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 and transmission facilities, 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 addition, the 2020 Rate Order 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 January 2021, the ACC staff opened a generic docket related to this matter and will consider additional evidence or recommendations in Phase 2. In 2021, there was limited activity in this docket. On January 19, 2022, the ACC issued an order delaying Phase 2 until after the completion of the generic docket. TEP cannot predict the timing or outcome of these proceedings.

The requested forward-looking formula rate is intended to allow for a more timely recovery of transmission-related costs. As part of the order, the FERC established hearing and settlement procedures. In February 2021, a Presiding Judge was appointed to continue the formula rate case proceeding after the settlement procedures resulted in an impasse. In August 2021, TEP filed an unopposed motion requesting that the Chief Judge suspend the litigation procedural schedule to allow the parties time to prepare and file a comprehensive settlement package, as parties in the proceeding reached a settlement in principle. The motion was granted and in December 2021 the settlement agreement was filed with the FERC. On February 1, 2022, the Presiding Judge certified and recommended approval by the FERC of the proposed settlement.

•a direct assignment of 25% of transmission costs allocated to retail customers and 75% allocated between wholesale and retail customers beginning January 1, 2022, through the date that is the later of: (i) December 31, 2031; or (ii) the date on which TEP has no Industrial Development Revenue Bonds outstanding;

As a result of the proposed settlement, in December 2021 TEP recognized: (i) $12 million of wholesale revenue, which includes $4 million and $3 million for transmission service provided in 2020 and 2019, respectively; and (ii) a decrease of $3 million in alternative revenues. The agreement does not go into effect until final approval from the FERC is received. TEP cannot predict the final timing of the proceedings. All rates charged under the revised OATT pursuant to the FERC order are subject to refund until the proceeding concludes. TEP had $15 million of wholesale revenues reserved in Current Liabilities—Regulatory Liabilities on the Consolidated Balance Sheets as of December 31, 2021 and 2020.

In January 2021, the FERC notified TEP that it was commencing an audit that intends 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 covers the period of January 1, 2018 to the present. The audit is ongoing and TEP cannot predict the outcome or findings, if any, of the FERC audit at this time.

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. On February 1, 2022, TEP filed a request with the ACC for approval of a rate adjustment for the PPFAC. The request presents two additional scenarios whereby the true-up component of the PPFAC rate is reset to reflect the recovery of the uncollected true-up balance over 18 and 24-month timeframes. TEP cannot predict the outcome of the proceeding.

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


	Years Ended December 31,
(in millions)	2021		2020
Beginning of Period	$	23	$	36
Deferred Fuel and Purchased Power Costs (1)	343		283
PPFAC and Base Power Recoveries (2)	(275)		(296)
End of Period	$	91	$	23

(2)In March 2021 and 2020, the ACC approved a PPFAC surcharge as part of TEP's annual rate adjustment request, which went into effect on June 1, 2021 and June 1, 2020.

The ECA allows for the recovery of capital carrying costs and incremental operations and maintenance costs related to environmental investments, provided that they are not already recovered in base rates or recovered through another commission-approved mechanism.

The eligible costs for the ECA are subject to a cap equal to 0.5% of total annual retail revenue. Beginning January 2021, the difference between costs recovered through rates and actual ECA eligible costs is deferred to a balancing account as approved as part of the 2020 Rate Order.

The TEAM allows for the timely recovery of future significant income tax changes. It provides the Company the ability to pass through as a kWh surcharge: (i) the TCJA Regulatory Deferral balance to the initial 2021 TEAM rate; (ii) the change in EDIT compared to the test year; and (iii) the income tax effects of tax legislation that materially impacts TEP's 2018 test year revenue requirements. The TEAM went into effect January 1, 2021, as approved in the 2020 Rate Order. In 2021, TEP refunded $29 million to customers through the TEAM.

In 2018, the ACC approved TEP’s proposal to return savings from TEP’s federal corporate income tax rate under the TCJA to its customers through a combination of customer bill credits and a regulatory liability deferral that reflected the return of a portion of the savings. As part of the 2020 Rate Order, the balances in the regulatory liability deferral and TCJA balancing account were moved to the TEAM regulatory account in December 2020.

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. The TCA went into effect January 1, 2021, as approved in the 2020 Rate Order.

On February 8, 2022, the ACC approved TEP's motion to modify the TCA Plan of Administration to reflect the terms of the 2019 FERC Rate Case proposed settlement agreement, pending the conclusion of that proceeding.

Arizona utilities are required to file an annual RES implementation plan for review and approval by the ACC. The renewable energy requirement in 2021 was 11% of retail electric sales. In 2021, the percentage of TEP's retail kWh sales attributable to the RES was approximately 26%.

In September 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 by July 1, 2022, to phase out the RES tariff.

Under the EE Standards, the ACC requires electric utilities to implement cost-effective programs to reduce customers' energy consumption. As of December 31, 2021, TEP's cumulative annual energy savings was approximately 23%. The annual DSM performance incentive for the prior calendar year is recorded in the first quarter of each year.

In 2019, the ACC approved TEP’s 2018 energy efficiency implementation plan with a budget of $23 million, which is collected through the DSM surcharge, and approved a waiver of the 2018 EE Standards. In addition, the ACC ordered that TEP's 2018 energy efficiency implementation plan be considered as its 2019 and 2020 energy efficiency implementation plans. In June 2021, TEP filed its 2022 energy efficiency implementation plan with a budget of approximately $23 million. TEP cannot predict the outcome of the proceeding.

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. In 2021, LFCR revenues decreased as a result of a rate adjustment as approved in the 2020 Rate Order. 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 in the balance sheet are summarized in the table below:


	Remaining Recovery Period (years)	December 31,
($ in millions)		2021		2020
Regulatory Assets
Pension and Other Postretirement Benefits (Note 10)	Various	$	128	$	166
Under Recovered Purchased Energy Costs	2	91		23
Early Generation Retirement Costs	Various	38		43
Lost Fixed Cost Recovery	1	37		59
Property Tax Deferrals (1)	1	27		26
Income Taxes Recoverable through Future Rates (2)	Various	17		27
Final Mine Reclamation and Retiree Healthcare Costs (3)	7	17		20
Derivatives (Note 13)	8	8		55
Springerville Unit 1 Leasehold Improvements (4)	2	4		7
Tax Expense Adjustor Mechanism	1	3		—
Other Regulatory Assets	Various	14		16
Total Regulatory Assets		384		442
Less Current Portion	1	116		124
Total Non-Current Regulatory Assets		$	268	$	318


Regulatory Liabilities
Income Taxes Payable through Future Rates (2)	Various	$	268	$	298
Net Cost of Removal (5)	Various	73		125
Renewable Energy Standard	Various	66		63
Derivatives (Note 13)	8	19		4
Transmission Revenue Subject to Refund—FERC	1	15		15
Demand Side Management	1	12		6


Transmission Cost Adjustor	1	9		—
Tax Expense Adjustor Mechanism	1	—		29
Other Regulatory Liabilities	Various	1		1
Total Regulatory Liabilities		463		541
Less Current Portion	1	111		151
Total Non-Current Regulatory Liabilities		$	352	$	390

(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. This asset is fully recovered in rates with a recovery period of approximately six months.

(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.

(4)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.

(5)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. As a result of the 2020 Rate

Order, TEP transferred costs from Net Cost of Removal to Accumulated Depreciation and Amortization. See Note 3 for additional information related to new depreciation rates approved as part of the 2020 Rate Order.

With the exception of Early Generation Retirement Costs, Income Taxes Recoverable through Future Rates, and Springerville Unit 1 Leasehold Improvements, 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.