University of Wisconsin Center for Cooperatives
Rural Cooperatives, July/August. 1998, pp. 6-13.
Published by the Rural Business and Cooperative Development Service
Pooling for Power
Ernest Righetti farms among the golden hills and rolling vineyards of California's scenic Central Coast. He produces some 2 million pounds of avocados every year on the terraced hillsides he and his sons carved out of the farm his grandfather started more than a century ago.
Righetti is also a consumer—an energy consumer—and he, like other California energy consumers, has been paying higher rates for electrical power than anyone else in the nation.
With the help of a unique new cooperative, Righetti and an estimated 22,000 other California farmers are now able to bargain as one group for lower energy costs, something that's never been possible before.
California Electric Users Cooperative (CEUC) is bringing together, for the first time, a remarkably diverse mix of agricultural cooperatives and farmers to negotiate collectively for lower power costs as the Golden State surges into a new era of energy deregulation.
"CEUC is an electric cooperative without wires," says Lee Ruth, one of CEUC's architects. "There is no other co-op like this one. This is not a rural electric co-op. This is different. It's an agricultural co-op providing electrical service to members. It's the first real breakthrough in the electric market in California."
In fact, CEUC is the nation's first electric co-op structured solely to service agriculture with an aggregated, or pooled, electric power purchase.
CEUC is a federation of 18 agricultural cooperatives that represent 22,000 California growers. In fact, it could be said that CEUC is two co-ops, because one of its members is the new CEUC Grower Cooperative (CGC). This affiliated co-op also was formed to negotiate for lower energy costs, but at the individual farm level rather than for the associations.
In all, this diverse group of cooperatives represents citrus, avocado, cotton, almond, grape, deciduous tree fruit, seed growers, dairy processors and producers from San Diego County to the Oregon border.
Together, they help make California the No. 1 agricultural state in America. And together, they're part of a history-making chapter in the story of the nation's cooperative utilities.
"For the first time, there's an agricultural cooperative to serve the interests of electricity users, not the electricity producers," says Jim Claassen, CGC board chairman and a San Luis Obispo farmer. Claassen also is president of the board of the San Luis Obispo County Farm Supply Co., a charter member of CEUC.
"With CEUC, agriculture has been given a significant amount of power," says Fielding Thompson, CEUC board chairman and vice president of the supply division of Fruit Growers Supply CO., the supply arm of Sunkist Growers.
"We now have a voice to negotiate with power providers, something individual growers can't do because they're too small," Thompson says.
"Real money" savings
The biggest feather in CEUC's cap so far is a master agreement the new co-op signed in February with an energy provider. Its energy supply contract with New West Energy of Phoenix, Ariz., guarantees the CEUC membership a 3-percent savings on its total yearly energy bill. Since CEUC's members represent $24 million worth of electrical use each year, that 3 percent savings amounts to a projected $772,000 in annual savings—what some might call real money.
Other achievements include just getting the state's widespread agricultural coops to meet, listen and agree to launch an untried venture. Some say that was a feat in itself.
"Without Lee Ruth's foresight, efforts and determination, CEUC would not have been formed," says Glen Janzen, CEUC board member and president/CEO of Ranchers Cotton Oil, a federated cottonseed marketing cooperative in Fresno, Calif. "If he hadn't put all of us in a room together, CEUC wouldn't have happened."
Ruth is former president of the Agricultural Council of California, the statewide association of the state's agricultural cooperatives. With help from several others, including Sunkist retiree Curt Anderson, Ruth worked for more than a year to get the program started. Agreeing that the purpose was worthwhile, the coops invested seed money for CEUC research and consultants. CEUC finally was incorporated in November 1997 and began functioning in April 1998.
Starting with 10 charter members, CEUC has since grown to 18 members. CGC now counts 450 individual farmer members.
In May, CEUC received a $60,000 USDA Rural Business Enterprise Grant to help form CGC and to conduct a statewide program of awareness and membership development. CEUC has also opened a line of credit with the National Rural Utilities Cooperative Finance Corporation, which finances rural electric cooperatives across the nation. In addition, CEUC has become a member of the National Rural Electric Cooperative Association.
Giving farmers clout
The founders of CEUC and CGC were motivated by the fact that in some areas of California farmers pay as much as three times more than the national average for energy.
"Agriculture's rates are among the highest of any sector," says Thompson. That's due, in part, to the higher rates California utilities charge because of numerous environmental and regulatory requirements.
Additionally, farmers' energy consumption varies significantly according to the season, the kinds of crops grown, type of irrigation system used and even the time of day. Peak season for farms' energy use is summer, when electricity demand charges are higher.
Cheaper energy costs would certainly be good news to farmers like Righetti. He pays thousands of dollars each year in electrical costs on his 150-acre avocado farm near San Luis Obispo. Over the years, Righetti has invested $1 million in equipment to irrigate his thirsty avocado orchards. His system sometimes pumps as much as 1,000 gallons of water a minute, and on a hot summer day, Righetti's power costs can soar.
"We're excited about CEUC," says, Righetti, a CEUC member through San Luis Obispo County Farm Supply, where he serves on the board. "These aggregated power savings will be a real benefit to growers."
Without CEUC, individual farmers such as Righetti would not have been able to take advantage of the new energy market.
"Farmers are not the most desirable accounts from an electrical supplier's viewpoint because of farms' remote locations and relatively low electricity use," says Ranchers' Janzen.
What are desirable electric accounts, however, are the agricultural processing and marketing cooperatives that operate all across the state: the dairy plants, the citrus packinghouses, the avocado, grape and fruit processors, the cotton gins, the farm suppliers—all of which are owned by farmers. Any of these operations will spend from $500,000 to $2 million in energy costs every year.
"Power usage is our highest expense after labor," says Darin Lundquist, manager of Central California Almond Growers Association, a 340-member almond hulling and shelling cooperative and another CEUC member. "We spend $300,000 in electrical costs during the four months we process almonds."
Big power usage gives California's coops clout in the eyes of the energy industry. And CEUC founders used that bargaining power to form the co-op so it could help individual farmer-members take advantage of the "consumer choice" electric restructuring that began in California this year.
California's new energy market
For decades, three large investor-owned utilities have delivered some 70 percent of the power in California. But in 1996, California became the first state to pass energy restructuring legislation. In a move reminiscent of the restructuring in the long-distance telephone and airline industries, energy deregulation then began taking place in the Golden State. The first step was to focus on the deregulation of the power-generation side of the industry.
Starting March 31, 1998, California's electricity became a commodity priced by the market, not a regulated product priced by the state Public Utilities Commission (PUC). As a result, California's energy customers became the first in the nation to be able to choose the company that supplies their electricity.
Driven by the deregulation opportunity of customer choice and potential savings, CEUC scouted the marketplace for a favorable energy deal. The new co-op sought help from the Northern California Power Agency (NCPA), a non-profit joint power agency that provides power consulting and program implementation services. NCPA understands the complex energy business with its network of power generators, transmitters, distributors, and metering and billing services.
For months, NCPA and CEUC searched for a competitive energy service provider, weighing which offers contained "hidden costs" and which might truly be advantageous. Finally, in early 1998, NCPA and CEUC received an attractive offer from New West Energy of Phoenix, Ariz. This energy provider is a for-profit, wholly-owned subsidiary of Arizona's Salt River Project, a 100-year-old company that's long brought water and power to agriculture. New West Energy also serves several other major California electric customers, including the Mobil Oil Corporation.
A risk-free deal
In February, CEUC and New West Energy signed the deal: a master agreement that guarantees a 3 percent discount to CEUC members who signed up before May 31,1998. "That 3 percent savings is not just off the energy-generating portion of the bill, which usually amounts to 25 percent of the overall charges," says Jim Brabeck, general manager of San Luis Obispo County Farm Supply Co., a charter member of CEUC. "CEUC's savings come off the entire bill, including distribution, transmission and service charges."
CEUC's "risk-free" contract calls for a three-year term with the option for CEUC members to exit from the agreement if they wish. Every CEUC member must be an agricultural cooperative or a member of one. All members must agree to purchase their electric energy through CEUC.
CEUC leaders expect the new cooperative to provide its members with a seamless transition from their former energy provider to New West Energy.
New West Energy will bill CEUC members for their electrical usage. Members will get one bill per month. These bills will show some of the first changes in the state's new energy restructuring because they will be "unbundled," meaning they'll display electric charges in greater detail.
New West Energy will pay for the electrical power as well as transmission, distribution and other costs. The Arizona company will seek its power supply from the marketplace. That energy may come from out-of-state power generators, as more than half of California's energy already does.
In actuality, the system delivering electricity to California's energy users does not change. All existing power lines and transmission stations stay in place and continue to be maintained by the user's current utility company However, new or upgraded meter equipment may need to be installed, especially for larger customers. For CEUC, New West Energy will pay those expenses as well as costs for meter reading and maintenance.
New West will rebate to CEUC every month the 3 percent savings off the total aggregated bill of the co-op's membership. New West will keep any difference between the cost of the electricity and what it sold for.
CEUC, of course, will have administrative overhead costs and it plans to begin paying off original organization expenses. An estimated 2.5 percent of the New West rebate will revolve back to members shortly after the end of the fiscal year.
"The 2.5 percent savings was the best deal CEUC could find at the time," says Ranchers' Janzen. "It was a good deal. Now, you can't even find that."
Looking to the future
CEUC membership is still open, but only those who signed up before May 31, 1998, will get the 3 percent savings. In the meantime, the co-op will continue to negotiate savings for its entire membership. CEUC leaders have their eyes on the future, and believe their co-op will be able to wrest more power as it gains experience, membership and credibility in the new world of energy bargaining.
"We hope to be able to create a data base of aggregated electric usage patterns," says Janzen. "Then well know better what our usage is so we can negotiate lower energy rates in the future."
Other CEUC members look to the day when the co-op can negotiate for even larger savings off the membership's energy bill. '11Vhen the CTCs [Competition Transition Charges] burn up in three years, we'll be in a better market for negotiating," says Brabeck.
CTCs are paid by all California customers to cover the stranded investments made by the state's existing utilities. CTCs represent past investments, such as power plants, made by California's utility industry to build the infrastructure to meet potential future demand.
Included in California's 1996 energy restructuring legislation, CTCs are part of a transition phase developed by California's PUC. Once these investment costs are recovered by the state's investor-owned utilities—sometime around 2002—CTCs will disappear from energy bills.
And plenty of energy users will be happy about that. CTC charges vary, but can represent a hefty amount on monthly energy bills. In the case of CEUC member Westside Farmers Cooperative Gin, near Tranquility, Calif., CTCs account for 30-40 percent of the cotton gin's $600,000 yearly energy bill.
"CTCs represent 30-40 percent of our electric bill at citrus packinghouses," says Thompson, of Fruit Growers Supply Co.
"Three percent isn't a lot now, but with the CTCs gone, we might be able to see savings of up to 50 percent," Brabeck says.
Abolishing "standby" charges
One other electrical expense CEUC hopes to address are "standby" charges, currently an integral part of energy's rate structure in California. These are costs charged to major energy users for the privilege of having power available when they need it—even if they don't use it. California is one of the few states with these standby charges.
"Agriculture doesn't feel these standby charges are fair," says chairman Thompson.
Thompson stands close to the energy needs of California's farmers. His employer, Fruit Growers Supply Co., supplies 62 citrus packinghouses and 6,500 citrus growers in the Sunkist system with a variety of equipment and services, including water pumps and wind machines. Among packinghouses, energy usage accounts for 10 percent of their operational costs.
"Standby charges can total anywhere from $50 to $200 per month—for nothing," Thompson says. "Farmers have objected to this and feel that over 10 to 30 years, they've paid for the electrical wires just through their standby charges. Standby charges are just a ploy for the utility companies to get more revenue.
'Now, with CEUC, agriculture will have a voice to get our rate structure modified," he says.
Thompson adds that Fruit Growers' Supply might have been able to negotiate an electricity deal of its own with an energy service provider but chose to go with CEUC. So far, 40 Sunkist-affiliated packinghouses have joined CEUC.
"By aggregating all the loads together, everybody benefits," he says. "That's very important to us. It's one of the driving forces of CEUC."
With CEUC illuminating the California countryside, its leaders are confident the co-op will one day become an independent power broker.
"Our ultimate goal is to be a full-fledged utility without wires," says Thompson. "Once our load is fully aggregated, we hope to negotiate for ourselves, without an intermediary doing it for us."
CEUC Growers Cooperative chairman Claassen agrees. "CEUC's goal, after the CTCs are removed in 2002, is to be well established, to have a good track record, and possibly even to broker our own energy-purchasing business."
With its newfound power, CEUC has positioned California's agricultural cooperatives to take advantage of the cheaper energy prices promised by deregulation. At least 18 agricultural co-ops and their farmer-owners will see less of their money go to energy expenses. And like thousands of cooperatives before it, CEUC will make sure that the grower who farms under the crackling wires that carry electricity across California's crop lands isn't just the little guy anymore.
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