Tenth Circuit Endorses FERC’s Balance-Sheet Exit-Fee Methodology for G&T Cooperatives and Rejects Lost-Revenues “Damages” Absent Breach

1. Introduction

This published decision arises from a high-stakes dispute over how members may exit a rural electric generation-and-transmission (“G&T”) cooperative—and what they must pay when they do. Tri-State Generation and Transmission Association, Inc. (“Tri-State”) supplies wholesale power (and transmission) to roughly forty utility members across Colorado, Wyoming, New Mexico, and Nebraska, largely through long-term “all-requirements” Wholesale Electric Service Contracts running to 2050. Several member utilities—United Power, Inc., Mountain Parks Electric, Inc., La Plata Electric Association, Inc., and Northwest Rural Public Power District—sought early withdrawal and contract termination.

Tri-State responded by filing with the Federal Energy Regulatory Commission (“FERC”) a tariff-based “exit fee” methodology (Rate Schedule No. 281). FERC initiated adjudicatory proceedings to determine a “just and reasonable” exit-fee methodology under the Federal Power Act. Tri-State urged a lost-revenues model (analogous to damages for the revenues it expected to receive through 2050), while FERC Trial Staff advocated a balance-sheet model (allocating a departing member’s pro rata share of Tri-State’s debt and long-term obligations, with a transmission credit mechanism).

The core issues before the Tenth Circuit were whether FERC acted arbitrarily and capriciously by:

• Rejecting a lost-revenues exit fee;
• Adopting a (previously unused-by-FERC) balance-sheet methodology;
• Implementing and administering a transmission crediting mechanism (including its scope); and
• Applying the methodology to Eastern Interconnection members notwithstanding Tri-State’s contract with Basin Electric Power Cooperative (“Basin”).

2. Summary of the Opinion

The majority (Judge Phillips) applied APA review and emphasized the “great deference” owed to FERC’s ratemaking judgments. The court upheld FERC across four challenged dimensions:

• No lost-revenues requirement: FERC reasonably concluded that lost-revenues models “embody contractual damages,” which are not compelled when withdrawal occurs under a tariff with notice, rather than through breach.
• Balance-sheet methodology upheld: FERC permissibly adopted a “novel” balance-sheet approach because it better fits cooperative-specific realities—member ownership interests, the likelihood of continued OATT transmission service, and cost-mitigation possibilities during the two-year notice period.
• Transmission crediting mechanism upheld: FERC reasonably required the transmission credit to apply to the departing member’s entire OATT invoice, and it did not “change” the purpose of the credit in later compliance orders when it required inclusion of non-networked transmission debt in the credit.
• Eastern Interconnection / Basin issues deferred appropriately: FERC did not act arbitrarily and capriciously by declining to litigate Basin-contract breach consequences within the exit-fee methodology proceeding, pointing instead to separate, concurrently issued Basin-contract orders.

Separate writing: Judge McHugh concurred in part and dissented in part, agreeing with the majority on every issue except one: he would have granted relief as to including non-networked transmission debt in the transmission credit, reasoning FERC effectively changed the credit’s rationale during compliance without the explanation required by FCC v. Fox Television Stations, Inc..

3. Analysis

3.1 Precedents Cited (and How They Shaped the Decision)

• FERC v. Elec. Power Supply Ass'n, 577 U.S. 260 (2016)
  Role: The decision is the majority’s anchor for (i) FERC’s statutory “duty” to ensure just and reasonable rates, (ii) the “great deference” owed to FERC in rate design, and (iii) the court’s limited role: ensuring “reasoned decisionmaking,” not picking the “better” rate method. The opinion repeatedly returns to this case to justify affirmance so long as FERC weighed competing views and explained itself.
• 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)
  Role: These cases supply the doctrinal distinction between § 205 and § 206 proceedings and the “dual burden” under § 206 (unlawfulness of the existing rate plus just-and-reasonable replacement). This background matters because FERC initiated § 206 to ensure it could “fix” an exit-fee methodology if Tri-State’s § 205 filing proved deficient.
• United Power, Inc. v. FERC, 49 F.4th 554 (D.C. Cir. 2022)
  Role: Used for two key propositions: (i) the just-and-reasonable standard applies to exit-fee methodology; and (ii) the purpose of an exit charge includes protecting other cooperative members from rate increases and covering the costs a cooperative incurs to serve the member. The majority treats this as supportive of cost-causation-focused design rather than lost-revenues “damages.” The partial dissent also relies heavily on this “purpose” framing to argue the non-networked-debt credit risks cost shifting.
• 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)
  Role: These cases articulate the cost-causation principle embedded in “just and reasonable” rates—costs must resemble burdens imposed or benefits drawn. The majority uses these authorities to validate FERC’s skepticism of lost-revenues models as overcompensatory and potentially deterrent.
• Town of Norwood v. FERC, 202 F.3d 392 (1st Cir. 2000)
  Role: Tri-State invoked it as supporting contract-termination charges resembling lost-revenues. The majority acknowledges FERC “misread” Norwood as merely about “inputs” to an existing formula, but holds the misstatement immaterial because the case involved distinct contracts, notice, and record circumstances, and does not mandate lost-revenues treatment here. The court invokes its own harmless-error style reasoning via Zzyym v. Pompeo.
• Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc., 874 F.2d 1346 (10th Cir. 1989)
  Role: Tri-State argued Shoshone supports lost-revenues logic. The majority distinguishes it as a breach-of-contract case (Tri-State sued for breach when a member sold assets), whereas here withdrawal occurs under a tariff and “there is no breach of contract.” Shoshone remains relevant as context for cooperative economics, but not as a rule compelling damages-like exit fees.
• Am. Wind Energy Ass'n The Wind Coal. v. Sw. Power Pool, Inc., 167 FERC ¶ 61,033 (2019)
  Role: Tri-State used it to argue remaining members must be placed in the same financial position as if the member stayed. The majority rejects that reading: American Wind discusses acceptable exit-fee objectives (cost coverage, debt service, preventing cost shifts, stability) but does not require a lost-revenues methodology.
• Wabash Valley Power Ass'n, 178 FERC ¶ 63,005 (2022)
  Role: Tri-State cited this ALJ decision approving a lost-revenues approach elsewhere. The majority agrees with FERC that ALJ initial decisions are nonprecedential and do not bind FERC, so Wabash cannot compel the agency here.
• 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)
  Role: These cases provide the lens for “precedent sensitivity”: agencies must grapple with their precedent, but different records and contexts can justify different outcomes. The majority uses them to reject Tri-State’s “FERC ignored precedent” framing.
• FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) and Qwest Corp. v. FCC, 689 F.3d 1214 (10th Cir. 2012)
  Role: These underpin the principle that agencies may adopt novel approaches or change course if they acknowledge the change and provide good reasons. The majority uses this to answer Tri-State’s “novel/unprecedented” attack on the balance-sheet method. The dissent, in contrast, uses Fox to argue FERC effectively changed the transmission-credit rationale during compliance (as to non-networked debt) without the required acknowledgement and explanation.
• W. Watersheds Project v. Haaland, 69 F.4th 689 (10th Cir. 2023) and Fabrizius v. USDA, 129 F.4th 1226 (10th Cir. 2025)
  Role: These supply the Tenth Circuit’s articulation of arbitrary-and-capricious review and “substantial evidence.” They frame the court’s repeated emphasis that FERC must consider important aspects and avoid counter-evidentiary explanations, but courts do not reweigh technical judgments.
• Pub. Serv. Elec. & Gas Co. v. FERC, 989 F.3d 10 (D.C. Cir. 2021)
  Role: Cited for the proposition that FERC “meaningfully responds” when it acknowledges an argument and necessarily rejects it with reasoned support—used to uphold FERC’s responses on credit ratings and contractual-event risk.
• Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos., 498 U.S. 211 (1991)
  Role: Supports FERC’s discretion to sequence and separate related issues procedurally—critical to the court’s holding that Basin-contract breach questions could be handled in separate proceedings rather than embedded in the exit-fee methodology.
• Sacramento Mun. Util. Dist. v. FERC, 616 F.3d 520 (D.C. Cir. 2010)
  Role: Used to emphasize that if the methodology later proves unjust in application (e.g., for Eastern Interconnection circumstances), parties may seek § 206 changes.
• Nat'l Cable & Telecomms. Ass'n v. FCC, 567 F.3d 659 (D.C. Cir. 2009) and Zzyym v. Pompeo, 958 F.3d 1014 (10th Cir. 2020)
  Role: These cases buttress the idea that imperfect engagement with precedent or minor misstatements do not necessarily invalidate an agency decision where its reasons are otherwise adequate and the same outcome would follow.
• Nw. Rural Pub. Power Dist. v. Basin Elec. Power Coop., 189 FERC ¶ 61,164 (2024) and Nw. Rural Pub. Power Dist. v. Basin Elec. Power Coop., 191 FERC ¶ 61,087 (2025)
  Role: These FERC Basin-contract orders are treated as the proper locus for interpreting whether withdrawal breaches the Basin contract and how Section 9 operates. The majority relies on FERC’s use of these concurrent proceedings to justify refusing to bake “assumed breach” damages into the Tri-State exit-fee tariff.

3.2 Legal Reasoning

A. The court’s framing: “reasoned decisionmaking” plus ratemaking deference

The opinion is structured around the APA’s arbitrariness standard and an intentionally constrained judicial posture. Quoting FERC v. Elec. Power Supply Ass'n, the court repeats that it may not “substitute [its] own judgment” for FERC’s technical and policy judgments in rate design. This framing is not merely boilerplate; it drives the outcome on each contested methodology choice, especially where the record contains competing expert evidence.

B. Lost revenues vs. cost causation: why “damages logic” does not carry the day

The decision’s most important doctrinal move is to separate:

• Contract damages (lost revenues for the remainder of a long-term all-requirements contract); from
• Tariff-governed withdrawal compensation (covering the cooperative’s incurred or obligated-to-incur costs to serve the member, without overcompensating or unduly deterring exit).

The majority endorses FERC’s view that Tri-State’s lost-revenues approach “would go beyond compensating Tri-State” for costs caused by the departing member—allowing recovery of “decades of revenues not yet earned,” based on costs Tri-State “will never actually incur.” That assessment is tied directly to cost-causation doctrine (Consol. Edison Co. of N.Y. v. FERC; Midwest ISO Transmission Owners v. FERC) and to the practical risk of deterrence and windfalls.

Importantly, the court does not hold lost-revenues exit fees are unlawful in the abstract. It holds FERC reasonably rejected them on this record, especially because withdrawal under the tariff entails “no breach of contract.” That distinction becomes the opinion’s primary answer to Tri-State’s reliance on Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc..

C. Why a “novel” balance-sheet method is permissible

Tri-State attacked the balance-sheet method as unprecedented. The court responds with a classic administrative-law point: novelty is not invalidity. Under FCC v. Fox Television Stations, Inc. and Qwest Corp. v. FCC, agencies may adopt new approaches if they explain why the approach fits the circumstances.

The majority accepts FERC’s explanation that this cooperative-withdrawal problem is “not analogous” to typical requirements-contract termination because of “additional complications,” including:

• Departing members’ ownership interests in the cooperative;
• The likelihood of continued transmission service under Tri-State’s OATT (making “double recovery” a live issue); and
• The two-year notice period, which supports mitigation of many non-balance-sheet costs.

In short, the court validates a methodology choice that targets stranded debt and long-term obligations as the central cost-causation concern, while treating many operating costs as mitigable or avoidable with notice.

D. The transmission-crediting mechanism: preventing double recovery and allocating benefits

The adopted methodology requires an up-front payment including transmission-related debt, followed by credits over time (if the exiting member takes OATT service) to return the “full time-value” of that transmission-debt portion. Tri-State challenged two features, and the majority upholds both:

• Credit applied to the entire OATT invoice: FERC reasoned that limiting the credit to only the debt component would often strand credit (because Tri-State also recovers transmission-related debt from non-member OATT customers), risking a windfall to Tri-State and undermining “full benefit” delivery.
• Non-networked debt included in the credit: Tri-State argued FERC changed rationale in compliance. The majority holds FERC did not change course because it had always described the credit as ensuring both no double recovery and that withdrawing members “get[] the full transmission benefit [they] paid for.”

E. Eastern Interconnection members and the Basin contract: procedural compartmentalization approved

Tri-State and Basin argued FERC ignored an important aspect by not pricing “unknown” Basin-contract costs into Eastern Interconnection exit fees. The majority accepts FERC’s procedural decision to treat “what might constitute a breach” of the Basin contract as outside the exit-fee methodology proceeding and addressed in separate orders (Nw. Rural Pub. Power Dist. v. Basin Elec. Power Coop., 189 FERC ¶ 61,164; 191 FERC ¶ 61,087).

The court relies on Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos. to uphold FERC’s discretion to handle “related, yet discrete” issues separately, and it points out that breach consequences would affect withdrawal “regardless” of the exit-fee formula—supporting FERC’s refusal to import breach-like lost revenues through the back door.

3.3 Impact

• Exit fees for cooperative withdrawal are not presumptively “lost revenues”: The decision strengthens the agency’s latitude to reject damages-like exit fees where withdrawal is tariff-authorized and not a contract breach—particularly where lost-revenues projections risk windfalls and deterrence.
• FERC may innovate in rate design when justified by cooperative-specific realities: The court explicitly accepts novelty (a balance-sheet methodology “FERC acknowledged that it hadn't used ... before”) so long as FERC explains why it fits the record and statutory objectives.
• Transmission crediting becomes a litigable template: The up-front payment plus amortized credit model—applied to the entire OATT invoice and (per the majority) inclusive of non-networked debt—may influence how other cooperatives and FERC staff structure “avoid double recovery” solutions where a member exits generation service but continues transmission service.
• Procedural sequencing of contract disputes is endorsed: Parties seeking to force FERC to resolve collateral contract-breach questions inside a rate-methodology docket face headwinds; the court approves FERC’s compartmentalization, especially where parallel dockets exist.
• Appellate posture matters: The opinion is a reminder that challengers must show more than “better policy.” Under the APA, especially in ratemaking, the decisive question is whether FERC’s explanation is coherent, record-grounded, and attentive to key objections.

4. Complex Concepts Simplified

• “Just and reasonable” (Federal Power Act): A flexible standard policed by FERC and reviewed deferentially by courts; it incorporates cost causation—charges should resemble the costs the customer causes or the benefits it draws.
• Cost-causation principle: The idea that those who cause costs (or benefit from facilities/commitments) should bear them; exact precision is not required, but the match must be recognizable.
• Section 205 vs. Section 206: Under § 205, utilities propose tariff changes and must show the new rate is just and reasonable. Under § 206, FERC (or a complainant) challenges an existing rate; FERC must show the existing rate is unlawful and then set a just and reasonable replacement.
• Lost-revenues approach: An exit fee calculated to replicate the cooperative’s expected net revenues from the member through the contract term—similar in feel to breach-of-contract damages.
• Balance-sheet approach: An exit fee based on allocating a departing member’s pro rata share of the cooperative’s debt and long-term obligations (including items like power purchase agreements), rather than projecting decades of future net revenues.
• OATT (Open Access Transmission Tariff): The FERC-jurisdictional tariff under which transmission service is offered to customers (including ex-members); here, continued OATT service is central to double-recovery concerns.
• Transmission crediting mechanism: A device to prevent the cooperative from recovering transmission debt twice (up-front exit fee and later transmission rates) by crediting the exiting member over time against its OATT bills.
• Networked vs. non-networked transmission facilities: “Networked” facilities broadly serve multiple users; “non-networked” facilities typically benefit a particular member. A key dispute here is whether the credit mechanism must return the prepayment associated with non-networked facilities.
• Western vs. Eastern Interconnection: Two major grid regions. Tri-State’s service and associated obligations differ by region; FERC approved allocating obligations within each interconnection because members were “not similarly situated.”

5. Conclusion

The Tenth Circuit’s decision is a consequential endorsement of FERC’s discretion to design cooperative exit fees around cost causation rather than contract-damages analogies—particularly where members withdraw through tariff mechanisms and provide advance notice. The court approves FERC’s “novel” balance-sheet methodology, validates transmission crediting as a workable response to continued OATT usage, and permits FERC to handle collateral contract-breach questions (like the Basin contract) in separate proceedings.

Practically, the opinion signals that regulated cooperatives and their members should expect FERC to scrutinize whether proposed exit fees overcompensate, deter withdrawal, or shift costs—and that appellate courts will uphold FERC so long as it explains its choices coherently and ties them to record evidence and cost-causation principles. The partial dissent highlights a continuing litigation pressure point: the proper scope and rationale of transmission credits, especially for non-networked facilities, and the level of explanation required if FERC’s implementation appears to evolve during compliance.