WHY THE FUTURE IS NOW

We are poised to become a new kind of vertically integrated utility – one that provides customers with reliable power at a reasonable price but remains subject to the discipline of the energy marketplace. A utility that uses its skills to navigate the energy market for the benefit of both customers and investors.

As I said in last year’s Annual Report letter, competition and regulation will co-exist and we must operate effectively in both worlds. The fundamental forces of market structure, electric reliability, customer value and investment risk/reward will shape the consistency and alignment between the two, and as a new kind of vertically integrated utility we must anticipate their evolution. Since competitive markets often move faster than regulation, it’s imperative that the regulatory structure considers the future, and that regulators go beyond traditional, historical regulation.

Our Arizona regulators recognize the absolute need to manage electric reliability and price volatility on behalf of customers and the importance of a financially solid electric utility. The regulatory decisions needed in 2004 are critical to the foundation of operating and resource decisions we must make now for 2008 and beyond. I believe our commissioners understand the long-term need to have a reliable and affordable electric infrastructure as a base to fuel Arizona’s economy.

Resolving our current rate case fairly means balancing customer and shareholder interests by recognizing that those interests are frequently aligned. Over the long term, a financially strong utility and low customer rates go hand-in-hand.

We are committed to achieving a regulatory outcome that sets a firm foundation for important operating and resource decisions. Simultaneously, we will continue to meet our customers’ growing needs, improve service levels, build on our excellent operating performance and manage our resources in a safe and ethical manner while providing our shareholders a fair return on their investment.

This is our hallmark.

William J. Post, Chairman

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