Electric cooperatives operate at cost, they are not in business to make a profit. So any excess revenues, called margins, are returned to LCEC members in the form of capital credits. There are two ways that LCEC finances long-term investments in utility infrastructure: debt and equity. Debt is borrowed from outside sources such as banks. Equity is money invested by cooperative members.
Most of the time, margins are not excess cash in the bank. Margins show up on the books as capital that has been invested in the system.
Capital credits are the value of a cooperative member’s investment in LCEC. An LCEC equity capital credit account reflects the dollar value credited to a member over the entire time they have service with LCEC.
As members of LCEC, customers are responsible for providing part of the capital necessary to operate the cooperative. Without the equity capital from members, LCEC would be required to borrow more money from outside sources in order to continue providing reliable electric. The result of borrowing additional money would be higher expenses due to an increase in debt and interest payments. To meet the higher expenses, electric rates would have to be increased.
LCEC Members Equity is Not Cash
Remember, equity is not cash sitting in the bank somewhere. It represents investment in operation of the business. It is poles and wires and other capital needed to operate and maintain a reliable electric system. Equity capital is also an essential part of the financial structure for any business because it provides a buffer against unexpected expenses or losses and reduces the risk that loans cannot be paid. This equity is retained until the capital credits are replaced by investments by new LCEC members. Then it can be retired and returned.
Since the value of your LCEC members equity capital account is not cash, it is not possible to retire a lump sum payment. If each inactive (or active) member were to receive a lump sum payment, LCEC would have to significantly increase rates to fund the payments.
LCEC retires and returns total equity capital credits
According to a Rural Utilities Service/Royer study in 2015, electric cooperatives maintaining a schedule of retiring equity after a customer has stopped service for 25 years would result in a 1.41 percent rate increase.
According to the same study, retiring equity after 10 years would result in a 3.84 percent rate increase. Currently, LCEC retires and returns total equity capital credits to accounts that have been inactive for seven years or longer and has been able to reduce electric rates five times in the past three years.
Each year, the LCEC Board of Trustees reviews the financial position of LCEC in order to determine if a portion of equity capital can be retired and returned to members. This practice is evaluated closely by the Board of Trustees each year to determine the impact on electric rates for current customers, the bearing on existing loan requirements, and the continued investment in the electric system.
It is a balancing act and decisions about the amount of equity to retire could result in rate increases or decreases, favorable or unfavorable credit ratings and the ability to secure future loans, or a reliable or unreliable electric system.