Rate Matters

Except to the extent noted below, the circumstances set forth in Note 11 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2012 and in Note 5 to PSCo’s Quarterly Reports on Form 10-Q for the quarter periods ended March 31, 2013 and June 30, 2013, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Pending and Recently Concluded Regulatory Proceedings — CPUC

Colorado 2013 Gas Rate Case — In December 2012, PSCo filed a multi-year request with the CPUC to increase Colorado retail natural gas rates by $48.5 million in 2013 with subsequent step increases of $9.9 million in 2014 and $12.1 million in 2015. The request is based on a 2013 forecast test year (FTY), a 10.5 percent return on equity (ROE), a rate base of $1.3 billion and an equity ratio of 56 percent. PSCo is requesting an extension of its Pipeline System Integrity Adjustment (PSIA) rider mechanism to collect the costs associated with its pipeline integrity efforts, including accelerated system renewal projects. PSCo estimates that the PSIA will increase by $26.8 million in 2014 with a subsequent step increase of $24.7 million in 2015 in addition to the proposed changes in base rate revenue. In conjunction with the multi-year base rate step increases, PSCo is proposing a stay-out provision and an earnings test through the end of 2015 with a commitment to file a rate case to implement revised rates on Jan. 1, 2016. Interim rates, subject to refund, went into effect in August 2013.

In April 2013, four parties filed answer testimony in the natural gas case. The CPUC Staff recommended an incremental base revenue decrease of $1.1 million, based on a historic test year (HTY), an ROE of 9 percent and an equity ratio of 52 percent. The Office of Consumer Counsel (OCC) recommended an incremental base revenue increase of $15.4 million based on an HTY, an ROE of 9 percent and an equity ratio of 51.03 percent and other adjustments. The recommended incremental base revenues are inclusive of proposed changes to the level of integrity management costs moved from the PSIA rider to base rates.

In April 2013, PSCo filed rebuttal testimony and revised its requested annual rate increase to $44.8 million for 2013, with subsequent step increases of $9.0 million for 2014 and $10.9 million for 2015, based on an ROE of 10.3 percent. This requested increase includes amounts to be transferred from the PSIA rider mechanism. The deficiency, based on an FTY, was $30.6 million.

In October 2013, the administrative law judge (ALJ) issued her recommendation. As part of this decision, she recommended the use of an HTY, an ROE of 9.72 percent and an equity ratio of 56 percent. The ALJ also recommended to reject PSCo's proposed changes to the PSIA, instead leaving the current rider in effect and suggested that changes be presented in a separate application. The recommended incremental base revenue increase was approximately $15.0 million.

The following table summarizes the CPUC Staff, OCC and ALJ's recommendations:



(Millions of Dollars)	CPUC Staff			OCC			ALJ
PSCo deficiency based on a FTY	$	44.8		$	44.8		$	44.8
Move to HTY	(1.6		)	(1.6		)	(1.6		)
ROE and capital structure adjustments	(20.8		)	(20.0		)	(7.7		)
Move to a 13 month average from year end rate base	(5.7		)	(3.2		)	(3.3		)
Remove pension asset	(5.9		)	—			—
Reduce pension expense net of corrections	(1.6		)	—			—
Remove incentive compensation	(3.5		)	(0.2		)	(0.2		)
Challenge known and measurable	—			(9.0		)	—
Eliminate depreciation annualization	—			(1.8		)	—
Revenue adjustments	(4.1		)	(1.4		)	(1.4		)
Resulting tax impacts	1.5			4.7			(0.2		)
Other adjustments	(4.2		)	3.1			(1.2		)
Remove PSIA from base rates	(14.2		)	(14.2		)	—
Recommendation	$	(15.3	)	$	1.2		$	29.2

Neutralize PSIA - base rate transfer	14.2			14.2			(14.2		)
Incremental base revenue	$	(1.1	)	$	15.4		$	15.0

Exceptions and corresponding responses are due to be filed in November 2013 and a CPUC decision is expected in December 2013.

Colorado 2013 Steam Rate Case — In December 2012, PSCo filed a request to increase Colorado retail steam rates by $1.6 million in 2013 with subsequent step increases of $0.9 million in 2014 and $2.3 million in 2015. The request is based on a 2013 FTY, a 10.5 percent ROE, a rate base of $21 million for steam and an equity ratio of 56 percent.

In October 2013, PSCo, the CPUC Staff, the OCC and Colorado Energy Consumers representing the Buildings Owners Management Association filed a comprehensive settlement which ties the outcome of the steam rate case to key issues to be decided in the natural gas rate case, including ROE and capital structure and allows the filed rates to be effective on Jan. 1, 2014, subject to refund for 60 days, resulting in a minimum 2014 annual rate increase of $1.2 million. The settlement withdraws the rate relief request for 2015 pending the outcome of the certificate of public convenience and necessity (CPCN) proceeding for the construction of the Sun Valley Steam Center. A decision on the settlement is expected at the end of 2013.

Annual Electric Earnings Test — An earnings sharing mechanism is used to apply prospective electric rate adjustments for earnings in the prior year over PSCo’s authorized ROE threshold of 10 percent. In June 2013, PSCo entered into a comprehensive settlement of issues with all parties associated with the 2012 earnings test, resulting in a refund obligation of approximately $8.2 million to be refunded through June 2014. As of Sept. 30, 2013, PSCo has also recognized management’s best estimate of an accrual for the 2013 test year.

Production Formula Rate ROE Complaint — On Aug. 30, 2013, PSCo’s wholesale production customers filed a complaint with the FERC, and requested it reduce the stated ROEs ranging from 10.1 percent through 10.4 percent to 9.04 percent in the PSCo power sales formula rates, which could reduce revenues approximately $2 million per year prospectively. The matter is currently pending the FERC’s action.

Renewable Energy Credit (REC) Sharing — In May 2011, the CPUC determined that margin sharing on stand-alone REC transactions would be shared 20 percent to PSCo and 80 percent to customers and ultimately becoming 10 percent to PSCo and 90 percent to customers by 2014. The CPUC also approved a change to the treatment of hybrid REC trading margins (RECs that are bundled with energy) that allows the customers’ share of the margins to be netted against the renewable energy standard adjustment (RESA) regulatory asset balance.

In March 2012, the CPUC approved an annual margin sharing on the first $20 million of margins on hybrid REC trades of 80 percent to the customers and 20 percent to PSCo. Margins in excess of the $20 million are to be shared 90 percent to the customers and 10 percent to PSCo. The CPUC authorized PSCo to return to customers unspent carbon offset funds by crediting the RESA regulatory asset balance. For the three months ended Sept. 30, 2013 and 2012, PSCo credited the RESA regulatory asset balance $6.1 million and $6.2 million, respectively. The cumulative credit to the RESA regulatory asset balance was $99.4 million and $82.8 million at Sept. 30, 2013 and Dec. 31, 2012, respectively. The credits include the customers’ share of REC trading margins and the customers’ share of carbon offset funds.

This sharing mechanism will be effective through 2014. The CPUC is then expecting to review the framework and evidence regarding actual deliveries before determining to continue the sharing mechanism.

Electric Commodity Adjustment (ECA) / RESA Adjustment — In July 2013, PSCo advised the CPUC that it had inadvertently allocated purchased power expense between the deferred accounts for the ECA and the RESA from 2010 to 2012. In order to be in compliance with a series of CPUC orders, PSCo proposed to transfer from the RESA deferred account to the ECA deferred account approximately $26.2 million and to amortize the recovery of this amount over 12 months. The transfer, if approved, would mainly impact the timing of recovery. In addition, interest of $2.6 million was accrued on the amount related to the RESA. The PSCo application to change the ECA tariff to address this issue has been set for hearing in December 2013 by the CPUC.

ECA Prudence Review — In September 2013, the CPUC Staff requested that the 2012 annual ECA prudence review be set for hearing. The prudence review, as determined by the ALJ, will primarily consider if replacement power costs during the outage of jointly owned facilities were properly allocated between wholesale and retail customers. A hearing is expected in January 2014.

2012 PSIA Report — In April 2013, PSCo filed its 2012 PSIA report. The OCC and CPUC Staff requested the CPUC set the matter for hearing to review in detail the information provided, including a review of the prudence of expenditures in 2012, and to develop standards for future filings. The CPUC approved the request on July 10, 2013 and assigned the matter to an ALJ.

Next steps in the procedural schedule are as follows:


•	Direct testimony - Nov. 5, 2013;


•	Intervenor testimony - Jan. 7, 2014;


•	Rebuttal testimony - Feb. 6, 2014;


•	Evidentiary hearing - March 3 - March 7, 2014;


•	Initial brief - March 28, 2014; and


•	Reply brief - April 11, 2014.