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CO-OPS: RIPE FOR PICKING Nashville, Tenn.: Rural electric cooperatives have enjoyed a privileged status in the United States. Like Mom and apple pie, they almost never receive public criticism or scrutiny - until now. On Monday, April 12, a multi-million dollar class-action lawsuit was filed in U.S. District Court alleging that cooperatives in Tennessee have conspired to keep electric rates higher than they could be, while retaining millions of dollars in "patronage capital" that members have contributed to co-op systems over the years. The lawsuit came on the heels of efforts by Rep. Jim Cooper (D-Tenn.) to get Tennessee co-ops to account for - and return a portion of - the money they've been withholding from their members. On April 11, a front-page story in the Tennessean daily newspaper quoted Rep. Cooper: "It's been well known for years that Tennessee cooperatives have been the fattest and happiest in the country." ( http://tennessean.com/local/archives/04/04/49693032.shtml?Element_ID=49693032) While the co-ops say they need their members' money to invest in new equipment, Rep. Cooper argues that retaining patronage equity is a questionable way to finance capital investments. Industry analysts agree. "Co-ops can borrow money at lower rates than their individual members can," said Kevin T. Williams, a Hendersonville (Nashville) Tennessee -based attorney who advises investor-owned utilities on acquiring co-ops. "It's better for members to get their money back. Letting the co-op keep that money represents a real cost for members - who could use that money to pay down credit card debt, for example, that might be costing them 22 percent interest." First, the consolidated utilities will become more efficient, and those savings will be shared with customers. This will increase so-called "competitive pressure" on the cooperatives, as typical rate differentials will become more pronounced. Such pressure will, in turn, encourage the cooperatives to merge amongst themselves into larger, more efficient entities. Of course, consolidation will produce a tremendous amount of consternation amongst the cooperatives, but the end result will benefit coop customer/owners. Short-Changing Members Co-ops across the country are collecting millions of dollars from their customers each year, accumulating billions of dollars in patronage capital. Except in Tennessee, co-ops generally return a portion of this money to members each year. But even then, members are short-changed; when co-ops return patronage capital, they do so without paying dividends, interest or even an inflation adjustment. The co-ops have argued that returning members' equity would cause rates to go up. "By re-investing every dollar of margin in the system, cooperatives have been able to keep rates low, borrow less and still keep the electric system well-maintained," wrote Tom Purkey, executive vice president and general manager of the Tennessee Electric Cooperative Association (TECA), in an April 13 Tennessean op/ed article. But this argument ignores the fact that by collecting and retaining patronage capital, co-ops effectively force members to subsidize rates. Moreover, patronage capital costs members more than low-rate co-op debt service would cost them. Meanwhile those customers are paying an "opportunity cost" because they cannot access their share of the patronage capital to invest or spend in any other way. Purkey of TECA noted that a co-op would return members' equity if the co-op were sold or dissolved. And that is precisely what some leading utility advisors are proposing. "If co-ops were acquired, consolidated and streamlined, they could refund money and still reduce rates," Williams said. In their current, balkanized state, co-ops are spending money on unnecessary administrative and operating costs, according to Williams. "There are 21 co-ops in Tennessee. That means 21 headquarters offices, 21 sets of directors, 21 general managers, 21 billing systems, 21 dispatchers, 21 truck fleets, and 21 of everything else," he said. "If co-ops would integrate themselves into larger groups, or if they were acquired by other utility companies, many of those costs could be reduced." Acquiring Co-ops Despite the savings and benefits that could come from consolidation, co-ops have clung to their old structures. Part of the reason is historic; co-ops were created to bring electric service to rural areas where it was uneconomical for investor-owned utilities to do so. This situation bred resentment toward investor-owned utilities, and a strong attachment to the co-op structure. Since the early days of rural electrification, however, many formerly rural areas have become suburbanized, and the government-subsidized cooperative structure is no longer necessary for those areas to be served economically. In fact, investor-owned utilities can provide services more efficiently and effectively than balkanized co-ops can. "In most cases, co-op directors are good people with the best of intentions," Williams said. "But because they dislike outside influences, they refuse to consider whether a new approach might be better for their members." At the same time, some board directors might be acting out of self-interest, protecting the perks and opportunities that come with their positions - i.e., health insurance, life insurance, junkets and stipends that are provided by co-ops, and paid for by owner/customers. The result is that co-ops have successfully stymied efforts to consolidate. But that might be changing. Investor-owned utilities, seeking growth opportunities that are compatible with today's "back-to-basics" strategies, are beginning to consider acquiring co-ops. "None of the barriers to co-op acquisitions are particularly challenging," Williams said. "It just takes a careful analysis of the costs and benefits, and an intelligent approach to dealing with the issues." For instance, potential acquirers need to realize that the ultimate owners of co-ops are the members, not the directors. These members generally welcome the opportunity to receive a cash refund, plus the stable or reduced rates that can be offered by a larger, more efficient service provider. "When members realize they've been providing free financing to the co-ops, to the tune of billions of dollars, they will begin to wonder where their money has gone," Williams says. "By acquiring co-ops, IOUs can give that money back to members, while offering better rates and services." As this "win-win" solution becomes better understood, co-op consolidation and acquisition will become as inevitable and acceptable as Mom and apple pie.
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