oversight

Rural Utilities Service: Status of Electric Loan Portfolio

Published by the Government Accountability Office on 1999-08-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting   and Information
      Management Division

      B-282424


      August 17,1999

      The Honorable John R. Kasich
      Chairman, Committee on the Budget
      House of Representatives

      The Honorable Stephen Horn
      Chairman, Subcommittee on Government
       Management, Information and Technology
      Committee on Government Reform
      House of Representatives

      Subject: Rural Utilities Service: Status of Electric Loan Portfolio


      This letter summarizes the information provided during July 15 and July 29,1999,
      briefings to your offices. You had asked us to update the financial status of the Rural
      Utilities Service’s (RUS) generation and transmission (G&T) borrowers and assess the
      likelihood of the federal government incurring losses in the future on loans to G&T
      borrowers. The briefings updated certain information on the RUS electric loan
      program included in our report, Federal Electricitv Activities: The Federal
      Government’s Net Cost and Potential for Future Losses (GAO/Al&ID-97-110,
      September 19,1997). The enclosed briefing slides highlight the results of our work
      and the information we provided during the briefings.

      RESULTS IN BRIEF

      G&T loans declined from $22.5 billion as of September 30,1996, to $20.1 billion as of
      September 30,1998, while the number of G&T borrowers increased from 55 to 56.
      The dollar amount of these G&T loans represents approximately 70 percent of RUS’
      total loan portfolio as of both dates.

      The number of financially stressed’G&Ts has declined from 13 as of September 30,
      1996, to 8 as of September 30,1998, and their outstanding loan balances have declined

      ‘Borrowers considered financially stressed have either defaulted on their loans, had their loans
      restructured but are still experiencing financial difficulty, declared bankruptcy, or formally requested
      financial assistance from RUS.




                                                              GAO/AIMD-99264R RUS’Electric Loan Portfolio
B-282424


from $10.5 billion to $6.3 billion in the same period. This decline is due to RUS (1)
reclassifying as financially viable 4 borrowers with $2.4 billion in outstanding debt as
of September 30,1996, (2) reducing accrued interest on a loan to a borrower by $1.1
billion as a result of a bankruptcy proceeding, (3) providing $300 million of partial
write-offs to two borrowers, one of which paid off the remaining loan balance of
approximately $152 million and is no longer a RUS borrower, and (4) approximately
$200 million of other payments net of interest accruals. Stressed G&T loans as of
September 30,1998, represented 31 percent of the total G&T electric loan portfolio.
Most of the financially troubled borrowers’ problems stem from their investment in
nuclear-generating plants that were completed late and over budget or in coal-fired
generating plants that were built to satisfy anticipated industrial growth that did not
materialize. According to RUS officials, the reasons the plant investments became
uneconomical included rapidly increasing construction and material costs, changing
Nuclear Regulatory Commission regulations, and soaring interest rates. This resulted
in the G&Ts incurring high levels of debt and debt-servicing requirements. In
addition, several states denied some of these borrowers’ requests for rate increases to
recover increasing costs. As a result, several G&T borrowers have been unable to
service their debt and have asked RUS to restructure their loans. It is probable that
the federal government will continue to incur losses from loan write-offs relating to
RUS borrowers that are currently bankrupt and/or otherwise Enancially stressed.
The number of financially viable G&T borrowers has increased from 33 as of
September 30,1996, to 37 as of September 30,1998, and their outstanding loan
lpilances have increased from $11.7 billion to $13.0 billion in the same period. This
increase can be primarily attributed to the reclassification of the four stressed G&T
borrowers discussed above. Since our September 1997report, there has been little or
no change in the risk factors (competitive pressures, cost disparity, and state
regulation of G&Ts) that impact currently viable G&T loans. While these risk factors
have been somewhat mitigated by a strong economy, they conthure to be applicable
today.

We believe the future viability of these G&T loans will be determined based on their
ability to be competitive in a deregulated market. Over half of the currently viable
G&T borrowers have power production costs2that are higher in their respective
regions than investor owned utilities (IOUs) or publicly owned generating utilities
(POGs). The relatively high average production costs indicate that the majority of the


‘We used averagerevenueper kilowatthour (kWh) to estimate power production costs. Power
production costs of the G&Ts should reflect their averagerevenue per kWh because the G&Ts
generally recover costs through rates with no profit. Average revenue per kwh is calculated by
dividing total revenuefrom the sale of wholesale electricity by the total number of wholesale kWhs
sold.




 Page 2                                               GAO/AIMD-99-264RRUS’Electric Loan Portfolio
B-282424


G&Ts currently considered viable may have difficulty competing in a deregulated
market.

As with the financially stressed borrowers, some of the G&T borrowers currently
considered viable have high debt costs because of investments in uneconomical
plants. In addition, according to RUS officials, two unique factors cause cost
disparity between the G&Ts and IOUs. One factor has been the inability to refinance
higher cost Federal Financing Bank (FFB) debt when lower interest rates have
prevailed. However, RUS officials said that recent legislative changes which enable
cooperatives to refinance FFB debt with a prepayment penalty may help align G&T
interest rates with those of the IOUs. The second factor is the sparser customer
density per mile for cooperatives and the corresponding high cost of providing service
to the rural areas.

Also, 17 of the viable G&T borrowers operate in states where regulatory commissions
must approve rates, and several states have in the past denied borrowers’ requests for
rate increases to recover costs. This means that these borrowers may be left with
significant unrecovered costs while competitive pressures are mounting. As a result
of these risk factors, some losses from loans currently considered viable are probable
in the future.

SCOPE AND METHODOLOGY
To update the financial status of the RUS G&T borrowers, we        identified changes in
the financial condition of the RUS G&T electric loan portfolio     since our September
1997report through September 30,1998. Our update focused           on the G&T loans, since
they make up the majority, in terms of dollars, of the portfolio    and generally pose the
greatest risk of loss to the federal government.

Based on our review of agency reports and discussions with RUS management, we
assessedthe financial condition of G&T borrowers that RUS identified as financially
stressed. We also reviewed and discussed with RUS management loans written off
since our last review.

For borrowers that RUS does not consider financially stressed, we assessedthe
ability of RUS G&T cooperatives to withstand competitive pressures by analyzing the
average revenue per kWh of 35 of the 48 viable G&T borrowers with loans
outstanding of about $13 billion as of September 30,1998. We excluded the 11 G&Ts
that only transmit electricity and 2 G&T borrowers that are not required to report
financial statistics to RUS. We also excluded the 8 financially stressed borrowers
discussed above. We compared the average revenue per kWh for the viable
borrowers with regional averages for IOUs and POGs.

In assessingthe likelihood of the federal government incurring future losses on loans
to G&T borrowers, we used the criteria for contingencies from Statement of Federal



Page 3                                         GAOMMD-99-264R RUS’Electxic Loan Portfolio
B-282424


F’inancial Accounting Standards (SFFAS) No. 5, Accounting for Liabilities of the
Federal Government. According to SFF’ASNo. 5, “a contingency is an existing
condition, situation, or set of circumstances involving uncertainty as to possible gain
or loss to an entity. The uncertainty will ultimately be resolved when one or more
future events occur or fail to occur.” When a loss contingency exists, the likelihood
that the future event or events will confirm the loss or the incurrence of a liability can
range from probable to remote.

We applied these criteria and considered different risk factors based on discussions
with agency officials and industry experts, analysis of financial and other data, review
of various reports, site visits to three G&T borrowers, and our professional judgment.

We conducted our work from February 1999 through July 1999in accordance with
generally accepted government auditing standards. We requested comments on our
draft briefing slides from RUS. They provided some clarifying comments that we
incorporated into our slides as appropriate.



We are sending copies of this letter to the Honorable John M. Sprat& Jr., and the
Honorable Jim Turner, the Ranking Minority Members of your Committees; the
Honorable Daniel Gliclunan, the Secretary of Agriculture; the Honorable Wally Beyer,
the Administrator of RUS; the Honorable Jacob J. Lew, the Director of the Office of
Management and Budget; and other interested parties. Copies will also be made
available to others upon request.

If you have any questions about this letter or the briefings, please contact me at (202)
512-9508or McCoy Williams, Assistant Director, at (202) 512-6906. Key contributors
to this assignment were Art Brouk and Carla Lewis.




Linda M. Calborn
Director, Resources, Community,
 and Economic Development, Accounting
 and Financial ManagementIssues


 Enclosure


 (913871)




 Page 4                                          GAO/AI&ID-99-264RRUS’Electric Loan Portfolio
GAO Accounting and Information
    Manaaement Division
    Briefings to the House Committee on the
      Budget and the Subcommittee on
     Government Management, Information
     and Technology, House Committee on
     Government Reform

    Rural Utilities Service: Status of Electric       .
     Loan Portfolio

   July 15,1999 and July 29,1999
                                                  1
GAo Purpose

    l   To provide an update on the financial status
        of the Rural Utilities Service’s (RUS)
        generation and transmission (G&T)
        borrowers

    l   To assess the likelihood of the federal
        government incurring losses in the future on
        loans to G&T borrowers.




                                                 2
GAo Table of Contents



     Results in Brief              5

     Scope and Methodology         9

     Background                18

     Status of Financially
      Stressed G&T Borrowers   25
                               3
GAo Table of Contents

                                     Pages
     Status of Financially
      Viable G&T Borrowers                 41

     Risk Factors of Financially
      Viable G&T Loans                     55

     Assessment of the Risk of the
      Federal Government Incurring
      Additional Losses                    61
                                       4
GAo Results in Brief

     l   The number of financially stressed G&Ts and
         their outstanding loan balances have declined
         from 13 and $10.5 billion as of September 30,.
         1996 to 8 and $6.3 billion as of September 30,
         1998, respectively.

     l   Stressed G&T loans as of September 30, 1998
         represent 31 percent of the total G&T electric
         loan portfolio.

     l   Future write-offs are probable in the short term
         for some of these financially stressed borrowers.
                                                      5
GAo Results in Brief

                    l    The number of financially viable G&T
                         borrowers and their outstanding loan balances
                         have increased from 33* and $11.7 billion as
                         of September 30, 1996 to 37* and $13 billion
                         as of September 30, 1998, respectively.

                   l     Since our September 1997 report, there has
                         been little or no change in the risk factors
                         (competitive pressures, cost disparity, and
                         state regulation of G&Ts) that impact currently
                         viable G&T loans.

*For fiscal year 1996, there were 42 financially viable borrowers with outstanding loan balances totaling $12 billion; however, we
excluded 9 entities that only transmit electricity. For fiscal year 1998, there were 48 financially viable borrowers with
                                                                                                                                     6   -
outstanding loan balances totaling $14 billion: however, we excluded 11 entities that only transmit electricity.
GAo Results in Brief

       l   Over half of the currently financially
           viable G&T borrowers have average
           revenue per kilowatthour (kWh) that is
           higher in their respective regions than
           Investor Owned Utilities (IOUs) or
           Publicly Owned Generating Utilities
           (POGs).

       l   Some viable G&T borrowers have
           high debt costs.
GAo       Results in Brief

      l    Several viable G&Ts operate in states
           where regulatory commissions must
           approve rates.

      l    As a result, some losses from loans
           currently considered viable are probable
           in the future.



                                                8

                                                      :
GAo Scope and Methodology

     l   Identified changes in the financial condition
         of the RUS G&T electric loan portfolio
         since our September 1997       report
         (GAO/AIMD-97-1 IO) through
         September 30, 1998. For our analysis of
         the average revenue per kWh, we used
         financial statistics of the electric utilities as
         of December 31, 1997, which was the
         most recent data available.


                                                       9
GAo Scope and Methodology

    l   Reviewed the financial condition of G&T
        borrowers identified as financially
        stressed by RUS, including G&T loans
        written off.

    0 Conducted an analysis of the
      competitive position of.financially viable
      G&Ts using average revenue per kWh.
      We excluded 11 entities that only
      transmit electricity.
                                              10
GAo Scope and Methodology

.
       0 Average revenue per kWh is calculated
         by dividing total revenue from the sale of
         wholesale electricity by the total number
         of wholesale kWhs sold.

       l   Because the G&Ts generally recover
           costs through rates with no profit,
           average revenue per kWh should reflect
           the power production costs of the G&Ts.


                                               11
GAo Scope and Methodology

      l   Average revenue per kWh has its
          limitations when used as a substitute
          for the price of power. However,
          average revenue per kWh is a good
          general indicator of production costs
          since, over time, utilities must recover
          all costs to remain in business.




                                               12
GAo Scope and Methodology

       l   In a competitive market for a relatively
           homogeneous product Iike electricity,
           being among the lowest cost
           producers is generally the most
           important factor in determining
           competitive position.




                                                13
GAo Scope and Methodology

     l   Assessed the risk of future G&T losses
         using the criteria for contingencies from
         SFFAS No. 5, Accounting for Liabilities
         of the Federal Government.

         l   Probable
         l   Reasonably possible
         l   Remote


                                                14
GAo Scope and Methodology

                    l     Conducted site visits to 3 G&T borrowers.

                    l     Conducted interviews with agency officials
                          and industry experts.

                    l     Identified states that have passed
                          legislation on restructuring in the electricity
                          industry and considered the impact of
                          restructuring* on G&T competitive position.


* The Energy Information Administration (EIA) definesrestructuringas a transition from a vertically integratedand regulatedmonopoly to an entity   15
in a competitive market where retail customerschoosethe suppliersof their electricity.
GAo Scope and Methodology

     l   Reviewed various reports:
         9 Rural Development’s fiscal year 1998
           financial statements (which
           encompass RUS),

         l   Department of Agriculture Office of
             Inspector General report on RUS’
             electric loan program,


                                                   16
GAo. Scope and Methodology

       l   G&T annual reports, and

       l   electric industry reports on
           restructuring of the electricity industry.

     * We conducted our work in accordance with
       generally accepted government auditing
       standards between February and July
       1999.


                                                 17
GAo Background

    l   RUS provides direct or guaranteed
        loans primarily to rural electric
        cooperatives that market power on a
        wholesale and retail basis.

    l   The rural electric cooperatives are either
        G&Ts or distribution cooperatives.



                                               18
m.
     m    .
              Lo
nl   nl       Lo
c9
#
GAo Background

    l   In September 1997, we reported that:
         l the total amount of write-offs related to the
           electricity activities of RUS between fiscal
           year 1992 and July 31, 1997 was about $1.5
           billion,

        l   additional losses from financially stressed
            G&T borrowers were probable in the short
            term, and

        l   some losses from loans currently considered
            viable were probable in the future.
                                                      20
GAo Background

    l   Restructuring of the electricity industry is
        continuing, with electricity generation markets
        being opened to competition.

    l   Current legislation requires that utilities make
        their transmission lines accessible to other
        utilities to transmit wholesale electricity. This
        enables wholesale customers to obtain
        electricity from a variety of competing
        suppliers and has resulted in increased
        wholesale competition in the electricity
        industry.
                                                      21
GAo Background

    l   Continuing deregulation efforts in some
        states have led to competition at the
        retail level.

    l   Industry experts expect that retail
        deregulation will continue to occur on a
        state-by-state basis over the next
        several years.


                                              22
* GAo Background

      l   According to the Energy Information
          Administration, as of July I$ 1999, 23
          states have restructuring legislation
          enacted and/or comprehensive regulatory
          orders issued.

      l   At the federal level, legislation intended to
          increase competition within the federal
          electricity industry has been introduced
          (H.R. 1828 and S. 1047),     but has not
          been enacted.
                                                   23
GAo Background
Figure 1: Status of Restructuring                    as of July I, 1999




                                                                                              m    RestrucAlxing legislation enacted’
                                                                                              m    Comprehensive regulatory order issued2
     2.
          ‘, k                                                                                6223 Legislation/Orders pending3
                                                                                             c7    Commission or legislative investigation ongoing4
    Notes:
    1 = Arizona, Arkansas,California, Connecticut,Delaware,Illinois, Maine, Maryland, Massachusetts,
                                                                                                  Montana,Nevada,New Hampshire,
        New Jersey,New Mexico, Ohio, Oklahoma,Pennsylvania,RhodeIsland, Texas,and Virginia.
    2 = Michigan, New York, and Vermont.
    3 = Missouri, Oregon,and SouthCarolina.
    4 = Alabama,Alaska, Colorado,District of Columbia,Florida, Georgia,Hawaii, Idaho, Indiana,Iowa, Kansas,Kentucky, Louisiana,Minnesota,
        Mississippi,Nebraska,North Carolina,North Dakota, SouthDakota, Tennessee,Utah, Washington,West Virginia, Wisconsin,and Wyoming.

    Source:      Energy Information Administration   (EIA)                                                                              24
           .




      a   es
      s   00 .-
      0
      k
      0
cnm
GAo Status of Financially Stressed
    G&T Borrowers
        Reconciliation of Stressed Borrowers’
                     Outstanding Debt

                                          Dollars in billions
       Outstanding debt
         as of g/30/96                            $10.5
       Debt reclassified as
        financially viable                          (24
       Interest accrual adjustment                  W)
       Write-offs                                    ( .3)
       Debt paid off                                 ( .2)
       Other payments, net of interest accruals      ( .2)
       Outstanding debt
        as of 9130198                               $6.3

                                                                26
GAO Financially Stressed Borrowers --
    Total DebtOutstanding
     Borrower                     g/30/98
                        (Dollars in millions)
     Borrower   A                $4,138.3
     Borrower   B                   619.8
     Borrower   C                   425.4
     Borrower   D                   333.8
     Borrower   E                   307.1
     Borrower   F                   175.9
     Borrower   G                   174.3
     Borrower   H                    88.3
     Total                       $6,262.9
                                            27
GAo       Financially Stressed Borrowers (g/30/98)
          Borrower A - $4,138.3 million
      l . Invested in a nuclear plant in the 1970s
           which was completed late and
           experienced construction cost overruns.

      l    Borrower has been in bankruptcy since
           December 1994.

      l    RUS anticipates a court ordered
           write-off of approximately $3 billion.

                                                    28
GAo   Financially Stressed Borrowers (g/30/98)
      Borrower B - $619.8 million
      0 Borrower overbuilt due to anticipated
        growth in electricity demand that did not
        occur.

      l   RUS previously restructured loans in
          May 1988.

      l   RUS is holding preliminary discussions
          with borrower regarding additional debt
          restructuring.
                                                 29
GAo       Financially Stressed Borrowers (g/30/98)
          Borrower C - $425.4 million
      l    Invested in a nuclear plant that proved to
           be uneconomical.

      l    In March 1999, RUS restructured
           borrower’s FFB loans to provide more
           favorable payment terms to improve
           borrower’s competitive position in a state
           with deregulation.

      l    RUS anticipates a partial write-off when
           notes are due in year 2008.
                                                      30
GAo   Financially Stressed Borrowers (g/30/98)
      Borrower D - $333.8 million’
      l   Originally considered stressed by RUS
          because borrower requested a partial
          write-off.

      l   Borrower is planning merger with another
          RUS cooperative.

      l   RUS anticipates no write-off assistance
          due to assumption of borrower D’s
          outstanding debt by merger partner.

                                                    31
GAo       Financially Stressed Borrowers (g/30/98)
          Borrower E - $307.1 million
      l    Invested in a nuclear plant that proved to be
           uneconomical.

      l    In May 1999, RUS restructured borrower’s loans
           to provide more favorable payment terms to
           improve borrower’s competitive position.

      l    RUS anticipates a partial write-off when notes are
           due in year 2009.




                   .
                                                           32
GAo   Financially Stressed Borrowers (g/30/98)
      Borrower F - $175.9 million
      l   Invested in construction of a nuclear plant that
          was never completed.

      l   In December 1996, court approved
          reorganization plan.

      l   According to RUS, under the court approved
          plan, RUS received $289.1 million in cash
          payments.

      l   Current balance reflects a court ordered
          write-off of $165 million.
                                                       33
GAo           Financially Stressed Borrowers     (g/30/98)
          Borrower G - $174.3 million
          l    Made an investment in a nuclear plant that
               proved to be uneconomical.

      l        RUS continues to work with borrower to
               reduce rates to a more competitive level.

                l   In August 1998, the State Commission
                    approved an interim rate reduction.

      l        RUS anticipates no write-off assistance.

                                                          34
GAo   Financially Stressed .Borrowers (g/30/98)
      Borrower H - $88.3 million
                         -



      l   Invested in several nuclear plants that
          proved to be uneconomical.

      l   Filed for bankruptcy in April 1996.

      l   RUS anticipates a court ordered
          write-off of at least $78 million by the
          end of 1999.


                                                     35
GAo G&T Borrowers Dropped Since the
    1996 Financiallv Stressed List
                    Total debt outstanding
                     (Dollars in millions)

     Borrower       9130196         9130198
     Borrower   I   $1,070.7        $1,131.2
     Borrower   J    1,101.2         1,287.6
     Borrower   K       167.9           221.4
     Borrower   L       103.2            94.5
     Borrower   M      313.4              0
     Total          $2,756.4        $2,734.7


                                I


                                                36
GAo G&T Borrowers Dropped Since the
    1996 Financiallv Stressed List
     l   Borrower I - $1,131.2 million

         l   Strong economy has improved
             financial condition, and RUS is not
             considering any write-off for, this
             borrower.




                                                   37
GAo G&T Borrowers Dropped Since the
    1996 Financially Stressed List
     a Borrower J - $1,287.6 million

       l   As part of an approved bankruptcy
           plan, RUS restructured loans in July
           1998 to provide more favorable
           payment terms.

       l   RUS management anticipates that the
           federal government’s recovery on debt
           should exceed 95 percent, with a
           reasonable potential for full recovery.
                                                  ‘38
GAo G&T Borrowers Dropped Since the
    1996 Financiallv Stressed List
     l   Borrower K - $221.4 million

         l   Strong economy has improved financial
             condition, and borrower is no longer
             requesting a write-off.

     l   Borrower L - $94.5 million

         l   Strong economy has improved financial
             condition, and borrower is no longer
             requesting a write-off.
                                                39
GAo G&T Borrowers Dropped Since the
    1996 Financiallv Stressed List
     l   Borrower M - $0

         * Received partial write-off of $164.8
           million and paid off remaining balance
           of $152 million. G&T is no longer a
           RUS borrower.




                                              40
          m
          0
          ci




     cd
     .-




In
GAo Status of Financially Viable
    G&T Borrowers
     l   Moody’s bond ratings available for 9 G&Ts, all
         of which received ratings that represent good
         or adequate financial security.
          l 8 of the 9 G&T borrowers have an “Al to
            A3” bond rating. The remaining G&T has a
            “Baa2” bond rating.

     0 Most G&T borrowers have average revenue
       per kWh that is higher in their respective
       regions than the average revenue per kWh for
       IOUS.

                                                   42
GAO Status of Financially Viable
    G&T Borrowers
     l   Over half of the G&T borrowers have
         average revenue per kWh that is higher
         in their respective regions than that for
         POGs.

     l   The relatively high average production
         costs indicate that the majority of G&Ts
         may have difficulty competing in a
         deregulated market.

                                                43
GAo Status of Financially Viable
    G&T Borrowers
Figure 2: Comparison of Average Revenue Per kWh of G&Ts to IOUs and
POGs (National Average)

                      Cents per kWh
                   4.5
                                 3-9 *                          *
                     4                                    3.6
                                                                      35
                                                                     -2
                   3.5
                     3
                   2.5
                     2
                   1.5
                     1
                   0.5
                     0      I                       1

                                    1995                     1997
                                                IOlJs 0 POGs 1


Source:   EIA                                                               44
* EIA’s national average rates also includes transmission only utilities.
GAo Status of Financially Viable
    G&T Borrowers
Figure 3: Average Revenue per kWh for G&Ts in the Alaska Systems Coordinating   Council
Region (as of December 31,1997)

                        per kWh
                          6.58




Source:   EIA and RUS                                                                     45
GAO Status of Financially Viable
    G&T Borrowers
Figure 4: Average Revenue per kWh for G&Ts in the East Central Area Reliability Coordination
Agreement Region (as of December 31,1997)

                 Cents per kWh
                                        3.39
          3.3
          *I         I



                                 2.88
                                                      3.11
            3                                  2.46
          2.5
                2-l
          1.5
                1




Source:        EIA and RUS                                                               46
 GAO Status of Financially Viable
     G&T Borrowers
 Figure 5: Average Revenue per kWh for G&Ts in the Electric Reliability Council of Texas
 (ERCOT) Regiori(as of December 31,1997)

               Cents per kWh
              8-
           4.:                                          4.16
             4
           3.5
             3
           2.5
             2
           1.5
             1
           0.5
             0   I       -I-




* Overlaps 2 regions - Southwest Power Pool and ERCOT

 Source:   EIA and RUS                                                                     47
GAo Status of Financially Viable
    G&T Borrowers
Figure 6: Average Revenue per kWh for G&Ts in the Florida Region Coordinating   Council
Region (as of December 31,1997)

            Cents per kWh
          61
          5
          4
          3
          2
          1
          0 3           l-   -r




Source:   EIA and RUS                                                                     48
GAo Status of Financially Viable
    G&T Borrowers
Figure 8: Average Revenue per kWh for G&Ts in the Mid-Continent   Area Power Pool
Region (as of December 31,1997)

            Cents per kWh

          4mz
          - 5
            - 1


          3.5
            3
                  4.38
                         3.82
                                2.93   2.83      3.01   2.96
                                                                  2.43
                                                                         3.03
          2.5
            2                                                                   1.59
          1.5
            1
          0.5
            0                                                               c

Source:   EIA and RUS                                                                  50

                                                                                            .I
GAO Status of Financially Viable
    G&T .Borrowers
Figure 9: Average Revenue per kWh for G&Ts in the Southeastern   Electric Reliability   Council
Region (as of December 31,1997)

            Cents per kWh
           9                                5
           54-   3.93

           3-
           2-
           1 -
           0            I   I   I   I   I       I




Source:   EIA and RUS                                                                        51
GAo Status of Financially Viable
    G&T Borrowers
Figure IO: Average Revenue per kWh for G&Ts in the Southwest Power Pool (SPP) Region
(as of December 31,1997)

             Cents per kWh
          5                                                                        4.43
        4.5    43.97
          4-                                                                                          3.33
        3.5    -                             315
                                              .        287
                                                        .        281
                                                                  .
          3-
        2.5    -
          2-
        1.5    -
          l-
        0.5    -
          0              I         I     I         I         I         I   I   I          I   I   I          I




l   Overlaps 2 regions - SPP and ERCOT


Source:   EIA and RUS                                                                                 52
GAO Status of Financially Viable
    G&T Borrowers
Figure 11: Average Revenue per kWh for G&Ts in the Western Systems Coordinating   Council
Region (as of December 31,1997)

          Cents per kWh
      4.5A 14.04 3.87

      3.:
         3                2.38
      2.5
         2
      1.5
         1
      0.5
         0 :




Source:   EIA and RUS
                                                                                       53
GAo Status of Financially Viable
    G&T Borrowers
        0 11 RUS G&Ts identified as financially
          viable are located in states with
          deregulation legislation.

        l   Of these 11 financially viable RUS G&Ts:

            l   10 had higher average revenue per kWh
                than IOUs in their respective regions.

            l   7 had higher average revenue per kWh
                than POGs in their respective regions.

                                                    54
GAo Risk Factors of Financially Viable
    G&T Loans
     0 In our previous report, we identified
       several risk factors that impact the
       future viability of G&T loans. While
       these risk factors have been somewhat
       mitigated by a strong economy, they
       continue to be applicable today.

        l   Competitive pressures
        l   Costs disparity
        l   State regulation of G&Ts
                                           55
GAo Risk Factors of Financially Viable
    G&T Loans
     l   Competitive pressures - Little change
         l Average revenue per kWh analysis      used
           to assess the G&Ts’ ability to be
           competitive in a restructured industry.

         a Our results identified little change
           between our previous report and our
           current assignment in the number of
           G&Ts with higher production costs than
           IOUs or POGs in their respective
           regions.
                                                 56
GAO Risk Factors of Financially Viable
    G&T Loans
                                  l    1995 Results (from our 1997 report)
                                           -27  of 33 had higher production costs
                                             than IOUs
                                           - 17 of 33 had higher production costs
                                             than POGs

                                  l    1997 Results (from our current work)
                                           - 32 of 35” had higher production costs
                                             than IOUs
                                           - 18 of 35” had higher production costs
                                             than POGs
*Two of the 37 borrowersare not requiredto report financial statisticsto RUS and,therefore,are excludedfrom our analysis.   57
GAO Risk Factors of Financially Viable
    G&T Loans
     l   Costs disparity - No change
         l As identified in our previous report, some
           G&T borrowers currently considered viable
           have high debt costs because of
           investments in uneconomical plants.

         l   According to RUS officials, two unique
             factors’cause additional cost disparity
             between the G&Ts and IOUs.
              0 sparser customer density per mile
              l significant cost to refinance higher cost
                FFB debt
                                                        58
GAo Risk Factors of Financially Viable
    G&T Loans
     l   State regulation of G&Ts - Little change
         l 17  G&Ts operate in states where
           regulatory commissions .must approve
           changes in rates.

         l   In the past, several state
             commissions have denied borrowers’
             requests for rate increases as a
             means to recover costs.

                                              59
GAO Risk Factors of Financially Viable
    G&T Loans
        l   Therefore, G&Ts with high costs may
            be at risk of default on their RUS
            loans, even without direct competitive
            pressures.




                                               60
GAo Assessment of the Risk of the Federal
    Government Incurrincr Additional Losses
           l   Future write-offs are probable in the
               short term for some of the financially
               stressed borrowers.

           l   Some losses from ‘loans currently
               considered viable are probable in the
               future.



(913849)
                                                        61
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