APS 2011 Annual Report Download - page 54

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Arizona, demand for power peaks during the hot summer months, with market prices also peaking at
that time. As a result, APS’s overall operating results fluctuate substantially on a seasonal basis. In
addition, APS has historically sold less power, and consequently earned less income, when weather
conditions are milder. As a result, unusually mild weather could diminish APS’s financial condition,
results of operations and cash flows.
Higher temperatures may decrease the snowpack, which might result in lowered soil moisture
and an increased threat of forest fires. Forest fires could threaten APS’s communities and electric
transmission lines. Any damage caused as a result of forest fires could negatively impact APS’s
financial condition, results of operations or cash flows.
Effects of Energy Conservation Measures and Distributed Energy. The ACC has enacted rules
regarding energy efficiency that mandate a 22% annual energy savings requirement by 2020. This will
likely increase participation by APS customers in energy efficiency and conservation programs and
other demand-side management efforts, which in turn will impact the demand for electricity. The rules
also include a requirement for the ACC to review and address financial disincentives, recovery of fixed
costs and the recovery of net lost income/revenue that would result from lower sales due to increased
energy efficiency requirements. To that end, the proposed Settlement Agreement in APS’s current
retail rate case includes a mechanism to address these matters. The 2009 retail rate case settlement
agreement also established energy efficiency goals for APS that began in 2010 that extend through
2012, subjecting APS to energy efficiency requirements slightly greater for the first two of those years
than required under the rules described above.
APS must also meet certain distributed energy requirements. A portion of APS’s total
renewable energy requirement must be met with an increasing percentage of distributed energy
resources (generally, small scale renewable technologies located on customers' properties). The
distributed energy requirement was 25% of the overall RES requirement of 3% in 2011 and increased
to 30% of the applicable RES requirement for 2012 and subsequent years. Customer participation in
distributed energy programs would result in lower demand, since customers would be meeting some or
all of their own energy needs.
Reduced demand due to these energy efficiency and distributed energy requirements, unless
offset through ratemaking mechanisms, such as those proposed in the Settlement Agreement, could
have a material adverse impact on APS’s financial condition, results of operations and cash flows.
The operation of power generation facilities and transmission systems involves risks that could
result in reduced output or unscheduled outages, which could materially affect APS’s results of
operations.
The operation of power generation, transmission and distribution facilities involves certain
risks, including the risk of breakdown or failure of equipment, fuel interruption, and performance
below expected levels of output or efficiency. Unscheduled outages, including extensions of scheduled
outages due to mechanical failures or other complications, occur from time to time and are an inherent
risk of APS’s business. Because our transmission facilities are interconnected with those of third
parties, the operation of our facilities could be adversely affected by unexpected or uncontrollable
events occurring on the larger transmission power grid, and the operation or failure of our facilities
could adversely affect the operations of others. If APS’s facilities operate below expectations,
especially during its peak seasons, it may lose revenue or incur additional expenses, including
increased purchased power expenses.