Rate Matters

Pending and Recently Concluded Regulatory Proceedings — PUCT

Texas 2015 Electric Rate Case — In December 2014, SPS filed a retail electric, non-fuel rate case in Texas with each of its Texas municipalities and the PUCT seeking an overall increase in annual revenue of approximately $64.75 million, or 6.7 percent. The filing is based on an HTY ended June 2014, adjusted for known and measurable changes, an ROE of 10.25 percent, an electric rate base of approximately $1.56 billion and an equity ratio of 53.97 percent.

As part of its request, SPS is seeking a waiver of the PUCT post-test year adjustment rule which would allow for inclusion of $442 million (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	$	29.60
Depreciation expense	13.90
Wholesale load reductions	12.00
Purchased power capacity costs	3.20
Other, net	6.05
Total	$	64.75

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


•	Intervenor Direct Testimony — April 1, 2015;


•	Staff Direct Testimony — April 8, 2015;


•	Staff and Intervenor Cross-Rebuttal Testimony — April 22, 2015;


•	Rebuttal Testimony — April 24, 2015; and


•	Evidentiary Hearing — May 11, 2015.

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

Texas 2014 Electric Rate Case — In January 2014, SPS filed a retail electric rate case in Texas seeking a net increase in annual revenue of approximately $52.7 million, or 5.8 percent. The net increase reflected a base rate increase, revenue credits transferred from base rates to rate riders or the fuel clause, and resetting the TCRF to zero when the final base rates become effective. In April 2014, SPS revised its request to a net increase of $48.1 million.

The rate filing was based on an HTY ending June 2013, a requested ROE of 10.40 percent, an electric rate base of approximately $1.27 billion and an equity ratio of 53.89 percent. The requested rate increase reflected an increase in depreciation expense of approximately $16 million.

In September 2014, SPS, PUCT staff, and intervenors filed a non-unanimous settlement agreement which would increase SPS’ rates by $37 million, or 3.5 percent, retroactive to June 1, 2014. Starting Oct. 1, 2014, SPS began collecting the rate increase through interim rates subject to refund. SPS expects to recover the rate increase for June through September 2014 through a separate surcharge, for which it has recognized approximately $15.4 million of revenue in 2014.

The settlement includes an ROE of 9.7 percent solely for the purpose of calculating the AFUDC and determining baselines in future filings for the TCRF. In October 2014, the ALJs approved the stipulation and recommended that SPS file to implement the surcharge following the PUCT’s final order.

Although the parties to the settlement agreement have not prepared a calculation of the $37 million increase and do not agree about which specific costs are included, or not, in the agreed settlement revenue requirement, SPS’ reconciliation of its original request to the settlement increase is as follows:



(Millions of Dollars)	Settlement Agreement
Base rate increase request, January 2014	$	81.5
Revisions for updated information	(4.6		)
Revised request, April 2014	76.9
Remove proposed increase in depreciation	(16.0		)
Remove adjustment allocators for certain wholesale load reduction	(12.0		)
Revised amortizations (rate case expenses, pension and other post-employment benefits expense and gain on sale to Lubbock)	(9.0		)
Non-specified settlement adjustments	(2.9		)
Settlement base rate increase	$	37.0

In December 2014, the PUCT approved the settlement and authorized SPS to file to implement the surcharge. In January 2015, SPS filed an application to implement a surcharge of approximately $15.6 million, including interest, to be recovered from March through June 2015, subject to a true-up. A hearing was held in February 2015 and a decision is expected in the first quarter of 2015.

Electric, Purchased Gas and Resource Adjustment Clauses

TCRF Rider — In November 2013, SPS filed with the PUCT to implement the TCRF for Texas retail customers. The requested increase in revenues was $13 million. The PUCT issued an order allowing the TCRF to go into effect on an interim basis effective Jan. 1, 2014. In May 2014, the ALJ terminated the interim TCRF due to a settlement in principle being reached with intervenors and the PUCT staff in the pending Texas electric rate case. In July 2014, the PUCT approved the settlement agreement between the parties allowing SPS to recover $4 million annually through the TCRF. In September 2014, SPS filed a proposal with the PUCT to refund approximately $3.7 million during November 2014 for interim rates collected in excess of the final rates approved. Under a settlement among the parties, SPS implemented the refund in November 2014, pending PUCT approval. The PUCT approved the refund on Dec. 18, 2014.

Pending Regulatory Proceedings — NMPRC

New Mexico 2014 Electric Rate Case — In December 2012, SPS filed an electric rate case in New Mexico with the NMPRC for an increase in annual revenue of approximately $45.9 million effective in 2014. The rate filing was based on a 2014 FTY, a requested ROE of 10.65 percent, an electric rate base of $479.8 million and an equity ratio of 53.89 percent.

In September 2013, SPS filed rebuttal testimony, revising its requested rate increase to $32.5 million, based on updated information and an ROE of 10.25 percent. The request reflected a base and fuel increase of $20.9 million, an increase of rider revenue of $12.1 million and a decrease to other of $0.5 million.

In March 2014, the NMPRC approved an overall increase of approximately $33.1 million. The increase reflects a base rate increase of $12.7 million and rider recovery of $18.1 million for renewable energy costs, both based on an ROE of 9.96 percent and an equity ratio of 53.89 percent. Final rates were effective April 5, 2014. In April 2014, the NMAG filed a request for rehearing. The rehearing request was denied by the NMPRC. In June 2014, the NMAG filed an appeal of the NMPRC’s denial to the New Mexico Supreme Court. A decision is expected by the second quarter of 2016.

Pending and Recently Concluded Regulatory Proceedings — 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 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 and transmission formula rates be reduced to 9.15 and 9.65 percent, respectively.

In June 2014, the FERC issued an order in a different ROE proceeding adopting a new ROE methodology for electric utilities. The new ROE methodology requires electric utilities to use a two-step discounted cash flow analysis to estimate cost of equity that incorporates both short-term and long-term growth projections.

The FERC also issued orders consolidating the Golden Spread ROE complaints and setting them for settlement judge procedures and hearings and indicated the parties should apply the new two-step discounted cash flow ROE methodology to the proceedings. The FERC established effective dates for the refunds as April 20, 2012 and July 19, 2013. Settlement judge procedures were unsuccessful and the complaints were set for hearing procedures, with an initial ALJ decision to be issued by Nov. 25, 2015 and a final FERC order to be issued no earlier than 2016. In January 2015, Golden Spread filed testimony requesting that wholesale production and transmission formula rates be reduced to 8.78 percent and 9.28 percent, respectively, for the period April 20, 2012 to July 18, 2013, and reduced to 8.51 percent and 9.01 percent, respectively, for the period July 19, 2013 to Oct. 19, 2014.

Golden Spread, along with certain New Mexico cooperatives and the West Texas Municipal Power Agency, separately filed a third rate complaint in October 2014, requesting that the base ROE in the SPS production and transmission formula rates 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.

FERC Complaint Case Orders — In August 2013, the FERC issued an order on rehearing related to a 2004 complaint case brought by Golden Spread and 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 3CP rather than a 12CP 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, 2013, SPS had accrued $44.5 million related to the August 2013 Orders and an additional $5.9 million of principal and interest was accrued during 2014.

On Jan. 30, 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 12CP demand-related cost allocator. If approved, principal and interest accruals from the August 2013 Orders would cease as of the effective date. FERC action is pending.

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 jurisdictional gain sharing of $7.2 million. The gain is reflected in the statement of income as a reduction to O&M expenses. In December 2014, Golden Spread submitted a preliminary challenge asserting that the gain should be shared with wholesale transmission customers. SPS has disputed this claim. It is uncertain if the matter will result in a formal proceeding with the FERC.

Request for Waiver of SPP Tariff — In July 2014, SPS filed a request for the FERC to grant SPS a waiver of an SPP tariff regarding the billing of SPP administrative and transmission expansion charges for certain loads that left the SPS system at the end of 2013 through a sale of transmission assets to Sharyland. Under the SPP tariff provisions, SPP assesses these charges based on prior year load. Absent the waiver, SPS would be billed approximately $2.9 million by SPP in 2014 for loads that are no longer served by SPS. SPP has intervened to oppose the waiver request and Sharyland has intervened to support the waiver request. FERC action is pending.