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, ifyou have any questions concerning this submittal. Sincerely,

Michelle R. Freeark Director ofEnvironmental Services / cc:Ms. Colleen W. McKaughan, EPA Region IX w/enclosure



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# .. www.azgt.coop P.O. Box2165·1000S.Highway80·Benson,Arizona85602•(520)586-5000Phone ArizonaElectricPowerCooperative, Inc.•SouthwestTransmissionCooperative,Inc. •SierraSouthwestCooperativeServices,Inc.Introduction Arizona Electric Power Cooperative, Inc

. (AEPCO) Apache Generating Station Comments to EPAonBART 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
cont ro 11 e d by A E PC0

. The low-population-density areas of southeastern Arizona serviced by AEPCO present significant economic challenges Business Structure AEPCO supplies all or the major portion ofthe 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 ofAgriculture. The Class A Member distribution cooperatives, which
are also not-for-profit cooperatives, consist ofAnza Electric Cooperative, Inc. in south central California(Anza), DuncanValleyElectric 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), servingthe major portions ofPimaCounty, AZ outside ofTucson.ArizonaElectricPowerCooperative, Inc. (AEPCO) Apache Generating Station Commentsto EPAonBART June 29, 2012 In addition to the Class A Member distribution cooperatives, Valley Electric Association (VEA), a Nevada cooperative, is a Class D Member ofAEPCO 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 ofits 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 ofthe RUS, as the holder ofAEPCO'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 workplans and projects, and seek loan authorizations for those plans and projects under 7 CFR 1710 ofthe 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 ofthe operations and maintenance costs ofAEPCO's generation units are allocated amongthe Class A members based on an Allocated CapacityPercentage (ACP) that is proportional to the size ofthe respective cooperative to the total in year 2000. The ACP ofeach

2ArizonaElectric PowerCooperative, 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 ofthe components ofAEPCO's costs, fixed, operations and maintenance, and energy. Financial and Rate Structure AEPCO is also regulated by the ACC in the areas offinancing 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 withjustification 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 stafflabor 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 AArizonaElectric Power Cooperative, Inc

. (AEPCO) Apache Generating Station Comments to EPAonBART June 29, 2012 members) of about $96 million. As a not-for profit cooperative, any revenues in
excess ofexpenses are considered as contributed capital or patronage capital to be refundedtothe Class A Members subjecttoRUS mortgage restrictions. As ofDecember 31, 2011, AEPCO long term financing consisted ofapproximately $142 million ofRural Utilities Services (RUS) guaranteed FederalFinancingBank (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 ofother 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) ofnot less than 1.05 and a Debt Service Coverage Ratio (DSC) ofnot less than 1.00 on an annual basis, based upon an average ofthe best two out ofthree most recent years. The ACC requires AEPCOto have a TIER andDSC greaterthanthe 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;

4ArizonaElectric PowerCooperative, Inc. (AEPCO) Apache Generating Station Comments to EPA on BART June 29, 2012 2. Riskmanagement; 3. Limitations of system extensions and additions; contracts for operation and maintenance; power purchases; power sales; service contracts; deposits offunds; 4. Limitations ofpatronage refunds and other cash distributions; 5. Compliance with loan agreements; and 6. Limitations onloans, 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 ofthe United States Department ofAgriculture (USDA), one of the federal executive departments ofthe 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 ofthree agencies (the other two are Rural Business-Cooperative Service and the Rural Housing Service) that are part ofthe USDA's Rural**Developmet;~.t** Bureau. Each ofthese agencies is headed by an administrator, who reports to the Under Secretary ofAgriculture for Rural Development. The RUS administrator is the only one ofthe 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 staffthat includes a financial services staff, an administrative liaison staff, and a program accounting

5ArizonaElectricPowerCooperative, Inc. (AEPCO) Apache Generating Station Commentsto EPAonBART June 29, 2012 servtces division. Because of the financial nature of the agency's work, the administrator and associated staffwork closely with other agencies that are not part of the USDA, like the FFB. his bank provides the funds for many ofthe loan programs administered bythe RUS.
Theprogram functions ofthe RUS are divided intothree operating units: water and waste, electric, and telecommunications, each led by an assistant administrator. The administrator and staffconcentrate on the financial details ofindividual 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 oflife 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 ofdistribution 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 "ArizonaElectric PowerCooperative, Inc. (AEPCO) Apache Generating Station Comments to EPAonBART June 29, 2012

AEPCO's principal source offuture 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 ofthe loan application, the Office ofGeneral Counsel prepares loan documents to be executed by AEPCO. Loan draws are generally based upon the cost ofcompleted projects. The terms ofeach 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 ofa 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 orderto be secured bythe 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 ofEquity 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 ofCochise County, Arizona.

Economics Several factors combine to make the projected cost of the proposed pollution controls unreasonable, unaffordable, and impracticable for AEPCO. First, AEPCO

7Arizona Electric PowerCooperative, Inc. (AEPCO) Apache Generating Station Comments to EPAonBART 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 ofits 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 ultimatelybearthe costs ofany required environmental controls. Second, AEPCO's customer base is relatively economically disadvantaged, and mandating installation ofthe controls would impose a disproportionate burden on those customers. Accordingto data compiled bythe Bureau ofEconomic Analysis ofthe United States Department ofCommerce, 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% ofthe 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 ofthe average per capita resident ofrural 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 sheetprepared by the Economic Research Service ofthe United States Department of Agriculture, http://www.ers.usda.gov/StateFacts/az.HTM, shows a 2010 average percapita income for rural Arizonaof$28,180,which is $1,003 belowthe DepartmentofCommerce figure

.

8ArizonaElectricPowerCooperative,Inc. (AEPCO) Apache Generating Station Comments to EPAonBART 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 ofthe 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 ofat 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 ofwhom are

9ArizonaElectric Power Cooperative, Inc

.(AEPCO) Apache Generating Station Comments to EPAon BART June 29, 2012 facing their own financing challenges). Indeed, it is far from clear that those entities have the abilityto extend thatmuch financingto AEPCO. It should also be noted that the Rural Electrification Act was enacted in 1936 in orderto promote the electrification and economic development ofrural 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 belowtheir already lowlevels. Mfordability Considerations Appendix Y ofPart 51,2 addresses the role of affordability in BART decisions. First, Appendix Y notes that "[e]ven ifthe control technology is cost effective, there may be cases where the installation ofcontrols 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 ofthe plant and the economic effects ofrequiring the use ofa 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 ofa control technology. Where these effects arejudged 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 ofFederal Regulations Title 40: Protection ofEnvironment,Part 51

- Requirements for Preparation, Adoption,and Submittal oflmplementation Plans, Appendix Y to Part 51

- Guidelines for BARTDeterminations Underthe Regional Haze Rule

10Arizona Electric PowerCooperative, Inc. (AEPCO) Apache Generating Station Comments to EPAonBART June 29, 2012 competing plants in the same industry have been required to install BART controls ifthis information is available. AEPCO believesthat the circumstances outlined above present one ofthose unique circumstances where affordability affects the choice ofBART

. 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 ofproposed BART technologies either over otherplants 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 productprices. 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 ofthe 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

IIArizonaElectric PowerCooperative, Inc. (AEPCO) Apache Generating Station Commentsto 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 ofthese factors restrict the ability ofAEPCO to raise funds. While not specifically addressed in Subpart Y, these are the types ofaffordability issues that BART, which is looking at installing controls on existing, olderunits, should consider. Third, a significant increase in the cost ofpower generation, as would likely occur should BART be established as an SCR-based control for NOx, wouldjeopardize 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 oftheir members and ifcosts at AEPCO become higher than other generation supplier alternatives, AEPCO could see loss of Class A members and further narrowing ofits 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 ofmarket share and viability-is clearly within the contemplation ofAppendix 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.

12Conclusion ArizonaElectricPowerCooperative, Inc

. (AEPCO) Apache Generating Station Comments to EPAonBART 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, orthe region as a whole. AEPCO's units are relatively small compared to the other coal-fired generating units located in the northern portion ofthe 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 ofrequiring AEPCO to install the controls.

13