The Denver-based federal appeals court upheld a regulatory agency’s methodology for calculating the fee owed by entities seeking to withdraw from Tri-State Generation and Transmission Association last week.

Tri-State is a Westminster-based cooperative that provides and transmits electricity to member utilities throughout neighboring states and to other customers. Tri-State enters into long-term service contracts in which members purchase nearly all of their electricity from Tri-State.

Although the bylaws permit members to exit early, they do not specify the financial cost. After Brighton-based United Power moved to withdraw before the 2050 termination date, Tri-State proposed a fee of up to $1.6 billion. An administrative law judge found the methodology unreasonable and adopted a different approach.

The Federal Energy Regulatory Commission eventually approved a modified version, resulting in a $627 million fee for United Power. The purpose of the exit fee, FERC indicated, was to compensate Tri-State for service costs related to the exiting member and to guard against shifting costs to the remaining members.

The question for the U.S. Court of Appeals for the 10th Circuit was whether FERC’s proposal was reasonable.

In a March 24 opinion, a three-judge panel largely found that it was.

Although Tri-State argued FERC’s methodology was unprecedented, “an agency decision isn’t arbitrary and capricious just because it takes a new approach. Agencies can change position or adopt new policies if they provide a reasoned explanation for doing so,” wrote Judge Gregory A. Phillips for himself and Judge Richard E.N. Federico. “And here, FERC acknowledged that it was taking a new approach, then justified using that approach under the case’s specific circumstances.”

Judge Carolyn B. McHugh agreed with all aspects of the majority’s opinion except for one. She found fault with FERC’s decision to credit the exit fee for certain members’ transmission facilities. McHugh was concerned the effect would be to increase costs to other Tri-State members.

Broadly, Tri-State defended its vision for an exit fee using a “lost-revenues approach,” which would have accounted for the reduction in revenue Tri-State would incur through the remainder of the prematurely ended contract. FERC did not support that approach, likening it to a breach-of-contract scenario that did not apply because the bylaws specifically allowed for early exit.

FERC also crafted an approach that would require an upfront payment by the exiting member, with Tri-State crediting back portions over time if that member continues to use Tri-State services. United Power protested, arguing the crediting system transformed it from a regular customer into Tri-State’s “bank.”

During oral arguments before the 10th Circuit panel in January, Tri-State contended that FERC’s methodology was unreasonable and shifted costs to its members.

“They did something with us, with our contracts, that they’ve never done with any other cooperative and any other contract that they can point to,” said attorney Misha Tseytlin.

Meanwhile, FERC defended its work, acknowledging that costs may go up for remaining members if one co-op member withdraws.

“But they’re not paying for the withdrawing member’s ‘share’ of anything because the withdrawing member is not causing those costs going forward. Tri-State’s theory of causation is, ‘If you would’ve been there contributing in that denominator, and now you’re not, that’s cost causation,'” said Deputy Solicitor Carol J. Banta. “Those costs of serving the system a couple years after a member withdraws aren’t caused by that member.”

The panel sided with FERC, rejecting Tri-State’s proposal to peg the exit fee to lost revenues in the future. Phillips noted in the majority opinion that the crediting approach served the purposes of preventing Tri-State from recovering double payments from exiting members, minimizing cost-shifts, and ensuring Tri-State was still compensated for debt costs through the upfront fee.

The case is Tri-State Generation and Transmission Association, Inc. v. Federal Energy Regulatory Commission.