GAO Report - Rural Electrification REA Borrowers' Investments in Cable and Satellite July-1993

8/14/2019 GAO Report - Rural Electrification REA Borrowers' Investments in Cable and Satellite July-1993

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United States General Accounting Office

GAO Report to the HonorableJohn E. Porter, House of Representatives

July 1993 RURALELECTRIFICATION

REA Borrowers

Investments in Cableand Satellite TelevisionServices

GAO/RCED-93-164


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GAO United StatesGeneral Accounting OfficeWashington, D.C. 20548Resources, Community, andEconomic Development Division

B-253315

July 29,1993

The Honorable John E. PorterHouse of Representatives

Dear Mr. Porter:

This report responds to your request that we examine the cable and satellite televisioninvestments of Rural Electrification Administration(REA) borrowers. The report discusses,among other things, the extent to which (1)REA borrowers have invested in cable and satellitetelevision businesses, (2) REA borrowers cable and satellite television businesses compete withother businesses that provide these services, and (3) federal and state agencies regulate andcontrol REA borrowers nonutility investments.

As arranged with your office, unless you publicly announce its contents earlier, we plan nofurther distribution of this report until 30 days after the date of this letter. At that time, we wilsend copies of this report to the appropriate congressional committees and to the Departmentof Agriculture. We will also make copies available to others upon request.

This work was performed under the direction of Victor S. Rezendes, Director, Energy andScience Issues, who can be reached at (202) 512-3841 f you or your staff have any questions.Other major contributors to this report are listed in appendix III.

Sincerely yours,

J. Dexter PeachAssistant Comptroller General


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Executive Summary

Purpose Concerned about the potential for Rural Electrification Administration(REA) borrowers to use REA loans to subsidize their cable or satellitetelevision services, Representative John Porter asked GAO to (1) examinethe extent to which REA borrowers have invested in cable and satellitetelevision, (2) determine whether REA borrowers or their affiliates competwith independent businesses to provide such services, and (3) provideinformation on the extent to whichREA and other federal and stateagencies oversee REA borrowers cable and satellite businesses .

Background Under the Rural Electrification Act of 1936, as amended,REA (an agency ofthe U.S. Department of Agriculture) provides loans and loan guarantees torural electric and telephone utilities (called electric borrowers andtelephone borrowers, respectively). According to the most recentlycompiled data, as of May 31, 1993,REA had outstanding balances for itsloans and guaranteed loans to electric and telephone util ities of about$37 billion. The Federal Communications Commission(FCC) has authorityto regulate interstate communication by wire or radio, includingtelephone, cable television, and satellite services. The Federal EnergyRegulatory Commission (FERC), among other things, regulates the rates,terms, and conditions of wholesale electric power sales and transmissionservices.

To examine borrowers cable and satellite investments, GAO surveyed all1,863 current borrowers identified byREA and received 1,610 usableresponses. The survey results, when reported as percentages in this report,are based on the number of responses received for each question; not allrespondents answered every question. (See app. I for the survey results.)

Results in Brief One-fourth of theREA borrowers that responded to GAOS survey provideeither cable television or satellite television equipment and programmingservices (called satellite television services) or both. Respondentsreported investments of $357 million in these businesses.

Borrowers that provide satellite television services compete with othersatellite businesses (independent businesses) that are not owned by REAborrowers. In GAOSsurvey, respondents with cable television businessessaid that, before and after they established the cable business, they facedonly limited competition from independent cable operators. Borrowers

The total is probably higher because about one-fifth of the borrowers reporting cable or satellitetelevision investments did not report the amount of money they had invested in these businesses

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Executive Summary

with cable businesses may compete with satellite businesses that serve thesame areas; however, a House Committee report indicates that suchcompetition largely has not materialized.2REA borrowers may havecompetitive advantages in their cable or satellite businesses; for example,they have access to credit sources established to help finance electric andtelephone cooperatives activities. Many share space, equipment, and staffused for their utility services with their cable or satellite activity.

Subject to statutory limits,REA restricts the amounts that borrowers mayinvest in nonutility activities.REA also has accounting and auditingcontrols intended to ensure that borrowers comply with their loanagreements and use REA loan funds for authorized purposes. Thesecontrols include annual audits ofREA borrowers that can extend to theaccounts of affiliates. For several reasons,FCCS and FYERCSoversight ofREAborrowers is limited. State regulation of borrowers and affiliates varies,depending in part on whether the borrower is a cooperative or isinvestor-owned. GAO did not assesswhether federal and/or state oversightis adequate to prevent borrowers from cross-subsidizing their cable andsatellite businesses.

Principal Findings

Many REA BorrowersInvest in Cable andSatellite TelevisionServices

REA BorrowersBusinesses May EnjoyCompetitive Advantages

One-quarter (416) of the borrowers responding toGAO'S survey providecable and/or satellite television services: 152 provide only cable televisionservices, 231 provide only satellite television services, and 33 provide bothcable and satellite television services. Over 95 percent of the borrowersthat provide only cable services are telephone utilities. About 77 percentof the borrowers that provide only satellite services are electric utilities.Respondents reported investments of about $338 million in cable andabout $19 million in satellite businesses.

About 15 percent of the survey respondents that provide cable televisionservices said they compete with other cable systems, while 78 percent ofthe respondents that provide satellite television services said theycompete with independent bus inesses. According to trade associationsthat represent REA borrowers, in many casesREA borrowers have enteredcable or satellite television businesses because their rural areas lacked

2H.R.Rep. No.62&?,102dCong.,2ndSess.30(1992).

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Executive Summary

these services and/or did not have access o over-the-air televisionchannels.

Borrowers with cable and/or satellite television businesses may haveaccess o financial resources that independent businesses do not have. Forexample, many electric and telephone cooperatives are members of theBanks for Cooperatives (&Bank), National Rural Utilities Cooperative ,Finance Corporation (CFC), or Rural Telephone Finance Cooperative(RTFC). These institutions lend money to members to finance utility andnonutility projects.&Bank and CFC officials said these institutions are notavailable to most parties and have lower interest rates than commercialbanks. Few respondents used these sources to directly finance cable orsatellite businesses; however, the availability of these sources-as well asof REA loan funds-may have freed the borrowers general funds(unrestricted funds available on demand) for these ventures: 56 percent othe respondents with cabIe businesses and 49 percent of those withsatellite businesses used general funds to enter these businesses.

Many borrowers share nonfinancial resources with their cable and satellibusinesses . About 94 percent of the respondents with cable services andabout 77 percent of those with satellite services share resources-such asstaff, offices, or service equipment used in providing utility services-withtheir cable and satellite businesses.

Government Oversight ofBorrowers NonutilityActivities Varies

To protect the security of its loans,REA has limited borrowers nonutilityinvestments. However, in 1987 he Congress amended the RuralElectrification Act to enable electric borrowers to invest their own fundwithout REA'S approval if the investments do not exceed 15 percent of thevalue of a borrowers utility plant. Amendments passed in 1990 enabletelephone borrowers to inves t up to one-third of their net worth in ruraldevelopment projects without REA'S approval and prohibit REA fromconsidering an applicants balance of general funds when makingdecisions about loan applications.

REA requires electric and telephone borrowers, respectively, to follow theFERC and FCC Uniform Syst ems of Accounts, each of which provides aframework for recording utility and affiliate cost s and transactions.REAemployees audit borrowers at least every 3 years.Also, REArequires itsborrowers to have annual audits by certified public accountants; theseaudits can detect improper cost allocations between utility and nonutilityactivities. GAO did not audit any borrowers or test these controls.


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Executive Summary

The Cable Communications Policy Act of 1984 generally prohibitscommon telephone carriers from providing cable television servi ces intheir service areas, but utilities that serve rural areas with 2,500 or fewerpersons are exempt from this prohibition. Also, under certain conditions,FCC an waive this cross-ownership prohibition. In GAOS urvey, about89 percent of the REA elephone borrowers that provide cable televisionservices obtained exemptions or waivers from FCC.n order to minimizeinterference among signals, FCC pproves and regulates transmissions bysatellite operators; however, REA borrowers that provide satelli te receptionservices are primarily distributors, or satellite equipment retailers, whicare not regulated by FCC.lso, since 1967,FERC (formerly the Federal

Power Commiss ion) has concluded it has no jurisdiction under theFederal Power Act to regulate the wholesale rates of REA-financedelectriccooperatives.

State regulation of borrowers cable and satellite bus inesses varies,depending in part on whether the borrower is a cooperative or isinvestor-owned. Almost all of REAS lectric borrowers are cooperatives.Onequarter of REASelephone borrowers are cooperatives, while the restare investor-owned companies. Almost all states regulate the utility ratesof investor-owned utilities and have procedures, frequently employedduring rate cases, o address cross-subsidies that could arise from utilitiesrelationships with their affiliates. However, many states do not regulate

cooperatives. For instance, according to the association of state utilitycommissioners , only 21 of the 46 states with electric cooperatives regulatethe rates of electric cooperatives, while only 23 of these states regulatecooperatives accounting and record-keeping.

Recommendations This report contains no recommendations.

Agency Comments REA rovided written comments on a draft of this report. REA uggestedminor clarifications and provided more current REA inancial data. Thesuggested clarifications and financial data were incorporated whereappropriate.



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Contents

Executive Summary

Chapter 1Introduction REA Provides Loans, Loan Guarantees, and Grants to RuralUtilities

Cable and Satellite Televis ion Businesses Serve Millions ofCustomers

1

Objectives, Scope, and Methodology 1

Chapter 2 1

Many REA BorrowersREA Telephone Borrowers Are Likely to Provide Cable 1

Television ServicesInvest in Cable and REA Electric Borrowers Are Likely to Provide Satellite Television 1Satellite Tel w-i si on Services.- ---- ----- - --- . -I----

Chapter 3REA BorrowersSatellite and Cable

REA Borrowers Cable and Satellite Businesses Compete WithIndependent Businesses

REA Borrowers May Have Competitive Advantages

11

1

Businesses May Enjoy REA Borrowers Have Access to Financial Resources 1CompetitiveAdvantagesChapter 4 2Government Federal Utility Regulatory Agencies Play a Limited Role 2REA Has Controls Over Borrowers Activities 2Oversight of State Regulation of Borrowers and Their Investments Varies 3Borrowers Cable andSatellite InvestmentsVaries

Appendixes Appendix I: Results of Survey of REA Borrowers 3Appendix II: Comments From the U.S. Department of Agriculture 4Appendix III: Major Contributors to This Report 4

Related GAO Products 4

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Contents

Figures Figure 1.1: REA Telephone and Electric BorrowersFigure 2.1: REA Borrowers That Provide Cable and Satellite

Television Services

813

Figure 3.1: Sources of Funding for REA Borrowers CableTelevision Investments

19

Figure 3.2: Sources of Funding for REA Borrowers SatelliteTelevision Investments

20

Figure 3.3: Sharing of Utility Resources Between REA Borrowersand Telecommunications Businesses

Figure 3.4: Sharing of Utility Services Between REA Borrowersand Telecommunications Businesses

23

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Abbreviations

CoBank Banks for CooperativesCFC National Rural Utilities Cooperative Finance CorporationCPA Certified Public AccountantsFCC Federal Communications CommissionFERC Federal Energy Regulatory CommissionGAO General Accounting OfficeNRTC National Rural Telecommunications CooperativeREA Rural Electrification AdministrationUSDA U.S. Department of AgricultureRTFC Rural Telephone Finance Cooperative



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Chapter 1

Introduction

The Rural Electrification Administration(REA), a credit agency of the U.S.Department of Agriculture (USDA), makes and guarantees loans to financerural electric and telephone services and economic development projects.About one-half of the 1,863 borrowers are electric utilities (called electriborrowers), and the other half are telephone utilit ies (called telephoneborrowers). (See fig. 1.1.)

Figure 1 I : REA Telephone andElectric Borrowers Commercial Telephone Utilities

Electric Cooperatives

- 2%Other Electric Utilities

L Telephone Cooperatives

m Electric borrowersI Telephone borrowers

Source: GAO oresentation of REA data.

REA was established in May 1935 by presidential executive order and wasaccorded statutory authority by the Rural Electrification Act of 1936. Thact established REA as a lender of funds that would promote the



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Chapter 1Introduction

electrification of rural areas. In 1949, he act was amended to allowREA toprovide funds for the development of rural telephone service.

REA Provides Loans,Loan Guarantees, andGrants to RuralUtilities

To finance the development and maintenance ofrural electric systems,REAmakes and guarantees loans to 938 rural electric utilities, almost all ofwhich are cooperatives. Sixty electric cooperatives are generation andtransmission cooperatives that produce electricity and then transmit itover high-voltage power lines to central distribution stations. Theremaining distribution electric borrowers buy and then transform thehigh-voltage power so that it can be used by households and businesses.

These borrowers transmit the electricity to local customers.Generation and transmission borrowers generally obtain funding throughREA'S guaranteed loan program. After REA approves a loan application,these borrowers may obtain loans from the Federal Financing Bank orfrom private sector lenders; these loans are guaranteed against REA'Srevolving fund. Interest rates for the guaranteed loans are equal to the cosof money to the Treasury plus one-eighth of I percent. As of May 31,1993outstanding REA loan guarantees for electric borrowers totaled about$21 billion.

Distribution electric borrowers generally useREA'S insured loan program.

REA finances 70,80, or 90 percent of a borrowers fmancial needs,depending on the borrowers financial condition. The remaining fundscome from other sources, such as the Banks for Cooperatives (CoBank) orthe National Rural Utilities Cooperative Finance Corporation(CFC).2 Theinterest rate paid by the borrower is a blend (or weighted average) ofREAand other interest rates. The REAportion of the insured loans comes fromREA'S revolving fund and carries an interest rate of 5 percent. For exampleif a utility needed to borrow $100,000, t could receivean REA-hSUred loanfor $70,000 at the 5-percent interest rate and borrow the remaining $30,00from CFC at the prevailing market rates (for example, at about 9 percent in1991). The blended interest rate for such a loan would be about6.2 percent. As of May 31,1993, outstandingREA insured loans to electric

borrowers totaled over $12 billion.

The Rural Electrification and Telephone Revolving Fund is primarily funded through rep ayments oREA loans and sales of certificates of beneficial ownership to the Federal Financing Bank.

*CoBank, which began ending in 1967, s a consortium of financial institutions that are owned by thborrowers. CFC was established by electric borrowers in 1 969 o raise funds from commercial markefor lending to cooperatives.



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About three-quarters of the 925 telephone utilities that borrow fromREAare commercial telephone companies. The remaining borrowers arealmost exclusively rural telephone cooperatives. Most rural telephoneutilities can obtain financing through (1) directREAloans at 5-percentinterest, (2) Rural Telephone Bank 10ans,~ 3) blendedREAand RuralTelephone Bank loans, and (4) Federal Financing Bank loans that areguaranteed by REA.The outstanding balance on REAloans to telephoneborrowers totaled about $3.3 billionin May 1993. The balance onREA oanguarantees to telephone borrowers was about $340 million.

In general, REA oans and loan guarantees may not be used to finance

nonutility investments4 However, under 1987 amendments to the RuralElectrification Act,REA currently makes loans and grants in amounts of upto $400,000 at no interest for general rural economic developmentpurposes. Projects funded by these loans and by grants include communitycenters, sewer lines, recycling facilities, or other manufacturing orbusiness activities in rural areas. According toREAofficials, such loans andgrants could be used to finance satellite or cable television investments byREAborrowers, but REAhas approved no such requests thus far. Under1990 amendments, REAmakes grants to schools and hospitals in order toencourage and improve telecommunications, computer networks, andrelated advanced technologies used in rural areas.

Cable and SatelliteTelevision Businesses

cable or satellite television services. According to trade associationofficials, cable television is concentrated in urban or suburban areas

Serve Millions of because it requires from 15 to 25 customers per mile of cable to beCustomers cost-effective. Cable television has grown from serving 37 percent of U.Shouseholds with televisions in 1985 o serving 61 percent (or about

56 million) of these households in 1992. With few exceptions, cabletelevision companies face no competition from other cable companies intheir service areas.

Satellite television services mostly serve rural areas not reached by cable

television services. The potential market for satellite television has been

?he Rural Telephone Bank, established in 1971, ends money to REA telephone borrowers that meetcertain criteria. The Bank, whose governor is the REA Administrator, historically was funded byTreasury funds. Since its inception, the Bank has also issued class B and C stocks. The Bank is retirinits government class A stocks in preparation for becoming a private corporation.

4Nonutility activities for telephone companies are more commonly known as nonregulated activiIn this report, the term nonutility is used instead of nonregulated.

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estimated at about 20 million households, but only about 3.6 millionhouseholds currently receive satellite programming.

Objectives, Scope,and Methodology

Many REAborrowers provide cable television or satellite equipment andprogramming services to their customers. Independent cable and satellitetelevision businesses and others have expressed concern that these REAborrowers may enjoy unfair competitive advantages because they haveaccess o low-cost financing and utility resources. Because of theseconcerns, Representative John E. Porter asked GAOto (1) examine theextent to which REAborrowers have invested in cable and satellitetelevision, (2) determine whetherREAborrowers or their affiliates competewith independent businesses to provide such services, and (3) provideinformation on the extent to which federal and state agencies overseeREAborrowers cable and satellite television busi nesses.

To determine the extent to which REAborrowers invest in cable or satellitetelevision services, we mailed questionnaires to allREAelectric andtelephone borrowers. We identified the universe of borrowers by obtainina list of these entities fromREA. REAborrowers completed and returned1,610 questionnaires to us, responding at a rate of about 86 percent. Thesurvey results are not adjusted in this report. Because different numbers ofrespondents chose to answer, or not to answer, specific questions in ourquestionnaire, percentages derived from the survey and contained in thisreport may be derived from different denominators. In this report, thesepercentages are reported without including the missing responses. (Seeapp. I for the number of missing responses.)

To examine whether REAborrowers compete with independent businesses,we relied upon appropriate questions in our questionnaire that quantifiedthe extent of competition between borrowers and independent businessesTo obtain the views of satellite equipment and broadcasting businessesand REAborrowers, we obtained and reviewed documents from, andinterviewed officials of, the National Rural TelecommunicationsCooperative, the National Telephone Cooperative Association, theNational Rural Electric Cooperative Association, the Cable AntennaTelevision Association, and the Satellite Broadcasting andCommunications Association.

To examine the extent to which federal and state authorities regulate andoversee the cable and satellite television activities ofREAborrowers, weinterviewed officials and/or reviewed documents obtained fromREA,the

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Federal Communications Commission(FCC), the Federal EnergyRegulatory Commission(FERC), and the National Association of RegulatoryUtility Commissioners-the national organization representing state utilitregulators. We obtained and reviewed federal regulations and reports thatpertained to regulating the nonutility investments of telephone and electriutilities. In addition, we included questions in our questionnaire about theextent to which REAborrowers are required to obtain authorizations to,engage in cable or satellite television businesses.

Because REAhas procedures and measures that are intended to ensure thatits loan and loan guarantees are used for authorized purposes, weexamined these controls to the extent that was appropriate for theobjectives and scope of this review. Furthermore, we noted and reviewedUSDAOffice of Inspector General reports that addressed these controls.Because we did not examine the financial records ofREAborrowers orconduct tests of REA'Scontrols, we have no basis for making observationsor drawing conclusions about the adequacy of these controls.

Most of our fieldwork was performed in the Washington, D.C.,metropolitan area, except that our questionnaire was pretested onREAborrowers in Virginia and New Jersey. Our work was performed fromJuly 1992 hrough April 1993 n accordance with generally acceptedgovernmental auditing standards.

In providing written comments on adraft of this report, REAsuggestedminor clarifications and provided more currentREAfinancial data.Specifically, REAprovided us with recent data on the outstanding balancesfor its loans and loan guarantees. Moreover, REAclarified the kinds ofstocks issued by the Rural Telephone Bank.REAalso suggested that weexplain why loans from such sources asc&ank and CFCare considered tobe low cost and indicate how many households in rural communities haveaccess o cable television. We incorporated these financial data andsuggested clarifications into the report.



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Chapter 2

Many REA Borrowers Invest in Cable andSatellite Television

Many REAborrowers have invested in cable and satellite televisionbusinesses. Specifically, about one-quarter (416) of the 1,610REAborrowers that responded to our survey said they provide cable or satellitetelevision services to customers. One hundred fifty-twoREAborrowers saidthey provide cable television services only, and 231 said they providesatellite television services only. Thirty-threeREAborrowers said theyprovide both cable and satellite television services. (See fig. 2.1.)

Figure 2.1: REA Borrowers ThatProvide Cable and Satellite TelevisionServices

r9%, Provide Cable Television Only

Provide Satellite Television Only

Source: GAO survey of REA borrowers.

In our survey, about 56 percent of the borrowers with cable televisionservices and about 49 percent of those with satellite televi sion services

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Chapter 2Many REA Borrowers Invest in Cable andSatellite Television

National Telephone Cooperative Association. Over 600 rural electric andtelephone systems belong to NRTC. NRTCobtains and organizes satellitetelevision programming packages from such sources as Home Box Officeand Cable News Network.

When REAborrowers provide satellite television programming to theircustomers, they do not actually transmit satellite signals to viewerssatellite dishes. Rather, most REAborrowers market NRTC'SRural TV package to viewers and collect program revenues from viewers. TheRural TV package is available on the satellite C-band to homeownerswith outdoor satellite di shes. Satellite dishes have prices of $1,000 or

more. Seventy-six percent of theREA

borrowers in our survey that providesatellite programming are members ofNRTC.



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Chapter 3REA Borrowers Satellite and CableBusinesses May Enjoy CompetitiveAdvantages

cable television sys tems may require 15 to 25 customers per mil e of cableto be profitable, while satellite television businesses can operatesuccessful ly in less populous areas. In addition, trade association officialssaid, entry into the satellite television market is relatively unfettered byfederal or state regulation, while many cable television providers aregranted exclusive operating franchises by local governments.

REA Borrowers MayHave Competitive

Advantages

REAelectric and telephone borrowers may enjoy competitive advantagesover independent cable and satellite television businesses. We found thatREA orrowers have access to financial, material, and human resourcesthat may expedite the borrowers entry into the cable and satellitetelevision businesses. According to independent cable and satellitetelevision businesses and their trade associations, rural electriccooperatives have access o loans from sources, such as the Banks forCooperatives (CoBank) or the National Rural Utilities Cooperative FinanceCorporation (CFC), that charge lower interest rates than many commercialbanks, as well as to marketing and operating resources that may surpassthose of many independent businesses.

REA electric and telephone borrowers and their national associationsinformed us that REA borrowers provide cable and/or satellite televisionservices in sparsely populated areas that would not otherwise have accessto these telecommunications services. For instance, these parties said thatfrequently only the local telephone utility had the financial and technicalresources to provide cable television services in some remote areas.According to anFCC official, over 91 percent of U.S. households are servedby cable television companies. However, according to the official, ruralcommunities are generally not as well served by cable television as moredensely populated communities.

REA Borrowers HaveAccess to Financial

and satellite television enterprises. These include (1) exclusive sources ofloans that REA borrowers established to finance their utility and nonutility

Resourcesprojects and (2) the borrowers general funds3 (We neither looked for nofound evidence that REA borrowers were using the proceeds of REA loansor loan guarantees to directly subsidize their cable or satelliteinvestments.)

3General unds are unrestricted funds that are derived from revenues and other sources; general fundare on deposit at banks and other institutions and are readily available on demand.

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Borrowers Have Acces s toExclusive Sources of Loans

REAborrowers have access to their own sources of funds. According to oursurvey, REAborrowers have not used these resources extensively todirectly finance their cable and satellite television businesses. However,the availability of these loan sources may free a borrowers own funds forcable and satellite investments.

Specifically, manyREAborrowers (such as electric and telephonecooperatives and public power agencies) are members ofCoBank, CFC, orthe Rural Telephone Finance Cooperative (RTFC). These institutions lendmoney to members to finance utility and nonutility activities. Thesesources of credit are generally available only toREAborrowers and theiraffiliates. Officials from these institutions said that loans from thesesources would probably have lower interest rates than loans fromcommercial banks, ACFCofficial added that loans for cable and satelliteinvestments might be easier for an REAborrower to obtain fromCFCthanfrom a commercial bank. In our survey, about 11 percent of the borrowerswith cable television bus inesses said they had obtained l oans from suchsources as C&ink, CFC,and the RTFC o start these businesses. Also, about7 percent of the borrowers with satellite television businesses said theyhad used these sources.

Borrowers Use Their GeneralFunds

REAborrowers also have money in their general funds to pay for theircable and satellite television businesses, which can be costly. Forexample, in our survey, the REA orrowers with cable businesses investedan average of over $2 million in these businesses. Moreover, in our survey,56 percent of the REAborrowers that provide cable television said theyused their general funds to fmance the cable television enterprise. (See fig.3.1.)

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Figure 3.1: Sources of Funding forREA Borrowers Cable Televisioninvestments

100.0 Percent of REA Borrowers WithCable Television Services

90.0

60.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0

Financing Sources

Note: Each borrower may have indicated more than one source of financing.

Source: GAO survey of REA borrowers

According to our survey, 49 percent of the borrowers that invested insatellite businesses used their general funds. (See fig. 3.2.)



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Figure 3.2: Sources of Funding forREA Borrowers Satellite TelevisionInvestments

100.0 Percent of REA Borrowers With Satellite Television Servlces

90.0

60.0

70.0

60.0

Financing Sources

Note: Each REA borrower may have indicated more than one source of funding.

Source: GAO s urvey of REA borrowers.

In 1994,REAborrowers, through NRTC, ook to expand and improve theirsatellite programming businesses. Specifically, in co@mction with HughCommunications, Inc.,NRTCplans to make available to its members aDirect TV satellite progr amming package that will have the advantage ofbeing receivable by relatively small l&inch-wide receivers. The DirectTV programming will use the Ku-band rather than C-band.NRTC will

pay up to $250 million as a distribution fee to Hughes. Consumers will becharged an initial acquisit ion and installation charge of about $700 for thenew receivers. Independent satellite equipment retailers and satelliteprogrammers that we contacted are concerned that the Direct TVventure will negatively affect their businesses. Some of these parties saidthat only an entity that had access to low-cost REAand other loans couldafford to invest in such an expensive and, in their opinion, risky venture.

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Chapter 3RBA Borrowers Satellite and CableBusinesses May Enjoy CompetitiveAdvantages

exceeded a borrowers utility plant and equipment requirements by morethan 8 percent.

On the basis of our survey, we found that borrowers with cable or satellitetelevision businesses account for no more than their proportionate shareof REAS utstanding loans and loan guarantees. Borrowers in our surveythat operate cable or satellite television businesses constitute 21 percentof all REA orrowers. As of December 31,1991, these borrowers accountedfor an outstanding balance in REAoans of $5.2 billion-or 18.5 percent ofthe total outstanding balance for all REAoans at that time. Moreover, theseborrowers collectively accounted for $1.5 billion in outstanding loanguarantees-or 4.3 percent of the total REA alance for guaranteed loans atthat time.

REA Borrowers Share According to our survey, most REA orrowers shared utility resources andTheir Utility Resources services with their cable or satellite television businesses. In general, REAWith Nonutility Businesses borrowers shared resources and services with their cable businesses more

than they shared resources and services with their satellite businesses.According to independent satellite businesses and associations thatrepresent the cable and satellite broadcasting industries, this sharing ofresources may give REA orrowers a competitive advantage overindependent businesses. The sharing of utility resources and services withnonutility activities could result in REA orrowers cross-subsidizing theirnonutility activities if costs are not properly allocated between the utilityand nonutility activities.

About 94 percent of the REA orrowers that provided cable televisionservices and about 77 percent of those that provided satellite televisionservices shared operating resources-such as personnel, business oroffice equipment, physical plant and office space, and service equipment(trucks and tools, for example)-with their satellite or cable business.Only 5 percent of the REA orrowers with cable businesses said they didnot share utility resources with their cable business. In contrast,19 percent of the REA orrowers with satellite television businesses saidthey did not share utility resources with the satellite business, and 25percent said they did not share utility services. (See fig. 3.3.)



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Chapter 3REA Borrowers Satellite and CableBusinesses May Enjoy CompetitiveAdvantiges

Figure 3.4: Sharing of Utility ServicesBetween REA Borrowers andTelecommunications Businesses

100 Percent of REA Borrowers

90

80

Satellite Televisi on Business

El Cable Television Business

Note: Each borrower may have indicated more than one service that was shared.

Source: Survey of REA borrowers.

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Chanter 4

Government Oversight of Borrowers Cableand Satellite Investments Varies

Federal and state government agencies are involved in regulating thebusiness activities of electric and telephone utilities. At the federal level,utility regulatory agencies play a limited role, in part because manyREAborrowers are relatively small. To protect the security of its loans andensure that loan proceeds are used for authorized purposes, REArequiresborrowers to follow certain accounting and audit procedures. Because wedid not test these controls or audit any borrowers, we make noconclusions about the adequacy of these procedures. State regulation ofborrowers and their affiliates varies widely among the states and dependsin part on whether the borrower is a cooperative or is investor-owned.

Federal UtilityRegulatory AgenciesPlay a Limited Role

The Federal Communications Commission(FCC) has authority to regulateinterstate communications by wire and radio, including telephone, cabletelevision, and satellite transmission services. The Federal EnergyRegulatory Commission (FEJRC),among other things, regulates the rates,terms, and conditions of wholesale electric power sales and transmissionservices. However, for various reasons, these agencies regulation ofREAborrowers activities is limited.

Telephone Borrowers Under the Cable Communications Policy Act of 1984, common carriers arReceive Rural Exemption generally prohibited from providing cable television services in their

to Provide Cable Televisionservice areas. The act, however, provides that the cross-ownershipprohibition does not apply to the extent that such carriers providetelephone exchange services in any rural area, as defined by FCC. FCChasadopted the Bureau of the Censuss definition of rural-places populateby fewer than 2,500 persons not in urbanized areas. In addition, undercertain circumstances, FCC can waive the cross-ownership prohibition. Inour survey, about 89 percent of theREAtelephone borrowers that providecable television services stated that they are exempt or obtained anFCCwaiver. FCC is currently considering increasing the population thresholdfor the rural exemption.

FCC Generally Does NotRegulate BorrowersSatellite Businesses

REAborrowers that provide satellite broadcasting services are primarilyprogramming dis tributors, or satellite equipment retailers, which aregenerally not regulated byFCC. In our survey, about 73 percent of theREAborrowers that invested in satellite television services staked they did nothave to obtain federal or state approval before beginning these businesses.

According to FCC, evidence suggests that there are still substantial areas that are wholly withoutcable service or are underserved by cable. Therefore, FCC has proposed increasing the populationthreshold for classifying an area as rural from fewer than 2,500 o fewer than 10,000persons.

Page 26 GAO/EKED-93-164 Rural Electrification

. ! I


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Chapter 4Government Oversight of Borrowers Cableand Satellite Investments Varies

(In contrast, only about 9 percent of the borrowers that invested in cablebusines ses did not obtain regulators approvals.)

Trade association officials explained that, when providing satelliteprogramming services,REA borrowers generally purchase the rights tomarket the National Rural Telecommunications Cooperatives(NRTC)Rural TV programming package and encourage their ratepayers to buythis package. The borrowers also bill service subscribers and collect therevenues. REA borrowers arrange for ratepayers to view the satelliteprogramming by obtaining the ratepayers descrambler2 codes andconveying the descrambler code to parties that transmit the satelliteprogramming. However,REA borrowers do not physically receive ortransmit satellite signals.

According to anFCC attorney, FCC does not regulate or license most entitiesthat distribute satellite programming to viewers or to otherdistributors.3 Neither doesFCC regulate entities that sell satellitereception equipment, such as satellite dishes . The Cable CommunicationsPolicy Act of 1984 allowed owners of backyard satellite dishes to receivesatellite-relayed, unscrambled programming free of charge until such timeas the signals were scrambled by programming carriers and the carrierscollected revenues to provide the programming. Today, many satelliteprogramming signals are scrambled.

An FCC attorney explained that, to minimize interference among signals,FCC approves and regulates transmissions by satellite operators. FCC,however, does not license or regulate the activities of programmingdistributors or of entities, such asNRTC, that arrange for programmingpackages but do not actually transmit televi sion broadcasting signalsthrough satellites.

FERC Excludes REAElectric CooperativesFrom Its RegulatoryJurisdiction

Under the Federal Power Act,FRRC is responsible for (among other things)setting the rates, terms, and conditions for the sale and transmission ofelectricity sold at wholesale. While manyREA borrowers purchase

electricity from wholesale suppliers, relatively few sell power atwholesale. Rather, the borrowers primarily sell electricity at retail to thei

%atellite signal s are scrambled to prevent unauthorized reception. Descramblers make it possible forsatellite dish owners to receive satellite television programming.

3Distributors are entities that buy satellite programming packages to sell to viewers or to otherdistributors. Distributors do not originate the programming and are not responsible for transmittingthe programming by satellite.



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Chapter 4Government Oversight of Borrowers Cableand SateIIite Investments Varies

customers. Primary responsibility for setting retail electricity prices andregulating utility transactions, such as contracts between utilities andaffiliated companies, lies with state utility commiss ions (although, asdiscussed below, not all states regulate electric cooperatives).

About 60REA borrowers are generation and transmission cooperatives;that is, they produce and sell power at wholesale to their member retailcooperatives. As wholesale power transactions, such sales potentialIy fallwithin FERCSurisdiction. However, in 1967, he Federal PowerCommission (the predecessor of FERC) held that it had no jurisdictionunder the Federal Power Act to regulate wholesale rates charged by ruralelectric cooperatives supervised by RJGL4

REA Has ControlsOver BorrowersActivities

To protect the security of its loans, REA laces certain restrictions onborrowers nonutility investments; however,REAS authority in this area islimited by statute. REA as accounting and auditing controls that areintended to ensure that borrowers comply with their loan agreements anduse REA loan funds for authorized purposes only.

REA Reviews NonutilityInvestments as a Loan

Security Measure

According to REA fficials, REA ttempts to prevent its borrowers fromcompleting agreements with other organizations (such as agreementspertaining to the sharing of resources for cable and satellite televisionservices) that could imperil the security of its loans. Specifically, REAregional office officials review and approve agreements between REAborrowers and other organizations. Before 1987, REA ules generallylimited electric borrowers nonutility investments to an amount notexceeding 3 percent of the value of a borrowers total utility plant. REAofficials said that REA ould also review and reject any nonutilityinvestments planned by its telephone borrowers.

However, the ability of REAo control its borrowers nonutility investmenthas been limited by law. In 1987, he Congress amended the RuralElectrification Act of 1936, as amended, to enable electric borrowers to

invest their own funds without REAS pproval, as long as the investmentsdo not exceed 15 percent of the value of the borrowers utility plant. In1990, he Congress further amended the act to enable telephone borrowersto invest up to one-third of their net worth in rural development projectswithout REXS approval. The 1990 amendment also stated that REA ould

4Dairyland Power Cooperative, 37 F.P.C. 12,67 P.U.R.3d 340 (1967). See also, Salt River ProjectAgricultural Improvement & Power District v. FPC, 129 U.S. App. D.C. 117,391 F.2d 470 (DC. Cir.1968).



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Chapter 4Government Oversight of Borrowers Cableand Satellite Investments Varies

not, on the basis of a borrowers level of general funds-the source,according to our survey, of many borrowers financing for cable andsatellite television businesses-deny or reduce any loan or loan advancemade under the act.

Accounting and AuditingControls Focus on Use ofREA Loan Proceeds

Agency officials explained that, as a general policy,REAelectric andtelephone loan funds (with the exception of funds from rural economicsdevelopment loans and grants) are to be used for utility purposes only.The loan agreement between REA and a borrower specifies the particularpurposes of the loan-for example, to upgrade an electrical transmissionsubstation. The accounting and auditing requirements forREAborrowersfocus on ensuring that loan funds are used in accordance with theagreement. We did not audit any borrowers or test these controls.

REA Applies FCCs and FERCs REArequires that telephone and electric borrowers followFCCS and FERCSAccounting Rules Uniform Systems of Accounts, respectively. These systems of accounts are

used by regulated utility companies and provide a framework forrecording costs and transactions. In addition to its uniform sys tem ofaccounts for telephone companies, FCC has established (1) joint cost rules,which specifically address how to allocate the costs of resources and/orservices that are shared by regulated telephone utilities and nonregulatedactivities,6 and (2) affiliate transaction rules, which govern how

transactions between a utility and its nonregulated affiliates are recorded.The joint cost rules are designed to ensure that utility costs are allocatedto the utility activity and that nonutility costs are allocated to thenonutility activity.6FERCS Uniform System of Accounts also addresses therecording of some nonutility and affiliate cost s; however, according toFERC and REA officials, FERC'Ssystem of accounts iS not as extensive orprecise as Fccs.

REArequires its borrowers to follow these rules as supplemented byREArequirements. Requi rements for telephone borrowers have been made partof REAs formal regulations (7 C.F.R. 1770), while requirements for electricborrowers are set forth in an REAbulletin. In 1990,REA issued a notice of

proposed rulemaking to make theREA accounting requirements for electricborrowers a formal regulation. As of May 1993, he rulemaking had notbeen completed.

61n his report, the nonutility services or activities of a telephone utility refer to the nonregulatedservices offered by a telephone utility or its affiliates.

Telephone Communications: Controlling Cross-Subsidy Between Regulated and Competitive Service(GAO/RCED%&34 , Oct. 30,1987).

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Chapter 4Government Oversight of Borrowers Cableand Satellite InvestmentsVaries

REA Requires Audits REAofficials review borrowers expenditures for authorized loan purposebefore approving fund withdrawals. Borrowers are required to establishspecial trustee accounts, into which they must deposit the proceeds ofREA oans. According to REAofficials, borrowers cannot withdraw moneysfrom their trustee accounts and deposit these funds into their generalfunds without REX'Sapproval. The REAofficials said that, before this fundtransfer can occur, they mus t review and approve the borrowersdocumentation showing that the work was performed for approved loanpurposes.

According toREAofficials, REAemployees audit the accounts of REAborrowers at least every 3 years, and REArequires that its borrowersaccounts undergo annual audits by certified public accountants(CPA). Thehead of REA'STechnical Accounting and Auditing Staff said that if anaffiliate is deemed to have material assets, hen aCPAcan audit theaccounts of the affiliate as well.

Controls May DeterCross-Subsidies

REAofficials said that the agencys accounting and audit requirements arenot intended primarily to identify or prevent potential cross-subsidiesunless the cross-subsidies directly involveREA oan funds; however, theybelieve that REA'Scontrols are sufficient to deter cross-subsidization.According to the head ofREA'STechnical Accounting and Auditing Staff,the required CPAaudits may include a review of cost allocations betweenborrowers and their nonutility activities, which can identify improper coallocations. REA fficials review CPA udit reports. If a CPA otes adeficiency, REAofficials may send a letter directing the borrower to correcthe deficiency and implement any recommendations.

Potential cross-subsidization may come to light in other ways. Forexample, according to REAofficials, a case in the 1980s was brought toREA'Sattention by several parties in the borrowers area. In this case, anelectric borrower purchased alI of its materials and supplies exclusivelyfrom one of its five subsidiaries from 1984 hrough 1987. The subsidiariesand the borrower shared common management, which arranged for theborrower to make the purchases at allegedly marked-up prices.REAdocumentation indicated that the alleged markups may have increased theborrowers (utility) expenses by about $1.3 million. According to thedocumentation, before the case was discovered, REAhad lent about$1 million more to the borrower because of the inflated prices thanREAwould otherwise have lent.REAdocumentation further indicated that theborrowers ratepayers had paid for about $300,000 of the increased utility



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Chapter 4Government Oversight of Borrowers Cableand Satellite. Investments Varies

expenses through their electricity rates.REAreferred the case to the USDASOffice of Inspector General. After an investigation, a settlement wasagreed upon that included a payment to the government of $25 million7

The Director ofREA'SBorrower Accounting Division noted thatREAauditors cannot examine the records of a borrowers affiliates unless thereis a specific authorization in a loan agreement.REAofficials said thatcurrently no borrowers have loan agreements containing such provisions.According to the Director, access to affiliates records could also helpdeter potential cross-subsidies. REA loan program officials, however,believe that existing procedures provide sufficient deterrence.

State Regulation of The extent to which states regulate the cable or satellite businesses ofREABorrowers and Their

borrowers varies among states. Almost all states regulate the utility ratesof private electric and telephone utilities, and almost all states employ

Investments Varies procedures, frequently during rate cases, o detect and preventcross-subsidies that can arise from a utilitys relationship with its affiliate

However, many cooperatives (andREAborrowers) are not regulated bystate regulators. For example, according to the 1992 study by the NationalAssociati on of Regulatory Utility Commissioners,* only 21 states (out of 46 states with electric cooperatives) regulate the rates of electriccooperatives. Twenty-three states can interpret the prescribed uniformsyst ems of accounts of electric cooperatives. Twenty-five states regulatesome nonutility activities.

In addition, according to a survey conducted for the Small BusinessAdministration,g several states, including Maine, New Mexico, Ohio, TexVermont, Virginia, and West Virginia, have laws that enable the publicutility commissions to restrict or regulate the diversification investmentsof cooperatives. For instance, under Maine statutes, electric utilities(including rural electric cooperatives) may not extend or receive creditfrom an affiliate or make any contract or arrangement with an affiliate toprovide management, construction, engineering, accounting, legal, or

other services without the approval of the state public utility commiss ion

The settlement agreement stated that the borrowers settlement did not constitute an admission ofwrongdoing.

*National Association of Regulatory Utility Commissioners, Utility Regulatory Policy in the UnitedStates and Canad a (Washington, D.C.: Dec. 31., 1992).

SVL Associates, Competition Between Small Business and Rural Electric and Telephone Cooperativin Non-Utility Business, National Technical Information Service (Springfield, Va: May 1989).



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Appendix I

Results of Survey of REA Borrowers

1. Which of the following most accurately describes thisutilitys business? (Check one.) (1,607 responses, 3 missing)

49.3% Electric cooperative14.0 Telephone cooperative0.1 Commercial electric company

34.7 Commercial telephone company0.2 Government owned telephone company1.5 Government owned electric company0.2 Other

2. Has this utility or its affiliates ever provided cable

television service? (Check one.) (1,609 responses, 1 missing)

15.8%84.2

YesNo (Skip to question 19.)

3. Does this utility or its affiliates currently providecable television service? (Check one.) (264 responses)

73.2%26.8

YesNo

4. Why does this utility or its affiliates no longer providecable television service? (Check all that apply.) (68 responses)

4.4%

22.1

1.525.00-

Do not want to compete with another company inthe areaNot economically feasible due to small number ofconsumersNot economically feasible due to competitionFound other investments with greater returnOther

6. As of December 1,1992, how many subscribers does thecable system operated by this utility or its affiliates serve?(164 responses, 22 missing)

2,727 Mean response638 Median response28 Minimum

221,000 Maximum

Page 32 GAWRCED-93-164 Rural Electrification


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Appendix IResults of Survey of REA Borrowem

6. Does the cable television system operated by this utility orits affiliates serve consumers inside its utility servicearea, outside its utility service area, or both inside andoutside its utility service area? (Check one.) (166responses, 2 1 missing)

53.3%1.8

44.8

Inside the utility service areaOutside the utility service areaBoth inside and outside the utilityservice area

7. In what year did this utility or its affiliates firstoffer cable television service to the public? (Enter year.)(165 responses, 21 missing)

1.2%1.20.60.60.60.6

1.8

4.89.119.417.06.17.94.25.54.25.52.44.8

2.4

19651966196919701976197719781979

198019811982198319841985198619871988198919901991

1992

8. Which of the following best describes how the cabletelevision business is organized in this utility?(Check one.) (164 responses, 22 missing)

Page 33 GAOAtCED-93-164 Rural Electrification


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Appendix IResults of Survey of REA Borrowers

21.3%

70.7

7.9

Cable television business is organized as a divisionof this utilityCable television business is organized as an affiliateor subsidiary of this utilityOther

9. Is the cable business provided by this utility or its affiliatesoperated as a for-profit business or as a not-for-profitbusiness? (Check one.) (164 responses, 22 missing)

84.8% For-profit

15.2Not-for-profit

10. Which of the following operating resources, if any, are sharedunder the terms of a management agreement or contract by thiutility and the cable television business? (Check all thatapply.) (186 responses)

5.4%82.876.9

69.467.72.7

No resources are sharedPersonnel (labor or management)Business or office equipment (computers, telephones,etc.)

Physical plant or office spaceService equipment (trucks, tools, etc.)Other (Please specify.)

11. Which of the following services, if any, are shared underthe terms of a management contract or agreement by this utilitand the cable television business? (Check all that apply.)(186 responses)

7.5% No services are shared68.8 Accounting66.7 Billing and/or collections

69.9 Maintenance and/or repair67.2 Customer service2.7 Other (Please specify.)

12. From which of the following operating resources, if any,did this utility obtain financing for its initial expansion into



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allowing the utility to provide cable television servicewithin its telephone service area? (Check one.) (151responses, 24 missing)

88.7% Yes6.0 No5.3 Dont know

16. At the time this utility or its affiliates first beganoffering cable television service, was cable televisionservice avail able to anyone in the service area from other

sources? (Check one.) (165 responses, 21 missing)13.3% Yes86.7 No

17. Do any other companies currently offer cable televisionservice in the cable television service area of this utilityor its affiliates? (Check one.) (163 responses, 23 missing)

14.7%85.3

YesNo

18. To the best of your knowledge, have any competitors orpotential competitors of this utilitys cable televisionbusiness filed any complaints against this utility for havingan unfair competitive advantage? (Check one.) (164responses, 22 missing)

1.8%98.2

YesNo

19. Has this utility or its affiliates ever offered satellite dishequipment or satellite programming services to consumers?(Check one.) (1,606 responses, 4 missing)

24.8%75.2

YesNo

20. In what year did this utility or its affiliates first offersatellite television service to the public? (Data beloware based on a total of 384 responses to question 19 that



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329%

53.8

18.97.718.2

Prefer to have another company provide satelliteequipmentNot economically feasible due to small number ofconsumersNot economically feasible due to competitionFound other investments with greater returnOther (Please specify.)

24. Does this utility or its affiliates currently offer satelli teprogramming services to consumers? (Check one.) (399responses)

63.4% Yes36.6 No

26. Has this utility or its affiliates ever offered satelliteprogramming services to consumers7 (Check one.) (143responses, 3 missing)

60.8% Yes39.2 No (Skip to question 27.)

26. Why does this utility or its affiliates no longer provide

satellite programming services to consumers? (Checkall that apply.) (87 responses)

29.9%

62.1

14.919.59.2

Prefer to have another company provide satelliteprogrammingNot economically feasible due to small number ofconsumersNot economically feasible due to competitionFound other investments with greater returnOther (Please specify.)

27. Which of the following describes how the satellite equipmentand/or programming business is organized in this utility?(Check one.) (368 responses, 31 missing)

29.6%

36.4

Satellite business is organized as a division ofthis utilitySatellite business is organized as an affiliate



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34.0or subsidiary of this utilityOther

28. Is the satellite equipment and/or programming businessprovided by this utility or its affiliates operated as afor-profit business or as a not-for-profit business?(Check one.) (322 responses, 77 missing)

49.4% For-profit50.6 Not-for-profit

29. Which of the following operating resources, if any, areshared under the terms of a management agreement orcontact by this utility and the satellite business?(Check all that apply.)(399 responses)

19.3%52.646.9

41.420.89.8

No resources are sharedPersonnel (labor or management)Business or office equipment (computers,telephones, etc.)Physical plant or office spaceService equipment (trucks, tools, etc.)Other (Please specify.)

30. Which of the following services, if any, are shared underthe terms of a management agreement or contract by this utilityand the satellite business? (Check all that apply.) (399responses)

25.3% No services are shared38.1 Accounting37.6 Billing and/or collections19.0 Maintenance and/or repair39.3 Customer service10.0 Other (Please specify.)

31. From which of the following sources, if any, did thisutility obtain financing for its initial expansion into thesatellite equipment and/or programming business? (Check allthat apply.) (399 responses)

Page 39 GAOILLCED-93-16 4 Rural Electrificatio


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36.8%48.90

4,5

1.03.35.5

Utility did not finance the satellite businessThis utilitys general fundsRural Telephone Finance CooperativeNational Rural Utilities Cooperative FinanceCorporationBanks for CooperativesCommercial banksOther (Please specify.)

32. How much money has this utility invested or its affiliatesinvested in satellite equipment and/or programming through

Dec. 31, 1991? (Enter the amount in dollars.)

(Statistics are based on 315 responses from the 399 entities thatindicated they have offered satellite equipment and/orprogramming services to their clients.)

$61,378 Mean3 3,000 Median$0 Minimum$2.369.180 Maximum

33. Is this utility or its satellite affiliates a member ofthe National Rural Telecommunications Cooperative (NRTC)?(Check one.) (377 responses, 22 missing)

75.9% Yes23.1 No (Skip to question 35.)1.1 Dont know (Skip to question 35.)

34. Which one of the following satellite equipment or services,if any, does this utility or its affiliates acquire fromNRTC forresale to consumers? (Check all that apply.) (286 responses)

15.4%14.0

Acquire no equipment or services fromNRTCSatellite equipment such as dishes, decoders, orreceivers.

77.6 Rural TV or other program packages2.8 Other (Please specify.)


!. I


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36. From which of the following federal or state agencies, ifany, did this utility obtain approval before offering satellitedish services? (Check all that apply.) (399 responses)

73.2%

7.06.07.5

Did not have to obtain approval from federal orstate agenciesRural Electrification AdministrationState regulatory authorityOther (Please specify,)

If this utility or its affiliates offer programming services only,

please skip to question 39.36. At the time this utility or its affiliates first offered

satellite equipment, was any other organization or businessselling or leasing satellite equipment on a walk-in basis (notmail order) in the local area? (Check one.) (100 responses,19 missing)

59.0% Yes25.0 No16.0 Dont know

37. Do any other organizat ions or businesses currently sell orlease satellite equipment on a walk-in basis (not mail order)in the local area? (Check one.) (99 responses, 20 missing)

78.0% Yes22.0 No

38. Under what terms does this utility or its affiliates offersatellite equipment to consumers? (Check all that apply.)(119 responses)

74.8% Cash sales30.3 Financing of sales37.0 Leasing of equipment3.4 Other (Please specify.)

39. To the best of your knowledge, have any competitors orpotential competitors of this utilitys satellite equipment

Page 41 GAO/ICED-93-16 4 Rural Electrificatio


44/52


and/or programming business filed any complaints against thisutility for having an unfair competit ive advantage? (Checkone.) (370 responses, 29 missing)

1.1%98.9

YesNo

0. If you would like to explain any of your answers or youhave any comments on subjects covered in this questionnaire,please do so below.



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Appendix II

Comments From the U.S. Department ofAgriculture

Nowon p. 10.

Nowonp.17

Now p. 18.

United StatesDepartment01Agriculture

Rural WashingtonElectriticatlon DC.Administration 20250

SUBJECT: U.S. General Accounting Office Draft Report RCED-93-164, "RURAL ELECTRIFICATION:REA Borrowers'Investments in Cable and Satellite Television Services"

TO: Ernest HazeraEvaluatorResources, Conservation and Energy DivisionGeneral Accounting Office

FROM: THOMASM. SCANJXN__Director d J %&ix> /pl. rs-&&/

L bPolicy and Manaqeme!@"Analysis Staff

Attached is a copy of the above mentioned draft report with ourcomments noted on the appropriate pages.

We have a few minor comments on this report in addition to someREA loan and guarantee dollar changes. On Page 12, the statementis made that the Rural Telephone Bank II... historically wasfunded by Treasury funds; however, it recently began issuingstocks in preparation for becoming a private corPoration.11 Thisis a misleading statement. The Telephone Bank has been issuingClass B and C stock since its inception. Retirement of theGovernment's Class A stock is the requirement for privatizationand is not dependent on stock sales except to determine theminimum amount of "A" stock that must be retired in a given year.On Page 22, the statement is made that, "According to independentcable and satellite television businesses and their trade associ-ations, rural electric cooperatives have marketing resources,access to low-cost loans from such sources as the Bank forCooperatives (CoBank) or the National Rural Utilities CooperativeFinance Corporation (CFC), and operating resources that maysurpass those of many independent businesses." There is nodefinition of "low-cost loans" or how the determination was madethat CFC and CoBank loans are low-cost. Perhaps this should beexplained further. Also on Page 22, it is stated that about 70percent of rural areas are served by cable television. Thisfigure appears somewhat high to us, although we do not have anexact figure. We suggest that perhaps the source for thisstatistic be cited.

On Page 23, in discussing borrower access to CoBank, CFC, and the

Rural Telephone Finance Cooperative, the statement is made that,I' . . . the availability of these loan sources may free a borrower'sown funds for cable and satellite investments."

Page43 GAO/RCED-93-164RuralElectrification


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Appendix III

Major Contributors to This Report

Resources,Community, and

James E. Wells, Jr., Associate DirectorDavid G. Wood, Assistant DirectorCarlos E. Hazera, Evaluator-in-Charge

EconomicDevelopment

Jonathan T. Bachmaq Senior Social Science Analyst

Division, Washington,D.C.

Chicago RegionalOffice

Richard S. Tsuhara, Senior Evaluator



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Page 46 GAO/RCED-93-164 Rural Electrificati


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Page 47 GAO/WED-93-16 4 Rural Electrification


50/52

Related GAO Products

(207321)

Telecommunications: FCC'SOversight Efforts to ControlCross-Subsidization (GAOiRCED-93-34,eb. 3,1993).

Telephone Communications: Controlling Cross-Subsidy BetweenRegulated and Competitive Services (GAOIRCED-WM,Oct. 23, 1987).

Rural Development: REATelephone Borrowers Cash Holdings and RuralDevelopment hVeStmentS(GAOm-RCED-92-65, May20, 19%).

Page 43 GAO/RCED-93-164 Rural Electrificati


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