Exemptions of REA Operational Controls

DEPARTMENT OF AGRICULTURE

Rural Electrification Administration

7 CFR Parts 1710 and 1717

Exemptions of REA Operational Controls

AGENCY: Rural Electrification Administration, USDA.

ACTION: Interim rule with request for comments.

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

SUMMARY: Pursuant to recent amendment of section 306E of the Rural

Electrification Act, the Rural Electrification Administration (REA)

hereby amends its regulations governing policies and requirements with

respect to controls and approvals of borrower operations and the

granting of lien accommodations and subordinations. These changes apply

to electric borrowers whose net worth exceeds 110 percent of the

outstanding balance of loans made or guaranteed to them by REA.

DATES: This rule is effective on January 28, 1994. Written comments

must be received by REA or carry a postmark or equivalent by April 28,

1994.

ADDRESSES: Written comments should be addressed to Mr. F. Lamont Heppe,

Jr., Deputy Director, Program Support Staff, U.S. Department of

Agriculture, Rural Electrification Administration, room 2234-S, 14th

Street and Independence Avenue, SW., Washington, DC 20250-1500. REA

requires a signed original and 3 copies of all comments (7 CFR 1700.30

(e)). Comments will be available for public inspection during regular

business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Mr. Alex Cockey, Deputy Assistant

Administrator--Electric, U.S. Department of Agriculture, Rural

Electrification Administration, room 4037-S, 14th Street & Independence

Avenue SW., Washington, DC 20250-1500. Telephone: 202-720-9547.

SUPPLEMENTARY INFORMATION: This regulatory action is issued in

conformance with Executive Order 12866, Regulatory Planning and Review.

The Administrator of REA has determined that the Regulatory Flexibility

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

Administrator of REA has determined that this rule will not

significantly affect the quality of the human environment as defined by

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

Therefore, this action does not require an environmental impact

statement or assessment. This rule is excluded from the scope of

Executive Order 12372, Intergovernmental Consultation, which may

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

Rule titled Department Programs and Activities Excluded from Executive

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

guarantees from coverage under this Order. This rule has been reviewed

under Executive Order 12778, Civil Justice Reform. This rule: (1) Will

not preempt any State or local laws, regulations, or policies, unless

they present an irreconcilable conflict with this rule; (2) Will not

have any retroactive effect; and (3) Will not require administrative

proceedings before any parties may file suit challenging the provisions

of this rule.

The program described by this rule is listed in the Catalog of

Federal Domestic Assistance Programs under number 10.850 Rural

Electrification Loans and Loan Guarantees. This catalog is available on

a subscription basis from the Superintendent of Documents, the United

States Government Printing Office, Washington, DC 20402-9325.

Information Collection and Recordkeeping Requirements

The existing recordkeeping and reporting burdens contained in this

rule were approved by the Office of Management and Budget (OMB)

pursuant to the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et

seq.), under control numbers 0572-0017, 0572-0032, and 0572-0103.

Send questions or comments regarding these burdens or any other

aspect of these collections of information, including suggestions for

reducing the burden, to the Office of Information and Regulatory

Affairs, Office of Management and Budget, room 3201, NEOB, Washington,

DC 20503. Attention: Desk Officer for USDA.

Background

Section 306E of the Rural Electrification Act of 1936 (RE Act) was

amended on December 17, 1993, by Public Law 103-201. As amended, the

section directs the Administrator to issue interim final regulations to

minimize approval rights, requirements, restrictions, and prohibitions

imposed on the operations of electric borrowers whose net worth exceeds

110 percent of the outstanding loans made or guaranteed to the borrower

by REA. The section also directs the Administrator, when requested by a

private lender providing financing for capital investments by such

borrowers, to offer, without delay, to share the government's lien on

the borrowers' systems or subordinate the government's lien on the

property financed by the private lender.

In issuing the regulations, the Administrator is authorized to

establish requirements, guided by the practices of private lenders with

respect to similar credit risks, to ensure that the security for loans

made or guaranteed by REA is reasonably adequate. REA understands this

to mean that it may consider the practices of private lenders in

general, and not just those that have lent or are currently lending to

REA borrowers. If the regulations are not issued within 180 days of

enactment of section 306E, the Administrator may not, until the

regulations are issued, require prior approval of, or establish any

requirement, restriction, or prohibition, with respect to the

operations of any electric borrower that meets the 110 percent ratio.

Nothing in section 306E limits the authority of the Administrator to

establish terms and conditions on the use of funds from loans made or

guaranteed by REA, or to take other actions specifically authorized by

law.

Section 1710.7 added by this rule addresses the application of

section 306E of the RE Act to REA operational controls that apply in

general to REA borrowers or specifically to REA loans and loan

guarantees. The application of section 306E to lien accommodations and

subordinations is set forth in new sections 7 CFR 1717.860 and

1717.904.

Section 1710.7--Exemptions of REA Operational Controls Under Section

306E of the RE Act

This section sets forth the policy established by section 306E of

the RE Act regarding REA operational controls applied to borrowers that

meet the 110 percent net worth ratio; the procedures for determining

whether a borrower meets the 110 percent ratio; and the specific

operational controls that are or are not exempted for such borrowers.

Borrowers' net worth to REA debt ratios will be determined each

year based on data as of December 31, and borrowers will be notified in

writing of their respective ratios by May 1 of each year. If a

borrower's net worth falls below 110 percent or if the borrower

defaults on any requirement of its mortgage, loan contract, or any

other agreement with REA that has not been exempted by REA, REA may

reimpose exempted operational controls by informing the borrower in

writing.

In calculating net worth, deferred current period expenses properly

recordable in accounts 182.2 and 182.3 will be subtracted from total

margins and equities. This is the same procedure followed in 7 CFR part

1717, subpart R to determine whether a borrower has sufficient net

worth to qualify for advance approval of a lien accommodation. It is

intended to prevent net worth from being overstated by the amount of

deferred current period expenses. The accounting data used will be

based on REA's system of accounts set forth in 7 CFR part 1767. Since

sinking fund depreciation is not approved under part 1767, net worth

for borrowers using sinking fund depreciation will be calculated as if

the borrower had been using straight line depreciation.

Paragraph (c) of Sec. 1710.7 lists 13 operational controls

contained in the REA mortgage or loan contract that are exempted for

borrowers that meet the 110 percent ratio. These include, for example:

The requirement that extensions and additions to the borrower's

electric system financed by the borrower's own funds be included in an

REA-approved construction work plan; requirements on contract bidding

procedures if no REA loan funds are involved; REA approval of

construction, engineering, and architectural contracts, and the use of

REA standard forms of contracts if no REA loan funds are involved;

higher maximum limits on plant additions that may be made without REA

approval if no REA loan funds are involved; higher maximum limits on

the sale of electric power and energy to ultimate consumers without REA

approval; higher maximum limits on the voluntary sale, lease or

transfer of any capital asset, without REA approval, in exchange for

fair market value; and REA approval of the selection of a borrower's

manager, provided that the borrower is not in default.

Two of the 13 exempted operational controls are also exempted for

all other borrowers. These are the requirement to obtain REA approval

of the purchase of data processing equipment and system control

equipment (except when REA loan funds are used), and the requirement

that distribution borrowers notify REA in writing of proposed changes

in electric rates 90 days prior to the effective date of such rates.

The required notification period has been changed to 30 days.

Although the rule exempts REA approval of the selection of a

manager for borrowers that meet the 110 percent test and are not in

default, REA wishes to emphasize again the critical importance of the

selection of fully qualified and capable managers. It is the most

important of a board of director's responsibilities. REA will shortly

be issuing new guidelines on manager selection.

For the convenience of the public, paragraph (d) of Sec. 1710.7

lists examples of the operational controls and requirements that are

not exempted. The controls and requirements not exempted fall into two

categories: (1) Requirements and operational controls that are

necessary to ensure that the security for loans made or guaranteed by

REA is reasonably adequate and that the loans will be repaid, or to

accomplish other fundamental purposes of the RE Act, and (2)

requirements imposed on REA or on borrowers by law.

The nonexempted controls and requirements include, for example,

area coverage requirements; following REA construction standards and

listed materials; certain borrowers having to maintain a power

requirements study on an ongoing basis; the maintenance of minimum

levels for the Times Interest Earned Ratio and Debt Service Coverage

ratio; REA approval of certain retirements of capital credits; controls

on borrower investments; certain borrowers having to maintain an equity

development plan; requirements on maintenance and repair of the

mortgaged property; and REA accounting and auditing requirements. These

requirements and controls are believed to be reasonable in comparison

with requirements imposed by private lenders on customers presenting

similar credit risks.

Paragraph (e) of Sec. 1710.7 authorizes REA to reinstate exempted

controls and requirements if the borrower is in default on any

requirement of its mortgage, loan contract with REA, or any other

agreement with REA that has not been exempted. REA will notify the

borrower in writing of the reinstatement, and it will remain in effect

until REA determines that it is no longer needed to help ensure loan

security.

Paragraph (f) is intended to make it clear that if controls are

reinstated because the borrower defaults or its net worth drops below

110 percent of outstanding REA debt, the controls and approval rights

will apply to all applicable subsequent actions by the borrower,

including REA approval of amendments to contracts entered into by the

borrower while it was exempt from controls.

Section 1717.860--Lien Accommodations and Subordinations Under Section

306E of the RE Act

Section 1717.860 promulgates the requirements of section 306E of

the RE Act as they relate to lien accommodations and subordinations. In

determining which borrowers qualify under the 110 percent net worth to

REA debt criterion, the same calculations and procedures are used as in

Sec. 1710.7, except that the determination is made at the time of an

application for a lien accommodation or subordination and there is no

annual notice to borrowers.

Paragraph (c) of Sec. 1717.860 establishes that REA will

expeditiously approve a lien accommodation or subordination for

financing of capital investments by borrowers that meet the 110 percent

test, if the borrower is in compliance with all requirements of its

mortgage, loan contract with REA, and any other agreement with REA that

have not been exempted pursuant to REA regulations, and if the

security, including assurance of repayment, of loans made or guaranteed

by REA will remain reasonably adequate. The paragraph also lists the

information that must be included in the application for the lien

accommodation or subordination.

Paragraph (d) of Sec. 1717.860 expands the circumstances under

which a lien subordination may be obtained for investments in rural

development and other non-electric utility endeavors in the case of

borrowers that meet the 110 percent test. It provides that a borrower

that meets the 110 percent test is eligible for a lien subordination on

the specific assets financed by a loan made directly to the borrower

for rural development or other non-electric utility purposes, provided

that the outstanding balance of all such loans lien subordinated under

paragraph (d), after taking into consideration the effect of the new

loan, does not exceed 15 percent of the borrower's net worth and the

security, including assurance of repayment, of loans made or guaranteed

by REA will remain reasonably adequate after granting the lien

subordination. While the rule grants this additional latitude to

borrowers that meet the 110 percent test, REA continues to urge all

borrowers to use separate subsidiaries when making investments in rural

development or other non-electric utility endeavors.

Investments lien subordinated under paragraph (d) will be included

among those investments subject to the 15 percent of total utility

plant limitation set forth in 7 CFR 1717.654(b)(1), and granting of the

lien subordination will not constitute approval of the investment under

7 CFR part 1717 subpart N.

Paragraph (e) of Sec. 1717.860 exempts borrowers that meet the 110

percent test from the requirement of Sec. 1717.856(d) that they submit

an equity development plan with their application for a lien

accommodation or subordination if the ratio of their equity to total

assets is below a specified level.

Finally, paragraphs (a)(1)(ii) and (b)(1)(ii)(A) of Sec. 1717.852

are amended to make it clear that programs of demand side management

and energy conservation, and on-grid and off-grid renewable energy

systems are eligible for lien accommodations and subordinations.

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

This new section establishes policies and procedures, consistent

with those in Sec. 1710.7 and 1717.860, for lien accommodations for

supplemental concurrent loans made to borrowers that meet the 110

percent test.

For the reasons stated, 7 CFR chapter XVII, parts 1710 and 1717 are

amended as follows:

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

INSURED AND GUARANTEED ELECTRIC LOANS

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

follows:

Authority: 7 U.S.C. 901-950b; Delegation of Authority by the

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

Under Secretary for Small Community and Rural Development, 7 CFR

2.72, unless otherwise noted.

2. Subpart A of part 1710 is amended by adding the following

section to read as follows:

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

of the RE Act.

(a) General policy. (1) Section 306E of the RE Act directs the

Administrator to issue interim final regulations to minimize approval

rights, requirements, restrictions, and prohibitions imposed on the

operations of electric borrowers whose net worth exceeds 110 percent of

the outstanding loans made or guaranteed to the borrower by REA. The

section also directs the Administrator, when requested by a private

lender providing financing for capital investments by such borrowers,

to offer, without delay, to share the government's lien on the

borrowers' systems or subordinate the government's lien on the property

financed by the private lender.

(2) In issuing the regulations, the Administrator is authorized to

establish requirements, guided by the practices of private lenders with

respect to similar credit risks, to ensure that the security, including

the assurance of repayment, for loans made or guaranteed by REA will

remain reasonably adequate. If the regulations are not issued within

180 days of enactment of section 306E, the Administrator may not, until

the regulations are issued, require prior approval of, or establish any

requirement, restriction, or prohibition, with respect to the

operations of any electric borrower that meets the 110 percent ratio.

(3) Nothing in section 306E limits the authority of the

Administrator to establish terms and conditions on the use of funds

from loans made or guaranteed by REA, to establish loan feasibility

criteria and other requirements for the approval of REA loans or loan

guarantees, such as those set forth in this part, or to take any other

action specifically authorized by law.

(4) This section addresses the application of section 306E of the

RE Act to REA operational controls and other requirements that apply in

general to REA borrowers. The application of section 306E to lien

accommodations and subordinations is set forth in 7 CFR 1717.860 and

1717.904.

(5) The exemptions granted by this section, 7 CFR 1717.860, and 7

CFR 1717.904 apply only to REA controls and approval rights. They do

not affect the controls and approval rights of other co-mortgagees

under the REA mortgage.

(b) Determination of ratio. The following principles and procedures

will apply to the calculation of net worth as a ratio, expressed as a

percent, to the outstanding balance of all loans made or guaranteed to

the borrower by REA, hereinafter called the borrower's ``net worth to

REA debt ratio'', or simply ``the ratio'':

(1) For purposes of determining whether a borrower is exempt from

approvals, requirements, restrictions, or prohibitions imposed by REA

with respect to borrower operations, i.e., ``operational controls,''

the ratio normally will be based on data as of December 31. Net worth

will be based on the year-end financial and statistical reports

submitted by borrowers to REA, and outstanding loans made or guaranteed

by REA will be based on REA's records. The financial and statistical

reports (Form 7 for distribution borrowers and Form 12a for power

supply borrowers) are subject to REA review and revision, and they must

comply with REA's system of accounts and accounting principles set

forth in 7 CFR part 1767. Since sinking fund depreciation is not

approved under part 1767, net worth for borrowers using sinking fund

depreciation will be calculated as if the borrower had been using

straight line depreciation;

(2) Net worth will be calculated by taking total margins and

equities (Line 33 of Part C of REA Form 7 for distribution borrowers,

or Line 34 of Section B of REA Form 12a for power supply borrowers) and

subtracting assets properly recordable in account 182.2, Unrecovered

Plant and Regulatory Study Costs, and account 182.3, Other Regulatory

Assets, as defined in 7 CFR part 1767; and

(3) By no later than May 1 of each year, REA will notify each

borrower in writing of its ratio as of December 31 of the preceding

year. If a borrower's net worth to REA debt ratio exceeds 110 percent

based on the year-end data, the borrower will be exempt from the

operational controls exempted under paragraph (c) of this section until

subsequently notified in writing by REA that it is no longer exempt.

(c) Borrower operations exempted from REA controls. Borrowers who

are notified by REA in writing that their net worth to REA debt ratio

exceeds 110 percent are exempted from the operational controls of the

REA mortgage and loan contract listed in this paragraph. These

controls, which are implemented through REA regulations and other

documents, are as follows:

(1) Requirement that extensions or additions to the borrower's

electric utility system financed by the borrower's own funds, as

defined in 7 CFR 1717.652, be included in an REA-approved construction

work plan. This exemption does not apply to extensions or additions

financed by loans made or guaranteed by REA or by loans for which REA

has granted a lien accommodation or subordination;

(2) Requirements on contract bidding procedures, as set forth in

Sec. 1710.120 and other REA regulations, except when the construction

is funded directly or through reimbursements from loans made or

guaranteed by REA;

(3) REA approval of construction contracts and engineering and

architectural service contracts, and use of REA standard forms of

contracts, as set forth in Sec. 1710.120 and other REA regulations,

except when the construction is funded directly or through

reimbursements from loans made or guaranteed by REA. To be eligible for

exemption of REA approval rights, here and elsewhere in this paragraph

(c), the contracts must not contain any provisions that prohibit or

restrict the assignment of the contracts to the government upon the

exercise by REA of its remedies under security instruments securing

loans made or guaranteed by REA. Throughout this section, REA approval

of contracts also includes REA approval of contract amendments and

renewals;

(4) REA approval of the borrower's use of general funds, as defined

as ``own funds'' in 7 CFR 1717.652, for plant extensions or additions

or other investments in the borrower's electric utility system,

provided that the funds will not be reimbursed with funds from a loan

made or guaranteed by REA, and:

(i) The plant addition will not provide direct service to any

ultimate consumer having an anticipated or contract kilowatt-hour (kWh)

or maximum kilowatt (kW) demand in any year that exceeds 25 percent of

the borrower's total kWh sales or maximum kW demand recorded during the

previous calendar year; or

(ii) If the investment is for the addition or substantial

reconstruction of generation capacity, the borrower is a power supply

borrower and the addition or substantial reconstruction of capacity

will not exceed 25 megawatts. The exemption under this paragraph (ii)

does not apply to distribution borrowers;

(5) REA approval of contracts for the sale of electric power and

energy to ultimate consumers except when the kWh sales or maximum kW

demand covered by the contract is for an amount in any year that

exceeds 25 percent of the borrower's total kWh sales or maximum kW

demand during the previous calendar year;

(6) REA approval of power purchase contracts with suppliers that do

not receive financial assistance from REA, provided that the contract

is for a period of not more than 1 year and the kWh amount of energy or

maximum kW capacity to be purchased under the contract does not exceed

25 percent of the total kWh amount of energy purchased and/or generated

by the borrower, or maximum kW demand of the borrower, during the

previous calendar year;

(7) REA approval of transmission, interconnection, and power

pooling contracts that cover a period of one year or less;

(8) REA approval of contracts for the operation and management and/

or maintenance of a borrower's system, provided that the contract does

not cover all or substantially all of the borrower's system;

(9) REA approval of the voluntary sale, lease or transfer by the

borrower of any capital asset in exchange for fair market value if:

(i) The borrower is not in default under its mortgage, loan

contract with REA, or any other agreement with REA. (As used in this

section, the term default includes defaults declared by the mortgagee

as well as events that have occurred and are continuing, which, with

notice or lapse of time and notice, would become events of default.);

(ii) The proceeds of such sale, lease or transfer are applied as

required by the REA mortgage;

(iii) The value of the capital asset is less than 5 percent of net

utility plant and the aggregate value of capital assets sold, leased or

transferred in any 12-month period is less than 10 percent of net

utility plant; and

(iv) If the borrower has an REA-approved wholesale power contract

with a power supply borrower (seller), the circumstances of the sale,

lease or transfer of capital assets conform with the conditions in such

contract under which the seller may not withhold its consent to the

sale, lease or transfer. The exemption of REA approval rights under

this paragraph (c)(9) applies only to voluntary sales, leases, and

transfers, and does not affect REA's right under section 7 of the RE

Act to approve other dispositions of property by the borrower;

(10) REA approval of the selection of a borrower's manager,

provided that the borrower is not in default under its mortgage, loan

contract with REA, or any other agreement with REA. Nothing herein

shall limit the right of REA under the mortgage to request termination

of the employment of a manager in the event of a default by the

borrower;

(11) REA approval, as set forth in the loan contract, of a

borrower's selection of a bank in which funds of the borrower are or

will be deposited, provided that the borrower is not in default under

its mortgage, loan contract with REA, or any other agreement with REA.

The requirement that such bank must be a member of the Federal Deposit

Insurance Corporation is not exempted;

(12) REA approval of the purchase of data processing equipment and

system control equipment, except when funds for the equipment,

including reimbursements, derive from loans made or guaranteed by REA.

This exemption, as well as that set forth in paragraph (c)(13) of this

section, also applies to all other borrowers, i.e., those that do not

meet the 110 percent equity ratio; and

(13) Requirement that distribution borrowers notify REA in writing

of proposed changes in electric rates 90 days prior to the effective

date of such rates. Instead, the required notification period shall be

30 days.

(d) REA requirements and operational controls not exempted. All

requirements and operational controls contained in the REA mortgage and

loan contract, or otherwise imposed on borrowers pursuant to statute or

regulation, that are not specifically listed in paragraph (c) of this

section are not exempted and shall continue to apply according to their

terms. Examples of such requirements and controls not exempted are

listed in this paragraph for the convenience of the public. This list

is not exhaustive, and the absence of a requirement or control from

this list in no way means that the requirement or control has been

exempted:

(1) Requirements and operational controls contained in the REA

mortgage or loan contract that are necessary to ensure that the

security for loans made or guaranteed by REA is reasonably adequate and

that the loans will be repaid, or to accomplish other fundamental

purposes of the RE Act. Some of these also represent terms and

conditions with respect to the use by borrowers of the proceeds of

loans made or guaranteed by REA. Together, these controls include, but

are not limited to, the following:

(i) Area coverage requirements set forth in the loan contract and

in Sec. 1710.103;

(ii) Requirement that certain borrowers maintain, on an ongoing

basis, a power requirements study and a power requirements study work

plan, as set forth in Sec. 1710.201 and Sec. 1710.202;

(iii) Requirement that borrowers follow REA construction standards

and use REA accepted materials, as set forth in 7 CFR 1710.41, 7 CFR

1710.45, and 7 CFR part 1728;

(iv) Requirement that borrowers maintain, on an ongoing basis, a

long-range engineering plan and a construction work plan, as set forth

in Sec. 1710.250(b);

(v) Requirement that borrowers set rates for electric service

sufficient to maintain certain levels for the Times Interest Earned

Ratio and Debt Service Coverage ratio, as set forth in Sec. 1710.114;

(vi) Requirement that certain borrowers maintain an equity

development plan, as set forth in Sec. 1710.116;

(vii) REA approval of retirements of capital credits in excess of

amounts specifically authorized in the mortgage;

(viii) REA approval of borrower investments, loans, guarantees, and

other obligations under 7 CFR Part 1717, subpart N;

(ix) REA requirements on accounting, auditing, irregularities,

financial reporting, and access to books and records;

(x) Requirement that borrowers record the mortgage and mortgage

amendments;

(xi) Requirement that the mortgagor maintain and preserve the

priority lien of the mortgage and defend title to the mortgaged

property;

(xii) Requirements on maintenance and repair of the mortgaged

property;

(xiii) Requirements on insurance of the mortgaged property; and

(xiv) REA approval of borrower mergers and consolidations; and

(2) Requirements imposed on borrowers pursuant to statute or

regulation and not specifically exempted by paragraph (c) of this

section. See, for example, Secs. 1710.122 through 1710.127.

(e) Rescission of exemptions if borrower defaults. If a borrower is

in default with respect to any requirement of its mortgage, loan

contract with REA, or any other agreement with REA that has not been

exempted pursuant to paragraph (c) of this section or other REA

regulations, upon written notice to the borrower REA may rescind all or

any part of the exemptions granted pursuant to said regulations. The

reinstated requirements and controls will remain in effect until REA

determines that they are no longer needed to help ensure that the

security, including the assurance of repayment, for loans made or

guaranteed by REA will remain reasonably adequate.

(f) Reinstated controls. If REA controls are reinstated because the

borrower defaults or its net worth falls below 110 percent of REA debt,

such controls and approval rights will apply to all applicable

subsequent actions of the borrower, including without limitation the

amendment of contracts that the borrower entered into while eligible

for an exemption under this section.

PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND

GUARANTEED ELECTRIC LOANS

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

follows:

Authority: 7 U.S.C. 901-950b; Delegation of Authority by the

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

Under Secretary for Small Community and Rural Development, 7 CFR

2.72, unless otherwise noted.

Sec. 1717.85 [Amended]

4. Section 1717.851 is amended by adding the following new

definition:

* * * * *

Capital investment. For the purposes of Sec. 1717.860, capital

investment means an original investment in an asset that is intended

for long-term continued use or possession and, for accounting purposes,

is normally depreciated or depleted as it is used. For example, such

assets may include land, facilities, equipment, buildings, mineral

deposits, patents, trademarks, and franchises. Original investments do

not include refinancings or refundings.

* * * * *

Sec. 1717.852 [Amended]

5. Section 1717.852 is amended in the second sentence of paragraph

(a)(1)(ii) by removing the word ``and'' after ``coal handling

facilities,'' and by adding after the words ``for generation'' the

following words: ``, programs of demand side management and energy

conservation, and on-grid and off-grid renewable energy systems;''.

6. Section 1717.852 is further amended by revising paragraph

(b)(1)(ii)(A) to read as follows:

Sec. 1717.852 Financing purposes.

* * * * *

(b) * * *

(1) * * *

(ii) * * *

(A) Renewable energy systems and REA-approved programs of demand

side management and energy conservation; and

* * * * *

7. New Sec. 1717.860 is added to read as follows:

Sec. 1717.860 Lien accommodations and subordinations under section

306E of the RE Act.

(a) General. Under section 306E of the RE Act, when requested by a

private lender providing financing for capital investments by a

borrower whose net worth exceeds 110 percent of the outstanding

principal balance of all loans made or guaranteed to the borrower by

REA, the Administrator will, without delay, offer to share the

government's lien on the borrower's system or subordinate the

government's lien on the property financed by the private lender,

provided that the security, including the assurance of repayment, for

loans made or guaranteed by REA will remain reasonably adequate. To

qualify for a lien accommodation or subordination under this section,

the investment must be an original capital investment, i.e., not a

refinancing or refunding. (See Sec. 1717.851 for the definition of

capital investment.)

(b) Determination of net worth to REA debt ratio. (1) In the case

of applications for a lien accommodation, a borrower's net worth will

be based on the borrower's most recent financial and statistical

report, the data in which shall not be more than 60 days old at the

time the application is received by REA, and the outstanding debt owed

to or guaranteed by REA will be based on latest REA records available.

The financial and statistical reports (Form 7 for distribution

borrowers and Form 12a for power supply borrowers) are subject to REA

review and revision, and they must comply with REA's system of accounts

and accounting principles set forth in 7 CFR part 1767. Since sinking

fund depreciation is not approved under part 1767, net worth for

borrowers using sinking fund depreciation will be calculated as if the

borrower had been using straight line depreciation.

(2) Net worth shall be calculated by taking total margins and

equities (Line 33 of Part C of REA Form 7 for distribution borrowers,

or Line 34 of Section B of REA Form 12a for power supply borrowers) and

subtracting assets properly recordable in account 182.2, Unrecovered

Plant and Regulatory Study Costs, and account 182.3, Other Regulatory

Assets, as defined in 7 CFR part 1767.

(c) Application requirements and process. (1) If a borrower's net

worth to REA debt ratio exceeds 110 percent, as determined by REA, and

the borrower is in compliance with all requirements of its mortgage,

loan agreement with REA, and any other agreement with REA that have not

been exempted in writing by REA, if requested REA will expeditiously

approve a lien accommodation or subordination for 100 percent private

financing of capital investments, provided that the security, including

the assurance of repayment, for loans made or guaranteed by REA will

remain reasonably adequate. REA's approval will be conditioned upon

execution and delivery by the borrower of a security instrument

satisfactory to REA, if required, and such additional information,

documents, and opinions of counsel as REA may require.

(2) The application must include the following:

(i) A resolution of the borrower's board of directors requesting

the lien accommodation and including the amount and maturity of the

proposed loan, a general description of the facilities or other

purposes to be financed, the name and address of the lender, and an

attached term sheet summarizing the terms and conditions of the

proposed loan;

(ii) A certification by an authorized official of the borrower that

the borrower is in compliance with all requirements of its mortgage,

loan agreement with REA, and any other agreement with REA that have not

been exempted in writing by REA;

(iii) The borrower's financial and statistical report, the data in

which shall not be more than 60 days old when the complete application

is received by REA;

(iv) Draft copy of any new mortgage or mortgage amendment

(supplement) required by REA or the lender, unless REA has notified the

borrower that it wishes to prepare these documents itself;

(v) A copy of the loan agreement, loan note, bond or other

financing instrument, unless REA has notified the borrower that these

documents need not be submitted. These documents will not be subject to

REA approval, but may be reviewed to determine whether they contain any

provisions that would result in the security, including assurance of

repayment, for loans made or guaranteed by REA no longer being

reasonably adequate;

(vi) The following certifications and reports required by law:

(A) The certification by the project architect for any buildings to

be constructed, as required by 7 CFR 1717.850(i);

(B) A certification by an authorized official of the borrower that

flood hazard insurance will be obtained for the full value of any

buildings, or other facilities susceptible to damage if flooded, that

will be located in a flood hazard area;

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

and Other Responsibility Matters--Primary Covered Transactions, as

required by 7 CFR part 3017;

(D) A report by the borrower stating whether or not it is

delinquent on any Federal debt, and if delinquent, the amount and age

of the delinquency and the reasons therefor; and a certification, if

not previously provided, that the borrower has been informed of the

Government's collection options; and

(E) The written acknowledgement from a registered engineer or

architect regarding compliance with seismic provisions of applicable

model codes for any buildings to be constructed, as required by 7 CFR

1792.104. All other elements of an application listed in Sec. 1717.855,

Sec. 1717.856, and Sec. 1717.858(c) not listed in this paragraph (c)

are exempted.

(3) Applications from distribution borrowers are submitted to the

general field representative (GFR), while applications from power

supply borrowers are submitted to the REA Power Supply Division, or its

successor, in Washington, DC. When an application is satisfactory to

the GFR, it will be sent promptly to the Washington office. If

Washington office staff determine that an application is incomplete,

the borrower will be promptly notified in writing about the

deficiencies. When the application is complete, and if the security,

including assurance of repayment, of loans made or guaranteed by REA

will remain reasonably adequate after granting the lien accommodation

or subordination, the borrower and the lender will be promptly notified

in writing that the lien accommodation or subornation has been

approved, subject to the conditions cited in paragraph (c)(1) of this

section.

(d) Rural development and other non-electric utility investments.

Although REA recommends the use of separate subsidiaries as set forth

in Sec. 1717.858, if requested by a borrower that meets the 110 percent

equity test and all other applicable requirements of this section, REA

will provide a lien subordination on the specific assets financed in

the case of loans made directly to the borrower for rural development

and other non-electric utility purposes, provided that the outstanding

balance of all such loans lien subordinated under this paragraph (d),

after taking into consideration the effect of the new loan, does not

exceed 15 percent of the borrower's net worth and the security,

including assurance of repayment, of loans made or guaranteed by REA

will remain reasonably adequate after granting the lien subordination.

Investments lien subordinated under this paragraph shall be included

among those investments subject to the 15 percent of total utility

plant limitation set forth in 7 CFR 1717.654(b)(1), and granting of the

lien subordination will not constitute approval of the investment under

7 CFR Part 1717, subpart N.

(e) Equity development plans. Borrowers that qualify for a lien

accommodation or lien subordination under this section are exempt from

the requirement set forth in Sec. 1717.856(d) that they submit an

equity development plan as part of their application. This exemption

applies only to applications for a lien accommodation or subordination,

and does not exempt borrowers from the requirements of 7 CFR 1710.116

applicable to applications for a loan or loan guarantee from REA.

(f) Requirements and controls not exempted. All requirements and

limitations imposed with respect to lien accommodations and

subordinations by this subpart R that are not specifically exempted by

this section are not exempted and shall continue to apply according to

their terms.

8. New Sec. 1717.904 is added to read as follows:

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

(a) General policy. If a borrower's net worth to REA debt ratio

exceeds 110 percent, as determined by REA, and the borrower is in

compliance with all requirements of its mortgage, loan agreement with

REA, and any other agreement with REA that have not been exempted in

writing by REA, REA will expeditiously approve a lien accommodation for

a concurrent supplemental loan if requested in writing by the borrower,

provided that the security, including assurance of repayment, of loans

made or guaranteed by REA will remain reasonably adequate. REA's

approval will be conditioned upon execution and delivery by the

borrower of a security instrument satisfactory to REA, if required, and

such additional information, documents, and opinions of counsel as REA

may require.

(b) Determination of net worth to REA debt ratio. A borrower's

ratio of net worth to REA debt will be determined as set forth in

Sec. 1717.860(b).

(c) Requirements and controls exempted. The applicable requirements

and controls exempted by 7 CFR 1710.7(c) are also exempted with respect

to concurrent supplemental loans.

(d) Requirements and controls not exempted. All requirements and

controls applicable to concurrent supplemental financing set forth in

this subpart and other REA regulations that are not specifically

exempted by 7 CFR 1710.7(c) are not exempted and shall continue to

apply according to their terms. These include, but are not limited to:

(1) The applicable requirements listed in 7 CFR 1710.7(d); and

(2) The requirements set forth in Sec. 1717.901(a) when a borrower

requests early approval of a lien accommodation.

(e) Procedures. If a borrower meets the requirements of this

section, upon receipt of a complete application REA will promptly

notify the borrower and lender in writing that the lien accommodation

has been approved subject to the conditions set forth in paragraph (a)

of this section.

Dated: January 21, 1994.

Bob J. Nash,

Under Secretary, Small Community and Rural Development.

[FR Doc. 94-1987 Filed 1-27-94; 8:45 am]

BILLING CODE 3410-15-P