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Why rural electric cooperatives should test the equity markets.
Fortnightly Magazine - January 15 2001

able to look to other limited-resource cooperatives for assistance.

But Members Don't Have to Bear Risk Alone

The second reason I think it is healthy to talk about cooperative conversion concerns the cooperative creed: operating for the benefit of members. Not only will members potentially be hurt by competition, but members actually may be better off as stockholders of a cooperative than as passive owners.

Typically, a member's financial interest in a cooperative—that is, the member's patronage capital—is held in the cooperative until it is allocated by the cooperative's board of directors. Even when the board allocates patronage capital, it often is not paid out to members, but remains with the cooperative. Conversion would unlock patronage capital and allow members to exchange their patronage capital, dollar for dollar, for stock.

Members also would get subscription rights in the converted cooperative: the right to buy additional stock at the initial public offering price. To the extent that the value of their stock increased, members would participate in the financial growth of the converted cooperative. Members would have an immediate, tangible interest in their utility plus the potential for additional appreciation. Members also would have a choice that they now lack: If they did not want to undertake the risk of ownership, they could sell their shares for cash.

Risk is not something that traditionally has been associated with electric utility ownership. But with retail access and national power marketers, risk of utility ownership can only increase. That brings up another benefit of cooperative conversion for members: a sharing of risk. Some of the stock of the converted cooperative will be owned by the public. If the converted cooperative is successful, the members will benefit. On the other hand, if the converted cooperative cannot succeed even as a stock company, members will not be the only ones bearing the risk, as they are now.

We can wish that the elephant in the middle of the room would simply disappear. But that is not likely to happen. Competition is here to stay and, sooner or later, it will profoundly affect rural electric cooperatives. We can wait for competition to come to us. Or we can start talking.

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