The defection of local electric cooperatives from a Colorado power wholesaler could imperil cleanup funds for coal mines in two Western states, according to an environmental group’s complaint to federal regulators.
Tri-State Generation and Transmission operates mines in Colorado and Wyoming. If the company were to close or abandon them, environmental reclamation is to be paid for in large part with $133 million in “self-bonds,” which are guaranteed by Tri-State but not backed by any bank, insurer or other third party.
That has some observers on edge as several Tri-State customers consider leaving it in search of cleaner, cheaper power. Other wholesale electricity providers that are still committed to fossil fuels face similar risks.
“It’s not unrealistic to think that a bad case could be something like a utility ‘death spiral’ but at the G&T level,” said Mark Dyson, a principal in the Rocky Mountain Institute’s electricity program.
Under that scenario, high electricity prices caused by overreliance on coal would cause co-ops to exit their relationships with Tri-State, forcing it to shift costs onto remaining customers by further increasing prices. That pattern could leave it unable to make good on promises to clean up coal mines.
Cleanup insurance
The environmental reclamation of the U.S. coal industry is backed by bonds, which take the form of cash, insurance policies or other guarantees that rehabilitation will occur even if a company abandons a mine. Nationwide, close to $10 billion is held in these bonds.
Self-bonds held by utility companies or other entities in the electricity industry account for $815 million of that, more than 8 percent. These guarantees are backed neither by cash nor by third parties, and environmentalists, researchers and federal agencies have decried them as likely to fail.
Just less than half of Tri-State’s overall electricity portfolio, both generated and purchased, comes from coal, and 30 percent comes from renewables. According to SEC filings, the vast majority of what Tri-State directly generates comes from fossil fuels.
Tri-State is also looking to open a new cut in its Colowyo Mine in Colorado, which Tri-State spokesperson Lee Boughey said would provide up to 35 years of coal. In January, Colorado accepted a $15 million increase in Tri-State’s self-bonds for Colowyo.
Boughey said self-bonds for these mines are cheaper than alternatives because there are no premiums, and Tri-State will continue to use them.
“We are highly sensitive to anything that can increase our cost,” Boughey said.
An official with Colorado’s Division of Reclamation, Mining and Safety is comfortable with self-bonding Colowyo in part because all the coal is shipped to and burned at a Tri-State power plant. “So, it’s a little bit different in that there’s a level of security that a mining company doesn’t have,” said Jim Stark, the division’s coal program director.
Vulnerable guarantees
Meanwhile, though, customers are paying more for power — financial documents show that over the past seven years, the amount member organizations paid per kilowatt hour increased about 17 percent — and more are beginning to look elsewhere to buy cheaper, renewable power.
In a report published in April, Moody’s Investor Service analyzed generating stations around the country, including five from Tri-State, and found that all five were “vulnerable” to being replaced by natural gas and renewables due to high operating costs.
“We feel like [self-bonding] is somewhat of a fiction to begin with,” said Jeremy Nichols, climate and energy program director at the Western-focused environmental advocacy group WildEarth Guardians. “But [at Tri-State] it’s even worse.”
WildEarth Guardians submitted a citizen complaint to the federal Office of Surface Mining Reclamation and Enforcement on April 2, alleging that Tri-State “does not appear to currently guarantee the full amount of these self-bonds” because it does not acknowledge the full extent of these bonds in its financial statements.
On May 16, OSMRE responded, denying the request after soliciting input from Colorado’s and Wyoming’s relevant agencies and finding “no regulation or general accounting guidelines require a guarantor to list self-bond obligations as liabilities on its reports.”
WildEarth Guardians has since appealed and is waiting on OSMRE’s response.
OSMRE did not respond to requests for comment on its self-bonding policies or on the citizen complaint.
Dissension in the ranks
“Getting rid of Tri-State is the best thing that ever happened to Kit Carson. Life is so easy,” said Bob Bresnahan, a founder of the nonprofit Renewable Taos and a board member of Kit Carson Electric Cooperative, which bought out of its relationship with Tri-State in 2016.
Upon leaving Tri-State, Kit Carson launched initiatives that will move the co-op’s energy mix to about 40 percent solar in the next few years, Bresnahan said. Even so, the exit was mainly a result of new renewables being cheaper than Tri-State’s prices.
Tri-State did not bid on Kit Carson’s business after the split.
Nichols argued that more co-ops will respond to both market forces as well as a desire for cleaner electricity. If more co-ops leave, then “pretty soon Tri-State’s facing a situation where it’s got a revolt on its hands.”
“It’s not going to be pretty,” Nichols said.
Boughey, Tri-State’s spokesperson, said, “We’re working to ensure that we give our members the best value that we can. We’re working to control costs, and, in fact, in the next five years we anticipate that our rates will remain flat.”
But members doubt that claim, especially as Tri-State’s most recent annual report filed with the SEC listed $3.3 billion in debt and outstanding short-term borrowings and noted that rate increases are possible.
According to the report: “If demand for electricity from our Members and under our long-term power sales agreements is materially less than projected, we might not generate sufficient revenue…to service our indebtedness.”
Several co-ops also indicated frustration with Tri-State’s 5 percent cap on self-supplied generation. In 2016, the Federal Energy Regulatory Commission ruled Delta-Montrose Electric Association, which is in a contract with Tri-State, could exceed that limit, potentially opening the door for a rush of local generation.
Tri-State requested a rehearing, but due to FERC’s case backlog caused by a lack of a quorum for several months, it remains unclear when that will happen.
“The underlying economics in the meantime have continued just to get better for co-ops that wish to pursue self-generation,” Dyson said.
La Plata Electric Association, which is the third-largest co-op in a long-term agreement with Tri-State, is already up against the 5 percent limit. The southwestern Colorado co-op recently completed a study on potentially cheaper energy futures, in part to determine if it could achieve lower rates by parting ways with Tri-State.
“We would like to have the independence to be able to pursue local projects that are good for our community, but we can’t do that now. We have seen several opportunities already go by the wayside because Tri-State controls us,” La Plata board member Britt Bassett said.
Bassett said his peers at several other large co-ops in long-term contracts with Tri-State also “are seriously discussing” leaving.
Delta-Montrose voted in January 2017 to begin exit negotiations with Tri-State, and Boughey confirmed the co-op requested information about the value of its contract but would not comment further on the matter.
Representatives of Delta-Montrose did not respond to requests for comment, but in an October interview with the Energy News Network, CEO Jasen Bronec spoke of Tri-State hindering the co-op’s goal of taking advantage of new technology to increase local and renewable power generation.
“Our current power suppliers can be very protectionary, reactionary to policy changes because they’re trying to protect their business model, and consequently it’s been very difficult to make that transformation because of that relationship,” Bronec said.
At-risk bonds
Tri-State isn’t the only company using self-bonds to keep costs down, and Nichols labeled utility-backed financial assurances “the next frontier of challenging self-bonding.”
Nine utilities or related companies in five states — Texas, North Dakota, Wyoming, Colorado and Missouri — hold self-bonds worth hundreds of millions of dollars.
Basin Electric Power Cooperative guarantees the most, with $146.2 million in liability backed by self-bonds, while four other companies — Tri-State, Southwestern Electric Power Company, National Rural Utilities Cooperative Finance Corporation and PacifiCorp — each account for more than $100 million in self-bonds.
Nichols said Tri-State’s situation is precarious but isn’t the only point of concern. “Basin Electric has a lot of similarities that raise red flags for us,” he said.
Melissa McHenry, a spokesperson for American Electric Power, parent company to Southwestern Electric, sent an emailed statement, stating the company has no plans to transfer its liability away from self-bonds.
“Self-bonding eliminates the premium paid for a third-party surety, thereby reducing the cost of fuel, which reduces the cost of electricity to our customers,” McHenry said.
Spokespeople from Basin Electric and the National Rural Utilities Cooperative Finance Corporation did not respond to requests for comment.
The replacement of self-bonds with safer forms of financial assurances was a major environmental success that came from the bankruptcies that hit the coal industry’s largest mining companies in 2015 and 2016.
When these companies emerged from bankruptcy, regulators directed them to shift to other bonding mechanisms. There were $3.86 billion worth of self-bonds prior to the bankruptcies, but that number since plummeted to just more than $1 billion, with $105 million in West Virginia slated for transfer to other bonding mechanisms.
The U.S. Government Accountability Office found, in a report published in April, that Congress should consider eliminating self-bonds due to their risk, although such efforts in the executive branch stalled.
In Texas, regulators are sticking with the practice, and data unearthed in records requests revealed they approved more than $56 million in new self-bonds since October.
Other states, though, are taking on the issue. Wyoming’s Department of Environmental Quality, for example, admits shortcomings in its self-bonding legislation, which has not been significantly altered since it was promulgated in 1982. Kyle Wendtland, the agency’s land quality division administrator, said amendments are underway to cap the amount a company can self-bond and to allow regulators to check the financials of both parent companies as well as subsidiaries.
But Wyoming will not go so far as to outlaw the practice. “We’re not interested in picking or choosing one financial assurance tool and saying one’s better than another,” Wendtland said.
In response to questions about the security of PacifiCorp’s self-bonds, a spokesperson noted the company’s opposition to stricter regulations.
Tiffany Erickson, of Rocky Mountain Power, a division of PacifiCorp, said in an emailed statement, “We value our good working relationship with the Wyoming Department of Environmental Quality and support their efforts to deal with the bonding issue. PacifiCorp has advised, however, that the rule as proposed would increase the cost of providing electric service to our customers.”
Dyson of the Rocky Mountain Institute said for Tri-State and other utilities “the basic story holds.” While the cost of coal-fired power continues to rise, G&Ts must appease co-ops that want renewable power, where prices “are all going down, down, down.”