ACCOUNTING FOR REGULATED OPERATIONS
We apply accounting standards that recognize the economic effects of rate regulation. As a result, we capitalize certain costs that would be recorded as expense or in Accumulated Other Comprehensive Income (AOCI) by unregulated companies. Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in the rates charged to retail customers or to wholesale customers through FERC-approved transmission tariffs. Regulatory liabilities generally represent expected future costs that have already been collected from customers or items that are expected to be returned to customers through future billing reductions.
Estimates of recovering deferred costs and returning deferred credits are based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are amortized consistent with the treatment in the rate setting process. We evaluate regulatory assets each period and believe recovery is probable. If future recovery of costs ceases to be probable, the assets would be written off as a charge to current period earnings or AOCI. See Note 3.
TEP, UNS Electric, and UNS Gas apply regulatory accounting as the following conditions exist:
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• | An independent regulator sets rates; |
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• | The regulator sets the rates to recover the specific enterprise’s costs of providing service; and |
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• | Rates are set at levels that will recover the entity’s costs and can be charged to and collected from customers. |
