Tri-State and United Power fighting in court and before state and federal regulators

Energize Weekly, May 13, 2020

A new front was opened last week in the battle between Tri-State Generation and Transmission Association and some of its electric cooperatives, as United Power, its largest member, filed a complaint in a Colorado district court charging subterfuge and breach of contract.

Meanwhile on May 18, hearings will open at the Colorado Public Utilities Commission (PUC) on a request by United Power and the La Plata Electric Association (LPEA), another member co-op, for the commission to set exit fees from Tri-State.

There are also dockets pending at the Federal Energy Regulatory Commission (FERC) on rates and a methodology for calculating an exit fee, which is also being challenged by United Power and some other co-ops.

Several co-ops – the association provides wholesale power to 43 cooperatives in Nebraska, Wyoming, Colorado and New Mexico – have criticized Tri-State for its heavy reliance on fossil fuel generation, its contracts that limit local generation to 5 percent of load and wholesale power prices above market rates.

Two co-ops have bought their way out of Tri-State’s contracts which run until 2050. The Kit Carson Electric Cooperative, in Taos, N.M., left in 2016 paying $37 million, and the Delta-Montrose Electric Association (DMEA), in Delta, Colo. paid $62.5 million to leave in 2020.

The stakes are higher in the case of Brighton, Colo.-based United Power, the association’s largest fastest-growing cooperative, accounting for 17 percent of sales, worth about $200 million a year. The co-op has about 95,000 accounts.

Tri-State has set the cooperative’s exit fee at $1.2 billion.

“It is United Power’s load and purchases that have permitted Tri-State to avoid raising rates and prevented other member-owners from following Kit Carson and DMEA out the door,” United Power contends in its lawsuit.

LPEA is about 8 percent of Tri-State’s load. Losing both would mean a big drop in sales for Tri-State. DMEA was about 4 percent of Tri-State’s load.

“United Power voluntarily entered into a contract with its fellow members to share the costs of power, and now it seeks to leave without fairly sharing those costs,” Tri-State said in a statement. “United Power’s most recent complaint smacks of desperation and is completely without merit.”

In its lawsuit, United Power charges that Tri-State acted in breach of contract and added new non-utility members in a way that contravened state statute.

United Power had sought to develop a partial contract with Tri-State that would allow more local flexibility and voted to a change in the association’s bylaws that it thought would do that.

Tri-State used that change to add new members, enabling it to shift its regulatory oversight from state authorities, such as the PUC, to FERC.

United Power characterizes Tri-State actions as a “years-long scheme to fraudulently direct the actions of United Power and other members to accept bylaw changes with a hidden agenda.”

The cooperative further argues that the addition of the three new non-co-op members added to qualify for FERC oversight were part of a conspiracy since they all had prior business dealings with Tri-State.

MIECO, a natural gas wholesaler, provided fuel to Tri-State. Ellgen Ranch rents land from Tri-State subsidiary. And Olson’s is a greenhouse operation that purchases thermal energy from the association.

United is seeking a ruling of breach of contract and damages. “This was a major step and was not taken lightly by any means,” Dean Hubbuck, United Power’s director of power supply and rates, said in an interview. “It was a step we felt we needed to take to protect not only United Power’s rights, but all members’ rights.”

The FERC has accepted MIECO as an association member and agreed to regulate Tri-State’s rates and contracts. Tri-State sought FERC action to block the PUC proceedings, but the federal commission ruled that while it has jurisdiction, it does not have exclusive jurisdiction.

So, the state docket on United Power and LPEA exits fees is moving forward.

“The PUC believes it has the authority to decide these formal complaints,” Terry Bote, a commission spokesman, said in an email.

The PUC hearing will focus on the method for determining the cost of leaving the association.

Tri-State contends that it had made investments based on the long-term contracts United Power and LPEA signed.

“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,” Duane Highley, Tri-State’s CEO, said in a PUC filing.

By Tri-State’s calculations, United Power should pay for all the power they would have taken in the next 30 years, plus operating and maintenance costs, additional investments plus debt service. Tri-State has $3.3 billion in long-term debt.

This is how the association arrived at the $1.2 billion exit fee. It declined to give LPEA an exit fee calculation, saying a moratorium on exit fees was in place while it developed the new formula, which is before the FERC.

Both United Power and LPEA are interested in adding more renewable energy and see development of local resources as stimulus to the local economy.

LPEA has a goal of reducing carbon emissions by 50 percent by 2030 and having rates below 70 percent of other cooperatives. Tri-State still gets about half of its electricity from fossil fuel sources and has a base wholesale rate including transmission of 7.5 cents a kilowatt-hour.

Hubbuck said that leads to rates for United Power customers that are 20 percent to 35 percent above those of Xcel Energy, the investor-owned utility that serves the area adjacent to the co-op.

United Power’s consultant Sandra Ennis in her preliminary testimony to the PUC said that if Tri-State’s approach to calculating an exit fee was applied to all the members leaving save one, the last member would be debt free with $5.6 billion in cash and have generation and transmission assets free of customer obligations.

Hubbuck said that the cooperative view is that it should pay for the infrastructure – lines and substations – built to service United Power and its share of the association’s debt.

“We will pay our fair share of the debt,” Hubbuck said in an interview. “For the rest of that, it gets back to how they manage their company.”

At the FERC, there are proceedings on transmission rates, wholesale power rates and a proposed methodology for calculating exit fees using mark-to-market accounting, which calculates all assets at present value.

Hubbuck said that these methods when applied to a long-term contract overstates the value of the contract and assets, particularly as the cost of electricity is falling with cheaper renewable generation.

Tri-State has moved to close four of its coal plants and is adding 1 gigawatt of wind and solar generation.

In April, the association announced a more flexible contract enabling utilities to add renewable energy above the 5 percent cap on local generation.

Under the partial contracts, which will also run to 2050, a co-op will be able to seek a portion of 300 megawatts of capacity, about 10 percent of the association’s peak system demand, for local projects, but not to exceed 50 percent of local demand.

Cooperatives will now also be able to develop community solar projects, in which homes and businesses purchase a share in a large solar array, up to 2MW, or up to 2 percent of local electricity demand above the 5 percent local generation cap.

“A number of our members asked for more flexible contracts, and this was done as part of Tri-State’s Responsible Energy Plan,” Lee Boughey, a Tri-State spokesman, said.

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