RESTRUCTURING: A FICTIONAL CO-OP'S ATTEMPT TO PREPARE.

• Author: McDaniel, Tillman

ABC Electric Cooperative, Inc. is an electric distribution utility serving approximately 25,000 consumers. Cooperatives are a unique form of business ownership in that their consumers, who are called members, own them. Electric distribution utilities in the state have certificated areas. A "Certificate of Convenience and Necessity" sets forth each utility's certificated service area within the state. No other electric distribution utility is allowed to distribute or sell power to customers within the certificated area. However, electric competition will begin February 1, 2000.

The Public Utilities Commission staff recommended on May 29, 1998, that electric utility customer's with 1 MW of load and above be allowed to choose their power supplier beginning February 1, 2000. Customers with loads equal to or greater than 40 kW can aggregate their load to meet the 1 MW threshold requirement. Affected utilities must offer 1/2 of 1% of residential customer's access to competition beginning July 1, 2000. The number of residential customers given access to competition will be increased by 1/2 of 1% every quarter through the transition period. Access to the program will be on a first-come first-serve basis. It is not clear how long the transition period will be. The whole deregulation process is full of uncertainties but one thing is certain. The electric utility industry is going to be changing.

The co-op's consumers will be given a choice of who to purchase their power from in the future. Since everyone in the co-op's certificated area now must purchase power from them, it is going to be a big change. Some large chain accounts such as Wal-Mart will be purchasing their power from another power supplier. The regular residential rate of this co-op is one of the highest in the state at the present time and the co-op stands to loose some retail power sales. The main reason that the retail electric rates is high is because the wholesale power provider, XYZ Electric G&T, has a high wholesale power rate. The cost of wholesale power accounts for about sixty five percent of the co-op's total costs.

Plans are to open generation, transmission, metering, and billing to competition. Electric utilities presently enjoy a monopoly while serving in certificated geographic areas. Utilities are being forced to think in competitive terms; therefore, they cannot depend on the past, as many of the old rules are changing. Management must begin to think creatively and imagine how things can be.

Utilities will still be allowed to recover costs plus a return on their plant investment necessary to serve their customers. However, any markup on the wholesale power cost will belong to whoever is providing the electricity. Not only is there the problem of losing load but utilities are being directed to determine exactly what their cost components are to serve each consumer. There have been considerable discussions about itemizing these cost components, (such as: meter reading, billing, and accounting) on the customer's bill. The co-op must address these changes on three fronts: lower wholesale power costs, continue to become more competitive, and expand business offerings.

Lower Wholesale Power Costs

XYZ G&T must lower wholesale power costs. ABC is not only a distribution cooperative but also is part owner in the G&T, along with 12 other electric distribution cooperatives that are located in the state. In order to finance the generation plant, all of the cooperatives agreed to make this G&T their sole source power provider. This means that the owners cannot purchase power from other sources even if they are cheaper than XYZ. The G&T's wholesale rates are high so as a result distribution cooperatives regular retail rates are some of the highest in the state. As a part owner, ABC has many concerns about losing electric load in their service area. The G&T's wholesale electric rates need to be reduced so they can compete in a competitive environment. Since the cooperative is a part owner in the G&T, they are legally responsible for their debt. If they become insolvent and go bankrupt, it will adversely impact the co-ops that own the G&T.

How can the G&T become more competitive? Each cooperative appoints one board member to the G&T's board of directors. The board has instructed management to figure out a way to cut wholesale power costs. As a result, management has had lengthy discussions with the Rural Utility Service (RUS), their banker, about forgiving some of the principal and restructuring the loan but RUS has been unwilling to do either. The G&T has engaged a consultant to let it be known that they will consider buyout or merger offers from any interested parties. This has resulted in considerable interest in the assets with several proposals being submitted.

As of October 14, 1999, XYZ G&T will be entering negotiations with another cooperative owned G&T and an IOU for a merger of XYZ the other cooperative and the sale of certain assets to the IOU. The completion of all approvals and consummation of the transaction is projected to take place during 2000.

Continue to Become More Competitive

First and foremost ABC Electric Cooperative must continue to become more competitive. They must continue to do the things that will increase efficiency and lower costs. How can this co-op become more competitive?

Load Management

The co-op has accelerated its load management activities in order to shave peak demand and thereby reduce power costs. The cooperative is...