Business born of co-op back in the fold

Four years ago, when a little-known company called Cobb Energy pledged $20 million to put its name on a new performing arts center, it was a bold and somewhat surprising statement about the company’s ambition.

What was Cobb Energy?

A national conglomerate in the making, CEO Dwight Brown said then, and a company not to be confused with Cobb EMC, the nonprofit, customer-owned electric cooperative that lived under the same roof.

Co-op ratepayers needn’t worry about the $20 million, he said: “We cannot and would not ever use Cobb Electric ratepayers’ money to do something like that. If we did that, they would have a right to run us out of town.”

Four years later, the Cobb Energy Performing Arts Centre is flourishing, and the Cobb Energy name looms over drivers on I-75 below.

But Cobb Energy’s ambitions have been clipped after 14 months of litigation centered squarely on the for-profit company’s use —- and alleged abuse —- of the nonprofit cooperative ratepayers’ money and assets.

On Tuesday, a Cobb County judge approved a settlement in that customer lawsuit. The deal strips Cobb Energy of most of its stable of businesses and returns the rest of the company to the 100 percent ownership of Cobb EMC.

The co-op will pay $47 million to acquire Cobb Energy and get an estimated $112 million in assets and benefits in return, according to court filings.

Plaintiff customers, such as businessman Edgar “Bo” Pounds, were only partly satisfied. Pounds wanted Brown gone. The settlement deal allows Brown to stay on as Cobb EMC’s chief executive for two years.

To some, such as Tennessee co-op expert Kevin Williams, the deal and the case it ends beg for a re-examination of how electric co-ops are governed: In Georgia, as in most states, utility regulators have little oversight over co-ops. There are 42 co-ops in Georgia, including some of the largest in the nation.

The saga “demonstrates the potential benefits of state public utility commission regulation of electric cooperatives,” he said.

Because regulators have no say over co-ops, Cobb EMC “and its members —- on both sides of the issue —- were caught in a private-enforcement netherworld which will undoubtedly prove to be far more costly than traditional regulation.”

‘Better mousetrap’

Cobb EMC is one of the largest cooperatives in the country, thanks to Atlanta’s suburban sprawl.

It formed Cobb Energy in 1997 to become even bigger.

The new company was a vehicle to branch into non-electric businesses, eventually including pest control, securities, staffing and mortgages.

In a deposition, Brown called Cobb Energy a “better mousetrap” for serving co-op customers’ needs.

Suing customers saw it differently.

In their lawsuit, they said Cobb Energy had been built on the co-op’s back, had siphoned the co-op’s assets and unjustly enriched insiders through a corporate structure rife with conflicts of interest.

Cobb EMC had done more than form a side company for new businesses. It also turned its business operations over to Cobb Energy, transferring employees, meters and other assets.

In 1998, Cobb Energy began operating Cobb EMC under a 40-year contract that allowed it to collect a markup for the job. Originally set at 2 percent of costs, that markup grew to 11 percent by 2005.

Co-op assets supported Cobb Energy in other ways, too.

The co-op’s customer list allowed Cobb Energy to earn millions in fees for signing up customers for gas marketer SCANA Energy, for instance.

The co-op lent Cobb Energy money, guaranteed other loans for it, and bought it property.

Despite that support, most of Cobb Energy’s side businesses lost money, court filings showed.

As the co-op’s assets flowed to Cobb Energy, its stake in the company shrank from 100 percent to about 30 percent.

New owners included a co-op lender, co-op employees, executives and board members, as well as business allies and partners.

Most of the stock ownership wasn’t disclosed to co-op members.

And insider ownership aggravated the potential for serious conflicts of interest.

At least four top co-op officials had a dividend-paying financial stake in the private company contracted to run the co-op’s business.

Brown, who already was serving as CEO of both companies, acquired his $3 million in Cobb Energy stock with an interest-free loan from his two employers, later forgiven. The stock paid $265,000 annually in dividends.

Three board members also owned dividend-paying stock, including the board’s chairman, Larry Chadwick.

According to the deposition of Brown, Chadwick sold his stake —- size unknown —- back to Cobb Energy after a contentious 2007 annual co-op meeting in which Brown refused to discuss who owned Cobb Energy.

“I suggested, because a lot of members seemed to be concerned about it, that he [sell] it,” Brown said.

Unexpected development

Until late summer, the lawsuit against Cobb EMC and Cobb Energy appeared headed for a hard-fought trial.

Then a bombshell dropped from an unlikely source, undermining defendants’ claims that all had been well and spooking plaintiffs with the specter of a Cobb Energy bankruptcy.

In a report on the lawsuit’s merits, a special litigation committee of three co-op board members called it baseless.

But it also said the co-op needed governance reforms to eliminate conflicts of interest, echoing claims in the complaint.

And it said Cobb Energy owed Cobb EMC $13 million.

Most of that debt stemmed from an amendment to the Cobb Energy operating agreement.

The amendment, signed by Brown and Chadwick, nearly doubled Cobb Energy’s allowed markup —- then at 6 percent —- to 11 percent.

The change took effect Feb. 1, 2005, less than a week after Brown announced the $20 million deal by Cobb Energy to name the performing arts center.

The co-op’s full board never approved the change, voted on it or, according to minutes and testimony, knew about it.

The special litigation committee called the oversight technical but said the co-op should be reimbursed for the unauthorized fee increase.

Cobb Energy didn’t have it.

“It would put us in a world of hurt,” its accountant, Robert Schoonover, said in a deposition. “I don’t know what the legal ramifications would be, but we would be unable to issue a check for that amount.”

Plaintiffs’ attorneys eventually sold the settlement as a way to fix the main problem —- the outsourcing of the co-op’s business to Cobb Energy —- while avoiding years of new litigation or a Cobb Energy bankruptcy filing.

They said the co-op’s customers can take it from here.

Under the settlement terms, a majority of the co-op’s board members will be up for election next year.