Re-Member-ing the Cooperative Way: Part One – The Challenges

Introduction

Decades after cities lit the first electric lamps in the 1880s, most of the rural places of America were still dark. Urban utilities didn’t care for the expense of wiring farms, and it wasn’t until communities organized that electricity expanded to rural areas. Farmers in southwest Idaho, for example, formed a nonprofit in 1920 to build 256 miles of power lines to transfer power from a federal hydroelectric dam.1 In 1923, farmers near Granite Falls, Minn., made a cooperative to buy power from a nearby municipal utility. By 1930, there were 46 cooperatives in 13 states, but many still faced natural and economic obstacles, as well as opposition from investor-owned power companies.

In the 1930s, President Franklin Roosevelt launched numerous government program to combat the Great Depression and encourage economic growth. In 1935, he created the Rural Electrification Administration. The agency would provide long-term, 2% loans to nonprofit public entities to deliver affordable electricity across the nation. Within 6 years, there were 800 electric cooperatives in the United States, driven by member-owners that bought the same energy they produced collectively.2

Today, more than 900 electric cooperatives serve 42 million (mostly rural) Americans. These cooperatives cover 75% of the nation’s land mass. They deliver 11% of U.S. electricity sales on a network containing 42% of its of its distribution lines.

http://www.nreca.coop/wp-content/uploads/2013/07/ServiceTerritoryMap.gif

Image Source: NRECA3 

Cooperatives have been the backbone of the nation’s rural electrical system for more than 80 years. Their mission and business model now faces more challenges than ever, from financial to contractual to basic member control. But the opportunity is equally great, with a chance for member-driven investment to power hundreds of local economies across the rural United States.

The Challenges

Electric cooperatives face diverse challenges. They rely heavily on coal power, with rising costs and risks as the nation eyes limits on carbon emissions. They are tied to this dirty and increasingly expensive power through ownership of coal assets (including power plants and mines) and by long-term purchase contracts, even as distributed solar, wind power, and energy storage are becoming more cost-effective. They serve 90% of the nation’s counties with “persistent poverty.”

Perhaps the largest barrier is the lack of member participation. As the National Rural Electric Cooperative Association (NRECA) wrote in its paper, “The Electric Cooperative Purpose,” the electric cooperative is not defined by its products and services. Its “bottom line” is the empowerment of its member-owners. How it engages its membership to deal with the problems of the 21st century will define its success or failure. In many electric cooperatives, members do not even know they are owners, and fail to participate.

Coal-Powered, Under Fire

The “distribution” electric cooperatives that sell power to customers don’t typically generate it themselves. They buy it, typically from generation and transmission cooperatives (G&T) that are owned by distribution cooperatives, or from federal power agencies, such as the Tennessee Valley Authority.

The generation and transmission cooperatives — the co-ops of co-ops — derive 75% of their energy from coal, and comprise 7 out of the 10 most carbon-intensive electric utilities in the nation (below, annotated by ILSR to denote G&T cooperatives).4

Image Source: Climate Desk5

Image Source: Climate Desk5

The trends that precipitated the cooperatives’ tie to coal include factors both in and out of their control.

As electric demand was expected to continue increasing almost exponentially in the 1960s and ‘70s, the drive toward economies of scale led the energy industry, mostly under the direction of investor-owned utilities, to construct larger and larger power plants. Many electric cooperatives banded together (in G&T cooperatives), and either sought to build their own large power plants, or were lobbied hard by the investor-owned utilities to buy a share of theirs, utilizing low interest financing through the Rural Electrification Administration to help fund the project.

Additionally, during the 1970s and ‘80s, under threat of oil and gas scarcity, the federal government sought to limit natural-gas fired power plants and incentivize coal-fired power plants. Most utilities shifted their power plant builds to coal-fired or nuclear power plants. Today, as cooperatives and other utilities have continued to build and retrofit coal plants, about two-thirds of current cooperative generation remains from coal.

With looming carbon regulations, increasing consumer demand for rooftop solar and energy efficiency, and the competitive growth of cheap wholesale energy from wind, natural gas, and solar, G&Ts now face “stranded assets,” or having to retire uneconomical coal plants and their upgrades before they are completely paid off. For example, Seminole Electric, which rounds out the top 30 of carbon-intense utilities, says that 75% of its debt comes from building and retrofitting a single coal-fired power plants.6 Closing the facility would leave member cooperatives “burdened with paying off the debt but with no revenues to support the payments.”

In the face of economic challenges, NRECA and its electric cooperatives continue to fight against most federal and state rules that endorse clean energy or energy efficiency, or require a fair accounting of environmental and health costs from fossil-fueled generation.7 Some cooperatives still say climate change in quotes.8 In all, electric cooperatives engaged more than 1 million members to send in comments in opposition to the U.S. Environmental Protection Agency’s proposed carbon rules.9 One cooperative in Ohio supported the effort by collecting 2,246 comments from its members, more than twice the members that usually turn out for yearly board elections.10

Distribution cooperatives and members are now burdened with decisions made by their boards and management decades ago. Members today are between a rock and a hard place: running a coal-fired power plant is increasingly expensive, or seeing rates rise if they decide to shutter the power plant. As NRECA says, it will ultimately be the distribution cooperatives that face the member-owners’ ire, “and without proper management, the very existence of member-owned cooperatives could be in jeopardy.”11

A Contract Job

As mentioned previously, Electric cooperatives rarely supply their own power. According to NRECA, 65 to 70% comes from commitments secured through “all-requirements” contracts.

All-requirements contracts are used to protect the power supplier, G&T, or federal power agency from contract default. They restrict the electric cooperative from buying from outside sources. The G&T can set rates unilaterally, meaning that while electric cooperatives have a guarantee of power, it is not a guarantee of low cost power.

To say the balance works out in the supplier’s favor is an understatement. Rating agency Standard and Poor’s explains this in an evaluation of a Seminole Electric.12 One of the utility’s credit strengths is, “A captive retail market and the ability to set rates through take-and-pay, all-requirements wholesale power agreements with nine of 10 members through 2045.”

In New Mexico, the Kit Carson Electric Cooperative signed a long-term contract with Tri-State Generation and Transmission Association (a G&T) in 2000, a decision many now regret.13 Power costs then were about 3.6 cents per kilowatt-hour. While wholesale power costs are now 4 cents per kilowatt-hour, Kit Carson’s costs from Tri-State have risen to 8 cents per kilowatt-hour. Because Kit Carson’s all-requirements contract to purchase 95% of their energy from Tri-State, they cannot seek cheaper energy without violating the terms of the contract.

Kit Carson sought to exit their contract in the last year. Tri-State initially said it would require a $132 million exit fee from the cooperative, representing lost sales from Kit Carson’s departure. After negotiation, Tri-State later lowered the exit fee to $37 million, and Kit Carson is deliberating how to move forward.

According to another NRECA publication, those electric cooperatives with all-requirements contracts “are generally prohibited from owning and using any utility-scale solar PV installation.”14 Elsewhere, the contracts block distribution electric cooperatives from purchasing energy from other suppliers, even small ones. The Delta-Montrose Electric Association was recently stopped by Tri-State’s 95% energy requirement from purchasing energy from a local hydroelectric facility.15

The situation is rather ironic, since Tri-State — like most G&T cooperative utilities — is owned by its distribution cooperatives like Kit Carson. In the past era of ever-rising electric demand, massive economies of scale in power generation, and few power supply alternatives, the G&T was a way to make the many small cooperatives competitive. But now, with flat or falling electricity use, smaller economies of scale with renewable energy, and competitive local alternatives, the bonds of solidarity have become more like chains.

Missing Members

Randy Wilson ran for the board of the Jackson Energy Cooperative in 2009, the first candidate to contest an election in the cooperative’s 71-year history.16 He ran on a platform of financing energy efficiency improvements on the electricity bill (known in energy policy circles as on-bill financing), and moving the local economy past its dependency on coal to alternative energy sources like solar.

He spoke on the local radio show, appeared on the front page of the newspaper, and talked with other member-owners in parking lots. But Wilson wasn’t surprised that he lost the election 740 votes to 151.

Less than two percent of members turned out to vote, but many more votes were cast with the use of “proxy” votes. Mostly used at corporate shareholder meetings, proxy votes allow one member to delegate his or her voting ability to another member. In the case of Wilson and Jackson Energy, the electric cooperative had collected hundreds of proxy votes from its members, then handed them to other members present at the annual meeting, telling them to vote as they saw fit (meaning, for the incumbent).

According to research from ILSR, Wilson’s story of low voter turnout was not unique. More than 70 percent of cooperatives have voter turnouts of less than 10 percent (including Wilson’s Jackson Energy Cooperative, which averages just under 3 percent turnout).

low turnout for rural electric cooperative board elections ILSR Image Source: ILSR

The low voter turnout at so many rural electric cooperatives is an indication of a member-owner apathy, disenfranchisement, and — in a few cases — outright abuse. Barriers around incumbency, burdened with difficult-to-access meetings, elections, and voting requirements, are often too much for members to overcome, even if they wanted to.

“Most electric co-ops are boys’ clubs that re-elect the same people, that develop policies that favor their children or their buddies,” says Tom “Smitty” Smith of the consumer rights advocacy nonprofit Public Citizen. Most states, Smitty adds, still believe in the myth of member-led rule and don’t regulate electric cooperatives at all. Colorado passed legislation to democratize electric cooperative bylaws in 2010, but Texas’s similar efforts fell short after intense lobbying from the cooperatives.17

The following map illustrates state electric cooperative regulation as of 2008.

state oversight of electric cooperatives 2008 ILSR Image Source: ILSR

Board members and electric cooperative employees are aging, representing another needs where membership can help fill in the gaps at the cooperative.18 According to Kauai Island Utility Cooperative board chair Jan TenBruggencate, “it would be convenient to believe that turnout is low because people believe we’re doing a good job… Higher voter turnout gives directors indication of which platforms are resonating with those members. It can be used to provide strategic direction for the cooperative. An engaged membership will recognize threats to the cooperative, and help bring resources to bear to solve problems.”

Photo Credit: Clean Energy Resource Team via Flickr (CC BY-NC-SA 2.0 license)

The full report is available on ILSR’s website here: Re-Member-ing the Cooperative WayThis article originally posted at ilsr.org. For timely updates, follow John Farrell on Twitter or get the Democratic Energy weekly update.

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