Rural Development Utilities Programs KENNETH M. ACKERMAN Assistant Administrator Program Accounting and Regulatory Analysis NARUC Staff Subcommittee on Accounting and Finance Lexington, Kentucky October 14, 2008
Topics • Electric Program • Telecommunication Program • Farm Bill • Water & Environmental Program • Accounting Issues • Other Issues
Program Overview • 670 borrowers • 617 distribution • 53 generation & transmission • RUS Loans $12,964,636,000 • FFB Loans $21,185,569,000 • Total $34,150,205,000
Loan Levels Loan Programs FY 2008 Hardship…………………………………………….........$99,300,000 Municipal ………………………………………………… $0 Treasury ……………………………………………........... $0 FFB Guaranteed (Generation & Transmission) ……$3,200,000,000 FFB Guaranteed (Distribution) …………………………$3,300,000,000
Loan Programs FY 2008 Hardship $99,300,000 12 $ 99,300,000 Municipal Not Funded 0 $ - 0- Pending 4 $ 25,943,000 FFB Guaranteed $6,500,000,000 177 $6,500,000,000 Treasury Not Funded 0 $ - 0 - Pending 9 $ 157,851,000 http://www.usda.gov/rus/electric/loans/loan_types041118.pdf
Electric Program Funding 2008 Budget($ Millions) Discretionary Budget Authority Program Level
Summary of Historical Electric Programs Loan Budget(Dollars In Million) Loan 2004 2005 2006 2007 2008 Program: Actual Actual Actual Actual Actual Direct 5% 240 119 99 99 99 Municipal Rate 1,000 104 101 101 0 Direct Treasury Rate 750 1,000 990 990 0 FFB Guaranteed 1,900 2,100 2,700 2,700 6,500 Non-FFB Guarantee 99 0 100 0 0 Section 313A 0 1,000 1,500 0 500 Total Loan Program 3,989 4,323 5,4003,889 7,099
Counties Impacted by Power Supply and Distribution Loan Programs FY07
USDA, Rural Development has several financingoptions available for financing Renewable Energy projects. FFB Loan Program for RenewablesSection9006, Renewable Energy and Energy Efficiency Grants and Loan Guarantees.
RENEWABLE ENERGY Rural Development, Electric Programs has typically setaside $200 million of FFB loan funds to finance renewable energy projects, with priorityprocessing.
COAL FIRED GENERATION • 50% of the electricity in this country • 80% for rural electric cooperatives WHY? Fuel Use Act of 1978 • Prohibited the use of natural gas and oil to generate electricity. • Forced the industry into coal and nuclear to meet demand.
COAL FIRED GENERATION • 51 % of cooperative generation • 80 % of MWhs generated • Trend is not likely to be reversed any time soon. • Strong track record in owning and operating coal fired plants. • Meaningful options are limited.
The Future is Dark(Black Actually) • US Projections • Annual Energy Outlook 2008 March 2008 (Revised)
World Electricity GenerationBy Fuel Type - 2004 and 2030 Sources: 2004: Derived from EIA, International Energy Annual 2004, www.eia.doe.gov/iea. 2030: EIA, System for the Analysis of Global Energy Markets (2007)
Many Challenges Ahead For The Electric Program • Funding availability for baseload projects and related cost of capital • Effects related to the control of greenhouse gas emissions • State and local support for power plant projects • Legal Challenges • Trajectory of construction costs • Forecast of wholesale fuel prices • Demand effects of increased energy efficiency, conservation, and prices
NRECA G&T Survey vs AEO 2008 Construction Cost By Generation Type
CLIMATE CHANGE IS REAL • Coal is the key problem and the key to solutions. • Technology will provide acceptable solutions. • Energy Efficiency, Renewables, and Nuclear, although very critical, cannot do the job alone.
WHAT IS RUS DOING? CO2 Sequestration • RUS is committed to financing a demonstration project at an existing plant owned and operated by Basin. • The project will add carbon capture technology on the back of an existing plant.
WHAT IS RUS DOING? CO2 Sequestration • Capture 90% of the flue gas devoted to this technology, clean it up some more and inject it into the pipeline already delivering CO2 for enhance oil recovery in Canada. • A portion of the output will also be diverted for injection into a non recoverable coal seam and another portion into a saline formation for permanent sequestration. These sites will be monitored continuously.
WHAT IS RUS DOING? • Recognize the need to reduce emissions • Recognize the need for pollution control systems • Prepared to finance, advanced power generation systems • IGCC (integrated gasification combined cycle) • CFBC (circulating fluidized bed combustion)
Loan Budgets (millions) 2008 2009(proposed) • Broadband $792.0 $297.0 • Infrastructure $685.2$690.0 Total $1,477.2 $987.0
Telecom Loan Investment Infrastructure: Broadband: • 86 loans have been made, for $1.7 billion, in more than 1,900 communities • More than 1.1 million households will receive broadband access under loans made • $376.7 million in loans made in FY 2007 • $3.7 billion in principal outstanding; 550 borrowers • 92% of borrowers are providing Broadband service
Infrastructure Program Trends: • Lending Levels • FY 2007 – only 55% of loan funding available was obligated • Higher demand was anticipated in FY 2008 AND has materialized • Typically funding requests are heavier in 3rd and 4th quarters of the fiscal year
Infrastructure Program Trends: • Competition • From multiple fronts (Cable, ISPs, other LECs, Satellite) • Decrease in subscriber lines • Continued reliance on Universal Service Funds • Offering of Non-regulated Services
Infrastructure Program Challenges: • Impact of Competition • Regulatory requirements • Proposed Changes in USF • Upgrades and expansion of service offerings • Un-liquidated Loan Obligations (ULOs)
Infrastructure Program Proposed Changes: • Feasibility Study and Toll Forecasts • Toll forecast model is becoming outdated • Moving to 5-yr pro forma analysis • More accurate projections based on business model assumptions
Broadband Program Trends: • Trend toward larger, more complex loans • Substantial private equity financing to supplement loan • Complicates loan security arrangements • Third party agreements (i.e., stock pledge)
Broadband Program Challenges: • Projections do not include entire borrower operation; • Projections do not reconcile with system design; • Assumptions not supported by market survey; • Assumptions do not reconcile with financial statements; • Assumptions too general or only cover the financed project.
Broadband Program Challenges(continued): • Validate financial forecast; • Determine reasonableness of assumptions based on submitted data; • Reconcile with system design, construction schedule, and budget; • Assess feasibility and risk • Can be extremely complex
Broadband Program Proposed Changes(Proposed Rule/Statutory): • Promote deployment to rural areas with little or no service • Limit funding in urban areas and areas where a significant share of the market is served by incumbent providers • Clarify equity and marketing survey requirements
Broadband Program Proposed Changes(continued): • Increase the transparency of the application process • Promote a better understanding of application requirements • Ensure that projects funded are keeping pace with increasing demand for bandwidth
2008 Farm Bill • Title VI, Rural Development • RE Act Amendments • Non-Act Amendments
What it is… • A five year law that sets “farm policy” for agriculture producers, agribusinesses, etc. • Contains 15 Titles (including Commodity, Conservation, Trade, Nutrition, Credit, Energy, etc.) • We are Title VI – Rural Development
What it did… • Title VI amended the Re Act: • Sec. 306: “Elimination” of FFB Loans • Sec. 306F: Initiative to better serve “underserved trust areas” (new) • Sec. 313A: Authority for the Guarantee of Other Lenders’ Financing of Telecom or Electric projects (modified)
What it did… • Title VI amended the RE Act: • Sec. 315: Expansion of 911 access (modified) • Sec. 318: Bonding Requirements (new) • Sec. 601: Broadband (modified) • Sec. 602: National Center for Rural Telecommunications Assessment (new)
What it did… • Other Provisions(non-RE Act amendments): • Comprehensive Rural Broadband Strategy (new) • Distance Learning and Telemedicine Program (re-authorization/modification) • Weather Radio (re-authorization)
Sec. 601: Broadband (modified) • Broadband Definition: • Requires the Secretary to, as advances in technology warrant, review and recommend modifications to the transmission rate • Prohibition: • The Secretary shall not establish a speed that has the effect of precluding the use of evolving technologies appropriate for rural areas
Sec. 601: Broadband (modified) • Rural Area means any area, which is not located within: • A city, town, or incorporated area that has a population of greater than 20,000 inhabitants; and • An Urbanized Area contiguous and adjacent to a city or town that has a population of greater than 50,000 inhabitants
Sec. 601: Broadband (modified) • Eligible Projects: • 25% un-served in proposed application (one or none = un-served) • There are less than 3 incumbent service providers providing broadband in the proposed service area
Sec. 602:National Center for Rural Telecommunications Assessment (new) • “The Secretary shall designate an entity to serve as the National Center for Rural Telecommunications Assessment…” • Assess effectiveness of this program • Work with other rural development centers to promote effective broadband deployment strategies and policy for rural areas • Managed by Board of Directors – issues annual report
Comprehensive Rural Broadband Strategy (new) Chairman of the FCC in coordination with the Secretary of Agriculture must report on: • Recommendations (interagency cooperation and coordination of agencies) to implement policies, streamline processes, target resources; • Address short- and long-term needs assessments on all levels (state, local, Federal) • Set goals and timeframes
Distance Learning and Telemedicine Program (modification) • Re-authorized through 2012 • Places emphasis on ensuring that “libraries” are included as eligible purposes/entities
Next Steps • Farm Bill Implementation • Broadband Provision a Priority • Interim Rule and Proposed for Comment • Team in place • New rule by the end of the year
Water and Environmental Programs($ Millions) FY 2007 FY 2008 FY09 Proposed Actual Actual Direct Loans $ 990.00 $ 1,261.52 $ 476 Guaranteed Loans $ 75.00 $ 18.4 $ 75 Grants $ 451.44 $ 426 $ 353 2005 Hurricanes $ 29.90 $ 0 $ 0 Solid Waste Mgmt Grants $ 3.50 $ 3.5 $ 3.5 Individually-owned water well$0.99 $ .05 $ 0.50 Grants for Water and $ 0.50 $ .5 $ 0.99 Wastewater Revolving Total $ 1,551.33 $ 1,709.97 $908.99
HWWS Grant Program • The loan limit is $ 11,000 at 1 percent for 20 years • A NOFA for FY 2009 will be published in March 2009