The utilities staff of the Arizona Corporation Commission has changed its position on the buyout to neutral from opposing the deal, in light of 40 new conditions proposed by UniSource and its Wall Street suitors, Chris Kempley, chief counsel of the Corporation Commission, told an administrative law judge presiding over Monday's hearing.

But the staff still has concerns over how the utilities would be protected from new financial pressures on the parent company under the debt-laden transaction, Kempley said.

An investor group led by buyout specialist Kohlberg Kravis Roberts & Co. has proposed buying UniSource in a deal worth nearly $3 billion, including $557 million in cash and $660 million in new debt.

The staff is charged with making recommendations to the administrative judge, who will formulate a final recommendation to the full Corporation Commission in advance of action expected by the elected panel by late summer.

The new conditions, designed to allay rate and service-quality concerns over the buyout, include a promise that UniSource would pump $1.5 billion into TEP and other utility subsidiaries for operating, maintenance and capital improvements through 2008. That's about a 10 percent increase over the amount UniSource had estimated, company officials said.

Additionally, the acquisition group has agreed to spend at least $400 million by 2008 to pay down or prepay lease-purchase agreements and other obligations of the regulated utilities, said Ray Heyman, a local attorney representing UniSource.

The new conditions on the deal are in response to documents filed in April by the Corporation Commission staff, which opposed the deal on the grounds that it didn't do enough to ensure safe, reliable utility service.

Heyman said the deal should be approved because it wouldn't harm ratepayers and would strengthen UniSource's regulated utility subsidiaries, including TEP and UniSource Energy Services, which provides electric and gas service to parts of rural Northern and Southern Arizona.

The deal would maintain current management in Tucson for at least five years, Heyman said.

During his testimony, UniSource Chairman James Pignatelli said TEP would become stronger financially with an infusion of $168 million in new equity from the investors and repayment of a $95 million intercompany loan to TEP from UniSource.

All current regulatory agreements, including a rate freeze through 2008, employment levels, union contracts and consumer protections, would remain the same under the deal, said Pignatelli, who also is UniSource's president and chief executive officer.

Critics said they fear TEP utility rates would rise or service would suffer as a result of the buyout.

Daniel Pozefsky, attorney for the Residential Utility Consumers Office, said the state utility watchdog agency opposes the deal based on the risk posed by additional debt that would be taken on by the parent company and concerns about the continuity of management.

"There are no incremental benefits to justify the increased risks," Pozefsky said.

Cross-examining Pignatelli, Pozefsky asked why data from a pending review of TEP rates shouldn't be considered in the buyout proceedings, citing a RUCO analysis showing the company has been collecting excess profits in recent years.

UniSource recently filed documents supporting current rates as part of the mandatory rate check, and Pignatelli has said that higher costs for fuel and other expenses may prompt a request for higher rates after 2008.

A bristling Pignatelli said TEP is not over-earning, calling RUCO's analysis technically flawed and "extremely naive or duplicitous." "I know what it takes to run a company -- gas is going up, and we are absorbing that," he said.

Opposition also came from some rural areas where UniSource bought the electric and natural-gas systems of Citizens Communications Co. last August. Power rates rose 22 percent as part of rate agreement consummated as part of the sale, though Citizens had proposed a larger increase.

Roy Dunton, a board member of the Mohave County Economic Development Authority, said businesses are leaving the area because of high power rates, and he fears more will exit if UniSource's new owners seek to raise rates to recoup their investment.

"There's only one place for them to get their money, and that's from the ratepayers," Dunton said.

But a parade of witnesses, including Mayor Bob Walkup and officials of Tucson business and charity groups, said they were satisfied local interests would be protected and TEP would be strengthened by the buyout.

Officials of the Arizona Chamber of Commerce, the Boys & Girls Clubs of Tucson, the American Red Cross of Southern Arizona, the Tucson Urban League and the Nogales City Council also said they supported the deal, citing assurances that UniSource's charity and community support would continue or increase after the acquisition.

Locals of the International Brotherhood of Electrical Workers that represent TEP and UniSource Energy Services employees have not yet taken a position on the buyout, said Nicholas Enoch, a Phoenix attorney representing the union.