Colorado’s second-largest electricity provider – the Tri-State Generation and Transmission Association – is set to lose nearly a quarter of its revenue as member electric cooperatives wholly or partially leave the group, a potentially crippling blow.

But what it will mean for the nonprofit provider of wholesale power to 42 rural co-ops in four states, including 17 in Colorado with 862,000 customers, remains uncertain as it awaits decisions in several cases pending before the Federal Energy Regulatory Commission, or FERC.

What is clear, executives at member co-ops, industry analysts and competing power wholesalers say, is that the 75-year-old Tri-State is at a crossroads.

Some cooperatives are looking to generate more of their own electricity or buy it on the open market, hence the loss of revenue. At the same time, there is increasing pressure on the association, once heavily powered by coal-fired generation, to move to wind, solar and energy storage.

“The all-powerful generation and transmission model that has dominated the West is breaking down,” said Seth Feaster, an energy analyst with the nonprofit Institute for Energy Economics and Financial Analysis. “Tri-State is not going to come out of this process the way it looked before.”

Generation and transmission associations, known as G&Ts, were created to provide power to even the smallest, far-flung rural co-ops relying on large central power stations and tens of thousands of miles of transmission lines.

“The goal was reliable power … and the G&T model with a central station was the way to do that,” Tri-State CEO Duane Highley said.

Much has changed, however, since Tri-State was created in 1952. Electricity generation has become more decentralized with solar panels and battery storage. Regional grids and wholesale markets have grown. The costs of wind and solar generation keep dropping, and some co-ops are growing restless.

Connexus Energy, the largest co-op in Minnesota’s Great River Energy G&T, is leaving the group, although it will continue to buy power from it. Last May, cooperatives in North Dakota and South Carolina each unsuccessfully went to court to break long-term, wholesale power contracts.

“The interest in smaller, more local decision making is something you see across the country,” said Robin Lunt, chief strategy officer for Denver-based Guzman Energy, a power wholesaler that was instrumental in helping two cooperatives leave Tri-State. “There are a lot of forces pushing toward more local generation decisions.”

In response, Tri-State is offering more flexible contracts, agreeing to a massive shift to 70% renewable generation by 2030, and working closely with member cooperatives on projects such as microgrids and electric school buses.

“Tri-State has evolved in trying to respond to members’ needs and the market,” said Jasen Bronec, who as CEO of the Delta-Montrose Electric Association oversaw the Colorado co-op’s exit from Tri-State in 2020. “It is a business decision by Tri-State to the question of how they can remain relevant.”

“A lot of co-ops are looking at how they can decentralize, be nimbler and better serve their members,” said Bronec, now head of the cooperative Inland Power & Light Co., in Spokane, Washington.

For Tri-State, the most contentious driver of change is the announced 2024 departure of the association’s largest and fastest-growing cooperative, Brighton-based United Power, serving 250,000 Front Range residential, commercial and industrial consumers.

In 2010, United accounted for about 10% of member co-op revenues. Today it is 18% and is projected to be 25% of Tri-State revenue by 2050, according to an association FERC filing.

Member co-ops must buy 95% of their electricity from Tri-State under 50-year contracts with the association, but at least 10 co-ops have pushed back on the requirement based on price, the dominance of coal-fired power or a desire to have locally based, clean generation.

Foremost among those is United Power, which has been trying to develop its own renewable generation and energy storage and is chafing at Tri-State’s wholesale prices, which are higher than those of Colorado’s largest electricity provider, Xcel Energy, which serves neighboring areas.

United and Tri-State have been battling at FERC over the cooperative’s breakup fee. Tri-State calculated the exit payment at $1.6 billion. United put it closer to $250 million.

In September, an initial decision by a FERC administrative law judge rejected both the Tri-State and United exit formulas and endorsed, with modifications, an approach proposed by FERC staff.

“We have some real clarity now,” United CEO Mark Gabriel said. “The initial decision gave a lot of direction in the exit payment and how to disentangle some of the contractual engagements.”

Highley, however, said the initial decision is just one step and that both sides are filing responses to it. The full commission will make the ultimate ruling.

Using the FERC method, United developed a spreadsheet that calculated its exit fee at $378 million, but in a November filing Tri-State argued that “in this document United manufactures evidence to bolster and recast its case after the record has been set.”

“We know we are going to be slugging it out for a year if not two or three,” Highley said.

Two other co-ops – Kit Carson Electric Cooperative in Taos, New Mexico, and Delta-Montrose – have left Tri-State. Kit Carson paid a $37 million exit fee in 2016 and four years later DMEA paid $136.5 million.

“Tri-State can’t get into a vicious cycle of losing members and raising rates,” Feaster said. “They have to stanch some of the pace of attrition.”

Moving to create more flexibility, Tri-State this year offered partial contracts, which would enable a co-op to increase its local generation above the 5% cap.

The Poudre Valley Rural Electric Association, the second-largest co-op representing about 8.6% of member revenues, and the La Plata Electric Association, the fourth-largest co-op with 5.4% of sales, both chose to get half of their electricity outside of Tri-State.

Four smaller cooperatives also opted to get at least some additional electricity from sources other than Tri-State.

While that is another sliver of revenue Tri-State is set to lose, the contracts – also pending before FERC – are designed to balance the interests of the co-ops and the association.

“We’ve come to a mutual understanding that if some of us co-ops leave with a partial contract that is a win-win for Tri-State,” said Jessica Matlock, La Plata’s CEO. “Tri-State needs to take this opportunity to change their model.”

While Tri-State does forgo some revenue, the association’s long-term debt obligations are accounted for, and that is a total of 300 megawatts of generating capacity it doesn’t have to spend money to build.

“They are capacity-constrained and by relieving some of that capacity relieves some of the pressure on them,” Matlock said.

The 50-year contracts were not designed as some instrument of servitude, but to assure a steady flow of revenues so the association could borrow the money to construct 10 generating stations, including six coal plants, and nearly 5,800 miles of transmission lines to serve 1.2 million consumers across 200,000 square miles of Nebraska, Wyoming, Colorado and New Mexico.

Unlike an investor-owned utility, like Xcel Energy, Tri-State can’t raise money by issuing stock. It relies on the debt and bond markets.

Tri-State is heavily leveraged with debt accounting for 72% of its capital structure, according to its 2021 annual report filed with the federal Securities and Exchange Commission, compared to as low as 40% debt exposure for an investor-owned utility.

That is the reason Tri-State sought an exit fee that included all the electricity United would have bought under the long-term contract. The FERC judge, Renee Terry, called the association’s arguments “unpersuasive.”

The lost-revenue formula “provides a windfall to Tri-State, and it will improperly deter members from considering departure,” Terry said in her decision.

United’s Gabriel said his cooperative’s main obligation is to pay for its portion of the long-term debt.

At the end of 2021, Tri-State had $3.2 billion in long-term debt, most of it under an agreement with bondholders called a master indenture, according to a company SEC filing.

A master indenture outlines rules and performance standards for the borrower to protect the bondholders, and Tri-State’s has debt covenants requiring the association to maintain a set level of revenue to debt service and balance between debt and equity.

Failure to maintain those ratios would give bondholders the option of seeking immediate repayments.

A co-op member leaving “under terms that trigger these debt covenants and any lender acts to enforce its rights … would likely put Tri-State into financial distress, and possibly even into bankruptcy,” the association said in a FERC filing.

“The big question is whether Tri-State has the financial stability to weather United’s leaving,” said Eric Frankowski, executive director of the nonprofit Western Clean Energy Campaign.

But Ron Lehr, chairman of the consulting group New Energy Economics and former Colorado PUC chairman, said these aren’t decisions made based simply on mathematical ratios.

“You have to get the creditors on board with the transition you are planning,” Lehr said. “If they are OK, you are OK. … There is a dance that is done in municipal finance.” As a nonprofit, Tri-State has access to the cheaper municipal bond market.

All this is taking place at a time when the entire utility industry is facing its greatest upheaval in 30 years, according to Travis Miller, an industry analyst with the financial services company Morningstar.

Miller evaluates publicly traded utilities so doesn’t follow Tri-State, but he said there were some general trends with which all utilities are struggling.

“Utilities across the board have a lot of different challenges from reliability to environmental to renewable energy integration,” Miller said. “There are a lot of competing interests who see utilities as the means to achieve their agenda.”

Financially, two pressure points are operating expenses and financing costs. “Managing operating costs in the industry right now is a critical financial consideration,” Miller said. “How do you spread operating costs across the customer base?”

In general, utilities, whether investor-owned or municipal, have enjoyed among the lowest borrowing rates because of their stable revenues. “Utilities have benefited from three decades of falling cost of capital, but as interest rates go up and markets become more volatile utilities could lose that tail wind,” Miller said.

At the end of 2021 Tri-State had about $500 million in debt with variable rates, according to an SEC filing. “The rates on this debt could increase,” the company said.

“The big challenge for Tri-State is to work out their uneconomic assets while they move to new generation,” Lehr said.

A big aid in making the transition could be two programs in the federal Inflation Reduction Act passed in August.

One is a $5 billion fund to back low-cost loans to utilities for closing coal-fired plants and another is a $9.7 billion financial assistance program to help electric cooperatives purchase or build clean energy systems.

Tri-State worked with the Sierra Club and the Rural Power Coalition, which lobbied Congress to include the programs in the act’s $391 billion energy and climate package.

Tri-State’s plan for the future is in its $21 billion Electric Resource Plan, or ERP, which the association submitted to the Colorado PUC in January. It was a settlement agreement with parties including state energy and utility officials, unions, consumer and environmental groups and renewable energy industry trade associations.

Tri-State was required to submit such a plan to the PUC for the first time under a law passed by the legislature in 2019.

The resource plan calls for closing its remaining coal-fired units in Colorado, cutting the company’s greenhouse gas emissions by 80% from 2005 levels and getting 70% of its electricity from renewable generation by 2030.

In 2021, Tri-State added two new wind projects with a total 304 megawatts and plans to add six solar projects by 2024, at which point 50% of its electricity will come from renewable sources, the company said.

“The ERP we settled was a tremendous success,” said Ellen Howard Kutzer, an attorney with the environmental group Western Resource Advocates, one of the settlement parties. “We really want to see that move forward.”

All those changes must be made at the same time Tri-State is losing demand for its electricity. “The Tri-State system as designed is not a simple thing to downsize,” Kutzer said.

In 2023, Tri-State will submit an ERP planning scenario to the PUC including the loss of the United Power electricity demand.

“If we can get certainty on when they are leaving, we can build a resource plan around that,” Highley said.

The major initiatives at Tri-State have come since Highley became CEO in 2019, but he says that there is full support for change from the board, which has representatives from each member cooperative. “I take my direction from my board,” Highley said. “Most decisions are unanimous.”

As for those cooperatives that have struck out on their own, their executives say they have reaped benefits with the departures.

Both Delta-Montrose and Kit Carson were helped by power wholesaler Guzman Energy in financing their exits from Tri-State. The co-ops are paying back the exit fees through their initial electricity purchases from Guzman.

As early as 2010, Kit Carson proposed to Tri-State that the co-op incrementally increase its share of local generation to 10%. “We got nowhere,” said Luis Reyes, the Taos, New Mexico, cooperative’s CEO.

After leaving Tri-State, Guzman Energy became the cooperative’s power supplier on a contract that ran until 2026 with fixed electricity rates. Kit Carson was free to build as much local generation as it could manage.

Today, there are 41 megawatts of new solar generation in the co-op’s service area, half of it owned locally, and 17 megawatts of battery storage. During the daytime 100% of the community’s electricity demand is met by solar.

Now, Kit Carson is exploring, in conjunction with the federal energy laboratories and Chevron Corp., the development of a green hydrogen project at the site of a shuttered molybdenum mine. Chevron owns the mine. “If we were still with Tri-State, we wouldn’t be having this discussion,” Reyes said.

In July, Kit Carson finished paying back the exit fee to Guzman and electricity rates for customers dropped 34%. “We are going to see that rate go down more over the next two years,” Reyes said.

While Tri-State is cutting its rates 8% between 2020 and 2023, Reyes questions whether they will be able to hold the line. “You have three of their biggest co-ops leaving and those are the ones that are growing,” he said. “If they don’t get growth, it will be really hard for Tri-State to be able to hold rates steady.”

United is already looking past Tri-State. In the short to midterm the cooperative will rely on purchase power contracts as new local generating capacity is planned, Gabriel said.

“We have 35 bidders for our load,” he said. “I am excited that the construction will be in our footprint, solar farms, batteries and natural gas.”

At the same time, the cooperative will promote the adoption of rooftop solar and electric vehicles – there are already 9,000 solar installations and more than 5,800 EVs and plug-in-hybrids in the service area, Gabriel said.

Further down the road, United is exploring the possibility of geothermal energy using abandoned oil and gas wells in its area.

How will United finance all of this and the exit fee? Through savings from being able to buy cheaper electricity, Gabriel said.

United is paying Tri-State close to $75 a delivered megawatt-hour, Gabriel said, while the bids from outside suppliers are coming in $15 to $18 a megawatt-hour cheaper. “Even a $10 delta pays off a lot of things,” he said. “Sometimes you just have to invest in the future.”

Tri-State is changing, even executives at United and the other co-ops that have left the association agree, but some say it isn’t changing fast enough.

“I do see changes happening,” La Plata’s Matlock said. “I see that Duane is trying to make changes, but he can’t go too fast.”

Highley said that while the association is “accelerating this clean energy transition,” it must be done while ensuring reliability and stable rates.

“There is a tension here between changing as quickly as you can and being responsive to its members and the reality that Tri-State is a utility and has to plan long term,” Feaster said. “Transitions are hard.”

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