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Frequently Asked Questions About Electric Cooperative Acquisitions

What is an electric cooperative?

In the 1930s only 5-10% of sparsely populated rural America received electric service. With financial help from the federal government, small groups of people organized cooperatives, creating their own electric utilities. Today there are 1,000 electric cooperatives and allied organizations operating in 47 states; about 865 of these provide distribution service only. Co-ops have assets worth $76 billion, serve about 36 million people (12% of the U.S. population), and have 2.3 million miles of distribution lines (approximately 43% of the U.S. total).

Who owns electric co-ops?

Co-ops are owned by the customers they serve, based on the equity contributions customers make when they pay their electricity bills. Co-ops are tax-exempt, not-for-profit businesses, i.e., any profit margin earned is retained by the co-op to form "patronage capital," which belongs to the customer/owners according to each customer's contributions. When patronage capital grows to 30-40% of net assets, the co-op begins to send refunds to its customer/owners. Varying methodologies are used to make refunds, including making refunds only to a customer/owner's estate after death. Equity contributions continue even though refunds are being paid; thus, a customer/owner is investing more and more money in the electric cooperative over time.

What is the difference in the management of electric co-ops in comparison to investor-owned utilities?

A co-op is governed by its Board Directors, a group of people elected by the co-op's customer/owners (although in practice a very small minority of customer/owners actually exercise the right to vote for these Directors). The Board Directors oversee the co-op's professional staff and make strategic and investment decisions. Board Directors also serve as co-ops' primary regulatory authority; with few exceptions, co-ops are exempt from the regulatory jurisdiction of the Federal Energy Regulatory Commission, and many are likewise exempt from the jurisdiction of state utility commissions.

Because a co-op's owners are also its ratepayers, co-op Board Directors do not have to consider profitability or shareholder value like their IOU counterparts do. However, because there are no shareholders to absorb losses, all business decisions that the co-op makes will directly impact the customer/owners, through rates and patronage capital refunds.

Co-ops tend to be small and very community-oriented. Although this allows Board Directors to be accessible, it causes relatively high administrative and other costs and operational inefficiencies.

Why are some electric co-ops attractive prospects for acquisition by IOUs?

Many co-ops' service territories are located in formerly rural areas that have become suburban, thanks to population growth. While a 2% growth rate is considered reasonably good for an IOU, many co-ops are growing at twice that rate and more. By acquiring a cooperative, an IOU acquires the co-op's high organic growth.

Additionally, because co-ops are small and they have high administrative costs, merging with a larger entity (whether an IOU or merging two or more cooperatives) can bring significant scale economies to co-op operations.

How would consolidation/acquisition change operations and affect customers if a co-op was merged with an IOU?

An acquired co-op becomes a taxable entity and will probably refinance subsidized loans from the federal government (while these loans are "assumable" in theory, pervasive governmental control makes such undesirable). But the elimination of duplicative operations and economies of scale balance those increased costs, often creating savings so great that rates can be reduced. In addition, the co-op's customer/owners will usually receive a refund of their entire patronage capital contribution. Thus, an electric cooperative acquisition can benefit the whole community by resulting in: 1) a larger and more efficient utility; 2) power at a lower cost; and 3) cash to customer/owners, who can invest it in the local economy.

Why have relatively few electric co-ops been acquired to date?

For most of the 1990s, investors on Wall Street encouraged utility companies to invest outside their regulated core utility businesses. The "wires" business was considered less attractive than fast-growth industries like independent power production, global investments and energy trading. These investment alternatives effectively ended the nascent co-op acquisition trend that began in the mid-1980s. Now, with utilities pursuing "back to basics" strategies, co-op acquisitions will become increasingly common.


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