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We are focused with laser-like intensity on the outcome of our current rate case and what it will say about the future – for our customers and our state.
Understanding how we got to this point – at the end of one state regulatory era but not yet firmly in a new era – requires a quick look at where we are now and how we got here.
HOW WE GOT TO NOW
In 2003, our year-end earnings were in line with expectations, and we strengthened our liquidity position. We had another strong year of operating performance. Our gas- and coal-fired power plants recorded some of their best production years ever. And the Palo Verde Nuclear Generating Station was the largest power producer of any kind in the U.S. for the 12th straight year.
We also achieved regulatory milestones. With approval from the Arizona Corporation Commission (ACC), APS loaned funds to Pinnacle West Energy to relieve the debt burden incurred in the construction of new gas-fired power plants. We also completed a bidding process to secure more than 2,200 megawatts of capacity, including about 1,800 megawatts from Pinnacle West Energy’s Arizona plants that were specifically built to serve APS customers. And our service area remained vibrant, as evidenced by customer growth of three times the national average and record levels of electricity consumption by our retail customers.
That growth, however, came at a price. Over the past few years, we've invested about $2 billion in new infrastructure to increase system reliability. In addition to expanding our generation portfolio, we completed a new 500-kilovolt transmission line from Palo Verde to the metropolitan Phoenix area. The 1,200-plus megawatt line played a significant role in APS’ ability to avoid delivery problems during the summer of 2003.
To recover these and other costs – and as required by our 1999 Settlement Agreement with the ACC – we filed our first general rate case in more than a decade. This rate case covers our cost of service, return on equity, and fuel and purchased power adjustors. Just as important, it addresses a host of issues left unresolved when the ACC reversed its position on deregulation in 2002.
In 1999, we signed a regulatory agreement with the ACC that brought competitive choice to our customers, required us to transfer our APS power plants to an unregulated subsidiary and lowered prices by an average of 1.5 percent per year for five years. This agreement provided a foundation for Pinnacle West to form a business plan consistent with the ACC’s wishes. It also explicitly recognized that our unregulated subsidiary could include our low-cost coal and nuclear units in one consolidated generating company.
In 2002, when the ACC reversed course and ordered us not to consolidate our power plants, we had been preparing for deregulation for nearly a decade. We built new gas-fired plants needed for APS customers in Arizona expecting they would be part of a much larger generation fleet that would include APS’ fossil and nuclear units. As directed, we stopped course. But the ACC reversal changed everything, leaving many important issues open, including the financial integrity of those plants.
Because of unresolved issues – such as the critical need to consolidate our power plants going forward – our 2003 rate filing goes beyond a rate case. It’s really about the future. In that sense, our current rate case is similar to our 1999 Settlement Agreement. The 1999 Settlement Agreement set out a path to the future. That future was the last five years and our performance was outstanding.
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