RUS’ Electricity Loans Are Often Made to Distribution Borrowers Serving Highly Populated Metropolitan Areas

Although the RE Act requires that borrowers serve rural areas, RUS  borrowers serve not only rural areas but also highly populated  metropolitan areas. This situation results from RUS applying its “once a  borrower, always a borrower” standard, which allows borrowers to  continuously receive RUS assistance regardless of the extent of population  increases within their service territories. Since the electricity program  began in the 1930s, substantial population growth has occurred in the  areas served by many RUS borrowers. About 29 percent, or 581 of the 1,988 counties  served partly or completely by RUS borrowers, are in metropolitan areas;  and, in fact, 9.4 percent, or 187 of the 1,988 counties, are in metropolitan  areas with populations of 1 million or more. Three cooperatives that received loans during the fiscal year 1999 through  2003 period provide electricity in the immediate vicinity of Atlanta,  Georgia. RUS officials believe  that while risks are involved, losses are unlikely given the past stability of  both the electricity market and the lender that might receive the  guarantees. In return for taxpayers assuming the risks of guaranteeing  payment on $3 billion of debt, we estimated that the fees paid on the  guarantees would only fund $15 million in rural economic development  loans and grants annually. The one cooperative lender that is currently  qualified and interested in obtaining a guarantee on its debt generally has  had a favorable financial history going back over 30 years. However, the  lender faces risk associated with the electricity and telecommunications  markets. Recognizing risks to taxpayers, RUS proposed to add certain risk  mitigation requirements, but the lender commented that these  requirements would make the guarantees unworkable. Financial Losses Estimated by RUS. In addition, one ratings service stated that  competition from wireless carriers is a longer-term threat to rural  telecommunications systems. They agreed that  the alternative option we raised is consistent with the loan-origination fees  USDA places on some other loans, would be a feasible way to fund rural  economic development loans and grants, and would likely have a very  small effect on the customers of borrowers that receive RUS loans. In  addition, to provide additional funds for rural economic development  loans and grants without risk to taxpayers, Congress may wish to consider  amending the RE Act to authorize a small loan-origination fee on RUS’  electricity and telecommunication loans and direct that fees collected on  such loans be used for rural economic development loans and grants, and  simultaneously repeal the new lender debt guarantee requirement. Finally, USDA commented that it is important to recognize, and not  criticize, RUS’ efforts to implement the 2002 Farm Bill provision to  guarantee the bonds and notes that lenders could use to raise funds for  making loans for electricity and telecommunications services. It does, however, provide an alternative for  funding rural economic development that avoids risk. Appendix I: Objectives, Scope, and Methodology

The Chairman of the Subcommittee on Energy Policy, Natural Resources  and Regulatory Affairs, House Committee on Government Reform asked  that we report to him on (1) the extent to which RUS distribution  borrowers provide electricity service to nonrural areas and (2) the  potential financial risk to taxpayers of the 2002 Farm Bill requirement to  guarantee lenders’ debts, and the amount of rural economic development  loans and grants that could be funded by fees on the guarantees. To determine whether an alternative mechanism might be available to  fund the rural economic development program with less risk, we analyzed  RUS’ fiscal year 2005 budget request for electricity and  telecommunications loans and the Rural Business-Cooperative Service’s  request for rural economic development loans and grants to determine  what level of fees would be needed to cover the costs of the Rural  Business-Cooperative Service’s program. Contrary to USDA’s assertion, we do not challenge RUS’ practice of  determining eligibility when a borrower first applies for a loan to  provide electricity service in a rural area. 5.
Why GAO Did This Study

The Agriculture Department's Rural Utilities Service (RUS) makes loans and provides loan guarantees to improve electric service to rural areas. Beyond guaranteeing loans, under a yet-to-be-implemented provision of the 2002 Farm Bill, RUS is also to guarantee the bonds and notes that lenders use to raise funds for making loans for electric and telecommunications services. Fees on these latter guarantees are to be used for funding rural economic development loans and grants. GAO was asked to examine (1) the extent to which RUS' borrowers provide electricity service to nonrural areas and (2) the potential financial risk to taxpayers and amount of loans and grants that the guarantee fees will fund. GAO also identified an alternative for funding rural economic development.

What GAO Found

While the Rural Electrification Act authorizes RUS' lending only in rural areas, borrowers that receive RUS loans and loan guarantees serve not only rural areas but also highly populated metropolitan areas. This condition stems from RUS' loan approval practices. RUS requires that borrowers serve rural areas when they apply for their first loans, but it approves subsequent loans without applying this criterion. Thus, RUS applies a "once a borrower, always a borrower" standard. Since the 1930s when the program began, substantial population growth has occurred in areas served by many RUS borrowers; 187 of the counties in which RUS borrowers provide service are in metropolitan areas with populations of 1 million or more. For example, three borrowers that received over $400 million in loans in fiscal years 1999 through 2003 distribute electricity in the immediate vicinity of Atlanta, Georgia. In contrast, about 24 percent of the counties served by RUS borrowers are completely rural, while the remainder have a mix of rural and urban populations. RUS estimates, in a worst-case scenario, that the requirement to guarantee lenders' debt could lead to taxpayer losses of $1.5 billion--and GAO estimated that in return for this risk, fees on the guarantees would add about $15 million per year in rural economic development loans and grants. RUS officials believe that while risks are involved, losses are unlikely given the past stability of both the electricity market and the lender that might receive the guarantees. Only one lender is both qualified and interested in obtaining these guarantees. According to financial rating services, that lender is well regarded, but worked through financial concerns in 2002 and 2003, and faces longer-term risks associated with the changes taking place in the electricity and telecommunications markets that it serves. Recognizing the risks of guaranteeing this lender's debt, RUS proposed certain risk mitigation requirements, such as a reserve against losses. However, the lender's officials have stated that RUS' proposed requirements would make the program unattractive. GAO identified an alternative with no additional taxpayer risk to add funds for rural economic development loans and grants. If RUS were authorized to charge borrowers a small loan-origination fee of one-fourth of 1 percent on loans it expects to make and guarantee in fiscal year 2005, $24 million in rural economic development loans and grants might be made available. This amount is almost equal to the level provided by USDA's 2005 budget request for rural economic development loans and grants, and would likely have a minimal cost impact on customers of distribution borrowers. This alternative would not include guarantees of lenders' debt. Furthermore, the lender expected to use the guarantees has indicated that, even without such guarantees, it expects to continue being very successful at accessing capital for lending.