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, 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 2014 Electric Rate Case — In 2014, PSCo filed an electric rate case with the CPUC requesting an increase in annual revenue of approximately $136.0 million, or 4.83 percent. The requested 2015 rate increase reflects approximately $100.9 million for recovery of costs associated with the CACJA project. The case also requests the initiation of a CACJA rider for 2016 and 2017, which is anticipated to increase revenue recovery by approximately $34.2 million in 2016 and then decline to approximately $29.9 million in 2017. PSCo’s objective is to establish a multi-year regulatory plan that provides certainty for PSCo and its customers.

The rate filing is based on a 2015 test year, a requested return on equity (ROE) of 10.35 percent, an electric rate base of $6.39 billion and an equity ratio of 56 percent. As part of the filing, PSCo will transfer approximately $19.9 million from the transmission rider to base rates, which will not impact customer bills. The CACJA rider is projected to recover incremental investment and expenses, based on a comprehensive plan to retire certain coal plants, add pollution control equipment to other existing coal units and add natural gas generation. The CACJA project investment is expected to be completed by 2017.

The next steps in the procedural schedule are expected to be as follows:


•	Answer Testimony — Nov. 7, 2014;


•	Rebuttal Testimony — Dec. 17, 2014;


•	Evidentiary Hearing — Jan. 26 - Feb. 4, 2015;


•	Interim rates are scheduled to be effective on Feb. 13, 2015, subject to refund; and


•	A decision as well as implementation of final rates are anticipated in the second quarter of 2015.

Manufacturer’s Sales Tax Refund — PSCo defers 2012-2014 annual property taxes in excess of $76.7 million as part of its multi-year rate plan with the CPUC. To the extent that PSCo was successful in the manufacturer’s sales tax refund lawsuit against the Colorado Department of Revenue, PSCo was to credit such refunds first against certain legal fees, and then against the unamortized deferred property tax balance at the end of 2014.

On June 30, 2014, the Colorado Supreme Court ruled against PSCo’s claim that it was due refunds for the payment of sales taxes on purchases of certain equipment from December 1998 to December 2001. As a result of the adverse ruling, PSCo is required to reduce its 2014 property tax deferral by $10 million, as this amount will not be recovered in electric rates. This impact is reflected in PSCo’s pending electric rate case before the CPUC.

Annual Electric Earnings Test — As part of an annual earnings test, PSCo must share with customers a portion of any annual earnings that exceed PSCo’s authorized ROE threshold of 10 percent for 2012-2014. In April 2014, PSCo filed its 2013 earnings test with the CPUC proposing a refund obligation of $45.7 million to electric customers to be returned between August 2014 and July 2015. This tariff was approved by the CPUC in July 2014 and became effective Aug. 1, 2014. As of Sept. 30, 2014, PSCo has also recognized management’s best estimate of an accrual for the 2014 earnings test of $52.4 million.

Electric, Purchased Gas and Resource Adjustment Clauses

Renewable Energy Credit (REC) Sharing — In 2011, the CPUC approved margin sharing on stand-alone REC transactions at 10 percent to PSCo and 90 percent to customers for 2014. In 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 renewable energy standard adjustment (RESA) regulatory asset balance. PSCo’s credit to the RESA regulatory asset balance was not material for the three months ended Sept. 30, 2014. For the three months ended Sept. 30, 2013, PSCo credited the RESA regulatory asset balance $6.1 million. The cumulative credit to the RESA regulatory asset balance was $104.7 million and $104.5 million at Sept. 30, 2014 and Dec. 31, 2013, respectively. The credits include the customers’ share of REC trading margins and the unspent share of carbon offset funds.

In May 2014, PSCo filed with the CPUC to continue this sharing mechanism for 2015 and beyond, but remove the step increase in the sharing allocation of hybrid REC trades on margins in excess of $20 million. In July 2014, the CPUC sent the proceeding to an administrative law judge (ALJ). On Sept. 5, 2014, PSCo, the CPUC Staff, and intervenors filed a settlement agreement to extend the current sharing mechanism without modification through 2017. On Sept. 18, 2014 the ALJ issued a final decision approving the settlement agreement.

Recently Concluded Regulatory Proceedings — Federal Energy Regulatory Commission (FERC)

Transmission Formula Rate Cases — In April 2012, PSCo filed with the FERC to revise the wholesale transmission formula rates from a historic test year formula rate to a forecast transmission formula rate and to establish formula ancillary services rates. PSCo proposed that the formula rates be updated annually to reflect changes in costs, subject to a true-up. The request would increase PSCo’s wholesale transmission and ancillary services revenue by approximately $2.0 million annually. Various transmission customers protested the filing. In June 2012, the FERC issued an order accepting the proposed transmission and ancillary services formula rates, suspending the increase to November 2012, subject to refund, and setting the case for settlement judge or hearing procedures.

In June 2012, several wholesale customers filed a complaint with the FERC seeking to have the transmission formula rate ROE reduced from 10.25 to 9.15 percent effective July 1, 2012. In October 2012, the FERC consolidated this complaint with the April 2012 formula rate change filing.

In December 2013, the FERC approved a partial settlement resolving all issues related to the April 2012 transmission rate filing and June 2012 complaint other than ROE. The settlement does not materially increase 2014 transmission revenues.

In June 2014, PSCo and its transmission customers reached a settlement in principle to resolve the ROE issue in the transmission rate filing and complaint. The settlement was filed in September 2014, and in October 2014, the FERC ALJ granted PSCo a motion to place interim rates into effect using the settlement ROE beginning Oct. 1, 2014. The FERC approved the settlement in October 2014, providing a 9.72 percent ROE effective retroactive to July 1, 2012 for the PSCo transmission formula rate. PSCo recorded a current liability for the refund obligation based on the settlement terms as of Sept. 30, 2014.

Production Formula Rate ROE Complaint — In August 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 production sales formula rates effective Sept. 1, 2013. In June 2014, PSCo and its wholesale customers reached a settlement in principle to resolve the complaint along with the pending transmission formula rate ROE matters. The settlement was filed in September 2014, and in October 2014, the FERC ALJ granted PSCo a motion to place interim rates into effect using the settlement ROE beginning Oct. 1, 2014. The FERC approved the settlement in October 2014, providing a 9.72 percent ROE effective for the PSCo production formula rate. PSCo recorded a current liability for the refund obligation based on the settlement terms as Sept. 30, 2014.