I have proposed that to enhance the prosperity of the hometown that its best people create an investment co-op that would let small investors like me invest in local businesses. It could be organized in Tennessee under TCA 65, the title controlling cooperatives, or perhaps another. The blessings such an investment hub would bring would be local strength in the great downturn ahead, the meltdown of which the 2008 collapse was a foretaste.
To get an idea of the cooperative concept, we talk today with Robert McCarty, a former newspaperman who is the media rep for Volunteer Energy Cooperative which serves power customers in Tennessee from the Georgia to Kentucky lines.
Of special interest should be Mr. McCarty’s discussion of how a co-op handles the question of profit. Profit is not paid by a dividend as it is in a traditional investment on Wall Street. It is paid by lower prices. It could be paid by discounts, chits, and other means, all outside the onerous federal jurisdiction that imposes virtually impossible costs on such an effort.
Chattanooga’s investment hub would be a way for small investors such as me to invest purposefully and deliberately in local economy. Elsewhere, such groups are limited to taking investment funds from within the state wherein they are incorporated.
Below is part of our interview at Copperhead 1240 AM, Nooganomics.com, a show airing weekdays 1 to 3 p.m. Please join me daily for my investigations into how we might prosper local economy and the free market.
Robert McCarty: We are a 112,000 member electricity distribution cooperative. What we do is buy electricity from TVa and then we distribute that electricity to 112,00 members through a swath of Tennessee that covers about all or part of 17 counties from the georgia line to the Kentucky line. *** So we got started in 1935 Basically what paved the way for coops across the country was the Rural Electrification Act, which provided for cooperatives, signed by President Roosevelt on May 11 and just a few days later, May 29, about 55 people in Meigs County got together. They had been around for-profit power companies in trying to get electric service to the more rural parts of the [county] and the for-profit electric companies just weren’t interested. They figured they had to run too many miles of line to serve too-few people, so they just weren’t interested in doing that. So these 55 people in Meigs County just got together and said we’ll do it ourselves.
David Tulis: Bold. That’s pretty bold.
Robert McCarty — Kind of in the spirit of a barn raising. It takes good old rural Americans with a do-it-yourself attitude, so they did. They got together. I think in the first month our total billing was $183.”
‘Cooperative spirit’ among shareholders
David: How do you — back up here, Robert. How can common people become distributors of electricity? That requires machinery. That requires stations. Sounds tough.
Robert McCarty: It does. It does. No one person has to do it all. That’s the cooperative spirit. Everybody pitches in a little bit. Also, as you mentioned, there’s a lot of infrastructure that’s involved. The rural electrification act also provided for this cooperative to borrow money from the federal government — which has been paid back many times over to get this infrastructure started and get it going
David: The word co-op is short for cooperative. It s about cooperation, ***, which is a very Christian thing to do and very common in the American past. How is it a cooperative now? Is it just a company now? Is it still a cooperative?
Robert McCarty: It is still a cooperative. It’s owned, operated financed managed by the people who get their energy from Volunteer Energy Cooperative. The mechanics of how that works is that [VEC’s] service district is divided into 12 districts. The people who get their electricity in each of those 12 district elect, democratically elect, someone from their community to serve our board, and they set policy and make the decisions on the operations of the cooperative.
David: You said the customers are the owners. So if I’m a customer of VEC, I’m not just a customer, I’m a member. That has a different status.
Robert McCarty: You’re an owner. Exactly. Exactly. A lot of that has to do with your ability to participate in absolutely every aspect of the cooperative. And that puts a burden on us, who are the stewards of this cooperative, to give them the information they need, to make sure we’re accessible and available and to get all the information they need to be able to make informed choices about their cooperative.
David: For example of something where the membership has a vote?
Robert McCarty: We’ve got elections going on right now in three districts, and we have seven candidates running ***. And that’s where the members’ vote comes in. From that point on, the board of directors, elected by the members — it’s like a representative democracy. So they come on and make decisions on rates, on services, on infrastructure investments, everything. *** As a general rule, [VEC is] autonomous. We won’t take on a loan that gives anybody an ownership stake in our members’ cooperative.
At VEC, the member is also a customer
David: Co-ops are not really a new idea. I was reading in a book, Locavesting[;] The Revolution in Local Investing And How to Profit From It by Amy Cortese, and she mentions something that you wrote in your story *** . Co-ops are used in many fields, Robert. Tell us how this model is used in fields other than electricity.
Robert McCarty: Mostly the cooperative movement basically got started [in] a lot of rural, agricultural areas. If you’ve ever heard of Land ‘O Lakes butter, that’s a cooperative. A lot of insurance companies. The genesis was in [agriculture], and still that cooperative tie with agriculture is very close. Were very involved with 4H. They help us sponsor 4-H electric camp where we bring in students around the states to learn about electricity. *** There are pretty close ties with the agricultural community and the cooperatives. It’s branched out in any different areas. banking. If you’re a member of a credit union, you are a member of a co-op. there are child-care cooperatives. There are housing cooperatives. The list is just huge.
David: There’s an art gallery downtown that’s run by a co-op [Mid-Town]. ***
Robert McCarty: Believe it or not, more than 100 million people are members of one cooperative or another. There about 47,000 cooperatives that serve the United States now.
David: I think you mention in your essay that the first cooperative was in Babylon. And Cortese mentions you that I think you cite. It’s founded in 1844 in Rochdale, England. It was called the Rochdale Equitable Pioneers Society, founded in 1844. I came from a group of 28 weavers and textile mill workers who pooled their savings and opened their own store where they could buy the staples such as butter, sugar and flour and oatmeal, because they were being ripped off by the company store. So, they formed their own store and then it grew over time into many other fields. And eventually this co-op ran bakeries, dairies, painting gservice, coal delivery, a laundry and mills.
My listener wants to know about the profit motive. How does VEC run a business without a profit motive. Because my listener agrees with me that we have to have the profit motive to succeed. Only profit brings sustainability to an enterprise.
How co-op got its start in 1935
Robert McCarty: In our accounting department there are guys who would agree with that. Like I said, those first 55 people who got together, they said, OK, we’re going to start our own business. Were going to do it a little bit differently. The motive is not profit; the motive is service. We want you to serve the community. And not just deliver electricity. They laid out a lot of mandates for us in 1935 that are our bible. That’s what we follow (in addition to the Bible). But they wanted us to be involved in the community. They wanted us to be involved in economic development. That’s a huge part of the electric cooperative, and a huge part of why electric cooperatives got started in the very beginning was the fact that these rural areas were at a real competitive disadvantage in terms of attracting industry, attracting business and attracting investors if you didn’t have cheap, reliable power. So that’s a huge part of why they wanted to get us started in this business in the first place.
David: What is VEC doing right now the economic development sense?
Robert McCarty: We participate along with all 17 county chambers of commerce. We also have our own program that we call Seed, supporting efforts for economic development, helping get a little seed money to people looking at investing in any of our communities. We do that ourselves independent of the other efforts we cooperate with.
David: Well, are you suggesting that volunteer is like a little bank for local business and startups and entrepreneurs.
Robert McCarty: I don’t know that I would go that far as to say a bank, but yes, under certain conditions, we can help out.
David: When you say help out, that is with more than just advice.
Robert McCarty: Sure. More than that. Seed capital. Startup money.
David: You mention how your co-op, since it does have a democratic and cooperative spirit, gives away a lot of money. *** The most recent newsletter points out that since the VEC customer share program was founded in 2001, it has given away F$4.5 million in grants. ***
Robert McCarty: That’s approximately F$30,000 a month that this works out to.*** Competition is good in industries and different business. We don’t have anything against competition. But cooperation can work really really well in certain situations.
Not profit, but ‘excess revenues’
David: The question I asked earlier about profit we kind of got distracted from it. You have to have profit to succeed. You have to have profit to have a sustainable operation selling electricity. Where does the profit go? And if you don’t call it a profit, what do you call it?
Robert McCarty: We call it excess revenue, revenue in excess of cost. For example. If you are selling a doughnut and it costs you 12 cents to make that doughnut and you sell it for 25 cents. And you say, OK, my profit is 13 cents. Well, wait a minute; not necessarily. You’ve got your electricity (thank you very much) to run your store. You’ve got your store. You’ve got your insurance. You’ve got your other costs that may be built in. So, your actual cost, when you factor in all that stuff, could be, say, 20 cents. So your actual profit, what you take in above expenses, would be 5 cents. Somebody made that 5 cents profit.
That’s what we try to lop off.
We do pretty extensive “cost of service” — all different classes of customers — we do extensive cost of service studies. So we try to set our rates that we do not produce any revenue in excess of cost, what it takes to deliver the service. But in the event that we do there are a couple different ways that cooperatives deal with that.
In the event that we do (turn a profit), there are different ways that different cooperatives deal with that, and how we choose to do it. Some cooperatives choose to cut a check. If they make over the course of a year F$112,000 more than the cost of providing their services, they would cut a check for F$1 to 112,000 members, so each of those members would get a F$1 check, minus whatever it costs them to write the checks and mail them. So I guess now we are looking at around 50 cents.
W choose a different option provided for in the Tennessee Code and our bylaws. *** We’ll turn around and use that [excess revenue] to lower costs, the lower the rate someone has to pay for their electric service. *** One of the last times [TVA] raised their rates, we were able to absorb that rate increase because we had a little excess revenue on hand, so we could absorb that and not pass it all on to the customer. Because we don’t have a profit margin, when our expenses go up — when TVA charges us a penny more for a kilowatt hour — it’s not like we can dip into our profits to cover that. We’ve got pretty much got to pass that along to the customer unless we’ve got that little bit of excess revenue and we can have *** a cushion.
David: I’m going to restate what you said in terms of the question my listener has My listener wants to know about the idea of an investment hub in Chattanooga. As I’ve described it, local investors put money into this hub and it provides a service, and the service is: It lends or invests in local businesses. And the investor does that because he wants a profit. Now, if it’s a co-op, there can’t be a profit; and it’s not a share, legally, because of federal regulation of the securities field. In your case, you have a profit, but it’s not called a profit. It’s called revenue in excess of cost, and the benefit to the member, or shareholder, your members are effectively shareholders, right?
Robert McCarty: Right.
David: The dividend, if you will, comes to him in the form of reduced cost of basic necessity, electricity. That’s his profit.
Robert McCarty: And we also have a few other things that work in For example, we did 2,000 in-home energy evaluations for absolutely free. *** We incur the expense of saving them money on their electric bill. We are selling less of our product. a for profit company I don’t know if they have a motivation to do that.
David: For profit company wants to serve the shareholders, the owners, so it’s going to find a way to sell more product, not less. *** Thank you very much.