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Will regulators in DC or Denver decide exit fees?

by Allen Best

This is from the April 23, 2020, issue of Big Pivots. If you want to receive issues of the e-magazine send your e-mail to allen.best:@comcast.net.

Send an e-mail Tri-State Generation & Transmission on April 10 announced two new policies, one described as designed to “increase member self-supply and local renewable energy resources.” The other would provide a methodology for determining exit fees.

Two of the member co-operatives seeking to get out of Tri-State say they like nothing of what they’ve seen.

“This does not meet our needs—at all,” said Bryan Bryant Roberts, the interim chief executive officer at United Power, the largest by far of Tri-State’s 43 members.

Also see “Upheaval & Tension in Colorado: The Delta-Montrose story is a microcosm of the upside down 21st century energy world

The flexibility that Tri-State says it is offering member cooperatives is not free, he said. For United Power to produce 200 megawatts of its own power, he said, would require it to pay Tri-State $200 million. At that price it would take 20 to 40 years for United Power to recoup its investment.

“If nobody can use (this flexibility provision), can it still be considered flexible?” he said.

In Durango, Jessica Matlock, chief executive of La Plata Electric, the other co-op that wants out of Tri-State, was also unpersuaded.

“It’s a lot of press releases coming out of Tri-State, and again, if you dig into the facts and details, several layers deeper, there’s still a lot of unknown,” she said.

Two issues overlap here. First, the so-called all-requirements contract between member and Tri-State allowed a maximum of 5% cap self-generation by member cooperatives. This had been a sticking point with Delta-Montrose Electric and then La Plata and United Power, who wanted more ability to generate their own electricity.

A new policy allows the two co-ops and others to express their intent to transition to partial requirements contracts. Up to 300 megawatts of generating capacity will be available among Tri-State members. That’s 10% of Tri-State’s system peak demand. Any individual member can self-supply up to 50% of its load requirements, subject to availability in this open season.

A second issue is the methodology for determining exit fees. Tri-State has submitted to the Federal Energy Regulatory Commission its proposal for that formula and asked for expedited approval.

Tri-State has all along insisted that it had to look out after the interest of all members. The exit fees had to reflect the true costs of member co-ops in say, Holyoke, in the state’s northeast corner, or those in Wyoming. That was explicit in the statement by Duane Highley, the chief executive officer.

“Both the partial requirements contract option and the contract termination payment methodology approved by the board protect the interests of the Tri-State utility members by ensuring this one member’s action does not unfairly shift costs to the other members,” he said in the April 10 press release.

But who decides whether Tri-State is being fair and reasonable? That’s the question at the heart of a mad scramble of filings in the last 10 days. Tri-State wants regulators in Washington D.C., to decide, while the two dissenting co-ops want regulators in Denver to decide. The history goes back to 2019.

This is from the April 23, 2020, issue of Big Pivots. If you want to be on the mailing list, send you e-mail to [email protected]

Tri-State applied to the Federal Energy Regulatory Commission to set rates. FERC recently agreed, said it does not have exclusive jurisdiction. See story posted March 26.

But does that mean to determine exit charges, too? Like Delta-Montrose before, both La Plata and United had asked the Colorado Public Utilities Commission to arbitrate. That has been delayed by the loss of PUC commissioner, Frances Koncilja, who had been assigned the case. It’s now scheduled to be heard by an administrative law judge on May 18-22.

Now comes a flurry of filings. The Monday after issuing that press release announcing the new policies, Tri-State asked FERC to accept the “contract termination payment methodology” on an “expedited basis, grant waiver of its prior notice requirements, and allow an effective date of April 14.” It made this request on April 13.

United and La Plata, a week later, on April 20, filed with the PUC asking a hurry-up of a decision from the PUC. “Time is of the essence here…” said the two co-ops in their filing. “In fact, every day may count.” Rather than awaiting a recommended decision by the administrative law judge, which would be subject to a 27-day period for various filings, the co-ops wanted a more hurried initial decision after the May sessions.

Further complicating the arguments is a new law in Colorado effective late March. HB 20-1225 declares that the PUC has traditionally had authority to determine just and reasonable rates by all public utilities and that if a co-op withdraws from a wholesaler, “the withdrawal is a matter of statewide concern” over which the PUC has authority to adjudicate complaints. The wholesaler—read Tri-State—“must act in good faith and fair dealing, cannot impose unreasonable contract terms in relation to the withdrawal …”

The bill’s primary sponsors included two Republicans from the Delta-Montrose area. Take that, Tri-State!

But again, Tri-State insists that FERC, not the state, has jurisdiction.

If the turf is still being decided, it still ends up coming down to numbers. What constitutes a fair and equitable exit fee?

Matthew Larson, an attorney representing La Plata and United, says Tri-State in the exits of Kit Carson Electrical Cooperative in 2016 and now in the Delta-Montrose exit have started high and come down. Tri-State started out at $137 million in the Kit Carson case and came down to $37.5 million. He said he was not privileged to disclose Tri-State’s original asking price but it was “hundreds of millions of dollars higher” than the final figure of $62.5 million.

In Durango, Matlock calls Tri-State’s offer for an exit price “bloated.” She sees Tri-State discouraging local development of solar. She previously developed solar energy in the Seattle area while working for a utility in Washington state. Southwestern Colorado has far better solar potential—if her co-op had the tools to develop it.

“Being here is like being in a candy shop,” she says. “I could save hundreds of millions of dollars for our customers. It’s real frustrating. I’ve never seen anything like this.”

To be able to generate more of its own electricity, United Power must partially buy its way out of Tri-State. Robbins, the interim CEO, says the numbers don’t work well. “We have run models at the level we want to participate in, and in some cases our costs actually go up. That is not what we were wanting.”

He added: “It’s going to be very difficult for anybody to be able to exit going forward, using what they have filed with FERC.”

Larsen says United Power would have to pay $1.22 billion to leave Tri-State using the new methodology. If all members were to leave and pay exit fees under the same formula, they’d pay $9 billion. Tri-State has debt of only $3.3 billion, he said.

If you think this will end up in a court case, you’re not alone. But the far bigger issue identified by Robbins is whether the Tri-State is trying to use a business models of the 1980s to compete in the 2020s.

Postscript: After this story was published in Big Pivots on April 23, 2020, Tri-State spokesman Mark Stutz responded to several questions that had been posed. His response, in part:

There is no issue of expediency here, other than to bring resolution in a timely fashion as to the question of appropriate jurisdictional authority. Tri-State has been Federal Energy Regulatory Commission (FERC) jurisdictional since Sept. 3, 2019, and as we are an interstate wholesale power supplier, FERC is the entity that would best adjudicate the interests of all of our cooperative members and public power districts across all four states where we serve (as opposed to one state utility regulatory commission).

It might be instructive for you to know exactly what FERC regulates. At its core, the answer is the rates and services for electric transmission in interstate commerce, and electric wholesale power sales in interstate commerce, principally under Parts II and III of the Federal Power Act. Further detail and specific references are here:

  • Transmission of electric energy in interstate commerce by public utilities, i.e., the rates, terms and conditions of interstate electric transmission by public utilities – FPA 201, 205, 206 (16 USC 824, 824d, 824e);

o   “Traveling electrons” –which cross state lines;

o   “Commingled electrons” –which join the stream of commerce;

  • Sales of electric energy at wholesale in interstate commerce by public utilities, i.e., the rates, terms & conditions of wholesale electric sales by public utilities – FPA 201, 205, 206 (16 USC 824, 824d, 824e);

o   Includes a sale to “any person . . . for resale”; and

  • FERC has exclusive jurisdiction over the “transmission of electric energy in interstate commerce,” and over the “sale of electric energy at wholesale in interstate commerce,” and over “all facilities for such transmission or sale of electric energy.” FPA 201(b) (16 USC 824(b);

o   Federal authority “trumps” contrary state authority.

It is our members themselves that make these key decisions about their cooperative. As a cooperative, all of our members worked together to develop our approach for partial requirements contracts to provide more flexibility, as well as the contract termination payment methodology. Both of these committee recommendations were then approved by our board of directors, also with representatives from each member system. The process was inclusive and democratic, and included an extensive review process with our membership’s Contract Committee. All points of view were expressed, listened to and considered. We had indicated last year that we would complete this prcess by April 2020, and that is what we did.

Our proposed contract termination payment methodology has been filed with the FERC, and is very similar to a previously FERC-approved tariff for the Wabash Valley Power Alliance. FERC will review our filing to determine whether it is just and reasonable as it relates to Tri-State, and other parties will be part of the review process at FERC.

Tri-State opposed this legislation you mentioned. We understand the intent of the new Colorado law, but we also believe that contract termination payment methodology ultimately is a FERC jurisdictional issue. FERC regulates our wholesale rates, or tariffs, and issues related to those tariffs, including ultimately contract termination payment methodology.

 

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