The battle between the Tri-State Generation and Transmission Association and two of its Colorado electric cooperatives seeking to ditch their memberships has become so pitched that it is now sprawling across state and federal regulatory agencies and the courts.
The two – Brighton-based United Power and the Durango-based La Plata Electric Association – want to install more local, clean electricity generation and object to Tri-State’s higher-than-market rates and heavy dependence on coal.
A week-long hearing is set to begin Monday before the Colorado Public Utilities Commission in an attempt to determine reasonable exit fees from the interstate power wholesaler for the two co-ops.
Meanwhile there are skirmishes ahead before the Federal Energy Regulatory Commission and in Adams County District Court.
The Kit Carson Electric Cooperative in Taos, N.M., left Tri-State in 2019 and Delta-Montrose Electric Association in Delta is set to leave June 30, but the stakes are higher with United Power and La Plata.
United Power, Tri-State’s biggest and fastest growing co-op, and La Plata combined account for nearly a quarter of the association’s revenue. Their loss would put pressure on Tri-State’s rates and finances.
There has already been a modest cut in Tri-State’s credit rating and its outlook was flipped to negative by S&P Global Ratings. “The downgrade and negative outlook reflect regulatory filings to the Colorado Public Utilities Commission made by two of Tri-State’s members,” S&P credit analyst David Bodek said in a report.
Tri-State put the cost of United Power getting out of its long-term contract at $1.2 billion – United Power’s total assets at the end of 2018 were $453 million. Tri-State declined to give La Plata an estimate, saying it was developing a new exit formula.
That new methodology has been filed in a case before the FERC and has drawn fire from both United Power and La Plata, which argued that it was “designed to be prohibitively expensive and punitive to a departing Utility Member.”
“From Tri-State’s perspective, the philosophy has always been that the decision by one member to withdraw should not prejudice the financial interests of the remaining members or the viability of Tri-State,” Tri-State CEO Duane Highley said in written testimony to the PUC.
To that end, the association is calculating that an exit fee should include all the electricity purchases the co-ops would have made in the next 30 years, plus debt, plus the financial burdens that the departures would create for the remaining members.
One vote per member, no matter how
Tri-State’s position is that in 2007 the co-ops, along with all the other members, agreed to extend their contracts to 2050. “LPEA and United freely signed wholesale power contracts to 2050, presumably because they believed it was advantageous to do so,” said Lee Boughey, a Tri-State spokesman.
The contracts were extended at Tri-State’s request to help secure financing for a planned 895-megawatt coal-fired power plant in Kansas, according to Dean Hubbuck, United Power’s director of power supply and rates.
Tri-State doggedly pursued the project, even as coal-fired plants were closing around the country, but pulled the plug in January.
“Everyone was divesting of coal and they were the only ones still going to coal,” said Jessica Matlock, La Plata’s CEO. “They kept believing that was the future when everyone else around them knew it wasn’t.”
There are fundamental policy differences at work as well as financial ones. United Power has pushed for more local solar generation and energy storage beyond the limits allowed by Tri-State’s standard contract, which requires the co-ops to buy 95% of their electricity from the association.
La Plata has a goal of reducing carbon emissions 50% by 2030. In 2018, Tri-State was still getting 47% of its electricity from coal. The association projects that by 2024 coal will make up a third of its power generation.
“They don’t understand this new energy economy of collaboration, of thinking outside of the box,” Matlock said. “The best-case scenario is we would partner with Tri-State and figure it out, but I don’t think the governance structure allows it.”
Tri-State sells wholesale power to 43 rural electric co-ops in Nebraska, Wyoming, Colorado and New Mexico. There are 18 member cooperatives in Colorado.
It is governed by a board with one member from each cooperative. Each member has one vote, so that even though United Power is 40 times larger than the Wheatland Rural Electric Association, in Wheatland, Wyoming, they have the same say.
Wheatland and the seven other rural co-ops from Wyoming, the nation’s biggest coal producing state, are backing Tri-State in this fight.
“Some of the members have different beliefs or needs,” United Power’s Hubbuck said. “The wants of someone living out on a ranch in the middle of Wyoming and someone on the Front Range are different.”
“We are willing to pay a just and reasonable number to get out,” Hubbuck said. “All we’ve done is ask for a just and reasonable buyout number. We haven’t asked to leave yet, we just need the number to evaluate what is the best thing to do.”
“Responsible Energy Plan” could save members $55 million
In January, Tri-State adopted a “Responsible Energy Plan” that calls for adding 1 gigawatt of wind and solar power and closing all the coal-fired plants owned by the association (it has partial ownership in some others) by 2030.
Tri-State is also opening up, on a limited basis, the opportunity for co-ops to add renewable generation beyond the contract cap.
The Rocky Mountain Institute, a non-profit energy consultant promoting sustainable and clean energy, estimated Tri-State’s plan will save its co-ops $55 million a year.
“The commitments that Tri-State has made to moving away from coal and expanding its clean energy capacity are important, but there are some deeply rooted problems in its business model,” said Eric Frankowski, executive director of the Western Clean Energy Campaign, a nonprofit promoting clean energy.
In September 2019, Tri-State shifted its regulatory oversight for rates and contracts from the utility commissions in the four states in which it operates to the FERC by changing its bylaws and adding non-utility members.
The association said it made more sense for its interstate operations to be uniformly overseen by one regulator.
It then filed a motion with FERC to shut down the exit fee proceedings before the PUC. The PUC intervened to defend its oversight and the federal commission ruled that while it had jurisdiction, it did not have exclusive jurisdiction.
Tri-State made a similar argument for FERC to intervene when it filed its new exit fee methodology in April.
“The PUC believes it has the authority to decide these formal complaints,” Terry Bote, a spokesman for the commission, said in an email.
In addition to the exit fee docket, there are two Tri-State rate-setting dockets at the FERC the co-ops are facing later this spring
Finally, in a lawsuit filed in Adams County District Court on May 4, United Power said that Tri-State manipulated its members and bylaws to allow three non-utility members to join and shift regulatory oversight to the FERC and had “engaged in a multiyear fraud to prevent United Power from exercising its contractual right to withdraw.”
Tri-State dismissed the United Power lawsuit in a statement, saying the “most recent complaint smacks of desperation and is completely without merit.”
There may be desperation on all sides as United Power makes up about 17% of Tri-State’s sales, accounting for more than $200 million in 2019 revenue – a sum the co-op said helps keep rates flat for all the other Tri-State members.
By way of comparison, Kit Carson was 1.8% of Tri-State sales and DMEA 3.24%
The cost of providing power to rural areas – with longer lines and fewer customers – has always been more expensive and one of the reasons for the creation of nonprofit generation and transmission operators like Tri-State.
But Tri-State’s rates are now a target of criticism for a number of co-ops. La Plata said that between 2000 and 2016 Tri-State raised rates 12 times, doubling their price for electricity.
United Power has to charge its customers 20% to 35% more than Xcel Energy, the state’s largest electricity provider, which serves the adjacent area. Part of that is due to Tri-State’s wholesale rates and part to other local factors, Hubbuck said.
Tri-State is now projecting flat or even slight decline in rates through 2030, according to Pat Bridges, the association’s chief financial officer.
Rates and predictable revenues are the lifeblood of a nonprofit like Tri-State. While an investor-owned utility, like Xcel, can raise funds for projects by issuing stock, Tri-State must rely on bonds and debt.
Investors lend money based on Tri-State’s guaranteed revenue stream through 2050 and are willing to lend even though Tri-State is heavily leveraged.
Tri-State has about $4.6 billion in debts and obligations and a ratio of 75% debt to 25% equity, compared with 40%-60% ratio for investor-owned utilities, according to a Tri-State filing.
“Member contracts make debt-financing possible,” Bridges said in PUC testimony. “Without the assured cash flow resulting from the member contracts, Tri-State could not obtain debt financing in the capital markets at any reasonable cost, and perhaps not at all.”
Even with the S&P downgrade, Tri-State’s debt is top investment grade with an A- rating.
Some of that debt, however, has covenants on it, including one that allows lenders to call for a prepayment fee if Tri-State loses 20% of its revenues from members exiting. The loss of DMEA and United Power would be enough to trigger that, according to a Tri-State filing with the PUC.
So when looking at the question of the price of exit, Tri-State has adopted an approach that includes the departing co-ops paying for all the electricity they would have bought until 2050 discounted to present value, as well as their share of operating expenses, depreciation and debt service through the life of the contract.
That is how the association came up with United Power’s $1.2 billion price tag and the methodology filed with FERC takes a similar approach. United and La Plata maintain this is “unrealistic.”
Susan Tierney, a La Plata consultant, cautioned that applying such an approach to Tri-State’s very long contracts would have to rely on “highly subjective” assumptions and variables that could be manipulated.
A United Power consultant said that if Tri-State’s method for calculating exit fees was applied to all members, the result would be a debt-free company with $5.9 billion in cash and a generation and transmission fleet free of customer obligation.
The co-ops also point to figures, only recently made public, that show Tri-State originally demanded a $137 million exit fee from Kit Carson, before accepting $37 million.
The initial exit fee quoted for DMEA was $332 million. Tri-State agreed to a sum that was a fifth of that, plus the purchase of $26 million in infrastructure. DMEA also forfeited about $48 million in patronage capital (or equity) it had in Tri-State.
United Power has filed its own proposed exit fee, although it remains a part of the confidential docket in the case.
“We are willing to pay our fair share,” Hubbuck said. This includes United Power’s fair share of the debt, including prepayments, and the cost of infrastructure, such as transmission lines and substations built by Tri-State to serve the cooperative.
“For the rest of that, it gets back to how they manage their company and how do you manage with change?” Hubbuck said. “Any company that loses 20% of its revenue stream has a challenge. The question is how are you going to manage that?”
Tri-State is just trying to make sure its members are “made whole” if the two Colorado co-ops leave, Boughey said.
And the association’s bylaws state: “No member shall be permitted to withdraw until it has met all its contractual obligations to this corporation.”
Whoever wins these battles, it is possible it will not end the war for Tri-State. “Until it fixes its systemic character flaws, it’s going to continue facing the kind of member discontent that is forcing La Plata and United to want to jump ship as quickly as possible,” Frankowski said.