October 23, 2014

Co-ops Are Different

What makes electric cooperatives different from other types of utilities lies in their core mission.

Michigan Country Lines magazine comes to you because you are a member and owner of the local electric “cooperative” that provides the power to your home or business. That’s why you’ll often see references to “the cooperative difference” in these pages. The differences between electric co-ops and other electric utilities range from how they refer to the people they serve—co-ops serve “members” or “member-owners” not “customers”—to the business model itself.

For example, electric co-ops operate on a not-for-profit basis. Revenues above operating costs, called “margins,” are returned to members in the form of capital credits in years when the co-op has profit above the actual cost of providing service and maintenance of the system for future reliability.

In the U.S., there are two other kinds of not-for-profit electric providers: public utility districts (PUDs) and public power districts (PPDs). There are also two other types of electric utilities: city-owned municipal electric systems and profit-driven investor-owned utilities. In every case, utilities receive financial assistance from the federal government in some fashion. Following is a look at each.

Co-ops, PUDs, PPDs
Electric co-ops are joined by public power districts—located exclusively in Nebraska—and public utility districts (all in the Pacific Northwest) as being not-for-profit. But while co-ops choose directors/trustees from their membership (people served by the co-op) and are required by state law to hold annual membership meetings, PUDs and PPDs are local government units—similar to school districts—and are not required to hold annual meetings or allocate capital credits. In addition, their directors (commissioners in the case of PUDs) are elected on the state ballot. Candidates only need to reside within the PPD/PUD’s boundaries to serve on a board; they do not have to receive power from the utility.

Federal assistance to electric co-ops comes in the form of low-interest loans from the Rural Utilities Service (RUS), formerly the Rural Electrification Administration (REA). Based on current interest rates, RUS loans actually make money for the federal government—about $274 million in fiscal year 2012. Aside from aiding in the construction of critical infrastructure that keeps electric service reliable and electric rates affordable, RUS financing remains important because household incomes in co-op service territories run about 11 percent lower than the national average.

Co-ops also have fewer consumers to share the cost of providing electricity. Co-ops serve an average of 7.4 consumers per mile of line, over which they collect annual revenue of about $14,900. Nationally, electric co-ops pay $1.4 billion in state and local taxes each year.

Municipal Electric Systems
Municipal systems are electric distribution utilities owned by a city, borough or other incorporated community. As public entities, they can levy taxes, issue government bonds, and adopt and enforce rules and regulations.

Not-for-profit municipals serve the most consumers per mile of line, an average of 48, and collect an average of $113,301 per mile of line. The federal government subsidies municipals, too—when cities or boroughs issue tax-exempt bonds, interest paid to bond owners is not taxed. The cost of this benefit in 2003 (the last year data is available) was $909 million, or $55 per consumer.

Investor-owned Utilities
Investor-owned utilities (IOUs) are governed by and generate profits for shareholders (stock owners) who do not necessarily live in the utility’s service area. IOUs average 34 customers and $75,498 in revenue per mile of line.

In almost every case, IOUs charge electric rates that include amounts for presumed federal tax liabilities. However, available tax breaks (investment tax credits and accelerated depreciation) allow IOUs to retain most of the taxes collected, a total of about $107 billion to date. At a cost to the government of $4.6 billion in 2010, this federal subsidy to IOUs equals about $44 per customer.

Back to the Co-op Difference
Your local electric co-op exists to provide affordable, reliable, environmentally responsible electric power. But at the core, it’s really about improving the quality of life in the communities it serves. That’s the main difference—the cooperative difference.

Keep reading Country Lines to see how electric co-ops make a difference in their communities.
Magen Howard writes on consumer and cooperative affairs for the National Rural Electric Cooperative Association, the Arlington, Va.-based service organization for the nation’s 900-plus consumer-owned, not-for-profit electric cooperatives.