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The ins and outs of capital credits

The ins and outs of capital credits

Article was added on Wednesday, June 01, 2016

One of the main concepts that truly sets cooperatives apart from other utilities is capital credits. 

Many of you have been loyal SEC members for long enough to understand the process, but we are also fortunate to have a great deal of newcomers. I want to make sure everyone has an opportunity to understand what makes us a not-for-profit entity.

At Santee Electric Cooperative, our rates are set to allow for a small buffer between our revenue and our actual costs. While we might have the occasional "lean" month due to weather conditions we cannot control, you would never want to operate at a loss for the year. Of course, as a not-for-profit, we call this buffer - the difference between our year's revenue and costs - our margins for that year. Those margins are allocated to our members on the basis of revenue minus power costs. Basically, we look at the cost of the power we purchased on behalf of our members and subtract that from the revenue we collected from those same members. Our margins are then divided proportionally based on contribution to the overall difference between revenue and power cost.

Some might ask why we would not simply pay back all of the margins at the end of each year, but it's pretty easy to see why that would not work. There are two main issues to consider. The first is the fact that it takes a great deal of time and money to finance the infrastructure necessary to supply electricity to our 45,000 services. That's why we pay back capital credits on a cycle similar to our loan terms. Furthermore, it's always prudent to make sure we hold on to some reserves each year so we can be prepared for the next hurricane or ice storm.

Of course, we don't want everyone to have to wait until the very end of the cycle to start getting capital credit payments back from their cooperatives. For this reason, we go ahead and retire a small portion of the previous year's allocated margins and then allow the largest portion to come from the oldest year in the cycle. This causes our longer-standing members to get larger payments, but our newcomers still get something. It's also important to make sure this early pay-out is fair, and this is accomplished by discounting based on the time value of money. While we want to make sure to give newcomers a taste of what it's like to be a cooperative member-owner from the beginning, we also have to make sure this process is fair to the ones that have been with us the longest.

If you have additional question about capital credit payments, please contact…

Robert G. Ardis III
President and Chief Executive 0fficer

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