PHOENIX – Arizona Public Service Company (APS) officials and 21 other parties announced today that an agreement has been reached that would settle issues involved in the Company’s general rate case pending before the Arizona Corporation Commission (ACC). Among the other parties reaching agreement are the Utilities Division Staff of the Commission, the Residential Utility Consumer Office, other consumer representatives, market competitors and conservation and renewable energy groups.

The agreement must be approved by the ACC.

“This rate case is about providing reliable service to our customers at a reasonable cost – today and in the future,” said Bill Post, Chairman and CEO of Pinnacle West Capital Corporation, the parent of APS and Pinnacle West Energy. “The settlement brings together within APS generating assets that have been used since their completion to serve our customers in Arizona, and it resolves through a reasonable compromise many of the open issues associated with the reversal of the competitive structure established in 1999. Important risks are mitigated for our customers, as well as our shareholders.”

The major provisions of the settlement agreement include:

• A rate increase of 4.21 percent, or $75.5 million, which includes an increase of 0.44 percent to recover costs APS previously incurred to comply with the ACC’s 1999 electric competition rules.
• The transfer to APS of power plants in Arizona currently owned by Pinnacle West Energy and placed in service between 2001 and 2003. These reliability plants have been serving the needs of APS customers since they began operating. The transfer will also require approval by the Federal Energy Regulatory Commission.
• A rate base disallowance of $148 million related to these same Pinnacle West Energy generating assets;
• A fuel adjustment mechanism to recover future fuel and purchased power costs.
• Requirements for an increase of nearly $15 million in annual spending for energy efficiency and conservation programs.
• A significant increase in the company’s commitment to renewable energy sources.
• Expansion of weatherization and bill assistance programs for low-income customers, as well as an increase in the low-income discount available for eligible customers;
• A competitive procurement process to promote wholesale competition and which precludes APS from building new fossil fuel power plants before 2015 unless expressly authorized by the ACC or found necessary to maintain reliable service to APS customers.
• Adjustment mechanisms for expenditures related to certain programs mandated by the ACC.

If approved by the ACC, the price increase would be the first in more than 13 years for APS’ retail customers. Under the proposed increase, an average residential bill would increase from $92.46 per month to $96.48 per month, based on usage of 1,100 kilowatt-hours of energy. Even with the increase, APS retail rates will still be lower than pre-1990 levels and well below increases in the consumer price index. APS last raised rates in 1991 and has since lowered prices 16 percent for residential and small commercial customers.

APS President and CEO Jack Davis explained the main factors in the company’s decision to ask for an increase in rates when the request was filed with the Commission in June 2003.

“Like many other businesses in high-growth areas, we’ve experienced significant increases in operating costs and capital investment,” Davis said. “Whether it’s the fuel we use to generate electricity, new plants and facilities, maintenance or other costs, expenses for providing reliable service are up. These rising expenses require a price adjustment to recover costs that are not included in current prices.”

For example, Davis said, the cost of natural gas to serve retail customers has jumped 500 percent – from about $30 million in 1999 to more than $180 million in 2003. And natural gas prices have continued to escalate during 2004.

“We’ve also built new generating plants and added more than 5,800 miles of transmission and distribution lines – all designed to meet the highest reliability standards and ensure that the lights stay on for APS customers,” Davis said. “Our actions so far and those in the days ahead will enable us to continue to protect Arizona customers without major disruption and avoid the price shocks that swept through the region over the past few years.”

Since it last increased prices, APS has experienced growth in its customer base and an unprecedented demand for electricity. Customer growth has increased at nearly three times the national average, and this summer APS experienced a retail peak demand of about 6,000 megawatts, or more than 75 percent higher than in 1991.

The agreement culminates more than a year of work involving APS, the ACC staff, customer groups, retail and wholesale competitors and other interests seeking a satisfactory outcome that balances the interests of customers and the development of competitive markets, while ensuring that capital will be available to invest in the future generation, transmission and delivery infrastructure that will be needed to meet Arizona’s fast-growing energy needs.

APS, Arizona's largest and longest-operating electric utility, serves more than 931,500 customers in 11 of the state's 15 counties. APS, with headquarters in Phoenix, is the largest subsidiary of Pinnacle West Capital Corporation (NYSE: PNW).

Conference Call and Webcast

Pinnacle West invites interested parties to listen to the live webcast of management’s conference call to discuss the proposed settlement agreement at 12:00 noon (ET) tomorrow, August 19, 2004. The webcast can be accessed at www.pinnaclewest.com/investors/presentations/default.html and will be available for replay on the website for 30 days. To access the live conference call by telephone, dial (877) 356-3961 and enter reservation number 9541813. A replay of the call also will be available until 12:00 midnight (ET), Thursday, August 26, 2004, by calling (800) 642-1687 in the U.S. and Canada or (706) 645-9291 internationally and entering reservation number 9541813.

Pinnacle West is a Phoenix-based company with consolidated assets of approximately $9.7 billion. Through its subsidiaries, the Company generates, sells and delivers electricity and sells energy-related products and services to retail and wholesale customers in the western United States. It also develops residential, commercial, and industrial real estate projects.

Contacts

Media:
Jim McDonald, 602.250.3738 or 602.321.3738 (mo)
Sheri Foote, 602.250.2363 or 602.684.1332 (mo)

Analyst:
Rebecca Hickman, (602) 250-5668
Lisa Malagon, (602) 250-5671