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Regulatory Matters
0202 - Disclosure - Regulatory Matters
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<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 2 - us-gaap:PublicUtilitiesDisclosureTextBlock-->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><u><b>NOTE 2. REGULATORY MATTERS </b></u>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>ACCOUNTING FOR RATE REGULATION</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">The Arizona Corporation Commission (ACC) and the Federal Energy Regulatory Commission (FERC)
regulate portions of TEP, UNS Gas, and UNS Electric (the three utilities) utility accounting
practices and rates. The ACC has authority over certain rates charged to retail customers, the
issuance of securities, and transactions with affiliated parties. The FERC regulates rates for
wholesale power sales and interstate transmission services.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>TEP PURCHASED POWER AND FUEL ADJUSTMENT CLAUSE (PPFAC)</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">The PPFAC allows recovery of fuel, transmission, and purchased power costs, including demand
charges and the prudent costs of contracts for hedging fuel and purchased power costs. In March
2010, the ACC approved a 0.09 cent PPFAC rate effective April 2010, compared to a 0.18 cent PPFAC
rate that expired March 2010. This includes a forward component credit of (0.08) cents and a
true-up component of 0.17 cents. TEP offsets the forward and true-up components of the PPFAC with
Fixed Competition Transition Charge (CTC) revenue to be refunded, resulting in a PPFAC charge of
zero to customers until the CTC is fully credited. TEP had no PPFAC rate in the first quarter of
2009.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">The following table shows the balance of (Over-) Under-Recovered Purchased Energy Costs:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">December 31,</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2009</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6">-Millions of Dollars-</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Fixed CTC Revenue to be Refunded Within the Next 12 Months;
Included in Regulatory Liabilities — Current</b>
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"><b>$</b></td>
<td align="right"><b>(19</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(9</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Under-Recovered Purchased Energy Costs — Regulatory Basis as
Billed to Customers
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>47</b></td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">29</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Reduction in Under-Recovered Purchased Energy Costs as
Estimated through Accrued Unbilled Revenues
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(16</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(9</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Fixed CTC Revenue to be Refunded
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(23</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(37</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Included in Regulatory Assets (Liabilities) — Noncurrent</b>
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>8</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(17</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">The $4 million amortization of Fixed CTC Revenue to be Refunded appears in the accompanying income
statements as a part of retail revenues in 2010. The $11 million 2010 net increase in
Under-Recovered Purchased Energy Costs appears in the income statement as a credit to fuel and
purchased power costs in the line item Increase (Decrease) to Reflect PPFAC Recovery Treatment.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">The following table summarizes TEP’s regulatory assets and liabilities:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">December 31,</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2009</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6">-Millions of Dollars-</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Regulatory Assets — Current</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Property Tax Deferrals
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>16</b></td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">16</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Derivative Instruments
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>7</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Deregulation Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>4</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Demand Side Management (DSM) Assets
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>3</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Other Current Regulatory Assets
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>4</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Regulatory Assets — Current</b>
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>34</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">27</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Regulatory Assets — Noncurrent</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Pension and Other Postretirement Benefits
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>78</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">80</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Income Taxes Recoverable through Future Revenues
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>18</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">18</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Final Mine Reclamation Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>10</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">9</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Under-Recovered Purchased Energy Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>8</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">San Juan Coal Contract Amendment
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>7</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Retiree Health Care Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>6</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Unamortized Loss on Reacquired Debt
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>6</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Deregulation Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>5</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Derivative Instruments
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>2</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">5</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Other Regulatory Assets
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>—</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Regulatory Assets — Noncurrent</b>
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>140</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">137</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Current Regulatory Liabilities</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Over-Recovered Purchased Energy Costs
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(19</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(9</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Renewable Energy Standards Tariff (REST)
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(19</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(17</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Other Current Regulatory Liabilities
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(2</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:45px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Current Regulatory Liabilities</b>
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(40</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(27</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:45px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Regulatory Liabilities — Noncurrent</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Net Cost of Removal for Interim Retirements
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(156</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(162</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Over-Recovered Purchased Energy Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>—</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(17</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:45px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Regulatory Liabilities — Noncurrent</b>
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(156</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(179</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Net Regulatory Assets (Liabilities)</b>
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"><b>$</b></td>
<td align="right"><b>(22</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(42</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>UNS GAS RATES AND REGULATION</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>2008 General Rate Case Filing</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">In November 2008, UNS Gas filed the general rate case (on a cost of service basis) with the ACC
requesting a total rate increase of 6% to cover a revenue deficiency of $10 million. Effective
April 2010, the ACC approved a rate increase of 2% ($3 million), including an 8% return on original
cost rate base, effective April 1, 2010. The rate increase is intended to cover the costs of
providing service.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>Purchased Gas Adjuster (PGA) Mechanism</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">UNS Gas’ retail rates include a PGA mechanism intended to address the volatility of natural gas
prices and allow UNS Gas to recover its actual commodity costs, including transportation, through a
price adjuster. All purchased gas commodity costs, including transportation, increase the PGA
bank, a balancing account. UNS Gas recovers these costs or returns amounts over-collected from/to
ratepayers through a PGA mechanism. In October 2009, the ACC approved an 8 cent per therm PGA
surcredit, effective November 2009 through October 2010. See table below for the balance of
Over-Recovered Purchased Energy Costs.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">UNS Gas has the following Regulatory Assets and Liabilities:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">December 31,</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2009</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6">-Millions of Dollars-</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Current Assets</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Derivative Instruments
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>8</b></td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">5</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Other Regulatory Assets</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Pension Obligations
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>2</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Derivative Instruments
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>2</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Other Regulatory Assets
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>1</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Regulatory Liabilities</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Over-Recovered Purchased Energy Costs
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(6</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(10</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Net Cost of Removal for Interim Retirements
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(21</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(21</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Net Regulatory Assets (Liabilities)</b>
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"><b>$</b></td>
<td align="right"><b>(14</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(20</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>UNS ELECTRIC RATES AND REGULATION</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>2009 General Rate Case Filing</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">In April 2009, UNS Electric filed a general rate case with the ACC (on a cost of service basis)
requesting a rate increase of 7.4% to cover a revenue deficiency of $14 million. Hearings before
an ACC administrative law judge concluded in February 2010. UNS Electric expects the ACC to rule
on its rate case by the end of September 2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>UNS Electric Purchased Power and Fuel Adjustment Clause (PPFAC)</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">The PPFAC allows recovery of fuel and purchased power costs, including demand charges and the
prudent costs of contracts for hedging fuel and purchased power costs. In April 2010, UNS Electric
filed an annual PPFAC recommendation with the ACC to have a (0.28) cent PPFAC surcredit for twelve
months. This includes a forward component credit of (0.42) cents and a true-up component of 0.14
cents. The surcredit was effective starting June 2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">UNS Electric’s regulatory assets and liabilities were as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">December 31,</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2009</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6">-Millions of Dollars-</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Current Regulatory Assets</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Derivative Instruments
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>13</b></td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">9</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Under-Recovered Purchased Power Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>3</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Other Regulatory Assets</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Derivative Instruments
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>4</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Pension Assets
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>2</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Other
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>—</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Current Regulatory Liabilities</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">REST
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(1</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Over-Recovered Purchased Power Costs
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>—</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(5</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Other Regulatory Liabilities</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Net Cost of Removal for Interim Retirements
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(12</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(12</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Total Net Regulatory Assets (Liabilities)</b>
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>9</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: Helvetica,Arial,sans-serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 0pt">
<b>
</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>REST/DSM</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">The ACC allows TEP and UNS Electric to include a REST tariff on customer bills to recover qualified
expenditures related to renewable energy projects. TEP and UNS Electric are required to file a
five-year implementation plan with the ACC, and annually seek approval for the upcoming year’s REST
funding amount. For 2010, the ACC approved collections through the REST tariff of $32 million for TEP, and a $8 million
for UNS Electric. In June of 2010, the ACC approved annual collection through the DSM tariffs of $12 million for TEP, $2
million for UNS Electric, and $1 million for UNS Gas.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">In April 2010, the ACC approved TEP’s use of REST and PPFAC funds to add approximately 30 MW of
solar generating capacity, through long-term power purchase contracts. In April 2010, the ACC
approved UNS Electric’s use of REST and PPFAC funds to add more than 7 MW of wind generating
capacity and 0.5 MW of solar generating capacity, through a long-term power purchase contract. See
Note 6 for additional information.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt">In May 2010, the ACC approved a funding mechanism for approximately 3 MW of TEP owned projects.
The mechanism allows TEP to use REST funds to recover operating costs, depreciation, property taxes
and provide TEP with a return on its investment until these costs could be recovered as part of
TEP’s base rates. We expect these projects to be completed by the end of 2010 and TEP to begin
cost recovery through the REST in January 2011. In July 2010, TEP filed its 2011 REST
implementation plan with the ACC. The plan includes a proposal for TEP to invest in approximately
7 MW of TEP owned solar projects per year. These company-owned solar projects would be installed
between 2011 and 2014. The plan includes the same funding mechanism that was approved by the ACC
in May 2010.
</div>
<div align="left">
</div>
</div>
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Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 71
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