Ms. Janet McCabe Acting Assistant Administrator U.S. Environmental ProtectionAgency William Jefferson Clinton Building 1200 PennsylvaniaAvenue, N.W. Mail Code: 6101A Washington, D.C. 20460 McCabe.janet@Epa.gov

VIAE-MAIL

Dear Ms. McCabe: DAVID A. HANSEN Vice President Fossil Operations

P

.O

. Box 53999 Phoenix, AZ 85072 Mail Station 9085 Tel 602 250 4402

Arizona Public Service Company ("APS") has owned (along with a number of other co-owners) and operatedthe Four Corners Power Plant ("Four Corners") on land leased from the Navajo Nation since the 1960s. Through the decades, APS has developed a very strong relationship with the Nation. The Navajo Transitional Energy Company's-an entity ofthe Navajo Nation-purchase ofthe Navajo Mine in 2013 has further solidified APS's partnership with the Nation. Inlight ofthis strong relationship, APS desires to support the Navajo Nation in its efforts to coordinate with the U.S. Environmental Protection Agency ("EPA") to develop a Clean Air Act Section 111(d) plan that assists the Nation with its transition away from coal toward low-carbon energy development. Nevertheless, we feel itimportantto set forth our position and discuss

our concerns regarding certain aspects ofthe Navajo Nation's proposal.

EPA issued its supplemental proposal for Carbon Pollution Emission Guidelines for Existing Stationary Sources: EGUs in Indian Country and U.S. Territories; Multijurisdictional Partnerships ("Supplemental Proposal") on October 28, 2014. In developing the Supplemental Proposal, EPA conducted considerable outreach and consulted with tribal officials to permittribes to have meaningful andtimely input into the proposed rule's development. With respect to the Navajo Nation, EPA held a consultation with the Nation on September 15, 2014. Three days later, on September 18, the Navajo Nation sent a letterto EPA summarizing the information presented at the consultation and setting forth the Nation's position on the Supplemental Proposal. Among otherthings, the Navajo Nation raised concerns about the application ofthe four building blocks to the two coal-fired power plants onthe Navajo Nation-Four Corners and Navajo Generating Station, the impact ofthe proposedrule on renewable energy projects on Navajo lands, andthe ability ofthe Navajo Nation to control any available

### Ms. Janet McCabe July 14, 2015 Page 2 of4

carbon credits under a trading program. It

### is primarilythe concept ofa carbon trading program onthe Navajo Nation about which APSis concerned.

EPA noted in its Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units proposal that it was "aware ofactions that have been taken or are being taken by some sources in tribal areas or territories andwill be mindful ofthese actions in considering establishment ofa [federaln1(d)] plan." 79 Fed. Reg. 34830,34854 (June 18, 2014). EPA also noted "some present and planned actions being taken to reduce criteria pollutants from EGUs in Indian countrywill result in significant C02 emission reductions relative to emissions in the 2012 baseline period used in computing the state C02 performance goals in this proposal." Id. 

### at 34854-55. The subsequently issued Supplemental Proposal confirmed that EPA's references to past actions related toAPS's permanent closure ofFour Corners Units 1, 2, and 3 on December 30, 2013. See 

### 79 Fed. Reg. 65482, 65496 (Nov. 4, 2014) (explaining the shutdown ofthree electric generating units at Four Corners to comply with requirements for Best Available Retrofit Technology ("BART") resulted in "substantial C02 reductions"). EPA explained thatthese emission reductions, along with the emission reductions expected to result from the closure ofone unit at Navajo Generating Station or curtailment ofgeneration atthatplant, represent approximately 30percent oftotal power plant C02 emissions in Navajo territory in 2012. Id. As 

### a result, EPA concluded that "the Navajo territory would meet the proposed goal without additional actions beyond the shutdowns

...." 

### Id. APS appreciates EPA's recognition of these actions-actions that resulted in real, permanent C02 reductions-andwe are very pleased that, provided the rule is finalized as proposed, we will be able to take credit for these actions and complyby converting to a mass-based goal.

The Navajo Nation has asked us to support its alternative proposal, and while APS continues to be supportive ofmany ofthe Nation's positions and concepts, including issues related to an appropriate baseline, the inabilityto make meaningful unit heat rate improvements, andthe Supplemental Proposal's early compliance option, 'we remain concerned about one key aspect: the creation ofa carbon trading program on the Navajo Nation.

On November 8, 2010, APS entered into a Purchaseand Sale Agreement ("PSA") with Southern California Edison Company ("SCE") to purchase SCE's 48 percent share ofFour Corners Units 4 and 5· Subsection 2.6(a)(ii) ofthePSA addresses the ownership of"Carbon Emission Allowances" allocated by a governmental authority after July 6, 2016, which are based on any pre-July 6, 2016 measurementperiod. In its entirety, Subsection 2.6(a)(ii) reads as follows: "[SCE] will retain any Carbon Emission Allowances allocated to [SCE], or attributable to [SCE's] Facilities Share, and [APS] will surrenderto [SCE] any such Carbon Emission Allowances attributable to [SCE's] Facilities Share." The rationale behindthis provision was that SCE wanted to reserve for itselfany potential monetarybenefit that might flow from the period during which it owned a portion ofFour Corners Units 4 and 5· Because any credits created under aMs. Janet McCabe July 14, 2015 Page 3 of4

Section 111(d) plan will likely be based on a pre-2016 baseline, APS expects that SCE will claim ownership of48 percent ofany carbon credits attributable to Units 4 and 5. Ifit does, we can expect SCE to take the position thatAPS is contractually obligated to turnoverthese credits to SCE. In such event, APS will beforced to purchase credits on the market in orderto complywith the Section 111(d) rule at Four Corners.

In a letter datedApril 6, 2015, we explainedto the Navajo Nation thatit is essential for APS to have absolute legal certaintythat, for thelife ofFour Corners, the plantparticipants will have a sufficient number of

### no-costcredits to operate Units 4 and 5 atfull capacity without any curtailmentin generating capacity for purposes of complying with the Section 111(d) rule and any implementation plan developed thereunder. APS further informedthe Nation that although we continuetobe committedto its success, we will be unable to supportits alternative Section 111(d) proposal until the carbon allowance issue is resolved, andAPS is satisfied thatitwill be kept whole in the event a carbon allowance trading program is established onthe Navajo Nation.

After reviewing APS's April6letter and meeting with SCE to discuss the issue, the Navajo Nation assured us thatit is committedto keeping us whole at Four Corners in respect to Section 111(d) compliance. APS appreciates the Navajo Nation's commitment in this regard andwants tobe supportive ofthe Nation's alternative proposal. We are willing to do so, but onlyto the extentAPS andthe other co-owners

are kept whole. Although APS has been working with the Navajo Nation on different approaches to achieving certainty, to date, the Nation has notbeen able to provide us with the assurances we require. As a result, APS is not in a position to supportthe Navajo Nation's alternative Section 111(d) proposal, because, as explained above, we believe there is a significant risk that Four Corners wouldbe unable to continue normal operations, without an allowance shortfall, due tothe SCE carbon emission allowances issue. 1
Although we are aware thatthe onJune 1, 2015, EPA delivered its final Clean Power Plan to the White House Office ofManagement andBudget for review, we are

unaware ofthe status ofthe final Section 111(d) rule as it applies to power plants in Indian country and U.S. territories. Moreover, after the rule is finalized, EPA will need
to develop a federal plan for the Nation. Therefore, we feel itimportant to inform EPA thatAPS does not supportthe Navajo Nation's proposal, because it creates a significant risk for APS andthe other Four Corners co-owners andjeopardizes the continued viability ofthe plant. EPA applied the four buildingblocks described in its June 2, 2014

1 To the extent a Navajo Nation trading program is established (i) under which carbon allowances or credits are created solely as a result ofthe reduction in C02 emissionsthat occurred due to the retirement ofFour Corners Units 1, 2, and 3 in December 2013, and (ii) Four Corners receives a quantity ofno-cost allowances eachyear (up to the total number allocated for compliancein that year) for purposes of complying with the Navajo Nation 111(d) plan, APS would potentiallybe supportive ofsuch program.Ms. Janet McCabe July 14, 2015 Page 4 of4

Clean Power Plan proposal to establish interim andfinal goals for the Navajo Nation, which were expressed as C02 emission rates. As proposed, the rule would not require additional emission reductions at Four Corners as a result ofAPS's closure ofUnits 1, 2, and 3 to comply with BART. EPA expects that Four Corners will be able to comply with the requirements ofSection 111(d) without any further action, ifthe rate

-based goal is simply converted to a mass-based goal. No credits or allowances would be established, and no trading program would be required. Accordingly, APS strongly encourages EPA
to finalize the Indian country Section 111(d) rule as the agency proposed it.

Sincerely,



# _£}~A~

David A. Hansen · Vice President, Fossil Generation

cc. Joe Goffman (Goffman.joseph@Epa.gov) William Niebling (Niebling.william@Epa.gov) Mabel E. Echols@omb.eop.gov April Quinn (aquinn@nndoj.org) Ann Becker (Ann.Becker@APS.com)