Public Utilities Cooperatives and Market Liberalization

Martin J. LoweryExecutive Vice President, External Affairs

National Rural Electric Cooperative Association

ACI-Americas XVI Conferencia RegionalSan José, Costa Rica

July 23, 2008

The Electric Cooperative Network in the United States Today

Electric Co-op Facts-at-a-Glance

864 distribution and 66 G&T cooperatives:

– 2.4 million miles of distribution line– 17 million businesses, homes and farms– 67,000 employees– 10 percent of annual kWh sales nationally

– 12 percent of the nation's population

NRECA international assistance in electric co-op development:

• Bangladesh• Philippines• Vietnam• Thailand• Sudan• Bolivia• Yemen• Afghanistan

• Brazil• Costa Rica• Honduras• Argentina• El Salvador• Nicaragua• Guatemala• Dominican Republic

The Traditional Mission of Electric Cooperatives

• Reliable Service• Lowest Possible Cost• Sound Business Practices

“Reliable, affordable, sustainable”

The U.S. Electric Industry Deregulation Experience

• Wholesale Deregulation– Generally successful– Still a “work in progress” after 10 years– Requires experience in hourly and forward

market trading and hedging

• Retail Deregulation– Predominately a failure

Electric Co-op Experience

• Difficult to imagine large scale competition as a healthy environment for consumers

• Unlike the telephone or banking industries, difficult to identify enhanced consumer value in unbundled, new services

Obligation to Serve

• Adopted in the early 1900’s• Regulated rate of return on investment

coupled with acceptance of obligation to serve all consumers within the territorial boundaries

• Particularly important to those for whom would otherwise be unavailable or unaffordable

Back to the Future

• Electric cooperatives have always accepted the obligation to serve

• In many cases, cooperatives were formed because service was literally not otherwise available

• Once again today the issue of reliable service at an affordable price consistent with sound business practices is the key issue

The Cooperative Opportunity

• Investor-owned company divestiture of existing assets has increased since wholesale deregulation

• Investor-owned identification of unprofitable assets can be an opportunity for cooperative expansion

Successful Acquisitions in Past Five Years

• Creation of Kauai Island Utility Cooperative to acquire the assets of Citizens Communications

• Acquisition of additional Citizens Communications assets by Vermont Electric Cooperative

• Acquisition of Aquila Energy properties in Kansas by electric cooperatives

• Acquisition of Alliant Energy properties in Illinois and Wisconsin by electric cooperatives