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

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.