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Douglas Beresford's article on IPOs for rural co-ops is an interesting concept, particularly his identification of five problems facing co-ops today, but the fundamental underpinnings of his argument are weak and his conclusions from a cooperative programmatic standpoint are wrong. In the work conducted by Management Consulting Services over the last six years we have consistently found a number of truths about co-op distribution service that counter Mr. Beresford's article:

The co-op capital structure is appropriate for their needs and most important can be several hundred basis points lower in cost than that of an IOU. Mr. Beresford states that cooperatives have an inflexible capital structure. Co-ops are limited in their ability to raise equity capital other than through "retained earning" (referred to as patronage by cooperatives), but this is rarely an impediment. Distribution co-ops often carry a higher percentage of debt; they pay no return on equity capital and pay no income tax. The math is fairly simple. Converting to a for-profit, taxable form of ownership would add to the co-op's cost. Virtually all cooperatives are credit worthy and can borrow at favorable rates for system improvements. Several co-ops have successfully undertaken significant acquisitions in the last few years, some achieving 30 to 100 percent growth in a single transaction.

Co-ops almost always deliver lower cost services to their territories than what could be provided by an investor-owned utility. Mr. Beresford states that cooperatives have a cost disadvantage compared to IOUs whereas our analysis clearly shows the opposite. That cost difference can be masked where rates charged by cooperatives are higher than that of the adjacent IOU (on average co-ops have lower rates than IOUs). If one adjusts for differences in consumer density (which can cause the distribution plant to be two to three times higher in rural territory) and for differences in load mix (rural territories are typically two-thirds residential while urban territories are two-thirds commercial and industrial), you find that co-ops are almost always the low cost provider of distribution services. The empirical data on distribution scale economies also show no evidence of structural cost decline in systems larger than 25,000 meters. While there are those in the consulting community that like to opine about the need to have 2 to 3 million meters, the empirical data does not support their assertion.

Retail wheeling generally poses no economic threat to distribution cooperatives. Mr. Beresford states that an increase in retail wheeling results in IOUs cherry-picking choice loads, whereas the fact is cooperatives will always enjoy distribution margins even where retail wheeling occurs. Co-ops will be entitled to collect their distribution costs and don't directly face the threat of stranded generation costs, because they own no generation. Their G&T may be threatened by retail wheeling, but in states such as Pennsylvania that have restructured, the G&Ts have been allowed to recover their stranded costs.

In many areas, customers are clamoring for cooperative service. Mr. Beresford states that customers are attempting to leave their cooperative suppliers, whereas our analysis, and that of many others, has clearly revealed the