can be used to fund further growth. It would also equalize to a certain extent the tax treatment of an investor in a dividened-paying utility with an investor in a company which reinvests its capital rather than pay a dividend. This mechanism would thereby make utility stocks attractive to a new class of investor who seeks capital appreciation rather than income. We believe that this is a key method of expanding the market for the securities of public utilities.

Third, at the option of the issuer, dividends on preferred stock should be deductible. The option for a utility to issue preferred stock, the dividends on which would be tax deductible by the issuer, would have a tremendously beneficial effect on the capital position of utilities. This option would allow a utility to reach other classes of investors than the customary corporate purchasers of preferred stock. These corporate investors would continue to be attracted by the 85 percent exclusion available on the traditional form of preferred stock, which utilities could continue to offer, along with the new-type preferred. The new form of preferred would make higher dividends possible and would appeal to investors whose tax-exempt status or minimal tax liability make the 85 percent exclusion available on the traditional form of preferred stock, which utilities could continue to offer, along with the new-type preferred. The new form of preferred would make higher dividends possible and would appeal to investors whose tax-exempt status or minimal tax liability make the 85 percent exclusion less attractive. We believe that the new option would substantially broaden the market for preferred stock, and that the new preferred would be particularly attractive to individual investors.

Such an option would provide new capital to the utilities without diluting the position of common stockholders. Earnings per share would increase to the extent that the new preferred was substituted for old preferred or for common stock. To the extent it is used as a substitute for debt financing, the company's debt ratios would improve, thereby reducing the cost of debt financing.

Fourth, increase the term for loss carryback and carry forward. Many utilities are experiencing low earnings or actually operating at a loss for income tax purposes. We recommend, therefore, an increase from the present limits for loss carrybacks and carry forwards to more realistic limits such as 10 and 7 years, respectively.

Fifth, maintain competitive parity among utilities. Any advantage given to one segment of the utility industry should be shared by all segments. This need for competitive parity results from the integrated nature of the market for the securities of public utilities. Securities of all utilities compete for the same investor dollars. Each segment is crucial to a healthy economy.

All utilities share the characteristic of being capital intensive. For the electrics and the telephones, about $3.50 in capital is required to generate $1 in sales. For comparison, manufacturing requires about 83 cents in capital per dollar of sales. In addition, the capital structures of most utilities are highly leveraged with debt and share the problem of inadequate interest coverage. Moreover, in most States the same regulatory agencies oversee the operations of all utilities and make no distinction between them. Finally, utilities are alike in that their rates of return on equity are inadequate at present levels to attract capital on favorable terms.

CONCLUSION

We believe that the benefits of implementing these proposals are well worth the possible short-term losses to the Treasury. We urge the committee's careful consideration of these proposals.

[A summary of the written statement follows:]

SUMMARY STATEMENT OF A. JONES YORKE, PRESIDENT, PAINE, WEBBER, JACKSON & CURTIS INCORPORATED

I. The cost of capital for public utilities, in terms of interest rates and earnings dilution, has become unprecedentedly high.

II. Unless investors can foresee reasonable opportunities for appreciation in their holdings of utility stocks and in the dividends paid on these holdings, utilities will no longer be able to raise new funds in the capital markets.

III. Expansion of the utilities must precede and anticipate growth in other sectors of the economy.

IV. Utilities share their staggering requirements of investment capital with all other corporate and governmental users. Tax measures that stimulate the movement of capital into productive investment generally will benefit all those

users.

V. Specific recommendations:

A. Permanently increase the investment tax credit to 12%.

B. Defer taxation of automatically reinvested dividends.

C. At the option of the issuer, dividends on preferred stock should be deductible.

D. Increase the term for loss carryback and carry forward.

E. Maintain competitive parity among utilities.

Mr. LANDRUM [presiding]. Mr. Brophy.

STATEMENT OF THEODORE F. BROPHY, PRESIDENT, GENERAL TELEPHONE & ELECTRONICS CORP., ON BEHALF OF UNITED STATES INDEPENDENT TELEPHONE ASSOCIATION

Mr. BROPHY. My name is Theodore F. Brophy, I am president of General Telephone & Electronics Corp. I appear here today on behalf of the United States Independent Telephone Association. The 1,600 independent (non-Bell) telephone companies in the United States serve over 25 million telephones in 48 of the 50 States.

We have handed to the members of the committee charts which will accompany my oral testimony. I hope you have a copy of that available to you. Included in those charts is a map of the area served by the independent telephone companies of the United States and a list. showing the numbers of independent telephone companies in each of the States.

In addition to my oral testimony we have submitted a longer and more comprehensive written statement to the committee for the record.

The most recent recommendations of the President's Labor-Management Advisory Committee recognize the serious plight of the electric utilities, and we believe that those recommendations deserve the serious considerations of Congress. However, a close examination of the problem of capital availability faced by the electric utilities indicates that in fact the telephone utilities do face a similar problem.

Pertinent financial ratios depicted in the charts numbered 1 through 4 that are before you show that the two types of utilities face an almost identical capital crisis. Both telephone and electric utilities are highly capital intensive as shown by chart no. 1. Both are nearly five times more capital intensive than all manufacturing.