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Contact:
Tracy Warren, NRECA
703-907-5746
Mobile: 703-517-3411

ARLINGTON, VIRGINIA, August 1, 2008 – NRECA CEO Glenn English today submitted a letter to the House Oversight and Government Reform Committee responding to a second set of questions following up on a hearing held on June 26.

In the June hearing on cooperative governance, Members raised questions about “capital credits.” In both the testimony and the letter, NRECA sought to clear up some misconceptions regarding capital credits.

In his June testimony, English explained: “Like other businesses – at least well-run businesses – an electric cooperative annually collects more money than it spends. Unlike other businesses, an electric cooperative annually ‘allocates’ its excess revenue, or its ‘margins,’ to its member-owners.” This allocation is based upon a member’s business with the cooperative during the year…. These allocated margins are called ‘capital credits.’”

Cooperatives use these credits as “capital” to expand its electrical system and meet other capital needs, thereby decreasing the funds that cooperative must borrow. By decreasing borrowing, a cooperative decreases interest payments and keeps its electric rates lower.

As English stated in the testimony, “At a later date determined by the cooperative’s board of directors, the cooperative ‘retires’ – or pays – capital credits. Until the cooperative retires these credits, the cooperative owns them and the members have a conditional, or contingent, right to the retirement and payment of them.”

In 2007, electric distribution cooperatives retired more than $500 million in capital credits to their members. As English testified, “[a]s of December 31, 2006, electric distribution cooperatives had an average equity as a percent of assets equaling 40.6…. According to Fitch Ratings, … an electric distribution cooperative with reasonable quality and average credit features needs 30 to 50 percent equity for an investment grade rating.”

In sum, the equity held by cooperatives, on average, is consistent with sound financial principles. Moreover, as English explains in the letter, “NRECA has no knowledge of unallocated capital credit accounts.”

See the Related Links for a copy of Chairman Waxman’s letter and the full text of NRECA’s response.

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