WE ARE ADAPTABLE
If you’re a long-time owner of our company, you know we emphasized agility, long-term growth and adaptability as we prepared for competition. We knew changes would come. This approach has served us well. For example, we didn’t sell our generating plants, even though we felt the same pressure to sell as other utilities. We also didn’t over-commit to competitive markets. We built new generation, primarily in Arizona, to match the growing needs of APS customers.
After preparing for deregulation for nearly a decade, we neared completion of that process in 2002. Under the 1999 regulatory settlement agreement with the Arizona Corporation Commission (ACC), we were to transfer APS’ generation to Pinnacle West Energy by the end of 2002. The competition and affiliate rules adopted by the ACC kept APS from adding new generation to serve its needs, while requiring APS to remain the provider of last resort.
To meet APS’ growing demand for power, Pinnacle West Energy built state-of-the-art, gas-fired combined-cycle power plants, financed with temporary "bridge" debt. This temporary financing was to be converted to permanent financing when the APS generation assets were consolidated with Pinnacle West Energy’s new plants as required by the 1999 settlement. Meanwhile, our company and the ACC recognized market conditions were radically different than envisioned in 1999. Serious structural flaws in the wholesale market were painfully apparent. In response, the ACC reversed course in August of 2002 and prohibited the transfer of APS generation to Pinnacle West Energy.
Prior to that, in the fall of 2001, we proposed a different solution in response to the same market weaknesses. The company and the ACC each sought to protect Arizona customers from a competitive debacle that could have mirrored the California disaster.
When the ACC changed its policy on competitive generation, however, it did not address the treatment of our plants built since 1999 to serve APS customers. Our request for financial treatment of the plants followed, and recognizing that the debt markets are essentially closed to unregulated generation companies, the ACC acted quickly on our application to allow APS to extend Pinnacle West a $125 million line of credit. Then, in March of 2003, the ACC also approved a $500 million loan from APS to Pinnacle West Energy. The loan will provide sufficient liquidity while the ACC decides the long-term rate treatment of these plants.
As required by the 1999 settlement agreement, we will file a full general rate case in 2003 – our first in well over a decade – to update our cost of service and address issues arising from the change in direction by the ACC. These issues include folding Pinnacle West Energy’s Arizona plants into rates, reversal of the $234 million write-off we took as part of the 1999 settlement agreement, and consideration of the costs incurred preparing to transfer APS’ generation to Pinnacle West Energy. We face a hefty regulatory agenda, but it’s an agenda we will continue to address to the benefit of our customers and shareholders. We have anticipated the issues and are resolving them before they turn into greater problems. We believe the ACC recognizes the importance of this agenda.
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