Rural Development Utilities Programs

Rural Development Utilities Programs

KENNETH M. ACKERMANAssistant Administrator

Program Accounting and Regulatory Analysis

NARUC Staff Subcommittee on

Accounting and Finance

Jackson Hole, Wyoming

October 9, 2007

Topics

•2007 Farm Bill

•Electric Program

•Telecommunications Program

•Water & Environmental Program

•Accounting and Depreciation Issues

Leadership Changes

September 20, 2007 - President Bush Announces Resignation of Secretary

of Agriculture Mike Johanns

and Names Chuck Conner

Acting Secretary of Agriculture

2007 Farm Bill Proposed Legislation• The proposed bill authorizes USDA’s:

– Commodity program support

– Conservation and Forestry

– Renewable Energy

– Research

– Trade

– Food stamps and other nutrition assistance

– Rural Development

• The current farm bill expires with the 2007 crop year

4

Title VI: Rural Development

• Consolidate rural development programs to increase flexibility and efficiency

• Provide $1.6 billion in loans to complete the rehabilitation of all 1,283 certified Rural Critical Access Hospitals

5

Title VI: Rural Development• Provide an additional $500 million to

reduce the backlog of rural infrastructure projects

– Water and waste disposal loans and grants – Emergency water assistance grants– Community Facilities loan and grant programs– Distance learning and telemedicine grants

Title IX: Energy• Provide $500 million to create a Bioenergy and

Bioproducts Research Program

– Increase cost-effectiveness through cooperation between university and Federal scientists

• Provide $500 million for rural alternative energy and energy efficiency grants

– Directly assists farmers, ranchers, and rural small businesses

Title IX: Energy• Provide $2.1 billion in loan guarantees to

support cellulosic ethanol projects in rural areas

• Provide $150 million for biomass research competitive grants, focusing on cellulosic ethanol

Electric Program

Electric Programs Budget (Dollars in Million)

CR Loan 2006 2007 2008 2008Program: Actual Actual Budget House SenateDirect 5% 99 99 99 100 100

Municipal Rate 100 101 101 0 0

Direct Treasury Rate 99 990 990 0 0

FFB Guaranteed 2,600 2,700 2,700 4,000 6,500

Non-FFB Guaranteed 100 0 0 0 0

Section 313A 1,500 250 250 0 0

Total Loan Program 4,498 4,140 4,140 4,100 6,600

High Energy Cost Grants 17.5

Summary of Loan Program

USDA, $21,907.00

RD, $2,622.00RUS All, $658.00

RUS Electric Program, $6.16

RUS All, $8.278

RUS Electric Program, 5,389.700

RD, 18,102.000

USDA, 132,954.000

Electric Program FundingElectric Program Funding2006 Budget2006 Budget$ Millions$ MillionsProgram LevelProgram Level Discretionary Budget Discretionary Budget

AuthorityAuthority

USDA Budget OutlaysUSDA Budget Outlays

Farm &CommodityPrograms

RuralDevelopment

Conservation &Forestry

Research,Inspection &Administration

Food Inspection

59%

19%

11%

6%

3%

2/07

Rural Development Program LevelsRural Development Program Levels

Rural HousingService

Rural UtilitiesService

Rural BusinessCooperativeService

9%

46%45%

2/07

Distribution Borrowers Balance SheetDistribution Borrowers Balance Sheet

Plant(distribution line,

poles, towers, equipment etc.)

$43b.

Other $3 b.

Investments in Assoc. Org.* $4 b.

General Funds $3 b.Receivables $3 b.

Assets $56 b.

Long-Term

Debt $26 b.

RUS $13 b.(including

guarantees)

Other Liabilities $7 b.

Liabilities & Equity $56 b.

Non-RUS $13 b.(CFC, CoBank etc)

Equity $23 b.

*Investments in Associated Organizations are amounts due as the result of business done with other co-ops (G&T capital credits, CFC Capital Term Certificates, etc.)

Distribution Co-op AssetsDistribution Co-op Assets

General Funds 6%

Net Utility Plant 76%

Receivables 6%

Invest. Assoc. Org.* 7%

*Investments in Associated Organizations are amounts due as the result of business done with other co-ops (G&T capital credits, CFC Capital Term Certificates, etc.)

Other 5%

Distribution BorrowersDistribution Borrowers Liabilities & Equity Liabilities & Equity

Non-RUS(CFC,

CoBank, other)23%

Equity 41%

RUS Direct18%

Other Liabilities*

12%

Debt 59%

RUS Guar. 6%

*Other Liabilities are primarily notes, accounts payable, debt coming due in current year

Average Cost of Debt 4.9%Average Cost of Debt 4.9%

5.4%5.3%

4.9%

4.7%4.6%

4.9%

4.2%

4.4%

4.6%

4.8%

5.0%

5.2%

5.4%

5.6%

2000 2001 2002 2003 2004 2005

Co-ops benefited from decreasing interest rates from 2000 to 2004. The average cost of debt to the typical distribution co-op dropped 80 basis points in that period. In 2005, average cost of debt reversed its 5-year decline, rising to nearly 5%. Total long-term debt outstanding for all distribution co-ops is nearly $30 billion.

COOPS SERVE PRIMARILY FARMS & COOPS SERVE PRIMARILY FARMS & FAMILIES (kWh SALES)FAMILIES (kWh SALES)

0%

10%

20%

30%

40%

50%

60%

70%

COOPERATIVES MUNICIPALS INVESTOR-OWNED

OTHER UTILITIES SERVE PRIMARILY OTHER UTILITIES SERVE PRIMARILY BUSINESSES (kWh SALES)BUSINESSES (kWh SALES)

0%

10%

20%

30%

40%

50%

60%

70%


COOPS HAVE THE LEAST REVENUECOOPS HAVE THE LEAST REVENUE PER MILE PER MILE

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000


LEAST REVENUE PER MILELEAST REVENUE PER MILE

COOPERATIVE $8,558

MUNICIPAL $72,146

INVESTOR-OWNED $58,981

CONSUMERS PER MILE OF LINE

0

10

20

30

40

50

Coops Investor-Owned Municipals

2005 Cooperative Sales Growth2005 Cooperative Sales Growth

Increased over 5% (361 co-ops)

Increased 0 to 5% (333 co-ops)

Decreased (90 co-ops)

kWh Sales:

MEDIAN = 4.6%

Strongest Sales GrowthStrongest Sales Growth

Record summer heat from the Great Lakes to the southwestern US contributed to strong sales in 2005.

Co-op kWh sales growth over 5%

2005 DATA

Moderate Sales GrowthModerate Sales Growth

Sales for these co-ops grew from 0% to 5% over the prior year.

from 0% to 5%

2005 DATA

2.4%

5.4%

1.7%

3.6%

5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2001 2002 2003 2004 2005

Annual kWh sales for utilities vary according to weather and economic conditions. Co-ops sales are largely residential and therefore even more weather dependent than IOUs. Coming off a low year in 2003, overall sales (shown above) were up 3.6% in 2004 and up 5% in 2005. Residential sales increased 5.7% in 2005 and C&I sales increased 4%.

Sales Growth Varies from Year to YearSales Growth Varies from Year to Year

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1997 1998 1999 2000 2001 2002 2003 2004 2005

Cooperative sales growth generally surpasses that of the total electric utility industry as a whole and did so again in 2005. Annual kWh sales for utilities vary according to weather and economic conditions. Cooperative sales are largely residential and therefore even more weather dependent.

Co-op Sales Growth Usually Outpaces Co-op Sales Growth Usually Outpaces the Industrythe Industry

Co-op

Industry

Average Cooperative Growth = 2.6%

Co-op Consumer GrowthCo-op Consumer Growth

High >2% (264 co-ops)

Medium 1% to 2% (326 co-ops)

Low <1% (256 co-ops)Median = 1.5%2005 DATA

Consumer growth > 2 %

High Consumer Growth WidespreadHigh Consumer Growth Widespread

One-third of all co-ops experienced strong consumer growth (over 2%) in 2005. Co-ops are experiencing high growth in all parts of the country, not just the fast-growing regions of the Southeast and West. Retirement migration, recreation activity & the effect of metropolitan areas spreading farther & farther from their cores have brought many new consumers to co-op areas.

Wash DC

Atlanta

Las Vegas

Minneapolis

Rapid City

Denver

Austin

Missoula

Dallas

2005 DATA

Consumer growth 1% to 2%

Moderate Consumer GrowthModerate Consumer Growth

2005 median growth = 1.5%

2005 DATA

Low Consumer GrowthLow Consumer GrowthConsumer growth < 1%

The lowest growth rates are typically in the Great Plains states & most rural areas of the country. Only 43 co-ops actually lost consumers in 2005.

2005 DATA

Cooperative Consumer Growth Leads IndustryCooperative Consumer Growth Leads Industry

0.7%

1.2%

1.7%

2.3%

2.7% 2.6%

0.0%

1.0%

2.0%

3.0%

2003 2004 2005

Source: EIA

From 2003 through 2005, the rate of consumer growth for cooperatives has been well above that of the total industry. Cooperatives grew 2.6% overall in 2005, adding over 400,000 new customers (meters). This is an estimated 900,000 additional people served by the rural electric network.

Industry Co-op Industry Co-op Industry Co-op

Retail Sales and Revenue, by Retail Sales and Revenue, by Customer ClassCustomer Class

The majority of cooperative sales and revenue comes from Residential customers. Commercial and Industrial customers make up 40% of sales and 32% of revenue. (“Other” includes irrigation, public and street lighting.)

Residential58% Residential

65%

Sales Revenue

Commercial19%

Commercial19%

Industrial21%

Industrial13%

Other2%

Other3%

364 billion kWh $30 billion

Co-op Residential Electric UsageCo-op Residential Electric UsagekWh/month

>1,250 kWh (260)

1,000 to 1,250 kWh (279)

<1,000 kWh (253)

High

Medium

Low

Usage

(median = 1,144 kWh)2005 DATA

High Residential Electric UsageHigh Residential Electric Usageover 1,250 kWh/month

Cooperatives shown in blue have high usage. The cooperatives with the highest electricity usage are located in Minnesota, Iowa & North Dakota. They serve electricity-intensive agriculture loads, have very high levels of electric water heating & so forth. Areas in the South have a great deal of summer air conditioning. Cooperatives with traditionally low electric rates (TVA, the Pacific Northwest) also tend to have higher usage.

2005 DATA

Moderate Residential Electric UsageModerate Residential Electric Usagefrom 1,000 to 1,250 kWh/month

Median usage = 1,144 kWh

2005 DATA

Lowest Residential Electric UsageLowest Residential Electric Usageunder 1,000 kWh/month

Low electricity usage may be due to less need for air conditioning in the summer or electric heat in the winter (availability of natural gas & other fuels). Less affluent households also tend to use less electricity as do areas with mostly seasonal sales.

2005 DATA

Residential Electricity Usage is Residential Electricity Usage is Higher in Cooperative AreasHigher in Cooperative Areas

880941

1,163

500

600

700

800

900

1,000

1,100

1,200

IOU Municipal Co-op

Residential electricity usage is higher for cooperatives than for other utilities because alternative heating fuels are often unavailable in rural areas. Also, agriculture is a high user of electricity (grain drying, dairy operations etc.) Usage for IOU customers jumped 6.5% in 2005. High heating oil and natural gas prices that year, probably contributed to greater electricity usage by IOU customers.

kWh/month

Telecommunications

Rural Telephone Bank

• Final distribution of residual funds to be completed by November 13, 2007

• Final pay-out is $39.6 M, or 4.4¢ per share to Class A & B shareholders

TELECOMMUNICATIONS

Program BudgetsInfrastructure Loan Programs:

Hardship: $143 million $145 million

Cost of Money: $247 million $250 million

FFB: $299 million $295 million

2007Program 2008 (proposed)


TELECOMMUNICATIONS

Program Budgets

Grants: $ 10 M $ -0-Loans: $ 998.5 M $300 M

Broadband Loan and Grant Program:

TELECOMMUNICATIONS

Program Budgets

Distance Learning and Telemedicine Programs:

Loans: $128 million $0*

Grants: $ 25 million $25 million


*Unused appropriation carries over from prior year

Rural Broadband Access Loans and Loan Guarantees

• Proposed revisions to 7 CFR Part 1738

• Published May 11, 2007

• Comments were due by July 10, 2007

• 8 specific areas of change

• 38 parties filed comments


Rural Definition

• Current: Population of less than 20,000 inhabitants – regardless of where that community is located.


Rural Definition

• Proposed Change: Communities of 20,000 or less located outside the boundaries of an Urban Area as defined by the U.S. Census


Competition

• Current: Allows for funding of applications where service already exists, with regard to the number of providers, current penetration rates, etc.


Competition• Proposed Change: Prohibits use of RD

funds to serve areas with 4 or more Existing Broadband Service Providers (EBSP).

• EBSP are those broadband providers who can certify that 10 % of the households passed by their facilities are purchasing their broadband service.


Priority for Unserved

• Current: Gives processing priority for application to serve unserved areas, no requirement to include unserved or underserved areas in project.


Priority for Unserved• Proposed Change: Minimum service

requirements:– 40% have no access or access to only one

provider.– Applies to applicants wanting to serve beyond

their existing service areas– Does not apply to incumbent providers when

upgrading existing facilities.


Priority for Unserved (con’t)• Provides credit incentives for providers wanting to serve

unserved or underserved areas;– Reduces equity requirements from 20% to 10% if 40% of the

proposed service households have no access or only one provider

– Applicants that have not demonstrated a positive cash flow for at least two years are required to maintain additional cash reserves. This proposal would allow 50% of revenue to be used to offset cash requirement


• Deployment Schedule

• Current: No regulatory deadlines for completion of a project. Generally, allows for five year buildout period during which competition cannot be funded by Rural Development through another applicant.


Deployment Schedule

• Proposed Change: Establishes a three year buildout period.


Market Survey Requirements

• Current: Regulation requires the all communities in a service area be surveyed.


Market Survey Requirements

• Proposed Change: Eliminate requirement for projects where the subscriber projections are less than 15% of households passed.


Transparency

• Current: Requires applicants to publish in local papers a notice of intent to serve the area


Transparency• Proposed Changes: Establish a standard 30-day

notice period beginning after application is filed• Post Legal Notices on RD website for easy access• Require applicants to include service area maps

and proposed service offerings in Legal Notices• Provide industry participants with a link to the

FCC Rural and the RD Broadband Program homepages


Ensuring that Projects keep pace with increasing demand for bandwidth

• Current: Do not specifically address projects proposing to upgrade existing broadband infrastructure.


Ensuring that Projects keep pace with increasing demand for bandwidth

• Proposed Change: Allows incumbents in areas with 4 or fewer existing providers to apply for a loan for the sole purpose of upgrading their existing facility (must enhance the existing level of service).

• RD will consider the bandwidth and service needs of rural communities when making lending decisions.


Promoting a better understanding of

all application requirements

• Current: Existing rules are not easy to navigate. Additionally, the existing rules do no include guidance on all required components of an application.


Promoting a better understanding of

all application requirements• Proposed Change: Re-order rules and make them

more user-friendly• Add rules sections that clearly define the required

content of the application, including business plan, system design, marketing survey, legal notice and competitive analysis.

Community Connect Grant Program: New for 2008

• Added Rand McNally as a community qualifier if the Census is not recognizing a community

• Using Median Household Income based on the state average rather than Per Capita Income based on the national level

• Clarified allowable operating expenses

Distance Learning/Telemedicine Distance Learning/Telemedicine Grant Program Grant Program

Available Funding FY 2007: $15 million

Application window closed June 11, 2007 $50,000 Minimum $500,000 Maximum Matching Funds: Minimum 15% Awards based on scoring

For more information visit our web site: http://www.usda.gov/rus/telecom/dlt/dlt.htm

Distance Learning/Telemedicine Distance Learning/Telemedicine Loan/Grant Combination Program Loan/Grant Combination Program

Two Types of Loan Grant Combinations9:1 and 4:1

• Applications accepted year-round and processed in the order they are received.

• Noncompetitive application process

• No required matching contribution


Offers $1 in grant funds for every $9 in loan funds requested

FY 2007 Available Funding: $50 million total

• $45 million loan• $5 million grant

$50,000 minimum

$20,000,000 maximum

9:1 Program

Distance Learning/Telemedicine Distance Learning/Telemedicine Loan/Grant Combination Program Loan/Grant Combination Program

4:1 Program

Offers $1 in grant funds for every $4 in loan funds requested

FY 2007 Available Funding: $25 million total

• $20 million loan• $5 million grant

$50,000 minimum

$1,000,000 maximum

Only available for projects that are exclusively for electronic medical records (EMR).

Distance Learning/Telemedicine Distance Learning/Telemedicine 100% Loan Program100% Loan Program

Available Funding FY 2007: $62.9 million • Applications accepted year-round and processed in the order they

are received.• Noncompetitive Application Process • No required matching contribution• $50,000 Minimum • $20,000,000 Maximum• Additional eligible purposes such as two years of project operating

costs and educational broadcasting for distance learning.


Water and Environmental Programs

FY 2007 FY 2008 Actual Proposed

Direct Loans $ 990.00 $ 1,080.24Guaranteed Loans $ 75.00 $ 75.00 Grants $ 451.44 $ 346.002005 Hurricanes $ 29.90 $ 0Solid Waste Mgmt Grants $ 3.50 $ 3.50 Individually-owed water well $ 0.99 $ 0Grants for Water and $ 0.50 $ 0 Wastewater Revolving

Total $ 1,551.33 $ 1,504.74

Water and Environmental Programs ($ Millions)

NRWA Revolving Loan Fund

• National Rural Water Association Revolving Loan Fund was established under a grant from the Rural Development Utilities Programs to provide financing to eligible utilities for pre-development costs associated with proposed water and wastewater projects.


• May also be used with existing water/wastewater systems and the short term costs incurred for replacement equipment, small scale extension of services, or other small capital projects.

• Applicants must be public entities, with up to 10,000 population and rural areas with no population limits


• Loan amounts may not exceed $100,000 or 75% of the total project cost, whichever is less

• Loan terms allow a maximum repayment period of 10 years

Household Water Well System (HWWS) Grant Program

• Provides grants to qualified private non-profit organizations to establish lending programs for household water wells. Homeowners or eligible individuals may borrow money from an approved organization to construct or upgrade their private well systems

HWWS Grant Program

• The loans may be used to construct, refurbish, and service an individual’s well system.

• The non-profit organizations applying for the grant funds must contribute at least 10 percent.

• Available funds: $990,000

HWWS Grant Program

• The loan limit is $8,000 at 1 percent for 20 years.

• A Notice of Funding Availability (NOFA) for the Fiscal Year 2007 HWWS Grant Program was published in the FEDERAL REGISTER on March 29, 2007 (volume 72, number 60, pages 14770-14776).

Accounting and Depreciation Issues

Uniform System of Accounts• Proposed Rulemaking to update our Electric

System of Accounts was published on July 13, 2007

• Comments were due by September 11, 2007• Implements recent FERC orders• Clarifies Rural Development Utilities

Programs specific guidance• 3 Comments Received

Uniform System of Accounts

• Proposes accounting for Renewable Energy Credits and seeks input from all interested parties on methodologies.

Coal Plants• RDUP requirement is to depreciate coal fired

plants at 3.1%. (Approximately 35 years subject to the effects of net salvage)

• RDUP allows any entity to request different rates than those prescribed in our Regulations

Coal Plants

• Requests for rates outside of our regulations generally must be supported by a depreciation study.

• Depreciation Studies for generation plant must include among other things:– A discussion of the facility’s design– On-site review and analysis of the unit’s current

operating and equipment conditions– An engineering opinion that the requested useful life

may be achieved– An analysis of the unit’s historical performance

Coal Plants• RUS has approved significant extensions of

lives for coal plants (decreases in depreciation rates) that are supported by depreciation studies.

• Based on previous life extensions for existing units, RUS has had a request for an extended life on a new coal fired plant

• RUS will not approve such a request.

Coal Plants• Primary reason for denial is that the engineering

design for units is 35 to 40 years.• Would be contradictory to state the unit is engineered for 35 years

and at the same time believe the life would be longer

• Although the entities may have a history of extended plant life with other units, that history is not automatically transferable to new plants

• Technological differences• Environmental differences• Operating differences• No history of interim replacements which ultimately extends the life.• Possibility of a “lemon”

Coal Plants

• Utilities Programs’ perspective– Assure full recovery of the plant in its useful

life.• Accounting allocation is systematic and rational

• Full recovery of costs in order to pay back RD loan

• Life reflects engineering constraints

Whole Life vs Remaining Life

• For Energy Utilities Does Agency allow remaining life depreciation rates?– RDUP has prescribed depreciation rates, but

allows depreciation studies to develop alternate depreciation rates and the studies may be based on whole life or remaining life calculations.

• Companies have used both methods• Discrepancies that may develop in reserves are

mitigated by requiring that studies be updated every 5 years.

http://www.usda.gov/rus/[email protected]

Documents

Rural Development Utilities Programs