Nine years ago, leaders of the Cobb Electric Membership Cooperative told members about the success of a new subsidiary created to run the co-op's affairs.

The Marietta-based nonprofit owned stock in the for-profit affiliate, Cobb Energy, and would collect dividends on its investment, co-op executives said in a 1999 annual report to members. A footnote said EMC would pay Cobb Energy a management fee that included a 2 percent markup on labor.

AJC Staff (ENLARGE)

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Now, newly disclosed documents show Cobb Energy's markup has climbed more than fivefold since then, reaching 6 percent in 2000 and 11 percent in 2005. Since 2000, the markup has also applied to some other costs besides labor.

As a consequence, Cobb Energy's annual markup, which initially amounted to no more than $560,000, increased to several million dollars.

The payments to Cobb Energy are at the heart of a lawsuit filed last fall by several members alleging "gross mismanagement" of the co-op, which is owned by its members. The suit claims that "every dollar of profit" derived from Cobb Energy's management of the EMC rightfully belongs to the co-op and its customers.

EMC executives counter that they never hid any important details of the Cobb Energy relationship from members. Its lawyers argue the suit should be dismissed because members were told about the deal.

"We have never, ever done anything without telling you," co-op CEO Dwight Brown told members at an annual meeting last fall. "If you don't believe me, go out and dig out all your newsletters and annual reports. It's all there."

Cobb EMC has reported total payments to Cobb Energy, but not the 2000 and 2005 fee increases, in its annual reports.

Asked if fee increases were disclosed to members, Carol Cookerly, a spokeswoman for both companies, provided reporters with newsletters that she said showed the co-op had been transparent with its members.

The newsletters discuss the co-op's creation of Cobb Energy as a for-profit company and the transfer of EMC employees to Cobb Energy. They do not disclose the increases in Cobb Energy's markup for running the co-op.

Annual reports show Cobb Energy, which has a wide range of side businesses, operated at a net loss until the markup was raised to 6 percent in 2000.

Cookerly said the EMC board approved the 11 percent fee when it accepted the 2005 budget that included the markup, on the recommendation of a subcommittee that discussed the fee. Brown and co-op board chairman Larry Chadwick signed the agreement that authorized the higher fee in February 2005.

Minutes of the board meeting at which the 2005 budget was approved do not mention an increase in the management fee.

Documents disclosing the fee hikes were posted last month on the Web site of Carr & Palmer, an Atlanta law firm that filed the suit against the co-op and Cobb Energy.

Cobb Energy has run the co-op under a 40-year contract since 1998. The co-op paid Cobb Energy $58 million last year and $402 million since 1998.

But neither company will disclose how much of that payment comprised Cobb Energy's markup. Since 2000, at least $19 million of one-time expenses was not subject to the markup, Cookerly said.

Cookerly said the 11 percent fee serves the business interests of both entities. She said the board commissioned an independent third party that confirmed in 2005 that 11 percent was "reasonable and well within the norm."

She declined to identify the third party.

Cookerly said the fees paid to Cobb Energy comprise only 0.53 percent of the EMC's budget. The Journal-Constitution's questions about the fee, she said, were "attempting to create the appearance of impropriety."

Cobb Energy absorbs some expenses without passing them on to the co-op, she added. "There are many services that Cobb Energy provides which Cobb EMC does not pay," she said.

The customers' lawsuit alleges Cobb EMC, as a non-profit cooperative, also violated Georgia law when it formed Cobb Energy to get into other kinds of for-profit businesses.

The complaint claims the company drained the co-op's assets and unjustly enriched co-op leaders who had jobs and stock holdings in Cobb Energy.

The relationship between Cobb EMC and Cobb Energy is unusual for an electric cooperative.

Many co-ops hire contractors to perform selected services such as tree trimming or installing power lines. Cobb EMC pays Cobb Energy to run virtually all of its operations.

The co-op and, by extension, its members once owned all of Cobb Energy. Now they own common stock that comprises 30 percent of the company's value. The common stock has no set yield and dividends are paid at the company's discretion.

Brown and others own the other 70 percent, which includes preferred stock that pays annual dividends of 8.85 percent. Cobb Energy has asked the judge hearing the members' lawsuit to permit it to keep its list of owners confidential.