Pre-loan Policies and Procedures for Electric Loans

SUMMARY: The Rural Electrification Administration (REA) proposes to

amend its pre-loan regulations for electric loans. Key provisions of

this proposed regulation include: lengthening the allowable loan period

for insured and guaranteed electric loans for distribution,

transmission, and improvements to generation facilities to 4 years;

clarifying REA requirements for supplemental financing concurrent with

municipal rate loans; substantially modifying the requirement that

borrowers develop and maintain certain levels of equity; and clearly

setting forth the documents required for a complete loan application.

This regulation is intended to facilitate the application process for

borrowers and reduce administrative costs to the government.

DATES: Written comments must be received by REA or carry a postmark or

equivalent by October 4, 1994.

ADDRESSES: Written comments should be addressed to Sue Arnold, Program

Support Staff, U.S. Department of Agriculture, Rural Electrification

Administration, room 2230-s, 14th Street and Independence Avenue, SW.,

Washington, DC 20250-1500. REA requires a signed original and three

copies of all comments (7 CFR 1700.30 (e)). Comments will be available

for public inspection during regular business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Sue Arnold, Financial Analyst, U.S.

Department of Agriculture, Rural Electrification Administration, room

2230-s, 14th Street & Independence Avenue, SW., Washington, DC 20250-

1500. Telephone: 202-720-0736. FAX 202-742-4120.

SUPPLEMENTARY INFORMATION: This proposed rule has been determined to be

not significant for the purposes of Executive Order 12866 and therefore

has not been reviewed by the Office of Management and Budget (OMB). The

Administrator of REA has determined that the Regulatory Flexibility Act

(5 U.S.C. 601 et seq.) does not apply to this proposed rule. The

Administrator of REA has determined that this rule will not

significantly affect the quality of the human environment as defined by

the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).

Therefore, this action does not require an environmental impact

statement or assessment. The program described by this proposed rule is

listed in the Catalog of Federal Domestic Assistance Programs under

number 10.850 Rural Electrification Loans and Loan Guarantees. This

catalog is available on a subscription basis from the Superintendent of

Documents, the United States Government Printing Office, Washington, DC

20402-9325. This proposed rule is excluded from the scope of Executive

Order 12372, Intergovernmental Consultation, which may require

consultation with State and local officials. A Notice of Final Rule

titled Department Programs and Activities Excluded from Executive Order

12372 (50 FR 47034) exempts REA electric loans and loan guarantees from

coverage under this Order. This proposed rule has been reviewed under

Executive Order 12778, Civil Justice Reform. If adopted, this proposed

rule: (1) Will not preempt any state or local laws, regulations, or

policies, unless they present an irreconcilable conflict with this

rule; (2) Will not have any retroactive effect; and (3) Will not

require administrative proceedings before any parties may file suit

challenging the provisions of this rule.

Information Collection and Recordkeeping Requirements

The existing recordkeeping and reporting burdens contained in this

proposed rule were approved by OMB pursuant to the Paperwork Reduction

Act of 1980 (44 U.S.C. 3501 et seq.), under control numbers 0572-0017,

0572-0032, and 0572-0103.

Send questions or comments regarding these burdens or any other

aspect of these collections of information, including suggestions for

reducing the burden, to the Office of Information and Regulatory

Affairs, Office of Management and Budget, Attention: Desk Officer for

USDA, room 3201, NEOB, Washington, DC 20503.

Background

REA is proposing several amendments to pre-loan regulations

affecting both insured and guaranteed loans. These amendments are

intended to enhance the delivery of customer service by facilitating

the application process for borrowers, and reducing administrative

costs to the Government.

Loan Period

The first of the proposed amendments would lengthen the allowable

loan period to 4 years for both insured and guaranteed loans for the

construction of distribution and transmission facilities and for

improvements to generation facilities. The loan period, sometimes

referred to as the financing period, means the period of time during

which the facilities included in a loan application will be

constructed. Currently loans to distribution borrowers are limited to a

2 year loan period, and loans to power supply borrowers are limited to

a 3 year period. Some borrowers must apply for loans every 2 or 3 years

in order to meet their financing needs. REA believes that allowing a

longer loan period will, in the long run, significantly reduce loan

application costs to Agency customers, including REA borrowers and

supplemental lenders, as well as loan processing costs to the

Government. Borrowers would still have the option of applying for loans

for a shorter period, if they so desire, and REA reserves the right to

limit loans to a period of less than 4 years under certain

circumstances (Sec. 1710.106).

To accomplish this policy change, REA is proposing to amend the

definition of ``loan period'' (Sec. Sec. 1710.2 and 1710.106) and the

construction period required to be covered by the borrower's REA

construction work plan (Sec. 1710.251). On December 20, 1993, at 58 FR

66260, REA published a rule setting forth policies and procedures for

municipal rate loans pursuant to the Rural Electrification Loan

Restructuring Act of 1993. This regulation at 7 CFR 1714.6(a)(2) allows

not more than 6 advances of funds on any municipal rate loans. To

provide flexibility to borrowers, REA proposes increasing this number

to 8 advances if the loan period is longer than 2 years.

In conjunction with lengthening the allowable loan period, REA

proposes amendments to the requirements for automatic termination of

the Government's obligation to advance funds from insured loans.

Current regulations at 7 CFR 1785 subpart A, provide that funds from

insured loans approved on or after June 1, 1984, may be advanced for a

period of no more than 4 years from the date of the loan contract as

amended unless the borrower applies for, and the Administrator approves

an extension of the Government's obligation. Subpart A of part 1785 was

originally published May 29, 1984, at 49 FR 22266. As stated in its

preamble, the rule was intended to help assure that REA's loan funds

are used effectively and efficiently.

To allow borrowers to complete construction projects based on a

loan period of more than 2 years, REA proposes, in Sec. 1714.56, that

funds from insured loans approved on or after the effective date of the

rule proposed today may be advanced for a period of 1 year longer than

the loan period, provided that the fund advance period may not be

shorter than 4 years. For example, if the loan period is 2 or 3 years,

the period during which funds may be advanced would terminate after 4

years; if the loan period is 4 years, the fund advance period would

terminate after 5 years.

To provide borrowers with a fixed date for automatic termination,

REA is proposing that the date of the automatic termination be computed

from the date of the loan note, rather than the date of the loan

contract. On April 7, 1993, at 58 FR 18043, REA published a proposed

amendment to part 1785 that would, in effect, redesignate 7 CFR 1785

subpart A as 7 CFR 1785 subpart F. Since automatic termination of

insured electric loans is more closely related to the subject matter of

part 1714 than of part 1785, REA has determined that setting out the

requirements in detail in part 1714 would better serve the public. It

is, therefore, proposed that existing subpart A (proposed subpart F) of

part 1785 be removed.

Supplemental Financing

REA is proposing amendments to clarify policy on supplemental

financing requirements. Existing 7 CFR 1710.110 states that, except in

cases of financial hardship, applicants for a municipal rate insured

loan are required to obtain a portion of their loan funds from a

supplemental source without an REA guarantee. The method for

determining the supplemental financing percentage for each individual

loan is set forth in existing Secs. 1710.110(c)(1) and (2). For most

borrowers, this percentage is based on the borrower's plant revenue

ratio (PRR), as defined in Sec. 1710.2. To clarify the requirement for

those borrowers whose PRR changes between the time of the loan

application and the time of loan approval, REA is proposing to codify

the policy of using the PRR based on the most recent year-end data

available on the date of loan approval.

Consistent with longstanding REA policy, if termination or

rescission of an insured loan, or its associated supplemental loan

substantially affects the overall proportion of REA and supplemental

financing to a borrower, the amount of supplemental financing required

on that borrower's next municipal rate loan is adjusted to maintain the

overall proportion. Since REA loans generally carry a lower interest

rate than supplemental loans from private lenders, this policy is

intended to avoid (1) Penalizing borrowers following a loan rescission

and (2) Allowing a borrower to receive a disproportionate amount of low

interest REA financing.

The proposed amendment will clarify that the adjustment will only

be made following rescission or termination of more than 5 percent of

an insured loan subject to supplemental financing. No adjustment will

be made based on rescission of a hardship rate loan where no

supplemental financing was required. The amendment will also set forth

the formula used to compute the adjustment.

Amortization of Principal

Under current procedures, amortization of principal begins 2 years

after the date of the note for advances made during the first and

second years of the loan, and 4 years after the date of the note for

advances made during the third and fourth years. REA proposes to

continue existing policy with respect to advances made during the first

2 years of the loan. In conjunction with lengthening the allowable loan

period, REA is proposing, in Sec. 1714.58, that principal amortization

of advances made more than 2 years after the date of the note begin

with the loan payment billed in the next full month after the month of

the advances. For example, principal amortization on funds advanced any

time during the month of June of the third year after the date of the

note would begin with the bill sent to the borrower in July of that

year. In cases of financial hardship, the Administrator may approve a

principal deferment period of up to 2 years for any advances made after

the second year of the loan.

The initial 2 year deferment period allows the borrower to make

significant improvements to existing facilities and, in addition, to

place most of the new plant in service, earning revenues with which to

repay the loan. REA believes that any increase in scheduled payments

after the second year of the loan will represent only a fraction of a

borrower's total scheduled debt service payments and an even smaller

fraction of its total costs. Any increase in principal payments during

these later years will be offset by reduced principal payments in

subsequent years.

Final Maturity

REA proposes a technical change in the method used to evaluate

final maturity of loans. Pursuant to Sec. 1710.115, REA loans must be

repaid with interest within a period, up to 35 years, that approximates

the expected useful life of the facilities financed. The existing rule

bases expected useful life on the weighted average of the depreciation

rates proposed by the borrower. The proposed amendment will base final

maturity on useful life, rather than on depreciation rates. Although

depreciation rates and useful life are closely related, REA believes

that basing loan maturity directly on useful life is a more

straightforward approach.

Equity Development Plans

On January 9, 1992, at 57 FR 1053, REA published regulations

requiring at 7 CFR 1710.116, that a borrower whose total equity as a

percentage of total assets is, or is projected to be, less than certain

target levels, prepare and agree to follow an equity development plan

as a condition of obtaining an REA loan. For distribution borrowers the

target equity level is 40 percent; for power supply borrowers the

target level is 20 percent. The equity development plan must be

designed to make reasonable progress toward meeting the applicable

target level during a 10-year period without, as stated in the existing

rule at 7 CFR 1710.116(d), raising power costs or retail rates for

electricity unreasonably, placing an unreasonable burden on rate

payers, or substantially reducing the borrower's ability to compete

with neighboring utilities or other energy sources.

The requirement that borrowers develop and maintain equity was

intended to strengthen the Agency's credit policies and protect the

value of its loan portfolio. In accordance with the RE Act, REA may

make a loan only if the Administrator determines that the security

therefor is reasonably adequate and such loan will be repaid in full

within the time agreed. Since a borrower's total capitalization is

equal to the sum of its equity and its debt, a low ratio of equity to

total assets indicates a correspondingly high level of debt. The equity

targets were designed to minimize cases where over leverage could

jeopardize a borrower's ability to meet its financial obligations.

While REA still believes that low levels of equity present risks to

lenders, two years of experience with the equity development plan

requirement has demonstrated that such plans are an unnecessary and

burdensome means of achieving the desired result. As stated in the

preamble to the 1992 regulation, the target level of 40 percent for

distribution borrowers was based on the experience of REA borrowers,

typical industry standards, and the long established threshold in the

REA mortgage for determining whether REA approval is required for

borrowers to retire capital credits.

At the time the rule was published, about 48 percent of

distribution borrowers had equity levels of 40 percent or more, and an

additional 31 percent had between 30 and 40 percent equity levels. At

the end of 1992, before borrowers were significantly impacted by the

new requirement, the percentage of distribution borrowers with equity

levels of 40 percent or more had increased to 53 percent, and the

percentage with levels between 30 and 40 percent had increased to about

32 percent. For power supply borrowers, the percentage of borrowers

with equity levels less than 10 percent dropped from about 60 percent

to about 50 percent between the time the 1992 rule was published and

the end of 1992.

At the same time, there has been a great deal of confusion as to

what constitutes an acceptable plan that will demonstrate reasonable

progress toward increasing equity and have no significant adverse

effects on rate payers or on the borrower's competitive position.

Consequently, REA is proposing to drop the requirement that an

equity development plan be submitted as part of a loan application. REA

does, however, continue to support and encourage borrower efforts to

achieve and maintain sound levels of equity. REA will continue to

review the borrower's total capital structure based on the borrower's

audited financial reports submitted pursuant to 7 CFR Part 1773; on

financial and statistical reports (REA Form 7 for distribution

borrowers and REA Form 12 for power supply borrowers) submitted by the

borrower to REA; the Long-Range Financial Forecast submitted in support

of the loan, and on other information known to REA. Capital structure

will be a factor in REA's evaluation of loan feasibility pursuant to

Sec. 1710.112, in determining borrower eligibility for advance approval

of a lien accommodation pursuant to 7 CFR 1717.854, and in evaluating

certain other borrower requests under the REA mortgage.

Credit Reform

A policy change mandated by the Federal Credit Reform Act of 1990

(2 U.S.C. 661f), affects loans approved on or after October 1, 1991.

The Federal Credit Reform Act requires Federal agencies to match funds

obligated, disbursed, and collected with their intended purposes.

Therefore, this rule proposes, in Sec. 1710.106(f), that advances of

funds from a loan made on or after that date be made only for primary

budget purposes included in that particular loan, unless the borrower

applies for and REA approves a budget transfer. Primary budget purposes

as listed in REA Bulletin 26-1, Budgetary Control and Advance of Loan

Funds, and on REA Form 595, Financial Requirement and Expenditure

Statement, are (1) Distribution, (2) Transmission, (3) Generation, (4)

Headquarters Facilities, (5) Acquisitions, and (6) All Other.

Loan Application Documents

Finally, REA proposes to add new subpart I to part 1710 to set

forth the documents and procedures required for a loan application. REA

has determined that publishing the entire list of loan application and

primary support documents in a single regulation would facilitate the

application process for borrowers and supplemental or other lenders.

The general requirement to submit each of the documents is set forth in

existing part 1710 or in other REA regulations. The proposed new

subpart I is simply a summary list for the convenience of the public.

To avoid imposing any unnecessary burdens, REA proposes, in some cases,

to accept copies of forms the borrower is required to submit to the

Department of Energy, instead of requiring the borrower to follow a

different format. REA is exploring possibilities for electronic

submission of certain documents.

Other Issuances

This proposed rule consolidates, updates, and, in some instances,

revises information contained in REA's Electric Operations Manual, EOM-

1 Guide for the Preparation of Electric Distribution Loan Applications

and in the following existing REA Bulletins:

20-5 Extensions of Payments of Principal and Interest

20-9 Loan Payments and Statements

26-1 Budgetary Control and Advance of Electric Loan Funds

86-3 Headquarters Facilities for Electric Borrowers

When this regulation and other related rules are effective, these

publications will be rescinded, in whole or in part, or revised. In the

future, REA bulletins will be used to provide certain procedural

information, illustrative examples, and other guidance to assist

borrowers in complying with REA's published rules.

REA believes the amended parts 1710 and 1714 will clarify pre-loan

policies and requirements, bring them up to date, facilitate

understanding and compliance by borrowers, and improve program

effectiveness.

List of Subjects

7 CFR Part 1710

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

areas.

7 CFR Part 1714

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

7 CFR Part 1785

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

For the reasons set out in the preamble, REA proposes to amend 7

CFR Chapter XVII as follows:

PART 1710--GENERAL AND PRE-LOAN POLICIES AND PROCEDURES COMMON TO

INSURED AND GUARANTEED ELECTRIC LOANS

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

follows:

Authority: 7 U.S.C. 901-950(b); Public Law 99-591, 100 Stat,

3341-16; Delegation of Authority by the Secretary of Agriculture, 7

CFR 2.23; Delegation of Authority by the Under Secretary for Small

Community and Rural Development, 7 CFR 2.72.

2. Section 1710.2 is amended by removing the existing definition of

``Loan Period'' and adding two new definitions in alphabetical order to

read as follows:

Sec. 1710.2 Definitions and rules of construction.

(a) * * *

Fund advance period means the period of time during which the

Government may advance loan funds to the borrower. See 7 CFR 1714.56.

* * * * *

Loan period means the period of time during which the facilities

included in a loan application will be constructed. It commences with

the date shown on page 1, in the block headed ``Cost Estimates as of,''

of REA Form 740c, Cost Estimates and Loan Budget for Electric

Borrowers, which is the same as the date on the Financial and

Statistical Report submitted with the loan application. The loan period

may be up to 4 years for distribution borrowers and, except in the case

of a loan for new generating and associated transmission facilities, up

to 4 years for the transmission facilities and improvements or

replacements of generation facilities for power supply borrowers. The

loan period for new generating facilities is determined on a case by

case basis.

* * * * *

3. Section 1710.106 is amended by redesignating paragraph (d) as

paragraph (e) and adding new paragraphs (d) and (f) to read as follows:

Sec. 1710.106 Uses of loan funds.

* * * * *

(d) A distribution borrower may request a loan period of 2, 3 or 4

years. Except in the case of loans for new generating and associated

transmission facilities, a power supply borrower may request a loan

period of not more than 4 years for transmission and substation

facilities and improvements or replacements of generation facilities.

The loan period for new generating facilities is determined on a case

by case basis. The loan period for DSM activities will be determined in

accordance with Sec. 1710.355. The Administrator may approve a loan

period shorter than the period requested by the borrower, if in the

Administrator's sole discretion, a loan made for the longer period

would fail to meet REA requirements for loan feasibility and loan

security set forth in Secs. 1710.112 and 1710.113, respectively.

* * * * *

(f)(1) For borrowers having one or more loans approved on or after

October 1, 1991, advances of funds will be made only for the primary

budget purposes included in the loan as shown on REA Form 740c as

amended and approved by REA, or on a construction work plan or a

construction work plan amendment approved by REA. Each advance will be

charged to the oldest outstanding note(s) having unadvanced funds for

the primary budget purpose for which the request for advances was made,

regardless of whether such notes are associated with loans approved

before or after October 1, 1991, unless any conditions on advances

under any of these notes have not been met by the borrower.

(2) For borrowers whose most recent loan was approved before

October 1, 1991, advances will be made on the oldest outstanding note

having unadvanced funds, unless any conditions on advances under such

note have not been met by the borrower.

4. Section 1710.110 is amended by revising paragraph (c)(1)(ii) and

adding a new paragraph (c)(3) to read as follows:

Sec. 1710.110 Supplemental financing.

* * * * *

(c) Supplemental financing required for municipal rate loans.--(1)

Distribution borrowers.

* * * * *

(ii) All other distribution borrowers must obtain supplemental

financing according to their plant revenue ratio (PRR), as defined in

Sec. 1710.2, based on the most recent year-end data available on the

date of loan approval, as follows:

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

Supplemental

PRR loan

percentage

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

9.00 and above............................................ 10

8.01-8.99................................................. 20

8.00 and below............................................ 30

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

* * * * *

(3) Subsequent loans. (i) If more than 5 percent of an insured loan

made prior to November 1, 1993, or of a municipal rate loan is

terminated or rescinded, the amount of supplemental financing required

in the borrower's next loan after the rescission for which supplemental

financing is required, pursuant to paragraph (a) of this section, will

be adjusted to average the actual supplemental financing portion on the

terminated or rescinded loan with the supplemental financing portion

that would have been required on the new loan according to paragraphs

(c) (1) and (2), in accordance with the formulas set forth in

paragraphs (c)(3) (ii) and (iii) of this section.

(ii) If a borrower's supplemental financing requirement as set

forth in paragraphs (a), (c)(1), and (c)(2) of this section has not

changed between the most recent loan and the loan being considered,

then the amount of supplemental financing required for the new loan

will be computed as follows:

Supplemental financing amount, new loan = [(A + B) x C] - D

where:

A = The total funds ($) actually advanced from the first loan,

including both REA loan funds and funds from the supplemental loan,

plus any unadvanced funds still available to the borrower after the

rescission.

B = The total amount ($) for facilities of the new loan request,

including both REA loan funds and funds from supplemental loans.

C = The proportion (%) of supplemental financing required on the

loans according to paragraphs (a), (c)(1) and (c)(2) of this

section.

D = The amount ($) of supplemental funds actually advanced on the

first loan, plus any unadvanced supplemental funds still available

to the borrower after the rescission.

(iii) If a borrower's supplemental financing requirement as set

forth in paragraphs (a), (c)(1), and (c)(2) of this section has changed

between the most recent loan and the loan being considered, then the

amount of supplemental financing required for the new loan will be the

weighted average of the portions otherwise applicable on the two loans

and will be computed as follows:

Supplemental financing amount, new loan = (A x C1) + (B x C2)

- D

where:

A = The total funds ($) actually advanced from the first loan,

including both REA loan funds and funds from the supplemental loan,

plus any unadvanced funds still available to the borrower after the

rescission.

B = The total amount ($) for facilities of the new loan request,

including both REA funds and funds from supplemental loans.

C1 = The proportion (%) of supplemental financing required on

the old loan according to paragraphs (a), (c)(1) and (c)(2) of this

section.

C2 = The proportion (%) of supplemental financing required on

the new loan according to paragraphs (a), (c)(1) and (c)(2) of this

section.

D = The amount ($) of supplemental funds actually advanced on the

first loan, plus any unadvanced supplemental funds still available

to the borrower after the rescission.

* * * * *

5. Section 1710.112 is amended by adding a new paragraph (b)(10) to

read as follows:

Sec. 1710.112 Loan feasibility.

* * * * *

(b) * * *

(10) The borrower's projected capitalization, measured by its

equity as a percentage of total assets, is adequate to enable the

borrower to meet its financial needs and to provide service consistent

with the RE Act. Among the factors to be considered in reviewing the

borrower's projected capitalization are the economic strength of the

borrower's service territory, the inherent cost of providing service to

the territory, the disparity in rates between the borrower and

neighboring utilities, the intensity of competition faced by the

borrower from neighboring utilities and other power sources, and the

relative amount of new capital investment required to serve existing or

new loads.

6. Section 1710.115 is amended by revising paragraph (b) to read as

follows:

Sec. 1710.115 Final maturity.

* * * * *

(b) Loans made or guaranteed by REA for facilities owned by the

borrower generally must be repaid with interest within a period, up to

35 years, that approximates the expected useful life of the facilities

financed. The expected useful life shall be based on the weighted

average of the useful lives that the borrower proposes for the

facilities financed by the loan, provided that the proposed useful

lives are deemed appropriate by REA. The proposed useful lives proposed

by the borrower for the facilities financed must be consistent with the

borrower's proposed depreciation rates for these facilities. In states

where the borrower must obtain state regulatory authority approval of

depreciation rates for rate making purposes, the depreciation rates

used for the purposes of this paragraph shall be the rates currently

approved by the state authority or rates for which the borrower plans

to seek state authority approval, provided that these rates are deemed

appropriate by REA. In other states, if the rates proposed by the

borrower are not deemed appropriate by REA, REA will base expected

useful life on the depreciation rates listed in Bulletin 183-1, or its

successor, revising such rates as necessary to reflect current industry

practice. Final maturities for loans for the implementation of programs

for demand side management and energy resource conservation and on and

off grid renewable energy sources not owned by the borrower will be

determined by REA.

* * * * *

Sec. 1710.116 [Removed and Reserved]

7. Section 1710.116 is removed and reserved.

8. Section 1710.251 is amended by revising paragraph (b) to read as

follows:

Sec. 1710.251 Construction work plans--distribution borrowers.

* * * * *

(b) A distribution borrower's CWP shall cover a construction period

of between 2 and 4 years, and include all facilities to be constructed

which are eligible for REA financing, whether or not REA financial

assistance will be sought or be available for certain facilities. Any

REA financing provided for the facilities will be limited to a 4-year

loan period. The construction period covered by a CWP in support of a

loan application shall not be shorter than the loan period requested

for financing of the facilities.

* * * * *

9. Section 1710.252 is amended by revising paragraph (b) to read as

follows:

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

* * * * *

(b) Normally a power supply borrower's CWP shall cover a period of

3 to 4 years. While comprehensive CWP's are desired, if there are

extenuating circumstances REA may accept a single-purpose transmission

or generation CWP in support of a loan application or budget

reclassification. The construction period covered by a CWP in support

of a loan application shall not be shorter than the loan period

requested for financing of the facilities.

* * * * *

10. Subpart I is added to part 1710 to read as follows:

Subpart I--Application Requirements and Procedures for Insured and

Guaranteed Loans

Sec.

1710.400 Initial contact.

1710.401 Loan application documents.

1710.402-1710.403 [Reserved]

1710.404 Additional requirements.

1710.405 Supplemental financing documents.

1710.406 Loan approval.

1710.407 Loan documents.

Subpart I--Application Requirements and Procedures for Insured and

Guaranteed Loans

Sec. 1710.400 Initial contact.

(a) Loan applicants that do not have outstanding loans from REA

should write to the Rural Electrification Administration, United States

Department of Agriculture, Washington, D.C. 20250-1500. A field or

headquarters staff representative may be assigned by REA to visit the

applicant and discuss its financial needs and eligibility. Borrowers

that have outstanding loans should contact their assigned REA general

field representative (GFR) or, in the case of a power supply borrower,

the Director, Power Supply Division. Borrowers may consult with REA

field representatives and headquarters staff, as necessary.

(b) Before submitting an application for an insured loan the

borrower shall ascertain from REA the amount of supplemental financing

required, as set forth in Sec. 1710.110.

Sec. 1710.401 Loan application documents.

(a) All borrowers. All applications for electric loans shall

include the documents listed in this paragraph. The first page of the

application shall be a list of the documents included in the

application. The borrower may use REA Form 726, Checklist for Electric

Loan Application, as this list.

(1) Transmittal letter. A letter signed by the borrower's manager

indicating the actual corporate name and taxpayer identification number

of the borrower and addressing the following items:

(i) The need for flood hazard insurance;

(ii) Breakdown of requested loan funds by state;

(iii) A listing of the counties served by the borrower;

(iv) A listing of threatened actions by third parties that could

adversely affect the borrower's financial condition, including

annexations or other actions affecting service territory, loads, or

rates; and

(v) A listing of pending regulatory proceedings pertaining to the

borrower.

(2) Board resolution. This document is the formal request by the

borrower's board of directors for a loan from REA. The board resolution

shall include:

(i) The requested loan amount, loan term, final maturity, and

method of amortization (Sec. 1710.110(b));

(ii) The sources and amounts of any supplemental or other

financing;

(iii) Authorization for REA to release appropriate information to

supplemental or other lender(s), and authorization for these lenders to

release appropriate information to REA; and

(iv) For an insured loan, a statement of whether the application is

for a municipal rate loan, with or without the interest rate cap, or a

hardship loan. If the application is for a municipal rate loan, the

board resolution must indicate whether the borrower intends to elect

the prepayment option. See 7 CFR 1714.4(c).

(3) REA Form 740c, Cost Estimates and Loan Budget for Electric

Borrowers. This form together with its attachments lists the

construction, equipment, facilities and other cost estimates from the

construction work plan or engineering and cost studies, and the sources

of financing for each component. The date on page 1 of the form is the

beginning date of the loan period and shall be the same as the date on

the Financial and Statistical Report submitted with the application

(paragraph (a)(5) of this section). Form 740c also includes the

following information, exhibits, and attachments:

(i) Description of funds and materials. This description details

the availability of materials and equipment, any unadvanced funds from

prior loans, and any general funds the borrower designates, to

determine the amount of such materials and funds to be applied against

the capital requirements estimated for the loan period.

(ii) Reimbursement schedule. This schedule lists the date, amount,

and identification number of each inventory of work orders and special

equipment summary that form the basis for the borrower's request for

reimbursement of general funds on the REA Form 740c. See Sec. 1710.109.

If the borrower is not requesting reimbursement, this schedule need not

be submitted.

(iii) Location of consumers. If the application is for a municipal

rate loan subject to the interest rate cap, or for a loan at the

hardship rate, and the average number of consumers per mile of the

total electric system exceeds 17, Form 740c must include, as a note, a

breakdown of funds included in the proposed loan to furnish or improve

service to consumers located in an urban area. See 7 CFR 1714.7(c) and

1714.8(d). This breakdown must indicate the method used by the borrower

for allocating loan funds between urban and non urban consumers.

(4) REA Form 740g, Application for Headquarters Facilities. This

form lists the individual cost estimates from the construction work

plan or other engineering study that support the need for REA financing

for any warehouse and service type facilities included, and funding

requested for such facilities shown on REA Form 740c. If no loan funds

are requested for headquarters facilities, Form 740g need not be

submitted.

(5) Financial and statistical report. Distribution borrowers shall

submit these data on REA Form 7; power supply borrowers shall use REA

Form 12. The form shall contain the most recent data available, which

shall not be more than 60 days old when received by REA.

(6) Pending litigation statement. A statement from the borrower's

counsel listing any pending litigation, including levels of related

insurance coverage and the potential effect on the borrower.

(7) Mortgage information. A new mortgage will be required if this

is a borrower's first application for a loan under the RE Act. A

restated mortgage, or a mortgage supplement will be required if there

has been a material change to the real property owned by the borrower

since the most recent REA loan, loan guarantee, or lien accommodation,

if the requested loan would cause the borrower to exceed its previously

authorized debt limit, or if REA otherwise determines it necessary. If

there has been no material change to the real property owned by the

borrower since the most recent REA loan or loan guarantee, the borrower

must submit an opinion of its counsel to that effect. If a new or

restated mortgage or a mortgage supplement is required, the borrower

must provide the following:

(i) Property schedule. For a new or restated mortgage or for a

mortgage supplement, the following information shall be submitted in a

form satisfactory to REA:

(A) A listing of the counties where the borrower's existing

electric facilities and new facilities are or will be located;

(B) A listing and description of all real property owned by the

borrower; and

(C) An opinion of the borrower's counsel certifying that the

property schedule is complete and adequate for inclusion in a security

instrument to be executed by the borrower to secure an REA loan.

(ii) Maximum debt limit. For a new mortgage, or if the proposed

loan would result in the borrower's existing mortgage debt limit being

exceeded, a resolution of the borrower's board of directors, and any

other authorizations or certifications required by State law,

certifying that a new debt limit has been legally established that is

adequate to accommodate existing indebtedness and the proposed new

financing, including any concurrent loans.

(8) Rate disparity and consumer income data. If the borrower is

applying under the rate disparity and consumer income tests for either

a municipal rate loan subject to the interest rate cap or a hardship

rate loan, the application must provide a breakdown of residential

consumers either by county or by census tract. In addition, if the

borrower serves in 2 or more states, the application must include a

breakdown of all ultimate consumers by state. This breakdown may be a

copy of Form EIA 861 submitted by the Borrower to the Department of

Energy or in a similar form. See 7 CFR 1714.7(b) and 1714.8(a). To

expedite the processing of loan applications, REA strongly encourages

distribution borrowers to provide this information to the GFR prior to

submitting the application.

(9) Standard Form 100 - Equal Employment Opportunity Employer

Report EEO-1. This form, required by the Department of Labor, sets

forth employment data for borrowers with 100 or more employees. A copy

of this form, as submitted to the Department of Labor, is to be

included in the application for an insured loan if the borrower has

more than 100 employees. See Sec. 1710.122.

(10) Form AD-1047, Certification Regarding Debarment, Suspension,

and Other Responsibility Matters--Primary Covered Transactions. This

statement certifies that the borrower will comply with certain

regulations on debarment and suspension required by Executive Order

12549, Debarment and Suspension (3 CFR, 1986 Comp., p. 189). See 7 CFR

part 3017 and Sec. 1710.123.

(11) Uniform Relocation Act assurance statement. This assurance,

which need not be resubmitted if previously submitted, provides that

the borrower shall comply with 49 CFR Part 24, which implements the

Uniform Relocation Assistance and Real Property Acquisition Policy Act

of 1970, as amended by the Uniform Relocation Act Amendments of 1987

and 1991. See Sec. 1710.124.

(12) Lobbying. The following information on lobbying is required

pursuant to 7 CFR part 3018 and Sec. 1710.125. Borrowers applying for

both insured and guaranteed financing should consult REA before

submitting this information.

(i) Certification regarding lobbying. This statement certifies that

the borrower shall comply with certain requirements with respect to

restrictions on lobbying activities.

(ii) Standard Form LLL--Disclosure of Lobbying Activities. This

disclosure form is required from those borrowers engaged in lobbying

activities.

(13) Federal debt delinquency requirements. See Sec. 1710.126. The

following documents are required:

(i) Report on Federal debt delinquency. This report indicates

whether or not a borrower is delinquent on any Federal debt.

(ii) Certification Regarding Federal Government Collection Options.

This statement certifies that a borrower has been informed of the

collection options the Federal government may use to collect delinquent

debt. The Federal government is authorized by law to take any or all of

the following actions in the event that a borrower's loan payments

become delinquent or the borrower defaults on its loans:

(A) Report the borrower's delinquent account to a credit bureau;

(B) Assess additional interest and penalty charges for the period

of time that payment is not made;

(C) Assess charges to cover additional administrative costs

incurred by the Government to service the borrower's account;

(D) Offset amounts owed directly or indirectly to the borrower

under other Federal programs;

(E) Refer the borrower's debt to the Internal Revenue Service for

offset against any amount owed to the borrower as an income tax refund;

(F) Refer the borrower's account to a private collection agency to

collect the amount due; and

(G) Refer the borrower's account to the Department of Justice for

collection.

(14) Articles of incorporation and bylaws. The following are

required if either document has been amended since the last loan

application was submitted to REA, or if this is a borrower's first

application for a loan under the RE Act:

(i) The borrower's articles of incorporation currently in effect,

as filed with the appropriate state office, setting forth the

borrower's corporate purpose; and

(ii) The bylaws currently in effect, as adopted by the borrower's

board of directors, setting forth the manner by which the borrower's

organization will be governed and regulated.

(15) State regulatory approvals. In states in which regulatory

authorities have jurisdiction over the borrower's rates, the borrower

must provide satisfactory evidence, pursuant to Secs. 1710.105 and

1710.151(f), based on the information available, such as an opinion of

counsel or of another qualified source, that the state regulatory

authority will not exclude from the borrower's rate base any of the

facilities included in the loan request, or otherwise prevent the

borrower from charging rates sufficient to repay with interest the debt

incurred for the facilities.

(16) Seismic safety certifications, if required under 7 CFR part

1792.

(17) Rates. (i) A distribution borrower shall explain any recent or

planned changes in retail rates, the status of any pending rate cases

before a state regulatory authority, or other pertinent rate

information.

(ii) A power supply borrower shall submit a schedule of its

wholesale rates currently in effect. Any changes in this schedule are

subject to REA approval.

(18) Additional supporting data. Additional supporting data may be

required by REA depending on the individual application or conditions.

Examples of such additional supporting data include information about

acquisitions, headquarters facilities, generation or transmission

facilities, large power loads or special loads.

(b) Distribution borrowers. In addition to the items in paragraph

(a) of this section, applications for loans submitted by distribution

borrowers shall include the borrower's area coverage and line extension

policies. If there have been any amendments to area coverage or line

extension policies since the last loan application submitted to REA, or

if this is a borrower's first application for a loan under the RE Act,

the borrower shall submit the board of directors' approved policies on

area coverage and line extensions. See Secs. 1710.103 and 1710.151(a).

(c) Primary support documents. In addition to the loan application,

consisting of the documents required by paragraphs (a) and (b) of this

section, all borrowers must also provide REA with the following primary

support documents pursuant to Sec. 1710.152:

(1) Along with the loan application, the borrower shall submit to

REA a Long-Range Financial Forecast (LRFF), that meets the requirements

of subpart G of this part and shall include the borrower's proposed

schedule of useful life of the facilities financed. The forecast shall

include any sensitivity analysis or analysis of alternative scenarios

required by subpart G of this part, and shall be accompanied by a

certified board resolution adopting, and indicating the board of

directors' approval of, the LRFF, and directing management to take

whatever steps may be necessary, including the filing for rate

increases, to achieve the TIER goals set forth in the LRFF.

(2) Prior to REA's acceptance of the loan application, the borrower

shall submit to REA and receive approval of:

(i) Power Requirements Study (PRS) that meets the requirements of

subpart E of this part, and is accompanied by a certified board

resolution adopting, and indicating the board of directors' approval

of, the PRS.

(ii) Construction Work Plan (CWP) and/or related engineering and

cost studies that meets the requirements of subpart F of this part, and

is accompanied by a certified board resolution adopting, and indicating

the board of directors' approval of, the CWP and/or engineering and

cost studies.

(iii) Borrower's Environmental Report (BER), or other environmental

information as required by 7 CFR part 1794.

(iv) Demand Side Management Plan and/or Integrated Resource Plan,

if required by subpart H of this part.

(d) Submission of documents. (1) Generally, all information

required by paragraphs (a), (b), and (c)(1) of this section is

submitted to REA in a single application package. The information

required by paragraph (c)(2) of this section is generally submitted to,

and approved by REA before the application is submitted.

(2) To facilitate loan review, REA urges borrowers to ensure that

their applications contain all of the information required by this

section before submitting the application to REA. Borrowers may consult

with REA field representatives and headquarters staff as necessary for

assistance in preparing loan applications.

(3) REA may, in its discretion, return an application to the

borrower if the application is not materially complete to the

satisfaction of REA within 10 months of receipt of any of the items

listed in paragraph (a) or (b) of this section. REA will generally

advise the borrower in writing at least 2 months prior to returning the

application as to the elements of the application that are not

complete.

(4) If an application is returned, an application for the same loan

purposes will be accepted by REA if satisfactory evidence is provided

that all of the information required by this section will be submitted

to REA within a reasonable time. An application for loan purposes

included in an application previously returned to the borrower will be

treated as an entirely new application.

(e) Complete applications. An application is complete when all

information required by REA to approve a loan is materially complete in

form and substance satisfactory to REA.

(f) Change in borrower circumstances. A borrower shall, after

submitting a loan application, promptly notify REA of any changes in

its circumstances that materially affect the information contained in

the loan application or in the primary support documents.

(g) Interest rate category. For pending loans, REA will promptly

notify the borrower if its eligibility for an interest rate category

changes pursuant to new information from the Department of Energy or

the Bureau of the Census. See 7 CFR 1714.

(Approved by the Office of Management and Budget under control

numbers 0572-0017, 0572-0032 and 0572-1013.)

Secs. 1710.402-1710.403 [Reserved]

Sec. 1710.404 Additional requirements.

Additional requirements are set forth in 7 CFR part 1712 for

guaranteed electric loans and 7 CFR part 1714 for insured electric

loans.

Sec. 1710.405 Supplemental financing documents.

(a) The borrower is responsible for ensuring that the loan

documents required for supplemental financing pursuant to Sec. 1710.110

are executed in a timely fashion. These documents are subject to REA

approval.

(b) Security. Any security offered by the borrower to a

supplemental lender is subject to REA approval.

Sec. 1710.406 Loan approval.

(a) A loan is approved when the Administrator signs the

administrative findings.

(b) If the loan is not approved, REA will notify the borrower.

Sec. 1710.407 Loan documents.

Following approval of a loan, REA will forward the loan documents

to the borrower for execution, delivery, recording, and filing, as

directed by REA.

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

LOANS

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

follows:

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

Delegation of Authority by the Secretary of Agriculture, 7 CFR 2.23;

Delegation of Authority by the Under Secretary for Small Community

and Rural Development, 7 CFR 2.72.

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

as follows:

Sec. 1714.6 Interest rate term.

(a) * * *

(2) The following limits apply to the number of advances of funds

that may be made to the borrower on any municipal rate loan:

(i) If the loan period is 2 years or less, no more than 6 advances;

(ii) If the loan period is greater more than 2 years, not more than

8 advances.

* * * * *

13. Subpart B is added to part 1714 to read as follows:

Subpart B--Terms of Insured Loans

Sec.

1714.50-1714.54 [Reserved]

1714.55 Advance of funds from insured loans.

1714.56 Fund advance period.

1714.57 Sequence of advances.

1714.58 Amortization of principal.

1714.59 Rescission of loans.

Subpart B--Terms of Insured Loans

Sec. 1714.50-1714.54 [Reserved]

Sec. 1714.55 Advance of funds from insured loans.

The borrower shall request advances of funds as needed. Advances

are subject to REA approval and must be requested in writing on REA

Form 595 or an REA approved equivalent. Funds will not be advanced

until the Administrator has received satisfactory evidence that the

borrower has met all applicable conditions precedent to the advance of

funds, including evidence that the supplemental financing required

under 7 CFR part 1710 and any concurrent loan guaranteed by REA are

available to the borrower under terms and conditions satisfactory to

REA.

Sec. 1714.56 Fund advance period.

(a) For loans approved on or after [the effective date of the final

rule], the fund advance period begins on the date of the loan note and

is one year longer than the loan period, but not less than 4 years. For

example, the fund advance period for a loan with a 2-year loan period

terminates automatically 4 years after the date of the loan note; a

loan with a 4-year loan period terminates automatically 5 years after

the date of the loan note. The Administrator may extend the fund

advance period on any loan if the borrower meets the requirements of

paragraph (c) of this section. As defined in 7 CFR 1710.2, the loan

period begins on the date shown on page 1 of REA Form 740c submitted

with the loan application.

(b) For loans approved between June 1, 1984, and [the effective

date of the final rule], the fund advance period begins on the date of

the loan contract, or the most recent amendment thereto, and terminates

automatically 4 years from the date of the loan contract, or the most

recent amendment thereto, except as provided in paragraph (c) of this

section.

(c) The Administrator may agree to an extension of the fund advance

period for loans approved on or after June 1, 1984, if the borrower

demonstrates to the satisfaction of the Administrator that the loan

funds continue to be needed for approved loan purposes (i.e.,

facilities included in an REA-approved construction work plan).

(1) To apply for an extension, the borrower must send to REA, at

least 120 days before the automatic termination date, the following:

(i) A certified copy of a board resolution requesting an extension

of the Government's obligation to advance loan funds;

(ii) Evidence that the unadvanced loan funds continue to be needed

for approved loan purposes; and

(iii) Notice of the estimated date for completion of construction.

(2) In the case of financial hardship, as determined by the

Administrator, REA may agree to an extension of the fund advance period

even though the borrower has failed to meet the 120-day requirement of

paragraph (c)(1) of this section.

(3) If the Administrator approves a request for an extension, REA

will notify the borrower in writing of the extension and the terms and

conditions thereof. An extension will be effective only if it is

obtained in writing prior to the automatic termination date.

(d) Advances of funds from loans approved before June 1, 1984, are

generally made during the first 6 years of the note.

(e) REA will rescind the balance of any loan funds not advanced to

a borrower as of the final date approved for advancing funds.

Sec. 1714.57 Sequence of advances.

(a) Except as set forth in paragraph (b) of this section,

concurrent loan funds will be advanced in the following order:

(1) 50 percent of the REA insured loan funds;

(2) 100 percent of the supplemental loan funds;

(3) The remaining amount of the REA insured loan funds.

(b) At the borrower's request and with REA approval, all or part of

the supplemental loan funds may be advanced before funds in paragraph

(a)(1) of this section.

Sec. 1714.58 Amortization of principal.

(a) For insured loans approved on or after [the effective date of

this section]:

(1) Amortization of funds advanced during the first 2 years after

the date of the note shall begin no later than 2 years from the date of

the note. Except as set forth in paragraph (a)(2) of this section,

amortization of funds advanced 2 years or more after the date of the

note shall begin with the scheduled loan payment billed in the month

following the month of the advance.

(2) For advances made 2 years or more after the date of the note,

the Administrator may authorize deferral of amortization of principal

for a period of up to 2 years from the date of the advance if the

Administrator determines that failure to authorize such deferral would

adversely affect either the government's financial interest or the

achievement of the purposes of the RE Act.

(b) For insured loans approved before [the effective date of this

section], amortization of principal shall begin 2 years after the date

of the note for advances made during the first and second years of the

loan, and 4 years after the date of the note for advances made during

the third and fourth years.

Sec. 1714.59 Rescission of loans.

(a) A borrower may request rescission of a loan with respect to any

funds unadvanced by submitting a certified copy of a resolution by the

borrower's board of directors.

(b) REA may rescind loans pursuant to Sec. 1714.56.

(c) Borrowers who prepay REA loans at a discounted present value

pursuant to 7 CFR part 1786, subpart F, are required to rescind the

unadvanced balance of all outstanding electric notes pursuant to 7 CFR

1786.158(j).

PART 1785--LOAN ACCOUNT COMPUTATIONS, PROCEDURES AND POLICIES FOR

ELECTRIC AND TELEPHONE BORROWERS

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

follows:

Authority: 7 U.S.C. 901 et seq.; Title 1, Subtitle D, sec. 1403,

Pub. L. 100-203, 101 Stat. 1330; Delegation of Authority by the

Secretary of Agriculture, 7 CFR 2.23; Delegation of Authority by the

Under Secretary for Small Community and Rural Development, 7 CFR

2.72.

Subpart A [Removed and Reserved]

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

Dated: July 27, 1994.

Bob J. Nash,

Under Secretary, Small Community and Rural Development.

[FR Doc. 94-18772 Filed 8-4-94; 8:45 am]

BILLING CODE 3410-15-P