Electric co-operatives are unique entities that are part government agency, part agricultural co-operative, and part not-for-profit company that provide electricity to rural areas of the United States. Most co-operatives are solely distributors of energy and do not actually generate the electricity themselves. Due to the fact that co-operatives are utilities in a largely unregulated sub-section of the energy industry which provide service in primarily rural locations, there are specific risks that need to be addressed. Here are the key risks for 2016:

  1. Cybersecurity
  2. Power Supply Costs
  3. Safety Including Overtime Management
  4. Billing Adjustments (Fraud Risk)
  5. Cash Handling (Fraud Risk)
  1. Third Party Contract Compliance
  2. Employee Benefits
  3. Weather
  4. Succession Planning
  5. Pensions
  1. Cybersecurity
    Co-operatives need to implement a proactive cybersecurity strategy that includes effective controls to prevent and detect cyber-crimes. Employee training regarding potential phishing schemes can be one cost effective preventative control. Potential effects of a cybersecurity breach include shutdown of an energy grid, re-direction of energy to a particular location, or theft of customer data.
  2. Power Supply Costs
    The EPA Clean Power Plan which proposes carbon dioxide limit regulations may result in increased costs of compliance for co-operatives that will either reduce profit margins or be passed on to the end consumer in the form of higher electricity rates. Management needs to investigate alternative sources of energy to further diversify power sources.
  3.  Safety Including Overtime Management
    Safety is a major concern for co-operatives as their employees routinely work in dangerous conditions (i.e. downed power line in a thunderstorm) that, if not taken seriously, can expose the co-operative to unnecessary costs. Monitoring of overtime hours to help ensure employee safety represents an important oversight role and a vital way to control costs.
  4. Billing Adjustments (Fraud Risk)
    Proper segregation of duties needs to be in place to prevent those who initiate billing adjustments from those approving the adjustment. Otherwise, an employee could raise a customer’s rate, remit the proper agreed upon amount, and then pocket the extra amount. Additionally, adjustments involving employee accounts should require a higher level of review.
  5. Cash Handling (Fraud Risk)
    Proper controls should be implemented to protect against fraud regarding the handling of cash. This includes proper segregation of duties around cash collection, accounting module access, reconciliation of the cash balance, and recording the collection in the accounting system.
  6. Third Party Contract Compliance
    Co-operatives engage in numerous agreements with third parties that require oversight. Agreements should be logged and reviewed periodically for compliance. Additionally, management should do an annual review of its third parties to ensure that they qualify as contractors and not employees.
  7. Employee Benefits
    Focus should be placed on compliance with affordable care act provisions. Additionally, a federal overtime proposal exists that salaried individuals who earn less than approximately $50,000 per year be eligible for overtime which will impact labor costs. This overtime change could be in place by 2017, so 2016 is a great time to determine which employees may be impacted by this change and evaluate potential options. Finally, co-operatives should use some creativity in offering benefit programs that appeal to younger generations and emphasize the importance of work-life balance.
  8. Weather
    Distribution co-operatives deliver electricity from the national gridlines to rural counties. In cases of severe weather, utility poles may be damaged and not functioning properly. It may be more difficult to restore functionality in a timely fashion due to the poles’ location in very rural areas. Contingency plans and proper training should be in place to deal with severe weather issues.
  9. Succession Planning
    As co-operative executives continue to grow older and retire in larger numbers than in the past, there must be a greater emphasis on succession planning and staff development. Whether a co-operative decides to use an internal or external hire to replace key top management, steps need to be taken to ensure a smooth transition.
  10. Pensions
    Unfunded pension benefit obligations pose a serious threat to the sustainability of current businesses as they may not have the required cash flow to pay benefits as they become due. Additionally, co-operatives that participate in multi-employer funded pensions may be paying funds that do not ultimately benefit their employees if other participating employers do not contribute the appropriate amount of funding. Management should update its pension obligations at least every other year through a credible actuary and actively discuss key assumptions with the actuary.

For more information, contact Bill Kohm at bkohm@deandorton.com or (859) 425-7625.

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