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Congressional Testimony

Statement of Wally Beyer
Former Administrator, Utilities Programs

Before the Senate Subcommittee on Agriculture, Rural Development and Related Agencies
April 15, 1997


Mr. Chairman and Members of the Subcommittee, I am pleased to accompany Under Secretary Jill Long Thompson and present the 1998 Budget and Program Proposals for the Utilities Programs (Utilities Programs). I want to thank the Subcommittee for the support you are providing to rural America. Investment in infrastructure continues to be an investment in our Nation's future productivity and equality of economic opportunity. Congress has always recognized that it is in our national interest for all citizens, and all regions, to have equal opportunity to build, to grow and to develop to our greatest potential. The latest example was the passage of the Telecommunications Act of 1996, when Congress and the President declared that it was in our national interest to ensure that reliable, affordable, telecommunications be available to rural citizens as well as major population centers.

The character of this nation is rooted in rural America. We began as an agrarian society and our rural experience still affects our lives. Geographically we are rural. Rural America comprises 80 percent of the nation's landmass. With nationhood comes responsibility, and the investment we as a people and as a government have made in the infrastructure of rural America has benefited all Americans. This investment has increased economic productivity, improved health care and education and created a modern agriculture that is a part of the global economy. Living in the Great Plains most of my life, I know firsthand the benefits of our rural electric, telecommunications and water programs. The opportunity that the government has "helped to ensure" throughout the years will be just as important tomorrow as it was 60 years ago.

The rural infrastructure programs are the foundation of rural education, health and economic development. Without a strong foundation, rural America will not be able to build on its strengths and aid the country as we move into this increasingly competitive global economy.

Utilities Programs is the Federal government's point agency for rural infrastructure assistance. Utilities Programs infrastructure programs focus on targeting scarce Federal resources into high cost areas, poverty areas, low density and out-migration areas and servicing the unserved. Priority is given to leveraging scarce Federal dollars. The 1998 budget proposes $34 million in budget authority for the electric and telecommunications infrastructure loan programs. This $34 million budget authority will generate $1.5 billion in Federal loans with an additional leveraging of $4.33 billion private capital for a total anticipated 1998 capital investment of $5.8 billion in the rural electric and telecommunications infrastructure. This relatively small Federal dollar investment in rural infrastructure is a critical catalyst for the much needed private, state, and local capital used to maintain quality reliable infrastructure in rural America at reasonable cost. Each Federal loan dollar in the Utilities Programs telecommunications program leverages 4.5 private capital dollars. Each Federal loan dollar in the Utilities Programs electric program leverages 3.0 private capital dollars.

WATER AND WASTE DISPOSAL PROGRAMS

It is hard to imagine, but in this modern era we still have rural areas with families that are drinking unsafe water and families without plumbing and wastewater facilities. These are pressing but solvable public health concerns. Towns and communities of less than 10,000 people often lack the tax base and bonding authority to construct, update, or repair water and waste disposal infrastructure systems.

Drinking water and waste disposal infrastructure is basic and vital to both health and economic development. The Water and Waste Disposal Program administered by Utilities Programs invests loans and grants to bring safe drinking water and sanitary, environmentally sound waste disposal facilities to rural Americans in greatest need. If economic growth is going to occur in an area, adequate water and waste disposal facilities are a necessity. The challenges presented by investing in safe and clean water for rural areas and small communities are sometimes daunting, but our achievements are among our most rewarding.

The programs make sound investments in rural citizens and small communities, improving the lives and public health standards of rural Americans in all 50 states. Sanitary and environmentally sound water and waste disposal facilities are key to protecting against serious, often life threatening illnesses related to water contamination, such as crypto sporidium*, giardia, gastroenteritis, cholera, typhoid, and salmonella. (* Crypto sporidium killed more than 100 people in Milwaukee, Wisconsin in April 1993, and seriously sickened thousands more.)

The Utilities Programs loan and grant programs will provide safe, affordable drinking water to an estimated 782,000 rural households and an estimated 2.2 million people in 1998. This program consistently has far more requests for funds than funds available. At the end of 1996, states had on hand loan and grant applications totaling $4.1 billion. State Rural Development Directors have for several years done an outstanding job of mixing grants, loans, state and non-USDA funds to leverage and finance the highest priority projects. Based on the Administration's belief and policy that low income and poverty areas represent the greatest need, water and waste disposal investments are targeted to those areas.

WATER 2000 INITIATIVE

In Utilities Programs'S state-by-state assessment in 1995, we found that an estimated 2.5 million rural Americans, including some one million people who do not have water piped into their homes, have critical needs for safe, dependable drinking water. Approximately 5.6 million more were found to have additional serious needs under Safe Drinking Water Act standards. Water 2000 is an initiative to clearly assess those needs and to target the loan and grant investments to address them. State Rural Development offices have completed the Needs Assessment which shows at least $3.5 billion in critical rural safe drinking water investment needs, and another $6.5 billion in additional serious needs.

A good example of the value of this initiative is a project just funded to allow the City of Campton, Kentucky to expand its current public water system to rural homes that now rely on spring, creek and well water.

Located in Wolf County in the Appalachian region of Kentucky, the local economy is limited to small farms, small timber operations, and small coal mines. The median household income in Wolfe County is approximately $11,000, less than half the state average of $22,232. The County has water sample records from the supplies of more than 100 people living in the proposed service area and the majority of the tested samples are highly contaminated with fecal coliform and/or confluent growth and some have detected the presence of dangerous E. Coli bacteria. By expanding the service area of the community, an additional 370 users will have a safe, dependable source of good drinking water.

WATER 2000 SPECIAL ALLOCATION

In 1996, Congress provided us with $36 million (budget authority) in unspent funds from the special supplemental nutrition program for Women, Infants and Children (WIC), to be used for safe and clean water projects. In July 1996, we converted these funds into $59 million in Water and Wastewater loans and grants, which we supplemented with $11 million in loans and grants from regular State allocations, and used to implement a total of $70 million (54 targeted) safe drinking water projects in 35 states. These projects, once all completed, will result in improved drinking water quality, quantity and dependability for an estimated 145,122 people, including some 18,200 receiving public water in their homes for the first time.

In 1995 and 1996, Utilities Programs invested a combined total of $547 million in loans and grants in projects that meet the guidelines of Water 2000, which place a priority on serving unserved or under served households.

WATER AND WASTE DISPOSAL BUDGET

The budget requests a total of $1.2 billion Water and Waste loans and grants. The program mixes loans and grants, according to the needs of the community or system, in order to provide water and waste disposal at an affordable rate. Under the RCAP program, the budget request is for a 1998 program level for Water and Waste Disposal loans of $809 million with a budget authority of $72 million and Water and Waste Disposal Grants and $484 million in grants.

TELECOMMUNICATIONS

Technological advances in the telecommunications industry will mean new tools to increase opportunities for rural America. The Information Superhighway will help rural America survive, prosper, and compete. It brings the entire world to the door of our rural citizens. Whether enabling regional communication or finding new markets throughout the world, access to the Information Superhighway is vital to the future of rural America.

The Utilities Programs Telecommunications program provides a cost-effective means for assisting rural telecommunications providers in building the infrastructure for the Information Superhighway in rural America. The program provides capital, establishes telecommunications standards, and provides policy guidance for rural telecommunications in the National Information Infrastructure initiative. This service is needed more than ever with the passage of the Telecommunications Act of 1996 (Telecommunications Act). Significant investment in rural infrastructure will be required to meet the promise of the Telecommunications Act and the maintenance, expansion, and improvement of the rural infrastructure.

The Utilities Programs Telecommunications Program continues to provide leadership in this changing environment. Just as we engaged in the development of the Telecommunications Act, we have been deeply involved in working with the FCC, the Federal-State Joint Board and State Public Utilities Commissions to create an acceptable universal service structure. To share ideas about the importance of telecommunications in people's lives, Utilities Programs held 6 satellite- accessible rural telecommunications forums around the country bringing together Federal and state policy makers with rural Americans to discuss issues and exchange ideas.

TELECOMMUNICATIONS PROGRAM BUDGET

The 1998 Budget requests $300 million for treasury rate loans, $120 million in guarantee of direct FFB financed loans, and $40 million for 5 percent hardship loans. These program loans are financed with a total budget authority of $1.6 million. Utilities Programs has requested budget authority in a single amount for telecommunications programs. If the Administrator has the flexibility to move budget authority between the Telecommunications programs, it will better enable the Agency to meet the needs of borrowers and the citizens of rural America who are the end users of these vital services.

DISTANCE LEARNING AND TELEMEDICINE PROGRAM

The Distance Learning and Telemedicine Loan and Grant Program has emerged as one of the most dynamic new programs in the rural development area. For the past four years grants have been made to rural organizations to buy end-user equipment to encourage, improve, and make affordable telecommunications access to educational and health care services.

The demand for the distance learning and telemedicine grants has been high. For the four fiscal years from 1993 through 1996, Utilities Programs has received 896 applications seeking a total of $277 million. Due to budget constraints, only $35 million was available. This money funded 119 projects in 39 states and one territory, leveraged more than 66 million in non-federal dollars. In 1997, under our new authority, we will make our first loans.

Through four years of the grant program activity, approximately 704 rural schools in 33 states, serving nearly 600,000 rural students, will be able to utilitize the Information Superhighway to share limited teaching resources and to gain access to libraries, training centers, vocational schools, and other institutions located in metropolitan areas. For telemedicine, approximately 500 rural medical facilities in 23 states and one territory, serving more than two million rural residents, will be able to provide improved health care through linkage with other rural hospitals and major urban medical centers for clinical interactive video consultation, distance training of rural health care providers, management and transport of patient information, and access to medical expertise or library resources. This amazing leveraging of resources is a testament to the creative nature of our rural citizens.

DISTANCE LEARNING AND TELEMEDICINE LOAN PROGRAM

The Federal Agriculture Improvement and Reform Act of 1996 (1996 Farm Bill) added a loan component to the Utilities Programs Distance Learning and Telemedicine Program. For its first year, 1997, the loan component has been funded at a program loan level of $150 million. This loan component will help to meet the extraordinary demand from rural schools, libraries, community centers and health care providers to purchase end-user equipment. The new loan component will also allow third parties to guarantee the repayment of, or to borrow funds on behalf of, rural schools, community centers, or libraries that either can not incur long-term debt or need a little extra help.

This increase in program level for end-user equipment will fit hand-in-glove with the discount in the Telecommunications Act of 1996 for transmission costs for schools, libraries and rural health care providers. Community centers can also use the equipment for welfare to work programs.

To bring it all together, we are in the process of revising the regulations to integrate the loan component into the program.

DISTANCE LEARNING AND TELEMEDICINE GRANT AND LOAN BUDGET

The Budget requests $21 million for grants in 1998. This is triple the current grant program, a $13.5 million increase over the 1997 appropriation. For the new loan program, the Budget requests a program level of $150 million.

RURAL TELEPHONE BANK

Congress created the Rural Telephone Bank (RTB) to address the increasing need for capital to develop rural telecommunications services. Over the life of the program, the RTB has lent more than $3.2 billion to rural telecommunications borrowers to help build, maintain, and upgrade the rural telecommunications infrastructure.

Pursuant to statute, the RTB began the process of privatization during Fiscal Year (FY) 1996, when the Board of Directors voted to retire $18 million of government held stock. Also during 1996, we completed a study on how accelerated privatization of the RTB would impact the RTB's ability to obtain capital in the private markets. The study concluded that the RTB could accelerate the maximum statutory privatization period and be in good shape to borrow money in the private markets by the end of 1998.

The RTB is in a strong financial position with more than $1 billion in net worth. By the end of FY 1998, the RTB will have sufficient internally generated funds to fully retire the government's remaining $574 million capitalization of the RTB. The Administration is working on legislation which would allow a fully private RTB to leverage its net worth in the private markets and free the RTB from the restrictive lending purposes of the Utilities Programs program -- allowing more capital for investment in the new rural telecommunications market structure.

RURAL TELEPHONE BANK BUDGET

The 1998 budget request is for $3.7 million in budget authority, to support a program level of $175 million in loans.

ELECTRIC PROGRAM

The Electric Program represents one of the most effective public/private partnerships in the history of our Nation. The Electric Program seeks to ensure universal electric service at affordable rates. It serves as a cost- effective means for the leveraging of capital for the maintenance of a nationwide network of infrastructure. The investment is a continuing success story.

Today, the nation's electric industry is changing dramatically. It is moving from being monopoly-based to a competitive structure. Already, to a great extent, the wholesale power industry has been deregulated. Several states are already introducing competition at the retail level, and legislatures in another dozen states are actively considering like proposals. The 105th Congress will debate a national restructuring this year.

As the debate on electric utility restructuring and deregulation develops, the Utilities Programs believes there are two goals that should be part of the development of any restructuring of the marketplace. The first goal is to ensure the continued availability of reliable, high quality electric service at a reasonable cost to rural consumers. The second goal is to protect the integrity of the government's loan portfolio.

To accomplish these goals, the Utilities Programs believes that any restructuring of the electric utility industry should be guided by the principles of reliability, fairness and flexibility. The transition to a more competitive industry environment must maintain the reliability of the nation's electric system. A more competitive electric sector with retail choice should be fair and equitable to all consumers -- including rural citizens, to existing electric utilities, and to Federal taxpayers who support the Utilities Programs program. Finally, industry restructuring should be flexible and contain a thoughtful transition process that accommodates the diversity of the electric utility industry, state regulatory structures and policies, and a process of educating consumers about the changes.

To help address the changing nature of the industry, the Utilities Programs is reforming itself. We have made the first reform of our mortgage and loan security documents in 25 years. Working with the Office of General Counsel (OGC), we have instituted an automated loan processing system, a computerization of our loan and security document preparation that in the telecommunications program has reduced the time involved from up to 6 months to a turn around of 10 days. We have streamlined our regulations and processes to maximize borrower flexibility. The new regulations and procedures enhance a borrower's ability to attract private financing while at the same time making internal changes to compete more effectively. New merger regulations encourage borrowers to take advantage of the economies of scale. The Utilities Programs continues to review our programs and procedures to allow for a more efficient program that is customer friendly while protecting the taxpayer investment in a modern rural infrastructure.

Utilities Programs's rural Electric Program is the primary mechanism that helps to provide universal service to those areas that are the highest cost to serve. The program helps service approximately 25 million rural Americans living on 80 percent of the land mass, areas that investor-owned and municipally-owned utilities failed to serve. Rural electric cooperatives own 2.2 million miles of line, serving an average of 5.5 customers per mile. This compares to an average of 35 customers per mile of line that other providers serve. Unlike the telecommunications industry, where over the years, many mechanisms have been created to offset the high cost to serve rural areas, in the electric industry, the Utilities Programs program is the only mechanism to address the high cost to serve. The ongoing cost to serve must be supported and aging and obsolete infrastructure must be replaced and improved.

As the electric utility industry undergoes restructuring and deregulation, Utilities Programs electric borrowers will face greater competition and uncertainty. This is particularly true of generation and transmission borrowers who, in the late 1970s and early 1980s made large investments in nuclear generation at a time of high inflation and high interest rates.

Since President Clinton appointed me as Administrator of Utilities Programs, working with the very able and competent Utilities Programs staff, I have made every effort to work through these problems. Where necessary, this has included working with the Department of Justice to resolve serious debt situations. There is no doubt that it would be easier to sit back and take no action. However, we have an obligation to manage the Utilities Programs loan portfolio, and to that end will continue to aggressively seek solutions that result in maximizing recovery of Federal loan funds.

ELECTRIC PROGRAM BUDGET

For 1998, the President's Budget requests $400 million loans for municipal rate electric loans, $125 million for 5 percent hardship loans, and $300 million for guarantee of direct FFB financed loans. The 1998 budget request reflects no change from the loan level of $825 million available in 1997. These program loans are financed with a total budget authority of $29 million. As in the telecommunications program, Utilities Programs is requesting budget authority in a single amount for maximum flexibility in using funds for programs with the most need.

CONCLUSION

Utilities Programs has had the opportunity to be at the vortex of change in two of the nation's most important industries -- electricity and telecommunications. Each of these industries generate revenue of approximately $200 billion a year and both are evolving from a regulated monopoly to a competitive environment. Each of these industries define who we are as a nation and how we move forward into a global economy.

Rural America is challenged by distance, density and economies of scale. The facts focus the issue -- rural America, 80 percent of the landmass and 20 percent of the population. Serving rural America simply costs more per person than serving urban and suburban America and, therefore, the market creates an access, quality and affordability disparity between rural and urban and suburban areas. This disparity is the rationale for the concept of universal service.

A concept which holds that all Americans are part of our nation and all Americans are entitled to the opportunity to make the most of their natural abilities and the opportunity to join with each other, as a nation, in our relationship with the rest of the world.

It is this issue -- universal service, coupled with universal opportunity, and ultimately what kind of country we are -- which defines the issue of rural infrastructure.

The Congress debated the universal service issue last year in the Telecommunications Act of 1996. In that debate we asked how does a new competitive environment affect universal service? Will serving rural residents still cost more than serving urban and suburban residents? How do we make service affordable for rural residents? How will it effect rural America? The answer was clear -- universal service must be preserved and strengthened. Rural America must not be left behind. Rural areas should be supported by the system as a whole.

The question of funding rural infrastructure through the Rural Utilities Service asks the same basic question -- the question of universal service. And the answer is the same as in the Telecommunications Act of 1996. Universal service support is part of who we are as a nation. The access to capital, standards, affordability equalization, and lending leadership is needed more then ever. As we move from a monopoly to a competitive market place, and as that transition takes place, the need is much greater, not less, than ever.

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