PHOENIX, ARIZ - Pinnacle West Capital Corporation and Arizona Public Service Company officials announced today that a settlement agreement has been reached with the Staff of the Arizona Corporation Commission that will substantially clear the way for electricity competition for Arizona customers.

The settlement agreement, which is subject to approval by the three-member Commission, would provide for additional electricity price reductions for APS customers and provide for stranded cost recovery.

"This is an important chapter in a long and complex process of moving our company and this industry into a new competitive era," said Bill Post, Pinnacle West President and APS Chief Executive Officer. "A lot of people with many points of view have worked very hard to resolve differences, find solutions and get us to this point."

"The hard work is far from over, but today's agreement establishes a foundation for competition. This is an innovative agreement, and we are very pleased to be able to continue our commitment to price reductions for APS customers, " he added.

Under a formula in the agreement, APS will reduce its prices for customers by a total of at least four percent in the years 1999-2002. The price reductions in 2001 and 2002 will apply only to APS residential customers who purchase all their electric services from APS. The contemplated four percent reduction, combined with the 8.4 percent reduction APS customers have already received over the last five years, brings APS' total reductions for residential customers to 12.4 percent since 1994.

The proposed settlement provides for recovery of APS' stranded costs through the electricity prices established by the agreement. Customers choosing to purchase competitive generation from other providers will receive a credit from APS that will relate to the actual market price of generation. The agreement also affirms a 1996 agreement with the ACC that allows recovery of APS' regulatory assets through amortization over an eight-year period which began July 1, 1996 and ends June 30, 2004.

Also as part of the agreement, APS and Tucson Electric Power Company have agreed to exchange APS' high voltage transmission facilities of 345,000 volts and above for Tucson Electric's interests in the Four Corners Generating Station near Farmington, New Mexico, and the Navajo Generating Plant near Page, Arizona. The two parties anticipate completing this asset exchange by year-end 2000.

APS already owns an interest in both power plants and manages the Four Corners facility. Post said the asset swap supports the Company's strategic direction of expanding its generation potential in the growing western United States. The transmission assets in the agreement include the large facilities that transmit electricity long distances, such as from power plants to population centers in and outside of the state. APS' divestiture of these assets is viewed by the Commission staff as key to its agreement to the proposed settlement.

Also proposed in the agreement:

• By December 1, 1998, staff will recommend Commission approval of APS' energy services affiliate as a provider of competitive energy services in Arizona.
• APS will establish a separate corporate affiliate for generation services by year-end 2002.
• If the settlement agreement is approved, the Company will move to dismiss all litigation currently pending against the Commission by APS.

APS, Arizona's largest electric utility, provides wholesale or retail electric service to the entire state with the exception of Tucson and about one-half of the Phoenix area. APS, which is headquartered in Phoenix, is the principal subsidiary of Pinnacle West Capital Corporation.

Contacts

This press release contains forward-looking statements that involve risks and uncertainties, which include, but are not limited to, the ongoing restructuring of the electric industry; the outcome of the regulatory proceedings relating to the restructuring; regional economic and market conditions, which could affect customer growth and the cost of power supplies; the cost of debt and equity capital; weather variations affecting customer usage; and the strength of the real estate market. These factors and the other matters discussed above may cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by the Company.