How Electric Cooperatives and Commercial Utilities Differ

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The first successful consumer cooperative was formed in 1844 in the United Kingdom by a group of blue-collar workers who didn’t want to pay inflated prices for inferior quality food at a company store. They pooled their money, bought food staples in bulk, and resold them to member-owners at low prices. Today’s electric cooperatives in rural America operate similarly. They’re tax-exempt nonprofit businesses set up and owned by the consumers who benefit from the services provided. It took time and a lot of help from the federal government for the cooperative model to be adapted so that rural Americans could have electricity in their homes and businesses.

History of Rural Electrification

During the early part of the 20th century, electricity was available only in larger cities and along major transportation routes. Americans living on farms used kerosene lanterns and candles for light, and wood-burning stoves to cook meals and warm their homes. In 1933, the Tennessee Valley Authority (TVA) Act set the stage for the electrification of rural America. The TVA Act provided for electric transmission lines to be constructed in rural areas. At the time, only about 10% of rural homes had electricity. Two years later, President Franklin D. Roosevelt issued an executive order creating the Rural Electrification Administration (REA) and authorized the establishment of rural electric cooperatives.

The following year, the agency funded loans for building electric power systems in under-served rural areas across the nation. Newly formed electric cooperatives borrowed most of the money, and within less than a decade after the end of World War II, about 90% of U.S. farms had electric service. Now, virtually all do. The REA, created as an independent federal agency, became part of the U.S. Department of Agriculture and changed its name to the Rural Utilities Service, which still offers loans to electric cooperatives. The National Rural Utilities Cooperative Finance Corporation and CoBank ACB also make loans to cooperatives.

Cooperatives vs. Electric Utilities

There are many differences between electric cooperatives and commercial utilities, but most importantly, cooperatives have member-owners, not just customers. The members of the cooperative are also its customers. Cooperatives also follow a democratic process, not board governance. Every member can vote and has a right to participate in the policy-making process and elect local board members. With commercial utilities, only shareholders have any say in running the company. All members of cooperatives can take part in shaping policies and influencing the business.

Unlike commercial utilities, cooperatives focus on service, not profits. Electric cooperatives bring electricity to rural areas because for-profit electric companies are reluctant to serve areas where customers may be miles apart. In cities and towns where homes and businesses are close together, power companies make more money per line mile. Though cooperatives don’t ignore the need to make a reasonable profit, they focus on customers because the organizations exist to provide service.

Financial Implications

Investors in commercial companies put their money to work and expect company growth to produce a return. When cooperatives produce a margin—revenue that exceeds the cost of providing service—it’s reserved as capital credits. The reserves are used to build and maintain the cooperative’s infrastructure and facilities and to provide for other service needs. Each member is allotted an amount of capital credits based on how much electricity the member consumes. 

This consumption is called patronage. When deemed appropriate by the board, a portion of capital credits may be paid to members according to the cooperative's bylaws. Investors buy shares in companies based on their financial ability and personal discretion, but members of a cooperative are usually required to “invest” initially by paying a registration fee, then provide continuous capital by consuming and paying for electricity. Cooperatives can also be exempt from federal tax by collecting 85% of its revenue from member-customers for providing service.