In early April, the Western Way published a report, Rural Energy at a Crossroads: Electric Cooperatives Trapped in a System Causing High Energy Costs. The report explores years of conflict between rural electric cooperatives and their wholesale power provider, Tri-State Generation and Transmission Association, over rate increases and the cost of servicing the association’s $3 billion debt load. In 2016, Kit Carson Electric Cooperative in New Mexico paid $37 million to exit the Tri-State monopoly and now a Colorado cooperative – Delta-Montrose Electric Association – is also trying to leave under similar terms.
More than three weeks later, Tri-State published a blog responding to our so-called “false claims.” But attacking our work – which we stand behind – does nothing to address the legitimate concerns of rural cooperatives about rising wholesale power rates within the Tri-State monopoly when cheaper options are available elsewhere.
Just as troubling, some of Tri-State’s claims are flatly contradicted by Tri-State’s own statements filed with the Colorado Public Utilities Commission (PUC) and the U.S. Securities and Exchange Commission (SEC). This should be seriously concerning to policymakers, cooperatives in the Tri-State system and interested members of the public. Excerpts are below from a May 6, 2019, letter sent to Tri-State CEO Duane Highley from TWW raising these contradictions:
1) Tri-State’s Response claims rates are “competitive” and “well positioned for the changes and transitions ahead BUT Tri-State filings have acknowledged that competing sources have lower costs that could cause a “death spiral” for Tri-State.
Tri-State’s response to the Report states: “Our wholesale rates are competitive … our association is financially strong and well positioned for the changes and transitions ahead.” This statement directly contradicts Tri-State’s formal position before the PUC. Tri-State conceded months ago in official testimony to the Colorado PUC that Delta-Montrose is trying to leave “because cheaper prices are now available elsewhere.”[i] Also, Delta-Montrose should not “be permitted to escape [a 40-year contract with Tri-State] now that the market price has fallen,” Tri-State argued in the same testimony, filed on Jan. 15.[ii]
In addition, on April 29, 2019 (one day after Tri-State issued its response to the Report) Tri-State filed additional testimony with the PUC not only acknowledging that competing sources have lower costs but this fact could cause a “death spiral” if members are allowed to leave Tri-State without paying an exorbitant exit fee:
“The levelized costs for new renewable electricity generation are decreasing. Tri-State has out-of-market generation and significant remaining fixed costs and associated debt. I think it is incumbent on the remaining members to consider what has been described as a potential ‘death spiral.’
If departing members do not hold harmless remaining members, this could start a growing procession of other self-interested members wanting to depart and join new associations or enter alternative purchase power agreements.”[iii]
Tri-State’s response to the Report claims that that Tri-State’s rates are “competitive” and “well positioned” but, in fact, Tri-State’s has already admitted that competitor rates are lower and keeping members in place and paying above market rates is necessary to avoid a “death spiral.”
2) Tri-State’s Response claims that “debt is not driving rate increases” but Tri-State has repeatedly affirmed that debt is a significant driver in setting rates.
Tri-State’s response to the Report states: “Tri-State’s debt is not driving rate increases.” However, one day after making this statement, Tri-State submitted testimony to the PUC that directly connected debt maintenance to wholesale rates. “As security for its loans, lenders require Tri-State to charge rates to its Members that produce revenues sufficient to enable Tri-State to pay its debts.”[iv]
In fact, Tri-State has made similar disclosures to federal financial regulators at the SEC and investors who may be interested in buying Tri-State debt. For example, Tri-State’s latest 10-K report describes the “master indenture” that covers most of the association’s $3 billion in debt:
“Under the Master Indenture, we are required to establish rates that are reasonably expected to achieve a DSR [i.e. Debt Service Ratio] of at least 1.10 on an annual basis. The Master Indenture also requires that we review rates promptly at any point during the year upon any material change in circumstances which was not contemplated during the annual review of Member rates.”[v]
In effect, a DSR of 1.10 gives Tri-State creditors the power to keep wholesale electricity rates high enough to cover debt payments plus a 10 percent margin of safety. The DSR requirement also makes it extremely difficult to reduce wholesale rates and keep pace with competing sources without risking default.
In a 2015, presentation to investors, Tri-State provided more detail on this point:
Tri-State’s master indenture provides for a lien over substantially all of Tri-State’s assets. … The DSR requirement of 1.10 ensures that we have adequate cash flow to cover our debt payments…”[vi]
According to the same presentation, after years of increases, Tri-State’s average wholesale rate in 2015 was 7.1 cents per kilowatt hour. Since then, it has increased further to 7.5 cents per kilowatt hour.
Tri-State’s testimony and disclosures to state and federal regulators clearly show that debt is a significant driver in setting wholesale rates on the Tri-State system. Not only that, it’s fueling the conflict between Tri-State, Delta-Montrose and other rural electric cooperatives seeking cheaper sources of electricity. As Moody’s Investor Service recently noted, the current situation with Tri-State and Delta-Montrose “exemplifies a situation where the [rural cooperative’s] interest does not align with the [Tri-State] creditors’ interest.”
Tri-State’s blanket response that “Tri-State’s debt is not driving rate increases” is not accurate and is in direct conflict with Tri-State’s own statements to regulators, investors, and the public.
TWW welcomes criticism and respects the right of Tri-State managers to defend their interests and respond to outside scrutiny however they choose. But telling one story to the public and another story to state and federal regulators does not help Tri-State’s cause.