Rural Development Utilities Programs

KENNETH M. ACKERMANAssistant Administrator

Program Accounting and Regulatory Analysis

NARUC Staff Subcommittee on Accounting and Finance

Lexington, KentuckyOctober 14, 2008

Topics

• Electric Program• Telecommunication Program• Farm Bill• Water & Environmental Program• Accounting Issues• Other Issues

Electric Program

670 borrowers670 borrowers•617 distribution617 distribution•53 generation & transmission53 generation & transmission

RUS Loans RUS Loans $12,964,636,000$12,964,636,000FFB LoansFFB Loans $21,185,569,000$21,185,569,000

TotalTotal$34,150,205,000$34,150,205,000

Program Overview

Loan Programs FY 2008

Hardship……………………………………………......... $99,300,000$99,300,000

Municipal ………………………………………………… $0$0

Treasury ……………………………………………........... $0$0

FFB Guaranteed (Generation & Transmission) …… $3,200,000,000$3,200,000,000

FFB Guaranteed (Distribution) ………………………… $3,300,000,000$3,300,000,000

Loan Levels

Loan Programs FY 2008

http://www.usda.gov/rus/electric/loans/loan_types041118.pdf

Hardship $99,300,000$99,300,000 12 $ 99,300,000

Municipal Not FundedNot Funded 0 $ - 0- PendingPending 4 4 $ 25,943,000 $ 25,943,000

FFB Guaranteed $6,500,000,000$6,500,000,000 177 $6,500,000,000

Treasury Not FundedNot Funded 0 $ - 0 - PendingPending 9 9 $ 157,851,000 $ 157,851,000

USDA, $20,226.00

RD, $2,066.03

RUS All, $866.02

RUS Electric Program, $7.13

RUS All, $10,623.27

RUS Electric Program, $7,099.30

RD, $21,322.50

USDA, $124,435.00

Electric Program Funding 2008 Budget($ Millions)

Program Level Discretionary Budget Authority

Loan 2004 2005 2006 2007 2008Program: 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 5,400 3,889 7,099

Summary of Historical Electric Programs Loan Budget (Dollars In Million)

G&T Loans 1971-2007 (Actual) 2008-2018 (Projected)

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

$(00

0)

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Electric Progam Loans for Generation and TransmissionActual 1971-2007 | Projected 2008-2018

Transmission

Generation

Counties Impacted by Power Supply and Distribution Loan Programs FY07

USDA, Rural Development has several financing options available for financing

Renewable Energy projects.

FFB Loan Program for Renewables

Section 9006, Renewable Energy and Energy Efficiency Grants

and Loan Guarantees.

RENEWABLE ENERGYRENEWABLE ENERGY

Rural Development, Electric Programs has

typically set aside $200 million of

FFB loan funds to finance renewable energy

projects, with priority processing.

Generation and the Future of Baseload

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.

• 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.

COAL FIRED GENERATION

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 TypeNRECA Survey vs AEO 2008

Construction Cost by Generation Type

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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?

COCO22 Sequestration 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?

COCO22 Sequestration 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.

• 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)

WHAT IS RUS DOING?

Telecommunications Program

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

• $376.7 million in loans made in FY 2007

• $3.7 billion in principal outstanding; 550 borrowers

• 92% of borrowers are providing Broadband service

• 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

• 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

Infrastructure: Broadband:

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

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

Broadband Program

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: 1. A city, town, or incorporated area that has a

population of greater than 20,000 inhabitants; and

2. 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:

1. Recommendations (interagency cooperation and coordination of agencies) to implement policies, streamline processes, target resources;

2. Address short- and long-term needs assessments on all levels (state, local, Federal)

3. 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

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 RevolvingTotal $ 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

Electric Uniform System of Accounts

• Published May 27, 2008• Provides alternative presentations for audited financial

statements for balances in the Cushion of Credit account– Long term debt or Long term investment

• Implements recent FERC orders– Acct 209, Accumulated Other Comprehensive Income

• Clarifies Rural Development Utilities Programs specific guidance– Storm Damage– Record Retention– Consolidated Financial Statements

Renewable Energy Credits

• Original proposal treated RECs as intangible assets.

• Defer accounting guidance until further information is available

• Creation of working group to recommend appropriate accounting treatment

Renewable Energy Credits

• REC Working Group (RECWG) participants:

• Diana Alger, Chief, TAAS, Chair

• Staff from several G&Ts

• NRECA

• CFC

RECWG

• First conference call held on June 9, 2008

• Goal is to recommend the accounting treatment and record keeping requirements related to RECs

Part 1773-Audit Policy

• Revisions being planned

• Update Independence Standards

• Consider electronic filing of audits

• Redefine users to include both for-profit and not-for-profit grant recipients

• Update sample letters to reflect an adoption of SAS 112, Communicating Internal Control Related Matters Identified in an Audit

Novinium

• Novinium Inc., is requesting it’s Perficio and Ultrinium products be treated as an addition to electric utility plant– Perficio extends useful life for 20 years

– Ultrinium extends useful life for 40 years

• Advancement to the silicone dielectric enhancement fluid used in CableCURE

Vacancies

• Field Accountants– Northwest (Alaska, Washington, Idaho, Western Montana)– Indiana– South Carolina– Tennessee– Iowa

• Washington D.C.– Staff Accountants– System Accountant

http://www.usda.gov/rus/kenneth.ackerman@wdc.usda.gov

Questions