p.o. Box 43020 • Phoenix, AZ 85080-3020
 

23636 North Seventh Street • Phoenix, AZ 85024
 

623-869-2333 • www.cap-az.com 

December 18, 2009 

Ms. Colleen McKaughan 

Associate Director, Air Division Region IX 

United States Environmental Protection Agency 

75 Hawthorne Street 

San Francisco, CA 94105 

RE:	 Assessment of Anticipated Visibility Improvements at Surrounding Class I Areas and 

Cost Effectiveness of Best Available Retrofit Technology for Four Corners Power Plant 

and Navajo Generating Station: Advanced Notice of Proposed Rulemaking, Docket No. 

EPA-R09-0AR-2009-0598 - Your Letter of November 25, 2009. 

Dear Ms. McKaughan: 

On August 28, 2009, the Environmental Protection Agency published an Advanced Notice of 

Proposed Rulemaking (ANPR) on Assessment of Anticipated Visibility Improvements at 

Surrounding Class I Areas and Cost Effectiveness of Best Available Retrofit Technology 

(BART) for Four Corners Power Plant and Navajo Generating Station (NGS).J On October 28, 

2009, the Central Arizona Water Conservation District (CAWCD) submitted detailed comments 

on the ANPR to EPA. By letter dated November 25, 2009, you requested further information 

from CAWCD about the cost impacts of EPA's BART determination on CAP water rates. 

Specifically, you asked: 

What would be the effect on the cost of water from the CAP for the various 

BART retrofit options outlined in the ANPR? 

We appreciate the opportunity to answer that question. 

Introduction and Executive Summary 

In assessing the impact of the BART control options on CAP water rates, we have used the cost 

estimates submitted to EPA by Salt River Project Agricultural Improvement and Power District 

(SRP) in December 2008. 2 Essentially, two control options for nitrogen oxide (NOx) emissions 

are at issue: low NOx burners and separated over fire air (LNB/SOFA) and selective catalytic 

reduction (SCR).3 These two options define the end-points of cost impacts. 

174 Fed. Reg. 44313-34. 

2 ENSR Corporation, Revised BART Analysis for the Navajo Generating Station Units 1-3, December 2008, EPAR09-0AR-2009-0598-0010.1. 

] We have ignored the option of installing Y2 an SCR on Unit 2 because we believe that option to be infeasible. We 

have also ignored selective non-catalytic reduction as that appears not to be under serious consideration by EPA as a 

control option. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 2 

The installation of LNB/SOFA would have a negligible impact on CAP water rates, resulting in 

an estimated increase in CAP energy charges of about $0.50 per acre-foot (a one percent increase 

in our 2010 energy rate of $49 per acre-foot). 

The installation of SCRs would necessitate an increase in CAP energy charges of at least $9.85 

per acre-foot, a 20 percent increase over our 2010 energy rate. It would also result in losses to 

the Development Fund on the order of $175 million, plus interest, between 2016 and 2036 alone. 

This represents the most favorable result that we would expect from a requirement that SCRs be 

installed, because it assumes (a) that the participants would decide to install SCRs at a cost of 

approximately $700 million despite several significant factors that mitigate against making such 

an investment at the present time and (b) that the participants would have at least 20 years to 

amortize that investment. A $10 per acre-foot increase in CAP energy charges would be 

especially problematic for our Indian and non-Indian agricultural water users, for reasons 

discussed below. A loss of $175 million in Development Fund revenues would be especially 

harmful to those Indian tribes that have negotiated final settlements of their water rights claims 

and benefit from the subsidy of fixed CAP OM&R charges that these revenues to the 

Development Fund would otherwise have provided. 

Much more significant costs would be incurred by CAWCD and its water users if a requirement 

to install SCRs resulted in closure of the Plant, which is a significant risk in this rulemaking, in 

our view. 

•	 First, CAWCD would have to acquire a substitute source of pumping energy at
 

market price. This would require a 50 to 300 percent increase in CAP energy
 

charges over those that would be expected if NGS continued to operate as it does
 

today.
 

•	 Second, CAWCD would have to replace at least $50 million in annual revenues
 

that are projected to result from the sale of surplus NGS power. These revenues
 

offset, dollar-for-dollar, the amount due from CAWCD each year on its
 

construction cost repayment obligation for the CAP. The loss of these revenues
 

would require substantial increases in water service capital charges for our
 

municipal and industrial (M&I) water users, significant increases in our ad
 

valorem tax rates, or both. If collected only in the form of increases in our water
 

service capital charges to M&I water users, this would necessitate a water service
 

capital charge to our M&I water users of about $80 per acre-foot, levied against
 

each M&I user's full contract entitlement to CAP water - an additional annual
 

charge of about $11.4 million to the City of Tucson and about $9.6 million to the
 

City of Phoenix. If not for this rulemaking, CAWCD has projected that, by the
 

year 2012, M&I water service capital charges would be reduced to zero, given
 

what we have expected to earn from sales of surplus NGS power.
 

•	 Third, the United States and those Indian entities that have entered into
 

congressionally approved settlements of their water rights claims would lose tens
 

of millions of dollars in revenues to the Lower Colorado River Basin
 

Development Fund each year that are over and above the annual payments due
 
Ms. Colleen McKaughan 

December 18, 2009 

Page 3 

from CAWCD on its repayment obligation for CAP - as much as $60 million to 

$90 million per year between 2016 and 2023 alone. These revenues are pledged 

to the direct benefit of the United States and Indian tribes under the Arizona 

Water Settlements Act of 2004. CAWCD has assumed in its long-term financial 

plan that NGS would continue to operate through the end of the CAP repayment 

period in 2046, and thus that such revenues would continue to benefit CAWCD, 

the United States and Indian entities well beyond the 2023 timeframe. 

Discussion 

I. The Cost Impacts of a Requirement to Install LNB/SOFA 

The participants in NGS are voluntarily installing LNB/SOFA on all three units at NGS at a total 

capital cost of approximately $43 million. The costs of installing LNB/SOFA would have a 

negligible impact on CAP water rates. The impact of installing LNB/SOFA on CAP water rates 

may be estimated as follows: 

Control Fixed Capital Total Annual NGS Additional Additional Cost 

Technology Costs Costs Annual Cost Per For CAP Pumping 

($/yrt ($Iyr) Production Unit 

(mwh) ($/mwh) 

LNB/SOFA $4,866,000 $4,866,000 17,400,000 $0.28b $784,000c 

(Units 1-3) 

(a) Fixed capital costs based on CFR of 0.1159, assuming interest rate of 9.8% and amortization Additional Cost for 

period of 20 years. CAP Pumping 

(b) $4,866,000 divided by 17,400,000. ($/AF) 

(c) $0.28 per mwh multiplied by 2,800,000 mwh from NGS for pumping. 

(d) $784,000 divided by 1,550,000 acre-feet annually. $0.51 d 

(e) Percent increase in Energy Rate 1 from 2010 rate of $49 per acre-foot. 1%e 

Since LNB/SOFA is currently being installed, and the costs to do so are included in the current 

NGS capital budget and established rates being paid by the NGS participants and their 

customers, the mechanics of financing these costs are not an issue. 

II. The Cost Impacts of a Requirement to Install SCRs 

The alternative control technology, SCR, would cost over 15 times more than LNB/SOFA ­

$660 million in capital costs, plus $13 million in annual operation and maintenance costs, 

according to estimates prepared by SRP. Because the installation of SCRs, if required, would be 

in addition to the installation of LNB/SOFA, the total capital costs of NOx controls would equal 

approximately $705,000,000, under this control option. If downstream particulate controls were 

also required, total capital costs could balloon to $1 billion. Nevertheless, for purposes of this 

analysis, we have assumed that no additional controls beyond SCR would be required. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 4 

A. NGS Continues to Operate At Least Through 2035 

1. Impact on CAP Energy Charges 

If one assumes that the remaining useful life of NGS is 25 years (promulgation of a final rule in 

2010, a requirement to install the required controls by December 31, 2015, and an amortization 

period of 20 years thereafter), the impact on CAP energy rates may be estimated as follows: 

Control Fixed Capital Total Annual NGS Additional Additional Cost 

Technology Costs Costs Annual Cost Per For CAP Pumping 

($Iyr)8 ($/yr)b Production Unit 

(mwh) ($Imwh) 

LNB/SOFA $81,681,000 $94,848,000 17,400,000 $5.45c $15,260,000d 

&SCR 

(Units 1-3) 

(a) Fixed capital costs based on CFR of 0.1159, assuming interest rate of 9.8% and amortization Additional Cost for 

period of 20 years. CAP Pumping 

(b) Fixed capital costs plus $13,167,000 in annual operation and maintenance costs. ($/AF) 

(c) $94,848,000 divided by 17,400,000. 

(d) $5.45 per mwh multiplied by 2,800,000 mwh from NGS for pumping. $9.856 

(e) $15,260,000 divided by 1,550,000 acre-feet annually. 20.1%' 

(f) Percent increase in Energy Rate 1 from 2010 rate of $49 per acre-foot. 

While a $10 per acre-foot increase in water delivery charges would be significant for our 

municipal and industrial (M&I) water users (it would increase annual water delivery charges to 

the Cities of Phoenix and Tucson, for example, by about $1.4 million and $1.3 million, 

respectively), the users most adversely affected by such an increase would be our non-Indian 

agricultural (Ag) and Indian water users. These users currently account for a major share of our 

water deliveries, as shown in the following diagram: 
Ms. Colleen McKaughan 

December 18, 2009 

Page 5 

CAP Water Deliveries 

Typical Water Year::::: 1,550,000 AF 

Recharge 

300,000 

19% 

Ag 

400,000 

Indian 26% 

380,000 

25% 

Of the 380,000 acre-feet of Indian water shown in the above diagram, about 130,000 acre-feet 

has been leased by tribes to non-Indian M&I entities pursuant to Indian water rights settlements, 

and the increased costs of those deliveries would fall on M&I entities. We have also assumed 

that non-Indian agricultural water use will eventually decline as agricultural lands in the CAP 

service area urbanize and M&I uses increase. However, Indian uses of CAP water will increase 

as their federally-funded CAP distribution systems are completed and brought on line. About 47 

percent of the total CAP water supply is dedicated to Indian use. Absent significant increases in 

CAP water rates, agricultural (including Indian) uses of CAP water will probably always 

comprise a major share of CAP water use. 

Agricultural uses of CAP water are highly sensitive to CAP water rates. Indeed, pursuant to a 

comprehensive settlement of disputes among the United States, the State of Arizona and 

CAWCD regarding the costs of the CAP and the proper division of CAP water between Indian 

and non-Indian water users, water delivery charges for Indian and non-Indian agricultural water 

users are subsidized in order to facilitate CAP water use by these two categories of water users. 

It is important to emphasize from the outset that the establishment of CAP water delivery 

charges for our non-Indian agricultural and Indian water users was part of a comprehensive 

settlement of CAP water supply and cost disputes that culminated in the Arizona Water 

Settlements Act discussed below. 

In 1972, CAWCD entered into a master contract with the Secretary of the Interior (Secretary) for 

repayment of CAP construction costs and delivery of the CAP water supply (the Repayment 

Contract). That contract was amended in 1988 to increase CAWCD's repayment obligation for 

the CAP. As a result of a subsequent dispute between the United States and CAWCD regarding 

CAWCD's repayment obligation, CAWCD filed suit against the United States in 1995. The 

United States also filed suit against CAWCD (the Repayment Litigation). On May 9, 2000, the 

litigation was settled, contingent upon the satisfaction of certain conditions within a specified 

time period (the Repayment Settlement). On April 28, 2003, the Repayment Settlement was 
Ms. Colleen McKaughan 

December 18, 2009 

Page 6 

amended to extend the time for satisfaction of the conditions necessary for entry of final 

judgment. 

One of the conditions to entry of final judgment was that Congress enact legislation satisfactory 

to the Secretary that authorized the use of amounts deposited in the Lower Colorado River Basin 

Development Fund (Development Fund) and credited against CAWCD's repayment obligation to 

help fund the costs of Indian water rights settlements in Arizona. On December 10, 2004, the 

Arizona Water Settlements Act was enacted into law (the Settlements Act).4 The Settlements 

Act facilitated final judgment in the Repayment Litigation by authorizing the actions that were 

necessary to satisfy the conditions of the Repayment Settlement. The Settlements Act included 

amendments to the Colorado River Basin Project Act of 1968 (the Basin Project Act),5 that allow 

amounts deposited in the Development Fund and credited against CAWCD's repayment 

obligation to be applied toward the costs of Indian water rights settlements in Arizona.6 

The Repayment Settlement also required that that there be a reallocation of CAP water supplies 

such that the total amount of CAP water allocated for federal (Indian) uses be increased to 

667,724 acre feet, or approximately 47% of average annual CAP supplies. The remaining CAP 

supplies, 747,276 acre-feet, or approximately 53% of average annual CAP supplies, were 

required to be made available for non-Indian agricultural, municipal and industrial use. 

This reallocation was required to be accomplished through the acquisition of the CAP water 

supplies of non-Indian agricultural CAP subcontractors and the eventual reallocation of those 

supplies to Indian and M&I water users. In return for the receipt of certain benefits, including 

the opportunity to purchase CAP water under short term contracts at energy-only rates through 

2030, non-Indian agricultural CAP subcontractors were offered the opportunity to relinquish 

their rights to non-Indian agricultural CAP water under their long-term CAP subcontracts. All 

non-Indian agricultural CAP water users have now relinquished their long-term CAP 

subcontracts in return for these benefits. 

For its part of the bargain, CAWCD has agreed, through 2030, to collect only the energy charges 

(what we refer to as "Energy Rate 1") associated with delivery of CAP water to those non-Indian 

agricultural water users that relinquished their long-term rights to CAP water. The 

relinquishment of these water supplies by our non-Indian agricultural contractors made 

subsequent Indian water rights settlements possible by providing a pool of settlement water 

supplies for reallocation by the Secretary of the Interior (a) to Indian entities as part of final 

Indian water rights settlements and (b) to non-Indian M&I CAP water users to supplement their 

existing supplies. 

Despite the fact that our non-Indian agricultural water users pay only CAP energy charges, in 

recent years, they have objected even to increases in water delivery charges on the order $1 per 

acre-foot, warning the CAWCD Board that even such modest increases in our energy rates 

threaten their ability to continue to use CAP water to meet their irrigation demand. If unable to 

use CAP water because of its cost, these water users would likely return to pumping groundwater 

4 Public Law 108-451. 

5 Public Law 90-537, 43 U.S.c. §§ 1501, et seq.
 

6 See Section 107 of the Settlements Act, codified at 43 U.S.c. § 1543(f).
 
Ms. Colleen McKaughan 

December 18, 2009 

Page 7 

water as the exclusive means of irrigating their lands, contrary to the purposes of the Basin 

Project Act and the Arizona Water Settlements Act. 7 It is our expectation that a $10 per acrefoot increase in CAP energy charges, over and above that predicted as a result of normal 

increases in energy costs, would put many, if not all, non-Indian agricultural water users "out of 

the business" of using CAP water.8 

The same can probably also be said of our Indian water users. They, like our non-Indian 

agricultural water users, use or will use their CAP water supplies almost exclusively for 

agricultural purposes. Under the Repayment Settlement, CAWCD and the United States have 

agreed that Indian users of CAP water shall be charged both the energy costs and the non-energy 

fixed operation, maintenance and replacement (OM&R) costs of CAP water delivery. However, 

Congress has provided, in the Settlements Act, that monies deposited in the Development Fund 

established under the Basin Project Act may be used to pay the fixed OM&R costs of CAP water 

deliveries for those tribes that have entered into final settlements of their water rights claims. 

Many tribes have entered into final settlements of their water rights claims, accepting CAP water 

supplies in lieu of claims to other local water supplies, in the expectation of receiving this 

benefit.9 The requirement that water delivery charges for Indian water users be subsidized in this 

manner is not an open-ended obligation, but lasts only so long as monies are available from the 

Development Fund to pay the fixed OM&R costs of Indian water deliveries. Nevertheless, at the 

current time, Indian customers of CAP water that have entered into congressionally approved 

water rights settlements pay only the energy charges (Energy Rate 1) associated with CAP water 

delivery.1O Even so, they, like our non-Indian agricultural customers, would probably find it very 

difficult to pay an additional $10 per acre-foot for CAP water, and they might view such an 

increase in costs as contrary to their reasonable expectations when they entered into final 

settlements of their water rights claims, and perhaps even a breach of the United States' trust 

responsibilities to them and their tribal members. 

2. The loss of revenues from the sale of surplus NGS power 

The installation of SCRs would also have a significant adverse effect on revenues accruing to the 

Development Fund from sales of surplus NGS power. NGS power not needed for CAP pumping 

is sold pursuant to federal law and policy to help repay the construction costs of the CAP and 

7 The legislative history of the Basin Project Act indicates that the principal purposes of the CAP were to reduce 

Arizona's overdraft of its dwindling groundwater supplies, maintain as much as possible Arizona's irrigated 

farmland, and provide additional water for future municipal and industrial growth. S. Rep. No. 408, 90th Cong., 2d 

Sess., at 27-28 (July 26, 1967). To these purposes has been added the facilitation ofIndian water rights settlements 

in Arizona. See Arizona Water Settlements Act, supra, note 4. 

8 Absent a $10 per acre-foot increase in CAP energy charges, agricultural water delivery charges are expected to 

increase by only $1 per acre-foot, to $50 per acre-foot, in 2011, and then by $2 to $3 per acre-foot per year through 

2014. Even these modest increases may be difficult for our agricultural water users to absorb. A complete listing of 

CAP water rates for 2009-2010 is available on the CAP website: http://www.cap-az.comlincludes/medialdocs/5-b-iiRevised-Rate-Schedule-Combined.pdf 

9 These settlements are described in detail in Appendix A to comments submitted by CAWCD to EPA on July 13, 

2009 as part of this rulemaking. 

10 If it were not for the subsidy of water rates for Indian water use provided for in the Arizona Water Settlements 

Act, CAP water rates for Indian (federal) water use would be $118 per acre-foot rather than $49 per acre-foot in 

2010, with similar, but escalating rates prevailing thereafter. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 8 

fund the costs of Indian water rights settlements in Arizona. This is authorized specifically by 

Congress. I I Currently, revenues from the sale of surplus NGS power contribute about $22 

million per year toward CAWCD's $55 million annual repayment obligation for the CAP. By 

the year 2012, however, revenues from the sale of surplus NGS power are expected to contribute 

tens of millions of dollars more each year toward CAP repayment, revenues that will also be 

used to help fund the costs of Indian water rights settlements in Arizona. 12 

By the year 2015 at the latest, and perhaps as early as the year 2012, revenues from the sale of 

surplus NGS power are expected to reach levels that would be more than sufficient to fully pay 

the annual amount due from CAWCD on its construction cost repayment obligation for CAP 

(about $55 million a year).13 However, the installation and operation of SCRs would reduce 

revenues to the Development Fund from the sale of surplus NGS power by about $9 million per 

year,14 or by about $175 million, not including interest, between the assumed date of their 

completion in 2016, and 2036, the end of the assumed 20-year amortization period. The 

operation of SCRs would reduce Development Fund revenues by about $1.2 million per year 

thereafter. IS 

Among other things, this would mean that CAWCD's repayment obligation might not be fully 

covered by Development Fund revenues until significantly later than we have projected, based 

on forecasts of the value of surplus NGS power. This would necessitate increases in our water 

service capital charges, our ad valorem tax rates, or both, beyond those assumed in our current 

rate structure. It would also mean that revenues in excess of the payments due from CAWCD on 

its construction cost repayment obligation for CAP (excess revenues) might not begin to accrue 

to the Development Fund until significantly later than we have projected. Because excess 

revenues to the Development Fund contribute directly to the payment of the fixed OM&R 

II The Basin Project Act authorized the Secretary of the Interior to dispose of power not needed for CAP pumping 

and required the Secretary to deposit the revenues from such power sales in the Lower Colorado River Basin 

Development Fund (Basin Development Fund) established under that Act. Basin Project Act, Sections 304(b) and 

403(c)(l), 43 U.S.c. §§ 1523(b), ]543(c)(l). The Hoover Power Plant Act of ]984 authorized the sale of surplus 

power from NGS for the specific purpose of assisting in payment and repayment of CAP costs. See Section 107 of 

the Hoover Power Plant Act of 1984, Public Law 98-38], 98 Stat. 1333, 1339-1340 (August 17, 1984). In 2004, 

Congress expanded the use of revenues from sales of surplus NGS power by authorizing the use of revenues 

deposited in the Lower Colorado River Basin Development Fund to help fund the costs of Indian water rights 

settlements in Arizona after having been applied first against CAWCD's repayment obligation for the CAP. See 

Section 107 of the Arizona Water Settlements Act of 2004, Public Law 108-451, codified at 43 U.S.c. § 1543(f). 

12 Currently, most revenues from sales of surplus NGS power (all but about $22 million a year) are pledged under a 

bond indenture to the payment of bonds issued by CAWCD to make an upfront contribution of $175 million toward 

the costs of construction of New Waddell Dam, the CAP regulatory storage feature. That bond indenture terminates 

on September 30, 20]]. Thereafter, all of the revenues from surplus NGS power sales will be applied to CAP 

repayment and the costs of Indian water rights settlements. At that time, we expect surplus NGS power sales to 

generate $50 million or more in annual revenues for these purposes 

13 The actual amount due from CAWCD to the United States each year on CAWCD's repayment obligation for the 

CAP is dictated by the amortization schedule in CAWCD's Repayment Contract and the schedule of annual 

payments set forth in the Repayment Settlement. The amount due from CAWCD varies somewhat from year to 

year, but is approximately $55 million per year. 

14 $5.45 per mwh multiplied by 1.6 million mwh of surplus NGS power. 

15 $13,167,000 in annual operation and maintenance costs divided by ]7,400,000 mwh of total NGS production 

multiplied by 1.6 million mwh of surplus NGS power. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 9 

charges of Indian CAP water deliveries for those tribes that have settled their water rights claims, 

the loss of these revenues would be especially harmful to such tribes. Currently, CAP delivery 

charges to Indian tribes that have settled their water rights claims are limited to energy charges 

only. The balance (the fixed OM&R charge of CAP water delivery) is being paid for by 

revenues from the Development Fund, as provided in the Arizona Water Settlements Act. The 

fixed OM&R charge for CAP water delivery is cost-based, but substantial. Under our 2009-2010 

water rate schedule, for example, the fixed OM&R charge for Indian water delivery has been 

established at $69 per acre foot for 2010 (the same fixed OM&R charge that applies to nonIndian M&I water deliveries).16 This brings the total cost of Indian water deliveries to $118 per 

acre-foot for 2010 ($49 per acre-foot in energy charges plus $69 per acre-foot in fixed OM&R 

charges). If, in addition to paying a $10 per acre-foot increase in energy charges necessitated by 

a requirement to install SCRs at NGS, Indian water users were forced to pay all or part of the 

fixed OM&R charge for CAP water delivery, the impact on Indian water users would be even 

more catastrophic. 

3.	 The mechanics and feasibility of financing the CAP share of the capital 

costs of SCRs 

While the financing costs of constructing SCRs have been included in the cost analysis, the 

mechanics and feasibility of financing the CAP share of those costs have not been addressed by 

either the Bureau of Reclamation or CAWCD. Had Reclamation not declared the CAP water 

supply system (including NGS) complete in 1993, CAWCD would have expected Reclamation 

to seek federal appropriations for the CAP share of the costs of controls under the authorization 

of appropriations contained in the Basin Project Act. CAWCD would then have repaid its share 

of the costs under its Repayment Contract and included those costs in its water and tax rates. 

However, that financing mechanism now appears to be unavailable. As a practical matter, the 

costs of financing SCRs, if required, could fall, at least initially, exclusively on CAWCD, despite 

the fact that 47 percent of the CAP water supply is dedicated to federal (Indian) water uses. How 

CAWCD would address such a financing requirement and subsequent cost recovery from Indian 

and non-Indian water users is unclear, but this is not a trivial problem. 

B.	 NGS Ceases Operating On December 31, 2015 

A $10 per acre-foot increase in the CAP energy charges and losses in revenues to the 

Development Fund on the order of $175 million or more is the most favorable result that we 

would expect from a requirement to install SCRs at NGS. The reasons are that it assumes that 

the NGS participants would make the decision to install SCRs, despite their enormous cost and 

in the face of other significant uncertainties now facing the Plant, and that they would have at 

least 20 years over which to amortize their investment. Several factors raise serious doubts about 

the willingness of the participants17 to make substantial additional investments in emissions 

controls at the present time. 

16 As noted above, a complete listing of CAP water rates for 2009-2010 is available on the CAP website: 

http://www.cap-az.comlincludes/media/docs/5-b-ii-Revised-Rate-Schedule-Combined.pdf 

17 The NOS participants are the United States Bureau of Reclamation for CAP (24.3%), Salt River Project (21.7%), 

Los Angeles Department of Water and Power (21.2%), Nevada Power (11.3%), and Tucson Electric Power (7.5%). 

SRP is both an owner of a 21.7% share in the Plant and the operating agent of the Plant. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 10 

•	 The current term of the Plant's lease and right-of-way agreements with the Navajo 

Nation and the Section 323 Grants from the Secretary of the Interior that are 

necessary for the Plant's continued operation currently are due to expire in 2019 

and have not yet been renewed or extended. If they are not renewed or extended, 

the remaining useful life of the Plant, beginning in the assumed control 

installation year of 2015, would be, effectively, as little as four years. 

•	 While the term of the existing coal contract with Peabody was most recently 

extended to 2019, certain other terms and conditions of that contract must be 

renegotiated. SRP as Plant operator is actively pursuing such negotiations, but it 

is unclear whether or when those negotiations will be successfully concluded. 

The contract must then be further extended and renegotiated for the period 

beyond 2019. 

•	 Because of restrictions imposed by California regulatory agencies on new 

investment in coal-fired power plants, one of the most significant participants in 

the Plant by percentage of entitlement to Plant output (21.2 percent), Los Angeles 

Department of Water and Power, has indicated its intention to withdraw from or 

dispose of its interest in the Plant by 2020. 18 How the remaining participants will 

deal with this very significant challenge is unclear. 

•	 The prospect of carbon dioxide emission control regulation, either under new 

federal legislation or under the existing Clean Air Act, creates enormous 

uncertainty about the Plant's economically viability. The effects on the Plant 

cannot be predicted with any degree of certainty, but likely would be substantial 

and could jeopardize the Plant's continued operation well before the 2035 

expiration date of the standard 20-year amortization period. 

•	 Other prospective Clean Air Act regulations add to the difficulty of predicting the 

Plant's remaining useful life at this time. (For example, new EPA standards are 

widely expected to impose very stringent control limits for mercury emissions and 

possibly a range of other substances listed under section 112 of the Clean Air 

Act.) Again, the effects on the Plant cannot be determined with confidence at this 

time but could be very substantial and may call into question whether the Plant, or 

all its units, would continue to operate until as late as 2035, even apart from the 

other factors described above. 

EPA might be tempted to conclude that these other factors are beyond its control or should not 

be taken into account in this rulemaking in any event. However, that would ignore the real world 

conditions under which the NGS participants must make decisions about significant capital 

expenditures. Until the Plant site agreements are renewed or extended beyond 2019, for 

18 See. e.g., Bernie Woodall, "Los Angeles Will End Use of Coal-Fired Power," Reuters, July 2, 2009, available at 

http://www.reuters.comlarticle/GCA-GreenBusiness/idUSTRE56165X20090702.This article reports that· Los 

Angeles will eliminate the use of electricity generated from coal combustion by 2020, and that Deputy Los Angeles 

Mayor David Freeman said that the Los Angeles Department of Water and Power will continue to use power from 

the coal-fired 2,250-megawatt Navajo Generating Station in Arizona until 2019 when its current contract expires. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 11 

example, and the other significant unknowns are resolved, the participants will naturally be loath 

to make investments in the Plant that entail the expenditure of hundreds of millions of dollars. 

For these reasons, it may be more reasonable to assume that the Plant would cease operating if 

SCRs were required than it is to assume that the participants would invest $700 million in 

additional emissions controls under current conditions. At the very least, there is a significant 

risk that that would occur. Thus, the real costs to CAWCD and its water users of a requirement 

that NOS install SCRs could well be the costs associated with purchasing an alternative power 

supply for CAP pumping and replacing the revenues associated with the sale of NOS power that 

is surplus to CAP's pumping needs. Accordingly, the following discusses the impact of Plant 

closure on CAP costs. 

NOS has provided a low cost source of power for CAP pumping since 1985 when the first CAP 

water deliveries were made. In addition, because revenues from the sale of surplus NOS power 

are required by CAWCD's Repayment Contract and by federal law and policy to be applied 

against CAWCD's construction cost repayment obligation for the CAP, NOS has served to offset 

a substantial share of that obligation each year. 

1. The projected cost of purchased power 

CAWCD retained Navigant and Black and Veatch to prepare projections of the cost of purchased 

power and the value of surplus NOS power. Using the Navigant and Black and Veatch estimates 

of the costs of purchased power, we have estimated the range of CAP pumping energy costs 

under the assumption that NOS is out of service on December 31, 2015. At that point, CAP 

pumping energy costs are estimated using Navigant and Black and Veatch forecasts of electricity 

prices at the Palo Verde Hub. The following graph also shows the cost of NOS power, 

extrapolated from current costs, as a baseline for comparison. The Navigant estimate was 

prepared for CAWCD in 2007 at the "top" of the electricity market, and represents the "high 

end" of the range. The Black and Veatch estimate was prepared for CAWCD in 2009, at the 

"bottom" of the electricity market, and represents the "low end" of the range. One cannot say 

that one estimate is any better or more accurate than the other. The fact that they differ 

significantly reflects the fact that the market price of electricity can vary (and has varied) 

substantially over a relatively short period of time. 
Ms. Colleen McKaughan 

December 18,2009 

Page 12 

240 Then Year $ per AF ------I Market Cost of Pumping Energy
 

Dollars Navigant 2007 Market Forecast
 per AF 

220 

200 

Medium Water Year 

180 

160 

I 140 

120 

100 

80	 -- - -~----

60 -	 - ~-=-=--~~=-=_~~"""'---=-= --:__-~Pr~O~jec::teld Cost of NGS

40- --­

NO CAABON TAX -- --- ._- - -- ­ 20 NOSCRs 

0+-.----.,..------------------------.,..--_---,--____,----1 

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 

Thus, for example, in the year 2017, the cost of purchased power is expected to vary from a low 

of $95 per acre-foot to a high of $180 per acre-foot. This represents a very significant increase 

over the estimated cost of NGS power at $65 per acre-foot (roughly a 50 to 300 percent increase 

in CAP energy charges). Under both forecasts, the spread between the costs of purchased power 

and cost of NGS power is expected to widen over time. 

2. The loss of revenues from the sale of surplus NGS power. 

An even more significant factor would be the loss of revenues from the sale of surplus NGS 

power that would result from closure of the Plant. 

(a)	 The impact of Plant closure on CAWCD tax rates and water 

service capital charges 

By the year 2015 at the latest, and perhaps as early as the year 2012, revenues from the sale of 

surplus NGS power are expected to reach levels that would be more than sufficient to fully pay 

the annual amount due from CAWCD on its construction cost repayment obligation for CAP 

(about $55 million a year).19 This is illustrated by the graph on page 13. Navigant and Black 

and Veatch estimates of the value of surplus NGS power were used to prepare this graph. If 

these revenues were unavailable for CAP repayment, CAWCD would be compelled to increase 

either its ad valorem tax rates, its water service capital charges to its M&I customers, or both. 

19 The actual amount due from CAWCD to the United States each year on CAWCD's repayment obligation for the 

CAP is dictated by the amortization schedule in CAWCD's Repayment Contract and the schedule of annual 

payments set forth in the Repayment Settlement. The amount due from CAWCD varies somewhat from year to 

year, but is approximately $55 million per year. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 13 

To assist in payment and repayment of CAP costs, CAWCD is authorized to levy an ad valorem 

tax of up to ten cents per $100 of assessed valuation on all taxable property within its threecounty service area. CAWCD currently levies a tax of six cents per $100 dollars of assessed 

valuation for these purposes. Most of the revenue from this tax is devoted to meeting water 

delivery costs, including the cost of subsidizing CAP water deliveries to those non-Indian 

agricultural water users that relinquished their long-term contracts for CAP water in return for 

energy only water delivery charges through 2030 and other benefits. CAWCD is also authorized 

to levy a tax of up to four cents per $100 of assessed valuation for water storage, and currently 

levies such a tax at the maximum statutory rate and uses the revenues from that tax to store CAP 

water underground to help meet future needs in the event of a shortage of Colorado River water. 

While CAWCD would have some ability to increase its ad valorem tax rates to help make up for 

a loss of revenues from sales of surplus NGS power (and the dollar-for-dollar increase in 

CAWCD's annual repayment obligation that would result), that ability is constrained by the 

statutory limits on CAWCD's taxing authority and the fact that revenues from CAWCD's tax 

collections are largely devoted to other purposes. As a practical matter, much if not all of the 

impact of the loss of revenues from surplus power sales would probably fall on our M&I 

customers. 

Only our M&I water users are obliged to pay water service capital charges (these charges are not 

collected from non-Indian agricultural or Indian CAP water users). The charge is levied on each 

acre-foot of an M&I user's contractual entitlement to CAP water, whether that user takes delivery 

of any CAP water or not. In 2010, the M&I water service capital charge will be $15 per acrefoot. By 2012, however, we have projected that the M&I water service capital charge will be 

reduced to zero, in consideration of the expected market value of surplus NGS power and our 

belief that revenues from the sale of surplus NGS power will be more than sufficient to fully 

meet our annual repayment obligation. If these revenues were unavailable, because the Plant 

was forced to close by 2016, the M&I water service capital charge would have to be increased to 

about $80 per acre-foot to fully replace the lost revenues from sales of surplus NGS power. 20 

This would result in increased annual charges of about $11.4 million to the City of Tucson and 

about $9.6 million to the City of Phoenix. 

(b)	 The impact of Plant closure on excess revenues to the 

Development Fund 

When net revenues from surplus NGS power sales reach about $50 million per year, they begin 

to exceed CAWCD's annual repayment obligation for the CAP. 21 This is expected to occur no 

later than the year 2015, according to Navigant and Black and Veatch estimates of the value of 

surplus NGS power. Thereafter, sales of surplus NGS power are expected to generate tens of 

millions of dollars in revenues in excess of the amount owed each year by CAWCD - as much as 

$60 million to $90 million per year between 2016 and 2023 alone. Under the Arizona Water 

Settlements Act of 2004, these revenues are pledged to the direct benefit of the United States and 

20 $55,000,000 (the annual payment due from CAWCD) minus $6,000,000 in revenues to the Development Fund 

from sources other than surplus NOS power sales, divided by 620,678 acre-feet, the total, current M&I entitlement. 

21 The reason is that miscellaneous revenues to the Development Fund (revenues other than from sales of surplus 

NOS power) contribute about $6 million per year toward CAWCD's $55 million annual repayment obligation for 

CAP. 
Ms. Colleen McKaughan 

December 18,2009 

Page 14 

Arizona Indian tribes. CAWCD has assumed in its long-term financial plan that NGS would 

continue to operate through the end of the CAP repayment period in 2046, and thus that such 

revenues would continue to benefit CAWCD, the United States and Indian entities well beyond 

the 2023 timeframe. 

! $150 Then Year $ Mllions ---j Net Proceeds from Sales of Navajo Surplus 

$140 

$130 

$120 --- Navigant 2007 Muket Forecast 

$110 

$100 

$90 

$80 

$70 

$60 

$50 CAP Aepayrrent 

$40 

$30 Black-Veatch 2009 tv'e.rket Forecast 

$20 - --- f\O CAffiON TAX ­

$10 - f\OSCRs 

$O~---------,.--,..--------~--~---r-------,----~--1

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 

As explained above, CAWCD's cash payments and the other revenues dedicated to CAP 

repayment are deposited each year in the Lower Colorado River Basin Development Fund where 

they become available for the purposes specified in the Arizona Water Settlements Act of 2004, 

after having been applied first against CAWCD's repayment obligation. The Repayment 

Settlement established a cascading flow of funds for monies deposited in the Development Fund. 

The Settlements Act carried this flow of funds forward into amendments to Section 403 of the 

Basin Project Act. 22 This flow of funds is illustrated in the figure attached to this letter. 

Given the fact that revenues to the Development Fund are currently only about half of the 

amount due from CAWCD each year, no monies are currently available in the Development 

Fund for the "second cascade" established by the Settlements Act, i.e., the cascade that applies to 

amounts deposited in the Development Fund that are in excess of CAWCD's annual payments. 

However, that is expected to change significantly after 2011. The analyses developed for 

CAWCD by Navigant and Black and Veatch of the value of surplus NGS power indicate that, by 

2023, net revenues from the sale of such power, that are in excess ofCA WCD's required, annual 

payment, are projected to fall between a low of about $25 million and a high of about $90 

million a year. These amounts would be available for the second cascade under Settlements Act 

and would contribute very substantially to the payment of the fixed OM&R costs of delivering 

CAP water to Indian tribes, thereby relieving the tribes of those costs and limiting water delivery 

22 See Section 107 of the Arizona Water Settlements Act of 2004, Public Law 108-451, codified at 43 U.S.C. § 

1543(0. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 15 

charges to tribes to energy charges only for a much longer period of time than if revenues to the 

Development Fund consisted only of CAWCD's annual payments. The loss of these excess 

revenues would constitute a substantial detriment to the United States and those Arizona Indian 

tribes that have or expect to have congressionally approved settlements of their water rights 

claims. 

Summary and Conclusions 

NGS provides a low cost source of power for CAP pumping that we cannot easily or 

inexpensively replace. While a requirement to install LNB/SOFA would not have a significant 

impact on CAP water delivery charges, a requirement to install SCRs would. At best, CAP 

energy charges would have to be increased by about $10 per acre-foot (20 percent) simply to 

cover the increased capital and OM&R costs of the control technology. The installation and 

operation of SCRs would also reduce revenues to the Development Fund from the sale of surplus 

NGS power by about $9 million per year,23 or by about $175 million in total between 2016 and 

2036, not including interest. This assumes that installing SCRs would not be judged by the NGS 

participants to be cost-prohibitive and that the participants would have at least 20 years to 

amortize the costs of controls. A $10 increase in our energy charges, over and above that which 

would occur as a result of normal cost escalation, would have a significant detrimental effect on 

agricultural users of CAP water supplies, non-Indian and Indian alike, and might all but 

eliminate deliveries to these classes of water users, contrary to the purposes of the Colorado 

River Basin Project Act and the Arizona Water Settlements Act. This problem would only be 

exacerbated for Indian water users because a reduction in Development Fund revenues would 

reduce monies available for the payment of the fixed OM&R charges for Indian water deliveries, 

making it necessary that Indian water users pay at least a portion of the fixed OM& charges of 

CAP water delivery sooner than they would otherwise have anticipated. 

If, given the enormous costs of SCRs and the other uncertainties currently facing the Plant, the 

participants decided to close the Plant by 2016, the assumed completion date for SCRs, then the 

costs to CAWCD and its water users of the control technology would increase dramatically. 

Plant closure would necessitate increases in CAP energy charges on the order of 50 to 300 

percent, as well as increases in M&I water service capital charges on the order of $80 per acrefoot. Plant closure would also result in the loss of tens of millions of dollars in revenue to the 

Development Fund in excess of the annual payments due from CAWCD - losses on the order of 

$25 million to $90 million a year by 2023. These revenues would otherwise provide substantial 

benefits to the United States and Arizona Indian tribes by significantly reducing the costs to the 

tribes of CAP water deliveries. 

As we said in our October 28th comments, CAWCD's greatest fear is that, under current 

conditions, the establishment of a NOx emission limit that requires the installation of SCRs could 

cause the participants to decide that the Plant is no longer viable economically. That would have 

disastrous consequences for the CAP and its water users. For this and the other reasons set forth 

in our comments, EPA should determine that a NOx emission limit of 0.24 pounds per million 

British thermal units (0.24 lbIMBtu), achieved using LNB/SOFA on Units 1-3 of NGS, is BART 

for NGS. EPA will have the ability in the future to consider using the "reasonable progress" 

provisions of its Regional Haze Rules to require more of NGS in subsequent planning periods, if 

23 $5.45 per mwh multiplied by 1.6 million mwh of surplus NGS power. 
Ms. Colleen McKaughan 

December 18, 2009 

Page 16 

necessary to meet the rules' requirements and objectives. It would make no sense for EPA to set 

a standard today that would risk the future of the Plant, particularly when another control option 

is available that does not entail that risk, yet achieves a calculable visibility benefit at a 

reasonable cost. 

Thank you for the opportunity to submit this additional information. Please contact us if you 

have any other questions or need further information from us about this or any other aspect of 

CAWCD's comments. 

David. V. Modeer 

General Manager 
Ms. Colleen McKaughan 

December 18, 2009 

Page 17 

Lower Colorado River Basin Development Fund 

Flow of Funds Under Arizona Water Settlements Act 

($ million In typical year)