Rural Development Utilities Programs

1. Rural Development Utilities Programs KENNETH M. ACKERMAN Assistant Administrator Program Accounting and Regulatory Analysis NARUC Staff Subcommittee on Accounting and Finance Jackson Hole, Wyoming October 9, 2007

2. Topics 2007 Farm Bill Electric Program Telecommunications Program Water & Environmental Program Accounting and Depreciation Issues

3. Leadership Changes September 20, 2007 - President Bush Announces Resignation of Secretary of Agriculture Mike Johanns and Names Chuck Conner Acting Secretary of Agriculture

4. 2007 Farm Bill Proposed Legislation • The proposed bill authorizes USDA’s: • Commodity program support • Conservation and Forestry • Renewable Energy • Research • Trade • Food stamps and other nutrition assistance • Rural Development • The current farm bill expires with the 2007 crop year 4

5. Title VI: Rural Development • Consolidate rural development programs to increase flexibility and efficiency • Provide $1.6 billion in loans to complete the rehabilitation of all 1,283 certified Rural Critical Access Hospitals 5

6. Title VI: Rural Development • Provide an additional $500 million to reduce the backlog of rural infrastructure projects • Water and waste disposal loans and grants • Emergency water assistance grants • Community Facilities loan and grant programs • Distance learning and telemedicine grants

7. Title IX: Energy • Provide $500 million to create a Bioenergy and Bioproducts Research Program • Increase cost-effectiveness through cooperation between university and Federal scientists • Provide $500 million for rural alternative energy and energy efficiency grants • Directly assists farmers, ranchers, and rural small businesses

8. Title IX: Energy • Provide $2.1 billion in loan guarantees to support cellulosic ethanol projects in rural areas • Provide $150 million for biomass research competitive grants, focusing on cellulosic ethanol

9. Electric Program

10. Summary of Loan Program Electric Programs Budget(Dollars in Million) CRLoan 2006 2007 2008 2008 Program: Actual Actual Budget House Senate Direct 5% 99 99 99 100 100 Municipal Rate 100 101 101 0 0 Direct Treasury Rate 99 990 990 0 0 FFB Guaranteed 2,600 2,700 2,700 4,000 6,500 Non-FFB Guaranteed 100 0 0 0 0 Section 313A 1,500 250 250 0 0 Total Loan Program 4,498 4,140 4,1404,100 6,600 High Energy Cost Grants 17.5

11. Electric Program Funding2006 Budget$ Millions Program Level Discretionary Budget Authority

12. USDA Budget Outlays 19% 3% 59% 11% 6% 2/07

13. Rural Development Program Levels 2/07

14. Distribution Borrowers Balance Sheet Assets $56 b. Liabilities & Equity $56 b. RUS $13 b. (including guarantees) Long-Term Debt $26 b. Plant (distribution line, poles, towers, equipment etc.) $43b. Non-RUS $13 b. (CFC, CoBank etc) Other Liabilities $7 b. Equity $23 b. Investments in Assoc. Org.* $4 b. General Funds $3 b. Receivables $3 b. Other $3 b. *Investments in Associated Organizations are amounts due as the result of business done with other co-ops (G&T capital credits, CFC Capital Term Certificates, etc.)

15. Distribution Co-op Assets Net Utility Plant 76% Invest. Assoc. Org.* 7% General Funds 6% Receivables 6% Other 5% *Investments in Associated Organizations are amounts due as the result of business done with other co-ops (G&T capital credits, CFC Capital Term Certificates, etc.)

16. Distribution Borrowers Liabilities & Equity RUS Direct18% Debt 59% Equity 41% RUS Guar. 6% Non-RUS(CFC, CoBank, other)23% Other Liabilities*12% *Other Liabilities are primarily notes, accounts payable, debt coming due in current year

17. Average Cost of Debt 4.9% Co-ops benefited from decreasing interest rates from 2000 to 2004. The average cost of debt to the typical distribution co-op dropped 80 basis points in that period. In 2005, average cost of debt reversed its 5-year decline, rising to nearly 5%. Total long-term debt outstanding for all distribution co-ops is nearly $30 billion.

18. COOPS SERVE PRIMARILY FARMS & FAMILIES (kWh SALES) COOPERATIVES MUNICIPALS INVESTOR-OWNED

19. OTHER UTILITIES SERVE PRIMARILY BUSINESSES (kWh SALES) COOPERATIVES MUNICIPALS INVESTOR-OWNED

20. COOPS HAVE THE LEAST REVENUE PER MILE COOPERATIVES MUNICIPALS INVESTOR-OWNED

21. LEAST REVENUE PER MILE

22. CONSUMERS PER MILE OF LINE

23. 2005 Cooperative Sales Growth kWh Sales: Increased over 5% (361 co-ops) MEDIAN = 4.6% Increased 0 to 5% (333 co-ops) Decreased (90 co-ops)

24. Strongest Sales Growth Co-op kWh sales growth over 5% 2005 DATA Record summer heat from the Great Lakes to the southwestern US contributed to strong sales in 2005.

25. Moderate Sales Growth from 0% to 5% Sales for these co-ops grew from 0% to 5% over the prior year. 2005 DATA

26. Sales Growth Varies from Year to Year Annual kWh sales for utilities vary according to weather and economic conditions. Co-ops sales are largely residential and therefore even more weather dependent than IOUs. Coming off a low year in 2003, overall sales (shown above) were up 3.6% in 2004 and up 5% in 2005. Residential sales increased 5.7% in 2005 and C&I sales increased 4%.

27. Co-op Sales Growth Usually Outpaces the Industry Co-op Industry Cooperative sales growth generally surpasses that of the total electric utility industry as a whole and did so again in 2005. Annual kWh sales for utilities vary according to weather and economic conditions. Cooperative sales are largely residential and therefore even more weather dependent.

28. Co-op Consumer Growth Average Cooperative Growth = 2.6% High >2% (264 co-ops) Medium 1% to 2% (326 co-ops) Median = 1.5% 2005 DATA Low <1% (256 co-ops)

29. High Consumer Growth Widespread Consumer growth > 2 % Minneapolis Missoula Rapid City Wash DC Denver Las Vegas Atlanta Dallas Austin One-third of all co-ops experienced strong consumer growth (over 2%) in 2005. Co-ops are experiencing high growth in all parts of the country, not just the fast-growing regions of the Southeast and West. Retirement migration, recreation activity & the effect of metropolitan areas spreading farther & farther from their cores have brought many new consumers to co-op areas. 2005 DATA

30. Moderate Consumer Growth Consumer growth 1% to 2% 2005 DATA 2005 median growth = 1.5%

31. Low Consumer Growth Consumer growth < 1% The lowest growth rates are typically in the Great Plains states & most rural areas of the country. Only 43 co-ops actually lost consumers in 2005. 2005 DATA

32. Cooperative Consumer Growth Leads Industry Industry Co-op Industry Co-op Industry Co-op From 2003 through 2005, the rate of consumer growth for cooperatives has been well above that of the total industry. Cooperatives grew 2.6% overall in 2005, adding over 400,000 new customers (meters). This is an estimated 900,000 additional people served by the rural electric network. Source: EIA

33. Retail Sales and Revenue, by Customer Class Sales Revenue 364 billion kWh $30 billion Commercial19% Commercial19% Residential58% Residential65% Industrial13% Industrial21% Other3% Other2% The majority of cooperative sales and revenue comes from Residential customers. Commercial and Industrial customers make up 40% of sales and 32% of revenue. (“Other” includes irrigation, public and street lighting.)

34. Co-op Residential Electric Usage kWh/month Usage High >1,250 kWh (260) Medium (median = 1,144 kWh) 1,000 to 1,250 kWh (279) 2005 DATA Low <1,000 kWh (253)

35. High Residential Electric Usage over 1,250 kWh/month Cooperatives shown in blue have high usage. The cooperatives with the highest electricity usage are located in Minnesota, Iowa & North Dakota. They serve electricity-intensive agriculture loads, have very high levels of electric water heating & so forth. Areas in the South have a great deal of summer air conditioning. Cooperatives with traditionally low electric rates (TVA, the Pacific Northwest) also tend to have higher usage. 2005 DATA

36. Moderate Residential Electric Usage from 1,000 to 1,250 kWh/month 2005 DATA Median usage = 1,144 kWh

37. Lowest Residential Electric Usage under 1,000 kWh/month Low electricity usage may be due to less need for air conditioning in the summer or electric heat in the winter (availability of natural gas & other fuels). Less affluent households also tend to use less electricity as do areas with mostly seasonal sales. 2005 DATA

38. Residential Electricity Usage is Higher in Cooperative Areas kWh/month Residential electricity usage is higher for cooperatives than for other utilities because alternative heating fuels are often unavailable in rural areas. Also, agriculture is a high user of electricity (grain drying, dairy operations etc.) Usage for IOU customers jumped 6.5% in 2005. High heating oil and natural gas prices that year, probably contributed to greater electricity usage by IOU customers.

39. Telecommunications

40. Rural Telephone Bank • Final distribution of residual funds to be completed by November 13, 2007 • Final pay-out is $39.6 M, or 4.4¢ per share to Class A & B shareholders

41. TELECOMMUNICATIONSProgram Budgets Infrastructure Loan Programs: Hardship: $143 million $145 million Cost of Money: $247 million $250 million FFB: $299 million $295 million Program 2007 2008 (proposed)

42. TELECOMMUNICATIONSProgram Budgets Broadband Loan and Grant Program: Program 2007 2008 (proposed) Grants: $ 10 M $ -0- Loans: $ 998.5 M $300 M

43. TELECOMMUNICATIONSProgram Budgets Distance Learning and Telemedicine Programs: Loans: $128 million $0* Grants: $ 25 million $25 million Program 2007 2008 (proposed) *Unused appropriation carries over from prior year

44. Rural Broadband Access Loans and Loan Guarantees • Proposed revisions to 7 CFR Part 1738 • Published May 11, 2007 • Comments were due by July 10, 2007 • 8 specific areas of change • 38 parties filed comments

45. Rural Broadband Access Loans and Loan Guarantees Rural Definition • Current: Population of less than 20,000 inhabitants – regardless of where that community is located.

46. Rural Broadband Access Loans and Loan Guarantees Rural Definition • Proposed Change: Communities of 20,000 or less located outside the boundaries of an Urban Area as defined by the U.S. Census

47. Rural Broadband Access Loans and Loan Guarantees Competition • Current: Allows for funding of applications where service already exists, with regard to the number of providers, current penetration rates, etc.

48. Rural Broadband Access Loans and Loan Guarantees Competition • Proposed Change: Prohibits use of RD funds to serve areas with 4 or more Existing Broadband Service Providers (EBSP). • EBSP are those broadband providers who can certify that 10 % of the households passed by their facilities are purchasing their broadband service.

49. Rural Broadband Access Loans and Loan Guarantees Priority for Unserved • Current: Gives processing priority for application to serve unserved areas, no requirement to include unserved or underserved areas in project.

50. Rural Broadband Access Loans and Loan Guarantees Priority for Unserved • Proposed Change: Minimum service requirements: • 40% have no access or access to only one provider. • Applies to applicants wanting to serve beyond their existing service areas • Does not apply to incumbent providers when upgrading existing facilities.