[Federal Register Volume 59, Number 150 (Friday, August 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18772]


[[Page Unknown]]

[Federal Register: August 5, 1994]


                                                   VOL. 59, NO. 150

                                             Friday, August 5, 1994

DEPARTMENT OF AGRICULTURE

Rural Electrification Administration

7 CFR Parts 1710, 1714, and 1785

RIN 0572-AA69

 

Pre-loan Policies and Procedures for Electric Loans

AGENCY: Rural Electrification Administration, USDA.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Electrification Administration (REA) proposes to 
amend its pre-loan regulations for electric loans. Key provisions of 
this proposed regulation include: lengthening the allowable loan period 
for insured and guaranteed electric loans for distribution, 
transmission, and improvements to generation facilities to 4 years; 
clarifying REA requirements for supplemental financing concurrent with 
municipal rate loans; substantially modifying the requirement that 
borrowers develop and maintain certain levels of equity; and clearly 
setting forth the documents required for a complete loan application. 
This regulation is intended to facilitate the application process for 
borrowers and reduce administrative costs to the government.

DATES: Written comments must be received by REA or carry a postmark or 
equivalent by October 4, 1994.

ADDRESSES: Written comments should be addressed to Sue Arnold, Program 
Support Staff, U.S. Department of Agriculture, Rural Electrification 
Administration, room 2230-s, 14th Street and Independence Avenue, SW., 
Washington, DC 20250-1500. REA requires a signed original and three 
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: Sue Arnold, Financial Analyst, U.S. 
Department of Agriculture, Rural Electrification Administration, room 
2230-s, 14th Street & Independence Avenue, SW., Washington, DC 20250-
1500. Telephone: 202-720-0736. FAX 202-742-4120.

SUPPLEMENTARY INFORMATION: This proposed rule has been determined to be 
not significant for the purposes of Executive Order 12866 and therefore 
has not been reviewed by the Office of Management and Budget (OMB). The 
Administrator of REA has determined that the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.) does not apply to this proposed 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. The program described by this proposed 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. This proposed 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 proposed rule has been reviewed under 
Executive Order 12778, Civil Justice Reform. If adopted, this proposed 
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.

Information Collection and Recordkeeping Requirements

    The existing recordkeeping and reporting burdens contained in this 
proposed rule were approved by 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, Attention: Desk Officer for 
USDA, room 3201, NEOB, Washington, DC 20503.

Background

    REA is proposing several amendments to pre-loan regulations 
affecting both insured and guaranteed loans. These amendments are 
intended to enhance the delivery of customer service by facilitating 
the application process for borrowers, and reducing administrative 
costs to the Government.

Loan Period

    The first of the proposed amendments would lengthen the allowable 
loan period to 4 years for both insured and guaranteed loans for the 
construction of distribution and transmission facilities and for 
improvements to generation facilities. The loan period, sometimes 
referred to as the financing period, means the period of time during 
which the facilities included in a loan application will be 
constructed. Currently loans to distribution borrowers are limited to a 
2 year loan period, and loans to power supply borrowers are limited to 
a 3 year period. Some borrowers must apply for loans every 2 or 3 years 
in order to meet their financing needs. REA believes that allowing a 
longer loan period will, in the long run, significantly reduce loan 
application costs to Agency customers, including REA borrowers and 
supplemental lenders, as well as loan processing costs to the 
Government. Borrowers would still have the option of applying for loans 
for a shorter period, if they so desire, and REA reserves the right to 
limit loans to a period of less than 4 years under certain 
circumstances (Sec. 1710.106).
    To accomplish this policy change, REA is proposing to amend the 
definition of ``loan period'' (Sec. Sec. 1710.2 and 1710.106) and the 
construction period required to be covered by the borrower's REA 
construction work plan (Sec. 1710.251). On December 20, 1993, at 58 FR 
66260, REA published a rule setting forth policies and procedures for 
municipal rate loans pursuant to the Rural Electrification Loan 
Restructuring Act of 1993. This regulation at 7 CFR 1714.6(a)(2) allows 
not more than 6 advances of funds on any municipal rate loans. To 
provide flexibility to borrowers, REA proposes increasing this number 
to 8 advances if the loan period is longer than 2 years.
    In conjunction with lengthening the allowable loan period, REA 
proposes amendments to the requirements for automatic termination of 
the Government's obligation to advance funds from insured loans. 
Current regulations at 7 CFR 1785 subpart A, provide that funds from 
insured loans approved on or after June 1, 1984, may be advanced for a 
period of no more than 4 years from the date of the loan contract as 
amended unless the borrower applies for, and the Administrator approves 
an extension of the Government's obligation. Subpart A of part 1785 was 
originally published May 29, 1984, at 49 FR 22266. As stated in its 
preamble, the rule was intended to help assure that REA's loan funds 
are used effectively and efficiently.
    To allow borrowers to complete construction projects based on a 
loan period of more than 2 years, REA proposes, in Sec. 1714.56, that 
funds from insured loans approved on or after the effective date of the 
rule proposed today may be advanced for a period of 1 year longer than 
the loan period, provided that the fund advance period may not be 
shorter than 4 years. For example, if the loan period is 2 or 3 years, 
the period during which funds may be advanced would terminate after 4 
years; if the loan period is 4 years, the fund advance period would 
terminate after 5 years.
    To provide borrowers with a fixed date for automatic termination, 
REA is proposing that the date of the automatic termination be computed 
from the date of the loan note, rather than the date of the loan 
contract. On April 7, 1993, at 58 FR 18043, REA published a proposed 
amendment to part 1785 that would, in effect, redesignate 7 CFR 1785 
subpart A as 7 CFR 1785 subpart F. Since automatic termination of 
insured electric loans is more closely related to the subject matter of 
part 1714 than of part 1785, REA has determined that setting out the 
requirements in detail in part 1714 would better serve the public. It 
is, therefore, proposed that existing subpart A (proposed subpart F) of 
part 1785 be removed.

Supplemental Financing

    REA is proposing amendments to clarify policy on supplemental 
financing requirements. Existing 7 CFR 1710.110 states that, except in 
cases of financial hardship, applicants for a municipal rate insured 
loan are required to obtain a portion of their loan funds from a 
supplemental source without an REA guarantee. The method for 
determining the supplemental financing percentage for each individual 
loan is set forth in existing Secs. 1710.110(c)(1) and (2). For most 
borrowers, this percentage is based on the borrower's plant revenue 
ratio (PRR), as defined in Sec. 1710.2. To clarify the requirement for 
those borrowers whose PRR changes between the time of the loan 
application and the time of loan approval, REA is proposing to codify 
the policy of using the PRR based on the most recent year-end data 
available on the date of loan approval.
    Consistent with longstanding REA policy, if termination or 
rescission of an insured loan, or its associated supplemental loan 
substantially affects the overall proportion of REA and supplemental 
financing to a borrower, the amount of supplemental financing required 
on that borrower's next municipal rate loan is adjusted to maintain the 
overall proportion. Since REA loans generally carry a lower interest 
rate than supplemental loans from private lenders, this policy is 
intended to avoid (1) Penalizing borrowers following a loan rescission 
and (2) Allowing a borrower to receive a disproportionate amount of low 
interest REA financing.
    The proposed amendment will clarify that the adjustment will only 
be made following rescission or termination of more than 5 percent of 
an insured loan subject to supplemental financing. No adjustment will 
be made based on rescission of a hardship rate loan where no 
supplemental financing was required. The amendment will also set forth 
the formula used to compute the adjustment.

Amortization of Principal

    Under current procedures, amortization of principal begins 2 years 
after the date of the note for advances made during the first and 
second years of the loan, and 4 years after the date of the note for 
advances made during the third and fourth years. REA proposes to 
continue existing policy with respect to advances made during the first 
2 years of the loan. In conjunction with lengthening the allowable loan 
period, REA is proposing, in Sec. 1714.58, that principal amortization 
of advances made more than 2 years after the date of the note begin 
with the loan payment billed in the next full month after the month of 
the advances. For example, principal amortization on funds advanced any 
time during the month of June of the third year after the date of the 
note would begin with the bill sent to the borrower in July of that 
year. In cases of financial hardship, the Administrator may approve a 
principal deferment period of up to 2 years for any advances made after 
the second year of the loan.
    The initial 2 year deferment period allows the borrower to make 
significant improvements to existing facilities and, in addition, to 
place most of the new plant in service, earning revenues with which to 
repay the loan. REA believes that any increase in scheduled payments 
after the second year of the loan will represent only a fraction of a 
borrower's total scheduled debt service payments and an even smaller 
fraction of its total costs. Any increase in principal payments during 
these later years will be offset by reduced principal payments in 
subsequent years.

Final Maturity

    REA proposes a technical change in the method used to evaluate 
final maturity of loans. Pursuant to Sec. 1710.115, REA loans must be 
repaid with interest within a period, up to 35 years, that approximates 
the expected useful life of the facilities financed. The existing rule 
bases expected useful life on the weighted average of the depreciation 
rates proposed by the borrower. The proposed amendment will base final 
maturity on useful life, rather than on depreciation rates. Although 
depreciation rates and useful life are closely related, REA believes 
that basing loan maturity directly on useful life is a more 
straightforward approach.

Equity Development Plans

    On January 9, 1992, at 57 FR 1053, REA published regulations 
requiring at 7 CFR 1710.116, that a borrower whose total equity as a 
percentage of total assets is, or is projected to be, less than certain 
target levels, prepare and agree to follow an equity development plan 
as a condition of obtaining an REA loan. For distribution borrowers the 
target equity level is 40 percent; for power supply borrowers the 
target level is 20 percent. The equity development plan must be 
designed to make reasonable progress toward meeting the applicable 
target level during a 10-year period without, as stated in the existing 
rule at 7 CFR 1710.116(d), raising power costs or retail rates for 
electricity unreasonably, placing an unreasonable burden on rate 
payers, or substantially reducing the borrower's ability to compete 
with neighboring utilities or other energy sources.
    The requirement that borrowers develop and maintain equity was 
intended to strengthen the Agency's credit policies and protect the 
value of its loan portfolio. In accordance with the RE Act, REA may 
make a loan only if the Administrator determines that the security 
therefor is reasonably adequate and such loan will be repaid in full 
within the time agreed. Since a borrower's total capitalization is 
equal to the sum of its equity and its debt, a low ratio of equity to 
total assets indicates a correspondingly high level of debt. The equity 
targets were designed to minimize cases where over leverage could 
jeopardize a borrower's ability to meet its financial obligations.
    While REA still believes that low levels of equity present risks to 
lenders, two years of experience with the equity development plan 
requirement has demonstrated that such plans are an unnecessary and 
burdensome means of achieving the desired result. As stated in the 
preamble to the 1992 regulation, the target level of 40 percent for 
distribution borrowers was based on the experience of REA borrowers, 
typical industry standards, and the long established threshold in the 
REA mortgage for determining whether REA approval is required for 
borrowers to retire capital credits.
    At the time the rule was published, about 48 percent of 
distribution borrowers had equity levels of 40 percent or more, and an 
additional 31 percent had between 30 and 40 percent equity levels. At 
the end of 1992, before borrowers were significantly impacted by the 
new requirement, the percentage of distribution borrowers with equity 
levels of 40 percent or more had increased to 53 percent, and the 
percentage with levels between 30 and 40 percent had increased to about 
32 percent. For power supply borrowers, the percentage of borrowers 
with equity levels less than 10 percent dropped from about 60 percent 
to about 50 percent between the time the 1992 rule was published and 
the end of 1992.
    At the same time, there has been a great deal of confusion as to 
what constitutes an acceptable plan that will demonstrate reasonable 
progress toward increasing equity and have no significant adverse 
effects on rate payers or on the borrower's competitive position.
    Consequently, REA is proposing to drop the requirement that an 
equity development plan be submitted as part of a loan application. REA 
does, however, continue to support and encourage borrower efforts to 
achieve and maintain sound levels of equity. REA will continue to 
review the borrower's total capital structure based on the borrower's 
audited financial reports submitted pursuant to 7 CFR Part 1773; on 
financial and statistical reports (REA Form 7 for distribution 
borrowers and REA Form 12 for power supply borrowers) submitted by the 
borrower to REA; the Long-Range Financial Forecast submitted in support 
of the loan, and on other information known to REA. Capital structure 
will be a factor in REA's evaluation of loan feasibility pursuant to 
Sec. 1710.112, in determining borrower eligibility for advance approval 
of a lien accommodation pursuant to 7 CFR 1717.854, and in evaluating 
certain other borrower requests under the REA mortgage.

Credit Reform

    A policy change mandated by the Federal Credit Reform Act of 1990 
(2 U.S.C. 661f), affects loans approved on or after October 1, 1991. 
The Federal Credit Reform Act requires Federal agencies to match funds 
obligated, disbursed, and collected with their intended purposes. 
Therefore, this rule proposes, in Sec. 1710.106(f), that advances of 
funds from a loan made on or after that date be made only for primary 
budget purposes included in that particular loan, unless the borrower 
applies for and REA approves a budget transfer. Primary budget purposes 
as listed in REA Bulletin 26-1, Budgetary Control and Advance of Loan 
Funds, and on REA Form 595, Financial Requirement and Expenditure 
Statement, are (1) Distribution, (2) Transmission, (3) Generation, (4) 
Headquarters Facilities, (5) Acquisitions, and (6) All Other.

Loan Application Documents

    Finally, REA proposes to add new subpart I to part 1710 to set 
forth the documents and procedures required for a loan application. REA 
has determined that publishing the entire list of loan application and 
primary support documents in a single regulation would facilitate the 
application process for borrowers and supplemental or other lenders. 
The general requirement to submit each of the documents is set forth in 
existing part 1710 or in other REA regulations. The proposed new 
subpart I is simply a summary list for the convenience of the public. 
To avoid imposing any unnecessary burdens, REA proposes, in some cases, 
to accept copies of forms the borrower is required to submit to the 
Department of Energy, instead of requiring the borrower to follow a 
different format. REA is exploring possibilities for electronic 
submission of certain documents.

Other Issuances

    This proposed rule consolidates, updates, and, in some instances, 
revises information contained in REA's Electric Operations Manual, EOM-
1 Guide for the Preparation of Electric Distribution Loan Applications 
and in the following existing REA Bulletins:

20-5  Extensions of Payments of Principal and Interest
20-9  Loan Payments and Statements
26-1  Budgetary Control and Advance of Electric Loan Funds
86-3  Headquarters Facilities for Electric Borrowers

    When this regulation and other related rules are effective, these 
publications will be rescinded, in whole or in part, or revised. In the 
future, REA bulletins will be used to provide certain procedural 
information, illustrative examples, and other guidance to assist 
borrowers in complying with REA's published rules.
    REA believes the amended parts 1710 and 1714 will clarify pre-loan 
policies and requirements, bring them up to date, facilitate 
understanding and compliance by borrowers, and improve program 
effectiveness.

List of Subjects

7 CFR Part 1710

    Electric power, Electric utilities, Loan programs--energy, Rural 
areas.

7 CFR Part 1714

    Electric power, Loan programs--energy, Rural areas.

7 CFR Part 1785

    Electric power, Loan programs--energy, Rural areas.

    For the reasons set out in the preamble, REA proposes to amend 7 
CFR Chapter XVII 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. 901-950(b); Public Law 99-591, 100 Stat, 
3341-16; 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.

    2. Section 1710.2 is amended by removing the existing definition of 
``Loan Period'' and adding two new definitions in alphabetical order to 
read as follows:


Sec. 1710.2  Definitions and rules of construction.

    (a) * * *
    Fund advance period means the period of time during which the 
Government may advance loan funds to the borrower. See 7 CFR 1714.56.
* * * * *
    Loan period means the period of time during which the facilities 
included in a loan application will be constructed. It commences with 
the date shown on page 1, in the block headed ``Cost Estimates as of,'' 
of REA Form 740c, Cost Estimates and Loan Budget for Electric 
Borrowers, which is the same as the date on the Financial and 
Statistical Report submitted with the loan application. The loan period 
may be up to 4 years for distribution borrowers and, except in the case 
of a loan for new generating and associated transmission facilities, up 
to 4 years for the transmission facilities and improvements or 
replacements of generation facilities for power supply borrowers. The 
loan period for new generating facilities is determined on a case by 
case basis.
* * * * *
    3. Section 1710.106 is amended by redesignating paragraph (d) as 
paragraph (e) and adding new paragraphs (d) and (f) to read as follows:


Sec. 1710.106  Uses of loan funds.

* * * * *
    (d) A distribution borrower may request a loan period of 2, 3 or 4 
years. Except in the case of loans for new generating and associated 
transmission facilities, a power supply borrower may request a loan 
period of not more than 4 years for transmission and substation 
facilities and improvements or replacements of generation facilities. 
The loan period for new generating facilities is determined on a case 
by case basis. The loan period for DSM activities will be determined in 
accordance with Sec. 1710.355. The Administrator may approve a loan 
period shorter than the period requested by the borrower, if in the 
Administrator's sole discretion, a loan made for the longer period 
would fail to meet REA requirements for loan feasibility and loan 
security set forth in Secs. 1710.112 and 1710.113, respectively.
* * * * *
    (f)(1) For borrowers having one or more loans approved on or after 
October 1, 1991, advances of funds will be made only for the primary 
budget purposes included in the loan as shown on REA Form 740c as 
amended and approved by REA, or on a construction work plan or a 
construction work plan amendment approved by REA. Each advance will be 
charged to the oldest outstanding note(s) having unadvanced funds for 
the primary budget purpose for which the request for advances was made, 
regardless of whether such notes are associated with loans approved 
before or after October 1, 1991, unless any conditions on advances 
under any of these notes have not been met by the borrower.
    (2) For borrowers whose most recent loan was approved before 
October 1, 1991, advances will be made on the oldest outstanding note 
having unadvanced funds, unless any conditions on advances under such 
note have not been met by the borrower.
    4. Section 1710.110 is amended by revising paragraph (c)(1)(ii) and 
adding a new paragraph (c)(3) to read as follows:


Sec. 1710.110  Supplemental financing.

* * * * *
    (c) Supplemental financing required for municipal rate loans.--(1) 
Distribution borrowers.
* * * * *
    (ii) All other distribution borrowers must obtain supplemental 
financing according to their plant revenue ratio (PRR), as defined in 
Sec. 1710.2, based on the most recent year-end data available on the 
date of loan approval, as follows: 

------------------------------------------------------------------------
                                                            Supplemental
                           PRR                                  loan    
                                                             percentage 
------------------------------------------------------------------------
9.00 and above............................................            10
8.01-8.99.................................................            20
8.00 and below............................................           30 
------------------------------------------------------------------------


* * * * *
    (3) Subsequent loans. (i) If more than 5 percent of an insured loan 
made prior to November 1, 1993, or of a municipal rate loan is 
terminated or rescinded, the amount of supplemental financing required 
in the borrower's next loan after the rescission for which supplemental 
financing is required, pursuant to paragraph (a) of this section, will 
be adjusted to average the actual supplemental financing portion on the 
terminated or rescinded loan with the supplemental financing portion 
that would have been required on the new loan according to paragraphs 
(c) (1) and (2), in accordance with the formulas set forth in 
paragraphs (c)(3) (ii) and (iii) of this section.
    (ii) If a borrower's supplemental financing requirement as set 
forth in paragraphs (a), (c)(1), and (c)(2) of this section has not 
changed between the most recent loan and the loan being considered, 
then the amount of supplemental financing required for the new loan 
will be computed as follows:
Supplemental financing amount, new loan = [(A + B) x C] - D

where:

A = The total funds ($) actually advanced from the first loan, 
including both REA loan funds and funds from the supplemental loan, 
plus any unadvanced funds still available to the borrower after the 
rescission.
B = The total amount ($) for facilities of the new loan request, 
including both REA loan funds and funds from supplemental loans.
C = The proportion (%) of supplemental financing required on the 
loans according to paragraphs (a), (c)(1) and (c)(2) of this 
section.
D = The amount ($) of supplemental funds actually advanced on the 
first loan, plus any unadvanced supplemental funds still available 
to the borrower after the rescission.

    (iii) If a borrower's supplemental financing requirement as set 
forth in paragraphs (a), (c)(1), and (c)(2) of this section has changed 
between the most recent loan and the loan being considered, then the 
amount of supplemental financing required for the new loan will be the 
weighted average of the portions otherwise applicable on the two loans 
and will be computed as follows:
Supplemental financing amount, new loan = (A x C1) + (B x C2) 
- D

where:

A = The total funds ($) actually advanced from the first loan, 
including both REA loan funds and funds from the supplemental loan, 
plus any unadvanced funds still available to the borrower after the 
rescission.
B = The total amount ($) for facilities of the new loan request, 
including both REA funds and funds from supplemental loans.
C1 = The proportion (%) of supplemental financing required on 
the old loan according to paragraphs (a), (c)(1) and (c)(2) of this 
section.
C2 = The proportion (%) of supplemental financing required on 
the new loan according to paragraphs (a), (c)(1) and (c)(2) of this 
section.
D = The amount ($) of supplemental funds actually advanced on the 
first loan, plus any unadvanced supplemental funds still available 
to the borrower after the rescission.
* * * * *
    5. Section 1710.112 is amended by adding a new paragraph (b)(10) to 
read as follows:


Sec. 1710.112   Loan feasibility.

* * * * *
    (b) * * *
    (10) The borrower's projected capitalization, measured by its 
equity as a percentage of total assets, is adequate to enable the 
borrower to meet its financial needs and to provide service consistent 
with the RE Act. Among the factors to be considered in reviewing the 
borrower's projected capitalization are the economic strength of the 
borrower's service territory, the inherent cost of providing service to 
the territory, the disparity in rates between the borrower and 
neighboring utilities, the intensity of competition faced by the 
borrower from neighboring utilities and other power sources, and the 
relative amount of new capital investment required to serve existing or 
new loads.
    6. Section 1710.115 is amended by revising paragraph (b) to read as 
follows:


Sec. 1710.115   Final maturity.

* * * * *
    (b) Loans made or guaranteed by REA for facilities owned by the 
borrower generally must be repaid with interest within a period, up to 
35 years, that approximates the expected useful life of the facilities 
financed. The expected useful life shall be based on the weighted 
average of the useful lives that the borrower proposes for the 
facilities financed by the loan, provided that the proposed useful 
lives are deemed appropriate by REA. The proposed useful lives proposed 
by the borrower for the facilities financed must be consistent with the 
borrower's proposed depreciation rates for these facilities. In states 
where the borrower must obtain state regulatory authority approval of 
depreciation rates for rate making purposes, the depreciation rates 
used for the purposes of this paragraph shall be the rates currently 
approved by the state authority or rates for which the borrower plans 
to seek state authority approval, provided that these rates are deemed 
appropriate by REA. In other states, if the rates proposed by the 
borrower are not deemed appropriate by REA, REA will base expected 
useful life on the depreciation rates listed in Bulletin 183-1, or its 
successor, revising such rates as necessary to reflect current industry 
practice. Final maturities for loans for the implementation of programs 
for demand side management and energy resource conservation and on and 
off grid renewable energy sources not owned by the borrower will be 
determined by REA.
* * * * *


Sec. 1710.116   [Removed and Reserved]

    7. Section 1710.116 is removed and reserved.
    8. Section 1710.251 is amended by revising paragraph (b) to read as 
follows:


Sec. 1710.251   Construction work plans--distribution borrowers.

* * * * *
    (b) A distribution borrower's CWP shall cover a construction period 
of between 2 and 4 years, and include all facilities to be constructed 
which are eligible for REA financing, whether or not REA financial 
assistance will be sought or be available for certain facilities. Any 
REA financing provided for the facilities will be limited to a 4-year 
loan period. The construction period covered by a CWP in support of a 
loan application shall not be shorter than the loan period requested 
for financing of the facilities.
* * * * *
    9. Section 1710.252 is amended by revising paragraph (b) to read as 
follows:


Sec. 1710.252   Construction work plans--power supply borrowers.

* * * * *
    (b) Normally a power supply borrower's CWP shall cover a period of 
3 to 4 years. While comprehensive CWP's are desired, if there are 
extenuating circumstances REA may accept a single-purpose transmission 
or generation CWP in support of a loan application or budget 
reclassification. The construction period covered by a CWP in support 
of a loan application shall not be shorter than the loan period 
requested for financing of the facilities.
* * * * *
    10. Subpart I is added to part 1710 to read as follows:

Subpart I--Application Requirements and Procedures for Insured and 
Guaranteed Loans

Sec.
1710.400  Initial contact.
1710.401  Loan application documents.
1710.402-1710.403  [Reserved]
1710.404  Additional requirements.
1710.405  Supplemental financing documents.
1710.406  Loan approval.
1710.407  Loan documents.

Subpart I--Application Requirements and Procedures for Insured and 
Guaranteed Loans


Sec. 1710.400  Initial contact.

    (a) Loan applicants that do not have outstanding loans from REA 
should write to the Rural Electrification Administration, United States 
Department of Agriculture, Washington, D.C. 20250-1500. A field or 
headquarters staff representative may be assigned by REA to visit the 
applicant and discuss its financial needs and eligibility. Borrowers 
that have outstanding loans should contact their assigned REA general 
field representative (GFR) or, in the case of a power supply borrower, 
the Director, Power Supply Division. Borrowers may consult with REA 
field representatives and headquarters staff, as necessary.
    (b) Before submitting an application for an insured loan the 
borrower shall ascertain from REA the amount of supplemental financing 
required, as set forth in Sec. 1710.110.


Sec. 1710.401  Loan application documents.

    (a) All borrowers. All applications for electric loans shall 
include the documents listed in this paragraph. The first page of the 
application shall be a list of the documents included in the 
application. The borrower may use REA Form 726, Checklist for Electric 
Loan Application, as this list.
    (1) Transmittal letter. A letter signed by the borrower's manager 
indicating the actual corporate name and taxpayer identification number 
of the borrower and addressing the following items:
    (i) The need for flood hazard insurance;
    (ii) Breakdown of requested loan funds by state;
    (iii) A listing of the counties served by the borrower;
    (iv) A listing of threatened actions by third parties that could 
adversely affect the borrower's financial condition, including 
annexations or other actions affecting service territory, loads, or 
rates; and
    (v) A listing of pending regulatory proceedings pertaining to the 
borrower.
    (2) Board resolution. This document is the formal request by the 
borrower's board of directors for a loan from REA. The board resolution 
shall include:
    (i) The requested loan amount, loan term, final maturity, and 
method of amortization (Sec. 1710.110(b));
    (ii) The sources and amounts of any supplemental or other 
financing;
    (iii) Authorization for REA to release appropriate information to 
supplemental or other lender(s), and authorization for these lenders to 
release appropriate information to REA; and
    (iv) For an insured loan, a statement of whether the application is 
for a municipal rate loan, with or without the interest rate cap, or a 
hardship loan. If the application is for a municipal rate loan, the 
board resolution must indicate whether the borrower intends to elect 
the prepayment option. See 7 CFR 1714.4(c).
    (3) REA Form 740c, Cost Estimates and Loan Budget for Electric 
Borrowers. This form together with its attachments lists the 
construction, equipment, facilities and other cost estimates from the 
construction work plan or engineering and cost studies, and the sources 
of financing for each component. The date on page 1 of the form is the 
beginning date of the loan period and shall be the same as the date on 
the Financial and Statistical Report submitted with the application 
(paragraph (a)(5) of this section). Form 740c also includes the 
following information, exhibits, and attachments:
    (i) Description of funds and materials. This description details 
the availability of materials and equipment, any unadvanced funds from 
prior loans, and any general funds the borrower designates, to 
determine the amount of such materials and funds to be applied against 
the capital requirements estimated for the loan period.
    (ii) Reimbursement schedule. This schedule lists the date, amount, 
and identification number of each inventory of work orders and special 
equipment summary that form the basis for the borrower's request for 
reimbursement of general funds on the REA Form 740c. See Sec. 1710.109. 
If the borrower is not requesting reimbursement, this schedule need not 
be submitted.
    (iii) Location of consumers. If the application is for a municipal 
rate loan subject to the interest rate cap, or for a loan at the 
hardship rate, and the average number of consumers per mile of the 
total electric system exceeds 17, Form 740c must include, as a note, a 
breakdown of funds included in the proposed loan to furnish or improve 
service to consumers located in an urban area. See 7 CFR 1714.7(c) and 
1714.8(d). This breakdown must indicate the method used by the borrower 
for allocating loan funds between urban and non urban consumers.
    (4) REA Form 740g, Application for Headquarters Facilities. This 
form lists the individual cost estimates from the construction work 
plan or other engineering study that support the need for REA financing 
for any warehouse and service type facilities included, and funding 
requested for such facilities shown on REA Form 740c. If no loan funds 
are requested for headquarters facilities, Form 740g need not be 
submitted.
    (5) Financial and statistical report. Distribution borrowers shall 
submit these data on REA Form 7; power supply borrowers shall use REA 
Form 12. The form shall contain the most recent data available, which 
shall not be more than 60 days old when received by REA.
    (6) Pending litigation statement. A statement from the borrower's 
counsel listing any pending litigation, including levels of related 
insurance coverage and the potential effect on the borrower.
    (7) Mortgage information. A new mortgage will be required if this 
is a borrower's first application for a loan under the RE Act. A 
restated mortgage, or a mortgage supplement will be required if there 
has been a material change to the real property owned by the borrower 
since the most recent REA loan, loan guarantee, or lien accommodation, 
if the requested loan would cause the borrower to exceed its previously 
authorized debt limit, or if REA otherwise determines it necessary. If 
there has been no material change to the real property owned by the 
borrower since the most recent REA loan or loan guarantee, the borrower 
must submit an opinion of its counsel to that effect. If a new or 
restated mortgage or a mortgage supplement is required, the borrower 
must provide the following:
    (i) Property schedule. For a new or restated mortgage or for a 
mortgage supplement, the following information shall be submitted in a 
form satisfactory to REA:
    (A) A listing of the counties where the borrower's existing 
electric facilities and new facilities are or will be located;
    (B) A listing and description of all real property owned by the 
borrower; and
    (C) An opinion of the borrower's counsel certifying that the 
property schedule is complete and adequate for inclusion in a security 
instrument to be executed by the borrower to secure an REA loan.
    (ii) Maximum debt limit. For a new mortgage, or if the proposed 
loan would result in the borrower's existing mortgage debt limit being 
exceeded, a resolution of the borrower's board of directors, and any 
other authorizations or certifications required by State law, 
certifying that a new debt limit has been legally established that is 
adequate to accommodate existing indebtedness and the proposed new 
financing, including any concurrent loans.
    (8) Rate disparity and consumer income data. If the borrower is 
applying under the rate disparity and consumer income tests for either 
a municipal rate loan subject to the interest rate cap or a hardship 
rate loan, the application must provide a breakdown of residential 
consumers either by county or by census tract. In addition, if the 
borrower serves in 2 or more states, the application must include a 
breakdown of all ultimate consumers by state. This breakdown may be a 
copy of Form EIA 861 submitted by the Borrower to the Department of 
Energy or in a similar form. See 7 CFR 1714.7(b) and 1714.8(a). To 
expedite the processing of loan applications, REA strongly encourages 
distribution borrowers to provide this information to the GFR prior to 
submitting the application.
    (9) Standard Form 100 - Equal Employment Opportunity Employer 
Report EEO-1. This form, required by the Department of Labor, sets 
forth employment data for borrowers with 100 or more employees. A copy 
of this form, as submitted to the Department of Labor, is to be 
included in the application for an insured loan if the borrower has 
more than 100 employees. See Sec. 1710.122.
    (10) Form AD-1047, Certification Regarding Debarment, Suspension, 
and Other Responsibility Matters--Primary Covered Transactions. This 
statement certifies that the borrower will comply with certain 
regulations on debarment and suspension required by Executive Order 
12549, Debarment and Suspension (3 CFR, 1986 Comp., p. 189). See 7 CFR 
part 3017 and Sec. 1710.123.
    (11) Uniform Relocation Act assurance statement. This assurance, 
which need not be resubmitted if previously submitted, provides that 
the borrower shall comply with 49 CFR Part 24, which implements the 
Uniform Relocation Assistance and Real Property Acquisition Policy Act 
of 1970, as amended by the Uniform Relocation Act Amendments of 1987 
and 1991. See Sec. 1710.124.
    (12) Lobbying. The following information on lobbying is required 
pursuant to 7 CFR part 3018 and Sec. 1710.125. Borrowers applying for 
both insured and guaranteed financing should consult REA before 
submitting this information.
    (i) Certification regarding lobbying. This statement certifies that 
the borrower shall comply with certain requirements with respect to 
restrictions on lobbying activities.
    (ii) Standard Form LLL--Disclosure of Lobbying Activities. This 
disclosure form is required from those borrowers engaged in lobbying 
activities.
    (13) Federal debt delinquency requirements. See Sec. 1710.126. The 
following documents are required:
    (i) Report on Federal debt delinquency. This report indicates 
whether or not a borrower is delinquent on any Federal debt.
    (ii) Certification Regarding Federal Government Collection Options. 
This statement certifies that a borrower has been informed of the 
collection options the Federal government may use to collect delinquent 
debt. The Federal government is authorized by law to take any or all of 
the following actions in the event that a borrower's loan payments 
become delinquent or the borrower defaults on its loans:
    (A) Report the borrower's delinquent account to a credit bureau;
    (B) Assess additional interest and penalty charges for the period 
of time that payment is not made;
    (C) Assess charges to cover additional administrative costs 
incurred by the Government to service the borrower's account;
    (D) Offset amounts owed directly or indirectly to the borrower 
under other Federal programs;
    (E) Refer the borrower's debt to the Internal Revenue Service for 
offset against any amount owed to the borrower as an income tax refund;
    (F) Refer the borrower's account to a private collection agency to 
collect the amount due; and
    (G) Refer the borrower's account to the Department of Justice for 
collection.
    (14) Articles of incorporation and bylaws. The following are 
required if either document has been amended since the last loan 
application was submitted to REA, or if this is a borrower's first 
application for a loan under the RE Act:
    (i) The borrower's articles of incorporation currently in effect, 
as filed with the appropriate state office, setting forth the 
borrower's corporate purpose; and
    (ii) The bylaws currently in effect, as adopted by the borrower's 
board of directors, setting forth the manner by which the borrower's 
organization will be governed and regulated.
    (15) State regulatory approvals. In states in which regulatory 
authorities have jurisdiction over the borrower's rates, the borrower 
must provide satisfactory evidence, pursuant to Secs. 1710.105 and 
1710.151(f), based on the information available, such as an opinion of 
counsel or of another qualified source, that the state regulatory 
authority will not exclude from the borrower's rate base any of the 
facilities included in the loan request, or otherwise prevent the 
borrower from charging rates sufficient to repay with interest the debt 
incurred for the facilities.
    (16) Seismic safety certifications, if required under 7 CFR part 
1792.
    (17) Rates. (i) A distribution borrower shall explain any recent or 
planned changes in retail rates, the status of any pending rate cases 
before a state regulatory authority, or other pertinent rate 
information.
    (ii) A power supply borrower shall submit a schedule of its 
wholesale rates currently in effect. Any changes in this schedule are 
subject to REA approval.
    (18) Additional supporting data. Additional supporting data may be 
required by REA depending on the individual application or conditions. 
Examples of such additional supporting data include information about 
acquisitions, headquarters facilities, generation or transmission 
facilities, large power loads or special loads.
    (b) Distribution borrowers. In addition to the items in paragraph 
(a) of this section, applications for loans submitted by distribution 
borrowers shall include the borrower's area coverage and line extension 
policies. If there have been any amendments to area coverage or line 
extension policies since the last loan application submitted to REA, or 
if this is a borrower's first application for a loan under the RE Act, 
the borrower shall submit the board of directors' approved policies on 
area coverage and line extensions. See Secs. 1710.103 and 1710.151(a).
    (c) Primary support documents. In addition to the loan application, 
consisting of the documents required by paragraphs (a) and (b) of this 
section, all borrowers must also provide REA with the following primary 
support documents pursuant to Sec. 1710.152:
    (1) Along with the loan application, the borrower shall submit to 
REA a Long-Range Financial Forecast (LRFF), that meets the requirements 
of subpart G of this part and shall include the borrower's proposed 
schedule of useful life of the facilities financed. The forecast shall 
include any sensitivity analysis or analysis of alternative scenarios 
required by subpart G of this part, and shall be accompanied by a 
certified board resolution adopting, and indicating the board of 
directors' approval of, the LRFF, and directing management to take 
whatever steps may be necessary, including the filing for rate 
increases, to achieve the TIER goals set forth in the LRFF.
    (2) Prior to REA's acceptance of the loan application, the borrower 
shall submit to REA and receive approval of:
    (i) Power Requirements Study (PRS) that meets the requirements of 
subpart E of this part, and is accompanied by a certified board 
resolution adopting, and indicating the board of directors' approval 
of, the PRS.
    (ii) Construction Work Plan (CWP) and/or related engineering and 
cost studies that meets the requirements of subpart F of this part, and 
is accompanied by a certified board resolution adopting, and indicating 
the board of directors' approval of, the CWP and/or engineering and 
cost studies.
    (iii) Borrower's Environmental Report (BER), or other environmental 
information as required by 7 CFR part 1794.
    (iv) Demand Side Management Plan and/or Integrated Resource Plan, 
if required by subpart H of this part.
    (d) Submission of documents. (1) Generally, all information 
required by paragraphs (a), (b), and (c)(1) of this section is 
submitted to REA in a single application package. The information 
required by paragraph (c)(2) of this section is generally submitted to, 
and approved by REA before the application is submitted.
    (2) To facilitate loan review, REA urges borrowers to ensure that 
their applications contain all of the information required by this 
section before submitting the application to REA. Borrowers may consult 
with REA field representatives and headquarters staff as necessary for 
assistance in preparing loan applications.
    (3) REA may, in its discretion, return an application to the 
borrower if the application is not materially complete to the 
satisfaction of REA within 10 months of receipt of any of the items 
listed in paragraph (a) or (b) of this section. REA will generally 
advise the borrower in writing at least 2 months prior to returning the 
application as to the elements of the application that are not 
complete.
    (4) If an application is returned, an application for the same loan 
purposes will be accepted by REA if satisfactory evidence is provided 
that all of the information required by this section will be submitted 
to REA within a reasonable time. An application for loan purposes 
included in an application previously returned to the borrower will be 
treated as an entirely new application.
    (e) Complete applications. An application is complete when all 
information required by REA to approve a loan is materially complete in 
form and substance satisfactory to REA.
    (f) Change in borrower circumstances. A borrower shall, after 
submitting a loan application, promptly notify REA of any changes in 
its circumstances that materially affect the information contained in 
the loan application or in the primary support documents.
    (g) Interest rate category. For pending loans, REA will promptly 
notify the borrower if its eligibility for an interest rate category 
changes pursuant to new information from the Department of Energy or 
the Bureau of the Census. See 7 CFR 1714.

(Approved by the Office of Management and Budget under control 
numbers 0572-0017, 0572-0032 and 0572-1013.)


Secs. 1710.402-1710.403  [Reserved]


Sec. 1710.404  Additional requirements.

    Additional requirements are set forth in 7 CFR part 1712 for 
guaranteed electric loans and 7 CFR part 1714 for insured electric 
loans.


Sec. 1710.405  Supplemental financing documents.

    (a) The borrower is responsible for ensuring that the loan 
documents required for supplemental financing pursuant to Sec. 1710.110 
are executed in a timely fashion. These documents are subject to REA 
approval.
    (b) Security. Any security offered by the borrower to a 
supplemental lender is subject to REA approval.


Sec. 1710.406  Loan approval.

    (a) A loan is approved when the Administrator signs the 
administrative findings.
    (b) If the loan is not approved, REA will notify the borrower.


Sec. 1710.407  Loan documents.

    Following approval of a loan, REA will forward the loan documents 
to the borrower for execution, delivery, recording, and filing, as 
directed by REA.

PART 1714--PRE-LOAN POLICIES AND PROCEDURES FOR INSURED ELECTRIC 
LOANS

    11. The authority citation for part 1714 continues to read as 
follows:

    Authority: 7 U.S.C. 901-950(b); Pub. L 99-591, 100 Stat. 3341; 
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.

    12. Section 1714.6 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 1714.6  Interest rate term.

    (a) * * *
    (2) The following limits apply to the number of advances of funds 
that may be made to the borrower on any municipal rate loan:
    (i) If the loan period is 2 years or less, no more than 6 advances;
    (ii) If the loan period is greater more than 2 years, not more than 
8 advances.
* * * * *
    13. Subpart B is added to part 1714 to read as follows:

Subpart B--Terms of Insured Loans

Sec.
1714.50-1714.54  [Reserved]
1714.55  Advance of funds from insured loans.
1714.56  Fund advance period.
1714.57  Sequence of advances.
1714.58  Amortization of principal.
1714.59  Rescission of loans.

Subpart B--Terms of Insured Loans


Sec. 1714.50-1714.54  [Reserved]


Sec. 1714.55  Advance of funds from insured loans.

    The borrower shall request advances of funds as needed. Advances 
are subject to REA approval and must be requested in writing on REA 
Form 595 or an REA approved equivalent. Funds will not be advanced 
until the Administrator has received satisfactory evidence that the 
borrower has met all applicable conditions precedent to the advance of 
funds, including evidence that the supplemental financing required 
under 7 CFR part 1710 and any concurrent loan guaranteed by REA are 
available to the borrower under terms and conditions satisfactory to 
REA.


Sec. 1714.56  Fund advance period.

    (a) For loans approved on or after [the effective date of the final 
rule], the fund advance period begins on the date of the loan note and 
is one year longer than the loan period, but not less than 4 years. For 
example, the fund advance period for a loan with a 2-year loan period 
terminates automatically 4 years after the date of the loan note; a 
loan with a 4-year loan period terminates automatically 5 years after 
the date of the loan note. The Administrator may extend the fund 
advance period on any loan if the borrower meets the requirements of 
paragraph (c) of this section. As defined in 7 CFR 1710.2, the loan 
period begins on the date shown on page 1 of REA Form 740c submitted 
with the loan application.
    (b) For loans approved between June 1, 1984, and [the effective 
date of the final rule], the fund advance period begins on the date of 
the loan contract, or the most recent amendment thereto, and terminates 
automatically 4 years from the date of the loan contract, or the most 
recent amendment thereto, except as provided in paragraph (c) of this 
section.
    (c) The Administrator may agree to an extension of the fund advance 
period for loans approved on or after June 1, 1984, if the borrower 
demonstrates to the satisfaction of the Administrator that the loan 
funds continue to be needed for approved loan purposes (i.e., 
facilities included in an REA-approved construction work plan).
    (1) To apply for an extension, the borrower must send to REA, at 
least 120 days before the automatic termination date, the following:
    (i) A certified copy of a board resolution requesting an extension 
of the Government's obligation to advance loan funds;
    (ii) Evidence that the unadvanced loan funds continue to be needed 
for approved loan purposes; and
    (iii) Notice of the estimated date for completion of construction.
    (2) In the case of financial hardship, as determined by the 
Administrator, REA may agree to an extension of the fund advance period 
even though the borrower has failed to meet the 120-day requirement of 
paragraph (c)(1) of this section.
    (3) If the Administrator approves a request for an extension, REA 
will notify the borrower in writing of the extension and the terms and 
conditions thereof. An extension will be effective only if it is 
obtained in writing prior to the automatic termination date.
    (d) Advances of funds from loans approved before June 1, 1984, are 
generally made during the first 6 years of the note.
    (e) REA will rescind the balance of any loan funds not advanced to 
a borrower as of the final date approved for advancing funds.


Sec. 1714.57  Sequence of advances.

    (a) Except as set forth in paragraph (b) of this section, 
concurrent loan funds will be advanced in the following order:
    (1) 50 percent of the REA insured loan funds;
    (2) 100 percent of the supplemental loan funds;
    (3) The remaining amount of the REA insured loan funds.
    (b) At the borrower's request and with REA approval, all or part of 
the supplemental loan funds may be advanced before funds in paragraph 
(a)(1) of this section.


Sec. 1714.58  Amortization of principal.

    (a) For insured loans approved on or after [the effective date of 
this section]:
    (1) Amortization of funds advanced during the first 2 years after 
the date of the note shall begin no later than 2 years from the date of 
the note. Except as set forth in paragraph (a)(2) of this section, 
amortization of funds advanced 2 years or more after the date of the 
note shall begin with the scheduled loan payment billed in the month 
following the month of the advance.
    (2) For advances made 2 years or more after the date of the note, 
the Administrator may authorize deferral of amortization of principal 
for a period of up to 2 years from the date of the advance if the 
Administrator determines that failure to authorize such deferral would 
adversely affect either the government's financial interest or the 
achievement of the purposes of the RE Act.
    (b) For insured loans approved before [the effective date of this 
section], amortization of principal shall begin 2 years after the date 
of the note for advances made during the first and second years of the 
loan, and 4 years after the date of the note for advances made during 
the third and fourth years.


Sec. 1714.59  Rescission of loans.

    (a) A borrower may request rescission of a loan with respect to any 
funds unadvanced by submitting a certified copy of a resolution by the 
borrower's board of directors.
    (b) REA may rescind loans pursuant to Sec. 1714.56.
    (c) Borrowers who prepay REA loans at a discounted present value 
pursuant to 7 CFR part 1786, subpart F, are required to rescind the 
unadvanced balance of all outstanding electric notes pursuant to 7 CFR 
1786.158(j).

PART 1785--LOAN ACCOUNT COMPUTATIONS, PROCEDURES AND POLICIES FOR 
ELECTRIC AND TELEPHONE BORROWERS

    14. The authority citation for part 1785 is revised to read as 
follows:

    Authority: 7 U.S.C. 901 et seq.; Title 1, Subtitle D, sec. 1403, 
Pub. L. 100-203, 101 Stat. 1330; 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.

Subpart A [Removed and Reserved]

    15. Subpart A of part 1785 is removed and reserved.

    Dated: July 27, 1994.
Bob J. Nash,
Under Secretary, Small Community and Rural Development.
[FR Doc. 94-18772 Filed 8-4-94; 8:45 am]
BILLING CODE 3410-15-P