xt7g1j978070 https://exploreuk.uky.edu/dips/xt7g1j978070/data/mets.xml   Kentucky Agricultural Experiment Station.  journals kaes_circulars_004_571 English Lexington : The Service, 1913-1958. Contact the Special Collections Research Center for information regarding rights and use of this collection. Kentucky Agricultural Experiment Station Circular (Kentucky Agricultural Experiment Station) n. 571 text Circular (Kentucky Agricultural Experiment Station) n. 571  2014 true xt7g1j978070 section xt7g1j978070   HOW KENTUCKY /
  COOPERATIVES
    ARE CONTROLLED \ `
EM   ; WENDELL c. BINKLEY
      \ E1.¤0N 0. SMITH
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Q AGRICULTURAL EXPERIMENT STATION
{ Lexington 1
U

 PREFACE
This report is designed primarily to be used by managers, boards
of directors and other personnel of the “management team” of rural
electric power distribution cooperatives. It attempts to bring to the
attention of these key decision-makers some important facts and ques-
tions of policy which may be facing these organizations.
Rural electric cooperatives have made significant improvements
in their operations, and their accomplishments have been important}
The determination of desirable policy for the future is the job of
members, boards of directors, managers, and other personnel within
cooperatives. It involves many factors outside the scope of this study. A
However, if a report such as this is to be useful to the “manage- bllllel
ment” of Kentucky rural electric cooperatives, it must focus attention eleele
on unsolved problems and possible future improvements; that is, on Ol lll‘
situations where some evaluation of alternative policies may be needed. el eee
The situations described, questions raised, and alternatives sug- Vlsely
gested in this report may appear unduly critical if the purpose and el the
the intended audience are not kept clearly in mind. When we draw Tl
attention to such situations we do not imply that they are “bad,” or leans
that improvements are not constantly attempted and made. Our eellllli
intent is to be constructive and to help Kentucky rural electric co- Vlslell
operatives carry on their important work with increasing effective- Selvle
ness. Todo this, we believe that we must call attention to those ellllel
perplexing unanswered questions which appear to be important to lzed l
their future as cooperative business associations. PUbll(
The report is based primarily on information supplied by man- M'
agers of local power distribution cooperatives. In some cases these epeml
managers may not have possessed complete information on certain Slble
practices and aspects of their operations. Information supplied by mem
managers has been checked, as far as possible, with that supplied ellve
by personnel of the statewide association. Throughout the report llllcleli
we have attempted to call attention to the source of our information Pells '
and its possible weaknesses. Vlclual
Finally, the data were collected in 1955. Some changes have bers Y
‘ occurred since that time. However, in most cases they will not seri— egemf
ously impair the usefulness of the report. A comparison of an exist- _h
ing situation in a particular cooperative with the general situation mm;}
described by the report will establish whether the questions raised ing ma
are pertinent to the situation existing in that cooperative at the present  
time. We have, at various places, attempted to recognize the like- of Ken
lihood that changes have occurred and to incorporate up-to-date data. gfclxzl
Hon. P
1 Can We Solve the Farm Problem, by Murray R. Benedict, 20th Century    
Fund, New York (1955), p. 70. “For the majority of farm people, the program
has removed one of the major disadvantages of farm life."

 How Kentucky Rural Electric
Cooperatives Are Controlled
By WENDELL C. BINKLEY and ELDON D. SMITH?
INTRODUCTION
A cooperative can be no better than its management. Its contri-
bution is a result of a vast number of decisions by members, their .
elected representatives (board of directors), and the paid employees ·
of the association. In addition, the laws under which some types
of cooperatives operate empower various regulatory bodies and super-
visory agencies to make important decisions affecting the operation
of the cooperative.
This is notably true in rural electric cooperatives, which obtain
loans from the Rural Electrification Administration. Such loans are
contingent upon accepting certain types of supervision. This super-
vision supplements the regulatory powers of the Kentucky Public
Service Commission which has responsibility for establishing rate
structures and service territories. The Commission is also author-
ized to require various reports and audits necessary to assure the
public of fair rates and adequate service.
Members, their representatives (directors) and paid employees,
operating within the framework established by law and by respon-
sible supervisory and regulatory agencies, constitute the manage-
ment of the cooperative. Therefore, an understanding of cooper-
ative problems involves, among other things, the following: (1)
understanding some of the ways that decisions are made by various
parts of the “management team;” (2) understanding who makes indi-
vidual types of decisions; (3) understanding how the various mem- (
bers relate themselves to each other, and to others, in making man-
agement decisions; (4) understanding the overall structure of powers
2 The authors recognize a debt of gratitude to all of the managers of the 26 I
rural electric cooperatives who willingly gave of their time and energies in answer-  
ing many questions and providing information from their files and records, and
to Willard Minton of the Department of Agricultural Economics, who assisted in
collecting much of the data and made some preliminary tabulations. Personnel
of Kentucky Rural Electric Cooperative Corporation have provided many items
of information and provided other services too numerous to mention. Particularly `
we wish to thank ]. K. Smith, H. L. Spurlock, C. M. Stewart, T. C. Long and the
Hon. Philip Ardery for reviewing the manuscript in draft and submitting several
very constructive suggestions. \Vithout such cooperation the study could not I
have been made.

 4
and responsibilities in the organization; and (5) understanding the
legal and social forces that affect management.
This study is based largely on a comprehensive survey of some
selected phases of these management processes. The survey was
conducted in 1955 and covered all of the 26 rural electric power
distribution cooperatives in Kentucky. A major part of the study is
based on facts and opinions obtained from interviews with managers
of such local cooperatives.
The study attempts mainly three things; (1) To make an inven-
tory of existing organizational structures and management practices
in these cooperatives, (2) to focus attention on some important ques-
tions relating to their management, and (3) to explore some of the
possible consequences of existing practices to these cooperatives.
Rural Electric Cooperatives Today and Yesterday
In 1935 only about 11 percent of the farms in the United States
were served by electric power lines. A few more had private power
plants, but the kerosene lamp and the gasoline engine, respectively,
provided the main source of light and stationary mechanical power.
President Franklin Roosevelt, by executive order, established the
Rural Electrification Administration (R.E.A.) in 1935. The agency
was given legislative sanction in the Rural Electrification Act of 1936.
A primary objective was to provide electric service in rural areas
of the United States. The R.E.A. accomplished its objectives by
extending loans to companies (mostly cooperatives) set up to pro-
vide electric service to rural areas? Interest rates were comparable,
initially, to the average yield on government long-term securities.
A 1944 amendment specified a maximum of 2 percent interest irre-
spective of the yields on U. S. securities and extended the amortization
period from 25 to 35 years.
]ustification for this liberalized policy was that of facilitating the
extension of electrical service to rural areas which could not other-
· wise be feasibly served. The intent of Congress that extension of loans
would be contingent upon complying with the “area coverage policy”
was clearly set forth in the record of hearings and has been so in-
terpreted by the R.E.A. in its lending policy} Managers reported
that 22 of the distribution cooperatives in Kentucky were organized
in the three years immediately following passage of the Rural Elec-
A-W ii By 1959 H.E.A. had extended loans to only 24 private (noncooperative)
]_)()\VCl' C()lHplII`11CS, HHC1 f()llI` SLlCl`l CO1TlI`)2lI'll(5S VV€I`C tlCtl\'€ l)OI`I`()VVCI'S in  
4 Reference is made to the policy and the earlier hearings in Hearings before
:1 Subcommittee of the Committee on Grwermnent Operations, United States
Senate Second Session on Senate Bill 2990, U. S. Government Printing Office,
1958, especially pp. 157-160 and 182. .

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 6
trification Act of 1936. (See Fig. 1 for present operating territories.)
Under this act rural electric service expanded to the point that
96 percent of all farms in the United States were electrified by 1959,
with more than half of them being served by Pt.E.A. borrowers.
Ninety percent of Kentucky farms had electrical service, according
to the 1954 Census of Agriculture, compared with 4.3 percent in
1930 and 16.7 percent in 1940 (Fig. 2).
PERCENT
IOC Kr gsi}
90°/ °
  . W
80 7s°/.  
Y  
KY  -;·
Ci· planning and conducting the meeting. This service is provided on a
ing contractual basis.
at? Attendance
rm. . . .
l_ Attendance at annual meetings of rural electric cooperatives was
> ic .. ,,
1_ reported as extremely large. Seven of the 26 managers were unable
(10 . . . .
1 to provide even an estimate. For the 18 cooperatives for which man-
ic . .
u_ agers provided data, estrrnated average total attendance exceeded
:‘1c .
I I 6,600. Four of the cooperatives reported 10,000 or more total at-
1rt
l tendance.
nt . . .
ll Attendance was composed of many nonmembers rn addition to
; a- .
the L; _
QS Win other types ot cooper·atives the day-to-day threat of economic com-
' petition from other firms provides stimulus to operate in a manner consistent with
rlly members’ interests and needs. However, because each rural electric cooperative —
me is granted an exclusive franchise for a given territory, member participation in I
the organization and in political pressure on regulatory agencies may provide j
the more important ways for members to assure themselves of adequate service.
1* K.R.S. 272.160 “Each association shall provide in the bylaws for one or
more regular meetings annually.” (Marketing and purchasing cooperatives.)
12 K.R.S. 279.210 (3) “The provisions of the general corporation laws of this
state . . . apply . . . except when such provisions are in conflict or inconsistent '
tl”l€ with the express provisions of this chapter.” Sec K.R.S. 271.295 for provisions
. _ on annual meetings. They are not required annually.
ut) 13 No explicit provision is made in the Kentucky law under which rrrral —
gee electric cooperatives are incorporated for petition by the members to hold .
Special membership meetings. As is true in the case of annual meetings, this ,
appears to be a weakness of the law. Some (possibly all) of the cooperatives `
provide for petition by members in their bylaws or articles of incorporation.

 12
members. In some cases, managers supplied fairly accurate data on hm;
numbers of members registered and voting. In other cases, they were Of l
able to make only crude estimates. However, on the basis of all
estimates, it appears that member attendance averaged about 880 {O1-
for 18 cooperatives. This was equal to less than one-sixth of the total OOO
attendance. That is, over 85 percent of those attending did not reg- SOO
ister as voting members of the association, according to the data sup I-Op
plied by the 18 managers. Despite this extremely large attendance, it V
apparently only about 10 percent of all members attended? me]
poi
The Business Meeting ulal
Although business considerations provide the primary justifica- por
tion for an annual membership meeting, major emphasis in terms cas·
of activities and time spent appeared to be placed on nonbusiness hav
activities, such as entertainment, meals, and refreshments. Actually,
only a few managers (nine) were able to provide even crude esti- mee
mates of the total time devoted to the business meeting. Personnel woi
of Kentucky Rural Electric Cooperative Corporation estimate that for
about 45 minutes is usually devoted to the entire business meeting, mei
which includes (1) reading minutes of the last meeting, (2) the lem
annual report to the membership, (3) the report of the nominating
committee, (4) elections, and (5) any discussion from the floor.
i All rural electric cooperatives have an annual audit. This is
required for any public utility. However, not all cooperatives pro- pm
vided members with copies of the financial statement. Five man- mil-
agers reported neither distributing financial statements at the meet- OOO
ings nor mailing them to members. The most common procedure ave
reported was to mail them out but not to hand them out at the meet- wm
ings (15 co-ops). Typically, the manager (14), or one of the direc- PIO
tors (9), read the abbreviated report at the meeting, without com- Out
ment or interpretation. Sixteen reported that total time devoted to am
reading and discussion of the report was 10 minutes or less. From by
l this, it would appear that in most rural electric cooperatives, the COS-
financial report to members at the annual meeting is hardly more
than a formality.1“ Certainly the financial report when it is so briefly Of
twc
14 This is slightly higher in percentage terms than farm credit cooperatives jpg
which have much smaller memberships. This figure was computed by dividing
CStlITlHtC(l 1H€l]]l)CI` 2lttCH(l2lI`1C€ I`€‘[)Ol`tCd   I]12l.I`l£Ig€YS   2`lCtll2Il ITl€Il]l)(?l'Sl]ll) Hgures ;__
takcn from official records.
15 It is recognized that the intricacies of a com lex organization cannot bv Sou]
completely communicated to members in a single clay. It must be rccognizcd At,
that even a general picture of operations may be better than complete ignorance,
but in a 10-minute period it is doubtful that more than a recitation of grow msu
statistics is possible. For most, this would create no basis for evaluation of mw
pCI`f()I`lIl2lI`lCC. glnul

 is z
on handled, can be neither educational nor a way of focusing attention
’€1‘€ of members on important problems.
all All but one of the rural electric cooperatives reported provision
880 for member discussion, “if people had questions or com1nents.” Only
otal one-fourth reported any member participation. This does not neces-
reg- sarily mean that members were not interested in the report. lf the
:up— report were hurriedly presented, with no interpretation or visual aids,
ice, it would be surprising if there were more than occasional and limited
member discussion. Ten of the 22 cooperatives reporting on this
point said that they had, at some time, prepared questions to stim- l
ulate discussion. The Kentucky Rural Electric Cooperative Cor-  
ica— poration reportedly designed questions for this purpose in a few  
rms cases."‘ Such questions, of course, can be more effective if members  
iess have some understanding of the financial statement.
illy, Considering the large memberships and large areas served, annual
esti- meeting attendance by members was relatively high. However, one
mel wonders whether the meetings serve as very effective instruments
zhat for control by members. Certainly there was little indication that
ing, members were making any direct evaluation of the status and prob-
the lems of their organization in the business meeting.
iing
Entertainment and Other Nonbusiness Features
9 is An annual meeting can be conducted at practically no cost, if
?1`0— purely business features are the only activities and if no prizes, enter-
lmt tainment, refreshments, etc. are provided. However, reports by local
€€t· cooperative managers indicated that local costs of annual meetings
»UY€ averaged $1,385 for all rural electric cooperatives. The reported range
96* was from $300 to $3,160.17 The Kentucky Rural Electric Cooperative
i`€C‘ provided equipment, entertainment, personnel, and, in most cases,
910 outlined and helped conduct the entire meeting program. The local
[ to association is charged $800 for this service. Prizes are often donated »
Y0m by appliance dealers, and the $800 fee is probably less than actual
the cost for services provided for the local association.
[Ow Among the nonbusiness features, “door prizes” and entertainment l
GHY of some type were common to nearly all annual meetings. (Only E
two reported no entertainment.) Fourteen associations reported serv- V
  ing a meal. all but one of which was paid for, in part at least, by the
QUYGS  ¥“_$ .
l"Six cooperatives were not affiliated with K.R.E.C.C. at survey time.
thc Some of these were afliliated with Tennessee Valley Public Power Association.
ized At the present time only four are not afliliated with K.R.E.C.C.
ncei ll Reports by officials of K.R.E.C.C. indicate that some of these differences
FOSS fvsult from differences in local policies for allocating various costs to the annual
I Of meeting. Some charge the salaries of all employees for the time spent to the ~
illlllllill l]](‘(‘l'll`lg; SOIHG (l() HOL Ctl`.  

 14
individual. Apparently because of the large crowds attending, free ma
refreshments were not served except in rare eases. The entertain- in
ment was reported as entirely professional in five cases; the remaining the
18 cooperatives reported use of both professional and amateur enter-
tainment. cot
In most cases, the annual meeting involved both an evening and pai
a day program, often covering a period of over 6 hours. It seems of
apparent that the meeting was much more than an occasion for re- on
viewing past performance, making business decisions, and electing “sa
directors. The business meeting may have been, in fact, somewhat for
incidental to advertising, public relations, recreational, and informa- in
tional activities. This raises questions regarding the purposes an tioi
annual meeting might serve, their relative importance, and to what ecc
degree they conflict. Can a meaningful business meeting be con- .—
ducted in an atmosphere of festivity with large numbers of children, 195
guests, and other nonmembers present? Will members who have to _
be attracted by door prizes and professional entertainment be suffici-  
ently interested to contribute to intelligent consideration of business sha]
affairs? Will they recognize such as a “business meeting of their as-  
SOC1at101'1?” wilt
Member Pcrticipution und Refund Policy  
U The “Capital Credits” plan has been accepted, at least to some  
extent, by practically all rural electric cooperatives. This is a system pria
by which (1) patrons are charged rates sufficient to cover operating  
costs and to retire debt obligations and (2) each patron is “credited" aiid
with his pro rata share of the equity resulting from the retirement  
of the corporate debt. The procedure recommended by the Rural
Electrification Administration is for each cooperative to notify each  
patron each year of his equity (ownership) accumulated in the co- 195
operative during the most recent fiscal period.  
Some doubt has been expressed by personnel of rural electric rect
_ cooperatives as to whether there is any real possibility of developing  
informed member interest under the present system of “Capital 501
Credits.” Under this plan, accrued member savings are not normally und,
refunded to the member unless total accumulated credits of all mem- of ti
' hers equal 40 percent of the assets of the cooperative. This is in  
accordance with R.E.A. recommendations}8 Any other policy might eapi
affect the ability of the local association to float new loans either  
through R.E.A. or other sources. lf refunds are made they must be ever
ship
18 OI`l€ 102111 C()I`ltl`1lCt S]_}(2ClilCS tllllt HO (llVl(lCl`l(lS, HO D2ltl`Ol`l2lg€ l`Cflll](lS, (Jil'--  
will bc made "unless, after such payment . . . the liquid assets; of the corporation. of tl
after deducting . . . all current liabilities, will equal at least 40 percentum ei no l
thc reserves for depreciation .... " on t

 15 t
me made in order of accumulation, by years. In no local cooperative
{in- in Kentucky had accumulated credits reached the 40 percent level at
ing the time of the survey.“’
6 - As of 1959, the avera T6 re orted iimember e uit ” in Kentuck
r P Cl Y Y
cooperatives was about 16 percent of total assets. Therefore, the
md patrons had not been able to realize fully either (1) the i111plications
; of “at eost” onerations or 2 the influence of managerial eflicienev
HIS c» ,
IQ- 011 HEI cost of €l€Ct1`1C3.l S€1`V1C€S. Ul1(;l€1` lfl`llS ]_)1`Og1`€ll`H   3.pp€3.1`S that
jug "savings” in a given fiscal year p