On PEC's Patronage Capital And Capital Credits

By Linda Kaye Rogers

The National Rural Electric Cooperative Association Capital Credits Task Force Report (January 2005) states:

“Establishing a capital credits policy is one of the most important responsibilities of a cooperative’s board of directors. There are good reasons to retire capital credits. It provides tangible evidence of members’ ownership in the cooperative and demonstrates the difference between cooperatives and other organizations. Since the fund's members invest in the cooperative do not earn dividends or other financial remuneration, retiring capital credits is a way to ensure that each generation of members pays its own way by providing its own equity.”

One of the agreements in the lawsuit settlement was the “retirement” of $23 million in capital credits, a return, or credit of monies, to members. This particular return will be as a once-a-year-credit on our electric bill for the next five years. Quickly note that doing this as a bill credit saves the co-op money in handling and postage. The Envision software will handle the whole process.

While everyone is excited about “finally” getting a capital credit refund, there is little understanding of the possible consequences of this action. General Manager Juan Garza has expressed concern that it may create the need to raise cost of service. As a member, this is not what I want to hear! And if you’re like me, you want to know WHY.

There are a number of things to review to understand this dilemma. The first is, where this money comes from. Almost all money into the co-op comes from members, that's bill payment, membership fees, etc. Our greatest expense, about 70% of the whole budget, goes to buying power. Operating expenses is the next largest, and then we have some interest charges and debt repayment. What is left is called Net Margin. At the end of the year this Net Margin is translated to Patronage Capital on PEC's Consolidated Report. What is not included in this picture is the investment into our equity. Our current equity is about $1 billion. We are in one of the fastest growing areas of the nation. With that growth comes the demand not only for more power, but more lines and more stations for distribution.

On paper we have a total of about $226 million in Patronage Capital. But this is on paper. There is no actual fund that has $226 million sitting in it. This money gets reinvested into the co-op, particularly in the infrastructure. It is used to help absorb some of the increases in expenses, such as our purchase cost of power. And this is a big one right now. Some may be used to decrease our debt. In short, it all goes back into the co-op.

So, when we pay out a capital credit, it means less in the Net Margin. In order to meet growth demand, we may then have to borrow. In my reckoning, this is robbing Peter to pay Paul. And it is one reason we may have to have rate increases.

This is a far more complicated accounting maze than I have presented here, but this is the gist of it.

For most of us, the credit return on an annual basis would be a very small amount. You can call PEC at any time and they will tell you your annual credit.

Eric Stratton, a board candidate in District 3, has offered this solution. He calls it “paper credits." He proposes an annual statement given to each member that would show their earned equity in their membership (capital credit) and that is has been RE-invested into the cooperative to ensure continued lowest possible rates and reliable service. Personally I find this agreeable. Service and low rates are the two most important products of our co-op. This “reporting” tracks the member’s equity credit and continues to foster the member ownership of the co-op.

This is an issue that the Board and members will have to address in the very near future. With the new openness of records, information, and ability for members to have input, this is the perfect opportunity for members to be heard. The PEC website (pec.coop) has a “contact us” section. I will be asking them to set up a link for “member input." You’ve ask that members have more say . . . go for it!

Thank you to Eric Stratton for sharing his NRECA information and proposal for member consideration.

Linda Kaye Rogers grew up on a small family farm in the Rio Grande Valley. She received her BA and Masters of Science in Social Work from UT Arlington. She has taught smoking cessation, communication skills, stress management and parenting in hospitals, corporations, community groups and churches. Linda Kaye moved to Wimberley in 2000 where she built a straw-bale cottage and immediately established a rainwater collection system as her water supply. That same year she began volunteering at the Katherine Anne Porter School and has worked in various capacities at the school. She is an avid organic gardener, animal lover, conservationist, and environmentalist. In 2005 she spearheaded efforts to defeat a road bond that would have benefited a developer and cost Woodcreek North residents a dramatic and 20-year tax increase. Linda Kaye is a member of PEC4u, the group of PEC members who initiated the investigation of PEC Board governance and practice.