Reason Foundation

Reason Foundation

Electric Cooperatives and a Changing Power Industry

How Outdated Statutes Short-circuit Competitive Markets

Terri Kandalepas and Lynne Kiesling
August 1, 2002

Executive Summary

Restructuring and increasing competition in the electricity industry is a reality in over half of U.S. states and the District of Columbia. As the electricity industry becomes more competitive, competition in electric power generation will create more choices for consumers and lead to efficient production of power. To realize these benefits, though, will also involve reconsidering the tax, legal and regulatory treatment of electric cooperatives. Cooperatives are member-owned non-profit private power companies, and they enjoy the following subsidies:

Cooperatives have also changed their business models as they have used these characteristics to their advantage, diversifying into such complementary businesses as natural gas, water and waste water, telecommunications, and cable and satellite television. As the country has evolved demographically, cooperatives have also found that their member base is increasingly suburban instead of rural, and that they can reach out to customers that are not their traditional members. Many cooperatives that used to serve small, rural communities now serve upscale urban developments, yet retain the preferential treatment accorded to them in return for serving small, rural communities. Thus many rural cooperatives are going commercial concerns, not lifeline service to rural areas any longer.

A timely reexamination of these factors would contribute to the growth and success of competition in the electricity industry. Integrating electric cooperatives into the restructuring industry will bring benefits to cooperative members and consumers, but the best way to ensure that those benefits occur is to create consistent tax, legal and regulatory treatment. Markets do not function well when participants play by different rules.

We make a series of policy recommendations for cooperatives to navigate the transition to a competitive electricity industry, and for all consumers to enjoy sovereignty to choose providers and services:

Remove federal preference power special treatment for cooperatives, opening access to federal power for all through an auction process.

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