To: Editors, News Directors	Date: March 1, 2005
For: Immediate Release

Judge Issues Recommendation in APS Rate Case

Supports August 2004 Settlement with Some Modifications

PHOENIX – On August 18, 2004 the Staff of the Arizona Corporation Commission, along with APS and over 20 intervenors, entered into a settlement agreement that concluded five months of negotiations between more than 30 interest groups and consumer advocates.

Arizona regulatory procedure requires that a full hearing take place in front of an administrative law judge.  The hearing on the settlement agreement took place over eight days beginning in November and ending on December 3, 2004.  Summary briefs were filed on January 14, 2005.  The judge took sworn testimony from all of the participants and interest groups to test the merits of the agreement.

Late yesterday, the judge issued a Recommended Opinion and Order that recommends approval of the settlement with a few modifications.  The judge found that with those modifications, the agreement is in the public interest and represents a legally sound resolution to the rate case.  The next step will be for the Commissioners to meet in an Open Meeting to discuss and vote on the judge’s recommendation.  The Commissioners can accept, amend or deny the Recommended Opinion and Order.  The Recommended Opinion and Order is posted at http://www.cc.state.az.us/utility/electric/arc-index.htm.

Participants in the discussions represented various interest groups such as residential consumer advocates, low income customer advocates, merchant plants, electric service providers, the solar industry, environmental groups, and certain large commercial customers.  If adopted by the Commissioners, this agreement would resolve one of the largest and most complicated rate cases in the history of the Commission.

What changes did the judge recommend?

The administrative law judge made several changes to the Power Supply Adjustor (PSA) proposed in the settlement.  The Recommended Opinion and Order also specifically encourages demand response demand side management (DSM) programs using “advanced” or “smart” meters.  These judge’s changes are indicated by bullets under the relevant questions below.

Who were the parties entering into the settlement agreement?

More than 30 corporations, government or non-profit groups participated in the discussions.  As of this date, the following groups have signed onto the settlement.

Arizona Public Service Company

Arizona Community Action Association

Arizona Competitive Power Alliance

Arizonans for Electric Choice and Competition

Arizona Solar Energy Industries Association

Arizona Utility Investors Association

Bowie Power Station, LLC

Constellation NewEnergy, LLC

Dome Valley Energy Partners, LLC

Federal Executive Agencies

IBEW, AFL-CIO, CLC, Local Unions 387, 640 & 769

Kroger Co.

Mesquite Power, LLC

Phelps Dodge Mining Company

PPL Southwest Gen. Holdings LLC

PPL Sundance, LLC

Residential Utility Consumer Office

Southwest Energy Efficiency Project

Southwestern Power Group II

Staff, Arizona Corporation Commission

Strategic Energy, LLC

Western Resource Advocates

Would the adoption of the settlement increase rates?

Slightly.  The settlement agreement calls for a modest, base rate increase of approximately 3.77 percent, the first increase to APS customers in over a decade.  The negotiated increase is significantly smaller than the 10 percent increase APS requested in its original filing in June 2003.  APS originally requested approval to increase its base rate revenues by $166.8 million, plus add a surcharge of $8.3 million to collect deferred costs related to competition for a total increase of 9.8 percent.

The settlement agreement reduced the base rate increase to $67.6 million and the surcharge to $7.9 million.  With the surcharge and the base rate increase, the practical effect will be a 4.21 percent increase in the revenue requirement.  Because there are more than two dozen different rate schedules, the net effect for each class of customer will depend on how the customer uses electricity, what rate plan they have selected, the time of year (APS has and will continue to have winter rates and summer rates) and the area in which the customer is located.

The $7.9 million surcharge is the temporary Competition Rules Compliance Charge which recovers APS’ costs of compliance with the Electric Competition Rules which have accumulated over several years.  This charge would recover approximately $7.9 million per year over a five-year period.  When a total of $47.7 million, plus interest, is collected through the Competition Rules Compliance Charge, the charge would end.  Even with the proposed increase, rates will be lower than they were in 1990.

APS recently had an outage at Palo Verde and a transformer fire.  Did those events affect rates?

No.  Rate cases are based on audits and review of a specific 12 month period of time.  The test year for this case was 2002.  None of the costs incurred by APS for purchased power related to the recent outage at Palo Verde, the transformer fires or the cost of the new transformer would be reflected in the new rates.  Since those costs occurred after the test year, they are not under consideration in this rate case.

Can you give an example of what a residential bill might be?

Excluding taxes and franchise fees, the bill for average residential monthly usage (Rate E-12) would increase from $62.14 to $64.26, or 3.41 %.  Residential customers’ bills may vary from this average depending upon usage, season and franchise fees in their area.  Taxes are not included because they vary by area.

How are low-income customers affected?

The settlement agreement insulates eligible low-income customers from a rate increase.  Therefore, nearly all eligible low-income customers would receive a net reduction in base rates.  The agreement adopts a larger discount on APS rates for this group.  For example, qualifying low-income customers using 401 to 800 kilowatt hours currently receive a 20 percent discount.  That discount would increase to 26 percent if the agreement is approved.  In addition, APS would devote up to $250,000 for low-income bill assistance.

In APS’ direct testimony, the company requested an “across the board” increase that did not acknowledge differences in the cost of serving the various customer classes.  The settlement agreement acknowledges those cost differences and assigns revenue requirements to the customer classes in a manner which better reflects the cost of service.

What is the rate of return on equity agreed upon by the parties?

The parties have agreed that rates should be set using a return on rate base which includes a return on equity of 10.25 percent, less than APS’ requested return on equity of 11.5 percent.

One of the central issues in this case was how to treat the power plants built by APS’ parent company, Pinnacle West.  How does the settlement resolve this issue?

The agreement addresses the ownership and current and future rate treatment of power plants belonging to APS’ affiliate, Pinnacle West Energy Corporation.  These plants are West Phoenix 4 and 5, Saguaro 3, and Redhawk 1 and 2 generating stations.  APS currently operates some of the facilities and purchases significant portions of their electricity output.  In its application, APS requested approval to own the plants and have them rolled into rate base at a transfer price of $882 million.

The agreement proposes the transfer of the assets to APS and inclusion in APS’ rate base at the reduced amount of $700 million.  The reduction in the rate-making value of the assets was made in part to ensure that the consumer benefits obtained through the Commission-ordered competitive bidding process are preserved for ratepayers – i.e. power procured at lower prices through competitive bidding.  If the power plants were to be included in rates at book value, as APS requested, the proposed rate increase would have been significantly larger.

Merchant power generators – power plants constructed to supply power on a wholesale basis to large users like utilities and bulk power users – were heavily involved in the discussions.  How does this proposal satisfy their concerns?

To settle matters relating to competition and the procurement of APS’ power from the competitive market, the parties agreed that APS would not build new, large, central station generation with an in-service date before 2015, subject to a safety mechanism that permits APS to seek an exemption from the Commission if the wholesale market cannot cost effectively meet the needs of APS’ customers.

There are no proposed restrictions against APS acquiring a generating unit from a non-affiliated owner.  Furthermore, APS would be permitted to enter bilateral contracts for portions of its power supply.  According to the agreement, APS would issue a request for proposal or other competitive solicitation no later than the end of 2005 to buy long-term power of not less than 1,000 megawatts for 2007 and beyond.

Many utilities throughout the country have adopted power supply adjustors (PSAs) to account for periodic changes in the cost of fuel and wholesale power.  How does the settlement resolve this issue?

The parties agreed that APS should institute a Power Supply Adjustor to collect fuel and purchased power costs that are above those experienced during the 2002 test year.  The mechanism would also work in reverse – as a refund to customers if fuel and purchased power costs are below those experienced during the test year.

The adjustor rate would initially be zero and change, if necessary, on April 1 of each year.  The change in the adjustor would be limited to plus or minus four tenths of a cent per kilowatt hour ($0.004 per kilowatt hour).  The Agreement specifies the information to be filed by APS and does not alter the Commission’s traditional opportunities to review APS’ fuel and purchased power costs and to determine whether the purchases were prudent.

The judge’s Recommended Opinion and Order modifies this provision.

· The judge puts a limit on the amount of “annual gas costs” that can be used to calculate the annual PSA charge to no more than $500,000,000.  Any gas costs above that level will not be recovered from ratepayers through the PSA.  This “cap” on gas costs will further encourage APS to manage its costs, and will help to prevent large account balances from occurring in one year.  Since there is no moratorium on filing a rate case, APS can file a rate case to reset its base rates if it deems it necessary when that cap is reached.

· Although the Settlement Agreement provides that the PSA will be in effect for five years, if APS files a rate case prior to the expiration of that five year term or if the Commission finds that APS has not complied with the terms of the PSA, the Commission can eliminate the PSA, if appropriate.

· No fuel costs from 2005 that were incurred prior to the effective date of the Commission’s Decision will be included in the calculation of the PSA implemented in 2006.

· APS must submit its PSA Plan of Administration for Commission approval.

· APS must implement a customer education program explaining how its PSA will work and maintain on its website information explaining the billing format, rates, and charges, including up-to-date information about the PSA and current gas costs.

· These additional provisions to the PSA will help to lesson the detrimental impact to ratepayers of this change to an adjustor mechanism.

Is there a similar adjustment mechanism to account for any Federal Energy Regulatory Commission (FERC) changes to the transmission tariffs?

Yes, but as above, the adjustor would be initially set at zero.  APS must bill itself and its potential direct access customers for transmission service at Open Access Transmission Tariff rates that are filed with and approved by FERC.  The parties agreed to a Transmission Adjustor that would be implemented if and when FERC changes the Open Access Transmission Tariff to a level above or below the test year level.  The adjustor would ensure that potential direct access customers would pay the same for transmission as standard offer customers.

Environmental issues were the subject of a great deal of the pre-filed testimony.  In what ways does the proposal satisfy the environmental concerns raised during the case?

Several environmental issues were resolved and embodied in the agreement.  These issues will be addressed in the next several questions and answers.  Many parties had a particular interest in the issue of demand-side management (DSM).  DSM programs seek to reduce demand on the customer side of the meter through energy efficient construction or by replacing high-energy use products with newer, more efficient models.

The agreement calls for a large increase in expenditures for energy-efficiency DSM.  Compared to test year DSM spending of approximately $1.0 million, the settlement calls for $10.0 million of DSM-related projects to be financed through the base rate revenue increase.  An additional $6.0 million of projects would be financed through an adjustor mechanism.  In total, APS must spend at least $48 million on DSM during the next three years.  Once the Commission approves a DSM program, APS must initially fund the program out of their corporate coffers.  Anything expended above the $10 million will be recovered through the adjustor mechanism.

Can anyone other than APS submit energy efficiency programs for Commission consideration?

Yes, if approved, the settlement establishes an advisory group that will work with APS to identify and recommend energy efficient demand side management programs to the Commission.  Staff will conduct an independent review of the advisory group’s recommendations and provide its findings to the Commissioners for consideration.

Will more money be spent on low-income weatherization programs?

Yes.  Up to $1.0 million of the DSM allowance would be used for low-income weatherization programs.

Are any specific areas targeted for DSM programs?

Yes.  The agreement places the highest priority on programs to develop energy efficient schools during new construction and by retrofitting.  The plan also proposes financial incentives for schools to become more energy efficient.  By utilizing energy efficient DSM programs, schools will be able to lower utility bills, thereby freeing up additional dollars for student education and teacher pay.  This ultimately translates into savings for taxpayers.

The Preliminary Energy Efficiency DSM Plan proposed by the parties is attached to the agreement.

The judge also modified this provision.

· The Recommended Opinion and Order also encourages submission of demand response DSM programs and the use of “advanced” or “smart” meters.

How does the settlement address solar and renewable energy issues?

Under the agreement, APS has committed to issuing a request for proposal in 2005 seeking at least 100 megawatts and 250,000 megawatt hours per year of electricity generated by solar, biomass/biogas, wind, small hydroelectric, hydrogen or geothermal resources.  In a separate docket, the Commission is examining whether or not changes should be made to the Environmental Portfolio Standard rules.

Does the proposal recommend policy changes to support distributed generation?

Distributed generation is a complex issue that involves stationing smaller or individual generating units throughout the electrical grid.  There are reliability and other considerations that are better addressed through a collaborative workshop process.  The parties agreed that Commission Staff should schedule workshops to consider outstanding issues affecting distributed generation to be followed, if necessary, by a rulemaking procedure.

Is this a “done deal”?

No.  The judge’s Recommended Opinion and Order is not final until voted on by the Commissioners.  They can accept, amend or deny any provision of the judge’s recommendation.

What will the Commissioners do now that the recommendation is out?

The Commissioners will spend the next several weeks studying the judge’s recommendation, reviewing transcripts and testimony and preparing to make a final decision on the case.  Parties and intervenors that take issue with the judge’s recommendation may file statements outlining their concerns by March 14, 2005.  The Commissioners can propose changes to the Recommended Opinion and Order, deny it or accept it as written.

I don’t understand.  If the Administrative Law Judge is on staff, isn’t she working under the direction of the Commissioners?

Staff does work under the direction of the Commissioners; however, where there are contested cases – cases with two or more opposing parties – the Commissioners have the role of final judges.  Administrative Law Judges work in the Hearing Division of the Commission.  Their role is to set procedural rules and deadlines, take evidence, preside over oral argument at the hearing and then make a recommendation to the Commissioners.  The judge writes a Recommended Opinion and Order based on his or her reading of the evidence, testimony and his or her study of state laws and regulations.

The Commissioners and Administrative Law Judges are prohibited from speaking to any of the other parties or outside persons about the merits of the case while the case is pending.  There are barriers – rules of conduct – to prevent cases from being decided before all the facts are gathered and a 360-degree review of the case is complete. 

Can I talk to the Administrative Law Judge or the Commissioners about this case?

No, not at this time.  The judge’s Recommended Opinion and Order stands on its own merit and she will not entertain calls or inquiries about specific aspects of the recommendation.  Because the Commissioners have to act as judges in this case, they will not comment on the substance or merits of the Recommended Opinion and Order until all five Commissioners can meet in a public open meeting to discuss the case.

When will the Commissioners meet to decide this case?

The Commission staff will be working over the next several weeks to find a date and time when all five Commissioners and the parties can meet.  Please check the APS Rate Case page on our website periodically (http://www.cc.state.az.us/utility/electric/arc-index.htm).  The official notice of the meeting will be posted there as soon as the schedule is finalized.

How can I learn more about this case?

For more information about is case or the steps leading up to the release of this Recommended Opinion and Order, visit the Commission’s webpage at http://www.cc.state.az.us/utility/electric/arc-index.htm.