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Rural electric cooperatives look at cutting the cord

Tuesday, August 7, 2018  
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COVER STORY | Rural electric cooperatives look at cutting the cord

Author: Mark Jaffe - August 7, 2018 

 

Craig Station, a Tri-State Generation & Transmission Association coal-fired power plant in northwest Colorado. (Jimmy Thomas / Wikimedia Commons)

Luis Reyes drove up to Durango from Taos, New Mexico, on a sunny April day in 2017 to tell folks how the Kit Carson Electric Cooperative, which he heads, left its interstate wholesale power provider and struck out on its own — and the room where he spoke at Durango’s Strater Hotel was packed.

Kit Carson had paid $37 million to get out of its long-term contract with the Westminster-based Tri-State Generation and Transmission Association, which serves 43 electric cooperatives in four states, including 18 in Colorado.

Several co-ops have complained about what they see as Tri-State’s high power costs, limits on developing local renewable energy, and the loss of dollars sent out of town to buy electricity.

Kit Carson, however, was the first to go beyond complaints. “We are showing it can be done,” Reyes told Colorado Politics. “This is not pie in the sky.”

Since Reyes’ talk, the Durango-based La Plata Electric Association has begun to explore its options, and the Delta-Montrose Electric Association is already in separation talks with Tri-State.

On the Front Range, large co-ops, such as Brighton-based United Power and Fort Collins-based Poudre Valley Rural Electric Association, are pressing for more local renewable generation.

“When Kit Carson left last year, the lightbulb went on at the other 42 co-ops,” said Jerry Marizza, new energy program coordinator for United Power.

Other co-ops have looked, but not leaped.

“We want more renewable energy,” said Rube Felicelli, board president of the San Miguel Power Association, which serves Telluride. “But we are reluctant to leave Tri-State. There are so many unknowns. We looked at it and decided it was economically unfeasible.”

This turmoil is born of rapid changes in the utility industry as power prices are falling due to cheap generation powered by natural gas, wind and solar and growing demands from consumers for homegrown renewable energy.

Meanwhile, Tri-State developed 5,562 miles of high voltage lines along with interests in six coal-fired and five natural gas-fired power plants and $3.2 billion in debt, the fruit of a business model created six decades ago that is making it a challenge to respond nimbly to the changing times.

Not that Tri-State hasn’t tried. It has closed one coal-fired plant and plans to close two more. In 2017 it retired its ownership share of the coal-fired San Juan Generating Station near Farmington, New Mexico, which is slated to close in 2022.

It also was the nation’s first generation and transmission group, known as G&Ts, to build a large-scale solar facility. It has added more wind and solar resources.

“There is no question that the utility industry is changing,” said Lee Boughey, a Tri-State spokesman. “But things aren’t changing overnight, and there is the difficult task of making sure the lights stay on and that the cost of power is affordable.”

Many co-ops, however, chafe at Tri-State’s 7.5 cents a kilowatt-hour charge when the going western wholesale price is around 3.1 cents a kilowatt-hour, according to energy broker Guzman Energy. Boughey says the Tri-State price reflects additional services.

“Tri-State is changing,” Marizza said. “It just isn’t changing fast enough.”

Questioning the relationship

When Tri-State was formed in 1952, getting power to rural areas was an expensive challenge. Tri-State met the need.

Each member co-op signed a long-term contract, took on its share of the operation costs and debt based on the kilowatt-hours it consumed, and agreed not to generate more than 5 percent of its own electricity needs. Most Tri-State contracts now run to 2050.

The 5 percent stipulation was to ensure that each co-op paid its fair share and did not shift the burden to other members, Boughey said. Each co-op got one vote on Tri-State’s board.

Tri-State built or bought interests in a fleet of coal-fired power plants that by 2010 was providing 62 percent of the association’s electricity, according to state data.

The association now gets 30 percent of energy from renewable sources, but it didn’t give up on building its last coal plant until November 2017—having to account for $93 million in costs. It still gets almost half its electricity from coal.

Tri-State’s business model is under pressure as wholesale energy prices continue to drop and the gap between what a co-op can buy electricity for on the open market and what Tri-State charges grows, said Chris Riley, president of Guzman Energy, which helped Kit Carson finance its Tri-State exit. The bigger the gap gets “the more the cost of defecting starts to make sense,” he said.

Tri-State’s defense is its long-term contracts and the 5 percent limitation on how much electricity a co-op can produce.

At least four cooperatives—United Power, the Delta-Montrose Electric Association (DMEA), the La Plata Electric Association and San Miguel—have hit the 5 percent cap, and another four are near the limit, according to a survey by Clean Cooperative.

Co-ops have come at the hurdle in different ways. DMEA, which has a community solar garden and gives a credit for rooftop solar, used a federal law that requires a utility to negotiate rates and buy energy from a qualified, local, renewable-energy facility.

This enabled DMEA to buy power, above the cap, from a small, local hydro project. Tri-State challenged the co-op’s position, but in 2015, the Federal Energy Regulatory Commission (FERC) ruled in DMEA’s favor. Tri-State has appealed and is seeking a rehearing.

Frustrated, the DMEA board began exploratory negotiations to leave Tri-State in November 2016. The talks are ongoing, and neither side will comment. But the minutes of the association’s May board meeting show that the co-op filed a complaint for not being able to get “certain withdraw-related information and its failure to receive equitable withdrawal terms from Tri-State.”

The tension isn’t only between co-ops and Tri-State, but within the co-ops themselves. Reyes’ talk in Durango “caused the community from many different angles to question the relationship with Tri-State,” said Emily Bowie, energy and climate organizer for the San Juan Citizens Alliance, an environmental group.

First, the La Plata Electric Association (LPEA), which serves about 43,000 members, placed a resolution before the Tri-State board seeking to raise the renewable-energy cap to 10 percent. It was defeated in July 2017.

The dynamics of the one-vote-per-co-op board are interesting. About 60 percent of Tri-State customers live in Colorado, whose cooperatives account for 40 percent of the votes. The rest of the votes are scattered among New Mexico, Wyoming and Nebraska cooperatives.

And while five large Colorado co-ops collectively serve more than 242,000 homes and businesses, there are 22 small co-ops each with fewer than 10,000 members.

Last January the LPEA board voted unanimously to form a committee to explore options for the co-op’s future.

The board, however, is deeply split on what to do. “There is a lot of ingrained trust issues on how we do an unbiased analysis,” Bowie said.

 

‘We have to be careful’

Britt Bassett, one of the “activists” on the LPEA board and a partner in a company providing solar to agricultural customers, was a member of the options committee. “There is some long-term risk staying with Tri-State with its long-term debt and falling prices in the power market,” he said.

Local generation could not only be a financial hedge, but by keeping dollars in the community, it can also serve as an economic development tool, Bassett said. The 30-percent renewable generation Tri-State cites includes all projects done by the co-ops, he added.

The committee presented a detailed report and PowerPoint to the LPEA board in May. “It wasn’t a successful report because nobody’s minds were changed,” Bassett said.

Davin Montoya, president of the LPEA board and a cattle rancher, said, “Tri-State is a leader in renewable energy in the last few years, so why they are complaining about Tri-State? We have $75 million in equity in Tri-State, and I don’t want to walk away from that.”

“We can’t afford to jump around,” Montoya said. “If Tri-State isn’t going to succeed, it will happen. But we have to careful.”

Some of the tension comes from an inherent conflict the co-ops face, said Mark Dyson, a principal in the electricity practice at the Rocky Mountain Institute (RMI), an energy-consulting group that has worked with cooperatives.

“There is a duty to provide your members with the lowest cost service,” Dyson said. “That is what is causing this tension between the co-ops and the G&Ts and even within the co-ops.”

Producing electricity locally, especially in rural and remote places, makes sense since it reduces transmission-line losses and helps reduce peak demands, Dyson said. “We see a lot of interest from co-ops in seeking competitive bids.”

RMI helped Granby-based Mountain Parks Electric negotiate the purchase of solar electricity for less than 4.5 cents a kilowatt-hour, Dyson said. That is 40 percent lower than Tri-State’s charge.

The Tri-State member co-ops on the Front Range are more suburban, and the push for renewable generation has been greater.

United Power, the association’s largest cooperative with more than 78,000 accounts, has been a leader in developing renewable resources. It was the first co-op in the country to build a community solar garden and since then has participated in five more solar projects.

Its 56 megawatts (MW) of renewable generation puts United at its 5 percent cap. So, last year it decided to go in another direction and add battery storage—a first for a Tri-State co-op and the first large-scale battery project in Colorado.

United, however, isn’t hooking up its 4-MW batteries to any of its solar installations. It will fill them with electricity bought from Tri-State. “Our position is the battery is not a generator,” Marizza. “Tri-State says it has the look and the feel of generator.”

Marizza made a presentation to Tri-State contending the batteries would actually increase electricity demand and that United was prepared to take all the financial and technological risks of the project. “Their argument is we’re losing money, and if we let you do it, others will want to do it,” Marizza said.

In July, Tri-State revised its renewable-energy policy to include batteries under the 5 percent cap. At the same time, it revised downward how much a co-op would be paid for battery power reducing peak loads, Marizza said.

According to Boughey, batteries are an emerging issue. “We have a member-driven committee that is reviewing these issues, including self-generation and batteries, and will likely make recommendations to our board,” he said, adding that the association’s battery policies follow those of FERC.

‘We have to push Tri-State’

Just to the north of United is the Poudre Valley Rural Electric Association (PVREA), another growing, suburban co-op serving 42,000 homes and business, with a robust renewable-energy policy. The co-op now has about 15 MW of solar, through its own facilities and purchase power agreements, and 2.6 MW of hydropower from Carter Lake.

PVREA is close to its cap, but thanks to continuing growth in the area, the co-op’s cap keeps growing as well, enabling it to accommodate all six solar projects it has sought to develop, said Amy Blunck, a spokeswoman for the cooperative.

“Because we are not there, we are always trying to see what our members want and always looking for more projects,” Blunck said. “We have a good working relationship with Tri-State.”

The area south of United’s service territory gets its electricity from Xcel Energy, the state’s biggest electricity provider. Xcel’s wholesale electricity rate is about a penny lower than Tri-State’s, Marizza said.

“We have oil and gas customers making demands we can’t meet,” Marizza said. “For an industry that uses a lot of energy an extra penny a kilowatt-hour is unacceptable. … We have to push Tri-State to help us mitigate that penny a kilowatt difference.”

Tri-State’s Boughey said, “We are working hard to control costs, and we anticipate that our rate remains flat over the next five years.”

Still, that price gap is creating a market of which energy traders, like Guzman Energy, are trying to take advantage.

“Presently the co-op is caught between a carrot and the stick,” said Leo Guzman. “The carrot is the wholesale price is a lot cheaper than they can get with a G&T. The stick is that their own large industrial and commercial customers could defect.”

“The economic incentives to change is higher in Colorado and New Mexico than anywhere else in the country,” Guzman said. The Coral Gables, Florida-based trader has opened an office in Denver.

When it decided to leave Tri-State, Kit Carson, which serves about 30,000 members, sought bids from energy wholesalers and providers, and settled on Guzman, which arranged for the upfront buyout money and a 10-year contract to provide electricity.

For the next six years, Kit Carson will be paying back the $37-million exit fee, but over the life of the contract, the co-op’s members should get $50 million to $70 million in savings compared to Tri-State rates, Reyes said.

There are no longer any debt obligations, nor is there a 5 percent cap. Kit Carson has 10 MW of solar, and that will grow to 40 MW in 2022 and provide 100 percent of the town’s daytime energy needs and about 50 percent of all the community’s electricity, Reye said. The cooperative is working on a battery project.

On the flip side, Kit Carson must pay transmission fees, primarily to Tri-State, to get its wholesale electricity to town and is now alone responsible for keep the lights on.

“This works for Kit Carson, but it may not work for other co-ops,” Reyes said. ”But the business model has to change. Smaller co-ops may have to merge with larger co-ops. The point is if you mix renewables with existing resources, you can get a better rate.”

“It is upsetting the conventional cooperative model where you by your power from the G&T and do what they say,” Reyes said.

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