Complying with Electric Cooperative State Statutes

Tyrus H. Thompson (Ty) Vice President and Deputy General Counsel Director and Member Legal Services Office of General Counsel National Rural Electric Cooperative Association 703-907-5855, [email protected] Electric Cooperative Acts

• Electric Cooperatives Incorporated and Operating under Electric Cooperative Act in 30 States – Approximately 70% of NRECA Voting Members – Approximately 80% of Meters Served and Electric Energy Sold by NRECA Voting Members • Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia, and Wyoming

July 12, 2017 NRECA Voting Members Only 2 Electric Cooperative Acts

• Usually, Old and Short

• Existence – Articles of Incorporation (Contents, Amendment, Etc.) – Disposition of Property (Member Approval, Appraisal, Etc.) – Dissolution (Member Approval, Lookback Period, Etc.)

• Operation – Purpose (Electric Energy Only, Any Lawful Purpose, Serve Members Only, Etc.) – Powers (Own Interest in Other Entities, Etc.) – Bylaws (Contents, Board and/or Member Amendment, Proposing Amendments, Reasonableness, Etc.) – Nonprofit Operation (No Dividends, Etc.)

July 12, 2017 NRECA Voting Members Only 3 Electric Cooperative Act

• Members – Qualifications (Bylaws, Purchase Electric Energy, Etc.) – Meetings (Annual, Special, Calling, Vote, Etc.) – Refunds (Rates, Capital Credits, Etc.)

• Directors – Qualifications (Bylaws, Etc.) – Elections (In Person Vote, Mail Vote, Electronic Vote, Staggered Terms, Length of Terms, Etc.) – Removal (Board and/or Members, Disqualification, Etc.) – Districts (Nominate and/or Elect, Etc.) – Meetings (Notice, Telephone Participation, Etc.) – Officers (President, Vice President, Secretary-Treasurer, Etc.) Electric Cooperative Acts Miscellaneous – Name – “Rural” – Eminent Domain Rights – Territorial Rights – State Utility Commission Jurisdiction – State Securities Law Exemption – Applicability of Other Corporate Law General Corporate Law Electric Cooperatives Incorporated and Operating Under – General Cooperative Act in 11 States (California, Colorado, Hawaii, Iowa, Michigan, Minnesota, Nevada, Oregon, Utah, Washington, and Wisconsin) – Nonprofit Corporation Act in 3 States (Idaho, Illinois, and Ohio) – Business Corporation Act in 3 States (Delaware, New Jersey, and West Virginia) July 12, 2017 NRECA Voting Members Only 6 General Corporate Law

• General Cooperative, Nonprofit Corporation, and Business Corporation Acts – Newer and Longer

• In Many (but not All) States, Electric Cooperatives – Directly or Indirectly Subject to, or Influenced by, General Corporate Law – To Extent Not Inconsistent with Electric Cooperative Act

July 12, 2017 NRECA Voting Members Only 7 Capital Credit Lawsuits

• State Statute Requires “Distributing” or “Returning” Excess Revenue the Next Year – Through Cash Payment and/or Rate Reduction – Not Through Capital Credit Allocation

July 12, 2017 NRECA Voting Members Only 8 Capital Credit Lawsuits

• Thirteen States with Similar Statute – Alabama, Florida, Kansas, Louisiana, Maine, Maryland, Missouri, Montana, New Mexico, New York, Oklahoma, Tennessee, and Vermont – Previously South Carolina • Annual Revenue in Excess of Amount Necessary to – Pay Operation and Maintenance Expenses, Pay Interest and Principal, Provide Reserves, and Provide an Education Fund • Shall, unless Otherwise Determined by Member Vote, be Distributed to Members as – Patronage Refunds Prorated According to Patronage Paid by Members During Year

July 12, 2017 NRECA Voting Members Only 9 Capital Credit Lawsuits • Six States with Similar Statute – Arkansas, Mississippi, Nebraska, North Dakota, Pennsylvania, and Texas • Annual Revenue not Required to – Pay Operation and Maintenance Expenses, Pay Interest and Principal, Provide Reserves • Shall be Returned “from time to time” to Members on Pro Rata Basis According to Amount of Business Done – In Cash – In Abatement of Current Electric Energy Charges – Otherwise as Board of Directors Determines, including General Rate Reduction June 28, 2017 NRECA Voting Members Only 10 Capital Credit Lawsuits • “Distributed” as “Patronage Refunds” or “Returned” on “Pro Rata Basis” – Layperson Meaning (Member, Judge, Juror) – Cooperative and Legal Meaning (Attorney, Accountant, Director, Management) • Cooperative Bylaws, Policies, and Communications – Use Terms in Statute – Continue Same Practice

July 12, 2017 NRECA Voting Members Only 11 Capital Credit Lawsuits

• Statutes Permit Providing Reserves for – Improvement, Construction, or Acquisition of Facilities as Determined or Prescribed by Board of Directors – Reasonable Working Capital or Contingencies – Paying Certain Indebtedness

• Reserves are Not Included in Excess Revenue – No Requirement to Distribute or Return

• Federal Cooperative Tax Law – Allocate Operating Margin – Reserve May Mean Allocated, but Unretired, Capital Credits – Nonmember Income if Not Allocated?

• Bylaws – Allocate Operating Margin?

July 12, 2017 NRECA Voting Members Only 12