[Federal Register Volume 59, Number 19 (Friday, January 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1987]


[Federal Register: January 28, 1994]


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DEPARTMENT OF AGRICULTURE
Rural Electrification Administration

7 CFR Parts 1710 and 1717


Exemptions of REA Operational Controls

AGENCY: Rural Electrification Administration, USDA.

ACTION: Interim rule with request for comments.

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SUMMARY: Pursuant to recent amendment of section 306E of the Rural 
Electrification Act, the Rural Electrification Administration (REA) 
hereby amends its regulations governing policies and requirements with 
respect to controls and approvals of borrower operations and the 
granting of lien accommodations and subordinations. These changes apply 
to electric borrowers whose net worth exceeds 110 percent of the 
outstanding balance of loans made or guaranteed to them by REA.

DATES: This rule is effective on January 28, 1994. Written comments 
must be received by REA or carry a postmark or equivalent by April 28, 
1994.

ADDRESSES: Written comments should be addressed to Mr. F. Lamont Heppe, 
Jr., Deputy Director, Program Support Staff, U.S. Department of 
Agriculture, Rural Electrification Administration, room 2234-S, 14th 
Street and Independence Avenue, SW., Washington, DC 20250-1500. REA 
requires a signed original and 3 copies of all comments (7 CFR 1700.30 
(e)). Comments will be available for public inspection during regular 
business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Mr. Alex Cockey, Deputy Assistant 
Administrator--Electric, U.S. Department of Agriculture, Rural 
Electrification Administration, room 4037-S, 14th Street & Independence 
Avenue SW., Washington, DC 20250-1500. Telephone: 202-720-9547.

SUPPLEMENTARY INFORMATION: This regulatory action is issued in 
conformance with Executive Order 12866, Regulatory Planning and Review. 
The Administrator of REA has determined that the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.) does not apply to this rule. The 
Administrator of REA has determined that this rule will not 
significantly affect the quality of the human environment as defined by 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). 
Therefore, this action does not require an environmental impact 
statement or assessment. This rule is excluded from the scope of 
Executive Order 12372, Intergovernmental Consultation, which may 
require consultation with State and local officials. A Notice of Final 
Rule titled Department Programs and Activities Excluded from Executive 
Order 12372 (50 FR 47034) exempts REA electric loans and loan 
guarantees from coverage under this Order. This rule has been reviewed 
under Executive Order 12778, Civil Justice Reform. This rule: (1) Will 
not preempt any State or local laws, regulations, or policies, unless 
they present an irreconcilable conflict with this rule; (2) Will not 
have any retroactive effect; and (3) Will not require administrative 
proceedings before any parties may file suit challenging the provisions 
of this rule.
    The program described by this rule is listed in the Catalog of 
Federal Domestic Assistance Programs under number 10.850 Rural 
Electrification Loans and Loan Guarantees. This catalog is available on 
a subscription basis from the Superintendent of Documents, the United 
States Government Printing Office, Washington, DC 20402-9325.

Information Collection and Recordkeeping Requirements

    The existing recordkeeping and reporting burdens contained in this 
rule were approved by the Office of Management and Budget (OMB) 
pursuant to the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et 
seq.), under control numbers 0572-0017, 0572-0032, and 0572-0103.
    Send questions or comments regarding these burdens or any other 
aspect of these collections of information, including suggestions for 
reducing the burden, to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, room 3201, NEOB, Washington, 
DC 20503. Attention: Desk Officer for USDA.

Background

    Section 306E of the Rural Electrification Act of 1936 (RE Act) was 
amended on December 17, 1993, by Public Law 103-201. As amended, the 
section directs the Administrator to issue interim final regulations to 
minimize approval rights, requirements, restrictions, and prohibitions 
imposed on the operations of electric borrowers whose net worth exceeds 
110 percent of the outstanding loans made or guaranteed to the borrower 
by REA. The section also directs the Administrator, when requested by a 
private lender providing financing for capital investments by such 
borrowers, to offer, without delay, to share the government's lien on 
the borrowers' systems or subordinate the government's lien on the 
property financed by the private lender.
    In issuing the regulations, the Administrator is authorized to 
establish requirements, guided by the practices of private lenders with 
respect to similar credit risks, to ensure that the security for loans 
made or guaranteed by REA is reasonably adequate. REA understands this 
to mean that it may consider the practices of private lenders in 
general, and not just those that have lent or are currently lending to 
REA borrowers. If the regulations are not issued within 180 days of 
enactment of section 306E, the Administrator may not, until the 
regulations are issued, require prior approval of, or establish any 
requirement, restriction, or prohibition, with respect to the 
operations of any electric borrower that meets the 110 percent ratio. 
Nothing in section 306E limits the authority of the Administrator to 
establish terms and conditions on the use of funds from loans made or 
guaranteed by REA, or to take other actions specifically authorized by 
law.
    Section 1710.7 added by this rule addresses the application of 
section 306E of the RE Act to REA operational controls that apply in 
general to REA borrowers or specifically to REA loans and loan 
guarantees. The application of section 306E to lien accommodations and 
subordinations is set forth in new sections 7 CFR 1717.860 and 
1717.904.

Section 1710.7--Exemptions of REA Operational Controls Under Section 
306E of the RE Act

    This section sets forth the policy established by section 306E of 
the RE Act regarding REA operational controls applied to borrowers that 
meet the 110 percent net worth ratio; the procedures for determining 
whether a borrower meets the 110 percent ratio; and the specific 
operational controls that are or are not exempted for such borrowers.
    Borrowers' net worth to REA debt ratios will be determined each 
year based on data as of December 31, and borrowers will be notified in 
writing of their respective ratios by May 1 of each year. If a 
borrower's net worth falls below 110 percent or if the borrower 
defaults on any requirement of its mortgage, loan contract, or any 
other agreement with REA that has not been exempted by REA, REA may 
reimpose exempted operational controls by informing the borrower in 
writing.
    In calculating net worth, deferred current period expenses properly 
recordable in accounts 182.2 and 182.3 will be subtracted from total 
margins and equities. This is the same procedure followed in 7 CFR part 
1717, subpart R to determine whether a borrower has sufficient net 
worth to qualify for advance approval of a lien accommodation. It is 
intended to prevent net worth from being overstated by the amount of 
deferred current period expenses. The accounting data used will be 
based on REA's system of accounts set forth in 7 CFR part 1767. Since 
sinking fund depreciation is not approved under part 1767, net worth 
for borrowers using sinking fund depreciation will be calculated as if 
the borrower had been using straight line depreciation.
    Paragraph (c) of Sec. 1710.7 lists 13 operational controls 
contained in the REA mortgage or loan contract that are exempted for 
borrowers that meet the 110 percent ratio. These include, for example: 
The requirement that extensions and additions to the borrower's 
electric system financed by the borrower's own funds be included in an 
REA-approved construction work plan; requirements on contract bidding 
procedures if no REA loan funds are involved; REA approval of 
construction, engineering, and architectural contracts, and the use of 
REA standard forms of contracts if no REA loan funds are involved; 
higher maximum limits on plant additions that may be made without REA 
approval if no REA loan funds are involved; higher maximum limits on 
the sale of electric power and energy to ultimate consumers without REA 
approval; higher maximum limits on the voluntary sale, lease or 
transfer of any capital asset, without REA approval, in exchange for 
fair market value; and REA approval of the selection of a borrower's 
manager, provided that the borrower is not in default.
    Two of the 13 exempted operational controls are also exempted for 
all other borrowers. These are the requirement to obtain REA approval 
of the purchase of data processing equipment and system control 
equipment (except when REA loan funds are used), and the requirement 
that distribution borrowers notify REA in writing of proposed changes 
in electric rates 90 days prior to the effective date of such rates. 
The required notification period has been changed to 30 days.
    Although the rule exempts REA approval of the selection of a 
manager for borrowers that meet the 110 percent test and are not in 
default, REA wishes to emphasize again the critical importance of the 
selection of fully qualified and capable managers. It is the most 
important of a board of director's responsibilities. REA will shortly 
be issuing new guidelines on manager selection.
    For the convenience of the public, paragraph (d) of Sec. 1710.7 
lists examples of the operational controls and requirements that are 
not exempted. The controls and requirements not exempted fall into two 
categories: (1) Requirements and operational controls that are 
necessary to ensure that the security for loans made or guaranteed by 
REA is reasonably adequate and that the loans will be repaid, or to 
accomplish other fundamental purposes of the RE Act, and (2) 
requirements imposed on REA or on borrowers by law.
    The nonexempted controls and requirements include, for example, 
area coverage requirements; following REA construction standards and 
listed materials; certain borrowers having to maintain a power 
requirements study on an ongoing basis; the maintenance of minimum 
levels for the Times Interest Earned Ratio and Debt Service Coverage 
ratio; REA approval of certain retirements of capital credits; controls 
on borrower investments; certain borrowers having to maintain an equity 
development plan; requirements on maintenance and repair of the 
mortgaged property; and REA accounting and auditing requirements. These 
requirements and controls are believed to be reasonable in comparison 
with requirements imposed by private lenders on customers presenting 
similar credit risks.
    Paragraph (e) of Sec. 1710.7 authorizes REA to reinstate exempted 
controls and requirements if the borrower is in default on any 
requirement of its mortgage, loan contract with REA, or any other 
agreement with REA that has not been exempted. REA will notify the 
borrower in writing of the reinstatement, and it will remain in effect 
until REA determines that it is no longer needed to help ensure loan 
security.
    Paragraph (f) is intended to make it clear that if controls are 
reinstated because the borrower defaults or its net worth drops below 
110 percent of outstanding REA debt, the controls and approval rights 
will apply to all applicable subsequent actions by the borrower, 
including REA approval of amendments to contracts entered into by the 
borrower while it was exempt from controls.

Section 1717.860--Lien Accommodations and Subordinations Under Section 
306E of the RE Act

    Section 1717.860 promulgates the requirements of section 306E of 
the RE Act as they relate to lien accommodations and subordinations. In 
determining which borrowers qualify under the 110 percent net worth to 
REA debt criterion, the same calculations and procedures are used as in 
Sec. 1710.7, except that the determination is made at the time of an 
application for a lien accommodation or subordination and there is no 
annual notice to borrowers.
    Paragraph (c) of Sec. 1717.860 establishes that REA will 
expeditiously approve a lien accommodation or subordination for 
financing of capital investments by borrowers that meet the 110 percent 
test, if the borrower is in compliance with all requirements of its 
mortgage, loan contract with REA, and any other agreement with REA that 
have not been exempted pursuant to REA regulations, and if the 
security, including assurance of repayment, of loans made or guaranteed 
by REA will remain reasonably adequate. The paragraph also lists the 
information that must be included in the application for the lien 
accommodation or subordination.
    Paragraph (d) of Sec. 1717.860 expands the circumstances under 
which a lien subordination may be obtained for investments in rural 
development and other non-electric utility endeavors in the case of 
borrowers that meet the 110 percent test. It provides that a borrower 
that meets the 110 percent test is eligible for a lien subordination on 
the specific assets financed by a loan made directly to the borrower 
for rural development or other non-electric utility purposes, provided 
that the outstanding balance of all such loans lien subordinated under 
paragraph (d), after taking into consideration the effect of the new 
loan, does not exceed 15 percent of the borrower's net worth and the 
security, including assurance of repayment, of loans made or guaranteed 
by REA will remain reasonably adequate after granting the lien 
subordination. While the rule grants this additional latitude to 
borrowers that meet the 110 percent test, REA continues to urge all 
borrowers to use separate subsidiaries when making investments in rural 
development or other non-electric utility endeavors.
    Investments lien subordinated under paragraph (d) will be included 
among those investments subject to the 15 percent of total utility 
plant limitation set forth in 7 CFR 1717.654(b)(1), and granting of the 
lien subordination will not constitute approval of the investment under 
7 CFR part 1717 subpart N.
    Paragraph (e) of Sec. 1717.860 exempts borrowers that meet the 110 
percent test from the requirement of Sec. 1717.856(d) that they submit 
an equity development plan with their application for a lien 
accommodation or subordination if the ratio of their equity to total 
assets is below a specified level.
    Finally, paragraphs (a)(1)(ii) and (b)(1)(ii)(A) of Sec. 1717.852 
are amended to make it clear that programs of demand side management 
and energy conservation, and on-grid and off-grid renewable energy 
systems are eligible for lien accommodations and subordinations.

Section 1717.904--Exemptions Pursuant to Section 306E of the RE Act

    This new section establishes policies and procedures, consistent 
with those in Sec. 1710.7 and 1717.860, for lien accommodations for 
supplemental concurrent loans made to borrowers that meet the 110 
percent test.
    For the reasons stated, 7 CFR chapter XVII, parts 1710 and 1717 are 
amended as follows:

PART 1710--GENERAL AND PRE-LOAN POLICIES AND PROCEDURES COMMON TO 
INSURED AND GUARANTEED ELECTRIC LOANS

    1. The authority citation for part 1710 continues to read as 
follows:

    Authority: 7 U.S.C. 901-950b; Delegation of Authority by the 
Secretary of Agriculture, 7 CFR 2.23; Delegation of Authority by the 
Under Secretary for Small Community and Rural Development, 7 CFR 
2.72, unless otherwise noted.

    2. Subpart A of part 1710 is amended by adding the following 
section to read as follows:


Sec. 1710.7  Exemptions of REA operational controls under section 306E 
of the RE Act.

    (a) General policy. (1) Section 306E of the RE Act directs the 
Administrator to issue interim final regulations to minimize approval 
rights, requirements, restrictions, and prohibitions imposed on the 
operations of electric borrowers whose net worth exceeds 110 percent of 
the outstanding loans made or guaranteed to the borrower by REA. The 
section also directs the Administrator, when requested by a private 
lender providing financing for capital investments by such borrowers, 
to offer, without delay, to share the government's lien on the 
borrowers' systems or subordinate the government's lien on the property 
financed by the private lender.
    (2) In issuing the regulations, the Administrator is authorized to 
establish requirements, guided by the practices of private lenders with 
respect to similar credit risks, to ensure that the security, including 
the assurance of repayment, for loans made or guaranteed by REA will 
remain reasonably adequate. If the regulations are not issued within 
180 days of enactment of section 306E, the Administrator may not, until 
the regulations are issued, require prior approval of, or establish any 
requirement, restriction, or prohibition, with respect to the 
operations of any electric borrower that meets the 110 percent ratio.
    (3) Nothing in section 306E limits the authority of the 
Administrator to establish terms and conditions on the use of funds 
from loans made or guaranteed by REA, to establish loan feasibility 
criteria and other requirements for the approval of REA loans or loan 
guarantees, such as those set forth in this part, or to take any other 
action specifically authorized by law.
    (4) This section addresses the application of section 306E of the 
RE Act to REA operational controls and other requirements that apply in 
general to REA borrowers. The application of section 306E to lien 
accommodations and subordinations is set forth in 7 CFR 1717.860 and 
1717.904.
    (5) The exemptions granted by this section, 7 CFR 1717.860, and 7 
CFR 1717.904 apply only to REA controls and approval rights. They do 
not affect the controls and approval rights of other co-mortgagees 
under the REA mortgage.
    (b) Determination of ratio. The following principles and procedures 
will apply to the calculation of net worth as a ratio, expressed as a 
percent, to the outstanding balance of all loans made or guaranteed to 
the borrower by REA, hereinafter called the borrower's ``net worth to 
REA debt ratio'', or simply ``the ratio'':
    (1) For purposes of determining whether a borrower is exempt from 
approvals, requirements, restrictions, or prohibitions imposed by REA 
with respect to borrower operations, i.e., ``operational controls,'' 
the ratio normally will be based on data as of December 31. Net worth 
will be based on the year-end financial and statistical reports 
submitted by borrowers to REA, and outstanding loans made or guaranteed 
by REA will be based on REA's records. The financial and statistical 
reports (Form 7 for distribution borrowers and Form 12a for power 
supply borrowers) are subject to REA review and revision, and they must 
comply with REA's system of accounts and accounting principles set 
forth in 7 CFR part 1767. Since sinking fund depreciation is not 
approved under part 1767, net worth for borrowers using sinking fund 
depreciation will be calculated as if the borrower had been using 
straight line depreciation;
    (2) Net worth will be calculated by taking total margins and 
equities (Line 33 of Part C of REA Form 7 for distribution borrowers, 
or Line 34 of Section B of REA Form 12a for power supply borrowers) and 
subtracting assets properly recordable in account 182.2, Unrecovered 
Plant and Regulatory Study Costs, and account 182.3, Other Regulatory 
Assets, as defined in 7 CFR part 1767; and
    (3) By no later than May 1 of each year, REA will notify each 
borrower in writing of its ratio as of December 31 of the preceding 
year. If a borrower's net worth to REA debt ratio exceeds 110 percent 
based on the year-end data, the borrower will be exempt from the 
operational controls exempted under paragraph (c) of this section until 
subsequently notified in writing by REA that it is no longer exempt.
    (c) Borrower operations exempted from REA controls. Borrowers who 
are notified by REA in writing that their net worth to REA debt ratio 
exceeds 110 percent are exempted from the operational controls of the 
REA mortgage and loan contract listed in this paragraph. These 
controls, which are implemented through REA regulations and other 
documents, are as follows:
    (1) Requirement that extensions or additions to the borrower's 
electric utility system financed by the borrower's own funds, as 
defined in 7 CFR 1717.652, be included in an REA-approved construction 
work plan. This exemption does not apply to extensions or additions 
financed by loans made or guaranteed by REA or by loans for which REA 
has granted a lien accommodation or subordination;
    (2) Requirements on contract bidding procedures, as set forth in 
Sec. 1710.120 and other REA regulations, except when the construction 
is funded directly or through reimbursements from loans made or 
guaranteed by REA;
    (3) REA approval of construction contracts and engineering and 
architectural service contracts, and use of REA standard forms of 
contracts, as set forth in Sec. 1710.120 and other REA regulations, 
except when the construction is funded directly or through 
reimbursements from loans made or guaranteed by REA. To be eligible for 
exemption of REA approval rights, here and elsewhere in this paragraph 
(c), the contracts must not contain any provisions that prohibit or 
restrict the assignment of the contracts to the government upon the 
exercise by REA of its remedies under security instruments securing 
loans made or guaranteed by REA. Throughout this section, REA approval 
of contracts also includes REA approval of contract amendments and 
renewals;
    (4) REA approval of the borrower's use of general funds, as defined 
as ``own funds'' in 7 CFR 1717.652, for plant extensions or additions 
or other investments in the borrower's electric utility system, 
provided that the funds will not be reimbursed with funds from a loan 
made or guaranteed by REA, and:
    (i) The plant addition will not provide direct service to any 
ultimate consumer having an anticipated or contract kilowatt-hour (kWh) 
or maximum kilowatt (kW) demand in any year that exceeds 25 percent of 
the borrower's total kWh sales or maximum kW demand recorded during the 
previous calendar year; or
    (ii) If the investment is for the addition or substantial 
reconstruction of generation capacity, the borrower is a power supply 
borrower and the addition or substantial reconstruction of capacity 
will not exceed 25 megawatts. The exemption under this paragraph (ii) 
does not apply to distribution borrowers;
    (5) REA approval of contracts for the sale of electric power and 
energy to ultimate consumers except when the kWh sales or maximum kW 
demand covered by the contract is for an amount in any year that 
exceeds 25 percent of the borrower's total kWh sales or maximum kW 
demand during the previous calendar year;
    (6) REA approval of power purchase contracts with suppliers that do 
not receive financial assistance from REA, provided that the contract 
is for a period of not more than 1 year and the kWh amount of energy or 
maximum kW capacity to be purchased under the contract does not exceed 
25 percent of the total kWh amount of energy purchased and/or generated 
by the borrower, or maximum kW demand of the borrower, during the 
previous calendar year;
    (7) REA approval of transmission, interconnection, and power 
pooling contracts that cover a period of one year or less;
    (8) REA approval of contracts for the operation and management and/
or maintenance of a borrower's system, provided that the contract does 
not cover all or substantially all of the borrower's system;
    (9) REA approval of the voluntary sale, lease or transfer by the 
borrower of any capital asset in exchange for fair market value if:
    (i) The borrower is not in default under its mortgage, loan 
contract with REA, or any other agreement with REA. (As used in this 
section, the term default includes defaults declared by the mortgagee 
as well as events that have occurred and are continuing, which, with 
notice or lapse of time and notice, would become events of default.);
    (ii) The proceeds of such sale, lease or transfer are applied as 
required by the REA mortgage;
    (iii) The value of the capital asset is less than 5 percent of net 
utility plant and the aggregate value of capital assets sold, leased or 
transferred in any 12-month period is less than 10 percent of net 
utility plant; and
    (iv) If the borrower has an REA-approved wholesale power contract 
with a power supply borrower (seller), the circumstances of the sale, 
lease or transfer of capital assets conform with the conditions in such 
contract under which the seller may not withhold its consent to the 
sale, lease or transfer. The exemption of REA approval rights under 
this paragraph (c)(9) applies only to voluntary sales, leases, and 
transfers, and does not affect REA's right under section 7 of the RE 
Act to approve other dispositions of property by the borrower;
    (10) REA approval of the selection of a borrower's manager, 
provided that the borrower is not in default under its mortgage, loan 
contract with REA, or any other agreement with REA. Nothing herein 
shall limit the right of REA under the mortgage to request termination 
of the employment of a manager in the event of a default by the 
borrower;
    (11) REA approval, as set forth in the loan contract, of a 
borrower's selection of a bank in which funds of the borrower are or 
will be deposited, provided that the borrower is not in default under 
its mortgage, loan contract with REA, or any other agreement with REA. 
The requirement that such bank must be a member of the Federal Deposit 
Insurance Corporation is not exempted;
    (12) REA approval of the purchase of data processing equipment and 
system control equipment, except when funds for the equipment, 
including reimbursements, derive from loans made or guaranteed by REA. 
This exemption, as well as that set forth in paragraph (c)(13) of this 
section, also applies to all other borrowers, i.e., those that do not 
meet the 110 percent equity ratio; and
    (13) Requirement that distribution borrowers notify REA in writing 
of proposed changes in electric rates 90 days prior to the effective 
date of such rates. Instead, the required notification period shall be 
30 days.
    (d) REA requirements and operational controls not exempted. All 
requirements and operational controls contained in the REA mortgage and 
loan contract, or otherwise imposed on borrowers pursuant to statute or 
regulation, that are not specifically listed in paragraph (c) of this 
section are not exempted and shall continue to apply according to their 
terms. Examples of such requirements and controls not exempted are 
listed in this paragraph for the convenience of the public. This list 
is not exhaustive, and the absence of a requirement or control from 
this list in no way means that the requirement or control has been 
exempted:
    (1) Requirements and operational controls contained in the REA 
mortgage or loan contract that are necessary to ensure that the 
security for loans made or guaranteed by REA is reasonably adequate and 
that the loans will be repaid, or to accomplish other fundamental 
purposes of the RE Act. Some of these also represent terms and 
conditions with respect to the use by borrowers of the proceeds of 
loans made or guaranteed by REA. Together, these controls include, but 
are not limited to, the following:
    (i) Area coverage requirements set forth in the loan contract and 
in Sec. 1710.103;
    (ii) Requirement that certain borrowers maintain, on an ongoing 
basis, a power requirements study and a power requirements study work 
plan, as set forth in Sec. 1710.201 and Sec. 1710.202;
    (iii) Requirement that borrowers follow REA construction standards 
and use REA accepted materials, as set forth in 7 CFR 1710.41, 7 CFR 
1710.45, and 7 CFR part 1728;
    (iv) Requirement that borrowers maintain, on an ongoing basis, a 
long-range engineering plan and a construction work plan, as set forth 
in Sec. 1710.250(b);
    (v) Requirement that borrowers set rates for electric service 
sufficient to maintain certain levels for the Times Interest Earned 
Ratio and Debt Service Coverage ratio, as set forth in Sec. 1710.114;
    (vi) Requirement that certain borrowers maintain an equity 
development plan, as set forth in Sec. 1710.116;
    (vii) REA approval of retirements of capital credits in excess of 
amounts specifically authorized in the mortgage;
    (viii) REA approval of borrower investments, loans, guarantees, and 
other obligations under 7 CFR Part 1717, subpart N;
    (ix) REA requirements on accounting, auditing, irregularities, 
financial reporting, and access to books and records;
    (x) Requirement that borrowers record the mortgage and mortgage 
amendments;
    (xi) Requirement that the mortgagor maintain and preserve the 
priority lien of the mortgage and defend title to the mortgaged 
property;
    (xii) Requirements on maintenance and repair of the mortgaged 
property;
    (xiii) Requirements on insurance of the mortgaged property; and
    (xiv) REA approval of borrower mergers and consolidations; and
    (2) Requirements imposed on borrowers pursuant to statute or 
regulation and not specifically exempted by paragraph (c) of this 
section. See, for example, Secs. 1710.122 through 1710.127.
    (e) Rescission of exemptions if borrower defaults. If a borrower is 
in default with respect to any requirement of its mortgage, loan 
contract with REA, or any other agreement with REA that has not been 
exempted pursuant to paragraph (c) of this section or other REA 
regulations, upon written notice to the borrower REA may rescind all or 
any part of the exemptions granted pursuant to said regulations. The 
reinstated requirements and controls will remain in effect until REA 
determines that they are no longer needed to help ensure that the 
security, including the assurance of repayment, for loans made or 
guaranteed by REA will remain reasonably adequate.
    (f) Reinstated controls. If REA controls are reinstated because the 
borrower defaults or its net worth falls below 110 percent of REA debt, 
such controls and approval rights will apply to all applicable 
subsequent actions of the borrower, including without limitation the 
amendment of contracts that the borrower entered into while eligible 
for an exemption under this section.

PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND 
GUARANTEED ELECTRIC LOANS

    3. The authority citation for part 1717 continues to read as 
follows:

    Authority: 7 U.S.C. 901-950b; Delegation of Authority by the 
Secretary of Agriculture, 7 CFR 2.23; Delegation of Authority by the 
Under Secretary for Small Community and Rural Development, 7 CFR 
2.72, unless otherwise noted.

Sec. 1717.85  [Amended]

    4. Section 1717.851 is amended by adding the following new 
definition:
* * * * *
    Capital investment. For the purposes of Sec. 1717.860, capital 
investment means an original investment in an asset that is intended 
for long-term continued use or possession and, for accounting purposes, 
is normally depreciated or depleted as it is used. For example, such 
assets may include land, facilities, equipment, buildings, mineral 
deposits, patents, trademarks, and franchises. Original investments do 
not include refinancings or refundings.
* * * * *


Sec. 1717.852  [Amended]

    5. Section 1717.852 is amended in the second sentence of paragraph 
(a)(1)(ii) by removing the word ``and'' after ``coal handling 
facilities,'' and by adding after the words ``for generation'' the 
following words: ``, programs of demand side management and energy 
conservation, and on-grid and off-grid renewable energy systems;''.
    6. Section 1717.852 is further amended by revising paragraph 
(b)(1)(ii)(A) to read as follows:


Sec. 1717.852  Financing purposes.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (A) Renewable energy systems and REA-approved programs of demand 
side management and energy conservation; and
* * * * *
    7. New Sec. 1717.860 is added to read as follows:


Sec. 1717.860  Lien accommodations and subordinations under section 
306E of the RE Act.

    (a) General. Under section 306E of the RE Act, when requested by a 
private lender providing financing for capital investments by a 
borrower whose net worth exceeds 110 percent of the outstanding 
principal balance of all loans made or guaranteed to the borrower by 
REA, the Administrator will, without delay, offer to share the 
government's lien on the borrower's system or subordinate the 
government's lien on the property financed by the private lender, 
provided that the security, including the assurance of repayment, for 
loans made or guaranteed by REA will remain reasonably adequate. To 
qualify for a lien accommodation or subordination under this section, 
the investment must be an original capital investment, i.e., not a 
refinancing or refunding. (See Sec. 1717.851 for the definition of 
capital investment.)
    (b) Determination of net worth to REA debt ratio. (1) In the case 
of applications for a lien accommodation, a borrower's net worth will 
be based on the borrower's most recent financial and statistical 
report, the data in which shall not be more than 60 days old at the 
time the application is received by REA, and the outstanding debt owed 
to or guaranteed by REA will be based on latest REA records available. 
The financial and statistical reports (Form 7 for distribution 
borrowers and Form 12a for power supply borrowers) are subject to REA 
review and revision, and they must comply with REA's system of accounts 
and accounting principles set forth in 7 CFR part 1767. Since sinking 
fund depreciation is not approved under part 1767, net worth for 
borrowers using sinking fund depreciation will be calculated as if the 
borrower had been using straight line depreciation.
    (2) Net worth shall be calculated by taking total margins and 
equities (Line 33 of Part C of REA Form 7 for distribution borrowers, 
or Line 34 of Section B of REA Form 12a for power supply borrowers) and 
subtracting assets properly recordable in account 182.2, Unrecovered 
Plant and Regulatory Study Costs, and account 182.3, Other Regulatory 
Assets, as defined in 7 CFR part 1767.
    (c) Application requirements and process. (1) If a borrower's net 
worth to REA debt ratio exceeds 110 percent, as determined by REA, and 
the borrower is in compliance with all requirements of its mortgage, 
loan agreement with REA, and any other agreement with REA that have not 
been exempted in writing by REA, if requested REA will expeditiously 
approve a lien accommodation or subordination for 100 percent private 
financing of capital investments, provided that the security, including 
the assurance of repayment, for loans made or guaranteed by REA will 
remain reasonably adequate. REA's approval will be conditioned upon 
execution and delivery by the borrower of a security instrument 
satisfactory to REA, if required, and such additional information, 
documents, and opinions of counsel as REA may require.
    (2) The application must include the following:
    (i) A resolution of the borrower's board of directors requesting 
the lien accommodation and including the amount and maturity of the 
proposed loan, a general description of the facilities or other 
purposes to be financed, the name and address of the lender, and an 
attached term sheet summarizing the terms and conditions of the 
proposed loan;
    (ii) A certification by an authorized official of the borrower that 
the borrower is in compliance with all requirements of its mortgage, 
loan agreement with REA, and any other agreement with REA that have not 
been exempted in writing by REA;
    (iii) The borrower's financial and statistical report, the data in 
which shall not be more than 60 days old when the complete application 
is received by REA;
    (iv) Draft copy of any new mortgage or mortgage amendment 
(supplement) required by REA or the lender, unless REA has notified the 
borrower that it wishes to prepare these documents itself;
    (v) A copy of the loan agreement, loan note, bond or other 
financing instrument, unless REA has notified the borrower that these 
documents need not be submitted. These documents will not be subject to 
REA approval, but may be reviewed to determine whether they contain any 
provisions that would result in the security, including assurance of 
repayment, for loans made or guaranteed by REA no longer being 
reasonably adequate;
    (vi) The following certifications and reports required by law:
    (A) The certification by the project architect for any buildings to 
be constructed, as required by 7 CFR 1717.850(i);
    (B) A certification by an authorized official of the borrower that 
flood hazard insurance will be obtained for the full value of any 
buildings, or other facilities susceptible to damage if flooded, that 
will be located in a flood hazard area;
    (C) Form AD-1047, Certification Regarding Debarment, Suspension, 
and Other Responsibility Matters--Primary Covered Transactions, as 
required by 7 CFR part 3017;
    (D) A report by the borrower stating whether or not it is 
delinquent on any Federal debt, and if delinquent, the amount and age 
of the delinquency and the reasons therefor; and a certification, if 
not previously provided, that the borrower has been informed of the 
Government's collection options; and
    (E) The written acknowledgement from a registered engineer or 
architect regarding compliance with seismic provisions of applicable 
model codes for any buildings to be constructed, as required by 7 CFR 
1792.104. All other elements of an application listed in Sec. 1717.855, 
Sec. 1717.856, and Sec. 1717.858(c) not listed in this paragraph (c) 
are exempted.
    (3) Applications from distribution borrowers are submitted to the 
general field representative (GFR), while applications from power 
supply borrowers are submitted to the REA Power Supply Division, or its 
successor, in Washington, DC. When an application is satisfactory to 
the GFR, it will be sent promptly to the Washington office. If 
Washington office staff determine that an application is incomplete, 
the borrower will be promptly notified in writing about the 
deficiencies. When the application is complete, and if the security, 
including assurance of repayment, of loans made or guaranteed by REA 
will remain reasonably adequate after granting the lien accommodation 
or subordination, the borrower and the lender will be promptly notified 
in writing that the lien accommodation or subornation has been 
approved, subject to the conditions cited in paragraph (c)(1) of this 
section.
    (d) Rural development and other non-electric utility investments. 
Although REA recommends the use of separate subsidiaries as set forth 
in Sec. 1717.858, if requested by a borrower that meets the 110 percent 
equity test and all other applicable requirements of this section, REA 
will provide a lien subordination on the specific assets financed in 
the case of loans made directly to the borrower for rural development 
and other non-electric utility purposes, provided that the outstanding 
balance of all such loans lien subordinated under this paragraph (d), 
after taking into consideration the effect of the new loan, does not 
exceed 15 percent of the borrower's net worth and the security, 
including assurance of repayment, of loans made or guaranteed by REA 
will remain reasonably adequate after granting the lien subordination. 
Investments lien subordinated under this paragraph shall be included 
among those investments subject to the 15 percent of total utility 
plant limitation set forth in 7 CFR 1717.654(b)(1), and granting of the 
lien subordination will not constitute approval of the investment under 
7 CFR Part 1717, subpart N.
    (e) Equity development plans. Borrowers that qualify for a lien 
accommodation or lien subordination under this section are exempt from 
the requirement set forth in Sec. 1717.856(d) that they submit an 
equity development plan as part of their application. This exemption 
applies only to applications for a lien accommodation or subordination, 
and does not exempt borrowers from the requirements of 7 CFR 1710.116 
applicable to applications for a loan or loan guarantee from REA.
    (f) Requirements and controls not exempted. All requirements and 
limitations imposed with respect to lien accommodations and 
subordinations by this subpart R that are not specifically exempted by 
this section are not exempted and shall continue to apply according to 
their terms.
    8. New Sec. 1717.904 is added to read as follows:


Sec. 1717.904  Exemptions pursuant to section 306E of the RE Act.

    (a) General policy. If a borrower's net worth to REA debt ratio 
exceeds 110 percent, as determined by REA, and the borrower is in 
compliance with all requirements of its mortgage, loan agreement with 
REA, and any other agreement with REA that have not been exempted in 
writing by REA, REA will expeditiously approve a lien accommodation for 
a concurrent supplemental loan if requested in writing by the borrower, 
provided that the security, including assurance of repayment, of loans 
made or guaranteed by REA will remain reasonably adequate. REA's 
approval will be conditioned upon execution and delivery by the 
borrower of a security instrument satisfactory to REA, if required, and 
such additional information, documents, and opinions of counsel as REA 
may require.
    (b) Determination of net worth to REA debt ratio. A borrower's 
ratio of net worth to REA debt will be determined as set forth in 
Sec. 1717.860(b).
    (c) Requirements and controls exempted. The applicable requirements 
and controls exempted by 7 CFR 1710.7(c) are also exempted with respect 
to concurrent supplemental loans.
    (d) Requirements and controls not exempted. All requirements and 
controls applicable to concurrent supplemental financing set forth in 
this subpart and other REA regulations that are not specifically 
exempted by 7 CFR 1710.7(c) are not exempted and shall continue to 
apply according to their terms. These include, but are not limited to:
    (1) The applicable requirements listed in 7 CFR 1710.7(d); and
    (2) The requirements set forth in Sec. 1717.901(a) when a borrower 
requests early approval of a lien accommodation.
    (e) Procedures. If a borrower meets the requirements of this 
section, upon receipt of a complete application REA will promptly 
notify the borrower and lender in writing that the lien accommodation 
has been approved subject to the conditions set forth in paragraph (a) 
of this section.

    Dated: January 21, 1994.
Bob J. Nash,
Under Secretary, Small Community and Rural Development.
[FR Doc. 94-1987 Filed 1-27-94; 8:45 am]
BILLING CODE 3410-15-P