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Tennessee Congressman, Jim Cooper’s report, “Electric Co-operatives: From New Deal to Bad Deal” is the best source we’ve found for an overview of how electric cooperatives have strayed so far from the original intent. The report explains not only what has gone wrong, but offers suggestions on how to get back on track. Click on the following link for the full report. www.harvardjol.com/wp-content/uploads/2009/08/335-376_Cooper.pdf

For those of you who don’t want to read the full report, the article below is a report summary of facts, what a good electric cooperative looks like, and why many cooperatives today are not serving their members’ best interests.

FACTS ABOUT ELECTRIC CO-OPS

• Owned by their customers, who are called Owned by their customers, who are called “members.”

• Co-op prices are set at the average cost of serving all residential or business customers.

• Each member gets one vote. This radically democratic policy reduces the influence of a large customer in co-op elections.

• The more electricity a member buys, the more equity he or she owns.

WHAT MAKES A GOOD ELECTRIC CO-OP?

• A return to their pro-consumer roots. Are the Directors responsive to membersA return to their pro-consumer roots. Are the Directors responsive to members’

• Primary obligation is Primary obligation is “at-cost”

• Member assistance in reducing the quantity of unneeded electricity purchased. Lowered rates can be tied to conservation and energy efficiency efforts. Demand management techniques, such as variable-price electricity, time-of-day meters, remote monitoring of meters, and prepaid electricity cards are ways that co-ops can show their Member assistance in reducing the quantity of unneeded electricity purchased. Lowered rates can be tied to conservation and energy efficiency efforts. Demand management techniques, such as variable-price electricity, time-of-day meters, remote monitoring of meters, and prepaid electricity cards are ways that co-ops can show their “members first”

• Complete financial transparency. This is required by the IRS in order to qualify for tax exempt status.

• Maintainance (or reduction) of equity at appropriate levels. Maximize capital credit retirements to all members. Disclose each memberMaintainance (or reduction) of equity at appropriate levels. Maximize capital credit retirements to all members. Disclose each member’

• Justification of all rate increases to members and any governing body.

• Inform widows, widowers, or heirs of the Inform widows, widowers, or heirs of the “special retirement” opportunity. A member’s capital account may not be terminated without consent of the member or the member’

• Open meetings, monthly or otherwise, where decisions are made about the co-opOpen meetings, monthly or otherwise, where decisions are made about the co-op’

• Produce a simple grading system by which members can evaluate performance, insuring that the co-op is indeed operating efficiently. Benchmarks measuring performance against other co-ops would be a catalyst for positive change. Of particular interest would be expenses and member cost-per-kilowatt of similar-sized co-ops.

• Address and takes steps to reduce the environmental harm that power generation inevitably produces.

• A co-op must meet three sets of conditions to maintain its tax-exempt status:

  • Be a genuine co-operative: must subordinate its capital and ensure democratic control, allocation of capital, and operation at cost.
  • Be an electric co-operative: must serve Be an electric co-operative: must serve “rural areas”
  • Be a tax-exempt electric co-operative: must not withhold member access to co-op accounts or retain earnings beyond the reasonable needs of the organizationBe a tax-exempt electric co-operative: must not withhold member access to co-op accounts or retain earnings beyond the reasonable needs of the organization’
    
    
• Level with members on all issues, including ways of reducing member’s bills with improved efficiency, capital credit retirement, conservation, and avoiding unnecessary plant construction and pollution-control costs.

THE PROBLEMS WITH MANY CO-OPS & HOW THEY FAIL TO SERVE THEIR MEMBERS’ INTERESTS …

• Cooperatives originally served primarily rural, agricultural communities. Their operating principles were “user-ownership, user-benefit, user-control, and limited returns to the co-op.” They were perceived as fair, neighborly and safe. Annual meetings were well attended social events and member/owners took responsibility for their co-ops. Electricity was not taken for granted, as it has been for many years. Membership has gone from voluntary to monopolistic. Few members are involved or knowledgeable about the business. These changes and lack of accountability have led away from the original operating principles.
  
  The situation is so severe that even the agents’ agents, namely the NRECA (National Rural Electric Cooperative Association) and CFC (National Rural Utilities Cooperative Finance Corporation), seem to be quietly siding with members.

• Most distribution co-ops have a financial incentive to sell more electricity, not less. Reducing either the price or volume of electricity threatens co-op management, since managers are motivated to improve the co-op’s top-line revenue, not the members’ bottom line. An extremely successful conservation program would make the co-op look like it has stopped growing, and co-op managers lack incentives to promote such a result.

• Co-ops have tried to hide information from their members. Since co-ops are in constant contact with members by means of monthly bills and issues of a co-op magazine, this failure to communicate important information is troublesome.

• Many small co-ops maintain electricity rates at artificially high levels by not merging with other co-ops. Most of these co-ops have used member equity to fund anti-takeover efforts. According to the NRECA, mergers among the co-ops that are uneconomically small could save customers at least $220 each per year, resulting in huge savings for customers. This amount is roughly the equivalent of two free months of electricity.

• Contrary to co-op policy, some co-ops have refused to refund any member equity. Excess cash reserves are sometimes maintained by management. The IRS requirement for exempt status of an electric co-op requires that no excessive reserves be kept.

• Rates are raised unnecessarily.

• Electric bills are not itemized. Therefore, customers cannot see the wholesale cost of electricity, the cost of retail distribution, overhead and interest expense, or the margin of profit (capital credits). It is hard to find a single co-op that can prove it has returned the right amount of capital credits, or, for that matter, kept member rates low or electric bills at a minimum.

• Co-ops do not want outsiders to check their results of operations. They argue that co- op procedures automatically produce superior outcomes. In addition, financial information that is released annually to members in lieu of financial statements is often simplistic and self-serving. Members receive less factual information than the owners of any other widely-held company. Comparisons with other co-ops Co-ops do not want outsiders to check their results of operations. They argue that co- op procedures automatically produce superior outcomes. In addition, financial information that is released annually to members in lieu of financial statements is often simplistic and self-serving. Members receive less factual information than the owners of any other widely-held company. Comparisons with other co-ops’

• Diversification into other industries have caused some financial hardship, even bankruptcy. The RUS (Rural Utilities Service, Dept. of Agriculture) offers government-guaranteed interest-free/low-interest loans and federal grants for worthy local projects to co-ops. These monies are not always used in ways that benefit members or even local communities. Some co-ops have morphed into wealthy power companies.

• Lack of financial accountability is an important issue. Financial information that is distributed to members is often self-serving and less factual than that of other widely-held companies.

• Mismanagement, excessive salaries and perks for executives and board members are well documented.

• The most informative NRECA (National Rural Electric Cooperative Association) website, www.cooperative.com, is password-protected so that no outsider can access it.

• Co-ops are big business, with equity of about $31 billion today. Equity (capital credits) is not always distributed to members as required by law. The tax and legal status of co-ops depends on this policy. The NRECA still considers co-op resistance to be a problem despite the fact that in 2008 eighty-four percent of the eligible 115 co-ops were returning some capital credits annually. Overall, co-ops are accumulating equity faster than they are refunding it. Equity increased by $2 billion in 2006 alone, but only $499 million was refunded.
  
  Capital credit is the amount of net revenue over expenses and is to be distributed among members according to the proportion of usage of electricity. No interest is paid, but cooperatives are required to return this capital to their members. Board members determine the size of the margin of revenue over expenses, as well as the timing of capital returns. Individual co-ops vary, but, in the aggregate, co-ops could offer one-time benefits to their owners of $3 billion to $9 billion without endangering co-op financial stability. Co-ops could also continue capital credit refunds at a higher level than today.
  
  Co-op managers argue that returning any capital credits to members would force them to raise electric rates unnecessarily. They are essentially saying that any change in the status quo would harm members. This argument, though it sounds persuasive, is flawed. It assumes that all co-ops are efficient and should be able to continue their current practices – practices which amount to confiscating member equity.

• “Special retirements” is the practice of refunding all or part of capital credit due to spouses or heirs of deceased members. These monies were often used to pay for burial expenses. This stipulation is commonly found in co-op by-laws, but not always put into practice. Even accountants, lawyers, and business people are often unfamiliar with unusual rules such as this that apply to co-ops.
  
  Children and grandchildren can often get full credit for the original co-op member’s account. The bad news for co-ops is that refusal to refund capital credits or settle with estates means that co-ops are increasingly owned by former customers, whether they are deceased or living in another area. No one knows how many co-ops have fifteen percent or more of their equity owned by non-members, such as dead or absent members, but this could also force revocation of a co-ops tax-favored status.

• Members are unaware of quorum requirements at annual meetings, where voting determines critical issues affecting them. Co-op board seats are very attractive positions, but few members apply because they know little about the benefits. No expertise is required, but annual compensation can range from $15,000 to $50,000.
  
  The number of co-op employees may be enough to pick all the directors during an annual meeting that is poorly attended by members who are not employees. Such rules serve to entrench co-op directors, management, and employees. Proxy voting varies among co-ops and can be an important factor in influencing control of the co-op. The ability of co-op employees to control these board seats – and, through the directors, the co-op – has made employees much more influential than the co-ops apathetic membership. Co-op managers and employees have often become the defacto owners of the co-op.

• In 2003, 93.5% of distribution cooperatives responding to a survey, offered or owned businesses that offered one or more services in addition to basic electric energy. Co-ops risk losing their tax-exempt status if they venture too far beyond their legal purpose. The primary test is the In 2003, 93.5% of distribution cooperatives responding to a survey, offered or owned businesses that offered one or more services in addition to basic electric energy. Co-ops risk losing their tax-exempt status if they venture too far beyond their legal purpose. The primary test is the “like organization” test of section 501(c)(12) of the Internal Revenue Code: an electric co-op is a “like organization” if it receives eight-five percent or more of its revenues by selling electricity to members on a co-operative basis. Income that does not meet the “like organization” test is called “unrelated business income”

• Co-op insiders gather regularly at state and national conventions but do little to educate anyone, even themselves, about co-ops. Co-op lobbying efforts often go against the best interests of members. Co-op insiders have funded a major political action committee to promote their interests.

• Co-ops have been lightly regulated at both the federal and state levels. Co-ops often deny that they are Co-ops have been lightly regulated at both the federal and state levels. Co-ops often deny that they are “utilities”

• Co-ops rely on coal-fired steam plants for eighty percent of their power. As a result, co-op decisions about new generation capacity may be biased toward coal.

• Burning coal produces pollutants such as mercury, sulfur dioxide, nitrogen oxide, and particulates, which harm the region surrounding the power plant and beyond. Another form of pollution, carbon dioxide, affects the global environment. Of course, most other energy sources pollute as well, whether CO2 from natural gas or long-term radioactive waste storage for nuclear plants. Some co-op managers are glossing over the environmental impacts of their decisions and exerting their political influence to exempt co-ops from laws that apply to other utilities. It is likely that co-op members are often unaware of the decision by co-op managers to lobby on their behalf, and possibly against their interests.

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