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Sell, APS, Sell!

You'd have thought Keith Turley was defending the town's virgins from cowboys hungry after a long stint on the range.

How dare these rustlers from Oregon come to Arizona and try to despoil our biggest company. He blustered what an "insult" this was; how these interlopers were just "opportunistic." From his jut-jawed reaction, you'd have thought he had a jewel worth protecting.

That scene started playing out last fall when PacifiCorp, one of the largest and most successful utility companies in the country, said it wanted to buy Arizona Public Service--the cornerstone of Turley's crumbling empire, Pinnacle West Capital Corporation.

By the time PacifiCorp came to town, Turley and his board of directors had taken their profitable utility company and sucked it into a series of disastrous diversifications--banking, development, uranium mining--that left PinWest on the verge of bankruptcy. By then, Turley had been subjected to a year of public humiliation; he'd been called a "bozo" and ordered to resign before he "ruined the economy of the entire state."

But did Turley welcome a suitor? No sir. He didn't even take the phone call. He and his board of directors smugly reminded Arizona that no outsider could protect its interests like they could. Even after public outrage over the PinWest disaster forced Turley's "retirement," successor Richard Snell pledged to carry on the fight against a takeover. The daily media lapped it up, and the public was left with the impression that Turley and Snell were saving the state from exploitation by a voracious foreign plunderer.

An entirely different picture emerges when you get beyond their press releases. In fact, their obstinance is hurting almost every household in the state as they shove Arizona closer to having the most expensive electricity in the country. To keep PinWest alive, they've forfeited shareholder dividends for years into the future and mortgaged APS.

A growing number of people concludes that the PinWest directors--who continued to feather their own nests even as the company fortunes nose-dived--are the only people certain to come out ahead from fighting the PacifiCorp takeover. This is the board, after all, that awarded itself cut-rate mortgages so Turley could retire to a 7,800-square-foot home overlooking the Paradise Valley Country Club golf course. And handed millions to PinWest director Karl Eller's son so he could have his own company to make high-risk investments. Experts outside the state conclude Arizona would be lucky if PinWest sold out to PacifiCorp. Because unlike APS--popularly known as "Another Public Screwing"--PacifiCorp is respected by regulators, environmentalists and financial analysts. It's been called one of the country's "smartest investor-owned utilities." And there's considerable amazement around the country that such a company would be treated so shabbily. Especially by an outfit with a national reputation for inept and self-serving management; a company that last year drained $20 million more out of APS than the utility earned in profits.

Most significant, PacifiCorp is a financially healthy company, while PinWest remains in deep financial water, despite its recent ballyhooed salvation. Much of PinWest's survival depends on boosting residential electric rates 26 percent--the largest single increase in state history. In contrast, PacifiCorp has pledged to limit rate hikes to no more than 8 percent over the next four years.

Against such a backdrop, state utility regulators, far from worrying that Arizona residents would be hurt if PacifiCorp took over, are openly receptive. "PacifiCorp understands APS ratepayers can't stand a big rate increase, and they are willing to eat some of the utility's debt as a good-will gesture," says Marcia Weeks, Arizona Corporation Commission chair. "APS doesn't seem to want to solve their problem except on the backs of the ratepayers. They have no social conscience; no recognition of the state of Arizona's economy."

Nor is Weeks impressed with PinWest plans for financial recovery. "I don't see shareholders getting much out of what you have accomplished at this point, and I only see the ratepayers getting hurt," she has told them. Weeks is but one of a growing chorus saying what PinWest directors never thought they'd hear: What's good for them is no longer good for Arizona.

PACIFICORP PRESIDENT A.M. Gleason waited and waited for a response to his $1.7 billion offer to purchase APS last November. But Turley never called. "We've never run into people like these before," marvels one PacifiCorp insider. "They don't seem to feel they owe anyone an explanation for anything. They don't even answer their mail, for God's sake." Even after PacifiCorp upped the ante with a new $1.87 billion offer to buy everything PinWest owned except Merabank, there was no response.

Until recently, when Snell finally met with Gleason as part of an inaugural good-will tour, PinWest's insolence was so obvious it even attracted the notice of state utility regulators. "Since coming to this state the PacifiCorp people have behaved as real gentlemen . . . but they've not been treated as such by [PinWest officials]," Weeks says.  

Snell is ready, even anxious, to dispel any impression that his elevation to CEO means business as usual at PinWest, the latest Arizona corporate giant to spin from swan dive to belly flop. "The first thing is to establish the confidence of the lenders and company employees, as well," Snell says of his strategy for PinWest.

Despite his long association with the board that approved PinWest's disastrous diversification, Snell is being presented as a new breed of leader. Where Turley was impulsive, Snell is careful. While Turley's credentials look laughably thin in the glare of failure, Snell's qualifications appear reassuringly solid.

Snell brings to the job a low-key, even taciturn, presence far different from Turley's expansive (some would say oppressive) ego. In the short weeks since taking the bridge, Snell has impressed colleagues, regulators and financial market experts with his business sense, thoughtful manner and record of accomplishment.

As head of Aztar, formerly Ramada Inns Incorporated, Snell pulled a wobbling string of hotels and gambling casinos out of financial straits similar to PinWest's. First elected to the APS board in 1975, he has been on the board of APS's parent company since its creation in 1985, when it was called AZP Group Incorporated. (The company was renamed Pinnacle West in 1987.)

Nevertheless, the similarities between Snell and his predecessor go deeper than their country-club tans. If, as he now claims, Snell opposed the diversification plans spearheaded by Turley, there is little evidence that he did so with either noise or energy. At most, Snell played the loyal opposition as Turley burdened the company's cash cow, APS, with $650 million in debt from the various diversification schemes.

Few observers expect Snell to make radical changes in the PinWest board, whose reign is marked by an almost total indifference to public opinion.

Snell, however, did take a lead role in salvaging PinWest when it began to collapse last year. He was able to convince creditors to extend the due date on the existing debt and to limit the company's share in the federal bailout of MeraBank.

MeraBank, the chief cause of PinWest's financial hemorrhaging, has lost nearly half a billion dollars on sour real estate speculation since PinWest bought it in 1986. Another $1 billion in losses is expected before it bottoms out.

In December, PinWest negotiated a deal with the federal Office of Thrift Supervision to pay $450 million toward covering MeraBank's bad loans. The responsibility for any losses beyond that is on the taxpayers' shoulders.

PinWest officials could barely conceal their relief when the feds finally towed off the ailing thrift on January 31, the same day they announced they'd gotten new loans to cover PinWest's remaining $650 million debt.

PinWest had a convenient pretext to reject PacifiCorp's offer because of the quick boost in stock prices following its announcement that it had slipped out from under the MeraBank debacle.

The oddest thing, however, is that none of the state's leaders outside the corporation commission probed either the takeover offer or PinWest's rationale for dismissing it so quickly.

"From the calls and comments I've gotten, I'd say there's a pervasive feeling out there that losing control of significant institutions to foreign corporations is not in the long-term interest of the people of this state," Snell says. "Some would say there are powerful counterarguments to be made, but from what I hear, I would say that's still the prevailing feeling."

If Phoenix, however, has learned anything from the past two years of hard times, it is that mythmakers don't die from public outrage, they just muzzle up until the storm passes. So much of Pinnacle West's former glory was, it turns out, pure myth, that only a fool would accept its tale of salvation without at least checking the bottom line. This then, is the bottom line:

--The PacifiCorp offer, dismissed as "low-ball" by PinWest officials, accurately reflects deep-seated financial problems throughout APS and other holdings. PinWest has so many money- losing ventures some experts say it's impossible to attach a book value to the company.

--PinWest's apparent rebound is more fragile than company officials have admitted, and both stockholders and customers stand to get burned because of it. PinWest mortgaged APS to pay for its own recovery, and much depends on its ability to win the huge rate increase sought by APS, which must be cajoled out of state regulators infuriated by the company's broken promises and pattern of mismanagement.

--The management of PacifiCorp is widely admired by financial analysts, regulators and environmentalists while PinWest, when it is mentioned at all, is used as a bad example. PinWest owes so much money to lenders that shareholders won't see a dividend for at least two years, company officials admit.  

PacifiCorp only offered one-third book value for APS, its original offer made last November, because the utility's financial problems are massive and complex, says the man who engineered the offer.

"We think there's a lot more involved in valuing a company than just book value," explains Verl Topham, executive vice president of PacifiCorp's electric operations group. "They have over one billion dollars of debt from nuclear and coal-fired plants that's yet to be included in the rate base, where it can be paid off," Topham says. "In addition, there's more than $1 billion in PinWest debt that has to be paid from APS earnings. They've got a nuclear plant with a troubled history of operation; they claim they've got that solved now but even if that's true, it will take time to get it up and running smoothly.

"Our concern about the utility's financial health has been borne out by the size of rate relief they are seeking," Topham says. "We don't think a 22 [overall] percent rate hike is doable, and if they don't get it, that reduces the cash flow out of the one operation that makes money.

"If you can get massive rate hikes, you can get the value of the company back up to book value," he acknowledges. "But that means the customers bear the entire brunt."

PinWest officials said the PacifiCorp offer was particularly insulting since it had paid twice book value when it merged with Utah Power & Light in 1988. But industry observers say the Utah utility's condition is more sound, and its problems less knotty, than those of APS.

For instance, APS' temperamental nuclear units make up 25 percent of its total power capacity. Last year's operating problems forced the utility to buy $60 million worth of replacement power. Across the state's northern border, however, "Utah Power has all these little coal-fired units just chugging away," says Mark Sullivan, executive director of the Northwest Conservation and Power Planning Act Coalition in Seattle, Washington.

Utah Power also had weathered the worst of its most notorious problems, including a lethal 1986 coal-mine fire and the bribery conviction of a company security official, by the time PacifiCorp came calling. "The problems with their coal-mine division, which included allegations of gross mismanagement, unsafe conditions and unusual salaries and gifts to favored employees, were pretty well resolved once they replaced the company they'd hired to manage their mining operation," says Ted Stewart, chair of the Utah Public Service Commission in Salt Lake City.

Utah Power & Light stock was actually selling at prices above the company's book value at the time PacifiCorp made its offer, Stewart says. PinWest stock, in contrast, was selling for one quarter of book value when PacifiCorp launched its takeover attempt.

The dismal stock performance notwithstanding, Turley and other PinWest leaders postured like opera divas when PacifiCorp made its initial approach. PacifiCorp officials tacitly admit their offer hardly flattered the PinWest topsiders, especially compared to the deal offered Utah Power & Light officials. (PacifiCorp pledged publicly not to fire a single top manager at the Utah utility--but such a reassuring nod to the Arizona company was conspicuously missing.)

PacifiCorp planned to deal PinWest and its honchos completely out of the picture, Topham says. "Our original offer was for the utility only and contemplated leaving them with enough cash to resolve their other problems," he says, referring to PinWest's money-losing subsidiaries. "The second offer did contemplate taking on these other problems and seeing if we could get some value out of them, for instance, out of the real-estate holdings. But we're not optimistic about the profit potential there."

PinWest president Snell contends two independent financial consultants found the offer "woefully inadequate." But he declines to release the consultants' analyses and claims they produced no written reports. "Those reports would be privileged information, if they existed," Snell says. "There wasn't anything written; [The consultants] made oral presentations, very extensive ones."

DEEPER CLUES to the board's quick rejection may reside in the manner in which individual members have prospered regardless of the annual bottom line. In straight salaries alone, Turley and other top officials have been among the highest paid of any utility holding company in the country. And that's not even counting the stock options and retirement benefits that line their golden parachutes.

In 1988, a year in which MeraBank losses drove PinWest's net income down to $4 million, Turley took home more than $600,000 in salary and benefits.

The directors, high-salary types for the most part, paid themselves $20,000 to sit on PinWest board. They voted to cut the annual fee in half only after media revelations had put shareholders in a lynching mood.  

Perhaps the best-known examples of regal excess are the cut-rate home loans board members approved for each other following PinWest's 1987 acquisition of MeraBank.

The mortgages range as high as three quarters of a million dollars and were approved at interest rates 30 percent below the market. Turley used his loan to build a 7,800-square-foot home overlooking the Paradise Valley Country Club golf course, its completion timed to coincide with his retirement. Snell borrowed $144,000 at 7.47 percent interest. (The board voted to bring interest rates up to market levels in January 1989 in an effort to quell shareholder unrest as the company's fortunes began to plummet.)

Snell is by far the most accomplished businessman on the PinWest board, whose membership is conspicuous for its lack of diversity and sophistication. Its members, as the overwhelming presence of Phoenix 40 members would suggest, are drawn from a narrow layer of provincial lords, people who've made a killing in such arenas as the Yuma media, local building supplies and cotton farming.

PacifiCorp, on the other hand, is governed by a board that includes Stan Hathaway, a former governor of Wyoming lauded for his conservation awareness; the presidents of NIKE, Incorporated and Pendleton Woolen Mills, both nationally successful companies; three top university administrators and the director of the Henry E. Huntington Library, one of the region's most important research libraries.

The brainpower at the top is not just for show, judging from the company's reputation nationwide. PacifiCorp wins praise for the quality of its management, philosophy and performance.

"They are an extremely well-managed company," says Ted Stewart, the Utah utility regulator who oversaw the merger of PacifiCorp and Utah Power. "They are very open with regulators, very cooperative." Not only did the merger not hurt Utahans, he says, PacifiCorp made good on its promises to reduce electricity rates through the cost savings achieved. "They did a fairly thorough explanation to us of their plan to acquire APS, and have been able to satisfy us that the acquisition would be to Utah's benefit," Stewart notes.

PacifiCorp has an equally good name with conservation groups in the seven states where it operates, says Mark Sullivan, whose group advocates the increased development of renewable energy sources by utilities. "It's the smartest investor-owned utility in the Northwest," he says. "They are the first company in the region to make a stab at quantifying and incorporating the environmental costs of future energy projects in their long-range plans. They also are extremely progressive in their attempts to look ahead at what conservation measures will be practical and available in the future, as they plan, not just what's available today."

Wall Street bond analysts agree with PinWest officials that PacifiCorp is "aggressive" and "opportunistic," but say the company, in contrast to PinWest, is well-run. "PacifiCorp has very talented management, and a great deal of depth," says Steve Zimmerman, a vice president of Standard & Poor's Corporation in New York City. "They've got good fuel resources, a good service territory, and good cash flow."

Zimmerman offers insight into PacifiCorp's strategy on PinWest. "The history is they go after distressed merchandise," he says. "The Utah Power deal aside, their strategy with electric utilities is to pick stuff up cheap. I would be very surprised if they greatly increased their offer for APS."

To the extent there's any downside to PacifiCorp, Zimmerman says, it stems from the company's aggressive acquisition plans. "The feeling is there's a risk to existing bondholders that they might go out and buy less creditworthy companies like APS and that might damage their credit rating." APS is in such poor shape that PacifiCorp's A rating might suffer, Zimmerman adds.

"They've done a lot of deals and a number of things have not worked out well," he says. "But PacifiCorp's shortcomings shouldn't be compared to PinWest. They make mistakes but not where they've bet the ranch."

PINWEST'S SLICK PR ASIDE, signs are clear that the nation's financial managers remain concerned about the company's prospects. Though comforted by the most recent developments, they say financial problems are so deep-rooted no easy solution exists.

For instance, on the same day PinWest flooded local media with news of its loan restructuring, Standard & Poor's--despite knowing of the debt reprieve--dropped APS another notch in its ratings. APS is now among a handful of utilities with the worst bond ratings in the country, Standard & Poor's figures show.

The devaluation, the second within the past year, means APS will have to pay higher interest rates next time it needs to borrow money. The only unknown, company officials and independent experts agree, is how much more APS will have to pay as a result of the ratings drop.  

Nor is the deal as done as PinWest claims. Two key propositions remain open; PinWest officials admit they don't yet know the source of permanent financing for the $450 million PinWest has committed as its part of the MeraBank bailout.

Perhaps more ominous, prospective lenders say they will call "due" on the loans if state utility regulators clamp additional restrictions on earnings siphoned from APS. The regulators, however, are looking for a way to do just that. Already regulators are furious that PinWest took all APS profits, plus an extra $20 million from the utility in 1989. "We want to ensure they don't pay out more to PinWest than they are actually earning," says Weeks, chair of the Arizona Corporation Commission. "We don't want a repeat of 1989."

Barbara Eiseman, a Standard & Poor vice president who analyzes utility finances, cites three reasons behind the decision to lower APS' ratings; hostile state regulators, operating problems at the Palo Verde nuclear generating station and the burden on APS to pay off its parent company's debt.

"Given the political and regulatory climate, we think they will have problems getting rate relief," Eiseman says, referring to the open criticism of Turley and other PinWest leaders voiced by Weeks and fellow Commissioner Renz Jennings.

"Second, you have to consider the performance of Palo Verde, which was very poor last year," Eiseman says. "That, combined with the fact APS already has got very, very high rates, makes it difficult to get more rate relief.

"The fact PacifiCorp is standing by with an offer to buy and commitments to seek very low rate hikes just further reduces the significant likelihood of rate relief," she adds.

The third issue troubling utility bondholders is the fact that PinWest mortgaged APS to accomplish its debt restructuring. "Under the restructuring, the entire debt of the parent company is secured by APS stock," Eiseman says. And the sole source of cash to pay off the debt is APS, the only PinWest subsidiary making a profit, she adds.

Terms of the bailout illuminate, as nothing else could, the dimensions of the PinWest myth. PinWest is totally dependent upon APS because APS has been, from the beginning, the only solid asset in its portfolio. Everything else--the bank for which it paid twice book value, the hugely ambitious development company it created from nothing--capitalized on the myth of a never-ending boom. The fact that former PinWest CEO Keith Turley, as much as any other Valley leader, helped to create and hype the dream, only deepens the irony.

PinWest's debt is now so large that APS profits, from which shareholder dividends are paid, will be devoured by the parent company's creditors as rapidly as they are produced for years into the future, Snell admits. "It's going to be a while before shareholders get dividends," he says. "I would think two years would be on the short end of that while."

Snell contends the company's biggest shareholders--large-scale investors such as mutual funds--are not overly distressed by the news. "The institutional shareholders I've talked to, those are about the only shareholders I've talked to, aren't focused on dividends," he says. "They look at it more in terms of the total return on investment. I understand it is not typical of utilities [to downplay the importance of dividends] but Wall Street looks at it more my way."

The reaction among small shareholders, judging by the lynch mob atmosphere of last May's annual stockholders' meeting, is apt to be more critical. Dividends, after all, are the reason most people buy utility stock. The three short years of PinWest's existence have been marked by dizzy declines in both dividends and stock prices, leaving individual investors, many of them retirees scattered around the Valley, with paper worth a fraction of its former value.

Annual dividends went from nearly three dollars per share to nothing, while stock values skidded from more than $30 per share to $4.25 per share as of December 1989. Stock prices jumped following the announcement in early December that PinWest had made a deal with federal thrift regulators limiting its liability in the MeraBank failure, but are still noodling along at a third their 1987 value.

Enraged investors demanded Turley's resignation at last year's annual stockholders' meeting in Phoenix and called on the company to jettison money-losing subsidiaries. He flatly refused, but finally in January, he retired early. At present, however, signs of organized rebellion are few. "Most of the investors are elderly people, many on fixed incomes, and they don't have the means or the wherewithal to organize the kind of effort needed to oust the entrenched management," corporation commissioner Jennings notes.  

A fraud lawsuit brought by investors against Turley and other company directors is languishing, the plaintiffs unable to pursue their quarry because U.S. District Court Judge Roger Strand has not ruled on the company's dismissal motion, filed nine months ago. The investors accuse PinWest officials of knowingly issuing falsely optimistic statements on the company's condition.

The 13,000-member Pinnacle West Shareholders Association, its leaders hand-picked by the PinWest board, has largely supported PinWest management. Phoenix businessman Joe Castillo, association chair for the past four years, recently announced he was resigning to challenge Marcia Weeks for her seat on the corporation commission in the November election..

A former chair of the Republican Hispanic Committee, he still is reluctant to criticize Turley. "I'm still putting together my platform," Castillo says. "I don't want to make a statement until I've fully studied the issues."

The challenge to Weeks comes at the very time APS most needs a friend on the commission, since the company's record-breaking rate increase won't be decided before the fall elections. Critics say it's no coincidence that APS requested its huge rate increase between the announcement of PinWest's agreement to dump another $450 million into MeraBank and the restructuring of its other $650 million debt.

"When the public asks `Is APS requesting this rate increase to pay off the MeraBank deal?' I think the answer is `Yes,' though they don't directly state it," Weeks says. "The fact is they have committed to their lenders to maintain a high level of cash flow from APS, the sole purpose of which is to pay off that debt."

UTILITIES, AS ANYONE knows who grew up playing Monopoly, are as effortless a source of cash as exists in the American economy. Ratepayers send in checks as regularly as players rolling dice. (If you're an APS customer, your monthly bill is roughly equal to the rent collected by the kid who's cornered three or four railroads.)

So maybe it's no surprise PinWest is leaning so heavily on APS to pay off its debts. But APS is facing its own, entirely separate money problems, rooted in its expensive love affair with nuclear power. APS customers are already paying for the construction of units one and two at Palo Verde, costs which have driven APS rates above those charged by more than 80 percent of the nation's utilities.

If APS is granted the 22 percent hike (26 percent for residential rates) it's now seeking, its customers would be paying for the most expensive electricity in the United States, according to rankings compiled by the National Association of Regulatory Utility Commissioners.

APS president Mark DeMichele contends the current rate request reflects the power company's need to pay for its most recent construction of new power plants, including the third unit of Palo Verde, and to service its growing number of customers.

He also disputes claims that the rate hike would deepen the Valley's economic slump. "We've not found any reticence by new business to move into the state based on electricity rates," DeMichele says. "For most of the new businesses looking at coming here, the cost of energy as a percentage of their product is around 7 percent of the total. Far more important to them is the overall business climate and the tax structure.

"Both Salt River Project and Tucson Electric Power have rates lower than ours and still the economy is not thriving in those service areas, either," he adds. Actually, the most recent economic figures from Tucson show the town is doing very nicely and SRP service territory, while hit by the Valley-wide downturn, has been the fastest-growing area before the bust.

DeMichele contends that a new coal-fired power plant now costs as much or more to build than a nuclear plant and dismisses arguments that the company should have abandoned nuclear power before it spent close to $1 billion to build Palo Verde Three. "Palo Verde is built, it's up and running," he says, adding that "three or four" independent studies have supported the utility's assertion that completion of Palo Verde was the cheapest route to go.

Experts from both the corporation commission and Residential Utility Consumers' Office (RUCO) say they will continue challenging APS' claims that the smart choice was building Palo Verde Three--or that the unit is needed now--in hearings scheduled for April and early fall. "After the Three Mile Island accident, every other utility with a Palo Verde-style reactor on order canceled or shelved those orders except APS," says Roger Schwartz, chief counsel for RUCO.

By 1980, utilities around the region were realizing they had overestimated growth and were looking to market excess capacity, mostly coal-fired, already under construction. But APS, instead of buying up those contracts, pushed ahead with Palo Verde Three, says Gary Yaquinto, chief of the corporation commission's utilities section.  

Underscoring their concern about the APS rate request, Yaquinto and Schwartz say that APS' claims are not supported by its own numbers. Even last summer--one of the hottest on record--APS peak power usage did not justify the claim that Palo Verde Three is needed, not if the first two units run correctly, they say.

Even without charging ratepayers for all of its costs, APS is floating in cash, Weeks says. Previous commission decisions allow the utility to charge ratepayers for depreciation of all three units, which yields $67 million a year.

The APS balance sheet is also brightened up by an accounting maneuver, approved by the commission, which allows the company to record its construction debt for Palo Verde Three as if it were already part of the rate base. "The utility doesn't really collect the money from ratepayers, but it helps with the lenders," Weeks says. The utility hopes to recapture these so-called "deferred costs" in the requested rate hike.

Not only does the corporation commission plan to grill APS about its need for the third unit at Palo Verde, Weeks hints the lucrative depreciation allowance may be in jeopardy, as well. "Should we be giving them depreciation on a plant sitting still for 75 percent of the year?" she says.

Last year Palo Verde, which is supposed to be the wheelhorse of the APS system, was broken down all but 25 percent of the time. The record for unit three, which operated 13 percent of the time, is even worse. Both RUCO and corporation commission officials say APS should be held accountable for the series of managerial and operating mistakes that caused the breakdown.

"The Nuclear Regulatory Commission reports leading up to last year make it clear that even in 1988, a good year, they were lucky," Schwartz says. "That which was festering below the surface popped last year."

In May, Palo Verde was named the worst-managed nuclear plant in the country in a report by Public Citizen, a Washington, D.C.-based public interest group founded by Ralph Nader. The report, called "Nuclear Lemons," was based entirely on performance scores in NRC reports.

"In the cold light of 1990, we forget that in 1988 Palo Verde Three broke a world record for power production," APS president DeMichele says in defense of the plant. "It operated in the 90 percent range."

DeMichele acknowledges the unfavorable NRC reviews but says, "The management problems at Palo Verde were identified to me by the NRC when I became CEO in January 1988. We immediately began a review and made an interim management change in July and began a national search for a qualified management team.

"It's not something you can do overnight," he says. "The pool of experienced nuclear managers is very small; it takes time to get them here. We've completed that finally and NRC has given them high marks. Our challenge now is to get the team working together well. If that is done, there's no reason to think we'll have a repeat of last year's problems."

"The focus [of the upcoming rate hearings] can't be necessarily on history," DeMichele says. "It has to be on where we're going and on the recognition that a lot of things have changed in the process."

Much as DeMichele may want to focus all eyes forward, officials at the corporation commission and RUCO say that very attitude among company officials has resulted in sloppy management and planning based more on optimism than reality.

"Most utilities are run by businessmen, engineers or financial people, but Arizona has the distinction of having its largest utility run by two PR men," says Schwartz, referring to DeMichele's background in advertising and the rise of his mentor, Turley, from company public-relations flack.

"RUCO is on record recommending a PinWest-APS divorce because they are not paying attention to APS except as a cash cow," he adds. "Get this utility back in the hands of people whose idea of an accomplishment is to get Palo Verde up and running, not to shake Cotton Fitzsimmons' hand."

Schwartz, a former APS lawyer for environmental affairs, describes the prevailing attitude within corporate offices as "a cross between a bunker mentality and being hopelessly out of touch with reality."

"They never had any sense of how much rate shock was too much," he says.
At least one onlooker is not at all shocked by the size of the APS rate request. "It's very close to what we predicted they would seek," says Verl Topham, architect of the PacifiCorp buyout offer. "The only way they can raise the cash flow they need, within their existing resource base, is with a rate increase of that size, and we don't think it's fair to place a burden like that on the customers."  

TURLEY, HIS SHOWMANSHIP intact, made sure it looked like PinWest had been rescued and its financial troubles were in the past. On February l, he led the show in describing how bankruptcy was averted in breathless, last-minute maneuvering to restructure the company's billion-dollar debt before the midnight deadline expired and creditors from New York to Tokyo converged to carve up the carcass.

With so much drama in the air, it's well to keep these facts firmly in mind: The shareholders won't see a dividend for years. The ratepayers are facing a rate hike of obscene dimensions. And PinWest's financial difficulties are far from over.

There is a way out of this mess. Somebody could organize the PinWest shareholders to fire their management, or force them to sell. But the hero for that job has yet to ride over the horizon. If anyone's interested, PacifiCorp's president is still waiting by the phone.

MUST use first pullquote
per Jana
Thanks, cj

"PacifiCorp's shortcomings shouldn't be compared to PinWest. They make mistakes but not where they've bet the ranch."

APS has no social conscience; no recognition of the state of Arizona's economy.

"They don't seem to feel they owe anyone an explanation for anything. They don't even answer their mail, for God's sake." Mythmakers don't die from public outrage, they just muzzle up until the storm passes.

PinWest owes so much money to lenders that shareholders won't see a dividend for at least two years.

PacifiCorp pledged publicly not to fire a single top manager at the Utah utility--but such a reassuring nod to the Arizona company was conspicuously missing.

Perhaps the best-known examples of regal excess are the cut-rate home loans board members approved for each other after PinWest's 1987 acquisition of MeraBank.

Already regulators are furious that PinWest took all APS profits, plus an extra $20 million from the utility in 1989.

If APS is granted the hike, its customers would be paying for the most expensive electricity in the United States.

"PacifiCorp understands APS ratepayers can't stand a big rate increase, and they are willing to eat some of the utility's debt as a good-will gesture.


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