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 and in Note 5 to the financial statements included in SPS’ Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2015 and June 30, 2015, 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 (HTY) 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 June 2015, SPS filed rebuttal testimony supporting a revised rate increase of approximately $42.1 million, or 4.4 percent.

On Oct. 12, 2015, the administrative law judges (ALJs) issued their Proposal for Decision (PFD) and recommended a rate increase of approximately $1.2 million, based on a ROE of 9.70 percent and an equity ratio of 53.97 percent.

The following table reflects the positions of Alliance of Xcel Municipalities (AXM), the Office of Public Utility Counsel (OPUC), the PUCT Staff (Staff), SPS as well as the estimated recommendation of the ALJs:



										SPS Rebuttal Testimony			ALJs’ PFD ^(a)
(Millions of Dollars)	AXM			OPUC			Staff			SPS Rebuttal Testimony			ALJs’ PFD ^(a)
SPS’ revised rate request	$	58.9		$	58.9		$	58.9		$	58.9		$	42.1
Investment for capital expenditures — post-test year adjustments	(11.3		)	(23.8		)	(23.8		)	—			(16.7		)
Lower ROE	(10.9		)	(13.5		)	(12.1		)	—			(6.3		)
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		)	(5.3		)
Depreciation expense	(13.3		)	—			—			—			(3.9		)
Property taxes	—			(1.2		)	(4.4		)	(1.8		)	(3.7		)
Revenue adjustments	(2.2		)	(0.2		)	—			—			—
Wholesale load reductions	(13.2		)	—			(11.1		)	—			—
Southwest Power Pool (SPP) transmission expansion plan	—			—			—			(7.3		)	(4.2		)
Other, net	(1.7		)	(0.6		)	(2.2		)	(1.8		)	(0.6		)
Total recommendation	$	(13.6	)	$	1.8		$	(2.6	)	$	46.4		$	1.4
Adjustment to move rate case expenses to a separate docket	—			—			—			(4.3		)	(0.2		)
Recommendation, excluding rate case expenses	$	(13.6	)	$	1.8		$	(2.6	)	$	42.1		$	1.2

^(a)The ALJs’ recommendation reflects proposed adjustments to SPS’ rebuttal testimony, as of Oct. 12, 2015, which supports a $42.1 million rate increase.

SPS subsequently filed a letter notifying the PUCT it had concerns regarding the calculation. On Oct. 28, 2015, the Staff issued a revised calculation reflecting corrections to the PFD. The ALJs’ revised recommended rate increase is $14.4 million.

New rates will be made effective retroactive to June 11, 2015 as established by the PUCT. A PUCT decision is expected in December 2015.

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

New Mexico 2015 Electric Rate Case — In October 2015, SPS filed an electric rate case with the NMPRC for a net increase in base rates of approximately $24.3 million for the New Mexico retail jurisdiction. The proposed net amount reflects an increase in non-fuel base rates of $45.4 million and a decrease in base fuel revenue of approximately $21.1 million. The decrease in base fuel revenue will be reflected in adjustments collected through the fuel and purchased power adjustment clause. The rate filing is based on a June 30, 2015 HTY adjusted for known and measurable changes, a requested ROE of 10.25 percent, an electric jurisdictional rate base of approximately $734 million and an equity ratio of 53.97 percent.

The major components of the requested rate increase are summarized below:



(Millions of Dollars)	Request
2015 base period deficiency	$	19.7
Capital expenditures — post-test year adjustments	12.3
Depreciation, higher rates reflecting changes in depreciable lives, interim retirements and net salvage	3.7
Transmission revenue and expense, including charges paid to SPP for construction of regionally shared transmission projects	2.0
ROE, reflecting an increase from 9.96 percent to 10.25 percent	1.6
Rider revenue adjustments - gross receipts tax	1.3
Other, net	4.8
Requested rate increase	$	45.4

A NMPRC decision and implementation of final rates is anticipated in the second half of 2016. In June 2015, the NMPRC dismissed a rate case filing using a future test year based on new precedent. SPS has appealed that decision to the New Mexico Supreme Court.

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

SPS – Global Settlement Agreement — In August 2015, SPS, Golden Spread Electric Cooperative, Inc. (Golden Spread), four New Mexico Cooperatives, West Texas Municipal Power Agency (WTMPA), Public Service Company of New Mexico (PNM) and Tri-County Electric Cooperative, Inc. (Tri-County) filed a settlement agreement with the FERC that would provide a comprehensive resolution of nine pending matters in dispute between SPS and these wholesale production and transmission customers, including the 2004 FERC Complaint Case, the Wholesale Rate Complaints, the 2015 Formula Rate Change Filing and the Sale of Texas Transmission Assets as discussed below. Key terms of the settlement agreement include:


•	A settlement payment to Golden Spread for $44.9 million and withdrawal of the SPS and the New Mexico Cooperatives’ requests for rehearing of the August 2013 FERC order ruling that SPS is a 3 coincident peak (CP) system;


•	A settlement payment to PNM of $4.2 million and the withdrawal of the PNM request for rehearing of the August 2013 FERC order denying PNM’s challenge to the 2008 FERC ruling regarding SPS’ fuel cost adjustment practices;


•	Withdrawal of the Golden Spread Wholesale Rate Complaints, resulting in no change to the then-effective production and transmission ROEs for the period April 20, 2012 through Oct. 19, 2014, and withdrawal of the SPS appeal of the FERC orders in those proceedings to the United States District Court of Appeals for the District of Columbia Circuit (D.C. Circuit);

•

A reduction in the SPS transmission ROE to 10.5 percent (including the 50 basis point SPP regional transmission organization membership adder) and the production ROE in the Golden Spread and New Mexico Cooperatives production formula rates to 10.0 percent effective Oct. 20, 2014, and establishment of a limited moratorium that precludes any increase or decrease in these effective ROEs through 2019;


•	Utilization of the 12 CP production cost allocation methodology in the Golden Spread, New Mexico Cooperatives and WTMPA production formula rates and a moratorium precluding all settlement parties from seeking to change from the 12 CP methodology during the remaining term of the Golden Spread production contract (currently scheduled to expire in May 2019);


•	SPS agrees to reduce its production formula rates retroactive to Jan. 1, 2015 to reflect full year implementation of reduced depreciation and certain other costs; the FERC had allowed these reductions to be effective July 1, 2015;

•

SPS agrees to make certain revisions to its transmission formula rate, effective Jan. 1, 2016, to provide for a sharing of the wholesale portion of any gain on a future sale of transmission assets; other parties agree not to challenge the non-sharing of the gain SPS recorded on prior and current transmission asset transactions with Sharyland Distribution and Transmission Services, LLC (Sharyland) and Oncor Electric Delivery Company LLC;


•	SPS agrees not to file with FERC to increase transmission depreciation rate rates effective prior to Jan. 1, 2017; and


•	SPS agrees not to transfer Tri-County from its current stated rate production service agreement to a production formula rate effective prior to Jan. 1, 2017. Tri-County agrees that it will not contest implementation of the formula rate as of that date.

On Oct. 29, 2015, the FERC issued an order approving the settlement agreement. The terms are effective 30 days after issuance. As a result of the settlement, SPS expects to recognize a net gain of approximately $7.9 million in the fourth quarter of 2015. The settlement also resolves the following:

2004 FERC Complaint Case Orders — In August 2013, the FERC issued an order related to a 2004 complaint case brought by Golden Spread, a wholesale cooperative customer, and PNM, a former wholesale customer, and also issued an Order on Initial Decision in a subsequent 2006 production rate case filed by SPS.

The original complaints included two key components: 1) a base rate complaint, including the appropriate demand-related CP cost allocator; and 2) a claim regarding alleged inappropriate fuel cost adjustment practices. The FERC had determined in April 2008 that the demand-related cost allocator and fuel cost adjustment practices utilized by SPS were appropriate.

In the August 2013 Orders, the FERC 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 CP rather than a 12 CP system. The FERC also clarified its previous ruling on fuel cost adjustment practices and reaffirmed that the refunds in question should only apply to firm requirements customers.

In September 2013, SPS, the New Mexico Cooperatives and PNM each filed requests for rehearing of the FERC ruling on the CP allocation and/or refund decision. As of Dec. 31, 2014, SPS had accrued $50.4 million related to the August 2013 Orders and an additional $1.9 million of principal and interest has been accrued during 2015.

Wholesale Rate Complaints — In April 2012, Golden Spread 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 formula rate ROE of 11.27 percent are unjust and unreasonable, and requested that the base 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 base ROE in the SPS production formula rate for Golden Spread and transmission formula rates be reduced to 9.15 percent and 9.65 percent, respectively, effective July 19, 2013. In June 2014, the FERC issued orders consolidating these ROE complaints, setting the complaints for hearing procedures and granting the complainant’s requested refund effective dates. SPS subsequently sought rehearing. In May 2015, FERC denied rehearing. In July 2015, SPS appealed the FERC orders to the D.C. Circuit.

A third ROE rate complaint was filed in October 2014 by Golden Spread, along with the New Mexico Cooperatives and WTMPA, requesting that the ROE in the SPS production formula rates for Golden Spread and the New Mexico Cooperatives and SPS transmission formula rate, be reduced 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. SPS subsequently sought rehearing. FERC has not acted on the SPS rehearing request.

2015 Formula Rate Change Filing — In January 2015, SPS filed to revise the production formula rates for Golden Spread, the four New Mexico Cooperatives and WTMPA, effective Feb. 1, 2015. The filing proposed 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.

Sale of Texas Transmission Assets — In March 2013, SPS reached an agreement to sell certain segments of SPS’ transmission lines and two related substations to Sharyland. In 2013, SPS received all necessary regulatory approvals for the transaction. In December 2013, SPS received $37.1 million and recognized a pre-tax gain of $13.6 million and regulatory liabilities for retail jurisdictional gain sharing of $7.2 million. The gain is reflected in the consolidated statement of income as a reduction to operating and maintenance (O&M) expenses. In December 2014, Golden Spread submitted a preliminary challenge under the SPS transmission formula rate procedures asserting the gain should be shared with wholesale transmission customers. SPS disputed this claim. In October 2015, the FERC denied rehearing on the matter.