Whereas, an REA borrower which is largely debt-financed with REA lower interest loans would be classified as follows:

Clearly, when the equity component is high the weighted cost

increases. When the debt component is low, weighted cost decreases. The distortion in the comparison of costs is even greater when applied to companies in high growth areas with 100% equity capital. Highly leveraged systems such as REA borrowers pose higher risks and therefore have greater equity costs than the uniform cost of equity utilized in the proposed formula. For this reason their costs will always appear low under the current formula. Yet REA borrowers serve low density, high cost areas. The FCC's formula assumes that because REA borrowers are able to obtain low interest loans they have an advantage when compared to non-REA borrower systems. However, penalizing REA borrowers through the FCC's calculation method eliminates much of the benefit they might derive from the REA program. REA low interest loans, which were designed to reduce subscribers

*This is AT&T's cost of equity, 86 FCC 221 (1981).

bills are instead preventing high cost rural companies from receiving the level of assistance they require to survive in this deregulated

environment.

We are concerned that the FCC may take similar action on the cost of capital formula in its recently announced rate of return proceeding (CC Docket 84-800).

In sum, the formula proposed by the Commission mismatches important factors and thereby misrepresents telephone companies relative costs. This mismatch prevents highly leveraged REA borrowers in high cost areas from receiving any or an adequate amount of assistance.

We believe the

traditional nationwide average cost of capital is more equitable and should be used.

IV. OTHER SMALL TELCO PROBLEMS

In addition to the consequences of access charges and divestiture I have already mentioned, other areas of on-going deregulation are having a impact on telephone rates of rural subscribers. Further, rural telephone systems traditional source of affordable financing - REA - is under attack.

Toll Rate Averaging

One deregulatory action which whould have a crucial impact on rural America is the deaveraging of interstate toll rates. Toll rate averaging is a pricing concept whereby a customer pays equally for toll calls of equal distance, duration and time of day. Currently low-density toll routes, such as those in rural areas, benefit from toll rate averaging. Unchecked,

the deaveraging of toll rates would have a disastrous impact on rural

America. Rural rates would soar and rural residents, for whom many

essential service contacts are a toll call away, would be denied these essential services. As I stated earlier, my company's subscribers' long-distance calls already average $40 per month. Thus, it is obvious why we are deeply concerned about the possibility of deaveraged interstate toll rates.

REA Financing

In these uncertain times, small rural telephone systems need REA support more than ever. Yet, that support is in serious jeopardy. NTCA members are making every effort to adapt to new competitive environment. Many are diversifying their operations in order to replace the loss of traditional toll revenues and ensure a sound financial base. REA policies, for example, those respecting lien accommodations and the use of general funds tremendously hinder these efforts. Administration has consistently proposed drastic cuts in annual REA loan levels. It is opposed to pending legislation which would make the REA Telephone and Electric Revolving Fund self-sustaining. The threat to REA financing and REA policies which impede telephone borrowers' efforts to secure non-government financing places additional pressure on rural telephone systems.

Moreover, the current

V. CONCLUSION

Clearly, the small telephone system is facing a multitude of challenges. The future of affordable telephone service in rural areas is at stake. We need strong Congressional support for rural telephony if we are to see our way through this period of change and continue to provide modern and affordable telephone service to rural America.

Mr. WYDEN. Ms. Louise Brown, president of the Loretto Telephone Company, Inc., Loretto, TN, for Organization for the Protection and Advancement of Small Telephone Companies.

As you know, we have got a number of residents of Tennessee in the U.S. Congress, particularly Jim Cooper and Albert Gore have been great advocates of the special needs of small telephone companies and rural residents generally, so I think you are very fortunate to have them in the Congress. I know Al would have liked to be here had he been able, and I am glad we have been able to have Mr. Cooper here for your testimony.

TESTIMONY OF LOUISE BROWN, PRESIDENT, LORETTO TELEPHONE CO., INC., REPRESENTING THE ORGANIZATION FOR THE PROTECTION AND ADVANCEMENT OF SMALL TELEPHONE COMPANIES

Ms. BROWN. Thank you.

Al did come down and say hello. I realized he was very busy.

I am Louise Brown and I am owner and president of the Loretto Telephone Co. I am in the very south central part of Tennessee and I am laying on the Alabama border. I serve about 4,100 customers in four exchanges. I serve by far the greater part of Lawrence County, the rural area.

We have EAS into all of the county except one little city in the top corner and we are talking about bypass, and would you believe I am already feeling bypass. A large furniture company is affected in Florence, AL. That is our primary shopping area, quad-city area of northern Alabama, and my toll is very small. I have the unique distinction of having the lowest average of toll use of any company in the State, but they can call into that area for all their needs. Consequently, I have one of the higher local rates of some small companies.

Now I am representing PASCO. There is such a wide variety of users, company owners in PASCO with different sets of problems, and of course we are independent and most of us are pretty independent in our thinking. But the years that this deregulation was coming about, and the FCC were visiting PASCO national meetings, we went over and over a lot of of these things that we anticipated and I saw PASCO members at microphones literally with tears in their eyes asking what is this going to do to my people? I think those of us-I was born and raised there, everybody knows you on a first name basis-we were not only concerned with our survival, and we were concerned about that, because after all, I don't have time to make another life for myself, I have 3 of my children working in the company, I have 23 employees, and I don't want to see their futures jeopardized, and I feel like that everyone concerned is sincerely devoted to finding the right answers for all this divestiture.

The very fact that you are having this hearing shows me you are concerned and I know from talking to Jim and Al that they are very concerned. It surprises me that they know what they do, because quite frankly, we wonder what we know, it changes so fast on a day-to-day basis.

I have a recurring nightmare that I am driving my car down a highway and the lights are off and I am down under the wheel and I can't see anything, and I am speeding down the highway. I wondered if this is what I have been dreaming in the telephone industry because for the first time since I have been working in the telephone business-I started out when I was 10 years old. I am having to make decisions and work out things I don't really feel fully competent to understand what those things are.

Now, the Bell companies always helped us. They were very supportive and helpful, but you see they are just in there with us now. They were working out requirements and economics, contracts, and so forth, and the small company couldn't have the staff, the qualified people to work out a lot of those things for themselves. I am seeing this happen, so many people are saying "I am discouraged, I don't know if I can face it and go on."

The question of equal access as I said, you might think that is really not relevant in a company the size of mine, but my largest industry is in Lawrenceburg, which is the Bell exchange and they have a site in Ethridge. Well, they are channeling their long distance-EAS-to Lawrenceburg and they send their long distance out, so I am losing that revenue. The furniture company, as I said, is affixed to Florence and hitting Americall. They can afford to buy some cheaper service but my people out there can't.

When they ask me about MCI and all these things they hear about on television to get cheaper rates, I have to say, well, I can't provide that. Most people in the rural area only have AT&T available and really I think that is going to be about all that is available, unless they do bypass me and shoot to Florence and pick up Americall.

The second being, is legislation desirable at this point?

Maybe not any legislative measures, but I certainly think for the Congress to keep a keen eye on it, as they are doing, is to be highly recommended.

I feel like the FCC is really concerned. I think they are addressing the issues, and they have good will toward the small company. I know that the carriers have to be treated fairly, and they have to survive, but I hope we don't see the burden of this access charge placed back just on the people.

I have got a lot of poor people in my county, and not as many as in a lot of counties. They are not just numbers. I know they are on a limited income, infirm, crippled, and they are paying more than they are able to pay now.

I think the bypassers should help make up some of this lost revenue. I think the carriers should bear the biggest part of it.

It should not be passed on to the poor, because they are helpless. When we put the $4 access charge on our multiline businesses in May, I lost one phone. Ironically, it was the senior citizens phone, that the city didn't want to pay anymore.

I didn't get any protests from my people. They have known me all my life, and if they have a problem, they call and they usually want to talk to Louise, and that is fine.

That is the way I like it, but I think they are relying me to represent their interests. I certainly want to do that, and I have for