Debt rules need to be changed

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The National Rural Electric Cooperative Association (NRECA) is working feverishly to include a provision in the next COVID-19 stimulus package that would allow power cooperatives to re-evaluate Rural Utilities Service (RUS) loans at the current low interest rates with no penalties. The change could save cooperatives more than $ 10 billion.

RUS, a US Department of Agriculture agency, provides funding to build or improve water and waste treatment, electricity, and telecommunications service infrastructures in rural communities. During a news conference on July 20, Jim Matheson, CEO of NRECA – the national trade association that represents more than 900 power cooperatives in the United States – said that more than $ 40 billion in debt is now held by cooperatives across the country. He said the RUS is running a “hugely successful program” that is raising money for the federal government due to a “remarkably low failure rate of power cooperatives”.

However, current rules require cooperatives to pay a high early repayment penalty if they want to refinance debt. Matheson said such provisions used to be common on all types of loans, but over time the rules have changed and now most mortgages and other loans don’t have early repayment penalties.

“In today’s environment of exceptionally low interest rates, other companies across America have the ability to refinance their debt and take advantage of that cost of capital. But in the case of debt held by power companies with the Rural Utilities Service, the economic penalty associated with this loan prepayment penalty is really precluded from being able to take advantage of those lower interest rates, ”Matheson said.

COVID-19 hits rural areas hard

The NRECA media call attended executives from three rural electrical cooperatives, and all noted that their communities had experienced significant economic problems due to COVID-19.

Suzanne Lane, Executive Vice President and CEO of the Kansas Electric Power Cooperative (KEPCo), headquartered in Topeka, Kansas, said, “Unfortunately, as in many states, our unemployment rates have risen dramatically in the past few months. In the first quarter of 2020, Kansas unemployment was about 3% or slightly below the national average. We rose to just under 12% in April and recovered somewhat to around 7.5% in June. “

Lane mentioned that rural Kansas is heavily reliant on agriculture and the oil industries, both of which have declined due to the pandemic. Randy Hauck, general manager of Velva, the Verendrye Electric Cooperative, headquartered in North Dakota, said the downturn in the oil industry had hurt his region as well.

“We don’t serve Bakken Wells, but we’re on the verge of the game. We have a lot of oil service companies, we have a lot of pipelines, and we have some conventional oil wells. This entire segment has suffered a significant, significant decline, ”said Hauck. About a third of the oil wells that Verendrye operates have been shut down, Hauck said. He said unemployment in Minot, which Verendrye operates parts of, was about 2.2% last year. Today, he found, the figure is 10.7%.

“Probably the best barometer is the sales tax collection in the city of Minot,” said Hauck. “It’s been running about 60% of the last year, which means 40% of the trade is gone.” He said Verendrye serves 16 hotels, but they only have 10-20% occupancy. Last year they were 60 to 70%. Verendrye also serves about 30 restaurants. “They were closed for a while, now they have a reduced capacity. You know, empty restaurants don’t use a lot of electricity, ”said Hauck.

Tracy Bensley, general manager of the Talquin Electric Cooperative in Quincy, Florida, reported similar fighting in his area of ​​service. “In just the past three months, the unemployment rate in our region has doubled in the counties we serve,” said Bensley. “Some of our counties already had a poverty rate well over 20%, and the pandemic has just put more financial strain on our local businesses and the people who live in our community. Since the beginning of COVID-19, Talquin has set aside over $ 854,000 for our members through flexible payment arrangements and fee waivers. Starting in July, we also used the fuel generation savings to cut bills, ”added Bensley.

Flexible refinancing would offer members significant benefits

Lane said KEPCo currently has about $ 82 million in RUS debt. “If we are able to reevaluate these loans with no penalty, we estimate total savings of about $ 20-25 million, or about $ 1 million a year, based on current Treasury Department rates,” Lane said. As a not-for-profit cooperative, Lane said those savings can be passed directly on to members to help alleviate financial challenges related to COVID-19.

Likewise, Hauck said Verendrye would save about $ 1 million. He suggested the savings be used to replace aging infrastructure. According to Hauck, Verendrye’s overhead system was mainly built in the 1950s and 1960s. The cooperative also installed some unsheathed subway lines in the 1970s and 1980s. “That’s around 2,100 of our 4,600-mile route that is nearing the end of its life expectancy,” says Hauck. He said reducing the cooperative’s debt service would allow it to redirect those funds towards infrastructure improvements without having to increase membership fees.

Bensley said Florida’s co-operatives had nearly $ 1.7 billion in RUS debt. Depending on the percentages, revaluing the debt could save up to $ 400 million over the life of the outstanding credit. Talquin alone has about $ 88 million in RUS debt, according to Bensley. The cooperative estimates that its members could save between $ 27 million and $ 40 million by refinancing debt, which equates to between $ 1.2 million and $ 2.1 million annually.

“These are significant savings for our communities,” said Bensley. “During this global pandemic, this would give our cooperative the much needed financial flexibility.”

Stimulus package could provide quick relief

In order to remedy the early repayment penalties, Sens. John Hoeven (RN.D.), Tina Smith (D-Minn.), John Boozman (R-Ark.) And Kyrsten Sinema (D-Ariz.) Managed the flexible financing for rural areas an America Act in the US Senate on July 2 A companion law was introduced in the House of Representatives by MPs Vicky Hartzler (R-Mo.) and Tom O’Halleran (D-Ariz.). However, Matheson suggested including the matter in a COVID-19 stimulus package to speed things up.

“We already have tremendous interest in Congress in a bipartisan way. We have tabled standalone bills in both the House and Senate, but of course the intent is to see if this provision can be included in the next coronavirus relief package that Congress is currently working on. he said.

Upon request from ENERGY When laws to change the rules had been proposed before, Matheson replied, “Actually, we have made no significant effort in the past to change this. I can’t explain why, ”he said. “I think this is an anachronism from decades ago and I think it is important that we update it.”

The timing couldn’t be better. Lane, Hauck, and Bensley all sounded somewhat pessimistic about the rapid economic recovery in their rural areas. Matheson said this was typical of past economic rallies.

“If you look at our history, whenever we have an economic slowdown and then have a period of economic recovery after that, rural America has traditionally lagged the rest of the country in that recovery,” he said. “So this legislation, which is important to our situation right now, is important to our economic recovery and the opportunities for rural America in the long term.”

Aaron Larson is the editor-in-chief of POWER (@AaronL_Power, @POWERmagazine).

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