Chugach Outlet
July/August 2001, Number 193

	President's report by Bruce Davison Capital credits set co-ops apart

Many of you noticed the special supplement we ran in the Anchorage Daily News for four consecutive Sundays in June. It listed the names of about 30,000 members of record from 1984 who had been mailed a capital credits check or notice and had not cashed a check. As you might imagine, many former members have not kept Chugach advised of their changes of address over the years and as a result might not receive their capital credits if Chugach did not publicize the names of persons to whom capital credits were owed. Capital credits are an important member benefit, and one that's worthy of some discussion.

Americans most commonly buy their electric service from a utility owned one of three {197387 SC} ways. Most Americans are served by investor-owned utilities, where profits flow to shareholders. Then there are those customers served by municipally-owned utilities, where profits flow to the cities. About 10 percent of Americans are served by a not-for-profit electric cooperative like Chugach, where any profits (called margins) flow back to the member-owners of the utility. In buying your electric service from a cooperative like Chugach you share in any margins the utility earns. This is the essence of our capital credits program.

Margins are what a for-profit business would call profits. Even though we're a not-for-profit, it's important for Chugach to earn margins each year to remain financially strong and satisfy the requirements of our lenders. Chugach generates margins by charging a little bit more than the cost of producing and providing electricity to its members and using this extra money to build equity. Equity is important when we need to borrow money. Just as in our personal finances, if you don't have much equity you are considered a greater risk by lenders, and therefore are likely to pay higher interest rates. Chugach has determined that an equity level of 25-30 percent is appropriate for the utility. It provides a good balance between financial strength and regular capital credits retirements.

Because we're a cooperative, margins are treated as an interest-free loan from the membership to the utility. Chugach uses margins to finance both capital and operating expenses and hold down the cost of electric service. Margins generated in a given year are returned about fifteen years later to members of record for that given year.

Margins are allocated to each and every member in proportion to the amount they were billed for electric service in a given year. These allocations are known as capital credits. Allocations usually average around 5-8 percent of a customer's total annual electric bills. Customers who paid bigger bills receive larger allocations. Chugach currently uses a FIFO (short for first-in, first-out) method to return capital credits. This means that we pay off the oldest credits on the books first. FIFO is probably the most common method used by electric co-ops around the country, and the average rotation cycle is about 20 years. By comparison, at Chugach we are closer to a 15-year cycle.

This summer members of record from 2000 will receive allocation statements showing what they were credited for last year. For many customers, it will probably be roughly equivalent to about a month's worth of electric service. It is important to keep in mind that an allocation statement is not cash. It shows you what you'll be entitled to receive, probably in about fifteen years.

Capital credits are paid or credited to members through an action known as a retirement. Retirements are authorized by the board to return specific credits after considering the impact on the organization.

So why did we advertise the list of names in the paper? There is a provision in Alaska law that allows a cooperative like Chugach to retain unclaimed capital credits, rather than having them transfer to the State of Alaska (a process known as "escheat"). In order to do this, we must fulfill some legal obligations to notify all members entitled to receive a check for capital credits which we carried out by advertising in the paper. The effort was successful. We have received thousands of phone calls, e-mails and letters in response to the ads. By meeting our notice responsibilities, Chugach is permitted to retain unclaimed capital credits.

The board has discussed the idea of allowing customers to cash out their capital credit accounts early, but at a discounted rate. We have not yet come to any conclusion about this topic, but we know many of you would like your capital credits earlier rather than later. Also you may not want to worry about keeping your address at Chugach current for the next fifteen years. Discounting for prepayment may provide a way to avoid the need to publish the names of so many former members who forgot to keep their addresses current with Chugach.

When you receive your 2000 capital credits allocation statement in a few weeks it will be one more reminder of the positive benefits of belonging to an electric cooperative.