January | February Chairpersons Corner

One of the questions I’m often asked is “why do Cloverland directors attend classes to serve on the board?”

Although directors may be knowledgeable and highly educated in their respective businesses, they may benefit from learning more about the electric utility business.

There are over 900 electric utility cooperatives nationwide. NRECA (National Rural Electric Cooperative Association) developed a series of classes to help directors better understand the electric utility business as well as the duties and responsibilities of being an effective co-op director.

There are three levels of accreditation directors can earn:

  1. CCD – Cooperative Credentialed Director
  2. BLP – Board Leadership Program
  3. Director Gold Program

When I began my management position with Edison Sault Electric, I completed coursework offered by a firm called Public Utility Reports (PUR). PUR courses focused on finance and operations of the utility business as well as the difference between the utility business and manufacturing. One of the things emphasized was that the utility business is “capital intense.” It takes a lot of money to build and operate a utility, whether it is water, sewer or electric. As a result, return on investment capital is spread over a longer term.

I recall learning that for every dollar invested in the manufacturing sector, investors could expect about $1.50 return on their investment. However, utilities could expect 50 cents return on every dollar invested in infrastructure. But utilities are awarded a “franchise” and operate as a regulated monopoly to providing service to a specific area. It would not be practical to have more than one set of poles or cables running down a street to serve customers. Decisions a utility board must make are made with long range considerations taken into account. Most utility assets are depreciated over a 30-year life span.

Although trained in the world of investor-owned utilities (IOUs), I soon learned that co-ops are an entirely different business model. Co-ops came into being as part of FDR’s New Deal legislation passed during the 1930s, which intended to bring electric service to rural America. IOUs didn’t want to invest in rural areas due to long distances between customers making serving them unprofitable. Both IOUs and co-ops provide a valuable commodity essential to modern life (electricity), but there are significant differences between the two business models.

With IOUs, any monies earned above the authorized return on equity, as determined by the Public Service Commission are paid to stockholders in the form of dividends. With an electric co-op, any monies earned above what is necessary to operate the business is returned to the members in the form of capital credits.

I hope this explanation helps answer the question of why directors train through NRECA. It is part of our effort to serve you, our members, in the best possible way.

-John Sawruk