[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
GOVERNANCE AND FINANCIAL ACCOUNTABILITY OF RURAL ELECTRIC COOPERATIVES:
THE PEDERNALES EXPERIENCE
=======================================================================
HEARING
before the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JUNE 26, 2008
__________
Serial No. 110-107
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania DAN BURTON, Indiana
CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri CHRIS CANNON, Utah
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina
Columbia VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota BRIAN P. BILBRAY, California
JIM COOPER, Tennessee BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
Lawrence Halloran, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on June 26, 2008.................................... 1
Statement of:
English, Glenn, CEO, National Rural Electric Cooperative
Association................................................ 122
Fraser, Troy, Chair, Business and Commerce Committee, Texas
Senate; Patrick Rose, Texas House of Representatives; John
Watson, member of Pedernales Electric Cooperative; Carlos
Higgins, member of Pedernales Electric Cooperative; and
Juan Garza, current general manager of Pedernales Electric
Cooperative................................................ 69
Fraser, Troy............................................. 69
Garza, Juan.............................................. 95
Higgins, Carlos.......................................... 88
Rose, Patrick............................................ 78
Watson, John............................................. 84
Letters, statements, etc., submitted for the record by:
Braley, Hon. Bruce, a Representative in Congress from the
State of Iowa, prepared statement of....................... 172
Cooper, Hon. Jim, a Representative in Congress from the State
of Tennessee, prepared statement of........................ 57
Davis, Hon. Tom, a Representative in Congress from the State
of Virginia, prepared statement of......................... 62
English, Glenn, CEO, National Rural Electric Cooperative
Association, prepared statement of......................... 125
Fraser, Troy, Chair, Business and Commerce Committee, Texas
Senate, prepared statement of.............................. 72
Garza, Juan, current general manager of Pedernales Electric
Cooperative, prepared statement of......................... 97
Higgins, Carlos, member of Pedernales Electric Cooperative,
prepared statement of...................................... 90
Rose, Patrick, Texas House of Representatives, prepared
statement of............................................... 80
Sali, Hon. Bill, a Representative in Congress from the State
of Idaho, prepared statement of............................ 51
Souder, Hon. Mark E., a Representative in Congress from the
State of Indiana, prepared statement of.................... 174
Watson, John, member of Pedernales Electric Cooperative,
prepared statement of...................................... 86
Waxman, Chairman Henry A., a Representative in Congress from
the State of California:
Information concerning a policy essay.................... 3
Prepared statement of.................................... 45
GOVERNANCE AND FINANCIAL ACCOUNTABILITY OF RURAL ELECTRIC COOPERATIVES:
THE PEDERNALES EXPERIENCE
----------
THURSDAY, JUNE 26, 2008
House of Representatives,
Committee on Oversight and Government Reform,
Washington, DC.
The committee met, pursuant to notice, at 10:12 a.m. in
room 2154, Rayburn House Office Building, Hon. Henry A. Waxman
(chairman of the committee) presiding.
Present: Representatives Waxman, Towns, Cummings, Kucinich,
Clay, Watson, Braley, Cooper, Sarbanes, Welch, Davis of
Virginia, Burton, Souder, Duncan, Issa, Marchant, Westmoreland,
Foxx, Sali, and Jordan.
Staff present: Phil Schiliro, chief of staff; Phil Barnett,
staff director and chief counsel; Karen Lightfoot,
communications director and senior policy advisor; Greg Dotson,
chief environmental counsel; David Rapallo, chief investigative
counsel; John Wiliams, deputy chief investigative counsel;
Brian Cohen, senior investigator and policy advisor; Jeff
Baran, counsel; Gilad Wilkenfeld, investigator; Caren Auchman
and Ella Hoffman, press assistants; Leneal Scott, information
systems manager; Rob Cobbs and Miriam Edelman, staff
assistants; Lawrence Halloran, minority staff director;
Jennifer Safavian, minority chief counsel for oversight and
investigations; Keith Ausbrook, minority general counsel; Ali
Ahmad, minority deputy press secretary; Larry Brady, minority
senior investigator and policy advisor; Alex Cooper and Adam
Fromm, minority professional staff members; Mary Pauline Jones,
minority staff assistant; Patrick Lyden, minority
parliamentarian and member services coordinator; and Brian
McNicoll, minority communications director.
Chairman Waxman. The committee will come to order.
Today's hearing focuses on an important issue that has
received little attention: electric cooperatives and the
billions of dollars they control.
Electric cooperatives are unique structures that provide
electricity to millions of customers in rural and suburban
areas. They are nonprofit utilities that are owned by their
customers, and at least in theory are supposed to be
democratically controlled. Nationwide there are 930 co-ops
serving over 17 million customers.
What isn't widely known is that these co-ops control over
$30 billion in customers' equity. In many cases, even the
consumers don't realize it is their equity and don't know how
the co-ops are spending their money.
I want to thank my colleague and friend, Jim Cooper, for
bringing this issue to the committee's attention. It is exactly
the kind of issue the oversight committee should be looking at,
and from what we have already found this is an area in strong
need of accountability. In fact, two of the witnesses we wanted
for this hearing have refused to attend. They declined to
appear voluntarily, and they have evaded Federal Marshals who
tried to serve them with subpoenas. The Federal Marshals
believe one of the witnesses is now hiding in a remote New
Mexico ranch.
These two witnesses essentially ran the Pedernales Electric
Cooperative in the Texas Hill country. This co-op has a proud
history, having been created in 1938 by a young Congressman by
the name of Lyndon Johnson. It is now the largest co-op in the
United States.
But Benny Fuelberg, the former Pedernales general manager,
and Bud Burnett, the former Pedernales president, aren't
reflecting the co-op's proud history by refusing to explain
their apparent self-dealings.
There is compelling evidence that the Pedernales Co-op used
its customers' private equity as a private piggy bank. Mr.
Fuelberg, Mr. Burnett, and the Pedernales board paid themselves
well. In 2007 Mr. Fuelberg received over $1 million in salary,
benefits, and bonuses. In just 5 years Mr. Fuelberg and the
board spent $700,000 to stay in five-star hotels like the Ritz
Carlton and Four Seasons, dine at expensive restaurants, and
buy themselves fancy chocolates and Celine Dion concert
tickets. They also spent millions of dollars in an unsuccessful
legal battle against their own customers.
We will learn more about all of this from our witnesses,
which include Pedernales Co-op members, two members of the
Texas Legislature, and the newly hired general manager of
Pedernales. But the questions about the potential abuses of co-
ops aren't limited to the Pedernales Co-op, and that brings us
back to the $30 billion in customer equity I mentioned a few
moments ago.
The Pedernales experience tells us we need to examine
whether co-ops are being run in a truly democratic fashion, and
we need to take a close look at whether there are adequate
financial protections for the investments customers have in
these entities.
The 17 million co-op customers' equity investments are
worth an average of $2,000 apiece, but there appears to be
little transparency and accountability for how co-ops use these
funds.
I know co-ops have done a tremendous amount of good for
millions of Americans, and I know it is unfair to suggest the
potential wrongdoing at the Pedernales Co-op is typical for all
co-ops. Congressman Cooper has done a real service by setting
the right balance for these issues in a recent article in the
Harvard Journal on Legislation, and I ask unanimous consent to
include it in the hearing record. Without objection, that will
be the order.
[The information referred to follows:]
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Chairman Waxman. I am looking forward to the testimony of
our witnesses and learning more about this important issue.
[The prepared statement of Chairman Henry A. Waxman
follows:]
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Chairman Waxman. I now want to recognize for his opening
statement any Member who wishes to make an opening statement.
Mr. Sali.
Mr. Sali. Thank you, Mr. Chairman. I want to thank you for
calling this important hearing about the governance and
financial accountability of rural electric cooperatives. We
will hear here today that the Pedernales incident in Texas is
indicative of the conduct of rural electric cooperatives across
the country. I anticipate we will hear remarks that most rural
electric cooperatives are poorly managed and may need further
regulation.
Certainly in Idaho--I would presume in many areas of the
country--rural electric cooperatives serve a critical and
positive role in our communities, providing service to rural
areas at an affordable rate.
In the northern part of my District in Idaho, if you will
look at the map there, there are several electric cooperatives
providing electricity to just over 100,000 residential and
business consumers. These electric cooperatives serve some of
the most isolated, rural consumers in our Nation. On average,
the electric cooperatives in Idaho serve 6 customers per mile
of wire, in contrast to the 20 customers per mile of wire for
the investor-owned utilities.
I have serious concerns if, by holding this hearing today,
this committee is suggesting that we must impose more stringent
regulations on the rural electric cooperative industry due to
the mismanagement of one cooperative. Regulations already exist
at the cooperative board level and at the State level, and the
cooperatives in northern Idaho already have transparency
policies in place where consumers can review all financial data
on a Web site.
Most cooperative consumers in Idaho receive a capital
credit refund. In the case of Clearwater Power--that is the
green area on the map--General Manager Dave Hagen stated, ``Our
consumers have received capital credit refunds since 1988
amounting to the total of $5 million.''
Additional regulations imposed at the Federal level will
only increase the cost of electricity to our rural communities
and small businesses, which are already struggling to get by as
they struggle with high food prices and high gas prices.
My constituents cannot afford higher electric bills with
the cost of gasoline and food on the rise, as well. New
regulations and higher utility bills are an unnecessary burden,
especially for my constituents in north Idaho who receive
electricity from a cooperative because their per capita income
is just $18,555, and they have an average household income of
$6,000 less than the other utility consumers in my State. This
would be a tremendous burden for them.
For these reasons, Mr. Chairman, I respectfully will oppose
any new regulatory burden that would increase the cost of doing
business for the rural electric cooperative industry. I would
ask my colleagues to do the same.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Bill Sali follows:]
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Chairman Waxman. Thank you, Mr. Sali.
Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
I really regret that we must have this hearing today. I
love electric co-ops and I don't want to see any of them
harmed. But I also love co-op customers. So far, I have not
introduced any legislation because my only goal is to return
co-ops to their roots. I don't even want to draw attention to
co-ops because I know how publicity shy they are.
My father helped start a rural electric cooperative and I
have represented roughly 20 electric co-ops, or at least their
customers, and that is perhaps more than any other Member.
I started learning about electric co-ops almost two decades
ago when I first attended a co-op annual meeting. For almost 10
years I have been talking privately with various co-op leaders,
speaking at co-op conventions, both State and national, to warn
them about problems that even I could see as a co-op observer.
I worked hard for many years to solve co-op problems within
the co-op family, but I was rebuffed at almost every turn, so
here we are today with one, the largest co-op in America, in
serious scandal; two, its former leaders hiding from Federal
Marshals; and, three, loads of other co-op problems bubbling
publicly to the surface.
For much of the last 10 years I didn't really know for sure
whether my co-op worries were justified, but then I saw the
outstanding reporting of Margaret Newkirk of the Atlanta
Journal Constitution and of Claudia Grisales of the Austin
American Statesman chronicling the abuses of Georgia and Texas
co-ops. I also found that TVA, the Tennessee Valley Authority,
Inspectors General had been complaining about Tennessee co-op
misbehavior for a long time, but, due to co-op pressure, hiding
the report from Congress and, as the IG put it in writing, from
shrill media attention.
I also stumbled upon the National Co-op Trade Association's
own secret, password-protected Web site and discovered that
some of my worst fears about co-ops were substantiated by the
Trade Association, itself, and NRECA, the same organization
that had been stonewalling me.
That is when I decided to write a law review article that
the chairman mentioned. If you have got to wash your dirty
laundry in public, you might as well get it cleaned.
I want to make seven quick points: No. 1, if you think
Pedernales is the only electric co-op scandal in America, then
you believe that there can only be one cockroach. If such
abuses can happen in the largest co-op in the country founded
by a former U.S. President within sight of the regulators in
the State capital in Austin, TX, then I think it can happen
anywhere.
Co-ops serve portions of 47 States. They serve 75 percent
of the land area of America, and I am thankful for that.
Overall, they have done a superb job. But we already know of
separate, unrelated, major co-op scandals outside of Atlanta
and Birmingham and Fort Worth. Is your State next? How could
you even know unless you have seen the audited co-op
financials? Or are you willing just to take the co-op
lobbyist's word for it? Our friends in the Texas Legislature
did that for too many years.
Point No. 2: co-ops don't have to be mired in scandal to
still have serious problems. It doesn't take a spike in
temperature to have a sick patient. A chronic, low-grade fever
can be just as damaging. The NRECA has been issuing reports for
over 30 years warning all co-ops in the country that they need
to be refunding more money to customers, because if they don't
they risk losing their tax-exempt status. For decades too many
co-ops have turned a deaf ear to their own trade association on
this and other important issues involving their precious tax-
exempt status.
Why would NRECA go to so much trouble and pay for such
expensive secret reports as this one that can only be found on
their password-protected Web site unless they were really
worried about an IRS crackdown under current law? Ironically,
much of this hearing will be spent just reinforcing NRECA's own
message to its own members.
Point No. 3: are co-op customers being treated fairly
today? Remember here that co-ops were founded under Franklin
Roosevelt's New Deal to be probably the most pro-consumer
organizations in America. Co-ops always brag about the ``co-op
difference.'' Yet, NRECA, itself, has written that countless
co-op customers, particularly in the most rural areas, pay an
extra $220 a year. Why? Just so that their own co-op can remain
inefficient.
This is the NRECA book. According to the NRECA, itself, if
small co-ops simply merged with other co-ops they could save
their customers' 2 months of electricity bills a year. Wouldn't
it be nice to give customers a 2-month holiday from their light
bills?
Point No. 4: private property rights. Co-op customers
really do own their co-op. This isn't any theoretical interest
like taxpayers who may have an undivided interest, say, in the
Smithsonian Museum. Co-op customers literally have or will have
legal title in their own name to a piece of the $30-plus
billion in co-op equity. That is about as much stock as
Amazon.com has. It averages out to $1,824 per customer, an
amount comparable to the economic stimulus checks that Congress
voted for just a couple of months ago. Here's the picture. Yet,
how many co-op customers have ever been told exactly what is in
their co-op account? Have any? I have not found one yet except
for one top power company executive who got all of his money
out every time he moved from one co-op to another.
Why can't regular co-op customers get this benefit? Or is
it reserved for VIPs? After all, internal co-op software
calculates individual ownership to the penny, yet co-ops
somehow run out of ink on the monthly bills before they
disclose your ownership stake.
All this leads me to conclude that this $30 billion plus
may be the largest lost pool of capital in America. I estimate
that co-ops could safely return between $3 billion and $9
billion of customers' own money to them. This money could help
millions of rural ratepayers today who are having a hard time
in a soft economy. And it is not a Government handout; this is
just a return of the customers' own money.
Chairman Waxman. Mr. Cooper, thank you very much for your
opening statement. We will allow you to submit additional
information and material in the opening statement. It is not
fair, because you know more about co-ops than anybody else on
this committee, so I am reluctant to invoke a time limit on
you, but I see other Members are seeking recognition, as well.
Mr. Cooper. Thank you.
[The prepared statement of Hon. Jim Cooper follows:]
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Chairman Waxman. Mr. Davis.
Mr. Davis of Virginia. Thank you.
Let me just thank Mr. Cooper for bringing this up to the
committee's attention.
We are here because questions have been raised about the
vulnerability and even the relevance of a venerable business
model that helped modernize post-Depression rural America and
today serves over 41 million consumers in 47 States. Rural
electric cooperatives, member-owned power generation and
distribution companies, bring the power of economic development
and growth to diverse communities who might otherwise languish
off the national grid.
But the apparent plundering of one large co-op, the
Pedernales in Texas, by entrenched directors and officers has
caused some to ask more broadly whether these tax-exempt,
federally subsidized organizations are governed democratically,
managed efficiently, regulated effectively, or operated
transparently enough to prevent self-dealing and abuse.
In the Pedernales case, millions of dollars of capital
owned by co-op members was misspent on excessive compensation
packages, phantom employees, first-class travel, and luxury
hotel expenses. High-living insiders even paid $2,000 for
Celine Dion tickets.
So it is fair to ask, as our committee colleague,
Representative Cooper, does, if this useful New Deal tool has
become a potentially bad deal for taxpayers and customers. In
this post-Enron Sarbanes-Oxley era of strengthened corporate
governance accountability and transparency, it is worth asking
what rural electric co-ops are doing to keep pace with
regulatory standards and governance reforms in the increasingly
complex and changing electric industry.
At the same time, there is little to suggest the abuses
uncovered at Pedernales are symptomatic of widespread fiscal
profligacy throughout the national network of 931 electric co-
ops. That critical infrastructure transmits power over 75
percent of the Nation's vast geography. At every juncture, co-
op member owners have the legal rights and powers under State
and corporation and utility regulation laws to police or
replace irresponsible directors and managers.
Eventually, Pedernales customers regained control of their
company and co-op democracy remains the most potent safeguard
against mismanagement and waste. But in the face of global
energy pressures and modern mandates to diversify co-op
activities for economic and social reasons, the quaint old ways
of doing business that worked in the 1950's and 1960's can
begin to look a bit threadbare. Even newly expanded IRS
disclosure requirements for non-profits may not give co-op
members, regulators, or taxpayers enough timely information to
prevent the next Pedernales from blooming in the crevices of a
patchwork regulatory and oversight system.
So we need to know how safeguards can be strengthened and
how rural electric co-ops can continue to fulfill their
potential as stable, responsible drivers of economic
development and community growth.
We appreciate the testimony of our witnesses this morning
as we explore these important issue.
Thank you.
[The prepared statement of Hon. Tom Davis follows:]
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Chairman Waxman. Thank you, Mr. Davis.
Let me ask unanimous consent that all Members' opening
statements be inserted in the record. I will recognize Members
who feel that they still want to say a few words of their
opening statement before we actually begin.
I will go to this side. I think Mr. Clay came in first.
Mr. Clay. Thank you, Mr. Chair. I have a very brief opening
statement and I appreciate your holding this hearing.
While I represent an urban area, I am aware that there are
47 rural electric co-ops in Missouri that serve nearly 1.5
million customers. The Quiver River Electric Cooperative serves
approximately 65,000 Missouri customers living close to my
District. Since 1976 Quiver has distributed $51.5 million in
capital credits to its members. In 2008 Quiver's board of
directors authorized a distribution of $3.8 million in refunds.
Quiver also conducts elections where the co-op's members
select the board of directors. In 2007 the elections were held
in August and involved 4 of the 12 board members.
Finally, Quiver prepares an annual report that is available
to its members. This report explains the financial conditions
of the co-op, as well as the assets that the co-op owns. Based
on this report and other information, the members are notified
about the co-op's activity.
The problems involving capital credits and board of
directors and general manager abuses that existed at the Texas
electric co-op have not occurred at Quiver. While there are
individual bad actors in every industry, I hope that this is an
isolated situation.
Mr. Chairman, I yield back my time.
Chairman Waxman. Thank you, Mr. Clay.
Mr. Marchant.
Mr. Marchant. Thank you, Mr. Chairman. I will be brief.
I would just like to bring greetings to Senator Fraser and
Representative Rose. It was my privilege when I was a member of
the Texas House to serve with both of them, and I have the
utmost confidence in their ability. Senator Fraser has been
involved in the co-op part of legislation for many years, and
I, myself, am a co-op customer. I do business with three
different co-ops. It is still my belief that the governance of
co-ops should stay at the local level and at the State level. I
believe the actions that the State took to correct the
Pedernales problem were appropriate, and I believe that they
have a handle on it.
I deeply appreciate you guys coming up today and
participating in the hearing, because I think in the long run
this will be a good day for the co-ops and a day where the co-
ops will be able to explain to the public and answer some of
these allegations.
Thank you.
Chairman Waxman. Thank you, Mr. Marchant.
Mr. Kucinich.
Mr. Kucinich. Thank you, Mr. Chairman, for holding this
hearing, and thanks, Mr. Cooper, for bringing it to the
attention of the committee.
We put this in the context of rural America, where you see
the physical infrastructure of rural America fraying, the
telecommunication infrastructure where people are paying more
for less, water rights are under attack in rural areas. Now we
see co-ops, in this case one that is under inspection,
exploiting the resource of the members.
You have to remember, let's go back historically, why we
saw rural electrification and why these co-ops were created: to
make sure the people in rural areas had reliable access to
electricity at a low cost, because the big energy companies
didn't want to spend the money and invest in infrastructure,
didn't want to do that. So our mission as a committee, I hope,
is going to be to find a way to not just call these particular
individuals to an accounting, as we should and must, but to
find a way to make sure that we protect the philosophical
underpinnings of rural electrification and of rural co-ops so
that people can have access to electricity at a low cost, so
that rural areas can find a way to survive in these very
troubled economic times.
Thank you.
Chairman Waxman. Thank you.
Mr. Duncan.
Mr. Duncan. Thank you, Mr. Chairman. Thank you for calling
this hearing. It is very appropriate, considering the scandal
that has gone in in Texas with this largest co-op in the United
States.
First of all I want to say that I have the greatest respect
for my colleague, Congressman Cooper, who is a good friend of
mine, and I salute him for raising these concerns and asking
these questions. He used to represent a very rural District in
Tennessee, and he has studied this issue and these co-ops for
many years and I have not, so he knows far more about this than
I do. He and I now represent the two fastest-growing areas in
Tennessee. He represents the Nashville area and I represent
primarily an urban/suburban District in and around Knoxville.
Only about 12 percent of my constituents are served by co-ops,
but overall I understand that about one-third of the people in
Tennessee are served by co-ops, so this is very important to
Tennessee.
I am told that the average profit per member in Tennessee,
the annual profit is around $82 per member for a year. I also
have learned that, under agreements with TVA, since the
Tennessee co-ops are supplying TVA power, that TVA requires
that, rather than rebate money, that these co-ops do one of
three things, are limited to three things: keeping rates low,
paying down debt, or investing in the infrastructure. They
couldn't, I suppose, do all three in any 1 year.
Those seem like good things to me. I haven't read any
articles about any co-ops in Tennessee doing anything even
remotely close to what has happened in Texas, but there is
certainly nothing wrong about looking into this and making sure
that the customers or members are treated fairly and honestly,
and that co-ops any place are not making investments in things
that they should not be investing in. So I thank you for
calling this hearing and for allowing me to participate.
Chairman Waxman. Thank you, Mr. Duncan.
Other Members who wish to make opening statements? Ms.
Watson.
Ms. Watson. Thank you, Mr. Chairman. And thank you for
holding today's hearing where we will be examining the
managerial practices of Pedernales Electric Cooperative.
Co-ops were created during the era of President Roosevelt's
New Deal, and their purpose was to supply millions of Americans
who lived in under-developed, rural communities with
electricity.
Presently, the conditions of modern and rural areas are not
in the dire situation they experienced during the Great
Depression, but 70 years later 930 co-ops are still responsible
for providing electricity for the 17 million Americans across
the country.
Pedernales has been providing reliable electrical service
to rural Texans for over 70 years; however, recently there have
been numerous allegations ranging from excessive personal
spending of co-op funds by board members, unearned compensation
for former board members, improper election methods, non-
beneficial investment practices, and numerous IRS reporting
infractions.
Even though this hearing is focusing mainly on the
questionable practices of Pedernales, it is important to find
out if the problems are widespread throughout the cooperative
industry.
Mr. Chairman, I hope that we will consider holding a future
hearing that will examine the nature of financial practices of
other cooperatives. In the end, what this committee desires to
uncover is why Pedernales and board members allegedly took
advantage of other member customers, how these practices were
carried out with the use of company funds, and if the practices
of the board members could plausibly be repeated in other
electric cooperatives around the country.
So I look forward to hearing from the panel, and especially
the testimony of Mr. Glenn English, the CEO of the National
Rural Electric Cooperative Association. I hope that he can
provide more insight on the co-op industry and give us a
general overview on the use of co-op funds in the industry as a
whole.
Mr. Chairman, I thank you. I yield back.
Chairman Waxman. Thank you very much, Ms. Watson.
Any other Members seek to make an opening statement? Mr.
Sarbanes.
Mr. Sarbanes. Very quickly, Mr. Chairman, thank you.
You know, we talk about expertise on the part of fellow
Members of Congress, but Congressman Cooper's expertise in this
area is so deep that he would easily be qualified by a judge in
any court case as an expert witness, based on all of the
research that he has done in his own personal and professional
experience with co-ops.
A hearing like this predictably will produce a response
among sort of three categories of actors. There will be those
who have engaged in outrageous practices who had better start
quickly figuring out how to fix the situation. There will be
those who maybe could do better than they have done and ought
to look at that. And then there will also be those who have
acted in a responsible manner.
I don't have any electric cooperatives in my district. In
Maryland we have one in southern Maryland called the Southern
Maryland Electric Cooperative, from my understanding, one of
the more responsible actors in this drama, but I would assume
that the responsible folks would step up within whatever the
association is to make the case that others need to clean up
their act and improve their own sort of self-regulation. But I
think Mr. Cooper bringing this issue to light as he has points
us to examining whether there ought to be more oversight and
regulation from third parties, including Government oversight.
That will be part of the discussion today, so I want to thank
him for making all of us look carefully at this issue.
I yield back my time.
Chairman Waxman. Mr. Welch.
Mr. Welch. We have two excellent co-ops in Vermont of that
category that my colleague, Mr. Sarbanes, was just talking
about. They take their democratic duties seriously. Service on
the board is much a sacrifice; it is not a bonanza. And they
are doing tremendous work on alternative energy, providing real
leadership in the State. That is the Vermont Electric Co-op and
the Washington Electric Co-op.
Mr. Chairman, if there is no objection, I would like to
introduce their newsletters into the record.
Chairman Waxman. Without objection, they will be made a
part of the record.
Mr. Welch. But those of us who support co-ops have the
major responsibility to root out when it is being abused,
because if we are going to allow there to be continued support
to do the good work, we have to make certain there is no
latitude to make this into a rip-off, and I really applaud
Congressman Cooper and would like to yield him at least part of
the balance of my time, Mr. Chairman. I know we are short, but
to finish a couple of points that he has, if that is possible.
Mr. Cooper. I thank my friend for yielding.
Two points that haven't been made so far: this year some
giant energy companies in America are trying to take advantage
of co-ops' strong balance sheets and tax-exempt borrowing
authority to get co-ops to issue billions of dollars worth of
bonds for new power generation, particularly coal-fired units.
They want co-ops to generate more power, to increase pollution,
and to issue these bonds. The last time co-ops fell for such a
sales pitch was in the 1970's and 1980's, and many co-ops went
bankrupt as a result. I think co-ops should make energy
conservation their first priority, and then, once they have
helped reduce customer bills, focus on other ventures.
Also, you all know that sunshine is the best disinfectant.
Without full disclosure, co-op democracy is a sham. Did you
know that in the official biography of the official lending arm
to co-ops, the CFC, they state explicitly that it was formed to
tell Wall Street how rich co-ops are so that NRECA can at the
same time tell us how poor they are.
Did you know that the PAC associated with NRECA gives
almost as much money to Congress as Boeing Corp.? Why are they
spending all this money to defend motherhood and apple pie
organizations? Is it just a narcotic to make sure that we, the
watchdogs, stay asleep.
So thank you, Mr. Chairman.
You have the best staff on the Hill. Co-op customers get
electricity today, but they don't have power and they are being
kept in the dark.
Chairman Waxman. Thank you very much, Mr. Cooper and Mr.
Welch.
Unless our witnesses want to yield the rest of their time
to Mr. Cooper, we are going to hear from you. [Laughter.]
I am pleased to welcome them to our hearing today.
The first panel is going to focus on the Pedernales
Electric Cooperative.
The Honorable Troy Fraser is a member of the Texas Senate
and a member of the Pedernales Co-op. He chairs the Texas
Senate's Business and Commerce Committee and has chaired a
hearing on the co-op's business practices.
The Honorable Patrick Rose is a member of the Texas House
of Representatives. He also is a member of the Co-op and has
been investigating business practices at the Pedernales.
Mr. John Watson is a member of the Pedernales Co-op.
Mr. Carlos Higgins is a member of the Pedernales Co-op and
recently ran for a position on its board of directors.
Mr. Juan Garza is the new general manager of Pedernales.
Before he started at Pedernales in February 2008 he was the
general manager of the publicly owned Austin Energy.
I want to thank all of you for traveling to be with us
today.
I would like to note again the absence of two invited
witnesses, Mr. Bennie Fuelberg was a long-time general manager
of Pedernales. He is not present today because he is evading
service of the committee's subpoena. His attorney advised
committee staff that he would assert his fifth amendment right
against self-incrimination if he did appear.
Mr. Bud Burnett was a long-time president of Pedernales. He
is also evading service of the committee's subpoena. His
attorney advised committee staff that he would assert his fifth
amendment right against self-incrimination if he did appear.
They don't have to assert it. They are not here.
We are pleased to have you with us. It is the practice of
this committee that all witnesses who testify do so under oath.
I would like to ask, if you would, to please stand and raise
your right hands.
[Witnesses sworn.]
Chairman Waxman. The record will indicate that each of the
witnesses answered in the affirmative.
Your prepared statements will be in the record in their
entirety. What I would like to ask each of you to do is to
limit your oral presentation to around 5 minutes. We will have
a clock that will indicate green, and then the last minute will
turn yellow, and then when the time is up it will turn red. If
you see red on the clock, we would welcome you to summarize
your testimony.
Mr. Fraser, why don't we start with you?
STATEMENTS OF TROY FRASER, CHAIR, BUSINESS AND COMMERCE
COMMITTEE, TEXAS SENATE; PATRICK ROSE, TEXAS HOUSE OF
REPRESENTATIVES; JOHN WATSON, MEMBER OF PEDERNALES ELECTRIC
COOPERATIVE; CARLOS HIGGINS, MEMBER OF PEDERNALES ELECTRIC
COOPERATIVE; AND JUAN GARZA, CURRENT GENERAL MANAGER OF
PEDERNALES ELECTRIC COOPERATIVE
STATEMENT OF TROY FRASER
Mr. Fraser. Mr. Chairman, I am extremely honored to be here
in your committee today. Also other Members, thank you for
being here, especially Representative Marchant. He served with
distinction in Texas, and we are very proud of Mr. Marchant and
the service he has given to the great State of Texas. Thank you
for being here.
Members, I currently serve as chairman of the Texas
Committee on Business and Commerce. That gives me oversight
over the electric industry. I also, along with Representative
Rose, am a member of the Pedernales Electric Cooperative.
I would like to emphasize, first of all, that I have been
and continue to be a strong supporter of the rural electric
cooperatives. These cooperatives brought electricity to many
parts of Texas and the Nation that no one else wanted to serve.
I also believe that the beauty of the electric co-op system
is that co-ops are designed so that member owners can determine
how best to run the system through the election of board of
directors. If members don't like the policies that are being
set by the board of directors, they can and they should vote
them out of office.
In 1995 the Texas Legislature allowed cooperatives to opt
out of retail rate regulation by majority vote of the members,
and a vast majority of the 66 distribution co-ops did that, but
the wires and the transmission lines continue to be regulated
by the State of Texas and the Public Utilities Commission.
I want to be clear that I believe that the best way to
control a cooperative is through the democratic participation
of members; however, the members of Pedernales Electric
Cooperative over the last year have raised many concerns that
they did not have a voice in their cooperative. Many of these
customers are also mine and Representative Rose's constituents.
Late last spring the constituents began contacting the
office to complain about the closed nature of the board of
directors. Specifically, concerns were raised over the
nomination and election process, the lack of transparency by
the board of directors and senior management by prohibiting
members from even attending board meetings or accessing
cooperative information, the failure of the cooperative to
return excess profits by paying capital credits, and the
extreme levels of compensation and benefits received by board
members and senior management.
In May 2006 a group of Pedernales members filed a civil
lawsuit against the cooperative and the board of directors,
making the same claims I just mentioned. Basically, these
members were suing themselves over perceived wrongdoings of the
cooperative and the board. A settlement to the lawsuit has been
reached, but it is currently under appeal.
This lawsuit, the watchful eye of the media, and the
legislative scrutiny by Representative Rose and myself have led
also to an ongoing criminal investigation that is being led by
the District Attorney but with the assistance of the Texas
Attorney General's office.
It became apparent that the inability to elect anyone
except the board's hand-picked candidates allowed Pedernales
Electric to become a self-governed entity with no way to be
controlled. With no one to look over their shoulders, abuses
occurred.
First of all, as was mentioned, Mr. Chairman, the president
of the board not only received the perks of being a board
member; he also paid himself $190,000 a year annually as an
employee, making him eligible for retirement benefits, but he
also had no real duties or also a severe lack of knowledge of
what was going on in the co-op. He currently today, after
leaving, is receiving $10,000 per month in retirement benefits,
and we just discovered in IRS filings that, as he was leaving,
he was paid an additional $600,000 retirement package that they
had voted in in 2001, again without our knowledge.
The general manager, Bennie Fuelberg, was being paid
$390,000 annual salary. In addition, the board secretly voted
to give him an additional $2 million in deferred compensation
over a 5-year period, and then they gave him another $375,000
what they called a signing bonus, in order to sign the $2
million bonus contract.
Last year Bennie Fuelberg, his last year at the company,
made $1.4 million. None of this additional pay was disclosed to
the members. It is also alleged that the board and management
falsified the 990 report to the IRS and all reports prior to
2006 by not reporting the general manager's total compensation
and bonuses.
We know the PEC board had paid themselves excessive
salaries totaling over $1 million per year. All board members,
including non-voting members, were given free lifetime health
insurance for themselves and dependents. They received free
$3,000 physicals for the members and spouses at the Cooper
Health Clinic Spa in Dallas. The board also created policies
that, when you left the board, you would become eligible for
$1,500 per month retirement as an emeritus status and free
lifetime insurance for not only the members but all dependents.
The board, senior management, and their spouses and
girlfriends traveled first-class to destinations all over the
world. They stayed at luxury hotels, as you said, Ritz Carlton,
the Four Seasons, and the like, when traveling on Cooperative
business, with no approval process.
Mr. Chairman, as you said, we have identified $700,000 in
credit card bills that were paid without any approval process
of whether those expenses were legitimate cooperative business.
Additionally, almost all cooperative expenditures were not
competitively bid, and the value of those expenditures is not
known and is currently under audit.
Compounding these abuses, board meetings were not
publicized or open to members. Members could not know or attend
meetings. I personally attempted to attend a board meeting on
January 3, 2008, and I was denied entrance into the board
meeting.
I could go on, but the fact that Pedernales Electric, if
they had had an open election process, probably these abuses
would not have occurred. Texas removed regulatory oversight
over cooperatives in 1999 because we thought it was redundant.
We thought the members could determine how to run the
cooperative through the election process. If the members were
unhappy, they should be able to vote them out of office.
The failures to have true and honest elections at
Pedernales is the reason the Senate Committee on Business and
Commerce is currently looking at all electric cooperatives to
make sure that what happened at Pedernales is not happening in
other parts of the State with those 66 co-ops.
There have been reforms this year at Pedernales. Juan Garza
is going to outline the things that have happened this year. We
just had an election where five new members were elected.
I will conclude with that and I will open up for questions
after the rest of the testimony.
Thank you.
[The prepared statement of Mr. Fraser follows:]
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Chairman Waxman. Thank you very much, Mr. Fraser.
Mr. Rose.
STATEMENT OF PATRICK ROSE
Mr. Rose. Mr. Chairman, Mr. Marchant, it is a pleasure to
be with you. I am sorry that we have to be with you today.
Since 2003 I have represented Johnson City and the
Pedernales Electric Cooperative headquarters in the Texas House
of Representatives. It is impossible to represent this District
and not recognize PEC's rich history and foundational role in
central Texas. As an elected official representing thousands of
members and employees of this organization, it is my duty to
ensure its long-term success, and that is why I am here before
you today.
As the co-op navigates these turbulent times, I am
committed to reforms that strike the balance between statutory
oversight and local control. PEC members need and deserve a co-
op that is open and transparent. We can do that with the right
reforms at the State level, and Senator Fraser and I, working
closely together over this last year and as we approach next
session, are committed to do just that.
With the cost of energy continuing to rise at an alarming
rate, our constituents rely on us to guarantee that the price
we pay for gas at the pump and for the electricity we use to
heat and cool our homes is reasonable and fair. We must provide
those we represent the security of knowing that they are not
paying unwarranted prices for basic necessities, and when we
find that those we have entrusted to deliver these essential
services have wasted PEC members' resources for their own gain,
it is the role of government to step in and fix this problem.
Bloated overhead, lavish expense accounts, full-time
employees who never showed up to work all were common practice
at the old PEC. The PEC board and senior management have
clearly taken advantage of its employees and members. PEC
employees are doing their job, and customers have excellent
service at a cost that is considerably lower than investor-
owned utilities in the State of Texas. We must end the PEC
board's and senior management's high salaries and lavish
spending in order to protect ratepayers in our co-op. We need
to implement laws that regulate co-op boards and at the same
time protect customers from high electricity costs.
I believe that statutory changes are the only way to ensure
that PEC keeps its electric rates low and shares its profits
with its members today and in the future. This starts by
overseeing the Navigant audited PEC that was mandated as part
of the settlement proceedings of the lawsuit of which the
Senator spoke. We must learn what went wrong in order to craft
legislation that prevents mismanagement in the future.
The results of the Navigant audit are expected in August,
and nothing short of a complete retrospective look at past
practices and transactions, as well as an analysis of
appropriate benchmarks and standards to apply to PEC's
operations prospectively, nothing short of both will be
acceptable.
Should Navigant fall short, I will statutorily require an
audit to be conducted by the State Auditors Office when the
Legislature reconvenes in January 2009.
Mr. Chairman, public power only works when it is
transparent, and without transparency there is no meaningful
local control. During the next legislative session I am
prepared to file legislation that will require all electric
cooperatives in Texas to comply with the open meetings and open
records laws, to submit annual audits to the PUC for their
review, the Public Utilities Commission for their review, and
ensure fair and open elections at all co-ops in Texas.
The intent of this legislation is to promote transparency
and informed member participation in all co-ops in Texas. I
believe this is the only way to fully prevent mismanagement and
fraud, guarantee low rates for our members, and ensure the
long-term success of one of central Texas' greatest assets.
Thank you for allowing us to be here today.
[The prepared statement of Mr. Rose follows:]
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Chairman Waxman. Thank you very much, Mr. Rose.
Mr. Watson.
STATEMENT OF JOHN WATSON
Mr. Watson. Chairman Waxman and Ranking Member Davis, I
appreciate the opportunity to offer a member's perspective on
the questionable and abusive practices at the Pedernales
Electric Cooperative. I will describe how those abuses led to a
member uprising and reforms. In spite of the problems, I want
to leave no doubt as to my strong support for electric
distribution co-ops and public power.
As a PEC member, I had attended annual meetings and asked
for increased efforts toward greater energy conservation and
increased reliance on renewable energy. I had urged greater
transparency and openness. Those pleas produced no meaningful
results.
In January 2007 the San Antonio Express News ran an article
detailing PEC Director compensation as disclosed on the form
990 from the year 2000. This report triggered a series of
events that I believe can rightly be called a member uprising.
We began to organize. Other newspapers began to investigate and
report on the PEC. A class action lawsuit was filed alleging
abusive practices. Elected officials were besieged by
constituents and began demanding more information and reforms.
Among the abusive practices uncovered at PEC were excessive
compensation and benefits for Directors and senior management;
a closed nominating and election process leading to a self-
perpetuating board with an average tenure of 22 years; closed
board meetings; absolute refusal to return capital credits to
members; refusal to provide information on the wholly owned
subsidiary, Envision, and an utter lack of transparency and
openness.
Through the lawsuit discovery, we later learned of still
more serious lapses in fiduciary responsibility and ethical
conduct.
In January 2007 a small group of members decided to take
coordinated and decisive action to establish co-op member
control, the core co-op principle. We continued to attempt to
work within the existing framework. I called the former general
manager, Bennie Fuelberg, and asked to appear before the
board's nominating committee. Seven members attended and
presented three candidates. All were highly qualified, but the
committee renominated the directors whose terms were expiring
so they were unopposed on the proxy ballots mailed to members.
Next, a group of members attended the March 2007 board
meeting and presented a by-law amendment to change the
nominating and election process. Again, we were ignored.
In May 2007 the class action lawsuit was filed. Throughout
the summer and fall we continued to voice our demands. By now,
those demands included the resignation of all directors.
In November 2007, after plaintiff's deposition of senior
co-op management and directors, several rapid developments
occurred. The general manager, Mr. Fuelberg, and the president
of the board, Mr. Burnett, announced their retirements. New
nominating and voting procedures were adopted. The return to
members of $7.3 million of capital credits was announced.
In January 2008 Mr. Juan Garza was hired as the new general
manager. The local District Attorney launched a criminal
investigation. The board meetings were open to members for the
first time.
In March 2008 settlement of the class action lawsuit was
announced. In May, despite almost 300 objections protesting the
terms of that settlement, the judgment was entered. That
judgment is now on appeal.
Most members I think believe strongly in electric co-ops
and public power. We are convinced that the efforts of
activated members such as myself and Mr. Higgins; the press,
especially Claudia Grisales of the Austin American Statesman
and Jodi Lehman of the Horseshoe Bay Beacon; elected officials
such as Senator Fraser and Representative Rose; and the lawsuit
have combined to begin the process of establishing control of
our co-op by its members. Quite frankly, we were asleep at the
switch for far too long.
Mr. Garza has committed to work for many of the reforms we
have long sought, including bringing PEC into the provisions of
the Texas Open Meetings and Open Records Act; however, I
endorse it being embedded in the legislation.
Transparency and openness, combined with fair elections
leading to reduced director tenure, could have prevented many
of the abuses we suffered at Pedernales. Much remains to be
done, and we intend to remain active and vigilant. Working with
Mr. Garza and the five newly elected directors, we will push
until we have a co-op that is truly responsive to its members
and complies fully with the co-op principles.
Thank you for this opportunity to tell part of our story. I
will be pleased to answer any questions that the Members might
have.
[The prepared statement of Mr. Watson follows:]
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Chairman Waxman. Thank you very much, Mr. Watson.
Mr. Higgins.
STATEMENT OF CARLOS HIGGINS
Mr. Higgins. Mr. Chairman and Members, I am Carlos Higgins
from Austin, TX. When you look at the name of our co-op, you
would naturally try to pronounce it Pedernales. Those of you
who knew President Johnson probably see him saying Perdinalis.
That is the way it is pronounced down there. It is along the
Perdinalis River.
This is my message, though: we know it was a big mistake
now to trust that general manager and our board. We don't know
yet what all they have done to us or how much it is going to
cost us. It took that expensive class action lawsuit to get
where we are now to find out that we had serious problems, and
the pending settlement of that lawsuit is awful.
What can you do for our co-op and other co-ops? I do have a
suggestion. First, what went wrong here with our co-op, we had
a general manager who became so powerful he was able to hand
pick the board, get-along board members who just merely did as
they were told, apparently. The board members ignored their
fiduciary obligations to the co-op owners and they apparently
did not know they were not the general manager's employees or
his amen chorus. They were quick to help themselves, though, to
lucrative compensation and perks, but gave us little to not
oversight of our co-op.
My wife and I have been members of the Pedernales Electric
Co-op for 34 years now. Our co-op has grown immensely in those
years, but we have been completely satisfied with the service
and the rates all that time. We do get reliable service.
We are like the majority of the owners: we lead fairly busy
lives, and we thought we had no reason to worry about our co-
op's operations. Board members seemed to be among the pillars
of their communities, so trusting them seemed to be a
reasonable thing to do. We were wrong.
A small group of owners had their suspicions about what was
going on, especially when they got totally brushed off by the
general manager and the board. They persisted and finally filed
this lawsuit, and that shed some light on what was going on at
our co-op.
This is clear: the board members are guilty of self-dealing
and pretty much being asleep at the wheel when it comes to
their oversight responsibilities. The is what the lawsuit did
for us: all of the attention and publicity about the misdeeds
at the PEC gave us some reforms, mainly letting the membership
actually vote for its own board members.
So is everything OK now? Not at all. The lawsuit is far too
expensive. It is costing about $4 million. As to the settlement
of that lawsuit, it was forced on the membership. I challenge
any of you to read through this settlement agreement and then
stand up and say, well, not so bad. It is really bad.
More than 200 members took time to strenuously object to
provisions in this settlement. The court ruled that three of
our members, the plaintiffs in the lawsuit, were competent and
able to speak for all 223,000 members. It is fiction to claim
that they even came close to representing the views of the rest
of us.
In this settlement we, the members, forgive anyone and
everyone and their attorneys for anything they may have done at
the PEC, whether their deeds are known or unknown. We
specifically forgive even any oral agreements that may have
been made and any trusts that may have been set up. That
arouses my suspicions right away.
What might all this forgiveness cost us? We don't have a
clue. We don't know. Some people tried to defend the settlement
on the basis that it gave us good reforms at the PEC. That is
not exactly so. What gave us those reforms is the discovery in
the lawsuit and the subsequent publicity, the spotlight of the
press revealing misdeeds and who the culprits are.
I doubt that this is a widespread problem among other co-
ops. It is probably just ours, and we don't really want all the
other co-ops and their members to be burdened because our
manager and board messed up. Co-op owners are also, of course,
co-op customers, and so that is an idea that ought to be
protected and preserved. I really believe that. We have been
punished enough at our PEC, so we don't want a bunch of other
regulations to come down that burden us further and punish us
any more.
So what is the solution? We had a general manager grow so
powerful he could run our co-op like it was his personal
fiefdom. It took that expensive and awkward lawsuit to
penetrate his barriers. We need a better tool.
I think if we had had any authority at all under our own
by-laws, a way to get through there and make some changes, we
could have reigned these people in a whole lot sooner with a
whole lot less fuss and cost. In our by-laws, all the power
resides in our board. All of it. If the board chose to do so
right now, legally and quickly they could do away with all of
the reforms that have gone on before. So we really need some
tools. That is what I recommend: that as a minimum, that the
by-laws of co-ops be required to give members some ultimate
control.
You have to be careful about how you structure the by-laws,
but members have to have some tools. They can be as vigilant as
all get-out, but they have to have the tools that allow them to
do something about it, so that is my recommendation.
One more thought, Mr. Chairman. Thank you very much for
allowing me to speak. We like our new general manager, Juan
Garza. He is getting our co-op back on course, but it is not
that easy. The problem is for at least one more year he is
working for this board, the majority of them who got us into
this mess, so he is not really the guy that you need to ask the
tough questions to. Those two and others are out there hiding
some place. You really need to bring them in and make them
answer some of these questions.
Thank you very much.
[The prepared statement of Mr. Higgins follows:]
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Chairman Waxman. Thank you, Mr. Higgins.
Mr. Garza.
STATEMENT OF JUAN GARZA
Mr. Garza. Mr. Chairman, as the son of a migrant farm
worker, Alejandro and his wife Maria, I am deeply, deeply
honored to be here. Thank you so much for inviting us.
President Johnson taught school in Cotulla, my home town,
and even though he did teach there, we never were able to teach
him that the proper way to pronounce Pedernales is Pedernales.
[Laughter.]
As general manager of Pedernales, I have been selected to
lead the Nation's largest electric cooperative, serving over
225,000 members, which was 219,000 when I started just in
February.
PEC has a rich and proud heritage of providing reliable
election service to its members. Historically, PEC has focused
on providing outstanding customer service, strong system
reliability, financial stability, and fair rates. This focus
has resulted in PEC being rated No. 1 in the country in
customer service and No. 5 of all utilities in the country in
overall customer satisfaction by J.D. Power.
Throughout the service territory, as I have toured it since
I have been appointed, I hear about the quality of the
employees at PEC. They are the backbone of this company, and
they carry out the mission of the corporation in a manner that
makes me proud, indeed, to be their general manager.
The people on this panel, especially Senator Fraser and
Representative Rose, have been directly involved in helping to
bring about dramatic and long-lasting changes to PEC. I know
they are here today because they are interested in the future
well-being of the cooperative.
For the past 18 months Pedernales Electric has been faced
with the challenge of responding to the concerns of its members
regarding openness, transparency, and governance issues;
however, I am here today to testify that these challenges have
resulted in significant changes at PEC.
In short, the cooperative system of local member control I
believe has worked. Under the leadership of Mr. E.B. Price, the
PEC's board has made these major changes: Our election system
was revised to be more democratic and open. This past Saturday
we had 58 candidates vying for five board positions. Over
30,000 members voted in that election.
The position of coordinator, which is a paid chairman's
position, the director emeritus, and the honorary director
positions have all been eliminated and abolished.
Our Web site now includes an array of business and
governance information, including board meeting agendas, our
IRS 990 filings, and other critical information.
We have implemented a credible policy that includes
expenses of the board being reviewed by a newly created expense
and audit committee and made public. I want to add that even
though I was at the game last night, I paid for that out of my
pocket and I also used the Metro system.
The monthly board meetings are now open to the public,
videotaped, and posted online to allow for greater member
participation. A board compensation committee has been
appointed to make recommendations for adjusting compensation,
which will be retroactive to March 10th when the settlement was
first announced of the lawsuit.
On March 10th a settlement agreement of the lawsuit brought
by our members was reached. Judge Dietz, who presided, approved
the agreement in April. PEC will comply with the terms of the
settlement agreement, even though it is currently under appeal
by a couple of our members.
As part of the settlement agreement and as a condition of
my employment, Navigant Consulting and Cox, Smith, Matthews, in
cooperation with the Public Utility Commission of Texas, are
conducting an investigation into the cooperative's operations
over the last 10 years. The results will be reported to our
members.
On the issue of capital credits, it is important to note
that capital credits are not held in a fund; rather, they have
been invested in electric infrastructure of a growing
cooperative. This investment of capital credits reduces the
need for borrowing, thereby lowering our rates. While the
cooperative industry averages a percentage of assets at just
over 40 percent, PEC's corresponding ratio is about 35 percent,
and for all but the last 2 years it has hovered at or below 30
percent. This fact should dispel the myth that PEC has been
hoarding dollars and not paying capital credits.
The disbursement or reinvestment of capital credits is a
local business decision that should be made annually, given the
financial and operational status of the cooperative, with
input--emphasize input--from the members and full disclosure of
the decision annually.
The PEC has made dramatic and long-lasting changes. As we
strive to adhere to these new policies of openness and
transparency, we will also strive to be a national model for
the principles upon which the cooperative was originally
formed. We will continue to strengthen our relationships with
our members, elected officials, and other interested parties.
We hold ourselves accountable to the new standards our members
have set because they are the reason PEC exists. As member
owners they have the right to a voice in the process, and we
have a sacred obligation to ensure that their voice is being
heard and acted upon.
This has been a very difficult year for the PEC, but when
you step back and look at the relatively rapid change in
policies and the result of our historic election, I want this
committee to know that the co-op system of member control
works, at least I believe that has been our experience at PEC.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Garza follows:]
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Chairman Waxman. Thank you, Mr. Garza.
We are now going to go to the Members' questions at 5
minutes each, and I will start off with myself.
What you have described is really astounding. Here is a co-
op--co-op, the name sounds like everybody is part of it and it
is going to serve everybody's interests, and they are
delivering the power. There doesn't seem to be any question
about that. They are doing their job of getting electricity to
their customers. But it is a closed system, very much like any
undemocratic institution around the world. I think Mr. Mugabe
could probably learn some things from Mr. Fuelberg. It is a
closed system.
Now, I could go through all these things that you have
outlined: the expenses for travel, the self-dealings and
pensions, the chocolates, the girlfriends traveling around,
their wives getting physicals. It is just plain self-dealing,
and I am sure in their minds they rationalized it. They had
been working there for so long and they are delivering the
electricity, and why not a few little perks, and who is going
to ever know because they are never going to let it out
publicly.
It took a lawsuit, it took courageous and crusading
journalists, it took members of the legislature to try to get
information about--forgive my pronunciation--the Pedernales Co-
op. And even then, as Mr. Higgins points out, we don't know
that it might not revert back until some of the board members
who perpetuated all of this are replaced, or at least they are
on notice that what they do is going to be made public.
It is what we have heard on this committee over and over
again. We have heard from investors who tell us that the board
of directors set the salary and compensation of their
executives, and they walk away with huge bonuses, even when the
corporations go in the tank and people are losing their money
who owned the corporation and people are losing their jobs that
worked for the corporation and the CEOs walk away with a huge
amount of money.
It seems to me that President Bush should be going back to
Texas to try to democratize the co-ops. It would be a chance
for more success there, I think, than some of the places where
we are making a huge military commitment.
Mr. Garza, how do you respond to what Mr. Higgins said
about the settlement? Do you think it was the best settlement
just to avoid throwing more money into the lawsuit and didn't
really resolve all the issues?
Mr. Garza. Your Honor, it was my considered opinion that it
was. The lawsuit was draining the energy of the co-op and the
focus away from doing our job, and I felt that we needed to
bring this to as quick a halt as we could. The minimum price
for those lawyers was something like $500 an hour, and every
hour just keeps mounting the cost.
Chairman Waxman. Who paid for the lawyers?
Mr. Garza. The insurance company is paying for a portion,
$2.4 million, and the co-op membership is paying the remainder
of it, $1.6 million, for a total of $4 million.
Chairman Waxman. Were co-op members paying for both sides
in the lawsuit, the plaintiff and the defendants?
Mr. Garza. In effect, that is basically what it amounts to,
Your Honor.
Chairman Waxman. I am just a chairman, not an Honor, but
thank you. [Laughter.]
Well, that sounds like public financing of lawsuits. A lot
of people say we shouldn't allow these lawsuits because so much
money goes into attorneys' fees. Well, that is absolutely
right. They shouldn't be necessary. But if you didn't have that
lawsuit, Mr. Higgins, I suppose a lot of these facts never
would have gotten out. Is that your assessment?
Mr. Higgins. Absolutely. That is the only way that we were
going to learn what was going on there was this lawsuit.
Chairman Waxman. You had to force the information out. Do
you think if we had a requirement in all of these co-ops around
the country--we don't know if any other co-op is acting the way
Pedernales has, but if we had at least a requirement of more
openness with the by-laws allowing members to get information,
try and eliminate the iron curtain that blocks out what the
investors and the owners of the co-op should know, do you think
that would be helpful?
Mr. Higgins. Absolutely, but you need two things. You need
at least some of the members that are vigilant, paying
attention, and trying to find out what is going on, but they
need the tools to work with in order to do anything about it,
and we did not have the tools here, and that is what I am a
strong advocate for. Give us the tools to work with. We don't
have them yet really. We have some reforms, but they can be
reversed.
Chairman Waxman. I would like to get from you in more
detail some of your recommendations for what you think the
Federal Government might do by way of legislation.
Mr. Higgins. Yes, sir. I would be happy to.
Chairman Waxman. I say that, I want to make it very clear.
We don't want to regulate these. We don't want to put extra
burdens on them financially. We are not talking about that. I
would just like to make sure that there is an openness in co-
ops so that when the pillars of the community tell our members
that they are certainly running honest co-ops, not like those
Pedernales people, we don't know if that is true or not.
Mr. Higgins. And one other thing there. When you look at
how much they have siphoned off, whatever amount that is, we
don't know, but whatever it is, when you spread it among
223,000 or more people or households, then it is not going to
make or break any individual, and it may not be enough to get
our attention to know that there is something going wrong
there, but whatever amount it is spread among it ought to be
stopped. It is the principle of the thing.
It is repugnant to have people like this get in and abuse
our trust in these positions, siphon off an awful lot of money
to feather their own nest at our expense.
Chairman Waxman. Thank you very much.
I think Mr. Marchant is the one I would call next to pursue
questions.
Mr. Marchant. Thank you, Mr. Chairman.
Mr. Rose, you have outlined a prospective legislative
package if the Navigant audit does not come back the way you
think it ought to. Do you have the same kind of agreement with
the Senate as far as their willingness? Senator Fraser, are you
willing to enter into the same kind of legislative package?
Mr. Rose. I will begin by saying the three legislative
proposals that I outlined in the opening remarks I want to have
occur however that Navigant audit turns out. We need open
meetings and open records to apply to all co-ops across the
State. We need all of our co-ops to submit third-party,
independent audits to the Public Utility Commission annually,
in my opinion. We also need minimum standards of governance so
that good people can run for the board and have a fair shot at
being elected.
Unless those three things occur, I don't think we have real
local control. If we have real local control, we have over
200,000 highly qualified, very intelligent, very able members
of the co-op who are going to be able to make sure that goes
well.
So the Navigant audit, Congressman, it is important for us
to monitor, it is important for us to see just what happened so
that we can figure out what is needed in the way of reform. If
that Navigant audit stops short of disclosing everything it
needs to do from past practices and policies and abuses, then I
believe the State ought to step in, and I believe we ought to
mandate the same State audit that the Senator and I spoke about
earlier this year requiring of the co-op.
Mr. Marchant. Senator, what course would you plan on taking
in your committee?
Mr. Fraser. I think Representative Rose has outlined it
exactly right, the things that we have to do is to put a little
sunshine on this, that open records, open meetings are a must,
and I think it will have broad support, bipartisan support in
both the Senate and the House. But we have also got to ensure
fair elections and also have the ability to audit.
One of the things that we are going to be looking at is a
sunset review. They are the equivalent of a quasi-State agency,
and the State has to know what they are doing, of which
obviously in the past we haven't had the ability to do that. So
it is going to depend a lot on what happens between now and
November, but we have, as you know, the authority in Texas the
any regulatory authority that we need, even to the point of
dismissing the current board if needed.
Mr. Marchant. Thank you. It is a little bit like being in
high school again, being in Congress. They ring the bells. We
have votes.
Thank you, Mr. Chairman.
Mr. Issa. Would the gentleman yield?
Mr. Marchant. Yes. Absolutely.
Mr. Issa. Thank you. If the gentleman would yield, I just
want to followup on the gentleman's statement. He knows more
about Texas than I do, but I just want to understand. You have
the ability essentially to regulate this and any corporation,
and if you choose to you can create all the transparency that
you want to within State law; is that correct?
Mr. Fraser. I am going to clarify. You used the word
corporation, and regulating the corporation is not----
Mr. Issa. Let me rephrase. I will take the corporation out.
What Federal assistance, if any, would you need because you
lack the authority within the State of Texas to create the
transparency you need?
Mr. Fraser. We appreciate the input of this committee
looking at it, but Texas has all the authority we need and
actually are moving forward in making sure that we exercise
that authority, so there is nothing in the regulatory spectrum
that Texas does not have.
This is a quasi-State agency. It was created by the State,
and we believe we have sufficient authority to do anything we
need, even to the point of full regulation.
Mr. Issa. So today the things we should realize are: don't
mess with Texas, and let's get on to providing low-cost
electricity in a time of incredible spiraling energy costs,
natural gas, coal, and all other forms.
Mr. Fraser. And we believe this is the State's issue and we
have sufficient authority. We are not asleep at the wheel. We
are aggressively going after this and we will address this. I
am making sure. This happened once; I want to make sure it is
not happening other places. In Texas we have 66 co-ops. We are
looking at all of them.
Mr. Issa. Excellent. Thank you.
Mr. Chairman, I would also ask unanimous consent that my
opening statement be made a part of the record.
Chairman Waxman. That is already agreed to.
Have you already adopted your legislation, or are these
just proposals?
Mr. Fraser. We have not been in session since this is going
on. We go into session January 8th of next year, and Patrick is
going to carry the legislation on the House side, I will be
carrying it on the Senate side. And so the answer is no, it has
not been adopted, but I have an interim study going that we are
in the process of meeting on right now, so it is being
formulated.
Chairman Waxman. Well, I wish you all the best.
Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
I think Mr. Clay wanted to go ahead. I yield to him.
Chairman Waxman. Mr. Clay, I will recognize you.
Mr. Clay. Thank you, Mr. Cooper, and thank you, Mr.
Chairman.
The leadership of Pedernales didn't just spend co-op money
on hotels and flights for themselves and their spouses; they
also charged Pedernales for thousands of dollars worth of meals
and drinks. One group dinner at a San Antonio steak house cost
$3,500. Another steak house meal cost $2,900. We have the co-op
credit card statements and receipts for a lobster dinner for
two and a trip to an oyster bar in New Orleans.
Here is a bill from Morton's Steak House, 7 rib-eyes, 20
mini crab cakes, 20 salmon pinwheels, even 3 callosal shrimp
Alexanders. Those were $59 each.
We also know the co-op was paying for bar tabs when Bennie
Fuelberg and the board of directors drank while traveling for
conferences and meetings. The members were paying for alcohol
at a jazzy hotel lounge in New Orleans and hotel bars at the
Four Seasons and the Ritz Carlton in St. Louis, Big Sky Resort
in Montana, and I could go on.
Mr. Garza, was this kind of spending or fancy meals and
drinks excessive to you?
Mr. Garza. Yes, it was.
Mr. Clay. Will the new expense policy allow the directors
to charge the co-op for their fine dining?
Mr. Garza. No, it will not.
Mr. Clay. You have changed that policy in a way that what
will happen? Will they pay their own meals?
Mr. Garza. Theoretically it could happen. Yes.
Mr. Clay. And they will pay for their own bar tabs?
Mr. Garza. Yes. The policy does not allow paying for
alcohol.
Mr. Clay. Let me ask Mr. Watson, Mr. Watson, were you
surprised when you learned that you and the other co-op members
were footing the bill for these steakhouse dinners?
Mr. Watson. Yes, sir, I was.
Mr. Clay. And the former general manager also charged
thousands of dollars to his co-op credit card for Godiva
chocolates. Apparently he had Godiva chocolates in his office
for select staff and visitors. Is that accurate, Mr. Garza?
Mr. Garza. That is correct.
Mr. Clay. And I assume the co-op is no longer spending
thousands of dollars on chocolates?
Mr. Garza. That is correct.
Mr. Clay. All right. I am glad to hear that these abusive
practices have been stopped. What concerns me is that the
excessive spending on meals, alcohol, and chocolates went on
for years and years without being detected, and they could be
going on at other co-ops. It is the absence of oversight and
true member control that allows this kind of behavior to go
undetected for decades.
I will yield to the gentleman from Indiana.
Mr. Burton. I just have one question. Well, two really. Who
won the ball game last night?
Mr. Garza. The Nationals.
Mr. Burton. I was just kidding.
Mr. Garza. The Nationals, bottom of the ninth.
Mr. Burton. OK. All right. Do you have a Public Service
Commission in Texas? I presume you do.
Mr. Garza. Yes, we do.
Mr. Clay. I am going to reclaim my time and yield back.
Thank you so much, Mr. Chairman.
Mr. Burton. I just have one or two questions real quick.
Mr. Clay. The gentleman has time. Why doesn't he yield?
Mr. Burton. We have votes on and I am not going to take all
the time.
You have a Public Service Commission. I am just curious.
The co-ops are regulated or overseen by the Public Service
Commission, aren't they, in Texas?
Mr. Fraser. No, they are not.
Mr. Burton. They are not?
Mr. Fraser. The wires and transmission is regulated by
rate. We have a postage stamp rate.
Mr. Burton. OK.
Mr. Fraser. But the rate authority is not overseen. They
are unregulated.
Mr. Burton. So I presume your legislation is going to give
the Public Service Commission some oversight authority there?
Mr. Fraser. We are going to determine what is needed. We
believe that if you put sunshine on the process where we allow
open meetings, open records where the members can see what is
going on and you have fair elections, we solve a lot of that.
Mr. Burton. Well, Senator, the only reason I ask that is in
any State it seems to me that if there is a question of abuse
there ought to be a regulatory agency they can go to
immediately and start raising the issue so that there can be an
investigation. I don't know if it is that way in Indiana. I am
going to check after having heard your testimony.
Mr. Fraser. The place of appeal on this, we didn't have a
place for them to go for appeal. I agree with you.
Mr. Burton. Thank you.
Thank you, Mr. Chairman.
Chairman Waxman. We do have some votes on the House floor.
We will recess. I think we can get back here in 15 or 20
minutes, so let's recess until 11:50.
[Recess.]
Chairman Waxman. The hour of 11:50 having come and gone, I
would like to reconvene the meeting. I am sorry it took a
little longer than I had hoped it would.
To pursue further questions, I want to recognize Mr.
Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
Mr. Garza, does Pedernales belong to the National Rural
Electric Co-op Association?
Mr. Garza. Yes, it does.
Mr. Cooper. Are you aware that Mr. English, the head of the
Association, who will be testifying on the next panel, has at
least stoutly claimed to me--and I think this is an official
position of the Association--that co-ops are not public power?
Mr. Garza. I have heard the argument. If you look at
Pedernales, we buy 99 percent of our power from the LCRA. We
are accountable to our members, which essentially is the
public. To me that pretty much defines public power. But I
understand there is another argument here.
Mr. Cooper. But Representative Rose, Mr. Watson, and
perhaps some others stoutly stress in their testimony that they
believe in their co-op, they believe in public power, and yet
you belong to a trade association that says you are not public
power?
Mr. Garza. That is correct.
Mr. Cooper. Why do you pay dues for an organization that
doesn't uphold your beliefs?
Mr. Garza. Because we come from the same roots as the rest
of the co-ops in the country.
Mr. Cooper. This is the opposite. You say you are public
power; they say you are not. Who is right?
Mr. Garza. I believe that I am right.
Mr. Cooper. But you are paying your ratepayers' money to an
organization that says you are wrong.
Mr. Garza. If you go beyond that fundamental difference of
opinion--and I understand that it is a difference--and you look
at the technical problems that we face as distribution co-ops,
how to deal with the----
Mr. Cooper. I agree on engineering and things like that.
Mr. Garza. We can share good information.
Mr. Cooper. But on the fundamental, philosophical point of
what your organization is, as you say, there is a fundamental
disagreement, so why do you belong to it?
Mr. Garza. For the purpose of sharing information on how to
best serve our members, and especially sharing technical
information on how to best design and implement the most modern
innovations that we can use to serve our members.
Mr. Cooper. Would you belong to a communist organization
that had good engineering capabilities?
Mr. Garza. Absolutely not.
Mr. Cooper. But one that denies the existence of public
power for co-ops is OK?
Mr. Garza. Even though it is a fundamental difference, I
consider it something that is outweighed by the value that they
bring in terms of the exchange of technological knowledge.
Mr. Cooper. Senator Fraser.
Mr. Fraser. Yes. I think the clarification you are trying
to make, I actually agree with the concept that they are not
public power because they are a distribution. Really they are a
resale and a billing operation as a co-op. If they were
generation, as we have nine generation co-ops, they are part of
the power generators. And so I would say that Pedernales, I
don't think they are public power. I think they are a
distribution and a billing entity as a co-op.
Mr. Cooper. So you are contradicting your colleague,
Representative Rose, and Mr. Watson----
Mr. Fraser. Well, I won't speak for Representative Rose.
Mr. Cooper [continuing]. In their sworn testimony before
this committee?
Mr. Fraser. I am giving my opinion that I believe that it
is a distribution company.
Mr. Cooper. So this is a fundamental difference of opinion.
Another fundamental issue--and I don't want to unsettle your
settlement down there, but I am a little worried that you all
may have been hoodwinked and perhaps sucker punched by this,
because everyone wants full disclosure, right?
Mr. Fraser. And, Representative Cooper, I appreciate that.
I have oversight over the industry, and the industry--this is a
co-op distribution company, and I personally see that----
Mr. Cooper. But, Senator, in response to Congressman
Burton's question it was revealed that there was no one to
complain to in Texas State government about co-op problems
because you all had abjured your jurisdiction, apparently.
But this other fundamental disagreement we need to get into
is this: everyone is for disclosure. Why hasn't anyone told you
it has been a Federal tax law since 1972, a long time, that
every electric co-op shall keep open books and records
accessible to members at any time? That was a ruling from 1972.
All we need to do is enforce existing Federal law.
Mr. Watson. May I comment on that?
Mr. Cooper. Yes, sir.
Mr. Watson. I am aware of that law. I will say about the
NRECA, last year when I began looking into capital credits I
became aware that there was something called the Task Force
Report on Capital Credits that had been prepared under the
auspices of the NRECA. I called the NRECA and talked to, I
would say, about six or seven people attempting to get a copy
of that report, and they would not give it to me. They asked
me, are you a board member? I said, no, I am merely the person
that pays your salary. I am a member of a co-op that is a
member of the NRECA. Yet they stonewalled me on attempting to
get that.
Now, on public power I finally did get it through the Blue
Bonnet Electric Co-op in Texas, of which I am also a member.
But I disagree with Senator Fraser. I believe it is public
power, although we are in a shady area here.
I think when Texas deregulated utilities they let the co-
ops slide into a netherland; yet, on the other hand, with all
due respect to our elected representatives here, I have
observed Texas government for many, many years. I am 71 years
old. I worked in the government when I was in law school.
Regulatory agencies in Texas are all too often the captive of
the regulated industries. It would not lend comfort to me to
think that the PUC was all we could rely on. Please do not
accept assurances that the State of Texas can take care of its
own problems. We have often demonstrated that, in fact, we
cannot do that in Texas.
Mr. Cooper. Representative Rose.
Mr. Rose. Congressman, I appreciate all the work that you
have done on this issue. I read your article on the plane
write-up here last night. I will say this: the Senator and I
both agree that it is important for us to have meaningful local
control at the co-op level, and ultimately that is the best
check and balance on decisions at the board and senior
management level in co-ops.
I do believe in statute we can require open meetings and
open records. I do believe we can require an annual report to
the PUC. And I do believe we can set minimum standards for
governance. If we do that, I believe we have taken a long step
forward toward correcting these problems moving forward. And on
those three points we absolutely agree.
Mr. Cooper. I heard that you favor a State audit. It is my
impression that Pedernales rejected a State audit because that
would have been----
Mr. Rose. Yes, sir. The Senator and I formally requested
that earlier this calendar year. I believe the more light we
can shine on these past practices the better for our co-op and
our membership so that we can figure out exactly what is needed
in the way of reform and statute as we move forward. This
Navigant audit, we are working very closely, the Senator and I
both are, with Navigant and with the PUC as they oversee and
review. I said it in my opening remarks and I will say it
again: if that Navigant audit stops in any manner, shape, or
form short of where they need to get totally to get the answers
to the co-op membership, the questions that we have, I will
move forward next session and require a State audit.
Mr. Cooper. Last question, because I see my time has
expired. Is Pedernales today telling every customer what is in
his or her capital accounts?
Mr. Watson. No.
Mr. Cooper. Why not?
Mr. Watson. I don't know. It is required by law, and yet
they are not.
Mr. Cooper. So this is private property that citizens are
not allowed to know about?
Mr. Watson. Well, at least it is not being reported to us
on an annual basis, which is my understanding of what the
Internal Revenue Code requires.
Mr. Cooper. After all the turmoil and upset you all have
gone through, all the $4 million in legal fees, members still
don't know exactly what they own?
Mr. Watson. That is correct. And I will also say that 2
weeks ago I requested the opportunity to come to the
headquarters of the PUC in Johnson City and read the minutes
from January 2007 through the current date. Those minutes were
not made available to me, couldn't be made available to me
because they are being redacted. There was even a scrivener's
error or correction in connection with this lawsuit, if you can
believe that old term. Mr. Garza is working hard to open up.
Mr. Garza I hope has become a friend of mine, but he
understands that I am still extremely critical.
We have four hold-over board members from the old regime
who have the nerve to think that they can constitute a
Compensation Committee to correct the mistakes they made
themselves, who are undermining, in my view, Mr. Garza's
efforts to open up this. I am doubtful now whether there is a
majority on the board as it currently exists to voluntarily
come under the Open Records Act, which is what we had all been
hoping for pending legislation, perhaps in the session which
will begin in January. We want it to begin now.
Mr. Cooper. When did Texas stop believing in private
property?
I thank you, Mr. Chairman.
Chairman Waxman. Thank you, Mr. Cooper.
I want to pursue some further questions.
Mr. Watson, you have expressed your view that you don't
think the State law in Texas, as good as it may be, that is
being offered by Mr. Fraser and Mr. Rose is going to be enough.
Is that a correct statement?
Mr. Watson. Well, I am not certain it is going to be
enough. It is easier to kill a legislative proposal in the
State of Texas than it is to pass one.
Chairman Waxman. That is true here, too.
Mr. Watson. And it is possible that these are highly
skilled legislators and influential legislators, and so it is
quite possible that the good legislation that I am sure they
will draft and introduce will, in fact, wend its way through
committees and stalling and go to other committees, the
calendars committee and so forth and so on. It is a very
convoluted process. I am trying not to be too pessimistic about
it; however, I am not sure that will fully take care of it.
It worries me. The practices of the PEC--and I have said
this for almost 3 years now--I believe jeopardized the tax-
exempt status of the PEC, hoarding and building up permanent
equity, which is not permitted; not complying with the
disclosure about property ownership, as Congressman Cooper
pointed out. So some of these may be more national issues or
issues related to matters that are more under the purview of
the committee.
Chairman Waxman. Mr. Higgins, what are your thoughts on
that?
Mr. Higgins. Well, I tend to agree with Mr. Watson here,
but I would just add to that there is one PEC here in one area
of the State, and the members of the legislature in that area
are very concerned and determined to do something. At the same
time, legislators in other areas of States with their own co-
ops will probably have a different view about added regulation.
So it is a huge barrier to overcome to get to the point that
legislation is, in fact, enacted to become law to regulate all
of the co-ops.
Chairman Waxman. Does anybody on the panel know how many
States that have co-ops also have laws like that being
proposed? Mr. Fraser. Mr. Rose.
[No response.]
Chairman Waxman. We don't know that.
Well, I must share my concern also that even when you have
regulatory agencies that are supposed to be watching over the
industries to be regulated, they often become captive of the
industries, themselves, although at least you have some place
to go when you have a complaint with the regulatory agency.
A root cause of the problems at Pedernales appears to be
the undemocratic process it had for selecting its board
members. In theory, the board of directors is directed by the
members and members are able to hold the board accountable
through the electoral process, but that is not what happened at
Pedernales. Until recently, incumbent directors selected a
nominating committee, which in turn endorsed the preferred
slate of incumbent directors, in some cases family members of
the incumbent directors were placed on the nominating
committee, so the son or brother of a director would be on the
nominating committee and, surprise, that director would be
nominated for another term. Only the slate of candidates
approved by the nominating committee appeared on the ballot, so
there was a ballot with just one name for each open position.
It was all but impossible for anyone but hand-picked members to
be elected to the board.
Mr. Watson, when you and other members tried to get some
new candidates on the ballot what happened?
Mr. Watson. When we appeared before the Nominating
Committee in March 2007 we presented three candidates that we
asked be placed on the ballot. We didn't say, don't place your
own other people on the ballot. By the way, it is my
understanding that those seven appointees, one from each of the
seven voting directors, that constituted that committee were
paid a stipend for serving on that committee.
I looked at all 17 directors, 7 voting directors and 10
advisory directors. Every single one of those 17 people were
originally appointed to the board by the board. In other words,
a vacancy occurred during a term--I think that is the way they
arranged it--and a new member was appointed by the board, who
then became the incumbent when the election rolled around. Not
that it would have mattered, because there was never any
competition.
But they absolutely refused. In fact, when we were leaving
the committee hearing that day at the headquarters at the PEC,
Mr. Fuelberg walked us down to the lobby, and we asked him
specifically, is there anything in your view in the by-laws
that would prevent the nominating committee from nominating
more than one person for a position? In other words, setting
up, oh my goodness, an election that actually had two people or
three. He said no, but it had never been done in his memory,
and his memory went back about 40 years. And we said, well, do
it this time, please. Of course, they didn't do it.
Chairman Waxman. Well, as I understand it, you say 40
years. My information was no one successfully challenged the
slate picked by the board's nominating committee for 30
straight years, maybe longer, and when write-in candidates
challenged the official slate the sitting directors exercised
thousands of proxy votes to defeat them. There were even prize
give-aways for members who signed their votes over to the
board's proxy committee. The prizes, which were donated by
vendors, ranged from TVs to gift certificates.
Is that correct?
Mr. Watson. That is correct.
Chairman Waxman. And, Mr. Garza, you wouldn't say this was
a fair or democratic system for electing directors, would you?
Mr. Garza. No, I would not.
Chairman Waxman. Under your State law would that be
prohibited or change, Mr. Rose?
Mr. Rose. Congressman, when this began to come to light a
year ago, the Senator and I both became engaged because we had
members and our constituents and ourselves were all alarmed by
what was going on. This is a statement of the obvious, but,
just to be clear, unless your name is on the proxy ballot that
is mailed to the membership, you don't have a chance to win
that vote. There aren't enough people who show up at the
meeting, itself, to vote. You are overwhelmed by the votes that
come in by mail.
The old PEC process was such that, as Mr. Watson says,
nobody other than the hand-picked Nominating Committee
designated candidates were in the proxy ballot in the mailbox.
So on September 4th of last year I wrote to the PEC and
requested five changes or reforms. One of them was to reform
the election process so that folks could access that proxy
ballot, members could access the proxy ballot by petition. Some
co-ops do that today in Texas.
I want to praise the co-op board for having made that
change and what resulted in 58 candidates running this time.
When I received the ballot in the mail as a member, I had those
names on my ballot and I could cast, as a mail-in ballot--I
attended the meeting, but as a mail-in voter I could choose any
of them.
I think as we look toward governance changes next session--
the Senator and I have been talking about it--we are going to
work on it as we approach the January session. We have to have
a signature-based or petition-based avenue to the proxy ballot
guarantee. Short of that, you don't have real democratic
governance for the co-op.
Chairman Waxman. Thank you.
Mr. Cooper, I want to recognize you.
Mr. Cooper. Thank you, Mr. Chairman.
We have focused just on Pedernales, but let's talk about
another Texas co-op. It is outside of Fort Worth, got tired of
being in the co-op business, so it decided to go in the hotel
and golf course business, borrowed a billion dollars--billion
with a B--and went bankrupt. This is in the jurisdiction of the
great State of Texas. Any opinion on that? Is that proper co-op
behavior? You want to sanction Pedernales going into the hotel/
golf course business like the Fort Worth co-op did?
Mr. Fraser. If you will allow me to answer that, Mr.
Cooper, Federal law very clearly says that 85 percent of the
business has to be in the resale of power. We did have a
renegade that took off.
I actually would take it one step further and say I don't
believe a distribution company should even be in the generation
business. I don't believe they should be getting in outside
businesses. I think they should concentrate only in the sale of
the resale of electricity. So no, that is not acceptable
behavior.
Mr. Cooper. My memory is not perfect, but I think the
committee memo for this hearing said that under investigation
50 percent of the co-ops that have gone into other businesses
have exceeded the 15 percent threshold. That is a 50 percent
error rate. That is a very high percentage. For anyone to
borrow a billion and put at risk the good faith of their
customers who signed up for electricity business, not a hotel
business/golf course business, that is amazing.
Let's look at some others outside of your State. There is a
co-op outside of Atlanta, Cobb, that subcontracted out its
entire operation--every truck, every light pole--to a for-
profit subsidiary secretly owned by co-op managers. So if you
think you have a scandal at Pedernales, Godiva Chocolates and
Celine Dion seems a little bit tame in comparison to this
master plan. And it has been under way and is still underway
for the last 10 years.
Mr. Fraser. One of the things that I plan to pursue is a
prohibition against the co-ops getting into other sideline
businesses. One of those would be generation of power. We have
a concern about using capital credits to invest in power
generation. At least it is my opinion that co-ops in Texas
should not be doing that, and that is not a good use of capital
credit money.
Mr. Cooper. What about our friends in Alabama who did not
have a board of directors election for their co-op for 38
years? So as great as the Texas Legislature is, you all don't
have jurisdiction outside of the State boundaries. These
problems seem to be mounting in a number of different areas,
but it all depends on an enterprising reporter like Margaret
Newkirk, like Claudia Grisales, and there was another one you
mentioned, Mr. Watson, that I don't remember.
Mr. Watson. Jodi Lehman from Horseshoe Bay.
Mr. Cooper. Those have become the watchdogs of democracy.
The legislature was asleep, we were asleep, and those few
intrepid reporters, sometimes relying on inside tips, were able
to blow the whistle and help shine the light where it needed to
be shined.
I thank you, Mr. Chairman.
Chairman Waxman. Thank you, Mr. Cooper.
Mrs. Foxx.
Mrs. Foxx. Thank you very much, Mr. Chairman.
Let me say that I am a long-time member of a rural
cooperative. Both my electricity and my telephone services come
from co-ops. I am very dependent on those for my energy and my
phone. In fact, I think my phone service is superior to phone
service I could get anywhere else.
But I am not a fan of the Federal Government getting
involved in things that it doesn't need to get involved in. I
have made many speeches in this committee, on the floor, and in
other committees about that.
I was the only member of North Carolina State Senate that
voted against allowing co-ops to compete with private
enterprise in North Carolina, because I have great concerns
about that, too. I told the head of my co-op, with whom I have
spoken recently, that I would be happy to come to this hearing
and talk about my concern about the Federal Government not
getting involved, but would also express my concerns that I
have expressed in the past about the role of co-ops.
I guess one of the questions I would like to ask Mr. Fraser
or others on a panel is: how do you think that the problems
that have been exposed by this panel and by Mr. Cooper should
be dealt with if not dealt with by the Federal Government? What
do you think should be done? And if you could make fairly short
answers, then I would like to make a couple of other comments.
Mr. Fraser. Madam Representative, we believe the State of
Texas has sufficient authority to solve this problem. We have
full regulatory control that we can exercise if needed, and we
are in the process to determine that. I appreciate, as I said
in my opening comments, that the Federal Government is looking
at this. We appreciate their interest, but the State of Texas
has sufficient authority and we need no other additional
authority from the Federal Government to address this issue.
Mr. Cooper. Would the gentlelady yield for just a second?
How about on disclosure of private property in Texas? Do
you need any help on that issue?
Mr. Fraser. Disclosure of private property? Give me a----
Mr. Cooper. That is what we were discussing earlier.
Pedernales is still not telling each member what he or she owns
in the cooperative. That is private property.
Mr. Fraser. You missed the conversation I had with Juan
Garza, general manager. Starting within the next billing cycle,
he is going to be putting on all the bills everyone's capital
credit issue. I have been advised by the Association of Co-ops
in Texas that the bulk of those are doing it, but it is
something that I am going to pursue that every month on their
bill it will say that in Pedernales I have $2,342 in equity in
that company.
The thing you are asking is something we have the ability
to do, and it is just a matter of we didn't have it done, but
it is going to get done.
Mr. Cooper. Thank you.
Mrs. Foxx. Mr. Rose.
Mr. Rose. Congresswoman, thank you for your interest and
your service in North Carolina. I have read up a little bit
about you. I don't know how the North Carolina Senate and House
operate, but Senator Fraser and I have been commenting back and
forth today. It is strange to sit here and look at one party on
one side of this dias and the other party on the other side of
this dais, the majority and minority reports, and all those
things. I wish it wasn't that way. It is not that way in Texas.
One thing that I might suggest that we all would agree on,
on both sides of this room, would be that the Federal
Government needs to enforce the laws that exist on the books.
To the extent that we have co-ops spending more of their
capital and resources outside of their core mission, if that
violates Federal statute you all ought to do something about
it.
To the extent that you need to make sure that open meetings
and open records are being followed and that comports with
their nonprofit, tax-exempt status, you have to do something
about it.
What we can do in the State of Texas--and we talked about
this a good bit, but I will just mention--we have to make sure
that every co-op in the State of Texas follows open meetings,
open records. We have to make sure that every co-op in Texas
submits at least an annual audit report to the Public Utility
Commission every year. Part of that might be a very clear
statement about the capital credit accumulation in that co-op,
and that is something that I would like to consider as we move
forward next session. But also, and finally, the third point,
we have to make sure that there are minimum standards of
democratic governance where members can seek, through fair
elections, a membership on their board.
Mrs. Foxx. Mr. Watson, go ahead.
Mr. Watson. Yes, Congresswoman Foxx. Thank you.
One of the things that inhibited us members from learning
about the workings of the PEC was that they filed inadequate
and really incomplete form 990's, which are the forms required
by all non-profits. The IRS, from what I read in the press, has
been starved of enforcement money, so I would urge you to, as a
Congressman, vote to beef up that enforcement, for one thing.
The other problem that we faced was the advisors, the
professional advisors to the co-op. They worked for Mr.
Fuelberg. They did not work for me as a member. They didn't
work for any of us 220,000 members. I am going to name them.
KPMG, the accounting firm, signed off on audits and on form
990's that were incomplete on their face.
The law firm of Clark Thomas, which has represented the PEC
for 70 years probably, one of their lawyers Mr. Fuelberg
reported in public or in the press had said there was a
loophole in the Internal Revenue code that allowed him not to
put in a key employee compensation, which is clearly called for
on the form and in the instructions. So I asked the lawyer, I
said, are you glad now that you advised him that way? And he
sort of gave me a sheepish look. But I understood at the time
that about 40 percent of all Texas co-ops were failing to
accurately and correctly report on the form 990.
That is the only instrument which is publicly available to
members such as myself to learn about the compensation and
perks that are being paid to co-op employees, key employees,
and the board. So I implore you, talk to the Internal Revenue
Service. I understand that within the last year they have let
it be known that they intend to begin finally looking at non-
profits and enforcing the requirements for 990's, but it just
simply takes away the only tool that we had.
Mrs. Foxx. Mr. Chairman, I know----
Chairman Waxman. I think Mr. Higgins had a comment.
Mrs. Foxx. OK. Go ahead.
Mr. Higgins. When you talk about the co-op that went
bankrupt getting into the golf course business, that is a
surprise to me. I don't think that co-ops ought to be in any
business except the business that they are supposed to be in.
When you say there is 15 percent latitude, I wonder about that.
The first red flag that caught my attention was that
apparently nobody was minding the store there enforcing it. The
second big red flag that catches my attention is if you merely
say to the IRS, Enforce these provisions, I am afraid that you
may punish the people who have already been punished if they
put our nonprofit status in jeopardy. So they need to be
enforced, but don't come down on us and take away the
advantages, whatever they are, of having a co-op to begin with.
Mr. Cooper. Will the gentlelady yield just for one quick
point?
Of co-ops, 93 percent are in other businesses, 93 percent,
according to the NRECA, itself, so we have a lot more work to
do in this regard.
Mrs. Foxx. Thank you, Mr. Chairman, for your latitude. I
appreciate it.
I do want to say again that we have excellent service from
our co-op. We had over 900 people at our annual meeting about a
month ago. I have attended every annual meeting for 15 years. I
realize that it is the members who have the control over what
happens in the co-ops. If they want to have things done, they
can have things done. But I have to say the capital credits are
being paid out by our co-op in I think a reasonable manner. I
have not investigated the books, but I have no doubt that
things are being done. We have excellent people on our board.
I want to say that I know there are co-ops that are
operating very effectively and very well, but I think it
worries all of us in Congress when there are problems with some
co-ops. As with other things, it taints everyone involved. I
think that it is in the interest of the co-ops to make things
better so that people aren't tainted.
It is just like us in Congress. If we have a Member of
Congress who performs badly, all of us get tainted with that,
all of get accused of being bad. So I would hope that the
message from this hearing would be that if there are problems,
the co-ops, themselves, and the States, themselves, would start
looking at where the problems are. I don't want to see an Enron
kind of situation develop here because the kinds of comments
you have made--and I have only heard a few of them, and I
apologize, because I had voting in another committee and
testifying in an other committee, so I apologize for being here
only part of the time, but I do want to caution you on that.
I again thank the chairman for his latitude.
Chairman Waxman. I thank the gentlelady for her comments
and questions.
Mr. Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
I think it is good that we have this hearing, and I
appreciate the chairman having it, and Mr. Cooper's asking for
it, but I am a little bit perplexed, having listened to some of
the testimony and having read some of the different things. I
can't fully grasp why the membership of these EMCs--and I
belong to an EMC. I buy my electricity from an EMC and I go to
the annual meetings where new board members are elected, and
there is probably anywhere from 1,500, 2,500 people there.
Why they don't govern themselves? I know from experience we
have had some problems, or at least some complaints, about an
EMC in Georgia. I believe it is the Cobb EMC. Yet, over the
past 8 or 10 years, their electricity bills have come down,
actually dropped about 7 percent, versus where the national
average has gone up about 20 percent. So in Georgia I guess we
oversee ours, I think, and I am not sure what the Senator from
Texas could say about it, but it looks to me like this is a
State issue, and not really a Federal issue.
But I would like to ask the Senator a question, if I could.
From one of the press releases after you attended a cooperative
meeting at the United Cooperative Services you lauded the group
and said the cooperative spirit of rural Texans created this
system which electrified rural Texas is the same spirit that
allows the majority of cooperatives to continue to operate
efficiently and effectively for their members.
Senator, would you say that you have acknowledged that
Pedernales situation is an isolated incident?
Mr. Fraser. We do believe that Pedernales was an isolated
incident. We have not found any indication at the other 65
distribution co-ops in Texas that there is a problem. That
doesn't mean we are not looking, and we have an ongoing
investigation, but I sent a letter to every member of the
legislature asking them to research the co-ops in their area.
We have not found anything else, so we believe yes, it was
isolated.
We are addressing the Pedernales problem, but I am not in
favor of throwing the baby out with the bath water and totally
abandoning the system, because co-ops in Texas are needed. I am
still a strong proponent, and yes, I agree, this is a State's
issue and we have the ability to address.
Mr. Westmoreland. Senator, wouldn't you want to keep that
ability to address it without having the Federal Government
come in and try to do it that might preclude you from
addressing and legislating those things that are inside your
State?
Mr. Fraser. Absolutely. The problem I always see with State
and Federal Government is you are trying to do a one size fits
all. It doesn't work. Texas has a unique system in the way we
do our independent system operator. We are the only State that
is totally defined in one network, the ERCOT, and because of
the way we govern, we take care of our own business. I think it
would be a mistake for the Federal Government to try to
intervene or to dictate a one size fits all policy.
I agree with Representative Rose: if we will enforce
Federal law that is on the books today, that should be done;
but other than that, the regulatory authority should lie with
the State.
Mr. Westmoreland. Thank you. And just keep in mind that we
have two speeds up here, knee-jerk and stop. This is one of
those knee-jerk speed things.
Thank you, Mr. Chairman. I yield back.
Chairman Waxman. Thank you, Mr. Westmoreland.
Mr. Jordan, do you have some questions?
Mr. Jordan. Thank you, Mr. Chairman. This is the first time
I have ever walked in and got to go right away. I appreciate
that. The timing works out nice.
Let me just go to the two members of the General Assembly,
if I could, Senator Fraser and Representative Rose. I
apologize, this may have been asked, but I just read some
information from one of our largest co-ops in our District and
how dissimilar they do things compared to how Pedernales's
board and their CEO handled things. People I think are, as has
been said earlier, very pleased with the treatment they get
from their co-op and how it functions, and we certainly are in
Ohio.
When you did your investigation of Pedernales, did you look
at others, as well, in your State? Was this just totally an
isolated incident, or did you see in your investigation other
co-ops around Texas, or, for that matter, around the country
who were engaged in similar practices?
Mr. Fraser. The last hearing we had with the Senate
Committee of Business and Commerce, we addressed Pedernales,
but we did exactly the same as the chairman is doing here. The
second portion was the co-ops, as a whole. We had the co-op
association, of which we had one of the people from the Texas
Association here today, Eric Craven, which is their political
arm and their lawyer, and we instructed them to go out and look
at the other 65, determine if there is a problem, and bring us
back the data. I also requested the same thing of the other
members of the legislature.
To this point, we have not uncovered anything other than
there have been several small changes in the way that they
elect members of the co-op, some of the reimbursement, travel
policies, some of the capital credits going out. They realize
that they are being watched and are correcting some of the
small problems.
Mr. Jordan. In your professional judgment as the chairman
of the committee that oversees this industry, you felt this was
just one co-op in your State that had a problem?
Mr. Fraser. We believe that. Unfortunately, it was the co-
op where Patrick and I live, and the largest in the Nation, so
yes, we believe that they were a renegade, one co-op, and we
believe that most problems were just in that co-op.
Mr. Cooper. Would the gentleman yield for a moment?
Mr. Jordan. I would be happy to.
Mr. Cooper. We discussed the Fort Worth co-op borrowed a
billion dollars to go into the hotel and golf course business
and then went bankrupt, so there must be at least one other
Texas co-op that has had significant problems, unless you view
in Texas a billion dollars as not being a lot of money.
Mr. Fraser. And, Representative, we are referencing what is
happening during current periods, which is the last few years.
The incident you are talking about was not in the current
period, I don't believe, and we are looking at what has
happened in the last current period. Of the current, ongoing
co-ops that are doing business in Texas, we believe Pedernales
right now is the only one we have identified that are still
doing business in Texas.
Mr. Jordan. Mr. Representative.
Mr. Rose. Congressman, thank you for your question. I think
it would ill suit us to just focus on the question is there one
co-op who has acted poorly. I think for us as we move forward
we have to make sure that each Texan who lives in a co-op and
is a member of a co-op has certain basic assurances.
I have said it before today, but I will say it again: I
would challenge anybody to disagree with the notion that open
meetings and open records aren't appropriate in a co-op
setting. I challenge anybody to disagree with the notion that
we ought to have a democratic election that is fair for the
board. I would also challenge anybody to say that we ought not
have our co-ops report to the Public Utility Commission a basic
accounting of their books, and perhaps also, Representative
Cooper, a snapshot of capital credits and where that co-op is
from that standpoint.
No disrespect, Congressman Westmoreland, but knee-jerk and
stop, neither one of those speeds is appropriate in this
situation as we approach it from the Texas legislature. We have
to be mindful to keep this balance of statutory oversight and
local control. I think those three reforms next session can do
that.
Mr. Jordan. I thank the chairman.
Chairman Waxman. Thank you for your questions.
I want to thank this panel. You have been very patient,
sitting here for quite a long time, but very responsive to the
questions that we have been asking, and also sharing with us
your insights about this whole problem that you have
experienced, and I think it has been very, very helpful. Thank
you so much for being here.
We have another panel, but I want to take a short break of
5 minutes, and then we will hear from Mr. English.
[Recess.]
Chairman Waxman. I am pleased to welcome to our committee
hearing today a former member of this committee and a classmate
of mine when I was first elected to Congress. Mr. Glenn English
is the CEO of the National Rural Electric Cooperative
Association, which is the electric co-op trade association. For
years he represented the sixth Congressional District in
Oklahoma.
I am pleased to have you here. Before you sit down, you
might as well continue to stand and take the oath.
Mr. English. That is the reason I was standing, Mr.
Chairman.
[Witness sworn.]
Chairman Waxman. The record will indicate that was an
affirmative answer.
Mr. English. Yes, it was. It was, indeed. But I have been
mistaken a couple of times in my life, Mr. Chairman. Just a
couple of times.
Chairman Waxman. The full statement that you have submitted
to us will be in the record. We will have a clock to let you
know when 5 minutes is up, and would like you to be mindful of
that, and then we can pursue questions from members of the
panel.
Let's hear from you.
STATEMENT OF GLENN ENGLISH, CEO, NATIONAL RURAL ELECTRIC
COOPERATIVE ASSOCIATION
Mr. English. Again, first of all, let me just say I am
delighted to be back to this committee. I have many fond
memories here of this committee, and am certainly happy to come
back and talk about electric cooperatives.
The first thing, I guess, that I am struck by as I looked
over the witness list, Mr. Chairman, is I wondered where the
Administrator of the Rural Utilities Service was. I know each
time that I ever had a hearing here in this committee dealing
with electric cooperatives, I always invited the Administrator
of the Rural Utilities Service. I got to thinking about that a
little bit, and it made sense to me. Golly, gee, I guess I am
here in place of the Administrator of the Rural Utilities
Service, and that I think says something.
I would like to point out, Mr. Chairman, I think you and I
made a big, big mistake 25 years ago, a big mistake. If you
look at the Rural Utilities Service today, we ended up through
those years of cutting out two-thirds of the staff at RUS, and
if you look at many of the issues that we are talking about
here today, the Rural Utilities Service still has rules and
regulations on the books to be able to deal with those issues,
but they don't have the staff and don't have the funding. They
have pretty much been neutered, to be honest about it, when we
talk about regulation. Probably that is the reason we are
raising questions, and we have some folks here that obviously
are not operating in the way that their membership thinks that
they should have operated. I think that has become very, very
obvious.
I think that is something that we have to weigh and take
into consideration. Maybe that is something the Congress would
want to do, maybe go back and rectify that mistake and bring
the Rural Utilities Service up to full funding and put them in
a position to where, in fact, they are able to carry out all
their duties.
I wasn't aware at the time--maybe you are--the Rural
Utilities Service still has the authority to remove a CEO. They
are supposed to be going in each year and auditing the books of
every co-op. We have an apparatus here that has fallen into
disuse simply because of the fact that the folks don't have the
resources. This was all a part of the changes that took place,
Democratic and Republican administrations and Democratic and
Republican Congresses. We pretty much, as I said, neutered this
agency.
Second point I would like to make, Mr. Chairman, is the
fact that--and I have been struck by this for some time--that
the directors of electric cooperatives are elected officials,
and as we look at them as elected officials, I would suspect
that the members of this committee and certainly in the
Congress should feel a great deal of empathy with some of the
challenges and difficulties that they face. They are not
dissimilar.
I think that you and I have both seen, as we have moved
through the last 30 years or so, that people really make up the
institution. It is not the institution, itself. This democratic
process of ours is good. It is good as far as the Congress and
our Government, it is good as far a electric cooperatives are
concerned. It is the people that we get involved. And so we run
into some of those issues with regard to people, and people,
well, they damage everybody. Everybody gets painted with the
same brush.
I think that is important for us to keep in mind. You made
mention of that, that it would be unfair to just say everybody
is the same. I think that is true.
As we have seen, whenever individuals stub their tow or
perhaps don't move in the direction that the public thinks they
should, then the public brings about changes. Sometimes it
takes time. I have seen an awful lot of elected officials in
this body from time to time who probably were not operating in
a way that their constituents thought they should, but sooner
or later their constituents took action and they dealt with
that. I think we have the same thing here.
In these days, everyone should be sensitive of the fact of
the smell test. I know each and every elected official, they
are always mindful of that, particularly these days. I know the
Congress is particularly sensitive about it. I was when I was
on the Congress. And you are always looking at this thing.
Golly, how would this read on the front page of the newspaper?
What kind of a headline would this make? Maybe you are not
doing anything wrong, but the appearance of impropriety is bad
enough and that damages you if you are an elected official, and
I think that is what we are talking about.
So whether you are an electric cooperative director or a
Member of Congress, we face the same constituency. These are
the same people that elect us. Whether we agree or disagree
with the wisdom of their decision as to who they pick, we have
to work together, and that is true within the electric
cooperative program, as well. We all try to work together, and
you do it in the Congress, and this is a struggle as to how do
we deal with it.
I think it really comes down to this question, bottom line:
how do we come to grips with this with our peers? How do other
electric cooperative directors deal with it, other electric
cooperative CEOs, how do Members of Congress deal with it with
their peers? It is not easy. It is not an easy thing to do.
So I appreciate your having the hearing, and certainly
appreciate the fact that we have had this little airing here
with regard to one property that got off track and obviously
did some things wrong. As I understand it, there may even be
the consideration of criminal penalties against some that
committed some wrongs.
I will be very straightforward with you: if there are any
violations of the law, we ought to prosecute. That ought to be
true for Members of Congress. It ought to be true with CEOs or
directors of cooperatives. That is one line.
Second line I think we come into is this question of it may
not be illegal, but it may not be something that is very
commendable.
Those are issues that I think are going to have to be taken
care of by the local people that they represent, just as they
take care of any disagreements they might have with their
elected officials.
And I think we also come down to the bottom line, Mr.
Chairman, that we all want a fair and open process. We want
everyone engaged in competition. We want everyone doing the
right thing, and we want all of the voters, whether they are
voting for Members of Congress or voting for directors of
electric cooperatives, to be involved in that process.
Thank you very much.
[The prepared statement of Mr. English follows:]
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Chairman Waxman. Thank you very much, Mr. English.
Let me start off. It seems to me that what you said was an
oversimplification. We face our constituents, but it looks like
some of these co-op board members don't face anybody. The
elections, as we heard in this Pedernales case, were rigged. Do
you know if the elections in other co-ops are similarly
undemocratic?
Mr. English. Well, keep in mind I have nothing other than
my own anecdotal information and the surveys that we have
conducted, things that we have seen, because, again, the RUS
would be the ones that should have that information.
Chairman Waxman. Let me ask you a question you might know.
How many States where there are co-ops have regulations like
that which was discussed earlier being proposed for Texas?
Mr. English. As far as open meetings and things of that
sort?
Chairman Waxman. Open board meetings and elections.
Mr. English. I would have to supply that for the record. I
don't have that handy.
Let me just say, though, I can say, Mr. Chairman, that in
the last few years we have had over 40 percent of all the
election co-op representatives, all the board members have
turned over, so you have over 40 percent new board members that
have come in in the last few years. If I recall correctly, that
date is somewhere in the neighborhood of since 2001.
I was comparing that, I believe, with Members of Congress,
and I don't think we have had near that kind of turnover, even
with the elections of 2006, so I don't think you have had a
similar turnover within the Congress.
Chairman Waxman. Turnover, by itself, doesn't really
impress me if it is a rigged deal, because if the father can
pass it on to the son or the uncle or someone else, it is just
going to follow the same policies.
Mr. English. And we have that in Congress. How many of our
colleagues do we know, Mr. Chairman, that find themselves in
similar situations.
Chairman Waxman. Let me move on, because it seems to me
that you are indicating to us there is very little Federal
oversight any longer by the Rural Utilities Service. It looks
like in Texas there wasn't oversight at all that we can tell.
Maybe there wasn't a way to have it. But if the co-ops were
designed to be self-governing through a democratic process, I
just think we have heard a good example of how that process
does not work. The Pedernales Co-op is an example. Its board
election process was rigged. They failed to have competitive
elections for over 30 years, maybe 40. Meanwhile, the directors
who were in charge were enriching themselves at the co-op
expense.
Would you agree that the typical process that provides
accountability at co-ops failed at Pedernales?
Mr. English. What I would say, Mr. Chairman, is obviously
the people down there were not happy with the situation.
Obviously, the situation that developed within Pedernales went
on for some time. Obviously, the people locally at Pedernales
did not take action until recently. But let me just say----
Chairman Waxman. They couldn't. They couldn't take action.
Mr. English. Well, to the contrary. They did. The system--
--
Chairman Waxman. They had to file a lawsuit.
Mr. English. Sure.
Chairman Waxman. It took some enterprising reporters to go
out and break the story. Finally some members of the
legislature looked at it. But there are a lot of places where
the press is not so vigorous because of all the cutbacks in
journalism. There are a lot of places where people don't want
to file lawsuits because it is so expensive. And there are a
lot of places where the legislators think that the heads of the
co-ops are just the powerful local people that are very
prominent and maybe there is nothing going on because they
haven't heard any complaints because there is no press
reporting them.
Mr. English. Let me just first of all say that I am going
to defend the actions taken by the people in Pedernales in
making a change in the leadership in that co-op. I want to
defend, Mr. Chairman, their right to do so. I am going to
defend the fact that they have a right to have as their
representatives on their board who they may choose. And I will
certainly agree with you that the process should be free and
open and we should encourage as many people to participate as
possible. An I will agree with you, Mr. Chairman, that went on
far too long without those kinds of situations coming to bear.
Chairman Waxman. Have you looked at the transparency in
other co-ops in your trade association? Does anybody look at
that or know about it?
Mr. English. Well, we look at the rules and regulations in
which they operate, the by-laws in which they operate and what
those by-laws provide. But this comes back again, Mr. Chairman,
I make this point, to people. Now, for instance, here----
Chairman Waxman. It does come down to people, and I must
say my view of human nature is if you give somebody the
opportunity to go and take a lot of money and use it for their
own purposes, there is unlimited ability to rationalize doing
it.
Mr. English. That is true.
Chairman Waxman. That is part of human nature. That is why
you need some checks on this abusive power.
Mr. English. If I could respond, Mr. Chairman.
Chairman Waxman. Sure.
Mr. English. I would make the point that is absolutely
right. We have seen it. I saw it here when I was a Member of
this body. We saw those individuals taking advantage of the
situation. We had rules and regulations and laws on the books.
We had new rules that were proposed and change, things that
came about, but we still had those individuals come through.
You have always got to be vigilant.
As I say, those are the people, I think, that if there are
criminal violations then we should prosecute. There is no
excuse not to.
Chairman Waxman. OK.
Mr. English. And I think, in fact, we have to recognize it
is not an easy situation to go in and prevent someone from
violating the law or doing wrong. We have tried many times in
this body.
Chairman Waxman. But transparency could help.
Mr. English. And we have an Ethics Committee in this
Congress----
Chairman Waxman. Transparency could help.
Mr. English [continuing]. That doesn't stop that sort of
activity.
Chairman Waxman. I know. Does transparency help?
Mr. English. Certainly, and I wholeheartedly agree.
Chairman Waxman. OK. Let me move on to Mr. Westmoreland,
because he is next on the line of questioning and the red light
is on.
Mr. English. Very good. Great.
Mr. Westmoreland. Thank you, sir.
Mr. English, it could be the case that an elected official
could be under indictment under Federal charges and still be
re-elected by his constituents; is that not true?
Mr. English. Well, that is my understanding, and that is
always the case, and that is the delicacy, I think, of the
problem that we are facing here. You have two bodies of elected
officials. You have the Congress and you have the directors of
local electric cooperatives. That is the reason I think there
should be a certain amount of empathy.
Mr. Westmoreland. The membership can elect anybody they
want to.
Mr. English. That is the situation.
Mr. Westmoreland. Whether they are convicted felons or
whatever. That is up to the membership to elect them.
Mr. English. And it is up to the folks to correct the
problem if they disagree with the representation they are
getting, whether it is their Congressman or their local
director at the local co-op. But there has to be, no matter
whether you are talking about government or whether you are
talking about privately owned electric cooperatives, under any
circumstance the people are the ones who must take charge and
deal with that problem.
Mr. Westmoreland. I have heard it said that the
cooperatives' governance activities are not transparent, but I
was looking through your written testimony here and I noticed
that you had some IRS forms attached to it. Are these typically
made public to the membership, these IRS forms?
Mr. English. These are the new forms and I thought that the
committee would like to see that. Obviously, they are very
extensive, far more extensive than you have for any corporation
in this country, even after Sarbanes-Oxley and Enron. Yes, they
are, and each cooperative is required to make that available to
any of their members who wish to look at it, and certainly it
is available. I think it is even published on the Internet.
Mr. Westmoreland. So you are saying that really, as far as
checks and balances, as far as the EMC goes you have actually
the local control of the membership, you have the Rural
Utilities Service, although under-funded and not really
functioning as it should. It is there as a check and a balance.
Mr. English. Right.
Mr. Westmoreland. And also you have the Federal Government
in the form of the IRS that takes a look at your paperwork.
Really, do you know if all electric memberships have these
annual meetings that I am accustomed to going to and having all
this information printed, or is that----
Mr. English. They are supposed to have annual meetings.
They are supposed to have elections. And certainly these
elections are supposed to be free and open.
Now, when we get into some situations, just as we have
sometimes in Congress and other elected offices, the system
doesn't always work the way it should. Any time that happens we
ought to make corrections.
Mr. Westmoreland. I have seen situations in Congress, Mr.
English, where they won't even take a vote out of fear of
losing.
Mr. English. I am not going to go there.
Mr. Westmoreland. I don't know.
Some have charged that electric cooperatives are no longer
rural. Could you just give us some of the characteristics of
what an electric cooperative is as far as average size,
density, amount of space they cover, or population-wise?
Mr. English. Well, we cover 75 percent of the land mass of
the United States. We have 12 percent of the consumers in the
country own electric cooperatives or are members of electric
cooperatives. And obviously that is a tremendous amount of
territory for a few people. We have nearly 43 percent of all
the infrastructure on the distribution side is owned, so you
have 12 percent of the population having to maintain and own
nearly 43 percent of all the distribution infrastructure of
this country.
Roughly the average size is around 21,000, give or take.
The smallest is less than 200. Pedernales is the largest, I
believe, at 230 I believe is the last thing I heard as far as
the number of members that they have at that cooperative.
Obviously these are very resource intensive entities in that
they have to maintain all that infrastructure, so it is a heck
of a struggle, but I think they have done extremely well. Most
cooperatives have great service.
Mr. Westmoreland. Let me give you a report from Georgia.
Mr. English. OK. Great.
Mr. Westmoreland. The agencies are doing well.
Mr. English. OK.
Mr. Westmoreland. And having been a member of one for
probably and different ones for probably the last 25 years,
they do a good job in servicing their customers. They work hand
in hand with the Southern company, Georgia Power, Oglethrope
Power, other companies in providing Georgians with good
electric service, dependable electric service, and I am proud
to say that in Georgia our electric rates are probably 15 to 20
percent below the national average. I am glad to have the
participation of all the power providers in the State of
Georgia, and your organization is doing a good job.
Mr. English. Thank you very much. That is usually the kind
of testimonials we are used to hearing about electric co-ops
all over the country, so I am happy to say that what you find
in Georgia is not unusual in the rest of the country, and even
the State of Texas.
Chairman Waxman. Thank you, Mr. Westmoreland. Your time has
run out.
Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
Glenn, as a former colleague and friend, I am sorry we
disagree on these issues, but it was actually his kind
invitation to let me speak at the national convention that
first led me to do enough research to understand some of these
things. Now I know that your PAC gives as much money to
politicians as Boeing Corp., so that has a lot of influence. It
has a lot of influence in States, too. You pretty much draft
whatever legislation you want and get exempted, you know, so
there is no oversight.
But I am delighted my friend from Georgia is here, because
we were talking about Cobb Electric earlier, and he was seeming
to say that, well, things are fine, you are doing a fine job,
everything is hunky-dory. Well, Cobb is one of the most
notorious examples in all of America, because is it OK for a
non-profit electric co-op to subcontract out its entire
operation to a for-profit subsidiary secretly owned by co-op
managers and still pretend to be a non-profit? That is a little
bit like subcontracting out the entire Pentagon to Blackwater.
This is an amazing thing. How can you pretend this is a
nonprofit if it is really run entirely by a for-profit? What
standards does the NRECA have if you think that is OK behavior?
Mr. English. Is that the question?
Mr. Cooper. Yes.
Mr. English. OK. Well, let me try to answer that. You had a
number of questions that were tied up in it.
First thing, let me just say we are very proud of our PAC,
and we have made contributions to friends, and you have
received quite a few of those contributions along the way, and
we were pleased to do it. You were previously very supportive
of electric cooperatives.
Mr. Cooper. I still am.
Mr. English. Well, we disagree on that for sure.
Mr. Cooper. I still am.
Mr. English. I guarantee you we disagree big time on that
one.
Now let me finish the question here. The issue you come
down to is I could have some very serious disagreements with
the way the Congress has been contracting out a whole number of
services as far as----
Mr. Cooper. Mr. English, the question is----
Mr. English. You asked me the question.
Mr. Cooper [continuing]. Standards that NRECA----
Mr. English. Mr. Cooper, you asked----
Mr. Cooper. Mr. English, you are no longer a Member here.
Mr. English. Let me finish my question.
Chairman Waxman. Both of you----
Mr. English. Let me finish my answer.
Chairman Waxman. If you will cease for a minute, we can't
have both of you talking. This is the time, as you may recall--
or if you don't--this is a time when Members ask questions and
expect answers to their questions.
Mr. English. Mr. Chairman, if you----
Chairman Waxman. No, no.
Mr. Cooper. Let me rephrase my question. Would it be OK for
every co-op in America to subcontract out its entire operation
to a for-profit subsidiary secretly owned by co-op management
and still pretend to be a nonprofit? Is that tolerable behavior
under NRECA guidelines?
Mr. English. Let me just say this. I would not personally
recommend that. That is not something I would do. But I am not
an elected representative of the membership in that particular
area of the State of Georgia. Those people, whatever business
decisions they make, have to be held accountable. And as I
understand it at the present time they are being held
accountable, because there is serious disagreement down there
among that membership, as you well know, raising these various
issues. There may even be legal questions involved. That has
been taken before the courts. That is the process that needs to
be followed.
Now, what Glenn English thinks and what the directors in
the State of Georgia think, I don't have their constituency.
And when I was a Member of this body people in western Oklahoma
may not have agreed with what the people in Tennessee thought,
and you and I didn't always vote the same way. That is the same
thing here.
Mr. Cooper. Mr. English, so there is no co-op misbehavior
that would be so bad that would prevent them from being members
of NRECA as long as a local vote ratified the decision?
Mr. English. I will go back again. We have the same
situation here. I don't know if the behavior of Members of
Congress that prohibit them from being members of this body.
Mr. Cooper. Mr. English----
Mr. English. NRECA is a trade association.
Mr. Cooper. I have limited time. Next question.
Mr. English. NRECA is a trade association, and our members
belong on that basis. It is up to their members to decide
whether their conduct is appropriate or not.
Mr. Cooper. So you will take anyone. Mr. English, we
mentioned in the first panel CFC, the lending arm of co-ops,
was set up, according to its official biography, to tell Wall
Street how rich co-ops are; meanwhile, NRECA's purpose is to
tell Congress how poor you are. Which story is correct?
Mr. English. Probably both. On one hand, CFC was set up in
1969 whenever it appeared that the administration at that time
was going to do away with the REA program. In fact, if you
recall, Richard Nixon did.
Mr. Cooper. Mr. English, how can you be rich and poor at
the same time?
Mr. English. If I can't complete my answer, Congressman, if
you just want to make statements, that doesn't make much sense
to ask me questions.
The point that I would make is this: electric cooperatives
are very proud of the fact that our bond rating on Wall Street
is very good. We are considered to be in great financial
condition. In fact, in some cases we are in better condition
than some of the big power companies of this Nation.
If you look at the cost of power because of the
infrastructure that we have, because of the fact there is only
7 co-op members per mile versus 35 for an investor-owned
utility, we have a huge amount of infrastructure we have to
keep up. And we have some of the poorest people in this country
that we must serve.
Percentage-wise, I would dare say that we have a larger
percentage than anyone else in this Nation, and so from that
standpoint I would point out that yes, electric cooperatives
are representing some of the poorest members of this country
and they are owned by those folks.
Mr. Cooper. Mr. Chairman, I see that my time has expired. I
hope that we have time for another round of questions, but I
see that my colleague is here from Iowa.
Chairman Waxman. We will give a second round to any Member
who wishes.
Mr. Braley.
Mr. Braley. Thank you, Mr. Chairman.
Mr. English, I am here as a long-time member of the Tama
Iowa Poweshiek Rural Electric Cooperative located in Brooklyn,
IA, which is run by my good friend, Darryl Heatland, who went
to church with me when I was growing up in high school, and I
have to tell you that there is a real big disconnect going on
between my experience and perception of how RECs are run and
operated in Iowa and some of the information that Mr. Cooper
has shared with the committee about other parts of the country.
I guess the opening comment that I would make is a comment
that I would share with anyone in your position as a head of
any type of a trade association or professional association,
and that is: oftentimes where there is smoke there is fire. I
think that all of those great rural electric cooperatives that
I represent in Iowa, those 75,000 constituents of mine who
depend upon RECs to take care of them, to take care of their
power needs, to be there for them in the ice storm disaster
that we faced in February 2007 where they responded with
admirable dispatch all over my district, when we went through
this terrible tornado that we just had, the largest tornado in
the United States this year, and the RECs were out in full
force taking care of my constituents, the flooding that we are
dealing with right now, it is the type of constituent service
that I would be proud of to have my staff performing.
But I also know that you are only as good as your weakest
link as a trade association, and some of these concerns we are
talking about are very disturbing. So what I would like to do
is ask you at the outset, from your perception and the
perception of the member co-ops you represent, what should be
the No. 1 guiding principle of how those co-ops service the
members that they take care of?
Mr. English. First of all let me say, as I said before,
unfortunately, as Members of Congress are well aware, you get
tarred with the same brush. That is just a part of it. And you
are dealing with a lot of people.
What we are supposed to be governed by are those seven
cooperative principles. That is the basis on which we have our
tax-exempt status with the Internal Revenue Service. It is the
basis on which we make our claim that we are, indeed,
different, and the basis on which we are a consumer
organization.
But at the same time, we fully recognize and understand
that when you bring people into a process, 7,000 directors,
1,000 managers, yes, your chances of running into somebody who
doesn't quite operate in the manner that we would like to see,
then we all get tarred with that brush.
This is a trade association. We have no authority. We can
encourage our members. We can provide our members with
education. We can provide our members with what their peers
think. But as far as being able to come down and mandate and
say, you shall do such and such, we are not a corporation
headquarters. That is the point that I was making to the
chairman early on. Whenever we gutted the Rural Utilities
Service--and we did it over a number of years after 1980--that
took care of a lot of that regulatory basis on which I think
members of this committee seem to be searching for. That was
deregulation.
Mr. Braley. In the materials you provided the committee
there is something called the Board Leadership Certificate.
Mr. English. Right.
Mr. Braley. Which looks like a number of continuing
education types of programs that are available to member co-ops
to help them become the best and most effective type of
cooperative that we expect from our co-ops in Iowa. Can you
give us some sense of what type of participation you get from
your member co-ops in those types of leadership training
opportunities? And is it having the desired effect that the
cooperatives would expect it to?
Mr. English. Right. First of all, what we would encourage
our members to do is get their credentials. We are looking for
credentialed directors. That is their first step after they get
elected. And we have good participation in that. We have over
half of the cooperatives--and keep in mind we have over 40
percent new directors in the last several years--moving through
that process.
We do, in fact, offer higher advanced training, which gets
into power supply and a number of other more complicated
issues. We encourage our directors to participate in that, as
well.
But our real focus, and the focus, I think, on the hearing
that we are talking about today comes under the grounds of the
credentialed director and, quite frankly, having a good dose of
common sense, and recognizing and understanding that whatever
behavior you are going to be following--and I don't think any
amount of education would have taken care of that under the
example that we have seen before us today--that comes down to
just plain, bottom-line common sense and recognizing and
understanding that you have to be held to a higher standard,
and you are going to be under scrutiny, and you had better be
prepared to answer for it. That is what they are being required
to do is answer for it.
Mr. Braley. And you also supplied us with these form 990's,
Return of Organization Exempt from Income Tax forms, which do
require organizations to put detailed information in on
executive and board of directors compensation. Are you
personally aware of what type of oversight the Internal Revenue
Service has been performing on monitoring these forms to ensure
their accuracy, their completeness, and to achieve the desired
transparency that this law is supposed to?
Mr. English. Well, the only thing I think I can say about
that is this is a new form, and it is to a degree that we have
never seen before and, as I said, no other business is being
required to do. I can only assume by this that the IRS plans a
much higher level of scrutiny and involvement in the proper
filling out of form 990's than we have had in the past.
Has everyone filled it out exactly as they should? As we
heard some of the testimony before us, a lot of it gets done on
the advice of accountants, and some of it gets done on the
advice of attorneys. Quite frankly, I don't think some of them
have gotten good advice.
Chairman Waxman. Thank you, Mr. Braley.
Mr. McHenry, do you wish to ask questions?
Mr. McHenry. Thank you, Mr. Chairman.
I am sorry. I have been kept away with other business
today.
This hearing is interesting to most of us. My experience
with my co-ops in North Carolina has been a pretty reasonable
one. We have Duke Energy in North Carolina, and that consumed a
lot of the attention of public policy when I was in the State
House, but co-ops have been pretty well managed in my State in
my experience in the State House. But this one is interesting
to me, Mr. English, this hearing.
Mr. English. It has been interesting to me, too.
Mr. McHenry. Can you give me some background on why we are
here today? I mean, I understand Mr. Cooper has an experience
in Tennessee, and that is sort of a little history on that?
Mr. English. Well, I know Mr. Cooper and I have had our
disagreement with regard to this issue, and I think it started
with the issue in Tennessee. I think that is fair to say. And
it has to do with the fact that cooperatives in Tennessee are
unique and different from cooperatives elsewhere in the
country. For instance, they buy their power from TVA, and with
a longstanding contract that TVA has had, it has prohibited the
payment of capital credits. What TVA co-ops are expected to do
is to reduce their rate; in other words, to charge less for the
power, as opposed to sending a check back to an individual for
any margins or excess over and above the cost of doing
business.
TVA has reiterated, in fact, I think back in the 1970's
underscored again that this was the directive. I assume the
reason for this is because they provide power both to
municipalities and to electric co-ops and they want to keep it
roughly the same as far as the cost for both entities. But
anyway, that is the contract.
Mr. Cooper has disagreed with that, and he wants me to
participate and tell him the cooperatives in Tennessee should
pay those capital credits. Perhaps he wants me to tell TVA that
they shouldn't require this contract. Whatever. But anyway,
that is where it started out. Now it has ballooned and I think
expanded to all the cooperatives all across the United States
that we have a disagreement over.
Mr. McHenry. So is that regulated, this going back and----
Mr. English. TVA?
Mr. McHenry. No. Co-ops distributing money that is in
excess of their----
Mr. English. The capital credits?
Mr. McHenry. Yes.
Mr. English. That is a part of the requirements that you
have for electric cooperatives through this process. Again, you
go back to the form 990's and the requirements that they
provide this information and make it available.
Now, the issue that I think we are into, as well, here
before us today is this question of how much is available. Even
Mr. Cooper agrees that the $31 billion that he talks about in
the way of equity, that most of that is tied up in buildings
and infrastructure and things of that sort. If you are talking
about actual cash that all the cooperatives across the country
have on hand, you are talking about roughly $3.8 billion.
This is a very intense industry from a resource standpoint,
and this is about 45 days' operating expenses, which on an
average on co-ops around the country, and it is my
understanding that is pretty much in line with what is being
recommended as any kind of prudent business practice.
Mr. McHenry. OK. So the Texas Legislature addressed this
particular issue that is the subject of the hearing today, did
they not?
Mr. English. The Texas Legislature is focusing on the
governance and open meetings, and I think they are looking
elsewhere at how they can ensure that the kind of situation
that took place at Pedernales won't happen again. As you heard
them testify, they seem to feel that this is a local matter and
that they have it under control.
I have to admit I personally have not run into situations
like we had in Pedernales, and so it is rather unique, I think.
Mr. McHenry. And how are the co-op boards elected?
Mr. English. They are elected by the same folks that elect
Members of Congress, the same constituents, so that is where it
comes from.
Mr. McHenry. Do they do a better job of electing Members of
Congress?
Mr. English. Well, I guess that is up for every Member to
make judgment on that.
Mr. McHenry. I am just kidding.
Mr. English. I have to say when I was a Member of this body
there were times that I questioned the judgment of some in
other parts of the country, but no one sitting on this panel.
Mr. McHenry. All right. Any other comments about this
Tennessee experience of Mr. Cooper's?
Mr. English. Mr. Cooper could probably do better to address
that than anything else, but that is certainly where he and I
personally had a disagreement.
Mr. Cooper. I would be happy to jump in if the gentleman
would yield.
Mr. English. So I am sure he will want to talk about that
some more.
Mr. McHenry. Sure, I am happy to yield.
Mr. Cooper. I thank the gentleman.
Is Tennessee unique and different? In a way. We do have
TVA. We are thankful for that. But Pedernales, the subject of
this hearing, the largest co-op in America, had never paid a
refund in 70 years, despite having a major surplus. So if the
largest co-op in America could behave like ours in Tennessee,
that got me worried.
Now, regarding the Tennessee case, co-ops in Tennessee have
so much political power that one line in the 1935 power
contract, the TVA Board is reluctant to take it out because
they don't want to be unpopular with their distributors. The
TVA IGs have repeatedly, since 1994, found that 50 distributors
in the Tennessee Valley, A, have embarrassing amounts of money
on hand and, B, are raising rates at the same time in violation
of this one sentence in the contract that we have talked about.
So we have a double whammy in our area, but it is hitting
the rest of the country, too, like with Pedernales.
Chairman Waxman. The gentleman's time has expired.
Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman.
It is good to see you.
Mr. English. Indeed, Mr. Towns. It is good to see you, sir.
Mr. Towns. Happy to know there is life after this place.
Mr. English. Well, it has been a long time since I have
been back.
Mr. Towns. Let me just ask you, when a co-op's revenue
exceeds its expenditures, it builds equity?
Mr. English. Right.
Mr. Towns. Well, when a cooperative refunds in the form of
capital credits to their customers, is this situation in Texas
cooperative unusual? Is this unique? I mean, if this is----
Mr. English. It is most unusual. It is most unusual. The
overwhelming majority of our members refund capital credits.
Really, the judgment in the case that has to be made, and,
again, this gets back to that business of a decision of the
local board, and a lot of it has to do with how conservative
they are. I had one--and certainly Mr. Cooper is going to
strongly disagree with this, because we have had this
discussion before--I have had one co-op that has told me that
they want to have 100 percent equity. That is probably going
way beyond, well, I know it is going way beyond what the
average co-op has, which is about 40, 41 percent. But that is a
decision on their part, because they have very conservative
directors, and it is their directors' idea, we don't want any
debt, and we want to make sure that we can cover whatever cost
we are without going out and borrowing a lot of money.
That is a local decision. It is a very conservative board.
As long as that is made available to the membership that they
represent, then obviously that is a local decision.
We have others that have far less, but it is a local
decision by elected representatives who have been elected by
their membership to make such judgments, just as Members of
Congress have been elected to make judgments with regard to the
budget and deficits and everything that Members of Congress
deal with. It is similar.
Mr. Towns. Well, do you think they should be doing a better
job of communicating to their members?
Mr. English. Well, I think we all need to do a better job
of communicating with the members. I think we can all do better
on that.
Mr. Towns. Right. Would you agree that co-op members ought
to have a say in what their co-ops are doing with the equity?
Mr. English. I think they certainly should, and that goes,
again, they need to participate in their local cooperative
elections. They need to pay attention to the business that is
taking place at their cooperatives. They need to pay attention
to what is going on here in Congress. They need to participate
in the election of Members of Congress. The election on an off-
year for Members of Congress, if I remember correctly, is about
36 percent, and the election nationwide for directors of
electric cooperatives is about 31 percent. I think we both
would agree that it ought to be three-quarters or better. We
ought to have far more participation in the democratic process
of government, and certainly in the process of co-op
governance. That is something that we wholeheartedly agree.
One point I would make--and, Mr. Chairman, I want to lay
this on the record, too--an awful lot of co-ops go to great
lengths to try to encourage people to participate. I know of
one electric cooperative--and it is a rather large electric
cooperative--every year just brings folks in to make sure that
they come into this thing. They will even give away a new car.
It is a drawing. That is it. You have to be at the meeting. You
come in, you sign up as a member, and they have a drawing. They
give away scholarships to the local folks. I know of some
others that give away old pickups that the co-op might have.
Some of you may have experienced that. In others they give away
a frying pan.
But they are trying to get folks in to participate in this
process, contrary to what I think the impression has been
created today that no one, no co-op wants people to show up at
their meeting. Well, that is not true, and it is completely
contrary to the experiences I have had in the last 14 years in
working with electric cooperatives across this country. They go
to great lengths on that.
I think there is no question we would like to see far
greater participation, and I am sure that you would, too, in
your District, people coming to the poll.
Mr. Towns. No doubt about it. Especially to vote for me.
Mr. English. Especially. And I am sure they would, because
they are smart folks up there. No question.
Mr. Towns. Let me ask you, what are you doing to encourage
that participation? Are you doing any of that?
Mr. English. The one thing I think that we are trying to do
is to help our members improve their overall communications
with their membership. One of the things that we are doing
right now is to engage them in something known as, Our Energy,
Our Future, which is to make three points. We are trying to get
them to talk to you all, and the first point is to make sure
that they are aware, not just election cooperatives, but the
whole electric utility industry is pretty much out of capacity.
We built up excess capacity in the late 1970's and early
1980's. We are out of that.
Second thing is to understand, from a standpoint of
technology, that far greater investment needs to be made in
technology so that we can meet any climate change objectives
that the Congress may set. If we don't, then we are probably
going to run into situations where we are not going to have
enough power, we are going to have rates that are excessive,
and that is a train wreck none of us want to see.
The third point is the fact that we also need to understand
that electric rates, particularly those people that we serve--
and I would suggest a lot of the folks that you serve--there is
a real question in the future as to whether electric power in
this country is going to be affordable to all Americans. Low-
income people may not be able to live with the promise that was
created in 1936 with the creation of the REA and affordable
electric power.
Mr. Towns. Thank you very much.
Chairman Waxman. Thank you, Mr. Towns.
All Members have completed a round of questions, and some
Members have requested a second round. Are you ready to go?
Mr. English. Yes, I am ready. Ready, Mr. Chairman.
Chairman Waxman. All right.
Mr. Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
My good friend Mr. Cooper down there, I know that he wants
this what is best for his constituents. It may not go along----
Mr. English. Well, he won't be an elected official long if
he doesn't.
Mr. Westmoreland. No, I understand, but I know that he
wants to do that. I just hope he doesn't mess up what is going
on in Georgia by trying to fix what is going on in Tennessee.
In fact, the comment about the PAC is almost laughable, that
because you have a PAC you can get anything you want up here.
If that was true, big labor and trial lawyers would be getting
anything they wanted.
Mr. English. And if I recall correctly, that is bribery, is
it not?
Mr. Westmoreland. Well, it is.
Mr. English. And you are supposed to be prosecuted if you
have bribes. Isn't that right, Mr. Chairman?
Mr. Westmoreland. Let me say this: I have never seen a
voter turnout method like the EMCs that I am used to use,
whether it is health screenings, giving away a pickup truck,
rides for the kids, a whole variety. They spend a lot of money
trying to get those people out to vote where I am from.
Let me ask you this. Mr. Cooper mentioned the Cobb EMC
case. Were there any laws broken there?
Mr. English. Well, that is the issue that I think there is
between some members and some of the officials at Cobb. That is
being dealt with, as I understand it, within the courts and
within the membership, so at this point I have no information.
Mr. Westmoreland. But if it was a law broken, it is being
dealt with in the court today, isn't it?
Mr. English. It is being dealt with. Yes. That is right. It
is in the courts.
Mr. Westmoreland. And that is what kind of system we have.
We are a country of laws, right?
Mr. English. Right.
Mr. Westmoreland. If you feel like there has been a law
broken, then you have a remedy in the court system?
Mr. English. Exactly.
Mr. Westmoreland. And that is exactly where this is being
taken, I am assuming.
Mr. English. That is the way I was always taught.
Mr. Westmoreland. Yes. And so I am assuming that if there
are laws being broken somewhere, that they are being taken to
court. I am not familiar with the situation in Tennessee, but
from what I heard you say, it is a contractual agreement
between the TVA and the electric membership cooperative that is
at question about why they can't do these rebates or refunds.
Mr. English. Got to lower the rate.
Mr. Westmoreland. They have to lower the rate for all
users, and that is a contractual thing. And so if the EMC
decided not to do that, that would be a contractual issue that
could be taken to court.
Mr. English. In fact, it is my understanding the issue has
been taken to court. They had some folks take it to court that
you all are not giving us back our capital credits. And it is
my understanding it was thrown out of court.
Mr. Westmoreland. OK.
Mr. English. The court didn't even take it up, or if they
did the judge came down and said this is a contractual issue
and----
Mr. Westmoreland. So there has been some type of
adjudication or something in this case?
Mr. English. There has been adjudication already on the
matter, yes.
Mr. Westmoreland. And the case that we are having the
hearing on today?
Mr. English. Well, I think that would be a little unfair to
Mr. Cooper, because I think what he is talking about and what
we are having the hearing on is Pedernales, but that is, I
think, a part of this discussion, yes. I think that is a part
of what we are talking about.
Mr. Westmoreland. Yes, sir.
Mr. Chairman, I thank you for doing the second round. I
appreciate it, and I yield back the balance of my time.
Chairman Waxman. Would you yield to me?
Mr. Westmoreland. I would.
Chairman Waxman. I just want to get something very clear.
As far as Federal regulation of the electric co-ops, it is only
the IRS requirements; is that correct?
Mr. English. No. As it stands right now, anyone who is an
RUS borrower also then comes----
Chairman Waxman. Anyone who is an RUS?
Mr. English. Borrower. Borrows from the Rural Utilities
Service.
Chairman Waxman. I understand that only 50 percent of the
co-ops actually----
Mr. English. No, you have about two-thirds of the co-ops
have an RUS loan.
Chairman Waxman. OK. Then what regulation do they have
under RUS?
Mr. English. As I say, there is a multitude of different
regulations pertaining to the loan, but also pertaining even to
the point that if they feel the activities of the co-op--if the
CEO, for instance, is carrying out activities--and I think you
could probably stretch what was happening down in Pedernales--
they would have the authority to remove the CEO.
Chairman Waxman. So they have regulatory power, but they
also don't have the staff or resources to exercise it?
Mr. English. Exactly. Now, let me take this just a----
Chairman Waxman. And you are not a regulator?
Mr. English. I am not.
Chairman Waxman. You are the head of the trade association.
Mr. English. Not unless you make me one, Mr. Chairman. Now,
if you want to give me that authority, then we will talk some
more.
Chairman Waxman. I don't think you'd want that authority.
If you have to keep all the members of your trade association
happy, you don't want that authority.
Mr. English. That is true. That makes it a little more
difficult.
Chairman Waxman. You answered my question.
Mr. English. Let me add one point.
Chairman Waxman. Yes.
Mr. English. There is one little part. That one-third that
is not borrowing from the Rural Utility Service, during that
period of time that I am talking about, most of those going
into the early 1980's were borrowers. They dropped off because
of the limitations that you had staff-wise. They could not get
a timely loan. So you get big co-ops such as the Pedernales
situation in which they are growing very rapidly, and they
said, RUS has been cut back so far we can't get this in time to
meet the needs to provide the electric power for our
membership. They got out.
So the whole point is: if you and I had maintained those
levels and kept RUS regulating like they should throughout the
1980's and 1990's, I doubt that we would be here today.
Chairman Waxman. Does RUS regulation, if it were ever
enforced, preclude a co-op from taking money from the co-op and
investing in hotels and other enterprises?
Mr. English. Well, that is another little thing.
Unfortunately, I have to take a big share of that, although you
get a little piece. The big share comes back in 1987 on the
Agriculture Committee Ed Jones, chairman of the subcommittee,
Conservation Credit, we came up and figured out, hey, we have
no money for rural development programs. We are out of luck. I
mean, that is when we were having tight budgets and all that
stuff.
So what we did at that time is, well, we have all these
electric cooperatives scattered all around the country that are
getting RUS loans. We ought to ask them to do more. So that is
when we made the move in saying you guys ought to be involved
in developing the economies of----
Chairman Waxman. So we don't stop it. In fact, you think we
have encouraged those?
Mr. English. We encouraged it. In fact, we have an
Inspector General report that condemns us for not doing enough.
Chairman Waxman. You answered my question. I appreciate
that.
Mr. English. Yes.
Chairman Waxman. Mr. Cooper.
Mr. Cooper. I thank the Chair not only for holding this
hearing but for your extraordinary patience.
I think the main NRECA argument is, well, there may be one
bad apple. If we had had this hearing last year, they probably
wouldn't have agreed even to one bad apple, but at least today
we know there is one bad apple and it is called Pedernales.
Mr. English. Don't put words in our mouth now.
Mr. Cooper. OK. From the limited research I have been able
to do--and I wish there were more data. I wish there were more
transparency. I wish there were more disclosure, because I
believe these are public power entities founded in the New Deal
owned by the people, and information should be widely
available. But the best I can tell, it is not one bad apple; it
is at least 10 percent of the 930 co-ops in the country, and it
may be a lot more than that. I hope that is not true.
I am sorry my friend from Georgia had to leave, but
remember, very few co-ops tell you exactly the private property
that you own. And I thought this was a country built on private
property. I cited the NRECA's own material to point out that
small co-ops are charging their customers an extra $220 a year,
2 months of light bills, just so they can remain small. All
this is completely legal. That worries me.
So I think it would be a complete mistake for this
committee or for Members to dismiss Pedernales as a rare
aberration. For example, Pioneer, the co-op in Alabama hadn't
had a board of directors election in 38 years. You were just
talking about how there is great attendance at elections and
stuff. How many decades does it take not to have a board of
directors election before that should affect their co-op
status? Are you willing to accept people that a half century or
100 years of no board of directors election? There has to be
some minimal standard to join the NRECA.
Mr. English. Well, there is an awful lot of accusations in
there, and first one I would say is this: you are saying bad
apples. You know, as I pointed out, any group you have bad
apples. You have bad apples in the Congress, and we have had
them all the way through. I can start ticking them off if you
want me to name them. And I would dare say that we do not have
any greater percentage of problems along those lines than you
have in Congress. This is anybody, group of people elected by
the general public, you are going to have bad apples.
Second issue, you are talking about the issue of public
power.
Mr. Cooper. How many bad apples are there in co-op land?
Mr. English. How many are there in Congress?
Mr. Cooper. I ask the questions.
Chairman Waxman. Would the gentleman yield to me?
Mr. English. And if I could, the courts----
Chairman Waxman. Would the gentleman yield?
Mr. Cooper. I would be delighted.
Mr. English. The courts have determined----
Chairman Waxman. Excuse me. Excuse me, Mr. English. He
controls the time.
Mr. English. OK.
Chairman Waxman. Look, I don't think this is a fair
question to ask a man who is the head of the trade association.
He is not the regulator. I think your question should be a
rhetorical question, because he is not going to be able to give
you an answer. He is not the regulator. If we had a regulator,
we could find out what they would say.
Mr. English. Well, you have one but you don't fund it.
Mr. Cooper. Mr. Chairman, a fair point, but I have met the
regulator at RUS. He is a very nice gentlemen whose name is Jim
Andrews. He is a former head of NRECA.
Mr. English. That is not right either.
Mr. Cooper. This is a family organization.
Mr. English. That is not right either. He was president of
the Board of Directors at NRECA a few years ago. He was not the
head of it.
My second point is----
Mr. Cooper. President of the board of directors----
Mr. English. The courts have stated, Mr. Cooper, the courts
have stated that it is not public power. Now, that is the
courts have said that, not me. What they have said is privately
owned. It is owned by the membership and it is privately owned.
They may buy public power--in fact, they do from TVA--but they
are not public power.
Mr. Cooper. Perhaps you can explain that to your members
like Pedernales and Representative Rose and others.
Mr. English. No one is here defending the management of
Pedernales, Mr. Cooper.
Mr. Cooper. It is public power.
Mr. English. No one is defending that.
Mr. Cooper. Would the gentleman yield?
Mr. English. If you knew the experiences I had with
Pedernales you wouldn't be asking me that question. You
wouldn't even raise that.
Mr. Cooper. Would the gentleman yield?
Mr. English. Certainly. Always yield.
Mr. Cooper. The co-op family is a very small one. It is a
very precious one. There is a great bond of intimacy between
co-op members because it is a very important institution in
America. It is a little bit like a church. Word travels fast.
Mr. English. That is going a little far.
Mr. Cooper. Word travels fast. Usually if something is
going on in co-op country people hear about it. I would like to
know when you first found out, you personally, that there were
serious problems in Pedernales.
Mr. English. In Pedernales? Well, let me just say this,
that the relationship that I had with the former CEO was not
close.
Mr. Cooper. But he was your largest member, right, or
Pedernales?
Mr. English. He was a member. There is no single member of
NRECA that is going to dictate what our association does. It is
governed by our resolutions.
Mr. Cooper. But he was your largest member.
Mr. English. He was a large member, but no, as far--he was
the largest distribution cooperative in the country. He was the
largest member from the standpoint--he was not the largest
dues-paying member.
Mr. Cooper. When did you first find out there were serious
problems at Pedernales?
Mr. English. When I first heard about serious problems was
whenever I heard about the newspaper articles that were coming
out about it.
Mr. Cooper. When did you first find out there were serious
problems at Cobb?
Mr. English. Well, I heard about the controversy at Cobb,
because I think that has not been settled by the courts nor by
the membership as to whether they are disagreeing.
Let me again go back to the point. What we are talking
about here are policies--they are adopted by the board of
directors--that the membership disagreed with. What we talked
about with regard to what you and I, I think, would agree is
excessive--staying at the Ritz Carlton and so on and so forth.
I don't do that. But the point that it comes down to is that
was board policy that allowed that. That was the direction of
the directors. They allowed that to happen.
The accountability comes with regard to those directors
with the membership, as it should, and those are the people
that have taken action and those are the people that took
action in Alabama and those are the people that, if they are
going to take action, will take it in Georgia, as well.
Mr. Cooper. Mr. Chairman, I see that my time has expired,
but one last question.
Mr. English. I will yield the gentleman some extra time,
Mr. Chairman, if you don't mind.
Mr. Cooper. I appreciate the former Member yielding.
I don't think it has been acknowledged in this hearing the
fact that if you look at the NRECA's real Web site, the secret,
password-protected one, they offer lots of legal or quasi-legal
advice. For example, through the Electric Co-op Borrower
Association and other entities, there are elaborate slide
shows, for example, that tell you how to fill out the 990 form.
In the earlier panel they talked about how in Texas some 40
percent of those forms are mis-filled out.
So I think a trade association, to the extent it tries to
give legal advice, should take some responsibility for
practices, board practices and other practices that may not
adhere to the high ethical standard that I think the average
co-op member back home wants their co-op to adhere to, because
these were not ever intended to be average. These were supposed
to be idealistic organizations that did the most to serve the
consumer interests by cutting their light bills, and not to
have organizations that raised rates unnecessarily, as the TVA
Inspector General has found that too many of ours have done.
So would the gentleman care to inform us on the slide shows
and other information materials on the secret, password-
protected Web site like this document that he refused to give
to my office or to Mr. Watson or anyone else who inquired, even
though this is superb legal research, it is extraordinarily
well done, and it backs up the premise that co-ops need to
behave in order to retain their tax-exempt status?
Mr. English. Mr. Chairman, I am sorry that Mr. Cooper
raised this issue and asked me this question. I was hoping we
were going to be able to avoid this.
The reference that he made was with regard to a private Web
site, and gave even a Web site that provides access to members'
401(k)'s and also retirement benefits. NRECA's counsel has
advised me that Mr. Cooper is currently under investigation by
the Federal Bureau of Investigation for his unauthorized access
and downloading of information from NRECA's password-protected
Web site, and that is in violation of the Federal Computer
Fraud and Abuse Act. These abuses----
Mr. Cooper. Would the gentleman yield?
Mr. English. These accesses occurred on a house.gov IP
address on December 10, 11, 12, and 14, 2007, and in order to
not jeopardize that investigation I would prefer not to answer
any questions with regard to those matters that were
downloaded.
Mr. Cooper. Would the chairman give me a moment to respond?
Chairman Waxman. Yes.
Mr. Cooper. I had authorization to use the Web site from
someone who gave me their password and information.
Mr. English. The only people that could give you
authorization is myself or others at NRECA, a limited number.
Like I said, this is a matter under investigation by the FBI.
You can take it up with them.
Chairman Waxman. All right. I think we have explored this
issue at great length, but I think there are still some matters
yet to be resolved. We will continue to pursue what, to an
urban guy like me, is a very interesting and surprising turn of
events.
We I think have concluded the hearing for today and we
stand adjourned.
[Whereupon, at 2:04 p.m., the committee was adjourned.]
[The prepared statements of Hon. Bruce Braley and Hon. Mark
E. Souder follow:]
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