The ACC and the FERC each regulate portions of the utility accounting practices and rates of TEP. The ACC regulates rates charged to retail customers, the siting of generation facilities and transmission systems, the issuance of securities, transactions with affiliated parties, and other utility matters. The ACC also enacts other regulations and policies that can affect the Company's business decisions. The FERC regulates rates and services for electric transmission and wholesale power sales in interstate commerce.

In August 2023, the ACC issued a rate order for new rates that took effect September 1, 2023. Provisions of the 2023 Rate Order include, but are not limited to:

In January 2023, the ACC ordered that funding for the just and equitable transition away from fossil fuel-based economies for communities impacted by early coal-fired plant closures be considered as part of the 2023 Rate Order. In the 2023 Rate Order, the ACC determined that there was insufficient evidence to support customer funding for the just and equitable transition as part of the proceeding.

In July 2023, TEP completed all compliance activities and submitted a final status update to the FERC related to the FERC's audit to evaluate TEP's compliance with: (i) the accounting requirements of the Uniform System of Accounts; and (ii) the reporting requirements of the FERC Form 1 Annual Report and Supplemental Form 3-Q Quarterly Financial Reports. The audit covered the period of January 1, 2018 to December 31, 2021. In 2023, TEP issued refunds to customers of $1 million related to the audit.

TEP has received regulatory decisions that allow for timely recovery of certain costs through recovery mechanisms. The difference between costs recovered through rates and actual approved costs is deferred. TEP defers over-recovered costs as a regulatory liability to return to customers and defers under-recovered costs as a regulatory asset to recover from customers in the future. Cost recovery mechanisms that have a material impact on TEP's operations or financial results are described below.

TEP's PPFAC rate is typically adjusted annually on April 1st and goes into effect for the subsequent 12-month period unless the schedule is modified by the ACC. The PPFAC rate includes: (i) a forward component which is calculated by taking the difference between forecasted fuel and purchased power costs and the amount of those costs established in Retail Rates; and (ii) a true-up component that allows for reconciliation of differences between actual costs and those recovered in the preceding period.

In 2022, the ACC approved a rate adjustment for the PPFAC that set the true-up component of the PPFAC rate to recover the then existing uncollected true-up balance over 18 months. The ACC also set the forward-looking component of the PPFAC rate to zero, which contributed to under-collection of PPFAC costs. In May 2023, the ACC approved a rate adjustment for the PPFAC to collect the remaining uncollected balance over 12 months.

The table below summarizes the PPFAC regulatory asset (liability) balance:


	Years Ended December 31,
(in millions)	2023		2022
Beginning of Period	$	124	$	91
Deferred Fuel and Purchased Power Costs (1)	328		348
PPFAC and Base Power Recoveries	(397)		(315)
End of Period	$	55	$	124

The ECA allows for the recovery of capital carrying costs and incremental operations and maintenance costs related to environmental investments, provided they are not already recovered in base rates or recovered through another commission-approved mechanism. Costs eligible for the ECA are subject to a cap equal to 0.5% of total annual retail revenue.

The TEAM allows for the timely recovery of future significant income tax changes and provides TEP the ability to pass through as a kWh surcharge: (i) the change in EDIT compared to the test year; and (ii) the income tax effects of tax legislation that materially impacts TEP's authorized revenue requirement.

The TCA allows for timely recovery of actual costs required to provide transmission services to retail customers. The TCA is limited to the recovery, or refund, of costs associated with future changes in TEP's OATT rate. TEP files new TCA rates with

In December 2023, the ACC approved a revision to the TCA plan of administration to credit retail customers with transmission revenue associated with line losses from wholesale customers that take transmission service under TEP's OATT. The amendment, which reduces TEP's retail revenue, became effective in December 2023.

The ACC’s RES requires Arizona regulated utilities to increase their use of renewable energy each year until it represents at least 15% of their total annual retail energy sales by 2025, with DG accounting for 30% of the annual energy requirement. The renewable energy requirement in 2023 was 13% of retail electric sales. Consistent with prior years, TEP plans to meet these requirements through a combination of utility-owned resources, PPAs, and customer-sited DG. Arizona utilities are required to file an annual RES implementation plan for review and approval by the ACC. TEP recovers approved costs of carrying out this plan from retail customers through a RES tariff.

In 2021, the ACC approved TEP's 2021 RES implementation plan for the years 2021 and 2022 with a budget of $66 million. The approved amounts fund: (i) above market cost of renewable power purchases; (ii) previously awarded incentives for customer-installed DG; and (iii) various other program costs. In June 2023, the ACC approved TEP's extension of the 2021 RES implementation plan through 2024.

TEP is required to implement cost-effective DSM programs to comply with the ACC’s EE Standards. The EE Standards provide regulated utilities a DSM surcharge to recover from retail customers the costs of implementing DSM programs, as well as an annual performance incentive. TEP records its annual DSM performance incentive for the prior calendar year in the first quarter of each year. As of December 31, 2023, TEP's cumulative annual energy savings were approximately 27%.

In the 2023 Rate Order, the ACC approved a 2023 energy efficiency implementation plan with a cumulative three-year budget of $72 million, which is collected through the DSM surcharge. In January 2024, TEP filed a proposal with the ACC to refund over-collected, uncommitted DSM surcharge funds totaling $10 million over a period not to exceed one year beginning in May 2024.

In 2022, as part of its acknowledgment of TEP's 2020 IRP, the ACC set an annual 1.3% energy efficiency target measured by retail MWh savings in each of the years 2023 through 2025. TEP will report its savings for these years in its first integrated resource plan following 2025 and in TEP's periodic energy efficiency filings.

The LFCR mechanism provides for recovery of certain non-fuel costs that would go unrecovered between rate cases due to reduced retail kWh sales as a result of implementing ACC-approved energy efficiency programs and customer-installed DG. The LFCR mechanism is adjusted in each rate case when the ACC approves new base rates. TEP records a regulatory asset and recognizes LFCR revenues based on an estimate of lost retail kWh sales during the period. TEP is required to make an annual filing with the ACC requesting recovery of LFCR revenues recognized in the prior year. The recovery is subject to a year-over-year increase cap of 2% of TEP's applicable retail revenues.

Regulatory assets and liabilities recorded in the Consolidated Balance Sheets are summarized in the table below:


	Remaining Recovery Period (years)	December 31,
($ in millions)		2023		2022
Regulatory Assets
Pension and Other Postretirement Benefits (Note 9)	Various	$	107	$	90
Under Recovered Fuel and Purchased Energy Costs	1	55		124
Early Generation Retirement Costs	Various	48		58
Lost Fixed Cost Recovery	1	35		25
Property Tax Deferrals (1)	1	30		29
Derivatives (Note 12)	6	26		3
Final Mine Reclamation and Retiree Healthcare Costs (2)	5	6		11
Income Taxes Recoverable through Future Rates (3)	Various	6		6
Unamortized Loss on Reacquired Debt	Various	5		5
Other Regulatory Assets	Various	12		19
Total Regulatory Assets		330		370
Less Current Portion	1	147		185
Total Non-Current Regulatory Assets		$	183	$	185


Regulatory Liabilities
Income Taxes Payable through Future Rates (3)	Various	$	229	$	244
Net Cost of Removal (4)	Various	130		43
Renewable Energy Standard	Various	77		73
Derivatives (Note 12)	6	28		86
Demand Side Management	1	9		16
Deferred Investment Tax Credits	Various	6		7


Transmission Balancing Accounts	1	5		9
Pension and Other Postretirement Benefits (Note 9)	Various	4		8
Transmission Revenue Subject to Refund - FERC	1	—		1
Other Regulatory Liabilities	Various	1		2
Total Regulatory Liabilities		489		489
Less Current Portion	1	93		111
Total Non-Current Regulatory Liabilities		$	396	$	378

(1)Recorded as a regulatory asset based on historical ratemaking treatment allowing regulated utilities recovery of property taxes on a pay-as-you-go or cash basis. TEP records a liability to reflect the accrual for financial reporting purposes and an offsetting regulatory asset to reflect recovery for regulatory purposes.

(2)Represents costs associated with TEP’s jointly-owned facilities at San Juan and Four Corners. TEP recognizes these costs at future value and is permitted to fully recover these costs on a pay-as-you-go basis through the PPFAC mechanism. Final mine reclamation costs are expected to be funded by TEP through 2028. San Juan Unit 1 was retired in 2022.

(4)Represents an estimate of the future cost of retirement, net of salvage value. These are amounts collected through revenue for transmission, distribution, generation, and general and intangible plant which are not yet expended. In September 2023, the Net Cost of Removal reserve was rebalanced as part of the 2023 Rate Order.

Except for Early Generation Retirement Costs, Income Taxes Recoverable through Future Rates, and Under Recovered Fuel and Purchased Energy Costs, TEP does not earn a return on regulatory assets. TEP pays a return on the majority of its regulatory liability balances.

If TEP determines that it no longer meets the criteria for continued application of regulatory accounting, TEP would be required to write off its regulatory assets and liabilities related to those operations not meeting the regulatory accounting requirements. Discontinuation of regulatory accounting could have a material impact on TEP's financial statements.