1. APS Resource Management February 10, 2017

2. APS Resource Management
Purpose:
Optimize the use of APS resources to provide the lowest cost reliable power to our customers
Total fuel and purchased power costs are about $1B per year:
APS Confidential Proprietary

3. APS Resource Management
What we do:
Forecast system load (total customer demand) and renewable resource production
Economically commit resources to meet demand
Procure and arrange for delivery of necessary fuel supplies
Make sales and purchases based off market prices and generation costs
Limit exposure to commodity prices through execution of commodity hedge program
Integrate maintenance into plans
Negotiate and manage long-term wholesale power contracts
APS Confidential Proprietary

4. Resource Management - Key Tools
Load Forecasting Models
Renewable Forecasting Tools (services)
Unit Commitment and Dispatch Models
Fuel Forecasting and Management
Transmission Procurement
Electricity Market Transacting Systems
Real-time View of Load, Generating Units, Transmission, Market Prices, Gas Pipelines
Support Functions:
Settlement (Back Office)
Energy Risk Management
Legal
Resource Planning and Acquisition
APS Confidential Proprietary

5. APS Resource Management – Trading
3 Years to Next Month
Current Month to Next Day
Current Day to Present Time
Term Trading
Commodity hedge program
Long-term transmission procurement
Outage planning Forward sales/purchases
Short-Term Trading
Load and weather forecasting
Coordination of maintenance with power plants
Next day to balance of the month power and gas trading
Next day transmission procurement
Real-Time Trading
Balance supply and demand Load & weather forecasting
Economic dispatch of generators
Respond to unanticipated events
Intraday power and gas trading
Transmission procurement Coordinate with power plants on emergent issues
Analysis Support
Scheduling

6. Transmission Operations
Operations Functions
Generation Resources
APS - Owned Generation
Long-Term Contracts
Resource Ops
Dispatch of generation
Ensure sufficient reserves to meet reliability needs
Buy/Sell with wholesale market
Meet fuel requirements
Transmission Operations
Electric system operations
System Reliability
Balancing
Provide transmission services to 3rd parties
Wholesale Market
Utilities
Merchant Generators
Traders
Gas Producers
CAISO
Buy & Sell
Customers
Retail
Wholesale
Energy
Production
Orders
APS Confidential Proprietary

7. Five Major Categories of Resources
Nuclear
Palo Verde
Coal
Four Corners
Cholla
Navajo
Natural Gas Intermediate Units
Redhawk, Gila River, Arlington
West Phoenix Units 1-5
Ocotillo Steamers
Natural Gas Peaking Units
Sundance
Yucca
West Phoenix, Saguaro, and Ocotillo GTs
Renewables (utility-scale)
Wind
Solar
Geothermal/Biomass
Reliable source of carbon-free around-the-clock power
Lowest operating cost
Affordable source of around-the-clock power
Relatively expensive and time consuming to start/stop
Large, high efficiency units, with longer ramps and longer minimum up and down times
Reliable and Flexible to System Demands
Small, less efficient units, quick start that can be online in minutes
Very flexible
Clean source of energy with low long-term costs
Inflexible, must take energy as it is produced (non-dispatchable)
1,146 MWs
1,672 MWs
3,151 MWs
1,017
MWs
840

8. 2016 - Well Balanced Energy Portfolio
26%
11%
10%
21%
32%

9. Renewable Plants Overview1 2 3 5 4
Arizona
New Mexico
California 7 9 8 11 10 12 13 14
15/18 16 6 17 19 20
AZ Sun Operating Plants
Generating Facility
Capacity
COD
13) Paloma 17
09/12/11
14) Cotton Center
10/24/11
15) Hyder 16
10/31/11
16) Chino Valley 19
11/25/12
17) Foothills
03/18/13 18
12/27/13
18) Hyder II 14
12/17/13
21) Gila Bend 32
10/17/14
22) Luke AFB 10
09/18/15
23) City of Phoenix
EPC In Development
24) Red Rock 40
03/01/17 23 22 21 24 7

10. Transmission, Generation & Trading Hubs
Palo Verde
Four Corners
Mead
= 500 kV
= 345 kV
= 230 kV
= 69 kV
APS Confidential Proprietary

11. Natural Gas Pipelines Serving Arizona
APS Confidential Proprietary

12. Commodity Hedge Program
Purpose:
Dampen price risk and volatility for APS customers
Program is systematic and independently monitored by Risk Management
Parameters:
3 year rolling program
Current volumes:
Approximately 150 BCF of natural gas
Equivalent to 19,800 GWHs
Notional value of $421M
Purpose of this program is to promote price stability for our customers by mitigating one of the major components of price risk.
We have not made any changes to the program in the last year. We have just continued to execute on the approved program.
Highlight magnitude of program (notional value of $420 M at the end of March)
Hedge program parameters:
Year 1 is 85% +/- 2%
Year 2 is 50-60%
Year 3 is 30-40%
Backup info:
At end of March, MTM of hedge was $(90)M
Collateral outstanding for the hedge was $11M
APS Confidential Proprietary

13. Daily Communications and Coordination
7:30AM
Daily Management Meeting
Review current day plan, next day plan, and near term outlook
Includes updates from Term Trading and weather
8:00AM
Fossil Generation Morning Call
Present current and projected next day plan to Fossil Generation
8:30AM
Resource Operations Daily Coordination Call with Energy Control Center (ECC)
Discuss Daily Plan and current transmission and generation constraints
1:00PM
Daily Resource Operations Turnover Meeting
Short Term plan for next day turned over to Real-Time
Real-Time update of current and next day gas plan
Daily compliance updates
APS Confidential Proprietary

14. Energy Imbalance Market (EIM) “the newest tool”

15. Variability of Net Load Intra-hour
Minutes
Customer demand constantly fluctuates
Demand can trend up/down during the hour
Renewable output can vary (intermittency)

16. The Role of EIM - Finding the Optimal Solution
Hedging up to 3 years
Month Ahead
Day Ahead
Hour Ahead
Inside the Hour
Ramp APS Generation Units Up/Down for Balancing
With EIM
Hedging up to 3 years
Month Ahead
Day Ahead
Hour Ahead
15 minute
5 minute Ahead
Inside of 5 minutes

17. EIM is an easily-scalable extension of the real-time market
Supports integration of renewables by sharing diverse resources across a larger geographical area
Enhances reliability through improved situational awareness in ISO and EIM footprint
Brings down costs by allowing access to a wider array of resources
Balancing authorities maintain control and responsibility for the reliability of their system
Today:
Each BA must balance loads and resources w/in its borders.
Limited pool of balancing resources
Inflexibility
High levels of reserves
Economic inefficiencies
Increased costs to integrate wind/solar
In an EIM:
The market dispatches resources across BAs to balance energy
Diversity of balancing resources
Increased flexibility
Decreased flexible reserves
More economically efficient
Decreased integration cost
Puget Sound Energy and Arizona Public Service are working with the ISO to begin participation in fall of 2016.

18. EIM Footprint

19. Focus on Solar

20. Solar Resource Growth
California - Renewable Portfolio Standard 50% energy production by 2030
Rooftop solar is in addition
Utility scale solar currently over 8,000 MW
APS
utility scale MW
rooftop > 500MW growing at MW per month

21. APS Load Shape Prior to Significant Rooftop Solar – Late fall day
Flat load middle of day MW
Review 3
Hour

22. Rooftop Solar Impact on APS Load Shape (Late Fall Day 2014 versus 2006)MW 4
Hour

23. Factoring in all Obligations and Operating Limitations
Over Gen 5
Hour

24. Average Hourly Market Prices (Mar-16)
Mid-day prices below 1 cent/kWH
Note – blue is day-ahead and green is real-time

25. Longer Term Solutions
Creating operational flexibility across generation fleet
Wholesale market changes that diversify load and resources
EIM participation
Developed new wholesale trading options (Trough hours and evening peak products starting soon)
Storage options
Retail rate design changes 8

26. CAISO Load Shape Reaches 2020 Minimum Load Level Already9

27. Renewable Curtailment in CAISO10