Settlement of Debt Owed by Electric Borrowers

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1717

RIN 0572-AB26

Settlement of Debt Owed by Electric Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

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SUMMARY: The Administrator of the Rural Utilities Service (RUS) hereby

establishes policies and standards for the settlement of debts and

claims owed by rural electric borrowers. In addition to establishing

policies and standards for debt settlement, the rule establishes RUS

policy on subsequent loans to borrowers whose debt has been

restructured.

DATES: This rule is effective September 26, 1997.

FOR FURTHER INFORMATION CONTACT: Mr. Blaine D. Stockton, Jr., Assistant

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

Utilities Service, Stop 1560, 1400 Independence Avenue, SW.,

Washington, DC 20250-1560. Telephone: 202-720-9545.

SUPPLEMENTARY INFORMATION: This regulatory action has been determined

to be significant for the purposes of Executive Order 12866, Regulatory

Planning and Review, and therefore has been reviewed by the Office of

Management and Budget (OMB). The Administrator of the Rural Utilities

Service (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.), for which RUS published a general notice of

proposed rulemaking pursuant to 5 U.S.C. 553(b). 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

under Executive Order 12988, Civil Justice Reform. RUS has determined

that this rule meets the applicable standards provided in Sec. 3 of the

Executive Order.

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

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 1995 (44 U.S.C. Chapter 35, as amended)

under control number 0572-0116.

Background

On April 4, 1996, Public Law 104-127 (110 Stat. 888) amended

section 331(b) of the Consolidated Farm and Rural Development Act (Con

Act) to extend to RUS loans and loan guarantees the Secretary of

Agriculture's authority to compromise, adjust, reduce, or charge-off

debts or claims owed to the government (collectively, debt settlement).

The amendment also extended to the security instruments, leases,

contracts, and agreements administered by RUS, the Secretary's

authority to adjust, modify, subordinate, or release the terms of those

documents. The Secretary of Agriculture, in 7 CFR 2.47, has delegated

authority under section 331(b) to the Administrator of RUS, with

respect to loans made or guaranteed by RUS.

The proposed rule to implement this new authority was published in

the Federal Register on March 3, 1997 at 62 FR 9382. Comments were

received from 42 different individuals or organizations, including the

National Rural Electric Cooperative Association (NRECA), the National

Rural Utilities Cooperative Finance Corporation (CFC), the Edison

Electric Institute (EEI), the Office of Inspector General of the U.S.

Department of Agriculture, an ad hoc group of 6 investor-owned

utilities (IOUs), 9 power supply borrowers, 16 distribution borrowers,

and 12 other individuals or organizations. Two of the power supply

borrowers submitted identical comments, which were supported by

identical or supporting comments from 9 of their members. Five other

distribution borrowers and one state-wide borrower association

submitted comments identical to their power supplier's comments.

In general, comments from NRECA, CFC, and most borrowers supported

a more expansive use of debt relief under section 331(b) of the Con

Act, more flexibility and discretion for the Administrator to grant

debt relief, no limitation on the debt relief measures, such as the

proposed 5 percent floor on interest rates, and other changes in

support of more generous terms and conditions for defaulting borrowers

and other borrowers facing financial or competitive problems. In

contrast, 2 distribution borrowers opposed settlement of borrowers'

debts, stating that debt forgiveness is unfair to the majority of

cooperatives who exercise fiscal responsibility and presents an

undesirable public image for all electric cooperatives. EEI, the ad hoc

group of 6 IOUs, and 2 individual IOUs generally favored strict

limitation of the Administrator's debt settlement authority to

borrowers in default or where default is imminent; more specific and

more restrictive standards for determining eligibility for relief and

the amount of relief provided; referral of most cases to the Department

of Justice for settlement under the Attorney General's settlement

authority; more extensive documentation of the need for relief, the

amount of relief provided, and the underlying justification; and

greater congressional and public oversight of RUS' debt settlement

activities.

All comments received were considered in drafting this final

regulation. The more common and more significant comments are discussed

below.

Information Collection and Recordkeeping Requirements

Several commenters expressed concern that the estimate of 2

responses per year from the public, in the from of borrowers seeking

debt settlement, was too low and might impose an artificial limit on

the number of applications for

[[Page 50487]]

debt relief RUS would consider. The estimate is nothing more than an

estimate of the average number of responses over a period of several

years. More applications may be received in some years than in others.

This estimate does not place any limit on the number of legitimate

applications RUS would consider.

Expansion of Use of Debt Settlement Authority

As indicated above, NRECA and several borrowers urged that the rule

be expanded to authorize the use of debt relief to lower the costs of

borrowers that, although not in default and not expected to face

default within the foreseeable future, nevertheless face serious

financial or competitive problems. They argued that Congress intended

the new debt settlement authority to be used in this expansive way. EEI

and the ad hoc group of 6 IOUs argued just the opposite. They argued

that Congress intended the authority to be used only in cases where a

borrower has defaulted or where default is imminent. They further

argued that providing debt relief to non-defaulting borrowers would

give an unfair competitive advantage to cooperatives at the expense of

IOUs and other utilities, which they and other taxpayers would be

required to pay for. They also said that such expanded use of debt

relief would constitute a federal program of stranded cost recovery

(avoidance) for cooperatives, at taxpayer expense, without any

direction from Congress on stranded cost recovery for the electric

industry as a whole.

RUS does not believe that the language of section 331(b) or the

legislative history of the section supports the expansive use of debt

settlement to lower the costs and improve the competitive positions of

borrowers that are not in default nor expected to default in the

foreseeable future. Furthermore, RUS does not believe it would be good

policy to accept applications with respect to defaults projected far

into the future. There would be too many uncertainties with respect to

a borrower's particular circumstances and the competitive and

regulatory environment within the industry as a whole. It would be too

difficult to accurately assess the borrower's problems, the likelihood

of default, effective remedial actions, and the actual need for and

appropriateness of debt settlement.

NRECA and several borrowers also urged that debt relief be used to

encourage mergers between borrowers, regardless of whether or not any

of the parties to the merger are in default or are expected to default

in the foreseeable future. RUS agrees that our policies and programs

ought to support mergers and consolidations between borrowers that will

likely result in economies of scale and lower operating costs, better

management, and improved opportunities for innovation, technological

development, market expansion, and better customer service. This past

December, with publication of 7 CFR 1717 subpart D, RUS instituted

several new forms of transitional assistance for borrowers entering

into economically beneficial mergers and consolidations. While such

assistance is appropriate and strongly supported by RUS, RUS does not

believe it is appropriate to use debt relief under section 331(b) of

the Con Act to encourage mergers or consolidations in the absence of

default or the likelihood of default in the foreseeable future.

Some borrowers also argued that, in support of the objectives of

the RE Act, mergers between borrowers in connection with debt

settlement should be given preference to mergers with or acquisitions

by nonborrowers. While as a general proposition, RUS is very supportive

of economically beneficial mergers that will strengthen both loan

security and service to rural electric consumers, and is happy to

provide transitional assistance for such mergers under 7 CFR part 1717

subpart D, RUS does not believe it is appropriate to give preference to

mergers between borrowers in connection with debt settlements if

granting such preference would in any material way reduce debt recovery

by the government in comparison with any other debt settlement

alternative.

Reports to Congress and the Public

The ad hoc group of 6 IOUs recommended that the findings of the in-

depth analysis used to determine the need for and amount of debt

settlement be published in the Federal Register in each case, with

notice and comment from the public; that RUS be required to report

periodically to Congress (also supported by EEI) on borrowers seeking

settlement, the amount of money at risk, the timetable for acting on

requests, and the status of settlements under consideration, with the

information being made available to the public; and that RUS publish

written orders in the Federal Register on final debt settlements,

detailing the basis for the debt settlement decision, and providing

opportunity for public comment. The commenters argued that these

procedures would keep Congress better informed; improve the information

available to the Administrator in making debt settlement decisions; and

give interested taxpayers and competitors of co-ops a chance to provide

input on the co-ops' financial and competitive positions and their need

for debt settlement, and explain how alternative workout solutions

would affect them.

Regarding the recommendation that RUS be required to report

periodically to Congress, it should be noted that RUS does report to

Congress on its debt settlement activities as part of the budget

process, in testifying before congressional oversight committees, and

in responding to special requests from Congress. Since Congress always

has the prerogative to request status reports and hearings, RUS does

not believe it is necessary to require such reporting in this

regulation.

Publishing the findings of the in-depth analyses of borrowers'

needs for debt settlement and the justification for the amount of

settlement provided, and providing opportunity for public comment,

presents several problems. It could risk divulging the government's

strategy and internal deliberations on debt settlements, thus damaging

the government's ability to achieve maximum recovery in other debt

settlement cases. In addition, much of the information about a borrower

and alternative workout scenarios contained in an in-depth analysis

could be used by the borrower's competitors, other creditors or other

parties, to the disadvantage of both the borrower and the government.

Such information should not be made routinely available to the public

at large. Also, allowing the normal 30 to 60 days for public comment on

the in-depth analyses could cause delays in some cases, such that

certain opportunities with a limited timeframe could be missed, to the

detriment of both the borrower and the government.

Moreover, development of the in-depth analyses, whether supervised

by RUS or an independent consultant, would include the gathering of all

relevant information from sources likely to have information bearing on

the question of a borrower's need for debt settlement and the

alternatives that will likely maximize the government's debt recovery.

For example, in many cases, RUS will require that a competitive bid be

conducted for the borrower's system to determine its value. Relevant

information would be expected to be obtained from bidders and other

parties as part of that process and other information collection

efforts. To ask for public comments on what would have to be, for

reasons of confidentiality, rather heavily summarized versions of the

in-depth analyses, after the analyses

[[Page 50488]]

have been completed, is not likely to produce much additional useful

information in most cases.

As to the last point, on publishing written orders in the Federal

Register on final debt settlements and providing opportunity for public

comment, the purpose of such a procedure isn't clear. If the main

purpose is to inform the public of decisions reached on debt

settlements, it would be more efficient and timely to continue to rely

on the trade press and general media. If the primary purpose is to

provide evaluation and supervision of RUS' debt settlement activities,

that function is more appropriately and effectively provided by the

traditional program planning, evaluation, and budgeting processes at

the RUS, USDA, Office of Management and Budget, and congressional

levels.

Confidentiality of Information and the Deliberative Process

NRECA and several borrowers expressed concerns that privileged or

confidential information about borrowers gathered by RUS be held in

strict confidence. They expressed concerns that such information, if

not held in strict confidence, could be used by competitors, other

creditors, or litigants to gain financial or competitive advantage over

them. RUS agrees that privileged or confidential information should be

held in strictest confidence and should not be released beyond RUS and

its consultants and advisors except when release of the information is

necessary to determine the value of a borrower's system and the need

for and appropriate type of debt settlement. For example, it would be

necessary to provide certain information about a borrower when

conducting a competitive bid for the borrower's system.

RUS also believes that commercial or financial information obtained

from borrowers that is privileged or confidential, as well as agency

documents and other information, such as inter-agency or intra-agency

memoranda, letters, or papers, that are predecisional or deliberative

in nature, should be withheld from the public under the exemptions in

the Freedom of Information Act, such as Exemption 4. Disclosure of this

information would allow other financially troubled borrowers to learn

the general strategic and tactical approaches of RUS and DOJ in dealing

with financially troubled borrowers. Disclosure would harm the

deliberative process of RUS and DOJ in negotiating, settling, and

compromising debts.

Section 1717.1201 Definitions

One commenter suggested that the definition of debt (outstanding

debt) be augmented by adding several specific items, such as deferred

principal and deferred interest. RUS believes that deferred principal

and deferred interest ordinarily would be considered as being included

as part of ``principal'' and ``accrued interest,'' which are listed as

elements of outstanding debt. It was not RUS' intention that the

specific items listed in the definition be all inclusive of every

conceivable element and variation of nomenclature that may make up the

outstanding debt of a borrower. Rather than trying to list every

conceivable element, the definition has been amended to indicate that

the items listed are not necessarily the only elements included in

outstanding debt.

Section 1717.1202 General Policy

Several comments were received regarding paragraph (d) of this

section, which sets forth several general factors (but not an exclusive

list of factors) the Administrator will consider in structuring debt

settlements and determining the amount of debt recovery that is

possible. NRECA and several borrowers recommended that regulatory and

legislative actions by states be added to the list since such actions

can affect a borrower's ability to meet its financial obligations. EEI

and the ad hoc group of 6 IOUs criticized paragraph (d) for failing to

list, as one of the factors, the ability of the borrower to repay its

debts.

Paragraph (d) is intended to set out some of the more important

general factors the Administrator will consider in structuring debt

settlements and determining the amount of debt a borrower can repay.

These general factors relate either to public policy or the competitive

positions of borrowers and their ability to meet their financial

obligations. They are not intended to have priority over other factors

that affect a borrower's ability to repay debt. Nor are they intended

in any way to modify or diminish the policy set forth in paragraph (a)

of this section that ``wherever possible, all debt owed shall be

collected in full in accordance with the terms of the borrower's loan

documents,'' or the policy in paragraph (c) that the Administrator's

authority to settle debts will be limited to cases where ``settlement

will maximize the recovery of debts and claims owed to the

government.'' This fact is particularly relevant with respect to one

IOU's comment that listing market and nonmarket forces that affect

competition in the electric utility industry introduces a vague and

overbroad provision that could result in RUS providing borrowers an

unfair advantage in competitive electric markets. That is not the

intent. Market and nonmarket forces are included in simple recognition

of the fact that they do affect a borrower's ability to generate

revenue to meet its financial obligations to the government and other

creditors.

Paragraph (d) has been amended to try to allay concerns that the

factors listed might somehow override the central consideration of a

borrower's ability to repay debt. Also, whereas legislative and

regulatory actions by the states was assumed to be included under

``other market and nonmarket forces as to their effects on competition

* * *,'' they are now explicitly listed as one of the general factors

that will be considered. While explicitly recognizing that state

regulatory and legislative actions may affect the ability of borrowers

to meet their financial obligations, RUS believes state legislators and

regulators should give due consideration to the effects of their

actions on the ability of rural electric systems to recover their costs

and meet their financial obligations to the federal government and

other creditors.

In related comments, EEI and the ad hoc group of 6 IOUs criticized

the proposed rule for failing to set out detailed standards for

deciding when a borrower is unable to meet its financial obligations

and the amount of debt relief that is appropriate. These commenters

also suggested several specific changes and additions to the analyses

to be conducted in determining the need for and the appropriate amount

of debt settlement. Several of these suggestions have been adopted, as

discussed elsewhere.

As for more detailed standards for deciding when debt settlement is

needed and the amount of debt settlement, RUS believes that, with the

changes made, the rule provides reasonably detailed standards. Sections

1717.1202 and 1717.1204(b)(1) clearly establish that, wherever

possible, all debt will be collected in full in accordance to its terms

and that settlement will be used only when it will maximize the

recovery of debts and claims. The remainder of Sec. 1717.1204 sets out

in substantial detail the information and actions required for the

Administrator to make a determination that debt settlement is necessary

and the appropriate amount and form of the settlement. Given the

tremendous variation from case to case in the numerous factors that

affect a borrower's ability to meet its financial

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obligations (e.g., economic, financial, competitive, engineering,

technological, and regulatory factors) RUS does not believe that it is

possible to develop a more detailed, immutable set of decision criteria

that would work well in most cases.

Section 1717.1203 Relationship Between RUS and Department of Justice

NRECA, CFC, and several borrowers asked for clarification of

several aspects of this section. First, if a claim has been referred in

writing to the Attorney General for settlement under the Attorney

General's authority, can the claim be referred back to the

Administrator for action? Yes, it can, at the discretion of the

Attorney General. Second, if a claim has been referred in writing to

the Attorney General, is there a formal mechanism by which the borrower

or the Administrator could request that the claim be referred back to

the Administrator? No, there is no formal mechanism. A claim could be

referred back to the Administrator at the discretion of the Attorney

General. Third, if a borrower has previously had its debt settled under

the authority of the Attorney General and the borrower applies for

additional relief on any outstanding debt to the government, can the

Administrator use his or her authority to consider the request from the

borrower? The Administrator could consider the borrower's request after

promptly notifying the Attorney General that the request has been

received. These points have been clarified in the changes made to

Sec. 1717.1203.

Section 1717.204(b) Need for Debt Settlement

The Office of Inspector General (OIG) of the U.S. Department of

Agriculture recommended that a borrower's application for debt

settlement include a certification by the borrower that it is unable to

meet its financial obligations. RUS agrees with the recommendation and

has revised Sec. 1717.204(b) to require a resolution to that effect by

the borrower's board of directors.

OIG also recommended the borrower be required to certify that all

the information provided to RUS in connection with the application for

debt settlement is true and accurate in all material respects. RUS has

adopted this recommendation and has added a new paragraph (m) to

Sec. 1717.1204.

NRECA and several borrowers criticized the provision in paragraph

(b)(1) that would limit the use of debt settlement to borrowers that

have defaulted or are likely to default within 24 months of the

borrower's application for debt settlement. They felt that either there

should be no limit on the forecast period within which a borrower is

likely to default, or that the forecast period should be longer. Some

of them felt that limiting the forecast period to 24 months would limit

the use of debt settlement to essentially crisis situations, where it

would be too late to help the borrower in dealing with its serious

problems and too late to avoid bankruptcy. EEI and the ad hoc group of

6 IOUs argued that debt settlement should be used only when a borrower

has in fact defaulted, and that use of a 24 month forecast period for

when a borrower is likely to default would amount to an extraordinary

grace period and would result in borrowers receiving an unfair subsidy

from RUS at the expense of taxpayers and the borrowers' competitors.

RUS continues to believe that its middle ground position is the

right one on this issue. It does not believe that debt settlement

should be used only when a borrower has already defaulted. Debt

settlement should be one of the tools available to assist borrowers in

addressing their own problems when it is reasonably clear that the

borrower will default without some debt relief. RUS believes, however,

that a specific, defined time period within which a borrower is likely

to default is needed to discourage unmerited or wildly speculative

applications for relief, and to focus government resources on problems

that can be defined and resolved with some degree of certainty, as

opposed to distant potential problems that may not materialize or may

change greatly in the rapidly changing industry environment. This

approach is an important element in maximizing debt recovery by the

government.

The forecast period is an aid for identifying cases where default

is relatively imminent. It does not establish the time period during

which RUS will consider the borrower's application for relief. Nor does

the forecast period limit in any way discussions between RUS and

borrowers regarding their financial and economic problems, possible

actions by the borrowers to address their problems, and any assistance

that RUS may be able to offer, short of debt settlement, such as

deferral of principal and interest payments under section 12 of the RE

Act, merger incentives under 7 CFR 1717 subpart D, or waiver of certain

requirements and controls under Secs. 1710.4 or 1717.600(c).

Eliminating the forecast period and accepting applications from

borrowers who assert that they may default at some distant point in the

future would not provide greater incentive for borrowers to take

advantage of all available opportunities to address their problems

themselves or to work with RUS in fashioning workable solutions short

of debt settlement. RUS continues to believe that a forecast period of

24 months is reasonable and will enable RUS to assist borrowers in

dealing with serious problems before they become insurmountable.

Some borrowers argued that requiring a borrower to demonstrate to

RUS that it will likely default within a certain period of time in

order to be considered for possible debt settlement would ruin the

borrower's credit rating and make it extremely difficult for the

borrower to obtain credit from other sources. Since debt settlement

will be used only when a borrower has already defaulted or will likely

default in the relatively near future, RUS believes that the act of

applying for debt settlement will probably have the same effect on the

borrower's relationship with other creditors whether or not the

borrower is required to demonstrate to RUS that it will likely default

within the forecast period. No change has been made in the requirement

that borrowers must demonstrate to RUS that they will probably be

unable to meet their financial obligations sometime during the forecast

period.

NRECA, CFC, and some borrowers argued that requiring the borrower

to perform an in-depth analysis of the opportunities available to the

member-owners of a power supply borrower to reduce costs or otherwise

improve their financial and competitive positions could cause too much

delay and should be optional. RUS believes that determination of the

need for debt settlement for a power supply borrower normally should

not be based only on the condition and potential remedial actions of

the power supply borrower, since the efficiency and effectiveness of

the borrower's member-owners will often have a major bearing on the

health of the power supply borrower. If there is a serious financial

problem warranting consideration of debt settlement, there appears to

be no reason why a credible analysis of the member-owner's operations

cannot be completed in a timely manner. However, since there could be

some instances where it may be in the government's interest to waive

this requirement, the provision has been amended to allow for a waiver

by the Administrator.

EEI and an investment banker recommended that the in-depth analysis

required to demonstrate the need for debt settlement include the

possibility of raising rates in order to generate more

[[Page 50490]]

revenue to meet the borrower's obligations. It was assumed by RUS that

such analysis would be included, and that has now been made explicit.

EEI also recommended that the in-depth analysis of the need for debt

settlement include a review of the borrower's contracts for services

and supplies; a thorough analysis of the borrower's management

structure, system operations, and financial and operating statements

for possible cost reductions; and comparisons of the borrower with one

or more ``benchmark'' electric utilities to help identify areas for

efficiency gains. RUS agrees with the substance of these

recommendations and notes that certain elements, such as including a

thorough analysis of the borrower's management structure, system

operations, and financial and operating statements, are already

included in one form or another. Changes have been made to paragraphs

(b)(2) and (b)(3) of Sec. 1717.1204 to include analytical elements

contained in EEI's recommendations that were not explicitly included in

the proposed rule.

With respect to the use by RUS of independent consultants to advise

on debt settlements (see paragraph (b)(3) of Sec. 1717.1204), a

borrower suggested that RUS have a pre-qualified list of consultants

for borrowers to choose among, in order to eliminate the need for

independent consultants. RUS disagrees with this suggestion. The choice

of an independent consultant must reside entirely with RUS in order to

ensure that the consultant has the expertise needed for a particular

case, and is in fact independent and capable of rendering impartial and

objective analysis and advice to RUS. NRECA, in its comments,

recognized the need for the consultant to be completely independent of

the borrower, but suggested that RUS should consider consulting with

the borrower before making a selection. RUS does not believe it should

be under any obligation to consult with the borrower, and would view

any such obligation as compromising its ability to select a truly

independent consultant.

The ad hoc group of 6 IOUs stated that use of independent

consultants and other neutral third parties to determine the value of

the borrower's system should be mandatory rather than optional. RUS

agrees that independent consultants should be used in most cases to

help RUS determine the value of a borrower's system, but does not

believe that this should be mandatory in all cases. The additional time

and cost of obtaining an independent consultant's assessment may not be

worthwhile in all cases, such as when the amount of debt involved is

small, or when only very limited relief is being considered, such as

reamortization or extension of maturities.

Section 1717.1204(c) Debt Settlement Measures

Several commenters argued that extension of debt maturities should

not be limited to the weighted average of the expected remaining useful

lives of the assets pledged as security. RUS agrees that the language

in the proposed rule is suitable primarily when the only assets

involved are plant and other real estate. In many cases there may to

other ``assets'' pledged as security for the debt, such as wholesale

power contracts, irrevocable trusts, or other assured streams of

revenues pledged as security, which don't fit the normal concept of an

asset's useful life. Given these considerations, RUS has concluded that

because of the unusual complexity of the loan security issues when debt

is restructured, it is not possible to impose a fixed generic limit on

debt maturity tied to specific assets or other forms of security that

would serve the government's interests in all cases. The limitation in

Sec. 717.1204(c) on debt maturity has been revised such that the

maturity of the restructured debt shall not extend more than 10 years

beyond the latest maturity date prior to settlement. This is an outside

limit, only. The actual maturity approved in each case will depend on

specific consideration of quality and longevity of the collateral and

other evidence or guarantees that the debt will be repaid and is

reasonably secured.

Proposed paragraph (c) included reducing the interest rate on debt

as one of the settlement measures, but imposed a floor of 5 percent

interest, below which rates could not be reduced. NRECA and several

borrowers argued that limiting the amount that interest rates could be

reduced would limit the Administrator's flexibility in negotiating

terms favorable to the government. RUS does not believe the 5 percent

interest floor would be a problem in most cases, but recognizes that

the Administrator should be able to waive the limitation if he or she

determines that that would facilitate the maximization of debt recovery

by the government. The paragraph has been amended accordingly.

Section 1717.1204(d) Debt Owed to Other Creditors

CFC stated that it was unfair to expect similar debt relief on a

pro rata basis to be provided by other secured lenders, and said that

pro rata implied equal methodology in determining the fair contribution

of each secured lender. RUS disagrees that it would be unfair to expect

each of the secured lenders to provide similar relief on a pro rata

basis, or ``other benefits or value to the restructuring.'' RUS

recognizes that a given structure of debt relief that may be suitable

to one lender may not be entirely suitable to another. RUS is not

trying to impose the same structure or methodology on all lenders

involved, but does want to ensure that each lender provides it fair

share of relief. RUS believes that the proposed language, retained

herein, adequately expresses the intended objective and is not unfair

to other lenders.

NRECA suggested substituting the words ``comparable concessions''

for ``similar relief on a pro rata basis . . . or other benefits or

value.'' RUS does not believe that this change would result in greater

assurance that each lender will provide its fair share of debt relief.

Section 1717.1204(e) Competitive Bids for System Assets

Paragraph (e) provides that RUS may ask the borrower or an

independent consultant to solicit competitive bids from potential

buyers of the borrower's system. One commenter asked how conflicts of

interest could be avoided if the borrower, rather than an independent

consultant, solicits the bids. RUS believes that any conflicts of

interest can be prevented or minimized by the provisions in paragraph

(e) which require the bidding process to be conducted in consultation

with RUS and using standards and procedures acceptable to RUS.

A borrower stated that preference should always be given to a co-op

acquiring or merging with a troubled borrower, and that competitive

bids should not be required when acquisition by or merger with another

RUS-financed co-op is possible. As discussed above, RUS strongly

supports mergers and consolidations between borrowers that are

economically beneficial to the parties and, as a result, strengthen RUS

loan security. RUS provides incentives for such mergers and

consolidations under 7 CFR 1717 subpart D. A merger or consolidation

among two or more borrowers may represent one of the elements of a debt

settlement, but should not be given preference at the expense of

reducing the government's recovery of debt.

Another borrower commented that requiring competitive bids for a

borrower's system and using the bids to sell the system is not a

mortgage requirement for non-defaulting borrowers, and may damage the

credit

[[Page 50491]]

worthiness of solvent borrowers. RUS notes that soliciting of

competitive bids applies only to borrowers that have requested debt

settlement, and in that situation is appropriate whether or not the

borrower has defaulted. It is not a requirement imposed on all

borrowers, but simply an option available to the Administrator for

determining the value of assets of borrowers that have requested debt

settlement.

The ad hoc group of 6 IOUs stated that the value to the Treasury of

selling all or part of the borrower's assets should be considered in

every case, and should not be optional. RUS does not believe it is

necessary to actually solicit competitive bids in every case to

determine the value of a borrower's system. Various appraisal

techniques other than actual competitive bids may be more cost-

effective, more timely, or otherwise more appropriate in some

circumstances to determine a system's value.

Section 1717.1204(i) Regulatory Approvals

A borrower stated that RUS should be able to conditionally approve

a settlement before all regulatory approvals are obtained so that the

borrower could proceed to implement an action plan. NRECA stated that

regulatory approvals should be required in advance of RUS approval of a

debt settlement only ``insofar as possible,'' since it may not be

possible to obtain the regulatory approvals in some cases. RUS would

note that most remedial actions available to borrowers do not hinge on

RUS approval of debt relief, and that borrowers should aggressively

implement such actions without delay. However, the point is well taken

that RUS could approve or preliminarily approve a debt settlement or

parts of a settlement before all regulatory approvals have been

obtained. The paragraph has been amended to clarify that only those

regulatory approvals deemed necessary by the Administrator must be

obtained before a settlement will be approved.

Section 1717.1204(j) Conditions Regarding Management and Operations

NRECA objected to the possibility of RUS imposing additional

controls on the members of a power supply borrower regarding general

funds and investments, based on the argument that such decisions by

members impacted little on their power supplier and because bankruptcy

would be an alternative for the power supply borrower. The additional

controls identified in Sec. 1717.1204(j)(3) ordinarily would not be

imposed on the members of a power supply borrower that is seeking debt

settlement. However, such controls on members may be appropriate in

some cases, such as when the members have agreed to guarantee the debt

of a power supply borrower as a condition of settling the latter's

debt.

Section 1717.1206 Loans Subsequent to Settlement

One commenter stated that the paragraph is unclear and subject to

various interpretations, but did not indicate what is unclear. Perhaps

one area needing some clarification is whether the section would grant

some right to subsequent loans to a borrower that as agreed as part of

its debt settlement not to seek subsequent loans from RUS. The section

does not grant any such right.

Perhaps the commenter thought that a ``presumption'' that credit

support will be needed for any subsequent loans is not clear.

``Presumption'' means that credit support will be required for any

subsequent loans, unless the Administrator, for good reason, determines

that credit support is not needed.

The ad hoc group of 6 IOUs stated that RUS should establish a

presumption that new loans will not be made to borrowers whose debts

have been settled unless they can prove that they are now creditworthy.

Demonstration of creditworthiness is a requirement which applies to all

loans made by RUS, as set forth in 7 CFR 1710.112, 1710.113, and

elsewhere in RUS regulations.

A borrower stated that if a healthy borrower acquires or merges

with a borrower whose debt has been settled by RUS, the surviving

entity should be exempt from the presumption that credit support will

be needed for any subsequent loans. RUS does not agree that an

exemption should be granted for all such cases, since the surviving

entity may nevertheless be a high risk that would warrant credit

support.

List of Subjects in 7 CFR Part 1717

Administrative practice and procedure, Claims, Electric power,

Electric utilities, Intergovernmental relations, Investments, Lien

accommodation, Lien subordination, Loan programs--energy, Reporting and

recordkeeping requirements, Rural areas.

For reasons explained in the preamble, RUS hereby amends 7 CFR

chapter XVII, part 1717, as follows:

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

GUARANTEED ELECTRIC LOANS

1. The authority citation for part 1717 is revised to read as

follows:

Authority: 7 U.S.C. 901-950b, 1981; Pub. L. 99-591, 100 Stat.

3341-16; Pub. L. 103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.),

unless otherwise noted.

2. Subparts T through X are added and reserved and subpart Y is

added to part 1717 to read as follows:

Subpart T--[Reserved]

Sec.

1717.950-1717.999 [Reserved]

Subpart U--[Reserved]

1717.1000-1717.1049 [Reserved]

Subpart V--[Reserved]

1717.1050-1717.1099 [Reserved]

Subpart W--[Reserved]

1717.1100-1717.1149 [Reserved]

Subpart X--[Reserved]

1717.1150-1717.1199 [Reserved]

Subpart Y--Settlement of Debt

1717.1200 Purpose and scope.

1717.1201 Definitions.

1717.1202 General policy.

1717.1203 Relationship between RUS and Department of Justice.

1717.1204 Policies and conditions applicable to settlements.

1717.1205 Waiver of existing conditions on borrowers.

1717.1206 Loans subsequent to settlement.

1717.1207 RUS obligations under loan guarantees.

1717.1208 Government's rights under loan documents.

Subpart T--[Reserved]

Secs. 1717.950-1717.999 [Reserved]

Subpart U--[Reserved]

Secs. 1717.1000-1717.1049 [Reserved]

Subpart V--[Reserved]

Secs. 1717.1050-1717.1099 [Reserved]

Subpart W--[Reserved]

Secs. 1717.1100-1717.1149 [Reserved]

Subpart X--[Reserved]

Secs. 1717.1150-1717.1199 [Reserved]

Subpart Y--Settlement of Debt

Sec. 1717.1200 Purpose and scope.

(a) Section 331(b) of the Consolidated Farm and Rural Development

Act (Con Act), as amended on April 4, 1996 by Public Law 104-127, 110

Stat. 888

(7 U.S.C. 1981), grants authority to the Secretary of Agriculture to

compromise,

[[Page 50492]]

adjust, reduce, or charge-off debts or claims arising from loans made

or guaranteed under the Rural Electrification Act of 1936, as amended

(RE Act). Section 331(b) of the Con Act also authorizes the Secretary

of Agriculture to adjust, modify, subordinate, or release the terms of

security instruments, leases, contracts, and agreements entered into or

administered by the Rural Utilities Service (RUS). The Secretary, in 7

CFR 2.47, has delegated authority under section 331(b) of the Con Act

to the Administrator of the RUS, with respect to loans made or

guaranteed by RUS.

(b) This subpart sets forth the policy and standards of the

Administrator of RUS with respect to the settlement of debts and claims

arising from loans made or guaranteed to rural electric borrowers under

the RE Act. Nothing in this subpart limits the Administrator's

authority under section 12 of the RE Act.

Sec. 1717.1201 Definitions.

Terms used in this subpart that are not defined in this section

have the meanings set forth in 7 CFR part 1710. In addition, for the

purposes of this subpart:

Application for debt settlement means a written application

containing all of the information required by Sec. 1717.1204(b)(2), in

form and substance satisfactory to RUS.

Attorney General means the Attorney General of the United States of

America.

Claim means any claim of the government arising from loans made or

guaranteed under the RE Act to a rural electric borrower.

Con Act means the Consolidated Farm and Rural Development Act (7

U.S.C. 1921 et seq.).

Debt means outstanding debt of a rural electric borrower

(including, but not necessarily limited to, principal, accrued

interest, penalties, and the government's costs of debt collection)

arising from loans made or guaranteed under the RE Act.

Enforced collection procedures means any procedures available to

the Administrator for the collection of debt that are authorized by

law, in equity, or under the borrower's loan documents or other

agreements with RUS.

Loan documents means the mortgage (or other security instrument

acceptable to RUS), the loan contract, and the promissory note entered

into between the borrower and RUS.

RE Act means the Rural Electrification Act of 1936, as amended (7

U.S.C. 901-950b).

Restructure means to settle a debt or claim.

Settle means to reamortize, adjust, compromise, reduce, or charge-

off a debt or claim.

Sec. 1717.1202 General policy.

(a) It is the policy of the Administrator that, wherever possible,

all debt owed to the government, including but not limited to principal

and interest, shall be collected in full in accordance with the terms

of the borrower's loan documents.

(b) Nothing in this subpart by itself modifies, reduces, waives, or

eliminates any obligation of a borrower under its loan documents. Any

such modifications regarding the debt owed by a borrower may be granted

under the authority of the Administrator only by means of the explicit

written approval of the Administrator in each case.

(c) The Administrator's authority to settle debts and claims will

apply to cases where a borrower is unable to pay its debts and claims

in accordance with their terms, as further defined in

Sec. 1717.1204(b)(1), and where settlement will maximize, on a present

value basis, the recovery of debts and claims owed to the government.

(d) In structuring settlements and determining the capability of

the borrower to repay debt and the amount of debt recovery that is

possible, the Administrator will consider, among other factors, the RE

Act, the National Energy Policy Act of 1992 (Pub. L. 102-486, 106 Stat.

2776), the policies and regulations of the Federal Energy Regulatory

Commission, state legislative and regulatory actions, and other market

and nonmarket forces as to their effects on competition in the electric

utility industry and on rural electric systems in particular. Other

factors the Administrator will consider are set forth in more detail in

Sec. 1717.1204.

Sec. 1717.1203 Relationship between RUS and Department of Justice.

(a) The Attorney General will be notified by the Administrator

whenever the Administrator intends to use his or her authority under

section 331(b)of the Con Act to settle a debt or claim.

(b) If an outstanding claim has been referred in writing to the

Attorney General, the Administrator will not use his or her own

authority to settle the claim without the approval of the Attorney

General.

(c) If an application for additional debt relief is received from a

borrower whose debt has been settled in the past under the authority of

the Attorney General, the Administrator will promptly notify the

Attorney General before proceeding to consider the application.

Sec. 1717.1204 Policies and conditions applicable to settlements.

(a) General. Settlement of debts and claims shall be subject to the

policies, requirements, and conditions set forth in this section and in

Sec. 1717.1202.

(b) Need for debt settlement. (1) The Administrator will not settle

any debt or claim unless the Administrator has determined that the

borrower is unable to meet its financial obligations under its loan

documents according to the terms of those documents, or that the

borrower will not be able to meet said obligations sometime within the

period of 24 months following the month the borrower submits its

application for debt settlement to RUS, and, in either case, such

default is likely to continue indefinitely. The determination of a

borrower's ability to meet its financial obligations will be based on

analyses and documentation by RUS of the borrower's historical,

current, and projected costs, revenues, cash flows, assets,

opportunities to reduce costs and/or increase revenues, and other

factors that may be relevant on a case by case basis.

(2) In its application to RUS for debt settlement, the borrower

must provide, in form and substance satisfactory to RUS, an in-depth

analysis supporting the borrower's contention that it is unable or will

not be able to meet its financial obligations as described in paragraph

(b)(1) of this section. The analysis must include:

(i) An explanation and analysis of the causes of the borrower's

inability to meet its financial obligations;

(ii) A thorough review and analysis of the opportunities available

or potentially available to the borrower to reduce administrative

overhead and other costs, improve efficiency and effectiveness, and

expand markets and revenues, including but not limited to opportunities

for sharing services, merging, and/or consolidating, raising rates when

appropriate, and renegotiating supplier and service contracts. In the

case of a power supply borrower, the study shall include such

opportunities among the members of the borrower, unless the

Administrator waives this requirement;

(iii) Documentation of the actions taken, in progress, or planned

by the borrower (and its member systems, if applicable) to take

advantage of the opportunities cited in paragraph (b)(2)(ii) of this

section; and

(iv) Other analyses and documentation prescribed by RUS on a case

by case basis.

(3) RUS may require that an independent consultant provide an

analysis of the efficiency and

[[Page 50493]]

effectiveness of the borrower's organization and operations, and those

of its member systems in the case of a power supply borrower. The

following conditions will apply:

(i) RUS will select the independent consultant taking into account,

among other matters, the consultant's experience and expertise in

matters relating to electric utility operations, finance, and

restructuring;

(ii) The contract with the consultant shall be to provide services

to RUS on such terms and conditions as RUS deems appropriate. The

consultant's scope of work may include, but shall not be limited to, an

analysis of the following:

(A) How to maximize the value of the government's collateral, such

as through mergers, consolidations, or sales of all or part of the

collateral;

(B) The viability of the borrower's system, taking into account

such matters as system size, service territory and markets, asset base,

physical condition of the plant, operating efficiency, competitive

pressures, industry trends, and opportunities to expand markets and

improve efficiency and effectiveness;

(C) The feasibility and the potential benefits and risks to the

borrower and the government of corporate restructuring, including

aggregation and disaggregation;

(D) In the case of a power supply borrower, the retail rate mark-up

by member systems and the potential benefits to be achieved by member

restructuring through mergers, consolidations, shared services, and

other alliances;

(E) The quality of the borrower's management, management advisors,

consultants, and staff;

(F) Opportunities for reducing overhead and other costs, for

expanding markets and revenues, and for improving the borrower's

existing and prospective contractual arrangements for the purchase and

sale of power, procurement of supplies and services, and the operation

of plant and facilities;

(G) Opportunities to achieve efficiency gains and increased

revenues based on comparisons with benchmark electric utilities; and

(H) The accuracy and completeness of the borrower's analysis

provided under paragraph (b)(2) of this section;

(iii) RUS and, as appropriate, other creditors, will determine the

extent to which the borrower and third parties (including the members

of a power supply borrower) will be required to participate in funding

the costs of the independent consultant;

(iv) The borrower will be required to make available to the

consultant all corporate documents, files, and records, and to provide

the consultant with access to key employees. The borrower will also

normally be required to provide the consultant with office space

convenient to the borrower's operations and records; and

(v) All analyses, studies, opinions, memoranda, and other documents

and information produced by the independent consultant shall be

provided to RUS on a confidential basis for consideration in evaluating

the borrower's application for debt settlement. Such documents and

information may be made available to the borrower and other appropriate

parties if authorized in writing by RUS.

(4) The borrower may be required to employ a temporary or permanent

manager acceptable to the Administrator, to manage the borrower's

operations to ensure that all actions are taken to avoid or minimize

the need for debt settlement. The employment could be on a temporary

basis to manage the system during the time the debt settlement is being

considered, and possibly for some time after any debt settlement, or it

could be on a permanent basis.

(5) The borrower must submit, at a time determined by RUS, a

resolution of its board of directors requesting debt settlement and

stating that the borrower is either currently unable to meet its

financial obligations to the government or will not be able to meet

said obligations sometime within the next 24 months, and that, in

either case, the default is likely to continue indefinitely.

(c) Debt settlement measures. (1) If the Administrator determines

that debt settlement is appropriate, the debt settlement measures the

Administrator will consider under this subpart with respect to direct,

insured, or guaranteed loans include, but are not limited to, the

following:

(i) Reamortization of debt;

(ii) Extension of debt maturity, provided that the maturity of the

borrower's outstanding debt after settlement shall not extend more than

10 years beyond the latest maturity date prior to settlement;

(iii) Reduction of the interest rate charged on the borrower's

debt, provided that the interest rate on any portion of the

restructured debt shall not be reduced to less than 5 percent, unless

the Administrator determines that reducing the rate below 5 percent

would maximize debt recovery by the government;

(iv) Forgiveness of interest accrued, penalties, and costs incurred

by the government to collect the debt; and

(v) With the concurrence of the Under Secretary for Rural

Development, forgiveness of loan principal.

(2) In the event that RUS has, under section 306 of the RE Act,

guaranteed loans made by the Federal Financing Bank or other third

parties, the Administrator may restructure the borrower's obligations

by: acquiring and restructuring the guaranteed loan; restructuring the

loan guarantee obligation; restructuring the borrower's reimbursement

obligations; or by such means as the Administrator deems appropriate,

subject to such consents and approvals, if any, that may be required by

the third party lender.

(d) Borrower's obligations to other creditors. The Administrator

will not grant relief on debt owed to the government unless similar

relief, on a pro rata basis, is granted with respect to other secured

obligations of the borrower, or the other secured creditors provide

other benefits or value to the debt restructuring. Unsecured creditors

will also be expected to contribute to the restructuring. If it is not

possible to obtain the expected contributions from other creditors, the

Administrator may proceed to settle a borrower's debt if that will

maximize recovery by the government and will not result in material

benefits accruing to other creditors at the expense of the government.

(e) Competitive bids for system assets. If requested by RUS, the

borrower or the independent consultant provided for in paragraph (b)(3)

of this section shall solicit competitive bids from potential buyers of

the borrower's system or parts thereof. The bidding process must be

conducted in consultation with RUS and use standards and procedures

acceptable to RUS. The Administrator may use the competitive bids

received as a basis for requiring the sale of all or part of the

borrower's system as a condition of settlement of the borrower's debt.

The Administrator may also consider the bids in evaluating alternative

settlement measures.

(f) Valuation of system. (1) The Administrator will consider the

value of the borrower's system, including, in the case of a power

supply borrower, the wholesale power contracts between the borrower and

its member systems. The valuation of the wholesale power contracts

shall take into account, among other matters, the rights of the

government and/or third parties, to assume the rights and obligations

of the borrower under such contracts, to charge reasonable rates for

service

[[Page 50494]]

provided under the contracts, and to otherwise enforce the contracts in

accordance with their terms. In no case will the Administrator settle a

debt or claim for less than the value (after considering the

government's collection costs) of the borrower's system and other

collateral securing the debt or claim.

(2) RUS may use such methods, analyses, and assessments as the

Administrator deems appropriate to determine the value of the

borrower's system.

(g) Rates. The Administrator will consider the rates charged for

electric service by the borrower and, in the case of a power supply

borrower, by its members, taking into account, among other factors, the

practices of the Federal Energy Regulatory Commission (FERC), as

adapted to the cooperative structure of borrowers, and, where

applicable, FERC treatment of any investments by co-owners in projects

jointly owned by the borrower.

(h) Collection action. The Administrator will consider whether a

settlement is favorable to the government in comparison with the amount

that can be recovered by enforced collection procedures.

(i) Regulatory approvals. Before the Administrator will approve a

settlement, the borrower must provide satisfactory evidence that it has

obtained all approvals required of regulatory bodies that the

Administrator determines are needed to implement rates or other

provisions of the settlement, or that are needed in any other way for

the borrower to fulfill its obligations under the settlement.

(j) Conditions regarding management and operations. As a condition

of debt settlement, the borrower, and in the case of a power supply

borrower, its members, will be required to implement those changes in

structure, management, operations, and performance deemed necessary by

the Administrator. Those changes may include, but are not limited to,

the following:

(1) The borrower may be required to undertake a corporate

restructuring and/or sell a portion of its plant, facilities, or other

assets

(2) The borrower may be required to replace senior management and/

or hire outside experts acceptable to the Administrator. Such changes

may include a commitment by the borrower's board of directors to

restructure and/or obtain new membership to improve board oversight and

leadership;

(3) The borrower may be required to agree to:

(i) Controls by RUS on the general funds of the borrower, as well

as on any investments, loans or guarantees by the borrower,

notwithstanding any limitations on RUS' control rights in the

borrower's loan documents or RUS regulations; and

(ii) Requirements deemed necessary by RUS to perfect and protect

its lien on cash deposits, securities, equipment, vehicles, and other

items of real or non-real property; and

(4) In the case of a power supply borrower, the borrower may be

required to obtain credit support from its member systems, as well as

pledges and action plans by the members to change their operations,

management, and organizational structure (e.g., shared services,

mergers, or consolidations) in order to reduce operating costs, improve

efficiency, and/or expand markets and revenues.

(k) Conveyance of assets. As a condition of a settlement, a

borrower may be required to convey some or all its assets to the

government.

(l) Additional conditions. The borrower will be required to warrant

and agree that no bonuses or similar extraordinary compensation has

been or will be provided, for reasons related to the settlement of

government debt, to any officer or employee of the borrower or to other

persons or entities identified by RUS. The Administrator may impose

such other terms and conditions of debt settlement as the Administrator

determines to be in the government's interests.

(m) Certification of accuracy. Before the Administrator will

approve a debt settlement, the manager or other appropriate official of

the borrower must certify that all information provided to the

government by the borrower or by any agent of the borrower, in

connection with the debt settlement, is true, correct, and complete in

all material respects.

Sec. 1717.1205 Waiver of existing conditions on borrowers.

Pursuant to section 331(b) of the Con Act, the Administrator, at

his or her sole discretion, may waive or otherwise reduce conditions

and requirements imposed on a borrower by its loan documents if the

Administrator determines that such action will contribute to

enhancement of the government's recovery of debt. Such waivers or

reductions in conditions and requirements under this section shall not

include the exercise of any of the debt settlement measures set forth

in Sec. 1717.1204(c), which are subject to all of the requirements of

said Sec. 1717.1204.

Sec. 1717.1206 Loans subsequent to settlement.

In considering any future loan requests from a borrower whose debt

has been settled in whole or in part (including the surviving entity of

merged or consolidated borrowers, where at least one of said borrowers

had its debts settled), it will be presumed that credit support for the

full amount of the requested loan will be required. Such support may be

in a number of forms, provided that they are acceptable to the

Administrator on a case by case basis. They may include, but need not

be limited to, equity infusions and guarantees of debt repayment,

either from the applicant's members (in the case of a power supply

borrower), or from a third party.

Sec. 1717.1207 RUS obligations under loan guarantees.

Nothing in this subpart affects the obligations of RUS under loan

guarantee commitments it has made to the Federal Financing Bank or

other lenders.

Sec. 1717.1208 Government's rights under loan documents.

Nothing in this subpart limits, modifies, or otherwise affects the

rights of the government under loan documents executed with borrowers,

or under law or equity.

Dated: September 19, 1997.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 97-25315 Filed 9-25-97; 8:45 am]

BILLING CODE 3410-15-P