Capital credits, and how REC fails to inform its members about them

Repower REC is pushing Rappahannock Electric Cooperative to be more transparent about its finances and board policies. As co-op members, we – and you – own REC. A business’s full financial transparency with its owners is essential. Without complete information from the business we own, we can’t tell whether REC board members are living up to their responsibility to look out for our best interests.

REC Capital Credit growth from 2005 to 2017

Complete information is especially important concerning capital credits because REC has nearly $400 million of its members’ funds – our funds – retained as capital credits. These amounts are allocated in accounts at REC with our names on them. But REC won’t tell us how much is in each of our individual accounts unless we know to ask. That’s unacceptable. We’ve been asking REC to put this basic information about our total investments in our co-op on our monthly bills. But so far REC has declined to do so.

And REC won’t even disclose its policies on retiring capital credits. One of Repower REC’s co-founders, a long-time REC member, asked for that information last year, but REC refused to provide it to him. A National Rural Electric Cooperative Association (NRECA) task force report recommends that electric co-ops keep their members well informed about the co-op’s capital credit policies:

Every cooperative should have a communications plan for educating members about capital credits and the cooperative’s capital credits policies. Every director and each employee should understand the policy and be able to explain how it works and why it was adopted to members who have questions.

But when a longtime REC member (and Repower REC co-founder) last year asked the co-op to disclose its capital credit policies, REC dismissed his request by saying that Virginia law does not require it to do so. We wonder how many of REC’s board members have read, or even know about, the NRECA recommendation that all U.S. electric co-ops be fully transparent about their capital credit policies. And how many current board members are able and willing to explain those policies to co-op members?  We’re still waiting for that explanation.

What are capital credits, and why should REC members care about them?

So what are capital credits? They’re probably the most important aspect of what distinguishes a nonprofit electric cooperative (like REC) from a for-profit, investor-owned utility like Dominion Energy Virginia, which is owned by shareholders.

Generally speaking, the amounts REC receives each year in excess of expenditures are called “margins.” As a nonprofit, tax-exempt electric cooperative, REC can’t just keep these funds for itself. Rather, it allocates annual margins to the co-op’s members in proportion to those members’ patronage of the co-op during that year. Then, each year, REC’s board decides how much of the total accumulated capital credit allocations – about $400 million in 2018 – can be retired (returned) to REC members that year. The board doesn’t just decide how much will be returned, it also sets policies that determine how long REC will hold on to members’ funds that aren’t returned, and what methodology will be used to determine which members get what amounts, and when. These decisions have significant impacts on REC member-owners, yet REC’s board makes them in near-total secrecy. The lack of transparency is stunning and entirely unwarranted.

Why should we care about capital credits?  Because the amount involved is huge – $400 million – and it’s our money. Most REC members care a lot about how high (or low) their electric rates and bills are, and rightly so. But as business owners with significant amounts invested in our co-op, we should also care about our investment in the business, especially when our combined investments total hundreds of millions of dollars. By keeping us in the dark about REC’s capital credit policies, REC makes it hard for us to see how important capital credits are.

Now it’s perfectly appropriate and normal for REC to keep a large amount of our patronage capital for its use, invested for a time, in the co-op’s business. That’s how co-ops work. But for how long a time? And when can a member expect to see his or her investment returned? Those are the important policy details that REC fails to disclose to us. Of course, some of those details depend on the financial condition of the co-op. Our investment in our co-op, like any investment in a business, depends on the financial condition of our co-op. But the co-op should still have goals and policies. And it should disclose those to its members, as the NRECA task force recommended over a decade ago. REC’s failure to do so is disturbing.

Last November REC announced that it was “retiring” – returning – $7.8 million in capital credits to its consumer-members, in the form of credits on their bills. REC’s announcement of these capital credit retirements said that REC was “investing back in members through these credits.” But that’s misleading. REC isn’t “investing” in its members at all. In fact, the truth is just the opposite – REC members invest in REC. And when REC retires members’ capital credits the co-op is simply returning a portion of members’ invested funds to them.

To know whether REC’s $7.8 million in total retirements/refunds of capital credits last year was a fair amount requires some context. Unfortunately, REC and its board of directors haven’t given REC members that context, which would require disclosure of REC’s capital credit policies and goals.

The $400 million of members’ funds currently tied up and invested in capital credit accounts at REC is about double the total amount members had invested in the co-op a decade or so ago. As co-op members we deserve (and need) to know what policies REC’s board is following in determining when we REC members can expect to see our investments in REC returned to us, and how the board is making that important determination.

Many U.S. electric co-ops publish their capital credit rotation policies and practices on their websites. A rotation schedule gives a goal of how long a co-op expects to hold on to its members allocated capital credits. For example you can see the policies of Pedernales Electric Co-op in Texas here and here (goal of a 30-year rotation, meaning all margins retained 30 years ago will be refunded this year, financial conditions permitting), the policies of Webster Electric Co-op in Missouri here (“well within the [NRECA-recommended] standard 20-year rotation”), and the policies of Oconto Electric Co-op in Wisconsin here (“It is [the] goal of the board to keep capital credit retirements on a 20-year rotation”).  

REC fails to disclose this basic capital credit information to its members.

The co-op’s board of directors is supposed to be looking out for the interests of co-op members. Board members should be knowledgeable enough to challenge REC management on this issue if it is management that is behind the lack of transparency. But as we’ve explained elsewhere, it appears that most or all board members don’t view their jobs as entailing challenging management on matters of policy. Or perhaps they simply don’t understand capital credits well enough to make an informed challenge.

We honestly don’t know whether REC is retaining excessive capital credits, because of REC’s lack of transparency about its affairs. Each year when credits are retired, REC mentions the total amount retired in Cooperative Living magazine. But REC focuses almost exclusively on the amount that is retired, rather than the much larger total amounts of members’ capital credits that the co-op retains and accumulates (i.e., the amount that is not retired). In fact, neither Cooperative Living nor the REC website reveal how much in total capital credits are allocated to members’ accounts each year, or the total accumulated capital credits that are on the co-op’s books. One has to find and examine REC’s financial statements to unearth that information.

Each REC member is told on his or her November or December bill how much his or her individual credit allocation is for that year, and how much his or her retirement amount is for that year. But the bill does not list the member’s total accumulated capital credit balance. Nor is that total accumulated balance included on REC’s password-protected online Smarthub account, where co-op members can see all sorts of other information about their accounts.

For elderly, longtime co-op members, and for large users, those accumulated capital-credit balances can be quite substantial – many thousands, or tens of thousands, of dollars. It’s hard to avoid the conclusion that REC withholds easy access to that information from co-op members because it doesn’t want them to be thinking about or asking questions about how much of their capital credits are being retained by REC and for how long. That’s not how a co-op should work. We deserve better and need a board that is fully committed to transparency.

What we can do?

There are two things REC members can do to work for greater transparency on capital credits. First, they can join Repower REC in pushing REC’s management and board to comply with NRECA’s transparency recommendations.

But it’s clear that the current REC board, or at least a good portion of it, isn’t up to the job. Some board members have served for 30 years or more. They have had access to NRECA’s capital credits task force report for 15 years, yet failed to ensure that REC implemented the task force’s transparency and education recommendations.

The second thing is to vote for board candidates who will pledge to work to make REC fully transparent on capital credits. We need new board members who are committed to and accountable to the co-op’s membership, and committed to full financial transparency at the co-op we own.

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