FACT SHEET; Rural Electrification Administration Financing Programs SUMMARY

Transcription

1 FACT SHEET; Rural Electrification Administration Financing Programs SUMMARY The financing programs of the Rural Electrification Administration (REA) that have been in effect since 1973 have worked well to meet the demand by America's rural electric systems for reasonably priced capital. While benefiting rural electric cooperatives and their consumers, these programs have not created any new costs for the federal government and, as a matter of fact, have actually provided an annual operating profit to the U.S. Treasury. Proposals made by the U.S. Office of Management and Budget (OMB) to reduce the level of the REA financing programs are not justified and have been rejected by Congress in its consideration of the fiscal year 1982 and fiscal year 1983 federal budgets. OMB-proposed reductions in the REA financing programs for fiscal year 1984 are also unjustified and deserve Congressional rejection. An OMB proposal to repeal Congressionally mandated REA loan ratios and criteria is not timely in light of recommendations by the rural electric industry that will preserve the long-term financial stability and responsiveness of the REA financing programs. These recommendations will be dealt with by Congress as part of the orderly legislative process.

2 -2- HISTORY The rural electrification program was established in 1935 to meet the needs of farmers and other rural residents for electric service. Federal support for rural electrification is necessary because of the continuing costs of extending service to new consumers in rural areas, because of the special costs involved in providing service in remote and rugged rural areas, and because of the federal government's recognition of the fact that all segments of the electric utility industry require certain forms of assistance. t In 1935, only one in ten rural Americans enjoyed the benefits of electric service. In Pennsylvania, less than a quarter of rural homes were electrified. Although private power companies had provided service in urban areas for decades, they were unable or unwilling to run lines into rural areas because of the high costs of providing service and the small prospects for profits. As a result, consumer-downed rural electric cooperatives came into existence to perform this vital task. President Franklin Roosevelt signed an executive order in 1935 that established the Rural Electrification Administration (REA) to provide technical and financial assistance to those who would provide electric service in rural areas. Through his action, Roosevelt established a half century tradition of bipartisan support for rural electrification. With the enactment of the Rural Electrification Act in 1936, Congress authorized the federal government to make loans to consumer-owned rural electric cooperatives and other utilities in order to electrify rural areas. Today, virtually every rural American enjoys the benefits of electricity. The job of rural electrification is not completed, however. New lines must be run to serve new consumers. Old lines must be upgraded to meet the increasing demand of rural residents for power. And generating plants must be constructed to meet the long-term needs of rural consumers; to provide them with adequate: and reliable supplies of reasonably priced electricity. The 14 rural electric distribution cooperatives that comprise the Pennsylvania Rural Electric Association serve over 600,000 people in the states of Pennsylvania, New Jersey, and Maryland. Allegheny Electric Cooperative, a power supply cooperative based in Harrisburg, exists to meet the bulk power needs of the 14 distribution cooperatives. REA FINANCING PROGRAMS From 1936 to 1972, REA made direct loans to rural electric cooperatives from funds that were appropriated annually by Congress. From 1936 to 1944, the interest rate on these loans fluctuated

3 .3 with the cost of money to the Treasury. From 1944 to 1972, the interest rate on these loans was fixed at two percent. In 1973, Congress replaced the existing program of direct loans with two new programs, neither of which depends on appropriations. Since 1973, the only appropriated funds that benefit rural electric cooperatives are those that cover the operations of the Rural Electrification Administration, the agency that oversees the government's investment in rural electric cooperatives. The first of the two new REA financing programs, the insured loan program, primarily benefits rural electric distribution cooperatives; the utilities that provide electricity directly to consumers. Seventy percent of distribution cooperatives' capital needs are met by the Rural Electrification and Telephone Revolving Fund. Almost all loans from the Revolving Fund carry a five percent interest rate. The remainder of cooperatives' capital needs is satisfied by non-federal sources and loans from these sources are made at the market rate which was as high as 17 percent during Most non-federal funds borrowed by distribution cooperatives come from the National Rural Utilities Cooperative Finance Corporation (CFC), a "self help" bank rural electric cooperatives established in 1969 to coordinate their borrowing. Rural electric power supply or "generation and transmission" cooperatives (like Allegheny Electric Cooperative) benefit from the REA guaranteed loan program. Under this program REA guarantees the repayment of the loans power supply cooperatives receive from lenders. Since 1974, under an agreement signed during the Nixon Administration, most REA guaranteed loans have been funded by the Federal Financing Bank (FFB), a federal agency that was established to coordinate borrowing guaranteed by government agencies. The FFB charges borrowers with REA guarantees the full cost of interest payed by the Treasury plus a service charge of.126 percent on the outstanding balance. As a result, borrowers with REA guarantees cover the government's costs and provide an annual profit of between $5 million and $6 million to the Treasury. RECENT LEVELS OF THE REA FINANCING PROGRAMS Insured Loan Program Fiscal year OMB proposed reducing the level of the insured loan program to $750 million. Congress mandated an insured loan program with a floor of $850 million and a ceiling of $1.1 Fiscal year OMB proposed reducing the level of the insured loan program to $625 million. Congress mandated an insured loan program with a floor of $850 million and a ceiling of $1.1

4 -4- Fiscal year OMB has proposed reducing the level of the insured loan program to $500 million.rural electric leaders are requesting that the insured loan program retain a floor of not less than $850 million and a ceiling of not more than $1.1 Loan criteria and ratios. In 1982, Congress mandated that insured loan criteria and supplemental financing rations be continued in accordance with provisions in effect on July 15, In the fiscal year 1984 federal budget, OMB has proposed that this mandate be repealed. Rural electric leaders are requesting that OMB's request be denied. t Guaranteed Loan Program Fiscal year OMB proposed that loans guaranteed by REA no longer be funded by the Federal Financing Bank (FFB). Congress mandated that, at the borrower's request, loans guaranteed by REA continue to be funded by the FFB. In addition, Congress established a floor for the guaranteed loan program of not less than $5.1 billion and a ceiling of not more than $6.4 Fiscal year OMB proposed that the REA guaranteed loan program be reduced to $3.615 Congress mandated a guaranteed loan program with a floor of $4.7 billion and a ceiling of $5.95 Fiscal year OMB has proposed that the REA guaranteed loan program be reduced to $3.235 Rural electric leaders are requesting that the #3.235 billion figure be accepted as a floor, but that a ceiling of $4.0 billion be established to provide the greatest possible flexibility. PROVIDING FOR ADEQUATE FUTURE FINANCING FOR RURAL ELECTRIC SYSTEMS A year ago, study committees were established by the National Rural Utilities Cooperative Finance Corporation and the National Rural Electric Cooperative Association (NRECA) to explore the need for possible changes to the rural electric financing programs. They were charged with providing recommendations that would assure continued financial stability and responsiveness for these programs. The NRECA Committee on Financing for the Future, which included all three living former REA Administrators, developed two primary recommendations: First, that the interest rate on newly issued insured loans be permitted to vary periodically in order to keep the Rural Electrification and Telephone Revolving Fund in balance. The interest rate in effect at the time the loan was made would continue throughout the term of the loan. The Committee called for new commitments from the Revolving Fund of at least $1 billion annually. In years when borrower demand would exceed the amount available from

5 -5- the Revolving Fund, rural electric cooperatives would be required to satisfy more of their capital needs from non-federal sources. Currently, rural electric distribution cooperatives must meet 30 percent of their capital needs from non-federal sources, usually CFC. Second, the Committee recommended that the pre-1973 principal obligations of rural electric cooperatives, now held as an asset of the Revolving Fund, be converted into permanent capital of the Fund. When the Revolving Fund was established in 1973, all outstanding REA loans were made assets of the Fund with interest and principal payments of these loans being re-lent to new borrowers. To assist the Fund's cash flow, it was empowered to borrow from the Treasury when necessary. When borrowing from the Treasury, however, the Fund is required to pay the government's full cost of capital; as much as 17 percent during By converting the pre-1973 capital obligations to permanent capital, the Revolving Fund would be spared annual principal repayments to the Treasury of $250 million. In addition, the Fund would have to borrow less high cost capital from the Treasury at today's current rates. This change would have a minimal impact on the federal government because pre-1973 REA loans were treated as appropriated expenditures and were expensed in the year they were made. These two recommendations and others made by the NRECA Study Committee will have to be considered and approved by Congress. 2/16/83