ARIZONA PUBLIC SERVICE CO, 10-Q, 1994-05-16

ARIZONA PUBLIC SERVICE CO
10-Q, 1994-05-16
ELECTRIC & OTHER SERVICES COMBINED

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FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 1994

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ________________

Commission file number 1-4473

ARIZONA PUBLIC SERVICE COMPANY
______________________________
(Exact name of registrant as specified in its charter)

Arizona 86-0011170
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999
___________________________________________________________________
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (602) 250-1000
______________

___________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes / X / No / /

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Number of shares of common stock, $2.50 par value,
outstanding as of May 13, 1994: 71,264,947

<PAGE>

Glossary

ACC - Arizona Corporation Commission

ACC Order - Final order of the ACC approving the Settlement
Agreement

ACC Staff - Staff of the Arizona Corporation Commission

AFUDC - Allowance for funds used during construction

ALJ - DOL Administrative Law Judge

cents/kWh - Cents per kilowatt-hour

Company - Arizona Public Service Company

DOL - U. S. Department of Labor

EPEC - El Paso Electric Company

Four Corners - Four Corners Power Plant

ITCs - Investment tax credits

1991 Settlement - December 1991 rate case settlement

1993 10-K - Arizona Public Service Company Annual Report on Form 10-K for
the fiscal year ended December 31, 1993

NRC - Nuclear Regulatory Commission

Palo Verde - Palo Verde Nuclear Generating Station

Pinnacle West - Pinnacle West Capital Corporation

SFAS No. 106 - Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other
Than Pensions"

SFAS No. 112 - Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits"

Settlement Agreement - Rate Settlement Agreement between the Company and
the ACC Staff dated April 20, 1994

INDEPENDENT ACCOUNTANTS' REPORT

Arizona Public Service Company:

We have reviewed the accompanying condensed balance sheet of Arizona Public
Service Company as of March 31, 1994 and the related condensed statements
of income for the three-month and twelve-month periods ended March 31, 1994
and 1993 and cash flows for the three-month periods ended March 31, 1994
and 1993. These financial statements are the responsibility of the
Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to such condensed financial statements for them to be in
conformity with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Arizona Public Service Company as of
December 31, 1993 and the related statements of income, retained earnings,
and cash flows for the year then ended (not presented herein); and in our
recent report dated February 21, 1994, we expressed an unqualified opinion
on those financial statements. In our opinion, the information set forth
in the condensed balance sheet as of December 31, 1993 is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.

DELOITTE & TOUCHE
Phoenix, Arizona
May 13, 1994
</AUDIT-REPORT>

<PAGE>
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
------------------------
1994 1993
---------- ----------
(Thousands of Dollars)

ELECTRIC OPERATING REVENUES . . . . . . . $ 365,176 $ 371,303
---------- ----------

FUEL EXPENSES:
Fuel for electric generation . . . . . 57,968 55,008
Purchased power . . . . . . . . . . . 10,063 10,496
---------- ----------
Total . . . . . . . . . . . . . . . 68,031 65,504
---------- ----------
OPERATING REVENUES LESS FUEL EXPENSES . . 297,145 305,799
---------- ----------

OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . 66,336 63,174
Maintenance . . . . . . . . . . . . . . 31,285 27,937
Depreciation and amortization . . . . . 57,910 55,489
Income taxes - current . . . . . . . . 12,944 19,377
Income taxes - deferred . . . . . . . . 8,192 9,146
Other taxes . . . . . . . . . . . . . . 53,331 51,235
---------- ----------
Total . . . . . . . . . . . . . . . 229,998 226,358
---------- ----------
OPERATING INCOME . . . . . . . . . . . . 67,147 79,441
---------- ----------

OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . 846 652
Income taxes - current . . . . . . . . 506 562
Income taxes - deferred . . . . . . . . (7,299) (6,277)
Palo Verde accretion income . . . . . . 19,980 17,990
Other - net . . . . . . . . . . . . . . (396) (530)
---------- ----------
Total . . . . . . . . . . . . . . . 13,637 12,397
---------- ----------
INCOME BEFORE INTEREST DEDUCTIONS . . . . 80,784 91,838
---------- ----------

INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . 39,476 41,811
Interest on short-term borrowings . . . 1,595 1,481
Debt discount, premium and expense . . 2,412 2,266
AFUDC - debt . . . . . . . . . . . . . (1,167) (886)
---------- ----------
Total . . . . . . . . . . . . . . . 42,316 44,672
---------- ----------

NET INCOME . . . . . . . . . . . . . . . 38,468 47,166
PREFERRED STOCK DIVIDEND REQUIREMENTS . . 7,510 7,889
---------- ----------
EARNINGS FOR COMMON STOCK . . . . . . . . $ 30,958 $ 39,277
========== ==========

See Notes to Financial Statements.

<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)

Twelve Months
Ended March 31,
-------------------------
1994 1993
----------- -----------
(Thousands of Dollars)

ELECTRIC OPERATING REVENUES . . . . . . . $ 1,680,163 $ 1,696,035
----------- -----------

FUEL EXPENSES:
Fuel for electric generation . . . . . 234,394 239,240
Purchased power . . . . . . . . . . . . 68,679 57,604
----------- -----------
Total . . . . . . . . . . . . . . . 303,073 296,844
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES . . 1,377,090 1,399,191
----------- -----------

OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . 285,822 273,518
Maintenance . . . . . . . . . . . . . . 121,904 111,701
Depreciation and amortization . . . . . 225,031 220,265
Income taxes - current . . . . . . . . 91,090 119,385
Income taxes - deferred . . . . . . . . 69,579 56,230
Other taxes . . . . . . . . . . . . . . 223,470 217,260
----------- -----------
Total . . . . . . . . . . . . . . . 1,016,896 998,359
----------- -----------
OPERATING INCOME . . . . . . . . . . . . 360,194 400,832
----------- -----------

OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . 2,520 3,049
Income taxes - current . . . . . . . . 4,309 5,601
Income taxes - deferred . . . . . . . . (26,238) (23,045)
Palo Verde accretion income . . . . . . 76,870 69,213
Other - net . . . . . . . . . . . . . . (2,001) (6,135)
----------- -----------
Total . . . . . . . . . . . . . . . 55,460 48,683
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS . . . . 415,654 449,515
----------- -----------

INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . 162,275 177,177
Interest on short-term borrowings . . . 6,776 4,798
Debt discount, premium and expense . . 9,349 8,631
AFUDC - debt . . . . . . . . . . . . . (4,434) (4,151)
----------- -----------
Total . . . . . . . . . . . . . . . 173,966 186,455
----------- -----------

NET INCOME . . . . . . . . . . . . . . . 241,688 263,060
PREFERRED STOCK DIVIDEND REQUIREMENTS . . 30,461 32,017
----------- -----------
EARNINGS FOR COMMON STOCK . . . . . . . . $ 211,227 $ 231,043
=========== ===========

See Notes to Financial Statements.

<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS

ASSETS
(Unaudited)

March 31, December 31,
1994 1993
----------- ----------
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for
future use . . . . . . . . . . . . . . $ 6,383,317 $ 6,333,884
Less accumulated depreciation and
amortization . . . . . . . . . . . . . 2,005,419 1,991,143
----------- -----------
Total . . . . . . . . . . . . . . . . 4,377,898 4,342,741
----------- -----------
Construction work in progress . . . . . . 166,431 197,556
Nuclear fuel, net of amortization . . . . 72,629 60,953
----------- -----------
Utility plant - net . . . . . . . . . 4,616,958 4,601,250
----------- -----------

INVESTMENTS AND OTHER ASSETS: . . . . . . . . 66,066 63,224
----------- -----------

CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . 8,607 7,557
Accounts receivable:
Service customers . . . . . . . . . . 86,337 102,745
Other . . . . . . . . . . . . . . . . 11,095 21,091
Allowance for doubtful accounts . . . (1,492) (2,569)
Accrued utility revenues . . . . . . . . 48,241 60,356
Materials and supplies (at average cost) 96,150 96,174
Fossil fuel (at average cost) . . . . . . 29,832 34,220
Deferred income taxes . . . . . . . . . . 27,019 29,117
Other . . . . . . . . . . . . . . . . . 14,955 12,653
----------- -----------
Total current assets . . . . . . . . . 320,744 361,344
----------- -----------

DEFERRED DEBITS:
Regulatory asset for income taxes . . . . 580,761 585,294
Palo Verde Unit 3 cost deferral . . . . . 299,457 301,748
Palo Verde Unit 2 cost deferral . . . . . 176,483 177,998
Unamortized costs of reacquired debt . . 61,306 63,147
Unamortized debt issue costs . . . . . . 18,413 17,999
Other . . . . . . . . . . . . . . . . . . 186,099 185,258
----------- -----------
Total deferred debits . . . . . . . . 1,322,519 1,331,444
----------- -----------

TOTAL . . . . . . . . . . . . . . . . $ 6,326,287 $ 6,357,262
=========== ===========

See Notes to Financial Statements.

<PAGE>

ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS

LIABILITIES
(Unaudited)

March 31, December 31,
1994 1993
----------- -----------
(Thousands of Dollars)
CAPITALIZATION:
Common stock . . . . . . . . . . . . . . $ 178,162 $ 178,162
Premiums and expense - net . . . . . . . 1,037,929 1,037,681
Retained earnings . . . . . . . . . . . . 295,292 307,098
----------- -----------
Common stock equity . . . . . . . . . 1,511,383 1,522,941
Non-redeemable preferred stock . . . . . 193,561 193,561
Redeemable preferred stock . . . . . . . 183,400 197,610
Long-term debt less current maturities 2,163,966 2,124,654
----------- -----------
Total capitalization . . . . . . . . . 4,052,310 4,038,766
----------- -----------

CURRENT LIABILITIES:
Commercial paper . . . . . . . . . . . . 79,000 148,000
Current maturities of long-term debt . . 3,288 3,179
Accounts payable . . . . . . . . . . . . 52,342 81,772
Accrued taxes . . . . . . . . . . . . . . 156,894 112,293
Accrued interest . . . . . . . . . . . . 37,988 45,729
Other . . . . . . . . . . . . . . . . . . 68,145 60,737
----------- -----------
Total current liabilities . . . . . . 397,657 451,710
----------- -----------
DEFERRED CREDITS AND OTHER:
Deferred income taxes . . . . . . . . . . 1,401,133 1,391,184
Deferred investment tax credit . . . . . 148,730 149,819
Unamortized gain - sale of utility plant 105,146 107,344
Customer advances for construction . . . 16,106 15,578
Other . . . . . . . . . . . . . . . . . . 205,205 202,861
----------- -----------
Total deferred credits and other . . . 1,876,320 1,866,786
----------- -----------

COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)

TOTAL . . . . . . . . . . . . . . . . $ 6,326,287 $ 6,357,262
=========== ===========

See Notes to Financial Statements.

<PAGE>

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)

Three Months
Ended March 31,
-------------------------
1994 1993
------------ -----------
(Thousands of Dollars)

CASH FLOWS FROM OPERATIONS:
Net income . . . . . . . . . . . . . . . . $ 38,468 $ 47,166
Items not requiring cash:
Depreciation and amortization . . . . . . 57,910 55,489
Nuclear fuel amortization . . . . . . . . 6,433 10,552
AFUDC - equity . . . . . . . . . . . . . (846) (652)
Deferred income taxes - net . . . . . . . 16,580 16,573
Deferred investment tax credit - net . . (1,089) (1,150)
Refund obligation - net . . . . . . . . . (5,344) (5,344)
Palo Verde accretion income . . . . . . . (19,980) (17,990)
Changes in certain current assets and
liabilities:
Accounts receivable - net . . . . . . . . 25,327 39,694
Accrued utility revenues . . . . . . . . 12,115 7,084
Materials, supplies and fossil fuel . . . 4,412 5,831
Other current assets . . . . . . . . . . (2,302) (51,999)
Accounts payable . . . . . . . . . . . . (17,920) (30,292)
Accrued taxes . . . . . . . . . . . . . . 44,601 49,391
Accrued interest . . . . . . . . . . . . (7,759) (851)
Other current liabilities . . . . . . . . 12,863 3,151
Other - net . . . . . . . . . . . . . . . 2,993 137
----------- -----------
Net cash provided from operations . . . 166,462 126,790
----------- -----------

CASH FLOWS FROM FINANCING:
Long-term debt . . . . . . . . . . . . . . 98,899 147,069
Short-term borrowings - net . . . . . . . . (69,000) (171,000)
Dividends paid on common stock . . . . . . (42,500) --
Dividends paid on preferred stock . . . . . (7,621) (7,922)
Repayment of preferred stock . . . . . . . (14,225) (4,510)
Repayment and reacquisition of long-term
debt . . . . . . . . . . . . . . . . . . (60,285) (37,000)
----------- -----------
Net cash used for financing . . . . . . (94,732) (73,363)
----------- -----------

CASH FLOWS FROM INVESTING:
Capital expenditures . . . . . . . . . . . (68,684) (43,533)
AFUDC - equity . . . . . . . . . . . . . . 846 652
Other . . . . . . . . . . . . . . . . . . . (2,842) (2,890)
----------- -----------
Net cash used for investing . . . . . . (70,680) (45,771)
----------- -----------

Net increase in cash and cash equivalents 1,050 7,656
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . 7,557 1,152
----------- -----------
Cash and cash equivalents at end of period $ 8,607 $ 8,808
=========== ===========

Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest (excluding capitalized interest) $ 47,246 $ 42,729
Income taxes . . . . . . . . . . . . . . $ -- $ --

See Notes to Financial Statements.

<PAGE>

ARIZONA PUBLIC SERVICE COMPANY

NOTES TO FINANCIAL STATEMENTS

1. In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of
March 31, 1994, the results of operations for the three months and twelve
months ended March 31, 1994 and 1993, and the cash flows for the three
months ended March 31, 1994 and 1993. It is suggested that these financial
statements and notes to financial statements be read in conjunction with the
financial statements and notes to financial statements included in the 1993
10-K.

2. The Company's operations are subject to seasonal fluctuations, with
variations occurring in energy usage by customers from season to season and
from month to month within a season, primarily as a result of changing
weather conditions. For this and other reasons, the results of operations
for interim periods are not necessarily indicative of the results to be
expected for the full year.

3. All the outstanding shares of common stock of the Company are owned by
Pinnacle West. Pursuant to a Pledge Agreement, dated as of January 31,
1990, and as part of a restructuring of substantially all of its outstanding
indebtedness, Pinnacle West granted certain of its lenders a security
interest in all of the Company's outstanding common stock.

4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report
for changes in capitalization since December 31, 1993.

5. On April 20, 1994, the Company and the ACC Staff entered into a Rate
Settlement Agreement (the "Settlement Agreement"). Pursuant to the terms of
the Settlement Agreement, the Company's annual retail rates would be reduced
by approximately $32.3 million, or approximately 2.2%. The rate decrease
would be effective on the date the ACC issues a final order approving the
Settlement Agreement (the "ACC Order"); if the ACC Order is appealed or
judicial review of the ACC Order is sought, the parties would no longer be
bound by the terms of the Settlement Agreement, in which case the rate
reduction would cease and the Company would be entitled to recover any
revenue reduction experienced by the Company to that point. If the ACC does
not issue the ACC Order on or before June 1, 1994, the Settlement Agreement
will be deemed to be automatically withdrawn. The following description of
the Settlement Agreement is a summary, and is qualified in its entirety by
the Settlement Agreement, a copy of which is attached to this filing as an
exhibit.

Future Retail Rate Changes

Neither the Company nor the ACC Staff would file for a permanent change
to the Company's general rates and charges prior to December 31, 1996 (the
"Rate Moratorium Period"), except (i) in the event of an emergency, such as
the Company's inability to finance on reasonable terms or material increases
in the Company's cost of service as a result of federal, tribal, state or
local laws, regulatory requirements or orders; (ii) for changes relating to
specific rate schedules or terms and conditions of service that do not
significantly affect the overall earnings of the Company; and (iii) in the
case of certain individual large customers, the ACC Staff will expeditiously
review any Company tariff or contract filing for such customers and
recommend that such filings be decided promptly by the ACC.

If the Company files its next general rate application before January
1, 1998, the ACC would render its decision no later than twelve (12) months
after the filing, subject to certain exceptions, and the Company and the ACC
Staff would use their best efforts to settle the rate request within six (6)
months of the filing.

If the next general rate proceeding results in no increase in
residential rates, the ACC would compare the Company's costs of service
during the test period under review for fuel expense and operation and
maintenance for all sales (including sales for resale, but excluding
interchange and non-traditional sales) to a target cost of service index of
3.63 cents/kWh. Forty-five percent (45%) of any cost savings below the
target cost of 3.63 cents/kWh would be added to the Company's otherwise
appropriate revenue requirement in such rate proceeding. The Company's cost
of service index for these items during 1993 was 3.71 cents/kWh.

All three Palo Verde units are, and in future rate cases would be,
included in the Company's rate base as "used and useful," less the net
prudence disallowance required by the December 1991 rate case settlement
(the "1991 Settlement"). The ACC could re-examine this position in future
general rate cases in the event of significant changes in the operating
characteristics, reliability, or efficiency of any or all of the Palo Verde
units, or if any unit is derated. In addition, the "in-lieu" refund
obligation resulting from the 1991 Settlement would be deemed fully
discharged as of the date of the ACC Order. See Note 2 of Notes to
Financial Statements in Part II, Item 8 of the 1993 10-K for additional
information regarding the 1991 Settlement.

Decommissioning Funding

The rates authorized by the Settlement Agreement would include an
annual jurisdictional allowance for decommissioning funding for all three
Palo Verde units at the following levels: Unit 1 ($3.621 million); Unit 2
($3.877 million); and Unit 3 ($3.405 million). See Note 1.e of Notes to
Financial Statements in Part II, Item 8 of the 1993 10-K for additional
information regarding the Company's decommissioning obligations.

Renewable Resources/Demand Side Management

The Company would spend specified amounts over a three year period on
renewable resources and demand side management projects and, on or before
December 31, 1994, would submit to the ACC Staff a three-year renewable
resource plan containing specified elements. See Paragraph K of the
Settlement Agreement, incorporated by reference herein, for further details
regarding renewable resources and demand side management.

Investment Tax Credits

The Company would, upon the receipt of a favorable ruling from the
Internal Revenue Service, amortize below the line approximately $137 million
of its jurisdictional unamortized investment tax credits ("ITCs") over a
five (5) year period beginning with calendar year 1995 instead of the
current amortization schedule of twenty-five (25) years. After such five
(5) year period all such amortized ITCs would be treated as fully restored
to the Company's rate base in any future ratemaking proceedings. Because of
the non-cash earnings that would result from the Company's (i) accelerated
amortization of ITCs during the 1995-1999 period; and (ii) recognition of
the removal of a regulatory liability (associated with the 1991 Settlement)
as income during 1994, the Company does not expect its earnings would be
significantly affected if the Settlement Agreement were to become effective.

Pricing and Operating Procedures

The ACC Staff and the Company would meet in a good faith attempt to
develop new pricing and operating procedures that are responsive to market
conditions, competitive pressures in the electric utility industry, and the
ACC's relationship to regulated utilities and their customers. The parties
would submit a report to the ACC within twelve (12) months of the ACC Order
and seek prompt ACC approval of recommendations that would assist the
Company in achieving its residential price stability goals and enhancing its
competitiveness related to non-residential customers.

The ACC has scheduled a public hearing on the Settlement Agreement to
be held on May 13, 1994. The Company cannot currently predict whether, or
when, the Settlement Agreement will be approved by the ACC and become
effective.

6. The Palo Verde participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
federal law. This potential liability is covered by primary liability
insurance provided by commercial insurance carriers in the amount of $200
million and the balance by an industrywide retrospective assessment program.
The maximum assessment per reactor under the retrospective rating program
for each nuclear incident is approximately $79 million, subject to an annual
limit of $10 million per incident. Based upon the Company's 29.1% interest
in the three Palo Verde units, the Company's maximum potential assessment
per incident is approximately $69 million, with an annual payment limitation
of $8.73 million. The insureds under this liability insurance include the
Palo Verde participants and "any other person or organization with respect
to his legal responsibility for damage caused by the nuclear energy hazard."

The Palo Verde participants maintain "all risk" (including nuclear
hazards) insurance for property damage to, and decontamination and
decommissioning of, property at Palo Verde in the aggregate amount of $2.75
billion, a substantial portion of which must first be applied to
stabilization and decontamination. The Company has also secured insurance
against portions of any increased cost of generation or purchased power and
business interruption resulting from a sudden and unforeseen outage of any
of the three units. The insurance coverage discussed in this and the
previous paragraph is subject to certain policy conditions and exclusions.

7. Tube cracking in the steam generators of Palo Verde adversely affected
operations in 1993, and will continue to do so in 1994 and probably into
1995, because of the cost of replacement power and maintenance expense
associated with unit outages and corrective actions required to deal with
the issue.

Palo Verde Unit 2

The operation of Palo Verde Unit 2 has been particularly affected by
this issue. The Company has encountered axial tube cracking in the upper
regions of the two steam generators in Unit 2. This form of tube
degradation is uncommon in the industry and, in March 1993, led to a tube
rupture and an outage of the unit that extended to September 1993, during
which the unit was refueled. In March 1994, a mid-cycle inspection outage
was completed which revealed further tube degradation in Unit 2. The outage
included, among other things, inspecting and chemically cleaning each of
Unit 2's steam generators, and subsequently starting the unit up using boric
acid in the secondary water system. Unit 2 is scheduled for another mid-
cycle inspection outage in the fall of 1994. The Unit 2 refueling and
maintenance outage which was originally planned for the fall of 1994 is now
scheduled to be completed in early 1995.

Palo Verde Unit 3

Palo Verde Unit 3 is currently in a refueling outage, during which the
Company is inspecting and has chemically cleaned each of Unit 3's two steam
generators, and the unit will be started up with boric acid in the secondary
water system. The Company's inspection of these generators has revealed
axial cracking in a small number of tubes in the upper regions of each of
the generators. As a result, the Company has expanded the scope of its
inspections of these steam generators to obtain additional information about
the extent and severity of the axial cracking. The expanded inspection in
one of the steam generators has been completed. The Company expects that
the expanded inspection in the other steam generator will be completed
within the next week. The Company currently expects that Unit 3 will be
restarted in June. However, in light of the axial cracking that the Company
has found to date, the Company anticipates that Unit 3 would be removed from
service in late 1994 for a mid-cycle inspection of steam generators.

Palo Verde Unit 1

Palo Verde Unit 1 is scheduled for a refueling outage beginning in
March 1995. In late 1993 the Company concluded that Unit 1 could be safely
operated until the 1995 outage and submitted its supporting analysis to the
NRC. However, in light of the axial cracking found in the Unit 3 steam
generators, the Company is currently evaluating the potential need for a
mid-cycle steam generator tube inspection outage in Unit 1 late in 1994.

General

Although its analysis is not yet completed, the Company believes that
the axial cracking in the Unit 2 and Unit 3 steam generator tubes is due to
the susceptibility of tube materials to a combination of deposits on the
tubes and the relatively high temperatures at which all three units are
currently designed to operate. The Company also believes that it can retard
further tube degradation to acceptable levels by remedial actions, which
include chemically cleaning the generators and performing analyses and
adjustments that will allow the units to be operated at lower temperatures
without appreciably reducing their power output. Chemical cleaning has been
completed in Unit 2 and was completed in Unit 3 during its current refueling
outage. The temperature analyses should be concluded within the next
several months. In the meantime, the lower temperatures will be achieved by
operating the units at less than full power (86%).

The Company previously reported that all three units should be returned
to full power by mid-1995, and one or more of the units could be returned to
full power during 1994. However due to the axial cracking found in Unit 3,
the Company cannot currently predict when one or more of the units will be
returned to full power.

As a result of the Unit 2 mid-cycle outage and operating the units at
reduced power during the three months ended March 31, 1994, the Company
incurred additional fuel and purchased power costs totaling about $10
million (before income taxes). During the last nine months of 1994, the
Company expects to incur replacement power costs related to a mid-cycle
inspection outage at Unit 2 and operating the three units at 86% power
averaging approximately $1.5 million (before income taxes) a month, which
costs may continue into 1995. In the event that mid- cycle inspection
outages are necessary in late 1994 for Units 1 and 3 and assuming that each
such outage will last forty (40) days, the replacement power costs for both
outages are estimated to total approximately $7 million (before income
taxes). Fuel and purchased power costs increased $15.5 million (before
income taxes) in 1993 due to Palo Verde outages and reduced power operations
related to steam generator tube cracking.

The Company estimates that additional operations and maintenance
expenses totaling approximately $6 million (before income taxes) will be
incurred if mid-cycle inspection outages are performed at Units 1 and 3 in
late 1994.

When tube cracks are detected during any outage, the affected tubes are
taken out of service by plugging. That has occurred in a number of tubes in
all three units, particularly in Unit 2, which is by far the most affected
by cracking and plugging. The Company expects that because of the foregoing
remedial actions the rate of plugging will slow considerably and that, while
it may ultimately reach some limit on plugging, it can operate the present
steam generators over a number of years.

ARIZONA PUBLIC SERVICE COMPANY

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

OPERATING RESULTS

The following table summarizes the Company's revenues and earnings for the
three-month and twelve-month periods ended March 31, 1994 and 1993:

Periods ended March 31
(Thousands of Dollars)

Three Months Twelve Months
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----

Operating
Revenues $365,176 $371,303 $1,680,163 $1,696,035

Earnings $ 30,958 $ 39,277 $ 211,227 $ 231,043

OPERATING RESULTS - THREE-MONTH PERIOD ENDED MARCH 31, 1994 COMPARED TO
THREE-MONTH PERIOD ENDED MARCH 31, 1993

Earnings decreased in the three-month period ended March 31, 1994
primarily due to increased operations and maintenance expenses and lower
operating revenues. Operations and maintenance expenses increased primarily
due to a mid-cycle outage at Palo Verde Unit 2 (see Note 7 of Notes to
Financial Statements in Part I, Item 1 of this report). Interchange sales
to other utilities decreased due to reduced generation availability at Palo
Verde and increased hydroelectric power availability in the Pacific
Northwest. Partially offsetting these factors was a revenue increase due to
customer growth.

OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED MARCH 31, 1994 COMPARED TO
TWELVE-MONTH PERIOD ENDED MARCH 31, 1993

Earnings decreased in the twelve-month period ended March 31, 1994
primarily due to increased operations and maintenance expenses, lower
operating revenues, and higher purchased power costs, partially offset by
lower interest expense. Operations and maintenance expenses increased
largely as a result of the implementation of SFAS No. 106 and SFAS No. 112
(see Note 9 of Notes to Financial Statements in Part II, Item 8 of the 1993
10-K). Purchased power expense increased due to reduced generation
availability at Palo Verde, partially offset by lower fuel costs related to
lower interchange sales. Interchange sales to other utilities decreased due
to reduced generation availability at Palo Verde and increased hydroelectric
power availability in the Pacific Northwest. Retail sales decreased due to
the effects of milder weather. Partially offsetting these decreases was a
revenue increase due to customer growth. Interest expense decreased due to
refinancing debt at lower rates, lower debt balances, and lower rates on
variable-rate debt.

OTHER INCOME

Net income reflects accounting practices required for regulated public
utilities and represents a composite of cash and noncash items, including
AFUDC, accretion income on Palo Verde Unit 3 and the reversal of a refund
obligation related to the Palo Verde write-off in December, 1991. See Note
2 of Notes to Financial Statements in Part II, Item 8 of the 1993 10-K for
additional information regarding Palo Verde Unit 3 accretion income and the
reversal of the refund obligation. The Company recorded after-tax accretion
income and refund obligation reversals in the three months ended March 31,
1994 of $12.1 million and $3.2 million respectively. The Company will
record the remaining after-tax accretion income and refund obligation
reversals of $8.2 million and $2.4 million respectively by June 5, 1994.

TAX LEGISLATION

On April 4, 1994, a comprehensive tax package was signed into Arizona
law that, among other things, reduces the assessment ratio for utility
property from the current assessment ratio of 30% to 25%. This reduction
will be phased in over a five-year period at one percent per year beginning
in 1995. This legislation is expected to reduce or offset the historical
rate of growth of property tax expense.

1994 RATE SETTLEMENT AGREEMENT

See Note 5 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the Company's Rate Settlement Agreement with the
ACC Staff.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended March 31, 1994, the Company incurred
approximately $56 million in construction expenditures, accounting for
approximately 20% of the most recently estimated 1994 construction
expenditures. The Company has estimated total construction expenditures for
the years 1994, 1995, and 1996 to be approximately $279 million, $302
million, and $293 million, respectively.

Refunding obligations for preferred stock and long-term debt, a
capitalized lease obligation, and certain anticipated early redemptions are
expected to total approximately $167 million, $145 million, and $14 million
for the years 1994, 1995, and 1996, respectively. During the first three
months of 1994, the Company refunded approximately $75 million (45%) of the
estimated 1994 total.

On March 1, 1994, the Company redeemed all of the outstanding shares of
its $8.80 Cumulative Preferred Stock, Series K ($100 Par Value) in the
amount of $14.21 million. On April 4, 1994, the Company redeemed all
$60.264 million of its outstanding First Mortgage Bonds, 10 3/4% Series due
2019; for financial reporting purposes, this debt was considered
extinguished as of March 31, 1994. On March 2, 1994, the Company issued
$100 million of its First Mortgage Bonds, 6 5/8% Series due 2004, and
applied the net proceeds to the repayment of short term debt that had been
incurred for the redemption of preferred stock and for general corporate
purposes. On June 1, 1994, pursuant to sinking fund requirements, the
Company will redeem 100,000 shares of its $8.48 Cumulative Preferred Stock,
Series S, and 35,250 shares of its $11.50 Cumulative Preferred Stock, Series
R ("Series R Preferred Stock"), both at a redemption price of $100 per
share, plus accrued and unpaid dividends. On June 2, 1994, the Company will
redeem all 248,750 outstanding shares of its Series R Preferred Stock at a
redemption price of $105.45 per share, plus accrued and unpaid dividends.

Provisions in the Company's mortgage bond indenture and articles of
incorporation require certain coverage ratios to be met before the Company
can issue additional first mortgage bonds or preferred stock. In addition,
the mortgage bond indenture limits the amount of additional bonds which may
be issued to a percentage of net property additions, to property previously
pledged as security for certain bonds that have been redeemed or retired
and/or cash deposited with the mortgage bond trustee. As of March 31, 1994,
the Company estimates that the mortgage bond indenture and the articles of
incorporation would have allowed the Company to issue up to approximately
$1.21 billion and $892 million of additional first mortgage bonds and
preferred stock, respectively.

The ACC has authority over the Company with respect to the issuance of
long-term debt and equity securities. Existing ACC orders allow the Company
to have up to approximately $2.6 billion in long-term debt and approximately
$501 million of preferred stock outstanding at any one time.

Management does not expect any of the foregoing restrictions to limit
the Company's ability to meet its capital requirements.

PART II - OTHER INFORMATION

ITEM 5. Other Information

Palo Verde Nuclear Generating Station

By letter dated July 7, 1993, the NRC advised the Company that, as a
result of a Recommended Decision and Order by a Department of Labor
Administrative Law Judge (the "ALJ") finding that the Company discriminated
against a former contract employee at Palo Verde because he engaged in
"protected activities" (as defined under federal regulations), the NRC
intended to schedule an enforcement conference with the Company. Following
the ALJ's finding, the Company investigated various elements of both the
substantive allegations and the manner in which the U.S. Department of
Labor (the "DOL") proceedings were conducted. As a result of that
investigation, the Company determined that one of its employees had falsely
testified during the proceedings, that there were inconsistencies in the
testimony of another employee, and that certain documents were requested
in, but not provided during, discovery. The two employees in question are
no longer with the Company. The Company provided the results of its
investigation to the ALJ, who referred matters relating to the conduct of
two former employees of the Company to the U.S. Attorney's office in
Phoenix, Arizona. A review by that office is continuing. On December 15,
1993, the Company and the former contract employee who had raised the DOL
claim entered into a settlement agreement, a part of which was subject to
approval by the Secretary of Labor. On March 21, 1994, the Secretary of
Labor issued a final order approving the settlement. By letter dated
August 10, 1993, the Company also provided the results of its investigation
to the NRC, and advised the NRC that, as a result of the Company's
investigation, the Company had changed its position opposing the finding of
discrimination. The NRC is investigating this matter and the Company is
fully cooperating with the NRC in this regard.

By letter dated April 1, 1994, the NRC sent a Notice of Violation and
Proposed Imposition of Civil Penalty notifying the Company, as Palo Verde
operating agent, that the NRC proposes to impose a civil penalty in the
amount of $100,000 for two violations aggregated into one "Severity Level
III" problem. The notice relates to two Company-identified violations of
NRC regulatory requirements and Palo Verde security procedures involving
failure to ensure that a contractor of the Company (1) conducted adequate
background investigations before the Company granted certain individuals
unescorted site access to Palo Verde and (2) required annual audits of
private investigative agencies that assisted the contractor in conducting
background investigations. On April 29, 1994, the Company responded to the
notice and paid the $100,000 penalty.

See Note 7 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the Unit 2 steam generator tube rupture event
and related issues, including inspections of the Unit 1 and Unit 3 steam
generators. See also "Palo Verde Nuclear Generating Station" in Item 5 in
the Company's Current Report on Form 8-K dated April 30, 1994 for
additional information regarding these issues.

Construction and Financing Programs

See "Liquidity and Capital Resources" in Part I, Item 2 of this report
for a discussion of the Company's construction and financing programs.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No. Description

10.1 Rate Settlement Agreement dated
April 30, 1994 between the
Company and the ACC Staff

15.1 Letter in Lieu of Consent
Regarding Unaudited Interim
Financial Information

(b) Reports on Form 8-K

During the quarter ended March 31, 1994, and the period ended May 13,
1994 the Company filed the following reports on Form 8-K:

Report filed February 17, 1994, regarding (i) inspections of the steam
generators of the Palo Verde units and related issues, and (ii) the
Company's settlement agreement with a former contract employee.

Report filed March 1, 1994 comprised of exhibits to the Company's
Registration Statement (Registration No. 33-61228) relating to the Company's
offering of $100 million of its First Mortgage Bonds.

Report filed May 9, 1994 regarding the inspection of the Palo Verde
Unit 3 steam generators and related issues.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of

1934, the Company has duly caused this report to be signed on its behalf by

the undersigned thereunto duly authorized.

ARIZONA PUBLIC SERVICE COMPANY
(Registrant)

Dated: May 13, 1994 By Jaron B. Norberg
----------------- ----------------
Jaron B. Norberg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Officer Duly Authorized
to sign this Report)

EXHIBIT 10.1

RATE SETTLEMENT AGREEMENT

April 20, 1994

This rate settlement agreement ("Agreement") is entered into as of
April 20, 1994, by Arizona Public Service Company ("APS" or the "Company") and
the Staff of the Arizona Corporation Commission ("Staff") for the purpose of
establishing revised rates and charges and related procedures for APS that are
just, reasonable, and in the public interest.

INTRODUCTION

In 1991, the Arizona Corporation Commission ("Commission" or "ACC")
approved a comprehensive and innovative settlement (the "1991 Settlement")
between Staff and APS that sought to keep APS' customer rates as low as
possible by directing the Company to further reduce its costs and operate more
efficiently. Since the 1991 Settlement, APS has taken a number of aggressive
steps to meet the Commission's goal of expense reduction and improved service.

One of the fundamental principles underlying the 1991 Settlement was
the Company's commitment to contain its costs, and thus its rates, through
disciplined cost management. This commitment was underscored, at Staff's
request, by the establishment of target price and cost levels which APS must
meet without deterioration in service. The 1991 Settlement also set forth in
detail the procedures for determining target price and cost levels and the
regulatory and rate consequences of failing to meet those targets. Finally,
the 1991 Settlement included a two-year moratorium on APS' ability to file for
a permanent rate increase and set forth procedures for determining how APS'
future rate filings would be handled.

The rate moratorium required by the 1991 Settlement ended in
December 1993. In addition, the procedures for limiting future rate increases
will likewise lapse unless APS files a permanent rate increase application
prior to January l, 1995. APS has indicated it has no present intention of
filing such a rate increase application by that time and therefore the target
pricing provisions contained therein will be of no further force and effect
unless a new agreement is reached.

The settlement described below represents the Staff's "report card"
on APS' performance that the Commission ordered in the 1991 Settlement. APS
has exceeded the Commission's cost reduction goals and has improved customer
service. These accomplishments were only possible through the cooperative
alignment of regulatory and corporate goals, the public commitment and
accountability to such goals, and the dedicated efforts of Staff and APS.
This progress toward improved utility performance should continue. The
settlement described below is in the public interest and provides the
company's customers with substantial benefits that would otherwise not be
achieved either at all, or at least not without significant expenditure of
public and private resources in protracted litigation. These benefits include
(l) an immediate rate reduction of approximately 2.2%; (2) an additional
moratorium on further permanent rate applications; (3) a comprehensive study
of the impacts increasing competition in the electric utility industry may
have on APS and its customers; (4) an increase in expenditures on renewable
resources and DSM programs, and (5) a provision that will encourage APS to
continue effective cost containment by allowing the Company to share with
ratepayers cost savings achieved in the next several years. In addition,
Staff has carefully reviewed APS' current financial condition, and believes
the provisions of this Agreement should not adversely affect the Company's
financial health; rather, it will sharpen management's focus on the challenges
of the future in a manner that is beneficial to its customers and its
shareholders.

NOW, THEREFORE, Staff and APS agree to the following provisions
which they both believe to be fair and reasonable and in the public interest:

TERMS OF AGREEMENT

A. REVENUE REDUCTION. For usage on or after the effective date of the
Agreement, as determined in accordance with Paragraph S, APS
jurisdictional rates will be decreased by approximately 2.2%
(approximately $32.3 million annually, based on September 30, 1993 sales
as adjusted).

B. SETTLEMENT RATES. The revenue decrease provided for in Paragraph A of
this Agreement shall be allocated among customer classes by means of a
uniform .20 cents/kWh reduction in the energy charges for all APS rate
schedules except those rate schedules set forth in Attachment A. In
addition, and concurrent with this rate reduction, APS will be authorized
to amend Schedule 1 of its tariffs. These revised tariff sheets are set
forth in Attachment B.

C. MORATORIUM ON AND PROCEDURES FOR FURTHER RATE CHANGES.

i. APS shall not file for a change to its general rates and charges
prior to December 31, 1996 ("Rate Moratorium Period"). Staff will
likewise be subject to the same moratorium. This moratorium shall
not apply to price changes pursuant to Paragraph P of this
Agreement.

ii. The next general rate application filed by APS will become effective
and permanent as soon as practicable after the filing, but in no
event later than 12 months after the filing. Such time limit shall
not be extended and shall supersede any Commission regulation or
legislative enactment which provides for a different period of time,
unless the Commission determines that such time limit has become
unreasonable due either to any amendment to the rate filing made by
APS which substantially alters the amount of the requested rate
change or substantially alters the facts used as a basis for the
requested rate change, or to an extraordinary event not otherwise
provided for. The provisions of this subparagraph shall not apply
to any general rate application filed by APS after December 31,
1997.

iii. During the six month period following the filing referenced in the
preceding subparagraph, APS and Staff will act in good faith to use
their best efforts to achieve a settlement on APS' filing and will
submit a written report to the Commission at the end of that period
on the outcome of such settlement activities. If a settlement is
reached, Staff and APS shall promptly file a motion seeking
Commission approval of the settlement, and the Commission shall
accept or reject the settlement as soon as practicable after filing.

iv. Neither APS nor Staff shall be prevented from seeking a change in
rates prior to or after December 31, 1996 in the event of conditions
or circumstances which constitute an emergency, such as the
inability to finance on reasonable terms or material increases in
the Company's cost of service as a result of federal, tribal, state
or local laws, regulatory requirements or orders. Staff's review of
such a request by APS for emergency rates shall focus on the
existence of a substantial threat or harm to APS' ability to
continue to provide reliable service.

D. ESTABLISHMENT OF FUTURE RATE PRINCIPLES. APS will aggressively pursue
the cost savings contemplated by Paragraph L of this Agreement with the
goal of maintaining average residential prices beyond the Rate
Moratorium Period at the proposed 10.45 cents/kWh level resulting from
this settlement rate reduction. To meet this goal, APS will have to
further reduce operating costs to offset increases in externally
imposed expenses, such as interest and other capital costs, fuel and
taxes.

In addition, APS will require additional regulatory flexibility and
pricing freedom to properly respond to the competitive forces and
financial risks inherent in the larger customer market segments.
Therefore, Staff will meet with APS in a good faith attempt to develop
new pricing and operating procedures that are responsive to market
conditions, competitive pressures in the electric utility industry, and
the Commission's relationship to regulated utilities and their customers.
In this endeavor, the parties agree to consider, inter alia, flexible
pricing provisions, innovative procedures, and product pricing
principles. The parties agree to provide a written report on their
progress to the Commission within 12 months of the date of commission
approval of this Agreement and will request prompt Commission approval of
recommendations that will assist APS in achieving its residential price
stability goals.

E. PROPERTY INCLUDED IN RATE BASE. The rates and charges authorized herein
fully include a return on the recorded book original cost of all
jurisdictional APS assets (net of depreciation, amortization, and
deferred income taxes and other deferred credits) as of September 30,
1993, excepting construction work in progress as of such date. However,
nothing in this Agreement shall be construed as prohibiting Staff or any
other party from pursuing new issues related to expenditures made or
actions taken after September 30, 1993.

F. AMORTIZATION OF "IN-LIEU" REFUND OBLIGATION AND RESTORATION OF PV-3
TEMPORARY IMPAIRMENT. The "In-Lieu" refund obligation referenced in
Decision No. 57649 (December 6, 1991), as well as in the 1991 Settlement,
shall be deemed fully discharged as of the date of Commission approval of
this Agreement, unless discharged earlier pursuant to the terms of the
l99l Settlement. Likewise, the temporary value impairment of Palo Verde
Unit 3 shall be deemed fully restored as of the date of Commission
approval of this Agreement, unless restored earlier pursuant to the terms
of the 1991 Settlement.

G. DECOMMISSIONING. The rates authorized herein expressly include an annual
allowance for decommissioning funding for all three Palo Verde Units at
the following ACC jurisdictional levels:

PV 1 $3,621,000

PV 2 $3,877,000

PV 3 $3,405,000

APS shall fund the amounts specified above through quarterly
contributions to the decommissioning trusts. The Commission hereby
adopts and approves the decommissioning factors set forth in Attachment C
hereto. However, the Commission shall not be bound in any subsequent
rate case to adopt the decommissioning funding levels or decommissioning
factors adopted and approved herein, but any subsequent change in such
levels or factors adopted by the Commission would not be applied
retroactively.

H. DEPRECIATION. The rates and charges authorized herein include an
allowance for depreciation computed at the annual rates and using the
methodology indicated in Attachment D hereto. These revised depreciation
rates and methodology are hereby expressly approved. The Company's
depreciation rates may also be changed from time to time in accordance
with the results of depreciation studies performed by or for APS, with
such changes to thereafter become effective upon Staff's approval. The
Commission shall not be bound in any subsequent rate case to adopt for
ratemaking purposes any changes in depreciation rates made pursuant to
this provision, but such ratemaking treatment would not be applied
retroactively. Any provision of A.A.C. R14-2-102 inconsistent with this
paragraph will be expressly waived.

I. IMPROVEMENT OF APS' EQUITY RATIO. In Section 2.E of the l99l Settlement,
both Staff and the commission supported APS' goal of continuous progress
toward a 40% common equity ratio. Staff continues to support that goal.
Therefore, in furtherance of that objective, APS shall, upon receipt of a
favorable ruling from the Internal Revenue Service, amortize below the
line its unamortized investment tax credits ("ITCs") over a five (5) year
period beginning with calendar year 1995. All such amortized ITCs shall
thereafter be treated as fully restored to the Company's rate base in any
future ratemaking proceedings.

J. RATE MIGRATION ADJUSTMENT. The rates and charges authorized herein
include the effects of any rate migration occurring as a result of the
l99l Settlement, and provisions of Section 20 of such l99l Settlement
shall be deemed fully satisfied.

K. EXPENDITURES ON DEMAND SIDE MANAGEMENT AND RENEWABLE RESOURCES. It is
the parties' intent that significant expenditures on both Demand Side
Management ("DSM") and renewable resources development shall be made by
APS. APS shall increase its commitment and activities in Demand Side
Management and renewable resources according to the following schedule:

i. APS shall spend at least $30 million over the next three years on
AGREEMENT OF SETTLEMENT - APS RATE CASE pre-approved renewable
resources and pre-approved DSM projects (including capital and
expensed program costs for renewables, DSM program costs, lost net
revenues due to DSM, and a reward or incentive for KW deferrals for
DSM). If APS fails to spend or commit to spend $18 million on
pre-approved renewable resources or pre-approved DSM projects within
three years from the effective date of this order, the unspent or
uncommitted portion of such $18 million shall be credited to
ratepayers through the Energy Efficiency And Solar Energy Fund
("EEASE Fund") as described in the Plan of Administration
(Subparagraph iv.).

ii. Each year APS shall spend an initial $6 million on pre-approved DSM
and renewables projects ("Base DSM/Renewables Amount"). After APS
has spent the required $6 million per year, APS shall be entitled to
recover up to $12 million per year through the EEASE Fund for
pre-approved renewable resource and DSM projects (including capital
and expensed program costs for renewables, DSM program costs, lost
net revenues due to DSM, and a reward or incentive for KW deferrals
for DSM). The amount recoverable through the EEASE Fund excludes
the Base DSM/Renewables Amount.

iii. A single EEASE Fund surcharge factor shall be applied to all
jurisdictional sales (except those on existing special contracts
which exclude the surcharge). To equitably distribute DSM and
renewables costs, APS shall explore a full range of DSM and
renewables programs for all customer classes and propose for pre-
approval, where applicable, customer service charges for DSM and
renewables in which the participating customer pays APS for some or
all of APS' DSM and renewables costs attributable to that customer.

iv. APS shall file a revised "Plan of Administration" for the EEASE Fund
within thirty (30) days of the effective date of this order and the
plan shall be effective upon a Staff determination that the plan is
in compliance with the Commission's order adopting this Settlement.
The plan shall include a process to account for the Base
DSM/Renewables Amount.

v. To be eligible to meet the goals and cost recovery mechanism
described in Subparagraphs i. and ii., a renewable or DSM program
proposed by APS under the terms of the plan of administration
described in Subparagraph iv must have been pre-approved by Staff.
The parties intend that the pre-approval process be substantially
the same as the existing process established for the EEASE Fund.

vi. APS shall expend a minimum of $250,000 on a low income DSM pilot
program.

vii. On or before December 31, 1994, APS shall submit a three-year
renewable resource plan for Staff review and comment that includes:

a. an aggressive program to identify, install and operate
cost-effective applications of renewables within the APS system
by the end of the three-year plan period;

b. an aggressive program to identify, install and operate
cost-effective applications of renewables (which are expected
to be cost-effective within a few years) by the end of the
three-year plan period;

c. a mix of technologies that must include photovoltaics and solar
thermal energy systems;

d. research and development projects such as resource assessments
for and test installations of wind energy systems, geothermal
systems, biomass systems, and other innovative renewable
technologies; and

e. a mix of off-grid applications, grid-connected end use
applications, distribution and transmission support, and
generation.

f. APS shall work cooperatively with Staff to develop the plan.

g. APS shall commit to spend at least $9 million on renewables
over the next three years as part of its obligation under
Subparagraph i. herein.

h. Nothing in this Subparagraph vii. shall be construed as
obliging APS to exceed the spending levels required by
Subparagraph i.

viii. APS shall report annually to staff on its renewable resources
activities. This report shall include a formal presentation at a
workshop and a written report.

ix. APS' goal of achieving 12 MW of renewables by December 31, 2000 as
stated in the Resource Planning hearing (Docket No. U-0000-93-052)
shall not be affected by this Agreement. Expenditures made by APS
on pre-approved projects during the next three years for the purpose
of achieving this goal are eligible for recovery through the EEASE
Fund pursuant to Subparagraphs i. and ii.

x. The provisions of this paragraph shall supersede any provisions of
the decision in Docket No. U-0000-93-052 to the extent they are
inconsistent.

L. ADJUSTMENT FOR EFFECTIVE COST CONTAINMENT. In furtherance of the
Commission's goal to establish regulatory procedures which encourage
superior utility performance, the Company shall have the opportunity to
earn a reward in its next general rate proceeding if that rate proceeding
results in no increase in residential rates. In that proceeding, the
Commission shall compare the costs of service for fuel expense and
operation and maintenance, for the test period under review, with the
target cost of service index for fuel expense and operation and
maintenance for all sales including sales for resale (but excluding
interchange and non-traditional sales) of 3.63 cents/kWh to determine if
the Company has achieved additional cost savings. Any achieved cost
savings that result in a price index below 3.63 cents/kWh for fuel
expense and operation and maintenance for all sales including sales for
resale (but excluding interchange and non-traditional sales) shall be
allocated in such rate proceeding between the Company's customers and its
shareholders by first adding to the Company's otherwise appropriate
jurisdictional revenue requirement 45% of such savings.

M. FUTURE RATE TREATMENT OF PALO VERDE. Based on current Staff analysis of
APS' loads and resources, all three Palo Verde generating units are used
and useful and are included in rate base, less the net prudence
disallowance required by the l99l Settlement. In subsequent rate cases,
all three Palo Verde units shall likewise be included in rate base and
their fair value shall be based upon the depreciated original cost value
and reconstruction values, less the net prudence disallowance adjustment
in the l99l Settlement, in the same manner as other APS generating
facilities. Notwithstanding the foregoing, in the event that significant
changes in the operating characteristics, reliability or efficiency of
any or all of the Palo Verde units occur, or any unit is derated, the
Commission may re-examine in subsequent APS general rate cases the extent
to which such unit continues to be used and useful.

N. AFFILIATE TRANSACTION REQUIREMENTS. APS and its affiliates shall remain
subject to the provision of A.A.C. R14-2-801, et seq., as modified by
Decision No. 58063 (November 3, 1992). However, the additional reporting
and prior approval provisions of Commission Decision Nos. 54504 (April
29, 1985) and 55196 (September 18, 1986) are no longer necessary and are
hereby expressly revoked.

O. POST-RETIREMENT EMPLOYEE BENEFITS. The rates and charges herein do not
include an allowance for Post-Retirement Employee Benefits ("OPEBs") as
required under SFAS 106. APS, however, is funding OPEBs using external
funds. Although the Commission has not permitted recovery of this
liability accounting approach for any Arizona regulated entity, Staff
will consider recovery of these expenses in future rate proceedings.

P. INNOVATIVE RATES FOR "AT RISK" CUSTOMERS. In today's competitive
environment, APS and Staff agree that traditional ratemaking based on
fully-allocated embedded cost of service may be inappropriate for certain
of the company's larger customers. APS faces a significantly larger risk
that such customers may decide to leave the APS system for all or part of
their electric service needs, thus imposing the responsibility for
stranded fixed costs on others. This competitive challenge must be met
by timely permitting innovative rate structures and agreements that allow
APS maximum flexibility in responding to competition, while at the same
time benefiting its remaining customers. Consistent with the above
acknowledgements, Staff, therefore, will expeditiously review any APS
tariff or contract filing for such customers and recommend that such
filings be decided promptly by the Commission. Staff agrees that such
tariffs or contracts may contain price adjustment provisions which shall
be effective in accordance with their terms, provided that such prices
are at or above APS' marginal costs for service to such customers.

Q. MISCELLANEOUS RATE CHANGES. This Agreement shall not preclude changes
during the Rate Moratorium Period to specific rate schedules or terms and
conditions of service, or the approval of new rates or terms or
conditions of service, that do not significantly affect the overall
earnings of the Company.

R. FAIR VALUE. For rate making purposes, and in accordance with the terms
of this Agreement, APS' "fair value rate base" is $5,019,405,000 as of
September 30, 1993. A fair rate of return on APS' fair value rate base
is 7.35%. Staff and APS stipulate to the adoption of the above stated
fair value rate base and fair rate of return and agree that the resultant
revenue decrease, as reflected in Paragraph A above, results in just and
reasonable rates for the Company. The determinations made in this
section are made solely for the purpose of the settlement contemplated by
this Agreement.

S. EFFECTIVE DATE. Each provision of this Agreement is in consideration and
support of all the other provisions. This Agreement shall not become
effective until the issuance of a final Commission Order approving this
Agreement without change or alteration on or before June 1, 1994 in the
form of the Proposed Order attached hereto as Attachment E. In the event
that the Commission fails to adopt this Agreement according to its terms
on or before June 1, 1994, this Agreement shall be deemed automatically
withdrawn, the rate reduction provisions of this Agreement shall not take
effect, and APS and Staff shall be free to pursue their respective
positions without prejudice. In addition, if any appeal is taken or
other judicial review is sought of a final Commission order approving
this Agreement, then the parties shall no longer be bound by the terms of
this Agreement and this Agreement shall automatically become null and
void, in which case: (1) the rate reduction specified in Paragraph A.
shall immediately cease; (2) all bills rendered on or after that date
shall be at the rates existing immediately prior to the Commission's
approval of this Agreement; and (3) the revenue reduction theretofore
experienced by APS pursuant to Paragraph A. shall be recovered through
the EEASE surcharge mechanism.

T. AGREEMENT NOT PRECEDENTIAL. The terms and provisions of this Agreement
apply solely to and are binding only in the context of the purposes and
results of this Agreement and none of the positions taken herein by APS
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
Agreement. Nothing in this Agreement shall be construed as imposing a
cap on the Company's otherwise reasonable and prudent cost of service
for purposes of setting just and reasonable rates.

U. AGREEMENT AND COMPROMISE. This Agreement represents an attempt to
compromise and settle disputed claims regarding the prospective just and
reasonable rate levels for APS in a manner consistent with the public
interest and applicable legal requirements. Nothing contained in this
Agreement is an admission by APS that its current rate levels or rate
design are unjust or unreasonable.

V. PROPOSED FORM OF ORDER. A proposed form of order is appended hereto as
Attachment E, and is acceptable to both APS and Staff.

DATED at Phoenix, Arizona, this 20th day of April, 1994.

STAFF OF ARIZONA ARIZONA PUBLIC SERVICE COMPANY
CORPORATION COMMISSION

By Gary Yaquinto By William J. Post
Title Director, Utilities Division Title Senior Vice President

<TABLE>

ATTACHMENT A

ARIZONA PUBLIC SERVICE COMPANY

ACC Approved Contracts with Provisions
For Exemption from General Rate Case Changes

<CAPTION>
Customer Nature of Contract Docket No. Decision Date

<S> <C> <C> <C> <C>
1. Cyprus Bagdad Copper Mine Subject to inflation adjustment U-1345-94-041 58870 3-16-94

2. Stone Container Corporation Daily sale at incremental cost U-1345-89-320 56770 1-11-90

3. El Paso Natural Gas, Fixed price "opportunity sale" U-1345-90-292 57127 10-22-90
Seligman

4. El Paso Natural Gas, Leupp Fixed price "opportunity sale" U-1345-90-292 57127 10-22-90

5. Phelps Dodge Corporation 1-year fixed priced U-1345-93-304 58501 1-13-94
"opportunity sale"

</TABLE>

ATTACHMENT B

2.6 SECURITY DEPOSITS

Existing:

2.6.3 Cash deposits held by the Company six (6) months or longer shall
earn interest at the rate of six (6) percent per year. Deposits
on inactive accounts are applied to the final bill and the
balance, if any, is refunded to the Customer of record within
thirty (30) days.

New:

2.6.3 Cash deposits held by the Company six (6) months/183 days or
longer shall earn interest at the established one year Treasury
Bill rate as published in the Wall Street Journal, as determined
annually, as of January 1 of each year. Deposits on inactive
accounts are applied to the final bill and the balance, if any, is
refunded to the Customer of record within thirty (30) days.

4.4 RETURNED CHECKS

Existing:

4.4 Returned checks. If Company is notified by the Customer's bank that the
bank will not honor a check tendered by Customer for payment of any bill
because: (i) there are insufficient funds to cover the check; (ii) the
checking account has been closed; (iii) Customer has sent a "stop
payment" request on the check; or (iv) any other reason the bank will not
honor Customer's check, Company may require the Customer to make payment
in cash, by money order, certified check, or other means which guarantee
the Customer's payment to the Company.

4.4.1 Customer shall be charged a fee of eight dollars ($8.00) for each
instance where Customer tenders payment of a bill with a check
which is not honored by Customer's bank.

4.4.2 The tender of a dishonored check shall in no way (i) relieve
Customer of the obligation to render payment to Company under the
original terms of the bill, or (ii) defer Company's right to
terminate service for nonpayment of bills.

New:

4.4.1 Customer shall be charged a fee of ten dollars ($10.00) for each
instance where Customer tenders payment of a bill with a check
which is not honored by Customer's bank.

4.4.3 Where the Customer has tendered two (2) or more dishonored checks
in the past twelve (12) consecutive months, Company may require
Customer to make payment in cash, money order or cashier's check
for the next six (6) consecutive months.

<TABLE>
ATTACHMENT C

DECOMMISSIONING FACTORS

PALO VERDE

(Thousands of Dollars)
(APS Share)1
<CAPTION>
LINE TYPE OF FUNDING UNIT 1 UNIT 2 UNIT 3
<S> <C> <C> <C> <C> <C>
1 Proposed method of decommissioning. Prompt removal/
dismantlement

2 Year in which substantial
decommissioning costs will first be
incurred. 2023 2025 2027

3 Year in which decommissioning
will be substantially complete. 2031 2033 2035

4 Total costs of decommissioning ($ 1992). $ 128,665 $ 126,599 $ 133,710

5 Total costs of decommissioning
(future dollars) (see item #6) $ 625,554 $ 670,385 $ 782,066

6 For each year between 2 and 3, the 2023 $ 1,235 $ -- $ --
annual cost of decommissioning 2024 2,555 -- --
(future dollars). 2025 33,229 245 --
2026 106,498 4,247 --
2027 111,291 38,792 3,414
2028 116,299 113,438 4,638
2029 121,532 122,723 34,075
2030 55,621 128,246 107,665
2031 47,294 134,017 136,074
2032 -- 83,183 142,198
2033 -- 45,494 148,596
2034 -- -- 123,529
2035 -- -- 81,877

$ 625,554 $ 670,385 $ 782,066

7 Methodology used to convert current
dollars to future dollars. Annual Rate 4.5% 4.5% 4.5%

8 After-tax rate of return
(compounded annually). 6.5% 6.5% 6.5%

9 Period over which decommissioning
costs will be included in cost of service. 1988-2024 1988-2015 1988-2024

10 For each year in 9, above, projected
amount to be included in cost of service. See: Schedule of
Decommissioning
amounts
(attached)

11 Estimated date on which the plant will
no longer be included in rate base. 12/31/2024 12/31/2025 12/31/2026

12 Cost study upon which decommissioning
cost estimates are based. TLG Engineering
1992

- - -------------
1 APS ownership share is 29.1%
ACC jurisdictional share is approximately 95.27%

</TABLE>

ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE OF DECOMMISSIONING AMOUNTS INCLUDED IN COST OF SERVICE
PALO VERDE UNIT I
(Thousands of dollars)
(APS Share)

Annual
Contribution ACC 1/
Required to Jurisdiction
Line Year Decommission Amount

1 1988 $1,496 $1,425
2 1989 $1,982 $1,888
3 1990 $1,982 $1,888
4 1991 $1,993 $1,899
5 1992 $2,140 $2,039
6 1993 $3,801 $3,621
7 1994 $3,801 $3,621
8 1995 $3,801 $3,621
9 1996 $3,801 $3,621
10 1997 $3,801 $3,621
11 1998 $3,801 $3,621
12 1999 $3,801 $3,621
13 2000 $3,801 $3,621
14 2001 $3,801 $3,621
15 2002 $3,801 $3,621
16 2003 $3,801 $3,621
17 2004 $3,801 $3,621
18 2005 $3,801 $3,621
19 2006 $3,801 $3,621
20 2007 $3,801 $3,621
21 2008 $3,801 $3,621
22 2009 $3,801 $3,621
23 2010 $3,801 $3,621
24 2011 $3,801 $3,621
25 2012 $3,801 $3,621
26 2013 $3,801 $3,621
27 2014 $3,801 $3,621
28 2015 $3,801 $3,621
29 2016 $3,801 $3,621
30 2017 $3,801 $3,621
31 2018 $3,801 $3,621
32 2019 $3,801 $3,621
33 2020 $3,801 $3,621
34 2021 $3,801 $3,621
35 2022 $3,801 $3,621
36 2023 $3,801 $3,621
37 2024 $3,801 $3,621
-------- --------
$131,225 $125,011
- - -------------
1/ACC jurisdictional share is approximately 95.27%.

ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE OF DECOMMISSIONING AMOUNTS INCLUDED IN COST OF SERVICE
PALO VERDE UNIT II
(Thousands of dollars)
(APS Share)

Annual
Contribution ACC /1
Required to Jurisdiction
Line Year Decommission Amount

1 1988 $1,360 $1,296
2 1989 $1,802 $1,717
3 1990 $1,802 $1,717
4 1991 $1,839 $1,752
5 1992 $2,320 $2,210
6 1993 $4,069 $3,877
7 1994 $4,069 $3,877
8 1995 $4,069 $3,877
9 1996 $4,069 $3,877
10 1997 $4,069 $3,877
11 1998 $4,069 $3,877
12 1999 $4,069 $3,877
13 2000 $4,069 $3,877
14 2001 $4,069 $3,877
15 2002 $4,069 $3,877
16 2003 $4,069 $3,877
17 2004 $4,069 $3,877
18 2005 $4,069 $3,877
19 2006 $4,069 $3,877
20 2007 $4,069 $3,877
21 2008 $4,069 $3,877
22 2009 $4,069 $3,877
23 2010 $4,069 $3,877
24 2011 $4,069 $3,877
25 2012 $4,069 $3,877
26 2013 $4,069 $3,877
27 2014 $4,069 $3,877
28 2015 $4,069 $3,877
29 2016
30 2017
31 2018
32 2019
33 2020
34 2021
35 2022
36 2023
37 2024
-------- -------
$102,710 $97,862

- - -------------
1/ACC jurisdictional share is approximately 95.27%

ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE OF DECOMMISSIONING AMOUNTS INCLUDED IN COST OF SERVICE
PALO VERDE UNIT III
(Thousands of dollars)
(APS Share)

Annual
Contribution ACC /1
Required to Jurisdiction
Line Year Decommission Amount

1 1988 $1,435 $1,367
2 1989 $1,901 $1,811
3 1990 $1,901 $1,811
4 1991 $1,912 $1,822
5 1992 $2,052 $1,955
6 1993 $3,574 $3,405
7 1994 $3,574 $3,405
8 1995 $3,574 $3,405
9 1996 $3,574 $3,405
10 1997 $3,574 $3,405
11 1998 $3,574 $3,405
12 1999 $3,574 $3,405
13 2000 $3,574 $3,405
14 2001 $3,574 $3,405
15 2002 $3,574 $3,405
16 2003 $3,574 $3,405
17 2004 $3,574 $3,405
18 2005 $3,574 $3,405
19 2006 $3,574 $3,405
20 2007 $3,574 $3,405
21 2008 $3,574 $3,405
22 2009 $3,574 $3,405
23 2010 $3,574 $3,405
24 2011 $3,574 $3,405
25 2012 $3,574 $3,405
26 2013 $3,574 $3,405
27 2014 $3,574 $3,405
28 2015 $3,574 $3,405
29 2016 $3,574 $3,405
30 2017 $3,574 $3,405
31 2018 $3,574 $3,405
32 2019 $3,574 $3,405
33 2020 $3,574 $3,405
34 2021 $3,574 $3,405
35 2022 $3,574 $3,405
36 2023 $3,574 $3,405
37 2024 $3,574 $3,405
-------- --------
$130,717 $124,536

- - -------------
1/ACC jurisdictional share is approximately 95.27%

<TABLE>

SCHEDULE D

ARIZONA PUBLIC SERVICE COMPANY
SUMMARY OF DEPRECIATION STUDY
DATA AS OF DECEMBER 31, 1992

<CAPTION>
_______________ ____ _______________________ __________ __________ ________ __________ _____________
CURRENT CURRENT ASL ASL DIFFERENCE:
FERC DEPREC ANNUAL DEPREC ANNUAL ASL VS CURR
FACILITY ACCT DESCRIPTION RATES ACRUAL RATES ACCRUAL ACCRUAL
_______________ ____ _______________________ __________ __________ _________ __________ _____________
<S> <C> <C> <C> <C> <C> <C>
TOTAL STM PROD. 311 STRUCTURES 3.36% 2,959,194 2.93% 2,577,695 (381,499)
312 BOILER PLANT 3.47% 21,882,957 3.16% 19,914,719 (1,968,238)
314 TURBOGENERATORS 3.36% 5,195,391 2.79% 4,315,109 (880,282)
315 ACCESSORY ELECTRIC 3.36% 4,068,955 3.00% 3,632,996 (435,959)
316 MISC. POWER PLANT 3.83% 1,100,596 3.87% 1,112,369 11,773
---------- --------- ---------- -------------
TOTAL STM PROD. 35,207,093 3.15% 31,552,888 (3,654,205)
---------- --------- ---------- -------------

TOTAL NUCLEAR 321 STRUCTURES 2.86% 17,571,218 2.63% 16,167,849 (1,403,369)
322 REACTOR PLANT 2.86% 26,234,301 2.89% 26,470,174 235,873
322.01 STEAM GENERATORS 2.86% 1,255,693 8.84% 3,882,157 2,626,464
323 TURBOGENERATORS 2.86% 9,511,302 2.73% 9,078,071 (433,231)
324 ACCESSORY ELECTRIC 2.86% 7,555,323 2.81% 7,411,496 (143,827)
325 MISC. POWER PLANT 2.86% 3,718,898 3.09% 4,019,152 300,254
---------- --------- ---------- -------------
TOTAL NUCLEAR 65,846,735 3.83% 67,028,899 1,182,164
---------- --------- ---------- -------------

HYDRAULIC PROD. 331 STRUCTURES 0.00% 0 2.16% 1,609 1,609
332 RESERVOIRS & DAMS 2.61% 25,890 2.16% 21,395 (4,495)
333 WATER WHEELS & TURBINES 2.76% 4,339 2.16% 3,391 (948)
334 ACCESSORY ELECTRIC 3.06% 13,892 2.16% 9,792 (4,100)
335 MISC. POWER PLANT 6.24% 6,804 2.16% 2,352 (4,452)
336 ROADS & BRIDGES 3.32% 1,639 2.16% 1,065 (574)
---------- --------- ---------- -------------
TOTAL HYDRAULIC 52,562 2.16% 39,602 (12,960)
---------- --------- ---------- -------------

COMB. CYCLE 341 STRUCTURES 3.45% 119,420 4.71% 171,185 51,765
342 FUEL HOLDERS 3.03% 362,573 4.62% 580,476 217,903
344 GENERATORS 3.23% 1,615,002 4.55% 2,275,003 660,001
345 ACCESSORY ELECTRIC 3.13% 202,687 4.56% 295,288 92,601
346 MISC. POWER PLANT 4.00% 42,667 7.12% 75,946 33,279
---------- --------- ---------- -------------
TOTAL COMB. CYCLE 2,342,348 5.11% 3,397,898 1,055,550
---------- --------- ---------- -------------

TOTAL OTHER PROD. 341 STRUCTURES 3.45% 53,399 3.26% 39,203 (14,196)
342 FUEL HOLDERS 3.03% 194,771 3.26% 192,080 (2,691)
343 PRIME MOVERS 3.03% 967,531 2.96% 939,168 (28,363)
344 GENERATORS 3.23% 467,442 3.26% 528,126 60,684
345 ACCESSORY ELECTRIC 3.13% 211,811 3.11% 214,048 2,237
346 MISC. POWER PLANT 4.00% 68,904 3.39% 56,877 (12,027)
---------- --------- ----------- --------------
TOTAL OTHER PROD. 1,963,858 3.21% 1,969,502 5,644
---------- --------- ---------- -------------

TRANSMISSION 352 STRUCTURES 2.00% 371,131 2.10% 389,687 18,557
353 STATION EQUIPMENT 3.09% 8,432,837 2.66% 7,251,538 (1,181,299)
354 TOWERS & FIXTURES 2.17% 1,536,838 2.17% 1,534,477 (2,361)
355 POLES & FIXTURES 3.71% 4,054,810 3.02% 3,304,239 (750,571)
356 OVERHEAD CONDUCTORS 2.60% 3,856,484 2.36% 3,505,895 (350,589)
357 UNDERGROUND CONDUIT 2.10% 108,368 2.10% 108,368 0
358 UNDERGROUND CONDUCTORS 3.00% 376,184 2.10% 263,328 (112,855)
---------- --------- ---------- -------------
TOTAL TRANSMISSION 18,736,651 2.36% 16,357,533 (2,379,118)
---------- --------- ---------- -------------

DISTRIBUTION 361 STRUCTURES 2.50% 345,743 2.88% 397,605 51,861
362 STATION EQUIPMENT 3.39% 3,485,087 3.85% 3,954,035 468,949
364 POLES, TOWERS, & FIXTURES 3.09% 6,463,800 2.97% 6,218,998 (244,802)
365 OVERHEAD CONDUCTORS 2.00% 2,664,056 2.08% 2,764,586 100,530
366 UNDERGROUND CONDUIT 2.27% 1,766,205 1.83% 1,426,450 (339,755)
367 UNDERGROUND CONDUCTORS 3.33% 14,107,834 4.07% 17,260,169 3,152,334
368.1 LINE XFMRS-POLE TOP 3.13% 4,089,994 3.00% 3,920,122 (169,872)
368.2 LINE XFMRS-PAD MOUNTED 3.13% 5,183,492 3.28% 5,433,972 250,480
369 SERVICES 3.50% 3,919,625 3.43% 3,844,966 (74,660)
370 METERS 2.57% 2,485,532 3.85% 3,719,742 1,234,210
371 INSTAL. ON CUSTOMER PREM. 6.43% 727,710 4.33% 490,421 (237,288)
373 STREET LIGHTS 3.00% 1,230,351 3.75% 1,537,939 307,588
---------- --------- ---------- -------------
TOTAL DISTRIBUTION 46,469,428 3.28% 50,969,004 4,499,576
---------- --------- ---------- -------------

GENERAL PLANT 390 STRUCTURES 2.62% 2,174,566 3.50% 2,904,955 730,389
391 OFFICE FURNITURE 5.00% 998,562 3.96% 790,861 (207,701)
391.1 COMPUTER EQUIPMENT 12.50% 9,330,555 12.50% 9,330,555 0
391.2 OFFICE EQUIPMENT 11.11% 517,027 7.07% 329,084 (187,943)
393 STORES EQUIPMENT 2.50% 32,258 2.50% 32,258 0
394 TOOLS, SHOP & GARAGE 7.31% 992,895 4.00% 543,308 (449,587)
395 LAB EQUIPMENT 6.67% 78,930 6.67% 78,890 (39)
397 COMMUNICATIONS 6.25% 4,206,807 4.76% 3,205,187 (1,001,621)
398 MISC. EQUIPMENT 5.00% 66,613 5.00% 66,613 0
----------- --------- ----------- -------------
TOTAL GENERAL PLANT 18,398,214 5.55% 17,281,711 (1,116,503)
----------- --------- ----------- -------------

TOTAL DEPREC. PLANT IN SERVICE 189,016,890 188,597,037 (419,853)
=========== ========= =========== =============

</TABLE>

ATTACHMENT E

BEFORE THE ARIZONA CORPORATION COMMISSION

MARCIA WEEKS
CHAIRMAN
RENZ D. JENNINGS
COMMISSIONER
DALE H. MORGAN
COMMISSIONER

IN THE MATTER OF THE COMMISSION'S ) DOCKET NO. U-1345-94-120
EXAMINATION OF THE RATES AND )
CHARGES OF ARIZONA PUBLIC SERVICE ) DECISION NO.__________
COMPANY )
___________________________________) ORDER

Open Meeting
May __, 1994
Phoenix, Arizona

FINDINGS OF FACT

1. Arizona Public Service Company ("APS") is an Arizona corporation

providing electric utility service within the State of Arizona.

2. The rates and charges currently in effect for APS were determined

to be just and reasonable in APS' last general rate case, Decision No.

57649, dated December 6, 1991.

3. Since Decision No. 57649, a number of events have occurred which

affect APS' expenses, rate base and rate of return. Included among those

events are:

A. Capital costs for APS have fallen significantly.

B. APS has re-financed significant amounts of debt, and has
retired old preferred stock and issued new lower-cost
preferred stock.

C. APS has undertaken several programs to reduce costs and
improve efficiency.

D. APS has experienced significant growth in kWh sales
related to new customers.

4. The Staff of the Commission undertook a preliminary review of

these events and their impact on APS. APS provided Staff with substantial

amounts of data and supporting documentation, and made personnel available

as needed to help explain or interpret the data, to assist Staff in

conducting the review.

5. As a result of discussions conducted subsequent to Staff's review,

Staff and APS jointly concluded that the rates and charges previously

authorized by the Commission for APS should be reduced. Staff and APS also

reached agreement on a number of related issues.

6. Staff and APS believe that the agreement they have reached is

consistent with the best interests of the parties and the public interest

generally. The particulars of the agreement are memorialized in a written

Rate Settlement Agreement ("Agreement"), a copy of which is attached hereto

as Exhibit 1.

7. Pursuant to the Agreement, Staff and APS have agreed to the

following:

A. REVENUE REDUCTION. For usage on or after the effective date of
the Agreement, as determined in accordance with Paragraph S, APS
jurisdictional rates will be decreased by approximately 2.2%
(approximately $32.3 million annually, based on September 30,
1993 sales as adjusted).

B. SETTLEMENT RATES. The revenue decrease provided for in
Paragraph A shall be allocated among customer classes by means
of a uniform .20 cents/kWh reduction in the energy charges for
all APS rate schedules except those rate schedules set forth in
Attachment A to the Agreement. In addition, and concurrent with
this rate reduction, APS will be authorized to amend Schedule
1 of its tariffs. These revised tariff sheets are set forth in
Attachment B to the Agreement.

C. MORATORIUM ON AND PROCEDURES FOR FURTHER RATE CHANGES.

i. APS shall not file for a change to its general rates and
charges prior to December 31, 1996 ("Rate Moratorium
Period"). Staff will likewise be subject to the same
moratorium. This moratorium shall not apply to price
changes pursuant to Paragraph P.

ii. The next general rate application filed by APS will become
effective and permanent as soon as practicable after the
filing, but in no event later than 12 months after the
filing. Such time limit shall not be extended and shall
supersede any Commission regulation or legislative
enactment which provides for a different period of time,
unless the Commission determines that such time limit has
become unreasonable due either to any amendment to the
rate filing made by APS which substantially alters the
amount of the requested rate change or substantially
alters the facts used as a basis for the requested rate
change, or to an extraordinary event not otherwise
provided for. The provisions of this subparagraph shall
not apply to any general rate application filed by APS
after December 31, 1997.

iii. During the six month period following the filing
referenced in the preceding subparagraph, APS and Staff
will act in good faith to use their best efforts to
achieve a settlement on APS' filing and will submit a
written report to the Commission at the end of that period
on the outcome of such settlement activities. If a
settlement is reached, Staff and APS shall promptly file a
motion seeking Commission approval of the settlement, and
the Commission shall accept or reject the settlement as
soon as practicable after filing.

iv. Neither APS nor Staff shall be prevented from seeking a
change in rates prior to or after December 31, 1996 in the
event of conditions or circumstances which constitute an
emergency, such as the inability to finance on reasonable
terms or material increases in the Company's cost of
service as a result of federal, tribal, state or local
laws, regulatory requirements or orders. Staff's review
of such a request by APS for emergency rates shall focus
on the existence of a substantial threat or harm to APS'
ability to continue to provide reliable service.

D. ESTABLISHMENT OF FUTURE RATE PRINCIPLES. APS will aggressively
pursue the cost savings contemplated by Paragraph L with the
goal of maintaining average residential prices beyond the Rate
Moratorium Period at the proposed 10.45 cents/kWh level
resulting from this settlement rate reduction. To meet this
goal, APS will have to further reduce operating costs to offset
increases in externally imposed expenses, such as interest and
other capital costs, fuel and taxes.

In addition, APS will require additional regulatory flexibility
and pricing freedom to properly respond to the competitive
forces and financial risks inherent in the larger customer
market segments. Therefore, Staff will meet with APS in a good
faith attempt to develop new pricing and operating procedures
that are responsive to market conditions, competitive pressures
in the electric utility industry, and the Commission's
relationship to regulated utilities and their customers. In
this endeavor, the parties agree to consider, inter alia,
flexible pricing provisions, innovative procedures, and product
pricing principles. The parties agree to provide a written
report on their progress to the Commission within 12 months of
the date of Commission approval of the Agreement and will
request prompt Commission approval of recommendations that will
assist APS in achieving its residential price stability goals.

E. PROPERTY INCLUDED IN RATE BASE. The rates and charges
authorized herein fully include a return on the recorded book
original cost of all jurisdictional APS assets (net of
depreciation, amortization, and deferred income taxes and other
deferred credits) as of September 30, 1993, excepting
construction work in progress as of such date. However, nothing
in the Agreement shall be construed as prohibiting Staff or any
other party from pursuing new issues related to expenditures
made or actions taken after September 30, 1993.

F. AMORTIZATION OF "IN-LIEU" REFUND OBLIGATION AND RESTORATION OF
PV-3 TEMPORARY IMPAIRMENT. The "In-Lieu" refund obligation
referenced in Decision No. 57649 (December 6, 1991), as well as
in the 1991 Settlement, shall be deemed fully discharged as of
the date of Commission approval of the Agreement, unless
discharged earlier pursuant to the terms of the l99l
Settlement. Likewise, the temporary value impairment of Palo
Verde Unit 3 shall be deemed fully restored as of the date of
Commission approval of the Agreement, unless restored earlier
pursuant to the terms of the 1991 Settlement.

G. DECOMMISSIONING. The rates authorized herein expressly include
an annual allowance for decommissioning funding for all three
Palo Verde Units at the following ACC jurisdictional levels:

PV 1 $3,621,000

PV 2 $3,877,000

PV 3 $3,405,000

APS shall fund the amounts specified above through quarterly
contributions to the decommissioning trusts. The Commission
hereby adopts and approves the decommissioning factors set
forth in Attachment C to the Agreement. However, the
Commission shall not be bound in any subsequent rate case to
adopt the decommissioning funding levels or decommissioning
factors adopted and approved herein, but any subsequent change
in such levels or factors adopted by the Commission would not
be applied retroactively.

H. DEPRECIATION. The rates and charges authorized herein include
an allowance for depreciation computed at the annual rates and
using the methodology indicated in Attachment D to the
Agreement. These revised depreciation rates and methodology
are hereby expressly approved. The Company's depreciation
rates may also be changed from time to time in accordance with
the results of depreciation studies performed by or for APS,
with such changes to thereafter become effective upon Staff's
approval. The Commission shall not be bound in any subsequent
rate case to adopt for ratemaking purposes any changes in
depreciation rates made pursuant to this provision, but such
ratemaking treatment would not be applied retroactively. Any
provision of A.A.C. R14-2-102 inconsistent with this paragraph
will be expressly waived.

I. IMPROVEMENT OF APS' EQUITY RATIO. In Section 2.E of the l99l
Settlement, both Staff and the commission supported APS' goal
of continuous progress toward a 40% common equity ratio. Staff
continues to support that goal. Therefore, in furtherance of
that objective, APS shall, upon receipt of a favorable ruling
from the Internal Revenue Service, amortize below the line its
unamortized investment tax credits ("ITCs") over a five (5)
year period beginning with calendar year 1995. All such
amortized ITCs shall thereafter be treated as fully restored to
the Company's rate base in any future ratemaking proceedings.

J. RATE MIGRATION ADJUSTMENT. The rates and charges authorized
herein include the effects of any rate migration occurring as a
result of the l99l Settlement, and provisions of Section 20 of
such l99l Settlement shall be deemed fully satisfied.

K. EXPENDITURES ON DEMAND SIDE MANAGEMENT AND RENEWABLE RESOURCES.
It is the parties' intent that significant expenditures on both
Demand Side Management ("DSM") and renewable resources
development shall be made by APS. APS shall increase its
commitment and activities in Demand Side Management and
renewable resources according to the following schedule:

i. APS shall spend at least $30 million over the next three
years on pre-approved renewable resources and pre-approved
DSM projects (including capital and expensed program costs
for renewables, DSM program costs, lost net revenues due
to DSM, and a reward or incentive for KW deferrals for
DSM). If APS fails to spend or commit to spend $18
million on pre-approved renewable resources or
pre-approved DSM projects within three years from the
effective date of this order, the unspent or uncommitted
portion of such $18 million shall be credited to
ratepayers through the Energy Efficiency And Solar Energy
Fund ("EEASE Fund") as de- scribed in the Plan of
Administration (Subparagraph iv.).

ii. Each year APS shall spend an initial $6 million on
pre-approved DSM and renewables projects ("Base
DSM/Renewables Amount"). After APS has spent the required
$6 million per year, APS shall be entitled to recover up
to $12 million per year through the EEASE Fund for
pre-approved renewable resource and DSM projects
(including capital and expensed program costs for
renewables, DSM program costs, lost net revenues due
to DSM, and a reward or incentive for KW deferrals for
DSM). The amount recoverable through the EEASE Fund
excludes the Base DSM/Renewables Amount.

iii. A single EEASE Fund surcharge factor shall be applied to
all jurisdictional sales (except those on existing special
contracts which exclude the surcharge). To equitably
distribute DSM and renewables costs, APS shall explore a
full range of DSM and renewables programs for all customer
classes and propose for pre-approval, where applicable,
customer service charges for DSM and renewables in which
the participating customer pays APS for some or all of
APS' DSM and renewables costs attributable to that
customer.

iv. APS shall file a revised "Plan of Administration" for
the EEASE Fund within thirty (30) days of the effective
date of this order and the plan shall be effective upon a
Staff determination that the plan is in compliance
with the Commission's order adopting the Settlement.
The plan shall include a process to account for the
Base DSM/Renewables Amount.

v. To be eligible to meet the goals and cost recovery
mechanism described in Subparagraphs i. and ii., a
renewable or DSM program proposed by APS under the terms
of the plan of administration described in Subparagraph iv
must have been pre-approved by Staff. The parties intend
that the pre-approval process be substantially the same as
the existing process established for the EEASE Fund.

vi. APS shall expend a minimum of $250,000 on a low income DSM
pilot program.

vii. On or before December 31, 1994, APS shall submit a
three-year renewable resource plan for Staff review and
comment that includes:

a. an aggressive program to identify, install and
operate cost-effective applications of renewables
within the APS system by the end of the three-year
plan period;

b. an aggressive program to identify, install and
operate cost-effective applications of renewables
(which are expected to be cost-effective within a few
years) by the end of the three-year plan period;

c. a mix of technologies that must include photovoltaics
and solar thermal energy systems;

d. research and development projects such as resource
assessments for and test installations of wind energy
systems, geothermal systems, biomass systems, and
other innovative renewable technologies; and

e. a mix of off-grid applications, grid-connected end
use applications, distribution and transmission
support, and generation.

f. APS shall work cooperatively with Staff to develop
the plan.

g. APS shall commit to spend at least $9 million on
renewables over the next three years as part of its
obligation under Subparagraph i. herein.

h. Nothing in this Subparagraph vii. shall be construed
as obliging APS to exceed the spending levels
required by Subparagraph i.

viii. APS shall report annually to staff on its renewable
resources activities. This report shall include a formal
presentation at a workshop and a written report.

ix. APS' goal of achieving 12 MW of renewables by December 31,
2000 as stated in the Resource Planning hearing (Docket
No. U-0000-93-052) shall not be affected by the Agreement.
Expenditures made by APS on pre-approved projects during
the next three years for the purpose of achieving this
goal are eligible for recovery through the EEASE Fund
pursuant to Subparagraphs i. and ii.

x. The provisions of this paragraph shall supersede any
provisions of the decision in Docket No. U-0000-93-052 to
the extent they are inconsistent.

L. ADJUSTMENT FOR EFFECTIVE COST CONTAINMENT. In furtherance of
the Commission's goal to establish regulatory procedures which
encourage superior utility performance, the Company shall have
the opportunity to earn a reward in its next general rate
proceeding if that rate proceeding results in no increase in
residen- tial rates. In that proceeding, the Commission shall
compare the costs of service for fuel expense and operation and
maintenance, for the test period under review, with the target
cost of service index for fuel expense and operation and
maintenance for all sales including sales for resale (but
excluding interchange and non-traditional sales) of 3.63
cents/kWh to determine if the Company has achieved additional
cost savings. Any achieved cost savings that result in a price
index below 3.63 cents/kWh for fuel expense and operation and
maintenance for all sales including sales for resale (but
excluding interchange and non-traditional sales) shall be
allocated in such rate proceeding between the Company's
customers and its shareholders by first adding to the Company's
otherwise appropriate jurisdictional revenue requirement 45% of
such savings.

M. FUTURE RATE TREATMENT OF PALO VERDE. Based on current Staff
analysis of APS' loads and resources, all three Palo Verde
generating units are used and useful and are included in rate
base, less the net prudence disallowance required by the l99l
Settlement. In subsequent rate cases, all three Palo Verde
units shall likewise be included in rate base and their fair
value shall be based upon the depreciated original cost value
and reconstruction values, less the net prudence disallowance
adjustment in the l99l Settlement, in the same manner as other
APS generating facilities. Notwithstanding the foregoing, in
the event that significant changes in the operating
characteristics, reliability or efficiency of any or all of the
Palo Verde units occur, or any unit is derated, the Commission
may re-examine in subsequent APS general rate cases the extent
to which such unit continues to be used and useful.

N. AFFILIATE TRANSACTION REQUIREMENTS. APS and its affiliates
shall remain subject to the provision of A.A.C. R14-2-801, et
seq., as modified by Decision No. 58063 (November 3, 1992).
However, the additional reporting and prior approval provisions
of Commission Decision Nos. 54504 (April 29, 1985) and 55196
(September 18, 1986) are no longer necessary and are hereby
expressly revoked.

O. POST-RETIREMENT EMPLOYEE BENEFITS. The rates and charges
herein do not include an allowance for Post-Retirement Employee
Benefits ("OPEBs") as required under SFAS 106. APS, however,
is funding OPEBs using external funds. Although the Commission
has not permitted recovery of this liability accounting
approach for any Arizona regulated entity, Staff will consider
recovery of these expenses in future rate proceedings.

P. INNOVATIVE RATES FOR "AT RISK" CUSTOMERS. In today's
competitive environment, APS and Staff agree that traditional
ratemaking based on fully-allocated embedded cost of service
may be inappropriate for certain of the company's larger
customers. APS faces a significantly larger risk that such
customers may decide to leave the APS system for all or part of
their electric service needs, thus imposing the responsibility
for stranded fixed costs on others. This competitive challenge
must be met by timely permitting innovative rate structures and
agreements that allow APS maximum flexibility in responding to
competition, while at the same time benefiting its remaining
customers. Consistent with the above acknowledgements, Staff,
therefore, will expeditiously review any APS tariff or contract
filing for such customers and recommend that such filings be
decided promptly by the Commission. Staff agrees that such
tariffs or contracts may contain price adjustment provisions
which shall be effective in accordance with their terms,
provided that such prices are at or above APS' marginal costs
for service to such customers.

Q. MISCELLANEOUS RATE CHANGES. The Agreement shall not preclude
changes during the Rate Moratorium Period to specific rate
schedules or terms and conditions of service, or the approval
of new rates or terms or conditions of service, that do not
significantly affect the overall earnings of the Company.

R. FAIR VALUE. For rate making purposes, and in accordance with
the terms of the Agreement, APS' "fair value rate base" is
$5,019,405,000 as of September 30, 1993. A fair rate of return
on APS' fair value rate base is 7.35%. Staff and APS stipulate
to the adoption of the above stated fair value rate base and
fair rate of return and agree that the resultant revenue
decrease, as reflected in Paragraph A above, results in just
and reasonable rates for the Company. The determinations made
in this section are made solely for the purpose of the
settlement contemplated by the Agreement.

S. EFFECTIVE DATE. Each provision of the Agreement is in
consideration and support of all the other provisions. The
Agreement shall not become effective until the issuance
of a final Commission Order approving the Agreement
without change or alteration on or before June 1, 1994 in the
form of the Proposed Order attached thereto as Attachment
E. In the event that the Commission fails to adopt
the Agreement according to its terms on or before June 1,
1994, the Agreement shall be deemed automatically
withdrawn, the rate reduction provisions of the Agreement
shall not take effect, and APS and Staff shall be free to
pursue their respective positions without prejudice. In
addition, if any appeal is taken or other judicial review is
sought of a final Commission order approving the Agreement,
then the parties shall no longer be bound by the terms of
the Agreement and the Agreement shall automatically become
null and void, in which case: (1) the rate reduction
specified in paragraph A. shall immediately cease; (2) all
bills rendered on or after that date shall be at the rates
existing immediately prior to the Commission's approval of
the Agreement; and (3) the revenue reduction theretofore
experienced by APS pursuant to paragraph A. shall be
recovered through the EEASE surcharge mechanism.

T. AGREEMENT NOT PRECEDENTIAL. The terms and provisions of the
Agreement apply solely to and are binding only in the
context of the purposes and results of the Agreement and none
of the positions taken herein by APS 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 Agreement.
Nothing in this Agreement shall be construed as imposing a
cap on the Company's otherwise reasonable and prudent cost
of service for purposes of setting just and reasonable rates.

U. AGREEMENT AND COMPROMISE. The Agreement represents an
attempt to compromise and settle disputed claims regarding the
prospective just and reasonable rate levels for APS in a
manner consistent with the public interest and applicable
legal requirements. Nothing contained in the Agreement is an
admission by APS that its current rate levels or rate design
are unjust or unreasonable.

CONCLUSIONS OF LAW

1. APS is a public service corporation within the meaning of Article

15 of the Arizona Constitution and A.R.S. Section 40-250, 40-251 and 40-367.

2. The Commission has jurisdiction over APS, over the subject matter

of this proceeding, and over the Agreement submitted by the Staff and APS.

3. The Agreement resolves all matters contained therein in a manner

which is just and reasonable, and which promotes the public interest.

4. The Commission's acceptance and approval of the terms of this

Agreement between Staff and APS are in the public interest.

5. Based on the Agreement of APS and Staff, for purposes of this

proceeding, APS' fair value rate base as of September 30, 1993 is

$5,019,405,000, and a fair and reasonable rate of return on that fair value

rate base is 7.35%.

6. Based on the Agreement between APS and Staff, it is appropriate to

reduce APS' authorized revenues by $32.3 million from September 30, 1993

sales as adjusted.

7. APS should be directed to file revised tariffs consistent with the

Agreement and the findings contained herein.

8. The rates and charges authorized herein are just and reasonable.

ORDER

IT IS THEREFORE ORDERED that APS shall decrease its rates and

charges for all usage on or after the effective date of this Order

consistent with the Findings of Fact and Conclusions of Law contained herein

so as to result in an annual decrease of $32.3 million, and shall fund $6

million per year for the next three years on pre-approved Demand Side

Management and renewables projects, for a total of $38.3 million per year in

benefits to APS' customers.

IT IS FURTHER ORDERED that this Order incorporates the Agreement

executed April 20, 1994, between APS and Staff, and such Order is expressly

conditioned thereon.

IT IS FURTHER ORDERED that the terms and conditions of the

Agreement be and the same are hereby adopted and approved.

IT IS FURTHER ORDERED that APS is authorized and directed to file

revised schedules of rates and charges consistent with the Findings and

Conclusions of this Order.

IT IS FURTHER ORDERED that neither APS nor Commission Staff shall

file any application to initiate a general rate change prior to December 31,

1996.

IT IS FURTHER ORDERED that any general rate change proposed by the

Company on or after December 31, 1996, but not later than December 31, 1997,

if substantiated after appropriate notice and hearing and authorized by the

Commission, will become effective within twelve months following the filing

of the proposed rate change.

IT IS FURTHER ORDERED that this Order shall become effective

immediately.

BY ORDER OF THE ARIZONA CORPORATION COMMISSION

___________________________________________________________________
CHAIRMAN COMMISSIONER COMMISSIONER

IN WITNESS WHEREOF, I, JAMES MATTHEWS, Executive
Secretary of the Arizona Corporation Commission,
have hereunto, set my hand and caused the
official seal of this Commission to be affixed
at the Capitol, in the City of Phoenix, this
____ day of ___________, 1994.

_______________________________________
JAMES MATTHEWS
Executive Secretary

DISSENT____________________

Exhibit 15.1

May 13, 1994

Arizona Public Service Company
Post Office Box 53999
Phoenix, Arizona 85072-3999

We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
financial information of Arizona Public Service Company for the periods
ended March 31, 1994 and 1993, as indicated in our report dated May 13,
1994; because we did not perform an audit, we expressed no opinion on that
information.

We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is
incorporated by reference in Registration Statement Nos. 33-51085, 33-57822
and 33-61228 on Form S-3.

We are also aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act, is not considered a part of the registration
statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of the
Act.

DELOITTE & TOUCHE

Phoenix, Arizona