REVENUE

TEP earns the majority of its revenues from the sale of power to retail and wholesale customers based on regulator-approved tariff rates. Most of the Company's contracts have a single performance obligation, the delivery of power. TEP has certain contracts with variable transaction pricing that require it to estimate the expected consideration. As of December 31, 2018, TEP's variable consideration included revenues that are subject to refund.

DISAGGREGATION OF REVENUES

The following table presents the disaggregation of TEP’s Operating Revenues on the Consolidated Statements of Income by type of service:



	Years Ended December 31,
(in millions)	2018		2017		2016
Retail	$	1,022	$	1,017	$	969
Wholesale	238		152		106
Other Services	100		103		109
Revenues from Contracts with Customers	1,360		1,272		1,184
Alternative Revenues	28		24		20
Other	45		45		31
Total Operating Revenues	$	1,433	$	1,341	$	1,235

Retail Revenues

TEP’s tariff-based sales to residential, commercial, and industrial customers are regulated by the ACC and recognized when power is delivered at the amount of consideration that the Company expects to receive in exchange. Retail Revenues include an estimate for unbilled revenues from service that has been provided but not billed by the end of an accounting period. At the end of the month, amounts of power delivered since the last meter reading are estimated and the corresponding unbilled revenue is calculated using anticipated Retail Rates. Unbilled revenues are dependent upon a number of factors that require management’s judgment including estimates of retail sales, customer usage patterns, and pricing. Once the usage is estimated, TEP applies the anticipated rate and records revenue. Unbilled revenues increase during the spring and summer months and decrease during the fall and winter months due to the seasonal fluctuations of TEP’s actual load. The timing of revenue recognition, billings, and cash collections results in billed and unbilled accounts receivable balances on the balance sheet. See Note 5 for components of Accounts Receivable, Net on the Consolidated Balance Sheets.

In January 2018, TEP began to recognize a provision for revenues subject to refund, which reduced operating revenues, and a current regulatory liability for savings expected to be returned to customers from the Company’s federal income tax reduction under the TCJA. In April 2018, the ACC approved the ACC Refund Order effective May 1, 2018. As a result of the ACC Refund Order, the Company returned savings to customers through a bill credit. See Note 2 for more information regarding the ACC Refund Order.

Wholesale Revenues

TEP’s operations include the wholesale marketing of electricity and transmission to other utilities and power marketers, which may include capacity, power, transmission, and ancillary services. When TEP promises to provide distinct services within a contract, the Company identifies one or more performance obligations. The Company recognizes revenue for wholesale and transmission sales at FERC-approved rates based on demand (for capacity) or the reading of meters (for power). For contracts with multiple performance obligations, all deliverables are eligible for recognition in the month of production; therefore, it is not necessary to allocate the transaction price among the identified performance obligations. For purchased power and wholesale sales contracts that are settled financially, TEP nets the purchased power contracts with the sales contracts and reflects the amount in Operating Revenues on the Consolidated Statements of Income.

In March 2018, the FERC issued the FERC Refund Order. In May 2018, TEP responded to the FERC Refund Order and proposed an overall transmission rate reduction. As a result, TEP began accruing a current regulatory liability and reduction in wholesale revenues. In November 2018, the FERC approved TEP's proposed revisions to its stated transmission rates. The related revenue subject to refund recorded did not have a material impact on TEP's financial position or results of operations. See Note 2 for more information regarding the FERC Refund Order.

Other Services Revenues

Other Services Revenues primarily include fees earned as operator of Springerville Units 3 and 4, miscellaneous service-related revenues, and reimbursement of various operating expenses for the use of the Springerville Common Facilities by Springerville Units 3 and 4 and the Springerville Coal Handling Facilities by Springerville Unit 3. As the operating agent for Springerville Units 3 and 4, TEP may be required to refund its monthly fee based on unit availability. When TEP recognizes revenue for reimbursement of Springerville Common Facilities and Springerville Coal Handling Facilities' operating expenses, the associated expenses are recorded in their respective line items on the income statement based on the nature of services provided.

Alternative Revenues

Alternative revenue programs allow utilities to adjust future rates in response to past activities or completed events if certain criteria established by a regulator are met. TEP has identified its LFCR mechanism and DSM performance incentive as alternative revenues. The LFCR mechanism provides for recovery of certain non-fuel costs that would go unrecovered due to reduced retail kWh sales as a result of implementing ACC-approved energy efficiency programs and customer-installed DG. The LFCR surcharge is assessed as a percentage of the customer’s bill. Revenue recognition related to the LFCR mechanism creates a regulatory asset until such time as the revenue is collected. For recovery of the LFCR regulatory asset, TEP is required to file an annual LFCR adjustment request with the ACC for the LFCR revenues recognized in the prior year. The recovery is subject to a year-over-year cap of applicable retail revenues of 2%. In addition, the ACC approves a new DSM surcharge annually, which is effective June 1 of each year, to compensate TEP for the costs to design and implement cost-effective energy efficiency and demand response programs until such costs are reflected in TEP’s non-fuel base rates as well as a performance incentive. TEP collects the DSM surcharge on a per kWh basis for residential customers and on a percentage of bill basis for non-residential customers. See Note 2 for additional information regarding these cost recovery mechanisms.

Other Revenues

Other Revenues include gains and losses on derivative contracts, late and returned payment finance charges, and lease income. See Note 12 for information regarding derivative instruments.