University of Wisconsin–Madison

Rural Electric Cooperatives

Overview


Rural electric cooperatives (RECs) are consumer-owned utilities that were established to provide reliable and affordable electricity by purchasing electric power at wholesale and delivering it directly to the consumer. These distribution cooperatives are primarily located in rural areas where the return on expensive infrastructure investment was not high enough to attract the investor-owned utilities (IOUs). Although electric cooperatives are not the dominant providers of electricity nationwide, they are the primary providers in most of the country’s rural areas.

To assure an adequate supply of the cost-effective, reliable power that is vital to their survival, distribution cooperatives formed generation and transmission (G&T) cooperatives to pool their purchasing power for wholesale electricity. The G&T cooperatives provide wholesale power to their member-owners either by purchasing and delivering power from public- or investor-owned power plants, or by generating electricity themselves.

Currently 834 electric distribution and 63 generation and transmission (G&T) cooperatives serve an estimated 42 million people in 47 states, including over 19 million homes, businesses, schools, churches, farms, and irrigation systems. Co-ops own assets worth $175 billion (distribution and G&T co-ops combined) and employ 71,000 people in the U.S. In total, electric coops maintain 42% of the electric distribution lines and deliver 11% of the total kilowatt hours sold annually in the U.S. (National Rural Electric Association).

In addition to providing electricity, many electric cooperatives are also involved in economic and community development issues.

History


It was only through cooperatives that electricity was provided to most of the nation’s farmers, their families, and rural businesses. By the 1930s nearly 90% of U.S. urban dwellers had electricity, but 90% of rural homes were without power. Investor-owned utilities often denied service to rural areas, citing high development costs and low profit margins. Consequently, even when they could purchase electricity, rural consumers paid far higher prices than urban consumers.

As part of Roosevelt’s New Deal, and in the face of significant opposition, the Rural Electrification Administration (REA) was created in 1935, and Congress passed the Rural Electrification Act a year later. In 1937, the REA drafted the Electric Cooperative Corporation Act, a model state law for formation and operation of rural electric cooperatives. The REA administered low-interest and long-term loan programs for rural electrification, and also provided technical, managerial, and educational assistance. By 1939, the REA had helped to establish 417 rural electric cooperatives, which served 288,000 households (New Deal Network, 2003).

The REA was replaced by the Rural Utilities Service (RUS) in 1994, when Congress reorganized the USDA. RUS continues to work with rural electric cooperatives to build infrastructure and improve rural electric services.

Since the 1970s, electric cooperatives have been confronted with energy resource issues. The 1973 oil embargo and ensuing national energy policy initiatives prompted several G&Ts to participate in nuclear power plants. However, nuclear accidents and growing anti-nuclear movements brought cancellations of partially built plants, and some cooperatives filed for bankruptcy.

Electric cooperatives have continued to diversify energy portfolios to include renewable resources.

Industry Niche


Electric utilities may perform generation, transmission, or distribution functions in the process of converting energy into electricity and delivering it to the consumer. Utilities may be investor owned (IOUs), owned by a municipal or public utility district (MUDs or PUDs), or, in the case of a cooperative, owned by its customer members.

Cooperatives generate $45 billion of the $389 billion in U.S. electric utility industry revenue. They serve an average of 7.4 consumers and collect an average of $16,000 per mile of distribution line. In contrast, IOUs average 34 customers and $75,500 in revenue per mile of line. MUDs and PUDs averages 48 consumers and $113,000 per mile of line. (NRECA).

These significant differences highlight the efficacy of the cooperative model for meeting the service needs of rural, geographically dispersed consumers. Electric cooperatives are owned and operated to provide electric service for the benefit of their member owners. They are financed through loans and retained earnings, which have been allocated to members on the basis of use. They are run on a not-for-profit basis, rather than to provide a return to outside investors.

IOUs, as commercial, for-profit utilities owned by private investors, are capitalized by shareholder investment, retained earnings and borrowing on the open market. Profits earned by IOUs are returned to investors in proportion to the number of shares they own. Out of the approximately 3100 electric utility organizations, the 200 IOUs have a 73% market share. IOUs are usually subject to different regulations than are publicly-owned utilities and cooperatives. It is rate regulated and authorized to achieve an allowable rate of return, and pay federal corporate income taxes.

There are about 2000 publicly owned utility organizations. MUDs are governmental entities created under state law to provide electricity, water, and wastewater treatment systems to the residents of the municipality. State laws govern the creation of MUDs, and vary from state to state. MUDs are distinct from other utility providers because, as public entities, they can levy taxes, issue government bonds, and adopt and enforce rules and regulations. Directors of MUDs are appointed by the municipality.

Public utility districts (PUDs) are publicly owned entities created by state governments to provide power to residents in the district they serve. However, unlike MUDs, they are governed by a democratically elected board of PUD customers, have no taxing or other rule-making authority, and receive no income from taxes. PUDs can raise capital through revenue bonds sold on the private bond market. They operate on a nonprofit basis and define themselves as “customer-owned” utilities.

Residential kilowatt consumption comprise 38% of the electric utility use nationally, with commercial and industrial use at 36% and 26% respectively. However, the customer base of cooperatives differs significantly from IOUs, and MUDs. Residential consumers, including farms, use 55% of the kilowatts sold by cooperatives.

Until the 1990s, all electricity providers operated as monopolies. A major deregulation effort during the 1990s, provided more competition in electricity markets, however. Although all IOUs are regulated by the Federal government, however. In all but 16 of the 47 states that have electric cooperatives regulators take the position that cooperatives are effectively self-regulated by locally elected boards of directors. While some states have excluded cooperatives from deregulation legislation, in states that have deregulated electric power supply, there has been little or no shift to other providers by rural electric cooperative members.

Most G&T cooperatives generate electric power from coal, like the industry in general. However, electric cooperatives actively support developing power from renewable resources. In 2017, electric cooperatives own or purchase approximately 10% of U.S. renewable capacity.

Cooperatives are leaders within the electric utility industry in developing community or “shared” solar projects. Approximately 100 cooperatives in 30 states have built solar arrays that provide lease or power purchase options to members.

There is considerable current interest in the potential synergies between cooperative infrastructure upgrades that support energy efficiencies through the smart grid technology, and developing or supporting broadband service delivery to underserved rural members.

Organizational Structure


Electric cooperatives are incorporated under state statutes. They are considered nonprofit corporations and are granted Federal tax-exempt status under IRC section 501(c)(12), provided that 85% or more of their annual income comes from members.

Each rural electric cooperative (REC) customer is a member-owner, and membership is a requirement of all customers. Since most RECs operate as monopolies, consumers must become cooperative members if they wish to purchase electricity. Members are required to purchase all of the electric power for a specified location from the cooperative. However, in some cases RECs will sell power to non-members. Members elect a board of directors from among the membership on a one-member/one-vote basis.

As with other cooperatives, RECs strive to operate at cost. However, like other businesses, RECs must accumulate equity capital to support their operations and new initiatives. Because the members are owners of the cooperative, when the REC has net earnings (i.e., revenues exceed expenses), or margins, those margins are returned to member-owners based on patronage.

Among the REC cooperatives, the amount of margin allocated to each member is called a “capital credit.” Capital credits are allocated to members’ accounts, but the underlying value is retained by the cooperative for a period of time. Most RECs have capital credit retirement programs, by which the cooperative gradually returns the value of past allocated capital credits to members. In most cases, members receive the value of their capital credits as a deduction on their electric bill.

Since the Federal government’s early commitment to cooperative ownership during the New Deal, rural electric cooperatives have had strong government support through lending programs, and through power supply preference programs. REA loans and technical assistance provided the primary momentum for rural electric cooperative formation. RUS financing remains an essential component of the cooperative utility sector’s loan portfolio, as does private sector sources such as the CFC and the National Cooperative Services Corporation (NCSC).

Further government lending supports rural electric cooperatives’ economic and community development programs. USDA’s Rural Economic Development Loan and Grant (REDLG) program provides zero-interest loans and grants through electric cooperatives to work in partnership with business and community leaders.

Electric cooperatives, as well as public utilities, have received preference from the Federal power marketing agencies since the first cooperative was established in 1937. The agencies market excess power generated by Federal water projects, and operate within the U.S. Department of Energy. The government support provided through the “preference clause in power supply” has been critical to ensuring cooperative access to sources of power.