A FERC administrative law judge on June 11 found that Basin Electric Power Cooperative improperly included the costs of a for-profit gasification business in its wholesale electricity rates, admonishing the co-op for its business practices and for apparently not understanding “some fundamental facts about what it means to be subject to independent regulation” (ER20-2441-002, et al.). 

In his 905-page initial decision, ALJ Scott Hempling opened with some of the basics of FERC’s regulations under the Federal Power Act. This, he wrote, was because Basin only came under FERC jurisdiction in 2019, after providing wholesale services since 1962. 

“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,” Hempling wrote. “Perhaps recognizing how remote are Basin’s practices from normal, customer-focused regulatory principles, Basin’s able counsel and witnesses have repeatedly sought refuge in such phrases as ‘the cooperative way,’ ‘the customers are the owners’ and the ‘democratic process.’ … 

“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. The cooperative way shouldn’t create divisions among the cooperative’s members. A democratic process doesn’t always produce prudent decisions. And in a democracy, the majority shouldn’t discriminate against a minority.” 

‘Thousands of Unnecessary Hours’

Basin is the largest rural electric cooperative in the country, based in North Dakota, and serves 3 million customers and 140 member co-ops in nine states in both the Eastern and Western Interconnections. When it filed its wholesale rates with FERC in 2020, having readmitted the jurisdictional Tri-State Generation and Transmission Association, several of its members and the Sierra Club protested, and the commission initiated an investigation under FPA Section 206. (See FERC to Investigate Basin Electric Rates; Danly Dissents.) 

Basin also owns for-profit subsidiary Dakota Gasification Co. (DGC), which produces natural gas from coal and urea that is used for fertilizer, among other products. The company bought the Great Plains Synfuel Plant from the Department of Energy in 1988, which is located next to Basin’s Antelope Valley Station coal generator in North Dakota. 

The co-op has set its electricity revenue requirement since 2016 at a level it says is needed to provide the financial health of the entire consolidated corporate family, taking into account all of its businesses’ losses — including DGC’s. 

“Because Basin’s consolidated corporate family includes nonutility businesses, most prominently DGC, the annual electricity revenue requirement reflects not only the costs of providing electricity, it also reflects DGC’s financial experience, positive or negative,” Hempling wrote. DGC’s losses added hundreds of millions of dollars to Basin’s electricity revenue requirement, he said. 

One of Basin’s members, McKenzie Electric Cooperative, argued that other than the products that it needs to provide power, none of DGC’s costs should be reflected in rates, and it should update its revenue requirements to reflect that.  

Hempling not only agreed; he castigated Basin for wasting his and intervenors’ time by ignoring FERC precedent. 

“Basin made no change in its pre-jurisdictional practice — the practice of basing rates on its consolidated income statement. Basin thus ignored commission precedent that protects a utility’s jurisdictional customers from the costs and risks of non-jurisdictional affiliates,” he wrote. “Basin also ignored commission precedent prohibiting the collection of amounts for unspecified, merely possible future events. 

“Insisting that ‘the cooperative way’ justifies its disregard for commission precedent, Basin has caused intervenors, and this tribunal, thousands of unnecessary hours — hours spent seeking, reading, interpreting and critiquing thousands of internal document — all to do what Basin should have done on its own: Take seriously the rule of law, as Congress enacted it in the Federal Power Act and as this commission has applied it in interpreting that act. Taking seriously the rule of law means presenting a revenue requirement that reflects the cost of electric service and only the cost of electric service.” 

Hempling also addressed the prudence of Basin and DGC’s business decisions. Though he ruled that this ultimately did not matter as to Basin’s electricity rates, “McKenzie and Basin have litigated the question of prudence, [so] they and the commission deserve my conclusions on that question.” 

The ALJ ruled that Basin failed to assess cheaper alternatives compared to investing in existing coal plants. He outlined numerous flaws in the companies’ decision-making process, from the overlapping structure of their boards to lacking a culture that encouraged internal debate. 

“Basin’s board failed Basin’s members — the ultimate consumers — by making them involuntary risk-takers in DGC’s business prospects, he wrote. “Worse, the board did so without any knowledge of, or any concern for, their members’ risk appetites.” 

Hempling also found that Basin treats some of its members who had contracts with it through 2050 differently from those who had contracts through 2075, charging the latter more favorable depreciation rates and providing them relief from pancaked transmission rates. 

“This dissimilar treatment of similarly situated customers violates the statutory prohibition against undue preference or advantage,” he wrote. 

Precedential?

“In the absence of competitive pressure or regulatory oversight, Basin has spent its members’ money on costly and polluting generation resources without ever assessing whether cleaner alternatives would better serve customers’ interests,” Sierra Club Managing Attorney Kristin Henry said in a statement. “Instead, Basin blindly spent tens of millions of dollars on aging coal plants that were already uncompetitive in the energy market. This initial decision makes significant strides forward in holding Basin accountable for its egregious disregard of customers’ interests.” 

Initial decisions still have to be voted on by the entire commission before any of its findings actually go into effect. Sierra will continue to participate in the case as it is considered by the full commission, so any final order, or future rate case, provides relief from the imprudent spending, Henry said. 

If FERC adopts the initial decision’s findings, it would be precedential in finding cooperatives are not exempt from accountability under the FPA, nor from the general regulatory principle that monopoly utilities must minimize costs, Sierra said. 

“This decision sends a clear signal: Instead of doubling down on these expensive and outdated coal plants — without even considering alternatives — Basin should commit to replacing coal plants with readily available, low-cost renewable sources of energy,” said Sierra Club Chief Energy Officer Holly Bender. 

The initial decision did not recommend disallowances, or ratepayer refunds, associated with the coal plant spending, but it could be liable for some monetary remedy if Sierra Club can present enough evidence on transmission infrastructure and other alleged deficiencies in future dockets, it said. 

Basin said in a statement that it was still evaluating the initial decision. 

“But there are a number of findings that are contrary to the positions we made in the case,” the co-op said. “Discussing an active proceeding in front of FERC is a delicate matter, but we will continue to aggressively defend our collective interests in the proceeding as this moves to the full FERC commission. This is one step in a long process, and Basin Electric Power Cooperative remains committed to the cooperative principles and serving our members.”