Tariff-Based Cooperative Withdrawals Need Not Use Lost-Revenues Exit Fees: Tenth Circuit Upholds FERC’s Balance-Sheet Methodology and Transmission Crediting

I. Introduction

In Tri-State Generation and Transmission Association, Inc. v. Federal Energy Regulatory Commission (10th Cir. Mar. 24, 2026), the Tenth Circuit denied four consolidated petitions for review challenging a series of Federal Energy Regulatory Commission (“FERC”) orders that replaced Tri-State’s preferred “lost-revenues” exit-fee formula with a “balance-sheet” methodology for cooperative-member withdrawals.

Parties. Petitioner Tri-State Generation and Transmission Association, Inc. (“Tri-State”) is a generation-and-transmission cooperative serving roughly forty utility members (mostly distribution cooperatives) under long-term “all-requirements” wholesale service contracts running through 2050. Several members sought early termination. FERC, after hearing procedures, adopted an exit-fee methodology proposed by FERC Trial Staff (with modifications), designed to prevent cost shifts to remaining members while avoiding overcompensation and undue deterrence of withdrawal.

Core issue. When members withdraw pursuant to a FERC-jurisdictional tariff (without breaching the underlying all-requirements contracts), what exit-fee methodology is “just and reasonable” under the Federal Power Act—Tri-State’s “lost revenues,” or a balance-sheet allocation of debt and obligations?

II. Summary of the Opinion

Applying Administrative Procedure Act review, the court held FERC engaged in reasoned decisionmaking and did not act arbitrarily or capriciously by:

  • Rejecting a lost-revenues exit-fee approach as inconsistent with cost-causation and as importing contract-damages concepts into a non-breach withdrawal regime;
  • Adopting a (novel) balance-sheet approach requiring an upfront, lump-sum payment of a departing member’s pro rata share of Tri-State’s long-term debt and obligations;
  • Approving a transmission-crediting mechanism that credits back (over time) the transmission-debt portion of the exit fee against the departing member’s Open Access Transmission Tariff (“OATT”) invoice, and allowing the credit to apply to the entire OATT bill;
  • Applying the same general methodology to Eastern Interconnection members notwithstanding Tri-State’s separate contract with Basin Electric, because alleged breach and Basin-contract consequences were addressed in distinct proceedings.

Separate writing. Judge McHugh concurred except she dissented on a narrow point: she would have granted review as to FERC’s later directive to include non-networked transmission debt in the transmission credit, reasoning FERC shifted rationale during compliance proceedings without adequate explanation.

III. Analysis

A. Precedents Cited (and How They Shaped the Decision)

1. Just-and-reasonable review, cost causation, and deference

  • FERC v. Elec. Power Supply Ass'n, 577 U.S. 260 (2016): supplied the court’s framing that FERC rate-setting involves technical and policy judgment and receives “great deference,” with judicial review focused on whether FERC “engaged in reasoned decisionmaking.”
  • 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): reinforced the “cost-causation principle”— charges should “reflect to some degree the costs actually caused by the customer who must pay them.” These cases supported FERC’s central premise that “lost revenues” could overcharge departing members for costs Tri-State will never incur.
  • W. Watersheds Project v. Haaland, 69 F.4th 689 (10th Cir. 2023): supplied the Tenth Circuit’s articulation of arbitrary-and-capricious review (failure to consider important aspects; explanation contrary to evidence; implausibility).
  • Fabrizius v. USDA, 129 F.4th 1226 (10th Cir. 2025): provided the “substantial evidence” definition used for reviewing factual findings.

2. Section 205 vs. section 206 burdens (procedural posture discipline)

  • Emera Me. v. FERC, 854 F.3d 9 (D.C. Cir. 2017) and PPL Wallingford Energy LLC v. FERC, 419 F.3d 1194 (D.C. Cir. 2005): informed the opinion’s explanation that section 205 (utility-filed tariff changes) and section 206 (FERC-initiated correction of unlawful rates) impose different burdens. This mattered because FERC both evaluated Tri-State’s filing and ensured it could “fix” a just-and-reasonable methodology under section 206 if needed.

3. Jurisdictional backdrop

  • United Power, Inc. v. FERC, 49 F.4th 554 (D.C. Cir. 2022): the Tenth Circuit relied on this decision for the governing understanding of an exit charge’s objectives and as confirmation that FERC had exclusive jurisdiction over the exit fee. It also served as a touchstone for the cost-shift/membership-stability framing FERC used.

4. Tri-State’s lost-revenue authorities—and why they did not control

  • Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc., 874 F.2d 1346 (10th Cir. 1989): distinguished because it involved breach-of-contract litigation and contract remedies (including discussion of damages), whereas the withdrawals here occur under a tariff with “no breach of contract.”
  • Town of Norwood v. FERC, 202 F.3d 392 (1st Cir. 2000): treated as materially different given different contracts, notice, and context; the court held FERC could reasonably find it non-controlling on this record. (The Tenth Circuit acknowledged FERC’s characterization of Norwood was imperfect but treated it as non-dispositive.)
  • Am. Wind Energy Ass'n The Wind Coal. v. Sw. Power Pool, Inc., 167 FERC ¶ 61,033 (2019): read as providing general exit-fee principles (cover costs; prevent cost shifts; promote stability), not a mandate for lost-revenues calculations.
  • Wabash Valley Power Ass'n, 178 FERC ¶ 63,005 (2022): rejected as nonprecedential because it was an ALJ decision, not binding on FERC. The court’s discussion aligned with administrative-law principles that agencies are not bound by unreviewed ALJ decisions.

5. Agency change/novelty and explanation

  • FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) and Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012): supported the proposition that an agency may adopt a novel approach if it acknowledges the shift and provides a reasoned explanation. This underwrote affirmance of FERC’s first-time use of a balance-sheet approach.
  • New England Power Generators Ass'n v. FERC, 881 F.3d 202 (D.C. Cir. 2018) and Int'l Transmission Co. v. FERC, 988 F.3d 471 (D.C. Cir. 2021): framed how agencies must address precedent and how differing records/procedures can justify different outcomes.
  • Zzyym v. Pompeo, 958 F.3d 1014 (10th Cir. 2020): used to explain why a minor misstatement (here, regarding Norwood) did not necessarily render the overall decision arbitrary if the record shows the agency would reach the same result.

6. Handling related-but-discrete issues in separate proceedings

  • Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos., 498 U.S. 211 (1991): supported FERC’s procedural discretion to handle contract-breach consequences (Basin contract issues) in separate proceedings from tariff methodology.
  • Sacramento Mun. Util. Dist. v. FERC, 616 F.3d 520 (D.C. Cir. 2010): cited for the proposition that if an outcome later proves unjust, parties can petition for changes under section 206.

B. Legal Reasoning

1. Why “lost revenues” was reasonably rejected

The court accepted FERC’s core distinction: an exit fee for tariff-permitted withdrawal is not a contract-damages device. Because withdrawal under Rate Schedule No. 281 entails “no breach of contract,” FERC reasonably found it inappropriate to award something akin to expectancy damages (“decades of revenues not yet earned” based on costs never incurred).

The opinion emphasizes two interlocking rationales: (i) cost causation—lost-revenue projections may “go beyond compensating” Tri-State for costs incurred or obligated to incur for the departing member; and (ii) exit deterrence/windfall risk—a lost-revenues model could function as an excessive barrier, granting Tri-State payments far exceeding system liabilities.

2. Why the “balance-sheet” method was upheld despite being “novel”

The Tenth Circuit treated novelty as permissible so long as FERC provided a reasoned explanation and record support. FERC justified the balance-sheet approach as better tailored to the “additional complications” of cooperative withdrawal: departing members have ownership interests, and many will continue using Tri-State’s transmission service (raising double-recovery concerns).

The court also credited FERC’s reliance on the tariff’s two-year notice period as a factual predicate for mitigation: many asserted “fixed costs” could be avoided, re-optimized, or otherwise reduced, undercutting Tri-State’s claim that only lost revenues would prevent cost shifts.

3. Transmission crediting: preventing double recovery and allocating benefit

FERC replaced an “offset” concept with a crediting mechanism due to workability concerns, then structured the credit to apply to the entire OATT invoice. The court upheld this as reasoned: applying the credit only to the “debt portion” of the invoice risked leaving departing members unable to realize the credit (and potentially producing a windfall for Tri-State), while the full-invoice application better ensured members receive the benefit of prepaying transmission debt.

On the disputed “non-networked” point, the majority concluded FERC had not changed course: from the start, FERC required crediting “the full time-value” of the transmission-debt portion of the exit payment and later compliance orders merely enforced that directive. Judge McHugh disagreed, viewing the compliance-stage inclusion of non-networked debt in the credit as an unexplained shift that could cause cost shifts.

4. Eastern Interconnection / Basin contract: scope and sequencing

Tri-State argued the Basin all-requirements contract created potentially “unknown” costs upon Eastern-member withdrawal and should alter the exit-fee calculation. The Tenth Circuit accepted FERC’s separation-of-issues approach: breach and contract-consequence questions were addressed in separate FERC proceedings (and were the subject of a pending D.C. Circuit appeal), while the methodology proceeding set a generally applicable, just-and-reasonable tariff framework.

C. Impact

  • Exit fees need not be lost-revenues damages where withdrawal is tariff-authorized. The opinion strengthens the line between contract remedies and just-and-reasonable tariff design, particularly in cooperative exit contexts.
  • FERC has leeway to design cooperative-specific exit methodologies. The court approved FERC’s attention to cooperative “ownership” dynamics and continued service relationships, signaling judicial tolerance for bespoke rate tools.
  • Transmission double-recovery is a central design constraint. FERC’s crediting approach—upfront payment to prevent “stranded” transmission assets coupled with credits tied to future OATT usage—may become a template where departing customers remain transmission users.
  • Compliance-stage disputes can be dispositive. The partial dissent underscores that even when a methodology is upheld, later “implementation” choices (especially if arguably rationale-shifting) can trigger serious APA risk—foreshadowing continued litigation over how “full value” credits should function.
  • Contract entanglements may be decoupled procedurally. By approving FERC’s decision to address Basin-contract questions elsewhere, the court validated an agency strategy of sequencing: set tariff methodology now, resolve contract/breach consequences in parallel or later proceedings.

IV. Complex Concepts Simplified

  • “Just and reasonable” (Federal Power Act). A flexible standard policed by FERC and reviewed deferentially by courts. A key component is cost causation—customers should generally pay charges that reasonably resemble the costs they cause.
  • Section 205 vs. Section 206. Under section 205, a utility proposes a tariff change and must show it is just and reasonable. Under section 206, FERC (or a complainant) must show the existing rate/practice is unlawful and that FERC’s replacement is just and reasonable.
  • Lost-revenues approach. An exit charge modeled on the revenues the utility expects to lose over the remaining contract term—akin to expectancy damages—often controversial because it can charge for costs never actually incurred post-withdrawal.
  • Balance-sheet approach. A method that sets the exit fee largely by allocating a pro rata share of existing long-term debt and obligations shown on (or tied to) the utility’s balance sheet, rather than projecting future revenues.
  • OATT (Open Access Transmission Tariff). A FERC-approved tariff under which transmission service is offered to eligible customers. A departing generation customer may still be a transmission customer.
  • Transmission crediting mechanism. Here, it functions like a refund-on-usage: the member prepays transmission-debt costs in the exit fee, then receives credits against future OATT bills as it continues to use the system.
  • Networked vs. non-networked transmission facilities. “Networked” facilities broadly support the system; “non-networked” facilities typically benefit a specific member. Whether and how those costs are credited back is central to the dissent’s cost-shift concerns.

V. Conclusion

The Tenth Circuit’s decision affirms a significant and practical rule for cooperative withdrawals under FERC-jurisdictional tariffs: FERC is not required to adopt a lost-revenues (contract-damages-like) exit fee when departure is tariff-authorized and non-breaching. Instead, a balance-sheet allocation of debt and obligations, paired with a transmission crediting mechanism designed to manage continued OATT usage, can satisfy the Federal Power Act’s “just and reasonable” standard—so long as FERC explains its choices and grounds them in the record.

The concurrence/dissent highlights the next frontier: even if the broad methodology survives, the APA demands careful explanation when compliance-stage details materially affect cost shifts—particularly in the treatment of non-networked transmission debt within crediting structures.