### 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 StatesEnvironmental ProtectionAgency 75 Hawthorne Street San Francisco, CA94105
RE: Assessment of Anticipated Visibility Improvements at Surrounding Class I Areas and Cost Effectiveness ofBest Available Retrofit Technology for Four Corners Power Plant and Navajo Generating Station: Advanced Notice ofProposed Rulemaking, Docket No. EPA-R09-0AR-2009-0598

- YourLetterofNovember25, 2009.
DearMs. 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 BARTretrofitoptionsoutlinedin the ANPR?
We appreciate the opportunitytoanswerthat question.
Introduction andExecutive Summary
In assessing the impact ofthe 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 Thesetwo options definetheend-points ofcostimpacts.

174Fed. Reg. 44313-34.

2 ENSR Corporation, Revised BARTAnalysis for the Navajo Generating Station Units 1-3, December2008, EPAR09-0AR-2009-0598-0010.1. ] We have ignored the option ofinstalling 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 beunder serious consideration by EPA as a control option.Ms. Colleen McKaughan December 18, 2009 Page 2

The installation ofLNB/SOFA would have a negligible impact on CAP water rates, resulting in an estimatedincrease in CAP energy charges ofabout $0.50peracre-foot (a onepercentincrease in our2010 energyrate of$49 peracre-foot).
The installation ofSCRs would necessitate an increase in CAP energy charges ofat 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 orderof$175 million, plus interest, between 2016 and 2036 alone. This represents the most favorable result that we would expect from a requirement that SCRsbe 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 oftheir water rights claims and benefit from the subsidy of fixed CAP OM&R charges that these revenues to the DevelopmentFund would otherwise have provided.
Much more significant costs would be incurred by CAWCD and its water users ifa requirement to install SCRs resulted in closure ofthe Plant, which is a significant risk in this rulemaking, in ourview.

• 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 ifNGS 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 ofthese 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, orboth. Ifcollected only in the form ofincreases 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 ofabout $80 per acre-foot, levied against each M&I user's full contract entitlement to CAP water

- an additional annual charge ofabout $11.4 million to the City ofTucson and about $9.6 million to the City ofPhoenix. Ifnot 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 ofsurplus NGS power.

• Third, the United States and those Indian entities that have entered into congressionally approved settlements oftheir 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 dueMs. ColleenMcKaughan December 18, 2009 Page 3
from CAWCD on its repayment obligation for CAP

- as much as $60 million to $90 millionperyearbetween 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 of2004. CAWCD has assumed in its long-term financial plan that NGS would continue to operate through the end ofthe CAP repayment period in 2046, and thus that such revenues would continue to benefit CAWCD, the UnitedStates andIndianentitieswellbeyond the 2023 timeframe.
Discussion
I. The CostImpacts ofa Requirementto 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 ofinstalling LNB/SOFA on CAP waterrates maybeestimated 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 Costfor period of 20years. 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) $784,000divided by 1,550,000acre-feetannually. $0.51 d (e) Percent increase in Energy Rate 1from 2010 rate of$49 peracre-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 offinancing these costs are not an issue.
II. TheCostImpacts ofa Requirementto 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 preparedbySRP. Because the installation ofSCRs, ifrequired, wouldbe in addition to the installation ofLNB/SOFA, the total capital costs ofNOx controls would equal approximately $705,000,000, under this control option. Ifdownstream particulate controls were also required, total capital costs could balloon to $1 billion. Nevertheless, for purposes of this analysis, wehave assumed that no additional controlsbeyond SCR wouldberequired.Ms. ColleenMcKaughan December 18, 2009 Page 4

A. NGS Continuesto OperateAtLeastThrough 2035
1. Impacton CAPEnergy Charges
Ifone assumes that the remaining useful life ofNGS is 25 years (promulgation ofa final rule in 2010, a requirement to install the required controls by December 31, 2015, and an amortization period of20 years thereafter), the impactonCAPenergyrates maybeestimated 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 Costfor period of 20years. 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 by2,800,000 mwh from NGSfor pumping. $9.856 (e) $15,260,000 divided by 1,550,000acre-feetannually. 20.1%' (f) Percent increase in Energy Rate 1from 2010 rate of$49 peracre-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 ofour waterdeliveries, as shownin 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%

Ofthe 380,000 acre-feet ofIndian 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 waterrights settlements, and the increased costs ofthose 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 ofCAP water will increase as their federally-funded CAP distribution systems are completed and broughton line. About47 percent ofthe 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 ofCAPwateruse. Agricultural uses ofCAP 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 ofthe CAP and the proper division ofCAP 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 ofwater 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 SettlementsAct discussedbelow.
In 1972,CAWCD entered into a master contract with the Secretaryofthe 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 ofa subsequent dispute between the United States and CAWCDregarding 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 ofcertain conditions within a specified time period (the Repayment Settlement). On April 28, 2003, the Repayment Settlement wasMs. ColleenMcKaughan December 18, 2009 Page 6
amended to extend the time for satisfaction of the conditions necessary for entry of final judgment.
One ofthe conditions to entry offinaljudgment was that Congress enact legislation satisfactory to the Secretarythat authorizedthe use ofamounts deposited in the LowerColorado RiverBasin DevelopmentFund (DevelopmentFund) and credited against CAWCD'srepayment obligationto help fund the costs ofIndian 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 ofthe Repayment Settlement. The Settlements Act included amendments to the Colorado RiverBasin Project Act of 1968 (the BasinProject Act),5 that allow amounts deposited in the Development Fund and credited against CAWCD's repayment obligationto be appliedtowardthecosts ofIndian waterrights settlements in Arizona. 6
The Repayment Settlement also required that that there be a reallocation ofCAP 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% ofaverage annual CAP supplies. The remaining CAP supplies, 747,276 acre-feet, or approximately 53% of average annual CAP supplies, were required tobe 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 ofcertain 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.
Forits part ofthebargain, CAWCD has agreed, through 2030, to collectonlythe energycharges (what we refer to as "Energy Rate 1") associated with delivery ofCAPwaterto 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 waterrights 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. Ifunable to use CAPwaterbecauseofits cost, these wateruserswouldlikelyreturntopumping groundwater

4 Public Law 108-451.

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

6 See Section 107 ofthe Settlements Act, codified at43 U.S.c. § 1543(f).Ms. Colleen McKaughan December 18, 2009 Page7

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, ifnot all, non-Indian agricultural water users "out of the business" ofusing CAPwater.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 ofCAP water shall be charged both the energycosts and the non-energy fixed operation, maintenance and replacement (OM&R) costs ofCAP water delivery. However, Congress has provided, in the Settlements Act, that monies deposited in the Development Fund established underthe Basin ProjectAct may be used to paythe fixed OM&R costs ofCAP water deliveries for those tribes that have entered into final settlements of their water rights claims. Many tribes have entered into final settlements oftheir waterrights 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 waterusers be subsidizedin this manner is not an open-ended obligation, but lasts only so long as monies are available from the DevelopmentFund to pay the fixed OM&R costs ofIndian waterdeliveries. Nevertheless, at the current time, Indian customers ofCAP water that have entered into congressionally approved water rights settlements pay only the energy charges (Energy Rate 1) associated with CAPwater delivery.1O Even so, they, like ournon-Indian agricultural customers, wouldprobably 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 theirtribal members.
2. The loss ofrevenues from the sale ofsurplus NGS power
The installation ofSCRs would also have a significant adverse effect on revenues accruing to the DevelopmentFund from sales ofsurplus NGS power. NGS powernot needed for CAPpumping is sold pursuant to federal law and policy to help repay the construction costs ofthe CAP and

7 The legislative history ofthe Basin Project Act indicates that the principal purposes ofthe 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 $50per 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. Acomplete listing of CAP waterrates for 2009-2010is availableon 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 partofthis rulemaking.

10 Ifit 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 escalatingrates prevailing thereafter.Ms. Colleen McKaughan December 18, 2009 Page 8
fund the costs ofIndian 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 ofsurplus NGS power are expected to contribute tens of millions of dollars more each year toward CAP repayment, revenues that will also be used tohelp fund the costs ofIndian waterrights 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 DevelopmentFund from the sale ofsurplus NGS powerby 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 ofthe 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. Itwould also mean thatrevenues in excess ofthe 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 ofthe Interior to dispose ofpower 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 DevelopmentFund) 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 ofassisting in payment and repayment ofCAP 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 ofthe ArizonaWater SettlementsActof2004, Public Law 108-451,codified at 43 U.S.c. § 1543(f).

12 Currently, most revenues from sales ofsurplus NGS power (all but about $22 million a year) are pledged under a bond indenture to the payment ofbonds issued by CAWCD to make an upfront contribution of$175 million toward the costs ofconstruction ofNew Waddell Dam, the CAPregulatory 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 ofIndian water rights settlements. At that time, we expect surplus NGS power sales to generate $50 millionormore 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 millionperyear. 14 $5.45 permwh multiplied by 1.6 million mwh ofsurplus 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 ofsurplus NGS power.Ms. Colleen McKaughan December 18, 2009 Page 9 charges ofIndian CAPwaterdeliveries for those tribes that have settledtheirwaterrights claims, the loss ofthese 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&Rcharge 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 ofIndian 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 necessitatedby a requirement to install SCRs at NGS, Indian water users were forced to pay all or part ofthe fixed OM&R charge for CAP water delivery, the impact on Indian water users would be even more catastrophic.
3. The mechanics and feasibility offinancing the CAPshare ofthe capital costs ofSCRs
While the financing costs of constructing SCRs have been included in the cost analysis, the mechanics and feasibility offinancing the CAP share ofthose costs have not been addressedby 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 ofthe costs ofcontrols under the authorization ofappropriations contained in the Basin Project Act. CAWCD would then have repaid its share ofthe 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 offinancing SCRs, ifrequired, could fall, at least initially, exclusively on CAWCD, despite the fact that47 percent ofthe CAP water supplyis dedicated to federal (Indian) wateruses. How CAWCD would address such a financing requirement and subsequentcost recovery from Indian and non-Indian waterusers is unclear, but this is not atrivial problem.
B. NGS Ceases Operating On December31, 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 mostfavorable 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 ofother significant uncertainties now facing the Plant, and that they would have at least 20 years overwhich to amortize their investment. Severalfactors raise serious doubts about the willingness of the participants17 to make substantial additional investments in emissions controls at the presenttime.

16As noted above, acomplete listing ofCAP waterrates for 2009-2010is available on the CAPwebsite: http://www.cap-az.comlincludes/media/docs/5-b-ii-Revised-Rate-Schedule-Combined.pdf

17 The NOS participants are the United States Bureau ofReclamation for CAP (24.3%), Salt River Project (21.7%), Los Angeles Department ofWater and Power (21.2%), Nevada Power (11.3%), and Tucson Electric Power (7.5%). SRPis both an owner ofa 21.7% share in the Plant and the operating agentofthe Plant.Ms. ColleenMcKaughan December 18, 2009 Page 10

• The currenttermofthe Plant's lease andright-of-way agreementswiththe 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. Ifthey are notrenewed orextended, the remaining useful life of the Plant, beginning in the assumed control installation yearof2015, wouldbe, 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 ofthe most significant participants in the Plant by percentage ofentitlement to Plant output (21.2 percent), Los Angeles Department ofWater and Power, has indicated its intention to withdraw from or dispose ofits interest in the Plantby 2020. 18 How the remaining participants will deal with this very significantchallengeis 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 ofcertainty, but likely would be substantial and could jeopardize the Plant's continued operation well before the 2035 expirationdate ofthe standard 20-year amortizationperiod.

• Otherprospective Clean Air Act regulations add to the difficulty ofpredicting the Plant's remaining useful life at this time. (For example, new EPA standards are widelyexpectedto impose very stringentcontrol limits for mercuryemissions and possibly a range of other substances listed under section 112 of the Clean Air Act.) Again, the effects on the Plant cannotbe determined with confidence at this time but couldbe very substantial and may call into question whetherthe 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 rulemakingin 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 ofCoal-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 ofelectricity generated from coal combustion by 2020, and that Deputy Los Angeles Mayor David Freeman said that the Los Angeles Department ofWater and Power will continue to use power from the coal-fired 2,250-megawatt Navajo Generating Station in Arizona until 2019 when its currentcontractexpires.Ms. ColleenMcKaughan December 18, 2009 Page 11 example, and the other significantunknowns are resolved, the participants will naturallybe loath to make investments in the Plant that entail theexpenditureofhundreds ofmillions ofdollars.
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 ofa requirement that NOS install SCRs could well be the costs associated with purchasing an alternative power supply for CAPpumping and replacing the revenues associated with the sale ofNOS powerthat is surplus to CAP's pumping needs. Accordingly, the following discusses the impact of Plant closure on CAPcosts.
NOS has provided a low cost source ofpower for CAPpumping since 1985 when the first CAP water deliveries were made. In addition, because revenues from the sale ofsurplus 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 shareofthat obligation each year.
1. Theprojectedcost ofpurchasedpower
CAWCDretainedNavigant and Black and Veatchtoprepareprojections ofthe cost ofpurchased power and the value ofsurplusNOS 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 pumpingenergycosts are estimated using Navigant and Blackand Veatch forecasts ofelectricity 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" ofthe electricity market, and represents the "low end" ofthe 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) substantiallyover arelatively shortperiod oftime.Ms. Colleen McKaughan December 18,2009 Page 12

240 Then Year $ per AF ------I Market Cost of Pumping Energy Navigant 2007 Market Forecast Dollars perAF 220
200 MediumWater Year 180
160
I 140

120
100
80

-- -**-~----** 60 - Cost of NGS

-

## ~-=-=--**~~=-=_~~"""'---=-=** 

## --:

__**-~Pr~O~jec::teld** 40-

--­ NO CAABONTAX

-- --- ._- - --

­ 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 costofpurchased poweris 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 overthe estimated cost ofNGS power at $65 per acre-foot (roughly a 50 to 300percent increase in CAPenergycharges). Underboth forecasts, the spreadbetween the costs ofpurchased power and cost ofNGS poweris expected to widen overtime.
2. The loss ofrevenues from the sale ofsurplus NGS power.
An even more significant factor would be the loss of revenues from the sale of surplus NGS powerthatwouldresultfrom closure ofthe Plant. (a) The impact of Plant closure on CAWCD tax rates and water servicecapitalcharges 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 eitherits ad valoremtax rates, its water service capitalcharges to its M&I customers, orboth.

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, butis approximately $55 million peryear.Ms. Colleen McKaughan December 18, 2009 Page 13
To assist in payment and repayment ofCAPcosts, 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 otherbenefits. CAWCDis also authorized to levy a tax ofup to four cents per $100 ofassessed 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 helpmeetfuture needsin the event ofa shortage ofColoradoRiver water.
While CAWCD would have some ability to increaseits ad valoremtax 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 ifnot all ofthe 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 chargeis levied on each acre-footofan M&Iuser's contractualentitlement to CAP water, whetherthat 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 ofthe 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. Ifthese revenues were unavailable, because the Plant was forced to closeby 2016, the M&Iwater 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 ofabout $11.4 million to the City ofTucson and about $9.6 million to the CityofPhoenix. (b) The impact ofPlantclosureonexcess revenues to the DevelopmentFund
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 ofthe value of surplus NGS power. Thereafter, sales of surplus NGS power are expected to generate tens of millions ofdollars in revenuesin excess ofthe amountowedeach yearby CAWCD

- as much as $60 million to $90 millionperyear between 2016 and 2023 alone. Under the Arizona Water Settlements Act of2004, these revenues are pledged to the directbenefit ofthe 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 otherthan surplus NOS power sales, divided by 620,678 acre-feet, the total, currentM&I entitlement.

21 The reason is that miscellaneous revenues to the Development Fund (revenues other than from sales ofsurplus NOS power) contribute about $6 million per year toward CAWCD's $55 million annual repayment obligation for CAP.Ms. ColleenMcKaughan 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 ofthe 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 CAPAepayrrent $40 $30 Black-Veatch 2009tv'e.rket Forecast $20

- -- - f\OCAffiONTAX

­ $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 inthe LowerColorado RiverBasin DevelopmentFund where they become available for the purposes specified in the ArizonaWater Settlements Act of2004, after having been applied first against CAWCD's repayment obligation. The Repayment Settlementestablished a cascading flow offunds for monies deposited in the DevelopmentFund. The Settlements Act carried this flow offunds forward into amendments to Section 403 ofthe Basin ProjectAct.22 This flow offunds is illustratedin 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 bythe Settlements Act, i.e., the cascade that applies to amounts deposited in the Development Fund that are in excess ofCAWCD's annual payments. However, that is expected to change significantly after 2011. The analyses developed for CAWCDbyNavigant and Blackand Veatch ofthe value ofsurplus NGS powerindicatethat, by 2023, net revenues from the sale ofsuch power, thatare in excess ofCAWCD'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 wouldbe available for the second cascade under Settlements Act and would contribute very substantially to the payment ofthe fixed OM&R costs of delivering CAP watertoIndian tribes, thereby relieving the tribes ofthose costs and limiting water delivery

22 See Section 107 ofthe 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 longerperiod oftime than ifrevenues 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. SummaryandConclusions
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 ofSCRs would alsoreduce revenues to the Development Fundfrom the sale ofsurplus NGS power by about $9 million per year,23 orby about $175 million in total between 2016 and 2036, notincluding interest. This assumes that installing SCRswouldnot bejudgedbythe NGS participants to be cost-prohibitive and that the participants would have at least 20 years to amortizethe costs ofcontrols. A $10increase in ourenergy charges, over and above that which would occur as a result ofnormal 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 forthe payment ofthe fixed OM&Rcharges for Indian waterdeliveries, making it necessary that Indian water users pay at least a portion ofthe fixed OM& charges of CAPwaterdelivery soonerthan they would otherwisehave anticipated. If, given the enormous costs of SCRs and the other uncertainties currently facing the Plant, the participants decided to close the Plantby 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 orderof$80 per acrefoot. Plant closure would also result in the loss oftens ofmillions ofdollars in revenue to the DevelopmentFund in excess ofthe annual payments due from CAWCD

- losses on the orderof $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 ofCAPwaterdeliveries.
As we said in our October 28th comments, CAWCD's greatest fear is that, under current conditions, the establishmentofaNOx emission limitthat requires the installation ofSCRs could
cause the participants to decide that the Plantisno longerviable economically. Thatwouldhave disastrous consequences for the CAP and its waterusers. Forthis and the otherreasons set forth in our comments, EPA should determine that a NOx emission limit of0.24 pounds per million Britishthermal units (0.24 lbIMBtu), achieved using LNB/SOFA on Units 1-3 ofNGS, is BART for NGS. EPA will have the ability in the future to consider using the "reasonable progress" provisions ofits Regional Haze Rules to require more ofNGS in subsequent planning periods, if

23 $5.45 permwh multiplied by 1.6 million mwh ofsurplus NGS power.

### Ms. Colleen McKaughan December 18, 2009 Page 16

necessary to meet the rules' requirements and objectives. It

### would make no sense for EPAto set a standard today that would risk the future ofthe 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 ManagerMs. Colleen McKaughan December 18, 2009 Page 17 

### Lower Colorado River Basin Development Fund Flowof Funds UnderArizona WaterSettlements Act ($ million Intypical year)