Electric cooperatives must charge for new construction to cover the costs of building and maintaining the infrastructure required to deliver power, such as power lines, transformers and equipment. Unlike for-profit utilities, co-ops are not-for-profit organizations, owned by their members. All operating and new construction costs must be covered to ensure the financial health of the cooperative. Members adding new service(s) are required to cover their costs for labor and materials, to prevent existing members from having to subsidize new construction costs.
A key reason electric cooperatives charge for construction is the high cost of serving rural areas, where a majority of electrical co-ops operate.
- Low population density: Rural co-ops serve fewer customers spread out over a larger geographic area. This means the costs of construction and maintenance are distributed among fewer members, increasing the cost per consumer.
- Lack of economies of scale: For-profit utilities and municipal electric utilities typically serve more concentrated urban and suburban areas. This higher population density allows them to benefit from economies of scale, distributing their infrastructure and operational costs across a much larger customer base.
- Contribution in aid of construction (CIAC): This is a one-time fee paid by new members or existing members upgrading their service to cover a portion of the construction costs. It is often based on the actual costs of materials, equipment and labor needed to connect the property to the grid.
- Debt financing: Co-ops use loans and grants to fund large infrastructure projects.
- Member equity (capital credits): Any revenue that exceeds a co-op’s expenses in a given year is allocated back to members as capital credits. The cooperative retains these funds for a period to build equity and finance capital projects before retiring them and returning them to members.
- Cash reserves: Co-ops maintain cash reserves to fund capital projects and other needs which help keep rates stable and minimize rate increases.
- Rates and fees: A portion of a member’s monthly charges, such as a facility or grid access fee, goes toward the fixed costs of operating and maintaining the cooperative’s infrastructure. Our fixed costs are the costs we incur to provide service regardless of how much energy a member uses.
Charging for construction ensures that all members contribute their fair share toward the cost of the electric system.
- Preventing cross-subsidization: Construction charges, along with other rate-setting methods, help ensure that new connections do not create a subsidy that raises rates for existing members.
- Equitable distribution of costs: As member-owned organizations, co-ops aim to set rates in a fair and transparent manner, allocating costs based on what is required to serve different classes of members.
In essence, construction charges are a necessary part of the co-op’s business model to maintain financial stability and ensure reliable service for all members, especially given the inherent challenges of serving rural communities.