Comments on S7-16-02

July 19, 2002

Jonathan G. Katz
Secretary, Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549

Re: Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies (File No. S7-16-02)

This letter is submitted in [MS WORD.]

Dear Mr. Katz:

I am the Principal Financial Officer of UniSource Energy Corporation (UniSource Energy). UniSource Energy is the holding company for Tucson Electric Power Company (TEP), Millennium Energy Holdings, Inc. (Millennium) and UniSource Energy Development Company (UED). TEP is the second largest investor owned electric utility in Arizona. TEP provides electric service to the Tucson area and has generating facilities in Arizona and New Mexico. Millennium invests in unregulated ventures related primarily to the energy business and UED engages in developing electric generation resources. UniSource Energy is publicly traded on the New York Stock Exchange under the ticker symbol UNS.

UniSource Energy has reviewed the Securities & Exchange Commission's proposal to require certain disclosure in Management's Discussion and Analysis (MD&A) about the application of critical accounting policies. UniSource Energy has a number of concerns about the effects of the proposed rules. We appreciate the opportunity to respond to the Commission's proposal and offer the following specific comments and questions.

Comments Regarding Specific Questions in the Proposal:

Should we require more disclosure by companies about their process of making estimates, or in other areas of discretion relating to recognition and measurement in financial statements? If so, please describe in detail. Is the additional information elicited by the proposals useful to investors, other users of company disclosure and readers of a company's financial statements? If not, how can it be improved to achieve that goal?

UniSource Energy agrees with the Commission that additional qualitative disclosure will improve investor understanding of a company's important accounting estimates that reflect significant management judgment and uncertainty. Accounting estimates are an integral part of accrual accounting. We believe that a company should describe, in plain English, in MD&A, the assumptions and methods used. In addition to enhancing the reader's understanding of the financial statements, the disclosures should provide the reader with insight as to management's assumptions regarding the business environment.

While plain English does not mean deleting complex information to make the document easier to read, it does mean we should focus on relevant information and not include superfluous information. We believe a sensitivity analysis for the assumptions used and a description of the possible alternative assumptions and methods that could have been selected would be superfluous information. A reader may misinterpret the sensitivity analysis as representing the magnitude that the estimate could be misstated. Management should already base their estimates on their best judgments; other estimates would therefore by definition be sub-optimal in their judgment. While a sensitivity analysis for the assumptions provides more information, the sheer magnitude of the volume of information may hinder an investor from grasping the critical concepts. Similarly, providing the possible alternative methods and assumptions that could have been used would merely contribute to the information overload. Also, trying to analyze what the financial statements would have reflected if different estimates had been used is analogous to analyzing what would have happened if the company engaged in industry B rather than industry A.

Is the definition appropriately designed to identify the accounting estimates involving a high potential to result in a material impact on the company's financial presentation?

It would be helpful if the Commission provided a further definition of materiality. In Staff Accounting Bulletin No. 99 - Materiality, the Commission moved away from a quantitative measure of materiality to a qualitative measure. The Commission's position is that an assessment of materiality requires that one view all of the facts in the context of surrounding circumstances and that materiality judgments can properly be made only by those who have all the facts. Discussing all of the facts and circumstances surrounding the materiality assessments regarding accounting estimates and all of the multiple judgments that could have been made will further confuse investors and readers of financial statements.

Is a three-year period the most appropriate period of time over which investors should consider changes? If not, why would a shorter or longer period be more appropriate? Would requiring disclosure over a longer period, such as five years, make it easier for investors to identify trends? If so, over how many years should we phase in a longer period requirement?

We feel that the proposal to include three year historical analysis of changes in significant estimates will require additional time to prepare financial reports and will add more confusing information to MD&A. The discussion of changes in significant estimates should be limited to the period-to-period comparison that already is in MD&A.

Should we consider requiring disclosure of whether the audit committee recommends the disclosure be included in the MD&A, which is akin to the disclosure required in the Item 306 audit committee report? Is additional disclosure or regulation necessary or appropriate concerning the role of the audit committee in discussing the critical accounting estimates and the disclosure about them that management drafts?

We feel that the requirement for the directors' signatures on the back of a 10-K should be sufficient. In addition to the signatures on the 10-K, UniSource Energy requires directors to sign an affirmation regarding their review of the 10-K. We presume that other companies have developed their own methodologies to assure themselves that their directors are comfortable with the content of the 10-K before they file their reports. We would not presume to tell others how to become comfortable before filing a document, but believe that such comfort would be inherently clear by the appearance of the signatures affixed to the document.

Should we require that the critical accounting estimates disclosure in the MD&A undergo an auditor examination comparable to that enumerated in AT §701? If we were to require examinations by auditors of part or all of MD&A disclosures, should we also require that a company file, or disclose the results of, the auditor's reports?

Auditors are currently reviewing MD&A as part of the audit. A separate report on critical accounting estimates should not be required. A statement regarding the auditor's review of MD&A could be added to the current auditors' report.

Is the additional information elicited by the proposals useful to investors, other users of company disclosure and readers of a company's financial statements? If not, how can it be improved to achieve that goal?

The additional information could be improved if the focus was more on a "Plain English" discussion of the assumptions underlying critical accounting estimates rather than explaining various assumptions and alternatives that could have been used.

Other Comments:

The Commission's estimate of the average amount of time it would take to prepare the disclosure about critical accounting policies is approximately 29 hours for annual reports and approximately 15 hours for quarterly reports. We do not feel that this is a realistic estimate. Preparing the disclosure for just one critical estimate with multiple alternatives and judgements and all of the qualitative and quantitative discussion proposed could take more time than that.

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UniSource Energy appreciates the opportunity to respond to the proposal to require certain disclosure in MD&A about the application of critical accounting policies. Should the Commission desire to speak to someone at UniSource Energy directly regarding these comments, please contact Kevin Larson at (520) 884-3660.

Sincerely,
Kevin Larson
Vice President and Principal Financial Officer