Tri-State members increasingly unsatisfied as the rise of distributed resources upends the G&T model
Given the increasing affordability of renewable energy, "the very reason G&Ts were created is less valid every day," Chris Riley, president of Guzman Energy, told Utility Dive.
A struggle over the future of the power sector is unfolding in the Mountain West as the supplier of generation to 43 electric cooperatives resists members' demands for a new resource mix.
Tri-State Generation and Transmission (G&T) Association is the latest utility power supplier caught in the transformation of the power system economics. As 2018 announcements from Xcel Energy Colorado and PacifiCorp showed, buying and using new renewables now can cost less than running existing coal generation.
"This is a fight for how future electricity demand will be met and a part of the fundamental questioning of the traditional utility business model."
President, Guzman Energy
Leading Tri-State members are demanding their supplier recognize this new reality.
"This is a fight for how future electricity demand will be met and a part of the fundamental questioning of the traditional utility business model," Chris Riley, president of Guzman Energy, the new power supplier to New Mexico's Kit Carson Electric Cooperative (KCEC), a former Tri-State member, told Utility Dive.
Guzman took over the power supply for KCEC in 2016, after the cooperative paid Tri-State $37 million to exit its contract. Since then, Guzman's mix of renewables and market-purchased power has kept KCEC on track to resolve that $37 million deficit by the early 2020s and deliver an estimated 40% rate decrease.
This validation of the new power system economics has led to increased doubt about Tri-State. Another one of its cooperatives, Delta-Montrose Electric Association (DMEA), is now negotiating an exit charge with the G&T and is consulting with Guzman.
In December, United Power (UP) board chair James Vigesaa wrote about "grave concerns" that other Tri-State members expressed about its power supply. "Uppermost on our list of concerns is cost," the Colorado co-op's head said. The cost of power from Xcel Energy, which borders UP's service territory, is lower than Tri-State's by 28.5%.
Tri-State remains committed to its approach, saying it "takes advantage of current low-costs of renewable energy and market power" and of "low-cost market power, whenever possible," senior public affairs manager Lee Boughey emailed Utility Dive.
An August study by the Rocky Mountain Institute (RMI) found a new power supply could save hundreds of millions dollars over the next decade for customers of Tri-State member co-ops, validated by the Xcel Energy and PacifiCorp analyses.
"Now, G&Ts are like the tail wagging the dog, but the economics of renewables have changed the game and the very reason G&Ts were created is less valid every day."
President, Guzman Energy
While the KCEC-Guzman partnership shows the pay-off from being "more aggressive in adapting to this new energy economy," the exit negotiation with DMEA is an opportunity to allow member exits that do no financial harm to remaining co-ops or Tri-State.
G&Ts were created by distribution co-ops in the 1950's so they would have the combined buying power to build large centralized generation and transmission because there was no local distributed energy, Riley said. "Now, G&Ts are like the tail wagging the dog, but the economics of renewables have changed the game and the very reason G&Ts were created is less valid every day."
Co-ops served by other G&Ts across the country are raising similar questions about the viability of power portfolios shaped before the emergence of cost-effective renewable and distributed generation. The debate between DMEA and Tri-State could have national reverberations.
There are 834 distribution co-ops and 63 G&Ts serving nearly 13% of the nation's meters and selling 11% of its kWh, according to the National Rural Electric Cooperative Association.
Tri-State's 43 distribution co-op members serve over 1 million consumers in Colorado, Nebraska, New Mexico and Wyoming, and generate 1,835 MW of coal, 1,155 MW of renewables and 973 MW of natural gas and oil.
KCEC member demand for more local renewable generation than the 5% allowed by the Tri-State contract led to its 2016 exit.
"It has gone even better than we thought," KCEC CEO Luis Reyes told Utility Dive. "We have had no reliability issues, we now have 30% local solar generation and we will have 100% daytime solar with local assets in 2022."
A 10-year fixed price contract with Guzman allows more certainty and flexibility than the multi-decade, fluctuating price commitment required by Tri-State, he added.
DMEA customers are also dissatisfied with Tri-State's 5% limit on local generation.
In 2015, FERC concluded PURPA's requirement that utility procurement of qualifying local generation has precedence over the Tri-State contract. In states like North Carolina where co-ops have been able to opt for PURPA contracts, solar has grown rapidly. Tri-State members have not yet been able to do so because of a Tri-State appeal of the FERC decision, which is pending.
[Tri-State and DMEA] "have a fundamentally different view of the future."
Following the KCEC exit, DMEA began negotiating its exit charge, "but we have come to an impasse on what is fair and equitable," DMEA CEO Jasen Bronec told Utility Dive. "Tri-State has denied information on how the $37 million Kit Carson exit charge was calculated, and we cannot see why our charge is multiples higher, even though we are only 50% bigger." Neither Bronec nor Tri-State were willing to disclose the exact amount of the G&T's proposed exit charge.
After seeing a 56% rate increase from the G&T over the last decade while wholesale power prices fell, Bronec said he believes [Tri-State and DMEA] "have a fundamentally different view of the future."
DMEA in December asked the Colorado Public Utilities Commission (CPUC) to intervene, arguing the charge "is unjust, unreasonable, and discriminatory in violation of Colorado law."
Tri-State's Boughey declined to comment on the pending proceeding and the G&T has not filed in the docket.
DMEA is consulting with Guzman Energy, an expert on power market valuation and financing, on what a reasonable exit fee should be. It is also working with Guzman to structure financing for such an exit charge, Bronec said. The exit has three objectives: meeting member demand for local generation, supporting local economic development and fairly meeting all financial obligations to Tri-State and its remaining members.
In September, the board of Colorado Tri-State member La Plata Electric Association (LPEA) formed a committee to study the costs and benefits of alternatives.
"The RMI study shows Tri-State will eventually have to transition to lower cost renewables to compete."
Board and Committee member, La Plata Electric Association
The committee's "fiduciary responsibility" is "to understand if exiting Tri-State is best for our members" and how it can be done in a "responsible manner," board and committee member Britt Bassett told Utility Dive.
It has retained consultants "to help get more specific data" because wholesale power prices suggest "a fair and equitable exit charge could allow savings," Bassett said. KCEC is "paying a slightly higher average rate because of the flattened load growth most utilities are seeing, but with more beneficial electrification coming, that is likely to turn around."
The LPEA board recognizes that Tri-State holds assets for which all members share financial obligation, "but Tri-State's management could be more proactive in doing what its key accounts want," he said. "The RMI study shows Tri-State will eventually have to transition to lower cost renewables to compete."
The letter from UP's Vigesaa to Tri-State members proposed an amendment to the G&T's bylaws,creating a "partial requirements membership clause" that would keep all members "financially whole," but allow for "more flexibility in their power supply," he wrote.
UP "competes with Xcel Energy for large industrial loads," but Xcel's lower prices are causing a "serious problem" for the co-op's ability to compete, Vigesaa said.
The two key objectives in UP's proposal are "to get more than 5% local generation" and "some access to lower cost power," CEO John Parker told Utility Dive. About a third of Tri-State members have already asked for a complete briefing on the proposal.
Similar proposals have been made by other Tri-State members "to no avail," Vigesaa acknowledged. As a result, KCEC exited, DMEA has taken steps to do so and others "are seeking solutions."
"Tri-State was among the first G&Ts to include local renewable energy development in our contracts," and each member "voluntarily agreed" to the 5% local generation limit, Boughey said. The company has kept wholesale rates stable "four of the last five years" and its prices "are forecast to remain stable in the years to come."
"We are disappointed DMEA has decided to attempt to litigate this matter rather than negotiate their withdrawal."
Senior Public Affairs Manager, Tri-State G&T
The G&T "takes advantage of current low-costs of renewable energy and market power," and responds "to market signals to take advantage of low-cost market power whenever possible," Boughey added. The owned and contracted assets for which exiting members face high charges are "an important backstop to ensure reliability," and can be price-competitive when market prices spike.
"We are disappointed DMEA has decided to attempt to litigate this matter rather than negotiate their withdrawal," he said. He declined to respond to Bronec's assertion that DMEA's exit charge is "multiples higher" than KCEC's exit charge.
Tri-State's board approved "a $30 million capital refund to the membership" in December as a response to member co-op exit initiatives, he said. However, Parker noted the refund does not address members' power supply questions.
A better exit
The RMI study estimates new renewables and market power would save Tri-State "roughly $20/MWh" over running its coal fleet, RMI Electricity Practice principal Mark Dyson told Utility Dive. But its ownership of upstream coal assets could reduce that savings because a loss of coal sales would offset fuel cost savings.
Financial strategies like securitization can resolve stranded debt on the upstream coal assets, according to Dyson, the lead author on the RMI study. "Many Tri-State's members and others in the power industry would like to help address this financial challenge without causing more exits or harm to Tri-State and its members."
"...every co-op board has a duty to consider the best power supply for the future or it is not doing its job."
Stranded assets are "a scare tactic," KCEC's Reyes said. "G&Ts like Tri-State can work with Guzman Energy or others to make this transition and become stronger. They seem to think 'it ain't broke, so why fix it?' But it is broke, and change is viable. When we moved away from Tri-State, the lights never went out."
A transition requires planning and can have costs and take time, he acknowledged. "But the world has gone from 'Can they do it?' to 'Will they do it?' and every co-op board has a duty to consider the best power supply for the future or it is not doing its job."
The ideal way to make the transition that Tri-State members want "is for us to work directly them," Guzman's Riley said. "But Tri-State has given zero indication it is willing to do that."
In the expert testimony Guzman files this month with the CPUC in support of DMEA, it will comment on Tri-State's method of calculating the exit charge, Riley added. Applied to all members, it would "cover every Tri-State liability, establish a reserve for non-debt stranded fixed costs, and leave no balance. Using this approach, we could work with Tri-State to allow exits by co-ops that want to pursue the new economics."
Correction: An earlier version of this article incorrectly stated how much money Tri-State customers could save based on the RMI report. The report found they could save hundreds of millions of dollars from a new power supply. An earlier version also misnamed Chris Riley's position; he is President of Guzman Energy.