Reports examine the impacts of Tri-State's high wholesale power costs

By Joe Smyth | [email protected] | @joesmyth

Two reports this month provide new details about the impacts of the high wholesale power costs that Tri-State Generation and Transmission Association charges electric cooperatives in Colorado, New Mexico, Wyoming and Nebraska.

One of the reports, “How Kit Carson Electric Engineered a Cost-Effective Coal Exit,” was published by the Institute for Energy Economics and Financial Analysis (IEEFA). It includes an overview of the history and reasons for the co-op's departure from Tri-State in 2016, such as interest in pursuing more local solar projects and frustration with Tri-State's increasing rates.

The IEEFA report also includes some key new information: the price that Kit Carson Electric Cooperative (KCEC) expects to pay for wholesale power from Guzman Energy over the next seven years.

KCEC had endured 12 rate increases from 2000-2016 under Tri-State, increases that doubled the price KCEC was paying for power from Tri-State over the full 16-year period, from $39.06/MWh to $79.17/MWh. These increases were predictable in only one sense—that they could be expected year after year. The unknown piece of the puzzle was by how much (Tri-State had unilateral discretion to change rates).

KCEC’s new power purchase agreement also sets the price bar markedly lower than Tri-State’s, which in its most recent annual report put its average 2017 wholesale rate to members at $75/MWh.

The KCEC-Guzman deal, by comparison, after setting 2017 rates at about $67/MWh, more than 10% below Tri-State’s wholesale rate to KCEC in 2016, put them even lower in 2018, at $66.66/MWh. From 2019-2022 the Guzman wholesale rate to KCEC will average about $75/MWh as the co-op pays off its exit-fee loan. After that, it plummets for the final four years to an average of about $47/MWh through 2026.

Kit Carson Electric CEO Luis Reyes confirmed that the figures in the IEEFA report are accurate, and explained that the co-op and Guzman Energy agreed to share the pricing information with IEEFA. Kathleen Stacks, Director of External Affairs for Guzman Energy, also confirmed that the figures in the IEEFA report are correct.

According to the IEEFA report, Kit Carson Electric officials estimate that its deal with Guzman Energy "will save the co-op $50-$70 million over the full 10-year life of the agreement."
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Delta-Montrose Electric also plans to purchase wholesale power from Guzman Energy upon exiting from Tri-State, and in January Holy Cross Energy announced a "renewable energy swap" agreement with Guzman Energy. Guzman Energy is also exploring other deals with co-ops in the region.

Tri-State debt means its wholesale rates aren't likely to go down
Another report, "Rural Energy at a Crossroads: Electric Cooperatives Trapped in System Causing High Energy Costs," was published earlier this month by The Western Way, a nonprofit "urging Western conservative leaders to deliver efficient, pro-market solutions to environmental and conservation challenges."

The Western Way report "details the critical situation facing rural electricity cooperatives in western states that are trapped in the Tri-State Generation and Transmission system that is resulting in unsustainable electricity rate increases."

The report contrasts the price that co-ops pay Tri-State for wholesale power, with lower wholesale power rates from other major power providers in Colorado such as Xcel Energy and Black Hills Energy. Those utilities' 10-K filings with the Securities and Exchange Commission show that the average revenue they receive for selling wholesale power has declined significantly in recent years. A representative of Western Way said that the report "assumed average wholesale data published by the SEC and ratings agencies captured all of the services before buyers “took delivery” of their electricity, including transmission."

The most recent 10-K for Xcel Energy's Colorado subsidiary shows that the average wholesale revenue it collected in 2018 declined to $24.20/MWh, down from $34.60/MWh in 2017.

United Power noted last year in a letter to other Tri-State member co-ops that the difference in price between Tri-State's and Xcel Energy's wholesale power rates was a "serious problem." United Power said "we have discovered that Xcel Energy’s wholesale combined demand charge and energy charge, for the amount of energy that United Power currently uses on an annual basis is 28.5% lower than Tri-State’s wholesale combined demand charge and energy charge."

​At a meeting in January with another co-op, United Power staff also noted that figure was based on comparing Tri-State's rates to Xcel Energy's published rates, not a negotiated rate - which could be lower. The figures from Xcel Energy's latest 10-K filing suggest its average wholesale power rates could now be lower than those United Power used to calculate the 28.5% figure.

​The Western Way report also argues that Tri-State's rates aren't likely to go down, because of the amount it spends on its debt:

This significant cost discrepancy is likely to grow worse for rural cooperatives tied to the Tri-State system. Tri-State reports total debt of $3.4 billion with falling net margins. From 2013 to 2018, Tri-State’s net margins have fallen from $73 million to $43 million despite a 6% increase in rates over that same time period – meaning even higher rate increases appear necessary to maintain its ballooning debt load.

La Plata Electric also expressed concerns that Tri-State's debt will lead to higher rates, in a letter to former Tri-State CEO Mike McInnes.

The Western Way report argues that addressing the addressing Tri-State's high wholesale power costs will require engagement by state and local leaders:

State and local leaders cannot ignore the structural concerns with the G&T model. They must engage with their rural cooperatives and Tri-State to seek a path that can benefit both interests and keep consumer rates stable. After all, it should also be remembered that rural electric cooperatives created G&T cooperatives, not the other way around. And they were created to provide cheaper electricity than individual rural cooperatives could generate or purchase on their own, not more expensive electricity.

Further Reading:

IEEFA report: Kit Carson electric co-op gains from breakup with coal-centric Tri-State group

Western Way report: Rural Energy at a Crossroads: Electric Cooperatives Trapped in System Causing High Energy Costs

​La Plata Electric concerned Tri-State debt will lead to higher rates​
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​United Power seeks solutions to "increasingly outmoded G&T business models"