TEP, ACC Staff Agree to 6-Percent Base Rate Increase, 4-Year Freeze

Tucson Electric Power Company (TEP) and the staff of the Arizona Corporation Commission (ACC) have agreed to a settlement that would increase the utility’s base rates by approximately 6 percent beginning no later than Jan. 1, 2009.

The settlement agreement, which must be approved by the ACC, would increase TEP’s rates for the first time in more than a decade. Under the agreement, the new base rates would be frozen until at least 2013.

“The proposed rates would help us cover our rising service costs while providing our customers with a greater degree of certainty about their future energy expenses,” said James S. Pignatelli, Chairman, President and CEO of TEP and its parent company, UniSource Energy Corporation (NYSE: UNS).

Under the new rates, a typical residential customer’s bills would be expected to increase by an average of approximately 6 percent, or $5.06 per month, over the course of a year. The impact would vary based on usage, and changing energy prices could further affect bills through a new Purchased Power and Fuel Adjustment Charge (PPFAC) included in the proposed rates.

The PPFAC would pass along changes in fuel and purchased power costs to customers without any markup, ensuring that TEP’s rates reflect those fluctuations. Similar components are included in the electric rates of TEP’s sister company, UniSource Energy Services, as well as in those charged by Arizona Public Service and many other electric utilities.

The new rates have been designed to encourage energy conservation by discounting the first 500 kilowatt-hours (kWh) per month while charging a higher rate for monthly usage in excess of 3,500 kWh. So customers who use less than TEP’s residential average of about 900 kWh per month would pay lower average rates than those with above-average consumption.

“Our new rates would provide tangible incentives for customers to conserve energy,” Pignatelli said. “Residents who can hold their average usage below 500 kWh per month could effectively avoid paying any rate increase if this agreement is approved.”

Low-income residents would continue to benefit from TEP’s Lifeline program, which provides a usage based discount of up to $8 per month to qualified customers. TEP also will continue to support emergency bill payment assistance through a partnership with the Salvation Army.

The settlement agreement is subject to review by a state hearing officer, who will forward a recommendation to the ACC. The commission will have final say over the agreement later this year and will decide when the new rates would take effect.

In addition to TEP and the ACC Staff, the settlement agreement has been endorsed by numerous groups representing customers, low-income residents, power producers and other parties to TEP’s rate case. Those parties include: Arizonans for Electric Choice and Competition; Phelps Dodge Mining Company; the Arizona Community Action Association; the U.S. Department of Defense; the Arizona Investment Council; the International Brotherhood of Electric Workers Local 1116; Mesquite Power, LLC; Southwestern Power Group II, LLC; Bowie Power Station, LLC; Sempra Energy Solutions; and Kroger Company.

TEP originally requested a 15- to 23-percent increase over its current rates. Those rates were established through a settlement agreement approved in 1999. TEP contends that agreement authorizes the company to charge a higher, market-based rate for generated power beginning next year. But the company would waive that right upon ACC approval of the new settlement agreement, which is based on traditional cost-of-service calculations.

“Although we have a legal right to charge rates that would likely be much higher, we believe this settlement agreement would serve the best interests of both the company and our customers,” Pignatelli said. “It provides a timely resolution to the issues at stake in our rate case and allows for a reasonable rate increase that will provide the revenue we need to meet our customers’ growing energy demands.”

The new rates would help cover TEP’s rising operating costs as well as nearly $1.4 billion in capital improvements planned over the next five years to expand and enhance the company’s system infrastructure. The peak energy demand of TEP’s retail customers has increased nearly 40 percent since 1999 and is still on the rise, driving a need to invest in new transformers, transmission lines, substations and other equipment.

TEP’s rates have remained unchanged since July 2000, when the last of three annual 1-percent rate decreases took effect. The rates were last increased in 1996, and the subsequent reductions resulted in rates that remain below the levels charged in 1994. Consumer prices have risen by 47 percent since the beginning of that year, while the cost of fuel, raw materials and other expenses involved in providing electric service have risen more dramatically.

TEP, a subsidiary of UniSource Energy Corporation, provides safe, reliable power to nearly 400,000 customers in the Tucson metropolitan area. For more information, visit TEP.com. For more information about UniSource Energy, visit uns.com.