History of the rural electrification industry.

Note: The information contained within this article was digested directly from the following:

Lowell J. Endahl. 1996. "Electrification of Rural America," Encyclopedia of Rural America. Department of Sociology/Anthropology, North Dakota State University, Garland Publishing, Inc.

NRECA. 1990. Rural Electric SOURCEBOOK. J.C. Brown, Patrick Dahl, Jennifer Sparkman, editors, National Rural Electric Cooperative Association, Arlington, VA, Library of Congress Catalog Card Number: 9063458.

NRECA. 1996. Regional Meeting Mini Seminars. Greg Boudreaux, Author, and Zan McKelway, editor, National Rural Electric Cooperative Association, Arlington, VA.

The Need

In the 1930s with the invaluable help and support from many rural organizations, partnerships were formed with an agency of the U.S. Government to plan a network of not-for-profit electric cooperatives that would provide a source for reliable and cost-efficient electric service for all rural areas of the United States. These member-owned cooperative businesses answered a need when investor-owned electric corporations and others would not or could not provide electricity to many of the country's rural areas.

Electric power had a profound effect on life in America's cities for nearly a half-century prior to the advent of the Rural Electrification Administration (REA). Electric service was one of the key attractions of city life in those times, and was a contributing factor to the exodus of many rural residents - especially young people - from the farms and into the nation's metropolitan areas.

According to the electric power industry of that time, it was far from being economically feasible to provide central station electric service in all parts of rural America. As profit driven businesses, they could foresee no profits to be made in serving the sparsely populated rural countryside. As late as the mid-1930s, nine out of ten rural homes were without electric service and living and working standards were primitive compared to life and work in the cities. As a result of the unavailability of electricity in rural areas, their economies were limited entirely and exclusively to agriculture.

The private, investor-owned companies that served most of the nation's cities gradually extended their lines along many of the main roads leading out into the countryside. Some farmers who lived along those routes were able to take advantage of the central station electric service. However, in those few and favored locations, though, the price usually was high and service often erratic. Rural customers were required to pay the full cost of connecting their homes to the "highline" - a price ranging from $2,000 to $3,000 a mile. (In 1996 dollars, this would be $26,109 to $34,664). And after the farmer paid to have a line extended to his home, that line became the property of the power company.

On top of that initial investment, rural consumers soon found that the rate they had to pay for electric service was frequently 10 to 12[cents] per kilowatt-hour. A typical price for an urban customer was 5[cents]. In some places, the companies charged as much as 25[cents] or even 40[cents] per kWh.

The Genesis

The first official action of the federal government pointing the way to the rural electrification program (which in the 1990s evolved into the rural utility services program) came with the passage of the Tennessee Valley Authority Act in May 1933. This act authorized the TVA Board to construct transmission lines to serve "farms and small villages that are not otherwise supplied with electricity at reasonable rates" and to give preference in the sale of surplus power to "cooperative organizations of citizens or farmers" as well as certain public agencies.

The idea of providing Federal assistance to accomplish rural electrification gained ground rapidly when the New Deal administration under President Franklin D. Roosevelt took office. On February 13, 1934, Secretary of Interior Harold Ickes was given a report showing the financial and economic feasibility of bringing electricity to rural areas and the social benefits that were likely to be derived from such a program. It was this memorandum, entitled "National Plan for the Advancement for Rural Electrification," submitted by Morris L. Cloke, which led directly to the creation of the Rural Electrification Administration.

President Roosevelt himself was the catalyst that produced the new agency. On May 11, 1935, he signed Executive Order No. 7037 to create the Rural Electrification Administration (REA) under authority of the Emergency Relief Appropriation Act of 1935. A year later, REA was made a permanent agency within the U.S. Department of Agriculture when Congress passed the Rural Electrification Act of 1936.

The legislation authorized the use of loan funds to implement the program. Existing private investor-owned power companies were challenged to carry out the task, but, except for the more densely populated areas, there was little interest on the part of the investor-owned utilities. As late as 1935, a group of utility company executives wrote a report in which they claimed that, in light of their earlier extensive research work, "there are very few farms requiring electricity from major farm operations that are not now served." This attempt was issued despite 1935 agricultural census figures that showed only a little better than one farm in 10 - 10.9% percent of the 6,812,350 farms in the United States at that time - were receiving electric service.

Early Development Years

The cost of building electric lines was generally estimated at between $1,500 and $2,000 per mile at the time the rural electrification program got underway. It was clear that line construction and operation costs had to be kept to a minimum to make electricity affordable when a mile of line might serve only one or two consumers compared to 20 or 30 for city electric systems. The REA engineering staff tackled the job of redesigning and standardizing single-phase lines for rural cooperative utilities. Huge cost savings resulted from innovations and redesign of virtually every aspect of the electric utility operation. This included eliminating crossarms, increasing primary distribution voltages, extending distance between poles, implementing production line construction techniques, and an ingenious idea of having consumers read their own meters.

With this done, the feasibility of extending service into new areas was then determined by examining whether or not the revenues of the whole system would be adequate to meet all costs and repay the REA loan. To help rural electric cooperatives achieve their objective of complete area coverage in the territories they could serve, Congress passed the Pace Act in 1944. This amended the Rural Electrification Act by extending the repayment period for REA loans from 25 to 35 years and by setting the interest rate for REA loans at 2%.

Construction was slowed to a virtual halt when U.S. involvement in World War II demanded sacrifices, including all available material. Electrification was recognized for its labor saving role and for increased food and fiber production so desperately needed for the war effort. "A one horsepower electric motor can do the work of eight men," read a poster that urged farmers to make effective use of electric power.

Post War Electrification

Cooperatives' success in electrifying rural areas during the pre-war years set the stage for an expanded, dynamic post-war electrification effort driven by the pent-up demand from farmers and returning veterans. At war's end, 43% of the farms in the U.S. remained unelectrified. The Area Coverage principle was more important than ever. Loan funds were made available through the REA to finance construction. There were major problems involving the shortage of materials and trained staff. But by 1948, more than 40,000 consumers per month were being connected to consumer-owned rural electric lines. By June 1949, more than 78% of U.S. farms were receiving central station electric power; the remaining 22% would be more difficult and costly, and would take considerably longer to electrify.

The National Rural Electric Cooperative Association (NRECA)

Less than four months before the incorporation of the National Rural Electric Cooperative Association (NRECA) took place in 1942, the nation had entered World War II, and already the new electric cooperatives were suffering badly on several fronts. Hard-lobbying power companies were out to destroy the new rural utility competitors in some areas. Systems found themselves unable to get financing, materials or labor. They could not obtain reasonable insurance rates for employees. Additionally, many rural electric systems were suffering from exorbitant wholesale power rates charged by the investor-owned utilities.

NRECA was initially organized as a dues supported organization to assist member-systems with many of these national problems including: securing employee insurance at reasonable costs; protecting them against threatening wholesale power and legislative issues, and breaking the bottleneck for much needed line construction materials. Today NRECA provides national leadership and representation, programs and materials for its more than 1,000 member-systems in the following areas: legislation, legal and regulatory issues, communications, energy policy, education, research, technology, conferences, insurance and financial services.

Statewide and Service Organizations

In an effort to support the unified efforts of the nation's individual electric cooperatives within the states where they serve, rural electric statewide service organizations have been organized in 36 of the 46 states where electric cooperatives operate. The primary objective of these dues supported organizations were to provide coordinated support, legislative efforts, and additional services that the individual electric systems in their respective states could not do at all, or as cost effectively, by themselves. Through their statewide organization, individual member-cooperatives in their respective states provide a unified voice before their state and national legislators and regulators. Currently, 32 state-wides publish monthly magazines and/or newspapers that are used to communicate with an estimated six million readers each month.

There are also 37 state or regional service organizations that member rural electric systems use to pool orders for purchasing electric materials and services.

The National Rural Utilities Cooperative Finance Corporation (CFC)

The electric utility industry has always been capital intensive, requiting huge outlays of funds to build and develop power plants, transmission lines, major substations and other facilities. To meet this demand and to lessen the impact upon the available resources throughout the REA loan program, rural electric cooperatives organized and established in 1969 the National Rural Utilities Cooperatives Finance Corporation (CFC) as a means of obtaining additional financing beyond the government's direct loan program for system development and growth.

As a cooperative financing organization that is wholly owned and controlled by its member-systems, CFC provides a source of private market financing, and offers a full range of financial services and programs to its more than 1,000 member-systems and affiliates. These services include loan and loan guarantee programs and related short-term investment and equity and cash management services. CFC's strong membership support and diverse loan portfolio has resulted in favorable ratings in the capital markets.

The Rural Electric Power Supply Systems (G&Ts)

Building distribution systems was difficult, but securing the wholesale power to meet new demands for electricity was an even greater challenge for the nation's rural electric cooperatives. Initially, these rural systems purchased wholesale power from many sources - investor-owned and municipal utilities and federal power sources such as Tennessee Valley Authority and Bonneville Power Administration.

Confronted with unreasonable demands from unfriendly power suppliers in the 1950s, rural electric systems found the REA G&T loan program provided for in Section 4 of the Rural Electrification Act as a very effective antimonopoly "yardstick" to be used as a leverage and "persuader" in bringing down exorbitant and overblown wholesale rates.

Ultimately, rural electric systems needed to develop their own power sources. They did this by forming generation and transmission (G&T) cooperatives to provide power to member cooperative distribution utilities on a state or regional basis. Currently rural electric systems generate 41% of their power needs through their G&Ts. The balance is purchased from investor-owned electric utilities (about 25%) and from federal power agencies and other public power sources (about 34%).

The 58 G&T cooperatives serve 750 member rural electric systems in 43 states. They generate about 5.6% of the nation's electricity.

In the 1970s and early 80s, wholesale rates spiralled, sometimes averaging 30% annually. Distribution rates followed, averaging 15% or higher in some years. Climbing fuel costs, combined with higher generating costs, plus skyrocketing inflation in distribution expenses, led to record high retail rate increases by virtually all utilities as they attempted to recover these increased costs. Many of these cost increases were the direct result of federally mandated safety and environmental laws and regulations.

A major cause of escalating rates for the cooperatives in the first half of the 1980s was the high cost of building new power plants and transmission lines. As an example, construction of a 1,000 megawatt coal-fired plant begun in 1968 cost a little over $100 million when completed. A similar plant begun in 1980 cost more than $800 million. In 1990 it would cost $1.25 billion.

Many G&Ts with construction projects that they were financing during that period of time also found their cost of funds severely impacted by record setting interest rates. As distribution cooperatives were forced to increase their rates to fulfill their all-requirements contract with their G&T, many rural consumers, who were also feeling the impact of inflation and high interest rates and, almost abruptly begun to use less electric energy.

Beginning in 1985, distribution cooperatives and their consumers began receiving some welcome relief from their G&T power suppliers in the form of rate decreases, a dramatic reversal after years of escalating rates. The declining rates are a result of the G&Ts being allowed to refinance and/or "restructure" their debt and by the successful completion of extensive power construction projects and bringing these expensive power facilities into commercial service.

The Threshold of the 21st Century

During the 1990s the electric utility industry began changing faster and more radically than any time in the past 100 years. In 1992, the Energy Policy Act kicked off a new era in the electric energy industry. EPAct gave the Federal Energy Regulatory Commission (FERC) new powers to order transmitting utilities to provide wholesale transmission service. The FERC is an independent government agency that oversees America's electric utilities, natural gas industry, non-federal hydroelectric projects, and oil pipelines transportation systems.

The Commission's primary responsibility is insuring that consumers have adequate suppliers of electricity and natural gas at reasonable rates. In April of 1996, FERC issued new orders that govern transmission access that require open access rates and tariffs, "unbundling" of the power sales and transmission functions and provisions for stranded cost recovery. As a result, changes are being proposed and debated on the federal and state levels that could dramatically restructure the entire electric utility industry.

The traditional electric utility is a vertically integrated company that combines generation, transmission and distribution. Many lawmakers and regulators are promoting the "unbundling" or "disaggregation" of this traditional structure in an effort to achieve greater competition and consumer price reductions.

An NRECA Advisory Task Force on Competitiveness was formed in 1995 to identify and assess they key issues and trends that are expected to drive the electric utility industry into the next century. The Task Force issued its first in a series of anticipated reports in 1996 which summarized how they saw the restructuring of the nation's electric industry impacting upon rural electric cooperatives: "The ways of doing business that produced success in the cooperative program over the past 60 years will not be sufficient to ensure our survival in the future." Therefore, the Task Force urged all electric distribution and G&T cooperatives to begin implementing long-term strategic plans to assure their future success and to be competitive in terms of price, service and reliability.

Robert W. Patton is associate director of member relations for the National Rural Electric Cooperative Association (NRECA) in Arlington, Virginia. He joined the NRECA Chief Executive Office staff on July 10, 1995, after working 25 years with the statewide electric cooperative associations in Illinois and Ohio. He has a degree in journalism and has directed a variety of employee and member communication programs during his career with the electric cooperatives.

As manager of statewide services for the Ohio Rural Electric Cooperatives in Columbus for five years, he was responsible for directing the statewide's legislative, industrial development, communications, employee training and member relations programs.

During his 20 years with the Illinois statewide in Springfield, he served as the Association's administrative assistant, public affairs representative before the Illinois legislature, and as director of membership services. As director of membership services until July 1995, he was responsible for the organization's member relations, energy marketing, group purchasing and property management programs. He also managed the IEC Federal Credit Union.

Bob began working with NRECA as a "loaned employee" in November 1994, and was assigned to work with electric cooperative systems throughout the country that have been targeted for hostile buyout or sellout offers from investor-owned utilities. In his current role at NRECA he will continue to work with NRECA member-systems through the executive director of membership issues and the NRECA Takeover Prevention Issues Team. He assists in the development and implementation of workshops, programs and strategic planning initiatives for enhancing NRECA member-system member and community relations and services programs.