December 23, 2021
Judge rules for REC board in transparency fight
A group of customer/members in 2018 launched the “Repower REC” campaign to seek changes in the utility’s board elections and operations.
By Sarah Vogelsong
The state largest electrical cooperative, REC serves 170,000 customers in 21 counties — including the western part of Fauquier.
Let me point out this is named a cooperative for a reason. And certainly the attitudes I’ve heard today express to this court that it’s not as cooperative as it should be.
— Spotsylvania County Circuit Court Judge Joseph J. Ellis
The Virginia Mercury
SPOTSYLVANIA — A judge denied a petition seeking greater transparency in the operations of Rappahannock Electric Cooperative’s board of directors Tuesday but said trial statements indicated the organization is “not as cooperative as it should be.”
The ruling from Spotsylvania County Circuit Court Judge Joseph J. Ellis culminates more than three-year legal fight by a group of REC members, led by retired Department of Justice lawyer Seth Heald, to amend the cooperative’s bylaws.
REC serves 5,719 Fauquier customers along the western part of the county. The co-op has 170,000 customers in 21 counties.
The most significant of the changes would have required all board of directors meetings to be open to cooperative members, except for executive sessions during which confidential or sensitive information could be discussed. That amendment would also have required the board to give 72 hours’ notice before any meeting and to livestream their meetings.
A second amendment would have altered the system of electing board members and required directors to reveal the candidates for whom they cast “proxy” votes, or votes that members cede to the board to cast as they choose. Currently, the board relies on secret balloting to allot proxy votes.
Finally, a third would have required directors’ annual compensation to be published every year in the co-op magazine and set a 60-day notice period for any board vote on changes to compensation.
“These are modest proposals. They are proposals that have proved workable in other electric cooperatives,” said Evan Johns, an attorney with Appalachian Mountain Advocates representing Mr. Heald and his co-plaintiffs, during arguments Tuesday.
However, Rappahannock Electric Cooperative, Virginia’s largest co-op, has staunchly resisted the changes, arguing that they would fundamentally prevent the cooperative from fulfilling its duties under state law.
“This would greatly hinder the operational efficiency and effectiveness of the cooperative,” REC Board of Directors Chairman Christopher Shipe told the court Tuesday during trial.
Open meetings ‘unworkable’
Tuesday’s proceedings trace back to 2018, when Rappahannock Electric Cooperative refused to give Mr. Heald a petition form to collect 500 signatures required to put his bylaw proposals to a membership vote. Several of the same proposals had previously been rejected by the board in 2012, eventually contributing to Heald’s decision to launch the “Repower REC” campaign to reform Rappahannock’s governance process.
The campaign is one of several efforts nationwide to reform electric cooperatives, which trace their roots to the New Deal and provide electricity to millions of rural and increasingly suburban people.
Unlike investor-owned utilities, cooperatives are nonprofit and owned by their members. Electric cooperatives are built around seven basic principles, of which one is democratic member control.
“We operate under democratic procedures in the boardroom,” Mr. Shipe testified Tuesday. “We’re a cooperative, but we’re a private business organized under the cooperative principles.”
However, he contended that open meetings would be “unworkable.” Not only must the board of directors regularly deal with sensitive contract and grid information not appropriate for public consumption, he contended, but opening meetings could expose the co-op to “safety and security” risks, including of cyberattacks.
“The world we operate in is full of threats and full of risks,” Rappahannock CEO and President John Hewa testified later.
Furthermore, opening up board meetings to member observation could politicize the co-op’s operations and complicate decision-making “because of things being misconstrued, misstatements and things being taken out of context and tracked,” Mr. Shipe told the court.
“Is the risk of constant exposure to litigation something that would cause paralysis on the board?” Andy Sherrod, a Hirschler Fleishcher attorney representing the REC, asked.
“Definitely,” Mr. Shipe responded.
Attorneys for Mr. Heald and his co-plaintiffs — retired educator Michael Murphy and retired Brig. Gen. John Levasseur, a former REC board member — noted that numerous other electric cooperatives around the nation have open board meetings and are still able to function. Some states, such as Colorado, require electric co-ops to open up board meetings to members.
One secret 2018 report by a task force convened by the National Rural Electric Cooperative Association, the trade association for electric cooperatives, stated that “on balance, the task force supports permitting members to attend board of directors meetings, other than portions of meetings at which legal, employee and other confidential matters are addressed.”
Mr. Hewa later described the task force report as less specific recommendations for how every co-op should function and more “intended to invoke and further encourage discussion in corporate boardrooms.”
Most prominently, the nation’s largest electric co-op, Pedernales Electric Cooperative in Texas, began holding open, live-streamed board meetings over a decade ago after widespread scandals involving the board’s leadership triggered a class-action lawsuit, the criminal conviction of a top official and state as well as congressional hearings on electric cooperative governance.
In Virginia, the Powell Valley Electric Cooperative, which has approximately 33,000 members spanning counties in Southwest Virginia and Tennessee, also began holding open board meetings in 2018.
PVEC member William Kornrich of Sneedville, Tenn., who has been involved in governance reforms at that co-op, testified that he has attended roughly 30 board meetings since Powell Valley opened them up to observation and that the co-op has continued to operate without major problems. Board members go into executive session to discuss confidential and sensitive matters three to four times per year, he said, and typically spend about an hour to an hour and a half in open session each month.
But Rappahannock Electric Cooperative officials said that they didn’t believe more than 10 percent of their board’s business could be done in public.
“It is my view that outside the consent agenda we’d have to go into some kind of executive session. It is not appropriate for open meetings,” said Mr. Shipe. “Open meetings would preclude us from fulfilling our statutory requirements.”
Mr. Hewa, the Rappahannock CEO, who previously served as CEO of Pedernales Electric Co-op after the institution of reforms there, said in response to questions from Mr. Heald’s attorneys that “over 50 percent” of that board’s business had been conducted in executive session, but not as much as 90 percent.
Co-op leaders said Rappahannock’s size meant its situation was not comparable to Powell Valley. Furthermore, Hewa pointed out that unlike Pedernales, Rappahannock Electric Cooperative is regulated by the state and subject to federal disclosure requirements as a federal borrower through the Rural Utilities Service.
“I believe Rappahannock is the most wisely and truly transparent cooperative out there,” Mr. Hewa said.
‘All things necessary and incidental’ but ‘not absolute’
Throughout the full day of trial, Judge Ellis said his role was not to determine whether the proposed bylaws were “good” or “bad” or whether they might complicate the work of Rappahannock Electric’s board, but whether they would fundamentally prevent that board from fulfilling its statutory role.
In particular, Judge Ellis pointed to a September 2020 ruling in the case by Spotsylvania Judge William Glover that led to many of the disputes going to trial this December.
“The board cannot prevent a vote on bylaws changes simply on the theory that the proposed alteration or repeal would impinge on the ability of the board to conduct its business,” Judge Glover wrote. “However, there may be proposals which would alter the existing bylaws to the extent that the board could not continue to execute its statutory role.”
The Virginia Utility Cooperatives Act defines the principal purpose of electric co-ops as “making energy, energy services and other utility services available at the lowest cost consistent with sound economy and prudent management of the business of such cooperative and such other purposes as its membership shall approve.”
The act also grants a cooperative’s board of directors the power “to do all things necessary or incidental in conducting the business of the cooperative,” including the power “to make its own rules and regulations as to its procedure.”
But, Judge Ellis cautioned, “the power of the Rappahannock Electric Cooperative is not absolute. It’s not.”
Late in the day, he told Mr. Hewa that it was hard to understand how it was in the highest and best interest of co-op members to be “completely locked out” of the board of directors’ decision-making process.
However, the case took a twist when Judge Ellis determined that he was required to look at the three bylaw proposals as a slate, rather than on an individual basis.
Consequently, he said, if he found that any one of the proposals would fundamentally prevent the board from fulfilling its statutory role, he would have to reject all of them.
“I don’t know if I have a choice,” he said, before telling Mr. Heald’s attorneys, “I understand your dismay.”
Ultimately Judge Ellis ruled that the provision in the first bylaw amendment requiring 72 hours’ notice before a meeting, without any accommodation for emergencies, would prevent the board from fulfilling its role. Rappahannock had argued that such a change would bar the board from meeting even in the case of a hurricane or other storm producing widespread outages, a concern echoed by Judge Ellis.
“Having said that, let me point out this is named a cooperative for a reason,” the judge continued. “And certainly the attitudes I’ve heard today express to this court that it’s not as cooperative as it should be.”
After the trial, Mr. Shipe said that he didn’t agree with Ellis’ assessment of Rappahannock’s cooperative spirit and that he was “sorry that was the judge’s impression.”
Nevertheless, both he and Mr. Hewa applauded the ruling, with Mr. Shipe saying that “the judge was trying to find the right balance in this case” and that the full slate of bylaws “was a bridge too far in its entirety.”
“Maybe we can find some compromise,” he said.
Mr. Heald said he was “extremely disappointed” in the case’s outcome and that the plaintiffs were evaluating whether or not they would appeal. During the trial, their attorneys disputed Judge Ellis’ interpretation of the law as requiring him to assess the proposals as a slate.
“The way hurdles have been thrown in our path all along the way makes it seem really unlikely that the bylaw amendment process is an effective tool for reforming a co-op if it really wants to fight your reforms,” said Mr. Heald. “Maybe legislation is a better way to handle it.”
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