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 and accounting practices. The FERC regulates rates and services for electric transmission and wholesale power sales in interstate commerce.

In 2020, the ACC issued a rate order for new rates and established a second phase of TEP’s rate case to address the impact on certain communities due to the closures of fossil-based generation facilities (Phase 2). In 2021, the ACC staff opened a generic docket related to this matter, and in January 2022, the ACC issued an order delaying Phase 2 until after the completion of the generic docket. In January 2023, the ACC closed Phase 2 and ordered that just and equitable transition issues be considered as part of the 2022 Rate Case.

In 2019, TEP filed a proposal with the FERC requesting a forward-looking formula rate intended to allow for timely recovery of transmission-related costs. The FERC issued an order approving TEP's proposed OATT revisions effective August 1, 2019, subject to refund and further proceedings. As part of the 2022 Final FERC Rate Order, the FERC established hearing and

Increased rates charged under the 2022 Final FERC Rate Order were subject to refund and deferred as a regulatory liability. In 2022, TEP returned all amounts in excess of the rates approved in the settlement agreement previously deferred as a regulatory liability. TEP had no wholesale revenues reserved in Current Liabilities—Regulatory Liabilities on the Consolidated Balance Sheets as of December 31, 2022, and $15 million reserved as of December 31, 2021, related to the 2022 Final FERC Rate Order.

In January 2021, the FERC notified TEP that it was commencing an audit with the intent 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. On November 4, 2022, the FERC published without prejudice the final audit report with its findings and recommendations. TEP accepted the findings therein and submitted compliance items related to the audit in January 2023. TEP does not expect a material financial impact from the results of the audit.

TEP has received regulatory decisions that allow for timely recovery of certain costs through recovery mechanisms. 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 April 2022, the ACC approved a rate adjustment for the PPFAC that sets the true-up component of the PPFAC rate to recover the existing uncollected true-up balance over 18 months. The ACC also set the forward-looking component of the PPFAC rate to zero, which has resulted in under-collection of PPFAC costs.

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


	Years Ended December 31,
(in millions)	2022		2021
Beginning of Period	$	91	$	23
Deferred Fuel and Purchased Power Costs (1)	348		343
PPFAC and Base Power Recoveries (2)	(315)		(275)
End of Period	$	124	$	91

(2)In March 2021, the ACC approved a PPFAC surcharge as part of TEP's annual rate adjustment request beginning in June 2021. The 2022 PPFAC rate adjustment became effective on April 29, 2022.

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 difference between costs recovered through rates and actual ECA eligible 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. The 2022 Rate Case includes a proposal to transition away from the current ECA surcharge and to recover the costs in base rates.

The TEAM allows for the timely recovery of future significant income tax changes and provides the Company 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. The Company files a notice with the ACC in December each year presenting a revised tariff that reflects the changes in the formula OATT rate which goes into effect in the first billing cycle in January of each year.

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%. The renewable energy requirement in 2022 was 12% of retail electric sales. In 2022, the percentage of TEP's retail kWh sales attributable to the RES was approximately 24%. 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 surcharge.

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. Additionally, the ACC directed TEP to collaborate with the ACC to develop and file a proposal to phase out the RES tariff. In June 2022, TEP filed a request with the ACC for approval of an extension of the 2021 RES implementation plan through the completion of the 2022 Rate Case. The rate case includes a proposal to transition away from the current RES surcharge and to recover the costs in base rates.

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 to implement 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, 2022, TEP's cumulative annual energy savings were approximately 24%.

In November 2022, the ACC approved TEP’s 2022 energy efficiency implementation plan, with a budget of $24 million, which is collected through the DSM surcharge. The 2022 plan will remain in effect until another plan is approved. The 2022 Rate Case includes a proposal to transition away from the current DSM surcharge and to recover the costs in base rates.

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 when amounts are verifiable regardless of when the lost retail kWh sales occurred. 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 on the balance sheet are summarized in the table below:


	Remaining Recovery Period (years)	December 31,
($ in millions)		2022		2021
Regulatory Assets
Under Recovered Purchased Energy Costs	2	$	124	$	91
Pension and Other Postretirement Benefits (Note 9)	Various	90		128
Early Generation Retirement Costs (1)	Various	58		38
Property Tax Deferrals (2)	1	29		27
Lost Fixed Cost Recovery	1	25		37
Final Mine Reclamation and Retiree Healthcare Costs (3)	6	11		17
Income Taxes Recoverable through Future Rates (4)	Various	6		17
Unamortized Loss on Reacquired Debt	Various	5		5
Derivatives (Note 12)	7	3		8
Tax Expense Adjustor Mechanism	1	3		3
Springerville Unit 1 Leasehold Improvements (5)	1	2		4
Other Regulatory Assets	Various	14		9
Total Regulatory Assets		370		384
Less Current Portion	1	185		116
Total Non-Current Regulatory Assets		$	185	$	268


Regulatory Liabilities
Income Taxes Payable through Future Rates (4)	Various	$	244	$	268
Derivatives (Note 12)	7	86		19
Renewable Energy Standard	Various	73		66
Net Cost of Removal (6)	Various	43		73
Demand Side Management	1	16		12
Transmission Cost Adjustor	1	9		9
Pension and Other Postretirement Benefits (Note 9)	Various	8		—
Deferred Investment Tax Credits	Various	7		1


Transmission Revenue Subject to Refund - FERC	1	1		15
Other Regulatory Liabilities	Various	2		—
Total Regulatory Liabilities		489		463
Less Current Portion	1	111		111
Total Non-Current Regulatory Liabilities		$	378	$	352

(2)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.

(3)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 June 2022.

(5)Represents investments TEP made, which were previously recorded in Plant in Service on the Consolidated Balance Sheets, to ensure that the facilities continued to provide safe, reliable service to TEP's customers. TEP received ACC authorization to recover leasehold improvement costs at Springerville Unit 1 over a 10-year period.

(6)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. The decrease in Net Cost of Removal is primarily due to the retirement of San Juan Unit 1 in June 2022.

Except for Early Generation Retirement Costs, Income Taxes Recoverable through Future Rates, Springerville Unit 1 Leasehold Improvements, and Under Recovered 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.