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What is a Cooperative?

Keeping Rural America Connected

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Cooperatives are businesses owned by the people who use their services. They provide an economic benefit by being driven by services rather than profits—an increasingly unique way of doing business. A cooperative is democratically controlled and returns any margins or profit to members on the basis of patronage.

The Cooperative Philosophy
The beginnings of the modern cooperative movement can be traced back more than 150 years to the town of Rochdale, England. Desperate over low pay and high living costs, 28 local weavers formed a grocery store there in 1844, calling themselves the Rochdale Society of Equitable Pioneers. From that small group emerged what have become known as the “Rochdale Principles,” a set of practices and procedures that have served as guideposts for cooperatives around the world. The Rochdale Principles establish:

Open membership—Anyone who can use a cooperative’s services and is willing to accept the responsibilities of membership is eligible to join.

One member, one vote—Power is shared equally among all members, rather than concentrated in the hands of a few. Cooperatives are based on democratic principles. Members elect a board of directors and, when necessary, vote on specific issues.

Limited return on investment—The purpose of a cooperative is to provide a service to its members, not to make a profit.

Surplus is returned to the members—Margins above and beyond the costs required to cover operating expenses are returned to the members in proportion to their patronage. The more business a member does with the co-op in a given year, the greater the amount of the patronage refund for that year.

The first American cooperative actually predates the Rochdale Principles, being established by Ben Franklin in 1752. The Philadelphia Contributionship for the Insurance of Homes from Loss by Fire still operates today, along with 47,000 other cooperatives that provide credit and financial services, telephone and electric service, insurance, housing, child care, health care, food, farm marketing supply, and news distribution services. Familiar cooperative enterprises include: Associated Press, Ocean Spray, Nationwide Insurance, Land O’Lakes, Ace Hardware, and Sunkist.

Each year, America’s cooperatives generate more than $100 billion in economic activity. Cooperatives serve more than 120 million people in cities, towns, suburbs, and throughout rural America.

Cooperatives embody the best traditions of American self-reliance and independence. Co-ops are successful because they provide non-profit services to their communities that may not be readily available otherwise. The cooperative movement will continue to thrive because it is based on the most powerful force in the world—a good idea.

Telephone Cooperatives…Keeping Rural America Connected

More than 1.2 million rural Americans receive their local telephone service from a telephone cooperative. Approximately 260 telephone cooperatives provide service in 31 states. Telephone cooperatives vary tremendously in size, but the average telco has approximately 4,000 subscribers, 23 employees, and annual revenues of between $1 million and $2 million. Customer bases range from less than 100 subscribers to more than 50,000. The highest customer density, approximately seven subscribers per line mile, is in the rural southeast. By contrast, the Bell operating companies, on average, serve 130 customers per line mile. Telephone cooperatives’ annual operating revenues range from less than $100,000 to more than $40 million. And in addition to their state-of-the-art switching and transmission facilities, many co-ops also offer cable TV, cellular, alarm, paging, Internet, and many other information-age services.

Telephone cooperatives are most heavily concentrated in the farm belt and other areas with a strong cooperative tradition and presence. Just ten states are home to half the nation’s telephone co-ops: Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, North Dakota, South Dakota, Texas, and Wisconsin. In The Southeast, the Carolinas, Tennessee, and Kentucky are also cooperative strongholds.

Roots of the rural telephone industry
The independent telephone industry developed throughout America following the expiration of Alexander Graham Bell’s patents in 1894. Independent telephone companies served small towns and cities, but most of rural America remained without telephone service. After the publication of a manual that explained to farmers how they could develop their own telephone systems on a mutual or cooperative basis, many “farmers mutual systems” emerged during the succeeding years. By 1912, the number of rural telephone systems had grown to more than 3,200, and the U.S. telephone industry included several manufacturers that specialized in the production of rural phones. The number of farmer lines continued to increase after World War I. At its high point in 1927, the rural telephone industry included some 6,000 mutual systems and other organizations. But even as the industry grew, rural systems began to deteriorate. Many failed to keep adequate accounts; customers were lax about paying bills; and there was little maintenance or regular upkeep of the facilities. Poor service became the standard in rural America. Many small companies simply operated the equipment until it failed and then went out of business.

In the 1930s, President Franklin D. Roosevelt sought to combat the effects of the Great Depression by launching the New Deal. One of FDR’s “alphabet agencies” was the Federal Communications Commission (FCC), established by the Communications Act of 1934. The act made the concept of “universal service” the law of the land. This cornerstone of national social policy called for making “available, so far as possible, to all the people of the United States a rapid, efficient, nationwide and worldwide wire and radio communication service with adequate facilities at reasonable charges…” The objective of universal service was—and remains today—to ensure that all Americans, regardless of where they live, receive quality telephone service at reasonable rates, Congress reaffirmed the nation’s commitment to the policy and social value of universal service in passing the landmark Telecommunications Act of 1996.

By late 1940s, it was clear that rural telephone systems had reached an impasse. The country’s massive war effort had exerted significant pressure on manpower and equipment. In addition, telephone rates were low, and capital was inadequate to maintain or upgrade the systems. The farmer systems continued to disappear, and as a result, fewer farmers had telephones in 1940 than had them in 1920.

Many telephone cooperatives came into being after the 1949 passage of the Telephone Amendment to the Rural Electrification Administration (REA) loan funds available to finance rural telephone systems. (In 1994, the REA became the Rural Utilities Service [RUS], an agency of the U.S. department of Agriculture.) The Bell companies and other large telephone companies were already well established in the nation’s cities and growing suburban areas, but most were not interested in serving sparsely populated rural areas without imposing expensive line extension charges. The unfulfilled need for telephone service led men and women in hundreds of rural communities to join together to develop, finance, and build their own telephone systems. Citizens canvassed the countryside, knocked on doors, and talked their neighbors into signing up and paying a small equity fee, often five dollars. The new members held organizational meetings, elected directors, and drew up articles of incorporation and bylaws. With the organizational details completed, a cooperative could apply for an REA loan, hire a manager, construct a telephone network, and offer service—in many cases, for the first time—to the community.

Today’s telephone cooperatives
Today’s telephone cooperatives provide a wide variety of services through the most modern switching and transmission equipment available, including digital switches and fiber—optic networks.

No matter how large or small, whether they’re located in the high plains or the lowlands, all telephone cooperatives share a common goal: to provide their members and their communities with the best telecommunications service available at the lowest possible price.

Patronage Dividends
As nonprofit organizations, telephone cooperatives seek to provide their patrons the highest quality service at the most affordable rates. It is not always possible, however, to establish rates that ensure that money collected exactly equals money spent. Revenues earned above operating expenses are called margins (in a commercial business, these funds are called profits). The end of each fiscal year, the co-op allocates a percentage of the margins to each patron on a pro-rated basis, according to the total amount paid or produced for telephone services. These allocations to patrons are known as patronage dividends. Upon approval of the board of directors, these allocations are refunded to co-op patrons.

Patronage allocation and the retirement of patronage dividends represent the proportional allocation of cooperative margins based on patrons’ individual use of telco services.

The retirement of patronage dividends enables the board of directors to reinforce the members’ inherent ownership rights. With an actual stake in the co-op’s business operations—evidence in its margins – members participate actively in the telco’s success; i.e., they share in the co-op’s success. Each time the directors declare a dividend retirement, they demonstrate to the members/owners that the co-op cares about its current members and its former patrons, whose equity has helped the system succeed.

If a cooperative member moves or discontinues service, the member still receives the patronage allocation for the year or years he or she was a member. Patronage dividends may also be paid to a deceased member’s estate upon request. For more info about capital credits, CLICK HERE.


Copyright© Farmers Mutual Cooperative Telephone Company
Harlan, Iowa  51537