Fitch: Arizona Commission Ruling in GRC Supports Arizona Public Service Co. & PNW Ratings.

NEW YORK -- The recent Arizona Corporation Commission (ACC) bench ruling in Arizona Public Service Company's (APS) general rate case (GRC) is, in Fitch's opinion, supportive of the existing credit ratings of the utility and its corporate parent, Pinnacle West Capital, Inc. (PNW). PNW and APS's credit ratings are listed below.

Pinnacle West Capital

--Long-term Issuer Default Rating (IDR) 'BBB-';

--Short-term Issuer Default Rating (IDR) 'F3'.

Arizona Public Service Co.

--Long-term Issuer Default Rating (IDR) 'BBB-';

--Short-term Issuer Default Rating (IDR) 'F2';

--Senior unsecured debt 'BBB'.

The Rating Outlook is Stable.

On June 19, 2007, the ACC issued a bench ruling in APS's GRC authorizing a $322 million retail base revenue increase (15%) based on a 10.75% authorized return on equity (ROE) and a 55% equity ratio. APS originally sought a 20% rate increase. New rates will be effective July 1, 2007.

Fitch notes that the ACC decision rejected APS's request for accelerated depreciation, inclusion of construction work in progress in rate base and an attrition adjustment. The inability of APS to receive timely recovery of its large capex program could pressure future credit metrics.

The ACC decision incorporates a base rate for fuel and purchased power costs of 3.25 cents per kilowatt hour (kwh), which compares favorably to the administrative law judge's 3.12 cents per kwh recommendation. The non-fuel portion of the rate increase was $7 million.

Importantly, the commission decision addressed significant issues with regard to the utility's power supply adjustor (PSA) that, in Fitch's opinion, meaningfully improves the company's business risk profile. The PSA allows APS to defer and recover 90% of the variance in net power supply costs without filing a general rate case.

The ACC modifications to the PSA include use of forward estimates of fuel and purchase power costs in place of historic costs. Positively, the order removes a $776 million annual power supply cost cap and a four mil cumulative, lifetime limit on collection of net power supply cost deferrals.

The commission order continues a four mil limit (approximately $105 million) on the amount of incremental cash collections of deferred power supply costs in a given year. APS is able, at its option, to seek a mid-year change through the transition component of the PSA in the event of large variances in fuel and purchase power costs.

The ACC order disallowed recovery of approximately $14 million of a total of $48 million of deferred costs related to unplanned 2005 Palo Verde Nuclear Generating Station (PVNGS) outages, representing 29% of the total 2005 PVNGS deferred balance. The remainder will be collected via a special surcharge.

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