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Mr. WHITTEN. The Committee will come to order. We have with us today the Rural Electrification Administration, represented by Mr. Zoller, the Acting Administrator. We are glad to have you. You may wish to introduce your colleagues to the Committee. Mr. Zoller. Yes, Mr. Chairman. I would first like to introduce the designate for Under Secretary for Small Community and Rural Development, Frank W. Naylor, Jr. He is sitting in the audience. At the table with me, Mr. Chairman, on my left is John H. Arnesen, Assistant Administrator for Telephone. Next to John is Joseph Vellone, acting Assistant Administrator for Administration. On my right is Charles A. Jewell, Director, Office of Budget of REA. Next to Charles is Michael W. Kelly, Assistant General Counsel, Electric and Telephone Division, Office of General Counsel, USDA. At the end of the table is Stephen B. Dewhurst, Budget Officer for the Department of Agriculture. Mr. Chairman, with your permission I would like to make some general comments about my statement and submit the full statement for the record. Mr. WHITTEN. We will be glad to have you proceed in any way you see fit. [CLERK's NoTE.—The full text of Mr. Zoller's prepared statement appears on pages 595 through 599, followed by the explanatory notes on pages 600 through 651.] Mr. Zoller. Thank you. Mr. Chairman and Members of the subcommittee, I appreciate this opportunity to present the 1982 REA budget. The proposed changes in the 1982 budget are important elements of the President's Program for Economic Recovery. The major mechanism for lowering inflation, reducing interest rates, increasing business investments, and enhancing economic growth is to reduce the overall level of federal activity and to encourage private economic activity. (1)

THE ELECTRIC LOAN AND LOAN GUARANTEE PROGRAM REA now makes some insured loans to generation and transmission borrowers as well as distribution borrowers. The loans to distribution borrowers are made for distribution facilities and in some cases for generation, and transmission facilities. Because the loan demands for generation and transmission facilities have exceeded $5 billion recently, it is obvious that insured loans for power supply facilities-generation and transmission-could only meet a very limited portion of these needs. Generally, the agency has exercised this responsibility by limiting such loans to construction of low voltage transmission lines that feed distribution systems, and more recently to development costs of potential supplemental renewable power supply sources such as biomass and low-head hydro generation. The February 1981 Economic Message of the President and the budget before you proposed to eliminate for the balance of fiscal year 1981 and thereafter insured loans for these purposes and to provide generation and transmission facility funding by REA guarantee of loans made by other lenders.

The Congress has received a fiscal year 1981 rescission proposal to reduce the 1981 Appropriation Act by $62 million to carry out this change in the last half of 1981. The insured loan level proposed in the fiscal year 1982 revised budget has been reduced by $150 million from $850 million to $700 million and the loan guarantee request increased from $5 billion to $5.1 billion to partially offset the insured loan reduction in fiscal year 1982. The loan program level ranges have also been eliminated to provide tighter controls.

The loans under REA guarantee will no longer be advanced from Treasury borrowings and, therefore, will be outside of the Federal debt limitation. The increase in cost to REA borrowers resulting from this change is small considering the overall increase in interest costs since the program began in 1974, some five percentage points in seven years.

Mr. WHITTEN. Will all these changes require a change in law? Mr. ZOLLER. Excuse me, sir? Mr. WHITTEN. Your proposed change as to how REA loans will get financed, does that require a change in the law or can it be done by just changing regulations?

Mr. KELLY. Is that question directed to the guaranteed program, Mr. Chairman?

Mr. WHITTEN. Mr. Zoller said “the loans will be outside of the debt limitation" by which I presume he meant the guaranteed loans. Does that call for a change in the law?

Mr. KELLY. No, Mr. Chairman. That would not require a change in the law. The guarantee program could operate with outside lenders.

Mr. WHITTEN. That assumes that Mr. Stockman does not put a limitation on guaranteed loans. Have you been given any assurance that he will not? In order to follow your recommendations, we need to know where they lead.

Mr. ZOLLER. What is being proposed is a ceiling on the guaranteed loans of $5.1 billion for fiscal year 1982.

Mr. WHITTEN. Wouldn't this ceiling leave borrowers to handle the remainder of their problems in some other fashion?

Mr. ZolleR. If there is need for other financing, it would be from other sources of funding, yes. Mr. WHITTEN. This Committee just received the details of the President's proposal last week. Many of the proposals call for changes in the law. I have seen previous Administrations propose to make changes in the law but then they could not get anybody to introduce the bill. Be sure in the record you point out what your assumptions are with regard to legislative changes. Mr. ZolleR. We will supply that for the record. [The information follows:]

Accomplishing THE PROPOSED CHANGEs for REA

The Administration has proposed that existing authority to make 2 percent interest loans pursuant to Section 305 of the Rural Electrification Act be eliminated through an amendment to the Act. In addition, the Administration will consider changes in the REA program which do not appear to require changes in existing legislation other than Appropriation Acts in some cases. The principal changes include limiting or eliminating insured loans for rural telephones and for electric generation and transmission facilities, and eliminating loans and guarantees for CATV purposes. In order to effect some of these changes during fiscal year 1981, it will be necessary to amend the provisions of the 1981 Appropriations Act, as proposed in the rescission package previously submitted.

Mr. WHITTEN. You may proceed. Mr. Zoller. A legislative change is being proposed to eliminate two percent loans and substitute five percent loans. This will have no effect on the overall loan levels in the balance of the 1981 budget and fiscal year budgets thereafter. Mr. WHITTEN. What does “no effect on the overall loan levels” mean? It could be that an applicant would qualify if he could get a two percent loan, but he could not qualify if he had to pay five percent. Mr. ZolleR. I mean that it would not affect the total dollars in the budget. Mr. WHITTEN. But you did not say it would not affect the people

in the area.
Mr. Zoller. That is correct. I did not say that.


It will, however, increase the interest income in the Revolving Fund in future years, and thereby reduce the need for future appropriations for interest differential costs in the Fund. Mr. WHITTEN. What does that mean? Mr. Zoller. The loans are now being made out of the revolving fund, but because of income to the revolving fund–– Mr. WHITTEN. The revolving fund has not been ample to meet your needs, has it? Mr. Zoller. We have to borrow additional funds to take care of the cash flow. We go back to the Federal Financing Bank twice a year, selling the Certificate of Beneficial Ownership to Treasury. Mr. WHITTEN. What does that mean? Mr. Zoller. The rate of subsidy for REA two percent loans where our current borrowings from the U.S. Treasury are running approximately 12 percent is creating an interest expense in that revolving fund.

Mr. WHITTEN. You are talking about the reasons. I am asking what your statement means.

Mr. ZOLLER. The interest income in the revolving fund would be increased from loans made at five percent as opposed to two percent, Mr. Chairman.

Mr. WHITTEN. In other words, by charging the people out there more— "for interest differential costs accruing to the fund”-your fund would be larger because you collected more. That is presuming that the people could continue to qualify and do business with you. What does this mean? We had testimony that in some areas there are only two and one-fourth customers per mile. With a five percent interest rate, it is questionable if those folks would qualify. So in effect you are cutting out electricity for those areas. You may not mean to do that, but that is the end result.

Mr. ZOLLER. We have looked, Mr. Chairman, at what might be the impact of moving these two percent loans to five percent on all those borrowers that qualify.

Mr. WHITTEN. That is the existing borrowers? Mr. ZOLLER. The existing ones. Mr. WHITTEN. Your existing customers want to borrow money to increase their line, either so it will carry the load, or enable them to continue to produce, or to extend the line to serve new customers. What would be the effect of the proposed increase in the interest rate to five percent? Have you made a finding on that?

Mr. ZOLLER. Only looking back on those that currently qualify, what might be the overall interest increase in those systems.

Mr. WHITTEN. Have you been with the department some time? Mr. ZOLLER. Yes, I have.

Mr. WHITTEN. Then you have approved two percent loans in the past, for which you had to certify that it was essential to make the loan. Are you now saying your judgment was wrong?

SPECIAL RATE PROVISIONS Mr. ZOLLER. No, sir. The Act currently has provisions under Section 305 for a density criterion and an investment to revenue criterion.

Mr. WHITTEN. What are those criteria?

Mr. ZOLLER. Two or fewer consumers per mile is the density criterion being used currently in the electric program. The other is average adjusted plant revenue ratio of nine or more.

Mr. WHITTEN. You might proceed. I was just trying to clarify what you meant.

TELEPHONE PROGRAM Mr. ZOLLER. In the telephone program the Congress has also received a 1981 rescission proposal which will reduce the telephone insured loan program by $125 million from the $250 million minimum level authorized in the 1981 Appropriation Act. The revised budget eliminates the entire $250 million telephone insured loan program proposed for fiscal year 1982 in the January budget. There will, however, be $330 million in funding available to meet most loan requests where feasibility can be established at higher interest rates. These funds will be provided by the Rural Telephone Bank, when the borrowers can meet the financial requirements of the Bank, and by REA loan guarantees of private financing where that procedure makes the project feasible. REA will also assist borrowers to explore alternative private funding sources where this is necessary.

No further Rural Telephone Bank capitalization is proposed for fiscal year 1982. As in the Electric Program the loans to be guaranteed by REA will be obtained by telephone borrowers from private lenders rather than through the FFB starting in fiscal year 1982.


The Congress has received a rescission proposal which will reduce by $16 million the funds provided in the 1981 Appropriation Act for CATV loans. The January budget proposed that this program level be continued at $34 million but that the funding be changed to guarantee authorizations rather than insured loans. The revised budget before you discontinues the Community Antenna Television program. The CATV industry is well funded and therefore federal credit is inappropriate for this purpose.

REA ADMINISTRATIVE BUDGET The administrative costs of the REA program have been reduced by $479,000 from $30,152,000 as shown in the January budget to $29,673,000 in the revised budget before you. This reduction eliminates the additional funding previously provided to cover inflationary cost.

The January budget included a supplemental appropriation request for 1981 of $1,484,000 to cover the cost of the pay increase effective in October 1980. That supplemental appropriation has been reduced by $894,000 to reflect absorption of $392,000 in travel costs and $502,000 in reduced personnel costs, equipment purchases, and management and other services contracts. We request your support of these changes. That completes my general summary statement, Mr. Chairman. We will be happy to answer your questions.

Mr. WHITTEN. I appreciate your statement and the position you are in. We have examined the figures in the Carter budget and the figures in the Reagan budget. I notice that in your statement you addressed the proposed 1981 rescissions. I notice the explanations of Farm Home Administration fees are quite lengthy. Then we turn to Rural Electrification Administration's electric loans. You propose to cut that. The insured telephone loans, you propose to cut that by 50 percent. You propose to cut Community Antenna TV loans by $16 million. Are these proposals by reasons of study, or by reason of directive from the Office of Management and Budget?

Mr. ZOLLER. The Secretary, looking at the proposed reductions in the total budget, did identify those areas as ones that could help reduce the Federal Credit Program, Mr. Chairman.

Mr. WHITTEN. These actions are being proposed by the Secretary of Agriculture?

Mr. ZOLLER. Yes.

Mr. WHITTEN. Is he experienced in producing electricity? Did he agree to cut out this program for the production of electricity? Do

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