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NM co-op started something big in electricity markets

Three years ago, a small nonprofit utility in New Mexico won a huge victory for choice and competition in electricity markets – and the impacts are still being felt across the West.

In June 2016, the Kit Carson Electric Cooperative in Taos severed ties with a monopoly wholesale power provider, the Tri-State Generation and Transmission Association, in search of cheaper and more renewable sources of electricity.

It wasn’t an easy move. Kit Carson reportedly paid $37 million to terminate its 40-year wholesale contract with Tri-State. But even with that cost, Kit Carson officials determined they could secure long-term savings by accessing wholesale power markets directly and building more local sources of renewable electricity.

This was made possible by a major transformation in U.S. energy markets over the past decade. Natural gas and renewables, which used to be relatively expensive sources of electricity, are now relatively cheap.

But electricity rates on the Tri-State system – where older coal plants are the biggest source – have been going up. It’s what drove Kit Carson to leave, and now other rural cooperatives in the Tri-State system, which spans Nebraska, Wyoming, Colorado and New Mexico, are also looking for the door.

The next big departure may take place in Colorado, where the Delta-Montrose Electric Association is asking the state Public Utility Commission to set a reasonable exit charge, similar to the $37 million paid by Kit Carson.

But this time, Tri-State is fighting back, proposing a higher – and undisclosed – amount. In PUC filings, Tri-State has even accused Delta-Montrose of masterminding a “scheme” to unfairly exit the 40-year contract “because cheaper prices are now available elsewhere.”

Many of the details of the case are confidential, but public sources of information show what’s driving the dispute: A large and growing difference in electricity rates between Tri-State and competing sources.

In 2014, Tri-State reported an average wholesale rate of 7.1 cents per kilowatt hour. By comparison, two nearby wholesale competitors reported indicative wholesale rates of between 5.8 cents and 6.2 cents per kilowatt hour that same year.

But since then, Tri-State’s average wholesale rate has climbed to 7.5 cents per kilowatt hour, making competing sources of electricity even more attractive for some rural cooperatives. Buying electricity from the wholesale market isn’t their only option, either.

Recent cost estimates show new natural gas, wind or solar generation could all be built by rural cooperatives themselves for less than 7.5 cents per kilowatt hour, according to a research paper from The Western Way, a conservative nonprofit that seeks pro-market solutions to environmental challenges.

That’s not the only reason some rural cooperatives are looking for alternatives to Tri-State.

According to Standard & Poor’s, Tri-State’s debt load has risen sharply over the past decade from $1.7 billion to more than $3 billion. SEC filings show the largest of those loans is a $2.8 billion “master indenture,” which imposes conditions on how much Tri-State charges for wholesale electricity. In short, Tri-State must keep rates high enough to cover payments on billions of dollars of debt.

This is critically important. Tri-State was created in the 1950s by rural cooperatives to provide cheaper sources of wholesale electricity, not more expensive sources. But even Tri-State concedes that “cheaper prices are now available elsewhere.” Meanwhile, more than 50 Colorado lawmakers – Democrats and Republicans – have rallied behind Delta-Montrose because they agree rural communities deserve access to “less expensive and more diverse” electricity sources.

To be clear: Not every cooperative in the Tri-State system wants to leave. Tri-State has recently signaled it may even be willing to renegotiate some contracts.

But if some rural cooperatives still want to leave, just like Kit Carson in New Mexico, they should not be blocked by unreasonably high exit charges or other barriers.

These utilities shouldn’t be unfairly penalized for seeking more choice and competition on behalf of their communities – and they shouldn’t be held captive to the monopolies of the past.

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