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.

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 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 May 2023, the ACC approved a rate adjustment designed to collect the then under-recovered PPFAC balance over 12 months.

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


	Three Months Ended March 31,
(in millions)		2024		2023
Beginning of Period		$	55	$	124
Deferred Fuel and Purchased Power Costs (1)		49		58
PPFAC and Base Power Recoveries		(97)		(64)
End of Period		$	7	$	118

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 the ACC in December each year based on changes in the OATT formula rate. New TCA rates take effect 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% of the annual energy requirement. The renewable energy requirement in 2024 is 14% 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 amount funds: (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.

In March 2024, TEP filed a proposal with the ACC to increase the RES tariff to account for under-collected RES funds totaling approximately $17 million as of December 31, 2023.

TEP is required to implement cost-effective DSM programs to comply with the ACC’s Energy Efficiency Standards (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.

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 the first half of 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 on the Condensed Consolidated Balance Sheets are summarized in the table below:


($ in millions)	Remaining Recovery Period (years)	March 31, 2024		December 31, 2023
Regulatory Assets
Pension and Other Postretirement Benefits (Note 7)	Various	$	106	$	107
Early Generation Retirement Costs	Various	47		48
Derivatives (Note 8)	6	40		26
Lost Fixed Cost Recovery	1	33		35
Property Tax Deferrals (1)	1	30		30
Final Mine Reclamation and Retiree Healthcare Costs (2)	16	21		6
Under-Recovered Purchased Energy Costs	1	7		55
Income Taxes Recoverable through Future Rates (3)	Various	6		6
Unamortized Loss on Reacquired Debt	Various	5		5


Other Regulatory Assets	Various	14		12
Total Regulatory Assets		309		330
Less Current Portion	1	113		147
Total Noncurrent Regulatory Assets		$	196	$	183


Regulatory Liabilities
Income Taxes Payable through Future Rates (3)	Various	$	225	$	229
Net Cost of Removal (4)	Various	132		130
Renewable Energy Standard	Various	76		77
Derivatives (Note 8)	6	28		28
Demand Side Management	1	10		9
Deferred Investment Tax Credits	Various	6		6
Pension and Other Postretirement Benefits (Note 7)	Various	4		4
Transmission Revenue Requirement Balancing Account	1	2		5



Other Regulatory Liabilities	Various	—		1



Total Regulatory Liabilities		483		489
Less Current Portion	1	92		93
Total Noncurrent Regulatory Liabilities		$	391	$	396

(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 2040. San Juan Unit 1 was retired in 2022. In March 2024, the San Juan reclamation oversight committee approved a new final mine reclamation study which resulted in a $15 million increase in the final mine reclamation regulatory asset.

(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.

Regulatory assets are either being collected or are expected to be collected through Retail Rates. With the exception of 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.