Rural Electrification Administration Loans to Electric Distribution Systems:

Policy Changes Needed

CED-80-52: Published: May 30, 1980. Publicly Released: May 30, 1980.

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Rural Electrification Administration (REA) loans and other assistance have played a major role in bringing electric service to rural America since 1935. Although some electric distribution systems continue to need loan subsidies, others could qualify for and obtain long-term credit from other sources at reasonable rates and terms and still have comparable costs and charge comparable electric rates. Changes are needed in REA loan policies and procedures to identify these borrowers and to better match loan subsidies with individual borrower needs.

Under its policies and procedures, REA has made limited progress in encouraging systems to become financially self-sufficient. About 42 percent of the borrowers GAO reviewed could probably qualify for non-REA loans at reasonable rates and terms. Some of these have high costs which would be passed on through charging relatively high electric rates. However, others have low costs and could absorb increased interest costs without increasing electric rates. REA loan-making criteria do not adequately correlate the type and/or amount of subsidized loan REA will provide with the borrower's needs. Thus, borrowers with high costs can receive the same subsidy or even less than those with low costs. The REA administrator advised GAO that using rate comparability criteria for determining need for assistance would be difficult because of such matters as differences in geographic energy use and supply and in state rate-setting agencies. Recognizing these difficulties, GAO concluded that, since the most important factor in establishing electric rates is borrowers' costs, cost comparability should be used as a substitute for rate comparability.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Agriculture should direct the Administrator, REA, to develop a legislative plan for revising the policies for making insured loans to rural electric distribution systems. As a part of the plan, new criteria should be developed, based on cost comparisons with urban electric systems, for determining the subsidized loans needed, if any, by the systems to help enable them to charge comparable electric rates. The criteria should be applied on a 2-year cycle to all borrowers requesting loans. Borrowers that can qualify for non-REA loans at reasonable rates and terms, and are not in need of a subsidized loan to charge comparable electric rates, should be ineligible for REA assistance.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Not Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Agriculture should direct the Administrator, REA, to develop criteria for determining which rural electric distribution system borrowers qualify for long-term loans from the private credit sector at reasonable rates and terms.

    Agency Affected: Department of Agriculture

 

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