Exhibit 99.1
July 11, 2002
HAND-DELIVERED
Chairman William A. Mundell
Commissioner Jim Irvin
Commissioner Marc Spitzer
ARIZONA CORPORATION COMMISSION
1200 West Washington Street
Phoenix, AZ 85007
RE: DOCKET NOS. E-00000-02-0051, E-01345-01-0822, E-00000A-06-0630,
E-01933A-02-0069 AND E-01933A-98-0471
GENERIC PROCEEDING TO ELECTRIC RESTRUCTURING
Dear Commissioners:
The purpose of this letter is to discuss the circumstances under which
Arizona Public Service Company ("APS" or "Company") would support a "temporary
suspension" or stay of Rules 1606(B) and 1615(A). The recent exchange of letters
among the Commissioners, as well as the letter from Greg Patterson on behalf of
the Arizona Competitive Power Alliance, have all commented on the issue of
delay. The Commissioners' letters also specifically raised the issue in the
context of APS. It is our further understanding that the Commission has
scheduled a Special Open Meeting for tomorrow. APS has received conflicting
reports as to what might be considered at this Special Open Meeting, but it is
noticed for a possible vote on any or all of the listed dockets.
Pinnacle West is at considerable risk because of the failure of the
Electric Competition Rules to (1) clearly allocate the reliability obligation to
serve retail customers, and (2) coordinate the timing of the Rules'
implementation with the mandated divestiture of assets and competitive
procurement. Thus, APS can support any contemplated further delay if:
1. The Commission permits APS to end the current "bifurcation" of its
generation resources as between itself and Pinnacle West Energy by
authorizing the acquisition by APS of the Pinnacle West Energy
generating facilities constructed or being constructed to serve APS.
William A. Mundell, Chairman
Jim Irvin, Commissioner
Marc Spitzer, Commissioner
July 11, 2002
Page 2
2. The Commission provides to APS any additional debt financing
authorization necessary to accomplish this acquisition.
3. While these assets remain at APS serving retail customers, their
inclusion in rates will be subject to Commission review as to their
prudence and as to whether they are "used and useful" just as are the
Company's existing generating plants.
Under such circumstances, APS would no longer have to submit a thirty-day
transfer notification (or transfer its assets) by year's end and would not need
to address restoration of its $234 million write-off, thus avoiding many of the
very legal issues alluded to by Commissioner Irvin in his letter.
Why are such interim steps necessary? As the Commission is well aware, the
condition of the capital markets makes it impossible for Pinnacle West Energy to
obtain permanent financing without divestiture to it of the Company's existing
generation. Pinnacle West Capital Corporation has been providing short-term
"bridge" financing, but is now facing a potential down-rating of its credit due
to the burden of this bridge financing.
How did these circumstances arise? Although prohibited by the Electric
Competition Rules from constructing new generation, APS could not simply ignore
the reliability and service needs of its customers. The wholesale market was
already looking tight by the end of 1999, with existing plants being sold at
multiples of book value which set the stage for even higher market prices in
future years. Thus, Pinnacle West Energy took the prudent course and began
construction of some $1 billion (1750 MW) of new generation, the majority of
which is already in service to APS customers. In addition, last year Pinnacle
West Energy expensed more than $140 million to meet APS load. It will provide
necessary generation resources for this same purpose during the current summer.
This construction program was the only way to maintain adequate electric
supplies without the need for the sort of double-digit price increases so
prevalent elsewhere in the region. And the only place Pinnacle West Energy could
obtain financing for this construction prior to divestiture was from Pinnacle
West Capital Corporation.
The steps outlined above (I.E., suspension of Rules 1606(B) and 1615(A) and
the APS acquisition and financing of the Pinnacle West Energy facilities built
to serve APS) have the following additional advantages over a piecemeal TEP-only
suspension of the Electric Competition Rules:
William A. Mundell, Chairman
Jim Irvin, Commissioner
Marc Spitzer, Commissioner
July 11, 2002
Page 3
* It resolves the Company's critical generation "bifurcation" issue
(created by the Electric Competition Rules) and its associated
financing problems while leaving the rate making treatment of the
newly-acquired assets to be taken up in the next APS general rate
proceeding, should those resources remain in APS.
* It provides the Commission with both time and flexibility -- time to
complete the generic review of electric competition initiated earlier
this year by the Commission and the flexibility to either proceed with
divestiture of all generating assets to Pinnacle West Energy and a
level of competitive procurement that makes sense for Arizona
consumers at some future date or to retain vertically-integrated
electric utilities indefinitely.
* It allows the issue of the timing of divestiture and competitive
procurement to be handled in a uniform and reasoned manner for both
APS and TEP without the potential of a premature decision on one
prejudicing the Commission's consideration of the other.
APS hopes this statement of its position on delay is helpful to your
deliberations on this important issue. Although we believe our October 2001
Partial Variance Request represents the best path to a workably competitive
market that benefits customers, and we request you to set this matter for
hearing and conclude the Track A and B proceedings as soon as possible, the
Company looks forward to addressing any Commission-desired delay along the lines
discussed above in the appropriate forum. APS will promptly begin discussions
concerning this proposal with Commission Staff and thereafter with other
participants in the generic proceeding.
Sincerely,
William J. Post
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William J. Post
cc: ACC Docket Control
and
Parties of Record in
Docket No. E-00000A-02-0051, ET AL.