Cooperative organizations and equity.

• Author: Gill, Charles B.

The accumulation, use and disposition of the involuntary equity contributions members make through rates paid for electric service is vital to the effective management of your rural electric system. The return of equity on a percentage basis is key to providing value to members for the equity they have contributed.

One of the most misunderstood aspects of the operation of a rural electric cooperative is the accumulation, use and disposition of equity. Except for sale and leaseback transactions and a few other unique accounting arrangements, the only method of accumulating equity is through the involuntary contributions made by consumer/members through rates paid for electric service. Additional equity accumulation may occur through the reinvestment of the member investments in various securities. The word involuntary is used because if the member were permitted to determine rate levels individually, he would probably not agree to an interest-free investment component in the rate.

Once collected, the cooperative usually views these funds as interest-free capital. To strengthen the income statement and balance sheet, the organization uses the capital in lieu of debt capital. Up until recently, less than a majority of cooperatives made any attempt to return this capital to its owners, the members of the cooperative, except at the time of death.

In 1974, a national committee spent an extended period of time studying this subject of equity accumulation and capital credit retirements and issued a detailed report on all aspects of the subject. The study recommended, among other matters, refunding capital on a regular basis and urged the consideration of the use of percentage method of retirement, whereby current members would receive an immediate refund of a portion of their involuntary investment.

In recent articles in this magazine on equity, suggestions have been made to convert this equity to a form of stock in order to provide liquidity to the members so as to maximize the value of the members' investment in the cooperative. In this manner, the member would determine when his contribution would be retired through a decision to hold or sell the stock. The 1974 study looked into this matter and concluded that a return of equity was more efficient than a return on equity. If a dividend on the stock is not paid, then the only way to realize value on the part of the member would be to sell his equity share (stock). The sale price would require a...