Trying to understand exactly what an electric cooperative system really is can be somewhat daunting. Here is a list of a few questions and answers that might help you understand:

1.	What is an electric cooperative?
2.	What is a generation and transmission cooperative?
3.	What is a distribution cooperative?
4.	What are capital credits?
5.	What is an investor-owned utility?
6.	What is a municipal electric system?
7.	What are the basic differences among electric utilities?
8.	Aren’t consumer-owned cooperatives run by or owned by the government?
9.	What is the big deal about being non-profit?
10.	What is the REA/RUS?
11.	What does an electric utility territorial law mean in Kentucky?
12.	What is the Kentucky Public Service Commission?

1. What is an electric cooperative?
   An electric cooperative is a type of electric utility that is owned by the members it serves. Its profits, or margins, are put back into the cooperative to help run the business efficiently, or are returned to the customer-owner. A co-op exists solely to provide high-quality service at the lowest possible price for its customer-owners.
   
   
2. What is a generation and transmission cooperative?
   A generation and transmission cooperative, or G&T, is owned by several distribution cooperatives to furnish their own generating plants and transmission lines to supply power to their member co-ops. To find out more about the two G&Ts providing power to Kentucky’s 24 distribution cooperatives, click here. 
   
   
3. What is a distribution cooperative?
   A distribution cooperative is a non-profit, customer-owned electric company that purchases electric power at wholesale and distributes it to its customers. For more information about Kentucky’s 24 distribution co-ops, click here. 
   
   
4. What are capital credits?
   An electric cooperative exists for the purpose of providing its members with electric service - on a non-profit basis. Therefore, in a cooperative, the net margins do not belong to the corporation - they belong to the individual consumers who paid the money on their monthly service bills. In most types of co-ops, net margins, after reasonable reserves are set aside to pay back government loans, operating costs and other expenses, go back to the members in the form of a cash patronage refund. The funds credited to members are “capital credits,” and over a period of years these membership funds take the place of federal investment. The individual member’s capital credits are his ownership equity in the system. Most electric co-ops have a provision in their bylaws for repayment of capital credits on a rotating basis.
   
   
5. What is an investor-owned utility?
   An investor-owned utility, or IOU, is an electric company owned by stockholders. IOUs provide a service to return a profit for investors.
   
   
6. What is a municipal electric system?
   Municipal systems are owned by a unit of government, like a city, that purchases electricity at wholesale and distributes it to customers.
   
   
7. What are the basic differences among electric utilities?
   The three kinds of utilities are distinguished more by their business structure than by the product they sell. They are electric cooperatives, investor-owned utilities, and municipal systems.

   •  An electric cooperative is owned by the members it serves. Therefore, all of the owners live in the cooperative's service territory, with most customers living in rural or semi-rural areas. A cooperative operates on a non-profit, cost-of-service basis. In Kentucky, electric cooperatives serve an average of eight consumers per mile of electric line.

   •  An investor-owned utility (IOU) is owned by stockholders who may or may not be customers and who may or may not live in the service area. The IOU is a for-profit enterprise. In Kentucky, IOUs serve an average of 25 consumers per mile of electric line.

   •  Municipal systems are usually owned by a city, a state or federal government agency. Municipal customers are usually located in urban or semi-urban areas. In Kentucky, municipal electric systems serve an average of 60 consumers per mile of electric line.
   
   

8. Aren’t consumer-owned cooperatives run by or owned by the government?
   No.

   Co-ops are owned by the customers they serve. Co-ops are run by policies established by a consumer-elected board of directors, normally about seven people, who in turn hire a manager and chief executive officer to hire additional staff for the purpose of running the organization. People often confuse co-ops with federal ownership because they typically receive a portion of their financing through federal loans. The interest rate on these loans is typically what is paid by municipal systems.
   
   

9. What is the big deal about being non-profit?
   Electric cooperatives developed because many citizens who did not have access to electricity in the 1930s decided to band together and form their own companies to acquire power. Investor-owned power companies said they couldn't make a profit in areas with a small number of consumers per mile of expensive power line. The cooperative business structure already was a well-established part of the American free enterprise system for providing services that were too big for individuals to do alone. Non-profit cooperatives were a natural for distributing electricity in areas where making a profit would be difficult.
   
   
10. What is the REA/RUS?
    REA: Before 1935, there was no national effort to bring electricity to rural America. In most rural areas, it was too expensive for electric companies to extend their lines out into sparsely populated areas. Farmers and other rural residents made due without the benefits of electricity, unlike folks in the cities who had electric service.

    However, President Franklin D. Roosevelt and some members of Congress felt strongly that having electricity should not be limited only to Americans who live in larger towns and cities. In 1935, President Roosevelt created the Rural Electrification Administration (REA). In 1936, President Roosevelt - working with Congress - passed the Rural Electrification Act. Thus began an enormous effort by rural Americans and the newly created REA to organize in their communities and plan how they would bring electricity to their towns and farms.

    When the Department of Agriculture was re-organized in 1995, the Rural Electrification Administration was combined with the rural Water Facilities and Telecommunications Programs to form the new Rural Utilities Service.

    RUS: The Rural Utilities Service (RUS) is the Federal "point" agency for rural infrastructure assistance in electricity, water and telecommunications.

    As a Federal credit agency in the United States Department of Agriculture, RUS provides a leadership role in lending and technical guidance for the rural utilities industries. The public/private partnership that is forged between RUS and these industries results in billions of dollars in rural infrastructure development and creates thousands of jobs for the American economy.

    If you’d like to find out more about the RUS, click here.
    
    

11. What does an electric utility territorial law mean in Kentucky?
    In 1972, the Kentucky General Assembly passed one of the country’s first territorial laws. The law, in essence, set up parameters for the service areas for Kentucky’s investor-owned utilities and the electric cooperatives, which were then filed with the Kentucky Public Service Commission. This was a good way for Kentucky’s electric utility companies to avoid the extra cost of stringing expensive electric lines that were already in place and to keep others from annexing service areas so the utility would not lose its source of income.
    
    
12. What is the Kentucky Public Service Commission?
    The Kentucky Public Service Commission is a three-member administrative body with quasi-legislative and quasi-judicial duties and powers involving regulation of nearly 600 conventional utilities, plus approximately 300 coin-operated phone vendors. It is funded by an assessment paid by all utilities under the Commission's jurisdiction based on a utility's annual gross intrastate revenues. The Commission's mission is to provide a healthy regulatory environment so that the utilities under its authority can safely provide quality services at reasonable rates to the people of Kentucky.

    With electric utilities, most of the state utilities’ rates are regulated by the Kentucky Public Service Commission, except for municipal systems and the five Tennessee Valley Authority (TVA) electric co-ops - but, the PSC does have the legal responsibility to enforce territorial boundaries of all electric utilities, including the TVA co-ops.

    If you'd like to know more about the Kentucky Public Service Commission, click here

Kentucky Association of Electric Cooperatives, Inc. 4515 Bishop Lane * Louisville, KY  40218 502-451-2430 * FAX: 502-459-3209 Terms of Use