June '29, 2012 J 

Ms. Deborah Jordan 

Director, Air Division 

U.S. Environmental Protection Agency, Region IX 

75 Hawthorne Street 

San Francisco, CA 94105-3901 

Re: Arizona Electric Power Cooperative, Inc. (AEPCO) 

Comments on BART for Apache Generating Station 

Dear Ms. Jordan: 

Arizona's 

G~T Cooperatives 

Touchstone Energy• Cooperatives ~ 

Arizona Electric Power Cooperative, Inc, (AEPCO) appreciates the opportunity to provide 

the enclosed comments to the Environmental Protection Agency (EPA) Region IX staff. 

Please contact me at (520) 586-5122, or Eric Hiser, AEPCO's counsel, at (480) 505-3927, if you 

have any questions concerning this submittal. 

Sincerely, 

Michelle R. Freeark 

Director of Environmental Services 

/ cc: Ms. Colleen W. McKaughan, EPA Region IX w/enclosure 

• • : . . . . '. . .. www.azgt.coop 

P.O. Box 2165 ·1000 S. Highway 80 ·Benson, Arizona 85602 • (520) 586-5000 Phone 

Arizona Electric Power Cooperative, Inc. • Southwest Transmission Cooperative, Inc. • Sierra Southwest Cooperative Services, Inc. 
Introduction 

Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

Arizona Electric Power Cooperative, Inc. (AEPCO) is a Section 501 (c) (12) notfor-profit, generation cooperative, headquartered in Benson, Arizona. AEPCO 

owns and operates the Apache Generating Station (Apache Station) in Cochise, 

Arizona, a sparsely populated area in southeastern Arizona. The Apache Station 

generation fleet includes two coal-fired steam units and five gas-fired 

generation units, which consist of four peaking units and a single steam unit. 

Apache Station is the only generation plant owned and 

con t r o 11 e d by A E PC 0 . The low-population-density areas of 

southeastern Arizona serviced by AEPCO present significant economic 

challenges 

Business Structure 

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 ural Utilities Service (RUS), a branch of the United States 

Department of Agriculture. The Class A Member distribution cooperatives, which 

are also not-for-profit cooperatives, consist of Anza Electric Cooperative, Inc. in 

south central California (Anza), Duncan Valley Electric Cooperative, Inc. (DVEC) 

in Greenlee County, AZ, Graham County Electric Cooperative, Inc. (GCEC) in 

Graham County, AZ, Mohave Electric Cooperative, Inc. (MEC) of Mohave 

County, AZ, Sulphur Springs Valley Electric Cooperative, Inc. (SSVEC) serving 

the major portions of Cochise County, AZ, and Trico Electric Cooperative, Inc. 

(Trico), serving the major portions ofPima County, AZ outside ofTucson. 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

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 YEA. The 

other twelve Directors (two per Class A Member) are distribution cooperatives' 

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 Arizona 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. All of AEPCO's capital expenditures are funded through 

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 regu1ations. 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 total in year 2000. The ACP of each 

2 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

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 handling 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 months to adjudicate and costs approximately 

$50,QOO 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 Commission Staff for sufficiency and then 

scheduled for rate hearings. The adjudication process for an application for rate 

relief takes approximately thirteen months for a standard rate case and costs 

approximately $500,000 to $700,000 in, legal and consulting fees 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 A 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

members) of about $96 million. As a not-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 toRUS mortgage restrictions. 

As of December 31, 2011, AEPCO long term financing consisted of approximately 

$142 million 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 an 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 this rate design covenant, the mortgage has an additional 25 

covenants which pledge to RUS all of AEPCO's rights under its contracts and 

agreements, subjecting 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; 

4 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

2. Risk management; 

3. Limitations of system extensions and additions; contracts for 

operation and maintenance; power purchases; power sales; 

service contracts; deposits of funds; 

4. Limitations of patronage refunds and other cash distributions; 

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 investment 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 Developmet;~.t Bureau. Each of these agencies is 

headed by an administrator, who reports to the Under Secretary of Agriculture for 

Rural Development. The 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 borrower and program support staff that includes a 

financial services staff, an administrative liaison staff, and a program accounting 

5 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

servtces division. Because of the financial nature of the agency's work, the 

administrator and associated staff work closely with other agencies that are not part 

of the USDA, like the FFB. his bank provides 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 technical 

personnel to plan and execute projects. 

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 

America'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 m rural areas. 

The loans and loan guarantees finance 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, limiteddividend, or mutual associations that provide retail electric service needs to rural 

areas or supply the power needs of distribution borrowers in rural areas. Through 

the Electric Programs, the Federal government is the majority noteholder for 

approximately 700 electric systems borrowers lll 46 states. 

6 

" 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

AEPCO' s principal source of future financing is FFB Loans which are guaranteed 

by RUS. In order to secure additional FFB financing, AEPCO must file a loan 

application toRUS 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 118 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 accommodations 

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% ofthe 

loan amount. In addition 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, AEPCO 

7 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

IS a consumer-owned, nonprofit rural electric generation and transmission 

cooperative. As a not-for-profit 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 through 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 

mandating installation of the controls would impose a disproportionate burden on 

those customers. According 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 disproportionately large cost. 

1 A fact sheet prepared by the Economic Research Service of the United States Department 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 . 

8 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

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. AEPCO's other generating units are not as inefficient and are 

used 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 effectively 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. An invest of at least $80 million investment in controls would 

increase AEPCO's existing net plant 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 

mcomes. 

Financing the investment would also be very challenging. AEPCO's total longterm debt as ofDecember 31,2011, was $179 million. The minimum $80 million 

investment would represent a 44.7% increase in the existing debt. Again, that 

increase would be borne by the members through increased rates. AEPCO may 

also face impediments to borrowing such a large sum of money, which would 

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 are 

9 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

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 Electrification 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 consist of fixedincome 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 reduce 

incomes below their already low levels. 

Mfordability 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 technology 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 technology. These effects would include effects on product prices, the 

market share, and profitability of the source. Where there are such unusual 

circumstances that are 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 technology. Where these effects are judged to have a severe 

impact on plant operations you may consider 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 the confidentiality of 

sensitive business information). Any analysis may also consider whether other 

2 Code of Federal Regulations Title 40: Protection of Environment, Part 51 - Requirements for Preparation, 

Adoption, and Submittal oflmplementation Plans, Appendix Y to Part 51- Guidelines for BART Determinations 

Under the Regional Haze Rule 

10 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

competing plants in the same industry have been required to install BART 

controls ifthis information is available. 

AEPCO believes that the circumstances outlined above present one of those unique 

circumstances where affordability affects the choice of BART. First, as detailed 

above, AEPCO is a rural electric cooperative with six Class A members. The six 

Class A members represent less than 150,000 rate payers in an economically 

disadvantaged area. Further, AEPCO has only a single facility. Unlike many other 

utilities, AEPCO is thus not in a position to "spread" the cost of proposed BART 

technologies either over other plants in its fleet (there are none) 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 

rate base. This goes to the first consideration outlined in Appendix Y-effects on 

product prices. 

Second, AEPCO IS financed almost wholly by the United States government 

through RUS and CFC. AEPCO, unusual for a rural electric cooperative, is also 

regulated by the ACC. All of these entities have imposed conditions upon 

AEPCO's operations. This has the following implications: (a) AEPCO must 

maintain certain covenants, such as TIER ratios, in order to meet past financing 

requirements. Adding debt in excess of the TIER ratios would violate loan 

covenants, potentially 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 providers 

II 
Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

would be subordinate to government debt; and (d) AEPCO has no effective equity 

financing options 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 affordability issues that BART, which is looking at installing 

controls on existing, 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 power provision to 

substantially exceed that available from either other cooperatives 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 narrowing 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 Appendix Y. 

In summary, AEPCO believes that Appendix Y reqmres 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 an opportunity to review EPA's calculations, AEPCO does not 

believe that they are affordable given AEPCO's unique circumstances. 

12 
Conclusion 

Arizona Electric Power Cooperative, Inc. (AEPCO) 

Apache Generating Station 

Comments to EPA on BART 

June 29, 2012 

Accordingly, AEPCO respectfully submits that requiring it to acquire and install 

the controls is not in the best economic interests of AEPCO, its membercustomers, 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, lessadvantaged communities. The adverse economic impacts of the controls upon 

AEPCO and its members are substantially more severe than for the other units and 

operators in the state. As stated in Appendix Y, which governs BART 

determinations 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 effects of requiring AEPCO to install 

the controls. 

13