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PINNACLE WEST CAPITAL CORPORATION
Post Office Box 53999
PHOENIX, ARIZONA 85072-3999

NOTICE AND PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
Wednesday May 21, 2008

To our Shareholders:

     You are invited to attend the 2008 Annual Meeting of Shareholders of Pinnacle West Capital Corporation (the “Company” or “Pinnacle West”) to be held at the Herberger Theater Center, 222 East Monroe, Phoenix, Arizona 85004, at 10:30 a.m., Mountain Standard Time, on Wednesday, May 21, 2008. At this meeting, we are asking you to vote on the following proposals in addition to any other business that may properly come before the meeting:

	(1)		Elect twelve (12) directors to serve until the 2009 Annual Meeting of Shareholders (Proposal 1);
	(2)		Approve an amendment to the Company’s Articles of Incorporation to provide for a majority shareholder vote to amend the Articles of Incorporation (Proposal 2); and
	(3)		Ratify the appointment of the Company’s independent auditors for the fiscal year ending December 31, 2008 (Proposal 3).

     All shareholders of record at the close of business on March 24, 2008 are entitled to notice of and to vote at the meeting. Shares can be voted at the meeting only if the holder is present or represented by proxy.

Approximate date of mailing to Shareholders:
April 10, 2008

TABLE OF CONTENTS

		Page
GENERAL INFORMATION			1
Introduction			1
What is the purpose of the Annual Meeting?			1
Who is entitled to vote?			1
How do I vote?			1
Is my vote confidential?			1
What constitutes a quorum?			2
What are the Board’s recommendations?			2
What is required to approve the items to be voted on?			2
Will shareholders be asked to vote on any other matters?			2
Who is entitled to attend the Annual Meeting?			2
Can I change or revoke my vote after I submit my proxy?			2
How do I get a copy of the Annual Report?			3
INFORMATION ABOUT OUR BOARD, ITS COMMITTEES AND OUR CORPORATE GOVERNANCE			3
How often did the Board meet during 2007?			3
Do we have independent directors?			3
How did the Board make its independence determinations?			3
What are the Committees the Board has established?			4
Where can I find the charters of the Board’s Committees and how do I get a copy?			4
What are the responsibilities of the Audit Committee?			5
What are the responsibilities of the Human Resources Committee?			5
What are the responsibilities of the Finance, Nuclear and Operating Committee?			5
What are the responsibilities of the Corporate Governance Committee?			6
Do the non-management and independent directors meet without management present?			6
How are nominees for the Board selected?			6
How are directors compensated?			7
DIRECTOR COMPENSATION			8
How can shareholders communicate with the Board?			9
Do Board members attend the Annual Meeting?			9
Does the Company have a code of business conduct and ethics?			9
PROPOSAL 1 – ELECTION OF DIRECTORS			10
Who will be elected at the Annual Meeting?			10
Who are the current nominees?			10
NOMINEES FOR DIRECTORS (TERM EXPIRING AT 2009 ANNUAL MEETING)			10
SHARES OF PINNACLE WEST STOCK OWNED BY MANAGEMENT AND LARGE SHAREHOLDERS			12
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE			13
RELATED PARTY TRANSACTIONS			13

 - i -

TABLE OF CONTENTS

		Page
AUDIT MATTERS			14
Report of the Audit Committee			14
Who are the Company’s independent auditors and will they be at the Annual Meeting?			15
What fees were paid to our independent registered public accountants in 2006 and 2007?			15
What are the Audit Committee’s pre-approval policies?			15
EXECUTIVE COMPENSATION			16
COMPENSATION DISCUSSION AND ANALYSIS			16
Introduction			16
What are our processes and procedures for considering and determining executive compensation?			16
What are the objectives of the Company’s compensation programs?			17
What is the compensation program designed to reward?			18
How does the Company determine the amount (and the formula) for each element of compensation paid to its Named Executive Officers?			18
What are the elements of the Company’s compensation program?			20
Why does the Company choose to pay each element of compensation to its Named Executive Officers?			25
How does each element of compensation and the Company’s decisions regarding that element fit into the Company’s overall compensation objectives and affect decisions regarding other elements?			25
What impact do taxation and accounting considerations have on the decisions regarding executive compensation?			25
Do we have stock ownership guidelines for our Named Executive Officers?			26
REPORT OF THE HUMAN RESOURCES COMMITTEE			27
SUMMARY COMPENSATION TABLE			28
GRANTS OF PLAN-BASED AWARDS			32
EMPLOYMENT AGREEMENTS			34
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END			35
OPTION EXERCISES AND STOCK VESTED			37
PENSION BENEFITS			38
DISCUSSION OF PENSION BENEFITS			39
NONQUALIFIED DEFERRED COMPENSATION			42
DISCUSSION OF NONQUALIFIED DEFERRED COMPENSATION			42
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL			43
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION			47
PROPOSAL 2 – COMPANY PROPOSAL TO PROVIDE FOR MAJORITY SHAREHOLDER VOTE TO AMEND THE ARTICLES OF INCORPORATION			47
Background			47
Reasons for Proposed Amendment			47
Effect of the Voting Outcome			48
PROPOSAL 3 – RATIFICATION OF THE SELECTION OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS OF THE COMPANY			48

 - ii -

TABLE OF CONTENTS

		Page
ADDITIONAL INFORMATION			49
How do we submit shareholder proposals or director nominations for the next Annual Meeting?			49
How many Annual Reports and proxy statements are delivered to a shared address?			49
How much did this proxy solicitation cost?			49
APPENDIX A			50

 - iii -

GENERAL INFORMATION

Introduction

          This proxy statement contains information regarding the Company’s 2008 Annual Meeting of Shareholders to be held at the Herberger Theater Center, 222 East Monroe, Phoenix, Arizona 85004, at 10:30 a.m., Mountain Standard Time, on Wednesday, May 21, 2008. Your proxy is being solicited by the Company’s Board of Directors.

     In accordance with rules and regulations recently adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each shareholder of record, we are now furnishing proxy materials to our shareholders on the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the proxy materials other than as described below. Instead, the Notice of Internet Availability of Proxy Materials will instruct you as to how you may access and review all of the important information contained in the proxy materials. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions included in the Notice of Internet Availability of Proxy Materials.

     It is anticipated that the Notice of Internet Availability of Proxy Materials is first being sent to shareholders on or about April 10, 2008. The proxy statement and the form of proxy relating to the 2008 Annual Meeting are first being made available to shareholders on or about April 10, 2008.

What is the purpose of the Annual Meeting?

          At the Annual Meeting you will vote on the matters outlined in the notice of meeting on the cover page of this proxy statement.

Who is entitled to vote?

          All shareholders at the close of business on March 24, 2008 (the record date) are entitled to vote at the meeting. Each holder of outstanding Company common stock is entitled to one vote per share held as of the record date on all matters on which shareholders are entitled to vote, except for the election of directors, in which case “cumulative” voting applies (see “What is required to approve the items to be voted on?” on page 2 of this proxy statement). At the close of business on the record date, there were ___ shares of common stock outstanding.

How do I vote?

          You may vote in person or by a validly designated proxy, or, if you or your proxy will not be attending the meeting, you may vote in one of three ways:

Vote by internet. The website address for internet voting is on your Notice of Internet Availability of Proxy Materials. Internet voting is available 24 hours a day;

Vote by telephone. The toll-free number for telephone voting is on your Notice of Internet Availability of Proxy Materials. Telephone voting is available 24 hours a day; or

Vote by mail. If you have requested and received a copy of our proxy materials, mark, date, sign and mail promptly a proxy card (a postage-paid envelope will be provided for mailing in the United States).

If you vote by telephone or internet, DO NOT mail a proxy card.

Is my vote confidential?

          Yes, your vote is confidential. Only the following persons have access to your vote: election inspectors; individuals who help with processing and counting of votes; and persons who need access for legal reasons. If you write comments on your proxy card, your comments will be provided to the Company, but how you vote will remain confidential.

What constitutes a quorum?

          To carry on the business of the meeting, we must have a quorum. A quorum is present when a majority of the outstanding shares, as of the record date, is represented in person or by proxy. Shares owned by the Company are not considered outstanding or present at the meeting. Shares that are entitled to vote but that are not voted at the direction of the beneficial owner (called abstentions) and votes withheld by brokers in the absence of instructions from beneficial owners (called broker non-votes) will be counted for the purpose of determining whether there is a quorum for the transaction of business at the meeting.

What are the Board’s recommendations?

          Unless you give other instructions through your proxy vote, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board of Directors. The Board’s recommendations are set forth below, together with the description of each item to be voted on in this proxy statement. In summary, the Board recommends a vote:

	•		FOR election of the nominated slate of directors (see Proposal 1);
	•		FOR amending the Articles of Incorporation to provide for a majority shareholder vote to amend the Articles of Incorporation (see Proposal 2); and
	•		FOR ratification of the appointment of Deloitte & Touche LLP as the Company’s independent auditors for the fiscal year ending December 31, 2008 (see Proposal 3).

What is required to approve the items to be voted on?

Election of Directors. Individuals receiving the highest number of votes will be elected. The number of votes that a shareholder may, but is not required to, cast is calculated by multiplying the number of shares of common stock owned by the shareholder, as of the record date, by the number of directors to be elected. Any shareholder may cumulate his or her votes by casting them all in person or by proxy for any one nominee, or by distributing them among two or more nominees. Abstentions and broker non-votes will not be counted towards a nominee’s total and will have no effect on the election of directors. You may not cumulate your votes against a nominee. If you hold shares beneficially through a broker, trustee or other nominee and wish to cumulate votes for any one or more (but less than all) nominees, you should contact your broker, trustee or nominee. Cumulative voting applies only to the election of directors.

Amendment to the Articles of Incorporation. Under the Articles of Incorporation, the approval of the holders of at least two-thirds of our outstanding common stock is required to amend the Articles of Incorporation as recommended in Proposal 2. In determining whether Proposal 2 has received the requisite number of votes, abstentions and broker non-votes will have the same effect as votes against Proposal 2.

Ratification of the Appointment of the Independent Auditors . In connection with the ratification of the appointment of the independent auditors for the fiscal year ending December 31, 2008, the affirmative vote of a majority of the shares voted on that item will be required for approval. Abstentions and broker non-votes will have no effect on the outcome of this proposal.

Will shareholders be asked to vote on any other matters?

          The Board of Directors is not aware of any other matters that will be brought before the shareholders for a vote. If any other matters properly come before the meeting, the proxy holders will vote on those matters in accordance with the recommendations of the Board of Directors, or, if no recommendations are given, in accordance with their own judgment. Shareholders attending the meeting may directly vote on those matters or they may vote by proxy.

Who is entitled to attend the Annual Meeting?

          You or your validly designated proxy may attend the meeting if you were a shareholder as of the record date. However, the Chairman of the meeting may limit the number of proxy representatives permitted to attend if a shareholder sends several representatives to the meeting.

Can I change or revoke my vote after I submit my proxy?

          Even after you have submitted your proxy card or voted by telephone or by internet, you may change or revoke your vote at any time before the proxy is exercised by filing with our Secretary either a notice of revocation or a signed proxy card bearing a

later date. The powers of the proxy holders will be suspended with respect to your shares if you attend the meeting in person and so request, although attendance at the meeting will not by itself revoke a previously granted proxy.

How do I get a copy of the Annual Report?

          You can access our Annual Report via the internet or request a copy as described in the Notice of Internet Availability of Proxy Materials that was sent to you. In addition, a copy of the Annual Report is available on the Company’s website (www.pinnaclewest.com) and will be provided to any shareholder upon request. Shareholders may request a copy from Shareholder Services at the telephone number or address set forth in “How many Annual Reports and proxy statements are delivered to a shared address?” on page 49 of this proxy statement.

INFORMATION ABOUT OUR BOARD, ITS COMMITTEES AND OUR CORPORATE GOVERNANCE

How often did the Board meet during 2007?

          The full Board of Directors met ten (10) times during 2007. Every director attended at least eighty-five percent (85%) of the meetings of the full Board and any committees on which he or she served.

Do we have independent directors?

          Yes. New York Stock Exchange (“NYSE”) rules require companies whose securities are traded on the NYSE to have a majority of independent directors. These rules describe certain relationships that prevent a director from being independent and require a company’s board of directors to make director independence determinations in all other circumstances. The Company’s Board of Directors has adopted Director Independence Standards to assist the Board in making director independence determinations. These Director Independence Standards are available at the Company’s website at www.pinnaclewest.com.

          Based on the Board’s review, the Board of Directors has determined that two (2) of the Company’s thirteen (13) directors are not independent and that eleven (11) of the directors are independent. The eleven (11) independent directors are Messrs. Basha, Gallagher, Herberger, Jamieson, Lopez, Nordstrom, Parker and Stewart, and Mses. Clark-Johnson, Grant and Munro. The Board also determined that Ms. Hesse, who did not stand for re-election at our 2007 Annual Meeting, was independent. Messrs. Davis and Post are not independent under NYSE rules or the Director Independence Standards because of their employment with the Company. Mr. Davis has announced his retirement from the Company effective March 1, 2008. He has also decided to not stand for re-election as a director at the end of his current term. Since Mr. Davis is not standing for re-election, if all of the directors standing for election at the 2008 Annual Meeting are elected, the Board will have twelve (12) directors, all of whom, except for Mr. Post, will be independent.

How did the Board make its independence determinations?

          In accordance with the NYSE rules and the Director Independence Standards, the Board undertakes an annual review to determine which of its directors are independent. The reviews generally take place in the first quarter of each year; however, directors are required to notify the Company of any changes that occur throughout the year that may impact their independence.

          In determining that Mr. Stewart is an independent director as part of the 2007 review, the Board considered that Mr. Stewart’s last date of employment with the Company was November 26, 2003, which was more than three years ago. In addition, although he had a nuclear consulting arrangement with Arizona Public Service Company (“APS”) during 2006, which has since terminated, the amount of fees paid to him under this arrangement was well below the amounts set forth in the NYSE rules and the Director Independence Standards.

          In determining that Mr. Gallagher is an independent director, the Board considered that the law firm of Gallagher and Kennedy, P.A. provided legal services to the Company in prior years and in 2007, and will perform legal services for the Company in 2008. However, since: (a) the amounts paid to Gallagher and Kennedy, P.A. were less than the dollar thresholds set forth in the NYSE rules and the Director Independence Standards; (b) Mr. Gallagher does not furnish legal services to the Company; and (c) he has advised the Company that he receives no compensation or benefits from Gallagher and Kennedy, P.A. as a result of the firm providing legal services to the Company, the Board determined that Mr. Gallagher was independent.

          In considering the independence of Ms. Clark-Johnson, who is President of the Newspaper Division of Gannett Co., Inc. (“Gannett”), the Board considered the fact that the Company and its affiliates purchase newspaper subscriptions, legal notice

publications and advertising from The Arizona Republic, AZCentral.com, and KPNX-TV, all of which are owned by Gannett. The Board determined that these transactions do not impact Ms. Clark-Johnson’s independence because they are ordinary course, arms-length transactions that are not material to either the Company or to Gannett. Ms. Clark-Johnson has announced her retirement from Gannett, effective May of 2008.

          In considering the independence of Mr. Parker, who is the Chairman and Chief Executive Officer of US Airways, the Board considered the fact that (a) directors and employees of the Company and its subsidiaries purchase air travel and freight from time to time for business purposes from US Airways or its affiliates, as well as limited advertising in the airline’s magazine; and (b) US Airways or its affiliates rented office space from SunCor Development Company (“SunCor”), a wholly-owned subsidiary of the Company, under three leases entered into in 2007; which were subsequently assigned to a third party when SunCor sold the buildings in December of 2007. The Board determined that these matters do not impact Mr. Parker’s independence because they are ordinary course, arms-length transactions that are not material to either the Company or US Airways and, in the case of the leases, were negotiated or entered into before Mr. Parker became a director of the Company.

          With respect to Ms. Hesse, who was a Board member prior to the 2007 Annual Meeting, from time to time in 2006 and in 2007, the company contracted for services from a subsidiary of AMEC plc. Ms. Hesse is a director of AMEC plc. However, since the amounts paid to these entities was less than the dollar thresholds set forth in the NYSE rules and the Director Independence Standards and the only position Ms. Hesse holds with AMEC plc is as a director, the Board determined that Ms. Hesse was independent.

          With respect to all of the directors, the Board considered that many of the directors and/or businesses of which they are officers, directors or shareholders are located in APS’ service territory and receive electricity from APS. The Board considered these relationships as well in determining the directors’ independence, but because the rates and charges for electricity provided by APS are fixed by the Arizona Corporation Commission, and the directors satisfied the other independence criteria specified in the NYSE rules and the Director Independence Standards, the Board determined that these relationships did not impact any director’s independence. The Board also considered contributions to charitable and non-profit organizations where a director also serves as a director of such charities or organizations. However, since none of the directors also serves as an executive officer of such charitable or non-profit organizations, the Board determined these payments did not impact any director’s independence.

What are the Committees the Board has established?

          The Board has a standing Audit Committee, Human Resources Committee, Corporate Governance Committee and Finance, Nuclear and Operating Committee. The Audit Committee, Human Resources Committee and Corporate Governance Committee are made up of independent directors (see “Do we have independent directors?” on page 3 of this proxy statement). The following table sets forth the membership of these Committees as of the date of this proxy statement:

								Finance,
				Human		Corporate		Nuclear and
				Resources		Governance		Operating
Director		Audit Committee		Committee		Committee		Committee
Edward N. Basha, Jr.		ü		ü		ü
Susan Clark-Johnson				ü		ü		ü
Jack E. Davis								ü
Michael L. Gallagher								X
Pamela Grant		ü		ü		ü
Roy A. Herberger, Jr.				X		ü		ü
William S. Jamieson		ü		ü		ü
Humberto S. Lopez		ü		ü		ü
Kathryn L. Munro		ü				X		ü
Bruce J. Nordstrom		X				ü		ü
W. Douglas Parker		ü				ü		ü
William J. Post								ü
William L. Stewart								ü

ü       Member
X       Chairman

Where can I find the charters of the Board’s Committees and how do I get a copy?

          All of the charters of the Board’s Committees are publicly available at the Company’s website (www.pinnaclewest.com).

What are the responsibilities of the Audit Committee?

          The primary functions of the Audit Committee, which held six (6) meetings in 2007, are to assist the Board in monitoring the following:

	•		the integrity of the Company’s financial statements;
	•		the independent auditors’ qualifications, independence and performance;
	•		the performance of the Company’s internal audit function; and
	•		the Company’s compliance with legal and regulatory requirements.

          The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the Company’s independent auditors. The Board has determined that each member of the Audit Committee meets the NYSE experience requirements for audit committee members and that Mr. Nordstrom, the Chairman of the Audit Committee, is an “audit committee financial expert” under applicable SEC rules. Mr. Nordstrom has been a certified public accountant (“CPA”) for more than thirty-six (36) years. During his career as a CPA, he has prepared, reviewed, audited and analyzed a wide variety of financial statements. As founder and president of Nordstrom and Associates, P.C., in addition to directly providing audit services to clients, he supervises other CPAs in their performance of audit services. All members of the Audit Committee meet the independence requirements of the NYSE rules, SEC rules and the Director Independence Standards.

What are the responsibilities of the Human Resources Committee?

          The responsibilities and independence of the Human Resources Committee are described below in the Compensation Discussion and Analysis under the heading “What are our processes and procedures for considering and determining executive compensation? – The Human Resources Committee” on page 16 of this proxy statement.

What are the responsibilities of the Finance, Nuclear and Operating Committee?

          Among other things, the Finance, Nuclear and Operating Committee, which held four (4) meetings in 2007, has the authority and responsibility under its Charter to:

	•		review and assess reports from the Palo Verde Nuclear Oversight Committee (the “NOC”), which formally reports to the Committee and APS’ Chief Executive Officer;
	•		review the Company’s historical and projected financial performance and annual budgets;
	•		review and recommend approval of short-term investments and borrowing guidelines;
	•		review the Company’s financing plan and recommend approval of credit facilities and the issuance of long-term debt and common equity;
	•		review and recommend to the Board the Company’s dividend actions, including stock dividends and other distributions;
	•		review and monitor the performance of the Company’s environmental policies; and
	•		review and monitor the customer and power plant operations of the Company.

          The members of the NOC are Warren F. Peabody, L. Joseph Callan, Michael B. Sellman, William L. Stewart and Alfred C. Tollison, Jr. The purpose of the NOC is to provide the Finance, Nuclear and Operating Committee and APS executive management with an independent assessment of the performance of the Palo Verde Nuclear Generating Station (“Palo Verde”). Performance includes nuclear safety, plant reliability, plant management, and organizational effectiveness. The NOC performs assessments of Palo Verde compared to established nuclear industry standards and practices and corporate requirements. In addition to the NOC, Palo Verde also receives input from the Palo Verde Offsite Safety Review Committee (the “OSRC”). The OSRC reports to the Company’s Chief Nuclear Officer and is comprised entirely of non-employee individuals with senior management experience in the nuclear industry. The OSRC reviews the overall performance of the plant, including its safety performance. The OSRC also reviews proposed changes to Palo Verde’s license prior to submitting such changes to the Nuclear Regulatory Commission.

What are the responsibilities of the Corporate Governance Committee?

          The Corporate Governance Committee is responsible for developing policies and practices relating to corporate governance, including the development of the Company’s Corporate Governance Guidelines. The Corporate Governance Guidelines are available on the Company’s website (www.pinnaclewest.com), and will be provided to any shareholder upon request. Shareholders may request a copy by contacting Shareholder Services at the telephone number or address set forth in “How many Annual Reports and proxy statements are delivered to a shared address?” on page 49 of this proxy statement. Additional functions of the Corporate Governance Committee include the development and recommendation to the full Board of criteria for selecting new directors; identifying and evaluating individuals qualified to become members of the Board, consistent with criteria approved by the Board; recommending director nominees to the full Board; and recommending to the Board the directors who should serve on each of the Board’s committees.

Do the non-management and independent directors meet without management present?

          Yes. NYSE rules require non-management directors to meet at regularly scheduled sessions without management. In 2007, all of the Company’s non-management directors were given notice of and could attend the meetings of the Corporate Governance Committee. The Corporate Governance Committee met three (3) times in 2007 and, at each of these meetings, management was not present for all or part of the meeting and the Company’s independent directors met in executive session. Ms. Munro chairs the Corporate Governance Committee and the meetings of the non-management directors and, as the Chair of the Corporate Governance Committee, serves as the Company’s lead director. The lead director performs the following functions:

	•		Serves as a liaison between the Chairman of the Board and the independent directors;
	•		Advises the Chairman of the Board on the appropriate schedule of Board meetings, reviews and provides the Chairman of the Board with input regarding agendas for the Board meetings and, as appropriate or as requested, reviews and provides the Chairman of the Board with input regarding information sent to the Board;
	•		Presides at all meetings at which the Chairman of the Board is not present, including executive sessions of the non-employee and the independent directors;
	•		Calls meetings of the non-employee and the independent directors when necessary and appropriate;
	•		Oversees the Board and Board committee self-assessment process;
	•		Is available for consultation and direct communication with the Company’s shareholders and other interested parties; and
	•		Performs such other duties as the non-employee directors may from time to time delegate.

          The Audit Committee met six (6) times in 2007, and at five (5) of these meetings, (and the Human Resources Committee met four (4) times in 2007 where) management was not present for a part of the meeting.

How are nominees for the Board selected?

          As noted above, the Corporate Governance Committee is responsible for evaluating individuals qualified to become members of the Board of Directors and recommending director nominees to the full Board.

          Shareholder Nominees. The policy of the Corporate Governance Committee is to consider properly submitted shareholder nominations for candidates for membership on the Board. See “How do we submit shareholder proposals or director nominations for the next Annual Meeting?” on page 49 of this proxy statement. In evaluating nominations, the Corporate Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board and to address the membership criteria set forth below under “Director Qualifications.” Any shareholder nominations proposed for consideration by the Corporate Governance Committee should include the nominee’s name and qualifications for Board membership and should be addressed to:

		Corporate Secretary Pinnacle West Capital Corporation 400 North 5th Street, Mail Station 9068 Phoenix, Arizona 85004

          In addition, the Bylaws of the Company permit shareholders to nominate directors for consideration at any Annual Meeting of Shareholders. For a description of the process for nominating directors in accordance with the Bylaws, see “How do we submit shareholder proposals or director nominations for the next Annual Meeting?” on page 49 of this proxy statement.

          Director Qualifications. The Company’s Corporate Governance Guidelines contain Board membership criteria that apply to nominees recommended by the Corporate Governance Committee for a position on the Board. Under these criteria, a director must be a shareholder of the Company. In determining whether an individual should be considered for the Board, the Corporate Governance Committee considers the following qualities, among others: integrity, specific or general skills or experience, wisdom, knowledge, judgment, understanding of the Company’s business environment, and willingness to devote adequate time to Board duties.

          Identifying and Evaluating Nominees for Directors. The Corporate Governance Committee uses a variety of methods to identify and evaluate nominees for a director position. The Corporate Governance Committee regularly assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Corporate Governance Committee may consider various potential candidates. Candidates may come to the attention of the Corporate Governance Committee through current Board members, professional search firms, shareholders or other persons. These candidates will be evaluated at regular or special meetings of the Corporate Governance Committee, and may be considered at any point during the year. As described above, the Corporate Governance Committee also will consider properly submitted shareholder nominations for candidates for the Board. The Corporate Governance Committee, with input from the chairmen of other Board committees, recommended Mr. Parker, who became a director effective December 1, 2007, and Ms. Clark-Johnson, who became a director effective February 1, 2008, for membership on the Board.

How are directors compensated?

          Pursuant to its Charter, the Human Resources Committee (the “Committee”) makes recommendations to the Board for director compensation, equity participation, and other benefits. See “Compensation Discussion and Analysis – What are the processes and procedures for considering and determining executive compensation? – The Human Resources Committee” for a further description of the Committee’s charter and responsibilities. The Committee generally considers director compensation every two years. In connection with its consideration, in 2005 and 2007, the Committee directly engaged Schuster-Zingheim and Associates, Inc., an outside compensation consultant, to evaluate and report to the Committee on competitive practices for outside director compensation and recommendations for such compensation.

          Only non-employee directors are compensated for Board service. Directors receive $30,000 in annual retainer fees, and the Chairman of the Audit Committee receives an additional annual retainer fee of $15,000, which was reduced on March 1, 2007 to $10,000; the Chairman of the Human Resources Committee receives an additional annual retainer of $7,500; and all other committee chairmen receive an additional annual retainer fee of $5,000, which was increased on March 1, 2007 to $7,500. Non-employee directors are eligible for grants of stock under a non-employee director equity grant policy adopted pursuant to the 2007 Long-Term Incentive Plan (the “2007 Plan”). For a description of the terms of this equity grant, see footnote 3 to the Director Compensation table on page 8 of this proxy statement. Directors are paid $1,500 for each Board meeting attended. Directors also receive $1,500 for each committee meeting attended if they are a member of that committee or if they are invited to attend the committee meeting by the chairman of the committee.

          Company directors, including employee directors, who also serve as APS directors, do so for no additional compensation. Non-employee Company directors who serve on the SunCor Board, the APS Energy Services Company, Inc. (“APSES”) Board or the El Dorado Investment Company (“El Dorado”) Board receive an additional $5,000 in annual retainer fees and $500 for each SunCor, APSES or El Dorado Board meeting attended. Employee Company directors who serve on the SunCor Board, the APSES Board and the El Dorado Board do so for no additional compensation. Mr. Stewart serves as the Board’s liaison to the Palo Verde Nuclear Oversight Committee, for which he receives $5,000 per quarter in additional fees. The Company also reimburses Board members for expenses associated with Board meetings and director education programs and effective December 19, 2007 matches up to $5,000 per year per director in director contributions to charities meeting certain requirements.

          Compensation of the directors for 2007 is as follows:

DIRECTOR COMPENSATION

																		Change in
																		Pension Value
																		and
																		Nonqualified
		Fees Earned												Non-Equity				Deferred
		or Paid in				Stock				Option				Incentive Plan				Compensation				All Other
		Cash				Awards				Awards				Compensation				Earnings4				Compensation				Total
Name1		($)2				($)3				($)				($)				($)				($) 5				($)
Edward N. Basha, Jr.			70,500				44,605				0				0				0				61				115,166
Jack E. Davis6			0				0				0				0				0				0				0
Michael L. Gallagher			77,082				44,605				0				0				12,339				5,061				139,087
Pamela Grant			77,500				44,605				0				0				0				3,061				125,166
Roy A. Herberger, Jr.			77,000				44,605				0				0				9,811				4,061				135,477
Martha O. Hesse			21,500				0				0				0				273				19				21,792
William S. Jamieson			70,500				44,605				0				0				9,121				2,311				126,537
Humberto S. Lopez			75,500				44,605				0				0				17,318				5,061				142,484
Kathryn L. Munro			73,082				44,605				0				0				4,663				5,061				127,411
Bruce J. Nordstrom			78,334				44,605				0				0				6,363				61				129,363
W. Douglas Parker			9,500				43,450				0				0				0				8				52,958
William J. Post6			0				0				0				0				0				0				0
William L. Stewart			84,500				44,605				0				0				0				61				129,966

How can shareholders communicate with the Board?

          Shareholders and other parties interested in communicating with the Board of Directors may do so by writing to Board of Directors, Pinnacle West Capital Corporation, 400 North 5th Street, Mail Station 9068, P.O. Box 53999, Phoenix, Arizona 85072-3999. You should send communications that are intended specifically for the non-management directors to the same address to the attention of the Corporate Governance Committee Chairman.

Do Board members attend the Annual Meeting?

          Yes. The Company’s Corporate Governance Guidelines provide that each director is expected to be present at the Annual Meeting. All of the Board members attended the 2007 Annual Meeting, except Ms. Hesse, who did not stand for re-election. Mr. Parker and Ms. Clark-Johnson were not directors at the time of the 2007 Annual Meeting.

Does the Company have a code of business conduct and ethics?

          Yes. In order to ensure the highest levels of business ethics, the Board has adopted the Ethics Policy and Standards of Business Practices, which applies to all employees, and the Code of Ethics for Financial Professionals, both of which are described below:

          1. Ethics Policy and Standards of Business Practices. “Doing the Right Thing” presents the Ethics Policy and the Standards of Business Practices of the Company and its subsidiaries. Employees receive a copy of “Doing the Right Thing” when they join the Company and are provided updates periodically throughout their employment. These guidelines help ensure that the employees, officers and directors of the Company and its subsidiaries act with integrity and avoid any real or perceived violation of the Company’s ethics policy, laws or regulations.

          2. Code of Ethics for Financial Professionals. The Company has adopted a Code of Ethics for Financial Professionals, which is designed to promote honest and ethical conduct and compliance with applicable laws, rules, and regulations, particularly as related to the maintenance of financial records, the preparation of financial statements, and proper public disclosure. For purposes of this Code, a Financial Professional means (a) any Company professional employee in the area of finance, accounting, internal audit, energy risk management, marketing and trading, financial control, tax, investor relations, or treasury, and (b) the Company’s Chief Executive Officer, Chief Financial Officer, Controller, Treasurer, and persons performing similar functions at any of the Company’s subsidiaries.

          The Company provides periodic on-line training and examination covering the principles in the Ethics Policy and Standards of Business Practices and in the Code of Ethics for Financial Professionals. This training includes extensive discussion of the Company’s ethical values, an explanation of Company ethical standards, application of ethical standards in typical workplace scenarios, assessment questions to help measure understanding, and an electronic sign-off. All of the employees of the

Company and APS, except those on a leave of absence or newly-hired employees, and all of our directors have completed the training. The codes of conduct are available at the Company’s website (www.pinnaclewest.com) and will be provided to any shareholder upon request. The shareholders may request copies from Shareholder Services at the telephone number or address set forth in “How many Annual Reports and proxy statements are delivered to a shared address?” on page 49 of this proxy statement.

PROPOSAL 1 – ELECTION OF DIRECTORS

Who will be elected at the Annual Meeting?

          The Board of Directors currently consists of thirteen (13) members. Directors are elected on an annual basis. Mr. Davis advised the Company in January of 2008 that he would not stand for re-election to the Board of Directors when his current term expires. As a result, all of the current directors, except for Mr. Davis, will stand for re-election at the 2008 Annual Meeting, to serve as members of the Board of Directors until the 2009 Annual Meeting of the Shareholders or until their successors are duly elected and qualified or their earlier death, resignation or removal. The persons named on the proxy will vote to elect all of the nominees as directors for terms ending at the 2009 Annual Meeting of the Shareholders unless you withhold authority to vote for any or all of the nominees by voting to that effect or so voting in person. If one or more of the twelve (12) nominees becomes unavailable to serve prior to the date of the 2008 Annual Meeting, the persons named as proxy holders will vote those shares for the election of such other person(s) as the Board of Directors may recommend, unless the Board of Directors reduces the total number of directors.

Who are the current nominees?

          The twelve (12) nominees for election as directors are set forth in the following table:

NOMINEES FOR DIRECTORS

(TERM EXPIRING AT 2009 ANNUAL MEETING)

								Director
Name		Age				Occupation, Business & Directorships		Since
Edward N. Basha, Jr.			70			Chairman of the Board of Bashas’ supermarket chain since 1968. Chief Executive Officer of Bashas’ and an Arizona civic leader dedicated to multiple Arizona community projects.			1999
Susan Clark-Johnson			60			President, Gannett Newspaper Division, Gannett Co., Inc. since September 2005. Ms. Clark-Johnson was Chairman and CEO of Phoenix Newspapers, Inc. from August 2000 to September 2005. Ms. Clark-Johnson has been a director of the Company since February 1, 2008.			2008
Michael L. Gallagher			63			Attorney-at-law with Gallagher & Kennedy, P.A., Phoenix, Arizona. Chairman Emeritus of Gallagher & Kennedy since 2001. Mr. Gallagher served as President of Gallagher & Kennedy from 1978 through 2000. Mr. Gallagher is also a director of AMERCO.			1999
Pamela Grant			69			Civic leader. President of TableScapes, Inc. (party supply rentals) from July 1989 through January 1995. Ms. Grant was President and CEO of Goldwaters Department Stores (general mercantile), a division of May Department Stores, from January 1987 to April 1988. From November 1978 to January 1987, Ms. Grant was President, Chair and CEO of Goldwaters Department Stores, a division of Associated Dry Goods.			1985
Roy A. Herberger, Jr.			65			President Emeritus of Thunderbird School of Global Management since November 2004. Mr. Herberger was President of Thunderbird from 1989 until August 2004. Mr. Herberger is also a director of MedAire, Inc., the Apollo Group and ECO2 Plastics Inc.			1992
William S. Jamieson			64			President of Micah Institute of Asheville, North Carolina since January 2005. From January 1999 to December 2004, Mr. Jamieson was President of the Institute for Servant Leadership.			1991
Humberto S. Lopez			62			President of HSL Properties, Inc. (real estate development and investment), Tucson, Arizona since 1975.			1995

								Director
Name		Age				Occupation, Business & Directorships		Since
Kathryn L. Munro			59			Principal of BridgeWest, LLC (investment company) since July 2003. Ms. Munro was Chair of BridgeWest, LLC from February 1999 until July 2003. From 1996 to 1998, Ms. Munro served as CEO of Bank of America’s Southwest Banking Group and was President of Bank of America Arizona from 1994 to 1996. Ms. Munro is also a director of FLOW International Corporation and Knight Transportation, Inc.			2000
Bruce J. Nordstrom			58			President of and certified public accountant at the firm of Nordstrom and Associates, PC, Flagstaff, Arizona, since 1988.			2000
W. Douglas Parker			46			Chairman of the Board and Chief Executive Officer of US Airways Group (“USAG”) and US Airways since September 27, 2005 to present. Mr. Parker was President of USAG and US Airways from September 27, 2005 to October 1, 2006. Mr. Parker has served as Chairman of the Board and Chief Executive Officer of America West Holdings (“AWH”) and of America West Airlines (“AWA”) since September 2001, and has served as a director of AWH and AWA since 1999. Mr. Parker also served as President of AWH and AWA from September 2001 to October 1, 2006. Mr. Parker is also a director of USAG and Clear Channel Outdoor. Mr. Parker has been a director of the Company since November 1, 2007.			2007
William J. Post			57			Chairman of the Board of the Company since February 2001 and CEO of the Company since February 1999. Mr. Post has served as an officer of the Company in the following additional capacities: from August 1999 to February 2001 as President; from February 1997 to February 1999 as President; and from June 1995 to February 1997 as Executive Vice President. Mr. Post is also Chairman of the Board of APS and has held various officer positions at APS since 1982.			1997
William L. Stewart			64			Mr. Stewart retired from the Company effective November 26, 2003. Mr. Stewart served as Chief Executive Officer of Pinnacle West Energy Corporation (“PWEC”) from October 2002 until January 2003 and President of PWEC from October 1999 until January 2003. Mr. Stewart served as President, Generation, of APS from October 1998 to October 2002.			2001

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF THE NOMINATED
SLATE OF DIRECTORS

SHARES OF PINNACLE WEST STOCK OWNED BY MANAGEMENT AND LARGE SHAREHOLDERS

          The following table shows the amount of Pinnacle West common stock owned by the Company’s directors, Messrs. Post, Brandt, Davis, Edington and Wheeler, who are the Company’s named executive officers pursuant to applicable SEC rules (the “Named Executive Officers”), our Directors and executive officers as a group and those persons who beneficially own more than 5% of the Company’s common stock. Unless otherwise indicated, each shareholder listed below has sole voting and investment power with respect to the shares beneficially owned.

          The address of listed shareholders not otherwise set forth below is P.O. Box 53999, Mail Station 8602, Phoenix, Arizona 85072-3999. Unless otherwise indicated, all information is as of March 24, 2008, the record date for the Annual Meeting.

		Number of Shares				Shares Acquirable
Name		Beneficially Owned1				Within 60 Days2				Percent of Class
Directors:
Edward N. Basha, Jr.			—				0				*
Susan Clark-Johnson			—				0
Jack E. Davis			—				—				*
Michael L. Gallagher			—				0				*
Pamela Grant			—				0				*
Roy A. Herberger, Jr.			—				0				*
William S. Jamieson			—				0				*
Humberto S. Lopez			—				0				*
Kathryn L. Munro			—				0				*
Bruce J. Nordstrom			—				0				*
W. Douglas Parker			—				0
William J. Post			—				—				*
William L. Stewart			—				0				*
Other Named Executive Officers:
Donald E. Brandt			—				0				*
Randall K. Edington			—				0				*
Steven M. Wheeler			—				0				*
All Directors and Executive Officers as a Group (24 Persons):			—				—				—
5% Beneficial Owners3:
Barclays Global Investors, NA. and certain other entities			7,896,913				N/A				7.9	%
45 Fremont Street
San Francisco, CA 94105
Capital Group International Inc.			6,662,570				N/A				6.6	%
11100 Santa Monica Boulevard
Los Angeles, CA 90025
Capital Guardian Trust Company			5,684,870				N/A				5.7	%
11100 Santa Monica Boulevard
Los Angeles, CA 90025
Franklin Resources, Inc. and certain other entities			7,233,100				N/A				7.2	%
One Franklin Parkway
San Mateo, CA 94403-1906
State Street Bank and Trust Company			6,481,644				N/A				6.5	%
One Lincoln Street
Boston, MA 02111
T. Rowe Price Associates, Inc.			8,596,188				N/A				8.5	%
100 E. Pratt Street
Baltimore, MD 21202

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and officers, and persons who own more than 10% of the Company’s common stock to file reports of ownership and changes of ownership with the SEC. Based solely on the Company’s review of these reports, the Company believes that its directors, officers, and greater than 10% beneficial owners complied with their respective Section 16(a) reporting requirements for fiscal year 2007 and prior fiscal years on a timely basis, except as otherwise previously disclosed.

RELATED PARTY TRANSACTIONS

     The Audit Committee of the Board of Directors is responsible for reviewing and approving all material transactions with any related party. Related parties include any of our directors, executive officers, shareholders owning in excess of five percent (5%) of the Company’s common stock, and with respect to each of them, their immediate family members and certain entities in which they are an officer or own an interest of 10% or more (a “Related Party”). This obligation is set forth in writing in our Statement of Policy Regarding Related Party Transactions (the “Policy”).

     To identify Related Party transactions, each year the Company submits and requires our directors and officers to complete Director and Officer Questionnaires identifying any transactions with the Company in which a Related Party has an interest. We review Related Party transactions due to the potential for a conflict of interest. A conflict of interest occurs when an individual’s private interest interferes, or appears to interfere, in any way with our interests. Our Ethics Policy and Standards of Business Practices, “Doing the Right Thing,” requires all directors, officers and employees who may have a potential or apparent conflict of interest to notify their immediate leader and the Company’s ethics department. In addition, the Policy specifically provides that any “Related Party Transaction,” as defined in the Policy, must be approved or ratified by the Audit Committee. A Related Party Transaction is any transaction or a series of similar transactions in which the Company or any of its subsidiaries is or was a participant, where the amount involved exceeds $120,000 in the aggregate and in which any Related Party has a direct or indirect material interest.

     Our directors and executive officers are required to bring Related Party Transactions to the attention of the Company’s General Counsel so that the Related Party Transaction may be reviewed in accordance with the Policy. The following transactions are exempt from the review requirement:

	•		Transactions in which rates or charges are fixed in conformity with law or governmental authority (such as APS rates approved by the Arizona Corporation Commission) or the rates or charges are determined by competitive bid;
	•		Transactions with SunCor or its affiliates (such as home purchases) that are offered to the Related Party on terms comparable to those that could be obtained in arm’s length dealing with an unrelated party;
	•		Transactions involving charitable or non-profit organizations where the Related Party serves only as a director or chairman of the organization’s Board of Directors for no compensation;
	•		Transactions in which the Related Party’s interest arises only: (a) from such person’s position as a director of the entity involved in the transaction; (b) from the direct or indirect ownership by such person, in the aggregate of less than a ten (10) percent equity interest in the entity involved in the transaction; or (c) the interest arises under both (a) and (b) above; and
	•		Any transaction involving a director that was considered by the Board in assessing the director’s independence and which resulted in a determination that disclosure of the transaction was not required under Item 404(a) of SEC Regulation S-K.

     The Audit Committee will only approve or ratify a Related Party Transaction if the transaction is on terms no less favorable than those that could be obtained in arm’s length dealing with an unrelated party and the Audit Committee finds that the terms of the transaction are fair and reasonable.

     We expect the Company’s directors, officers and employees to act and make decisions that are in the Company’s best interests and encourage them to avoid situations that present a conflict between the Company’s interests and their own personal interests. The Company’s directors, officers and employees are prohibited from taking any action that may make it difficult for them to perform their duties, responsibilities and services to the Company in an objective and fair manner.

AUDIT MATTERS

Report of the Audit Committee

     The Audit Committee of the Board submitted the following report:

     In accordance with its written charter adopted by the Board, the primary function of the Audit Committee is to assist the Board in monitoring (a) the integrity of the Company’s financial statements, (b) the independent auditors’ qualifications and independence and performance, (c) the performance of the Company’s internal audit function, and (d) the Company’s compliance with legal and regulatory requirements. The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the Company’s independent auditors. Management is responsible for the Company’s financial reporting process, including the Company’s system of internal controls, and for the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America. The independent auditors are responsible for auditing and rendering an opinion on those financial statements, as well as auditing certain aspects of the Company’s internal controls. The Committee’s responsibility is to monitor these processes.

     During 2007, the Audit Committee met six (6) times. These meetings included sessions with the Company’s internal auditors and with the independent auditor, both with and, at five of these meetings, without the presence of management.

     In discharging its oversight responsibility as to the audit process, the Committee obtained from Deloitte & Touche LLP, the Company’s independent auditors, the formal written disclosures and the letter required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees.” The Committee discussed with the auditors any relationships that may impact the auditors’ objectivity and independence and satisfied itself as to the auditors’ independence. The Audit

Committee further determined that the other services provided to the Company for which the auditors received the fees disclosed on page 15 of this proxy statement were compatible with maintaining the auditors’ independence.

     The Committee discussed and reviewed with Deloitte & Touche LLP all communications required by auditing standards generally accepted in the United States of America and SEC regulations, including those described in Statement on Auditing Standards No. 61, as amended, “AICPA, Professional Standards, Vol. 1. AU § 380” and Rule 2-07 of Regulation S-X and, with and without management present, discussed and reviewed the results of the independent auditors’ audit of the financial statements.

     The Audit Committee discussed and reviewed the audited financial statements of the Company as of and for the fiscal year ended December 31, 2007, with the Company’s management, the Director of Audit Services and the independent auditors.

     Based on the foregoing, the Committee recommended to the Board that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, for filing with the SEC.

		COMMITTEE CHAIRMAN		COMMITTEE MEMBERS
		Bruce J. Nordstrom		Edward N. Basha, Jr.
				Pamela Grant
				William S. Jamieson
				Humberto S. Lopez
				Kathryn L. Munro
				W. Douglas Parker

Who are the Company’s independent auditors and will they be at the Annual Meeting?

     The Audit Committee has selected Deloitte & Touche LLP, independent registered public accountants, to examine the Company’s financial statements for the fiscal year ending December 31, 2008 and, pursuant to Proposal 3, has requested shareholder ratification of this selection. Representatives of that firm will be present at the Annual Meeting. These representatives will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

What fees were paid to our independent registered public accountants in 2006 and 2007?

     The following fees were paid to the Company’s independent registered public accountants, Deloitte & Touche LLP, for the last two fiscal years:

Type of Service		2006				2007
Audit Fees 1		$	2,722,685			$	2,762,477
Audit-Related Fees 2			207,890				227,310
Tax Fees 3			37,396				16,251

What are the Audit Committee’s pre-approval policies?

     The Audit Committee pre-approves each audit service and non-audit service to be provided by the Company’s independent registered public accountants. The Audit Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve audit and non-audit services to be performed by the independent public accountants if the services are not expected to cost more than $50,000. The Chairman must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. All of the services performed by Deloitte & Touche LLP for the Company in 2007 were pre-approved by the Audit Committee.

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Introduction

     The purpose of this Compensation Discussion and Analysis (“CDA”) is to provide information about the compensation that the Company paid to our Named Executive Officers or that they earned in 2007 and to explain the Company’s compensation process and philosophy and the policies and the factors that underlie our decisions regarding the Named Executive Officers’ compensation. As we describe in more detail below, the principal objectives of our executive compensation strategy are to attract and retain talented executives, reward business results, strongly emphasize pay based on performance and align the interest of executives with shareholders.

What are our processes and procedures for considering and determining executive compensation?

     The Human Resources Committee. Edward N. Basha, Jr., Susan Clark-Johnson, Pamela Grant, Roy A. Herberger, Jr. (Chairman), William S. Jamieson, and Humberto S. Lopez are the members of the Human Resources Committee of our Board of Directors (the “Committee”). Each member of the Committee qualifies as an independent director under NYSE rules and our Director Independence Standards.

     The Committee meets as often as necessary to perform its duties and responsibilities. In 2007, the Committee met four (4) times and it has had ___ (_) meetings so far in 2008. The Committee typically meets with representatives of management and, where appropriate, with outside advisors. It also regularly meets in executive session without management.

     Among other things, the Committee has the authority and responsibility under its charter to:

	•		review management’s plans and programs for the attraction, retention, succession, motivation, and development of the human resources needed to achieve corporate objectives;
	•		review and approve policies on compensation, benefits, and perquisites, including incentive cash compensation plans, equity participation, and other forms of executive incentives;
	•		recommend persons for election or appointment as officers to the full Board;
	•		annually review the goals and performance of our elected officers, including review of compensation, benefits, and perquisites, to satisfy the Committee that there is equity in the compensation practices and general integrity in conforming to approved plans and policies;
	•		review and approve corporate goals and objectives relevant to compensation of our Chief Executive Officer (“CEO”), assess the CEO’s performance in light of these goals and objectives, and set the CEO’s compensation level based on this assessment;
	•		make recommendations to the Board with respect to non-CEO executive compensation, and incentive compensation and equity-based plans that are subject to Board approval;
	•		make recommendations to the Board for director compensation, equity participation, benefits and perquisites;
	•		act as the “committee” under our long-term incentive plans; and
	•		review and recommend changes to pension benefits.

     The charter also provides that in determining the long-term incentive component of CEO compensation, the Committee will consider the Company’s performance and relative shareholder return, the value of incentive awards to CEOs at comparable companies, and the awards given to the CEO in past years.

     Although the Committee monitors executive officer compensation throughout the year, it undertakes a thorough analysis of our executive officer compensation each fall. This review includes consideration of competitive positions relative to specified labor markets, the mix of elements of compensation, the degree and type of performance focus, and a consideration of individual officer evaluations. From December through February, the Committee then makes adjustments, if any, to executive officer compensation, including salary and cash and non-cash incentives. Generally, awards are granted at one of the Committee’s regularly scheduled meetings in January and February of each year.

     Under the Committee’s charter, the Committee may create subcommittees and vest those subcommittees with the authority of the full Committee with respect to specific matters delegated to such subcommittees. In 2007, the full Committee addressed all executive compensation matters.

     Role of Compensation Consultants. The Committee’s charter gives the Committee the sole authority to retain and terminate any consulting firm used by the Committee in evaluating director and officer compensation. Consistent with past practice, in 2006, the Committee directly engaged Schuster-Zingheim and Associates, Inc. (“Schuster-Zingheim”), an outside compensation consultant, to assist the Committee in its evaluation of compensation for our executive officers. The Committee instructed the consultant to prepare a competitive compensation analysis of the compensation of the Named Executive Officers and other officers of the Company and of APS, and to make recommendations for changes to the existing compensation program. We discuss the reports and recommendations of Schuster-Zingheim with respect to 2007 compensation of our Named Executive Officers in more detail under the heading “How does the Company determine the amount (and the formula) for each element of compensation paid to its Named Executive Officers? – Independent Consultant’s Report” beginning on page 18 of this proxy statement. Schuster-Zingheim does not provide any other services to our Company or to APS.

     Role of Executive Officers in Determining Executive Compensation. The Committee makes all compensation decisions relating to our CEO’s compensation. The Committee recommends other compensation decisions, which are approved by the Board. Management works with the Committee in establishing the agenda for Committee meetings and in preparing meeting information. Management conducts evaluations and provides information on the performance of the executive officers for the Committee’s consideration and provides such other information as the Committee may request. Management also assists the Committee in recommending salary levels, annual incentive plan structure and design, including corporate and business unit performance targets or other goals, long-term incentive plan structure and design, including award levels, and the type, structure, and amount of other awards. The executive officers are also available to the compensation consultant to provide information as requested by the consultant. At the request of the Chairman of the Committee, the CEO or other officers may attend and participate in portions of the Committee’s meetings.

What are the objectives of the Company’s compensation programs?

     The principal objectives of the Company’s executive compensation strategy are to attract and retain talented executives, reward business results, strongly emphasize pay based on performance and align the interest of executives with shareholders. The objectives are based on the following core principles, which we explain in greater detail below:

	•		Alignment with Shareholder Interests. Compensation should be tied to the Company’s stock performance through performance-based or other stock incentives so that executives’ interests are aligned with those of our shareholders.
	•		Business Performance Accountability. Compensation should be tied to the Company’s performance in several key areas, including customer satisfaction, so that executives are focused on specific strategic and operating objectives and are held accountable through their compensation for the performance of the Company.
	•		Individual Performance Accountability. Compensation should be tied to an individual’s performance so that individual contributions to the Company’s performance are rewarded.
	•		Retention. Compensation should be designed to promote key employee retention.
	•		Competitiveness. Finally, the compensation program should be designed to attract, retain and reward key leaders critical to the Company’s success by providing competitive total compensation.

What is the compensation program designed to reward?

     The primary objective of our compensation program is performance. In addition to rewarding business and individual performance, the compensation program is designed to promote both annual performance objectives and longer-term performance objectives.

     Annual incentives in our compensation program are principally cash-based. Annual incentives promote superior operational performance, disciplined cost management, and increased productivity and efficiency that contribute significantly to positive results for Pinnacle West shareholders and APS customers. The elements of our compensation program that promote annual performance objectives are described below under the heading “What are the elements of the Company’s compensation program? – Annual Incentives” beginning on page 21 of this proxy statement.

     Long-term incentives in our compensation program are principally stock-based. On December 13, 2006, our Board, acting on the recommendation of the Committee, restructured the Company’s long-term incentive program to replace, on a going-forward basis, the compensation opportunity previously afforded key employees through grants of performance shares and stock ownership incentive awards, with grants of performance shares and retention units or restricted stock units (“RSUs”). We made an initial grant of retention units in December of 2006 to our executive officers except to Mr. Edington, who was not an employee at the time, and a special grant of retention units in January of 2007 to Mr. Edington as part of his initial employment package. We expect that we will generally make 50% of our long-term incentive awards in performance shares and 50% in RSUs. We describe these awards below under the heading “What are the elements of the Company’s compensation program? – Long-Term Incentives” beginning on page 22 of this proxy statement. We describe the retention units in footnote 2 of the Summary Compensation Table beginning on page 28 of this proxy statement.

     This restructured program is intended to maintain the economic opportunity for key employees to earn long-term incentive compensation comparable with their opportunity in prior years. The aim of the program is to motivate long-term performance while promoting key employee retention. The performance shares promote shareholders’ interests through a focus on Company performance relative to companies in a peer index. They also afford the officer the opportunity to increase stock ownership, which aligns the officer’s interest with that of our shareholders.

     The retention units and RSUs have solely time-based vesting, encouraging employee retention, although the value of the retention units and RSUs increases or decreases with the value of the Company stock at vesting, which also aligns the officer’s interests with the interests of our shareholders. In addition, the feature of our RSUs that allows the recipient to elect to receive the value of the RSUs on vesting in either stock or cash reduces stockholder dilution and provides an opportunity for either access to cash to balance equity holding requirements or for increasing stock ownership.

     While our emphasis is on performance incentives, a compensation program must also have elements that are not solely performance-based in order to be competitive in attracting and retaining talented executives. However, we attempt to set these elements at a level that is consistent with our performance objectives and market requirements. Our consistent practice of setting base salaries in the median competitive range emphasizes performance-based compensation objectives. The lack of any significant perquisites emphasizes performance-based compensation objectives. The absence of traditional employment agreements for substantially all of our executive officers, including the CEO, promotes accountability and does not reward poor performance through the payment of severance benefits traditionally paid under employment agreements.

How does the Company determine the amount (and the formula) for each element of compensation paid to its Named Executive Officers?

     Independent Consultant’s Report. Consistent with past practice, in 2006, the Committee directly engaged Schuster-Zingheim, an outside compensation consultant, to assist the Committee in its evaluation of 2007 compensation for our executive officers. At the request of the Committee, the consultant provided the Committee with compensation information for the utility market, the general industry market, and a blended market comprised of 50% weighted for the utility labor market and 50% weighted for the general industry labor market (100% utility for utility-specific jobs), adjusted for our size (including, in revenue comparisons, assets managed as well as owned), and taking into account the specific duties assigned to each executive officer.

     The compensation information provided by the consultant is based on an analysis of several compensation practices derived from a number of widely-accepted industry compensation surveys. The compensation information for the utility labor market was obtained in part from a survey providing an analysis of the compensation practices of a 14-company comparator group recommended by the compensation consultant, with the input of our senior management, and approved by the Committee. This group was established in 2005. The Committee periodically evaluates the continuing relevance of the comparator group, with input from management and the outside consultant. The 14 companies in the approved peer group are Ameren Corporation, DTE

Energy Company, Entergy Corp., FPL Group Inc., Great Plains Energy Inc., OGE Energy Corp., PPL Corporation, Progress Energy Inc., Puget Energy Inc., Scana Corp., Southern Co., TECO Energy Inc., Wisconsin Energy Corp., and XCEL Energy Inc. Factors in choosing the companies in the 14-company comparator group include that they:

	•		be strongly represented by nuclear companies because the Company is a large nuclear operator;
	•		include representation of companies in the S&P 1500 Super Composite Electric Utility Index because the Company’s performance shares are earned based on financial performance compared to this index;
	•		include some companies smaller than the companies in the Index to balance the peer group from a size perspective; and
	•		have a solid reputation and long-term prospects.

     Compared to the peer group, however, the Company is generally smaller in revenues, assets, market cap, and total megawatts owned. The consultant adjusts the peer group using regression based on revenues to take this into account. The consultant believes that revenues is the best statistical predictor of pay for a job. If regression is not available, the consultant uses the median of the peer group as the best predictor of pay for a job.

     The 14-company sample, however, is just one of seven compensation survey data points used to determine competitive compensation (three of the data points represent the utility industry and are weighted 50%, and four of the data points represent general industry and are weighted 50%). The two utility industry surveys in addition to the 14 company peer group survey are: Energy Services Industry, CDB Executive Compensation Database, and Towers Perrin (regression and $3-$6B). The four all industry surveys are: Towers Perrin, CDB Executive Compensation Database (regression and $3-$6B); William M. Mercer, Executive Compensation Survey (regression); and Watson/Wyatt Data Services (ECS), Top Management Report (regression). Data for one officer is also obtained from Hewitt Energy Marketing and Trading Compensation Survey. These other six data points are also based on revenue – either regression analysis based on revenue or percentile statistics of the comparator group. We believe that using several surveys and several survey samples provides a sound competitive compensation analysis.

     In providing information to the Committee with respect to setting 2007 compensation, the consultant also reviewed the total compensation of the named executive officers and the individual elements of that compensation, including the type and balance of annual incentives and long-term incentives, and evaluated the competitiveness of the total compensation and individual elements of compensation of each such officer based on the survey data discussed above. The consultant’s report, which was provided to the Committee in October 2006, also included recommendations for Committee consideration for 2007 compensation of the named executive officers and for changes to the compensation program generally. The competitive position of each named executive officer’s compensation was targeted in the report relative to the comparison group at various performance levels:

	•		base salary at the median of the blended market;
	•		total cash compensation (base salary plus annual cash incentive) and total direct compensation (total cash compensation plus long-term incentive) for target/goal performance at or near the median of the blended market;
	•		total cash compensation and total direct compensation for exceptional performance around or above the 75th percentile of the blended market; and
	•		below median pay for below median performance. For purpose of this analysis, survey data for determining annual and long-term incentive opportunities is averaged for a three-year period to smooth any variation that may occur in a single year in the survey data.

     Named Executive Officer Compensation (excluding Mr. Post, who is discussed below). The consultant’s October 2006 report concluded that, at that time, (i) the total direct compensation (total cash compensation paid plus long-term incentive grants) for Messrs. Davis, Brandt, and Wheeler was significantly below the median total direct compensation of the blended industry group (47%, 62%, and 75%, respectively, of the median) because of the non-payment, in early 2006, of 2005 annual incentive awards and, with respect to Messrs. Davis and Brandt “lower-than-competitive” performance share grants in February 2006; (ii) the total cash compensation (base salary plus annual incentive) of Messrs. Davis, Brandt, and Wheeler was significantly below the median total cash compensation of the blended industry group (47%, 57%, and 57%, respectively, of the median) because of the non-payment of the 2005 annual incentive awards; and (iii) the base salary of Messrs. Davis, Brandt, and Wheeler was within a competitive range of the median base salary of the blended industry group (101%, 99%, and 109%, respectively, of the median). Mr. Edington was not hired by the Company until early 2007 and was not included in the consultant’s 2006 report.

     Mr. Post’s Compensation. With respect to Mr. Post’s compensation, the consultant’s October 2006 report concluded that, at that time, (i) his total direct compensation (total cash compensation paid plus long-term incentive grants) was significantly below the median total direct compensation of the blended industry group (63% of the median) because of the non-payment, in early 2006, of the 2005 annual incentive award and the “lower-than-competitive” performance share grant in February 2006; (ii) his total cash compensation (base salary plus annual incentive) was significantly below the competitive range of the median total cash compensation of the blended industry group (46% of median) because of the non-payment of the 2005 annual incentive award; and (iii) his base salary at that time was at the median base salary of the blended industry group (100% of the median). See “What are the elements of the Company’s compensation program? – Annual Incentives” below for a description of the non-payment in early 2006 of the 2005 incentive plan awards.

     Application of Committee’s Judgment. The benchmarking inherent in the consultant report and its recommendations regarding the competitiveness and structure of compensation are factors that the Committee takes into account in its evaluation of compensation for the Named Executive Officers. In addition, the Committee considers how Schuster-Zingheim’s recommendations regarding particular elements of compensation may differ from management’s recommendations. However, the Committee also focuses on the individual executives and their individual responsibilities, skills, expertise, value added through performance, internal equity and other external factors, and applies these views in conjunction with the information provided by the consultant. The performance of each officer is formally reviewed in the fourth quarter of each year by management and shared with the Committee. Individual performance evaluations consider individual goals and include a discussion of the officer’s strengths, developmental needs and overall value to the Company. Each officer has a development plan and prepares an annual self-evaluation. CEO performance is separately reviewed by the Committee based on Company performance goals.

     The Committee also considers contractual commitments in determining or recommending executive pay. For example, under the arrangements pursuant to which Mr. Edington was hired, he is entitled to a fixed starting salary and other specified benefits that are described in more detail below under the heading “Employment Agreements” beginning on page 34 of this proxy statement. The Committee approved the terms of this arrangement after considering the entire compensation package in the context of the desirability of hiring Mr. Edington. While the Committee considers internal pay equity in making compensation decisions, we do not have a policy requiring any set levels of internal pay differentiation. Finally, the Committee considers other factors that it considers relevant, such as the financial condition of the Company and APS.

     In making any decision regarding an executive’s compensation, the Committee considers the officer’s total compensation, but with an increased emphasis on performance-based or other long-term compensation in lieu of base salary adjustments. While compensation competitiveness is a priority, Company, business unit and, in some cases, individual officer performance are the primary factors determining the level of total direct compensation for the Named Executive Officers. Except as described above, we do not have a pre-established policy or target for allocation between cash and non-cash compensation or between short-term and long-term incentive compensation.

What are the elements of the Company’s compensation program?

     In general, the Company’s compensation program consists of three major elements: base salary, performance-based annual incentives, and long-term incentives consisting of both performance-based awards and other equity-based awards designed to promote key employee retention. In addition, the Company provides pension programs, deferred compensation programs and change-in-control arrangements.

     Base Salary. The Committee reviews competitive salary information and individual salaries for executive officers on an annual basis. The Named Executive Officers do not have a contractual right to receive a fixed base salary, except that Mr. Edington was entitled to a starting annual base salary of at least $600,000 pursuant to the offer letter dated December 20, 2006 under which he was hired in early 2007. In considering individual salaries, the Committee reviews the scope of job responsibilities, internal equity, individual contributions, business performance, retention concerns and current compensation compared to market practices. In setting base salaries, the Committee also considers that base salary is used as the basis for calculating annual incentive awards and, along with regular annual incentives, in calculating payments that may be made on a change-in-control as described below.

     Mr. Brandt’s base salary was increased in December of 2006 to $600,000 in connection with his appointment to the position of President of APS. Mr. Brandt’s base salary was also increased in February of 2008 to $750,000 in connection with his appointment to the position of Chief Executive Officer of APS and President and Chief Operating Officer of the Company, effective March 1, 2008.

     We describe the salary paid to our Named Executive Officers in 2007 in the Summary Compensation Table beginning on page 28 of this proxy statement.

     Annual Incentives. We have used incentive programs for all our employees for a number of years. The performance criteria that underlie the annual incentive programs focus on: shareholder value; customer value; financial strength; operational and environmental performance; and safety (the “General Performance Objectives”). We believe that the annual incentive programs have been effective in achieving the General Performance Objectives. For example, since the Company introduced employee incentive plans in 1992, productivity has increased by 65%, as measured by the annual improvement in the number of customers served per employee.

     In order to promote specific goals for 2007, (a) on January 16, 2007, the Committee approved the CEO component of the 2007 Pinnacle West Employee Variable Incentive Plan (the “Pinnacle West Incentive Plan”) and (b) on January 17, 2007, the Board of Directors, acting on the Committee’s recommendation, adopted the Pinnacle West Incentive Plan and the 2007 APS Employee Variable Incentive Plan (the “APS Incentive Plan” and together with the Pinnacle West Incentive Plan, the “2007 Incentive Plans”). The APS Incentive Plan applies to all of our Named Executive Officers other than Mr. Post, who was granted incentive opportunities under the Pinnacle West Incentive Plan.

     Executive officers, other than Messrs. Post, Davis, and Brandt, were granted incentive opportunities up to 100% of base salary. Messrs. Post, Davis and Brandt were granted incentive opportunities up to 150% of their base salary. In this way, the individuals with the greatest overall responsibility for Company performance were granted larger incentive opportunities, so as to weigh their overall pay mix more heavily towards performance-based compensation.

     In assessing the award opportunity for Mr. Post under the Pinnacle West Incentive Plan, the Committee first considered Pinnacle West’s 2007 earnings, excluding the non-fuel impacts from the 2007 APS general rate case before the Arizona Corporation Commission. The Pinnacle West Incentive Plan established the following Pinnacle West earnings levels: $234 million (threshold); $260 million (midpoint); and $286 million (maximum). In order for Mr. Post to be eligible for an incentive award, Pinnacle West’s earnings had to meet or exceed the threshold level. Pinnacle West’s actual 2007 earnings, as defined under the Pinnacle West Incentive Plan, were $305 million, which exceeded the “maximum” level of earnings established by the Plan. Because the payment of an incentive award to Mr. Post under the Pinnacle West Incentive Plan is in the sole discretion of the Committee, the Committee then considered other factors, including customer value, financial strength, operational and environmental performance, and safety, in assessing Mr. Post’s 2007 award opportunity. In doing so, the Committee considered Mr. Post’s personal objectives in these areas and, with input from Mr. Post, weighted these factors and considered other matters that the Committee deemed appropriate. The Committee then determined that Mr. Post’s incentive award under the Pinnacle West Incentive Plan should be $1,300,000, compared to a maximum award potential of $1,425,006.

     For the other Named Executive Officers, the Committee first considered APS’ 2007 earnings, excluding the non-fuel impacts from the 2007 APS general rate case before the Arizona Corporation Commission. The APS Incentive Plan established the following APS earnings levels: $210 million (threshold); $233 million (midpoint); and $256 million (maximum). In order for these officers to be eligible for an incentive award, APS’ earnings had to meet or exceed the threshold level. APS’ actual 2007 earnings, as defined under the APS Plan, were $281 million, which exceeded the “maximum” level of earnings established by the Plan. Because the payment of an incentive award to the officers under the APS Incentive Plan is in the sole discretion of the Committee, the Committee then considered other factors, including customer value, financial strength, operational and environmental performance, and safety, in assessing 2007 award opportunities. In the case of Mr. Davis and Mr. Brandt, the Committee, with input from Mr. Post, weighted these factors and considered other matters that the Committee deemed appropriate. The Committee then determined that Mr. Davis’ incentive award under the APS Incentive Plan should be $1,015,205 (compared to a maximum award potential of $1,200,006) and that Mr. Brandt’s incentive award should be $766,800 (compared to a maximum award potential of $900,000). In the case of Mr. Edington and Mr. Wheeler, the APS Incentive Plan provided “critical success indicators” for specific business units. Once APS’ earnings threshold was met, the Committee considered the achievement of the critical success indicators, which were weighted proportionally from a threshold level to a maximum level. Mr. Edington’s award opportunity was based up to 50% on APS earnings and up to 50% on Palo Verde Business Unit Results (nuclear safety – up to 7.5%; personnel – up to 4.5%; human performance – up to 8%; unit performance – up to 15%; and financial performance – up to 15%). Mr. Wheeler’s award opportunity was based up to 50% on APS earnings and up to 50% on Delivery Business Unit Results (safety performance – up to 10%; customer experience survey – up to 9%; business performance trends – up to 13%; customer reliability – up to 12%; and environmental performance – up to 6%). In the case of Mr. Edington and Mr. Wheeler, the Committee, with input from Mr. Post and Mr. Davis, weighted both the APS earnings component and the business unit components and considered other matters that the Committee deemed appropriate. The Committee then determined that Mr. Edington’s incentive award under the APS Incentive Plan should be $432,300 (compared to a maximum award potential of $660,000) and that Mr. Wheeler’s incentive award should be $353,330 (compared to a maximum award potential of $445,000).

     We attempt to set the midpoint earnings target for this program based on a reasonable range of expectations for the year, while taking into account other factors, such as prior year performance, shareholder expectations and the like. Individual business

unit goals that can be directly correlated to earnings are determined at levels that, if achieved at target, would contribute to earnings being achieved at target. However, some of the business units’ metrics, like safety and customer satisfaction, are not directly correlated to earnings. We attempt to set business unit goals, and the weightings among the goals, generally with a balance of factors relating to the General Performance Objectives.

     In addition to meeting earnings targets, the Company’ operational results for 2007 included the following:

	•		the implementation of new base fuel rates and power supply adjustor amendments, as approved by the Arizona Corporation Commission, which addressed the need for timely recovery of our fuel and purchased power costs;
	•		the Company’s coal plants posted an 87.5 percent capacity factor, a new all-time fleet record, slightly ahead of the record set a year ago and well ahead of the industry average of 71 percent;
	•		in one of the hottest summers on record, APS established eight of the 10 highest system peak days ever, culminating in a 2007 peak of 7,545 MW, set on August 13, 2007;
	•		APS recorded all-time best results in reliability measures in 2007; and
	•		the Company continued to earn recognition for addressing environmental, social and governance issues, including the following:

	o		For the third consecutive year, Pinnacle West was named one of the Global 100 Most Sustainable Corporations in the World by Corporate Knights Inc., which evaluates performance on social, environmental and strategic governance issues.
	o		Also for the third straight year, Pinnacle West was selected for the 2007 U.S. Dow Jones Sustainability Index, the premier index recognizing sustainable business practices for publicly held corporations.
	o		Pinnacle West again achieved the highest rating (AAA) and is ranked in the top two of utilities in the United States by Innovest Strategic Value Advisors in its analysis covering the environmental, social and governance factors of the largest publicly-traded utility companies.

     The incentive awards earned by the Named Executive Officers under the 2007 Incentive Plans are disclosed in the Summary Compensation Table on page 28 of this proxy statement in the column “Non-Equity Incentive Plan Compensation.” The possible payouts under the 2007 Incentive Plans are described in the Grant of Plan-Based Awards table on page 32 of this proxy statement in the columns headed “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards.”

     As noted above, under the Company’s annual incentive plans, the Committee may determine not to approve an award for any or all officers, even if the earnings and business unit targets are met. For example, in early 2006 (when the Committee would otherwise have approved incentive awards based on 2005 performance), the Committee considered the Company’s financial condition and issues facing the Company and decided to forego making any incentive payments to eligible officers even though performance targets were exceeded under the 2005 incentive plans. The incentive award that each of the Named Executive Officers was eligible to receive in early 2006, based on 2005 performance, was as follows: Mr. Post – $1,900,008; Mr. Davis – $1,200,006; Mr. Brandt – $396,686; and Mr. Wheeler – $352,607. These awards were not paid. Similarly, in considering payouts under the 2006 incentive plans in early 2007, the Committee reduced the award amounts by the indicated percentages for Messrs. Post, Davis and Brandt because of an unfavorable Nuclear Regulatory Commission regulatory assessment relating to the Palo Verde Nuclear Generating Station: Mr. Post (31%); Mr. Davis (28%); and Mr. Brandt (28%). Mr. Wheeler’s incentive was not reduced since he had no direct or indirect responsibility for Palo Verde. Mr. Edington was not hired by the Company until early 2007 and did not participate in the 2005 and 2006 incentive plans.

     On January 23, 2008, the Board, acting on the recommendation of the Committee, approved the Company’s 2008 annual incentive plans and, on January 22, 2008, the Committee approved the CEO component of such plans. The 2008 incentive plans are substantially similar to the 2007 Incentive Plans. We described the 2008 incentive plans and the award opportunities for our Named Executive Officers under those plans in our Current Report on Form 8-K filed on January 28, 2008.

     Long-Term Incentives. In late 2006, we restructured our long-term compensation program to change the type of grants but not the overall incentive potential. Under our restructured program, long-term incentives will generally consist of 50% performance shares and 50% RSUs. Although we believe that performance shares best tie long-term compensation to shareholder value, adding RSUs to the program allows us to balance the goals of maximizing performance and promoting officer retention.

Although we issued stock ownership incentive awards in prior years, we did not issue such awards in 2007 and, at present, we do not anticipate that we will be issuing them in the future. However, in 2007, we adopted stock ownership guidelines that we describe below under the heading “Do we have stock ownership guidelines for our Named Executive Officers?”

     We have not granted stock options to the Company’s executive officers since 2003, except for a single grant in 2004 in connection with an officer’s employment agreement. We began voluntarily expensing stock options in 2002, although the accounting rules requiring the expensing of stock options did not apply to us until January 1, 2006. Stock options are not currently, and are not expected to be, a component of our long-term compensation program in the foreseeable future.

     To determine the amount of performance share and RSU awards, the Committee first establishes a target compensation value for each officer that it wants to deliver through long-term equity awards. It considers various factors, including the retention value of the total compensation package and the long-term equity component in light of the competitive environment. The Committee also considers target value in light of the Company’s budget and performance. Once the target value is established, the Committee determines the number of shares subject to the awards by reference to the then current value of the Company common stock.

     Performance Shares. We use performance shares to promote long-term performance. Generally, each recipient of performance shares is entitled to receive shares of common stock at the end of a three-year period based upon the Company’s earnings per share growth rate during that three-year period compared to the earnings per share growth rate of the S&P 1500 Super Composite Electric Utility Index over the same period. For the performance shares granted in 2007, the three-year performance period is from January 1, 2007 to December 31, 2009. The earnings per share growth rate for the three-year performance period is the compounded annual-growth rate of a company’s earnings per share from continuing operations (plus SunCor’s discontinued operations for purposes of calculating the Company’s earnings per share growth), on a fully-diluted basis, during the three-year period. We include SunCor discontinued operations for purposes of calculating the Company’s earnings per share growth primarily to include sales by SunCor of commercial properties in the ordinary course after development is complete, although from time to time other accelerated property sales or sales not in the ordinary course would also be included. We believe that earnings growth provides the best opportunity to align officer performance with shareholder interests.

     Performance share awards that we made in 2002 through 2005 were based on our earnings per share growth rate compared to companies in the S&P 500 Electric Utility Index. Electric utilities are included in that index based on meeting various criteria including being a U.S. company and meeting minimum market capitalization amounts. In 2002, there were 20 companies in the index. By early 2006, the number had fallen to 11 as a result of mergers between companies and companies failing to meet the criteria and being removed from the index. In 2006, we revised our future performance share awards to measure earnings per share growth as compared to companies in the S&P 1500 Super Composite Electric Utility Index. This index has generally the same criteria as the S&P 500 Electric Utility Index and includes the same electric utilities, but it also includes additional electric utilities with smaller market capitalizations amounts. In 2006, when we began using the S&P 1500 Super Composite Electric Index, there were 28 electric utilities in the index. Currently there are 26 electric utilities in the index.

     Based on information provided by Schuster-Zingheim, we have considered using other performance metrics for our performance share awards. For example, many of the companies in our comparator group use total shareholder return instead of, or in addition to, earnings per share growth for this purpose. However, total shareholder return has no widely accepted calculation methodology. So meaningful company-to-company comparison is not assured. We also concluded that results from adding a total shareholder return metric would not generally differ so significantly as to override the simplicity and historical stability of using earnings per share growth.

     Under the performance share awards, the number of shares of common stock a recipient is entitled to receive is determined by the Company’s percentile ranking in the index during the three-year performance period. Generally, the base grant is earned at the 50th percentile, two times the base grant is earned at the 90th percentile or above, and .5 times the base grant is earned at the 25th percentile, which is the threshold for any payout. The recipient must also remain employed with the Company throughout the performance period, unless the recipient retires (in the case of the 2006 and 2007 performance share grants). Under the 2006 and 2007 performance share grants, in the case of an employee’s retirement, the employee is deemed to have been employed through the end of the performance period. A participant who receives an award of performance shares is also entitled to a cash payment equal to the amount of dividends that the participant would have received had he or she owned the shares during the three-year performance period, plus a specified annual rate of interest, compounded quarterly, which, in the case of the 2007 performance share awards, is 5.0%.

     Historically, our first grant of performance shares in 2002 achieved the 30th percentile of the index over the applicable three-year period, and resulted in 60% of the grant being earned. The 2003 grant did not vest because the Company’s performance

was below the threshold level, so no award was earned. The 2004 performance share grant achieved the 27.3 percentile ranking on the S&P Electric Utility Index over the applicable three-year period. This resulted in 54.6% of the grant being earned.

     We include performance share awards granted in 2007 in the Summary Compensation Table on page 28 of this proxy statement in the column under “Stock Awards” and in the Grants of Plan-Based Awards table on page 32 of this proxy statement. These awards have been valued in the tables in accordance with SEC rules; however, if the performance targets for the 2007 awards are not achieved, the executives will receive nothing from these awards. The performance share awards granted in 2005 that vested in 2007 are disclosed in the Option Exercises and Stock Vested table on page 37 of this proxy statement in the columns under “Stock Awards.” Outstanding performance shares are also included in the Outstanding Equity Awards At Fiscal Year-End table on page 34 of this proxy statement in the “Equity Incentive Plan Awards” columns under the heading “Stock Awards.”

     We issued additional performance share awards in the first quarter of 2008 for a three-year performance period from January 1, 2008 to December 31, 2010. The terms of these awards are consistent with our prior performance share grants.

          RSUs and Retention Units. We granted RSUs to our Named Executive Officers for the first time in early 2007. In January of 2007, we also made a special award of retention units to Mr. Edington as part of his initial employment package. RSUs and retention units are incentive awards that vest over a number of years if the award recipient remains employed by the Company or one of its subsidiaries. Each RSU or retention unit represents the fair market value of one share of our common stock on the applicable vesting date. The 2007 RSUs and Mr. Edington’s retention unit grant:

	•		vest in 25% increments, beginning with respect to RSUs, on February 20, 2008, so that they will be fully vested on February 20, 2011 and with respect to Mr. Edington’s retention units, beginning with one fourth of the award immediately vesting on the grant date, and the remaining increments vesting on the first business day of each January following the grant date, so that the retention units will be fully vested on January 4, 2010;
	•		fully vest before the end of the regular vesting period if the participant or Mr. Edington retires or, with respect to Mr. Edington’s retention units, Mr. Edington becomes disabled or dies (unvested RSUs or retention units are forfeited if the participant terminates employment for any other reason);
	•		for RSUs, are payable in stock or cash to the participant (the election to receive cash or stock was made by the participant within thirty days of the date that the participant received the grant) as the RSUs vest (retention units are payable only in cash as the retention units vest), in an amount equal to the number of RSUs or retention units vesting multiplied by the fair market value of a share of our common stock on the vesting date (in the case of a participant’s or Mr. Edington’s retirement (or in the case of Mr. Edington’s death or disability) before the end of the vesting period, the RSUs and retention units are payable on the dates and in the percentages specified in the vesting schedule, even though fully vested);
	•		accrue dividend rights equal to the amount of dividends that a participant or Mr. Edington would have received if the participant or Mr. Edington had directly owned one share of our common stock for each RSU or retention unit held, with the dividend rights payable only on the RSUs or retention units that actually vest, plus interest at the rate of 5% per annum, compounded quarterly; and
	•		for RSUs, are not included in the calculation of pension benefits, however, for Mr. Edington’s retention units, are included in the determination of Mr. Edington’s compensation for purposes of calculating pension benefits under our supplemental excess benefit retirement program (the “Retirement Program”), to the extent the retention units ultimately vest.

     We issued additional RSUs in the first quarter of 2008. The terms of these awards are consistent with our prior RSU grants.

     We also made grants of retention units in 2006 to the other Named Executive Officers. The 2006 retention units are substantially similar to the 2007 grant of retention units, except that they vest in one-fourth increments on the first business day of each January following the grant date, so that they will be fully vested on January 4, 2010. The 2007 award to Mr. Edington was intended to put him in the same position as the other executives with respect to the retention unit grant.

     Pension programs, deferred compensation programs and change-in-control agreements.

     The Company also maintains retirement plans, deferred compensation plans and change-in-control arrangements for our officers, including the Named Executive Officers. We believe that these elements of total compensation are essential in order to be

competitive in attracting and retaining the caliber of skilled executive talent that we require to be successful. The Committee and the Board consider these elements in setting other elements of executive pay. However, we generally consider the value in the deferred compensation plan to be the participant’s own money and do not give this amount significant weight in making compensation decisions. Similarly, change-in-control payments do not have a significant impact on compensation design. However, in setting annual incentives, we do consider that the change-in-control payment, if triggered, would be based on the average of these amounts for the prior four years.

     We describe our retirement plans under the heading “Discussion of Pension Benefits” beginning on page 39 of this proxy statement. We describe accrued benefits under our retirement plans for each of the Named Executive Officers in the Pension Benefits table beginning on page 38 of this proxy statement. See also the column “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the Summary Compensation Table beginning on page 28 of this proxy statement.

     We describe our deferred compensation plans under the heading “Discussion of Nonqualified Deferred Compensation” beginning on page 42 of this proxy statement. We describe accrued benefits under our deferred compensation plans for each of the Named Executive Officers in the Nonqualified Deferred Compensation table beginning on page 42 of this proxy statement. See also the column “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the Summary Compensation Table beginning on page 28 of this proxy statement.

     We describe our change-in-control arrangements under the heading “Potential Payments Upon Termination or Change-in-Control – Change-in-Control Arrangements” beginning on page 45 of this proxy statement. The arrangements are customary “double trigger” agreements that provide severance benefits if, during a specified period following a change-in-control, the Company terminates an employee without “cause” or the employee terminates “for good reason.” We believe that the possibility of strategic transactions or unsolicited offers creates job uncertainty for executives, and that change-in-control agreements are effective tools to provide incentives for executives to stay with the company in light of these uncertainties. In addition, we believe that if the agreements are appropriately structured, as we believe ours to be, they do not deter takeovers or disadvantage stockholders. The Company’s agreements are terminable on six months prior notice, prior to a change-in-control. The Committee regularly reviews the desirability and structure of our change-in-control arrangements and whether to terminate them under this provision. The tax treatment of these arrangements is described below under the heading “What impact do taxation and accounting considerations have on the decisions regarding executive compensation?”

     Perquisites. We have had a long-standing policy of not providing significant perquisites to our executive officers. We describe our perquisites paid to each of the Named Executive Officers in footnote 6 to the Summary Compensation Table on page 28 of this proxy statement.

Why does the Company choose to pay each element of compensation to its Named Executive Officers?

     We choose to pay each element of compensation to further the objectives of our compensation program described above, including the need to attract, retain, and reward key leaders critical to our success by providing competitive total compensation, but with a strong emphasis on performance-based incentives.

How does each element of compensation and the Company’s decisions regarding that element fit into the Company’s overall compensation objectives and affect decisions regarding other elements?

     Before establishing or recommending executive compensation payments or awards, the Committee considers all the components of such compensation, including current pay (salary and bonus, if any), annual and long-term incentive awards, deferred compensation, retirement benefits, outstanding equity awards, perquisites and potential change-in-control severance payments. The Committee considers each element in relation to the others when setting total compensation. See also the discussion under the heading “How does the Company determine the amount (and the formula) for each element of compensation paid to its Named Executive Officers?” above.

What impact do taxation and accounting considerations have on the decisions regarding executive compensation?

     Publicly-traded corporations generally are not permitted to deduct, for federal income tax purposes, annual compensation in excess of $1 million paid to any of certain top executives, except to the extent the compensation qualifies as “performance-based.” The Company does not use the deduction as a justification for awarding compensation in excess of $1 million. However, to the extent the awards do exceed $1 million, the Company generally believes that it is in the shareholders’ best interests to award compensation that will qualify as “performance-based” in order to take advantage of the deduction. Even so, the Company has not adopted a policy requiring all such compensation to be deductible.

     The Committee and the Board also take into account other tax and accounting consequences of the total compensation program and the individual components of compensation, and weigh these factors when setting total compensation and determining the individual elements of an officer’s compensation package, including the treatment of the awards under FAS 123R. For example, in evaluating the change-in-control provisions discussed above under “What are the elements of the Company’s compensation program? – Pension programs, deferred compensation programs and change-in-control agreements,” the Committee considered that a 20% excise tax is imposed on the executive for certain “golden parachute” payments and that under the change-in-control agreements, the Company must gross-up the officer for this tax. This puts the officer in the same after-tax position as if no such tax were imposed. We describe these tax payments in more detail below under the heading “Potential Payments Upon Termination Or Change-In-Control – Change-in-Control Arrangements – KEESAs” beginning on page 45 of this proxy statement.

Do we have stock ownership guidelines for our Named Executive Officers?

     Yes. In an effort to further align the interests of management and shareholders, effective October 17, 2007, the Board adopted stock ownership guidelines applicable to the Named Executive Officers and certain other officers. We believe that linking a significant portion of an officer’s current and potential future net worth to the Company’s success, as reflected in our stock price, helps to ensure that officers have a stake similar to that of our shareholders. The guidelines also encourage the long-term management of the Company for the benefit of the shareholders.

     The guidelines for each executive officer are based on the executive officer’s position and his or her base salary. The Company expects executive officers to own Company stock having a value equal to a multiple of their annual base salary within five years of the later of the effective date of these guidelines, an executive officer’s appointment, or his or her designation as an executive officer to which these guidelines apply. The types of ownership arrangements counted toward these guidelines are those securities that are beneficially owned by an executive officer in accordance with SEC Rule 13d-3, excluding unexercised options. Compliance with these guidelines will be reviewed on an annual basis. The stock ownership guideline for the CEO is three times base salary and for the other Named Executive Officers is two times base salary. Mr. Post and Mr. Davis satisfy the stock ownership guidelines and Messrs. Brandt, Edington and Wheeler will have five years from October 17, 2007 to become compliant.

     On October 17, 2007, the Board also adopted a stock retention policy. Under the policy, we expect executive officers to not sell or transfer shares of restricted stock (net of shares utilized to satisfy tax withholding obligations) within six months of the date on which such shares become vested. The term “restricted stock” includes any shares received upon the vesting of restricted stock units. In addition, the executive officers have observed an informal policy that they will generally hold any stock awarded to them by the Company except to the extent necessary to satisfy tax withholding obligations, option exercise costs and brokerage fees.

REPORT OF THE HUMAN RESOURCES COMMITTEE

     The Human Resources Committee of the Board submitted the following report:

     The Human Resources Committee is composed of six non-employee directors, each of whom is independent as defined by NYSE rules and the Company’s Director Independence Standards.

     In accordance with SEC rules, the Human Resources Committee discussed and reviewed the Compensation Discussion and Analysis beginning on page 16 of this proxy statement with management and, based on those discussions and review, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

		COMMITTEE CHAIRMAN		COMMITTEE MEMBERS
		Roy A. Herberger, Jr.		Edward N. Basha, Jr.
				Susan Clark-Johnson
				Pamela Grant
				William S. Jamieson
				Humberto S. Lopez

SUMMARY COMPENSATION TABLE

     The Summary Compensation Table below includes the following principal information, which is explained in greater detail in the footnotes:

•

Cash compensation. Generally, the cash compensation actually received by our Named Executive Officers for 2007 is the sum of the “Salary,” “Bonus,” and “Non-Equity Incentive Plan Compensation” columns.

It is important to note the difference between such cash compensation and total compensation. Named Executive Officer actual cash compensation in 2007 and the percentage of this amount compared to the “Total” compensation column is as follows: Mr. Post – $2,250,004 (33%); Mr. Brandt – $1,366,799 (58%); Mr. Davis – $1,815,209 (39%); Mr. Edington – $1,246,255 (60%); and Mr. Wheeler – $769,588 (36%). For Mr. Edington, this amount excludes certain payments made in connection with his initial employment with APS that are included in “All Other Compensation” and described in footnote 6 below.

•

Stock awards. Amounts accrued by the Company during 2007 for stock awards (including performance shares and RSUs) are shown in the “Stock Awards” column.

The shares underlying the performance share awards can only be received in future years if the terms of the awards – primarily three-year performance measures – are met. Under the SEC’s disclosure rules, the value given to stock awards in the Summary Compensation Table is the amount of expense accrued by the Company for the awards in the applicable year, even if the awards are subject to performance measures that may never be met.

•

Changes in pension value. Changes in estimated potential future pension benefits are shown in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column.

The change in pension value is based on various factors, including level of compensation and assumptions such as interest rate, discount factors, and mortality tables. A change in any of these assumptions may trigger a change in the amount reported in the table but may not change the actual amount of the benefit payable to the executives.

     Because Mr. Edington and Mr. Wheeler were not named executive officers in the proxy disclosures for our 2007 Annual Meeting, we are including information for them only for 2007.

																										Change in Pension
																										Value and
																										Nonqualified
																						Non-Equity				Deferred
														Stock				Option				Incentive Plan				Compensation				All Other
Name and Principal						Salary				Bonus				Awards				Awards				Compensation				Earnings				Compensation				Total
Position		Year				($)				($)1				($)2				($)3				($)4				($)5				($)6				($)
William J. Post,			2007				950,004				0				1,877,976				0				1,300,000				2,595,365				30,518				6,753,863
Chairman of the Board			2006				950,004				0				3,725,544				52,644				985,000				2,353,845				31,902				8,098,939
and Chief Executive Officer and Chairman of the Board, APS
Donald E. Brandt,			2007				599,999				0				542,513				0				766,800				440,417				24,815				2,374,544
Executive Vice			2006				456,263				0				402,788				9,286				648,000				145,144				24,590				1,686,071
President and Chief Financial Officer and President and Chief Financial Officer, APS
Jack E. Davis,President			2007				800,004				0				869,917				0				1,015,205				1,943,556				21,065				4,649,747
and COO and CEO, APS			2006				800,004				99,840				2,115,499				21,334				860,000				2,885,510				24,590				6,806,777
Randall K. Edington,			2007				547,955				266,000				378,538				0				432,300				1,251				451,460				2,077,504
Executive Vice President, and Chief Nuclear Officer, APS
Steven M. Wheeler,			2007				416,258				0				228,759				0				353,330				1,142,931				19,695				2,160,973
Executive Vice President Customer Service and Regulation, APS

	•		Performance Shares. We describe the performance shares under the heading “What are the elements of the Company’s compensation program? – Long-Term Incentives – Performance Shares” on page 23 of this proxy statement. With respect to the performance shares, we estimate the amount accrued based upon projections of the Company’s performance against projections of those companies in the comparator group. As earnings per share are reported by comparator companies, as new information becomes available, or as significant changes to the Company’s earnings become known, these estimates are updated. As such, based upon our estimates, the 2007 compensation expense accrued assumes that the following percentages of the target number of shares will be awarded: 2005 grant – 75%, 2006 grant – 100%, and 2007 grant – 75%. Compensation expense recorded for financial reporting purposes in 2006 for the 2004 grant was accrued using 100% of target shares, but the number of shares actually awarded was 54.6% of target shares. The expense accrued for this award in 2006 was adjusted in 2007, and the adjustment is reflected as a deduction in the 2007 stock award columns for each of the Named Executive Officers who were also named executive officers in 2006. In addition, the actual number of shares issued to the Named Executive Officers under the 2005 grant is set forth in the Option Exercises and Stock Vested table on page 37 of this proxy statement. The expense accrued for this award will be adjusted in 2008 to reflect the change from 75% of the target shares to ___% of the target shares, consistent with the number of shares actually awarded. The 2006 compensation expense accrued assumes that the following percentages of the target number of shares will be awarded for each grant year: 2004 grant – 100%, 2005 grant – 75%, 2006 grant – 100%. Furthermore, with respect to the 2007 and 2006 grants, pursuant to the terms of the award agreements, the employees become fully vested in the award upon retirement. Because Mr. Post and Mr. Davis had reached the age of retirement and attained the requisite years of service at the grant date, their entire awards were accrued on the grant date. Mr. Brandt’s, Mr. Wheeler’s, and Mr. Edington’s awards are being accrued over the three-year vesting period of the award. Based upon SEC guidance issued in August of 2007, we revised the 2006 amounts to exclude reductions to compensation expense that were made in 2006 but related to prior periods.
	•		Retention Units. We describe the retention units under the heading “What are the elements of the Company’s compensation program? – Long-Term Incentives – RSUs and Retention Units” on page 24 of this proxy statement. The retention units that were granted in December of 2006 (and with respect to Mr. Edington, January of 2007) are payable in 25% annual increments, beginning January 3, 2007 (except with respect to Mr. Edington, whose grant was payable beginning January 25, 2007) and ending January 4, 2010. Pursuant to the terms of the award agreement, the employee becomes fully vested in the award upon retirement, although the awards will be paid out over the standard vesting period described in the previous sentence. Under FAS 123R, we are required to accrue the entire compensation expense for retirement eligible employees on the date of the grant, as no additional services are required beyond that date. Because Mr. Post and Mr. Davis had reached the age of retirement and attained the requisite years of service at the grant date (December 13, 2006), their entire awards were accrued on the grant date. Mr. Brandt’s, Mr. Wheeler’s, and Mr. Edington’s awards are currently being accrued over the standard vesting period of the award.

	•		Restricted Stock Units. We describe the RSUs under the heading “What are the elements of the Company’s compensation program? – Long-Term Incentives – RSUs and Retention Units” on page 24 of this proxy statement. The RSUs vest in 25% annual increments, beginning February 20, 2008 and ending February 20, 2011. Pursuant to the terms of the award agreement, the employee becomes fully vested in the award upon retirement, although the awards will be paid out over the standard vesting period described in the previous sentence. Because Mr. Post and Mr. Davis had reached the age of retirement and attained the requisite years of service at the grant date, which for purposes of FAS 123R is May 23, 2007, their entire awards were accrued on the grant date. Mr. Brandt’s, Mr. Wheeler’s, and Mr. Edington’s awards are being accrued over the standard vesting period of the award.
	•		Ownership Incentive Awards. The likelihood of a Named Executive Officer’s receiving a stock ownership incentive award is considered in the calculation of compensation expense. Because of the significant stock ownership requirements of these awards and the current holdings of the Named Executive Officers, no dollars were accrued in connection with the stock ownership incentive awards granted to Messrs. Post, Brandt, Davis, and Wheeler in 2006. No ownership incentive awards were granted in 2007.
	•		Special Grant. As described in footnote 1 to this table, in 1999, the Company added to Jack Davis’ compensation a grant of 2,000 shares of restricted stock. This grant was awarded each year through 2004. In 2005 and 2006, restricted stock was no longer available for issuance under the Company’s equity plans, so Mr. Davis was granted a cash payment equal to the value of 2,000 shares of the Company’s common stock. In 2007, the Board was able to grant stock under the 2007 Plan. This special grant was expensed immediately on the grant date of October 16, 2007 using the closing market price on that date multiplied by the number of shares.

There were no forfeitures of stock awards during 2006 or 2007.

GRANTS OF PLAN-BASED AWARDS

																																		All Other
																																		Stock
																																		Awards:
										Estimated Possible Payouts												Estimated Future Payouts												Number				Grant Date
										Under Non-Equity Incentive												Under Equity Incentive												of Shares				Fair Value of
										Plan Awards1												Plan Awards												of Stock				Stock and
						Approval				Threshold				Target				Maximum				Threshold				Target				Maximum				or Units				Option
Name		Grant Date				Date				($)3				($)				($)				(#)				(#)				(#)				(#)				Awards2
William J. Post, Chairman			01/16/2007								475,002				950,004				1,425,006
of the Board and Chief			02/20/2007	4																			11,250				22,500				45,000								1,089,450
Executive Officer and			05/23/2007	5			02/20/2007	6																											22,500				1,048,050
Chairman of the Board, APS
Donald E. Brandt,			01/17/2007								225,000				450,000				900,000
Executive Vice President			02/20/2007	4																			5,000				10,000				20,000								484,200
and Chief Financial			05/23/2007	5			02/20/2007	6																											10,000				465,800
Officer and President and Chief Financial Officer, APS
Jack E. Davis, President			01/17/2007								300,002				600,003				1,200,006
and COO and CEO, APS			02/20/2007	4																			5,000				10,000				20,000								484,200
			05/23/2007	5			02/20/2007	6																											10,000				465,800
			10/16/2007	7																															2,000				83,760
Randall K. Edington,			01/17/2007								1				330,000				660,000
Executive Vice President,			01/25/2007	8			01/16/2007	8																											10,000				505,500
and Chief Nuclear			02/20/2007	4																			3,050				6,100				12,200								295,362
Officer, APS			05/23/2007	5			02/20/2007	6																											6,100				284,138
Steven M. Wheeler,			01/17/2007								1				222,500				445,000
Executive Vice President			02/20/2007	4																			1,925				3,850				7,700								186,417
Customer Service and			05/23/2007	5			02/20/2007	6																											3,850				179,333
Regulation, APS

EMPLOYMENT AGREEMENTS

     Messrs. Post, Davis and Brandt do not have an employment agreement with the Company.

     The Company and Mr. Edington entered into a letter agreement dated December 20, 2006 pursuant to which Mr. Edington is to receive the following: annual base salary of $600,000; a hiring bonus of $200,000 (gross) payable during his first two weeks of employment, plus subsequent bonuses of $100,000 (gross) payable on employment anniversary dates in 2008 and 2009 if he is then employed by the Company; participation in the annual incentive plan with a target of 50% and up to a maximum of 100% of annual base salary; an award of 10,000 retention units (see “What are the elements of the Company’s compensation program? — Long-Term Incentives — RSUs and Retention Units” on page 24 of this proxy statement for a description of retention units); annual grants of long-term awards if made by the Committee, with his first grant of Performance Shares to be in the amount of $125,000; an agreement that if he is employed by APS on the dates on which performance shares and stock options granted to him by his former employer would have vested, APS will make a cash payment to him for the value of such stock grants; a vehicle allowance of $10,008 per year; and certain medical benefits, including lifetime medical coverage for Mr. Edington and his spouse. In addition, the letter agreement provides that his total pension benefit (including the benefit due under the Company’s qualified plan, general non-qualified plan and a special agreement that will be prepared for him) will be the greater of: a) his total pension benefit if he had remained with his former employer for five more years, or b) a pension benefit that will accrue at 10% per year, up to a maximum of 60%, which will vest at five years of service. The percentage is applied to his final average wage (highest 3 years in the final ten years and includes both base salary and annual incentives) to determine his lifetime benefit. In addition, the retention units granted to him in January 2007 are also included in the calculation of pension benefits. See “What are the elements of the Company’s compensation program? — Long-Term Incentives — RSUs and Retention Units” on page 24 of this proxy statement. If he terminates for any reason other than voluntary resignation or termination for cause prior to meeting the vesting as indicated above, part (a) of this paragraph will become payable to him or his spouse. If part (b) of this paragraph applies, it will be paid to him in two forms: one-half of the benefit will be paid to him in a lump sum and the second half of the benefit will be paid to him in a 100% Joint and Survivor annuity that will be calculated by applying the applicable factor to the life annuity benefit. Mr. Edington’s compensation reflects the criticality of his job, Executive Vice President and Chief Nuclear Officer, to the Company, the scarcity of talent for this job, and the importance of his hire for an effective, safe, healthy and environmentally sound nuclear operation.

     The Company and Mr. Wheeler entered into a letter agreement in June of 2001, pursuant to which Mr. Wheeler was credited with ten (10) years of service for purposes of calculating his pension, effective as of June 29, 2001. Mr. Wheeler also received two years of service for pension purposes in each of the first two years of employment.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

		Option Awards																								Stock Awards
																																		Equity				Equity
																																		Incentive				Incentive
																																		Plan				Plan
																																		Awards:				Awards:
														Equity																				Number				Market or
														Incentive																				of				Payout
														Plan																Market				Unearned				Value of
														Awards:												Number				Value of				Shares,				Unearned
						Number of				Number of				Number of												of Shares				Shares or				Units or				Shares,
						Securities				Securities				Securities												or Units				Units of				Other				Units or
						Underlying				Underlying				Underlying												of Stock				Stock				Rights				Other
						Unexercised				Unexercised				Unexercised				Option								That				That				That Have				Rights
		Option				Options				Options				Unearned				Exercise				Option				Have Not				Have Not				Not				That Have
		Grant				(#)				(#)				Options				Price				Expiration				Vested				Vested				Vested				Not Vested
Name		Date1				Exercisable				Unexercisable				(#)				($)				Date				(#)				($)2				(#)				($)2
William J. Post,			11/18/1998				20,000				0				0				46.78				11/17/2008
Chairman of the			01/20/1999				70,000				0				0				41.00				1/19/2009
Board and Chief			11/17/1999				37,500				0				0				34.66				11/16/2009
Executive Officer			11/15/2000				65,000				0				0				44.03				11/14/2010
and Chairman of the			11/14/2001				65,000				0				0				42.55				11/13/2011
Board, APS			06/19/2002				108,000	3			0				0				38.37				06/18/2012
			03/18/2003				85,750				0				0				32.29				03/17/2013
																											15,776	4			669,060
																											22,500	5			954,225				______	6			—
																																			______	7			—
Donald E. Brandt,							0				0				0
Executive Vice																											8,264	4			350,476
President and Chief																											10,000	5			424,100				_____	6			—
Financial Officer																																			_____	7			—
and President and Chief Financial Officer, APS
Jack E. Davis,			11/18/1998				13,500				0				0				46.78				11/17/2008
President and COO			11/15/2000				26,250				0				0				44.03				11/14/2010
and CEO, APS			11/14/2001				26,250				0				0				42.55				11/13/2011
																											14,273	4			605,318
																											10,000	5			424,100				______	6			—
																																			______	7			—
Randall K. Edington,							0				0				0
Executive																											7,500	4			318,075
Vice President and																											6,100	5			258,701
Chief Nuclear																																			_____	7			—
Officer, APS
Steven M. Wheeler,							0				0				0
Executive Vice																											5,259	4			223,034
President Customer																											3,850	5			163,279				_____	6			—
Service and																																			_____	7			—
Regulation, APS