A sudden power shift: Empire Electric’s provider invites the feds to take over rate regulation, despite pleas to delay

by Carolyn Dunmire | August 5, 2019 12:31 pm

EMPIRE ELECTRIC ASSOCIATION OFFICE

Tri-State, which is the electric power provider for the Empire Electric Association, the local co-op, has caused some concerns because of its recent decision to seek federal rate regulation. Photo by Gail Binkly.

Despite requests to delay the move, the Tri-State Generation and Transmission Association has decided to seek regulation by the Federal Energy Regulatory Commission (FERC) instead of state regulators.

On July 9, the board of directors of Tri-State, which is the electric power provider for the Empire Electric Association, voted to move forward with an application to FERC for regulation of the wholesale rates it charges to its 43 member co-ops.

Fourteen days later, Tri-State filed its tariff application with FERC and announced that it expects the filing to be accepted in 60 days. According to Tri- State’s press release on the vote, “For the first time, Tri-State will be fully rate regulated. Tri-State would be required to file proposed rates with FERC, and FERC would establish just and reasonable rates through its regular rate setting process.”

The vote marked the end of a rushed process shrouded in mystery on the reasoning, timing, and voting results. During the three-week period before the vote, member co-ops submitted a long list of questions to Tri-State seeking to clarify the reasoning and implications of FERC oversight. Individual members of Empire Electric and other co-ops submitted questions to their own board of directors to clarify the vote, and members of the Colorado legislature requested a delay to better understand the implications of FERC oversight on Colorado ratepayers.

The vote on July 9 angered some members of the Colorado Public Utilities Commission (PUC) who felt that Tri-State is reneging on a deal it reportedly struck in May with the state legislature regarding a bill aimed at reducing Colorado’s greenhouse-gas emissions. What seems to be lost in the process is consideration of the impacts that FERC rate regulation will have on Empire Electric and other co-op members. “I have qualms about how the timing of this decision diminished our co-op’s voice,” said Heidi Brugger, an Empire Electric member who regularly attends board meetings, in an email response to a question from the Four Corners Free Press.

“The Empire Electric board met after the Tri-State decision was made on July 9th. Are we nothing more than a rubber stamp? And the federal oversight by FERC is not a bargain. While it may standardize withdrawal arrangements across the Tri-State co-op, every ask of FERC will have a high price tag, which eventually may impact EEA member rates. We needed more time to ensure that the questions raised were answered.”

The Tri-State family

As an Empire Electric customer, “You are part of something bigger,” the Tri-State website says. “You’re a part of a co-op. Your reliable and affordable electricity comes from Empire Electric Association working together with their power supplier, Tri-State Generation and Transmission Association. Collaboration is part of our DNA. Our family of not-for-profit electric co-operatives, including Empire Electric Association, leverages our combined resources and knowledge – giving us the stability we need to succeed when it counts for you.”

As a member of the Tri-State family, Empire Electric entered into a “full requirements contract” with Tri-State to provide all its electricity needs through 2040. The terms of the contract dictate that Empire Electric cannot “self-supply” more than 5 percent of its power needs. That is why Empire Electric is conservative on implementing local power projects and monitors net metering customers to ensure that they are not selling excessive power to the grid.

As a member/owner of Tri-State, Empire Electric has one vote on the Tri-State board and sends a representative from its own board to the monthly meetings.

Up until the July 9 vote, Tri-State proudly touted its independent management and oversight. Tri-State’s mission “is to provide our member systems a reliable, affordable and responsible supply of electricity in accordance with cooperative principles.” There are seven cooperative principles, including voluntary and open membership; democratic member control; and concern for community.

All co-operatives, including Tri-State and Empire Electric, are to follow those.

Tri-State explained its self-governance and rate regulation to the New Mexico legislature in 2017 as follows, “Our association is member-owned and member-governed. One member, one vote. Unlike investor-owned utilities whose rates include profit margins for their shareholders, co-operatives operate on a not-for-profit basis and have cost-based rates.”

In addition to its own by-laws and regulations, co-operatives in Colorado and New Mexico must abide by state regulations on business and accounting practices. The co-operative principles as implemented in by-laws and practices are overseen by the board of directors for the co-operative, who assume “fiduciary responsibility” for managing the enterprise in the best interest of the members they represent.

For co-operatives with a purchase power agreement with Tri-State, one director is selected to represent the co-op on the Tri-State board. This director assumes additional fiduciary responsibility for protecting the interests of Tri-State. What is not clear is what happens when Tri-State and the distribution co-op, such as Empire Electric, are at cross-purposes.

Several co-operatives such as La Plata Electric Association (LPEA) and San Miguel Power Association (SMPA) held emergency board meetings before July 9 to discuss their strategy as a group and guide their Tri-State representatives on a course of action. They also submitted letters to Tri-State and other co-operatives urging them to delay the vote until more questions were answered.

Empire Electric’s representative to Tri-State, Bill Mollenkopf, presented the information provided by Tri-State about FERC oversight at Empire’s regular board meeting on June 14.

In contrast to the flurry of activity and questions prior to the vote, there was relative silence afterward. Other than a confusing press release from Tri- State, there was no information released by the individual co-ops on how they voted and whether the questions or requests for delay were duly considered by the Tri-State board.

“After the FERC vote passed, I tried to find out how my co-op voted, because the press release from Tri-State and the news reports were vague and conflicting,” said Joan May of Telluride, an SMPA member. “I heard, secondhand, that the vote on this at Tri-State was a voice vote, and the votes were not recorded, it was simply that is sounded like there were a lot more yes votes than no votes. I’d love to confirm this, but of course Tri-State does not require votes to be attributed nor are their minutes (or agendas, or calendars, or board members, or notices) easily locatable. DMEA, LPEA — and I believe United — have volunteered that they voted no on the FERC vote.”

May continued, “One of the many ironies is that Tri-State claims that they are better off without PUC oversight because they have a democratic board of 43 members. It is misleading to call their board democratic, because they seem to be directed how to vote by Tri- State, and also because each of the 43 co-ops gets one vote, despite its size. So, when three of the co-ops oppose a motion, they represent 25 percent of the power demands on Tri-State but only a small minority of votes.”

In the end, a statement released by SMPA sums up the voting process for many Tri-State members. “SMPA is not necessarily opposed to Tri-State becoming rate regulated by the Federal Energy Regulatory Commission. We do feel that a less rushed, and more methodical process leading up to this would have allowed for a more complete understanding of what was being done, and why.”

Who is FERC?

The Federal Energy Regulatory Commission was created as an independent agency in 1977 to assume many of oversight responsibilities outlined in the Federal Power Act of 1920. FERC regulates interstate commerce for energy supply such as wholesale power rates and transport charges for oil and natural gas pipe lines. In addition, FERC oversees purchase contracts for qualifying facilities (QFs) under Public Utility Regulatory Policies Act of 1978.

Most generation and transmission companies like Tri-State that own and operate resources in multiple states are regulated by FERC. Tri-State is exempt from FERC rate regulation because it is owned by small electric co-operatives and borrowed from the Rural Utilities Service.

Despite its exemption, Tri-State has dealt with FERC over-rate and contract complaints. In 2016, Tri-State was denied a petition for a declaratory order from FERC to limit power purchases from QFs by the Delta-Montrose Electric Association, which wanted to exceed the 5 percent self-supply cap.

Tri-State’s new CEO, Duane Highley, who started work in April and came from the Arkansas Electric Co-operative Corp. and Arkansas Electric Co-operative Inc,. has experience working under FERC orders related to QFs.

Looking back, Tri-State has been on the path to be eligible for FERC oversight for the past few years. According to the Tri-State press release on July 23, “Tri-State has considered FERC regulation since 2010, as both Colorado and New Mexico exercised wholesale rate jurisdiction over Tri-State, which resulted in increased costs, unrecovered revenue and inconsistent rates to its members.”

In 2014 Tri-State repaid its Rural Utilities Service debt and in May 2019, the Tri-State board amended its by-laws to allow new types of members to join the association, effectively eliminating the exemptions to FERC jurisdiction.

Mollenkopf, the Empire Electric representative to the Tri-State board, said, “If we at Tri-State had requested FERC regulation when it was first seriously considered in 2012, Tri-State would have avoided just shy of $50 million that was lost in the New Mexico ($39 million) and Colorado ($11 million ) rate protests that occurred in 2013-14. Even with paying a $1.3 million annual fee to FERC over the intervening seven years, Tri-State members would be over $40 million ahead today!”

The primary reason that Tri-State puts forward for inviting FERC rate regulation is that it would “eliminate inconsistent rate treatment across states. It would preempt rate regulation in Colorado, Nebraska, New Mexico, and Wyoming. It would eliminate the three-protest rule in New Mexico, moot the New Mexico Federal Court case, eliminate the rate complaint jurisdiction in Colorado and prevent new rate regulation in Wyoming and Nebraska, as well as in Colorado and New Mexico.”

In a July 23 press release announcing Tri-State’s tariff application filing with FERC, Highley, the CEO, said, “If Tri-State is to be rate regulated, it makes sense to be regulated by a single regulatory body that would apply consistent rates to Tri-State’s members in each of our four states.”

By eliminating the cost of case-bycase opposition to state rate regulation, there would be a higher level of rate certainty because FERC uses formula rates. This rate certainty may also help reduce Tri-State’s borrowing costs. The costs to Tri-State with FERC regulation will be an annual fee of approximately $1.3 million, litigation costs, and increased staff costs for hiring FERC-qualified lawyers and analysts.

The costs to individual members have not been specified but it is expected that filing a rate complaint with FERC will be more costly than involving the state PUC. Josh Dellinger, general manager of Empire Electric, said in an email to the Four Corners Free Press that there could be both benefits and drawbacks.

“If Empire Electric did want to challenge a Tri-State rate, doing so at FERC would be expensive,” Dellinger said. “However, FERC offers an additional check that we presently do not have. Tri-State will have to file its rates with FERC and FERC will have to approve them before they become effective.

“As it works now, Tri-State’s rates become effective without any third-party review. The state commissions only become involved if there is a complaint. FERC is very familiar with electric utility rates, likely much more so than state commissions. Regulating wholesale electricity rates for utilities involved in interstate commerce is part of FERC’s core mission. A rate is going to have to be ‘just and reasonable’ for FERC to approve it in the first place. So, hopefully, the likelihood that we would need to challenge a rate will be reduced by having FERC review.”

Following co-operative principles?

The Tri-State mission statement specifies providing reliable electric power to its members while following the cooperative principles, including “voluntary membership.” The other benefit of FERC regulation, according to Tri-State, is that it would eliminate state jurisdiction over “buy-outs.”

In December 2018, Delta-Montrose Electric Association filed a complaint with the Colorado PUC to intervene in its negotiations with Tri-State on a buy-out agreement that would allow it to terminate its power purchase contract with Tri-State and exit the family. Mark Pearson, executive director for San Juan Citizens Alliance, suspects that Tri- State’s rush to move to FERC oversight is related to the DMEA complaint.

“It seems like the urgency for immediate action was entirely an attempt to avoid Colorado PUC oversight of the exit fee negotiation with Delta-Montrose,” Pearson said. “Tri-State flatly refused to address any of the questions raised by member co-operatives, including United and LPEA. The rushed, secretive nature of the decision can only raise questions.”

Pearson is not the only one who has questions about Tri-State’s timing. The Colorado PUC commissioners were concerned enough about the potential change of venue for the DMEA complaint that after they were noticed about the FERC filing they ordered Tri-State to “file a summary of all actions taken by Tri-State, its employees and any third party consultants, including attorneys, from the period January 1, 2019, through Friday, July 12, 2019, concerning the steps it has taken to consider and to move Tri-State toward additional FERC regulation.”

Just 10 days after the FERC vote, Tri- State and DMEA announced that they had filed a settlement agreement with the Colorado PUC and this previous complaint would be dismissed. In an effort to support “sound public policy, good faith and fair dealing,” another Tri-State member, LPEA, sent a motion to the Colorado PUC on July 18 that “any Settlement between DMEA and Tri-State should not be confidential … and in particular, that the Commission should make clear, transparent and public any details regarding the proper calculation of any just and reasonable exit charges, or equivalent charges.” As LPEA announced that it would submit a request for a buy-out estimate from Tri- State earlier in the month, a transparent settlement process would assist its consideration for leaving the family as well.

One confusing aspect of the reasoning behind FERC regulation is that Tri- State would always have the option of leaving FERC oversight. It is not clear how this would be possible now that Tri- State has eliminated possible exemptions or how new family members that are not member-owned would be treated if FERC oversight were to be terminated.

What does it mean for EEA members?

Overall the change from self-regulation to FERC oversight is a transfer of power and control from the elected member board to FERC. While this might clear up some of the fiduciary responsibility for the board members that represent both their own co-operative and Tri-State, it will saddle small distribution co-ops with big bills if they want to contest rate or contract terms.

How this power split will work will not be clear until Tri-State’s Contract Committee makes recommendations for new forms of membership and contract terms. Empire Electric board member Fetterman said, “As best as I can determine, the effect of Tri-State being rate regulated by FERC would be neutral to our members. It would be positive since we wouldn’t be rate regulated in five different states. The negative is that it would be an expensive venue to file grievances in.”

Pearson raised similar concerns. “One concern about moving regulation from the state level to the federal level is that it greatly increases the cost and difficulty of consumers to raise complaints about rates. Now, any rate complaints will require hiring extremely expensive lawyers in Washington, D.C., and expensive travel to a far-off location. FERC also has a reputation for taking years to complete decisions. The ultimate gist for co-op customers is a greatly more expensive process with a much slower response.”

It appears that while the move to FERC oversight was good for Tri-State, it has yet to be determined if or how it will benefit Empire Electric members. With ill-defined standing under the new membership and oversight rules, there seems to be little opportunity for individual members to be heard.

However, there is a new opportunity for Empire Electric members. On July 17, Tri-State announced that it will be a pursuing a “Responsible Energy Plan to support transition to clean energy resources, ensure reliability, with goal to reduce rates.” Part of this planning process will be facilitated by the Center for New Energy Economy, led by former Colorado Gov. Bill Ritter.

“As a co-operative, we understand that transformative change requires understanding and engagement with stakeholders,” said Tri-State CEO Highley in a release. “Governor Ritter and the Center for the New Energy Economy will convene for Tri-State the best and brightest to surface ideas that will inform and advance our planning.”

Marianne Mate of Dolores, an Empire Electric member, said she intends to stay involved in Tri-State’s ongoing process. “As an owner/member of EEA it’s important to me to continue to stay informed and advocate for cost-effective clean energy solutions.

“The issues are complex, and we need to be sure our board of directors are engaged and asking the hard questions and if they aren’t, we need to be asking those questions.”

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