New Deal-Era Rural Utility Subsidies Coming Under Fire

OFF Interstate 94, two blocks past the gas station advertising "Giant Leeches" for sale, sits the Albany Mutual Telephone Company. It's a modest place - 16 workers in a one-story building serving some 2,600 customers. Nevertheless Albany Mutual lies at the center of a political storm.

It is one of nearly 1,000 rural, independent telephone companies that receive federal loans. Congress wants to know why these New Deal-era subsidies should continue. Today the Senate Appropriations Committee is scheduled to hold hearings on the matter.

By Washington standards, the money involved is small potatoes. But the agency that hands it out - the Rural Electrification Administration (REA) - looms large to critics of big government. Even though the REA accomplished its primary mission decades ago, it still lingers on.

"REA is symbolic of an endemic problem in public policy," says Fred Smith, president of the Competitive Enterprise Institute, a pro-market public-interest group in Washington, D.C. "It's not easy to tear out old programs."

The REA was created in 1935 to bring electric power to rural America. The private utilities of the day typically focused on the lucrative potential of electrifying cities. So the REA offered low-interest loans to rural cooperatives so they could string their own power lines and manage them. The program worked. By the late 1940s, much of the countryside had electric power. The agency then broadened its mandate to give low-interest loans to rural telephone companies, giving rural residents cheaper telephon e service.

Since then, the ranks of REA critics have grown. Three of the last four administrations tried to trim, reform, or eliminate the REA. At least two US congressmen currently have bills that would end the program. The Clinton administration is proposing to reform the system, raising the agency's interest rates from 5 percent to market levels. That would save an estimated $374 million over the next four years.

The agency lives on - thanks in large part to the nation's rural electric-power cooperatives and independent phone companies, which have always managed to convince Congress to keep REA off the chopping block.

"It's a wonderful, very effective government program," says Michael Brunner, executive vice president with the National Telephone Cooperative Association. "One of the big things we are trying to do is keep and attract economic development to rural America." By providing state-of-the-art telecommunications and reasonably priced electricity, the REA is doing just that, he says.

The key question, of course, is whether it's worth taxpayers' money to accomplish that. Do the benefits of REA justify its $2 billion-a-year price tag? If not, should it be restructured or eliminated?

Even ardent supporters would like to restructure REA. One problem is that its loans are not targeted. They may be a boon to struggling cooperatives in the rural Midwest, but a 1987 Office of Management and Budget study found REA money flowing into such high-toned communities as Hilton Head, S.C., and Vail, Colo. Another problem is that the REA discourages the cooperatives from private-sector borrowing.

Should the REA be eliminated completely? Albany Mutual, one of the successful rural phone companies in Minnesota, could get along without it. The low-debt, $8 million company would probably not even have to raise its phone rates because of the subsidy loss, says company manager John Rose. He's confident that Albany Mutual could find alternate funding in the private sector. Even though Albany Mutual only serves 5.5 customers per mile of phone line (compared with densities of 100 or more for large regional

companies, such as USWest or NYNEX), it charges only about half of what USWest charges for basic service.

Not all the rural independents are so fortunate as Albany Mutual. Some independent phone providers serve areas with declining populations or so sparsely peopled to begin with that REA subsidies play an important role. The Dell Telephone Cooperative in West Texas averages only one customer for every 10 miles of phone line.

The other big change if REA disappears would be the pace at which rural systems would modernize.

Ironically, small independent companies have introduced new technology far more aggressively in rural America than the giant regional Bell companies. This week, for example, USWest announced it would invest $2.5 billion in a deal with Time Warner to bring its customers a new generation of interactive television. But USWest still hasn't upgraded nearby Avon, Minn., to digital technology, Mr. Rose says. Albany Mutual has been all-digital since 1985.

Without REA loans, "the developments wouldn't come anywhere near as fast," says Paul Hoff, general manager of the Park Region Mutual Telephone Company in western Minnesota.