[Federal Register Volume 77, Number 144 (Thursday, July 26, 2012)]
[Proposed Rules]
[Pages 43723-43734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-17784]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 77, No. 144 / Thursday, July 26, 2012 / 
Proposed Rules  

[[Page 43723]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Parts 1710, 1717, 1721, 1724, and 1730

RIN 0572-AC19


Energy Efficiency and Conservation Loan Program

AGENCY: Rural Utilities Service, USDA.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Rural Utilities Service (RUS or Agency) is proposing 
policies and procedures for loan and guarantee financial assistance in 
support of energy efficiency programs (EE Programs) sponsored and 
implemented by electric utilities for the benefit of rural persons in 
their service territory. This notice of proposed rulemaking proposes 
changes to RUS regulations on General and Pre-Loan Policies and 
Procedures Common to Electric Loans and Guarantees. This regulation was 
finalized December 20, 1993. The notice of proposed rulemaking also 
proposes conforming amendments to additional RUS regulations. Under 
Section two of the Rural Electric Act, RUS is authorized to assist 
electric borrowers in implementing demand side management, energy 
efficiency and conservation programs, and on-grid and off-grid 
renewable energy systems. The scope of this proposed regulation falls 
within the authority of the Act.

DATES: Comments must be submitted on or before September 24, 2012.

ADDRESSES: Submit comments by either of the following methods: Federal 
eRulemaking Portal: Go to http://www.regulations.gov. Follow the 
instructions for submitting comments.
    Postal Mail/Commercial Delivery: Please send your comments 
addressed to Michele Brooks, Director, Program Development and 
Regulatory Analysis, USDA Rural Development, 1400 Independence Avenue 
SW., STOP 1522, Room 5162, Washington, DC 20250-1522.
    Other Information: Additional information about Rural Development 
and its programs is available on the Internet at http://www.rurdev.usda.gov/index.html.

FOR FURTHER INFORMATION CONTACT: Gerard Moore, USDA-Rural Utilities 
Service, 1400 Independence Avenue SW., Stop 1569, Washington, DC 20250-
1569, telephone (202) 205-9692 or email to [email protected].

SUPPLEMENTARY INFORMATION: 
    Executive Summary: The Rural Utilities Service (RUS or Agency) is 
proposing policies and procedures for loan and guarantee financial 
assistance in support of energy efficiency programs (EE Programs) 
sponsored and implemented by electric utilities for the benefit of 
rural persons in their service territory. This notice of proposed 
rulemaking is designed to supplement the policies contained in 7 CFR 
part 1710, GENERAL AND PRE-LOAN POLICIES AND PROCEDURES COMMON TO 
ELECTRIC LOANS AND GUARANTEES, which were finalized in December 1993. 
Under Section 2(a) of the Rural Electrification Act of 1936 (7 U.S.C. 
902(a)), the Secretary of Agriculture is explicitly ``authorized and 
empowered to make loans in the several States and Territories of the 
United States * * * for the purpose of assisting electric borrowers to 
implement demand side management, energy efficiency and conservation 
programs, and on-grid and off-grid renewable energy systems.'' As 
noted, Section 6101 of the 2008 Farm Bill inserted the words ``and 
energy efficiency'' into this provision. In order to implement this new 
focus of the program, RUS proposes to amend 7 CFR part 1710 by adding a 
new subpart H entitled ``Energy Efficiency and Conservation Loan 
Program.''
    The goals of an eligible Energy Efficiency Program that could be 
funded under this program under this proposed subpart may include: (1) 
Increasing energy efficiency at the end user level, (2) modifying 
electric load such that there is a reduction in overall system demand, 
(3) effecting a more efficient use of existing electric distribution, 
transmission and generation facilities, (4) attracting new businesses 
and create jobs in rural communities by investing in energy efficiency, 
and (5) encouraging the use of renewable energy fuels for both demand 
side management and the reduction of conventional fossil fuel use 
within the service territory.
    The Energy Efficiency and Conservation Loan Program may include 
loans supporting energy efficiency activities undertaken by the utility 
itself, the finance of energy efficiency projects undertaken by others 
and investments made by the utility to accomplish their obligations 
under utility energy services contracts.

Impacts

    The new Subpart H. for the Energy Efficiency and Conservation Loan 
Program can have several economic impacts. The benefits include: (1) 
The value of purchased energy saved; (2) the value of corresponding 
avoided generation, transmission and/or distribution; (3) reserve 
investments as may be displaced or deferred by program activities; and 
(4) savings in energy bills.
    The proposed loan program is estimated to have a maximum funding 
level of $250 million annually. The estimated administrative cost to 
the applicant and federal government are relatively low, at about 
$740,000 total for applicants, and about $1.7 million for the Federal 
government.

Executive Order 12866 and 13563

    This proposed rule has been reviewed under Executive Order (EO) 
12866, ``Regulatory Planning and Review,'' 58 FR 51735 (Oct. 4, 1993), 
and has been determined to be significant by the Office of Management 
and Budget. The EO defines a ``significant regulatory action'' as one 
that is likely to result in a rule that may: (1) Have an annual effect 
on the economy of $100 million or more or adversely affect, in a 
material way, the economy, a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local, or tribal governments or communities; (2) Create a serious 
inconsistency or otherwise interfere with an action taken or planned by 
another agency; (3) Materially alter the budgetary impact of 
entitlements, grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) Raise novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in this EO. As required by OMB circular A-4 
the regulatory impact analysis will be

[[Page 43724]]

published along with this proposed rule on regulations.gov
    The agency has also reviewed this regulation pursuant to Executive 
Order 13563, issued on January 18, 2011 (76 FR 3281, Jan. 21, 2011). EO 
13563 is supplemental to and explicitly reaffirms the principles, 
structures, and definitions governing regulatory review established in 
Executive Order 12866. To the extent permitted by law, agencies are 
required by Executive Order 13563 to: (1) Propose or adopt a regulation 
only upon a reasoned determination that its benefits justify its costs 
(recognizing that some benefits and costs are difficult to quantify); 
(2) tailor regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives, taking into account, 
among other things, and to the extent practicable, the costs of 
cumulative regulations; (3) select, in choosing among alternative 
regulatory approaches, those approaches that maximize net benefits 
(including potential economic, environmental, public health and safety, 
and other advantages; distributive impacts; and equity); (4) to the 
extent feasible, specify performance objectives, rather than specifying 
the behavior or manner of compliance that regulated entities must 
adopt; and (5) identify and assess available alternatives to direct 
regulation, including providing economic incentives to encourage the 
desired behavior, such as user fees or marketable permits, or providing 
information upon which choices can be made by the public.
    The Agency conducted a benefit-cost analysis to fulfill the 
requirements of EO 12866 and 13563. In this analysis, the Agency 
identifies potential benefits and costs of the Energy Efficiency and 
Conservation Loan Program to borrowers, and RUS. The analysis contains 
quantitative estimates of the burden to the public and the Federal 
government and qualitative descriptions of the expected economic, 
environmental, and energy impacts associated with the Energy Efficiency 
and Conservation Loan Program.

Catalog of Federal Domestic Assistance

    The program described by this proposed rule is an eligible purpose/
subsidiary program of the Electrification Loans and Loan Guarantee 
program as listed in the Catalog of Federal Domestic Assistance 
Programs under number 10.850, Rural Electrification Loans and Loan 
Guarantees. The Catalog is available on the Internet at http://www.cfda.gov.

Executive Order 12372

    This proposed rule is excluded from the scope of Executive Order 
12372, Intergovernmental Consultation, which may require consultation 
with State and local officials. See the final rule related notice 
entitled, ``Department Programs and Activities Excluded from Executive 
Order 12372'' (50 FR 47034).

Paperwork Reduction Act of 1995

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
chapter 35), comments are invited on this information collection for 
which the Agency has requested approval from the Office of Management 
and Budget (OMB).
    Comments on this proposed rule must be received by September 24, 
2012.
    Comments are invited on (a) whether the collection of information 
is necessary for the proper performance of the functions of the Agency, 
including whether the information will have practical utility; (b) the 
accuracy of the Agency's estimate of burden including the validity of 
the methodology and assumption used; (c) ways to enhance the quality, 
utility and clarity of the information to be collected; and (d) ways to 
minimize the burden of the collection of information on those who are 
to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques on 
other forms or information technology.
    Comments may be sent to Michele Brooks, Director, Program 
Development and Regulatory Analysis, Rural Development, U.S. Department 
of Agriculture, 1400 Independence Avenue SW., Stop 1522, Room 5162 
South Building, Washington, DC 20250.
    Title: Energy Efficiency and Conservation Loan Program.
    Type of Request: New information collection.
    Abstract: The Agency manages loan programs in accordance with the 
Rural Electrification Act of 1936, 7 U.S.C. 901 et seq., as amended (RE 
Act), which expressly provides for assisting electric borrowers in 
their implementation of demand side management (DSM), EE Programs and 
energy conservation programs. This proposed rulemaking expands upon the 
policies and procedures which are specific to loans for EE Programs. As 
a practical matter, energy efficiency investment includes the eligible 
purposes of DSM and energy conservation as well as investments 
resulting in the better management of existing loads or a reduction in 
investment needed for additional electric facilities.
    The implementation of effective EE Programs by utilities also 
benefits rural America by creating jobs and these programs stimulate 
the economy by catalyzing material and equipment orders needed to 
implement the programs.
    Title 7 CFR part 1710 General and Pre-loan Policies and Procedures 
Common to Electric Loans and Guarantees, subpart H, Energy Efficiency 
Programs, will provide for insured or guaranteed loans to new or 
existing borrowers for EE Programs undertaken by them in their service 
territory.
    Estimate of Burden: Public reporting burden for this collection of 
information is estimated to average 8 hours per response.
    Respondents: Not for profit organizations, business or other for 
profit.
    Estimated Number of Respondents: 20.
    Estimated Number of Responses per Respondent: 1.
    Estimated Annual Responses: 20.
    Estimated Total Annual Burden on Respondents: 160 hours.
    Copies of this information collection can be obtained from Thomas 
P. Dickson, Program Development and Regulatory Analysis, USDA Rural 
Development, 1400 Independence Avenue SW., STOP 1522, Room 5164, 
Washington, DC 20250-1522. Telephone: 202-690-4492.
    All responses to this information collection and recordkeeping 
notice will be summarized and included in the request for OMB approval. 
All comments will also become a matter of public record.

E-Government Act Compliance

    The Agency is committed to the E-Government Act, which requires 
Government agencies in general to provide the public the option of 
submitting information or transacting business electronically to the 
maximum extent possible.

National Environmental Policy Act Certification

    In accordance with the National Environmental Policy Act of 1969 
(42 U.S.C. 4321 et seq.), the Agency will prepare a Programmatic 
Environmental Assessment (PEA) for this loan program activity as part 
of this rulemaking process. The PEA will be prepared pursuant to the 
National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et 
seq.), the Council on Environmental Quality's (CEQ) regulations for 
implementing NEPA (40 CFR parts 1500-1508), and RUS' NEPA

[[Page 43725]]

implementing regulations, Environmental Policies and Procedures (7 CFR 
part 1794). A notice will be published in the Federal Register 
announcing the availability of this PEA for public review. No 
obligations under this proposed new subpart will be processed until the 
Agency has made a determination of environmental finding for the 
actions contemplated in the proposed new subpart.

Regulatory Flexibility Act Certification

    It has been determined the Regulatory Flexibility Act is not 
applicable to this rule since the RUS is not required by 5 U.S.C. 551 
et seq. or any other provision of law to publish a notice of proposed 
rulemaking with respect to the subject matter of this rule.

Unfunded Mandates

    This rule contains no Federal mandates (under the regulatory 
provisions of title II of the Unfunded Mandates Reform Act of 1995) for 
State, local, and tribal governments or for the private sector. 
Therefore, this rule is not subject to the requirements of section 202 
and 205 of the Unfunded Mandates Reform Act of 1995.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. The Agency has determined that this proposed rule 
meets the applicable standards in Sec.  3 of the Executive Order. In 
addition, all state and local laws and regulations that are in conflict 
with this rule will be preempted, no retroactive effort will be given 
to this rule, and, in accordance with section 212(e) of the Department 
of Agriculture Reorganization Act of 1994 (7 U.S.C. 6912(e)), 
administrative appeals procedures, if any, must be exhausted before any 
action against the Department or its agencies may be initiated.

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on states and local governments, on the relationship 
between the national government and the states and locals, or on the 
distribution of power and responsibilities among the various levels of 
government. Nor does this rule impose substantial direct compliance 
costs on state and local governments. Therefore, consultation with the 
states is not required.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order imposes requirements on Rural Development in 
the development of regulatory policies that have tribal implications or 
preempt tribal laws. Between October 2010 and January 2011, the United 
States Department of Agriculture (USDA) hosted seven regional 
regulation Tribal consultation sessions to gain input by elected Tribal 
officials or their designees concerning the impact of this rule on 
Tribal governments, communities, and individuals. These sessions 
established a baseline of consultation for future actions, should any 
be necessary, regarding this rule. As a result of the input received 
during these sessions, Rural Development has determined that the 
proposed rule does not have a substantial direct effect on one or more 
Indian tribe(s) or on either the relationship or the distribution of 
powers and responsibilities between the Federal Government and Indian 
tribes. Thus, this proposed rule is not subject to the requirements of 
Executive Order 13175. If a tribe determines that this rule has 
implications of which Rural Development is not aware and would like to 
engage in consultation with Rural Development on this rule, please 
contact Rural Development's Native American Coordinator at (720) 544-
2911 or [email protected].

Background

    RUS proposes to amend 7 CFR part 1710 by adding a new subpart H 
entitled ``Energy Efficiency and Conservation Loan Program''. Under 
Section 2(a) of the Rural Electrification Act of 1936 (7 U.S.C. 
902(a)), the Secretary of Agriculture is explicitly ``authorized and 
empowered to make loans in the several States and Territories of the 
United States * * * for the purpose of assisting electric borrowers to 
implement demand side management, energy efficiency and conservation 
programs, and on-grid and off-grid renewable energy systems.'' As 
noted, Section 6101 of the 2008 Farm Bill inserted the words ``and 
energy efficiency'' into this provision which was originally added as 
an amendment to the RE Act by the Rural Electrification Loan 
Restructuring Act of 1993 (``RELRA'') (Pub. L. 103-129 sec. 
2(c)(1)(B)).\1\ Energy conservation was a part of the Agency's mission 
even before RELRA explicitly recognized this. In 1980, RUS developed an 
Energy Resources Conservation Program by issuing RUS Bulletin 20-23, 
Section 12 Extensions for Energy Resources Conservation Loans, dated 
December 8, 1980).\2\ Commonly known as the ERC Loan Program, the 
Administrator used his broad discretion under the RE Act to employ 
Section 11 of the RE Act, authority to extend the time for payments as 
the foundation for creating the ``ERC Loan Program.'' RUS did not make 
ERC Loans directly. It operated the program by entering into agreements 
with its borrowers to defer amortization of their loans in order for 
the borrowers to fund energy conservation improvements. The electric 
cooperatives made loans to their members out of the cash flow resulting 
from the deferments they received from RUS on their own loans. Even 
though RUS did not make the ERC loans itself, it provided financial 
assistance to rural consumers by using the electric cooperatives as 
intermediaries. Congress subsequently amended Section 12 to expand it, 
first in 1990 to enable deferments to enable borrowers to provide 
financing to local businesses to stimulate rural economic development 
and again in 2008 to authorize energy efficiency and use audits and to 
install energy efficient measures or devices to reduce demand on 
electric systems. The recent grant of additional authority in Section 3 
of the RE Act to make loans and guarantees for energy efficiency, as 
contrasted with authority to merely defer payments on direct loans, has 
become increasingly significant as percentage of the RUS portfolio 
represented by direct loans continues to amortize. In recent times the 
Agency delivers nearly all of its electric program assistance in the 
form of loan guarantees. As a guarantor, RUS does not have the same 
discretion to defer payments that it does when it is the lender. 
Consequently, RUS has determined that it is now necessary and 
appropriate to develop a loan program for this RE Act purpose.
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    \1\ Senator Patrick Leahy, as the Chairman of the Senate 
Committee on Agriculture, Nutrition and Forestry, explained this 
provision in a letter dated June 18, 1993 to Senator Jim Sasser, the 
Chairman of the Senate Committee on the Budget, as follows: ``These 
amendments also permit REA [RUS] to make loans for demand side 
management and energy conservation program[s] which are required by 
some state agencies. They are also often the most cost effective 
methods of meeting the energy needs of rural areas.''
    \2\ This Bulletin was rescinded in 2002 when RUS updated and 
codified the ERC Loan Program as 7 CFR Part 1721, subpart B. (See 67 
FR 484, January 4, 2002).
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    ``The REA Act, 7 U.S.C. 904, commits to the discretion of the 
Administrator the making of loans for rural electrification * * *.'' 
Alabama Power Co. v. Ala. Elec. Coop., 394 F.2d 672 at 675 (CA 5) cert. 
denied 393 U.S. 1000

[[Page 43726]]

(1968). ``REA is the administrative agency charged by Congress with 
responsibility for facilitating rural electrification. REA was intended 
by Congress to determine the appropriate course of conduct to 
accomplish the legislative purpose.'' Public Utility District No. 1 of 
Franklin County v. Big Bend Electric Cooperative, Inc., 618 F.2d 601 at 
603 (CA 9 1980). By broadly adding ``energy efficiency'' in the 2008 
Farm Bill as a legislative purpose for the RE Act loans, Congress left 
it to the Administrator's discretion to fashion the appropriate method 
to accomplish this purpose. Drawing on more than three decades of 
experience in using electric cooperatives as local intermediaries to 
accomplish RE Act objectives at the consumer level, RUS is proposing to 
deliver this energy efficiency program drawing upon its favorable past 
successes with using its electric borrowers as intermediaries.
    RUS anticipates that borrowers under this subpart will be 
generation and transmission (G&T) borrowers or their distribution 
members or unaffiliated distribution borrowers who are current on their 
loan payments and in compliance with their loan documents. RUS will 
only make loans for these purposes to electric utility systems. RUS 
also anticipates that the EE improvements installation work may be 
contracted by either the utility or the ultimate recipient, or 
performed directly by employees of the borrower, at the discretion of 
the utility designing the EE Program. In all cases, the Eligible 
Borrower is expected to hold title to the receivables funded by the RUS 
loan.
    RUS is authorized by the RE Act to make loans to implement DSM, EE 
Programs and conservation programs, and on-grid and off-grid renewable 
energy systems. Energy Efficiency in this regulation can be defined as 
the degree a system or component performs its designated function with 
minimum consumption of resources. Renewable energy systems have a 
specific role in this regulation. Renewable generation can be used as 
load modifiers. Load modifiers can increase the efficiency of energy 
consumption from the utilities perspective and are highly effective at 
decreasing energy used by decreasing load during system peaks. 
Renewable energy and conservation savings associated with this 
regulation are from the utilities perspective, though the energy 
savings could be realized by both the consumer and utility, depending 
on the type of project, as the utility is the RUS borrower and is 
culpable for repayment of the loan. Energy efficiency as contemplated 
in this proposed regulation may, depending on the given project, 
accomplish either DSM, energy conservation, or both. The goals of an 
eligible EE Program under this proposed subpart may include one or more 
of the following: (1) To increase energy efficiency at the end user 
level, (2) to modify electric load such that there is a reduction in 
overall system demand, (3) to effect a more efficient use of existing 
electric distribution, transmission and generation facilities, and (4) 
to attract new businesses and create jobs in rural communities by 
investing in energy efficiency, and (5) to encourage the use of 
renewable energy fuels to accomplish either DSM or a reduction in the 
consumption of conventional fossil fuel within the service territory.
    The primary differences between the existing energy resource 
conservation program codified in subpart B of 7 CFR part 1721 (ERC 
program) and the EE Program proposed in this rulemaking are: (1) The 
existing ERC program is limited to direct loan principal deferments and 
is not available for RUS guaranteed loans, (2) the list of eligible 
loan purposes for this proposed program is more expansive than for the 
ERC program and, where applicable, emphasizes that the assets in 
question must be characterized as an integral part of the Consumer's 
real property that would typically transfer with the title under 
applicable state law, and (3) the term of financing available under 
this proposed subpart is longer than the term allowed for principal 
deferments under the ERC loan program.
    Rural electric cooperatives are proponents of energy efficiency 
measures. According to the National Rural Electric Cooperative 
Association, 73% of co-ops plan on significantly expanding existing 
efficiency programs in the next two years, 70% of co-ops offer 
financial incentives to promote greater energy efficiency, 96% of co-
ops have some form of energy efficiency program in place, cooperatives 
are responsible for nearly 25% of residential peak load management 
capacity and cooperatives have 10% of retail electricity sales but are 
responsible for 20% of actual peak demand reduction. Representatives 
from rural electric cooperatives have commented that access to low 
interest funds can be the difference between success and failure for an 
energy efficiency program.
    Eligible EE Programs may be comprised of a variety of activities, 
performed by either the utility or third parties. This proposed rule 
sets forth the policies and procedures related to eligible EE Programs 
where the RUS will finance: (1) Energy efficiency activities undertaken 
by the utility itself, (2) loans made by the utility to finance energy 
efficiency projects undertaken by others and (3) investments made by 
the utility to accomplish their obligations under utility energy 
services contracts. The types of activities that are eligible for RUS 
financing under this subpart include but are not limited to: (1) 
Residential and commercial energy audits, (2) community awareness and 
outreach programs, (3) services, materials and equipment provided by a 
qualified local contractor to improve energy efficiency at the Consumer 
level, and (4) energy efficiency loans made by the utility to its 
customers. RUS is considering allowing fuel switching as an eligible 
activity under this regulation. Fuel switching would not be designed to 
be a permanent change from one fuel to another, rather a method to 
handle peak loads during limited time periods. A description of EE 
Programs that would qualify for RUS financing may be found in the 
proposed Sec.  1710.405. Eligible investments are listed in the 
proposed Sec.  1710.406. Finally, eligible borrowers are defined in the 
proposed Sec.  1710.404.
    The term ``Energy efficiency'' is used in this part to refer to 
eligible load modification investments as well as traditional energy 
efficiency projects. A program to finance photovoltaic (solar) 
installations, for example, would typically be classified as 
distributed renewable generation, not energy efficiency. Distributed 
solar investments, however, including those made by individual 
Consumers, may also impact the load profile of the interconnected 
utility in a positive way, or facilitate demand side management, and 
they would be an eligible purpose for this program where any associated 
power flow from them into the grid is incidental. Small scale renewable 
energy systems that are constructed with the primary purpose of 
supplying energy to the grid would not be considered an energy 
efficiency investment under this loan program. Such small scale 
renewable energy systems may be financed under this Agency's 
traditional loan programs. The operative distinctions between eligible 
investments under this proposed subpart and the regular loan program 
are (1) these assets would ordinarily be on the customer side of the 
meter and (2) to the extent these assets deliver electricity to the 
grid, it will not exceed an incidental amount. This rulemaking proposes 
that the small scale renewable energy system investments financed on 
the Consumer side of the meter under

[[Page 43727]]

this program will be presumed to be incidental where the nameplate 
generation capacity is less than 50% of the average anticipated 
electrical load associated with the end user.
    Some programs designed by utilities may have the utility initially 
owning an asset even though it is located on a Consumer's premise and 
the asset is later conveyed to the Consumer after it is paid for or a 
period of time has elapsed. Where this is the case, RUS is proposing 
that the application include an additional or revised Schedule C to the 
RUS mortgage listing these assets as Excepted Property under the RUS 
mortgage, so as to preclude the assets being captured under the after 
acquired clause that is standard in the RUS mortgage codified in 7 CFR 
part 1718. It is the intent of RUS that a release of lien need not be 
executed by the Agency for the utility to convey to the Consumer clear 
title to these assets when this Schedule C is recorded.
    This proposed rulemaking recognizes that energy may take a variety 
of forms, not just electricity. The criteria to be met by eligible 
programs include energy efficiency as measured by Btu \3\ input 
relative to Btu output, in order to facilitate the widest and greatest 
contribution by the rural utility in optimizing the energy consumption 
profile of its service territory. The proposed rulemaking also provides 
that an eligible program must demonstrate that the financial strength 
of the electric utility is not harmed by EE Program activities funded 
under this proposed new subpart.
---------------------------------------------------------------------------

    \3\ British Thermal Unit.
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    An important distinction between eligible energy efficiency assets 
to be financed under this new subpart H and other energy efficiency 
activities is that the assets located at a Consumer's premises, whether 
or not title is to be held by the utility must, for the most part, be 
considered an integral part of the real property that would typically 
transfer with the title under applicable State law (a specified 
exception relates to lighting) in order to be financed pursuant to an 
eligible program under this proposed rulemaking.
    Eligible programs may provide that the utility will recoup all or 
part of the costs from specific ratepayers on whose behalf an 
investment has been made. Recoupment may take the form of Consumer loan 
repayment or a dedicated tariff. An eligible program under this part 
must show that the payment terms and loan term offered to the Consumer 
are generally correlated with the expected life of the applicable 
assets. An eligible program must also offer an undertaking that funds 
collected from ratepayers in excess of the current amortization 
requirements for the RUS loan will be redeployed for EE Program 
purposes or used to prepay the RUS loan. These prepayments would be in 
addition to scheduled principal and interest debt service payments.
    Applications for program financings under this subpart must fully 
describe a Business Plan that meets the requirements of Sec.  1710.407.
    The Agency recognizes that energy efficiency investments that 
reduce energy consumption at the Consumer premises (for instance those 
that affect the power factor) may prompt a need for investments at the 
system level to sustain the reliability and stability of the grid. The 
business plan called for in this proposed rulemaking must identify the 
related system investment to be identified as part of the EE Program, 
but these system level investments would be reflected in the utility's 
construction work plan and financed as part of a traditional loan 
application.
    It is not required that an eligible program fund energy audits 
performed at Consumer premises. However, if the utility proposes to 
provide audits the rulemaking proposes that the program must also 
include a provision for assisting Consumers in implementing changes 
suggested by the audit in those cases where the recommended investments 
are expected to achieve minimum performance objectives. A program that 
funds energy audits without providing assistance for implementing audit 
recommendations included in the audit would not be an eligible program 
and only those activities that meet minimum performance objectives are 
eligible to be funded under this program. Only those audit 
recommendations that taken together will achieve an overall reduction 
in annualized energy consumption at a specific premise of at least 10% 
may be financed with RUS loan funds under this subpart.
    The list of eligible investments and activities that a qualified 
plan may incorporate is not intended to be exhaustive. The intent is to 
facilitate flexibility for the utility's EE Program consistent with the 
resources and Consumer profiles in its service territory.
    Performance thresholds have been established in this regulation. 
The objective of these thresholds is to ensure a minimum increase in 
energy efficiency for a given system. This approach also ensures that 
any energy efficiency upgrades will not be marginal. These thresholds 
appear as percent increases in system efficiency. At this time there 
are no standards to apply to each of these systems.
    This proposed lending program is designed for utility-designed and 
directed EE Programs. As such it anticipates that eligible loan 
purposes will include program administrative and other soft costs, such 
as marketing expenses, where not more than four percent of the loan 
budget may be used for these purposes. A utility's program may include 
acting as an intermediary lender, where the utility uses RUS financing 
to make Consumer loans to finance these investments on the Consumers' 
premises. Where this is the case, this rulemaking proposes to cap the 
interest rate at one percent that the utility can charge.
    The process for applying for EE Program loans is intended to 
largely conform to the Agency's existing process for loans relating to 
other eligible purposes. Accordingly, the requirements discussed 
throughout 7 CFR part 1710 are proposed to apply equally to EE Program 
loans unless otherwise stated after giving effect to the proposed 
conforming amendments incorporated in this rulemaking. Expenditures by 
the utility will be reimbursed by the Agency after the fact pursuant to 
an inventory of work orders system as is typical for our existing loan 
process. The analytical material needed to support an EE Program loan 
is different from what is needed to analyze a generation or 
transmission loan. Accordingly, the proposed subpart H elaborates on 
what is needed for RUS to approve an EE Program and loans to execute 
the program. EE Program activity will be captured under a separate 
energy efficiency work plan. Energy efficiency investments will not be 
listed on the traditional construction work plan that applies to 
utility assets financed by RUS.
    As with other loans made pursuant to 7 CFR part 1710, a borrower's 
Environmental Report (ER) is expected to accompany the energy 
efficiency work plan associated with the loan request. The ER is in 
accordance with 7 CFR 1794. This Part contains the policies and 
procedures of the Rural Utilities Service for implementing the 
requirements of the National Environmental Policy Act. In the case of 
an EE Program loan, this ER will be expected to reference the PEA as 
completed by the Agency for EE Program loans, and identify any 
investments that are proposed in the work plan that were not captured 
in the PEA.
    This new subpart H is not intended to be duplicative of 
requirements

[[Page 43728]]

otherwise prescribed in part 1710, but rather, adaptive. It identifies 
requirements that are unique to loans made under the proposed subpart H 
to finance EE Programs. It addresses federal requirements that arise 
when our direct borrower acts as an intermediary lender to accomplish 
the investments outlined in an approved EE program. Where there is an 
express conflict with requirements elsewhere in part 1710, the 
provisions of the proposed subpart H would apply, but otherwise this 
proposed subpart H is not intended to supplant the applicability of the 
rest of part 1710 or other applicable parts in the Code of Federal 
Regulations.
    Subpart H, as required with for all of 1710, will work with DOE, 
following the requirements set of by the Rural Electrification Act of 
1936, Section 16 that states: ``the Secretary in making or guaranteeing 
loans for the construction, operations, or enlargement of generating 
plants or electric transmission lines or systems shall consider such 
general criteria consistent with the provisions of this Act as may be 
published by the Secretary of Energy.''

Comments Are Specifically Invited on the Following Questions

    1. What should be the threshold for determining when small scale 
renewable energy systems on the Consumer side of the meter is presumed 
incidental and thereby qualify for reimbursement under this program?
    2. What is the appropriate markup above the Treasury-based interest 
rate paid to RUS that the utility should be allowed to add to cover its 
administrative costs in the interest rate it establishes for Consumer 
loans funded under this proposed subpart?
    3. What is the appropriate performance thresholds that should be 
set to ensure products purchased with loan funds are significantly more 
energy efficient than conventional products, have reasonable payback 
periods, and perform at least as well as conventional products? Are the 
percentage energy efficiency improvements for specific projects 
appropriate measures for this program's energy efficiency standards? 
Should this rule reference existing energy efficiency standards or 
criteria such as those from ENERGY STAR, FEMP, ANSI, or other voluntary 
consensus standards as a means of ensuring products purchased with loan 
funds are significantly more energy efficiency than conventional 
products?
    4. Should fuel switching be an eligible activity under this 
programmatic regulation? Should the agency consider any net increases 
in conventional fossil fuel consumption or emissions due to fuel 
switching even though the utility's electrical load may be reduced 
during peak periods? Would limiting fuel switching projects to 50% of 
the average anticipated electrical load associated with the end user, 
adequately address any concerns with potential emissions or overall 
energy generation increases?
    5. RUS requests comment on the one percent cap on interest rates 
that utilities may charge under this program, where the utility uses 
RUS financing to make Consumer loans to finance these investments on 
the Consumers' premises. RUS also requests comment on the four percent 
limit of the loan budget that may be used on administration and other 
soft costs, such as marketing expenses.
    6. RUS requests comment on the appropriate funding cap for this 
program. Should it be $250 million?

List of Subjects

7 CFR Part 1710

    Electric power, Loan programs--energy, Reporting and recordkeeping 
requirements, Rural areas.

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.

7 CFR Part 1721

    Electric power, Loan programs energy, Rural areas.

7 CFR Part 1724

    Electric power, Loan programs--energy, Reporting and recordkeeping 
requirements, Rural areas.

7 CFR Part 1730

    Electric power, Loan programs--energy, Reporting and recordkeeping 
requirements, Rural areas.

    For reasons set forth in the preamble, the Agency proposes to amend 
7 CFR chapter XVII as follows:

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

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

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

Subpart A--General

    2. In Sec.  1710.2(a) revise the definition of ``Demand side 
management'' and add a new definition of ``Eligible Energy Efficiency 
Programs'' in alphabetical order to read as follows:


Sec.  1710.2  Definitions and rules of construction.

    (a) * * *
    Demand side management (DSM) means the deliberate planning and/or 
implementation of activities to influence Consumer use of electricity 
provided by a distribution borrower to produce beneficial modifications 
to the system load profile. Beneficial modifications to the system load 
profile ordinarily improve load factor or otherwise help in utilizing 
electric system resources to best advantage consistent with acceptable 
standards of service and lowest system cost. Load profile modifications 
are characterized as peak clipping, valley filling, load shifting, 
strategic conservation, strategic load growth, and flexible load 
profile. (See, for example, publications of the Electric Power Research 
Institute (EPRI), 3412 Hillview Avenue, Palo Alto, CA 94304, especially 
``Demand-Side Management Glossary'' EPRI TR-101158, Project 1940-25, 
Final Report, October 1992.) DSM includes energy conservation programs. 
It does not include sources of electrical energy such as renewable 
energy systems unless the power flow into the grid from such an 
interconnected resource is incidental to the operation of the source. A 
small scale renewable energy source with a nameplate capacity 50 
percent or less than the average anticipated load of the associated end 
user(s) is presumed to be incidental.
* * * * *
    Eligible Energy Efficiency and Conservation Programs (Eligible EE 
Program) means an energy efficiency and conservation program that meets 
the requirements of subpart H of this part.
* * * * *

Subpart C--Loan Purposes and Basic Policies


Sec.  1710.100  [Amended]

    3. In Sec.  1710.100, amend the first sentence by adding the words 
``efficiency and'' before ``energy conservation.''


Sec.  1710.101  [Amended]

    4. In Sec.  1710.101, amend the second sentence of paragraph (b) by 
adding the word ``direct'' before ``loans to individual Consumers.''


Sec.  1710.102  [Amended]

    5. Amend Sec.  1710.102 as follows:
    a. Amend the first sentence of paragraph (a) of by adding ``energy

[[Page 43729]]

efficiency and'' before ``energy conservation.''
    b. Amend the first sentence of paragraph (b) by adding ``energy 
efficiency and'' before ``energy conservation.''
    6. Amend Sec.  1710.106 by adding a new paragraph (a)(6), and 
revising paragraphs (c)(1) and (d) to read as follows:


Sec.  1710.106  Uses of loan funds.

    (a) * * *
    (6) Eligible Energy Efficiency and Conservation Programs pursuant 
to subpart H of this part.
* * * * *
    (c) * * *
    (1) Electric facilities, equipment, appliances, or wiring located 
inside the premises of the Consumer, except for assets financed 
pursuant to an Eligible EE Program, and qualifying items included in a 
loan for demand side management or energy resource conservation 
programs, or small scale renewable energy systems.
* * * * *
    (d) A distribution borrower may request a loan period of up to 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 and DSM activities will 
be determined on a case by case basis. 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 RUS requirements for loan feasibility and loan 
security set forth in Sec. Sec.  1710.112 and 1710.113, respectively.
* * * * *


Sec.  1710.109  [Amended]

    7. In Sec.  1710.109 amend the first sentence of paragraph (a) by 
adding the words ``energy efficiency and conservation program work 
plan,'' after ``construction work plan.''
    8. Amend Sec.  1710.115 by adding a new paragraph (c) to read as 
follows:


Sec.  1710.115  Final maturity.

* * * * *
    (c) The term for loans made to finance Eligible EE Programs will be 
determined in accordance with Sec.  1710.408 of this part.
* * * * *


Sec.  1710.120  [Amended]

    9. In Sec.  1710.120 add the words ``energy efficiency and 
conservation program work plans,'' after ``construction work plans,''

Subpart D--Basic Requirements for Loan Approval

    10. Amend Sec.  1710.152 by adding a new paragraph (e) to read as 
follows:


Sec.  1710.152  Primary support documents.

* * * * *
    (e) EE Program work plan (EEPWP). In the case of a loan application 
to finance an Eligible Energy Efficient Program, an EE Program work 
plan shall be prepared in lieu of a traditional CWP required pursuant 
to paragraph (b) of this section. The requirements for an EEPWP are set 
forth in Sec.  1710.255 and in subpart H of this part.

Subpart E--Load Forecasts

    11. Amend Sec.  1710.202 by adding a new paragraph (d) to read as 
follows:


Sec.  1710.202  Requirement to prepare a load forecast--power supply 
borrowers.

* * * * *
    (d) Notwithstanding paragraphs (a) through (c) of this section, a 
power supply borrower that has an outstanding loan for an Eligible EE 
Program is required to maintain an approved load forecast and an 
approved load forecast work plan on an ongoing basis.
    12. Amend Sec.  1710.203 by adding a new paragraph (f) to read as 
follows:


Sec.  1710.203  Requirement to prepare a load forecast--distribution 
borrowers.

* * * * *
    (f) Notwithstanding paragraphs (a) through (e) of this section, a 
distribution borrower that has an outstanding loan for an Eligible EE 
Program is required to maintain an approved load forecast and an 
approved load forecast work plan on an ongoing basis.


Sec.  1710.205  [Amended]

    13. In Sec.  1710.205 amend paragraph (b)(5) by adding the words 
``and energy efficiency and conservation program'' after ``demand side 
management''.

Subpart F--Construction Work Plans and Related Studies

    14. Add Sec.  1710.255 to subpart F to read as follows:


Sec.  1710.255  Energy efficiency work plans--energy efficiency 
borrowers.

    (a) All energy efficiency borrowers must maintain a current EEWP 
approved by their board of directors covering all new construction, 
improvements, replacements, and retirements of energy efficiency 
related equipment and activities;
    (b) An energy efficiency borrower's EEWP shall cover a period of 
between 2 and 4 years, and include all facilities to be constructed or 
improved which are eligible for RUS financing, whether or not RUS 
financial assistance will be sought or be available for certain 
facilities. The term for any RUS financing provided for the facilities 
may be up to 30 years for ground source heat pump systems and up to 15 
years for all other energy efficiency improvements and installations. 
The construction period covered by an EEWP in support of a loan 
application shall not be shorter than the loan period requested for 
financing of the facilities;
    (c) The borrower's EEWP may only include facilities, equipment and 
other activities that have been approved by RUS as a part of an 
Eligible Energy Efficiency and Conservation Program pursuant to subpart 
H of this part;
    (d) The borrower's EEWP must be consistent with the documentation 
provided as part of the current RUS approved EE Program as outlined in 
Sec.  1710.410(c); and
    (e) The borrower's EEWP must include an estimated schedule for the 
implementation of included projects.

Subpart G--Long Range Financial Forecasts

    15. Amend Sec.  1710.300 by redesignating paragraphs (d)(3) through 
(d)(5) as paragraphs (d)(4) through (d)(6) respectively; and adding a 
new paragraph (d)(3) to read as follows:


Sec.  1710.300  General.

* * * * *
    (d) * * *
    (3) RUS-approved EE Program work plan;
* * * * *


Sec.  1710.302  [Amended]

    16. In Sec.  1710.302 amend paragraph (d)(5) by removing the 
reference ``Sec.  1710.300(d)(5)'' and adding in its place ``Sec.  
1710.300(d)(6)''.

Subpart I--Application Requirements and Procedures for Loans

    17a. In subpart I, redesignate Sec. Sec.  1710.400 through 1710.407 
as Sec. Sec.  1710.500 through 1710.507, respectively.
    17b. Add subpart H consisting of Sec. Sec.  1710.400 through 
1710.499, to read as follows:
Subpart H--Energy Efficiency and Conservation Loan Program
Sec.
1710.400 Purpose.

[[Page 43730]]

1710.401 RUS Policy.
1710.402 Scope.
1710.403 General.
1710.404 Definitions.
1710.405 Eligible energy efficiency and conservation programs.
1710.406 Eligible activities and investments.
1710.407 Business plan.
1710.408 Quality assurance plan.
1710.409 Loan provisions.
1710.410 Application documents.
1710.411 Analytical support documentation.
1710.412 Borrower accounting methods, management reporting and 
audits
1710.413 Compliance with other laws and regulations.
1710.414-1710.499 [Reserved]

Subpart H--Energy Efficiency and Conservation Loan Program


Sec.  1710.400  Purpose.

    This subpart establishes policies and requirements that apply to 
loans and loan guarantees to finance Energy Efficiency and Conservation 
programs (EE Programs) undertaken by an eligible utility system to 
finance demand side management, energy efficiency and conservation, or 
on-grid and off-grid renewable energy system programs that will result 
in the better management of their system load growth, a more beneficial 
load profile, or greater optimization of the use of alternative energy 
resources in their service territory.


Sec.  1710.401  RUS policy.

    EE Programs under this part may be financed at the distribution 
level or by an electric generation and transmission provider. RUS 
encourages borrowers to coordinate with the relevant member systems 
regarding their intention to implement a program financed under this 
part. RUS also encourages borrowers to leverage funds available under 
this subpart with State, local, or other funding sources that may be 
available to implement such programs.


Sec.  1710.402  Scope.

    This subpart adapts and modifies, but does not supplant, the 
requirements for all borrowers set forth elsewhere where the purpose of 
the loan is to finance an approved EE program. In the event there is 
overlap or conflict between this subpart and the provisions of this 
part 1710 or other parts of the Code of Federal Regulations, the 
provisions of this subpart will apply for loans made or guaranteed 
pursuant to this subpart.


Sec.  1710.403  General.

    EE Programs financed under this subpart may be directed at all 
forms of energy consumed within a utility's service territory, not just 
electricity, where the electric utility is in a position to facilitate 
the optimization of the energy consumption profile within its service 
territory and do so in a way that enhances the financial or physical 
performance of the rural electric system and enables the repayment of 
the energy efficiency loan.


Sec.  1710.404  Definitions.

    For the purpose of this subpart, the following terms shall have the 
following meanings. In the event there is overlap or conflict between 
the definitions contained in Sec.  1710.2, the definitions set forth 
below will apply for loans made or guaranteed pursuant to this subpart.
    British thermal unit (Btu) means the quantity of heat required to 
raise one pound of water one degree Fahrenheit.
    Cost effective means the cost of an EE Program is less than the 
financial benefit of the program over time. The cost of a program for 
this purposes shall include the costs of incentives, measurement and 
verification activity and administrative costs, and the benefits shall 
include the value of energy saved, the value of corresponding avoided 
generation, transmission or distribution and reserve investments as may 
be displaced or deferred by program activities.
    Demand means the electrical load averaged over a specified interval 
of time. Demand is expressed in kilowatts, kilovolt amperes, kilovars, 
amperes, or other suitable units. The interval of time is generally 15 
minutes, 30 minutes, or 60 minutes.
    Demand savings means the quantifiable reduction in the load 
requirement for electric power, usually expressed in kilowatts (kW) or 
megawatts (MW) such that it reduces the cost to serve the load.
    Eligible borrower means a utility system that has direct or 
indirect responsibility for providing retail electric service to 
persons in a rural area.
    Energy audit means an inspection and analysis of energy flows in a 
building, process, or system with the goal of identifying opportunities 
to enhance energy efficiency. The activity should result in an 
objective standard- based technical report containing recommendations 
for improving the energy efficiency. The report should also include a 
cost benefit analysis reflecting the estimated benefits and costs of 
pursuing each recommendation.
    Energy efficiency and conservation measures means equipment, 
materials and practices that when installed and used at a Consumer's 
premise result in a verifiable reduction in energy consumption, 
measured in Btus, or demand as measured in Btu-hours, or both, at the 
point of purchase relative to a base level of output. The ultimate goal 
is the reduction of utility energy needs.
    Energy efficiency and Conservation program (EE Program) means a 
program of activities undertaken or financed by a utility within its 
service territory to reduce the amount or rate of energy used by 
Consumers relative to a base level of output.
    HVAC means heating, ventilation, and air conditioning.
    Load means the Power delivered to power utilization equipment 
performing its normal function.
    Load factor means the ratio of the average load over a designated 
period of time to the peak load occurring in the same period.
    Net Utility Plant means Total Utility Plant net of accumulated 
depreciation.
    Peak demand (or maximum demand) means the highest demand measured 
over a selected period of time, e.g., one month.
    Peak demand reduction means a decrease in electrical demand on an 
electric utility system during the system's peak period, calculated as 
the reduction in maximum average demand achieved over a specified 
interval of time.
    Power means the rate of generating, transferring, or using energy. 
The basic unit is the watt, where one Watt is approximately 3.41213 
Btu/hr.
    Re-lamping means the initial conversion of bulbs or light fixtures 
to more efficient lighting technology but not the replacement of like 
kind bulbs or fixtures after the initial conversion.
    Seasonal Energy Efficiency Rating (SEER) means the commonly used 
measure of efficiency of Consumer central air conditioners and heat 
pumps. It is the ratio of cooling output divided by electric energy 
input (Btu/Wh).
    SI means the International System of Units: the modern metric 
system.
    Smart Grid Investments means capital expenditures for devices or 
systems that are capable of providing real time, two way (utility and 
Consumer) information and control protocols for individual Consumer 
owned or operated appliances and equipment, usually through a Consumer 
interface or smart meter.
    Ultimate Recipient means a Consumer that receives a loan from a 
borrower under this subpart.
    Utility Energy Services Contract (UESC) means a contract whereby a 
utility provides a Consumer with comprehensive energy efficiency 
improvement services or demand reduction services.

[[Page 43731]]

    Utility System means an entity in the business of providing retail 
electric service to Consumers (distribution entity) or an entity in the 
business of providing wholesale electric supply to distribution 
entities (generation entity) or an entity in the business of providing 
transmission service to distribution or generation entities 
(transmission entity), where, in each case, the entities provide the 
applicable service using self-owned or controlled assets under a 
published tariff that the entity and any associated regulatory agency 
may adjust.
    Watt means the SI unit of power equal to a rate of energy transfer 
(or the rate at which work is done), of one joule per second.


Sec.  1710.405  Eligible energy efficiency and conservation programs.

    (a) General. Eligible EE Programs shall:
    (1) Be developed and implemented by an Eligible borrower and 
applied within its service territory;
    (2) Consist of eligible activities and investments as provided in 
Sec.  1710.406
    (3) Provide for the use of State and local funds where available to 
supplement RUS loan funds;
    (4) Incorporate the applicant's policy applicable to the 
interconnection of distributed resources;
    (5) Incorporate a business plan that meets the requirements of 
Sec.  1710.407;
    (6) Incorporate a quality assurance plan that meets the 
requirements of Sec.  1710.408;
    (7) Demonstrate that the program can be expected to be Cost 
effective;
    (8) Demonstrate that the program will have no net negative 
cumulative impact on the borrower's financial condition over the time 
period contemplated in the analytical support documents provided 
pursuant to Sec.  1710.411;
    (9) Demonstrate energy savings or peak demand reduction for the 
service territory overall; and
    (10) Be approved in writing by RUS prior to the investment of funds 
for which reimbursement will be requested.
    (b) Financial Structures. Eligible EE Programs may provide for 
direct recoupment of expenditures for eligible activities and 
investment from Consumers as follows:
    (1) Loans made to Consumers located in a rural area where--
    (i) The Consumers may be wholesale or retail;
    (ii) The loans may be secured or unsecured;
    (iii) The loan receivables are owned by the Eligible Borrower;
    (iv) The loans are made or serviced directly by the Eligible 
Borrower or by a financial institution pursuant to a contractual 
relationship between the Eligible Borrower and the financial 
institution;
    (v) Due diligence is performed to confirm the repayment ability of 
the Consumer;
    (vi) Loans are funded only upon completion of the project financed 
or to reimburse startup costs that have been incurred;
    (vii) The rate charged the Consumer is less than or equal to the 
direct Treasury rate established daily by the United States Treasury 
pursuant to Sec.  1710.51(a)(1) or Sec.  1710.52, as applicable, plus 
1%, as of the date the Consumer loan is approved; and
    (viii) Loans are not used to refinance a preexisting loan.
    (2) A tariff that is specific to an identified rural Consumer, 
premise or class of ratepayer; or
    (3) Other financial recoupment mechanisms as may be approved by 
RUS.
    (c) Period of Performance--(1) Performance Thresholds. (i) Eligible 
EE Programs activities that are listed under Sec.  1710.406(b) should 
be designed to achieve the applicable operating performance thresholds 
within one year of the date of installation of the facilities.
    (ii) All activities other than those included in subparagraph 
(c)(1)(i) above should be designed to achieve the applicable operating 
performance targets within the time period contemplated by the analytic 
support documents for the overall EE Program as approved by RUS.
    (2) Cost effectiveness. Eligible EE Programs must demonstrate that 
Cost effectiveness as measured for the program overall will be achieved 
within five years of initial funding.


Sec.  1710.406  Eligible activities and investments.

    (a) General. Eligible program activities and investments:
    (1) Shall be designed to improve energy efficiency or managed 
demand on the customer side of the meter;
    (2) Shall be Cost effective in the aggregate after giving effect to 
all activities and investments contemplated in the approved EE Program; 
and
    (3) May apply to all Consumer classes.
    (b) Eligible activities and investments. Eligible program 
activities and investments may include, but are not limited to, the 
following:
    (1) Energy efficiency and conservation measures where assets 
financed at a Consumer premises can be characterized as an integral 
part of the real property that would typically transfer with the title 
under applicable state law.
    (2) Small Scale Renewable Energy Systems, including--
    (i) On or Off Grid Renewable energy systems;
    (ii) Fuel cells;
    (3) Demand side management (DSM) investments excluding Smart Grid 
Investments;
    (4) Energy audits;
    (5) Utility Energy Services Contracts;
    (6) Consumer education and outreach programs;
    (7) Power factor correction equipment on the Consumer side of the 
meter;
    (8) Re-lamping to more energy efficient lighting; and
    (9) Other activities and investments as approved by RUS as part of 
the EE Program
    (c) Intermediary lending. EE Program loan funds may be used for 
direct re-lending to Consumers where the requirements of Sec.  
1710.405(b) are met
    (d) Performance thresholds.
    (1) Energy efficiency and conservation measures:
    (i) Appliance upgrades must achieve a reduction in energy 
consumption for the appliance equal to or greater than 20%;
    (ii) Cooling system improvements must be designed to achieve a SEER 
increase of not less than 20%, and the improved SEER rating must be 
greater than or equal to the minimum applicable SEER standard 
promulgated by the U.S. Department of Energy for the cooling system;
    (iii) Building envelope improvements must be designed to achieve a 
reduction of annualized baseline energy consumption (measured in Btus) 
greater than 10% for the building;
    (2) Energy audit recommendations. Only those recommendations that 
taken together will achieve an overall reduction in annualized energy 
consumption of at least 10% at the Consumer premises covered by the 
audit may be financed with RUS loan funds under this subpart.
    (3) Heating system improvements must demonstrate an annualized 
energy reduction in Btu consumption equal to or greater than 20%.
    (4) Activities not otherwise listed in this paragraph (d) must 
demonstrate energy savings which will be determined on a case by case 
basis by RUS, but in any event not less than a 10% improvement in 
energy efficiency.
    (e) The borrowers shall follow a bulletin or such other publication 
as RUS deems appropriate that contains and describes best practices for 
energy efficiency and conservation measures associated with different 
technologies. RUS will make this bulletin or publication publicly 
available and

[[Page 43732]]

revise it from time to time as RUS deems it necessary.


Sec.  1710.407  Business plan.

    An Eligible EE Program must have a business plan for implementing 
the program. The business plan must have the following elements:
    (a) Executive summary. The executive summary shall capture the 
overall objectives to be met by the Eligible EE Program and the 
timeframe in which they are expected to be achieved.
    (b) Organizational background. The background section shall include 
descriptions of the management team responsible for implementing the 
Eligible EE Program.
    (c) Marketing plan. The marketing section should identify the 
target Consumers, promotional activities to be pursued and target 
penetration rates by Consumer category and investment activity.
    (d) Operations plan. The operations plan shall include but is not 
limited to:
    (1) A list of the activities and investments to be implemented 
under the EE Program and the Btu savings goal targeted for each 
category;
    (2) An estimate of the dollar amount of investment by the utility 
for each category of activities and investments listed under paragraph 
(d)(1) of this section;
    (3) A staffing plan that identifies whether and how outsourced 
contractors or subcontractors will be used to deliver the program;
    (4) A description of the process for documenting and perfecting 
collateral arrangements for Consumer loans, if applicable; and
    (5) The overall Btu savings to be accomplished over the life of the 
EE Program.
    (e) Financial Plan. The financial plan shall include but is not 
limited to:
    (1) A schedule showing sources and uses of funds for the program;
    (2) An itemized budget for each activity and investment category 
listed in the operations plan;
    (3) A Cost effectiveness forecast for each activity and investment 
category listed in the operations plan;
    (4) Where applicable, provision for Consumer loan loss reserves. 
These loan loss reserves will not be funded by RUS.
    (5) Identify expected loan delinquency and default rates and report 
annually on deviations from the expected rates
    (f) Risk analysis. The business plan shall include an evaluation of 
the financial and operational risk associated with each activity and 
investment category listed in the operations plan, including an 
estimate of prospective Consumer loan losses consistent with the loan 
loss reserve to be established pursuant to subparagraph (e)(4) above.
    (g) The borrowers shall follow a bulletin or such other publication 
as RUS deems appropriate that contains and describes best practices for 
energy efficiency business plans. RUS will make this bulletin or 
publication publicly available and revise it from time to time as RUS 
deems it necessary.


Sec.  1710.408  Quality assurance plan.

    An Eligible EE Program must have a quality assurance plan as part 
of the program. The quality assurance plan must have the following 
elements:
    (a) Quality assurance assessments shall include the use of 
qualified energy managers or professional engineers to evaluate program 
activities and investments;
    (b) Energy audits shall be performed for energy efficiency 
investments involving the building envelope at a Consumer premises;
    (c) Energy audits must be performed by certified energy auditors; 
and
    (d) Follow up audits shall be performed within one year after 
installation on all investments made to confirm whether efficiency 
improvement expectations are being met.
    (e) In cases involving energy efficiency upgrades to a single 
system (such as a ground source heat pump) the new system must be 
designed and installed by certified and insured professionals 
acceptable to the utility.
    (f) Industry or manufacturer standard performance tests, as 
applicable, shall be required on any system upgraded as a result of an 
EE Program. This testing shall indicate the installed system is meeting 
its designed performance parameters.
    (g) In some programs the utility may elect to recommend independent 
contractors who can perform energy efficiency related work for their 
customers. In these cases utilities shall monitor the work done by the 
contractors and confirm that the contractors are performing quality 
work. Utilities should remove substandard contractors from their 
recommended lists if the subcontractors fail to perform at a 
satisfactory level.
    (h) Contractors not hired by the utility may not act as agents of 
the utility in performing work financed under this subpart.
    (i) The borrowers shall follow a bulletin or other publication that 
RUS deems appropriate and contains and describes best practices for 
energy efficiency quality assurance plans. RUS will make this bulletin 
or publication publicly available and revise it from time to time as 
RUS deems it necessary.


Sec.  1710.409  Loan provisions.

    (a) Loan term. The maximum term for loans under this subpart shall 
be 15 years unless the loans relate to ground source loop investments. 
The maximum term for loans for ground source loop investments only 
shall be 30 years. Ground source loop investments as the term is used 
in this paragraph do not include ancillary equipment related to ground 
source heat pump systems.
    (b) Loan feasibility. Loan feasibility must be demonstrated for all 
loans made under this subpart. Loans made under this subpart shall be 
secured.
    (c) Reimbursement for completed projects. (1) A borrower may 
request an initial advance not to exceed five percent of the total loan 
amount for working capital purposes to implement an eligible EE 
Program;
    (2) Except for the initial advance provided for in paragraph (c)(1) 
of this section, all advances under this subpart shall be used for 
reimbursement of expenditures relating to a completed activity or 
investment; and
    (3) Advances shall be in accordance with RUS procedures.
    (d) Loan amounts. (1) Cumulative loan amounts outstanding under 
this subpart may not exceed 100% of Net Utility Plant less total 
outstanding debt inclusive of any loan applied for under this subpart; 
and
    (2) Financing for Consumer education and outreach programs may not 
exceed 4% of the total loan amount.
    (3) The Rural Utilities Service reserves the right to place a cap 
on both the total amount of funds an eligible entity can apply for, as 
well as a cap on the total amount of funds the energy efficiency and 
Conservation program can utilize in the appropriations. These caps will 
be announced regularly through the Federal Register.


Sec.  1710.410  Application documents.

    The required application documentation listed in this section is 
not all inclusive but is specific to Eligible borrowers requesting a 
loan under this subpart and in most cases is supplemental to the 
general requirements for loan applications provided for in this part 
1710:
    (a) A letter from the Borrower's General Manager requesting a loan 
under this subpart.
    (b) A copy of the board resolution establishing the EE Program that 
reflects an undertaking that funds collected in excess of then current 
amortization requirements for the related RUS loan will be redeployed 
for EE Program

[[Page 43733]]

purposes or used to prepay the RUS loan.
    (c) Current RUS-approved EE Program documentation that includes:
    (1) A Business Plan that meets the requirements of Sec.  1710.407;
    (2) A Quality Assurance Plan that meets the requirements of Sec.  
1710.408;
    (3) Analytical support documentation that meets the requirements of 
Sec.  1710.411;
    (4) A copy of RUS' written approval of the EE Program.
    (d) An EE Program work plan that meets the requirements of Sec.  
1710.255;
    (e) A statement of whether an initial working capital advance 
pursuant to Sec.  1710.409(c)(1) is included in the loan budget 
together with a schedule of how these funds will be used.
    (f) A proposed draft Schedule C pursuant to 7 CFR part 1718 that 
lists assets to be financed under this subpart as excepted property 
under the RUS mortgage, as applicable.


Sec.  1710.411  Analytical support documentation.

    Applications for loans under this subpart may only be made for 
eligible activities and investments included in an RUS-approved EE 
Program. In addition to a business plan and operations plan, a request 
for EE program approval must include analytical support documentation 
that demonstrates the program meets the requirements of Sec.  1710.303 
and assures RUS of the operational and financial integrity of the EE 
Program. This documentation must include, but is not necessarily 
limited to, the following:
    (a) A comparison of the utility's projected annual growth in demand 
after incorporating the EE Program together with an updated baseline 
forecast on file with RUS, where each includes an inventory of energy 
consuming devices used by customers in the service territory and a 
specific time horizon as determined by the utility for meeting the 
performance objectives established by them for the EE Program;
    (b) An itemized estimate of the energy savings and peak demand 
reduction to be obtained for each category of eligible activities and 
investments to be pursued;
    (c) An evaluation of the Cost effectiveness of each category of 
eligible activities and investments to be pursued under the EE Program;
    (d) Demonstration that the required periods of performance under 
Sec.  1710.405(c) can reasonably be expected to be met;
    (e) A report of discussions and coordination conducted with the 
power supplier, where applicable, issues identified as a result, and 
the outcome of this effort.
    (f) An estimate of the amount of direct investment in utility-owned 
generation that will be deferred as a result of the EE Program;
    (g) A description of efforts to identify state and local sources of 
funding and, if available, how they are to be integrated in the 
financing of the EE Program; and
    (h) Copies of sample documentation used by the utility in 
administering its EE Program.
    (i) Such other documents and reports as the Administrator may 
require.


Sec.  1710.412  Borrower accounting methods, management reporting and 
audits.

    Nothing in this subpart changes a Borrower's obligation to comply 
with RUS's accounting, monitoring and reporting requirements. In 
addition thereto, the Administrator may also require additional 
management reports that provide the agency with a means of evaluating 
the extent to which the goals and objectives identified in the EE Plan 
are being accomplished.


Sec.  1710.413  Compliance with other laws and regulations.

    Nothing in this subpart changes a Borrower's obligation to comply 
with all laws and regulations to which it is subject.


Sec. Sec.  1710.414-1710.499   [Reserved]

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

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

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

Subpart R--Lien Accommodations and Subordinations for 100 Percent 
Private Financing

    19. Amend Sec.  1717.852 by revising paragraph (b)(2)(ii) to read 
as follows:


Sec.  1717.852  Financing purposes.

* * * * *
    (b) * * *
    (2) * * *
    (ii) Renewable energy systems and RUS-approved programs of demand 
side management, energy efficiency and energy conservation; and
* * * * *

PART 1721--POST-LOAN POLICIES AND PROCEDURES FOR INSURED AND 
GUARANTEED ELECTRIC LOANS

    20. The authority citation for part 1721 continues to read as 
follows:

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

Subpart A--Advance of Funds

    21. Amend Sec.  1721.1 by revising paragraph (a) to read as 
follows:


Sec.  1721.1  Advances.

    (a) Purpose and amount. With the exception of minor projects, 
insured loan funds will be advanced only for projects that are included 
in an RUS approved borrower's construction work plan (CWP), EE Program 
work plan (EEWP), or approved amendment, and in an approved loan as 
amended. Loan fund advances can be requested in an amount representing 
actual costs incurred.
* * * * *

PART 1724--ELECTRIC ENGINEERING, ARCHITECTURAL SERVICES AND DESIGN 
POLICIES AND PROCEDURES

    22. The authority citation for part 1724 continues to read as 
follows:

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

Subpart C--Engineering Services

    23. Amend Sec.  1724.30 by revising paragraph (a) to read as 
follows:


Sec.  1724.30  Borrowers' requirements--engineering services.

* * * * *
    (a) Each borrower shall select one or more qualified persons to 
perform the engineering services involved in the planning (including 
the development of an EE Program eligible for financing pursuant to 
subpart H of part 1710 of this chapter, design, and construction 
management of the system.
* * * * *

PART 1730--ELECTRIC SYSTEM OPERATIONS AND MAINTENANCE

    24. The authority citation for part 1730 continues to read as 
follows:

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

Subpart B--Operations and Maintenance Requirements

    25. Amend Appendix A to subpart B of Part 1730 by adding a new 
paragraph 13.f. to read as follows:

[[Page 43734]]

Appendix A to Subpart B of Part 1730--Review Rating Summary, RUS Form 
300

* * * * *
    13. * * *
    f. Energy Efficiency and Conservation Program quality assurance 
compliance--Rating:----
* * * * *

    Dated: July 16, 2012.
Jonathan Adelstein,
Administrator, Rural Utilities Service.
[FR Doc. 2012-17784 Filed 7-25-12; 8:45 am]
BILLING CODE P