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Consolidating Co-ops

Like it or not, changes are coming for electric cooperatives. Fewer and bigger might be the inevitable result.
Fortnightly Magazine - June 2004

2003. APM acts as an agent for its 14 member cooperatives and other customers, which include municipal utilities, independent power producers, and banks that find themselves holding surrendered merchant capacity. In all, APM is responsible for managing 15,000 MW of generation and 25,000 MW of load in the wholesale markets.

"Everything APM does is for hedging, not speculation," says David J. Tudor, APM president and CEO. "We are ultimately owned by the consumers that own our member co-ops, and we have no business risking the consumer's money on speculative activity." APM provides its services at cost to member co-ops, with a small markup for other customers. "The structure of the co-op program calls for this business plan," Tudor says.

Part of APM's business involves representing its member cooperatives in regional transmission restructuring proceedings, including ongoing meetings at the Midwest ISO, the Southwest Power Pool (SPP), and ERCOT in Texas.

"If you are not participating in the sessions to establish the rules, they can negatively affect you, both operationally and financially," Tudor says. "There are significant issues around congestion and load, how zones are established, and how the load affects the value and cost changes in each portfolio. Operating in a deregulated wholesale market during this transition period is very risky and complicated."

A key operational challenge is the fact that market participants must update their automation and software systems to comply with the new systems being created by the RTOs. This requires a significant financial commitment from co-ops, particularly those that might trade in more than one market.

"The tagging system that is used to schedule power is being replaced with a new market design," Tudor says. "ERCOT, MISO, and SPP are all taking a similar approach, based on PJM, but they're not exactly the same. So you end up with more than one way that you must be able to operate and manage your software."

Such factors are forcing co-ops to work more closely together than is usual for them. "It is forcing allegiances between co-ops, as well as municipals and other load-serving entities," Tudor says. "They have to work together to protect their competitive positions."

Boiling Down

Concurrent with increased pressure from market shifts, some co-ops are beginning to feel the heat of regulatory and competitive pressures. One of the hot spots is the state of Tennessee, or, more generally, the region served by the Tennessee Valley Authority (TVA).

Most co-ops refund patronage capital to customers over time. Cooperatives operating under the jurisdiction of the TVA, however, are prohibited from returning patronage equity.

"TVA is an unusual case," English says. "They have this agreement that prevents them from returning capital credits. TVA wants to make sure rates are as low as they can be, and someone isn't charging more on the distribution level so they can pay out capital credits." In other words, TVA expects its cooperatives to use excess capital to reduce power rates.

Indeed, power rates are low across Tennessee, thanks to the availability of cut-rate TVA power supplies. But questions are being raised about whether rates for