In the running battle over how much a suburban Denver electric cooperative must pay to leave the Tri-State Generation and Transmission Association, the co-op picked up some ammunition in a report by a federal energy economist that calls the association’s exit fee calculations flawed and unreasonable.
The exit fee for Brighton-based United Power should be less than a tenth of the $1.6 billion Tri-State is seeking, according to Greg Golino, an economist with the Federal Energy Regulatory Commission.
“We know we owe something, because we are participants in a contract, but it should be just and reasonable and the FERC analysis shows that,” said Mark Gabriel, United Power’s CEO.
In an extensive rebuttal, Tri-State, a power wholesaler serving 43 rural electric cooperatives in four states, warned that low exit fees could stress its operating system and create an incentive for big co-ops to depart, leaving its smallest members stranded.
“This economic incentive creates a dangerous and unstable situation and can lead to the unraveling and eventual bankruptcy of Tri-State,” Joseph Mancinelli, an expert witness for the association, said in a FERC filing. “The only winners will be a few members like United Power, who are first to leave the system.”
Why United Power and Tri-State don’t get along
Tri-State’s six largest cooperatives, based on association exit fee calculations, account for 47% of the association’s revenue.
The fight between Tri-State and its largest member, United Power, has been going on for more than three years, spilling into district court, the Colorado Public Utilities Commission and the FERC, which will be the final arbiter on the exit fees.
United Power has chafed under the long-term contracts, which run until 2050, and require the co-op to buy 95% of its electricity from Tri-State. That has limited the cooperative’s ability to develop local, renewable generation.
The co-op has four solar farms and 3,000 rooftop solar installations in its service territory, as well as 4 megawatts of utility-scale battery storage, but it is at its limit.
United Power and other co-ops have also criticized Tri-State’s heavy reliance on coal-fired power plants, which provided more than half the association’s electricity in 2021.
In addition, the contract makes it impossible to take advantage of cheaper power on the open, wholesale market, Gabriel said.
Tri-State charges $75 a megawatt-hour for electricity, while on the open market a comparable price is around $55 a megawatt-hour. “There is a big gap between Tri-State’s prices and the market,” Gabriel said.
Generating and transmission associations, like Tri-State, were created to serve far-flung and often small, rural electric cooperatives, building generating stations and stringing thousands of miles of electric lines. Tri-State has nearly 5,800 miles of transmission lines.
How Tri-State calculated its exit fee
Tri-State’s position is that any departing association member must pay for its share of all those investments and assure that the remaining members are not left with an unfair financial burden.
While United Power, with more than 100,000 accounts, may have options, the North Rio Arriba Electric Cooperative, in Chama, New Mexico, the smallest in the association by revenue, with 3,100 customers, has fewer.
“The make-whole approach simply enforces a departing member’s obligations in a long-term contract executed by willing members of Tri-State for the joint benefit of all members,” Metin Celebi, a principal at the Brattle Group, a consulting firm, and a Tri-State expert witness, said in testimony.
It is this tug between innovation and open markets on one hand and long-term commitments on the other that is at the heart of the battle — and the calculations over exit fees.
“This case reflects a tension a lot of cooperatives will face,” said Gabriel Chan, a professor at the University of Minnesota’s Hubert H. Humphrey School of Public Affairs, who is studying rural electric cooperatives.
Those long-term commitments are based on the fixed or embedded costs of all that infrastructure, while power on the wholesale markets is more supple and based on higher or lower prices at the margin.
“Generally, what we’ve seen through the maturation of wholesale markets, through the declining price of renewables, and the volatility of fuel prices is a really big gap between wholesale energy prices, based on marginal costs, and long-term contract prices, based on embedded costs,” Chan said.
In its calculations of a contract termination payment, or CTP, Tri-State tallied the portion of the overall debt a cooperative is responsible for based on its revenues, plus the cost of all the electricity it would have bought between now and the end of the contract in 2050.
That is how Tri-State determined United Power’s $1.6 billion exit fee — and the fees for the 42 other members.
Federal report questions Tri-State’s methodology
But Golino, the FERC economist, questioned whether this “lost revenue” method was appropriate and even if it was, he said it lacked “any checks on Tri-State’s motivation and ability to inflate the exit fee.”
The Tri-State method does not have the safeguards found in a lost revenue exit calculation approved by FERC years ago, Golino said, such as giving the departing member the option of brokering or remarketing its share of the electricity and generating capacity.
“Without these safeguards built into the language of the Modified CTP, there is nothing to prevent Tri-State from once again artificially inflating its exit fees,” he said.
Golino also faulted Tri-State for not including more robust figures for the association selling that extra capacity, which would also reduce the exit fee, or accounting for downsizing operations to reduce costs.
“An exit fee that is too large creates an unreasonable barrier for a member to exit a cooperative and enter the market,” Golino said. “Such barriers suppress competition and ultimately lead to inefficiencies such as higher prices.”
Using a methodology focused on assuring debt repayment, Golino calculated an exit fee for United Power of $154 million, before adding the cost of agreements to purchase power from third-party generators.
Golino did concede that “an exit fee that is too small will not only make rates increase for remaining co-op members but cause the co-op to unravel as more and more members leave and expenses for remaining members spiral out of control.”
It was this last point that Tri-State representatives hammered home in rebuttal testimony filed with FERC on March 25.
“A CTP that is too small would increase rates for remaining members, trigger a rush to the door, and ultimately may well result in financial dissolution of the Tri-State enterprise,” the Brattle Group’s Celebi said.
And as for downsizing or marketing the excess power, Tri-State’s options are limited, Brad Nebergall, the association’s senior vice president for energy management, said in a filing.
The Tri-State system due to its expansive reach — it covers cooperatives in Nebraska, Wyoming, Colorado and New Mexico — and the need to reliably serve every member has limited flexibility in retiring generating capacity, Nebergall said.
Nebergall also pushed back on Golino’s criticism that the association underestimated the value of selling the electricity freed up by a United Power departure.
“United Power’s load is almost exclusively served with Colorado and Wyoming generation resources,” Nebergall said. “There are transmission limitations precluding the movement of this energy and capacity into and from other regions.”
The investment community is watching
While invoking the specter of bankruptcy may seem histrionic, it is a possibility on which the investment community is keeping watch.
In January, S&P Global Ratings, one of the three major bond rating agencies, dropped Tri-State’s rating to BBB+, a lower-medium grade, and revised its outlook to negative from stable.
It came as eight cooperatives formally asked for exit fee calculations — including five in Colorado. Two cooperatives — the Kit Carson Electric Cooperative, in Taos, New Mexico, and the Delta-Montrose Electric Association, in Delta — have already left.
Kit Carson paid a $37 million exit fee in 2019 and DMEA paid $136.5 million in 2020. Golino said the exit fees for both were about double their annual billings, not eight times annual billings as Tri-State is seeking from United Power.
“We revised the outlook to negative to reflect our view that the utility faces more pronounced governance exposures following the initiation by three of Tri-State’s members of the two-year notice period for withdrawing from the utility,” S&P Global Ratings credit analyst David Bodek, said at the time.
Tri-State’s response to criticism
Tri-State has responded to some of the criticism. It is closing coal-fired plants and plans to add 2,375 megawatts of renewable generation by 2030, with 59% of its electricity coming from renewable sources by 2030. It has lifted the 5% cap on local generation and is offering partial contracts.
The La Plata Electric Association, in Durango, for example, has signed a contract to get 50% of its electricity from Tri-State and 50% from clean energy provider Crossover Energy. It will have to pay an exit for half of its long-term contract. La Plata is one of the cooperatives that had asked for an exit fee.
Tri-State has also cut its wholesale electricity rates 4% and said it will hold them steady through 2030.
Still, S&P Global said, “We believe the utility faces significant governance risks. Over more than a decade, three CEOs have struggled to placate members that are expressing dissatisfaction with the level of rates and the utility’s carbon intensity. The notices of intent to withdraw compound these risks.”