Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

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

Tennessee co-ops are as low as they could be, and about how much patronage capital is tied up in the cooperative system.

"I think co-ops should disclose what each customer owns as soon as possible," wrote Rep. Jim Cooper, D-Tenn., in a guest editorial appearing in the April 12, 2004, edition of the Tennessean newspaper.

Cooper's hackles were raised when he realized that Tennessee co-ops were carrying an inordinate amount of patronage capital. In some cases, patronage equity makes up nearly 70 percent of co-op assets in Tennessee, compared to the national average of 43 percent. Yet the average Tennessee co-op customer/owner is unaware of this fact, and would be unable to learn the value of his or her patronage stake because the co-ops don't report that information.

Cooper further noted that only 2 percent of Tennessee co-op members participate in annual elections, and called for greater accountability in general. "Government barely regulates co-ops because of the assumption that [co-op owner/members] are policing them through annual elections of co-op directors," Cooper wrote.

Too Many Co-ops?

Cooper is one of the few politicians to publicly call co-ops to the carpet, but in policy circles, the unregulated nature of co-ops has caused some discomfort.

"Politicians in general would rather have co-ops regulated by the same entities that regulate other utilities," Tirello says. "The rules should be the same for everyone. It's better for the consumer and ultimately for the industry."

Furthermore, security and reliability issues are raising the stakes in the regulatory game. The fragmented nature of co-op systems might be complicating the tasks of regional coordination, control, and communication.

"The simple fact is there are too many co-ops," Williams says. "Co-ops are balkanized and inefficient. If co-op directors weren't so attached to their local control and perks, co-ops would consolidate into a more rational number."

Aside from regulatory and market pressures, the primary driver for consolidation is economics. In short, co-ops' rates are higher, on average, than rates for IOUs: 7.2 percent for commercial customers, 4.6 percent higher for industrial customers, and 3.4 percent for residential customers (see Figure 2, "Average Utility Rates (2002)," p. 75). In some places the disparity is dramatic. For example, co-ops are charging industrial customers 38 percent higher rates than IOUs, on average, in the 15 states where co-op rates are highest, relative to IOU rates.

Of course, in some states co-ops are providing lower rates, but on average, co-op power is more expensive. To what degree higher rates are attributable to low customer density is difficult to determine, but the bottom line is that co-op customers on average pay more for their power than IOU customers.

Williams and others argue that co-op rates would be lower if it weren't for the unnecessary expense that comes with balkanization. "Local control has a cost, and it's not cheap," Williams says. "Texas has about 75 co-ops. That means 75 headquarters offices, 75 sets of board directors, 75 general managers, 75 IT systems. … If co-ops would consolidate themselves into larger groups, many of those costs would be reduced."

Other analysts