Arizona Public Service (APS) will file a motion to reconsider a move to slow down deregulation, after the three-member Arizona Corporation Commission (ACC) on Tuesday voted unanimously to reverse a 1999 requirement that the state’s utilities divest their generating assets. The vote followed a ruling by the commission’s administrative law judge in July, who recommended that Arizona delay competition past July 2004 because the wholesale market was not ready (see Power Market Today, Aug. 28).

The action by the ACC may compromise the viability of the new merchant plants under construction, because the reversal will limit the size of the competitive marketplace. For APS, the largest subsidiary of Pinnacle West Capital Corp. and Arizona’s largest electric utility, the turnaround temporarily strands $1 billion of new power plants it built following the 1999 vote. When the ACC voted to proceed with deregulation in 1999 — prohibiting APS from building new plants — Pinnacle West undertook the new construction under the assumption that the new plants would be combined with existing APS plants. However, with divestiture on hold, Pinnacle West and APS officials believe they will have trouble arranging for long-term financing for the new plants.

ACC Chairman Bill Mundell, who had voted for the deregulation in 1999, said his decision to slow down the restructuring process was done to “protect Arizona consumers.” Commissioner Jim Irvin, who had voted against restructuring in 1999, said the state’s current plan was based on a retail market that has failed to materialize. The state’s consumers have had the right to shop for their own power since 2000, but an unstable market and rules favoring existing utilities have kept suppliers low and consumers uninterested.

“We have to develop a viable wholesale market before we can even consider retail competition,” said Irvin.

The ACC said it will work to resolve Pinnacle West’s problems, but stipulated Tuesday that for now, Pinnacle West would not be permitted to recover the costs of the plants from ratepayers, or count the generation against the amount it would be required to bid out. Pinnacle West and APS Chairman Bill Post had argued that the new plants were built to serve APS customers, and that the company should be allowed to recover costs.

Pinnacle West and APS officials said that the reversal had “substantially modified the 1999 settlement agreement between the company, the commission and various customer groups without sufficient consideration of the economic impact of such action or recognition of plants built since 1999 to serve the needs of APS retail customers.” Jack Davis, president of APS, said that the ACC decision “did not recognize that these plants provided value to our customers in enabling the company to meet the record demand that occurred during the last two summers.”

In a written statement, APS said that while the “ACC provided for a future process to consider the financing impact of generating assets built or under construction between 1999 and 2003, [the] decision makes recovery of the construction costs of these plants dependent on a future competitive bidding process for new loads that will be defined in a pending second track of the ACC review of electric restructuring in Arizona.” The plants (Redhawk 1 and 2, West Phoenix 4 and 5 and a combustion turbine at Saguaro) were built by APS subsidiary Pinnacle West Energy after the earlier ruling prohibited APS from building new generation.

“While we understand the complexity of issues facing the ACC, we are hopeful that when all factors are considered, the commissioners will reassess their decision and consider the negative impact it will have on the treatment of these assets,” said Post. APS serves more 800,000 customers in 11 of Arizona’s 15 counties.

Although Pinnacle West is upset by the slowdown, Credit Suisse First Boston (CSFB) analysts said the ACC order “sets the stage for Pinnacle West to transfer nearly 1,800 MW of generation…into APS. While the ultimate decision regarding the economics of cost recovery for these new plants will likely be addressed as part of next year’s general rate case, we believe [Tuesday’s] decision demonstrated ACC’s concern for the financial condition of APS/Pinnacle West and provides evidence to our supposition that a return to cost-of-service is the most likely outcome for the post-’04 economics of Pinnacle West’s generation.”

CSFB’s Scott Pearl and Curt Launer noted that the ACC decision “relieves near-term rating agency concerns regarding the bridge financing for these plants, likely removing any need for equity issuance. While the ACC will still determine the amount of utility load that may be bid into the wholesale market by March 1, 2003, we believe that APS is well positioned to recover the costs of its new generation.” CSFB upgraded its recommendation for Pinnacle West to “buy” from “hold.”

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