(Editor's note: The Daily Leader has taken a closer look at a lawsuit filed by Dakota Energy against East River Electric. Part 1 looks at the organizations and the basis of the lawsuit. Part 2 compares the arguments of the two cooperatives. Part 3 looks at an electric cooperative that has exited a wholesale cooperative.)
By MARY GALES ASKREN
In November, Dakota Energy asked the court to determine whether the East River Electric Power Cooperative bylaws allow Dakota Energy to withdraw from the cooperative and, if so, what Dakota Energy must pay to fulfill its contractual obligations.
"We are asking only for a fair exit fee to leave East River so Dakota Energy can have the freedom and ability to determine our own energy future," Chad Felderman, CEO and general manager, said in a press release at the time. "We know there are better options to provide our member-owners with affordable and reliable power."
Currently, Dakota Energy not only buys power from East River but is supported by East River with infrastructure, such as transmission lines and substations, and other services. Dakota Energy also has a representative on the East River board of directors, which makes decisions regarding rates and the wholesale cooperative's direction, and benefits from the rebates it receives when profits exceed expenses.
Dakota Energy, which serves Hyde, Hand and Beadle counties, was created in 1995 when two of East River's founding cooperatives -- Ree Electric and Beadle Electric -- merged. Since that time, East River has returned $3.6 million to Dakota Energy, according to Chris Studer, chief member and public relations officer for East River.
No buy-out provision
From the perspective of East River, the central issue is not whether Dakota Energy can withdraw from the cooperative agreement, but whether Dakota Energy must fulfill its contractual obligations before doing so. Section 5 of the East River bylaws -- "Termination of Membership" -- specifically states, "no member shall be permitted to withdraw until it has met all contractual obligations to the Cooperative."
As a member, Dakota Energy has entered into a Wholesale Power Contract (WPC) with East River which expires in 2075. According to Studer, these contracts, which East River has with all 25 member cooperatives, are in essence the collateral which the cooperative uses to leverage financing to build the multimillion-dollar infrastructure used to ensure members and their consumers have a reliable source of energy.
"The contract that they signed does not contemplate a buyout provision," Studer said. It requires them to fulfill those contractual agreements. He noted that should Dakota Energy exit its contract, every other cooperative being served would feel the impact.
"If they were allowed to buy out of their contract, it would leave the other member cooperatives who signed the contract and are standing by that contract with higher costs," Studer said.
In the initial paperwork filed in Lake County, Dakota Energy indicates those contractual obligations "effectively [hold] Dakota Energy as a prisoner in East River." The document goes on to say that failure "to provide Dakota Energy with equitable terms and conditions for withdrawal" is a violation of East River's bylaws.
Both Dakota Energy and East River cite the same sentence in the bylaws in making their case. Each places an emphasis on a different portion of that sentence.
While East River has been open and transparent in providing information regarding this legal action, Dakota Energy has been reticent. The cooperative hired Lawrence and Schiller, a Sioux Falls-based marketing firm, to field questions from the press.
However, those questions -- which must be forwarded to Dakota Energy -- either remain unanswered or the answers add little to what was indicated in the company's initial press release. Recently, Ryan Budmayr, vice president of public relations and business development at Lawrence and Schiller, indicated via email, "I sent the updated and new questions to Dakota Energy and there was a real concern that much of the direction of your queries have nothing to do with the lawsuit."
Citing a "history of broken promises," Felderman said in a prepared statement, "This lawsuit is about East River's unwillingness to live up to cooperative principle number one -- open and voluntary membership."
Where answers are provided, they lack a nuanced understanding of how leaving East River will affect Dakota Energy. Currently, their stated goal is to obtain power on the open market, possibly through energy broker Guzman Energy, with whom Dakota Energy has initiated discussions, according to Felderman.
When asked how Dakota Energy would receive that energy, Budmayr replied: "When we withdraw as a member of East River, the power we buy will reach our members exactly the way they get it now -- over East River's transmission lines. East River is legally required to provide us with access to its transmission, so our members will not notice any change in their level of service."
Studer said it's not quite that simple.
"If Dakota were to cease being a member, they would have to apply for wheeling service to East River. East River's board has the exclusive right to decide if they want to provide wheeling service and at what cost," he said.
Dakota Energy's other option would be to apply to get service from the Southwest Power Pool (SPP), a regional transmission organization, he explained. However, Dakota Energy is not currently tied to SPP facilities and would have to make a significant investment in order to get energy via that avenue.
Info, not exit, sought
Despite the lawsuit and press release, Budmayr has said Dakota Energy is not currently seeking to exit East River. Rather, the board is seeking information.
"Dakota Energy feels that between the contract and the bylaws, their mission, values and goals, they should be able to receive that buyout to make a decision," he said in a brief phone interview.
Asked to confirm this, he said, "They want a number to be able to make that decision. They have not approved leaving East River."
However, court documents filed by Dakota Energy's attorney, Lee Schoenbeck, specifically state the board has passed a resolution directing "Dakota Energy's staff to work with East River's staff to obtain a dollar figure for Dakota Energy to buy out of its WPC with East River, which would end its membership."
A consumer member with Dakota Energy indicated they are also being told the board of directors has not made a decision about leaving East River. Dakota Energy was not asked to address the discrepancy between its actions and the information consumer members are receiving.
Since the lawsuit was originally filed, East River has filed notice to remove the case to federal court. Studer explained that since East River has $320 million in outstanding loans through the Rural Utilities Service, an agency within the USDA, the federal court is the appropriate venue for this case.