House
Bill 568
Legislation Allowing Kentucky Electric Co-ops to Offer Nonelectric
Services
04/25/2006
In early 2006 the Kentucky Legislature passed a bill that Gov. Ernie
Fletcher signed into law, allowing electric co-ops to provide services
in addition to electricity. The items below, adapted from Kentucky
Living magazine provide background and commentary on House
Bill 568:
Co-op Services
Bill to become Law
(From Kentucky Living, May 2006)
Gov. Ernie Fletcher signed a bill April 3 allowing electric cooperatives
in Kentucky to continue offering services in addition to electricity.
With the signature, the bill will become law this July.
Final approval of House Bill 568 marks the end of four intense months
for electric co-ops in Kentucky, after a far-reaching ruling in
November by the state Supreme Court. That decision said that state
law did not permit electric co-ops to offer any service other than
electricity.
That high-court ruling would have affected several thousand Kentuckians
who receive services from electric co-op subsidiary businesses,
such as propane gas and high-speed broadband Internet connections.
The change in the law will allow such businesses to continue, but
under rules that strengthen the separation between the co-op electric
utility businesses and their non-electric subsidiaries. The stronger
rules were added to the original bill as a result of some business
people who were concerned that the co-ops would use the electric
utility business to subsidize the nonelectric ventures.
The story of the new law began in 1998 after Jackson
Energy Cooperative based in McKee, set up a subsidiary to offer
propane gas services to its members. An area propane gas dealer,
backed by the Kentucky Propane Gas Association, sued Jackson Energy
Co-op.
The suit charged that state law restricted electric co-ops from
providing any service other than electricity. The trial court and
the Kentucky Court of Appeals ruled that Jackson Energy Co-op could
legally sell propane, but the Supreme Court reversed those decisions.
So Rep. Rob Wilkey of Scottsville introduced HB 568. That bill specified
that the primary purpose of electric cooperatives in Kentucky is
to provide electricity, and that they can also have a secondary
purpose of engaging in any other legal activity through an affiliate
subject to statutory requirements.
The most extensive public discussion of the legislation first came
in a March 9 hearing before the House Tourism Development and Energy
Committee. Rep. Wilkey told the panel he introduced the bill “to
clarify the law with regard to electric co-ops” and their involvement
in nonelectric services.
Ron Sheets, president of the Kentucky Association of Electric Cooperatives,
called the bill “an extremely critical piece of legislation”
for electric co-ops. He said at the committee hearing that various
state and federal rules of protection are already in place. He said
the additional rules in the legislation create a “firewall”
between electric utility operations and affiliates providing nonelectric
services, effectively preventing the electric utility part of the
co-op from subsidizing the nonelectric subsidiaries.
That point was emphasized at the hearing by Hilda Legg, former head
of the federal Rural Utilities Service, an agency of the U.S. Department
of Agriculture which provides loans for many electric co-op operations
nationwide.
“If co-ops were engaged in other (nonelectric) activities,
that had to be a separate accounting system,” said Legg. Such
operations can not be financed by federal loans.
“Co-ops make a difference in so many lives,” said Legg.
“They need to be involved in issues that members deem important
to their lives.”
Dan Brewer, president and CEO of Blue
Grass Energy Cooperative based in Nicholasville, in his testimony
listed several nonelectric services provided by Kentucky electric
co-ops, including economic development, and billing services for
trash collection and water supply.
Brewer said without the change in the law, “Cooperatives will
be forced to discontinue efforts at improving communities.”
Electric
Co-ops Support Bill to Allow Additional Services
(From Kentucky Living, March 2006)
by: Paul Wesslund
Legislators are considering a small change in state law that could
make a big difference for people who get their electricity from
electric cooperatives in Kentucky.
The proposed change would more clearly allow the customer-owned
utilities to continue offering nonelectricity services such as propane
gas sales and high-speed Internet connections.
The proposal comes in the form of a bill (House Bill 568) introduced
by Rep. Rob Wilkey of Scottsville. Electric co-ops in Kentucky strongly
support the measure.
The bill deletes 56 words in the current state law and replaces
them with 64 words (at least, that’s how it read when it was
introduced in mid-February, before any possible amendments). The
deleted phrases allow co-op utilities to generate, transmit, and
distribute electricity. The new language describes electricity as
the “primary purpose” of electric co-ops, but adds a “Secondary
purpose of engaging in any other lawful business or activity.”
That section of state law has been the focus of a legal dispute
for the past seven years. After a propane gas dealer sued an electric
co-op for setting up a propane business, two courts ruled that the
law allows co-ops to sell nonelectricity services to their customers.
But the final word came late last November from the Kentucky Supreme
Court. It ruled that the law restricts co-ops in Kentucky from selling
any service that isn’t directly related to providing electricity.
The Supreme Court ruling surprised the electric co-ops, which had
won in the two lower court rulings. And it raised difficult questions
about how the local, customer-owned utilities could continue to
help their communities solve local problems or provide services
that are sometimes unavailable or too expensive in small towns and
rural areas.
Over the years, several of the 24 electric distribution co-ops in
Kentucky have provided a variety of nonelectricity services to help
solve local problems. Electric co-ops have been involved in economic
development, home security systems, long-distance and cellular phone
service, and billing services for sewer and solid-waste systems.
More recently, electric co-ops have been exploring how they might
help provide high-speed broadband Internet access, a service currently
either very expensive or not available at all in many of the rural
areas served by the co-ops.
The Supreme Court ruling raises questions about whether the thousands
of current customers of those nonelectric businesses will be able
to continue to receive those services. For the future, the ruling
would keep co-ops from helping their communities solve local problems
that might arise in years to come.
Faced with those current and future dilemmas, electric co-ops asked
the legislature to consider amending the law to allow co-ops to
provide nonelectricity related services. The result is House Bill
568.
Opposition to the bill could come from businesses fearing competition
from electric co-ops. In its November-December 2005 newsletter,
the Kentucky Propane Gas Association said it opposed any legislation
that would allow electric co-ops to use income from their electric
utility businesses to subsidize the operations of nonelectric businesses.
However, electric co-ops already follow laws that prevent such “cross-subsidization”
(see “The truth about co-ops” in the From the Editor column).
The non-electric operations are set up as separate business units
that do not rely on money from the part of the co-op that provides
electric utility service. In addition, most nonelectric businesses
set up by electric co-ops don’t compete with any local business,
says Ron Sheets, president of the Kentucky Association of Electric
Cooperatives.
“Co-ops started providing these services because they weren’t
easily affordable or available in small-town and rural communities,”
says Sheets. “We feel strongly that this legislation will not
result in unfair competition. What it will do is provide prices
and services that electric co-op consumer-owners can’t get
any other way.”
Late last year, the Kentucky Supreme Court ruled that electric co-ops
in the state are not allowed to provide any service other than electricity.
The decision shocked electric co-op leaders and reversed two lower
court rulings. It also disrupted years of business practices that
have provided thousands of customers with services such as propane
gas, telephone, and broadband Internet access.
“Co-ops started providing these services because they weren’t
easily affordable in small-town and rural communities,” says
Ron Sheets, president of the Kentucky Association of Electric Co-ops.
“We’re now analyzing how this decision will affect the
people who were using these much-needed services.”
The November 23 decision came in the case of J. Randolph Lewis vs.
Jackson Energy Co-op based in McKee. In 1998, Jackson set up a subsidiary
business to sell propane gas after a survey showed co-op members
supported such a service. Lewis, a member of Jackson Energy Co-op
and a propane dealer, sued the co-op to stop it from selling propane.
The Laurel County Circuit Court sided with Jackson Energy and ruled
that under state law, co-ops can sell electricity and other forms
of energy.
Lewis, a member of the Kentucky Propane Gas Association (which funded
the lawsuit), appealed that decision and again lost. The Appeals
Court wrote that, “based upon the language of the statute,
Jackson Energy is permitted to furnish all forms of energy, including
propane gas, to its members and to the public.”
But the Supreme Court pointedly disagreed, writing, “It was
plain error for both the Circuit Court and the Court of Appeals
to construe (the law) as permitting rural electric cooperatives
to engage in non-electric ventures.”
The disagreement centers on the words “energy” and “electric,”
and how often and where they appear in the law that controls cooperative
utilities. In fact, three pages of the 16-page written decision
come under the heading, “Grammatical Structures.”
The law says co-ops can “organize to conduct an electric generation,
transmission, distribution or service nonprofit cooperative corporation
to produce, transmit, distribute or furnish energy to any person
or corporation and/or to provide electrical devices, wiring and
equipment and any services that are requested or deemed advisable
or desirable to operate a utility …”
Jackson Energy contended that language allowed the co-op to provide
propane energy services as well as non-energy services because of
the phrase “any services that are requested or deemed advisable
or desirable.” Jackson said its case was further strengthened
because in 1974, the legislature amended the law, changing the term
“electric energy” to “energy.”
But the Supreme Court focused on the number of times “electric”
was still a part of the law. The Court wrote, “If the legislature
had intended to convert ‘electric cooperatives’ into ‘energy
cooperatives,’ it would have deleted the word ‘electric’
from the statute altogether. That was not done.”
Now that the Supreme Court has issued the final word on how to interpret
current law, electric co-ops in Kentucky must determine how to comply.
Options range from seeking a change in the law to exiting non-electric
services. Across the state, five electric co-ops sell propane gas
to a total of more than 13,000 customers. In the short term, it’s
not clear how propane could be made available to those customers
this winter.
Longer-term questions must be answered as well. Other non-electric
co-op services provided by electric co-ops have ranged from tree-trimming
to home security services. And co-ops have been frequently mentioned
as possible participants in solving the problem of getting high-speed,
broadband Internet access into rural parts of Kentucky. The Supreme
Court decision appears to prohibit that kind of involvement.
Electric co-op leaders have asked the court for clarification on
how to treat existing customers of non-electric services. And they
are considering whether to ask the legislature for a change in the
law that would allow co-ops to provide some or all of those services.
Disagreeing with the court's opinion
Although the Supreme Court’s 4-2 ruling that electric co-ops
cannot provide non-electric services was a decisive margin, the
two dissenting opinions provide some intriguing opposing arguments.
(There are seven Supreme Court justices but Chief Justice Joseph
E. Lambert excused himself from the case.) Justice John C. Roach
focused his disagreement on the legislature’s 1974 changes
to the law governing electric co-op utilities. Justice Roach wrote
that, “The current version (of the law) states that rural electric
cooperatives may provide ‘any services that are requested or
deemed advisable or desirable to operate a utility.’”
He concluded, “It is clear that the pre-1974 version imposed
a restriction on services that is significantly more stringent than
the current statute. I believe that in altering the limiting language
of the last clause, the General Assembly expressed its clear intent
to allow rural electric cooperatives to expand into services with
the only limitation being that those services be ‘requested
or deemed advisable or desirable to operate a utility.’”
Justice Will T. Scott agreed with Roach but added concerns about
how the ruling might affect energy services in the state.
Scott wrote, “Have we forgotten the energy crisis that began
in 1973 and ran through 1974 and 1975, resulting in our first service
station gas lines since War World II; along with the concomitant
surge in fossil fuel costs—coal went from $7-$10 a ton to upwards
of $100 per ton by 1975 with oil and natural gas prices leading
the way. The point I make is that this amendment (changing the statute
to refer to ‘energy’ rather than ‘electric energy’)
was made during the middle of this crisis. And when the legislature
undertook to delete the word ‘electric’—they surely
meant the statute to refer to something different than ‘electric
energy’; otherwise, why would they have made the change? We
should not presume the legislature would perform a needless act.”
Justice Scott continued, “The distribution of propane to its
customers was a service ‘requested, or deemed advisable or
desirable to operate a utility.’ There was simply no evidence
put forth to contradict this.”
And Justice Scott concluded, in his November 23 dissent, “The
legislature will meet early next year and consider this issue again—but
there is ‘a cold winter comin’.’ And by the logic
of the majority, we have inhibited competition in a ‘free enterprise
system’ to the detriment of all the Appellee’s customers.”
Text of the Supreme Court ruling
To download the complete Supreme Court opinion on the issue of electric
co-ops providing propane gas services, click here: Supreme
Court
The state Supreme Court’s ruling restricting services electric
co-ops can offer may be right or it may be wrong. But it definitely
hurts Kentucky.
This month's article “Supreme Court Ruling Restricts Co-op
Services” describes the court’s decision. The case concerns
whether a McKee-based electric co-op can set up a business selling
propane gas. But the sweeping decision restricts electric co-ops
across the state from providing any service other than electricity.
When electric co-ops began in the 1930s, it wasn’t because
farmers wanted electrons flowing through their houses. It was because
they looked at the lights of the cities and saw a world leaving
them behind. They wanted to share the lifestyle and productivity
brought by lights, refrigerators, washing machines, and motors.
Their isolation from the modern world wasn’t caused by any
technical problem of stringing power lines to the country. It was
because electric companies couldn’t envision a way to reap
large profits from farmsteads.
So the federal government set up the Rural Electrification Administration
to provide loans and technical advice. And the farmers formed their
own utilities—private, not-for-profit corporations owned by
the people who used the services.
These co-ops saw their mission broadly. They weren’t about
technology; they were about finding ways to bring modern society
to people who wouldn’t otherwise have access to its benefits.
Jackson Energy Co-op asked its member-owners how it might help the
community, and affordable propane gas services came back as one
of the answers.
Co-ops across the state and nation have responded in similar ways,
offering telephone, home security, and satellite TV when none was
easily available outside large cities.
Today’s need in the country is for affordable access to high-speed
broadband Internet service. Electric co-ops had been working with
state and national leaders to see whether co-ops could help bring
the Internet to rural Kentucky. The Supreme Court decision appears
to put an end to those discussions.
Electric co-ops are now working on how to best respond to this court
decision.
The Supreme Court ruling hinged on how many times the word “electricity”
appeared in the law, and where commas were placed. The Supreme Court
may have a point when it comes to grammar. But it comes at the expense
of the quality of life for people who live in small-town and rural
communities of Kentucky.
A proposal in the state legislature would allow electric cooperatives
in Kentucky to sell services in addition to electricity.
Electric co-ops strongly support the bill. They say that if a co-op
can offer an important service not easily available to its customers,
it should be able to.
Any change raises questions. But the doubts over this legislation
result from misconceptions about electric co-ops.
The proposed change in the law comes after the Kentucky Supreme
Court decided in November that Jackson Energy Co-op, based in McKee,
could not sell propane gas.
The propane gas dealers association supported the lawsuit against
Jackson Energy, saying the co-op competed unfairly against local
dealers because it had access to low-cost loans.
The truth is that when a local electric co-op provides a commercial
service other than electricity, it sets up the business so that
the electric utility does not subsidize the nonelectric operation.
This makes good business sense and it’s federally required.
The co-op’s core electric utility business should be protected
from any financial difficulties that could result from a new venture.
The truth is that local electric co-ops offer diversified services
only when their customers, who own the co-op, feel they can’t
get competitive quality or cost any other way.
Over the years, electric co-ops have stepped up to offer satellite
TV when cable television wasn’t available in rural areas and
programmers refused to make satellite signals available at any price.
More recently, co-ops have been considering how they might help
solve the lack of access to high-speed Internet connections in rural
areas.
As local businesses themselves, electric co-ops support hometown
entrepreneurs. As not-for-profit corporations, they don’t stand
to profit from nonelectric activities. But as local institutions
owned by the members they serve, co-ops act when those members ask.
In the case of Jackson Energy, members asked if the co-op could
provide a better deal on propane gas, and the co-op complied.
The truth is that changing the law so that co-ops could offer services
not otherwise available or affordable is the simplest, least expensive,
and most effective way to help Kentucky’s rural and small-town
communities help themselves.
Kentucky Association of
Electric Cooperatives, Inc.
4515 Bishop Lane * Louisville, KY 40218
502-451-2430 * FAX: 502-459-3209 Terms of Use
