SMPA to Consider Diversifying Power Supply

At its next regular Meeting, on March 29th, the San Miguel Power Association (SMPA) Board of Directors will consider two recommendations from the SMPA Staff: The first is whether to begin contractual negotiations on a transition from its “All-Power-Requirements” contract with current wholesale power provider, Tri-State Generation and Transmission (Tri-State), to a “Partial Requirements” contract, thereby allowing room in SMPA’s total power load, for service from another supplier. The other is to select a finalist from the recent SMPA Request for Proposals (RFP) for alternative power supply providers.

History

“The upcoming Board consideration is the latest step in a process that began with a Board Strategic Objective back in 2017,” remarked SMPA Board President, Rube Felicelli. At that time, the objective was to “…understand the full value, and options, of [SMPA’s] membership and contract with Tri-State…”. Since then, there have been significant changes surrounding the wholesaler: Regulatory oversight moved from the state level to the Federal Energy Regulatory Commission (FERC); Neighboring electric co-op, DMEA exited their Tri-State contract, replacing its service with that of Denver-based Guzman Energy, and Tri-State’s largest member, United Power, announced its plan to exit its contract as well. Most recently SMPA, along with neighboring co-op La Plata Electric Association, (LPEA), and Poudre Valley Electric Association have made plans to further explore a partial requirements contract with Tri-State.

During this time, SMPA had issued a Request for Proposals (RFP) from eligible wholesale power providers and has been a key participant in the FERC process. This process will eventually make it possible to calculate the costs of both a contract termination and/or a buy-down of the existing contract to move to a partial requirements contract. With these cost estimates nearly in hand, the SMPA Board is preparing to compare the various power supply options against each other and against the status quo.

The Need

The future of SMPA wholesale power is of paramount importance, given the likelihood of continued operational cost increases related to fire mitigation, grid reliability, and a sharp rise in material costs due to national and international inflation.

“Over the past couple years, through our Board Strategic Objectives, we have prioritized fire mitigation. The costs to complete necessary fire mitigation projects has increased substantially,” said SMPA Chief Executive Officer, Brad Zaporski. Perhaps this increase in costs and the necessity of these projects should not come as a surprise, given recent inflation and supply chain issues paired with the statewide rise in summer drought conditions and fire restrictions—not to mention that four of the top five largest wildfires in the state’s recorded history, have all occurred since 2018.

More future cost increases will arise from the SMPA Board Objective to improve overall system reliability. Keeping with this objective, SMPA has undertaken major reliability projects in Telluride, Mountain Village, Ouray county and the West End of Montrose County, not to mention numerous smaller “system hardening” upgrades that have been quietly preventing power outages throughout SMPA’s territory. “The cost of materials and labor for these projects keeps going up,” said Zaporski. “Another point to consider, is that, unlike expansion projects, these system upgrades do not increase revenues.”

The most notable example is that of the proposed Red Mountain Electrical Reliability and Broadband Improvement Project, which would provide reliable backup power and new broadband infrastructure to Ouray County, SMPA’s fastest-growing area. “When we first estimated the cost of this vital project, it was going to be the most expensive construction project in SMPA’s 84-year history,” said Zaporski. “Based on today’s numbers, that estimate has doubled.”

Another part of the overall need for a break in wholesale power cost, has been the rising cost of wholesale power, itself. In the past 22 years, Tri-State has raised its rates to member cooperatives, like SMPA, by an average of 4.19% per year, a total 96.34% increase. SMPA was proud to have been a key negotiator in the recent rate reduction that was mandated through a FERC settlement, but, based upon projections announced at Tri-State’s own Annual Meeting in February, a rate increase in 2023 will be difficult to avoid.

SMPA has been able to absorb most of these rate and operational expense increases through increased efficiencies, having raised its own retail rates for the majority of our members by only $1 dollar/month over the past seven years. This is unheard of among all of the other utilities that our members use. SMPA’s access charge is still the lowest of any of its surrounding electric cooperatives yet with a relatively high energy charge. This is a risky cost-recovery structure and is likely to come under board review in the future.

The Proposal

When the Board meets on March 29th, they’ll consider two related staff recommendations:

The first is to proceed with negotiations to replace the current Tri-State all power requirements contract with a new partial requirements contract. In May of 2021, SMPA took advantage of Tri-State’s so called “open season” by securing 15 Megawatts (MW) of demand for replacement under a potential partial requirements structure. This action committed SMPA to nothing, but reserved its option to replace approximately 35% of it peak demand, while retaining full membership status in Tri-State. “This is important,” notes Zaporski, “given the current membership benefits of preferential access to the Tri-State transmission system, multiple points of risk mitigation, and financial aid for critical reliability projects, a modified contract structure may allow us to retain these benefits while also giving us further access to clean, low-cost sources of energy.”

The second recommendation is to name a winner of SMPA’s recent RFP process. SMPA issued its RFP early in 2020, and it received proposals from four potential power providers. The process went through several stages of narrowing the field to those providers that looked the most promising.

Then, the process was stalled at FERC, Tri-State’s new regulator, as they continue to decide key expenses for moving to a new contract structure.

As SMPA continues to work through this process at FERC, the SMPA Board has been concurrently paring down the RFP list to just two finalists: A detailed cost analysis was presented to the Board during an Executive Session on March 8th, and staff will follow with its recommendation at the Board Meeting on March 29th.

What's Next?

“If the Board gives SMPA staff the go-ahead, it will move things along, but it will still be far from a final step in diversifying SMPA’s power supply,” said Board President, Felicelli. “Several critical pieces of the puzzle still need to be put into place.” For one, SMPA will still need final answers on the costs of moving to a different contract structure from FERC. Beyond that, new contracts will need to be negotiated and drawn up with both Tri-State and the secondary provider.

Nonetheless, many see recent developments as progress toward a better future. The hope is that a new contract structure will facilitate the completion of a myriad of fire mitigation and reliability projects while both decreasing the pressure to increase retail rates and lowering SMPA’s overall carbon footprint.

“The difficulties of the past few years have forced us to adapt,” remarked Felicelli. “But the changes we are making in response, have the potential to make us stronger than ever.”