1 SETTL EMENT AGREEMENT This Settlement Agreement (“Agreement”) is entered into by Public Service Company of Oklahoma (“PSO”), the Secretary of the Environment on behalf of the State of Oklahoma (“Secretary ”), the Oklahoma Department of Environmental Quality (“ODEQ”), the United States Environmental Protection Agency (“EPA”), and the Sierra Club. PSO, the Secretary , ODEQ, EPA, and the Sierra Club are hereinafter collectively referred to as “the Parties” for purposes of this Agreement. RECI TALS A. On December 28, 2011, EPA issued a final rule entitled, “Approval and Promulgation of Implementation Plans; Oklahoma; Federal Implementation Plan for Interstate Transport of Pollution Affecting Visibility and Best Available Retrofit Technology Determinations,” 76 Fed. Reg. 81,728 (Dec. 28, 2011) (the “Final Rule”). B. The Final Rule partially approved and partiall y disapproved Oklahoma’s state implementation plan (“SIP”) submitted under the “visibility” and “interstate transport” provisions of the Clean Air Act ( “ CAA ”), 42 U.S.C. § 7410, 7491, and 7492 . The Final Rule included a federal implementation plan (“FIP”) establishing Best Available Retrofit Technology

(“BART”) emission limitations on sulfur dioxide (“ SO 2 ”) for Units 3 and 4 of PSO’s Northeastern plant ( “PSO’s Units”) to address the visibility and interstate transport provisions of the CAA
. C. PSO desires to develop and implement a comprehensive strategy to comply

with its obligations with respect to the visibility and interstate transport provisions o f the CAA as well as its other obligations with respect to the CAA in a coordinated manner. D. PSO intends to install low NOx combustion technologies on both of its Units, retire one of its Units, and install and operate on its other Unit a dry sorbent i njection sy stem and baghouse in order to achieve emissions rates that comply with the terms of this Agreement and with its obligations with respect to the visibility provisions of the CAA. E. PSO intends to retire one of its Units and install and operate on its other Unit a dry sorbent injection sy stem, a baghouse, and activated carbon injection to achieve emissions rates that compl y with the Mercury & Air Toxics Standard that became effective April 16, 2012, 40 C.F.R. § 63.9984 (“the MATS Rule”) . Prope rl y designed and operated air pollution control sy stems consisting of dry sorbent injection sy stem, baghouse, and activated carbon injection can achieve the MATS Rule emission limits. An EPA letter to the ODEQ and PSO dated July 18, 2012, expresses EPA’s support of PSO’s comprehensive strategy

to use the technologies described in the Regional Haze Agreement referenced in Attachment A to this Agreement to achieve the emission limitations prescribed by

the MATS Rule. The letter is attached to this Agreement as Attachment B.2

F. On February

24, 2011, PSO timely

filed a Petition for Review, challenging the issuance of the Final Rule in Public Service Company of Oklahoma v. U.S. Environmental Protection Agency, et al., No. 12
- 9524. On March 26, 2012, Sierr a Club filed a timely motion to intervene. The motion was granted March 27, 2012. G. The CAA and EPA’s regulations require States to develop SIPs to implement the CAA’s provisions, including the CAA’s visibility and interstate transport provisions. See 42 U.S.C. §§ 7410(a)(2)(D)(i)(II), (J), 7491(b)(2); 40 C.F.R. § 50.300(a). ODEQ is the administrative agency

in the State of Oklahoma responsible for developing and proposing such SI Ps. See 27A O.S. §§ 2
- 5
- 105(3), (20), 1

- 3
- 101(B)(8), 2

- 3
- 101(B)(2). The Secretary , as the Governor’s designee for the State of Oklahoma, is responsible for submitting SIPs to EPA for review. See 40 C.F.R. Part 51, Appendix V, Section 2.1(a); 40 C.F.R. § 51.103(a). Because this Agreement requires ODEQ to develop and propose and the Secretary

to submit SIP revisions to EPA under the visibility and interstate transport provisions of the CAA, and ODEQ and the Secretary prefer to regulate PSO under such SIP revisions rather than EPA’s FIP, ODEQ and the Secretary have an interest in and are essential parties to this Settlement Agreement. H. The Parties have negotiated in good faith and have determined that the settlement reflected in this Agreement is in the public interest. If approved and implemented as set forth herein, this Agreement will resolve PSO’s Petition for Review. I. This Agreement will not impact an y other provisions of the Final Rule, and/or any other applicable federal, state, and local laws and regulations. No other claims will be affected by the resolutio n of the issues related to PSO’s Units as set forth herein. AGREEMENT 1. PSO, Sierra Club, and EPA agree that within ten (10) day s after this Agreement is executed by

the Parties (i.e., signed), but before finalization pursuant to Paragraph 16 of this Agreement, they

will jointly

move the Court for an order holding in abey ance PSO’s Petition for Review pending implementation of the terms of the Agreement. 2. Within thirty ( 3 0 ) day s of the effective date of this Agreement, PSO shall submit to ODEQ final and complete versions of all information and documentation (including technical supporting documentation for PSO’s Units) necessary for the development of the SIP revisions referenced in Paragraphs 3 and 4. 3. No later than one hundred

- twenty (120) day s after PSO provides ODEQ with the information and documentation required in Paragraph 2, ODEQ will develop and propose a SI P revision under the visibility provisions of the CAA, 42 U.S.C. § 7491, and EPA’s regional haze regulations, 40 C.F.R. § 51.308, th at addresses PSO’s Units (“Regional Haze SIP revision”) in accordance with the provisions of Attachment A. 4. No later than one hundred

- twenty (120) day s after PSO provides ODEQ with the information and documentation required in Paragraph 2, ODEQ will dev elop and propose3

a SI P revision under the interstate transport provisions of the CAA, 42 U.S.C. § 7410(a)(2)(D)(i)(II), that addresses PSO’s Units (“Interstate Transport SIP revision”) in accordance with the provisions of Attachment A. 5. No later than one hundred

- twenty (120) day s after PSO provides ODEQ with the information and documentation required in Paragraph 2, the Secretary shall provide the proposed SI P revisions required in Paragraphs 3 and 4 to EPA and request parallel processin g of the SIP revisions from EPA pursuant to 40 C.F.R. Part 51, App. V, Section 2.3. 6. If ODEQ determines, at any time subsequent to PSO’s submittal of all information and documentation for PSO’s Units as required in Paragraph 2, that additional information and/or documentation is necessary in order to develop the SI P revisions referenced in Paragraphs 3 and 4, ODEQ shall provide PSO with a written request for such additional information and/or documentation with a cop y to all Parties. The deadlines ass ociated with the obligations under Paragraphs 3

- 5 of this Agreement shall be tolled during the period of time between the issuance of the written request and ODEQ’s receipt of the requested information and/or documentation. 7. After the opportunity for public hearing and the close of Oklahoma’s notice

- and

comment period for the Regional Haze and Interstate Transport SIP revisions, but no later than ninety

(90) day s after the Secretary submits the request for parallel processing referenced in Paragraph 5, ODEQ will consider and if appropriate adopt the Regional Haze and Interstate Transport SI P revisions referred to in Paragraphs 3 and 4. If adopted, the Secretary

will submit to EPA those SIP revisions. 8. The Regional Haze and Interstate Transport SIP revisions adopted and submitted to EPA under Paragraph 7 will include the provisions described in Attachment A to this Agreement unless the Parties, by written mutual agreement, amend the provisions described in Attachment A. If the Regional Haze and Int erstate Transport SI P revisions adopted and submitted to EPA by the Secretary do not include the provisions described in Attachment A to this Agreement, PSO may file a motion to dissolve the stay of PSO’s petition for review and request that a briefing sch edule be set. PSO may also pursue an y opportunities for administrative or judicial review of the Regional Haze and Interstate Transport SI P revisions adopted by ODEQ and submitted by the Secretary
. 9. Within sixty

(60) day s of EPA’s receipt of the final Regional Haze and Interstate Transport SI P revisions EPA will determine whether the revisions meet the requirements of the CAA consistent with 42 U.S.C. § 7410(k)(1)(B) (“completeness finding”). 10. EPA will take final action on the Regional Haze and the Interstate Transport SIP revisions as soon as possible, but no later than six ( 6 ) months from the date of the completeness finding referred to in Paragraph 9 consistent with 42 U.S.C. § 7410(k)(2). 11. If EPA promulgates a final action approving the prov isions of the Regional Haze and Interstate Transport SIP revisions included in Attachment A, as adopted and submitted to4

EPA by Oklahoma, PSO, the Sierra Club, and EPA will promptly file a joint stipulation of dismissal of PSO’s Petition for Review. The P arties agree that they will not challenge that portion of an y final action issued by EPA that fully approves the Regional Haze and Interstate Transport SIP revisions as adopted and submitted to EPA by the Secretary that contain the provisions in Attachment A affecting PSO’s Units. 12. Separatel y from the SIP process, PSO will report biannually to EPA (beginning in 2017 for the period 2015

- 2016, and every second y ear thereafter through the end of 2025 or 2026, whenever the last Northeastern unit is retired) on the energy produced by

PSO’s units and the sources of energy secured under PSO’s long

- term purchased power contracts. The initial report will include similar information for calendar ye ars 2013
- 2014. Requests for proposals (“RFPs”) for long

- term purc hase power contracts issued between 2013 and the date the reporting obligation ends will specificall y seek bids for energy supplied by

natural gas and renewable resources. The biannual reports will include copies of an y RFPs issued during the reporting pe riod, and a summary of the capacity or energy

secured through any

long

- term power purchase agreements executed during the reporting period, including the unit(s) providing the purchased power, the amount of capacity

or energy

secured under the agreement, and the term of each agreement. 13. The Parties may , by written mutual agreement, extend the dates in Paragraphs 2

- 5, 7, and 9
- 10 by which actions must be taken to fulfill the Parties’ respective obligations under this Agreement. 14. Nothing in the Region al Haze and Interstate Transport SIP revisions as adopted and submitted to EPA by

Oklahoma or in this Agreement shall relieve PSO from its obligations to comply

with all applicable federal, state, and local laws and regulations, including laws, regulations , and compliance deadlines that become applicable after the date of an y revisions to Oklahoma’s Regional Haze SIP that may be approved by

EPA. Such laws and regulations include, but are not limited to, any EPA rule imposing requirements relevant to inters tate transport under 42 U.S.C. § 7410(a)(2)(D) and the MATS Rule . Nothing in Oklahoma’s Regional Haze SI P revision, including the BART determination for PSO’s Units, should be construed to provide any relief from the emissions limits or deadlines specifie d in such regulations, including, but not limited to, deadlines for the installation of pollution controls required b y an y such regulations. 15. If EPA does not take final action approving those aspects of the Regional Haze and Interstate Transport SIP r evisions that contain the provisions of Attachment A, as adopted and submitted to EPA by Oklahoma, PSO may file a motion to dissolve the stay of PSO’s Petition for Review, and to request that a briefing schedule be set. EPA does not waive or limit any

def ense relating to such litigation. This shall be the only remedy for EPA’s failure to fulfill its obligations under this Agreement. PSO and Sierra Club agree that contempt of court is not an available remed y under this Agreement. 16. The Parties agree an d acknowledge that before this Agreement is final, EPA must provide notice in the Federal Register and an opportunit y for public comment pursuant to CAA5

section 113(g), 42 U.S.C. § 7413(g). EPA shall promptly submit said notice of this Agreement to the Fe deral Register after this Agreement is executed by the Parties (i.e., signed). After this Agreement has undergone an opportunity for notice and comment, the Administrator or the Attorney General, as appropriate, shall promptly consider an y such written co mments in determining whether to withdraw or withhold their consent to the Agreement, in accordance with section 113(g) of the CAA
. If the United States elects not to withdraw or withhold its consent to this Agreement, EPA shall provide written notice to the Parties as expeditiously as possible. This Agreement shall become final and effective on the date that EPA provides such written notice to the Parties . If EPA does not provide such written notice within sixty (60) day s after the notice of the Agreeme nt is published in the Federal Register, the sole remedy shall be the right to file a motion to dissolve the stay of the Petition for Review, and to request that a briefing schedule be set. EPA does not waive or limit any defense relating to such litigati on. PSO and Sierra Club agree that contempt of court is not an available remed y under this Agreement. 17. No provision of this Agreement shall be interpreted as or constitute a commitment or requirement that the United States or an y of its departments or agencies obligate or pay funds in contravention of the Anti

- Deficiency Act, 31 U.S.C. § 1341 et seq. , or in violation of any

other statue, law, or regulation. 18. Nothing in this Agreement shall be construed to limit or modify the discretion accorded to EPA, ODEQ, or the Secretary by statute, or b y general principles of administrative law. 19. Nothing in this Agreement shall be construed to limit or modify the rights of PSO or Sierra Club to seek reconsideration or judicial review of an y altered, amended or revised provisions of any

final action that ODEQ or EPA may take that differ in any

material respect from the provisions described in Attachment A (or as amended b y mutual written agreement of the Parties pursuant to Paragraph 8)
. 20. The undersigned hereb y certify that they are dul y authorized to bind the Party on whose behalf this Agreement is executed to the terms of this Agreement. 21. The provisions of this Agreement shall appl y to and be binding on the Parties, their successors and assigns. 22. This Agreement may be signed in counterparts, and such counterpart signatures shall be given full force and effect.6 FOR PETITIONER PSO: Dated:__________

__________________________________________7 FOR STATE OF OKLAHOMA: SECRETARY OF THE ENVIRONMENT FOR THE STATE OF OKLAHOMA Dated:__________

__________________________________________ FOR OKLAHOMA DEPARTMENT OF ENVIRONMENTAL QUALITY: Dated:___________

__________________________________________8 FOR U.S. ENVIRONME NTAL PROTECTION AGENCY: IGNACIA S. MORENO Assistant Attorney

General Environment and Natural Resources Division Dated:__________ By :

__________________________________________ STEPHANI E J. TALBERT Environmental Defen se Section Environment and Natural Resources Division U.S. Department of Justice P.O. BOX 7611 Washington, DC 20044 (202) 514

- 2617 Fax: (202) 514

- 8865 Stephanie.Talbert@usdoj.gov9 FOR INTERVENOR SIERRA CLUB: Dated:__________

__________________________________________10 ATTACHMENT A 1. Oklahoma, through the Secretary , will submit to EPA a Regional Haze SI P revision that addresses PSO’s Units and includes, among other things, the following elements:
a. Oklahoma’s SIP revision will include a Regional Haze Agreement (“RHA”) entered into b y ODEQ and PSO to effectuate the BART determination. b. The RHA will require that by no later than December 31, 2013, PSO will complete installation of low NOx combusti on technologies and achieve a nitrogen oxide (“NOx”) emission rate of 0.23 lb/MMBtu on a 30

- day rolling average at each of PSO’s Units
. c. The RHA will require that beginning on January 31, 2014, PSO will comply with a new SO 2 emission rate at each of PSO’s Units of 0.65 lb/MMBtu on a 30

- day rolling average, and beginning on December 31, 2014, PSO will comply with a new SO 2 emission rate of 0.60 lb/MMBtu on a 12

- month rolling average at each of PSO’s Units . PSO will maintain those emission rates until contro ls are installed at one unit as provided in subparagraph (e), and the other unit is retired as provided in subparagraph (d). The RHA will include an alternative operating scenario that addresses potential service disruption of coal supplies during the tim e period between January 31, 2014 through April 16, 2016. d. The RHA will require that PSO seek all necessary regulatory approvals, and will retire one of the coal

- fired generating units at Northeastern Station b y April 16, 2016.
e. The RHA will require that PSO seek all necessary regulatory approvals, and install and operate a dry

- sorbent injection sy stem, activated carbon injection sy stem, and a fabric filter baghouse, and secure further NOx emission reductions by April 16, 2016 on the coal

- fired generating unit at Northeastern Station that will continue to operate. After completion of the installation of the pollution controls required b y this subparagraph, PSO will achieve a 0.15 lb/MMBtu emission rate for NOx on a 30

- day rolling average basis, and a 0.40 lb/MMBtu emission rate for SO 2 on a 30
- day rolling average basis. f. The RHA will require that during the first year of operation of the controls required under the RHA, PSO will develop and propose a monitoring program to test various operating profiles an d other measures, to determine whether increased SO 2 removal efficiencies can be achieved during normal operations. Pursuant to the terms of the RHA, PSO will submit the monitoring program to EPA and ODEQ for review and will implement the monitoring progr am during the second and third y ears of operation of the dry sorbent injection sy stem. PSO will evaluate and report the results of the monitoring program to EPA and ODEQ, and if that evaluation demonstrates that the technology is capable of sustainably11 ac hieving an emission rate of less than 0.37 lbs/MMBtu on a 30

- day rolling average basis without (i) altering the unit’s fuel supply , (ii) incurring additional capital costs, (iii) increasing operating expenses by more than a negligible amount, and/or (iv) a dversely impacting overall unit operations, ODEQ will propose to revise the emission rate in the RHA by 60 percent of the difference between 0.40 and the demonstrated emission rate. Upon adoption after notice and opportunity

for hearing, Oklahoma, through the Secretary , will submit a Regional Haze SIP revision to EPA for approval. If the demonstrated emission rate is 0.37 lbs/MM B tu or greater, no adjustment will be made to the RHA, and the emission rate from the operating Northeastern coal

- fired generati ng unit in the RHA will remain 0.40 lbs/MMBtu. g. The RHA will require that beginning in calendar y ear 2021, the Annual Capacit y Factor (calculated for each calendar year as a percentage of MWH based on a rated capacit y of 470 MW times 8760 hours) for the operating coal

- fired generating unit at Northeastern Station will be reduced as follows: i. to no more than 70 percent in calendar ye ars 2021 and 2022; ii. to no more than 60 percent in calendar ye ars 2023 and 2024; and iii. to no more than 50 percent in calendar ye ar s 2025 and 2026. h. The RHA will require that no later than December 31, 2026, PSO will retire the remaining operating coal

- fired generating unit at Northeastern Station. However, in calendar ye ar 2021, the RHA will require PSO to evaluate whether the proje cted generation from that unit can be replaced at lower or equal total projected costs from natural gas or renewable resources. Pursuant to the RHA, PSO will provide a copy

of the evaluation to EPA and ODEQ. If power is available from such resources at a lower projected total cost (including consideration of PSO ’ s need to recover its remaining investment in the units), then the operating unit will retire no later than December 31, 2025. 2. Oklahoma, through the Secretary , will submit to EPA an Interstate Transport SI P revision that addresses PSO’s Units and includes, among other things, the following elements:
a. An enforceable mechanism that addresses SO 2 reductions from sources other than those operated b y PSO, to the extent necessary to achieve the antic ipated visibility benefits from the 2018 regional modeling; and b. A provision requiring that the enforceable mechanism referred to in Paragraph 2(a) of this Attachment A be implemented if the SO 2 e mission r ate for the controlled unit at Northeastern is no t reduced to 0.30 lbs/MMBtu or less as a result of the Paragraph 1(f) of this Attachment A.