Arizona Public Service Company 2012 Renewable Energy Standard Implementation Plan Arizona Corporation Commission Open Meeting August 17, 2011

Commission Policy Questions Reaching a Balance Market Support Customer Costs Should distributed energy programs and budgets continue to exceed annual requirements, and if so, by how much? What is the right mix of… 1) DE and utility-scale projects? 2) Utility and 3rd party ownership?

APS Observations External Factors APS Plan Solar costs are declining and Arizona solar-related development is increasing Market maturity is impacting the industry APS Plan APS will exceed most RES requirements through 2016 with existing 2011 commitments Continued transparency

The 2012 Implementation Plan… Provides long-term customer value Supports the successful APS model of building, buying, and encouraging customers to add solar Creates market opportunities Provides options to the Commission for how APS will meet its renewable energy requirements

Over the Five Years of the APS Plan… 5,500 jobs will be created $800 million impact on local economies *Based on NREL Jobs and Economic Data Impact Model for PV (www.nrel.gov)

2011 Performance Update

Under Contract and Authorized 2015 Energy Requirements Remaining Need Subject of this Plan Under Contract and Authorized In Development In Operation Approximately 300 MW of PV capacity is needed through 2015

Cumulative Non-Residential DE Capacity 125.8 MW Projects up to 270 days into development 104.1 MW expected in-service by 12/31/11 ~98 MW 2012 requirement Significant construction and interconnections in progress ~70 MW 2011 requirement 54.1 MW in-service through 8/16/2011 Installed capacity includes 4.5 MW of PV-equivalent capacity from non-PV technologies

More Solar at Lower Costs Cumulative Residential DE Installations Incentive Cost per Watt 16,000 $4 Incentive $ per watt $3 8,000 $2 # of installations $1

Diversity of Ownership - 2011 APS Owned Customer Owned Purchased

Renewable Energy Requirements

Balanced Approach to Meeting Renewable Energy Requirements

Balanced Approach to Meeting Renewable Energy Requirements (No 2012 Cost Impact) (No 2012 Cost Impact)

Diversity of Ownership APS Owned Purchased Customer Owned 2011 2015

2012 Plan Options

Commission Policy Questions Reaching a Balance Market Support Customer Costs Should distributed energy programs and budgets continue to exceed annual requirements, and if so, by how much? What is the right mix of… 1) DE and utility-scale projects? 2) Utility and 3rd party ownership?

2012 Implementation Plan Options 150 MW 0 MW $20 M ~ Option 2 125 MW 25 MW 150 MW $30 M Option 3 100 MW 50 MW 150 MW $40 M Third - party PPAs Non - residential DE Incentives Total MW Residential DE Incentives

Non-Residential DE Requirements Option 3 Non-residential DE Incentive Options: Option 1 – 0 MW Option 2 – 25 MW Option 3 – 50 MW Option 2 2016 Requirement Total Authorized $670 million total lifetime authorization 2012 Requirement Expected Installed by YE 2011

2012 Residential DE Options

APS Plan Budget and Adjustor    Option 1 Option 2 Option 3 2012 Budget $129.2 M $141.2 M $151.5 M 2012 – 2016 Budget $783.1 M $810.2 M $873.8 M Residential Cap $5.43 $5.96 $6.41 Non-Residential (<3 MW cap) $201.84 $221.47 $238.27 (>3 MW cap) $605.53 $664.40 $714.81

Utility Ownership

APS Owned Projects Create Value for Customers Lower overall costs for customers APS has ready access to capital even in difficult financial markets Ownership expands the market for developers and suppliers APS is here to stay and committed to the community Why lease when you can own? Under a PPA, APS customers are paying for the cost of this facility plus a developer profit through monthly payments similar to a lease – but they never get the benefit of receiving low-cost energy once the facility is “paid-off” AZ Sun allows customers to benefit from low-cost energy once the facility is “paid-off” APS can finance projects needed to meet our renewable goals, even in difficult financial markets APS can use the strength of it’s balance sheet to finance the projects while still employing independent developers to construct them Increase certainty with a balanced procurement approach Balancing the renewable portfolio with AZ Sun ownership increases the financing and timing certainty for our entire renewable plan Financial uncertainty exists for PPA’s even once a PPA reaches commercial operation Changes in tax law levelized the ultimate cost of AZ Sun and PPA’s for customers Federal tax laws were changed in 2008 to allow public utilities to claim a 30% Investment Tax Credit when investing in renewable projects; prior to this change, utilities were barred from this credit Through utility ownership, customers are assured a benefit from the tax credit Certainty of success

Success Under AZ Sun Cost-effective, market-based solution 17 MW Paloma Cotton Center Hyder 17 MW Operational Sept. 2011 17 MW Operational Q4 2011 16 MW Operational Q1 2012 Cost-effective, market-based solution Created 700+ construction jobs in 2011

Lower Costs to Customers from Utility Ownership Utility-scale (15-20 MW, PV) Ownership is 10-15% less expensive than PPA ~$60MM nominal savings over life of system ~$8-10MM net present value savings Customer-sited (350kW, Distributed PV) Ownership is 5-10% less expensive than PBI $300K nominal savings over life of each system $70-80K net present value savings

Cost Components Utility-scale Ownership costs based on standard rate base approach Capital investment converted into annual revenue requirement Depreciation Property taxes Income taxes Cost of debt and equity Plus operations and maintenance costs, annually PPA costs based on market bids Vintage of capital costs the same as ownership Same providers, same projects

Cost Components (cont’d) Customer-sited (Distributed) Ownership costs based on standard rate base approach Similar to utility-scale, plus add’l costs Drives redistribution of fixed costs through net metering APS Solar Rate provides offset Recoupment of redistributed fixed costs Partial contribution to system capital cost PBI costs Incentive payments Redistributed fixed costs

Arizona Public Service Company 2012 Renewable Energy Standard Implementation Plan Arizona Corporation Commission Open Meeting August 17, 2011