Substantial Loan Write-Offs Occurred in Recent Years

Under Department of Justice (DOJ) authority, during fiscal year 1996 and through July 31, 1997, RUS wrote off about $1.5 billion of loans to rural electric cooperatives. The most significant write-offs relate to two G&T loans. Additional Losses From Financially Stressed G&T Loans Are Probable in the Short Term

It is probable that RUS will have additional loan write-offs and therefore that the federal government will incur further losses in the short term from loans to borrowers that have been identified as financially stressed by RUS management. At the time of our review, RUS reports indicated that about $10.5 billion of the $22.5 billion in G&T debt was owed by 13 financially stressed G&T borrowers. Some Losses From Loans Considered Viable Are Probable in the Future

In addition to the financially stressed loans, RUS had loans outstanding to G&T borrowers that were considered viable by RUS but may become stressed in the future due to high costs and competitive or regulatory pressures. We believe it is probable that the federal government will eventually incur losses on some of these G&T loans. We believe the future viability of these G&T borrowers will be determined based on their ability to be competitive in a deregulated market. The relatively high average production costs indicate that the majority of G&Ts may have difficulty competing in a deregulated market. As with the financially stressed borrowers, some of the G&T borrowers considered viable by RUS at the time of our work had high debt costs because of investments in uneconomical plants. In the short term, G&Ts will likely be shielded from competition because of the all-requirements wholesale power contracts between the G&T and their member distribution cooperatives. Wholesale rates under these contracts are set by a G&T’s board of directors with approval from RUS. In states whose commissions regulate cooperatives, the cooperatives must file requests with the commissions for rate increases or decreases. As discussed above, denials of requested rate increases by state commissions culminated in several G&Ts filing for bankruptcy. These commissions may deny a request for a rate increase if they believe such an increase will have a negative impact on the region. According to RUS officials, some commissions have denied rate increases to cover the costs of projects that the commissions had previously approved for construction. Therefore, G&Ts with high costs may be likely candidates to default on their RUS loans, even without direct competitive pressures. And finally, RUS has loans outstanding to G&T borrowers that are currently considered viable by RUS that may become stressed in the future due to high production costs and competitive or regulatory pressures.
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed the Rural Utilities Service's (RUS) electric loan portfolio and the potential for future losses to the federal government from these loans, focusing on: (1) substantial write-offs of loans to rural electric cooperatives; (2) likely additional losses to the federal government from loans to financially stressed borrowers; and (3) the potential for future losses from viable loans that may become stressed in the future due to high production costs and competitive or regulatory pressures.

What GAO Found

GAO noted that: (1) under Department of Justice authority, during fiscal year (FY) 1996 and through July 31, 1997, RUS wrote off about $1.5 billion of loans to rural electric cooperatives; (2) the most significant write-offs relate to two generation and transmission (G&T) loans; (3) it is probable that RUS will have additional loan write-offs and therefore that the federal government will incur losses in the short term from loans to borrowers that have been identified as financially stressed by RUS management; (4) at the time of GAO's review, RUS reports indicated that about $10.5 billion of the $22.5 billion in G&T debt was owed by 13 financially stressed G&T borrowers; (5) in addition to the financially stressed loans, RUS had loans outstanding to G&T borrowers that were considered viable by RUS but may become stressed in the future due to high costs and competitive or regulatory pressures; (6) GAO believes it is probable that the federal government will eventually incur losses on some of these G&T loans; (7) GAO also believes the future viability of these G&T borrowers will be determined based on their ability to be competitive in a deregulated market; (8) relatively high average production costs indicate that the majority of G&Ts may have difficulty competing in a deregulated market; (9) as with the financially stressed borrowers, some of the G&T borrowers considered viable by RUS at the time of GAO's work had high debt costs because of investments in uneconomical plants; (10) in the short term, G&Ts will likely be shielded from competition because of the all-requirements wholesale power contracts between the G&T and their member distribution cooperatives; (11) wholesale rates under these contracts are set by a G&T's board of directors with approval from RUS; (12) in states whose commissions regulate cooperatives, the cooperative must file a request with the commission for a rate increase or decrease; (13) these commissions may deny a request for a rate increase if they believe such an increase will have a negative impact on the region; (14) denials of requested rate increases by state commissions culminated in several G&Ts filing bankruptcy; (15) according to RUS officials, some commissions have denied a rate increase to cover the cost of projects that the commission had previously approved for construction; and (16) therefore, G&Ts with high costs may be likely candidates to default on their RUS loans, even without direct competitive pressures.