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Off the hook

March 24, 2006 by  
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Proposed settlement releases Peabody from penalty for damages to resources

By Kathy Helms
Diné Bureau

WINDOW ROCK — A proposed settlement agreement to keep Peabody Western Coal
Co. operating on Black Mesa and return Mohave Generating Station to service
would give the feds control over the C-Aquifer project and dismiss all claims
against Peabody for injury to groundwater in the lease area.

A March 7 confidential draft document of recommended noneconomic terms
proposed in the Mohave mediation between the Navajo Nation, Hopi Tribe, Peabody,
and the owners of Mohave Generating Station and Navajo Generating Station
assumes the U.S. Bureau of Reclamation will operate the C-Aquifer Project,
subject to reimbursement of Mohave owners.

The proposed agreement also calls for approval by Congress of Navajo and
Hopi coal leases and grants under the “Navajo-Hopi Coal Leasing Settlement Act.”

The draft memorandum states that the proposed noneconomic terms represent
the agreed result of the mediation but that there are no assurances those terms
will be adopted by any of the parties.

After execution of the proposed terms, Mohave and Navajo Generating Station
owners would make a one-time grant of $150,000 to both the Navajo and Hopi
tribes “to be used for social service programs for which funding has been
reduced as a result of the shut-down of Mohave Generating Station operations.”

The proposed agreement would allow Mohave, located in Nevada, to use
Navajo-Aquifer water for backup purposes, limited to the amount in an N-Aquifer
Bank. Terms of the N-Aquifer Bank call for 8,000 acre feet upon Mohave’s return
to service, with an “annual increase to balance of 1,500 afy (acre feet per
year) for the first six years and 1,000 afy thereafter.”

The maximum balance at any one time would be 18,000 acre feet with maximum
annual withdrawals of 5,000 afy.

Peabody estimates it will use 500 afy of N-Aquifer water for well
maintenance, domestic uses at the Black Mesa and Kayenta mines, and the Many Mules
Project, which could establish a local utility on Black Mesa akin to Navajo
Tribal Utility Authority.

The 500 afy pumped by Peabody would not be deducted from the N-Aquifer Bank
balance and would not be subject to the proposed surcharges of between $1,500
and $2,000 an acre foot per year for N-Aquifer Bank water use.

Instead, Peabody will pay a non-surcharge royalty rate of $750 per acre foot
for its use of N-Aquifer water. The company’s draw on N-Aquifer water for
the Kayenta mine would not be limited to amounts in the N-Aquifer Bank and
would not be deducted from the bank, according to the draft.

The company’s use of water from surface impoundments within the Peabody Coal
lease area for Mohave use would not be limited by the settlement agreement.

Mohave owners also could obtain up to 5,000 afy of water in any calendar
year from C-Aquifer wells located on the Hopi Hart Ranch and would pay the Hopi
Tribe $880 per acre foot for the first 667 acre feet used annually for Mohave
and $500 per acre foot for any remaining water used.
Definitive agreements

Prior to execution of any definitive agreements, the tribes will conduct a
due diligence review of Peabody’s past operations as deemed necessary “to
grant the waivers of certain natural resources damages claims … ”

Peabody’s responsibility is to “respond in good faith to reasonable requests
by the Tribes in their due diligence process.”

A Mohave Extension Option Payment would be increased from $1 million to $3
million, payable to the tribes upon execution of the Definitive Agreements.
Other extension option payments will be made quarterly and are not retroactive
to periods predating execution of the Definitive Agreements.

Mohave and Navajo Generating Station owners will establish education funds
of $250,000 per tribe to be used for scholarships, educational programs, or
other activities related to the preservation of tribal cultures.

The tribes will agree not to grant third parties any rights to use the
C-Aquifer or the N-Aquifer that would interfere with Mohave’s owners’ ability to
make the “Decision to Proceed.”

The proposed agreement calls for execution by the Secretary of the Interior
of grants for the C-Aquifer Project and Black Mesa Pipeline; approval by the
Secretary of leases for the C-Aquifer Project and amendments to Peabody coal

Decision to proceed
Once the Definitive Agreements have become effective, Mohave owners will
decide whether to proceed with extension of its operations. Should owners decide
to proceed, they will make initial payments to the tribes of $5 million for
C-Aquifer rights-of-way.

Additionally, Mohave will pay the Navajo Nation $1.725 million and the Hopi
Tribe $1.275 for Black Mesa Pipeline rights-of-way. Navajo would be paid $2.5
million annual in lieu of taxes and the Hopi, $1.25 million. The Hopi Tribe
also would be paid $2.5 million for a J-23 right-of-way.

Should Mohave decide to proceed, the tribes “shall cooperate with
construction of the C-Aquifer Project,” with Mohave owners loaning the Hopi up to $5
million at 5 percent interest to construct Hopi Hart Ranch wells, connection of
the wells to the C-Aquifer Pipeline, and upsizing of the pipeline.

The Hopi would repay the loan in five equal annual installments beginning in

The document states that the money also would be used to design, construct
and operate the C-Aquifer Project well field, which would have a capacity of
7,000 afy.

Of that amount, 1,000 afy would be dedicated to Navajo Nation on-reservation
domestic and municipal uses “and up to (amount not stated) afy for the 1.5
MW El Paso Natural Gas Waste Heat Generation Project to provide electric
service in the Leupp area.”

Either tribe may terminate the Definitive Agreements if Mohave owners have
not decided to proceed by July 1, 2008, otherwise, the Definitive Agreements
would end July 1, 2026.

Dismissal of litigation
According to the draft, the parties “will voluntarily dismiss with prejudice
(can’t be brought up again) all complaints, claims, and counterclaims”
asserted in the Racketeer Influenced and Corrupt Organization Act lawsuit and the
“Arizona Suit” upon Mohave’s return to service.

If there is no return to service, all payments received by the tribes would
be credited toward any judgment from the RICO lawsuit the Navajo Nation filed
against Peabody on June 18, 1999, in U.S. District Court for the District of

The complaint alleges that Peabody, two customers and two employees jointly
participated in unlawful activity to obtain favorable coal lease amendments.
The Nation is seeking actual damages of at least $600 million, which could be
tripled under the RICO counts, punitive damages of at least $1 billion, a
determination that Peabody’s coal leases for Kayenta and Black Mesa mines have
terminated due to Peabody’s breach of those leases, and a reformation of the
two coal leases to adjust the royalty rate up to 20 percent.

The Hopi filed a motion to intervene in the lawsuit in March 2000, alleging
seven claims, including fraud.

If Mohave owners do not complete the Navajo Well Field or the C-Aquifer
Pipeline, and instead transfer it to the tribes and they complete the projects,
or the projects are transferred “to or by the federal government in trust for
the tribes,” all money spent by Mohave owners on the projects would be
credited against any judgment, as would money spent to complete the Hopi Hart Ranch
well-field infrastructure.

The proposed agreement also would place a $35 million cap on the cumulative
damages liability of each tribe, MGS and NGS owners, and Peabody.

Settlement of claimsShould the RICO Suit be dismissed, the tribes and the
United States, as trustee of the tribes, “will waive and release any and all
claims against APS, Southern California Edison, Salt River Project, Nevada
Power, Tucson Electric Power, and LADWP for injury to underground water caused
by, or resulting from the withdrawal of underground water from wells located
within the surface area leased to Peabody” from Feb. 1, 1964, through and
including the effective date of the Navajo-Hopi Coal Leasing Settlement Act,
whether the injury occurs within or outside the boundaries of the coal leases.

Tribal authority
The proposal states that the tribes will retain their regulatory and
judicial authority over their tribal lands, except as it applies to Mohave owners in
connection with the construction, ownership or operation of the C-Aquifer

The tribes would not be able to establish any new or revised taxes or
special tax districts that apply to Peabody Coal leases in connection with the
operation of Black Mesa Mine or the C-Aquifer Project. The tribes also could not
exercise any criminal jurisdiction over Mohave owners, Peabody, any
non-Indian employee, officer or agent of the MGS owners.

The tribes would be required to allow the owners of the coal slurry pipeline
to abandon the pipeline in place after they have been purged of coal and
slurry water.

“To the extent the federal government agrees to operate the C-Aquifer
Project, the scope of any regulatory contractual provisions incorporated into the
Definitive Agreements shall be in accordance with federal law,” the draft

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