Rate Matters

Except to the extent noted below, the circumstances set forth in Note 10 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2014 appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Pending Regulatory Proceedings — Public Utility Commission of Texas (PUCT)

Texas 2015 Electric Rate Case — In December 2014, SPS filed a retail electric, non-fuel rate case in Texas seeking an overall increase in annual revenue of approximately $64.8 million, or 6.7 percent. The filing was based on a historic test year ending June 2014, adjusted for known and measurable changes, a return on equity (ROE) of 10.25 percent, an electric rate base of approximately $1.6 billion and an equity ratio of 53.97 percent. In March 2015, SPS revised its requested increase to $58.9 million based on updated information.

As part of its request, SPS is seeking a waiver of the PUCT post-test year adjustment rule which would allow for inclusion of $392 million (SPS total company) additional capital investment for the period July 1, 2014 through Dec. 31, 2014.

The following table summarizes the net request:



(Millions of Dollars)	Request
Investment for capital expenditures — post-test year adjustments	$	23.7
Depreciation expense	13.9
Wholesale load reductions	12.0
Purchased power capacity costs	3.2
Other, net	6.1
Total	$	58.9

In April 2015, a revised procedural schedule was established. The next steps are expected to be as follows:


•	Intervenor Direct Testimony — May 15, 2015;


•	Staff Direct Testimony — May 22, 2015;


•	Staff and Intervenor Cross-Rebuttal Testimony — June 8, 2015;


•	Rebuttal Testimony — June 10, 2015; and


•	Evidentiary Hearing — June 24, 2015.

The parties have agreed the rates will be effective June 11, 2015. A PUCT decision is anticipated in the second half of 2015.

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

Wholesale Rate Complaints — In April 2012, Golden Spread Electric Cooperative, Inc. (Golden Spread), a wholesale cooperative customer, filed a rate complaint alleging that the base ROE included in the SPS production formula rate for Golden Spread of 10.25 percent, and the SPS transmission base formula rate ROE of 10.77 percent, are unjust and unreasonable. In July 2013, Golden Spread filed a second complaint, again asking that the base ROE in the SPS production formula rate for Golden Spread and transmission formula rates be reduced to 9.15 and 9.65 percent, respectively. In June 2014, the FERC issued orders consolidating the Golden Spread ROE complaints and setting the complaints for settlement judge or hearing procedures.

The FERC established effective dates for the refunds as April 20, 2012 (first refund period) and July 19, 2013 (second refund period). Settlement judge procedures were unsuccessful and the complaints were set for hearings. In the first quarter of 2015, Golden Spread, SPS and FERC staff filed their initial testimonies recommending the following ROEs:



	Refund Period	Production ROE		Transmission ROE ^(a)
Golden Spread	1	8.78	%	9.28	%
	2	8.51		9.01
SPS	1	10.25		10.39
	2	10.25		11.20
FERC Staff	1	8.97		9.47
	2	8.64		9.14


^(a)	Includes a Southwest Power Pool, Inc. (SPP) Regional Transmission Organization (RTO) membership adder up to 50 basis points.

Hearings are scheduled for July 2015. An initial administrative law judge (ALJ) decision is expected to be issued by Nov. 25, 2015, and a final FERC order to be issued no earlier than 2016.

A third rate complaint was filed in October 2014 by Golden Spread, along with certain New Mexico cooperatives and the West Texas Municipal Power Agency, requesting that the ROE in the SPS production formula rates for Golden Spread and the New Mexico cooperatives and SPS transmission formula rate, which includes an SPP RTO membership adder up to 50 basis points, be reduced to 8.61 percent and 9.11 percent, respectively. The complainants requested a refund effective date of Oct. 20, 2014. In January 2015, the FERC issued an order setting the third complaint for hearing procedures and granting the complainants’ requested refund effective date. A hearing is scheduled for October 2015, with an ALJ initial decision expected in January 2016, and a final FERC order following later in 2016.

SPS recorded a current liability representing the current best estimate of a refund obligation associated with potential ROE adjustments as of March 31, 2015, and is reducing transmission and production revenues, net of expense, between $4 million and $6 million annually.

2004 FERC Complaint Case Orders — In August 2013, the FERC issued an order related to a 2004 complaint case brought by Golden Spread and Public Service Company of New Mexico (PNM) and an Order on Initial Decision in a subsequent 2006 production rate case filed by SPS.

The original complaint included two key components: 1) PNM’s claim regarding inappropriate allocation of fuel costs and 2) a base rate complaint, including the appropriate demand-related cost allocator. The FERC previously determined that the allocation of fuel costs and the demand-related cost allocator utilized by SPS was appropriate.

In the August 2013 Orders, the FERC clarified its previous ruling on the allocation of fuel costs and reaffirmed that the refunds in question should only apply to firm requirements customers and not PNM’s contractual load. The FERC also reversed its prior demand-related cost allocator decision. The FERC stated that it had erred in its initial analysis and concluded that the SPS system was a 3 coincident peak (CP) rather than a 12 CP system.

In September 2013, SPS filed a request for rehearing of the FERC ruling on the CP allocation and refund decisions. SPS asserted that the FERC applied an improper burden of proof and that precedent did not support retroactive refunds. PNM also requested rehearing of the FERC decision not to reverse its prior ruling. In October 2013, the FERC issued orders further considering the requests for rehearing, which are currently pending. As of Dec. 31, 2014, SPS had accrued $50.4 million related to the August 2013 Orders and an additional $1.8 million of principal and interest was accrued during 2015.

2015 Formula Rate Change Filing — In January 2015, SPS filed to revise the production formula rates for six of its wholesale customers, including Golden Spread, effective Feb. 1, 2015. The filing proposes several modifications, including a reduction in wholesale depreciation rates and the use of a 12 CP demand-related cost allocator for all wholesale customers. On March 31, 2015, the FERC accepted this filing, effective July 1, 2015, subject to refund and settlement judge or hearing procedures. The parties are engaged in settlement judge procedures.