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Agenda Number 6.

Navajo Surplus helps fund CAP's repayment obligation, which, in turn helps fund Indian water rights settlements; however, the repayment obligation is due with or without assistance from the sale of Navajo Surplus.

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1977 – Congress substantially amended the Clean Air Act (CAA). The amendments included section 169A, which declared "as a national goal the prevention of any future, and the remedying of any existing, impairment of visibility in mandatory class I Federal areas," such as national parks. Congress required EPA to adopt regulations to assure "reasonable progress toward meeting th[is] national goal." Measures for achieving reasonable progress were to include best available retrofit technology or "BART" for certain existing stationary sources and a long-term strategy.

1979 – EPA identified 156 mandatory Class I Federal areas, including Grand Canyon National Park, which is the closest to NGS. Other nearby Class 1 areas include Capital Reef National Park and Canyonlands National Park, located in Utah.

1980s – In 1980, EPA adopted visibility regulations under section 169A of the Act. The regulations adopted a "phased approach to visibility protection." The first phase addressed visibility impairment "that can be traced to a single stationary facility or a small group of stationary facilities." EPA deferred addressing other types of visibility impairment, such as "regional haze" caused by a multitude of sources.Most states failed to timely submit state implementation plans (SIPs) for the new regulations and in 1987 EPA disapproved the SIPs of 29 states, including Arizona, for failing to comply with the visibility regulations. Over the next few years, EPA investigated visibility impairment at several class I areas, including Grand Canyon National Park.

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1990 – Congress again amended the Clean Air Act, adding section 169B, which required, among other things, that EPA undertake research to identify "sources" and "source regions" of visibility impairment in class I areas and establish a visibility transport commission for Grand Canyon National Park.

1991 - EPA revised the federal implementation plan (FIP) for Arizona to address wintertime visibility impairment at the Grand Canyon that it claimed was associated with SO2 emissions from NGS. EPA's final rule required a 90% reduction in SO2 emissions. CAWCD challenged that rule, but the rule was upheld by the U. S. Ct. App. (9th Cir.). Salt River Project installed SO2 scrubbers at NGS at a cost of over $400 million.

1999 – After issuing a proposed rule in 1997, EPA issued its final regional haze rule (RHR). The rule required that all states submit an implementation plan that provides for reasonable progress toward achieving "natural background conditions" in Class 1 national parks and wilderness areas by 2064. The rule required states to identify sources subject to BART requirements and then determine what constitutes BART for each such source.

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2005 – After the U.S. Ct. App. (D.C. Cir.) overturned the RHR in 2002 as contrary to the CAA (including because it forced the states to require BART controls at sources without any empirical evidence of the particular source's contribution to visibility impairment in a Class I area), EPA revised its regional haze rule and issued guidelines for making BART determinations. The rule calls for imposition of BART if a source "may reasonably be anticipated to cause or contribute to any impairment of visibility in any mandatory Class I Federal area." In determining BART for a particular source, the states (and EPA) must consider five factors, including the cost of compliance and the degree of visibility improvement which may reasonably be anticipated to result from the use of the technology. The guidelines include presumptive limits for nitrogen oxides (NOx) emissions from large coal-fired power plants, and say that these presumptive limits "are extremely likely to be appropriate" for such plants. "Based on our analysis of emissions from power plants," EPA said, "we believe that applying these highly cost-effective controls at the large power plants covered by the guidelines would result in significant improvements in visibility and help to ensure reasonable progress toward the national visibility goal." EPA's presumptive limits are based on the use of combustion controls, such as low-NOx burners, at such plants, not substantially more expensive post-combustion controls.

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SRP BART ANALYSIS – 2008: Based on an evaluation of the five statutory factors, SRP concluded that BART for NGS can be achieved by installing Low-NOx Burners and Separated Overfire Air (LNB/SOFA) on all three units. The primary basis for this conclusion is that the cost of the more stringent NOx control option, Selective Catalytic Reduction (SCR), is more than 10 times the cost of LNB/SOFA (over $500 million), and is only predicted to result in limited visibility improvement relative to LNB/SOFA. Accordingly, SRP concluded that SCR cannot be justified as BART.

SRP further identified a potential requirement for installation of polishing baghouses to remove fine particulates formed as a result of the chemical reactions in the flue gases that would result from SCR installation. Such additional baghouses could push the total cost for additional pollution controls to $1.1 billion or more.

EPA disagreed with SRP’s BART analysis and made several major revisions to key inputs used to model the visibility impacts of the alternative NOx controls, resulting in a determination that the addition of SCR to LNB/SOFA would improve visibility at GNCP by 1.89 deciview (dv), by 2.04 dv at Capitol Reef and by over 1.0 dv at 4 other of the 11 Class 1 areas modeled.

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• Prior to 2009, NGS used close-coupled overfire air (CCOFA) to control NOx emissions to a level of 0.40 lbs/MMBtu.

• Early and voluntary installation of Low NOx Burners with Separated Overfire Air (LNB/SOFA) was completed in 2011 at a cost of $45 million. NOx emissions were reduced plant-wide to about 0.21lbs/MMBtu – a 40% reduction.

• EPA is now proposing that Selective Catalytic Reduction (SCR) technology be installed at NGS at a cost of $589 million, to reduce NOx emissions to 0.055 lbs/MMBtu on a 30-day rolling average – an 84% reduction in NOx emissions per the EPA from current conditions.

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EPA has applied the five factors required for BART determination to the proposed FIP for NGS as follows:1. Cost of compliance is expressed as the total capital cost of controls, the total annual cost of controls (annual operating

costs plus amortized capital costs), and the cost effectiveness of controls expressed in cost per ton of pollutant reduced ($/ton).

2. Energy and Non-Air Quality Impacts: This is an examination of whether the use of control technology would result in direct energy penalties or benefits, and whether there are environmental impacts other than air quality due to emissions of the pollutant in question or due to the control technology. In the case of NGS, EPA considered “affordability” in the BART analysis and also included an analysis to examine the viability of NGS’ continued operation if new NOx controls are required. This analysis compares electricity generation costs after installing new NOx controls at NGS against the cost to purchase an equivalent amount of power on the wholesale market. EPA also included an analysis to estimate potential indirect impacts to ratepayers who use electricity supplied by SRP or water supplied by CAP.

3. Existing controls at the facility: NGS is currently equipped with SO2 scrubbers, installed in the mid-1990s at a cost of $420 million, and LNB/SOFA installed from 2009-2011 at a cost of $45 million.

4. Remaining useful life of the facility: EPA proposed a useful life of 20 years as the “default for amortization purposes,” recognizing that the plant owners are engaged in negotiating the lease renewal for a period to end in 2044.

5. Degree of visibility improvement: As stated in the proposed FIP, “The BART guidelines recommend using the CALPUFF air quality dispersion model to estimate the visibility improvements from alternative control technologies at each nearly Class I area, typically those within a 300 km radius of the source, and to compare these to each other and to the impact of the baseline (i.e., current) source configuration”. For this analysis, EPA uses a deciview scale, which is a measure of visibility impairment.

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Revisions to the Regional Haze Rules after 1999 allow EPA to promulgate alternatives to BART, provided the alternatives result in greater reasonable progress than will result from installation and operation of BART.

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Alternative 1 provides credit for voluntary NOx reductions. SRP’s early and voluntary installation of LNB/SOFA over the 2009-2011 timeframe resulted in more NOx emissions reductions during the 2009-2018 period that if LNB/SOFA were installed concurrently with SCR by 2018. EPA is proposing to apply these NOx emissions reductions as a credit in the analysis of BART alternatives.

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Alternative 2 and 3: As the compliance dates under a given alternative extend further into the future, the NOx emission reduction deficit increases. As a result, Alternative 2 requires further reduction of 15,179 tons of NOx emissions over the life of the plant (for example, this equates to 1,518 tons per year over a 10-year period from 2013-2023 or 490 tons/year over 2013-2044). Alternative 3 requires an additional reduction of 33,160 tons of NOx emissions, equating to 3,015 tons/year from 2013-2024 or 1,070 tons/year over 2013-2044.

EPA recognizes the rule may not be finalized until 2014, shifting compliance timeframes by one year for all alternatives.

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The Clean Air Act states that EPA “shall take into consideration…the degree of improvement in visibility which may reasonably be anticipated to result” from use of proposed BART technology. There is no justification for installing SCR or other control technologies at a price tag of $500 million to $1.1 billion, as there is no known or expected effect on regional visibility that can reasonably be anticipated to result. The pollution control system currently in place at NGS, including LNB/SOFA, is BART.

A decision on whether baghouses are required would be made by EPA during the permitting process for SCR, which would not occur until two years prior to construction.

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National Renewable Energy Laboratory, Navajo Generating Station and Air Visibility Regulations: Alternatives and Impacts, January 2012; Executive Summary, page iv: “The body of research to date (summarized in this report) is inconclusive as to whether removing approximately two-thirds of the current NOx emissions from Navajo GS would lead to any perceptible improvement in visibility at the Grand Canyon and other areas of concern.”

The Technical Support Document (TSD) dedicates only two paragraphs to Non-Indian Agriculture, relying primarily on information provided by CAWCD. In the short discussion, EPA notes that NIA users gave up long-term entitlements to CAP as part of the Arizona Water Settlement Act of 2004 but goes on to indicate that it is unclear how long NIA users expect to continue using CAP water and whether they can legally return to groundwater or whether they will be forced to "cease operations" when CAP is no longer available to them.

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EPA is specifically requesting comment on whether NGS can maintain its 3-year outage cycle with four layers of catalyst to meet a limit of 0.055 lbs/MMBtu and on the adequacy of the margin of compliance provided by the plant.

Both the proposed FIP and the technical document contain lengthy discussions about tribal interests. The technical document provides a listing of each tribe’s CAP allocations and notes. Additionally, it provides a narrative tribe-by-tribe discussion of water related impacts and requests additional information from all tribes within Arizona, except for Pueblo of Zuni, situated primarily in New Mexico.

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This graph is based on extremely preliminary estimates and is likely to change substantially. It is intended to be conceptual to illustrate the discussion on previous slides, not to describe any particular price levels or trends.

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The public comment period began on February 5th with publication of the proposed FIP in the Federal Register.

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On January 4, 2013 the Department of Energy, Department of the Interior and the Environmental Protection Agency released a Joint Federal Agency Statement Regarding Navajo Generating Station, laying out “the goals of the three Agencies with respect to NGS and energy production in the region currently served by NGS,” including specific actions as follows:

1. Create a long-term DOI-EPA-DOE Navajo Generating Station Working Group

2. Work with stakeholders to develop a Navajo Generating Station roadmap

3. Complete the Phase 2 report on Navajo Generating Station clean energy options

4. Support shorter term investments that align with long term clean energy goals

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