Distribution electric cooperatives that supply 13% of U.S. electricity are increasingly demanding their generation and transmission (G&T) suppliers offer them the new opportunities emerging in low-cost renewables or let them exit to independent energy suppliers.
Colorado G&T Tri-State and many others are bound by long term investments in uneconomic fossil fuel generation and struggling to respond to co-op demands. The tension could have implications that drive an energy transition — or tear the electric cooperative (co-op) system apart.
There is a "general dissatisfaction" in member co-ops with G&T investment decisions "that have kept rates artificially high compared to low-cost renewables now available in the market," Jason Johns, a partner with law firm Stoel Rives, which represents distribution co-ops, told Utility Dive. "There is little precedent for how to reconcile the differences."
One avenue is to allow co-op members to leave their G&T provider in a way that minimizes impacts on remaining members.
"Some G&Ts made investments over the disapproval of a part of their membership and the question is whether those investments should be part of the charge to co-ops exiting their contracts."
Partner, Stoel Rives
"If members want to exit their G&T, they should, but an exit charge should keep remaining members whole," Tri-State CEO Duane Highley told Utility Dive.
But how should the amount of such a charge be determined?
Two Tri-State co-ops have negotiated exits, and two others, United Power (UP) and La Plata Electric Association (LPEA), are asking Colorado regulators for an affordable alternative to Tri-State's exit charge. Battles between G&Ts and members over exits have also emerged in Indiana and North Dakota. Colorado's May 18 hearing could produce a template for a co-op transformation — or cascading G&T bankruptcies.
The exit charge dispute
In addition to Tri-State's disputes, Indiana's Tipmont REMC is seeking an exit from G&T Wabash Valley Power Alliance and North Dakota's Mckenzie Electric Cooperative is demanding better rates from G&Ts Basin Electric and Upper Missouri, Johns said. Despite jurisdictional differences, each dispute revolves around what cost the contract termination should impose on the exiting co-op and the G&T's remaining members.
"They are all debating how to value the G&T's stranded costs for assets acquired to serve the member departing to acquire more renewables," Johns said. "Some G&Ts made investments over the disapproval of a part of their membership and the question is whether those investments should be part of the charge to co-ops exiting their contracts."
Tri-State, which supplies power to 46 members that include 43 electric co-ops in four states and is therefore subject to both state and federal jurisdiction, is moving forward with plans for shuttering coal, investing in utility-scale renewables, and allowing members more access to local renewables. But Colorado members LPEA and UP found those plans inadequate and asked the G&T to set exit costs, LPEA CEO Jessica Matlock and UP Acting CEO Bryant Robbins told Utility Dive.
The exit costs proposed by Tri-State and the methodology used to calculate them are unreasonable, they said.
The co-ops appealed to the Colorado Public Utilities Commission (CPUC) for a methodology for calculating an acceptable exit cost, Colorado State Senator Chris Hansen, D, told Utility Dive. But Tri-State asked the Federal Energy Regulatory Commission (FERC) to make that decision. The federal regulators deferred a ruling long enough to allow the CPUC to act. A hearing is scheduled for May 18.
If co-ops "leave to access cheaper energy, they shouldn't put the burden of higher rates on other members. It's that simple."
CEO, Tri-State Generation and Transmission
All Tri-State member contracts run through 2050 and both the G&T and the two member co-ops "have tried to find a way to figure out the exit charge, but now they are lawyered up and ready to adjudicate," Senator Hansen said.
"Tri-State invested in transmission and generation facilities and contracts to meet 95% or more of members' loads," Tri-State CEO Highley said. "If they leave to access cheaper energy, they shouldn't put the burden of higher rates on other members. It's that simple."
Regulators' choice of an exit charge is unlikely to be simple, though it could have implications that determine whether more co-ops consider exits or transitions to new resources.
Exit charge questions
The North Dakota and Indiana exit charge decisions are unlikely to be as significant as Colorado's decision on Tri-State's methodology, Stoel Rives' Johns said. That's because the North Dakota dispute involves other issues and could end up in a court where legal matters become more important, and the Indiana parties are expected to settle without establishing a formal precedent for the exit charge question, he added.
But the Colorado proceeding could produce a landmark decision on what a fair exit charge methodology should be, which is what member co-ops told Utility Dive they want. And a proceeding that does not focus on Tri-State's methodology "would simply be moot," Tri-State's April 24 CPUC filing on various elements of the proceeding said.
Doubts about the validity of Tri-State's exit charge methodology began in 2016, when Tri-State's $163 million exit charge offer to Kit Carson Electric Cooperative (KCEC) ended with a $37 million settlement. Those doubts grew when Delta-Montrose Electric Association (DMEA) negotiated a 2019 exit settlement of $88.5 million down from Tri-State's initial $322 million demand.
"The methodology, which we call a 'make whole' calculation, is our best estimate of the cashflow differences if the member does not fulfill its contract," Tri-State's Highley said. "It protects remaining members by ensuring the exit does not unfairly shift costs to them."
Tri-State's negotiated settlements with DMEA and KCEC "met the standard of being fair and equitable to the remaining members," Highley said. "But they did not necessarily meet the 'make whole' standard, because a negotiated settlement of a lawsuit is different than an exit fee from a contract."
"We owe our fair share of the debt. But [what is] fair is where the argument is. The Tri-State calculation is inflated because it includes everything associated with the contract that runs through 2050."
CEO, United Power
The Tri-State methodology for calculating exit charges has three steps, Tri-State Senior Vice President and Chief Financial Officer Patrick L. Bridges testified to FERC on April 13.
A "base case" forecasts Tri-State's total revenue requirement annually through the 2050 contract term, assuming no exits, he testified. A "change case" forecasts the total revenue requirement without the exiting member, and the exit charge is the net present value of the difference between the base case and the change case.
Long term forecasts included in the methodology include load, power supply, transmission, and system costs and revenue, along with other factors, according to Bridges. It also includes assumptions about the future financial impacts of policies like Colorado and New Mexico emissions reduction goals.
It is the forecasts and assumptions that make Tri-State's methodology unreliable, UP's Robbins and LPEA's Matlock said.
"We're not asking to exit for free," Robbins said. "We owe our fair share of the debt. But [what is] fair is where the argument is. The Tri-State calculation is inflated because it includes everything associated with the contract that runs through 2050."
The distribution co-ops "want an unbiased decision on what is fair from the CPUC," LPEA's Matlock added.
Tri-State's methodology is based on many "highly subjective" variables that are "subject to manipulation," Analysis Group Senior Advisor Susan Tierney testified for LPEA to the CPUC on January 10, 2020. In a 2018 SEC filing, Tri-State called its forecasts for demand, fuel prices, and resource and capital needs, "sources of risk and uncertainty," Tierney added.
An alternative three-step methodology could minimize uncertainty by using cost-based principles and public information like the asset and liability values in Tri-State's financial statements, Tierney testified.
Member co-ops are part owners of their G&Ts, and the exit charge should reflect those "ownership interests," she said. Therefore, start with the member's "pro-rata share" of the value of the G&T's assets that "it would leave behind if it withdrew."
Second, subtract the G&T's "debt and other financial liabilities and unavoidable economic commitments," she testified. Third, the exit charge should acknowledge "uncertainties" in the calculation by requiring the member to forfeit capital already paid to the G&T.
Because the Tri-State debates are among the earliest and most hard fought in the U.S., some say the CPUC's upcoming ruling could be a template for future exits from G&T providers.
It could be "the first public record decision on an exit charge" and "could establish a template that would at least need to be considered in later decisions," former CPUC Chair Ron Lehr told Utility Dive.
But co-ops are "diverse" and face "unique regional and local factors," National Rural Electric Cooperative Association spokesperson Stephen Bell emailed Utility Dive. "A technology, program or policy that works for one co-op might not work for another."
The CPUC decision could also impact how G&Ts and their member co-ops respond to the rapidly emerging transition in the U.S. power sector.
Implications for the energy transition
Tri-State's methodology will also be used to compensate the G&T when a member moves beyond the amount of self-supplied generation allowed by existing contracts, Highley said. "This is called a partial exit, and when a member chooses it, Tri-State still has fixed costs for assets acquired to meet its power needs. A 'make whole' equalization payment will be used to cover that cost."
A member supplying a growing amount of its own renewables would have to compensate the G&T with an equalization payment, based on the exit charge methodology, in addition to paying for its new generation, Highley said. The objective is to "not put upward pressure on rates for remaining members."
The equalization payment does not make it "cost prohibitive to develop local renewables," he added. Tri-State solicitations have shown members can pay almost three times the current cost for renewables projects "and still save money after paying the equalization charge, unless it is a very small project."
But the equalization payment "doesn't work for us and we don't think it will work for anybody," UP's Robbins responded. "We would have to raise rates." LPEA's Matlock agreed.
"In more responsive G&Ts, if members want community solar, the answer is not 2% but ‘as much as you want, and we'll retire some of the old assets sooner.' That is how to animate change."
Former Chair, Colorado Public Utilities Commission
With Tri-State's new 50% self-supply offer to members, LPEA, UP and other co-ops could reach higher penetrations of local renewables faster while "hedging their risk," Highley said. Tri-State is about 31% renewable now and, by 2024, expects to be at 50%. Independent energy suppliers like Guzman Energy "offer members better prices now, but nobody knows what costs will be in 10 years and there is risk in that," Highley added.
Tri-State's April 13 FERC filing proposes an estimated 2.1% annual rate increase from 2030 to 2050, CEO Chris Riley of Guzman Energy, which supplies KCEC and DMEA and is developing exit strategies for other co-ops, told Utility Dive. "That should raise red flags about what the true cost of this transition is going to be to Tri-State's members."
Co-ops that leave Tri-State "will not have costs for legacy assets and no reason to face higher future rates," he added. Cost trends "are down for renewable energy, battery storage and other technologies, and co-ops building portfolios without legacy costs will likely have lower future costs, while Tri-State has explicitly said its rates are going to increase."
The Tri-State 50% offer is not being well-received as a way to transition to local renewables, Senator Hansen agreed. Highley and his team "are sincere in their proposed plans, and members see them as good, but not good enough."
Member reactions to the 50% self-supply and equalization payment offer have been "withering," former CPUC Chair Lehr added.
Tri-State carefully considered the needs and options of members seeking more access to local renewables in establishing the equalization payment, Highley said. "The offer also allows members to obtain up to 2% of their supply from community solar outside the contract limits."
That reveals Tri-State's problem, Lehr responded. "In more responsive G&Ts, if members want community solar, the answer is not 2% but 'as much as you want, and we'll retire some of the old assets sooner.' That is how to animate change."
More rapidly replacing legacy assets with low cost renewables will make Tri-State's transition more affordable, easing pressure from members and winning critical "lender goodwill," Lehr added. Though S&P and Fitch declared Tri-State's outlook "negative" last fall, it can earn lender support by demonstrating it is moving away from "antiquated, expensive fossil fuel assets."
A bankruptcy caused by dissatisfied members "is not pretty, and Tri-State needs to see this as an emergency," Lehr, who oversaw the 1991 Colorado Ute bankruptcy, said. "An energy transition is the road out, but it will take a different way of executing."
To advance its transition, Tri-State will also need more progress by Colorado policymakers on commitments to new transmission, greater power market access, and more public funding for transitioning communities, Highley said.
But Tri-State members see waiting for lenders and policymakers as "locking them into Tri-State membership," Guzman's Riley said. "That is leading to an acceleration of interest in exits for greater access to renewables. And the more U.S. co-ops see successful exits and prices coming down, the harder it is for G&Ts to argue they are on the right path
Correction: A previous version of this article mischaracterized a statement from NRECA spokesperson Stephen Bell. He said, “A technology, program or policy that works for one co-op might not work for another,” but did not refer specifically to any exit charge methodology.