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How Electric Cooperatives Differ From Commercial Utilities

By Tim Tune

The first successful consumer cooperative was formed in 1844 by a group of British blue-collar workers who didn’t want to pay inflated prices for inferior food at the company store. They saved and pooled their money and eventually were able to buy food staples in bulk and resell to member-owners for less than they paid in the store.

Today’s electric cooperatives in rural America operate in a similar way. They’re tax-exempt nonprofit businesses set up and owned by the consumers who benefit from the services provided. It took a while and a lot of help from the federal government for the cooperative model to be adapted as a means for rural Americans to enjoy the benefits of electricity.

History of Rural Electrification

During the early part of the 20th century, electricity was generally available only in larger cities and along major transportation routes. Americans living on farms lit their houses and barns with kerosene lanterns and candles, and cooked meals and warmed their homes with wood-burning stoves.

In May 1933, the Tennessee Valley Authority Act set the stage for the electrification of rural America. The TVA Act provided for electric transmission lines to be constructed in rural areas so that Americans living on farms could take advantage of electricity to light their homes, cook their meals and operate appliances and farm equipment. At the time only about one in 10 rural homes had electricity.

Two years later in 1935 President Franklin D. Roosevelt issued an executive order creating the Rural Electrification Administration (REA) and authorized the establishment of rural electric cooperatives.

The next year the agency was authorized to fund loans for building electric power systems in under-served rural areas of the nation. Most of the money was loaned to newly formed electric cooperatives. Within less than a decade after the end of World War II, about 90 percent of U.S. farms had electric service. Now, virtually all do.

The REA, created as an independent federal agency, was moved into the U.S. Department of Agriculture and changed its name to the Rural Utilities Service. The service still offers loans to electric cooperatives. The National Rural Utilities Cooperative Finance Corporation, and CoBank ACB also make loans to cooperatives.

How cooperatives differ from electric utilities

Cooperatives have member-owners, not just customers. The members of the cooperative are also customers, as well as part-owners.

Cooperatives follow democratic process, not board governance. Every member can vote and has a right to participate in the process of policy-making, as well as to elect local board members. With commercial utilities, only shareholders have any say in running the company. All members of cooperatives can take part in shaping policies and influence the business.

Cooperatives focus on service, not profits. Electric cooperatives provide a key mechanism to bringing electricity to rural areas because for-profit electric companies are reluctant to serve areas where customers may be miles apart. In cities and towns where homes and businesses are close together, power companies can make more money per line-mile. And though cooperatives don’t ignore the need to make a reasonable return, they focus on the customer first because the organization exists to provide service, not to function as a business and make money.

Cooperatives' members participate financially. Investors in commercial companies put their money to work and expect company growth to produce a return. When cooperatives produce a margin – revenue that exceeds the cost of providing service – it’s reserved as capital credits. The reserves are used to build and maintain the cooperative’s infrastructure and facilities and to provide for other service needs. Each member is allotted an amount of the capital credits based on how much electricity the member consumed. This consumption is called patronage. When deemed appropriate by the cooperative’s board, a portion of capital credits may be paid to members according to the bylaws of each cooperative.

Investors buy shares in companies based on their financial ability and personal discretion. But members of a cooperative are usually required to “invest” initially by paying a registration fee, then provide continuous capital by consuming and paying for electricity.

Cooperatives can be exempt from federal tax. To remain tax-exempt, electric cooperatives must collect 85 percent of their revenue from member customers for providing service.

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