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• W149065105 abstract "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: 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 requirements include purchased power, operating expenses, debt service, extensions and replacements of plant not directly financed, taxes, and cash working capital. The answer to the patronage capital question comes from the difference between the method in which we set rates and the method in which we keep our books. In other words, the cash method versus the accrual method, or as I like to call it the GAAP (generally accepted accounting principles) versus GARP (generally accepted regulatory principles). (Note: the GAAP method is equivalent to the Form 7 approach.) EQUITY GROWTH For example, let's assume that the only revenue requirement for a cooperative is $1,000,000 of utility plant extensions and replacements. The cash flow of that cooperative would be the collection of $1,000,000 in revenue through customer rates and a $1,000,000 payment for the plant (assuming no financing). In other words, under the cash method of accounting, or GARP, we have no cost in excess of revenues and therefore no additional equity or patronage owed the member. However, if we look at the accrual, or GAAP, method we will see a totally different result. The accrual method will still show $1,000,000 of revenue collected from customer rates, however, the only expense will be depreciation, which on $1,000,000 would be approximately $30,000. This results in a net margin of $970,000 for the cooperative. I call this instant equity. …" @default.
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• W149065105 title "Rethinking Patronage Capital" @default.
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