La Plata Electric Association’s contract termination payment to Tri-State Generation and Transmission Association will remain unchanged after a federal appeals court rejected the argument that Tri-State should be compensated for decades of lost future revenue.
The ruling locks in the framework for calculating LPEA’s exit cost and removed a major legal uncertainty that loomed over the co-op’s upcoming exit date from the power wholesaler April 1.
Under the court-approved framework, LPEA must pay about $160 million, however LPEA is owed roughly $93 million in credits, which reduces the total net exit cost to about $70 million.
Under Tri-State’s preferred compensation plan, LPEA estimated it could have faced an additional $291 million.
At the center of the legal dispute was how Tri-State should calculate what member utilities like LPEA must pay to leave long-term power supply contracts.
The decision made by the U.S Court of Appeals for the 10th Circuit on Tuesday affirms previous rulings in favor of the Federal Energy Regulatory Commotion’s decision to calculate contract termination fees using a “balanced checkbook approach,” as opposed to Tri-State’s “lost-revenues” approach.
Tri-State argued that departing members should cover the revenue it expected to earn over the life of those contracts. But FERC instead adopted the “balance-sheet” approach, requiring exiting members to pay their proportional share of the cooperative’s existing debt and financial obligations, rather than projected future income.
The court agreed with FERC’s reasoning, finding that the lost-revenue approach could result in a “windfall for Tri-State and improperly deter members from exiting.”
While the lawsuit was primarily between Tri-State and federal regulators, LPEA joined the case as an intervenor, given the direct financial implications for the cooperative.
Tuesday’s ruling is a success for LPEA, which would have had to pay hundreds of millions more if the court’s ruled in Tri-State’s favor.
“FERC’s balance-sheet approach is based on actual costs and obligations, while Tri-State’s proposal relied on projected future revenue,” LPEA CEO Chris Hansen said in an email to The Durango Herald. “From our seat, the lost revenue approach was a complete violation of the cooperative model because the ‘revenue’ related to a cooperative’s future payment should be allocated back to that exact cooperative in the form of patronage capital.”
Hansen said the distinction was significant for LPEA, resulting in “a fair and finite” contract termination payment instead of a much larger and more uncertain amount tied to decades of forecasts.
“The recent ruling does not change that amount but is a legally binding decision that states that the CTP was calculated using a fair and consistent methodology,” Hansen said.
“For our members, that means confidence: the amount was fair, grounded in real obligations and the result of years of disciplined work.”
jbowman@durangoherald.com
