The Cooperative Difference: Watt’s Fair


A long time ago on an Iowa farm, I was subjected to some injustice that I can’t remember. I’m sure I wanted to do something, and my parents said, “No.” I remember that it made me angry, and I lashed out, “That’s not fair!” I definitely remember my dad calmly saying, “Buddy, you will learn that life isn’t fair, so get over it,” and much like Forrest Gump, that was all he had to say about that.

I have learned that life often isn’t fair, and people almost always react negatively, like I did, when they perceive unfairness. Turns out, my dad’s advice was good advice but hard to follow.

This reaction is normal. Social scientists call this phenomenon inequity aversion. Economists and psychologists have conducted experiments using the Ultimatum Game to prove this. In one game variation, a moderator gives $100 to Player 1, who splits the money into two envelopes; Player 1 keeps one envelope, handing the other to Player 2. If Player 2 is satisfied with the amount, both Players keep their respective envelopes. If Player 2 is not satisfied with the share and rejects the deal, both players give their envelopes back to the moderator, and the game is over. No one gets any money.

In a completely rational world, there is no instance where Player 2 should reject the deal, unless there is $0 in the envelope. It is free money. However, in real case studies, Player 2 doesn’t always act rationally. Player 2 almost always accepts the deal if offered between $40 to $50. If offered $20 or less, Player 2 rarely accepts the deal. The concept of fairness can cause Player 2 to react irrationally and punish Player 1 for a perceived unfairness.

Humans are not the only ones to display this phenomenon. Dutch primatologist Frans de Waal conducted an experiment with Capuchin monkeys, teaching them to trade rocks for slices of cucumber. He found that two monkeys positioned side by side in cages would trade rocks for cucumber slices agreeably for a long time. However, when he began rewarding one monkey with more desirable grapes, the other monkey was no longer satisfied and began throwing the cucumber slices at the administrator.

Why all this talk about fairness and game theory? They illustrate why the Electric Cooperatives have been advocating for a change to Arkansas’ solar net metering rules. Current rules allow a member with privately owned solar panels to put excess energy produced on the electric grid, and cooperatives are required to credit their account at the full retail rate for those kilowatt hours (kWh). Rules also allow them to bank those credits for a rainy day. On the surface, it seems fair, but it is not. It is much more like one member getting a grape and the other getting a cucumber slice, and we saw how that worked out in the lab.

Why is it not fair? Well, there are several cost shifts that create this inequity. The first is the overcompensation for the excess kWh. Cooperatives are required to credit a net metering account at full retail, which is about 12 cents per kWh, when wholesale power costs about 5 cents per kWh. The difference between the wholesale power price and the retail cost of power is the cost to build, operate and maintain the entire electric distribution system, which benefits everyone. How does this create a cost shift? This overcompensation for excess kWh results in cooperatives collecting less revenue to operate the electric grid. However, cooperatives are not-for-profit, so this is not about shrinking profits but rather shrinking revenue to pay for fixed costs to maintain the grid. Ultimately, cooperatives must raise rates, and when that happens, more of that increased cost is passed on to non-solar members.

The second form of cost shift is the ability to time-shift energy using the cooperatives’ balance sheets. In the physical world, if you want to time-shift energy, you need a battery.
A good strategy would be to charge your battery when prices are low and discharge it when prices are high — and hope the value you get would more than pay for the cost of the battery. Members who net meter benefit, as they generally produce excess kWh when power prices and demand are low, but claim credits back when power prices and demand are high. Take Winter Storm Uri, for instance. Solar output was minimal during Uri, so all members were pulling their power off the grid and contributing to the entire cost of that storm, which was about $100 million for five days of electricity. However, if you had net metering credit, you could use it during that storm and avoid the incredible fuel costs passed on to members who were billed for their usage, even though you contributed to the high cost.

The average cost shift for an average net metering account is about $500 per year. This means that those with solar panels avoid about $500 of the fixed costs needed to maintain the electric system. And those costs are passed on to others because this is a nonprofit system. As more members net meter, the impact gets larger and larger on each non-solar member. Solar installations are not cheap and often can only be financed or afforded by economically successful members. This cost shift has been referred to as a regressive subsidy, since it pushes increased costs onto members who can likely least afford them.

The Electric Cooperatives of Arkansas depend on principles grounded in fairness to work. Concepts of nondiscrimination and fairness are central to what has made cooperatives successful since the 1800s.

To be clear, we support all forms of generation technology, and we advocate for fair rules and economic policies for all forms of generation — and for ALL members in accordance with the cooperative principles.

Another thing that would not be fair would be changing the rules on a member after solar was installed. That is why we have advocated for ending the highly subsidized rule and shifting to a fairer set of net metering rules for the future. We support maintaining the current rules for those who have already installed their systems, known as “grandfathering.” However, this is unsustainable if applied to every current and future account.

We want to ensure that future net metering accounts pay their equitable share to maintain the Electric Cooperatives of Arkansas that stand for Reliable, Affordable and Responsible power and for fairness for all members.

Vernon “Buddy” Hasten is President and CEO of Arkansas Electric Cooperatives, Inc., and Arkansas Electric Cooperative Corporation.