ACC Issues Modified Recovery Options; Approves Proposed Amendments to Electric Competition Rules.

TUCSON, Ariz.--(BUSINESS WIRE)--April 15, 1999--

The Arizona Corporation Commission (ACC) yesterday approved a modified order that provides Arizona utilities such as Tucson Electric Power Co. (TEP) with five recovery options for stranded costs in a competitive energy market.

TEP is a wholly owned subsidiary of UniSource Energy Corp. (NYSE:UNS).

In addition, the ACC approved proposed amendments to the Electric Competition Rules that potentially could allow retail competition in the state's electricity industry to begin in Arizona later this year. Both orders were approved by the Commissioners in a 2-1 vote, Wednesday afternoon (April 14).

"The Commissioners' decision is a significant step toward opening Arizona's electricity generation to competition for the benefit of all our customers," said James S. Pignatelli, TEP president and chief executive officer.

"TEP will fully evaluate each option to determine which alternative provides our company and shareholders the best opportunity to recover 100 percent of our stranded costs."

Recovery Options

While the company has not received a copy of the ACC's final written order, the stranded cost ruling provides for the following recovery options:

-- Net Revenues Lost Methodology. Under the first option, stranded

costs would be determined by comparing generation revenues under

competition to revenues under regulation. Using growth as a

mitigating factor, the amount of recovery would be reduced over a

five-year period.

-- Divestiture/Auction Methodology. The second option provides

utilities an opportunity to recover stranded costs by auctioning

non-essential generation assets. The amount of stranded costs

would be the difference between the assets' market value and

their book value. Recovery of stranded costs would occur over a

maximum 10-year period.

-- Financial Integrity Methodology. The third option approved by the

ACC would provide sufficient revenues necessary to maintain

financial integrity, such as avoiding default under currently

existing financial instruments for a period of 10 years, at

which time there would be no remaining stranded costs.

-- Settlement Methodology. This option provides for some combination

of the three preceding methods, submitted as a settlement option.

-- Alternative Methodology. The final option approved by the ACC

would allow affected utilities to file an alternative plan. Under

this option, utilities would be required to demonstrate how an

alternative plan would be in the best interests of all

stakeholders.

TEP and other affected utilities have until June 14, 1999, to amend their previously filed stranded cost recovery plans. TEP's original stranded cost plan filed on Aug. 21, 1998, specified divestiture of generation assets as the preferred method for recovery given the then-available options.

The ACC is expected to issue in the next few weeks a procedural order outlining dates for consideration of stranded costs and unbundled tariffs for each utility.

Competition Rules

At yesterday's meeting, the ACC also approved proposed amendments to the electric competition rules that will phase-in a competitive market, while ensuring all customers will have access to competitive generation by Jan. 1, 2001.

Arizona had been scheduled to begin retail electric competition on Jan. 1, 1999, but the ACC delayed the opening of the market by staying the previous Competition Rules for further review.

The proposed rules adopt a similar phase-in to the competitive market as their predecessors, calling for three customer classes to be given the initial opportunity for choice:

-- Large customers whose average usage/load is 1 megawatt (MW) or

above, such as mines, refineries, factories, and resorts. (TEP

currently serves about 80 such customers in this category,

representing 351 MW of load. Of this load, 60 percent is under

contract through 2001.)

-- Somewhat smaller commercial customers whose individual peak usage

totals 40 kilowatts (kW) or greater, who can aggregate with

similar entities to reach a total load of 1 MW, also are

eligible. These customers can include convenience stores,

fast-food restaurants and large retail stores; and

-- A percentage of TEP's residential customers will be able to

choose to participate in the new market on a first-come,

first-served basis. Every three months, an additional one and

one-quarter percent of residential consumers will have the

opportunity to choose.

By Jan. 1, 2001, consumer choice will be available to all customers. TEP, as the regulated local distribution company, will continue to provide delivery of the electricity over existing power lines to homes and businesses. The company also will continue to provide operation and maintenance of the lines.

Under these rules, competition will begin in each affected utility's service territory after the affected utility's stranded cost plan is approved by the ACC. In addition, the proposed rules replace the affiliated transaction provision with a code of conduct to be filed by each utility.

The Solar Portfolio Standard also has been replaced with a placeholder for a Solar and Environmentally Friendly Renewable Portfolio Standard to be determined based upon further study.

The proposed amended rules will be submitted to the Secretary of State's Office for publication in the Arizona Administrative Register. It is anticipated that public comment sessions will be held in June, and the Rules will be resubmitted to the ACC for their final approval in July or August.

Tucson Electric Power Co., a wholly-owned subsidiary of UniSource Energy Corp., is a Tucson-based utility engaged in the generation, purchase, transmission, distribution and sale of electric energy to retail and wholesale customers.

UniSource Energy's other subsidiaries include New Energy Ventures Inc., one of the nation's leading representatives for energy buyers; Advanced Energy Technologies Inc., a developer of renewable energy and distributed generation technologies; Nations Energy Corp., an independent power developer; Southwest Energy Solutions, and SWPP Investment Co.

TEP Public Affairs P.O. Box 711 Tucson, AZ 85702 520/884-3742 www.tucsonelectric.com or www.unisourceenergy.com