Federal Power Act Exit Fees for Cooperative Withdrawals: FERC May Reject Lost-Revenues and Approve a Balance-Sheet Method with Transmission Crediting

1. Introduction

This published Tenth Circuit decision addresses a high-stakes problem for generation-and-transmission (“G&T”) cooperatives and their member distribution cooperatives: how to set a “just and reasonable” exit-fee methodology when members seek to withdraw before the end of long-term, all-requirements wholesale service contracts.

Petitioner Tri-State Generation and Transmission Association, Inc. (“Tri-State”), a G&T cooperative serving roughly forty utility members across several states, faced withdrawal requests from several members (including United Power, Mountain Parks, La Plata Electric Association, and Northwest Rural Public Power District). Tri-State responded by filing a FERC-jurisdictional rate schedule proposing an exit-fee methodology. FERC rejected Tri-State’s lost-revenues framing and ultimately adopted (with modifications) a novel balance-sheet-based methodology, including a transmission crediting mechanism for departing members that continue to use Tri-State’s Open Access Transmission Tariff (“OATT”) service.

The core legal issues were: (1) whether FERC acted arbitrarily and capriciously in rejecting a lost-revenues exit-fee approach; (2) whether FERC permissibly adopted a balance-sheet approach (despite Tri-State’s claims of cost shifting and under-recovery); (3) whether FERC reasonably designed the transmission crediting mechanism (including application to the entire OATT invoice and to non-networked transmission debt); and (4) whether FERC could apply the same balance-sheet methodology to “Eastern Interconnection” members notwithstanding Tri-State’s separate contract with Basin Electric Power Cooperative.

2. Summary of the Opinion

Applying APA review standards and substantial deference to FERC’s ratemaking judgments, the Tenth Circuit denied all four consolidated petitions for review. The court held that FERC engaged in reasoned decisionmaking when it:

• Rejected a lost-revenues approach as overcompensatory, inconsistent with cost-causation principles, and rooted in breach-of-contract damages even though tariff withdrawal was not a breach;
• Adopted a balance-sheet approach requiring an upfront payment of a departing member’s pro rata share of Tri-State’s debt and long-term obligations, calculated using a three-year average share of billings and allocated within each interconnection;
• Adopted a transmission crediting mechanism that credits back the transmission-debt portion of the upfront payment over time against a departing member’s OATT bills (and applies the credit to the entire invoice), while requiring forfeiture of any credit exceeding the monthly bill; and
• Declined to bake Basin-contract breach contingencies into the exit-fee methodology, treating breach questions as outside the methodology proceeding and pointing to separate FERC proceedings addressing that contract.

Notable separate writing: Judge McHugh concurred in part and dissented in part, agreeing with most of the majority’s analysis but disputing FERC’s inclusion of non-networked transmission debt in the transmission credit, viewing that step as an unexplained shift likely to cause cost shifting.

3. Analysis

3.1 Precedents Cited (and How They Shaped the Decision)

A. Federal Power Act framework and burdens

• Emera Me. v. FERC, 854 F.3d 9 (D.C. Cir. 2017): Used to distinguish the procedural posture and burdens of proof in FPA § 205 (utility-filed rate changes) versus § 206 (FERC/complainant-initiated challenges). The opinion relies on Emera Me. to explain why rate design disputes can turn on which section is invoked and who bears what burden.
• PPL Wallingford Energy LLC v. FERC, 419 F.3d 1194 (D.C. Cir. 2005): Cited for § 206’s “dual burden”—FERC must first show the existing rate is unlawful, then establish a just and reasonable replacement.
• FERC v. Elec. Power Supply Ass'n, 577 U.S. 260 (2016): Supplies both the articulation of FERC’s “authority and duty” to ensure just and reasonable rates and the judicial posture of “great deference” to FERC in technical rate decisions; the Tenth Circuit repeatedly uses this case’s “reasoned decisionmaking” framing.

B. Cost-causation as a component of “just and reasonable”

• United Power, Inc. v. FERC, 49 F.4th 554 (D.C. Cir. 2022): Central backdrop confirming that exit-fee methodologies are subject to the FPA just-and-reasonable standard and summarizing the purpose of cooperative exit charges (protect remaining members from rate increases due to exit, increase commitment/stability, cover cooperative costs to serve the member). The Tenth Circuit uses it as a legitimating premise for FERC’s focus on cost causation and anti-cost-shifting design.
• Consol. Edison Co. of N.Y. v. FERC, 45 F.4th 265 (D.C. Cir. 2022), and Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C. Cir. 2004): Provide the doctrinal statement that rates should reflect costs caused by the paying customer and need only “bear some resemblance” to burdens imposed/benefits received. These cases supported the court’s acceptance of a methodology that is not perfectly precise but is rationally connected to debt and obligations incurred to serve withdrawing members.

C. Administrative law: arbitrary-and-capricious review and agency change-of-position

• W. Watersheds Project v. Haaland, 69 F.4th 689 (10th Cir. 2023): Used for the canonical arbitrary-and-capricious factors (important aspect ignored, counter-evidence, implausibility, etc.).
• Fabrizius v. USDA, 129 F.4th 1226 (10th Cir. 2025): Cited for the substantial evidence standard.
• FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009), and Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012): Cited for the principle that agencies may adopt novel approaches or change policy if they acknowledge the change and provide a reasoned explanation. This was key to rejecting Tri-State’s “novel/unprecedented” attack on the balance-sheet approach.
• New England Power Generators Ass'n v. FERC, 881 F.3d 202 (D.C. Cir. 2018): Invoked for the requirement that FERC meaningfully engage with its own precedent and explain deviations.
• Int'l Transmission Co. v. FERC, 988 F.3d 471 (D.C. Cir. 2021): Cited to reinforce that differing outcomes are not arbitrary when cases have distinct records, claims, and procedural contexts.
• Zzyym v. Pompeo, 958 F.3d 1014 (10th Cir. 2020), and Nat'l Cable & Telecomms. Ass'n v. FCC, 567 F.3d 659 (D.C. Cir. 2009): Used to treat a perceived minor misreading of precedent (the court notes FERC “misread” Town of Norwood v. FERC) as non-fatal where the agency’s broader reasoning remains adequately supported.
• Pub. Serv. Elec. & Gas Co. v. FERC, 989 F.3d 10 (D.C. Cir. 2021): Supports the conclusion that FERC satisfied its obligation to respond meaningfully by expressly acknowledging and necessarily rejecting arguments (e.g., credit rating and contract-trigger concerns).
• Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos., 498 U.S. 211 (1991): Used to justify FERC’s procedural discretion to separate related but discrete issues (exit methodology versus Basin-contract breach questions).
• Sacramento Mun. Util. Dist. v. FERC, 616 F.3d 520 (D.C. Cir. 2010): Cited for the safety valve that parties may later seek § 206 relief if real-world application yields unjust outcomes.

D. The “lost revenues” debate: breach cases and exit-fee precedent

• Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc., 874 F.2d 1346 (10th Cir. 1989): Tri-State’s key reliance for lost-revenues/damages logic. The court accepted FERC’s distinction: Shoshone involved breach-of-contract litigation and damages concepts; tariff withdrawal here was not a breach.
• Town of Norwood v. FERC, 202 F.3d 392 (1st Cir. 2000): Tri-State invoked it as support for termination charges reflecting contract-like obligations. The Tenth Circuit noted FERC’s characterization of Norwood as an “inputs” case was inaccurate, but still held Norwood non-controlling given differing contracts and a materially different context (including notice period and ability to mitigate).
• Am. Wind Energy Ass'n The Wind Coal. v. Sw. Power Pool, Inc., 167 FERC ¶ 61,033 (2019): Cited by Tri-State for broad exit-fee purposes; the court read it as general guidance (avoid barriers, prevent cost shifts, ensure solvency/stability) rather than a mandate for lost revenues.
• Wabash Valley Power Ass'n, 178 FERC ¶ 63,005 (2022): An ALJ decision approving lost revenues. The court agreed with FERC that ALJ initial decisions are nonprecedential and do not bind FERC.
• RMI Co. v. Sec'y of Lab., 594 F.2d 566 (6th Cir. 1979): Used to reinforce that an agency is not bound by unreviewed ALJ decisions.

3.2 Legal Reasoning

A. Why FERC could reject lost revenues

The court accepted FERC’s central conceptual move: an exit fee under a filed tariff is not a breach remedy. Because members can withdraw with two years’ notice under Tri-State’s tariff, FERC was entitled to treat the fee as a rate mechanism to: (1) compensate Tri-State for costs incurred (or obligated) to serve the member, while (2) avoiding overcompensation and (3) preventing cost shifts to remaining members.

Thus, the court upheld FERC’s conclusion that a lost-revenues calculation would tend to function like contractual damages—recovering projected revenues for costs Tri-State may never actually incur after withdrawal—creating windfalls and deterring exit in a way inconsistent with just-and-reasonable ratemaking.

B. Why FERC could adopt a “novel” balance-sheet approach

The Tenth Circuit emphasized that novelty is not illegality under the APA. What matters is whether FERC: (1) considered competing proposals; (2) grounded its choice in record evidence; and (3) explained its reasoning coherently. The court found those elements satisfied in FERC’s lengthy Methodology Order and Methodology Rehearing Order.

FERC justified a balance-sheet approach as uniquely fitting cooperative withdrawal because it accounts for:

• Member ownership interests (the cooperative structure makes pure “customer damages” framing incomplete);
• Continuing transmission usage by departing members (making transmission cost recovery and double-recovery avoidance central); and
• The two-year notice period, which supports mitigation/re-optimization and undermines the premise that all projected fixed costs are truly unavoidable.

The court also credited FERC’s responses to practical objections (credit rating, contract triggers, omitted costs), treating them as matters FERC addressed with record support and policy judgment—territory in which courts defer heavily.

C. The transmission crediting mechanism: avoiding double recovery while preserving upfront recovery

FERC’s modification replaced an administratively burdensome transmission offset (requiring forecasts and discounting of future OATT usage) with a credit applied over time against OATT bills. The court upheld:

• Applying the credit to the entire OATT invoice (to avoid frequent situations where the “debt-only” portion is too small to absorb the credit, leading to under-crediting and windfalls for Tri-State); and
• Forfeiture of excess monthly credit (the credit is tied to continued usage of the assets for which the member prepaid; unused “service” does not generate refundable value).

On the most contested point—including non-networked transmission debt in the credit—the majority found no “purpose shift,” concluding FERC consistently described the credit as ensuring the member recovers the full time-value of the transmission-debt portion of its exit payment. Judge McHugh’s dissent argued the opposite: that FERC’s earlier rationale focused on preventing double payment/double recovery and that crediting non-networked debt risks shifting costs to remaining members without adequate explanation.

D. Eastern Interconnection members and the Basin contract: procedural compartmentalization

Tri-State argued that the exit-fee methodology must incorporate potential Basin-imposed costs or breach consequences. The court accepted FERC’s approach: treat breach/contract-construction consequences as a separate issue handled in separate proceedings (including Nw. Rural Pub. Power Dist. v. Basin Elec. Power Coop., 189 FERC ¶ 61,164 (2024)), and keep the exit-fee methodology a generally applicable cost-causation tool rather than a contingent damages model keyed to hypothetical litigation outcomes.

3.3 Impact

• Exit-fee design for cooperatives: The decision strengthens FERC’s latitude to reject “lost revenues” framing where withdrawal occurs under a tariff (with notice), and to instead align exit payments with debt/long-term obligations and cost causation.
• Judicial deference in novel rate tools: The opinion reinforces that “unprecedented” is not an APA defect where FERC builds a record-based explanation (a theme grounded in FERC v. Elec. Power Supply Ass'n and FCC v. Fox Television Stations, Inc.).
• Transmission-specific innovation: The transmission crediting mechanism—particularly its application to the entire OATT invoice and the “use-it-or-lose-it” forfeiture rule—may become a template for cooperatives where departing members remain transmission customers.
• Future litigation pressure points: Judge McHugh’s partial dissent flags a likely future battleground: whether crediting non-networked transmission debt is coherent with anti-cost-shifting principles and whether FERC adequately explained that design choice.
• Interconnection-sensitive allocation: FERC’s interconnection-based allocation (members not “similarly situated”) provides a path for differentiated treatment within a single cooperative where service footprints and obligations differ materially.

4. Complex Concepts Simplified

• All-requirements contract: A long-term wholesale power contract under which a member buys (almost) all of its needed power/services from the supplier.
• Exit fee (termination charge): A FERC-jurisdictional rate mechanism allowing early withdrawal under a tariff, designed to prevent shifting the cooperative’s incurred costs to remaining members.
• Lost-revenues approach: Sets the exit fee by estimating the supplier’s future revenues (often net of avoided costs) that would have been collected through the contract’s end—conceptually similar to expectation damages.
• Balance-sheet approach: Ties the exit fee to a departing member’s pro rata share of the cooperative’s existing debt and long-term obligations (including some off-balance-sheet commitments like PPAs), rather than projected future margin.
• Cost causation: The ratemaking principle that those who cause costs (or benefit from investments) should bear those costs, at least roughly; the law does not require perfect precision.
• OATT: Open Access Transmission Tariff—standardized transmission service terms and formula rates under which customers (including former members) can take transmission service.
• Transmission crediting mechanism: A method where the withdrawing member prepays its share of transmission debt in the exit fee, then receives a credit over time against OATT bills to reflect continued use and avoid inappropriate over-collection.
• Non-networked transmission facilities: Facilities typically benefiting a particular member; the dispute here concerned whether the debt associated with such facilities should be included in the crediting mechanism.
• Eastern vs. Western Interconnection: Separate synchronized grid regions; Tri-State’s service and obligations differed by region, affecting “similarly situated” analysis and allocation methodology.

5. Conclusion

The Tenth Circuit’s decision confirms that, under the Federal Power Act’s just-and-reasonable standard and embedded cost-causation principles, FERC may reject a cooperative’s proposed lost-revenues exit fee where withdrawal is permitted under a tariff and not treated as breach. FERC may instead adopt a balance-sheet methodology aimed at assigning the withdrawing member its pro rata share of incurred debt and long-term obligations, and may innovate with transmission crediting to balance upfront cost recovery, double-recovery concerns, and ongoing transmission usage.

At a broader level, the opinion is a strong statement of APA deference in technically complex rate design—paired with a pointed dissent that signals continuing doctrinal and practical controversy over how far “crediting back” can go before it becomes an unexplained cost shift.