Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 8981

fleshy scales have a watersoaked

condition; and,

(l) Watery scales when more than the

equivalent of the entire outer fleshy

scale is affected by an off-color,

watersoaked condition. The off-color

must be of some shade of brown or

yellow.

§ 51.3211 Serious damage.

Serious damage unless otherwise

specifically defined in this section,

means any defect which seriously

affects the appearance, or the edible or

shipping quality of the onions. Any one

of the following defects, or any

combination of defects the seriousness

of which exceeds the maximum allowed

for any one defect, shall be considered

as serious damage:

(a) Seedstems when more than onehalf inch in diameter;

(b) Dry sunken areas when extending

deeper than one fleshy scale, or when

affecting an area equivalent to that of a

circle 1 inch in diameter on an onion

23⁄4 inches in diameter, or

correspondingly lesser or greater areas

on smaller or larger onions;

(c) Sprouting when any visible sprout

is more than one-half inch in length;

(d) Staining, dirt or foreign material

when more than 25 percent of the

onions in any lot are badly stained.

Onions with adhering dirt or other

foreign matter shall be judged on the

same basis as stained onions;

(e) Mechanical when any cut extends

deeper than two fleshy scales, or when

cuts seriously damage the appearance of

the onion; and,

(f) Watery scales when more than the

equivalent of two entire outer fleshy

scales are affected by an off-colored,

watersoaked condition. The off-color

must be of some shade of brown or

yellow.

§ 51.3212 Diameter.

Diameter means the greatest

dimension of the onion at right angles

to a line running from the stem to the

root.

Metric Conversion Table

§ 51.3213 Metric conversion table.

Inches Millimeters

(mm)

1⁄8 .......................................... 3.2 1⁄4 .......................................... 6.4 3⁄8 .......................................... 9.5 1⁄2 .......................................... 12.7 5⁄8 .......................................... 15.9 3⁄4 .......................................... 19.1 7⁄8 .......................................... 22.2

1 ............................................ 25.4

11⁄4 ........................................ 31.8

11⁄2 ........................................ 38.1

Inches Millimeters

(mm)

13⁄4 ........................................ 44.5

2 ............................................ 50.8

21⁄2 ........................................ 63.5

23⁄4 ........................................ 69.9

3 ............................................ 76.2

31⁄2 ........................................ 88.9

4 ............................................ 101.6

Dated: February 9, 1995.

Lon Hatamiya,

Administrator.

[FR Doc. 95–3787 Filed 2–15–95; 8:45 am]

BILLING CODE 3410–02–P

Rural Utilities Service

7 CFR Part 1717

Investments, Loans, and Guarantees

by Electric Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Proposed Rule.

SUMMARY: The Rural Utilities Service

(RUS) hereby proposes to revise its

policies and requirements governing

restrictions on investments, loans and

guarantees made by electric borrowers.

This proposed rule is intended to clarify

RUS’s policies and requirements, reduce

uncertainty by borrowers, and improve

compliance.

DATES: Written comments must be

received by RUS or carry a postmark or

equivalent by April 17, 1995.

ADDRESSES: Written comments should

be addressed to Mr. F. Lamont Heppe,

Jr., Deputy Director, Program Support

Staff, U.S. Department of Agriculture,

Rural Utilities Service, Ag Box 1522,

room 2234–S, 14th Street and

Independence Avenue, SW.,

Washington, DC 20250–1500. RUS

requires a signed original and 3 copies

of all comments (7 CFR 1700.30 (e)).

Comments will be available for public

inspection during regular business

hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Mr.

Alex M. Cockey, Jr., Deputy Assistant

Administrator—Electric, U.S.

Department of Agriculture, Rural

Utilities Service, Ag Box 1560, room

4037–S, 14th Street & Independence

Avenue, SW., Washington, DC 20250–

1500. Telephone: 202–720–9547.

SUPPLEMENTARY INFORMATION: This

proposed rule has been determined to

be not significant for the purposes of

Executive Order 12866, and therefore

has not been reviewed by the Office of

Management and Budget (OMB). The

Administrator of RUS has determined

that the Regulatory Flexibility Act (5

U.S.C. 601 et seq.) does not apply to this

rule. The Administrator of RUS has

determined that this rule will not

significantly affect the quality of the

human environment as defined by the

National Environmental Policy Act of

1969 (42 U.S.C. 4321 et seq.). Therefore,

this action does not require an

environmental impact statement or

assessment. This rule is excluded from

the scope of Executive Order 12372,

Intergovernmental Consultation, which

may require consultation with State and

local officials. A Notice of Final Rule

titled Department Programs and

Activities Excluded from Executive

Order 12372 (50 FR 47034) exempts

RUS electric loans and loan guarantees

from coverage under this Order. This

rule has been reviewed under Executive

Order 12778, Civil Justice Reform. This

rule: (1) Will not preempt any State or

local laws, regulations, or policies,

unless they present an irreconcilable

conflict with this rule; (2) Will not have

any retroactive effect; and (3) Will not

require administrative proceedings

before any parties may file suit

challenging the provisions of this rule.

The program described by this rule is

listed in the Catalog of Federal Domestic

Assistance Programs under number

10.850 Rural Electrification Loans and

Loan Guarantees. This catalog is

available on a subscription basis from

the Superintendent of Documents, the

United States Government Printing

Office, Washington, DC 20402–9325.

Information Collection and

Recordkeeping Requirements

The existing recordkeeping and

reporting burdens contained in this rule

were approved by the Office of

Management and Budget (OMB)

pursuant to the Paperwork Reduction

Act of 1980 (44 U.S.C. 3501 et seq.),

under control numbers 0572–0017,

0572–0032, and 0572–0103. Additional

information collection and

recordkeeping requirements contained

in this proposed rule have been

submitted to OMB for review.

Send questions or comments

regarding these burdens or any other

aspect of these collections of

information, including suggestions for

reducing the burden, to the Office of

Information and Regulatory Affairs,

Office of Management and Budget, room

10102, NEOB, Washington, DC 20503.

Attention: Desk Officer for USDA.

Background

On December 22, 1987, section 312

was added to the Rural Electrification

Act of 1936. This section allows electric

borrowers to invest their own funds or

make loans or guarantees, not in excess

of 15 percent of their total utility plant,
8982 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

without restriction or prior approval of

the Administrator of the Rural Utilities

Service (RUS). On June 29, 1989, RUS

issued a final rule codifying this

provision (at 54 FR 27325), and the

provision became effective for all

electric mortgages executed after July

31, 1989. Mortgages executed prior to

that date contained a provision granting

the Administrator the right to approve

investments, loans and guarantees by

the borrower once the aggregate of such

investments, loans and guarantees

reached 3 percent of total utility plant.

This proposed rule is intended to

clarify RUS’s policies and requirements

regarding restrictions on borrower

investments, loans and guarantees. Over

the past several years borrowers have

raised a number of questions about such

issues as: Which investments, loans or

guarantees are subject to RUS approval

and which are excluded; the criteria

used by RUS in approving an

investment, loan or guarantee; whether

RUS approval of an investment, loan or

guarantee means that it is no longer

counted in determining the ratio to total

utility plant; whether RUS will approve

an investment, loan or guarantee if the

borrower is under the 15 percent limit;

whether a borrower will be in default

under its mortgage because net profits

earned on its investments pushed its

total above the 15 percent limit. This

proposed rule attempts to resolve such

questions.

RUS is also in the process of updating

its mortgage and loan contract used with

electric borrowers. RUS published a

proposed mortgage for electric

distribution borrowers on September 29,

1994 at 59 FR 49594. In that rule it is

proposed that RUS controls over

borrower investments, loans and

guarantees be moved from the mortgage

to the RUS loan contract. Such a move

would have no effect on RUS’s controls

or their enforceability under the RUS

mortgage.

The following discussion of the

proposed rule published today focuses

on the major provisions and more

significant changes proposed to the

existing regulation.

Section 1717.651 Policy

No change is proposed to this section.

It would remain RUS policy that

borrowers are encouraged to use their

own funds to foster the economic

development of rural areas, provided

that such actions do not in any way put

government funds at risk or impair the

borrower’s ability to repay its

indebtedness to RUS and other lenders.

Section 1717.652 Definitions

Several changes are proposed to this

section, mostly to accommodate changes

proposed elsewhere in the rule. For

example, definitions are added for

‘‘Default,’’ ‘‘Equity,’’ ‘‘Operating DSC,’’

‘‘Operating TIER,’’ ‘‘Regulatory Created

Assets,’’ and ‘‘Total Assets.’’ These

relate primarily to proposed § 1717.655,

under which borrowers that meet

certain criteria would be exempt from

RUS approval of investments, loans and

guarantees.

Technical changes are proposed to the

definition of ‘‘Own Funds.’’ These are

not intended to make any substantive

change to what investments, loans and

guarantees are or are not controlled by

RUS. The proposed changes are

intended to more closely reflect the

approach actually used by RUS in

monitoring investments, loans and

guarantees. The current definition may

give the erroneous impression that all

cash deposits and other assets held by

a borrower are first divided into ‘‘Own

Funds’’ and ‘‘other funds’’ and that only

‘‘Own Funds’’ are subject to controls. In

fact, all of a borrower’s investments,

loans and guarantees are subject to

controls except those made under the 15

percent limit and those excluded under

§ 1717.654. The definition of ‘‘Own

Funds’’ serves primarily to make clear

that, for the purposes of the 15 percent

exclusion, a borrower cannot treat funds

lent by RUS as its ‘‘Own Funds’’.

In addition, four new terms would be

defined: ‘‘Natural Gas Distribution

System,’’ ‘‘Solid Waste Disposal

System,’’ Telecommunication and Other

Electronic Communication System,’’

and ‘‘Water and Waste Disposal

System.’’ Under proposed § 1717.654

investments by borrowers in these four

types of community infrastructure

located in the borrowers’ service

territories would be excluded from RUS

control.

Finally, it is proposed that the current

definition of ‘‘Invest’’ be supplemented

by allowing borrowers to submit any

proposed transaction to RUS for an

interpretation of whether the action is

an investment for the purposes of RUS

controls.

Section 1717.653 Transactions Below

the 15 Percent Level

Proposed paragraph (a) of new

§ 1717.653 is the same substantively as

existing § 1717.653. It would continue

to provide that a borrower in

compliance with all provisions of its

RUS mortgage, RUS loan contract, and

any other agreement with RUS would

not need prior approval from RUS to

make investments, loans and guarantees

up to the 15 percent level. For purposes

of clarity, the proviso that the borrower

must not be in default would be

included at this point rather than in the

definition of borrower, as in the existing

rule. Similarly, a proviso would be

included to make it clear that funds

necessary to make timely payments of

principal and interest on loans secured

by the RUS mortgage would remain

subject to RUS controls. This issue is

currently addressed in the definition of

‘‘Own Funds’’ in the existing rule.

Proposed paragraph (b) is

substantively the same as existing

§ 1717.654(b).

Proposed paragraph (c) is new, and is

intended to clarify RUS policy that it

will not ‘‘approve’’ investments, loans

or guarantees made below the 15

percent level. In the past, some

borrowers have sought to obtain RUS

approval of transactions below the 15

percent limit and to have these

transactions excluded when

determining the aggregate amount of

investments, loans and guarantees made

by the borrower. Such approvals would

not be consistent with the restriction

imposed on RUS by section 312 of the

RE Act. They also would not be

consistent with protecting loan security

since a borrower might seek approval

and exclusion of low-risk transactions

below the 15 percent limit in order to

make room for high-risk transactions

below the limit that would be immune

from RUS review.

Section 1717.654 Exclusion of Certain

Investments, Loans and Guarantees

Proposed paragraph (a) would remain

substantively the same as existing

paragraph (a). The exclusions set forth

in proposed paragraph (b) are the same

as those in existing paragraph (b)(2),

except that it would be made clear that

all investments made in the National

Rural Utilities Cooperative Finance

Corporation and the National Bank for

Cooperatives would be excluded from

RUS controls, as they are now under

current RUS policy.

Certain other exclusions currently

followed by RUS would continue. These

include exclusions for any investment,

loan or guarantee that the borrower is

required to make by RUS or other USDA

agency; investments included in an

irrevocable trust for the purpose of

funding post-retirement benefits of the

borrower’s employees; and reserves

required by a reserve bond agreement or

other legally binding agreement that are

dedicated to making required payments

on debt secured under the RUS

mortgage, not to exceed the amount of

reserves specifically required by such

agreement.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 8983

All dollar amounts excluded by RUS

from the calculation of aggregate

investments, loans, and guarantees

pursuant to the RUS mortgage, RUS loan

contract, and/or RUS regulations,

bulletins, memoranda (including the

memorandum of March 28, 1985 cited

below), or other written notice as of the

date of this proposed rule will continue

to be excluded in the future. However,

profits, interest and other returns

(regardless of whether or not they are

reinvested) from such investments,

loans, and guarantees after the date of

this proposed rule will be excluded only

if they are excluded under proposed

§ 1717.654. Also, any new commitment

of funds to such investments, loans, and

guarantees will not be exempted after

the date of this proposed rule unless

they are excluded under proposed

§ 1717.654. Moreover, the memorandum

issued to all electric borrowers by the

Administrator of the Rural

Electrification Administration, dated

March 28, 1985, regarding the approval

of certain investments is hereby

rescinded.

Several new exclusions are proposed

under paragraph (c) of this section.

There would be no restrictions on

investments in or loans to the following

types of community infrastructure

located in the borrower’s service

territory: water and waste disposal

systems; solid waste disposal systems;

telecommunication and other electronic

communication systems; and natural gas

distribution systems. Guarantees of the

obligations of such systems would also

be excluded so long as the aggregate

amount of such guarantees does not

exceed 20 percent of the borrower’s

equity.

RUS believes that borrowers should

be able to minimize the risks associated

with investing in these types of

community infrastructure because of the

similarities in structure and operation

between them and the borrowers’ main

electric utility business, and the

opportunities for sharing overhead in

such areas as billing, communications,

system control, repair and maintenance,

and construction supervision. Excluding

these investments complements the

approach in the proposed new mortgage

for distribution borrowers, which would

allow borrowers meeting certain criteria

to issue up to 20 percent of their total

secured debt for such community

infrastructure, without the approval of

the mortgagees.

It is also proposed that amounts

‘‘invested’’ in customer accounts

receivable and other accounts receivable

be excluded from the calculation of total

investments, loans and guarantees.

These ‘‘investments’’ represent

commitments made for a period of less

than a year, and should not present a

significant on-going risk to the borrower

or RUS.

Other proposed editorial changes to

existing 1717.654, such as shifting

paragraph (b)(1) to 1717.653(b) would

not change the substance of the rule.

Section 1717.655 Exemption of Certain

Borrowers From Controls

Proposed new § 1717.655 would

exempt borrowers that meet certain

criteria from RUS approval of

investments, loans and guarantees. The

proposed criteria are as follows:

• The borrower must be in

compliance with all provisions of its

RUS mortgage, RUS loan contract, and

any other agreement with RUS.

• The average revenue per kWh for

residential service received by the

borrower must not exceed 130 percent

of the average revenue for residential

service for all residential consumers in

the state or states served by the

borrower. The criterion would apply

only to distribution borrowers.

• In the most recent calendar year the

borrower must have achieved an

operating TIER and an operating DSC of

at least 1.0, in each case based on the

average of the two highest ratios

achieved in the three most recent years.

• The borrower’s ratio of net utility

plant to long-term debt must be at least

1.1.

• The borrower must have equity

equal to at least 27 percent of its total

assets.

Both distribution and power supply

borrowers that meet these criteria would

be exempt from RUS approval of

investments, loans and guarantees. It is

estimated that about 83 percent of

distribution borrowers and 3 power

supply borrowers currently would meet

the proposed criteria for exemption.

Borrowers not meeting the criteria

would be subject to RUS approval of

investments, loans and guarantees above

15 percent of total utility plant.

The first qualification criterion would

require the borrower to be in good

standing with respect to all covenants of

its RUS mortgage, RUS loan contract or

any other agreement with RUS, such as

adequately maintaining the property,

having adequate insurance coverage,

meeting all financial obligations, and

achieving margins sufficient to meet

TIER and DSC requirements.

The second criterion would exclude

borrowers that are more likely to face

risks of substantial downward pressure

on rates and the possible loss of load

and revenues. While comparing a

borrower with the state average, as

proposed, is less reliable analytically

than a detailed comparison with the

borrower’s neighboring competitors,

setting the threshold at 130 percent

should ensure that borrowers that fail

the test most likely face an increased

risk of rate competition. At a borrower’s

request, the Administrator of RUS could

waive this criterion if he found that the

borrower’s strength on the other

qualification criteria offset the

borrower’s weakness in rate disparity.

The third criterion would ensure that

the borrower is usually able to cover all

of the expenses of its utility operation

from utility revenues, and normally

should not be dependent on income

from investments or loans to meet the

expenses of its primary business.

The fourth criterion would provide

substantial assurance that the

borrower’s long-term debt is adequately

collateralized and that RUS loan

security normally should not need to

depend on the borrower’s investments

and loans, which may not be secured or

effectively secured under the RUS

mortgage and whose liquidation value

may vary substantially over time.

The fifth criterion would provide an

equity cushion in the event the

borrower defaulted and foreclosure and

liquidation became necessary. It also

would provide an incentive for

profitable investments and a

disincentive for unprofitable

investments, since the ratio of equity to

total assets would increase in the first

case and decrease in the second. A

borrower could lose its exemption status

if bad investments reduced equity below

27 percent.

While distribution and power supply

borrowers that meet the proposed

criteria would be exempt from RUS

approval of their investments, loans and

guarantees, these borrowers would

continue to be obligated to maintain

adequate records and to report annually

on their transactions. Such records and

reports would be needed in the event an

exempt borrower lost its exemption

because of failure to meet one or more

of the criteria, and also to monitor

borrower performance in making

investments in rural development.

If an exempt borrower ceases to meet

the criteria for exemption, it would

become subject to the controls set forth

in this proposed rule upon receiving

written notice from RUS. Such borrower

could regain its exemption if

subsequently it met the qualification

criteria and was so notified in writing

by RUS.

If an exempt borrower is over the 15

percent level at the time it loses its

exemption, it could ask the

Administrator to exclude a portion of its

investments, loans and guarantees up to
8984 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

the aggregate amount of net profit

earned on all of its transactions over the

past 10 years. If the net profits are

insufficient, or if the Administrator does

not exclude an amount sufficient to

bring the borrower to or below the 15

percent level, the borrower would be

required to reduce or restructure its

portfolio (e.g., divest or shift some

investments to excluded investments) in

order to come within the 15 percent

limit. If the borrower failed to do this

within a timeframe set by RUS, the

borrower would be in default of its RUS

loan contract and/or RUS mortgage

upon receiving written notice from RUS

of the default.

Section 1717.656 Investments, Loans,

and Guarantees in Excess of 15 Percent

of Total Utility Plant

Proposed new § 1717.656 would

establish policies and requirements for

RUS approval of investments, loans and

guarantees above 15 percent of total

utility plant. The section would apply

only to borrowers that do not qualify for

an outright exemption from RUS

approval under § 1717.655. In the case

of distribution borrowers that do not

qualify for an exemption, they would

not be given approval to make

controlled investments, loans and

guarantees above the 15 percent level.

These borrowers currently represent

less than 20 percent of all distribution

borrowers, and all but one of them are

below the 15 percent level at the present

time. These borrowers would retain the

latitude to make unlimited investments,

loans and guarantees within those

categories excluded from control under

§ 1717.654. Moreover, RUS believes that

many of these borrowers could improve

their economic and financial condition

in order to qualify for the outright

exemption under § 1717.655, if they

want the additional latitude to make

controlled investments, loans and

guarantees above the 15 percent level.

In the case of power supply borrowers

that do not qualify for an exemption

under § 1717.655, RUS would consider

requests to make controlled

investments, loans and guarantees above

the 15 percent level. To be eligible to

submit a request, a power supply

borrower would have to meet the

following criteria:

• The borrower must be in

compliance with all provisions of its

RUS mortgage, RUS loan contract and

any other agreement with RUS.

• The borrower cannot be in financial

workout nor had its government debt

restructured.

• The borrower must have equity of at

least 5 percent of total assets.

• After approval of the request, the

aggregate of the borrower’s investments,

loans and guarantees cannot exceed 20

percent of total utility plant. Beyond

this level RUS believes that further

investments, loans or guarantees outside

of the ‘‘excluded categories’’ would

present unacceptable risks in the case of

borrowers that do not qualify for an

exemption under § 1717.655.

If a power supply borrower meets the

above criteria, its request would be

considered on a case by case basis. In

considering the request, the

Administrator would take the following

factors into consideration:

• The repayment of all loans secured

by the RUS mortgage must continue to

be assured and security must continue

to be reasonably adequate even if the

entire investment, loan or guaranteed

amount were lost. This ‘‘total loss’’

approach would expedite review by

RUS by eliminating the need to assess

the probability of a loss occurring and

its probable size. The effect of the loss

of the entire investment, loan or

guaranteed amount would be

considered along with all other risks

facing the borrower.

• In the case of an investment, the

investment would have to be made in an

entity separate from the borrower, such

as a subsidiary, whereby the borrower

would be protected from any liabilities

incurred by the separate entity, unless

the borrower is able to demonstrate that

making the investment directly rather

than through a separate entity would

present no substantial risk beyond that

of possibly losing part or all of the

investment.

• The borrower must be economically

and financially sound as indicated by its

costs of operation, competitiveness,

operating TIER and operating DSC,

physical condition of the plant, ratio of

equity to total assets, ratio of net utility

plant to long-term debt, and other

factors.

• Other factors affecting the security

and repayment of government debt, as

determined on a case by case basis.

This proposed new section 1717.656

would also clarify existing policy that if

RUS approves an investment, loan or

guarantee, such investment, loan or

guarantee would continue to be

included when calculating the

borrower’s ratio of aggregate

investments, loans and guarantees to

total utility plant. In other words, just

because an investment has been

approved by RUS doesn’t mean it will

not continue to be counted toward the

borrower’s total investments.

Proposed paragraph (d) of this section

would deal with the situation where

profits earned on investments increase

the aggregate amount of investment and

could cause a borrower to be in

technical violation of its loan contract or

mortgage. The paragraph would make it

clear that if a borrower exceeded the 15

percent limit as a result of net profits

earned on the aggregate of its

investments, loans and guarantees

during the past 10 years, the borrower

would not be in default of its loan

contract or mortgage. Net profit would

be calculated by taking the sum of all

profits earned on all transactions during

the past 10 years (including interest

earned on cash accounts, loans, and

similar transactions), and subtracting all

losses experienced on all transactions

during the same period.

Also, under proposed paragraph (d)

RUS would be willing to consider a

borrower’s request to exclude up to the

amount of net profit earned on the

borrower’s investments, loans and

guarantees during the past 10 years.

Such exclusion by RUS may or may not

reduce the borrower’s aggregate

investments, loans and guarantees to or

below the 15 percent limit. If it does

not, the borrower would be required to

restructure or reduce its portfolio to

come within the 15 percent level.

Failure to do so within a timeframe set

by RUS would result, upon written

notice from RUS, in a default by the

borrower.

Section 1717.657 Records, Reports and

Audits

Paragraphs (a), (b) and (c) of proposed

§ 1717.657 are the same substantively as

existing § 1717.655. Proposed paragraph

(a) is the same substantively as existing

paragraph (a) of § 1717.655, and

proposed paragraph (c) is the same

substantively as existing paragraph (b).

Proposed paragraph (b) would combine

existing paragraphs (c) and (d).

Proposed paragraph (d) would be a

new provision. It would clarify that RUS

monitoring of borrower compliance

with this rule will be based primarily on

the annual financial and statistical

reports submitted by borrowers (i.e., the

RUS Forms 7 and 12), and the annual

auditor’s report on borrower operations.

While RUS would ordinarily rely

primarily on these annual reports, all

borrowers would continue to be

obligated to comply with this rule

throughout the entire year. For example,

if a borrower was below the 15 percent

level at the end of the preceding year,

it could not exceed the 15 percent level

during the current year without prior

approval from RUS, unless of course it

was exempt from approval under

proposed § 1717.655.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 8985

Section 1717.658 Effect of Subpart on

RUS Loan Contract and Mortgage

Section 1717.656 of the existing rule

lists several specific provisions of the

RUS mortgage that are not affected by

the rule, as well as the fact that a

supplemental lender’s rights under the

RUS mortgage regarding control of

investments also are not affected by the

rule. These specific provisions were

listed for emphasis only; there being no

intent to imply that other provisions of

the mortgage are somehow affected by

the rule on investment controls.

Furthermore, section 1717.657 of the

existing rule provides that the rule does

not affect a supplemental lender’s rights

under its own loan documentation to

control borrower investments.

Proposed § 1717.658 would combine

and simplify the two existing sections.

Rather than list, for emphasis, specific

provisions of the RUS mortgage that are

not affected by the rule, the proposed

rule would make it clear that it does not

affect any provision, covenant, or

requirement in the RUS mortgage, RUS

loan contract, or any other agreement

between a borrower and RUS with

respect to any matter other than the

prior approval of investments, loans,

and guarantees made by the borrower.

Also, the proposed section would

combine the provisions of the two

existing sections regarding a

supplemental lender’s rights to control

investments not being affected by the

proposed rule.

Appendix A

Existing Appendix A to subpart N

provides several examples of how

certain types of investments, loans, and

guarantees should be reported. In light

of the clarification and additional

guidance that would be provided in the

main body of this proposed rule, as well

as that provided annually in RUS

Bulletins 1717B–2 and 1717B–3, it is

proposed that Appendix A be dropped.

In summary, RUS believes the

proposed changes to subpart N will

clarify RUS’s policies and requirements

on investments, loans and guarantees,

improve compliance, provide better

service to our borrowers by reducing

uncertainty as to what is expected of

them, and improve the utilization of

RUS staff resources.

List of Subject in 7 CFR Part 1717

Administrative practice and

procedure, Electric power, Electric

power rates, Electric utilities,

Intergovernmental relations,

Investments, Loan programs—energy,

Reporting and recordkeeping

requirements, Rural areas.

For the reasons stated, subpart N of 7

CFR 1717 is proposed to be revised as

follows:

PART 1717—POST-LOAN POLICIES

AND PROCEDURES COMMON TO

INSURED AND GUARANTEED

ELECTRIC LOANS

Subpart N—Investments, Loans, and

Guarantees by Electric Borrowers

Sec.

1717.650 Purpose.

1717.651 Policy.

1717.652 Definitions.

1717.653 Transactions below the 15 percent

level.

1717.654 Exclusion of certain investments,

loans, and guarantees.

1717.655 Exemption of certain borrowers

from controls.

1717.656 Investments, loans, and

guarantees in excess of 15 percent of

total utility plant.

1717.657 Records, reports and audits.

1717.658 Effect of this subpart on RUS loan

contract and mortgage.

Subpart N—Investments, Loans, and

Guarantees by Electric Borrowers

Authority: 7 U.S.C. 901–950b; Pub.L. 103–

354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.);

Title I, Subtitle D, Pub.L. 100–203, 101 stat.

1330.

§ 1717.650 Purpose.

This subpart contains the general

regulations of the Rural Utilities Service

(RUS) for implementing and

interpreting the provisions of the Rural

Electrification Act of 1936, as amended,

including section 312 (7 U.S.C. 901 et

seq.) (RE Act), permitting, in certain

circumstances, that borrowers of

insured or guaranteed electric loans

under the RE Act may, without

restriction or prior approval of the

Administrator of RUS, invest their own

funds and make loans or guarantees.

§ 1717.651 Policy.

RUS electric borrowers are

encouraged to utilize their own funds to

participate in the economic

development of rural areas, provided

that such activity does not in any way

put government funds at risk or impair

a borrower’s ability to repay its

indebtedness to RUS and other lenders.

In considering whether to make loans,

investments, or guarantees, borrowers

are expected to act in accordance with

prudent business practices and in

conformity with the laws of the

jurisdictions in which they serve. RUS

assumes that borrowers will use the

latitude afforded them by section 312 of

the RE Act primarily to make needed

investments in rural community

infrastructure projects (such as water

and waste systems, garbage collection

services, etc.) and in job creation

activities (such as providing technical,

financial, managerial assistance) and

other activities to promote business

development and economic

diversification in rural communities.

Nonetheless, RUS believes that

borrowers should continue to give

primary consideration to safety and

liquidity in the management of their

funds.

§ 1717.652 Definitions.

As used in this subpart:

Borrower means any organization that

has an outstanding loan made or

guaranteed by RUS for rural

electrification.

Cash-construction fund-trustee

account means the account described in

the Uniform System of Accounts as one

to which funds are deposited for

financing the construction or purchase

of electric facilities.

Guarantee means to undertake

collaterally to answer for the payment of

another’s debt or the performance of

another’s duty, liability, or obligation,

including, without limitation, the

obligations of subsidiaries. Some

examples of such guarantees include

guarantees of payment or collection on

a note or other debt instrument

(assuring returns on investments);

issuing performance bonds or

completion bonds; or cosigning leases or

other obligations of third parties.

Equity means the Margins and

Equities of the borrower as defined in

the Uniform System of Accounts, less

regulatory created assets.

Invest means to commit money in

order to earn a financial return on

assets, including, without limitation, all

investments properly recorded on the

borrower’s books and records in

investment accounts as those accounts

are used in the Uniform System of

Accounts for RUS Borrowers. Borrowers

may submit any proposed transaction to

RUS for an interpretation of whether the

action is an investment for the purposes

of this definition.

Make loans means to lend out money

for temporary use on condition of

repayment, usually with interest.

Mortgaged property means any asset

of the borrower which is pledged in the

RUS mortgage.

Natural gas distribution system means

any system of community infrastructure

that distributes natural gas and whose

services are available by design to all or

a substantial portion of the members of

the community.

Operating DSC means Operating Debt

Service Coverage (ODSC) calculated as:
8986 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

ODSC A B C

D = + +

where:

A = Depreciation and Amortization

Expense;

B = Interest on Long-term Debt, except

that Interest on Long-term Debt

shall be increased by 1⁄3 of the

amount, if any, by which the rentals

of Restricted Property exceed 2

percent of Total Margins and

Equities;

C = Patronage Capital & Operating

Margins (distribution borrowers) or

Operating Margins (power supply

borrowers); and

D = Debt Service Billed (RUS + other)

which equals all interest and

principal billed during the calendar

year plus 1⁄3 of the amount, if any,

by which the rentals of Restricted

Property exceed 2 percent of Total

Margins and Equities. Unless

otherwise indicated, all terms used

in defining ODSC and OTIER are as

defined in RUS Bulletin 1717B–2

Instructions for the Preparation of

the Financial and Statistical Report

for Electric Distribution Borrowers,

and RUS Bulletin 1717B–3

Instructions for the Preparation of

the Operating Report for Power

Supply Borrowers and for

Distribution Borrowers with

Generating Facilities, or the

successors to these bulletins.

Operating TIER means Operating

Times Interest Earned Ratio (OTIER)

calculated as:

OTIER

A B

A = +

where:

A = Interest on Long-term Debt, except

that Interest on Long-term Debt

shall be increased by 1⁄3 of the

amount, if any, by which the rentals

of Restricted Property exceed 2

percent of Total Margins and

Equities; and

B = Patronage Capital & Operating

Margins (distribution borrowers) or

Operating Margins (power supply

borrowers).

Own funds means money belonging to

the borrower other than the proceeds of

loans made or guaranteed by RUS. Such

proceeds include, but are not limited to,

all funds on deposit in the cashconstruction fund-trustee account.

Regulatory created assets means the

sum of the amounts properly recordable

in Account 182.2 Unrecovered Plant

and Regulatory Study Costs, and

Account 182.3 Other Regulatory Assets

of the Uniform System of Accounts.

RUS means the Rural Utilities

Service, an agency of the U.S.

Department of Agriculture established

pursuant to Section 232 of the Federal

Crop Insurance Reform and Department

of Agriculture Reorganization Act of

1994 (Pub. L. 103–354, 108 Stat. 3178,

7 U.S.C. 6941 et seq.) and, for purposes

of this subpart, includes its predecessor,

the Rural Electrification Administration.

RUS mortgage means any and all

instruments creating a lien on or

security interest in the borrower’s assets

in connection with loans or guarantees

under the RE Act.

RUS loan contract means the loan

contract between the borrower and RUS.

Solid waste disposal system means

any system of community infrastructure

that provides collection and/or disposal

of solid waste and whose services are

available by design to all or a substantial

portion of the members of the

community.

Subsidiary means a company which is

controlled by the borrower through

ownership of voting stock, and is further

defined in 7 CFR 1767.10.

Supplemental lender means a lender

that has provided a supplemental source

of financing that is secured by the RUS

mortgage.

Telecommunication and other

electronic communication system means

any community infrastructure that

provides telecommunication or other

electronic communication services and

whose services are available by design

to all or a substantial portion of the

members of the community.

Total assets means the total assets of

the borrower as calculated according to

the Uniform System of Accounts, less

regulatory created assets.

Total utility plant means the sum of

the borrower’s Electric Plant Accounts

and Construction Work in Progress—

Electric Accounts, as such terms are

used in the Uniform System of

Accounts.

Uniform System of Accounts means

the system of accounts prescribed for

RUS borrowers in 7 CFR part 1767.

Water and waste disposal system

means any system of community

infrastructure that supplies water and/or

collects and treats waste water and

whose services are available by design

to all or a substantial portion of the

members of the community.

§ 1717.653 Transactions below the 15

percent level.

(a) A borrower in compliance with all

provisions of its RUS mortgage, RUS

loan contract, and any other agreement

with RUS may, without prior written

approval of the Administrator, invest its

own funds or make loans or guarantees

not in excess of 15 percent of its total

utility plant without regard to any

provision contained in any RUS

mortgage or RUS loan contract to the

effect that the borrower must obtain

prior approval from RUS. However,

funds necessary to make timely

payments of principal and interest on

loans secured by the RUS mortgage

remain subject to RUS controls on

borrower investments, loans and

guarantees.

(b) RUS will require that any electric

loan made or guaranteed by RUS after

[Date 30 days after the final rule is

published in the Federal Register] shall

be subject to a provision in the loan

contract or mortgage restricting

investments, loans and guarantees by

the Borrower substantially as follows:

The borrower may, to the extent

permitted by this subpart, invest its own

funds or make loans or guarantees not

in excess of 15 percent of its total utility

plant, as those terms are used in said

subpart.

(c) RUS will not consider requests

from borrowers to approve or exclude

investments, loans, or guarantees made

below the 15 percent level. (Categorical

exclusions are set forth in 1717.654.)

§ 1717.654 Exclusion of certain

investments, loans, and guarantees.

(a) In calculating the amount of

investments, loans and guarantees

permitted under this subpart, there is

excluded from the computation any

investment, loan or guarantee of the

type which by the terms of the

borrower’s RUS mortgage or RUS loan

contract the borrower may make in

unlimited amounts without RUS

approval.

(b) Furthermore, the borrower may

make unlimited investments, without

prior approval of the Administrator, in:

(1) Securities or deposits issued,

guaranteed or fully insured as to

payment by the United States

Government or any agency thereof;

(2) Capital term certificates, bank

stock, or other similar securities of the

supplemental lender which have been

purchased as a condition of membership

in the supplemental lender, or as a

condition of receiving financial

assistance from such lender, as well as

any other investment made in, or loans

made to, the National Rural Utilities

Cooperative Finance Corporation or the

National Bank for Cooperatives;

(3) Patronage capital allocated from a

power supply cooperative of which the

borrower is a member.

(c) Without prior approval of the

Administrator, the borrower may also:

(1) Invest or lend funds derived

directly from grants received from, or

loans made or guaranteed by, an agency

of the U.S. Department of Agriculture
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 8987

(USDA) for the purposes specifically

authorized in such grants or loans;

(2) Make loans guaranteed by an

agency of USDA, up to the amount of

principal whose repayment, with

interest, is fully guaranteed; and

(3)(i) Make unlimited investments in

and unlimited loans to finance the

following community infrastructure

located within its service territory, and

guarantee debt issued by such entities

up to an aggregate amount of such

guarantees not to exceed 20 percent of

the borrower’s equity:

(A) Water and waste disposal systems;

(B) Solid waste disposal systems;

(C) Telecommunication and other

electronic communication systems; and

(D) Natural gas distribution systems.

(ii) In each of the four cases in

paragraph (c)(3)(i) of this section, if the

system is a component of a larger

organization other than the borrower

itself (e.g., if it is a component of a

subsidiary of the borrower or a

corporation independent of the

borrower), to be eligible for the

exemption the borrower must certify

annually that either a majority of the

assets of the larger organization were

invested in said system at the end of the

most recent fiscal year, or that a

majority of the revenues of the larger

organization came from said system

during the most recent fiscal year.

(d) Also excluded from the

calculation of investments, loans and

guarantees made by the borrower are:

(1) Amounts properly recordable in

Account 142 Customer Accounts

Receivable, and Account 143 Other

Accounts Receivable;

(2) Any investment, loan, or guarantee

that the borrower is required to make by

an agency of USDA, for example, as a

condition of obtaining financial

assistance for itself or any other person

or organization;

(3) Investments included in an

irrevocable trust for the purpose of

funding post-retirement benefits of the

borrower’s employees; and

(4) Reserves required by a reserve

bond agreement or other agreement

legally binding on the borrower, that are

dedicated to making required payments

on debt secured under the RUS

mortgage, not to exceed the amount of

reserves specifically required by such

agreements.

(e) Grandfathered exclusions. All

amounts excluded by RUS from the

calculation of the aggregate amount of

investments, loans and guarantees as of

February 16, 1995 shall remain

excluded. Such exclusions must have

been based on the RUS mortgage, RUS

loan contract, regulations, bulletins,

memoranda, or other written notice

from RUS. Profits, interest, and other

returns earned (regardless of whether or

not they are reinvested) on such

investments, loans and guarantees after

February 16,1995 shall be excluded only

if they are eligible for exclusion under

paragraphs (a) through (d) of this

section. Any new commitments of

money to such investments, loans and

guarantees shall likewise be excluded

only if they are eligible under

paragraphs (a) through (d) of this

section.

(f) Any investment, loan or guarantee

made by a borrower that is not excluded

under this section or under

§ 1717.656(d) shall be included in the

aggregate amount of investments, loans

and guarantees made by the borrower,

regardless of whether RUS has

specifically approved the investment,

loan or guarantee under § 1717.656(c),

or has approved a related transaction

(e.g., a related contract or lien

accommodation).

§ 1717.655 Exemption of certain borrowers

from controls.

(a) Any distribution or power supply

borrower that meets all of the following

criteria is exempted from the provisions

of the RUS mortgage and loan contract

that require RUS approval of

investments, loans, and guarantees

made by the borrower:

(1) The borrower is in compliance

with all provisions of its RUS mortgage,

RUS loan contract, and any other

agreement with RUS;

(2) The average revenue per kWh for

residential service received by the

borrower during the two most recent

calendar years does not exceed 130

percent of the average revenue per kWh

for residential service during the same

period for all residential consumers

located in the state or states served by

the borrower. This criterion applies only

to distribution borrowers and does not

apply to power supply borrowers. If a

borrower serves customers in more than

one state, the state average revenue per

kWh will be based on a weighted

average using the kWh sales by the

borrower in each state as the weight.

The calculation will be based on the two

most recent calendar years for which

both borrower and state-wide data are

available. If a borrower fails to qualify

for an exemption based solely on its

failure to meet this criterion on rate

disparity, at the borrower’s request the

Administrator may at his sole discretion

exempt the borrower if he finds that the

borrower’s strengths with respect to the

other criteria are sufficient to offset any

weakness due to rate disparity;

(3) In the most recent calendar year

for which data are available, the

borrower achieved an operating TIER of

at least 1.0 and an operating DSC of at

least 1.0, in each case based on the

average of the two highest ratios

achieved in the three most recent

calendar years;

(4) The borrower’s ratio of net utility

plant to long-term debt is at least 1.1,

based on year-end data for the most

recent calendar year for which data are

available; and

(5) The borrower’s equity is equal to

at least 27 percent of its total assets,

based on year-end data for the most

recent calendar year for which data are

available.

(b) While borrowers meeting the

criteria in paragraph (a) of this section

are exempt from RUS approval of

investments, loans and guarantees, they

are nevertheless subject to the recordkeeping, reporting, and other

requirements of § 1717.657.

(c) Any borrower exempt under

paragraph (a) of this section that ceases

to meet the criteria for exemption shall,

upon written notice from RUS, no

longer be exempt and shall be subject to

all provisions of this subpart applicable

to non-exempt borrowers. A borrower

may regain its exemption if it

subsequently meets the criteria in

paragraph (a) of this section, and is so

notified in writing by RUS.

(d) If a borrower loses its exemption

and the aggregate of investments, loans

and guarantees of such borrower

exceeds 15 percent of total utility plant,

the borrower will be required to reduce

or restructure its portfolio (e.g., divest or

shift some investments to excluded

investments) in order to come within

the 15 percent level. (However, such

borrower is eligible to ask RUS to

exclude a portion of its investments

under the conditions set forth in

§ 1717.656(d).) If the borrower does not

come within the 15 percent level within

a reasonable period of time determined

by the Administrator, which shall not

exceed 12 months from the date the

borrower was notified of its loss of

exemption, then, upon written notice

from RUS, the borrower shall be in

default of its RUS loan contract and/or

RUS mortgage.

(e) By no later than May 1 of each

year, RUS will provide written notice to

any borrowers whose exemption status

has changed as a result of more recent

data being available for the qualification

criteria set forth in paragraph (a) of this

section, or as a result of other reasons,

such as corrections in the available data.

An explanation of the reasons for any

changes in exemption status will also be

provided to the borrowers affected.
8988 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

§ 1717.656 Investments, loans, and

guarantees in excess of 15 percent of total

utility plant.

(a) General. This section applies only

to borrowers that are subject to

Administrator approval of investments,

loans and guarantees made above the 15

percent limit, i.e., borrowers that do not

meet the exemption criteria in

§ 1717.655(a).

(b) Distribution borrowers.

Distribution borrowers subject to

Administrator approval of investments,

loans and guarantees will not be given

approval to make investments, loans

and guarantees in an aggregate amount

in excess of 15 percent of total utility

plant. Above the 15 percent level, such

borrowers will be restricted to excluded

investments, loans and guarantees as

defined in § 1717.654. (However, they

are eligible to ask RUS to exclude a

portion of their investments under the

conditions set forth in paragraph (d) of

this section.)

(c) Power supply borrowers. (1) Power

supply borrowers subject to

Administrator approval of investments,

loans and guarantees may request

approval to exceed the 15 percent level

if all of the following criteria are met:

(i) The borrower is in compliance

with all provisions of its RUS mortgage,

RUS loan contract, and any other

agreement with RUS;

(ii) The borrower is not in financial

workout and has not had its government

debt restructured;

(iii) The borrower has equity equal to

at least 5 percent of its total assets; and

(iv) After approval of the investment,

loan or guarantee, the aggregate of the

borrower’s investments, loans and

guarantees will not exceed 20 percent of

the borrower’s total utility plant.

(2) Borrower requests for approval to

exceed the 15 percent level will be

considered on a case by case basis. The

requests must be made in writing.

(3) In considering borrower requests,

the Administrator will take the

following factors into consideration:

(i) The repayment of all loans secured

under the RUS mortgage will continue

to be assured, and loan security must

continue to be reasonably adequate,

even if the entire investment or loan is

lost or the borrower is required to

perform for the entire amount of the

guarantee. These risks will be

considered along with all other risks

facing the borrower, whether or not

related to the investment, loan or

guarantee;

(ii) In the case of investments, the

investment must be made in an entity

separate from the borrower, such as a

subsidiary, whereby the borrower is

protected from any liabilities incurred

by the separate entity, unless the

borrower demonstrates to the

satisfaction of the Administrator that

making the investment directly rather

than through a separate entity will

present no substantial risk to the

borrower in addition to the possibility

of losing all or part of the original

investment;

(iii) The borrower must be

economically and financially sound as

indicated by its costs of operation,

competitiveness, operating TIER and

operating DSC, physical condition of the

plant, ratio of equity to total assets, ratio

of net utility plant to long-term debt,

and other factors; and

(iv) Other factors affecting the security

and repayment of government debt, as

determined by the Administrator on a

case by case basis.

(4) If the Administrator approves an

investment, loan or guarantee, such

investment, loan or guarantee will

continue to be included when

calculating the borrower’s ratio of

aggregate investments, loans and

guarantees to total utility plant.

(d) Distribution and power supply

borrowers. If the aggregate of the

investments, loans and guarantees of a

distribution or power supply borrower

exceeds 15 percent of the borrower’s

total utility plant as a result of the

cumulative profits or margins, net of

losses, earned on said transactions over

the past 10 calendar years (i.e., the sum

of all profits earned during the 10 years

on all transactions—including interest

earned on cash accounts, loans, and

similar transactions—less the sum of all

losses experienced on all transactions

during the 10 years) then:

(1) The borrower will not be in default

of the RUS loan contract or RUS

mortgage with respect to required

approval of investments, loans and

guarantees, provided that the borrower

had not made additional net

investments, loans or guarantees

without approval after reaching the 15

percent level; and

(2) At the request of the borrower, the

Administrator in his sole discretion may

decide to exclude up to the amount of

net profits or margins earned on the

borrower’s investments, loans and

guarantees during the past 10 calendar

years, if the Administrator determines

that such exclusion will not increase

loan security risks. The borrower must

provide documentation satisfactory to

the Administrator as to the current

status of its investments, loans and

guarantees and the net profits earned

during the past 10 years. Any exclusion

approved by the Administrator may or

may not reduce the level of investments,

loans and guarantees to or below the 15

percent level. If such exclusion does not

reduce the level to or below the 15

percent level, RUS will notify the

borrower in writing that it must reduce

or restructure its investments, loans and

guarantees to a level of not more than

15 percent of total utility plant. If the

borrower does not come within the 15

percent level within a reasonable period

of time determined by the

Administrator, which shall not exceed

12 months from the date the borrower

was notified of the required action,

then, upon written notice from RUS, the

borrower shall be in default of its RUS

loan contract and mortgage.

§ 1717.657 Records, reports and audits.

(a) Every borrower shall maintain

accurate records concerning all

investments, loans and guarantees made

by it. Such records shall be kept in a

manner that will enable RUS to readily

determine:

(1) The nature and source of all

income, expenses and losses generated

from the borrower’s loans, guarantees

and investments;

(2) The location, identity and lien

priority of any loan collateral resulting

from activities permitted by this

subpart; and

(3) The effects, if any, which such

activities may have on the feasibility of

loans made, guaranteed or lien

accommodated by RUS.

(b) In determining the aggregate

amount of investments, loans and

guarantees made by a borrower, the

borrower shall use the recorded value of

each investment, loan or guarantee as

reflected on its books and records for

the next preceding end-of-month, except

for the end-of-year report which shall be

based on December 31 information.

Every borrower shall also report

annually to RUS, in the manner and on

the form specified by the Administrator,

the current status of each investment,

outstanding loan and outstanding

guarantee which it has made pursuant

to this subpart.

(c) The records of borrowers shall be

subject to the auditing procedures

prescribed in part 1773 of this chapter.

RUS reserves the right to review the

financial records of any subsidiaries of

the borrower to determine if the

borrower is in compliance with this

subpart, and to ascertain if the debts,

guarantees (as defined in this subpart),

or other obligations of the subsidiaries

could adversely affect the ability of the

borrower to repay its debts to the

Government.

(d) RUS will monitor borrower

compliance with this subpart based

primarily on the annual financial and

statistical report submitted by the
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 8989

borrower to RUS and the annual

auditor’s report on the borrower’s

operations. However, RUS may inspect

the borrower’s records at any time

during the year to determine borrower

compliance. If a borrower’s most recent

annual financial and statistical report

shows the aggregate of the borrower’s

investments, loans and guarantees to be

below the 15 percent level, that in no

way relieves the borrower of its

obligation to comply with its RUS

mortgage, RUS loan contract, and this

subpart with respect to Administrator

approval of any additional investment,

loan or guarantee that would cause the

aggregate to exceed the 15 percent level.

§ 1717.658 Effect of this subpart on RUS

loan contract and mortgage.

(a) Nothing in this subpart shall affect

any provision, covenant, or requirement

in the RUS mortgage, RUS loan contract,

or any other agreement between a

borrower and RUS with respect to any

matter other than the prior approval by

RUS of investments, loans, and

guarantees made by the borrower. Also,

nothing in this subpart shall affect any

rights which supplemental lenders have

under the RUS mortgage, or under their

loan contracts or other agreements with

their borrowers, to limit investments,

loans and guarantees by their borrowers

to levels below 15 percent of total utility

plant.

(b) RUS reserves the right to change

the provisions of the RUS mortgage and

loan contract relating to RUS approval

of investments, loans and guarantees

made by the borrower, on a case-by-case

basis, in connection with providing

additional financial assistance to a

borrower after [Date 30 days after the

final rule is published in the Federal

Register].

Dated: February 7, 1995.

Bob J. Nash,

Under Secretary, Rural Economic and

Community Development.

[FR Doc. 95–3665 Filed 2–15–95; 8:45 am]

BILLING CODE 3410–15–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Parts 101, 111, 170, and 310

[Docket Nos. 91P–0186 and 93P–0306]

Iron-Containing Supplements and

Drugs; Label Warning Statements and

Unit-Dose Packaging Requirements

AGENCY: Food and Drug Administration,

HHS.

ACTION: Supplemental proposed rule.

SUMMARY: The Food and Drug

Administration (FDA) is issuing a

supplemental proposed rule to set forth

its legal authority, after the passage of

the Dietary Supplement Health and

Education Act (DSHEA), to require unitdose packaging of iron-containing

dietary supplements that contain 30

milligrams (mg) or more iron per dosage

unit. On October 6, 1994, the agency

proposed this packaging requirement as

part of a broader proposal to require

unit-dose packaging of all ironcontaining products in solid oral dosage

form containing 30 mg or more iron per

dosage unit and to require label warning

statements on all iron-containing

products in solid oral dosage form. The

agency’s authority to establish the

labeling requirements and the packaging

requirements for iron-containing

products other than dietary

supplements (i.e., iron-containing

drugs) is unaffected by the DSHEA. To

ensure that there is adequate time to

comment on this supplemental

proposed rule, as well as on the issues

raised by the initial proposal, FDA is

reopening the comment period for this

rulemaking until April 17, 1995.

DATES: Written comments to the initial

proposal (published at 59 FR 51030,

October 6, 1994) and this supplemental

proposal by April 17, 1995. The agency

is proposing that any final rule that may

be issued based upon this proposal

become effective 180 days after its

publication in the Federal Register.

ADDRESSES: Submit written comments

to the Dockets Management Branch

(HFA–305), Food and Drug

Administration, rm. 1–23, 12420

Parklawn Dr., Rockville, MD 20857.

FOR FURTHER INFORMATION CONTACT: John

N. Hathcock, Center for Food Safety and

Applied Nutrition (HFS–465), Food and

Drug Administration, 8301 Muirkirk

Rd., Laurel, MD 20708, 301–594–6006.

SUPPLEMENTARY INFORMATION:

I. Background

In the Federal Register of October 6,

1994 (59 FR 51030), FDA issued a

proposal on actions that it tentatively

concluded were necessary to stem the

recent epidemic of pediatric poisonings

from accidental overdoses of ironcontaining products. The available

evidence shows that since the mid

1980’s, there has been an upsurge in

reported accidental pediatric poisonings

from ingestion of iron-containing

products (59 FR 51030). This upsurge in

poisonings, and the many resultant

injuries and deaths of children, have

created a dilemma with respect to how

to ensure that iron sources are available

while still minimizing the risks to

children.

To protect children, FDA proposed

two new requirements: First, to ensure

that consumers are fully informed about

the consequences of consuming ironcontaining products, FDA proposed to

require a warning statement about the

adverse effects of acute, high-dose iron

ingestion by children to be included in

the labeling of all iron-containing

products in solid oral dosage form. FDA

found that the fact that poisonings

continue to occur, even though there

have been at least 37 deaths from

accidental iron ingestion, strongly

suggests that many adults are not aware

of the potential for serious harm or

death in young children from accidental

ingestion of iron-containing products.

Support for this finding is provided by

statements made by the parents of the

victims in several of the poisoning

incidents, described in the case reports

obtained from the U.S. Consumer

Product Safety Commission (CPSC).

FDA proposed that this requirement

apply to iron-containing drugs and

dietary supplements based on its

authority under sections 201(n),

403(a)(1), 502(a), and 701(a) of the

Federal Food, Drug, and Cosmetic Act

(the act) (21 U.S.C. 321(n), 343(a)(1),

352(a), and 371(a)). Under section

403(a)(1) of the act, a food is

misbranded if its labeling is false or

misleading in any particular. Section

502(a) of the act establishes the same

rule for drugs. Section 201(n) of the act

states:

If an article is alleged to be misbranded

because the labeling or advertising is

misleading, then in determining whether the

labeling or advertising is misleading there

shall be taken into account (among other

things) not only representations made or

suggested by statement, word, design, device,

or any combination thereof, but also the

extent to which the labeling or advertising

fails to reveal facts material in the light of

such representations or material with respect

to consequences which may result from the

use of the article to which the labeling or

advertising relates under the conditions of

use prescribed in the labeling or advertising

thereof or under such conditions of use as are

customary or usual.

These statutory provisions, combined

with section 701(a) of the act, which

grants the agency authority to issue

regulations for the efficient enforcement

of the act, clearly authorize FDA to issue

a regulation designed to ensure that

persons using iron-containing drugs and

dietary supplements will receive

information that is material with respect

to consequences that may result from

the use of the product.