Will Tri-State's exit fee dispute at FERC shake up the cooperative utility model?

A dispute at the Federal Energy Regulatory Commission over the exit fees Tri-State Generation and Transmission members must pay to get out of their power supply contracts could help set precedents affecting attempts by distribution cooperative utilities in Indiana, North Dakota, South Carolina and elsewhere to leave their long-time power suppliers.

These efforts are driven by a desire for more emissions-free power, access to less expensive wholesale markets and more freedom to make local decisions, according to leaders of the distribution co-ops.

In some cases, their power suppliers — wholesale generation and transmission (G&T) cooperatives — are adapting to those forces by expanding the options they offer utility members.

"The thicket of court cases and administrative proceedings that are in play to determine an exit fee ... suggest that an immediate resolution is unlikely."

Ron Lehr

Western Grid Group, consultant

Tri-State's largest member eyes an exit

In the latest development in the push and pull between distribution cooperative utilities and their G&T suppliers, United Power, Tri-State's largest member, on Tuesday said it plans to leave the G&T on Jan. 1, 2024, in an effort to buy lower cost electricity and more renewable energy.

"Instead of working with us in the pursuit of lower-cost, cleaner options, Tri-State has resisted these developments," Mark Gabriel, United Power CEO, said in a statement.

Tri-State is limiting its members’ ability to add more carbon-free generation and is penalizing additional energy storage on United Power’s system, Gabriel said. Tri-State in May bought Wyoming Municipal Power Agency’s 1.4% share, or 23 MW, of the coal-fired Laramie River plant in Wyoming, where the G&T already had a 464-MW stake.

Tri-State increased its stake in the Laramie plant and related "low cost" transmission lines to help import renewables it plans to build in Wyoming into Colorado, according to the G&T.

United Power’s notice to withdraw from the G&T "is not surprising," given its attempts to end its wholesale power contract in the last few years, Duane Highley, Tri-State CEO, said in a statement. “We worked with United Power to understand its individual needs, but each of its proposals would have harmed the other utility members of Tri-State," Highley said.

United Power buys about 20% of the electricity Tri-State produces, according to the distribution utility, which noted that those purchases account for about three-quarters of its expenses.

United Power’s exit fee will be determined by the outcome of pending cases at FERC, city and county courts and at the U.S. Court of Appeals, Gabriel said.

"The thicket of court cases and administrative proceedings that are in play to determine an exit fee ... suggest that an immediate resolution is unlikely," Ron Lehr, a consultant with the Western Grid Group, said.

"Is a negotiated settlement possible in the meanwhile?" he asked. "Are there potential compromises between big, progressive, and dissident [Tri-State] members, and smaller, more dependent entities who cling to the past?"

Tri-State shifts to renewables, contract flexibility

With pressure coming from some members and renewable energy prices falling, G&Ts are taking steps to adapt to their members' needs. Since Kit Carson Electric Cooperative and Delta-Montrose Electric Association left Tri-State, the G&T has made major changes to its power supply plans and is giving its members more flexibility in their supply options.

Responding to criticism from some members and stakeholders, Tri-State almost two years ago released a plan to retire about 900 MW of coal-fired generation, add about 1,000 MW of renewables and let its members supply up to half of their electricity. The G&T also dropped its plans to expand the coal-fired Holcomb power plant in Kansas by 900 MW.

"When I came on board [in 2019], [the goal] was 'let's get started' developing a responsible energy plan that addresses reliable, affordable, responsible energy that doesn't leave communities behind in the transition and yet make the transition as rapidly as possible," Highley said in an interview before United Power's announcement.

Tri-State's most recent tranche of renewables cost on average $17/MWh, less than operating fossil-fueled power plants, according to Highley.

At the beginning of this year, Tri-State's power portfolio included 1,532 MW of coal, making up 38% of its capacity, 1,062 MW of renewables (26%), 903 MW of natural gas and oil (22%) and 573 MW of "other" contracts, according to the utility's most recent annual report to the Securities and Exchange Commission. By 2024, Tri-State will get about half of its electricity from emissions-free sources, Highley said.

Tri-State's long-range resource plan, which is under review at the Colorado PUC, highlights the G&T's ongoing shift in its power fleet.

"We're going to have to be able to dispatch [renewables] across a broad geographic region, across what would be currently balancing area boundaries, across state boundaries."

Duane Highley

Tri-State G&T, CEO

The utility's preferred portfolio through 2040 calls for adding 1,400 MW of wind, 2,450 MW of solar, 600 MW of batteries and 290 MW of gas. Under the portfolio, Tri-State estimates that at the end of this decade it would get 62% of its electricity from renewables, 20% from coal, 10% from natural gas and the remainder from the market and from another G&T, Basin Electric Power Cooperative.

In another change for Tri-State, the G&T is exploring joining an organized power market, which it sees as critical for handling the growing renewables on its system and lowering costs.

"We'll quickly be getting into a region where many hours of the year we'll have more renewables online than our peak load," Highley said. "We're going to have to be able to dispatch that across a broad geographic region, across what would be currently balancing area boundaries, across state boundaries."

Meanwhile, partly driven by the addition of lower-cost renewables, Tri-State will lower the electric rates it charges its members by 2% in March and another 2% a year later.

In a move designed to give its members flexibility in their power supply options, Tri-State developed a process so its members can supply up to half of their own power after they pay a fee. Tri-State's proposed partial supply contract is part of ongoing settlement discussions at FERC. Currently, Tri-State's members are allowed to supply up to 5% of their own electricity.

Although FERC hasn't approved the process yet, earlier this year, Tri-State gave its members a chance to self-supply a total of 300 MW, or about 10% of the G&T's peak load.

All eyes on FERC

Three years ago, Tri-State added a non-utility member, which shifted its jurisdiction from the states where it operates to FERC. As a result, an exit fee dispute at the Colorado Public Utilities Commission landed at the federal agency in Washington, D.C.

Earlier this year, a group of Tri-State members — Wheat Belt Public Power District, La Plata Electric Association (LPEA), Northwest Rural Public Power District, San Isabel Electric Association, San Miguel Power Association, Springer Electric Cooperative and United Power — filed a complaint at FERC saying the wholesale cooperative was refusing to calculate exit fees for them.

The utilities argued that, without the exit fee calculation, they were in limbo and unable to decide whether leaving Tri-State made financial sense.

In May, FERC rejected Tri-State's initial proposal for a process for calculating a contract termination payment, saying the plan included excessive fees and it would take years before some members received an exit fee estimate.

Tri-State revised its methodology in September, estimating that United Power and LPEA would have to pay $1.6 billion and $489 million, respectively, to get out of their contracts. Tri-State has about $3.1 billion in long-term debt.

In late October, FERC said the revised contract termination payment plan by Tri-State was an improvement on the previous proposal, but "significant" concerns remained, including the possibility that Tri-State's proposed methodology overestimated exit fees.

FERC established a hearing process under the Federal Power Act's section 206, which gives the commission the authority to set a "just and reasonable" exit fee calculation process for Tri-State. A FERC administrative law judge (ALJ) could issue a proposed decision before August, according to a Dec. 3 filing by the judge. FERC would have eight months after parties respond to the ALJ's findings to make a final decision.

A case with national implications

FERC's review of Tri-State's exit fees has national implications for G&Ts regulated by the agency and for pending court cases involving G&Ts, according to Guzman Energy, a power supplier that helped two Tri-State members leave the G&T by financing their exit fees.

"You have a huge pent-up demand across the country of distribution co-ops who are potentially looking to leave their G&T," Chris Riley, Guzman Energy CEO, said. "This FERC case is going to set the precedent for how that happens."

There are 63 G&T's in the United States supplying power to 832 distribution co-ops that serve about 42 million people, according to the National Rural Electric Cooperative Association.

"Right now you have a host of distribution co-ops, all across the country, who are paying more for their power than they need to be, who are finding themselves more coal-heavy under a lot of pressure from their local membership to do something."

Chris Riley

Guzman Energy, CEO

Several of those distribution co-ops have pending cases at FERC and in federal courts in pursuit of transparency about their G&T obligations and the chance to pursue market opportunities for wholesale power supply, according to Robin Lunt, Guzman's chief strategy officer.

Some of those cases are:

Marlboro Electric Cooperative's litigation in South Carolina seeking to leave Central Electric Power Cooperative;
McKenzie Electric Cooperative in North Dakota suing Upper Missouri G&T Electric Cooperative and Basin Electric over rate increase related to a synthetic fuels plant; and,
Dakota Energy Cooperative's suit in South Dakota seeking to exit its contract with East River Electric Cooperative.

FERC's decision in the Tri-State dispute will affect other G&Ts that fall under the agency's jurisdiction and will give courts a framework for making decisions for distribution co-ops that are outside FERC's jurisdiction, Lunt said.

Guzman Energy is working with Tri-State members such as United Power, LPEA and San Miguel as they consider leaving the G&T, according to Riley.

"[Tri-State's] faced with a choice of either transitioning right now and figuring out a way to get their rates down or they're going to lose all their customers," Riley said. "That is a direct result of our activity and our company and what we've been doing and now, I think, you're starting to see other similar reactions of other G&Ts around the country and they're all watching this FERC ruling very closely."

LPEA weighs its options

LPEA, a co-op based in Durango, Colorado, is considering leaving Tri-State, partly to reduce its electric costs, use less carbon-intensive power and gain more local control. The co-op's contract with Tri-State runs through 2050.

LPEA pays Tri-State about $68 million a year for electricity, an expense that makes up about 64% of the co-op's rates, according to a late-October presentation to its members.

After issuing an RFP, LPEA is in talks with Crossover Energy Partners, a renewables-focused company backed by investment firm Kohlberg Kravis Roberts, to supply the co-op for 20 years with 71 MW, about half its capacity needs, according to the presentation.

A contract with Crossover would save La Plata Electric about $7 million a year, Jessica Matlock, the co-op's CEO, said last month in an update on the utility's power supply discussions. It would also allow the co-op to cut its carbon emissions in half six to seven years ahead of its 2030 target, she said.

While it is keeping its options open, a partial supply contract with Tri-State could be a "win-win" for the distribution utility and for the G&T, according to the presentation.

LPEA expects it will select which option to pursue once FERC makes decisions on the partial contract methodology and Tri-State's exit fee, Matlock said.

Kit Carson: The first to leave

Kit Carson Electric Cooperative, based in Taos, New Mexico, set a path for distribution co-ops when it left Tri-State service in 2016 after paying a $37 million exit fee.

Like other distribution co-ops, Kit Carson was locked into a power supply contract that ran for decades. The co-op's contract with Tri-State ran until 2040.

Leaving Tri-State had several key benefits, including being able to add enough solar so Kit Carson will get all its day-time electricity from solar by June, according to Luis Reyes, the co-op's CEO and general manager.

"The members of the community now are the drivers of their energy future versus having someone in Wyoming being able to kind of trump that because they don't feel the same way as our members," Reyes said, describing the divergent views among Tri-State's members on coal-fired power and renewable energy.

"I think our exit and success in remaining financially viable and reliable showed other co-ops you can do it."

Luis Reyes

Kit Carson Electric Cooperative, CEO and general manager

Also, Kit Carson was able to reduce its electricity costs by entering into a 10-year contract with Guzman Energy.

"In today's world, who signs contracts that are 50 years long?" Reyes asked.

When Kit Carson, which has a 65-MW peak load, finishes paying off its exit fee expenses to Guzman Energy in July, the utility's retail rates will fall by $0.03/kWh, according to Reyes. The cooperative's power costs are already about $0.025/kWh less than the rates Tri-State charges its members, he said.

"I think our exit and success in remaining financially viable and reliable showed other co-ops you can do it," Reyes said. Kit Carson's success since leaving Tri-State spurred the G&T to think about ways to keep its members, according to Reyes.

Delta-Montrose Electric Association, headquartered in Montrose, Colorado, paid $62.5 million last year to sever its relationship with Tri-State. Guzman Energy helped facilitate the exit.

However, Reyes said that with Tri-State under FERC jurisdiction, the cost of an exit fee fight have gone up. "A lot of these co-ops that really want to exit, they're more afraid of ‘What does it cost me to litigate at FERC, which may take two or three years?’" Reyes said. "Part of the G&T strategy is just trying to ... make it so financially tough that, at the end, you just kind of run out of gas."

Tipmont co-op seeks access to power markets

Tipmont Rural Electric Cooperative in Indiana has taken inspiration from Kit Carson. The co-op is in an exit fee dispute with Wabash Valley Power Association, a G&T with 23 utility members in Indiana, Illinois and Missouri.

Wabash Valley proposed to its members in 2018 a 40-year all-requirements contract with a 35-year advanced notice to exit services, prompting Tipmont to explore options, according to Ron Holcomb, CEO of the co-op based in Linden, Indiana.

"That didn't make any sense to us, because there's actually a functioning market here, where a competitive space can help us provide the best and the lowest cost power supply solution," Holcomb said.

Buying electricity from the Midcontinent Independent System Operator market could cut Tipmont's power costs by about 30%, according to Holcomb. The proposed Wabash Valley agreement would prevent the 115-MW peak load co-op from accessing MISO until its contract expires in 2050.

After Tipmont told Wabash Valley it intended to exit its contract, the G&T estimated the exit fee at $236 million. Tipmont challenged the proposed fee at FERC and an administrative law judge is expected to issue a recommended decision this month.

According to Holcomb, the power industry and power markets have changed, but the G&T model hasn't kept up with the transition.

"Let's change the model," he said. "When we're successful, you know, it's going to likely have a broader impact because others will cash in on Tipmont's courage to do this."

Wabash Valley declined to comment.

Editor's note: We have updated this story with more information on why Tri-State bought a stake in the Laramie power plant and to clarify FERC's action in May regarding Tri-State's proposal for a process for calculating exit fees.