Story by John Broux

Today's electric co-op is not your grandparents' or even your parents' cooperative. As the needs of members have grown, so have the services offered by co-ops. When rural electrification began, cooperatives dealt solely with supplying electricity. Today, co-ops provide a variety of services including propane gas, Internet services, satellite TV systems, cellular phones and more.

It is these challenges, providing new and in-demand services to their members and keeping rates competitive, which co-ops will face in the coming century. "We are dealing with a changing membership," said Mick Cummins, general manager of SouthEastern Illinois Electric Cooperative, Eldorado. The staunch supporters of the cooperative, those folks who remember when the lights came on, are disappearing. They are being replaced by younger members, some of whom view the cooperative as just another power company and are asking, "What have you done for me lately?"

Keeping rates competitive is the biggest challenge of the new millennium for cooperatives. Coming on the heels of the enactment of the Electric Service Customer Choice and Rate Relief Law Of 1997 (commonly referred to as the "deregulation" bill), co-ops are investigating all possibilities.

The theory behind the Illinois deregulation law, according to Earl Struck, president/CEO of the Association of Illinois Electric Cooperatives, is that "electricity should be a commodity which can be purchased from the supplier of choice — that consumers should have the right to choose their supplier. The mistaken impression is that some think they can switch all services to that new supplier. Under Illinois and the proposed national law, the only choice is what supplier will provide the energy. The current electric provider will continue to deliver the electricity to the consumer."

The movement was driven in large part by industrial and commercial interests, according to Struck. He said that when a business considers a location, they look at all the costs involved — prevailing labor rates, worker's compensation insurance, transportation systems, taxes, energy, etc.

"Advocates of deregulation present it as a win-win situation — consumers have a choice and as a result of competition, lower rates," Struck said. "There is no question that some consumers will be winners. Some studies, however, show that residential and farm consumers will not necessarily benefit. There may not be a significant number of suppliers who will provide for the needs of people outside of the metropolitan areas.

"There has been significant activity across the country, and now nearly half of the states have some plan, study, or timetable for deregulation. Congress is also considering deregulation legislation. In Illinois, legislators did as outstanding a job of making a complete and thorough study of this issue as any I've ever seen," said Struck,

And deregulation has forged a

10 ILLINOIS COUNTRY LIVING FEBRUARY 2000

very strong alliance between cooperatives and the other not-for-profit electric suppliers in the state.

"While co-ops and municipal systems are different creatures, they were natural partners on this issue," said Struck. "We had one position in common and did not have to compromise it. Our joint position was that consumers of not-for-profit electric providers own their systems and should have the exclusive right to govern them. No one understands the local consumer issues better. All members have one vote, a characteristic that most democratic systems possess. In such consumer-owned systems how and when to enter the deregulated marketplace should be a local decision that benefits consumers of those cooperatives or municipal systems. The law provides consumers of member-owned co-ops and municipally-owned utilities with that control and responsibility."

Consumer-owned utilities will have one of three decisions under the deregulation law. The first option is to wait and see what happens before deciding whether entry into the competitive marketplace is in the best interest of the local consumers. The second option is to enter the deregulated marketplace. In the interest of maintaining or bringing in new jobs, a third option is to release one or more members for a specified period of time and allow them to purchase their own power supply.

"Once a co-op decides to participate in deregulation, it is irrevocable. The board of directors must decide what is in the best interest of the general membership. It will be the most important decision they will make," Struck said.

But what would the future for co-ops be like under deregulation?

"Cooperatives must continually monitor the impacts and effects of deregulation, because this was not an evolutionary change, it was a revolutionary change — an upheaval of what we have done in our 60 years of existence," Struck said. He said after the monitoring and analysis is done, revisions should be considered to reach the goal of delivering an adequate, reliable electric source in the competitive marketplace to all consumers.

"It will force us to be even more efficient, to do the things we do well, outsourcing systems or portions of systems while making others more efficient," says Lynn Frasco, manager of Menard Electric Cooperative, Petersburg. "We will see more organizations involved in getting things done, becoming more profit motivated."

Some cooperatives haven't waited for deregulation and have already made drastic changes and additions to their businesses. But deregulation will certainly increase the forces of evolution on co-ops. Cooperative leaders differ on just what these changes will be, but all agreed the pace of change would increase no matter what path co-ops take.

"In Illinois, legislators did as outstanding a job of making a complete and thorough study of this issue as any I've ever seen." Earl Struck

For example, within the next two to five years cooperatives in Illinois plan to produce and deliver energy in radically new ways. Fuel cells and distributed generation are at the forefront of breakthroughs in the industry, and officials continue to look into "green" power (i.e. wind, solar and hydropower).

A fuel cell is a like a mini generating station for the home or small business, which uses a chemical reaction to generate enough electricity for the average home. The size of the unit, by the time the technology is ready for implementation, could be the size of the average hot water heater.

And a fuel cell could send that hot water heater "out to pasture." Two of the by-products from fuel cells are heat and water, which can be harnessed to provide hot water for the home.

Jeff Almen, vice-president of marketing and member services for Energy Co-Opportunities (ECO) says costs at the present time are, as with any new technology, a little high, but that the price of fuel cells will drop to $5,000 or below within a few years.

"One view is that consumers will want that option, and co-ops need to be leaders in the industry," Almen said. "It is estimated that half of the electrical poles and lines are 40-50 years old. When do we pass that point of comfort and need to start looking at replacement? Given the cost of replacement, fuel cells may provide co-ops with a cost-effective way to replace these poles and lines."

And if co-ops decide to offer fuel cells to customers, co-ops should be able to diversify into the service and maintenance of fuel cells.

Another option, in addition to fuel cells, is that of distributed generation. Distributed generation provides for mini generation stations scattered around a service area, as opposed to one large generating station for all. Industrial or commercial operations could even have their own generator, as some do now. Some even foresee the central power station going the way of the dinosaur. At some point in the next 50 years, said Jeff Reeves, president/CEO of Corn Belt Energy, Bloomington, "New technologies will make the central power station obsolete."

Keeping the cost of bringing power to rural areas inline with other utilities serving more profitable areas is one of the major challenges which co-ops have always

FEBRUARY 2000 ILLINOIS COUNTRY LIVING 11

Whether it's through shared services, mergers or new businesses, the bottom line is still to provide energy at an affordable rate

faced. New concerns about the increased cost of on-peak power create new challenges. Joe Firlit, president/CEO of Soyland Power Cooperative, Decatur, said, "The challenge is for cooperatives to cap on-peak prices at a reasonable level. Such action requires long-term fixed price contracts with market-based providers or investment in peaking generation facilities and capacity pooling with others to minimize outage risks. The cooperative's challenge is that of successfully communicating with the consumers the necessity of making the decision and long-term commitment for investment to cap these on-peak prices and to support their decision as a cooperative member."

But power distribution may not be the only business the co-ops will be in. As the light of new technologies comes over the horizon, many co-ops will be there to meet the needs of their members, whatever those needs are.

"Any co-op that doesn't offer a variety of services may not exist in the future," says Jim Coleman, president/CEO of Shelby Electric Cooperative, Shelbyville, a co-op heavily involved in diversified products and services.

This idea is already being put into practice by several cooperatives in Illinois. Through new and joint ventures, cooperatives are providing new services like propane, Internet, telecommunications, satellite TV, rural water service, cellular and radio communications, and many other services to rural areas. And technological advancements in these areas will continue to bring new products and services co-ops will provide to their members and other consumers.

With deregulation, and co-ops diversifying into other services to help keep electric costs down for the consumer, there are disagreements as to what tomorrow's co-op will be like, or even if co-ops will continue to exist or evolve into entirely different entities. Because of the diversification, most agree that the largest co-ops will be around in some form or another, but what about the smaller ones?

Alan Wattles, manager at Clay Electric Co-operative, Flora, thinks that for smaller cooperatives one of two options may have to happen — mergers and alliances.

"I think mergers will come into play, but not in the near future," Wattles said. "There are opportunities to increase in size, and as the IOUs (investor owned utilities) begin pulling out of the smaller towns and low profit rural areas, we (the co-ops) will begin serving them." This growth could help smaller co-ops remain competitive.

The other option, besides merger, is to form alliances with other co-ops. If one co-op cannot provide a service to its members, it could form an alliance with another cooperative, and members from both co-ops would benefit. As a result of these added services, Wattles, along with several other co-op managers, could see the electric business becoming a minor portion of the business they conduct.

Rene Dubois, director of sales and marketing for H Power Corp., demonstrates fuel cell technology that electric co-ops will soon provide to members.

And although Wattles sees cooperation and shared services being a major part of the survival of the smaller cooperatives, Coleman said he could foresee co-ops both working together and at the same time battling head to head.

Coleman explained that in a deregulated environment, the alternative products and services could pit co-ops against each other. He explained that as coops seek to reduce rates with revenues from other enterprises, cooperatives could compete for customers with other co-ops.

Whether it's through shared services, mergers or new businesses, the bottom line is still to provide energy at an affordable rate. But what will deregulation really do to the price of electricity? No one is sure and even cooperative managers disagree.

Tom Hentz, president/CEO of EnerStar Power, Paris, Coleman and Reeves, all agree that in the short-term, prices may be reduced, but long-term they see different possibilities. Hentz said he believes that rates will go down due to the competitiveness of the marketplace. Coleman said he believes electric utility deregulation will be similar to that of other industries. Initially prices will go down, but that after deregulation mergers and buyouts will lead to higher prices, or abandonment of isolated less profitable areas. Reeves, however, was unsure as to where the issue will lead the industry after 10 years.

Whatever the future brings, rest assured that your local electric co-op will be there to ensure your energy needs through the next century, in whatever form.

12 ILLINOIS COUNTRY LIVING FEBRUARY 2000