Accounting when Producers share Profits with Customers

We create efficient economic systems when Customers are permitted to invest in a Producer’s means of production. Customers can do this by pre-purchasing goods and services and get a discount when they receive the goods. How much discount they get depends on how long the Producer keeps the money and the terms of the agreement. The systems save money by removing the cost of renting money to build productive assets. The money to build comes from selling goods, not from renting money.

We can organise Customers and Producers into Co-ops with no external debt or obligations such as loans or equity. Prepayments for goods and services are not money debt but is an obligation to supply goods and services.

Co-ops are organisations that last a long but indefinite time. They last while-ever they provide a benefit to members. Co-ops have a life beyond the participation of any individual. They distribute all the benefits from collaboration to the members.

The value of money put into the Co-op must always equal the value of money still in the Co-op plus the value of the cash that leaves the Co-op. The total obligations should never be higher than the assets owned by the Co-op. The Co-op owns or has a mortgage on the means of production.

Because the Co-op neither creates or destroys money, there is no traditional profit shown in the profit and loss. Profits and Losses will be made, but they will show in the Balance Sheet as Capital gains or Losses.

An Example System

In a Pre Power Co-op, members are buyers of electricity. Some buy their electricity with cash and some pre-purchase and get a discount when they pay for their electricity with prepayments. The pre-purchasing Co-op members are investors or virtual producers. The amount paid with cash and the discount available for prepayments is an internal matter. The Co-op members determine the sharing of the discounts between lower costs today or lower costs in the future. The Co-op members can all vote on changes to the internal rules, and this allows the Co-op to react to external changes such as changes in technology.

If a Co-op uses service providers who only collect money from the Co-op when the Co-op consumes electricity, then there are few obligations in conducting the Co-op.

The Co-op will remain solvent if it meets its obligations when they come due. As all the Co-op members know the financial state of the Co-op at all times, they can ensure that the Co-op remains viable and the Co-op members can collectively take action to ensure the Co-op remains solvent. For example, the Co-op can decide to require higher cash payments and can reduce the value of pre-payments used in a given year.

All members can produce or invest in the means of production, and all members can consume electricity. The Co-op takes money in as payments for electricity, and it pays the same amount of money out of the Co-op to purchase the means of production and for services received from outside the Co-op. Importantly the Co-op does not generate extra money in the form of profits. Internally members get a return on investments by pre-paying for some of their electricity. A Co-op that does not generate extra money is in a steady economic state.

Steady State with Rapidly Reducing PrePayments

Assume on average each member consumes $1000 worth of electricity each year. Assume each member has prepaid $6000 where the prepayments have a value of $600 each year for 25 years. Assume the cost of operating including replacement and maintenance is $200 each year.

In this case, the member pays $400 in cash and $600 in prepayments each year, and there is a surplus of $200 in cash. The money can purchase further prepayments and act as a Reserve for the Co-op. The Reserve appears on the books as an asset of the Co-op. The Reserve serves as insurance to cover loss by fire or hail or other natural disasters. If the Reserve becomes too high, the Co-op can distribute the Reserve with lower prices. At the end of year one, the member has zero in the prepayments with the discount account and $6000 — $300 or $5,700 in the prepayments account while the Co-op has assets of $6000 and a cash balance of $200. The Co-op has built up a Reserve of $300 plus $200 or $500.

The Co-op has a high degree of resilience as new investments are easy to obtain. The Co-op is likely to reduce the immediate cost of electricity once the outstanding prepayments reach a given level.

Steady State with Slower Prepayment Reduction

Let us assume each member has prepaid $10000 and so each year they are entitled to $1000 each. Assume each year each member pays $200. Each year $200 worth of prepayments is unused. Half of the $200 goes into an unpaid prepayment account, and half remains with prepayments. At the end of the first year, the unpaid prepayment account has $100 in it, and the prepayments owing is at $10,000 — $400 + $100 or $9,700 in it. The Co-op will have assets of $10,000 in assets, cash of $200 and liabilities of $9,700 + $100. It will have built up a reserve of $400.

Assuming all the cash is used for maintenance, replacement and operations then at the end of 25 years, there will be $2000 in unpaid prepayments and $4,000 in the prepayment account or a total of $6,000. If the maintenance and replacement have been successful, the Co-op now has prepayments of $6,000 outstanding while previously it had $10,000.

Providing that the prepayments balance goes down each year the Co-op will sooner or later have zero prepayments outstanding.

Possible External Changes

Assume the cost of producing energy continues to drop, and that the demand for energy will increase. In the short term, the price of fossil fuel energy is likely to remain the same or increase as households will move to renewable energy. The fossil fuel industry cannot compete on price with renewables and customer preference, and they will find it difficult to claim back customers so they will continue to keep the price high.

The demand for household energy will increase as electric vehicles become more prevalent. There will be an increase in energy use for home-based processing of waste and the provision of other services such as food.

The result of these two trends is that while the cost of producing electricity will drop the demand will increase and prices will remain high. However, the value of the assets is the value of the energy produced by the assets. With Pre Power, we can continue to maintain and operate the solar systems with the cash collected. It means that as long as the price never drops below the value of the cash collected the Co-op remains financially viable and the assets retain their value.

The ability to vary the value of pre-payments used each year makes Co-ops resilient and able to handle economic shocks.

Movement of members between Co-operatives

It is unlikely for members to move between Co-operatives unless they move home and it is doubtful that members will move their prepayments as it requires both Co-ops to agree to the movement.

Co-ops will have an incentive to reduce the cost of production from their existing resources, and they will look for technologies that improve the performance and durability of their existing systems. The idea of reducing costs will replace the concept of maximising profits as the economic driver.

Co-ops are unlikely to compete for members, and there will be little incentive in making Co-ops larger as larger Co-ops are likely to be more expensive to operate than smaller Co-ops.

Summary

The financial calculations of Co-ops to show the viability of Co-ops is different from the financial calculations using discounted cash flow and monetary profits. The levelised cost of Energy has no place in Co-op calculations. What matters in Co-op economics is that the cash payments are sufficient to cover the ongoing operating and maintenance cost. The fact that new lower cost methods of producing electricity might arise does not make existing renewable systems less viable. Co-op economics keeps assets productive for longer and reduces the impact of humans on the planet compared to traditional economics.