Rate Matters

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 reflected approximately $100.9 million (subsequently updated to $98.7 million) for recovery of costs associated with the CACJA project. The case also requested 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. The rate filing was based on a 2015 forecast test year, a requested 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 would transfer approximately $19.9 million from the transmission rider to base rates, which would not impact customer bills. The rider would recover incremental investment and expenses associated with the CACJA project to retire certain coal plants, add pollution control equipment to other existing coal units and add natural gas generation.

In November 2014, several parties filed answer testimony, including the CPUC Staff (Staff) and the OCC. The Staff’s position was based on an ROE of 9.11 percent and a 51.24 percent equity ratio. In addition, the Staff proposed that costs associated with the CACJA project be recovered through a rider mechanism. The OCC recommended an ROE of 9.10 percent, a 52.70 percent equity ratio and that a portion of the costs associated with the CACJA project be recovered in base rates and the remainder through a rider mechanism.

In December 2014, PSCo filed rebuttal testimony, revising its requested rate increase to $107.2 million, or 3.79 percent, reflecting an ROE of 10.25 percent and updated information for both the sales and property tax forecasts. PSCo also proposed to recover all costs associated with the CACJA project through the rider beginning in 2015.

On Jan. 23, 2015, PSCo and intervenors filed a comprehensive settlement agreement, subject to CPUC approval, which would result in an overall 2015 revenue increase of approximately $53.3 million, or 1.87 percent. Key terms of the agreement include the following:


•	The settlement is based on a 2013 HTY, an ROE of 9.83 percent and an equity ratio of 56 percent;


•	It includes the implementation of a forward-looking CACJA rider, effective Jan. 1, 2015, a forward-looking TCA rider, effective Feb. 13, 2015 and tracking mechanisms for pension expense and property taxes; and


•	The agreement also includes an earnings test for 2015 through 2017, under which PSCo and customers would share in any earnings on a 50/50 basis if the ROE recognized falls between 9.84 percent and 10.48 percent. The earnings test principles are based primarily on those established in the previous rate case.

The Staff and OCC’s recommendations, PSCo’s rebuttal testimony and the terms of the settlement agreement are summarized as follows:



2015 Rate Request (Millions of Dollars)	Staff			OCC			PSCo Rebuttal			Settlement Agreement
PSCo’s filed rate request	$	136.0		$	136.0		$	136.0		$	136.0
Transfer from TCA rider to base rates	19.9			19.9			19.9			19.9
PSCo’s filed revenue requirement deficiency	155.9			155.9			155.9			155.9
Lower ROE	(69.1		)	(66.5		)	(6.2		)	(27.9		)
Capital structure	(20.9		)	(23.7		)	—			—
Rate base adjustments (largely the removal of prepaid pension asset)	(20.8		)	2.3			—			—
Adjustment to an HTY	(82.5		)	(82.5		)	—			(23.9		)
Adjustment to use 13-month average rate base	(26.1		)	(22.0		)	—			—
Rate base adjustments for known and measurable plant through September 2014	21.9			—			—			—
O&M expense adjustments	(7.2		)	(16.6		)	—			—
Depreciation	—			(3.8		)	—			—
Property taxes	—			(12.1		)	(5.3		)	(5.3		)
Remove CACJA from base rates	(62.4		)	—			(98.7		)	(98.7		)
Updated sales forecast	—			—			(15.2		)	(15.2		)
Prepaid pension amortization	—			—			—			9.5
Non-specified settlement adjustments	—			—			—			(31.7		)
Other, net	0.1			0.1			(2.1		)	(2.1		)
Total base rate (decrease) increase	(111.1		)	(68.9		)	28.4			(39.4		)
CACJA rider mechanism	54.2			—			98.7			97.0
TCA rider mechanism — 2015 forecast test year	—			—			—			15.6
Transfer from TCA rider to base rates	(19.9		)	(19.9		)	(19.9		)	(19.9		)
Total revenue impact	$	(76.8	)	$	(88.8	)	$	107.2		$	53.3

In addition to the revenue reflected in the table above, PSCo estimates that it will defer approximately $3.1 million of additional expenses in 2015 as a result of the settlement.

In its original rate case request, PSCo proposed to shorten the depreciable lives for certain assets, which would have resulted in a material increase in depreciation expense. As a result of the settlement, PSCo will not implement the depreciation changes, but will instead file a standalone case to address depreciation, amortization and decommissioning in early 2016. The results of the depreciation case will become effective as part of the 2018 electric rate case.

Settlement rates became effective Feb. 13, 2015 on an interim basis, subject to refund, and the CPUC is expected to issue a final decision regarding the settlement in the first quarter of 2015.

Manufacturer’s Sales Tax Refund — PSCo has deferred 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 was required to reduce its 2014 property tax deferral by $10 million, as this amount will not be recovered in electric rates.

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. This tariff was approved by the CPUC in July 2014. As of Dec. 31, 2014, PSCo has also recognized management’s best estimate of the expected customer refund obligation for the 2014 earnings test of $74.0 million. PSCo will file its 2014 earnings test with the CPUC in April 2015. The final sharing obligation will be based on the CPUC-approved tariff and could vary from the current estimate.

SmartGridCity (SGC) Cost Recovery — PSCo requested recovery of $45 million of capital costs and $4 million of annual O&M costs incurred to develop and operate SGC as part of its 2010 electric rate case. In 2011, the CPUC allowed recovery of approximately $28 million of the capital cost and all of the O&M costs. PSCo subsequently requested recovery of the remaining capital investment in SGC, which the CPUC denied in April 2013. Based on the ALJ’s previous recommended decision to deny recovery, PSCo recognized a $10.7 million pre-tax charge in 2012, representing the net book value of the disallowed investment, which was included in O&M expense.

Electric, Purchased Gas and Resource Adjustment Clauses

DSM and the DSMCA — The CPUC approved higher savings goals and a lower financial incentive mechanism for PSCo’s electric DSM energy efficiency programs starting in 2015. Energy efficiency and DSM costs are recovered through a combination of the DSMCA riders and base rates. DSMCA riders are adjusted biannually to capture program costs, performance incentives, and any over- or under-recoveries are trued-up in the following year. Savings goals were 384 GWh in 2014 and are 400 GWh in 2015 with incentives awarded in the year following plan achievements. PSCo is able to earn $5 million upon reaching its annual savings goal along with an incentive on five percent of net economic benefits up to a maximum annual incentive of $30 million.

The CPUC approved the 2014 PSCo electric and gas DSM budget of $87.8 million and $12.3 million, respectively. In October 2014, PSCo filed its 2015-2016 DSM plan, which proposes a 2015 DSM electric budget of $81.6 million and a gas budget of $13.1 million and a 2016 DSM electric budget of $78.7 million and gas budget of $13.6 million. A decision by the ALJ is expected in the second quarter of 2015.

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 RESA regulatory asset balance. PSCo credited to the RESA regulatory asset balance approximately $0.6 million and $21.7 million in 2014 and 2013, respectively. The cumulative credit to the RESA regulatory asset balance was $105.1 million and $104.5 million at Dec. 31, 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 September 2014, an ALJ issued a decision approving a settlement between PSCo, the CPUC Staff, and intervenors to extend the current sharing mechanism without modification through 2017.

Recently Concluded Regulatory Proceedings — FERC

Transmission Formula Rate Cases — In April 2012, PSCo filed with the FERC to revise the wholesale transmission formula rates from an HTY 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.

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. Several wholesale customers then 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 September 2014, PSCo and its transmission customers filed a settlement to resolve the ROE issue in the transmission rate filing and complaint. 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. Refunds were provided to customers in December 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 September 2014, PSCo and its wholesale customers filed a settlement to resolve the complaint along with the pending transmission formula rate ROE matters. The FERC approved the settlement in October 2014, providing a 9.72 percent ROE effective for the PSCo production formula rate. Refunds were provided to customers in December 2014.