Electric Co-op's lack of transparency sparks customer revolt

Pedernales unlikely candidate for controversy
Electric coop attracting lawsuit, controversy, legislative attention.
By Laylan Copelin and Claudia Grisales - AMERICAN-STATESMAN STAFF - Sunday, July 22, 2007

At first glance, the Pedernales Electric Cooperative seems an unlikely candidate for controversy. The largest in the United States, it boasts of reasonable rates, reliable service and the highest rating for customer satisfaction among the state's electric utilities.

Yet it is facing a co-op member revolt and lawsuit and a state senator's threat of legislative intervention.

Why all the fuss?

The answer, in large part, lies in the co-op's longstanding operational mode of doing things its own way. For instance:

•Despite accruing millions in surplus revenues over the years, Pedernales has never paid dividends to its member customers in Central Texas.

More than 80 percent of the nation's cooperatives, according to a study by the National Rural Electric Cooperative Association, pay such dividends — also known as capital credits — to build customer loyalty and avoid litigation.

•It pays its part-time board members an average of $35,590 annually, the highest among the state's 10 largest co-ops, an amount the lawsuit claims is excessive.

•Its longtime board president, former Hays County Judge W.W. "Bud" Burnett, is paid $188,730 annually to handle a host of external relations for the utility although he has no staff and no office and divides his time between his home in Hays County and a New Mexico ranch.

Alone among the state's largest electric cooperatives, Pedernales refused to disclose any salary information for key employees, despite Internal Revenue Service rules requiring such disclosure for "chief management and administrative officials." Its failure to do so was an issue in the lawsuit.

On Tuesday, Pedernales reported on its Web site that it paid $391,652 to General Manager Bennie Fuelberg in 2006.

But Fuelberg's total compensation might be much higher.

According to information from a source familiar with the cooperative's finances, who requested anonymity, that figure does not include a bonus of about $375,000 that Fuelberg received upon signing his new contract several years ago.

What appears to be a localized squabble could spotlight accountability issues for all electric cooperatives in Texas.

Since the Legislature deregulated the power industry in 1999, these customer-owned utilities enjoy the best of both worlds: Most are state-protected monopolies that pay no federal income taxes. Yet they aren't covered by state open meetings or open records laws, and utility regulators no longer oversee their books or business practices.

Today, the Pedernales cooperative answers only to its 212,000 members — basically, its customers in 24 counties — and only through a 17-member board that critics say is a self-perpetuating, insular entity that keeps members in the dark. The board disputes that. But it decided to disclose Fuelberg's pay during a workshop session in San Antonio to talk about the lawsuit and revise the cooperative's bylaws to clean up outdated language, Burnett said.

Questions about conflicts between the bylaws and actual operating practices were raised at the co-op's tumultuous annual meeting in June, when members attempted to elect an outside slate of candidates for the board.

"We haven't resolved every issue on the bylaws, but that's a lengthy process. There's some archaic language in there. . . . It's been a vigorous discussion," Burnett said between the workshop sessions last week.

In addition to contending that Pedernales pays its officers and board members too much, the lawsuit argues that Burnett does not work full time as he and the co-op's tax forms claim and that the policy of withholding capital credits from members violates state law.

The co-op, through its lawyers, denies the allegations and seeks to have the lawsuit dismissed.

Fuelberg has blamed the lawsuit on greedy lawyers representing a handful of disgruntled members. He defended the co-op's "stellar" business practices and declared management's willingness to deal with member issues when warranted.

"Hunkering down is not our way of doing business," said Fuelberg, who has been general manager since 1976.

A senator weighs in

Pedernales Electric Cooperative played a starring role in then-U.S. Rep. Lyndon Johnson's efforts to bring electricity to the impoverished farmers of the rural Hill Country in the 1930s.

Today, the once-struggling company generates the highest revenue of any electric co-op in the nation, thanks to booming development of Austin's suburbs.

Two-thirds of Pedernales' member customers are in the fast-growing western parts of Travis, Williamson and Hays counties. The cooperative is adding 11,000 meters a year, a 5 percent increase.

That steady expansion is cited by Fuelberg in justifying compensation for its board.

Growth is also Exhibit A in the co-op's case against returning dividends, also known as capital credits, to its members.

Though most electric cooperatives return a percentage of their profits to members, Pedernales has never done so, even during decades when growth was much slower.

Fuelberg and Burnett defend that policy as prudent for the co-op's financial health.

The $226 million in accumulated capital credits that is carried on Pedernales' books, they say, is committed to other needs within the utility.

"What you pay back in capital credits . . . has to be made up for somewhere if you're going to keep a level financial condition of the system. How do you raise that? You can raise fees, you can cut services, or you can raise rates. If you're talking about paying back a significant amount of money, that has to come from somewhere," Burnett said.

The controversy at co-op has attracted the attention of state Sen. Troy Fraser, R-Horseshoe Bay, who is a Pedernales customer and member — along with many of his constituents — and chairman of a Senate committee overseeing the power industry.

In the regulatory void created by deregulation, Fraser said the Legislature should start reviewing the practices of city-owned and cooperative power providers.

Fraser said he had trouble getting information from Pedernales about salaries and the accounts from which the dividends would be paid. He said Burnett, whose responsibilities include dealing with state officials, did not return several phone calls, though he did talk to Fuelberg.

"They have been very guarded in what they give their members," Fraser said. "Even though I am a member and an elected official, I have had difficulty even getting that information."

The senator said he's confident that Pedernales will respond in the next few months to his concerns about compensation, transparency and dividends. If not, he said, his committee might use subpoenas to gather the information.

"These are things that they have the power to address themselves," Fraser said. "Obviously, the Legislature has the authority to address this issue, but it is not my preference."

A special position

The lawsuit, like many of Pedernales' current public relations problems, has its origins in a failure to communicate.

In January, Lee Beck Lawrence, a Pedernales customer whose grandfather once served on the cooperative's board, wrote Burnett asking him about news reports about his $188,730 salary.

When Lawrence never heard back (Fuelberg said the response didn't get mailed by mistake), she didn't let it drop.

Her husband is a partner of Jan Soifer, an Austin lawyer who sued and won a $21 million judgment in 2004 against a Dallas foundation for excessive compensation of its officers.

Soifer, now joined by Baker & McKenzie, one of the world's largest law firms, sued on behalf of Lawrence and other members after Texas Attorney General Gregg Abbott refused to get involved.

At the annual meeting in June, several hundred members supported a call for more openness by Pedernales' management.

Such riffs are not new to Pedernales; in the 1980s, a member uprising made headlines and led to changes in the co-op's voting process.

But usually, the co-op boasts of happy members: A J.D. Power & Associates study of electric utilities gave Pedernales one of the highest residential customer satisfaction ratings in the country last year, the best in Texas.

In 2005, the last year for which reports are available, Pedernales paid members of its board of directors, on average, $35,590 plus benefits.

"The numbers are small," Fuelberg said, "for a co-op this size."

It's more than twice the average pay for directors ($16,545) at Bastrop's Bluebonnet Electric Cooperative, which is about one-third the size of Pedernales.

The bylaws for Pedernales prohibit paying salaries to members of the board of directors but allow a fixed sum and expenses for attending board meetings and per diem expenses for attending other sorts of meetings.

Six or seven years ago, Fuelberg said, the board interpreted the rules to allow a flat monthly sum for board members..

According to co-op attorney Walter Demond, the bylaws are now being rewritten to clarify the monthly fee for various directors' activities.

Tax returns that show board members working only one to four hours a week on Pedernales business are inaccurate, said Fuelberg, terming those hours "a filler number" that will be corrected in the 2006 filing, due in August.

Although Pedernales discloses the compensation of its board, it has refused to release details on trips and related expenses incurred by board members and the general manager during the past seven years.

It also refuses to release its IRS tax filings from the 1990s, when the state Public Utility Commission still regulated the cooperative.

The commission no longer has those records, which could help show how board compensation has escalated since deregulation.

News reports from 1976 indicate board members were paid $75 for each meeting they attended.

Burnett, who keeps no regular office hours at the cooperative, confirmed he does not put in the 44-hour workweek that Pedernales reported to the IRS.

"I don't know where that figure came from; it didn't come from me," Burnett said.

Demond said, "We're going to correct those forms."

Still, Burnett said, he is a dedicated, full-time employee. "I don't have any other business; I don't have any other employment," he said. "I devote a lot of time to struggling with big policies at PEC, and I work closely with Bennie."

His 14,000-acre ranch near Duran, N.M., is leased by other ranchers, he said, adding, "I wish I could spend all my time out there, but I don't."

Fuelberg has said that he and Burnett talk by phone almost daily and that Burnett comes to the Johnson City headquarters as needed.

Burnett's title as coordinator charges him with handling external affairs such as government relations, right-of-way issues and negotiations with the Lower Colorado River Authority, which generates the electricity Pedernales sells.

It also makes him an employee of the board he leads.

It's an unusual arrangement dating back to the 1960s and another president, the late E. "Babe" Smith, whose name is on the Johnson City headquarters.

In 1975, according to news reports, Smith was paid $32,375, more than the general manager. In today's dollars, that would be $117,000.

Burnett will celebrate his 40th year on the board in February.

Fraser wonders whether his position as coordinator is still needed. "I asked questions about his job," he said. "The message I have received is that, probably, the job right now is not necessary."
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