Capital Credits? Membership Equity? What does it all mean?

What are capital credits?

Many electric cooperatives outside the Tennessee Valley return capital credits to members. That means that when a cooperative brings in more revenue than it spends during the year, the Board of Directors can choose to return part of that to the members (some or all of the excess might be used to pay off debt). Sometimes and in some places these capital credit checks to members are $2-3, sometimes they are much more. Some co-ops send these checks every year, some almost never.

Why doesn't Middle Tennessee Electric return capital credits to its members?

In the 1930s the Tennessee Valley Authority and the electric cooperatives it serves, such as MTEMC, made the decision to re-invest excess revenue back into the electric system. By contract with TVA, MTEMC cannot return capital credits.

Why did TVA and the cooperatives make this decision?

To keep rates as low as possible. Re-investing excess revenue into the electric system was more in keeping with the original intent of the TVA Act, which was to make electric power available at the lowest possible cost. As opposed to returning excess revenue to members later, this allowed members to keep more money in their pockets in the first place.

Was it the right thing to do?

Historically, this has proved to be a wise decision, as cooperatives in the Valley have about the lowest rates in the United States. For MTEMC members, it has been particularly beneficial, as our rates are low even by Tennessee cooperative standards. Re-investment has allowed MTEMC to make significant system improvements that save today's members millions of dollars each year. Plus, re-investment allows MTEMC to keep up with the area's incredible growth without going headlong into debt.

What is membership equity?

It basically means totaling all the cooperative's margins (excess revenue) since 1936 and dividing that by the total value of the cooperative. When you do this, you find MTEMC has about 67 percent membership equity.

Where does MTEMC have this equity invested?

Members' equity is found in the cooperative's poles, lines, transformers and substations.

Does MTEMC have large cash reserves?

No. MTEMC has less than 1 percent of annual revenue on hand as cash investments for emergency needs.

Why is MTEMC's membership equity so high?

Because the cooperative has low debt and a good electric system. MTEMC's membership equity is 67 percent, which is high by cooperative standards. It is a sign that the employees and Board of Directors working for the members have been good stewards of the members' money. Significantly, MTEMC's operational expenses are the lowest of virtually any cooperative in the United States.

What would happen if MTEMC cashed out part of its equity and returned the money to its members?

MTEMC would have to borrow the money, send the money to the members and then raise rates in order for the members to pay back the debt. Members would get a check, but they would have to pay it back over a period of time…with interest. Of course, the TVA contract would have to be changed before MTEMC would be able to consider such a move.

How big a check would members stand to receive?

It would depend upon many factors, starting with how deeply the cooperative would be going into debt. Distributions would also depend on the length of membership and the amount of electricity purchased.

So what good does this equity do for a member?

It truly makes you part of this cooperative, as your equity combined with many others, helps the membership at large to have reliable service and low rates. It is about the greater good and meeting the needs of the many through cooperation. You can have confidence you're investing in a system that's working well and will continue to do so for you, your neighbors and any of your family members who might be served by the cooperative in the future.

If MTEMC had been giving capital credits since its inception, would members be better off today?

This is an important question for this debate, and we think the answer is a resounding "no." As a result of re-investment, we have been able to pay for system efficiency initiatives that save our membership millions of dollars each year. That translates into considerably lower rates than would be the case otherwise, because if we had not re-invested this money, we would not have been able to perform these initiatives. And we would find ourselves today with higher rates and a much less efficient system.

What is an example of these "initiatives" that have kept rates low?

In the 1960s, MTEMC made the decision to use some of the re-investment money to, essentially, double the system's voltage. It was a huge decision, because it would take years to complete and millions of dollars to fund. The project was completed two years ago (with the exception of some areas of the recently purchased city of Lebanon system). As a result, MTEMC saves millions of kilowatt-hours of electricity and millions of dollars for the members - as much as $10 million a year. If MTEMC didn't re-invest its excess revenue, the cooperative could not have paid for such an initiative.

How much lower are our rates than other cooperatives?

Tennessee cooperative rates are among the ten lowest in the nation, and among Tennessee cooperatives, MTEMC has the second lowest rates. Incidentally, among Tennessee's five largest electric utilities (those serving Memphis, Nashville, Knoxville, Chattanooga, and MTEMC) Middle Tennessee Electric features the lowest electric rates.

What is the proof that MTEMC is doing a good job in managing the membership's money?

There are many proofs, but here are five cold, hard facts from an independent source - the Cooperative Finance Corporation, headquartered in Herndon, Va. (These 2003 statistics compare MTEMC to 18 other cooperatives of similar size around the nation):

MTEMC members pay less interest on borrowed money than do members of any other cooperative in the United States.

MTEMC's administrative costs are the lowest in the nation.

MTEMC's operational costs (costs after power is purchased from TVA) are the lowest in the nation.

MTEMC's equity is the highest among cooperatives, which means its debt and liabilities are the lowest of any cooperative in the United States.

MTEMC's margins (excess revenue) are the second lowest in the nation.

Would members be hurt if MTEMC began returning capital credits?

Possibly. What is certain is that MTEMC members have been best served by re-investing excess revenue as opposed to returning capital credits. Rates could be raised so capital credits could more likely be returned, but would that make sense? Some would argue it could help members feel more a part of the cooperative, but it might do so at the expense of higher monthly bills. Returning capital credits without raising rates would severely limit MTEMC's ability to meet our area's growth and to further invest in greater system efficiencies…which has been a philosophy that currently saves our members millions of dollars each year.

Five important points to remember about this issue

1) Under the current TVA contract, electric cooperatives, like MTEMC, cannot distribute excess revenue (capital credits) to members.

2) The decision by TVA and MTEMC to invest excess revenue (margins) back into the electric system has proved to be a good one as MTEMC's rates are among the lowest in the nation.

3) Among the 30 largest electric cooperatives, MTEMC has the lowest operating expenses in the United States.

4) MTEMC's membership equity is in its poles, lines, transformers and substations.

5) Cashing out any membership equity would mean borrowing money and raising rates.

Posted on June 27, 2008.

 

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