MEMORANDUM

TO: EPA Region 9

Air Permits Office DATE: December 7, 2015

FROM: Makram Jaber

Navajo Generating Station Refined Coal Treatment Sy stem - Response to EPA request for
additional information

This memorandum supplements the December 7, 2015 re sponse from Mr. Kyle C. Heckel, Salt River Project (“SRP”) to the request f or additional information from Mr. Laurence Maurin, EPA Region 9, Air Permits Office, regarding a minor NSR permit application for a proposed Refined Coal Project at the Navajo Generat ing Station (“NGS”). SRP understands this request for information to relate to an evaluation of whether the proposed project should have been aggregated with a recently permitted project a t NGS, namely the MATS Controls Project. This memorandum supplements Mr. Heckel’s response b y addressing relevant EPA guidance on the issue of aggregation.

EPA’s guidance with respect to whether the two proj ects should be aggregated for the purpose of NSR permitting (typically, that guidance addresses two projects that together would have triggered major NSR, which is not the case her e) makes clear that the gravamen of the inquiry is an evaluation of the source’s intent—spe cifically, whether the source intends to circumvent NSR permitting—in undertaking two such p rojects. As EPA explained:

In the extreme case where the source has made a del iberate effort to circumvent PSD review (by the systematic constru ction of carefully sized emissions units which only in the a ggregate would trigger review) a permitting agency may, however, m ake a finding that PSD applies to the total plant. Such a finding would have to be
based on clear evidence that the source made a conscious effort to escape review by knowingly misrepresenting the intended source size through the calculated juggling of actual and scheduled
construction of emission units.

EPA Memorandum, “Applicability of PSD to Portions o f a Plant Constructed in Phases Without Permits” (October 21, 1986). It is clear, however, from the information previously submitted to EPA, as well as Mr. Heckel’s response, that SRP has conceived of the two projects as completely separate, for two very different business reasons. Certainly, SRP was in no way seeking to subdivide a single project into smaller subsets to avoid permitting. There is no evidence that SRP was seeking to circumvent the minor NSR permitt ing rules or the PSD rules (which would not apply even if the two projects were considered together).-2-

In the 3M Maplewood applicability determination, EP A Memorandum, “Applicability of
New Source Review Circumvention Guidance to 3M - Ma plewood, Minnesota” (June 17, 1993) (“3M Maplewood Memorandum”), EPA set forth criteria that it uses to evaluate the source’s
intent. We address these criteria below.

1. Filing multiple permit applications within a sh ort period of time.

At the outset, with respect to this factor, we note that the facts here are very different from those in the 3M Maplewood Memorandum. There, 3 M had received 12 minor NSR permits and filed several more such applications wi thin the span of 18 months. Here, there are only two projects. Furthermore, as the 3M Maplewoo d letter explains, proximity in time is in no way determinative. Rather, it is a reason for furt her scrutiny (which may well be the reason for EPA’s inquiry in this case)—to determine whether th e two projects are so interrelated as to constitute, in reality, a single project. Indeed, EPA has in the past found that two synthetic minor permits for two entire electric generating units at the same site, filed within a year of each other, could proceed separately, where the specific facts demonstrated that the projects were in fact
separate. See Memorandum, “PSD Applicability for Frederickson Po wer L.P.” (Oct. 12, 2001) (“Frederickson Memorandum”).

In 3M Maplewood, it was not just the sheer number o f minor permits that led EPA to conclude these projects we interrelated. Rather, i t was that “given the nature of this source, under normal conditions, a certain level of product ion or research development of new products can be expected.” Because the nominally-separate m ore than a dozen projects in the span of 18 months were collectively “consistent with the sourc e’s overall production goals or plans for a short planning period,” EPA found those projects in terrelated enough to require permitting as a single project. Here, as explained more fully in M r. Heckel’s response, the MATS Controls Project was designed and constructed to ensure the plant’s compliance with MATS. The Refined Coal Project is being undertaken for a wholly diffe rent and independent business purpose: to
secure federal tax credits for such activities. Th e MATS Controls Project is arguably related to the plant’s production goals, in that it is necessa ry for continued operations in compliance with MATS. The Refined Coal Project has no relationship to, or impact on, the plant’s production of electricity, whatsoever.

2. Application for funding

The 3M Maplewood Memorandum explains:

Applications for commercial loans, or, for public u tilities, bond issues, should be scrutinized to see if the source has treated the projects as one modification for financial purposes . If the project
would not be funded or if it would not be economica lly viable if operated on an extended basis (at least a year) wit hout the other projects, this should be considered evidence of cir cumvention.

Here, the two projects were conceived separately, a nd were funded separately. The funding of one does not depend on the other, in any way. And the economics of the two projects are completely independent. The MATS Controls Proj ect is economically viable, regardless of whether the Refined Coal Project is constructed, no t just for one year, but for the life of the plant. Indeed, it is essential for the plant’s compliance with MATS. The Refined Coal Project is-3-

completely independent of MATS compliance. In fact , the Federal tax credit that is the driver for that project in no way references MATS or is pa rt of the strategy for MATS compliance. Finally, as explained earlier, the economics of the Refined Coal Project are exclusively and completely driven by the Federal tax credit. If th at credit expires or otherwise terminates, SRP would probably discontinue the Refined Coal Project

. 3. Reports on Consumer Demand and Projected Produc tion Levels

The 3M Maplewood Memorandum explains:

Stockholder reports, reports to the Securities and Exchange Commission, utility board reports, or business perm it applications should be reviewed for projected operation or produ ction levels. If reported levels are necessary to meet projected con sumer demand but are higher than permitted levels, this is addit ional evidence of
circumvention.

To the extent this factor is applicable here, we no te that SRP’s MATS compliance strategy in no way relies on the Refined Coal Proje ct. The MATS Controls Project was designed and permitted to comply with the MATS Hg limits ind ependently and in the absence of the Refined Coal system. In other words, the technical viability of the MATS Controls Project is in no way dependent on the Refined Coal Project. No c ompany statements, whether to inside or outside entities, would contradict these facts.

4. Statements of Authorized Representatives of the Source Regarding Plans for Operation

According to the 3M Maplewood Memorandum,

Statements by representatives of the source to EPA or to State or local permitting agencies about the source's plans for operation can be evidence to show intent to circumvent preconstru ction review requirements.

This factor presumably applies where the source’s s tatements regarding its plan for operation are inconsistent with a piecemeal permitt ing approach for the projects needed to achieve that plan. That is clearly not the case he re.
5. The economic realities of the projects consider ed together

The 3M Maplewood Memorandum explains that this fact or considers the “intrinsic relationship” of the two projects and “their impact on the economic viability of the plant.” As is evident from the discussion above, there is no intr insic relationship between the two projects. They have entirely different drivers and business p urposes, and each is economically and technically independent of the other. While the MA TS Controls Project, in and of itself, is essential for the continued compliance of the plant with MATS, the Refined Coal Project has no impact whatsoever on the economic viability of the plant, whether considered separately or together with the MATS Controls Project.

* * * * *-4-

EPA has repeatedly made clear that “a source’s inte nt is central to an evaluation of whether two projects may be permitted under two min or source permits or whether they must be permitted under a single PSD permit.” (Frederickso n Memorandum, at 7.) A single permit is required only where “ clear evidence exists demonstrating an intent” by the source to c ircumvent NSR permitting. Id. (emphasis added). Here there is clear evidence th at SRP did not in any way intend to circumvent the permit rules. As the anal ysis above demonstrates, the MATS Controls Project and the proposed Refined Coal Project are t wo separate projects—they have different drivers and business purposes; they were planned an d funded independently of each other; and they are completely independent, both economically and technically. Accordingly, these two projects are properly permitted separately, under t he minor NSR rules as well as the PSD rules. 1

1 The PSD rules would not apply in any event, as the two projects together would result in emissions that are substantially less than the P SD significance thresholds. This is a further reason for not aggregating the two projects, as BAC T would not apply in any event. Cf. Frederickson Memo (noting that, in that case, PSD p ermitting would not result in additional controls, as the state minor permits required BACT already, and finding this further supported a
conclusion that the source had no intent to circumv ent).