[Title 7 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2002 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

                    7


          Parts 1600 to 1899

                         Revised as of January 1, 2002

Agriculture





          Containing a codification of documents of general 
          applicability and future effect
          As of January 1, 2002
          With Ancillaries
          Published by:
          Office of the Federal Register
          National Archives and Records
          Administration

A Special Edition of the Federal Register



[[Page ii]]






                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002



  For sale by the Superintendent of Documents, U.S. Government Printing 
                                  Office
  Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area 
                              (202) 512-1800
      Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001



[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 7:
    Subtitle B--Regulations of the Department of Agriculture--
      Continued:
          Chapter XVI--Rural Telephone Bank, Department of 
          Agriculture                                                5
          Chapter XVII--Rural Utilities Service, Department of 
          Agriculture                                               17
          Chapter XVIII--Rural Housing Service, Rural 
          Business-Cooperative Service, Rural Utilities 
          Service, and Farm Service Agency, Department of 
          Agriculture                                             1153
  Finding Aids:
      Material Approved for Incorporation by Reference........    1191
      Table of CFR Titles and Chapters........................    1201
      Alphabetical List of Agencies Appearing in the CFR......    1219
      Redesignation Tables....................................    1229
      List of CFR Sections Affected...........................    1233



[[Page iv]]





                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  7 CFR 1600.1 refers 
                       to title 7, part 1600, 
                       section 1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, January 1, 2002), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 1986, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, or 1973-1985, published in seven separate volumes. For 
the period beginning January 1, 1986, a ``List of CFR Sections 
Affected'' is published at the end of each CFR volume.

INCORPORATION BY REFERENCE

    What is incorporation by reference? Incorporation by reference was 
established by statute and allows Federal agencies to meet the 
requirement to publish regulations in the Federal Register by referring 
to materials already published elsewhere. For an incorporation to be 
valid, the Director of the Federal Register must approve it. The legal 
effect of incorporation by reference is that the material is treated as 
if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
    Properly approved incorporations by reference in this volume are 
listed in the Finding Aids at the end of this volume.
    What if the material incorporated by reference cannot be found? If 
you have any problem locating or obtaining a copy of material listed in 
the Finding Aids of this volume as an approved incorporation by 
reference, please contact the agency that issued the regulation 
containing that incorporation. If, after contacting the agency, you find 
the material is not available, please notify the Director of the Federal 
Register, National Archives and Records Administration, Washington DC 
20408, or call (202) 523-4534.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I). A list of CFR titles, chapters, 
and parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

[[Page vii]]


REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-523-5227 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, Washington, DC 20408 or e-mail 
info@fedreg.nara.gov.

SALES

    The Government Printing Office (GPO) processes all sales and 
distribution of the CFR. For payment by credit card, call 202-512-1800, 
M-F, 8 a.m. to 4 p.m. e.s.t. or fax your order to 202-512-2250, 24 hours 
a day. For payment by check, write to the Superintendent of Documents, 
Attn: New Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954. For GPO 
Customer Service call 202-512-1803.

ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
Register, Public Laws, Public Papers, Weekly Compilation of Presidential 
Documents and the Privacy Act Compilation are available in electronic 
format at www.access.gpo.gov/nara (``GPO Access''). For more 
information, contact Electronic Information Dissemination Services, U.S. 
Government Printing Office. Phone 202-512-1530, or 888-293-6498 (toll-
free). E-mail, gpoaccess@gpo.gov.
    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) World Wide Web 
site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.nara.gov/fedreg. The NARA 
site also contains links to GPO Access.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

January 1, 2002.



[[Page ix]]



                               THIS TITLE

    Title 7--Agriculture is composed of fifteen volumes. The parts in 
these volumes are arranged in the following order: parts 1-26, 27-52, 
53-209, 210-299, 300-399, 400-699, 700-899, 900-999, 1000-1199, 1200-
1599, 1600-1899, 1900-1939, 1940-1949, 1950-1999, and part 2000 to end. 
The contents of these volumes represent all current regulations codified 
under this title of the CFR as of January 1, 2002.

    The Food and Nutrition Service current regulations in the volume 
containing parts 210-299, include the Child Nutrition Programs and the 
Food Stamp Program. The regulations of the Federal Crop Insurance 
Corporation are found in the volume containing parts 400-699.

    All marketing agreements and orders for fruits, vegetables and nuts 
appear in the one volume containing parts 900-999. All marketing 
agreements and orders for milk appear in the volume containing parts 
1000-1199. Part 900--General Regulations is carried as a note in the 
volume containing parts 1000-1199, as a convenience to the user.

    Redesignation tables appear in the Finding Aids section of the 
volumes containing parts 210-299 and parts 1600-1899.

[[Page x]]





[[Page 1]]



                          TITLE 7--AGRICULTURE




                 (This book contains parts 1600 to 1899)

  --------------------------------------------------------------------

  SUBTITLE B--Regulations of the Department of Agriculture--Continued:

                                                                    Part

chapter xvi--Rural Telephone Bank, Department of Agriculture        1600

chapter xvii--Rural Utilities Service, Department of 
  Agriculture...............................................        1700

chapter xviii--Rural Housing Service, Rural Business-
  Cooperative Service, Rural Utilities Service, and Farm 
  Service Agency, Department of Agriculture.................        1806

[[Page 3]]

   Subtitle B--Regulations of the Department of Agriculture--Continued

[[Page 5]]



      CHAPTER XVI--RURAL TELEPHONE BANK, DEPARTMENT OF AGRICULTURE




  --------------------------------------------------------------------
Part                                                                Page
1600            General information.........................           7
1610            Loan policies...............................          10

[[Page 7]]



PART 1600--GENERAL INFORMATION--Table of Contents




     Meetings of the Board of Directors of the Rural Telephone Bank

Sec.
1600.1 General.
1600.2 Definitions.
1600.3 Open meetings.
1600.4 Scheduling of meetings.
1600.5 Public announcement of meetings.
1600.6 Bases for closing a meeting to the public.
1600.7 Procedures for closing a meeting to the public.
1600.8 Transcript, recording or minutes; availability to the public.

    Authority: 7 U.S.C. 941 et seq.; Pub. L. 103-354, 108 Stat. 3178 (7 
U.S.C. 6941 et seq.).

    Source: 56 FR 49134, Sept. 27, 1991, unless otherwise noted.

     Meetings of the Board of Directors of the Rural Telephone Bank



Sec. 1600.1  General.

    The purpose of this part is to effectuate the provisions of the 
Government in the Sunshine Act. This part applies to the deliberations 
of a quorum of the Directors of the Bank required to take action on 
behalf of the Bank where such deliberations determine or result in the 
joint conduct or disposition of official Bank business. Any deliberation 
to which this part applies is hereinafter in this part referred to as a 
meeting of the Board of Directors.



Sec. 1600.2  Definitions.

    As used in this part:
    Board means Board of Directors of the Rural Telephone Bank (Bank).
    Director means an individual who is a member of the Board.
    Legal Counsel means the legal counsel of the Bank.
    Meeting means the deliberations (including those conducted by 
conference telephone call or by any other method) among a quorum of the 
Directors, where such deliberations determine or result in joint conduct 
of official business of the Board. For purposes of this part, each item 
on the agenda of a meeting is considered a meeting or a portion of a 
meeting. To the extent that the discussions do not result in the 
beginning of deliberations or achieve a consensus on a matter of 
official agency business or effectively predetermine official actions, 
the term Meeting does not include:
    (1) Deliberations to determine whether a meeting or portions of a 
meeting will be open or closed or whether information pertaining to 
closed meetings will be disclosed;
    (2) Calling a meeting at a date earlier than announced as provided 
in Sec. 1600.5;
    (3) Changing the subject matter of a publicly announced meeting as 
provided in Sec. 1600.5;
    (4) Disposition of Board business by circulation of materials to 
individual Board members;
    (5) Staff briefings of Board members;
    (6) Informal background discussions among Board members and staff 
which clarify issues and expose varying views; or
    (7) Sessions with individuals from outside the Bank where Board 
members listen to a presentation and may elicit additional information.
    Open to public observation means the right of any member of the 
public to attend and observe, but not participate or interfere in any 
way in an open meeting of the Board.



Sec. 1600.3  Open meetings.

    (a) Except as provided for in Sec. 1600.6 every portion of every 
meeting of the Board shall be open to public observation. Observation 
does not include participation or disruptive conduct by observers, and 
persons engaging in such conduct will be removed from the meeting. 
Documents being considered at meetings of the Board may be obtained 
subject to the exemptions set forth in Sec. 1600.8.
    (b) Board members shall not jointly conduct or dispose of official 
Board business other than in accordance with this part.
    (c) The Secretary of the Board shall be responsible for assuring 
that ample space, sufficient visibility, and adequate acoustics are 
provided for public observation of meetings of the Board.



Sec. 1600.4  Scheduling of meetings.

    A decision to hold a meeting of the Board should be made as provided 
in the bylaws of the Bank and at least ten days prior to the scheduled 
meeting date in order for the Secretary of the

[[Page 8]]

Bank to give the public notice required by Sec. 1600.5. Special meetings 
of the Board may be held on less than ten days notice if a majority of 
the Board determines by a recorded vote that Bank business requires that 
the special meeting be held on less than ten days notice. After public 
announcement of a meeting of the Board under the provisions of 
Sec. 1600.5, the subject matter thereof, or the determination to open or 
close a meeting, or portion thereof, may only be changed if a majority 
of the Directors determines by a recorded vote that business so requires 
and that no earlier announcement of the change is possible.



Sec. 1600.5  Public announcement of meetings.

    (a) Except as otherwise provided in this section, public 
announcement of open meetings and meetings or portions thereof closed 
under Sec. 1600.7 will be made at least seven days in advance of each 
meeting. Except to the extent that such information is determined to be 
exempt from disclosure under Sec. 1600.6, each such public announcement 
will state the time, place, and subject matter of the meeting, whether 
it is to be open or closed to the public, and the name and telephone 
number of the official designated to respond to requests for information 
about the meeting. Each such announcement shall be submitted for 
publication in the Federal Register. Copies of the announcement shall 
also be mailed to holders of Class B and Class C Bank stock.
    (b) If a meeting is closed, the Board may omit from the announcement 
information usually included, if and to the extent that it finds that 
disclosure would be likely to have any of the consequences listed in 
Sec. 1600.6.
    (c) Where a majority of the Board members determine by recorded vote 
that Bank business requires that a meeting be called on less than ten 
days notice, public announcement shall be made at the earliest 
practicable time. Such announcement will state the time, place, and the 
subject matter of the meeting, whether it is to be open or closed to the 
public, and the name and telephone number of the official designated to 
respond to requests for information about the meeting.
    (d) The time or place of a meeting may be changed following the 
public announcement required by paragraph (a) of this section only if 
the Secretary publicly announces such change at the earliest practicable 
time. The subject matter of a meeting, or the determination of the Board 
to open or close a meeting, or portion of a meeting, to the public, may 
be changed following the public announcement required by this section 
only if:
    (1) A majority of the Directors determines by a recorded vote that 
business so requires and that no earlier announcement of the change was 
possible; and
    (2) The Secretary publicly announces such change and the vote of 
each Director upon such change at the earliest practicable time.
    (e) The earliest practicable time, as used in this subsection, means 
as soon as possible, which should in few, if any, instances be later 
than the commencement of the meeting or portion in question.
    (f) Each person interested in attending an open meeting of the Board 
should notify the Assistant Secretary of the Board at least one business 
day prior to the open meeting of their intention to attend the meeting. 
Any person who fails to do so may not be accommodated if there is 
insufficient space in the meeting room.



Sec. 1600.6  Bases for closing a meeting to the public.

    (a) A portion or portions of a Board meeting may be closed to the 
public and any information pertaining to such meeting otherwise required 
by Sec. 1600.3 to be disclosed to the public may be withheld, where the 
Board determines that public disclosure of information to be discussed 
at such meetings is likely to:
    (1) Disclose matters that are:
    (i) Specifically authorized under criteria established by an 
Executive Order to be kept secret in the interests of national defense 
or foreign policy; and
    (ii) In fact properly classified pursuant to such Executive Order.
    (2) Relate solely to the internal personnel rules and practices of 
the Bank;
    (3) Disclose matters specifically exempted from disclosure by 
statute

[[Page 9]]

(other than the Freedom of Information Act, 5 U.S.C. 552), provided that 
such statute:
    (i) Requires that the matters be withheld from the public in such a 
manner as to leave no discretion on the issue; or
    (ii) Establishes particular criteria for withholding or refers to 
particular types of matters to be withheld.
    (4) Disclose trade secrets and commercial or financial information 
obtained from a person and privileged or confidential;
    (5) Involve accusing any person of a crime, or formally censuring 
any person;
    (6) Disclose information of a personal nature where disclosure would 
constitute a clearly unwarranted invasion of personal privacy;
    (7) Disclose investigatory records compiled for law enforcement 
purposes, or information which if written would be contained in such 
records, but only to the extent that the production of such records or 
information would:
    (i) Interfere with enforcement proceedings;
    (ii) Deprive a person of a right to a fair trial or to an impartial 
adjudication;
    (iii) Constitute an unwarranted invasion of personal privacy;
    (iv) Disclose the identity of a confidential source, and, in the 
case of a record compiled by a criminal enforcement authority in the 
course of a criminal investigation, or by an agency conducting a lawful 
national security intelligence investigation, confidential information 
furnished only by the confidential source;
    (v) Disclose investigative techniques and procedures; or
    (vi) Endanger the life or physical safety of law enforcement 
personnel.
    (8) Disclose information contained in or related to examination, 
operating, or condition reports prepared by, on behalf of, or for the 
use of the Bank or any other agency responsible for the regulation or 
supervision of financial institutions;
    (9) Disclose information the premature disclosure of which would be 
likely to significantly frustrate implementation of a proposed action of 
the Board or of another agency, except that this shall not apply in any 
instance where the content or nature of the proposed action has already 
been disclosed to the public or where the Board is required by law to 
make such disclosure on its own initiative prior to taking final action 
on such proposal; or
    (10) Specifically concern the Board's participation in a civil 
action or proceeding, an action in a foreign court or international 
tribunal, or an arbitration, or the initiation, conduct, or disposition 
by the Board of a particular case of formal agency adjudication pursuant 
to the procedures in 5 U.S.C. 554 or otherwise involving a determination 
on the record after opportunity for a hearing.
    (b) Any Board meeting or portion thereof, which may be closed, or 
any information which may be withheld under paragraph (a) of this 
section, will not be closed or withheld, respectively, in any case where 
the Board finds the public interest requires otherwise.



Sec. 1600.7  Procedures for closing a meeting to the public.

    (a) A majority of all Directors may vote to close a meeting or 
withhold information pertaining to that meeting. A separate vote shall 
be taken with respect to any action under Sec. 1600.6(a). A majority of 
the Board may act by taking a single vote with respect to a series of 
meetings, a portion or portions of which are proposed to be closed to 
the public, or with respect to any information concerning such series of 
meetings, so long as each meeting in such series involves the same 
particular subject matter and is scheduled to be held no more than 
thirty days after the initial meeting in such series. The vote of each 
Director participating in such vote shall be recorded and no proxy shall 
be allowed.
    (b) Whenever any person whose interests may be directly affected by 
a portion of the Board's meeting requests that the Board close such 
portion to the public on the basis of exemptions in paragraph (a)(5), 
(a)(6), or (a)(7) of Sec. 1600.6, the Board, upon request of any one of 
its members, will vote whether or not to close such portion of the 
meeting. The vote of each Director participating in such vote shall be 
recorded and no proxy shall be allowed.

[[Page 10]]

    (c) Before every Board meeting closed on the basis of one or more of 
the exemptions in Sec. 1600.6(a), the Legal Counsel will publicly 
certify that, in Counsel's opinion, the meeting may be closed to the 
public and shall state each relevant exemption.
    (d) Within one business day after any vote taken pursuant to 
paragraph (a), (b), or (c) of this section, the Board will make publicly 
available a written copy of the vote, reflecting the vote of each Board 
member. Except to the extent that such information is exempt from 
disclosure, if a meeting or portion of a meeting is to be closed to the 
public, the Board will make publicly available within one business day 
after the required vote a full written explanation of its action, 
together with a list of all persons expected to attend the meeting and 
their affiliation.



Sec. 1600.8  Transcript, recording or minutes; availability to the public.

    (a) The Secretary of the Board will maintain the following records 
for each Board meeting, or portion thereof which is closed to the public 
pursuant to a vote under Sec. 1600.7:
    (1) A copy of the Legal Counsel's certification required by 
Sec. 1600.7;
    (2) A copy of a statement from the presiding officer which sets 
forth the time and place of the closed meeting or portion thereof and a 
list of persons present; and
    (3) A complete verbatim transcript or electronic recording adequate 
to record fully the proceedings of each Board meeting or portion of a 
meeting, except that in the case of a meeting or portion of a meeting 
closed to the public on the basis of exemptions in paragraph (a)(8) or 
(a)(10) of Sec. 1600.6, the Secretary of the Board will maintain either 
a transcript, electronic recording, or a complete set of minutes. Such 
minutes shall fully and clearly describe all matters discussed and shall 
provide a full and accurate summary of actions taken and the reasons 
therefor, including a description of each of the views expressed on any 
item and the record of all roll-call vote reflecting the vote of each 
member of the question. All documents considered in connection with any 
action will be identified in such minutes.
    (b) The retention period for the records required by paragraph (a) 
of this section will be for a period of at least two years after the 
particular Board meeting or until one year after the conclusion of any 
Board proceeding with respect to which the meeting or portion thereof 
was held, whichever occurs later.
    (c) The Secretary of the Board will make promptly available to the 
public the transcript, electronic recording, transcription of the 
recording, or minutes of the discussion of any item on the agenda of a 
Board meeting, except for such item or items of such discussion as the 
Board determines to contain information which may be withheld on the 
basis of one or more of the exemptions in Sec. 1600.6.
    (d) Requests for public inspection of electronic recording, 
transcripts or minutes of Board meetings shall be made to the Assistant 
Secretary of the Board of Directors of the Rural Telephone Bank, room 
4051-South Building, U.S. Department of Agriculture, 14th Street and 
Independence Avenue SW., Washington, DC 20250. Requests for inspection 
or copies of transcripts shall specify the date of the meeting, the name 
of the agenda and the agenda item number; this information will appear 
in the notice of the meeting.
    (e) The transcripts, minutes, or transcriptions of electronic 
recordings of a Board meeting will disclose the identity of each 
speaker, and will be furnished to any person at the actual cost of 
transcription or duplication.



PART 1610--LOAN POLICIES--Table of Contents




Sec.
1610.1 General.
1610.2 Definitions.
1610.3 Loan authorizations.
1610.4 Loan applications.
1610.5 Minimum Bank loan.
1610.6 Concurrent Bank and RUS cost-of-money loans.
1610.7 Acquisition of certain exchange facilities.
1610.8 Adoption of applicable RUS policy.
1610.9 Class B stock.
1610.10 Determination of interest rate on Bank loans.
1610.11 Prepayments.

    Authority: 7 U.S.C. 941 et seq.; Pub. L. 103-354, 108 Stat. 3178 (7 
U.S.C. 6941 et seq.).

[[Page 11]]


    Source: 38 FR 17184, June 29, 1973, unless otherwise noted.

    Editorial Note: Nomenclature changes to part 1610 appear at 59 FR 
66439, Dec. 27, 1994.



Sec. 1610.1  General.

    Loans made by the Governor of the Rural Telephone Bank (the 
``Bank'') will be made in conformance with title IV of the Rural 
Electrification Act of 1936 (the ``Act''), as amended (7 U.S.C. 941 et 
seq.), and this part 1610. Loans are made under section 408(a)(1) of the 
Act for purposes of section 201 of the Act. Loans are also made for 
purposes of section 408(a)(2) of the Act. The Bank will give preference 
to the use of loan funds for purposes set forth in section 408(a)(2) of 
the Act to the extent that it has completed applications for such loans.

[38 FR 17184, June 29, 1973, as amended at 58 FR 66252, Dec. 20, 1993]



Sec. 1610.2  Definitions.

    As used in this part:
    Act means the Rural Electrification Act of 1936, as amended (7 
U.S.C. 901 et seq.).
    Appropriated means funds appropriated based on subsidy.
    Bank means the Rural Telephone Bank, an agency and instrumentality 
of the United States within the United States Department of Agriculture.
    Borrower means any organization which has an outstanding telephone 
loan made by the Bank or RUS, or guaranteed by RUS, or which is seeking 
such financing.
    Governor means the Governor of the Bank.
    REA means the Rural Electrification Administration, formerly an 
agency of the United States Department of Agriculture and predecessor 
agency to RUS with respect to administering certain electric and 
telephone loan programs.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture established pursuant to Section 232 of 
the Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub.L. 103-354, 108 Stat. 3178), successor 
to REA with respect to administering certain electric and telephone 
programs. See 7 CFR 1700.1.
    RUS cost-of-money-loan means a loan made under section 305(d)(2) of 
the Act bearing an interest rate as determined under 7 CFR 1735.31(c). 
RUS cost-of-money loans are made concurrently with Bank loans.
    TIER (Times Interest Earned Ratio) means the ratio of the borrower's 
net income (after taxes) plus interest expense, all divided by interest 
expense. For the purpose of this calculation, all amounts will be annual 
figures and interest expense will include only interest on debt with a 
maturity greater than one year.

[58 FR 66252, Dec. 20, 1993, as amended at 59 FR 66439, Dec. 27, 1994]



Sec. 1610.3  Loan authorizations.

    The aggregate amount of loans made will not exceed the amount 
authorized by the Board of Directors (the ``Board'') of the Bank.

[38 FR 17184, June 29, 1973. Redesignated at 58 FR 66252, Dec. 20, 1993]



Sec. 1610.4  Loan applications.

    No application for a loan will be considered for approval by the 
Bank until it has been reviewed by RUS and the Governor has determined, 
based on such review, the eligibility of the applicant for a Bank loan 
and the amount thereof. Loan application forms are available from RUS on 
request. No fees or charges are assessed for Bank loans.

[58 FR 66252, Dec. 20, 1993]



Sec. 1610.5  Minimum Bank loan.

    A Bank loan will not be made unless the applicant qualifies for a 
Bank loan of at least $50,000.

[38 FR 17184, June 29, 1973. Redesignated at 58 FR 66252, Dec. 20, 1993]



Sec. 1610.6  Concurrent Bank and RUS cost-of-money loans.

    (a) The Bank makes loans, under section 408 of the Act, concurrently 
with RUS cost-of-money loans made under section 305(d)(2) of the Act. To 
qualify for concurrent Bank and RUS cost-of-money loans on or after 
November 1, 1993, a borrower must meet each of the following 
requirements:

[[Page 12]]

    (1) The average number of proposed subscribers per mile of line in 
the service area of the borrower is not more than 15, or the borrower 
has a projected TIER (including the proposed loans) of at least 1.0, but 
not greater than 5.0, as determined by the feasibility study prepared in 
connection with the loans, see 7 CFR part 1737, subpart H; and
    (2) The Administrator of RUS has approved and the borrower is 
participating in a telecommunications modernization plan for the state, 
see 7 CFR part 1751, subpart B.
    (b) The loan amounts from each program (Bank, including amounts for 
class B stock, and RUS cost-of-money) will be proportionate to the total 
amount of funds appropriated for the fiscal year for Bank loans and RUS 
cost-of-money loans. To determine the Bank portion, the total loan 
amount will be multiplied by the ratio of Bank funds appropriated for 
the fiscal year to the sum of RUS cost-of-money and Bank funds 
appropriated for the fiscal year in which the loan is approved. The same 
method would be used to calculate the RUS cost-of-money portion (see 7 
CFR 1735.31(b)). If during the fiscal year the amount of funds 
appropriated changes, the ratio will be adjusted accordingly and applied 
only to those loans approved afterwards.
    (c) The actual rate of interest on the Bank loan shall be determined 
as provided in Sec. 1610.10; the RUS cost-of-money loan shall bear 
interest at a rate equal to the current cost of money to the Federal 
Government, on the date of advance of funds to the borrower, for loans 
of similar maturity, but not more than 7 percent per year (see 7 CFR 
1735.31(c)).
    (d) Generally, no more than 10 percent of lending authority from 
appropriations in any fiscal year for Bank and RUS cost-of-money loans 
may be loaned to a single borrower. The Bank will publish by notice in 
the Federal Register the dollar limit that may be loaned to a single 
borrower in that particular fiscal year based on approved Bank and RUS 
lending authority.

[58 FR 66252, Dec. 20, 1993, as amended at 62 FR 46869, Sept. 5, 1997]



Sec. 1610.7  Acquisition of certain exchange facilities.

    In the interest of making optimum use of the Bank's loan funds, a 
Bank loan for the acquisition of exchange facilities under section 
408(a)(2) of the Act (7 U.S.C. 948(a)(2)) will not be recommended by the 
Governor for approval by the Secretary of Agriculture unless the 
Governor determines that the acquisition is reasonably necessary to 
improve the efficiency, effectiveness, or financial stability of the 
borrower's telephone system, that the location and character of the 
proposed acquisition are such that the acquisition is reasonably 
necessary to accomplish such improvement, and that the amount of the 
requested loan for such acquisition is reasonably justified by the 
nature and scope of the improvement which the acquisition would effect.



Sec. 1610.8  Adoption of applicable RUS policy.

    The policies embodied in 7 CFR part 1610, in all parts of 7 CFR 
chapter XVII except those identified below, will be utilized by the 
Governor in carrying out the Bank's loan program to the extent that such 
policies are consistent with title IV of the Act (7 U.S.C. 941 et seq.) 
and to the extent that policies in 7 CFR chapter XVII are consistent 
with 7 CFR part 1610. The parts of 7 CFR chapter XVII applicable solely 
to the Electric Program and thus exceptions to this section are parts 
1710 through 1734 inclusive.

[55 FR 39397, Sept. 27, 1990]



Sec. 1610.9  Class B stock.

    Borrowers receiving loans from the Bank shall be required to invest 
in class B stock at 5 percent of the total amount of loan funds 
advanced. Borrowers may purchase class B stock by:
    (1) Paying an amount (using their own general funds) equal to 5 
percent of the amount, exclusive of the amount for class B stock, of 
each loan advance, at the time of such advance; or
    (2) Requesting that funds for the purchase of class B stock be 
included in the loan. If funds for class B stock are included in a loan, 
the funds for class B stock shall be advanced in an amount

[[Page 13]]

equal to 5 percent of the amount, exclusive of the amount for class B 
stock, of each loan fund advance, at the time of such advance.

[56 FR 26596, June 10, 1991]



Sec. 1610.10  Determination of interest rate on Bank loans.

    (a) All loan fund advances made on or after December 22, 1987 under 
Bank loans approved on or after October 1, 1987, shall bear interest at 
the rate determined as established below, but not less than 5 percent 
per annum.
    (b) The interest rate for the period beginning on the date the 
advance is made and ending at the close of the fiscal year in which the 
advance is made shall be the average yield on the date of advance on 
outstanding marketable obligations of the United States having a final 
maturity comparable to the final maturity of the advance. The interest 
rate shall be determined to the nearest 0.01 percent.
    (1) For this determination, the Bank will use yields on actively 
traded Treasury issues adjusted to constant maturities obtained from the 
Federal Reserve statistical release (``Treasury rate''). In accordance 
with standard Treasury procedures, the rate in effect for any given day 
is the rate set at the close of business on the preceding day. The 30-
year Treasury rate will be applied to all advances with a final maturity 
of at least 30 years from date of advance. A straight-line interpolation 
between other Treasury rates will be used to determine the rate 
applicable for advances with final maturities of less than 30 years.
    (2) The Bank will notify the borrower in writing of the interest 
rate that applies to each advance.
    (c) After the fiscal year in which the advance is made, the interest 
rate applied to the advance will be the sum of the calculations made in 
paragraphs (c) (1) through (5) of this section. This interest rate 
determination shall be made by the Governor within 30 days of the end of 
each fiscal year and shall be determined to the nearest 0.01 percent.
    (1) The aggregate of all amounts received by the Bank during the 
fiscal year from the issuance of Class A stock, multiplied by the rate 
of return payable by the Bank during the fiscal year as specified in 
section 406(c) of the Act, which product is divided by the aggregate of 
the amounts advanced by the Bank during the fiscal year.
    (2) The aggregate of all amounts received by the Bank during the 
fiscal year from the issuance of Class B stock, multiplied by the rate 
at which dividends are payable by the Bank during the fiscal year as 
specified in section 406(d) of the Act, which product is divided by the 
aggregate of the amounts advanced by the Bank during the fiscal year. 
Section 406(d) provides that ``No dividends shall be payable on Class B 
stock.'' The ``amounts received by the Bank during the fiscal year from 
the issuance of Class B stock'' means the amount of cash received during 
the fiscal year for the purchase of Class B stock, plus the amount 
advanced to borrowers by the Bank during the fiscal year for such 
purchases, less any Class B stock that is rescinded during the fiscal 
year.
    (3) The aggregate of all amounts received by the Bank during the 
fiscal year from the issuance of Class C stock, multiplied by the rate 
at which dividends are payable by the Bank during the fiscal year as 
specified in section 406(e) of the Act, which product is divided by the 
aggregate of the amounts advanced by the Bank during the fiscal year.
    (4) The amounts received by the Bank during the fiscal year from 
each issue of telephone debentures and other obligations of the Bank, 
multiplied, respectively, by the rates at which interest is payable by 
the Bank during the fiscal year to holders of each issue, each of which 
product is divided, respectively, by the aggregate of the amounts 
advanced by the Bank during the fiscal year.
    (5) The amount by which the aggregate of the amounts advanced by the 
Bank during the fiscal year exceeds the aggregate of the amount received 
by the Bank from the issuance of Class A stock, Class B stock, Class C 
stock, and telephone debentures and other obligations of the Bank during 
the fiscal year, multiplied by the historic cost of money rate as of the 
close of the immediately preceding fiscal year, which product is divided 
by the aggregate of

[[Page 14]]

the amounts advanced by the Bank during the fiscal year.
    (6) As used in paragraph (c)(5) of this section, the term ``historic 
cost of money rate as of the close of the immediately preceding fiscal 
year,'' means the sums of the results of the following calculations: The 
amounts advanced by the Bank in each fiscal year during the period 
beginning with fiscal year 1974 and ending with the immediately 
preceding fiscal year, multiplied, respectively, by the cost of money 
rate for the fiscal year (as set forth in Table I for fiscal years 1974 
through 1987, and as determined by the Governor in paragraphs (c) (1) 
through (5) of this section for fiscal years after fiscal year 1987), 
with each product then divided by the aggregate of the amounts advanced 
by the Bank from the beginning of fiscal year 1974 through the end of 
the fiscal year just ended.

                                 Table I
------------------------------------------------------------------------
                                            The cost of money rate shall
     For advances made in fiscal year:                   be:
------------------------------------------------------------------------
1974......................................  5.01 percent.
1975......................................  5.85 percent.
1976......................................  5.33 percent.
1977......................................  5.00 percent.
1978......................................  5.87 percent.
1979......................................  5.93 percent.
1980......................................  8.10 percent.
1981......................................  9.46 percent.
1982......................................  8.39 percent.
1983......................................  6.99 percent.
1984......................................  6.55 percent.
1985......................................  5.00 percent.
1986......................................  5.00 percent.
1987......................................  5.00 percent.
------------------------------------------------------------------------
In this table, ``fiscal year'' means the 12-month period ending on
  September 30 of the designated year.

    (d) A borrower with a Bank loan approved on or after October 1, 
1987, and before December 22, 1987, and with funds not fully advanced as 
of December 22, 1987, may until the next advance under the loan or March 
21, 1988, whichever is later, elect to have the interest rate specified 
in the loan commitment apply to the unadvanced portion in lieu of the 
rate which would otherwise apply as set forth in Sec. 1610.10(a). A 
borrower making such an election shall contact, in writing, the 
applicable Area Office of RUS. The Governor shall then adjust the 
interest rate that applies to the unadvanced portion of the loan 
accordingly.
    (e) If the Bank, pursuant to section 407(b) of the Act, issues 
telephone debentures to refinance outstanding telephone debentures or 
other obligations, the Bank shall reduce the interest rate charged on 
each advance of Bank loan funds made during the fiscal year(s) in which 
the refinanced debentures or other obligations were originally issued. 
The reduction shall be for the period beginning on the issue date of the 
refinancing debentures and ending on the date the advance matures or is 
completely prepaid, whichever is earlier. This reduction shall be in 
addition to any other interest rate reduction required by section 
408(b)(3) of the Act. The interest rate shall be reduced by the amount 
which fully reflects that percentage of the funds saved by the Bank as a 
result of the refinancing which is equal to the percentage 
representation of the advance of all advances made during the fiscal 
year(s) involved. In no case, however, shall the interest rate be 
reduced to less than 5 percent per annum. The interest rate reduction 
for each advance shall be determined as follows:
    (1) The funds saved by the Bank as a result of the refinancing shall 
be computed.
    (2) The advance shall be divided by the total of all advances made 
during the fiscal year(s) involved, and stated to the nearest .01 
percent.
    (3) The percentage in paragraph (e)(2) of this section is multiplied 
by the amount in paragraph (e)(1) of this section to determine the 
savings for a particular advance. The interest rate on that advance is 
then reduced to fully reflect the savings over the remaining 
amortization period of the loan from which the advance was made.
    (f) Within 60 days after the issue date described in paragraph (e) 
of this section, the Governor shall amend the loan documentation for 
each advance described in paragraph (e) of this section, as necessary, 
to reflect any interest rate reduction applicable to the advance by 
reason of paragraph (e) of this section, and shall notify each affected 
borrower of the reduction.
    (g) Within 5 days of determining the cost of money rate for a fiscal 
year, the Governor shall:

[[Page 15]]

    (1) Cause the determination to be published in the Federal Register 
in accordance with section 552 of title 5, United States Code, and
    (2) Furnish a copy of the determination to the Comptroller General 
of the United States.
    (h) A borrower should not wait until the end of the fiscal year to 
submit a requisition for an advance of loan funds if it wants the 
advance made in that fiscal year. Borrower requisitions submitted late 
in the fiscal year may not be processed in that fiscal year because of 
workload and other factors.

[53 FR 36783, Sept. 22, 1988; 53 FR 39014, Oct. 4, 1988]



Sec. 1610.11  Prepayments.

    (a) Bank loans approved before November 1, 1993, may be prepaid in 
accordance with the terms thereof, including payment of the premium as 
provided therein.
    (b) A borrower may prepay part or all of a Bank loan made on or 
after November 1, 1993, by paying the outstanding principal and any 
accrued interest without being required to pay a prepayment premium.
    (c) Borrowers that qualify to issue a refunding note or notes in 
accordance with 7 CFR 1735.43, Payments on loans, shall not be required 
to pay a prepayment premium on all payments made in accordance with the 
new payment schedule.

[58 FR 66252, Dec. 20, 1993, as amended at 62 FR 46869, Sept. 5, 1997]

[[Page 17]]



    CHAPTER XVII--RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE




  --------------------------------------------------------------------


  Editorial Note: Nomenclature changes to Chapter XVII appear at 59 FR 
66440, Dec. 27, 1994.
Part                                                                Page
1700            General information.........................          19
1703            Rural development...........................          24
1710            General and pre-loan policies and procedures 
                    common to insured and guaranteed 
                    electric loans..........................          91
1714            Pre-loan policies and procedures for insured 
                    electric loans..........................         140
1717            Post-loan policies and procedures common to 
                    insured and guaranteed electric loans...         146
1718            Loan security documents for electric 
                    borrowers...............................         196
1721            Post-loan policies and procedures for 
                    insured electric loans..................         237
1724            Electric engineering, architectural services 
                    and design policies and procedures......         238
1726            Electric system construction policies and 
                    procedures..............................         253
1728            Electric standards and specifications for 
                    materials and construction..............         280
1730            Electric system operations and maintenance..         304
1735            General policies, types of loans, loan 
                    requirements--telecommunications program         308
1737            Pre-loan policies and procedures common to 
                    insured and guaranteed 
                    telecommunications loans................         332
1741

Pre-loan policies and procedures for insured telephone loans [Reserved]

1744            Post-loan policies and procedures common to 
                    guaranteed and insured telephone loans..         347
1748

Post-loan policies and procedures for insured telephone loans [Reserved]

1751            Telecommunications system planning and 
                    design criteria, and procedures.........         373
1753            Telecommunications system construction 
                    policies and procedures.................         378
1755            Telecommunications standards and 
                    specifications for materials, equipment 
                    and construction........................         415

[[Page 18]]

1757

Telephone systems operations and maintenance [Reserved]

1767            Accounting requirements for RUS electric 
                    borrowers...............................         771
1770            Accounting requirements for RUS telephone 
                    borrowers...............................         962
1773            Policy on audits of RUS borrowers...........         983
1775            Technical assistance and training grants....         998
1777            Section 306C WWD loans and grants...........        1004
1778            Emergency Community Water Assistance Grants.        1008
1779            Water and waste disposal programs guaranteed 
                    loans...................................        1014
1780            Water and waste loans and grants............        1036
1781            Resource Conservation and Development (RCD) 
                    loans and Watershed (WS) loans and 
                    advances................................        1075
1785            Loan account computations, procedures and 
                    policies for electric and telephone 
                    borrowers...............................        1092
1786            Prepayment of RUS guaranteed and insured 
                    loans to electric and telephone 
                    borrowers...............................        1094
1788            RUS fidelity and insurance requirements for 
                    electric and telecommunications 
                    borrowers...............................        1124
1789            Use of consultants funded by borrowers......        1129
1792            Compliance with other Federal statutes, 
                    regulations, and Executive orders.......        1134
1794            Environmental policies and procedures.......        1136

[[Page 19]]



PART 1700--GENERAL INFORMATION--Table of Contents




                           Subpart A--General

Sec.
1700.1 General.
1700.2 Availability of information.
1700.3 Requests under the Freedom of Information Act.
1700.4 Public comments on proposed rules.
1700.5-1700.24 [Reserved]

              Subpart B--Agency Organization and Functions

1700.25 Office of the Administrator.
1700.26 Deputy Administrators.
1700.27 Electric Program.
1700.28 Telecommunications Program.
1700.29 Water and Environmental Programs.
1700.30 Distance Learning and Telemedicine Loan and Grant Program.
1700.31 Program Accounting and Regulatory Analysis.
1700.32 Financial Services Staff.
1700.33-1700.49 [Reserved]

             Subpart C--Loan and Grant Approval Authorities

1700.50-1700.52 [Reserved]
1700.53 Persons serving as Acting Administrator.
1700.54 Electric Program.
1700.55 Telecommunications Program.
1700.56 Water and Environmental Programs.
1700.57 Distance Learning and Telemedicine Loan and Grant Program.

    Authority: 5 U.S.C. 301, 552; 7 U.S.C. 901 et seq., 1921 et seq., 
6941 et seq.; 7 CFR 2.7.

    Source: 63 FR 16085, Apr. 2, 1998, unless otherwise noted.



                           Subpart A--General



Sec. 1700.1  General.

    (a) The Rural Electrification Administration (REA) was established 
by Executive Order No. 7037 on May 11, 1935. Statutory authority was 
provided by the Rural Electrification Act of 1936 (RE Act) (7 U.S.C. 
901). The RE Act established REA as a lending agency with responsibility 
for developing a program for rural electrification.
    (b) On October 28, 1949, the RE Act was amended to authorize REA to 
make loans to improve and extend telephone service in rural areas. The 
Rural Telephone Bank (RTB), an agency of the United States, was 
established by amendment to the RE Act, approved May 7, 1971. The 
Administrator of RUS serves as the Bank's chief executive with the title 
of Governor.
    (c) The Secretary of Agriculture (Secretary) established the Rural 
Utilities Service (RUS) on October 20, 1994, pursuant to the Department 
of Agriculture Reorganization Act of 1994, (7 U.S.C. 6941 et seq.). RUS 
was assigned responsibility for administering electric and 
telecommunications loan and loan guarantee programs previously 
administered by REA, including programs of the Rural Telephone Bank 
(RTB), and water and waste loans and grants previously administered by 
the Rural Development Administration, along with other functions as the 
Secretary determined appropriate. The rights, interests, obligations, 
duties, and contracts previously vested in REA were transferred to, and 
vested in RUS.



Sec. 1700.2  Availability of information.

    (a) The offices of RUS are located in the South Building of the 
United States Department of Agriculture at 1400 Independence Avenue, SW, 
Washington, DC 20250-1500. Hours of operation are from 8:15 AM to 4:45 
PM, Eastern time on Federal Government business days.
    (b) Information about RUS is available for public inspection and 
copying as required by the Freedom of Information Act, 5 U.S.C. 552 et 
seq. Information about availability and costs of agency publications and 
other agency materials is available from the Director, Program 
Development and Regulatory Analysis, Rural Utilities Service, United 
States Department of Agriculture, Room 4034-S, 1400 Independence Avenue, 
SW, STOP 1522, Washington, DC 20250-1522. Phone 202-720-0736. FAX 202-
720-4120.
    (c) RUS issues indexes of publications in conformance with the 
Freedom of Information Act and Department of Agriculture regulations at 
7 CFR part 1. Many RUS issuances, including regulations, delegations of 
authority for headquarters and field staff, and other documents, are 
available on the world wide web at http://www.usda.gov/rus. Single hard 
copies of publications, forms, forms of basic loan and security 
instruments, and other materials are available either directly from RUS,

[[Page 20]]

from the Superintendent of Documents, U.S. Government Printing Office, 
Washington DC 20402, or from another source as identified. Costs for 
these publications are established in conformance with 7 CFR part 1.



Sec. 1700.3  Requests under the Freedom of Information Act.

    Department of Agriculture procedures for requests for official 
records under the Freedom of Information Act are found at 7 CFR part 1. 
Requests must be in writing and may be submitted in person or by mail to 
United States Department of Agriculture, Rural Development, Room 0164-S, 
1400 Independence Avenue, SW, STOP 0742, Washington, DC 20250-0742; or 
by FAX to 202-720-1915. As set forth in 7 CFR 1.16, fees may be charged 
for processing of requests for records. An appeal of the agency 
determination concerning the request for official records shall be made 
in writing to the Administrator, Rural Utilities Service, United States 
Department of Agriculture, Room 4051-S, 1400 Independence Avenue, SW, 
STOP 1510, Washington, DC 20250-1500.



Sec. 1700.4  Public comments on proposed rules.

    RUS requires that all persons submitting comments to a proposed rule 
or other document published by the agency in the Federal Register 
submit, in hard copy, a signed original and three copies of their 
comments to the address shown in the preamble to the proposed rule. 
Copies of comments submitted are available to the public in conformance 
with 7 CFR part 1.



Secs. 1700.5-1700.24  [Reserved]



              Subpart B--Agency Organization and Functions



Sec. 1700.25  Office of the Administrator.

    The Administrator, who also serves as Governor of the RTB, is 
appointed by the President, with the advice and consent of the Senate. 
The Under Secretary, Rural Development delegated to the Administrator, 
in 7 CFR part 2, responsibility for administering the programs and 
activities of RUS and RTB. The Administrator is aided directly by Deputy 
Administrators and by Assistant Administrators for the electric program, 
telecommunications program, the water and environmental programs, and 
program accounting and regulatory analysis, and by other staff offices. 
The work of the agency is carried out as described in this part.



Sec. 1700.26  Deputy Administrators.

    Deputy Administrators aid and assist the Administrator. The Deputy 
Administrator, Program Policy and Telecommunications, provides overall 
policy direction to all RUS programs and directs and coordinates the 
telecommunications programs. The Deputy Administrator, Water and 
Environmental Programs, directs and coordinates the agency's water and 
waste disposal programs. The Deputy Administrators review agency 
policies in these areas and, as necessary, implement changes, and 
participate with the Administrator and other officials in planning and 
formulating the programs and activities of the agency, including the 
making and servicing of loans and grants.



Sec. 1700.27  Electric Program.

    RUS, through the Electric Program, makes loans and loan guarantees 
for rural electrification and the furnishing of electric service to 
persons in rural areas.
    (a) The Assistant Administrator, Electric Program, directs and 
coordinates the rural electrification programs, participating with the 
Administrator, and others, in planning and formulating the programs and 
activities of the agency, and performs other activities as the 
Administrator may prescribe from time to time.
    (b) Primary point of contact with borrowers.Two regional divisions, 
one for the Northern Region and one for the Southern Region, are the 
primary points of contact between RUS and its electric distribution 
borrowers. Each office administers the rural electric program for its 
assigned geographical area through headquarters staff and general field 
representatives. The Power Supply Division is the primary point of 
contact between RUS and its electric power supply borrowers.

[[Page 21]]

    (c) Staff office.The Electric Staff Division is responsible for 
engineering aspects of RUS' standards, specifications and other 
requirements for design, construction, and technical operation and 
maintenance of RUS borrowers' electric systems. The Electric Staff 
Division oversees the activities of Technical Standards Committees ``A'' 
and ``B'', Electric, which determine whether engineering specifications, 
drawings, material and equipment are acceptable for use in RUS 
borrowers' electric systems. The Office of the Assistant Administrator 
prepares analyses of loan making activities and the business and 
regulatory environment of RUS borrowers and recommends policies and 
procedures.



Sec. 1700.28  Telecommunications Program.

    RUS and RTB, through the Telecommunications Program, make loans and 
loan guarantees to furnish and improve telecommunications service in 
rural areas.
    (a) The Assistant Administrator, Telecommunications Program, directs 
and coordinates the rural telecommunications programs, including the 
distance learning and telemedicine program, and in conjunction with the 
Administrator and Deputy Administrator, and others, the planning and 
formulating of programs and activities of the agency, and performs other 
activities as the Administrator may prescribe from time to time.
    (b) Primary point of contact with borrowers.Area offices are the 
primary points of contact between RUS and all telecommunications program 
borrowers. Each office administers the rural telecommunications program 
for its assigned geographical area with assistance of field 
representatives located in areas assigned to them.
    (c) Staff offices.The Telecommunications Staff Division is 
responsible for engineering aspects of design, construction, and 
technical operation and maintenance of rural telecommunications systems 
and facilities, including the activities of Technical Standards 
Committees ``A'' and ``B'', Telecommunications, which determine whether 
engineering specifications, drawings, material, and equipment are 
acceptable for use in RUS financed telecommunications systems. The 
Advanced Telecommunications Services office prepares analyses of loan 
making activities and the business and regulatory environment of RUS 
borrowers and recommends policies and procedures.

[63 FR 16085, Apr. 2, 1998; 63 FR 18307, Apr. 15, 1998]



Sec. 1700.29  Water and Environmental Programs.

    RUS, through the Water and Environmental Programs, provides loan and 
grant funds for water and waste disposal projects serving the most 
financially needy rural communities.
    (a) The Assistant Administrator, Water and Environmental Programs, 
develops and institutes plans, procedures, and policies for the 
effective, efficient, and orderly management of Water and Environmental 
Programs responsibilities; provides leadership to ensure execution of 
policies and procedures by the Water and Waste Disposal programs and 
support functions; and performs other activities as the Administrator or 
Deputy Administrator may prescribe from time to time.
    (b) Primary point of contact. The State Rural Development Offices 
are the primary points of contact between RUS and loan and grant 
recipients.
    (c) The Engineering and Environmental Staff is responsible for 
engineering staff activities at all stages of Water and Waste Disposal 
programs implementation, including review of preliminary engineering 
plans and specifications, procurement practices, contract awards, 
construction monitoring, and system operation and maintenance. This 
staff develops agency engineering practices, policies, guidelines, and 
technical data relating to the construction and operation of water and 
waste disposal systems, and for implementing the National Environmental 
Policy Act, and other environmental requirements as they apply to all 
agency programs and activities.



Sec. 1700.30  Distance Learning and Telemedicine Loan and Grant Program.

    RUS, through the Telecommunications Program, makes grants and

[[Page 22]]

loans to furnish and improve telemedicine services and distance learning 
services in rural areas.
    (a) The Assistant Administrator, Telecommunications Program, directs 
and coordinates the distance learning and telemedicine program.
    (b) Primary point of contact with borrowers. The area offices, 
described in Sec. 1700.28(b) support the distance learning and 
telemedicine program. Each office administers the distance learning and 
telemedicine program for its assigned geographical area with assistance 
of field representatives located in areas assigned to them.

[63 FR 16085, Apr. 2, 1998; 63 FR 18307, Apr. 15, 1998]



Sec. 1700.31  Program Accounting and Regulatory Analysis.

    RUS, through Program Accounting and Regulatory Analysis, monitors 
and administers applicable regulations, RUS policy, and accounting 
requirements. The staffs assist the Assistant Administrator with respect 
to management, information systems, budgets, and other such matters.
    (a) The Assistant Administrator, Program Accounting and Regulatory 
Analysis, directs and coordinates program accounting and financial 
services with respect to electric and telecommunications borrowers and 
directs and coordinates the regulatory actions of the agency.
    (b) This division monitors borrowers' accounting operations in order 
to ensure compliance with applicable statutory and regulatory 
requirements and with the requirements of the Office of Management and 
Budget.
    (c) The two regional branches (the Northern Region and the Southern 
Region) work directly with borrowers. Each regional office has a staff 
of headquarters and field accountants. The Technical Accounting and 
Auditing Staff monitors industry developments, including the standards 
of the Financial Accounting Standards Board, and recommends Agency 
policies and procedures.
    (d) Program Development and Regulatory Analysis directs and 
administers the preparation, clearance, processing, and distribution of 
RUS submissions to the Office of the Federal Register in the form of 
proposed and final rules and notices and RUS bulletins and staff 
instructions.



Sec. 1700.32  Financial Services Staff.

    The Financial Services Staff evaluates the financial condition of 
financially troubled borrowers in order to protect the Government's 
interests.



Secs. 1700.33-1700.49  [Reserved]



             Subpart C--Loan and Grant Approval Authorities



Secs. 1700.50-1700.52  [Reserved]



Sec. 1700.53  Persons serving as Acting Administrator.

    The following persons are authorized, in descending order, to act 
for the Administrator when he or she is not on official duty in the 
Washington, DC, Metropolitan Area, is sick, has resigned, or is 
deceased. That is, if the first person on the list is also not on 
official duty in the Washington, DC, Metropolitan Area, is sick, has 
resigned, or is deceased, the second person on the list is authorized to 
act for the Administrator and so on down the list. Persons on this list 
may not redelegate the authority to act as the Administrator. The 
Administrator may in his or her discretion in writing, on a case-by-case 
basis, delegate authority to act as Administrator in his or her absence 
outside of this specified order.
    (1) Deputy Administrator, Program Policy and Telecommunications.
    (2) Deputy Administrator, Water and Environmental Programs.
    (3) Assistant Administrator, Electric Program.
    (4) Assistant Administrator, Telecommunications Program.
    (5) Assistant Administrator, Water and Environmental Programs.
    (6) Assistant Administrator, Program Accounting and Regulatory 
Analysis.



Sec. 1700.54  Electric Program.

    (a) Administrator: The authority to approve the following loans, 
loan guarantees, and lien accommodations and subordinations of liens is 
reserved to the Administrator:
    (1) All discretionary hardship loans.

[[Page 23]]

    (2) All loans, loan guarantees, and lien accommodations and 
subordinations of liens to finance operating costs.
    (3) All loans, loan guarantees, and lien accommodations and 
subordinations of liens of more than $20,000,000 for distribution 
borrowers or more than $50,000,000 for power supply borrowers.
    (4) All loans, loan guarantees, and lien accommodations and 
subordinations of liens for distribution borrowers that are members of a 
power supply borrower that is in default of its obligations to the 
Government or that is currently assigned to the Financial Services 
Staff, unless otherwise determined by the Administrator.
    (5) All loans, loan guarantees, and lien accommodations and 
subordinations of liens that require an Environmental Impact Statement.
    (6) Certifications and findings required by the RE Act or other 
applicable laws and regulations, the placing and releasing of conditions 
precedent to the advance of funds, and all security instruments, loan 
contracts, and all other necessary documents relating to the authorities 
reserved in this section.
    (7) Execution of all loan contracts, security instruments, and all 
other documents in connection with loans, loan guarantees, and lien 
accommodations approved by the Administrator.
    (b) The Assistant Administrator, Electric Program, has the authority 
to approve the following loans, loan guarantees, and lien accommodations 
and subordinations of liens, except for those approvals reserved to the 
Administrator:
    (1) Loans, loan guarantees, and lien accommodations and 
subordinations of liens for distribution borrowers in amounts not 
exceeding $20,000,000.
    (2) Loans, loan guarantees, and lien accommodations and 
subordinations of liens for power supply borrowers in amounts not 
exceeding $50,000,000.
    (3) Execution of all loan contracts, security instruments, and all 
other documents in connection with loans, loan guarantees, and lien 
accommodations approved by the Assistant Administrator, Electric 
Program.
    (c) Directors, Regional Divisions, have the authority to approve, 
for distribution borrowers:
    (1) Loans, loan guarantees, and lien accommodations and 
subordinations of liens in amounts not exceeding $15,000,000 except for 
those approvals reserved to the Administrator.
    (2) All certifications and findings required by the RE Act or other 
applicable laws and regulations, the imposing and releasing of 
conditions precedent to the advance of loan funds, and all security 
instruments, loan contracts, and all other documents relating to the 
delegations set forth in paragraph (c)(1) of this section.
    (d) Director, Power Supply Division, has the authority to approve 
for power supply borrowers:
    (1) Loans, loan guarantees, and lien accommodations and 
subordinations of liens in amounts not exceeding $30,000,000, except for 
those approvals reserved to the Administrator.
    (2) All certifications and findings required by the RE Act or other 
applicable laws and regulations, the placing and releasing of conditions 
precedent to the advance of funds, and all security instruments, loan 
contracts or all other documents relating to the delegations set forth 
in paragraph (d)(1) of this section.



Sec. 1700.55  Telecommunications Program.

    (a) Administrator: The authority to approve the following loans, 
loan guarantees, and lien accommodations is reserved to the 
Administrator:
    (1) All loans, loan guarantees, and lien accommodations and 
subordinations of liens to finance operating costs.
    (2) All loans, loan guarantees, or lien accommodations and 
subordinations of liens of $25,000,000 or more.
    (3) Loans and loan guarantees with acquisition costs of $5,000,000 
or more.
    (4) Loans and loan guarantees containing funds to refinance 
outstanding debt of more than $5,000,000.
    (5) All loan contracts, security instruments, and all other 
documents to be executed in connection with loans and loan guarantees 
approved by the Administrator.

[[Page 24]]

    (b) Assistant Administrator, Telecommunications Program, has the 
authority to approve the following loans, loan guarantees, and lien 
accommodations, except for those approvals reserved to the 
Administrator:
    (1) Loans, loan guarantees, and lien accommodations and 
subordinations of liens not to exceed $25,000,000 except for those 
reserved to the Administrator.
    (2) Loans and loan guarantees with acquisition costs where the 
acquisition portion of the loan is less than $5,000,000.
    (3) Loans and loan guarantees including refinancing amounts that do 
not exceed $5,000,000.
    (4) Distance learning and telemedicine loans and loan guarantees 
that do not exceed $5,000,000.
    (5) Loan contracts, security instruments, and other documents to be 
executed in connection with loans and loan guarantees approved by the 
Assistant Administrator, Telecommunications Program.
    (c) Area Directors have the authority to approve the following 
loans, loan guarantees, and lien accommodations, except for those 
approvals reserved to the Administrator:
    (1) Loans, loan guarantees, and lien accommodations and 
subordinations of liens of less than $10,000,000.
    (2) Loans and loan guarantees with acquisition costs of less than 
$2,000,000.
    (3) Loans and loan guarantees including refinancing amounts of less 
than $2,000,000.
    (4) Any modifications in the method of carrying out loan purposes.



Sec. 1700.56  Water and Environmental Programs.

    The State Rural Development Offices have the responsibility for 
making and servicing water and waste loans and grants.



Sec. 1700.57  Distance Learning and Telemedicine Loan and Grant Program.

    (a) Administrator: The authority to approve the following loans and 
lien accommodations is reserved to the Administrator:
    (1) Grants or loan and grant combinations.
    (2) The number selected from each state for financial assistance for 
grant approval and loans or grants approved.
    (3) Extension of principal and interest repayments for rural 
development purposes.
    (4) Loan contracts, security instruments, and all other documents to 
be executed in connection with loans and loan guarantees approved by the 
Administrator.
    (b) Assistant Administrator, Telecommunications Program, has the 
authority to approve the following loans and lien accommodations and 
subordinations of liens:
    (1) Loans, that do not also include requests for grant funds, except 
for those reserved to the Administrator.
    (2) Loan contracts, security instruments, and all other documents to 
be executed in connection with loans and loan guarantees approved by the 
Assistant Administrator, Telecommunications Program.



PART 1703--RURAL DEVELOPMENT--Table of Contents




Subpart A [Reserved]

      Subpart B--Rural Economic Development Loan and Grant Program

Sec.
1703.10 Purpose.
1703.11 Policy.
1703.12 Definitions.
1703.13 Source of funds.
1703.14 Disposition of funds in the subaccount.
1703.15 [Reserved]
1703.16 Eligibility.
1703.17 Uses of zero-interest loans and grants.
1703.18 Types of projects eligible for grant funding.
1703.19 General requirements for grant funding.
1703.20 Ineligible uses of zero-interest loans and grants.
1703.21 Limitations on the use of zero-interest loan and grant funds.
1703.22 Revolving loan program.
1703.23 Supplemental funds requirements for zero-interest loans and 
          grants.
1703.24 [Reserved]
1703.25 Significance of RUS financing to the total project cost.
1703.26 [Reserved]
1703.27 Owner's equity in the project.
1703.28 Maximum and minimum sizes of a zero-interest loan or grant 
          application.

[[Page 25]]

1703.29 Terms of zero-interest loan repayment.
1703.30 Approval of agreements.
1703.31 Transfer of employment or business.
1703.32 Environmental requirements.
1703.33 Other considerations.
1703.34 Applications.
1703.35 Section of the application covering the selection factors.
1703.36 Section of the application covering the project description.
1703.37 Section of the application covering the environmental impact of 
          the project.
1703.38-1703.44 [Reserved]
1703.45 Review and analysis of applications.
1703.46 Documenting the evaluation and selection of applications for 
          zero-interest loans and grants.
1703.47-1703.57 [Reserved]
1703.58 Post selection period.
1703.59 Final application processing and legal documents.
1703.60 [Reserved]
1703.61 Disbursement of zero-interest loan and grant funds.
1703.62-1703.65 [Reserved]
1703.66 Review and other requirements.
1703.67 Changes in project objective or scope.
1703.68 Loan and grant termination provisions.
1703.69-1703.79 [Reserved]

Subpart C--Rural Business Incubator Program [Reserved]

1703.80-1703.99 [Reserved]

 Subpart D--Distance Learning and Telemedicine Loan and Grant Program--
                                 General

1703.100 Purpose.
1703.101 Policy.
1703.102 Definitions.
1703.103 Applicant eligibility and allocation of funds.
1703.104 [Reserved]
1703.105 Processing of selected applications.
1703.106 Disbursement of loans and grants.
1703.107 Reporting and oversight requirements.
1073.108 Audit requirements.
1703.109 Grant and loan administration.
1703.110 Changes in project objectives or scope.
1703.111 Grant and loan termination.
1703.112 Expedited telecommunications loans.
1703.113-1703.119 [Reserved]

       Subpart E--Distance Learning and Telemedicine Grant Program

1703.120 Use of grants.
1703.121 Approved purposes for grants.
1703.122 Matching contributions.
1703.123 Nonapproved purposes for grants.
1703.124 Maximum and minimum grant amounts.
1703.125 Completed application.
1703.126 Criteria for scoring grant applications.
1703.127 Application selection provisions.
1703.128 Submission of applications.
1703.129 Appeals.

Subpart F--Distance Learning and Telemedicine Combination Loan and Grant 
                                 Program

1703.130 Use of combination loan and grant.
1703.131 Approved purposes for a combination loan and grant.
1703.132 Nonapproved purposes for a combination loan and grant.
1703.133 Maximum and minimum amounts.
1703.134 Completed application.
1703.135 Application selection provisions.
1703.136 Submission of applications.
1703.137 Appeals.
1703.138-1703.139 [Reserved]

       Subpart G--Distance Learning and Telemedicine Loan Program

1703.140 Use of loan funds.
1703.141 Approved purposes for loans.
1703.142 Nonapproved purposes for loans.
1703.143 Maximum and minimum amounts.
1703.144 Completed application.
1703.145 Application selection provisions.
1703.146 Submission of applications.
1703.147 Appeals.

    Subpart H--Deferments of RUS Loan Payments for Rural Development 
                                Projects

1703.300 Purpose.
1703.301 Policy.
1703.302 Definitions and rules of construction.
1703.303 Eligibility criteria for deferment of loan payments.
1703.304 Restrictions on the deferment of loan payments.
1703.305 Requirements for deferment of loan payments.
1703.306 Limitation on funds derived from the deferment of loan 
          payments.
1703.307 Uses of the deferments of loan payments.
1703.308 Amount of deferment funds available.
1703.309 Terms of repayment of deferred loan payments.
1703.310 Environmental considerations.
1703.311 Application procedures for deferment of loan payments.
1703.312 RUS review requirements.
1703.313 Compliance with other regulations.

    Authority: 7 U.S.C. 901 et seq. and 950aaa et seq.

[[Page 26]]


    Source: 54 FR 6870, Feb. 15, 1989, unless otherwise noted. 
Redesignated at 55 FR 39394, Sept. 27, 1990.

Subpart A [Reserved]



      Subpart B--Rural Economic Development Loan and Grant Program

    Source: 57 FR 44317, Sept. 25, 1992, unless otherwise noted.



Sec. 1703.10  Purpose.

    (a) This subpart sets forth RUS's policies and procedures for making 
zero-interest loans and grants to borrowers in accordance with the 
cushion of credit payments program authorized in section 313 of the Act 
(7 U.S.C. 940c).
    (b) The zero-interest loans and grants are provided for the purpose 
of promoting rural economic development and job creation projects.



Sec. 1703.11  Policy.

    (a) It is RUS's policy that borrowers use the Rural Economic 
Development Loan and Grant Program to promote projects that will result 
in a sustainable increase in the productivity of economic resources in 
rural areas and thereby lead to a higher level of income for rural 
citizens.
    (b) It is RUS's policy that borrowers promote economic development 
in rural areas and job creation projects that:
    (1) Are based on sound economic and financial analyses; and
    (2) Take a long-term perspective.
    (c) It is RUS's policy to direct the funds under this program to 
projects which are located in, or will primarily benefit, those rural 
areas that are experiencing the greatest economic hardship.
    (d) It is RUS's policy to encourage economic development in rural 
areas and job creation projects without regard to service area.
    (e) It is RUS's policy to encourage borrowers to make cushion of 
credit payments.
    (f) It is RUS's policy to maintain liaisons with officials of other 
Federal, state, regional and local rural development agencies to 
coordinate this program with other rural economic development programs.



Sec. 1703.12  Definitions.

    Act--the Rural Electrification Act of 1936, as amended (7 U.S.C. 901 
et seq.).
    Administrator-- the Administrator of the Rural Utilities Service or 
the Administrator's designee.
    Approved purpose--a purpose that the Administrator has specifically 
approved in the letter of agreement covering the use of the RUS zero-
interest loan and/or grant funds provided to the borrower.
    Borrower--an entity that has outstanding RUS and/or Rural Telephone 
Bank (RTB) loan(s) or loan guarantee(s) for an electric or telephone 
purpose under the provisions of the Act.
    Business incubator--a facility in which small businesses can share 
premises, support staff, computers, software or hardware, 
telecommunications terminal equipment, machinery, janitorial services, 
utilities, or other overhead expenses, and where such businesses can 
receive technical assistance, financial advice, business planning 
services or other support. The business incubator program, however, does 
not necessarily have to involve the sharing of premises.
    Cushion of credit payment--a voluntary unscheduled payment made 
after October 1, 1987, on an RUS note, which is credited to the cushion 
of credit account of a borrower.
    Demonstration Project--a project for which the owner agrees in 
writing to provide RUS, if requested, with detailed information on the 
steps it takes in organizing and operating the project, will permit RUS 
and RUS's guests to make reasonable visits to the project, and honor any 
other reasonable RUS request to disseminate information on the project. 
Examples of information include a description of incorporation 
procedures, types of financing obtained, permits required by 
governments, amount of time required for various stages of the project, 
sources of technical assistance from government programs, private 
foundations or trade organizations, any experiences or lessons that the 
owner wishes to share with the public and other

[[Page 27]]

information which will assist RUS in promoting similar projects. It will 
not require the disclosure of trade secrets or proprietary techniques.
    Electric or telephone purpose--a purpose that:
    (1) The Administrator or Governor of the RTB is authorized to 
finance under sections 2, 4, 5, 201, 305, and 408 of the Act; or
    (2) Is characterized as furnishing, generating or transmitting 
electric energy or other activities involved in providing electricity, 
or is characterized as providing telephone service. It will include 
electric and telephone facilities and equipment used in connection with 
providing such a service. It will not include a relatively insignificant 
amount of customer premises equipment, as determined by the 
Administrator.
    Job creation--creation of jobs in rural areas. This includes the 
implementation of a project in close enough proximity to rural areas so 
that it is likely that the majority of the jobs created will be held by 
rural residents.
    Letter of agreement--a legal document executed by the Administrator 
and the borrower that contains certain terms, conditions, requirements 
and understandings applicable to the zero-interest loan and/or grant, as 
determined by the Administrator.
    Letter of credit--a commitment from a financial institution 
satisfactory to the Administrator to honor a draft drawn on the RUS 
borrower should the RUS borrower fail to pay on a zero-interest loan.
    Pass-through-grant--a grant that the borrower makes to another 
entity that will own or undertake the project using the proceeds of the 
RUS grant.
    Pass-through-loan--a loan that the borrower makes to another entity 
that will own or undertake the project using the proceeds of the RUS 
zero-interest loan.
    Project--an undertaking that develops the economy of a rural area or 
results in job creation. As used in subpart B, the term ``project'' 
includes both direct undertakings by borrowers as well as those 
sponsored by other parties using the proceeds of pass-through-loans or 
pass-through-grants. It is the component or phase of the undertaking for 
which the borrower is requesting RUS funds, as determined by the 
Administrator.
    Project feasibility studies--studies, analyses, designs, reports, 
manuals, guides, literature, or other forms of creating and/or 
disseminating information for use in evaluating or developing a proposed 
project. For example, it would include market research and environmental 
studies.
    REA means the Rural Electrification Administration formerly an 
agency of the United States Department of Agriculture and predecessor 
agency to RUS with respect to administering certain electric and 
telephone loan programs.
    Reasonable loan servicing charges--charges for expenses the borrower 
incurs to service a loan provided to another entity unaffiliated with 
the borrower using the proceeds of the RUS zero-interest loan. The 
charges over the life of the loan for routine loan servicing expenses 
must not exceed an amount equal to the sum of one percent per year of 
the outstanding principal on the first day of each year on the 
borrower's RUS zero-interest loan. The charges for extraordinary 
expenses associated with collection of delinquent payments or other 
similar expenses must receive the prior approval of the Administrator.
    Revolving loan program--a program established and operated by the 
Borrower, using grant funds, the Borrower's contribution and loan 
repayments to make loans to businesses or others for rural economic 
development and job creation purposes.
    RTB--the Rural Telephone Bank, established as a body corporate and 
an instrumentality of the United States, to obtain supplemental funds 
from non-Federal sources and utilize them in making loans, for the 
purposes of financing, or refinancing, the construction, improvement, 
expansion, acquisition, and operation of telephone lines, facilities, or 
systems, for RUS Borrowers financed under sections 201 and 408 of the 
Act.
    Rural area--a rural area as defined in section 13 of the Act.
    Rural economic development--job creation or preservation or 
community facilities improvement projects that clearly demonstrate 
significant benefits to rural areas.

[[Page 28]]

    Rural economic development account--a federally insured account into 
which the borrower deposits any advances of zero-interest loan funds 
from RUS until the borrower disburses the funds.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture established pursuant to Section 232 of 
the Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor 
to REA with respect to administering certain electric and telephone 
programs. See 7 CFR 1700.1.
    Scope of work--a detailed plan, which has been approved by the 
Administrator, covering the work to be performed by the loan and/or 
grant recipient using the loan and/or grant funds.
    Significant stockholder--an owner or holder of five percent or more 
of the common stock (or shares) or five percent or more of the preferred 
stock (or shares) of the RUS borrower.
    Subaccount--the rural economic development subaccount created by 
section 313 of the Act.
    Technical assistance--analysis of facilities or processes, 
managerial, financial and operational consultation by independent 
qualified entities to assist project owners to identify and evaluate 
problems or potential problems and provide training to enable project 
owners to successfully implement, manage, operate and maintain viable 
projects.
    Tribal government--The governing body or a governmental agency of 
any Indian tribe, band, nation, or other organized group or community 
(including any Native village as defined in 43 U.S.C. 1602) certified by 
the Secretary of the Interior as eligible for the special programs and 
services provided through the Bureau of Indian Affairs.

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11706, Mar. 14, 1994; 
59 FR 53930, Oct. 27, 1994; 59 FR 66440, Dec. 27, 1994]



Sec. 1703.13  Source of funds.

    Funds provided under this program come from interest differential 
credits to the subaccount and appropriated amounts made available to the 
subaccount.



Sec. 1703.14  Disposition of funds in the subaccount.

    Zero-interest loans and grants will be made during each fiscal year 
to the full extent of the amounts held in the subaccount subject only to 
limitations imposed by law. For administrative purposes, the 
Administrator will make a determination of the fiscal year-end amount 
held in the subaccount as of a date prior to, but as near as practicable 
to, the end of the fiscal year.



Sec. 1703.15  [Reserved]



Sec. 1703.16  Eligibility.

    Zero-interest loans and grants may be made to any borrower that is 
not delinquent on any outstanding Federal debt or in bankruptcy 
proceedings. However, a zero-interest loan or grant will not be made to 
a borrower during any period in which the Administrator has determined 
that no additional financial assistance of any nature should be provided 
to the borrower pursuant to any provision of the Act. The determination 
to suspend eligibility for assistance under this subpart will be based 
on one or more of the following factors:
    (a) The borrower's demonstrated unwillingness to exercise diligence 
in repaying RUS loans or loan guarantees that results in the 
Administrator being unable to find that a loan, or loan guaranteed by 
RUS, would be repaid within the time agreed;
    (b) The borrower's demonstrated unwillingness to meet requirements 
in RUS's legal documents or regulations; or
    (c) Other actions on the part of the borrower that thwart the 
achievement of the objectives of the RUS program.



Sec. 1703.17  Uses of zero-interest loans and grants.

    (a) Zero-interest loans and grants must be used exclusively to 
promote rural economic development and/or job creation projects, 
including, but not limited to, project feasibility studies, start-up 
costs, business incubator projects, and other reasonable expenses for 
the purpose of fostering rural economic development.
    (b) The Administrator will give preference to providing funds under 
this

[[Page 29]]

subpart for projects other than business incubator projects to the 
extent funds are available to borrowers for business incubator projects 
from a rural business incubator fund administered by the Administrator 
in accordance with section 502 of the Act (7 U.S.C. 950aa-1).
    (c) Zero-interest loans and grants may be used for Projects that 
enhance rural economic development by providing advanced 
telecommunications services and computer networks for medical and 
educational services, as follows: (1) For telecommunications end use 
and/or transmission facilities; and (2) Other portions of the project, 
such as modifications to buildings necessary to accommodate 
telecommunications equipment for medical care and other services, public 
or private education, and employment training.
    (d) Zero-interest loans and grants may be used for community antenna 
television systems or facilities. The borrower will document that such 
facilities provide a tangible economic benefit to the proposed service 
area in accordance with Sec. 1703.46 of this subpart. Notwithstanding 
this, the Administrator reserves the right to deny any proposal for 
community antenna television systems or facilities. Community antenna 
television systems or facilities will be considered for funding in 
accordance with Sec. 1703.46 of this subpart and this section only when 
all of the following conditions exist:
    (1) The proposed community antenna television system or facility is 
established in cooperation with a local educational and/or medical 
entity(ies) to provide educational and/or medical programming which 
addresses specific needs of rural residents;
    (2) Services to be provided by the proposed community antenna 
television systems or facilities are not available in the area to be 
served, or services are not being provided by the existing television 
programming carrier at an affordable cost to residents; and
    (3) Such community antenna systems or facilities will not present 
undue competition for existing television programming carriers in the 
area.

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11706, Mar. 14, 1994; 
59 FR 53930, Oct. 27, 1994]



Sec. 1703.18  Types of projects eligible for grant funding.

    Grants may be made for the following purposes:
    (a) The establishment and operation of a revolving loan program by 
Borrowers in accordance with Sec. 1703.22;
    (b) Project feasibility studies to assist for-profit and non-profit 
entities in conjunction with a loan for an authorized project. 
Feasibility studies will include management assistance, consultation, 
and research for planning individual projects that the Borrower has 
determined will benefit the rural community. Feasibility studies which 
may be financed under this section must be performed by qualified 
entities subject to Sec. 1703.19, General requirements for grant 
funding. Feasibility studies must address the important aspects of 
project assessment and planning to ensure, to the extent practicable, 
the success of projects. These include the market, technical, economic, 
financial, and managerial issues related to project feasibility. 
Feasibility studies may be funded in connection with viable projects as 
a reimbursement to the project owner for expenses incurred during the 
initial planning stages of the project prior to project funding by RUS;
    (c) The acquisition of technical assistance in conjunction with 
projects funded with zero-interest loans to enable for-profit and non-
profit entities to obtain analysis of facilities and processes, 
managerial, financial and operational consultation. Grant funds may also 
be used in conjunction with zero-interest loans to enable non-profit 
business incubators to provide technical assistance. Technical 
assistance will enable project owners to identify and evaluate problems 
or potential problems and provide training in order that they may 
ultimately implement, manage, operate and maintain viable projects which 
are financed with zero-interest loan funds. Technical assistance 
financed under this section must be performed by qualified entities 
which are independent of the project owner subject to Sec. 1703.19, 
General requirements for grant funding;
    (d) Business incubators established by non-profit organizations to 
assist in

[[Page 30]]

developing emerging enterprises. Business incubators funded in 
conjunction with zero-interest loans will include those facilities in 
which single or multiple businesses may use premises, support staff, 
computer software, hardware, telecommunications equipment, machinery, 
janitorial services, utilities, or other overhead facilities. Grant 
funding may also be provided to allow business incubators to provide 
feasibility studies and technical assistance in accordance with 
paragraphs (b) and (c) of this section;
    (e) Community development assistance to non-profit entities and 
public bodies for employment creation projects, or other projects which 
provide needed community facilities and services;
    (f) Facilities and equipment to public, for-profit and non-profit 
entities to provide education and training to rural residents to 
facilitate economic development. Equipment and facilities may be funded 
to enable rural businesses to provide educational and job enhancement 
skills to employees;
    (g) Facilities and equipment to public, for-profit and non-profit 
entities to provide medical care to rural residents. Equipment and 
facilities may be funded to enable eligible entities to provide medical 
training and related professional health care skills to rural health 
care providers;
    (h) Projects which utilize advanced telecommunications and/or 
computer networks to facilitate medical or educational services or job 
training in accordance with paragraphs (f) and (g) of this section.

[59 FR 11706, Mar. 14, 1994, as amended at 59 FR 38341, July 28, 1994]



Sec. 1703.19  General requirements for grant funding.

    (a) Grants made under Sec. 1703.18(a), establishment and operation 
of a revolving loan program by Borrowers, will be limited to Borrowers 
and can be made without zero-interest loans. Grants made under 
Sec. 1703.18 (b) through (h) will be made only in conjunction with zero-
interest loans, and on a pass-through basis.
    (b) Pass-through grant funding for projects under Sec. 1703.18 (b), 
(c), (f), (g) and (h) will be available for non-profit and for-profit 
entities. Pass-through grant funding for projects under Sec. 1703.18 (d) 
and (e) will be available only for non-profit entities.
    (c) All projects funded with zero-interest loans and grants will 
require supplemental funding in accordance with Sec. 1703.23. For grants 
made under Sec. 1703.18(a), the portion eligible for RUS funding may be 
fully funded with grant funds. For all other grants funded under 
Sec. 1703.18, the portion of project costs eligible for RUS funding may 
be funded up to 20 percent with grant funds.
    (d) Grant funding will be provided only to the extent necessary for 
a feasible project. A feasible project is a project which expects to 
generate sufficient income to pay operating expenses and debts and 
compensate for depreciation of equipment and facilities for the project 
which is to be funded by RUS. Depreciation must be based on allowable 
depreciation schedules as set forth by the United States Internal 
Revenue Service. Borrowers whose analyses of projects show feasibility 
without grant funds should not apply for grant funding. Borrowers 
requesting pass-through grant funds will base grant funding requests on 
borrower projected income and expense projections for the project, and 
documentation regarding depreciation of the equipment and facilities for 
the project. The Administrator will determine whether the Borrower's 
projections of income, expenses and depreciation are reasonable.
    (e) For projects that project insufficient operating revenue the 
first two years to show feasibility, borrowers should first consider the 
deferral provisions set forth in Sec. 1703.29(b) before determining the 
appropriate level of requested grant funding. Zero-interest loan and 
grant funding will be approved in accordance with paragraph (d) of this 
section based on the option which results in the lowest required grant 
percentage.
    (f) The owner of the pass-through project that receives grant funds 
will be encouraged to commit that the project will be a demonstration 
project.
    (g) Borrowers or project owners must demonstrate the availability 
and commitment of other sources of funding

[[Page 31]]

needed to complete a project in addition to RUS loan and/or grant funds, 
prior to the first advance of RUS funds.
    (h) Feasibility studies and/or technical assistance funded with 
grants under Sec. 1703.18 (b) and (c) must be performed by entities 
which are independent of the Borrower and qualified to provide such 
services. The project owner, if deemed qualified in accordance with this 
paragraph, may furnish a feasibility study under Sec. 1703.18(b). 
Entities furnishing technical assistance under Sec. 1703.18(c), must be 
independent of the project owner. To be deemed qualified, entities 
providing feasibility studies and/or technical assistance must:
    (1) Provide sufficient documentation evidencing their proven 
ability, background and experience to furnish such services; and
    (2) Provide sufficient documentation evidencing their legal 
authority and capacity to furnish such services.

[59 FR 11706, Mar. 14, 1994]



Sec. 1703.20  Ineligible uses of zero-interest loans and grants.

    (a) Zero-interest loans and grants must not be used:
    (1) To fund or assist projects of which any director, officer, 
general manager or significant stockholder of the Borrower, or close 
relative thereof, is an owner, stockholder, partner or director, or 
which would, in the judgment of the Administrator, create a conflict of 
interest or the appearance of a conflict of interest. The Borrower must 
disclose to the Administrator information regarding any conflict of 
interest, potential conflict of interest or any appearance of a conflict 
of interest. The Administrator will determine whether there is a 
conflict of interest or whether any potential conflict of interest or 
appearance of a conflict of interest may adversely affect RUS's 
interests. A Borrower organized as, or consisting of a cooperative, 
widely held mutual corporation, tribal government, municipal power 
corporation, public power district, or a similar widely held 
organization would ordinarily be able to have an ownership interest in 
or manage a project operated on either a for-profit or non-profit basis. 
A Borrower organized as a closely held, for-profit corporation with more 
than 5 percent of its stock held by one legal person, its subsidiary or 
an affiliate, would ordinarily be able to own or manage a project 
operated on a non-profit basis only;
    (2) For any costs incurred on the project:
    (i) Prior to receipt of the Borrower's completed application by RUS 
during an application period unless the Administrator has specifically 
approved such usage in writing; or
    (ii) For site development, the destruction or alteration of 
buildings, or other activities that would adversely affect the 
environment or limit the choice of reasonable alternatives prior to 
satisfying the requirements of Sec. 1703.32;
    (3) By the Borrower to purchase or lease any real property, 
materials, equipment, or services from its subsidiary, an affiliate, or 
significant stockholders, officers, managers or directors of the 
Borrower, or close relatives thereof, where the purchase or lease has 
not been fully disclosed to the Administrator and received the 
Administrator's prior written approval;
    (4) By the recipient of a pass-through-loan or pass-through-grant to 
purchase or lease any real property, materials, equipment, or services 
from the Borrower, its subsidiary, an affiliate of the Borrower, or 
significant stockholders, officers, managers or directors of the 
Borrower, or close relatives thereof, where the purchase or lease has 
not been fully disclosed to the Administrator and received the 
Administrator's prior written approval;
    (5) To pay off or refinance existing indebtedness incurred prior to 
receipt of the Borrower's completed application by RUS or for 
refinancing or repaying a loan made under the Act or a program 
administered by the Administrator;
    (6) For any electric or telephone purpose, as determined by the 
Administrator;
    (7) For the Borrower's electric or telephone operations or for any 
operations affiliated with the Borrower unless the Administrator has 
specifically informed the Borrower in writing that the operations are 
part of the approved purposes;

[[Page 32]]

    (8) To pay the salaries of any employee or owner of the Borrower, 
its subsidiaries, or affiliates. This restriction does not prohibit the 
use of loan or grant funds for printing and similar costs for project 
feasibility studies it has prepared, commissioned or purchased if 
specifically approved by the Administrator. This restriction is subject 
to the operating expense allowance for revolving loan funds set forth in 
Sec. 1703.22 (a)(6);
    (9) To fund feasibility studies and technical assistance as set 
forth in Sec. 1703.18 independently of projects which are funded under 
the zero-interest loan and grant program;
    (10) For community antenna television systems or facilities except 
as provided in Sec. 1703.17(d) of this subpart;
    (11) For proposed projects located in areas covered by the Coastal 
Barrier Resources Act (16 U.S.C. 3501 et seq.); or
    (12) For anything other than an approved purpose.
    (b) [Reserved]

[59 FR 11707, Mar. 14, 1994, as amended at 59 FR 53930, Oct. 27, 1994]



Sec. 1703.21  Limitations on the use of zero-interest loan and grant funds.

    (a) A borrower may not charge interest for the use of the proceeds 
of the zero-interest loan provided under this program; however, it may 
charge reasonable loan servicing charges, reasonable legal fees involved 
in providing the RUS funds to the recipient, and the amount paid for an 
irrevocable letter of credit made payable to RUS and issued on behalf of 
the borrower that guarantees repayment of an RUS zero-interest loan, all 
as determined by the Administrator. A borrower may require the recipient 
of a pass-through-loan to provide and/or obtain adequate security for 
the zero-interest loan funds.
    (b) A borrower must calculate any costs to charge in connection with 
the use of grant funds under this program for the project and must 
temporarily deposit the grant funds in accordance with 7 CFR parts 3015, 
Uniform Federal Assistance Regulations, and 3016, Uniform Administrative 
Requirements for Grants and Cooperative Agreements to State and Local 
Governments, as appropriate. Grant funds will be disbursed to the 
Borrower in accordance with Sec. 1703.61(b).
    (c) A borrower may not make a profit from any zero-interest loan or 
grant provided from the subaccount, with the exception of the $500 
interest income exclusion in paragraph (d) of this section.
    (d) The Borrower may not requisition zero-interest loan funds unless 
those funds are deposited into the Borrower's RUS construction fund 
trustee account. The Borrower will be required to set up a separate 
Federally insured account called the Rural Economic Development Account, 
if loan funds are not expected to be disbursed within two months after 
receipt from RUS. All interest earned on temporarily deposited zero-
interest loan funds in excess of $500 per 12-month period must be used 
for approved purposes or returned to RUS. Interest earned in excess of 
$500 per 12 month period and returned to RUS will not be used to reduce 
the Borrower's principal indebtedness. Grant funds will be disbursed by 
RUS in accordance with 7 CFR parts 3015 and 3016, and Sec. 1703.61(b).
    (e) The borrower may not condition the receipt of the proceeds of a 
zero-interest loan or grant under this subpart with the requirement that 
the recipient take electric or telephone service from the borrower.

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11708, Mar. 14, 1994]



Sec. 1703.22  Revolving loan program.

    Grant funds under this section will be provided only to RUS 
Borrowers on a non pass-through basis. RUS Borrowers will, in turn, 
provide loans to foster rural economic development in accordance with 
this subpart and the specific requirements of this section.
    (a) General. Grant funds disbursed to RUS Borrowers to establish 
revolving loan programs under this section are subject to the following 
requirements:
    (1) The uses, restrictions and limitations for zero-interest loans 
set forth in Secs. 1703.17, 1703.20 and 1703.21 respectively;
    (2) Loans made by RUS Borrowers initially lending grant funds 
disbursed by RUS are limited to types of projects specified in 
Sec. 1703.18 (d), (e), (f), (g) and

[[Page 33]]

(h). Loans may also be made for feasibility studies and technical 
assistance in accordance with Sec. 1703.18 (b) and (c), respectively, 
but only for those types of projects specified in this paragraph (a)(2). 
Loans made from repayments of the initial loans made by RUS Borrowers 
may be used for any rural economic development purpose in accordance 
with a prior agreement between the Borrower and RUS;
    (3) All other requirements relevant to zero-interest pass-through 
loans and grants outlined in this subpart, except the minimum size of a 
zero-interest loan as specified in Sec. 1703.28(f);
    (4) The initial loans made from the revolving loan fund using the 
grant funds must carry an interest rate of zero percent; however, loans 
made from repayments of the initial loan may carry an interest rate in 
accordance with prior agreement with RUS. In either case, the Borrower 
may charge reasonable loan servicing fees;
    (5) The Borrower will provide a board resolution certifying a 
commitment to provide and maintain additional funding to the revolving 
loan fund in an amount no less than 20 percent of the RUS grant 
approved. The Borrower will provide documentation that the additional 
funding has been deposited in the appropriate account in 
Sec. 1703.22(h)(1) prior to grant disbursement. This requirement does 
not pertain to supplemental funding requirements for individual projects 
as set forth in Sec. 1703.23. Additional funding required in this 
paragraph pertains only to borrowers establishing revolving loan funds, 
with the following provisions:
    (i) Use of additional funding is subject to requirements set forth 
in paragraph (b) of this section and with RUS concurrence;
    (ii) Individual projects funded under this section are subject to 
supplemental funds requirements set forth in Sec. 1703.23;
    (iii) At the Borrower's option with RUS concurrence, all or a 
portion of the additional funding may be used to assist project owners 
receiving funding from Federal grant funds under this section to meet 
their supplemental funding requirements set forth in Sec. 1703.23 of 
this subpart. Such additional funding will be deemed as Federal funds 
and accounted for in accordance with paragraph (h)(1)(i)(A) of this 
section for electric borrowers or paragraph (h)(1)(ii)(A) of this 
section for telephone borrowers, as appropriate;
    (iv) At the Borrower's option, all or a portion of the additional 
funding may be retained as non-Federal funds, for any rural economic 
development project(s), subject to paragraph (g) of this section and RUS 
concurrence. Additional funding committed as non-Federal will be 
accounted for in accordance with paragraph (h)(1)(i)(E) of this section 
for electric borrowers or paragraph (h)(1)(ii)(E) of this section for 
telephone borrowers, as appropriate;
    (6) Grant funds will only be provided to an RUS Borrower for a 
revolving loan program when a proposed budget submitted to RUS 
demonstrates and the Borrower agrees in writing that no more than 10 
percent of grant funds received are used to cover operating expenses of 
the revolving loan program. Operating expenses include the costs of 
administering the revolving loan fund and the provision of technical 
assistance to project owners. All proceeds in excess of those needed to 
cover authorized expenses, as described above, must revert to the 
revolving fund and be available for re-lending for eligible projects. 
Budgets which reflect expenses incurred in operating the fund must be 
submitted to RUS annually;
    (7) The Borrower may charge reasonable loan servicing charges. For 
purposes of this section, loan servicing charges must not exceed an 
amount equal to the sum of one percent per year of the outstanding 
principal on the first day of each year on each project owner's zero-
interest loan which is made from the RUS grant proceeds;
    (8) The Borrower will submit documentation indicating that potential 
projects which are eligible for funding have sufficiently progressed in 
the planning stage to allow grant funding approved for a revolving loan 
program to be requisitioned by the Borrower, disbursed by RUS, and 
loaned to recipients within 3 years of the date of grant approval by 
RUS. Grant funds that have not been requisitioned within 3

[[Page 34]]

years will be cancelled, unless the Administrator has approved an 
extension in writing. Grant funds will be disbursed by RUS in accordance 
with paragraphs (d) and (g) of this section;
    (9) If the revolving loan program is terminated, further 
disbursement of grant funds will be cancelled. Repayments of loans made 
using grant funds which have been disbursed will be used in accordance 
with the Borrower's rural development plan;
    (10) Payment of creditors which provide interim or construction 
financing to a viable project for eligible purposes as set forth in 
Sec. 1703.18 of this subpart may be authorized. Refinancing for the sole 
purpose of replacing higher interest conventional financing with zero-
interest revolving loan funds is not authorized.
    (b) The Borrower's rural development plan. RUS requires that the 
revolving loan program be administered in accordance with a rural 
development plan, developed by the Borrower and approved by RUS. The 
plan must be of sufficient detail to provide RUS with a complete 
understanding of what the Borrower intends to accomplish by 
administering a revolving loan program. The rural development plan will 
provide the mechanics of how the revolving loan funds will be disbursed 
to the project owner. The rural development plan must outline the 
Borrower's plans for administering the revolving loan program, during 
the initial period when RUS grant funds are lent by the Borrower and 
after the revolving fund becomes non-Federal in accordance with 
paragraph (g) of this section. The plan must outline the following:
    (1) Specific objectives for the revolving loan program, revolving 
loan operating procedures, lending parameters, maximum and minimum loan 
amount, and types of projects to be funded;
    (2) Documentation of Borrower's coordination of lending activities 
with other local entities that provide financing for rural economic 
development projects. Such documentation will indicate that the Borrower 
will not compete with, but supplement other sources of legal financing;
    (3) Eligibility criteria if other than outlined in this subpart;
    (4) The application process and method of disposition of the funds 
to the project owner; and
    (5) A procedure for monitoring the project owner's accomplishments 
and reporting requirements by the project owner's management.
    (c) The Borrower's scope of work. Borrowers applying for grant 
funding under this section must submit a scope of work to RUS. 
Applications for grants under this section will be evaluated for funding 
based on the Borrower's rural development plan in paragraph (b) of this 
section and the scope of work. The scope of work must contain the 
following items:
    (1) Documented need for grant funds. The Borrower must identify a 
sufficient number of rural development projects of the type specified in 
Sec. 1703.18 (d), (e), (f), (g), and (h) which are currently being 
planned requiring zero-interest loans equal to the amount of grant 
assistance requested from RUS. These projects may be supported with a 
community facilities plan, or other development plan, prepared by local 
community leaders in cooperation with the Borrower. For each project, 
the Borrower will submit information required under Sec. 1703.34;
    (2) Documented authority and ability of the Borrower to administer a 
revolving rural development loan program in accordance with the 
provisions of this subpart. The Borrower must provide a complete listing 
of all personnel responsible for administering this program along with a 
statement of their qualifications and experience;
    (3) Documented ability of the Borrower to commit financial resources 
under the control of the Borrower to assist in the establishment of a 
rural development revolving loan program. This should include a 
statement of the sources of funding for the administration of the 
Borrower's operations, as well as financial and technical assistance for 
projects;
    (4) Documentation that the Borrower has secured commitments of 
significant financial support from public agencies and/or private 
organizations for supplemental funding to support a rural development 
loan program;

[[Page 35]]

    (5) A list of proposed fees and other charges the Borrower will 
assess the projects it funds; and
    (6) The Borrower's rural development policy for non-Federal funds in 
accordance with paragraphs (b) and (g) of this section.
    (d) Grant processing and approval. Applications for grants to 
establish revolving loan funds will be reviewed in accordance with 
Secs. 1703.45 and 1703.46, and with the Borrower's rural development 
plan and scope of work outlined in paragraphs (b) and (c) of this 
section. Grants will be processed in accordance with Secs. 1703.58 and 
1703.59.
    (e) Disbursement of grant funds. Borrowers are not authorized to 
commence projects to be funded under this section until those projects 
have been submitted for authorization in accordance with paragraph 
(c)(1) of this section, or the projects have been submitted for 
authorization subsequent to grant approval in accordance with paragraph 
(e)(2) of this section. RUS grant funds will be disbursed on a 
reimbursement basis. However, upon written justification by borrowers 
and approval by the Administrator, borrowers unable to fund projects 
under reimbursement provisions, for financial or other extraordinary 
reasons, may receive grant funds under the special disbursement method 
by submitting unpaid invoices from project owners, and grant funds will 
be disbursed to borrowers and passed directly to project owners. In 
either case, RUS grant funds will be disbursed in accordance with the 
provisions of 7 CFR Part 3015, Uniform Federal Assistance Regulations, 
the applicable requirements of this subpart, the administrative 
provisions outlined in paragraph (g) of this section, and the following 
requirements:
    (1) Only projects authorized by RUS in accordance with paragraphs 
(c)(1) and (e)(2) of this section, for which adequate documentation is 
submitted, including receipts for expenditures under the reimbursement 
method or unpaid invoices under the special disbursement method, as 
applicable, and certification of approved purposes, will be considered 
for disbursement;
    (2) A project which was not submitted prior to grant approval in 
accordance with paragraph (c)(1) of this section, may be authorized for 
funding subsequent to grant approval. A project which is authorized for 
funding under this paragraph will be considered for disbursement at the 
first allowable time period after project authorization in accordance 
with paragraphs (e)(3) and (e)(4) of this section. Project authorization 
after grant approval is subject to the following requirements:
    (i) The project meets the specific objectives for the Borrower's 
revolving loan program as outlined in paragraph (b)(1) of this section;
    (ii) The Borrower presents evidence that the project requested for 
authorization can be funded prior to projects which were authorized 
prior to grant approval in accordance with paragraph (b)(1) of this 
section; and
    (iii) RUS approves the project for funding in accordance with 
Sec. 1703.34;
    (3) Under the reimbursement method, grant funds requisitioned for 
individual projects in increments of less than $100,000, or less than 25 
percent of the amount approved for the revolving loan fund, whichever is 
less, may be disbursed semi-annually. Submission periods for 
requisitioning grant funds on a semi-annual disbursement basis will be 
14 days commencing from the 6-month anniversary date of grant approval. 
Grant funds under the special disbursement method will be requisitioned 
in accordance with the applicable provision in paragraph (e)(4) of this 
section;
    (4) For the reimbursement method, grant funds requisitioned for 
individual projects in increments of $100,000 or greater, or at least 25 
percent of the amount approved for the revolving loan fund, whichever is 
less, may be submitted for disbursement at any time. Under the special 
disbursement method, grant funds of less than $100,000 may be 
requisitioned for disbursement at any time. However, the minimum 
requisition will be $50,000, or the total grant award, whichever is 
less.
    (f) Reporting requirements. (1) The Borrower must maintain financial 
management systems and retain financial records in accordance with 7 CFR 
part 3015, Uniform Federal Assistance Regulations.
    (2) Borrower records must include an accurate accounting and source 
documentation to support each transaction

[[Page 36]]

involving the revolving loan fund. Records are subject to a rural 
economic loan review as set forth in Sec. 1703.66(g).
    (3) SF-269, ``Financial Status Report,'' and a revolving loan 
program activity report will be required of all Borrowers on an annual 
basis. Reports will be submitted no later than 90 days after December 31 
of each year. The program activity report will contain an aggregate list 
of projects funded, the amount funded for each project, the project 
repayment schedule, a brief description of each project, the project 
objectives, whether or not the project has been completed, and the 
projected number of jobs created or saved by each project. Reports under 
this paragraph will be required until all grant funds have been 
disbursed and projects completed.
    (4) A performance report will be required for each project funded on 
an annual basis. Performance reports will be due no later than 90 days 
after December 31 of each year. Performance reports will be submitted 
until one year after project completion. Project performance reports 
will contain the following:
    (i) A comparison of actual accomplishments during the reporting 
period to the objectives established for the project and, if not 
attained, reasons why established objectives were not met;
    (ii) Problems, delays, or adverse conditions which will materially 
affect attainment of planned project objectives, prevent the meeting of 
time schedules or objectives, or preclude the attainment of project work 
elements during established time periods. This disclosure shall be 
accompanied by a statement of the action taken or contemplated to 
resolve the situation;
    (iii) Projected accomplishments for the next reporting period, if 
applicable; and
    (iv) Status of compliance with any special conditions for project 
funding, if applicable.
    (5) Borrowers must report and remit interest earned on advances of 
grant funds deposited in interest accounts to RUS on a quarterly basis 
in accordance with 7 CFR part 3015, Uniform Federal Assistance 
Regulations.
    (g) Non-Federal funds. Once all RUS-derived grant funds have been 
utilized by the Borrower to fund rural development projects according to 
the provisions of this section and the applicable provisions of this 
subpart, loans made by the Borrower thereafter from repayments to the 
revolving loan fund shall not be considered as being derived from 
Federal funds and the requirements of these regulations will not be 
imposed on the Borrower or project owners. However, the Borrower will, 
as a condition for receiving a grant under this section, agree to the 
following conditions:
    (1) To maintain a revolving loan account to promote rural economic 
development in accordance with the Borrower's rural development plan for 
non-Federal funds submitted in accordance with paragraph (b) of this 
section;
    (2) To maintain the additional funding supplied by the Borrower in 
accordance with paragraph (a)(5) of this section and interest earnings 
within the revolving loan fund;
    (3) Approval may be granted by the Administrator to terminate the 
revolving loan program, or modify the requirements set forth in 
paragraphs (g)(1) and (g)(2) of this section, upon written request and 
justification by the Borrower. Should the Borrower terminate the 
revolving loan program without obtaining approval by the RUS 
Administrator, the Borrower will return the amount of the original grant 
to RUS.
    (h) Administrative provisions. The requirements of this paragraph 
set forth the procedures for accounting, requisitioning and disbursement 
of Federal funds, those funds initially disbursed for projects which may 
be funded in accordance with an approved rural development plan and 
scope of work submitted by the Borrower. Disbursement of grant funds 
will be approved on a reimbursement basis after the grant agreement is 
executed by RUS and the Borrower, the applicable provisions of this 
subpart are met, subject to disbursement restrictions in paragraph (e) 
of this section, and the requirements in paragraphs (h) (1) through (3) 
of this section.
    (1) Accounting requirements. Accounting will be performed in 
accordance

[[Page 37]]

with 7 CFR part 1767, Accounting Requirements for RUS Electric 
Borrowers, or 7 CFR part 1770, Accounting Requirements for RUS Telephone 
Borrowers, as appropriate. The Borrower will maintain accounts for the 
revolving funds as follows:
    (i) RUS electric Borrowers. (A) A general ledger Account 131.13, 
``Cash-General--Economic Development Grant Funds.'' The Borrower will 
debit this account in an amount equal to the amount of the grant 
received from RUS, any additional funds deemed Federal from the Borrower 
as required by paragraph (a)(5)(iii) of this section, and all other 
funds advanced for the project, regardless of the source, if controlled 
by the Borrower. The Borrower will credit this account for all 
expenditures made with Federal funds on behalf of the rural development 
project.
    (B) A general ledger Account 124.1, ``Other Investments--Federal 
Economic Development Loans.'' The Borrower will debit this account in 
the amount of Federal funds the Borrower advances to non-associated 
organizations for authorized rural economic development projects. For 
each debit in this account, a corresponding credit will be made in 
Account 131.13 in paragraph (h)(1)(i)(A) of this section. This account 
will be credited with repayments of loans made with Federal economic 
development grant funds.
    (C) A general ledger Account 123.3, ``Investment in Associated 
Companies--Federal Economic Development Loans.'' The Borrower will debit 
this account in the amount of Federal funds the Borrower advances to 
associated organizations for authorized rural economic development 
projects. For each debit in this account, a corresponding credit will be 
made in Account 131.13 in paragraph (h)(1)(i)(A) of this section. This 
account will be credited with repayments of loans made with Federal 
economic development grant funds.
    (D) Account 421, ``Miscellaneous Non-operating Income.'' The 
Borrower will credit this account in the amount of grant funds disbursed 
by RUS resulting from an approved requisition request in accordance with 
paragraph (h)(2) of this section.
    (E) A general ledger Account 131.14, ``Cash-General--Economic 
Development Non-Federal Revolving Funds.'' The Borrower will debit this 
account with any additional funds deemed non-Federal from the borrower 
as required by paragraph (a)(5)(iv) of this section, cash received from 
the repayment of loans made from accounts in paragraphs (h)(1)(i)(B), 
(h)(1)(i)(C), (h)(1)(i)(F), and (h)(1)(i)(G) of this section. The 
Borrower will credit this account to reflect loans made for rural 
economic development projects from non-Federal funds from accounts 
specified in paragraphs (h)(1)(i)(F) and (h)(1)(i)(G) of this section.
    (F) A general ledger Account 124.2, ``Other Investments--Non-Federal 
Economic Development Loans.'' The Borrower will debit this account in 
the amount of non-Federal funds the Borrower advances to non-associated 
organizations for authorized rural economic development projects. For 
each debit in this account, a corresponding credit will be made in 
Account 131.14, in paragraph (h)(1)(i)(E) of this section. This account 
will be credited with repayments of loans made from non-Federal economic 
development funds.
    (G) A general ledger Account 123.4, ``Investment in Associated 
Companies--Non-Federal Economic Development Loans.'' The Borrower will 
debit this account in the amount of non-Federal funds the Borrower 
advances to associated organizations for authorized rural economic 
development projects. For each debit in this account, a corresponding 
credit will be made in Account 131.14, in paragraph (h)(1)(i)(E) of this 
section. This account will be credited with repayments of loans made 
from non-Federal economic development funds.
    (H) A general ledger Account 171 ``Interest and Dividends 
Receivable.'' The Borrower will debit this account with the amount of 
interest earned on the revolving loan fund. The Borrower will credit 
this account and debit the appropriate cash account when the cash is 
received.
    (I) A general ledger Account 419, ``Interest and Dividend Income.'' 
The Borrower will credit this account with the amount of interest earned 
on the revolving loan fund.
    (ii) RUS telephone Borrowers. (A) A general ledger Account 1130.4, 
``Cash--

[[Page 38]]

General Fund--Economic Development Grant Funds (Class A Companies)'', or 
Account 1120.14, ``Cash-General Fund--Economic Development Grant Funds 
(Class B Companies).'' The Borrower will debit the appropriate account 
in an amount equal to the amount of the grant received from RUS, any 
additional funds deemed Federal from the Borrower required by paragraph 
(a)(5)(iii) of this section, and all other funds advanced for the 
project, regardless of the source, if controlled by the Borrower. The 
Borrower will credit the appropriate account for all expenditures made 
with Federal funds on behalf of the rural development project.
    (B) A general ledger Account 1402.4, ``Other Investments in 
Nonaffiliated Companies--Federal Economic Development Grant Loans.'' The 
Borrower will debit this account in the amount of Federal funds the 
Borrower advances to nonaffiliated organizations for authorized rural 
economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(A) of this section. This account will be credited 
with repayments of loans made from Federal economic development grant 
funds.
    (C) A general ledger Account 1401.1, ``Other Investments in 
Affiliated Companies--Federal Economic Development Grant Loans.'' The 
Borrower will debit this account in the amount of Federal funds the 
Borrower advances to affiliated organizations for authorized rural 
economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(A) of this section. This account will be credited 
with repayments of loans made from Federal economic development grant 
funds.
    (D) Account 7360, ``Other Non-operating Income (Class A 
Companies)'', or Account 7300, Non-operating Income and Expense (Class B 
Companies), as appropriate. The Borrower will credit these accounts, as 
appropriate, in the amount of grant funds disbursed by RUS resulting 
from an approved requisition request in accordance with paragraph (h)(2) 
of this section.
    (E) A general ledger Account 1130.5, ``Cash--General Fund--Economic 
Development Non-Federal Revolving Funds (Class A Companies)'', or 
Account 1120.15, ``Cash--General Fund--Economic Development Non-Federal 
Revolving Funds (Class B Companies)'', as appropriate. The Borrower will 
debit the appropriate account with any additional funds deemed non-
Federal from the Borrower as required by paragraph (a)(5) of this 
section, cash received from the repayment of loans made from accounts in 
paragraphs (h)(1)(ii)(B), (h)(1)(ii)(C), (h)(1)(ii)(F), and 
(h)(1)(ii)(G) of this section. The Borrower will credit the appropriate 
account to reflect loans made for rural economic development projects 
from non-Federal funds from accounts specified in paragraphs 
(h)(1)(ii)(F) and (h)(1)(ii)(G) of this section.
    (F) A general ledger Account 1402.5, ``Other Investments in 
Nonaffiliated Companies-Non-Federal Economic Development Grant Loans.'' 
The Borrower will debit this account in the amount of non-Federal funds 
the Borrower advances to nonaffiliated organizations for authorized 
rural economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(E) of this section. This account will be credited 
with repayments of loans made from non-Federal economic development 
funds.
    (G) A general ledger Account 1401.2, ``Other Investments in 
Affiliated Companies--Non-Federal Economic Development Grant Loans.'' 
The Borrower will debit this account in the amount of non-Federal funds 
the Borrower advances to affiliated organizations for authorized rural 
economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(E) of this section. This account will be credited 
with repayments of loans made from non-Federal economic development 
funds.
    (H) A general ledger Account 1210, ``Interest and Dividends 
Receivable.'' The Borrower will debit this account with the amount of 
interest earned on the revolving fund loan. The borrower will credit 
this account and debit the appropriate cash account when the cash is 
received.

[[Page 39]]

    (I) A general ledger Account 7320, ``Interest Income (Class A 
Companies)'', or Account 7300.2, ``Interest Income (Class B 
Companies)'', as appropriate. The Borrower will credit this account with 
the amount of interest earned on the revolving fund loans.
    (2) Requisition requirements. Grant funds may be requisitioned by 
RUS Borrowers in accordance with disbursement requirements in paragraph 
(e) of this section. Borrowers will be fully reimbursed for funds 
expended for approved projects funded. For each completed project, the 
Borrower will submit the following for reimbursement:
    (i) Standard Form 270, ``Request for Advance of Reimbursement'';
    (ii) Copies of cancelled checks and other verifiable source records 
supporting the transactions; and
    (iii) Certification and evidence that the project costs to be 
reimbursed are for a project which has been authorized by RUS and are 
authorized costs for that project.
    (3) RUS review. Requisition requests will be evaluated for 
compliance with loan purposes previously submitted by the Borrower for 
project authorization in accordance with paragraphs (c)(1) or (e)(2) of 
this section, compliance with the Borrower's rural development plan, 
accounting documentation submitted in paragraph (h)(1) of this section, 
and the cancelled checks and source records submitted.

[59 FR 11708, Mar. 14, 1994, as amended at 59 FR 38341, July 28, 1994; 
59 FR 53931, Oct. 27, 1994]



Sec. 1703.23  Supplemental funds requirements for zero-interest loans and grants.

    The Administrator will not select an application unless the project 
will receive supplemental funds in an amount at least equal to 20 
percent of the RUS zero-interest loan and grant to be provided to the 
project, as determined by the Administrator. Supplemental funds as used 
in this section may come from the project owner in the form of equity 
funds, private sources, state and local government sources, other 
Federal Government sources, the borrower or other sources. Only 
supplemental funds that will be provided to the project after the date 
RUS receives the borrower's completed application may be used to satisfy 
this requirement. Supplemental financing must be verified and committed 
to the project in form and substance satisfactory to the Administrator 
before RUS will advance any funds.



Sec. 1703.24  [Reserved]



Sec. 1703.25  Significance of RUS financing to the total project cost.

    Selection of applications will be based on a preference for 
applications requesting RUS financing which will be at least equal to 5 
percent of the total project costs, as determined by the Administrator. 
Projects costs will be based on the amount that would be spent over the 
first 2 years after the first advance of RUS funds for the component or 
phase of the undertaking for which the borrower is requesting RUS funds, 
as determined by the Administrator. The Administrator may determine that 
a component or phase, especially actions necessary to initiate a larger 
project, constitute a distinct project for the purposes of this section.



Sec. 1703.26  [Reserved]



Sec. 1703.27  Owner's equity in the project.

    The Administrator may require, as a condition to RUS financing, that 
the owner(s) of the project invest equity capital if determined to be 
financially necessary, based on an RUS financial analysis and sound 
lending practices.



Sec. 1703.28  Maximum and minimum sizes of a zero-interest loan or grant application.

    (a) The maximum size of an application that will be considered for 
funding under this subpart during a fiscal year will be 3 percent of the 
projected total amount available for the zero-interest loans or grants 
under section 313 of the Act during that fiscal year, rounded to the 
nearest $10,000. This determination will be made by the Administrator 
for each fiscal year.
    (b) Regardless of the projected total amount that will be available, 
the maximum size may not be lower than $200,000.
    (c) The projected total amount available during a particular fiscal 
year is calculated as the sum of the projected

[[Page 40]]

amount that will be credited to the subaccount during a particular 
fiscal year from the interest differential calculation based on the RUS 
borrowers' cushion of credit levels at the time the Administrator makes 
the determination and any amounts appropriated for that fiscal year for 
zero-interest loans or grants made under section 313 of the Act.
    (d) After the Administrator has determined the maximum size for a 
fiscal year, a notice of the calculation and amount will be published 
promptly in the Federal Register.Thereafter, the maximum size will 
remain in effect until the Administrator has published the maximum size 
for the next fiscal year.
    (e) All unselected applications on file at RUS, including both loan 
and grant applications, from the same borrower for the same project will 
be considered to be one application in determining that the maximum size 
of the application is in accordance with this section.
    (f) The minimum size of an application for assistance under this 
subpart that will be considered for funding is $10,000.

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11711, Mar. 14, 1994]



Sec. 1703.29  Terms of zero-interest loan repayment.

    (a) The Administrator will determine the terms and repayment 
schedule of the zero-interest loan to the borrower based on the nature 
of the project and approved purposes. Ordinarily, the total term of the 
zero-interest loan, including any principal deferment period, will not 
exceed 10 years. The repayment terms the borrower sets on a pass-
through-loan must equal the terms of the loan provided to the borrower 
unless a written request from the borrower to provide a longer deferment 
period, shorter total term of the loan, or other benefits is approved by 
the Administrator.
    (b) The Administrator has the discretion to defer the repayment of 
principal up to two years, based on an analysis of the feasibility of 
the project. Ordinarily, if the Administrator considers the project to 
be a business expansion or going concern, the first repayment of 
principal will not begin until one year after the date of the RUS note. 
Ordinarily, if the Administrator considers the project to be a start-up 
project, the first repayment of principal will not begin until 2 years 
after the date of the RUS note. Loans must be repaid under terms set 
forth in RUS's legal documents.
    (c) Unless the Administrator has specifically approved otherwise, 
the borrower will be required to repay the RUS zero-interest loan in 
full at such time as a pass-through-loan has been fully repaid to the 
borrower. If the borrower uses the proceeds of the RUS zero-interest 
loan to provide pass-through-loans to more than one entity, this 
requirement will only apply to that portion of the zero-interest loan 
associated with the loan that has been fully repaid to the borrower.
    (d) If the Administrator determines that, as a result of state law, 
court rulings, or regulatory commission decisions, it is necessary to 
ensure that the borrower will repay the RUS zero-interest loan, the 
borrower may be required to provide an irrevocable letter of credit, or 
another form of guarantee satisfactory to the Administrator. The letter 
of credit or other guarantee is to be made payable to RUS. The letter of 
credit or other guarantee may not be secured by any assets under a RUS 
and/or Rural Telephone Bank mortgage and must be in form and substance 
satisfactory to the Administrator. RUS must receive the letter of credit 
or other guarantee prior to the advance of any zero-interest loan funds.



Sec. 1703.30  Approval of agreements.

    (a) The Administrator must approve any agreements between the 
borrower and the owner(s) of the project, those undertaking the project, 
or any intermediary that will re-lend or transfer the proceeds of the 
RUS funds, that the Administrator deems necessary.
    (b) Borrowers must obtain the Administrator's approval of any loan, 
grant or security agreement, mortgage or note between the borrower and 
the owner(s) of the project, those undertaking the project or any 
intermediary that will re-lend or transfer the proceeds of the RUS 
funds, prior to the advance of RUS zero-interest loan or

[[Page 41]]

grant funds to the borrower. The borrower must receive the 
Administrator's approval of the final draft version of the documents 
prior to their execution.
    (c) Borrowers must obtain the Administrator's written approval prior 
to revising or amending any loan, grant or security agreement, mortgage 
or note that has been reviewed and approved by the Administrator 
pursuant to paragraph (b) of this section. Additionally, the borrower 
must obtain the Administrator's written approval prior to executing, 
revising or amending any other agreement, in connection with the 
project, between the borrower and the owner(s) of the project, those 
undertaking the project or any intermediary that will re-lend or 
transfer the proceeds of the RUS funds.
    (d) The borrower and the owner(s) of the project, or those 
undertaking the project, should make agreements and prepare documents in 
accordance with all applicable laws.

(Approved by the Office of Management and Budget under control number 
0572-0090)

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11711, Mar. 14, 1994; 
59 FR 38341, July 28, 1994]



Sec. 1703.31  Transfer of employment or business.

    The project must not result primarily in the transfer of any 
existing employment or business activity from one area to another.



Sec. 1703.32  Environmental requirements.

    (a) Prospective recipients of zero-interest loans or grants should 
consider the potential environmental impact of their proposed projects 
at the earliest planning stage and plan development in a manner that 
reduces, to the extent practicable, the potential to affect the quality 
of the human environment adversely.
    (b) Application for zero-interest loans or grants for project 
feasibility studies. For a proposal to fund a project feasibility study, 
the only environmental information normally required is whether or not 
the proposed project being studied or analyzed will be located within an 
area protected under the Coastal Barrier Resources Act (16 U.S.C. 3501 
et seq.) Generally, the use of Federal funds to promote development on 
coastal barriers is strictly limited by the Coastal Barriers Resources 
Act.
    (c) Application for zero-interest loans or grants for a project that 
is not considered project feasibility studies. (1) The Administrator 
will review support materials in the application and initiate an 
environmental review process pursuant to 7 CFR part 1794. This process 
will focus on any environmental concerns or problems that are associated 
with the project.
    (2) The level and scope of the environmental review will be 
determined in accordance with the National Environmental Policy Act of 
1969 (NEPA), as amended, (42 U.S.C. 4321 et seq.), the Council on 
Environmental Policy for Implementing the Procedural Provisions of NEPA 
(40 CFR parts 1500--1508), RUS's environmental policies and procedures 
(7 CFR part 1794) and other relevant Federal environmental laws, 
regulations and Executive Orders.
    (3) Activity related to the project that will adversely affect the 
environment or limit the choice of reasonable alternatives must not be 
undertaken prior to completion of RUS's environmental review process.



Sec. 1703.33  Other considerations.

    (a) Equal opportunity and nondiscrimination requirements. All zero-
interest loans and grants made under this subpart are subject to the 
nondiscrimination provisions of title VI of the Civil Rights Act of 
1964, as amended, (42 U.S.C. 1971 et seq., 1975a et seq., 2000a et seq.; 
7 CFR part 15); section 504 of the Rehabilitation Act of 1973, as 
amended, (29 U.S.C. 701 et seq.; 7 CFR part 15b); the Age Discrimination 
Act of 1975, as amended, (42 U.S.C. 6101 et seq.; 45 CFR part 90); and 
Executive Order 11246, Equal Employment Opportunity, (3 CFR, 1964--1965 
Comp., p. 339) as amended by Executive Order 11375, Amending Executive 
Order 11246, Relating to Equal Employment Opportunity (3 CFR, 1966--1970 
Comp., p. 684).
    (b) Architectural barriers. All facilities financed with RUS zero-
interest loans or grants that are open to the public or in which 
physically handicapped persons may be employed or reside must be 
designed, constructed, and/or altered to be readily accessible to, and 
usable by handicapped persons. Standards for

[[Page 42]]

these facilities must comply with the Architectural Barriers Act of 
1968, as amended, (42 U.S.C. 4151 et seq.) and with the Uniform Federal 
Accessibility Standards (UFAS), (Appendix A to 41 CFR part 101.19, 
subpart 101-19.6).
    (c) Flood hazard area precautions. In accordance with 7 CFR part 
1788, if the project is in an area subject to flooding, flood insurance 
must be provided to the extent available and required under the Flood 
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001 et seq.). 
The insurance must cover, in addition to the buildings, any machinery, 
equipment, fixtures and furnishings contained in the buildings. RUS will 
comply with Executive Order 11988, Floodplain Management (3 CFR, 1977 
Comp., p. 117), and Sec. 1794.41 of this chapter, in considering the 
application for the project. As set forth in Sec. 1794.41 of this 
chapter, public notice is required if a project will be located in a 
floodplain.
    (d) Uniform relocation assistance. Relocations in connection with 
this program are subject to 49 CFR part 24 as referenced by 7 CFR Part 
21, Uniform Relocation Assistance and Real Property Acquisition for 
Federal and Federally Assisted Programs except that the provisions in 
Title III, Uniform Real Property Acquisition Policy, of the Uniform 
Relocation Assistance and Real Property Acquisition Act of 1970, as 
amended, (42 U.S.C. 4601-4655) (the ``Uniform Act'') do not apply to 
this program.
    (e) Drug-free workplace. Grants made under this program are subject 
to the requirements set forth in 7 CFR part 3017, subpart F, Drug-Free 
Workplace Requirements, which implements the Drug-Free Workplace Act of 
1988 (41 U.S.C. 701 et seq.). A borrower requesting a grant will be 
required to certify that it will establish and make a good faith effort 
to maintain a drug-free workplace program.
    (f) Debarment and suspension. The requirements of Executive Order 
12549, Debarment and Suspension (3 CFR, 1986 Comp., p. 189), and 7 CFR 
part 3017, subparts A through E, Governmentwide Debarment and Suspension 
(Nonprocurement), regarding debarment and suspension are applicable to 
this program.
    (g) Intergovernmental review of Federal programs. (1) This program 
is subject to the requirements of Executive Order 12372, 
Intergovernmental Review of Federal Programs (3 CFR, 1982 Comp., p. 197) 
and 7 CFR part 3015, subpart V, Intergovernmental Review of Department 
of Agriculture Programs and Activities, which implements Executive Order 
12372.
    (2) With the exception of zero-interest loans and grants for project 
feasibility studies, proposed projects are subject to the state and 
local government review process set forth in 7 CFR part 3015. Under the 
review process, state and local governments have 60 days to comment on 
the proposed project.
    (3) The Administrator will not give final approval to an application 
until the requirements of 7 CFR part 3015, subpart V, regarding state 
and local government review have been satisfied.
    (h) Restrictions on lobbying. (1) The restrictions and requirements 
imposed by 31 U.S.C. 1352, entitled ``Limitation on Use of Appropriated 
Funds to Influence Certain Federal Contracting and Financial 
Transactions'' and the implementing regulation, 7 CFR part 3018, New 
Restrictions on Lobbying, are applicable to this program.ca 7v15.018
    (2) The regulation that implements this statute requires applicants 
for a zero-interest loan in excess of $150,000 and applicants for a 
grant in excess of $100,000 to file a certification statement regarding 
the use of Federal appropriated funds to lobby the Executive and 
Legislative branches of the Federal Government, and to file a disclosure 
form if engaged in these activities using unappropriated funds.
    (3) In addition, persons that receive contracts or subcontracts in 
excess of $150,000 under a zero-interest loan and persons that receive 
subgrants, contracts or subcontracts in excess of $100,000 under a grant 
are required to file certification statements regarding lobbying the 
Executive and Legislative branches and, if engaged in these activities, 
to file disclosure forms.



Sec. 1703.34  Applications.

    (a) Borrowers may file an application on any official workday during 
the

[[Page 43]]

first 14 days of every month. A borrower must send a copy of the 
application, except for an application that requests a zero-interest 
loan or grant for project feasibility studies, to the state single point 
of contact for state and local governments at the same time it submits 
the application to RUS. As discussed in Sec. 1703.33(g), state and local 
governments have 60 days to review a borrower's proposal before the 
Administrator gives final approval to an application, except a proposal 
for project feasibility studies. The Administrator may establish a 
special application period if determined necessary.
    (b) A completed application will consist of an original and two 
copies of:
    (1) An application form. The application must include a completed 
application form, ``Application for Federal Assistance,'' Standard Form 
424;
    (2) A board resolution. The application must include a board 
resolution that:
    (i) Requests a zero-interest loan and/or grant, including the amount 
of the zero-interest loan and/or the amount of the grant rounded to the 
nearest 1,000 dollars;
    (ii) Includes the total combined deferment and repayment period 
requested for a zero-interest loan if less than 10 years;
    (iii) Includes the board's endorsement of the proposed rural 
economic development project as described in the application;
    (iv) States the proposed project does not violate Secs. 1703.20 and 
1703.21; and discloses any information regarding a conflict of interest, 
potential conflict of interest, or appearance of a conflict of interest 
that would allow the Administrator to make an informed decision;
    (v) Authorizes an official of the borrower to requisition zero-
interest loan or grant funds under this program;
    (vi) For an application for a grant only, authorizes the chief 
executive officer of the borrower to execute and deliver on behalf of 
the borrower the certification Form AD-1049 regarding a drug-free 
workplace program as required in part 3017, subpart F of this title; and
    (vii) Any other matters deemed necessary by the Administrator;
    (3) Miscellaneous Federal forms. The application must include the 
following completed forms:
    (i) Form AD-1047, ``Certification Regarding Debarment, Suspension, 
and Other Responsibility Matters--Primary Covered Transactions,'' as 
required in part 3015, subparts A through E of this title; and
    (ii) Assurance statement or certification statement required under 
the Uniform Act as set forth in Sec. 1703.33(d). For pass-through-loans 
and pass-through-grants, the ultimate recipient of the proceeds of the 
RUS zero-interest loan or grant must sign the assurance statement that 
it will comply with the applicable provisions of the Uniform Act or sign 
a certification that the provisions of the Uniform Act will not apply to 
the rural development project which will be partially financed with the 
proceeds of RUS funds. If the borrower will not provide a pass-through-
loan or pass-through-grant to another entity, the borrower must submit a 
completed assurance statement or certification regarding the applicable 
provisions of the Uniform Act, or have such an assurance statement on 
file at RUS;
    (4) Contingent certifications and disclosures. As determined by the 
type and amount of requested funds, the application must include the 
following completed forms:
    (i) For an application for a zero-interest loan in excess of 
$150,000 or for an application for a grant in excess of $100,000, a 
certification statement, ``Certification Regarding Lobbying,'' and, if 
the borrower is engaged in lobbying activities described under 
Sec. 1703.33(h), a completed disclosure form, ``Disclosure of Lobbying 
Activities''; and
    (ii) For an application for a grant only, a completed certification 
form, ``Certification Regarding Drug-Free Workplace Requirements 
(Grants),'' Form AD-1049 as required in part 3017, subpart F of this 
title;
    (5) Other requirements. The following:
    (i) A section entitled ``Selection Factors'' as set forth in 
Sec. 1703.35;
    (ii) A section entitled ``Project Description'' as set forth in 
Sec. 1703.36;

[[Page 44]]

    (iii) Except for applications for project feasibility studies, a 
section entitled ``Environmental Impact of the Project'' as set forth in 
Sec. 1703.37;
    (iv) Monitoring plan. For a pass-through loan and/or grant, a copy 
of the Borrower's plan to monitor the loan and/or grant and ensure that 
the requirements of this subpart are met; and
    (v) Scope of work. For an application for a loan and/or grant, a 
proposed scope of work for the project.
    (c) The Administrator may request additional information it 
considers relevant from the borrower.
    (d) During the application review process, the borrower may change 
the amount of the zero-interest loan or grant funds requested or other 
portions of its application, only if approved by the Administrator. A 
borrower that changes its request from a grant to a zero-interest loan 
must submit information necessary for the Administrator to evaluate a 
loan proposal as set forth in this subsection, and submit a new board 
resolution requesting the loan.

(The information collection requirements contained in paragraph (b) of 
this section were approved by the Office of Management and Budget under 
control number 0572-0090)

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11711, Mar. 14, 1994; 
59 FR 38341, July 28, 1994]



Sec. 1703.35  Section of the application covering the selection factors.

    The application must contain a section addressing the ``selection 
factors'' consisting of the following:
    (a) ``Nature of the project'' (Sec. 1703.46(g)(1)), which includes 
any information considered appropriate including aspects of the project 
that may not be obvious to an outside observer;
    (b) ``Job creation project'' (Sec. 1703.46(g)(2)), which includes 
any information that is not readily apparent concerning whether the 
project would directly create jobs in rural areas. The number of the 
jobs and the basis for the job projection should be included under 
``Number of long-term jobs'';
    (c) ``Long-term improvements in economic development'' 
(Sec. 1703.46(g)(3)), which addresses the extent to which the project 
will improve the productive potential of the labor force, industrial 
plant, infrastructure, natural resources and institutions by employing 
advanced technology, creating higher-skilled occupations, adding higher 
value to natural resources, creating jobs with higher-career potential, 
or is considered part of a knowledge intensive industry;
    (d) ``Diversifying the rural economy or alleviating 
underemployment'' (Sec. 1703.46(g)(4)), which includes any information 
the borrower desires the Administrator to consider;
    (e) ``Supplemental funds'' (Sec. 1703.46(h)(1)), which includes the 
name of each source and the respective amount of supplemental funds that 
was provided to the project within 6 months of submitting the 
application to RUS, and the amount that will be provided within two 
years of receiving RUS funds. Also indicate the nature and strength of 
the commitments to make these supplemental funds available, when these 
funds are expected to be disbursed, any special terms and conditions 
associated with the commitments, copies of the commitments, and, if 
established, the interest rate, term and deferment period on any loan 
for the project;
    (f) ``Economic conditions and job creation'' (Sec. 1703.46(h)(2)), 
which includes:
    (1) ``Unemployment rates'' (Sec. 1703.46(h)(2)(i)). List the county 
or counties in which the project will be located. It is not necessary to 
include the county, state or national unemployment rates. RUS obtains 
these rates from other Federal agencies;
    (2) ``Per capita personal income'' (Sec. 1703.46(h)(2)(ii)). As with 
``Unemployment rates,'' it is not necessary to include the county, state 
or national per capita personal income levels;
    (3) ``Change in population'' (Sec. 1703.46(h)(2)(iii)). It is not 
necessary to include the county population levels;
    (4) ``Number of long-term jobs'' (Sec. 1703.46(h)(2)(iv)). Include 
the number of long-term jobs that the project will directly create in 
rural areas and the total project cost;
    (5) ``Community-based economic development program'' 
(Sec. 1703.46(h)(2)(v)).

[[Page 45]]

Explain if the project is part of a community-based economic development 
program; and
    (6) ``Plan for improving the marketable skills of people in rural 
areas'' (Sec. 1703.46(h)(2)(vi)). Include information on any written 
plan for the project to provide opportunities or incentives to improve 
the marketable skills of rural residents through training and/or 
education. For projects that consist of providing training or education, 
indicate how it will benefit rural residents;
    (g) ``Location'' (Sec. 1703.46(h)(3)), which indicates whether or 
not the project will be located in a town and, if so, the name of the 
town;
    (h) ``Support for the program--cushion of credit payments'' 
(Sec. 1703.46(h)(4)), which mentions any cushion of credits payments 
made recently in accounts at RUS;
    (i) ``Demonstration project'' (Sec. 1703.46(h)(5)), which includes a 
discussion of any commitments from the owner(s) of the project to be a 
demonstration project and a copy of the written commitment;
    (j) ``Probability of success'' (Sec. 1703.46(h)(6)), which includes:
    (1) ``Owners and management of the project'' (Sec. 1703.46(h)(6)(i)) 
that discusses how the knowledge, experience, education and training of 
the proposed owners and management of the project increases the 
likelihood of long-term success; and
    (2) ``Ultimate recipient's business plan'' (Sec. 1703.46(h)(6)(ii)), 
that references an attached copy of the business plan.
    (i) The plan should include:
    (A) A description of the project;
    (B) A description of the business, if applicable, its products and 
the prospects of the industry;
    (C) What will be produced or accomplished;
    (D) The area to be served;
    (E) Any market research or marketing plan;
    (F) Any operating plan;
    (G) Total project costs and projected use of funds by purpose or 
category;
    (H) A financial plan, including a feasibility study with projected 
balance sheets, income statements and cash flow statements;
    (I) The source of supplemental funds, the nature and strength of 
commitments from other sources of financing, and the equity 
contribution;
    (J) The proposed ownership and management of the project;
    (K) A description of any coordination with a local, regional or 
state development organization; and
    (L) Other relevant information.
    (ii) The scope of the plan should reflect the amount requested in 
the application, the risks involved with developing and operating the 
project, and the overall cost of the project. The plan should describe 
any coordination with a local, regional or state development 
organization.



Sec. 1703.36  Section of the application covering the project description.

    In general, this section should be more detailed the larger the 
project for which the borrower is requesting funding. The section of the 
application on the ``project description'' must include:
    (a) A description of the proposed project including the nature of 
the project, the location of the project, organizations that will be 
involved in the project and the primary beneficiaries of the project. 
Also include in this subsection a statement describing whether the 
borrower has or will have a direct or indirect (through a subsidiary or 
affiliated organization) ownership or similar beneficial interest in the 
facilities to be constructed or in the entity that will occupy or 
utilize these facilities. In addition, explain whether it seems likely 
that the proposed project will be undertaken or completed in the absence 
of an RUS zero-interest loan or grant;
    (b) A separate paragraph entitled ``Uses of RUS Funds and Total 
Project Costs'', that includes a breakdown of the specific uses of RUS 
funds and a breakdown of the specific uses of all funds necessary to 
ensure completion of the project. Project costs should be limited to the 
amount to be spent over the 2-year period after receiving RUS funds;
    (c) For a project that involves the establishment of a new venture, 
such as a rural business incubator or a similar start-up venture, a 
discussion of how the costs of establishing, organizing

[[Page 46]]

and arranging financing for the venture will be paid, how start-up costs 
incurred after the venture has been established will be paid, the 
expected sources of revenue necessary to sustain the project and revenue 
and expense projections for the first 3 years of the project;
    (d) If the borrower will provide a pass-through-loan or pass-
through-grant to another entity, outline the terms and conditions that 
the borrower intends to place on the recipient of the RUS funds 
including the security arrangements and collateral on a zero-interest 
loan. The discussion of proposed security arrangements and collateral 
should reflect the amount requested in the application, the risks 
involved with developing and operating the project, and the overall cost 
of the project;
    (e) For pass-through-loans and pass-through-grants, a description of 
the ultimate recipient, including the form of organization and ownership 
(i.e., corporation, nonprofit corporation, cooperative, partnership, 
sole proprietor), the owner(s) and the chief officers;
    (f) If the project involves construction, a brief description of the 
construction necessary to make the project operational and the 
organization involved with the project that will be responsible for 
building the project facilities or having them built;
    (g) A discussion of the manner in which the borrower intends to 
monitor the zero-interest loan and/or grant proceeds to ensure that they 
are used only for approved purposes; and
    (h) If applicable, a discussion on any potential conflict of 
interest or the appearance of a conflict of interest, a clarification of 
any aspect of the project with respect to the restriction that it must 
not result primarily in the transfer of any existing employment or 
business activity from one area to another or a clarification of any 
aspect of the project with respect to limitations in Secs. 1703.20 and 
1703.21.



Sec. 1703.37  Section of the application covering the environmental impact of the project.

    (a) For a proposed project that only involves internal modifications 
or equipment additions to buildings or other structures (for example; 
relocating interior walls or adding computer facilities) and/or external 
changes or additions to existing buildings, structures or facilities 
requiring physical disturbance of less than 0.4 hectare (0.99 acre), the 
environmental information normally required is:
    (1) A copy of a flood hazard zone map from the Federal Emergency 
Management Agency with the location of the project site marked;
    (2) A statement of whether or not the proposed project will be 
located within an area protected under the Coastal Barrier Resources Act 
(16 U.S.C. 3501 et seq.);
    (3) A description of the internal modifications or equipment 
additions, and the external changes or additions to existing buildings, 
structures or facilities being proposed, the size of the site in 
hectares, and the general nature of the proposed use of the facilities 
once the project is completed, including any hazardous materials to be 
used, created or discharged, any substantial amount of air emissions, 
wastewater discharge, or solid waste that will be generated; and
    (4) A statement of whether the project site contains or is near a 
property listed or eligible for listing in the National Register of 
Historic Places (16 U.S.C. 470).
    (b) For all other proposed projects include:
    (1) A copy of a flood hazard zone map from the Federal Emergency 
Management Agency with the location of the project site marked (42 
U.S.C. 4001 et seq.);
    (2) A diagram showing the general layout of the proposed facilities 
on the project site;
    (3) The size of the project site in hectares;
    (4) A map (preferably a U.S. Geological Survey map) of the project 
area indicating the boundaries of the project;
    (5) A statement of whether or not the project will be located within 
an area protected under the Coastal Barrier Resources Act;
    (6) The amount of property to be cleared, excavated, fenced or 
otherwise disturbed by the project;
    (7) The current land use and zoning of the project site and any 
vegetation on the project site;

[[Page 47]]

    (8) A description of buildings or other major structures, including 
dimensions, to be constructed or modified;
    (9) A statement of whether the presence of wetlands or existing 
agricultural operations are present at the project site (7 CFR part 
1794); whether properties listed or eligible for listing in the National 
Register of Historic Places are on or near the project site; whether 
threatened or endangered species or critical habitat are on or near the 
project site (16 U.S.C. 1531 et seq.);
    (10) The general nature of the proposed use of the facilities once 
the project is completed, including any hazardous materials to be used, 
created or discharged, any substantial amount of air emissions, 
wastewater discharge, or solid waste that will be generated (7 CFR part 
1794); and
    (11) A copy of any environmental review, study, assessment, report 
or other document that has been prepared in connection with obtaining 
permits, approvals or other financing for the proposed project from 
state, local or other Federal agencies. Such material, to the extent 
relevant, may be used to fulfill the requirements of this section.
    (c) The Administrator may request additional environmental 
information in specific cases to satisfy Sec. 1703.32.



Secs. 1703.38-1703.44  [Reserved]



Sec. 1703.45  Review and analysis of applications.

    Completed applications received at RUS by the 14th day of the month 
will be considered at the first selection date which occurs at least 40 
days after the application was received. Completed applications received 
at RUS after the 14th day of a month will be either be held for the next 
application period or returned to the borrower, at the borrower's 
option. The review period of at least 40 days should allow sufficient 
time for state and local governments to review the proposed projects 
under the intergovernmental review process, as set forth in 7 CFR part 
3015, and to provide sufficient time for the Administrator to fully 
review and analyze these applications. In the event state and local 
government review has not been completed, the Administrator's approval 
may be contingent upon the review being satisfactorily documented. The 
Administrator reserves the discretion to consider applications outside 
the normal selection period.



Sec. 1703.46  Documenting the evaluation and selection of applications for zero-interest loans and grants.

    (a) The Administrator will only consider for selection applications 
that request funds for purposes as set forth in Secs. 1703.17 and 
1703.18 and are not ineligible under Sec. 1703.20, as determined by the 
Administrator. The Administrator will not consider applications that do 
not conform with all of the provisions of this subpart, as determined by 
the Administrator. The Administrator will make the determination of all 
numbers, dollars, levels and rates, as well as the nature, costs, 
location and other characteristics of the proposed project, to calculate 
the number of points assigned to an application for each selection 
factor. Applications for zero-interest loans and grants will be ranked 
separately. In addition, applications requesting less than 5 percent of 
the total project costs as provided in Sec. 1703.25 will be ranked 
separately, subject to Sec. 1703.46(j). The Administrator will select 
applications that receive the greatest number of total points under 
paragraphs (f) and (g) of this section, subject to available funds and 
the provisions of Sec. Sec. 1703.25, 1703.46(i), and 1703.46(j).
    (b) After reviewing an application, the Administrator may decline to 
select an application:
    (1) That would result in a conflict of interest or the appearance of 
a conflict of interest;
    (2) Based on the management and financial situation of the borrower 
applying for the zero-interest loan or grant. In determining the 
borrower's financial situation, the Administrator will consider, among 
other things, the borrower's existing and projected cash flows, equity 
to asset ratios, times interest earned ratios, debt service coverage 
ratios, the level of its investments, the level of its cash and other 
liquid assets, its working capital and repayment of its debts;
    (3) Based on a determination that limitations under state laws will 
lessen the likelihood of repayment of the RUS

[[Page 48]]

zero-interest loan in the event that the borrower does not receive funds 
from the project necessary to cover the RUS zero-interest loan payments;
    (4) Based on the unwillingness of the borrower applying for the 
zero-interest loan or grant to exercise diligence in repaying RUS loans 
or loan guarantees, and comply with RUS's legal documents and 
regulations;
    (5) For an otherwise eligible project when any of the revenues of 
the project are derived from a legalized gambling activity; or
    (6) For any illegal activity.
    (c)(1) The Administrator will first evaluate the application and the 
project with respect to the three factors in this paragraph. The 
Administrator will not select applications requesting funds for projects 
that in the Administrator's best judgment have a low probability of:
    (i) Being a viable business or operation;
    (ii) Being successful as measured by long-term job creation or 
retention; and
    (iii) Producing long-term economic development in rural areas.
    (2) The Administrator's determination in paragraph (c) of this 
section will be based on the ultimate recipient's feasibility studies, 
income statements, cash flow statements, existing and projected balance 
sheets, market research, job creation potential, industry trends, and 
current economic conditions given the nature of the project. Long-term 
job creation and economic development in rural areas as used for this 
factor will mean jobs or economic development that would generally be 
expected to last at least five years.
    (d) The Administrator will not award points under the selection 
factors in paragraphs (f) and (g) of this section for applications that:
    (1) Involve the purchase land that will not be developed or used as 
a site for a project structure during the current phase of the project, 
as determined by the Administrator;
    (2) Will be used for residential purposes or entertainment purposes 
at the residential level, such as residential dwellings and land sites, 
facilities to provide entertainment television, or personal, non-
business related vehicle(s); however, nursing homes providing medical 
care, as determined by the Administrator, will not be considered to be 
residential dwellings;
    (3) Will be used primarily to finance the purchase of an established 
business or operation rather than for economic development in rural 
areas or job creation purposes; or
    (4) Will be used primarily to transfer property or real estate 
between owners without making any improvements or additions that will 
promote economic development in rural areas or job creation.
    (e) After the above determinations, the Administrator will evaluate 
the applications and assign points with respect to the factors in 
paragraph (f) of this section. Applications evaluated under paragraph 
(f) of this section that do not receive at least 35 points or are not 
within the top 75 percent when all applications being assigned points 
are ranked from high to low by total number of points will not be 
evaluated with respect to the factors in paragraph (g) of this section. 
The only exception to this evaluation process would be the 
Administrator's determination that additional applications must be 
selected in accordance with Sec. 1703.14. After such a determination, 
the remaining applications evaluated in paragraph (f) of this section 
will be also evaluated under the factors in paragraph (g) of this 
section.
    (f) Selection factors pertaining to the type of project. The number 
of points assigned for each selection factor will be determined as 
follows:
    (1) Nature of the project. The extent to which the nature of the 
project will promote economic development in rural areas and/or job 
creation--up to 50 points. The determination for this factor will be 
based on whether the project:
    (i) Is considered a start-up, expansion, or enhancement of a 
business, a business incubator, an industrial building or park, 
infrastructure necessary to connect these types of projects to existing 
infrastructure, necessary for the development and operation of these 
types of projects, or, in the Administrator's determination, basic 
infrastructure necessary for successful businesses in the rural economy;

[[Page 49]]

    (ii) Will provide technical assistance to rural businesses or rural 
residents, train or educate rural residents, promote economic 
development in rural areas on a non-profit basis, or provide medical 
care to rural residents; and
    (iii) Will succeed as envisioned in the application, and the 
possibility that the owners or operators may become delinquent on their 
loan payments.
    (2) Job creation project. The extent to which the project will 
directly lead to job creation given the size of the project and the 
amount of RUS funds requested or the project is necessary for job 
creation--up to 25 points. As part of the determination, the 
Administrator will consider whether the project will provide long-term 
employment for rural residents. For industrial parks, industrial 
buildings, and similar projects, the Administrator will consider whether 
the application includes information on businesses or tenants that will 
occupy the building(s) and the nature and extent of the commitments to 
use the buildings in determining the number of points to award. The 
Administrator will also consider the probability that the project will 
not result in job creation as envisioned in the application in terms of 
both the number of jobs and the duration of the jobs.
    (3) Long-term improvements in economic development. Projects that 
lead directly to an increase in long-term productivity and per capita 
income in rural areas--up to 25 points. The Administrator's 
determination will be based on the extent to which the project will 
improve the productive potential of the labor force, industrial plant, 
natural resources, institutions, and infrastructure necessary for 
economic development and job creation by utilizing advanced technology, 
creating higher skilled occupations, creating jobs with higher career 
potential or jobs that are considered part to be of a knowledge 
intensive industry, or adding higher value to natural resources. In 
considering infrastructure projects, the Administrator will award points 
only for the facilities, such as water and sewer facilities, that will 
serve and are necessary for commercial activities described under this 
factor.
    (4) Diversifying the rural economy or alleviating underemployment. 
Projects that in the judgement of the Administrator will diversify the 
rural economic base or assist in alleviating chronic underemployment for 
rural residents--10 points. The Administrator will assign points only to 
the extent the application contains convincing evidence pertaining to 
this factor.
    (g) Other selection factors. The number of points assigned for each 
selection factor will be determined as follows:
    (1) Supplemental funds. (i) A determination of the amount of 
supplemental funds provided or to be provided to the project from the 
project owner in the form of equity funds, private sources, state and 
local government sources, other Federal Government sources, the borrower 
or other sources of funds. The supplemental funds used in this 
calculation must be disbursed to the project during the period covering 
six months prior to the receipt of the application by RUS and two years 
after the first advance of RUS funds for the project. Supplemental funds 
must be committed to the project before RUS will advance its funds. RUS 
loan or grant funds from the borrower or RUS loan or grant funds from 
any other organization will not be included in the calculations. The 
Administrator will determine what constitutes expenditures on the 
project. If supplemental funds as a percentage of the RUS zero-interest 
loan and/or grant to be provided to the project is:
    (A) Equal to 20%--10 points, the minimum number of points;
    (B) Equal to 100%--20 points;
    (C) Equal to 500%--30 points, the maximum number of points.
    (ii) Ratios of supplemental funds to RUS funds falling between these 
levels will be assigned points based on a straight-line interpolation 
calculated to the nearest whole point. The result will be rounded based 
on the standard convention of a fraction of 1/2 or greater equals 1.
    (2) Economic conditions and job creation. (i) A comparison will be 
made of the unemployment rate in the county where the project will be 
located to the state and national unemployment rates.

[[Page 50]]

    (A) If the unemployment rate in the county where the project will be 
located exceeds the National unemployment rate by 30 percent or more--10 
points, the maximum number of points awarded.
    (B) If the unemployment rate in the county where the project will be 
located is equal to the National unemployment rate--5 points.
    (C) If the unemployment rate in the county where the project will be 
located is equal to or less than 75 percent of the National unemployment 
rate--0 points.
    (D) If the unemployment rate in the county where the project will be 
located exceeds the state unemployment rate by 30 percent or more--8 
points, the maximum number of points awarded.
    (E) If the unemployment rate in the county where the project will be 
located is equal to the state unemployment rate--4 points.
    (F) If the unemployment rate in the county where the project will be 
located is equal to or less than 75 percent of the state unemployment 
rate--0 points.
    (G) For both the state and national unemployment rate calculations, 
rates falling between the levels will be assigned points based on 
straight-line interpolation calculated to the nearest whole point. The 
result will be rounded based on the standard convention of a fraction of 
1/2 or greater equals 1. If the project will be located in several 
counties, the Administrator will use a simple average (mean) of the 
counties for the comparison. The Administrator will use the average of 
the most recent twelve months of unemployment rates it has obtained from 
the Bureau of Labor Statistics, U.S. Department of Labor or other 
government sources and processed into a suitable format.
    (ii) A comparison will be made of the per capita personal income in 
the county where the project will be located to the state and national 
per capita personal income levels.
    (A) If the per capita personal income level in the county where the 
project will be located is less than or equal to 90 percent of the 
National per capita personal income level--10 points, the maximum number 
of points awarded.
    (B) If the per capita personal income level in the county where the 
project will be located is equal to the National per capita personal 
income level--5 points.
    (C) If the per capita personal income level in the county where the 
project will be located exceeds the National per capita personal income 
level by 15 percent or more--0 points.
    (D) If the per capita personal income level in the county where the 
project will be located is less than or equal to 90 percent of the state 
per capita personal income level--8 points, the maximum number of points 
awarded.
    (E) If the per capita personal income level in the county where the 
project will be located is equal to the state per capita personal income 
level--4 points.
    (F) If the per capita personal income level in the county where the 
project will be located exceeds the state per capita personal income 
level by 15 percent or more--0 points.
    (G) For both the state and national per capita personal income 
calculations, incomes falling between the levels will be assigned points 
based on straight-line interpolation calculated to the nearest whole 
point. The result will be rounded based on the standard convention of a 
fraction of 1/2 or greater equals 1. If the project will be located in 
several counties, the Administrator will use a simple average (mean) of 
the counties for the comparison. The Administrator will use the most 
recent annual per capita personal income levels it has obtained from the 
Bureau of Economic Analysis, U.S. Department of Commerce or other 
government sources and processed into a suitable format.
    (iii) A calculation will be made of the change in total population 
over the most recent two-year period in the county where the project 
will be located. The population change will be the based on the total 
percentage change over the two-year period calculated as follows: the 
population for the most recent year less the population as of two years 
prior to that year with the difference being divided by the population 
as of two years prior to the most recent year.
    (A) If the percentage growth over the two-year period is negative 
2.00 percent

[[Page 51]]

or higher negative amount (a population decline)--8 points, the maximum 
number of points.
    (B) If the percentage growth over the two-year period is equal to 
zero or is positive (population increase)--0 points.
    (C) Population growth percentages falling between these levels will 
be assigned points based on straight-line interpolation calculated to 
the nearest whole point. The result will be rounded based on the 
standard convention of a fraction of 1/2 or greater equals 1. If the 
project will be located in several counties, the Administrator will use 
a simple average (mean) of the counties for the comparison. The 
Administrator will use the most recent population data for all counties 
it has obtained from the Bureau of Economic Analysis, U.S. Department of 
Commerce or other government sources and processed into a suitable 
format. The data provide one population figure for the year.
    (iv) The number of long-term jobs that the project will directly 
create in rural areas.
    (A) For five or more direct long-term jobs per $100,000 of total 
project costs--15 points, the maximum number of points awarded.
    (B) For two direct long-term jobs per $100,000 of total project 
costs--8 points.
    (C) For no direct long-term jobs--0 points.
    (D) Direct, long-term jobs under this factor are jobs that would 
generally be expected to last at least five years. Long-term jobs that 
would provide 6 months per year of equivalent full-time employment will 
be counted under this factor. Long-term jobs that would provide fewer 
months of employment would be given points based on the ratio of the 
number of months per year of employment to 12 months. Jobs of at least 
20 hours per week will be counted under this factor. For construction of 
an industrial building, extension of water and/or sewer lines to a 
building, or a similar project, the Administrator will require a 
reasonable analysis of the number of jobs that will be created before 
awarding points for this factor. The Administrator reserves the right to 
adjust the number based on its analysis of the project, the explanation 
in the application of the businesses that will locate in the 
building(s), and any commitments from businesses to locate in the 
building(s). This factor will not count indirect job creation that 
results from an overall increase in the local economy once the project 
is completed. If total project costs per job falls between these levels, 
points will be assigned based on straight-line interpolation calculated 
to the nearest whole point. The result will be rounded based on the 
standard convention of a fraction of 1/2 or greater equals 1.
    (v) Projects that are part of a local, community-based rural 
economic development program that would improve the local economy and 
enhance the well-being of rural residents--10 points. The determination 
will be based on information submitted by the borrower in its 
application and other information the Administrator considers 
appropriate.
    (vi) Projects that have a written plan to provide opportunities or 
incentives to improve marketable skills for rural residents through 
training and/or education, or projects which consist of providing this 
training and/or education--5 points.
    (3) Location. Projects that will be physically in a rural area--20 
points.
    (4) Support for program--cushion of credit payments. (i) 
Applications submitted by borrowers that have made cushion of credit 
payments as set forth in section 313 of the Act based on the following:
    (A) If the borrower has $300,000 or three percent of total assets, 
whichever is less, in cushion of credit payments--15 points;
    (B) If the borrower has $100,000 or one percent of total assets, 
whichever is less, in cushion of credit payments--10 points;
    (C) If the borrower has at least $5,000 or 0.5 percent of total 
assets, whichever is less, in cushion of credit payments--5 points.
    (ii) The amount of cushion of credit payments will be based on the 
amount at the time the Administrator evaluates the project. The 
calculation of a borrower's total assets will be based on RUS's most 
recently published Statistical Report, Rural Electric Borrowers (RUS 
Informational Publication 201-1) or Statistical Report, Rural Telephone

[[Page 52]]

Borrowers (RUS Informational Publication 300-4). These publications are 
available from the Rural Utilities Service, Administrative Services 
Division, Washington, DC 20250. If the amount of cushion of credits 
payments falls between these levels, points will be based on a straight-
line interpolation calculated to the nearest whole point. The result 
will be rounded based on the standard convention of a fraction of 1/2 or 
greater equals 1.
    (5) Demonstration project. If the application contains a written 
commitment from the owner(s) of the project that the project will be a 
demonstration project--5 points.
    (6) Probability of Success. (i) The knowledge, experience, education 
and training of the proposed owners and management of the project--up to 
10 points.
    (ii) The ultimate recipient's business plan and indications that the 
project will successfully result in economic development in rural areas 
and/or job creation--up to 40 points. The Administrator's evaluation of 
the success of the project will be based on indications in the 
application and RUS's analysis that the project will be a viable 
business or operation, be successful in creating or retaining long-term 
jobs, and be successful in producing economic development that will 
result in long-term benefits to rural areas. The plan should include:
    (A) A description of the project;
    (B) A description of the business, if applicable, its products and 
the prospects of the industry;
    (C) What will be produced or accomplished;
    (D) The area to be served;
    (E) Any market research or marketing plan;
    (F) Any operating plan;
    (G) Total project costs and projected use of funds by purpose or 
category;
    (H) A financial plan, including a feasibility study with projected 
balance sheets, income statements and cash flow statements;
    (I) The source of supplemental funds, the nature and strength of 
commitments from other sources of financing, and the equity 
contribution;
    (J) The proposed ownership and management of the project;
    (K) A description of any coordination with a local, regional or 
state development organization; and
    (L) Other relevant information.
    (iii) The Administrator expects the ultimate recipient's business 
plan referenced in paragraph (g)(6)(ii) of this section to be comparable 
to a plan normally submitted to a bank for long-term financing. In 
evaluating an application for this selection factor, the Administrator 
will consider the probability that the project will result in long-term 
economic development in rural areas and/or job creation as envisioned in 
the application.
    (iv) Quality and completeness of borrower's initial application 
submitted to RUS--up to 10 points. The Administrator's determination 
will be based on the completeness and quality of the application as 
measured by the additional information required from the borrower to 
complete the analysis. For a pass-through loan and grant, the quality of 
the Borrower's plan to monitor the loan and grant and assure that the 
requirements of this subpart and 7 CFR parts 3015 and 3016 are met will 
also be considered.
    (7) Special economic status. The Administrator has the discretion to 
designate special economic status (up to 25 points) to applications 
submitted by borrowers that have documented one or more of the following 
four conditions in one or more county(ies) to be served by the proposed 
project:
    (i) A designation of disaster area by the President of the United 
States which has been so designated within three years prior to applying 
to RUS;
    (ii) The loss, removal, or closing of a major source or sources of 
employment in the last 3 years which causes an increase of 2 percentage 
points or more in the area's most recent unemployment rate compared with 
the period immediately before the dislocation;
    (iii) Chronic or long-term economic deterioration, documented by one 
or both of the following conditions:
    (A) An unemployment level equal to or greater than 1.5 times the 
National average unemployment percentage from 4 out of the last 5 years, 
starting with the most current statistics available. The applicant, when 
calculating

[[Page 53]]

recent years' unemployment percentages, should compare county statistics 
with the National Average unemployment for the corresponding year. 
Statistics on unemployment will be based on figures provided by the U.S. 
Bureau of Labor Statistics. However, the Administrator may, at his 
discretion, also consider verifiable, published State statistical data 
provided by the applicant in situations where county-wide statistical 
data is not representative of local conditions. Such statistical data 
must be part of a recognized database which reflects information for 
other areas within the State;
    (B) A 15% loss of population due to out-migration over the most 
recent 10-year decennial census, based on the U.S. Bureau of the Census 
decennial data;
    (iv) A designation as a Rural Empowerment Zone or Rural Enterprise 
Community by the Empowerment Zone Program authorized by Section 13301 of 
the Omnibus Reconciliation Act of 1993, Public Law 103-66 (107 Stat. 
312), 26 U.S.C. 1391-1393.
    (h) Outline of selection factors. The selection factors contained in 
Secs. 1703.46(f) and 1703.46(g) and the maximum number of points that 
may be assigned to each is listed below:
    (1) Nature of the project--50 points;
    (2) Job creation project--25 points;
    (3) Long-term improvements in economic development--25 points;
    (4) Diversifying the rural economy or alleviating underemployment--
10 points;
    (5) Supplemental funds--30 points;
    (6) Economic conditions and job creation:
    (i) Unemployment rates--18 points;
    (ii) Per capita personal income--18 points;
    (iii) Change in population--8 points;
    (iv) Number of long-term jobs--15 points;
    (v) Community-based economic development program--10 points;
    (vi) Plan for improving the marketable skills of people in rural 
areas--5 points;
    (7) Location--20 points;
    (8) Support for program--cushion of credit payments--15 points;
    (9) Demonstration project--5 points;
    (10) Probability of success:
    (i) Owners and management of the project--10 points;
    (ii) Ultimate recipient's business plan--40 points; and
    (iii) Completeness of borrower's initial application--10 points;
    (11) Special economic status--25 points.
    (i) Regardless of the number of points assigned to a borrower's 
application, the Administrator may:
    (1) Limit the number of applications selected in any one state 
during any fiscal year to the ratio of borrowers in that state to the 
total number of borrowers multiplied by three, or ten percent of the 
total number selections that have been made during the current fiscal 
year, or ten, whichever is greatest. The number of borrowers will be 
determined as of the latest published RUS statistical reports 
(Statistical Report, Rural Electric Borrowers, RUS Informational 
Publication 201-1 and Statistical Report, Rural Telephone Borrowers, RUS 
Informational Publication 300-4. These publications are available from 
the Rural Utilities Service, Administrative Services Division, 
Washington, DC 20250);
    (2) Limit a borrower to one selected application during any 
selection period;
    (3) Limit the number of applications selected for a particular 
project;
    (4) Allocate available funds between applications from electric and 
telephone borrowers;
    (5) Select an application receiving fewer points than another 
application if there are insufficient funds during a particular budget 
period to select the higher ranked application; except that the 
Administrator may ask the borrower that submitted the higher ranked 
application if it desires to reduce the amount of its application to the 
amount of funds available. The reduction may require additional 
supplemental funds to ensure a successful project. Based on information 
the borrower provides, the Administrator will re-analyze the project to 
ensure that the project will still be feasible with reduced funding; or
    (6) Select the highest ranking applications for funds to finance 
projects that the Administrator classifies as project feasibility 
studies.
    (j) During each selection period, the highest ranking application 
from among the applications requesting less

[[Page 54]]

than 5 percent of the total project costs as provided in Sec. 1703.25 
will be considered with the applications requesting 5 percent or more of 
total project costs.
    (k) The Administrator reserves the right to use the region or data 
it considers most appropriate if ``county'' data are unavailable for a 
particular area.

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11711, Mar. 14, 1994; 
59 FR 38341, July 28, 1994; 59 FR 53931, Oct. 27, 1994]



Secs. 1703.47-1703.57  [Reserved]



Sec. 1703.58  Post selection period.

    (a) RUS will inform a borrower whether the Administrator has 
selected its application. The advance of RUS funds after the selection 
has occurred is contingent upon the borrower meeting any terms and 
conditions the Administrator determines are necessary. A borrower that 
submitted an application which was not selected will be asked to inform 
RUS whether it desires to be reconsidered at a later date. The borrower 
may modify the application after it has been considered without 
resubmitting all the required material in an application, except if it 
changes the request from a grant to a zero-interest loan it must submit 
information necessary for the Administrator to evaluate a loan proposal 
as set forth in Secs. 1703.35 and 1703.36 and submit a new board 
resolution requesting a loan. If the borrower so desires, the 
Administrator will consider an application for up to one year after the 
date RUS originally received the application. A borrower may submit new 
applications as often as it desires.
    (b) During the period between the selection of the application and 
the execution of RUS's legal documents, the borrower must inform the 
Administrator if the project is no longer viable or the borrower no 
longer desires a zero-interest loan or grant for the project. Upon a 
determination by the Administrator to that effect, the selected 
application will be considered cancelled.
    (c) If an application has been selected and the nature of the 
project changes, as determined by the Administrator, the borrower may be 
required to submit a new application to RUS for consideration. The 
selection may not be transferred to another project, as determined by 
the Administrator. At any time after the selection of an application, 
the Administrator may, upon a request from the borrower and receipt of 
any documentation the Administrator considers necessary, approve changes 
in the method of carrying out the purpose of the project as long as the 
overall purpose of the project remains the same, revise the amount of 
the zero-interest loan and/or grant, revise the loan maturity date and 
principal deferment period and make other adjustments. The Administrator 
may reduce the amount of the RUS loan or grant to reflect reductions in 
the amount of supplemental funds to be provided to the project. For 
substantial reductions in amount of supplemental funds to be provided to 
the project, the Administrator may require the borrower to re-apply for 
the RUS loan or grant funds.
    (d) If state or local governments raise objections to a proposed 
project under the intergovernmental review process that are not resolved 
within three months of the Administrator's selection of the application, 
the Administrator may consider the selection of the application 
cancelled.



Sec. 1703.59  Final application processing and legal documents.

    (a) After a borrower has submitted all information the Administrator 
determines is necessary for the selected application, RUS will send the 
necessary legal documents to the borrower to execute and return to RUS. 
The legal documents will include a letter of agreement and any legal 
documents the Administrator deems appropriate, including any loan 
agreements, notes, security instruments, certifications or legal 
opinions. The letter of agreement will, among other things, constitute 
the Administrator's approval of funds for the project subject to certain 
terms and conditions as determined by the Administrator, and include a 
project description, approved purposes of the zero-interest loan and/or 
grant, the maximum amount of zero-interest loan and/or grant, 
supplemental funds to be provided to the project and certain

[[Page 55]]

agreements or commitments the borrower proposed in its application.
    (b) The Administrator has the discretion to include as an approved 
purpose the reimbursement of short-term financing and expenditures that 
were used for costs incurred on the project in accordance with 
Sec. 1703.20(a)(2).
    (c) If the borrower fails to submit within one month from the date 
of the Administrator's selection of an application all of the 
information that the Administrator determines to be necessary for RUS to 
prepare legal documents, the Administrator may consider the selection of 
the application cancelled.



Sec. 1703.60  [Reserved]



Sec. 1703.61  Disbursement of zero-interest loan and grant funds.

    (a) RUS will disburse zero-interest loan funds to the borrower which 
must disburse zero-interest loan proceeds to the project for approved 
purposes in accordance with the legal documents executed by the 
Administrator and the borrower and applicable RUS regulations. The 
borrower must make payments on a zero-interest loan as set forth in the 
legal documents executed by the Administrator and the borrower. The 
Borrower or project owner's share in the cost of the project must be 
utilized in advance of RUS zero-interest loan funds, or upon RUS 
approval, on a pro-rata distribution basis with loan funds during the 
disbursement period. The Borrower or project owner will not be permitted 
to provide its contribution at the end of the loan disbursement period.
    (b) RUS will disburse grant funds to the borrower which must 
disburse grant proceeds to the project for approved purposes in 
accordance with the provisions of 7 CFR part 3015 and 7 CFR part 3016, 
as appropriate, the legal documents executed by the Administrator and 
the borrower, and applicable RUS regulations. Prior to the disbursement 
of grant funds under this subpart, the Borrower will provide evidence of 
fidelity bond coverage as required by 7 CFR 3015.17. The grant portion 
of a pass-through zero-interest loan and grant will be disbursed to the 
Borrower on a reimbursement basis after all other project funds have 
been utilized and evidence is provided that the project has been 
completed. Grants to Borrowers for establishment of revolving loan funds 
will be disbursed in accordance with Sec. 1703.22 of this subpart.
    (c) If the borrower fails to satisfy all conditions, requirements, 
and terms prerequisite to the advance of zero-interest loan and/or grant 
funds as set forth in the letter of agreement or other RUS legal 
documents within 120 days from the date the borrower signs the letter of 
agreement agreeing and accepting the conditions, requirements, and terms 
of the RUS zero-interest loan and/or grant, or such later date as the 
Administrator may approve, the Administrator may rescind the zero-
interest loan and/or grant commitment.
    (d) During the period between the execution of RUS's legal documents 
and the disbursement of funds, the borrower must provide the 
Administrator written notification if the project is no longer viable or 
the borrower no longer desires a zero-interest loan or grant for the 
project. After RUS has received the borrower's notification, the 
Administrator will rescind the commitment.
    (e) The borrower must return to RUS all proceeds of the zero-
interest loan and/or grant, including any interest earned on the funds 
being returned, which have not been lent or disbursed by the borrower 
for approved purposes during the six months following the advance of the 
loan or grant funds from RUS to the borrower, or such later date as the 
Administrator may approve. If the project is under the control of the 
borrower, all proceeds of the zero-interest loan and/or grant must be 
returned to RUS, including any interest earned on the funds being 
returned, which have not been expended by the borrower for approved 
purposes before the first anniversary of the date of the advance of the 
loan or grant funds from RUS to the borrower, or such later date as the 
Administrator may approve. Authorization of any extension rests solely 
within the discretion of the Administrator.

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11712, Mar. 14, 1994]

[[Page 56]]



Secs. 1703.62-1703.65  [Reserved]



Sec. 1703.66  Review and other requirements.

    (a) RUS will review borrowers receiving zero-interest loans or 
grants, as necessary, to ensure that funds are expended for approved 
purposes. Borrowers receiving zero-interest loans or grants must monitor 
the project to the extent necessary to ensure that the project is in 
compliance with all applicable regulations, including ensuring that 
funds are expended for approved purposes. The borrower is responsible 
for ensuring that disbursements and expenditures of funds are properly 
supported with certifications, invoices, contracts, bills of sale, or 
any other forms of evidence determined appropriate by the Administrator 
and that such supporting material is available, at the borrower's 
premises, for review by the RUS field accountant, borrower's certified 
public accountant, the Office of Inspector General, the General 
Accounting Office and any other accountant conducting an audit of the 
borrower's financial statements or this rural economic development 
program. Borrowers will be required to permit RUS to inspect and copy 
its records and documents that pertain to the project.
    (b) The Borrower must require the recipient of a pass-through loan 
and grant to provide an itemized list to the Borrower that shows the 
expenditures made on the project for approved purposes, including a 
certification to that effect. The Borrower will also require the 
recipient to attach invoices, receipts, bills of sale, and other 
evidence representing the items on the list of expenditures that at 
least total the amount of the RUS zero-interest loan and grant. In 
addition, the Borrower will also require the recipient to furnish a 
record of itemized receipts showing total project costs in such detail 
that will permit auditors to establish the RUS funding percentage. RUS's 
legal agreements will include the terms and conditions that the Borrower 
must require in its agreement with the recipient of a pass-through loan 
and grant covering the use and intended schedule of expenditures of the 
loan funds.
    (c) RUS's legal documents may require the borrower to include in its 
legal documents with the recipient of a pass-through loan or a pass-
through-grant the requirement to expend the funds for approved purposes 
by a certain date specified in RUS's legal documents or return to the 
borrower all funds that have not been expended by such date. The 
borrower must promptly return to RUS all unexpended funds that the 
recipient returns to the borrower under the terms set forth in the legal 
documents executed between the Administrator and the borrower. The 
borrower may request an extension due to delays in the project. 
Authorization of any extension rests solely within the discretion of the 
Administrator.
    (d) The legal documents executed between the Borrower and the 
Administrator in connection with a zero-interest loan and/or grant must 
contain certain provisions giving the Administrator discretionary rights 
and remedies in the event a Borrower fails to comply with this subpart, 
other Federal regulations and statutes, or the terms, conditions and 
requirements of the executed legal documents. Regardless of any right or 
remedy the Administrator chooses to assert, if the Borrower uses any 
zero-interest loan and/or grant funds other than for approved purposes, 
the Borrower will be required to return to RUS the amount used for 
unapproved purposes. An unauthorized zero-interest loan amount which is 
returned will be considered a prepayment on the RUS note.
    (e) Borrowers receiving zero-interest loans and/or grants will be 
subject to a rural economic development review of zero-interest loan and 
grant funds.
    (f) The borrower must promptly notify the Administrator in writing 
if another entity is in default on a pass-through-loan between the 
borrower and the entity.
    (g) Grants provided under this program will be administered in 
accordance with 7 CFR part 3015 and 7 CFR part 3016, as appropriate. 
Copies of these USDA Uniform Assistance regulations can be obtained by 
contacting RUS in Washington, DC. A Borrower that receives a grant for 
the establishment of a revolving loan fund, or project owner that 
receives a pass-

[[Page 57]]

through loan and grant, will be subject to requirements under these 
regulations which cover, among other things, financial reporting, 
accounting records, budget controls, record retention and audit 
requirements. For pass-through loans and grants, RUS Borrowers will be 
required to include in their legal documents the requirement for project 
owners to provide sufficient financial, accounting and budget 
information and other records deemed necessary to facilitate audits in 
accordance with 7 CFR part 3015 and 7 CFR part 3016 for non-profit 
entities, and RUS rural economic development loan reviews for projects 
in a for-profit status.
    (h) For pass-through loans and grants awarded under this subpart, 
the Borrower must diligently monitor performance to ensure that time 
schedules are being met, projected work by time periods is being 
accomplished, and other performance objectives are being achieved. The 
Borrower must submit an original and one copy of each report to RUS on 
an annual basis. The project performance reports shall include, but not 
be limited to, the following:
    (1) A comparison of actual accomplishments to the objectives 
established for that period;
    (2) Reasons why any established objectives were not met;
    (3) A description of any problems, delays, or adverse conditions 
which have occurred, or are anticipated, and which may affect the 
attainment of overall project objectives, prevent meeting of time 
schedules or objectives, or preclude the attainment of particular 
project work elements during established time periods. This disclosure 
shall be accompanied by a statement of the action taken or planned to 
resolve the situation; and
    (4) Objectives and timetable established for the next reporting 
period.
    (i) For pass-through loans and grants, a final project performance 
report will be required with the last SF 269, ``Financial Status 
Report,'' available from RUS in Washington, DC. The final report also 
must provide an evaluation of the success of the project in meeting the 
objectives of the program. The final report may serve as the last annual 
report.
    (j) Monitoring requirements for Borrowers receiving grants for 
revolving loan funds are specified in Sec. 1703.22.

[57 FR 44317, Sept. 25, 1992, as amended at 59 FR 11712, Mar. 14, 1994]



Sec. 1703.67  Changes in project objective or scope.

    For loans and grants awarded under this subpart, the Borrower must 
obtain prior approval for any material change to the scope or objectives 
of the approved project, including changes to the scope of work or 
budget. Failure to obtain prior approval of changes can result in 
suspension or termination of grant funds.

[59 FR 11712, Mar. 14, 1994]



Sec. 1703.68  Loan and grant termination provisions.

    (a) Termination for cause. The Administrator may terminate any loan 
and/or grant in whole, or in part, at any time before the date of 
completion of loan and/or grant disbursement, whenever the Borrower has 
failed to comply with the conditions of the loan and/or grant. The 
Administrator will promptly notify the Borrower in writing of the 
determination and the reasons for the termination, together with the 
effective date. The termination date will be no less than 30 days 
following receipt of the termination notice. The Borrower will have such 
time to cure the default, or to state why it feels the loan and/or grant 
should not be terminated. The Administrator will stay the termination 
upon the curing of the default, and may delay termination if, sufficient 
cause has been given by the Borrower.
    (b) Termination for convenience. The Administrator or the Borrower 
may terminate a loan and/or grant in whole, or in part, when both 
parties agree that the continuation of the project would not produce 
beneficial results commensurate with further expenditure of funds. The 
two parties will agree upon termination conditions, including the 
effective date, and in the case of partial terminations, the portion to 
be terminated. The Borrower will not incur new obligations for the 
terminated portion after the effective date, and will cancel as many 
outstanding

[[Page 58]]

obligations as possible. The Administrator will allow full credit to the 
Borrower for the Federal share of unfulfilled contractual obligations 
which were incurred in good faith by the Borrower prior to grant 
termination.

[59 FR 11712, Mar. 14, 1994]



Secs. 1703.69-1703.79  [Reserved]



         Subpart C--Rural Business Incubator Program [Reserved]



Secs. 1703.80-1703.99  [Reserved]



 Subpart D--Distance Learning and Telemedicine Loan and Grant Program--
                                 General

    Source: 64 FR 14357, Mar. 25, 1999, unless otherwise noted.



Sec. 1703.100  Purpose.

    The purpose of the Distance Learning and Telemedicine (DLT) Loan and 
Grant Program is to encourage and improve telemedicine services and 
distance learning services in rural areas through the use of 
telecommunications, computer networks, and related advanced technologies 
by students, teachers, medical professionals, and rural residents. This 
subpart describes the general policies for administering the DLT 
program. Subpart E contains the policies and procedures related to 
grants; subpart F contains the policies and procedures related to a 
combination loan and grant; and subpart G contains the policies and 
procedures related to loans.



Sec. 1703.101   Policy.

    (a) The transmission of information is vital to the economic 
development, education, and health of rural Americans. To further this 
objective, RUS will provide financial assistance to distance learning 
and telemedicine projects that will improve the access of people 
residing in rural areas to educational, learning, training, and health 
care services.
    (b) In providing financial assistance, RUS will give priority to 
rural areas that it believes have the greatest need for distance 
learning and telemedicine services. RUS believes that generally the need 
is greatest in areas that are economically challenged, costly to serve, 
and experiencing outward migration. This program is consistent with the 
provisions of the Telecommunications Act of 1996 that designate 
telecommunications service discounts for schools, libraries, and rural 
health care centers. RUS will take into consideration the community's 
involvement in the proposed project and the applicant's ability to 
leverage grant funds.
    (c) In administering this subpart, RUS will not favor or mandate the 
use of one particular technology over another.
    (d) Rural institutions are encouraged to cooperate with each other, 
with applicants, and with end-users to promote the program being 
implemented under this subpart.
    (e) RUS staff will make diligent efforts to inform potential 
applicants in rural areas of the programs being implemented under this 
subpart.
    (f) The Administrator will provide only loans under this subpart to 
any entity that has received a telecommunications or electric loan under 
the Rural Electrification Act of 1936. Telecommunications and Electric 
borrowers are encouraged to seek a loan under this subpart to bolster 
educational and health care opportunities in the rural communities they 
serve. A borrower receiving a loan shall:
    (1) Make the loan available to entities that qualify as distance 
learning or telemedicine projects satisfying the requirements of this 
subpart, under any terms it so chooses as long as the terms are no more 
stringent than the terms under which it received the financial 
assistance.
    (2) Use the loan to acquire, install, improve, or extend a distance 
learning or telemedicine system referred to in this subpart.
    (g) The Administrator will allocate funds that are appropriated each 
fiscal year for the subparts E, F, and G, of this part respectively. Not 
more than 30 days before the end of the fiscal year, the Administrator 
may transfer any funds not committed to grants in the combination loan 
and grant program to the grant program.

[[Page 59]]

    (h) Financial assistance may be provided for end user sites. 
Financial assistance may also be provided for hubs located in rural or 
non-rural areas if they are necessary to provide distance learning or 
telemedicine services to rural residents at end user sites.
    (i) The Administrator will publish, at the end of each fiscal year, 
a notice in the Federal Register of all applications receiving financial 
assistance under this subpart. Subject to the provisions of the Freedom 
of Information Act, (5 U.S.C. 552), applications will be available for 
public inspection at the U.S. Department of Agriculture, 1400 
Independence Avenue, SW., Washington, DC, 20250.



Sec. 1703.102  Definitions.

    1996 Act means the Federal Agriculture Improvement Act of 1996.
    Act means the Rural Electrification Act of 1936 (7 U.S.C. 901 et 
seq.).
    Administrator means the Administrator of the Rural Utilities 
Service, or designee or successor.
    Applicant means an eligible organization that applies for financial 
assistance under this subpart.
    Approved purposes means project purposes for which grant, loan, or 
combination loan and grant financial assistance may be expended.
    Champion community means any community that submitted a valid 
application to become a USDA Empowerment Zone/Enterprise Community (EZ/
EC) area, that met the requirements to be designated an EZ/EC area, but 
not chosen because their score was not high enough to be selected.
    Combination loan and grant means a grant in combination with a loan 
made under the DLT program.
    Completed application means an application that includes all those 
items specified in Secs. 1703.125, 1703.134, and 1703.144 in form and 
substance satisfactory to the Administrator.
    Computer networks mean computer hardware and software, terminals, 
signal conversion equipment including both modulators and demodulators, 
or related devices, used to communicate with other computers to process 
and exchange data through a telecommunication network in which signals 
are generated, modified, or prepared for transmission, or received, via 
telecommunications terminal equipment and telecommunications 
transmission facilities.
    Consortium means a combination or group of eligible entities formed 
to undertake the purposes for which the distance learning and 
telemedicine financial assistance is provided. Each consortium shall be 
composed of a minimum of one eligible organization that meets the 
requirements of Sec. 1703.103.
    Construct means to acquire, construct, extend, improve, or install a 
facility or system.
    Data terminal equipment means equipment that converts user 
information into data signals for transmission, or reconverts the 
received data signals into user information, and is normally found on 
the terminal of a circuit and on the premises of the end user.
    Distance learning means a telecommunications link to an end user 
through the use of eligible equipment to:
    (1) Provide educational programs, instruction, or information 
originating in one area, whether rural or not, to students and teachers 
who are located in rural areas; or
    (2) Connect teachers and students, located in one rural area with 
teachers and students that are located in a different rural area.
    DLT borrower means an entity that has an outstanding loan under the 
provisions of the DLT program.
    DLT program means the Distance Learning and Telemedicine Loan and 
Grant Program administered by RUS.
    Economic useful life as applied to equipment and facilities financed 
under the DLT program means the number of years resulting from dividing 
100 percent by the depreciation rate (expressed as a percent) based on 
Internal Revenue Service depreciation rules or recognized 
telecommunications industry guidelines.
    Eligible equipment means computer hardware and software, audio or 
video equipment, computer network components, telecommunications 
terminal equipment, data terminal equipment, inside wiring, interactive 
video equipment, or other facilities that would further telemedicine 
services or distance learning services.

[[Page 60]]

    Eligible facilities means land, buildings, or building construction 
needed to carry out an eligible distance learning or telemedicine 
project for loan financial assistance only.
    Eligible organization means an entity that meets the requirements of 
Sec. 1703.103.
    Empowerment Zone and Enterprise Community (EZ/EC) means any 
community whose designation as such by USDA pursuant to 26 U.S.C. 1391 
et seq., is in effect at the time RUS agrees to provide financial 
assistance.
    End user is one or more of the following:
    (1) Rural elementary, secondary schools, and other educational 
institutions, such as institutions of higher education, vocational and 
adult training and education centers, libraries, and teacher training 
centers, and students, teachers and instructors using such rural 
educational facilities, that participate in a rural distance learning 
telecommunications program through a project funded under this subpart;
    (2) Rural hospitals, primary care centers or facilities, such as 
medical centers, nursing homes, and clinics, and physicians and staff 
using such rural medical facilities, that participate in a rural 
telemedicine program through a project funded under this subpart; and
    (3) Other rural community facilities, institutions, or entities that 
receive distance learning or telemedicine services.
    End user site means a facility that is part of a network or 
telecommunications system that is utilized by end users.
    Financial assistance means a grant, combination loan and grant, or 
loan.
    GFR means RUS telecommunications program General Field 
Representative.
    Grant documents means the grant agreement, including any amendments 
and supplements thereto, between RUS and the grantee.
    Grantee means a recipient of a grant from RUS to carry out the 
purposes of the DLT program.
    Guarantee means a guarantee for a loan provided by a RUS borrower or 
other qualified third party.
    Hub means a facility that is part of a network or telecommunications 
system that provides educational or medical services to end user sites.
    Instructional programming means educational material, including 
computer software, which would be used for educational purposes in 
connection with eligible equipment but does not include salaries, 
benefits, and overhead of medical or educational personnel.
    Interactive equipment means equipment used to produce and prepare 
for transmission audio and visual signals from at least two distant 
locations so that individuals at such locations can orally and visually 
communicate with each other. Such equipment includes monitors, other 
display devices, cameras or other recording devices, audio pickup 
devices, and other related equipment.
    Loan means a loan made under the DLT program bearing interest at a 
rate equal to the then current cost-of-money to the government.
    Loan documents mean the loan agreement, note, and security 
instrument, including any amendments and supplements thereto, between 
RUS and the DLT borrower.
    Local exchange carrier means a commercial, cooperative or mutual-
type association, or public body that is engaged in the provision of 
telephone exchange service or exchange access.
    Matching contribution means the applicant's contribution for 
approved purposes.
    National school lunch program (NSLP) means the federally assisted 
meal program established under the National School Lunch Act of 1946 (42 
U.S.C. 1751).
    Project means approved purposes for which financial assistance has 
been provided.
    Project service area means the area in which at least 90 percent of 
the persons to be served by the project are likely to reside.
    Recipient means a grantee, borrower, or both of a DLT program grant, 
loan or combination loan and grant.
    Rural community facilities mean facilities such as schools, 
libraries, learning centers, training facilities, hospitals, medical 
centers, and similar facilities, primarily used by residents of rural 
areas, that will use a telecommunications, computer network, or related

[[Page 61]]

advanced technology system to provide educational or health care 
benefits primarily to residents of rural areas.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture, successor to the Rural Electrification 
Administration.
    Secretary means the Secretary of Agriculture.
    Technical assistance means:
    (1) Assistance in learning to manage, operate, or use equipment or 
systems; and
    (2) Studies, analyses, designs, reports, manuals, guides, 
literature, or other forms of creating, acquiring, or disseminating 
information.
    Telecommunications carrier means any provider of telecommunications 
services.
    Telecommunications or electric borrower means an entity that has 
outstanding RUS or Rural Telephone Bank electric or telecommunications 
loans or loan guarantees under the provisions of the Act.
    Telecommunications systems plan means the plan submitted by an 
applicant in accordance with Sec. 1703.125 for grants, Sec. 1703.134 for 
a combination loan and grant, or Sec. 1703.144 for loans.
    Telecommunications terminal equipment means the assembly of 
telecommunications equipment at the end of a circuit or path of a 
signal, including but not limited to facilities that receive or transmit 
over the air broadcast, satellite, and microwave, normally located on 
the premises of the end user, that interfaces with telecommunications 
transmission facilities, and that is used to modify, convert, encode, or 
otherwise prepare signals to be transmitted via such telecommunications 
facilities, or that is used to modify, reconvert, or carry signals 
received from such facilities, the purpose of which is to accomplish the 
goal for which the circuit or signal was established.
    Telecommunications transmission facilities means facilities that 
transmit, receive, or carry voice, video, or data between the 
telecommunications terminal equipment at each end of the 
telecommunications circuit or path. Such facilities include microwave 
antennae, relay stations and towers, other telecommunications antennae, 
fiber-optic cables and repeaters, coaxial cables, communication 
satellite ground station complexes, copper cable electronic equipment 
associated with telecommunications transmissions, and similar items.
    Telemedicine means a telecommunications link to an end user through 
the use of eligible equipment which electronically links medical 
professionals at separate sites in order to exchange health care 
information in audio, video, graphic, or other format for the purpose of 
providing improved health care services primarily to residents of rural 
areas.



Sec. 1703.103  Applicant eligibility and allocation of funds.

    (a) To be eligible to receive financial assistance under this 
subpart, the applicant must be organized in one of the following 
corporate structures:
    (1) An incorporated organization, partnership, Indian tribe and 
tribal organization as defined in 25 U.S.C. 450b (b) and (c), or other 
legal entity, including a municipal corporation or a private corporation 
organized on a for-profit or not-for-profit basis, which operates, or 
will operate a school, college, university, learning center, training 
facility, or other educational institution, including a regional 
educational laboratory, library, hospital, medical center, medical 
clinic, or any rural community facility. A political subdivision of a 
State government, other than a political subdivision of a State 
government that operates a rural community facility, is not considered 
an eligible applicant; or
    (2) A consortium, as defined in Sec. 1703.102. A consortium which 
includes a political subdivision of a State government is only eligible 
if the political subdivision of the State government operates a rural 
community facility; or
    (3) An incorporated organization, partnership, Indian tribe, and 
tribal organization as defined in 25 U.S.C. 450b (b) and (c), or other 
legal entity which is providing or proposes to provide telemedicine 
service or distance learning service to other legal entities or 
consortia at rates calculated to ensure that the economic value and 
other benefits of the financial assistance is

[[Page 62]]

passed through to such other legal entities or consortia.
    (b) At least one of the entities in a partnership or consortium must 
be eligible individually, and the partnership or consortium must provide 
written evidence of its legal capacity to contract with RUS and to 
obtain the applicable financial assistance. If a partnership or 
consortium lacks the capacity to contract, each individual entity must 
contract with RUS on its own behalf.
    (c) Electric or telecommunications borrowers are eligible for loans 
only.

[64 FR 14357, Mar. 25, 1999; 64 FR 25422, May 12, 1999]



Sec. 1703.104  [Reserved]



Sec. 1703.105  Processing of selected applications.

    (a) During the period between the submission of an application and 
the execution of documents, the applicant must inform RUS if the project 
is no longer viable or the applicant no longer is requesting financial 
assistance for the project. When the applicant so informs RUS, the 
selection will be rescinded or the application withdrawn and written 
notice to that effect sent to the applicant.
    (b) If an application has been selected and the scope of the project 
changes substantially, the applicant may be required to submit a new 
application to RUS for review and consideration depending on the degree 
of change. A new application will be subject to review in accordance 
with this subpart. The financial assistance may not be transferred by 
the applicant for use for another project.
    (c) If State or local governments raise objections to a proposed 
project under the intergovernmental review process that are not resolved 
within 90 days of the Administrator's selection of the application, the 
Administrator will rescind the selection and written notice to that 
effect will be sent to the applicant. The Administrator, in his sole 
discretion may extend the 90 day period if it appears resolution is 
imminent.
    (d) RUS may request additional information to complete the 
appropriate documents covering financial assistance.
    (e) Financial assistance documents. (1) The documents will include a 
grant agreement for grants; loan documents, including third party 
guarantees, notes and security instruments for loans; or any other legal 
documents the Administrator deems appropriate, including suggested forms 
of certifications and legal opinions.
    (2) The grant agreement and the loan documents will include, among 
other things, conditions on the release or advance of funds and include 
at a minimum, a project description, approved purposes, the maximum 
amount of the financial assistance, supplemental funds required for the 
project, and certain agreements or commitments the applicant may have 
proposed in its application. In addition, the loan documents may contain 
covenants and conditions the Administrator deems necessary or desirable 
to provide additional assurance that loans will be repaid and the 
purposes of the loan will be accomplished.
    (3) The recipient of a loan will be required to execute a security 
instrument in form and substance satisfactory to RUS and must, before 
receiving any advance of loan funds, provide security that is adequate, 
in the opinion of RUS, to assure repayment, within the time agreed, of 
all loans to the borrower under the DLT program. This assurance will 
generally be provided by a first lien upon all facilities and equipment 
financed by the loan. RUS may require additional security as it deems 
necessary.
    (4) Adequate security may also be provided by third-party 
guarantees, letters of credit, pledges of revenue, or other forms of 
security satisfactory to RUS.
    (5) The security instrument and other loan documents required by RUS 
in connection with a loan under the DLT program shall contain such 
pledges, covenants, and other provisions as may, in the opinion of RUS, 
be required to secure repayment of the loan.
    (6) If the project does not constitute a complete operating system, 
the DLT recipient shall provide evidence, in form and substance 
satisfactory to

[[Page 63]]

RUS, demonstrating that the recipient has sufficient contractual, 
financing, or other arrangements to assure that the project will provide 
adequate and efficient service.
    (f) Prior to the execution of a grant and loan document, RUS 
reserves the right to require any changes in the project or legal 
documents covering the project to protect the integrity of the DLT 
program and the interests of the government.
    (g) If the applicant fails to submit, within 120 calendar days from 
the date of RUS' selection of an application, all of the information 
that RUS determines to be necessary to prepare legal documents and 
satisfy other requirements of this subpart, RUS may rescind the 
selection of the application.

[64 FR 14357, Mar. 25, 1999; 64 FR 25422, May 12, 1999]



Sec. 1703.106  Disbursement of loans and grants.

    (a) For financial assistance of $100,000 or greater, prior to the 
disbursement of a grant and a loan, the recipient, if it is not a unit 
of government, will provide evidence of fidelity bond coverage as 
required by 7 CFR part 3019.
    (b) Grants and loans will be disbursed to recipients on a 
reimbursement basis, or with unpaid invoices for the eligible purposes 
contained in this subpart, by the following process:
    (1) An SF 270, ``Request for Advance or Reimbursement,'' will be 
completed by the recipient and submitted to RUS not more frequently than 
once a month;
    (2) RUS will review the SF 270 for accuracy when received and will 
schedule payment if the form is satisfactory. Payment will ordinarily be 
made within 30 days; and
    (3) For financial assistance approved during and subsequent to FY 
1999, funds will be advanced in accordance with 7 CFR 1744.69.
    (c) The recipient's share in the cost of the project must be 
disbursed in advance of the loan and grant, or if the recipient agrees, 
on a pro rata distribution basis with financial assistance during the 
disbursement period. Recipients will not be permitted to provide their 
contributions at the end of the project.
    (d) A combination loan and grant will be disbursed on a pro rata 
basis based on the respective amounts of financial assistance provided.



Sec. 1703.107  Reporting and oversight requirements.

    (a) A project performance activity report will be required of all 
recipients on an annual basis until the project is complete and the 
funds are expended by the applicant.
    (b) A final project performance report must be provided by the 
recipient. It must provide an evaluation of the success of the project 
in meeting the objectives of the program. The final report may serve as 
the last annual report.
    (c) RUS will monitor recipients, as it determines necessary, to 
assure that projects are completed in accordance with the approved scope 
of work and that the financial assistance is expended for approved 
purposes.
    (d) Recipients shall diligently monitor performance to ensure that 
time schedules are being met, projected work by time periods is being 
accomplished, and other performance objectives are being achieved. 
Recipients are to submit an original and one copy of all project 
performance reports, including, but not limited to, the following:
    (1) A comparison of actual accomplishments to the objectives 
established for that period;
    (2) A description of any problems, delays, or adverse conditions 
which have occurred, or are anticipated, and which may affect the 
attainment of overall project objectives, prevent the meeting of time 
schedules or objectives, or preclude the attainment of particular 
project work elements during established time periods. This disclosure 
shall be accompanied by a statement of the action taken or planned to 
resolve the situation; and
    (3) Objectives and timetable established for the next reporting 
period.



Sec. 1703.108  Audit requirements.

    A recipient of financial assistance shall provide RUS with an audit 
for each year, beginning with the year in which a portion of the 
financial assistance is expended, in accordance with the following:

[[Page 64]]

    (a) If the recipient is a for-profit entity, a Telecommunications or 
Electric borrower, or any other entity not covered by the following 
paragraph, the recipient shall provide an independent audit report in 
accordance with 7 CFR part 1773, ``Policy on Audits of RUS Borrowers.''
    (b) If the recipient is a State or local government, or non-profit 
organization, the recipient shall provide an audit in accordance with 7 
CFR part 3052, ``Audits of States, Local Governments, and Non-Profit 
Organizations.''

[64 FR 14357, Mar. 25, 1999; 64 FR 25422, May 12, 1999]



Sec. 1703.109  Grant and loan administration.

    RUS will conduct reviews as necessary to determine whether the 
financial assistance was expended for approved purposes. The recipient 
is responsible for ensuring that the project complies with all 
applicable regulations, and that the grants and loans are expended only 
for approved purposes. The recipient is responsible for ensuring that 
disbursements and expenditures of funds are properly supported by 
invoices, contracts, bills of sale, canceled checks, or other 
appropriate forms of evidence, and that such supporting material is 
provided to RUS, upon request, and is otherwise made available, at the 
recipient's premises, for review by the RUS representatives, the 
recipient's certified public accountant, the Office of Inspector 
General, U. S. Department of Agriculture, the General Accounting Office, 
and any other official conducting an audit of the recipient's financial 
statements or records, and program performance for the grants and loans 
made under this subpart. The recipient shall permit RUS to inspect and 
copy any records and documents that pertain to the project.



Sec. 1703.110  Changes in project objectives or scope.

    The recipient shall obtain prior written approval by RUS for any 
material change to the scope or objectives of the project, including any 
changes to the scope of work or the budget submitted to RUS. Any 
material change shall be contained in a revised scope of work plan to be 
prepared by the recipient, submitted to, and approved by RUS in writing.



Sec. 1703.111  Grant and loan termination.

    (a) The financial assistance may be terminated when RUS and the 
recipient agree upon the conditions of the termination, the effective 
date of the termination, and, in the case of a partial termination of 
the financial assistance, any unadvanced portion of the financial 
assistance to be terminated and any advanced portion of the financial 
assistance to be returned.
    (b) The recipient may terminate the financial assistance by written 
notification to RUS, providing the reasons for such termination, the 
effective date, and, in the case of a partial termination, the portion 
of the financial assistance to be terminated. In the case of a partial 
termination, if RUS believes that the remaining portion of the financial 
assistance will not accomplish the approved purposes, then, RUS may 
terminate the financial assistance in its entirety, pursuant to the 
provisions of paragraph (a) of this section.



Sec. 1703.112  Expedited telecommunications loans

    RUS will expedite consideration and determination of an application 
submitted by an RUS telecommunications borrower for a loan under the Act 
or an advance of such loan funds to be used in conjunction with 
financial assistance under subparts E, F, or G of this part. See 7 CFR 
part 1737 for loans and 7 CFR part 1744 for advances under this section.



Secs. 1703.113-1703.119  [Reserved]



       Subpart E--Distance Learning and Telemedicine Grant Program

    Source: 64 FR 14360, Mar. 25, 1999, unless otherwise noted.



Sec. 1703.120  Use of grants.

    (a) Grants may be used by eligible organizations for distance 
learning and telemedicine projects to finance up to 70 percent of the 
amount designated for approved purposes; at least 30 percent of the 
project must be funded by

[[Page 65]]

matching contributions. For purposes of determining the applicant's 
ability to leverage resources in Sec. 1703.126(b)(4), the minimum 
matching contribution of 30 percent of the amount designated for 
approved purposes equals 42.85 percent of the grant requested.
    (b) Only projected costs for approved grant purposes will be 
considered in determining the amount of DLT grant eligibility in 
accordance with paragraph (a) of this section.
    (c) Funding from Federal sources other than RUS cannot be considered 
as matching contributions under this subpart.



Sec. 1703.121  Approved purposes for grants.

    Grants shall be expended only for the costs associated with the 
initial capital assets associated with the project. The following are 
approved grant purposes:
    (a) Acquiring, by lease or purchase, eligible equipment as defined 
in Sec. 1703.102;
    (b) Acquiring instructional programming; and
    (c) Providing technical assistance and instruction for using 
eligible equipment, including any related software; developing 
instructional programming; providing engineering or environmental 
studies relating to the establishment or expansion of the phase of the 
project that is being financed with the grant (this purpose shall not 
exceed 10 percent of the grant).



Sec. 1703.122  Matching contributions.

    (a) The grant applicant's minimum matching contribution (as 
specified in Sec. 1703.120) for approved purposes, generally must be in 
the form of cash. However, in-kind contributions for the purposes listed 
in Sec. 1703.121 may be substituted for cash.
    (b) In-kind items listed in Sec. 1703.121 must be non-depreciated or 
new assets with established monetary values. Manufacturers' or service 
providers' discounts are not considered in-kind matching.
    (c) Costs incurred by the applicant, or others on behalf of the 
applicant, for facilities or equipment installed, or other services 
rendered prior to submission of a completed application, shall not be 
considered as an eligible in-kind matching contribution.
    (d) Costs incurred for non-approved purposes for grant outlined in 
Sec. 1703.123 shall not be used as an in-kind matching contribution.



Sec. 1703.123  Nonapproved purposes for grants.

    (a) A grant made under this subpart will not be provided or used:
    (1) To cover the costs of installing or constructing 
telecommunications transmission facilities, other than those facilities 
not available and necessary for the completion of the proposed project 
and not otherwise available;
    (2) To pay for medical equipment not having telemedicine as its 
essential function;
    (3) To pay salaries, wages, or employee benefits to medical or 
educational personnel;
    (4) To pay for the salaries or administrative expenses of the 
applicant or the project;
    (5) To purchase equipment that will be owned by the local exchange 
carrier or another telecommunications service provider unless that 
service provider is the applicant.
    (6) To duplicate facilities providing distance learning or 
telemedicine services in place or to reimburse the applicant or others 
for costs incurred prior to RUS' receipt of the completed application;
    (7) To pay costs of preparing the application package for financial 
assistance under this program;
    (8) For projects whose sole objective is to provide links between 
teachers and students or between medical professionals who are located 
at the same facility;
    (9) For site development and the destruction or alteration of 
buildings;
    (10) For the purchase of land, buildings, or building construction;
    (11) For projects located in areas covered by the Coastal Barrier 
Resources Act (16 U.S.C. 3501 et seq.);
    (12) For any purpose that the Administrator has not specifically 
approved;
    (13) Except for leases provided for in Sec. 1703.121, to pay the 
cost of recurring or operating expenses for the project; or

[[Page 66]]

    (14) For any other purposes not specifically contained in 
Sec. 1703.121.
    (b) Except as otherwise provided in Sec. 1703.112, grants shall not 
be used to finance a project, in part, when the success of the project 
is dependent upon the receipt of additional financial assistance under 
this subpart or is dependent upon the receipt of other financial 
assistance that is not assured.

[64 FR 14360, Mar. 25, 1999; 64 FR 25422, May 12, 1999, as amended at 64 
FR 25423, May 12, 1999]



Sec. 1703.124  Maximum and minimum grant amounts.

    Applications for grants under this subpart will be subject to 
limitations on the proposed amount of grant funds. The Administrator 
will establish the maximum amount of a grant to be made available to an 
individual recipient for each fiscal year under this subpart by 
publishing notice of the maximum amount in the Federal Register not 
sooner than 45 days before the period for accepting applications begins. 
The minimum amount of a grant is $50,000.



Sec. 1703.125  Completed application.

    The following items are required to be submitted to RUS in support 
of an application for grant funds:
    (a) An application for Federal Assistance. A completed Standard Form 
424.
    (b) An executive summary of the project. The applicant must provide 
RUS with a general project overview that addresses the following 8 
categories:
    (1) A description of why the project is needed;
    (2) An explanation of how the applicant will address the need cited 
in paragraph (b)(1) of this section, why the applicant requires 
financial assistance, the types of educational or medical services to be 
offered by the project, and the benefits to rural residents;
    (3) A description of the applicant, documenting eligibility in 
accordance with Sec. 1703.103;
    (4) An explanation of the total project cost including a breakdown 
of the grant required and the source of matching contribution and other 
financial assistance for the remainder of the project;
    (5) A statement specifying whether the project is either a distance 
learning or telemedicine facility as defined in Sec. 1703.102. If the 
project provides both distance learning and telemedicine services, the 
applicant must identify the predominant use of the system;
    (6) A general overview of the telecommunications system to be 
developed, including the types of equipment, technologies, and 
facilities used;
    (7) A description of the participating hubs and end user sites and 
the number of rural residents that will be served by the project at each 
end user site; and
    (8) A certification by the applicant that facilities constructed 
with grants do not duplicate adequate established telemedicine or 
distance learning services.
    (9) A listing of the location of each end user site (city, town, 
village, borough, or rural areas) plus the State.
    (c) Scoring criteria documentation. Each grant applicant must 
address and provide documentation on how it meets each of the scoring 
criteria contained in Sec. 1703.126.
    (d) A scope of work. The scope of work must include, at a minimum:
    (1) The specific activities to be performed under the project;
    (2) Who will carry out the activities;
    (3) The time-frames for accomplishing the project objectives and 
activities; and
    (4) A budget for all capital expenditures reflecting the line item 
costs for approved purposes for both the grant funds and other sources 
of funds for the project. Separately, the budget must specify any line 
item costs that are nonapproved purposes for grants as contained in 
Sec. 1703.123.
    (e) Financial information. The applicant must provide financial 
information to support the need for the financial assistance requested 
for the project and the applicant's ability and financial capacity to 
carry out the proposed project. It must show its financial and other 
ability to carry out the proposed work. All institutions participating 
in a project application (including all members of a consortium), must 
include an income statement (or equivalent revenue and expense reports) 
and

[[Page 67]]

balance sheet reports, reflecting net worth, for the most recent annual 
reporting period preceding the date of the application. When the 
applicant is a partnership, company, corporation or other entity, 
current balance sheets, reflecting net worth, are needed from each of 
the entities that has at least a 20 percent interest in such 
partnership, company, corporation, or other entity. When the applicant 
is a consortium, a current balance sheet, reflecting net worth, is 
needed from each member of the consortium and from each of the entities 
that has at least a 20 percent interest in such member of the 
consortium.
    (1) Applicants must include sufficient pro-forma financial data to 
demonstrate feasibility of the project and the financial capability of 
the project participants to continue a sustainable project for a minimum 
of 10 years after completion of the project. This documentation should 
include non-contingent sources of income or revenues that are sufficient 
to pay operating expenses including telecommunications access and toll 
charges, system maintenance, salaries, training, and any other general 
operating expenses, and provide for replacement of depreciable items.
    (2) For each hub and end user site, the applicant must identify and 
provide reasonable evidence of each source of revenue. If the projection 
relies on cost sharing arrangements among hub and end user sites, the 
applicant must provide evidence of agreements made among project 
participants.
    (3) For applicants eligible under Sec. 1703.103(a)(3), an 
explanation of the economic analysis justifying the rate structure to 
ensure that the benefit, including cost saving, of the financial 
assistance is passed through to those receiving telemedicine or distance 
learning services.
    (f) A statement of experience. The applicant must provide a written 
narrative (not exceeding three single spaced pages) describing its 
demonstrated capability and experience, if any, in operating an 
educational or health care endeavor and any project similar to the 
project. Experience in a similar project is desirable but not required.
    (g) Funding commitment from other sources. The applicant must 
provide evidence, in form and substance satisfactory to RUS, that 
funding agreements have been obtained to ensure completion of the 
project. These agreements shall be sufficient to ensure:
    (1) Payment of all proposed expenditures for the project;
    (2) All required matching contribution in 1703.120;
    (3) any additional matching funding provided in accordance with 
Sec. 1703.126(b)(4); and
    (4) Any other funds necessary to complete the project.
    (h) A telecommunications system plan. A telecommunications system 
plan consisting of the following:
    (1) The capabilities of the telecommunications terminal equipment, 
including a description of the specific equipment which will be used to 
deliver the proposed service. The applicant must document discussions 
with various technical sources which could include consultants, 
engineers, product vendors, or internal technical experts, provide 
detailed cost estimates for operating and maintaining the end user 
equipment and provide evidence that alternative equipment and 
technologies were evaluated.
    (2) A listing of the proposed purchases or leases of 
telecommunications terminal equipment, telecommunications transmission 
facilities, data terminal equipment, interactive video equipment, 
computer hardware and software systems, and components that process data 
for transmission via telecommunications, computer network components, 
communication satellite ground station equipment, or any other elements 
of the telecommunications system designed to further the purposes of 
this subpart, that the applicant intends to build or fund using RUS 
financial assistance.
    (3) A description of the consultations with the appropriate 
telecommunications carriers (including other interexchange carriers, 
cable television operators, enhanced service providers, providers of 
satellite services and telecommunications equipment manufacturers and 
distributors) and the anticipated role of such providers in the proposed 
telecommunications system.

[[Page 68]]

    (i) Compliance with other Federal statutes. The applicant must 
provide evidence of compliance with other Federal statutes and 
regulations including, but not limited to the following:
    (1) E.O. 11246, Equal Employment Opportunity, as amended by E.O. 
11375 and as supplemented by regulations contained in 41 CFR part 60;
    (2) Architectural barriers;
    (3) Flood hazard area precautions;
    (4) Assistance and Real Property Acquisition Policies Act of 1970;
    (5) Drug-Free Workplace Act of 1998 (41 U.S.C. 701);
    (6) E.O.s 12549 and 12689, Debarment and Suspension;
    (7) Byrd Anti-Lobbying Amendment (31 U.S.C. 1352).
    (j) Environmental impact and historic preservation. (1) The 
applicant must provide details of the project's impact on the 
environment and historic preservation. Grants made under this part are 
subject to part 1794 of this chapter which contains RUS' policies and 
procedures for implementing a variety of Federal statutes, regulations, 
and executive orders generally pertaining to the protection of the 
quality of the human environment that are listed in 7 CFR 1794.1. The 
application shall contain a separate section entitled ``Environmental 
Impact of the Project.''
    (2) The applicant may use the ``Environmental Questionnaire,'' 
available from RUS, to assist in complying with the requirements of this 
section.
    (k) Evidence of legal authority and existence. The applicant must 
provide evidence of its legal existence and authority to enter into a 
grant agreement with RUS and perform the activities proposed under the 
grant application.
    (l) Federal debt certification. The applicant must provide a 
certification that it is not delinquent on any obligation owed to the 
government (7 CFR parts 3016 and 3019).
    (m) Consultation with USDA State Director, Rural Development. The 
applicant must provide evidence that it has consulted with the USDA 
State Director, Rural Development, concerning the availability of other 
sources of funding available at the State or local level.
    (n) State strategic plan conformity. The applicant must provide 
evidence from the USDA State Director, Rural Development, that the 
application conforms with the State strategic plan as prepared under 
section 381D of the Consolidated Farm and Rural Development Act (7 
U.S.C. 1921 et seq.). The applicant should indicate if such a plan does 
not exist.
    (o) Supplemental information. The applicant should provide any 
additional information it considers relevant to the project and likely 
to be helpful in determining the extent to which the project would 
further the purposes of the 1996 Act.
    (p) Additional information required by RUS. The applicant must 
provide any additional information RUS may consider relevant to the 
application and necessary to adequately evaluate the application. RUS 
may request modifications or changes, including changes in the amount of 
financial assistance requested, in any proposal described in an 
application submitted under this subpart.

[64 FR 14360, Mar. 25, 1999, as amended at 64 FR 25423, May 12, 1999]



Sec. 1703.126  Criteria for scoring grant applications.

    (a) Criteria. The criteria in this section will be used by RUS to 
score applications that have been determined to be in compliance with 
the requirements of this subpart. Applications for grants must meet the 
rurality requirements in paragraph (b)(2)(iv) of this section and 
address each of the following scoring criteria:
    (1) The need for services and benefits derived from services (up to 
55 points);
    (2) The comparative rurality of the project service area (up to 45 
points);
    (3) The economic need of the applicant's service area as estimated 
by the NSLP or other supplemental objective criteria (up to 35 points);
    (4) The ability of the applicant to leverage resources (up to 35 
points);
    (5) Innovativeness of the project (up to 15 points);
    (6) The cost effectiveness of the system (up to 35 points);
    (7) Project participation in EZ/ECs (Empowerment Zone and Enterprise 
Communities) and Champion Communities (up to 15 points).
    (b) Scoring criteria:

[[Page 69]]

    (1) The need for services and benefits derived from services--Up to 
55 Points. (i) This criterion will be used by RUS to score applications 
based on the documentation in support of the need for services, benefits 
derived from the services proposed by the project, and local community 
involvement in planning, implementing, and financial assistance of the 
project. Applicants may receive up to 45 points for documenting the need 
for services and benefits derived from service as explained in this 
section. Applicants with an average NSLP percentage less than 50 percent 
as determined in paragraph (b)(3) of this section may receive up to an 
additional 10 points based on information submitted that evidences the 
economic need of the project's service area. This determination will be 
made by RUS based on information submitted by the applicant under 
paragraph (b)(1) of this section.
    (ii) RUS will consider the extent of the applicant's documentation 
explaining the economic, education, or health care challenges facing the 
community; the applicant's proposed plan to address these challenges; 
how the grant can help; and why the applicant cannot complete the 
project without a grant. RUS will also consider the extent to which the 
applicant provides evidence that economic, education, or health care 
challenges could not be addressed without employing advanced technology. 
The Administrator will also consider any support by recognized experts 
in the related educational or health care field, any documentation 
substantiating the educational or health care underserved nature of the 
applicant's proposed service area, and any justification for specific 
educational or medical services which are needed and will provide direct 
benefits to rural residents.
    (A) Some examples of benefits to be provided by the project include, 
but are not limited to:
    (1) Improved educational opportunities for a specified number of 
students;
    (2) Travel time and money saved by telemedicine diagnoses;
    (3) Number of doctors retained in rural areas;
    (4) Number of additional students electing to attend higher 
education institutions;
    (5) Lives saved due to prompt medical diagnoses and treatment;
    (6) New education courses offered, including college level courses;
    (7) Expanded use of educational facilities such as night training;
    (8) Number of patients receiving telemedicine diagnoses;
    (9) Provision of training, information resources, library assets, 
adult education, lifetime learning, community use of technology, jobs, 
connection to region, nation, and world.
    (B) Other matters that will be considered by RUS under this 
criterion include:
    (1) That rural residents, and other beneficiaries, desire the 
educational or medical services to be provided by the project. A strong 
indication of need is the willingness of local end users or 
institutions, to the extent possible, to contribute to the capital costs 
of establishing the project. This could include letters of financial 
commitment toward the project from local institutions.
    (2) The extent of the project's planning, development, and support 
by local residents and institutions. This may include evidence of 
community involvement, as exemplified in community meetings, public 
forums, and surveys. In addition, applicants should provide evidence of 
local residents' participation in the project planning and development.
    (3) The extent to which the application addresses the problems of 
population out-migration and how the project seeks to slow, halt, or 
prevent population loss.
    (4) The extent to which the application is consistent with the State 
strategic plan prepared by the Rural Development State Director of the 
United States Department of Agriculture.
    (2) The comparative rurality of the project service area--Up to 45 
Points. This criterion will be used to evaluate the relative rurality of 
service areas for various projects. Under this system, the end user 
sites and hubs (as defined in Sec. 1703.102) contained within the 
project service area are identified and

[[Page 70]]

given a score according to the population of the area where the end user 
sites are located.
    (i) The following definitions are used in the evaluation of 
rurality:
    (A) Exceptionally Rural Area means any area of the United States not 
included within the boundaries of any incorporated or unincorporated 
city, village, or borough having a population in excess of 5,000 
inhabitants.
    (B) Rural Area means any area of the United States included within 
the boundaries of any incorporated or unincorporated city, village, or 
borough having a population over 5,000 and not in excess of 10,000 
inhabitants.
    (C) Mid-Rural Area means any area of the United States included 
within the boundaries of any incorporated or unincorporated city, 
village, or borough having a population over 10,000 and not in excess of 
20,000 inhabitants.
    (D) Urban Area means any area of the United States included within 
the boundaries of any incorporated or unincorporated city, village, or 
borough having a population in excess of 20,000 inhabitants.
    (ii) There are a total of 45 possible points for this criterion. 
Each end user site will receive points based on its location in 
accordance with paragraph (b)(2)(i) of this section. If a hub is 
utilized as an end user site, the hub will be considered as an end user 
site. The applicant will receive points as follows:
    (A) If the end user site is located in an Exceptionally Rural Area, 
it will receive 45 points.
    (B) If the end user site is located in a Rural Area, it will receive 
30 points.
    (C) If the end user site is located in a Mid-Rural Area, it will 
receive 15 points.
    (D) If the end user site is located in an Urban Area, it will 
receive 0 points.
    (iii) The total score for this criterion will be based on the 
average score for all the end user sites included in the project.
    (iv) An application must receive a minimum of 20 points as an 
average score for all the end user sites under this criterion to be 
eligible for a grant.
    (3) The economic need of the applicant's service area as estimated 
by NSLP--Up to 35 points. This criterion will be used to evaluate the 
relative financial need of the applicant, community, and project. All 
applicants are required to provide the applicable percentage of students 
eligible to participate in the NSLP for each area to be served by the 
end user site. The appropriate State or local organization administering 
the program must certify the percentages as being correct. The applicant 
must provide RUS with a listing of the location of each end user site 
(city, town, village, borough or rural area plus the State) discussing 
how the appropriate NSLP percentage was determined in accordance with 
this section. These percentages may be obtained from the State or local 
organization that administers the program and must be certified by that 
organization as being correct. For purposes of this subpart, the NSLP 
percentage will reflect the percentage of eligibility rather than the 
percentage of actual participation.
    (i) The following guidelines will be used to determine the 
applicable NSLP percent for a particular application:
    (A) Public schools or non-profit private schools of high school 
grade or under will use the actual eligibility percentage for that 
particular school.
    (B) Schools and institutions of higher learning ineligible to 
participate in the NSLP and non-school end user sites (medical 
facilities, libraries, etc.) will use the eligibility percentage of all 
students in the school district where the end user will be located.
    (C) Percentage ratios will be rounded up to the next highest or 
rounded down to the next lowest whole number for fraction of percentages 
at or greater than .5 or less than .5, respectively.
    (D) The project NSLP percentage will be determined by the average of 
the NSLP percentages of the end user sites. If end user sites fall 
within different percentile categories, the eligibility percentages 
associated with each end user site will be averaged to determine the 
percentile category. For purposes of averaging, if a hub is also 
utilized as an end user site, the hub will be considered as an end user 
site.
    (ii) The applicant will receive points as follows:
    (A) NSLP percentage greater than or equal to 75 percent--35 points

[[Page 71]]

    (B) NSLP percentage greater than or equal to 50 percent but less 
than 75 percent--25 points
    (C) NSLP percentage greater than or equal to 25 percent but less 
than 50 percent--15 points
    (D) NSLP percentage less than 25% percent--0 points
    (4) The ability of the applicant to leverage resources--Up to 35 
points. This criterion will be used to evaluate the ability of the 
applicant to provide a matching contribution for the project using other 
non-Federal financial assistance. Documentation submitted in support of 
the application should reflect any additional financial support for the 
project from non-Federal sources above the applicant's matching 
contribution as required by Sec. 1703.120. Based on the maximum RUS 
financial assistance percentage of 70 percent of eligible project costs, 
the minimum matching as a percentage of the grant requested is 42.85 
percent. The applicant must include evidence from authorized 
representatives of the sources that the funds are available and will be 
used for the project. The applicant will receive points as follows:
    (i) Matching contribution for a grant for approved purposes greater 
than 42.85 percent, but less than or equal to 70 percent of the grant--0 
points.
    (ii) Matching contribution for a grant for approved purposes greater 
than 70 percent, but less than or equal to 100 percent of the grant--15 
points.
    (iii) Matching contribution for a grant for approved purposes 
greater than 100 percent, but less than or equal to 150 percent of the 
grant--25 points.
    (iv) Matching contribution for a grant for approved purposes greater 
than 150 percent, but less than or equal to 200 percent of the grant--30 
points.
    (v) Matching contribution for a grant for approved purposes greater 
than 200 percent of the grant--35 points.
    (5) Innovativeness of the project--Up to 15 points. This criterion 
will be used to evaluate the innovativeness of application based on 
documentation that shows how the project utilizes advanced 
telecommunications in a unique way to address the needs of the 
community. Innovativeness should be addressed in the context of how the 
project will deliver distance learning or telemedicine services more 
effectively or at a lower cost. The following issues may be addressed to 
show how the project differs from a typical distance learning and 
telemedicine network as follows:
    (i) The extent to which the project differs from a technical 
standpoint;
    (ii) The extent to which the project differs from an educational or 
medical programmatic standpoint;
    (iii) The extent to which the project reflects a unique adaptation 
of technology based on the special needs or circumstances of the 
proposed area to be served by the project; and
    (iv) The potential of the project to influence or lead changes in 
how telecommunications services can be delivered in other areas.
    (6) The cost-effectiveness of the project--Up to 35 points. This 
criterion will be used to evaluate the cost effectiveness of the 
application based on the extent that cost-efficiency is considered in 
delivering the services in the project. The following issues should be 
addressed under this criterion:
    (i) The extent to which the applicant has considered various 
technological options for delivering the services. The applicant must 
provide sufficient documentation reflecting accepted analytical and 
financial methodologies to substantiate its choice of technology as the 
most cost-effective option. RUS will consider the applicant's 
documentation and analysis comparing various systems and technologies.
    (ii) Whether buying or leasing specific equipment is more cost 
effective.
    (iii) The extent to which the project will utilize other existing 
networks at the regional, statewide, national or international levels. 
To the extent possible, educational and health care networks should be 
designed to utilize the widest practicable number of other networks that 
expand the capabilities of the project, thereby affording rural 
residents opportunities that may not be available at the local level. 
The ability to connect to the Internet alone cannot be used as the sole 
basis to fulfill this criteria.
    (iv) The extent to which the facilities being constructed with 
financial assistance, particularly financial assistance under this 
chapter provided to entities

[[Page 72]]

other than the applicant, will be utilized to extend or enhance the 
benefits of the project.
    (v) The extent to which the project utilizes existing 
telecommunications transmission facilities that could provide the 
transmission path for the needed services. For projects that do not 
utilize existing transmission facilities, RUS will consider 
documentation explaining the necessity of this option. RUS will also 
consider any agreements between the applicant and other entities for 
sharing transmission facilities to lower the fixed costs of such 
facilities.
    (7) Project participation in EZ/ECs and champion communities--(Up to 
15 Points). This criterion will be used by RUS to score applications 
based on the number of end user sites within an EZ/EC and Champion 
Community. Ten (10) points will be assigned if at least one end user 
site is located in an EZ/EC. Five (5) points will be assigned if at 
least one end user site is located in a Champion Community.

[64 FR 14360, Mar. 25, 1999; 64 FR 25422, May 12, 1999]



Sec. 1703.127  Application selection provisions.

    (a) Applications will be selected for approval based on scores 
assigned, availability of funds, and the provisions of this section. RUS 
will make determinations regarding the reasonableness of all numbers; 
dollar levels; rates; the nature and design of the project; costs; 
location; and other characteristics of the application and the project 
to determine the number of points assigned to a grant application for 
all selection criteria.
    (b) Regardless of the number of points an application receives in 
accordance with Sec. 1703.126, the Administrator may, based on a review 
of the applications in accordance with the requirements of this subpart:
    (1) Limit the number of applications selected for projects located 
in any one State during a fiscal year;
    (2) Limit the number of selected applications for a particular 
project;
    (3) Select an application receiving fewer points than another higher 
scoring application if there are insufficient funds during a particular 
funding period to select the higher scoring application. In this case, 
however, the Administrator will provide the applicant of the higher 
scoring application the opportunity to reduce the amount of its grant 
request to the amount of funds available. If the applicant agrees to 
lower its grant request, it must certify that the purposes of the 
project can be met, and the Administrator must determine the project is 
financially feasible at the lower amount in accordance with 
Sec. 1703.125(e)(1). An applicant or multiple applicants affected under 
this paragraph will have the opportunity to be considered for loan 
financing in accordance with subparts F and G of this part.
    (c) RUS will not approve a grant if RUS determines that:
    (1) The applicant's proposal does not indicate financial feasibility 
or is not sustainable in accordance with the requirements of 
Sec. 1703.125(e)(1);
    (2) The applicant's proposal indicates technical flaws, which, in 
the opinion of RUS, would prevent successful implementation, operation, 
or sustainability of the project;
    (3) Other applications would provide more benefit to rural America 
based on a review of the financial and technical information submitted 
in accordance with Sec. 1703.125(e).
    (4) Any other aspect of the applicant's proposal fails to adequately 
address any requirement of this subpart or contains inadequacies which 
would, in the opinion of RUS, undermine the ability of the project to 
meet the general purpose of this subpart or comply with policies of the 
DLT Program contained in Sec. 1703.101.
    (d) Grant applications will be ranked by the type of application 
(health care or educational) and total points scored. Grants available 
for medical and educational applicants may be allocated based on the 
total number of medical and educational applications scoring in the top 
50 percent of all applications received for that fiscal year. Based on 
the number and type of applications received, applications may be ranked 
only in one category based on the predominant use of the project.
    (e) RUS may reduce the amount of the applicant's grant based on 
insufficient program funding for the fiscal

[[Page 73]]

year in which the project is reviewed. RUS will discuss its findings 
informally with the applicant and make every effort to reach a mutually 
acceptable agreement with the applicant. Any discussions with the 
applicant and agreements made with regard to a reduced grant amount will 
be confirmed in writing, and these actions shall be deemed to have met 
the notification requirements set forth in paragraph (f) of this 
section.
    (f) RUS will provide the applicant with an explanation of any 
determinations made with regard to paragraphs (c)(1) through (c)(4) of 
this section prior to making final project selections for the year. The 
applicant will be provided 15 days from the date of RUS' letter to 
respond, provide clarification, or make any adjustments or corrections 
to the project. If, in the opinion of the Administrator, the applicant 
fails to adequately respond to any determinations or other findings made 
by the Administrator, the project will not be funded, and the applicant 
will be notified of this determination. If the applicant does not agree 
with this finding an appeal may be filed in accordance with 
Sec. 1703.129.
    (g) Grantees shall comply with all applicable provisions of 7 CFR 
parts 3015, 3016, and 3019.

[64 FR 14360, Mar. 25, 1999; 64 FR 25422, May 12, 1999]



Sec. 1703.128  Submission of applications.

    (a) Applications for grants shall be submitted to the RUS, U.S. 
Department of Agriculture, 1400 Independence Avenue, SW., STOP 1590, 
Washington, DC 20250-1590. Applications should be marked ``Attention: 
Assistant Administrator, Telecommunications Program''.
    (b) Applications must be submitted to RUS postmarked not later than 
the application filing deadline established by the Administrator if the 
applications are to be considered during the period for which the 
application was submitted. The deadline for submission of applications 
each fiscal year will be published, and provided through other notices, 
by RUS in the Federal Register, at least 30 days before the deadline 
occurs. It is suggested that applications be submitted prior to the 
respective deadline to ensure they can be reviewed and considered 
complete by the deadline. RUS will review each application for 
completeness in accordance with Sec. 1703.125, and notify the applicant, 
within 15 working days of the receipt of the application, of the results 
of this review, citing any information that is incomplete. To be 
considered for a grant, the applicant must submit the information to 
complete the application within 15 working days of the date of RUS' 
written response. If the applicant has submitted an application prior to 
the application filing deadline, the applicant will have 15 working days 
from RUS' response or until the application filing deadline to submit 
information, whichever provides the applicant more time. If the 
applicant fails to submit such information by the appropriate deadline, 
the application will be considered during the next established 
application period.
    (c) All applicants must submit an original and two copies of a 
completed application. Applicants must also submit a copy of the 
application to the State government point of contact, if one has been 
designated for the State, at the same time it submits an application to 
RUS. All applications must include the information required by 
Sec. 1703.125.



Sec. 1703.129  Appeals.

    All qualifying applications under this subpart will be scored based 
on the criteria contained in Sec. 1703.126. Awards will be made by RUS 
based on the highest ranking applications and the amount of financial 
assistance available for grants. All applicants will be notified in 
writing of the score each application receives, and included in this 
notification will be a tentative minimum required score to receive 
financial assistance. If the score received by the applicant could 
result in the denial of its application, or if its score, while 
apparently sufficient to qualify for financial assistance, may be 
surpassed by the score awarded to a competing application after appeal, 
that applicant may appeal its numerical scoring. Any appeal must be 
based on inaccurate scoring of the application by RUS and no new 
information or data that was not included in the original application

[[Page 74]]

will be considered. The appeal must be made, in writing, within 10 days 
after the applicant is notified of the scoring results. Appeals shall be 
submitted to the Administrator, RUS, U.S. Department of Agriculture, 
1400 Independence Ave., SW., STOP 1590, Washington, DC 20250-1590. 
Thereafter, the Administrator will review the original scoring to 
determine whether to sustain, reverse, or modify the original scoring 
determination. Final determinations will be made after consideration of 
all appeals. The Administrator's determination will be final. A copy of 
the Administrator's decision will be furnished promptly to the 
applicant.



Subpart F--Distance Learning and Telemedicine Combination Loan and Grant 
                                 Program

    Source: 64 FR 14366, Mar. 25, 1999, unless otherwise noted.



Sec. 1703.130  Use of combination loan and grant.

    (a) A combination loan and grant may be used by eligible 
organizations as defined in Sec. 1703.103 for distance learning and 
telemedicine projects to finance 100 percent of the cost of approved 
purposes contained in Sec. 1703.131 provided that no financial 
assistance may exceed the maximum amount for the year in which the 
combination loan and grant is made.
    (b) Applicants must meet the minimum eligibility requirement for 
determining the extent to which the project serves rural areas as 
determined in Sec. 1703.126(b)(2) (the applicant must receive at least 
20 points to be eligible to receive financial assistance under this 
subpart).



Sec. 1703.131  Approved purposes for a combination loan and grant.

    The approved purposes for a combination loan and grant are:
    (a) Acquiring, by lease or purchase, eligible equipment or 
facilities as defined in Sec. 1703.102;
    (b) Acquiring instructional programming;
    (c) Providing technical assistance and instruction for using 
eligible equipment, including any related software; developing 
instructional programming; providing engineering or environmental 
studies relating to the establishment or expansion of the phase of the 
project that is being financed with a combination loan and grant (this 
purpose shall not exceed 10 percent of the total requested financial 
assistance);
    (d) Paying for medical or educational equipment and facilities that 
are shown to be necessary to implement the project, including vehicles 
utilizing distance learning and telemedicine technology to deliver 
educational and health care services. The applicant must demonstrate 
that such items are necessary to meet the purposes under this subpart 
and financial assistance for such equipment and facilities is not 
available from other sources at a cost which would not adversely affect 
the economic viability of the project;
    (e) Providing links between teachers and students or medical 
professionals who are located at the same facility, provided that such 
facility receives or provides distance learning or telemedicine services 
as part of a distance learning or telemedicine network which meets the 
purposes of this subpart;
    (f) Providing for site development and alteration of buildings in 
order to meet the purposes of this subpart. Financial assistance for 
this purpose must be necessary and incidental to the total amount of 
financial assistance requested;
    (g) Purchasing of land, buildings, or building construction 
determined by RUS to be necessary and incidental to the project. The 
applicant must demonstrate that financial assistance funding from other 
sources is not available at a cost that does not adversely impact the 
economic viability of the project as determined by the Administrator. 
Financial assistance for this purpose must be necessary and incidental 
to the total amount of financial assistance requested; and
    (h) Acquiring telecommunications transmission facilities provided 
that no telecommunications carrier will install such facilities under 
the Act or through other financial procedures within a reasonable time 
period and at a cost to the applicant that does not impact the economic 
viability of the

[[Page 75]]

project, as determined by the Administrator.



Sec. 1703.132  Nonapproved purposes for a combination loan and grant.

    (a) Without limitation, a combination loan and grant made under this 
subpart shall not be expended:
    (1) To pay salaries, wages, or employee benefits to medical or 
educational personnel;
    (2) To pay for the salaries or administrative expenses of the 
applicant or the project;
    (3) To purchase equipment that will be owned by the local exchange 
carrier or another telecommunications service provider, unless the 
applicant is the local exchange carrier or other telecommunications 
service provider;
    (4) To duplicate facilities providing distance learning or 
telemedicine services in place or to reimburse the applicant or others 
for costs incurred prior to RUS' receipt of the completed application;
    (5) For projects located in areas covered by the Coastal Barrier 
Resources Act (16 U.S.C. 3501 et seq.);
    (6) For any purpose that the Administrator has not specifically 
approved;
    (7) Except for leases (see Sec. 1703.131), to pay the cost of 
recurring or operating expenses for the project; or,
    (8) For any other purposes not specifically outlined in 
Sec. 1703.131.
    (b) Except as otherwise provided in Sec. 1703.112, funds shall not 
be used to finance a project, in part, when the success of the project 
is dependent upon the receipt of additional financial assistance under 
this subpart or is dependent upon the receipt of other funding that is 
not assured.



Sec. 1703.133  Maximum and minimum amounts.

    Applications for a combination loan and grant under this subpart 
will be subject to limitations on the proposed amount of loans and 
grants. The Administrator will establish the maximum amount of loans and 
grants and the portion of grant funds as a percentage of total 
assistance for each project to be made available to an individual 
recipient for each fiscal year under this subpart, by publishing notice 
of the maximum amount in the Federal Register before the beginning of 
the fiscal year to carry out this subpart. The minimum amount of a 
combination loan and grant is $50,000.



Sec. 1703.134  Completed application.

    The following items are required to be submitted to RUS in support 
of an application for a combination loan and grant:
    (a) An application for federal assistance: A completed Standard Form 
424.
    (b) An executive summary of the project: The applicant must provide 
RUS with a general project overview that addresses each of the following 
9 categories:
    (1) A description of why the project is needed;
    (2) An explanation of how the applicant will address the need cited 
in paragraph (b)(1) of this section, why the applicant requires 
financial assistance, the types of educational or medical services to be 
offered by the project, and the benefits to the rural residents;
    (3) A description of the applicant, documenting eligibility in 
accordance with Sec. 1703.103;
    (4) An explanation of the total project cost including a breakdown 
of the combination loan and grant required and the source of funding, if 
applicable, for the remainder of the project;
    (5) A statement specifying whether the project provides 
predominantly distance learning or telemedicine services as defined in 
Sec. 1703.102. If the project provides both distance learning and 
telemedicine services, the applicant must identify the predominant use 
of the system;
    (6) A general overview of the telecommunications system to be 
developed, including the types of equipment, technologies, and 
facilities used;
    (7) A description of the participating hubs and end user sites and 
the number of rural residents that will be served by the project at each 
end user site;
    (8) A certification by the applicant that facilities constructed 
with a combination loan and grant do not duplicate adequately 
established telemedicine or distance learning services.

[[Page 76]]

    (9) A listing of the location of each end user site (city, town, 
village, borough, or rural area plus the State).
    (c) A scope of work. The scope of work must include, at a minimum:
    (1) The specific activities to be performed under the project;
    (2) Who will carry out the activities;
    (3) The time-frames for accomplishing the project objectives and 
activities; and
    (4) A budget for capital expenditures reflecting the line item costs 
for both the combination loan and grant and any other sources of funds 
for the project.
    (d) Financial information. The applicant must show its financial 
ability to complete the project; show project feasibility; and provide 
evidence that it can execute a note for a loan with a maturity period 
greater than one year. For educational institutions participating in a 
project application (including all members of a consortium), the 
financial data must reflect revenue and expense reports and balance 
sheet reports, reflecting net worth, for the most recent annual 
reporting period preceding the date of the application. For medical 
institutions participating in a project application (including all 
members of a consortium), the financial data must include income 
statement and balance sheet reports, reflecting net worth, for the most 
recent completed fiscal year preceding the date of the application. When 
the applicant is a partnership, company, corporation, or other entity, 
current balance sheets, reflecting net worth, are needed from each of 
the entities that has at least a 20 percent interest in such 
partnership, company, corporation or other entity. When the applicant is 
a consortium, a current balance sheet, reflecting net worth, is needed 
from each member of the consortium and from each of the entities that 
has at least a 20 percent interest in such member of the consortium.
    (1) Applicants must include sufficient pro-forma financial data that 
adequately reflects the financial capability of project participants and 
the project as a whole to continue a sustainable project for a minimum 
of 10 years and repay the loan portion of the combination loan and 
grant. This documentation should include sources of sufficient income or 
revenues to pay operating expenses including telecommunications access 
and toll charges, system maintenance, salaries, training, and any other 
general operating expenses, provide for replacement of depreciable 
items, and show repayment of interest and principal for the loan portion 
of the combination loan and grant.
    (2) A list of property which will be used as collateral to secure 
repayment of the loan. The applicant shall purchase and own collateral 
that secures the loan free from liens or security interests and take all 
actions necessary to perfect a security interest in the collateral that 
secures the loan. RUS considers as adequate security for a loan, a 
guarantee by a RUS telecommunications or electric borrower or by another 
qualified party. Additional forms of security, including letters of 
credit, real estate, or any other items will be considered. RUS will 
determine the adequacy of the security offered.
    (3) As applicable, a depreciation schedule covering all assets of 
the project. Those assets for which a combination loan and grant are 
being requested should be clearly indicated.
    (4) For each hub and end user site, the applicant must identify and 
provide reasonable evidence of each source of revenue. If the projection 
relies on cost sharing arrangements among hub and end user sites, the 
applicant must provide evidence of agreements made among project 
participants.
    (5) For applicants eligible under Sec. 1703.103(a)(3), an 
explanation of the economic analysis justifying the rate structure to 
ensure that the benefit, including cost saving, of the financial 
assistance is passed through to the other persons receiving telemedicine 
or distance learning services.
    (e) A statement of experience. The applicant must provide a written 
narrative (not exceeding three single spaced pages) describing its 
demonstrated capability and experience, if any, in operating an 
educational or health care endeavor similar to the project. Experience 
in a similar project is desirable but not required.

[[Page 77]]

    (f) A telecommunications system plan. A telecommunications system 
plan, consisting of the following (the items in paragraphs (f)(4) and 
(f)(5) of this section are required only when the applicant is 
requesting a combination loan and grant for telecommunications 
transmission facilities):
    (1) The capabilities of the telecommunications terminal equipment, 
including a description of the specific equipment which will be used to 
deliver the proposed service. The applicant must document discussions 
with various technical sources which could include consultants, 
engineers, product vendors, or internal technical experts, provide 
detailed cost estimates for operating and maintaining the end user 
equipment and provide evidence that alternative equipment and 
technologies were evaluated.
    (2) A listing of the proposed purchases or leases of 
telecommunications terminal equipment, telecommunications transmission 
facilities, data terminal equipment, interactive video equipment, 
computer hardware and software systems, and components that process data 
for transmission via telecommunications, computer network components, 
communication satellite ground station equipment, or any other elements 
of the telecommunications system designed to further the purposes of 
this subpart, that the applicant intends to build or fund using a 
combination loan and grant.
    (3) A description of the consultations with the appropriate 
telecommunications carriers (including other interexchange carriers, 
cable television operators, enhanced service providers, providers of 
satellite services, and telecommunications equipment manufacturers and 
distributors) and the anticipated role of such providers in the proposed 
telecommunications system.
    (4) Results of discussions with local exchange carriers serving the 
project area addressing the concerns contained in Sec. 1703.131(h).
    (5) The capabilities of the telecommunications transmission 
facilities, including bandwidth, networking topology, switching, 
multiplexing, standards, and protocols for intra-networking and open 
systems architecture (the ability to effectively communicate with other 
networks). In addition, the applicant must explain the manner in which 
the transmission facilities will deliver the proposed services. For 
example, for medical diagnostics, the applicant might indicate whether 
or not a guest or other diagnosticians can join the network from 
locations off the network. For educational services, indicate whether or 
not all hub and end-user sites are able to simultaneously hear in real-
time and see each other or the instructional material in real-time. The 
applicant must include detailed cost estimates for operating and 
maintaining the network, and include evidence that alternative delivery 
methods and systems were evaluated.
    (g) Compliance with other Federal statutes. The applicant must 
provide evidence of compliance with other federal statutes and 
regulations including, but not limited to the following:
    (1) E.O. 11246, Equal Employment Opportunity, as amended by E.O. 
11375 and as supplemented by regulations contained in 41 CFR part 60;
    (2) Architectural barriers;
    (3) Flood hazard area precautions;
    (4) Assistance and Real Property Acquisition Policies Act of 1970;
    (5) Drug-Free Workplace Act of 1998 (41 U.S.C. 701);
    (6) E.O.s 12549 and 12689, Debarment and Suspension;
    (7) Byrd Anti-Lobbying Amendment (31 U.S.C. 1352).
    (h) Environmental impact and historic preservation. (1) The 
applicant must provide details of the project's impact on the 
environment and historic preservation. Loans and grants made under this 
part are subject to 7 CFR part 1794 which contains RUS' policies and 
procedures for implementing a variety of Federal statutes, regulations, 
and Executive orders generally pertaining to the protection of the 
quality of the human environment that are listed in 7 CFR 1794.1. The 
application shall contain a separate section entitled ``Environmental 
Impact of the Project.''
    (2) The applicant may use the ``Environmental Questionnaire,'' 
available from RUS, to assist in complying with the requirements of this 
section.

[[Page 78]]

    (i) Evidence of legal authority and existence. The applicant must 
provide evidence of its legal existence and authority to enter into a 
grant and incur debt with RUS.
    (j) Federal debt certification. The applicant must provide evidence 
that it is not delinquent on any obligation owed to the government.
    (k) Supplemental information. The applicant should provide any 
additional information it considers relevant to the project and likely 
to be helpful in determining the extent to which the project would 
further the purposes of this subpart.
    (l) Additional information required by RUS. The applicant must 
provide any additional information RUS may consider relevant to the 
application and necessary to adequately evaluate the application. RUS 
may also request modifications or changes, including changes in the 
amount of funds requested, in any proposal described in an application 
submitted under this subpart.

[64 FR 14366, Mar. 25, 1999; 64 FR 25422, May 12, 1999, as amended at 64 
FR 25423, May 12, 1999]



Sec. 1703.135  Application selection provisions.

    (a) A combination loan and grant will be approved based on 
availability of funds, the financial feasibility of the project in 
accordance with Sec. 1703.134(d), the services to be provided which 
demonstrate that the project meets the general requirements of this 
subpart, the design of the project; costs; location; and other 
characteristics of the application.
    (b) RUS will determine, from the information submitted with each 
application for a combination loan and grant, whether the application 
achieves sufficient priority, based on the criteria set forth in the 
1996 Act, to receive a combination loan and grant from funds available 
for the fiscal year. If such priority is achieved, RUS will process the 
combination loan and grant application on a first-in, first-out basis, 
provided that the total amount of applications on-hand for combination 
loans and grants does not exceed 90 percent of the total loan and grant 
funding available for the fiscal year. At such time as the total amount 
of applications eligible for combination loans and grants, if such 
applications were approved, exceeds 90 percent of amount of combination 
loan and grant funding available, RUS will process the remaining 
applications using the evaluation criteria set forth in Sec. 1703.126.
    (c) RUS will not approve a combination loan and grant if RUS 
determines that:
    (1) The applicant's proposal does not indicate financial 
feasibility, or will not be adequately secured in accordance with the 
requirements contained in Sec. 1703.134(d);
    (2) The applicant's proposal indicates technical flaws, which, in 
the opinion of RUS, would prevent successful implementation, or 
operation of the project; or
    (3) Any other aspect of the applicant's proposal fails to adequately 
address any requirements of this subpart or contains inadequacies which 
would, in the opinion of RUS, undermine the ability of the project to 
meet the general purpose of this subpart or comply with policies of the 
DLT program contained in Sec. 1703.101.
    (d) RUS will provide the applicant with a statement of any 
determinations made with regard to paragraphs (c)(1) through (c)(3) of 
this section. The applicant will be provided 15 days from the date of 
RUS' letter to respond, provide clarification, or make any adjustments 
or corrections to the project. If, in the opinion of the Administrator, 
the applicant fails to adequately respond to any determinations or other 
findings made by the Administrator, the project will not be funded, and 
the applicant will be notified of this determination. If the applicant 
does not agree with this finding, an appeal may be filed in accordance 
with Sec. 1703.137.



Sec. 1703.136   Submission of applications.

    (a) RUS will accept applications for a combination loan and grant 
submitted by RUS telecommunications General Field representatives 
(GFRs), by Rural Development State Directors, or by applicants 
themselves. Applications for a combination loan and grant under this 
subpart may be filed at any time and will be evaluated as received.

[[Page 79]]

    (b) Applications submitted to the State Director, Rural Development, 
in the State serving the headquarters of the project will be evaluated 
as they are submitted. All applicants must submit an original and two 
copies of a completed application. The applicant must also submit a copy 
of the application to the State government point of contact, if one has 
been designated for the State, at the same time it submits an 
application to the State Director. The State Director will:
    (1) Review each application for completeness in accordance with 
Sec. 1703.134, and notify the applicant, within 15 working days of 
receiving the application, of the results of this review, acknowledging 
a complete application, or citing any information that is incomplete. To 
be considered for a combination loan and grant, the applicant must 
submit any additional information requested to complete the application 
within 15 working days of the date of the State Director's written 
response. If the applicant fails to submit such information, the 
application will be returned to the applicant.
    (2) Within 30 days of the determination of a completed application 
in accordance with paragraph (b)(1) of this section, review the 
application to determine suitability for financial assistance in 
accordance with Sec. 1703.135, and other requirements of this subpart. 
Based on its review, the State Director will work with the applicant to 
resolve any questions or obtain any additional information. The 
applicant will be notified, in writing, of any additional information 
required to allow a financial assistance recommendation and will be 
provided a reasonable period of time to furnish the additional 
information.
    (3) Based on the review in accordance with Sec. 1703.135 and other 
requirements of this subpart, make a preliminary determination of 
suitability for financial assistance. A combination loan and grant 
recommendation will be prepared by the State Director with concurrence 
of the RUS telecommunications GFR that addresses the provisions of 
sections Sec. 1703.134 and Sec. 1703.135 and other applicable 
requirements of this subpart.
    (4) If the application is determined suitable for further 
consideration by RUS, forward an original and one copy of the 
application with a financial assistance recommendation, signed jointly, 
to the Assistant Administrator, Telecommunications Program, Rural 
Utilities Service, Washington, DC. The applicant will be notified by 
letter of this action. Upon receipt of the application from the State 
Director, RUS will conduct a review of the application and the financial 
assistance recommendation. A final determination will be made within 15 
days. If the Administrator determines that a combination loan and grant 
can be approved, the State Director will be notified and the State 
Director will notify the applicant. A combination loan and grant will be 
processed, approved, and serviced in accordance with Secs. 1703.105 
through 1703.112 of subpart D.
    (5) If the State Director determines that the application is not 
suitable for further consideration by RUS, notify the applicant with the 
reasons for this determination. The applicant may appeal this 
determination pursuant to section Sec. 1703.137 of this subpart.
    (c) Applications submitted by RUS telecommunications GFRs or 
directly by applicants will be evaluated as they are submitted. All 
applicants must submit an original and two copies of a completed 
application. The applicant must also submit a copy of the application to 
the State government point of contact, if one has been designated for 
the State, at the same time it submits an application to RUS. RUS will:
    (1) Review each application for completeness in accordance with 
Sec. 1703.134, and notify the applicant, within 15 working days of 
receiving the application, of the results of this review, acknowledging 
a complete application, or citing any information that is incomplete. To 
be considered for a combination loan and grant assistance, the applicant 
must submit any additional information requested to complete the 
application within 15 working days of the date of the RUS written 
response. If the applicant fails to submit such information, the 
application will be returned to the applicant.
    (2) Within 30 days of the determination of a completed application 
in accordance with paragraph (c)(1) of this

[[Page 80]]

section, review the application to determine suitability for financial 
assistance in accordance with Sec. 1703.135, and other requirements of 
this subpart. Based on its review, RUS will work with the applicant to 
resolve any questions or obtain any additional information. The 
applicant will be notified, in writing, of any additional information 
required to allow a financial assistance recommendation and will be 
provided a reasonable period of time to furnish the additional 
information.
    (3) If the application is determined suitable for further 
consideration by RUS, conduct a review of the application and financial 
assistance recommendation. A final determination will be made within 15 
days. If the Administrator determines that a combination loan and grant 
can be approved, the applicant will be notified. A combination loan and 
grant will be processed, approved, and serviced in accordance with 
Secs. 1703.105 through 1703.112 of subpart D.
    (4) If RUS determines that the application is not suitable for 
further consideration, notify the applicant with the reasons for this 
determination. The applicant will be able to appeal in accordance with 
Sec. 1703.137 of this subpart.



Sec. 1703.137  Appeals.

    Any appeal must be made, in writing, within 10 days after the 
applicant is notified of the determination to deny the application. 
Appeals shall be submitted to the Administrator, RUS, U.S. Department of 
Agriculture, 1400 Independence Ave., SW., STOP 1590, Washington, DC 
20250-1590. Thereafter, the Administrator will review the appeal to 
determine whether to sustain, reverse, or modify the original 
determination. Final determinations will be made after consideration of 
all appeals. The Administrator's determination will be final. A copy of 
the Administrator's decision will be furnished promptly to the 
applicant.



Secs. 1703.138-1703.139  [Reserved]



       Subpart G--Distance Learning and Telemedicine Loan Program

    Source: 64 FR 14369, Mar. 25, 1999, unless otherwise noted.



Sec. 1703.140  Use of loan funds.

    A loan may be used by eligible organizations as defined in 
Sec. 1703.103 for distance learning and telemedicine projects to finance 
100 percent of the cost of approved purposes contained in Sec. 1703.141 
provided that no financial assistance may exceed the maximum amount for 
the year in which the loan is made. Entities seeking a loan must be able 
to provide security and execute a note with a maturity period greater 
than one year. The following entities are eligible for loans under this 
subpart:
    (a) Organizations as defined in Sec. 1703.103. If a RUS 
telecommunications borrower is seeking a loan, the borrower does not 
need to submit all of the financial security information required by 
Sec. 1703.144(d). The borrower's latest financial report (Form 479) 
filed with RUS and any additional information relevant to the project, 
as determined by RUS, will suffice;
    (b) Any non-profit or for-profit entity, public or private entity, 
urban or rural institution, or rural educational broadcaster, which 
proposes to provide and receive distance learning and telemedicine 
services to carry out the purposes of this subpart; or
    (c) Any entity that contracts with an eligible organization in 
paragraphs (a) or (b) of this section for constructing distance learning 
or telemedicine facilities for the purposes contained in Sec. 1703.141, 
except for those purposes in Sec. 1703.141(h).
    (d) Applicants must meet the minimum eligibility requirement for 
determining the extent to which the project serves rural areas as 
contained in Sec. 1703.126(b)(2) (the applicant must receive at least 20 
points to be eligible to receive financial assistance under this 
subpart).

[64 FR 14369, Mar. 25, 1999, as amended at 64 FR 25423, May 12, 1999]



Sec. 1703.141  Approved purposes for loans.

    The following are approved purposes for loans:
    (a) Acquiring, by lease or purchase, eligible equipment or 
facilities as defined in Sec. 1703.102;

[[Page 81]]

    (b) Acquiring instructional programming;
    (c) Providing technical assistance and instruction for using 
eligible equipment, including any related software; developing 
instructional programming; providing engineering or environmental 
studies relating to the establishment or expansion of the phase of the 
project that is being financed with the loan (financial assistance for 
this purpose shall not exceed 10 percent of the requested financial 
assistance);
    (d) Paying for medical or educational equipment and facilities which 
are shown to be necessary to implement the project, including vehicles 
utilizing distance learning and telemedicine technology to deliver 
educational and health care services. The applicant must demonstrate 
that such items are necessary to meet the purposes under this subpart 
and financial assistance for such equipment and facilities is not 
available from other sources at a cost which would not adversely affect 
the economic viability of the project;
    (e) Providing links between teachers and students or medical 
professionals who are located at the same facility, provided that such 
facility receives or provides distance learning or telemedicine services 
as part of a distance learning or telemedicine network which meets the 
purposes of this subpart;
    (f) Providing for site development and alteration of buildings in 
order to meet the purposes of this subpart. Loans for this purpose must 
be necessary and incidental to the total amount of financial assistance 
requested;
    (g) Purchasing of land, buildings, or building construction, where 
such costs are demonstrated necessary to construct distance learning and 
telemedicine facilities. The applicant must demonstrate that funding 
from other sources is not available at a cost which does not adversely 
impact the economic viability of the project as determined by the 
Administrator. Financial assistance for this purpose must be necessary 
and incidental to the total amount of financial assistance requested;
    (h) Acquiring of telecommunications transmission facilities provided 
that no telecommunications carrier will install such facilities under 
the Act or through other financial procedures within a reasonable time 
period and at a cost to the applicant that does not impact the economic 
viability of the project, as determined by the Administrator;
    (i) Any project costs, except for salaries and administrative 
expenses, not included in paragraphs (a) through (h) of this section, 
incurred during the first two years of operation after the financial 
assistance has been approved. The applicant must show that financing 
such costs are necessary for the establishment or continued operation of 
the project and that financing is not available for such costs 
elsewhere, including from the applicant's financial resources. The 
Administrator will determine whether such costs will be financed based 
on information submitted by the applicant. Loans shall not be made 
exclusively to finance such costs, and financing for such costs will not 
exceed 20 percent of the loan provided to a project under this section; 
and
    (j) All of the costs needed to provide distance learning 
broadcasting to rural areas. Loans may be used to cover the costs of 
facilities and end-user equipment dedicated to providing educational 
broadcasting to rural areas for distance learning purposes. If the 
facilities are not 100 percent dedicated to broadcasting, a portion of 
the financing may be used to fund such facilities based on a percentage 
of use factor that approximates the distance learning broadcasting 
portion of use.

[64 FR 14369, Mar. 25, 1999, as amended at 64 FR 25423, May 12, 1999]



Sec. 1703.142  Nonapproved purposes for loans.

    (a) Loans made under this subpart will not be provided to pay the 
costs of recurring or operating expenses incurred after two years from 
approval of the project except for leases (see Sec. 1703.141).
    (b) Loans made under this subpart will not be provided for any of 
the following costs:
    (1) To purchase equipment that will be owned by the local exchange 
carrier

[[Page 82]]

or another telecommunications service provider, unless the applicant is 
the local exchange carrier or other telecommunications service provider;
    (2) To duplicate facilities providing distance learning or 
telemedicine services in place or to reimburse the applicant or others 
for costs incurred prior to RUS' receipt of the completed application;
    (3) For projects located in areas covered by the Coastal Barrier 
Resources Act (16 U.S.C. 3501 et seq.); or
    (4) To pay for salaries, wages, or administrative expenses; or
    (5) For any purpose that the Administrator has not specifically 
approved.
    (c) Except as otherwise provided in Sec. 1703.112, funds shall not 
be used to finance a project, in part, when the success of the project 
is dependent upon the receipt of additional financial assistance under 
this subpart G or is dependent upon the receipt of other funding that is 
not assured.

[64 FR 14369, Mar. 25, 1999, as amended at 64 FR 25423, May 12, 1999]



Sec. 1703.143  Maximum and minimum amounts.

    Applications for loans under this subpart will be subject to 
limitations on the proposed amount of loans. The Administrator will 
establish the maximum amount of a loan available to an applicant under 
this subpart, by publishing notice of the maximum amount in the Federal 
Register before the opening of the application window. The minimum 
amount of a loan is $50,000.



Sec. 1703.144  Completed application.

    The following items are required to be submitted in support of an 
application for a loan:
    (a) An application for federal assistance: A completed standard form 
424.
    (b) An executive summary of the project. The applicant must provide 
RUS with a general project overview that addresses each of the following 
9 categories:
    (1) A description of why the project is needed;
    (2) An explanation of how the applicant will address the need (see 
paragraph (b)(1) of this section), why the applicant requires financial 
assistance, the types of educational or medical services to be offered 
by the project, and the benefits to the rural residents;
    (3) A description of the applicant, documenting eligibility in 
accordance with Sec. 1703.103;
    (4) An explanation of the total project cost including a breakdown 
of the loan required and the source of funding, if applicable, for the 
remainder of the project;
    (5) A statement specifying whether the project provides 
predominantly distance learning or telemedicine services as defined in 
Sec. 1703.102. If the project provides both distance learning and 
telemedicine services, the applicant must identify the predominant use 
of the system;
    (6) A general overview of the telecommunications system to be 
developed, including the types of equipment, technologies, and 
facilities used;
    (7) A description of the participating hubs and end user sites and 
the number of rural residents which will be served by the project at 
each end user site;
    (8) A certification by the applicant that facilities funded by a 
loan do not duplicate adequate established telemedicine or distance 
learning services.
    (9) A listing of the location of each end user site (city, town, 
village, borough, or rural area plus the State).
    (c) A scope of work. The scope of work must include, at a minimum:
    (1) The specific activities to be performed under the project;
    (2) Who will carry out the activities;
    (3) The time-frames for accomplishing the project objectives and 
activities; and
    (4) A budget for capital expenditures reflecting the line item costs 
for the loan and any other sources of funds for the project.
    (d) Financial information. The applicant must show its financial 
ability to complete the project; show project feasibility; and provide 
evidence that it can execute a note for a loan for a maturity period 
greater than one year. For educational institutions participating in a 
project application (including all members of a consortium), the 
financial data must reflect revenue and expense reports and balance 
sheet reports, reflecting net worth, for the most recent annual 
reporting period preceding the date of the application.

[[Page 83]]

For medical institutions participating in a project application 
(including all members of a consortium), the financial data must include 
income statement and balance sheet reports, reflecting net worth, for 
the most recent completed fiscal year preceding the date of the 
application. When the applicant is a partnership, company, corporation, 
or other entity, current balance sheets, reflecting net worth, are 
needed from each of the entities that has at least a 20 percent interest 
in such partnership, company, corporation or other entity. When the 
applicant is a consortium, a current balance sheet, reflecting net 
worth, is needed from each member of the consortium and from each of the 
entities that has at least a 20 percent interest in such member of the 
consortium.
    (1) Applicants must include sufficient pro-forma financial data 
which adequately reflects the financial capability of project 
participants and the project as a whole to continue a sustainable 
project for a minimum of 10 years and repay the requested loan. This 
documentation should include sources of sufficient income or revenues to 
pay operating expenses including telecommunications access and toll 
charges, system maintenance, salaries, training, and any other general 
operating expenses, provide for replacement of depreciable items, and 
show repayment of interest and principal for the loan.
    (2) A list of property which will be used as collateral to secure 
repayment of the proposed loan. The applicant shall purchase and own 
collateral that secures the loan free from liens or security interests 
and take all actions necessary to perfect a first lien in the collateral 
that secures the loan. RUS will consider as adequate security a loan 
guarantee by a telecommunications or electric borrower or by another 
qualified party. Additional forms of security, including letters of 
credit, real estate, or any other items will be considered. RUS will 
determine the adequacy of the security offered.
    (3) As applicable, a depreciation schedule covering all assets of 
the project. Those assets for which a loan is being requested should be 
clearly indicated.
    (4) For each hub and end user site, the applicant must identify and 
provide reasonable evidence of each source of revenue. If the projection 
relies on cost sharing arrangements among hub and end user sites, the 
applicant must provide evidence of agreements made among project 
participants.
    (5) For applicants eligible under Sec. 1703.103(a)(3), an 
explanation of the economic analysis justifying the rate structure to 
ensure that the benefit, including cost saving, of the financial 
assistance is passed through to the other persons receiving telemedicine 
or distance learning services.
    (e) A statement of experience. The applicant must provide a written 
narrative (not exceeding three single spaced pages) describing its 
demonstrated capability and experience, if any, in operating an 
educational or health care endeavor and any project similar to the 
project. Experience in a similar project is desirable but not required.
    (f) A telecommunications system plan. A telecommunications system 
plan, consisting of the following (the items in paragraphs (f)(4) and 
(f)(5) of this section are required only when the applicant is 
requesting a loan for telecommunications transmission facilities):
    (1) The capabilities of the telecommunications terminal equipment, 
including a description of the specific equipment which will be used to 
deliver the proposed service. The applicant must document discussions 
with various technical sources which could include consultants, 
engineers, product vendors, or internal technical experts, provide 
detailed cost estimates for operating and maintaining the end user 
equipment and provide evidence that alternative equipment and 
technologies were evaluated.
    (2) A listing of the proposed purchases or leases of 
telecommunications terminal equipment, telecommunications transmission 
facilities, data terminal equipment, interactive video equipment, 
computer hardware and software systems, and components that process data 
for transmission via telecommunications, computer network components, 
communication satellite ground station equipment, or any other

[[Page 84]]

elements of the telecommunications system designed to further the 
purposes of this subpart, that the applicant intends to build or fund 
using a loan.
    (3) A description of the consultations with the appropriate 
telecommunications carriers (including other interexchange carriers, 
cable television operators, enhanced service providers, providers of 
satellite services, and telecommunications equipment manufacturers and 
distributors) and the anticipated role of such providers in the proposed 
telecommunications system.
    (4) Results of discussions with local exchange carriers serving the 
project area addressing the concerns contained in Sec. 1703.141(h).
    (5) The capabilities of the telecommunications transmission 
facilities, including bandwidth, networking topology, switching, 
multiplexing, standards, and protocols for intra-networking and open 
systems architecture (the ability to effectively communicate with other 
networks). In addition, the applicant must explain the manner in which 
the transmission facilities will deliver the proposed services. For 
example, for medical diagnostics, the applicant might indicate whether 
or not a guest or other diagnosticians can join the network from 
locations off the network. For educational services, indicate whether or 
not all hub and end-user sites are able to simultaneously hear in real-
time and see each other or the instructional material in real-time. The 
applicant must include detailed cost estimates for operating and 
maintaining the network, and include evidence that alternative delivery 
methods and systems were evaluated.
    (g) Compliance with other Federal statutes. The applicant must 
provide evidence of compliance with other Federal statutes and 
regulations including, but not limited to the following:
    (1) E.O. 11246, Equal Employment Opportunity, as amended by E.O. 
11375 and as supplemented by regulations contained in 41 CFR part 60;
    (2) Architectural barriers;
    (3) Flood hazard area precautions;
    (4) Assistance and Real Property Acquisition Policies Act of 1970;
    (5) Drug-Free Workplace Act of 1998 (41 U.S.C. 701);
    (6) E.O.s 12549 and 12689, Debarment and Suspension;
    (7) Byrd Anti-Lobbying Amendment (31 U.S.C. 1352).
    (h) Environmental impact and historic preservation. (1) The 
applicant must provide details of the project's impact on the 
environment and historic preservation. Loans made under this part are 
subject to 7 CFR part 1794 which contains RUS' policies and procedures 
for implementing a variety of Federal statutes, regulations, and 
executive orders generally pertaining to the protection of the quality 
of the human environment that are listed in 7 CFR 1794.1. The 
application shall contain a separate section entitled ``Environmental 
Impact of the Project.''
    (2) The applicant may use the ``Environmental Questionnaire,'' 
available from RUS, to assist in complying with the requirements of this 
section.
    (i) Evidence of legal authority and existence. The applicant must 
provide evidence of its legal existence and authority to enter into debt 
with RUS and perform the activities proposed under the loan application.
    (j) Federal debt certification. The applicants must provide a 
certification that it is not delinquent on any obligation owed to the 
government (7 CFR parts 3016 and 3019).
    (k) Supplemental information. The applicant should provide any 
additional information it considers relevant to the project and likely 
to be helpful in determining the extent to which the project would 
further the purposes of this subpart.
    (l) Additional information required by RUS. The applicant must 
provide any additional information RUS determines is necessary to 
adequately evaluate the application. Modifications or changes, including 
changes in the loan amount requested, may be requested in any project 
described in an application submitted under this subpart.

[64 FR 14369, Mar. 25, 1999; 64 FR 25422, May 12, 1999, as amended at 64 
FR 25423, May 12, 1999]



Sec. 1703.145  Application selection provisions.

    (a) Loans will be approved based on availability of funds, the 
financial feasibility of the project in accordance

[[Page 85]]

with Sec. 1703.144(d), the services to be provided which demonstrate 
that the project meets the general requirements of this subpart, the 
design of the project; costs; location; and other characteristics of the 
application.
    (b) RUS will determine, from the information submitted with each 
application for a loan, whether the application achieves sufficient 
priority, based on the criteria set forth in the 1996 Act, to receive a 
loan from funds available for the fiscal year. If such priority is 
achieved, RUS will process the loan application on a first-in, first-out 
basis, provided that the total amount of applications on-hand for loans 
does not exceed 90 percent of the total loan funding available for the 
fiscal year. At such time as the total amount of applications eligible 
for loans, if such applications were approved, exceeds 90 percent of 
amount of loan funding available, RUS will process the remaining 
applications using the evaluation criteria set forth in Sec. 1703.126.
    (c) A loan will not be approved if it is determined that:
    (1) The applicant's proposal does not indicate financial 
feasibility, or is not adequately secured in accordance with the 
requirements of Sec. 1703.144(d);
    (2) The applicant's proposal indicates technical flaws, which, in 
the opinion of RUS, would prevent successful implementation, or 
operation of the project; or
    (3) Any other aspect of the applicant's proposal fails to adequately 
address any requirements of this subpart or contains inadequacies which 
would, in the opinion of RUS, undermine the ability of the project to 
meet the general purpose of this subpart or comply with policies of the 
DLT program contained in Sec. 1703.101.
    (d) RUS will provide the applicant with a statement of any 
determinations made with regard to paragraphs (c)(1) through (c)(3) of 
this section. The applicant will be provided 15 days from the date of 
the RUS letter to respond, provide clarification, or make any 
adjustments or corrections to the project. If, in the opinion of the 
Administrator, the applicant fails to adequately respond to any 
determinations or other findings made by the Administrator, the loan 
will not be approved, and the applicant will be notified of this 
determination. If the applicant does not agree with this finding an 
appeal may be filed in accordance with Sec. 1703.147.

[64 FR 14369, Mar. 25, 1999; 64 FR 25422, May 12, 1999]



Sec. 1703.146  Submission of applications.

    (a) RUS will accept applications for loans submitted by RUS 
telecommunications General Field Representatives (GFRs), by Rural 
Development State Directors, or by applicants themselves. Applications 
for loans under this subpart may be filed at any time and will be 
evaluated as received on a non-competitive basis.
    (b) Applications submitted to the State Director, Rural Development, 
in the State serving the headquarters of the project will be evaluated 
as they are submitted. All applicants must submit an original and two 
copies of a completed application. The applicant must also submit a copy 
of the application to the State government point of contact, if one has 
been designated for the State, at the same time it submits an 
application to the State Director. The State Director will:
    (1) Review each application for completeness in accordance with 
Sec. 1703.144, and notify the applicant, within 15 working days of 
receiving the application, of the results of this review, acknowledging 
a complete application, or citing any information that is incomplete. To 
be considered for a loan, the applicant must submit any additional 
information requested to complete the application within 15 working days 
of the date of the State Director's written response. If the applicant 
fails to submit such information, the application will be returned to 
the applicant.
    (2) Within 30 days of the determination of a completed application 
in accordance with paragraph (b)(1) of this section, review the 
application to determine suitability for financial assistance in 
accordance with Sec. 1703.145, and other requirements of this subpart. 
Based on its review, the State Director will work with the applicant to 
resolve any questions or obtain any additional information. The 
applicant will be notified, in writing, of any additional information 
required to allow a financial assistance recommendation and will be

[[Page 86]]

provided a reasonable period of time to furnish the additional 
information.
    (3) Based on the review in accordance with Sec. 1703.145 and other 
requirements of this subpart, make a preliminary determination of 
suitability for financial assistance. A loan recommendation will be 
prepared by the State Director with concurrence of the RUS 
telecommunications GFR that addresses the provisions of Secs. 1703.144 
and 1703.145 and other applicable requirements of this subpart.
    (4) If the application is determined suitable for further 
consideration by RUS, forward an original and one copy of the 
application with a loan recommendation, signed jointly, to the Assistant 
Administrator, Telecommunications Program, Rural Utilities Service, 
Washington DC. The applicant will be notified by letter of this action. 
Upon receipt of the application from the State Director, RUS will 
conduct a cursory review of the application and the recommendation. A 
final determination will be made within 15 days. If the Administrator 
determines that a loan can be approved, the State Director will be 
notified and the State Director will notify the applicant. Applications 
for loans will be processed, and approved loans serviced, in accordance 
with Secs. 1703.105 through 1703.112.
    (5) If the State Director determines that the application is not 
suitable for further consideration by RUS, notify the applicant with the 
reasons for this determination. The applicant will be offered appeal 
rights in accordance with Sec. 1703.147.
    (c) Applications submitted by RUS telecommunications GFRs or 
directly by applicants will be evaluated as they are submitted. All 
applicants must submit an original and two copies of a completed 
application. The applicant must also submit a copy of the application to 
the State government point of contact, if one has been designated for 
the State, at the same time it submits an application to the RUS. RUS 
will:
    (1) Review each application for completeness in accordance with 
Sec. 1703.144, and notify the applicant, within 15 working days of 
receiving the application, of the results of this review, acknowledging 
a complete application, or citing any information that is incomplete. To 
be considered for a loan, the applicant must submit any additional 
information requested to complete the application within 15 working days 
of the date of the RUS written response. If the applicant fails to 
submit such information, the application will be returned to the 
applicant.
    (2) Within 30 days of the determination of a completed application 
in accordance with paragraph (c)(1) of this section, review the 
application to determine suitability for financial assistance in 
accordance with this subpart. Based on its review, RUS will work with 
the applicant to resolve any questions or obtain any additional 
information. The applicant will be notified, in writing, of any 
additional information required to allow a financial assistance 
recommendation and will be provided a reasonable period of time to 
furnish the additional information.
    (3) If the application is determined suitable for further 
consideration by RUS, conduct a review of the application and financial 
assistance recommendation. A final determination will be made within 15 
days. If the Administrator determines that a loan can be approved, the 
applicant will be notified. Applications will be processed, and approved 
loans serviced, in accordance with Secs. 1703.105 through 1703.112 of 
subpart D.
    (4) If RUS determines that the application is not suitable for 
further consideration, notify the applicant with the reasons for this 
determination. The applicant will be offered appeal rights in accordance 
with Sec. 1703.147 of this subpart.



Sec. 1703.147  Appeals.

    Any appeal must be made, in writing, within 10 days after the 
applicant is notified of the determination to deny the application. 
Appeals shall be submitted to the Administrator, RUS, U.S. Department of 
Agriculture, 1400 Independence Ave., SW., STOP 1590, Washington, DC 
20250-1590. Thereafter, the Administrator will review the appeal to 
determine whether to sustain, reverse, or modify the original 
determination. Final determinations will be made after consideration of 
all appeals. The Administrator's determination

[[Page 87]]

will be final. A copy of the Administrator's decision will be furnished 
promptly to the applicant.



    Subpart H--Deferments of RUS Loan Payments for Rural Development 
                                Projects

    Source: 58 FR 21639, Apr. 23, 1993, unless otherwise noted. 
Redesignated at 64 FR 14356, Mar. 25, 1999.



Sec. 1703.300  Purpose.

    This subpart E sets forth RUS's policies and procedures for making 
loan deferments of principal and interest payments on direct loans or 
insured loans made for electric or telephone purposes, but not for loans 
made for rural economic development purposes, in accordance with 
subsection (b) of section 12 of the RE Act. Loan deferments are provided 
for the purpose of promoting rural development opportunities.



Sec. 1703.301  Policy.

    It is RUS's policy to encourage borrowers to invest in and promote 
rural development and rural job creation projects that are based on 
sound economic and financial analyses. Borrowers are encouraged to use 
this program to promote economic, business and community development 
projects that will benefit rural areas.



Sec. 1703.302  Definitions and rules of construction.

    (a) Definitions. For the purpose of this subpart, the following 
terms will have the following meanings:1
    Administrator means the Administrator of RUS.
    Borrower means any organization which has an outstanding direct loan 
or insured loan made by RUS for the provision of electric or telephone 
service.
    Cushion of credit payment means a voluntary unscheduled payment on 
an RUS note made after October 1, 1987, credited to the cushion of 
credit account of a borrower.
    Deferment means a re-amortization of a payment of principal and/or 
interest on an RUS direct loan or insured loan for over either a 5- or 
10 year period, with the first payment beginning on the date of the 
deferment.
    Direct loan means a loan that is made by the Administrator pursuant 
to section 4 or section 201 of the RE Act (7 U.S.C. 901 et seq.) for the 
provision of electric or telephone service in rural areas and does not 
include a loan made to promote economic development in rural areas.
    Financially distressed borrower means an RUS-financed borrower 
determined by the Administrator to be either:
    (i) In default or near default on interest or principal payments due 
on loans made or guaranteed under the RE Act;
    (ii) A borrower that was in default or near default, but is 
currently participating in a workout or debt restructuring plan with 
RUS; or
    (iii) Experiencing a financial hardship.
    Insured loan means a loan that is made, held, and serviced by the 
Administrator, and sold and insured by the Administrator, pursuant to 
Section 305 of the RE Act (7 U.S.C. 901 et seq.) for the provision of 
electric or telephone service in rural areas and does not include a loan 
made to promote economic development in rural areas.
    Job creation means the creation of jobs in rural areas, or in close 
enough proximity to rural areas so that it is likely that the majority 
of the jobs created will be held by residents of rural areas.
    Project means a rural development project that a borrower proposes 
and the Administrator approves as qualifying under this subpart.
    RE Act means the Rural Electrification Act of 1936, as amended (7 
U.S.C. 901 et seq.).
    REA means the Rural Electrification Administration formerly an 
agency of the United States Department of Agriculture and predecessor 
agency to RUS with respect to administering certain electric and 
telephone loan programs.
    RTB means the Rural Telephone Bank (telephone bank), a body 
corporate and an instrumentality of the United States, that obtains 
supplemental funds from non-Federal sources and utilizes them in making 
loans, operating on a self-sustaining basis to the extent practicable 
(section 401, RE Act).

[[Page 88]]

    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture established pursuant to Section 232 of 
the Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor 
to REA with respect to administering certain electric and telephone 
programs. See 7 CFR 1700.1.
    Technical assistance means market research, product or service 
improvement, feasibility studies, environmental studies, and similar 
activities that benefit rural development or rural job creation 
projects.
    (b) Rules of construction. Unless the context otherwise indicates; 
``includes'' and ``including'' are not limiting, and ``or'' is not 
exclusive. The terms defined in Sec. 1703.302(a) include both the plural 
and the singular.

[58 FR 21639, Apr. 23, 1993, as amended at 59 FR 66440, Dec. 27, 1994]



Sec. 1703.303  Eligibility criteria for deferment of loan payments.

    The deferment of loan payments may be granted to any borrower that 
is not financially distressed, delinquent on any Federal debt, or in 
bankruptcy proceedings. However, the deferment of loan payments will not 
be granted to a borrower during any period in which the Administrator 
has determined that no additional financial assistance of any nature 
should be provided to the borrower pursuant to any provision of the RE 
Act. The determination to suspend eligibility for the deferment of loan 
payments under this subpart will be based on:
    (a) The borrower's demonstrated unwillingness to exercise diligence 
in repaying loans made by RUS or RTB or guaranteed by RUS that results 
in the Administrator being unable to find that such loans, would be 
repaid within the time agreed; or
    (b) The borrower's demonstrated unwillingness to meet the 
requirements in RUS's or RTB's legal documents or regulations.



Sec. 1703.304  Restrictions on the deferment of loan payments.

    (a) The deferment must not impair the security of any loans made RUS 
or RTB, or guaranteed by RUS, pursuant to the RE Act.
    (b) At no point in time may the amount of the debt service payments 
deferred exceed 50 percent of the total cost of a community, business, 
or economic development project for which a deferment is provided.
    (c) A borrower may defer debt service payments only in an amount 
equal to the investment made by such borrower in a rural development 
project. The investment must not be made from:
    (1) Proceeds of loans made or guaranteed pursuant to the RE Act, or 
grants made pursuant to the RE Act or section 2331 through section 2335A 
of the Rural Economic Development Act of 1990 (7 U.S.C. 950aaa et seq.);
    (2) Funds necessary to make timely payments of principal and 
interest on loans made, guaranteed or lien accommodated pursuant to the 
RE Act;
    (3) Insurance proceeds from mortgaged property;
    (4) Damage awards and sale proceeds resulting from eminent domain 
and similar proceedings involving mortgaged property;
    (5) Sale proceeds from mortgaged property sales requiring specific 
Administrator approval; and
    (6) Funds which are restricted by RUS or RTB loan instruments to be 
held in trust for the Government or to be held for any other specific 
purpose.
    (d) Any investment made in a rural development project prior to the 
date of the application for a deferment based on such project cannot be 
used to satisfy the requirements of this section.



Sec. 1703.305  Requirements for deferment of loan payments.

    (a) Except as otherwise provided in paragraph (b) of this section, 
the borrower must make a cushion of credit payment equal to the amount 
of the payment deferred and subject to the following rules:
    (1) Cushion of credit payments made prior to the date that an 
application for deferral has been approved by RUS cannot be used to 
satisfy the requirements of this section;
    (2) Once a cushion of credit payment has been made to satisfy the 
requirements of paragraph (a) of this section,

[[Page 89]]

it must remain on deposit in the cushion of credit account on the date 
of the deferral or the deferral will not take place; and
    (3) The cushion of credit payment must be received by RUS on the 
date the payment being deferred is due, or within 30 days prior to this 
date.
    (b) A borrower may elect to consolidate in one application filed 
pursuant to Sec. 1703.311, all of the related deferrals it wishes to 
receive in a twelve month period following application approval. In such 
a case, the requirement contained in paragraph (a)(1) of this section 
may alternatively be satisfied by depositing an amount equal to the 
aggregate deferrals covered by such application into the cushion of 
credit account at the time the first cushion of credit payment is due 
under paragraph (a)(1) of this section.



Sec. 1703.306  Limitation on funds derived from the deferment of loan payments.

    Funds derived from the deferment of loan payments will not be used:
    (a) To fund or assist projects which would, in the judgement of the 
Administrator, create a conflict of interest or the appearance of a 
conflict of interest. The borrower must disclose to the Administrator 
information regarding any potential conflict of interest or appearance 
of a conflict of interest;
    (b) For any purpose not reasonably related to the project as 
determined by the Administrator;
    (c) To transfer existing employment or business activities from one 
area to another; or
    (d) For the borrower's electric or telephone operations, nor for any 
operations affiliated with the borrower unless the Administrator has 
specifically informed the borrower in writing that the affiliated 
operations are part of the approved purposes.



Sec. 1703.307  Uses of the deferments of loan payments.

    The deferment of loan payments will be made to enable the borrower 
to provide funding and assistance for rural development and job creation 
projects. This includes, but is not limited to, the borrower providing 
financing to local businesses, community development assistance, 
technical assistance to businesses, and other community, business, or 
economic development projects that will benefit rural areas.



Sec. 1703.308  Amount of deferment funds available.

    (a) The total amount of deferments made available for each fiscal 
year under this program will not exceed 3 percent of the total payments 
due during fiscal year 1993 from all borrowers on direct loans and 
insured loans made under the RE Act. For each subsequent fiscal year 
after 1993, the total amount of deferments will not exceed 5 percent of 
the total payments due for the year from all borrowers on direct loans 
and insured loans.
    (b) The total amount of annual deferments are subject to limitations 
established by appropriations Acts.



Sec. 1703.309  Terms of repayment of deferred loan payments.

    (a) Deferments made to enable the borrower to provide financing to 
local businesses will be repaid over a period of 60 months, in equal 
installments, with payments beginning on the date of the deferment, and 
continuing in such a manner until the total amount of the deferment is 
repaid. The deferment payments will be made on either a monthly or 
quarterly basis depending on the existing repayment terms of the direct 
loan or insured loan being deferred. The deferment will not accrue 
interest.
    (b) In the case of deferments made to enable the borrower to provide 
community development assistance, technical assistance to businesses, 
and for other community, business, or economic development projects not 
included in paragraph (a) of this section, the deferment will be repaid 
over a period of 120 months, in equal installments, with payments 
beginning on the date of the deferment and continuing in such a manner 
until the total amount of the deferment is repaid. The deferment 
payments will be made on either a monthly or quarterly basis depending 
on the existing repayment terms of the direct loan or insured loan being 
deferred. The deferment will not accrue interest.

[[Page 90]]

    (c) The maturity date of a loan may not be extended as a result of a 
deferment.
    (d) If the required payment is not made by the borrower or received 
by the Administrator when due, the Administrator will reduce the 
borrower's cushion of credit account established under this subpart in 
an amount equal to the deferment payment required.
    (e) The balance in a borrower's cushion of credit account shall not 
be reduced by the borrower below the level of the unpaid balance of the 
payment deferred.



Sec. 1703.310  Environmental considerations.

    Prospective recipients of funds received from the deferment of loan 
payments are encouraged to consider the potential environmental impact 
of their proposed projects at the earliest planning stage and plan 
development in a manner that reduces, to the extent practicable, the 
potential to affect the quality of the human environment adversely.



Sec. 1703.311  Application procedures for deferment of loan payments.

    (a) A borrower applying for a deferment must:
    (1) Submit a certified board resolution to the Administrator 
requesting a deferment of principal and interest. The resolution must:
    (i) Be signed by the president or vice president of the borrower;
    (ii) Contain information on the total amount of deferment requested 
for each specific project;
    (iii) Contain information on the type of project and the length of 
deferment requested as defined in Sec. 1703.309; and
    (iv) Specify which officer of the borrower has been given the 
authority to certify to those matters required in this section;
    (2) Submit certification by the appropriate officer to the 
Administrator that the proposed project will not violate the limitations 
set forth in Sec. 1703.306 and disclose all information regarding any 
potential conflict of interest or appearance of a conflict of interest 
that would allow the Administrator to make an informed decision;
    (3) Submit certification by the appropriate officer to the 
Administrator that an investment in the rural development project will 
be made by the borrower in an amount equal to the deferred debt service 
payment;
    (4) Submit certification by the appropriate officer to the 
Administrator that the amount of the deferment will not exceed 50 
percent of the total cost of the project for which the deferment is 
provided;
    (5) Submit certification by the appropriate officer to the 
Administrator that it will make a cushion of credit payment necessary to 
satisfy the requirement of Sec. 1703.305(a);
    (6) Submit certification by the appropriate officer to the 
Administrator that it will comply with Sec. 1703.313 and provide 
documentation showing that its total investments, including the proposed 
investment, will not exceed the investment limitations specified in 7 
CFR part 1717, Subpart N, Investments, Loans and Guarantees by Electric 
Borrowers, or 7 CFR Part 1744, Post Loan Policies and Procedures Common 
to Guaranteed and Insured Loans. The documentation must provide a list 
of each rural development project the borrower has invested in to date, 
including the investment amounts;
    (7) Submit to the Administrator written identification of the direct 
loan(s) and/or insured loan(s) for which payments are to be deferred;
    (8) Submit to the Administrator a written narrative which contains 
information regarding the proposed rural development or job creation 
project such as the manner in which the project will promote community, 
business, or economic development in rural areas, the nature of the 
project, its location, the primary beneficiaries, and, if applicable, 
the number and type of jobs to be created; and
    (9) Submit to the Administrator a letter of approval from the state 
regulatory authority, if applicable, granting its approval for the 
borrower to defer direct loan payment(s) and/or insured loan payment(s) 
and invest the amount in a rural development project.
    (b) The Administrator reserves the right to determine that special 
circumstances require additional data

[[Page 91]]

from borrowers before acting on a deferment. The Administrator also 
reserves the right to require, as a condition of approving a loan 
payment deferment pursuant to this subpart, that the borrower execute 
and deliver any amendments or supplements to its loan documents that may 
be necessary or appropriate to achieve the purposes outlined in 
Sec. 1703.300.
    (c) The Administrator will decide whether the borrower is eligible 
for the deferment and will notify the borrower of the decision.



Sec. 1703.312  RUS review requirements.

    Borrowers shall ensure that funds are invested in the rural 
development project as approved by RUS. The Administrator reserves the 
right to review the books and copy records of borrowers receiving loan 
payment deferments as necessary to ensure that the investments in the 
rural development project are in accordance with this subpart and the 
representations and purposes stated in the borrower's completed 
application. If an audit discloses that the amount deferred was not used 
for the purposes stated in the completed application, the borrower shall 
be required to promptly repay the amount deferred and the benefits of 
the deferment to the borrower will be recaptured by RUS. The borrower is 
responsible for ensuring that disbursements and expenditures of funds 
covering the investment in the rural development project are properly 
supported with certifications, invoices, contracts, bills of sale, 
cancelled checks, or any other forms of evidence determined appropriate 
by the Administrator and that such supporting material is available at 
the borrower's premises for review by the RUS field accountant, 
borrower's certified public accountant, the Office of Inspector General, 
the General Accounting Office and any other accountant conducting an 
audit of the borrower's financial statements for this rural development 
program.



Sec. 1703.313  Compliance with other regulations.

    (a) Investments in a rural economic development project made by an 
electric borrower under this subpart are subject to the provisions of 7 
CFR part 1717, Subpart N, Investments, Loans and Guarantees by Electric 
Borrowers.
    (b) Investments in a rural economic development project made by a 
telephone borrower under this subpart are subject to the provisions of 7 
CFR Part 1744, Post Loan Policies and Procedures Common to Guaranteed 
and Insured Loans.



PART 1710--GENERAL AND PRE-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND GUARANTEED ELECTRIC LOANS--Table of Contents




                           Subpart A--General

Sec.
1710.1 General statement.
1710.2 Definitions and rules of construction.
1710.3 Form and bulletin revisions.
1710.4 Exception authority.
1710.5 Availability of forms.
1710.6 Applicability of certain provisions to completed loan 
          applications.
1710.7 Exemptions of RUS operational controls under section 306E of the 
          RE Act.
1710.8-1710.49 [Reserved]

              Subpart B--Types of Loans and Loan Guarantees

1710.50 Insured loans.
1710.51 Loan guarantees.
1710.52-1710.99 [Reserved]

              Subpart C--Loan Purposes and Basic Policies.

1710.100 General.
1710.101 Types of eligible borrowers.
1710.102 Borrower eligibility for different types of loans.
1710.103 Area coverage.
1710.104 Service to non-RE Act beneficiaries.
1710.105 State regulatory approvals.
1710.106 Uses of loan funds.
1710.107 Amount lent for acquisitions.
1710.108 Mergers and consolidations.
1710.109 Reimbursement of general funds and interim financing.
1710.110 Supplemental financing.
1710.111 Refinancing.
1710.112 Loan feasibility.
1710.113 Loan security.
1710.114 TIER, DSC, OTIER and ODSC requirements.
1710.115 Final maturity.
1710.116 [Reserved]
1710.117 Environmental considerations.
1710.118 [Reserved]

[[Page 92]]

1710.119 Loan processing priorities.
1710.120 Construction standards and contracting.
1710.121 Insurance requirements.
1710.122 Equal opportunity and nondiscrimination.
1710.123 Debarment and suspension.
1710.124 Uniform Relocation Act.
1710.125 Restrictions on lobbying.
1710.126 Federal debt delinquency.
1710.127 Drug free workplace.
1710.128-1710.149 [Reserved]

             Subpart D--Basic Requirements for Loan Approval

1710.150 General.
1710.151 Required findings for all loans.
1710.152 Primary support documents.
1710.153 Additional requirements and procedures.
1710.154-1710.199 [Reserved]

                        Subpart E--Load Forecasts

1710.200 Purpose.
1710.201 General.
1710.202 Requirement to prepare a load forecast-power supply borrowers.
1710.203 Requirement to prepare a load forecast-distribution borrowers.
1710.204 Filing requirements for borrowers that must maintain a current 
          RUS approved load forecast on an ongoing basis.
1710.205 Minimum requirements for all borrower load forecasts.
1710.206 Requirements for load forecasts prepared pursuant to RUS 
          approved load forecast work plans.
1710.207 RUS approval criteria for approval of load forecasts by 
          distribution borrowers not required to maintain a current load 
          forecast on an ongoing basis.
1710.208 RUS approval criteria for load forecasts submitted by all power 
          supply borrowers and by distribution borrowers required to 
          maintain a current load forecast on an ongoing basis.
1710.209 Requirements for load forecast work plans.
1710.210 Waiver of requirements or approval criteria.
1710.211-1710.249 [Reserved]

         Subpart F--Construction Work Plans and Related Studies

1710.250 General.
1710.251 Construction work plans--distribution borrowers.
1710.252 Construction work plans--power supply borrowers.
1710.253 Engineering and cost studies--addition of generation capacity.
1710.254 Alternative sources of power.
1710.255-1710.299 [Reserved]

                Subpart G--Long-Range Financial Forecasts

1710.300 General.
1710.301 Financial forecasts--distribution borrowers.
1710.302 Financial forecasts--power supply borrowers.
1710.303 Power cost studies--power supply borrowers.
1710.304-1710.349 [Reserved]

     Subpart H--Demand Side Management and Renewable Energy Systems

1710.350 Purpose.
1710.351 General policy; renewable energy systems.
1710.352 General policy; energy resource conservation programs.
1710.353 General policy; demand side management.
1710.354 Eligible DSM activities.
1710.355 DSM loan applications.
1710.356 Integrated resource plans.
1710.357 DSM plans.
1710.358 Requirements for a DSM plan.
1710.359 DSM effects.
1710.360 Submittal of alternate documentation.
1710.361 Type and term of loans.
1710.362 Loan approval.
1710.363 Advance and documentation of use of loan funds.
1710.364 Loan limits.

   Subpart I--Application Requirements and Procedures for Insured and 
                            Guaranteed Loans

1710.400 Initial contact.
1710.401 Loan application documents.
1710.402-1710.403 [Reserved]
1710.404 Additional requirements.
1710.405 Supplemental financing documents.
1710.406 Loan approval.
1710.407 Loan documents.

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

    Source: 57 FR 1053, Jan. 9, 1992, unless otherwise noted.



                           Subpart A--General



Sec. 1710.1  General statement.

    (a) This part establishes general and pre-loan policies and 
requirements that apply to both insured and guaranteed loans to finance 
the construction and improvement of electric facilities in rural areas, 
including generation, transmission, and distribution facilities.

[[Page 93]]

    (b) Additional pre-loan policies, procedures, and requirements that 
apply specifically to guaranteed and/or insured loans are set forth 
elsewhere:
    (1) For guaranteed loans in 7 CFR part 1712 and RUS Bulletins 20-22, 
60-10, 86-3, 105-5, and 111-3, or the successors to these bulletins; and
    (2) For insured loans in 7 CFR part 1714 and in RUS Bulletins 60-10, 
86-3, 105-5, and 111-3, or the successors to these bulletins.
    (c) This part supersedes those portions of the following RUS 
Bulletins and supplements that are in conflict.

20-5 Extensions of Payments of Principal and Interest
20-20 Deferment of Principal Repayments for Investment in Supplemental 
Lending Institutions
20-22 Guarantee of Loans for Bulk Power Supply Facilities
20-23 Section 12 Extensions for Energy Resources Conservation Loans
60-10 Construction Work Plans, Electric Distribution Systems
86-3 Headquarters Facilities for Electric Borrowers
105-5 Financial Forecast-Electric Distribution Systems
111-3 Power Supply Surveys
120-1 Development, Approval, and Use of Power Requirements Studies

    (d) When parts 1710, 1712, and 1714 are published in final form, the 
bulletins cited in paragraph (b) of this section will be rescinded, in 
whole or in part, or revised.

[57 FR 1053, Jan. 9, 1992, as amended at 58 FR 66262, Dec. 20, 1993]



Sec. 1710.2  Definitions and rules of construction.

    (a) Definitions. For the purpose of this part, the following terms 
shall have the following meanings:
    Administrator means the Administrator of RUS or his or her designee.
    Approved load forecast means a load forecast that RUS has determined 
is current for RUS purposes and has been approved by RUS pursuant to 7 
CFR part 1710, subpart E.
    Approved load forecast work plan means a load forecast work plan 
that RUS has determined is current for RUS' purposes and has been 
approved pursuant to 7 CFR part 1710, subpart E.
    APRR means Average Adjusted Plant Revenue Ratio calculated as a 
simple average of the adjusted plant revenue ratios for 1978, 1979 and 
1980 as follows:
[GRAPHIC] [TIFF OMITTED] TC16SE91.000

where:

A=Distribution (plant), which equals Part E, Line 14(e) of RUS Form 7;
B=General Plant, which equals Part E, Line 24(e) of RUS Form 7;
C=Operating Revenue and Patronage Capital, which equals Part A, Line 1 
of RUS Form 7; and
D=Cost of Power, which equals the sum of Part A, Lines 2, 3, and 4 of 
RUS Form 7.

    Area Coverage means the provision of adequate electric service to 
the widest practical number of rural users in the borrower's service 
area during the life of the loan.
    Borrower means any organization that has an outstanding loan made or 
guaranteed by RUS for rural electrification, or that is seeking such 
financing.
    Bulk Transmission Facilities means the transmission facilities 
connecting power supply facilities to the subtransmission facilities, 
including both the high and low voltage sides of the transformer used to 
connect to the subtransmission facilities, as well as related 
supervisory control and data acquisition systems.
    Call provision has the same meaning as ``prepayment option''.
    Consolidation means the combination of 2 or more borrower or 
nonborrower organizations, pursuant to state law, into a new successor 
organization that takes over the assets and assumes the liabilities of 
those organizations.
    Consumer means a retail customer of electricity, as reported on RUS 
Form 7, Part R, Lines 1-7.
    Demand side management (DSM) means the deliberate planning and/or 
implementation of activities to influence consumer use of electricity 
provided by a distribution borrower to produce beneficial modifications 
to the system load profile. Beneficial modifications to the system load 
profile ordinarily improve load factor or otherwise help in utilizing 
electric system resources to best advantage consistent with acceptable 
standards of service and lowest system cost. Load profile modifications 
are characterized as

[[Page 94]]

peak clipping, valley filling, load shifting, strategic conservation, 
strategic load growth, and flexible load profile. (See, for example, 
publications of the Electric Power Research Institute (EPRI), 3412 
Hillview Avenue, Palo Alto, CA 94304, especially ``Demand-Side 
Management Glossary'' EPRI TR-101158, Project 1940-25, Final Report, 
October 1992.) DSM includes energy conservation programs. It does not 
include sources of electrical energy such as renewable energy systems, 
fuel cells, or traditionally fueled generation, such as fossil or 
nuclear fueled generators.
    Distribution Borrower means a borrower that sells or intends to sell 
electric power and energy at retail in rural areas.
    Distribution Facilities means all electrical lines and related 
facilities beginning at the consumer's meter base, and continuing back 
to and including the distribution substation.
    DSC means Debt Service Coverage of the borrower calculated as:
    [GRAPHIC] [TIFF OMITTED] TR29DE95.000
    
Where:

All amounts are for the same calendar year and are based on the RUS 
system of accounts and RUS Forms 7 and 12. References to line numbers in 
the RUS Forms 7 and 12 refer to the June 1994 version of RUS Form 7 and 
the December 1993 version of RUS Form 12, and will apply to 
corresponding information in future versions of the forms;
A=Depreciation and Amortization Expense of the borrower, which equals 
Part A, Line 12 of RUS Form 7 (distribution borrowers) or Section A, 
Line 20 of RUS Form 12a (power supply borrowers);
B=Interest expense on total long-term debt of the borrower, which equals 
Part A, Line 15 of RUS Form 7 or Section A, Line 22 of RUS Form 12a, 
except that interest expense shall be increased by \1/3\ of the amount, 
if any, by which restricted rentals of the borrower (Part M, Line 3 of 
RUS Form 7 or Section K, Line 4 of RUS Form 12h) exceed 2 percent of the 
borrower's equity (RUS Form 7, Part C, Line 36 [Total Margins & 
Equities] less Line 26 [Regulatory Assets] or RUS Form 12a, Section B, 
Line 38 [Total Margins & Equities] less Line 28 [Regulatory Assets]);
C=Patronage Capital or Margins of the borrower, which equals Part A, 
Line 28 of RUS Form 7 or Section A, Line 35 of RUS Form 12a; and
D=Debt Service Billed (RUS + other), which equals the sum of all 
payments of principal and interest required to be made on account of 
total long-term debt of the borrower during the calendar year, plus \1/
3\ of the amount, if any, by which restricted rentals of the borrower 
(Part M, Line 3 of RUS Form 7 or Section K, Line 4 of RUS Form 12h) 
exceed 2 percent of the borrower's equity (RUS Form 7, Part C, Line 36 
[Total Margins & Equities] less Line 26 [Regulatory Assets] or RUS Form 
12a, Section B, Line 38 [Total Margins & Equities] less Line 28 
[Regulatory Assets]);

    DSM activities means activities of the type referred to in 
Sec. 1710.354(f).
    DSM plan means a plan that describes the implementation at the 
distribution level of the DSM activities identified in the integrated 
resource plan as having positive net benefits. See Sec. 1710.357.
    Electric system means all of the borrower's interests in all 
electric production, transmission, distribution, conservation, load 
management, general plant and other related facilities, equipment or 
property and in any mine, well, pipeline, plant, structure or other 
facility for the development, production, manufacture, storage, 
fabrication or processing of fossil, nuclear, or other fuel or in any 
facility or rights with respect to the supply of water, in each case for 
use, in whole or in major part, in any of the borrower's generating 
plants, including any interest or participation of the borrower in any 
such facilities or any rights to the output or capacity thereof, 
together with all lands, easements, rights-of-way, other works, 
property, structures, contract rights and other tangible and intangible 
assets of the borrower in each case used or useful in such electric 
system.
    Equity means total margins and equities, which equals Part C, Line 
33 of RUS Form 7 (distribution borrowers) or Section B, Line 34 of RUS 
Form 12a (power supply borrowers).
    Final maturity means the final date on which all outstanding 
principal and accrued interest on an electric loan is due and payable.
    Five percent hardship rate means an interest rate of 5 percent 
applicable to a hardship rate loan.
    Fund advance period means the period of time during which the 
Government

[[Page 95]]

may advance loan funds to the borrower. See 7 CFR 1714.56.
    Generation Facilities means the generating plant and related 
facilities, including the building containing the plant, all fuel 
handling facilities, and the stepup substation used to convert the 
generator voltage to transmission voltage, as well as related energy 
management (dispatching) systems.
    Hardship rate loan means a loan made at the 5 percent hardship rate 
pursuant to 7 CFR 1714.8.
    Insured Loan means a loan made pursuant to Section 305 of the RE 
Act, and may include a direct loan made under Section 4 of the RE Act.
    Integrated Resources Plan (IRP) means a plan resulting from the 
planning and selection process for new energy resources that evaluates 
the benefits and costs of the full range of alternatives, including new 
generating capacity, power purchases, DSM programs, system operating 
efficiency, and renewable energy systems.
    Interest rate cap means a maximum interest rate of 7 percent 
applicable to certain municipal rate loans as set forth in Sec. 1710.7.
    Interest rate term means a period of time selected by the borrower 
for the purpose of determining the interest rate on an advance of funds. 
See 7 CFR 1714.6.
    Load forecast means the thorough study of a borrower's electric 
loads and the factors that affect those loads in order to determine, as 
accurately as practicable, the borrower's future requirements for energy 
and capacity.
    Load forecast work plan means the plan that contains the resources, 
methods, schedules, and milestones to be used in the preparation and 
maintenance of a load forecast.
    Loan means any loan made or guaranteed by RUS.
    Loan Contract means the agreement, as amended, supplemented, or 
restated from time to time, between a borrower and RUS providing for 
loans made or guaranteed pursuant to the RE Act.
    Loan Feasibility means that the borrower has the capability of 
repaying the loan in full as scheduled, in accordance with the terms of 
the mortgage, note, and loan contract.
    Loan Guarantee means a loan guarantee made by RUS pursuant to the RE 
Act.
    Loan period means the period of time during which the facilities 
included in a loan application will be constructed. It commences with 
the date shown on page 1, in the block headed ``Cost Estimates as of,'' 
of RUS Form 740c, Cost Estimates and Loan Budget for Electric Borrowers, 
which is the same as the date on the Financial and Statistical Report 
submitted with the loan application. The loan period may be up to 4 
years for distribution borrowers and, except in the case of a loan for 
new generating and associated transmission facilities, up to 4 years for 
the transmission facilities and improvements or replacements of 
generation facilities for power supply borrowers. The loan period for 
new generating facilities is determined on a case by case basis.
    Merger means the combining, pursuant to state law, of borrower or 
nonborrower organizations into an existing survivor organization that 
takes over the assets and assumes the liabilities of the merged 
organizations.
    Mortgage means any and all instruments creating a lien on or 
security interest in the borrower's assets in connection with loans or 
guarantees under the RE Act.
    Municipal rate loan means a loan made at a municipal interest rate 
pursuant to 7 CFR 1714.5.
    ODSC means Operating Debt Service Coverage of the electric system 
calculated as:
[GRAPHIC] [TIFF OMITTED] TR29DE95.001

Where:

All amounts are for the same calendar year and are based on the RUS 
system of accounts and RUS Form 7. References to line numbers in the RUS 
Form 7 refer to the June 1994 version of the form, and will apply to 
corresponding information in future versions of the form;
A=Depreciation and Amortization Expense of the electric system, which 
usually equals Part A, Line 12 of RUS Form 7;
B=Interest expense on total long-term debt of the electric system, which 
usually equals Part A, Line 15 of RUS Form 7, except that such interest 
expense shall be increased by \1/3\ of the amount, if any, by

[[Page 96]]

which restricted rentals of the electric system (usually Part M, Line 3 
of RUS Form 7) exceed 2 percent of the borrower's equity (RUS Form 7, 
Part C, Line 36 [Total Margins & Equities] less Line 26 [Regulatory 
Assets]);
C=Patronage Capital & Operating Margins of the electric system, which 
usually equals Part A, Line 20 of RUS Form 7, plus cash received from 
the retirement of patronage capital by suppliers of electric power and 
by lenders for credit extended for the Electric System; and
D=Debt Service Billed (RUS + other), which equals the sum of all 
payments of principal and interest required to be made on account of 
total long-term debt of the electric system during the calendar year, 
plus \1/3\ of the amount, if any, by which restricted rentals of the 
Electric System (usually Part M, Line 3 of RUS Form 7) exceed 2 percent 
of the borrower's equity (RUS Form 7, Part C, Line 36 [Total Margins & 
Equities] less Line 26 [Regulatory Assets]).

    Off-grid renewable energy system means an energy source which is not 
electrically attached to the grid. Off-grid systems are operated as an 
island and will have no direct impact on a utility system's physical 
operations. An off-grid system need not meet electric utility power 
quality standards.
    On-grid renewable energy system means an energy source electrically 
attached to an existing grid. It can be attached on either side of a 
consumer's meter. On-grid systems are operated as part of the overall 
utility system and have a direct impact on a utility system's 
operations. An on-grid system must meet electric utility power quality 
and safety standards.
    Ordinary Replacement means replacing one or more units of plant, 
called ``retirement units'', with similar units when made necessary by 
normal wear and tear, damage beyond repair, or obsolescence of the 
facilities.
    OTIER means Operating Times Interest Earned Ratio of the electric 
system calculated as:
[GRAPHIC] [TIFF OMITTED] TR29DE95.002

Where:

All amounts are for the same calendar year and are based on the RUS 
system of accounts and RUS Form 7. References to line numbers in the RUS 
Form 7 refer to the June 1994 version of the form, and will apply to 
corresponding information in future versions of the form;
A=Interest expense on total long-term debt of the electric system, which 
usually equals Part A, Line 15 of RUS Form 7, except that such interest 
expense shall be increased by \1/3\ of the amount, if any, by which 
restricted rentals of the electric system (usually Part M, Line 3 of RUS 
Form 7) exceed 2 percent of the borrower's equity (RUS Form 7, Part C, 
Line 36 [Total Margins & Equities] less Line 26 [Regulatory Assets]); 
and
B=Patronage Capital & Operating Margins of the electric system, which 
usually equals Part A, Line 20 of RUS Form 7, plus cash received from 
the retirement of patronage capital by suppliers of electric power and 
by lenders for credit extended for the Electric System.

    Power requirements study (PRS) has the same meaning as load 
forecast.
    Power Supply Borrower means a borrower that sells or intends to sell 
electric power at wholesale to distribution or power supply borrowers 
pursuant to RUS wholesale power contracts.
    Prepayment option means a provision included in the loan documents 
to allow the borrower to prepay all or a portion of an advance on a 
municipal rate loan on a date other than a rollover maturity date. See 7 
CFR 1714.9.
    PRR means Plant Revenue Ratio calculated as:
    [GRAPHIC] [TIFF OMITTED] TC16SE91.001
    
where:

A = Total Utility Plant, which equals Part C, Line 3 of RUS Form 7;
B = Operating Revenue and Patronage Capital, which equals Part A, Line 1 
of RUS Form 7; and
C = Cost of Power, which equals the sum of Part A, Lines 2, 3, and 4 of 
RUS Form 7.

    PRS work plan has the same meaning as load forecast work plan.
    RE Act means the Rural Electrification Act of 1936, as amended (7 
U.S.C. 901 et seq.).
    RE Act beneficiary means a person, business, or other entity that is 
located in a rural area.
    REA means the Rural Electrification Administration formerly an 
agency of the United States Department of Agriculture and predecessor 
agency to RUS with respect to administering certain electric and 
telephone loan programs.

[[Page 97]]

    Renewable energy system means a source of energy (kWh) used to meet 
borrower electric load that is fueled by any of the following 
technologies: Hydropower, geothermal, biomass, municipal waste, solar 
thermal, photovoltaic, wind, fuel cells not fueled by fossil fuels. See, 
for example, ``Renewable Resources in U.S. Electricity Supply,'' 
February 1993, Publication number DOE/EIA 0561, published by the 
Department of Energy, Energy Information Administration, Forrestal 
Building, EI-231, Washington, DC 20585.
    Retirement Unit means a substantial unit of property, which when 
retired, with or without being replaced, is accounted for by removing 
its book cost from the plant account.
    Rollover maturity date means the last day of an interest rate term.
    Rural area means any area of the United States, its territories and 
insular possessions (including any area within the Federated States of 
Micronesia, the Marshall Islands, and the Republic of Palau) not 
included within the boundaries of any urban area, as defined by the 
Bureau of the Census. For purposes of the ``rural area'' definition, the 
character of an area is determined at the time of the initial loan to 
furnish or improve service in the area.
    (i) For initial RUS loans made prior to November 1, 1993, the RE Act 
defined ``rural area'' to mean any area of the United States not 
included within the boundaries of any city, village, or borough having a 
population exceeding 1500. An area determined to be a ``rural area'' for 
the purposes of an initial loan made prior to November 1, 1993, shall 
continue to be considered a ``rural area.''
    (ii) For initial RUS loans made on or after November 1, 1993, this 
definition shall apply. In determining the character of the area, RUS 
will rely on the Bureau of the Census designation.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture established pursuant to Section 232 of 
the Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor 
to REA with respect to administering certain electric and telephone 
programs. See 7 CFR 1700.1.
    Subtransmission Facilities means the transmission facilities that 
connect the high voltage side of the distribution substation to the low 
voltage side of the bulk transmission or generating facilities, as well 
as related supervisory control and data acquisition facilities.
    System Improvement means the change or addition to electric plant 
facilities to improve the quality of electric service or to increase the 
quantity of electric power available to RE Act beneficiaries.
    TIER means Times Interest Earned Ratio of the borrower calculated 
as:
[GRAPHIC] [TIFF OMITTED] TR29DE95.003

Where:

All amounts are for the same calendar year and are based on the RUS 
system of accounts and RUS Forms 7 and 12. References to line numbers in 
the RUS Forms 7 and 12 refer to the June 1994 version of RUS Form 7 and 
the December 1993 version of RUS Form 12, and will apply to 
corresponding information in future versions of the forms;
A=Interest expense on total long-term debt of the borrower, which equals 
Part A, Line 15 of RUS Form 7 or Section A, Line 22 of RUS Form 12a, 
except that interest expense shall be increased by \1/3\ of the amount, 
if any, by which restricted rentals of the borrower (Part M, Line 3 of 
RUS Form 7 or Section K, Line 4 of RUS Form 12h) exceed 2 percent of the 
borrower's equity (RUS Form 7, Part C, Line 36 [Total Margins & 
Equities] less Line 26 [Regulatory Assets] or RUS Form 12a, Section B, 
Line 38 [Total Margins & Equities] less Line 28 [Regulatory Assets]); 
and
B=Patronage Capital or Margins of the borrower, which equals Part A, 
Line 28 of RUS Form 7 or Section A, Line 35 of RUS Form 12a.

    Total Assets means Part C, Line 26 of RUS Form 7 (distribution 
borrowers) or Section B, Line 27 of RUS Form 12a (power supply 
borrowers).
    Total Utility Plant means Part C, Line 3 of RUS Form 7 (distribution 
borrowers) or Section B, Line 27 of RUS Form 12a (power supply 
borrowers).
    Transmission Facilities means all electrical lines and related 
facilities, including certain substations, used to connect the 
distribution facilities to generation facilities. They include

[[Page 98]]

bulk transmission and subtransmission facilities.
    Urban area is defined by the Bureau of the Census as an area 
comprising all territory, population, and housing units in urbanized 
areas and in places of 2500 or more persons outside urbanized areas. 
More specifically, ``urban'' consists of territory, persons, and housing 
units in:
    (i) Places of 2500 or more persons incorporated as cities, villages, 
boroughs (except in Alaska and New York), and towns (except in the six 
New England States, New York, and Wisconsin), but excluding the rural 
portions of ``extended cities.''
    (ii) Census designated places of 2500 or more persons.
    (iii) Other territory, incorporated or unincorporated, included in 
urbanized areas.
    Urbanized area means an urbanized area as defined by the Bureau of 
the Census in notices published periodically in the Federal 
Register.Generally an urbanized area is characterized as an area that 
comprises a place and the adjacent densely settled territory that 
together have a minimum population of 50,000 people.
    (b) Rules of Construction. Unless the context otherwise indicates, 
``includes'' and ``including'' are not limiting, and ``or'' is not 
exclusive. The terms defined in paragraph (a) of this part include the 
plural as well as the singular, and the singular as well as the plural.

[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992, as amended at 58 FR 
66263, Dec. 20, 1993; 59 FR 495, Jan. 4, 1994; 59 FR 66440, Dec. 27, 
1994; 60 FR 3730, Jan. 19, 1995; 60 FR 67400, Dec. 29, 1995; 65 FR 
14786, Mar. 20, 2000]



Sec. 1710.3  Form and bulletin revisions.

    References in this part to RUS or REA forms or line numbers in RUS 
or REA forms are based on RUS or REA Form 7 and Form 12 dated December 
1992, unless otherwise indicated. These references will apply to 
corresponding information in future versions of the forms. The terms 
``RUS form'', ``RUS standard form'', ``RUS specification'', and ``RUS 
bulletin'' have the same meanings as the terms ``REA form'', ``REA 
standard form'', ``REA specification'', and ``REA bulletin'', 
respectively, unless otherwise indicated.

[59 FR 66440, Dec. 27, 1994]



Sec. 1710.4  Exception authority.

    Consistent with the RE Act and other applicable laws, the 
Administrator may waive or reduce any requirement imposed by this part 
or other RUS regulations on an electric borrower, or a lender whose loan 
is guaranteed by RUS, if the Administrator determines that imposition of 
the requirement would adversely affect the Government's financial 
interest.



Sec. 1710.5  Availability of forms.

    Information about the availability of RUS forms and publications 
cited in this part is available from Administrative Services Division, 
Rural Utilities Service, United States Department of Agriculture, 
Washington, DC 20250-1500. These RUS forms and publications may be 
reproduced.



Sec. 1710.6  Applicability of certain provisions to completed loan applications.

    (a) Certain new or revised policies and requirements set forth in 
this part, which are listed in this paragraph, shall not apply to a 
pending loan application that has been determined by RUS to be complete 
as of January 9, 1992, the date of publication of such policies and 
requirements in the Federal Register.This exception does not apply to 
loan applications received after said date, nor to incomplete 
applications pending as of said date. This exception applies only to the 
following provisions:
    (1) Paragraph 1710.115(b)--with respect to limiting loan maturities 
to the expected useful life of the facilities financed;
    (2) Section 1710.116--with respect to the requirement to develop and 
follow an equity development plan;
    (3) Paragraph 1710.151(f)--with respect to the borrower providing 
satisfactory evidence that a state regulatory authority will allow the 
facilities to be included in the rate base or otherwise allow sufficient 
revenues to repay the loan;

[[Page 99]]

    (4) Paragraphs 1710.250(b), 1710.251(a), and 1710.252(a)--with 
respect to the requirement that improvements, replacements, and 
retirements of generation plant be included in a Construction Work Plan; 
and
    (5) Paragraph 1710.300(d)(5)--with respect to the requirement that a 
borrower's financial forecast include a sensitivity analysis of a 
reasonable range of assumptions for each of the major variables in the 
forecast.
    (b) Certain provisions of this part apply only to loans made on or 
after February 10, 1992. These provisions are identified in the 
individual sections of this part.


[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992, as amended at 58 FR 
66263, Dec. 20, 1993]



Sec. 1710.7  Exemptions of RUS operational controls under section 306E of the RE Act.

    (a) General policy. (1) Section 306E of the RE Act directs the 
Administrator to issue interim final regulations to minimize approval 
rights, requirements, restrictions, and prohibitions imposed on the 
operations of electric borrowers whose net worth exceeds 110 percent of 
the outstanding loans made or guaranteed to the borrower by RUS. The 
section also directs the Administrator, when requested by a private 
lender providing financing for capital investments by such borrowers, to 
offer, without delay, to share the government's lien on the borrowers' 
systems or subordinate the government's lien on the property financed by 
the private lender.
    (2) In issuing the regulations, the Administrator is authorized to 
establish requirements, guided by the practices of private lenders with 
respect to similar credit risks, to ensure that the security, including 
the assurance of repayment, for loans made or guaranteed by RUS will 
remain reasonably adequate. If the regulations are not issued within 180 
days of enactment of section 306E, the Administrator may not, until the 
regulations are issued, require prior approval of, or establish any 
requirement, restriction, or prohibition, with respect to the operations 
of any electric borrower that meets the 110 percent ratio.
    (3) Nothing in section 306E limits the authority of the 
Administrator to establish terms and conditions on the use of funds from 
loans made or guaranteed by RUS, to establish loan feasibility criteria 
and other requirements for the approval of RUS loans or loan guarantees, 
such as those set forth in this part, or to take any other action 
specifically authorized by law.
    (4) This section addresses the application of section 306E of the RE 
Act to RUS operational controls and other requirements that apply in 
general to RUS borrowers. The application of section 306E to lien 
accommodations and subordinations is set forth in 7 CFR 1717.860 and 
1717.904.
    (5) The exemptions granted by this section, 7 CFR 1717.860, and 7 
CFR 1717.904 apply only to RUS controls and approval rights. They do not 
affect the controls and approval rights of other co-mortgagees under the 
RUS mortgage.
    (6) For purposes of this section, the terms ``default,'' ``financed 
or funded by RUS,'' ``interchange agreement,'' ``interconnection 
agreement,'' ``loan documents,'' ``pooling agreement,'' ``power supply 
contract,'' and ``wheeling agreement'' have the meanings as set forth in 
7 CFR 1717.602.
    (b) Determination of ratio. The following principles and procedures 
will apply to the calculation of net worth as a ratio, expressed as a 
percent, to the outstanding balance of all loans made or guaranteed to 
the borrower by RUS, hereinafter called the borrower's ``net worth to 
RUS debt ratio'', or simply ``the ratio'':
    (1) For purposes of determining whether a borrower is exempt from 
approvals, requirements, restrictions, or prohibitions imposed by RUS 
with respect to borrower operations, i.e., ``operational controls,'' the 
ratio normally will be based on data as of December 31. Net worth will 
be based on the year-end financial and statistical reports submitted by 
borrowers to RUS, and outstanding loans made or guaranteed by RUS will 
be based on RUS's records. The financial and statistical reports (Form 7 
for distribution

[[Page 100]]

borrowers and Form 12a for power supply borrowers) are subject to RUS 
review and revision, and they must comply with RUS's system of accounts 
and accounting principles set forth in 7 CFR part 1767. Since sinking 
fund depreciation is not approved under 7 CFR part 1767, net worth for 
borrowers using sinking fund depreciation will be calculated as if the 
borrower had been using straight line depreciation;
    (2) Net worth will be calculated by taking total margins and 
equities (from Part C of RUS Form 7 for distribution borrowers, or 
Section B of RUS Form 12a for power supply borrowers) and subtracting 
assets properly recordable in account 182.2, Unrecovered Plant and 
Regulatory Study Costs, and account 182.3, Other Regulatory Assets, as 
defined in 7 CFR part 1767; and
    (3) By no later than July 1 of each year, RUS will notify each 
borrower in writing of its exemption status. If the borrower's net worth 
to RUS debt ratio exceeds 110 percent based on the most recent year-end 
data, the borrower will be exempt from the operational controls exempted 
under paragraph (c) of this section until subsequently notified in 
writing by RUS that it is no longer exempt.
    (c) Borrower operations exempted from RUS controls. Borrowers who 
are notified by RUS in writing that their net worth to RUS debt ratio 
exceeds 110 percent are exempted from the operational controls of the 
RUS mortgage and loan contract listed in this paragraph. These controls, 
which are implemented through RUS regulations and other documents, are 
as follows:
    (1) RUS approval of extensions and additions. RUS approval of 
extensions and additions to borrowers' electric systems, except for the 
following:
    (i) Extensions and additions financed by RUS;
    (ii) Construction, procurement, or leasing of generating facilities, 
regardless of the source of funding, if the combined capacity of the 
facilities to be built, procured, or leased, including any future 
facilities included in the planned project, will exceed 25 megawatts in 
the case of power supply borrowers, or the lesser of 5 megawatts or 30 
percent of the borrower's equity in the case of distribution borrowers;
    (iii) Acquisition or leasing of existing electric facilities or 
systems in service, regardless of the source of funding, whose purchase 
price, or capitalized value in the case of a lease, exceeds 10 percent 
of the borrower's net utility plant; and
    (iv) Construction, procurement, or leasing of electric facilities, 
regardless of the source of funding, to serve a customer whose annual 
kWh purchases or maximum annual kW demand in the foreseeable future is 
projected to exceed 25 percent of the borrower's total kWh sales or 
maximum kW demand in the year immediately preceding the acquisition or 
start of construction;
    (2) Long-range engineering plans and construction work plans. RUS 
approval of long-range engineering plans and CWPs if the borrower does 
not intend to seek RUS financing for any of the facilities, equipment or 
other purposes included in those plans. However, if requested by RUS, a 
borrower must provide an informational copy of such plans to RUS;
    (3) Plans and specifications. RUS approval of plans and 
specifications for construction not financed by RUS;
    (4) Standard forms of construction contracts, and engineering and 
architectural services contracts. RUS requirements to use standard forms 
of contracts for construction, procurement, engineering services, and 
architectural services, if the construction, procurement or services are 
not financed by RUS. To be eligible for this waiver the contracts used 
must not contain any provisions that prohibit or restrict the assignment 
of the contracts to the government upon the exercise by RUS of its 
remedies under security instruments securing loans made or guaranteed by 
RUS;
    (5) Contract bidding requirements. RUS requirements regarding the 
competitive bidding of construction contracts, if the construction is 
not financed by RUS;
    (6) RUS approval of contracts. (i) Construction contracts and 
architectural and engineering contracts. RUS approval of contracts for 
construction and procurement and for architectural

[[Page 101]]

and engineering services, if such construction, procurement or services 
are not financed by RUS.
    (ii) Large retail power contracts. RUS approval of contracts to sell 
electric power to retail customers except when the contract is for 
longer than 2 years and the kWh sales or kW demand for any year covered 
by the contract exceeds 25 percent of the borrower's total kWh sales or 
maximum kW demand for the year immediately preceding execution of the 
contract. This exemption applies regardless of the source of funding of 
any plant extensions, additions or improvements that may be involved in 
connection with the contract.
    (iii) Power supply arrangements. (A) RUS approval of power supply 
contracts (including but not limited to economy energy sales and 
emergency power and energy sales), interconnection agreements, 
interchange agreements, wheeling agreements, pooling agreements, and any 
other similar power supply arrangements subject to approval by RUS, if 
they have a term of 2 years or less. Amendments to said power supply 
arrangements are also exempted from RUS approval provided that the 
amendment does not extend the term of the arrangement for more than 2 
years beyond the date of the amendment.
    (B) Any amendment to a schedule or exhibit contained in any power 
supply arrangement subject to RUS approval that merely has the effect of 
either altering a list of interconnection or delivery points or changing 
the value of a variable term (but not the formula itself) contained in a 
formulary rate or charge.
    (C) The exemptions under this paragraph (c)(6)(iii) apply regardless 
of whether the borrower is a seller or purchaser of the services 
furnished by the contracts or arrangements, and regardless of whether or 
not a Federal power marketing agency is a party to any of them.
    (iv) System management and maintenance contracts. RUS approval of 
contracts for the management and operation of a borrower's electric 
system or for the maintenance of the electric system, if such contracts 
do not cover all or substantially all of the electric system.
    (v) Other contracts. [Reserved];
    (7) RUS approval of general manager. RUS approval of the selection 
of a borrower's manager and employment contract, provided that the 
borrower is not in default under its loan documents or any other 
agreement with RUS. Nothing herein shall limit the right of RUS under 
the loan documents to request termination of the employment of a manager 
in the event of a default by the borrower;
    (8) Board of directors. RUS approval of compensation of a borrower's 
board of directors;
    (9) Certain expenditures. (i) RUS approval of expenditures for 
legal, accounting, and supervisory services by a borrower. However, 
while expenditures for accounting do not require RUS approval, the 
selection of a certified public accountant by the borrower to prepare 
audited reports required by RUS remains subject to RUS approval.
    (ii) RUS approval of expenditures for engineering services by a 
borrower, if such engineering services will not be financed by RUS;
    (10) Banks. RUS approval of banks or other depositories used by a 
borrower. However, without the prior written approval of RUS, a borrower 
shall not deposit funds from loans made or guaranteed by RUS in any bank 
or other depository that is not insured by the Federal Deposit Insurance 
Corporation or other Federal agency acceptable to RUS, or in any account 
not so insured.
    (11) Certain equipment. RUS approval of the purchase of data 
processing equipment and system control equipment by a borrower, if the 
equipment is not financed by RUS;
    (12) Notification of rate changes. Requirement that distribution 
borrowers notify RUS in writing of proposed changes in electric rates 90 
days prior to the effective date of such rates. Instead, the required 
notification period shall be 30 days, and such notification shall be 
required only if requested by RUS;
    (13) Consolidations and mergers. RUS approval of mergers and 
consolidations, and conveyances or transfers of the mortgaged property 
substantially as an entirety, if the following conditions are met:

[[Page 102]]

    (i) Such consolidation, merger, conveyance or transfer shall be on 
such terms as shall fully preserve the lien and security of the mortgage 
and the rights and powers of the mortgagees;
    (ii) The entity formed by such consolidation or with which the 
borrower is merged or the corporation which acquires by conveyance or 
transfer the mortgaged property substantially as an entirety shall 
execute and deliver to the mortgagees a mortgage supplemental in 
recordable form and containing an assumption by such successor entity of 
the due and punctual payment of the principal of and interest on all of 
the outstanding notes and the performance and observance of every 
covenant and condition of the mortgage;
    (iii) Immediately after giving effect to such transaction, no 
default under the mortgage shall have occurred and be continuing;
    (iv) The borrower shall have delivered to the mortgagees a 
certificate of its general manager or other officer, in form and 
substance satisfactory to each of the mortgagees, which shall state that 
such consolidation, merger, conveyance or transfer and such supplemental 
mortgage comply with this section and that all conditions precedent 
herein provided for relating to such transaction have been complied 
with;
    (v) The borrower shall have delivered to the mortgagees an opinion 
of counsel in form and substance satisfactory to each of the mortgagees; 
and
    (vi) The entity formed by such consolidation or with which the 
borrower is merged or the corporation which acquires by conveyance or 
transfer the mortgaged property substantially as an entirety shall be an 
entity:
    (A) Having equity equal to at least 27% of its total assets on a pro 
forma basis after giving effect to such transaction;
    (B) Having a pro forma TIER of not less than 1.25 and a pro forma 
DSC of not less than 1.25 for each of the two proceeding calendar years; 
and
    (C) Having net utility plant equal to or greater than 1.0 times its 
total long-term debt on a pro forma basis;
    (14) Sale, lease, or transfer of capital assets. RUS approval for a 
distribution borrower to sell, lease, or transfer capital assets, if the 
following conditions are met:
    (i) The borrower is not in default;
    (ii) In the most recent year for which data are available, the 
borrower achieved a TIER of at least 1.25, DSC of at least 1.25, OTIER 
of at least 1.1, and ODSC of at least 1.1, in each case based on the 
average or the best 2 out of the 3 most recent years.
    (iii) The sale, lease, or transfer of assets will not reduce the 
borrower's existing or future requirements for energy or capacity being 
furnished to the borrower under any wholesale power contract which has 
been pledged as security to the government;
    (iv) Fair market value is obtained for the assets;
    (v) The aggregate value of assets sold, leased, or transferred in 
any 12-month period is less than 10 percent of the borrower's net 
utility plant prior to the transaction;
    (vi) The proceeds of such sale, lease, or transfer, less ordinary 
and reasonable expenses incident to such transaction, are immediately:
    (A) Applied as a prepayment of all notes secured under the mortgage 
equally and ratably;
    (B) In the case of dispositions of equipment, materials or scrap, 
applied to the purchase of other property useful in the borrower's 
utility business; or
    (C) Applied to the acquisition of construction of utility plant; and
    (vii) If the borrower has an RUS-approved wholesale power contract 
with a power supply borrower (seller), the circumstances of the sale, 
lease or transfer of capital assets conform with the conditions in such 
contract under which the seller may not withhold its consent to the 
sale, lease or transfer;
    (15) Limitations on distributions. RUS approval for a borrower to 
declare or pay dividends, pay or determine to pay patronage refunds, 
retire patronage capital, or make any other cash distributions, if the 
following conditions are met:
    (i) After giving effect to the distribution, the borrower's equity 
will be greater than or equal to 30 percent of its total assets;

[[Page 103]]

    (ii) The borrower is current on all payments due on all notes 
secured under the mortgage;
    (iii) The borrower is not otherwise in default under its loan 
documents; and
    (iv) After giving effect to the distribution, the borrower's current 
and accrued assets will be not less than its current and accrued 
liabilities.
    (d) RUS requirements and operational controls not exempted. All 
requirements and operational controls contained in the RUS mortgage and 
loan contract, or otherwise imposed on borrowers pursuant to statute or 
regulation, that are not specifically listed in paragraph (c) of this 
section are not exempted and shall continue to apply according to their 
terms. Examples of such requirements and controls not exempted are 
listed in this paragraph for the convenience of the public. This list is 
not exhaustive, and the absence of a requirement or control from this 
list in no way means that the requirement or control has been exempted:
    (1) Requirements and operational controls contained in the RUS 
mortgage or loan contract that are necessary to ensure that the security 
for loans made or guaranteed by RUS is reasonably adequate and that the 
loans will be repaid, or to accomplish other fundamental purposes of the 
RE Act. Some of these also represent terms and conditions with respect 
to the use by borrowers of the proceeds of loans made or guaranteed by 
RUS. Together, these controls include, but are not limited to, the 
following:
    (i) Area coverage requirements set forth in the loan contract and in 
Sec. 1710.103;
    (ii) Requirement that certain borrowers maintain, on an ongoing 
basis, a power requirements study and a power requirements study work 
plan, as set forth in Secs. 1710.201 and 1710.202;
    (iii) Requirement that borrowers follow RUS construction standards 
and use RUS accepted materials, as set forth in Sec. 1710.41, 
Sec. 1710.45, and 7 CFR part 1728;
    (iv) Requirement that borrowers maintain, on an ongoing basis, a 
long-range engineering plan and a construction work plan, as set forth 
in Sec. 1710.250(b);
    (v) Requirement that borrowers set rates for electric service 
sufficient to maintain certain coverage ratios, as set forth in 
Sec. 1710.114;
    (vi) Certain RUS approvals of retirements of capital credits in 
excess of amounts specifically authorized in the mortgage;
    (vii) RUS approval of borrower investments, loans, guarantees, and 
other obligations under 7 CFR part 1717, subpart N;
    (viii) RUS requirements on accounting, auditing, irregularities, 
financial reporting, and access to books and records;
    (ix) Requirement that borrowers record the mortgage and mortgage 
amendments;
    (x) Requirement that the mortgagor maintain and preserve the 
priority lien of the mortgage and defend title to the mortgaged 
property;
    (xi) Requirements on maintenance and repair of the mortgaged 
property;
    (xii) Requirements on insurance of the mortgaged property; and
    (xiii) Certain RUS approvals of borrower mergers and consolidations; 
and
    (2) Requirements imposed on borrowers pursuant to statute or 
regulation and not specifically exempted by paragraph (c) of this 
section. See, for example, Secs. 1710.122 through 1710.127.
    (e) Rescission of exemptions if borrower defaults. If a borrower is 
in default with respect to any requirement of its mortgage, loan 
contract with RUS, or any other agreement with RUS that has not been 
exempted pursuant to paragraph (c) of this section or other RUS 
regulations, upon written notice to the borrower RUS may rescind all or 
any part of the exemptions granted pursuant to paragraph (c) of this 
section or other RUS regulations. The reinstated requirements and 
controls will remain in effect until RUS determines that they are no 
longer needed to help ensure that the security, including the assurance 
of repayment, for loans made or guaranteed by RUS will remain reasonably 
adequate.
    (f) Reinstated controls. If RUS controls are reinstated because the 
borrower defaults or its net worth falls below 110 percent of RUS debt, 
such controls and

[[Page 104]]

approval rights will apply to all applicable subsequent actions of the 
borrower, including without limitation the amendment of contracts that 
the borrower entered into while eligible for an exemption under this 
section.

[60 FR 67401, Dec. 29, 1995, as amended at 62 FR 27930, May 22, 1997; 65 
FR 51748, Aug. 25, 2000]



Secs. 1710.8-1710.49  [Reserved]



              Subpart B--Types of Loans and Loan Guarantees



Sec. 1710.50  Insured loans.

    RUS makes insured loans under section 305 of the RE Act.
    (a) Municipal rate loans. The standard interest rate on an insured 
loan made on or after November 1, 1993, is the municipal rate, which is 
the rate determined by the Administrator to be equal to the current 
market yield on outstanding municipal obligations with remaining periods 
to maturity, up to 35 years, similar to the interest rate term selected 
by the borrower. In certain cases, an interest rate cap of 7 percent may 
apply. The interest rate term and rollover maturity date for a municipal 
rate loan will be determined pursuant to 7 CFR part 1714, and the 
borrower may elect to include in the loan documents a prepayment option 
(call provision).
    (b) Hardship rate loans. RUS makes hardship rate loans at the 5 
percent hardship rate to qualified borrowers meeting the criteria set 
forth in 7 CFR 1714.8

[58 FR 66263, Dec. 20, 1993]



Sec. 1710.51  Loan guarantees.

    RUS provides financing through 100 percent loan guarantees made 
under sections 306 and 306A of the RE Act. RUS also provides 90 percent 
loan guarantees under section 311 of the RE Act to enable borrowers to 
secure financing from certain private lenders. The loan guarantees are 
made for a term of up to 35 years, and the interest rate is established 
at a rate agreed to by the borrower and the lender, with RUS 
concurrence. The guarantee applies to the repayment of both principal 
and interest.

[58 FR 66264, Dec. 20, 1993]

    Effective Date Note: At 66 FR 66294, Dec. 26, 2001, Sec. 1710.51 was 
redesignated as Sec. 1710.52 and a new Sec. 1710.51 was added in its 
place, effective February 11, 2002. For the convenience of the user, the 
added text is set forth below:

Sec. 1710.51  Direct loans.

    RUS makes direct loans under section 4 of the RE Act.
    (a) General. Except as otherwise modified by this section, RUS will 
make loans under the direct Treasury rate loan program in the same 
manner that it makes loans under the municipal rate program. The general 
and pre-loan policies and procedures for municipal rate electric loans 
made by RUS may be found in this part and 7 CFR part 1714. Treasury rate 
electric loans are also governed by such municipal rate policies and 
procedures, except as follows:
    (1) Interest rates. The standard interest rate on direct Treasury 
rate loans will be established daily by the United States Treasury. The 
borrower will select interest rate terms for each advance of funds. The 
minimum interest rate term shall be one year. Interest rate terms will 
be limited to terms published by the Treasury (i.e. 1, 2, 3, 5, 7, 10, 
20, and 30). Interest rate terms to final maturity date, if other than 
published by Treasury, will be determined by RUS. Interest rates for 
terms greater than 30 years will be at the 30-year rate. There will be 
no interest rate cap on Treasury rate loans.
    (2) Prepayment. A Treasury rate direct electric loan may be repaid 
at par on its rollover maturity date if there is one. Such a loan, or 
portion thereof, may also be prepaid after it has been advanced for not 
less than two years, at any time prior to its rollover or final maturity 
date at its ``net present value'' (NPV) as determined by RUS.
    (3) Supplemental financing. Supplemental financing will not be 
required in connection with Treasury rate direct electric loans.
    (4) Transitional assistance. A Treasury rate direct loan is not 
available to provide transitional assistance to borrowers.
    (b) Loan documents. Successful applicants will be required to 
execute and deliver to RUS a promissory note evidencing the borrower's 
obligation to repay the loan. The note must be in form and substance 
satisfactory to RUS. RUS will require a form of note substantially in 
the form that it currently accepts for direct municipal rate electric 
loans, with such revisions as may be necessary or appropriate to reflect 
the different interest setting provisions and the terms of paragraphs 
(a) (1) and (2) of this section. All

[[Page 105]]

notes will be secured in accordance with the terms of 7 CFR part 1718.



Secs. 1710.52-1710.99  [Reserved]



               Subpart C--Loan Purposes and Basic Policies



Sec. 1710.100  General.

    RUS makes loans and loan guarantees to finance the construction of 
electric distribution, transmission and generation facilities, including 
system improvements and replacements required to furnish and improve 
electric service in rural areas, and for demand side management, energy 
conservation programs, and on grid and off grid renewable energy 
systems. In some circumstances, RUS may finance selected operating 
expenses of its borrowers. Loans made or guaranteed by the Administrator 
of RUS will be made in conformance with the Rural Electrification Act of 
1936, as amended (7 U.S.C. 901 et seq.), and 7 CFR chapter XVII. RUS 
provides certain technical assistance to borrowers when necessary to aid 
the development of rural electric service and to protect loan security.

[58 FR 66264, Dec. 20, 1993]



Sec. 1710.101  Types of eligible borrowers.

    (a) RUS makes loans to corporations, states, territories, and 
subdivisions and agencies thereof; municipalities; people's utility 
districts; and cooperative, nonprofit, limited-dividend, or mutual 
associations that provide or propose to provide:
    (1) The retail electric service needs of rural areas, or
    (2) The power supply needs of distribution borrowers under the terms 
of power supply arrangements satisfactory to RUS.
    (b) In making loans, RUS gives preference to states, territories, 
and subdivisions and agencies thereof; municipalities; people's utility 
districts; and cooperative, nonprofit, or limited-dividend associations. 
RUS does not make loans to individual consumers.
    (c) For the purpose of determining eligibility of a distribution 
borrower not in default on the repayment of a loan made or guaranteed 
under the RE Act for a loan, loan guarantee, or lien accommodation, a 
default by a borrower from which a distribution borrower purchases 
wholesale power shall not:
    (1) Be considered a default by the distribution borrower;
    (2) Reduce the eligibility of the distribution borrower for 
assistance under the RE Act; or
    (3) Be the cause, directly or indirectly, of imposing any 
requirement or restriction on the borrower as a condition of the 
assistance, except such requirements or restrictions as are necessary to 
implement a debt restructuring agreed on by the power supply borrower 
and RUS.
    (d) For the purpose of determining the eligibility of a distribution 
borrower, RUS will consider whether the distribution borrower is current 
on its obligations to its wholesale power supplier under the RUS 
wholesale power contract.
    (e) Nothing in paragraph (c) of this section relieves any 
distribution borrower that is a member of a power supply borrower in 
default on its obligations to RUS or operating under a debt 
restructuring agreement, of requirements set forth in RUS regulations, 
including, without limitation, Sec. 1710.112(b)(6), or of any terms and 
conditions that the Administrator may otherwise impose on any borrower 
as a condition of obtaining a loan or loan guarantee (including, in 
appropriate cases, member guarantees).
    (f) Except as provided in paragraph (g) of this section, former 
borrowers that have paid off all outstanding loans may reapply for a 
loan to serve RE Act beneficiary loads accruing from the time the former 
borrower's complete loan application is received by RUS. The 
determination of whether an area is rural will be based on the Census 
designation of the area at the time of the reapplication for a loan, if 
the area is not served by electric facilities financed by RUS. If the 
area is served by electric facilities financed by RUS, it will continue 
to be considered rural.
    (g) Former borrowers that have prepaid all, or portions of 
outstanding insured and direct loans in accordance with RUS regulations 
must comply with the provisions of 7 CFR part 1786

[[Page 106]]

before being considered eligible to borrow additional funds from RUS.

[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992. Revised and 
redesignated at 58 FR 66264, Dec. 20, 1993]



Sec. 1710.102  Borrower eligibility for different types of loans.

    (a) Insured loans under section 305. Insured loans are normally 
reserved for the financing of distribution and subtransmission 
facilities of both distribution and power supply borrowers, including, 
under certain circumstances, the implementation of demand side 
management, energy conservation programs, and on grid and off grid 
renewable energy systems. In accordance with Sec. 1710.110, the 
Administrator may require the borrower to obtain no more than 30 percent 
of the total debt financing required for a proposed project by means of 
a supplemental loan from another lender without an RUS guarantee.
    (b) One hundred percent loan guarantees under section 306. Both 
distribution and power supply borrowers are eligible for 100 percent 
loan guarantees under section 306 of the RE Act for any or all of the 
purposes set forth in Sec. 1710.106, including, under certain 
circumstances, the implementation of demand side management, energy 
conservation programs, and on grid and off grid renewable energy 
systems. (See 7 CFR part 1712). These guarantees are normally used to 
finance bulk transmission and generation facilities, but they may also 
be used to finance distribution and subtransmission facilities. If a 
borrower applies for a section 306 loan guarantee to finance all or a 
portion of distribution and subtransmission facilities, such request 
will not affect the borrower's eligibility for an insured loan to 
finance any remaining portion of said facilities or for any future 
insured loan to finance other distribution or subtransmission 
facilities. A section 306 loan guarantee, however, may not be used to 
guarantee a supplemental loan required by Sec. 1710.110.
    (c) One hundred percent loan guarantees under section 306A. Under 
section 306A of the RE Act, both distribution and power supply borrowers 
are eligible under certain conditions to use an existing section 306 
guarantee to refinance advances made on or before July 2, 1986 from a 
loan made by the Federal Financing Bank. (See 7 CFR part 1786.)
    (d) [Reserved]
    (e) Ninety percent guarantees of private-sector loans under section 
311. Under section 311 of the RE Act, both distribution and power supply 
borrowers in the state of Alaska are eligible under certain conditions 
to obtain from RUS a 90 percent guarantee of a private-sector loan to 
refinance their Federal Financing Bank loans. (See 7 CFR part 1786.)

[57 FR 2832, Jan. 24, 1992, as amended at 58 FR 66264, Dec. 20, 1993]

    Effective Date Note: At 66 FR 66294, Dec. 26, 2001, Sec. 1710.102 
was amended by redesignating paragraphs (b) and (c) as (c) and (d) and 
adding a new paragraph (b), effective February 11, 2002. For the 
convenience of the user, the added text is set forth below:

Sec. 1710.102  Borrower eligibility for different types of loans.

                                * * * * *

    (b) Direct loans under section 4. Direct loans are normally reserved 
for the financing of distribution and subtransmission facilities of both 
distribution and power supply borrowers, including, under certain 
circumstances, the implementation of demand side management, energy 
conservation programs, and on grid and off grid renewable energy 
systems.

                                * * * * *



Sec. 1710.103  Area coverage.

    (a) Borrowers shall make a diligent effort to extend electric 
service to all unserved persons within their service area who:
    (1) Desire electric service; and
    (2) Meet all reasonable requirements established by the borrower as 
a condition of service.
    (b) If economically feasible and reasonable considering the cost of 
providing such service and/or the effects on all consumers' rates, such 
service shall be provided, to the maximum extent practicable, at the 
rates and minimum charges established in the borrower's rate schedules, 
without the payment by such persons, other than seasonal or temporary 
consumers, of a contribution in aid of construction. A seasonal consumer 
is one that demands

[[Page 107]]

electric service only during certain seasons of the year. A temporary 
consumer is a seasonal or year-round consumer that demands electric 
service over a period of less than five years.
    (c) Borrowers may assess contributions in aid of construction 
provided such assessments are consistent with the policy set forth in 
this section.

[57 FR 1053, Jan. 9, 1992, as amended at 60 FR 67404, Dec. 29, 1995]



Sec. 1710.104  Service to non-RE Act beneficiaries.

    (a) To the greatest extent practical, loans are limited to providing 
and improving electric facilities to serve consumers that are RE Act 
beneficiaries. When it is determined by the Administrator to be 
necessary in order to furnish or improve electric service in rural 
areas, loans may, under certain circumstances, be made to finance 
electric facilities to serve consumers that are not RE Act 
beneficiaries.
    (b) Loan funds may be approved for facilities to serve non-RE Act 
beneficiaries only if:
    (1) The primary purpose of the loan is to furnish or improve service 
for RE Act beneficiaries; and
    (2) The use of loan funds to serve non-RE Act beneficiaries is 
necessary and incidental to the primary purpose of the loan.

[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992, as amended at 58 FR 
66264, Dec. 20, 1993]



Sec. 1710.105  State regulatory approvals.

    (a) In States where a borrower is required to obtain approval of a 
project or its financing from a state regulatory authority, RUS may 
require that such approvals be obtained, if feasible for the borrower to 
do so, before the following types of loans are approved by RUS:
    (1) Loans requiring an Environmental Impact Statement;
    (2) Loans to finance generation and transmission facilities, when 
the loan request for such facilities is $25 million or more; and
    (3) Loans for the purpose of assisting borrowers to implement demand 
side management and energy conservation programs and on and off grid 
renewable energy systems.
    (b) At minimum, in the case of all loans in states where state 
regulatory approval is required of the project or its financing, such 
state approvals will be required before loan funds are advanced.
    (c) In cases where state regulatory authority approval has been 
obtained, but the borrower has failed to proceed with the project in a 
timely manner according to the schedule contained in the borrower's 
project design manual, or if there are cost overruns or other 
developments that threaten loan feasibility or security, RUS may require 
the borrower to obtain a reaffirmation of the project and its financing 
from the state authority before any additional loan funds are advanced.

[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992, as amended at 58 FR 
66265, Dec. 20, 1993]



Sec. 1710.106  Uses of loan funds.

    (a) Funds from loans made or guaranteed by RUS may be used to 
finance:
    (1) Distribution facilities. (i) The construction of new 
distribution facilities or systems, the cost of system improvements and 
removals less salvage value, the cost of ordinary replacements and 
removals less salvage value, needed to meet load growth requirements, 
improve the quality of service, or replace existing facilities.
    (ii) The purchase, rehabilitation and integration of existing 
distribution facilities and associated service territory when the 
acquisition is an incidental and necessary means of providing or 
improving service to persons in rural areas who are not receiving 
adequate central station service, and the borrower is unable to finance 
the acquisition from other sources. See Sec. 1710.107.
    (2) Transmission and generation facilities. (i) The construction of 
new transmission and generation facilities or systems, the cost of 
system improvements and removals, less salvage value, the cost of 
ordinary replacements and removals less salvage value, needed to meet 
load growth, improve the quality of service, or replace existing 
facilities.
    (ii) The purchase of an ownership interest in new or existing 
transmission or generation facilities to serve RE Act beneficiaries.

[[Page 108]]

    (3) Warehouse and garage facilities. The purchase, remodeling, or 
construction of warehouse and garage facilities required for the 
operation of a borrower's system. See paragraph (b) of this section.
    (4) Interest. The payment of interest on indebtedness incurred by a 
borrower to finance the construction of generation and transmission 
facilities during the period preceding the date such facilities are 
placed into service, if requested by the borrower and found necessary by 
RUS.
    (5) Certain costs incurred in demand side management, energy 
conservation programs and on and off grid renewable energy systems.
    (b) In cases of financial hardship, as determined by the 
Administrator, loans may also be made to finance the following items:
    (1) The headquarters office and other headquarters facilities in 
addition to those cited in paragraph (a)(4) of this section;
    (2) General plant equipment, including furniture, office, 
transportation, data processing and other work equipment; and
    (3) Working capital required for the initial operation of a new 
system.
    (c) RUS will not make loans to finance the following:
    (1) Electric facilities, equipment, appliances, or wiring located 
inside the premises of the consumer, except qualifying items included in 
a loan for demand side management or energy resource conservation 
programs, or on or off grid renewable energy systems;
    (2) Facilities to serve consumers who are not RE Act beneficiaries 
unless those facilities are necessary and incidental to providing or 
improving electric service in rural areas (See Sec. 1710.104);
    (3) Any facilities or other purposes that a state regulatory 
authority having jurisdiction will not approve for inclusion in the 
borrower's rate base, or will not otherwise allow rates sufficient to 
repay with interest the debt incurred for the facilities or other 
purposes; and
    (4) Any facilities or other specific purposes that were included in 
a loan made or guaranteed by RUS that the borrower has prepaid or that 
has been rescinded.
    (d) A distribution borrower may request a loan period of up to 4 
years. Except in the case of loans for new generating and associated 
transmission facilities, a power supply borrower may request a loan 
period of not more than 4 years for transmission and substation 
facilities and improvements or replacements of generation facilities. 
The loan period for new generating facilities is determined on a case by 
case basis. The loan period for DSM activities will be determined in 
accordance with Sec. 1710.355. The Administrator may approve a loan 
period shorter than the period requested by the borrower, if in the 
Administrator's sole discretion, a loan made for the longer period would 
fail to meet RUS requirements for loan feasibility and loan security set 
forth in Secs. 1710.112 and 1710.113, respectively.
    (e)(1) If, in the sole discretion of the Administrator, the amount 
authorized for lending for municipal rate loans, hardship rate loans, 
and loan guarantees in a fiscal year is substantially less than the 
total amount eligible for RUS financing, RUS may limit the size of all 
loans of that type approved during the fiscal year. Depending on the 
amount of the shortfall between the amount authorized for lending and 
the loan application inventory on hand for each type of loan, RUS may 
either reduce the amount on an equal proportion basis for all applicants 
for that type of loan based on the amount of funds for which the 
applicant is eligible, or may shorten the loan period for which funding 
will be approved to less than the maximum of 4 years. All applications 
for the same type of loan approved during a fiscal year will be treated 
in the same manner, except that RUS will not limit funding to any 
borrower requesting an RUS loan or loan guarantee of $1 million or less.
    (2) If RUS limits the amount of loan funds approved for borrowers, 
the Administrator shall notify all electric borrowers early in the 
fiscal year of the manner in which funding will be limited. The portion 
of the loan application that is not funded during that fiscal year may, 
at the borrower's option, be treated as a second loan application 
received by RUS at a later date.

[[Page 109]]

This date will be determined by RUS in the same manner for all affected 
loans and will be based on the availability of loan funds. The second 
loan application shall be considered complete except that the borrower 
must submit a certification from a duly authorized corporate official 
stating that funds are still needed for loan purposes specified in the 
original application and must notify RUS of any changes in its 
circumstances that materially affects the information contained in the 
original loan application or the primary support documents. See 7 CFR 
1710.401(f).
    (f)(1) For borrowers having one or more loans approved on or after 
October 1, 1991, advances of funds will be made only for the primary 
budget purposes included in the loan as shown on RUS Form 740c as 
amended and approved by RUS, or on a construction work plan or a 
construction work plan amendment approved by RUS. Each advance will be 
charged to the oldest outstanding note(s) having unadvanced funds for 
the primary budget purpose for which the request for advances was made, 
regardless of whether such notes are associated with loans approved 
before or after October 1, 1991, unless any conditions on advances under 
any of these notes have not been met by the borrower.
    (2) For borrowers whose most recent loan was approved before October 
1, 1991, advances will be made on the oldest outstanding note having 
unadvanced funds, unless any conditions on advances under such note have 
not been met by the borrower.

[57 FR 1053, Jan. 9, 1992, as amended at 58 FR 66265, Dec. 20, 1993; 60 
FR 3730, Jan. 19, 1995; 62 FR 7922, Feb. 21, 1997; 64 FR 33178, June 22, 
1999]



Sec. 1710.107  Amount lent for acquisitions.

    The maximum amount that will be lent for an acquisition is limited 
to the value of the property, as determined by RUS. If the acquisition 
price exceeds this amount, the borrower shall provide the remainder 
without RUS financial assistance.



Sec. 1710.108  Mergers and consolidations.

    (a) RUS encourages its borrowers to consider merging or 
consolidating with another electric borrower when such action will 
contribute to greater operating efficiency and financial soundness.
    (b) After a merger or consolidation, RUS will give priority 
consideration per Sec. 1710.119 to the processing of loans for the 
surviving system to finance the integration and rehabilitation of 
electric facilities, if necessary, and the improvement or extension of 
electric service in rural areas. Such priority consideration will also 
be given in the case of a borrower that has merged or consolidated with 
an electric system that has not previously received RUS financial 
assistance, if such system was serving primarily rural residents at the 
time of the merger or consolidation and such rural residents will 
continue to be served by the merged or consolidated system. RUS does not 
make loans for costs incurred in effectuating mergers or consolidations, 
such as legal expenses or feasibility study costs.



Sec. 1710.109  Reimbursement of general funds and interim financing.

    (a) Borrowers may request that a loan include funds to reimburse 
general funds and/or replace interim financing used to finance equipment 
and facilities that were included in an RUS-approved construction work 
plan, work plan amendment or other RUS-approved plan, and for which loan 
funds have not been provided by RUS. Such reimbursement and/or 
replacement of interim financing may include the direct costs of 
procurement and construction, as well as the related cost of 
engineering, architectural, environmental and other studies and plans 
needed to support the project, when such cost is capitalized as part of 
the cost of the facilities.
    (b) If procurement and/or construction of the equipment and 
facilities was completed prior to the current loan period, 
reimbursement, including replacement of interim financing, will be 
limited, except in cases of extreme financial hardship as determined by 
the Administrator, to the cost of procurement and construction completed 
during the period immediately preceding the current loan period, as 
specified in paragraph (c) of this section. As

[[Page 110]]

defined in Sec. 1710.2, the loan period begins on the date shown on page 
1 of RUS Form 740c, Cost Estimates and Loan Budget for Electric 
Borrowers.
    (c)(1) The period immediately preceding the current loan period for 
which reimbursement and replacement of interim financing is authorized 
under paragraph (b) of this section is as follows:
    (i) The number of months agreed to by RUS and the borrower for 
complete loan applications received by RUS before February 10, 1992;
    (ii) 36 months for complete loan applications received from February 
10, 1992 through February 10, 1993; or
    (iii) 24 months for complete loan applications received after 
February 10, 1993.
    (2) Policies for reimbursement of general funds and interim 
financing following certain mergers, consolidations, and transfers of 
systems substantially in their entirety are set forth in 7 CFR 1717.154.
    (d) If the reimbursement of general funds and/or replacement of 
interim financing is for approved expenditures for equipment and 
facilities whose procurement and/or construction is completed during the 
current loan period, the time limits of paragraph (c) of this section do 
not apply.

[57 FR 1053, Jan. 9, 1992, as amended at 58 FR 66265, Dec. 20, 1993; 61 
FR 66870, Dec. 19, 1996]



Sec. 1710.110  Supplemental financing.

    (a) Except in the case of financial hardship as determined by the 
Administrator, and following certain mergers, consolidations, and 
transfers of systems substantially in their entirety as set forth in 7 
CFR 1717.154, applicants for a municipal rate loan will be required to 
obtain a portion of their loan funds from a supplemental source without 
an RUS guarantee, in the amounts set forth in paragraph (c) of this 
section. RUS will normally grant a lien accommodation to the 
supplemental lender. RUS does not require supplemental financing in 
conjunction with an RUS guaranteed loan. However, if a borrower elects 
to obtain supplemental financing in conjunction with a guaranteed loan, 
the granting of RUS's loan guarantee may be conditioned on the 
borrower's obtaining supplemental financing.
    (b) The terms and conditions of supplemental financing and any 
security offered to the supplemental lender are subject to RUS approval. 
Generally, supplemental loans must have the same final maturity and be 
amortized in the same manner as RUS loans made concurrently. Borrowers 
may elect to repay the loans either in substantially equal periodic 
installments covering interest and principal, or in periodic 
installments that include interest and level amortization of principal.
    (c) Supplemental financing required for municipal rate loans--(1) 
Distribution borrowers. (i) Distribution borrowers that had, as of 
December 31, 1980, an average consumer density of 2 or fewer consumers 
per mile or an average adjusted plant revenue ratio (APRR), as defined 
in Sec. 1710.2, of over 9.0 shall obtain supplemental financing equal to 
10 percent of their loan request.
    (ii) All other distribution borrowers must obtain supplemental 
financing according to their plant revenue ratio (PRR), as defined in 
Sec. 1710.2, based on the most recent year-end data available on the 
date of loan approval, as follows:

------------------------------------------------------------------------
                                                       Supplemental loan
                         PRR                               percentage
------------------------------------------------------------------------
9.00 and above.......................................                 10
8.01-8.99............................................                 20
8.00 and below.......................................                 30
------------------------------------------------------------------------

    (iii) If a distribution borrower enters into a merger, 
consolidation, or transfer of system substantially in its entirety, and 
the provisions of 7 CFR 1717.154(b) do not apply, required supplemental 
financing will be determined as follows for loans approved by RUS after 
December 19, 1996. If one of the merging parties met the criteria in 
paragraph (c)(1)(i) of this section prior to the effective date of the 
merger consolidation or transfer, the borrower will be required to 
obtain supplemental financing equal to 10 percent of any loan funds 
requested for facilities to serve consumers located in the territory 
formerly served by the ``paragraph (c)(1)(i)'' borrower. The required 
amount of supplemental financing for the rest of the loan will be 
determined

[[Page 111]]

according to the provisions of paragraph (c)(1)(ii) of this section.
    (2) Power supply borrowers. The supplemental loan proportion 
required of a power supply borrower is based on the simple arithmetic 
mean of the supplemental loan proportions required of the borrower's 
distribution members.
    (3) Subsequent loans. (i) If more than 5 percent of an insured loan 
made prior to November 1, 1993, or of a municipal rate loan is 
terminated or rescinded, the amount of supplemental financing required 
in the borrower's next loan after the rescission for which supplemental 
financing is required, pursuant to paragraph (a) of this section, will 
be adjusted to average the actual supplemental financing portion on the 
terminated or rescinded loan with the supplemental financing portion 
that would have been required on the new loan according to paragraphs 
(c)(1) and (2) of this section, in accordance with the formulas set 
forth in paragraphs (c)(3)(ii) and (iii) of this section.
    (ii) If a borrower's supplemental financing requirement as set forth 
in paragraphs (a), (c)(1), and (c)(2) of this section has not changed 
between the most recent loan and the loan being considered, then the 
amount of supplemental financing required for the new loan will be 
computed as follows:

Supplemental financing amount, new loan = [(A + B) x C] - D

where:

A = The total funds ($) actually advanced from the first loan, including 
both RUS loan funds and funds from the supplemental loan, plus any 
unadvanced funds still available to the borrower after the rescission.
B = The total amount ($) for facilities of the new loan request, 
including both RUS loan funds and funds from supplemental loans.
C = The proportion (%) of supplemental financing required on the loans 
according to paragraphs (a), (c)(1) and (c)(2) of this section.
D = The amount ($) of supplemental funds actually advanced on the first 
loan, plus any unadvanced supplemental funds still available to the 
borrower after the rescission.

    (iii) If a borrower's supplemental financing requirement as set 
forth in paragraphs (a), (c)(1), and (c)(2) of this section has changed 
between the most recent loan and the loan being considered, then the 
amount of supplemental financing required for the new loan will be the 
weighted average of the portions otherwise applicable on the two loans 
and will be computed as follows:

Supplemental financing amount, new loan = 
(AxC1)+(BxC2)-D

where:

A = The total funds ($) actually advanced from the first loan, including 
both RUS loan funds and funds from the supplemental loan, plus any 
unadvanced funds still available to the borrower after the rescission.
B = The total amount ($) for facilities of the new loan request, 
including both RUS funds and funds from supplemental loans.
C1 = The proportion (%) of supplemental financing required on 
the old loan according to paragraphs (a), (c)(1) and (c)(2) of this 
section.
C2 = The proportion (%) of supplemental financing required on 
the new loan according to paragraphs (a), (c)(1) and (c)(2) of this 
section.
D = The amount ($) of supplemental funds actually advanced on the first 
loan, plus any unadvanced supplemental funds still available to the 
borrower after the rescission.

    (d) Supplemental financing will not be required in connection with 
hardship rate loans. Borrowers that qualify for hardship rate loans but 
elect to take municipal rate loans instead, will be required to obtain 
supplemental financing pursuant to this section, unless at the time of 
loan approval, there are no funds remaining available for hardship 
loans, in which case supplemental financing will not be required.

[57 FR 1053, Jan. 9, 1992, as amended at 58 FR 66265, Dec. 20, 1993; 60 
FR 3730, Jan. 19, 1995; 61 FR 66870, Dec. 19, 1996]



Sec. 1710.111  Refinancing.

    (a) RUS makes loans or loan guarantees to refinance the outstanding 
indebtedness of borrowers in the following cases:
    (1) Loans or loan guarantees to refinance long-term debt owed by 
borrowers to the Tennessee Valley Authority fpr credit extended under 
the terms of the Tennessee Valley Authority Act of 1933, as amended.
    (2) Loan guarantees made in accordance with the provisions of 
section 306A of the RE Act to prepay a loan (or

[[Page 112]]

any loan advance thereunder) made by the Federal Financing Bank.
    (b) In certain circumstances, RUS may make a loan to replace interim 
financing obtained for the construction of facilities (See 
Sec. 1710.109).



Sec. 1710.112  Loan feasibility.

    (a) RUS will make a loan only if there is reasonable assurance that 
the loan, together with all outstanding loans and other obligations of 
the borrower, will be repaid in full as scheduled, in accordance with 
the mortgage, notes, and loan contracts. The borrower must provide 
evidence satisfactory to the Administrator that the loan will be repaid 
in full as scheduled, and that all other obligations of the borrower 
will be met.
    (b) Based on evidence submitted by the borrower and other 
information, RUS will use the following criteria to evaluate loan 
feasibility:
    (1) Projections of power requirements, rates, revenues, expenses, 
margins, and other factors for the present system and proposed additions 
are based on reasonable assumptions and adequate supporting data and 
analysis, including analysis of a range of assumptions for the 
significant variables, when required by Sec. 1710.300(d)(5).
    (2) Projected revenues from the rates proposed by the borrower are 
adequate to meet the required TIER and DSC ratios based on the 
borrower's total costs, including the projected maximum debt service 
cost of the new loan.
    (3) The economics of the borrower's operations and service area are 
such that consumers can reasonably be expected to pay the proposed rates 
required to cover all expenses and meet RUS TIER and DSC requirements, 
and the borrower can reasonably compete with other utilities and other 
energy sources to prevent substantial load loss while providing 
satisfactory service to its consumers.
    (4) Risks of possible loss of substantial loads from large consumers 
or from load concentrations in particular industries will not 
substantially impair loan feasibility.
    (5) Risks of loss of portions of the borrower's service territory 
from annexation or other causes will not substantially impair loan 
feasibility. If there appears to be a substantial risk, RUS may require 
additional information from the borrower, such as a summary and analysis 
of the risk by the borrower; state, county or local planning reports 
having information on projected growth or expansion plans of local 
communities; annexation plans of the municipalities in question; and any 
other relevant information.
    (6) In states where rates or investment decisions are subject to 
approval by state regulatory authorities, there is reasonable 
expectation that such approvals will be forthcoming to enable repayment 
of the loan in full according to its terms.
    (7) The experience and performance of the system's management is 
acceptable.
    (8) In the case of joint ventures, the borrower has sufficient 
management control or other contractual safeguards with respect to the 
construction and operation of the jointly owned facility to ensure that 
the borrower's interests are protected and the credit risk is minimized.
    (9) The borrower has implemented adequate financial and management 
controls and there are and have been no significant financial or other 
irregularities.
    (10) The borrower's projected capitalization, measured by its equity 
as a percentage of total assets, is adequate to enable the borrower to 
meet its financial needs and to provide service consistent with the RE 
Act. Among the factors to be considered in reviewing the borrower's 
projected capitalization are the economic strength of the borrower's 
service territory, the inherent cost of providing service to the 
territory, the disparity in rates between the borrower and neighboring 
utilities, the intensity of competition faced by the borrower from 
neighboring utilities and other power sources, and the relative amount 
of new capital investment required to serve existing or new loads.
    (c) RUS considers a loan to be feasible only if the borrower's 
electric system is year 2000 compliant, or if the borrower provides RUS 
with evidence, satisfactory to RUS, that it is taking measures necessary 
to ensure that its

[[Page 113]]

electric system will be year 2000 compliant on or before December 31, 
1999. Year 2000 compliant means that product performance and function 
are not affected by dates before, during, and a reasonable time after 
the year 2000.

[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992, as amended at 60 FR 
3731, Jan. 19, 1995; 63 FR 51793, Sept. 29, 1998]



Sec. 1710.113  Loan security.

    (a) RUS makes loans only if, in the judgment of the Administrator, 
the security therefor is reasonably adequate and the loan will be repaid 
according to its terms within the time agreed.
    (b) RUS generally requires that borrowers provide it with a first 
lien on all of the borrower's real and personal property, including 
intangible personal property and any property acquired after the date of 
the loan. This lien shall be in the form of a mortgage by the borrower 
to the Government or a deed of trust between the borrower and a trustee 
satisfactory to the Administrator, together with such security documents 
as RUS may deem necessary in a particular case.
    (c)(1) When a borrower is unable by reason of preexisting 
encumbrances, or otherwise, to furnish a first mortgage lien on its 
entire system the Administrator may accept other forms of security, such 
as a pledge of revenues, if he or she determines such security is 
reasonably adequate and the form and nature thereof is otherwise 
acceptable.
    (2) The Administrator, at his or her discretion, may approve the use 
of an indenture patterned after those indentures commonly used by 
utilities engaged in private market financing, in lieu of a mortgage as 
the security instrument for loans to power supply borrowers. The use of 
an indenture will be by mutual agreement of the borrower and the 
Administrator. The terms of each indenture and related loan agreement 
will be negotiated on a case by case basis to best meet the needs of the 
individual borrower and the Government. The provisions of the indenture 
and loan contract shall control, notwithstanding any provisions of 7 CFR 
Chapter XVII which may be in conflict therewith.
    (d) In the case of loans that include the financing of electric 
facilities that are operated as an integral component of a non-RUS 
financed system (such as generation and transmission facilities co-owned 
with other electric utilities), the borrower shall, in addition to the 
mortgage lien on all of the borrower's electric facilities, furnish 
adequate assurance, in the form of contractual or other security 
arrangements, that the system will be operated on an efficient and 
continuous basis. Satisfactory evidence must also be provided that the 
non-RUS financed system is financially sound and under capable 
management. Examples of such evidence include financial reports, annual 
reports, Security and Exchange Commission 10K reports if the system is 
required to file them, credit reports from Standard and Poor's, Moodys 
or other recognized sources, reports to state regulatory authorities and 
the Federal Energy Regulatory Commission, and evidence of a successful 
track record in related construction projects.
    (e) Additional controls on the borrower's financial, investment and 
managerial activities appear in the loan contract and mortgage required 
by RUS.

[57 FR 1053, Jan. 9, 1992, as amended at 62 FR 7665, Feb. 20, 1997]



Sec. 1710.114  TIER, DSC, OTIER and ODSC requirements.

    (a) General. Requirements for coverage ratios are set forth in the 
borrower's mortgage, loan contract, or other contractual agreements with 
RUS. The requirements set forth in this section apply to borrowers that 
receive a loan approved by RUS on or after February 10, 1992. Nothing in 
this section, however, shall reduce the coverage ratio requirements of a 
borrower that has contractually agreed with RUS to a higher requirement.
    (b) Coverage ratios. (1) Distribution borrowers. The minimum 
coverage ratios required of distribution borrowers whether applied on an 
annual or average basis, are a TIER of 1.25, DSC of 1.25, OTIER of 1.1, 
and ODSC of 1.1. OTIER and ODSC shall apply to distribution borrowers 
that receive a loan approved on or after January 29, 1996.
    (2) The minimum coverage ratios required of power supply borrowers,

[[Page 114]]

whether applied on an annual or average basis, are a TIER of 1.05 and 
DSC of 1.00.
    (3) When new loan contracts are executed, the Administrator may, 
case by case, increase the coverage ratios of distribution and power 
supply borrowers above the levels cited in paragraphs (b)(1) and (b)(2), 
respectively, of this section if the Administrator determines that the 
higher ratios are required to ensure reasonable security for and/or the 
repayment of loans made or guaranteed by RUS. Also, the Administrator 
may, case by case, reduce said coverage ratios if the Administrator 
determines that the lower ratios are required to ensure reasonable 
security for and/or the repayment of loans made or guaranteed by RUS. 
Policies for coverage ratios following certain mergers, consolidations, 
and transfers of systems substantially in their entirety are in 7 CFR 
1717.155.
    (4) If a distribution borrower has in service or under construction 
a substantial amount of generation and associated transmission plant 
financed at a cost of capital substantially higher than the cost of 
funds under section 305 of the RE Act, then the Administrator may 
establish, in his or her sole discretion, blended levels for TIER, DSC, 
OTIER, and ODSC based on the respective shares of total utility plant 
represented by said generation and associated transmission plant and by 
distribution and other transmission plant.
    (c) Requirements for loan feasibility. To be eligible for a loan, 
borrowers must demonstrate to RUS that they will, on a pro forma basis, 
earn the coverage ratios required by paragraph (b) of this section in 
each of the years included in the borrower's long-range financial 
forecast prepared in support of its loan application, as set forth in 
subpart G of this part.
    (d) Requirements for maintenance of coverage ratios--(1) Prospective 
requirement. Borrowers must design and implement rates for utility 
service to provide sufficient revenue (along with other revenue 
available to the borrower in the case of TIER and DSC) to pay all fixed 
and variable expenses, to provide and maintain reasonable working 
capital and to maintain on an annual basis the coverage ratios required 
by paragraph (b) of this section. Rates must be designed and implemented 
to produce at least enough revenue to meet the requirements of this 
paragraph under the assumption that average weather conditions in the 
borrower's service territory will prevail in the future, including 
average system damage and outages due to weather and the related costs. 
Failure to design and implement rates pursuant to the requirements of 
this paragraph shall be an event of default upon notice provided in 
accordance with the terms of the borrower's mortgage or loan contract.
    (2) Retrospective requirement. The average coverage ratios achieved 
by a borrower in the 2 best years out of the 3 most recent calendar 
years must meet the levels required by paragraph (b) of this section. If 
a borrower fails to achieve these average levels, it must promptly 
notify RUS in writing. Within 30 days of such notification or of the 
borrower being notified in writing by RUS, whichever is earlier, the 
borrower, in consultation with RUS, must provide a written plan 
satisfactory to RUS setting forth the actions that will be taken to 
achieve the required coverage ratios on a timely basis. Failure to 
develop and implement a plan satisfactory to RUS shall be an event of 
default upon notice provided in accordance with the terms of the 
borrower's mortgage or loan contract.
    (3) Fixed and variable expenses, as used in this section, include 
but are not limited to: all taxes, depreciation, maintenance expenses, 
and the cost of electric power and energy and other operating expenses 
of the electric system, including all obligations under the wholesale 
power contract, all lease payments when due, and all principal and 
interest payments on outstanding indebtedness when due.
    (e) Requirements for advance of funds. (1) If a borrower applying 
for a loan has failed to achieve the coverage ratios required by 
paragraph (b) of this section during the latest 12 month period 
immediately preceding approval of the loan, or if any of the borrower's 
average coverage ratios for the 2 best years out of the most recent 3 
calendar years were below the levels required in paragraph (b) of this 
section, RUS may

[[Page 115]]

withhold the advance of loan funds until the borrower has adopted an 
annual financial plan and operating budget satisfactory to RUS and taken 
such other action as RUS may require to demonstrate that the required 
coverage ratios will be maintained in the future and that the loan will 
be repaid with interest within the time agreed. Such other action may 
include, for example, increasing system operating efficiency and 
reducing costs or adopting a rate design that will achieve the required 
coverage ratios, and either placing such rates into effect or taking 
action to obtain regulatory authority approval of such rates. If failure 
to achieve the coverage ratios is due to unusual events beyond the 
control of the borrower, such as unusual weather, system outage due to a 
storm or regulatory delay in approving rate increases, then the 
Administrator may waive the requirement that the borrower take the 
remedial actions set forth in this paragraph, provided that such waiver 
will not threaten loan feasibility.
    (2) With respect to any outstanding loan approved by RUS on or after 
February 10, 1992, if, based on actual or projected financial 
performance of the borrower, RUS determines that the borrower may not 
achieve its required coverage ratios in the current or future years, RUS 
may withhold the advance of loan funds until the borrower has taken 
remedial action satisfactory to RUS.

[60 FR 67404, Dec. 29, 1995, as amended at 61 FR 66871, Dec. 19, 1996; 
65 FR 51748, Aug. 25, 2000]



Sec. 1710.115  Final maturity.

    (a) RUS is authorized to make loans and loan guarantees with a final 
maturity of up to 35 years. The borrower may elect a repayment period 
for a loan not longer than the expected useful life of the facilities, 
not to exceed 35 years. Most of the electric facilities financed by RUS 
have a long useful life, often approximating 35 years. Some facilities, 
such as load management equipment and Supervisory Control and Data 
Acquisition equipment, have a much shorter useful life due, in part, to 
obsolescence. Operating loans to finance working capital required for 
the initial operation of a new system are a separate class of loans and 
usually have a final maturity of less than 10 years.
    (b) Loans made or guaranteed by RUS for facilities owned by the 
borrower generally must be repaid with interest within a period, up to 
35 years, that approximates the expected useful life of the facilities 
financed. The expected useful life shall be based on the weighted 
average of the useful lives that the borrower proposes for the 
facilities financed by the loan, provided that the proposed useful lives 
are deemed appropriate by RUS. RUS Form 740c, Cost Estimates and Loan 
Budget for Electric Borrowers, submitted as part of the loan application 
must include, as a note, either a statement certifying that at least 90 
percent of the loan funds are for facilities that have a useful life of 
33 years or longer, or a schedule showing the costs and useful life of 
those facilities with a useful life of less than 33 years. The useful 
lives proposed by the borrower for the facilities financed must be 
consistent with the borrower's proposed depreciation rates for these 
facilities. In states where the borrower must obtain state regulatory 
authority approval of depreciation rates for rate making purposes, the 
depreciation rates used for the purposes of this paragraph shall be the 
rates currently approved by the state authority or rates for which the 
borrower plans to seek state authority approval, provided that these 
rates are deemed appropriate by RUS. In other states, if the rates 
proposed by the borrower are not deemed appropriate by RUS, RUS will 
base expected useful life on the depreciation rates listed in Bulletin 
183-1, or its successor, revising such rates as necessary to reflect 
current industry practice (for availability of bulletins, see 
Sec. 1710.5.). Final maturities for loans for the implementation of 
programs for demand side management and energy resource conservation and 
on and off grid renewable energy sources not owned by the borrower will 
be determined by RUS. Due to the uncertainty of predictions over an 
extended period of time, RUS may add up to 2 years to the composite 
average useful life of the facilities in order to determine final 
maturity.

[[Page 116]]

    (c) [Reserved]
    (d) The Administrator may approve a repayment period longer than the 
expected useful life of the facilities financed, up to 35 years, if a 
longer final maturity is required to ensure repayment of the loan and 
loan security is adequate.
    (e) The final maturity of a loan established pursuant to the 
provisions of this section shall not be extended as a result of 
extending loan payments under section 12(a) of the RE Act.

[58 FR 66265, Dec. 20, 1993, as amended at 60 FR 3731, Jan. 19, 1995]



Sec. 1710.116  [Reserved]



Sec. 1710.117  Environmental considerations.

    Borrowers are required to comply with 7 CFR part 1794, which sets 
forth applicable requirements of the National Environmental Policy Act 
(NEPA), as amended (42 U.S.C. 4321 et seq.); the Council on 
Environmental Quality Regulations for Implementing the Procedural 
Provisions of NEPA (40 CFR parts 1500-1508); and certain other statutes, 
regulations and orders. Borrowers must also comply with any other 
applicable Federal or state environmental laws and regulations.



Sec. 1710.118  [Reserved]



Sec. 1710.119  Loan processing priorities.

    (a) Generally loans are processed in chronological order based on 
the date the complete application is received in the Regional office.
    (b) The Administrator may give priority to processing loans that are 
required to meet the following needs:
    (1) To restore electric service following a major storm or other 
catastrophe;
    (2) To bring existing electric facilities into compliance with any 
environmental requirements imposed by Federal or state law that were not 
in effect at the time the facilities were originally constructed;
    (3) To finance the capital needs of borrowers that are the result of 
a merger, consolidation, or a transfer of a system substantially in its 
entirety, provided that the merger, consolidation, or transfer has 
either been approved by RUS or does not need RUS approval pursuant to 
the borrower's loan documents (See 7 CFR 1717.154); or
    (4) To correct serious safety problems, other than those resulting 
from borrower mismanagement or negligence.
    (c) The Administrator may also change the normal order of processing 
loan applications when it is necessary to ensure that all loan authority 
for the fiscal year is utilized.

[57 FR 1053, Jan. 9, 1992, as amended at 61 FR 66871, Dec. 19, 1996]



Sec. 1710.120  Construction standards and contracting.

    Borrowers shall follow all RUS requirements regarding construction 
work plans, construction standards, approved materials, construction and 
related contracts, inspection procedures, and bidding procedures.



Sec. 1710.121  Insurance requirements.

    Borrowers are required to comply with certain requirements with 
respect to insurance and fidelity coverage as set forth in 7 CFR part 
1788.



Sec. 1710.122  Equal opportunity and nondiscrimination.

    Borrowers are required to comply with certain regulations on 
nondiscrimination in program services and benefits and on equal 
employment opportunity as set forth in RUS Bulletins 20-15 and 20-19 or 
their successors; 7 CFR parts 15 and 15b; and 45 CFR part 90.



Sec. 1710.123  Debarment and suspension.

    Borrowers are required to comply with certain requirements on 
debarment and suspension as set forth in 7 CFR part 3017.



Sec. 1710.124  Uniform Relocation Act.

    Borrowers are required to comply with applicable provisions of 49 
CFR part 24, which sets forth the requirements of the Uniform Relocation 
Assistance and Real Property Acquisition Policy Act of 1970 (Pub. L. 91-
646; 84 Stat. 1894), as amended by the Uniform Relocation Act Amendments 
of 1987 (Pub. L. 100-17; 101 Stat. 246-256) and the Intermodal Surface 
Transportation Efficiency Act of 1991.

[[Page 117]]



Sec. 1710.125  Restrictions on lobbying.

    Borrowers are required to comply with certain requirements with 
respect to restrictions on lobbying activities. See 7 CFR part 3018.



Sec. 1710.126  Federal debt delinquency.

    (a) Prior to approval of a loan or advance of funds, a borrower must 
report to RUS whether or not it is delinquent on any Federal debt, such 
as Federal income tax obligations or a loan or loan guarantee from 
another Federal agency. If delinquent, the reasons for the delinquency 
must be explained, and RUS will take such explanation into consideration 
in deciding whether to approve the loan or advance of funds.
    (b) Applicants for a loan or loan guarantee must also certify that 
they have been informed of the collection options the Federal government 
may use to collect delinquent debt.



Sec. 1710.127  Drug free workplace.

    Borrowers are required to comply with the Drug Free Workplace Act of 
1988 (Pub. L. 100-690, title V, subtitle D) and the Act's implementing 
regulations (7 CFR part 3017) when a borrower receives a Federal grant 
or enters into a procurement contract awarded pursuant to the provisions 
of the Federal Acquisition Regulation (title 48 CFR) to sell to a 
Federal agency property or services having a value of $25,000 or more.



Secs. 1710.128-1710.149  [Reserved]



             Subpart D--Basic Requirements for Loan Approval



Sec. 1710.150  General.

    The RE Act and prudent lending practice require that the 
Administrator make certain findings before approving an electric loan or 
loan guarantee. The borrower shall provide the evidence determined by 
the Administrator to be necessary to make these findings.



Sec. 1710.151  Required findings for all loans.

    (a) Area coverage. Adequate electric service will be made available 
to the widest practical number of rural users in the borrower's service 
area during the life of the loan. See Sec. 1710.103.
    (b) Feasibility. The loan is feasible and it will be repaid on time 
according to the terms of the mortgage, note, and loan contract. At any 
time after the original determination of feasibility, the Administrator 
may require the borrower to demonstrate that the loan remains feasible 
if there have been, or are anticipated to be, material changes in the 
borrower's costs, loads, rates, rate disparity, revenues, or other 
relevant factors from the time that feasibility was originally 
determined. See Sec. 1710.112 and subpart G of this part.
    (c) Security. RUS will have a first lien on the borrower's total 
system or other adequate security, and adequate financial and managerial 
controls will be included in loan documents. See Sec. 1710.113.
    (d) Interim financing. For loans that include funds to replace 
interim financing, there is satisfactory evidence that the interim 
financing was used for purposes approved by RUS and that the loan meets 
all applicable requirements of this part.
    (e) Facilities for nonrural areas. Whenever a borrower proposes to 
use loan funds for the improvement, expansion, construction, or 
acquisition of electric facilities for non-RE Act beneficiaries, there 
is satisfactory evidence that such funds are necessary and incidental to 
furnishing or improving electric service for RE Act beneficiaries. See 
Sec. 1710.104.
    (f) Facilities to be included in rate base. In states having 
jurisdiction, the borrower has provided satisfactory evidence based on 
the information available, such as an opinion of counsel, that the state 
regulatory authority will not exclude from the borrower's rate base any 
of the facilities included in the loan request, or otherwise prevent the 
borrower from charging rates sufficient to repay with interest the debt 
incurred for the facilities. Such evidence may be based on, but not 
necessarily limited to, the provisions of applicable state laws; the 
rules and policies of the state authority; precedents in other similar 
cases; statements made by the state authority; any assurances given to 
the borrower

[[Page 118]]

by the state authority; and other relevant information and experience.



Sec. 1710.152  Primary support documents.

    The following primary support documents and studies must be prepared 
by the borrower for approval by RUS in order to support a loan 
application:
    (a) Load forecast. The load forecast provides the borrower and RUS 
with an understanding of the borrower's future system loads, the factors 
influencing those loads, and estimates of future loads. The load 
forecast provides a basis for projecting annual electricity (kWh) sales 
and revenues, and for engineering estimates of plant additions required 
to provide reliable service to meet the forecasted loads. Subpart E of 
this part contains the information to be included in a load forecast and 
when an approved load forecast is required.
    (b) Construction work plan (CWP). The CWP shall specify and document 
the capital investments required to serve a borrower's planned new 
loads, improve service reliability and quality, and service the changing 
needs of existing loads. The requirements for a CWP are set forth in 
subpart F of this part.
    (c) Long-range financial forecasts. RUS encourages borrowers to 
maintain on a current basis a long-range financial forecast, which 
should be used by a borrower's board of directors and manager to guide 
the system toward its financial goals. The forecast submitted in support 
of a loan application shall show the projected results of future actions 
planned by the board of directors. The requirements for a long-range 
financial forecast are set forth in subpart G of this part.
    (d) Borrower's environmental report (BER). This document is used to 
determine what effect the construction of the facilities included in the 
construction work plan will have on the environment. In developing a BER 
a borrower shall follow the policy and procedural requirements set forth 
in 7 CFR part 1794. After reviewing the BER, RUS will determine whether 
additional environmental studies will be required.

[57 FR 1053, Jan. 9, 1992, as amended at 65 FR 14786, Mar. 20, 2000]



Sec. 1710.153  Additional requirements and procedures.

    Additional requirements and procedures for obtaining RUS financial 
assistance are set forth in 7 CFR part 1712 for loan guarantees, and in 
7 CFR part 1714 for insured loans.



Secs. 1710.154-1710.199  [Reserved]



                        Subpart E--Load Forecasts

    Source: 65 FR 14786, Mar. 20, 2000, unless otherwise noted.



Sec. 1710.200  Purpose.

    This subpart contains RUS policies for the preparation, review, 
approval and use of load forecasts and load forecast work plans. A load 
forecast is a thorough study of a borrower's electric loads and the 
factors that affect those loads in order to estimate, as accurately as 
practicable, the borrower's future requirements for energy and capacity. 
The load forecast of a power supply borrower includes and integrates the 
load forecasts of its member systems. An approved load forecast, if 
required by this subpart, is one of the primary documents that a 
borrower is required to submit to support a loan application.



Sec. 1710.201  General.

    (a) The policies, procedures and requirements in this subpart are 
intended to implement provisions of the loan documents between RUS and 
the electric borrowers and are also necessary to support approval by RUS 
of requests for financial assistance.
    (b) Notwithstanding any other provisions of this subpart, RUS may 
require any power supply or distribution borrower to prepare a new or 
updated load forecast for RUS approval or to maintain an approved load 
forecast on an ongoing basis, if such documentation is necessary for RUS 
to determine loan feasibility, or to ensure compliance under the loan 
documents.



Sec. 1710.202  Requirement to prepare a load forecast--power supply borrowers.

    (a) A power supply borrower with a total utility plant of $500 
million or more must maintain an approved load

[[Page 119]]

forecast that meets the requirements of this subpart on an ongoing basis 
and provide an approved load forecast in support of any request for RUS 
financial assistance. The borrower must also maintain an approved load 
forecast work plan. The borrower's approved load forecast must be 
prepared pursuant to the approved load forecast work plan.
    (b) A power supply borrower that is a member of another power supply 
borrower that has a total utility plant of $500 million or more must 
maintain an approved load forecast that meets the requirements of this 
subpart on an ongoing basis and provide an approved load forecast in 
support of any request for RUS financial assistance. The member power 
supply borrower may comply with this requirement by participation in and 
inclusion of its load forecasting information in the approved load 
forecast of its power supply borrower. The approved load forecasts must 
be prepared pursuant to the RUS approved load forecast work plan.
    (c) A power supply borrower that has total utility plant of less 
than $500 million and that is not a member of another power supply 
borrower with a total utility plant of $500 million or more must provide 
an approved load forecast that meets the requirements of this subpart in 
support of an application for any RUS loan or loan guarantee which 
exceeds $50 million. The borrower is not required to maintain on an 
ongoing basis either an approved load forecast or an approved load 
forecast work plan.



Sec. 1710.203  Requirement to prepare a load forecast--distribution borrowers.

    (a) A distribution borrower that is a member of a power supply 
borrower with a total utility plant of $500 million or more must 
maintain an approved load forecast that meets the requirements of this 
subpart on an ongoing basis and provide an approved load forecast in 
support of any request for RUS financial assistance. The distribution 
borrower may comply with this requirement by participation in and 
inclusion of its load forecasting information in the approved load 
forecast of its power supply borrower. The distribution borrower's load 
forecast must be prepared pursuant to the approved load forecast work 
plan of its power supply borrower.
    (b) A distribution borrower that is a member of a power supply 
borrower which is itself a member of another power supply borrower that 
has a total utility plant of $500 million or more must maintain an 
approved load forecast that meets the requirements of this subpart on an 
ongoing basis and provide an approved load forecast in support of any 
request for RUS financial assistance. The distribution borrower may 
comply with this requirement by participation in and inclusion of its 
load forecasting information in the approved load forecast of its power 
supply borrower. The distribution borrower's approved load forecast must 
be prepared pursuant to the approved load forecast work plan of the 
power supply borrower with total utility plant in excess of $500 
million.
    (c) A distribution borrower that is a member of a power supply 
borrower with a total utility plant of less than $500 million must 
provide an approved load forecast that meets the requirements of this 
subpart in support of an application for any RUS loan or loan guarantee 
that exceeds $3 million or 5 percent of total utility plant, whichever 
is greater. The distribution borrower may comply with this requirement 
by participation in and inclusion of its load forecasting information in 
the approved load forecast of its power supply borrower. The borrower is 
not required to maintain on an ongoing basis either an approved load 
forecast or an approved load forecast work plan.
    (d) A distribution borrower with a total utility plant of less than 
$500 million and that is unaffiliated with a power supply borrower must 
provide an approved load forecast that meets the requirements of this 
subpart in support of an application for any RUS loan or loan guarantee 
which exceeds $3 million or 5 percent of total utility plant, whichever 
is greater. The borrower is not required to maintain on an ongoing basis 
either an approved load forecast or an approved load forecast work plan.
    (e) A distribution borrower with a total utility plant of $500 
million or more must maintain an approved load

[[Page 120]]

forecast that meets the requirements of this subpart on an ongoing basis 
and provide an approved load forecast in support of any request for RUS 
financing assistance. The borrower must also maintain an approved load 
forecast work plan. The distribution borrower may comply with this 
requirement by participation in and inclusion of its load forecasting 
information in the approved load forecast of its power supply borrower.



Sec. 1710.204  Filing requirements for borrowers that must maintain an approved load forecast on an ongoing basis.

    (a) Filing of load forecasts and updates. A power supply or 
distribution borrower required to maintain an approved load forecast on 
an ongoing basis under Sec. 1710.202 or Sec. 1710.203 may elect either 
of the following two methods of compliance:
    (1) Submitting a new load forecast to RUS for review and approval at 
least every 36 months, and then submitting updates to the load forecast 
to RUS for review and approval in each intervening year; or
    (2) Submitting a new load forecast to RUS for review and approval 
not less frequently than every 24 months.
    (b) Extensions. RUS may extend any time period required under this 
section for up to 3 months at the written request of the borrower's 
general manager. A request to extend a time period beyond 3 months must 
be accompanied by a written request from the borrower's general manager, 
an amendment to the borrower's approved load forecast work plan 
incorporating the extension, a board resolution approving the extension 
request and any amendment to the approved load forecast work plan, and 
any other relevant supporting information. RUS may extend the time 
periods contained in this section for up to 24 months.



Sec. 1710.205  Minimum approval requirements for all load forecasts.

    (a) Documents required for RUS approval of a borrower's load 
forecast. The borrower must provide the following documents to obtain 
RUS approval for a load forecast:
    (1) The load forecast and supporting documentation;
    (2) A memorandum from the borrower's general manager to the board of 
directors recommending that the board approve the load forecast and its 
uses; and
    (3) A board resolution from the borrower's board of directors 
approving the load forecast and its uses.
    (b) Contents of Load Forecast. All load forecasts submitted by 
borrowers for approval must include:
    (1) A narrative describing the borrower's system, service territory, 
and consumers;
    (2) A narrative description of the borrower's load forecast 
including future load projections, forecast assumptions, and the methods 
and procedures used to develop the forecast;
    (3) Projections of usage by consumer class, number of consumers by 
class, annual system peak demand, and season of peak demand for the 
number of years agreed upon by RUS and the borrower;
    (4) A summary of the year-by-year results of the load forecast in a 
format that allows efficient transfer of the information to other 
borrower planning or loan support documents;
    (5) The load impacts of a borrower's demand side management 
activities, if applicable;
    (6) Graphic representations of the variables specifically identified 
by management as influencing a borrower's loads; and
    (7) A database that tracks all relevant variables that might 
influence a borrower's loads.
    (c) Formats. RUS does not require a specific format for the 
narrative, documentation, data, and other information in the load 
forecast, provided that all required information is included and 
available. All data must be in a tabular form that can be transferred 
electronically to RUS computer software applications. RUS will evaluate 
borrower load forecasts for readability, understanding, filing, and 
electronic access. If a borrower's load forecast is submitted in a 
format that is not readily usable by RUS or is incomplete, RUS will 
require the borrower to submit the load forecast in a format acceptable 
to RUS.

[[Page 121]]

    (d) Document retention. The borrower must retain its latest approved 
load forecasts, and supporting documentation until RUS approval of its 
next load forecast. Any approved load forecast work plan must be 
retained as part of the approved load forecast.
    (e) Consultation with RUS. The borrower must designate and make 
appropriate staff and consultants available for consultation with RUS to 
facilitate RUS review of the load forecast work plan and the load 
forecast when requested by RUS.
    (f) Correlation and consistency with other RUS loan support 
documents. If a borrower relies on an approved load forecast or an 
update of an approved load forecast as loan support, the borrower must 
demonstrate that the approved load forecast and the other primary 
support documentation for the loan were reconciled. For example, both 
the load forecast and the financial forecast require input assumptions 
for wholesale power costs, distribution costs, other systems costs, 
average revenue per kWh, and inflation. Also, a borrower's engineering 
planning documents, such as the construction work plan, incorporate 
consumer and usage per consumer projections from the load forecast to 
develop system design criteria. The assumptions and data common to all 
the documents must be consistent.
    (g) Coordination. Power supply borrowers and their members that are 
subject to the requirement to maintain an approved load forecast on an 
ongoing basis are required to coordinate preparation of their respective 
load forecasts, updates of load forecasts, and approved load forecast 
work plan. A load forecast of a power supply borrower must consider the 
load forecasts of all its member systems.



Sec. 1710.206  Approval requirements for load forecasts prepared pursuant to approved load forecast work plans.

    (a) Contents of load forecasts prepared under an approved load 
forecast work plan. In addition to the minimum requirements for load 
forecasts under Sec. 1710.205, load forecasts developed and submitted by 
borrowers required to have an approved load forecast work plan shall 
include the following:
    (1) Scope of the load forecast. The narrative shall address the 
overall approach, time periods, and expected internal and external uses 
of the forecast. Examples of internal uses include providing information 
for developing or monitoring demand side management programs, supply 
resource planning, load flow studies, wholesale power marketing, retail 
marketing, cost of service studies, rate policy and development, 
financial planning, and evaluating the potential effects on electric 
revenues caused by competition from alternative energy sources or other 
electric suppliers. Examples of external uses include meeting state and 
Federal regulatory requirements, obtaining financial ratings, and 
participation in reliability council, power pool, regional transmission 
group, power supplier or member system forecasting and planning 
activities.
    (2) Resources used to develop the load forecast. The discussion 
shall identify and discuss the borrower personnel, consultants, data 
processing, methods and other resources used in the preparation of the 
load forecast. The borrower shall identify the borrower's member and, as 
applicable, member personnel that will serve as project leaders or 
liaisons with the authority to make decisions and commit resources 
within the scope of the current and future work plans.
    (3) A comprehensive description of the database used in the study. 
The narrative shall describe the procedures used to collect, develop, 
verify, validate, update, and maintain the data. A data dictionary 
thoroughly defining the database shall be included. The borrower shall 
make all or parts of the database available or otherwise accessible to 
RUS in electronic format, if requested.
    (4) A narrative for each new load forecast or update of a load 
forecast discussing the methods and procedures used in the analysis and 
modeling of the borrower's electric system loads as provided for in the 
load forecast work plan.
    (5) A narrative discussing the borrower's past, existing, and 
forecast of

[[Page 122]]

future electric system loads. The narrative must identify and explain 
substantive assumptions and other pertinent information used to support 
the estimates presented in the load forecast.
    (6) A narrative discussing load forecast uncertainty or alternative 
futures that may determine the borrower's actual loads. Examples of 
economic scenarios, weather conditions, and other uncertainties that 
borrowers may decide to address in their analysis include:
    (i) Most-probable assumptions, with normal weather;
    (ii) Pessimistic assumptions, with normal weather;
    (iii) Optimistic assumptions, with normal weather;
    (iv) Most-probable assumptions, with severe weather;
    (v) Most-probable assumptions, with mild weather;
    (vi) Impacts of wholesale or retail competition; or
    (vii) new environmental requirements.
    (7) A summary of the forecast's results on an annual basis. Include 
alternative futures, as applicable. This summary shall be designed to 
accommodate the transfer of load forecast information to a borrower's 
other planning or loan support documents. Computer-generated forms or 
electronic submissions of data are acceptable. Graphs, tables, 
spreadsheets or other exhibits shall be included throughout the forecast 
as appropriate.
    (8) A narrative discussing the coordination activities conducted 
between a power supply borrower and its members, as applicable, and 
between the borrower and RUS.
    (b) Compliance with an approved load forecast work plan. A borrower 
required to maintain an approved load forecast work plan must also be 
able to demonstrate that both it and its RUS borrower members are in 
compliance with its approved load forecast work plan for the next load 
forecast or update of a load forecast.



Sec. 1710.207  RUS criteria for approval of load forecasts by distribution borrowers not required to maintain an approved load forecast on an ongoing basis.

    Load forecasts submitted by distribution borrowers that are 
unaffiliated with a power supply borrower, or by distribution borrowers 
that are members of a power supply borrower that has a total utility 
plant less than $500 million and that is not itself a member of another 
power supply borrower with a total utility plant of $500 million or more 
must satisfy the following minimum criteria:
    (a) The borrower considered all known relevant factors that 
influence the consumption of electricity and the known number of 
consumers served at the time the study was developed;
    (b) The borrower considered and identified all loads on its system 
of RE Act beneficiaries and non-RE Act beneficiaries;
    (c) The borrower developed an adequate supporting data base and 
considered a range of relevant assumptions; and
    (d) The borrower provided RUS with adequate documentation and 
assistance to allow for a thorough and independent review.



Sec. 1710.208  RUS criteria for approval of all load forecasts by power 
supply borrowers and by distribution borrowers required to maintain an 
approved load forecast on an ongoing basis.

    All load forecasts submitted by power supply borrowers and by 
distribution borrowers required to maintain an approved load forecast 
must satisfy the following criteria:
    (a) The borrower objectively analyzed all known relevant factors 
that influence the consumption of electricity and the known number of 
customers served at the time the study was developed;
    (b) The borrower considered and identified all loads on its system 
of RE Act beneficiaries and non-RE Act beneficiaries;

[[Page 123]]

    (c) The borrower developed an adequate supporting database and 
analyzed a reasonable range of relevant assumptions and alternative 
futures;
    (d) The borrower adopted methods and procedures in general use by 
the electric utility industry to develop its load forecast;
    (e) The borrower used valid and verifiable analytical techniques and 
models;
    (f) The borrower provided RUS with adequate documentation and 
assistance to allow for a thorough and independent review; and
    (g) In the case of a power supply borrower required to maintain an 
approved load forecast on an ongoing basis, the borrower adequately 
coordinated the preparation of the load forecast work plan and load 
forecast with its member systems.



Sec. 1710.209  Approval requirements for load forecast work plans.

    (a) In addition to the approved load forecast required under 
Secs. 1710.202 and 1710.203, any power supply borrower with a total 
utility plant of $500 million or more and any distribution borrower with 
a total utility plant of $500 million or more must maintain an approved 
load forecast work plan. RUS borrowers that are members of a power 
supply borrower with a total utility plant of $500 million or more must 
cooperate in the preparation of and submittal of the load forecast work 
plan of their power supply borrower.
    (b) An approved load forecast work plan establishes the process for 
the preparation and maintenance of a comprehensive database for the 
development of the borrower's load forecast, and load forecast updates. 
The approved load forecast work plan is intended to develop and maintain 
a process that will result in load forecasts that will meet the 
borrowers' own needs and the requirements of this subpart. An approved 
work plan represents a commitment by a power supply borrower and its 
members, or by a large unaffiliated distribution borrower, that all 
parties concerned will prepare their load forecasts in a timely manner 
pursuant to the approved load forecast work plan and they will modify 
the approved load forecast work plan as needed with RUS approval to 
address changing circumstances or enhance the usefulness of the approved 
load forecast work plan.
    (c) An approved load forecast work plan for a power supply borrower 
and its members must cover all member systems, including those that are 
not borrowers. However, only members that are borrowers, including the 
power supply borrower, are required to follow the approved load forecast 
work plan in preparing their respective load forecasts. Each borrower is 
individually responsible for forecasting all its RE Act beneficiary and 
non-RE Act beneficiary loads.
    (d) An approved load forecast work plan must outline the 
coordination and preparation requirements for both the power supply 
borrower and its members.
    (e) An approved load forecast work plan must cover a period of 2 or 
3 years depending on the applicable compliance filing schedule elected 
under Sec. 1710.204.
    (f) An approved load forecast work plan must describe the borrower's 
process and methods to be used in producing the load forecast and 
maintaining current load forecasts on an ongoing basis.
    (g) Approved load forecast work plans for borrowers with residential 
demand of 50 percent or more of total kWh must provide for a residential 
consumer survey at least every 5 years to obtain data on appliance and 
equipment saturation and electricity demand. Any such borrower that is 
experiencing or anticipates changes in usage patterns shall consider 
surveys on a more frequent schedule. Power supply borrowers shall 
coordinate such surveys with their members. Residential consumer surveys 
may be based on the aggregation of member-based samples or on a system-
wide sample, provided that the latter provides for relevant regional 
breakdowns as appropriate.
    (h) Approved load forecast work plans must provide for RUS review of 
the load forecasts as the load forecast is being developed.
    (i) A power supply borrower's work plan must have the concurrence of 
the

[[Page 124]]

majority of the members that are borrowers.
    (j) The borrower's board of directors must approve the load forecast 
work plan.
    (k) A borrower may amend its approved load forecast work plan 
subject to RUS approval. If RUS concludes that the existing approved 
load forecast work plan will not result in a satisfactory load forecast, 
RUS may require a new or revised load forecast work plan.



Sec. 1710.210  Waiver of requirements or approval criteria.

    For good cause shown by the borrower, the Administrator may waive 
any of the requirements applicable to borrowers in this subpart if the 
Administrator determines that waiving the requirement will not 
significantly affect accomplishment of RUS' objectives and if the 
requirement imposes a substantial burden on the borrower. The borrower's 
general manager must request the waiver in writing.



Secs. 1710.211-1710.249  [Reserved]



         Subpart F--Construction Work Plans and Related Studies



Sec. 1710.250  General.

    (a) An ongoing, integrated planning system is needed by borrowers to 
determine their short-term and long-term needs for plant additions, 
improvements, replacements, and retirements. The primary components of 
the system consist of long-range engineering plans, construction work 
plans (CWPs), CWP amendments, and special engineering and cost studies. 
Long range engineering plans identify plant investments required over a 
period of 10 years or more. CWPs specify and document plant requirements 
for the short-term, usually 2 to 3 years, and special engineering and 
cost studies are used to support CWPs and to identify and document 
requirements for specific items or purposes, such as load management 
equipment, System Control and Data Acquisition equipment, sectionalizing 
investments, and additions of generation capacity and associated 
transmission plant.
    (b) Generally, all borrowers are required to maintain up-to-date 
long range engineering plans approved by their boards of directors. 
Current CWPs approved by the borrower's board must also be developed and 
maintained for distribution and transmission facilities and for 
improvements and replacements of generation facilities. All such 
distribution, transmission or generation facilities must be included in 
the respective CWPs regardless of the source of financing.
    (c) A long range engineering plan specifies and supports the major 
system additions, improvements, replacements, and retirements needed for 
an orderly transition from the existing system to the system required 10 
or more years in the future. The planned future system should be based 
on the most technically and economically sound means of serving the 
borrower's long-range loads in a reliable and environmentally acceptable 
manner, and it should ensure that planned facilities will not become 
obsolete prematurely.
    (d) A CWP shall include investment cost estimates and supporting 
engineering and cost studies to demonstrate the need for each proposed 
facility or activity and the reasonableness of the investment 
projections and the engineering assumptions used in sizing the 
facilities. The CWP must be consistent with the borrower's long range 
engineering plan and both documents must be consistent with the 
borrower's RUS-approved power requirements study.
    (e) Applications for a loan or loan guarantee from RUS (new loans or 
budget reclassifications) must be supported by a current CWP approved by 
both the borrower's board of directors and RUS. RUS approval of these 
plans relates only to the facilities, equipment, and other purposes to 
be financed by RUS, and means that the plans provide an adequate basis 
from a planning and engineering standpoint to support RUS financing. RUS 
approval of the plans does not mean that RUS approves of the facilities, 
equipment, or other purposes for which the borrower is not seeking RUS 
financing. If RUS disagrees with a borrower's estimate of the cost of 
one or more facilities for which RUS financing is sought,

[[Page 125]]

RUS may adjust the estimate after consulting with the borrower and 
explaining the reasons for the adjustment.
    (f) Except as provided in paragraph (g) of this section, to be 
eligible for RUS financing, the facilities, including equipment and 
other items, included in a CWP must be approved by RUS before the start 
of construction. This requirement also applies to any amendments to a 
CWP required to add facilities to a CWP or to make significant physical 
changes in the facilities already included in a CWP. Provision for 
funding of ``minor projects'' under an RUS loan guarantee is permitted 
on the same basis as that discussed for insured loan funds in 7 CFR part 
1721, Post-Loan Policies and Procedures for Insured Electric Loans.
    (g) In the case of damage caused by storms and other natural 
catastrophes, a borrower may proceed with emergency repair work before a 
CWP or CWP amendment is prepared by the borrower and approved by RUS, 
without loosing eligibility for RUS financing of the repairs. The 
borrower must notify the RUS regional office in writing, not later than 
45 days after the natural catastrophe, of its preliminary estimates of 
damages and repair costs. Not later than 120 days after the natural 
catastrophe, the borrower must submit to RUS for approval, a CWP or CWP 
amendment detailing the repairs.
    (h) A CWP may be amended or augmented when the borrower can 
demonstrate the need for the changes.
    (i) A borrower's CWP or special engineering studies must be 
supported by a Borrower's Environmental Report, and when necessary by an 
Environmental Analysis or Environmental Impact Statement, as set forth 
in 7 CFR 1794 or required by other Federal or state regulations or laws.
    (j) All engineering activities required by this subpart must be 
performed by qualified engineers, who may be staff employees of the 
borrower or outside consultants.
    (k) Upon written request from a borrower, RUS may waive in writing 
certain requirements with respect to long-range engineering plans and 
CWPs if RUS determines that such requirements impose a substantial 
burden on the borrower and that waiving the requirements will not 
significantly affect the accomplishment of the objectives of this 
subpart. For example, if a borrower's load is forecast to remain 
constant or decline during the planning period, RUS may waive those 
portions of the plans that relate to load growth.

[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992, as amended at 60 FR 
67405, Dec. 29, 1995; 64 FR 33178, June 22, 1999]



Sec. 1710.251  Construction work plans--distribution borrowers.

    (a) All distribution borrowers must maintain a current CWP approved 
by their board of directors covering all new construction, improvements, 
replacements, and retirements of distribution and transmission plant, 
and improvements replacements, and retirements of any generation plant. 
Construction of new generation capacity need not be included in a CWP 
but must be specified and supported by specific engineering and cost 
studies. (See Sec. 1710.253.)
    (b) A distribution borrower's CWP shall cover a construction period 
of between 2 and 4 years, and include all facilities to be constructed 
which are eligible for RUS financing, whether or not RUS financial 
assistance will be sought or be available for certain facilities. Any 
RUS financing provided for the facilities will be limited to a 4 year 
loan period. The construction period covered by a CWP in support of a 
loan application shall not be shorter than the loan period requested for 
financing of the facilities.
    (c) The facilities, equipment and other items included in a 
distribution borrower's CWP may include:
    (1) Line extensions required to connect consumers, improve service 
reliability or improve voltage conditions;
    (2) Distribution tie lines to improve reliability of service and 
voltage regulation;
    (3) Line conversions and changes required to improve existing 
services or provide additional capacity for new consumers;
    (4) New substation facilities or additions to existing substations;
    (5) Transmission and substation facilities required to support the 
distribution system;

[[Page 126]]

    (6) Distribution equipment required to serve new consumers or to 
provide adequate and dependable service to existing consumers, including 
replacement of existing plant facilities;
    (7) Residential security lights;
    (8) Communications equipment and meters;
    (9) Headquarters facilities;
    (10) Improvements, replacements, and retirements of generation 
facilities;
    (11) Load management equipment, automatic sectionalizing facilities, 
and centralized System Control and Data Acquisition equipment. Load 
management equipment eligible for financing, including the related costs 
of installation, is limited to capital equipment designed to influence 
the time and manner of consumer use of electricity, which includes peak 
clipping and load shifting. To be eligible for financing, such equipment 
must be owned by the borrower, although it may be located inside or 
outside a consumer's premises; and
    (12) The cost of engineering, architectural, environmental and other 
studies and plans needed to support the construction of facilities, when 
such cost is capitalized as part of the cost of the facilities.

[57 FR 1053, Jan. 9, 1992; 57 FR 4513, Feb. 5, 1992, as amended at 60 FR 
3731, Jan. 19, 1995; 60 FR 67405, Dec. 29, 1995]



Sec. 1710.252  Construction work plans--power supply borrowers.

    (a) All power supply borrowers must maintain a current CWP approved 
by the borrower's board of directors covering all new construction, 
improvements, replacements, and retirements of distribution and 
transmission plant, and improvements, replacements, and retirements of 
generation plant. Applications for RUS financial assistance for such 
facilities must be supported by a current, RUS-approved CWP. 
Construction of new generation capacity need not be included in a CWP 
but must be specified and supported by specific engineering and cost 
studies.
    (b) Normally a power supply borrower's CWP shall cover a period of 3 
to 4 years. While comprehensive CWP's are desired, if there are 
extenuating circumstances RUS may accept a single-purpose transmission 
or generation CWP in support of a loan application or budget 
reclassification. The construction period covered by a CWP in support of 
a loan application shall not be shorter than the loan period requested 
for financing of the facilities.
    (c) Facilities, equipment, and other items included in a power 
supply borrower's CWP may include:
    (1) Distribution and related facilities as set forth in 
Sec. 1710.251(c);
    (2) Transmission facilities required to deliver the power needed to 
serve the existing and planned new loads of the borrower and its 
members, and to improve service reliability, including tie lines for 
improved reliability of service, line conversions, improvements and 
replacements, new substations and substation improvements and 
replacements, and Systems Control and Data Acquisition equipment, 
including communications, dispatching and sectionalizing equipment, and 
load management equipment;
    (3) The borrower's proportionate share of transmission facilities 
required to tie together the operating systems of supporting power pools 
and to connect with adjacent power suppliers;
    (4) Improvements and replacements of generation facilities; and
    (5) The cost of engineering, architectural, environmental and other 
studies and plans needed to support the construction of facilities, when 
such cost is capitalized as part of the cost of the facilities.
    (d) A CWP for transmission facilities shall normally include studies 
of load flows, voltage regulation, and stability characteristics to 
demonstrate system performance and needs.

[57 FR 1053, Jan. 9, 1992, as amended at 60 FR 3731, Jan. 19, 1995; 60 
FR 67405, Dec. 29, 1995]



Sec. 1710.253  Engineering and cost studies--addition of generation capacity.

    (a) The construction or purchase of additional generation capacity 
and associated transmission facilities by a power supply or distribution 
borrower, including the replacement of existing capacity, shall be 
supported by comprehensive project-specific engineering and cost studies 
as specified by RUS. The studies shall cover a period from

[[Page 127]]

the beginning of the project to at least 10 years after the start of 
commercial operation of the facilities.
    (b) The studies must include comprehensive economic present-value 
analyses of the costs and revenues of the available self-generation, 
load management, energy conservation, and purchased-power options, 
including assessments of service reliability and financing requirements 
and risks. Requirements for analyzing purchased-power options are set 
forth in Sec. 1710.254.
    (c) Generally, studies of self-generation, load management, and 
energy conservation options shall include, as appropriate, analyses of:
    (1) Capital and operating costs;
    (2) Financing requirements and risks;
    (3) System reliability;
    (4) Alternative unit sizes;
    (5) Alternative types of generation;
    (6) Fuel alternatives;
    (7) System stability;
    (8) Load flows; and
    (9) System dispatching.
    (d) At the request of a borrower, RUS, in its sole discretion, may 
waive specific requirements of this section if such requirements imposed 
a substantial burden on the borrower and if such waiver will not 
significantly affect the accomplishment of the objectives of this 
subpart.



Sec. 1710.254  Alternative sources of power.

    (a) General. (1) RUS will make loans to finance the construction of 
generation facilities by distribution or power supply borrowers and 
transmission facilities by power supply borrowers only under the 
following conditions if said borrowers do not already own and operate 
such types of facilities:
    (i) Where no adequate and dependable source of power is available to 
meet the consumers' needs; or
    (ii) Where the rates offered by other power sources would result in 
a higher cost of power to the consumers than the cost from facilities 
financed by RUS, and the amount of the power cost savings that would 
result from the RUS-financed facilities bears a significant relationship 
to the amount of the proposed loan.
    (2) If a borrower already owns and operates the types of facilities 
included in a loan request, then a loan for the purposes contained in 
paragraph (a)(1) of this section, as well as for the construction of 
transmission facilities by a distribution borrower, will be considered 
and evaluated by RUS in terms of whether the proposed facilities 
constitute an effective and economical means of meeting the power 
requirements of the consumers. A borrower shall contact RUS as soon as 
practicable in order for RUS to review information submitted by the 
borrower and advise the borrower, in writing, whether there is a need 
for the borrower to investigate and seek alternative sources of power. 
RUS will determine, based on information provided by the borrower or 
otherwise available, whether there is a need to investigate alternative 
sources of power or whether RUS will require information or other 
methods of determining the need for the generation capacity. RUS will 
base its determination on whether RUS is able to conclude that the 
project is needed, the borrower would incur delays and costs in pursuing 
an RFP, or that an RFP is not likely to produce new alternatives to the 
project.
    (b) Loan requests for the addition of generation capacity, including 
replacement of existing capacity, will be accepted by RUS when the 
applicant has completed the requirements established by RUS, in a manner 
satisfactory to RUS. The investigations of alternative sources of power 
must be coordinated in advance with RUS. This section applies to RUS 
financed generation capacity whether owned solely by the borrower, owned 
on an undivided ownership basis with other utilities or substantially 
controlled by the borrower.
    (c) The applicant may be required to seek and utilize capacity 
available from RUS borrowers and other organizations before developing 
plans for additional generation capacity. RUS may require, on a case by 
case basis, that the applicant, among other things:
    (1) Solicit power and energy purchase proposals from all reasonable 
potential sources of power, such as other electric cooperatives, 
investor-owned utilities, municipal utility organizations, and Federal 
and state power authorities.

[[Page 128]]

    (2) Solicit proposals from independent power producers, including 
co-generators, to determine the terms and conditions under which these 
producers can supply the additional power and energy needs of the 
applicant, without RUS financial assistance. Such solicitations should 
be placed in at least three national newspapers or trade publications, 
and they meet all planning, coordination or other requirements imposed 
by state authorities, as well as the environmental requirements of RUS.
    (d) When solicitations are received in accordance with paragraph (c) 
of this section, the applicant will evaluate all alternative proposals 
on an economic, present-value basis, giving consideration to cost-
effectiveness, reliability of service, the short-term and long-term 
financial viability of the supplier, and the financial risk to the 
borrower and its creditors. The applicant will keep RUS fully informed 
on these evaluations and provide supporting information and analysis as 
requested by RUS.
    (e) After evaluation of all proposals received in accordance with 
paragraph (c) of this section, and having informed RUS of the results, 
the applicant may be required to negotiate final proposals with the 
entities submitting the best acceptable offers. Contracts requiring RUS 
approval will either be approved in advance by the Administrator or 
contain a provision that the contract is not valid until approved, in 
writing, by the Administrator. The Administrator will approve the 
contracts in a timely manner provided that the borrower has met all 
applicable requirements, including, among other matters, evidence that 
the alternative source of power selected is an economical and effective 
alternative.
    (f) RUS may make independent inquiries with potential power 
suppliers as to the availability of power to meet borrowers' needs. 
Information developed by RUS will be shared with borrowers at their 
request.
    (g) Further details of RUS requirements for financing of generation 
and bulk transmission facilities are set forth in 7 CFR part 1712.
    (h) At the request of a borrower, RUS, in its sole discretion, may 
waive specific requirements of paragraphs (b) through (e) of this 
section if such waiver is required to prevent unreasonable delays in 
obtaining generation capacity that could result in system reliability 
problems.

(Approved by the Office of Management and Budget under control number 
0572-0032)

[57 FR 1053, Jan. 9, 1992, as amended at 65 FR 31247, May 17, 2000]



Secs. 1710.255-1710.299  [Reserved]



                Subpart G--Long-Range Financial Forecasts



Sec. 1710.300  General.

    (a) RUS encourages borrowers to maintain a current long-range 
financial forecast. The forecast should be used by the board of 
directors and the manager to guide the system towards its financial 
goals.
    (b) A borrower must prepare, for RUS review and approval, a long-
range financial forecast, approved by its board of directors, in support 
of its loan application. The forecast must demonstrate that the 
borrower's system is economically viable and that the proposed loan is 
financially feasible. Loan feasibility will be assessed based on the 
criteria set forth in Sec. 1710.112.
    (c) The financial forecast and related projections submitted in 
support of a loan application shall include:
    (1) The projected results of future actions planned by the 
borrower's board of directors;
    (2) The financial goals established for margins, TIER, DSC, equity, 
and levels of general funds to be invested in plant;
    (3) A pro forma balance sheet, statement of operations, and general 
funds summary projected for each year during the forecast period;
    (4) A full explanation of the assumptions, supporting data, and 
analysis used in the forecast, including the methodology used to project 
loads, rates, revenue, power costs, operating expenses, plant additions, 
and other factors having a material effect on the balance sheet and on 
financial ratios such as equity, TIER, and DSC;
    (5) Current and projected cash flows;

[[Page 129]]

    (6) Projections of future borrowings and the associated interest and 
principal expenses required to meet the projected investment 
requirements of the system;
    (7) Current and projected kW and kWh energy sales;
    (8) Current and projected unit prices of significant variables such 
as retail and wholesale power prices, average labor costs, and interest;
    (9) Current and projected system operating costs, including, but not 
limited to, wholesale power costs, depreciation expenses, labor costs, 
and debt service costs;
    (10) Current and projected revenues from sales of electric power and 
energy;
    (11) Current and projected non-operating income and expense;
    (12) A discussion of the historical experience of the borrower, and 
in the case of a power supply borrower its member systems as 
appropriate, with respect to the borrower's market competitiveness as it 
relates to the rates charged for electricity, competition from other 
fuels, and other factors. Additional data and analysis may be required 
by RUS on a case by case basis to assess the probable future 
competitiveness of those borrowers that have a history of serious 
competitive problems; and
    (13) An analysis of the effects of major factors, such as projected 
increases in rates charged for electricity, on the ability of the 
borrower, and in the case of a power supply borrower its member systems, 
to compete with neighboring utilities and other energy sources.
    (d) The following plans, studies and assumptions shall be used in 
developing the financial forecast:
    (1) The RUS-approved CWP;
    (2) RUS-approved power requirements data;
    (3) The current rate schedules or new rates already approved by the 
board of directors;
    (4) Future plant additions and operating expenses projected at 
anticipated future cost levels rather than in constant dollars, with the 
annual rate of inflation for major items specified; and
    (5) A sensitivity analysis may be required by RUS on a case-by-case 
basis taking into account such factors as the number and type of large 
power loads, projections of future borrowings and the associated 
interest, projected loads, projected revenues, and the probable future 
competitiveness of the borrower. When RUS determines that a sensitivity 
analysis is necessary for distribution borrowers, the variables to be 
tested will be determined by the General Field Representative in 
consultation with the borrower and the regional office. The regional 
office will consult with the Power Supply Division in the case of 
generation projects for distribution borrowers. For power supply 
borrowers, the variables to be tested will be determined by the borrower 
and the Power Supply Division.
    (e) The financial forecast shall use the accrual method, as approved 
by RUS, for analyzing costs and revenues, and, as applicable, compare 
the economic results of the various alternatives on a present value 
basis.

[57 FR 1053, Jan. 9, 1992, as amended at 63 FR 53277, Oct. 5, 1998]



Sec. 1710.301  Financial forecasts--distribution borrowers.

    (a) Financial forecasts prepared by distribution borrowers shall 
cover at least a ten-year period, unless a shorter period is authorized 
by other RUS regulations.
    (b) In addition to the requirements set forth in Sec. 1710.300 of 
this part, financial forecasts prepared by distribution borrowers in 
support of a loan application shall:
    (1) Include expenditures for any maintenance determined to be needed 
in the current system's operation and maintenance review and evaluation 
in order to comply with mortgage covenants and prudent utility practice;
    (2) Fully explain the basis for the power cost projections used. 
Generally, the power supplier's most recent forecasted rates shall be 
used; and
    (3) Use RUS Form 325 or computer-generated equivalent reports.



Sec. 1710.302  Financial forecasts--power supply borrowers.

    (a) The requirements of this section apply only to financial 
forecasts submitted by power supply borrowers in

[[Page 130]]

support of a loan from RUS. The financial forecast prepared by power 
supply borrowers shall demonstrate the effects that the addition of 
generation, transmission and any distribution facilities will have on 
the power supply borrower's sales, costs, and revenues, and on the cost 
of power to the member distribution systems.
    (b) The financial forecast shall cover a period of 10 years. RUS may 
request projections for a longer period of time if RUS deems necessary.
    (c) Financial forecasts prepared in support of loan applications to 
finance additional generation capacity shall include a power cost study 
as set forth in Sec. 1710.303.
    (d) In addition to the requirements set forth in Sec. 1710.300, 
financial forecasts prepared by power supply borrowers shall:
    (1) Identify all plans for generation and transmission capital 
additions and system operating expenses on a year-by-year basis, 
beginning with the present and running for 10 years, unless a longer 
period of time has been requested by RUS.
    (2) Integrate projections of operation and maintenance expenses 
associated with existing plant with those of new proposed facilities to 
determine total costs of system operation as well as the costs of new 
generation and generation-related facilities;
    (3) Provide an in-depth analysis of the regional markets for power 
if loan feasibility depends to any degree on a borrower's ability to 
sell surplus power while its system loads grow to meet the planned 
capacity of a proposed plant;
    (4) If not previously submitted, furnish RUS with all material 
information on operating agreements, ownership agreements, fuel 
contracts and any other special agreements that affect annual cost 
projections, as may be required by RUS on a case by case basis; and
    (5) Include sensitivity analysis if required by RUS pursuant to 
Sec. 1710.300(d)(5).
    (e) The projections shall be coordinated in advance with RUS so that 
agreement can be reached on major aspects of the economic studies. These 
include, but are not limited to, projections of future kW and kWh 
requirements, RE Act beneficiary loads, electricity prices, revenues 
from system and off-system power sales, the cost of prospective plant 
additions, interest and depreciation rates, fuel costs, cost escalation 
factors, the discount rate, and other factors.
    (f) The projections, analysis, and supporting information must be 
included in a report that will provide RUS with the information needed 
to:
    (1) Understand and compare various power supply plans;
    (2) Determine that the facilities to be financed will perform 
satisfactorily; and
    (3) Determine that the overall system is economically viable and the 
loan is financially feasible and secure.

[57 FR 1053, Jan. 9, 1992, as amended at 63 FR 53278, Oct. 5, 1998]



Sec. 1710.303  Power cost studies--power supply borrowers.

    (a) All applications for financing of additional generation capacity 
and the associated bulk transmission facilities shall be supported by a 
power cost study to demonstrate that the proposed generation and 
associated transmission facilities are the most economical and effective 
means of meeting the borrower's power requirements. This study usually 
is a separate study but it may be integrated with the financial forecast 
required by Sec. 1710.302.
    (b) A power cost study shall include the following basic elements:
    (1) A study of all reasonably available self-generation, purchased-
power, load management, and energy conservation alternatives as set 
forth in Secs. 1710.253 and 1710.254;
    (2) A present-value analysis of the costs of the alternatives and 
their effects on total power costs, covering a period of at least 10 
years beyond the projected in-service date of the facilities;
    (3) A description of proposed new power-purchase contracts or 
revisions to existing contracts, and an analysis of the effects on power 
costs;
    (4) Use of sensitivity analyses to determine the vulnerability of 
the alternatives to a reasonable range of assumptions about fuel costs, 
failure to achieve projected load growth, changes

[[Page 131]]

in operating and financing costs, and other major factors, if the 
financial forecast is used in support of a loan or loan guarantee that 
exceeds the smaller of $25 million or 10 percent of the borrower's total 
utility plant. Individual sensitivity analyses need not be duplicated if 
they have been included in other materials submitted to RUS; and
    (5) Assessment of the financial risks of the various alternatives, 
especially as between capital-intensive and non-capital-intensive 
alternatives, under the range of assumptions set forth in paragraph 
(b)(4) of this section.
    (c) Power cost studies must use current, RUS-approved power 
requirements data, and all major assumptions are subject to RUS 
approval. Alternative assumptions about projected power requirements may 
be used, however, in conjunction with the sensitivity analyses required 
by paragraph (b)(4) of this section.

(Approved by the Office of Management and Budget under control number 
0572-0032)



Secs. 1710.304-1710.349  [Reserved]



     Subpart H--Demand Side Management and Renewable Energy Systems

    Source: 59 FR 496, Jan. 4, 1994, unless otherwise noted.



Sec. 1710.350  Purpose.

    This subpart sets forth RUS policies and procedures with regard to 
loans and loan guarantees to RUS borrowers for the purpose of 
implementing their demand side management (DSM) plans, energy 
conservation programs, and on-grid and off-grid renewable energy 
systems. The Administrator reserves the right to determine if loans for 
purposes under this subpart will be made to a borrower in default under 
its mortgage and loan contract. As is the case with all other RUS loans, 
loans for purposes under this subpart will not be made to individuals.



Sec. 1710.351  General policy; renewable energy systems.

    (a) Off-grid renewable energy systems will be considered the same as 
DSM activities and will qualify for either insured loans or loan 
guarantees pursuant to Sec. 1710.102.
    (b) On-grid renewable energy systems will be treated as a generation 
resource and will be eligible only for loan guarantees pursuant to 
Sec. 1710.102. Existing RUS policy with respect to generation resources 
shall generally apply.
    (c) RUS loans for renewable energy systems will be made only for 
systems utilizing technologies that are proven and commercially 
available.



Sec. 1710.352  General policy; energy resource conservation programs.

    This subpart does not replace the energy resource conservation 
program financed by deferments of loan principal.



Sec. 1710.353  General policy; demand side management.

    (a) RUS will make loans for the purpose of assisting electric 
borrowers to implement RUS approved demand side management plans. For 
the purposes of this regulation energy conservation programs are 
included as a DSM activity.
    (b) RUS will treat demand-side and supply-side resources on an equal 
basis. All requirements applicable to loans for traditional electric 
facilities will apply to loans for DSM. In addition the requirements set 
forth in this subpart will apply.
    (c) DSM will be considered a distribution loan purpose, eligible for 
either insured loans or loan guarantees pursuant to Sec. 1710.102.
    (d) RUS will conduct its own evaluation, as specified in this 
subpart, of a borrower's DSM activities before making a determination on 
the disposition of a borrower's loan application.
    (e) RUS loans for DSM activities will be made only for systems 
utilizing technologies that are proven and commercially available.
    (f) In general, RUS will require pilot project testing of DSM 
activities new to the borrower.
    (g) If the borrower's IRP, DSM plan, project construction and/or 
financing, and/or rate recovery is subject to the approval of state 
authorities, the borrower must obtain such approvals before RUS will 
approve a loan for any purpose for which an RUS approved

[[Page 132]]

DSM plan or IRP is required under this subpart.



Sec. 1710.354  Eligible DSM activities.

    DSM activities that are projected to result in more efficient use of 
electric system resources and which are consistent with an RUS approved 
Integrated Resource Plan (IRP) and DSM plan may be eligible for 
financing. Examples of such DSM activities, which are not mutually 
exclusive, are as follows:
    (a) General information and education;
    (b) Purchase and installation of borrower owned or consumer owned 
equipment or materials, including:
    (1) Heating, ventilation, air conditioning;
    (2) Building envelope;
    (3) Appliances;
    (4) Load control;
    (5) Lighting and lighting control;
    (6) Thermal storage; and
    (7) Efficient motors and drives;
    (c) Rebates for DSM equipment and facilities;
    (d) Fuel switching for dual fuel applications where one of the 
energy sources is electricity; and
    (e) Pilot DSM projects.



Sec. 1710.355  DSM loan applications.

    (a) Any loan application which includes funds for DSM must include 
all loan support documents required for a loan for electric facilities, 
and must demonstrate that requirements for need, loan feasibility and 
loan security are satisfied. In addition, the application must be 
supported by an RUS approved IRP, except as provided in 
Sec. 1710.356(a)(1), and an RUS approved DSM plan.
    (b) DSM loans will be made to provide financing for DSM activities 
planned to be implemented within a two year period.



Sec. 1710.356  Integrated resource plans.

    (a)(1) An RUS approved IRP is required for all loans that include 
funds for DSM activities, unless the cumulative total of all previous 
DSM loans and the loan under consideration for that applicant is less 
than 1 percent of the applicant's total utility plant.
    (2) An RUS approved IRP is required for all loans that include funds 
for on-grid renewable energy systems.
    (3) An RUS approved IRP is required for all loans that include funds 
for off-grid renewable energy systems unless the Administrator 
determines that an IRP is not needed to determine that the loan is both 
feasible and secure pursuant to Secs. 1710.112 and 1710.113, 
respectively.
    (b)(1) When an IRP is required, a distribution borrower that is a 
member of a power supply borrower must use the IRP prepared by the power 
supply borrower for its overall system. This IRP must have been 
coordinated with all of the member systems and it must have been 
approved by the board of directors of the power supply borrower. Because 
of the relationship between the power supply borrower and its members 
under which the loans incurred by the power supply borrower are 
primarily to construct, improve or acquire facilities that benefit all 
members directly or indirectly, the security of loans to all parties is 
interlinked. Consequently, DSM activities and renewable energy 
activities must be coordinated among all parties to insure that the 
activities of one member do not jeopardize the financial integrity or 
loan security of any other member or that of the power supply borrower.
    (2) A distribution system that is not a member of an RUS financed 
power supply borrower shall prepare its own IRP. An IRP developed by a 
distribution borrower that is not a member of a power supply borrower 
need only address its own system, but shall include an analysis of the 
effects of its DSM activities on its wholesale power costs.
    (c) The IRP shall identify supply side and demand side options and 
analyze their benefits and costs in order to provide adequate and 
reliable electric service to consumers at the lowest cost for the system 
as a whole.
    (d) The IRP shall include necessary features for system operation, 
such as diversity, reliability, dispatchability, and other factors of 
risk; and it shall take into account the ability to verify energy and 
cost savings achieved through DSM, energy conservation, and renewable 
energy systems, and the

[[Page 133]]

projected durability of such savings measured over time.
    (e) The following elements also included in a DSM plan, pursuant to 
Secs. 1710.357 and 1710.358, shall be included except where RUS 
determines that they are not necessary:
    (1) Load shape objectives;
    (2) Wholesale power pricing policy and costs, and their relationship 
to the proposed DSM activities;
    (3) Ownership and costs of DSM related hardware;
    (4) Incentive and marketing costs;
    (5) Communication and control costs; and
    (6) Monitoring methods and costs.
    (f) The IRP shall analyze the DSM effects set forth in 
Sec. 1710.359.



Sec. 1710.357  DSM plans.

    (a) A DSM plan approved by the borrower's board of directors is 
required in support of a loan that includes funds for DSM activities or 
for off-grid renewable energy systems. The DSM plan shall address the 
borrower's existing and proposed activities for the same period covered 
by the Long-Range Financial Forecast submitted in support of the loan 
application.
    (b)(1) A DSM plan prepared by a member of a power supply borrower 
must be consistent with the IRP prepared by the power supply borrower.
    (2) A DSM plan prepared by a distribution borrower that is not a 
member of an RUS financed power supply borrower must be consistent with 
the borrower's own IRP.
    (c) The level of detail required in the DSM plan is dependent on 
several factors, for example:
    (1) Size and term of loan;
    (2) Financial impact of loan on the borrower;
    (3) Probability of realization of the estimated impacts;
    (4) Magnitude of the estimated effects; and
    (5) Potential effects, if any, on other distribution members of a 
power supply borrower.
    (d) RUS will consider effects of proposed and existing DSM plans on 
government loan security, rates, revenue requirements, competitiveness, 
other distribution borrowers, power supply borrowers or other industry 
recognized tests as applicable.



Sec. 1710.358  Requirements for a DSM plan.

    A DSM plan shall include:
    (a) A list of the DSM activities to be financed by the loan 
including details on implementation such as beginning and completion 
dates and estimated draw downs of loan funds;
    (b) An analysis of the borrower's existing and proposed DSM 
activities, including sources of financing and projections of the 
effects of those activities as set forth in Sec. 1710.359;
    (c) System specific load research and DSM pilot projects as required 
by Sec. 1710.353(f);
    (d) A benefit/cost and net present value cash flow analysis of each 
DSM activity included in the plan. Benefits and costs must be expressed 
in the same units where possible. Short term and long term impacts must 
be addressed. Who benefits and who pays must be clearly identified. 
Objectives of a DSM plan shall be stated in terms of load profile 
adjustments by customer rate class and/or market segment. The benefit/
cost analysis shall include the following steps:
    (1) Identification of objectives, alternatives, and effects;
    (2) Simulation of impacts on the system and its consumers, and the 
probable costs and benefits, including sensitivity/probability and 
scenario analysis; and
    (3) Selection of DSM activities;
    (e) An outline of monitoring and reporting procedures to evaluate 
the performance of the implemented DSM plan;
    (f) A narrative discussing the following:
    (1) Scope of the DSM plan;
    (2) Resources used to develop the DSM plan;
    (3) Internal and external data collection and analysis;
    (4) Analysis method used to screen and evaluate the projected 
programs;
    (5) Analysis of existing and projected plans; and
    (6) Coordination activities with power supplier.

[[Page 134]]



Sec. 1710.359  DSM effects.

    The IRP and the DSM plan shall consider and discuss the expected 
effects of the borrower's DSM activities. The expected effects to be 
considered and discussed includes, but are not limited to, the 
following:
    (a) Effects on the utility (supply side effects):
    (1) Operations;
    (2) Maintenance;
    (3) Environmental compliance;
    (4) Capacity planning, including deferment of capacity and 
reliability of capacity;
    (5) DSM equipment including purchase, operation and maintenance 
considerations;
    (6) Transmission and distribution effects;
    (7) Administrative costs, including administrative and general 
costs, program costs, DSM planning costs, integration of supply and DSM 
planning, marketing costs, incentive costs, infrastructure support, 
monitoring and evaluation costs, bidding costs; and
    (8) Revenues and rates;
    (b) Effects on consumers (demand side effects):
    (1) Equipment purchases;
    (2) Operation costs;
    (3) Maintenance costs;
    (4) Supply voltage quality;
    (5) Availability of service and reliability (outages);
    (6) Change in benefits received from appliances and housing;
    (7) Convenience (availability of equipment, appliances and 
services);
    (8) Change in comfort and air quality levels of buildings; and
    (9) Rates, billing level and elasticity;
    (c) Effects on competitiveness;
    (d) Effects on other member distribution systems of the power supply 
borrower; and
    (e) Effects on power supply borrower.



Sec. 1710.360  Submittal of alternate documentation.

    (a) The borrower may have performed analysis and prepared comparable 
documentation for other purposes, such as for a state regulatory 
commission. This information may be acceptable to RUS as an IRP or a DSM 
plan if the borrower demonstrates that the alternative information meets 
the goals and objectives of this subpart.
    (b) The borrower shall advise RUS of all material information 
provided to other lenders or other governmental authorities relating to 
their DSM plans. This information shall be provided to RUS as requested.



Sec. 1710.361  Type and term of loans.

    (a) The final maturity of loans for purposes under this subpart 
shall be determined by RUS based on the expected life of needed capital 
improvements, expected cost recovery periods, the expected life of 
program benefits, the certainty of these benefits, and matching costs 
and benefits.
    (b) RUS will normally consider final maturities for DSM loans of up 
to 5 years. Longer loan terms, not to exceed 10 years, for loans for 
these purposes will be considered if the borrower can satisfactorily 
demonstrate to the Administrator an acceptable basis for doing so and 
can demonstrate that the loan will be feasible and secure pursuant to 
Secs. 1710.112 and 1710.113, respectively, for the longer period. As 
used in this paragraph, renewable energy resource equipment and 
facilities are not considered a DSM purpose. Maturities for such loans 
will be limited to the expected useful life of the equipment and 
facilities.



Sec. 1710.362  Loan approval.

    The amount and scope of loans approved by RUS under this subpart are 
subject to the discretion of RUS. Applications will be evaluated on the 
merits of the proposals as outlined in the plans specified in this 
subpart. RUS approval of a loan for purposes under this subpart and/or 
RUS approval of IRPs and DSM plans does not relieve a borrower of its 
responsibilities under this subpart or constitute a representation or 
warranty by RUS to the borrower or any person that its IRP or DSM plan 
will work as described therein.



Sec. 1710.363  Advance and documentation of use of loan funds.

    (a) Loan funds for on-grid renewable energy systems will be advanced 
using the same procedure as loans for other electric system facilities.

[[Page 135]]

    (b) Loan funds for DSM activities. (1) Funds for these purposes 
shall be advanced and used only for the specific projects and purposes 
detailed in the loan application and supporting documents. Generally 
funds shall be drawn down on a reimbursement basis. The borrower shall 
certify completion of work according to the DSM plan.
    (2) The borrower shall maintain accounting and plant records 
sufficient to document the cost and location of DSM activities and to 
support loan fund advances and disbursements.
    (3) All cost associated with DSM projects related to construction, 
operations or maintenance, shall be accumulated using the borrower's 
work order procedure. An individual work order or work orders shall be 
used to record and control the costs of each DSM project. Daily time and 
material reports referenced to the DSM activity shall be kept to record 
labor and materials used as the activity(ies) is completed.
    (4) All other disbursements for DSM activities must be properly 
supported by invoices, contracts, or other forms of evidence required by 
RUS regulations. All such supporting material shall be available at the 
borrower's premises for review by the RUS Field Accountant, borrower's 
certified public accountant and other authorized parties as applicable. 
Costs of DSM activities related to operations and maintenance should be 
charged to expense in the month incurred. Departures from this 
prescribed accounting must be approved by RUS subject to the provisions 
of 7 CFR 1767.13.
    (c) Requirements on advance of funds for all insured electric loans 
are in 7 CFR part 1721, subpart B.



Sec. 1710.364  Loan limits.

    Cumulative loans DSM activities at the time of loan approval for, 
including energy conservation programs and off-grid renewable energy 
systems, shall not exceed the lesser of:
    (a) Twenty percent of the borrower's equity at the time of the loan 
or any time during amortization of the loan; or
    (b) An amount approved for such purposes in a final non-appealable 
order by the applicable regulatory body for inclusion in the borrower's 
rate base.



   Subpart I--Application Requirements and Procedures for Insured and 
                            Guaranteed Loans

    Source: 60 FR 3731, Jan. 19, 1995, unless otherwise noted.



Sec. 1710.400  Initial contact.

    (a) Loan applicants that do not have outstanding loans from RUS 
should write to the Rural Utilities Service Administration, United 
States Department of Agriculture, Washington, DC 20250-1500. A field or 
headquarters staff representative may be assigned by RUS to visit the 
applicant and discuss its financial needs and eligibility. Borrowers 
that have outstanding loans should contact their assigned RUS general 
field representative (GFR) or, in the case of a power supply borrower, 
the Director, Power Supply Division. Borrowers may consult with RUS 
field representatives and headquarters staff, as necessary.
    (b) Before submitting an application for an insured loan the 
borrower shall ascertain from RUS the amount of supplemental financing 
required, as set forth in Sec. 1710.110. If the borrower is applying for 
either a municipal rate loan subject to the interest rate cap or a 
hardship rate loan, the application must provide a preliminary breakdown 
of residential consumers either by county or by census tract. Final data 
must be included with the application. See Sec. 1710.401(a)(8).



Sec. 1710.401  Loan application documents.

    (a) All borrowers. All applications for electric loans shall include 
the documents listed in this paragraph. The first page of the 
application shall be a list of the documents included in the 
application. The borrower may use RUS Form 726, Checklist for Electric 
Loan Application, or a computer generated equivalent as this list.
    (1) Transmittal letter. A letter signed by the borrower's manager 
indicating the actual corporate name and taxpayer identification number 
of the borrower and addressing the following items:

[[Page 136]]

    (i) The need for flood hazard insurance;
    (ii) Breakdown of requested loan funds by state;
    (iii) A listing of the counties served by the borrower;
    (iv) A listing of threatened actions by third parties that could 
adversely affect the borrower's financial condition, including 
annexations or other actions affecting service territory, loads, or 
rates; and
    (v) A listing of pending regulatory proceedings pertaining to the 
borrower.
    (2) Board resolution. This document is the formal request by the 
borrower's board of directors for a loan from RUS. The board resolution 
shall include:
    (i) The requested loan amount, loan term, final maturity, and method 
of amortization (Sec. 1710.110(b));
    (ii) The sources and amounts of any supplemental or other financing;
    (iii) Authorization for RUS to release appropriate information to 
supplemental or other lender(s), and authorization for these lenders to 
release appropriate information to RUS; and
    (iv) For an insured loan, a statement of whether the application is 
for a municipal rate loan, with or without the interest rate cap, or a 
hardship loan. If the application is for a municipal rate loan, the 
board resolution must indicate whether the borrower intends to elect the 
prepayment option. See 7 CFR 1714.4(c).
    (3) RUS Form 740c, Cost Estimates and Loan Budget for Electric 
Borrowers. This form together with its attachments lists the 
construction, equipment, facilities and other cost estimates from the 
construction work plan or engineering and cost studies, and the sources 
of financing for each component. The date on page 1 of the form is the 
beginning date of the loan period and shall be the same as the date on 
the Financial and Statistical Report submitted with the application 
(paragraph (a)(5) of this section). Form 740c also includes the 
following information, exhibits, and attachments:
    (i) Description of funds and materials. This description details the 
availability of materials and equipment, any unadvanced funds from prior 
loans, and any general funds the borrower designates, to determine the 
amount of such materials and funds to be applied against the capital 
requirements estimated for the loan period.
    (ii) Useful life of facilities financed by the loan. Form 740c must 
include, as a note, either a statement certifying that at least 90 
percent of the loan funds are for facilities that have a useful life of 
33 years or longer, or a schedule showing the costs and useful life of 
those facilities with a useful life of less than 33 years. This 
statement or schedule will be used to determine the final maturity of 
the loan. See Sec. 1710.115.
    (iii) Reimbursement schedule. This schedule lists the date, amount, 
and identification number of each inventory of work orders and special 
equipment summary that form the basis for the borrower's request for 
reimbursement of general funds on the RUS Form 740c. See Sec. 1710.109. 
If the borrower is not requesting reimbursement, this schedule need not 
be submitted.
    (iv) Location of consumers. If the application is for a municipal 
rate loan subject to the interest rate cap, or for a loan at the 
hardship rate, and the average number of consumers per mile of the total 
electric system exceeds 17, Form 740c must include, as a note, a 
breakdown of funds included in the proposed loan to furnish or improve 
service to consumers located in an urban area. See 7 CFR 1714.7(c) and 
1714.8(d). This breakdown must indicate the method used by the borrower 
for allocating loan funds between urban and non urban consumers.
    (4) RUS Form 740g, Application for Headquarters Facilities. This 
form lists the individual cost estimates from the construction work plan 
or other engineering study that support the need for RUS financing for 
any warehouse and service type facilities included, and funding 
requested for such facilities shown on RUS Form 740c. If no loan funds 
are requested for headquarters facilities, Form 740g need not be 
submitted.
    (5) Financial and statistical report. Distribution borrowers shall 
submit these data on RUS Form 7; power supply borrowers shall use RUS 
Form 12. The form shall contain the most recent data available, which 
shall not be more than 60 days old when received by RUS.

[[Page 137]]

    (6) Pending litigation statement. A statement from the borrower's 
counsel listing any pending litigation, including levels of related 
insurance coverage and the potential effect on the borrower. This 
statement and the statements from counsel required by paragraphs (a)(7) 
and (15) of this section may be combined into a single document.
    (7) Mortgage information. A new mortgage will be required if this is 
a borrower's first application for a loan under the RE Act. A restated 
mortgage, or a mortgage supplement will be required if there has been a 
material change to the real property owned by the borrower since the 
most recent RUS loan, loan guarantee, or lien accommodation, if the 
requested loan would cause the borrower to exceed its previously 
authorized debt limit, or if RUS otherwise determines it necessary. If 
there has been no material change to the real property owned by the 
borrower since the most recent RUS loan or loan guarantee, the borrower 
must submit an opinion of its counsel to that effect. If a new or 
restated mortgage or a mortgage supplement is required, the borrower 
must provide the following:
    (i) Property schedule. For a new or restated mortgage or for a 
mortgage supplement, the following information shall be submitted in a 
form satisfactory to RUS:
    (A) A listing of the counties where the borrower's existing electric 
facilities and new facilities are or will be located;
    (B) A listing and description of all real property owned by the 
borrower; and
    (C) An opinion of the borrower's counsel certifying that the 
property schedule is complete and adequate for inclusion in a security 
instrument to be executed by the borrower to secure an RUS loan.
    (ii) Maximum debt limit. For a new mortgage, or if the proposed loan 
would result in the borrower's existing mortgage debt limit being 
exceeded, a resolution of the borrower's board of directors, and any 
other authorizations or certifications required by State law, certifying 
that a new debt limit has been legally established that is adequate to 
accommodate existing indebtedness and the proposed new financing, 
including any concurrent loans.
    (8) Rate disparity and consumer income data. If the borrower is 
applying under the rate disparity and consumer income tests for either a 
municipal rate loan subject to the interest rate cap or a hardship rate 
loan, the application must provide a breakdown of residential consumers 
either by county or by census tract. In addition, if the borrower serves 
in 2 or more states, the application must include a breakdown of all 
ultimate consumers by state. This breakdown may be a copy of Form EIA 
861 submitted by the Borrower to the Department of Energy or in a 
similar form. See 7 CFR 1714.7(b) and 1714.8(a). To expedite the 
processing of loan applications, RUS strongly encourages distribution 
borrowers to provide this information to the GFR prior to submitting the 
application.
    (9) Standard Form 100--Equal Employment Opportunity Employer Report 
EEO--1. This form, required by the Department of Labor, sets forth 
employment data for borrowers with 100 or more employees. A copy of this 
form, as submitted to the Department of Labor, is to be included in the 
application for an insured loan if the borrower has more than 100 
employees. See Sec. 1710.122.
    (10) Form AD-1047, Certification Regarding Debarment, Suspension, 
and Other Responsibility Matters--Primary Covered Transactions. This 
statement certifies that the borrower will comply with certain 
regulations on debarment and suspension required by Executive Order 
12549, Debarment and Suspension (3 CFR, 1986 Comp., p. 189). See 7 CFR 
part 3017 and Sec. 1710.123.
    (11) Uniform Relocation Act assurance statement. This assurance, 
which need not be resubmitted if previously submitted, provides that the 
borrower shall comply with 49 CFR part 24, which implements the Uniform 
Relocation Assistance and Real Property Acquisition Policy Act of 1970, 
as amended by the Uniform Relocation Act Amendments of 1987 and 1991. 
See Sec. 1710.124.
    (12) Lobbying. The following information on lobbying is required 
pursuant

[[Page 138]]

to 7 CFR part 3018 and Sec. 1710.125. Borrowers applying for both 
insured and guaranteed financing should consult RUS before submitting 
this information.
    (i) Certification regarding lobbying. This statement certifies that 
the borrower shall comply with certain requirements with respect to 
restrictions on lobbying activities.
    (ii) Standard Form LLL--Disclosure of Lobbying Activities. This 
disclosure form is required from those borrowers engaged in lobbying 
activities.
    (13) Federal debt delinquency requirements. See 1710.126. The 
following documents are required:
    (i) Report on Federal debt delinquency. This report indicates 
whether or not a borrower is delinquent on any Federal debt.
    (ii) Certification Regarding Federal Government Collection Options. 
This statement certifies that a borrower has been informed of the 
collection options the Federal Government may use to collect delinquent 
debt. The Federal Government is authorized by law to take any or all of 
the following actions in the event that a borrower's loan payments 
become delinquent or the borrower defaults on its loans:
    (A) Report the borrower's delinquent account to a credit bureau;
    (B) Assess additional interest and penalty charges for the period of 
time that payment is not made;
    (C) Assess charges to cover additional administrative costs incurred 
by the Government to service the borrower's account;
    (D) Offset amounts owed directly or indirectly to the borrower under 
other Federal programs;
    (E) Refer the borrower's debt to the Internal Revenue Service for 
offset against any amount owed to the borrower as an income tax refund;
    (F) Refer the borrower's account to a private collection agency to 
collect the amount due; and
    (G) Refer the borrower's account to the Department of Justice for 
collection.
    (14) Articles of incorporation and bylaws. The following are 
required if either document has been amended since the last loan 
application was submitted to RUS, or if this is a borrower's first 
application for a loan under the RE Act:
    (i) The borrower's articles of incorporation currently in effect, as 
filed with the appropriate state office, setting forth the borrower's 
corporate purpose; and
    (ii) The bylaws currently in effect, as adopted by the borrower's 
board of directors, setting forth the manner by which the borrower's 
organization will be governed and regulated.
    (15) State regulatory approvals. In states in which regulatory 
authorities have jurisdiction over the borrower's rates, the borrower 
must provide satisfactory evidence, pursuant to Secs. 1710.105 and 
1710.151(f), based on the information available, such as an opinion of 
counsel or of another qualified source, that the state regulatory 
authority will not exclude from the borrower's rate base any of the 
facilities included in the loan request, or otherwise prevent the 
borrower from charging rates sufficient to repay with interest the debt 
incurred for the facilities.
    (16) Seismic safety certifications. This certification shall be 
included, if required under 7 CFR part 1792.
    (17) Rates. (i) A distribution borrower shall explain any recent or 
planned changes in retail rates, the status of any pending rate cases 
before a state regulatory authority, or other pertinent rate 
information.
    (ii) A power supply borrower shall submit a schedule of its 
wholesale rates currently in effect. Any changes in this schedule are 
subject to RUS approval.
    (18) Additional supporting data. Additional supporting data may be 
required by RUS depending on the individual application or conditions. 
Examples of such additional supporting data include information about 
acquisitions, headquarters facilities, generation or transmission 
facilities, large power loads or special loads.
    (b) Distribution borrowers. In addition to the items in paragraph 
(a) of this section, applications for loans submitted by distribution 
borrowers shall include the borrower's area coverage and line extension 
policies. If there have been any amendments to area coverage or line 
extension policies

[[Page 139]]

since the last loan application submitted to RUS, or if this is a 
borrower's first application for a loan under the RE Act, the borrower 
shall submit the board of directors' approved policies on area coverage 
and line extensions. See Secs. 1710.103 and 1710.151(a).
    (c) Primary support documents. In addition to the loan application, 
consisting of the documents required by paragraphs (a) and (b) of this 
section, all borrowers must also provide RUS with the following primary 
support documents pursuant to Sec. 1710.152:
    (1) Along with the loan application, the borrower shall submit to 
RUS a Long-Range Financial Forecast (LRFF), that meets the requirements 
of subpart G of this part. The forecast shall include any sensitivity 
analysis or analysis of alternative scenarios required by subpart G of 
this part, and shall be accompanied by a certified board resolution 
adopting, and indicating the board of directors' approval of, the LRFF, 
and directing management to take whatever steps may be necessary, 
including the filing for rate increases, to achieve the TIER goals set 
forth in the LRFF.
    (2) Prior to RUS's acceptance of the loan application, the borrower 
shall submit to RUS and receive approval of:
    (i) Power Requirements Study (PRS) that meets the requirements of 
subpart E of this part, and is accompanied by a certified board 
resolution adopting, and indicating the board of directors' approval of, 
the PRS.
    (ii) Construction Work Plan (CWP) and/or related engineering and 
cost studies that meets the requirements of subpart F of this part, and 
is accompanied by a certified board resolution adopting, and indicating 
the board of directors' approval of, the CWP and/or engineering and cost 
studies.
    (iii) Borrower's Environmental Report (BER), or other environmental 
information as required by 7 CFR part 1794.
    (iv) Demand Side Management Plan and/or Integrated Resource Plan, if 
required by subpart H of this part.
    (d) Submission of documents. (1) Generally, all information required 
by paragraphs (a), (b), and (c)(1) of this section is submitted to RUS 
in a single application package. The information required by paragraph 
(c)(2) of this section is generally submitted to, and approved by RUS 
before the application is submitted.
    (2) To facilitate loan review, RUS urges borrowers to ensure that 
their applications contain all of the information required by this 
section before submitting the application to RUS. Borrowers may consult 
with RUS field representatives and headquarters staff as necessary for 
assistance in preparing loan applications.
    (3) RUS may, in its discretion, return an application to the 
borrower if the application is not materially complete to the 
satisfaction of RUS within 10 months of receipt of any of the items 
listed in paragraph (a) or (b) of this section. RUS will generally 
advise the borrower in writing at least 2 months prior to returning the 
application as to the elements of the application that are not complete.
    (4) If an application is returned, an application for the same loan 
purposes will be accepted by RUS if satisfactory evidence is provided 
that all of the information required by this section will be submitted 
to RUS within a reasonable time. An application for loan purposes 
included in an application previously returned to the borrower will be 
treated as an entirely new application.
    (e) Complete applications. An application is complete when all 
information required by RUS to approve a loan is materially complete in 
form and substance satisfactory to RUS.
    (f) Change in borrower circumstances. A borrower shall, after 
submitting a loan application, promptly notify RUS of any changes in its 
circumstances that materially affect the information contained in the 
loan application or in the primary support documents.
    (g) Interest rate category. For pending loans, RUS will promptly 
notify the borrower if its eligibility for an interest rate category 
changes pursuant to new information from the Department of Energy or the 
Bureau of the Census. See 7 CFR part 1714.

(Approved by the Office of Management and Budget under control numbers 
0572-0017, 0572-0032 and 0572-1013.)

    Effective Date Note: At 66 FR 66295, Dec. 26, 2001, in 
Sec. 1710.401, paragraph (a)(2)(i) was

[[Page 140]]

revised, effective February 11, 2002. For the convenience of the user, 
the revised text is set forth below:

Sec. 1710.401  Loan application documents.

    (a) * * *
    (2) * * *
    (i) The requested loan type, loan amount, loan term, final maturity 
and method of amortization (Sec. 1710.110(b));

                                * * * * *



Secs. 1710.402-1710.403  [Reserved]



Sec. 1710.404  Additional requirements.

    Additional requirements for insured electric loans are set forth in 
7 CFR part 1714.



Sec. 1710.405  Supplemental financing documents.

    (a) The borrower is responsible for ensuring that the loan documents 
required for supplemental financing pursuant to Sec. 1710.110 are 
executed in a timely fashion. These documents are subject to RUS 
approval.
    (b) Security. Any security offered by the borrower to a supplemental 
lender is subject to RUS approval.



Sec. 1710.406  Loan approval.

    (a) A loan is approved when the Administrator signs the 
administrative findings.
    (b) If the loan is not approved, RUS will notify the borrower of the 
reason.



Sec. 1710.407  Loan documents.

    Following approval of a loan, RUS will forward the loan documents to 
the borrower for execution, delivery, recording, and filing, as directed 
by RUS.



PART 1714--PRE-LOAN POLICIES AND PROCEDURES FOR INSURED ELECTRIC LOANS--Table of Contents




                           Subpart A--General

Sec.
1714.1 [Reserved]
1714.2 Definitions.
1714.3 Applicability of provisions.
1714.4 Interest rates.
1714.5 Determination of interest rates on municipal rate loans.
1714.6 Interest rate term.
1714.7 Interest rate cap.
1714.8 Hardship rate loans.
1714.9 Prepayment of insured loans.
1714.10-1714.49 [Reserved]

                    Subpart B--Terms of Insured Loans

1714.50-1714.54 [Reserved]
1714.55 Advance of funds from insured loans.
1714.56 Fund advance period.
1714.57 Sequence of advances.
1714.58 Amortization of principal.
1714.59 Rescission of loans.

    Authority: 7 U.S.C. 901-950(b); Pub. L. 99-591, 100 Stat. 3341; Pub. 
L. 103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).

    Source: 58 FR 66260, Dec. 20, 1993, unless otherwise noted.



                           Subpart A--General



Sec. 1714.1  [Reserved]



Sec. 1714.2  Definitions.

    The definitions set forth in 7 CFR 1710.2 are applicable to this 
part, unless otherwise stated. References to specific RUS forms and 
other RUS documents, and to specific sections of such forms and 
documents, shall include the corresponding forms, documents, sections 
and lines in any subsequent revisions of these forms and documents.



Sec. 1714.3  Applicability of provisions.

    (a) Insured electric loans approved on or after November 1, 1993. On 
November 1, 1993, the Rural Electrification Loan Restructuring Act, Pub. 
L. 103-129, 107 Stat. 1356, (RELRA) amended the Rural Electrification 
Act of 1936, 7 U.S.C. 901 et seq., (RE Act) to establish a new interest 
rate structure for insured electric loans. Insured electric loans 
approved on or after this date, are either municipal rate loans or 
hardship rate loans. Borrowers meeting the criteria set forth in 
Sec. 1714.8 are eligible for 5 percent hardship rate loans. The interest 
rate on loans to other borrowers is the municipal interest rate, and 
borrowers meeting the criteria set forth in Sec. 1714.7 are eligible for 
the interest rate cap on their municipal rate loans. Interest rates for 
the initial interest rate term and rollover terms (Sec. 1714.6) will be 
determined pursuant to Sec. 1714.4. Provisions for prepayment are set 
forth in Sec. 1714.9. The provisions of this subpart apply to loans 
approved on or after November 1, 1993, unless otherwise stated.

[[Page 141]]

    (b) Insured electric loans approved prior to November 1, 1993. These 
loans have a single interest rate applicable to the entire loan. The 
rate is generally 5 percent, but, in some cases, may be as low as 2 
percent. These loans have a single interest rate term and may be prepaid 
at face value at any time. Provisions for discounted prepayment of these 
loans are set forth in 7 CFR part 1786.



Sec. 1714.4  Interest rates.

    (a) Municipal rate loans. Each advance of funds on a municipal rate 
loan shall bear interest at a single rate for each interest rate term. 
All interest rates applicable to municipal rate loans will be increased 
by one eighth of one percent (0.125 percent), if the borrower elects to 
include in the loan agreement a prepayment option (call provision), 
allowing the borrower to prepay all or a portion of an advance on a date 
other than a rollover maturity date. However, no interest rate for any 
advances of a loan to a borrower who qualifies for the interest rate cap 
may exceed 7 percent.
    (b) Hardship rate loans. All advances of funds on hardship rate 
loans shall bear interest at a rate of 5 percent.
    (c) Application procedure. The borrower's board resolution submitted 
with the loan application must indicate whether the application is for a 
municipal rate loan, with or without the interest rate cap, or a 
hardship rate loan. If the application is for a municipal rate loan, the 
board resolution must also indicate whether the borrower intends to 
elect the prepayment option.



Sec. 1714.5  Determination of interest rates on municipal rate loans.

    (a) RUS will publish a schedule of interest rates for municipal rate 
loans in the Federal Register at the beginning of each calendar quarter. 
The schedule will show the year of maturity and the applicable interest 
rates in effect for all funds advanced on municipal rate loans during 
the calendar quarter and all interest rate terms beginning in the 
quarter. All interest rates will be adjusted to the nearest one eighth 
of one percent (0.125 percent).
    (b) The rate for interest rate terms of 20 years or longer will be 
the average of the 20 year rates published in the Bond Buyer in the 4 
weeks specified in paragraph (d) of this section for the ``11-Bond GO 
Index'' of Aa rated general obligation municipal bonds, or the successor 
to this index.
    (c) The rate for terms of less than 20 years will be the average of 
the rates published in the Bond Buyer in the 4 weeks specified in 
paragraph (d) of this section in the table of ``Municipal Market Data--
General Obligation Yields'' for Aa rated bonds, or the successor to this 
table, for obligations maturing in the same year as the interest rate 
term selected by the borrower.
    (d) The interest rates on municipal rate loans shall not exceed the 
interest rate determined under section 307(a)(3)(A) of the Consolidated 
Farm and Rural Development Act (7 U.S.C. 1927(a)(3)(A)) for Water and 
Waste Disposal loans. The method used to determine this rate is set 
forth in the regulations of the Farmers Home Administration (FmHA) at 7 
CFR 1942.17(f) (1) and (4). Pursuant to the FmHA rule, the interest 
rates are set using as guidance the average of the Bond Buyer Index for 
the four weeks prior to the first Friday of the last month before the 
beginning of the quarter. Information about the Bond Buyer is available 
by writing Bond Buyer, One State Street Plaza, New York, NY 10004-1549, 
or by calling 1-800-982-0633.



Sec. 1714.6  Interest rate term.

    (a) Municipal rate loans. Selection of interest rate terms shall be 
made by the borrower for each advance of funds. The minimum interest 
rate term shall be one year. RUS will send the borrower written 
confirmation of each rollover maturity date and the applicable interest 
rate.
    (1) The initial interest rate term will begin on the date of the 
advance. All rollover interest rate terms will begin on the first day of 
a month, and except for the last interest rate term to final maturity, 
shall end on the last day of a month. All terms except for the initial 
interest rate term on an advance, and the last term to final maturity 
shall be in yearly increments.

[[Page 142]]

    (2) The following limits apply to the number of advances of funds 
that may be made to the borrower on any municipal rate loan:
    (i) If the loan period is 2 years or less, not more than 6 advances;
    (ii) If the loan period is more than 2 years, not more than 8 
advances.
    (3) For the initial interest rate term of an advance, a letter from 
an authorized official of the borrower indicating the selection of the 
term shall accompany the request for the advance.
    (4) At the end of any interest rate term, the borrower shall pay all 
accrued interest and principal balance then due, and either prepay the 
remaining principal of the advance at face value, or roll over the 
remaining principal for a new term, provided that no interest rate term 
may end later than the date of the final maturity.
    (i) If the borrower elects to prepay all or part of the remaining 
principal of the advance at face value, it must notify the Director of 
the appropriate Regional Division or the Power Supply Division in 
writing not later than 20 days before the rollover maturity date.
    (ii) If the borrower wishes to elect a new interest rate term that 
is different from the term previously selected, it must notify RUS in 
writing of the new term not later than 20 days before the end of the 
current term. The election of the new term shall be addressed to the 
Director, Financial Operations Division, Rural Utilities Service, 
Washington, DC 20250-1500.
    (iii) If the borrower fails to notify RUS within the timeframes set 
out in this paragraph of its intention to prepay or elect a different 
interest rate term, RUS will automatically roll over the remaining 
principal for the shorter of, and at the interest rate applicable to:
    (A) A period equal in length to the term that is expiring; or
    (B) The remaining period to final maturity.
    (b) Hardship rate loans. Loans made at the 5 percent hardship rate 
are made for a single term that cannot exceed the final maturity as set 
forth in 7 CFR 1710.115. The hardship interest rate applies to the 
entire amount of the loan.

[58 FR 66260, Dec. 20, 1993, as amended at 60 FR 3734, Jan. 19, 1995]



Sec. 1714.7  Interest rate cap.

    Except as provided in paragraph (c) of this section, the municipal 
interest rate may not exceed 7 percent on a loan advance to a borrower 
primarily engaged in providing retail electric service if the borrower 
meets, at the time of loan approval, either the consumer density test 
set forth in paragraph (a) of this section, or both the rate disparity 
test for the interest rate cap and the consumer income test set forth in 
paragraph (b) of this section.
    (a) Low consumer density test. The borrower meets this test if the 
average number of consumers per mile of line of its total electric 
system, based on the most recent data available at the time of loan 
approval is less than 5.50.
    (b)(1) Rate disparity test for the interest rate cap. The borrower 
meets this test if its average revenue per kWh sold is more than the 
average revenue per kWh sold by all electric utilities in the state in 
which the borrower provides service. To determine whether a borrower 
meets this test, RUS will compare the borrower's average total revenue 
with statewide data in the table of Average Revenue per Kilowatthour for 
Electric Utilities by Sector, Census Division and State, in the Electric 
Power Annual issued by the Energy Information Administration of the 
Department of Energy (DOE), or the successor to this table. The test 
will be based on the most recent calendar year for which full year DOE 
data are available at the time of loan approval and borrower data for 
the same year.
    (2) Consumer income test.The borrower meets this test if either the 
average per capita income of the residents receiving electric service 
from the borrower is less than the average per capita income of 
residents of the state in which the borrower provides service or the 
median household income of the households receiving electric service 
from the borrower is less than the median household income of the 
households in the state.
    (i) To qualify under the consumer income test, the borrower must 
include in its loan application information about the location of its 
residential consumers. The borrower must provide to RUS, based on the 
most recent data

[[Page 143]]

available at the time of loan application, either the number of 
consumers in each county it serves or the number of consumers in each 
census tract it serves. Using the most recently published decennial 
census data on income from the Bureau of the Census, RUS will compare, 
on a weighted average basis, the average per capita and median household 
income of the counties or census tracts served by the borrower with 
state figures.
    (ii) In cases where conditions have substantially changed so that 
the decennial census data no longer accurately describes the economic 
conditions of the borrower's consumers, the borrower may provide RUS 
with more current income data from a reliable source such as a State 
agency. The Administrator has the sole discretion to determine whether 
such data submitted by the borrower is sufficient to determine whether 
the borrower qualifies under the consumer income test.
    (3) Borrowers serving 2 or more states. If a borrower serves 
consumers in 2 or more states, the rate disparity test and the consumer 
income test will be determined on a weighted average based on the 
percentage of the borrower's total consumers that are served in each 
state.
    (c) High density test. If the average number of consumers per mile 
of the borrower's total electric system exceeds 17, the interest rate 
cap will not apply to funds used for the purpose of furnishing or 
improving electric service to consumers located in an area that is an 
urban area at the time of loan approval, notwithstanding that the area 
must have been deemed a rural area for the purpose of qualifying for a 
loan under this part. (See the definition of ``rural area'' in 7 CFR 
1710.2.) If the average number of consumers per mile of line of the 
borrower's total electric system exceeds 17, the borrower must include, 
as a note on RUS Form 740c, Cost Estimates and Loan Budget for Electric 
Borrowers, submitted as part of the loan application for a loan subject 
to the interest rate cap, a breakdown of funds included in the proposed 
loan to furnish or improve service to consumers located in such urban 
areas. For such borrowers only funds for those facilities serving 
consumers located outside an urban area are eligible for the interest 
rate cap.



Sec. 1714.8  Hardship rate loans.

    Except as provided in paragraph (d) of this section, the 
Administrator shall make an insured electric loan for eligible purposes 
at the 5 percent hardship rate to a borrower primarily engaged in 
providing retail electric service if the borrower meets, at the time of 
loan approval, both the rate disparity test for hardship and the 
consumer income test described in paragraph (a) of this section; or the 
extremely high rates test set forth in paragraph (b) of this section. A 
loan at the 5 percent hardship rate may also be made to any borrower 
pursuant to paragraph (c) of this section who, in the sole discretion of 
the Administrator, has experienced a severe hardship. The Administrator 
may not require a loan from a supplemental source in connection with a 
hardship rate loan.
    (a)(1) Rate disparity test for hardship. The borrower meets this 
test if its average revenue per kWh sold is not less than 120 percent of 
the average revenue per kWh sold by all electric utilities in the state 
in which the borrower provides service, and its average residential 
revenue per kWh is not less than 120 percent of the average residential 
revenue per kWh sold by all electric utilities in the state in which the 
borrower provides service. To determine whether a borrower meets this 
test, RUS will compare the borrower's average total revenue and average 
residential revenue with statewide data in the table of Average Revenue 
per Kilowatthour for Electric Utilities by Sector, Census Division and 
State, in the Electric Power Annual issued by the Energy Information 
Administration of the Department of Energy (DOE), or the successor to 
this table. The test will be based on the most recent calendar year for 
which full year DOE data are available at the time of loan approval and 
borrower data for the same year.
    (2) Consumer income test. The borrower meets this test if either the 
average per capita income of the residents receiving electric service 
from the borrower is less than the average per capita income of the 
residents of the state

[[Page 144]]

in which the borrower provides service or the median household income of 
the residents receiving electric service from the borrower is less than 
the median household income of the households in the state. RUS will 
determine whether the borrower qualifies under this test according to 
the procedure set forth in Sec. 1714.7(b)(2).
    (3) Borrowers serving 2 or more states. If a borrower serves 
consumers in 2 or more states, the rate disparity test and the consumer 
income tests will be determined on a weighted average based on the 
percentage of the borrower's total consumers that are served in each 
state.
    (b) Extremely high rates test. Except as provided in this paragraph, 
the Administrator shall make an insured electric loan at the 5 percent 
hardship rate to any borrower whose residential revenue exceeds 15.0 
cents per kWh sold. Residential revenue shall be calculated for the most 
recent full calendar year for which data are available and shall include 
sales to both seasonal and nonseasonal consumers. If, at the time of 
loan approval, the area to be served is an urbanized area 
(notwithstanding that the area must be deemed a rural area to qualify 
for a loan under this part (See the definition of ``rural area'' in 7 
CFR 1710.2)), then the borrower must satisfy the provisions of 
paragraphs (a) and (d) of this section to qualify to the 5 percent 
hardship interest rate. If at the time of loan approval, such area is 
outside an urbanized area, the loan shall not be subject to the 
conditions and limitations set forth in paragraphs (a) and (d) of this 
section.
    (c) Administrator's discretion. The Administrator may make a 
hardship rate loan if, in the sole discretion of the Administrator, the 
borrower has experienced a severe hardship. The Administrator shall 
consider, among other matters, whether factors beyond the control or 
substantial influence of the borrower have had severe adverse effect on 
the borrower's ability to provide service consistent with the purposes 
of the RE Act, and which prudent management could not reasonably 
anticipate and either prevent or insure against. Among the factors that 
may be considered are system damage due to unusual weather or other 
natural disasters or Acts of God, loss of substantial loads, extreme 
rate disparity compared to a contiguous utility, and other factors that 
cause severe financial hardship. The Administrator will also consider 
whether a hardship rate loan will provide significant relief to the 
borrower in dealing with the severe hardship.
    (d) High density test. Except as provided in paragraph (b) of this 
section, if the average number of consumers per mile of the borrower's 
total electric system exceeds 17, the 5 percent hardship rate will not 
apply to funds used for the purpose of furnishing or improving electric 
service to consumers located in an area that is an urban area at the 
time of loan approval, notwithstanding that the area must have been 
deemed a rural area for the purpose of qualifying for a loan under this 
part. (See the definition of ``rural area'' in 7 CFR 1710.2.) If the 
average number of consumers per mile of line of the borrower's total 
electric system exceeds 17, the borrower must include, as a note on RUS 
Form 740c, Cost Estimates and Loan Budget for Electric Borrowers, 
submitted as part of the loan application for a loan at the 5 percent 
hardship rate, a breakdown of funds included in the proposed loan to 
furnish or improve service to consumers located in urban areas. For such 
borrowers only funds for those facilities serving consumers located 
outside an urban area are eligible for the 5 percent hardship rate.

(Approved by the Office of Management and Budget under control number 
0572-1013.)



Sec. 1714.9  Prepayment of insured loans.

    This section sets out provisions for prepayment of insured electric 
loans at face value. Provisions for discounted prepayment of RUS loans 
are set out in 7 CFR part 1786.
    (a) Municipal rate loans. Loan documents for municipal rate loans 
shall provide for the following:
    (1) Prepayment on a rollover maturity date. All, or a portion of, 
the outstanding balance on any advance from a municipal rate loan may be 
prepaid on any rollover maturity date pursuant to Sec. 1714.6(a)(4).

[[Page 145]]

    (2) Prepayment on a date other than a rollover maturity date. A 
borrower may elect at the time of loan approval to include a prepayment 
option (call provision) that will allow the borrower to prepay all, or a 
portion of, the outstanding balance on any advance on a date other than 
a rollover maturity date. Interest rates on advances from loans with a 
prepayment provision will be increased as set forth in Sec. 1714.4(a).
    (b) Hardship rate loans. Loan documents for hardship loans shall 
provide that the loan may be prepaid at face value at any time without 
penalty.



Secs. 1714.10-1714.49  [Reserved]



                    Subpart B--Terms of Insured Loans

    Source: 60 FR 3734, Jan. 19, 1995, unless otherwise noted.



Secs. 1714.50-1714.54  [Reserved]



Sec. 1714.55  Advance of funds from insured loans.

    The borrower shall request advances of funds as needed. Advances are 
subject to RUS approval and must be requested in writing on RUS Form 595 
or an RUS approved equivalent. Funds will not be advanced until the 
Administrator has received satisfactory evidence that the borrower has 
met all applicable conditions precedent to the advance of funds, 
including evidence that the supplemental financing required under 7 CFR 
part 1710 and any concurrent loan guaranteed by RUS are available to the 
borrower under terms and conditions satisfactory to RUS.



Sec. 1714.56  Fund advance period.

    (a) For loans approved on or after February 21, 1995, the fund 
advance period begins on the date of the loan note and is one year 
longer than the loan period, but not less than 4 years. For example, the 
fund advance period for a loan with a 2-year loan period terminates 
automatically 4 years after the date of the loan note; a loan with a 4-
year loan period terminates automatically 5 years after the date of the 
loan note. The Administrator may extend the fund advance period on any 
loan if the borrower meets the requirements of paragraph (c) of this 
section. As defined in 7 CFR 1710.2, the loan period begins on the date 
shown on page 1 of RUS Form 740c submitted with the loan application.
    (b) For loans approved on or after June 1, 1984, and before February 
21, 1995, the fund advance period begins on the date of the loan 
contract, or the most recent amendment thereto, and terminates 
automatically 4 years from the date of the loan contract, or the most 
recent amendment thereto, except as provided in paragraph (c) of this 
section.
    (c) The Administrator may agree to an extension of the fund advance 
period for loans approved on or after June 1, 1984, if the borrower 
demonstrates to the satisfaction of the Administrator that the loan 
funds continue to be needed for approved loan purposes (i.e., facilities 
included in an RUS approved construction work plan). Policies for 
extension of the fund advance period following certain mergers, 
consolidations, and transfers of systems substantially in their entirety 
are set forth in 7 CFR 1717.156.
    (1) To apply for an extension, the borrower must send to RUS, at 
least 120 days before the automatic termination date, the following:
    (i) A certified copy of a board resolution requesting an extension 
of the Government's obligation to advance loan funds;
    (ii) Evidence that the unadvanced loan funds continue to be needed 
for approved loan purposes; and
    (iii) Notice of the estimated date for completion of construction.
    (2) In the case of financial hardship, as determined by the 
Administrator, RUS may agree to an extension of the fund advance period 
even though the borrower has failed to meet the 120-day requirement of 
paragraph (c)(1) of this section.
    (3) If the Administrator approves a request for an extension, RUS 
will notify the borrower in writing of the extension and the terms and 
conditions thereof. An extension will be effective only if it is 
obtained in writing prior to the automatic termination date.
    (d) Advances of funds from loans approved before June 1, 1984, are 
generally made during the first 6 years of the note.

[[Page 146]]

    (e) RUS will rescind the balance of any loan funds not advanced to a 
borrower as of the final date approved for advancing funds.

[60 FR 3734, Jan. 19, 1995, as amended at 61 FR 66871, Dec. 19, 1996]



Sec. 1714.57  Sequence of advances.

    (a) Except as set forth in paragraph (b) of this section, concurrent 
loan funds will be advanced in the following order:
    (1) 50 percent of the RUS insured loan funds;
    (2) 100 percent of the supplemental loan funds;
    (3) The remaining amount of the RUS insured loan funds.
    (b) At the borrower's request and with RUS approval, all or part of 
the supplemental loan funds may be advanced before funds in paragraph 
(a)(1) of this section.



Sec. 1714.58  Amortization of principal.

    (a) For insured loans approved on or after February 21, 1995:
    (1) Amortization of funds advanced during the first 2 years after 
the date of the note shall begin no later than 2 years from the date of 
the note. Except as set forth in paragraph (a)(2) of this section, 
amortization of funds advanced 2 years or more after the date of the 
note shall begin with the scheduled loan payment billed in the month 
following the month of the advance.
    (2) For advances made 2 years or more after the date of the note, 
the Administrator may authorize deferral of amortization of principal 
for a period of up to 2 years from the date of the advance if the 
Administrator determines that failure to authorize such deferral would 
adversely affect either the Government's financial interest or the 
achievement of the purposes of the RE Act.
    (b) For insured loans approved before February 21, 1995, 
amortization of principal shall begin 2 years after the date of the note 
for advances made during the first and second years of the loan, and 4 
years after the date of the note for advances made during the third and 
fourth years.



Sec. 1714.59  Rescission of loans.

    (a) A borrower may request rescission of a loan with respect to any 
funds unadvanced by submitting a certified copy of a resolution by the 
borrower's board of directors.
    (b) RUS may rescind loans pursuant to Sec. 1714.56.
    (c) Borrowers who prepay RUS loans at a discounted present value 
pursuant to 7 CFR part 1786, subpart F, are required to rescind the 
unadvanced balance of all outstanding electric notes pursuant to 7 CFR 
1786.158(j).



PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND 
GUARANTEED ELECTRIC LOANS--Table of Contents




Subparts A-C [Reserved]

       Subpart D--Mergers and Consolidations of Electric Borrowers

Sec.
1717.150 General.
1717.151 Definitions.
1717.152 Required documentation for all mergers.
1717.153 Transitional assistance.
1717.154 Transitional assistance in connection with new loans.
1717.155 Transitional assistance affecting new and preexisting loans.
1717.156 Transitional assistance affecting preexisting loans.
1717.157 Requests for transitional assistance.
1717.158 Mergers with borrowers who prepaid RUS loans.
1717.159 Applications for RUS approvals of mergers.
1717.160 Application contents.
1717.161 Application process.

Subparts E-F [Reserved]

 Subpart G--Federal Pre-emption in Rate Making in Connection With Power 
                            Supply Borrowers

1717.300 Purpose.
1717.301 Policy.
1717.302 Definitions and rules of construction.
1717.303 Requirements of RUS documents.
1717.304 State regulatory authority rate jurisdiction.
1717.305 Pre-emption.
1717.306 RUS required rates.
1717.307 Distribution members' rates.

[[Page 147]]

1717.308 RUS approval of nonconforming rates.
1717.309 Additional statutory pre-emption.
1717.310-1717.349 [Reserved]

  Subpart H--Federal Pre-emption in Rate Making in Connection With RUS 
                    Electric Borrowers in Bankruptcy

1717.350 Purpose.
1717.351 Policy.
1717.352 Definitions and rules of construction.
1717.353 Requirements of RUS documents.
1717.354 Pre-emption.
1717.355 RUS required rates.
1717.356 Additional statutory pre-emption.

Subparts I-L [Reserved]

                     Subpart M--Operational Controls

1717.600 General.
1717.601 Applicability.
1717.602 Definitions.
1717.603 RUS approval of extensions and additions.
1717.604 Long-range engineering plans and construction work plans.
1717.605 Design standards, plans and specifications, construction 
          standards, and RUS accepted materials.
1717.606 Standard forms of construction contracts, and engineering and 
          architectural services contracts.
1717.607 Contract bidding requirements.
1717.608 RUS approval of contracts.
1717.609 RUS approval of general manager.
1717.610 RUS approval of compensation of the board of directors.
1717.611 RUS approval of expenditures for legal, accounting, 
          engineering, and supervisory services.
1717.612 RUS approval of borrower's bank or other depository.
1717.613 RUS approval of data processing and system control equipment.
1717.614 Notification of rate changes.
1717.615 Consolidations and mergers.
1717.616 Sale, lease, or transfer of capital assets.
1717.617 Limitations on distributions.

   Subpart N--Investments, Loans, and Guarantees by Electric Borrowers

1717.650 Purpose.
1717.651 General.
1717.652 Definitions.
1717.653 Borrowers in default.
1717.654 Transactions below the 15 percent level.
1717.655 Exclusion of certain investments, loans, and guarantees.
1717.656 Exemption of certain borrowers from controls.
1717.657 Investments above the 15 percent level by certain borrowers not 
          exempt under Sec. 1717.656(a).
1717.658 Records, reports and audits.
1717.659 Effect of this subpart on RUS loan contract and mortgage.

Subpart O [Reserved]

1717.700-1717.749 [Reserved]

Subpart P [Reserved]

1717.750-1717.799 [Reserved]

Subpart Q [Reserved]

1717.800-1717.849 [Reserved]

   Subpart R--Lien Accommodations and Subordinations for 100 Percent 
                            Private Financing

1717.850 General.
1717.851 Definitions.
1717.852 Financing purposes.
1717.853 Loan terms and conditions.
1717.854 Advance approval--100 percent private financing of 
          distribution, subtransmission and headquarters facilities, and 
          certain other community infrastructure.
1717.855 Application contents: Advance approval--100 percent private 
          financing of distribution, subtransmission and headquarters 
          facilities, and certain other community infrastructure.
1717.856 Application contents: Normal review--100 percent private 
          financing.
1717.857 Refinancing of existing secured debt--distribution and power 
          supply borrowers.
1717.858 Lien subordination for rural development investments.
1717.859 Application process and timeframes.
1717.860 Lien accommodations and subordinations under section 306E of 
          the RE Act.
1717.861-1717.899 [Reserved]

Subpart S--Lien Accommodations for Supplemental Financing Required by 7 
                              CFR 1710.110

1717.900 Qualification requirements.
1717.901 Early approval.
1717.902 Other RUS requirements.
1717.903 Liability.
1717.904 Exemptions pursuant to section 306E of the RE Act.
1717.905-1717.949 [Reserved]

                          Subpart T [Reserved]

1717.950-1717.999 [Reserved]

                          Subpart U [Reserved]

1717.1000-1717.1049 [Reserved]

[[Page 148]]

                          Subpart V [Reserved]

1717.1050-1717.1099 [Reserved]

                          Subpart W [Reserved]

1717.1100-1717.1149 [Reserved]

                          Subpart X [Reserved]

1717.1150-1717.1199 [Reserved]

                      Subpart Y--Settlement of Debt

1717.1200 Purpose and scope.
1717.1201 Definitions.
1717.1202 General policy.
1717.1203 Relationship between RUS and Department of Justice.
1717.1204 Policies and conditions applicable to settlements.
1717.1205 Waiver of existing conditions on borrowers.
1717.1206 Loans subsequent to settlement.
1717.1207 RUS obligations under loan guarantees.
1717.1208 Government's rights under loan documents.

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

    Source: 55 FR 38646, Sept. 19, 1990, unless otherwise noted.

Subparts A-C [Reserved]



       Subpart D--Mergers and Consolidations of Electric Borrowers

    Source: 61 FR 66871, Dec. 19, 1996, unless otherwise noted.



Sec. 1717.150  General.

    (a) This subpart establishes RUS policies and procedures for mergers 
of electric borrowers. These policies and procedures are intended to 
provide borrowers with the flexibility to negotiate and enter into 
mergers that offer advantages to the borrowers and to rural communities, 
and adequately protect the integrity and credit quality of RUS loans and 
loan guarantees.
    (b) Consistent with prudent lending practices, the maintenance of 
adequate security for RUS loans and loan guarantees, and the objectives 
of the Rural Electrification Act of 1936, as amended, (7 U.S.C. 901 et 
seq.) (RE Act), RUS encourages electric borrowers to consider mergers 
when such action is likely to contribute, in the long-term, to greater 
operating efficiency and financial soundness. Borrowers are specifically 
encouraged to explore mergers that are likely to enhance the ability of 
the successor to provide reliable electric service at reasonable cost to 
RE Act beneficiaries.
    (c) Pursuant to the loan documents and RUS regulations, certain 
mergers are subject to RUS approval. See Sec. 1717.615.
    (d) Since RUS must take action in order to advance funds and 
otherwise conduct business with a successor, RUS encourages borrowers to 
consult RUS early in the process regardless of whether RUS approval of 
the merger is required. RUS will provide technical assistance and 
guidance to borrowers to help expedite the processing of their requests 
and to help resolve potential problems early in the process.



Sec. 1717.151  Definitions.

    The definitions set forth in 7 CFR 1710.2 are applicable to this 
subpart unless otherwise stated. In addition, for the purpose of this 
subpart, the following terms shall have the following meanings:
    Active borrower means an electric borrower that has, on the 
effective date, an outstanding insured or guaranteed loan from RUS for 
rural electrification, and whose eligibility for future RUS financing is 
not restricted pursuant to 7 CFR part 1786.
    Active distribution borrower means an electric distribution borrower 
that has, on the effective date, an outstanding insured or guaranteed 
loan from RUS for rural electrification, and whose eligibility for 
future RUS financing is not restricted pursuant to 7 CFR part 1786.
    Consolidation. See Merger.
    Coverage ratios means collectively TIER, OTIER, DSC and ODSC, as 
these terms are defined in 7 CFR 1710.2.
    Effective date means the date a merger is effective pursuant to 
applicable state law.
    Former distribution borrower means any organization that
    (1) Sells or intends to sell electric power and energy at retail;
    (2) At one time had an outstanding loan made or guaranteed by RUS, 
or its predecessor the Rural Electrification Administration (REA) for 
rural electrification; and

[[Page 149]]

    (3) Either repaid such loans at face value or prepaid pursuant to 7 
CFR part 1786.
    Loan documents means the mortgage (or other security instrument 
acceptable to RUS), the loan contract, and the promissory note(s) 
entered into between the borrower and RUS.
    Merger means: (1) A consolidation where two or more companies are 
extinguished and a new successor is created, acquiring the assets, 
liabilities, franchises and powers of those passing out of existence;
    (2) A merger where one company is absorbed by another, the former 
ceasing to exist as a separate business entity, and the latter retaining 
its own identity and acquiring the assets, liabilities, franchises and 
powers of the former; or
    (3) A transfer of mortgaged property by one company to another where 
the transferee acquires substantially as an entirety the assets, 
liabilities, franchises, and powers of the transferor.
    New loan means a loan to a successor approved by RUS on or after the 
effective date.
    Preexisting loan means a loan to a borrower approved by RUS prior 
to, and outstanding on the effective date.
    Successor means the entity that continues as the surviving business 
entity as of the effective date, and acquires all the assets, 
liabilities, franchises, and powers of the entity or entities ceasing to 
exist as of the effective date.
    Transitional assistance means financial relief provided to borrowers 
by RUS during a limited period of time following a merger.



Sec. 1717.152  Required documentation for all mergers.

    In order for RUS to advance funds, send bills, and otherwise conduct 
business with a successor, the documents listed in this section must be 
submitted to RUS regardless of the need for RUS approval of the merger. 
Borrowers are responsible for ensuring that these documents are received 
by RUS in timely fashion. In cases of mergers that require RUS approval, 
or cases where borrowers must submit requests for transitional 
assistance, the documents listed in this section may be combined with 
the documents required by Secs. 1717.157 and/or 1717.160 where 
appropriate.
    (a) Prior to the effective date, borrowers must submit:
    (1) A transmittal letter on corporate letterhead signed by the 
manager of each active borrower that is a party to the proposed merger 
indicating the borrower's intention to merge and tentative timeframes, 
including the proposed effective date;
    (2) An original certified board resolution from each party to the 
proposed merger affirming the board's support of the merger;
    (3) All documents necessary to evidence the merger pursuant to 
applicable law. Examples include plan of merger, articles of merger, 
amended articles of incorporation, bylaws, and notices and filings 
required by law. These documents may be copies of documents filed 
elsewhere, unless otherwise specified by RUS; and
    (4) A letter addressed to the Administrator from the counsel of at 
least one of the active borrowers briefly describing the merger and 
indicating the relevant statutes under which the merger will be 
consummated.
    (b) On or after the effective date, borrowers must submit:
    (1) An opinion of counsel from the successor addressing, among other 
things, any pending litigation, proper authorization and consummation of 
the merger, proper filing and perfection of RUS' security interest, and 
all approvals required by law. RUS will provide the form of the opinion 
of counsel to the successor;
    (2) A letter signed by the manager of the successor advising RUS of 
the effective date of the merger; the corporate name, address, and phone 
number; the names of the officers of the successor; and the taxpayer 
identification number; and
    (3) Evidence of proper filing and perfection of RUS' security 
interest, as instructed by RUS, and an executed loan contract.



Sec. 1717.153  Transitional assistance.

    RUS recognizes that short-term financial stresses can follow even 
the most beneficial mergers. To help stabilize electric rates, enhance 
the credit quality of outstanding loans made or

[[Page 150]]

guaranteed by the Government, and otherwise ease the transition period 
before the long-term efficiencies and economies of a merger can be 
realized, RUS may approve one or more types of transitional assistance 
to a successor under the conditions set forth in this part.



Sec. 1717.154  Transitional assistance in connection with new loans.

    Requests for transitional assistance in connection with new loans 
may be submitted to RUS no later than the loan application.
    (a) Loan processing priority.(1) RUS loans are generally processed 
in chronological order based on the date the complete application is 
received in the regional or division office. At the borrower's request, 
RUS will offer loan processing priority for the first loan to a 
successor, provided that the loan is approved by RUS not later than 5 
years after the effective date of the merger. For any subsequent loans 
approved during those 5 years, RUS may offer loan processing priority. 
In reviewing requests for loan processing priority on subsequent loans, 
RUS will consider the loan authority for the fiscal year, the borrower's 
projected cash flows, its electric rates and rate disparity, and the 
likely mitigating effects of priority loan processing. See 7 CFR 
1710.108 and 1710.119.
    (2) Loan processing priority is available following any merger where 
at least one of the merging parties is an active borrower.
    (b) Supplemental financing.(1) RUS generally requires that an 
applicant for a municipal rate loan obtain a portion of its debt 
financing from a supplemental source without an RUS guarantee. See 7 CFR 
1710.110. RUS will, at the borrower's request, waive the requirement to 
obtain supplemental financing for the first RUS loan approved after the 
effective date if that first loan is a municipal rate loan whose loan 
period does not exceed 2 years, and the loan is approved by RUS not 
later than 5 years after the effective date. For any subsequent loans 
approved during these 5 years, or if the borrower requests a loan period 
longer than 2 years, RUS may, subject to the availability of loan funds, 
waive or reduce the amount of supplemental financing required. In 
reviewing requests to reduce or waive supplemental financing on 
subsequent loans or on loans with a loan period longer than 2 years, RUS 
will consider the differences in interest rates between RUS and 
supplemental loans and the impacts of this difference on the borrower's 
projected cash flows and its electric rates and rate disparity. If 
significant differences would result, the waiver will be granted.
    (2) Waiver of supplemental financing may be available if:
    (i) All parties to the merger are active distribution borrowers, or
    (ii) At least one of the merging parties is an active distribution 
borrower, all merging parties are either active distribution borrowers 
or former distribution borrowers, and the merger is effective after 
December 19, 1996.
    (c) Reimbursement of general funds and interim financing.(1) 
Borrowers may request RUS loan funds to reimburse general funds and/or 
interim financing used to finance equipment and facilities included in a 
RUS approved construction work plan or amendment if the construction was 
completed immediately preceding the current loan period. This 
reimbursement period is generally limited to 24 months. See 7 CFR 
1710.109. RUS may, in connection with the first RUS loan approved after 
the effective date, approve a reimbursement period of up to 48 months 
prior to the current loan period if the loan is approved not later than 
5 years after the effective date. In reviewing requests for this longer 
reimbursement period, RUS will consider the stresses that the 
transaction and other costs of entering into the merger places on the 
borrower's rates and cash flows, and the mitigating effects of more 
generous reimbursement.
    (2) A longer reimbursement period may be available if:
    (i) All parties to the merger are active distribution borrowers, or
    (ii) At least one of the merging parties is an active distribution 
borrower, all merging parties are either active distribution borrowers 
of former distribution borrowers, and the merger is effective after 
December 19, 1996.

[[Page 151]]



Sec. 1717.155  Transitional assistance affecting new and preexisting loans.

    Requests for transitional assistance affecting new and preexisting 
loans must be received by RUS no later than 2 years after the effective 
date.
    (a) Section 12 deferments. (1) Section 12 of the RE Act (7 U.S.C. 
912) allows RUS to extend the time of payment of interest or principal 
of RUS loans. Section 12 deferments do not extend the final maturity of 
the loan; lower payments during the deferment period result in higher 
payments later. Therefore, RUS may approve a Section 12 deferment of 
loan payments of up to 5 years only if such deferments will help to 
avoid substantial increases in retail electric rates during the 
transition period, without placing borrowers in financial stress after 
the deferment period.
    (2) Section 12 deferment may be available following any merger where 
at least one of the merging parties is an active borrower.
    (b) Coverage ratios. Required levels for coverage ratios are set 
forth in 7 CFR 1710.114 and in the loan documents. RUS may approve a 
plan, on a case by case basis, that provides for a phase-in period for 
these coverage ratios of up to 5 years from the effective date. Under 
such a plan the successor would be permitted to project and achieve 
lower levels for one or more of these coverage ratios during the phase-
in period.
    (1) A phase-in plan for coverage ratios must provide a pro forma 
level for each ratio during each year of the phase-in period and be 
supported by a financial forecast covering a period of not less than 10 
years from the effective date of the merger. The plan must demonstrate 
that a minimum TIER level of 1.00 will be achieved in each year, that 
trends will be generally favorable, that the borrower will achieve the 
levels required in its loan documents and RUS regulations by the end of 
the phase-in period, and that these levels will be maintained in 
subsequent years.
    (2) In reviewing phase-in plans for coverage ratios, RUS will review 
rates, rate disparity, and likely mitigating effects of the proposed 
phase-in plan.
    (3) The borrower is responsible for obtaining approvals of 
supplemental lenders.
    (4) Upon RUS approval of a phase-in plan, the levels in that plan 
will be substituted for the levels required in the borrower's 
preexisting loan documents and will be incorporated in any new loan or 
security documents.
    (5) A phase in plan for coverage ratios may be available if:
    (i) All parties to the merger are active distribution borrowers, or
    (ii) At least one of the merging parties is an active distribution 
borrower, all merging parties are either active distribution borrowers 
or former distribution borrowers, and the merger is effective after 
December 19, 1996.



Sec. 1717.156  Transitional assistance affecting preexisting loans.

    The fund advance period for an insured loan, which is the period 
during which RUS may advance loan funds to a borrower, terminates 
automatically after a specific period of time. See 7 CFR 1714.56. If, on 
the effective date the original fund advance period or the fund advance 
period as extended pursuant to 7 CFR 1714.56(c), on any preexisting RUS 
loan to any of the active borrowers involved in a merger has not 
terminated, such fund advance period shall be automatically lengthened 
by 2 years. On the borrower's request RUS will prepare documents 
necessary for the advance of loan funds. RUS will prepare documents for 
the borrower's execution that will reflect this extension and will 
provide the legal authority for RUS to advance funds to the successor.



Sec. 1717.157  Requests for transitional assistance.

    (a) If the merger requires RUS approval, the borrower should, where 
possible, indicate that it desires transitional assistance at the time 
it requests approval of the merger. The formal request for transitional 
assistance must be received by RUS as specified in Secs. 1717.155 and 
171.156. Documents listed in this section may be combined with the 
documents required by Secs. 1717.152 and/or 1717.160 where appropriate. 
If the request for transitional assistance is submitted at the same time 
as a loan

[[Page 152]]

application, documents listed in this section may be combined with the 
loan application documents where appropriate. See 7 CFR part 1710, 
subpart I. A request for transitional assistance must include:
    (1) Transmittal letter(s) formally listing the types of transitional 
assistance requested. If the request is submitted before the effective 
date, a transmittal letter must be signed by the manager of each party 
to the transaction. If the request is submitted on or after the 
effective date, a transmittal letter must be signed by the manager of 
the successor. Transmittal letter(s) must be signed originals on 
corporate letterhead stationery;
    (2) Board resolution(s). If the request is submitted before the 
effective date, a separate board resolution must be submitted from each 
entity involved in the merger. If the request is submitted on or after 
the effective date, a board resolution from the successor must be 
submitted. Each board resolution must be a certified original;
    (3) A merger plan, financial forecasts, and any available studies 
such as net present value analyses showing the anticipated costs and 
benefits of the merger and likely timeframes for the merger. The merger 
plan must clearly identify those benefits that cannot be achieved 
without a merger, and those benefits that can be achieved through other 
means;
    (4) If the transitional assistance requires RUS approval, the type 
and extent of the mitigation that the transitional assistance is 
expected to provide; and
    (5) Other information that may be relevant.
    (b) Borrowers are responsible for ensuring that requests for 
transitional assistance are complete and sound in form and substance 
when they are submitted to RUS. After submitting a request, borrowers 
shall promptly notify RUS of any changes or events that materially 
affect the request or any information in the request.
    (c) In considering whether to approve requests for transitional 
assistance, RUS will evaluate the costs and benefits of the merger; the 
type and extent of the likely transitional stress; whether the 
transitional assistance requested is likely to materially mitigate such 
stress; and the likely impacts on electric rates and on the security of 
RUS loans. Review factors applicable to each type of transitional 
assistance are set forth in Secs. 1717.154-1717.156.



Sec. 1717.158  Mergers with borrowers who prepaid RUS loans.

    In some cases, an active distribution borrower may merge with a 
borrower that has prepaid RUS debt at a discount pursuant to 7 CFR part 
1786, and whose eligibility for future RUS financing is thereby 
restricted. During the period when the restrictions on future financing 
are in effect, the successor will be eligible for RUS loans to finance 
facilities to serve consumers located in the territory that was served 
by the active distribution borrower immediately prior to the effective 
date, provided that other requirements for loan eligibility are met.



Sec. 1717.159  Applications for RUS approvals of mergers.

    If a proposed merger requires RUS approval according to RUS 
regulations and/or the loan documents executed by any of the active 
borrowers involved, the application must be submitted to RUS not later 
than 90 days prior to the effective date of the proposed borrower 
action. A distribution borrower should consult with its assigned RUS 
general field representative, and a power supply borrower with the 
Director, Power Supply Division for general information prior to 
submitting the request.



Sec. 1717.160  Application contents.

    An application for RUS approval of a merger must include the 
documents listed in this section. Documents listed in this section may 
be combined with the documents required by Secs. 1717.152 and/or 
1717.157 where appropriate.
    (a) Transmittal letters signed by the managers of all borrowers and 
non-borrowers who are parties to the proposed merger. These letters must 
include the actual corporate name, address, and taxpayer identification 
number of all parties to the proposed merger. The transmittal letters 
must be signed originals on corporate letterhead stationery.

[[Page 153]]

    (b) Resolutions from the boards of directors of all borrowers and 
non-borrowers who are parties to the proposed merger. This document is 
the formal request by each entity for RUS approval of the proposed 
merger. The board resolution must include a description of the proposed 
merger, including timeframes, and authorization for RUS to release 
appropriate information to supplemental or other lenders, and for these 
lenders to release appropriate information to RUS. Each board resolution 
must be a certified original.
    (c) Evidence that the proposed merger will result in a viable 
entity, and that the security of outstanding RUS loans will not be 
adversely affected by the action. This evidence shall include financial 
forecasts, and any available studies such as net present value analyses 
covering a period of not less than 10 years from the effective date of 
the merger, as well as information about any threatened actions by other 
parties that could adversely affect the financial condition of any of 
the parties to the proposed merger, or of the successor. Such threatened 
actions may include annexations or other actions affecting service 
territory, loads, rates or other such matters.
    (d) Regulatory information about pending federal or state 
proceedings pertaining to any of the parties that could have material 
effects on the successor.
    (e) Rate information. Distribution and power supply borrowers shall 
submit schedules of proposed rates after the merger, including the 
effects of the proposed action on rates and the status of any pending 
rate cases before a state regulatory authority. The rates of power 
supply borrowers are subject to RUS approval. If rates are not projected 
to change after the merger, a statement to that effect will suffice.
    (f) Area coverage and line extension policies. If any distribution 
systems are parties to the proposed merger, a statement of proposed area 
coverage and line extension policies for the successor.



Sec. 1717.161  Application process.

    (a) Borrowers are responsible for ensuring that their applications 
for RUS approval of a merger are complete and sound in form and 
substance when they are submitted to RUS. After submitting an 
application, borrowers shall promptly notify RUS of any changes or 
events that materially affect the application or any information in the 
application.
    (b) In reviewing borrower requests for approval of mergers, RUS will 
consider the likely effects of the action on the ability of the 
successor to provide reliable electric service at reasonable cost to RE 
Act beneficiaries and on the security of outstanding RUS loans. Among 
the factors RUS will consider are whether the proposed merger is likely 
to:
    (1) Contribute to greater operating efficiency and financial 
soundness;
    (2) Mitigate high electric rates and or rate disparity;
    (3) Help borrowers to diversify their loads or otherwise hedge 
risks;
    (4) Have beneficial effects on rural economic development in the 
community served by the borrower, such as diversifying the economic base 
or alleviating unemployment; and
    (5) Provide other benefits consistent with the purposes of the RE 
Act.
    (c) RUS will not approve a merger if, in the sole judgment of the 
Administrator, such action is likely to have an adverse effect on the 
credit quality of outstanding loans made or guaranteed by the 
Government. RUS will thoroughly review each request for approval of such 
action, including review of the feasibility and security of outstanding 
Government loans according to the standards in 7 CFR 1710.112 and 
1710.113, respectively, and in other RUS regulations.
    (d) RUS will keep the borrowers apprised of the progress of their 
applications.

Subparts E-F [Reserved]



 Subpart G--Federal Pre-emption in Rate Making in Connection With Power 
                            Supply Borrowers



Sec. 1717.300  Purpose.

    This subpart contains regulations of the Rural Utilities Service 
(RUS) implementing provisions of Section 4 of the RE Act (7 U.S.C. 904) 
which authorize the Administrator to establish

[[Page 154]]

terms and conditions of loans and implementing provisions of the RUS 
wholesale power contracts and other RUS documents which provide for the 
establishment of rates to be charged by power supply borrowers for the 
sale of electric power and energy. This subpart contains the general 
regulations of RUS for the pre-emption, under certain circumstances, 
which are not exclusive, of the regulation of a power supply borrower's 
rates by a state regulatory authority under state law and for the 
exercise of exclusive jurisdiction over rates by RUS pursuant to the RUS 
documents.



Sec. 1717.301  Policy.

    (a) RUS makes and guarantees loans to borrowers to bring electric 
service to persons in rural areas. RUS requires, as a condition to 
making or guaranteeing any loans to power supply borrowers, that the 
borrower enter into RUS wholesale power contracts with its several 
members and assign and pledge such contracts as security for the 
repayment of loans made or guaranteed by RUS and for other loans which, 
pursuant to the RE Act, RUS has permitted to be secured pursuant to the 
RUS mortgage. The RUS wholesale power contract requires, among other 
matters, that the rates charged for power and energy sold thereunder 
produce revenues sufficient to enable the power supply borrower to make 
payments on account of all indebtedness of the power supply borrower. 
The Administrator relies upon the RUS wholesale power contracts together 
with other RUS documents to find and certify, as required in section 4 
of the RE Act (7 U.S.C. 904), that the security for the loan is 
reasonably adequate and the loan will be repaid within the time agreed.
    (b) RUS requires power supply borrowers to take such actions as may 
be necessary to charge rates for the sale of electric power and energy 
which are sufficient to pay the principal and interest on loans made or 
guaranteed by RUS in a timely manner and to meet the requirements of the 
RUS wholesale power contract and other RUS documents.
    (c) With respect to power supply borrowers which are not subject to 
rate regulation by a state regulatory authority, RUS requires that such 
borrowers establish rates and obtain RUS approval of such rates as 
required by the terms of the RUS wholesale power contract and other RUS 
documents.
    (d) With respect to power supply borrowers which are subject to 
regulation by a state regulatory authority, RUS does not make or 
guarantee a loan for the construction, operation or enlargement of any 
generating plant or transmission facility unless the consent of the 
state regulatory authority having jurisdiction in the premises is first 
obtained.
    (e) Pursuant to applicable provisions of state law state regulatory 
authorities regulate many aspects of a power supply borrowers business 
activities, including such matters as the setting of wholesale electric 
rates, the borrowing of money, and the mortgaging of property. A state 
regulatory authority's jurisdiction over the rates charged by a power 
supply borrower shall be pre-empted where the Administrator has 
determined that such jurisdiction has compromised Federal interests, 
including without limitation, the ability of the borrower to repay its 
secured loans in accordance with the terms of the RUS documents. 
Thereupon, RUS shall, pursuant to the RUS documents, exercise exclusive 
jurisdiction over the rates charged by a power supply borrower.

[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec. 26, 1990]



Sec. 1717.302  Definitions and rules of construction.

    (a) Definitions. For the purpose of this subpart, the following 
terms shall have the following meanings:
    Administrator means the Administrator of RUS.
    Borrower means any organization which has an outstanding loan made 
or guaranteed by RUS for rural electrification. Unless otherwise stated 
in the text, ``borrower'' shall mean power supply borrower.
    Loan contract means the agreement, as amended, supplemented, or 
restated from time to time, between a borrower and RUS providing for 
loans made or guaranteed pursuant to the RE Act.

[[Page 155]]

    Power supply borrower means any borrower engaged in the wholesale 
sale of electric power and energy to distribution members either 
directly or though other power supply borrowers pursuant to RUS 
wholesale power contracts.
    RE Act means Rural Electrification Act of 1936, as amended (7 U.S.C. 
901 et seq.).
    REA means the Rural Electrification Administration formerly an 
agency of the United States Department of Agriculture and predecessor 
agency to RUS with respect to administering certain electric and 
telephone loan programs.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture established pursuant to Section 232 of 
the Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor 
to REA with respect to administering certain electric and telephone 
programs. See 7 CFR 1700.1.
    RUS documents means the loan contract, mortgage and RUS wholesale 
power contract of a power supply borrower.
    RUS mortgage means the mortgage and security agreement, as from time 
to time supplemented, amended and restated, made by and among the 
borrower, RUS, and, if a party thereto, third party lenders, or any 
other form of mortgage or security instrument or indenture of mortgage 
and deed of trust, securing the payment of outstanding loans made or 
guaranteed by RUS and other lenders.
    RUS wholesale power contract means the contract for the wholesale 
sale of electric power and energy between a power supply borrower and 
its member as approved by RUS.
    Secured loans shall mean outstanding loans secured pursuant to the 
RUS mortgage.
    State regulatory authority means any state board or local governing 
body having jurisdiction under state law to regulate, or in any way, 
approve the electric rates charged by a power supply borrower or 
electric distribution member of a power supply borrower.
    (b) Rules of Construction. Unless the context shall otherwise 
indicate, the terms defined in Sec. 1717.302(a) hereof include the 
plural as well as the singular, and the singular as well as the plural. 
The words ``herein,'' and ``hereunder'', and words of similar import, 
refer to this subpart as a whole. ``Includes'' and ``including'' are not 
limiting and ``or'' is not exclusive.

[55 FR 38646, Sept. 19, 1990, as amended at 59 FR 66440, Dec. 27, 1994]



Sec. 1717.303  Requirements of RUS documents.

    (a) Pursuant to the terms of the RUS documents each power supply 
borrower shall establish and adjust rates for the sale of electric power 
and energy in such a manner as to assure that the borrower will be able 
to make required payments on secured loans.
    (b) Pursuant to the terms of the RUS wholesale power contract, the 
Board of Directors or Board of Trustees of the power supply borrower 
shall review rates not less frequently than once each calendar year and 
revise its rates as therein set forth.\1\ The RUS wholesale power 
contract further provides that the borrower shall notify the 
Administrator not less than 30 nor more than 45 days prior to the 
effective date of any adjustment and shall set forth the basis upon 
which the rate is to be adjusted and established. The RUS wholesale 
power contract provides that no final revision in rates shall be 
effective unless approved in writing by the Administrator.
---------------------------------------------------------------------------

    \1\ The Wholesale Power Contract, with minor modifications which are 
approved by RUS on a case by case basis, provides that the rate charged 
for electric power and energy, shall produce revenues which shall be 
sufficient, but only sufficient, with the revenues of the Seller from 
all other sources, to meet the cost of the operation and maintenance 
(including without limitation, replacements, insurance, taxes and 
administrative and general overhead expenses) of the generating plant 
transmission system and related facilities of the Seller, the cost of 
any power and energy purchased for resale hereunder by the Seller, the 
cost of transmission service, make payments on account of principal and 
interest on all indebtedness of the Seller, and to provide for the 
establishment and maintenance of reasonable reserves. (Section 4. Rates 
(b), RUS Form 444, ``Wholesale Power Contract--Federated Cooperative''; 
Rev. 6-60.)
---------------------------------------------------------------------------

    (c) Pursuant to the terms of the RUS mortgage, each power supply 
borrower

[[Page 156]]

must design its rates as therein set forth and must give 90 days prior 
---------------------------------------------------------------------------
notice to RUS of any proposed change in its general rate structure.

(Approved by the Office of Management and Budget under control number 
0572-0089)



Sec. 1717.304  State regulatory authority rate jurisdiction.

    (a) In the event that rate revisions required by the terms of the 
RUS wholesale power contract or other RUS documents may be subject to 
the approval of a state regulatory authority, the power supply borrower 
shall seek such required approval in a timely manner.
    (b) RUS recognizes the need of state regulatory authorities for 
documents, information and records for use in connection with an 
application for rate approval and will consider any reasonable request 
by a borrower or a state regulatory authority for such documents, 
information and records. The failure of RUS to provide requested 
documents, information or records shall not limit any rights of RUS 
including the right with respect to pre-emption of the state regulatory 
authority as provided in this subpart.
    (c) In the event that the state regulatory authority shall fail to 
act favorably upon the borrower's application for rate increases 
required by terms of the RUS wholesale power contract or other RUS 
documents, the borrower shall pursue such legal and administrative 
appeals as may be available to it, unless RUS shall approve otherwise in 
writing.



Sec. 1717.305  Pre-emption.

    (a) Inadequate rates. State regulatory authority jurisdiction over a 
power supply borrower's rates shall be pre-empted by the RE Act if the 
Administrator shall have determined that the borrower's rates approved 
by the state regulatory authority are, after taking into account the 
borrower's costs and expenses, inadequate to produce revenues sufficient 
to permit the borrower to make required payments on its secured loans 
and the borrower has failed to make required payments on its secured 
loans.
    (b) Public notice. The Administrator shall:
    (1) Notify the borrower and the state regulatory authority in 
writing of the determination, indicating the jurisdiction of the state 
regulatory authority over the rates of the borrower has been pre-empted 
pursuant to this part and the borrower shall henceforth establish its 
rates in accordance with the term of the RUS documents.
    (2) publish a notice in the Federal Register informing the public of 
the action.

[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec. 26, 1990]



Sec. 1717.306  RUS required rates.

    (a) Upon the publication in the Federal Register of the notice of 
pre-emption of state regulatory authority as provided in this subpart, 
RUS will exercise exclusive jurisdiction over the rates of the borrower 
pursuant to the terms of the RUS documents. The borrower shall 
immediately establish rates with the approval of RUS that are sufficient 
to satisfy the requirements of the RUS wholesale power contract and 
other RUS documents described in Sec. 1717.303 of this subpart. The 
borrower shall establish such rates notwithstanding provisions of state 
law, and rules, orders or other actions of state regulatory authorities, 
and notwithstanding any provision of the RUS documents referring to such 
laws, rules, orders or actions.
    (b) So long as the state regulatory authority shall be pre-empted 
hereunder, RUS shall be considered the governmental regulatory body with 
jurisdiction over rates for the purposes of the RUS documents and for 
the purposes of section 1129(a)(6) of the Bankruptcy Code of 1978, as 
amended (11 U.S.C. 1129(a)(6)).
    (c) If a borrower, which is subject to exclusive RUS rate 
jurisdiction, shall fail to establish rates in accordance with terms of 
the RUS wholesale power contract and other RUS documents in a timely 
fashion, RUS may proceed to exercise any and all rights and remedies 
available pursuant under the RUS documents or otherwise.
    (d) The jurisdiction of the state regulatory authority over the 
rates of the borrower shall continue to be pre-

[[Page 157]]

empted hereunder until the Administrator shall in writing approve the 
resumption of jurisdiction by the state regulatory authority and publish 
in the Federal Register a notice to such effect. The Administrator shall 
approve resumption only after determining that such jurisdiction shall 
be exercised in a manner consistent with Federal interests.

[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec. 26, 1990]



Sec. 1717.307  Distribution members' rates.

    A state regulatory authority which has been pre-empted as provided 
in this subpart may continue to exercise jurisdiction, pursuant to 
applicable provisions of state law, over all other business affairs of 
the power supply borrower and over the rates of its distribution 
members: Provided, however, that the state regulatory authority shall 
treat any RUS approved rate for the power supply borrower as fair and 
reasonable and shall not in any manner, directly or indirectly, prevent 
or impede the distribution member from recovering the costs of paying 
the RUS approved rates to the power supply borrower.



Sec. 1717.308  RUS approval of nonconforming rates.

    Borrowers may request and RUS may approve rates which do not conform 
with the requirements of the RUS wholesale power contract and other RUS 
documents if RUS determines, in its sole discretion, that such approval 
is in the interests of RUS. If RUS approval is granted prior to pre-
emption hereunder, and if the state regulatory authority shall have 
approved such rates, then, so long as RUS's approval of the 
nonconforming rates remains in effect, the jurisdiction of the state 
regulatory authority over the rates of the borrower shall not be pre-
empted hereunder.



Sec. 1717.309  Additional statutory pre-emption.

    This subpart addresses pre-emption of state law and state regulatory 
authority in only those specific circumstances herein described. Nothing 
in this subpart waives, limits, or otherwise affects the explicit pre-
emption or pre-emption, which is implicit and shall occur pursuant to 
the RE Act as a matter of law, of state law or action of a state 
regulatory authority where such state law or such action compromises 
Federal interests, including the ability of any borrower, including 
power supply borrowers, to repay loans made or guaranteed by RUS.



Secs. 1717.310-1717.349  [Reserved]



  Subpart H--Federal Pre-emption in Rate Making in Connection With RUS 
                    Electric Borrowers in Bankruptcy

    Source: 55 FR 38653, Sept. 19, 1990, unless otherwise noted.



Sec. 1717.350  Purpose.

    This subpart contains regulations of the Rural Utilities Service 
(RUS) implementing provisions of section 4 of the RE Act (7 U.S.C. 904) 
which authorizes the Administrator to establish terms and conditions of 
loans, and provisions of the RUS documents which provide for the 
establishment of rates for electric service to be charged by RUS 
electric borrowers. This subpart contains the general regulations of RUS 
for the pre-emption of the regulation by a State Regulatory Authority 
under State law of an RUS borrower's rates and for the exercise by RUS, 
pursuant to the RUS documents, of exclusive jurisdiction over rates of a 
borrower by or against whom a case under the Bankruptcy Code of 1978, as 
amended, has commenced.



Sec. 1717.351  Policy.

    (a) RUS makes and guarantees loans to borrowers to bring electric 
service to persons in rural areas. To accomplish this objective, RUS 
normally requires, as a condition to making or guaranteeing any loans to 
an electric borrower, that the borrower execute and deliver the RUS 
documents in the form prescribed by RUS. The RUS mortgage secures 
repayment of the loans made or guaranteed by RUS and other loans which, 
pursuant to the RE Act, RUS has permitted to be secured pursuant to the 
RUS mortgage. The Administrator relies upon the RUS mortgage together 
with other RUS

[[Page 158]]

documents to find and certify, as required by section 4 of the RE Act (7 
U.S.C. 904), that the security for the loan is reasonably adequate and 
the loan will be repaid within the time agreed.
    (b) RUS requires borrowers to take such actions as may be necessary 
to establish rates for electric service which are sufficient to pay the 
principal of and interest on the loans made or guaranteed by RUS in a 
timely manner and to meet the requirements of the RUS documents.
    (c) With respect to borrowers whose rates are not regulated by a 
State Regulatory Authority, RUS requires that such borrowers establish 
rates and to obtain RUS approval of such rates as required by the RUS 
documents.
    (d) To protect Federal interests, including without limitation the 
ability of the borrower to repay RUS loans, RUS's policy is to exercise, 
pursuant to the RUS documents, exclusive jurisdiction over the rates for 
electric service charged by a borrower by or against whom a case under 
the Bankruptcy Code of 1978, as amended, has commenced.



Sec. 1717.352  Definitions and rules of construction.

    (a) Definitions. For the purpose of this subpart, the following 
terms shall have the following meanings:
    Administrator means the Administrator of RUS.
    Bankruptcy code of 1978, as amended, means the Bankruptcy Reform Act 
of 1978, as amended (11 U.S.C. 101 et seq.).
    Borrower means any organization which has an outstanding loan made 
or guaranteed by RUS for rural electrification.
    RE Act means Rural Electrification Act of 1936, as amended (7 U.S.C. 
901 et seq.).
    REA means the Rural Electrification Administration formerly an 
agency of the United States Department of Agriculture and predecessor 
agency to RUS with respect to administering certain electric and 
telephone loan programs.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture established pursuant to Section 232 of 
the Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor 
to REA with respect to administering certain electric and telephone 
programs. See 7 CFR 1700.1.
    RUS documents means the RUS loan contract, RUS mortgage and, if the 
Borrower is engaged in the wholesale sale of electric power and energy 
to members pursuant to RUS Wholesale Power Contracts, the RUS Wholesale 
Power Contract.
    RUS loan contract means the agreement, as amended, supplemented, or 
restated from time to time, between a borrower and RUS providing for 
loans made or guaranteed pursuant to the RE Act.
    RUS mortgage means the mortgage and security agreement, as from time 
to time supplemented, amended and restated, made by and among the 
borrower, RUS, and, if a party thereto, third party lenders, or any 
other form of mortgage or security instrument or indenture of mortgage 
and deed of trust, securing the payment of outstanding loans made or 
guaranteed by RUS and other lenders.
    RUS wholesale power contract means the contract for the wholesale 
sale of electric power and energy between a power supply borrower and 
its member as approved by RUS.
    Secured loans shall mean outstanding loans secured pursuant to the 
RUS mortgage.
    State regulatory authority means any state board or local governing 
body having jurisdiction under state law to regulate, or in any way, 
approve the electric rates charged by a borrower.
    (b) Rules of construction. Unless the context shall otherwise 
indicate, the terms defined in Sec. 1717.352(a) hereof include the 
plural as well as the singular, and the singular as well as the plural. 
The words ``herein,'' and ``hereunder'', and words of similar import, 
refer to this subpart as a whole. ``Includes'' and ``including'' are not 
limiting and ``or'' is not exclusive.

[55 FR 38653, Sept. 19, 1990, as amended at 59 FR 66440, Dec. 27, 1994]



Sec. 1717.353  Requirements of RUS documents.

    Each borrower shall establish and adjust rates for electric service 
as set

[[Page 159]]

forth in the RUS documents to assure that the borrower will be able to 
make required payments on secured loans and to otherwise meet the terms 
of the RUS documents.



Sec. 1717.354  Pre-emption.

    State Regulatory Authority jurisdiction over an RUS borrower's rates 
shall be pre-empted by the RE Act and RUS shall have exclusive 
jurisdiction over the borrower's rates:
    (a) On October 19, 1990, with respect to any borrower by or against 
whom a case under the Bankruptcy Code of 1978, as amended, was commenced 
prior to and remains outstanding on October 19, 1990; and
    (b) With respect to all other borrowers, upon the filing of a 
petition by or against the borrower commencing a case under the 
Bankruptcy Code of 1978, as amended.



Sec. 1717.355  RUS required rates.

    (a) Upon the pre-emption of State Regulatory Authority as provided 
in this subpart, RUS will exercise exclusive jurisdiction over the rates 
of the borrower pursuant to the terms of the RUS documents.
    (b) So long as the State Regulatory Authority shall be pre-empted 
hereunder, RUS shall be considered the governmental regulatory body with 
jurisdiction over rates for all purposes, including for the purposes of 
the RUS documents and for the purposes of section 1129(a)(6) of the 
Bankruptcy Code of 1978, as amended (11 U.S.C. 1129(a)(6)).
    (c) RUS shall, pursuant to the terms of the RUS documents, exercise 
exclusive jurisdiction over the rates of the borrower until the 
Administrator shall in writing approve the resumption of jurisdiction by 
the State Regulatory Authority. The Administrator shall approve 
resumption only after determining that such jurisdiction shall be 
exercised in a manner consistent with Federal interests.



Sec. 1717.356  Additional statutory pre-emption.

    This subpart addresses pre-emption of State law and State Regulatory 
Authority upon the filing of a petition by or against the borrower 
commencing a case under the Bankruptcy Code of 1978, as amended. Nothing 
in this subpart waives, limits, or otherwise affects the explicit pre-
emption or pre-emption, which is implicit and shall occur pursuant to 
the RE Act as a matter of law, of State law or action of a State 
Regulatory Authority where such State law or such action compromises 
Federal interests, including the ability of any borrower to repay loans 
made or guaranteed by RUS.

Subparts I-L [Reserved]



                     Subpart M--Operational Controls

    Source: 60 FR 67405, Dec. 29, 1995, unless otherwise noted.



Sec. 1717.600  General.

    (a) General. The loan contract and mortgage between the Rural 
Utilities Service (RUS) and electric borrowers imposes certain 
restrictions and controls on the borrowers and gives RUS (and other co-
mortgagees in the case of the mortgage) the right to approve or 
disapprove certain actions contemplated by the borrowers. Certain of 
these controls and approval rights are referred to informally as 
``operational controls'' because they pertain to decisions or actions 
with respect to the operation of the borrowers' electric systems. The 
approval authority granted to RUS by the loan contract or mortgage 
regarding each decision or action subject to controls is often stated in 
broad, unlimited terms. This subpart lists the main operational controls 
affecting borrowers and establishes for each area of control the 
circumstances under which RUS approval of a decision or action by a 
borrower is either required or not required. In some cases, only the 
general principles or general circumstances pertaining to RUS approval 
or control are presented in this subpart, while the details regarding 
the circumstances and requirements of RUS approval or control are set 
forth in other RUS regulations. Since this subpart addresses only the 
main operational controls, failure to address a control or approval 
right in this subpart in no way invalidates such controls or rights 
established by the loan

[[Page 160]]

contract, mortgage, other agreements between a borrower and RUS, and RUS 
regulations.
    (b) Case by case amendments. Upon written notice to a borrower, RUS 
may amend or annul the approvals and exceptions to controls set forth in 
this subpart or other RUS regulations if the borrower is in violation of 
any provision of its loan documents or any other agreement with RUS, or 
if RUS determines that loan security and/or repayment is threatened. 
Such amendment or annulment will apply to decisions and actions of the 
borrower after said written notice has been provided by RUS.
    (c) Generic notices. By written notice to all borrowers or a group 
of borrowers, RUS may grant or waive approval of decisions and actions 
by the borrowers that are controlled under the loan documents and RUS 
regulations. RUS may also by written notice withdraw or cut back its 
grant or waiver of approval of said decisions and actions made by 
previous written notice, but may not by such notice extend its authority 
to approve decisions and actions by borrowers beyond the authority 
granted by the loan documents and RUS regulations.



Sec. 1717.601  Applicability.

    (a) The approvals and exceptions to controls conveyed by this 
subpart apply only to controls and approval rights normally included in 
RUS loan documents dated prior to January 29, 1996. They do not apply to 
special controls and approval requirements included in loan documents or 
other agreements executed between a borrower and RUS that relate to 
individual problems or circumstances specific to an individual borrower.
    (b) The approvals and exceptions to controls granted by RUS in this 
subpart shall not in any way affect the rights of other co-mortgagees 
under the mortgage or their loan contracts.



Sec. 1717.602  Definitions.

    Terms used in this subpart that are not defined in this section have 
the meanings set forth in 7 CFR part 1710. In addition, for the purposes 
of this subpart:
    Default means an event of default as defined in the borrower's loan 
documents or other agreement with RUS, and furthermore includes any 
event that has occurred and is continuing which, with notice or lapse of 
time and notice, would become an event of default.
    Equity means the borrower's total margins and equities computed 
pursuant to RUS accounting requirements but excluding any regulatory 
created assets.
    Financed or funded by RUS means financed or funded wholly or in part 
by a loan made or guaranteed by RUS, including concurrent supplemental 
loans required by 7 CFR 1710.110, loans to reimburse funds already 
expended by the borrower, and loans to replace interim financing.
    Interchange agreement means a contractual arrangement that can 
include a variety of services utilities provide each other to increase 
reliability and efficiency, and to avoid duplicating expenses. Some 
examples are: transmission service (the use of transmission lines to 
move power and energy from one area to another); emergency service (an 
agreement by one utility to furnish another with power and energy to 
protect it in times of emergency, such as power plant outages); reserve 
sharing (contributions to a common pool of generating plant reserves so 
that each individual utility's reserves can be reduced); and economic 
exchanges (swapping power and energy from different plants to avoid 
running the most expensive units).
    Interconnection agreement means a contract governing the terms for 
establishing or using one or more electrical connections between two or 
more electric systems permitting a flow of power and energy among the 
systems.
    Loan documents means the mortgage (or other security instrument 
acceptable to RUS), the loan contract, and the promissory note entered 
into between the borrower and RUS.
    Net utility plant means the amount constituting the total utility 
plant of the borrower, less depreciation, computed in accordance with 
RUS accounting requirements.
    Pooling agreement means a contract among two or more interconnected

[[Page 161]]

electric systems to operate on a coordinated basis to achieve economies 
and/or enhance reliability in supplying their respective loads.
    Power supply contract means any contract entered into by a borrower 
for the sale or purchase, at wholesale, of electric energy.
    Regulatory created assets means the sum of any amounts properly 
recordable as unrecovered plant and regulatory study costs or as other 
regulatory assets, computed pursuant to RUS accounting requirements.
    RUS accounting requirements means the system of accounts prescribed 
for electric borrowers by RUS regulations as such RUS accounting 
requirements exist at the date of applicability thereof.
    RUS regulations mean regulations of general applicability published 
by RUS from time to time as they exist at the date of applicability 
thereof, and shall also include any regulations of other federal 
entities which RUS is required by law to implement.
    Total assets means an amount constituting the total assets of the 
borrower as computed pursuant to RUS accounting requirements, but 
excluding any regulatory created assets.
    Wheeling agreement means a contract providing for the use of the 
electric transmission facilities of one electric utility to transmit 
power and energy of another electric utility or other entity to a third 
party. Such transmission may be accomplished directly or by 
displacement.



Sec. 1717.603  RUS approval of extensions and additions.

    (a) Distribution borrowers. Prior written approval by RUS is 
required for a distribution borrower to extend or add to its electric 
system if the extension or addition will be financed by RUS. For 
extensions and additions that will not be financed by RUS, approval is 
hereby given to distribution borrowers to make such extensions and 
additions to their electric systems, including the use of (or commitment 
to use) general funds of the borrower, except for the following:
    (1) Construction, procurement, or leasing of generating facilities 
if the combined capacity of the facilities to be built, procured, or 
leased, including any future facilities included in the planned project, 
will exceed the lesser of 5 megawatts or 30 percent of the borrower's 
equity;
    (2) Acquisition or leasing of existing electric facilities or 
systems in service whose purchase price, or capitalized value in the 
case of a lease, exceeds 10 percent of the borrower's net utility plant; 
and
    (3) Construction, procurement, or leasing of electric facilities to 
serve a customer whose annual kWh purchases or maximum annual kW demand 
in the foreseeable future is projected to exceed 25 percent of the 
borrower's total kWh sales or maximum kW demand in the year immediately 
preceding the acquisition or start of construction.
    (b) Power supply borrowers. Prior written approval by RUS is 
required for a power supply borrower to extend or add to its electric 
system if the extension or addition will be financed by RUS. 
Requirements for RUS approval of extensions and additions that will not 
be financed by RUS are set forth in other RUS regulations.
    (c) Additional details. Additional details relating to RUS approval 
of extensions and additions of a borrower's electric system financed by 
RUS are set forth in other RUS regulations, e.g., in 7 CFR parts 1710 
and 1726.



Sec. 1717.604  Long-range engineering plans and construction work plans.

    (a) All borrowers are required to maintain up-to-date long-range 
engineering plans and construction work plans (CWPs) in form and 
substance as set forth in 7 CFR part 1710, subpart F.
    (b) Applications for financing from RUS must be supported by a long-
range engineering plan and CWP approved by RUS.
    (c) RUS approval is not required for long-range engineering plans 
and CWPs if the borrower does not intend to seek RUS financing for any 
of the facilities, equipment or other purposes included in those plans. 
However, if requested by RUS, a borrower must provide an informational 
copy of such plans to RUS.

[[Page 162]]



Sec. 1717.605  Design standards, plans and specifications, construction standards, and RUS accepted materials.

    All borrowers, regardless of the source of funding, are required to 
comply with applicable RUS requirements with respect to system design, 
construction standards, and the use of RUS accepted materials. Borrowers 
must comply with applicable RUS requirements with respect to plans and 
specifications only if the construction or procurement will be financed 
by RUS. These requirements are set forth in other RUS regulations, 
especially in 7 CFR parts 1724 and 1728.



Sec. 1717.606  Standard forms of construction contracts, and engineering 
and architectural services contracts.

    All borrowers are encouraged to use the standard forms of contracts 
promulgated by RUS for construction, materials, equipment, engineering 
services, and architectural services, regardless of the source of 
funding for such construction and services. Borrowers are required to 
use these standard forms of contracts only if the construction, 
procurement or services are financed by RUS, and only to the extent 
required by RUS regulations. RUS requirements with respect to such 
standard forms of contract are set forth in 7 CFR part 1724 for 
architectural and engineering services, and in 7 CFR part 1726 for 
construction, materials, and equipment.



Sec. 1717.607  Contract bidding requirements.

    Borrowers must follow RUS requirements regarding bidding for 
contracts for construction, materials, and equipment only if financing 
of the construction or procurement will be provided by RUS. These 
requirements are set forth in 7 CFR part 1726.



Sec. 1717.608  RUS approval of contracts.

    (a) Construction contracts and architectural and engineering 
contracts. RUS approval of contracts for construction and procurement 
and for architectural and engineering services is required only when 
such construction, procurement or services are financed by RUS. Detailed 
requirements regarding RUS approval of such contracts are set forth in 7 
CFR part 1724 for architectural and engineering services, and in 7 CFR 
part 1726 for construction and procurement.
    (b) Large retail power contracts. RUS approval of contracts to sell 
electric power to retail customers is required only if the contract is 
for longer than 2 years and the kWh sales or kW demand for any year 
covered by the contract exceeds 25 percent of the borrower's total kWh 
sales or maximum kW demand for the year immediately preceding execution 
of the contract. This requirement applies regardless of the source of 
funding of any plant extensions, additions or improvements that may be 
involved in connection with the contract.
    (c) Power supply arrangements. (1) Power supply contracts (including 
but not limited to economy energy sales and emergency power and energy 
sales), interconnection agreements, interchange agreements, wheeling 
agreements, pooling agreements, and any other similar power supply 
arrangements subject to approval by RUS are deemed approved if they have 
a term of 2 years or less. Amendments to said power supply arrangements 
are also deemed approved provided that the amendment does not extend the 
term of the arrangement for more than 2 years beyond the date of the 
amendment.
    (2) Any amendment to a schedule or exhibit contained in any power 
supply arrangement subject to RUS approval, which merely has the effect 
of either altering a list of interconnection or delivery points or 
changing the value of a variable term (but not the formula itself) 
contained in a formulary rate or charge is deemed approved.
    (3) The provisions of this paragraph (c) apply regardless of whether 
the borrower is a seller or purchaser of the services furnished by the 
contracts or arrangements, and regardless of whether or not a Federal 
power marketing agency is a party to any of them.
    (d) System management and maintenance contracts. RUS approval of 
contracts for the management and operation of a borrower's electric 
system or for the maintenance of the electric system is required only if 
such contracts cover all or substantially all of the electric system.

[[Page 163]]

    (e) Other contracts. [Reserved]



Sec. 1717.609  RUS approval of general manager.

    (a) If a borrower's mortgage or loan contract grants RUS the 
unconditioned right to approve the employment and/or the employment 
contract of the general manager of the borrower's system, such approval 
is hereby granted provided that the borrower is in compliance with all 
provisions of its loan documents and any other agreements with RUS.
    (b) If a borrower is in default with respect to any provision of its 
loan documents or any other agreement with RUS:
    (1) Such borrower, if directed in writing by RUS, shall replace its 
general manager within 30 days after the date of such written notice; 
and
    (2) Such borrower shall not hire a general manager without prior 
written approval by RUS.



Sec. 1717.610  RUS approval of compensation of the board of directors.

    If a borrower's mortgage or loan contract requires the borrower to 
obtain approval from RUS for compensation provided to members of the 
borrower's board of directors, such requirement is hereby waived.



Sec. 1717.611  RUS approval of expenditures for legal, accounting, engineering, and supervisory services.

    (a) If a borrower's mortgage or loan contract requires the borrower 
to obtain approval from RUS before incurring expenses for legal, 
accounting, supervisory (other than for the management and operation of 
the borrower's electric system, see Sec. 1717.608(d)), or other similar 
services, such approval is hereby granted. However, while expenditures 
for accounting do not require RUS approval, the selection of a certified 
public accountant by the borrower to prepare audited reports required by 
RUS remains subject to RUS approval.
    (b) If a borrower's mortgage or loan contract requires the borrower 
to obtain approval from RUS before incurring expenses for engineering 
services, such approval is hereby granted if such services will not be 
financed by RUS. Approval requirements with respect to engineering 
services financed by RUS are set forth in other RUS regulations.



Sec. 1717.612  RUS approval of borrower's bank or other depository.

    If a borrower's mortgage or loan contract gives RUS the authority to 
approve the bank or other depositories used by the borrower, such 
approval is hereby granted. However, without the prior written approval 
of RUS, a borrower shall not deposit funds from loans made or guaranteed 
by RUS in any bank or other depository that is not insured by the 
Federal Deposit Insurance Corporation or other Federal agency acceptable 
to RUS, or in any account not so insured.



Sec. 1717.613  RUS approval of data processing and system control equipment.

    If a borrower's mortgage or loan contract requires the borrower to 
obtain approval from RUS before purchasing data processing equipment or 
system control equipment, such approval is hereby granted if the 
equipment will not be financed by RUS.



Sec. 1717.614  Notification of rate changes.

    If a distribution borrower is required by its loan documents to 
notify RUS in writing of proposed changes in electric rates more than 30 
days prior to the effective date of such rates, the required 
notification period shall be 30 days. Moreover, such notification shall 
be required only upon the request of RUS.



Sec. 1717.615  Consolidations and mergers.

    A distribution or power supply borrower may without the prior 
approval of RUS, consolidate or merge with any other corporation or 
convey or transfer the mortgaged property substantially as an entirety 
if the following conditions are met:
    (a) Such consolidation, merger, conveyance or transfer shall be on 
such terms as shall fully preserve the lien and security of the RUS 
mortgage and the rights and powers of the mortgagees;
    (b) The entity formed by such consolidation or with which the 
borrower is merged or the corporation which acquires by conveyance or 
transfer the

[[Page 164]]

mortgaged property substantially as an entirety shall execute and 
deliver to the mortgagees a mortgage supplemental in recordable form and 
containing an assumption by such successor entity of the due and 
punctual payment of the principal of and interest on all of the 
outstanding notes and the performance and observance of every covenant 
and condition of the mortgage;
    (c) Immediately after giving effect to such transaction, no default 
under the mortgage shall have occurred and be continuing;
    (d) The borrower shall have delivered to the mortgagees a 
certificate of its general manager or other officer, in form and 
substance satisfactory to each of the mortgagees, which shall state that 
such consolidation, merger, conveyance or transfer and such supplemental 
mortgage comply with this section and that all conditions precedent 
herein provided for relating to such transaction have been complied 
with;
    (e) The borrower shall have delivered to the mortgagees an opinion 
of counsel in form and substance satisfactory to each of the mortgagees; 
and
    (f) The entity formed by such consolidation or with which the 
borrower is merged or the corporation which acquires by conveyance or 
transfer the mortgaged property substantially as an entirety shall be an 
entity having:
    (1) Equity equal to at least 27% of its total assets on a pro forma 
basis after giving effect to such transaction;
    (2) A pro forma TIER of not less than 1.25 and a pro forma DSC of 
not less than for each of the two preceding calendar years; and
    (3) Net utility plant equal to or greater than 1.0 times its total 
long-term debt on a pro forma basis.

[60 FR 67405, Dec. 29, 1995, as amended at 65 FR 51748, Aug. 25, 2000]



Sec. 1717.616  Sale, lease, or transfer of capital assets.

    A distribution borrower may without the prior approval of RUS sell, 
lease, or transfer any capital asset if the following conditions are 
met:
    (a) The borrower is not in default;
    (b) In the most recent year for which data are available, the 
borrower achieved a TIER of at least 1.25, DSC of at least 1.25, OTIER 
of at least 1.1, and ODSC of at least 1.1 in each case based on the 
average or the best 2 out of the 3 most recent years;
    (c) The sale, lease, or transfer of assets will not reduce the 
borrower's existing or future requirements for energy or capacity being 
furnished to the borrower under any wholesale power contract which has 
been pledged as security to the government;
    (d) Fair market value is obtained for the assets;
    (e) The aggregate value of assets sold, leased, or transferred in 
any 12-month period is less than 10 percent of the borrower's net 
utility plant prior to the transaction;
    (f) The proceeds of such sale, lease, or transfer, less ordinary and 
reasonable expenses incident to such transaction, are immediately:
    (1) Applied as a prepayment of all notes secured under the mortgage 
equally and ratably;
    (2) In the case of dispositions of equipment, materials or scrap, 
applied to the purchase of other property useful in the borrower's 
utility business; or
    (3) Applied to the acquisition of construction of utility plant.

[60 FR 67405, Dec. 29, 1995, as amended at 65 FR 51748, Aug. 25, 2000]



Sec. 1717.617  Limitations on distributions.

    If a distribution or power supply borrower is required by its loan 
documents to obtain prior approval from RUS before declaring or paying 
any dividends, paying or determining to pay any patronage refunds, or 
retiring any patronage capital, or making any other cash distributions, 
such approval is hereby given if the following conditions are met:
    (a) After giving effect to the distribution, the borrower's equity 
will be greater than or equal to 30 percent of its total assets;
    (b) The borrower is current on all payments due on all notes secured 
under the mortgage;
    (c) The borrower is not otherwise in default under its loan 
documents; and

[[Page 165]]

    (d) After giving effect to the distribution, the borrower's current 
and accrued assets will be not less than its current and accrued 
liabilities.



   Subpart N--Investments, Loans, and Guarantees by Electric Borrowers

    Authority: 7 U.S.C. 901-950b; Pub.L. 103-354, 108 Stat. 3178 (7 
U.S.C. 6941 et seq.); Title I, Subtitle D, Pub.L. 100-203, 101 Stat. 
1330.

    Source: 60 FR 48877, Sept. 21, 1995, unless otherwise noted.



Sec. 1717.650  Purpose.

    This subpart sets forth general regulations for implementing and 
interpreting provisions of the RUS mortgage and loan contract regarding 
investments, loans, and guarantees made by electric borrowers, as well 
as the provisions of the Rural Electrification Act of 1936, as amended, 
including section 312 (7 U.S.C. 901 et seq.) (RE Act), permitting, in 
certain circumstances, that electric borrowers under the RE Act may, 
without restriction or prior approval of the Administrator of the Rural 
Utilities Service (RUS), invest their own funds and make loans or 
guarantees.



Sec. 1717.651  General.

    (a) Policy. RUS electric borrowers are encouraged to utilize their 
own funds to participate in the economic development of rural areas, 
provided that such activity does not in any way put government funds at 
risk or impair a borrower's ability to repay its indebtedness to RUS and 
other lenders. In considering whether to make loans, investments, or 
guarantees, borrowers are expected to act in accordance with prudent 
business practices and in conformity with the laws of the jurisdictions 
in which they serve. RUS assumes that borrowers will use the latitude 
afforded them by section 312 of the RE Act primarily to make needed 
investments in rural community infrastructure projects (such as water 
and waste systems, garbage collection services, etc.) and in job 
creation activities (such as providing technical, financial, and 
managerial assistance) and other activities to promote business 
development and economic diversification in rural communities. 
Nonetheless, RUS believes that borrowers should continue to give primary 
consideration to safety and liquidity in the management of their funds.
    (b) Applicability of this subpart. This subpart applies to all 
distribution and power supply borrowers regardless of when their loan 
contract or mortgage was executed.



Sec. 1717.652  Definitions.

    As used in this subpart:
    Borrower means any organization that has an outstanding loan made or 
guaranteed by RUS for rural electrification.
    Cash-construction fund-trustee account means the account described 
in the Uniform System of Accounts as one to which funds are deposited 
for financing the construction or purchase of electric facilities.
    Distribution borrower means a Distribution Borrower as defined in 7 
CFR 1710.2.
    Electric system means all of the borrower's interests in all 
electric production, transmission, distribution, conservation, load 
management, general plant and other related facilities, equipment or 
property and in any mine, well, pipeline, plant, structure or other 
facility for the development, production, manufacture, storage, 
fabrication or processing of fossil, nuclear, or other fuel or in any 
facility or rights with respect to the supply of water, in each case for 
use, in whole or in major part, in any of the borrower's generating 
plants, including any interest or participation of the borrower in any 
such facilities or any rights to the output or capacity thereof, 
together with all lands, easements, rights-of-way, other works, 
property, structures, contract rights and other tangible and intangible 
assets of the borrower in each case used or useful in such electric 
system.
    Equity means the Margins and Equities of the borrower as defined in 
the Uniform System of Accounts, less regulatory created assets.
    Guarantee means to undertake collaterally to answer for the payment 
of another's debt or the performance of another's duty, liability, or 
obligation,

[[Page 166]]

including, without limitation, the obligations of subsidiaries. Some 
examples of such guarantees include guarantees of payment or collection 
on a note or other debt instrument (assuring returns on investments); 
issuing performance bonds or completion bonds; or cosigning leases or 
other obligations of third parties.
    Invest means to commit money in order to earn a financial return on 
assets, including, without limitation, all investments properly recorded 
on the borrower's books and records in investment accounts as those 
accounts are used in the Uniform System of Accounts for RUS Borrowers. 
Borrowers may submit any proposed transaction to RUS for an 
interpretation of whether the action is an investment for the purposes 
of this definition.
    Make loans means to lend out money for temporary use on condition of 
repayment, usually with interest.
    Mortgaged property means any asset of the borrower which is pledged 
in the RUS mortgage.
    Natural gas distribution system means any system of community 
infrastructure that distributes natural gas and whose services are 
available by design to all or a substantial portion of the members of 
the community.
    Operating DSC means Operating Debt Service Coverage (ODSC) of the 
borrower's electric system calculated as:
[GRAPHIC] [TIFF OMITTED] TR21SE95.001

where:

All amounts are for the same year and are based on the RUS system of 
accounts;

A=Depreciation and Amortization Expense of the electric system;
B=Interest on Long-term Debt of the electric system, except that 
Interest on Long-term Debt shall be increased by \1/3\ of the amount, if 
any, by which the rentals of Restricted Property of the electric system 
exceed 2 percent of Total Margins and Equities;
C=Patronage Capital & Operating Margins of the electric system 
(distribution borrowers) or Operating Margins of the electric system 
(power supply borrowers); and
D=Debt Service Billed (RUS + other) which equals all interest and 
principal billed or billable during the calendar year for long-term debt 
of the electric system plus \1/3\ of the amount, if any, by which the 
rentals of Restricted Property of the electric system exceed 2 percent 
of Total Margins and Equities. Unless otherwise indicated, all terms 
used in defining ODSC and OTIER are as defined in RUS Bulletin 1717B-2 
Instructions for the Preparation of the Financial and Statistical Report 
for Electric Distribution Borrowers, and RUS Bulletin 1717B-3 
Instructions for the Preparation of the Operating Report for Power 
Supply Borrowers and for Distribution Borrowers with Generating 
Facilities, or the successors to these bulletins.

    Operating TIER means Operating Times Interest Earned Ratio (OTIER) 
of the borrower's electric system calculated as:
[GRAPHIC] [TIFF OMITTED] TR21SE95.002

where:

All amounts are for the same year and are based on the RUS system of 
accounts;

A=Interest on Long-term Debt of the electric system, except that 
Interest on Long-term Debt shall be increased by 1/3 of the amount, if 
any, by which the rentals of Restricted Property of the electric system 
exceed 2 percent of Total Margins and Equities; and
B=Patronage Capital & Operating Margins of the electric system 
(distribution borrowers) or Operating Margins of the electric system 
(power supply borrowers).

    Own funds means money belonging to the borrower other than funds on 
deposit in the cash-construction fund-trustee account.
    Power supply borrower means a Power Supply Borrower as defined in 7 
CFR 1710.2.
    Regulatory created assets means the sum of the amounts properly 
recordable in Account 182.2 Unrecovered Plant and Regulatory Study 
Costs, and Account 182.3 Other Regulatory Assets of the Uniform System 
of Accounts.
    RUS means the Rural Utilities Service, an agency of the U.S. 
Department of Agriculture established pursuant to Section 232 of the 
Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178, 7 U.S.C. 
6941 et seq.) and, for purposes of this subpart, includes its 
predecessor, the Rural Electrification Administration.
    RUS loan contract means the loan contract between the borrower and 
RUS.

[[Page 167]]

    RUS mortgage means any and all instruments creating a lien on or 
security interest in the borrower's assets in connection with loans or 
guarantees under the RE Act.
    Solid waste disposal system means any system of community 
infrastructure that provides collection and/or disposal of solid waste 
and whose services are available by design to all or a substantial 
portion of the members of the community.
    Subsidiary means a company which is controlled by the borrower 
through ownership of voting stock, and is further defined in 7 CFR 
1767.10.
    Supplemental lender means a lender that has provided a supplemental 
source of financing that is secured by the RUS mortgage.
    Telecommunication and other electronic communication system means 
any community infrastructure that provides telecommunication or other 
electronic communication services and whose services are available by 
design to all or a substantial portion of the members of the community.
    Total assets means the total assets of the borrower as calculated 
according to the Uniform System of Accounts, less regulatory created 
assets.
    Total utility plant means the sum of the borrower's Electric Plant 
Accounts and Construction Work in Progress--Electric Accounts, as such 
terms are used in the Uniform System of Accounts.
    Uniform System of Accounts means the system of accounts prescribed 
for RUS borrowers in 7 CFR part 1767.
    Water and waste disposal system means any system of community 
infrastructure that supplies water and/or collects and treats waste 
water and whose services are available by design to all or a substantial 
portion of the members of the community.



Sec. 1717.653  Borrowers in default.

    Any borrower not in compliance with all provisions of its mortgage, 
loan contract, or any other agreements with RUS must, unless the 
borrower's mortgage, loan contract, or other agreement with RUS 
specifically provides otherwise with respect to such a borrower:
    (a) Obtain prior written approval from the Administrator to invest 
its own funds or to make loans or guarantees regardless of the aggregate 
amount of such investments, loans, or guarantees; and
    (b) If requested by the Administrator, restructure or reduce the 
amount of its investments, loans, and guarantees to a level determined 
by the Administrator, in his or her sole discretion, to be in the 
financial interest of the government with respect to loan security and/
or repayment. If the borrower does not so restructure or reduce its 
portfolio within a reasonable period of time determined by the 
Administrator, which shall not exceed 12 months from the date the 
borrower was notified of the required action, then, upon written notice 
from RUS, the borrower shall be in default of its RUS loan contract and 
mortgage.



Sec. 1717.654  Transactions below the 15 percent level.

    (a) A borrower in compliance with all provisions of its RUS 
mortgage, RUS loan contract, and any other agreements with RUS may, 
without prior written approval of the Administrator, invest its own 
funds or make loans or guarantees not in excess of 15 percent of its 
total utility plant without regard to any provision contained in any RUS 
mortgage or RUS loan contract to the effect that the borrower must 
obtain prior approval from RUS, provided, however, that the borrower may 
not, without the prior written approval of the Administrator, make such 
investments, loans, and guarantees to extend, add to, or modify its 
electric system. Moreover, funds necessary to make timely payments of 
principal and interest on loans secured by the RUS mortgage remain 
subject to RUS controls on borrower investments, loans and guarantees.
    (b) RUS will not consider requests from borrowers to exclude 
investments, loans, or guarantees made below the 15 percent level. 
(Categorical exclusions are set forth in Sec. 1717.655.)

[[Page 168]]



Sec. 1717.655  Exclusion of certain investments, loans, and guarantees.

    (a) In calculating the amount of investments, loans and guarantees 
permitted under this subpart, there is excluded from the computation any 
investment, loan or guarantee of the type which by the terms of the 
borrower's RUS mortgage or RUS loan contract the borrower may make in 
unlimited amounts without RUS approval.
    (b) Furthermore, the borrower may make unlimited investments, 
without prior approval of the Administrator, in:
    (1) Securities or deposits issued, guaranteed or fully insured as to 
payment by the United States Government or any agency thereof;
    (2) Capital term certificates, bank stock, or other similar 
securities of the supplemental lender which have been purchased as a 
condition of membership in the supplemental lender, or as a condition of 
receiving financial assistance from such lender, as well as any other 
investment made in, or loans made to, the National Rural Utilities 
Cooperative Finance Corporation, the Saint Paul Bank for Cooperatives, 
and CoBank, ACB;
    (3) Patronage capital allocated from an electric power supply 
cooperative of which the borrower is a member; and
    (4) Patronage capital allocated from an electric distribution 
cooperative to a power supply borrower.
    (c) Without prior approval of the Administrator, the borrower may 
also:
    (1) Invest or lend funds derived directly from:
    (i) Grants which the borrower in not obligated to repay, regardless 
of the source or purpose of the grant; and
    (ii) Loans received from or guaranteed by any Federal, State or 
local government program designed to promote rural economic development, 
provided that the borrower uses the loan proceeds for such purpose;
    (2) Make loans guaranteed by an agency of USDA, up to the amount of 
principal whose repayment, with interest, is fully guaranteed; and
    (3)(i) Make unlimited investments in and unlimited loans to finance 
the following community infrastructure that serves primarily consumers 
located in rural areas as defined in 7 CFR 1710.2, and guarantee debt 
issued for the construction or acquisition of such infrastructure, up to 
an aggregate amount of such guarantees not to exceed 20 percent of the 
borrower's equity:
    (A) Water and waste disposal systems;
    (B) Solid waste disposal systems;
    (C) Telecommunication and other electronic communication systems; 
and
    (D) Natural gas distribution systems.
    (ii) In each of the four cases in paragraph (c)(3)(i) of this 
section, if the system is a component of a larger organization other 
than the borrower itself (e.g., if it is a component of a subsidiary of 
the borrower or a corporation independent of the borrower), to be 
eligible for the exemption the borrower must certify annually that a 
majority of the gross revenues of the larger organization during the 
most recent fiscal year came from customers of said system who were 
located in a rural area.
    (d) Also excluded from the calculation of investments, loans and 
guarantees made by the borrower are:
    (1) Amounts properly recordable in Account 142 Customer Accounts 
Receivable, and Account 143 Other Accounts Receivable;
    (2) Any investment, loan, or guarantee that the borrower is required 
to make by an agency of USDA, for example, as a condition of obtaining 
financial assistance for itself or any other person or organization;
    (3) Investments included in an irrevocable trust for the purpose of 
funding post-retirement benefits of the borrower's employees;
    (4) Reserves required by a reserve bond agreement or other agreement 
legally binding on the borrower, that are dedicated to making required 
payments on debt secured under the RUS mortgage, not to exceed the 
amount of reserves specifically required by such agreements; and
    (5) Investments included in an irrevocable trust approved by RUS and 
dedicated to the payment of decommissioning costs of nuclear facilities 
of the borrower.
    (e) Grandfathered exclusions. All amounts of individual investments, 
loans, and guarantees excluded by RUS

[[Page 169]]

as of February 16, 1995 shall remain excluded. Such exclusions must have 
been based on the RUS mortgage, RUS loan contract, regulations, 
bulletins, memoranda, or other written notice from RUS. Profits, 
interest, and other returns earned (regardless of whether or not they 
are reinvested) on such investments, loans and guarantees after February 
16, 1995 shall be excluded only if they are eligible for exclusion under 
paragraphs (a) through (d) of this section. Any new commitments of money 
to such investments, loans and guarantees shall likewise be excluded 
only if they are eligible under paragraphs (a) through (d) of this 
section.
    (f) Any investment, loan or guarantee made by a borrower that is not 
excluded under this section or under Sec. 1717.657(d) shall be included 
in the aggregate amount of investments, loans and guarantees made by the 
borrower, regardless of whether RUS has specifically approved the 
investment, loan or guarantee under Sec. 1717.657(c), or has approved a 
related transaction (e.g., a lien accommodation).



Sec. 1717.656  Exemption of certain borrowers from controls.

    (a) Any distribution or power supply borrower that meets all of the 
following criteria is exempted from the provisions of the RUS mortgage 
and loan contract that require RUS approval of investments, loans, and 
guarantees, except investments, loans, and guarantees made to extend, 
add to, or modify the borrower's electric system:
    (1) The borrower is in compliance with all provisions of its RUS 
mortgage, RUS loan contract, and any other agreements with RUS;
    (2) The average revenue per kWh for residential service received by 
the borrower during the two most recent calendar years does not exceed 
130 percent of the average revenue per kWh for residential service 
during the same period for all residential consumers located in the 
state or states served by the borrower. This criterion applies only to 
distribution borrowers and does not apply to power supply borrowers. If 
a borrower serves customers in more than one state, the state average 
revenue per kWh will be based on a weighted average using the kWh sales 
by the borrower in each state as the weight. The calculation will be 
based on the two most recent calendar years for which both borrower and 
state-wide data are available. If a borrower fails to qualify for an 
exemption based solely on its failure to meet this criterion on rate 
disparity, at the borrower's request the Administrator may, at his or 
her sole discretion, exempt the borrower if he or she finds that the 
borrower's strengths with respect to the other criteria are sufficient 
to offset any weakness due to rate disparity;
    (3) In the most recent calendar year for which data are available, 
the borrower achieved an operating TIER of at least 1.0 and an operating 
DSC of at least 1.0, in each case based on the average of the two 
highest ratios achieved in the three most recent calendar years;
    (4) The borrower's ratio of net utility plant to long-term debt is 
at least 1.1, based on year-end data for the most recent calendar year 
for which data are available; and
    (5) The borrower's equity is equal to at least 27 percent of its 
total assets, based on year-end data for the most recent calendar year 
for which data are available.
    (b) While borrowers meeting the criteria in paragraph (a) of this 
section are exempt from RUS approval of investments, loans and 
guarantees, they are nevertheless subject to the record-keeping, 
reporting, and other requirements of Sec. 1717.658.
    (c) Any borrower exempt under paragraph (a) of this section that 
ceases to meet the criteria for exemption shall, upon written notice 
from RUS, no longer be exempt and shall be subject to the provisions of 
this subpart applicable to non-exempt borrowers. A borrower may regain 
its exemption if it subsequently meets the criteria in paragraph (a) of 
this section, and is so notified in writing by RUS.
    (d)(1) A borrower that loses its exemption and is not in compliance 
with all provisions of its mortgage, loan contract, or any other 
agreement with RUS may be required to restructure or reduce its 
portfolio of investments, loans and guarantees as provided in 
Sec. 1717.653(b). If the borrower's portfolio

[[Page 170]]

exceeds the 15 percent level, the borrower will be required to 
restructure or reduce its portfolio to the 15 percent level or below. 
For example, if the borrower's mortgage or loan contract has an approval 
threshold, the borrower may be required to reduce its portfolio to that 
level, which in many cases is 3 percent of total utility plant.
    (2) A borrower that loses its exemption but is in compliance with 
all provisions of its mortgage, loan contract, and any other agreements 
with RUS will be required, if its investments, loans and guarantees 
exceed the 15 percent level, to restructure or reduce its portfolio to 
the 15 percent level, unless the Administrator, in his or her sole 
discretion, determines that such action would not be in the financial 
interest of the government with respect to loan security and/or 
repayment. (Such borrower is eligible to ask RUS to exclude a portion of 
its investments under the conditions set forth in Sec. 1717.657(d).)
    (3) If a borrower required to reduce or restructure its portfolio 
does not fully comply within a reasonable period of time determined by 
the Administrator, which shall not exceed 12 months from the date the 
borrower was notified of its loss of exemption, then, upon written 
notice from RUS, the borrower shall be in default of its RUS loan 
contract and/or RUS mortgage.
    (e) By no later than July 1 of each year, RUS will provide written 
notice to any borrowers whose exemption status has changed as a result 
of more recent data being available for the qualification criteria set 
forth in paragraph (a) of this section, or as a result of other reasons, 
such as corrections in the available data. An explanation of the reasons 
for any changes in exemption status will also be provided to the 
borrowers affected.



Sec. 1717.657  Investments above the 15 percent level by certain borrowers 
not exempt under Sec. 1717.656(a).

    (a) General. (1) This section applies only to borrowers that are in 
compliance with all provisions of their mortgage, loan contract, and any 
other agreements with RUS and that do not qualify for an exemption from 
RUS investment controls under Sec. 1717.656(a).
    (2) Nothing in this section shall in any way affect the 
Administrator's authority to exercise approval rights over investments, 
loans, and guarantees made by a borrower that is not in compliance with 
all provisions of its mortgage, loan contract and any other agreements 
with RUS.
    (b) Distribution borrowers. Distribution borrowers not exempt from 
RUS investment controls under Sec. 1717.656(a) may not make investments, 
loans and guarantees in an aggregate amount in excess of 15 percent of 
total utility plant. Above the 15 percent level, such borrowers will be 
restricted to excluded investments, loans and guarantees as defined in 
Sec. 1717.655. (However, they are eligible to ask RUS to exclude a 
portion of their investments under the conditions set forth in paragraph 
(d) of this section.)
    (c) Power supply borrowers. (1) Power supply borrowers not exempt 
from RUS investment controls under Sec. 1717.656(a) may request approval 
to exceed the 15 percent level if all of the following criteria are met:
    (i) Satisfactory evidence has been provided that the borrower is in 
compliance with all provisions of its RUS mortgage, RUS loan contract, 
and any other agreements with RUS;
    (ii) The borrower is not in financial workout and has not had its 
government debt restructured;
    (iii) The borrower has equity equal to at least 5 percent of its 
total assets; and
    (iv) After approval of the investment, loan or guarantee, the 
aggregate of the borrower's investments, loans and guarantees will not 
exceed 20 percent of the borrower's total utility plant.
    (2) Borrower requests for approval to exceed the 15 percent level 
will be considered on a case by case basis. The requests must be made in 
writing.
    (3) In considering borrower requests, the Administrator will take 
the following factors into consideration:
    (i) The repayment of all loans secured under the RUS mortgage will 
continue to be assured, and loan security must continue to be reasonably 
adequate, even if the entire investment or loan is lost or the borrower 
is required to perform for the entire amount of the guarantee. These 
risks

[[Page 171]]

will be considered along with all other risks facing the borrower, 
whether or not related to the investment, loan or guarantee;
    (ii) In the case of investments, the investment must be made in an 
entity separate from the borrower, such as a subsidiary, whereby the 
borrower is protected from any liabilities incurred by the separate 
entity, unless the borrower demonstrates to the satisfaction of the 
Administrator that making the investment directly rather than through a 
separate entity will present no substantial risk to the borrower in 
addition to the possibility of losing all or part of the original 
investment;
    (iii) The borrower must be economically and financially sound as 
indicated by its costs of operation, competitiveness, operating TIER and 
operating DSC, physical condition of the plant, ratio of equity to total 
assets, ratio of net utility plant to long-term debt, and other factors; 
and
    (iv) Other factors affecting the security and repayment of 
government debt, as determined by the Administrator on a case by case 
basis.
    (4) If the Administrator approves an investment, loan or guarantee, 
such investment, loan or guarantee will continue to be included when 
calculating the borrower's ratio of aggregate investments, loans and 
guarantees to total utility plant.
    (d) Distribution and power supply borrowers. If the aggregate of the 
investments, loans and guarantees of a distribution or power supply 
borrower exceeds 15 percent of the borrower's total utility plant as a 
result of the cumulative profits or margins, net of losses, earned on 
said transactions over the past 10 calendar years (i.e., the sum of all 
profits earned during the 10 years on all transactions--including 
interest earned on cash accounts, loans, and similar transactions--less 
the sum of all losses experienced on all transactions during the 10 
years) then:
    (1) The borrower will not be in default of the RUS loan contract or 
RUS mortgage with respect to required approval of investments, loans and 
guarantees, provided that the borrower had not made additional net 
investments, loans or guarantees without approval after reaching the 15 
percent level; and
    (2) At the request of the borrower, the Administrator in his or her 
sole discretion may decide to exclude up to the amount of net profits or 
margins earned on the borrower's investments, loans and guarantees 
during the past 10 calendar years, if the Administrator determines that 
such exclusion will not increase loan security risks. The borrower must 
provide documentation satisfactory to the Administrator as to the 
current status of its investments, loans and guarantees and the net 
profits earned during the past 10 years. Any exclusion approved by the 
Administrator may or may not reduce the level of investments, loans and 
guarantees to or below the 15 percent level. If such exclusion does not 
reduce the level to or below the 15 percent level, RUS will notify the 
borrower in writing that it must reduce or restructure its investments, 
loans and guarantees to a level of not more than 15 percent of total 
utility plant. If the borrower does not come within the 15 percent level 
within a reasonable period of time determined by the Administrator, 
which shall not exceed 12 months from the date the borrower was notified 
of the required action, then, upon written notice from RUS, the borrower 
shall be in default of its RUS loan contract and mortgage.



Sec. 1717.658  Records, reports and audits.

    (a) Every borrower shall maintain accurate records concerning all 
investments, loans and guarantees made by it. Such records shall be kept 
in a manner that will enable RUS to readily determine:
    (1) The nature and source of all income, expenses and losses 
generated from the borrower's loans, guarantees and investments;
    (2) The location, identity and lien priority of any loan collateral 
resulting from activities permitted by this subpart; and
    (3) The effects, if any, which such activities may have on the 
feasibility of loans made, guaranteed or lien accommodated by RUS.
    (b) In determining the aggregate amount of investments, loans and 
guarantees made by a borrower, the borrower shall use the recorded value 
of each investment, loan or guarantee as reflected on its books and 
records

[[Page 172]]

for the next preceding end-of-month, except for the end-of-year report 
which shall be based on December 31 information. Every borrower shall 
also report annually to RUS, in the manner and on the form specified by 
the Administrator, the current status of each investment, outstanding 
loan and outstanding guarantee which it has made pursuant to this 
subpart.
    (c) The records of borrowers shall be subject to the auditing 
procedures prescribed in part 1773 of this chapter. RUS reserves the 
right to review the financial records of any subsidiaries of the 
borrower to determine if the borrower is in compliance with this 
subpart, and to ascertain if the debts, guarantees (as defined in this 
subpart), or other obligations of the subsidiaries could adversely 
affect the ability of the borrower to repay its debts to the Government.
    (d) RUS will monitor borrower compliance with this subpart based 
primarily on the annual financial and statistical report submitted by 
the borrower to RUS and the annual auditor's report on the borrower's 
operations. However, RUS may inspect the borrower's records at any time 
during the year to determine borrower compliance. If a borrower's most 
recent annual financial and statistical report shows the aggregate of 
the borrower's investments, loans and guarantees to be below the 15 
percent level, that in no way relieves the borrower of its obligation to 
comply with its RUS mortgage, RUS loan contract, and this subpart with 
respect to Administrator approval of any additional investment, loan or 
guarantee that would cause the aggregate to exceed the 15 percent level.



Sec. 1717.659  Effect of this subpart on RUS loan contract and mortgage.

    (a) Nothing in this subpart shall affect any provision, covenant, or 
requirement in the RUS mortgage, RUS loan contract, or any other 
agreement between a borrower and RUS with respect to any matter other 
than the prior approval by RUS of investments, loans, and guarantees by 
the borrower, such matters including, without limitation, extensions, 
additions, and modifications of the borrower's electric system. Also, 
nothing in this subpart shall affect any rights which supplemental 
lenders have under the RUS mortgage, or under their loan contracts or 
other agreements with their borrowers, to limit investments, loans and 
guarantees by their borrowers to levels below 15 percent of total 
utility plant.
    (b) RUS will require that any electric loan made or guaranteed by 
RUS after October 23, 1995 shall be subject to a provision in the loan 
contract or mortgage restricting investments, loans and guarantees by 
the borrower substantially as follows: The borrower shall not make any 
loan or advance to, or make any investment in, or purchase or make any 
commitment to purchase any stock, bonds, notes or other securities of, 
or guaranty, assume or otherwise become obligated or liable with respect 
to the obligations of, any other person, firm or corporation, except as 
permitted by the RE Act and RUS regulations.
    (c) RUS reserves the right to change the provisions of the RUS 
mortgage and loan contract relating to RUS approval of investments, 
loans and guarantees made by the borrower, on a case-by-case basis, in 
connection with providing additional financial assistance to a borrower 
after October 23, 1995.

Subpart O [Reserved]



Secs. 1717.700-1717.749  [Reserved]

Subpart P [Reserved]



Secs. 1717.750-1717.799  [Reserved]

Subpart Q [Reserved]



Secs. 1717.800-1717.849  [Reserved]



   Subpart R--Lien Accommodations and Subordinations for 100 Percent 
                            Private Financing

    Source: 58 FR 53843, Oct. 19, 1993, unless otherwise noted.

[[Page 173]]



Sec. 1717.850  General.

    (a) Scope and applicability. (1) This subpart R establishes policies 
and procedures for the accommodation, subordination or release of the 
Government's lien on borrower assets, including approvals of supporting 
documents and related loan security documents, in connection with 100 
percent private sector financing of facilities and other purposes. 
Policies and procedures regarding lien accommodations for concurrent 
supplemental financing required in connection with an RUS insured loan 
are set forth in subpart S of this part.
    (2) This subpart and subpart S of this part apply only to debt to be 
secured under the mortgage, the issuance of which is subject to the 
approval of the Rural Utilities Service (RUS) by the terms of the 
borrower's mortgage with respect to the issuance of additional debt or 
the refinancing or refunding of debt. If RUS approval is not required 
under such terms of the mortgage itself, a lien accommodation is not 
required. If the loan contract or other agreement between the borrower 
and RUS requires RUS approval with respect to the issuance of debt or 
making additions to or extensions of the borrower's system, such 
required approvals do not by themselves result in the need for a lien 
accommodation.
    (b) Overall policy. (1) Consistent with prudent lending practices, 
the maintenance of adequate security for RUS's loans, and the objectives 
of the Rural Electrification Act (RE Act), it is the policy of RUS to 
provide effective and timely assistance to borrowers in obtaining 
financing from other lenders by sharing RUS's lien on a borrower's 
assets in order to finance electric facilities, equipment and systems, 
and certain other types of community infrastructure. In certain 
circumstances, RUS may facilitate the financing of such assets by 
subordinating its lien on specific assets financed by other lenders.
    (2) It is also the policy of RUS to provide effective and timely 
assistance to borrowers in promoting rural development by subordinating 
RUS's lien for financially sound rural development investments under the 
conditions set forth in Sec. 1717.858.
    (c) Decision factors. In determining whether to accommodate, 
subordinate, or release its lien on property pledged by the borrower 
under the RUS mortgage, RUS will consider the effects of such action on 
the achievement of the purposes of the RE Act, the repayment and 
security of RUS loans secured by the mortgage, and other factors set 
forth in this subpart. The following factors will be considered in 
assessing the effects on the repayment and security of RUS loans:
    (1) The value of the added assets compared with the amount of new 
debt to be secured;
    (2) The value of the assets already pledged under the mortgage, and 
any effects of the proposed transaction on the value of those assets;
    (3) The ratio of the total outstanding debt secured under the 
mortgage to the value of all assets pledged as security under the 
mortgage;
    (4) The borrower's ability to repay debt owed to the Government, as 
indicated by the following factors:
    (i) Revenues, costs (including interest, lease payments and other 
debt service costs), margins, Times Interest Earned Ratio (TIER), Debt 
Service Coverage (DSC), and other case-specific economic and financial 
factors;
    (ii) The variability and uncertainty of future revenues, costs, 
margins, TIER, DSC, and other case-specific economic and financial 
factors;
    (iii) Future capital needs and the ability of the borrower to meet 
those needs at reasonable cost;
    (iv) The ability of the borrower's management to manage and control 
its system effectively and plan for future needs; and
    (5) Other factors that may be relevant in individual cases, as 
determined by RUS.
    (d) Environmental considerations. Under certain circumstances, such 
as when the project does not qualify for a categorical exclusion, the 
environmental requirements of 7 CFR part 1794 may apply to applications 
for lien accommodations, subordinations, and releases.
    (e) Co-mortgagees. Other mortgagees under existing mortgages shared 
with

[[Page 174]]

RUS may have the right to approve requests for lien accommodations, 
subordinations and releases. In those cases, borrowers would have to 
obtain the approval of such mortgagees in order for the lien of the 
mortgage to be accommodated, subordinated or released. Any reference in 
this subpart to waiving by RUS of any of its rights under the mortgage 
shall apply only to the rights of RUS and shall not apply to the rights 
of any other co-mortgagee.
    (f) Safety and performance standards. (1) To be eligible for a lien 
accommodation or subordination from RUS, a borrower must comply with RUS 
standards regarding facility and system planning and design, 
construction, procurement, and the use of materials accepted by RUS, as 
required by the borrower's mortgage, loan contract, or other agreement 
with RUS, and as further specified in RUS regulations.
    (2) RUS ``Buy American'' requirements shall not apply.
    (g) Advance of funds. (1) The advance of funds from 100 percent 
private loans lien accommodated or subordinated by RUS will not be 
subject to RUS approval. It is the private lender's responsibility to 
adopt reasonable measures to ensure that such loan funds are used for 
the purposes for which the loan was made and the lien accommodation or 
subordination granted. RUS encourages lenders to adopt the following 
measures:
    (i) Remit loan advances to a separate subaccount of the Cash-
Construction Fund-Trustee Account;
    (ii) Obtain a certification from a registered professional engineer, 
for each year during which funds from the separate subaccount are 
utilized by the borrower, that all materials and equipment purchased and 
facilities constructed during the year from said funds comply with RUS 
safety and performance standards, as required by paragraph (f) of this 
section, and are included in an CWP or CWP amendment approved by the 
borrower's board of directors;
    (iii) Obtain an auditor's certification from a Certified Public 
Accountant, for each year during which funds are advanced to or remitted 
from the separate subaccount, certifying:
    (A) The amount of loan funds advanced to and remitted from the 
separate subaccount during the period of review;
    (B) That based on the auditor's review of construction work orders 
and other records, all moneys disbursed from the separate subaccount 
during the period of review were used for purposes contemplated in the 
loan agreement and the lien accommodation; and
    (iv) Immediately notify RUS in writing if the lender is unable to 
obtain the certifications cited in paragraphs (g)(1)(ii) and (g)(1)(iii) 
of this section.
    (2) The measures listed in paragraph (g)(1) of this section will 
normally be sufficient to meet the lender's responsibility provided that 
additional measures are not reasonably required based on the particular 
circumstances of an individual case. Should a lender fail to carry out 
its responsibility in the manner described in this paragraph (g) or in 
another manner acceptable to RUS, RUS may disqualify such lender from 
participation in advance approval under Sec. Sec. 1717.854 and 1717.857 
and condition the lender's receipt of a lien accommodation or 
subordination upon the lender providing satisfactory evidence that it 
will fulfill its responsibility under this paragraph (g).
    (h) Contracting and procurement procedures. (1) Facilities financed 
with debt obtained entirely from non-RUS sources, without an RUS loan 
guarantee, are not subject to RUS post-loan requirements regarding 
contracting, procurement and bidding procedures; contract close-out 
procedures pertaining to project completion, final payment of 
contractor, and related matters; and standard forms of construction and 
procurement contracts listed in 7 CFR 1726.300.
    (2) To the extent that provisions in a borrower's loan contract or 
mortgage in favor of RUS may be inconsistent with paragraphs (g)(1) and 
(h)(1) of this section, paragraphs (g)(1) and (h)(1) of this section are 
intended to constitute an approval or waiver under the terms of such 
instruments, and in any regulations implementing such instruments, with 
respect to facilities financed with debt obtained entirely from non-RUS 
sources without an RUS guarantee.

[[Page 175]]

    (i) Access of handicapped to buildings and seismic safety. A 
borrower must meet the following requirements to be eligible for a lien 
accommodation or subordination for 100 percent private financing of the 
construction of buildings:
    (1) The borrower must provide RUS with a certification by the 
project architect that the buildings will be designed and constructed in 
compliance with Section 504 of the Rehabilitation Act of 1973 as amended 
(29 U.S.C. 794), as applicable under that Act, and that the facilities 
will be readily accessible to and usable by persons with handicaps in 
accordance with the Uniform Federal Accessibility Standards (UFAS), 
(Appendix A to 41 CFR part 101.19, subpart 101-19.6). The certification 
must be included in the borrower's application for a lien accommodation 
or subordination. In addition to these requirements, building 
construction may also be subject to requirements of The Americans with 
Disabilities Act (42 U.S.C. 12101 et seq.); and
    (2) The borrower must comply with RUS's seismic safety requirements 
set forth in 7 CFR part 1792, subpart C.
    (j) Breach of warranty. Any breach of any warranty or agreement or 
any material inaccuracy in any representation, warranty, certificate, 
document, or opinion submitted pursuant to this subpart, including, 
without limitation, any agreement or representation regarding the use of 
funds from loans lien accommodated or subordinated pursuant to this 
subpart, shall constitute a default by the borrower under the terms of 
its loan agreement with RUS.
    (k) Guaranteed loans. The provisions of this subpart do not apply to 
lien accommodations or subordinations sought for loans guaranteed by 
RUS. Such lien accommodations and subordinations are governed by RUS 
regulations on guaranteed loans.
    (l) Release of lien. To avoid repetition, release of lien is not 
mentioned in every instance where it may be an acceptable alternative to 
subordination of RUS's lien. Generally, lien subordination is favored 
over release of lien, and any decision to release RUS's lien is at the 
sole discretion of RUS.
    (m) Waiver authority. Consistent with the RE Act and other 
applicable laws, any requirement, condition, or restriction imposed by 
this subpart, or subpart S of this part, on a borrower, private lender, 
or application for a lien accommodation or subordination may be waived 
or reduced by the Administrator, if the Administrator determines that 
said action is in the Government's financial interest with respect to 
ensuring repayment and reasonably adequate security for loans made or 
guaranteed by RUS.
    (n) Liability. It is the intent of this subpart that any failure on 
the part of RUS to comply with any provisions hereof, including without 
limitation, those provisions setting forth specified timeframes for 
action by RUS on applications for lien accommodations or lien 
subordinations, shall not give rise to liability of any kind on the part 
of the Government or any employees of the Government including, without 
limitation, liability for damages, fees, expenses or costs incurred by 
or on behalf of a borrower, private lender or any other party.

[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67408, Dec. 29, 1995]



Sec. 1717.851  Definitions.

    Terms used in this subpart have the meanings set forth in 7 CFR 
1710.2. References to specific RUS forms and other RUS documents, and to 
specific sections or lines of such forms and documents, shall include 
the corresponding forms, documents, sections and lines in any subsequent 
revisions of these forms and documents. In addition to the terms defined 
in 7 CFR 1710.2, the following terms have the following meanings for the 
purposes of this subpart:
    Borrower's financial and statistical report means RUS Form 7, Parts 
A through D, for distribution borrowers, and RUS Form 12a for power 
supply borrowers.
    Calendar day means any day of the year, except a Federal holiday 
that falls on a work day.
    Capital investment. For the purposes of Sec. 1717.860, capital 
investment means an original investment in an asset that is intended for 
long-term continued use

[[Page 176]]

or possession and, for accounting purposes, is normally depreciated or 
depleted as it is used. For example, such assets may include land, 
facilities, equipment, buildings, mineral deposits, patents, trademarks, 
and franchises. Original investments do not include refinancings or 
refundings.
    Current refunding means any refunding of debt where the proceeds of 
the new debt are applied to refund the old debt within 90 days of the 
issuance of the new debt.
    Default under the RUS mortgage, loan contract, restructuring 
agreement, or any other agreement between the borrower and RUS means any 
event of default or any event which, with the giving of notice or lapse 
of time or both, would become an event of default.
    Equity, less deferred expenses, means Line 33 of Part C of RUS Form 
7 less assets properly recordable in Account 182.2, Unrecovered Plant 
and Regulatory Study Costs, and Account 182.3, Other Regulatory Assets.
    Front-end costs means the reasonable cost of engineering, 
architectural, environmental and other studies and plans needed to 
support the construction of facilities and other investments eligible 
for a lien accommodation or subordination under this subpart.
    Lien accommodation means the sharing of the Government's (RUS's) 
lien on property, usually all property, covered by the lien of the RUS 
mortgage.
    Lien subordination means allowing another lender to take a first 
mortgage lien on certain property covered by the lien of the RUS 
mortgage, and the Government (RUS) taking a second lien on such 
property.
    Natural gas distribution system means any system of community 
infrastructure whose primary function is the distribution of natural gas 
and whose services are available by design to all or a substantial 
portion of the members of the community.
    Net utility plant means Part C, Line 5 of RUS Form 7 (distribution 
borrowers) or Section B, Line 5 of RUS Form 12a (power supply 
borrowers).
    Power cost study means the study defined in 7 CFR 1710.303.
    Solid waste disposal system means any system of community 
infrastructure whose primary function is the collection and/or disposal 
of solid waste and whose services are available by design to all or a 
substantial portion of the members of the community.
    Telecommunication and other electronic communication system means 
any system of community infrastructure whose primary function is the 
provision of telecommunication or other electronic communication 
services and whose services are available by design to all or a 
substantial portion of the members of the community.
    Total assets, less deferred expenses means Line 26 of Part C of RUS 
Form 7 less assets properly recordable in Account 182.2, Unrecovered 
Plant and Regulatory Study Costs, and Account 182.3, Other Regulatory 
Assets.
    Total outstanding long-term debt means Part C, Line 38 of RUS Form 
7.
    Transaction costs means the reasonable cost of legal advice, 
accounting fees, filing fees, recording fees, call premiums and 
prepayment penalties, financing costs (including, for example, 
underwriting commissions, letter of credit fees and bond insurance), and 
printing associated with borrower financing.
    Water and waste disposal system means any system of community 
infrastructure whose primary function is the supplying of water and/or 
the collection and treatment of waste water and whose services are 
available by design to all or a substantial portion of the members of 
the community.
    Weighted average life of the loan means the average life of the loan 
based on the proportion of original loan principal paid during each year 
of the loan. It shall be determined by calculating the sum of all loan 
principal payments, expressed as a fraction of the original loan 
principal amount, times the number of years and fractions of years 
elapsed at the time of each payment since issuance of the loan. For 
example, given a $5 million loan, with a maturity of 5 years and equal 
principal payments of $1 million due on the anniversary date of the 
loan, the weighted average life would be: (.2)(1 year) + (.2)(2 years) + 
(.2)(3 years) + (.2)(4 years) + (.2)(5 years) = .2 years + .4 years + .6 
years + .8 years + 1.0 years = 3.0 years.

[[Page 177]]

If instead the loan had a balloon payment of $5 million at the end of 5 
years, the weighted average life would be: ($5 million/$5 million)(5 
years) = 5 years.

[58 FR 53843, Oct. 19, 1993, as amended at 59 FR 3986, Jan. 28, 1994; 60 
FR 67409, Dec. 29, 1995]



Sec. 1717.852  Financing purposes.

    (a) Purposes eligible. The following financing purposes, except as 
excluded in paragraph (b) of this section, are eligible for a lien 
accommodation from RUS, or in certain circumstances a subordination of 
RUS's lien on specific assets, provided that all applicable provisions 
of this subpart are met:
    (1) The acquisition, construction, improvement, modification, and 
replacement (less salvage value) of systems, equipment, and facilities, 
including real property, used to supply electric and/or steam power to:
    (i) RE Act beneficiaries; and/or
    (ii) End-user customers of the borrower who are not beneficiaries of 
the RE Act. Such systems, equipment, and facilities include those listed 
in 7 CFR 1710.251(c) and 1710.252(c), as well as others that are 
determined by RUS to be an integral component of the borrower's system 
of supplying electric and/or steam power to consumers, such as, for 
example, coal mines, coal handling facilities, railroads and other 
transportation systems that supply fuel for generation, programs of 
demand side management and energy conservation, and on-grid and off-grid 
renewable energy systems;
    (2) The purchase, rehabilitation and integration of existing 
distribution facilities, equipment and systems, and associated service 
territory;
    (3) The following types of community infrastructure substantially 
located within the electric service territory of the borrower: water and 
waste disposal systems, solid waste disposal systems, telecommunication 
and other electronic communications systems, and natural gas 
distribution systems;
    (4) Front-end costs, when and as the borrower has obtained a binding 
commitment from the non-RUS lender for the financing required to 
complete the procurement or construction of the facilities;
    (5) Transaction costs included as part of the cost of financing 
assets or refinancing existing debt, provided, however, that the amount 
of transaction costs eligible for lien accommodation or subordination 
normally shall not exceed 5 percent of the principal amount of financing 
or refinancing provided, net of all transaction costs;
    (6) The refinancing of existing debt secured under the mortgage;
    (7) Interest during construction of generation and transmission 
facilities if approved by RUS, case by case, depending on the financial 
condition of the borrower, the terms of the financing, the nature of the 
construction, the treatment of these costs by regulatory authorities 
having jurisdiction, and such other factors deemed appropriate by RUS; 
and
    (8) Lien subordinations for certain rural development investments, 
as provided in Sec. 1717.858.
    (b) Purposes ineligible. The following financing purposes are not 
eligible for a lien accommodation or subordination from RUS:
    (1) Working capital, including operating funds, unless in the 
judgment of RUS the working capital is required to ensure the repayment 
of RUS loans and/or other loans secured under the mortgage;
    (2) Facilities, equipment, appliances, or wiring located inside the 
premises of the consumer, except:
    (i) Certain load-management equipment (see 7 CFR 1710.251(c));
    (ii) Renewable energy systems and RUS-approved programs of demand 
side management and energy conservation; and
    (iii) As determined by RUS on a case by case basis, facilities 
included as part of certain cogeneration projects to furnish electric 
and/or steam power to end-user customers of the borrower;
    (3) Investments in a lender required of the borrower as a condition 
for obtaining financing; and
    (4) Debt incurred by a distribution or power supply borrower to 
finance facilities, equipment or other assets that are not part of the 
borrower's electric system or one of the four community infrastructure 
systems cited in paragraph (a)(3) of this section, except for certain 
rural development investments

[[Page 178]]

eligible for a lien subordination under Sec. 1717.858.
    (c) Lien subordination for electric utility investments. RUS will 
consider subordinating its lien on specific electric utility assets 
financed by the lender, when the assets can be split off without 
materially reducing the stability, safety, reliability, operational 
efficiency, or liquidation value of the rest of the system.

[58 FR 53843, Oct. 19, 1993, as amended at 59 FR 3986, Jan. 28, 1994; 60 
FR 67409, Dec. 29, 1995]



Sec. 1717.853  Loan terms and conditions.

    (a) Terms and conditions. A loan, bond or other financing 
instrument, for which a lien accommodation or subordination is requested 
from RUS, must comply with the following terms and conditions:
    (1) The maturity of the loan or bond used to finance facilities or 
other capital assets must not exceed the weighted average of the 
expected remaining useful lives of the assets being financed;
    (2) The loan or bond must have a maturity of not less than 5 years, 
except for loans or bonds used to refinance debt that has a remaining 
maturity of less than 5 years;
    (3) The principal of the loan or bond must be amortized at a rate 
that will yield a weighted average life not greater than the weighted 
average life that would result from level payments of principal and 
interest; and
    (4) The loan, or any portion of the loan, may bear either a variable 
(set annually or more frequently) or a fixed interest rate.
    (b) RUS approval. Loan terms and conditions and the loan agreement 
between the borrower and the lender are subject to RUS approval. 
However, RUS will usually waive its right of approval for distribution 
borrowers that meet the conditions for advance approval of a lien 
accommodation or subordination set forth in Sec. 1717.854. RUS may also 
waive its right of approval in other cases. RUS's decision to waive its 
right of approval will depend on the adequacy of security for RUS's 
loans, the current and projected financial strength of the borrower and 
its ability to meet its financial obligations, RUS's familiarity with 
the lender and its lending practices, whether the transaction is 
ordinary or unusual, and the uncertainty and credit risks involved in 
the transaction.



Sec. 1717.854  Advance approval--100 percent private financing of distribution, subtransmission and headquarters facilities, and certain other community 
          infrastructure.

    (a) Policy. Requests for a lien accommodation or subordination from 
distribution borrowers for 100 percent private financing of 
distribution, subtransmission and headquarters facilities, and for 
community infrastructure listed in Sec. 1717.852(a)(3), qualify for 
advance approval by RUS if they meet the conditions of this section and 
all other applicable provisions of this subpart. Advance approval means 
RUS will approve these requests once RUS is satisfied that the 
conditions of this section and all other applicable provisions of this 
subpart have been met.
    (b) Eligible purposes. Lien accommodations or subordinations for the 
financing of distribution, subtransmission, and headquarters facilities 
and community infrastructure listed in Sec. 1717.852(a)(3) are eligible 
for advance approval, except those that involve the purchase of existing 
facilities and associated service territory.
    (c) Qualification criteria. To qualify for advance approval, the 
following requirements, as well as all other applicable requirements of 
this subpart, must be met:
    (1) The borrower has achieved a TIER of at least 1.25 and a DSC of 
at least 1.25 for each of 2 calendar years immediately preceding, or any 
2 consecutive 12 month periods ending within 180 days immediately 
preceding, the issuance of the debt;
    (2) The ratio of the borrower's equity, less deferred expenses, to 
total assets, less deferred expenses, is not less than 27 percent, after 
adding the principal amount of the proposed loan to the total assets of 
the borrower;
    (3) The borrower's net utility plant as a ratio to its total 
outstanding long-term debt is not less than 1.0, after adding the 
principal amount of the proposed loan to the existing outstanding long-
term debt of the borrower;

[[Page 179]]

    (4) There are no actions or proceedings against the borrower, 
pending or overtly threatened in writing before any court, governmental 
agency, or arbitrator that would materially adversely affect the 
borrower's operations and/or financial condition;
    (5) The borrower is current on all debt payments and all other 
financial obligations, and is not in default under the RUS mortgage, the 
RUS loan contract, the borrower's wholesale power contract, any debt 
restructuring agreement, or any other agreement with RUS;
    (6) The borrower has:
    (i) Submitted the annual auditor's report, report on compliance, 
report on internal controls, and management letter in accordance with 7 
CFR part 1773;
    (ii) Received an unqualified opinion in the most recent auditor's 
report;
    (iii) Resolved all material findings and recommendations made in the 
most recent Loan Fund and Accounting Review;
    (iv) Resolved all material findings and recommendations made in the 
most recent financial statement audit, including those material findings 
and recommendations made in the report on internal control, report on 
compliance, and management letter;
    (v) Resolved all outstanding material accounting issues with RUS; 
and
    (vi) Resolved any significant irregularities to RUS's satisfaction; 
and
    (7) If the borrower has a power supply contract with a power supply 
borrower, the power supply borrower is current on all debt payments and 
all other financial obligations, and is not in default under the RUS 
mortgage, the loan contract, any debt restructuring agreement, or any 
other agreement with RUS.
    (d) Right of normal review reserved. RUS reserves the right to 
review any request for lien accommodation or subordination under its 
normal review process rather than under advance approval procedures if 
RUS, in its sole discretion, determines there is reasonable doubt as to 
whether the requirements of paragraphs (b) and (c) of this section have 
been or will be met, or whether the borrower will be able to meet all of 
its present and future financial obligations.

[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67410, Dec. 29, 1995; 
65 FR 51748, Aug. 25, 2000]



Sec. 1717.855  Application contents: Advance approval--100 percent private 
financing of distribution, subtransmission and headquarters facilities, and 
certain other community infrastructure.

    Applications for a lien accommodation or subordination that meet the 
requirements of Sec. 1717.854 must include the following information and 
documents:
    (a) A certification by an authorized official of the borrower that 
the borrower and, as applicable, the loan are in compliance with all 
conditions set forth in Sec. 1717.854(c) and all applicable provisions 
of Secs. 1717.852 and 1717.853;
    (b) A resolution of the borrower's board of directors requesting the 
lien accommodation or subordination and including the amount and 
maturity of the proposed loan, a general description of the facilities 
or other purposes to be financed, the name and address of the lender, 
and an attached term sheet summarizing the terms and conditions of the 
proposed loan;
    (c) The borrower's financial and statistical report, the data in 
which shall not be more than 60 days old when the complete application 
is received by RUS;
    (d) Draft copy of any new mortgage or mortgage amendment 
(supplement) required by RUS or the lender, unless RUS has notified the 
borrower that it wishes to prepare these documents itself;
    (e) A copy of the loan agreement, loan note, bond or other financing 
instrument, unless RUS has notified the borrower that these documents 
need not be submitted;
    (f) Borrower's environmental report and/or other environmental 
documentation, if required by 7 CFR part 1794;
    (g) RUS Form 740c, Cost Estimates and Loan Budget for Electric 
Borrowers, and RUS Form 740g, Application for Headquarters Buildings;

[[Page 180]]

    (h) A CWP or CWP amendment covering the proposed project, in 
accordance with 7 CFR part 1710, subpart F, and subject to RUS approval, 
and a resolution of the borrower's board of directors adopting the CWP;
    (i) The certification by the project architect for any buildings to 
be constructed, as required by Sec. 1717.850(i);
    (j) A certification by an authorized official of the borrower that 
flood hazard insurance will be obtained for the full value of any 
buildings, or other facilities susceptible to damage if flooded, that 
will be located in a flood hazard area;
    (k) Form AD-1047, Certification Regarding Debarment, Suspension, and 
Other Responsibility Matters--Primary Covered Transactions, as required 
by 7 CFR part 3017;
    (l) A report by the borrower stating whether or not it is delinquent 
on any Federal debt, and if delinquent, the amount and age of the 
delinquency and the reasons therefor; and a certification, if not 
previously provided, that the borrower has been informed of the 
Government's collection options;
    (m) The written acknowledgement from a registered engineer or 
architect regarding compliance with seismic provisions of applicable 
model codes for any buildings to be constructed, as required by 7 CFR 
1792.104; and
    (n) Other information that RUS may require to determine whether all 
of the applicable provisions of this subpart have been met.

[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67410, Dec. 29, 1995]



Sec. 1717.856  Application contents: Normal review--100 percent private financing.

    Applications for a lien accommodation or subordination for 100 
percent private financing for eligible purposes that do not meet the 
requirements of Sec. 1717.854 must include the following information and 
documents:
    (a) A certification by an authorized official of the borrower that:
    (1) The borrower and, as applicable, the loan are in compliance with 
all applicable provisions of Secs. 1717.852 and 1717.853; and
    (2) There are no actions or proceedings against the borrower, 
pending or overtly threatened in writing before any court, governmental 
agency, or arbitrator that would materially adversely affect the 
borrower's operations and/or financial condition. If this certification 
cannot be made, the application must include:
    (i) An opinion of borrower's counsel regarding any actions or 
proceedings against the borrower, pending or overtly threatened in 
writing before any court, governmental agency, or arbitrator that would 
materially adversely affect the borrower's operations and/or financial 
condition. The opinion shall address the merits of the claims asserted 
in the actions or proceedings, and include, if appropriate, an estimate 
of the amount or range of any potential loss; and
    (ii) A certification by an authorized official of the borrower as to 
the amount of any insurance coverage applicable to any loss that may 
result from the actions and proceedings addressed in the opinion of 
borrower's counsel;
    (b) The information and documents set forth in Sec. 1717.855 (b) 
through (n);
    (c) A long-range financial forecast providing financial projections 
for at least 10 years, which demonstrates that the borrower's system is 
economically viable and that the proposed loan is financially feasible, 
and a resolution of the borrower's board of directors adopting the long-
range financial forecast. The financial forecast must comply with the 
requirements of 7 CFR part 1710 subpart G. RUS may, in its sole 
discretion, waive the requirement of this paragraph that a long range 
financial forecast be provided, if:
    (1) The borrower is current on all of its financial obligations and 
is in compliance with all requirements of its mortgage and loan 
agreement with RUS;
    (2) In RUS's judgment, granting a lien accommodation or 
subordination for the proposed loan will not adversely affect the 
repayment and security of outstanding debt of the borrower owed to or 
guaranteed by RUS;
    (3) The borrower has achieved the TIER and DSC and any other 
coverage ratios required by its mortgage or loan contract in each of the 
two most recent calendar years; and

[[Page 181]]

    (4) The amount of the proposed loan does not exceed the lesser of 
$10 million or 10 percent of the borrower's current net utility plant;
    (d) [Reserved]
    (e) As applicable to the type of facilities being financed, a CWP, 
related engineering and cost studies, a power cost study, and a 
resolution of the borrower's board of directors adopting these 
documents. These documents must meet the requirements of 7 CFR part 
1710, subpart F and, as applicable, subpart G;
    (f) Unless the requirement has been waived in writing by RUS, a 
current, RUS-approved power requirements study, which must meet the 
requirements of 7 CFR part 1710, subpart E, to the same extent as if the 
loan were being made by RUS, and a resolution of the borrower's board of 
directors adopting the study; and
    (g) A discussion of the borrower's compliance with RUS requirements 
on accounting, financial reporting, record keeping, and irregularities 
(see Sec. 1717.854(c)(5)). RUS will review the case and determine the 
effect of any noncompliance on the feasibility and security of RUS's 
loans, and whether the requested lien accommodation or subordination can 
be approved.

[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 3735, Jan. 19, 1995; 60 
FR 67410, Dec. 29, 1995]



Sec. 1717.857  Refinancing of existing secured debt--distribution and power supply borrowers.

    (a) Advance approval. All applications for a lien accommodation or 
subordination for the refinancing of existing secured debt that meet the 
qualification criteria of this paragraph, except applications from 
borrowers in default under their mortgage or loan contract with RUS, are 
eligible for advance approval. Such lien accommodations and 
subordinations are deemed to be in the Government's interest, and RUS 
will approve them once RUS is satisfied that the requirements of this 
paragraph and paragraph (c) of this section have been met. The 
qualification criteria are as follows:
    (1) The refinancing is a current refunding and does not involve 
interest rate swaps, forward delivery contracts, or similar features;
    (2) The principal amount of the refinancing loan does not exceed the 
sum of the outstanding principal amount of the debt being refinanced 
plus the amount of transactions costs included in the refinancing loan 
that are eligible for lien accommodation or subordination under 
Sec. 1717.852(a)(4);
    (3) The weighted average life of the refinancing loan is not greater 
than the weighted average remaining life of the loan being refinanced; 
and
    (4) The present value of the cost of the refinancing loan, including 
all transaction costs and any required investments in the lender, is 
less than the present value of the cost of the loan being refinanced, as 
determined by a method acceptable to RUS. The discount rate used in the 
present value analysis shall be equal to either:
    (i) The current rate on Treasury securities having a maturity equal 
to the weighted average life of the refunding loan, plus one-eighth 
percent, or
    (ii) A rate approved by RUS based on documentation provided by the 
borrower as to its marginal long-term borrowing cost.
    (b) Other applications. Applications for a lien accommodation or 
subordination for refinancing that do not meet the requirements of 
paragraph (a) of this section will be reviewed by RUS under normal 
review procedures for these applications. In the case of either advance 
approval or normal review, a lien subordination would be authorized only 
if the lien of the mortgage was subordinated with respect to the assets 
securing the loan being refinanced.
    (c) Application contents--advance approval of refinancing. 
Applications for a lien accommodation or subordination for refinancing 
of existing secured debt that meet the qualification criteria for 
advance approval set forth in paragraph (a) of this section, must 
include the following information and documents:
    (1) A certification by an authorized official of the borrower that 
the application meets the requirements of paragraph (a) of this section 
and all applicable provisions of Secs. 1717.852 and 1717.853;

[[Page 182]]

    (2) Documentation and analysis demonstrating that the application 
meets the qualification criteria set forth in paragraph (a) of this 
section;
    (3) A resolution of the borrower's board of directors requesting the 
lien accommodation or subordination and including the amount and 
maturity of the proposed loan, a general description of the debt to be 
refinanced, the name and address of the lender, and an attached term 
sheet summarizing the terms and conditions of the proposed loan;
    (4) The borrower's financial and statistical report, the data in 
which shall not be more than 60 days old when the complete application 
is received by RUS;
    (5) Draft copy of any new mortgage or mortgage amendment 
(supplement) required by RUS or the lender, unless RUS has notified the 
borrower that it wishes to prepare these documents itself;
    (6) A copy of the loan agreement, loan note, bond or other financing 
instrument, unless RUS has notified the borrower that these documents 
need not be submitted;
    (7) Form AD-1047, Certification Regarding Debarment, Suspension, and 
Other Responsibility Matters--Primary Covered Transactions, as required 
by 7 CFR part 3017;
    (8) A report by the borrower stating whether or not it is delinquent 
on any Federal debt, and if delinquent, the amount and age of the 
delinquency and the reasons therefor; and a certification, if not 
previously provided, that the borrower has been informed of the 
Government's collection options; and
    (9) Other information, documents and opinions that RUS may require 
to determine whether all of the applicable provisions of this subpart 
have been met.
    (d) Application contents--normal review of refinancing. Applications 
for a lien accommodation or subordination for refinancing of existing 
secured debt that do not meet the requirements for advance approval set 
forth in paragraph (a) of this section, must include the following 
information and documents:
    (1) The information and documents set forth in paragraphs (c)(3) 
through (9) of this section;
    (2) A complete description of the refinancing loan and the 
outstanding debt to be refinanced;
    (3) An analysis comparing the refinancing loan with the loan being 
refinanced as to the weighted average life and the net present value of 
the costs of the two loans; and
    (4) If the present value of the cost of the refinancing loan is 
greater than the present value of the cost of the debt being refinanced, 
financial forecasts for at least 5 years comparing the borrower's debt 
service and other costs, revenues, margins, cash flows, TIER, and DSC, 
with and without the proposed refinancing.
    (e) Application process and timeframes. The application process and 
timeframes for RUS review and action for refinancings are set forth in 
Sec. 1717.859(d).
    (f) Prepayments of concurrent RUS insured loans. If the loan being 
refinanced was made concurrently as supplemental financing required by 
RUS in connection with an RUS insured loan, the refinancing will not be 
considered a prepayment under the RUS mortgage, and no proportional 
prepayment of the concurrent RUS insured loan will be required, provided 
that the principal amount of the refinancing loan is not less than the 
amount of loan principal being refinanced, and the weighted average life 
of the refinancing loan is materially equal to the weighted average 
remaining life of the loan being refinanced. The refinancing loan shall 
be considered a concurrent loan.

[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67410, Dec. 29, 1995]



Sec. 1717.858  Lien subordination for rural development investments.

    (a) Policy. RUS encourages borrowers to consider investing in 
financially sound projects that are likely to have a positive effect on 
economic development and employment in rural areas. In addition to the 
guidance set forth in Sec. 1717.651, RUS recommends that such 
investments be made through a subsidiary of the borrower in order to 
clearly separate the financial risks and

[[Page 183]]

the revenues and costs of the rural development enterprise from those of 
the borrower's electric utility business. This should reduce credit 
risks to the borrower's primary business, and minimize the possibility 
of undisclosed cross subsidization of the rural development enterprise 
by electric rate payers.
    (b) Lien subordination. RUS will consider subordinating or releasing 
its lien on the stock held by a borrower in a subsidiary whose primary 
business directly contributes to or supports economic development and 
employment in rural areas, as defined in section 13 of the RE Act, when 
requested by a lender to the subsidiary, other than the borrower. To be 
eligible for said lien subordination or release:
    (1) The borrower must be current on all of its financial obligations 
and be in compliance with all provisions of its mortgage and loan 
agreement with RUS; and
    (2) In the judgment of RUS, the borrower must be able to repay all 
of its outstanding debt, and the security forall outstanding loans made 
to the borrower by RUS, including loans guaranteed by RUS, must be 
adequate, after taking into account the proposed subordination or 
release of lien.
    (c) Application contents. Applications for a lien subordination or 
release of lien for rural development investments must include the 
following information and documents:
    (1) A resolution of the borrower's board of directors requesting the 
lien subordination or release of lien;
    (2) A certification by an authorized official of the borrower that 
the borrower is current on all of its financial obligations and is in 
compliance with all provisions of its mortgage and loan agreement with 
RUS;
    (3) A description of the facilities or other purposes to be financed 
and the projected effects on economic development and employment in 
rural areas;
    (4) The borrower's financial and statistical report, the data in 
which shall not be more than 60 days old when the complete application 
is received by RUS;
    (5) If requested by RUS, a long-range financial forecast providing 
financial projections for at least 10 years, in form and substance 
satisfactory to RUS, which demonstrates that the borrower's system is 
economically viable and that the borrower will be able to repay all of 
its outstanding debt and meet all other financial obligations;
    (6) A discussion of the borrower's compliance with RUS requirements 
on accounting, financial reporting, record keeping, and irregularities 
(see Sec. 1717.854(c)(5)). RUS will review the case and determine the 
effect of any noncompliance on the feasibility and security of RUS's 
loans, and whether the requested lien subordination or release of lien 
can be approved;
    (7) If any buildings are to be constructed with the proceeds of the 
loan to be made to the subsidiary:
    (i) A certification by the project architect that the buildings will 
be designed and constructed in compliance with Section 504 of the 
Rehabilitation Act of 1973 as amended (29 U.S.C. 794), as applicable 
under that Act, and that the facilities will be readily accessible to 
and usable by persons with handicaps in accordance with the Uniform 
Federal Accessibility Standards; and
    (ii) A written acknowledgement from a registered engineer or 
architect regarding compliance with seismic provisions of applicable 
model codes, as required by 7 CFR 1792.104;
    (8) A certification by an authorized official of the borrower that 
flood hazard insurance will be obtained for the full value of any 
buildings, or other facilities susceptible to damage if flooded, that 
will be located in a flood hazard area;
    (9) Form AD-1047, Certification Regarding Debarment, Suspension, and 
Other Responsibility Matters--Primary Covered Transactions, as required 
by 7 CFR part 3017;
    (10) A report by the borrower stating whether or not it is 
delinquent on any Federal debt, and if delinquent, the amount and age of 
the delinquency and the reasons therefor; and a certification, if not 
previously provided, that the borrower has been informed of the 
Government's collection options; and
    (11) Other information that RUS may require to determine whether all 
of the applicable provisions of this subpart have been met.

[[Page 184]]



Sec. 1717.859  Application process and timeframes.

    (a) General. (1) Borrowers are responsible for ensuring that their 
applications for a lien accommodation or subordination are complete and 
sound as to substance and form before they are submitted to RUS. RUS 
will not accept any application that, on its face, is incomplete or 
inadequate as to the substantive information required by this subpart. 
RUS will notify borrowers in writing when their applications are 
complete and in form and substance satisfactory to RUS. A copy of all 
notifications of borrowers cited in this section will also be sent to 
the private lender.
    (2) It is recommended that borrowers consult with RUS staff before 
submitting their applications to determine whether they will likely 
qualify for advance approval or normal review, and to obtain answers to 
any questions about the information and documents required for the 
application.
    (3) A borrower shall, after submitting an application, promptly 
notify RUS of any changes that materially affect the information 
contained in its application.
    (4) After submitting an application and having been notified by RUS 
of additional information and documents and other changes needed to 
complete the application, if the required information and documents are 
not supplied to RUS within 30 calendar days of the borrower's receipt of 
the notice, RUS may return the application to the borrower. The borrower 
may resubmit the application when the required additional information 
and documents are available.
    (5) Timeframes. The timeframes for review of applications set forth 
in this section are based on the following conditions:
    (i) The types of lien accommodations or subordinations requested are 
of the ``standard'' types that RUS has approved previously, i.e., the 
so-called Type I, II and III lien accommodations. Future revisions of 
the RUS mortgage may result in other ``standard'' types of lien 
accommodations and lien subordinations acceptable to RUS. Requests for 
lien accommodations or subordinations that are substantially different 
than the ``standard'' types previously approved by RUS may require 
additional time for review and action;
    (ii) The requested lien accommodation or subordination does not 
require the preparation of an environmental assessment or an 
Environmental Impact Statement. Preparation of these documents often 
will require additional time beyond the timeframes cited in this 
section; and
    (iii) The timeframes set forth in this section, except for paragraph 
(b)(4) of this section, which deals only with approval of a new mortgage 
or mortgage amendment, include RUS review and/or approval of a loan 
contract, if required as part of the application, and required 
supporting documents, such as a CWP.
    (b) Advance approval--100 percent private financing of distribution, 
subtransmission, and headquarters facilities. (1) Applications that 
qualify under Sec. 1717.854 for advance approval of a lien accommodation 
or subordination for 100 percent private financing of distribution, 
subtransmission, and headquarters facilities are submitted to the 
general field representative (GFR). The GFR will work with the borrower 
to ensure that all components of the application are assembled. Once the 
application is satisfactory to the GFR, it will be sent promptly to the 
Washington office for further review and action. If a new mortgage or 
mortgage amendment is required, a draft of these documents must be 
included in the application, unless the borrower has been notified that 
RUS wishes to prepare the documents itself.
    (2) If no additional or amended information is needed for RUS to 
complete its review of the application once it is received in the 
Washington Office, RUS will, within 45 calendar days of receiving the 
application in the Washington Office, either:
    (i) Approve the lien accommodation or subordination if the borrower 
has demonstrated satisfactorily to RUS that all requirements of this 
subpart applicable to advance approval have been met, and send written 
notice to the borrower. RUS's approval, in this case and all other 
cases, will be conditioned upon execution and delivery by the borrower 
of a satisfactory security

[[Page 185]]

instrument, if required, and such additional information, documents, and 
opinions of counsel as RUS may require;
    (ii) If all requirements have not been met, so notify the borrower 
in writing. The application will be returned to the borrower unless the 
borrower requests that it be reconsidered under the requirements and 
procedures for normal review set forth in paragraph (c) of this section 
and in Sec. 1717.856; or
    (iii) Send written notice to the borrower explaining why a decision 
cannot be made at that time and giving the estimated date when a 
decision is expected.
    (3) If additional or amended information is needed after the 
application is received in the Washington Office, RUS will so notify the 
borrower in writing within 15 calendar days of receiving the application 
in the Washington Office. If RUS subsequently becomes aware of other 
deficiencies in the application, additional written notice will be sent 
to the borrower. Within 30 calendar days of receiving all of the 
information required by RUS to complete its review, RUS will act on the 
application as described in paragraphs (b)(2)(i) through (b)(2)(iii) of 
this section.
    (4) If a new mortgage or mortgage amendment is required, within 30 
days of receiving such documents satisfactory to RUS, including required 
execution counterparts, RUS will execute the documents and send them to 
the borrower, along with instructions pertaining to recording of the 
mortgage, an opinion of borrower's counsel, and other matters. RUS will 
promptly notify the borrower upon receiving satisfactory evidence that 
the borrower has complied with said instructions.
    (c) Normal review--100 percent private financing of distribution, 
transmission, and/or generation facilities--(1) Distribution borrowers. 
(i) Applications from distribution borrowers for a lien accommodation or 
subordination for 100 percent private financing of distribution, 
transmission, and/or generation facilities (including other eligible 
electric utility purposes) that do not meet the criteria for advance 
approval, are also submitted to the GFR. Procedures at this stage are 
the same as in paragraph (b)(1) of this section.
    (ii) If no additional or amended information is needed for RUS to 
complete its review of the application once it is received in the 
Washington office, RUS will, within 90 calendar days of receiving the 
application in the Washington office, send written notice to the 
borrower either approving the request, disapproving the request, or 
explaining why a decision cannot be made at that time and giving the 
estimated date when a decision is expected.
    (iii) If additional or amended information is needed after the 
application is received in the Washington Office, RUS will so notify the 
borrower in writing within 15 calendar days of receiving the application 
in the Washington Office. If RUS subsequently becomes aware of other 
deficiencies in the application, additional written notice will be sent 
to the borrower. Within 90 calendar days of receiving all of the 
information required by RUS to complete its review, RUS will act on the 
application as described in paragraph (c)(1)(ii) of this section.
    (iv) If a new mortgage or mortgage amendment is required, the 
procedures and timeframes of paragraph (b)(4) of this section will 
apply.
    (2) Power supply borrowers. (i) Applications from power supply 
borrowers for a lien accommodation or subordination for 100 percent 
private financing of distribution, transmission, and/or generation 
facilities, and other eligible electric utility purposes, are submitted 
to the RUS Power Supply Division, or its successor, in Washington, DC.
    (ii) Within 30 calendar days of receiving the borrower's application 
containing the information and documents required by Sec. 1717.856, RUS 
will send written notice to the borrower of any deficiencies in its 
application as to completeness and acceptable form and substance. 
Additional written notices may be sent to the borrower if RUS 
subsequently becomes aware of other deficiencies in the borrower's 
application.
    (iii) Within 90 calendar days of receiving all of the information 
required by RUS to complete its review, RUS will act on the application 
as described in paragraph (c)(1)(ii) of this section.

[[Page 186]]

    (iv) If a new mortgage or mortgage amendment is required, these 
documents will be reviewed and executed pursuant to the procedures and 
timeframes of paragraph (b)(4) of this section.
    (d) Refinancing of existing debt. All requests for a lien 
accommodation or subordination for refinancing are sent directly to the 
Washington office.
    (1) Advance approval. (i) Within 15 calendar days of receiving the 
borrower's application containing the information and documents required 
by Sec. 1717.857(c), RUS will send written notice to the borrower of any 
deficiencies in its application as to completeness and acceptable form 
and substance. Additional written notices may be sent to the borrower if 
RUS subsequently becomes aware of other deficiencies in the borrower's 
application.
    (ii) Within 15 calendar days of receiving all of the required 
information and documents, in form and substance satisfactory to RUS, 
RUS will either:
    (A) Approve the lien accommodation or subordination if the borrower 
has demonstrated satisfactorily to RUS that all requirements of 
Sec. 1717.857(a) and (c) have been met, and send written notice to the 
borrower;
    (B) If all requirements have not been met, so notify the borrower in 
writing. The application will be returned to the borrower unless the 
borrower requests that it be reconsidered under the requirements and 
procedures for normal review set forth in paragraph (d)(2) of this 
section and in Sec. 1717.857; or
    (C) Send written notice to the borrower explaining why a decision 
cannot be made at that time and giving the estimated date when a 
decision is expected.
    (iii) If a new mortgage or mortgage amendment is required, these 
documents will be reviewed and executed pursuant to the procedures and 
timeframes of paragraph (b)(4) of this section.
    (2) Normal review. (i) Within 20 calendar days of receiving the 
borrower's application containing the information and documents required 
by Sec. 1717.857(d), RUS will send written notice to the borrower of any 
deficiencies in its application as to completeness and acceptable form 
and substance. Additional written notices may be sent to the borrower if 
RUS subsequently becomes aware of other deficiencies in the borrower's 
application.
    (ii) Within 30 calendar days of receiving all of the required 
information and documents, in form and substance satisfactory to RUS, 
RUS will notify the borrower in writing either approving the request, 
disapproving the request, or explaining why a decision cannot be made at 
that time and giving the estimated date when a decision is expected. If 
the proposed refinancing involves complicated transactions such as 
interest rate swaps or forward delivery contracts, additional time may 
be required for RUS review and final action.
    (iii) If a new mortgage or mortgage amendment is required, these 
documents will be reviewed and executed pursuant to the procedures and 
timeframes of paragraph (b)(4) of this section.
    (e) Rural development investments. (1) Applications for a lien 
subordination for rural development investments are submitted by 
distribution borrowers to the GFR and by power supply borrowers to the 
RUS Power Supply Division, or its successor, in Washington, DC.
    (2) The GFR will work with the borrower to ensure that all 
components of the application are assembled. Once the application is 
satisfactory to the GFR, it will be sent promptly to the Washington 
Office for further review and action. After the application is received 
in the Washington Office, if additional or amended information is needed 
for RUS to complete its review, RUS will so notify the borrower in 
writing within 15 calendar days of receiving the application.
    (3) Applications from power supply borrowers containing the 
information and documents required by Sec. 1717.858(c) will be reviewed 
in the Washington office and the borrower given written notice within 30 
calendar days of receiving the application of any deficiencies as to 
completeness and acceptable form and substance. Additional written 
notices may be sent to the borrower if RUS subsequently becomes aware of 
other deficiencies in the borrower's application.

[[Page 187]]

    (4) Within 60 calendar days of receiving in the Washington office 
all of the required information and documents, in form and substance 
satisfactory to RUS, RUS will give written notice to the borrower either 
approving the request, disapproving the request, or explaining why a 
decision cannot be made at that time and giving the estimated date when 
a decision is expected.
    (5) If a new mortgage or mortgage amendment is required, these 
documents will be reviewed and executed pursuant to the procedures and 
timeframes of paragraph (b)(4) of this section.



Sec. 1717.860  Lien accommodations and subordinations under section 306E of 
the RE Act.

    (a) General. Under section 306E of the RE Act, when requested by a 
private lender providing financing for capital investments by a borrower 
whose net worth exceeds 110 percent of the outstanding principal balance 
of all loans made or guaranteed to the borrower by RUS, the 
Administrator will, without delay, offer to share the government's lien 
on the borrower's system or subordinate the government's lien on the 
property financed by the private lender, provided that the security, 
including the assurance of repayment, for loans made or guaranteed by 
RUS will remain reasonably adequate. To qualify for a lien accommodation 
or subordination under this section, the investment must be an original 
capital investment, i.e., not a refinancing or refunding. (See 
Sec. 1717.851 for the definition of capital investment.)
    (b) Determination of net worth to RUS debt ratio. (1) In the case of 
applications for a lien accommodation, a borrower's net worth will be 
based on the borrower's most recent financial and statistical report, 
the data in which shall not be more than 60 days old at the time the 
application is received by RUS, and the outstanding debt owed to or 
guaranteed by RUS will be based on latest RUS records available. The 
financial and statistical reports (Form 7 for distribution borrowers and 
Form 12a for power supply borrowers) are subject to RUS review and 
revision, and they must comply with RUS's system of accounts and 
accounting principles set forth in 7 CFR part 1767. Since sinking fund 
depreciation is not approved under part 1767, net worth for borrowers 
using sinking fund depreciation will be calculated as if the borrower 
had been using straight line depreciation.
    (2) Net worth shall be calculated by taking total margins and 
equities (Line 33 of Part C of RUS Form 7 for distribution borrowers, or 
Line 34 of Section B of RUS Form 12a for power supply borrowers) and 
subtracting assets properly recordable in account 182.2, Unrecovered 
Plant and Regulatory Study Costs, and account 182.3, Other Regulatory 
Assets, as defined in 7 CFR part 1767.
    (c) Application requirements and process. (1) If a borrower's net 
worth to RUS debt ratio exceeds 110 percent, as determined by RUS, and 
the borrower is in compliance with all requirements of its mortgage, 
loan agreement with RUS, and any other agreement with RUS that have not 
been exempted in writing by RUS, if requested RUS will expeditiously 
approve a lien accommodation or subordination for 100 percent private 
financing of capital investments, provided that the security, including 
the assurance of repayment, for loans made or guaranteed by RUS will 
remain reasonably adequate. RUS's approval will be conditioned upon 
execution and delivery by the borrower of a security instrument 
satisfactory to RUS, if required, and such additional information, 
documents, and opinions of counsel as RUS may require.
    (2) The application must include the following:
    (i) A resolution of the borrower's board of directors requesting the 
lien accommodation and including the amount and maturity of the proposed 
loan, a general description of the facilities or other purposes to be 
financed, the name and address of the lender, and an attached term sheet 
summarizing the terms and conditions of the proposed loan;
    (ii) A certification by an authorized official of the borrower that 
the borrower is in compliance with all requirements of its mortgage, 
loan agreement with RUS, and any other agreement

[[Page 188]]

with RUS that have not been exempted in writing by RUS;
    (iii) The borrower's financial and statistical report, the data in 
which shall not be more than 60 days old when the complete application 
is received by RUS;
    (iv) Draft copy of any new mortgage or mortgage amendment 
(supplement) required by RUS or the lender, unless RUS has notified the 
borrower that it wishes to prepare these documents itself;
    (v) A copy of the loan agreement, loan note, bond or other financing 
instrument, unless RUS has notified the borrower that these documents 
need not be submitted. These documents will not be subject to RUS 
approval, but may be reviewed to determine whether they contain any 
provisions that would result in the security, including assurance of 
repayment, for loans made or guaranteed by RUS no longer being 
reasonably adequate;
    (vi) The following certifications and reports required by law:
    (A) The certification by the project architect for any buildings to 
be constructed, as required by 7 CFR 1717.850(i);
    (B) A certification by an authorized official of the borrower that 
flood hazard insurance will be obtained for the full value of any 
buildings, or other facilities susceptible to damage if flooded, that 
will be located in a flood hazard area;
    (C) Form AD-1047, Certification Regarding Debarment, Suspension, and 
Other Responsibility Matters--Primary Covered Transactions, as required 
by 7 CFR part 3017;
    (D) A report by the borrower stating whether or not it is delinquent 
on any Federal debt, and if delinquent, the amount and age of the 
delinquency and the reasons therefor; and a certification, if not 
previously provided, that the borrower has been informed of the 
Government's collection options; and
    (E) The written acknowledgement from a registered engineer or 
architect regarding compliance with seismic provisions of applicable 
model codes for any buildings to be constructed, as required by 7 CFR 
1792.104. All other elements of an application listed in Sec. 1717.855, 
Sec. 1717.856, and Sec. 1717.858(c) not listed in this paragraph (c) are 
exempted.
    (3) Applications from distribution borrowers are submitted to the 
general field representative (GFR), while applications from power supply 
borrowers are submitted to the RUS Power Supply Division, or its 
successor, in Washington, DC. When an application is satisfactory to the 
GFR, it will be sent promptly to the Washington office. If Washington 
office staff determine that an application is incomplete, the borrower 
will be promptly notified in writing about the deficiencies. When the 
application is complete, and if the security, including assurance of 
repayment, of loans made or guaranteed by RUS will remain reasonably 
adequate after granting the lien accommodation or subordination, the 
borrower and the lender will be promptly notified in writing that the 
lien accommodation or subornation has been approved, subject to the 
conditions cited in paragraph (c)(1) of this section.
    (d) Rural development and other non-electric utility investments. 
Although RUS recommends the use of separate subsidiaries as set forth in 
Sec. 1717.858, if requested by a borrower that meets the 110 percent 
equity test and all other applicable requirements of this section, RUS 
will provide a lien subordination on the specific assets financed in the 
case of loans made directly to the borrower for rural development and 
other non-electric utility purposes, provided that the outstanding 
balance of all such loans lien subordinated under this paragraph (d), 
after taking into consideration the effect of the new loan, does not 
exceed 15 percent of the borrower's net worth and the security, 
including assurance of repayment, of loans made or guaranteed by RUS 
will remain reasonably adequate after granting the lien subordination. 
Investments lien subordinated under this paragraph shall be included 
among those investments subject to the 15 percent of total utility plant 
limitation set forth in 7 CFR 1717.654(b)(1), and granting of the lien 
subordination will not constitute approval of the investment under 7 CFR 
part 1717, subpart N.

[[Page 189]]

    (e) Requirements and controls not exempted. All requirements and 
limitations imposed with respect to lien accommodations and 
subordinations by this subpart R that are not specifically exempted by 
this section are not exempted and shall continue to apply according to 
their terms.

[59 FR 3986, Jan. 28, 1994, as amended at 60 FR 3735, Jan. 19, 1995; 60 
FR 67410, Dec. 29, 1995]



Secs. 1717.861-1717.899  [Reserved]



Subpart S--Lien Accommodations for Supplemental Financing Required by 7 
                              CFR 1710.110

    Source: 58 FR 53851, Oct. 19, 1993, unless otherwise noted.



Sec. 1717.900  Qualification requirements.

    Applications for a lien accommodation for supplemental financing 
required by 7 CFR 1710.110 must meet the same requirements as an RUS 
insured loan. The justification and documentation materials submitted as 
part of the borrower's application for an insured loan also serve as the 
justification and documentation of the request for a lien accommodation 
for the required supplemental loan. Unless early approval under 
Sec. 1717.901 is requested by a borrower, these applications will be 
processed during the same time as RUS's review of the borrower's 
application for the concurrent insured loan.



Sec. 1717.901  Early approval.

    (a) Conditions. If requested by a borrower in writing, RUS will 
review the application for a lien accommodation for required 
supplemental financing early in the process, before funding is available 
for the concurrent RUS insured loan, and approve the lien accommodation 
if the following conditions are met:
    (1) The required supplemental loan meets the requirements for an 
insured loan, as set forth in 7 CFR part 1710, subparts A through G, and 
other RUS regulations pertaining to required supplemental loans;
    (2) The borrower has demonstrated the ability to obtain the funds 
that would be needed to complete other portions of the project, if the 
portion to be constructed with private loan funds could not be used 
productively without completion of such other portions, in the event 
concurrent RUS insured loan funds are not forthcoming. Such evidence may 
include financial records demonstrating the availability of general 
funds, and/or a written commitment from the private lender to provide a 
loan for the remaining amount of financing required, with such 
commitment being conditioned upon the availability of a lien 
accommodation from RUS; and
    (3) An authorized official of the borrower has requested early 
approval of the lien accommodation and explained the reasons therefor, 
and has certified that the funds are needed and will be drawn down 
before funds from the concurrent insured loan are expected to be 
available, assuming that the insured loan is approved.
    (b) Timeframe for RUS action. (1) RUS will either approve or 
disapprove the lien accommodation within 90 days of receiving the 
borrower's request for early approval and the complete application for 
the concurrent RUS loan and required supplemental financing, in form and 
substance satisfactory to RUS, or notify the borrower in writing of the 
estimated date when a decision is expected. If an environmental 
assessment or an Environmental Impact Statement is required, additional 
time beyond the 90 days may be required to prepare these documents. 
RUS's approval of the lien accommodation will be conditioned upon 
execution and delivery by the borrower of a satisfactory security 
instrument, if required, and such additional information, documents, and 
opinions of counsel as RUS may require.
    (2) If a mortgage or mortgage amendment is required, RUS will 
consult with the other mortgagees as to who will prepare the documents. 
Within 30 days of obtaining the documents satisfactory to RUS, including 
required execution counterparts, RUS will execute the documents and send 
them to the borrower, along with instructions pertaining to recording of 
the mortgage, an opinion of borrower's counsel, and

[[Page 190]]

other matters. RUS will promptly notify the borrower upon receiving 
satisfactory evidence that the borrower has complied with said 
instructions.
    (c) Approval of concurrent insured loan. Early approval of a lien 
accommodation for a required supplemental loan does not ensure that the 
concurrent RUS insured loan will be approved. The request for the 
concurrent insured loan will be reviewed when funds are available to 
make the loan. The borrower may be requested to update certain 
supporting information in the loan application if substantial time has 
elapsed since the lien accommodation or subordination was approved.



Sec. 1717.902  Other RUS requirements.

    Supplemental loans required by 7 CFR 1710.110 are subject to the 
same post-loan requirements as insured RUS loans regarding accepted 
materials, construction standards, contracting and procurement 
procedures, standard forms of contracts, RUS approval of the advance of 
loan funds, and other matters.



Sec. 1717.903  Liability.

    It is the intent of this subpart that any failure on the part of RUS 
to comply with any provisions of this subpart, including without 
limitation, those provisions setting forth specified timeframes for 
action by RUS on applications for lien accommodations or lien 
subordinations, shall not give rise to liability of any kind on the part 
of the Government or any employees of the Government including, without 
limitation, liability for damages, fees, expenses or costs incurred by 
or on behalf of a borrower, private lender or any other party.



Sec. 1717.904  Exemptions pursuant to section 306E of the RE Act.

    (a) General policy. If a borrower's net worth to RUS debt ratio 
exceeds 110 percent, as determined by RUS, and the borrower is in 
compliance with all requirements of its mortgage, loan agreement with 
RUS, and any other agreement with RUS that have not been exempted in 
writing by RUS, RUS will expeditiously approve a lien accommodation for 
a concurrent supplemental loan if requested in writing by the borrower, 
provided that the security, including assurance of repayment, of loans 
made or guaranteed by RUS will remain reasonably adequate. RUS's 
approval will be conditioned upon execution and delivery by the borrower 
of a security instrument satisfactory to RUS, if required, and such 
additional information, documents, and opinions of counsel as RUS may 
require.
    (b) Determination of net worth to RUS debt ratio. A borrower's ratio 
of net worth to RUS debt will be determined as set forth in 
Sec. 1717.860(b).
    (c) Requirements and controls exempted. The applicable requirements 
and controls exempted by 7 CFR 1710.7(c) are also exempted with respect 
to concurrent supplemental loans.
    (d) Requirements and controls not exempted. All requirements and 
controls applicable to concurrent supplemental financing set forth in 
this subpart and other RUS regulations that are not specifically 
exempted by 7 CFR 1710.7(c) are not exempted and shall continue to apply 
according to their terms. These include, but are not limited to:
    (1) The applicable requirements listed in 7 CFR 1710.7(d); and
    (2) The requirements set forth in Sec. 1717.901(a) when a borrower 
requests early approval of a lien accommodation.
    (e) Procedures. If a borrower meets the requirements of this 
section, upon receipt of a complete application RUS will promptly notify 
the borrower and lender in writing that the lien accommodation has been 
approved subject to the conditions set forth in paragraph (a) of this 
section.

[59 FR 3987, Jan. 28, 1994]

[[Page 191]]



Secs. 1717.905-1717.949  [Reserved]



                          Subpart T [Reserved]



Secs. 1717.950-1717.999  [Reserved]



                          Subpart U [Reserved]



Secs. 1717.1000-1717.1049  [Reserved]



                          Subpart V [Reserved]



Secs. 1717.1050-1717.1099  [Reserved]



                          Subpart W [Reserved]



Secs. 1717.1100-1717.1149  [Reserved]



                          Subpart X [Reserved]



Secs. 1717.1150-1717.1199  [Reserved]



                      Subpart Y--Settlement of Debt

    Source: 62 FR 50491, Sept. 26, 1997, unless otherwise noted.



Sec. 1717.1200  Purpose and scope.

    (a) Section 331(b) of the Consolidated Farm and Rural Development 
Act (Con Act), as amended on April 4, 1996 by Public Law 104-127, 110 
Stat. 888 (7 U.S.C. 1981), grants authority to the Secretary of 
Agriculture to compromise, adjust, reduce, or charge-off debts or claims 
arising from loans made or guaranteed under the Rural Electrification 
Act of 1936, as amended (RE Act). Section 331(b) of the Con Act also 
authorizes the Secretary of Agriculture to adjust, modify, subordinate, 
or release the terms of security instruments, leases, contracts, and 
agreements entered into or administered by the Rural Utilities Service 
(RUS). The Secretary, in 7 CFR 2.47, has delegated authority under 
section 331(b) of the Con Act to the Administrator of the RUS, with 
respect to loans made or guaranteed by RUS.
    (b) This subpart sets forth the policy and standards of the 
Administrator of RUS with respect to the settlement of debts and claims 
arising from loans made or guaranteed to rural electric borrowers under 
the RE Act. Nothing in this subpart limits the Administrator's authority 
under section 12 of the RE Act.



Sec. 1717.1201  Definitions.

    Terms used in this subpart that are not defined in this section have 
the meanings set forth in 7 CFR part 1710. In addition, for the purposes 
of this subpart:
    Application for debt settlement means a written application 
containing all of the information required by Sec. 1717.1204(b)(2), in 
form and substance satisfactory to RUS.
    Attorney General means the Attorney General of the United States of 
America.
    Claim means any claim of the government arising from loans made or 
guaranteed under the RE Act to a rural electric borrower.
    Con Act means the Consolidated Farm and Rural Development Act (7 
U.S.C. 1921 et seq.).
    Debt means outstanding debt of a rural electric borrower (including, 
but not necessarily limited to, principal, accrued interest, penalties, 
and the government's costs of debt collection) arising from loans made 
or guaranteed under the RE Act.
    Enforced collection procedures means any procedures available to the 
Administrator for the collection of debt that are authorized by law, in 
equity, or under the borrower's loan documents or other agreements with 
RUS.
    Loan documents means the mortgage (or other security instrument 
acceptable to RUS), the loan contract, and the promissory note entered 
into between the borrower and RUS.
    RE Act means the Rural Electrification Act of 1936, as amended (7 
U.S.C. 901-950b).
    Restructure means to settle a debt or claim.
    Settle means to reamortize, adjust, compromise, reduce, or charge-
off a debt or claim.



Sec. 1717.1202  General policy.

    (a) It is the policy of the Administrator that, wherever possible, 
all debt owed to the government, including but not limited to principal 
and interest, shall be collected in full in accordance with the terms of 
the borrower's loan documents.
    (b) Nothing in this subpart by itself modifies, reduces, waives, or 
eliminates any obligation of a borrower

[[Page 192]]

under its loan documents. Any such modifications regarding the debt owed 
by a borrower may be granted under the authority of the Administrator 
only by means of the explicit written approval of the Administrator in 
each case.
    (c) The Administrator's authority to settle debts and claims will 
apply to cases where a borrower is unable to pay its debts and claims in 
accordance with their terms, as further defined in Sec. 1717.1204(b)(1), 
and where settlement will maximize, on a present value basis, the 
recovery of debts and claims owed to the government.
    (d) In structuring settlements and determining the capability of the 
borrower to repay debt and the amount of debt recovery that is possible, 
the Administrator will consider, among other factors, the RE Act, the 
National Energy Policy Act of 1992 (Pub. L. 102-486, 106 Stat. 2776), 
the policies and regulations of the Federal Energy Regulatory 
Commission, state legislative and regulatory actions, and other market 
and nonmarket forces as to their effects on competition in the electric 
utility industry and on rural electric systems in particular. Other 
factors the Administrator will consider are set forth in more detail in 
Sec. 1717.1204.



Sec. 1717.1203  Relationship between RUS and Department of Justice.

    (a) The Attorney General will be notified by the Administrator 
whenever the Administrator intends to use his or her authority under 
section 331(b)of the Con Act to settle a debt or claim.
    (b) If an outstanding claim has been referred in writing to the 
Attorney General, the Administrator will not use his or her own 
authority to settle the claim without the approval of the Attorney 
General.
    (c) If an application for additional debt relief is received from a 
borrower whose debt has been settled in the past under the authority of 
the Attorney General, the Administrator will promptly notify the 
Attorney General before proceeding to consider the application.



Sec. 1717.1204  Policies and conditions applicable to settlements.

    (a) General. Settlement of debts and claims shall be subject to the 
policies, requirements, and conditions set forth in this section and in 
Sec. 1717.1202.
    (b) Need for debt settlement. (1) The Administrator will not settle 
any debt or claim unless the Administrator has determined that the 
borrower is unable to meet its financial obligations under its loan 
documents according to the terms of those documents, or that the 
borrower will not be able to meet said obligations sometime within the 
period of 24 months following the month the borrower submits its 
application for debt settlement to RUS, and, in either case, such 
default is likely to continue indefinitely. The determination of a 
borrower's ability to meet its financial obligations will be based on 
analyses and documentation by RUS of the borrower's historical, current, 
and projected costs, revenues, cash flows, assets, opportunities to 
reduce costs and/or increase revenues, and other factors that may be 
relevant on a case by case basis.
    (2) In its application to RUS for debt settlement, the borrower must 
provide, in form and substance satisfactory to RUS, an in-depth analysis 
supporting the borrower's contention that it is unable or will not be 
able to meet its financial obligations as described in paragraph (b)(1) 
of this section. The analysis must include:
    (i) An explanation and analysis of the causes of the borrower's 
inability to meet its financial obligations;
    (ii) A thorough review and analysis of the opportunities available 
or potentially available to the borrower to reduce administrative 
overhead and other costs, improve efficiency and effectiveness, and 
expand markets and revenues, including but not limited to opportunities 
for sharing services, merging, and/or consolidating, raising rates when 
appropriate, and renegotiating supplier and service contracts. In the 
case of a power supply borrower, the study shall include such 
opportunities among the members of the borrower, unless the 
Administrator waives this requirement;

[[Page 193]]

    (iii) Documentation of the actions taken, in progress, or planned by 
the borrower (and its member systems, if applicable) to take advantage 
of the opportunities cited in paragraph (b)(2)(ii) of this section; and
    (iv) Other analyses and documentation prescribed by RUS on a case by 
case basis.
    (3) RUS may require that an independent consultant provide an 
analysis of the efficiency and effectiveness of the borrower's 
organization and operations, and those of its member systems in the case 
of a power supply borrower. The following conditions will apply:
    (i) RUS will select the independent consultant taking into account, 
among other matters, the consultant's experience and expertise in 
matters relating to electric utility operations, finance, and 
restructuring;
    (ii) The contract with the consultant shall be to provide services 
to RUS on such terms and conditions as RUS deems appropriate. The 
consultant's scope of work may include, but shall not be limited to, an 
analysis of the following:
    (A) How to maximize the value of the government's collateral, such 
as through mergers, consolidations, or sales of all or part of the 
collateral;
    (B) The viability of the borrower's system, taking into account such 
matters as system size, service territory and markets, asset base, 
physical condition of the plant, operating efficiency, competitive 
pressures, industry trends, and opportunities to expand markets and 
improve efficiency and effectiveness;
    (C) The feasibility and the potential benefits and risks to the 
borrower and the government of corporate restructuring, including 
aggregation and disaggregation;
    (D) In the case of a power supply borrower, the retail rate mark-up 
by member systems and the potential benefits to be achieved by member 
restructuring through mergers, consolidations, shared services, and 
other alliances;
    (E) The quality of the borrower's management, management advisors, 
consultants, and staff;
    (F) Opportunities for reducing overhead and other costs, for 
expanding markets and revenues, and for improving the borrower's 
existing and prospective contractual arrangements for the purchase and 
sale of power, procurement of supplies and services, and the operation 
of plant and facilities;
    (G) Opportunities to achieve efficiency gains and increased revenues 
based on comparisons with benchmark electric utilities; and
    (H) The accuracy and completeness of the borrower's analysis 
provided under paragraph (b)(2) of this section;
    (iii) RUS and, as appropriate, other creditors, will determine the 
extent to which the borrower and third parties (including the members of 
a power supply borrower) will be required to participate in funding the 
costs of the independent consultant;
    (iv) The borrower will be required to make available to the 
consultant all corporate documents, files, and records, and to provide 
the consultant with access to key employees. The borrower will also 
normally be required to provide the consultant with office space 
convenient to the borrower's operations and records; and
    (v) All analyses, studies, opinions, memoranda, and other documents 
and information produced by the independent consultant shall be provided 
to RUS on a confidential basis for consideration in evaluating the 
borrower's application for debt settlement. Such documents and 
information may be made available to the borrower and other appropriate 
parties if authorized in writing by RUS.
    (4) The borrower may be required to employ a temporary or permanent 
manager acceptable to the Administrator, to manage the borrower's 
operations to ensure that all actions are taken to avoid or minimize the 
need for debt settlement. The employment could be on a temporary basis 
to manage the system during the time the debt settlement is being 
considered, and possibly for some time after any debt settlement, or it 
could be on a permanent basis.
    (5) The borrower must submit, at a time determined by RUS, a 
resolution of its board of directors requesting debt

[[Page 194]]

settlement and stating that the borrower is either currently unable to 
meet its financial obligations to the government or will not be able to 
meet said obligations sometime within the next 24 months, and that, in 
either case, the default is likely to continue indefinitely.
    (c) Debt settlement measures. (1) If the Administrator determines 
that debt settlement is appropriate, the debt settlement measures the 
Administrator will consider under this subpart with respect to direct, 
insured, or guaranteed loans include, but are not limited to, the 
following:
    (i) Reamortization of debt;
    (ii) Extension of debt maturity, provided that the maturity of the 
borrower's outstanding debt after settlement shall not extend more than 
10 years beyond the latest maturity date prior to settlement;
    (iii) Reduction of the interest rate charged on the borrower's debt, 
provided that the interest rate on any portion of the restructured debt 
shall not be reduced to less than 5 percent, unless the Administrator 
determines that reducing the rate below 5 percent would maximize debt 
recovery by the government;
    (iv) Forgiveness of interest accrued, penalties, and costs incurred 
by the government to collect the debt; and
    (v) With the concurrence of the Under Secretary for Rural 
Development, forgiveness of loan principal.
    (2) In the event that RUS has, under section 306 of the RE Act, 
guaranteed loans made by the Federal Financing Bank or other third 
parties, the Administrator may restructure the borrower's obligations 
by: acquiring and restructuring the guaranteed loan; restructuring the 
loan guarantee obligation; restructuring the borrower's reimbursement 
obligations; or by such means as the Administrator deems appropriate, 
subject to such consents and approvals, if any, that may be required by 
the third party lender.
    (d) Borrower's obligations to other creditors. The Administrator 
will not grant relief on debt owed to the government unless similar 
relief, on a pro rata basis, is granted with respect to other secured 
obligations of the borrower, or the other secured creditors provide 
other benefits or value to the debt restructuring. Unsecured creditors 
will also be expected to contribute to the restructuring. If it is not 
possible to obtain the expected contributions from other creditors, the 
Administrator may proceed to settle a borrower's debt if that will 
maximize recovery by the government and will not result in material 
benefits accruing to other creditors at the expense of the government.
    (e) Competitive bids for system assets. If requested by RUS, the 
borrower or the independent consultant provided for in paragraph (b)(3) 
of this section shall solicit competitive bids from potential buyers of 
the borrower's system or parts thereof. The bidding process must be 
conducted in consultation with RUS and use standards and procedures 
acceptable to RUS. The Administrator may use the competitive bids 
received as a basis for requiring the sale of all or part of the 
borrower's system as a condition of settlement of the borrower's debt. 
The Administrator may also consider the bids in evaluating alternative 
settlement measures.
    (f) Valuation of system. (1) The Administrator will consider the 
value of the borrower's system, including, in the case of a power supply 
borrower, the wholesale power contracts between the borrower and its 
member systems. The valuation of the wholesale power contracts shall 
take into account, among other matters, the rights of the government 
and/or third parties, to assume the rights and obligations of the 
borrower under such contracts, to charge reasonable rates for service 
provided under the contracts, and to otherwise enforce the contracts in 
accordance with their terms. In no case will the Administrator settle a 
debt or claim for less than the value (after considering the 
government's collection costs) of the borrower's system and other 
collateral securing the debt or claim.
    (2) RUS may use such methods, analyses, and assessments as the 
Administrator deems appropriate to determine the value of the borrower's 
system.
    (g) Rates. The Administrator will consider the rates charged for 
electric service by the borrower and, in the case of a power supply 
borrower, by its

[[Page 195]]

members, taking into account, among other factors, the practices of the 
Federal Energy Regulatory Commission (FERC), as adapted to the 
cooperative structure of borrowers, and, where applicable, FERC 
treatment of any investments by co-owners in projects jointly owned by 
the borrower.
    (h) Collection action. The Administrator will consider whether a 
settlement is favorable to the government in comparison with the amount 
that can be recovered by enforced collection procedures.
    (i) Regulatory approvals. Before the Administrator will approve a 
settlement, the borrower must provide satisfactory evidence that it has 
obtained all approvals required of regulatory bodies that the 
Administrator determines are needed to implement rates or other 
provisions of the settlement, or that are needed in any other way for 
the borrower to fulfill its obligations under the settlement.
    (j) Conditions regarding management and operations. As a condition 
of debt settlement, the borrower, and in the case of a power supply 
borrower, its members, will be required to implement those changes in 
structure, management, operations, and performance deemed necessary by 
the Administrator. Those changes may include, but are not limited to, 
the following:
    (1) The borrower may be required to undertake a corporate 
restructuring and/or sell a portion of its plant, facilities, or other 
assets
    (2) The borrower may be required to replace senior management and/or 
hire outside experts acceptable to the Administrator. Such changes may 
include a commitment by the borrower's board of directors to restructure 
and/or obtain new membership to improve board oversight and leadership;
    (3) The borrower may be required to agree to:
    (i) Controls by RUS on the general funds of the borrower, as well as 
on any investments, loans or guarantees by the borrower, notwithstanding 
any limitations on RUS' control rights in the borrower's loan documents 
or RUS regulations; and
    (ii) Requirements deemed necessary by RUS to perfect and protect its 
lien on cash deposits, securities, equipment, vehicles, and other items 
of real or non-real property; and
    (4) In the case of a power supply borrower, the borrower may be 
required to obtain credit support from its member systems, as well as 
pledges and action plans by the members to change their operations, 
management, and organizational structure (e.g., shared services, 
mergers, or consolidations) in order to reduce operating costs, improve 
efficiency, and/or expand markets and revenues.
    (k) Conveyance of assets. As a condition of a settlement, a borrower 
may be required to convey some or all its assets to the government.
    (l) Additional conditions. The borrower will be required to warrant 
and agree that no bonuses or similar extraordinary compensation has been 
or will be provided, for reasons related to the settlement of government 
debt, to any officer or employee of the borrower or to other persons or 
entities identified by RUS. The Administrator may impose such other 
terms and conditions of debt settlement as the Administrator determines 
to be in the government's interests.
    (m) Certification of accuracy. Before the Administrator will approve 
a debt settlement, the manager or other appropriate official of the 
borrower must certify that all information provided to the government by 
the borrower or by any agent of the borrower, in connection with the 
debt settlement, is true, correct, and complete in all material 
respects.



Sec. 1717.1205  Waiver of existing conditions on borrowers.

    Pursuant to section 331(b) of the Con Act, the Administrator, at his 
or her sole discretion, may waive or otherwise reduce conditions and 
requirements imposed on a borrower by its loan documents if the 
Administrator determines that such action will contribute to enhancement 
of the government's recovery of debt. Such waivers or reductions in 
conditions and requirements under this section shall not include the 
exercise of any of the debt settlement measures set forth in 
Sec. 1717.1204(c), which are subject to all of the requirements of said 
Sec. 1717.1204.

[[Page 196]]



Sec. 1717.1206  Loans subsequent to settlement.

    In considering any future loan requests from a borrower whose debt 
has been settled in whole or in part (including the surviving entity of 
merged or consolidated borrowers, where at least one of said borrowers 
had its debts settled), it will be presumed that credit support for the 
full amount of the requested loan will be required. Such support may be 
in a number of forms, provided that they are acceptable to the 
Administrator on a case by case basis. They may include, but need not be 
limited to, equity infusions and guarantees of debt repayment, either 
from the applicant's members (in the case of a power supply borrower), 
or from a third party.



Sec. 1717.1207  RUS obligations under loan guarantees.

    Nothing in this subpart affects the obligations of RUS under loan 
guarantee commitments it has made to the Federal Financing Bank or other 
lenders.



Sec. 1717.1208  Government's rights under loan documents.

    Nothing in this subpart limits, modifies, or otherwise affects the 
rights of the government under loan documents executed with borrowers, 
or under law or equity.



PART 1718--LOAN SECURITY DOCUMENTS FOR ELECTRIC BORROWERS--Table of Contents




                           Subpart A--General

Sec.
1718.1-1718.49 [Reserved]

             Subpart B--Mortgage for Distribution Borrowers

1718.50 Definitions.
1718.51 Policy.
1718.52 Existing mortgages.
1718.53 Rights of other mortgagees.
1718.54 Availability of model mortgage.

Appendix A to Subpart B to Part 1718--Model Form of Mortgage for 
          Electric Distribution Borrowers

          Subpart C--Loan Contracts With Distribution Borrowers

1718.100 General.
1718.101 Applicability.
1718.102 Definitions.
1718.103 Loan contract provisions.
1718.104 Availability of model loan contract.

Appendix A to Subpart C to Part 1718--Model Form of Loan Contract for 
          Electric Distribution Borrowers

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.



                           Subpart A--General



Secs. 1718.1-1718.49  [Reserved]



             Subpart B--Mortgage for Distribution Borrowers

    Source: 60 FR 36888, July 18, 1995, unless otherwise noted.



Sec. 1718.50  Definitions.

    Unless otherwise indicated, terms used in this subpart are defined 
as set forth in 7 CFR 1710.2.



Sec. 1718.51  Policy.

    (a) Adequate loan security must be provided for loans made or 
guaranteed by RUS. The loans are required to be secured by a first 
mortgage lien on most of the borrower's assets substantially in the form 
set forth in appendix A of this subpart. At the discretion of RUS, this 
model form of mortgage may be adapted to satisfy different legal 
requirements among the states and individual differences in lending 
circumstances, provided that such adaptations are consistent with the 
policies set forth in this subpart.
    (b) Some borrowers, such as certain public power districts, may not 
be able to provide security in the form of a first mortgage lien on 
their assets. In these cases RUS will consider accepting other forms of 
security, such as resolutions and pledges of revenues.
    (c) RUS may require supplemental and amending mortgages to protect 
its security, or in connection with additional loans.
    (d) RUS may also require such other security instruments (such as 
loan contracts, security agreements, financing

[[Page 197]]

statements, guarantees, and pledges) as it deems appropriate.
    (e) All distribution borrowers that receive a loan or loan guarantee 
from RUS on or after August 17, 1995 will be required to enter into a 
mortgage with RUS that meets the requirements of this subpart. The 
concurrence of any other lenders secured under the borrower's existing 
mortgage may be required before the borrower can enter into a new 
mortgage.



Sec. 1718.52  Existing mortgages.

    Nothing contained in this subpart amends, invalidates, terminates or 
rescinds any existing mortgage entered into between the borrower and RUS 
and any other mortgagees.



Sec. 1718.53  Rights of other mortgagees.

    Nothing contained in this subpart is intended to alter or affect any 
other mortgagee's rights under an existing mortgage.



Sec. 1718.54  Availability of model mortgage.

    Single copies of the model mortgage (RUS Informational Publication 
1718 B) are available from the Administrative Services Division, Rural 
Utilities Service, United States Department of Agriculture, Washington, 
DC 20250-1500. This document may be reproduced.

    Appendix A to Subpart B to Part 1718--Model Form of Mortgage for 
                     Electric Distribution Borrowers

      RESTATED MORTGAGE AND SECURITY AGREEMENT Made By And Between

________________________________________________________________________
Mortgagor

                    and UNITED STATES OF AMERICA and

________________________________________________________________________
MORTGAGEE

Dated as of_____________________________________________________________

  THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A TRANSMITTING UTILITY

           THIS INSTRUMENT CONTAINS FUTURE ADVANCE PROVISIONS

       THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS

                            TABLE OF CONTENTS

                            GRANTING CLAUSES

FIRST
SECOND
THIRD
FOURTH
EXCEPTED PROPERTY

                                HABENDUM

    ARTICLE I--DEFINITIONS & OTHER PROVISIONS OF GENERAL APPLICATION

SECTION 1.01 Definitions
SECTION 1.02 General Rules of Construction
SECTION 1.03 Special Rules of Construction if RUS is a Mortgagee
SECTION 1.04 Governing Law
SECTION 1.05 Notices

                               ARTICLE II

                            ADDITIONAL NOTES

SECTION 2.01 Additional Notes
SECTION 2.02 Refunding or Refinancing Notes
SECTION 2.03 Other Additional Notes
SECTION 2.04 Additional Lenders Entitled to the Benefits of This 
          Mortgage
SECTION 2.05 Form of Supplemental Mortgage

           ARTICLE III--PARTICULAR COVENANTS OF THE MORTGAGOR

SECTION 3.01 Payment of Debt Service on Notes
SECTION 3.02 Warranty of Title
SECTION 3.03 After-Acquired Property; Further Assurances: Recording
SECTION 3.04 Environmental Requirements and Indemnity
SECTION 3.05 Payment of Taxes
SECTION 3.06 Authority to Execute and Deliver Notes, Loan Agreements and 
          Mortgage; All Action Taken; Enforceable Obligations
SECTION 3.07 Restrictions on Further Encumbrances on Property
SECTION 3.08 Restrictions on Additional Permitted Debt
SECTION 3.09 Preservation of Corporate Existence and Franchises
SECTION 3.10 Limitations on Consolidations and Mergers
SECTION 3.11 Limitations on Transfers of Property

[[Page 198]]

SECTION 3.12 Maintenance of Mortgaged Property
SECTION 3.13 Insurance; Restoration of Damaged Mortgaged Property
SECTION 3.14 Mortgagee Right to Expend Money to Protect Mortgaged 
          Property
SECTION 3.15 Time Extensions for Payment of Notes
SECTION 3.16 Application of Proceeds from Condemnation
SECTION 3.17 Compliance with Loan Agreements; Notice of Amendments to 
          and Defaults under Loan Agreements
SECTION 3.18 Rights of Way, etc., Necessary in Business
SECTION 3.19 Limitations on Providing Free Electric Services
SECTION 3.20 Keeping Books; Inspection by Mortgagee

               ARTICLE IV--EVENTS OF DEFAULT AND REMEDIES

SECTION 4.01 Events of Default
SECTION 4.02 Acceleration of Maturity; Rescission and Annulment
SECTION 4.03 Remedies of Mortgagees
SECTION 4.04 Application of Proceeds from Remedial Actions
SECTION 4.05 Remedies Cumulative; No Election
SECTION 4.06 Waiver of Appraisement Rights, Marshaling of Assets Not 
          Required
SECTION 4.07 Notice of Default

         ARTICLE V--POSSESSION UNTIL DEFAULT--DEFEASANCE CLAUSE

SECTION 5.01 Possession Until Default
SECTION 5.02 Defeasance
SECTION 5.03 Special Defeasance

                        ARTICLE VI--MISCELLANEOUS

SECTION 6.01 Property Deemed Real Property
SECTION 6.02 Mortgage to Bind and Benefit Successors and Assigns
SECTION 6.03 Headings
SECTION 6.04 Severability Clause
SECTION 6.05 Mortgage Deemed Security Agreement
SECTION 6.06 Indemnification by Mortgagor of Mortgagees
Schedule A
Schedule B
Schedule C
Exhibit A--Manager's Certificate
Exhibit B--Form of Supplemental Mortgage
Supplemental Mortgage Schedule A--Maximum Debt Limit and Other 
          Information
Supplemental Mortgage Schedule B--Property Schedule
Supplemental Mortgage Schedule C--Excepted Property

    RESTATED MORTGAGE AND SECURITY AGREEMENT, dated as of ---------- 
19----, (hereinafter sometimes called this ``Mortgage'') is made by and 
between
________________________________________________________________________
(hereinafter called the ``Mortgagor''), a corporation existing under the 
laws of the State of ----------, and the UNITED STATES OF AMERICA acting 
by and through the Administrator of the Rural Utilities Service 
(hereinafter called the ``Government''), ---------- { Supplemental 
Lender{time} , (hereinafter called ``----------'') a ---------- existing 
under the laws of ----------, and is intended to confer rights and 
benefits on both the Government and ---------- as well as any and all 
other lenders pursuant to Article II of this Mortgage that enter into a 
supplemental mortgage in accordance with Section [2.04] of Article II 
hereof (the Government and any such other lenders being herein sometimes 
collectively referred to as the ``Mortgagees'').

                                RECITALS

    WHEREAS, the Mortgagor, the Government and ---------- are parties to 
that certain ---------- Mortgage and Security Agreement dated as of ----
------, 19----, as supplemented, amended or restated (the ``Original 
Mortgage'' identified in Schedule ``A'' of this Mortgage) originally 
entered into between the Mortgagor, the Government acting by and through 
the Administrator of the Rural Electrification Administration, the 
predecessor of RUS, and ----------;
    WHEREAS, the Mortgagor deems it necessary to borrow money for its 
corporate purposes and to issue its promissory notes and other debt 
obligations therefor from time to time in one or more series, and to 
mortgage and pledge its property hereinafter described or mentioned to 
secure the payment of the same;
    WHEREAS, the Mortgagor desires to enter into this Mortgage pursuant 
to which all secured debt of the Mortgagor hereunder shall be secured on 
parity;
    WHEREAS, this Mortgage restates and consolidates the Original 
Mortgage while preserving the priority of the Lien under the Original 
Mortgage securing the payment of Mortgagor's outstanding obligations 
secured under the Original Mortgage, which indebtedness is described 
more particularly by listing the Original Notes in Schedule ``A'' 
hereto; and
    WHEREAS, all acts necessary to make this Mortgage a valid and 
binding legal instrument for the security of such notes and obligations, 
subject to the terms of this Mortgage, have been in all respects duly 
authorized;
    NOW, THEREFORE, THIS MORTGAGE WITNESSETH: That to secure the payment 
of the principal of (and premium, if any) and interest on the Original 
Notes and all Notes issued hereunder according to their tenor and 
effect, and the performance of all provisions therein and herein 
contained, and in

[[Page 199]]

consideration of the covenants herein contained and the purchase or 
guarantee of Notes by the guarantors or holders thereof, the Mortgagor 
has mortgaged, pledged and granted a continuing security interest in, 
and by these presents does hereby grant, bargain, sell, alienate, 
remise, release, convey, assign, transfer, hypothecate, pledge, set over 
and confirm, pledge, and grant a continuing security interest and lien 
in for the purposes hereinafter expressed [other language may be 
required under various state laws], unto the Mortgagees all property, 
rights, privileges and franchises of the Mortgagor of every kind and 
description, real, personal or mixed, tangible and intangible, of the 
kind or nature specifically mentioned herein OR ANY OTHER KIND OR 
NATURE, except any Excepted Property, now owned or hereafter acquired by 
the Mortgagor (by purchase, consolidation, merger, donation, 
construction, erection or in any other way) wherever located, including 
(without limitation) all and singular the following:

                          GRANTING CLAUSE FIRST

    A. all of those fee and leasehold interests in real property set 
forth in Schedule ``B'' hereto, subject in each case to those matters 
set forth in such Schedule;
    B. all of the Mortgagor's interest in fixtures, easements, permits, 
licenses and rights-of-way comprising real property, and all other 
interests in real property, comprising any portion of the Utility System 
(as herein defined) located in the Counties listed in Schedule ``B'' 
hereto;
    C. all right, title and interest of the Mortgagor in and to those 
contracts of the Mortgagor (i) relating to the ownership, operation or 
maintenance of any generation, transmission or distribution facility 
owned, whether solely or jointly, by the Mortgagor, (ii) for the 
purchase of electric power and energy by the Mortgagor and having an 
original term in excess of 3 years, (iii) for the sale of electric power 
and energy by the Mortgagor and having an original term in excess of 3 
years, and (iv) for the transmission of electric power and energy by or 
on behalf of the Mortgagor and having an original term in excess of 3 
years, including in respect of any of the foregoing, any amendments, 
supplements and replacements thereto;
    D. all the property, rights, privileges, allowances and franchises 
particularly described in the annexed Schedule ``B'' are hereby made a 
part of, and deemed to be described in, this Granting Clause as fully as 
if set forth in this Granting Clause at length; and
    ALSO ALL OTHER PROPERTY, real estate, lands, easements, servitudes, 
licenses, permits, allowances, consents, franchises, privileges, rights 
of way and other rights in or relating to real estate or the occupancy 
of the same; all power sites, storage rights, water rights, water 
locations, water appropriations, ditches, flumes, reservoirs, reservoir 
sites, canals, raceways, waterways, dams, dam sites, aqueducts, and all 
other rights or means for appropriating, conveying, storing and 
supplying water; all rights of way and roads; all plants for the 
generation of electric and other forms of energy (whether now known or 
hereafter developed) by steam, water, sunlight, chemical processes and/
or (without limitation) all other sources of power (whether now known or 
hereafter developed); all power houses, gas plants, street lighting 
systems, standards and other equipment incidental thereto; all 
telephone, radio, television and other communications, image and data 
transmission systems, air conditioning systems and equipment incidental 
thereto, water wheels, waterworks, water systems, steam and hot water 
plants, substations, lines, service and supply systems, bridges, 
culverts, tracks, ice or refrigeration plants and equipment, offices, 
buildings and other structures and the equipment thereto all machinery, 
engines, boilers, dynamos, turbines, electric, gas and other machines, 
prime movers, regulators, meters, transformers, generators (including, 
but not limited to, engine-driven generators and turbogenerator units), 
motors, electrical, gas and mechanical appliances, conduits, cables, 
water, steam, gas or other pipes, gas mains and pipes, service pipes, 
fittings, valves and connections, pole and transmission lines, towers, 
overhead conductors and devices, underground conduits, underground 
conductors and devices, wires, cables, tools, implements, apparatus, 
storage battery equipment, and all other fixtures and personalty; all 
municipal and other franchises, consents, certificates or permits; all 
emissions allowances; all lines for the transmission and distribution of 
electric current and other forms of energy, gas, steam, water or 
communications, images and data for any purpose including towers, poles, 
wires, cables, pipes, conduits, ducts and all apparatus for use in 
connection therewith, and (except as hereinbefore or hereinafter 
expressly excepted) all the right, title and interest of the Mortgagor 
in and to all other property of any kind or nature appertaining to and/
or used and/or occupied and/or employed in connection with any property 
hereinbefore described, but in all circumstances excluding Excepted 
Property;

                         GRANTING CLAUSE SECOND

    All other property, real, personal or mixed, of whatever kind and 
description and wheresoever situated, including without limitation 
goods, accounts, money held in a trust account pursuant hereto or to a 
Loan Agreement, and general intangibles now owned or which may be 
hereafter acquired by

[[Page 200]]

the Mortgagor, but excluding Excepted Property, now owned or which may 
be hereafter acquired by the Mortgagor, it being the intention hereof 
that all property, rights, privileges, allowances and franchisees now 
owned by the Mortgagor or acquired by the Mortgagor after the date 
hereof (other than Excepted Property) shall be as fully embraced within 
and subjected to the lien hereof as if such property were specifically 
described herein.

                          GRANTING CLAUSE THIRD

    Also any Excepted Property that may, from time to time hereafter, by 
delivery or by writing of any kind, be subjected to the lien hereof by 
the Mortgagor or by anyone in its behalf; and any Mortgagee is hereby 
authorized to receive the same at any time as additional security 
hereunder for the benefit of all the Mortgagees. Such subjection to the 
lien hereof of any Excepted Property as additional security may be made 
subject to any reservations, limitations or conditions which shall be 
set forth in a written instrument executed by the Mortgagor or the 
person so acting in its behalf or by such Mortgagee respecting the use 
and disposition of such property or the proceeds thereof.

                         GRANTING CLAUSE FOURTH

    Together with (subject to the rights of the Mortgagor set forth on 
Section [5.01]) all and singular the tenements, hereditaments and 
appurtenances belonging or in anywise appertaining to the aforesaid 
property or any part thereof, with the reversion and reversions, 
remainder and remainders and all the tolls, earnings, rents, issues, 
profits, revenues and other income, products and proceeds of the 
property subjected or required to be subjected to the lien of this 
Mortgage, and all other property of any nature appertaining to any of 
the plants, systems, business or operations of the Mortgagor, whether or 
not affixed to the realty, used in the operation of any of the premises 
or plants or the System, or otherwise, which are now owned or acquired 
by the Mortgagor, and all the estate, right, title and interest of every 
nature whatsoever, at law as well as in equity, of the Mortgagor in and 
to the same and every part thereof (other than Excepted Property with 
respect to any of the foregoing).

                            EXCEPTED PROPERTY

    There is, however, expressly excepted and excluded from the lien and 
operation of this Mortgage the following described property of the 
Mortgagor, now owned or hereafter acquired (herein sometimes referred to 
as ``Excepted Property''):
    A. all shares of stock, securities or other interests of the 
Mortgagor in the National Rural Utilities Cooperative Finance 
Corporation, the National Bank for Cooperatives and the St. Paul Bank 
for Cooperatives other than any stock, securities or other interests 
that are specifically described in Subclause D of Granting Clause First 
as being subjected to the lien hereof;
    B. all rolling stock (except mobile substations), automobiles, 
buses, trucks, truck cranes, tractors, trailers and similar vehicles and 
movable equipment, and all tools, accessories and supplies used in 
connection with any of the foregoing;
    C. all vessels, boats, ships, barges and other marine equipment, all 
airplanes, airplane engines and other flight equipment, and all tools, 
accessories and supplies used in connection with any of the foregoing;
    D. all office furniture, equipment and supplies that is not data 
processing, accounting or other computer equipment or software;
    E. all leasehold interests for office purposes;
    F. all leasehold interests of the Mortgagor under leases for an 
original term (including any period for which the Mortgagor shall have a 
right of renewal) of less than five (5) years;
    G. all timber and crops (both growing and harvested) and all coal, 
ore, gas, oil and other minerals (both in place or severed);
    H. the last day of the term of each leasehold estate (oral or 
written) and any agreement therefor, now or hereafter enjoyed by the 
Mortgagor and whether falling within a general or specific description 
of property herein: PROVIDED, HOWEVER, that the Mortgagor covenants and 
agrees that it will hold each such last day in trust for the use and 
benefit of all of the Mortgagees and Noteholders and that it will 
dispose of each such last day from time to time in accordance with such 
written order as the Mortgagee in its discretion may give;
    I. all permits, licenses, franchises, contracts, agreements, 
contract rights and other rights not specifically subjected or required 
to be subjected to the lien hereof by the express provisions of this 
Mortgage, whether now owned or hereafter acquired by the Mortgagor, 
which by their terms or by reason of applicable law would become void or 
voidable if mortgaged or pledged hereunder by the Mortgagor, or which 
cannot be granted, conveyed, mortgaged, transferred or assigned by this 
Mortgage without the consent of other parties whose consent has been 
withheld, or without subjecting any Mortgagee to a liability not 
otherwise contemplated by the provisions of this Mortgage, or which 
otherwise may not be, hereby lawfully and effectively granted, conveyed, 
mortgaged, transferred and assigned by the Mortgagor; and
    J. the property identified in Schedule ``C'' hereto.
    PROVIDED, HOWEVER, that (i) if, upon the occurrence of an Event of 
Default, any

[[Page 201]]

Mortgagee, or any receiver appointed pursuant to statutory provision or 
order of court, shall have entered into possession of all or 
substantially all of the Mortgaged Property, all the Excepted Property 
described or referred to in the foregoing Subdivisions A through H, 
inclusive, then owned or thereafter acquired by the Mortgagor shall 
immediately, and, in the case of any Excepted Property described or 
referred to in Subdivisions I through J, inclusive, upon demand of any 
Mortgagee or such receiver, become subject to the lien hereof to the 
extent permitted by law, and any Mortgagee or such receiver may, to the 
extent permitted by law, at the same time likewise take possession 
thereof, and (ii) whenever all Events of Default shall have been cured 
and the possession of all or substantially all of the Mortgaged Property 
shall have been restored to the Mortgagor, such Excepted Property shall 
again be excepted and excluded from the lien hereof to the extent and 
otherwise as hereinabove set forth.
    However, pursuant to Granting Clause Third, the Mortgagor may 
subject to the lien of this Mortgage any Excepted Property, whereupon 
the same shall cease to be Excepted Property.

                                HABENDUM

    TO HAVE AND TO HOLD all said property, rights, privileges and 
franchises of every kind and description, real, personal or mixed, 
hereby and hereafter (by supplemental mortgage or otherwise) granted, 
bargained, sold, aliened, remised, released, conveyed, assigned, 
transferred, mortgaged, encumbered, hypothecated, pledged, setover, 
confirmed, or subjected to a continuing security interest and lien as 
aforesaid, together with all the appurtenances thereto appertaining 
(said properties, rights, privileges and franchises, including any cash 
and securities hereafter deposited with any Mortgagee ((other than any 
such cash, if any, which is specifically stated herein not to be deemed 
part of the Mortgaged Property)), being herein collectively called the 
``Mortgaged Property'') unto the Mortgagees and the respective assigns 
of the Mortgagees forever, to secure equally and ratably the payment of 
the principal of (and premium, if any) and interest on the Notes, 
according to their terms, without preference, priority or distinction as 
to interest or principal (except as otherwise specifically provided 
herein) or as to lien or otherwise of any Note over any other Note by 
reason of the priority in time of the execution, delivery or maturity 
thereof or of the assignment or negotiation thereof, or otherwise, and 
to secure the due performance of all of the covenants, agreements and 
provisions herein and in the Loan Agreements contained, and for the uses 
and purposes and upon the terms, conditions, provisos and agreements 
hereinafter expressed and declared.
    SUBJECT, HOWEVER, to Permitted Encumbrances (as defined in Section 
1.01).

                                ARTICLE I

          DEFINITIONS & OTHER PROVISIONS OF GENERAL APPLICATION

    Section 1.01. Definitions. In addition to the terms defined 
elsewhere in this Mortgage, the terms defined in this Article I shall 
have the meanings specified herein and under the UCC, unless the context 
clearly requires otherwise. The terms defined herein include the plural 
as well as the singular and the singular as well as the plural.
    Accounting Requirements shall mean the requirements of any system of 
accounts prescribed by RUS so long as the Government is the holder, 
insurer or guarantor of any Notes, or, in the absence thereof, the 
requirements of generally accepted accounting principles applicable to 
businesses similar to that of the Mortgagor.
    Additional Notes shall mean any Notes issued by the Mortgagor to the 
Government or any other lender pursuant to Article II of this Mortgage 
including any refunding, renewal, or substitute Notes which may from 
time to time be executed and delivered by the Mortgagor pursuant to the 
terms of Article II.
    Board shall mean either the Board of Directors or the Board of 
Trustees, as the case may be, of the Mortgagor.
    Business Day shall mean any day that the Government is open for 
business.
    Debt Service Coverage Ratio (``DSC'') shall mean the ratio 
determined as follows: for each calendar year add (i) Patronage Capital 
or Margins of the Mortgagor, (ii) Interest Expense on Total Long Term 
Debt of the Mortgagor (as computed in accordance with the principles set 
forth in the definition of TIER) and (iii) Depreciation and Amortization 
Expense of the Mortgagor, and divide the total so obtained by an amount 
equal to the sum of all payments of principal and interest required to 
be made on account of Total Long-Term Debt during such calendar year 
increasing said sum by any addition to interest expense on account of 
Restricted Rentals as computed with respect to the Times Interest Earned 
Ratio herein.
    Depreciation and Amortization Expense shall mean an amount 
constituting the depreciation and amortization of the Mortgagor as 
computed pursuant to Accounting Requirements.
    Electric System shall mean, and shall be broadly construed to 
encompass and include, all of the Mortgagor's interests in all electric 
production, transmission, distribution, conservation, load management, 
general plant and other related facilities, equipment or property and in 
any mine, well, pipeline,

[[Page 202]]

plant, structure or other facility for the development, production, 
manufacture, storage, fabrication or processing of fossil, nuclear or 
other fuel of any kind or in any facility or rights with respect to the 
supply of water, in each case for use, in whole or in major part, in any 
of the Mortgagor's generating plants, now existing or hereafter acquired 
by lease, contract, purchase or otherwise or constructed by the 
Mortgagor, including any interest or participation of the Mortgagor in 
any such facilities or any rights to the output or capacity thereof, 
together with all additions, betterments, extensions and improvements to 
such Electric System or any part thereof hereafter made and together 
with all lands, easements and rights-of-way of the Mortgagor and all 
other works, property or structures of the Mortgagor and contract rights 
and other tangible and intangible assets of the Mortgagor used or useful 
in connection with or related to such Electric System, including without 
limitation a contract right or other contractual arrangement referred to 
in Granting Clause First, Subclause [(C)] but excluding any excepted 
property.
    Environmental Law and Environmental Laws shall mean all federal, 
state, and local laws, regulations, and requirements related to 
protection of human health or the environment, including but not limited 
to the Comprehensive Environmental Response, Compensation and Liability 
Act of 1980 (42 U.S.C. 9601 et seq.), the Resource Conservation and 
Recovery Act (42 U.S.C. 6901 et seq.), the Clean Water Act (33 U.S.C. 
1251 et seq.) and the Clean Air Act (42 U.S.C. 7401 et seq.), and any 
amendments and implementing regulations of such acts.
    Equity shall mean the total margins and equities and margins 
computed pursuant to Accounting Requirements, but excluding any 
Regulatory Created Assets.
    Event of Default shall have the meaning specified in Section [4.01] 
hereof.
    Excepted Property shall have the meaning stated in the Granting 
Clauses.
    Government shall mean the United States of America acting by and 
through the Administrator of RUS and shall include its successors and 
assigns.
    Government Notes shall mean the Original Notes, and any Additional 
Notes, issued by the Mortgagor to the Government, or guaranteed or 
insured as to payment by the Government.
    Independent shall mean when used with respect to any specified 
person or entity means such a person or entity who (1) is in fact 
independent, (2) does not have any direct financial interest or any 
material indirect financial interest in the Mortgagor or in any 
affiliate of the Mortgagor and (3) is not connected with the Mortgagor 
as an officer, employee, promoter, underwriter, trustee, partner, 
director or person performing similar functions.
    Interest Expense shall mean an amount constituting the interest 
expense of the Mortgagor as computed pursuant to Accounting 
Requirements.
    Lien shall mean any statutory or common law consensual or non-
consensual mortgage, pledge, security interest, encumbrance, lien, right 
of set off, claim or charge of any kind, including, without limitation, 
any conditional sale or other title retention transaction, any lease 
transaction in the nature thereof and any secured transaction under the 
UCC.
    Loan Agreement shall mean any agreement executed by and between the 
Mortgagor and the Government or any other lender in connection with the 
execution and delivery of any Notes secured hereby.
    Long-Term Debt shall mean any amount included in Total Long-Term 
Debt pursuant to Accounting Requirements.
    Long-Term Lease shall mean a lease having an unexpired term (taking 
into account terms of renewal at the option of the lessor, whether or 
not such lease has previously been renewed) of more than 12 months.
    Margins shall mean the sum of amounts recorded as operating margins 
and non-operating margins as computed in accordance with Accounting 
Requirements.
    Maximum Debt Limit, if any, shall mean the amount more particularly 
described in Schedule ``A'' hereof.
    Mortgage shall mean this Restated Mortgage and Security Agreement, 
including any amendments or supplements thereto from time to time.
    Mortgaged Property shall have the meaning specified as stated in the 
Habendum to the Granting Clauses.
    MORTGAGEE or MORTGAGEES shall mean the Government, ---------- {the 
supplemental lender{time} , ---------- their successors and assigns as 
well as any and all other lenders pursuant to Article II of this 
Mortgage that enter into a supplemental mortgage in accordance with 
Section [2.04] of Article II hereof, their successors and assigns.
    Net Utility Plant shall mean the amount constituting the total 
utility plant of the Mortgagor less depreciation computed in accordance 
with Accounting Requirements.
    Note or Notes shall mean one or more of the Government Notes, and 
any other Notes which may, from time to time, be secured under this 
Mortgage.
    Noteholder or Noteholders shall mean one or more of the holders of 
Notes secured by this Mortgage; PROVIDED, however, that in the case of 
any Notes that have been guaranteed or insured as to payment by RUS, as 
to such Notes Noteholder or Noteholders shall mean RUS, exclusively, 
regardless of whether such notes are in the possession of RUS.

[[Page 203]]

    Original Mortgage means the instrument(s) identified as such in 
Schedule ``A'' hereof.
    Original Notes shall mean the Notes listed on Schedule ``A'' hereto 
as such, such Notes being instruments evidencing outstanding 
indebtedness of the Mortgagor (i) to the Government (including 
indebtedness which has been issued by the Mortgagor to a third party and 
guaranteed or insured as to payment by the Government) and (ii) to each 
other Mortgagee on the date of this Mortgage.
    Outstanding Notes shall mean as of the date of determination, (i) 
all Notes theretofore issued, executed and delivered to any Mortgagee 
and (ii) any Notes guaranteed or insured as to payment by the 
Government, except (a) Notes referred to in clause (i) or (ii) for which 
the principal and interest have been fully paid and which have been 
canceled by the Noteholder, and (b) Notes the payment for which has been 
provided for pursuant to Section [5.03].
    Permitted Debt shall have the meaning specified in Section [3.08].
    Permitted Encumbrances shall mean:
    (1) as to the property specifically described in Granting Clause 
First, the restrictions, exceptions, reservations, conditions, 
limitations, interests and other matters which are set forth or referred 
to in such descriptions and each of which fits one or more of the 
clauses of this definition, PROVIDED, such matters do not in the 
aggregate materially detract from the value of the Mortgaged Property 
taken as a whole and do not materially impair the use of such property 
for the purposes for which it is held by the Mortgagor;
    (2) liens for taxes, assessments and other governmental charges 
which are not delinquent;
    (3) liens for taxes, assessments and other governmental charges 
already delinquent which are currently being contested in good faith by 
appropriate proceedings; PROVIDED the Mortgagor shall have set aside on 
its books adequate reserves with respect thereto;
    (4) mechanics', workmen's, repairmen's, materialmen's, 
warehousemen's and carriers' liens and other similar liens arising in 
the ordinary course of business for charges which are not delinquent, or 
which are being contested in good faith and have not proceeded to 
judgment; PROVIDED the Mortgagor shall have set aside on its books 
adequate reserves with respect thereto;
    (5) liens in respect of judgments or awards with respect to which 
the Mortgagor shall in good faith currently be prosecuting an appeal or 
proceedings for review and with respect to which the Mortgagor shall 
have secured a stay of execution pending such appeal or proceedings for 
review; PROVIDED the Mortgagor shall have set aside on its books 
adequate reserves with respect thereto;
    (6) easements and similar rights granted by the Mortgagor over or in 
respect of any Mortgaged Property, PROVIDED that in the opinion of the 
Board or a duly authorized officer of the Mortgagor such grant will not 
impair the usefulness of such property in the conduct of the Mortgagor's 
business and will not be prejudicial to the interests of the Mortgagees, 
and similar rights granted by any predecessor in title of the Mortgagor;
    (7) easements, leases, reservations or other rights of others in any 
property of the Mortgagor for streets, roads, bridges, pipes, pipe 
lines, railroads, electric transmission and distribution lines, 
telegraph and telephone lines, the removal of oil, gas, coal or other 
minerals and other similar purposes, flood rights, river control and 
development rights, sewage and drainage rights, restrictions against 
pollution and zoning laws and minor defects and irregularities in the 
record evidence of title, PROVIDED that such easements, leases, 
reservations, rights, restrictions, laws, defects and irregularities do 
not materially affect the marketability of title to such property and do 
not in the aggregate materially impair the use of the Mortgaged Property 
taken as a whole for the purposes for which it is held by the Mortgagor;
    (8) liens upon lands over which easements or rights of way are 
acquired by the Mortgagor for any of the purposes specified in Clause 
[(7)] of this definition, securing indebtedness neither created, assumed 
nor guaranteed by the Mortgagor nor on account of which it customarily 
pays interest, which liens do not materially impair the use of such 
easements or rights of way for the purposes for which they are held by 
the Mortgagor;
    (9) leases existing at the date of this instrument affecting 
property owned by the Mortgagor at said date which have been previously 
disclosed to the Mortgagees in writing and leases for a term of not more 
than two years (including any extensions or renewals) affecting property 
acquired by the Mortgagor after said date;
    (10) terminable or short term leases or permits for occupancy, which 
leases or permits expressly grant to the Mortgagor the right to 
terminate them at any time on not more than six months' notice and which 
occupancy does not interfere with the operation of the business of the 
Mortgagor;
    (11) any lien or privilege vested in any lessor, licensor or 
permittor for rent to become due or for other obligations or acts to be 
performed, the payment of which rent or performance of which other 
obligations or acts is required under leases, subleases, licenses or 
permits, so long as the payment of such rent or the performance of such 
other obligations or acts is not delinquent;

[[Page 204]]

    (12) liens or privileges of any employees of the Mortgagor for 
salary or wages earned but not yet payable;
    (13) the burdens of any law or governmental regulation or permit 
requiring the Mortgagor to maintain certain facilities or perform 
certain acts as a condition of its occupancy of or interference with any 
public lands or any river or stream or navigable waters;
    (14) any irregularities in or deficiencies of title to any rights-
of-way for pipe lines, telephone lines, telegraph lines, power lines or 
appurtenances thereto, or other improvements thereon, and to any real 
estate used or to be used primarily for right-of-way purposes, PROVIDED 
that in the opinion of counsel for the Mortgagor, the Mortgagor shall 
have obtained from the apparent owner of the lands or estates therein 
covered by any such right-of-way a sufficient right, by the terms of the 
instrument granting such right-of-way, to the use thereof for the 
construction, operation or maintenance of the lines, appurtenances or 
improvements for which the same are used or are to be used, or PROVIDED 
that in the opinion of counsel for the Mortgagor, the Mortgagor has 
power under eminent domain, or similar statutes, to remove such 
irregularities or deficiencies;
    (15) rights reserved to, or vested in, any municipality or 
governmental or other public authority to control or regulate any 
property of the Mortgagor, or to use such property in any manner, which 
rights do not materially impair the use of such property, for the 
purposes for which it is held by the Mortgagor;
    (16) any obligations or duties, affecting the property of the 
Mortgagor, to any municipality or governmental or other public authority 
with respect to any franchise, grant, license or permit;
    (17) any right which any municipal or governmental authority may 
have by virtue of any franchise, license, contract or statute to 
purchase, or designate a purchaser of or order the sale of, any property 
of the Mortgagor upon payment of cash or reasonable compensation 
therefor or to terminate any franchise, license or other rights or to 
regulate the property and business of the Mortgagor; PROVIDED, HOWEVER, 
that nothing in this clause 17 is intended to waive any claim or rights 
that the Government may otherwise have under Federal laws;
    (18) as to properties of other operating electric companies acquired 
after the date of this Mortgage by the Mortgagor as permitted by Section 
[3.10] hereof, reservations and other matters as to which such 
properties may be subject as more fully set forth in such Section;
    (19) any lien required by law or governmental regulations as a 
condition to the transaction of any business or the exercise of any 
privilege or license, or to enable the Mortgagor to maintain self-
insurance or to participate in any fund established to cover any 
insurance risks or in connection with workmen's compensation, 
unemployment insurance, old age pensions or other social security, or to 
share in the privileges or benefits required for companies participating 
in such arrangements; PROVIDED, HOWEVER, that nothing in this clause 19 
is intended to waive any claim or rights that the Government may 
otherwise have under Federal laws;
    (20) liens arising out of any defeased mortgage or indenture of the 
Mortgagor;
    (21) the undivided interest of other owners, and liens on such 
undivided interests, in property owned jointly with the Mortgagor as 
well as the rights of such owners to such property pursuant to the 
ownership contracts;
    (22) any lien or privilege vested in any lessor, licensor or 
permittor for rent to become due or for other obligations or acts to be 
performed, the payment of which rent or the performance of which other 
obligations or acts is required under leases, subleases, licenses or 
permits, so long as the payment of such rent or the performance of such 
other obligations or acts is not delinquent;
    (23) purchase money mortgages permitted by Section [3.08]; and
    (24) the Original Mortgage.
    Property Additions shall mean Utility System property as to which 
the Mortgagor shall provide Title Evidence and which shall be (or, if 
retired, shall have been) subject to the lien of this Mortgage, which 
shall be properly chargeable to the Mortgagor's utility plant accounts 
under Accounting Requirements (including property constructed or 
acquired to replace retired property credited to such accounts) and 
which shall be:
    (1) acquired (including acquisition by merger, consolidation, 
conveyance or transfer) or constructed by the Mortgagor after the date 
hereof, including property in the process of construction, insofar as 
not reflected on the books of the Mortgagor with respect to periods on 
or prior to the date hereof, and
    (2) used or useful in the utility business of the Mortgagor 
conducted with the properties described in the Granting Clauses of this 
Mortgage, even though separate from and not physically connected with 
such properties.
    ``Property Additions'' shall also include:
    (3) easements and rights-of-way that are useful for the conduct of 
the utility business of the Mortgagor, and
    (4) property located or constructed on, over or under public 
highways, rivers or other public property if the Mortgagor has the 
lawful right under permits, licenses or franchises granted by a 
governmental body having jurisdiction in the premises or by the law

[[Page 205]]

of the State in which such property is located to maintain and operate 
such property for an unlimited, indeterminate or indefinite period or 
for the period, if any, specified in such permit, license or franchise 
or law and to remove such property at the expiration of the period 
covered by such permit, license or franchise or law, or if the terms of 
such permit, license, franchise or law require any public authority 
having the right to take over such property to pay fair consideration 
therefor.
    ``Property Additions'' shall NOT include:
    (a) good will, going concern value, contracts, agreements, 
franchises, licenses or permits, whether acquired as such, separate and 
distinct from the property operated in connection therewith, or acquired 
as an incident thereto, or
    (b) any shares of stock or indebtedness or certificates or evidences 
of interest therein or other securities, or
    (c) any plant or system or other property in which the Mortgagor 
shall acquire only a leasehold interest, or any betterments, extensions, 
improvements or additions (other than movable physical personal property 
which the Mortgagor has the right to remove), of, upon or to any plant 
or system or other property in which the Mortgagor shall own only a 
leasehold interest unless (i) the term of the leasehold interest in the 
property to which such betterment, extension, improvement or addition 
relates shall extend for at least 75% of the useful life of such 
betterment, extension, improvement or addition and (ii) the lessor shall 
have agreed to give the Mortgagee reasonable notice and opportunity to 
cure any default by the Mortgagor under such lease and not to disturb 
any Mortgagee's possession of such leasehold estate in the event any 
Mortgagee succeeds to the Mortgagor's interest in such lease upon any 
Mortgagee's exercise of any remedies under this Mortgage so long as 
there is no default in the performance of the tenant's covenants 
contained therein, or
    (d) any property of the Mortgagor subject to the Permitted 
Encumbrance described in clause [(23)] of the definition thereof.
    Prudent Utility Practice shall mean any of the practices, methods 
and acts which, in the exercise of reasonable judgment, in light of the 
facts, including, but not limited to, the practices, methods and acts 
engaged in or approved by a significant portion of the electric utility 
industry prior thereto, known at the time the decision was made, would 
have been expected to accomplish the desired result consistent with 
cost-effectiveness, reliability, safety and expedition. It is recognized 
that Prudent Utility Practice is not intended to be limited to optimum 
practice, method or act to the exclusion of all others, but rather is a 
spectrum of possible practices, methods or acts which could have been 
expected to accomplish the desired result at the lowest reasonable cost 
consistent with cost-effectiveness, reliability, safety and expedition.
    REA shall mean the Rural Electrification Administration of the 
United States Department of Agriculture, the predecessor of RUS.
    Regulatory Created Assets shall mean the sum of any amounts properly 
recordable as unrecovered plant and regulatory study costs or as other 
regulatory assets, pursuant to Accounting Requirements.
    Restricted Rentals shall mean all rentals required to be paid under 
finance leases and charged to income, exclusive of any amounts paid 
under any such lease (whether or not designated therein as rental or 
additional rental) for maintenance or repairs, insurance, taxes, 
assessments, water rates or similar charges. For the purpose of this 
definition the term ``finance lease'' shall mean any lease having a 
rental term (including the term for which such lease may be renewed or 
extended at the option of the lessee) in excess of 3 years and covering 
property having an initial cost in excess of $250,000 other than 
aircraft, ships, barges, automobiles, trucks, trailers, rolling stock 
and vehicles; office, garage and warehouse space; office equipment and 
computers.
    RUS shall mean the Rural Utilities Service, an agency of the United 
States Department of Agriculture, or if at any time after the execution 
of this Mortgage RUS is not existing and performing the duties of 
administering a program of rural electrification as currently assigned 
to it, then the entity performing such duties at such time.
    Security Interest shall mean any assignment, transfer, mortgage, 
hypothecation or pledge.
    Subordinated Indebtedness shall mean secured indebtedness of the 
Mortgagor, payment of which shall be subordinated to the prior payment 
of the Notes in accordance with the provisions of Section [3.08] hereof 
by subordination agreement in form and substance satisfactory to each 
Mortgagee which approval will not be unreasonably withheld.
    Supplemental Mortgage shall mean an instrument of the type described 
in Section [2.04].
    Times Interest Earned Ratio (``TIER'') shall mean the ratio 
determined as follows: for each calendar year: add (i) patronage capital 
or margins of the Mortgagor and (ii) Interest Expense on Total Long-Term 
Debt of the Mortgagor and divide the total so obtained by Interest 
Expense on Total Long-Term Debt of the Mortgagor, provided, however, 
that in computing Interest Expense on Total Long-Term Debt, there shall 
be added, to the extent not otherwise included, an amount equal to 33-1/
3% of the excess of Restricted Rentals paid by the Mortgagor over 2% of 
the Mortgagor's Equity.
    Title Evidence shall mean with respect to any real property:

[[Page 206]]

    (1) an opinion of counsel to the effect that the Mortgagor has 
title, whether fairly deducible of record or based upon prescriptive 
rights (or, as to personal property, based on such evidence as counsel 
shall determine to be sufficient), as in the opinion of counsel is 
satisfactory for the use thereof in connection with the operations of 
the Mortgagor, and counsel in giving such opinion may disregard any 
irregularity or deficiency in the record evidence of title which, in the 
opinion of such counsel, can be cured by proceedings within the power of 
the Mortgagor or does not substantially impair the usefulness of such 
property for the purpose of the Mortgagor and may base such opinion upon 
counsel's own investigation or upon affidavits, certificates, abstracts 
of title, statements or investigations made by persons in whom such 
counsel has confidence or upon examination of a certificate or guaranty 
of title or policy of title insurance in which counsel has confidence; 
or
    (2) a mortgagee's policy of title insurance in the amount of the 
cost to the Mortgagor of the land included in Property Additions, as 
such cost is determined by the Mortgagor in accordance with the 
Accounting Requirements, issued in favor of the Mortgagees by an entity 
authorized to insure title in the states where the subject property is 
located, showing the Mortgagor as the owner of the subject property and 
insuring the lien of this Mortgage; and with respect to any personal 
property a certificate of the general manage or other duly authorized 
officer that the Mortgagor lawfully owns and is possessed of such 
property.
    Total Assets shall mean an amount constituting total assets of the 
Mortgagor as computed pursuant to Accounting Requirements, but excluding 
any Regulatory Created Assets.
    Total Long-Term Debt shall mean the total outstanding long-term debt 
of the Mortgagor as computed pursuant to Accounting Requirements.
    Total Utility Plant shall mean the total of all property properly 
recorded in the utility plant accounts of the Mortgagor, pursuant to 
Accounting Requirements.
    Uniform Commercial Code or UCC shall mean the UCC of the state 
referred to in Section [1.04], and if Mortgaged Property is located in a 
state other than that state, then as to such Mortgaged Property UCC 
refers to the UCC in effect in the state where such property is located.
    Utility System shall mean the Electric System and all of the 
Mortgagor's interest in community infrastructure located substantially 
within its electric service territory, namely water and waste systems, 
solid waste disposal facilities, telecommunications and other electronic 
communications systems, and natural gas distribution systems.
    SECTION 1.02. General Rules of Construction:
    a. Accounting terms not referred to above are used in this Mortgage 
in their ordinary sense and any computations relating to such terms 
shall be computed in accordance with the Accounting Requirements.
    b. Any reference to ``directors'' or ``board of directors'' shall be 
deemed to mean ``trustees'' or ``board of trustees,'' as the case may 
be.
    SECTION 1.03. Special Rules of Construction if RUS is a Mortgagee: 
During any period that RUS is a Mortgagee, the following additional 
provisions shall apply:
    a. In the case of any Notes that have been guaranteed or insured as 
to payment by RUS, as to such Notes RUS shall be considered to be the 
Noteholder, exclusively, regardless of whether such Notes are in the 
possession of RUS.
    b. In the case of any prior approval rights conferred upon RUS by 
Federal statutes, including (without limitation) Section 7 of the Rural 
Electrification Act of 1936, as amended, with respect to the sale or 
disposition of property, rights, or franchises of the Mortgagor, all 
such statutory rights are reserved except to the extent that they are 
expressly modified or waived in this Mortgage.
    SECTION 1.04. Governing Law: This Mortgage shall be construed in and 
governed by Federal law to the extent applicable, and otherwise by the 
laws of the State of --------.
    SECTION 1.05 Notices: All demands, notices, reports, approvals, 
designations, or directions required or permitted to be given hereunder 
shall be in writing and shall be deemed to be properly given if sent by 
registered or certified mail, postage prepaid, or delivered by hand, or 
sent by facsimile transmission, receipt confirmed, addressed to the 
proper party or parties at the following address:
    As to the Mortgagor:

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
    As to the Mortgagee:

    Rural Utilities Service,
    United States Department of Agriculture,
    Washington, DC 20250-1500

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

and as to any other person, firm, corporation or governmental body or 
agency having an interest herein by reason of being a Mortgagee, at the 
last address designated by such person, firm, corporation, governmental 
body or agency to the Mortgagor and the other Mortgagees. Any such party 
may from time to time designate to each other a new address to which 
demands, notices, reports, approvals, designations or directions may be

[[Page 207]]

addressed, and from and after any such designation the address 
designated shall be deemed to be the address of such party in lieu of 
the address given above.

                               ARTICLE II

                            ADDITIONAL NOTES

    SECTION 2.01. Additional Notes: (a) Without the prior consent of any 
Mortgagee or any Noteholder, the Mortgagor may issue Additional Notes to 
the Government or to another lender or lenders for the purpose of 
acquiring, procuring or constructing new or replacement Eligible 
Property Additions which Notes will thereupon be secured equally and 
ratably with the Notes if each of the following requirements are 
satisfied:
    (1) As evidenced by a certificate of an Independent certified public 
accountant sent to each Mortgagee on or before the first advance of 
proceeds from such Additional Notes:
    (i) The Mortgagor shall have achieved for each of the two calendar 
years immediately preceding the issuance of such Additional Notes, a 
TIER of not less than 1.25 and a DSC of not less than 1.25;
    (ii) After taking into account the effect of such Additional Notes 
on the Total Long Term Debt of the Mortgagor, the ratio of the 
Mortgagor's Net Utility Plant to its Total Long Term Debt shall be 
greater than or equal to 1.0 on a pro forma basis;
    (iii) After taking into account the effect of such Additional Notes 
on the Total Assets of such Mortgagor, the Mortgagor shall have Equity 
greater than or equal to 27 percent of Total Assets on a pro forma 
basis; and
    (iv) The sum of the aggregate principal amount of such Additional 
Notes (if any) that are not related to the Electric System if added to 
the aggregate outstanding principal amount of all the existing Notes (if 
any) that are not related to the Electric System will not exceed 30% of 
the Mortgagor's Equity on a pro forma basis.
    (2) No Event of Default has occurred and is continuing hereunder, or 
any event which with the giving of notice or lapse of time or both would 
become an Event of Default has occurred and is continuing.
    (3) The Eligible Property Additions being constructed, acquired, 
procured or replaced are part of the Mortgagor's Utility System.
    (4) The Borrower's general manager or other duly authorized officer 
shall send to each of the Mortgagees a certificate in substantially the 
form attached hereto as [Exhibit A] on or before the date of the first 
advance of proceeds from such Additional Notes.
    (b) For purposes of this section:
    (1) ``Eligible Property Additions'' shall mean Property Additions 
acquired or whose construction was completed not more than 5 years prior 
to the issuance of the Additional Notes and Property Additions acquired 
or whose construction is started and/or completed not more than 4 years 
after issuance of the Additional Notes, but shall exclude any Property 
Additions financed by any other debt secured under the Mortgage at the 
time additional Notes are issued;
    (2) Notes are considered to be ``issued'' on, and the date of 
``issuance'' shall be, the date on which they are executed by the 
Mortgagor; and
    (3) For purposes of calculating the pro forma ratios in 
subparagraphs (a)(1)(ii) and (iii), the values for Total Long Term Debt 
and Total Assets before debt issuance and the values for Equity and Net 
Utility Plant shall be the most recently available end-of-month figures 
preceding the issuance of the Additional Notes, but in no case for a 
month ending more than 180 days preceding such issuance.
    SECTION 2.02. Refunding or Refinancing Notes: The Mortgagor shall 
also have the right without the consent of any Mortgagee or any 
Noteholder to issue Additional Notes for the purpose of refunding or 
refinancing any Notes so long as the total amount of outstanding 
indebtedness evidenced by such Additional Note or Notes is not greater 
than 105% of the then outstanding principal balance of the Note or Notes 
being refunded or refinanced. PROVIDED, HOWEVER, that the Mortgagor may 
not exercise its rights under this Section if an Event of Default has 
occurred and is continuing, or any event which with the giving of notice 
or lapse of time or both would become an Event of Default has occurred 
and is continuing. On or before the first advance of proceeds from Notes 
issued under this section, the Mortgagor shall notify each Mortgagee of 
the refunding or refinancing. Additional Notes issued pursuant to this 
Section [2.02] will thereupon be secured equally and ratably with the 
Notes.
    SECTION 2.03. Other Additional Notes.With the prior written consent 
of each Mortgagee, the Mortgagor may issue Additional Notes to the 
Government or any lender or lenders, which Notes will thereupon be 
secured equally and ratably with Notes without regard to whether any of 
the requirements of Sections [2.01] or [2.02] are satisfied.
    SECTION 2.04. Additional Lenders Entitled to the Benefits of This 
Mortgage: Without the prior consent of any Mortgagee or any Noteholder, 
each new lender designated as a payee in any Additional Notes issued by 
the Mortgagor pursuant to Section [2.01] or [2.02] of this Mortgage 
shall become a Mortgagee hereunder upon the execution and delivery by 
the Mortgagor and such lender of a supplemental mortgage hereto 
designating such lender as a Mortgagee hereunder. Such new lender shall 
be entitled to the benefits of this Mortgage without further act or 
deed. Each Mortgagee and each person or entity that becomes a lender 
pursuant to Section [2.01] or

[[Page 208]]

[2.02] of this Mortgage shall, upon the request of the Mortgagor to do 
so, execute and deliver a supplement to this Mortgage in substantially 
the form set forth in Section [2.05] to evidence the addition of such 
new lender as an additional Mortgagee entitled to the benefits of this 
Mortgage. The failure of any existing Mortgagee to enter into such 
supplemental mortgage shall not deprive the new lender of its rights 
under this Mortgage; provided that such additional indebtedness 
otherwise conforms in all respects with the requirements for issuing 
Additional Notes under this Mortgage.
    SECTION 2.05. Form of Supplemental Mortgage: (a) The form of 
supplemental mortgage referred to in Section [2.04] is attached to this 
Mortgage as Exhibit B and hereby incorporated by reference as if set 
forth in full at this point.
    (b) In the event that the Mortgagor subsequently issues Additional 
Notes pursuant to Sections [2.01] or [2.02] to any existing Mortgagee 
and that Mortgagee desires further assurance that such Additional Notes 
will be secured by the lien of the Mortgage, an instrument substantially 
in the form of the supplemental mortgage attached as Exhibit B may be 
used.
    (c) In the event that the Mortgagor issues Additional Notes pursuant 
to Section [2.03] to either an existing Mortgagee or a new lender, in 
either case with the prior written consent of each Mortgagee, then an 
instrument substantially in the form of the supplemental mortgage 
attached as Exhibit B may also be used.

           ARTICLE III--PARTICULAR COVENANTS OF THE MORTGAGOR

    SECTION 3.01. Payment of Debt Service on Notes: The Mortgagor will 
duly and punctually pay the principal, premium, if any, and interest on 
the Notes in accordance with the terms of the Notes, the Loan Contracts, 
this Mortgage and any Supplemental Mortgage authorizing such Notes.
    SECTION 3.02. Warranty of Title: (a) At the time of the execution 
and delivery of this instrument, the Mortgagor has good and marketable 
title in fee simple to the real property specifically described in 
Granting Clause First as owned in fee and good and marketable title to 
the interests in real property specifically described in Granting Clause 
[First], subject to no mortgage, lien, charge or encumbrance except as 
stated therein, and has full power and lawful authority to grant, 
bargain, sell, alien, remise, release, convey, assign, transfer, 
encumber, mortgage, pledge, set over and confirm said real property and 
interests in real property in the manner and form aforesaid.
    (b) At the time of the execution and delivery of this instrument, 
the Mortgagor lawfully owns and is possessed of the personal property 
specifically described in Granting Clauses [First and Second], subject 
to no mortgage, lien, charge or encumbrance except as stated therein, 
and has full power and lawful authority to mortgage, assign, transfer, 
deliver, pledge and grant a continuing security interest in said 
property and, including any proceeds thereof, in the manner and form 
aforesaid.
    (c) The Mortgagor hereby does and will forever warrant and defend 
the title to the property specifically described in Granting Clause 
First against the claims and demands of all persons whomsoever, except 
Permitted Encumbrances.
    SECTION 3.03. After-Acquired Property; Further Assurances; 
Recording: (a) All property of every kind, other than Excepted Property, 
acquired by the Mortgagor after the date hereof, shall, immediately upon 
the acquisition thereof by the Mortgagor, and without any further 
mortgage, conveyance or assignment, become subject to the lien of this 
Mortgage; SUBJECT, HOWEVER, to Permitted Encumbrances and the 
exceptions, if any, to which all of the Mortgagees consent. 
Nevertheless, the Mortgagor will do, execute, acknowledge and deliver 
all and every such further acts, conveyances, mortgages, financing 
statements and assurances as any Mortgagee shall require for 
accomplishing the purposes of this Mortgage.
    (b) The Mortgagor will cause this Mortgage and all Supplemental 
Mortgages and other instruments of further assurance, including all 
financing statements covering security interests in personal property, 
to be promptly recorded, registered and filed, and will execute and file 
such financing statements and cause to be issued and filed such 
continuation statements, all in such manner and in such places as may be 
required by law fully to preserve and protect the rights of all of the 
Mortgagees and Noteholders hereunder to all property comprising the 
Mortgaged Property. The Mortgagor will furnish to each Mortgagee:
    (1) promptly after the execution and delivery of this instrument and 
of each Supplemental Mortgage or other instrument of further assurance, 
an Opinion of Counsel stating that, in the opinion of such Counsel, this 
instrument and all such Supplemental Mortgages and other instruments of 
further assurance have been properly recorded, registered and filed to 
the extent necessary to make effective the lien intended to be created 
by this Mortgage, and reciting the details of such action or referring 
to prior Opinions of Counsel in which such details are given, and 
stating that all financing statements and continuation statements have 
been executed and filed that are necessary fully to preserve and protect 
the rights of all of the Mortgagees and Noteholders hereunder, or 
stating that, in the opinion of such Counsel, no such action is 
necessary to make the lien effective; and

[[Page 209]]

    (2) within 30 days after ---------- in each year beginning with the 
year ----, an Opinion of Counsel, dated as of such date, either stating 
that, in the opinion of such Counsel, such action has been taken with 
respect to the recording, registering, filing, re-recording, re-
registering and re-filing of this instrument and of all Supplemental 
Mortgages, financing statements, continuation statements or other 
instruments of further assurances as is necessary to maintain the lien 
of this Mortgage (including the lien on any property acquired by the 
Mortgagor after the execution and delivery of this instrument and owned 
by the Mortgagor at the end of preceding calendar year) and reciting the 
details of such action or referring to prior Opinions of Counsel in 
which such details are given, and stating that all financing statements 
and continuation statements have been executed and filed that are 
necessary to fully preserve and protect the rights of all of the 
Mortgagees and Noteholders hereunder, or stating that, in the opinion of 
such Counsel, no such action is necessary to maintain such lien.
    SECTION 3.04. Environmental Requirements and Indemnity: (a) The 
Mortgagor shall, with respect to all facilities which may be part of the 
Mortgaged Property, comply with all Environmental Laws.
    (b) The Mortgagor shall defend, indemnify, and hold harmless each 
Mortgagee, its successors and assigns, from and against any and all 
liabilities, losses, damages, costs, expenses (including but not limited 
to reasonable attorneys' fees and expenses), causes of actions, 
administrative proceedings, suits, claims, demands, or judgments of any 
nature arising out of or in connection with any matter related to the 
Mortgage Property and any Environmental Law, including but not limited 
to:
    (1) the past, present, or future presence of any hazardous 
substance, contaminant, pollutant, or hazardous waste on or related to 
the Mortgaged Property;
    (2) any failure at any time by the undersigned to comply with the 
terms of any order related to the Mortgaged Property and issued by any 
federal, state, or municipal department or agency (other than RUS) 
exercising its authority to enforce any Environmental Law; and
    (3) any lien or claim imposed under any Environmental Law related to 
clause (1).
    (c) Within 10 (ten) business days after receiving knowledge of any 
liability, losses, damages, costs, expenses (including but not limited 
to reasonable attorneys' fees and expenses), cause of action, 
administrative proceeding, suit, claim, demand, judgment, lien, 
reportable event including but not limited to the release of a hazardous 
substance, or potential or actual violation or non-compliance arising 
out of or in connection with the Mortgaged Property and any 
Environmental Law, the Mortgagor shall provide each Mortgagee with 
written notice of such matter. With respect to any matter upon which it 
has provided such notice, the Mortgagor shall immediately take any and 
all appropriate actions to remedy, cure, defend, or otherwise 
affirmatively respond to the matter.
    SECTION 3.05. Payment of Taxes: The Mortgagor will pay or cause to 
be paid as they become due and payable all taxes, assessments and other 
governmental charges lawfully levied or assessed or imposed upon the 
Mortgaged Property or any part thereof or upon any income therefrom, and 
also (to the extent that such payment will not be contrary to any 
applicable laws) all taxes, assessments and other governmental charges 
lawfully levied, assessed or imposed upon the lien or interest of the 
Noteholders or of the Mortgagees in the Mortgaged Property, so that (to 
the extent aforesaid) the lien of this Mortgage shall at all times be 
wholly preserved at the cost of the Mortgagor and without expense to the 
Mortgagees or the Noteholders; PROVIDED, HOWEVER, that the Mortgagor 
shall not be required to pay and discharge or cause to be paid and 
discharged any such tax, assessment or governmental charge to the extent 
that the amount, applicability or validity thereof shall currently be 
contested in good faith by appropriate proceedings and the Mortgagor 
shall have established and shall maintain adequate reserves on its books 
for the payment of the same.
    SECTION 3.06. Authority to Execute and Deliver Notes, Loan 
Agreements and Mortgage; All Action Taken; Enforceable Obligations: The 
Mortgagor is authorized under its articles of incorporation and bylaws 
[or code of regulations] and all applicable laws and by corporate action 
to execute and deliver the Notes, any Additional Notes, the Loan 
Agreements and this Mortgage. The Notes, the Loan Agreements and this 
Mortgage are, and any Additional Notes and Loan Agreements when executed 
and delivered will be, the valid and enforceable obligations of the 
Mortgagor in accordance with their respective terms.
    SECTION 3.07. Restrictions on Further Encumbrances on Property: 
Except to secure Additional Notes, the Mortgagor will not, without the 
prior written consent of each Mortgagee, create or incur or suffer or 
permit to be created or incurred or to exist any Lien, charge, 
assignment, pledge, mortgage on any of the Mortgaged Property inferior 
to, prior to, or on a parity with the Lien of this Mortgage except for 
the Permitted Encumbrances. Subject to the provisions of Section [3.08], 
or unless approved by each of the Mortgagees, the Mortgagor will 
purchase all materials, equipment and replacements to be incorporated in 
or used in connection with the Mortgaged Property outright and not

[[Page 210]]

subject to any conditional sales agreement, chattel mortgage, bailment, 
lease or other agreement reserving to the seller any right, title or 
Lien.
    SECTION 3.08. Restrictions On Additional Permitted Debt: The 
Mortgagor shall not incur, assume, guarantee or otherwise become liable 
in respect of any debt for borrowed money and Restricted Rentals 
(including Subordinated Debt) other than the following: (``Permitted 
Debt'')
    (1) Additional Notes issued in compliance with Article II hereof;
    (2) Purchase money indebtedness in non-Utility System property, in 
an amount not exceeding 10% of Net Utility Plant;
    (3) Restricted Rentals in an amount not to exceed 5% of Equity 
during any 12 consecutive calendar month period;
    (4) Unsecured lease obligations incurred in the ordinary course of 
business except Restricted Rentals;
    (5) Debt represented by dividends declared but not paid; and
    (6) Subordinated Indebtedness approved by each Mortgagee.
    PROVIDED, However, that the Mortgagor may incur Permitted Debt 
without the consent of the Mortgagee only so long as there exists no 
Event of Default hereunder and there has been no continuing occurrence 
which with the passage of time and giving of notice could become an 
Event of Default hereunder.
    PROVIDED, FURTHER, by executing this Mortgage any consent of RUS 
that the Mortgagor would otherwise be required to obtain under this 
Section is hereby deemed to be given or waived by RUS by operation of 
law to the extent, but only to the extent, that to impose such a 
requirement of RUS consent would clearly violate existing federal laws 
or government regulations.
    SECTION 3.09. Preservation of Corporate Existence and Franchises: 
The Mortgagor will, so long as any Outstanding Notes exist, take or 
cause to be taken all such action as from time to time may be necessary 
to preserve its corporate existence and to preserve and renew all 
franchises, rights of way, easements, permits, and licenses now or 
hereafter to be granted or upon it conferred the loss of which would 
have a material adverse affect on the Mortgagor's financial condition or 
business. The Mortgagor will comply with all laws, ordinances, 
regulations, orders, decrees and other legal requirements applicable to 
it or its property the violation of which could have a material adverse 
affect on the Mortgagor's financial condition or business.
    SECTION 3.10. Limitations on Consolidations and Mergers: The 
Mortgagor shall not, without the prior written approval of each 
Mortgagee, consolidate or merge with any other corporation or convey or 
transfer the Mortgaged Property substantially as an entirety unless: (1) 
such consolidation, merger, conveyance or transfer shall be on such 
terms as shall fully preserve the lien and security hereof and the 
rights and powers of the Mortgagees hereunder; (2) the entity formed by 
such consolidation or with which the Mortgagor is merged or the 
corporation which acquires by conveyance or transfer the Mortgaged 
Property substantially as an entirety shall execute and deliver to the 
Mortgagees a mortgage supplemental hereto in recordable form and 
containing an assumption by such successor entity of the due and 
punctual payment of the principal of and interest on all of the 
Outstanding Notes and the performance and observance of every covenant 
and condition of this Mortgage; (3) immediately after giving effect to 
such transaction, no default hereunder shall have occurred and be 
continuing; (4) the Mortgagor shall have delivered to the Mortgagees a 
certificate of its general manager or other officer, in form and 
substance satisfactory to each of the Mortgagees, which shall state that 
such consolidation, merger, conveyance or transfer and such supplemental 
mortgage comply with this subsection and that all conditions precedent 
herein provided for relating to such transaction have been complied 
with; (5) the Mortgagor shall have delivered to the Mortgagees an 
opinion of counsel in form and substance satisfactory to each of the 
Mortgagees; and (6) the entity formed by such consolidation or with 
which the Mortgagor is merged or the corporation which acquires by 
conveyance or transfer the Mortgaged Property substantially as an 
entirety shall be an entity--(A) having Equity equal to at least 27% of 
its Total Assets on a pro forma basis after giving effect to such 
transaction, (B) having a pro forma TIER of not less than 1.25 and a pro 
forma DSC of not less than 1.25 for each of the two preceding calendar 
years, and (C) having Net Utility Plant equal to or greater than 1.0 
times its Total Long-Term Debt on a pro forma basis. Upon any 
consolidation or merger or any conveyance or transfer of the Mortgaged 
Property substantially as an entirety in accordance with this 
subsection, the successor entity formed by such consolidation or with 
which the Mortgagor is merged or to which such conveyance or transfer is 
made shall succeed to, and be substituted for, and may exercise every 
right and power of, the Mortgagor under this Mortgage with the same 
effect as if such successor entity had been named as the Mortgagor 
herein.
    SECTION 3.11. Limitations on Transfers of Property: The Mortgagor 
may not, except as provided in [Section 3.10] above, without the prior 
written approval of each Mortgagee, sell, lease or transfer any 
Mortgaged Property to any other person or entity (including any 
subsidiary or affiliate of the Mortgagor), unless (1) there exists no 
Event of Default or occurrence which with the passing of time

[[Page 211]]

and the giving of notice would be an Event of Default, (2) fair market 
value is obtained for such property, (3) the aggregate value of assets 
so sold, leased or transferred in any 12-month period is less than 10% 
of Net Utility Plant, and (4) the proceeds of such sale, lease or 
transfer, less ordinary and reasonable expenses incident to such 
transaction, are immediately (i) applied as a prepayment of all Notes 
equally and ratably, (ii) in the case of dispositions of equipment, 
materials or scrap, applied to the purchase of other property useful in 
the Mortgagor's utility business, not necessarily of the same kind as 
the property disposed of, which shall forthwith become subject to the 
Lien of the Mortgage, or (iii) applied to the acquisition or 
construction of utility plant.
    SECTION 3.12. Maintenance of Mortgaged Property: (a) So long as the 
Mortgagor holds title to the Mortgaged Property, the Mortgagor will at 
all times maintain and preserve the Mortgaged Property which is used or 
useful in the Mortgagor's business and each and every part and parcel 
thereof in good repair, working order and condition, ordinary wear and 
tear and acts of God excepted, and in compliance with Prudent Utility 
Practice and in compliance with all applicable laws, regulations and 
orders, and will from time to time make all needed and proper repairs, 
renewals and replacements, and useful and proper alterations, additions, 
betterments and improvements, and will, subject to contingencies beyond 
its reasonable control, at all times use all reasonable diligence to 
furnish the consumers served by it through the Mortgaged Property, or 
any part thereof, with an adequate supply of electric power and energy. 
If any substantial part of the Mortgaged Property is leased by the 
Mortgagor to any other party, the lease agreement between the Mortgagor 
and the lessee shall obligate the lessee to comply with the provisions 
of subsections (a) and (b) of this Section in respect of the leased 
facilities and to permit the Mortgagor to operate the leased facilities 
in the event of any failure by the lessee to so comply.
    (b) If in the sole judgement of any Mortgagee, the Mortgaged 
Property is not being maintained and repaired in accordance with 
paragraph (a) of this section, such Mortgagee may send to the Mortgagor 
a written report of needed improvements and the Mortgagor will upon 
receipt of such written report promptly undertake to accomplish such 
improvements.
    (c) The Mortgagor further agrees that upon reasonable written 
request of any Mortgagee, which request together with the requests of 
any other Mortgagees shall be made no more frequently than once every 
three years, the Mortgagor will supply promptly to each Mortgagee a 
certification (hereinafter called the ``Engineer's Certification''), in 
form satisfactory to the requestor, prepared by a professional engineer, 
who shall be satisfactory to the Mortgagees, as to the condition of the 
Mortgaged Property. If in the sole judgment of any Mortgagee the 
Engineer's Certification discloses the need for improvements to the 
condition of the Mortgaged Property or any other operations of the 
Mortgagor, such Mortgagee may send to the Mortgagor a written report of 
such improvements and the Mortgagor will upon receipt of such written 
report promptly undertake to accomplish such of these improvements as 
are required by such Mortgagee.
    SECTION 3.13. Insurance; Restoration of Damaged Mortgaged Property: 
(a) The Mortgagor will take out, as the respective risks are incurred, 
and maintain the classes and amounts of insurance in conformance with 
generally accepted utility industry standards for such classes and 
amounts of coverages of utilities of the size and character of the 
Mortgagor and consistent with Prudent Utility Practice.
    (b) The foregoing insurance coverage shall be obtained by means of 
bond and policy forms approved by regulatory authorities having 
jurisdiction, and, with respect to insurance upon any part of the 
Mortgaged Property, shall provide that the insurance shall be payable to 
the Mortgagees as their interests may appear by means of the standard 
mortgagee clause without contribution. Each policy or other contract for 
such insurance shall contain an agreement by the insurer that, 
notwithstanding any right of cancellation reserved to such insurer, such 
policy or contract shall continue in force for at least 30 days after 
written notice to each Mortgagee of cancellation.
    (c) In the event of damage to or the destruction or loss of any 
portion of the Mortgaged Property which is used or useful in the 
Mortgagor's business and which shall be covered by insurance, unless 
each Mortgagee shall otherwise agree, the Mortgagor shall replace or 
restore such damaged, destroyed or lost portion so that such Mortgaged 
Property shall be in substantially the same condition as it was in prior 
to such damage, destruction or loss, and shall apply the proceeds of the 
insurance for that purpose. The Mortgagor shall replace the lost portion 
of such Mortgaged Property or shall commence such restoration promptly 
after such damage, destruction or loss shall have occurred and shall 
complete such replacement or restoration as expeditiously as 
practicable, and shall pay or cause to be paid out of the proceeds of 
such insurance all costs and expenses in connection therewith.
    (d) Sums recovered under any policy or fidelity bond by the 
Mortgagor for a loss of funds advanced under the Notes or recovered by 
any Mortgagee or any Noteholder for any loss under such policy or bond 
shall, unless

[[Page 212]]

applied as provided in the preceding paragraph, be used to finance 
construction of utility plant secured or to be secured by this Mortgage, 
or unless otherwise directed by the Mortgagees, be applied to the 
prepayment of the Notes pro rata according to the unpaid principal 
amounts thereof (such prepayments to be applied to such Notes and 
installments thereof as may be designated by the respective Mortgagee at 
the time of any such prepayment), or be used to construct or acquire 
utility plant which will become part of the Mortgaged Property. At the 
request of any Mortgagee, the Mortgagor shall exercise such rights and 
remedies which they may have under such policy or fidelity bond and 
which may be designated by such Mortgagee, and the Mortgagor hereby 
irrevocably appoints each Mortgagee as its agent to exercise such rights 
and remedies under such policy or bond as such Mortgagee may choose, and 
the Mortgagor shall pay all costs and reasonable expenses incurred by 
the Mortgagee in connection with such exercise.
    SECTION 3.14. Mortgagee Right to Expend Money to Protect Mortgaged 
Property: The Mortgagor agrees that any Mortgagee from time to time 
hereunder may, in its sole discretion, after having given 5 Business 
days prior written notice to Mortgagor, but shall not be obligated to, 
advance funds on behalf of Mortgagor, in order to insure the Mortgagor's 
compliance with any covenant, warranty, representation or agreement of 
the Mortgagor made in or pursuant to this Mortgage or any of the Loan 
Agreements, to preserve or protect any right or interest of the 
Mortgagees in the Mortgaged Property or under or pursuant to this 
Mortgage or any of the Loan Agreements, including without limitation, 
the payment of any insurance premiums or taxes and the satisfaction or 
discharge of any judgment or any Lien upon the Mortgaged Property or 
other property or assets of Mortgagor; provided, however, that the 
making of any such advance by or through any Mortgagee shall not 
constitute a waiver by any Mortgagee of any Event of Default with 
respect to which such advance is made nor relieve the Mortgagor of any 
such Event of Default. The Mortgagor shall pay to a Mortgagee upon 
demand all such advances made by such Mortgagee with interest thereon at 
a rate equal to that on the Note having the highest interest rate but in 
no event shall such rate be in excess of the maximum rate permitted by 
applicable law. All such advances shall be included in the obligations 
and secured by the security interest granted hereunder.
    SECTION 3.15. Time Extensions for Payment of Notes: Any Mortgagee 
may, at any time or times in succession without notice to or the consent 
of the Mortgagor, or any other Mortgagee, and upon such terms as such 
Mortgagee may prescribe, grant to any person, firm or corporation who 
shall have become obligated to pay all or any part of the principal of 
(and premium, if any) or interest on any Note held by or indebtedness 
owed to such Mortgagee or who may be affected by the lien hereby 
created, an extension of the time for the payment of such principal, 
(and premium, if any) or interest, and after any such extension the 
Mortgagor will remain liable for the payment of such Note or 
indebtedness to the same extent as though it had at the time of such 
extension consented thereto in writing.
    SECTION 3.16. Application of Proceeds from Condemnation: (a) In the 
event that the Mortgaged Property or any part thereof, shall be taken 
under the power of eminent domain, all proceeds and avails therefrom may 
be used to finance construction of utility plant secured or to be 
secured by this Mortgage. Any proceeds not so used shall forthwith be 
applied by the Mortgagor: first, to the ratable payment of any 
indebtedness secured by this Mortgage other than principal of or 
interest on the Notes; second, to the ratable payment of interest which 
shall have accrued on the Notes and be unpaid; third, to the ratable 
payment of or on account of the unpaid principal of the Notes, to such 
installments thereof as may be designated by the respective Mortgagee at 
the time of any such payment; and fourth, the balance shall be paid to 
whomsoever shall be entitled thereto.
    (b) If any part of the Mortgaged Property shall be taken by eminent 
domain, each Mortgagee shall release the property so taken from the 
Mortgaged Property and shall be fully protected in so doing upon being 
furnished with:
    (1) A certificate of a duly authorized officer of the Mortgagor 
requesting such release, describing the property to be released and 
stating that such property has been taken by eminent domain and that all 
conditions precedent herein provided or relating to such release have 
been complied with; and
    (2) an opinion of counsel to the effect that such property has been 
lawfully taken by exercise of the right of eminent domain, that the 
award for such property so taken has become final and that all 
conditions precedent herein provided for relating to such release have 
been complied with.
    SECTION 3.17. Compliance with Loan Agreements; Notice of Amendments 
to and Defaults under Loan Agreements: The Mortgagor will observe and 
perform all of the material covenants, agreements, terms and conditions 
contained in any Loan Agreement entered into in connection with the 
issuance of any of the Notes, as from time to time amended. The 
Mortgagor will send promptly to each Mortgagee notice of any default by 
the Mortgagor under any Loan Agreement and notice of any amendment to 
any Loan Agreement. Upon request of any Mortgagee, the Mortgagor will 
furnish to such Mortgagee single

[[Page 213]]

copies of such Loan Agreements and amendments thereto as such Mortgagee 
may request.
    SECTION 3.18. Rights of Way, etc., Necessary in Business: The 
Mortgagor will use its best efforts to obtain all such rights of way, 
easements from landowners and releases from lienors as shall be 
necessary or advisable in the conduct of its business, and, if requested 
by any Mortgagee, deliver to such Mortgagee evidence satisfactory to 
such Mortgagee of the obtaining of such rights of way, easements or 
releases.
    SECTION 3.19. Limitations on Providing Free Electric Services. The 
Mortgagor will not furnish or supply or cause to be furnished or 
supplied any electric power, energy or capacity free of charge to any 
person, firm or corporation, public or private, and the Mortgagor will 
enforce the payment of any and all amounts owning to the Mortgagor by 
reason of the ownership and operation of the Utility System by 
discontinuing such use, output, capacity, or service, or by filing suit 
therefor within 90 days after any such accounts are due, or by both such 
discontinuance and by filing suit.
    SECTION 3.20. Keeping Books; Inspection by Mortgagee: The Mortgagor 
will keep proper books, records and accounts, in which full and correct 
entries shall be made of all dealings or transactions of or in relation 
to the Notes and the Utility Systems, properties, business and affairs 
of the Mortgagor in accordance with the Accounting Requirements. The 
Mortgagor will at any and all times, upon the written request of any 
Mortgagee and at the expense of the Mortgagor, permit such Mortgagee by 
its representatives to inspect the Utility Systems and properties and 
properties, books of account, records, reports and other papers of the 
Mortgagor and to take copies and extracts therefrom, and will afford and 
procure a reasonable opportunity to make any such inspection, and the 
Mortgagor will furnish to each Mortgagee any and all such information as 
such Mortgagee may request, with respect to the performance by the 
Mortgagor of its covenants under this Mortgage, the Notes and the Loan 
Agreements.

                               ARTICLE IV

                     EVENTS OF DEFAULT AND REMEDIES

    SECTION 4.01. Events of Default: Each of the following shall be an 
``Event of Default'' under this Mortgage:
    (a) default shall be made in the payment of any installment of or on 
account of interest on or principal of (or premium, if any associated 
with) any Note or Notes for more than five (5) Business Days after the 
same shall be required to be made;
    (b) default shall be made in the due observance or performance of 
any other of the covenants, conditions or agreements on the part of the 
Mortgagor, in any of the Notes, Loan Agreements or in this Mortgage, and 
such default shall continue for a period of thirty (30) days after 
written notice specifying such default and requiring the same to be 
remedied and stating that such notice is a ``Notice of Default'' 
hereunder shall have been given to the Mortgagor by any Mortgagee; 
PROVIDED, HOWEVER that in the case of a default on the terms of a Note 
or Loan Agreement of a particular Mortgagee, the ``Notice of Default'' 
required under this paragraph may only be given by that Mortgagee;
    (c) the Mortgagor shall file a petition in bankruptcy or be 
adjudicated a bankrupt or insolvent, or shall make an assignment for the 
benefit of its creditors, or shall consent to the appointment of a 
receiver of itself or of its property, or shall institute proceedings 
for its reorganization or proceedings instituted by others for its 
reorganization shall not be dismissed within sixty (60) days after the 
institution thereof;
    (d) a receiver or liquidator of the Mortgagor or of any substantial 
portion of its property shall be appointed and the order appointing such 
receiver or liquidator shall not be vacated within sixty (60) days after 
the entry thereof;
    (e) the Mortgagor shall forfeit or otherwise be deprived of its 
corporate charter or franchises, permits, easements, or licenses 
required to carry on any material portion of its business;
    (f) a final judgment for an amount of more than $---------- shall be 
entered against the Mortgagor and shall remain unsatisfied or without a 
stay in respect thereof for a period of sixty (60) days; or,
    (g) any material representation or warranty made by the Mortgagor 
herein, in the Loan Agreements or in any certificate or financial 
statement delivered hereunder or thereunder shall prove to be false or 
misleading in any material respect at the time made.
    SECTION 4.02. Acceleration of Maturity; Rescission and Annulment:
    (a) If an Event of Default described in Section [4.01(a)] has 
occurred and is continuing, any Mortgagee upon which such default has 
occurred may declare the principal of all its Notes secured hereunder to 
be due and payable immediately by a notice in writing to the Mortgagor 
and to the other Mortgagees (failure to provide said notice to any other 
Mortgagee shall not affect the validity of any acceleration of the Note 
or Notes by such Mortgagee), and upon such declaration, all unpaid 
principal (and premium, if any) and accrued interest so declared shall 
become due and payable immediately, anything contained herein or in any 
Note or Notes to the contrary notwithstanding.
    (b) If any other Event of Default shall have occurred and be 
continuing, any Mortgagee

[[Page 214]]

may declare the principal of all its Notes secured hereunder to be due 
and payable immediately by a notice in writing to the Mortgagor and to 
the other Mortgagees (failure to provide said notice to any other 
Mortgagee shall not affect the validity of any acceleration of the Note 
or Notes by such Mortgagee), and upon such declaration, all unpaid 
principal (and premium, if any) and accrued interest so declared shall 
become due and payable immediately, anything contained herein or in any 
Note or Notes to the contrary notwithstanding.
    (c) Upon receipt of actual knowledge of or any notice of 
acceleration by any Mortgagee, any other Mortgagee may declare the 
principal of all of its Notes to be due and payable immediately by a 
notice in writing to the Mortgagor and upon such declaration, all unpaid 
principal (and premium, if any) and accrued interest so declared shall 
become due and payable immediately, anything contained herein or in any 
Note or Notes or Loan Agreements to the contrary notwithstanding.
    (d) If after the unpaid principal of (and premium, if any) and 
accrued interest on any of the Notes shall have been so declared to be 
due and payable, all payments in respect of principal and interest which 
shall have become due and payable by the terms of such Note or Notes 
(other than amounts due as a result of the acceleration of the Notes) 
shall be paid to the respective Mortgagees, and (i) all other defaults 
under the Loan Agreements, the Notes and this Mortgage shall have been 
made good or cured to the satisfaction of the Mortgagees representing at 
least 80% of the aggregate unpaid principal balance of all of the Notes 
then Outstanding, (ii) proceedings to foreclose the lien of this 
Mortgage have not been commenced, and (iii) all reasonable expenses paid 
or incurred by the Mortgagees in connection with the acceleration shall 
have been paid to the respective Mortgagees, then in every such case 
such Mortgagees representing at least 80% of the aggregate unpaid 
principal balance of all of the Notes then Outstanding may by written 
notice to the Mortgagor, for purposes of this Mortgage, annul such 
declaration and waive such default and the consequences thereof, but no 
such waiver shall extend to or affect any subsequent default or impair 
any right consequent thereon.
    SECTION 4.03. Remedies of Mortgagees: If one or more of the Events 
of Default shall occur and be continuing, any Mortgagee personally or by 
attorney, in its or their discretion, may, in so far as not prohibited 
by law:
    (a) take immediate possession of the Mortgaged Property, collect and 
receive all credits, outstanding accounts and bills receivable of the 
Mortgagor and all rents, income, revenues, proceeds and profits 
pertaining to or arising from the Mortgaged Property, or any part 
thereof, whether then past due or accruing thereafter, and issue binding 
receipts therefor; and manage, control and operate the Mortgaged 
Property as fully as the Mortgagor might do if in possession thereof, 
including, without limitation, the making of all repairs or replacements 
deemed necessary or advisable by such Mortgagee in possession;
    (b) proceed to protect and enforce the rights of all of the 
Mortgagees by suits or actions in equity or at law in any court or 
courts of competent jurisdiction, whether for specific performance of 
any covenant or any agreement contained herein or in aid of the 
execution of any power herein granted or for the foreclosure hereof or 
hereunder or for the sale of the Mortgaged Property, or any part 
thereof, or to collect the debts hereby secured or for the enforcement 
of such other or additional appropriate legal or equitable remedies as 
may be deemed necessary or advisable to protect and enforce the rights 
and remedies herein granted or conferred, and in the event of the 
institution of any such action or suit the Mortgagee instituting such 
action or suit shall have the right to have appointed a receiver of the 
Mortgaged Property and of all proceeds, rents, income, revenues and 
profits pertaining thereto or arising therefrom, whether then past due 
or accruing after the appointment of such receiver, derived, received or 
had from the time of the commencement of such suit or action, and such 
receiver shall have all the usual powers and duties of receivers in like 
and similar cases, to the fullest extent permitted by law, and if 
application shall be made for the appointment of a receiver the 
Mortgagor hereby expressly consents that the court to which such 
application shall be made may make said appointment; and
    (c) sell or cause to be sold all and singular the Mortgaged Property 
or any part thereof, and all right, title, interest, claim and demand of 
the Mortgagor therein or thereto, at public auction at such place in any 
county (or its equivalent locality) in which the property to be sold, or 
any part thereof, is located, at such time and upon such terms as may be 
specified in a notice of sale, which shall state the time when and the 
place where the sale is to be held, shall contain a brief general 
description of the property to be sold, and shall be given by mailing a 
copy thereof to the Mortgagor at least fifteen (15) days prior to the 
date fixed for such sale and by publishing the same once in each week 
for two successive calendar weeks prior to the date of such sale in a 
newspaper of general circulation published in said locality or, if no 
such newspaper is published in such locality, in a newspaper of general 
circulation in such locality, the first such publication to be not less 
than fifteen (15) days nor more than thirty (30) days prior to the date 
fixed for such sale. Any sale to be made under this subparagraph (c) of 
this Section [4.03] may be

[[Page 215]]

adjourned from time to time by announcement at the time and place 
appointed for such sale or for such adjourned sale or sales, and without 
further notice or publication the sale may be had at the time and place 
to which the same shall be adjourned; provided, however, that in the 
event another or different notice of sale or another or different manner 
of conducting the same shall be required by law the notice of sale shall 
be given or the sale be conducted, as the case may be, in accordance 
with the applicable provisions of law. The expense incurred by any 
Mortgagee (including, but not limited to, receiver's fees, counsel fees, 
cost of advertisement and agents' compensation) in the exercise of any 
of the remedies provided in this Mortgage shall be secured by this 
Mortgage.
    (d) In the event that a Mortgagee proceeds to enforce remedies under 
this Section, any other Mortgagee may join in such proceedings. In the 
event that the Mortgagees are not in agreement with the method or manner 
of enforcement chosen by any other Mortgagee, the Mortgagees 
representing a majority of the aggregate unpaid principal balance on the 
then Outstanding Notes may direct the method and manner in which 
remedial action will proceed.
    SECTION 4.04. Application of Proceeds from Remedial Actions: Any 
proceeds or funds arising from the exercise of any rights or the 
enforcement of any remedies herein provided after the payment or 
provision for the payment of any and all costs and expenses in 
connection with the exercise of such rights or the enforcement of such 
remedies shall be applied first, to the ratable payment of indebtedness 
hereby secured other than the principal of or interest on the Notes; 
second, to the ratable payment of interest which shall have accrued on 
the Notes and which shall be unpaid; third, to the ratable payment of or 
on account of the unpaid principal of the Notes; and the balance, if 
any, shall be paid to whomsoever shall be entitled thereto.
    SECTION 4.05. Remedies Cumulative; No Election: Every right or 
remedy herein conferred upon or reserved to the Mortgagees or to the 
Noteholders shall be cumulative and shall be in addition to every other 
right and remedy given hereunder or now or hereafter existing at law, or 
in equity, or by statute. The pursuit of any right or remedy shall not 
be construed as an election.
    SECTION 4.06. Waiver of Appraisement Rights; Marshaling of Assets 
Not Required: The Mortgagor, for itself and all who may claim through or 
under it, covenants that it will not at any time insist upon or plead, 
or in any manner whatever claim, or take the benefit or advantage of, 
any appraisement, valuation, stay, extension or redemption laws now or 
hereafter in force in any locality where any of the Mortgaged Property 
may be situated, in order to prevent, delay or hinder the enforcement or 
foreclosure of this Mortgage, or the absolute sale of the Mortgaged 
Property, or any part thereof, or the final and absolute putting into 
possession thereof, immediately after such sale, of the purchaser or 
purchasers thereat, and the Mortgagor, for itself and all who may claim 
through or under it, hereby waives the benefit of all such laws unless 
such waiver shall be forbidden by law. Under no circumstances shall 
there be any marshalling of assets upon any foreclosure or to other 
enforcement of this Mortgage.
    SECTION 4.07. Notice of Default: The Mortgagor covenants that it 
will give immediate written notice to each Mortgagee of the occurrence 
of any Event of Default or in the event that any right or remedy 
described in Sections [4.02] and [4.03] hereof is exercised or enforced 
or any action is taken to exercise or enforce any such right or remedy.

          ARTICLE V--POSSESSION UNTIL DEFAULT-DEFEASANCE CLAUSE

    SECTION 5.01. Possession Until Default: Until some one or more of 
the Events of Default shall have happened, the Mortgagor shall be 
suffered and permitted to retain actual possession of the Mortgaged 
Property, and to manage, operate and use the same and any part thereof, 
with the rights and franchises appertaining thereto, and to collect, 
receive, take, use and enjoy the rents, revenues, issues, earnings, 
income, proceeds, products and profits thereof or therefrom, subject to 
the provisions of this Mortgage.
    SECTION 5.02. Defeasance: If the Mortgagor shall pay or cause to be 
paid the whole amount of the principal of (and premium, if any) and 
interest on the Notes at the times and in the manner therein provided, 
and shall also pay or cause to be paid all other sums payable by the 
Mortgagor hereunder or under any Loan Agreement and shall keep and 
perform, all covenants herein required to be kept and performed by it, 
then and in that case, all property, rights and interest hereby conveyed 
or assigned or pledged shall revert to the Mortgagor and the estate, 
right, title and interest of the Mortgagee so paid shall thereupon 
cease, determine and become void and such Mortgagee, in such case, on 
written demand of the Mortgagor but at the Mortgagor's cost and expense, 
shall enter satisfaction of the Mortgage upon the record. In any event, 
each Mortgagee, upon payment in full to such Mortgagee by the Mortgagor 
of all principal of (and premium, if any) and interest on any Note held 
by such Mortgagee and the payment and discharge by the Mortgagor of all 
charges due to such Mortgagee hereunder or under any Loan Agreement, 
shall execute and deliver to the Mortgagor such

[[Page 216]]

instrument of satisfaction, discharge or release as shall be required by 
law in the circumstances.
    SECTION 5.03. Special Defeasance: Other than any Notes excluded by 
the foregoing Sections 5.01 and 5.02 and Notes which have become due and 
payable, the Mortgagor may cause the Lien of this Mortgage to be 
defeased with respect to any Note for which it has deposited or caused 
to be deposited in trust solely for the purpose an amount sufficient to 
pay and discharge the entire indebtedness on such Note for principal 
(and premium, if any) and interest to the date of maturity thereof; 
PROVIDED, HOWEVER, that depository serving as trustee for such trust 
must first be accepted as such by the Mortgagee whose Notes are being 
defeased under this section. In such event, such a Note will no longer 
be considered to be an Outstanding Note for purposes of this Mortgage 
and the Mortgagee shall execute and deliver to the Mortgagor such 
instrument of satisfaction, discharge or release as shall be required by 
law in the circumstances.

                               ARTICLE VI

                              MISCELLANEOUS

    SECTION 6.01. Property Deemed Real Property: It is hereby declared 
to be the intention of the Mortgagor that any electric generating plant 
or plants and facilities and all electric transmission and distribution 
lines, or other Electric System or Utility System facilities, embraced 
in the Mortgaged Property, including (without limitation) all rights of 
way and easements granted or given to the Mortgagor or obtained by it to 
use real property in connection with the construction, operation or 
maintenance of such plant, lines, facilities or systems, and all other 
property physically attached to any of the foregoing, shall be deemed to 
be real property.
    SECTION 6.02. Mortgage to Bind and Benefit Successors and Assigns: 
All of the covenants, stipulations, promises, undertakings and 
agreements herein contained by or on behalf of the Mortgagor shall bind 
its successors and assigns, whether so specified or not, and all titles, 
rights and remedies hereby granted to or conferred upon the Mortgagees 
shall pass to and inure to the benefit of the successors and assigns of 
the Mortgagees and shall be deemed to be granted or conferred for the 
ratable benefit and security of all who shall from time to time be a 
Mortgagee. The Mortgagor hereby agrees to execute such consents, 
acknowledgements and other instruments as may be reasonably requested by 
any Mortgagee in connection with the assignment, transfer, mortgage, 
hypothecation or pledge of the rights or interests of such Mortgagee 
hereunder or under the Notes or in and to any of the Mortgaged Property.
    SECTION 6.03. Headings: The descriptive headings of the various 
articles and sections of this Mortgage and also the table of contents 
were formulated and inserted for convenience only and shall not be 
deemed to affect the meaning or construction of any of the provisions 
hereof.
    SECTION 6.04. Severability Clause: In case any provision of this 
Mortgage or in the Notes or in the Loan Agreements shall be invalid or 
unenforceable, the validity, legality and enforceability of the 
remaining provisions thereof shall not in any way be affected or 
impaired, nor shall any invalidity or unenforceability as to any 
Mortgagee hereunder affect or impair the rights hereunder of any other 
Mortgagee.
    SECTION 6.05. Mortgage Deemed Security Agreement: To the extent that 
any of the property described or referred to in this Mortgage is 
governed by the provisions of the UCC this Mortgage is hereby deemed a 
``security agreement'' under the UCC, and, if so elected by any 
Mortgagee, a ``financing statement'' under the UCC for said security 
agreement. The mailing addresses of the Mortgagor as debtor, and the 
Mortgagees as secured parties are as set forth in Section [1.05] hereof. 
If any Mortgagee so directs the Mortgagor to do so, the Mortgagor shall 
file as a financing statement under the UCC for said security agreement 
and for the benefit of all of the Mortgagees, an instrument other than 
this Mortgage. In such case, the instrument to be filed shall be in a 
form customarily accepted by the filing office as a financing statement. 
PROCEEDS OF COLLATERAL ARE COVERED HEREBY.
    SECTION 6.06. Indemnification by Mortgagor of Mortgagees: The 
Mortgagor agrees to indemnify and save harmless each Mortgagee against 
any liability or damages which any of them may incur or sustain in the 
exercise and performance of their rightful powers and duties hereunder. 
For such reimbursement and indemnity, each Mortgagee shall be secured 
under this Mortgage in the same manner as the Notes and all such 
reimbursements for expense or damage shall be paid to the Mortgagee 
incurring or suffering the same with interest at the rate specified in 
Section [3.14] hereof. The Mortgagor's obligation to indemnify the 
Mortgagees under this section and under Section [3.04] shall survive the 
satisfaction of the Notes, the reconveyance or foreclosure of this 
Mortgage, the acceptance of a deed in lieu of foreclosure, or any 
transfer or abandonment of the Mortgaged Property.
    IN WITNESS WHEREOF, ---------- as Mortgagor, has caused this 
Restated Mortgage and Security Agreement to be signed in its name and 
its corporate seal to be hereunto affixed and attested by its officers 
thereunto duly authorized, and UNITED STATES OF AMERICA, as Mortgagee, 
and as Mortgagee, has caused this Restated

[[Page 217]]

Mortgage and Security Agreement to be signed in its name by duly 
authorized persons, all as of the day and year first above written.
________________________________________________________________________

(SEAL)

By:_____________________________________________________________________
President

Attest:_________________________________________________________________
Title:__________________________________________________________________

    Executed by the Mortgagor in the presence of:

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Witnesses

                        UNITED STATES OF AMERICA

By: Director, of the ---------- Rural Utilities Service

    Executed by the United States of America, Mortgagee, in the presence 
of:

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Witnesses

By:

(SEAL)

Attest:_________________________________________________________________
Title:__________________________________________________________________
    Executed by the above-named Mortgagee in the presence of:

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Witnesses

                               Schedule A

    1. The Maximum Debt Limit is ----------.
    2. The Original Mortgage as described in the [first] WHEREAS clause 
above is ----------.
    3. The outstanding secured indebtedness described in the [fourth] 
WHEREAS clause above as evidenced by the Original Notes is as follows:

    [Note this requires computation of principal balances, not merely a 
toting up of the original face amounts of the notes. Alternative 
approaches may be used by the parties where legally effective and 
mutually agreeable.]

                      Schedule B--Property Schedule

    The fee and leasehold interests in real property referred to in 
Section Subclause (a) of Granting Clause One are ----------.
    The counties referred to in Subclause (B) of Granting Clause One are 
----------.

                      Schedule C--Excepted Property

STATE OF ----------
COUNTY OF ----------

    On this ------ day of ----------, 19 ----, before me appeared ------
---- and ---------- personally known, by me and having been duly sworn 
by me, did say that they are the President and Secretary, respectively, 
of ----------------, a ---------- corporation, and that the seal affixed 
to the foregoing instrument is the corporate seal of said corporation, 
and that said instrument was signed and sealed in behalf of said 
corporation by authority of its Board, and said ---------- and --------
-- acknowledged that the execution of said instrument was a free act and 
deed of said corporation.
    IN WITNESS whereof, I have hereunto set my hand and official seal 
the day and year last above written.
________________________________________________________________________
Notary Public

(Notarial Seal)

    My commission expires:

DISTRICT OF COLUMBIA ) SS
    The foregoing instrument was acknowledged before me this---------- 
day of 19------, by ---------- Director, ---------- Regional Division of 
the Rural Utilities Service, acknowledging an agency of the United 
States of America, on behalf of the Rural Utilities Service, United 
States of America.
________________________________________________________________________

Notary Public

(Notarial Seal)

    My Commission expires:

COMMONWEALTH OF VIRGINIA ) SS
    BEFORE ME, a Notary Public, in and for the Commonwealth of Virginia, 
appeared in person ----------, signing for the Governor of the National 
Rural Utilities cooperative Finance Corporation, to me personally known, 
and known to be the identical person who subscribed the name of said 
corporation to the foregoing instrument, being by me duly sworn, and who 
stated that she/he is duly authorized to execute the foregoing 
instrument on behalf of said corporation, and further stated and 
acknowledged that she/he executed the foregoing instrument as a free and 
voluntary act and deed of said corporation for the consideration therein 
mentioned and set forth.
    IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal 
this ------ day of ----------, 19------.
________________________________________________________________________

Notary Public

(Notarial Seal)
    My commission expires:

                    Exhibit A--Manager's Certificate

     Manager's Certificate Required Under Mortgage Section 2.01 for 
                            Additional Notes

    On behalf on ----------[Name of Borrower] (the ``Borrower''), I ----
------ hereby certify as follows:

[[Page 218]]

    1. I am the Manager of the Borrower and have been duly authorized to 
deliver this certificate in connection with the Additional Note or Notes 
to be issued on or about ---------- [Date Note or Notes are to be 
Signed] pursuant to Section [2.01] of the Mortgage dated ----------.
    2. No Event of Default has occurred and is continuing under the 
Mortgage, or any event which with the giving of notice or lapse of time 
or both would become an Event of Default has occurred and is continuing.
    3. The Additional Notes described in paragraph 1 are for the purpose 
of funding Property Additions being constructed, acquired, procured or 
replaced that are or will become part of the Borrower's Utility System.
    4. The Property Additions referred to in paragraph 3 are Eligible 
Property Additions, i.e. Property Additions acquired or whose 
construction was completed not more than 5 years prior to the issuance 
of additional Notes and Property Additions acquired or whose 
construction is started and/or completed not more than 4 years after 
issuance of the additional Notes, but shall exclude any Property 
Additions financed by any other debt secured under the Mortgage at the 
time additional Notes are issued.
    5. I have reviewed the certificate of the Independent certified 
public accountant also being delivered to each of the Mortgagees 
pursuant to Section [2.01] in connection with the aforesaid Additional 
Note or Notes and concur with the conclusions expressed therein.
    6. Capitalized terms that are used in this certificate but are not 
defined herein have the meanings defined in the Mortgage.
[Signed]________________________________________________________________
[Dated]_________________________________________________________________
[Name]__________________________________________________________________
[Title]_________________________________________________________________
[Name and Address of Borrower]__________________________________________
________________________________________________________________________
________________________________________________________________________

                Exhibit B--Form of Supplemental Mortgage

________________________________________________________________________
    Supplemental Mortgage and Security Agreement, dated as of ----------
, ------, --------, (hereinafter sometimes called this ``Supplemental 
Mortgage'') is made by and between ---------- (hereinafter called the 
``Mortgagor''), a corporation existing under the laws of the State of --
--------, and the UNITED STATES OF AMERICA acting by and through the 
Administrator of the Rural Utilities Service (hereinafter called the 
``Government''), ---------- (Supplemental Lender) (hereinafter called --
--------), a ---------- existing under the laws of ----------, and 
intended to confer rights and benefits on both the Government and ------
---- and ---------- in accordance with this Supplemental Mortgage and 
the Original Mortgage (hereinafter defined) (the Government and the 
Supplemental Lenders being herein sometimes collectively referred to as 
the ``Mortgagees'').

                                Recitals

    Whereas, the Mortgagor, the Government and ---------- are parties to 
that certain Restated Mortgage and Security Agreement, as supplemented, 
amended or restated (the ``Original Mortgage'' identified in Schedule 
``A'' of this Mortgage) originally entered into between the Mortgagor, 
the Government acting by and through the Administrator of the Rural 
Utilities Service (hereinafter called ``RUS''), and ----------; and
    Whereas, the Mortgagor deems it necessary to borrow money for its 
corporate purposes and to issue its promissory notes and other debt 
obligations therefor, and to mortgage and pledge its property 
hereinafter described or mentioned to secure the payment of the same, 
and to enter into this Supplemental Mortgage pursuant to which all 
secured debt of the Mortgagor hereunder shall be secured on parity, and 
to add ---------- as a secured party hereunder and under the Original 
Mortgage (the Supplemental Mortgage and the Original Mortgage, as it may 
have been previously amended or supplemented, hereinafter may be called 
collectively the ``RUS Mortgage''); and
    Whereas, the RUS Mortgage, as supplemented hereby, preserves the 
priority of the Original Mortgage for the pro rata benefit of all the 
Mortgagees and secures the payment of all of the Mortgagor's outstanding 
indebtedness as listed in the Instruments Recital of Schedule ``A''; and
    Whereas, all acts necessary to make this Supplemental Mortgage a 
valid and binding legal instrument for the security of such notes and 
obligations, subject to the terms of the RUS Mortgage, have been in all 
respects duly authorized:
    Now, Therefore, This Supplemental Mortgage Witnesseth: That to 
secure the payment of the principal of (and premium, if any) and 
interest on all Notes issued hereunder according to their tenor and 
effect, and the performance of all provisions therein and herein 
contained, and in consideration of the covenants herein contained and 
the purchase or guarantee of Notes by the guarantors or holders thereof, 
the Mortgagor has mortgaged, pledged and granted a continuing security 
interest in, and by these presents does hereby grant, bargain, sell, 
alienate, remise, release, convey, assign, transfer, hypothecate, 
pledge, set over and confirm, pledge and grant a continuing security 
interest in for the purposes hereinafter expressed [other language may 
be required under various state laws], unto the Mortgagees all property, 
rights, privileges and franchises of the Mortgagor of every kind and 
description,

[[Page 219]]

real, personal or mixed, tangible and intangible, of the kind or nature 
specifically mentioned herein or any other kind or nature, except any 
Excepted Property set forth on Schedule ``C'' hereof owned or hereafter 
acquired by the Mortgagor (by purchase, consolidation, merger, donation, 
construction, erection or in any other way) wherever located, including 
(without limitation) all and singular the following:
    A. All of those fee and leasehold interests in real property set 
forth in Schedule ``B'' hereto, subject in each case to those matters 
set forth in such Schedule; and
    B. All of those fee and leasehold interests in real property set 
forth in Schedule ``B'' of the Original Mortgage or in any restatement, 
amendment or supplement thereto, subject in each case to those matters 
set forth in such Schedule; and
    C. All of the kinds, types or items of property, now owned or 
hereafter acquired, described as Mortgaged Property in the Original 
Mortgage or in any restatement, amendment to supplement thereto as 
Mortgaged Property.
    It is Further Agreed and Covenanted That the Original Mortgage, as 
previously restated, amended or supplemented, and this Supplement shall 
constitute one agreement and the parties hereto shall be bound by all of 
the terms thereof and, without limiting the foregoing.
    1. All capitalized terms not defined herein shall have the meaning 
given in Article I of the Original Mortgage.
    2. This Supplemental Mortgage is one of the Supplemental Mortgages 
contemplated by Article II of the Original Mortgage.
    In Witness Whereof, ---------- as Mortgagor.

[ACKNOWLEDGEMENTS]

     Supplemental Mortgage Schedule A--Maximum Debt Limit and Other 
                               Information

    1. The Maximum Debt Limit is ----------.
    2. The Original Mortgage as described in the first WHEREAS clause 
above is ----------.
    3. The outstanding secured indebtedness described in the third 
WHEREAS clause above is ----------.

           Supplemental Mortgage Schedule B--Property Schedule

    The fee and leasehold interests in real property referred to in 
clause A of the granting clause are ----------.

           Supplemental Mortgage Schedule C--Excepted Property

[60 FR 36888, July 18, 1995, as amended at 60 FR 67410, Dec. 29, 1995; 
65 FR 51749, Aug. 25, 2000]



          Subpart C--Loan Contracts With Distribution Borrowers

    Source: 60 FR 67410, Dec. 29, 1995, unless otherwise noted.



Sec. 1718.100  General.

    (a) Purpose.The purpose of this subpart is to set forth the 
policies, requirements, and procedures governing loan contracts entered 
into between the Rural Utilities Service (RUS) and distribution 
borrowers or, in some cases, other electric borrowers.
    (b) Flexibility for individual circumstances.The intent of this 
subpart is to provide the flexibility to address the different needs and 
different credit risks of individual borrowers, and other special 
circumstances of individual lending situations. The model loan contract 
contained in Appendix A of this subpart provides an example of what a 
loan contract with an ``average'' or ``typical'' distribution borrower 
may look like under ``average'' or ``typical'' circumstances. Depending 
on the credit risks and other circumstances of individual loans, RUS may 
execute loan contracts with provisions that are substantially different 
than those set forth in the model. RUS may develop alternative model 
loan contract provisions. If it does, such provisions will be made 
available to the public.
    (c) Resolution of any differences in contractual provisions.If any 
provision of the loan contract appears to be in conflict with provisions 
of the mortgage, the loan contract shall have precedence with respect to 
the contractual relationship between the borrower and RUS with respect 
to such provision. If either document is silent on a matter addressed in 
the other document, the other document shall have precedence with 
respect to the contractual relationship between the borrower and RUS 
with respect to such matter.
    (d) Certain loan contract provisions subject to subsequent 
rulemaking.If a loan contract provision imposes an obligation or 
limitation on the borrower whose interpretation or specification is 
subject to RUS regulations or the discretion of the Administrator or 
RUS, such interpretation or specification

[[Page 220]]

shall be subject to subsequent rulemaking. Such interpretation or 
specification of the borrower's obligations or limitations may not 
exceed the authority granted to the Administrator or RUS in the loan 
contract provision.



Sec. 1718.101  Applicability.

    (a) Distribution borrowers.The provisions of this subpart apply to 
all distribution borrowers that obtain a loan or loan guarantee from RUS 
approved on or after January 29, 1996. Distribution borrowers that 
obtain a lien accommodation or any other form of financial assistance 
from RUS after January 29, 1996, may be required to execute a new loan 
contract and new mortgage. Moreover, any distribution borrower may 
submit a request to RUS that a new loan contract and new mortgage be 
executed. Within the constraints of time and staff resources, RUS will 
attempt to honor such requests. Borrowers must first obtain the 
concurrence of any other mortgagees on their existing mortgage before a 
new mortgage can be executed.
    (b) Other borrowers.Borrowers other than distribution borrowers may 
also submit requests for execution of a new loan contract pursuant to 
this subpart and a new mortgage pursuant to subpart B of this part. RUS 
may approve such requests if it determines that such approval is in the 
government's financial interest. If other mortgagees are on the 
borrower's existing mortgage, their concurrence would be required before 
a new mortgage could be executed.



Sec. 1718.102  Definitions.

    For the purposes of this subpart:
    Borrower means any organization that has an outstanding loan made or 
guaranteed by the Rural Utilities Service (RUS) or its predecessor, the 
Rural Electrification Administration, for rural electrification, or that 
is seeking such financing.
    Distribution borrower means a borrower that sells or intends to sell 
electric power and energy at retail in rural areas, the latter being 
defined in 7 CFR 1710.2.
    Loan documents means the mortgage (or other security instrument 
acceptable to RUS), the loan contract, and the promissory note entered 
into between the borrower and RUS.



Sec. 1718.103  Loan contract provisions.

    Loan contracts executed pursuant to this subpart shall contain such 
provisions as RUS determines are appropriate to further the purposes of 
the RE Act and to ensure that the security for the loan will be 
reasonably adequate and that the loan will be repaid according to the 
terms of the promissory note. Such loan contracts will contain 
provisions addressing, but not necessarily limited to, the following 
matters:
    (a) Description of the purpose of the loan;
    (b) Specification of the interest to be charged on the loan, 
including the method for determining the interest rate if it is not 
fixed for the entire term of the loan;
    (c) Specification of the method for repaying the loan principal, 
including the final maturity of the loan;
    (d) The conditions under which the loan may be prepaid before its 
maturity date, including but not limited to requirements regarding the 
prepayment of loans made concurrently by RUS and another secured lender;
    (e) The method for making scheduled payments on the loan;
    (f) Accounting principles and system of accounts, and RUS authority 
to approve the accountant used by the borrower;
    (g) The method and time period for advancing loan funds and the 
conditions precedent to the advance of funds;
    (h) Representations and warranties by the borrower as a condition of 
obtaining the loan, including but not limited to: the legal authority of 
the borrower to enter into the loan contract and operate its system; 
that the loan documents will be a legal, valid and binding obligation of 
the borrower enforceable according to their terms; compliance of the 
borrower in all material respects with all federal, state, and local 
laws, regulations, codes, and orders; existence of any pending or 
threatened legal actions that could have a material adverse effect on 
the borrower's ability to perform its obligations under the loan 
documents; the

[[Page 221]]

accuracy and completeness of all information provided by the borrower in 
the loan application and with respect to the loan contract, and the 
existence of any material adverse change since the information was 
provided; and the existence of any material defaults under other 
agreements of the borrower;
    (i) Representations, warranties, and covenants with respect to 
environmental matters;
    (j) Reports and notices required to be submitted to RUS, including 
but not limited to: annual financial statements; notice of defaults; 
notice of litigation; notice of orders or other directives received by 
the borrower from regulatory authorities; notice of any matter that has 
resulted in or may result in a material adverse change in the condition 
or operations of the borrower; and such other information regarding the 
condition or operations of the borrower as RUS may reasonably require;
    (k) Annual written certification that the borrower is in compliance 
with its loan contract, note, mortgage, and any other agreement with 
RUS, or if there has been a default in the fulfillment of any obligation 
under said agreements, specifying each such default and the nature and 
status thereof;
    (l) Requirement that the borrower design and implement rates for 
utility services to meet certain minimum coverage of interest expense 
and/or debt service obligations;
    (m) Requirement that the borrower maintain and preserve its 
mortgaged property in compliance with prudent utility practice and all 
applicable laws, which may include certain specific actions and 
certifications set forth in the borrower's loan contract or mortgage;
    (n) Requirement that the borrower plan, design and construct its 
electric system according to standards and other requirements 
established by RUS, and if directed by the Administrator, that the 
borrower follow RUS planning, design and construction standards and 
requirements for other utility systems constructed by the borrower;
    (o) Limitations on extensions and additions to the borrower's 
electric system without approval by RUS;
    (p) Limitations on contracts and contract amendments that the 
borrower may enter into without approval by RUS;
    (q) Limitations of the transfer of mortgaged property by the 
borrower;
    (r) Limitations on dividends, patronage refunds, and cash 
distributions paid by the borrower;
    (s) Limitations on investments, loans, and guarantees made by the 
borrower;
    (t) Authority of RUS to approve a new general manager and to require 
that an existing general manager be replaced if the borrower is in 
default under its mortgage, loan contract, or any other agreements with 
RUS;
    (u) Description of events of default under the loan contract and the 
remedies available to RUS;
    (v) Applicability of state and federal laws;
    (w) Severability of the individual provisions of the loan documents;
    (x) Matters relating to the assignment of the loan contract;
    (y) Requirements relating to federal laws and regulations, including 
but not limited to the following matters: area coverage for electric 
service; civil rights and equal employment opportunity; access to 
buildings and other matters relating to the handicapped; design and 
construction standards relating to earthquakes; the National 
Environmental Policy Act of 1969 and other environmental laws and 
regulations; flood hazard insurance; debarment and suspension from 
federal assistance programs; and delinquency on federal debt; and
    (z) Special requirements applicable to individual loans, and such 
other provisions as RUS may require to ensure loan repayment and 
reasonably adequate loan security.



Sec. 1718.104  Availability of model loan contract.

    Single copies of the model loan contract (RUS Informational 
Publication 1718 C) are available from the Rural Utilities Service, 
United States Department of Agriculture, Washington, DC 20250-1533. This 
document may be reproduced.

[[Page 222]]

 Appendix A to Subpart C to Part 1718--Model Form of Loan Contract for 
                     Electric Distribution Borrowers

LOAN CONTRACT
TABLE OF CONTENTS
RECITALS
ARTICLE I--DEFINITIONS
ARTICLE II--REPRESENTATIONS AND WARRANTIES
    Section 2.1. Representations and Warranties.
ARTICLE III--LOAN
    Section 3.1. Advances.
    Section 3.2. Interest Rate and Payment.
    Section 3.3. Prepayment.
ARTICLE IV--CONDITIONS OF LENDING
    Section 4.1. General Conditions.
    Section 4.2. Special Conditions.
ARTICLE V--AFFIRMATIVE COVENANTS
    Section 5.1. Generally.
    Section 5.2. Annual Certificates.
    Section 5.3. Simultaneous Prepayment of Contemporaneous Loans.
    Section 5.4. Rates to Provide Revenue Sufficient to Meet Coverage 
Ratios Requirements.
    Section 5.5. Depreciation Rates.
    Section 5.6. Property Maintenance.
    Section 5.7. Financial Books.
    Section 5.8. Rights of Inspection.
    Section 5.9. Area Coverage.
    Section 5.10. Real Property Acquisition.
    Section 5.11. ``Buy American'' Requirements.
    Section 5.12. Power Requirements Studies.
    Section 5.13. Long Range Engineering Plans and Construction Work 
Plans.
    Section 5.14. Design Standards, Construction Standards, and List of 
Materials.
    Section 5.15. Plans and Specifications.
    Section 5.16. Standard Forms of Construction Contracts, and 
Engineering and Architectural Services Contracts.
    Section 5.17. Contract Bidding Requirements.
    Section 5.18. Nondiscrimination.
    Section 5.19. Financial Reports.
    Section 5.20. Miscellaneous Reports and Notices.
    Section 5.21 Special Construction Account.
    Section 5.22. Additional Affirmative Covenants.
ARTICLE VI--NEGATIVE COVENANTS
    Section 6.1. General.
    Section 6.2. Limitations on System Extensions and Additions.
    Section 6.3. Limitations on Changing Principal Place of Business.
    Section 6.4. Limitations on Employment and Retention of Manager.
    Section 6.5. Limitations on Certain Types of Contracts.
    Section 6.6. Limitations on Mergers and Sale, Lease or Transfer of 
Capital Assets.
    Section 6.7. Limitations on Using non FDIC-insured Depositories.
    Section 6.8. Limitation on Distributions.
    Section 6.9. Limitations on Loans, Investments and Other 
Obligations.
    Section 6.10. Depreciation Rates.
    Section 6.11. Historic Preservation.
    Section 6.12. Rate Reductions.
    Section 6.13. Limitations on Additional Indebtedness.
    Section 6.14. Limitations on Issuing Additional Indebtedness Secured 
Under the Mortgage.
    Section 6.15. Impairment of Contracts Pledged to RUS.
    Section 6.16. Additional Negative Covenants.
ARTICLE VII--DEFAULT
    Section 7.1. Events of Default.
ARTICLE VIII--REMEDIES
    Section 8.1. Generally.
    Section 8.2. Suspension of Advances.
ARTICLE IX--MISCELLANEOUS
    Section 9.1. Notices.
    Section 9.2. Expenses.
    Section 9.3. Late Payments.
    Section 9.4. Filing Fees.
    Section 9.5. No Waiver.
    Section 9.6. Governing Law.
    Section 9.7. Holiday Payments.
    Section 9.8. Rescission.
    Section 9.9. Successors and Assigns.
    Section 9.10. Complete Agreement; Amendments.
    Section 9.11. Headings.
    Section 9.12. Severability.
    Section 9.13. Right of Setoff.
    Section 9.14. Schedules and Exhibits.
    Section 9.15. Prior Loan Documents.
    Section 9.16. Authority of Representatives of RUS.
    Section 9.17. Term.
SCHEDULE 1
SCHEDULE 2--Existing Liens
SCHEDULE 3--Additional Contracts
EXHIBIT A--Form of Promissory Note
EXHIBIT B--Equal Opportunity Contract Provisions
EXHIBIT C-1--Manager's Certificate Required Under Loan Contract
    Section 6.14 for Additional Notes
Exhibit C-2--Manager's Certificate Required Under Loan Contract
    Section 6.14 for Refinancing Notes

                              Loan Contract

    AGREEMENT, dated --------------------, 199----, between ------------
-------- (``Borrower''), a corporation organized and existing under the 
laws of the State of -------------------- (the ``State'') and the UNITED 
STATES OF AMERICA acting by and through the Administrator of the Rural 
Utilities Service (``RUS'').

[[Page 223]]

                                Recitals

    The Borrower has applied to RUS for a loan for the purpose(s) set 
forth in Schedule 1 hereto.
    RUS is willing to make such a loan to the Borrower pursuant to the 
Rural Electrification Act of 1936, as amended, on the terms and 
conditions stated herein.
    THEREFORE, for and in consideration of the premises and the mutual 
covenants hereinafter contained, the parties hereto agree and bind 
themselves as follows:

                         Article I--Definitions

    Capitalized terms that are not defined herein shall have the 
meanings as set forth in the Mortgage. The terms defined herein include 
the plural as well as the singular and the singular as well as the 
plural.
    ``Act'' shall mean the Rural Electrification Act of 1936, as 
amended.
    ``Advance'' or ``Advances'' shall mean advances by RUS to Borrower 
pursuant to the terms and conditions of this Agreement.
    ``Agreement'' shall mean this Loan Contract together with all 
schedules and exhibits and also any subsequent supplements or 
amendments.
    ``Business Day'' shall mean any day that RUS is open for business.
    ``Contemporaneous Loan'' shall mean any loan which the Borrower has 
used to satisfy RUS Regulations or loan conditions requiring that 
supplemental financing be obtained in order to obtain a loan from RUS. 
Any loan used to refinance or refund a Contemporaneous Loan is also 
considered to be a Contemporaneous Loan.
    ``Coverage Ratios'' shall mean, collectively, the following 
financial ratios: (i) TIER of 1.25; (ii) Operating TIER of 1.1; (iii) 
DSC of 1.25; and Operating DSC of 1.1.
    ``Debt Service Coverage Ratio'' (``DSC'') shall have the meaning 
provided in the Mortgage.
    ``Distributions'' shall mean for the Borrower to, in any calendar 
year, declare or pay any dividends, or pay or determine to pay any 
patronage refunds, or retire any patronage capital or make any other 
Cash Distributions, to its members, stockholders or consumers; provided, 
however, that for the purposes of this Agreement a ``Cash Distribution'' 
shall be deemed to include any general cancellation or abatement of 
charges for electric energy or services furnished by the Borrower, but 
not the repayment of a membership fee upon termination of a membership 
or the rebate of an abatement of wholesale power costs previously 
incurred pursuant to an order of a state regulatory authority or a 
wholesale power cost adjustment clause or similar power pricing 
agreement between the Borrower and a power supplier.
    ``Electric System'' shall have the meaning as defined in the 
Mortgage.
    ``Equity'' shall mean the Borrower's total margins and equities 
computed pursuant to RUS Accounting Requirements but excluding any 
Regulatory Created Assets.
    ``Event of Default'' shall have the meaning as defined in Section 
[7.1].
    ``Independent'' when used with respect to any specified person or 
entity means such a person or entity who (1) is in fact independent, (2) 
does not have any direct financial interest or any material indirect 
financial interest in the Borrower or in any affiliate of the Borrower 
and (3) is not connected with the Borrower as an officer, employee, 
promoter, underwriter, trustee, partner, director or person performing 
similar functions.
    ``Interest Expense'' shall mean the interest expense of the Borrower 
computed pursuant to RUS Accounting Requirements.
    ``Loan'' shall mean the loan described in Article III which is being 
made pursuant to the RUS Commitment in furtherance of the objectives of 
the Act.
    ``Loan Documents'' shall mean, collectively, this Agreement, the 
Mortgage and the Note.
    ``Long-Term Debt'' shall mean the total of all amounts included in 
the long-term debt of the Borrower pursuant to RUS Accounting 
Requirements.
    ``Maturity Date'' shall have the meaning as defined in the Note.
    ``Monthly Payment Date'' shall have the meaning as defined in the 
Note.
    ``Mortgage'' shall have the meaning as described in Schedule 1 
hereto.
    ``Mortgaged Property'' shall have the meaning as defined in the 
Mortgage.
    ``Net Utility Plant'' shall mean the amount constituting the Total 
Utility Plant of the Borrower, less depreciation, computed in accordance 
with RUS Accounting Requirements.
    ``Note'' shall mean a promissory note executed by the Borrower in 
the form of exhibit A hereto, and any note executed and delivered to RUS 
to refund, or in substitution for such a note.
    ``Operating DSC'' or ``ODSC'' shall mean Operating Debt Service 
Coverage calculated as:
[GRAPHIC] [TIFF OMITTED] TR29DE95.004

Where:

All amounts are for the same calendar year and are computed pursuant to 
RUS Accounting Requirements and RUS form 7;
A=Depreciation and Amortization Expense of the Electric System;
B=Interest Expense on Total Long-Term Debt of the Electric System, 
except that

[[Page 224]]

such Interest Expense shall be increased by \1/3\ of the amount, if any, 
by which the Restricted Rentals of the Electric System exceed 2 percent 
of the Mortgagor's Equity;
C=Patronage capital & operating margins of the Electric System, (which 
equals operating revenue and patronage capital of Electric System 
operations, less total cost of electric service, including Interest 
Expense on Total Long-Term Debt of the Electric System) plus cash 
received from the retirement of patronage capital by suppliers of 
electric power and by lenders for credit extended for the Electric 
System; and
D=Debt service billed which equals the sum of all payments of principal 
and interest required to be made on account of Total Long-Term Debt of 
the Electric System during the calendar year, plus \1/3\ of the amount, 
if any, by which Restricted Rentals of the Electric System exceed 2 
percent of the Mortgagor's Equity.

    ``Operating TIER'' or ``OTIER'' shall mean Operating Times Interest 
Earned Ratio calculated as:
[GRAPHIC] [TIFF OMITTED] TR29DE95.005

Where:
All amounts are for the same calendar year and are computed pursuant to 
RUS Accounting Requirements and RUS form 7;
A=Interest Expense on Total Long-Term Debt of the Electric System, 
except that such Interest Expense shall be increased by 1/3 of the 
amount, if any, by which Restricted Rentals of the Electric System 
exceed 2 percent of the Mortgagor's Equity; and
B=Patronage capital & operating margins of the Electric System, (which 
equals operating revenue and patronage capital of Electric System 
operations, less total cost of electric service, including Interest 
Expense on Total Long-Term Debt of the Electric System) plus cash 
received from the retirement of patronage capital by suppliers of 
electric power and by lenders for credit extended for the Electric 
System.

    ``Payment Notice'' shall mean a notice furnished by RUS to Borrower 
that indicates the precise amount of each payment of principal and 
interest and the total amount of each payment.
    ``Permitted Debt'' shall have the meaning as defined in section 
[6.13].
    ``Prior Loan Contracts'' shall have the meaning as defined in 
section 9.15.
    ``Regulatory Created Assets'' shall mean the sum of any amounts 
properly recordable as unrecovered plant and regulatory study costs or 
as other regulatory assets, computed pursuant to RUS Accounting 
Requirements.
    ``RUS Accounting Requirements'' shall mean any system of accounts 
prescribed by RUS Regulations as such RUS Accounting Requirements exist 
at the date of applicability thereof.
    ``RUS Commitment'' shall have the meaning as defined in schedule 1 
hereto.
    ``RUS Regulations'' shall mean regulations of general applicability 
published by RUS from time to time as they exist at the date of 
applicability thereof, and shall also include any regulations of other 
Federal entities which RUS is required by law to implement.
    ``Special Construction Account'' shall have the meaning as defined 
in section 5.21.
    ``Subsidiary'' shall mean a corporation that is a subsidiary of the 
Borrower and subject to the Borrower's control, as defined by RUS 
Accounting Requirements.
    ``Termination Date'' shall have the meaning as defined in the Note.
    ``Times Interest Earned Ratio'' (``TIER'') shall have the meaning 
provided in the Mortgage.
    ``Total Assets'' shall mean an amount constituting the total assets 
of the Borrower as computed pursuant to RUS Accounting Requirements, but 
excluding any Regulatory Created Assets.
    ``Total Utility Plant'' shall mean the amount constituting the total 
utility plant of the Borrower computed in accordance with RUS Accounting 
Requirements.
    ``Utility System'' shall have the meaning as defined in the 
Mortgage.

               Article II--Representations and Warranties

              Section 2.1. Representations and Warranties.

    To induce RUS to make the Loan, and recognizing that RUS is relying 
hereon, the Borrower represents and warrants as follows:
    (a) Organization; Power, Etc. The Borrower: (i) is duly organized, 
validly existing, and in good standing under the laws of its state of 
incorporation; (ii) is duly qualified to do business and is in good 
standing in each jurisdiction in which the transaction of its business 
makes such qualification necessary; (iii) has all requisite corporate 
and legal power to own and operate its assets and to carry on its 
business and to enter into and perform the Loan Documents; (iv) has duly 
and lawfully obtained and maintained all licenses, certificates, 
permits, authorizations, approvals, and the like which are material to 
the conduct of its business or which may be otherwise required by law; 
and (v) is eligible to borrow from RUS.
    (b) Authority. The execution, delivery and performance by the 
Borrower of this Agreement and the other Loan Documents and the 
performance of the transactions contemplated thereby have been duly 
authorized by all necessary corporate action and shall

[[Page 225]]

not violate any provision of law or of the Articles of Incorporation or 
By-Laws of the Borrower or result in a breach of, or constitute a 
default under, any agreement, indenture or other instrument to which the 
Borrower is a party or by which it may be bound.
    (c) Consents. No consent, permission, authorization, order, or 
license of any governmental authority is necessary in connection with 
the execution, delivery, performance, or enforcement of the Loan 
Documents, except (i) such as have been obtained and are in full force 
and effect and (ii) such as have been disclosed on Schedule 1 hereto.
    (d) Binding Agreement. Each of the Loan Documents is, or when 
executed and delivered shall be, the legal, valid, and binding 
obligation of the Borrower, enforceable in accordance with its terms, 
subject only to limitations on enforceability imposed by applicable 
bankruptcy, insolvency, reorganization, moratorium, or similar laws 
affecting creditors' rights generally.
    (e) Compliance With Laws. The Borrower is in compliance in all 
material respects with all federal, state, and local laws, rules, 
regulations, ordinances, codes, and orders (collectively, ``Laws''), the 
failure to comply with which could have a material adverse effect on the 
condition, financial or otherwise, operations, properties, or business 
of the Borrower, or on the ability of the Borrower to perform its 
obligations under the Loan Documents, except as the Borrower has 
disclosed on Schedule 1 attached hereto.
    (f) Litigation. There are no pending legal, arbitration, or 
governmental actions or proceedings to which the Borrower is a party or 
to which any of its property is subject which, if adversely determined, 
could have a material adverse effect on the condition, financial or 
otherwise, operations, properties, profits or business of the Borrower, 
or on the ability of the Borrower to perform its obligations under the 
Loan Documents, and to the best of the Borrower's knowledge, no such 
actions or proceedings are threatened or contemplated, except as the 
Borrower has disclosed to RUS in writing.
    (g) Title to Property. As to property which is presently included in 
the description of Mortgaged Property, the Borrower holds good and 
marketable title to all of its real property and owns all of its 
personal property free and clear of any Lien except the Liens 
specifically identified on Schedule 2 attached hereto (the ``Existing 
Liens''), and Permitted Encumbrances or Liens permitted under the 
Mortgage.
    (h) Financial Statements; No Material Adverse Change; Etc. All 
financial statements submitted to RUS in connection with the application 
for the Loan or in connection with this Agreement fairly and fully 
present the financial condition of the Borrower and the results of the 
Borrower's operations for the periods covered thereby and are prepared 
in accordance with RUS Accounting Requirements consistently applied. 
Since the dates thereof, there has been no material adverse change in 
the financial condition or operations of the Borrower. All budgets, 
projections, feasibility studies, and other documentation submitted by 
the Borrower to RUS are based upon assumptions that are reasonable and 
realistic, and as of the date hereof, no fact has come to light, and no 
event or transaction has occurred, which would cause any assumption made 
therein not to be reasonable or realistic.
    (i) Principal Place of Business; Records. The principal place of 
business and chief executive office of the Borrower is at the address of 
the Borrower shown on Schedule 1 attached hereto.
    (j) Location of Properties. All property owned by the Borrower is 
located in the counties identified in Schedule 1 hereto.
    (k) Subsidiaries. The Borrower has no subsidiary, except as the 
Borrower has disclosed to RUS in writing.
    (l) Defaults Under Other Agreements. The Borrower is not in default 
under any agreement or instrument to which it is a party or under which 
any of its properties are subject that is material to its financial 
condition, operations, properties, profits, or business.
    (m) Survival. All representations and warranties made by the 
Borrower herein or made in any certificate delivered pursuant hereto 
shall survive the making of the Advances and the execution and delivery 
to RUS of the Note.

                            Article III--Loan

                          Section 3.1. Advances

    RUS agrees to make, and the Borrower agrees to request, on the terms 
and conditions of this Agreement, Advances from time to time in an 
aggregate principal amount not to exceed the RUS Commitment. On the 
Termination Date, RUS may stop advancing funds and limit the RUS 
Commitment to the amount advanced prior to such date. The obligation of 
the Borrower to repay the Advances shall be evidenced by the Note in the 
principal amount of the unpaid principal amount of the Advances from 
time to time outstanding. The Borrower shall give RUS written notice of 
the date on which each Advance is to be made.

                 Section 3.2. Interest Rate and Payment

    The Note shall be payable and bear interest as follows:
    (a) Payments and Amortization. Principal shall be amortized in 
accordance with the method stated in Schedule 1 hereto and more fully 
described in the form of Note attached hereto as Exhibit A.
    (b) Application of Payments. All payments which the Borrower sends 
to RUS on any

[[Page 226]]

outstanding obligation owed to RUS shall be applied in the manner 
provided in the Borrower's loan documents to which such payments relate 
and in a manner consistent with RUS policies, practices, and procedures 
for obligations that have been similarly classified by RUS.
    (c) Electronic Funds Transfer. Except as otherwise prescribed by 
RUS, the Borrower shall make all payments on the Note utilizing 
electronic funds transfer procedures as specified by RUS.
    (d) Fixed or Variable Rate. The Note shall bear interest at either a 
fixed or variable rate in accordance with the method stated in Schedule 
1 hereto and as more particularly described in the form of Note attached 
hereto as Exhibit A.

                         Section 3.3. Prepayment

    The Borrower has no right to prepay the Note in whole or in part 
except such rights, if any, as are expressly provided for in the Note. 
However, prepayment of the Note (and any penalties) shall be mandatory 
under Section [5.3] hereof if the Borrower has used a Contemporaneous 
Loan in order to qualify for the RUS Commitment, and later prepays the 
Contemporaneous Loan.

                    Article IV--Conditions of Lending

                     Section 4.1. General Conditions

    The obligation of RUS to make any Advance hereunder is subject to 
satisfaction of each of the following conditions precedent on or before 
the date of such Advance:
    (a) Legal Matters. All legal matters incident to the consummation of 
the transactions hereby contemplated shall be satisfactory to counsel 
for RUS.
    (b) Loan Documents. That RUS receive duly executed originals of this 
Agreement and the other Loan Documents.
    (c) Authorization. That RUS receive evidence satisfactory to it that 
all corporate documents and proceedings of the Borrower necessary for 
duly authorizing the execution, delivery and performance of the Loan 
Documents have been obtained and are in full force and effect.
    (d) Approvals. That RUS receive evidence satisfactory to it that all 
consents and approvals (including without limitation the consents 
referred to in Section [2.1(c)] of this Agreement) which are necessary 
for, or required as a condition of, the validity and enforceability of 
each of the Loan Documents have been obtained and are in full force and 
effect.
    (e) Event of Default. That no Event of Default specified in Article 
VII and no event which, with the lapse of time or the notice and lapse 
of time specified in Article VII would become such an Event of Default, 
shall have occurred and be continuing, or shall have occurred after 
giving effect to the Advance on the books of the Borrower.
    (f) Continuing Representations and Warranties. That the 
representations and warranties of the Borrower contained in this 
Agreement be true and correct on and as of the date of such Advance as 
though made on and as of such date.
    (g) Opinion of Counsel. That RUS receive an opinion of counsel for 
the Borrower (who shall be acceptable to RUS) in form and content 
acceptable to RUS.
    (h) Mortgage Filing. The Mortgage shall have been duly recorded as a 
mortgage on real property, including after-acquired real property, and 
duly filed, recorded or indexed as a security interest in personal 
property, including after acquired personal property, wherever RUS shall 
have requested, all in accordance with applicable law, and the Borrower 
shall have caused satisfactory evidence thereof to be furnished to RUS.
    (i) Wholesale Power Contract. That the Borrower shall not be in 
default under the terms of, or contesting the validity of, any contract 
for sales for resale that has been pledged by any entity to RUS as 
security for the repayment of any loan made or guaranteed by RUS under 
the Act.
    (j) Material Adverse Change. That there has occurred no material 
adverse change in the business or condition, financial or otherwise, of 
the Borrower and nothing has occurred which in the opinion of RUS 
materially and adversely affects the Borrower's ability to meet its 
obligations hereunder.
    (k) Requisitions. That the Borrower shall requisition all Advances 
by submitting its requisition to RUS in form and substance satisfactory 
to RUS. Requisitions shall be made only for the purpose(s) set forth 
herein. The Borrower agrees to apply the proceeds of the Advances in 
accordance with its loan application with such modifications as may be 
mutually agreed.
    (l) Flood Insurance. That for any Advance used in whole or in part 
to finance the construction or acquisition of any building in any area 
identified by the Secretary of Housing and Urban Development pursuant to 
the Flood Disaster Protection Act of 1973 (the ``Flood Insurance Act'') 
or any rules, regulations or orders issued to implement the Flood 
Insurance Act (``Rules'') as any area having special flood hazards, or 
to finance any facilities or materials to be located in any such 
building, or in any building owned or occupied by the Borrower and 
located in such a flood hazard area, the Borrower has submitted 
evidence, in form and substance satisfactory to RUS, or RUS has 
otherwise determined, that (i) the community in which such area is 
located is then participating in the national flood insurance program, 
as required by the Flood Insurance Act and any Rules, and (ii) the 
Borrower has obtained flood insurance coverage with respect to

[[Page 227]]

such building and contents as may then be required pursuant to the Flood 
Insurance Act and any Rules.
    (m) Compliance With Loan Contract and Mortgage. That the Borrower is 
in material compliance with all provisions of this Agreement and the 
Mortgage.

                     Section 4.2. Special Conditions

    The obligation of RUS to make any Advance hereunder is also subject 
to satisfaction, on or before the date of such Advance, of each of the 
special conditions, if any, listed in Schedule 1 hereto.

                    Article V--Affirmative Covenants

                         Section 5.1. Generally

    Unless otherwise agreed to in writing by RUS, while this Agreement 
is in effect, whether or not any Advance is outstanding, the Borrower 
agrees to duly observe each of the affirmative covenants contained in 
this Article:

                    Section 5.2. Annual Certificates

    (a) Performance Under Loan Documents. The Borrower shall duly 
observe and perform all of its obligations under each of the Loan 
Documents.
    (b) Annual Certification. Within ninety (90) days after the close of 
each calendar year, commencing with the year following the year in which 
the initial Advance hereunder shall have been made, the Borrower shall 
deliver to RUS a written statement signed by its General Manager, 
stating that during such year the Borrower has fulfilled all of its 
obligations under the Loan Documents throughout such year in all 
material respects or, if there has been a default in the fulfillment of 
any such obligations, specifying each such default known to said person 
and the nature and status thereof.

      Section 5.3. Simultaneous Prepayment of Contemporaneous Loans

    If the Borrower shall at any time prepay in whole or in part the 
Contemporaneous Loan described on Schedule 1, the Borrower shall prepay 
the RUS Note correspondingly in order to maintain the ratio that the 
Contemporaneous Loan bears to the RUS Commitment. If the RUS Note calls 
for a prepayment penalty or premium, such amount shall be paid but shall 
not be used in computing the amount needed to be paid to RUS under this 
section to maintain such ratio. In the case of Contemporaneous Loans and 
RUS Notes existing prior to the date of this Agreement under previous 
agreements, prepayments shall be treated as if governed by this section. 
Provided, however, in all cases prepayments associated with refinancing 
or refunding a Contemporaneous Loan pursuant to Article II of the 
Mortgage are not considered to be prepayments for purposes of this 
Agreement if they satisfy each of the following requirements:
    (a) Principal. The principal amount of such refinancing or refunding 
loan is not less than the amount of loan principal being refinanced; and
    (b) Weighted Average Life. The weighted average life of the 
refinancing or refunding loan is materially equal to the weighted 
average remaining life of the loan being refinanced.

Section 5.4 Rates to Provide Revenue Sufficient to Meet Coverage Ratios 
                              Requirements

    (a) Prospective Requirement. The Borrower shall design and implement 
rates for utility service furnished by it to provide sufficient revenue 
(along with other revenue available to the Borrower in the case of TIER 
and DSC) (i) to pay all fixed and variable expenses when and as due, 
(ii) to provide and maintain reasonable working capital, and (iii) to 
maintain, on an annual basis, the Coverage Ratios. In designing and 
implementing rates under this paragraph, such rates should be capable of 
producing at least enough revenue to meet the requirements of this 
paragraph under the assumption that average weather conditions in the 
Borrower's service territory shall prevail in the future, including 
average Utility System damage and outages due to weather and the related 
costs.
    (b) The average Coverage Ratios achieved by the Borrower in the 2 
best years out of the 3 most recent calendar years must be not less than 
any of the following:

TIER=1.25
DSC=1.25
OTIER=1.1
ODSC=1.1

    (c) Prospective Notice of Change in Rates. The Borrower shall give 
thirty (30) days prior written notice of any proposed change in its 
general rate structure to RUS if RUS has requested in writing that it be 
notified in advance of such changes.
    (d) Routine Reporting of Coverage Ratios. Promptly following the end 
of each calendar year, the Borrower shall report, in writing, to RUS the 
TIER, Operating TIER, DSC and Operating DSC levels which were achieved 
during that calendar year.
    (e) Reporting Non-achievement of Retrospective Requirement. If the 
Borrower fails to achieve the average levels required by paragraph (b) 
of this section, it must promptly notify RUS in writing to that effect.
    (f) Corrective Plans. Within 30 days of sending a notice to RUS 
under paragraph (e) of this section, or of being notified by RUS, 
whichever is earlier, the Borrower in consultation with RUS, shall 
provide a written plan satisfactory to RUS setting forth the

[[Page 228]]

actions that shall be taken to achieve the required Coverage Ratios on a 
timely basis.
    (g) Noncompliance. Failure to design and implement rates pursuant to 
paragraph (a) of this section and failure to develop and implement the 
plan called for in paragraph (f) of this section shall constitute an 
Event of Default under this Agreement in the event that REA so notifies 
the Borrower to that effect under section [7.1(d)] of this Agreement.

                     Section 5.5. Depreciation Rates

    The Borrower shall adopt as its depreciation rates only those which 
have been previously approved for the Borrower by RUS.

                    Section 5.6. Property Maintenance

    The Borrower shall maintain and preserve its Utility System in 
compliance in all material respects with the provisions of the Mortgage, 
RUS Regulations and all applicable laws.

                      Section 5.7. Financial Books

    The Borrower shall at all times keep, and safely preserve, proper 
books, records and accounts in which full and true entries shall be made 
of all of the dealings, business and affairs of the Borrower and its 
Subsidiaries, in accordance with any applicable RUS Accounting 
Requirements.

                    Section 5.8. Rights of Inspection

    The Borrower shall afford RUS, through its representatives, 
reasonable opportunity, at all times during business hours and upon 
prior notice, to have access to and the right to inspect the Utility 
System, any other property encumbered by the Mortgage, and any or all 
books, records, accounts, invoices, contracts, leases, payrolls, 
canceled checks, statements and other documents and papers of every kind 
belonging to or in the possession of the Borrower or in anyway 
pertaining to its property or business, including its Subsidiaries, if 
any, and to make copies or extracts therefrom.

                       Section 5.9. Area Coverage

    (a) The Borrower shall make diligent effort to extend electric 
service to all unserved persons within the service area of the Borrower 
who (i) desire such service and (ii) meet all reasonable requirements 
established by the Borrower as a condition of such service.
    (b) If economically feasible and reasonable considering the cost of 
providing such service and/or the effects on consumers' rates, such 
service shall be provided, to the maximum extent practicable, at the 
rates and minimum charges established in the Borrower's rate schedules, 
without the payment of such persons, other than seasonal or temporary 
consumers, of a contribution in aid of construction. A seasonal consumer 
is one that demands electric service only during certain seasons of the 
year. A temporary consumer is a seasonal or year-round consumer that 
demands electric service over a period of less than five years.
    (c) The Borrower may assess contributions in aid of construction 
provided such assessments are consistent with this section.

                 Section 5.10. Real Property Acquisition

    In acquiring real property, the Borrower shall comply in all 
material respects with the provisions of the Uniform Relocation 
Assistance and Real Property Acquisition Policies Act of 1970 (the 
``Uniform Act''), as amended by the Uniform Relocation Act Amendments of 
1987, and 49 CFR part 24, referenced by 7 CFR part 21, to the extent the 
Uniform Act is applicable to such acquisition.

               Section 5.11. ``Buy American'' Requirements

    The Borrower shall use or cause to be used in connection with the 
expenditures of funds advanced on account of the Loan only such 
unmanufactured articles, materials, and supplies as have been mined or 
produced in the United States or any eligible country, and only such 
manufactured articles, materials, and supplies as have been manufactured 
in the United States or any eligible country substantially all from 
articles, materials, and supplies mined, produced or manufactured, as 
the case may be, in the United States or any eligible country, except to 
the extent RUS shall determine that such use shall be impracticable or 
that the cost thereof shall be unreasonable. For purposes of this 
section, an ``eligible country'' is any country that applies with 
respect to the United States an agreement ensuring reciprocal access for 
United States products and services and United States suppliers to the 
markets of that country, as determined by the United States Trade 
Representative.

                Section 5.12. Power Requirements Studies

    The Borrower shall prepare and use power requirements studies of its 
electric loads and future energy and capacity requirements in 
conformance with RUS Regulations.

 Section 5.13. Long Range Engineering Plans and Construction Work Plans

    The Borrower shall develop, maintain and use up-to-date long-range 
engineering plans and construction work plans in conformance with RUS 
Regulations.

  Section 5.14. Design Standards, Construction Standards, and List of 
                                Materials

    The Borrower shall use design standards, construction standards, and 
lists of acceptable materials in conformance with RUS Regulations.

[[Page 229]]

                 Section 5.15. Plans and Specifications

    The Borrower shall submit plans and specifications for construction 
to RUS for review and approval, in conformance with RUS Regulations, if 
the construction will be financed in whole or in part by a loan made or 
guaranteed by RUS.

Section 5.16. Standard Forms of Construction Contracts, and Engineering 
                  and Architectural Services Contracts

    The Borrower shall use the standard forms of contracts promulgated 
by RUS for construction, procurement, engineering services and 
architectural services in conformance with RUS Regulations, if the 
construction, procurement, or services are being financed in whole or in 
part by a loan being made or guaranteed by RUS.

               Section 5.17. Contract Bidding Requirements

    The Borrower shall follow RUS contract bidding procedures in 
conformance with RUS Regulations when contracting for construction or 
procurement financed in whole or in part by a loan made or guaranteed by 
RUS.

                     Section 5.18. Nondiscrimination

    (a) Equal Opportunity Provisions in Construction Contracts. The 
Borrower shall incorporate or cause to be incorporated into any 
construction contract, as defined in Executive Order 11246 of September 
24, 1965 and implementing regulations, which is paid for in whole or in 
part with funds obtained from RUS or borrowed on the credit of the 
United States pursuant to a grant, contract, loan, insurance or 
guarantee, or undertaken pursuant to any RUS program involving such 
grant, contract, loan, insurance or guarantee, the equal opportunity 
provisions set forth in Exhibit B hereto entitled Equal Opportunity 
Contract Provisions.
    (b) Equal Opportunity Contract Provisions Also Bind the Borrower. 
The Borrower further agrees that it shall be bound by such equal 
opportunity clause in any federally assisted construction work which it 
performs itself other than through the permanent work force directly 
employed by an agency of government.
    (c) Sanctions and Penalties. The Borrower agrees that it shall 
cooperate actively with RUS and the Secretary of Labor in obtaining the 
compliance of contractors and subcontractors with the equal opportunity 
clause and the rules, regulations and relevant orders of the Secretary 
of Labor, that it shall furnish RUS and the Secretary of Labor such 
information as they may require for the supervision of such compliance, 
and that it shall otherwise assist the administering agency in the 
discharge of RUS's primary responsibility for securing compliance. The 
Borrower further agrees that it shall refrain from entering into any 
contract or contract modification subject to Executive Order 11246 with 
a contractor debarred from, or who has not demonstrated eligibility for, 
Government contracts and federally assisted construction contracts 
pursuant to Part II, Subpart D of Executive Order 11246 and shall carry 
out such sanctions and penalties for violation of the equal opportunity 
clause as may be imposed upon contractors and subcontractors by RUS or 
the Secretary of Labor pursuant to Part II, Subpart D of Executive Order 
11246. In addition, the Borrower agrees that if it fails or refuses to 
comply with these undertakings RUS may cancel, terminate or suspend in 
whole or in part this contract, may refrain from extending any further 
assistance under any of its programs subject to Executive Order 11246 
until satisfactory assurance of future compliance has been received from 
such Borrower, or may refer the case to the Department of Justice for 
appropriate legal proceedings.

                     Section 5.19. Financial Reports

    The Borrower shall cause to be prepared and furnished to RUS a full 
and complete annual report of its financial condition and of its 
operations in form and substance satisfactory to RUS, audited and 
certified by Independent certified public accountants satisfactory to 
RUS and accompanied by a report of such audit in form and substance 
satisfactory to RUS. The Borrower shall also furnish to RUS from time to 
time such other reports concerning the financial condition or operations 
of the Borrower, including its Subsidiaries, as RUS may reasonably 
request or RUS Regulations require.

             Section 5.20. Miscellaneous Reports and Notices

    The Borrower shall furnish to RUS:
    (a) Notice of Default. Promptly after becoming aware thereof, notice 
of: (i) the occurrence of any default; and (ii) the receipt of any 
notice given pursuant to the Mortgage with respect to the occurrence of 
any event which with the giving of notice or the passage of time, or 
both, could become an ``Event of Default'' under the Mortgage.
    (b) Notice of Non-Environmental Litigation. Promptly after the 
commencement thereof, notice of the commencement of all actions, suits 
or proceedings before any court, arbitrator, or governmental department, 
commission, board, bureau, agency, or instrumentality affecting the 
Borrower which, if adversely determined, could have a material adverse 
effect on the condition, financial or otherwise, operations, properties 
or business of the Borrower, or on the ability of the Borrower to 
perform its obligations under the Loan Documents.
    (c) Notice of Environmental Litigation. Without limiting the 
provisions of Section

[[Page 230]]

[5.20(b)] above, promptly after receipt thereof, notice of the receipt 
of all pleadings, orders, complaints, indictments, or other 
communications alleging a condition that may require the Borrower to 
undertake or to contribute to a cleanup or other response under laws 
relating to environmental protection, or which seek penalties, damages, 
injunctive relief, or criminal sanctions related to alleged violations 
of such laws, or which claim personal injury or property damage to any 
person as a result of environmental factors or conditions for which the 
Borrower is not fully covered by insurance, or which, if adversely 
determined, could have a material adverse effect on the condition, 
financial or otherwise, operations, properties or business of the 
Borrower, or on the ability of the Borrower to perform its obligations 
under the Loan Documents.
    (d) Notice of Change of Place of Business. Promptly in writing, 
notice of any change in location of its principal place of business or 
the office where its records concerning accounts and contract rights are 
kept.
    (e) Regulatory and Other Notices. Promptly after receipt thereof, 
copies of any notices or other communications received from any 
governmental authority with respect to any matter or proceeding which 
could have a material adverse effect on the condition, financial or 
otherwise, operations, properties, or business of the Borrower, or on 
the ability of the Borrower to perform its obligations under the Loan 
Documents.
    (f) Material Adverse Change. Promptly, notice of any matter which 
has resulted or may result in a material adverse change in the 
condition, financial or otherwise, operations, properties, or business 
of the Borrower, or the ability of the Borrower to perform its 
obligations under the Loan Documents.
    (g) Other Information. Such other information regarding the 
condition, financial or otherwise, or operations of the Borrower as RUS 
may, from time to time, reasonably request.

               Section 5.21. Special Construction Account

    The Borrower shall hold all moneys advanced to it by RUS hereunder 
in trust for RUS and shall deposit such moneys promptly after the 
receipt thereof in a bank or banks which meet the requirements of 
Section [6.7] of this Agreement. Any account (hereinafter called 
``Special Construction Account'') in which any such moneys shall be 
deposited shall be insured by the Federal Deposit Insurance Corporation 
or other federal agency acceptable to RUS and shall be designated by the 
corporate name of the Borrower followed by the words ``Trustee, Special 
Construction Account.'' Moneys in any Special Construction Account shall 
be used solely for the construction and operation of the Utility System 
and may be withdrawn only upon checks, drafts, or orders signed on 
behalf of the Borrower and countersigned by an executive officer 
thereof.

             Section 5.22. Additional Affirmative Covenants

    The Borrower also agrees to comply with any additional affirmative 
covenant(s) identified in Schedule 1 hereto.

                     Article VI--Negative Covenants

                          Section 6.1. General

    Unless otherwise agreed to in writing by RUS, while this Agreement 
is in effect, whether or not any Advance is outstanding hereunder, the 
Borrower shall duly observe each of the negative covenants set forth in 
this Article.

       Section 6.2. Limitations on System Extensions and Additions

    (a) The Borrower shall not extend or add to its Electric System 
either by construction or acquisition without the prior written approval 
of RUS if the construction or acquisition is financed or will be 
financed, in whole or in part, by a RUS loan or loan guarantee.
    (b) The Borrower shall not extend or add to its Electric System with 
funds from other sources without prior written approval of RUS in the 
case of:
    (1) Generating facilities if the combined capacity of the facilities 
to be built, procured, or leased, including any future facilities 
included in the planned project, will exceed the lesser of 5 Megawatts 
or 30 percent of the Borrower's Equity;
    (2) Existing electric facilities or systems in service whose 
purchase price, or capitalized value in the case of a lease, exceeds ten 
percent of the Borrower's Net Utility Plant; and
    (3) Any project to serve a customer whose annual Kwh purchases or 
maximum annual Kw demand is projected to exceed 25 percent of the 
Borrower's total Kwh sales or maximum Kw demand in the year immediately 
preceding the acquisition or start of construction of facilities.

    Section 6.3. Limitations on Changing Principal Place of Business

    The Borrower shall not change its principal place of business or 
keep property in a county not shown on a schedule to the Mortgage if the 
change would cause the lien in favor of RUS to become unperfected or 
fail to become perfected, as the case may be, unless, prior thereto, the 
Borrower shall have taken all steps required by law in order to assure 
that the lien in favor of RUS remains or becomes perfected, as the case 
may be, and, in either event, such lien has the priority accorded by the 
Mortgage.

[[Page 231]]

     Section 6.4. Limitations on Employment and Retention of Manager

    At any time any Event of Default, or any occurrence which with the 
passage of time or giving of notice would be an Event of Default, occurs 
and is continuing the Borrower shall not employ any general manager of 
the Utility System or the Electric System or any person exercising 
comparable authority to such a manager unless such employment shall 
first have been approved by RUS. If any Event of Default, or any 
occurrence which with the passage of time or giving of notice would be 
an Event of Default, occurs and is continuing and RUS requests the 
Borrower to terminate the employment of any such manager or person 
exercising comparable authority, or RUS requests the Borrower to 
terminate any contract for operating the Utility System or the Electric 
System, the Borrower shall do so within thirty (30) days after the date 
of such notice. All contracts in respect of the employment of any such 
manager or person exercising comparable authority, or for the operation 
of the Utility System or the Electric System, shall contain provisions 
to permit compliance with the foregoing covenants.

         Section 6.5. Limitations on Certain Types of Contracts

    Without the prior approval of RUS in writing, the Borrower shall not 
enter into any of the following contracts:
    (a) Construction Contracts. Any contract for construction or 
procurement or for architectural and engineering services in connection 
with its Electric System if the project is financed or will be financed, 
in whole or in part, by a RUS loan or loan guarantee;
    (b) Large retail power contracts. Any contract to sell electric 
power and energy for periods exceeding two (2) years if the kWh sales or 
kW demand for any year covered by such contract shall exceed 25 percent 
of the Borrower's total kWh sales or maximum kW demand for the year 
immediately preceding the execution of such contract;
    (c) Wholesale power contracts. Any contract to sell electric power 
or energy for resale and any contract to purchase electric power or 
energy that, in either case, has a term exceeding two (2) years;
    (d) Power supply arrangements. Any interconnection agreement, 
interchange agreement, wheeling agreement, pooling agreement or similar 
power supply arrangement that has a term exceeding two (2) years;
    (e) System management and maintenance contracts. Any contract for 
the management and operation of all or substantially all of its Electric 
System; or
    (f) Other contracts. Any contracts of the type described on Schedule 
3.

   Section 6.6. Limitations on Mergers and Sale, Lease or Transfer of 
                             Capital Assets

    (a) The Borrower shall not consolidate with, or merge, or sell all 
or substantially all of its business or assets, to another entity or 
person except to the extent it is permitted to do so under the Mortgage. 
The exception contained in this paragraph (a) is subject to the 
additional limitation set forth in paragraph (b) of this section.
    (b) The Borrower shall not, without the written approval of the 
Administrator, voluntarily or involuntarily sell, convey or dispose of 
any portion of its business or assets (including, without limitation, 
any portion of its franchise or service territory) to another entity or 
person if such sale, conveyance or disposition could reasonably be 
expected to reduce the Borrower's existing or future requirements for 
energy or capacity being furnished to the Borrower under any wholesale 
power contract which has been pledged as security to RUS.

     Section 6.7. Limitations on Using non-FDIC Insured Depositories

    Without the prior written approval of RUS, the Borrower shall not 
place the proceeds of the Loan or any loan which has been made or 
guaranteed by RUS in the custody of any bank or other depository that is 
not insured by the Federal Deposit Insurance Corporation or other 
federal agency acceptable to RUS.

                Section 6.8. Limitation on Distributions

    Without the prior written approval of RUS, the Borrower shall not in 
any calendar year make any Distributions (exclusive of any Distributions 
to the estates of deceased natural patrons) to its members, stockholders 
or consumers except as follows:
    (a) Equity above 30%. If, after giving effect to any such 
Distribution, the Equity of the Borrower shall be greater than or equal 
to 30% of its Total Assets; or
    (b) Equity above 20%. If, after giving effect to any such 
Distribution, the aggregate of all Distributions made during the 
calendar year when added to such Distribution shall be less than or 
equal to 25% of the prior year's margins.
    Provided however, that in no event shall the Borrower make any 
Distributions if there is unpaid when due any installment of principal 
of (premium, if any) or interest on its Notes, if the Borrower is 
otherwise in default hereunder or if, after giving effect to any such 
Distribution, the Borrower's current and accrued assets would be less 
than its current and accrued liabilities.

  Section 6.9. Limitations on Loans, Investments and Other Obligations

    The Borrower shall not make any loan or advance to, or make any 
investment in, or

[[Page 232]]

purchase or make any commitment to purchase any stock, bonds, notes or 
other securities of, or guaranty, assume or otherwise become obligated 
or liable with respect to the obligations of, any other person, firm or 
corporation, except as permitted by the Act and RUS Regulations.

                    Section 6.10. Depreciation Rates

    The Borrower shall not file with or submit for approval of 
regulatory bodies any proposed depreciation rates which are inconsistent 
with RUS Regulations.

                   Section 6.11. Historic Preservation

    The Borrower shall not, without approval in writing by RUS, use any 
Advance to construct any facilities which shall involve any district, 
site, building, structure or object which is included in, or eligible 
for inclusion in, the National Register of Historic Places maintained by 
the Secretary of the Interior pursuant to the Historic Sites Act of 1935 
and the National Historic Preservation Act of 1966.

                      Section 6.12. Rate Reductions

    Without the prior written approval of RUS, the Borrower shall not 
decrease its rates if it has failed to achieve all of the Coverage 
Ratios for the calendar year prior to such reduction.

          Section 6.13. Limitations on Additional Indebtedness

    Except as expressly permitted by Article II of the Mortgage and 
subject to the further limitations expressed in the next section, the 
Borrower shall not incur, assume, guarantee or otherwise become liable 
in respect of any debt for borrowed money and Restricted Rentals 
(including Subordinated Indebtedness) other than the following: 
(``Permitted Debt'')
    (a) Additional Notes issued in compliance with Article II of the 
Mortgage;
    (b) Purchase money indebtedness in non-Utility System property, in 
an amount not exceeding 10% of Net Utility Plant;
    (c) Restricted Rentals in an amount not to exceed 5% of Equity 
during any 12 consecutive calendar month period;
    (d) Unsecured lease obligations incurred in the ordinary course of 
business except Restricted Rentals;
    (e) Unsecured indebtedness for borrowed money, except when the 
aggregate amount of such indebtedness exceeds 15% of Net Utility Plant 
and after giving effect to such unsecured indebtedness the Borrower's 
Equity is less than 30% of its Total Assets;
    (f) Debt represented by dividends declared but not paid; and
    (g) Subordinated Indebtedness approved by RUS.
    PROVIDED, However, that the Borrower may incur Permitted Debt 
without the consent of RUS only so long as there exists no Event of 
Default hereunder and there has been no continuing occurrence which with 
the passage of time and giving of notice could become an Event of 
Default hereunder.
    PROVIDED, FURTHER, by executing this Agreement any consent of RUS 
that the Borrower would otherwise be required to obtain under this 
Section is hereby deemed to be given or waived by RUS by operation of 
law to the extent, but only to the extent, that to impose such a 
requirement of RUS consent would clearly violate federal laws or RUS 
Regulations.

  Section 6.14. Limitations on Issuing Additional Indebtedness Secured 
                           Under the Mortgage

    (a) The Borrower shall not issue any Additional Notes under the 
Mortgage to finance Eligible Property Additions without the prior 
written consent of RUS unless the following additional requirements are 
met in addition to the requirements set forth in the Mortgage for 
issuing Additional Notes:
    (1) The weighted average life of the loan evidenced by such Notes 
does not exceed the weighted average of the expected remaining useful 
lives of the assets being financed;
    (2) The principal of the loan evidenced by such Notes is amortized 
at a rate that shall yield a weighted average life that is not greater 
than the weighted average life that would result from level payments of 
principal and interest; and
    (3) The principal of the loan being evidenced by such Notes has a 
maturity of not less than 5 years.
    (b) The Borrower shall not issue any Additional Notes under the 
Mortgage to refund or refinance Notes without the prior written consent 
of RUS unless, in addition to the requirements set forth in the Mortgage 
for issuing Refunding or Refinancing Notes, the weighted average life of 
any such Refunding or Refinancing Notes is not greater than the weighted 
average remaining life of the Notes being refinanced.
    (c) Any request for consent from RUS under this section, shall be 
accompanied by a certificate of the Borrower's manager substantially in 
the form attached to this Agreement as Exhibit C-1 in the case of Notes 
being issued under Section [2.01] of the Mortgage and C-2 in the case of 
Notes being issued under Section [2.02] of the Mortgage.

          Section 6.15. Impairment of Contracts Pledged to RUS

    The Borrower shall not materially breach any obligation to be paid 
or performed by the Borrower on any contract, or take any action which 
is likely to materially impair the value of any contract, which has been

[[Page 233]]

pledged as security to RUS by the Borrower or any other entity.

               Section 6.16. Additional Negative Covenants

    The Borrower also agrees to comply with any additional negative 
covenant(s) identified in Schedule 1 hereto.

                          Article VII--Default

                     Section 7.1. Events of Default

    The following shall be Events of Default under this Agreement:
    (a) Representations and Warranties. Any representation or warranty 
made by the Borrower in Article II hereof or any certificate furnished 
to RUS hereunder or under the Mortgage shall prove to have been 
incorrect in any material respect at the time made and shall at the time 
in question be untrue or incorrect in any material respect and remain 
uncured;
    (b) Payment. Default shall be made in the payment of or on account 
of interest on or principal of the Note when and as the same shall be 
due and payable, whether by acceleration or otherwise, which shall 
remain unsatisfied for five (5) Business Days;
    (c) Borrowing Under the Mortgage in Violation of the Loan Contract. 
Default by the Borrower in the observance or performance of any covenant 
or agreement contained in Section 6.14 of this Agreement.
    (d) Other Covenants. Default by the Borrower in the observance or 
performance of any other covenant or agreement contained in any of the 
Loan Documents, which shall remain unremedied for 30 calendar days after 
written notice thereof shall have been given to the Borrower by RUS;
    (e) Corporate Existence. The Borrower shall forfeit or otherwise be 
deprived of its corporate charter, franchises, permits, easements, 
consents or licenses required to carry on any material portion of its 
business;
    (f) Other Obligations. Default by the Borrower in the payment of any 
obligation, whether direct or contingent, for borrowed money or in the 
performance or observance of the terms of any instrument pursuant to 
which such obligation was created or securing such obligation;
    (g) Bankruptcy. A court having jurisdiction in the premises shall 
enter a decree or order for relief in respect of the Borrower in an 
involuntary case under any applicable bankruptcy, insolvency or other 
similar law now or hereafter in effect, or appointing a receiver, 
liquidator, assignee, custodian, trustee, sequestrator or similar 
official, or ordering the winding up or liquidation of its affairs, and 
such decree or order shall remain unstayed and in effect for a period of 
ninety (90) consecutive days or the Borrower shall commence a voluntary 
case under any applicable bankruptcy, insolvency or other similar law 
now or hereafter in effect, or under any such law, or consent to the 
appointment or taking possession by a receiver, liquidator, assignee, 
custodian or trustee, of a substantial part of its property, or make any 
general assignment for the benefit of creditors; and
    (h) Dissolution or Liquidation. Other than as provided in the 
immediately preceding subsection, the dissolution or liquidation of the 
Borrower, or failure by the Borrower promptly to forestall or remove any 
execution, garnishment or attachment of such consequence as shall impair 
its ability to continue its business or fulfill its obligations and such 
execution, garnishment or attachment shall not be vacated within 30 
days. The term ``dissolution or liquidation of the Borrower'', as used 
in this subsection, shall not be construed to include the cessation of 
the corporate existence of the Borrower resulting either from a merger 
or consolidation of the Borrower into or with another corporation 
following a transfer of all or substantially all its assets as an 
entirety, under the conditions permitting such actions.

                         Article VIII--Remedies

                         Section 8.1. Generally

    Upon the occurrence of an Event of Default, then RUS may pursue all 
rights and remedies available to RUS that are contemplated by this 
Agreement or the Mortgage in the manner, upon the conditions, and with 
the effect provided in this Agreement or the Mortgage, including, but 
not limited to, a suit for specific performance, injunctive relief or 
damages. Nothing herein shall limit the right of RUS to pursue all 
rights and remedies available to a creditor following the occurrence of 
an Event of Default listed in Article VII hereof. Each right, power and 
remedy of RUS shall be cumulative and concurrent, and recourse to one or 
more rights or remedies shall not constitute a waiver of any other 
right, power or remedy.

                   Section 8.2. Suspension of Advances

    In addition to the rights, powers and remedies referred to in the 
immediately preceding section, RUS may, in its absolute discretion, 
suspend making Advances hereunder if (i) any Event of Default, or any 
occurrence which with the passage of time or giving of notice would be 
an Event of Default, occurs and is continuing; (ii) there has occurred a 
change in the business or condition, financial or otherwise, of the 
Borrower which in the opinion of RUS materially and adversely affects 
the Borrower's ability to meet its obligations under the Loan Documents, 
or (iii) RUS is authorized to do so under RUS Regulations.

[[Page 234]]

                        Article IX--Miscellaneous

                          Section 9.1. Notices

    All notices, requests and other communications provided for herein 
including, without limitation, any modifications of, or waivers, 
requests or consents under, this Agreement shall be given or made in 
writing (including, without limitation, by telecopy) and delivered to 
the intended recipient at the ``Address for Notices'' specified below; 
or, as to any party, at such other address as shall be designated by 
such party in a notice to each other party. Except as otherwise provided 
in this Agreement, all such communications shall be deemed to have been 
duly given when transmitted by telecopier or personally delivered or, in 
the case of a mailed notice, upon receipt, in each case given or 
addressed as provided for herein. The Address for Notices of the 
respective parties are as follows:

Rural Utilities Service, United States Department of Agriculture, 
Washington, DC 20250-1500
Fax: (202) xxx-xxxx

Attention: [Administrator]
The Borrower:
The address set forth in Schedule 1 hereto

                          Section 9.2. Expenses

    To the extent allowed by law, the Borrower shall pay all costs and 
expenses of RUS, including reasonable fees of counsel, incurred in 
connection with the enforcement of the Loan Documents or with the 
preparation for such enforcement if RUS has reasonable grounds to 
believe that such enforcement may be necessary.

                       Section 9.3. Late Payments

    If payment of any amount due hereunder is not received at the United 
States Treasury in Washington, DC, or such other location as RUS may 
designate to the Borrower within five (5) Business Days after the due 
date thereof or such other time period as RUS may prescribe from time to 
time in its policies of general application in connection with any late 
payment charge (such unpaid amount being herein called the ``delinquent 
amount'', and the period beginning after such due date until payment of 
the delinquent amount being herein called the ``late-payment period''), 
the Borrower shall pay to RUS, in addition to all other amounts due 
under the terms of the Note, the Mortgage and this Agreement, any late-
payment charge as may be fixed by RUS Regulations from time to time on 
the delinquent amount for the late-payment period.

                        Section 9.4. Filing Fees

    To the extent permitted by law, the Borrower agrees to pay all 
expenses of RUS (including the fees and expenses of its counsel) in 
connection with the filing or recordation of all financing statements 
and instruments as may be required by RUS in connection with this 
Agreement, including, without limitation, all documentary stamps, 
recordation and transfer taxes and other costs and taxes incident to 
recordation of any document or instrument in connection herewith. 
Borrower agrees to save harmless and indemnify RUS from and against any 
liability resulting from the failure to pay any required documentary 
stamps, recordation and transfer taxes, recording costs, or any other 
expenses incurred by RUS in connection with this Agreement. The 
provisions of this subsection shall survive the execution and delivery 
of this Agreement and the payment of all other amounts due hereunder or 
due on the Note.

                         Section 9.5. No Waiver

    No failure on the part of RUS to exercise, and no delay in 
exercising, any right hereunder shall operate as a waiver thereof nor 
shall any single or partial exercise by RUS of any right hereunder 
preclude any other or further exercise thereof or the exercise of any 
other right.

                       Section 9.6. Governing Law

    EXCEPT TO THE EXTENT GOVERNED BY APPLICABLE FEDERAL LAW, THE LOAN 
DOCUMENTS SHALL BE DEEMED TO BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE 
WITH, THE LAWS OF THE STATE [IN WHICH THE BORROWER IS INCORPORATED].

                      Section 9.7. Holiday Payments

    If any payment to be made by the Borrower hereunder shall become due 
on a day which is not a Business Day, such payment shall be made on the 
next succeeding Business Day and such extension of time shall be 
included in computing any interest in respect of such payment.

                         Section 9.8. Rescission

    The Borrower may elect not to borrow the RUS Commitment in which 
event RUS shall release the Borrower from its obligations hereunder, 
provided the Borrower complies with such terms and conditions as RUS may 
impose for such release and provided also that if the Borrower has any 
remaining obligations to RUS for loans made or guaranteed by RUS under 
any Prior Loan Contracts, RUS may, under Section [9.15] of this Loan 
Contract, withhold such release until all such obligations have been 
satisfied and discharged.

                   Section 9.9. Successors and Assigns

    This Agreement shall be binding upon and inure to the benefit of the 
Borrower and RUS and their respective successors and assigns,

[[Page 235]]

except that the Borrower may not assign or transfer its rights or 
obligations hereunder without the prior written consent of RUS.

              Section 9.10. Complete Agreement; Amendments

    Subject to RUS Regulations, this Agreement and the other Loan 
Documents are intended by the parties to be a complete and final 
expression of their agreement. However, RUS reserves the right to waive 
its rights to compliance with any provision of this Agreement and the 
other Loan Documents. No amendment, modification, or waiver of any 
provision hereof or thereof, and no consent to any departure of the 
Borrower herefrom or therefrom, shall be effective unless approved in 
writing by RUS in the form of either a RUS Regulation or other writing 
signed by or on behalf of RUS, and then such waiver or consent shall be 
effective only in the specific instance and for the specific purpose for 
which given.

                         Section 9.11. Headings

    The headings and sub-headings contained in the titling of this 
Agreement are intended to be used for convenience only and do not 
constitute part of this Agreement.

                       Section 9.12. Severability

    If any term, provision or condition, or any part thereof, of this 
Agreement or the Mortgage shall for any reason be found or held invalid 
or unenforceable by any governmental agency or court of competent 
jurisdiction, such invalidity or unenforceability shall not affect the 
remainder of such term, provision or condition nor any other term, 
provision or condition, and this Agreement, the Note, and the Mortgage 
shall survive and be construed as if such invalid or unenforceable term, 
provision or condition had not been contained therein.

                      Section 9.13. Right of Setoff

    Upon the occurrence and during the continuance of any Event of 
Default, RUS is hereby authorized at any time and from time to time, 
without prior notice to the Borrower, to exercise rights of setoff or 
recoupment and apply any and all amounts held or hereafter held, by RUS 
or owed to the Borrower or for the credit or account of the Borrower 
against any and all of the obligations of the Borrower now or hereafter 
existing hereunder or under the Note. RUS agrees to notify the Borrower 
promptly after any such setoff or recoupment and the application 
thereof, provided that the failure to give such notice shall not affect 
the validity of such setoff, recoupment or application. The rights of 
RUS under this section are in addition to any other rights and remedies 
(including other rights of setoff or recoupment) which RUS may have. 
Borrower waives all rights of setoff, deduction, recoupment or 
counterclaim.

                  Section 9.14. Schedules and Exhibits

    Each Schedule and Exhibit attached hereto and referred to herein is 
each an integral part of this Agreement.

                   Section 9.15. Prior Loan Contracts

    It is understood and agreed that with respect to all loan agreements 
previously entered into by and between RUS and the Borrower (hereinafter 
being referred to as ``Prior Loan Contracts'') the Borrower shall be 
required, after the date hereof, to meet affirmative and negative 
covenants as set forth in this Agreement rather than those set forth in 
the Prior Loan Contracts. In addition, any remaining obligation of RUS 
to make additional advances on promissory notes of the Borrower that 
have been previously delivered to RUS under Prior Loan Contracts shall, 
after the date hereof, be subject to the conditions set forth in this 
Agreement. In the event of any conflict between any provision set forth 
in a Prior Loan Contract and any provision in this Agreement, the 
requirements as set forth in this Agreement shall apply. Nothing in this 
section shall, however, eliminate or modify any special condition, 
special affirmative covenant or special negative covenant, if any, 
unless specifically agreed to in writing by RUS.

            Section 9.16. Authority of Representatives of RUS

    In the case of any consent, approval or waiver from RUS that is 
required under this Agreement or any other Loan Document, such consent, 
approval or waiver must be in writing and signed by an authorized RUS 
representative to be effective. As used in this section, ``authorized 
RUS representative'' means the Administrator of RUS, and also means a 
person to whom the Administrator has officially delegated specific or 
general authority to take the action in question.

                           Section 9.17. Term

    This Agreement shall remain in effect until one of the following two 
events has occurred:
    (a) The Borrower and RUS replace this Agreement with another written 
agreement; or
    (b) All of the Borrower's obligations under the prior loan contracts 
and this Agreement have been discharged and paid.
    IN WITNESS WHEREOF, the parties hereto have caused this Agreement to 
be duly executed as of the day and year first above written.

________________________________________________________________________
(Name of Borrower)

(SEAL)


[[Page 236]]


By______________________________________________________________________
President

Attest:_________________________________________________________________

Secretary

                         RURAL UTILITIES SERVICE

By______________________________________________________________________
Administrator

                               Schedule 1

[citations subject to change]

    1. The purpose of this loan is -------------------- and such other 
purposes that RUS may agree to in writing in order to carry out the 
purposes of the Rural Electrification Act.
    2. The Mortgage shall mean the Restated Mortgage and Security 
Agreement, dated as of --------------------, between the Borrower and 
RUS, as it may have been or shall be supplemented, amended, 
consolidated, or restated from time to time.
    3. The governmental authority referred to in Section [2.1(c)] is --
------------------.
    4. The exception being taken to the representations in Section 
[2.1(e)] concerning material compliance with laws is as follows: ------
--------------.
    5. The litigation referred to in Section [2.1(f)] is described as 
follows: --------------------.
    6. The date of the Borrower's financial information referred to in 
Section [2.1(h)] is --------------------.
    7. The principal place of business of the Borrower referred to in 
Section [2.1(i)] is --------------------.
    8. All of the property of the Borrower is located in the counties of 
--------------------.
    9. The subsidiary (or subsidiaries) referred to in Section [2.1(k)] 
is (are): --------------------.
    10. The Contemporaneous Loan referred to in Section [5.3] is 
described as follows: --------------------.

Lender:_________________________________________________________________

Amount:_________________________________________________________________

Year of Final Maturity:_________________________________________________

    11. The RUS Commitment referred to in the definitions means a loan 
in the principal amount of $---------------- which is being made by RUS 
to the Borrower at the ------ Hardship Rate ------ Municipal Rate (CHECK 
ONE) pursuant to the Rural Electrification Act and RUS Regulations.
    12. Amortization of Advance shall be based upon the method indicated 
below:

------ level principal

------ level debt service

------ other

    13. The SPECIAL condition(s) referred to in Section [4.2] is (are): 
--------------------.
    14. The additional AFFIRMATIVE covenant(s) referred to in Section 
[5.22] is (are) as follows: ----------------. 15. The additional 
NEGATIVE covenant(s) referred to in Section [6.16] is (are) as follows: 
--------------------.
    16. The address of the Borrower referred to in Section [9.1]. is --
------------------.

                       Schedule 2--Existing Liens

    The Existing Liens referred to in Section [2.1(g)] are as follows:

[INSERT DESCRIPTION OF EXISTING LIENS, IF ANY, HERE]

                    Schedule 3--Additional Contracts

    The additional contracts referred to in Section [6.5(f)] are 
described as follows:

[INSERT LIST OF ANY ADDITIONAL CONTRACTS HERE]

                   Exhibit A--Form of Promissory Note

[INSERT EITHER MUNICIPAL or HARDSHIP RATE PROMISSORY NOTE FORM HERE]

            Exhibit B--Equal Opportunity Contract Provisions

    During the performance of this contract, the contractor agrees as 
follows:
    (a) The contractor shall not discriminate against any employee or 
applicant for employment because of race, color, religion, sex or 
national origin. The contractor shall take affirmative action to ensure 
that applicants are employed, and that employees are treated during 
employment without regard to their race, color, religion, sex or 
national origin. Such action shall include, but not be limited to the 
following: employment, upgrading, demotion or transfer, recruitment or 
recruitment advertising; layoff or termination; rates of pay or other 
forms of compensation; and selection for training, including 
apprenticeship. The contractor agrees to post in conspicuous places, 
available to employees and applicants for employment, notices to be 
provided setting forth the provisions of this nondiscrimination clause.
    (b) The contractor shall, in all solicitations or advertisements for 
employees placed by or on behalf of the contractor, state that all 
qualified applicants shall receive consideration for employment without 
regard to race, color, religion, sex or national origin.
    (c) The contractor shall send to each labor union or representative 
of workers with which he has a collective bargaining agreement or other 
contract or understanding, a notice to be provided advising the said 
labor union or workers' representative of the contractor's commitments 
under this section, and shall post copies of the notice in conspicuous 
places available to employees and applicants for employment.

[[Page 237]]

    (d) The contractor shall comply with all provisions of Executive 
Order 11246 of September 24, 1965, and of the rules, regulations and 
relevant orders of the Secretary of Labor.
    (e) The contractor shall furnish all information and reports 
required by Executive Order 11246 of September 24, 1965, and by the 
rules, regulations and orders of the Secretary of Labor, or pursuant 
thereto, and shall permit access to his books, records and accounts by 
the administering agency and the Secretary of Labor for purposes of 
investigation to ascertain compliances with such rules, regulations and 
orders.
    (f) In the event of the contractor's noncompliance with the non-
discrimination clauses of this contract or with any of the said rules, 
regulations or orders, this contract may be cancelled, terminated or 
suspended in whole or in part and the contractor may be declared 
ineligible for further Government contracts or federally assisted 
construction contracts in accordance with procedures authorized in 
Executive Order 11246 of September 24, 1965, and such other sanctions 
may be imposed and remedies invoked as provided in said Executive Order 
or by rule, regulation or order of the Secretary of Labor, or as 
otherwise provided by law.
    (g) The contractor shall include the provisions of paragraphs (a) 
through (g) in every subcontract or purchase order unless exempted by 
rules, regulations or orders of the Secretary of Labor issued pursuant 
to section 204 of Executive Order 11246, dated September 24, 1965, so 
that such provisions shall be binding upon each subcontractor or vendor. 
The contractor shall take such action with respect to any subcontract or 
purchase order as the administering agency may direct as a means of 
enforcing such provisions, including sanctions for noncompliance: 
Provided, however, that in the event a contractor becomes involved in, 
or is threatened with, litigation with a subcontractor or vendor as a 
result of such direction by the agency, the contractor may request the 
United States to enter into such litigation to protect the interests of 
the United States.

Exhibit C-1--Manager's Certificate Required Under Loan Contract Section 
                        6.14 for Additional Notes

    On behalf on -------------------- [Name of Borrower] --------------
------ I hereby certify that the Additional Note or Notes to be issued 
under Section [2.01] of the Mortgage on or about -------------------- 
[Date Note or Notes are to be Signed] -------------------- meet all of 
the requirements of Section [6.14] of the Loan Contract, namely:
    (a) The weighted average life of the loan evidenced by such Notes 
(-------- years) does not exceed the weighted average of the expected 
remaining useful lives of the assets being financed (-------- years) as 
evidenced by the attached calculation of said weighted average lives.
    (b) The principal of the loan evidenced by such Notes shall either 
be [check one and provide evidence in the second case]:
    ------ (1) repaid based on level payments of principal and interest 
throughout the life of the loan, or
    ------ (2) amortized at a rate that shall yield a weighted average 
life that is not greater than the weighted average life that would 
result from level payments of principal and interest throughout the life 
of the loan as evidenced by the attached analysis of said weighted 
average lives.
    (c) The principal of the loan evidenced by such Notes has a maturity 
of not less than 5 years.

[Signed]________________________________________________________________

[Dated]_________________________________________________________________

[Name]__________________________________________________________________

[Title]_________________________________________________________________

[Name and Address of Borrower]__________________________________________

________________________________________________________________________

________________________________________________________________________
________________________________________________________________________

Exhibit C-2--Manager's Certificate Required Under Loan Contract Section 
                       6.14 for Refinancing Notes

    On behalf on -------------------- [Name of Borrower] --------------
------ I hereby certify that the Additional Note or Notes to be issued 
under Section [2.02] of the Mortgage on or about -------------------- 
[Date Note or Notes are to be Signed] -------------------- meet the 
requirement of Section [6.14] of the Loan Contract that the weighted 
average life of such Notes is not greater than the weighted average 
remaining life of the Notes being refinanced, as evidenced by the 
attached calculation of said weighted average lives.
[Signed]________________________________________________________________

[Dated]_________________________________________________________________

[Name]__________________________________________________________________

[Title]_________________________________________________________________

[Name and Address of Borrower]__________________________________________

________________________________________________________________________

________________________________________________________________________
________________________________________________________________________

[60 FR 67410, Dec. 29, 1995, as amended at 65 FR 51749, Aug. 25, 2000]



PART 1721--POST-LOAN POLICIES AND PROCEDURES FOR INSURED ELECTRIC LOANS--Table of Contents




    Authority: 7 U.S.C. 901 et seq.; 1921 et seq.; and 6941 et seq.

[[Page 238]]



                       Subpart A--Advance of Funds



Sec. 1721.1  Advances.

    (a) Purpose and amount. With the exception of minor projects, 
insured loan funds will be advanced only for projects which are included 
in an RUS approved borrower's construction work plan (CWP) or approved 
amendment and in an approved loan, as amended. Loan fund advances can be 
requested in an amount representing actual costs incurred.
    (b) Minor project. Minor project means a project costing $100,000 or 
less. Such a project qualifies for advance of loan funds even though it 
may not have been included in an RUS-approved borrower's CWP, amendment 
to such CWP, or approved loan. Total advances requested shall not exceed 
the total loan amount. All projects for which loan fund advances are 
requested must be constructed to achieve purposes permitted by terms of 
the loan contract between the borrower and RUS.
    (c) Certification. Pursuant to the applicable provisions of the RUS 
loan contract, borrowers shall certify with each request for funds to be 
approved for advance that such funds are for projects in compliance with 
this section and shall also provide for those that cost in excess of 
$100,000, a contract or work order number as applicable and a CWP cross-
reference project coded identification number. For a minor project not 
included in an RUS approved borrower's CWP, the Borrower shall describe 
the project and do one of the following to satisfy RUS' environmental 
requirements (see 7 CFR part 1794).
    (1) If applicable, state that the project is a categorical exclusion 
of a type described in Sec. 1794.21(b), which normally does not require 
preparation of an Environmental Report (ER); or
    (2) If applicable, state that the project is a categorical exclusion 
of a type that normally requires an ER and then:
    (i) Submit the ER with the request for funds to be approved for 
advance, or
    (ii) If applicable, certify that it has analyzed the minor project 
with respect to a comprehensive service area environmental map and data 
base collected and used in preparing the ER for its RUS-approved 
borrower's CWP, and that on the basis of that information, the minor 
project will not be located in an environmentally sensitive area or 
location.
    (d) Noncompliance. Where insured loan funds are found to have been 
advanced in noncompliance with this section, borrowers will be required 
to deposit the appropriate amount of the over-advance in the 
construction fund-trustee account and pay any accrued and unpaid 
interest to RUS. The Administrator will require borrowers, in order to 
remedy such noncompliance, to pay an additional amount equal to the 
interest on the funds over-advanced for the period such funds were 
outstanding, calculated at a rate equal to the difference between the 
RUS loan interest rate and the most recent rate at which RUS sold 
Certificates of Beneficial Ownership (CBO's). While RUS will generally 
permit the amount of over-advance deposited in the construction fund-
trustee account to be subsequently used by the borrower for RUS approved 
projects, nothing in this section shall be construed to preclude RUS 
from exercising any rights or remedies which RUS may have pursuant to 
the loan contract.

[64 FR 72489, Dec. 28, 1999]

Subpart B [Reserved]



PART 1724--ELECTRIC ENGINEERING, ARCHITECTURAL SERVICES AND DESIGN POLICIES AND PROCEDURES--Table of Contents




                           Subpart A--General

Sec.
1724.1 Introduction.
1724.2 Waivers.
1724.3 Definitions.
1724.4 Qualifications.
1724.5 Submission of documents to RUS.
1724.6 Insurance requirements.
1724.7 Debarment and suspension.
1724.8 Restrictions on lobbying.
1724.9 Environmental compliance.
1724.10 Standard forms of contracts for borrowers.
1724.11-1724.19 [Reserved]

                    Subpart B--Architectural Services

1724.20 Borrowers' requirements--architectural services.

[[Page 239]]

1724.21 Architectural services contracts.
1724.22-1724.29 [Reserved]

                     Subpart C--Engineering Services

1724.30 Borrowers' requirements--engineering services.
1724.31 Engineering services contracts.
1724.32 Inspection and certification of work order construction.
1724.33-1724.39 [Reserved]

                   Subpart D--Electric System Planning

1724.40 General.
1724.41-1724.49 [Reserved]

                    Subpart E--Electric System Design

1724.50 Compliance with National Electrical Safety Code (NESC).
1724.51 Design requirements.
1724.52 Permitted deviations from RUS construction standards.
1724.53 Preparation of plans and specifications.
1724.54 Requirements for RUS approval of plans and specifications.
1724.55 Dam safety.
1724.56-1724.69 [Reserved]

Appendix A to Subpart E to Part 1724--Hazard Potential Classification 
          for Civil Works Projects

                      Subpart F--RUS Contract Forms

1724.70 Standard forms of contracts for borrowers.
1724.71 Borrower contractual obligations.
1724.72 Notice and publication of listed contract forms.
1724.73 Promulgation of new or revised contract forms.
1724.74 List of electric program standard contract forms.
1724.75-1724.99 [Reserved]

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

    Source: 63 FR 35314, June 29, 1998, unless otherwise noted.



                           Subpart A--General



Sec. 1724.1  Introduction.

    (a) The policies, procedures and requirements in this part implement 
certain provisions of the standard form of loan documents between the 
Rural Utilities Service (RUS) and its electric borrowers.
    (b) All borrowers, regardless of the source of financing, shall 
comply with RUS' requirements with respect to design, construction 
standards, and the use of RUS accepted material on their electric 
systems.
    (c) Borrowers are required to use RUS contract forms only if the 
facilities are financed by RUS.



Sec. 1724.2  Waivers.

    The Administrator may waive, for good cause on a case-by-case basis, 
requirements and procedures of this part.



Sec. 1724.3  Definitions.

    Terms used in this part have the meanings set forth in Sec. 1710.2 
of this chapter. References to specific RUS forms and other RUS 
documents, and to specific sections or lines of such forms and 
documents, shall include the corresponding forms, documents, sections 
and lines in any subsequent revisions of these forms and documents. In 
addition to the terms defined in Sec. 1710.2 of this chapter, the 
following terms have the following meanings for the purposes of this 
part:
    Architect means a registered or licensed person employed by the 
borrower to provide architectural services for a project and duly 
authorized assistants and representatives.
    Engineer means a registered or licensed person, who may be a staff 
employee or an outside consultant, to provide engineering services and 
duly authorized assistants and representatives.
    Force account construction means construction performed by the 
borrower's employees.
    GPO means Government Printing Office.
    NESC means the National Electrical Safety Code.
    RE Act means the Rural Electrification Act of 1936 as amended (7 
U.S.C. 901 et seq.).
    Repowering means replacement of the steam generator or the prime 
mover or both at a generating plant.
    RUS means Rural Utilities Service.
    RUS approval means written approval by the Administrator or a 
representative with delegated authority. RUS approval must be in 
writing, except in emergency situations where RUS approval may be given 
orally followed by a confirming letter.
    RUS financed means financed or funded wholly or in part by a loan 
made or

[[Page 240]]

guaranteed by RUS, including concurrent supplemental loans required by 
Sec. 1710.110 of this chapter, loans to reimburse funds already expended 
by the borrower, and loans to replace interim financing.

[63 FR 35314, June 29, 1998, as amended at 63 FR 58284, Oct. 30, 1998]



Sec. 1724.4  Qualifications.

    The borrower shall ensure that:
    (a) All selected architects and engineers meet the applicable 
registration and licensing requirements of the States in which the 
facilities will be located;
    (b) All selected architects and engineers are familiar with RUS 
standards and requirements; and
    (c) All selected architects and engineers have had satisfactory 
experience with comparable work.



Sec. 1724.5  Submission of documents to RUS.

    (a) Where to send documents. Documents required to be submitted to 
RUS under this part are to be sent to the office of the borrower's 
respective RUS Regional Director, the Power Supply Division Director, or 
such other office of RUS as designated by RUS. (See part 1700 of this 
chapter.)
    (b) Contracts requiring RUS approval. The borrower shall submit to 
RUS three copies of each contract that is subject to RUS approval under 
subparts B and C of this part. At least one copy of each contract must 
be an original signed in ink (i.e., no facsimile signature). Each 
contract submittal must be accompanied by a certified copy of the board 
resolution awarding the contract.
    (c) Contract amendments requiring RUS approval. The borrower shall 
submit to RUS three copies of each contract amendment (at least one copy 
of which must be an original signed in ink) which is subject to RUS 
approval. Each contract amendment submittal to RUS must be accompanied 
by a certified copy of the board resolution approving the amendment.



Sec. 1724.6  Insurance requirements.

    (a) Borrowers shall ensure that all architects and engineers working 
under contract with the borrower have insurance coverage as required by 
part 1788 of this chapter.
    (b) Borrowers shall also ensure that all architects and engineers 
working under contract with the borrower have insurance coverage for 
Errors and Omissions (Professional Liability Insurance) in an amount at 
least as large as the amount of the architectural or engineering 
services contract but not less than $500,000.



Sec. 1724.7  Debarment and suspension.

    Borrowers shall comply with the requirements on debarment and 
suspension in connection with procurement activities as set forth in 
part 3017 of this title, particularly with respect to lower tier 
transactions, e.g., procurement contracts for goods or services.



Sec. 1724.8  Restrictions on lobbying.

    Borrowers shall comply with the restrictions and requirements in 
connection with procurement activities as set forth in part 3018 of this 
title.



Sec. 1724.9  Environmental compliance.

    Borrowers shall comply with the requirements of part 1794 of this 
chapter, Environmental Policies and Procedures for Electric and 
Telephone Borrowers.



Sec. 1724.10  Standard forms of contracts for borrowers.

    The standard loan agreement between RUS and its borrowers provides 
that, in accordance with applicable RUS regulations in this chapter, the 
borrower shall use standard forms of contracts promulgated by RUS for 
construction, procurement, engineering services, and architectural 
services financed by a loan made or guaranteed by RUS. This part 
implements these provisions of the RUS loan agreement. Subparts A 
through E of this part prescribe when and how borrowers are required to 
use RUS standard forms of contracts for engineering and architectural 
services. Subpart F of this part prescribes the procedures that RUS 
follows in promulgating standard contract forms and identifies those 
contract forms that borrowers are required to use for engineering and 
architectural services.

[63 FR 58284, Oct. 30, 1998]

[[Page 241]]



Secs. 1724.11-1724.19  [Reserved]



                    Subpart B--Architectural Services



Sec. 1724.20  Borrowers' requirements--architectural services.

    The provisions of this section apply to all borrower electric system 
facilities regardless of the source of financing.
    (a) Each borrower shall select a qualified architect to perform the 
architectural services required for the design and construction 
management of headquarters facilities. The selection of the architect is 
not subject to RUS approval unless specifically required by RUS on a 
case by case basis. Architect's qualification information need not be 
submitted to RUS unless specifically requested by RUS on a case by case 
basis.
    (b) The architect retained by the borrower shall not be an employee 
of the building supplier or contractor, except in cases where the 
building is prefabricated and pre-engineered.
    (c) The architect's duties are those specified under the 
Architectural Services Contract and under subpart E of this part, and, 
as applicable, those duties assigned to the ``engineer'' for competitive 
procurement procedures in part 1726 of this chapter.
    (d) If the facilities are RUS financed, the borrower shall submit or 
require the architect to submit one copy of each construction progress 
report to RUS upon request.
    (e) Additional information concerning RUS requirements for electric 
borrowers' headquarters facilities are set forth in subpart E of this 
part. See also RUS Bulletin 1724E-400, Guide to Presentation of Building 
Plans and Specifications, for additional guidance. This bulletin is 
available from Program Development and Regulatory Analysis, Rural 
Utilities Service, U.S. Department of Agriculture, Stop 1522, 1400 
Independence Ave., SW., Washington, DC 20250-1522.



Sec. 1724.21  Architectural services contracts.

    The provisions of this section apply only to RUS financed electric 
system facilities.
    (a) RUS Form 220, Architectural Services Contract, must be used by 
electric borrowers when obtaining architectural services.
    (b) The borrower shall ensure that the architect furnishes or 
obtains all architectural services related to the design and 
construction management of the facilities.
    (c) Reasonable modifications or additions to the terms and 
conditions in the RUS contract form may be made to define the exact 
services needed for a specific undertaking. Such modifications or 
additions shall not relieve the architect or the borrower of the basic 
responsibilities required by the RUS contract form, and shall not alter 
any terms and conditions required by law. All substantive changes must 
be approved by RUS prior to execution of the contract.
    (d) Architectural services contracts are not subject to RUS approval 
and need not be submitted to RUS unless specifically requested by RUS on 
a case by case basis.
    (e) Closeout. Upon completion of all services and obligations 
required under each architectural services contract, including, but not 
limited to, submission of final documents, the borrower must closeout 
that contract. The borrower shall obtain from the architect a final 
statement of cost, which must be supported by detailed information as 
appropriate. For example, out-of-pocket expense and per diem types of 
compensation should be listed separately with labor, transportation, 
etc., itemized for each service involving these types of compensation. 
RUS Form 284, Final Statement of Cost for Architectural Service, may be 
used. All computations of the compensation must be made in accordance 
with the terms of the architectural services contract. Closeout 
documents need not be submitted to RUS unless specifically

[[Page 242]]

requested by RUS on a case by case basis.



Secs. 1724.22-1724.29  [Reserved]



                     Subpart C--Engineering Services



Sec. 1724.30  Borrowers' requirements--engineering services.

    The provisions of this section apply to all borrower electric system 
facilities regardless of the source of financing.
    (a) Each borrower shall select one or more qualified persons to 
perform the engineering services involved in the planning, design, and 
construction management of the system.
    (b) Each borrower shall retain or employ one or more qualified 
engineers to inspect and certify all new construction in accordance with 
Sec. 1724.32. The engineer must not be the borrower's manager.
    (c) The selection of the engineer is not subject to RUS approval 
unless specifically required by RUS on a case by case basis. Engineer's 
qualification information need not be submitted to RUS unless 
specifically requested by RUS on a case by case basis.
    (d) The engineer's duties are specified under the Engineering 
Services Contract and under part 1726 of this chapter. The borrower 
shall ensure that the engineer executes all certificates and other 
instruments pertaining to the engineering details required by RUS.
    (e) Additional requirements related to appropriate seismic safety 
measures are contained in part 1792, subpart C, of this chapter, Seismic 
Safety of Federally Assisted New Building Construction.
    (f) If the facilities are RUS financed, the borrower shall submit or 
require the engineer to submit one copy of each construction progress 
report to RUS upon RUS' request.



Sec. 1724.31  Engineering services contracts.

    The provisions of this section apply only to RUS financed electric 
system facilities.
    (a) RUS contract forms for engineering services shall be used. 
Reasonable modifications or additions to the terms and conditions in the 
RUS contract form may be made to define the exact services needed for a 
specific undertaking. Any such modifications or additions shall not 
relieve the engineer or the borrower of the basic responsibilities 
required by the RUS contract form, and shall not alter any terms and 
conditions required by law. All substantive changes to the RUS contract 
form shall be approved by RUS prior to execution of the contract.
    (b) RUS Form 236, Engineering Service Contract--Electric System 
Design and Construction, shall be used for all distribution, 
transmission, substation, and communications and control facilities. 
These contracts are not subject to RUS approval and need not be 
submitted to RUS unless specifically requested by RUS on a case by case 
basis.
    (c) RUS Form 211, Engineering Service Contract for the Design and 
Construction of a Generating Plant, shall be used for all new generating 
units and repowering of existing units. These contracts require RUS 
approval.
    (d) Any amendments to RUS approved engineering services contracts 
require RUS approval.
    (e) Closeout. Upon completion of all services and obligations 
required under each engineering services contract, including, but not 
limited to, submission of final documents, the borrower must closeout 
the contract. The borrower shall obtain from the engineer a completed 
final statement of engineering fees, which must be supported by detailed 
information as appropriate. RUS Form 234, Final Statement of Engineering 
Fee, may be used. All computations of the compensation shall be made in 
accordance with the terms of the engineering services contract. Closeout 
documents need not be submitted to RUS unless specifically requested by 
RUS on a case by case basis.



Sec. 1724.32  Inspection and certification of work order construction.

    The provisions of this section apply to all borrower electric system 
facilities regardless of the source of financing.
    (a) The borrower shall ensure that all field inspection and related 
services are performed within 6 months of the completion of 
construction, and are

[[Page 243]]

performed by a licensed engineer, except that a subordinate of the 
licensed engineer may make the inspection, provided the following 
conditions are met:
    (1) The inspection by the subordinate is satisfactory to the 
borrower;
    (2) This practice is acceptable under applicable requirements of the 
States in which the facilities are located;
    (3) The subordinate is experienced in making such inspections;
    (4) The name of the person making the inspection is included in the 
certification; and
    (5) The licensed engineer signs such certification which appears on 
the inventory of work orders.
    (b) The inspection shall include a representative and sufficient 
amount of construction listed on each RUS Form 219, Inventory of Work 
Orders (or comparable form), being inspected to assure the engineer that 
the construction is acceptable. Each work order that was field inspected 
shall be indicated on RUS Form 219 (or comparable form.) The inspection 
services shall include, but not be limited to, the following:
    (1) Determination that construction conforms to RUS specifications 
and standards and to the requirements of the National Electrical Safety 
Code (NESC), State codes, and local codes;
    (2) Determination that the staking sheets or as-built drawings 
represent the construction completed and inspected;
    (3) Preparation of a list of construction clean-up notes and staking 
sheet discrepancies to be furnished to the owner to permit correction of 
construction, staking sheets, other records, and work order inventories;
    (4) Reinspection of construction corrected as a result of the 
engineer's report;
    (5) Noting, initialing, and dating the staking or structure sheets 
or as-built drawings and noting the corresponding work order entry for 
line construction; and
    (6) Noting, initialing, and dating the as-built drawings or sketches 
for generating plants, substations, and other major facilities.
    (c) Certification. (1) The following certification must appear on 
all inventories of work orders:

    I hereby certify that sufficient inspection has been made of the 
construction reported by this inventory to give me reasonable assurance 
that the construction complies with applicable specifications and 
standards and meets appropriate code requirements as to strength and 
safety. This certification is in accordance with acceptable engineering 
practice.

    (2) A certification must also include the name of the inspector, 
name of the firm, signature of the licensed engineer, the engineer's 
State license number, and the date of signature.



Secs. 1724.33-1724.39  [Reserved]



                   Subpart D--Electric System Planning



Sec. 1724.40  General.

    Borrowers shall have ongoing, integrated planning to determine their 
short-term and long-term needs for plant additions, improvements, 
replacements, and retirements for their electric systems. The primary 
components of the planning system consist of long-range engineering 
plans and construction work plans. Long-range engineering plans identify 
plant investments required over a long-range period, 10 years or more. 
Construction work plans specify and document plant requirements for a 
shorter term, 2 to 4 years. Long-range engineering plans and 
construction work plans shall be in accordance with part 1710, subpart 
F, of this chapter. See also RUS Bulletins 1724D-101A, Electric System 
Long-Range Planning Guide, and 1724D-101B, System Planning Guide, 
Construction Work Plans, for additional guidance. These bulletins are 
available from Program Development and Regulatory Analysis, Rural 
Utilities Service, U.S. Department of Agriculture, Stop 1522, 1400 
Independence Ave., SW., Washington, DC 20250-1522.



Secs. 1724.41-1724.49  [Reserved]



                    Subpart E--Electric System Design



Sec. 1724.50  Compliance with National Electrical Safety Code (NESC).

    The provisions of this section apply to all borrower electric system 
facilities regardless of the source of financing.

[[Page 244]]

    (a) A borrower shall ensure that its electric system, including all 
electric distribution, transmission, and generating facilities, is 
designed, constructed, operated, and maintained in accordance with all 
applicable provisions of the most current and accepted criteria of the 
National Electrical Safety Code (NESC) and all applicable and current 
electrical and safety requirements of any State or local governmental 
entity. Copies of the NESC may be obtained from the Institute of 
Electrical and Electronic Engineers, Inc., 445 Hoes Lane, Piscataway, NJ 
08855. This requirement applies to the borrower's electric system 
regardless of the source of financing.
    (b) Any electrical standard requirements established by RUS are in 
addition to, and not in substitution for or a modification of, the most 
current and accepted criteria of the NESC and any applicable electrical 
or safety requirements of any State or local governmental entity.
    (c) Overhead distribution circuits shall be constructed with not 
less than the Grade C strength requirements as described in Section 26, 
Strength Requirements, of the NESC when subjected to the loads specified 
in NESC Section 25, Loadings for Grades B and C. Overhead transmission 
circuits shall be constructed with not less than the Grade B strength 
requirements as described in NESC Section 26.



Sec. 1724.51  Design requirements.

    The provisions of this section apply to all borrower electric system 
facilities regardless of the source of financing.
    (a) Distribution. All distribution facilities must conform to the 
applicable RUS construction standards and utilize RUS accepted 
materials.
    (b) Transmission lines. (1) All transmission line design data must 
be approved by RUS.
    (2) Design data consists of all significant design features, 
including, but not limited to, transmission line design data summary, 
general description of terrain, right-of-way calculations, discussion 
concerning conductor and structure selection, conductor sag and tension 
information, design clearances, span limitations due to clearances, 
galloping or conductor separation, design loads, structure strength 
limitations, insulator selection and design, guying requirements, and 
vibration considerations. For lines composed of steel or concrete poles, 
or steel towers, in which load information will be used to purchase the 
structures, the design data shall also include loading trees, structure 
configuration and selection, and a discussion concerning foundation 
selection.
    (3) Line design data for uprating transmission lines to higher 
voltage levels or capacity must be approved by RUS.
    (4) Transmission line design data which has received RUS approval in 
connection with a previous transmission line construction project for a 
particular borrower is considered approved by RUS for that borrower, 
provided that:
    (i) The conditions on the project fall within the design data 
previously approved; and
    (ii) No significant NESC revisions have occurred.
    (c) Substations. (1) All substation design data must be approved by 
RUS.
    (2) Design data consists of all significant design features, 
including, but not limited to, a discussion of site considerations, oil 
spill prevention measures, design considerations covering voltage, 
capacity, shielding, clearances, number of low and high voltage phases, 
major equipment, foundation design parameters, design loads for line 
support structures and the control house, seismic considerations, 
corrosion, grounding, protective relaying, and AC and DC auxiliary 
systems. Reference to applicable safety codes and construction standards 
are also to be included.
    (3) Substation design data which has received RUS approval in 
connection with a previous substation construction project for a 
particular borrower is considered approved by RUS for that borrower, 
provided that:
    (i) The conditions on the project fall within the design data 
previously approved; and
    (ii) No significant NESC revisions have occurred.
    (d) Generating facilities. (1) This section covers all portions of a 
generating plant including plant buildings, the

[[Page 245]]

generator step-up transformer, and the transmission switchyard at a 
generating plant. Warehouses and equipment service buildings not 
associated with generation plants are covered under paragraph (e) of 
this section. Generation plant buildings must meet the requirements of 
paragraph (e)(1) of this section.
    (2) For all new generation units and for all repowering projects, 
the design outline shall be approved by RUS, unless RUS determines that 
a design outline is not needed for a particular project.
    (3) The design outline will include all significant design criteria. 
During the early stages of the project, RUS will, in consultation with 
the borrower and its consulting engineer, identify the specific items 
which are to be included in the design outline.
    (e) Headquarters--(1) Applicable laws. The design and construction 
of headquarters facilities shall comply with all applicable Federal, 
State, and local laws and regulations, including, but not limited to:
    (i) Section 504 of the Rehabilitation Act of 1973, (29 U.S.C. 794), 
which states that no qualified individual with a handicap shall, solely 
by reason of their handicap, be excluded from participation in, be 
denied the benefits of, or be subject to discrimination under any 
program or activity receiving Federal financial assistance. The Uniform 
Federal Accessibility Standards (41 CFR part 101-19, subpart 101-19.6, 
appendix A) are the applicable standards for all new or altered borrower 
buildings, regardless of the source of financing.
    (ii) The Architectural Barriers Act of 1968 (42 U.S.C. 4151), which 
requires that buildings financed with Federal funds are designed and 
constructed to be accessible to the physically handicapped.
    (iii) The Earthquake Hazards Reduction Act of 1977 (42 U.S.C. 7701 
et seq.), and Executive Order 12699, Seismic Safety of Federal and 
Federally Assisted or Regulated New Building Construction (3 CFR 1990 
Comp., p. 269). Appropriate seismic safety provisions are required for 
new buildings for which RUS provides financial assistance. (See part 
1792, subpart C, of this chapter.)
    (2) The borrower shall provide evidence, satisfactory in form and 
substance to the Administrator, that each building will be designed and 
built in compliance with all Federal, State, and local requirements.
    (f) Communications and control. (1) This section covers microwave 
and powerline carrier communications systems, load control, and 
supervisory control and data acquisition (SCADA) systems.
    (2) The performance considerations for a new or replacement master 
system must be approved by RUS. A master system includes the main 
controller and related equipment at the main control point. Performance 
considerations include all major system features and their 
justification, including, but not limited to, the objectives of the 
system, the types of parameters to be controlled or monitored, the 
communication media, alternatives considered, and provisions for future 
needs.



Sec. 1724.52  Permitted deviations from RUS construction standards.

    The provisions of this section apply to all borrower electric system 
facilities regardless of the source of financing.
    (a) Structures for raptor protection. (1) RUS standard distribution 
line structures may not have the extra measure of protection needed in 
areas frequented by eagles and other large raptors to protect such birds 
from electric shock due to physical contact with energized wires. Where 
raptor protection in the design of overhead line structures is required 
by RUS; a Federal, State or local authority with permit or license 
authority over the proposed construction; or where the borrower 
voluntarily elects to comply with the recommendations of the U.S. Fish 
and Wildlife Service or State wildlife agency, borrowers are permitted 
to deviate from RUS construction standards, provided:
    (i) Structures are designed and constructed in accordance with 
``Suggested Practices for Raptor Protection on Powerlines: The State of 
the Art in 1996'' (Suggested Practices for Raptor Protection); and,

[[Page 246]]

    (ii) Structures are in accordance with the NESC and applicable State 
and local regulations.
    (2) Any deviation from the RUS construction standards for the 
purpose of raptor protection, which is not in accordance with the 
Suggested Practices for Raptor Protection, must be approved by RUS prior 
to construction. ``Suggested Practices for Raptor Protection on 
Powerlines: The State of the Art in 1996,'' published by the Edison 
Electric Institute/Raptor Research Foundation, is hereby incorporated by 
reference. This incorporation by reference is approved by the Director 
of the Office of the Federal Register in accordance with 5 U.S.C. 552(a) 
and 1 CFR part 51. Copies of this publication may be obtained from the 
Raptor Research Foundation, Inc., c/o Jim Fitzpatrick, Treasurer, 
Carpenter Nature Center, 12805 St. Croix Trail South, Hastings, 
Minnesota 55033. It is also available for inspection during normal 
business hours at RUS, Electric Staff Division, 1400 Independence 
Avenue, SW., Washington, DC, Room 1246-S, and at the Office of the 
Federal Register, 800 North Capitol Street, NW., Suite 700, Washington, 
DC.
    (b) Transformer neutral connections. Where it is necessary to 
separate the primary and secondary neutrals to provide the required 
electric service to a consumer, the RUS standard transformer secondary 
neutral connections may be modified in accordance with Rule 97D2 of the 
NESC.
    (c) Lowering of neutral conductor on overhead distribution lines. 
(1) It is permissible to lower the neutral attachment on standard 
construction pole-top assemblies an additional distance not exceeding 
two feet (0.6 m) for the purpose of economically meeting the clearance 
requirements of the NESC.
    (2) It is permissible to lower the transformer and associated 
neutral attachment up to two feet (0.6 m) to provide adequate clearance 
between the cutouts and single-phase, conventional distribution 
transformers.
    (3) It is permissible to lower the neutral attachment on standard 
construction pole-top assemblies an additional distance of up to six 
feet (2 m) for the purpose of performing construction and future line 
maintenance on these assemblies from bucket trucks designed for such 
work.



Sec. 1724.53  Preparation of plans and specifications.

    The provisions of this section apply to all borrower electric system 
facilities regardless of the source of financing.
    (a) General. (1) The borrower (acting through the engineer, if 
applicable) shall prepare plans and specifications that adequately 
represent the construction to be performed.
    (2) Plans and specifications for distribution, transmission, or 
generating facilities must be based on a construction work plan (as 
amended, if applicable), engineering study or construction program which 
has been approved by RUS if financing for the facilities will at any 
time be requested from RUS.
    (b) Composition of plans and specifications package. (1) Whether 
built by force account or contract, each set of plans and specifications 
must include:
    (i) Distribution lines. Specifications and drawings, staking sheets, 
key map and appropriate detail maps;
    (ii) Transmission lines. Specifications and drawings, transmission 
line design data manual, vicinity maps of the project, a one-line 
diagram, and plan and profile sheets;
    (iii) Substations. Specifications and drawings, including a one-line 
diagram, plot and foundation plan, grounding plan, and plans and 
elevations of structure and equipment, as well as all other necessary 
construction drawings, in sufficient detail to show phase spacing and 
ground clearances of live parts;
    (iv) Headquarters. Specifications and drawings, including:
    (A) A plot plan showing the location of the proposed building plus 
paving and site development;
    (B) A one line drawing (floor plan and elevation view), to scale, of 
the proposed building with overall dimensions shown; and
    (C) An outline specification including materials to be used (type of 
frame, exterior finish, foundation, insulation, etc.); and
    (v) Other facilities (e.g., generation and communications and 
control facilities).

[[Page 247]]

Specifications and drawings, as necessary and in sufficient detail to 
accurately define the scope and quality of work required.
    (2) For contract work, the appropriate standard RUS construction 
contract form shall be used as required by part 1726 of this chapter.



Sec. 1724.54  Requirements for RUS approval of plans and specifications.

    The provisions of this section apply only to RUS financed electric 
system facilities.
    (a) For any contract subject to RUS approval in accordance with part 
1726 of this chapter, the borrower shall obtain RUS approval of the 
plans and specifications, as part of the proposed bid package, prior to 
requesting bids. RUS may require approval of other plans and 
specifications on a case by case basis.
    (b) Distribution lines. RUS approval of the plans and specifications 
for distribution line construction is not required if standard RUS 
drawings, specifications, RUS accepted material, and standard RUS 
contract forms (as required by part 1726 of this chapter) are used. 
Drawings, plans and specifications for nonstandard distribution 
construction must be submitted to RUS and receive approval prior to 
requesting bids on contracts or commencement of force account 
construction.
    (c) Transmission lines. (1) Plans and specifications for 
transmission construction projects which are not based on RUS approved 
line design data or do not use RUS standard structures must receive RUS 
approval prior to requesting bids on contracts or commencement of force 
account construction.
    (2) Unless RUS approval is required by paragraph (a) of this 
section, plans and specifications for transmission construction which 
use previously approved design data and standard structures do not 
require RUS approval. Plans and specifications for related work, such as 
right-of-way clearing, equipment, and materials, do not require RUS 
approval unless required by paragraph (a) of this section.
    (d) Substations. (1)(i) Plans and specifications for all new 
substations must receive RUS approval prior to requesting bids on 
contracts or commencem