Huron power struggle sets precedent for rural electric co-ops across US

In 2019, some board members of the rural electric cooperative Dakota Energy wanted to find out if they could get a better deal for wholesale power on the private market.

Rates, and electric bills by extension, had doubled in 15 years for the 2,300 member-owners who pay the Huron-based co-op for electrical service. Wholesale costs soaked up 70% of the Dakota Energy budget – significantly more than decades past.

But there was a problem. Dakota Energy, which doesn’t generate any of its own electricity, was under contract to buy power exclusively from a co-op named East River Electric until 2075. 

Madison-based East River gets power from the Oahe Dam and buys power from a co-op named Basin Electric, headquartered in Bismarck. The Dakota Energy leadership in 2019 felt both partners had too much debt and offered too little predictability on rates.

A for-profit Colorado company called Guzman Energy had offered to buy out Dakota Energy’s contract with East River in exchange for the chance to sell Dakota Energy power at a lower market rate. 

East River refused to give a buyout number.

The dispute bubbled into a yearslong legal battle over the rights of ratepayers and the contractual obligations of nonprofit co-ops.

Dakota Energy sued East River, and later some of Dakota Energy’s own member-owners who’d sought to force a vote to shut down the Guzman deal.

East River pushed the case into federal court.

Basin Electric signed on to countersue.

Lawyers for Guzman got involved. A coalition of co-ops did, too.

A town hall was held, radio ads appeared, statements were released and letters to the editor were submitted. 

East River set up a website called “Keep Our Co-op.“

Some of Dakota Energy’s member-owners, even now, feel that their local co-op leadership conspired to upend a long-term relationship with East River.

Bill Folk, one of the Dakota Energy member-owners the co-op sued, said he and many others learned about the Guzman talks on television news.

“They planted a bunch of stuff in the paper,” Folk said. “They started running down the manager of East River, printing his salary and everything and saying he was mismanaging things. But this had nothing to do with him. The guy from East River is a good person. It was just totally wrong what they were doing.”

A decision with big implications

Last spring and summer, the courts made the call: East River was not obligated to offer a buyout number, and Dakota Energy is legally obligated to stick with East River until 2075.

The 8th Circuit Court of Appeals cast the final die last month when it affirmed a spring 2022 decision saying so, issued by a Sioux Falls judge and appealed by Dakota Energy. 

The decision settled the dispute, but it also created a legal precedent likely to have ripple effects for the electric co-ops that serve rural Americans from coast to coast.

For Dakota Energy, its loss before the three-judge panel means it can’t try to save its member-owners money by breaking its contract for what it saw as a better deal.

“We are disappointed that the ruling ties our hands and prevents us from finding ways to bring real cost savings to our members,” said Chase Binger, Dakota Energy board president, “but it is clear to the board that it is time to end the lawsuit. Dakota Energy will remain a full and active member of East River.”

For co-ops with contracts similar to Dakota Energy’s, particularly those within the 8th Circuit, the ruling means they needn’t bother looking into a buyout.

“Outside of the Eighth Circuit, it is yet to be seen how influential the decision will be,” Guzman Chief Commercial Officer Robin Lunt said in written answers to South Dakota Searchlight.

Unlike investor-owned utilities like Xcel Energy, electric co-ops aren’t required to submit rate hikes for review by public utilities commissions. Instead, elected board members for generation and transmission co-ops like East River set rates. “Profits” from a co-op are meant to be returned to member-owners.

The contracts and lack of oversight can create an unfair situation for distribution co-ops like Dakota Energy, Lunt said. 

Lunt said that if co-ops like East River are not “regulated by government oversight, disciplined through competition and do not actually adhere to the ‘open and voluntary membership’ code of cooperative membership, distribution cooperatives risk being left behind in a time of energy transition. This can lead to a very troubling place.”

East River and its backers, however, see the ruling as a win for the cooperative concept that made rural electrification possible in the first place.

A loss, they say, would have enabled smaller co-ops partnered with larger ones all across the nation to follow Dakota Energy’s lead and jump ship, potentially whittling away buying power and reliability for those left behind.

“The affirmation of this contract is a foundational piece of the future of the co-ops,” said Jeff Nelson, who worked for East River for 40 years before retiring in 2014. “Is it huge? I think it is absolutely huge. If you believe that scope and scale is important to your future, you can’t attack the critical mass of that by saying ‘we just want to leave and nobody else will.’”

Contract disputes part of co-op history

Long-term contracts are almost as defining a feature of co-ops as profit-sharing. Lengthy contracts that guarantee a steady flow of cash are used in the absence of a profit history to secure loans for multi-million dollar system investments.

“Co-ops, if you want to serve rural areas, are always high-debt, high-capital needs operations,” Nelson said. 

It’s an operational model that emerged in 1936, when President Franklin D. Roosevelt signed legislation enabling the creation of cooperatives. The law was meant to address the challenging economics of getting electricity to places like rural South Dakota, where energy companies don’t see enough customers to justify the cost of power lines and substations. The mechanism for electric service delivery was the extension of low-interest loans, backed by the security of co-ops’ shared commitment to servicing debts.

The first co-op in South Dakota was founded in 1937.

Dakota Energy was built through that co-op system. In 1949, the two co-ops that would later merge to form Dakota Energy were founding members of East River, which now sends power across its transmission lines to 23 small co-ops and one city in eastern South Dakota. 

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East River was formed to boost its members’ bargaining power as the federal government began to allocate energy from the hydroelectric facilities being built on the Missouri River through the 1950s, Nelson said. 

That power began to flow in earnest in the early 1960s, he said, but the co-ops already knew they’d need more. That’s where Basin Electric came in. That co-op was formed in 1961 to get low-interest loans on coal plants whose output could offer supplemental power.

The system made electrification possible for rural South Dakota, Nelson said, but the long-term contracts haven’t always been popular. In addition to pricing concerns, modern co-ops are increasingly focused on renewable energy, as are their investor-owned counterparts. The Biden administration included $9.7 billion in the Inflation Reduction Act to help co-ops move away from coal-fired power. 

Basin Electric has already indicated an interest in applying for some of that money. Smaller co-ops might also have a shot at some funding, depending on how current contract provisions and contract renegotiation talks play out for them individually.

Some rural co-ops have expressed concern that their contracts might lock them into dirtier fuel, even as other utilities shift to greener sources.

The Dakota Energy situation didn’t focus heavily on a better mix of renewables through a shift to Guzman, though it was noted as a potential benefit. Aside from that aspect of the discussions, the rift shares many of the same features as the disputes that arose historically in South Dakota each time a smaller co-op reworked its contracts. Dakota Energy did that in 1995 and 2015, just as other co-op partners of East River have on multiple occasions over the years.

“I would sometimes describe it as a long-term marriage where every 10 years, you get your marriage license out and have an opportunity for both parties to tell the other all the things they don’t like about why they’re married,” Nelson said.

Contracts, debt, free market factor into dispute

In the past, Nelson said, East River had always been able to resolve issues about debt, contract length and maneuverability during those negotiations.

For Dakota Energy, the possibility of a Guzman buyout came at a time of not just higher energy costs, but during a period of financial losses for a Basin Electric-owned coal gasification plant that operates as a separate, for-profit entity.

Binger, the Dakota Energy board president, was among the leaders who saw the plant as a drag on East River and its 24 partners.

A move away from East River would benefit the cooperative, Binger said during a recorded town hall meeting in spring 2021. The meeting was meant to make the case for the lawsuit against East River, which had commenced the previous fall.

“We believe there are better and more flexible options out there,” Binger said during the town hall. 

At that same meeting, Dakota Energy CEO Chad Felderman pointed to the gasification plant’s financial losses as proof that his co-op was “paying more than our share.”

Guzman officials at the town hall pointed to lower electric bills for the member-owners of a New Mexico co-op called Kit Carson, which successfully separated from its nonprofit power supplier and signed on with Guzman.

Guzman was offering 10- to 15-year fixed rates for power, which Binger said was as appealing as lower market costs for power because the fixed rates would offer protection against future rate hikes.

Binger said East River’s rate hikes through 2019, the debt load, the possibility of savings and moves by other co-ops in the western U.S. motivated the discussion.

“I mean, when you’re looking at those losses being bled up there to begin with, it was a huge thing,” Binger said.

East River has consistently claimed that the departure of Dakota Energy, whose payments represent 4-5% of its budget, would saddle other co-ops with the remaining costs.

Binger said that argument wouldn’t hold water if Dakota Energy had been allowed to buy out the contract.

“We would have paid our fair share out,” Binger said. “Us leaving would not have hurt the other co-ops.”

The 8th Circuit loss shut down a Guzman deal. A similar decision out of South Carolina in 2022 ruled against a buyout demand from a co-op in that state called Marlboro Electric Cooperative. It came around the same time Dakota Energy lost in U.S. District Court in South Dakota, setting up the 8th Circuit appeal.

But Binger noted that those rulings aren’t the only approach to co-op contract buyouts. 

Last fall, an administrative law judge with the Federal Energy Regulatory Commission (FERC) endorsed a methodology for calculating buyouts in a dispute between United Power and Tri-State in Colorado – a state outside the jurisdiction of the 8th Circuit Court of Appeals. That decision cleared a path for the production of buyout prices for Tri-State’s co-op partners.

Those buyout numbers are key to informed decision-making by rural co-ops, Guzman executive Lunt said.

In the absence of a buyout price from East River, she said, a final number for savings to Dakota Energy ratepayers was never produced. A letter of intent signed by Dakota Energy, she said, aimed for a 15% reduction in homeowner electric bills – a figure Lunt said is supported by the experience of Kit Carson in New Mexico and the Delta-Montrose Electric Association in Colorado.

“The pursuit of cheaper wholesale power is sadly a move that (Dakota Energy) member-owners have been denied,” Lunt said. 

East River: Rates competitive, gas plant beneficial

East River’s anti-Guzman website says East River’s rates are competitive in the region, have declined for three years in a row – a trend that began shortly after Dakota Energy filed suit – and that it expects prices to hold steady in the near term.

The same website also pointed to additional market fees attached to Kit Carson bills, essentially arguing that the proposed deal in South Dakota wouldn’t return the promised results. 

As to the gasification plant, East River spokesman Chris Studer told South Dakota Searchlight it has returned to a stable financial condition. It produces agricultural chemicals and gas derived from coal, and Studer said those operations have been profitable for the past few years. 

“When Dakota Gasification does well, that comes over to Basin Electric and helps us keep our rates lower. When natural gas prices are low, Dakota Gasification can be a drain on Basin Electric’s financials.”

Regarding the buyout number, Studer said the ever-changing energy market makes it incredibly difficult to guess what a co-op’s obligation might look like decades into the future.

“The trouble that you have when you go down that road is ‘what’s a fair buyout price?’ Electricity is moving all over the place every single day,” Studer said.

A buyout number also would have sparked potentially lengthy negotiations, he said, which he argues would have distracted both East River and Dakota Energy from serving member-owners.

Nelson, the former head of East River, sides with his former employer in the Dakota Energy dispute. 

But he also said he understands the appeal of Guzman’s offer. 

“The people at Guzman are smart people,” Nelson said. “They’ve demonstrated that they can do what they promise to do. But they can only tell you their own perspective.”

Moving forward

The 8th Circuit ruling ensures Dakota Energy and East River will remain partners for decades to come, but the impact of the heated dispute might have a long tail.

This month, Dakota Energy will hold an election for its board of directors. Bill Folk and his wife, Twyla, who was also sued for trying to push an anti-Guzman vote, are among those who’d like to see three new board members elected who will change Dakota Energy’s bylaws to prevent a departure from East River without a member vote.

“We’re worried that they have not told us the truth in the past,” said Twyla Folk, who has penned multiple letters to the Huron Plainsman newspaper decrying the Guzman talks. “And maybe we need new members in there that will tell us what’s going on.” 

Binger would like to see the opposite – a board willing to update the bylaws in a way that makes clear that the Huron co-op has the right to look for a better deal.

The court ruling was a disappointment, Binger said, but he hopes that opening up the questions of independence and freedom of movement for local co-ops will produce future contract renegotiations that end with more options for Dakota Energy.

If solar and wind power become more available in the area, for example, Binger would like Dakota Energy to have a chance at buying some of it. 

“With our contract right now, we can do nothing but buy power from Basin and East River,” he said. 

 

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