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Paradigm pioneering: Edgar Electric enters the propane business to get an edge on the future.

Marketing and sales plans for the product are dissected into four areas: 1) Pricing & Profitability; 2) Selling Tactics; 3) Advertising & Promotion; and 4) Public Relations.

The primary objective in pricing is to offer a competitive price per gallon for propane in the geographic sales territory and operate on a stated cents per gallon margin. We also developed several pricing possibilities for consideration, such as discounts for tank ownership, summer fill-up programs, and dual-fuel programs. It was the consensus of the board and management to adhere to a simple, one low price "Wal-Mart" approach in pricing the product. Currently, we maintain one Synopsis

Two articles in the Fall, 1992 edition of Management Quarterly introduced the "Future Edge" theme of the 1992 Advanced Management Program. Steve Collier presented historical background and a "big-picture" viewpoint or macro application of the "paradigm shifting" which is taking place in the electric utility industry. His contribution, "Restructuring in the Electric Utility Industry: Old and New Paradigms," points out the emerging paradigm of competition in our business. Participants and speakers at the 1992 Advanced Management Program report that "The Future is Spelled CONSUMER":

Consumer choices

Opportunities beyond the meter

No territories

Satellite communications

Uninterruptable supplies of power

Materials for construction of plant

Excellence (TQM)

Retail Wheeling

Scott Luecal summarizes this article by concluding that "timely responses to the market and customer attitudes" adds up to "commercial success."

These two articles are filled with fantastic, theoretical concepts, but how do they apply at the electric distribution cooperative level? What is the "micro" approach? Don't you have to be a large cooperative with thousands of members and skyrocketing growth in order to implement concepts such as "market driven," "competitive resources" and "alternative, for-profit businesses"? This article will outline the process of how Edgar Electric Cooperative has taken the lead in paradigm pioneering by developing their own market driven, competitive businesses and, yes, even selling a competing energy source, liquid propane gas. It is not the intent of this article to convince the reader that these same businesses should be developed by every cooperative. The purpose of the article is to encourage cooperative leaders to explore their own unique opportunities to expand their services beyond providing electricity, and present an actual case study in the application of the aforementioned concepts of change.

Force for Change

What does a 5,000 member rural electric cooperative do when the cost of power is 70% of the total cost of electric service, an all-requirements contract binds them to some of the highest power costs in the country, retail residential rates are 26% higher than the neighboring IOU, growth in electric customers is minimal, and over half of their largest customer group is heating with a competing fuel? (In this case, liquid propane gas.) Surrender? Wave the white flag? Throw out the current board and management? Not at Edgar Electric Cooperative, located in rural, east-central Illinois. Instead of declaring defeat, the board, management and members of Edgar Electric decided to look for new markets, businesses and revenues. Edgar Electric decided to confront the gas company competition by becoming the gas company. So began the development of Edgar Propane Supply, Edgar Electric's evolution into a "total energy supplier."

In 1987, Edgar Electric Cooperative's board of directors and management took a progressive step forward in planning for the future and formed the wholly-owned, for-profit subsidiary, EEC Services, Inc. Expanding upon the cooperative's established role of providing reliable, quality electric service to the rural areas of Edgar, Clark, Coles, Douglas, and Vermillion counties but based upon traditional philosophy, EEC Services allows the cooperative to provide additional products and services to cooperative members AND non-members where there is a need to be filled. Customers may take advantage of "Rural TV" programming (and soon Direct Broadcast Satellite TV) and satellite equipment sales and service, areas where, again, private industry has failed to satisfactorily serve rural America. The subsidiary has also found a way to benefit Edgar Electric Cooperative directly while providing a service to the public. The installation of a state-of-the-art 800-MHz communications/trunking system in 1988 has taken care of the electric cooperative's communication needs and is being financed, in part, by the sale of two-way FM radios, air-time, and paging service to the general public. The subsidiary's net income flows back to Edgar Electric Cooperative and hopefully will defer electric rate increases.

Since the cost of power represents 70% of the electric cooperative's expenses, the management and board of directors have committed themselves to looking for new sources of revenue in order to subsidize electric rates. This appears to be the evolving mission of EEC Services, Inc.


During the summer of 1991, Tom Hentz, General Manager of Edgar Electric, decided it was time to investigate the propane gas business. A previous study of Edgar Electric members revealed that 54% were using propane as their primary energy source for heating while only 10% chose electricity. Increasing all-electric heat load did not appear to be a feasible solution to this problem based upon Edgar's residential electric rates, which, currently, are 26% higher than the neighboring IOU. However, dual-fuel rates based on off-peak electric sales could increase KWH consumption while bringing down the cost of heating a member's home, increasing efficiency for both the cooperative and the customer. While developing these dual-fuel rates, why not explore the possibility of being the alternative fuel provider? In this case, propane gas appeared to be the overwhelming alternative fuel choice.

The local propane market was undergoing some big changes at this time. Several local propane gas suppliers had gone out of business. A large, national company had bought out several of these suppliers and appeared to be building a monopoly in the area. The business atmosphere was right to explore the propane venture.

While the management team was aware of several electric cooperatives and IOUs that sold electricity and natural gas, we didn't know of any that were in the propane business. That is, until we found Kaw Valley Electric and Propane Division in Topeka, Kansas. This cooperative had made the decision to expand into propane gas service a few years earlier and, to our knowledge, is the only other electric cooperative selling propane gas in the country. We spoke with their General Manager, Dan O'Brien, who invited us to Topeka to have a look at their operation. Since Kaw Valley is very similar to Edgar Electric in size and customer base, we decided this was an excellent opportunity to learn how we might develop a propane segment of our own. Two of our board members, Tom Hentz, myself, and three other members of the management team caught the next flight to Topeka.

At Kaw Valley, we found a first class electric utility operation as well as an established and thriving propane business. We met with the propane division manager, Gayle Miles, as well as other office and operations staff members, and discussed start-up, administrative, billing, accounting, financing, safety, and operating issues. After talking with them, it was obvious that Dan O'Brien and the Kaw Valley board and staff have done an excellent job of combining electric and propane gas operations and would provide us with a starting point for an information and philosophy base.

After returning from Kaw Valley, the management team convened to discuss the propane project based upon what we had learned so far. We proceeded with a preliminary WOTS-UP analysis (weaknesses, opportunities, threats and strengths), and discovered there was much information we needed to acquire about propane usage patterns, sales potential, competitive practices, consumer behavior and pricing. More importantly, we wanted to know how our members would feel about adding this new business to the EEC Services subsidiary. After further discussions with the board, it was decided that the best way to gather the remaining information we needed and provide the members with a part in this landmark decision was to ask them! After all, what better source for consumer information do we as cooperative management have than our membership?

The Membership Survey

The first step in developing the strategic business plan for the propane project was to survey the membership of Edgar Electric Cooperative. The general purpose of the survey was to determine the attitudes and interest of the members of Edgar Electric Cooperative regarding the expansion of EEC Services, Inc. to include the sale of propane gas. The strategic business plan including pro-forma financial statements for the propane project would be developed using data gathered and analyzed from this research.

The Edgar Electric staff identified study areas to be addressed. A careful review of those question areas led to the development of the following research objectives:

1. Identify the extent of propane usage and usage patterns by Edgar Electric members in order to estimate current market potential for the sale of propane.

2. Identify, the predominant propane suppliers and their market share of Edgar Electric members in order to analyze the competitive environment of the propane market.

3. Identify the factors which most affect a member's choice of propane suppliers and, based upon the rating of those factors, determine which members are more likely to switch to EEC Services as a propane supplier.

4. Determine if customers of certain propane suppliers are more likely to switch to EEC Services for propane supply.

5. Determine the general attitudes of members towards Edgar Electric Cooperative & EEC Services, Inc. and if those attitudes affect a member's decision to switch to EEC Services as a propane supplier or their opinion regarding the expansion of EEC Services into the propane business.

6. Determine if a member's primary energy source, age, primary source of income, or location (zip code) affects the member's attitude toward Edgar Electric Cooperative or their decision regarding the expansion of EEC Services into the propane business.

7. Gather additional marketing information for EEC Services regarding Rural TV, satellite sales and communications sales.

After establishing these research objectives, much time was spent preparing the survey instrument. Each question in the survey was designed to gather the information to fulfill the research objectives and lead logically into the next inquiry. The actual survey instrument appears on pages 25 and 26.

Survey Methodology

Respondents were asked to answer twenty questions consisting of interval, dichotomous, and open-ended choices. A packet consisting of a cover letter, survey, business reply envelope and a mailing envelope was printed, assembled, and mailed.

As of September 30, 1991, Edgar Electric reported 4,911 active accounts. Surveys were sent to 3,841 Edgar Electric members. The mailing represents 80% of ALL active accounts. The surveys were mailed on October 2, 1991 with a requested return date of October 10, 1991. One thousand one hundred thirteen surveys were received for an overall response rate of 30%. This appears to be a representative sample of the Edgar Electric service territory. The percentage of the total surveys returned for each zip code is very close to the percentage of total surveys mailed to each zip code.

Based upon the sample size, a random sampling error can be estimated at plus or minus 3% with a 95% confidence level. In other words, we can be 95% confident, plus or minus 3%, that the sample represents the membership of Edgar Electric Cooperative.

Survey preparation and statistical analysis were completed under the direction and supervision of myself and Dr. Robert Meier, Professor of Computer and Operations Research and Director of Graduate Studies at Eastern Illinois University. Dr. Meier's expertise was enlisted to ensure the correctness and objectivity of the data analysis, upon which many decisions and conclusions about the propane project will be based. He has also provided a broad-based viewpoint of the results, having been involved in many similar studies spanning a wide range of businesses.


Responses to questions one through three provide information about the size of the propane market. These figures will be used to prepare sales forecasts and estimate market potential.

Primary Energy Source

For a majority of Edgar Electric members, propane continues to be the choice for purposes of heating homes, businesses and grain dryers. Fifty-six percent indicated propane for home heating. In addition to the choices listed, several respondents marked two sources for heating. Electricity & wood were chosen by 2% of the respondents, propane and wood by 6% and propane and electricity by almost 2%. All those choosing propane in some way totaled 63% for home heating. Only 11% of the respondents are using electricity to heat their homes.

Only 17% of the respondents indicated a source of energy for business purposes, however, the majority of those indicated propane. Propane for Grain Drying was selected by 22% of the respondents.

Annual Usage of Propane

The average annual usage of propane for each group (home, business, and grain drying) was calculated by multiplying the midpoint of each interval by the number choosing that interval. For example, in home usage for choice b, 1-400 gallons, 200 gallons were multiplied by 119 respondents to arrive at 23,800 gallons for that interval. For usage over 1000 gallons, an estimate of 1,100 was used. (For Grain Drying, 7,100 gallons was estimated for usage over 7,000 gallons). Totals for all intervals were added together for a grand total of 555,700 gallons for total annual home usage. The same method was used for business and grain drying calculations. This method allows a conservative estimate of 1,103,800 gallons of propane used annually by all respondents to Question 2.

Propane usage for grain drying has no doubt been affected in the last few years by such factors as weather conditions, new corn hybrids, and the price of propane. Respondents were probably estimating their usage based upon the current conditions.

Propane Appliances in Use

Corresponding to the primary energy source for heating, 56% of the respondents have propane gas furnaces. Thirty-eight percent have propane gas water heaters and 36% use propane for cooking.

Questions four through six reveal important implications for capital investment that may be required.

Own or Lease Tank & Lease Payment

The majority of the 842 respondents to Question 4 lease their propane tank and pay no lease fee to their current supplier. This is not surprising since preliminary research indicated that most local suppliers do not charge an "obvious" fee for the use of their company-owned tank. The charge is most often included in the price of the propane, although the customer is not perceiving this as a lease fee. Some suppliers do give a 2 cent per gallon discount if a customer owns his/her tank. This information is significant in forming a business plan since the decision in this area will greatly affect capital investment.

Size and Number of Tanks

The majority of the respondents (55% of the 1276 tanks) have 500 gallon tanks. Thirty-three percent report using 1000 gallon tanks. Several respondents wrote in "gas grill" tanks. This information is also important for estimating capital investment in tanks since the cost of the tank is dependent on the gallon capacity.

Propane Suppliers

Question seven reveals who the competition is and their current share of the market. Three suppliers dominate the propane market for these respondents, controlling 80% of the local business. All other suppliers accounted for only 20% of the market. Percentages are based upon the total 928 responses to Question 7.

Ratings for Determining Factors of Propane Supplier

Question eight tells us where we will have to excel in order to attract and keep customers. The price of propane and on-time delivery are the most important factors respondents consider when choosing a propane supplier.

Switch to EEC Services for Propane

Question 9, "Would you switch from your current propane supplier and buy propane from Edgar Electric's subsidiary, EEC Services, Inc. if we can offer quality service at a competitive price?", forced the respondent to make a decision about their propane supplier and EEC Services. This is probably one of the most important questions asked of the respondents, since it would give us some indication of the number of customers we might expect to serve. A total of 806 responded to this question. Of those, 509 or 63% indicated "yes," they would switch to EEC Services for propane supply. 22% or 180 replied "no" and 15% or 117 replied "maybe." Many respondents commented on their decision in Question 10. The response to question 9 plus the comments in Question 10 are helpful in analyzing why or why not people will buy propane from EEC Services. The comments were sorted by Zip Code in order to identify geographic areas of concern.

Prefer to lease or purchase

Three hundred fifty of the respondents would prefer to own their tank, 308 would prefer to lease the tank from EEC Services, and 48 would prefer to both own and lease tanks. Many respondents commented that this decision would be dependent upon the lease agreement. Again, responses to this question would be used to estimate capital investment in the project.

General Feelings toward Edgar Electric Cooperative

Another important area for analysis is the respondents' positive or negative feelings towards Edgar Electric. Sixty-five percent of the 1,113 respondents feel very positive or positive towards the cooperative. Only 5% stated they were negative or very negative about the cooperative while 23% reported neutral feelings towards the cooperative.

Expansion into Propane

Another very important question was asked in Question 14, "In summary, do you feel EEC Services, Inc., should expand into the propane gas business if the potential exists for financial success?" Sixty-four percent or 702 responded "yes," 14% or 158 replied "no," 3% or 29 were unsure and a rather large number (19% or 211) did not answer this question.

Respondent Demographics

Sixty-eight percent of the respondents are males, 57% are over the age of 50, with Farming and Social Security being the predominate primary sources of income.

Many respondents chose to write their comments and suggestions about a variety of topics in the space provided for Question 20. All of the comments were entered into the database and occupy a separate section in the full survey report. These comments are excellent resources of information to consider. Some respondents included letters and rather lengthy statements. Any comments that were particularly negative or sensitive were referred to the manager for follow-up. The board and staff reviewed all comments and letters and decided how to proceed in answering specific questions.

Statistical Tests for Relationships

The chi-square distribution was used for testing the statistical significance of cross-tabulations for specific relationships. The chi-square test allows us to determine if the variation among groups is the result of chance variation due to random sampling or if the variation is significant. If the variation is statistically significant, then a conclusion can be made about that relationship.

Primary Energy Source Relationships

Respondents' choices of primary energy source for home, business and grain drying were cross-tabulated with their responses to each of the following questions:

* Question 9--Would you switch to EEC Services for propane

* Question 12--Feelings toward Edgar Electric Cooperative

* Question 14--Should EEC Services expand into Propane

No statistically significant relationships were found to exist for primary energy source--home and a respondent's decision to switch to EEC, feelings towards the cooperative, or their opinion about propane expansion.

For primary energy source--business, (90% confidence) those using natural gas were more likely to answer "no" to Question 14--expansion than other groups. Those using propane were less likely to answer "no" to expansion. No other relationships were found to be significant. For primary energy source-grain drying, (90% confidence) respondents who indicated electricity were more positive and less neutral about their feelings towards the cooperative-Question 12 than the other energy source groups.

Propane Supplier

No statistically significant relationship was found to exist between a respondent's choice of propane supplier and their decision to switch to EEC Services for propane supply. Therefore, customers of supplier A are no more likely to switch to EEC than customers of supplier B or C, etc. The cross-tabulation is shown in Table 1.
Table 1. Cross Tabulation of Propane Supplier & Question 9
Supplier Would Switch Would Not Switch Maybe
A 66% 18% 15%
B 64% 20% 15%
C 60% 26% 14%

Feelings Toward Edgar Electric Cooperative

The responses to Question 12--Feelings toward Edgar Electric Cooperative were cross-tabulated with the responses to:

* Question 9--Would you switch to EEC

* Question 14--Should EEC expand into propane The cross-tabulation table for Question 9 is shown in Table 2.
Table 2. Cross-tab of Feelings toward Edgar & Question 9
Feelings Would Switch Would Not Maybe No Response
Positive 73% 9% 3% 15%
Negative 36% 48% 3% 13%
Neutral 49% 19% 2% 30%

A very significant difference exists here. At the 95% confidence level, respondents with positive feelings towards the cooperative were more likely to switch to EEC for propane. Those who were negative or neutral towards the cooperative were more likely to not switch.

The cross-tabulations for Question 12-Feelings and Question 14-Expansion is shown in Table 3.
Table 3. Cross-tab of Feelings toward Edgar & Question 14
Feelings Yes--Expand No--Do not expand No Response
Positive 72% 9% 15%
Negative 35% 48% 13%
Neutral 49% 19% 30%

A very significant difference exists with this relationship, also. At the 95% confidence level, respondents with positive feelings towards the cooperative were more likely to answer "yes" to the expansion issue. Those with negative feelings towards the cooperative were more likely to answer "no" to expansion. For those not responding to Question 14, more were neutral towards the cooperative than the other groups.

Age of the Respondent

The responses to Question 16--Age were cross-tabulated with the responses to the following questions:

* Question 9--Would you switch to EEC Services for propane

* Question 12--Feelings toward Edgar Electric Cooperative

* Question 14--Should EEC Services expand into Propane

The cross-tabulations for Question 16--age and Question 9--Would you switch are shown in Table 4.
Table 4. Cross-tab of Age and Response to Question 9
Age Group Would Switch Would Not Switch Maybe
Under 30 82% 8% 10%
31-40 71% 19% 10%
41-50 69% 19% 12%
51-65 62% 23% 16%
Over 65 51% 31% 18%

A very significant relationship exists (99% confidence level). Those under the age of 50 were more likely to switch than those over 50. Those over 50 were more likely to be unsure about switching or would not switch.

The cross-tabulations for Question 16--age and Question 12--Feelings toward Edgar Electric are shown in Table 5.
Table 5. Cross-tab of Age and Response to Question 12
Age Group Positive Negative Neutral
Under 30 63% 6% 32%
31-40 62% 8% 30%
41-50 61% 9% 30%
51-65 68% 4% 27%
Over 65 70% 2% 28%

A very significant relationship exists (99% confidence level). Respondents over the age of 50 tended to be more positive than those under the age of 50. Those under 50 tend to be more negative than those over the age of 50. It is important to keep in mind, however, the high percentage of positive responses in all groups.

The cross tabulations for age and responses to Question 14--expansion into propane are found in Table 6.
Table 6. Cross-tab of Age and Response to Question 14
Age Group Yes--Expand No--Do not expand No response
Under 30 79% 8% 13%
31-40 77% 12% 8%
41-50 73% 17% 8%
51-65 66% 13% 18%
Over 65 49% 16% 31%

A very significant relationship exists (99% confidence level). Respondents under the age of 50 tended to favor expansion more than those over the age of 50. Those over 65 were more likely to have no opinion on expansion into propane.

Primary Source of Income

The responses to Question 17--Primary Source of Income were cross-tabulated with the following questions:

* Question 9--Would you switch to EEC Services for propane

* Question 12--Feelings toward Edgar Electric Cooperative

* Question 14--Should EEC Services expand into Propane

The cross-tabulations for primary source of income and Question 9--would you switch to EEC are found in Table 7.

A significant relationship exits (99% confidence level). Farming and Social Security income groups were less likely to switch than other groups. Farm/Job and Factory/Industrial income groups were more likely to switch than other groups.
Table 7. Cross-tab of Income Source and Responses to Question 9
Source Would Switch Would Not Switch Maybe
Fac/Ind 84% 6% 10%
Farm/Job 78% 11% 11%
Office/Sales 77% 9% 14%
Service Ind 65% 18% 17%
Professional 64% 26% 10%
Ag Related 63% 21% 16%
Pension/Inv 62% 25% 13%
Farming 54% 29% 17%
Social Sec 53% 30% 17%

A significant majority of the professional, office/sales, and service industry groups also indicated that they would switch.

The cross-tabulations for primary source of income and feelings toward the cooperative, Question 12, are displayed in Table 8.
Table 8. Cross-tab for Primary Source of Income & Question 12
Source Very Pos or Pos Neutral Neg or Very Neg
Soc Sec 72% 26% 2%
Pens/Inv 72% 24% 6%
Farming 70% 27% 3%
Fac/Ind 69% 24% 7%
Serv Ind 64% 27% 9%
Farm/Job 63% 26% 11%
Ag Related 57% 39% 4%
Professional 57% 35% 8%
Office Sales 53% 40% 7%

At a 99% confidence level, the social security income group was more likely to feel positive towards the cooperative. At 95% confidence level, the Farming income group was also likely to be more positive than other income groups. The Farm and Job income group was more likely to be negative towards the cooperative.

The cross-tabulations for primary source of income and Question 14--expansion are shown in Table 9.
Table 9. Cross-tab for Primary Source of Incomee & Question 14
Source Yes--Expand No--Do Maybe No Response
 not Expand
Fac/Ind 84% 8% 1% 7%
Office/Sales 80% 10% 0% 10%
Service Ind 79% 8% 1% 12%
Farm/Job 75% 12% 5% 8%
Professional 67% 17% 2% 13%
Ag Related 61% 22% 0% 17%
Pension/Inv 57% 14% 2% 27%
Farming 57% 18% 3% 22%
Social Sec 54% 15% 4% 27%

At a 99% confidence level, the factory and industrial group was more likely to say "yes" to expansion than other groups. Those indicating social security were less likely to say "yes" but more likely to have no response.

Zip Code or Geographic Area

Selected zip codes were cross-tabulated with responses to the following questions:

* Question 9--Would you switch to EEC Services for propane

* Question 12--Feelings toward Edgar Electric Cooperative

* Question 14--Should EEC Services expand into Propane

No statistically significant relationship was found to exist between a respondent's zip code and their decision to switch.

Some differences do appear to be obvious in the analysis of the relationship between geographic area and feelings towards the cooperative.

* Paris tends to be more positive, less neutral, and less negative than other towns.

* Marshall tends to be more neutral as well as Martinsville & Oakland.

* Dennison & West Union tend to be more negative while West Union also has a higher non-response rate.

The relationship between geographic area and Question #14--expansion also reveals some differences.

* Paris & Marshall tend to be more favorable than others towards expansion into propane, with Paris being most favorable.

* West Union tends to be less favorable than others toward the expansion into propane. This is probably due to supplier A's influence in this small town, since their branch office is located here.

Analysis of Variance Testing

Analysis of Variance (ANOVA) is a statistical test to determine the variance between groups of means. This test was used to analyze the ratings for the factors which determine the choice of propane supplier (Survey question #8). A 99% confidence level was used for analysis purposes.

The analysis of variance shows that the price of propane and on-time delivery are the highest rated factors and are also of equal importance.

Personalized, friendly service from the company was next in importance followed by feeling of customer loyalty.

Rapport with delivery person/truck driver and tank leasing agreement followed next and were of equal importance. Company name was rated lowest and was of small importance.

The factors were also analyzed to discover if a relationship existed between the rating of these factors and a respondent's decision to switch to EEC Services for propane supply (Question 9).

Those responding "Yes" and "Maybe" to Question 9--switch rated the following factors higher than those responding "No":

* Price of Propane

* On-time Delivery

* Rapport with Delivery Person/Truck Driver

* Tank Leasing Agreement

Ratings were generally the same for the remaining factors in terms of responses to the expansion issue.


The time frame for the completion of this report was rather narrow for a study of this magnitude. Many other tests of the data are still needed for a thorough and complete analysis of all the information included in the survey. However, enough analysis was completed for a preliminary picture about the propane project and all the objectives were accomplished. More cross-tabulations of the data are possible for further analysis of market and customer demographics and relationships.

Conclusions and Recommendations from the Member Survey

Having achieved all the original objectives of the project, the results of the survey & data analysis certainly provide an extensive data base and excellent starting point in developing a strategic plan for entry into the propane business. Since development of the strategic plan is the primary purpose for this report, only general summations are made at this point, saving the detailed conclusions, calculations and recommendations for the business plan.

Generally, we can use the information gathered from this report to reach conclusions in three areas:

1. Estimations and calculations for the propane project.

2. The current services and products offered by EEC Services.

3. Attitudes and comments towards Edgar Electric Cooperative

The Propane Project Business Plan

We can assess that the majority of the membership would like EEC Services to offer propane service if the project will be financially successful. Therefore, further exploration into the propane business and preparation of the propane business plan is justified by the members' wishes.

Market potential and annual sales for propane look promising if EEC can deliver a competitive price per gallon and guarantee timely delivery.

Competition with the three major suppliers will be fierce due to their current market dominance. However, the willingness of customers to switch from their current suppliers to EEC appears to be more a function of propane price and service dependability rather than customer loyalty. Since propane is a commodity, we will have to differentiate our product based on price, increased quality of service, and convenience to the customer.

The demographics of potential customers and the cross-tabulations point to specific areas for market analysis. Probably one of the most important considerations is the relationship between the respondent's attitude toward the cooperative and their decision to switch to EEC for propane. Likely, the reverse is true also. A negative attitude of our propane business may reflect negatively upon the cooperative. But, a thriving propane business may also improve attitudes towards the electric cooperative; something to keep in mind.

Geographically, the largest portion of our service territory (Paris and Marshall) tends to be favorable towards the propane project and towards the cooperative. This appears to be a good reflection on our market potential and member support for the project.

* Recommendation--Develop and construct a detailed and complete business plan which fully utilizes the data gathered from the representative sample in this report. The plan should be used as a tool for the board of directors to make their decision regarding the expansion of EEC Services into the propane business.

The cross-tabulations of attitudes with the various demographics need to be studied and discussed in detail among the board and staff, especially those concerning age, income group, and location, to arrive at possible reasons for the feelings of individual groups. We need to determine what makes our members happy and unhappy with the cooperative.

* Recommendation--Analyze more cross-tabulations with feelings toward the cooperative in addition to the general comments received and develop a plan for improving negative attitudes and responding to member concerns and questions pointed out in the general comments.

Based upon the member survey report and management recommendations, the Edgar Electric Board of Directors requested that a strategic plan for entry into the propane business be prepared by the Edgar Electric staff for presentation to the board.

Strategic Business Plan Development

Using the marketing information gained from the member survey and Kaw Valley Electric, a formal business plan for the development of Edgar Propane Supply was created for the board to consider. The plan consists of six analytic sections: 1) Present Situation; 2) Mission, Objectives, Policies, and Strategies; 3) Market Analysis; 4) Marketing Strategy; 5) Additional & Supporting Information; and 6) Financial Projections.

Present Situation

The plan begins by briefly identifying the market environment, propane products and services, pricing and profitability, customers to be served, distribution of the product, management needs, and financial resources. A new WOTS analysis reflecting the information gathered from the member survey follows. This is an important activity since it identifies topics to be addressed when developing pricing, marketing, and financing strategies. Many of the items listed could be applied to any new business venture.


1. No direct knowledge of the propane business.

2. Staffing--Will need to hire 2 people.

3. Will need to find the "right" person to manage and sell propane division.

4. Cash flow, financing, capital requirements.

5. Land acquisitions for bulk plant.

6. Storage space at co-op office for tank inventory, etc.

7. Marketing know-how for product and propane division.

8. EPA regulations.

9. Zoning requirements.

10. Insurance carriers & associated costs.

11. Only one other electric distribution co-op in the entire U.S. in the propane business.

12. Edgar Electric has higher electric rates than neighboring utilities.

13. Competing philosophies between electricity and propane usage, marketing and sales.

14. Administrative drain on staff and resources of Edgar Electric in the start-up phase of propane division.

15. Lack of management experience in a competitive, unregulated energy environment.


1. Evolution of Edgar Electric Cooperative into a total energy supplier through the subsidiary operation.

2. Expansion of energy services to members and non-members.

3. Additional revenues and long-term profits which will flow back to Edgar Electric Cooperative, hopefully deferring future electric rate increases.

4. Duel-Fuel Rates could actually increase KWH sales, lower peak demand, and decrease power costs.

5. Make members happy and comply with their request to sell propane if the project is financially feasible. Sixty-four percent of the membership said "yes" to expansion into propane.

6. Take advantage of the propane market which currently exits among our own membership. Almost 60% of our members use propane in some way to heat their homes. Sixty-three percent of those using propane said they would switch to EEC Services for propane supply.

7. Few local competitors may make it easier to gain market share.

8. Further diversification of EEC Services.

9. Pricing strategies and bulk sales.

10. Exciting challenge for management, staff, and employees.

11. Greater exposure to the membership and surrounding areas will further embed the importance of the cooperative to the consumer.

12. May be able to provide our members with the convenience of combining billing for electric service, radios, Rural TV programming, and propane service on one monthly bill.


1. Possible negative reaction to Edgar Electric's involvement in the propane business from general public, members, industry organizations, other electric cooperatives, and farm cooperatives.

2. Perception of using "subsidized government funds" for propane business.

3. Competition which now controls 80% of the local market will be intense.

4. Spot price volatility of propane.

5. "Price war" situation could develop with the competition.

6. Capital investment in tanks.

7. Long payback period is risky.

8. Accelerated growth will further increase capital investment, debt load, interest expense and risk.

9. Questionable economic conditions and looming recession. If interest rates take a dramatic upturn, we could be in trouble due to our capital structure being highly leveraged.

10. While Edgar Electric Cooperative will not have a direct financial investment in the propane division, the cooperative will have to guarantee the loans made to the propane division. If the propane division fails, Edgar Electric will be responsible for all outstanding loans.

11. Safety hazards to members, customers, and employees and liability to the propane division.

12. Dependability of wholesale propane supplier, especially in a shortage situation.

13. High electric rates could reflect badly on propane business.

14. Competing energy source philosophy.

15. Competition with other energy sources.

16. Employee reaction and morale.

17. Poor reflection upon board and management if the project is undertaken and fails.

18. Members rated "price of propane" highest as the determining factor when choosing a supplier. Customer loyalty among the current vendors is nonexistent. We must enter the business as and remain a competitively priced supplier to attract and retain propane sales.

19. Younger members (under 50) tend to be more negative towards the cooperative. However, only 5% of the membership is negative or very negative towards Edgar Electric.


1. Fifty year tradition of financial stability and service dependability in the rural electric industry.

2. Competent, well-educated, capable management and staff.

3. Knowledgeable, experienced, progressive, involved and supportive board of directors.

4. Excellent data base and marketing information provided by our recent member survey regarding the propane business.

5. Majority of the membership supports the decision to expand into propane if the possibility exists for financial success.

6. Over half of the customers of the top three propane suppliers indicated they would switch to EEC Services for propane supply if we can provide quality service at a competitive price.

7. Sixty-five percent of our members feel positive or very positive towards Edgar Electric Cooperative.

8. Those who are positive towards the cooperative tend to be more likely to switch to EEC for propane and are more likely to be in favor of expansion into propane.

9. Radio communications and Rural TV divisions have provided a service, filled a market niche, and diversified operations for the cooperative. We have established credibility in FOR PROFIT businesses outside of providing electric service.

10. EEC Services is already set up to handle the administrative tasks of starting the propane business.

11. Funding for the project will allow us increased flexibility and expertise. 100% debt financing will also limit the financial involvement of Edgar Electric to guaranteeing the loans for the subsidiary.

12. Kaw Valley Electric and Propane Division assistance and experience in the propane business.

13. Propane accounting software package and Kaw Valley's know-how in accounting and billing.

14. Edgar Electric has a high rural, residential base, many heating their homes with propane and using various propane appliances.

15. Many small, local propane companies have gone out of business recently.

16. "Big Company" image of our competition.

17. "Local Company" image of Edgar Electric.

18. Positive operating cash flow projections beginning in Year 3.

Mission, Objectives, Policies, and Strategies

Our mission statement was revised to reflect our new direction in the energy business:

Edgar Electric Cooperative, together with its wholly-owned subsidiary, EEC Services, Inc., exists to serve the changing needs of its members and customers by improving their quality of life, by actively supporting community development, and by identifying and serving their members' and customers' energy needs.


1. Expand the role of Edgar Electric Cooperative into that of a total energy supplier.

2. Provide additional long-term revenues for Edgar Electric Cooperative to help defray future rate increases.

3. Provide an energy service requested by the membership.

4. Further diversify the operations of EEC Services, Inc.


1. Secure adequate financing so that the propane division is sufficiently capitalized for operations.

2. Develop and maintain a comprehensive accounting system specifically for the propane project in order to safeguard assets to ensure their highest productivity possible. Develop and monitor internal control procedures for maximum security.

3. Secure and maintain adequate insurance for property damage and liability coverages.

4. Promote safety in all aspects of the propane operation.

5. Develop an extensive marketing program aimed at the "total energy supplier image" including the creation of "Dual Fuel Rates" combining the use of electricity and propane.

6. Develop a detailed product pricing policy (complete with discount incentives and contract purchase deals) to coincide with the marketing program objectives.

7. Strive to maintain a competitive price per gallon for propane, while maintaining the image of a high quality, dependable, on-time propane supplier.

8. Develop an incentive-based wage and salary program for the propane division manager and office assistant.

9. Foster Edgar Electric employee involvement and support in the propane project.


1. Capitalize the project with 100% debt financing by using an optimum mixture of long-term notes and short-term line of credit.

2. In start-up phase, obtain and utilize the propane accounting software package recommended by Kaw Valley Electric & Propane.

3. Obtain insurance coverage through qualified agent.

4. Develop safety check program for all propane tanks and propane appliances in use by our customers.

5. Carry out marketing strategies as outlined in that section.

6. Carry out pricing policies as outlined in that section.

7. Regularly monitor competition's prices and policies.

8. Set-up a customer feedback system so that we can continually improve our propane division.

9. Devise a formal reporting and control procedure to be carried out by the Propane Manager reporting back to the General Manager of Edgar Electric.

10. Develop an incentive program for Edgar Electric employees which rewards their involvement and support of the propane project.

Market Analysis

This section defines the market intended to serve, initial target customer base and geographic service area, market distribution and the market share to achieve. Specific market characteristics are analyzed such as volatility, price history, and customer demographics. The major competitors' pricing strategies, market share, strengths, weaknesses and how Edgar Propane Supply will position against them are studied. Risk is assessed based on the industry risk, product life cycle, competitive position, strategy, assumptions, management, and past performance. For the propane project, the industry risk is high since the market is mature with entrenched competitors. Risk is also high with regard to the assumptions that the business plan is based upon. Sales forecasts for propane and number of customers are difficult to predict since they are weather dependent, much like KWH sales. However, a detailed strategy specifying price and service niche, careful planning and clear objectives, plus proven performance in a diverse communications operation lowers the overall risk of the project.

Marketing Strategy
COPYRIGHT 1992 National Rural Electric Cooperative Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:includes appendix; Edgar Electric Cooperative Association
Author:Hammond, Allison Conley
Publication:Management Quarterly
Date:Dec 22, 1992
Previous Article:Management strategies for electric cooperatives for the 1990s.
Next Article:How to get informed about your competing investor-owned utility.

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