Electric cooperatives (ECs) in the Philippines are characterized as not-for-profit. I believe that it’s deceptive and misleading to think that the government doesn’t tax ECs in the Philippines because they somehow “need a break.” It’s also deceptively misleading and even fallacious to think that ECs don’t make (or need to make) any surplus (i.e. “profit”) above their operating expenses (opex here being loosely defined as anything that is normally deductible for purposes of calculating income tax).

First, let’s back up and revisit an implied compact between the government and normal corporations. The government basically is saying to firms:

“You can sell your goods at any price you want, but if there’s a surplus of earnings above your cost to produce and sell the goods then I want a share of that execss. Specifically, I want 35% of it. You can keep the rest and do whatever you wish with it. You can keep it in the firm (as retained earnings, which can, up to a point, actually lower your cost of doing business and thus increase your profits) or you can simply extract it and give it to your owners.”

For cooperatives (any kind of cooperative, and this is true throughout the world) the compact with the government goes something like this:

“If you generate a surplus of earnings above your cost to produce and sell the goods, then you must either retain it in the business solely to reduce your cost of doing business or you must return it to your customers. In either case, since your customers, and only your customers, benefit, I won’t take any cut from that profit as it is essentially returned to the customer anyway.”

So there IS a difference in a cooperative and a normal firm. But it has nothing to do with generation of profits. It has everything to do with where the profits go and how they are used.

Cooperatives are non-taxable NOT because there is nothing to tax. There ARE surpluses or profits, if you will. But the profits go back to the customer. And it’s instructive to not forget that a normal firm, like Meralco, is also not taxable if they reduce their price to a level that generates no surplus to be extracted by owners.

So, to revisit my main thesis:
Cooperatives are “classified” as not-for-profit, but that is because their surpluses are assignable solely back to their customers – not that they don’t generate surpluses!

So why is the dangerous?

Because everybody – from the lowest EC staff member to their key managerial staff and Boards of Directors, to customers, to politicians, to bankers, to policy makers, to regulators – get it in their heads that Philippine ECs are not allowed to generate a profit. From there it’s a simple leap to justifying the dismantlement of the whole cooperative electric sector – because everybody with an ounce of business experience knows you can’t operate without margins. But even more insidious than that, it’s a sophistically specious concept that leads to bad regulation, bad credit, bad management, bad policy.

There are a number of savvy managers and Boards throughout the sector that understand this very clearly; but, even they have to maneuver around and through an environment that is misinformed. Electric cooperatives would be better served by never using the term not-for-profit and just focus on good business practices – including the communication with their customer base (and politicians and bankers, etc) about how pricing levels are determined and how whatever profits are generated are plowed directly back to them or to their benefit.

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