United States: Tribal Utility Development Energy Development And Services On Tribal Land

Last Updated: April 12 2019
Article by Pilar Thomas

With over 19 million acres of reservation trust lands in the state of Arizona, and approximately 40 percent of the renewable energy resources in the state,1 the 22 federally recognized Indian tribes are uniquely positioned to take advantage of their energy resources to promote more energy development—especially clean energy— and improved energy services to tribal communities. Five of those tribes—Navajo, Tohono O'odham, Ak Chin, Gila River Indian Community, and Fort Mojave—have been operating tribal electricity utilities for decades.2 More and more tribes in the state have begun evaluating the economic and technical feasibility of operating their own electricity utility.

Benefits of Tribal Electric Utility Ownership

A few of the major economic benefits of tribal electric utility ownership and operation include the following.

Tribal Sovereignty and Control

Many Arizona tribes and tribal members have expressed substantial concern over climate change impacts, clear air issues, greenhouse gas emissions, and rising electricity costs. Through a tribal utility, these tribes can reduce their dependence on fossil fuel electricity (such as coal and natural gas), increase their use of renewable energy and distributed energy resources, and reduce electricity costs through the acquisition of electricity of their choosing.

Furthermore, a tribal utility can be a vehicle for developing tribal renewable energy resources for both on-reservation and off-reservation use.3 This provides the tribe with a greater degree of control over the development of those energy resources, while maintaining a separation of effort between the tribal government and the tribal utility's enterprise efforts.

Cost Reduction and Management of Electricity Costs

A tribal utility can control its electricity costs through access to the wholesale electricity market. As the regulated utilities and SRP continue increasing their retail rates, the wholesale costs of power have stayed relatively flat.4 Furthermore, tribes that are serviced by incumbent utilities—whether investor owned like APS, rural electric cooperative, or a public power company like SRP—lack control over both the source of power and the price they pay for it. A tribal utility can directly access the wholesale market, or negotiate for long-term electricity contracts, that will most likely result in lower power costs for the tribal government, enterprises, and tribal members who live on the reservation.

Revenue Generation and Job Creation

Instead of making payments to outside utilities, the tribal government, enterprises and members will make payments instead to the tribal utility. These revenues would go directly to a tribal entity that is more responsive to the tribal community. The revenues would also go toward electricity procurement, operations and maintenance of the electricity system. In addition to energy choice, the tribal utility will have more flexibility in operations and customer service. Lastly, the tribal utility will result in funds remaining in the tribal community.

Tribal utilities can also promote tribal member workforce development and job creation through the operations and maintenance of the utility. Depending on the size of the reservation, the energy system, and the number of facilities to be serviced, there can be dozens of new jobs for tribal members. If the tribal utility makes the determination that it can produce its own electricity— such as through distributed energy systems like community solar, wind or small natural gas generation—the construction and operation of those types of projects will result in further job creation.

Legal Issues

As tribes consider the economic benefits of tribal electric utility ownership and operation, there are several additional legal benefits and considerations that should be included in that analysis. For example, tribes should consider the following four things.

Jurisdictional Status of Tribal Utility Authority

The five tribes that operate utilities in Arizona are not subject to state law or Arizona Corporation Commission regulations related to retail electricity service. Under longstanding federal law principles, the state of Arizona lacks legal jurisdiction over tribal entities operating on tribal lands.5 Any other tribe in Arizona also may form a utility under tribal law, and that utility will not be subject to ACC oversight. Instead, the tribe itself would assert jurisdiction and authority under its tribal utility. The tribal government would exercise governmental authority over the tribal utility authority. This authority could include the same type of regulatory authority exercised by the ACC —that is, the tribal government can approve electricity rates, customer service standards, renewable energy requirements, interconnection standards, net metering policies, and other regulatory responsibilities.

It may be prudent to obtain a jurisdictional disclaimer order from the ACC to provide certainty and clarity. In assessing whether the tribal utility would be subject to any ACC oversight, the tribe will need to understand the physical footprint of the electrical system. If the system serves any non-Indian customers who live within (on non-Indian fee land) or near reservation lands, the tribal utility may be subject to ACC jurisdiction. Of course, a strong argument can be made that the state would still lack jurisdiction over tribal utility services to non-Indians under the test in White Mountain Apache Tribe v. Bracker6 and that the tribe has jurisdiction under Montana v. United States.7 But this legal analysis should be thoroughly evaluated if this type of situation exists.

Corporate Form

While every tribe with a utility has created a wholly owned tribal entity, there are still several choices for how to form the tribal utility. Tribes can create for-profit or not-for- profit entities. Tribes also can create a Section 17 corporation or a tribally chartered corporation. The utility can be a separate legal entity from the tribe, or a political subdivision of the tribe. Each of these decisions has implications for utility governance, tribal versus state jurisdiction, and financing options.8

The primary legal benefits to forming a tribally chartered not-for-profit tribal utility— similar to other public power companies like SRP and L.A. Water and Power— is that it can more likely qualify as a political subdivision of the tribe. This in turn can shroud the tribal utility in the tribe's sovereign immunity, including immunity from suit, state taxation and regulatory jurisdiction. Furthermore, a political subdivision of the tribe can issue tax-exempt bonds to raise financing for tribal utility capital expenses and obtain other potential benefits of federal funding from programs for which tribes are eligible.

On the other hand, creating a Section 17 for-profit tribal utility—similar to an investor-owned utility like APS—may create other financing opportunities for the tribal utility. Typically a Section 17 corporation is treated as a separate legal entity from the tribe.

Contractual Relations With Incumbent Utility

Whatever form the tribal utility takes, the first major transaction is likely to be an agreement with the incumbent utility to either: (1) negotiate a purchase/sale of the incumbent utility's electricity infrastructure; or (2) negotiate a service agreement for the incumbent utility to continue to own and operate the electricity distribution infrastructure. A tribe considering utility formation has to address the question of ownership of the distribution system. In assessing its options, the tribe should approach the incumbent utility to determine whether the utility will enter into a voluntary agreement to sell the distribution system, or whether the tribe will need to pursue eminent domain proceedings. Alternatively, the tribe can enter into an agreement with the incumbent utility to continue to operate and maintain the distribution system, subject to the tribe's jurisdiction.

Tribal utilities are a viable vehicle for tribes to reduce energy costs, promote job creation, and exercise more control.

Power Purchase Contracts

To achieve electricity cost savings, the tribe will have to identify a cheaper source of power. Power can be purchased on the spot market (usually through an energy marketing firm), from an electricity generator, or from another utility. The easiest way to enter the spot market generally involves hiring an energy trading company, which can both buy power at the purchase hub on behalf of the tribal utility and schedule the delivery of that power. The tribal utility also may enter into bilateral agreements with independent power producers (independent entities that generate power for sale in the wholesale market) and/or other utilities.

In any of these scenarios, in addition to buying power, the tribal utility also will have to enter into wheeling contracts—agreements with the transmission line owners—to move the power from the purchase hub or place of generation. One way to reduce these transmission costs is to develop more distributed energy projects on tribal lands—where the power will be used.

Conclusion

As tribes evaluate the economic and social benefits of tribal utility enterprises, due consideration should be given to the legal benefits—governance and jurisdictional control over energy services and energy development— as well as the key initial legal transactions (corporate formation, utility agreements and energy purchase agreements). While each tribe's circumstances are different, and tribal leadership goals will vary, on balance tribal utilities are a viable vehicle for tribes to reduce energy costs, promote job creation, and exercise more control over energy services and energy development on tribal lands.

Footnotes

1. E. Doris, A. Lopez & D. Beckley, National Renewable Energy Laboratory, Geospatial Analysis of Renewable Energy Technical Potential on Tribal Lands (DOE/IE-0013), Feb. 2013

2. See, e.g., Schaff & Clark- Deschene, LLC, Tribal Authority Process Case Studies: The Conversion of On-Reservation Electric Utilities to Tribal Ownership and Operation, Sept. 2010.

3. Navajo Tribal Utility Authority (NTUA) has developed almost 50 MW of solar energy, which will be used both on and off the Navajo Reservation. Kayenta Solar Project is Operational, Navajo Times, June 22, 2017, available at: www.ntua.com/assets/ kayenta-solar-project-is-operational---- navajo-timespaper--- 06-22-2017.pdf. NTUA also has a MOU with SRP to develop up to 500 MW of solar power on the Navajo Reservation.

4. According to the Energy Information Administration, the 2017 average residential retail rate for APS was 0.1357/kWh,for SRP was 0.1159/kWh, and for TEP was 0.1205/kWh. On the other hand, the average retail rate for Fort Mojave's tribal utility was 0.0829/kWh. The average wholesale rate for 2017 was .0329/kWh. See www.eia.gov/electricity/ (last visited Jan. 7, 2019).

5. McClanahan v. Arizona State Tax Comm'n, 411 U.S. 164, 173 (1973) (state law cannot impact tribal authority to regulate internal affairs); White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980) (establishing balancing test for state jurisdiction over non-Indian activity on tribal lands); Montana v. United States, 450 U.S. 544 (1981) (tribe's authority over non- Indian activity on non-Indian fee land within the Indian reservation); Merrion v. Jicarilla Apache Tribe, 455 U.S. 130 (1982) (tribe's inherent sovereign authority over economic activity on tribal lands)

6. 448 U.S. at 136.

7. 450 U.S. at 544.

8. For in-depth discussion of the pros and cons of tribal enterprise structures, see Karen J. Atkinson & Kathleen M. Nilles, Tribal Business Structure Handbook (2009).

Originally published in the Arizona Attorney April 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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