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 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.

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


	Three Months Ended March 31,
(in millions)	2025		2024
Beginning of Period	$	(49)	$	55
Deferred Fuel and Purchased Power Costs (1)	61		49
PPFAC and Base Power Recoveries	(60)		(97)
End of Period	$	(48)	$	7

The TCA (Transmission Cost Adjustor) allows for timely recovery or refund of actual costs, net of applicable credits, required to provide transmission services to retail customers. TEP files new TCA rates with the ACC in December each year based on changes in net costs required to provide transmission services to retail customers. New TCA rates take effect in January of each year.

The ACC’s RES requires Arizona regulated electric utilities to increase their use of renewable energy each year until it represents at least 15% of their total annual retail energy sales by the end of 2025. Consistent with prior years, TEP plans to meet these requirements through a combination of utility-owned resources, PPAs, and customer-sited DG. TEP recovers approved costs of carrying out this plan from retail customers through a RES tariff.

In May 2024, the ACC approved an extension of TEP's 2021 RES implementation with a budget of $66 million until further order of the ACC and an increase to the RES tariff to recover under-collected RES funds totaling $17 million. The ACC also

waived for TEP the general requirement that Arizona utilities file an annual RES implementation plan. 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.

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 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 periodically reports on its energy efficiency savings in filings with the ACC.

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, 2025		December 31, 2024
Regulatory Assets
Pension and Other Postretirement Benefits (Note 9)	Various	$	102	$	103
Early Generation Retirement Costs	Various	44		46
Lost Fixed Cost Recovery	1	33		31
Property Tax Deferrals (1)	1	32		32
Derivatives (Note 10)	5	19		19
Transmission Revenue Requirement Balancing Account	1	14		11
Final Mine Reclamation (2)	15	8		9

Income Taxes Recoverable through Future Rates (3)	Various	5		5
Unamortized Loss on Reacquired Debt	Various	4		4



Other Regulatory Assets	Various	15		16
Total Regulatory Assets		276		276
Less Current Portion	1	102		98
Total Noncurrent Regulatory Assets		$	174	$	178


Regulatory Liabilities
Income Taxes Payable through Future Rates (3)	Various	$	212	$	209
Net Cost of Removal (4)	Various	102		110
Renewable Energy Standard	Various	90		88
Over-Recovered Fuel and Purchased Energy Costs	1	48		49
Deferred Investment Tax Credits	Various	24		4
Derivatives (Note 10)	5	18		22
Pension and Other Postretirement Benefits (Note 9)	Various	18		19
Demand Side Management	1	5		5








Total Regulatory Liabilities		517		506
Less Current Portion	1	145		143
Total Noncurrent Regulatory Liabilities		$	372	$	363

(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.

(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 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 Transmission Revenue Requirement

On April 28, 2025, the ACC issued an accounting order allowing TEP to defer for recovery in TEP's next rate case certain incurred costs associated with owning, operating, and maintaining Roadrunner Reserve I, including depreciation and amortization, property taxes, operations and maintenance expense, interest expense, and ITC transaction costs. These costs will be partially offset by future benefits associated with ITCs.