Understanding Capital Credits

As a not-for-profit cooperative, the Electric Cooperatives of Arkansas are literally owned by members, so as you pay your utility bill, you are also building equity—capital credits—in your local electric cooperative, based on your usage. That means that when the cooperative thrives, you earn a return, which is distributed via capital credits to each member of the cooperative. In the last five years, the cooperatives have returned approximately $107 million to its members in patronage payments.  

While no two cooperatives handle credits exactly the same, the questions and answers below will give you a better understanding of how this works.

What are capital credits?

The retained margins left over at the end of the year at a not for profit electric cooperative.  Capital credits are the most significant source of equity for most cooperatives.  Capital credits are somewhat similar to the dividends that investor-owned utilities pay to their shareholders.  The difference is that the Cooperative's "shareholders" are also the people that it serves and the "dividends" (capital credits) are distributed to those member/consumers.  Capital credits reflect each member's ownership in the cooperative.  It is also called patronage capital or equity capital.  

How are capital credits used and how are they paid?

Member-owned, not-for-profit electric utilities set their rates to bring in enough money to pay operating costs, make payments on any loans and provide an emergency reserve.  At the end of each calendar year, cooperatives subtract operating expenses from the total amount of money collected during the year and this balance is called the "margin."

How are the year-end margins allocated?

These margins are allocated to member-consumers as capital credits based on their purchases from the cooperative.  Member purchases may also be called patronage.

Why does a cooperative refund some capital credits?

It is one of the seven Cooperative Principles:  Member Economic Participation.  That principle states:  Members allocated surpluses fro any or all of the following purposes:  developing the cooperative, possibly by setting up reserves, part of which at least would be indivisible benefiting members in proportion to their transactions with the cooperative; and supporting other activities approved by the membership.  

Do investor-owned utilities or municipal utilities refund capital credits?

No.  Capital credits only exist at not-for-profit electric utilities owned by their members.  Some cooperatives are not allowed to refund capital credits according to their power supply contracts or by law.

Is a cooperative required to refund capital credits every year?

Each year, a cooperative's board of directors makes a decision on whether to refund capital credits based on the financial health of the cooperative.  The cooperative's ability to return margins to members in the form of the capital credits checks each year reflect the cooperative's strength and financial stability.

Do I lose my capital credits if the cooperative does not refund that year?

No.  All capital credits from every year members have been served are maintained until such time as the board refunds them.

How often do members receive capital credits?

The board of directors makes a decision each year whether or not to refund capital credits.  When the cooperative is strong enough financially and the member equity level is high enough, the Board directs the staff to refund some portion of the past year's capital credits.

What is a member?

Any individual or entity that uses electricity from the cooperative.  They are entitled to participate in cooperative elections and vote and to share in patronage capital allocations.

What does it mean to allocate capital credits?

To assign capital credits to members/patrons after the books are closed on a one-year operation of the cooperative.

What does it mean to retire capital credits?

To pay capital credits to members either through cash or credit.  It's also called revolving, rotation or redeeming capital credits. 

What is a rotation period?

The period of time that capital credits are held by the cooperative before being returned to members.

What methods are used to determine a capital credit refund for members?

Some cooperatives refund on the first in, first out (FIFO) method, refund the oldest capital credits first.  Others will refund capital credits from the most recent year called last-in, first out (LIFO).  Still others use a percentage of all capital credits from all years.  And finally, the other method is a hybrid of those two methods.