McKenzie Electric, Basin Electric at odds over rates, synfuels plant

Cooperatives await hearing on lawsuit over rates

WATFORD CITY – A rural electric cooperative and its energy suppliers are in court over a dispute that stems from the failing economics of a synthetic fuels plant.

McKenzie Electric Cooperative filed a lawsuit last November seeking damages from its supplier Upper Missouri G. & T. Electric Cooperative and electricity generator Basin Electric Cooperative in connection with rate increases it says were imposed to cover losses at Dakota Gasification Co.’s Great Plains Synfuels Plant near Beulah. The lawsuit also asks the court to order Basin to divest itself of the plant.

Basin and Upper Missouri have asked for the case to be dismissed. A hearing has not yet been set.

In its complaint filed in Northwest District Court, McKenzie Electric states Basin lost $600 million or more since 2013 from “its unreasonable and imprudent operation of a for-profit synthetic fuels subsidiary.” As operated by Basin, the gasification plant produces natural gas so costly that it can be sold only at a loss, and Basin’s strategy for addressing the problem has been to invest more than $700 million in a urea plant designed to use the natural gas from the gasification facility, making the problem worse, according to the complaint.

“Plagued by construction cost overruns and unable to compete effectively using the natural gas from DGC, the urea plant itself has been unable to operate profitably and has only increased Basin’s losses,” the complaint stated. “Basin’s only way of funding these imprudent losses has been to guarantee or provide financing from Basin to DGC, effectively foisting the losses on the back of its members and customers.”

The U.S. Department of Energy, which acquired the synfuels plant when original owners failed, sold the plant to Basin Electric in 1988. The plant provided a $1.4 billion benefit to Basin members before it began experiencing losses from a decline in commodity prices.

“Throughout the decades that DGC was profitable, McKenzie raised no concerns about Basin’s ownership and operation of DGC,” Basin Electric responded in a court brief. “But now that DGC is incurring losses, McKenzie proclaims that Basin’s customers are unfairly burdened by these operations and asks this Court to put a stop to it. McKenzie’s underlying claim in this action – that Basin should not be allowed to include DGC’s profits or losses in Basin’s rate calculations – would have ripple effects throughout the rural electrical cooperative system in this region of the country, and could have harsh consequences for the more than 500 individuals currently employed by DGC, the largest employer in Mercer County.”

McKenzie Electric claims Basin’s dramatic increases in electricity rates since 2016 to compensate for DGC’s losses violates state law and breaches Basin’s contractual agreements with member cooperatives.

McKenzie Electric is bound by long-term contracts through at least 2075 that preclude it from purchasing power elsewhere. When McKenzie Electric requested a buyout figure from Upper Missouri and Basin, Basin refused to provide one, which McKenzie Electric considers a breach of Basin’s duty of good faith and fair dealing, the complaint states.

McKenzie Electric is seeking compensation for damages, an order setting aside the Basin board’s decision to raise rates to pay for gasification plant losses, an order requiring Basin to divest the gasification plant and a judgment precluding Basin from including the costs associated with the plant in its rates going forward. It is seeking a jury trial.

McKenzie Electric also claims entitlement to relief from Upper Missouri for failing to act in good faith to obtain reasonably priced power for its members.

Basin Electric and Upper Missouri are seeking dismissal on the grounds the rates case is one for federal regulators rather than the courts to decide. McKenzie Electric has filed a complaint with the Federal Energy Regulatory Commission, whose jurisdiction Basin Electric became subject to in November. However, McKenzie Electric argues its complaint alleging violation of contracts and state law is subject to state court jurisdiction.

Basin also argues McKenzie has no standing to sue Basin because there is no “three-tiered contract” among the parties, only a contract between McKenzie and Upper Missouri and between Upper Missouri and Basin. McKenzie counters the contracts were designed to be “interdependent, joint and mutual contracts.” Other issues in the case relate to the legal questions around how state laws might apply if found relevant to the case.

McKenzie Electric has about 4,400 member-owners and serves more than 14,000 electrical meters. About 30% of meters belong to commercial and industrial accounts, primarily in the Bakken oil fields. McKenzie Electric purchases all its electricity from Upper Missouri, accounting for about 40% of Upper Missouri’s power sales.


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