ARIZONA PUBLIC SERVICE CO, 10-Q, 1994-08-12

ARIZONA PUBLIC SERVICE CO
10-Q, 1994-08-12
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 June 30, 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 August 12, 1994: 71,264,947

<PAGE>

Glossary

ACC - Arizona Corporation Commission

ACC Order - Final order of the ACC dated June 1, 1994 approving the 1994
Settlement Agreement

ACC Staff - Staff of the Arizona Corporation Commission

AFUDC - Allowance for funds used during construction

cents/kWh - Cents per kilowatt-hour

Company - Arizona Public Service Company

ITCs - Investment tax credits

1991 Settlement - December 1991 retail rate case settlement

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

1994 Settlement Agreement - Rate Settlement Agreement between the Company and
the ACC Staff dated May 27, 1994

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"

INDEPENDENT ACCOUNTANTS' REPORT

Arizona Public Service Company:

We have reviewed the accompanying condensed balance sheet of Arizona Public
Service Company as of June 30, 1994 and the related condensed statements of
income for the three-month, six-month and twelve-month periods ended June 30,
1994 and 1993 and cash flows for the six-month periods ended June 30, 1994 and
1993. These condensed 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 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
August 11, 1994

</AUDIT-REPORT>
<PAGE>
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)

Three Months
Ended June 30,
--------------------------
1994 1993
--------- ---------
(Thousands of Dollars)

ELECTRIC OPERATING REVENUES .................. $ 417,588 $ 407,375
--------- ---------

FUEL EXPENSES:
Fuel for electric generation ............... 60,090 55,029
Purchased power ............................ 16,304 16,577
--------- ---------
Total ................................... 76,394 71,606
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ........ 341,194 335,769
--------- ---------

OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ......... 76,107 67,379
Maintenance ................................ 32,337 26,812
Depreciation and amortization .............. 57,664 55,574
Income taxes - current ..................... 15,250 26,495
Income taxes - deferred .................... 19,192 12,817
Other taxes ................................ 57,037 54,428
--------- ---------
Total ................................... 257,587 243,505
--------- ---------
OPERATING INCOME ............................. 83,607 92,264
--------- ---------

OTHER INCOME (DEDUCTIONS):
AFUDC - equity ............................. 977 758
Palo Verde accretion income ................ 13,616 18,469
Other - net ................................ 19,572 (853)
Income taxes - current ..................... 1,411 1,028
Income taxes - deferred .................... (10,118) (6,373)
--------- ---------
Total ................................... 25,458 13,029
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS ............ 109,065 105,293
--------- ---------

INTEREST DEDUCTIONS:
Interest on long-term debt ................. 40,564 41,082
Interest on short-term borrowings .......... 1,539 1,619
Debt discount, premium and expense ......... 2,461 2,308
AFUDC - debt ............................... (1,350) (1,080)
--------- ---------
Total ................................... 43,214 43,929
--------- ---------

NET INCOME ................................... 65,851 61,364
PREFERRED STOCK DIVIDEND REQUIREMENTS ........ 6,972 7,648
--------- ---------
EARNINGS FOR COMMON STOCK .................... $ 58,879 $ 53,716
========= =========

See Notes to Financial Statements.

<PAGE>

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)

Six Months
Ended June 30,
---------------------------
1994 1993
--------- ---------
(Thousands of Dollars)

ELECTRIC OPERATING REVENUES ................ $ 782,764 $ 778,678
--------- ---------

FUEL EXPENSES:
Fuel for electric generation ............. 118,058 110,037
Purchased power .......................... 26,367 27,073
--------- ---------
Total ................................. 144,425 137,110
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ...... 638,339 641,568
--------- ---------

OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ....... 142,443 130,553
Maintenance .............................. 63,622 54,749
Depreciation and amortization ............ 115,574 111,063
Income taxes - current ................... 28,194 45,872
Income taxes - deferred .................. 27,384 21,963
Other taxes .............................. 110,368 105,663
--------- ---------
Total ................................. 487,585 469,863
--------- ---------
OPERATING INCOME ........................... 150,754 171,705
--------- ---------

OTHER INCOME (DEDUCTIONS):
AFUDC - equity ........................... 1,823 1,410
Palo Verde accretion income .............. 33,596 36,459
Other - net .............................. 19,176 (1,383)
Income taxes - current ................... 1,917 1,590
Income taxes - deferred .................. (17,417) (12,650)
--------- ---------
Total ................................. 39,095 25,426
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS .......... 189,849 197,131
--------- ---------

INTEREST DEDUCTIONS:
Interest on long-term debt ............... 80,040 82,893
Interest on short-term borrowings ........ 3,134 3,100
Debt discount, premium and expense ....... 4,873 4,574
AFUDC - debt ............................. (2,517) (1,966)
--------- ---------
Total ................................. 85,530 88,601
--------- ---------

NET INCOME ................................. 104,319 108,530
PREFERRED STOCK DIVIDEND REQUIREMENTS ...... 14,482 15,537
--------- ---------
EARNINGS FOR COMMON STOCK .................. $ 89,837 $ 92,993
========= =========

See Notes to Financial Statements.

<PAGE>

ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)

Twelve Months
Ended June 30,
--------------------------------
1994 1993
----------- -----------
(Thousands of Dollars)

ELECTRIC OPERATING REVENUES ............... $ 1,690,376 $ 1,694,398
----------- -----------

FUEL EXPENSES:
Fuel for electric generation ............ 239,455 241,227
Purchased power ......................... 68,406 60,472
----------- -----------
Total ................................ 307,861 301,699
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES 1,382,515 1,392,699
----------- -----------

OTHER OPERATING EXPENSES:
Operations excluding fuel expenses 294,550 276,793
Maintenance ............................. 127,429 108,973
Depreciation and amortization ........... 227,121 221,308
Income taxes - current .................. 79,845 115,825
Income taxes - deferred ................. 75,954 59,512
Other taxes ............................. 226,079 218,414
----------- -----------
Total ................................ 1,030,978 1,000,825
----------- -----------
OPERATING INCOME .......................... 351,537 391,874
----------- -----------

OTHER INCOME (DEDUCTIONS):
AFUDC - equity .......................... 2,739 2,961
Palo Verde accretion income ............. 72,017 71,054
Other - net ............................. 18,424 (6,360)
Income taxes - current .................. 4,692 5,586
Income taxes - deferred ................. (29,983) (23,567)
----------- -----------
Total ................................ 67,889 49,674
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS ......... 419,426 441,548
----------- -----------

INTEREST DEDUCTIONS:
Interest on long-term debt .............. 161,757 169,701
Interest on short-term borrowings ....... 6,696 5,299
Debt discount, premium and expense 9,502 8,919
AFUDC - debt ............................ (4,704) (4,022)
----------- -----------
Total ................................ 173,251 179,897
----------- -----------

NET INCOME ................................ 246,175 261,651
PREFERRED STOCK DIVIDEND REQUIREMENTS 29,785 31,572
----------- -----------
EARNINGS FOR COMMON STOCK ................. $ 216,390 $ 230,079
=========== ===========
See Notes to Financial Statements.

<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS

ASSETS
(Unaudited)

June 30, December 31,
1994 1993
----------- -----------
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for
future use..................................... $ 6,432,779 $ 6,333,884
Less accumulated depreciation and amortization .. 2,033,180 1,991,143
----------- -----------
Total ....................................... 4,399,599 4,342,741
Construction work in progress ................... 156,104 197,556
Nuclear fuel, net of amortization ............... 66,549 60,953
----------- -----------
Utility plant - net ......................... 4,622,252 4,601,250
----------- -----------

INVESTMENTS AND OTHER ASSETS (at cost): ........... 67,887 63,224
----------- -----------

CURRENT ASSETS:
Cash and cash equivalents ....................... 7,286 7,557
Accounts receivable:
Service customers ........................... 94,673 102,745
Other ....................................... 17,617 21,091
Allowance for doubtful accounts ............. (1,568) (2,569)
Accrued utility revenues ........................ 70,472 60,356
Materials and supplies (at average cost) ........ 95,031 96,174
Fossil fuel (at average cost) ................... 24,577 34,220
Deferred income taxes ........................... 25,478 29,117
Other ........................................... 14,995 12,653
----------- -----------
Total current assets ........................ 348,561 361,344
----------- -----------

DEFERRED DEBITS:
Regulatory asset for income taxes ............... 564,841 585,294
Palo Verde Unit 3 cost deferral ................. 297,167 301,748
Palo Verde Unit 2 cost deferral ................. 174,967 177,998
Unamortized costs of reacquired debt ............ 64,975 63,147
Unamortized debt issue costs .................... 16,385 17,999
Other ........................................... 189,417 185,258
----------- -----------
Total deferred debits ....................... 1,307,752 1,331,444
----------- -----------

TOTAL ....................................... $ 6,346,452 $ 6,357,262
=========== ===========

See Notes to Financial Statements.

<PAGE>

ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS

LIABILITIES
(Unaudited)

June 30, December 31,
1994 1993
----------- -----------
(Thousands of Dollars)
CAPITALIZATION:
Common stock ........................... $ 178,162 $ 178,162
Premiums and expense - net ............. 1,038,322 1,037,681
Retained earnings ...................... 268,760 307,098
----------- -----------
Common stock equity ................. 1,485,244 1,522,941
Non-redeemable preferred stock ......... 193,561 193,561
Redeemable preferred stock ............. 145,000 197,610
Long-term debt less current maturities . 2,163,173 2,124,654
----------- -----------
Total capitalization ................ 3,986,978 4,038,766
----------- -----------

CURRENT LIABILITIES:
Commercial paper ....................... 119,500 148,000
Current maturities of long-term debt ... 3,402 3,179
Accounts payable ....................... 81,646 81,772
Accrued taxes .......................... 110,016 112,293
Accrued interest ....................... 45,081 45,729
Common dividends payable ............... 65,000 --
Other .................................. 63,594 60,737
----------- -----------
Total current liabilities .......... 488,239 451,710
----------- -----------

DEFERRED CREDITS AND OTHER:
Deferred income taxes .................. 1,414,639 1,391,184
Deferred investment tax credit ......... 147,073 149,819
Unamortized gain - sale of utility plant 102,948 107,344
Customer advances for construction ..... 16,702 15,578
Other .................................. 189,873 202,861
----------- -----------
Total deferred credits and other ... 1,871,235 1,866,786
----------- -----------

COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)

TOTAL ............................... $ 6,346,452 $ 6,357,262
=========== ===========

See Notes to Financial Statements.

<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
-----------------------
1994 1993
--------- ---------
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income........................................ $ 104,319 $ 108,530
Items not requiring cash: ........................
Depreciation and amortization .................. 115,574 111,063
Nuclear fuel amortization ...................... 12,848 18,069
AFUDC - equity ................................. (1,823) (1,410)
Deferred income taxes - net .................... 47,547 37,332
Deferred investment tax credit - net ........... (2,746) (2,719)
Refund obligation - net ........................ (9,308) (10,687)
Palo Verde accretion income (33,596) (36,459)
Changes in certain current assets and liabilities:
Accounts receivable - net ...................... 10,545 40,605
Accrued utility revenues ....................... (10,116) (11,505)
Materials, supplies and fossil fuel ............ 10,786 5,102
Other current assets ........................... (2,342) (6,013)
Accounts payable ............................... 13,339 (19,645)
Accrued taxes .................................. (2,277) 10,196
Accrued interest ............................... (666) 813
Other current liabilities ...................... 8,485 4,743
Other - net ...................................... (10,392) 17,712
--------- ---------
Net cash flow provided by operating activities 250,177 265,727
--------- ---------

Cash Flows from Financing Activities:
Long-term debt ................................... 401,168 147,069
Short-term borrowings - net ...................... (28,500) (48,000)
Dividends paid on common stock ................... (62,500) (42,500)
Dividends paid on preferred stock ............... (14,945) (15,748)
Repayment of preferred stock ..................... (54,096) (28,040)
Repayment and reacquisition of long-term debt .... (367,044) (168,231)
--------- ---------
Net cash flow used for financing activities (125,917) (155,450)
--------- ---------

Cash Flows from Investing Activities:
Capital expenditures.............................. (121,691) (99,942)
AFUDC - equity ................................... 1,823 1,410
Other............................................. (4,663) (4,837)
--------- ---------
Net cash flow used for investing activities... (124,531) (103,369)
--------- ---------

Net increase (decrease) in cash and cash equivalents (271) 6,908
Cash and cash equivalents at beginning of period ... 7,557 1,152
--------- ---------
Cash and cash equivalents at end of period ......... $ 7,286 $ 8,060
========= =========

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) ...... $ 81,106 $ 82,419
Income taxes ................................... $ 29,047 $ 38,479

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 June 30,
1994, the results of operations for the three months, six months and twelve
months ended June 30, 1994 and 1993, and the cash flows for the six months ended
June 30, 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. By order dated June 1, 1994 (the "ACC Order"), the ACC approved a Settlement
Agreement dated May 27, 1994 (the "1994 Settlement Agreement"), between the
Company and ACC Staff. The 1994 Settlement Agreement replaces the agreement
dated April 20, 1994. Pursuant to the terms of the 1994 Settlement Agreement,
the Company's annual retail rates were reduced by approximately $38.3 million,
or approximately 2.7%, effective June 1, 1994. The Company will also be allowed
to recover through a surcharge up to an additional $6 million for demand side
management and renewable resource programs, effective upon ACC approval of the
Company's application for such programs. The reduction in retail rates offset by
the demand side management surcharge would result in a net rate reduction of
approximately 2.2%. The ACC Order is final and non-appealable. The following
description of the ACC Order is a summary and is qualified in its entirety by
the ACC Order, a copy of which is attached to this filing as an exhibit.

Future Retail Rate Changes

Neither the Company nor the ACC Staff will 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 will render its decision no later than twelve (12) months after
the filing, subject to certain exceptions.

If the next general rate proceeding results in no increase in
residential rates, the ACC will 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 for resale) 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 will 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"). As with any of the Company's generating facilities, the ACC can
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 was 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 ACC Order 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 will spend specified annual amounts over an indefinite
period on renewable resources and demand side management projects and, on or
before December 31, 1994, will submit to the ACC Staff a three-year renewable
resource plan containing specified elements. See Paragraph K of the ACC Order,
incorporated by reference herein, for further details regarding renewable
resources and demand side management.

Investment Tax Credits; Depreciation Reversal

The Company will, 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 remaining
amortization schedule of approximately twenty-five (25) years. After this five
(5) year period all such amortized ITCs will be treated as fully restored to the
Company's rate base in any future ratemaking proceedings. The ACC Order also
allowed the Company to reverse certain depreciation related to Palo Verde
(associated with the 1991 Settlement), which resulted in approximately $15
million of after-tax income during the three-month period ended June 30, 1994.

Pricing and Operating Procedures

The ACC Staff and the Company will 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 will
submit quarterly updates and a final report to the ACC within twelve (12) months
of the ACC Order and seek prompt ACC approval of recommendations that will
assist the Company in achieving its residential price stability goals and
enhancing its competitiveness related to non-residential customers.

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. The Company has encountered axial tube cracking in the upper regions of the
two steam generators in Unit 2 and, to a lesser degree, in Unit 3. This form of
tube degradation is uncommon in the industry and, in March 1993, led to a tube
rupture in Unit 2 resulting in the extension of a scheduled refueling outage
through September 1993. 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 Units 2 and
3, and the Company expects to chemically clean the Unit 1 steam generators
during its refueling outage in 1995. The Company began operating the units at
approximately 86% capacity in October 1993 to reduce the operating temperature,
pending the completion of the temperature analyses and appropriate modification
of operating procedures. The temperature analyses have been concluded for Units
1 and 3, and these units are operating at or near 100% capacity. The Company
anticipates that Unit 2, which is currently operating at 88% capacity, will be
returned to full power by late 1994.

In March 1994, a mid-cycle inspection outage was completed at Unit 2 to
assess the status of the unit's steam generators' tubes and to continue
implementing a program of improvements. Unit 2 is scheduled for another
mid-cycle inspection outage beginning in September 1994 and a refueling and
maintenance outage in early 1995. Palo Verde Unit 3 completed a refueling outage
in June 1994 and, in light of the axial cracking that the Company has found to
date, Unit 3 is scheduled for a mid-cycle inspection outage beginning in
November 1994. Palo Verde Unit 1 is scheduled for a refueling outage beginning
in April 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, the potential need for a mid-cycle steam generator tube inspection
outage in Unit 1 late in 1994 is currently being evaluated.

During the six months ended June 30, 1994, the Company incurred
replacement power costs totalling approximately $17 million (before income
taxes) above normal levels as a result of the Unit 2 mid-cycle outage and
operating the units at reduced power. Because a Unit 2 refueling and maintenance
outage which was scheduled to begin in late 1994 is now scheduled for 1995, the
Company does not expect to incur any additional replacement power costs above
normal levels during the remainder of the year. In the event that a mid-cycle
inspection outage is necessary in late 1994 for Unit 1 and assuming that such an
outage would last about a month, the incremental replacement power costs and
operation and maintenance expenses related to the outage are estimated to be
approximately $5 million, before income taxes. In comparison, replacement power
costs exceeded normal levels in 1993 by approximately $15.5 million (before
income taxes) due to Palo Verde outages and reduced power operations.

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 its program to
control the tube degradation, the rate of plugging will slow to a manageable
level.

<PAGE>
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, six-month and twelve-month periods ended June 30, 1994 and 1993:

Periods ended June 30
(Thousands of Dollars)

Three Months Six Months Twelve Months
----------------- ------------------- ----------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
Operating
Revenues $417,588 $407,375 $782,764 $778,678 $1,690,376 $1,694,398

Earnings for
common stock $ 58,879 $ 53,716 $ 89,837 $ 92,993 $ 216,390 $ 230,079

OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED
TO THREE-MONTH PERIOD ENDED JUNE 30, 1993

Earnings increased in the three-month period ended June 30, 1994
primarily due to the reversal of certain previously recorded depreciation
related to Palo Verde and increased revenues. Pursuant to the ACC Order, the
Company reversed accumulated depreciation related to the portion of Palo Verde
written off as a result of the 1991 Settlement. See Note 5 of Notes to Financial
Statements in Part I, Item 1 of this report for a detailed discussion of the ACC
Order. Operating revenues increased primarily due to customer growth. These
positive factors were partially offset by increases in both operation and
maintenance expenses and fuel costs. Operation and maintenance expenses were
higher primarily due to employee severance costs resulting from various Company
cost reduction efforts and fossil plant maintenance costs. Fuel costs were
higher primarily due to replacement power related to reduced nuclear generation.

OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO
SIX-MONTH PERIOD ENDED JUNE 30, 1993

Earnings decreased in the six-month period ended June 30, 1994
primarily due to increases in operation and maintenance expenses and fuel costs.
Operation and maintenance expenses increased due to higher power plant
maintenance costs and employee severance costs. Fuel costs were higher primarily
due to replacement power related to reduced nuclear generation, offset partially
by the effect of lower interchange sales. These negative factors were partially
offset by the depreciation reversal related to Palo Verde and increased
revenues. Revenues increased due to retail customer growth and higher usage per
customer, partially offset by lower interchange sales due to reduced nuclear
generation.

OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED
TO TWELVE-MONTH PERIOD ENDED JUNE 30, 1993

Earnings decreased in the twelve-month period ended June 30, 1994
primarily due to increased operation and maintenance expenses, higher fuel costs
and lower operating revenues. Operation and maintenance expenses increased due
to higher power plant maintenance costs, the implementation of SFAS No. 106 and
SFAS No. 112 in 1993 (see Note 9 of Notes to Financial Statements in Part II,
Item 8 of the 1993 10-K), and employee severance costs. Fuel costs were higher
primarily because of replacement power costs due to reduced nuclear generation,
partially offset by the effect of lower interchange sales. Operating revenues
were down due to lower interchange sales and milder weather partially offset by
customer growth. These negative factors were partially offset by the
depreciation reversal related to Palo Verde and lower interest costs.

OTHER INCOME

Net income reflects accounting practices required for regulated public
utilities and represents a composite of cash and noncash items, including AFUDC.
In accordance with the 1991 Settlement, during the six months ended June 30,
1994, the Company recorded $20.3 million of after-tax accretion income on Palo
Verde Unit 3 and $5.6 million of after-tax income resulting from Palo Verde
refund obligation reversals. The Company has now recorded all of the Unit 3
accretion income and Palo Verde refund obligation reversals related to the 1991
Settlement. See Note 2 of Notes to Financial Statements in Part II, Item 8 of
the 1993 10-K. In accordance with the ACC Order, during the three months ended
June 30, 1994, the Company also recorded a one-time depreciation reversal
related to Palo Verde in the amount of approximately $15.0 million after tax.
See Note 5 of Notes to Financial Statements in Part I, Item 1 of this report.

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 SETTLEMENT AGREEMENT

See Note 5 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the ACC Order. Because of the non-cash earnings (1)
that the Company expects to result from the accelerated amortization of ITCs
during the 1995-1999 period (subject to Internal Revenue Service approval); and
(2) that resulted from the reversal of depreciation related to Palo Verde
(associated with the 1991 Settlement), the Company does not expect its earnings
to be significantly affected as a result of the ACC Order.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 1994, the Company incurred
approximately $106 million in construction expenditures, accounting for
approximately 39% 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 $272 million, $298 million, and $257 million,
respectively.

Refunding obligations for preferred stock and long-term debt, a
capitalized lease obligation, and certain actual and anticipated early
redemptions, including premiums thereon, are expected to total approximately
$582 million (of which $513 million are optional), $111 million, and $4 million
for the years 1994, 1995, and 1996, respectively. During the first six months of
1994, the Company refunded approximately $421 million (72%) of the estimated
1994 total. This amount includes the redemption, refunding, or repurchase of
approximately $367 million of long-term debt and the redemption of approximately
$54 million of preferred stock, including premiums thereon. During August 1994,
the Company purchased on the open market approximately $24 million in aggregate
principal amount of its First Mortgage Bonds, 10 1/4% Series due 2000 (the "10
1/4% Bonds"). On September 1, 1994, the Company will redeem at maturity all
outstanding shares of its $8.50 Cumulative Preferred Stock, Series T ($100 Par
Value) (the "Series T Stock") in the amount of $50 million. Since December 31,
1993, the Company has issued $100 million of its First Mortgage Bonds and
incurred approximately $303 million of long-term debt consisting of borrowings
from governmental authorities which had funded that amount through the issuance
of pollution control bonds.

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 June 30, 1994, and (i) adjusting
for the purchase of approximately $24 million of the 10 1/4% Bonds, and (ii)
assuming the redemption on September 1, 1994 of $50 million of the Series T
Stock, the Company estimates that the mortgage bond indenture and the articles
of incorporation would have allowed the Company to issue up to approximately
$1.26 billion and $1.04 billion 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.

<PAGE>
PART II - OTHER INFORMATION

ITEM 4. Submission of Matters to a Vote of Security-Holders

At the Annual Meeting of Shareholders held on April 19, 1994, the
shareholders elected all of its directors who will serve for the ensuing year or
until their successors are elected or qualified, as follows:

Votes
Against Broker
and Non-
Director Votes For Withheld Abstentions Votes
- -------- ---------- -------- ----------- ------

Kenneth M. Carr 76,119,727 20,853 N/A N/A
O. Mark De Michele 76,125,414 16,501 N/A N/A
Martha O. Hesse 76,126,096 15,541 N/A N/A
Marianne M. Jennings 76,119,854 20,457 N/A N/A
Robert G. Matlock 76,123,863 17,171 N/A N/A
Jaron B. Norberg 76,125,690 16,271 N/A N/A
John R. Norton III 76,125,560 16,135 N/A N/A
Donald M. Riley 76,125,604 15,850 N/A N/A
Henry B. Sargent 76,066,353 67,401 N/A N/A
Wilma W. Schwada 76,123,990 16,890 N/A N/A
Verne D. Seidel 76,123,724 17,272 N/A N/A
Richard Snell 76,063,698 69,356 N/A N/A
Ben F. Williams, Jr. 76,127,545 14,771 N/A N/A
Thomas G. Woods, Jr. 76,126,377 15,686 N/A N/A

ITEM 5. Other Information

Palo Verde Nuclear Generating Station

See Note 7 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the tube cracking in the Palo Verde steam
generators.

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.

Water Supply

As previously reported, in an action pending in Maricopa County
Superior Court relating to claims to water in the Lower Gila Watershed, issues
important to the Company's claims were remanded to the trial court for further
action. See "Water Supply" in Part I, Item 1 of the 1993 10-K. On June 30,
1994, the trial court rendered its decision with respect to these issues. The
trial court has certified its decision for interlocutory appeal to the Arizona
Supreme Court, and the Supreme Court has not yet rendered its decision.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No. Description
----------- -----------

10.1 ACC Order dated June 1, 1994

15.1 Letter in Lieu of Consent
Regarding Unaudited Interim
Financial Information

(b) Reports on Form 8-K

During the quarter ended June 30, 1994, and the period ended August 12,
1994 the Company filed the following reports on Form 8-K:

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

Report filed May 24, 1994 regarding the rescission by the Secretary of
Labor of a final order approving a settlement agreement between the Company and
a former contract employee.

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: August 12, 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

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. 58644
COMPANY )
ORDER

Open Meeting
May 27, 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.

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 n 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. The particulars of the agreement are memorialized in a written
Rate Settlement Agreement ("Agreement"). On April 20, 1994, Staff filed the
Settlement Agreement and requested that a procedural order be issued
establishing a timetable to present the Agreement to the Commission.

7. On April 21, 1994, a Procedural Order governing the conduct of
this proceeding was issued. The Procedural Order, inter alia, required that APS
provided notice to its customers as well as to all parties of record in APS'
previous rate case (Docket No. U-1345-90-007) and the Commission's current
resource planning docket (Docket No. U-0000-93-052), established procedures for
intervention, established procedures for discovery, and set a hearing date at
which all parties would be able to present witnesses and evidence and
cross-examine the witnesses of other parties.

8. Requests for intervention were filed by the Residential Utility
Consumers Office ("RUCO") on April 21, 1994, by the Land and Water Fund of the
Rockies ("LAW Fund") on April 27, 1994, by Arizona Community Action Association
("ACCA") on May 3, 1994, by Southwest Gas Corporation on May 3, 1994, and by the
Arizona Interfaith Coalition on Energy ("AZ ICE") on May 4, 1994. Pursuant to
the April 21, 1994, Procedural Order these requests for intervention are granted
since no objections were filed.

9. Comments regarding and/or objections to the Agreement were
filed by all intervenors.

10. On May 13, May 23, and May 27, 1994, hearings were held on this
matter at the Commission's offices in Phoenix, Arizona.

11. On May 23, 1994, Staff and APS entered into an amended Settlement
Agreement and on May 27, 1994 they agreed to further revisions at the hearing
(collectively referred to as the "Amended Agreement").

12. Staff and APS believe that the Amended Agreement they have
reached is consistent with the best interests of the parties and the public
interest generally. The particulars of the Amended Agreement are memorialized in
an amended Rate Settlement Agreement, a copy of which is attached hereto as
Exhibit 1 and in the transcript of the May 27, 1994 hearing.

13. Pursuant to the Amended 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 2.7% (approximately $38.3 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 .24(cent)/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 re 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 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. APS hereby waives any rights it may
possess under the newly enacted Arizona Revised
Statutes Section 40-250.01 to a more timely issuance of
a final order than is set forth in this subparagraph.
The provisions of this subparagraph shall not apply to
any general rate application filed by APS after
December 31, 1997.

iii. 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 10.41(cent)/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 file quarterly
status reports and obtain input from interested parties
and prepare a final 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 1991 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:

PV1 $3,621,000

PV2 $3,877,000

PV3 $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 1991 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 1991 Settlement,
and provisions of Section 20 of such 1991 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 cost effective Demand Side Management
("DSM") and renewable resources development shall be made
by APS. APS shall increase its commitment and activities
in cost effective Demand Side Management and renewable
resources according to the following schedule:

i. a. Subject to the provisions of subparagraph
v., APS shall spend at least the minimum
amount shown below on pre-approved renewable
resources and pre-approved DSM projects
(including the capital expenditures
described in k.vii.g., and expensed program
costs for renewables, and DSM program costs,
lost net revenues due to DSM, and a reward
or incentive for kW deferrals for DSM, all
of which collectively shall be referred to
as "costs," "expenses" or "expenditures").

. . .

. . .
YEAR MINIMUM CAP
- --------------------------- ----------- -----------
First year $8 million $10 million
Second year $10 million $12 million
Third year $12 million $18 million
Subsequent years until next $14 million $18 million
rate case is decided

b. APS shall account for, report on, and be
entitled to recover costs (as defined above)
for all pre-approved DSM and renewables
projects through the Energy Efficiency and
Solar Energy Fund (EEASE Fund) as described
in the Plan of Administration (Subparagraph
iv).

c. If APS fails to spend the minimum amount in
any year, at the time of submission of its
annual report on the EEASE Fund, it shall
bank the shortfall in expenditures in a
special account and APS shall pay into the
account interest at a rate of 8.85 percent
per year. APS shall use the banked amount
(plus interest) for future pre-approved DSM
and renewables projects. APS shall not
recover the interest paid on the banked
amount from ratepayers through the EEASE
Fund or any other mechanism. The foregoing
will not apply to any situation where APS'
failure to spend is due to unreasonable
action, inaction, or unreasonable delay in
the preapproval process.

d. The amount recoverable through the EEASE
Fund in any year shall be capped at the
amount indicated in the table in
Subparagraph i.a. above.

ii. In reviewing APS' proposals for DSM and renewables
projects, Staff shall obtain input from the public,
consistent with the procedures adopted by the
Commission in its resource planning order in Docket
No. U-0000-93-052.
. . .
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
provisions for a balancing account to reflect both
the accumulated balance of pre-approved
expenditures and the annual recovery thereof
through the EEASE Fund surcharge. The plan shall
also include a process to bank shortfalls in DSM
and renewables costs below the minimum, including
the payment of interest on the banked amount by
APS. Prior to the second year of the "Plan of
Administration", Staff will convene interested
parties to discuss the possible capitalization and
amortization of DSM and renewables and other cost
recovery mechanisms.

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 in
accordance with the provisions for such
pre-approval established in Docket No.
U-0000-93-052 (unless such program has aready been
pre-approved in accordance with the procedures
established in Docket No. U-1345-90-007).

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 file, and
provide a notice of filing to interested parties, a
three-year renewable resource plan for the review
of Staff and interested parties, such plan to
include:

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 of 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. Subject to the provisions of subparagraphs
ii and v, APS shall commit to spend at least
$9 million on renewables over the next three
years as part of its obligation under
Subparagraph i, ii and ix 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.

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. 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 1991 Settlement. The rates established in this
Agreement include only the costs of normal, full power
operation of Palo Verde and do not include recovery of the
recently announced estimated $13 million in replacement
power and operation and maintenance costs associated with
possible additional outages or reduced power output
resulting from investigation of steam generator tubes at
Palo Verde.

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 1991 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. Therefore, consistent
with the above acknowledgements and in furtherance of the
provisions of Paragraph D, Staff 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 or 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 experience 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 OR ORDER. A proposed form of order is
appended hereto as Attachment E, and is acceptable to both
APS and Staff.

CONCLUSIONS OF LAW

1. APS is a public service corporation within the meaning of Article
15 of the Arizona Constitution and A.R.S. ss. 40-250,40-25 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. APS provided notice of this matter in accordance with law.

4. The Amended Agreement resolves all matters contained therein in a
manner which is just and reasonable, and which promotes the public interest.

5. The Commission's acceptance and approval of the terms of this
Amended Agreement between Staff and APS are in the public interest.

6. Based on the Amended 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%.

7. Based on the Amended Agreement between APS and Staff, it is
appropriate to reduce APS' authorized revenues by $38.3 million from September
30, 1993 sales as adjusted.

8. APS should be directed to file revised tariffs consistent with
the Amended Agreement and the findings contained herein.

9. 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 $38.3 million.

IT IS FURTHER ORDERED that this Order incorporates the Agreement
executed May 23,1994, between APS and Staff as modified at the May 27, 1994
hearing, and such Order is expressly conditioned thereon.

IT IS FURTHER ORDERED that the terms and conditions of the Amended
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

/s/ Marcia Weeks /s/ Renz D. Jennings /s/ Dale H. Morgan
- -------------------------------------------------------------------------------
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 1
day of June, 1994.

/s/ James Matthews
------------------------------------------
JAMES MATTHEWS
Executive Secretary

DISSENT______________________________

<PAGE>

EXHIBIT 1
RATE SETTLEMENT AGREEMENT

May 23, 1994

This rate settlement agreement ("Agreement") is entered into as
of April 20, 1994, and amended as of May 23, 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 2.7%; (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 2.7%
(approximately $38.3 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 .24(cent)/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. 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 10.41(cent)/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 file quarterly status reports and
obtain input from interested parties and prepare a final 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.

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
1991 Settlement, and provisions of Section 20 of such 1991 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 cost effective
Demand Side Management ("DSM") and renewable resources development shall
be made by APS. APS shall increase its commitment and activities in cost
effective Demand Side Management and renewable resources according to
the following schedule:

i. a. Subject to the provisions of subparagraph v., APS shall
spend at least the minimum amount shown below on
pre-approved renewable resources and preapproved DSM
projects (including capital and expensed program costs for
renewables, and DSM program costs, lost net revenues due
to DSM, and a reward or incentive for kW deferrals for
DSM, all of which collectively shall be referred to as
"costs," "expenses" or "expenditures").

Year Minimum Cap
- --------------------------- ----------- -----------
First year $8 million $10 million
Second year $10 million $12 million
Third year $12 million $18 million
Subsequent years until next $14 million $18 million
rate case is decided

b. APS shall account for, report on, and be entitled to
recover costs (as defined above) for all preapproved DSM
and renewables projects through the Energy Efficiency and
Solar Energy Fund (EEASE Fund) as described in the Plan of
Administration (Subparagraph iv).

c. If APS fails to spend the minimum amount in any year, at
the time of submission of its annual report on the EEASE
Fund, it shall bank the shortfall in expenditures in a
special account and APS shall pay into the account
interest at a rate of 8.85 percent per year. APS shall
use the banked amount (plus interest) for future
pre-approved DSM and renewables projects. APS shall not
recover the interest paid on the banked amount from
ratepayers through the EEASE Fund or any other mechanism.
The foregoing will not apply to any situation where APS'
failure to spend is due to unreasonable action, inaction,
or unreasonable delay in the preapproval process.

d. The amount recoverable through the EEASE Fund in any year
shall be capped at the amount indicated in the table in
Subparagraph i.a., above.

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 provisions for a
balancing account to reflect both the accumulated balance of
pre-approved expenditures and the annual recovery thereof through
the EEASE Fund surcharge. The plan shall also include a process
to bank shortfalls in DSM and renewables costs below the minimum,
including the payment of interest on the banked amount by APS.

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 in
accordance with the provisions for such pre-approval established
in Docket No. U-0000-93-052 (unless such program has already been
pre-approved in accordance with the procedures established in
Docket No. U-1345-90-007).

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 file, and provide
a notice of filing to interested parties, 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. Subject to the provisions of subparagraphs ii and v, APS
shall commit to spend at least $9 million on renewables
over the next three years as part of its obligation under
Subparagraph i, ii and ix 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.

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 1991 Settlement. The rates established in
this Agreement include only the costs of normal, full power operation of
Palo Verde and do not include recovery of the recently announced
estimated $13 million in replacement power and operation and maintenance
costs associated with possible additional outages or reduced power
output resulting from investigation of steam generator tubes at Palo
Verde.

In subsequent rate case, 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 1991 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.
Therefore, consistent with the above acknowledgements and in furtherance
of the provisions of Paragraph D, Staff 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 23rd day of May, 1994.

STAFF OF ARIZONA ARIZONA PUBLIC SERVICE COMPANY
CORPORATION COMMISSION

By /s/ Gary Yaquinto By /s/ William J. Post
--------------------------------- ---------------------

Title Director, Utilities Division Title SVP
- ----------------------------------- -------------------

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, Seligman Fixed price "opportunity sale" U-1345-90-292 57127 10-22-90

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 "opportunity sale" U-1345-93-304 58501 1-13-94

</TABLE>

<PAGE>

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.

DECOMMISSIONING FACTORS

PALO VERDE

(Thousands of Dollars)
(APS Share)<F1>
<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
<FN>
<F1> APS ownership share is 29.1%;
ACC jurisdictional share is approximately 95.27%

</TABLE>

<PAGE>

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%.

<PAGE>

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%.

<PAGE>

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%.

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> <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)
----------- ----- ---------- -----------
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 & 2.76% 4,339 2.16% 3,391 (948)
TURBINES
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)
----------- ----- ---------- -----------

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, & 3.09% 6,463,800 2.97% 6,218,998 (244,802)
FIXTURES
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 6.43% 727,710 4.33% 490,421 (237,288)
PREM.
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
----------- ----- ---------- -----------

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>

Exhibit 15.1

August 11, 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 June 30,
1994 and 1993, as indicated in our report dated August 11, 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 June 30, 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