[Federal Register Volume 60, Number 32 (Thursday, February 16, 1995)]
[Proposed Rules]
[Pages 8981-8989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3665]



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

DEPARTMENT OF AGRICULTURE
Rural Utilities Service

7 CFR Part 1717


Investments, Loans, and Guarantees by Electric Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Proposed Rule.

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

SUMMARY: The Rural Utilities Service (RUS) hereby proposes to revise 
its policies and requirements governing restrictions on investments, 
loans and guarantees made by electric borrowers. This proposed rule is 
intended to clarify RUS's policies and requirements, reduce uncertainty 
by borrowers, and improve compliance.

DATES: Written comments must be received by RUS or carry a postmark or 
equivalent by April 17, 1995.

ADDRESSES: Written comments should be addressed to Mr. F. Lamont Heppe, 
Jr., Deputy Director, Program Support Staff, U.S. Department of 
Agriculture, Rural Utilities Service, Ag Box 1522, room 2234-S, 14th 
Street and Independence Avenue, SW., Washington, DC 20250-1500. RUS 
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 M. Cockey, Jr., Deputy 
Assistant Administrator--Electric, U.S. Department of Agriculture, 
Rural Utilities Service, Ag Box 1560, room 4037-S, 14th Street & 
Independence Avenue, SW., Washington, DC 20250-1500. Telephone: 202-
720-9547.

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 RUS has determined that the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this rule. The 
Administrator of RUS 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 RUS 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. 
Additional information collection and recordkeeping requirements 
contained in this proposed rule have been submitted to OMB for review.
    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 10102, NEOB, Washington, 
DC 20503. Attention: Desk Officer for USDA.

Background

    On December 22, 1987, section 312 was added to the Rural 
Electrification Act of 1936. This section allows electric borrowers to 
invest their own funds or make loans or guarantees, not in excess of 15 
percent of their total utility plant, [[Page 8982]] without restriction 
or prior approval of the Administrator of the Rural Utilities Service 
(RUS). On June 29, 1989, RUS issued a final rule codifying this 
provision (at 54 FR 27325), and the provision became effective for all 
electric mortgages executed after July 31, 1989. Mortgages executed 
prior to that date contained a provision granting the Administrator the 
right to approve investments, loans and guarantees by the borrower once 
the aggregate of such investments, loans and guarantees reached 3 
percent of total utility plant.
    This proposed rule is intended to clarify RUS's policies and 
requirements regarding restrictions on borrower investments, loans and 
guarantees. Over the past several years borrowers have raised a number 
of questions about such issues as: Which investments, loans or 
guarantees are subject to RUS approval and which are excluded; the 
criteria used by RUS in approving an investment, loan or guarantee; 
whether RUS approval of an investment, loan or guarantee means that it 
is no longer counted in determining the ratio to total utility plant; 
whether RUS will approve an investment, loan or guarantee if the 
borrower is under the 15 percent limit; whether a borrower will be in 
default under its mortgage because net profits earned on its 
investments pushed its total above the 15 percent limit. This proposed 
rule attempts to resolve such questions.
    RUS is also in the process of updating its mortgage and loan 
contract used with electric borrowers. RUS published a proposed 
mortgage for electric distribution borrowers on September 29, 1994 at 
59 FR 49594. In that rule it is proposed that RUS controls over 
borrower investments, loans and guarantees be moved from the mortgage 
to the RUS loan contract. Such a move would have no effect on RUS's 
controls or their enforceability under the RUS mortgage.
    The following discussion of the proposed rule published today 
focuses on the major provisions and more significant changes proposed 
to the existing regulation.

Section 1717.651  Policy

    No change is proposed to this section. It would remain RUS policy 
that borrowers are encouraged to use their own funds to foster the 
economic development of rural areas, provided that such actions do not 
in any way put government funds at risk or impair the borrower's 
ability to repay its indebtedness to RUS and other lenders.

Section 1717.652  Definitions

    Several changes are proposed to this section, mostly to accommodate 
changes proposed elsewhere in the rule. For example, definitions are 
added for ``Default,'' ``Equity,'' ``Operating DSC,'' ``Operating 
TIER,'' ``Regulatory Created Assets,'' and ``Total Assets.'' These 
relate primarily to proposed Sec. 1717.655, under which borrowers that 
meet certain criteria would be exempt from RUS approval of investments, 
loans and guarantees.
    Technical changes are proposed to the definition of ``Own Funds.'' 
These are not intended to make any substantive change to what 
investments, loans and guarantees are or are not controlled by RUS. The 
proposed changes are intended to more closely reflect the approach 
actually used by RUS in monitoring investments, loans and guarantees. 
The current definition may give the erroneous impression that all cash 
deposits and other assets held by a borrower are first divided into 
``Own Funds'' and ``other funds'' and that only ``Own Funds'' are 
subject to controls. In fact, all of a borrower's investments, loans 
and guarantees are subject to controls except those made under the 15 
percent limit and those excluded under Sec. 1717.654. The definition of 
``Own Funds'' serves primarily to make clear that, for the purposes of 
the 15 percent exclusion, a borrower cannot treat funds lent by RUS as 
its ``Own Funds''.
    In addition, four new terms would be defined: ``Natural Gas 
Distribution System,'' ``Solid Waste Disposal System,'' 
Telecommunication and Other Electronic Communication System,'' and 
``Water and Waste Disposal System.'' Under proposed Sec. 1717.654 
investments by borrowers in these four types of community 
infrastructure located in the borrowers' service territories would be 
excluded from RUS control.
    Finally, it is proposed that the current definition of ``Invest'' 
be supplemented by allowing borrowers to submit any proposed 
transaction to RUS for an interpretation of whether the action is an 
investment for the purposes of RUS controls.

Section 1717.653  Transactions Below the 15 Percent Level

    Proposed paragraph (a) of new Sec. 1717.653 is the same 
substantively as existing Sec. 1717.653. It would continue to provide 
that a borrower in compliance with all provisions of its RUS mortgage, 
RUS loan contract, and any other agreement with RUS would not need 
prior approval from RUS to make investments, loans and guarantees up to 
the 15 percent level. For purposes of clarity, the proviso that the 
borrower must not be in default would be included at this point rather 
than in the definition of borrower, as in the existing rule. Similarly, 
a proviso would be included to make it clear that funds necessary to 
make timely payments of principal and interest on loans secured by the 
RUS mortgage would remain subject to RUS controls. This issue is 
currently addressed in the definition of ``Own Funds'' in the existing 
rule.
    Proposed paragraph (b) is substantively the same as existing 
Sec. 1717.654(b).
    Proposed paragraph (c) is new, and is intended to clarify RUS 
policy that it will not ``approve'' investments, loans or guarantees 
made below the 15 percent level. In the past, some borrowers have 
sought to obtain RUS approval of transactions below the 15 percent 
limit and to have these transactions excluded when determining the 
aggregate amount of investments, loans and guarantees made by the 
borrower. Such approvals would not be consistent with the restriction 
imposed on RUS by section 312 of the RE Act. They also would not be 
consistent with protecting loan security since a borrower might seek 
approval and exclusion of low-risk transactions below the 15 percent 
limit in order to make room for high-risk transactions below the limit 
that would be immune from RUS review.

Section 1717.654  Exclusion of Certain Investments, Loans and 
Guarantees

    Proposed paragraph (a) would remain substantively the same as 
existing paragraph (a). The exclusions set forth in proposed paragraph 
(b) are the same as those in existing paragraph (b)(2), except that it 
would be made clear that all investments made in the National Rural 
Utilities Cooperative Finance Corporation and the National Bank for 
Cooperatives would be excluded from RUS controls, as they are now under 
current RUS policy.
    Certain other exclusions currently followed by RUS would continue. 
These include exclusions for any investment, loan or guarantee that the 
borrower is required to make by RUS or other USDA agency; investments 
included in an irrevocable trust for the purpose of funding post-
retirement benefits of the borrower's employees; and reserves required 
by a reserve bond agreement or other legally binding agreement that are 
dedicated to making required payments on debt secured under the RUS 
mortgage, not to exceed the amount of reserves specifically required by 
such agreement. [[Page 8983]] 
    All dollar amounts excluded by RUS from the calculation of 
aggregate investments, loans, and guarantees pursuant to the RUS 
mortgage, RUS loan contract, and/or RUS regulations, bulletins, 
memoranda (including the memorandum of March 28, 1985 cited below), or 
other written notice as of the date of this proposed rule will continue 
to be excluded in the future. However, profits, interest and other 
returns (regardless of whether or not they are reinvested) from such 
investments, loans, and guarantees after the date of this proposed rule 
will be excluded only if they are excluded under proposed 
Sec. 1717.654. Also, any new commitment of funds to such investments, 
loans, and guarantees will not be exempted after the date of this 
proposed rule unless they are excluded under proposed Sec. 1717.654. 
Moreover, the memorandum issued to all electric borrowers by the 
Administrator of the Rural Electrification Administration, dated March 
28, 1985, regarding the approval of certain investments is hereby 
rescinded.
    Several new exclusions are proposed under paragraph (c) of this 
section. There would be no restrictions on investments in or loans to 
the following types of community infrastructure located in the 
borrower's service territory: water and waste disposal systems; solid 
waste disposal systems; telecommunication and other electronic 
communication systems; and natural gas distribution systems. Guarantees 
of the obligations of such systems would also be excluded so long as 
the aggregate amount of such guarantees does not exceed 20 percent of 
the borrower's equity.
    RUS believes that borrowers should be able to minimize the risks 
associated with investing in these types of community infrastructure 
because of the similarities in structure and operation between them and 
the borrowers' main electric utility business, and the opportunities 
for sharing overhead in such areas as billing, communications, system 
control, repair and maintenance, and construction supervision. 
Excluding these investments complements the approach in the proposed 
new mortgage for distribution borrowers, which would allow borrowers 
meeting certain criteria to issue up to 20 percent of their total 
secured debt for such community infrastructure, without the approval of 
the mortgagees.
    It is also proposed that amounts ``invested'' in customer accounts 
receivable and other accounts receivable be excluded from the 
calculation of total investments, loans and guarantees. These 
``investments'' represent commitments made for a period of less than a 
year, and should not present a significant on-going risk to the 
borrower or RUS.
    Other proposed editorial changes to existing 1717.654, such as 
shifting paragraph (b)(1) to 1717.653(b) would not change the substance 
of the rule.

Section 1717.655 Exemption of Certain Borrowers From Controls

    Proposed new Sec. 1717.655 would exempt borrowers that meet certain 
criteria from RUS approval of investments, loans and guarantees. The 
proposed criteria are as follows:
     The borrower must be in compliance with all provisions of 
its RUS mortgage, RUS loan contract, and any other agreement with RUS.
     The average revenue per kWh for residential service 
received by the borrower must not exceed 130 percent of the average 
revenue for residential service for all residential consumers in the 
state or states served by the borrower. The criterion would apply only 
to distribution borrowers.
     In the most recent calendar year the borrower must have 
achieved an operating TIER and an operating DSC of at least 1.0, in 
each case based on the average of the two highest ratios achieved in 
the three most recent years.
     The borrower's ratio of net utility plant to long-term 
debt must be at least 1.1.
     The borrower must have equity equal to at least 27 percent 
of its total assets.
    Both distribution and power supply borrowers that meet these 
criteria would be exempt from RUS approval of investments, loans and 
guarantees. It is estimated that about 83 percent of distribution 
borrowers and 3 power supply borrowers currently would meet the 
proposed criteria for exemption. Borrowers not meeting the criteria 
would be subject to RUS approval of investments, loans and guarantees 
above 15 percent of total utility plant.
    The first qualification criterion would require the borrower to be 
in good standing with respect to all covenants of its RUS mortgage, RUS 
loan contract or any other agreement with RUS, such as adequately 
maintaining the property, having adequate insurance coverage, meeting 
all financial obligations, and achieving margins sufficient to meet 
TIER and DSC requirements.
    The second criterion would exclude borrowers that are more likely 
to face risks of substantial downward pressure on rates and the 
possible loss of load and revenues. While comparing a borrower with the 
state average, as proposed, is less reliable analytically than a 
detailed comparison with the borrower's neighboring competitors, 
setting the threshold at 130 percent should ensure that borrowers that 
fail the test most likely face an increased risk of rate competition. 
At a borrower's request, the Administrator of RUS could waive this 
criterion if he found that the borrower's strength on the other 
qualification criteria offset the borrower's weakness in rate 
disparity.
    The third criterion would ensure that the borrower is usually able 
to cover all of the expenses of its utility operation from utility 
revenues, and normally should not be dependent on income from 
investments or loans to meet the expenses of its primary business.
    The fourth criterion would provide substantial assurance that the 
borrower's long-term debt is adequately collateralized and that RUS 
loan security normally should not need to depend on the borrower's 
investments and loans, which may not be secured or effectively secured 
under the RUS mortgage and whose liquidation value may vary 
substantially over time.
    The fifth criterion would provide an equity cushion in the event 
the borrower defaulted and foreclosure and liquidation became 
necessary. It also would provide an incentive for profitable 
investments and a disincentive for unprofitable investments, since the 
ratio of equity to total assets would increase in the first case and 
decrease in the second. A borrower could lose its exemption status if 
bad investments reduced equity below 27 percent.
    While distribution and power supply borrowers that meet the 
proposed criteria would be exempt from RUS approval of their 
investments, loans and guarantees, these borrowers would continue to be 
obligated to maintain adequate records and to report annually on their 
transactions. Such records and reports would be needed in the event an 
exempt borrower lost its exemption because of failure to meet one or 
more of the criteria, and also to monitor borrower performance in 
making investments in rural development.
    If an exempt borrower ceases to meet the criteria for exemption, it 
would become subject to the controls set forth in this proposed rule 
upon receiving written notice from RUS. Such borrower could regain its 
exemption if subsequently it met the qualification criteria and was so 
notified in writing by RUS.
    If an exempt borrower is over the 15 percent level at the time it 
loses its exemption, it could ask the Administrator to exclude a 
portion of its investments, loans and guarantees up to 
[[Page 8984]] the aggregate amount of net profit earned on all of its 
transactions over the past 10 years. If the net profits are 
insufficient, or if the Administrator does not exclude an amount 
sufficient to bring the borrower to or below the 15 percent level, the 
borrower would be required to reduce or restructure its portfolio 
(e.g., divest or shift some investments to excluded investments) in 
order to come within the 15 percent limit. If the borrower failed to do 
this within a timeframe set by RUS, the borrower would be in default of 
its RUS loan contract and/or RUS mortgage upon receiving written notice 
from RUS of the default.

Section 1717.656  Investments, Loans, and Guarantees in Excess of 15 
Percent of Total Utility Plant

    Proposed new Sec. 1717.656 would establish policies and 
requirements for RUS approval of investments, loans and guarantees 
above 15 percent of total utility plant. The section would apply only 
to borrowers that do not qualify for an outright exemption from RUS 
approval under Sec. 1717.655. In the case of distribution borrowers 
that do not qualify for an exemption, they would not be given approval 
to make controlled investments, loans and guarantees above the 15 
percent level.
    These borrowers currently represent less than 20 percent of all 
distribution borrowers, and all but one of them are below the 15 
percent level at the present time. These borrowers would retain the 
latitude to make unlimited investments, loans and guarantees within 
those categories excluded from control under Sec. 1717.654. Moreover, 
RUS believes that many of these borrowers could improve their economic 
and financial condition in order to qualify for the outright exemption 
under Sec. 1717.655, if they want the additional latitude to make 
controlled investments, loans and guarantees above the 15 percent 
level.
    In the case of power supply borrowers that do not qualify for an 
exemption under Sec. 1717.655, RUS would consider requests to make 
controlled investments, loans and guarantees above the 15 percent 
level. To be eligible to submit a request, a power supply borrower 
would have to meet the following criteria:
     The borrower must be in compliance with all provisions of 
its RUS mortgage, RUS loan contract and any other agreement with RUS.
     The borrower cannot be in financial workout nor had its 
government debt restructured.
     The borrower must have equity of at least 5 percent of 
total assets.
     After approval of the request, the aggregate of the 
borrower's investments, loans and guarantees cannot exceed 20 percent 
of total utility plant. Beyond this level RUS believes that further 
investments, loans or guarantees outside of the ``excluded categories'' 
would present unacceptable risks in the case of borrowers that do not 
qualify for an exemption under Sec. 1717.655.
    If a power supply borrower meets the above criteria, its request 
would be considered on a case by case basis. In considering the 
request, the Administrator would take the following factors into 
consideration:
     The repayment of all loans secured by the RUS mortgage 
must continue to be assured and security must continue to be reasonably 
adequate even if the entire investment, loan or guaranteed amount were 
lost. This ``total loss'' approach would expedite review by RUS by 
eliminating the need to assess the probability of a loss occurring and 
its probable size. The effect of the loss of the entire investment, 
loan or guaranteed amount would be considered along with all other 
risks facing the borrower.
     In the case of an investment, the investment would have to 
be made in an entity separate from the borrower, such as a subsidiary, 
whereby the borrower would be protected from any liabilities incurred 
by the separate entity, unless the borrower is able to demonstrate that 
making the investment directly rather than through a separate entity 
would present no substantial risk beyond that of possibly losing part 
or all of the investment.
     The borrower must be economically and financially sound as 
indicated by its costs of operation, competitiveness, operating TIER 
and operating DSC, physical condition of the plant, ratio of equity to 
total assets, ratio of net utility plant to long-term debt, and other 
factors.
     Other factors affecting the security and repayment of 
government debt, as determined on a case by case basis.
    This proposed new section 1717.656 would also clarify existing 
policy that if RUS approves an investment, loan or guarantee, such 
investment, loan or guarantee would continue to be included when 
calculating the borrower's ratio of aggregate investments, loans and 
guarantees to total utility plant. In other words, just because an 
investment has been approved by RUS doesn't mean it will not continue 
to be counted toward the borrower's total investments.
    Proposed paragraph (d) of this section would deal with the 
situation where profits earned on investments increase the aggregate 
amount of investment and could cause a borrower to be in technical 
violation of its loan contract or mortgage. The paragraph would make it 
clear that if a borrower exceeded the 15 percent limit as a result of 
net profits earned on the aggregate of its investments, loans and 
guarantees during the past 10 years, the borrower would not be in 
default of its loan contract or mortgage. Net profit would be 
calculated by taking the sum of all profits earned on all transactions 
during the past 10 years (including interest earned on cash accounts, 
loans, and similar transactions), and subtracting all losses 
experienced on all transactions during the same period.
    Also, under proposed paragraph (d) RUS would be willing to consider 
a borrower's request to exclude up to the amount of net profit earned 
on the borrower's investments, loans and guarantees during the past 10 
years. Such exclusion by RUS may or may not reduce the borrower's 
aggregate investments, loans and guarantees to or below the 15 percent 
limit. If it does not, the borrower would be required to restructure or 
reduce its portfolio to come within the 15 percent level. Failure to do 
so within a timeframe set by RUS would result, upon written notice from 
RUS, in a default by the borrower.

Section 1717.657  Records, Reports and Audits

    Paragraphs (a), (b) and (c) of proposed Sec. 1717.657 are the same 
substantively as existing Sec. 1717.655. Proposed paragraph (a) is the 
same substantively as existing paragraph (a) of Sec. 1717.655, and 
proposed paragraph (c) is the same substantively as existing paragraph 
(b). Proposed paragraph (b) would combine existing paragraphs (c) and 
(d).
    Proposed paragraph (d) would be a new provision. It would clarify 
that RUS monitoring of borrower compliance with this rule will be based 
primarily on the annual financial and statistical reports submitted by 
borrowers (i.e., the RUS Forms 7 and 12), and the annual auditor's 
report on borrower operations. While RUS would ordinarily rely 
primarily on these annual reports, all borrowers would continue to be 
obligated to comply with this rule throughout the entire year. For 
example, if a borrower was below the 15 percent level at the end of the 
preceding year, it could not exceed the 15 percent level during the 
current year without prior approval from RUS, unless of course it was 
exempt from approval under proposed Sec. 1717.655. [[Page 8985]] 

Section 1717.658  Effect of Subpart on RUS Loan Contract and Mortgage

    Section 1717.656 of the existing rule lists several specific 
provisions of the RUS mortgage that are not affected by the rule, as 
well as the fact that a supplemental lender's rights under the RUS 
mortgage regarding control of investments also are not affected by the 
rule. These specific provisions were listed for emphasis only; there 
being no intent to imply that other provisions of the mortgage are 
somehow affected by the rule on investment controls. Furthermore, 
section 1717.657 of the existing rule provides that the rule does not 
affect a supplemental lender's rights under its own loan documentation 
to control borrower investments.
    Proposed Sec. 1717.658 would combine and simplify the two existing 
sections. Rather than list, for emphasis, specific provisions of the 
RUS mortgage that are not affected by the rule, the proposed rule would 
make it clear that it does not affect any provision, covenant, or 
requirement in the RUS mortgage, RUS loan contract, or any other 
agreement between a borrower and RUS with respect to any matter other 
than the prior approval of investments, loans, and guarantees made by 
the borrower. Also, the proposed section would combine the provisions 
of the two existing sections regarding a supplemental lender's rights 
to control investments not being affected by the proposed rule.

Appendix A

    Existing Appendix A to subpart N provides several examples of how 
certain types of investments, loans, and guarantees should be reported. 
In light of the clarification and additional guidance that would be 
provided in the main body of this proposed rule, as well as that 
provided annually in RUS Bulletins 1717B-2 and 1717B-3, it is proposed 
that Appendix A be dropped.
    In summary, RUS believes the proposed changes to subpart N will 
clarify RUS's policies and requirements on investments, loans and 
guarantees, improve compliance, provide better service to our borrowers 
by reducing uncertainty as to what is expected of them, and improve the 
utilization of RUS staff resources.

List of Subject in 7 CFR Part 1717

    Administrative practice and procedure, Electric power, Electric 
power rates, Electric utilities, Intergovernmental relations, 
Investments, Loan programs--energy, Reporting and recordkeeping 
requirements, Rural areas.

    For the reasons stated, subpart N of 7 CFR 1717 is proposed to be 
revised as follows:

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

Subpart N--Investments, Loans, and Guarantees by Electric Borrowers

Sec.
1717.650  Purpose.
1717.651  Policy.
1717.652  Definitions.
1717.653  Transactions below the 15 percent level.
1717.654  Exclusion of certain investments, loans, and guarantees.
1717.655  Exemption of certain borrowers from controls.
1717.656  Investments, loans, and guarantees in excess of 15 percent 
of total utility plant.
1717.657  Records, reports and audits.
1717.658  Effect of this subpart on RUS loan contract and mortgage.

Subpart N--Investments, Loans, and Guarantees by Electric Borrowers

    Authority: 7 U.S.C. 901-950b; Pub.L. 103-354, 108 Stat. 3178 (7 
U.S.C. 6941 et seq.); Title I, Subtitle D, Pub.L. 100-203, 101 stat. 
1330.


Sec. 1717.650  Purpose.

    This subpart contains the general regulations of the Rural 
Utilities Service (RUS) for implementing and interpreting the 
provisions of the Rural Electrification Act of 1936, as amended, 
including section 312 (7 U.S.C. 901 et seq.) (RE Act), permitting, in 
certain circumstances, that borrowers of insured or guaranteed electric 
loans under the RE Act may, without restriction or prior approval of 
the Administrator of RUS, invest their own funds and make loans or 
guarantees.


Sec. 1717.651  Policy.

    RUS electric borrowers are encouraged to utilize their own funds to 
participate in the economic development of rural areas, provided that 
such activity does not in any way put government funds at risk or 
impair a borrower's ability to repay its indebtedness to RUS and other 
lenders. In considering whether to make loans, investments, or 
guarantees, borrowers are expected to act in accordance with prudent 
business practices and in conformity with the laws of the jurisdictions 
in which they serve. RUS assumes that borrowers will use the latitude 
afforded them by section 312 of the RE Act primarily to make needed 
investments in rural community infrastructure projects (such as water 
and waste systems, garbage collection services, etc.) and in job 
creation activities (such as providing technical, financial, managerial 
assistance) and other activities to promote business development and 
economic diversification in rural communities. Nonetheless, RUS 
believes that borrowers should continue to give primary consideration 
to safety and liquidity in the management of their funds.


Sec. 1717.652  Definitions.

    As used in this subpart:
    Borrower means any organization that has an outstanding loan made 
or guaranteed by RUS for rural electrification.
    Cash-construction fund-trustee account means the account described 
in the Uniform System of Accounts as one to which funds are deposited 
for financing the construction or purchase of electric facilities.
    Guarantee means to undertake collaterally to answer for the payment 
of another's debt or the performance of another's duty, liability, or 
obligation, including, without limitation, the obligations of 
subsidiaries. Some examples of such guarantees include guarantees of 
payment or collection on a note or other debt instrument (assuring 
returns on investments); issuing performance bonds or completion bonds; 
or cosigning leases or other obligations of third parties.
    Equity means the Margins and Equities of the borrower as defined in 
the Uniform System of Accounts, less regulatory created assets.
    Invest means to commit money in order to earn a financial return on 
assets, including, without limitation, all investments properly 
recorded on the borrower's books and records in investment accounts as 
those accounts are used in the Uniform System of Accounts for RUS 
Borrowers. Borrowers may submit any proposed transaction to RUS for an 
interpretation of whether the action is an investment for the purposes 
of this definition.
    Make loans means to lend out money for temporary use on condition 
of repayment, usually with interest.
    Mortgaged property means any asset of the borrower which is pledged 
in the RUS mortgage.
    Natural gas distribution system means any system of community 
infrastructure that distributes natural gas and whose services are 
available by design to all or a substantial portion of the members of 
the community.
    Operating DSC means Operating Debt Service Coverage (ODSC) 
                                                         calculated as:
[[Page 8986]]

[GRAPHIC][TIFF OMITTED]TP16FE95.014


where:
A = Depreciation and Amortization Expense;
B = Interest on Long-term Debt, except that Interest on Long-term Debt 
shall be increased by \1/3\ of the amount, if any, by which the rentals 
of Restricted Property exceed 2 percent of Total Margins and Equities;
C = Patronage Capital & Operating Margins (distribution borrowers) or 
Operating Margins (power supply borrowers); and
D = Debt Service Billed (RUS + other) which equals all interest and 
principal billed during the calendar year plus \1/3\ of the amount, if 
any, by which the rentals of Restricted Property exceed 2 percent of 
Total Margins and Equities. Unless otherwise indicated, all terms used 
in defining ODSC and OTIER are as defined in RUS Bulletin 1717B-2 
Instructions for the Preparation of the Financial and Statistical 
Report for Electric Distribution Borrowers, and RUS Bulletin 1717B-3 
Instructions for the Preparation of the Operating Report for Power 
Supply Borrowers and for Distribution Borrowers with Generating 
Facilities, or the successors to these bulletins.

    Operating TIER means Operating Times Interest Earned Ratio (OTIER) 
calculated as:
[GRAPHIC][TIFF OMITTED]TP16FE95.015


where:
A = Interest on Long-term Debt, except that Interest on Long-term Debt 
shall be increased by \1/3\ of the amount, if any, by which the rentals 
of Restricted Property exceed 2 percent of Total Margins and Equities; 
and
B = Patronage Capital & Operating Margins (distribution borrowers) or 
Operating Margins (power supply borrowers).

    Own funds means money belonging to the borrower other than the 
proceeds of loans made or guaranteed by RUS. Such proceeds include, but 
are not limited to, all funds on deposit in the cash-construction fund-
trustee account.
    Regulatory created assets means the sum of the amounts properly 
recordable in Account 182.2 Unrecovered Plant and Regulatory Study 
Costs, and Account 182.3 Other Regulatory Assets of the Uniform System 
of Accounts.
    RUS means the Rural Utilities Service, an agency of the U.S. 
Department of Agriculture established pursuant to Section 232 of the 
Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178, 7 U.S.C. 
6941 et seq.) and, for purposes of this subpart, includes its 
predecessor, the Rural Electrification Administration.
    RUS mortgage means any and all instruments creating a lien on or 
security interest in the borrower's assets in connection with loans or 
guarantees under the RE Act.
    RUS loan contract means the loan contract between the borrower and 
RUS.
    Solid waste disposal system means any system of community 
infrastructure that provides collection and/or disposal of solid waste 
and whose services are available by design to all or a substantial 
portion of the members of the community.
    Subsidiary means a company which is controlled by the borrower 
through ownership of voting stock, and is further defined in 7 CFR 
1767.10.
    Supplemental lender means a lender that has provided a supplemental 
source of financing that is secured by the RUS mortgage.
    Telecommunication and other electronic communication system means 
any community infrastructure that provides telecommunication or other 
electronic communication services and whose services are available by 
design to all or a substantial portion of the members of the community.
    Total assets means the total assets of the borrower as calculated 
according to the Uniform System of Accounts, less regulatory created 
assets.
    Total utility plant means the sum of the borrower's Electric Plant 
Accounts and Construction Work in Progress--Electric Accounts, as such 
terms are used in the Uniform System of Accounts.
    Uniform System of Accounts means the system of accounts prescribed 
for RUS borrowers in 7 CFR part 1767.
    Water and waste disposal system means any system of community 
infrastructure that supplies water and/or collects and treats waste 
water and whose services are available by design to all or a 
substantial portion of the members of the community.


Sec. 1717.653  Transactions below the 15 percent level.

    (a) A borrower in compliance with all provisions of its RUS 
mortgage, RUS loan contract, and any other agreement with RUS may, 
without prior written approval of the Administrator, invest its own 
funds or make loans or guarantees not in excess of 15 percent of its 
total utility plant without regard to any provision contained in any 
RUS mortgage or RUS loan contract to the effect that the borrower must 
obtain prior approval from RUS. However, funds necessary to make timely 
payments of principal and interest on loans secured by the RUS mortgage 
remain subject to RUS controls on borrower investments, loans and 
guarantees.
    (b) RUS will require that any electric loan made or guaranteed by 
RUS after [Date 30 days after the final rule is published in the 
Federal Register] shall be subject to a provision in the loan contract 
or mortgage restricting investments, loans and guarantees by the 
Borrower substantially as follows: The borrower may, to the extent 
permitted by this subpart, invest its own funds or make loans or 
guarantees not in excess of 15 percent of its total utility plant, as 
those terms are used in said subpart.
    (c) RUS will not consider requests from borrowers to approve or 
exclude investments, loans, or guarantees made below the 15 percent 
level. (Categorical exclusions are set forth in 1717.654.)


Sec. 1717.654  Exclusion of certain investments, loans, and guarantees.

    (a) In calculating the amount of investments, loans and guarantees 
permitted under this subpart, there is excluded from the computation 
any investment, loan or guarantee of the type which by the terms of the 
borrower's RUS mortgage or RUS loan contract the borrower may make in 
unlimited amounts without RUS approval.
    (b) Furthermore, the borrower may make unlimited investments, 
without prior approval of the Administrator, in:
    (1) Securities or deposits issued, guaranteed or fully insured as 
to payment by the United States Government or any agency thereof;
    (2) Capital term certificates, bank stock, or other similar 
securities of the supplemental lender which have been purchased as a 
condition of membership in the supplemental lender, or as a condition 
of receiving financial assistance from such lender, as well as any 
other investment made in, or loans made to, the National Rural 
Utilities Cooperative Finance Corporation or the National Bank for 
Cooperatives;
    (3) Patronage capital allocated from a power supply cooperative of 
which the borrower is a member.
    (c) Without prior approval of the Administrator, the borrower may 
also:
    (1) Invest or lend funds derived directly from grants received 
from, or loans made or guaranteed by, an agency of the U.S. Department 
of Agriculture [[Page 8987]] (USDA) for the purposes specifically 
authorized in such grants or loans;
    (2) Make loans guaranteed by an agency of USDA, up to the amount of 
principal whose repayment, with interest, is fully guaranteed; and
    (3)(i) Make unlimited investments in and unlimited loans to finance 
the following community infrastructure located within its service 
territory, and guarantee debt issued by such entities up to an 
aggregate amount of such guarantees not to exceed 20 percent of the 
borrower's equity:
    (A) Water and waste disposal systems;
    (B) Solid waste disposal systems;
    (C) Telecommunication and other electronic communication systems; 
and
    (D) Natural gas distribution systems.
    (ii) In each of the four cases in paragraph (c)(3)(i) of this 
section, if the system is a component of a larger organization other 
than the borrower itself (e.g., if it is a component of a subsidiary of 
the borrower or a corporation independent of the borrower), to be 
eligible for the exemption the borrower must certify annually that 
either a majority of the assets of the larger organization were 
invested in said system at the end of the most recent fiscal year, or 
that a majority of the revenues of the larger organization came from 
said system during the most recent fiscal year.
    (d) Also excluded from the calculation of investments, loans and 
guarantees made by the borrower are:
    (1) Amounts properly recordable in Account 142 Customer Accounts 
Receivable, and Account 143 Other Accounts Receivable;
    (2) Any investment, loan, or guarantee that the borrower is 
required to make by an agency of USDA, for example, as a condition of 
obtaining financial assistance for itself or any other person or 
organization;
    (3) Investments included in an irrevocable trust for the purpose of 
funding post-retirement benefits of the borrower's employees; and
    (4) Reserves required by a reserve bond agreement or other 
agreement legally binding on the borrower, that are dedicated to making 
required payments on debt secured under the RUS mortgage, not to exceed 
the amount of reserves specifically required by such agreements.
    (e) Grandfathered exclusions. All amounts excluded by RUS from the 
calculation of the aggregate amount of investments, loans and 
guarantees as of February 16, 1995 shall remain excluded. Such 
exclusions must have been based on the RUS mortgage, RUS loan contract, 
regulations, bulletins, memoranda, or other written notice from RUS. 
Profits, interest, and other returns earned (regardless of whether or 
not they are reinvested) on such investments, loans and guarantees 
after February 16,1995 shall be excluded only if they are eligible for 
exclusion under paragraphs (a) through (d) of this section. Any new 
commitments of money to such investments, loans and guarantees shall 
likewise be excluded only if they are eligible under paragraphs (a) 
through (d) of this section.
    (f) Any investment, loan or guarantee made by a borrower that is 
not excluded under this section or under Sec. 1717.656(d) shall be 
included in the aggregate amount of investments, loans and guarantees 
made by the borrower, regardless of whether RUS has specifically 
approved the investment, loan or guarantee under Sec. 1717.656(c), or 
has approved a related transaction (e.g., a related contract or lien 
accommodation).


Sec. 1717.655  Exemption of certain borrowers from controls.

    (a) Any distribution or power supply borrower that meets all of the 
following criteria is exempted from the provisions of the RUS mortgage 
and loan contract that require RUS approval of investments, loans, and 
guarantees made by the borrower:
    (1) The borrower is in compliance with all provisions of its RUS 
mortgage, RUS loan contract, and any other agreement with RUS;
    (2) The average revenue per kWh for residential service received by 
the borrower during the two most recent calendar years does not exceed 
130 percent of the average revenue per kWh for residential service 
during the same period for all residential consumers located in the 
state or states served by the borrower. This criterion applies only to 
distribution borrowers and does not apply to power supply borrowers. If 
a borrower serves customers in more than one state, the state average 
revenue per kWh will be based on a weighted average using the kWh sales 
by the borrower in each state as the weight. The calculation will be 
based on the two most recent calendar years for which both borrower and 
state-wide data are available. If a borrower fails to qualify for an 
exemption based solely on its failure to meet this criterion on rate 
disparity, at the borrower's request the Administrator may at his sole 
discretion exempt the borrower if he finds that the borrower's 
strengths with respect to the other criteria are sufficient to offset 
any weakness due to rate disparity;
    (3) In the most recent calendar year for which data are available, 
the borrower achieved an operating TIER of at least 1.0 and an 
operating DSC of at least 1.0, in each case based on the average of the 
two highest ratios achieved in the three most recent calendar years;
    (4) The borrower's ratio of net utility plant to long-term debt is 
at least 1.1, based on year-end data for the most recent calendar year 
for which data are available; and
    (5) The borrower's equity is equal to at least 27 percent of its 
total assets, based on year-end data for the most recent calendar year 
for which data are available.
    (b) While borrowers meeting the criteria in paragraph (a) of this 
section are exempt from RUS approval of investments, loans and 
guarantees, they are nevertheless subject to the record-keeping, 
reporting, and other requirements of Sec. 1717.657.
    (c) Any borrower exempt under paragraph (a) of this section that 
ceases to meet the criteria for exemption shall, upon written notice 
from RUS, no longer be exempt and shall be subject to all provisions of 
this subpart applicable to non-exempt borrowers. A borrower may regain 
its exemption if it subsequently meets the criteria in paragraph (a) of 
this section, and is so notified in writing by RUS.
    (d) If a borrower loses its exemption and the aggregate of 
investments, loans and guarantees of such borrower exceeds 15 percent 
of total utility plant, the borrower will be required to reduce or 
restructure its portfolio (e.g., divest or shift some investments to 
excluded investments) in order to come within the 15 percent level. 
(However, such borrower is eligible to ask RUS to exclude a portion of 
its investments under the conditions set forth in Sec. 1717.656(d).) If 
the borrower does not come within the 15 percent level within a 
reasonable period of time determined by the Administrator, which shall 
not exceed 12 months from the date the borrower was notified of its 
loss of exemption, then, upon written notice from RUS, the borrower 
shall be in default of its RUS loan contract and/or RUS mortgage.
    (e) By no later than May 1 of each year, RUS will provide written 
notice to any borrowers whose exemption status has changed as a result 
of more recent data being available for the qualification criteria set 
forth in paragraph (a) of this section, or as a result of other 
reasons, such as corrections in the available data. An explanation of 
the reasons for any changes in exemption status will also be provided 
to the borrowers affected. [[Page 8988]] 


Sec. 1717.656  Investments, loans, and guarantees in excess of 15 
percent of total utility plant.

    (a) General. This section applies only to borrowers that are 
subject to Administrator approval of investments, loans and guarantees 
made above the 15 percent limit, i.e., borrowers that do not meet the 
exemption criteria in Sec. 1717.655(a).
    (b) Distribution borrowers. Distribution borrowers subject to 
Administrator approval of investments, loans and guarantees will not be 
given approval to make investments, loans and guarantees in an 
aggregate amount in excess of 15 percent of total utility plant. Above 
the 15 percent level, such borrowers will be restricted to excluded 
investments, loans and guarantees as defined in Sec. 1717.654. 
(However, they are eligible to ask RUS to exclude a portion of their 
investments under the conditions set forth in paragraph (d) of this 
section.)
    (c) Power supply borrowers. (1) Power supply borrowers subject to 
Administrator approval of investments, loans and guarantees may request 
approval to exceed the 15 percent level if all of the following 
criteria are met:
    (i) The borrower is in compliance with all provisions of its RUS 
mortgage, RUS loan contract, and any other agreement with RUS;
    (ii) The borrower is not in financial workout and has not had its 
government debt restructured;
    (iii) The borrower has equity equal to at least 5 percent of its 
total assets; and
    (iv) After approval of the investment, loan or guarantee, the 
aggregate of the borrower's investments, loans and guarantees will not 
exceed 20 percent of the borrower's total utility plant.
    (2) Borrower requests for approval to exceed the 15 percent level 
will be considered on a case by case basis. The requests must be made 
in writing.
    (3) In considering borrower requests, the Administrator will take 
the following factors into consideration:
    (i) The repayment of all loans secured under the RUS mortgage will 
continue to be assured, and loan security must continue to be 
reasonably adequate, even if the entire investment or loan is lost or 
the borrower is required to perform for the entire amount of the 
guarantee. These risks will be considered along with all other risks 
facing the borrower, whether or not related to the investment, loan or 
guarantee;
    (ii) In the case of investments, the investment must be made in an 
entity separate from the borrower, such as a subsidiary, whereby the 
borrower is protected from any liabilities incurred by the separate 
entity, unless the borrower demonstrates to the satisfaction of the 
Administrator that making the investment directly rather than through a 
separate entity will present no substantial risk to the borrower in 
addition to the possibility of losing all or part of the original 
investment;
    (iii) The borrower must be economically and financially sound as 
indicated by its costs of operation, competitiveness, operating TIER 
and operating DSC, physical condition of the plant, ratio of equity to 
total assets, ratio of net utility plant to long-term debt, and other 
factors; and
    (iv) Other factors affecting the security and repayment of 
government debt, as determined by the Administrator on a case by case 
basis.
    (4) If the Administrator approves an investment, loan or guarantee, 
such investment, loan or guarantee will continue to be included when 
calculating the borrower's ratio of aggregate investments, loans and 
guarantees to total utility plant.
    (d) Distribution and power supply borrowers. If the aggregate of 
the investments, loans and guarantees of a distribution or power supply 
borrower exceeds 15 percent of the borrower's total utility plant as a 
result of the cumulative profits or margins, net of losses, earned on 
said transactions over the past 10 calendar years (i.e., the sum of all 
profits earned during the 10 years on all transactions--including 
interest earned on cash accounts, loans, and similar transactions--less 
the sum of all losses experienced on all transactions during the 10 
years) then:
    (1) The borrower will not be in default of the RUS loan contract or 
RUS mortgage with respect to required approval of investments, loans 
and guarantees, provided that the borrower had not made additional net 
investments, loans or guarantees without approval after reaching the 15 
percent level; and
    (2) At the request of the borrower, the Administrator in his sole 
discretion may decide to exclude up to the amount of net profits or 
margins earned on the borrower's investments, loans and guarantees 
during the past 10 calendar years, if the Administrator determines that 
such exclusion will not increase loan security risks. The borrower must 
provide documentation satisfactory to the Administrator as to the 
current status of its investments, loans and guarantees and the net 
profits earned during the past 10 years. Any exclusion approved by the 
Administrator may or may not reduce the level of investments, loans and 
guarantees to or below the 15 percent level. If such exclusion does not 
reduce the level to or below the 15 percent level, RUS will notify the 
borrower in writing that it must reduce or restructure its investments, 
loans and guarantees to a level of not more than 15 percent of total 
utility plant. If the borrower does not come within the 15 percent 
level within a reasonable period of time determined by the 
Administrator, which shall not exceed 12 months from the date the 
borrower was notified of the required action, then, upon written notice 
from RUS, the borrower shall be in default of its RUS loan contract and 
mortgage.


Sec. 1717.657  Records, reports and audits.

    (a) Every borrower shall maintain accurate records concerning all 
investments, loans and guarantees made by it. Such records shall be 
kept in a manner that will enable RUS to readily determine:
    (1) The nature and source of all income, expenses and losses 
generated from the borrower's loans, guarantees and investments;
    (2) The location, identity and lien priority of any loan collateral 
resulting from activities permitted by this subpart; and
    (3) The effects, if any, which such activities may have on the 
feasibility of loans made, guaranteed or lien accommodated by RUS.
    (b) In determining the aggregate amount of investments, loans and 
guarantees made by a borrower, the borrower shall use the recorded 
value of each investment, loan or guarantee as reflected on its books 
and records for the next preceding end-of-month, except for the end-of-
year report which shall be based on December 31 information. Every 
borrower shall also report annually to RUS, in the manner and on the 
form specified by the Administrator, the current status of each 
investment, outstanding loan and outstanding guarantee which it has 
made pursuant to this subpart.
    (c) The records of borrowers shall be subject to the auditing 
procedures prescribed in part 1773 of this chapter. RUS reserves the 
right to review the financial records of any subsidiaries of the 
borrower to determine if the borrower is in compliance with this 
subpart, and to ascertain if the debts, guarantees (as defined in this 
subpart), or other obligations of the subsidiaries could adversely 
affect the ability of the borrower to repay its debts to the 
Government.
    (d) RUS will monitor borrower compliance with this subpart based 
primarily on the annual financial and statistical report submitted by 
the [[Page 8989]] borrower to RUS and the annual auditor's report on 
the borrower's operations. However, RUS may inspect the borrower's 
records at any time during the year to determine borrower compliance. 
If a borrower's most recent annual financial and statistical report 
shows the aggregate of the borrower's investments, loans and guarantees 
to be below the 15 percent level, that in no way relieves the borrower 
of its obligation to comply with its RUS mortgage, RUS loan contract, 
and this subpart with respect to Administrator approval of any 
additional investment, loan or guarantee that would cause the aggregate 
to exceed the 15 percent level.


Sec. 1717.658  Effect of this subpart on RUS loan contract and 
mortgage.

    (a) Nothing in this subpart shall affect any provision, covenant, 
or requirement in the RUS mortgage, RUS loan contract, or any other 
agreement between a borrower and RUS with respect to any matter other 
than the prior approval by RUS of investments, loans, and guarantees 
made by the borrower. Also, nothing in this subpart shall affect any 
rights which supplemental lenders have under the RUS mortgage, or under 
their loan contracts or other agreements with their borrowers, to limit 
investments, loans and guarantees by their borrowers to levels below 15 
percent of total utility plant.
    (b) RUS reserves the right to change the provisions of the RUS 
mortgage and loan contract relating to RUS approval of investments, 
loans and guarantees made by the borrower, on a case-by-case basis, in 
connection with providing additional financial assistance to a borrower 
after [Date 30 days after the final rule is published in the Federal 
Register].

    Dated: February 7, 1995.
Bob J. Nash,
Under Secretary, Rural Economic and Community Development.
[FR Doc. 95-3665 Filed 2-15-95; 8:45 am]
BILLING CODE 3410-15-P