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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
March 3, 1998


Mr. Chairman, members of the subcommittee, thank you for the opportunity to appear here today to discuss the President's budget and program proposals for FY 1999. I want to begin by thanking you and the members of the subcommittee for our productive working relationship over the years. A relationship that, I am proud to say, has helped rural America contribute to the nation's continuing prosperity.

Rural America continues to be a vital part of our nation and its economy. As we look to the future, we see an environment of challenge and opportunity. The global marketplace is redefining rural America. Rural America's customers and competitors are no longer just down the road, but around the world as well. National and global changes are constant and rapid.

Safe, affordable, modern utility infrastructure is a key component of economic competitiveness. The telecommunications and electric industries are at the vortex of change. Rural America is at a critical juncture, and the challenge is to secure its role, as well as its future, in a rapidly changing national and global economy. USDA/Utilities Programs is helping communities meet this challenge.

To secure this role, rural America must reinvest in infrastructure, provide quality education, and continue to address quality of life issues. Rural youth must be provided with educational opportunities that will enable them to compete with the best and brightest from around the world. The aging rural population must have affordable access to quality health care, and rural businesses need state-of-the-art communications technologies to foster new economic growth, create new jobs and enhance the quality of life.

Through a successful local/public partnership with the federal government, Utilities Programs programs help provide needed capital and critical credit support to leverage private capital for infrastructure financing. Utilities Programs programs focus scarce resources into areas burdened by poverty, low population density, and high out-migration. These factors, contributing to a lack of economies of scale, make it significantly more expensive to construct infrastructure in rural areas.

As rural America is changing to meet these challenges, USDA/Utilities Programs is changing as well. We are reinventing program delivery, streamlining our organizational structure, and leveraging private investment. We embrace these changes as new opportunities. Our goal is to help provide rural America with the tools and resources necessary to realize the full extent of its potential. This requires creative thinking, commitment, and value-added program delivery. From the point of initial contact, to project reality, the USDA/Utilities Programs role has never been more important.

The Federal Partnership with Rural America

The nearly $42 billion Utilities Programs loan portfolio includes investments in approximately 7,000 small community and rural water and wastewater systems, and 2,000 telecommunications and electric systems, servicing approximately 84% of America's 3,096 counties. This 60-year old local/federal partnership is a classic American success story. It is a partnership providing critical infrastructure to 80% of the nation's landmass while enhancing the lives of 25% of the nation's population. That infrastructure spurs economic growth, creates jobs, and improves the quality of life in rural America. The vitality of rural communities truly depends on access to modern, reliable, and affordable utilities.

Telecommunications

This year's telecommunications budget proposes $4.895 million in budget authority to support $50 million in direct telecommunications loans and $810 thousand in budget authority to support $300 million in Treasury-rate loans, as well as $4.638 million in budget authority to support $175 million in Rural Telephone Bank (RTB) loans. Implementation of the Telecommunications Act of 1996 poses many challenges for rural consumers. Utilities Programs continues to work with our borrowers to assure that rural citizens share in the benefits of the digital revolution. I am very proud of the role Utilities Programs plays in assuring that citizens outside America's great urban centers have affordable and quality service. Our borrowers are providing modern, reliable telecommunications service that enables rural Americans to benefit from the rapidly improving technologies of the information age. Continued capital investments and operational and technical support are critical to maintaining that level of quality in areas served by Utilities Programs borrowers.

The budget also reflects our commitment to move the RTB toward privatization within the next 10 years. The RTB is proposed to become a performance based organization, under which the RTB can demonstrate its financial and managerial independence, as an intermediate step towards full privatization. This move toward independence is consistent with funds for subsidy budget authority and administrative expenses being transferred from the unobligated RTB liquidating account balances in FY 1999.

Distance Learning and Telemedicine

In the Distance Learning and Telemedicine (DLT) Program, the budget request of just over $15.2 million in budget authority will support $150 million DLT Loans and $15 million in DLT grants.

The Distance Learning Telemedicine Program provides financial assistance for rural education and health care providers utilizing state-of-the-art telecommunications technologies. The DLT loans and grants provide for needed infrastructure and end-user equipment for rural areas. This program is a powerful complement to the new schools, libraries and rural health care discounts recently authorized by the FCC, which primarily focus on the recurring monthly telecommunications costs to those entities.

When Vice President Gore announced the 1997 DLT awards, he stated "This country cannot afford a digital divide between those who have access to the benefits of the Information Superhighway, and those who do not." A range of financing options that includes loans, grants, and combinations of the two makes this program a flexible tool and resource for any rural community that wants to use telecommunications to bring the advantages of technology in the 21st Century to rural America's students and citizens.

The DLT Program is making a real difference in people's lives. Utilities Programs made a grant to the Fiber Optic Consortium United Schools (FOCUS) project. This initiative united eight school districts in Northeast Montana to share teachers and other course resources in foreign languages, vocational agriculture, science and mathematics, and for staff training. These same facilities are used by the community for fire, emergency medical, and environmental training.

Since 1993, the DLT program has funded 192 projects totaling $52 million in 41 states and one U.S. territory. These projects serve 850 schools and learning centers and 600 hospitals and rural health clinics. The DLT program provides seed money to leverage almost two times its investment from other private and public sources.

Simply put, rural Americans must be connected to America's Information Superhighway. USDA/Utilities Programs is the catalyst for the rural connection.

Electric Program

The Electric Program budget proposes $30 million in budget authority to support a program level of over a billion dollars. The Utilities Programs Electric Program continues to serve as one of the most effective local/public partnerships of the federal government. Today's program ensures that all areas of our nation have access to reliable, reasonably affordable, electric energy.

FY 1997 budget authority for Utilities Programs loans and loan guarantees enabled 136 rural electric utilities in 33 states and the Marshall Islands to upgrade their electric systems to provide more reliable and efficient electric service to their customers.

Over the last several years, changes have been made in the electric lending program to reduce the overall federal cost of the program. This year's proposal contains $1 billion of funding for the electric program, an increase from $925 million in FY 1998. In an effort to reduce the cost of the electric program and provide yet another financing tool to meet increasing demand, the Administration proposes a new Treasury Rate Loan Program to complement its existing loan programs. This $400 million loan program can be generated with only $840,000 of budget authority.

Each Utilities Programs electric loan dollar leverages three dollars from private sources. Utilities Programs provides only 1/3 of the $3 billion annual capital needs of the Utilities Programs borrowers. The following chart illustrates leveraging of the Federal dollars:

Investment in Electric Plant

Years 1991 through 1996


(DOLLARS IN MILLIONS)

Year

Gross
Additions
to Plant

Utilities Programs

Funds Advanced
FB

Private &
General Capital
Expended

1996

$3,212

$682

$ 93

$2,437

1995

3,269

809

211

2,249

1994

3,344

618

242

2,484

1993

2,833

277

169

2,276

1992

3,104

401

208

2,495

1991

2,833

592

98

2,241

We believe that Utilities Programs has a continuing role to play in assuring that electric systems serving rural communities have access to the capital needed to maintain reliable, high quality, affordable electric service to support economic development and meet new environmental requirements.

In the coming years, rural distribution and power supply systems will require assistance in upgrading and replacing an aging electric infrastructure to support growing electricity demand, new technologies, and a more competitive industry structure. For example, Utilities Programs financing will enable rural electric systems to replace aging, inefficient and undersized electric transformers and conductors to enhance the reliability of distribution and transmission systems to meet load growth while cutting line losses, improving energy efficiency, and reducing carbon and other air pollution emissions.

Utilities Programs is also working very closely with borrowers facing financial stresses from past nuclear and large base-load generating plant investments and from increasing pressures from wholesale and retail competition. In each instance, Utilities Programs is diligent in ensuring that work-out agreements maximize the recovery to the Federal taxpayers. Today, Utilities Programs is actively working with 6 financially stressed borrowers as compared with some 15 borrowers 3 years ago.

Water and Waste Disposal Programs

This budget seeks $503 million in budget authority for Water and Waste grants and $126 million in budget authority to support $839 million in loans.

The Utilities Programs Water and Waste Disposal (WWD) program improves the quality of life of thousands of rural Americans each year by bringing safe drinking water and environmentally sound wastewater facilities to those rural communities in the greatest need. The program is delivered by a field network of Rural Development employees who provide "hands-on" technical and financial assistance. The funding for this program is contained in the Rural Community Advancement Program (RCAP), and could be enhanced as a result of the flexibility of funding offered by RCAP authorizations. This funding is also part of the Environmental Fund for America.

Water 2000 Presidential Initiative

The demand for this program is high. As of January 1998, $3.7 billion of unfunded loan and grant applications were on hand. Based on the Administration's belief and policy that low income, high unemployment and high poverty areas -- especially those with water-related public health problems -- represent the greatest need, we increasingly target drinking water and waste disposal investments to those areas.

In a state-by-state safe drinking water assessment performed in 1995, Utilities Programs found that at least 2.5 million rural Americans had very critical needs for safe, dependable drinking water, including one million rural residents who had no water piped into their homes. Approximately 5.6 million more were found to have serious needs under Safe Drinking Water Act standards. The costs of meeting all of these needs was estimated at $10 billion. Water 2000 is an initiative to clearly assess rural drinking water needs and target loan and grant investments to address them.

Under Water 2000 targeting guidelines, over three fiscal years, Utilities Programs has committed almost $1.3 billion in loans and grants to over 1,000 of the high priority safe drinking water projects throughout the nation. Water 2000 projects serve communities with the most limited financial resources and highest poverty rates. They are financed with significant grant assistance and our lowest interest rate loans to ensure safe drinking water at affordable cost. We estimate that the Water 2000 projects funded through September 1997 will serve an estimated 1,900,000 rural Americans and leverage approximately $437 million in additional investments from other federal, state, and local sources. For the first time ever, 280,000 Americans will receive water from properly maintained and tested public sources.

A good example of Water 2000 in action is a project funded with Water and Waste Disposal loans and grants for the Pueblo of Acoma, in New Mexico, in FY 1997. The Utilities Programs investment is allowing the Pueblo, which has an annual median household income of less than $17,000 (slightly above the national poverty standard), to expand and improve its drinking water treatment and distribution system to overcome serious water quality, quantity, and dependability problems. To overcome the constraints of the relatively low income of the population and limited resources of the community, New Mexico Rural Development field personnel worked closely with Pueblo officials to develop a fundable application. In April 1997, Rural Development announced a grant/loan package of $1.5 million, to be combined with funds from the State of New Mexico, to allow the Pueblo to develop Phase One of a drinking water system that will supply 177 homes, two schools and a Head Start center, and a 25 bed Indian Health Service hospital that serves three pueblos.

In summary, we are very proud of our record of bringing drinking water and wastewater facilities to thousands of rural Americans - serving those who truly need our services the most.

The New Telecommunications & Electric Competitive Environments

To ensure that newly formulated policies address the role of rural utility systems in a deregulated marketplace, Utilities Programs has assumed a proactive role in discussions with FCC, FERC and our partners within the executive branch to protect and enhance Utilities Programs loan security, and improve the lives of rural residents. As this nation grapples with telecommunications and electric market reforms, the Utilities Programs will remain in the forefront of these discussions and will lead the policy debate as it impacts on rural Americans. In an ever-changing legislative and regulatory environment, ensuring the security of a $42 billion loan portfolio while providing modern, high quality, reliable, and affordable infrastructure in rural America will present a formidable challenge into the 21st century.

The February 2nd issue of US News and World Report article outlines, in human terms, the impacts of a deregulated environment in rural areas. It points out that in Arizona alone, 5,000 rural Americans remain involuntarily phoneless. The spokesperson for one of America's large for-profit telecommunications companies was quoted as asking "Why should we be spending money in expensive rural areas if we need to upgrade our network in the cities to compete with competitors?" No other statement better illustrates the need for the Utilities Programs program to provide financial support to high-cost rural areas.

Financial support mechanisms will be critical to supporting high costs, rural areas in a market driven, for-profit environment. The stage is now set for serious reflection on the rural challenges of electric infrastructure deregulation in state legislatures and Congress as well.

Although the pace of restructuring in the electric industry may have slowed, many states are moving ahead. At last count, 10 states have passed legislation providing for retail electric competition and 6 state public service commissions have issued comprehensive restructuring orders to promote competitive retail electric markets. Other states are continuing to study the issue and may act on legislative recommendations in 1998 or 1999. Many unanswered questions remain concerning how to transform America's $200 billion plus electric industry from a traditional, monopolistic, industry to a more competitive, market-based, consumer-driven environment. One of those questions is, what happens to electric rates in high cost rural areas?

In a recent letter to Energy Secretary Pena, Secretary Glickman expressed concern that in a restructured marketplace, electric rates in high cost to serve rural areas will likely increase.

"In examining the potential effects of restructuring on rural areas, it is important to consider the common practice of "cost-averaging" across customer classes within utility systems. This practice has been supported historically by public utility systems. It most often occurs when utilities use revenues from industrial and large commercial consumers to offset other fixed costs within the system. This is done to maintain reasonably affordable cost of service to residential customers and to balance the high cost of service in rural areas."

In a competitive environment, larger industrial and commercial power purchasers in high cost areas will be lured away from incumbent utilities. New competitors will engage in cherry-picking'. The Secretary went on to state that "Although distribution companies may be able to institute "wire charges" to cover delivery cost of another company's power, these charges may not be sufficient to maintain reasonably affordable rates for smaller customers."

Conclusion

USDA/Utilities Programs continues to be an integral part of rural America's future. Rural America's ability to capitalize on new opportunities depends, to a large extent, on the success of Utilities Programs in meeting its goals of creating modern community facilities and infrastructure. Utilities Programs is enabling rural communities to utilize state-of-the-art telecommunications technologies to improve education and health care. By continuously reinventing our programs to address the changing needs of rural residents, Utilities Programs will achieve its ambitious goals, and continue to play a significant role in advancing rural America's quality of life and enhancing its competitiveness in the global marketplace.

Thank you Mr. Chairman for the opportunity to appear before your committee.

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