Cooperatives’ local ownership protects electric rates, service and, above all, consumers

Glenn English, National Rural Electric Cooperative Association

More than 36 million Americans receive reliable, affordable service from electric cooperatives. They are, according to a decade’s worth of research, the nation’s most loyal and satisfied electricity consumers. Co-op members take comfort in the knowledge that their utility is managed and operated by members of their own community—neighbors, whose ultimate goal is to provide exceptional service at the lowest reasonable cost. In the co-op community, each customer is an owner of the business and has the opportunity to participate actively in the democratic control of the utility by enacting or amending bylaws, electing or removing a board of directors, and ultimately determining the ownership and direction of the business.

A few weeks ago (see May 2003, Guest Commentary, page 8) a part-time utility lawyer claimed to have created a scheme for big power companies to successfully acquire locally owned electric co-ops and absorb their desirable service territories. He supports his blatant business pitch with flawed data and factual errors. In fact, the entire premise—that there exists an incredible balkanization of electric cooperatives—is spurious.

“Balkanization” is a term that has come to define the process of geopolitical fragmentation, the division of a region into smaller, often hostile, political units. I cannot imagine a more naive or misinformed view of the electric cooperative sector of the industry.

If there were two things that defined co-op service territories a generation ago, it was their acute need for electricity and the reluctance of the big power companies to serve them. Where the market failed, the can-do spirit prevailed—the snub unified communities, creating an economic imperative and providing incentive for neighbors to work together, ultimately providing for themselves that which big business would not. Out of necessity the cooperative network was born, and in the years since, co-ops have continued to organize.

Today, co-ops own and operate electric generation, transmission, and distribution utilities, maintain statewide and national trade associations and most recently have developed and launched Touchstone Energy, a national brand awareness campaign.

In his article, which might more properly be characterized as an advertisement, the writer suggests that the large number of electric cooperatives makes them “incredibly inefficient” and asserts that they can “realize significant cost savings from economies of scale.” The ability to achieve these economies of scale through acquisition allegedly makes them “enticing,” with acquisitions being “‘win-win’ propositions for both the acquirer and the coops’ customer/owners.” This reasoning is flawed for a number of reasons.

First, the writer clearly has a financial interest in encouraging the acquisition of electric cooperatives. Although he advertises a “better model” than the tender offer model for acquiring cooperatives, he fails to discuss the “better model.” Instead, he provides his telephone number and e-mail address, a clear conflict of interest.

Second, the writer states that electric cooperatives can be acquired by “monetizing” the owners’ equity in the cooperative. He fails to state, however, that any acquiring entity will need to recover its equity payment. The only way to recover this payment is through increased electric rates.

Third, the writer fails to note that electric cooperatives are not-for-profit entities. In fact, he incorrectly notes that “contrary to a widely held misconception, electric co-ops earn profits.” As a matter of law, electric cooperatives may not earn a profit. Any revenues that exceed operational costs are reinvested in the member-owned business or returned to the consumer-owner. In contrast, for-profit utilities must pay investors a return on investment, or must build equity in order to borrow money. The only way to recover this return on investment or to increase equity is through increased electric rates.

Fourth, the writer fails to explain that most electric cooperatives are exempt from federal income taxation. Most for-profit utilities, however, must pay income tax. The only way to recover this income tax payment is through increased electric rates.

Fifth, although the writer claims that electric cooperatives are “ultimately controlled by board directors,” he fails to note that, in most states, the member-owners of an electric cooperative must approve the sale or transfer of all or substantially all of the cooperative’s assets. In fact, in most states, a majority or two-thirds of all members must approve the sale or transfer.

When Enron’s cousin comes courting, I’ll bet that co-op members will recognize him, and will reject any attempt to usurp control of their utility, knowing as I do that local ownership and democratic control are the consumer’s best defense against higher rates.

English is CEO of NRECA. For additional information, visit www.nreca.org or call 703-907-5500.

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