You are a member-owner of an electric cooperative. Cooperatives are businesses organized differently from other types of companies. The principal difference is one method of financing.
The equity in a co-op comes almost entirely from its member-owners. Capital credits are the most important measure of equity for a cooperative.
Say a person moves to the community, signs up to receive electric service with the co-op, and becomes a member-owner. This person pays a deposit and can then use as much or as little electricity as he or she needs. An invoice for the electricity is mailed each month (or yearly for seasonal accounts) which the person pays.
The rate which is charged for electricity service on the invoice often turns out to be slightly higher than the cost the cooperative incurs to provide the service. The difference between the invoice amount and the cost the co-op incurs is called a margin. (Margins are called profits when they are earned by a 'for-profit' company.)
Owners get the margins
Margins belong to the member-owners. Margins are assigned-allocated--to members based on an equation that treats each member-owner fairly. Often the margins for a year are allocated based on the dollar amount each member-owner spent on electricity during that year. They can also be based on the number of kilowatt-hours used or even the cost of service the co-op incurred on behalf of each member.
Margins are assets
This money--the margin--is used by the co-op for a certain period of time before it's returned to the member-owners. Returning capital credits to member-owners is called 'retiring' capital credits. Unretired capital credits--to the co-op--are monies the co-op does not have to borrow. To the member-owner, unretired capital credits are funds the member-owner has temporarily lent to the co-op without interest.
The length of time the co-op keeps the money varies between co-ops and sometimes even varies between rate classes in one co-op. Economics also figure into it. If the co-op will be financially jeopardized by paying capital credits, the board will delay retiring them or retire a smaller percentage of them.
Credits not retired all at once
Once a co-op starts retiring capital credits, a certain percentage of the margins is paid out-retired--each year. Sometimes those member-owners who joined the co-op first are the first to have their capital credits retired. This is called a first-in, first-out (FIFO) retirement policy. Sometimes the capital credits of newer member-owners are retired first. This is called a last-in, first-out (LIFO) retirement policy.
Hybrid retirement policies
There are also retirement policies which combine aspects of a FIFO policy with a LIFO policy. Such an example could be a retirement of 20 percent of the allocations from 20 years ago and retirement of 10 percent of the allocations from last year.
The capital credits allocation and retirement policies are set by each co-op's board of directors. Usually these policies can be changed if the co-op's economic goals change or if the makeup of the co-op makes old policies unfeasible.
Tough for small communities
For example, if a co-op is experiencing decreasing kilowatt-hour sales each year and a large percentage of its member-owners are in one age bracket, a first-in, first-out policy can eventually cripple the co-op. At some point, those member-owners in the same age bracket will pass away or move out of the co-op service territory into town and stop paying the co-op for electricity.
Co-op revenues will therefore decrease even though the co-op's obligation to retire capital credits from more financially robust years stays the same or increases. This is the sort of tricky capital credits situation it can take 30 years to get into. It can't be solved overnight.
Balancing equity
Board members are cautious about retiring capital credits, but they are also mindful of the obligations of the future. They must balance the equity of today's members against the equity of yesterday's members and tomorrow's members.
Capital credits management requires reliable information, a commitment to the financial health of the co-op, and a commitment to the cooperative community. Revolving over the years, capital credits allow members to participate in the financial health of their co-op while they enjoy the benefits of its service.
Making decisions about capital credits is not easy, but allocating and retiring these member-owner investments in the co-op is one of the most important management tools available to the board.
The board of Wyrulec Company tries to refund five percent of the cooperative's allocated capital credits each year. Currently, capital credits are retired on a first-in, first-out basis.
In the case of a deceased member, capital credits will be paid to the estate. Should the executor of the estate wish to have the capital credits paid out in one lump sum, the amount will be discounted. The amount of the discount will depend on how early in the capital credits schedule the deceased was an active Wyrulec member and how many years away that member's final capital credit retirement is anticipated.
