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Consolidating Co-ops

Like it or not, changes are coming for electric cooperatives. Fewer and bigger might be the inevitable result.
Fortnightly Magazine - June 2004


When power planners at Basin Electric Power Cooperative began trying to decide how and where the company's next big power plant would be built, they did what a co-op does best -they reached out and formed a coalition.

Early this year, Basin joined with three other utilities-one investor-owned and two municipals-to conduct a joint transmission study that would help determine the best location for a new, 600-MW coal-fired power plant, and possibly a 100-MW wind farm.

"The coalition was formed to capture the economies of scale that are necessary to provide low-cost, reliable power, and to help mitigate the risks associated with developing a large resource," Hill says.

Combining efforts to serve an aggregated load is the name of the game for Basin, which generates power for 125 member co-ops from northern Montana to southern New Mexico. As such, Basin is a super-cooperative, created by a group of generation and transmission (G&T) co-ops to own and operate power plants to serve dozens of small distribution co-ops.

Basin Electric exemplifies the very best of G&Ts and the co-op model in general. The company is one of several noteworthy examples of co-ops banding together to form a greater-and more efficient-whole.

At the same time, however, most electric co-ops remain fundamentally small, local entities. Therein can be found a long-standing source of their strength. "The consumers own the business," says Glenn English, CEO of the National Rural Electric Cooperative Association (NRECA) in Arlington, Va. "Decisions are made by the members' elected board directors. In many ways, it's like our democratically elected government. If you don't like the policies, you elect a new administration."

Co-ops' local control, however, might be limiting their ability to fulfill their primary mission-namely, to provide reliable electricity service for the lowest possible cost. Some analysts argue that co-ops are wasting their customers'/owners' money by failing to consolidate and economize administrative costs. Furthermore, the local-control argument might no longer carry the weight it once did.

"The idea of a co-op was great in the '20s and '30s, when electricity wasn't extended out to everyone," says Ed Tirello, managing director and senior power strategist with Berenson & Co. in New York. "But now suburbia has moved out to the rural areas. You have a lot of co-ops that are serving urbanized America, and their costs remain high because they have fewer customers."

A confluence of forces-political, market, and economic-may be putting pressure on co-ops to consolidate and update their business approaches. If these forces persist, the typical co-op of the future will have much more in common with Basin Electric than it does with the small, insular co-ops of today.

Power to the People

If the U.S. Congress ever gets around to repealing the Public Utility Holding Company Act (PUHCA), the nation's 100-odd investor-owned utility holding companies might quickly consolidate into Ed Tirello's famous 50. After all, the 10 biggest utilities already sell about 30 percent of the country's electricity.

Yet at the same time,