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University of Wisconsin Center for Cooperatives
Research on the Economic Impact of Cooperatives
Rural electric cooperatives (RECs) are consumer-owned utilities that were established to provide reliable and affordable electricity by purchasing electric power at wholesale and delivering it directly to the consumer. These distribution cooperatives are primarily located in rural areas where the return on expensive infrastructure investment was not high enough to attract the investor-owned utilities (IOUs).
To assure an adequate supply of the cost-effective, reliable power that is vital to their survival, distribution cooperatives formed generation and transmission (G&T) cooperatives to pool their purchasing power for wholesale electricity. The G&T cooperatives provide wholesale power to their member-owners either by purchasing and delivering power from public- or investor-owned power plants, or by generating electricity themselves.
There are 864 distribution cooperatives delivering 10% of the nation's total kilowatt hours’ electricity to ultimate consumers each year. They serve 12% of the nation’s electric consumers (42 million people), but own and maintain 42% of the nation’s electric distribution lines that cover 75% of the country’s land mass (National Rural Electric Cooperative Association [NRECA(a)]). Although electric cooperatives are not the dominant providers of electricity nationwide, they are the primary providers in most of the country’s rural areas.
Currently, 66 G&T cooperatives own 6% of the nation’s miles of transmission lines. Forty-five own generation facilities that account for approximately 5% of the total electricity generated in the U.S (NRECA(a)).
In addition to providing electricity, many electric cooperatives are also involved in economic and community development activities.
It was only through cooperatives that electricity was provided to most of the nation’s farmers, their families, and rural businesses. By the 1930s nearly 90% of U.S. urban dwellers had electricity, but 90% of rural homes were without power. Investor-owned utilities often denied service to rural areas, citing high development costs and low profit margins. Consequently, even when they could purchase electricity, rural consumers paid far higher prices than urban consumers.
As part of Roosevelt’s New Deal, and in the face of significant opposition, the Rural Electrification Administration (REA) was created in 1935, and Congress passed the Rural Electrification Act a year later. In 1937, the REA drafted the Electric Cooperative Corporation Act, a model state law for formation and operation of rural electric cooperatives. The REA administered low-interest and long-term loan programs for rural electrification, and also provided technical, managerial, and educational assistance. By 1939, the REA had helped to establish 417 rural electric cooperatives, which served 288,000 households (New Deal Network, 2003).
The REA was replaced by the Rural Utilities Service (RUS) in 1994, when Congress reorganized the USDA. RUS continues to work with rural electric cooperatives to build infrastructure and improve rural electric services.
Since the 1970s, electric cooperatives have been confronted with energy resource issues. The 1973 oil embargo and ensuing national energy policy initiatives prompted several G&Ts to participate in nuclear power plants. However, nuclear accidents and growing anti-nuclear movements brought cancellations of partially built plants. Some cooperatives filed for bankruptcy.
Electric utilities may perform generation, transmission, or distribution functions in the process of converting energy into electricity and delivering it to the consumer. Currently about 3,200 electric utilities throughout the U.S.; about 700 operate facilities that generate electric power. According to Energy Information Administration 2006 data, generation accounts for 67% of the entire cost of providing electricity. Transmission and distribution account for 7% and 26%, respectively (Energy Information Administration, 2007).
Electricity is provided to residential, commercial, and industrial consumers by investor-owned utilities by IOUs, municipal utility districts (MUDs), public power districts (PPDs), and cooperatives. IOUs, as commercial, for-profit utilities owned by private investors, are capitalized by shareholder investment, retained earnings and borrowing on the open market. Profits earned by IOUs are returned to investors in proportion to the number of shares they own. While the U.S. has only 240 IOUs, they provide nearly 75% of the electricity sales to ultimate consumers. IOUs are usually subject to different regulations than are publicly-owned utilities and cooperatives, and they pay taxes as corporate citizens (Energy Information Administration, 2007).
MUDs are governmental entities created under state law to provide electricity, water, and waste water treatment systems to the residents of the municipality. State laws govern the creation of MUDs, and vary from state to state. MUDs are distinct from other utility providers because, as public entities, they can levy taxes, issue government bonds, and adopt and enforce rules and regulations. Directors of MUDs are appointed by the municipality. Although a few MUDs are members of NRECA, they are excluded from this analysis because they are government entities, operated by local governments.
Public utility districts (PUDs) are publicly owned entities created by state governments to provide power to residents in the district they serve. However, unlike MUDs, they are governed by a democratically elected board of PUD customers, have no taxing or other rule-making authority, and receive no income from taxes. PUDs can raise capital through revenue bonds sold on the private bond market. They operate on a nonprofit basis and define themselves as “customer-owned” utilities. All power supplied to Nebraska residents comes through PUDs. PUDs are included in this analysis.
Residential consumers use 37% of the nation's total electricity produced. Commercial and industrial consumers use 35% and 28% respectively. However, the customer base of cooperatives differs significantly from IOUs, and MUDs. Residential consumers, including farms, consume 57% of the electricity provided by cooperatives, but they comprise only 35% of the IOU customer base and 36% of the MUD base.
Cooperatives serve 7 customers per mile of line, as opposed to 35 for IOUs, and 47 for MUDs. They generate $10,565 in revenue per mile, while IOUs and MUDs produce $62,665 and $ 86,302, respectively. This disparity reflects the rural nature of the electric cooperatives’ primary service areas, where the geographically dispersed consumers generate the least revenue per mile.
Until the 1990s, all electricity providers operated as monopolies. A major deregulation effort during the 1990s, provided more competition in electricity markets, however. Although all IOUs are regulated by the Federal government, however. In all but 16 of the 47 states that have electric cooperatives regulators take the position that cooperatives are effectively self-regulated by locally elected boards of directors. While some states have excluded cooperatives from deregulation legislation, in states that have deregulated electric power supply, there has been little or no shift to other providers by rural electric cooperative members.
Most G&T cooperatives generate electric power from coal, like the industry in general. However, electric cooperatives actively support developing power from renewable resources. In 2007, electric cooperatives received 11% of their power from renewable sources, as compared to 9% for the nation’s entire electric utility sector (NRECA(b)).
Electric cooperatives are incorporated under state statutes. They are considered nonprofit corporations and are granted Federal tax-exempt status under IRC section 501(c)(12), provided that 85% or more of their annual income comes from members.
Each rural electric cooperative (REC) customer is a member-owner, and membership is a requirement of all customers. Since most RECs operate as monopolies, consumers must become cooperative members if they wish to purchase electricity. Members are required to purchase all of the electric power for a specified location from the cooperative. However, in some cases RECs will sell power to non-members. Members elect a board of directors from among the membership on a one-member/one-vote basis.
As with other cooperatives, RECs strive to operate at cost. However, like other businesses, RECs must accumulate equity capital to support their operations and new initiatives. Because the members are owners of the cooperative, when the REC has net earnings (i.e., revenues exceed expenses), or margins, those margins are returned to member-owners based on patronage.
Among the REC cooperatives, the amount of margin allocated to each member is called a “capital credit.” Capital credits are allocated to members’ accounts, but the underlying value is retained by the cooperative for a period of time. Most RECs have capital credit retirement programs, by which the cooperative gradually returns the value of past allocated capital credits to members. In most cases, members receive the value of their capital credits as a deduction on their electric bill.
Since the Federal government’s early commitment to cooperative ownership during the New Deal, rural electric cooperatives have had strong government support through lending programs, and through power supply preference programs. REA loans and technical assistance provided the primary momentum for rural electric cooperative formation. Over time, however, the dominance of Federal lending has declined. Currently, RUS loans to electric cooperatives comprise <40% of total financing; >60% comes from private sector sources such as the CFC and the National Cooperative Services Corporation (NCSC). Nonetheless, RUS financing remains an essential component of the cooperative utility sector’s loan portfolio.
Further government lending supports rural electric cooperatives' economic and community development programs. USDA’s Rural Economic Development Loan and Grant (REDLG) program provides zero-interest loans and grants through electric cooperatives to work in partnership with business and community leaders.
Electric cooperatives, as well as public utilities, have received preference from the Federal power marketing agencies since the first cooperative was established in 1937. The agencies market excess power generated by Federal water projects, and five power marketing agencies currently operate within the U.S. Department of Energy. The government support provided through the “preference clause in power supply” has been critical to ensuring cooperative access to sources of power.
Although governmental support was critical to the formation of consumer-owned electric cooperatives, all electric utilities receive various federal subsidies. In fact, according to calculations based on Federal government financial reports, rural electric cooperatives receive the smallest Federal subsidy per consumer (NRECA(a)) As with other utilities, government support to electric cooperatives has been provided through loan programs or policy involvement rather than direct subsidies.
Table 4-5 shows that we obtained data from 911 electric utilities, and collectively these firms account for >$97B in assets, exceed $34B in sales revenue, and pay close to $4B in wages. There are approximately 16 million memberships and 67,000 employees. As Table 4-5.1 shows, by extrapolating to the entire population (929 firms) and adding indirect and induced impacts to this activity, electric cooperatives account for >$45B in revenue, nearly 130,000 jobs, $6.6B in wages paid, and >$11B in valued-added income.