Electric Cooperatives in a Deregulated Market

By Lindenberg, Steven P. | Forum for Applied Research and Public Policy, Summer 2000 | Go to article overview
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Electric Cooperatives in a Deregulated Market

Lindenberg, Steven P., Forum for Applied Research and Public Policy

With the help of applied research, electric cooperatives are expanding their horizons beyond rural America.

Sixty-five years ago, the federal government passed the Rural Electrification Act, promising rural Americans that they, too, would enjoy the benefits of electric power. That promise, however, stopped short of explaining exactly how it was supposed to happen. The legislation that created the Rural Electrification Administration (REA) was more of an open appeal to encourage the construction and operation of generating plants, electric transmission lines, and distribution systems to serve rural areas. In return, those constructing such operations could expect low-interest loans from the federal government.

There weren't a lot of takers, at least at first. While financing a rural electric-system was a concern, the real showstopper was that electric utilities are complex, technical businesses, and the challenges of designing, constructing, and operating electric transmissions and distribution in rural American was something no existing organization wanted to tackle.

Those already in the electric utility business knew that the economics of providing affordable power to isolated farm families held out little hope of cost recovery, let alone profits within normal return-on-investment time requirements. In addition, the capital-intensive nature of the business and the commitment of investor-owned utilities to regulatory realities and rate structures that locked them into particular markets discouraged the risk of extending service beyond urban centers. As tax-based entities, municipal utilities did not feel it their responsibility to embrace anything outside city limits. Faced with those harsh realities, it wasn't long before it became clear that solving the problem of serving rural America required the development of new engineering approaches and an entirely new and innovative financing mechanism.

The grand experiment with the cooperative structure began as a grassroots effort, strongly supported by the federal government. In the end, it became one of America's most dramatic success stories. Dedicated local residents and capable federal employees shared the responsibility for design, construction, and operations.

In the late 1930S, rural America possessed few of the skills required to create and manage an electric utility, but there was plenty of determination. With REA supplying the engineering standards and guidelines, based on contemporary practice and adjusted for rural settings, and with the local community providing the labor and oversight through democratically elected directors, the result was a rural America that was almost entirely electrified by the mid-1950s. Today, over 30 million consumers are served by rural electric cooperatives.

Stasis and Change

As the electric utility industry now enters a period of rapid deregulation, the realities facing the rural electric cooperative industry are no less challenging than they were in the 1930s. The needs then were for basic electrical engineering and construction skills. Today's needs include new technical, business, and marketing skills necessary to successfully manage a competitive enterprise and stay within the cooperative structure of local control.

This overarching challenge hovers over the entire electric utility industry. The abundance and efficiency of electricity have led to many new electrical devices that have changed the way Americans work and that require highly reliable service. Moreover, the landscape of rural America has changed as well. Where the original program served mainly farmsteads, today's rural electric cooperative program serves essentially every type of commercial and business enterprise imaginable as well as suburban subdivisions and entire communities.

This transition--from an almost entirely rural electric distribution network to a modern all-purpose electric generation, transmission, and distribution system that offers a wide variety of ancillary products and services--was possible only with routine and substantial investments in research and development, much of which was supported by cooperatives.

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