A Profitable Partnership
Tucson Electric Power’s success in providing safe, reliable, and affordable service depends in part on the reasonable return we can earn by investing in our local energy grid.
Energy providers must invest significant capital in new and upgraded infrastructure. The opportunity to earn a regulated return grants us affordable access to capital for critical investments that serve our community’s expanding energy needs and help us transition to cleaner energy resources. It also creates a powerful incentive to control costs, promote efficiency and achieve excellence.
Together, these and other factors produce the greatest possible value for TEP's customers through our safe, reliable and cost-effective service. This is particularly true in Arizona, where utilities’ opportunities to earn financial returns are tightly regulated.
Returns Restricted by Design
The Arizona Corporation Commission (ACC), a panel of five elected state regulators, periodically adjusts TEP’s rates in an extensive process that includes public notice and opportunities for customer comment. Because it takes about two years to prepare and process a rate case application, even newly approved rates don’t reflect our current costs. This so-called “regulatory lag” is just one of many factors limiting the return TEP can achieve.
We don’t earn a return on our day-to-day operating and maintenance expenses or energy costs, such as fuel and the power we buy to deliver to our customers. Those costs are passed along without any markup, helping to keep rates as low as possible.
Our only opportunity to earn a profit is through investments in generation, transmission and distribution facilities and other infrastructure that regulators determine to be both necessary and prudent. Profit is not guaranteed, however, and our regulated rate of return on capital is 9.5%, a level that was consistent with average investor-owned utility returns across the country when it was set in 2023. We must work hard to control costs if we hope to achieve that level of return.
Reinvesting in Reliability
So, what happens to the money TEP earns? More than half of our returns are reinvested in new systems to support safe, reliable service for customers. This reduces our need for debt, limiting the interest expense that could contribute to higher rates. Our returns have contributed greatly to a local energy grid that extends across 1,155 square miles and includes more than 9,000 miles of transmission and distribution lines, 3,000-plus megawatts of generating capacity, more than 120 substations and about 86,000 transformers.
Maintaining these facilities while serving customers’ expanding energy needs and transitioning to less carbon-intensive resources requires significant investments. From 2024 through 2028, we anticipate investing more than $3.4 billion in new generation, transmission, distribution and other necessities. We could not attract that much capital on affordable terms if our investors lacked the opportunity for a reasonable return.
In this way, the possibility of profit drives us to operate efficiently and effectively and provides the resources we need to operate a complex, capital-intensive business serving the evolving energy needs of 1.2 million people. Government-run systems, by contrast, face competing priorities, political considerations and financial constraints that make it harder to access the capital for infrastructure upgrades, such as those needed to improve local roads.
TEP and its parent company, UNS Energy, are subsidiaries of Fortis, Inc. (NYSE/TSX: FTS), a relationship that has provided significant benefits for our customers and community. Fortis has injected $870M in additional capital in UNS Energy since our merger was completed in 2014, supporting critical investments in resources that continue to serve our customers. The ability to raise equity capital gives investor-owned energy providers an advantage over government-run utilities that are limited to debt issuances.
Investments from Fortis have improved TEP’s financial strength, contributing to an upgrade in our credit rating that resulted in reduced interest rates and greater access to capital. The savings from reduced interest rates are passed along to customers, contributing to more affordable rates. We’ve also reduced the percentage of profits that are shared as dividends with our investors to about 37%, compared to 60-65% when UNS Energy was a publicly traded company. This allows us to reinvest more of our cash flows in upgrades that support our service customers.
Effective Incentives
As a publicly regulated, investor-owned utility, we’re subject to strict oversight and constructive incentives that promote positive results for our customers. For example, controlling our costs provides benefits for shareholders as well as customers by increasing potential earnings and reducing upward pressure on our rates.
We know that lower rates also support economic development. Unlike many companies with a national footprint, our opportunity for growth is directly linked to the success of the community we serve. We work closely with local leaders to attract, retain and support local employers, and we have supported the creation of nearly 22,000 new jobs since 2016.
TEP also generates mutual benefits by helping customers use energy more efficiently, particularly during peak usage periods. These efforts limit our long-term need to build new generating resources and lead to lower emissions, reducing our environmental control costs. They also result in significant bill savings for our customers.
All these factors have contributed to our success in stabilizing the cost of our service. While our rates have risen over time, they are actually lower on an inflation-adjusted basis than they were 25 years ago.
Reinvesting Returns in our Community
We tap TEP’s returns to fund our philanthropic investments. TEP contributed nearly $1.5 million in 2023 to help more than 200 local charities support community vitality, expand educational opportunities, protect our environment and promote racial and social equity. Funds for these contributions are not recovered through customers’ rates.
Our Community Investment and Philanthropy team also promoted and supported our active employee volunteer program, the Community Action Team. Our volunteers donated nearly 8,500 hours in 2023 to their chosen causes.
These efforts help make TEP one of Southern Arizona’s leading employers. We provide rewarding, challenging jobs to more than 1,200 Southern Arizona residents whose contributions to their community are as valuable as the service we provide. We work together in alignment with our values to realize TEP’s vision: to be an exceptional energy provider that positively impacts the lives of our employees, customers, and communities.
Managing your energy costs
We understand that energy costs impact household budgets, especially as the prices for food, housing and other basic necessities are on the rise. While we’re doing our part to keep rates as low as possible, individual energy usage contributes significantly to monthly bills. We offer a variety of ways to help customers manage bill impacts:
- Budget billing: Pay the same amount for energy every month, even if your usage varies with the seasons.
- Time of use pricing: If you can reduce your energy use during peak usage periods, you may be able to save money on a pricing plan that features time of use, demand pricing or both.
- Energy saving tips and rebates: We offer room-by-room tips for saving energy throughout your home. We also provide rebates for smart energy investments, from air conditioning tune-ups to efficient appliances.
- Payment assistance: We all need a little help sometimes. Our team can help you find a solution that works for you, from our low-income discounts to payment extensions and other options.
- Track your usage: Knowing how you use energy each day can help you adjust your habits to save on your monthly bill.