Rulemaking in CC Docket No. 84-800 in consideration of substantially revising the current system of rate of return regulation. While the plan contemplated by the Commission may appear more realistic in a cost-based environment, the effect may be detrimental to the majority of small telephone companies.

Perhaps none of these issues alone threaten widespread financial failure of small companies; however, in combination they will likely create an environment in which small companies must use all of their limited resources to keep pace with a rapidly changing technological and regulatory environment. Small companies have the least defenses and in

many aspects, the least access to needed expertise.

In order for rural residents to continue to have reasonably priced modern and efficient telecommunications services and equipment, small companies must find new ways to stabilize their revenue streams; extensive regulatory burdens must be removed and direct assistance must be provided when necessary. If rural residents are to participate in the information age, the companies that serve them must remain financially healthy.

Thank you for giving me this opportunity to share my views with the Committee. Again, I commend this committee for its interest in small telephone companies and for its concern. I will be pleased to try to answer any questions you might have concerning Loretto Telephone Company or

Mr. WYDEN. Mr. Keen?

TESTIMONY OF JACK C. KEEN, PRESIDENT, WESTERN NEW MEXICO TELEPHONE CO., ON BEHALF OF THE NATIONAL RURAL TELECOM ASSOCIATION

Mr. KEEN. Thank you, Mr. Chairman, and members of the committee. I wish you hadn't put me behind Louise. She is a hard act to follow.

Mr. WYDEN. Kind of like Tugboat Annie following the Queen Mary.

Mr. KEEN. My name is Jack Keen, president of the Western New Mexico Telephone Co. in Silver City, NM. We serve about 3,300 customers over 9 rural exchanges. It is in southwestern New Mexico.

I am here also as president of the National Rural Telecom Association, which is our successor organization. We have been calling ourselves for 20-some-odd years, the National REA Telephone Association.

We represent about 350 to 400 commercial telephone companies that borrow money under the REA Program.

We are also a member of the Rural Telephone Coalition, and as small companies, we can speak for our customers. We drink coffee with them every day. They are not just a bunch of statistics to us nor are they people that can be run off the network indiscriminately with high rates. They are more than a statistic.

We are also part of a task force that the companies in the Rural Coalition and the USTA has formed, and we are examining the data that is available now from NECA, and we are seeking a common solution to these two problems.

I have written testimony, and I would request that it be included in the record, Mr. Chairman.

Mr. WYDEN. Without objection, it will.

Mr. KEEN. I also have with me today Margot Humphrey of Koteen & Naftalin here in Washington, and Mr. John F. O'Neal, who is our Association's General Counsel.

Our Congress has about 3,300 customers. We serve an area that is 15,000 square miles. We have three national forests in that area; 15,000 square miles doesn't sound like very much, but it compares to the size of the State of Maryland and Connecticut combined. I say that so some of the people here in the East might more fully understand what we are talking about.

But the problem is that Maryland and Connecticut have 4,764 times as many telephones as we have, so it does create a problem. My company is a small business. When we got the letter from the committee referring to the fact that a small business is one with 1,500 employees or less, if we went that route, we would have 1 employee for every 2 customers, so we do have less than 35 employees.

Our density is 1.24 subscribers per route mile, and the cost of our plant is about six times the national average. One reason for that is, besides the rough terrain, we have served the entire area as most REA borrowers have.

We have some people that are 15 miles to their nearest neighbor, and we have some lines that have gone 30 miles with only one customer. They do have straight lines. It is all digital, and it was made possible by two things: First, the REA Program and second, the toll settlements procedures.

Without the cost settlements that we have had in effect and working properly for 40-some-odd years, without them, we are dead in the water.

The FCC and the Justice Department combined, they have come in and changed the rules all of a sudden, you know, we started all these things in good faith, on the basis that they would continue, and suddenly, we get the rug pulled out from under us, and now everything is different.

It really is a problem to try to make any long-range plans. Longrange plans today in the telephone business are next Thursday. That is about as far as we can go, and maybe that is too long.

One of the real problems with high cost is, or what has caused it is our area coverage. If we went down the paved roads and just served those that were easy to get to, we could cut our costs down, but when you attempt to serve everybody that is eligible for phone service, and of course, that is one of the things that our contract or mortgage with REA requires, and we are glad to do it, that does run the costs up.

We have recently bought some property from one of the Bell companies, and in every case, we have added at least 40 percent customers, which tells you something right off the top. They couldn't serve everybody with conventional money.

We have one in progress right now, where they have 175 stations. We are taking it over and there is going to be over 600 customers in that one 60-mile area.

This is to give you an idea of what are we talking about when we say universal service. There are a lot of companies out there that are not providing universal service today.

I think one of our biggest problems on the whole divestiture problem, and the FCC, is the manner in which it has been accomplished. Louise spoke of having this nightmare of being in a car. Mine is in a train.

I guess it is about the same thing, but anyway, there is a combination of things that has hit us here all at the same time. The issues are coming faster than the answers, that is for sure.

Just to name a few, the access charges from FCC, the cost of capital issue, the toll and the accounting changes that are going to create a nightmare for a company like hers or mine or any of the small companies, and all of those things demand raising the price.

That is the bottom line, it raises the cost of the service to everybody, and it is ridiculous to have to do all these things at once, and equal access is yet another issue.

Bypass is a problem, but the biggest bypassers today are the State and Federal governments which I can prove.

It is happening right now, and in several of the States, if I am not mistaken, probably all of them, but I know it is happening in New Mexico where I live. You wonder if it is an appropriate way for the Government to spend taxpayers' money, you know, to bypass our existing brand new, up-to-date system that can provide

them anything in the world they want, and they will admit that they are getting great service.

They admit that we give them everything they want, but they want to do this, because their superiors are telling them to, and that is a good reason for them to do it, somebody telling you to do

it.

So there are many, many things that are affecting the small companies. When you say what effect does it have? It has had a great effect, and even though the Justice Department said, you know, they said this the week after Bell settled the antitrust case that they didn't intend to have any effect on independent companies.

Frankly, I don't think they realized that there were any independent companies, the way they came up with this settlement. I really doubt that they even knew there were any out there, but now they have said: Oh, don't worry it won't have any effect upon you smaller companies.

It is going to have all kinds of effects on us, and most of it is bad. We don't have a competitiveness marketplace out in our rural areas. They talk a lot about competition, you know.

That principle doesn't mean anything when you are out in a rural area. Nobody is going to come out there and compete with you. That is not the problem.

We do have lots of things to worry about in the rural area. I appreciate the opportunity to be here, and I will answer any questions that I can.

[Mr. Keen's prepared statement follows:]

PREPARED STATEMENT OF JACK C. KEEN, PRESIDENT, WESTERN NEW MEXICO TELEPHONE Co., ON BEHALF OF THE NATIONAL RURAL TELECOM ASSOCIATION

Mr. Chairman and Members of the committee on Small

Business's Special Task Force on Telephones, good afternoon.

My name is Jack Keen. I am President of the Western New Mexico Telephone Company in Silver City, New Mexico. My company is an independent telephone company that serves about 3,300 subscribers spread over seven rural exchanges in southwestern

New Mexico.

I am here on behalf of the National Rural Telecom

Association, as the association's President. Our organization is a national trade association representing about 350 commercial telephone companies that borrow money under Rural Electrification Administration (REA) programs. The organization is also one of the three organizations that make up the Rural Telephone Coalition. We are also part of an industry task force comprised of the Rural Coalition organizations and the United States Telephone Association about the effects of FCC policies. The task force is examining new data and looking for a common solution to problems confronting the telephone industry today. I should point out, too, that small companies are uniquely able to speak for our customers. I drink coffee with my customers. They are not just statistics to me.

I want to start by emphasizing how grateful the National Rural Telecom Association and the Rural Telephone Coalition are for your continuing interest in the problems facing small telephone companies. The national communications policies