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.

◦if a new proposed ARAM is approved, elimination of certain existing adjustor mechanisms, including the ECA, TEAM, and LFCR mechanism, that results in a $20 million reduction in revenues collected from customers;

◦if the proposed ARAM is not approved, a new SRB mechanism, which would help recover investments in significant generation resources, and a new LIRA, which would allow TEP to recover or refund differences between actual limited income tariff costs and the costs included in base rates;

•an accounting order to defer for future recovery certain incurred costs associated with owning, operating and maintaining Roadrunner Reserve II, offset by future benefits associated with investment tax credits.

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 Customer 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)		2026		2025
Beginning of Period		$	(32)	$	(49)
Deferred Fuel and Purchased Power Costs (1)		68		61
PPFAC and Base Power Recoveries		(52)		(60)
End of Period		$	(16)	$	(48)

The TCA 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 required Arizona regulated electric utilities to increase their use of renewable energy each year until it represented at least 15% of their total annual retail energy sales by the end of 2025. Consistent with prior years, TEP met these requirements through a combination of utility-owned resources, PPAs, and customer-sited DG. TEP recovers approved costs of meeting the requirements from retail customers through a RES tariff.

In May 2024, the ACC approved an extension of TEP's 2021 RES implementation plan 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 for renewable power purchases under agreements that were operational when the

In March 2026, the ACC issued an order repealing the RES. The Arizona Attorney General received the order on April 2, 2026, and has 60 days to review the order and submit the final repeal to the Secretary of State of Arizona. TEP anticipates the repeal will become effective 60 days after receipt by the Secretary of State of Arizona. Until otherwise ordered, TEP will continue to operate under its existing RES implementation plan. TEP is continuing to evaluate the potential impacts of this order on its regulatory obligations and financial position.

TEP is required to implement cost-effective DSM programs to comply with the ACC’s 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 October 2025, a NOPR recommending the repeal of the EE Standards was published in the Arizona Administrative Register. TEP is unable to predict the timing or outcome of this rulemaking 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. 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, 2026		December 31, 2025
Regulatory Assets
Pension and Other Postretirement Benefits (Note 7)	Various	$	90	$	91
Derivatives (Note 8)	4	49		23
Lost Fixed Cost Recovery	1	36		33
Early Generation Retirement Costs	Various	34		36
Property Tax Deferrals (1)	1	33		32
Transmission Revenue Requirement Balancing Account	2	29		32
Roadrunner Reserve I Accounting Order (2)	Various	26		16
Transportation Electrification and Electric Vehicle Infrastructure	Various	9		8
Self-Insured Medical & Short-Term Disability	1	7		7
Income Taxes Recoverable through Future Rates (3)	Various	4		4


Other Regulatory Assets	Various	10		12
Total Regulatory Assets		327		294
Less Current Portion	1	153		127
Total Noncurrent Regulatory Assets		$	174	$	167


Regulatory Liabilities
Income Taxes Payable through Future Rates (3)	Various	$	198	$	199
Renewable Energy Standard	Various	103		102
Deferred Investment Tax Credits (4)	Various	102		94
Net Cost of Removal (5)	Various	68		75
Pension and Other Postretirement Benefits (Note 7)	Various	32		32
Over-Recovered Fuel and Purchased Energy Costs	1	16		32
Derivatives (Note 8)	4	14		20
Demand Side Management	1	9		9

Total Regulatory Liabilities		542		563
Less Current Portion	1	130		144
Total Noncurrent Regulatory Liabilities		$	412	$	419

(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)In April 2025, the ACC issued an accounting order allowing TEP to defer for future recovery in the 2025 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 benefits associated with ITCs.

(4)As federal ITCs are deferred, TEP records a regulatory liability to be refunded to customers. On the effective date of new rates, TEP expects to begin amortizing the portion of the deferred ITCs related to Roadrunner Reserve I over five years.

(5)Represents an estimate of the future cost of retirement, net of salvage value. The reserve is funded through ACC‑approved depreciation rates for transmission, distribution, generation, and general plant assets. These amounts are billed to customers but will not be spent until the assets are retired.

Regulatory assets are either being collected or are expected to be collected through Customer Rates. With the exception of Early Generation Retirement Costs, Income Taxes Recoverable through Future Rates, and Transmission Revenue Requirement