Tribal Utility Formation: Three Key Considerations for Tribal Electric Utility Formation
Power is a key factor in a Tribe’s long-term prosperity. A Tribe’s sovereignty, environmental footprint, economic development opportunities, and members’ welfare are all impacted by how the Tribe is powered. Most Tribes are powered by large utilities. The utility makes decisions related to where the power comes from, how it is transported over power lines, and how to manage customer service. The utility makes the decisions and the Tribe pays the bills. In some cases, local utilities develop close relationships with Tribal leadership to align their energy investments with the Tribe’s long-term plans. However, it is often the case that the utility does not understand the unique values and goals of the Tribe.
Tribes are investing in power projects. Tribes looking to gain more control over how their Reservation is powered can invest in tribal-scale renewable projects. Tribal lands are especially well-positioned for renewable generation, representing 5% of the total U.S. renewable generation potential. With capital costs for renewable generation continuing to decline, on-Reservation renewable projects are becoming more attractive. Many Tribes are generating their own renewable power to become more self-sufficient and reduce electricity payments to the utility. Tribes are also investing in natural gas combined heat and power (CHP) projects, typically co-located at the Tribe’s casino. These projects can generate cost-competitive, reliable, electricity, while also supplying heat to nearby buildings.
Forming a tribal electric utility gives a Tribe full control of energy decisions. Energy decisions are long-term decisions. Tribes desiring full control over energy decisions that have long-term impacts to the Tribe’s natural resources, businesses, and members have pursued tribal electric utility formation. A tribal electric utility gives the Tribe the authority to decide how to generate or procure power, how to invest in tribal infrastructure, and how to provide customer service to electric customers on Reservation. Furthermore, Tribes may be able to reduce rates for tribal members, as well as negotiate rates with developers to attract economic development on Reservation. Below are three key planning activities Tribes should take before investing in a tribal electric utility.
1. Develop a power supply strategy
Power supply costs are generally the largest on-going expense of an electric utility. In most cases, the opportunity to achieve electric cost savings is based on whether or not the Tribe can generate or procure cheaper power than the incumbent utility. New competitive market constructs, low-cost natural gas and declining capital costs for renewable generation have driven wholesale power prices down throughout the country. This provides a unique opportunity for Tribes being served by utilities that have aging, more expensive assets in their power portfolio. While Tribes may be able to find economic opportunities with current wholesale power prices, markets are volatile and Tribes should be sure to develop solutions to manage risk. It is crucial that the Tribe evaluate power supply alternatives and develop both near-term and long-term power supply strategies.
2. Evaluate infrastructure and interconnection alternatives
Most of the upfront costs and challenges associated with forming a tribal electric utility are related to acquiring the necessary infrastructure and interconnecting the infrastructure to the larger grid. At the highest level, infrastructure and interconnection alternatives include building infrastructure, purchasing/acquiring infrastructure, or wheeling power (paying a “toll” for moving power over a power line the Tribe does not own). Building the infrastructure is typically the most expensive option, but can reduce uncertainties associated with negotiating a purchase or wheeling agreement with the incumbent utility. Purchasing the infrastructure on Reservation is typically the preferred approach. However, if there are no transmission lines on Reservation, the Tribe will need a solution for off-Reservation infrastructure. The wheeling option can provide a solution for off-Reservation infrastructure that is needed for the Tribe to interconnect with the transmission system. Tribes should work with experienced firms to develop a detailed understanding of the electric system configuration and estimated value of the infrastructure on Reservation.
3. Define organizational structure and staffing plan
With power supply and infrastructure well understood, the last area to focus on is the organizational structure and staffing plan. The Tribe should evaluate the various corporate entity alternatives, as well as the regulatory framework for the utility. Depending on the utility’s power supply and infrastructure approach, the utility could be subject to Federal Energy Regulatory commission (FERC) oversight. Lastly, it is important that the Tribe develops a staffing plan that cost-effectively keeps the lights on 24/7. In many cases, Tribes opt to hire experienced third-party contractors to perform utility operations during early phases of utility management. However, tribal utilities can invest in developing in-house expertise to create new jobs, expand the Tribe’s self-sufficiency, and position the utility for long-term success.