Use of Consultants Funded by Borrowers

SUMMARY: The Rural Utilities Service (RUS) hereby establishes

procedures and policies pursuant to which a borrower under the RE Act

may fund consultants used by the Administrator for financial, legal,

engineering, environmental and other technical advice and services. The

use of the consultants will assist RUS in the expeditious review of

applications for financial assistance or other approvals sought by

borrowers.

EFFECTIVE DATE: This rule is effective October 16, 1996.

FOR FURTHER INFORMATION CONTACT: F. Lamont Heppe, Jr., Director,

Program Support and Regulatory Analysis, U.S. Department of

Agriculture, Rural Utilities Service, STOP 1522, Washington, D.C.

20250-1522. Telephone: (202) 720-0736.

SUPPLEMENTARY INFORMATION: This final rule has been determined to be

not significant for purposes of Executive Order 12866, Regulatory

Planning and Review, and therefore has not been reviewed by the Office

of Management and Budget (OMB). The Administrator of RUS has determined

that a rule relating to the RUS electric loan program is not a rule as

defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and,

therefore, the Regulatory Flexibility Act does not apply to this rule.

The Administrator of RUS has determined that this rule will not

significantly affect the quality of the human environment as defined by

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

Therefore, this action does not require an environmental impact

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

Executive Order 12372, Intergovernmental Consultation, which may

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

Rule titled Department Programs and Activities Excluded from Executive

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

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

in accordance with Executive Order 12988 , Civil Justice Reform. RUS as

determined that this rule meets the applicable standards provided in

Section 3 of the Executive Order.

The programs covered by this rule are listed in the Catalog of

Federal Domestic Assistance Programs under numbers 10.850, Rural

Electrification Loans and Loan Guarantees, 10.851, Rural Telephone

Loans and Loan Guarantees, and 10.852, Rural Telephone Bank Loans. 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 recordkeeping and reporting burden contained in this rule will

be submitted to the Office of Management and Budget (OMB) for approval

under control number 0572-0108. The paperwork contained in this rule

will not be effective until approved by OMB.

Send questions or comments regarding any other aspect of this

collection of information, including suggestions for reducing the

burden, to F. Lamont Heppe, Jr., Director, Program Support and

Regulatory Analysis, U.S. Department of Agriculture, Rural Utilities

Service, STOP 1522, Washington, D.C. 20250-1522.

Background

On January 2, 1996, at 61 FR 21, the Rural Utilities Service (RUS)

published a proposed rule, 7 CFR Part 1789, Use of Consultants Funded

by Borrowers, which proposed the agency's policies and procedures

pursuant to which a borrower may fund consultants used by the

Administrator for financial, legal, engineering, environmental and

other technical advice and services.

A total of eleven different organizations commented on the proposed

rule. Comments were received from the National Rural Electric

Cooperative Association (NRECA), the National Telephone Cooperative

Association, CoBank, the National Rural Utilities Cooperative Finance

Corporation (CFC), four borrowers, an engineering services firm, a law

firm and the U.S. Department of Treasury.

Comments by the NRECA asserted that staffing constraints at RUS and

the Office of General Counsel (OGC) have often caused burdensome and

costly delays for RUS borrowers in their applications and approval

requests. NRECA recommended allowing the borrower to initiate RUS'

consideration of use of a borrower-funded consultant. NRECA observed

that following the lengthy full and open competition provisions of the

Federal Acquisition Regulation (FAR) would, in many cases, negate the

usefulness of hiring a third party consultant, and urged that RUS

consider authorized exceptions to FAR's full competition requirements.

RUS is of the view that the rule does not prohibit a borrower from

initiating a discussion with the applicable regional director; however

a requirement that obligates RUS program officials to extensive

justification for turning down requests, is unnecessary and takes time

away from the administration of RUS programs.

RUS agrees that the application of the FAR may diminish the

usefulness of hiring a third party consultant and will consider

authorized exceptions to FAR's full competition requirements. RUS will

continue to investigate ways in which the procurement process can be

streamlined.

NRECA and two other commentators protested that the conflict of

interest provisions were too restrictive. They argue that timely

response to borrower approval requests required, in many cases, that

the consultant have extensive, ready knowledge of RUS programs. NRECA

stated that there is a relatively small cadre of lawyers, accountants,

and other professionals who are versed in the unique aspects of RUS

programs. RUS is of the view that the agency has sufficient internal

expertise with respect to specific attributes of the cooperative

industry. However, the definition of organizational conflict of

interest has

[[Page 48606]]

been modified to conform with the definition found in the FAR. The

determination of whether or not a conflict exists, using the FAR

definition, may be made by either the Administrator or the responsible

contracting officer.

NRECA, CoBank and CFC commented that RUS should consider a letter

of credit payment mechanism as an alternative to the proposed escrow

account arrangement. CFC and Oglethorpe supported direct payment from

borrowers to consultants. The use of a letter of credit payment

mechanism was one of the first inquiries made by RUS as the agency

sought to implement this law. RUS is of the view that direct payment by

borrowers to consultants can undermine the integrity of the client-

consultant relationship. The final rule is unchanged from the proposed

rule with respect to the payment mechanism, but RUS will continue to

explore whether a letter of credit mechanism may be substituted for the

escrow account mechanism.

One commenter argued that borrowers should be able to select the

consultant used by RUS. Alternatively, the commenter said that a

borrower should be able to veto RUS' selection of a consultant. Nothing

in the proposed rule prohibits borrowers from making recommendations or

suggestions to RUS regarding the choice of consultant. Under the final

rule, the government retains the authority to select the consultant to

be used.

Oglethorpe proffered the third party contracting process set up by

the Federal Energy Regulatory Commission (FERC) for preparing

environmental impact statements as a model for RUS consultant

procurements. RUS followed the FERC developments with great interest

and actively explored the possibility of emulating it, with some

modifications. The agency was particularly interested in adopting the

``pre-qualified list'' approach. The statutory authorizations are

sufficiently different so as to preclude the agency from emulating the

FERC third party contracting process. Among other examples of how the

FERC process differs from RUS, the guidance documents issued by FERC in

this regard emphasize that those are not federal procurements.

The only law firm which commented urged that the use of legal

consultants should be kept to an absolute minimum. The firm voiced the

concern that the proposed rule will create a class of ``professional

consultants'' with a vested interest in promoting their participation

in RUS transactions. From this, the firm projects the possibility of a

proliferation in the use of legal consultants by RUS and its borrowers,

thereby resulting in significantly increased time consumption and

transaction costs for matters involving RUS approval.

RUS believes that many aspects of this final rule will be self-

policing. The use of borrower funded consultants is a joint decision on

the part of RUS and the borrower. If borrowers elect to incur the costs

associated with funding third party consultants, it will be because it

is to their advantage to do so. Proliferation under those circumstances

is not necessarily undesirable.

List of Subjects in 7 CFR Part 1789

Administrative practice and procedure, Electric power, Electric

utilities, Legal services, Loan programs--energy, Loan programs--

telecommunications, Reporting and recordkeeping requirements.

For the reasons stated, RUS amends 7 CFR Chapter XVII to add a new

part 1789 to read as follows:

PART 1789--USE OF CONSULTANTS FUNDED BY BORROWERS

Subpart A--Policy and Procedures With Respect to Consultant

Services Funded by Borrowers--General

Sec.

1789.150 Purpose.

1789.151 Definitions.

1789.152 Policy.

1789.153 Borrower funding.

1789.154 Eligible borrowers.

1789.155 Approval criteria.

1789.156 Proposal procedure.

1789.157 Consultant contract.

1789.158 Implementation.

1789.159 Contract administration.

1789.160 Access to information.

1789.161 Conflicts of interest.

1789.162 Indemnification agreement.

1789.163 Waiver.

1789.164--1789.165 [Reserved]

Subpart B--Escrow Account Funding and Payments

1789.166 Terms and conditions of funding agreement.

1789.167 Terms and conditions of escrow agreement.

1789.168--1789.175 [Reserved]

Authority: 7 U.S.C. 901-950b; Pub. L. 103-354, 108 Stat. 3178 (7

U.S.C. 6941 et seq.).

Subpart A--Policy and Procedures With Respect to Consultant

Services Funded by Borrowers--General

Sec. 1789.150 Purpose.

This part sets forth policies and the procedures for implementing

subsection (c) of section 18 of the Rural Electrification Act of 1936,

as amended (7 U.S.C. 901 et seq.)(RE Act) which authorizes the Rural

Utilities Service (RUS) to use the services of Consultants funded by

the Borrowers to facilitate timely action on Applications by Borrowers

for financial assistance and other approvals.

Sec. 1789.151 Definitions.

As used in this part:

Administrator means the Administrator of the Rural Utilities

Service (RUS).

Application means a request for financial assistance under the RE

Act or such other approvals as may be required of the RUS pursuant to

the terms of outstanding loan or security instruments or otherwise.

Borrower means any organization which has an outstanding loan(s)

made or guaranteed by RUS or its predecessor agency, the Rural

Electrification Administration (REA) under the RE Act or any

organization which has submitted or submits an Application before RUS.

Consultant means a person or firm which has been retained pursuant

to this subpart under a contract to provide financial, legal,

engineering, environmental, or other technical advice and services.

Consultant Contract means a contract for the performance of

consulting services for RUS, to be paid using funds provided by a

Borrower, which may be in the form of a Retainer Contract, purchase

order, or other form as may be appropriate.

Escrow Account means an account established pursuant to

Sec. 1789.158.

Escrow Agreement means an agreement, between a Borrower, a

Consultant and a Third-party Commercial Institution, meeting the

requirements of Sec. 1789.167.

Final Invoice means the closing Invoice prepared for a given Task

Order.

Financial Consultant means a Consultant retained pursuant to this

part to provide financial advisory services.

Funding Agreement means an agreement, between a Borrower and a

Consultant, providing for the Borrower to fund the costs of a Task

Order and otherwise meeting the requirements of Sec. 1789.166.

Indemnification Agreement means an agreement by a Borrower meeting

the requirements of Sec. 1789.162.

Invoice means an invoice prepared by a Consultant pursuant to the

terms of a Consultant Contract.

Legal Consultant means any Consultant retained pursuant to this

part to provide legal services to RUS.

Notice of Proposal to Fund means a notice meeting the requirements

of Sec. 1789.156 provided to RUS by the Borrower.

[[Page 48607]]

Organizational Conflict of Interest means that because of other

activities or relationships with other persons, a person is unable or

potentially unable to render impartial assistance or advice to the

Government, or the person's objectivity in performing the contract work

is or might be otherwise impaired, or a person has an unfair

competitive advantage.

Retainer Contract means a Consultant Contract providing for a

minimum required payment to a Consultant irrespective of whether

services are utilized by RUS thereunder.

Task Order means a written request for consultant services pursuant

to the terms of a Consultant Contract.

Third-party Commercial Institution means a commercial financial

institution mutually acceptable to the Borrower and the Consultant.

Sec. 1789.152 Policy.

(a) As provided in this subpart, RUS may, at its discretion, use

the services of Consultants funded by a Borrower where such services

will facilitate timely action on an Application by such Borrower for

financial assistance or other approvals. Such Consultants may provide

financial, legal, engineering, environmental or other technical advice

and services in connection with the review of an Application.

(b) With the approval of RUS, a Borrower may fund the cost of

consulting services in connection with the review by RUS of an

Application by such Borrower. Such funding shall be provided pursuant

to the terms of a Funding Agreement between the Borrower and the

Consultant designated by RUS.

(c) RUS may not, without the consent of the Borrower, require, as a

condition of processing any Application for approval, that the Borrower

agree to pay the costs of a Consultant hired to provide services to

RUS.

(d) The government shall retain sole discretion in the selection of

Consultants to provide services to RUS and the form of contract

utilized. RUS may either use the services of one or more Consultants

retained under Retainer Contracts or the government may elect to retain

a Consultant not otherwise on retainer. The government shall have sole

discretion to prescribe terms and conditions of Consultant Contracts.

The Borrower may bring considerations to the attention of the

government which the Borrower deems pertinent to the selection process.

(e) RUS shall retain sole discretion as to whether to further

pursue use of an outside consultant for the relevant application in the

event the Borrower does not enter into the agreements referenced in

Sec. 1789.158(c)(3)(iii) within 60 days of the government providing to

the Borrower the information set forth in Sec. 1789.158(c)(3).

Sec. 1789.153 Borrower funding.

Borrowers shall use their general funds for the purposes of funding

consultant services hereunder. Borrowers may not use the proceeds of

loans made or guaranteed under the RE Act for costs incurred by

Borrowers pursuant to the funding of consultant services for RUS.

Sec. 1789.154 Eligible borrowers.

All Borrowers are eligible to fund consultant services under this

part.

Sec. 1789.155 Approval criteria.

RUS will consider approving the use of consultant services funded

by a Borrower on a case by case basis taking into account, among other

matters, the following:

(a) Whether such services are required to facilitate timely action

on a Borrower's Application. RUS shall determine what represents timely

action with respect to each Application considering, among other

matters, the review period normally required for such projects by RUS

and other lenders and the consequences to the Borrower of adjusting the

review period.

(b) The availability of staff resources, the priorities of other

projects then before RUS, and the efficiencies to be realized from the

use of consultant services.

(c) Whether it is in the best interest of RUS to use Borrower-

funded Consultants. Certain types of projects, such as those involving

issues of program-wide significance, may not be well suited for the use

of Borrower funded Consultants.

Sec. 1789.156 Proposal procedure.

(a) In the event RUS determines that consideration should be given

to the use of a Borrower-funded consultant in connection with the

review of an Application, the RUS Regional Director or the Director of

the Power Supply Division, as appropriate, will discuss with the

Borrower the nature of the Application and the projected review period

required of RUS. If RUS concludes that the projected review period will

not result in timely action on the Application, and after being so

notified in writing by RUS the Borrower wishes to fund consultant

services to facilitate RUS review, the Borrower shall submit to the

same Director a funding proposal. The proposal shall set forth the

following:

(1) Identification in the heading or caption as a Notice of

Proposal to Fund Consulting Services;

(2) Borrower's REA/RUS designation;

(3) Borrower's legal name and address;

(4) A description of the Application, critical issues and concerns

relating to the Application, time deadlines, and the consequences of

any delays in RUS review;

(5) A description of the consulting service(s) that would

facilitate timely RUS review of the Application; and

(6) Such additional documents and information as RUS may request.

(b) RUS will review the Notice of Proposal to Fund and any

additional information RUS deems relevant in determining whether to

proceed with procuring Borrower funded Consultants. If RUS proposes to

utilize Legal Consultants, RUS must obtain the concurrence of the

Office of General Counsel (OGC) of the Department of Agriculture. RUS

will notify the Borrower in writing of its determination.

Sec. 1789.157 Consultant contract.

(a) The Federal Acquisition Regulation (FAR), 48 CFR Ch. 1, and the

Agriculture Acquisition Regulation (AGAR), 48 CFR Ch. 4, shall apply to

all Consultant Contracts entered into pursuant to this part except as

provided in this section.

(1) Contracts for Legal Consultants shall provide for a technical

representative from OGC.

(2) All Consultant Contracts shall provide for an escrow account

funding mechanism pursuant to this part and for the government's sole

discretion in determining whether payments are to be made from the

Escrow Account to the Consultant.

(3) All Consultant Contracts shall provide that payment of all

obligations for work performed thereunder must be satisfied by amounts

available in the Escrow Account; with the exception of the annual

retainer fee, if any, Consultants shall not be entitled to any payments

from the government.

(b) The provisions of paragraph (a) of this section shall be given

prominent emphasis in requests for proposals issued under this part.

Sec. 1789.158 Implementation.

(a) Upon making a determination to go forward with Borrower funding

for consulting services, RUS shall initiate a procurement request for a

Consultant to provide the services. The government may either contract

with a Consultant on a case by case basis or elect to use a Consultant

pursuant to an outstanding

[[Page 48608]]

Retainer Contract. The Borrower will not be informed of the Consultant

selected until such time as the government provides the information set

forth in paragraph (c)(3) of this section.

(b) If the government determines to contract with a Consultant on a

case by case basis, the government shall notify the Borrower of the

applicable procedures.

(c) If the government determines to contract with a Consultant

under an outstanding Retainer Contract, the following procedures will

normally apply:

(1) Pursuant to the terms of the contract, the government will

prepare a draft Task Order requesting consultant services in connection

with the review of the Borrower's Application. The draft Task Order

shall set forth for the Consultant's review and acceptance, a

description of the services to be provided and applicable time frames

for the provision of such services.

(2) The government will request that the Consultant:

(i) Notify the government as to the acceptability of the form and

substance of the draft Task Order;

(ii) Notify the government as to its ability to provide a

satisfactory conflict of interest certification consistent with the

requirements of the FAR (48 CFR ch. 1); and

(iii) Provide a cost estimate for the draft Task Order.

(3) When the government is satisfied with the response(s) received

pursuant to paragraph (c)(2) of this section, the government shall

promptly provide to the Borrower:

(i) A copy of the draft Task Order identifying the Consultant;

(ii) The Consultant's cost estimate for the draft Task Order; and

(iii) Contract information required to enable the Borrower to

develop a Funding Agreement, an Escrow Agreement and an Indemnification

Agreement (the ``agreements'').

(4) The Borrower shall develop and submit to the government for

approval executed originals of:

(i) The agreements; and

(ii) A certified copy of a resolution of the board of directors

authorizing the Borrower to enter into the agreements and to take such

other action as is necessary to effect the purposes of the agreements.

(5) Upon receiving written RUS approval of the agreements and the

form and substance of the board resolution, the Borrower shall:

(i) Establish and fund the Escrow Account; and

(ii) Provide written notice to the government of the Escrow Account

number, the funding thereof, and such other information as required

pursuant to the agreements.

(6) After the Borrower has funded the Escrow Account, the

government shall issue Task Order(s) for consultant services in

accordance with the terms and conditions of the applicable Retainer

Contract.

Sec. 1789.159 Contract administration.

The government shall be solely responsible for the administration

of a Consulting Contract and shall have complete control over the scope

of the Consultant's work, the timetable for performance, the standards

to be applied in determining the acceptability of deliverables and the

approval of payment of Invoices.

Sec. 1789.160 Access to information.

The Borrower shall not have rights in nor right of access to the

work product of the Consultant. All analyses, studies, opinions,

memoranda, and other documents and information provided by the

Consultant pursuant to a Consulting Contract may be released and made

available to the Borrower only with the approval of RUS. This section

does not restrict release of information by RUS pursuant to the Freedom

of Information Act (5 U.S.C. 552(a)(2)) or other legal process.

Sec. 1789.161 Conflicts of interest.

The standard for determining organizational conflicts of interest

shall be as set forth in the FAR subpart 9.5 (48 CFR part 9, subpart

9.5); however, the identification of the existence of an organizational

conflict of interest may be made by either the Administrator or the

cognizant Contracting Officer. In the event an organizational conflict

of interest is determined to exist, the cognizant Contracting Officer

shall take the actions prescribed at FAR 9.504 (48 CFR 9.504) to

attempt to avoid, neutralize or mitigate the conflict. Should these

actions be deemed by the Administrator and the Contracting Officer to

adequately resolve the conflict, the contracting action with the

offeror/contractor may proceed. Should the Administrator or the

Contracting Officer determine that an organizational conflict of

interest still exists such that contract award or other contracting

action cannot be taken (award of task/delivery order, etc.) the

offeror/contractor shall be so informed by the Contracting Officer and

be provided a reasonable opportunity to respond in accordance with FAR

9.504(e) (48 CFR 9.504(e)). After considering the contractor's

response, if it is found by both the Administrator and Contracting

Officer to remedy the conflict of interest, the contracting action may

proceed. If the Administrator and Contracting Officer determine that

the contractor's response does not resolve the conflict of interest,

yet continuing with the contracting action with the offeror/contractor

in question is considered in the best interest of the United States, a

waiver in accordance with FAR 9.503 (48 CFR 9.503) may be executed.

This waiver shall be submitted under the Contracting Officer's

signature and approved by the Administrator. The Administrator has been

delegated Head of Contracting Activity authority by the USDA Senior

Procurement Executive solely for the purpose of waiver approval.

Sec. 1789.162 Indemnification agreement.

As a condition of approving Borrower funding, the government will

require the Borrower to enter into an Indemnification Agreement, in

form and substance satisfactory to RUS, providing that the Borrower

will indemnify and hold harmless the government and any officers,

agents or employees of the government from any and all liability,

including costs, fees, and settlements arising out of, or in any way

connected with the payment of the Consultant's fee pursuant to the

Consultant Contract. The Indemnification Agreement may recognize, as a

condition of liability thereunder, the rights of the borrower to prompt

notice, to use of counsel of its own choosing, and to participation in

any settlement of a claim against which indemnification is sought.

Sec. 1789.163 Waiver.

RUS may waive any requirement or procedure of this subpart by

determining that its application in a particular situation would not be

in the government's interest, except that certain provision that the

subject contracts are subject to the provisions of the FAR (48 CFR ch.

1) and AGAR (48 CFR ch. 4).

Secs. 1789.164--1789.165 [Reserved]

Subpart B--Escrow Account Funding and Payments

Sec. 1789.166 Terms and conditions of funding agreement.

Funding Agreements between the Borrower and a Consultant shall be

in form and substance satisfactory to RUS and provide for, among other

matters, the following:

(a) Specific reference by number to the applicable Consulting

Contract entered into between the government and the Consultant;

[[Page 48609]]

(b) Specific reference by number to the applicable Task Order

(where applicable);

(c) A brief description of the Application;

(d) A requirement that Invoices make specific reference to:

(1) The applicable contract and Task Order(s); and

(2) The Escrow Account from which payment is to be made;

(e) A requirement that the Final Invoice for a Task Order be

clearly identified as such;

(f) A description of the services to be provided by the Consultant

to RUS and the applicable time frames for the provision of such

services;

(g) Agreement that the Borrower shall pay for the Consultant

services provided to RUS under the applicable contract through an

Escrow Account established pursuant to an Escrow Agreement, the

Consultant shall not provide services to RUS under the applicable

contract unless there are sufficient funds in the Escrow Account to pay

for such services, the Consultant shall seek compensation for services

provided under the applicable contract from, and only from, funds made

available through the Escrow Account, and the Consultant must submit

all Invoices to the government for approval.

(h) A form of Escrow Agreement satisfactory to the Borrower,

Consultant and the designated Third-party Commercial Institution;

(i) A schedule setting forth when and in what amounts the Borrower

shall fund the Escrow Account;

(j) Acknowledgment by the Consultant of the Indemnification

Agreement provided by the Borrower to the government; and

(k) The Funding Agreement shall not be effective unless and until

approved in writing by RUS.

Sec. 1789.167 Terms and conditions of escrow agreement.

Escrow Agreements between and among the Borrower, Consultant and

Third-party Commercial Institution shall be in form and substance

satisfactory to RUS and provide for, among other matters, the

following:

(a) Specific reference by number to the applicable contract for

services;

(b) Specific reference by number to the applicable Task Order;

(c) Specific reference by number to the Escrow Account into which

funds are to be deposited;

(d) Invoices to specifically identify the applicable contract and

Task Order(s);

(e) Funds to be held in the Escrow Account by the escrow agent

until paid to the Consultant pursuant to the government's

authorization;

(f) The Escrow Account to be closed and all remaining funds

remitted to the Borrower after payment of the Final Invoice, unless

otherwise directed by the government;

(g) The government, the Consultant and the Borrower to have the

right to be informed, in a timely manner and in such form as they may

reasonably request, as to the status of and activity in the Escrow

Account; and

(h) The Escrow Agreement shall not be effective unless and until

approved in writing by RUS.

Secs. 1789.168-1789.175 [Reserved]

Dated: September 6, 1996.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 96-23512 Filed 9-13-96; 8:45 am]

BILLING CODE 3410-15-P