1 Q. What are the ratemaking consequences of the sale of the distribution assets?

Transcription

1 Exhibit SPS-AXM 2-14(b)(1) Page 86 of 91 1 Q. What are the ratemaking consequences of the sale of the distribution assets? 2 A. There are two consequences. First, SPS expects to experience a gain on the sale 3 of the assets. Second, SPS anticipates that the sale will lead to ongoing cost 4 savings for the system as a whole. 5 Q. What is the gain on sale expected to be? 6 A. The APA calls for SPS to sell the distribution assets to Lubbock for a total 7 consideration of $87 million, and SPS's net book value of the assets is 8 approximately $64 million. After certain transaction costs are deducted, the gain 9 on sale will be roughly $19 million, although the final amount will not be 10 determined until the transaction closes. 11 Q. How does SPS propose to treat the gain on sale? 12 A. SPS proposes to return the entire gain on sale to ratepayers over a five-year 13 amortization period. Mr. Willemsen shows the effect of the five-year 14 amortization in his Attachment TLW-RR-4, which is an alternative cost of service 15 study that reflects the sale of the distribution assets to Lubbock. As noted above, 16 however, the final amount of the gain on sale will not be known until the sale 17 concludes, so Mr. Willemsen's alternative cost of service study is based on SPS's 18 best estimates at this time. 19 Q. Please explain why SPS believes that the sale of assets will provide ongoing 20 cost savings. 21 A. SPS has an extensive distribution network within Lubbock but serves only about percent of the customers within Lubbock. Therefore, the average distribution Lakey Direct - Revenue Requirement Page 86 RR1-86 of

2 Exhibit SPS-AXM 2-14(b)(1) Page 87 of 91 I net plant cost per customer in Lubbock is almost twice that of the average net 2 distribution plant cost per customer in the overall Texas retail jurisdiction. The 3 Texas retail jurisdictional distribution net plant cost per customer is about $1,500, 4 whereas the average net plant cost for an SPS customer in Lubbock is more than 5 $2,700. Therefore, if SPS can dispose of the Lubbock system at or above net 6 book value, which SPS is doing as part of the APA, the sale has a beneficial cost 7 impact on the remainder of the SPS Texas retail distribution voltage level 8 customers because it reduces their average net rate base costs. There will also be 9 a reduction in distribution function O&M expenses because SPS will no longer be 10 operating and maintaining its Lubbock distribution system. In addition, SPS will 11 not have to pay insurance and property taxes on the lower density distribution 12 network within Lubbock. 13 Q. What are the ongoing cost savings expected to be? 14 A. The ongoing cost savings are expected to be $5,248,564 (Texas retail). Mr. 15 Willemsen reflects those projected cost savings in his Attachment TLW-RR Q. How does SPS propose to allocate the ongoing cost savings? 17 A. SPS proposes to split the savings between customers and shareholders on a 50/50 18 basis for the next five years, beginning on the date the rates approved in this case 19 take effect. Based on current projections, allocating half of the savings to 20 customers would reduce SPS's cost of service by $2,624,282 on an annual basis. Lakey Direct - Revenue Requirement Page 87 RR1-87 of

3 Exhibit SPS-AXM 2-14(b)(1) Page 88 of 91 1 Q. Is the allocation that SPS proposes fair and reasonable to customers? 2 A. Yes. That allocation gives customers a reasonable share of the benefit, 3 particularly in light of the fact that customers will receive all of the gain on sale. 4 At the same time, it rewards shareholders for SPS's decision to dispose of assets 5 that are less economical than SPS's other assets, thereby reducing overall costs 6 for the remaining Texas retail ratepayers. Lakey Direct - Revenue Requirement Page 88 RR1-88 of

4 Exhibit SPS-AXM 2-14(b)(1) Page 89 of 91 1 XV. REQUESTED FILING PACKAGE SCHEDULE WAIVERS 2 Q. Is SPS requesting any waivers of the Commission promulgated RFP? 3 A. Yes. For the reasons listed in RFP Schedule V, and as supported by the witnesses 4 5 listed on Schedule V, SPS requests that the Commission waive the requirement for SPS to file the following R.FP schedules: H-7.4, H-12.1, H c1, 6 H c, H g, H f, H c, 1-7, 1-11 [all], 1-12 [all], 7 Q-2 [all], Q-8.1, and Q-8.3. Lakey Direct - Revenue Requirement Page 89 RR1-89 of

5 Exhibit SPS-AXM 2-14(b)(1) Page 90 of 91 1 XVI. CONCLUSION 2 Q. Were Attachments GNL-RR-1 through GNL-RR-5 and GNL-RR-A through 3 GNL-RR-D prepared by you or under your direct supervision and control? 4 A. Yes, as to Attachments GNL-RR-1 through GNL-RR-5. Attachments 5 GNL-RR-A through GNL-RR-D were prepared by Ms. Locker and her staff. I 6 and my staff have reviewed those attachments and believe them to be accurate. 7 The same information provided in GNL-RR-A through GNL-RR-D is presented 8 in Ms. Locker's Attachments KL-RR-A through KL-RR-D. 9 Q. Were the portions of the RFP schedules and Executive Summary that you 10 sponsor or co-sponsor prepared by you or under your direct supervision and 11 control? 12 A. Yes 13 Q. Do you incorporate the RFP schedules and the portions of the Executive 14 Summary sponsored or co-sponsored'by you into your testimony? 15 A. Yes 16 Q. Does this conclude your pre-filed Direct Testimony? 17 A. Yes. Lakey Direct - Revenue Requirement Page 90 RRI - 90 of

6 Exhibit SPS-AXM 2-14(b)(1) Page 91 of 91 AFFIDAVIT STATE OF TEXAS COUNTY OF POTTER GARY N. LAKEY, first being sworn on his oath, states: I am the witness identified in the preceding testimony. I have read the testimony and the accompanying attachments and am familiar with their contents. Based upon my personal knowledge, the facts stated in the testimony are true. In addition, in my judgment and based upon my professional experience, the opinions and conclusions stated in the testimony are true, valid, and accurate. DONNA M. ANDERSON W)TARY PLMLIC STATE OF TEXA$, ioy commision Expim o GAR. LAKE Subscribed and sworn to before me this /1^1 day of N. LAKEY. /k by GARY Notary Public, State of Texas My Commission Expires: Lakey Direct - Revenue Requirement Page 91 RRI - 91 of

7 Page 1 of 91 DOCKET NO APPLICATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY FOR AUTHORITY TO CHANGE RATES AND TO RECONCILE FUEL AND PURCHASED POWER COSTS FOR 2008 AND 2009 PUBLIC UTILITY COMMISSION OF TEXAS DIRECT TESTIMONY of TIMOTHY L. WILLEMSEN on behalf of SOUTHWESTERN PUBLIC SERVICE COMPANY (Revenue Requirement) (Filename: WillemsenRRDirect.doc) Table of Contents GLOSSARY OF ACRONYMS AND DEFINED TERMS : LIST OF ATTACHMENTS 'WITNESS IDENTIFICATION AND QUALIFICATIONS II. ASSIGNMENT III. REVENUE REQUIREMENT...: IV. RATE BASE V. FUEL AND PURCHASED POWER EXPENSE VI. O&M EXPENSE VII. A&G EXPENSE...: VIII. DEPRECIATION AND AMORTIZATION EXPENSE IX. TAXES OTHER THAN INCOME X. INCOME TAX EXPENSE XI. REVENUE CREDITS...: XII. CAPITAL STRUCTURE XIII. JURISDICTIONAL ALLOCATION XIV. SPP TRANSMISSION PROJECTS XV. XVI. COST OF SERVICE STUDY WITH SALE OF ASSETS TO LUBBOCK CONCLUSION AFFIDAVIT Willemsen Direct - Revenue Requirement Page I RRl 0-86 of

8 Page 2 of 91 GLOSSARY OF ACRONYMS AND DEFINED TERMS Acronym/Defined Term A&G ADIT BEA Commission CRS Docket No Meaning Administrative and General Accumulated Deferred Income Taxes Borger Energy Associates, L.P. Public Utility Commission of Texas Customer Resource System Application of Southwestern Public Service Company for Authority to Change Rates, to Reconcile Fuel and Purchased Power Costs for 2006 and 2007, and to Provide a Credit for Fuel Cost Savings, Docket No , Order (June 2, 2009) Docket No Southwestern Public Service Company's: (1) Report of Sale ofassets; (2) Request for a Finding that the Sale ofassets is in the Public Interest; (3) Request for Authority to Discontinue Retail Electric Service in its Dually Certificated Service Area Within the City of Lubbock and Adjacent Areas; and (4) Request for Findings Regarding Wholesale Power Sales Agreements, Docket No , Application (Jan. 19, 2010) DSM EE FAS FERC ]CO JOA Lubbock OATT Demand Side Management Energy Efficiency Financial Accounting Standard Federal Energy Regulatory Commission Interruptible Credit Option Joint Operating Agreement City of Lubbock, Texas Open Access Transmission Tariff Willemsen Direct -Revenue Requirement Page 2 RR10 - $7 of

9 Page 3 of 91 Acronym/Defined Term O&M PCRF PNM PSCo REC RFP SPP SPS Test Year Xcel Energy XES Meaning Operation and Maintenance Power Cost Recovery Factor Public Service Company of New Mexico Public Service Company of Colorado, a Colorado corporation Renewable Energy Credit Rate Filing Package Southwest Power Pool Southwestern Public Service Company, a New Mexico Corporation January 1, 2009 through December 31, 2009 Xcel Energy Inc. Xcel Energy Services Inc. "'IIlemsen Direct - Revenue Requirement Page 3 RR of

10 Page 4 of 91 LIST OF ATTACHMENTS Attachment TLW-RR-1 TLW-RR-2 TLW-RR-3 TLW-RR-4 TLW-RR-5 Description Cost of Service Study (Filenames: TLW-RR-1.l.xls, TLW-RR-1.2.xls, and TLW-RR-1.3.xls) Safety, Conservation and Customer Program Advertising (Filenames: TLW-RR-2.pdf) Impact of Consolidated Tax Savings Adjustment (Filename: TLW-RR-3.xls) Cost of Service Study Reflecting the Sale of Distribution Assets to the City of Lubbock (Filenames: TLW-RR-4. l.xls, TLW-RR-4.2.xls, and TLW-RR-4.3.xls) Workpapers of Timothy L. Willemsen (Filenames: TLW-RR-5.pdf) - Willemsen Direct -Revenue Requirement Page 4 RR10-89 of

11 Page 5 of 91 DIRECT TESTIMONY OF TIMOTHY L. WILLEMSEN 1 I. WITNESS IDENTIFICATION AND QUALIFICATIONS 2 Q. Please state your name and business address. 3 A. My name is Timothy L. Willemsen. My business address is `}' Street, 4 Denver, Colorado Q. On whose behalf are you testifying in this proceeding? 6 A. I am filing testimony on behalf of Southwestern Public Service Company, a New 7 Mexico Corporation ("SPS") and wholly owned subsidiary of Xcel Energy Inc. 8 ("Xcel Energy"). Xcel Energy is a registered holding company that owns several 9 electric and natural gas utility operating companies and a regulated natural gas 10 pipeline company.' 11 Q. By whom are you employed and in what position? 12 A. I am employed by Xcel Energy Services Inc. ("XES"), the service company 13 subsidiary of Xcel Energy, as Manager, Revenue Analysis. 14 Q. Please briefly outline your responsibilities as Manager, Revenue Analysis. 15 A. I am responsible for the determination of the overall revenue levels required in all 16 of the jurisdictions served by SPS and PSCo. I Xcel Energy is the parent company of four wholly owned electric and gas utility operating companies: Northern States Power Company, a Minnesota corporation; Northern States Power Company, a Wisconsin corporation; Public Service Company of Colorado, a Colorado corporation (`PSCo"); and SPS. Xcel Energy's gas pipeline subsidiary is WestGas Interstate, Inc. Willemsen Direct - Revenue Requirement Page S RR10-90 of

12 Page 6 of 91 1 Q. Please describe your educational background. 2 A. I graduated from Colorado State University in 1980 with a Bachelor of Science 3 Degree in Business with a concentration in Accounting. 4 Q. Please describe your professional experience. 5 A. I have 29 years of experience in the utility industry, in various accounting and 6 regulatory positions. I began my career with PSCo in April 1981 in the Property 7 Accounting Department. In 1990, 1 accepted a position as a Rate Accountant in 8 the Revenue Requirements Department. In 1997, I was promoted to Manager, 9 Cost Analysis for New Century Services, Inc. My current position is Manager, 10 Revenue Analysis for XES. 11 Q. Have you attended or taken any special courses or seminars relating to 12 public utilities? 13 A. Yes. I have attended several courses including those offered by Arthur Anderson, 14 Financial Accounting Institute, and Utilities International. I have also attended 15 several meetings of the National Association of Regulatory Utility 16 Commissioners Staff Subcommittee on Accounts. 17 Q. Have you testified before any regulatory authorities? 18 A. Yes. I have submitted prefiled testimony before the Public Utility Commission of 19 Texas ("Commission"). In addition, I have testified before the Colorado Public 20 Utilities Commission, the Wyoming Public Utilities Commission, and the New 21 Mexico Public Regulation Commission. Willemsen Direct - Revenue Requirement Page 6 RR10-91 of

13 Page 7 of 91 1 II. ASSIGNMENT 2 Q. What is your assignment in this proceeding? 3 A. I will present SPS's revenue requirement and sponsor many of the related 4 schedules that support that revenue requirement. I also will discuss the various 5 components of the cost of service and the adjustments made to those components, 6 including rate base, fuel expense, operation and maintenance ("O&M") expense, 7 administrative and general ("A&G") expense, depreciation and amortization 8 expense, taxes other than income, income tax expense, revenue credits, and 9 capital structure. Finally, I will address the jurisdictional allocation method used 10 in this proceeding. Those revenue requirements support the required increase of 11 $62,026,302 in base rate revenues SPS is requesting in this case. 12 In addition, I will discuss the effect that SPS's pending sale of distribution 13 assets to the City of Lubbock, Texas ("Lubbock"), will have on the cost of service, 14 assuming that the sale is completed will also explain the impact that the Commission's standard consolidated 16 tax savings adjustment would have on SPS's cost of service and return on equity also sponsor or co-sponsor the following schedules in SPS's Rate Filing 18 Package ("RFP"): A, A-1, A-2, A-3, A-4, A-5, BI, B-1.1, B-1.2, B-1.3, B-1.4, 19 B-2, B-2.1, C-4.2, E-1, E-1.1, E-4, E-5, E-6, G-4, G-7.4d, G-7.6, G-7-6a, G-7.7, 20 G-7.8, G-7.10, G-7.11, G-7.12, G-7.12a, G-7.13, G-7.13a, G-9, G-9.1, G-10, 21 G-11, G-12, G-13, G-14, G-14.1, G-14.2, G-15, H-2 and N I also sponsor 22 the portions of the Executive Summary dealing with these areas. ViIlemsen Direct - Revenue Requirement Page 7 RR10-92 of

14 Page 8 of 91 1 III. REVENUE REOUIREMENT 2 Q. What is a revenue requirement study? 3 A. A revenue requirement study - also referred to as a cost of service study or pro 4 forma rate of return study - examines all of a company's investments, revenues, 5 and expenses associated with providing electric utility service over a specific 12-6 month period, with the goal of determining the company's cost of providing 7 service to its customers. The revenue requirement study indicates the overall 8 level of revenues necessary for the company to earn its authorized return, which is 9 used in setting the company's base rates for service. In effect, the revenue 10 requirement establishes a proxy for what the company's cost of service will be in 11 future periods when the new rates will be in effect. 12 Q. What test year has SPS used in this proceeding? 13 A. SPS's test year is the historic period encompassing the 12 months ended 14 December 31, 2009, (the "Test Year"). I have made known and measurable 15 changes to the Test Year data in developing the pro forma revenue requirement. 16 Q. How is a cost-of-service study developed? 17 A. As stated above, the study calculates the base rate revenues required to recover 18 the cost of providing utility service to the appropriate jurisdiction (in this case, 19 SPS's Texas retail jurisdiction), otherwise known as the "revenue requirement." 20 The cost-of-service study is essentially a model that measures revenue, expense, 21 and investment levels, and the relationship among these components. The 22 determination of the revenue requirement carefully isolates the income and 23 expense associated with providing electric service to the jurisdictional customers. Willemsen Direct - Revenue Requirement Page 8 RR10-93 of

15 Page 9 of 91 1 The isolation of revenues, expenses, and investments is then applied to determine 2 the revenue deficiency based on the company's proposed return on equity and 3 capital structure and includes the amount of income tax expense that is associated 4 with providing utility service to the jurisdiction. Thus, in this case, the entire 5 revenue requirement determination, including the determination of income taxes, 6 is associated only with the portions of investments, revenues, and expenses that 7 are related to the provision of retail utility service in Texas. This process, in 8 essence, creates a stand-alone financial look at the revenue requirement for the 9 cost of serving the Texas retail jurisdiction. 10 In this case, the starting point in developing the study is total company 11 per-book accounting information. Adjustments are then made to the per-book 12 data to derive Test Year costs. There are three types of adjustments that can be 13 made to the book data: (1) accounting adjustments; (2) Commission-ordered 14 adjustments; and (3) pro forma adjustments. The adjusted amounts are then 15 assigned to the Texas retail jurisdiction to calculate the retail jurisdictional 16 revenue requirement. The resulting required revenues computed by the model are 17 then compared to the pro forma present revenues for the test year to determine 18 any deficiency or excess. Any excess indicates the need for a rate decrease, 19 whereas a deficiency indicates that SPS is not recovering the cost of providing 20 service to its customers and, thus, a rate increase is warranted. Killemse» Direct-Revenue Requirement Page 9 RR of

16 Page 10 of 91 I Q. The first type of adjustment you mentioned is "accounting adjustments." 2 What are those? 3 A. Accounting adjustments include both out-of-period adjustments and adjustments 4 to eliminate or add certain accounts or expenses. Out-of-period adjustments 5 eliminate transactions that were recorded in the test year, but that apply to periods 6 outside the test year. The intent of these adjustments is to remove the effect of 7 transactions occurring outside of the test year from the study. Conversely, 8 transactions that were recorded outside the test year but that are applicable to the 9 test year are added, and thus reflected in the study. Adjustments also are made to 10 eliminate certain accounts that are included in the per-book accounts, but which 11 should not be included in the base rate calculation. 12 Q. The second type of adjustment you mentioned is a"commission-ordered 13 adjustment." What is that? 14 A. Commission-ordered adjustments are made to comply with rate recovery policies and principles established by the Commission in its substantive rules and in orders issued in prior SPS proceedings. For example, promotional and image advertising expenses incurred and expenses associated with political purposes are costs that the Commission has specifically ordered be eliminated from the cost of service. In isolating the effects on the cost of service for Texas, when these expenses are 20 excluded, so are the tax deductions associated with them. 21 Q. You also mentioned "pro forma adjustments." What are those? 22 A. Pro forma adjustments are made to test year per-book results so that the test year 23 will be representative of certain future conditions. Adjustments are made for Willemsen Direct - Revenue Requirement Page 10 RR of

17 Exhibit SPS-AXM 2-]4(b)(2) Page ] I of 91 known and measurable changes occurring both in the test year (in-period 2 adjustments) and outside the test year (out-of-period adjustments). WiUemsen Direct -Revenue Requirement Page ]] RRI O- 96 of

18 Page 12 of 91 I Q. Please summarize the results of the revenue requirements study. 2 A. The study shows a total net revenue requirement of $431,114,624 based on the 3 proposed return on equity of percent as recommended by SPS witness 4 Robert B. Hevert in his revenue requirement direct testimony, and a capital 5 structure of 51 percent equity and 49 percent debt as discussed by SPS witness 6 George E. Tyson II in his revenue requirement direct testimony. When compared 7 with Test Year revenue of $369,088,323 as discussed by SPS witness Richard M. 8 Luth, it results in a base rate revenue deficiency of $62,026,302. This revenue 9 deficiency does not reflect any adjustments related to the sale of distribution 10 assets to the City of Lubbock, which I discuss later in my testimony. The 11 cost-of-service study is provided as Attachment TLW-RR-1 to my direct 12 testimony. Willemsen Direct - Revenue Requirement Page 12 RR10-97 of

19 168 Exhibit SPS-AXM 2-14(b)(2) Page 13 of 91 I IV. RATE BASE 2 Q. What method of measuring rate base did you use? 3 A. For the most part, rate base is measured using original cost year-end balances 4 ending December 31, The exceptions to that are for items that can be more 5 volatile and have large variances from month to month. These items are valued 6 using a 13-month average balance. The items that are based upon a 13-month 7 average are 8 Fuel inventory, 9 NOx emission allowance inventory, 10 Materials and supplies, 11 Prepayments, 12 Financial Accounting Standard ("FAS") 106 liability, and 13 FAS 112 liability. 14 Q. Have you made any adjustments to rate base? 15 A. Yes. I have made the following adjustments: 16 Restated the accumulated reserve for depreciation to reflect a Texas- 17 specific balance of accumulated depreciation; 18 Restated accumulated deferred income taxes ("ADIT") balances to reflect 19 the impact of the unblending of accumulated depreciation and to remove 20 the impact of state income taxes. 21 Eliminated the ADIT related to expenses not included in the cost of 22 service study; 23 Adjusted the ADIT related to FAS 106 Medicare Reimbursements; 24 Eliminated distribution plant-in-service balances and accumulated 25 depreciation reserve associated with SPS's former service territory in 26 Oklahoma that remains on its books; Willemsen Direct -Revenue Requirement Page 13 RR of 495

20 Page 14 of 91 I * Eliminated the Construction Work in Progress balance; and 2 * Eliminated the balance of the Regulatory. Asset associated with prior 3 demand side management ("DSM") expenditures. 4 I also have conducted a lead-lag study to determine SPS's cash working capital 5 requirements- 6 Q. What adjustments did you make to the accumulated reserve for 7 depreciation? 8 A. As discussed in detail by SPS witness Lisa H. Perkett in her direct testimony, the 9 accumulated reserve for depreciation was adjusted to develop a Texas-specific 10 depreciation reserve based upon the depreciation rates approved for the Texas 11 retail jurisdiction. The adjustment decreases the accumulated reserve by 12 approximately $82 million (total company). 13 Q. What adjustments did you make to ADIT? 14 A. Adjustments were made to eliminate the balances related to items not included in 15 the cost of service, to adjust the deferred tax asset associated with FAS Medicare Reimbursements, and to eliminate the effect of state income taxes. In 17 addition, the plant-related ADIT balances were adjusted to reflect the impact that 18 the adjustment to accumulated depreciation reserve for "unblending" had on 19 deferred taxes. The entire ADIT balance was adjusted to reflect only the federal 20 income tax rate of 35 percent, thereby removing any state income tax effects. 21' Q. Please describe the adjustments to remove the deferred taxes associated with 22 items not included in the cost of service. 23 A. An example of one of these items is the deferred taxes associated with statement 24 of FAS 109, "accounting for income taxes." The deferred taxes created by FAS Willemsen Direct - Revenue Requirement Page 14 RRIO - 99 of

21 Exhibit SPS-AxM 2-14(b)(2) Page 15 of are recorded as both deferred tax assets (Federal Energy Regulatory Account 2 ("FERC") Account 190) and deferred tax liabilities (FERC Account 282). These 3 deferred taxes have equal and offsetting regulatory asset and liability accounts on 4 SPS's balance sheet. Because the regulatory assets and liabilities are not included 5 in rate base, the deferred taxes are also eliminated. There are also deferred taxes 6 associated with unbilled revenues, rate refunds, and other items that are excluded 7 from the cost of service, all of which have been eliminated. The costs that 8 generated these deferred taxes are not part of the cost of service, so therefore the 9 associated deferred tax balances are also properly excluded. 10 Q. Please describe the adjustments to remove the deferred taxes associated with 11 FAS 106 Medicare Reimbursements. 12 A. As described by SPS witness Mark P. Moeller, the 2010 federal healthcare reform 13 legislation removed the tax deductibility of Medicare reimbursements.2 To 14 comply with this requirement, SPS had to write down its deferred tax asset for 15 FAS 106 Medicare Reimbursements in the first quarter of I made a post- 16 test year adjustment to FERC account 190 to reflect this write-down and to restate 17 the remaining deferred tax asset using a federal income tax rate of 35 percent. 18 That adjustment, in the amount of $1,877,110, is shown on page 24 of Attachment 19 TLW-RR-1. As I discuss later in my testimony, SPS has proposed recovery of 20 this expense as an amortization. 2 The formal name for the legislation is the Patient Protection Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of WillemsenDirect - Revenue Requirement Page 15 RR of

22 Page 16 of 91 1 Q. How have you treated SPS's prepaid pension asset and the liabilities 2 associated with FAS 106 and FAS 112 in the cost of service study? 3 A. _ As discussed by Mr. Moeller and SPS witness Gene H. Wickes, SPS has included 4 the prepaid pension asset in rate base. Similarly, and consistent with the 5 treatment of the prepaid pension asset in rate base, SPS has included the liabilities 6 associated with FAS 106 (post-retirement benefits other than pensions) and FAS (post-employment benefits) in rate base. The inclusion of the FAS 106 and 8 FAS 112 liabilities in rate base reduces rate base. 9 Q. Please describe cash working capital included in rate base. 10 A. Cash working capital is the amount of investor-supplied capital necessary to 11 finance cost of service expenses between the time the expenditures are required to 12 provide the service to customers and the time cash is received for that service. To 13 determine the allowance of cash working capital, the Commission has 14 traditionally accepted the use of a lead-lag study. 15 Q. Did SPS prepare the lead-lag study that was used to derive the cash working 16 capital amount in rate base in this case? 17 A. Yes. SPS prepared a new lead-lag study for this case based on data from the Test 18 Year. 19 Q. Please describe a lead-lag study. 20 A. A.lead-lag study is a method used to measure the amount of working capital 21 required to finance a utility's day-to-day operations. There are two parts in a 22 lead-lag study. First, the expense lead must be calculated. An extensive and 23 detailed study of the payment practices for each cash expense is made by Willemsen Direct - Revenue Requirement Page 16 RR of

23 Page 17 of 91 I determining the service period when goods or services are received by the 2 company and when the expense is paid. Depending on the number of records, 3 statistical sampling can be used to determine the expense lead. Second, the 4 revenue lag must be calculated. The revenue lag is the time between the mid- 5 point of the service period to the date when the company receives payment from 6 the customer. Depending on the number of customers, statistical sampling can be 7 used to determine the revenue lag. The expense lead is then subtracted from the 8 revenue lag to determine the number of days until the company is compensated 9 for its expense. This net number of days is converted to an annual number by 10 dividing by 365 days, which is referred to as the cash working capital factor. The 11 cash working capital factor is multiplied by the corresponding test year expense 12 items and is an addition to rate base. Cash working capital factors can be positive 13 or negative, depending upon whether the expense lead is shorter or longer than the 14 revenue lag. 15 Q. What cash expense items are included in the expense lead calculation you 16 performed? 17 A. The following cash expense items have been included in the expense lead 18 calculation: 19 Coal for steam production; 20. Natural gas for other power generation; 21 Oil for electric generation; 22 Other fuel; 23 Purchased power; lviilemsen Direct - Revenue Requirement Page 17 RR of

24 Page 18 of 91 1 Labor - regular pay O&M expense; 2 Labor - incentive pay O&M; 3 Non-labor O&M expense; 4 Property taxes; 5 Payroll taxes; 6 Federal income taxes; 7 State income taxes; and 8 Franchise fees paid. 9 Q. Please discuss in more detail the procedures used to determine the expense 10 lead. 11 A. SPS used statistical sampling to determine the expense lead for the coal for steam 12 production, natural gas for other power generation, oil for electric generation, 13 purchased power, and non-labor O&M cash working capital expense categories. 14 SPS followed a statistical sampling method that allowed for confidence intervals 15 of 90 percent for expense leads. For each sample group, all of the invoice service 16 dates and payment dates were reviewed. Service dates and payment dates were 17 gathered for the O&M labor and the various tax cash working capital expense 18 categories. The expense lead is the average number of days from the time of 19 service to the date SPS remits payment for the service to the vendor. The expense 20 lead for each invoice is the difference between the number of days it takes for 21 SPS's -payment to the vendor to clear the bank and the mid-point date of each 22 invoice's service period. The expense lead days are weighted by the amount of 23 the invoices. Willemsen Direct -Revenue Requirement Page 18 RR of

25 Page 19 of 91 1 Q. Please discuss in more detail the procedures used to determine the revenue 2 lag. 3 A. The revenue lag was calculated using data from SPS's customer billing system. 4 SPS used statistical sampling for the customers billed on rate schedules with or more customers, and used 100 percent sampling for the customers on rate 6 schedules with fewer than 600 customers. SPS followed a statistical sampling 7 method that allowed for confidence intervals of 95 percent for revenue lag. A _8 revenue lag was calculated for each invoice. The revenue lag is the average 9 number of days from the time of service to the date SPS receives payment from the customer. The revenue lag is determined by calculating the collection lag, the number of days it takes for the customers to pay their bills from the mid-point date of the service period, and adding an additional half -day to account for the posting of the customer receipts to SPS's bank account. An average lag day value for each rate group was calculated and weighted with that group's percent of total 15 revenue. 16 Q. What are the resulting lead-lag factors SPS has calculated for use in 17 calculating cash working capital in this case? 18 A. The lead-lag study results are presented in RFP Schedule E-4. The resulting 19 requested cash working capital amount is negative $5,924,241, which reduces rate 20 base by that amount. 21 Q. Are there any new rate base items that were not in SPS's last rate case? 22 A. Yes, in this case SPS has included its NOx Emissions Allowance Inventory 23 balance as a rate base item. SPS did not have this inventory balance in its last test Willemsen Direct - Revenue Requirement Page 19 RR of

26 Page 20 of 91 1 year. SPS purchases.and maintains a certain level of NOx emissions allowances 2 to use if needed to satisfy its compliance requirements. The NOx inventory 3 balance is similar in nature to fuel inventory in that SPS has invested in the 4 emissions allowances and this investment should be properly included in rate 5 base. SPS has included the 13-month average balance in rate base in the amount 6 of $198,315 (total company). In her Fuel Reconciliation testimony, SPS witness 7 Karen Roberts discusses SPS's proposed treatment of NOx emissions allowances 8 that are surrendered each year. 9 Q. Turning to a different subject, are there any rate base items that were 10 directly assigned to SPS's retail jurisdictions? 11 A. Yes, there are three plant items that have been directly assigned to jurisdictions, 12 the customer resource system ("CRS"), the call center, and radial transmission 13 lines. 14 Q. Please discuss the direct assignment of the CRS system and the call center. 15 A The CRS system is not used to bill any of SPS's wholesale customers. One hundred percent of the CRS system is used to bill SPS's retail customers. SPS does not have a specific investment in a software system to bill its wholesale 18 customers. Rather, SPS currently uses an accounts receivable module within the 19 general ledger system, J.D. Edwards, to bill its wholesale customers, and a portion 20 of this system is already being allocated to. the wholesale customers. Likewise, 21 SPS's wholesale customers do not benefit from or use the call centers. These 22 large customers deal with account representatives and not the call center 23 employees. The labor, employee expenses, and payroll taxes associated with the Willemsen Direct - Revenue Requirement page 20 RR of

27 Page 21 of 9] 1 wholesale account managers, in the amount of $622,338 have been eliminated 2 from the Texas retail cost of service. Because the wholesale jurisdiction does not 3 benefit from either of these two assets, they are allocated among only the retail 4 jurisdictions served by SPS. There are also lease expenses in FERC Account 931, 5 in the amount of $2,068,527, associated with the customer care functions that 6 benefit only retail customers. These lease expenses have been allocated to SPS's 7 retail jurisdictions. 8 Q. Please discuss the direct assignment of transmission facilities that are 9 included in the cost of service. 10 A. Under the Southwest Power Pool ("SPP") Regional Open Access Transmission 11 Tariff ("OATT"), all transmission-owners were required to determine which of its 12 facilities qualify as "Transmission Facilities" as defined in Attachment Al, by 13 September 30, The SPP definition of Transmission Facilities in 14 Attachment Al to the SPP Regional OATT requires SPS to analyze the way it 15 allocates the costs of certain facilities that do not meet the SPP definition of 16 Transmission Facilities. Accordingly, SPS has performed a systematic review of 17 all of its transmission lines and made a determination as to which facilities should 18 be included in the cost of service as transmission facilities and which facilities 19 should be directly assigned to SPS retail loads or wholesale customers. SPS has 20 directly assigned specific radial transmission lines to applicable SPS retail 3 SPP Regional OATT, Attachment AI IV; see also Southwest Power Pool, Inc., 112 FERC 61,355 at P 62 (2005) (establishing effective date for applicable tariff sheets and the requirement to determine which facilities are "Transmission Facilities"), order granting clarif., 114 FERC 61,242 (2006). Willemsen Direct - Revenue Requirement Page 21 RR of

28 Page 22 of 91 1 jurisdictions and wholesale transmission customers consistent with Attachment Al 2 criteria in the cost of service presented in this case. 3 Q. Is the direct assignment of these three items consistent with how SPS 4 jurisdictionalized them in its last rate case? 5 A. Yes. The CRS and call center plant balances have been updated to the Test Year 6 level. The radial line study has been updated based on SPS's most recent review 7 of its transmission lines and for the December 31, 2009 level of transmission 8 plant. The practice of direct assigning these items is consistent with SPS's 9 practice in its 2008 and 2006 base rate cases, Docket Nos and Q. What is the rate base included in your cost of service after these 11 adjustments? 12 A. The Texas retail jurisdictional rate base is $1,031,360, Application of Southwestern Public Service Company for Authority to Change Rates, to Reconcile Fuel and Purchased Power Costs for 2006 and 2007, and to Provide a Credit for Fuel Cost Savings, Docket No , Order (June 2, 2009) ("Docket No "). 5 Application of Southwestern Public Service Company for: Authority to Change Rates; Reconciliation of its Fuel Costs for 2004 and 2005; Authority to Revise the Semi Annual Formulae Originally Approved in Docket No Used to Adjust its Fuel Factors; and Related Relief, Docket No , Order (July 27, 2007). Willemsen Direct - Revenue Requirement Page 22 RR of

29 Page 23 of 91 I V. FUEL AND PURCHASED POWER EXPENSE 2 Q. Did you make any adjustments to fuel expense? 3 A. Yes. SPS's current base rates include a small amount of fuel expense related to 4 the generation at the Celanese generator. Celanese ceased operations in 2009 and 5 therefore SPS is proposing to recover all of its fuel expense through its fixed fuel 6 factors. In the cost-of-service study, the fuel expense is set equal to zero. 7 Q. Did you make any adjustments to purchased power expense? 8 A. Yes. There are several adjustments to purchased power expense. First, the Test 9 Year purchased capacity costs were adjusted to reflect known, contractual price 10 changes in The 2009 volumes were held constant and multiplied by the prices to establish the pro forma long-term purchased capacity expense. 12 Short-term capacity expense was not adjusted. SPS witness Tim Kawakami 13 discusses the capacity costs associated with the purchased power agreements. 14 Next, SPS's Power Cost Recovery Factor ("PCRF") is due to expire in and, as discussed by SPS witness Gary N. Lakey, SPS is proposing to move 16 the purchased capacity associated with the Borger Energy Associates, L.P. 17 ("BEA") plant into base rates and to discontinue the PCRF concurrent with the 18 implementation of the rates from this case. The capacity costs, adjusted to reflect 19 the 2010 prices for BEA, are $19,216,540 on a total company basis. 20 The third adjustment relates to variable O&M for purchased capacity. 21 SPS is continuing the practice of recovering this variable O&M purchase in base 22 rates. The variable O&M associated with the BEA purchase has been recorded in 23 FERC account (Purchased Capacity) as it is currently recovered through Willemsen Direct - Revenue Requirement. Page 23 RR of

30 Page 24 of 91 1 the PCRF. An adjustment was made to move this variable O&M into FERC 2 account (Variable O&M) and to recover it in base rates. The variable 3 O&M associated with the Lea Power contract was adjusted to reflect known, 4 contractual price changes in In addition, the variable O&M associated with 5 two long-term purchased capacity contracts, Sid Richardson and Degussa 6 Engineered Carbons, were recorded in FERC account (Purchased Energy) 7 in the Test Year and have been moved to FERC account in the cost of 8 service. 9 Q. What is the dollar amount of the Texas retail purchased power capacity- 10 related and variable O&M costs reflected in the cost of service? 11 A. The Texas retail portion of purchased capacity and variable O&M included in 12 base rates is $55,417,615. WiUemsen Direct -Revenue Requirement Page 24 RR of

31 Page 25 of 91 I VI. O&M EXPENSE 2 Q. Have you made any adjustments to O&M expense? 3 A. Yes. I have adjusted the following components of O&M expense: 4 Fuel handling; 5 NOx and SO2 allowance; 6 Employee wages; 7 Annual incentive; 8 Long-term incentive; 9 Interruptible Credit Option ("ICO") costs; 10 Office relocation costs; 11 Wheeling expense; 12 Vegetation management and wood pole inspection; 13 Advertising, contributions and donations; 14 Eliminated certain expenses associated with the trading operations; 15 Economic development; and 16 Energy efficiency ("EE") expense; 17 Renewable Energy Credit ("REC") expense; 18 Accounting corrections. 19 Q. Please describe the adjustment to fuel handling expense. 20 A. I made a known and measurable change to the Test Year level of costs charged to 21 SPS by TUCO for supplier margins based on calendar year 2010 contract 22 increases for this item in the amount of $73,873 on a total company basis. SPS 23 witness James Love discusses the change. Willemsen Direct -Revenue Requirement page 25 RR of

32 Page 26 of 91 1 Q. Please describe the adjustment to NOx and SO2 emission allowance costs. 2 A. As discussed by Ms. Roberts in her direct testimony in the fuel reconciliation 3 phase, SPS is proposing to recover the NOx emission allowance costs through its 4 fuel factor similar to the way it is authorized to recover the costs of SO2 emission 5 allowances. These costs in the amount of $630,387, which are recorded in FERC 6 account 509, have been eliminated. If the Commission requires SPS to recover NOx 7 emission allowances through base rates instead of through fuel, as SPS proposes, 8 SPS's base rate request will need to be increased by $1,579,820 (total company), as 9 discussed by SPS witness Charles E. Anderson. 10 Q. Please describe the adjustment for employee wages. 11 A. I made an adjustment to incorporate the known and measurable wage increases that 12 will be in place when the rates resulting from this case take effect. First, a wage 13 increase of 3.5 percent for bargaining unit employees of SPS was effective on 14 November 1, 2009, according to the union contract. Second, non-bargaining unit 15 employees of SPS and of XES receive annual increases on March l of every year. 16 The wage increase for non-bargaining unit employees that became effective on 17 March 1, 2010, was 2.75 percent. To simplify the adjustment,. a percent increase was calculated on all O&M wages and salaries for both bargaining 19 unit and non-bargaining unit employees. The adjustment was calculated by starting 20 with labor amounts subject to the increase that was charged to O&M accounts 21 during the Test Year. These amounts were then multiplied by 2.75 percent to 22 establish the adjustment. The adjustment was calculated by FERC account so that 23 the proper jurisdictional allocation could be made, as shown on Attachment Willemsen Direct - Revenue Requirement Page 26 RRIO- III of

33 Page 27 of 91 1 TLW-RR-1, pages The revenue requirement impact of this adjustment to 2 wages is an increase of approximately $1.5 million to the Texas retail jurisdiction. 3 Q. Please describe the adjustment for annual incentive compensation. 4 A. During the Test Year, annual incentive compensation was accrued in excess of the 5 targeted amount. As stated by SPS witness Mark R. McCloskey, I made an 6 adjustment to eliminate the amount of annual incentive compensation that exceeded 7 the target. This adjustment was made by FERC account so that the proper 8 jurisdictional allocation could be made and is shown on pages of Attachment 9 TLW-RR-1. The Texas retail jurisdictional revenue requirements impact of this 10 adjustment is a decrease of approximately $676, Q. Please describe the adjustment that you make to remove long-term incentive 12. compensation. 13 A. As discussed by Mr. McCloskey, long-term incentive compensation has been 14 eliminated from the cost of service: The Texas retail jurisdictional revenue 15 requirements impact of this adjustment is a decrease of approximately $1.5 million. 16 This adjustment is made by FERC account to ensure proper jurisdictional allocation. 17 Q. Please describe the adjustments for ICO costs. 18 A. As discussed by SPS witness Ruth M. Sakya, SPS is proposing to recover the 19 costs associated with the ICO program. An adjustment was made to FERC 20 Account 908 for.ico costs in the amount of $2,798,531. This adjustment is 21 shown on page 56 of Attachment TLW-RR-1. WiUemsen Direct -Revenue Requirement Page 27 RR of

34 Page 28 of 91 I Q. Please describe the adjustments for office relocation costs. 2 A. Xcel Energy is consolidating office space in its Denver offices. The offices that 3 are being combined house many service company employees that perform 4 services for SPS. Consolidation into one primary downtown Denver office 5 location is anticipated to result in several benefits that will help Xcel Energy 6 provide better service to its customers, including increased worker productivity 7 and efficiency and improved space efficiency. For example, meetings that 8 previously required travel from one building to another or scheduling of an off- 9 site location can now be accommodated within the same premises. There is a cost 10 increase associated with the new facility that will be charged to SPS as well as to 11 the other Xcel Energy subsidiaries that are allocated labor costs. The move will 12 take place over the summer of 2010, and the cost increases will be charged to SPS 13 on an ongoing basis. An adjustment to the cost of service is made to reflect the 14 expected level of lease expense at the 1800 Larimer Street facility above the 15 facilities expenses from the vacated buildings. This known and measurable 16 change totals $1,285,892 on a total company basis and has been reflected in the 17 cost of service as shown on page 51 of Attachment TLW-RR Q. Please describe the adjustments for wheeling expense. 19 A. As discussed by Ms. Sakya, adjustments were made to: 20 (1) Eliminate $4.4 million of point-to-point costs associated with a 21 purchased power contract with Exelon; (2) Annualize the costs of a transmission path purchased from Public 24 Service Company of New Mexico ("PNM") in the amount of $ million; WiUemsen Direct - Revenue Requirement Page 28 RR of

35 Page 29 of 91 1 (3) (4) These adju; Update Base Plan Upgrade charges to reflect the 2010 allocated costs in the amount of $2.9 million; and Make other miscellaneous adjustments in the amount of negative $481,000. 3tments are shown on page 28 of Attachment TLW-RR-1. 8 Q. Please describe the adjustments for vegetation management and wood pole 9 inspection costs. 10 A. As discussed in the direct testimony of SPS witness David T. Hudson, SPS 11 expects to see increases in its vegetation management and wood pole inspection 12 costs over the next several years. These costs are key to maintaining reliable 13 service for SPS customers, and this known and measurable change has been 14 reflected in the cost of service. The amount was determined by comparing the 15 expected costs in 2010 to the actual costs experienced in the Test Year. The 16 adjustment for vegetation management is an increase of $322,802 (total company) 17 and the adjustment for wood pole inspection is $373,000 (total company). The 18 adjustments for vegetation management are shown on pages of Attachment 19 TLW-RR-1, and the adjustment for wood pole inspection is shown on page 29 of 20 Attachment TLW-RR Q. Have you included any advertising, contributions, and donations in the cost 22 of service? 23 A. Yes, the amounts incurred for safety, conservation; and customer program 24 advertising have been included in the cost of service. A copy of each ad and its 25 cost is included in Attachment TLW-RR-2. The advertising costs are recorded in Willemsen Direct - Revenue Requirement Page 29 RR of

36 Page 30 of 91 I FERC account 909, and the Texas jurisdictional amount of these ads is $363,449, 2 as shown on page 16 of Attachment TLW-RR-1. 3 In addition, costs for contributions and donations have also been included 4 in the cost of service. P.U.C. SUBST. R (b)(1)(E) provides for inclusion of 5 advertising, contributions, and donations up to a cap of 0.3 percent of the gross 6 receipts of the electric utility for services rendered to the public. SPS has 7 included $1,531,061 of contributions and donations in the cost of service.6 SPS's 8 gross receipts in Texas for 2009 were $754,241,651, which when multiplied by percent results in a cap of $2,262,725 for advertising, contributions, and 10 donations. The sum of the advertising expense, $363,449, and the contributions 11 and donations, $1,531,061, is $1,894,510, which is less than the calculated cap. 12 Initially, a $1,112,365 balance was recorded in FERC account 426, and I made an 13 adjustment to include it in the cost of service, as shown on page 30 of Attachment 14 TLW-RR Q. Have you included any costs associated with legislative and political 16 advocacy in the cost of service? 17 A. No, there are no costs associated with lobbying activities in the cost of service in 18 this case. 6 All numbers listed in this paragraph are Texas retail numbers. Willemsen Direct-Revenue Requirement Page 30 RR of

37 Page')] of 91 1 Q. Have you included any payments, except those made under an insurance or 2 risk-sharing arrangement executed before the date of the loss, made to cover 3 costs of an accident, equipment failure, or negligence at an electric utility 4 facility owned by a person or governmental body not selling power within the 5 State of Texas? 6 A. No. 7 Q. Have you included any costs associated with processing a refund or credit of 8 bonded rates? 9 A. No. SPS incurred no such costs during the test year. 10 Q. Have you included any expenses for the categories of expenses not allowed 11 that are listed in P.U.C. SUBST. R (b)(2)(A) through (I)? 12 A. No. None of the types of expenses listed in P.U.C. SUBST. R (b)(2)(A) 13 through (1) have been included in the cost of service. 14 Q. Please discuss the adjustment for expenses associated with the trading 15 organization. 16 A. SPS gives its Texas retail customers the benefit of the first $400,000 (Texas retail) 17 in net margins by reducing revenue requirements by that amount. This amount 18 represents the administrative costs associated with the trading organization of 19 Xcel Energy. SPS is proposing to maintain this practice, as discussed in the 20 testimonies of Mr. Lakey and Ms. Roberts. Therefore, I have made an adjustment 21 to remove $400,000 from FERC account 557, as shown on page 28 of Attachment 22 TLW-RR-I, to ensure that this amount is not included both in base rates and fuel. 23 The adjustment was directly assigned to the Texas retail jurisdiction. Willemsen Direct - Revenue Requirement Page 31 RR of