Capital Credit Allocations and How the Cooperative Difference Affects Your Rates
At Oregon Trail Electric Cooperative the people who receive electricity are not just customers, they are vested members with a stake in the operations of the cooperative. Members enjoy certain rights that customers don’t have with investor-owned, for-profit, utilities.
As a member of OTEC, you can choose to run for a board seat, or if you don’t want to actually run for a seat, you can offer to become a member of our nomination committee. Because you have a vote in the annual election for the board candidates of your choice, our board is democratically composed of your friends, neighbors and people who live and work in the four county service territory that OTEC serves.
Many people, however, don’t understand the various ways their membership in a cooperative affects their rates. At OTEC, our rates are based on two main components – the actual cost of the wholesale power we buy from the Bonneville Power Administration that generates our electricity, and the cost for us to get that power to you.
The second component – the cost for us to get power to you – is all of the other operational costs, including the cost for poles and lines, the cost and maintenance of trucks and buildings, actual employee costs like wages and benefits, and the costs associated with maintaining records, like the printing and mailing of bills.
We do collect some money, figured into your rates, that is invested into capital projects. This helps us to build many of the expensive system improvements to ensure delivery of safe and reliable power. Any money collected in excess of rates is allocated to each member’s account in the form of a capital credit.
Each year in early summer we get many questions as to what capital credits and allocations truly are. Capital credits represent your personal investment in the cooperative and your stake in all of its assets. You are the owner.
Unlike investor-owned, for-profit, electric utilities, which distribute their profits to stockholders, OTEC is a non-profit electric cooperative. That means if the financial position of the cooperative allows, OTEC returns a portion of its margins back to you, the member-owner. We work hard to keep our rates as low as possible – continuously searching for ways to reduce operating costs and advocating on your behalf with the Bonneville Power Administration to keep power costs low - all while guaranteeing a stable supply of clean, renewable electricity.
Returning capital credits to members is a practice unique to the cooperative model and represents one of our seven cooperative principles – Members’ Economic Participation. And perhaps best of all, the benefits of this economic participation accrues into all four counties of our OTEC communities.
Here are some answers to frequently asked questions:
What are capital credits?
The difference between a cooperative such as Oregon Trail Electric Cooperative (OTEC) and an investor-owned, for-profit, utility is that a cooperative is owned by the member-owners it serves. As a member-owner, you share in the margins of the co-op. At the close of each fiscal year, all revenue received in excess of expenses (i.e. margins) is allocated back to the membership in the form of a credit, a “capital credit”. This allocation, in OTEC’s case, is based on the dollar amount of your purchases during the same year.
How do capital credits work?
You need to know two things about capital credits in order to understand how they work for you:
- Allocations: Each year, you are "allocated" your portion of the previous year's margins based on the amount of electric service and power delivery you purchased from OTEC in relation to the total amount purchased by all members during the year. This amount is used by OTEC to fund capital needs for items such as power line construction, transformers, trucks, inventory and other equipment. This is an underlying principle of the cooperative business model and is one more way we keep your electric rates as low as possible. This "allocation" becomes your equity in the cooperative and is maintained in a separate account assigned to you.
- Rotation or “retirement”: This is what you will get in cash at a later date. OTEC uses the amount "allocated" to you for a time, but then returns this amount to members. When it is your turn in the retirement rotation, this is when you get actual “cash back” dollars.
When are capital credits returned to members?
Per cooperative bylaws, your locally elected Board of Directors determines the amount of rotation cycled (cash back) each year, based on the financial condition of the cooperative and other considerations. These payments are usually made in December in the form of checks or bill credits.
What should a member do if he or she moves from our service area?
The member should inform our office of any changes in his or her mailing address. It is a member's responsibility to make sure the cooperative has up-to-date address information at all times. By keeping your contact information up to date, you can take full advantage of the services your Oregon Trail Electric Cooperative offers.
How does a member know the amount of his or her capital credits?
Each member has a separate capital credit account, which represents the member's ownership in the cooperative. When capital credits are allocated at the end of a year, all members who received electric service during that year will receive an allocation notice showing their current year's allocation and their accumulated balance of all prior years’ service.
Is my capital credit allocation taxable?
For individuals, capital credits are generally not taxable. We suggest you seek the advice of a tax professional for any specific questions.
What happens to the capital credits of a deceased member?
There is one special condition when a capital credit balance may be “cashed out” or refunded before the 30-year maturity date. When a member dies, OTEC’s Bylaws allow the surviving spouse or executor of the estate to apply for early retirement of all balances. There are three options for the spouse, executor, or heirs to consider:
- The first option is to continue and wait for the capital credit refund to be processed through the normal annual retirement schedule. (up to 30 years)
- The second option is to apply for early retirement of the deceased member’s capital credit account. To ensure all members are treated fairly, particularly those who are not receiving full cash-outs before the rest of the membership, the capital credit balance is discounted or reduced to the present value.
- The third option is to donate the entire capital credit balance to OTEC’s scholarship fund. In 2017, 26 deserving students received scholarships to continue their education beyond high school. For more information visit our Community page.
Can you explain what discounting to the Net Present Value means?
Net Present Value (NPV) formulas are used to determine today’s value of money that would otherwise have been paid in a series of payments through OTEC’s normal retirement process over 30 years. Capital credits earned one year ago have less value than those earned 20 years ago. The three key factors in NPV formulas are time, NPV rate, and balance. OTEC currently uses a 15-year maturity, and a 5.3% discount rate when calculating the current worth of the capital credit account balances.
Mary Jones’ daughter applied for early retirement of capital credits after her mother’s death. Mary Jones’ capital credit account shows a balance of $1,400 which is an accumulation of a series of margins allocated from 1999 to 2016.
|Retirement of Capital Credits Scenario||Total Paid from Capital Credit Account|
|Mrs. Jones' daughter receives annual capital credit payments for up to 30 years until account is zero.||
|Mrs. Jones' daughter receives a one-time lump sum payment payment for early payout at the NPV. OTEC does not discount the first $100 of the balance.||
- Joint memberships are not eligible for early retirement unless both members are deceased.