To: Editors, News Directors

Date: February 28, 2003

For: Immediate Release

ACC Approves Launch of Competitive Solicitation for Electricity
Decision Ushers In Fair, Unbiased Wholesale Competition

PHOENIX - Regulators approved the start of a competitive wholesale power solicitation after two days of deliberations on amendments designed to protect utility ratepayers and the environment.

Yesterday's decision stems from the Track A Order - the Arizona Corporation Commission's order on the first group of issues related to electric competition - requiring that Arizona Public Service (APS) and Tucson Electric Power (TEP) procure, through a competitive solicitation process, the power required to serve their customers that cannot be produced from their own existing assets. The competitive solicitation process is set to begin by March 1, 2003. (The Track A decision is Commission decision number 65154 September 2002, see news release at http://www.cc.state.az.us/news/pr08-28-02.htm.)

The Track B Process is designed to lay a framework for the competitive wholesale market by setting parameters and procedures for wholesale energy procurement. As a result of the Track B Process, consumers should receive the benefits resulting from the least cost mix of power. Amendments adopted yesterday will ensure that the environmental impacts of generation begin to be measured and evaluated. Arizona will be a national leader in evaluating the environmental impacts measured against economic costs. APS and TEP will be required to evaluate both the impact on the wholesale market, and the environmental effects of their procurement decisions.

In compliance with the Track A Order, interested parties and Commission staff worked to develop a competitive procurement process, and reached consensus on many issues. A hearing, which lasted several days, was held on the unresolved issues in late November 2002.

The order largely adopts the proposed solicitation process outlined in an October 25, 2002 staff report, and requires APS and TEP to test the competitive generation market in the solicitation.

An independent monitor will oversee the entire solicitation process and will continue to be involved throughout the process, along with Commission staff. An independent monitor will conduct a post-evaluation review of the process. Page 10 of Hearing Division Amendment 1 (http://www.cc.state.az.us/utility/electric/track-b-amend-02-04-03.pdf ) discusses a few of the duties of the independent monitor.

The order adopts staff's estimates as the amount to be solicited. These numbers are only estimates, subject to finalization in the pre-solicitation process. The chart listed as Exhibit B on the Hearing Division Amendment 1 offers an indication of what the solicitation amounts might be. To view this chart, click on http://www.cc.state.az.us/utility/electric/track-b-amend-02-04-03.pdf and scroll to the next to last page of the report.

One component of staff's estimates, reliability must-run generation, or RMR, will be updated by ongoing studies on transmission constraints and RMR to be filed by APS, TEP and the Western Area Power Administration (WAPA).

Staff and an independent monitor will review the RMR studies, as well as interested parties' comments about those studies, prior to the finalization of the RMR component of the solicitation figures.

The order requires APS and TEP to analyze all bids received, but does not dictate the solicitation method to be utilized. APS and TEP are not required to accept bids that are unreasonable, uneconomical or unreliable.

The Commission specified that the utilities' goal should be to obtain for their customers the least-cost mix of reliable power over the long term, while being mindful of the environmental effects of their procurement decisions.

Because APS has a competitive affiliate offering power on the wholesale generation market, the decision imposes conduct requirements on APS to protect the integrity of the initial solicitation process. The decision also reiterates the Track A Order's requirement that hearings be held on revisions to the utilities' Codes of Conduct, to further address affiliate issues.

Key Amendments

> Inspection of Generating Facilities - The first part of Mundell Amendment 4 will allow Commission inspections of generating facilities. This is a safeguard to ensure "that any claimed outages by a successful bidder are legitimate and not used as a tool for market manipulation." Additionally, each bidder must provide a written assurance that it will not engage in market manipulation. The second part of the Mundell amendment deals with what happens if there are allegations that the safeguards against market manipulation are violated. The amendment gives the Commission the ability to take action including, but not limited to: imposing penalties and/or fines; rescinding contracts and/or excluding wrongdoers from future power bid solicitations.

> Integrated Resource Planning - An amendment passed that eliminates a requirement for the study of integrated resource planning. (Spitzer 4)

> Codes of Conduct - Amendments passed that are designed to clarify and reinforce codes of conduct between APS and its affiliates, including Pinnacle West and Pinnacle West and Pinnacle West Energy Corporation. The amendments prohibit contact among affiliate employees that might be related to the Track B solicitation process. The Commission's goal is to ensure that no employees of APS, Pinnacle West or PWEC engage in activity that could be preferential or discriminatory and would thereby interfere with a fair, unbiased solicitation process.

> Procurement Methods - An amendment encouraging the parties to consider diverse procurement methods in future solicitations, including auctions, passed unanimously. (Spitzer 5)

> Future of the AISA - The Commission passed an amendment sponsored by Commissioner Mundell to require a study of the need for and value of continuing funding for the Arizona Independent Scheduling Administrator (AISA).

> Environmental Effects of Procurement Decisions - This amendment clarifies the intent of the Commission order, which orders APS and TEP to quantify the environmental effects of their power procurement decisions. The utilities, in an open forum with other interested parties, are required to develop objective assessment criteria to evaluate the environmental impacts of running various types of generating stations around the state or in the west. The goal is to balance the economic costs with an accurate, reliable assessment of the environmental impacts of solicitation decisions. (Portions of Spitzer 8 and Gleason 5)

> Demand Side Management & Environmental Risk Management - The order requires the Commission to hold workshops to explore the development of a demand side management policy and environmental risk management policy. The workshops would also examine the possible costs and benefits of the respective policies. The Commission staff will facilitate a series of workshops and file a progress report within 12 months of this Commission order. (Staff 2)

> Rejection of Bids - Commissioner Hatch-Miller offered an amendment aimed at protecting consumers from unreasonable wholesale prices, such as those seen during California's deregulation debacle. His amendment allows the utilities to reject bids if they are unreasonable, uneconomical or unreliable. Commissioner Gleason offered an amendment to deal with the unlikely event that a utility rejects all bids. The Gleason amendment requires a utility to notify the Commission by filing a detailed, written explanation within 72 hours if the utility rejects all bids. The Commission may take whatever action it deems necessary at that time.

> Reliability Must Run Generation (RMR) - Grossly simplified, this refers to the need for certain generating plants to run because conditions exist within a specific region during certain hours when the system load exceeds the ability to import power due to transmission constraints or imbalances in system voltage.

In the context of local generation, APS has identified RMR conditions in the Phoenix and Yuma load pockets. Amendments were discussed that could have temporarily eliminated RMR from the 2003 bidding or segregating the RMR component into a separate bid. After a great deal of discussion, the changes were not made, instead, the Commissioners affirmed APS' and TEP's ability to reject unreliable bids for RMR.

Staff believes there could be negative effects from delaying or segregating RMR from the solicitation because RMR typically represents the most expensive power and, therefore, offers the opportunity to obtain the greatest value through competition. The market test that will be take place as a result of the competitive solicitation process could reveal innovative solutions or relief for congestion.

A final order will be posted on the Commission's web page as soon as the amendments can be integrated, the Commissioner can sign the official order and it can be docketed. This may take a week to ten days as there were several detailed amendments and many were amended during the floor debate.

Comments from Commissioners

Commissioner Mike Gleason - "Today begins a phased-in approach toward full competition. This order has many safeguards in place to make sure that competition is open and unbiased. Our ruling will make sure the people of Arizona have a reliable energy supply at the lowest price."

Commissioner Jeff Hatch-Miller - "To protect Arizona's ratepayers and utilities, we have scaled back the requirements established by prior Commission decisions. We invited merchant power producers to come to Arizona and they came. They built modern, efficient power plants and now they're ready to bid. This is definitely not an affirmative action plan for the merchant plants. We're not trying to tip the balance in one direction or the other - we are establishing a level playing field."

Commissioner Bill Mundell - "The Commission started a review of deregulation in November 2001, when I wrote a letter expressing my concerns. Then, as now, I wanted to ensure that Arizona will not experience the same problems that occurred in California - bankrupt utilities, rolling blackouts and skyrocketing prices. By instituting the revisions embodied in the Track A decision and now the Track B decision, we are protecting ratepayers while still ensuring that consumers benefit from state-of-the-art, environmentally-friendly, highly efficient power plants that are being constructed today."

Commissioner Jim Irvin - "It's no secret that I have had problems with the deregulation path we laid out and I have been calling for its review since 1999. I believe this review was absolutely necessary and I am pleased that the Commission has taken a cautious path to review the wholesale electric market, which will give us the flexibility to see its impact on the retail market in the future. The independent monitor and our staff will play an important role in ensuring that the process is fair, unbiased and will adequately protect Arizona's consumers."

Chairman Marc Spitzer - "I appreciate the hard work of my colleagues and Administrative Law Judge Wolfe. Government has a responsibility to balance competing interests. We have the interests of the merchant plants that came to Arizona and invested in an infrastructure that is the envy of the Western Interconnection. And we have the interests of the utilities that have invested in their own assets and are required to provide reliable power to their customers. And, most important are the interests of Arizona's ratepayers, who expect us to ensure that they receive reliable power at a reasonable price. Today's decision marks a win for the ratepayers of Arizona, fair treatment for the merchant generators and utilities and is big win for the environment."