Case Example: Rural Electric Cooperatives

Brian McCabe

Case Example:  Rural Electric Cooperatives

An interesting space in which cooperatives flourish is one where privately held firms choose not to operate due to low opportunity for profitability.  Such is the case with rural utility services, where the expected profits from providing electric and telecom services to rural customers do not justify the required investment for extensive transmission infrastructure.

During the 1930s in the U.S., nearly 90% of urban households had electricity while only 10% had electricity in rural areas.   Since investor-owned utilities were unwilling to provide services to these areas at the time, the government formed the Rural Electrification Administration as part of Roosevelt’s New Deal, which helped establish and fund what are known as rural electric cooperatives.  These cooperatives, referred to as RECs, are considered non-profit corporations and are tax-exempt provided that 85% or more of their annual income comes from its member-owners.  Currently, the U.S. has 864 distribution cooperatives that serve 10% of the nation’s total kilowatt-hours and 12% of total electric consumers.  In order to create purchasing power among smaller distribution cooperatives, generation and transmission cooperatives were formed to pool resources and purchase energy at wholesale prices from public and private power plants.

Unlike privately held electric utility companies, RECs aim to operate at cost, and either recycle profits to fund ongoing operations and improvements, or return proceeds to its member-owners in the form of capital credits.  Typically, these capital credits are issued in the form of a deduction on member-owners’ monthly electric bill.  To keep costs low for its members, RECs have a vested interest in promoting energy efficiency programs and demand-side management.  By creating this closed-loop incentive system for consumers, RECs become far better positioned to create social value in the communities it serves.  Consumers are not only more inclined to be more responsible about energy consumption, but are more engaged with the sourcing of their energy, particularly with purchasing energy from renewable sources.  In fact, cooperatives received 13% of their electricity from renewable sources in 2010 compared to about 10% for the entire electric utility sector, and 94% of all the nation’s co-ops offer renewable energy options to its member-owners.  As the availability of renewable energy grows, electric cooperatives are uniquely positioned to quickly adopt, creating the most social value for their member-owners.

The foundation of the electric cooperative is that it is owned by the customers it serves, and therefore has a deeply rooted commitment to the communities they operate in.  Electric cooperatives provide ongoing social value by maintaining and enhancing quality of life standards for the areas they serve, revitalizing communities, and creating jobs.  Despite the higher cost of operating utility services in rural areas, rural electric cooperatives are able to provide comprehensive electrification at affordable prices comparable to their investor-owned counterparts in more low-cost urban areas.  As energy prices continue to rise and consumers become more concerned with the impact their energy sources have on the environment, the cooperative framework will provide an increasingly attractive option for consumers to play an active role in the sourcing and distribution of their energy needs.



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