eight times paid in capital. I think your other farm credit systems have 20 times authorization.

In addition to that, if the administration is willing to guarantee and insure loans in this other direction, we think it would be very appropriate if they would have the Treasury backup the bank's debentures. This is one of the things we wanted way back there that we had to yield on in the legislative process. This would help the bank obtain a lower rate of interst when it sells its debentures in the private market. Another thing we could do is increase the seed money into that bank which is now $30 million a year for 10 years. If we could increase that seed money then we could get more of our company loans at that 4-percent level. But you understand that if the only seed money coming into the bank for which the bank pays 2-percent interest, is $30 million a year, then we are naturally limited in the bank's capacity to loan very much money at that low rate of interest.

Senator Curtis asked a question about how many loans were made from the bank. I think to date there are some 150 loans having been made from the time the bank started making loans in January 1972, to date, and those loans vary all of the way from 4 to 8 percent.

We have cooperatives under that lending program who are paying 8-percent interest.

Senator HUMPHREY. I just want to say that is too high. I am against 8 percent interest, period. So, get that in the record here.

Mr. PETERSON. I think the best way I can indicate to the committee the severity of the task that faces rural telephone companies is just to give you a brief example of what density factors mean in the telephone industry.

The Bell System enjoys a density of over 40 subscribers per mile. If you take the whole industry, that is the independent industry, of which there are approximately 1,800 companies, they have a density of about a little over 16 subscribers per mile.

That includes from General Telephone & Electronics right on down, including the REA companies. But if you just segregate REA telephone companies, the density, the average density, is about 4.2 subscribers per mile.

That is the best argument I know of why these companies must continue to have a low rate of interest. There are those who are simply not financially able to pay a higher rate.

I might add in closing that the telephone segment—and this seems very strange to a lot of people-the telephone segment has been faced with more unapproved loan applications on hand over the past several years than has the electric side.

As a matter of fact, it hit an all-time high last fiscal year, about $661 million. And even in spite of the fact more money has been loaned from REA and from the Telephone Bank in the last year, still in spite of that, at the end of December 1972 there were $559 million worth of unapproved telephone applications on hand.

I think, Mr. Chairman, I shall conclude and be very happy to try to answer any questions which the members may have.

(The prepared statement of Mr. Peterson is as follows:)

Mr. PETERSON. Mr. Chairman and members of the committee, my name is Harold Peterson, attorney at law, and I reside at Chisago City, Minn. I appear here today as executive director and counsel of the National REA Telephone Association whose membership is composed solely of REA telephone borrowers, mainly the commercial (privately owned) type. We have had the courtesy extended to us to appear before this committee over the past 7 years when this committee held hearings concerning the REA programs, both electric and telephone, and we deeply appreciate the courtesy you have extended us to appear here today.

Mr. Chairman, we share your concern and that of other members of this committee, over the action of the Secretary of Agriculture of December 29, 1972, which prompted the holding of these hearings. In speaking to the subject of how this action affects the REA telephone program, we would like to divide our observations into three separate parts; namely

1. The concern for Federal fiscal responsibility;

2. Detrimental aspects and questions left unanswered by the Secretary of Agriculture's action of December 29, 1972; and

3. Suggestions for continued implementation of Rural Electrification Administration telephone program objectives.

We hope that in so doing we may help provide a clearer perspective in which this matter now before the committee may be properly examined and evaluated.

1. THE CONCERN FOR FISCAL RESPONSIBILITY

Let's talk about the first part, the concern for Federal fiscal responsibility. We can assure this committee that the President of the United States is not the only person who is concerned about the vast amount of moneys which are expended at the Federal level. You Mr. Chairman, and other members of this committee, have already stated in these hearings that the Congress of the United States is concerned in this matter. We want to assure you that the REA telephone companies who render modern telephone service to rural America are just as concerned. We recognize that the No. 1 enemy of this country at the moment is runaway inflation. We recognize that if it is not curbed, that very serious economic consequences

will follow. We stand firmly behind the President and the Congress in their endeavor to solve this very serious problem.

Let us now discuss Federal fiscal responsibility in another light. Thirty-seven years ago the Congress of the United States created the Rural Electrification Administration to fill a vacuum in our free enterprise economic system. By so doing, the necessary debt capital was provided to newly formed electric cooperatives and others so that electricity could be extended to rural America where only a small percentage of the farms were electrified and vast areas were entirely without any electricity. In 1949, the telephone amendment to the Rural Electrification Act was passed. Hundreds of existing small telephone companies, many of which were family owned, whose systems were broken down and outmoded, were in need of modernization. No bank or insurance company considered broken down systems as adequate equity for any kind of financing, long term or otherwise. In addition, 62 percent of America's farms had no telephone service whatsoever. The private sector of our economic system could not meet the financial needs of these companies.

From this background of events the Congress passed the telephone amendment to the Rural Electification Act. The tremendous success of the electric program, which had been in operation since 1936, augered well for the expectation that the telephone program would also be successful. Now 23 years later, the Congress of the United States can look back with tremendous pride at what has been achieved in these programs. No one can deny that without the REA electric program our Nation would not have been able to produce the magnitude of food and fiber for our Nation and much of the world during World War II. This continues today as America is still the most efficient producer of food and fiber in the world.

Modern telephone service has been provided to those areas of rural America where 867 REA telephone companies are carrying out the mandate of the Congress "to assure the availability of adequate telephone service to the widest practical number of rural users of such service."

The point we wish to make here is that Congress exhibited fiscal responsibility in filling a void in our free enterprise economic system when it provided for the Rural Electrification Administration electric and telephone programs. The Rural Electrification Administration is a long established institution in our great free enterprise economic system. Any fair minded, objective person will admit today that what the Congress did in making it possible for electric and telephone companies to receive long-term debt capital at low interest rates was absolutely necessary to accomplish the results of these programs. The task still continues and the need for low-cost debt capital still exists for many companies. The average density, per route mile of line, for REA financed companies is 4.2 subscribers. The entire independent telephone industry of which REA telephone companies are a part, have a density of approximately 16 per mile. The giant Bell system, which service 84 percent of all subscribers in our country, have a density of over 40 per mile. Need we say more to prove why many REA telephone companies continue to need low-cost debt capital?

Let us now examine Federal fiscal responsibility in still another light. As long ago as 1966, we had a conference with the Director

of the Bureau of the Budget. He told us at that time that the strain on commitment of Federal moneys was becoming so severe that we should look for supplemental means to meet our financial needs, which at that time were over twice what the Congress was appropriating under the direct loan program. We set about immediately to carry out the Director's suggestion. Some 5 years later, after much work and effort and after extensive hearings in the Congress, the Rural Telephone Bank bill was passed and signed by the President on May 7, 1971. You Mr. Chairman, played a leadership role in accomplishing that legislative objective. We shall be eternally grateful to you and the other members of this committee who supported this fiscally responsible objective.

Let us tell you briefly what has been accomplished by the rural telephone bank. In the fiscal year ending June 30, 1972 (and please bear in mind that the bank did not make its first loan until January 21, 1972), the bank made 89 loans totaling $90,954,800 to REA telephone companies. The interest rate on these loans ranged from 4 to 8 percent. The commercial (private) companies represented 67 of those 89 loans, the other 22 loans being to cooperative companies. In the first 6 months of fiscal year 1973, the bank made loans to 52 commercial companies and 12 cooperative companies totaling $72,246,300. Ending June 30, 1973, the bank contemplates 1973 fiscal year loans totaling $126 million. The Rural Telephone Bank Act specifies criteria which must be followed for receiving bank loans. In essence, those companies which are financially able, under criteria established by REA are required to obtain their debt capital from the bank, at varying rates of interest, ranging from 4 to 8 percent limit can be changed, but the minimum 4-percent rate is set by law. Those who could not meet the Bank rate criteria, were able to receive low-interest moneys from REA. The low-interest loans were terminated on January 1, 1973, at which time a directive became effective, which said directive is the reason for these hearings.

Gentlemen, the establishment of the rural telephone bank is the finest example of Federal fiscal responsibility. Its fundamental concept is based on ability to pay. It is our understanding that the administration recommends continuance of the rural telephone bank. Our companies worked hard for its creation.

Again, Mr. Chairman, we thank you and your committee for the outstanding leadership and effort which made the rural telephone bank possible.

II.

Let us now proceed to part II.

DETRIMENTAL ASPECTS AND QUESTIONS LEFT UNANSWERED BY SECRETARY OF AGRICULTURE'S ACTION OF DECEMBER 29, 1972

The only directive in writing which has been received concerning the action of the Secretary of Agriculture, is a news release with a Washington dateline of December 19, 1972. It is entitled "Rural Electric and Rural Telephone Loan Program Change." The news release states that "the REA electric and telephone 2-percent direct loan programs are being converted to insured and guaranteed loan programs at somewhat higher interest rates effective January 1, 1973. This action was made possible by the enactment of the Rural Develop