Rural Electric Cooperatives: Debt Rules Need to Change

Credit to Author: Aaron Larson| Date: Tue, 21 Jul 2020 17:50:28 +0000

The post Rural Electric Cooperatives: Debt Rules Need to Change appeared first on POWER Magazine.

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The National Rural Electric Cooperative Association (NRECA) is working feverishly to get a provision into the next COVID-19 stimulus package that would allow electric cooperatives to reprice loans from the Rural Utilities Service (RUS) at current low interest rates without penalties. The change could save co-ops more than $10 billion.

The RUS, which is a U.S. Department of Agriculture agency, provides financing to build or improve water and waste treatment, electric power, and telecommunications services infrastructure in rural communities. During a media conference call on July 20, Jim Matheson, CEO of NRECA—the national trade association that represents more than 900 electric cooperatives in the U.S.—said there’s more than $40 billion of debt held today by co-ops across the country. He said the RUS runs a “tremendously successful program” that makes money for the federal government because of a “remarkably low default rate on the part of electric cooperatives.”

However, current rules charge co-ops a hefty prepayment penalty if they want to refinance debt. Matheson said such stipulations used to be common in all types of loans, but over time the rules have changed, and now most home mortgages and other loans do not charge prepayment penalties.

“Other businesses across America, in the current environment of exceptionally low interest rates, have the opportunity to refinance their debt and take advantage of that cost of capital. But in the case of debt held by electric cooperatives with the Rural Utilities Service, the opportunity to realize the benefit of those lower interest rates is really precluded by the economic penalty associated with this prepayment penalty provision of the loan,” Matheson said.

COVID-19 Hits Rural Areas Hard

Leaders from three rural electric co-ops participated on the NRECA media call, and all of them noted significant economic troubles experienced in their communities due to COVID-19.

Suzanne Lane, executive vice president and CEO of Kansas Electric Power Cooperative (KEPCo), which is headquartered in Topeka, Kansas, said, “Like many states, our unemployment numbers have unfortunately increased dramatically over the past few months. For the first quarter of 2020, Kansas was at about 3% unemployment, or slightly below the national average. We increased in April to just under 12%, and have recovered a little bit to about 7.5% in June.”

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

“We don’t serve any Bakken oil wells, but we’re on the edge of the play. We have a lot of oil service companies, we have a lot of pipeline load, and we have some conventional oil wells. That whole segment has taken a significant, significant decline,” Hauck said. Of the oil wells that Verendrye serves, Hauck said about one-third of them had been shut down. He said unemployment in Minot, which Verendrye serves parts of, was about 2.2% last year. Today, he noted, it’s 10.7%.

“Probably the best barometer is the sales tax collection in the city of Minot,” Hauck posited. “It’s running about 60% of last year, so that means 40% of commerce has gone away.” He said Verendrye serves 16 hotels, but they’re running only about 10% to 20% occupancy. Last year they were at 60% to 70%. Verendrye also serves about 30 restaurants. “They were closed for a while, now they’re at a reduced capacity. You know, empty restaurants don’t use much power,” said Hauck.

Tracy Bensley, general manager of Talquin Electric Cooperative in Quincy, Florida, reported similar struggles in his service territory. “In just the last three months, the unemployment rate in our area has doubled in the counties that we serve,” Bensley said. “Some of our counties already had poverty levels well above 20%, and the pandemic has just placed a greater financial strain on our local businesses and the people that live within our community. Since the start of COVID-19, Talquin has deferred over $854,000 for our members through flexible payment arrangements and waived fees. We’ve also used generation fuel savings to reduce bills starting in July,” Bensley added.

Flexible Refinancing Would Provide Significant Benefits to Members

Lane said KEPCo currently has about $82 million in RUS debt. “If we’re able to reprice these loans without penalty, based on current Treasury rates, we estimate a total savings of about $20 to $25 million, or about a million dollars a year,” Lane said. As a not-for-profit cooperative, Lane said those savings can be passed directly on to members, helping to relieve financial challenges associated with COVID-19.

Likewise, Hauck said Verendrye would save about $1 million. He suggested the savings would be used to replace aging infrastructure. According to Hauck, Verendrye’s overhead system was mostly built in the 1950s and 1960s. The co-op also installed some unjacketed underground line in the 1970s and 1980s. “That’s about 2,100 of our 4,600 miles of line that’s getting toward the end of its life expectancy,” said Hauck. He said reducing the co-op’s debt service payment would allow it to divert those funds to infrastructure improvements without having to raise members’ rates.

Bensley said Florida’s co-ops have almost $1.7 billion in RUS debt. Depending on percentage rates, repricing the debt could save up to $400 million over the life of outstanding loans. Talquin alone has about $88 million in RUS debt, according to Bensley. The cooperative estimates its members could save between $27 million and $40 million if debt was refinanced, 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 provide our co-op with some much-needed financial flexibility.”

Stimulus Package Could Allow Quick Relief

To address the prepayment penalties, Sens. John Hoeven (R-N.D.), Tina Smith (D-Minn.), John Boozman (R-Ark.), and Kyrsten Sinema (D-Ariz.) introduced the Flexible Financing for Rural America Act in the U.S. Senate on July 2. Companion legislation was introduced in the House of Representatives by Reps. Vicky Hartzler (R-Mo.) and Tom O’Halleran (D-Ariz.). However, Matheson suggested getting the matter added to a COVID-19 stimulus package would expedite things.

“We’ve got tremendous interest in Congress already in a bipartisan way. We’ve had standalone bills introduced in both the House and the Senate, but of course, the intent is to see if this provision can be included in whatever the next coronavirus relief package is going to be that Congress is working on right now,” he said.

When asked by POWER if legislation to change the rules had been proposed previously, Matheson responded, “Actually, no, we’ve not made a significant push to get this changed in the past. I can’t explain why,” he said. “I think this is an anachronism from decades ago and I think it’s important that we update it.”

The timing couldn’t be better. Lane, Hauck, and Bensley all sounded somewhat pessimistic about the economy improving quickly in their rural areas. Matheson suggested that’s typical of past economic recoveries.

“If you look at our history of whenever we have an economic slowdown, and then we have a period of economic recovery afterwards, rural America traditionally lags the rest of the country in that recovery,” he said. “That’s why this legislation, which is important in the moment for where we face, it also matters over the longer run in terms of our economic recovery and opportunity for rural America.”

Aaron Larson is POWER’s executive editor (@AaronL_Power, @POWERmagazine).

The post Rural Electric Cooperatives: Debt Rules Need to Change appeared first on POWER Magazine.

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