Greening the Old New Deal: Strengthening Rural Electric Cooperative Supports and Oversight to Combat Climate Change.

• Author: Pacyniak, Gabriel

TABLE OF CONTENTS ABSTRACT 409 I. INTRODUCTION 412 II. COOP HISTORY AND GOVERNANCE 419 A. New Dealers Turned to Coops to Electrify Rural America 419 1. Cities Electrified Quickly; the Countryside Did Not 419 2. After Exhausting Other Options, the Roosevelt Administration Settled on Cooperatives 423 3. Faced with Continued Private Sector Opposition, Cooperatives Banded Together to Build Power Plants and Transmission Lines 426 B. Coops Are Largely Exempted from Utility Regulation 430 1. States and the Federal Government Develop a State-Federal Regulated Monopoly Model 430 2. The REA Viewed Itself as Cooperative Overseer and Urged States and the Federal Government to Avoid Additional Regulation 435 C. Coop Successes and Challenges 443 III. COOPS AND THE CHALLENGE OF CLIMATE CHANGE 449 A. Coops Have Lagged Behind in the Transition to Clean Energy 450 B. Case Study: Tri-State Coops in CO and NM 455 1. Tri-State's Organization and Generation Mix 456 2. Reasons for Member Coop Dissatisfaction 457 i. High Wholesale Rates 457 ii. Desire for Increased, Locally-Sited, Renewable Energy 458 3. Kit Carson's Exit from Tri-State and Subsequent Accelerated Clean Energy Pathway 461 4. Delta-Montrose's Attempt to Use PURPA to Greenlight Additional Local Renewables 462 5. Delta-Montrose and Two Other Coops Seek Colorado Utility Commission Oversight over Exit Price 465 6. Colorado, New Mexico 20I9 Legislation 468 7. Tri-State's Coal Power Plant Closures and Responsible Energy Plan 469 IV. COOP OVERSIGHT IS NOT ADEQUATE TO ADDRESS CLIMATE CHANGE 471 A. Not All Benefits of the Coop Form Transfer to the Clean Energy Transition 47I B. Coop Managers Often Have Incentives to Grow Size and Revenue 475 C. Shifting to a Low-Carbon System will Likely Require Disrupting the Power Supply--Distribution Coop Model 477 D. Coops Have Largely Been Exempted from Rigorous Resource Planning Oversight 483 E. Implications of Failure to Prudently Plan for the Shift to a Low-Carbon Electricity System 485 V. STRENGTHENING COOP SUPPORTS AND OVERSIGHT TO ADDRESS CLIMATE CHANGE 487 A. States Should Include Coops in Clean Energy, Resource Planning Mandates 488 B. Allow Distribution Coops to Innovate, Require Power Supply Cooperatives to Compete 490 C. Use RUS to Incentivize the Shift to Low-Carbon Electricity 492 D. Give Coops an Out 492 VI. CONCLUSION 493 I. INTRODUCTION

One of the signature achievements of the New Deal was the electrification of rural America, which was accomplished chiefly through the formation of rural cooperatives bankrolled by federal loans. (1) At a time when less than I0% of the rural United States was electrified, President Franklin D. Roosevelt and Congress made available hundreds of millions of dollars in subsidized loans to bring electric power to farms across America. (2) Private, for-profit utilities refused to carry out this sweeping rural electrification effort - even with government subsidies--in large part because of the expense of serving poor and sparsely-populated areas. (3) Federal administrators therefore looked to a model for rural electrification that was used successfully in Europe and had been tried in a few areas in the United States: customer-owned nonprofit cooperatives. The federal loan program gave preference to cooperatives and government-owned utilities over for-profit utilities and helped rural communities organize such cooperatives. (4)

The program, carried out by the Rural Electrification Administration ("REA") and later the Rural Utilities Service ("RUS"), (5) was strikingly successful. Two years after it was started in I936, "more than 350 projects in forty-five states [were delivering electricity to] 1,450,000 farms." (6) These electricity distribution cooperatives went on to form power supply cooperatives--cooperatives of cooperatives--to build and own power plants and high-voltage transmission lines. (7) By the mid-1950s most American farms had electrical service. (8) The REA's electrification of America "is considered one of the most immediate and profound successes in the history of federal policy-making for the national economy." (9)

Today over 800 rural electric distribution cooperatives provide electricity to 42 million people in 48 states, approximately 13% of the U.S. population. (10) Many of these cooperatives purchase wholesale power from 62 power supply cooperatives. (11) Collectively, electric cooperatives serve 56% of the U.S. land mass and supply 13% of U.S. electricity. (12)

Now, however, addressing the challenge of climate change will require the "near-complete decarbonization" of the U.S. electricity industry by 2050. (13) Electric utilities will need to shut down nearly all of their coal and natural gas power plants and shift instead to renewable energy and other sources of zero-carbon electricity in the next twenty to thirty years.

This challenge occurs while the domestic electricity sector undergoes other dramatic changes. Building natural gas, wind, or solar power plants is now cheaper than building coal power plants due to rapid declines in the cost of natural gas fuel and renewable technologies. (14) And after 100 years of relying exclusively on centralized power plants, the domestic electricity system is now flooded with decentralized actors that can supply electricity and other services to the grid, upending the traditional utility business model.

Within this changing environment, and despite the lack of a comprehensive federal climate policy, utilities across the nation have significantly decarbonized their generating portfolios over the past decade. Since 2005, electric utilities have cut carbon dioxide emissions by 28%. (15) while these reductions are not sufficient to address climate change, they represent critical and needed progress in the absence of a comprehensive federal climate policy.

These utilities are cutting carbon primarily because it makes economic sense. To take advantage of low natural gas prices resulting from the fracking boom, utilities have shifted from coal-fired power plants to cheaper, less-carbon-polluting natural gas power plants. Federal renewable energy tax credits, state renewable energy mandates, and falling renewable technology costs have combined to make wind energy, and increasingly solar energy, the cheapest forms of new electricity to construct. (16) Moreover, most utility executives are betting that their firms will eventually be subject to substantial greenhouse gas ("GHG") standards, even if the Trump Administration has rolled back the climate regulations established by the Obama Administration. (17) Putting all of these factors together, utilities have generally been shifting to lower-carbon electricity generation portfolios.

Cooperative utilities, however, have generally lagged behind in this shift. Power supply cooperatives rely on coal-fired power plants to a much greater degree than for-profit or municipal utilities, and they have been slower to retire these power plants. (18) From 2009 to 2017, the electric power sector as a whole reduced carbon emissions by 23%, but cooperatives reduced emissions by only 9%. (19) Among the 100 largest power producers in the United States--which includes ten power supply and distribution cooperatives - six out of the top ten most carbon-intensive emitters were cooperatives. (20) In an important case study highlighted in this Article, Tri-State Generation and Transmission Association, Inc. ("Tri-State")--one of the largest power supply cooperatives--has until recently repeatedly stymied efforts of some of its distribution cooperatives to accelerate a transition to a lower-carbon electricity system. (21) Tri-State also was endeavoring to build a new coal-fired power plant at a time when most utilities were shifting away from coal.22 Cooperatives have also been slower to move to renewable energy and to implement energy efficiency. (23)

This Article seeks to explain why cooperatives are lagging behind. Drawing on the insights of organization theory, public choice, and theories of energy governance, this Article argues that a combination of structural barriers, institutional incentives, and a weak system of governance and regulation inhibit prudent resource planning in the face of the climate change challenge. The Article also identifies ways that cooperative oversight and supports can be strengthened to facilitate the transition to a low-carbon electricity system.

Even though rural electricity cooperatives serve a relatively small portion of the population, they represent an important piece of the puzzle in finding policy solutions for climate change. For one, cooperatives are responsible for a significant portion of electric-sector carbon emissions. Cooperatives account for 6% of the carbon emissions of the largest 100 utilities even though they account for only 4% of electricity generated by this group. (24) Achieving decarbonization will require dramatic reductions from all electric utilities, including cooperatives.

Cooperatives are important for other reasons. Cooperatives serve less affluent communities, and these communities will feel the effects of any rate increases to a greater degree. (25) This is doubly true because unlike for-profit utilities, any business losses sustained by cooperatives will also be borne by cooperative member-owners as a loss in the equity that they have paid into the cooperative (referred to as patronage capital). (26) No separate shareholders absorb losses from bad business decisions made by cooperative managers. Therefore, shifting to a low-carbon electricity system poses unique equity issues for rural electricity cooperatives.

Moreover, polling has found that rural residents are somewhat less likely to believe in climate change than their urban counterparts. (27) At the same time, cooperatives wield outsized political power at both federal and state levels, and they have used that power to lobby against federal and state climate and clean energy...