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Tri-State strife over cost, coal highlights energy transition challenge


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Tri-State strife over cost, coal highlights energy transition challenge

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Tri-State receives all the power produced by the 30-MW San Isabel Solar Project in Colorado. Under pressure to green its portfolio, Tri-State aims to get 70% of the electricity it sells to members from renewables by 2030.
Source: Tri-State Generation and Transmission Association

Competing visions for the future of energy are chipping away at Tri-State Generation and Transmission Association Inc.'s sprawling wholesale cooperative, which stretches from wealthy Denver suburbs to small-town New Mexico and remote Wyoming cattle ranches.

The cooperative spirit of 70 years has given way to growing dissonance over Tri-State's power prices and the pace of its transition away from coal. Three distribution cooperatives accounting for nearly 27% of the association's member revenue recently announced they want out, following two other departures in recent years.

With Tri-State's challenges on display, electric co-ops nationwide are paying attention as they seek to position themselves in a changing industry, according to analysts who follow rural cooperatives.

"I think co-ops are watching this case and for many different reasons," said Gabriel Chan, a University of Minnesota professor who studies electric cooperatives. "This wave of exits from Tri-State ... is posing a potentially significant challenge to how cooperatives are going to navigate the energy transition going forward."

Tri-State's issues provide an uncommon glimpse into power distribution co-ops and their generation and transmission associations, or G&Ts, according to Chan, one of several people interviewed for this story.

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Money matters in internal dispute

The debate within Tri-State and between its 42 members is ultimately about economics, Tri-State CEO Duane Highley told S&P Global Market Intelligence.

"We do have disagreements in the boardroom, no question about it, just like any family would," Highley said. "And most of the time it's over how we're going to share costs equitably. If you look closely at the arguments [from co-ops] making the loudest complaints ... it's more of an economic argument than it's a green energy argument."

Two of Tri-State's distribution co-ops left in 2016 and 2020, respectively, for an up-and-coming power provider that fronted nearly $100 million in early exit fees. Tri-State's largest member, Colorado's United Power Inc., gave notice Dec. 14, 2021, that it intends to depart as well.

Two days later, Poudre Valley REA Inc. followed suit, as did Northwest Rural Pub Power District in Nebraska on Dec. 30, 2021.

United Power, Northwest and five others are participating in a February 2021 complaint before the Federal Energy Regulatory Commission over Tri-State's exit fee calculations, which suggests that more members might be on their way out. A FERC administrative judge will hear the case in 2022.

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Coal among competing priorities

To address the environmental and economic concerns of some of the co-op's members, Tri-State plans to ramp up fossil fuel-free power sales from an estimated 29% in 2021 to 70% a decade later. Tri-State also introduced more flexible wholesale contracts, lowered rates and increased allowances for community solar gardens.

Colorado requires 100% fossil-free power by 2040, whereas Wyoming prioritizes preserving coal jobs. The formula for serving such different states informed the plan for greening Tri-State's wholesale power business; a vast majority of members voted for it.

The "Responsible Energy Plan," unveiled in early 2020, rests on the two top pillars of Tri-State's mission statement: reliability and affordability. The majority of Tri-State's board members and owners supported the plan to bring more than 1,000 MW of wind and solar resources online by 2024. They also voted to close Colorado's last coal plant, the Craig (Yampa) station, by the end of 2029.

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CEO Duane Highley has led Tri-State since 2019.
Source: Tri-State Generation and Transmission Association Inc.

The plan was propelled by new clean energy mandates in Colorado and New Mexico, which together accounted for 83% of Tri-State power sales in 2018, according to Tri-State's 2019 investor presentation. In New Mexico, utilities and electric co-ops must deliver 50% renewable power by 2030.

The new road map was a major shift for Tri-State, which, like many rural cooperatives, has taken longer than its investor-owned neighbors to transition away from coal.

Highley continues to see a role for coal in coming decades, albeit diminished. Tri-State's new energy plan still leaves the G&T with a 25.7% share of the 1,625-MW Springerville coal and oil-burning plant in Arizona and a 28.5% stake in the 1,700-MW Laramie River Station in Wyoming.

In 2021, as leading dissident United Power noted, Tri-State increased its share in the Wyoming coal plant by 23 MW, or 1.4%, saying the deal was key to obtaining access to low-cost transmission lines needed to carry wind energy from Wyoming to Colorado.

Highley points to the severe winter storm in February 2021 to illustrate the role fossil fuels still play. Tri-States's G&T used oil at its dual-fuel generating plants when natural gas prices spiked and relied on coal generation to avoid shortages.

"It was fossil fuels that kept the lights on during that period, about five days of extremely cold temperatures," Highley said. "That's why we say we still need that coal today."

Rates play a role

Carbon and cost concerns mix for some members. "We've got [utility customers] who want more carbon-free resources that we're not allowed to support," United Power CEO Mark Gabriel said. "Tri-State just bought more coal, contrary to their public image, when coal is just not economic any longer."

United Power's 900-square-mile service territory just outside Denver includes 7,200 solar rooftops, 4,000 electric vehicles and 100 Tesla Powerwalls.

"Our power price is currently $75/MWh delivered when the market for such power is in the mid-to-high $40s," Gabriel said.

Tri-State's wholesale power prices more than doubled between 2000 and 2016, according to a study co-authored by Chan. During the time, average retail power prices in New Mexico and Colorado rose 39% and 67%, respectively.

Tri-State acknowledged that its rates can no longer compete with wholesale market prices. The trend has pressured Tri-State to lower prices and contributed to "increased utility member unrest and desires by our utility members to withdraw," the G&T said its 2020 annual report to the U.S. Securities and Exchange Commission.

In response to such risks, Tri-State announced a 4% reduction of its wholesale rates in 2020 to be implemented through March 2022. In all, the Tri-State board set a goal to reduce rates by 8% by the end of 2023.

"We don't work for shareholders; we're not trying to make anybody any money," Highley said. "We're working for the member at the end of the line."

Some members said the rate concessions fall short and that Tri-State's limits on how much solar capacity they may develop within their contracts remain too restrictive. Tri-State's members are locked into long-term and fossil fuel-heavy power supply contracts preventing them from taking advantage of cheaper energy elsewhere.

Kit Carson Electric Cooperative Inc.'s power costs dropped 15% after the co-op left Tri-State for Guzman Energy LLC and will decrease another 45% to 50% in June 2022, after Kit Carson pays off its exit fee debt, according to Luis Reyes, the co-op's CEO. The same month, Kit Carson will produce 43 MW of solar and have 16 MW of battery storage, enough to fully power its 24,000 retail members during the day, Reyes said.

Discord and concessions

On Jan. 25, S&P Global Ratings downgraded Tri-State's senior secure debt along with certain bonds and certificates from stable to negative. The assessment affirmed the BBB+ rating Tri-State received after an earlier ratings drop from A- in April 2021 due to the exit fee dispute.

"We view the members' actions as an outgrowth of more than a decade of divisiveness that three successive general managers and the board have been unable to conciliate," Ratings credit analyst David Bodek wrote in a report. "This level of discord can consume management resources and frustrate strategic planning."

La Plata Electric Assn Inc. in southwestern Colorado is the first Tri-State member to explore the new flexible contract option, held up by Tri-State as a sign of progress. The co-op is in discussions with Crossover Energy Partners LLC to source 50% of its power from the renewables developer.

The deal "makes good business sense" by promising the distribution co-op at least $7 million in annual savings, said Jessica Matlock, La Plata's CEO. The deal, approved by the board Feb. 16, would allow La Plata to remain a Tri-State member. For Tri-State, it means a sales drop of about 71 MW of load.

But La Plata remains a party to the complaint targeting Tri-State's exit fees that is now before FERC, telling its members in 2019 that it needed to explore new ways to access cleaner and cheaper energy.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.