Rethinking patronage capital.

• Author: Mercer, Duane C.

What is the most common topic of conversation at board meetings today? Your first response would probably be deregulation. But, according to many of my clients in Indiana, patronage capital has been discussed and argued as much, if not more than, deregulation. Maybe your discussions on deregulation have led you to discussions on patronage capital. And in some cases you avoid discussing patronage capital at all due to the philosophical differences in the attitudes of board members. Many of you have found that your board is more divided over the issues surrounding patronage than the possibilities of deregulation. How can something so simple in theory become so complex in reality?

When I'm asked what the issues are, concerning patronage capital, I respond with six (6) common concerns: (1) Should we pay patronage?; (2) How much patronage should we be paying?; (3) How much can we afford to pay?; (4) How does the IRS view this?; (5) To whom do we pay it?; and finally, (6) Why is our annual patronage growing faster than it did in the past?

PATRONAGE DEFINED

To answer these concerns we must first look at the cooperative philosophy and what patronage capital means. To do this we must first define patronage capital. I define it as: "any revenue in excess of operating costs. This excess is treated as equity capital contributed by the cooperative's members, which eventually must be returned to the members in proportion to their purchase of electricity." In a cooperative, equity can only come from the members. Once we accept this definition of patronage capital, then we have to ask ourselves three basic questions.

1) If we are a cooperative, and cooperatives are not-for-profit utilities, then how did we accumulate so much equity?

2) If rates to members are set to recover cash revenue requirements, then how did cooperatives generate such large net margins from operations?

3) If rates are set to collect cash revenue requirements; and the cooperatives have so much equity; and if equity represents net margins from all the years of operations; then why don't we have any cash to retire patronage?

The real key to this issue is in the second question.

In the state of Indiana, where I am an auditor and financial advisor to electric and telephone cooperatives, rates are set for not-for-profit utilities based on cash revenue requirements. I know that in many states where electric cooperatives are not regulated, rates are set on a similar basis. Those revenue...