This is the story of two co-operatives to fund, operate and sell electricity from rooftop solar. The first Co-op is a distributing Co-op with shareholder members and consumer members. The other is a non-distributing Co-op where investor members get a return on money invested and the remaining surplus is distributed to consumer members. Non-distributing Co-ops are also called Not-for-profit Co-ops.
In both cases, the panels are owned by the Co-op. In both cases, consumers pay the same price to the Co-op for electricity. The difference between the two Co-ops is how the investor members receive their funds back and in the distribution of the surplus money from the sale of electricity. Distributing Co-ops pay back the money as though the shareholding were a loan. Not-for-profit Co-ops gives back the money plus a return on investment as discounted electricity.
In both cases, the surplus on sales before finance costs are assumed to be 30% and the sales are $70,000 a year. In the distributing case, investors receive a 5% return on their funds as a dividend and are repaid within ten years. Investor and consumer members share in the surplus.
In the Not-for-profit Co-op, the sales are the same. The investor members receive either one and a half times the value of their money as discounted electricity or cash from the sale of discounted electricity to customer members. The return on investment is equivalent to a 10% annuity. The investor members have shared in the surplus with their annuity so they do not share in the remaining surplus. The customer members take the surplus as future discounts. A member can be both an investor and a customer member.
The total surplus for distribution differs by $10,000 because of the extra cost associated with operating a distributing (shareholder) system. The split of the surplus depends on the size of the surplus for the distributing system. As the surplus varies so the split varies.
The underlying assumptions with distributing Co-ops comes from the world of shareholder-owned companies. With shareholder companies, the investors get all the surplus. Consumers may get part of the surplus if the investors charge less in the future for their products. In a Co-op that is not the case and both investors and consumers should share in the surplus depending on their contribution. The contribution of consumers is the money they pay for electricity when they consume it. The contribution of investors is the money they pay upfront. Both receive a benefit in the form of a discount on electricity.
The discounts approach to returning value is simpler and more reliable than interest on a loan as there is no separate shareholder system. There is one payments system. It means the surplus is higher as the costs are lower. The timing of investor discounts is synchronised with customer discounts. This brings stability to the Co-op cash flow. It means the financial state of Not-for-profit Co-ops and the distribution of surplus is known and transparent. It means members can be confident the surplus is shared fairly and as agreed. It means members trust the system to deliver a fair division of surplus.
External Investors
If the investors are external to the Co-operative — say a bank — and there are no investor members then the following will occur.
Here there is a dramatic difference in the total surplus distributed to members. Money is taken out of the Co-op to pay the external lender and the total surplus is less because the Co-op no longer has the use of the money. The second difference is the external lender takes most of the surplus.
A solution is to remove the external lender and to only get funds from entities who are willing to become Co-op members. They can get a higher return than they would get as external lenders.
The worst situation is when the external lender is also the owner of the community assets. In that case, they take all the surplus. This happens when the commons is privatised.
Co-operatives and Fairness
Co-operatives are meant to return benefits to members roughly according to their contributions. Most people would see that as “fair” and hence will be willing to participate in the Co-operative. If they don’t think a Co-operative is fair or they do not like the others in the Co-op they need to be able to leave a Co-operative and move to another one for no penalty.
Not for Profit Co-operatives with discounts can meet both those criteria.
Distributing cooperatives cannot meet these criteria because:
- It is difficult to measure the contributions of both investors and consumers.
- It is difficult to adjust so that investors and consumers are rewarded according to their contribution.
- Surpluses are distributed long after they happen.
- It is difficult for an investor or a consumer to move to another Co-op and normally only happens when a Co-op dissolves.
- Distributing Co-ops have to become large to gain economies of scale while Not-for-profit Co-ops are more trustworthy with a limited number of members. Not-for-profit Co-ops can share their productivity improvements with other Not-for-profit Co-ops without penalising the giving Co-op.
Markets and Co-operatives
Markets are a mechanism to share the benefits of productivity improvements to consumers. The invisible hand is meant to reduce prices through competition. As Shareholder Co-operatives get larger so the invisible hand gives investors a greater share of the benefits and there is less competition because there are fewer Co-operatives. To survive Shareholder Co-operatives have to become larger and so competition decreases.
By contrast, Not-for-profit Co-ops work best as small local units. If a Co-operative produces a product that others in other co-operatives can use and if it is easy for members to move between Co-ops then competition between Co-ops encourages productivity improvements. The reason is that the only way both investors and consumers can both benefit is to increase the surplus by productivity improvements. It means there is no advantage to an individual Co-op in becoming too large.
External Funding
As soon as a Co-operative accepts external funding as loans or with external shareholders the Co-operative costs more to operate because external parties take capital out of the Co-op and use it elsewhere.
Shares provide an easy mechanism for this to occur and so shareholding Co-operatives tend to demutualise particularly when they get larger and accumulate more assets.
In contrast, Not-for-profits distribute any surplus to all members “in real time” and no surplus accumulates in the Co-op. External lenders are acceptable to Not-for-profits if they become members or lend through individual members and not attempt to take ownership of the Co-operative.
Converting existing enterprises to prepayments
Any existing organisation can convert to the equivalent of a Not-for-profit by changing the way surpluses are distributed. It is not the structure of the organisation that is important. It is the common “fair” way the organisation shares the profit between investors, consumers, employees, governments or other stakeholders.
It is technically easy for any organisation to adopt a different method of surplus distribution if the owner of the organisation allows it to happen.
Summary
Not-for-profits that use discounts on goods and services to distribute surpluses tend to be:
- More productive through competition
- Local and Small
- Measurably fairer to both investors (savers) and consumers
- Give a high secure return to investors while giving consumers lower prices.
Any business can convert to a fairer system by distributing profits to consumers as discounts and by using the same mechanism to distribute profits to investors. Doing so reduces churn and lowers the cost of customer or member acquisition. Other stakeholders like owners, employees, government and related enterprises can all share in the surplus by rewarding them with a share of the surplus according to the contribution they make.
