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Crushing Small Business With Your Tax Dollars: The Truth About Those "Friendly" Local RECsby
Al Cors, Jr. Dec 12, 2001 The first rural electric cooperative (REC) was created in the United States
in 1914, a time when the vast majority of rural America was without electricity.
By 1935 there were 30 such cooperatives in existence. Their first Internal
Revenue Service tax exemption occurred in 1923. The pattern continued – through the 1936 Rural Electrification Act – when RECs got the start-up
capital to build distribution facilities. It goes on to the present day, as
RECs span the nation. Unlike taxable co-ops or quasi-exempt agricultural co-ops,
these unique government-supported rural electric cooperatives have been favored
with taxpayer funding and a special tax status. Today, however, RECs are more
concerned with political power than electric power, and are using their advantages
to crush their small-business competition in areas of commerce far from their
original mission.
National Taxpayers Union has long questioned the modern need for these Depression-era
dinosaurs. Recent reports (1999, by the National Rural Electric Cooperative
Association) count 875 distribution RECs and 60 generation and transmission
RECs operating in a country where, as far back as 1989, the Small Business
Administration noted that “99 percent of America’s farms are receiving
electricity.” The RECs’ mission, the electrification of rural
America, was accomplished many years ago. And yet the taxpayer subsidies continue
unabated. In the 1990s, for example, RECs demanded and received $1.5 billion
in federal loan write-downs after they threatened bankruptcy.
America’s RECs have gone far, far beyond providing electricity. A recent
list of their ever expanding activities include the sale, operation, and/or
distribution of: propane gas, heat pumps, surge suppression/protection systems,
water heaters, natural gas, wind energy, internet services, home security,
personal security/medical alert systems, cable and satellite TV, credit cards,
speakers bureaus, personal computers, security lighting, decorative lighting,
storm shelters, telephone service, digital cameras, home improvement loans,
water distillers, weather radios, electric and gas grills, landscaping, irrigation,
electric generators, fireplaces, and high-efficiency light bulbs. Even this
exhaustive list is bound to expand, as RECs work daily to leverage their taxpayer-subsidized
status in new private markets.
While free-market competition is always desirable, government advantaged
competitors skew the contest and, ultimately, drive all of the other private
competitors off the field and out of business. It’s happening now, and
without changes in the law, it will happen often. The threat is so real that
one group of impacted service providers, representing nearly 8,000 private
propane gas distribution companies, has formed the Coalition for Fair Competition
in Rural Markets to bring attention to their plight.
Among the Coalition’s true life horror stories are two cases where
the RECs used their cross-subsidization to unfairly compete with private propane
companies in Texas and in Georgia. Despite the RECs’ routine denials,
former REC propane affiliate employees in these two cases confirmed the charges
as true. In the Texas case a man who served as General Manager of a rural
electric cooperative’s affiliate even related (in sworn testimony) that:
“Several enterprises were undertaken in order to transfer funds from
the Electric Cooperative to the propane business.” This REC offers credit
cards, sells appliances, manages two local water systems, and sells propane
gas. In Georgia, the propane affiliate employees were apparently provided
insurance and retirement benefits through the National Rural Electric Cooperative
Association, and the propane affiliate used the REC’s officer space
– even after a court ordered a complete separation of the two entities.
These examples are not isolated cases.
A new study prepared for the Tax Foundation, The Growth of Government
Supported Enterprises: The Case of Rural Electric Co-operatives Entering
the Propane Market, by economist William
P. Orzechowski, Ph. D., finds that rural co-ops use the substantial assets
they have acquired (a huge customer base for low-cost marketing, and management
and equipment for crafty cross-subsidization), through taxpayer subsidization
(federal and state income tax exemption, loan guarantees and interest rate
subsidies, preferential access to federal power, and monopoly franchises),
to enter the propane market and drive out private companies. The study notes
that the RECs’ entry into the propane market wastes resources that could
better be used to provide discounts to electric ratepayers. Finally, the study
concludes that taxpayers are paying millions to subsidize co-ops with no good
economic rationale.
As America’s largest grassroots taxpayer organization, National Taxpayers
Union couldn’t agree more. If we are forced to continue down the path
of funding RECs simply because of their political clout, at least we should
make sure that they aren’t allowed to grow even larger, crushing small
businesses and taxpayers along the way.
Al Cors, Jr. is Vice President for Government Affairs with the Alexandria, VA-based National Taxpayers Union, a 335,00-member citizen group founded in 1969 to work for lower taxes, less wasteful spending, and accountable government.
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