New Rule for Cooperative Exit Fees: FERC May Reject Lost-Revenues “Damages” and Require a Balance-Sheet, Pro‑Rata Debt Methodology (with Transmission Crediting)

1. Introduction

This published Tenth Circuit decision addresses how the Federal Energy Regulatory Commission (“FERC”) may regulate “exit fees” when member utilities seek to withdraw early from a generation-and-transmission cooperative operating under long-term, all-requirements wholesale power contracts. The petitioner, Tri-State Generation and Transmission Association, Inc. (“Tri-State”), is a generation-and-transmission cooperative supplying wholesale power to member distribution cooperatives (and others) across multiple states. Several members sought early termination of their relationships with Tri-State, triggering a dispute over what a “just and reasonable” exit-fee methodology must look like under the Federal Power Act (“FPA”).

The case’s core legal issues were:

• Whether FERC acted arbitrarily and capriciously by rejecting a lost-revenues exit-fee methodology (one resembling contract-damages recovery over the remaining contract term).
• Whether FERC permissibly adopted a balance-sheet methodology requiring an up-front payment of a withdrawing member’s pro rata share of Tri-State’s debts and long-term obligations.
• Whether FERC’s transmission-crediting mechanism (crediting back the transmission-debt component over time via OATT bills) was rationally explained and lawful.
• Whether FERC could apply the same general methodology to Tri-State’s Eastern Interconnection members despite Tri-State’s separate all-requirements contract with Basin Electric Power Cooperative (“Basin”).

The panel majority (Judge Phillips) concluded FERC engaged in reasoned decisionmaking and denied all four petitions for review. Judge McHugh concurred in part and dissented in part, disagreeing only on the inclusion of non-networked transmission debt within the transmission credit.

2. Summary of the Opinion

The court upheld FERC’s methodology orders and compliance orders under the Administrative Procedure Act’s deferential standard of review. It held that FERC:

• Reasonably rejected a lost-revenues approach because it would overcompensate Tri-State, misalign with cost-causation principles, and import a “breach-of-contract foundation” into a tariff-based, notice-driven withdrawal regime.
• Reasonably adopted a balance-sheet approach—novel but adequately explained—because it accounted for cooperative ownership structure, pro rata responsibility for incurred debts/obligations, and the likelihood that departing members would continue using transmission service under Tri-State’s OATT.
• Reasonably approved the transmission-crediting mechanism, including applying the credit against the entire OATT invoice, and found no unexplained policy shift regarding including non-networked debt in the credit.
• Reasonably treated disputes about whether withdrawal would breach the Basin contract as outside the exit-fee methodology proceeding, especially given FERC’s related determinations in separate Basin-contract proceedings (not directly before the Tenth Circuit in this case).

Accordingly, the petitions were denied.

3. Analysis

3.1. Precedents Cited

A. FPA “just and reasonable,” cost causation, and rate-setting discretion

• FERC v. Elec. Power Supply Ass'n, 577 U.S. 260 (2016): The court relied on this case for (i) FERC’s “authority and duty” under FPA § 206, (ii) the principle that courts afford “great deference” to FERC’s rate decisions, and (iii) the reviewing court’s limited role—ensuring “reasoned decisionmaking,” not second-guessing technical and policy judgments.
• 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): The opinion used these authorities to anchor the cost-causation principle within the “just and reasonable” standard: charges should resemble costs caused or burdens imposed, without “exacting precision.”
• United Power, Inc. v. FERC, 49 F.4th 554 (D.C. Cir. 2022): Cited both for the proposition that the FPA’s just-and-reasonable standard applies to Tri-State’s exit-fee methodology, and for a description of exit-charge purposes (protecting remaining members from rate increases, increasing stability, and covering cooperative costs incurred to serve the member). This case also frames why the dispute belongs within FERC’s exclusive jurisdiction.

B. Section 205 vs. Section 206 burdens

• 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): These cases structured the opinion’s explanation of “related but distinct” FPA pathways: in § 205 filings, the utility bears the burden to show the proposed change is just and reasonable; in § 206 proceedings, FERC bears a “dual burden” (existing rate unlawful; replacement just and reasonable). This distinction matters because FERC initiated § 206 proceedings to preserve its ability to set a just-and-reasonable methodology if Tri-State’s § 205 proposal failed.

C. Contract-termination charges and “lost revenues” precedent arguments

• Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc., 874 F.2d 1346 (10th Cir. 1989): Tri-State invoked Shoshone to argue that cooperative all-requirements contracts rely on long-term stability and can justify damages akin to present value of contract benefits. The Tenth Circuit agreed with FERC’s key distinction: Shoshone was a breach-of-contract case, while Tri-State member withdrawal here occurs pursuant to a FERC-jurisdictional tariff with notice and no breach.
• Town of Norwood v. FERC, 202 F.3d 392 (1st Cir. 2000): Tri-State relied on Norwood to support a lost-revenues termination charge. The court acknowledged FERC mischaracterized Norwood as merely about “inputs,” but held the mismatch did not render FERC’s reasoning arbitrary and capricious, emphasizing factual and procedural differences and the two-year notice feature here.
• Am. Wind Energy Ass'n The Wind Coal. v. Sw. Power Pool, Inc., 167 FERC ¶ 61,033 (2019): Tri-State cited this as supporting an exit-fee’s role in stability and cost recovery. The court agreed with FERC that American Wind did not mandate a lost-revenues method; it discussed exit fees’ purposes without dictating a particular formula.
• Wabash Valley Power Ass'n, 178 FERC ¶ 63,005 (2022): The court accepted FERC’s view that this ALJ decision is nonprecedential and did not bind FERC.

D. Administrative-law standards: arbitrariness, explanation, and deference

• W. Watersheds Project v. Haaland, 69 F.4th 689 (10th Cir. 2023): Provided the Tenth Circuit’s articulation of arbitrary-and-capricious review: reliance on improper factors, failure to consider important aspects, counterevidentiary explanations, or implausible reasoning.
• 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 principle that agencies may adopt novel approaches or change policies, provided they acknowledge and rationally explain the change.
• New England Power Generators Ass'n v. FERC, 881 F.3d 202 (D.C. Cir. 2018): Cited for the duty to respond meaningfully and to grapple with precedent when it is actually controlling or relevant.
• Int'l Transmission Co. v. FERC, 988 F.3d 471 (D.C. Cir. 2021), 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): Used to reinforce that different records can justify different outcomes; that contrary precedent limits judicial power only to require adequate explanation; and that minor errors do not necessarily invalidate an agency decision if the result would be the same.
• Pub. Serv. Elec. & Gas Co. v. FERC, 989 F.3d 10 (D.C. Cir. 2021): Used to illustrate what “meaningful response” can look like—acknowledging and necessarily rejecting an argument.
• Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos., 498 U.S. 211 (1991): Cited for FERC’s procedural discretion to manage related but discrete issues in separate proceedings (here, Basin-contract questions versus methodology design).
• Sacramento Mun. Util. Dist. v. FERC, 616 F.3d 520 (D.C. Cir. 2010): Cited to suggest future relief remains possible under § 206 if the methodology later yields unjust outcomes.
• Fabrizius v. USDA, 129 F.4th 1226 (10th Cir. 2025): Provided the court’s “substantial evidence” definition for reviewing factual findings.

E. Nonprecedential ALJ decisions

• RMI Co. v. Sec'y of Lab., 594 F.2d 566 (6th Cir. 1979): Supported the proposition that an agency is not bound by unreviewed ALJ decisions; therefore, it is not arbitrary to decline to treat them as precedent.

F. The dissent’s administrative-law touchstone

• Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983): In dissent, Judge McHugh invoked State Farm to argue that crediting non-networked debt risked cost shifts and reflected an unexplained change in rationale—potentially failing to consider an important aspect of the problem.

3.2. Legal Reasoning

A. The court’s framing: exit-fee methodology as FPA “rate” practice subject to APA review

The court treated Tri-State’s exit-fee methodology as subject to the FPA’s “just and reasonable” mandate and reviewed FERC’s decisions under APA standards. Two review principles controlled:

• Deference in rate design: Rate methodology choices require technical and policy judgments; courts ensure reasoned explanation rather than picking the “better call.”
• Cost causation as a lodestar: Charges must bear resemblance to burdens imposed/benefits drawn; exact precision is not required.

B. Why FERC could reject a lost-revenues approach

The majority accepted FERC’s premise that “lost revenues” resembles contract damages and can overcompensate when withdrawal is authorized by tariff (with a two-year notice period) and no breach is assumed. FERC’s articulated concerns—endorsed by the court—were:

• Overcompensation / windfall risk: Recovering decades of projected revenues and projected costs Tri-State “will never actually incur” overshoots cost-causation boundaries.
• Improper deterrence: A methodology that effectively penalizes exit beyond cost responsibility can function as an unlawful barrier, not a cost-true charge.
• Contract/bargain arguments not dispositive: Because neither the Service Contracts nor the bylaws prescribed a specific exit-fee calculation, FERC was not compelled to mimic breach damages.

The court’s treatment of Tri-State Generation & Transmission Ass'n v. Shoshone River Power, Inc. is especially important: it signals that cooperative-system reliance interests (stability, financing) do not automatically convert a tariff-authorized exit into a damages-based remedy.

C. Why adopting a balance-sheet approach was not arbitrary—even if “novel”

Tri-State argued a balance-sheet method was unprecedented and ignored large categories of fixed costs. The court accepted FERC’s justification as reasoned:

• Fit to the cooperative form: Departing members are not mere customers; they hold ownership interests and participate in a cooperative capital structure. Allocating pro rata debt/obligations matches that structure.
• Two-year notice mitigates non-balance-sheet costs: FERC relied on record evidence that Tri-State could “re-optimize” and mitigate many purportedly fixed costs, limiting cost shifts.
• Purpose of the charge: FERC repeatedly stated the exit fee aims to compensate Tri-State for costs incurred (or obligated) to serve the departing member—not to preserve economies-of-scale benefits absent breach.

Critically, the opinion reinforces that “novel” does not equal “arbitrary” under FCC v. Fox Television Stations, Inc. so long as FERC acknowledges and rationally explains the policy choice.

D. Transmission-crediting mechanism: double-recovery prevention plus “full benefit” logic

FERC’s adopted mechanism required an up-front payment including transmission-related debt, then a time-distributed credit against the withdrawing member’s OATT bills if it continues to use Tri-State transmission. The court upheld:

• Credit applied to entire OATT invoice: FERC reasoned limiting the credit to the “debt portion” would often leave credit unusable (and thus create a Tri-State windfall), given other revenue sources and invoice composition.
• Including non-networked debt in the credit: The majority held FERC did not change its purpose; from the start it spoke in terms of returning the “full time-value” and ensuring the member reaps “full benefit” while minimizing cost shifts.

E. Eastern Interconnection members and the Basin contract: issue separation as reasoned administration

Tri-State and Basin argued FERC ignored the possibility Basin could impose additional costs under their all-requirements contract. The court accepted FERC’s approach:

• Scope/sequence: Whether withdrawal breaches the Basin contract is “related, yet discrete” from designing a generally applicable exit-fee methodology, and FERC may handle such issues in separate proceedings (Mobil Oil Expl. & Producing Se. Inc. v. United Distrib. Cos.).
• No-breach assumption grounded elsewhere: FERC pointed to its separate decision (Nw. Rural Pub. Power Dist. v. Basin Elec. Power Coop., 189 FERC ¶ 61,164) concluding Tri-State would not breach the Basin contract by allowing withdrawal.
• Future adjustment preserved: If later experience proves unjust, § 206 remains available (Sacramento Mun. Util. Dist. v. FERC).

3.3. Impact

• Exit fees need not replicate contract damages when exit is tariff-authorized: The decision strengthens FERC’s latitude to treat withdrawal under a filed tariff (with notice) as fundamentally different from breach litigation, even for long-term all-requirements cooperatives.
• Balance-sheet/pro rata debt methodologies gain appellate validation: Even where “novel,” such methodologies can be upheld if FERC explains how they match cooperative ownership and debt allocation and why non-balance-sheet costs are mitigable.
• Transmission-crediting as a template (with unresolved edges): The Tenth Circuit endorsed a crediting mechanism that amortizes the transmission-debt component through OATT bills and permits forfeiture of unused credit. However, the dissent highlights continuing legal risk around including non-networked facilities within that credit—an issue that could draw future judicial scrutiny if framed as cost-shifting or as an unexplained policy change.
• Procedural modularity for complex cooperative disputes: The case approves FERC’s choice to compartmentalize contract-interpretation/breach questions (e.g., Basin) in separate proceedings while maintaining a single, systemwide methodology—useful for multi-issue cooperative restructurings.
• Precedent discipline clarified: The court reinforced that ALJ initial decisions (e.g., Wabash Valley Power Ass'n) are nonprecedential, reducing the force of “inconsistent ALJ outcomes” arguments in future methodology challenges.

4. Complex Concepts Simplified

• All-requirements contract: A long-term wholesale supply contract under which a member agrees to purchase almost all of its power requirements from the supplier (here, Tri-State) for a defined term.
• Exit fee (termination charge): A payment required to withdraw early; under the FPA, it functions like a rate/practice and must be “just and reasonable.”
• Lost-revenues approach: A methodology that charges the present value of expected future revenues (often akin to damages), usually premised on the supplier losing bargain benefits.
• Balance-sheet approach: A methodology based on allocating to the departing member a pro rata share of the cooperative’s existing debts and long-term obligations (including certain off-balance-sheet commitments like PPAs), rather than forecasting decades of future margin.
• Cost causation: The principle that those who cause costs (or benefit from facilities/services) should bear charges resembling those burdens/benefits; it polices “cost shifts” to others.
• OATT (Open Access Transmission Tariff): The filed tariff under which transmission service is offered on standardized terms to customers (members and nonmembers).
• Transmission crediting mechanism: Here, a process where a withdrawing member prepays a share of transmission debt in its exit fee, then (if it continues taking OATT transmission service) receives a monthly credit on its OATT invoice over time; excess monthly credit may be forfeited.
• Eastern vs. Western Interconnection: Two large synchronized portions of the North American grid. Tri-State’s service and cost structures differ by interconnection, affecting cost allocation.
• APA arbitrary-and-capricious review: Courts ask whether the agency considered relevant factors and explained its choice; they do not re-design rates or choose among reasonable methodologies.

5. Conclusion

The Tenth Circuit’s decision confirms a durable principle in FERC-regulated cooperative withdrawal disputes: when exit is authorized by tariff (with meaningful notice), FERC may reject a damages-like lost-revenues model and instead adopt a cost-causation-oriented, balance-sheet methodology allocating a withdrawing member’s pro rata share of debt and long-term obligations. The opinion further validates FERC’s discretion to craft transmission-crediting mechanisms to manage overlap between exit payments and post-withdrawal OATT usage, and to separate contract-breach questions into distinct proceedings.

While the majority fully endorsed FERC’s approach, the partial dissent flags an important future battleground: whether crediting “non-networked” transmission debt back to a withdrawing member is consistent with cost-causation and adequately explained under Fox/State Farm principles. That unresolved tension may shape the next wave of cooperative exit-fee litigation.