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Power Outage

Charlie Keating and Gary Driggs have fallen. And in a city edgy about the self-destruction of its icons, a question is being posed: Will Keith Turley, the man who pushed the Arizona Public Service utility into real estate and banking with disastrous results, be next?

A few years ago, the suggestion of Keith Turley as a suntanned Humpty Dumpty would have seemed ludicrous. The man, after all, may be the biggest power broker of them all in a city whose fortunes have long been dictated by the captains of commerce. A native Mesan and original member of the Phoenix 40, he was the top dog at the state's largest utility throughout the boom years of the Seventies and Eighties, a position that, combined with his own driving ambition, made him an irresistible force. He's on a first-name basis with congressmen and world bankers. But Turley's Midas touch may be exhausted, along with the magical, invulnerable air that made him such a Phoenix fixture in the boom years.

Turley's decision to diversify Arizona Public Service in 1985 was controversial from its inception. But it came as no surprise considering the acrobatic efforts of other electric companies. In the easy-come, easy-go Reagan years, utilities across the country were creating shell-like "holding companies." Those paper corporations helped them route profits away from the watchful eye of state regulators, essentially allowing the utilities to escape from the time- honored system whereby the giant companies accepted modest profits in exchange for receiving marketplace monopolies. That's exactly what the fancifully named Pinnacle West Capital Corporation was designed to do for APS. With work winding up on the Palo Verde nuclear plant and no more big construction jobs scheduled for years, APS would soon be flush with cash. "Pinnacle West was nobody," remembers one source familiar with the company's early days. "They had two employees." But that didn't prevent the company from engaging in what Forbes magazine cautioned was "an unprecedented diversification spree."

The five businesses purchased or assembled under the protective wing of Pinnacle West are APS, the giant MeraBank savings and loan, a real estate development arm called SunCor, a uranium mining company called Malapai Resources, and El Dorado Investment Company, a venture capital arm whose assets include a 15 percent chunk of the Phoenix Suns.

The thought of allowing a regulated utility to expand into free markets scared the daylights out of state regulators like John Ahearn, the former chairman of the Residential Utilities Consumer Office who fought against it back in 1985. They realized that the creation of the holding companies had an ominous implication: If a company could figure out a way to bamboozle state regulators, it could start billing utility ratepayers for speculative investments that had nothing to do with electricity. What would happen, they asked, if the company's non-utility subsidiaries started losing money?

Unfortunately for Arizona regulators, that's the exact scenario at which Pinnacle West has arrived. And the fear is that local ratepayers, who were protected under the old system, may be forced to cover the corporate gambling debts of a board of directors gone awry. The Arizona Corporation Commission has vowed to prevent Pinnacle West from bleeding APS customers and has even commissioned an audit of the parent company's books. Pinnacle West swears it has no intention of using APS money to patch up other subsidiaries. But observers wonder: What if a new corporation commission gets elected? What if the state Senate cuts the commission's budget, reducing its ability to keep tabs on possible accounting high jinks? And what if Pinnacle West's problems wind up putting APS in jeopardy? Could the commissioners really allow the state's largest utility to risk its stability? Wouldn't they be forced to grant it relief in the form of rate hikes?

They're questions made all the more pressing by the fact that, four years after its creation, Pinnacle West is dropping like a stone. The Phoenix- based Goliath has slashed dividend payments to shareholders and shows no signs of mounting a recovery. In the past year, it lost six cents per share, compared to earnings of $2.82 the year before. Enraged shareholders have filed suit, alleging fraud. And only one of its subsidiaries is making money: APS is the old reliable. Clucked Forbes in a follow-up piece last January, "Sometimes it's best to leave well enough alone."

What happened? Put simply, Turley and his board of directors put all their eggs in one basket, investing heavily in two companies--MeraBank and the real estate development firm SunCor--whose fortunes are inextricably linked to Southwestern real estate. When real estate values began dropping, both firms got burned badly. MeraBank lost $209 million last year, while SunCor dropped $81 million. Most of those losses came when the firms had to "write down" real estate they bought--in short, they own thousands of acres of land that's worth a lot less now than it was three years ago.

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Andy Van De Voorde