The following is a contributed article by Raymond L. Gifford and Matthew S. Larson, both partners at Wilkinson Barker Knauer. The authors represent La Plata Electric Association in its ongoing exit litigation with Tri-State Generation and Transmission.
The Wire is a legendary television show unique because its main character is really the City of Baltimore. But among its greatest characters is Omar Little — a stickup man defined by his code. Indeed, he is known for his seminal statement, “a man got to have a code.”
The Wire and rural electric cooperatives are rarely mentioned in the same breath, but both prestige dystopian television show characters and cooperatives purport to live by a code.
We have encountered many rural electric cooperative members of generation and transmission cooperatives (“G&Ts”) asking what Omar Little ponders throughout his turn on The Wire: Are G&Ts living by their own ideals set forth in the seven Cooperative Principles?
The answer, unfortunately, is “no.” Looking only as far as the first Cooperative Principle — Voluntary and Open Membership — it is increasingly clear that some G&Ts have left that principle behind.
In recent years, several rural electric cooperatives have sought to withdraw from their G&Ts, but the G&Ts’ captive practices and inflated buyout numbers make it very difficult, if not impossible, for members to ever leave without resorting to expensive lawyers and lengthy litigation.
Right now, to survey a few of the battle fronts, Delta Montrose Electric Association is finalizing its exit from Tri-State in front of FERC after a three year protracted legal battle; Tipmont Rural Electric Member Cooperative is 18 months into litigation with Wabash Valley Power Alliance at the Federal Energy Regulatory Commission to set a just and reasonable exit fee; and La Plata Electric Association and United Power are fighting a multi-front war at the Colorado Public Utilities Commission and FERC to even know what their obligations would be if they exercised their right to exit.
Such policies that make it so difficult to leave do not meet the Voluntary and Open Membership principle — and they do not meet the code that cooperatives were founded upon.
This is a two-way street — distribution cooperatives that withdraw from their G&Ts should hold the other members harmless. Indeed, the sixth Cooperative Principle is “Cooperation Among Cooperatives,” and cooperation should include doing what is right for fellow members. Therefore, a withdrawing member should certainly pay its fair share.
But at the same time, G&Ts have engaged in practices that make it very difficult for member cooperatives to withdraw, and they frequently ask for far more from the exiting members than is needed. Additionally, members are locked into long-term contracts that can last to 2050 and beyond, and often the G&T board has the sole power to approve a member exit.
Then, when members do want to leave, the G&T argues that it has the sole discretion to set the methodology by which the member can leave, often reverting to claims that the G&T should receive all the revenues that it would have received over an entire contract. But this method for calculating an exit fee makes no sense and it certainly is not informed by the Voluntary and Open Membership principle.
G&Ts argue that they need long-term contracts to plan how much generation to build in the future, but a contract going out to 2050 is far longer than needed for an adequate planning horizon when it only takes a few years to construct a new power plant.
Additionally, to calculate an exit charge in that way, the G&T has to project all the way to the end of the contract how much electricity will cost. Trying to predict prices of electricity that far into the future presents plenty of opportunity for manipulation because the price of electricity is subject to significant fluctuations.
A few examples demonstrate how much this method inflates the calculation.
Several years ago, Kit Carson Electric Cooperative withdrew from its membership in Tri-State Generation and Transmission Association, and it paid an exit charge of $37 million, which Tri-State asserted was “fair and equitable, and protect[ed] the interests of all [Tri-State’s remaining] members.”
But this exit charge was reached after Tri-State initially asked for $137 million from Kit Carson. Only after Kit Carson did not back down and advocated for its right to leave — consistent with the cooperative code — did Tri-State then drop its initial charge by $100 million, meaning Tri-State’s initial ask was more than 3.5 times what it ultimately concluded was fair.
And then Tri-State did the same thing only a couple years later in Colorado.
This time, Delta Montrose asked Tri-State for an exit charge, and Tri-State requested $322 million. It took Delta Montrose going to the Colorado Public Utilities Commission to have the Commission set a just, reasonable and non-discriminatory exit charge for Tri-State to finally settle and agree to a $62.5 million exit charge, meaning that Tri-State’s original ask was more than five times the final settlement.
Yet again, Tri-State supported the eventual exit charge and related terms of its settlement with Delta Montrose as “reasonable and in the public interest,” which seriously calls into question how the initial offer was a good faith or fair offer to Delta Montrose.
But Tri-State is not the only G&T to calculate hostage-holding exit charges.
In Indiana, Tipmont has attempted to withdraw from its G&T, Wabash Valley. Just like Tri-State, Wabash Valley has set its exit charge to make up for all the revenue that it projects Tipmont would pay under its contract all the way to 2050. (Notably, FERC has twice rejected the contract that Wabash Valley now proposes that its members sign.)
Wabash Valley proposed that Tipmont pay over $200 million over 10 years just to be considered for exit. This is orders of magnitude more than previously exiting cooperatives paid Wabash Valley, even adjusted for size differences.
The G&T exit demands are designed to make it practically impossible for distribution co-operatives to leave. This abuse of subordinate members might be a code worthy of Omar’s nihilistic world chronicled in The Wire, but it is not the code of Voluntary and Open Membership — cooperative principle number one.