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new coal-fired power plant on line. In order to have the line ready to go into service by the time the plant is finished Western Farmers had to start taking delivery this month of materials needed to construct this line. They need this loan to pay for those materials. What is the status of this loan application and why has approval taken so long? Mr. ZolleR. Many of these large power supply type loans do take considerable amounts of time. We are hopeful to have that loan ready to go yet this month. I am fully aware of the critical need of getting that transmission line in. It is essential to start up that plant at the end of the year, to have that piece of transmission line completed. So we are processing the loan and do expect to be able to consider it this month. Mr. WATKINs. Mr. Chairman, I would like to have the opportunity to submit a letter concerning this with historical data in it. Because, Mr. Chairman, the letter outlines the procedural steps that Western Farmer people have taken to try to gain approval of this loan package and all the delaying tactics and stalling of the transition team that has caused this group of people, Western Farmers people, a great amount of difficulty and misery in trying to make this application. All the paperwork was completed and environmental reports filed by August 1980. The former REA Administrator on January 18, 1981, assured them everything was in order and they would try to sign the application before leaving office the next day. Apparently the transition people prevented this from happening because the change was contemplated by the OMB director. On January 27 of 1981, Mr. Frank Bennett, Chief of Power Supply at REA, assured Western Farmers their application was one of three at the top of the priority loans and the approval should not be much longer. Western Farmers contacted Mr. Bennett and Mr. Zoller here at least twice each week since that date. On February 26, 1981, Mr. Zoller assured Western Farmers the application was complete and in order and the loan package would be executed during the first quarter of 1981. That is only just the next two or three days. On March 12, 1981, Frank Bennett finally admitted to Western Farmers their application was being held up because the Administration or someone was seeking Congressional approval to terminate direct loans during the remainder of fiscal year 1981. Mr. Chairman, it is obvious REA is engaged in some deliberate stalling tactics to threaten Western Farmers with huge cost overruns and delay timely completion of its new generating facility which is so important to this economically depressed area of the State of Oklahoma. Tell me what authority REA has to freeze the REA direct loan program prior to seeking budget rescission or secure Congressional approval? Mr. ZolleR. We have not frozen any loan applications. We are processing loan applications, 2 and 5 percent loan applications if those applications did not include generation or transmission facilities. That application from Western Farmers has been reworked several times to get it in a condition to submit to the Administrator and, when I spoke with the President of the Board, I told him I fully expect that that loan would be ready for the consideration of the Administrator by, as you indicated, the end of this quarter. We still expect to get that loan out but we have not held up any loans at this point in time. Mr. WATKINs. It seems to me there has been—I do not want to say deliberate tactics of delaying it but if we do not get it on board it will cost those people out there in that area over $1,000 per day. Bless their hearts they cannot afford it. I would like to ask you and the personnel that you rely on to—if this was one of the top three—then try to get it out so we can assure our people that just going through a transition is not something that will end up costing them a great deal of money and cost them their opportunity of getting this particular loan. I would like if you could assure me and assure this Committee that you will try to work on that and get that out. I would deeply appreciate it. Mr. ZolleR. My staff indicates to me I still should have that loan this week for consideration. I assure you we are going to move it as quickly as we can. Mr. WATKINs. If not I might have to start delivering ice back there again and that was hard work. I would rather have the opportunity to serve these folks in Congress a little while longer. I want to say I think without question most of your people can tell you I am a strong supporter of anything that affects rural America. I am a strong supporter of REA. I would ask you not to give me any reasons to be negative or not to have to try on many occasions to defend an organization I truly believe in, in an unjustified way. So I hope that you can give us some personal attention so we can give those people assistance they really need. If you can do that, it would be great. Can you or someone in your office follow on up with me as soon as you can in the next day or two on that? Mr. ZolleR. We will notify you. [Additional information follows:

The loan guarantee in question was approved by the acting REA Administrator on March 25, 1981.

Mr. WATKINs. I think they are a great group but we will let that pend until I hear what happens.

RESCISSION PROPOSAL

Mr. NATCHER. Mr. Zoller, for fiscal year 1981 for the telephone loan program you are proposing rescission of $125 million leaving a revised program level of $125 million. How and why was the decision made to rescind 50 percent of the telephone loan program?

Mr. ZolleR. That decision was made in looking at the total budget of REA. For the telephone loan program, the $125 million to be rescinded will leave nothing for the balance of this year. Rural telephone subscribers have had lower increases in their rates than rural electric consumers over the last ten year period. So, looking at the total proposal to cut back on the insured loan level it was decided, based on the fact that there was a smaller increase in those rates, the fact that improved technology has tended to keep the rates down, plus the alternate funding which is proposed to be left in there of the guarantee authority and the Rural Telephone Bank that the insured program would give some priority to the electric borrowers as opposed to the telephone systems.

Mr. NATCHER. That is the reason for the 50 percent rescission reduction?

Mr. ZOLLER. In looking at the 1981 budget, there is a $125 million proposed reduction in 1981.

Mr. NATCHER. Mr. Zoller, when you get the transcript of this hearing, if you will, amplify this in the record now and give us a detailed statement as to the reasoning behind the 50 percent reduction. [The information follows:]

USDA POSITION ON REA INSURED TELEPHONE LOANS In the past decade, the rapid growth in Federal credit activity in both direct loans and loan guarantees has had a serious effect on the Nation's economy and financial markets. With this in mind, President Reagan directed that both on-budget and offbudget credit programs be reviewed and reductions made to reduce the size and scope of Federal credit programs and thus reduce the pressure on credit markets that is due to or stimulated by the Federal Government. The proposed changes in the 1981 and 1982 Budget for the Rural Electrification Administration are important elements of the President's Program for Economic Recovery. The Secretary has stated “the present unacceptable high interest rates and high inflation rates, both in real and psychological terms, are directly linked to the present level of Federal borrowing required to support Federal loan activities in the Federal Budget. 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 acitivity."

In view of the above, the decision was made to reduce the size of the insured telephone loan program. Factors considered included (1) rates for telephone service have not increased to the same extent as other utility services and (2) two-thirds of the telephone systems are commercial operations already receiving benefits under provisions of the tax code.

Substantial funds will remain available under the Rural Telephone Bank and REA loan guarantee programs to cover priority needs of rural telephone systems.

TELEPHONE LOAN APPLICATIONS Mr. NATCHER. How many applications do you have on hand for the telephone loan program? Can you give the Committee any idea?

Mr. ZOLLER. Currently there are $1,460,000,000 in loan applications on hand approximately.

Mr. NATCHER. If you would, provide for the record a listing of the number and dollar amount of applications for the telephone loan program, by state. Mr. ZOLLER. Yes sir. [The information follows:]

TELEPHONE LOAN APPLICATIONS As of February 28, 1981, the following numbers and amounts of telephone loan applications were on hand in REA:

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State

Number

Amount

$14,000,000 14,011,000 16,534,150 35,022,000 32,649,688 35,896,000 40,167,100 6,833,000

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TELEPHONE SERVICE RATES

Mr. NATCHER. Would you provide furthermore for the record any material you may have on hand that would describe the telephone rate situation in rural areas as opposed to the rate situation in urban areas?

[The information follows:]

TELEPHONE SERVICE RATE COMPARISON Data on comparable costs of local telephona service are not available as urban rates provide extended areas coverage in the basic monthly service rate. Rural rates, on the other hand, do not cover many calls that would be considered local in urban areas. The rural resident frequently must pay a toll charge to call the doctor or the school which educates the family's children. When these are added to the ha 'n rate, it is apparent that rural residents pay higher bills than urban residents

ne local services.

GROWTH OF RURAL TELEPHONE SYSTEMS

Mr. NATCHER. Also, provide for the record any material you have which would describe the need for future growth in the telephone program in rural areas of the country.

[The information follows:]

Growth of RURAL TELEPHONE SYSTEMS

During the 1970s, U.S. population grew at a faster rate in rural areas and small towns than in metropolitan areas. This is the first time in more than 160 years this has happended. Preliminary figures from the 1980 Census show that the nonmetropolitan areas grew by 15.4 percent during 1970 to 1980 as opposed to 9.1 percent for metropolitan areas. The telecommunications needs of these rural people, and therefore the capital needs of rural telephone systems, are related to this growth. Also increasing the financial needs of rural telephone systems is the rapidly changing telecommunications technology. Rural systems are utilizing these technologies where they are economically feasible. REA expects to help the rural telephone systems meet this increasing demand for capital by assisting them to obtain private funding, where possible, and by making full use of the telephone loan guarantee authority.

Mr. NATCHER. Mr. Myers.

ELECTRIC PROGRAM CHANGES

Mr. MYERs. Administrator Zoller, the suggestion was made that we move from two percent loans to five percent loans which are still not realistic with the cost of money today. The two percent back when they were originally started was closer to the cost of money at that time. How many loans are we talking about that would be affected by the increase from two to five percent? Mr. Zoller. Presently there are about 140 systems that qualify under the provision of the Act for the special rate of two percent. Mr. MYERs. How many of them will be borrowing money in the next few years? Do you have any idea? Mr. ZolleR. I do not have any feeling for it. We estimated in the budget submission for next year it would be approximately $100 million at the two percent rate. Mr. MYERS. Of course everyone would like to borrow money at the least interest rate possible. I would like to borrow money at two percent or even five percent. I would be delighted. We all would be but we have to look at it realistically. Under the guarantee—a while ago you and I were discussing this—under the guaranteed loan program is there not still some subsidy to interest rates, under the guaranteed loan? Mr. Zoller. A subsidy? Mr. MYERs. The only subsidy is under the two percent loan or five percent loan, is that right? Mr. ZolleR. That is correct. There is no subsidy in the guarantee program. At present, FFB borrows its funds to make advances under those loan guarantees from the Treasury but it is based on the cost of money to the Treasury plus a markup that FFB adds On. Mr. MYERs. Do they actually borrow from Treasury or is there a pledge of assets and the Treasury borrows for them in the name of the Treasury. How are the mechanics of it handled?

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