For over 50 years, Basin Electric Power Cooperative has been ripping off its member rural electric cooperative distribution utilities. It could owe them potentially hundreds of millions of dollars in refunds, according to an initial decision by a Federal Energy Regulatory Commission administrative law judge Scott Hempling last week (June 11).
Basin, headquartered in Bismarck, N.D., is a nonprofit generation and transmission cooperative, selling wholesale power to some 3 million customers in 140 smaller distribution utilities spanning 500,000 square miles in North Dakota, South Dakota, Wyoming, Colorado, Minnesota, Iowa, Nebraska, Montana, and New Mexico. It is the largest rural electric cooperative in the U.S., with a reach extending from the Canadian to the Mexican borders.
When Basin began operations in 1961, it was not subject to the Federal Power Act. But that changed in 2019, when a variety of circumstances, including new circumstances for one of its largest members, Tri-State Generation and Transmission Association, triggered federal jurisdiction at FERC.
In addition to its heavily coal-fired generating system, Basin owns for-profit Dakota Gasification Co., which operates a lignite coal-to-gas plant, the for-profit Dakota Coal Company, which supplies coal to Basin’s coal-fired plants and the gasification company, and a for-profit gas generating company, Nemadji River Generation.
Falling under FERC jurisdiction brought Basin rate cases before the federal agency and led to the initial decision, which will guide the commission in final determinations. As Hempling noted in his 905-page (but extremely well organized) decision, the case not only has mammoth potential financial impact, but a mammoth record, leading to a mammoth initial decision.
In a preface to the decision, Hempling wrote, “This half-century absence of independent regulatory constraint explains the breadth, depth, and intensity of the disputes over Basin’s rates for 2020 and 2021. It also explains the length and detail of this Initial Decision—an Initial Decision based on 2,968 pages of prefiled testimony presented by 28 witnesses, 1,492 exhibits, and 9,647 pages of cross-examination and legal argument transcribed over nine weeks of hearings.”
Hempling found that Basin was enmeshed in regulatory imprudence throughout its operations and now is forced to confront that approach to rates now subject to federal oversight. He wrote, “Being subject to independent regulation—not just under the Federal Power Act but under every modern utility ratemaking statute—means these things:”
“• A utility may not respond to its coal-fired generating units’ poor economic performance, and a national trend of replacing coal-fired generating units with more economical alternatives, by failing to conduct any serious, expertise-based comparison of the coal units’ prospective costs with the all in costs of alternative generation portfolios.
“• A utility may not include in electricity rates any cost, loss, gain, or anything else, that is associated with the business operations or financial condition of an affiliated nonutility business, whether that business is succeeding or failing.
“• A utility may not use dissimilar depreciation rates for similarly situated customers buying the same service, disfavoring some customers merely because they decline to add 25 years to their already lengthy wholesale contracts.
“• A utility may not deny those same disfavored customers the transmission pancake relief that the utility provides to all other customers, again for no reason other than their decision not to commit to those additional 25 years—while making those disfavored customers pay in part for the relief received by all the others.”
Basin attempted to explain its behavior by wrapping itself in the rhetoric of public power, Hempling noted, citing “the cooperative way,” “the customers are the owners,” and the “democratic process.” Hempling responded, “But the cooperative movement’s venerable principles, and its honorable history, provide no logical or legal justification for the managerial mistakes, financial errors, and discriminatory practices revealed by the record in this proceeding.”
That’s where the feds come in. The FPA, Hempling said, “protects customers from the costs of a utility’s imprudent decisions, it prohibits a utility from forcing its customers to cover the costs and debts of its nonutility affiliates, and it protects the minority from undue discrimination by the majority. When a cooperative becomes subject to the Act, it must adjust to those legal realities. There is no cooperative exception.”
“Basin argues that for a cooperative, all disallowances are unlawful. This argument is beyond audacious; it is lawless.”
Hempling noted, “Basin argues that for a cooperative, all disallowances are unlawful. This argument is beyond audacious; it is lawless.”
How much financial pain will Basin face? The initial decision does not specify the damage, but notes that the Sierra Club, a participant in the proceeding, and Minnesota’s Meeker Cooperative Light and Power Association, also a participant, have suggested as much as $800 million in disallowances and refunds. Hempling noted, “The refunds sought by Tri-State, MVEC, and Wright-Hennepin, to compensate for Basin’s undue discrimination relating to depreciation expense and transmission-pancake relief, add to that total.”
Utility Dive reported that the disallowance for the Dakota coal gasification subsidiary could hit $471.5 million. Hempling wrote, “A utility may not include in electricity rates any cost, loss, gain, or anything else, that is associated with the business operations or financial condition of an affiliated nonutility business.”
In an email to Utility Dive, Basin spokesman Andy Buntrock commented, “We will continue to aggressively defend our collective interests in the proceeding as this moves to the full FERC commission.”
–Kennedy Maize
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