UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): June 9, 1999
Commission Registrant; State of
File Incorporation; IRS Employer
Number Address; and Telephone Number Identification Number
------- ----------------------------- ---------------------
1-13739 UNISOURCE ENERGY CORPORATION 86-0786732
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
1-5924 TUCSON ELECTRIC POWER COMPANY 86-0062700
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
<PAGE>
Item 5. Other Events
- ---------------------
Settlement Agreement
--------------------
On June 9, 1999, Tucson Electric Power (TEP) entered into a
Settlement Agreement (Settlement) with certain customer groups
related to the implementation of retail electric competition. The
Settlement has been filed with the Arizona Corporation Commission
(ACC), and TEP has requested the ACC to schedule the Settlement for
review as soon as practicable. The Settlement will become
effective on the issuance of a final ACC order approving the
Settlement without modification.
The following are major provisions of the Settlement, which is
filed as an exhibit to this filing:
-- Consumer choice for energy supply will begin sixty (60) days
after the ACC approves the Settlement and will be phased in as
required by the retail electric competition rules previously
described in Management's Discussion and Analysis of Financial
Condition and Results of Operation in the Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999. By January 1,
2001, consumer choice will be available to all customers.
-- TEP rates will be frozen from July 1, 2000 through December 31,
2008, providing TEP with the opportunity to recover its stranded
costs, including regulatory assets. The ACC will authorize a
Competition Transition Charge (CTC) with two parts - a "Fixed" CTC
and a "Floating" CTC.
- The Fixed CTC will equal $0.93/kwh (average) and will include
recovery of regulatory assets. The Fixed CTC will terminate when
$450 million has been recovered, but will in no case extend beyond
December 31, 2008. When the Fixed CTC terminates, unbundled
service rates will be reduced by the same amount.
- The Floating CTC recovers stranded costs that are not recovered
through the Fixed CTC. The Floating CTC is determined by the
difference between the frozen rate and all other rate charges as
listed below. The Floating CTC will be calculated using a Market
Generation Credit (MGC) approach which adjusts the floating CTC as
the price of energy in the power markets fluctuates. Because TEP's
total retail rate is frozen, the Floating CTC recoups the revenue
shortfall: when market prices are strong, stranded costs are lower
and, thus, the Floating CTC is lower; and when market prices are
weak, stranded costs are greater and the Floating CTC is higher.
The Floating CTC will terminate on December 31, 2008.
-- TEP's rates will be unbundled into separate charges for: 1)
distribution; 2) transmission; 3) metering; 4) billing; 5)
ancillary services; 6) fixed must-run generation; 7) system
benefits; and 8) standard offer generation. The total of these
charges will not be more than a customer's current bundled rates.
All customers will be charged unbundled rates, including those
customers who are not initially eligible for competition. For
TEP's standard offer customers, the CTC will be included in the
cost of standard offer generation service.
-- In accordance with the Rate Settlement Agreement approved by the
ACC in 1998, TEP will decrease rates to retail customers by one
percent (1%) on July 1, 1999 and one percent (1%) on July 1, 2000.
These reductions will apply to all tariffed retail customers.
After these reductions, the Settlement provides that TEP's rates
will be frozen until December 31, 2008, except for:
<PAGE>
- changes that result due to this Settlement;
- changes in TEP's transmission tariffs due to the implementation
of the Arizona Independent System Administrator (AISA);
- changes resulting from the June 2004 review as described below.
-- By June 1, 2004 TEP will recommend to the ACC any required
modifications to the CTCs and other service charges. A rate
change, to take effect no later than January 1, 2005, will only be
made if it results in a net reduction to overall charges.
-- On or before December 31, 2002, TEP will transfer its generation
and other competitive assets to a subsidiary of TEP, at market
value. At the time that TEP makes the transfer of such assets, it
will be required to provide generation for its standard offer
customers according to the ACC's electric competition rules.
-- On final approval of the Settlement by the ACC, TEP will move to
dismiss all pending litigation brought by TEP against the ACC.
When the final ACC order is approved, TEP will stop accounting
for its generation operations using Financial Accounting Standard
No. 71, "Accounting for the Effects of Certain Types of Regulation"
(FAS 71). The regulatory assets of the generation business,
together with certain above-market generation plant costs, totaling
$450 million, will be recovered through the distribution business.
No net gain or loss to TEP or UniSource Energy results. These
regulatory assets will amortize to expense over the period ending
in 2008, as provided for in the Settlement Agreement.
In addition, if the Settlement is approved we will immediately
recognize as income the following Investment Tax Credit (ITC)
amounts:
-- Deferred ITC: On our financial statements we have deferred the
benefit relating to ITC claimed on tax returns. This Deferred ITC
was then amortized to income over the tax lives of the related
property. The balance remaining when the Settlement is approved
will be recognized immediately. At March 31, 1999, the Deferred
ITC balance was $9.7 million.
-- ITC Carryforward: This ITC is generated but not yet claimed on a
tax return, and will be recognized immediately as income to the
extent that we expect to use the ITC on future tax returns. At
March 31, 1999, the total ITC Carryforward was $23 million. The
amounts expected to be used on future returns have not presently
been determined.
Certain other generation expenses, such as lease expense, will
amortize differently in the future, although total amounts of such
expenses will remain the same over the life of the leases.
<PAGE>
Overall, earnings will increase in 1999, primarily as a result
of the recognition of the ITC described above, and earnings will be
reduced in the next few subsequent years, primarily as a result of
the changes in ceasing to apply FAS 71 to generation related
assets. However, TEP expects that such earnings reductions could
be offset and its earnings power retained provided:
- customer growth in TEP's service territory continues at its
current pace, about 2% to 3% annually;
- margins on wholesale sales grow as market prices increase over
time in the region; and
- a portion of free cash flow is used to reduce TEP's debt.
The table below illustrates the anticipated impact on TEP and
UniSource Energy's income statements in 1999-2001 from ceasing to
apply FAS 71 to our generation operations. The table shows only
expense item changes.
This analysis reflects TEP's Settlement filed with the ACC on
June 9, 1999, as originally filed, and assumes that the Settlement
is approved by year end 1999. The analysis involves estimates;
actual results in the future may differ materially from those
expressed below. TEP's analysis is expressed in good faith and is
believed by management to have reasonable basis, including without
limitation, examination of historical operating trends, data
contained in TEP's records and other data available from third
parties. There can be no assurance that the Settlement filed with
the ACC will be accepted as filed or that key assumptions and
related events will be realized.
For additional information regarding the accounting implications
from ceasing to account for the generation operations in accordance
with FAS 71, see Note 2, TEP's Regulatory Assets and Liabilities,
of Notes to Financial Statements contained in the Annual Report on
Form 10-K for 1998.
<PAGE>
Summary of Anticipated Expense Item Changes
1999 2000 2001
---- ---- ----
- millions of dollars -
Operating Expenses -
increases/(decreases)
Fuel & Purchased Power (a) $ (4) $(14) $(14)
Impact of changes in generation
asset accounting methodologies (b) (10) (50) (46)
Stranded Asset Amortization (c) 4 17 21
Income Taxes (d) (1) (4) (6)
--------------------
Total Operating Expenses (11) (51) (45)
--------------------
Operating Income -
increase/(decrease) 11 51 45
Other Income -
Income Taxes: ITCs (e) 30 (4) (5)
Interest Expense - increase/(decrease)
Capital Lease "interest method"
interest expense (f) 23 92 91
Interest on Losses recorded at
present value (g) (9) (35) (37)
-------------------
Total Interest Expense 14 57 54
-------------------
After-tax impact $ 27 $(10) $(14)
===================
(a) This item may decrease to reflect the reclassification of
certain expenses presently classified as fuel expense to other line
items of expense. After we stop applying FAS 71 to our generation
operations, the lease costs for the coal handling facility lease
will be reflected as depreciation expense and interest expense in
the income statement, rather than operating lease expense. Also,
the fuel contract termination fee is presently capitalized and
amortized to fuel expense in accordance with ACC and FERC
directives. Post-FAS 71, the amortization of this fee may be
included with the amortization of other regulatory assets for
financial statement presentation purposes.
(b) This item reflects changes in accounting for leased and owned
generating assets after we stop applying FAS 71 to our generation
operations. These changes include:
- recognizing depreciation expense rather than lease expense for
capital lease assets;
- eliminating the amortization of the Springerville Unit 1
Allowance contra asset which is offset against the Stranded Assets;
and
- reducing amortization and depreciation expense due to the write-
down of generation plant assets.
(c) This is a new amortization expense item resulting from
reclassifying all generation-related regulatory assets to a
stranded cost regulatory asset totaling a net $414 million. The
$450 million of stranded costs includes $414 million presently on
the balance sheet and $36 million which has already been expensed
for financial statement purposes.
<PAGE>
(d) This item reflects the expected 40% composite federal and
state tax benefit from all the other changes in expense noted in
the table.
(e) TEP expects to recognize all deferred ITC and all ITC
carryforward expected to be used within the ITC carryforward
period, when TEP stops applying FAS 71 to its generation
operations. The 1999 amount in the table represents TEP's best
estimate of the amount recognizable and may change materially
before the settlement is approved. For years after 1999, the
reduction in ITC reflects the elimination of amortization of ITC.
(f) Interest expense on the balance of the capital lease
liabilities will be recognized as a component of interest expense
on the income statement after TEP stops applying FAS 71 to its
generation operations.
(g) This item is imputed interest expense and relates to the
Springerville Unit 1 Allowance. The imputed interest expense is
eliminated since the Springerville Unit 1 Allowance is reclassified
to offset Stranded Assets.
Supreme Court Decision
----------------------
In a separate issue, on June 9 the Arizona Supreme Court removed
Commissioner Tony West from the ACC. Mr. West held a Commission-
issued securities license when elected November 3, 1998. Arizona
state law prohibits the election of a person to the ACC who is
subject to regulation by the Commission. The Court's decision
returns former Commissioner Renz Jennings to the Commission until
the Governor appoints a successor to serve until the general
election in 2000. The Court also stated that no rulings where Mr.
West cast the deciding vote would be disturbed.
Item 7. Financial Statements and Exhibits
------------------------------------------
Exhibit 10 Settlement Agreement
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, each registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized. The
signature for each undersigned company shall be deemed to relate
only to matters having reference to such company or its subsidiary.
UniSource Energy Corporation
(Registrant)
Date: June 18, 1999 /s/ Karen G. Kissinger
---------------------------
Karen G. Kissinger
Principal Accounting Officer
Tucson Electric Power
(Registrant)
Date: June 18, 1999 /s/ Karen G. Kissinger
---------------------------
Karen G. Kissinger
Principal Accounting Officer
SETTLEMENT AGREEMENT
This Settlement Agreement is entered into this 9th day
of June, 1999 by Tucson Electric Power Company ('TEP' or the
'Company'), the Arizona Residential Utility Consumer Office
('RUCO'), members of the Arizonans For Electric Choice And
Competition ('AECC')1 and Arizona Community Action
Association ('ACAA') (collectively the 'Parties').
BACKGROUND
A. TEP is a public service corporation that, along with
its predecessors, has provided electric service in Arizona
since 1892. TEP currently provides retail electric service
to the City of Tucson and in the surrounding Pima County
area, and to Fort Huachuca in Cochise County pursuant to
Certificates of Convenience and Necessity ('CC&Ns'); these
areas shall collectively be referred to as the 'TEP CC&N
Service Territory') that it has received from the Arizona
Corporation Commission ('Commission').
B. On December 26, 1996, the Commission issued an Order
approving A.A.C. R14-2-1601, et seq. (the 'Electric
Competition Rules') for the purpose of introducing
competitive access to retail electric generation and certain
other services that are deemed to be competitive
(hereinafter referred to as 'Competitive Retail Access').
Since then, the Electric Competition Rules have been the
subject of multiple litigation and the implementation
1 AECC consists of the following organizations: Arizonans
for Electric Choice and Competition is a coalition of energy
consumers in support of competition and includes Cable
Systems International, BHP Copper, Motorola, Chemical Lime,
Intel, Honeywell, Allied Signal, Cyprus Climax Metals,
Asarco, Phelps Dodge, Homebuilders of Central Arizona,
Arizona Mining Industry Gets Our Support, Arizona Food
Marketing Alliance, Arizona Association of Industries,
Arizona Multihousing Association, Arizona Rock Products
Association, Arizona Restaurant Association, Arizona
Retailers Association, Boeing, Arizona School Board
Association, National Federation of Independent Business,
Arizona Hospital Association, Lockheed Martin, Abbot Labs,
and Raytheon.
<PAGE>
thereof has been stayed while additional amendments and
revisions thereto are being considered.
C. TEP has worked with the Commission Staff and other
interested parties towards finalization of the Electric
Competition Rules and the implementation of Competitive
Retail Access in Arizona.
D. The Parties acknowledge that in order to restructure
the Arizona retail electric industry to provide for
Competitive Retail Access and customer choice, this
Settlement Agreement provides TEP's shareholders a
reasonable opportunity to recover their prudently incurred
investments and costs, including stranded costs.
E. The Parties also acknowledge that each Affected
Utility (as defined in the Electric Competition Rules) has
unique financial and other circumstances such that the
Commission should review the provisions of this Settlement
Agreement relating to TEP's recovery of stranded costs
independently from the proposals of any other Affected
Utility.
F. The Parties believe that this Settlement Agreement
provides for the timely implementation of Competitive
Retail Access in TEP's CC&N Service Territory and for TEP's
shareholders to have a reasonable opportunity to recover
their prudently incurred investments and costs. The Parties
further believe that competition in the electric industry
will benefit all customers in providing greater efficiencies
and lower electric power costs. Accordingly, this
Settlement Agreement is to be interpreted so as to bring
about these consumer benefits as soon as possible.
G. The Parties further believe that the terms and
conditions of this Settlement Agreement are just, reasonable
and in the public interest in that they, among other things,
<PAGE>
provide for Competitive Retail Access in TEP's Service
Territory, establish rate reductions for all TEP customers,
set a mechanism for stranded cost recovery and resolve
contentious litigation.
H. The Parties desire that the Commission issue an
Order: (a) finding that the terms and conditions of this
Settlement Agreement are just and reasonable;
(b) concluding that this Settlement Agreement is in the
public interest; (c) approving this Settlement Agreement;
and (d) implementing the terms and conditions set forth
herein (the 'Commission's Approval Order').
NOW, THEREFORE, in consideration of the mutual covenants
and promises contained herein and for other good and
valuable consideration, the Parties hereto agrees as
follows:
1. COMPETITIVE RETAIL ACCESS.
1.1 Competitive Retail Access in TEP's CC&N Service
Territory shall commence sixty (60) days after the issuance
of the Commission's Approval Order ('Commencement Date'),
and subject to: (a) the provisions of effective Electric
Competition Rules; and (b) the terms and conditions herein.2
1.2 Upon the Commencement Date, TEP shall make available
for Competitive Retail Access the amount of system peak load
set forth in the currently proposed Electric Competition
Rules, plus an additional fifty-four (54) megawatts of load
which shall be made available to eligible non-residential
customers. Unless subject to judicial or regulatory
2 The Parties recognize that Y2K issues will be of critical
importance during the fourth quarter of 1999. Therefore,
the Parties respectfully request approval of this Settlement
Agreement on or before August 1, 1999 so that Competitive
Retail Access may commence in TEP's service territory on or
before October 1, 1999.
<PAGE>
restraint, all TEP customers will be eligible to receive
Competitive Retail Access on January 1, 2001.
1.3 The Parties shall urge the Commission to approve the
Electric Competition Rules, at least on an emergency basis,
so that meaningful Competitive Retail Access can begin in
TEP's service territory subject to the provisions of Section
1.1 herein.
1.4 Electric Service Agreements ('ESAs'), in effect as
of the Commencement Date, shall remain in effect, unless TEP
and the respective parties thereto agree to a modification
or a termination thereof. In the event that an ESA, in
effect as of the Commencement Date, terminates by its terms
prior to January 1, 2001, then the ESA customer shall have
the option of choosing: (a) Competitive Retail Access; or
(b) an extension of the ESA up to January 1, 2001 at the
then-current contract price (with any applicable seasonal
adjustment and continuing escalation that would have applied
had the ESA not terminated).
2. STRANDED COST RECOVERY.
2.1 TEP shall have a reasonable opportunity to recover
its stranded costs, including its regulatory assets. TEP
shall be authorized to recover its stranded costs in the
following manner:
(a) The Commission shall authorize TEP to implement
a competition transition charge ('CTC') in two components:
(i) a 'Fixed' CTC; and (ii) a 'Floating' CTC.
(b) The Fixed CTC shall be set so as to equal a
charge of 0.93 cents/kWh (average) ('Fixed CTC amount '),
which shall include recovery of TEP's regulatory assets.
The Fixed CTC component shall terminate when it has yielded
a stranded cost recovery of four hundred fifty million
<PAGE>
dollars ($450 million), or on December 31, 2008, whichever
occurs first. When the Fixed CTC terminates, unbundled
service rates will be reduced by the same amount. The
amortization schedule for the $450 million of Fixed CTC is
attached hereto as Exhibit A. The parties acknowledge that
the actual collection of the Fixed CTC will vary with actual
kWh sales.
(c) The Floating CTC shall be calculated using a
Market Generation Credit ('MGC') methodology (as defined in
subsection 2.1(d) below) and will terminate on December 31,
2008. The Floating CTC shall be determined on a quarterly
basis. TEP shall set the Floating CTC amount forty-five
(45) days prior to each calendar quarter. The Parties
acknowledge that the Floating CTC amount may vary from month-
to-month, as the MGC varies. The Floating CTC amount shall
equal the difference between the customer's bundled rate and
the sum of: (i) the MGC; (ii) the 'Adder' (as defined in
subsection 2.1(e) below); and (iii) the unbundled charges
for: a) distribution; b) transmission; c) metering;
d) billing; e) ancillary services; f) fixed must-run
generation; g) system benefits; and h) the Fixed CTC.
In a given quarter, the Floating CTC can have a negative
value, in which case the negative value will be credited
to the customers' monthly bill.
(d) The monthly MGC amount shall be calculated in
advance and stated as both an on-peak value and an off-peak
value. The monthly on-peak MGC component shall be equal to
the Market Price multiplied by one plus the appropriate line
loss (including unaccounted for energy ('UFE')) amount. The
Market Price shall be equal to the Palo Verde NYMEX futures
price, except when adjusted for the variable cost of TEP's
must-run generation. The off-peak MGC component shall be
<PAGE>
determined in the same manner as the on-peak component,
except that the Palo Verde futures price will be adjusted by
the ratio of off-peak to on-peak hourly prices from the
California Power Exchange of the same month from the
preceding year. The market price shall reflect the cost of
serving a one hundred percent (100%) load factor customer.
(e) The Parties acknowledge that the purpose of the
Adder is to estimate the cost of supplying power to a
specific customer or customer group and stratum relative to
the value of the NYMEX futures prices used in the
calculation of the market price for a one hundred percent
(100%) load factor. The Adder will be adjusted for each
customer class and stratum, shall average 3.5 mills and
shall be subject to the same line loss adjustment outlined
in subsection (d) herein. However, the initial Adder for
any customer shall not be less than 2.5 mills.
(f) The Parties acknowledge that the Adder is
intended to estimate the difference between the flat load
costs associated with the PV index and actual customer load
characteristics plus an additional amount for costs that
will not be readily quantifiable until the Arizona market
more fully develops. After June 1, 2004, any Party to this
Settlement Agreement may submit a request to the Commission
to alter/amend the initial Adder based upon actual market
conditions. Any such requests will be considered as part of
the rate modifications contemplated pursuant to Section 5.2.
(g)The Commission shall authorize TEP to securitize
any portion of the CTC, provided that TEP shall file with
the Commission a financing application that provides that
TEP will share the benefits of such securitization with its
customers.
<PAGE>
(h) The CTC for an ESA customer shall be calculated
using the customer's ESA price as of May 1, 1999 (subject to
any automatic escalation provisions contained in the ESA) as
the customer's bundled rate.
(i) Self-generation and other reductions in
purchases 'off-the-grid' shall not be subject to the CTC
(consistent with the Electric Competition Rules).
(j) During a month in which must-run generation is
provided to meet retail load, the Market Price component
used in calculating the on-peak MGC shall be a weighted
average of the Palo Verde NYMEX futures price and the must-
run variable cost charges that are levied on scheduling
coordinators serving retail customers in the TEP load zone
during that month, consistent with AISA protocols.
3. SEPARATION OF COMPETITIVE AND NON-COMPETITIVE SERVICES.
3.1 On or before December 31, 2002, TEP shall transfer
its generation and other assets deemed to be competitive (as
defined in the Electric Competition Rules) to a subsidiary
of TEP, at market value. Commission approval of this
Settlement Agreement shall constitute any necessary approval
or waiver under Title 40, Arizona Revised Statutes and the
Commission's Affiliated Interest Rules (A.A.C. R14-2-801, et
seq.) for the formations of the subsidiary and the transfer
of the assets. At such time that TEP effectuates the
transfer of its generation assets, it shall be required to
procure generation for its standard offer customers in
accordance with the Electric Competition Rules.
4. UNBUNDLED RATES.
4.1 TEP's rates shall be fully unbundled into separate
charges for:
(a) distribution; (b) transmission; (c) metering; (d)
billing; (e) ancillary services; (f) fixed must-run
generation; (g) system benefits; and (h) standard offer
generation, the sum of which shall not exceed a customer's
<PAGE>
current bundled rates. For TEP's standard offer customers,
the CTC shall be included in the cost of standard offer
generation service, and shall be separately identified on
the customers' bills.
4.2 TEP's cost for variable must-run generation shall be
billed directly to scheduling coordinators in accordance
with AISA protocols, and shall be included in the standard
offer generation charge.
4.3 TEP shall take reasonable steps to minimize the
'collapsing' of tariffs that are on file with the Commission
as of the Commencement Date.
4.4 TEP shall charge rates for transmission and
ancillary services based upon its FERC Open Access
Transmission Tariff.
4.5 TEP's tariffs shall be unbundled for all customers,
including those who are not initially eligible for
Competitive Retail Access.
4.6 TEP shall defer for future recovery its cost to
implement Competitive Retail Access. The Commission shall
authorize TEP to recover its reasonable and prudently
incurred Competitive Retail Access implementation costs as a
plant cost and/or deferred debit subject to review in the
TEP June 1, 2004 filing (as discussed in section 5.2 below.)
5. RATE REDUCTIONS.
5.1 TEP shall reduce the rates charged to all non-ESA
customers by two percent (2%) as follows: one percent (1%)
on July 1, 1999 and one percent (1%) on
July 1, 2000. Except for the non-ESA two percent (2%) rate
reductions, TEP's rates shall be frozen until December 31,
2008, except for: (a) those adjustments that will result as
a consequence of this Settlement Agreement; (b) changes in
TEP's transmission tariffs due to AISA or Desert STAR; and
(c) changes authorized hereinbelow.
<PAGE>
5.2 TEP shall file a report with the Director of the
Utilities Division by June 1, 2004 identifying any required
modifications to the Fixed or Floating CTC, TEP's
distribution tariffs and other unbundled components ('TEP
June 1, 2004 filing'), that would have the effect of
reducing standard offer and/or overall unbundled rates while
providing for TEP's recovery of costs associated with
provider of last resort service in standard offer rates.
This report shall include a recommendation as to whether the
Fixed CTC can be eliminated/reduced prior to December 31,
2008. Any changes in TEP's rates made pursuant to this
section 5.2 shall be implemented no later than January 1,
2005.
5.3 TEP's rate reductions provided for herein shall
constitute full compliance with provisions of the Electric
Competition Rules requiring that Affected Utilities
implement rate reductions.
6. TARIFF FILINGS.
6.1 The Parties agree that the Unbundled Distribution
Tariffs, attached hereto as Exhibit B, are just and
reasonable. The Commission's Approval Order shall include
such a finding and approve TEP's Unbundled Distribution
Tariffs.
7. CODE OF CONDUCT.
7.1 All transactions between TEP (the regulated Utility
Distribution Company) and its affiliates engaged in
Competitive Retail Access shall be governed by a Code of
Conduct. Within thirty (30) days of the filing of this
Settlement Agreement, TEP shall file with the Commission an
Interim Code of Conduct. TEP will voluntarily comply with
this Interim Code of Conduct until the Commission approves a
final Code of Conduct for TEP in accordance with the
Electric Competition Rules. TEP shall confer with the
Parties prior to filing its Interim Code of Conduct.
<PAGE>
8. CERTIFICATE OF CONVENIENCE AND NECESSITY.
8.1 TEP agrees to the amendment and modification
of its CC&N in order to permit Competitive Retail Access
consistent with the terms of this Settlement Agreement. The
Commission's Approval Order shall contain the necessary
findings and conclusions and constitute the necessary
Commission Order amending and modifying TEP's CC&Ns to
permit competitive Retail Access consistent with the terms
of this Settlement Agreement.
9. INDEPENDENT SCHEDULING ADMINISTRATOR/INDEPENDENT SYSTEM
OPERATOR.
9.1 TEP shall fully support the development of the
Arizona Independent Scheduling Administrator ('AISA') and
Desert STAR. TEP shall modify its FERC Open Access
Transmission Tariff ('OATT') to be fully compatible with the
AISA/ISO Bylaws and Protocols Manual. The Parties reserve
their rights with respect to any AISA protocols, including
the right to challenge or seek modifications to, or waivers
from, such protocols. TEP shall file changes to its
existing OATT consistent with this Section within ten (10)
days of Commission approval of this Settlement Agreement
pursuant to Section 13.3.
10.RESOLUTION OF LITIGATION.
10.1 Upon issuance by the Commission of the Commission's
Approval Order that is no longer subject to judicial review,
TEP shall move to dismiss with prejudice all pending
litigation brought by TEP against the Commission and assist
the Commission in any remaining litigation regarding
implementation of the Electric Competition Rules.
<PAGE>
11.LOW-INCOME PROGRAMS.
11.1To ensure that low-income customers and programs are
not negatively impacted by the introduction and transition
to Competitive Retail Access, TEP's System Benefits Charge
as set forth in the tariffs filed herewith, shall include
charges to maintain its existing low-income programs (which
include weatherization, Life Fund, bill assistance and rate
discounts) in an amount of at least current levels through
December 31, 2004 when all such programs will be reviewed as
part of TEP's June 1, 2004 filing. Additionally, the
Parties agree to recommend to the Commission that TEP's low
income rate discount program (with the exception of the
medical discount which shall remain the same) be amended as
follows: (a) to replace the current percentage discounts
with a flat eight dollar ($8.00) per month discount; (b) the
applicant for the program must receive the bill in their
name, be a residential customer and meet one-hundred fifty
percent (150%) of the federal poverty income guidelines; and
(c) the program would operate as follows: (i) the program
would have an application which is self-declared/self-
addressed and available in English and in Spanish; (ii) once
TEP receives the application, it would be reviewed; (iii)
once the customer has been determined to be eligible, the
discount would become effective immediately;
(iv) participants who move within TEP's service territory
would have their eligibility transferred with them; and (v)
the customers would be notified annually by TEP when it is
time to reapply.
12.WAIVERS.
12.1 The Parties agree that waivers for TEP of the
Affiliated Interest Rules, Integrated Resource Planning
Rules, certain conditions in Decision No. 60480, and certain
<PAGE>
Commission decisions are in the public's interest. The
Commission's Approval Order shall include and grant to TEP
waivers from the following:
(a) A.A.C. R14-2-701, et seq. - Integrated Resource
Planning Rules.
(b) A.A.C. R14-2-801 et seq. - Affiliated Interest
Rules (to the extent necessary to comply with this
Settlement Agreement and the Electric Competition Rules).
(c) Decision No. 60480, Holding Company Order:
Condition Nos. 2, 12, 13, 17, 19, 20, 21, 23, 25, 26, 27 and
28.
(d) Decision No. 59594 - Mid-Year DSM and Renewables
Report.
(e) Decision No. 57586 - Director Transaction
Report.
(f) Decision No. 58316 - Investment Subsidiary
Liquidation Report and Purchase Agreement Summary.
(g) Decision No. 58497 - Avoided Cost Report.
(h) Decision No. 57090 - Time of Use Letters.
(i) Decision No. 56659 - Time of Use Report.
(j) Decision No. 56526 - Fuel & Performance Filing
(upon transfer of generation assets).
(k) Decision No. 57924 - Interruptible Report Filing
(upon transfer of generation assets).
(l) Statistical Data on Generating Units Filing
(upon transfer of generation assets).
(m) Generating Unit Outage Report Filing (upon
transfer of generation assets).
<PAGE>
13.CONTINGENCIES TO THIS SETTLEMENT AGREEMENT.
13.1 Neither the Parties nor the Commission shall take
any action that would diminish the recovery of TEP's
stranded costs or regulatory assets provided for herein. In
entering into this Settlement Agreement, TEP has relied upon
the Commission's irrevocable promise to permit recovery of
TEP's stranded costs and regulatory assets as provided
herein. Such irrevocable promise by the Commission shall be
evidenced by the issuance of the Commission's Approval
Order, shall survive the expiration of the Settlement
Agreement and shall be specifically enforceable against this
and any future Commission.
13.2 The Parties acknowledge that TEP's ability to offer
Competitive Retail Access is contingent upon conditions and
circumstances, a number of which are not within the direct
control of the Parties. Accordingly, the Parties agree that
it may become necessary to modify the terms of retail access
to account for such factors, and they further agree to
address such matters in good faith and to cooperate in an
effort to propose joint resolutions for any such matters.
13.3 This Settlement Agreement shall not become effective
until the issuance of a final Commission Order approving
this Settlement Agreement, without modification, on or
before August 1, 1999. In the event that the Commission
fails to approve this Settlement Agreement without
modification according to its terms on or before August 1,
1999, any Party to this Settlement Agreement may withdraw
from this Settlement Agreement and shall thereafter not be
bound by its provisions; provided, however, that if TEP
withdraws from this Settlement Agreement, the Settlement
Agreement shall be null and void and of no further force and
effect. Parties so withdrawing shall be free to pursue
<PAGE>
their respective positions without prejudice. Approval of
this Settlement Agreement by the Commission shall make the
Commission a Party to this Settlement Agreement and fully
bound by its provisions.
13.4 TEP shall not be prevented from seeking a change in
unbundled or Standard Offer rates prior to December 31,
2008, in the event of (a) conditions or circumstances which
constitute an emergency, such as the inability to finance on
reasonable terms; or (b) material changes in TEP's cost of
service for Commission regulated services resulting from
federal, tribal, state or local laws, regulatory
requirements, judicial decisions, actions or orders. Except
for the changes otherwise specifically contemplated by this
Agreement, unbundled and Standard Offer rates shall remain
unchanged until at least December 31, 2008.
13.5 Each provision of this Settlement Agreement is in
consideration and support of all the other provisions, and
expressly conditioned upon acceptance by the Commission
without change. In the event that the Commission fails to
adopt this Settlement Agreement according to its terms, this
Settlement Agreement shall be deemed withdrawn and the
parties shall be free to pursue their respective positions
in these proceedings without prejudice.
13.6 This Settlement Agreement shall not preclude TEP
from requesting, or the Commission from approving, changes
to specific rate schedules or terms and conditions of
service, or the approval of new rates or terms and
conditions of service, that do not significantly affect the
overall earnings of the Company or materially modify the
tariffs or increase the rates approved in this Settlement
Agreement. Nothing contained in this Settlement Agreement
shall preclude TEP from filing changes to its tariffs or
<PAGE>
terms and conditions of service which are not inconsistent
with its obligation under this Settlement Agreement.
14.MISCELLANEOUS PROVISIONS.
14.1 This Settlement Agreement represents an attempt to
compromise and settle disputed claims in a manner consistent
with the public interest. Nothing contained in this
Settlement Agreement is an admission by any of the Parties
that any of the positions taken, or that might be taken by
each in a formal proceeding, is unreasonable. In addition,
acceptance of this Settlement Agreement by the Parties is
without prejudice to any position taken by any party in
these proceedings.
14.2 The Parties agree that they shall make all
reasonable and good faith efforts necessary to (a) obtain
final approval of this Settlement Agreement by the
Commission; and (b) ensure full implementation and
enforcement of all the terms and conditions set forth in
this Settlement Agreement. Neither the Parties nor the
Commission shall take or propose any action which would be
inconsistent with the provisions of this Settlement
Agreement. All parties shall actively defend this
Settlement Agreement in the event of any challenge to its
validity or implementation.
14.3 To the extent that any provision of this Settlement
Agreement is inconsistent with any existing or future
Commission order, rule or regulation or is inconsistent with
the Electric Competition Rules as now existing or as may be
amended in the future, the provisions of this Settlement
Agreement shall control and the approval of this Settlement
Agreement by the Commission shall be deemed to constitute a
Commission-approved variation or exemption to any
conflicting provision of the Electric Competition Rules.
<PAGE>
14.4 The provisions of this Settlement Agreement shall be
implemented and enforceable notwithstanding the pendency of
a legal challenge to the Commission's approval of this
Settlement Agreement, unless such implementation and
enforcement is stayed or enjoined by a court having
jurisdiction over this matter. If any portion of the
Commission's Approval Order or any provision of this
Settlement Agreement is declared by a court to be invalid or
unlawful in any respect, then (a) TEP shall have no further
obligations or liabilities under this Settlement Agreement,
including, but not limited to, any obligation to implement
any future rate reductions under Section 5.1 not then in
effect; and (b) the modifications to TEP's CC&Ns referred to
in Section 8.1 shall be automatically revoked, in which
event TEP shall use its best efforts to continue to provide
noncompetitive services (as defined in the proposed Electric
Competition Rules) at then current rates with respect to
customer contracts in effect for competitive generation (for
the remainder of their term) to the extent not prohibited by
law and subject to applicable regulatory requirements.
14.5 The terms and provisions of this Settlement
Agreement apply solely to and are binding only in the
context of the purposes and results of this Settlement
Agreement and none of the positions taken herein by any
party may be referred to, cited or relied upon by any other
Party in any fashion as precedent or otherwise in any other
proceeding before this Commission or any other regulatory
agency or before any court of law for any purpose except in
furtherance of the purposes and results of this Settlement
Agreement.
14.6 The filing of this Settlement Agreement with the
Commission shall constitute TEP's compliance with the
requirements of Decision No. 61677 that it file with the
<PAGE>
Commission a plan for stranded cost recovery and unbundled
tariffs on or before June 14, 1999.
14.7 The Parties agree and recommend that the Commission
schedule public meetings and hearings for consideration of
this Settlement Agreement. The filing of this Settlement
Agreement with the Commission shall be deemed to be the
filing of a formal request for the expeditious issuance of a
procedural schedule that establishes such formal hearings
and public meetings as may be necessary for the Commission
to approve the Settlement Agreement and that afford
interested parties adequate opportunity to comment and be
heard on the terms of this Settlement Agreement consistent
with applicable legal requirements.
(THIS SPACE INTENTIONALLY LEFT BLANK)
<PAGE>
15. Proposed Order.
15.1 Within thirty (30) days of the filing of this
Settlement Agreement, TEP shall file with the Commission a
Proposed Form of Order approving this Settlement Agreement.
TEP shall confer with the Parties prior to filing the
Proposed Form of Order.
DATED as of this _____ day of June, 1999.
ARIZONANS FOR ELECTRIC
CHOICE AND COMPETITION
a coalition of energy
consumers in support
of competition and
includes Cable Systems
International, BHP
Copper, Motorola,
Chemical Lime, Intel,
Honeywell, Allied
Signal, Cyprus Climax
Metals, Asarco, Phelps
Dodge, Homebuilders of
Central Arizona,
Arizona Mining
Industry Gets Our
Support, Arizona Food
Marketing Alliance,
Arizona Association of
Industries, Arizona
Multihousing
Association, Arizona
Rock Products
Association, Arizona
Restaurant
Association, Arizona
Retailers Association,
Boeing, Arizona School
Board Association,
National Federation of
Independent Business,
Arizona Hospital
Association, Lockheed
Martin, Abbot Labs,
and Raytheon.
By: _________________________
Title: ________________________
<PAGE>
ARIZONANS FOR ELECTRIC
CHOICE AND COMPETITION
a coalition of energy
consumers in support
of competition and
includes Cable Systems
International, BHP
Copper, Motorola,
Chemical Lime, Intel,
Honeywell, Allied
Signal, Cyprus Climax
Metals, Asarco, Phelps
Dodge, Homebuilders of
Central Arizona,
Arizona Mining
Industry Gets Our
Support, Arizona Food
Marketing Alliance,
Arizona Association of
Industries, Arizona
Multihousing
Association, Arizona
Rock Products
Association, Arizona
Restaurant
Association, Arizona
Retailers Association,
Boeing, Arizona School
Board Association,
National Federation of
Independent Business,
Arizona Hospital
Association, Lockheed
Martin, Abbot Labs,
and Raytheon.
By: _________________________
Title: ________________________
<PAGE>
DATED this ____ day of June, 1999.
RESIDENTIAL UTILITY CONSUMER
OFFICE
By: __________________________
Title: _________________________
_______________________________
