The future of rural electric cooperatives

Families often struggle with tension when a disagreement spurs a member to leave. These days, rural electric cooperatives are enduring the same strain, as a South Dakota case shows.

This story starts in 1949, when founders formed East River Electric Power Cooperative. Its purpose was noble — to electrify rural areas at a reasonable rate. Located in southeastern South Dakota, the electricity provider buys most of its power from Basin Electric, a North Dakota wholesale power cooperative. East River also receives a portion of its power through a hydropower allocation from the Western Area Power Administration. It then resells power to its 24-member distribution cooperatives in eastern South Dakota and western Minnesota.

"Each of our members has invested in East River and has an ownership stake in our cooperative," says Chris Studer, chief member and public relations officer at East River. "By working together, we are able to keep costs stable and spread risk."

Like some families, though, one member wants to leave.

Dakota Energy Looks to Part Ways

Formed in 1995, Dakota Energy Cooperative (DEC) is the result of a merger between two of East River's founding members: Ree Electric and Beadle Electric. Based in Huron, South Dakota, DEC serves about 3,600 customers primarily in Beadle, Hand, and Hyde counties and makes up about 6.7% of East River's electric sales today.

Before the merger, each cooperative had a separate, long-term wholesale power contract with East River. The current contract, which was signed in 2015, runs through 2075.

A long-term contract is not unusual. It exists so Basin Electric can preserve an excellent credit rating and procure long-term, low-interest loans to maintain and invest in critical infrastructure.

In 2018, DEC's nine-member board requested an exit fee calculation, so it could determine if it was feasible to end its contract and purchase power elsewhere. The idea had been percolating since 2015, when concerns began surfacing about
the hundreds of millions of dollars lost at Dakota Gasification, a for-profit subsidiary owned by Basin Electric. While East River says the contract does not provide for a buyout, DEC refutes that claim.

Why Leave?

It comes down to money, says Chase Binger, DEC board president. East River power rates have risen dramatically in recent years, and DEC believes it can purchase cheaper electricity from Guzman Energy.

"Our power costs to East River are just under 75% of our expenses," says Binger, who farms in Hitchcock, South Dakota. "In the last 15 years, we have had 12 rate increases, which doubled our rates to just under 7¢ per kWh. Under our current wholesale power contract, there is no cap or ceiling on rates.

New technology is changing the power industry, and the DEC board members say it is their fiduciary duty to examine all the options to bring low-cost electricity to their cooperative members. "The board wanted to open the door to other opportunities a buyout number would bring not only for current members but future generations," says Todd Bushong, who also sits on the DEC board.

What Is Guzman?

Formed in 2013, Guzman is a wholesale energy provider based in Colorado. Targeting primarily rural areas, the company's business model is to essentially buy and sell energy off the market, offering fixed-rate, short-term contracts (about 10 to 15 years) as well as more flexibility. It currently serves power to cooperatives, municipalities, and tribes mostly in Colorado and New Mexico but is expanding into other organized markets. The company's portfolio is a combination of solar, wind, natural gas, and some coal.

DEC is not the first to explore alternatives. Tri-State Generation and Transmission Association, which provides power to Colorado, New Mexico, Wyoming, and Nebraska, lost two of its cooperatives in the past six years. It looks to lose two more by 2025. Departing cooperatives' motives are driven by a mix of reasons, including lowering costs, stabilizing wholesale rates, increasing the amount of renewable energy they use, and more local control. See "Why Tri-State Generation and Transmission Members are Leaving" below.

"Basically, Dakota Energy wants to know how to decide what its power supply looks like and whether they are getting the best rates for customers and managing that appropriately," says Robin Lunt, chief commercial officer at Guzman Energy. "As a board, it is your fiduciary responsibility to the community in which you live to examine all your options."

DEC CEO and General Manager Chad Felderman says even if the cooperative wasn't looking to switch providers, it should know what its indebtedness is to East River. "It's a number we believe we should have to be able to manage our cooperative correctly," he says.

Pursuing an Exit Fee

Because it's impossible to make any decision until an exit fee is established, DEC filed a lawsuit in November 2020 against East River to compel it to provide a buyout figure.

"This is the first time in 72 years that an East River member cooperative has attempted to leave its contract," Studer says.

A federal judge ruled against DEC in April 2022. It appealed the ruling to the Eighth Circuit Court of Appeals, and a three-judge panel heard oral arguments from DEC, East River, and Basin Electric in November. It's unclear how long it will take for a decision to be reached.

"We know we're on the right side of history," Binger says. "While it is difficult to be the leader, we won't let our foot off the gas in doing what we believe is best for our member owners."

What was unfolding didn't sit right with Dave Eide. The DEC member circulated a petition among DEC members to give them a voice in their co-op's direction. A little over 300 members signed the petition. See "Dakota Energy Cooperative Sues Member Owners" below.

"I am passionately opposed to purchasing power on the open market through Guzman Energy," Eide says. "Purchasing power on the open market is very volatile. During the February 2021 energy emergency, power went up to $4.10 per kWh."

While Lunt says it's true that the market can be volatile, Guzman is not dependent on it. "We either develop or contract for assets and then supply capacity and energy to our customers at a fixed price," she says.

In most cases, Eide says retail power is less than 10¢ per kWh. "Basin Electric buys and sells power on the open market every day and shields members from these high swings because they have generation on the ground," he explains.

Eide also points out that the buyout number, which could potentially be tens of millions of dollars, would have to be borrowed and paid back. "How many cents per kilowatt hour would have to be added to our rates for this?" Eide asks.

Holabird, South Dakota, farmer and DEC member Nick Nemec also had concerns and signed the petition. The situation also spurred him to run for a seat on the board.

The two men's doubts had company. At DEC's annual meeting in June 2022, members turned out in record numbers, voting to replace three long-standing directors whose three-year terms had expired.

"There were over 600 people at that meeting, which is more than usual, and the election wasn't even close," says newly elected board member Nemec.

Digging Into the Numbers

From the very beginning, Eide has said the math didn't add up.

"Guzman had a representative at some of our public meetings to answer questions. He stated that their rate was going to be 4.2¢ per kWh, which doesn't include transmission. At the time, I knew for a fact that bulk transmission was about a penny per kWh, and the sub transmission was about another penny per kWh. Even before you calculate in a buyout number, we're up to 6.2¢ per kWh. This doesn't make any sense at all."

Studer says East River's members, on average, pay about 6¢ per kWh wholesale. DEC maintains it is not the average and pays just under 7¢ per kWh to East River.

"The co-op model has proven to be for and about rural America, whereas these investor-owned companies are solely in it for a profit," Nemec says. "If the cooperative has a profit, it either goes into improving the critical infrastructure or goes back in the form of patronage to its members."

Since it began in 1949, East River has returned more than $90 million to its members through patronage capital and bill credits, with $22.6 million being returned in the past two years. As a member, DEC received over $1.13 million in 2021 and 2022. East River credits disappear if DEC decides to go with Guzman or another wholesale power provider. The credits DEC returns to its members would remain.

Both Nemec and Eide say infrastructure must also be factored into this switch. "If Dakota is successful in exiting its contract with East River, it becomes a perpetual renter, because it would have to rent the bulk transmission, sub transmission, substations, and pay for capacity," Eide says. "The cost of doing so will be no less and, most likely, more than what they are paying for today."

Felderman says DEC currently rents transmission and substations through East River, which is built into its current rate. "We would need to get a number for that cost and pay it separately," he says.

And what about service? "If there's an ice storm, will the other cooperatives send line crews to members that are no longer part of the family? If they do, will they go to areas that are still part of the cooperative family first?" Eide asks.

Because DEC has its own personnel and equipment, Binger says maintaining and responding to emergencies would not change. The cooperative is also covered by a mutual aid agreement with the State of South Dakota, which ensures additional resources are available if needed.

All About Members

Ultimately, this feud is not about DEC or East River, it's about what's best for the people at the end of the line - cooperative members.

As someone who recently went through a breakup, Luis A. Reyes, Jr., CEO and general manager at Kit Carson Electric Cooperative in Taos, New Mexico, says, "I think we discount both the value of members and how sophisticated they are if we don't provide them with the opportunity to give us their input."

Nemec says the stories told by his predecessors before electricity came to South Dakota is what drives his skepticism over the proposal.

"Farmers who lived out here wanted to have all the amenities the people in town had. The electric cooperative changed life in rural America," he says. "We shouldn't forget that the investor-owned companies were either unwilling or unable to help us back then, and I'm not convinced they want to help us now."

Culturally and historically, the DEC board understands that the rural electric cooperative has always been there for rural America. It also realizes that changing power providers is a big decision, so the board passed a resolution after its annual meeting that gives members final say in the matter.

"We weren't very effective in telling our story and should have held more meetings to express what we were trying to do," Binger says. "If we are successful in getting a buyout figure, we will present the information to our members, and they will then be able to vote on whether we move forward with leaving East River."

Why Tri-State Generation and Transmission Members Are Leaving

Tri-State Generation and Transmission, a 45-member coop-erative that provides power in Colorado, Nebraska, New Mexico, and Wyoming to more than a million people across nearly 200,000 square miles, lost two of its cooperatives in the past six years.

Founded in 1944, Kit Carson Electric Cooperative (KCEC) left Tri-State in 2016. CEO Luis A. Reyes, Jr., says that over a 12-year period, KCEC's wholesale rates doubled under Tri-State.

KCEC contracted with Guzman Energy, which financed the $37 million exit fee and added the amount to the cooperative's wholesale power costs. The fee methodology was based on KCEC's portion of Tri-State's service debt. All remaining members were kept whole. Last summer, KCEC made the final payment on the exit fee.

"Since Tri-State was not regulated, we didn't really feel we had a voice in trying to craft rates that were affordable to our community," says Reyes, who has been the CEO at KCEC for 30 years. "At 0.125¢ per kWh, we have a lower cost for residential power than we had with Tri-State. We also have a fixed-cost wholesale contract that has flexibility. Are our ratepayers better off today versus before we changed wholesale power providers? Unequivocally, yes."

With its wholesale power cost savings, KCEC was able to drop its retail rates in summer 2022, saving members 20% to 25% on their cost of power. It's important to note that cited figures are power only and don't include extra charges such as taxes and franchise fees, which vary by municipality and state and over time.

Leaving had other key benefits, including being able to add enough solar power so the cooperative could get all its summer daytime electricity from the sun.

In 2020, Delta-Montrose Electric Association (DMEA) exited Tri-State. Kyle Martinez says the decision to leave was a culmination of many years of rate increases and then being restricted on how much power it could generate from a hydropower plant it had invested in.

"I believe in the cooperative model, but it must work. It wasn't working for us, so we decided it was time to control our own destiny," says Martinez, who is a local farmer and the DMEA board president. "It all comes down to controlling the largest portion of your budget — wholesale power."

DMEA also partnered with Guzman and signed a 12.5-year con-tract. In the first six months, Martinez says the cooperative saved about $2.4 million on its power costs and $4 million to $5 million each year since.

Tri-State's largest member, United Power, says it wants out by May 2024. Mountain Parks Electric intends to leave Tri-State by January 2025.

Dakota Energy Cooperative Sues Member Owners

The dispute surrounding Dakota Energy Cooperative's (DEC) intent to leave East River Electric Power has spurred another lawsuit. This time it's against 17 of its own members.

DEC claims the 17 defendants named in the complaint pursued an unlawful effort to amend the cooperative's bylaws and to convene an un-lawful special meeting of its members. The petition was signed by about 12% of DEC members. A judgment ruled in favor of the cooperative.

Unfortunately, the lawsuits, countersuit, and appeals mean legal fees related to the case will continue to mount at the expense of members.

"Not only are we paying for our legal fees, but we are also paying a pro-rata share of East River's cost because we are a member there as well," says Nick Nemec, who farms in Holabird, South Dakota, and is a newly elected DEC board member. "In essence, both teams of lawyers are being paid by Dakota Energy ratepayers."

Update: On July 31, a three-judge panel of the 8th Circuit Court of Appeals has ruled in favor of East River Electric Power Cooperative, upholding a lower court’s ruling to dismiss a lawsuit brought by Dakota Energy Cooperative seeking to terminate its wholesale power contract early in order to buy power from Guzman Energy, a for-profit, Colorado-based energy broker. The ruling upholds a contractual commitment between East River Electric and Dakota Energy, confirming that Dakota Energy must honor its long-term power contract until its agreed upon termination date of December 31, 2075, and that no provision in the wholesale power contract or East River’s bylaws allows for early termination of that obligation.