University of Wisconsin Center for Cooperatives
Co-operative Federation of Victoria Ltd
Co-operative Opportunities Project

Discussion Paper No 2

Opportunities for Co-operatives in Electricity Industry Restructuring

By the Co-operative Federation of Victoria Ltd
Email contact: David Griffiths
June 1996

[Introduction][Outline][Main Features of the Restructured Electricity Industry][Factors Shaping Consumer Choice][What Is a Co-operative?][How a Co-operative and Investor Owned Enterprise Differ][Co-operatives in Victoria][Five Business Opportunities for Co-operatives][Electricity Co-operatives in Victoria][Future Prospects][The Way Forward][For More Information][Acknowledgment]

INTRODUCTION

The Victorian electricity industry is currently experiencing a massive restructuring. The break-up of the SEC monopoly and the creation of independent generating units and competing distribution companies has been undertaken by the Victorian Government with the aim of creating a competitive and efficient electricity industry.

Five distribution companies have been sold to private buyers, some of which are wholly controlled by foreign utilities. Five generation companies are also being privatised.

The restructuring process has been accompanied by a great deal of public uncertainty about its economic and social value. Many small consumers (households, small businesses and farmers) are uncertain about the promised benefits of competition. Some fear an eventual rise in prices as the privatised distribution companies seek to deliver returns to their investors. Many regret the sale of assets to foreign entities.

This paper suggests that the restructuring of the electricity industry provides potential benefits for consumers, but these potential benefits will not be realised if small consumers stand alone as independent purchasing agents. Through processes of aggregation of purchasing power, small consumers can take advantage of the new competitive environment.

The paper argues that co-operatives are the ideal mechanism for aggregating the purchasing power of small consumers. Existing co-operatives, which already provide benefits to members through a pooling of resources and enterprise, may facilitate the aggregation of their members' electricity purchases. Alternatively, new co-operatives may form to undertake this service in a variety of ways.

In some rural and remote areas, co-operatives may be established to provide an electricity generating capacity. In some environmentally conscious communities, co-operatives may be formed to further 'green energy' objectives.

In the United States of America, there are more than 1,000 electricity co-operatives, owned by twelve million consumer members. Their activities encompass the generation, distribution, and retailing of electricity.

The paper aims to stimulate interest in the co-operative option in the restructuring of Victoria's electricity industry. It is produced by the Co-operative Opportunities Project of the Co-operative Federation of Victoria, the peak body of Victorian co-operatives comprising diverse enterprises from child-care to agriculture to housing, finance and health care.

This paper is directed to co-operatives, community organisations, policy makers, and others who are interested in enhancing community ownership and consumer choice in the 1990s environment of devolution, deregulation and marketisation.

OUTLINE

The paper is organised as follows. The main features of Victoria's electricity industry restructuring are first described, and the factors shaping consumer choice in the new environment are explored. The nature of co-operative enterprise is then defined, and five business opportunities for co-operatives in the electricity industry are examined. Three existing electricity co-operatives in Victoria are noted, and the prospects for the further development of a co-operative sector in electricity are assessed. The paper concludes with suggestions about how individuals, communities and co-operatives might proceed in exploring the possibilities in their areas.

MAIN FEATURES OF THE RESTRUCTURED ELECTRICITY INDUSTRY

The Victorian electricity industry currently comprises four components:

In addition, there are independent, licensed retail suppliers.

The rationale for the adoption of this structure has been the introduction of competition into the industry, so that providers of products and services may compete for customers. By the year 2000, all electricity consumers will have the opportunity to choose who provides their electricity services. This represents a dramatic change from the past, where all consumers were captive to a vertically integrated state monopoly.

A timetable for phasing-in choice for all consumers has been established. Electricity users who consume loads greater than 1000MWh per year are already able to shop around for their power needs. In July 1996, customers with more than 750MWh/Yr become contestable in this fashion. From July 1998, those with loads of 160MWh/Yr become contestable, and the remainder of consumers become contestable in December 2000.

This means that large businesses and institutions are currently able to shop around, and in the next few years, medium-sized businesses and institutions (schools, hospitals, churches) will be able to join them. Households, small businesses, and small community organisations will not be able to do so until the year 2000.

FACTORS SHAPING CONSUMER CHOICE

A competitive market requires many buyers and sellers who are free to trade with each other without restriction. Consumers must have the freedom to choose the products and services they require. In electricity supply, choice is constituted by the following variables:

In the marketplace, choice is dependent upon two factors, information and purchasing power.

Information asymmetries between sellers and buyers of electricity are an impediment to effective choice. In theory, consumers have an opportunity to acquire or purchase information and then act on the basis of this information, but high transaction costs may make it not feasible for small consumers. Acquisition of information to make a choice is therefore dependent upon power in the marketplace.

Choice is also dependent upon purchasing power. The greater the load purchased, the greater the bargaining power of buyers; the lesser the load purchased, the greater the bargaining power of sellers. For small consumers, the transactions costs in shopping between suppliers may be too high.

These dynamics have been recognised by the Victorian Government. Even the most optimistic government claims about the price benefits for small consumers in choosing between suppliers suggest that small consumers will be able to save 0.55 cents/KWh. On an average domestic consumption of 1020 KWhs, that amounts to a total of $5.10 per year. Large consumers of electricity, on the other hand, will be able to derive considerable savings.

For small consumers, the electricity distribution companies will therefore exercise a de facto monopoly on supply in their service areas unless small consumers exercise a countervailing power.

The only way such countervailing power can be constituted is through the aggregation of purchasing to increase the bargaining power of small consumers relative to large consumers.

The principal historical means whereby individual consumers have empowered themselves in this way is through co-operatives. The essence of co-operative enterprise is the pooling of economic resources to obtain benefits for members.

WHAT IS A CO-OPERATIVE?

A co-operative is an incorporated enterprise that is owned and controlled by its members for the purpose of providing mutual benefits. By forming a co-operative, members aim to derive benefits which they could not achieve effectively by acting individually.

In forming a co-operative, members agree to make use of its services and contribute capital to fund the enterprise, usually by purchasing shares. Funds are contributed not for capital gain but for service or trading benefits. Members may receive dividends on capital contributed, but these are secondary to the benefits derived.

In this sense, a co-operative is a self-help organisation. It is not a charity. It is an enterprise which operates within a market economy with the aim of integrating social and economic objectives through the provision of mutual benefits. Co-operatives are a product of our market economy, often established in response to market failures or imbalances. They are not an alternative to a market economy.

Membership is voluntary, and is usually based upon a specific group of persons who have a unifying interest. This may be a common residential community or locality, or a common interest as consumers, suppliers, producers, tenants or workers.

Ownership and democratic control of a co-operative is vested in the membership, which may comprise individuals and/or other corporate entities (co-operatives, companies or associations). Democratic control means the final authority to control the affairs of the co-operative rests with the members who use it. Every member has one vote only, irrespective of the capital contributed or the use of the co-operative by them.

Democratic control is exercised by members electing a board of directors charged with management of the co-operative, by approval of the rules by which the co-operative operates, and by the passing of resolutions at general meetings.

A co-operative may raise capital from its membership and from sources external to the membership, offering fair market rate returns. However, control of the co-operative is exercised solely by the membership and is unrelated to the source or level of capital.

HOW A CO-OPERATIVE AND INVESTOR OWNED ENTERPRISE DIFFER

As a member-owned enterprise, a co-operative differs from an investor-owned enterprise in four respects:

  1. The prime objective of a co-operative is to provide mutual benefits to its members. An investor-owned enterprise exists to maximise the return on the capital invested in the business.
  2. In a co-operative each member has one vote only. In an investor-owned enterprise voting and control is related to the number of shares held.
  3. The profits of a co-operative are either distributed to members in proportion to use of its services, or retained in the co-operative and not distributed. Profits in an investor-owned enterprise are usually distributed as a return on capital invested.
  4. In a member-owned enterprise ownership is based in a group of people with a unifying interest and tied to long-term objectives. In an investor-owned enterprise ownership can be traded and capital is footloose.

Co-operatives may be for-profit or not-for-profit, though all must operate on a profitable basis. They may be community-based, customer-based, employee-based, tenant-based or producer-based.

CO-OPERATIVES IN VICTORIA

Co-operatives have served generations of Victorians for over 100 years, in fact a number formed early this century still exist today. The Victorian Co-operation Act 1981 provides for a range of co-operatives, and governs the current operation of over 1000 enterprises in agriculture, transport, energy, water, retailing, marketing, health, housing, child care, broadcasting, culture and community services. Some specific forms of co-operative activity are governed by specific Acts (friendly societies, co-operative housing, credit unions and building societies), but in general terms, there are no bounds to the activities and services which may be provided through a co-operative enterprise.

The diversity of co-operative enterprises is the product of a flexible form of organisation that is held together by a common sense of tradition and commitment to democracy and service, rather than by a rigid set of prescriptive rules or practices.

FIVE BUSINESS OPPORTUNITIES FOR CO-OPERATIVES

There are five distinct business opportunities for co-operatives in the restructured Victorian electricity industry.

* New or existing co-operatives retailing electricity

This option would involve co-operatives entering arrangements with suppliers for power services to their members. The development of telephone discount purchasing schemes provides a useful model of how such aggregation works. By aggregating many small consumers, authorised retailers can offer discounts on local, interstate and international telephone calls. To benefit, consumers must pay their bills by the due date. The retailers can also offer a range of discounted telecommunications services.

Co-operatives that wish to retail electricity in this way must acquire a retail licence from the Regulator-General, Victoria. A smart meter, such as the CAMRI, would enable efficient recordings of electricity usage to occur. Work being undertaken by the Victorian Government on modelling and averaging in the preparation of consumer profiles could enable consumer choice without a smart meter.

* New or existing co-operatives purchasing electricity

Individuals and communities in particular localities may establish co-operatives to purchase electricity and associated services for their members. A purchasing co-operative would be able to negotiate with retailers, distribution companies and generation units for the supply of power to their members. The installation of smart meters could form part of contract arrangements with the supplier. A retail licence would not be required.

It is estimated that the viability of a purchasing co-operative depends upon a threshold membership of 2000, with viability increasing with increased membership.

* Generation co-operatives

Communities in rural and remote areas may establish a co-operative to generate electricity, either by arrangement with a distribution company or in competition with them. The establishment of small power plants of up to 10MW may be feasible in remote and rural communities, where service quality from the distribution companies may not be adequate.

A strong degree of community identification with and participation in such a co-operative project would provide the basis for viability.

* Promoting energy efficiency and 'green energy'

Existing co-operatives or newly-formed electricity purchasing and generating co-operatives may promote energy savings and energy conservation. With consumers eventually having to pay the full cost of their electricity, there will be a steady increase in consumer interest in using energy more efficiently.

This may involve retailing or purchasing packages of energy efficient equipment and load shifting from high price times to low price times. It may also involve retailing or purchasing packages with 'green premium' pricing mechanisms to favour renewable energy sources.

* Purchasing a part or full share in a distribution company

Existing co-operatives and purchasing and generating co-operatives may, at some point in the future, establish strategic alliances which may enable the purchase of a part or full share in an entity holding a distribution license. In the United States, there are currently some 30 electricity co-operatives in various stages of acquiring private utilities.

ELECTRICITY CO-OPERATIVES IN VICTORIA

There are currently three electricity co-operatives in Victoria.

Orbost Power Co-operative Ltd
Established in 1992, this co-operative is seeking to establish a generating capacity in the remote East Gippsland community of Orbost.

Southern Energy Co-operative Ltd
Established in 1995, this co-operative is attempting to aggregate consumers in the Mornington Peninsula and southern suburbs of Melbourne (the franchise area of United Energy) to purchase electricity for member households and small businesses after December 2000.

Co-operative Energy Ltd
Established in 1994, this co-operative is exploring services and facilities that might enhance the viability of electricity co-operatives in Victoria. It also seeks to promote the co-operative option for electricity consumers. Co-operative Energy Ltd is an associate member of the National Rural Electric Co-operative Association in the United States.

FUTURE PROSPECTS

The future development of co-operative participation in the electricity industry is dependent upon the following factors:

Customer loyalty

There is a residue of customer loyalty to the state-owned SECV, and much of the current resistance to privatisation has been based on this loyalty. The gradual privatisation of the electricity industry will eventually eliminate this loyalty. At the same time, the new distribution companies will not find it easy to win customer loyalty. It will be up to all new players, including co-operatives, to earn and retain customer loyalty.

Switching costs

If there is a substantial cost to consumers in switching suppliers, this will be an effective barrier to the competitive success of electricity co-operatives. This will have the effect of forcing consumers to remain with their existing supplier. Continuing advances in usage recording technology will, however, steadily diminish this barrier.

Price signals

Once price controls are finally phased out in the year 2000, consumers will be required to pay the real costs of their electricity. Consumers will therefore become more sensitive to pricing signals and more inclined to alter behaviour.

Capital costs

The capital costs in becoming and remaining competitive are critical to the viability of an electricity co-operative. These costs are threefold: initial and set-up costs, operating costs until a viable market share is secured, and the costs imposed by competitor pricing strategies. If a competitor has significant liquidity reserves, it can reduce its margins to drive its competitors out of the industry. Strategic alliances and the utilisation of existing co-operative and community infrastructure can assist the limitation of capital costs.

Political barriers

A political framework is established by legislation, regulation and public debate involving industry players and interest groups. This framework can either hinder or facilitate the development of electricity co-operatives.

Customer mix

The larger the sales volume, the lower the cost per GWh and the higher the proportion of sales to industrial and commercial customers, the lower the unit cost. It has been estimated, for instance, that average operating costs per customer in urban areas reduce 1.3 cents for every increase of 10 customers.

Strategic alliances

Existing co-operatives and electricity co-operatives may advance their participation in the electricity industry through strategic alliances. Large membership organisations such as credit unions and friendly societies, trade unions, churches and large voluntary associations offer potentially very powerful consumer purchasing blocs.

THE WAY FORWARD

The Co-operative Federation of Victoria, through its Co-operative Opportunities Project, aims to encourage individuals, co-operatives, policy makers and communities to explore these various options. The Project does not favour any specific type of co-operative enterprise. It exists to encourage individuals and communities to explore the possibilities of co-operative enterprise in meeting their various needs.

Specifically, the Federation will:

FOR MORE INFORMATION

Contact Vern Hughes, Project Co-ordinator on (03) 9314 7235, or Tony Gill, Secretary, Co-operative Federation of Victoria Ltd., RMB 1282 Langs Road, Blampied, Victoria 3364, Telephone (053) 457 466, Fax (053) 483 253.

ACKNOWLEDGMENT

In preparation of this paper, acknowledgment is made of use of material contained in Southern Energy Co-operative Ltd The Co-operative Option, 1995; and Co-operative Energy Ltd Choice Realities, 1996.

Consultant Author: Vern Hughes


 Return to UWCC Homepage