Agenda Number 4.a.i.

CONTACT: Tom McCann Ron Lunt (623) 869-2343 (623) 869-2362 tmccann@cap-az.com rlunt@cap-az.com MEETING DATE: February 7, 2013 AGENDA ITEM: Consideration of Action to Approve an Agreement Between

Arizona Public Service Company and CAWCD for the Palo Verde – Morgan 500kV Transmission Project

RECOMMENDATION: The Finance, Audit & Power Committee recommends that the Board approve the Agreement between Arizona Public Service (APS) and CAWCD for the Palo Verde – Morgan 500kV transmission project. This project will allow direct access to the Palo Verde wholesale power market, increase reliability by completing the CAP transmission system loop, and reduce transmission payments to third party providers.

FINANCIAL IMPLICATIONS:

Impact on Budget:

Capital Budget ($000) Budget

Year Funds

Requested Funds Included in the Budget

(Over) / Under Budget

Pre-2013 $3,291.3 $9,467.9 $6,176.6

2013 $6,900.3 $6,905.6 $ 5.3

2014-2018

$30,332.7 $15,871.6 ($14,461.1)

Total $40,524.3 $32,245.1 ($ 8,279.2) Additional spending authority requested: $0 – None required for 2013

Impact on Reserves: No additional impact on current reserves. Impact on Rates: No additional impact on current rates.

LINKAGE TO STRATEGIC PLAN, POLICY, STATUTE OR GUIDING PRINCIPLE: 2010 CAP Strategic Plan

• Power: Transmission Resources

PREVIOUS BOARD ACTION/ACTIVITY: May 6, 2004 Description of APS PV-TS5-TS9 transmission project June 16, 2004 Description of study agreement June 17, 2004 Board approval for CAWCD participation in study phase February 5, 2005 Project status report June 23, 2005 Project status report September 22, 2005 Project status report April 20, 2006 Project status report June 22, 2006 Project status report January 18, 2007 Project status report March 22, 2007 Project described in Board briefing booklet entitled

"Optimization of Power Resources" August 23, 2007 Board Workshop on Transmission Issues October 23, 2008 Board Workshop June 25, 2009 Project status report January 21, 2010 Project status report May 19, 2011 Project status report June 2, 2011 Board approved $3.6 million in additional spending

authority for project in 2011 September 15, 2011 Project status report to FAP Committee October 20, 2011 FAP Committee recommended approval for

participation in the $32,385,000 project between APS, SRP and CAWCD.

November 3, 2011 Funds for this project were in the approved 2012-2013 Budget.

October 18, 2012 Project status report to FAP Committee January 10, 2013 Update to the Board January 24, 2013 FAP Committee recommended approval of the

Agreement between Arizona Public Service (APS) and CAWCD for the Palo Verde – Morgan 500kV transmission project.

ISSUE SUMMARY/DESCRIPTION: Project Overview The Arizona Public Service Company (APS) is planning to construct and operate a 500-kV transmission line and associated substations that will connect the Palo Verde Switchyard to the Morgan Substation, a recently completed facility just south of Lake Pleasant. The PV-Morgan project will provide a direct link between Arizona's primary energy trading hub (Palo Verde) and the 500-kV Navajo Southern Transmission Line, which delivers energy from Navajo Generating Station (NGS).

The PV-Morgan project includes the Delaney Switchyard at the eastern edge of the Harquahala Valley and the Sun Valley Substation, a new facility that will be located immediately adjacent to CAP’s Hassayampa Pumping Plant. Importance to CAP Participation in the PV-Morgan project will allow CAP to convey energy directly from NGS to CAP loads (through the Sun Valley Substation) without having to contract—and pay—for capacity over other systems. The CAP transmission system was originally designed and built to be part of an integrated system that served the transmission needs of numerous federal Reclamation projects in the southwest. But with the creation of the Department of Energy in 1980, certain functions and facilities were transferred from Reclamation to the Western Area Power Administration, including responsibility for the Parker-Davis and Pacific Northwest-Pacific Southwest Intertie transmission systems. Reclamation retained ownership and control of the CAP transmission system. That split created a "gap" in the CAP transmission system between the Westwing and Liberty Substations, which today requires CAP to purchase transmission capacity from Western or others to move NGS energy from Westwing to CAP loads. In some cases, CAP must use multiple transmission systems—and pay multiple rates—to reach its loads, a situation referred to as "pancaking." The PV-Morgan line will bridge this gap in the CAP transmission system and allow CAP to avoid paying pancaked rates. The PV-Morgan project will also improve reliability for CAP's western pumping plants by creating an additional grid interconnection at Sun Valley. This is accomplished by closing the gap on the southern end of the CAP transmission system by directly connecting the NGS southern transmission system at Morgan Substation with the western CAP system at Hassayampa tap. To further enhance reliability, CAP is investigating the possibility of upgrading the current Hassayampa Tap—the 230-kV line that connects the Hassayampa Pumping Plant to the Parker-Liberty line—to allow CAP to move energy through the Sun Valley Substation to the Parker-Liberty line and from there to our western pumping plants. Finally, the PV-Morgan project will allow CAP to transmit energy purchased at the Palo Verde hub or Westwing Substation to CAP loads. Currently, when CAP purchases energy at Palo Verde or Westwing it must also acquire sufficient transmission capacity to move that energy to where it is needed. Those transmission rights can add significantly to the cost of the purchased energy. Having the ability to deliver energy acquired from Palo Verde or Westwing to CAP loads is especially important when NGS units are out of service.

History of CAP Participation The Board authorized CAP to participate in the study phase of the PV-Morgan project in 2004. APS originally anticipated that the project would be in service by the summer of 2007, but the project was delayed due to the economic downturn. The Salt River Project joined APS and CAP in the study phase, but in April 2012 notified APS that it was withdrawing from the PV-Morgan project. Staff has been negotiating an agreement with APS under which CAP would control ten percent (10%) of the bidirectional transmission capacity of the 500-kV PV-Morgan project, as well as capacity in the Sun Valley Substation sufficient to meet CAP needs. APS would operate the line and control the remaining capacity. CAP's share of the costs of the PV-Morgan project, as well as the cost of upgrading the Hassayampa Tap (not included in this Agreement), is part of the current CAP Capital Improvement Program. Due to the complexity and nature of this project, APS has a moderate contingency included in the amounts listed above. A copy of the proposed Joint Participation Agreement was included with the January 24, 2013, Finance, Audit & Power Committee materials and is also available on the CAP website. SUGGESTED MOTION: I move that the Board approve the Joint Participation Agreement for the Palo Verde – Morgan 500kV Transmission Project between the Arizona Public Service Company and Central Arizona Water Conservation District for a total contract value of $40,524,300 and authorize the General Manager, or his Designee, to execute the Agreement.

PALO VERDE - MORGAN 500kV

TRANSMISSION PROJECT

JOINT PARTICIPATION AGREEMENT

BETWEEN

ARIZONA PUBLIC SERVICE COMPANY

AND

CENTRAL ARIZONA WATER CONSERVATION DISTRICT

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TABLE OF CONTENTS

1. Parties .................................................................................................................................. 1 2. Recitals ................................................................................................................................ 1 3. Agreement ........................................................................................................................... 2 4. Effective Date and Term ..................................................................................................... 2 5. Definitions ........................................................................................................................... 3 6. Future Development .......................................................................................................... 12 7. Ownership and Title to Delaney 500kV and Sun Valley 500kV Substations .................. 13 8. Administration and Committees. ....................................................................................... 13 9. Construction of Facilities .................................................................................................. 18 10. Operating Agent ................................................................................................................ 23 11. Capital Improvements ....................................................................................................... 28 12. Ownership Ratios and Cost Responsibility Ratios ............................................................ 29 13. Construction Costs ............................................................................................................ 30 14. Operating Costs ................................................................................................................. 30 15. Capital Improvement Costs ............................................................................................... 30 16. Billing and Payment .......................................................................................................... 31 17. Taxes ................................................................................................................................. 31 18. Reduction of Capacity in the Delaney 500kV and Sun Valley 500kV Substations .......... 32 19. Operating Emergency ........................................................................................................ 32 20. Project Insurance ............................................................................................................... 33 21. General Provisions Affecting Project Insurance ............................................................... 36 22. Mortgage and Transfer of Interest ..................................................................................... 39 23. Liability; Covenant Not to Execute ................................................................................... 40 24. Severance of Improvements .............................................................................................. 42 25. Defaults ............................................................................................................................. 42 26. Dispute Resolution Provisions .......................................................................................... 46 27. Removal of Project Manager or Operating Agent ............................................................. 46 28. Authorizations and Approvals ........................................................................................... 46 29. Waiver ............................................................................................................................... 47 30. Uncontrollable Forces ....................................................................................................... 48 31. Audit .................................................................................................................................. 48 32. Accrual of Causes of Action ............................................................................................. 48 33. Relationship of the Parties ................................................................................................. 48 34. Governing Law .................................................................................................................. 49 35. Successors and Assigns ..................................................................................................... 49 36. Notices ............................................................................................................................... 49 37. Severability ........................................................................................................................ 50 38. No Dedication of Facilities ................................................................................................ 50 39. Regulatory Authority ......................................................................................................... 50 40. Section Headings ............................................................................................................... 50 41. Representations and Warranties ........................................................................................ 50 42. No Third Party Rights ....................................................................................................... 51 43. Right of First Refusal ........................................................................................................ 51 44. Revision of Overhead Loadings ........................................................................................ 54

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45. Entire Agreement .............................................................................................................. 54 46. Partitionment ..................................................................................................................... 54 47. Survival. ............................................................................................................................ 55 Signature Clause ................................................................................................................ 56

Appendix A - Palo Verde – Morgan 500kV Project Description ................................... A-1 Appendix B - Initial Ownership and Cost Responsibility Ratios .................................. B-1 Appendix C - Diagram of the Palo Verde and Delaney 500kV Initial One-Line .......... C-1 Appendix D - Diagram of the Sun Valley and Morgan 500/230kV Initial One-Line .... D-1 Appendix E - Description of Delaney 500kV Switchyard Property .............................. E-1 Appendix F - Description of Sun Valley 500kV Substation Property .......................... F-1 Appendix G - Overhead Loading Applied to Capital Improvement Costs .................... G-1 Appendix H - Overhead Loading Applied to Operating Costs ...................................... H-1 Appendix I - Overhead Loading Applied to Construction Costs ................................... I-1 Appendix J - Application of Overhead Load Calculations ............................................ J-1

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PALO VERDE - MORGAN 500KV TRANSMISSION PROJECT PARTICIPATION AGREEMENT

1. Parties. The Parties to this Palo Verde to Morgan 500kV Project Participation Agreement (“Agreement”) are Arizona Public Service Company (“APS”), an Arizona corporation. Central Arizona Water Conservation District (“CAWCD”), a multi-county water conservation district organized and existing under and by virtue of the laws of the State of Arizona.

2. Recitals.

2.1 On August 9, 2004, APS, CAWCD and Salt River Project Agricultural Improvement and Power District (“SRP”) entered into the Palo Verde to TS5 (Sun Valley) Memorandum of Agreement to site a 500kV transmission line that would originate at the Palo Verde Substation and terminate at the TS5 (Sun Valley) Substation.

2.2 On December 16, 2008, APS, CAWCD and SRP entered into the TS5 (Sun Valley) – TS9 (Morgan) Memorandum of Agreement to site a 500kV transmission line that would originate at the TS5 (Sun Valley) Substation and terminate at the TS9 (Morgan) Substation.

2.3 On August 17, 2005, the Arizona Corporation Commission (ACC) granted APS a Certificate of Environmental Compatibility for the future construction of a 500kV transmission line, the Palo Verde to TS5 (Sun Valley) Project.

2.4 On March 17, 2009, the ACC granted APS a Certificate of Environmental Compatibility for the future construction of a 500kV transmission line, the TS5 (Sun Valley) to TS9 (Morgan) Project.

2.5 On April 20, 2012, SRP submitted a notice of withdrawal from the Palo Verde – Morgan 500kV Transmission Project.

2.6 The Palo Verde – Morgan 500kV Transmission Project will include the projects previously known as: Palo Verde – TS5 (Sun Valley) Project and the TS5 – TS9 (Sun Valley – Morgan) Project.

2.7 This project will serve the electric energy needs in the northern Phoenix Metropolitan area. It will increase the import capability to the Phoenix Metropolitan area, as well as increase the export/scheduling capability from the Palo Verde area, which includes both solar and gas resources. The project will also increase the reliability of the EHV system by completing a 500kV loop that connects the Palo Verde Transmission system, the Southern Navajo Transmission System, and the Southern Four Corners system.

2.8 The Parties agree that joint development, ownership and operation of the Palo Verde – Morgan 500kV Transmission Project (Delaney 500kV Switchyard, Sun

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Valley 500/230kV Substation and associated 500kV Transmission Lines) are beneficial to All Parties and their customers.

3. Agreement. In consideration of the premises and the mutual covenants contained herein, the Parties hereby agree as follows:

4. Effective Date and Term.

4.1 This Agreement shall become effective when it has been duly executed and delivered on behalf of all Parties provided that the following events have occurred:

4.1.1 Federal Energy Regulatory Commission (FERC) has accepted this Agreement for filing without modification or condition unacceptable to any Party. Upon receipt of fully executed originals of this Participation Agreement, APS shall promptly file this Participation Agreement with FERC.

4.1.1.1 In the event FERC requires conditions or modifications to this Participation Agreement to enable it to accept this Participation Agreement for filing, APS shall promptly notify CAWCD of such conditions or modifications required by FERC. CAWCD shall, within thirty (30) calendar days of such notice by APS, give written notice to APS whether such condition or modification is acceptable or unacceptable to it.

4.1.1.2 If CAWCD does not provide written notice indicating that FERC’s condition or modification is unacceptable within such thirty (30) calendar day period, this Participation Agreement, as amended by FERC’s required conditions or modifications, shall be deemed effective as of the date of its execution.

4.1.1.3 If CAWCD gives written notice to APS that FERC’s requirement for conditions or modifications is unacceptable to it, the Parties shall meet to prepare a mutually agreeable response to FERC with respect to FERC’s required conditions or modifications, and, unless the Parties agree otherwise, this Participation Agreement shall be of no further force or effect unless and until FERC and the Parties have resolved FERC’s requirement for unacceptable conditions or modifications in a manner agreeable to all Parties and have amended this Participation Agreement to reflect such resolution.

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4.2 Unless terminated earlier pursuant to Section 25 hereof, this Agreement shall continue in force and in effect for fifty (50) years from the date of execution, provided that the Agreement shall extend automatically for five (5) year periods unless any Party provides a written notice of cancellation six (6) months prior to the expiration of the initial fifty year term or of any extension period. Upon receiving written notice of a Party’s election to terminate its interest in this Agreement, the other Parties shall have ninety (90) calendar days after receipt of such notice to elect to continue operation of the Palo Verde - Morgan 500kV Transmission Project by providing written notice of such election to the other Parties.

4.2.1 If no Party elects to continue operation of the Palo Verde – Morgan 500kV Transmission Project, the Project shall be retired and disposed of as provided in Section 4.2.4 herein.

4.2.2 If any remaining Party elects to continue operation of the Palo Verde – Morgan 500kV Transmission Project, the remaining Party(ies) shall purchase the Palo Verde– Morgan 500kV Transmission Project at each terminating Party’s net book value and assume the rights, titles, interests, and obligations of the Party(ies) electing to terminate on the effective date of such termination.

4.2.3 On the effective date of termination of any Party in accordance with this Section 4.2, each terminating Party shall assign its rights, titles, interest, and obligations in the Palo Verde – Morgan 500kV Transmission Project to the remaining Party(ies). Sections 43.5 and 43.6 shall apply to such transfer. Upon any such assignment and assumption, the terminating Party(ies) will be relieved of all future liability under this Agreement arising after the date of such assignment and assumption and relating to matters occurring after such date. Nothing herein will relieve any such terminating Party(ies) from any liability under this Agreement arising prior to the date of any such assignment and assumption and relating to matters occurring prior to such date.

4.2.4 Unless otherwise determined by the Parties, upon termination of this Agreement the disposition of all property comprising the Palo Verde – Morgan 500kV Transmission Project shall be liquidated by a third party liquidator. The Parties will use commercially reasonably efforts to maximize the proceeds of the liquidation and all proceeds and all associated termination costs shall be shared by each Party in proportion to its Cost Responsibility Ratio in each Component.

5. Definitions.

5.1 Accounting Practice: Generally accepted accounting principles in accordance with the FERC System of Accounts and Generally Accepted Accounting Principles (G.A.A.P).

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5.2 Appraisal Procedure:

5.2.1 The defaulting Party and each non-defaulting Party who has given a Demand Purchase Notice shall first attempt to reach agreement on the Fair Market Value of the interest in the Palo Verde – Morgan 500kV Transmission Project to be purchased. If such Parties fail to reach such agreement within thirty (30) calendar days following the receipt of the Demand Purchase Notice, then, within ten (10) calendar days after such thirty (30) calendar day period, the defaulting Party, on the one hand, and the non-defaulting Party(ies) collectively, on the other hand, shall each select from a reputable engineering or consulting firm an individual qualified in matters related to the operation and maintenance of transmission lines and related facilities or the valuation of transmission lines and related facilities and notify the other Party(ies) of the persons so selected. A condition precedent to the designation of any appraiser shall be a certification by the appraiser that he or she is aware of the nature and time frame of the evaluation and is capable of performing the service within the time designated.

5.2.2 The two (2) appraisers thus designated shall designate a third appraiser within ten (10) calendar days after the appointment of the second of the Party appraisers who shall have experience in the valuation of transmission lines and related facilities and who shall not have performed significant work for any of the Parties within three (3) years preceding such appointment. Each of the defaulting Party and the non-defaulting Party(ies) shall be allowed to submit to the appraisers written submissions setting forth their views on the appropriate considerations for determining the Fair Market Value of the defaulting Party’s interest in the Palo Verde - Morgan 500kV Transmission Project. The appraisers shall render their decision within ninety (90) calendar days following selection of the third appraiser. The Fair Market Value of the defaulting Party’s interest in the Palo Verde - Morgan 500kV Transmission Project shall then be the average of the values submitted by any two (2) of the three (3) appraisers which are nearest to each other (or, if the two (2) extreme values are equidistant from the middle value, the middle value), which average (or middle value) shall be presented to the Parties.

5.3 Capacity: Electrical rating or scheduling capability expressed in megawatts (MW) or kilowatts (kW)

5.4 Capital Improvement(s): Any Units of Property, land or land rights which are added to the Palo Verde - Morgan 500kV Transmission Project, the betterment of land or land rights, the enlargement or betterment of any Units of Property constituting a part of the Palo Verde - Morgan 500kV Transmission Project, the relocation of existing facilities and the replacement of any Units of Property for other Units of Property or the replacement of land or land rights constituting a part of the Palo Verde - Morgan 500kV Transmission Project, the relocation of existing facilities along the line route, irrespective of whether such replacement

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constitutes an enlargement or betterment of that which it replaces, which additions, betterments, enlargements and replacements, in accordance with Accounting Practice, would be capitalized and are not included in the Operating Work or Construction Work.

5.5 Capital Improvement Costs: Subject to Section 15, all costs and expenses to plan, design, acquire, construct, install and equip Capital Improvements, place Capital Improvements in operation, and obtain governmental approvals, certificates, permits and licenses with respect thereto. Capital Improvement Costs shall include, but not be limited to, those categories of costs described in the definition of Construction Costs, applied to Capital Improvements undertaken after the Commercial Operation Date of the Palo Verde - Morgan 500kV Transmission Project. See Appendix G for Overhead Loads Applied to Capital Improvement Costs.

5.6 Commercial Operation Date: The date that the Palo Verde - Morgan 500kV Transmission Project can reasonably be expected to operate reliably, as determined by the Project Manager.

5.7 Common Facilities: Those facilities required for a total substation, in general including, but not limited to: site preparation – grading, fencing, surfacing; grounding; trenching and conduit; yard lighting; control house and equipment therein (except certain terminal-related equipment); major and minor steel structures; transmission lines, communications and control components; substation service power facilities; water line installation; fire protection system; security monitoring system; site retention basins; perimeter wall; landscaping; irrigation; and power and control cables.

5.8 Component(s): Any component(s) of the Palo Verde - Morgan 500kV Transmission Project described or depicted in Appendix A hereto, including associated land and land rights.

5.9 Construction Agreement: Any agreement entered into by the Project Manager for the design, engineering, construction or installation of any Component of the Palo Verde - Morgan 500kV Transmission Project, including without limitation engineering, design, construction, supervisory, licensing or consulting services in connection with the Construction Work, corridor studies, pre-operational environmental studies or reports, and for any other services or materials necessary or useful in the performance of the Construction Work.

5.10 Construction Costs: The costs associated with Construction Work, including overhead loads, as described in Appendix I, attached hereto.

5.11 Construction Insurance: Policies of insurance to be procured and maintained or caused to be procured and maintained by a Project Manager applicable to Construction Work and in accordance with Sections 20 and 21 hereof.

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5.12 Construction Work: All work for the construction of the Palo Verde - Morgan 500kV Transmission Project or any Component thereof, performed pursuant to this Agreement, including but not limited to all planning, engineering, design, acquisition, contract preparation and negotiations, contract administration, legal services, regulatory compliance, purchasing, procurement, construction, supervisions, recruiting, training, expediting, inspection, accounting, procurement and maintenance of insurance, acquisition of land or land rights as appropriate, testing and start-up of the Components and associated equipment, preparation of operating and equipment manuals, all reports required by regulatory authorities and the conduct of hearings, conferences and other activities incidental to obtaining requisite permits, licenses and certificates for the construction and operation of the Components and associated equipment, and any other associated work undertaken by the Project Manager that is required by this Agreement or Good Utility Practice.

5.13 Cost Responsibility Ratio (CRR): The percentage cost responsibility ratio for each Party for Construction Work, Operating Work and Capital Improvements for each Component, as determined pursuant to Section 12 and Appendix B hereof.

5.14 Demand Purchase Notice: As defined in Section 25.8.2.

5.15 Demand Sale Notice: As defined in Section 25.8.1.

5.16 Engineering and Operating Committee: The committee established pursuant to Section 8.1 and 8.2 hereof.

5.17 Fair Market Value: The value of property determined on the basis of an arms-length transaction between an informed and willing seller and an informed and willing buyer.

5.18 FERC System of Accounts: The Federal Energy Regulatory Commission (“FERC”) “Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act,” as the same may be modified, supplemented or amended from time to time. References to a specific FERC Account number shall mean the FERC Account number now in effect or the successor to such FERC Account number.

5.19 Final Completion Report: A complete summary of Construction Costs, a description of the Palo Verde - Morgan 500kV Transmission Project and a summary of each Party’s contributions to Construction Costs in order to assist each party’s unitization of the project.

5.20 Final Billing Report: A complete summary of Construction Costs incurred to date excluding subsequent costs associated with the Construction Project and audit findings.

5.21 Good Utility Practice: Any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry in the Western

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Interconnection during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather to be acceptable practices, methods, or acts generally accepted in the region.

5.22 Palo Verde - Morgan 500kV Transmission Project: The following facilities as such facilities are more fully described in Appendix A hereto, to be constructed and operated by the Parties: (i) Palo Verde Interconnection Facilities (ii) the Palo Verde - Delaney 500kV transmission line; (iii) the Delaney 500kV Switchyard; (iv) the Delaney - Sun Valley 500kV transmission line; (v) the Sun Valley 500kV Substation; (vi) the 500/230kV Transformer at Sun Valley (vii) the Sun Valley - Morgan 500kV transmission line (viii) the Sun Valley 230kV Substation (ix) Morgan Interconnection Facilities; and any other system facilities agreed to by the Parties and reflected in a revised Appendix A.

5.23 Operating Agent: The Party responsible for the performance of Operating Work and making Capital Improvements as more particularly described in Section 10 hereof.

5.24 Operating Costs: Subject to Sections 14, all costs and expenses to perform the Operating Work. Operating Costs shall include, but not be limited to:

5.24.1 All costs and expenses for operation and maintenance of all facilities installed pursuant to this Agreement, repairs, replacements and reconstruction of such facilities which do not entail the acquisition and installation of any Units of Property

5.24.2 All costs of Operating Insurance, including premiums paid, and all costs of enforcing or attempting to enforce applicable insurance policies, payment and performance bonds, contracts and warranties

5.24.3 Federal, state and local taxes and payments in lieu of taxes payable for any period of operation during the term of this Agreement, except any tax assessed directly against an individual Party unless such tax was assessed on behalf of any one or more of the Parties for Operating Work

5.24.4 Subject to reduction by insurance proceeds provided under Section 20, the costs of discharging or paying any liability or loss, damage or expense, including costs and expenses for attorneys’ fees and other costs of defending, settling or otherwise administering claims, liabilities or losses against any one or more of the Parties arising out of workers’ compensation or employer’s liability claims or by reason of property damage or injuries to or death of any person or persons or by

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reason of claims of any and every character resulting from, arising out of or connected with the ownership of the Palo Verde - Morgan 500kV Transmission Project or any Component thereof, the operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project, or the performance or non-performance of Operating Work, whether caused wholly or partially by the negligence of any of the Parties, or their respective directors, members of governing bodies, officers, employees or agents

5.24.5 Payroll and other expenses of the Operating Agent’s employees performing Operating Work and making Capital Improvements, including without limitation, properly allocated labor loading charges using the loading method and rates in Appendices G, H, I and J.

5.24.6 Allowance for the Operating Agent’s administrative and general expenses associated with Operating Work and making Capital Improvements; using the Operating Agent’s Set Rate and allocation in accordance with Appendices G, H, I, and J.

5.24.7 The costs of discharging liens (excluding liens placed by any Party under Section 22.1) on the Palo Verde - Morgan 500kV Transmission Project or any Component thereof required to be discharged by the Operating Agent

5.24.8 A portion of the load dispatching salaries and expenses as defined by FERC Accounts 561.1 – 561.8 and incurred by the Operating Agent. Such allocation shall be determined by multiplying the total of such salaries and expenses incurred for load dispatching on transmission systems above 69 kV by a ratio the numerator of which is the total number of the Palo Verde - Morgan 500kV Transmission Project switching stations being dispatched, having power circuit breakers and/or circuit switchers above 69 kV, and the denominator of which is the total number of substations and/or switching stations being dispatched by the Operating Agent and having power circuit breakers and/or circuit switchers above 69 kV in accordance with the following formula:

A = B X C D Where: A = Dispatching cost allocable to the

Participants B = Dispatching charges above 69 kV

as defined in FERC accounts 561.1 – 561.8. C = Number of substations and/or

switching stations on the Palo Verde - Morgan 500kV Transmission Project with

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power circuit breakers and/or circuit switchers above 69 kV.

D = Total number of substations and/or switching stations dispatched by Operating Agent with power circuit breakers

5.24.9 All other costs properly allocable to the operation and maintenance of

the Palo Verde - Morgan 500kV Transmission Project.

5.25 Operating Emergency: An unplanned event or circumstance which threatens or results in a reduction in the transmission Capacity of the Palo Verde - Morgan 500kV Transmission Project or a Component thereof that would otherwise be available to the Parties under normal operating conditions.

5.26 Operating Insurance: Policies of insurance to be procured and maintained or caused to be procured and maintained by the Operating Agent applicable to Operating Work or Capital Improvements in accordance with Sections 20 and 21 hereof.

5.27 Operating Work: All work undertaken by the Operating Agent, in its capacity as such, pursuant to this Agreement and required for the operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project or any Component thereof after the Commercial Operation Date of the Palo Verde - Morgan 500kV Transmission Project, including without limitation actions pursuant to Section 10 hereof, obtaining consulting and legal services for the Palo Verde - Morgan 500kV Transmission Project, engineering, negotiation, contract preparation and administration, planning, purchasing, procurement and maintaining in force the Operating Insurance, repair, maintenance, environmental monitoring, regulatory compliance, supervision, expediting, testing, recruiting and training of operating personnel, preparation of operating procedures and manuals, protection, operation, management, securing, public information services, activities related to securing requisite permits, licenses, approvals and certificates from governmental agencies and authorities, any work undertaken by the Operating Agent pursuant to an interconnection agreement, and any work necessitated by an Operating Emergency, but excluding any work undertaken to make Capital Improvements. Operating Work shall not include legal services, consulting services or other work performed by or for one Party in resolving disputes with any other Party.

5.28 Operating Year: The Operating Agent’s fiscal year, as it may be revised from time to time.

5.29 Ownership Ratio: The percentage ownership ratio for each Party for land and land rights and facilities, as determined pursuant to Sections 6 and 12 hereof and Appendix B hereto.

5.30 Party(ies): APS and CAWCD individually or, as appropriate, collectively with future Palo Verde - Morgan 500kV Transmission Project parties, and their

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respective successors and permitted assigns hereunder. The Parties are also sometimes referred to herein as “Participants”.

5.31 Permitted Liens: Liens for taxes and assessments not yet delinquent, liens for labor and material not yet perfected or undetermined charges or liens incidental to the performance of the Operating Work, Construction Work or the making of Capital Improvements, liens permitted under the Project Agreements or liens otherwise approved by the Engineering and Operating Committee.

5.32 Project Agreements: This Agreement and any additional agreements between the Parties or any of them and any third party for associated land or land rights, as such agreements are originally executed or as they may thereafter be supplemented or amended, and any other agreements as the Parties agree to designate as Project Agreements.

5.33 Project Insurance: Construction Insurance and Operating Insurance.

5.34 Project Manager: The Party responsible for carrying out Construction Work on the various Components of the Palo Verde - Morgan 500kV Transmission Project, as more particularly described in Section 9 hereof.

5.35 Uncontrollable Forces: Any cause beyond the control of the affected Party which by the exercise of due diligence the Party could not reasonably be expected to avoid and which, by the exercise of due diligence, the Party shall be unable to overcome, including but not limited to acts of God, failure of or threat of failure of facilities, explosions, flood, drought, earthquake, storm, fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civil disturbance or disobedience, strike, labor disturbance, dispute or unrest of whatever nature, labor, material or fuel shortage, restraint by court order or public authority and action or non-action by or inability to obtain the necessary authorizations or approvals from any governmental agency or authority, except that, for purposes of this provision, a governmental agency or authority shall not include CAWCD, except to the extent CAWCD is unable to act due to applicable laws, rules or regulations, a lawful order of any agency having jurisdiction, or contractual obligations.

5.36 Units of Property: Units of property as described in the FERC’s “List of Units of Property for Use in Connection with Uniform System of Accounts Prescribed for Public Utilities and Licensees” in effect as of the date of this Agreement and as such list may be modified, supplemented or amended from time to time.

5.37 Willful Action:

5.37.1 Action taken or not taken by a Party (including the Project Manager(s) and the Operating Agent) at the direction of its directors, members of its governing body, officers or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action is knowingly or intentionally taken or

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not taken with conscious indifference to the consequences thereof or with intent that injury or damage would result or would probably result therefrom.

5.37.2 Action taken or not taken by a Party (including the Project Manager(s) and the Operating Agent) at the direction of its directors, members of its governing body, officers or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action has been determined by final arbitration award or final judgment or judicial decree to be a material default under this Agreement and which action occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default or, if no time to cure is specified therein, occurs or continues beyond a reasonable time to cure such default.

5.37.3 Action taken or not taken by a Party (including the Project Manager(s) and the Operating Agent) at the direction of its directors, members of its governing body, officers or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action is knowingly or intentionally taken or not taken with the knowledge that such action taken or not taken is a material default under any of the Project Agreements.

5.37.4 The phrase “employees having management or administrative responsibility” means employees of a Party who are responsible for one or more of the executive functions of planning, organizing, coordinating, directing, controlling, and supervising such Party’s performance under any of the Project Agreements; provided, however, that with respect to employees of either Party when acting as Project Manager or Operating Agent, such phrase shall refer only to (i) the senior employee of such Party who is responsible for Construction Work, Operating Work and/or Capital Improvements under this Agreement, and (ii) anyone in the organizational structure of such Party between such senior employee and an officer.

5.37.5 Willful Action shall not include any act or failure to act which is merely involuntary, accidental, or negligent.

5.38 Work Liability: Liability of one or more of the Parties for damage suffered by anyone other than a Party, whether or not resulting from the negligence of any Party, its directors, members of its governing body, officers, employees or any other person or entity whose negligence could be imputed to such Party, resulting from:

5.38.1 The performance or non-performance of Construction Work, Operating Work or the making of Capital Improvements.

5.38.2 The use or ownership of the Palo Verde - Morgan 500kV Transmission Project.

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6 Future Development

6.1 Each Party shall have the right to participate in the future development of additional facilities in association with the Palo Verde–Morgan 500kV Transmission Project; provided, however, such additional facilities shall not adversely impact the capacity rights or operations of another Party in the Palo Verde-Morgan Transmission Project or any facilities previously developed by a Party in association with the Palo Verde-Morgan Transmission Project pursuant to this Section.

6.2 Unless otherwise agreed to by the Parties, a Party desiring to develop an additional facility in association with the Palo Verde-Morgan 500kV Transmission Project shall provide notice to the other Parties, on the earlier of (i) not less than thirty (30) months prior to the planned in-service date of such facility, or (ii) not less than six (6) months prior to the commencement of engineering and design required for the proposed development of additional facilities.

6.3 Upon receipt of the notice provided pursuant to Section 6.2 herein, each Party shall have ninety (90) calendar days to express notice of its interest in participating in the development of the additional facility and identify its desired level of participation (i.e., Ownership Interest, Capacity Entitlement, etc.). To the extent the aggregate participation interest exceeds the capability of the additional facility, the Parties shall participate in proportion to their existing ownership percentage in the Palo Verde - Morgan 500kV Transmission line. If no other Party expresses an interest to participate in the development of the additional facility, the initiating Party may pursue the development of such facility.

6.4 The incremental capacity created in each Component as the result of the future development of an additional facility in association with the Project shall be allocated only to those Parties with Cost Responsibility in such additional facility; provided however, no Party shall be allocated Capacity Entitlement resulting from the development of such additional facility over a Component in which they do not have an Ownership Interest.

6.5 Within six (6) months of the date of notice provided pursuant to Section 6.2 herein, the Parties shall prepare any supplement, amendment or other documentation necessary to incorporate the additional facility(ies) as a Component, if applicable, and identify the applicable Ownership Interests, Capacity Entitlements, and Cost Responsibilities, as appropriate and in accordance with the procedures developed pursuant to Section 8.2.3.11 herein.

7 Ownership and Title to Palo Verde - Morgan Transmission Project

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7.1 Real Property: Upon execution and recordation of the land-related Project Agreements, each Party shall own and have title to an undivided interest in the land and land rights in the percentages shown in Appendix B hereto.

7.2 Initial ownership in and title to the Palo Verde - Morgan Transmission Project and equipment shall be equal to each Party’s Ownership Ratio, calculated pursuant to Section 12 hereof and as shown in Appendix B hereto.

7.3 Each Party shall accept and hold title to an undivided interest as a tenant in common in the Palo Verde - Morgan Project in accordance with this Section 7 and Appendix B.

7.4 The ownership and title to the Components described in this Agreement and all Capital Improvements shall be deemed to vest simultaneously in the Parties so that the estate of each of them shall be deemed to be concurrent as to time, right and priority.

7.5 At any time as any Party may reasonably demand in writing, the Parties shall jointly make, execute and deliver one or more supplements to this Agreement which shall describe with such particularity and detail as may be appropriate under the circumstances the property and facilities then constituting the Palo Verde - Morgan Project and the rights, titles and interests of each Party therein. The Engineering and Operating Committee may at any time revise Appendix A hereto to further describe the Palo Verde - Morgan Project or any Component thereof.

7.6 In the event any Party transfers or assigns any of its rights, title or interest in and to the Palo Verde - Morgan 500kV Transmission Project in accordance with Section 22 hereof and other terms and conditions of this Agreement, the Parties and any successor shall jointly make, execute and deliver a supplement to this Agreement in recordable form which shall describe with such particularity and detail as may be appropriate under the circumstances the rights, titles and interests of each Party and any successor following such transfer or assignment.

8 Administration and Committees:

8.1 As a means of securing effective cooperation and interchange of information and of providing consultation on a prompt and orderly basis among the Participants in connection with various administrative and technical matters which may arise from time to time in connection with the terms and conditions of this Agreement, the Participants hereby establish the committees described herein. The chairman of each such committee shall be a representative of the Project Manager up to the date the Palo Verde – Morgan 500kV Transmission Project is placed into service and thereafter shall be a representative of the Operating Agent. The chairman shall be responsible for calling meetings and establishing agendas. The following committees are hereby established and shall have the functions and responsibilities described herein:

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8.1.1 An Engineering and Operating Committee, consisting of two (2) representatives appointed by each Party, provided however, that in respect to each matter brought before the Engineering and Operating Committee, only one (1) of such representatives shall have the right to vote thereon. The representatives for each Party shall be authorized to act on behalf of the Party designating such representatives regarding the matters assigned to the Engineering and Operating Committee. During construction of the Palo Verde - Morgan 500kV Transmission Project, the Engineering and Operating Committee shall meet with the Project Manager on a quarterly basis, or upon the request of a Party. After the Palo Verde - Morgan 500kV Transmission Project is placed in operation, the Engineering and Operating Committee shall meet at least two times per year with the Operating Agent or more often at the discretion of the chairman or upon the request of a Party. The Engineering and Operating Committee shall have the functions described in Section 8.2 below.

8.1.2 An Audit Committee consisting of two (2) representatives appointed by each Party, provided however, that in respect to each matter brought before the Audit Committee, only one (1) of such representatives shall have the right to vote thereon. The representatives for each Party shall be authorized to act on behalf of the Party designating such representatives regarding the matters assigned to the Audit Committee. After the Palo Verde - Morgan 500kV Transmission Project is placed in operation, the Audit Committee shall meet at least two times per year with the Operating Agent or more often at the discretion of the chairman or upon the request of a Party. The Audit Committee shall have the functions described in Section 8.3 below.

8.2 The Engineering and Operating Committee shall provide liaison between the Parties and the Project Manager(s) with regard to Construction Work by meeting on a quarterly basis with the Project Manager to:

8.2.1.1 Review the status and schedule of Construction Work;

8.2.1.2 Review and approve, modify or otherwise act upon any change(s) proposed by a Project Manager that is reasonably expected to require a revision of the Commercial Operation Date or to increase the Construction Budget by ten percent (10%) or more (excluding contingencies and allocated project risk funds);

8.2.1.3 Review the status of Construction Costs, including projected versus actual cash flows;

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8.2.1.4 Review Construction Work safety reports; and

8.2.1.5 Review and, if necessary, act upon any other significant factors involving or affecting the Construction Work or Construction Costs.

8.2.3 Review and approve, modify or otherwise act upon recommendations of the Operating Agent concerning the performance of Operating Work or the making of Capital Improvements, including but not limited to

8.2.3.1 The annual capital expenditures budget, and annual operation and maintenance budget, and any revisions thereto;

8.2.3.2 The planned outages for scheduled maintenance;

8.2.3.3 Amendments to the appendices included in the Project Agreements

8.2.3.4 The policies for establishing the spare parts inventory and materials and supplies inventory and any revisions thereto;

8.2.3.5 The written statistical and administrative reports, written budgets, and information and other similar records, and the form thereof, to be kept and furnished by the Operating Agent (excluding accounting records used internally by the Operating Agent for the purpose of accumulating financial and statistical data, such as books of original entry, ledgers, work papers and source documents);

8.2.3.6 The policies, criteria and procedures for determining Capacities of facilities and any revisions thereto;

8.2.3.7 The Operating Agent’s analysis of the total expenditures caused by an Operating Emergency;

8.2.3.8 The written statement of operating practices and procedures and any revisions thereto;

8.2.3.9 Scheduling practices and procedures, including, the establishment of procedures for dealing with Operating Emergencies or curtailed operations of the Components and any revisions thereto;

8.2.3.10 The establishment of procedures and calculations for determining energy losses of the Components and any revisions thereto; and

8.2.3.11 Develop and maintain procedures to address the interconnection of facilities to the Palo Verde - Morgan 500kV Transmission Project; provided, such procedures must include the following

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principles, as accepted by FERC: (i) the Parties shall be entitled to compensation from the third party for the Capital Improvement Costs previously incurred in connection with the Common Facilities, with such Capital Improvement Costs calculated based on the original installed costs including loading rates, except for land which shall be based upon the higher of x) the original cost of such land or y) the appraised value, based upon an appraisal agreed upon by the Parties and the third party; and (ii) cost responsibility for ongoing costs including operation and maintenance costs associated with the new facilities and any Common Facilities will be allocated between the third party and Parties pro rata based upon number of interconnections; and (iii) cost responsibility for Capital Improvements associated with Common Facilities, including but not limited to any Common Facilities resulting from the third party’s interconnection will be allocated between the third party and Parties pro-rata based upon the number of interconnections.

8.2.4 Exercise general supervision as required to consider and resolve matters arising under this Agreement, and perform such other duties as are provided in this Agreement or as may be directed by the Parties’ senior management.

8.2.5 Consider and act upon, as required, requests for installation on the property comprising the Palo Verde - Morgan 500kV Transmission Project of any structures, facilities or equipment by any one or more Parties or any third party for its or their own use, which structures, facilities or equipment shall not become a part of the Palo Verde - Morgan 500kV Transmission Project.

8.3 The Audit Committee shall have the following functions:

8.3.3 Development of procedures for accounting and auditing Construction Costs, Operating Work costs and Capital Improvements, consistent with the provisions of this Agreement, and Generally Accepted Accounting Principles (G.A.A.P)

8.3.4 Audit or cause to be audited the books and records of the Project Manager, Operating Agent, and any other Participant or contractor relevant to the performance of Construction Work and Operating Work and to the construction of Capital Improvements.

8.3.5 Perform such other duties as may be assigned to it by the Engineering and Operating Committee.

8.4 Within thirty (30) calendar days after the execution of this Agreement, each Party shall designate its representative(s) on the Engineering and Operating Committee and Audit Committee with written notice thereof given to the other Parties.

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8.5 Any action or determination of the Engineering and Operating Committee or the Audit Committee must be unanimous.

8.6 The Engineering and Operating Committee and the Audit Committee shall keep written minutes and records of all meetings and all actions, agreements or determinations made by such committee shall be reduced to writing and shall be signed by a representative of each Party on said committee or an authorized alternate.

8.7 The Engineering and Operating Committee and Audit Committee shall have no authority to modify any of the terms, covenants or conditions of this Agreement except as specifically authorized herein.

8.8 If the Engineering and Operating Committee fails to reach agreement while performing the functions and duties delegated to it in this Agreement, then such disagreement shall be resolved pursuant to the provisions of Section 26 hereof other than referral to the Engineering and Operating Committee meeting. The Project Manager or the Operating Agent, as appropriate, shall take such action as in its discretion is necessary, pending the resolution of any such inability or failure to agree, for the successful and proper construction, operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project as contemplated hereby.

8.9 If the Audit Committee fails to reach agreement while performing the functions and duties delegated to it in this Agreement, then such disagreement shall be referred to the Engineering and Operating Committee. The Project Manager or the Operating Agent, as appropriate, shall take such action as in its discretion is necessary, pending the resolution of any such inability or failure to agree, for the successful and proper construction, operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project as contemplated hereby.

8.10 Each Party shall notify the other Parties promptly in writing of any change in the designation of its representatives on the Engineering and Operating Committee and Audit Committee. A Party may designate an alternate to act as its representative on such Committee in the absence of the regular member or to act on specified occasions with respect to specified matters. Any alternate representative appearing at an Engineering and Operating Committee or Audit Committee meeting shall be deemed to have authority to act on behalf of the Party he or she represents unless the Committee chairman is furnished with written notice to the contrary.

8.11 The Parties jointly shall have the right to establish standing or ad hoc committees. The authority and duties of any such committee shall be set forth in writing by the Parties and shall be subject to the provisions of this Agreement.

8.12 Any reasonable expenses incurred by any member of the Engineering and Operating Committee, Audit Committee or any standing or ad hoc committees in connection with his or her duties on such committee shall be paid and borne by

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the Party which he or she represents and shall not be included in Construction Costs, Operating Costs or Capital Improvement Costs.

9 Construction of Facilities.

9.1 APS will serve as Project Manager (“Project Manager”) for all construction activities associated with the Palo Verde - Morgan 500kV Transmission Project, unless and until removed as Project Manager pursuant to Section 27 hereof, which shall include, but not be limited to, performing or causing to be performed the following:

9.1.1 Siting work for the Palo Verde – Sun Valley 500kV transmission project, and the Sun Valley – Morgan 500kV transmission project.

9.1.2 Subject to Section 9.4.24, planning, designing, acquiring, constructing, installing and equipping all facilities and equipment necessary to develop and place into operation the Palo Verde - Morgan 500kV Transmission Project.

9.1.3 Negotiation and execution of an agreement for the interconnection of the Palo Verde – Morgan 500 kV Transmission Project into the Morgan 500/230 kV Substation and into the Palo Verde 500 kV Switchyard to be signed by both Parties.

9.2 APS will serve as Project Manager for Palo Verde - Morgan 500kV Transmission Project engineering and Construction Work, which shall include, but not be limited to, performing or causing to be performed, planning, designing, acquiring, constructing, installing and equipping all facilities and equipment necessary to develop and place the Palo Verde - Morgan 500kV Transmission Project into operation.

9.3 The Project Manager shall be solely responsible for performing, or causing to be performed, the Construction Work necessary to terminate the Palo Verde - Morgan 500kV Transmission Project at the Morgan Substation. The Parties shall cooperate with each other in effecting this termination.

9.4 The Project Manager shall on behalf of the Parties:

9.4.1 Negotiate and enter into any Construction Agreement, and purchase and procure such equipment, apparatus, machinery, materials, tools, supplies and services necessary or useful for the performance and completion of the Construction Work. The Project Manager shall cause any critical and major Construction Agreements to contain provisions that require (i) pro-ration of total contract cost in the case of early contract

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cancellation and (ii) payment of damages in the case of a contractor’s non-performance.

9.4.2 Execute, perform and enforce all Construction Agreements in the name of the Project Manager, acting on behalf of the Parties, in which all Parties shall have undivided interests as tenants in common equal to their respective Cost Responsibility Ratios in each Component.

9.4.3 Furnish any other Party upon request with copies of all Construction Agreements. The Project Manager shall ensure that the Construction Agreement allows provision of such Construction Agreement to any Party requesting a copy; provided, that any such Party shall agree to comply with the terms of confidentiality restrictions, except as otherwise required by law. The Project Manager shall include in such confidentiality provisions an acknowledgment by the contractor that, a political subdivision of the State of Arizona, CAWCD may be subject to certain disclosure requirements under the Arizona public records law (A.R.S. §39-101, et seq.)

9.4.4 Arrange for placement and maintenance of Construction Insurance pursuant to Sections 20 and 21 hereof.

9.4.5 Determine which contractors, if any, shall be required to furnish any portion of the Construction Insurance, other insurance and/or performance and/or payment bonds.

9.4.6 Assist any insurer in the investigation, adjustment and settlement of any loss or claim covered by Construction Insurance.

9.4.7 Present and prosecute claims against insurers and indemnitors providing Construction Insurance or indemnities with respect to any loss of or damage to any property comprising the Palo Verde - Morgan 500kV Transmission Project or liability of any Party to third parties covered by Construction Insurance or indemnity agreement, and to the extent that any such loss or damage is not covered by Construction Insurance, present and prosecute claims therefore against any parties who may be liable therefore. In the event the cost of repair, replacement or correction of such loss or damage arising out of a single incident or event exceeds $1,000,000, the Project Manager shall not make any settlement of any claims in respect thereof without the written consent and approval of the Parties.

9.4.8 Subject to the provisions of Section 23 hereof and except as hereinafter provided in this Section 9.4.8, investigate, adjust,

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defend and settle third party claims against any or all Parties arising out of or attributable to Construction Work, or the past or future performance or non-performance of the obligations and duties of any Party during the performance of the Construction Work, including the Project Manager, under or pursuant to this Agreement, including but not limited to any claim resulting from death or injury to persons or damage to property, when said claims are not covered by valid and collectible Construction Insurance or other valid and collectible insurance carried by any Party, and whenever and to the extent warranted, present and prosecute claims against any third party, including insurers, for any costs, losses and damages incurred in connection with said claims. The approval of the Parties shall be obtained by the Project Manager before any said claim or combination of said claims against any or all Parties arising out of the same transaction or incident is settled for more than $1,000,000, unless it shall be established that the entire amount of the settlement in excess of $1,000,000 is recoverable from an insurer providing Construction Insurance.

9.4.9 Comply with (i) any and all laws applicable to the performance of Construction Work, including without limitation all applicable laws, rules and regulations for protection of the environment and all applicable provisions of any worker’s compensation laws; and (ii) the terms and conditions of any Project Agreement or other contract, permit or license relating to the Palo Verde - Morgan 500kV Transmission Project.

9.4.10 Expend the funds advanced to the Project Manager only in accordance with the terms and conditions of this Agreement.

9.4.11 Keep and maintain records of monies received and expended, obligations incurred, credits accrued, estimates of Construction Costs (excluding, subject to Section 17.3 hereof, ad valorem taxes or payments in lieu thereof), and Construction Agreements, and make such records available for audit inspection pursuant to Section 31 hereof.

9.4.12 Not suffer any liens to remain in effect unsatisfied against the Palo Verde - Morgan 500kV Transmission Project or any Component thereof other than Permitted Liens; provided, however, that the Project Manager shall not be required to pay or discharge any such lien as long as the Project Manager in good faith shall be contesting the same, which contest shall operate during the pendency thereof to prevent the collection or enforcement of such lien so contested.

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9.4.13 Clear all liens, other than Permitted Liens, related to Construction Work within (90) calendar days.

9.4.14 Obtain or cause to be obtained necessary construction permits, temporary access rights and other licenses and approvals requisite to the performance and completion of Construction Work and initiation of Operating Work.

9.4.15 As soon as practicable after the completion of Construction Work on each Component, provide each Party with a summary of the Construction Costs classified to appropriate FERC Accounts.

9.4.16 Meet with the Engineering and Operating Committee on a quarterly basis to review the following:

9.4.16.1 The status and schedule of Construction Work;

9.4.16.2 The status of Construction Budgets and obtain prompt approval of any change(s) proposed by a Project Manager that is reasonably expected to require a revision of the Commercial Operation Date or to increase the Construction Budget by ten percent (10%) or more (excluding contingencies and allocated project risk funds).

9.4.16.3 The status of the Construction Costs, including projected versus actual cash flows;

9.4.16.4 Construction Work safety reports; and

9.4.16.5 Any other significant factors involving or affecting the Construction Work or Construction Costs, as determined by the Project Manager.

9.4.17 Furnish a Party any information reasonably available pertaining to the construction of the Palo Verde - Morgan 500kV Transmission Project that will assist said Party in responding to a request for such information by any federal, state or local regulatory authority.

9.4.18 Keep the Parties fully and promptly advised of significant developments in connection with the progress, performance and completion of Construction Work.

9.4.19 Prepare and distribute the Final Completion Reports to each Party as soon as practicable but not later than twenty-four (24) months after completion of Construction Work performed by the Project Manager on the final Component to be completed

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by such Project Manager unless such time is extended by agreement of the Parties

9.4.20 Prepare and distribute the Final Billing Reports to each Party as soon as practicable but not later than six (6) months after completion of Construction Work performed by the Project Manager on the final Component to be completed by such Project Manager unless such time is extended by agreement of the Parties. The Final Billing Report does not include subsequent costs associated with the Construction Project incurred during the six (6) months after completion of Construction Work or pursuant to subsequent audit findings.

9.4.21 Provide the Engineering and Operating Committee with all necessary and required records and information for its use in the performance of its responsibilities under this Agreement.

9.4.22 Provide for and enforce any and all warranties on equipment, facilities, materials and services sold to or furnished for the Palo Verde - Morgan 500kV Transmission Project except that any equipment warranties which expire more than one (1) year after the completion of Construction Work for the final Component to be constructed by the Project Manager shall be enforced by the Operating Agent.

9.4.23 Take such actions as are necessary and appropriate to obtain a Certificate of Environmental Compatibility from the Arizona Power Plant and Transmission Line Siting Committee for a suitable route for the Palo Verde - Morgan 500kV Project transmission line and to comply with such certificate and any other required permits.

9.4.24 The Project Manager shall secure or cause to be secured the necessary land and land rights for the Palo Verde - Morgan 500kV Transmission Project. Land and land rights required for construction, operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project shall be procured by the Project Manager for itself as a Party and on behalf of CAWCD as a Party by purchase or by the exercise of the power of eminent domain and may include (i) a fee interest in, or (ii) a grant of easement across or (iii) a license to, permit for, and/or lease of any parcel of such lands as the Project Manager shall, in its sole discretion, deem advantageous to the Parties. In the event the Project Manager deems it prudent so to do in order to expedite acquisition, avoid exercise of the power of eminent domain, or obtain an advantageous price, the Project Manager is authorized to acquire lands not required for any segment of such rights of way either (i) for subsequent resale (“excess

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lands”), if such excess lands are acquired from the grantor(s) of a contiguous segment of such rights of way, or (ii) for exchange (“exchange lands”) for lands required for a segment of such rights of way. Applications for rights of way across federal and state lands shall be filed by the Project Manager on behalf of the Parties.

9.4.25 Dispose of excess material and equipment after completion of Construction Work and distribute proceeds from such disposal to the Parties in proportion to their Cost Responsibility Ratios for the associated Component.

9.4.26 Perform the Construction Work in accordance with Good Utility Practice.

9.5 Each Party shall provide to the extent possible all assistance as may be requested by the Project Manager in the performance of its obligations hereunder and such Party shall be reimbursed for its costs and expenses incurred in providing such assistance under such terms and conditions as may be agreed upon by such Party and the Project Manager.

9.6 Each Party shall, within sixty (60) calendar days after the execution of this Agreement, submit to the Project Manager any special requirement it may have regarding accounting, records or information in order that all required records may be maintained in the same manner throughout the construction and final completion of the Palo Verde - Morgan 500kV Transmission Project. The Project Manager shall use its reasonable best efforts to accommodate said special requirements.

9.7 The Project Manager shall have the full responsibility and authority for the employment and organization of the personnel and staff required to complete the Construction Work.

10 Operating Agent.

10.1 APS shall be the Operating Agent for the Palo Verde - Morgan 500kV Transmission Project, unless and until removed as Operating Agent pursuant to Section 27 hereof.

10.2 The Operating Agent shall:

10.2.1 Administer, enforce and perform the Operating Work and Capital Improvements so as to comply with the Project Agreements and in a manner consistent with Good Utility Practices.

10.2.2 Furnish from its own resources or contract for and obtain from any other sources it may select, including any Party, the services and

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studies necessary for performance of Operating Work and the making of Capital Improvements.

10.2.3 Execute, administer, perform and enforce contracts in the name of the Operating Agent, acting on behalf of the Parties, for Operating Work and the making of Capital Improvements, including without limitation any and all warranties on equipment, facilities, materials and services furnished pursuant to any such contracts.

10.2.4 Administer, perform and enforce all other contractual obligations and arrangements, including all warranties applicable thereto, entered into by the Project Manager(s) and continuing beyond the period ending one year after the completion of Construction Work for the final Component.

10.2.5 Furnish or recruit the necessary personnel and provide for such training as may be required to qualify them to perform the Operating Work or Capital Improvements and to meet all requirements established by law.

10.2.6 Comply with (i) any and all laws applicable to the performance of Operating Work and the making of Capital Improvements, including without limitation all applicable laws, rules and regulations for protection of the environment and all applicable provisions of any worker’s compensation laws; and (ii) the terms and conditions of any Project Agreement and other contract, permit or license relating to the Palo Verde - Morgan 500kV Transmission Project.

10.2.7 Except as otherwise provided herein, purchase and procure, through and from any source it may select, in the name of the Parties, with undivided interests as tenants in common in accordance with their respective Ownership Ratios, the equipment, apparatus, machinery, tools, materials and supplies and spare parts necessary for the performance of Operating Work and the making of Capital Improvements.

10.2.8 Expend the funds advanced to the Operating Agent in accordance with the terms and conditions of this Agreement.

10.2.9 Keep and maintain such records of monies received and expended, obligations incurred, credits accrued, the conduct of Operating Work and the making of Capital Improvements, and of contracts entered into in the performance of Operating Work as may be necessary or useful in carrying out the Project Agreements or required to permit an audit of the Operating Work or Capital Improvements, and make such records available for inspection and/or audit by the Parties or their designated auditors, pursuant to Section 31 hereof.

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10.2.10 Not suffer any liens to remain in effect unsatisfied against the Palo Verde - Morgan 500kV Transmission Project or any Component thereof other than Permitted Liens; provided that the Operating Agent shall not be required to pay or discharge any lien as long as the Operating Agent in good faith shall be contesting the same which contest shall operate during the pendency thereof to prevent the collection or enforcement of such lien so contested.

10.2.11 Clear all liens, other than Permitted Liens, related to Operating Work and Capital Improvements within ninety (90) calendar days.

10.2.12 Arrange for the placement and maintenance of Operating Insurance as provided in Sections 20 and 21 hereof.

10.2.13 Assist any insurer in the investigation, adjustment and settlement of any loss or claim covered by Operating Insurance.

10.2.14 Present and prosecute claims against insurers and indemnitors providing Operating Insurance or indemnities in respect to any loss of or damage to any property comprising the Palo Verde - Morgan 500kV Transmission Project or liability of any Party to third parties covered by Operating Insurance or any indemnity agreement, and to the extent that any such loss, damage or liability is not covered by Operating Insurance, present and prosecute claims therefore against any parties who may be liable therefore. In the event the cost of repair, replacement or correction of such loss or damage arising out of a single incident or event exceeds $1,000,000, the Operating Agent shall not make any settlement of any claims in respect thereof without the consent and approval of the Parties.

10.2.15 Subject to the provisions of Section 23 hereof and except as hereinafter provided in this Section 10.2.15, investigate, adjust, defend and settle third party claims against any or all Parties arising out of or attributable to Operating Work or Capital Improvements, or the past or future performance or non-performance of the obligations and duties of any Party during the performance of the Operating Work, including the Operating Agent, under or pursuant to this Agreement, including but not limited to any claim resulting from death or injury to persons or damage to property, when said claims are not covered by valid and collectible Operating Insurance or other valid or collectible insurance carried by any Party, and whenever and to the extent reasonable present and prosecute claims against any third party, including insurers, for any costs, losses and damages incurred in connection with said claims. The approval of the Parties shall be obtained by the Operating Agent before any said claim or combination of said claims against any or all Parties arising out of the same transaction or incident is settled for more than $1,000,000, unless the entire amount of the

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settlement in excess of $1,000,000 is recoverable from an insurer providing Operating Insurance.

10.2.16 Keep the Engineering and Operating Committee fully and promptly

advised of material changes in conditions or other material developments affecting the performance of Operating Work and the making of Capital Improvements and furnish the other Parties with copies of any notices given or received pursuant to the Project Agreements.

10.2.17 Provide the Engineering and Operating Committee with all written statistical and administrative reports, records, budgets, and other information relating to Operating Work and Capital Improvements necessary or useful in the performance of its responsibilities under this Agreement. Not later than ninety (90) calendar days prior to each Operating Year, the Operating Agent shall prepare an annual operating budget, or initially a portion thereof, for Operating Work to be performed by the Operating Agent in the ensuing Operating Year for the Palo Verde - Morgan 500kV Transmission Project, and shall submit such operating budget to the Engineering and Operating Committee for its review and approval, modification or other action. The Operating Agent may revise the operating budget from time to time when the need for additional expenditures not reflected in a prior operating budget becomes known. All revisions shall be submitted to the Engineering and Operating Committee for review and approval, modification or other action.

10.2.18 Upon the request of any Party, provide such Party, in reasonable quantity without direct charge therefore, a copy or copies of any report, record, list, budget, manual, accounting or billing summary, classification of accounts or other documents or revisions of any of the aforesaid items, all as prepared in accordance with this Agreement.

10.2.19 Prepare budgets and reports and recommendations covering the matters which are to be reviewed and acted upon by the Engineering and Operating Committee pursuant to Section 8.1 hereof.

10.2.20 Carry out and follow the practices and procedures and directions which have been approved and issued by the Engineering and Operating Committee pursuant to the Project Agreements.

10.2.21 In the event of an Operating Emergency take such action as the Operating Agent in its sole discretion may deem prudent or necessary, notwithstanding any practices and procedures and directions approved and issued by the Engineering and Operating Committee, to terminate the Operating Emergency, to preserve and maintain the safety, integrity and operability of the Palo Verde - Morgan 500kV

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Transmission Project, to maintain the maximum transfer capability of each Component, to protect the health and safety of the public or to minimize any adverse environmental effects and such other action as required by Section 19 hereof.

10.2.22 Coordinate scheduled outages of the Palo Verde - Morgan 500kV Transmission Project with the other Parties and any affected third parties, as directed or agreed to by the Engineering and Operating Committee.

10.2.23 Maintain land rights constituting any portion of the Palo Verde - Morgan 500kV Transmission Project, including making necessary payments for state and federal land rights.

10.3 Each Party shall provide to the extent possible all assistance as may be requested by the Operating Agent in the performance of its obligations hereunder and such Party shall be reimbursed for its costs and expenses incurred in providing such assistance under such terms and conditions as may be agreed upon by such Party and the Operating Agent.

10.4 Units of Property retired from service, whether considered original construction or Capital Improvements, shall be disposed of by the Operating Agent on the best available terms as soon as practicable, and the proceeds, if any, received therefrom shall be credited or distributed to the Parties in proportion to their Cost Responsibility Ratios in the Component of which the Units of Property retired from service are a part.

10.5 Each Party shall operate and maintain its 500/230kV transmission lines interconnected with the Palo Verde - Morgan 500kV Transmission Project consistent with Good Utility Practice and shall coordinate such operation and maintenance with the other Parties. The Parties shall establish and agree to guidelines and operating practices regarding metering, scheduling, losses, inadvertences, accounting practices, informal communications and any other matters relating to the parallel operation of the Parties’ interconnected systems which are not specifically dealt with herein.

10.6 In the course of performing Operating Work and Capital Improvements, Operating Agent shall prepare and maintain appropriate records and other audit materials, without limitation, as reasonably necessary to demonstrate discharge of Operating Work and Capital Improvements in compliance with applicable North American Electric Reliability Corporation (“NERC”) Reliability Standards as related to the Palo Verde – Morgan 500kV Transmission Project. Upon written request by any Party, the Operating Agent shall provide copies of such records and audit materials to the requesting Party, and also provide such documents to all other Parties to this Agreement.

10.6.1 Notwithstanding Section 23, the Participants shall indemnify and hold harmless Operating Agent for any penalty or sanction, without

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limitation, arising from a NERC Reliability Standards compliance enforcement action, including without limitation, audits and investigations as related to NERC Reliability Standards discussed in Section 10.6 of this Agreement regardless of whether Operating Agent or a Participant is the entity subject to such action, except where Operating Agent is found by a court of competent jurisdiction to be grossly negligent or to have engaged in Willful Action resulting in any such finding of non-compliance.

10.6.2 Absent a finding of gross negligence or Willful Action on the part of the Operating Agent, all Participants, including the Operating Agent, shall bear, in proportional ratio to their ownership interests in the Palo Verde – Morgan 500kV Transmission Project, both the costs of defense against any such allegations of non-compliance, if any, and any cost of any penalty or sanction as ultimately ordered by a court or agency of competent jurisdiction.

10.6.3 The Engineering & Operating Committee, in cooperation with the Operating Agent, shall unanimously agree upon the specific NERC Reliability Standards for which the Operating Agent shall be responsible for both compliance and maintenance of an auditable record demonstrating such. The applicable list of NERC Reliability Standards shall be memorialized in an Engineering & Operating Committee memoranda or other appropriate written record, and shall be subject to change as needed, upon unanimous agreement of the Engineering & Operating Committee.

10.6.4 Notwithstanding the foregoing, the Participants expressly acknowledge that each individual Participant may be the subject of NERC Reliability Standards compliance enforcement actions relating to NERC Reliability Standards discussed in Section 10.6 of this Participation Agreement. In the event of any such action directed at any Participant, the Operating Agent shall provide the compliance action record and related information in the same form and manner as the Operating Agent would provide such if the Operating Agent were itself the subject of such an action.

11 Capital Improvements.

11.1 The Parties recognize that from time to time it may be necessary or desirable to make Capital Improvements or that Capital Improvements may be required by laws and regulations applicable to the Palo Verde - Morgan 500kV Transmission Project or any Party hereto.

11.2 If requested by a Party, any such Capital Improvement shall be described in a supplement to this Agreement executed in recordable form.

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11.3 All Capital Improvements shall be included in the annual capital expenditures budget. Not later than ninety (90) calendar days prior to each Operating Year, the Operating Agent shall prepare an annual capital expenditures budget, or initially a portion thereof, for Capital Improvements to be performed by the Operating Agent in the ensuing Operating Year for the Palo Verde - Morgan 500kV Transmission Project, and shall submit such capital expenditures budget to the Engineering and Operating Committee for review and approval, modification or other action. The Operating Agent may revise the capital expenditures budget from time to time when the need for additional expenditures not reflected in a prior capital expenditures budget becomes known. All revisions shall be submitted to the Engineering and Operating Committee for review and approval, modification or other action. After such budget, or revisions thereto, has been approved by the Engineering and Operating Committee, each Party shall be obligated for the costs incurred for such Capital Improvements in proportion to its Cost Responsibility Ratio in the Component to which the Capital Improvement is made.

11.4 At any time the Engineering and Operating Committee may authorize Capital Improvements not included in the annual capital expenditures budget.

11.5 The Operating Agent shall submit to the Parties a forecast of cash requirements for each authorized Capital Improvement.

11.6 The Operating Agent shall be responsible for the design and construction of all Capital Improvements unless otherwise agreed by the Parties.

12 Ownership Ratios and Cost Responsibility Ratios. Ownership Ratios and Cost Responsibility Ratios shall be computed for the purpose of showing ownership interests in the land and land rights, equipment and facilities constituting the Palo Verde - Morgan 500kV Transmission Project and for sharing Construction Costs, Operating Costs, and Capital Improvement Costs between the Parties and any future third parties. For this purpose, each connection to the Palo Verde 500kV Substation, Delaney Switchyard, Sun Valley Substation and Morgan Substation through a power circuit breaker or disconnect switch, such as a line or transformer connection, shall be deemed a function. Ownership Ratios and Cost Responsibility Ratios shall be computed initially as shown in Appendix B hereto. Upon the installation of additional facilities or the participation of third parties in the Palo Verde - Morgan 500kV Transmission Project, the Ownership Ratios and Cost Responsibility Ratios in Appendix B shall be recalculated by the Operating Agent and approved by the Parties. Unless otherwise agreed, the revised Ownership Ratios and Cost Responsibility Ratios shall be effective on the Commercial Operation Date of any new equipment, as determined by the Engineering and Operating Committee, or, in any other case, on the effective date of an agreement necessitating the revision. The construction and installation of additional facilities must be mutually agreed upon or approved by the Parties. Allocation of Ownership Ratios and Cost Responsibility Ratios for any such additional facilities shall be based on the respective financial contributions of the Parties and shall be reflected in a revision to Appendix B hereto.

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13 Construction Costs

13.1 Construction Costs shall include all costs incurred, including overhead loadings as depicted in Appendix I, by the Project Manager for or in connection with Construction Work, whether incurred before or after the effective date of this Agreement, but only to the extent that the Construction Budget is approved in this Agreement or changes thereto are approved by the Engineering and Operating Committee pursuant to Section 8.2.1.2.

13.2 Construction Costs will be allocated between the Parties in proportion to their Cost Responsibility Ratios shown in Appendix B hereto.

13.3 Upon execution of this Agreement, all costs incurred for Construction Work by any Party prior to such execution shall be reallocated between the Parties in proportion to their Cost Responsibility Ratios pursuant to Section 12.

13.4 The Project Manager shall bill and each Party shall pay for Construction Costs in accordance with Section 16 hereof.

14 Operating Costs.

14.1 Operating Costs shall include all costs incurred, including overhead loadings as depicted in Appendix H, by the Operating Agent for or in connection with Operating Work, to the extent approved in an operating budget by the Engineering and Operating Committee pursuant to Section 8.2

14.2 Operating Costs for the Palo Verde - Morgan 500kV Transmission Project shall be allocated between the Parties in proportion to their Cost Responsibility Ratios. In cases where costs cannot be or are not normally accounted for separately, the Cost Responsibility Ratio for Common Facilities will be used. Load Dispatch and Insurance Costs will be allocated between the Parties in proportion to their Cost Responsibility Ratios shown in Appendix B hereto.

14.3 The Operating Agent shall bill and each Party shall pay for Operating Costs for Operating Work in accordance with Section 16 hereof.

15 Capital Improvement Costs.

15.1 Capital Improvement Costs shall include all costs incurred, including overhead loadings as depicted in Appendix G, by the Operating Agent for or in connection with Capital Improvements, but only to the extent approved in a capital expenditure budget by the Engineering and Operating Committee pursuant to Section 8.2.3.

15.2 Capital Improvement Costs shall be allocated between the Parties in proportion to their Cost Responsibility Ratios.

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15.3 The Operating Agent shall bill and the each Party shall pay for Capital Improvement Costs for Capital Improvements in accordance with Section 16 hereof.

16 Billing and Payment.

16.1 Each Party shall advance sufficient funds to the Project Manager or Operating Agent to enable it to pay for Construction Costs, Operating Costs, or Capital Improvement Costs, as applicable, so that the Project Manager or Operating Agent, in their capacities as such, will not have to advance funds on behalf of another Party. Unless another procedure is approved by the Engineering and Operating Committee, each billing Party shall bill the other Parties on an estimated basis on or before the tenth (10th ) business day of each month and payment shall be due and payable from each paying Party by the 25th day of such month. Adjustments for differences between estimated costs and actual costs incurred for such month shall be reflected in the bill for the quarter which follows the date of determination of actual costs.

16.2 Amounts billed pursuant to this Section 16 that are not paid to the billing Project Manager(s) or Operating Agent on or before the due date shall be payable with interest accrued on each calendar day from the due date to the date of payment. The interest rate shall be at the effective prime commercial lending rate per annum published by the Wall Street Journal, or at the maximum rate permitted by Arizona law, whichever is lower.

16.3 In the event the paying Party disputes any portion of any bill, that Party shall pay the total amount when due, identifying the disputed amount and stating that it is paying the disputed amount under protest. If the disputed portion of the bill is found to be incorrect, the billing Party shall promptly refund to the paying Party any amount due, including interest accrued on such amount due for each calendar day from the date of payment by the paying Party to the date the refund is made by the billing Party. The interest rate shall be the rate specified in Section 16.2 hereof.

16.4 Each Party shall advance funds to the Operating Agent for its share of all expenditures for Operating Emergencies.

16.5 Each Party shall deposit payments for advances in immediately available funds on or before the due dates in the account specified by the Project Manager(s) or Operating Agent.

17 Taxes:

17.1 The Parties shall use their best efforts to have any taxing or other authority levying any taxes or assessments, or payments in lieu thereof, or making any valuations for the purpose of levying any taxes or assessments or payments in lieu thereof, on the Palo Verde - Morgan 500kV Transmission Project, or any beneficial interest or rights therein, assess and levy such taxes or assessments or

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payments in lieu thereof directly against the ownership or beneficial interest of each Party in the Palo Verde - Morgan 500kV Transmission Project.

17.2 All taxes or assessments or payments in lieu thereof levied against each Party’s ownership or beneficial interest in the Palo Verde - Morgan 500kV Transmission Project, excepting those taxes or assessments or payments in lieu thereof levied against an individual Party on behalf of another Party, shall be the sole responsibility of the Party upon whose ownership or beneficial interest said taxes or assessments or payments in lieu thereof are levied.

17.3 If any property taxes or payments in lieu thereof or any other taxes or assessments are levied or assessed in a manner other than as specified in Section 17.1 hereof, it shall be the responsibility of the Parties to establish equitable practices and procedures for the apportionment among the Parties of such taxes and assessments or payments in lieu thereof.

17.4 No Party which is exempt from any taxes or payments in lieu thereof assessed against any or all of the other Parties shall be obligated to make any contribution toward such taxes to the extent of the exemption, unless such assessment is on behalf of such Party that is exempt.

18 Reduction of Capacity in the Palo Verde - Morgan 500kV Project

18.1 The Operating Agent shall notify the dispatchers of each Party as soon as practical of the occurrence of an Operating Emergency, and the amount of any resulting reduced rating, which shall be determined by the Operating Agent in accordance with criteria approved by the Engineering and Operating Committee.

18.2 The Operating Agent shall notify the Parties of the maximum Capacity available in the Palo Verde - Morgan 500kV Transmission Project, or Components thereof, during each period of reduction and shall allocate that available Capacity between the Parties in accordance with their Cost Responsibility Ratios.

19 Operating Emergency.

19.1 In the event of an Operating Emergency, the Operating Agent shall take any and all steps reasonably necessary and required to terminate the Operating Emergency, in accordance with Good Utility Practice.

19.2 During the continuation of an Operating Emergency and following the termination thereof, the Operating Agent will keep the Parties updated as to the status of the Operating Emergency and provide such information with respect thereto as may be required or requested by the Engineering and Operating Committee.

19.3 The costs incurred and amounts expended for repair, restoration and reconstruction of the Palo Verde Hub - Morgan 500kV Transmission Project as a

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result of an Operating Emergency shall be billed as Operating Work in the same proportion as Operating Costs under Section 14 hereof.

20 Project Insurance.

20.1 Unless otherwise agreed by the Engineering and Operating Committee, during the performance of Construction Work, the Project Manager shall, subject to the provisions hereof, procure and maintain in force, or cause to be procured and maintained in force, so as to be effective not later than the date on which the Project Manager shall first incur a risk of loss, damage or liability, Construction Insurance for the following casualty, property, and surety exposures.

20.1.1 Casualty Exposures

20.1.1.1 Workers’ Compensation insurance with limits to cover obligations imposed by federal and state statutes having jurisdiction over employees of the Project Manager or any persons engaged in the performance of the Construction Work, or a qualified self-insured program(s).

20.1.1.2 Employer’s Liability insurance with a minimum limit of $1,000,000.

20.1.1.3 Liability insurance with a minimum limit of $10 million each occurrence. The policy shall include coverage for bodily injury liability, property damage liability, personal injury liability, contractual liability, broad form property damage, and completed operations for a period of two (2) years after acceptance. The policy shall also include “X” (explosion), “C” (collapse), and “U” (underground) coverage and contain a severability of interests provision.

20.1.1.4 If a Project Manager subcontracts any part of the Construction Work, then the Project Manager shall require its contractors to purchase and maintain, for the benefit of the Parties at all times during the performance of the Construction Work, an Owner’s and Contractor’s Protection Liability insurance policy for bodily injury and property damage with a minimum limit of $5,000,000 each occurrence. In lieu of this requirement, the Project Manager may require the subcontractor to name APS and CAWCD as additional insureds on the subcontractors’ Commercial General Liability Policy of at least $5,000,000 per occurrence.

20.1.1.5 Business Automobile Liability insurance with a combined single limit for bodily injury and property damage of not less than $10 million each occurrence with respect to the

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use of vehicles whether owned, hired, or non-owned, assigned to or used in performance of the Construction Work, or a qualified self-insured program(s).

20.1.1.6 The Project Manager shall require contractors providing design services to purchase and maintain Professional Liability insurance with a minimum combined single limit of $1,000,000 each occurrence for a term of the length of the complete contract (design plus construction) and five (5) additional years after contract, or as required by Arizona State law, whichever is greater.

20.1.1.7 If applicable, Aircraft Public Liability insurance covering fixed wing and rotorcraft aircraft whether owned, hired, or non-owned with a combined single limit for bodily injury and property damage of not less than $10 million, including passenger liability coverage.

20.1.2 Property Exposures

20.1.2.1 All Risk Builders Risk insurance covering the Construction Work of this project’s transmission lines within 1,000 feet of substations and substation inter-ties, including the interest of the Parties, with limits adequate to cover the value of the Construction Work installed and materials and equipment while in transit and while stored at the jobsite. Such insurance shall afford coverage from the time that Construction Work is first at risk of loss until such date as coverage is provided by the Project Insurance required to be obtained pursuant to Section 20.2 hereof.

20.1.2.2 All Risk Contractors Equipment Floater insurance covering owned, non-owned and leased equipment used in connection with the performance of Construction Work for such equipment at risk to the Parties.

20.1.3 Surety Exposures: The standard form of Employees Dishonesty Bond or Commercial Crime insurance covering loss of property of the Palo Verde - Morgan 500kV Transmission Project or funds of the Parties due to the dishonest or fraudulent acts committed by an officer or employee of a Project Manager and any Party or contractor engaged in the Construction Work.

20.2 Operating Agent Provided Insurance: Unless otherwise specified by the Engineering and Operating Committee, during the performance of Operating Work or Capital Improvements, the Operating Agent shall procure and maintain in force, or cause to be procured and maintained in force, so as to be effective not later than the date on which the Operating Agent shall first incur a risk of loss,

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damage or liability, Operating Insurance for the following casualty, property, and surety exposures.

20.2.1 Casualty Exposures

20.2.1.1 Workers’ Compensation insurance with limits to cover obligations imposed by federal and state statutes having jurisdiction over employees of the Operating Agent or any persons engaged in the performance of the Operating Work, or a qualified self-insured program(s).

20.2.1.2 Employer’s Liability insurance with a minimum limit of $1,000,000.

20.2.1.3 Liability insurance with a minimum combined single limit of $10 million each occurrence. The policy shall include coverage for bodily injury liability, property damage liability, personal injury liability, contractual liability, broad form property damage, and completed operations for a period of two (2) years after acceptance. The policy shall also include “X” (explosion), “C” (collapse), and “U” (underground) coverage and contain a severability of interests provision.

20.2.1.4 If the Operating Agent subcontracts any part of the Capital Improvements, then the Operating Agent shall require its contractors to purchase and maintain, for the benefit of the Parties at all times during the performance of the Capital Improvements, an Owner’s and Contractor’s Protection Liability insurance policy for bodily injury and property damage with a minimum limit of $5,000,000 each occurrence. In lieu of this requirement, the Operating Agent may require the subcontractor to name APS and CAWCD as additional insureds on the subcontractors Commercial General Liability Policy of at least $5,000,000 per occurrence.

20.2.1.5 Business Automobile Liability insurance for bodily injury and property damage of not less than $10 million each occurrence with respect to the use of vehicles whether owned, hired, or non-owned, assigned to or used in performance of the Operating Work or Capital Improvements, or a qualified self-insured program(s).

20.2.1.6 The Operating Agent shall require contractors providing design services to purchase and maintain Professional Liability insurance with a minimum combined single limit of $1,000,000 each occurrence for a term of the length of

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the complete contract (design plus construction) and five (5) additional years after contract, or as required by Arizona State laws, whichever is greater.

20.2.1.7 If applicable, Aircraft Public Liability insurance covering fixed wing and rotorcraft aircraft whether owned, hired, or non-owned with a combined single limit for bodily injury and property damage of not less than $10 million, including passenger liability coverage.

20.2.2 Property Exposures:

20.2.2.1 All Risk Property/Boiler and Machinery insurance providing replacement cost coverage for all insurable property (transmission lines within 1,000 feet of substations and interconnections) of the Palo Verde - Morgan 500kV Transmission Project and the portion of the Morgan Substation that is part of the Palo Verde - Morgan 500kV Transmission Project.

20.2.2.2 In the event any Capital Improvements are undertaken, the Operating Agent shall procure and maintain, or cause to be procured and maintained, Construction Insurance providing coverage for risks described in Sections 20.1.2.

20.2.3 Surety Exposures: The standard form of Employees Dishonesty Bond or Commercial Crime insurance covering loss of property of the Palo Verde - Morgan 500kV Transmission Project or funds of the Parties due to the dishonest or fraudulent acts committed by an officer or employee of the Operating Agent during the performance of Operating Work or Capital Improvements.

20.3 The Project Manager and the Operating Agent shall require their contractors and the contractors’ insurers providing the required coverage to waive all rights of recovery and rights of subrogation against the Parties and members of their governing bodies, their officers, agents and employees.

21 General Provisions Affecting Project Insurance.

21.1 Except as otherwise directed by the Engineering and Operating Committee, the following provisions shall apply to the Project Insurance obtained by the Project Manager or Operating Agent in compliance with this Section 21 hereof.

21.2 Except for Project Insurance described in Sections 20.1.1.1, 20.1.1.2, 20.1.1.6, , 20.2.1.1, 20.2.1.2 and 20.2.1.6 hereof, each Party shall be named an additional insured, individually and joint with the other Party, on all policies of Project Insurance, and the policies of Project Insurance referred to in Sections 20.1.1.3 and 20.2.1.3 hereof shall carry cross-liability endorsements.

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21.3 Such insurance coverage as required under Section 20 hereof shall be written with deductibles and limits as approved by the Engineering and Operating Committee. The Engineering and Operating Committee may, at any time, increase the policy(ies) limits, eliminate coverage(s) or require additional policies not previously specified, and shall determine appropriate deductibles, retentions and other special terms and conditions of Project Insurance.

21.4 Except for losses within the deductible of any Workers’ Compensation insurance policy required in Section 20 for which the Project Manager and Operating Agent are reimbursed through an overhead loading pursuant to Appendix H, losses under any deductibles shall be apportioned among the Parties on the basis set forth in Section 23.5 hereof.

21.5 Project Insurance policies shall be primary insurance for all purposes relative to any other insurance carried by a Party individually. Such other insurance carried by a Party shall not participate with Project Insurances as to any loss or claim for which valid and collectible Project Insurance shall apply and shall apply solely as to the individual interest of the Party carrying such other insurance; provided, however, that each Party shall accept any reasonably restrictive endorsement to its separate insurance policies as may be required by an insurer as a condition precedent to the issuance of a policy of Project Insurance.

21.6 At the direction of a Project Manager or the Operating Agent, any Party furnishing services, materials, parts or equipment in connection with the planning, design, engineering, construction, maintenance, operation or use of property of the Palo Verde - Morgan 500kV Transmission Project may be named as an insured as its interest may appear in any of the Project Insurance policies, and either the Project Manager or the Operating Agent may waive on behalf of each Party its right of recovery against any such Party for insured loss for damage to any property covered by Project Insurance as required in Sections 20 and 21 hereof, provided that no such waiver shall impair the right to recover any sums otherwise payable to any Party under the Project Insurance.

21.7 Upon the written request of a Party, the Project Manager and the Operating Agent respectively shall furnish such Party with a copy of each of the policy forms of Project Insurance, naming the insurers and underwriters and the extent of their participation.

21.8 In the event the Engineering and Operating Committee is unable to agree upon any matters relating to Project Insurance not governed by Sections 20 and 21 hereof, the Project Manager or Operating Agent, pending the resolution of such disagreement, shall procure or cause to be procured, such policies of Project Insurance as in its best judgment are necessary and required to protect the Parties against the insurable risks more particularly set forth in Section 20 hereof. During any period of negotiations with an insurer, or any negotiations which are pending at the expiration of the period of coverage of a Project Insurance policy, or in the event a Project Insurance policy is cancelled, the Project Manager and the Operating Agent shall renew or bind policies as an emergency measure or may

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procure policies of insurance which are identical to those which were cancelled, or may, to the extent possible, secure replacement policies which will provide substantially the same coverage as the policy expiring or cancelled.

21.9 Each Party shall have the right to have any mortgagee, trustee or secured party named on all or any of the Project Insurance policies as additional insured as its interest may appear, by notice to the Project Manager or the Operating Agent given in writing not less than ninety (90) calendar days prior to the procurement or renewal of the Project Insurance policy(ies), which such notice shall specify the name or names of such mortgagee, trustee or secured party and such additional information as may be necessary or required to permit it to be included on the policy(ies) of Project Insurance.

21.10 Unless otherwise directed by the Engineering and Operating Committee, the Project Manager and the Operating Agent shall obtain Project Insurance from such insurers or underwriters, including stock companies, mutuals and pools or groups of insurers or underwriters, as any of them in its sole discretion may select, provided that any policy which obligates any Party to pay any assessment shall be not obtained unless such Party has agreed in writing to undertake such obligation.

21.11 Any refunds of premiums or dividends received by a Project Manager or the Operating Agent on any Project Insurance shall be allocated between the Parties in proportion to their Cost Responsibility Ratios in the affected Component at the time of receipt thereof, provided that any reserve premium refunds received under any policy with a retrospective rating plan shall be allocated between the Parties at the time of payment of the reserve premium in proportion to their Cost Responsibility Ratios in the affected Component at such time.

21.12 Nothing herein shall prohibit a Project Manager or the Operating Agent from combining the coverage required by this Agreement with coverage outside of that required by this Agreement. If a Project Manager or the Operating Agent does so combine coverage, the Project Manager or the Operating Agent shall recommend and the Engineering and Operating Committee shall determine the portion of the total premium cost which is allocable to Construction Insurance or Operating Insurance. If the Engineering and Operating Committee is unable to determine such allocation, the Project Manager or Operating Agent, as the case may be, may make an estimated allocation and bill the Parties on the basis thereof, with adjustment to be made when the dispute is resolved.

21.13 Except as provided in Section 21.8 hereof, if any Party desires changes in any policy of Project Insurance, such Party shall request in writing to the appropriate Project Manager or the Operating Agent, as the case may be, to have the desired changes made. Upon receipt of any such request, the Project Manager or Operating Agent shall promptly determine whether or not the desired change can be made and the effect thereof upon the coverage afforded each other Party and upon insurance premiums. If the Project Manager or Operating Agent determines that the desired changes (i) can be made, (ii) will not reduce the coverage otherwise afforded to any Party, and (iii) will not result in any increase in

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premium expense or if an increase in premium expense will result and the requesting Party agrees in writing to pay such increase, then the Project Manager or Operating Agent shall cause such desired changes to be made at the earliest feasible time. If the Project Manager or Operating Agent determines that the desired changes can be made but to do so (i) will result in a reduction in coverage otherwise afforded to any Party, or (ii) will result in any increase in premium expense shared by the Parties, such request shall be referred to the Engineering and Operating Committee for resolution.

22 Mortgage and Transfer of Interest

22.1 Each Party shall have the right at any time and from time to time to mortgage, create or provide for a security interest in or convey in trust all or a part of its ownership share in the Palo Verde - Morgan 500kV Transmission Project, together with an equal interest in the Project Agreements, to a trustee or trustees under deed of trust, mortgage or indenture or to a secured party or parties, under a security agreement, as security for its present or future bonds or other obligations or securities, and to any successors or assigns thereof, without the need for the prior written consent of any other Party and without such mortgagee, trustee or secured party assuming or becoming in any respect obligated to perform any of the obligations of the Parties.

22.2 Any mortgagee, trustee or secured party under present or future deeds of trust, mortgages, indentures or security agreements of any of the Parties and any successor or assignee thereof, and any receiver, referee or trustee in bankruptcy or reorganization of any of the Parties, and any successor by action of law or otherwise, and any purchaser, transferee or assignee of any thereof may, without need for the prior written consent of any other Party, succeed to and acquire all the rights, titles and interest of such Party in the Palo Verde - Morgan 500kV Transmission Project and the Project Agreements, and may take over possession of or foreclose upon said property, rights, titles and interests of such Party, and in such event shall assume and be obligated fully to perform and discharge all of the obligations of such Party hereunder and under any other Project Agreement.

22.3 With the prior written consent of the other Parties, which shall not be unreasonably withheld, each Party shall have the right to transfer or assign all or part of its interest in the ownership of the Palo Verde - Morgan 500kV Transmission Project, together with an equal interest in the Project Agreements, to any person, partnership, corporation or governmental corporation or agency engaged in the generation, transmission or distribution of energy.

22.4 Except as otherwise provided in this Section 22, any successor to the rights, titles and interests of a Party in the Palo Verde - Morgan 500kV Transmission Project shall assume and agree fully to perform and discharge all of the obligations hereunder (and under the Project Agreements) of such Party, to the extent of the interests transferred or assigned, and such successor shall notify each of the other Parties in writing of such transfer, assignment or merger, and shall furnish to each Party evidence of such transfer, assignment or merger and thereupon shall be

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considered to be a Party in the Palo Verde - Morgan 500kV Transmission Project, together with an equal interest in the Project Agreements, to the extent of the interests transferred or assigned, and the transferring Party shall thereupon, without the consent of any other Party, be released from all future obligations under the Project Agreements so assumed and agreed to by such successor; provided, however, that no assignment of any interest in the Palo Verde - Morgan 500kV Transmission Project shall relieve the assigning Party of any obligation hereunder until the assignor shall have delivered to the other Parties the written assumption and agreement of such successor to fully perform and discharge all of the obligations hereunder (and under the Project Agreements) of the assigning Party, to the extent of the interests transferred or assigned.

22.5 Each Party shall have the right, without the need for the prior written consent of any other Parties, to assign its right, title and interest in the Palo Verde - Morgan 500kV Transmission Project and the Project Agreements to any entity into which such Party may be merged or consolidated or to which the Party transfers all or substantially all of its assets, and which assumes the obligations of such Party hereunder, but such assignment shall not relieve the Party from said obligations.

22.6 Each Party shall have the right at any time, and from time to time, without the need for the prior written consent of any other Party, to assign and/or convey its right, title and interest in the Palo Verde - Morgan 500kV Transmission Project and the Project Agreements to a trustee or trustees for the purpose of enabling the Party to finance its obligations hereunder, and such trustee or trustees shall be entitled, without the prior written consent of any other Party, to mortgage or grant a security interest in the said assets to accomplish such financing, provided that such transfers will not relieve the Party from any of its obligations hereunder.

23 Liability; Covenant Not to Execute.

23.1 Subject to the provisions of this Section 23, each Party hereby extends to each other Party, and its directors, members of its governing bodies, officers and employees, the Party’s covenant not to execute on any judgment obtained by it against any such other Party or such directors, members, officers or employees, including recording or effecting a judgment lien, for direct, indirect, special, incidental or consequential loss or damages, whether or not resulting from the negligence of such Party, its directors, members of its governing body, officers, employees, or any other person or entity whose negligence would be imputed to such Party, suffered by such Party with respect to the design, construction and operation of the Palo Verde - Morgan 500kV Transmission Project. Subject to Section 23.2 hereof, this covenant not to execute shall apply to judgments obtained in any type of claim or cause of action including, but not limited to, claims or actions based upon contract, tort, patent and trademark. The rights and obligations set forth in this Section 23 shall survive the termination of this Agreement.

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23.2 For purposes of this Section 23.2, direct loss or damages shall not include indirect, special, incidental or consequential loss or damages. The covenant not to execute in Section 23.1 hereof shall not extend to:

23.2.1 Any judgment for direct loss or damages resulting from Willful Action of the Party against which the judgment is rendered or persons or entities whose act or failure to act would be imputed to such Party, to the extent that the aggregate liability (not covered by insurance) of such Party and such persons or entities with respect to an act constituting Willful Action does not exceed $10 million per occurrence; provided, such $10 million per occurrence amount (the "Baseline Amount") shall be adjusted upward or downward (but never below $10 million) once every three years, as of the anniversary date of the effective date of this Agreement, as follows. The Baseline Amount shall be multiplied by an escalation factor (EF), determined by the formula EF= CPI-U-New ÷ CPI-U-Base, where CPI-U-Base is the final All Items Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average, 1982-84 = 100 as published by the U.S. Bureau of Labor Statistics (BLS) for the month and year of the effective date of the Agreement and CPI-U-New is the final CPI-U for the month and year of the three year adjustment. For example, if the effective date of the Agreement had been during July, 2009 and the three year adjustment had been for July, 2012, CPI-U-Base=215.351 and CPU-U-New=229.104, then EF=229.104÷215.351=1.0639. EF may go up or down in any adjustment; provided EF shall never fall below 1.000. If the BLS ceases to publish the CPI-U, the parties shall mutually agree on a satisfactory alternate index.

23.2.2 Subject to Section 23.3 hereof, any judgment for the liability of the Party against which the judgment is rendered for loss or damages suffered by anyone other than a Party, to the extent such liability results from an act or failure to act with respect to the design, construction and operation of the Palo Verde - Morgan 500kV Transmission Project.

23.2.3 Subject to Section 23.4, any judgment collectible from valid Project Insurance.

23.3 Each Party shall assume all liability of any claim, or judgment, whether or not caused by negligence of such Party, arising out of or in connection with electric service to any of its wholesale and retail customers caused by the design, construction and operation of the Palo Verde - Morgan 500kV Transmission Project, and shall indemnify and hold harmless the other Party from any such claim, action or judgment. Notwithstanding the foregoing, a Party may seek recovery for such claim, action or judgment from the appropriate other Part(ies), to the extent permitted in Section 23.2.1 hereof.

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23.4 In the event any insurer providing Project Insurance refuses to pay any judgment obtained by a Party against another Party, its directors, members of its governing body, officers or employees, on account of liability referred to in Section 23.1 hereof, any Party, its directors, members of its governing body, officers or employees against whom the judgment is obtained shall, at the request of the prevailing Party and in consideration of the covenant given in Section 23.1 hereof, execute such documents as may be necessary to effect an assignment of its contractual rights against the nonpaying insurer and thereby give the prevailing Party the opportunity to enforce its judgment directly against such insurer. In no event when a judgment debt is collectible from valid Project Insurance shall the Party obtaining the judgment execute, levy or otherwise enforce the judgment (including recording or effecting a judgment lien) against any Party, its directors, members of its governing body, officers or employees, against whom the judgment was obtained.

23.5 Except as otherwise provided in this Section 23, the costs and expenses of discharging all Work Liability imposed upon one or more of the Parties for which payment is not made by Project Insurance shall be allocated among the Parties in proportion to their Cost Responsibility Ratios in the Components involved in the operative facts which give rise to the Work Liability.

23.6 Each Party shall be responsible for any damage, loss, claim, cost, charge or expense that is not covered by Project Insurance and results from its own Willful Action and shall indemnify and hold harmless the other Parties, their directors, members of their governing bodies, officers and employees from any such damage, loss, claim, cost, charge or expense.

23.7 Notwithstanding the provisions of this Section 23, the Parties may determine, protect and enforce their rights under this Agreement by a suit or suits in equity for specific performance of, or declaratory action with respect to, any obligation or duty hereunder.

24 Severance of Improvements. The Parties agree that all facilities, structures, improvements, equipment and property of whatever kind and nature constructed, placed or affixed on the Real Property, rights-of-way, easements, and patented and leased lands as part of, or as a Capital Improvement to, the Palo Verde - Morgan 500kV Transmission Project as against all parties and persons whomsoever (including without limitation any party acquiring any interest in the Real Property, rights-of-way, easements, patented or leased lands or any interest in or lien, claim or encumbrance against any of such facilities, structures, improvements, equipment and property of whatever kind and nature), shall be deemed to be and remain personal property of the Parties, not affixed to the realty, in accordance with each Party’s ownership interest therein.

25 Defaults.

25.1 The failure by a Party to keep, observe, or perform any material term, covenant or agreement contained in the Project Agreements shall be an act of default (a “Default”) under this Agreement.

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25.2 After receipt of a notice of Default as set forth in Section 25.3 below, the defaulting Party shall take all steps necessary to promptly and completely cure such Default. No delay in a Party providing written notice of the existence and nature of a Default to a defaulting Party shall constitute a waiver of the non-defaulting Party’s right to invoke its rights under this Section, unless such right is waived in a writing signed by the waiving Party. Any waiver at any time by a Party of its rights with respect to a Default or any other matter arising in connection with this Agreement shall not be deemed a waiver with respect to any subsequent default or matter.

25.3 In the event that a Default is not cured within thirty (30) calendar days after any non-defaulting Party provides written notice of the existence and nature of such Default to the defaulting Party and any other non-defaulting Party, the non-defaulting Party(ies) shall remedy such Default by either (i) advancing the funds necessary to remedy such Default or, (ii) if the Default is of a nature such that it cannot be reasonably cured within thirty (30) calendar days, and if practicable to do so, commencing to render and expeditiously rendering the performance necessary to remedy such Default within a reasonable time.

25.4 Upon demand, the defaulting Party shall pay the non-defaulting Party(ies) within twenty (20) calendar days the total amount of money and/or the reasonable equivalent in money of non-monetary performance, if any, paid and/or made by the non-defaulting Party(ies) in order to remedy any Default by the defaulting Party, together with interest on such money and/or the costs of non-monetary performance at the rate set forth in Section 16.2 from the date of the expenditure of such money and/or the date of completion of such non-monetary performance by each such non-defaulting Party, to the date of such reimbursement by the defaulting Party, or such greater amount as may be otherwise provided in the Project Agreements.

25.5 If a Party who receives a notice of default disputes the existence or nature of the Default, such Party shall, nonetheless, pay the disputed payment or perform the disputed obligation, but may do so under protest, in which case such Party shall promptly initiate the dispute resolution procedure set forth under Section 27. In the event that a court or arbiter determines that a protesting Party is entitled to a refund of all or any portion of a disputed payment or payments, or is entitled to the reasonable equivalent in money of non-monetary performance of a disputed obligation theretofore made, then, upon such determination, the non-protesting Parties shall pay such amounts to the protesting Party with interest thereon calculated as set forth in Section 16.2.

25.6 If the defaulting Party has not cured the Default within thirty (30) calendar days after written notice of such Default required under Section 25.3, or commenced and continued action in good faith to cure the Default within such period, and the defaulting Party has not commenced and continued such action to cure the Default within thirty (30) calendar days, then, at any time thereafter, and for so long as the Default continues, the non-defaulting Parties, by written notice to the defaulting Party, may elect to suspend the right of the defaulting Party to be represented on

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and participate in the actions of all committees, including but not limited to the Engineering and Operating Committee. The suspension shall be lifted when the defaulting Party has cured all of its Defaults and has paid all costs incurred by non-defaulting Parties pursuant to Section 25.3.

25.7 If the defaulting Party has not cured the Default within ninety (90) calendar days after written notice of such Default required under Section 25.3, or, in the sole judgment of each non-defaulting Party, commenced and continued action in good faith to cure the Default within such period, or if the question of whether a Default exists becomes the subject of an arbitration or litigation and the defaulting Party has not cured the Default or commenced and continued such action to cure the Default within ninety (90) calendar days following a final determination by the arbiter or a court that a Default exists, then, each non-defaulting Party, by written notice to the defaulting Party, shall require the defaulting Party to accelerate the amounts owed by the defaulting Party to an amount equal to amounts otherwise owed pursuant to this Section 25 plus: (i) if such acceleration occurs prior to the Commercial Operation Date, accelerate payment of all Construction Costs required to complete the Palo Verde - Morgan 500kV Transmission Project, and, if such acceleration occurs any time within the three (3) months prior to the projected Commercial Operation Date as determined by the Engineering and Operating Committee, accelerate payment of Estimated Post COD Costs; or (ii) if such acceleration occurs following the Commercial Operation Date, accelerate payment of Estimated Post COD Costs. In the case of either subparagraph (i) or (ii) above, all monies paid by the defaulting Party shall be deposited into an interest-bearing account designated by the non-defaulting Parties, and shall be utilized to pay Construction Costs, Operating Costs and Capital Improvement Costs payable by the defaulting Party until fully expended.

25.8 If the defaulting Party does not or cannot comply with Section 25.7 within sixty (60) calendar days, then at any time thereafter, and for so long as the Default continues, the non-defaulting Parties, by written notice to the defaulting Party, may elect to take the action in either Section 25.8.1 or 25.8.2:

25.8.1 Require the defaulting Party to sell its interest in the Palo Verde - Morgan 500kV Transmission Project, in which case, the non-defaulting Parties shall give notice to the defaulting Party (the “Demand Sale Notice”). Upon receipt of the Demand Sale Notice, the defaulting Party shall use its best efforts to obtain bids for and to sell all, but not less than all, of its interest in the Palo Verde - Morgan 500kV Transmission Project to a third party purchaser as promptly as practicable after the date of such Demand Sale Notice. As a condition to the sale and the third party purchaser’s ability to become a party to this Agreement, including the third party purchaser assuming all liabilities and obligations of the defaulting Party, all amounts owed by the defaulting Party to the non-defaulting Parties under this Section 25 shall be paid.

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25.8.2 Elect to purchase the defaulting Party’s interest in the Palo Verde - Morgan 500kV Transmission Project; in which case, the non-defaulting Parties may give notice to the defaulting Party (the “Demand Purchase Notice”), of their election to purchase all, but not less than all, of the interest of the defaulting Party in the Palo Verde - Morgan 500kV Transmission Project. The defaulting Party, shall use commercially reasonable efforts to complete such sale and purchase within one hundred and twenty (120) calendar days after the date of delivery of the original Demand Purchase Notice or, if the purchasing Parties choose to determine Fair Market Value as set forth in Section 25.8.2.3, after the final determination of Fair Market Value. At the closing of such sale and purchase, the purchasing Parties shall pay the purchase price for the defaulting Party’s interest in the Palo Verde - Morgan 500kV Transmission Project determined as provided in Section 25.8.2.3 in immediately available funds to the defaulting Party, The defaulting Party shall deliver to the purchasing Parties such documents and instruments of transfer of title and assignment as are reasonably requested by such purchasing Party; provided, however, that no representations or warranties shall be required to be provided by the defaulting Party other than representations and warranties that (i) the defaulting Party holds all right, power and authority to convey its interest, and good and marketable title to such interest, and (ii) the interest being transferred is free and clear of all liens, except Permitted Liens. At any time prior to purchase, the purchasing Parties may elect to terminate their election to purchase under this Section.

25.8.2.1 The purchase price for the defaulting Party’s interest in the Palo Verde - Morgan 500kV Transmission Project as set forth in Section 25.8.2 above shall be equal to the lesser of:

25.8.2.2 If (a) such purchase occurs prior to the Commercial Operation Date, Construction Costs expended to the purchase date by the defaulting Party; or (b) if such purchase occurs following the Commercial Operation Date, the defaulting Party’s proportionate share of the project book value (such share being equal to the defaulting Party’s proportionate interest vis-à-vis the non-defaulting Parties) as of the purchase date; less in the case of either clause (a) or (b), (i) amounts payable by the defaulting Party to cure the Default, (ii) amounts necessary to remove any liens on the defaulting Party’s interest in the Palo Verde - Morgan 500kV Transmission Project, except Permitted Liens constituting liens on the Palo Verde - Morgan 500kV Transmission Project as a whole and not just on the defaulting Party’s interest therein, and (iii) a discount of twenty (20%) percent of the price determined pursuant to clause (a) or (b), as the case may be; or

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25.8.2.3 Fair Market Value (but only if the purchasing Parties choose to determine Fair Market Value) determined in accordance with the Appraisal Procedure, less (i) amounts payable by the defaulting Party to cure the Default, (ii) Permitted Liens, and (iii) a discount of twenty (20%) percent of such Fair Market Value. The Demand Purchase Notice given in accordance with Section 25.8.2 shall specify whether Fair Market Value is to be determined and the amount that the non-defaulting Party or Parties giving or joining in such notice estimate as Fair Market Value.

25.9 The rights and remedies of the Parties set forth in this Agreement shall be in addition to the rights and remedies of the Parties set forth in any other of the Project Agreements.

26 Dispute Resolution. Any dispute arising from this Agreement shall, at the request of any Party, be referred to a senior representative of each of the Parties for resolution on an informal basis as promptly as practicable. In the event the senior representatives are unable to resolve the dispute within thirty (30) calendar days of such referral or such other period as the Parties may mutually agree, such dispute may, at the mutual agreement of the Parties, be considered at the next Engineering and Operating Committee meeting. If the Parties do not mutually agree to have the dispute considered at the next Engineering and Operating Committee meeting or do not resolve the dispute as a result of discussions with the Engineering and Operating Committee, the Parties may pursue legal remedies in courts having jurisdiction in the mater. Each Party hereto retains the right to seek interim measures from a judicial authority, and any such request shall not be deemed incompatible with this provision.

27 Removal of Project Manager or Operating Agent. The Project Manager and Operating Agent shall serve during the term of and pursuant to this Agreement unless either one resigns by giving written notice to the Parties at least one (1) year in advance of the date of resignation or until receipt by either one of notice of its removal following a determination that it is in default of this Agreement as provided in Section 25. Upon the effective date of such resignation or removal, the Parties shall designate a new Project Manager or Operating Agent by written agreement.

28 Authorizations and Approvals.

28.1 The Project Manager shall be responsible for obtaining all licenses, permits and authorizations requisite to construct facilities of each Component of Palo Verde - Morgan 500kV Transmission Project and any portions thereof for which it is responsible and, in coordination with the Operating Agent, for obtaining all licenses, permits and authorizations requisite to operate and maintain such Components of the Palo Verde - Morgan 500kV Transmission Project prior to the completion of Construction Work. The Project Manager is authorized to submit and prosecute on behalf of all Parties any applications therefore, including the preparation and submission of any supplementary or supporting documentation or other evidence and appearing at any hearing. The Project Manager(s) shall

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furnish all Parties with copies of all documents submitted as much in advance of the filing or submission date as may be reasonably possible without incurring a delay or risk of delay of the completion of Construction Work of any Component of the Palo Verde - Morgan 500kV Transmission Project and shall otherwise keep all Parties informed of the status of all applications. All Parties shall cooperate with the Project Manager(s) in the preparation, submission and execution of such information, records, statements or other material required to obtain any such licenses, permits or authorizations or any changes thereto.

28.2 The Operating Agent shall be responsible for obtaining and continuing in effect all licenses, permits and authorizations requisite to operate and maintain each Component of the Palo Verde - Morgan 500kV Transmission Project, and to construct or install any Capital Improvements. The Operating Agent is authorized on behalf of all Parties to submit and prosecute any applications therefor including the preparation and submission of any supplementary or supporting documentation or other evidence and appearance at any hearing. The Operating Agent shall furnish all Parties with copies of all documents submitted, as much in advance of the filing or submission date as may be reasonably possible without incurring a delay or risk of delay of the Operating Work or Capital Improvement Construction Work, and all licenses, permits and authorizations received and shall otherwise keep all Parties informed of the status of all licenses, permits and authorizations in effect and any pending or proposed applications therefore or for changes thereto. All Parties shall cooperate with the Operating Agent in the preparation, submission and execution of such information, records, statements or other material required to obtain and continue in effect any such licenses, permits or authorizations and any changes thereto.

28.3 Except as provided in Sections 28.1 and 28.2 hereof, each Party shall be responsible for obtaining, at its own expense, its required authorizations and approvals, if any, relating to its participation in the construction or reconstruction and operation of the Palo Verde - Morgan 500kV Transmission Project and to its performance of the provisions of the Project Agreements, from federal, state or local regulatory authorities having jurisdiction to issue such authorizations and approvals, and each Party shall keep the Project Manager and Operating Agent informed of its applications therefore.

28.4 All Parties shall cooperate with the other Parties in the preparation, submission and execution of such information, records, statements or other material required to obtain any permits required for construction or operation of the Palo Verde - Morgan 500kV Transmission Project and any changes thereto.

29 Waiver. No delay in exercising any right or remedy shall constitute a waiver unless such right or remedy is waived in a writing signed by the waiving Party. Any waiver at any time by a Party of its rights with respect to a default or any other matter arising in connection with this Agreement shall not be deemed a waiver with respect to any subsequent default or matter.

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30 Uncontrollable Forces. No Party shall be considered to be in default in the performance of its obligations under the Agreement (other than obligations of said Party to make payment of bills rendered hereunder or to fund its share of Construction Costs, Operating Costs or Capital Improvement Costs) when a failure of performance shall be due to an Uncontrollable Force. Nothing contained herein shall be construed to require a Party to settle any strike or labor dispute in which it may be involved. A Party rendered unable to fulfill any of its obligations hereunder by reason of an Uncontrollable Force shall give prompt written notice of such fact to the other Parties and an estimate, if possible, of when the Party claiming the Uncontrollable Force believes in good faith that the Uncontrollable Force will end and performance will resume. The Party claiming the Uncontrollable Force shall exercise due diligence to remove such inability with all reasonable dispatch.

31 Audit. Each Party shall maintain adequate financial records and documents to support all Construction Costs, Operating Costs and Capital Improvement Costs billed to the other Parties. The Project Manager shall maintain financial records and documents relating to Construction Costs for at least five (5) years after completion of Construction Work. The Operating Agent shall retain financial records and documents relating to Operating Costs and Capital Improvement Costs for five (5) years after the billing period. Each Party shall make such financial records and documents, and other pertinent information, available to the other Parties’ auditors or a certified public accounting firm upon request by the other Party to review and examine as necessary, in determining if such costs billed are in accordance with the terms of this Agreement; provided that such request for review and examination by a Party may not be made more than one time per year. This audit and financial review shall be conducted during normal business hours and at the sole cost of the Party who is performing the audits.

32 Accrual of Causes of Action. No cause of action shall accrue for any purpose until a Party serves, as provided in Section 35, a written notice of accrual of a cause of action on the Party(ies) against which the cause of action is directed. A copy shall be provided to the other Party.

33 Relationship of the Parties. The covenants, obligations and liabilities of the Parties are intended to be several and not joint or collective, and nothing herein contained shall be construed to create an association, joint venture, trust or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to any one or more of the Parties. Each Party shall be responsible for its own covenants, obligations and liabilities as provided herein. No Party shall be under the control of or shall be deemed to control any other Party. No Party shall be the agent of or have a right or power to bind any other Party without its express written consent, except as expressly provided in this Agreement. Each Party hereby elects pursuant to Treas. Reg. 1.761-2(a) to have the arrangement among the Parties that is governed by this Agreement excluded completely from the provisions of Subchapter K of the Internal Revenue Code of 1986, as amended, for all federal and state income tax purposes, and each Party further agrees to execute and deliver such additional documentation, including the statement required by Treas. Reg. 1.761-2(b)(2), as may be required from time to time to effect such exclusion. Each Party agrees to report on such Party’s separate return in a manner consistent with such exclusion election any items of revenue and expenditure attributable to such Party’s share

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of any revenue received and any expenditures made under this Agreement. Nothing in this Agreement shall be construed as an undertaking by any Party to jointly sell any electrical transmission or other services or property. Should it ultimately be determined that this agreement is not eligible for election out of Subchapter K of the Internal Revenue Code, then the Project Manager will have the sole discretion to make all Federal and state income tax elections.

34 Governing Law. This Agreement shall be interpreted, governed by, and construed in accordance with the laws of the State of Arizona, without regard to conflicts of law principles. The Parties agree that any action, suit, or proceeding arising out of or relating to this Agreement shall be initiated and prosecuted in a state or federal court of competent jurisdiction located in Maricopa County, Arizona, and the Parties irrevocably submit to the jurisdiction and venue of such court. To the fullest extent permitted by law, each Party hereby irrevocably waives any and all rights to a trial by jury, and covenants and agrees that it will not request a trial by jury with respect to any legal proceeding arising out of or relating to this Agreement.

35 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Parties. Except in compliance with Section 22, no Party shall assign this Agreement nor any part thereof without prior written consent of the other Parties; provided however, that such consent shall not be unreasonably withheld.

36 Notices. Any notice, demand or request provided for in this Agreement, or served, given or made in connection with this Agreement, shall be in writing and shall be deemed properly served, given or made if delivered in person or sent by registered or certified mail or other qualified and recognized delivery service, postage prepaid, to the persons specified below.

To APS: Arizona Public Service Company Attn: Interconnection Development Manager P.O. Box 53999 M.S. 2259 Phoenix, AZ 85072-3999

To CAWCD:

Central Arizona Water Conservation District c/o General Manager P. O. Box 43020 Phoenix, Arizona 85080-3020

A Party may at any time, by written notice to the other Party, change the designation or the address of the person so specified. This Section 35 does not apply to notices and requests of a routine character in connection with delivery or receipt of power and energy, request for funds, or in connection with operation of facilities. Such notices and requests shall be given in such manner as the Parties from time to time shall arrange.

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37. Severability. In the event that any term, covenant or condition of this Agreement or the

application of such term, covenant or condition, shall be held invalid as to any person or circumstance by any court or regulatory authority having jurisdiction in the premises, all other terms, covenants and conditions of this Agreement and their application shall not be affected thereby, but shall remain in force and effect unless a court holds that the provisions are not severable from all other provisions of this Agreement because such severance would defeat the purpose for which a Party entered into this Agreement.

38. No Dedication of Facilities. The Parties do not intend to dedicate and nothing in this

Agreement or the Project Agreements shall be constituted as constituting a dedication by any Party of its properties or facilities, or any part thereof, to any other Party, to the public, or to the customers of any Party except as expressly provided herein.

39. Regulatory Authority. The Parties acknowledge and agree that to the extent any

provision of this Agreement conflicts with statutes, rules, regulations or orders from applicable governmental or regulatory authorities, the statute, rule, regulation or order shall control and compliance shall not be grounds for a default of any Party.

40. Section Headings. The Section headings in this Agreement have been inserted for

convenience of reference only and shall not in any manner affect the construction, meaning or effect of anything contained in this Agreement nor govern the rights and liabilities of the Parties.

41. Representations and Warranties.

41.1 CAWCD hereby represents, warrants and covenant to APS, each with respect

solely to its own organization, as follows:

41.1.1 CAWCD is a multi-county water conservation district duly organized and validly existing and in good standing under the laws of the State of Arizona and has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and to carry on its business as it is now being conducted and as it is contemplated hereunder to be conducted during the term hereof.

41.1.2 The execution, delivery and performance of this Agreement by CAWCD

has been duly and effectively authorized by all requisite action of the Board of Directors of CAWCD.

41.2 APS hereby represents, warrants and covenants to CAWCD as follows:

41.2.1 APS is an Arizona corporation duly organized, validly existing and in

good standing under the laws of the State of Arizona and has corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and to carry on its business as it is

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now being conducted and as it is contemplated hereunder to be conducted during the term hereof.

41.2.2 The execution, delivery and performance of this Agreement by APS have been duly and effectively authorized by all requisite corporate action.

42. No Third Party Rights. This Agreement and all rights under this Agreement are intended

for the sole benefit of the Parties and otherwise shall not imply or create any rights on the part of, or obligations to, any other person, except as, and then only to the extent as, expressly provided elsewhere in this Agreement.

43. Right of First Refusal:

43.1 Except for a transfer specifically allowed pursuant to other sections of this Agreement, should any Party desire to transfer its ownership in the Palo Verde - Morgan 500kV Transmission Project or any part thereof to any person or entity (“Prospective Buyer”), the other Parties shall have the right of first refusal to purchase all, but not less than all (unless the transferring Party shall otherwise agree), of the interest to be transferred at the price and on substantially the same terms (except as otherwise provided in this Section 43) as are provided in a bona fide written offer from the Prospective Buyer. The Party desiring to so transfer such ownership shall notify the other Parties of its intent to do so as soon as reasonably practicable, so that other Parties may consider making a proposal to acquire such ownership.

43.2 Unless the Parties otherwise agree and except as otherwise provided herein, purchase of a transferring Party’s ownership interest pursuant to this Section may only be made on the same terms and conditions as set forth in the bona fide offer from the Prospective Buyer; provided, however, that if some or all of the consideration to be received by the transferring Party from the proposed transferee(s) in such bona fide offer is to be in kind, in stock, or in services rendered, a Party desiring to purchase pursuant to this Section may match the value of such consideration with cash or other consideration acceptable to the transferring Party.

43.3 If more than one of the Parties desire to purchase such interest, unless otherwise agreed, each such Party shall be entitled to purchase the portion of the interest being transferred determined by multiplying such interest by a fraction, the numerator of which is the Capacity of such Party desiring to purchase in the facilities to be transferred, and the denominator of which is the total Capacity of all of the Parties desiring to purchase in the facilities to be transferred.

43.4 At least six (6) months prior to the date on which the intended transfer is to be consummated, the Party desiring to transfer shall serve written notice of its

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intention to do so upon the other Parties. Such notice shall contain the proposed date of transfer, the price, and the other terms and conditions of the transfer.

43.5 Each Party shall have the option to purchase all or any part of the interest to be transferred and shall exercise said option by serving written notice of its intention upon the Party desiring to transfer within ninety (90) calendar days after service of the written notice of intention to transfer given pursuant to Section 43.4 herein. Failure by a Party to exercise said option as provided herein within the time period specified shall be conclusively deemed to be an election not to exercise said option.

43.6 If the Parties fail to exercise their option to purchase the entire ownership interest to be transferred, then the Party desiring to transfer shall serve written notice of this fact upon the remaining Parties within ten (10) calendar days after its receipt of the last of the written notices given pursuant to Section 43.5 herein, or after the expiration of the ninety (90) calendar day period referred to in Section 43.5 herein, whichever is earlier.

43.7 The Parties who exercised their option to purchase less than the entire ownership interest to be transferred shall have the option to purchase the remaining ownership interest to be transferred, which such option shall be exercised by serving written notice of such election upon the Party desiring to transfer within sixty (60) calendar days after the receipt of the notice given pursuant to Section 43.6 herein.

43.8 When options to purchase all, but not less than all (unless the transferring Party shall otherwise agree) of said ownership interest have been exercised, the Parties shall thereby incur the following obligations:

43.8.1 The Parties shall be obligated to proceed in good faith and with due diligence to obtain all required authorizations and approvals for such purchase.

43.8.2 The Party desiring to transfer such ownership interest shall be obligated to obtain the release of any lien encumbering its ownership interest which is the subject of the transfer at the earliest practicable date, but not later than the date of transfer.

43.8.3 The Parties having exercised the option to purchase such ownership shall be obligated to use commercially reasonable efforts in good faith to perform all of the terms and conditions required of them to complete the purchase of said ownership interest including conveying such real property interests as may be necessary to allow the purchaser to utilize the Palo Verde - Morgan 500kV Transmission Project.

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43.9 The purchase of the ownership interest by the Parties having elected to purchase the same shall be fully consummated within six (6) months following the date upon which all notices required to be given under this Section have been duly served, unless the Parties are then diligently pursuing applications for required authorizations or approvals to effect such transfer or are then diligently pursuing or defending appeals from orders entered or authorizations issued in connection with such applications, in which event the transfer shall be consummated within twelve (12) months following the date upon which the final order is entered or authorization issued in connection with such applications.

43.10 If the Parties fail to exercise their option to purchase all of the ownership interest to be transferred or fail to complete the transfer of the interest within the time period set forth above, the Party desiring to transfer such interest shall be free to transfer all, but not less than all, of such interest to the person that made the offer to purchase referred to in Section 43.4 herein upon the terms and conditions set forth in said bona fide written offer. Unless otherwise agreed to by the Parties, if such transfer is not consummated within ninety (90) calendar days following the proposed date of transfer referred to in the notice given pursuant to Section 43.4 herein, the Party desiring to transfer said ownership interest may not proceed with the proposed transfer and that process shall be deemed terminated. Following such termination, the Party seeking to transfer its ownership shall fully comply with the procedures in this Section 43 before reinitiating a proposed transfer to the original bona fide offeror or any new proposed transfer to another party.

43.11 Any Party transferring an ownership interest to any other Party pursuant to the provisions of this Section shall remain liable and obligated for the performance of all of the terms and conditions of this Agreement prior to the date of transfer, unless otherwise agreed to by the remaining Parties.

43.12 Any party who may succeed to an ownership interest pursuant to this Section shall specifically agree in writing with the remaining Parties at the time of such transfer that it will not transfer or assign all or any portion of such ownership interest without complying with the terms and conditions of this Section.

43.13 Except for a transfer from one Party to one or more other Party(ies), the provisions of Section 22.4 shall apply to any transfer of an ownership interest made pursuant to this Section 43.

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44. Revision of Overhead Loadings:

44.1 The Parties other than the Operating Agent shall have the right to review and recommend adjustment of the overhead loadings depicted in Appendices G and H, attached hereto at intervals not more frequently than every three (3) years. Such review and adjustment shall be based on (i) historical evidence of corporate and departmental overhead loadings that are significantly different than the overhead loadings provided for in Appendices G and H attached hereto, or (ii) an incremental cost change resulting from a variation in regulatory policy or other regulatory actions. Revised rates must be agreed to by all Parties and are subject to audit in accordance with the provisions of Section 31.

44.2 Operations, Maintenance, and Capital Improvements: The Operating Agent’s internal corporate overhead loading rate as described in Appendix J and applied to Operations, Maintenance and Capital Improvements will be trued up on an annual basis as soon as practicable. To the extent that the expenses are more or less than those already paid by the Participants during the year, the Operating Agent shall bill or reimburse the Participants for the amount of such difference. The Operating agent shall have the right to review and recommend adjustment of the fixed A&G overhead loading depicted in Appendices G and H, on an annual basis. Such review and adjustment shall be based on (i) historical evidence of corporate and departmental overhead loadings that are significantly different than the overhead loadings provided for in Appendices G and H attached hereto, or (ii) an incremental cost change resulting from a variation in regulatory policy or other regulatory actions. Revised rates must be agreed to by all Parties and are subject to audit by the Parties other than the Operating Agent in accordance with the provisions of Section 31.

45. Entire Agreement. This Agreement and its appendices contain the entire agreement between the Parties with respect to the Palo Verde - Morgan 500kV Transmission Project, and merge and supersede all prior and contemporaneous agreements, commitments, representations, writings and discussions, whether written or oral, between them.

46. Partitionment: Each Party hereby waives any rights it may have to partition the Palo Verde - Morgan 500kV Transmission Project or this Agreement, whether by partition in kind or by sale and division of the proceeds, and further agrees that it will not resort to any action in law or in equity to partition the Palo Verde - Morgan 500kV Transmission Project or this Agreement. Each Party waives the benefits of all laws that may now or hereafter authorize such partition for a term: (i) which shall be coterminous with this Agreement; or (ii) which shall be for such lesser period as may be required under applicable law.

55

47. Survival: Termination, expiration or cancellation of this Agreement shall not relieve any Party of any obligation under this Agreement which expressly or by implication survives termination of this Agreement or any Order, including its obligations under the following section headings: Billings and Payment, Taxes, Liability, Covenant Not to Execute, Accrual of Causes of Action, Audit, Governing Law, and Dispute Resolution Provisions.

56

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of this _____ day of _______________, 20__.

CENTRAL ARIZONA WATER CONSERVATION DISTRICT

ATTEST AND COUNTERSIGN:

By:

Title:

Date:

ARIZONA PUBLIC SERVICE COMPANY

ATTEST AND COUNTERSIGN:

By:

Title:

Date:

A1

APPENDIX A

Palo Verde - Morgan 500kV Transmission Project Description

A.1 Palo Verde Bay 10 Interconnection: Facilities and equipment to be installed for the Palo Verde Bay 10 Expansion shall include but not be limited to: A.1.1 The point of interconnection originates at Bay 10 in the Palo Verde Nuclear Generating Station (“ANPP”) Switchyard located in Section 34, Township

1 North, Range 6 West.

A.1.2 Two (2) 500kV Breakers, Four (4) 500kV MOD Switches, Three (3) Line CCVTs. A.1.3 Associated facilities, including but not limited to: site preparation (including grading, Arizona Native Plant laws and plant salvage programs, drainage structures and surfacing), foundations, structures, conductors, insulators and

hardware. A.1.4 All relaying, metering, control and communications equipment required for the interconnection of facilities into the ANPP Palo Verde 500kV switchyard.

A.2 Palo Verde - Delaney 500kV Transmission Line: Facilities and equipment to be installed

for the Palo Verde - Delaney 500kV Transmission Line shall include but not be limited to: A.2.1 The transmission line originates at Bay 10 in the Palo Verde Nuclear Generating

Station (“ANPP”) Switchyard. This line will be located within a 1,000-foot corridor on the North side of the existing centerline of the Palo Verde-Devers No.1 500kV transmission line then proceeds approximately ½ mile West of Wintersburg Road. From this location, the route proceeds West and then Northwest, paralleling the existing Palo Verde-Devers No. 1 and Harquahala- Hassayampa 500kV transmission lines to the proposed Delaney 500kV Switchyard (formerly known as the Harquahala Junction Switchyard) located in the southwest quarter of Section 25, Township 2 North, Range 8 West near 451st Avenue and the Thomas Road alignment (Link 30). For this portion of the route, the line will be located within a 1,000-foot corridor on the North and East side of the existing centerline of the Palo Verde-Devers No. 1 500kV transmission line. The length of this line is approximately 15 miles.

A.3 Delaney 500kV Switchyard: Facilities and equipment to be installed for the Delaney 500kV Switchyard shall include but not be limited to:

A.3.1 Delaney switchyard will be designed and built as a breaker-and-a-half

configuration. Delaney initial build consists of two (2) 500kV line terminations and one shunt reactor connected to the bus with a breaker.

A2

A.3.2 The ultimate design of the Delaney 500kV switchyard is engineered for the project to consist of Three(3) 500kV breakers, Eleven(11) 500kV MOD switches, Six(6) Line CCVT’s, One(1) bus synchronization CCVT, One(1) 3-Phase 500kV 170MVAR Reactor. A.3.3 Associated facilities, including but not limited to: site preparation including

grading, Arizona Native Plant laws and plant salvage programs, drainage structures, surfacing and landscaping; ground grid; cable trench; yard lighting; control house and equipment therein (except certain terminal-related equipment) AC and DC auxiliary power systems; auxiliary power cable; station lighting; main busses including foundations, structures, conductor, insulators and hardware; CCVTs and protective relaying; communications and supervisory control components; and site security systems.

A.3.4 All relaying, metering, control and communications equipment required for the

interconnection of facilities into the Delaney 500kV switchyard.

A.4 Delaney – Sun Valley 500kV Transmission Line: Facilities and equipment to be installed for the Delaney – Sun Valley 500kV Transmission Line shall include but not be limited to:

A.4.1 Point of termination from Delaney switchyard to Sun Valley substation. Length

of the line is approximately 28 miles. Generally the line will head north-northeast out of the Delaney switchyard, cross the Central Arizona Project canal, then head easterly following the north side of the Central Arizona Project canal, crossing the Central Arizona Project canal again, then proceeding to the Sun Valley substation.

A.4.2 Associated facilities, including but not limited to: site preparation (including

grading, Arizona Native Plant laws and plant salvage programs, drainage structures and surfacing), foundations, structures, conductors, insulators, hardware and communications.

A.5 Sun Valley 500kV Substation – Facilities and equipment to be installed for the Sun Valley

500kV Substation shall include but not be limited to:

A.5.1 Three (3) 500kV power circuit breakers and termination facilities for three 500kV transmission elements: i) the APS/CAWCD jointly owned Delaney to Sun Valley 500kV transmission line; ii) the APS/CAWCD jointly owned Sun Valley to Morgan 500kV transmission line; iii) one (1) 500/230kV transformer bay; iv) one (1) APS/CAWCD 500/230kV 600MVA transformer.

A.5.2 Substation design consists of a 500kV and 230kV breaker-and-a-half arrangement. A.5.3 Associated facilities, including but not limited to: site preparation including

grading, Arizona Native Plant laws and plant salvage programs, drainage structures, surfacing and landscaping; ground grid; cable trench; yard lighting;

A3

control house and equipment therein (except certain terminal-related equipment); AC and DC auxiliary power systems; auxiliary power cable; station lighting; main busses including foundations, structures conductor insulators and hardware; CCVTs and protective relaying; communications and supervisory control components; and site security systems.

A. 5.4 All relaying, metering, control and communications equipment required for the

interconnection of facilities in the Sun Valley 500kV substation.

A.6 Sun Valley 230kV Substation – Facilities and equipment to be installed for the Sun Valley 230kV Substation shall include but not be limited to:

A.6.1 Four (4) 230kV power circuit breakers, five (5) termination facilities for 230kV

transmission lines: i) one (1) APS/CAWCD 500/230kV 600MVA transformer; ii) an APS owned 230kV transmission line to APS’s Trilby Wash substation; iii) the CAWCD owned 230kV transmission line to CAWCD Hassayampa Pump Station; iv) the CAWCD owned 230kV transmission line to the Hassayampa tap which is located on the Liberty-Parker 230kV line.

A.6.2 The initial build is a ring bus configuration; the substation design consists of an

ultimate build out of a 500kV and 230kV breaker-and-a-half arrangement (see Appendix D).

A.6.3 Associated facilities, including but not limited to: site preparation including

grading, Arizona Native Plant laws and plant salvage programs, drainage structures, surfacing and landscaping; ground grid; cable trench; yard lighting; control house and equipment therein (except certain terminal-related equipment); AC and DC auxiliary power systems; auxiliary power cable; station lighting; main busses including foundations, structures conductor insulators and hardware; CCVTs and protective relaying; communications and supervisory control components; and site security systems.

A.6.4 All relaying, metering, control and communications equipment required for the

interconnection of facilities in the Sun Valley 230kV substation. A.7 Sun Valley – Morgan 500/230kV Transmission Lines: Facilities and equipment to be

installed for the Transmission Lines shall include but not be limited to:

A.7.1 Point of termination from Sun Valley substation to Morgan substation. The length of the line is approximately 40 miles. Generally, the line will head north- northeast out of the Sun Valley substation, then East to the Morgan substation. This project is being designed as a double circuit 500/230kVtransmission line. It will initially be constructed with a single circuit 500kV attached.

A4

A.7.2 Associated facilities, including but not limited to: site preparation (including

grading, Arizona Native Plant laws and plant salvage programs, drainage structures and surfacing), foundations, structures, conductors, insulators, hardware and communications.

A.8 Morgan 500kV Interconnection: Facilities and equipment to be installed for the Interconnection at Morgan 500kV Substation shall include but not be limited to:

A.8.1 The point of interconnection terminates at position four in the Morgan 500kV switchyard.

A.8.2 Substation consists of a 500kV breaker-and-a-half arrangement A.8.3 Two (2) 500kV Breakers, Two (2) 500kV MOD Switches, and associated line CCVTs A.8.4 Associated facilities, including but not limited to: site preparation (including grading, Arizona Native Plant laws and plant salvage programs, drainage structures and surfacing), foundations, structures, conductors, insulators and

hardware, if applicable. A.8.5 All relaying, metering, control and communications equipment required for the interconnection of facilities into the Morgan 500kV switchyard.

A.9 Morgan 230kV Interconnection: APS to construct and own future 230kV interconnection facilities at Morgan 230kV Substation

B1

APPENDIX B

OWNERSHIP AND COST RESPONSIBILITY RATIOS

B Ownership and Cost Responsibility of Land, Land Rights, Deemed Interest, Initial Construction, Operations, Maintenance and Capital Improvements B.1 Palo Verde 500kV Interconnection Facility:

APS Cost Responsibility Ratio 90% CAWCD Cost Responsibility Ratio 10%

B.2 Palo Verde – Delaney 500kV Transmission Line, Circuit, Insulators, Structures and Foundations:

APS Ownership/Cost Responsibility Ratio 90% CAWCD Ownership/Cost Responsibility Ratio 10%

B.3 Delaney 500kV Switchyard Including Roadways and Common Facilities: APS Ownership/Cost Responsibility Ratio 90% CAWCD Ownership/Cost Responsibility Ratio 10%

B.4 Delaney – Sun Valley 500kV Transmission Line, Circuit, Insulators, Structures and Foundations:

APS Ownership/Cost Responsibility Ratio 90% CAWCD Ownership/Cost Responsibility Ratio 10%

B.5 Sun Valley 500kV Substation: * The supporting calculation equates to 99.99 In an effort to eliminate the .01 underage, it is agreed to by the Parties to round CAWCD’s percentage up by .01 to obtain 100% APS Ownership/Cost Responsibility Ratio 82.22%

CAWCD Ownership/Cost Responsibility Ratio 17.78%

Computation of the CRR for the Sun Valley 500kV Substation: Total Number of Sun Valley 500kV Connections:

APS CAWCD Others Delaney 500kV – Sun Valley 500kV Line 0.9 0.1 0.0 Sun Valley 500kV – Morgan Line 0.9 0.1 0.0 500/230kV Transformer (500kV termination) 0.6667 0.3333 0.0

Total Connections by Entity: 2.4667 0.5333 0.0

B2

Where: A = Connections used by APS 2.4667 B = Connections used by CAWCD 0.5333 Z = Connections used by Others 0.0

Total Number of Sun Valley 500kV Substation Connections 3.0

A 2.4667 2.4667

APS CRR = _________ = __________________ = _______ = 0.8222 A+B+ Z 2.4667 + 0.5333 + 0.0 3 B 0.5333 0.5333

*CAWCD CRR = _________ = __________________ = _______ = 0.1777 A+B +Z 2.4667 + 0.5333 + 0.0 3

B.6 Sun Valley 500/230kV Substation Common Facilities and Roadways: APS Ownership/Cost Responsibility Ratio 60% CAWCD Ownership/Cost Responsibility Ratio 40%

Calculated as follows: Total Number of Sun Valley 500kV and 230kV Connections:

APS CAWCD Others Delaney – Sun Valley 500kV Line 0.9 0.1 0.0 Sun Valley – Morgan 500kV Line 0.9 0.1 0.0 500/230kV Transformer (500 kV termination) 0.7 0.3 0.0 500/230kV Transformer (230kV termination) 0.7 0.3 0.0 CAWCD 230kVLine to Pump Station 0.0 1.0 0.0 CAWCD 230kV Line to Hassayampa Tap 0.0 1.0 0.0 APS 230kV Line to Trilby Wash 1.0 0.0 0.0

Total Connections by Entity: 4.2 2.8

0.0

Where: A = Connections used by APS 4.2

B = Connections used by CAWCD 2.8 Z = Connections used by Others 0.0 Total # of Sun Valley 500/230kV Connections: 7.0

B3

A 4.2 4.2 APS CRR = _________ = __________________ = _______ = 0.60

A+B+Z 4.2 + 2.8 + 0.0 8 B 2.8 2.8

CAWCD CRR = _________ = ___________________ = _______ = 0.40 A+B+Z 4.2 + 2.8 + 0.0 8

B.7 Sun Valley 500/230kV 600MVA Transformer: 500/230kV 600MVA XFMR APS Ownership/CRR 66.67% CAWCD Ownership/CRR 33.33% Calculated as follows: Transformer = 600MVA MVA used by APS = 400MVA 400MVA / 600MVA = 0.6667 MVA used by CAWCD = 200MVA 200MVA / 600MVA = 0.3333

B.8 Sun Valley 230kV Substation:

APS Ownership/Cost Responsibility Ratio 41.67%

CAWCD Ownership/Cost Responsibility Ratio 58.33%

Computation of the CRR for the Sun Valley 230kV Switchyard: Total Number of Sun Valley 230kV Connections:

APS CAWCD Others 500/230kV Transformer (230kV termination) 0.6667 0.3333 0.0 CAWCD 230kV Line to Pump Station 0.0 1.0 0.0 CAWCD 230kV Line to Hassayampa Tap 0.0 1.0 0.0 APS 230kV Line to Trilby Wash 1.0 0.0 0.0

Total Connections by Entity: 1.6667 2.3333 0.0

Where: A = Connections used by APS 1.6667 B = Connections used by CAWCD 2.3333 Z = Connections used by Others 0.0000

Total Number of Sun Valley 230kV Substation Connections 4.0

B4

A 1.6667 1.6667 APS CRR = _________ = __________________ = _______ = 0.4167

A+B +Z 1.6667 + 2.3333 + 0.0 4 B 2.3333 2.3333

CAWCD CRR = _________ = __________________ = _______ = 0.5833 A+B+Z 1.6667 + 2.3333 + 0.0 4

B.9 Sun Valley – Morgan 500/230kV Transmission Line Structures and Foundations (not including circuits and insulators):

APS Ownership/Cost Responsibility Ratio 93% CAWCD Ownership/Cost Responsibility Ratio 7%

Methodology: 70/30 split between 500/230kV Responsibilities: Philosophy is based on the known capability of the system and applied known voltages. In this case, the Palo Verde – Morgan line has a 3,000 Amp rating. The formula used as an example is as follows: 525kV: (kV x amps x √3 = MVA) .525 kV x 3,000 amps x 1.732 = ~ 2,700 MVA 230kV: (kV x amps x √3 = MVA) .230 kV x 3,000 amps x 1.732 = ~ 1,200 MVA 2,700 MVA + 1,200 MVA = 3,900 MVA 500kV allocation: 2700/3900 = 70% 230kV allocation: 1200/3900 = 30% 500kV 230kV Net

APS 0.70 x 0.90 = 0.63 0.30 x 1.00 = 0.3 0.93 CAWCD 0.70 x 0.10 = 0.07 0.30 x 0.00 = 0.0 0.07 B.10 Sun Valley – Morgan 500kV Transmission Line (circuits, insulators and

Morgan 500kV Interconnection Facilities only): APS Ownership Ratio 90% CAWCD Ownership Ratio 10%

B.11 Sun Valley – Morgan 230kV Transmission Line (circuits, insulators and Morgan 230kV Interconnection Facilities only):

APS Ownership Ratio 100% CAWCD Ownership Ratio 0%

B5

B.12 Composite Cost Responsibility Ratio for Palo Verde to Morgan 500/230kV Project (To be used for operating costs allocated to the transmission system as a whole such as Load Dispatch and Insurance costs):

APS Cost Responsibility Ratio 82.69%

CAWCD Cost Responsibility Ratio 17.31% Others Cost Responsibility Ratio 0.00%

Calculated as follows, based on the number of Functions: APS CAWCD Others Palo Verde Bay 10 (500kV Interconnection) 0.9 0.1 0.0

Palo Verde-Delaney (500kV Line) 0.9 0.1 0.0 Delaney (500kV Switchyard, 2 connections) 1.8 0.2 0.0 Delaney-Sun Valley (500kV Line) 0.9 0.1 0.0 Delaney Shunt Reactor 0.9 0.1 0.0 Sun Valley (500kV Switchyard, 2 connections) 1.8 0.2 0.0 Sun Valley (500kV Transformer Termination) 0.6667 0.3333 0.0 Sun Valley 500/230kV Transformer 0.6667 0.3333 0.0 Sun Valley-Morgan (500kV Line) 0.9 0.1 0.0 Sun Valley 230kV Substation 0.4167 0.5833 0.0 Morgan (500kV Interconnection) 0.9 0.1 0.0 Total Functions by Entity 10.7501 2.2499 0.0

Where: A = Functions used by APS 10.7501 B = Functions used by CAWCD 2.2499 Z = Functions used by Others 0.0 Total # of 500/230kV Functions: 13.0

A 10.7501 10.7501

APS CRR = _________ = __________________ = _______ = 0.8269 A+B+ Z 10.7501 + 2.2499 + 0.0 13 B 2.2499 2.2499

*CAWCD CRR = _________ = ___________________ = _______ = 0.1731 A+B+Z 10.7501 + 2.2499 + 0.0 13

B6

B.13 Composite Cost Responsibility Ratio for Palo Verde to Morgan Transmission Line (O&M, Line Patrol)

Distance (miles)

% of Totala

Line Ownership Share

APS CAWCD

Palo Verde-Delaney 15 18.1% 90.0% 10.0% Delaney-Sun Valley 28 33.7% 90.0% 10.0% Sun Valley-Morgan 500kV 40 48.2% 90.0% 10.0% Total 83 100.0%

Cost Responsibility Ratiob

90.00% 10.00%

Notes: a % of Total = Line segment miles/Total Miles. b Cost Responsibility Ratio (CRR) Share calculated based on line segment ownership share for each entity for each segment; e.g. for APS: CRR = ∑[PL-DL (18.1%*90%)] + [DL-SV (33.7%*90%)] + [SV-MG 500kV (48.2%*90%)] = 90.00%

APS CRR = 18.1%*90% + 33.7%*90% + 48.2%*90% = 90.00%

CAWCD CRR = 18.1%*10% + 33.7%*10% + 48.2%*10% = 10.00%

C

APPENDIX C

PALO VERDE AND DELANEY 500kV INITIAL ONE LINE

D

APPENDIX D

SUN VALLEY AND MORGAN 500/230kV INITIAL ONE LINE

E1

APPENDIX E

DESCRIPTION OF DELANEY 500kV SWITCHYARD PROPERTY

E2

E3

F1

APPENDIX F

DESCRIPTION OF SUN VALLEY 500kV SUBSTATION PROPERTY

F2

G1

APPENDIX G

Overhead Loading Applied to Capital Improvement Costs

G.1 Capital Improvement Costs shall consist of all direct costs, expenses, and obligations incurred for or in connection with the making of Capital Improvements. Indirect overhead loading costs described in this section shall be added to direct costs. Capital Improvement Costs shall be determined in accordance with this Appendix G and overhead and loading costs shall be applied in accordance with Appendix J. Such costs shall include, but not be limited to those listed below.

G.1.1 All of Operating Agent’s internal costs of labor, services, and studies performed

as a part of Capital Improvements.

G.1.2 Payroll of Operating Agent’s employees performing Capital Improvements,

including a departmental overhead loading as described in Appendix J of such

payroll and expenses. This overhead load is intended to allow for the recovery of

construction overhead costs, as defined in “Subchapter C, Part 101, Electric Plant

Instructions #4 Overhead Construction Costs” in the FERC Code of Federal

Regulations. Employees performing functions that are being recovered in this

load may not direct charge to this project unless they are performing construction

work.

G.1.2.1 Loadings for employee benefits, workers compensation, payroll taxes,

and SVHL (sick, vacation, holiday and leave) will be applied as

described in Appendix J.

G.1.3 All direct costs and expenses associated with materials, supplies, tools,

machinery, apparatus, and equipment, including rental charges and energy usage,

applicable or allocable to Capital Improvements, plus an indirect material

overhead load. The materials load shall be applied as described in Appendix J.

G.1.4 All costs and expenses for contract labor or outside services, including outside

consultants and attorneys, applicable or allocable to Capital Improvements,

including an overhead loading shall be applied as described in Appendix J of such

costs and expenses.

G2

G.1.5 All costs of insurance, including premiums paid and amounts deductible from

insured claims, applicable or allocable to Capital Improvements.

G.1.6 All federal, state or local taxes of any character imposed upon the Interconnection

Facilities, or Capital Improvements, excluding any taxes on income.

G.1.7 All costs of relocating existing facilities, including demolition and reconstruction,

acquisition of lands and permits, and any upgrades or modifications required by

applicable requirements or otherwise caused by Capital Improvements.

G.1.8 All costs of enforcing or attempting to enforce the provisions of applicable

insurance policies, payment and performance bonds, contracts and warranties.

G.1.9 All costs for transportation expenses shall be applied as described in Appendix J

of Operating Agent’s direct labor applicable or allocable to the performance of

Capital Improvements.

G.1.10 All costs for Operating Agent’s administrative and general expenses, as described

in Appendix J of direct labor cost plus applicable SVHL (sick, vacation, holiday,

and leave) applicable or allocable to the performance of Capital Improvements.

G.1.11 Any other cost or expense applicable or allocable to Capital Improvements that

are listed, described, or implicit in this Agreement.

H1

Appendix H

Overhead Loading Applied to Operating Costs

H.1. Operating Costs shall consist of all direct costs, payments made and expenses, or

obligations incurred for or in connection with Operating Work. Indirect overhead loading

costs described in this section shall be added to direct costs. Operating Costs incurred

shall be determined in accordance with this Appendix H and overhead and loading costs

shall be applied in accordance with Appendix J. Such costs shall include, but not be

limited to those listed below.

H.1.1 All of Operating Agent’s internal costs of labor, services and studies performed as

a part of Operating Work.

H.1.2 Payroll of Operating Agent’s employees performing Operating Work, including a

departmental overhead loading as described in Appendix J of such payroll and

expenses. This overhead load is intended to allow for the recovery of construction

overhead costs, as defined in “Subchapter C, Part 101, Electric Plant Instructions

#4 Overhead Construction Costs” in the FERC Code of Federal Regulations.

Employees performing functions that are being recovered in this load may not

direct charge this project, unless they are performing Operating Work.

H.1.2.1 Loadings for employee benefits, workers compensation, payroll taxes,

and SVHL (sick, vacation, holiday and leave) will be applied as

described in Appendix J.

H.1.3 All direct costs and expenses associated with materials, supplies, tools,

machinery, apparatus, and equipment, including rental charges and energy usage,

applicable or allocable to Operating Work, plus an indirect material overhead

load. The materials load shall be applied as described in Appendix J.

H2

H.1.4 All costs and expenses for contract labor or outside services, including outside

consultants and attorneys, applicable or allocable to Operating Work, including an

overhead loading shall be applied as described in Appendix J of such costs and

expenses.

H.1.5 All costs of insurance, including premiums paid and amounts deductible from

insured claims, applicable or allocable to Operating Work.

H.1.6 All federal, state or local taxes of any character imposed upon Operating Work,

excluding any taxes on income.

H.1.7 All costs of relocating existing facilities including demolition and reconstruction,

acquisition of lands and permits, and any upgrades or modifications required by

applicable requirements or otherwise caused by Operating Work.

H.1.8 All costs of enforcing or attempting to enforce the provisions of applicable

insurance policies, payment and performance bonds, contracts and warranties.

H.1.9 An allowance for transportation expenses shall be applied as described in

Appendix J to Operating Agent’s direct labor applicable or allocable to the

performance of Operating Work.

H.1.10 An allowance for Operating Agent’s administrative and general expenses, as

described in Appendix J of Operating Agent’s direct labor cost plus SVHL (Sick,

Vacation, Holiday, and Leave) applicable or allocable to the performance of

Operating Work.

H.1.11 Any other cost or expense applicable or allocable to Operating Work that is listed,

described, or implicit in this Agreement.

I1

Appendix I

Overhead Loading Applied to Construction Costs

I.1 Construction Costs shall consist of all direct costs, expenses, and obligations incurred for

and in connection with initial construction of the Palo Verde - Morgan 500kV

Transmission Project. Indirect overhead loading costs described in this section shall be

added to direct costs. Construction Costs shall be determined in accordance with this

Appendix I and overhead and loading costs shall be applied in accordance with Appendix

J. Such costs shall include, but not be limited to those listed below.

I.1.1 All of Project Manager’s internal costs of labor, services, and studies performed

as a part of Construction Work.

I.1.2 Payroll of Project Manager’s employees performing Construction Work,

including a departmental overhead loading as described in Appendix J of such

payroll and expenses. This overhead load is intended to allow for the recovery of

construction overhead costs, as defined in “Subchapter C, Part 101, Electric Plant

Instructions #4 Overhead Construction Costs” in the FERC Code of Federal

Regulations. Employees performing functions that are being recovered in this

load may not direct charge this project, unless they are performing Construction

Work.

I.1.3 All direct costs and expenses associated with materials, supplies, tools,

machinery, apparatus, and equipment, including rental charges and energy usage,

applicable or allocable to Construction Work, plus an indirect material overhead

load. The materials load shall be applied as described in Appendix J.

I.1.4 All costs and expenses for contract labor or outside services, including outside

consultants and attorneys, applicable or allocable to Construction Work, including

an overhead loading shall be applied as described in Appendix J.

I.1.5 All costs of insurance, including premiums paid and amounts deductible from

insured claims, applicable or allocable to Construction Work.

I2

I.1.6 All federal, state or local taxes of any character imposed upon the interconnection

facilities, or Construction Work, excluding any taxes on income.

I.1.7 All costs of relocating existing facilities, including demolition and reconstruction,

acquisition of lands and permits, and any upgrades or modifications required by

applicable requirements or otherwise caused by Construction Work.

I.1.8 All costs of enforcing or attempting to enforce the provisions of applicable

insurance policies, payment and performance bonds, contracts and warranties.

I.1.9 An allowance for transportation expenses shall be applied as described in

Appendix J of Project Manager’s direct labor applicable or allocable to the

performance of Construction Work.

I.1.10 An allowance for Project Manager’s administrative and general expenses, as

described in Appendix J, of Project Manager’s direct labor cost plus applicable

SVHL (sick, vacation, holiday, and leave) applicable or allocable to the

performance of Construction Work.

I.1.11 Any other cost or expense applicable or allocable to Construction Work that is

listed, described, or implicit in this Agreement.

J1

Appendix J

Application of Overhead Load Calculations

* (Allowed Time load only applies to Straight Time charges in payroll on line 1)

**(Injuries and Damages load only applies to Straight Time charges and Allowed Time in payroll on line 1)

Line # Description Initial Construction O&M/Capital Improvements

Load Load

Example of Direct Charges 1 Payroll 2 Outside Service 3a Materials (Via Warehouse) 3b Materials (Direct to job-site) 3c Materials (Outside services) 4 Taxes, Insurance and Other

Loads 5 Allowed Time (SVHL) * (Line 1) x 18% (Line 1) x Operating Agent Internal Rate

6 Payroll Taxes (Line 1 + Line 5) x 7% (Line 1 + Line 5) x Operating Agent Internal Rate 7 Injuries and Damages ** (Line 1 + Line 5) x 1% (Line 1 + Line 5) x Operating Agent Internal Rate

8 Benefits (Line 1 + Line 5) x 37% (Line 1 + Line 5) x Operating Agent Internal Rate 9 Materials (Via Warehouse) (Line 3a) x 4% (Line 3a) x Operating Agent Internal Rate 10 Materials (Direct to Job Site) (Line 3b) x 4% (Line 3b) x Operating Agent Internal Rate 11 Engineering and Supervision (Line 1 + Line 5) x 31% (Line 1 + Line 5) x Operating Agent Internal Rate 12 Transportation (Line 1 + Line 5) x 8% (Line 1 + Line 5) x Operating Agent Internal Rate 13 A&G (Line 1 + Line 5) x 28% (Line 1 + Line 5) x 28% 14 Outside Services (Line 2 + Line 3c) x 1% (Line 2 + Line 3c) x 1%

Notes