A r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

. ( A E P C O ) A p a c h e G e n e r a

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## Introduction

Arizona Electric Power Cooperative, Inc. (AEPCO ) is a Section 501 (c) (12) not

for

- profit, generation cooperative, headquartered in Benson, Arizona

. AE PC O

owns a nd op e r a t e s the Ap a c he G e n e ra

t i ng S t a tion (Apache Station) in C o c his e , A r i z on a , a sp ar s e l y popul a t e d ar e a in south ea st er n A r i z on a

. The Ap a c he S t a

tion generation f

l e e t in c lud e s two c o a l

- f i re d st ea m units a nd f i v e g a s

- f i r e d

g e n e ra tion units, w h i c h c o n s i s t o f four peaking units and a single s team unit

. A p a c h e S t a t i o n i s t h e o n l y g e n e r a t i o n p l a n t o w n e d a n d

c o n t r o l l e d b y A E P C O

. The low

- popul a tion

- d e n s i t y a r ea s of
south e a st er n A r

i z ona s er

vi ce d b y A

E PC O p re s e nt si g ni f

i ca nt ec onomic

c h a ll e ng e s

B usiness S tructure

AEPCO supplies all or the major portion of the power needs of its six Class A
Member distribution cooperatives under wholesale power contracts that are approved by the Rural Utilities Service (RUS) , a branch of the United States Department of Agriculture . The Class A Member distribution cooperatives , which
are also no t

- for

- profit cooperatives
, consist of Anza Electric Cooperative, Inc. in
south central California ( A n z a ) , Duncan Valley Electric Cooperative, Inc. (DVEC) in Greenlee County, AZ, Graham County Electric Cooperative, Inc. (GCEC) in Graham County, AZ, Moha ve Electric Coope rative, Inc. ( MEC) of Mohave County, AZ , Sulphur Springs Vall ey Electric Cooperative, Inc. ( SSVEC) serving the major portions of Cochise County, AZ, and Tri co Electric Cooperative, Inc. ( T r i c o ) , serving the major portions of Pima County, AZ outside of Tucson

.A r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

. ( A E P C O ) A p a c h e G e n e r a

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## In addition to the Class A Member distribution cooperatives, Valley Electric
Association (VEA) , a Nevada cooperative, is a Class D Member of AEPCO that
takes certain scheduling and trading services from AEPCO but does not have a wholesale power purchase contract with AEPCO

. AEPCO is governed by a Board of Directors consisting of 13 Directors that oversee all aspects of its operation. One AEPCO Director represents VEA . The
other t welve Directors (two per Class A Member) are distribution coope ratives’ representatives who are selected by their respective distribution cooperative
Boards. The Boards of each distribution cooperative are elected by their retail

customers , which comprise their membership

.
AEPCO and the five Arizona Class A member distribution cooperatives are regulated by the A rizona Corporation Commission ( ACC ), and AEPCO is subject to the regulations of the RUS, as the holder of AEPCO’s debt related to Apache Generating Station. A ll of AEPCO’s capital expenditures are funded t h rough loans guaranteed by RUS. AEPCO’s wholesale power contracts with the Class A Members represent RUS’ security behind AEPCO’s debt. To fund construction projects, AEPCO must prepare and provide to RUS construction work plans and projects, and seek loan authorizations for those plans and projects under 7 CFR 1710 of the Federal regulations. RUS ’ role in this process will be described in greater detail later in these comments

. Under the wholesale power contracts, the fixed and the majority of the operations
and maintenance costs of AEPCO’ s generation units are allocated among the Class A members based on an Allocated Capacity Percentage (ACP) that is proportional to the size of the respective cooperative to the tot al in year 2000 . The ACP of eachA r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## Class A member for costs related to AEPCO’s Apache generation units is as
follows: ANZA

– 2.5%, DVEC

– 1.3%, GCEC

– 7.6%, MEC

- 35.8%, SSVEC

– 31.7%, and TRICO

– 21.1%. Under the wholesale power contract, the fuel and
fuel h andling costs are energy

- related charges allocated among the Class A
members based on the metered energy used by each cooperative in serving the respective loads of its retail electric membership. The installation of new emission controls at Apache will increase all of the components of AEPCO’s costs, fixed, operations and maintenance, and energy.

Financial and Rate Structure

AEPCO is also regulated by the ACC in the areas of financing and rate setting as well as other areas. For financing authority, AEPCO files an application with the
ACC listing the projects to be financed along with justification and the proposed sources of financing , including interim financing. An application for financing authority usually takes six to eigh t months to adjudicate and costs approximately $50,000 in legal fees and expenses in addition to AEPCO ’s internal labor and
expenses.
To obtain regulatory approval of rate relief, AEPCO is required to file an application which is reviewed by the Commissio n Staff for sufficiency and then scheduled for rate hearings. The adjudication process for an application f or rate relief takes approximately thirteen months for a standard rate case and costs approximately $500,000 to $700,000 in legal and consulting fee s and expenses as well as AEPCO staff labor and expense.

As of December 31, 2011, AEPCO had assets of approximately $350 million,
liabilities of roughly $254 million and patronage capital (equity from Class AA r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## members) of about $96 million. As a no t

- for profit cooperative, any revenues in excess of expenses are considered as contributed capital or patronage capital to be
refunded to the Class A Members subject to RUS mortgage restrictions.
As of December 31, 2011, AEPCO long term financing consist ed of a pproximately $142 millio n of Rural Utilities Services ( RUS) guaranteed Federal Financing Bank (FFB) notes, $23 million of National Rural Utilities Cooperative Finance Corporation (CFC), $14 million of CFC Guaranteed Solid Waste Disposal
Revenue Bonds and $16 million of other debt.

As mentioned earlier, AEPCO assets are secured by a Consolidated Mortgage, Security Agreement and Financing Statement, dated August 3, 2009, made by and among AEPCO, RUS and CFC. As principal holder of the mortgage, RUS exercises substantial control and supervision over AEPCO’ s operations requiring AEPCO to design rates that 1) provide sufficient revenues to pay all fixed and variable expenses, 2) provide and maintain reasonable levels of working capital, and 3) achieve a Times Interest Earned Ratio (TIER) of not less than 1.05 and a Debt Service Coverage Ratio (DSC) of not less than 1.00 on an annual basis
, based

upon a n average of the best two out of three most recent years. The ACC requires AEPCO to have a TIER and DSC greater than the RUS minimum.

In addition to th is rate design covenant, the mortgage has an additional 25
covenants which pledge to RUS all of AEPCO’s rights under its contracts and agreements, subject ing substantially all of AEPCO’s properties to its mortgage liens to secure present and future indebtedness to RUS . The mortgage also contains provisions for RUS control and supervision in such areas as:

1. Financial books and financial records;A r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## 2. Risk management;
3. Limitations of system extensio ns and additions; contracts for operation and maintenance ; power purchases; power sales; service contracts; deposits of funds;
4. Limitations of patronage refunds and other cash distr ibutions;
5. Compliance with loan agreements; and
6. Limitations on loans, investments and other obligations.

In addition to long term debt, AEPCO has a $25 million unsecured operating line
of credit with CFC as well as a member investme nt program to provide working capital support.

Rural Utilities Service

RUS is an agency of the United States Department of Agriculture (USDA), one of the federal executive departments of the United States government charged with providing public utilities (electricity, telephone, water, sewer) to rural areas in the
United States via public

- private partnerships. RUS is one of three agencies (the
other two are Rural Business

- Cooperative Service and the Rural Housing Service) that are part of the USDA's Rural Development Bureau. Each of these agencies is headed by an administrator, who report s to the Under Secretary of Agriculture for Rural Development

. T he RUS administrator is the only one of the three who is
Senate

- confirmed.

The RUS administrator makes the primary policy and program decisions for the agency and is assisted by a b orrower and program support staff that includes a financial services staff, an administrative liaison staff, and a program accountingA r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## services division. Because of the financial nature of the agency's work, the
administrator and associated staff work close ly with other agencies that are not part of the USDA, like the FF B . Th i s bank provide s the funds for many of the loan programs administered by the RUS.

The program functions of the RUS are divided into three operating units: water and waste, electric, and telecommunications, each led by an assistant administrator.
The administrator and staff concentrate on the financial details of individual RUS projects, and these three operating units provide the engineering and t e c h nical personnel to plan and execute pro jects.
Providing reliable, affordable electricity is essential to the economic well

- being and quality of life for the nation's rural residents. The Electric Programs provide leadership and capital to construct, upgrade, expand, maintain, and replace
Americ a's vast rural electric infrastructure. Under the authority of the Rural Electrification Act of 1936, the Electric Programs make direct loans and loan guarantees to electric utilities to serve customers in rural areas.

The loans and loan guarantees financ e the construction of electric distribution, transmission, and generation facilities, including system improvements and replacement required to furnish and improve electric service in rural areas . Loans are made to corporations, states, territories and subdivisions and agencies such as municipalities, people's utility districts, and cooperative, nonprofit, limited

dividend, or mutual associations that provide retail electric service needs to rural areas or supply the power needs of distribu tion borrowers in rural areas. Through the Electric Programs, the Federal government is the majority noteholder for approximately 700 electric systems borrowers in 46 states.A r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

. ( A E P C O ) A p a c h e G e n e r a

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## AEPCO’s principal source of future financing is FFB Loans which are guaranteed by RUS. In or der to secure additional FFB financing, AEPCO must file a loan application to RUS with sufficient documentation which demonstrates the need for the projects to be financed as well as a financial forecast which supports the application. A typical RUS loan application takes 8 to 12 months to be approved. After approval of the loan application, the Office of General Counsel prepares loan documents to be executed by AEPCO. Loan draws are generally based upon the cost of completed projects. The terms of each draw are based upon a maturity date established by the loan documents, prepayment/refinancing options and an interest rate based upon the equivalent term treasury rate plus 1/8 of a percent. In addition to FFB financing, AEPCO may also borrow from CFC to either supplement financing requirements or to provide interim financing needs until FFB loan funds
can be drawn. CFC financing requires a lien accommodation from RUS in order to be secured by the mortgage. CFC loan applications requiring lien accommoda tions from RUS generally take about the same time as RUS loan applications. Typically, CFC loan interest rates are 1.00% to 1.50% higher than RUS loans and also require the purchase of Equity Term Certificates amounting to 14.29% of the
loan amount. In a ddition to CFC loans, AEPCO may also work with CFC to obtain pollution control financing through revenue bonds issued through the Pollution Control Corporation of Cochise County , Arizona.

Economics Several factors combine to make the projected cost of the proposed pollution controls unreasonable, unaffordable, and impracticable for AEPCO. First, AEPCOA r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## is a consumer

- owned, nonprofit rural electric generation and transmission cooperative. As a n o t

- f

o r

- pro fit entity, AEPCO does not have outside investors as such. Instead, it is a wholesale entity owned ultimately by the member

- customers of its Class A distribution cooperatives

. Since AEPCO has no outside investors, AEPCO must necessarily pass its costs th rough to the Class A member who pass them through approximately 147,643 retail customers (meters), who must ultimately bear the costs of any required environmental controls.
Second, AEPCO’s customer base is relatively economically disadvantaged, and
mand ating installation of the controls would impose a disproportionate burden on
those customers. A ccording to data compiled by the Bureau of Economic Analysis of the United States Department of Commerce, the average per capita income for
the United States as a whole for 2010, the last year for which complete data is available, was $40,584. In contrast, the average per capital income for Arizona as a whole was $34,999. Arizona ranked 40th among the 50 states, and its income was 86.2% of the national average. However, AEPCO and its members primarily

serve non

- metropolitan Arizona, where the average per capita income is considerably lower, $29,183. 1 

## Accordingly, the average income in the United States is 39% greater than that of the average per capita resident of rural Arizona ($40,584/$29,183=1.39). In short, a population limited in both size and income would be required to bear a disproportionate ly large cost.

1 

### A fact sheet prepared by the Economic Research Service of the United States Depa rtment of Agriculture, http://www.ers.usda.gov/StateFacts/az.HTM , shows a 2010 average per capita income for rural Arizona of $28,180, which is $1,003 below the Department of Commerce figure.A r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## Furthermore, AEPCO lacks feasible alternatives for avoiding the costs of the controls. The two units that are affected, ST2 and ST3, are AEPCO’s two load following units. AEPC O’s other generating units are n o t a s in efficient and are

use d primarily for peaking and reserves. Especially during the summer peak period, AEPCO cannot import sufficient power from other generators to cover its
loads due to limitations in grid capacity . From an operating perspective, the ST2
and ST3 units are ef

fectively RMR (reliability must run) during key portions of the year, and AEPCO cannot abandon the units and expect to serve its loads adequately and reliably.
In addition, the required investment would swamp AEPCO’s budget and limited
financial resources . A n i n v e s t o f a t l e a s t $80 million investment in controls would increase AEPCO’s existing net plan t investment by a third. Beyond that, AEPCO’s operating margin for 2011 was less than $1.9 million. Accordingly, an $80 million investment would be over 42 times AEPCO ’s 2011 margin. The associated investment would necessitate a substantial long

- term increase in AEPCO’s rates, and those rates would be borne by members with relatively low
incomes.
Financing the investment would also be very challenging. A EPCO’s total long

term debt as of December 31, 2011, was $179 million. The minimum $80 million investment would represent a 44.7% increase in the existing deb t. Again, that
increase would be borne by the member s through increased rates. AEPCO m ay also face impediments to borrowing such a large sum of money, which wou ld likely need to come from RUS (meaning ultimately from United States taxpayers through Congressional allocation ) or from the National Rural Electric Cooperative Finance Corporation (effectively meaning other cooperatives, many of whom areA r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## facing their own financing challenges). Indeed, it is far from clear that those entities have the ability to extend that much financing to AEPCO

.
It should also be noted that the Rural Electr ification Act was enacted in 1936 in order to promote the electrification and economic development of rural portions of the United States. AEPCO continues to serve that mission throughout rural Arizona and beyond. Many of AEPCO’s ultimate customers consi st of fixed

income retirees or subsistence

- level agricultural farms. An increase in their rates would not only impact them adversely, but it would also have a ripple effect on their local communities, which could curtail economic activity and further redu ce incomes below their already low levels.
Affordability Considerations
Appendix Y of Part 51
, 2 

## addresses the role of affordability in BART decisions. First, Appendix Y notes that ―[e] ven if the control t e c hnology is cost effective, there may be cases where the installation of controls would affect the viability of continued plant operations. ‖ Appendix Y then provides the following guidance for affordability review :

There may be unusual circumstances that justify taking into consideration the conditions of the plant and the economic effects of requiring the use of a given control t e c hnology. These effects would include effects on product prices, the market share, and profitability of the source. Where there are such unusual circumstances that a re judged to affect plant operations, you may take into consideration the conditions of the plant and the economic effects of requiring the use of a control t e c hnology. Where these effects are judged to have a severe impact on plant operations you may cons ider them in the selection process, but you may wish to provide an economic analysis that demonstrates, in sufficient detail for public review, the specific economic effects, parameters, and reasoning. (We recognize that this review process must preserve t he confidentiality of sensitive business information). Any analysis may also consider whether other

2 C o d e o f F e d e r a l R e g u l a t i o n s Title 40: Protection of Environment
, P a r t 5 1

– Requirements f

o r P r e p a r a t i o n , A d o p t i o n , a n d Submittal o f Implementation P l a n s , Appendix Y to Part 51

— Guidelines for BART Determinations Under the Regional Haze RuleA r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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### competing plants in the same industry have been required to install BART controls if this information is available.



## AEPCO believes that the circumstances outlined above present one of those unique
circumstan ces where affordability affects the choice of BART. First, a s detailed above, AEPCO is a rural electric cooperative with six Class A members. The six
Class A members represent less than 150,000 rat e payers in an economically disadvantaged area. Further, A EPCO has only a single facility. Unlike many other utilities, AEPCO is thus not in a position to ―spread‖ the cost of proposed BART

t e c h nologies either over other plants in its fleet (there are no ne) or over a large rate payer base. While AEPCO has not yet been able to calculate the likely rate structure necessary to support an SCR

- based BART determination, AEPCO anticipates that substantial increases in rates would be necessary given the narrow

r ate base. This goes to the first consideration outlined in Appendix Y

— effects on product prices.

Second, AEPCO is fina nced almost wholly by the United States government throug h RUS and CFC. AEPCO, unusual for a rural electric cooperative, is also regul ated by the ACC. All of these entities have imposed conditions upon AEPCO’s operations . This has the following implications: (a) AEPCO must

ma intain certain covenants, such as TIER ratios, in order to meet past financing requirements. Adding debt in exc ess of the TIER ratios would violate loan covenants, pote ntially resulting in foreclosure or similar actions; (b) the presence of the TIER ratio and similar requirements means that AEPCO’s costs are higher than a corresponding investor

- owned utility, that may be able to finance based on either equity or corporate bonding, which may not include similar restrictions; (c) it is not clear that existing government resources in RUS and CFC are available to AEPCO and AEPCO is unlikely to find private resources where private providersA r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## would be subordinate to government debt; and (d) AEPCO has no effective equity financing op tions under its cooperative structure. All of these factors restrict the ability of AEPCO to raise funds. While not specifically addressed in Subpart Y, these are the types of af fordability issues that BART, which is looking at installing
controls on exi sting, older units, should consider.
Third, a significant increase in the cost of power generation, as would likely occur
should BART be established as an SCR

- based control for NOx, would jeopardize AEPCO’s long

- term existence if it causes the cost of powe r provision to substantially exceed that available from either other cooperativ es that AEPCO’s existing Class A and D members could join. While AEPCO’s board must take action in the best interests of AEPCO, AEPCO’s members’ boards must take
action in the best interests of their members and if costs at AEPCO become higher than other generation supplier alternatives, AEPCO could see loss of Class A
members and further narro wing of its rate base. Given the existing small size and low income profile of AEPCO’s service area, any further narrowing of the rate based is of substantial concern and may affect the viability of AEPCO as an ongoing generation alternative. This factor

— loss of market share and viability

— is clearly within the contemplation of Appe ndix Y.
In summary, AEPCO believes that Appendix Y requires consideration of the ―affordability‖ of proposed BART controls. In this case, even if SCR

- based
controls were to be cost

- effective, which AEPCO does not believe the case, but it has not yet had a

n opportunity to review EPA’s calculations, AEPCO does not
believ e that they are affordable given AEPCO’s unique circumstances.A r i z o n a E l e c t r i c P o w e r C o o p e r a t i v e , I n c

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## Conclusion
Accordingly, AEPCO respectfully submits that requiring it to acquire and install
the controls is not in the best econ omic interests of AEPCO, its member

customers, or the region as a whole. AEPCO’s units are relatively small compared
to the other coal

- fired generating units located in the northern portion of the state, they consume considerably less coal, and they serve predominately rural, less

advantaged communities. The adverse economic impacts of the controls upon
AEPCO and its m e m b e r s are substantially more severe than for the other units and operators in the state. As stated in Appendix Y, which governs BART
de terminations for coal

- fired power plants, the affordability of controls must be considered when there are unique circumstances. Under AEPCO’s specific and unique circumstances, affordability is an issue due to the small rate base, government required loan covenants and limits in borrowing capability, and potential loss of rate base should costs increase significantly. Accordingly, the
EPA should consider the adverse economic eff ects of requiring AEPCO to install
the controls.