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 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.

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.

In May 2015, several intervenors filed direct testimony in response to SPS’ rate request, including the Alliance of Xcel Municipalities (AXM), the Office of Public Utility Counsel (OPUC), and the PUCT Staff (Staff).


•	AXM recommended a rate decrease of $13.6 million, an ROE of 9.40 percent and an equity ratio of 53.97 percent.


•	The OPUC recommended a rate increase of $1.8 million, an ROE of 9.20 percent and an equity ratio of 52.38 percent.


•	The Staff recommended a rate decrease of $2.6 million, an ROE of 9.30 percent and an equity ratio of 53.97 percent.

In June 2015, SPS filed rebuttal testimony supporting a revised rate increase of approximately $42 million, or 4.4 percent.



										SPS Rebuttal Testimony
(Millions of Dollars)	AXM			OPUC			Staff			SPS Rebuttal Testimony
SPS’ revised rate request	$	58.9		$	58.9		$	58.9		$	58.9
Investment for capital expenditures — post-test year adjustments	(11.3		)	(23.8		)	(23.8		)	—
Lower ROE	(10.9		)	(13.5		)	(12.1		)	—
Rate base adjustments (largely the removal of the prepaid pension asset)	(6.2		)	(6.8		)	—			—
O&M expense adjustments	(13.7		)	(11.0		)	(7.9		)	(1.6		)
Depreciation expense	(13.3		)	—			—			—
Property taxes	—			(1.2		)	(4.4		)	(1.8		)
Revenue adjustments	(2.2		)	(0.2		)	—			—
Wholesale load reductions	(13.2		)	—			(11.1		)	—
Southwest Power Pool (SPP) transmission expansion plan	—			—			—			(7.3		)
Other, net	(1.7		)	(0.6		)	(2.2		)	(1.8		)
Total recommendation	$	(13.6	)	$	1.8		$	(2.6	)	$	46.4
Adjustment to move rate case expenses to a separate docket	—			—			—			(4.3		)
Recommendation, excluding rate case expenses	$	(13.6	)	$	1.8		$	(2.6	)	$	42.1

New rates will be made effective retroactive to June 11, 2015 as established by the PUCT. Hearings were completed in July 2015. A PUCT decision is expected in the fourth quarter of 2015.

Pending Regulatory Proceedings — New Mexico Public Regulation Commission (NMPRC)

New Mexico 2015 Electric Rate Case — In June 2015, SPS filed an electric rate case with the NMPRC for an increase in non-fuel base rates of $31.5 million and a base fuel decrease of $30.1 million. The rate filing was based on a 2016 forecast test year (FTY), a requested return on equity of 10.25 percent, a jurisdictional electric rate base of $777.9 million and an equity ratio of 53.97 percent.

In June 2015, SPS’ rate case application was dismissed by the NMPRC. The NMPRC determined that the filing did not comply with its new interpretation of the statute regarding FTY periods and the corresponding timing of a rate case submission in relation to the FTY used in the case. This new interpretation occurred during the recent Public Service Company of New Mexico rate case.

In July, SPS filed an appeal with the New Mexico Supreme Court. In addition, SPS plans to file a rate case later this year.

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

Wholesale Rate ROE 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, and asking that the ROEs be reduced to 9.15 percent and 9.65 percent, respectively, effective April 20, 2012. In July 2013, Golden Spread filed a second complaint, again asking that the ROE in the SPS production formula rate for Golden Spread and transmission formula rates be reduced to 9.15 and 9.65 percent, respectively, effective July 19, 2013. In June 2014, the FERC issued orders consolidating the Golden Spread ROE complaints and setting the complaints for settlement judge or hearing procedures.

A third rate complaint was filed in October 2014 by Golden Spread, certain New Mexico cooperatives and the West Texas Municipal Power Agency, requesting that the ROE in certain SPS production formula rates for Golden Spread and the New Mexico cooperatives and transmission formula rates be reduced, this time to 8.61 percent and 9.11 percent, respectively, effective 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. The FERC established effective dates for refunds of April 20, 2012 (first refund period), July 19, 2013 (second refund period) and Oct. 20, 2014 (third refund period), respectively.

SPS sought rehearing of the FERC decisions to allow back-to-back complaints involving the same issue with consecutive 15 month refund periods, asserting this ruling is contrary to the governing statute. On May 12, 2015, FERC denied the rehearing request as it pertained to the first two rate complaints. In July 2015, SPS filed an appeal to the D.C. Circuit Court of Appeals of the FERC orders in the first two rate complaints allowing the sequential complaints and consecutive 15 month refund periods. The D.C. Circuit Court has not established a procedural schedule. FERC action on the similar SPS rehearing request related to the third complaint is pending.

In the first half 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 ^(b)	1		8.78	%	9.28	%
	2		8.51		9.01
	3		8.45		8.95
SPS	1		10.25		10.39
	2		10.25		11.20
	3	^(c)	10.40		11.20
FERC Staff	1		8.97		9.47
	2		8.64		9.14
	3		8.53		9.03


^(a)	Includes a SPP RTO membership adder up to 50 basis points.


^(b)	For the third refund period, the recommended production and transmission ROEs are supported by Golden Spread, certain New Mexico cooperatives and the West Texas Municipal Power Agency (transmission ROE only).


^(c)	In addition to the recommended ROEs, SPS also filed testimony recommending the ROEs remain unchanged.

Hearings scheduled for July 2015 for the first two rate complaints were canceled and the parties agreed to file briefs based on pre-filed testimony. An initial ALJ decision on the first two complaints is expected to be issued by Nov. 25, 2015, and a final FERC order to be issued no earlier than 2016. A hearing for the third rate complaint is scheduled for Oct. 2015, with an ALJ initial decision expected in January 2016 and a final FERC order no earlier than later in 2016.

SPS recorded a current liability representing the current best estimate of a refund obligation associated with potential ROE adjustments as of June 30, 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 $1.5 million of principal and interest has been accrued during 2015.

2015 Production Formula Rate Change Filing — In January 2015, SPS filed to revise the production formula rates for six of its wholesale customers, including Golden Spread, certain New Mexico cooperatives and West Texas Municipal Power Agency, 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. In March 2015, the FERC accepted this filing, effective July 1, 2015, subject to refund and settlement judge or hearing procedures. The parties remain engaged in settlement judge procedures. Effective June 1, 2015, the Golden Spread contract demand quantity subject to the formula rate change declined from 500 MW to 300 MW.