When you sign up for electric service with East Central Electric, you become a member. Unlike other types of businesses, East Central Electric is a non-profit corporation. As a member-owner, you are entitled to share in the cooperative profits, also known as margins. These margins are called capital credits. When capital credits are returned to members, you are seeing the return on your investment. This is one of the benefits of being served by a non-profit utility.
Why We Pay Capital Credits
Because East Central Electric is a cooperative, owned by its members, no stock is sold, there are no dividends declared, and any excess of revenue over expenses (net margins) belong to the members who provide that margin by purchasing electric power.
As you pay your electric bill each month, East Central Electric uses that money to pay for power supply, improve infrastructure, ensure continuity of service and make payments on any loans. Any revenues left over after covering operating expenses (also known as margin) are allocated back to our members. These allocations are called capital credits. Essentially, you are making a long-term investment each month to ensure East Central Electric remains a safe, affordable and reliable electric provider.
Allocating Capital Credits
In a cooperative, you are a member-owner of the business. At the end of the calendar year East Central Electric reviews the financial condition of your cooperative. After paying all the expenses for the year, finances are audited and all the year-end financial obligations are met. Any revenues remaining are allocated to the member in the form of capital credits. Each member is entitled to a proportional share of the margin based on their electric usage during the previous year.
Each year, East Central Electric allocates capital credits and applies them to the individual member’s account, and capital credit allocation notices are mailed to all members.
Basically, we take the money left over at the end of the year that would be profit in an investor-owned utility (IOU) and we divide it among the members according to how much electricity usage they purchased last year.
Retiring Capital Credits
Once capital credits are allocated, they are retained by the Cooperative until retirement of a given year. Your allocation total is then held in an account in your name. They are retained as an investment by the member and are the most significant source of equity for the Cooperative. During some years, the co-op may experience high growth or severe storms, which increases costs and lowers margins. For this reason, the ability to retire capital credits reflects the cooperative’s strength and financial stability.
It is your equity in the cooperative (because remember, you are an owner) that helps meet the expenses of the Cooperative. Equity equates to financial strength for East Central Electric members. It is one of the benefits of belonging to a financially stable electric cooperative.
Why Hold The Money?
So, many people ask, why we hold the money and don’t simply pay it out right now?
East Central Electric is a growing cooperative and as new businesses and homes are added to our system, the construction of new electrical infrastructure requires a large investment in plant (lines, poles, etc.) and equipment. Retaining the capital credits helps keep rates affordable by reducing the amount the cooperative has to borrow to operate, maintain and expand. In addition our lenders require certain levels of equity. If we fall below that level, capital credits cannot be paid.
Paying Out Capital Credits
After the Board of Directors has determined the amount to retire, East Central Electric pays out capital credits to the members with 50% going to the oldest outstanding capital credits and 50% going to the current capital credits. Typically, these credits were accrued around thirty years prior and a portion of your capital credits are returned to you. This means that the amount allocated to members for the current year will be retired to members in 30 years.
Why A 30-Year Cycle?
East Central Electric strives to remain on a 30-year capital credit cycle. Since most of the Cooperative’s assets are fully depreciated in 30 years, this practice ensures that margins generated in excess of 30 years are returned to the members who paid into the cooperative at that time. Retiring capital credits this way ensures that each generation of members pays its own way.
If a member has passed away, capital credits that have accumulated can be released through an estate retirement. Capital credits are payable to the estates of deceased members or deceased former members of the Cooperative at a discounted rate as the financial condition of the cooperative permits. Estates are only payable to residential accounts.
Even if you move and are no longer a member of the Cooperative, the capital credits remain in your account. Be sure to update your mailing address with East Central Electric if you move so we can send future capital credit checks to the correct address.