The cost of leaving Tri-State G&T

United Power exit fee would be $235 million under recommended formula

by Allen Best

United Power would pay $234.8 million to leave Tri-State Generation & Transmission under a methodology recommended by an administrative law judge to the Colorado Public Utilities Commission.

Using a somewhat similar methodology, Durango-based La Plata Electric would pay a trifle less than $97 million.

United Power is by far the largest member co-operative of Tri-State, with about 93,000 members in Denver’s northern suburbs and exurbs and roughly a 15% share of electrical demand. La Plata is the third largest.

Both electrical co-operatives asked Tri-State for what it would cost them to leave short of their contracts, which expire in 2050. They could not agree on what constitutes a fair and just fee, and the two co-ops then appealed to the Public Utilities Commission to arbitrate. The PUC commissioners referred the case to administrative law judge Robert Garvey, who took testimony for nearly a week in May.

In his decision filed on Friday, July 10, Garvey ruled that the methodology recommended by United Power’s expert witness, Sandra Ringelstetter Ennis, a consultant with more than 30 years of experience in the electricity industry would provide members of Tri-State a “just, reasonable and non-discriminatory exit charge.”

See: 2020-07-10 PUC ALJ Recommended Decision

Key elements are the indebtedness of Tri-State, including the money it owes on coal and gas plants, but also solar and wind farms, minus something called “patronage capital,” or what the individual co-ops own of those assets. Subtracting the patronage capital from that member’s share of indebtedness would yield a figure that would leave Tri-State in a position had the member never joined, Garvey said.

But most important, he added, this methodology results in exit charges that are comparable to the exit charges paid by Kit Carson Electrical Cooperative and Delta-Montrose Electric Association.

“There is no better evidence of what an exit charge from Tri-State is than the agreed-upon exit charge for two former Tri-State members,” Garvey wrote. “The Tri-State Board determined that these charges made its Members whole and were just and reasonable. There is no other evidence that is nearly as helpful in determining a just and reasonable exit charge rate.”

Kit Carson, a much smaller cooperative based in Taos, N.M., which has fewer customers and hence less demand, left Tri-State in 2016 after paying an exit fee of $37 million. Details of the exit agreement with Delta-Montrose were more complicated, but the bottom-line figure in Garvey’s ruling was $62.5 million.

In other words, the judge had two exit fees to study, creating a pattern. The number yielded by the methodology recommended by United’s expert witness lined up with those two previous cases.

Tri-State, in a press release several hours after the Garvey decision was filed, provided numbers that argued that the buy-out was far below what would be appropriate. The most important number cited by Tri-State is that United Power’s share of the wholesaler’s outstanding debt and other obligations is approximately $762 million.

in a statement, United Power said that Tri-State tried to block United Power from leaving by proposing a charge of $1.25 billion. In a statement in response to the Garvey ruling, United called that that figure a ‘discriminatory amount that would have resulted in an unfair windfall to Tri-State’s remaining members.”

The PUC commissioners will have the final decision. However, Tri-State had also filed with the Federal Energy Regulatory Commission, arguing that that agency should have jurisdiction, not the state, because Tri-State operates in four states and not just Colorado. As such, it should have one decision-making body for exit fees.

Even if the Colorado PUC commissioners accept Garvey’s recommendation and FERC does not get involved, it’s not certain the two co-ops will be leaving Tri State. Dean Hubbuck, chief energy resource officer for United, said in an interview that the exit fee is one piece of information needed as United evaluates its options going forward. While he and other senior staff members can make recommendations based on studies, the financial decision of whether United leaves Tri-State will be made by elected directors. But it’s still early in the process, he said.

The broader issue may be whether Tri-State, because of its size, and organizational structure, can meet the needs of a diverse membership amid the great fluidity of the changing energy landscape. The wholesale cooperative, No. 2 to Xcel Energy among Colorado utilities, has been changing rapidly after a time of stagnation.

The outstanding question as two of Tri-State’s three largest members consider their options is whether it’s capable of moving rapidly enough.

“Access to today’s energy marketplace requires a utility to be nimble and responsive to both the energy mix and the cost of the members at the end of the line,” said Hubbuck.

In an interview, he explained that Tri-State has a challenge in both its geographic diversity and the diversity of its member’s sizes and profiles. United is a giant and on the edge of a metropolitan area with 93,000 members while some cooperatives have just a few thousand.

“What satisfies one may not satisfy the other, and the utility industry is changing quickly,” he explained. With our proximity to the Denver metro area we are seeing change fairly routinely, and we need to be able to keep up with that.” One example, he said, is the adoption of electric vehicles. Smaller and more rural member cooperatives may not see the same EV adoption rates for another decade.

The diversities among its members, he said, “make it very difficult for somebody like Tri-State to keep up with those changes,” he said.

Tri-State was created in 1952 by several co-operatives to transmit power from the federal dams. Over time, its mission broadened. When the hydropower contracts fell short of meeting demand, it added generation. One major growth was the addition of the assets and members of Colorado Ute in the early 1990s. Assets included the coal-generating plants in Craig.

That model of large, central fossil-fuel power stations has come under assault in the last 10 to 15 years with the arrival of more dispersed and renewable generation assets. La Plata believes it can develop solar resources extensively in its service territory of southwestern Colorado much as Kit Carson has been doing in New Mexico and which is planned for Delta-Montrose.

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