Project Financing Loans, 33755-33757 [2013-13313]

Agencies

• DEPARTMENT OF AGRICULTURE
• Rural Utilities Service

[Federal Register Volume 78, Number 108 (Wednesday, June 5, 2013)]
[Proposed Rules]
[Pages 33755-33757]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13313]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 78, No. 108 / Wednesday, June 5, 2013 / 
Proposed Rules

[[Page 33755]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1710

[0572-AC21]


Project Financing Loans

AGENCY: Rural Utilities Service, USDA.

ACTION: Advanced notice of proposed rulemaking and notice of public 
meeting.

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SUMMARY: The Rural Utilities Service (RUS or Agency) is considering 
regulatory reforms to codify statutory changes related to ``project 
financing'' requirements to advance the agency's rural development 
mission and improve its ability to finance electric infrastructure 
projects, including those that use renewable sources of energy. RUS is 
also considering regulations to clarify the agency's procedures for 
single asset/project financing arrangements for all RUS eligible 
projects. This advance notice of proposed rulemaking seeks comments on 
the parameters necessary to more effectively and prudently use project 
financing in the RUS electric loan program and will serve several 
purposes.
    It will assist the agency to gather information and comments about 
its ability to make loans for renewable electric generation even where 
the consumers may be non-rural residents.
    It will help develop a record on industry standards and public 
recommendations related to financing arrangements and collateral 
requirements which could be used to implement a focused Project 
Financing Program (PFP) for investments in electric generation, 
transmission, and distribution facilities, including plant necessary 
for generating electricity from renewable energy sources.
    It will also help the agency better understand the potential demand 
for financing utilizing either or both of the aforementioned 
authorities, collect comments from potential applicants and co-lenders 
on PFP, terms, and renewable energy financing as well as help inform 
the public about federal financing options available through the RUS 
Electric Loan Program.
    The RUS is also announcing a public meeting for interested parties 
to express their views on the opportunities and challenges related to 
the use of the agency's authority for electric generation from 
renewable energy sources and project financing within the electric 
utility sector.

DATES: Written comments: Comments must be received by RUS, or bear a 
postmark or equivalent, no later than July 30, 2013.
    Public meeting: Two public meetings will be held on July 9, 2013. 
The first meeting will begin at 9:00 a.m. eastern time, and the second 
meeting will begin at 1:15 p.m. Registration will begin at 8:00 a.m. 
and 12:15 p.m., respectively. The public meetings will last no more 
than 4 hours, with 20 minutes of introductory remarks from the RUS 
Administrator, followed by a PowerPoint presentation explaining the 
ANPR. RUS will then open the floor to discussion.

ADDRESSES: Comments: Submit comments by either of the following 
methods:
     Federal eRulemaking Portal at https://www.regulations.gov. 
Follow instructions for submitting comments.
     Postal Mail/Commercial Delivery: Please send your comment 
addressed to Michele Brooks, Director, Program Development and 
Regulatory Analysis, USDA Rural Development, 1400 Independence Avenue, 
STOP 1522, Room 5159, Washington, DC 20250-1522.
    Public meeting: The public meeting will be held in the Jefferson 
Auditorium, South Building, U.S. Department of Agriculture, 1400 
Independence Avenue SW., Washington, DC. Persons interested in making a 
presentation at the meeting should send a written request to Nivin A. 
Elgohary, Assistant Administrator, Electric Program, Rural Utilities 
Service, room 5165-S, Stop 1560, 1400 Independence Avenue SW., 
Washington, DC 20250-1565.

FOR FURTHER INFORMATION CONTACT: Kristi Kubista-Hovis, USDA-Rural 
Utilities Service, 1400 Independence Avenue SW., Stop 1560, Washington, 
DC 20250-1560, telephone (202)720-0424 or email to kristi.kubista-hovis@wdc.usda.gov.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be not significant for purposes of 
Executive Order 12866 and, therefore, has not been reviewed by the 
Office of Management and Budget.
    Background: The RUS provides long term financing to electric 
utility systems providing services to eligible rural communities. Loan 
funds are typically available for construction on a reimbursement basis 
once the project is completed. Private sector lenders or utility assets 
are used as bridge financing. The Electric program of RUS manages a 
portfolio of well-established loan programs that continue to meet the 
needs of eligible applicants. It represents the largest federal direct 
investment in the electric sector. RUS' Electric loan programs provide 
loans for rural electrification to persons, corporations, States, 
Territories, and subdivisions, tribal entities and agencies for the 
purpose of financing the construction and operation of generating 
plants, electric transmission and distribution lines or systems for 
furnishing and improving electric service to people living in rural 
areas. Current RUS borrowers are well established utilities, most 
frequently rural electric cooperatives that have a history of 
participation in the program. RUS loans are secured by a system-wide 
mortgage or indenture on the tangible assets of the utility as well as 
a contractual claim on system revenues. Security and feasibility of RUS 
financing for power supply has historically been based on all 
requirements wholesale power contracts; an after acquired property 
clause within the mortgage; a loan contract which identifies 
performance criteria during the term of the loan. Primary support 
documents are used to determine financial and engineering feasibility 
for all loans. In recent years, electric infrastructure, including 
generation systems using renewable energy, peaking units and 
transmission lines have been increasingly financed on a ``project 
basis.''
    Section 317 Authority--The Rural Electrification Act of 1936, as 
amended ((7 U.S.C. 940 et seq.) RE Act) provides authority for the 
financing of assets used

[[Page 33756]]

in furnishing or improving electric service to rural areas. Section 13 
of the RE Act defines a rural area as a community of 20,000 or less or 
an area within the service territory of a borrower that had an 
outstanding loan on the date of enactment of the Food, Conservation, 
and Energy Act of 2008, more commonly known as the 2008 Farm Bill (June 
18, 2008). That definition expanded the number of communities eligible 
to be served by an RUS financed entity.
    In the 2008 Farm Bill, Congress added a new section 317 to the RE 
Act. The provision gave the agency the authority to make electric loans 
under Title III of the RE Act for ``electric generation from renewable 
energy resources for resale to rural and nonrural residents.'' The 
statute defined a ``renewable energy source'' as ``an energy conversion 
system fueled from a solar, wind, hydropower, biomass or geothermal 
source of energy.'' Section 317 authorities could be used to provide 
financing to construct renewable energy generation facilities to serve 
both rural and non-rural residents.
    The RUS is committed to utilizing section 317 in a manner that 
spurs rural economic development, expands renewable energy options for 
consumers and protects taxpayers from undue risks. Rural areas hold the 
potential of producing significant amounts of renewable energy. Rural 
development can be enhanced by facilitating the rural production and 
use of renewable electric resources. The RUS Electric Program can add 
value to rural markets by using its program to increase physical 
assets, set policies and regulations that encourage success, foster job 
creation and enhance energy independence. The RUS seeks comments on 
several issues related to the effective use of section 317.
    1. Under what conditions should section 317 authorities be used? 
Are there any legislative impediments to utilizing the authority on an 
ad hoc or programmatic manner?
    2. What is the level of interest among current and past RUS program 
participants in providing financing for renewable energy projects where 
consumers of the power may be non-rural? What is the level of interest 
among potential non-traditional applicants?
    3. Do renewable energy generation projects serving non-rural 
consumers require the agency to take into consideration factors not 
addressed in the existing RUS electric loan program requirements?
    Project Financing--Prudence has been a core value of the RE Act's 
Electric Loan Program. The electric program has a current default rate 
of less than 1 percent. This has enabled the agency in recent years to 
generate billions of dollars of rural infrastructure investment with 
little or no budget authority other than the salaries and expenses of 
the staff necessary to run the loan program. RUS loans are generally 
secured by a mortgage or indenture on the tangible assets of the 
borrower's electric system. The collateral includes the borrowers' real 
property, revenue streams through contractual arrangements, and any 
future acquisitions. This ``system'' approach has served the program 
and rural America well. The RUS electric loan portfolio exceeds $43 
billion. While RUS has authority to finance electric infrastructure on 
a ``project'' basis and has occasionally used that authority, the 
``system'' approach has been the predominant financing method for the 
agency.
    As the regulatory and business environments evolve for electric 
utilities, the agency notes that there is a growing use of and interest 
in investing in electric infrastructure on a ``project'' basis, 
especially for power generation from natural gas and renewable sources 
of energy and transmission line investments. In a ``project'' finance 
model, the assets and revenues from a particular investment form the 
security for the loan rather than the assets of the entire electric 
system. Often additional credit support is needed, such as equity 
investment or third party commitments to minimize risk to the lender. 
For example, the assets and revenues from a specific generating 
facility might be financed and secured by that investment rather than 
by placing a lien on the assets of the whole utility. In a renewable 
energy illustration, a lender might finance only the wind turbine 
assets and not take or be able to take a security interest beyond those 
assets. This Advance Notice of Proposed Rule Making seeks comments on 
the project structure for infrastructure developments when an entire 
utility system is not pledged as collateral. While the existing RUS 
project financing authority has been used on an ad hoc basis, the 
agency is considering new regulations to create a more focused PFP to 
potentially provide financing for eligible applicants for electric 
utility projects, enabling utilities, tribal entities and corporations 
to access the lowest cost capital. The agency advises entities 
interested in pursuing PFP loans, that all RUS projects must take into 
account a number of factors not typically involved in private sector 
project financing arrangements, including (1) beneficiary 
determinations; (2) government social clauses; (3) executive orders; 
(4) a statutory preference for not-for-profit entities; (5) 
appropriations/allocation schedules; (6) application processing time; 
(7) loan advance and interest rate lock-ins at time of advance; (8) 
construction and procurement standards; and (9) reporting requirements. 
See 7 CFR Part 1710, subpart B.
    The RUS is seeking public comment on the following questions and 
potential requirements:
    1. The RUS program relies on borrowers financing commercially 
proven technologies suitable for rural deployment. If the RUS were to 
expand its project financing authority, especially for renewable energy 
investments, what infrastructure should be eligible for PFP loans? What 
entities should qualify for PFP loans?
    2. Based on the information provided in this Advance Notice of 
Proposed Rulemaking is there interest in seeking a PFP loan from the 
RUS under that authority or Section 317 authority referenced above?
    3. All RUS investments must comply with the National Environmental 
Policy Act (NEPA). As it relates to project construction, will 
potential PFP applicants be able to meet the timing requirements of the 
NEPA, as codified at 7 CFR Part 1794?
    4. The ability to repay must be established prior to loan approval 
for RUS financing. In considering a PFP loan, risk mitigation and 
revenue assurance are key issues. What type of credit support, in 
addition to power purchase agreements and corporate guarantees, are 
available to secure the government's interest and ensure a long term 
revenue stream to repay PFP loans?
    5. RUS is considering limiting lending under a new PFP to a maximum 
of 75 percent of the RUS eligible project costs. The government's 
interest rate on an RUS Electric Program loan is tied to Treasury rates 
of interest. The most popular option in recent times has been a loan 
with an interest rate equal to the Treasury rate, at the time of the 
loan fund advance, plus one eighth of one percent. The loan term is 
based on the shorter of the useful life of the asset, term of power 
purchase agreements, term of fuel supply, or term of license that 
ensure a revenue stream or as deemed appropriate to ensure the 
repayment of the debt. What other criteria can be built into the credit 
structure to ensure the repayment of PFP loans?

[[Page 33757]]

    6. RUS is considering a requirement that PFP borrowers contribute 
equity in an amount equal to at least 25 percent of the eligible 
project costs at the time of the RUS loan obligation. What other equity 
levels are acceptable for this type of credit and what types of credit 
enhancements can be provided by the applicant?
    7. Other credit enhancements have been suggested to ensure 
repayment including the establishment of a debt service reserve fund 
required at the time of the RUS obligation for an amount up to one year 
of debt service. This amount will be maintained while the loan is 
outstanding with funds deposited in an escrow account to be withdrawn 
only by RUS or with RUS approval. Will private financing institutions 
consider this RUS requirement in their interim financing arrangement? 
Should an operation and maintenance reserve account be required at the 
time of the RUS obligation for an amount agreed to by RUS and the 
applicant and maintained while the loan is outstanding? What are 
typical costs or percentages for Operations and Maintenance expenses 
for the RUS eligible facilities? Please consider the effects of 
unplanned as well as planned maintenance.
    8. RUS does not presently intend to provide construction loans for 
project financing. What entities would be interested in partnering with 
the federal government on these types of projects by providing 
construction financing? What are the details of the financing 
arrangements available from the private lending institutions?
    9. RUS frequently lends in concurrence with private sector lenders. 
Will private lending institutions participate in financing facilities 
on a term financing basis?
    10. Outside consultants and legal counsel are often used by RUS 
loan applicants. Under current regulations project applicants will fund 
the costs of outside legal, engineering and environmental consultants 
working for RUS. What should the appropriate cost range be for such 
expenses incurred by private lenders for a potential PFP loan?
    11. Would borrowers accommodate a take or pay Power Purchase 
agreement equivalent with a component where RUS will always be paid?
    12. Federally Recognized Tribes in rural areas have access to a 
large share of rural renewable energy resources on lands that they own, 
that are held in Trust by the Federal Government. What additional 
financing and regulatory considerations should RUS take into 
consideration to ensure that Electric Program policy changes are 
structured to help meet the renewable energy development needs of 
Federally Recognized Tribes?
    13. What additional intergovernmental cooperation and collaboration 
between Federal agencies and Federally Recognized Tribes might better 
position RUS to meet the renewable energy development needs of 
Federally Recognized Tribes?
    14. Would Federally Recognized Tribes like to consult with RUS on 
proposed Electric Program policy changes to help meet their renewable 
energy development needs? If so, what recommendations do Tribes have 
for conducting such consultation?

    Dated: May 30, 2013.
John Charles Padalino,
Acting Administrator, Rural Utilities Service.
[FR Doc. 2013-13313 Filed 6-4-13; 8:45 am]
BILLING CODE 3410-15-P