In 1935, the Rural Electrification Administration was created by executive order to make loans to electrify rural America. RUS was established by the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 to replace this agency and now administers the electricity program. It is located in USDA’s Rural Development mission area. RUS’ loans for electricity purposes are made primarily to nonprofit cooperatives. Cooperatives are organizations owned by their customers and operated for the benefit of those using their services. The customers elect boards of directors responsible for policy and operations. Most RUS- financed utility systems have a two-tiered structure covering electricity distribution and power supply. Retail customers are members of the distribution cooperative that provides electricity directly to their homes and businesses. Most distribution cooperatives, in turn, are members of power supply cooperatives, which generate and transmit electricity to their members. Currently, RUS makes three types of direct loans for electricity purposes. These direct loans are (1) hardship rate loans with a 5 percent interest rate made to borrowers that have a relatively high cost of providing service, as indicated by a high average revenue per kilowatt-hour sold, and that serve customers with below-average income, or at the discretion of RUS’ Administrator; (2) municipal rate loans with an interest rate tied to an index of municipal borrowing rates, resulting in interest rates ranging from 1.1 percent to 4.6 percent during the first quarter of calendar year 2004; and (3) Treasury rate loans with an interest rate matching the government’s cost of money, which ranged from 1.2 percent to 4.4 percent in mid-March 2004. In addition to making direct loans, RUS places a USDA 100 percent repayment guarantee on loans made by the Treasury’s Federal Financing Bank, which makes loans at an interest rate equal to the Treasury’s cost of money plus one-eighth of 1 percent, as well as on loans made by CFC and by CoBank—a member bank of the Farm Credit System, which is a government-sponsored enterprise. Most borrowers seeking a loan guaranteed by RUS choose to have the loan made by the Federal Financing Bank because of lower interest rates than those available from the other lenders. The outstanding principal owed by borrowers with RUS direct and guaranteed loans totaled $28.3 billion as of September 30, 2003: $9.5 billion in direct loans, $15.3 billion in guaranteed loans made by the Federal Financing Bank, $0.4 billion in guaranteed loans made by CFC, $0.2 billion in guaranteed loans made by CoBank, and $2.9 billion in restructured loans. During fiscal years 1999 through 2003, RUS made or provided guarantees on 936 electricity loans, which totaled more than $14.3 billion. Table 1 shows the level of loans for each type of electricity loan. As we have reported in the past, RUS has had problems with some borrowers. During fiscal years 1999 through 2003, RUS wrote off more than $3.2 billion on loans to three borrowers—$3 billion and $73.2 million for two borrowers under bankruptcy liquidation and $159.3 million for a borrower with unsecured debt. Also, it wrote off $7.2 million for another borrower that had been restructured. The Rural Business-Cooperative Service, which like RUS, is in USDA’s Rural Development mission area, operates loan and grant programs that are intended to assist in the business development of the nation’s rural areas and the employment of rural residents. Among these programs is the rural economic development program, which is authorized by section 313 of the RE Act, 7 U.S.C. § 940c. Under the program, the Rural Business- Cooperative Service makes direct loans to entities that have outstanding RUS electricity or telecommunications loans or to former RUS borrowers that repaid their electricity loans early at a discount. Rural economic development loans are not available to former RUS borrowers that repaid their loans with scheduled payments. All rural economic development loans are made for relending, and the loan funds are targeted to specific projects. Rural economic development loan funds are deposited into a fund that a RUS borrower has established, and the RUS borrower then relends the money to other borrowers, which may be any public or private organization or other legal entity, for an economic development and job creation project. Such projects include new business creation, existing business expansion, community improvements, and infrastructure development. Rural economic development loan funds, however, cannot be used for certain purposes, including the RUS borrowers’ electricity or telecommunications operations or a community’s television system or facility, unless tied to an educational or medical project. The Rural Business-Cooperative Service also provides rural economic development grants to RUS utility borrowers to establish revolving loan funds to promote economic development in rural areas. The revolving loan funds provide capital to nonprofit entities and municipal organizations to finance community facilities that promote job creation or education and training to enhance a marketable job skill or that extend or improve medical care. An unusual source of funding is available for rural economic development loans and grants. The RE Act provides that RUS’ electricity and telecommunications borrowers can make advance payments on their RUS loans, referred to as “cushion-of-credit” payments, and earn interest at a rate of 5 percent on the advance payments. The Rural Business- Cooperative Service is allowed to use the differential between the earnings on these advance payments and the 5 percent interest to cover the subsidy costs of rural economic development loans and the cost of rural economic development grants. During fiscal years 1999 through 2003, the Rural Business-Cooperative Service made 233 rural economic development loans, which totaled $82.5 million. Also, 117 rural economic development grants were made, which totaled $24.6 million. On average, the loan amounts were about $354,000 and the grant amounts were about $211,000. The outstanding principal owed by borrowers with rural economic development loans totaled $155.2 million as of September 30, 2003. Although the RE Act requires that borrowers serve rural areas, RUS borrowers serve not only rural areas but also highly populated metropolitan areas. This situation results from RUS applying its “once a borrower, always a borrower” standard, which allows borrowers to continuously receive RUS assistance regardless of the extent of population increases within their service territories. Since the electricity program began in the 1930s, substantial population growth has occurred in the areas served by many RUS borrowers. We analyzed the areas served by the 530 distribution borrowers that received RUS loans or guarantees on loans between October 1, 1998, and September 30, 2003. These borrowers serve customers in part or all of 1,988 counties in 46 states, and they received 864 RUS loans or guarantees on loans during this period valued at almost $9 billion. Overall, RUS distribution borrowers provide service in more than half the counties in the country that are classified as metropolitan. In general, these metropolitan areas contain a substantial core population, together with adjacent communities having a high degree of social and economic integration with the core. About 29 percent, or 581 of the 1,988 counties served partly or completely by RUS borrowers, are in metropolitan areas; and, in fact, 9.4 percent, or 187 of the 1,988 counties, are in metropolitan areas with populations of 1 million or more. The following examples illustrate cooperatives whose service territories include highly populated areas. Three cooperatives that received loans during the fiscal year 1999 through 2003 period provide electricity in the immediate vicinity of Atlanta, Georgia. These three borrowers received a total of more than $400 million of loans during this period. A Maryland electric distribution cooperative that serves approximately 115,000 residential customers in four counties in the vicinity of Washington, D.C., received over $25 million in loans in fiscal years 1999 and 2001. Three of these counties are in a metropolitan area with a population of more than 1 million people. A Florida cooperative that serves roughly 150,000 customers in parts of five counties that are located to the north of Tampa received RUS loans in fiscal years 2000 and 2002 totaling $66 million. Four of these counties have a population of more than 100,000 residents, including two with a population of more than 300,000. On the other hand, about 24 percent, or 485 of the 1,988 counties served by RUS borrowers are completely rural or have only nominal urban populations. The remaining counties are in nonmetropolitan areas, but with urban populations of 2,500 or more. Table 2 shows the classifications of the counties being served partly or completely through RUS electricity loans. RUS officials pointed out that many metropolitan areas contain rural sections. In addition, they agreed that its borrowers now provide service to a mix of areas including rural areas and heavily populated areas, and that many of its borrowers would not meet the population criterion of the RE Act if it were applied. RUS officials also told us that they had drafted legislation consistent with the President’s fiscal year 2005 budget, which would require borrowers to recertify that they are serving rural areas, rather than urban or suburban areas. RUS estimated that guarantees on lenders’ debt under the 2002 Farm Bill provision could result in losses of up to $1.5 billion on guarantees of $3 billion, although RUS does not expect such losses. RUS officials believe that while risks are involved, losses are unlikely given the past stability of both the electricity market and the lender that might receive the guarantees. In return for taxpayers assuming the risks of guaranteeing payment on $3 billion of debt, we estimated that the fees paid on the guarantees would only fund $15 million in rural economic development loans and grants annually.