No Breach, No Lost Revenues: FERC May Require Balance-Sheet Exit Fees with Transmission Crediting for Cooperative Withdrawals

Introduction

Tri-State Generation and Transmission Association, Inc. (“Tri-State”), a generation-and-transmission cooperative serving distribution-cooperative members under long-term, all-requirements contracts running to 2050, faced member withdrawal requests from United Power, Inc., Mountain Parks Electric, Inc., La Plata Electric Association, Inc., and Northwest Rural Public Power District. Tri-State proposed a FERC-jurisdictional “exit fee” methodology intended to govern early departures.

The core legal question was not whether members could withdraw as a matter of state cooperative law, but whether the Federal Energy Regulatory Commission (“FERC”) acted lawfully under the Federal Power Act’s “just and reasonable” standard when it (i) rejected Tri-State’s lost-revenues methodology and (ii) required a balance-sheet methodology (with a transmission-crediting mechanism) to prevent cost shifts and over-recovery.

The Tenth Circuit, exercising jurisdiction under 16 U.S.C. § 825l(b), denied Tri-State’s petitions and upheld FERC’s methodology as non-arbitrary and supported by reasoned decisionmaking under the APA.

Summary of the Opinion

  • The court upheld FERC’s rejection of a lost-revenues exit fee (a damages-like model) because withdrawal under the tariff is not a breach of contract, and a lost-revenues approach would likely overcompensate Tri-State and improperly deter withdrawal.
  • The court upheld FERC’s adoption of a balance-sheet approach requiring a withdrawing member to pay its pro rata share of Tri-State’s debt and long-term obligations (including PPAs), calculated using a three-year average billing share and interconnection-specific allocation.
  • The court upheld FERC’s transmission-crediting mechanism, including applying credits to the withdrawing member’s entire OATT invoice, and upheld FERC’s compliance directives (including treatment of non-networked transmission debt).
  • The court upheld FERC’s decision to apply the same methodology to Eastern Interconnection members notwithstanding Tri-State’s separate contract with Basin Electric Power Cooperative, treating Basin-contract breach questions as appropriately handled in separate FERC proceedings.

Notable separate writing: Judge McHugh concurred on most points but dissented as to including non-networked debt in the transmission credit, viewing it as an unexplained shift in rationale.

Analysis

Precedents Cited

1) The Federal Power Act framework and burdens (Sections 205 and 206)

  • Emera Me. v. FERC, 854 F.3d 9 (D.C. Cir. 2017): Used to explain the distinction between § 205 utility-initiated filings and § 206 FERC-initiated rate correction proceedings, including the different burdens. The court relied on this framing to contextualize why FERC could both reject Tri-State’s proposal and, through § 206 authority, implement/modify a just-and-reasonable methodology.
  • PPL Wallingford Energy LLC v. FERC, 419 F.3d 1194 (D.C. Cir. 2005): Cited for § 206’s “dual burden” concept (show existing rate unlawful; show replacement just and reasonable). This supports the legitimacy of FERC’s posture in moving beyond Tri-State’s filing to impose a methodology it deemed lawful.
  • FERC v. Elec. Power Supply Ass'n, 577 U.S. 260 (2016): Central for (i) FERC’s duty to ensure just and reasonable rates and (ii) judicial deference to FERC’s technical/policy judgments so long as the agency engages in “reasoned decisionmaking.” The Tenth Circuit repeatedly invoked this deference lens in upholding FERC’s methodology choices.

2) Cost-causation as the “just and reasonable” anchor

  • United Power, Inc. v. FERC, 49 F.4th 554 (D.C. Cir. 2022): Cited for applying the just-and-reasonable standard to exit-fee methodology and for describing exit charges as protecting cooperative members from rate increases caused by departures while covering costs incurred to serve the exiting member. The Tenth Circuit treated this as consistent with FERC’s cost-causation framing.
  • 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): Cited for the principle that rates must bear a reasonable relationship to costs caused/benefits received, without exacting precision. This principle undergirded the rejection of lost-revenues (over-collection for costs never incurred) and acceptance of balance-sheet debt/obligation allocation (cost responsibility for incurred/committed costs).

3) Administrative law: APA review, precedent handling, and policy change

  • W. Watersheds Project v. Haaland, 69 F.4th 689 (10th Cir. 2023): Provided the court’s articulation of arbitrary-and-capricious review (consideration of relevant factors, explanation consistent with the record).
  • Fabrizius v. USDA, 129 F.4th 1226 (10th Cir. 2025): Used for the substantial-evidence definition.
  • New England Power Generators Ass'n v. FERC, 881 F.3d 202 (D.C. Cir. 2018): Cited for the proposition that agencies must come to terms with their own precedent; the Tenth Circuit used it to evaluate Tri-State’s claim that FERC ignored prior decisions supporting lost-revenues.
  • Int'l Transmission Co. v. FERC, 988 F.3d 471 (D.C. Cir. 2021): Supported the idea that different records/procedures can justify different outcomes without an agency being arbitrary.
  • FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) and Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012): Grounded the holding that an agency may adopt a “novel” approach or change position if it acknowledges and reasonably explains it. The court used this to reject “unprecedented” as a standalone objection to balance-sheet methodology.
  • Zzyym v. Pompeo, 958 F.3d 1014 (10th Cir. 2020): Cited to support harmlessness of minor errors and the ability to discern agency reasoning from the record.
  • Pub. Serv. Elec. & Gas Co. v. FERC, 989 F.3d 10 (D.C. Cir. 2021): Used for the standard that FERC responds meaningfully when it acknowledges and necessarily rejects a party’s argument.
  • Nat'l Cable & Telecomms. Ass'n v. FCC, 567 F.3d 659 (D.C. Cir. 2009): Reinforced that inconsistent precedent does not expand judicial power beyond ensuring adequate explanation and no clear error of judgment.

4) Contract and exit-fee precedent Tri-State invoked—and why it did not control

  • Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc., 874 F.2d 1346 (10th Cir. 1989): Distinguished because it was a breach-of-contract case where damages logic (including present value of contract performance) could apply. Here, tariff-based withdrawal was treated as not a breach, weakening the analogy.
  • Town of Norwood v. FERC, 202 F.3d 392 (1st Cir. 2000): The court acknowledged differences and treated Norwood as factually/procedurally distinct, especially regarding notice and the context of termination charges.
  • Am. Wind Energy Ass'n The Wind Coal. v. Sw. Power Pool, Inc., 167 FERC ¶ 61,033 (2019): Read as emphasizing exit fees should not create unlawful barriers and should avoid cost shifts, but not as mandating lost-revenues.
  • Wabash Valley Power Ass'n, 178 FERC ¶ 63,005 (2022): Treated as nonbinding because it was an ALJ decision; FERC’s refusal to treat it as controlling was upheld (with support from RMI Co. v. Sec'y of Lab., 594 F.2d 566 (6th Cir. 1979) on agencies not being bound by unreviewed ALJ decisions).

5) Procedural discretion to separate related disputes

  • Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos., 498 U.S. 211 (1991): Supported FERC’s broad discretion in managing discrete but related issues in separate proceedings—critical to the court’s approval of FERC’s handling of Basin-contract concerns outside the exit-fee methodology docket.
  • Sacramento Mun. Util. Dist. v. FERC, 616 F.3d 520 (D.C. Cir. 2010): Cited to note that future unjust outcomes can be addressed through later § 206 proceedings, reinforcing the court’s acceptance that the methodology need not resolve every hypothetical future contingency.

6) Dissent-relevant APA anchor

  • Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983): Appeared in the separate opinion to argue that including non-networked debt in transmission credits could reflect an unexplained failure to consider cost-shift consequences.

Legal Reasoning

1) “No breach” matters: exit fees are not contract damages

The opinion’s most crystallized doctrinal move is its acceptance of FERC’s distinction between (i) breach-of-contract remedies and (ii) tariff-governed withdrawal. Because “there is no breach of contract when a member withdraws from Tri-State pursuant to [its] tariff,” the court held FERC could reasonably conclude there was “no breach of contract that could warrant a remedy of damages in the form of lost revenues.”

This becomes the hinge for rejecting lost-revenues exit charges that replicate expectancy damages over decades of performance—especially where those “projected costs to serve that member” may never be incurred after withdrawal.

2) Cost causation and over-recovery: the boundary FERC was policing

The court accepted FERC’s framing that the exit fee should “compensate Tri-State for the costs that it has incurred or has an obligation to incur in the future to satisfy its service obligations under the [Service Contract] with the departing member”—not to preserve Tri-State’s future revenue stream as such. Lost-revenues, on this record, risked (i) a “windfall” and (ii) an impermissible deterrent to withdrawal.

3) Why a balance-sheet approach was “just and reasonable” despite being novel

The court emphasized administrative-law basics: novelty is not invalidity. What mattered was that FERC (a) acknowledged it had not used this approach before, (b) grounded it in record evidence, and (c) explained why cooperative-specific “complications” justified it—particularly the members’ ownership interests and the probability of continued OATT usage.

4) Transmission credits: preventing double recovery and aligning benefits with payment

FERC replaced an “offset” with a “transmission crediting approach,” citing workability concerns, and the court upheld that choice. The credit’s structure—upfront payment to prevent “stranded” transmission assets, then amortized crediting against OATT bills—was treated as a rational mechanism to balance recovery and avoid cost shifts, with an additional incentive effect to keep users on the system.

The court also upheld applying the credit to the entire OATT invoice (not just the debt-related portion) as a rational way to ensure the withdrawing member can practically realize the benefit of its prepayment while avoiding a windfall to Tri-State from payments by non-member transmission customers.

5) Eastern Interconnection and the Basin contract: scope management

The court accepted FERC’s decision to treat “what might constitute a breach” of the Basin contract as outside the exit-fee methodology proceeding’s scope, especially because the availability of exit payments could be affected by breach determinations regardless of the exit-fee formula. The court further relied on FERC’s separate Basin-related orders (issued concurrently) as supporting the instruction that Tri-State should not assume a breach when calculating Eastern members’ exit fees.

Impact

  • Exit-fee design for cooperatives under FERC jurisdiction: The decision endorses (and thereby normalizes) a non-damages, cost-causation-driven approach to cooperative exit fees where withdrawal is tariff-authorized, even when underlying relationships are long-term all-requirements contracts.
  • Regulatory flexibility: The court signals that FERC can adopt “novel” methodologies (like a balance-sheet model) so long as it explains why the methodology fits the cooperative’s structure and the record.
  • Transmission-specific mechanisms: The transmission-crediting model may become a template for addressing the “depart but still use the wires” problem—recover transmission debt upfront while preventing double payment over time.
  • Litigation strategy and forum separation: Parties should expect FERC (and reviewing courts) to tolerate separation of contract-interpretation disputes into parallel dockets, rather than forcing those disputes into a methodology rulemaking/adjudication.
  • Unresolved tension (highlighted by the dissent): The proper treatment of non-networked transmission facilities within the crediting mechanism is a pressure point. Future challenges may focus on whether crediting back certain debt components produces impermissible cost shifts or reflects an inadequately explained policy move.

Complex Concepts Simplified

  • All-requirements contract: A long-term agreement under which a member must buy nearly all its electricity needs from the cooperative supplier.
  • Exit fee (termination charge): A payment required when a member leaves early, intended (in FERC’s framing here) to cover costs the cooperative incurred or committed to incur to serve that member and to avoid shifting those costs to remaining members.
  • Lost-revenues approach: A damages-like model charging the member for the revenue the cooperative would have earned over the remaining contract term. FERC and the court viewed this as ill-suited where departure is authorized by tariff (i.e., not a breach).
  • Balance-sheet approach: A model focusing on allocating the member’s share of existing debts and long-term obligations (including off-balance-sheet commitments like PPAs), rather than projecting future profit/revenue streams.
  • OATT (Open Access Transmission Tariff): The standardized tariff under which transmission customers (including former members) can buy transmission service.
  • Transmission crediting mechanism: The withdrawing member prepays its share of transmission-related debt in the exit fee, then receives credits over time on its OATT bills if it continues to use the system—designed to avoid double payment while keeping the system financially whole.
  • Networked vs. non-networked transmission facilities: “Networked” assets broadly serve the system; “non-networked” assets typically benefit a particular member. A key controversy was whether debt tied to non-networked assets must be included in credits as well as the upfront transmission component.
  • Eastern vs. Western Interconnection: Separate parts of the U.S. grid. Tri-State’s service model differs across them, affecting how costs are allocated.

Conclusion

The Tenth Circuit’s decision cements three practical propositions for FERC-regulated cooperative withdrawals: (1) when withdrawal occurs under a tariff rather than through breach, FERC may reject damages-like lost-revenues exit fees; (2) FERC may require a balance-sheet allocation of incurred/committed costs as a just-and-reasonable, cost-causation-consistent exit methodology; and (3) FERC may address post-withdrawal transmission usage with a crediting mechanism aimed at preventing cost shifts and double recovery, while reserving related contract disputes for separate proceedings.