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The CSOP-Financing Technique: Origins, Legal Concept and Implementation

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Energy Transition

Abstract

The Consumer Stock Ownership Plan (CSOP) applies the future savings principle to the financing of new utilities in the energy sector. This technique, invented in the 1950s by the American lawyer and investment banker Louis O. Kelso, is especially applicable to financing public utilities on regulated markets so that they are owned by consumers rather than outside investors; due to guaranteed prices, investments in the sector involve lower risk and thus are easier to finance. CSOP financing is based on the following core principles: (1) the allocation of borrowed investment funds sequestered in a special vehicle with its own legal personality, that is, a trust or a similar intermediate company, invested in a business enterprise or equity interest on behalf of the individual plan participants, namely consumers, employees or citizens; (2) the repayment of the loan from future earnings of the credit-financed shares—the essence of every profitable investment—instead of savings from foregone consumption; (3) the securing of the loan by the investment entity, preferably backed by a state guarantee. Kelso first introduced the CSOP in 1958 in California’s Central Valley by enabling almost 5,000 local farmers to become owners of a fertilizer processing plant the Valley Nitrogen Producers, Inc., of which they were the primary consumers. The overall investment of USD 120 million (today an equivalent of a billion euros) was success; by 1978 Valley Nitrogen, Inc. had four manufacturing plants in California and one in Arizona. This chapter describes the legal structure of the CSOP, together with a case study of the first 1958 pilot CSOP.

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Notes

  1. 1.

    Regarding the plan participants the ESOP limited to the employees of the company is narrower while the GSOP involving citizens of a geographical region is wider.

  2. 2.

    This structure is generally appropriate for countries without Common Law tradition.

  3. 3.

    Of the initial capital of EUR 25,000, only 50 percent, that is, EUR 12,500, actually need to be actually paid down.

  4. 4.

    Direct shareholding in German limited liability companies has the disadvantage that the transfer of shareholders’ positions follows a formal procedure, that is, a notary’s acknowledgment of execution, which in turn increases transaction cost for the tradability of the shares.

  5. 5.

    This structure is a standard solution in Germany tested many times by so-called public companies (“Publikumsgesellschaften”) in real estate investments, who face a similar problem: A very large number of investors is intended to participate in the equity of a company where every change in ownership, whether it be due to death, sale of shares or seizure, has to be signed into the commercial register following the relevant formal procedures.

  6. 6.

    Thus double taxation in general is avoided, and the CSOP-Operating LLC generates a tax shield for the consumer-shareholders, which, however, has only limited benefits here. Nevertheless, the benefits of the first scenario, that is, to accelerate principal payments, can be achieved by a debt pushdown through a merger of the CSOP-Operating LLC with the target utility.

  7. 7.

    “Aktuelle Daten und Fakten—Erneuerbare Energien”, http://www.unendlich-viel-energie.de/de/wirtschaftlaktuelle-daten-und-fakten.html, [login 3.04.2013].

  8. 8.

    “Erneuerbare Energien—ein neues Zeitalter hat begonnen”, http://www.bundesregierung.de/Webs/Breg/DE/Themen/Energiekonzept/Energieversorgung/ErneuerbareEnergien-Zeitalter/_node.html, [login 3.04.2013].

  9. 9.

    However, even some energy cooperatives lack the local reference, an example in Germany being Greenpeace Energy, where 110,715 electricity customers, 9280 gas customers and 22,841 members are involved.

  10. 10.

    In particular municipal law typically stipulates four main prerequisites for participation of municipalities in RE projects, that is, public purpose, capacities for the investment, subsidiarity and appropriate representation.

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  1. European University Viadrina, Frankfurt (Oder), Germany

    Jens Lowitzsch

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  1. European University Viadrina, Frankfurt (Oder), Germany

    Jens Lowitzsch

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Lowitzsch, J. (2019). The CSOP-Financing Technique: Origins, Legal Concept and Implementation. In: Lowitzsch, J. (eds) Energy Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-93518-8_8

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  • DOI: https://doi.org/10.1007/978-3-319-93518-8_8

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