Financial tool for competitiveness: the Cooperative Finance Corporation (CFC).

We at the National Rural Utilities Cooperative Finance Corporation (CFC) believe that the strategic decisions made by directors of electric cooperatives in the next few years will be critical to the long-term success and visibility of the electric cooperative program. Directors will be called upon to make far reaching decisions that will position electric cooperatives for an increasingly competitive environment. We have no doubt that co-ops can compete and will succeed. But this success will require that the entire electric co-op family work together and build on our strengths.

Financing is the last thing your electric cooperative should have to worry about as the electric utility industry enters a period that many believe will result in profound changes. CFC is itself a cooperative - owned and controlled by the nation's electric cooperatives. CFC is also an $8.5 billion financing powerhouse with a solid "double A" credit rating. This credit rating is maintained year in and year out, based on the collective financial strength of electric cooperatives, the equity investments made in CFC by electric cooperatives and the strength that comes from the geographic diversity gained because CFC's members are located in every region of the country.

CFC exists only to serve electric cooperatives and to help you to be successful. You are CFC's only owners and your success is the sole focus of all of our efforts. CFC works to provide your cooperative with the lowest cost private capital and expert strategic services to assist your cooperative in positioning itself for the future. CFC's vision is to earn the distinction of being your most important financial partner.

What business is your cooperative in and what business should it be in the future? That is perhaps the first question that co-op boards should consider as the electric utility industry enters a period of significant change. This change will create both serious threats and enormous opportunities for electric cooperatives.

Nobody knows for certain what specific changes will evolve. Some cooperatives welcome the opportunities that restructuring could bring, while others strongly oppose these potential changes. Whatever approach your cooperative takes on the policy question of whether restructuring is positive or negative, inevitable or unlikely, CFC believes that it would be wise from a business perspective to take a "no regrets" approach and implement those changes that will make sense whether or not electric utility restructuring, along the lines already adopted by some states, is enacted in your state or by the U.S. Congress.

There are significant challenges in each of the traditional components of the electric utility industry and in each of these areas CFC is committed to working with cooperatives to find solutions that fit the unique needs of each cooperative.

GENERATION

This sector is rapidly becoming the most competitive segment of the electric utility business as there is a movement toward market-based pricing rather than traditional cost-based regulated pricing.

Wholesale power prices are being driven down, in part, by competition from lower cost non-utility generators. Utilities are preparing for competition by cutting costs, and, in the case of several generation and transmission cooperatives (G&Ts), seeking much needed debt restructuring.

There is very little doubt that future success in the electric generation business will require competitive pricing. High cost generators - whether they are co-ops, IOUs or non-utility entities - are likely to experience severe financial stress until they become cost competitive by restructuring their financing, paying down their debt, slashing costs, renegotiating high cost contracts, or otherwise eliminating or minimizing competitive or "stranded" costs.

CFC is playing a key role in working with several of our financially troubled G&T members, in partnership with the Rural Utilities Service (RUS). A few of these work-out arrangements have already been completed and include terms that maximize the return to the Government while leaving the G&T with competitive rates in the future. In some of these instances CFC has provided the financing required by RUS for the G&T to repay its RUS obligations. CFC believes that these efforts are positive for all parties involved, provided that the G&T achieves rate competitiveness and that its distribution members are committed to the business plan of their G&T. This commitment of distribution systems can be reflected in a variety of ways, for example, distribution system guarantees of G&T debt or loans to the distribution system to repay G&T obligations.

TRANSMISSION

The Federal Energy Regulatory Commission (FERC) has recently taken bold steps to ensure that the nation's transmission facilities will be operated in an open access manner. The authority for these FERC actions are included in the Energy Policy Act of 1992 which authorizes FERC to prohibit utilities from restructuring the use of their available transmission capacity. The authorities contained in the 1992 Act were sought for decades by electric cooperatives as a way of preventing the abuse of monopoly power by investor-owned utilities (IOUs) that own most of the nation's transmission facilities. Cooperatives sought these open access requirements as a means of requiring IOUs to wheel power over their transmission lines that cooperatives may purchase from lower cost sources than the transmitting utility.

The 1992 Act also subjects cooperatives that own transmission facilities to potentially being forced to open these facilities to others. Therefore, if your cooperative is currently, or decides that it wishes to be, in the transmission business, the cooperative will also be potentially subject to FERC requirements. This is true whether or not your cooperative is an RUS borrower, although there may be different filing and other requirements for non-RUS borrowers as compared to RUS borrowers. FERC regulation of a cooperative is not necessarily a negative to be avoided at all costs, but it is a factor to be considered as your cooperative decides whether it wishes to be in the transmission business.

Fear or lack of trust is common whenever a cooperative or other utility is faced with a new set of regulatory requirements. This is certainly true for some cooperatives in the case of FERC regulation. However, FERC has shown that it is very willing to grant waivers in many cases involving cooperatives and other small utilities.

Because of the concern of many cooperatives regarding FERC regulation of non-RUS borrowers, CFC is committed to providing staff expertise and other assistance to 100% CFC borrowers in meeting their FERC requirements.

DISTRIBUTION

There has been much discussion recently that "distribution" is really not just one business, but it involves at least two separate services - a "wires" function and an "energy services" function. These two services could then be further "unbundled."

We at CFC believe that the "wires" function is likely to remain a monopoly service in which utilities, including cooperatives, build, operate and maintain distribution facilities in much the same manner that they do today. This "wires" function is not likely to be subject to competition from entities that construct duplicate facilities because such duplication would involve wasteful and costly expenditures as well as public safety, esthetic and environmental concerns.

Because the "wires" function is likely to remain a monopoly service, we believe that distribution cooperatives will continue to face hostile actions by IOUs and municipal electric systems that seek to acquire all or part of a co-op's "wires" service territory. CFC offers grants through its CFC Integrity Fund to assist cooperatives to fight hostile territorial actions. In the 10 years since the creation of the CFC Integrity Fund, CFC has assisted 125 cooperatives and provided nearly $5 million in grants. The Integrity Fund is supported by cooperatives who voluntarily contribute a portion of their annual CFC patronage capital refund to the Integrity Fund. CFC also provides grants to electric cooperative statewide associations to promote cooperative education.

In some areas of the country, as investor-owned utilities begin to focus on the core businesses they want to be in, some will undoubtedly decide to abandon their rural properties in order to focus on more profitable urban centers. The early signs of this are already apparent in the actions of IOUs that are closing district offices and curtailing maintenance of rural facilities. A similar pattern may emerge among municipalities who decide that a rural co-op can do a better job of providing reliable electric service to a community, while permitting the municipal government to focus on services, like schools, public safety, and others that are core municipal services. All of these trends present opportunities for electric cooperatives to acquire territories that may not be attractive to urban utilities, but which are quite beneficial to lower density cooperatives. CFC is actively assisting electric cooperatives to pursue these opportunities. We have completed more than 100 acquisition studies for electric cooperatives around the country.

Despite the fact that the "wires" function is likely to remain a monopoly, many industry experts believe that utilities that provide a "wires" function are likely to feel more pressure regarding this cost component than they have traditionally felt when all costs are included on one "unbundled" bill to the consumer. Industry restructuring could place a spotlight on this "wires" function - sometimes referred to as a "distribution adder" - if it is displayed as a separate item on consumer bills. This could put pressure on this cost element in a way that has never occurred in he past. There is even some discussion that certain states may place a cap or maximum "wires" cost that may be charged by utilities. Such a cap would place particular pressure on electric cooperatives that serve more sparsely settled rural areas and, on a per consumer basis, have higher "wires" charges than urban utilities.

CFC is working to assist our members to respond to the cost pressure that may be felt at the "wires" level in several ways. First of all, CFC continues to prepare an annual Key Ratios Trend Analysis (KRTA) for each electric cooperative. The KRTA is designed to help cooperatives to size up their own cost and financial performance relative to a peer group of other electric cooperative distribution systems. CFC also recently developed a new financial forecasting module, called COMPASS that is designed to assist cooperatives in assessing the financial impact of various actions as well as to meet loan requirements. In addition, CFC has provided support for NRECA's benchmarking project which can assist cooperatives in identifying cost-saving actions they can implement.

Mergers are receiving renewed attention by cooperatives across the country. To assist these cooperatives, CFC - at the request of electric cooperatives - will perform free of charge, a preliminary analysis that estimates the potential cost savings that can result from a merger. If the cooperatives included in the preliminary CFC merger analysis decide to continue exploring the merger option, NRECA has a staff of consultants that can provide expert assistance. CFC is currently doing more mergers studies than in the past because of the renewed interest in this option. CFC has also provided assistance to cooperatives that do not want to merge or are not ready to merge, but still wish to work with other cooperatives in ways that can reduce costs and provide economies of scale. These kinds of "shared service" arrangements are becoming increasingly popular in virtually every area of the country.

In addition to the "wires" function, distribution may be unbundled into an "energy services" function. This function would involve selling electric energy to consumers using the facilities of the "wires" utility, and could also include the sale of non-electric energy, as well as certain telecommunications, consumer finance and other services. This "energy services" function is likely to be highly competitive, unregulated and based on market rather than cost-based pricing.

Consumer financing is likely to be one of the services offered by cooperatives that enter the "energy services" business. CFC is preparing to assist cooperatives to meet this challenge in a manner that will provide cooperatives a competitive advantage and build on our natural strength of being close to our consumers and caring about our communities. Recently CFC, in a partnership with Fannie Mae, began offering energy efficiency loans through the electric cooperative network to residential consumers. These loans are currently being offered on a pilot basis on one state, but may be offered to cooperatives in additional areas as CFC gains experience with this effort. CFC is also developing plans for making loans to rural business and industrial consumers and single family mortgages in electric co-op areas. In all of these efforts CFC is developing loan programs that will provide the electric cooperatives with competitive tools, but which Will not place loan burdens on electric cooperatives.

In some areas, as a result of restructuring legislation on a state level, electric cooperatives will be able to offer "energy services" to consumers who do not obtain "wires" services from an electric cooperative. This could involve the potential for new cooperative members in urban areas that have long been denied the benefits of electric cooperative service. Co-op boards and management will have to decide whether, if given such an opportunity, this is a business the co-op wants to be in.

CFC is convinced that cooperatives will prosper and that cooperatives can compete with any other entity. Electric cooperatives have enormous advantages over other entities. They are in the communities for the long haul and are trusted organizations that have demonstrated their commitment to service. These are advantages few other organizations possess. Another advantage that co-ops posses is that they own their own financing cooperative - CFC. Like you, CFC is here for the long term - in good times and bad. And because electric cooperatives are CFC's only owners, CFC's only focus is your success. Together we can find winning strategies in the competitive marketplace.

Rich LaRochelle is director of corporate relations for CFC. Rich's areas of responsibility within CFC's Strategic Services Group include serving as CFC's liaison to other organizations, including NRECA, the Rural Utilities Service. Rural Electric Statewide Managers, and others. Rich also is responsible for CFC's Cooperative Integrity Fund and its Cooperative Education grants, and serves as CFC's focus for development of economic development programs.

Prior to joining CFC in May of 1996, Rich served as the executive and legislative director of NRECA, with areas of responsibility which included the broad range of NRECA legislative issues, grassroots advocacy, political action committee and legislative research. Rich also served in NRECA's Economics Division for three years.

Rich worked at the U.S. Department of Agriculture for ten years, working for the former Rural Electrification Administration (REA) and the former Farmers Home Administration (FmHA). Rich was also a rate research analyst for the Boston Edison Company.

Rich graduated from Worcester State College in Massachusetts, and lives in Falls Church, Virginia, with his wife and two sons.