6. Lisa H. Perkett Discusses SPS's revised depreciation study and dismantling cost study.

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1 Witness Area of Testimony 6. Lisa H. Perkett Discusses SPS's revised depreciation study and dismantling cost study. Discusses SPS's proposed dismantling cost true- UP.- Discusses SPS's development of the balance of accumulated depreciation for the Texas retail jurisdiction and related balance of accumulated deferred federal income taxes (the unblending adjustment). Supports capital additions, including affiliate charges, made by SPS for the period from January 1, 2010 through June 30, Discusses the prudence of capital additions closed to plant-in-service before Amy L. Stitt Discusses the reasonableness and necessity of affiliate expenses from XES to SPS for seven different affiliate classes of services in the Chief Executive Officer and Financial Operations business areas. Discusses the budgeting process. 8. Cathy J. Hart Discusses the reasonableness and necessity of affiliate charges from XES to SPS for five different affiliate classes in the Corporate Services business area. Supports capital additions associated with Property Services. 9. Alan L. Bellinghausen Discusses the reasonableness and necessity of the Transmission and Substations class of affiliate charges Discusses transmission reliability statistics. 10. John S. Fulton Discusses transmission infrastructure capital additions since SPS's last rate case. Jackson Direct - Revenue Requirement page 22 RRl - 22 of

2 Witness Area of Testimony 11. Gary J. O'Hara Supports the reasonableness and necessity of the Supply Chain class of affiliate charges. 12. Gary N. Lakey Discusses the reasonableness and necessity of affiliate charges from the Distribution Operations and Gas Systems classes for the Test Year and the distribution capital additions for the period from January 1, 2010 through June 30, David A. Low Discusses SPS's power plant operations, maintenance, and cost-control operations. Discusses reasonableness and necessity of. affiliate charges from the Energy Supply and Operational Services classes of services. 14. Bennie F. Weeks Discusses SPS's resource planning process and assessment of capacity needs. Discusses SPS's resource acquisitions during the period January 1, 2010 through June 30, Discusses the analyses performed by SPS to select the best resources for its customers. 15. Alan J. Davidson Supports the costs, reasonableness, and necessity of the production plant capital additions placed in service during the period January 1, 2010 through June 30, 2012, including Jones Unit 3. Discusses two significant capital additions (Jones Unit 4 and the Quay County Project) whose costs are not included in rate base. 16. David C. Harkness Discusses the reasonableness and necessity of the Business Systems class of affiliate services. Supports capital additions associated with Business Systems. 17. S. Michelle Edwards Discusses the reasonableness and necessity of affiliate charges from XES to SPS for the Customer Care class of affiliate services. Jackson Direct -Revenue Requirement Page 23 RR1-23 of

3 Witness Area of Testimony 18. Theresa I. Donnelly Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for six different affiliate classes in the Public Affairs/External Policy business area. 19. Matt W. Watson Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for the Safety class of affiliate services. 20. Janet Schmidt-Petree Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for seven different affiliate classes in the Group President business area. 21. Thomas A. Imbler Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for the ES Commercial Operations class of affiliate services. 22. James L. Altman Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for the GC Claims, GC Legal Services, and the VP- General Counsel classes of affiliate services. 23. Jack S. Dybalski Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for the Risk Management class of affiliate services. 24. Stanley P. Dufault Discusses reasonableness and necessity of affiliate charges from the Business Development and Portfolio Strategy class of services. 25. Kurt J. Haeger Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for the Resource Planning class of affiliate services Jackson Direct - Revenue Requirement Page 24 RR1-24 of

4 Witness Area of Testimony 26. Mark R. McCloskey Addresses compensation and benefits provided to the employees of SPS and its affiliates. -Discusses the reasonableness and necessity of affiliate expense charges from XES to SPS for the Human Resources, SS Company Benefits, and Chief Administrative Officer classes of affiliate services. 27. Francis W. Seymore Discusses the dismantling cost study used to support the depreciation rates for production and other production plant recommended by Dane Watson. 28. Dane A. Watson Discusses the depreciation study completed for SPS's assets and provides support and justification for the recommended depreciation rate changes for SPS's assets. 29. Christopher A. Arend Explains the method used by SPS to compute the consolidated income tax adjustment that was applied to SPS's federal income tax liability for determination of SPS's revenue requirement. Explains the federal income tax requirements in relation to SPS's net operating losses and the resulting deferred tax asset. 30. Mark P. Moeller Supports SPS's request for recovery of Test Year pension expense, as well as known and measurable adjustments to the Test Year pension expense. Discusses the calculation of the prepaid pension asset and explains the rationale for including the prepaid pension asset in rate base. Supports recovery of the deferred asset attributable to pension and OPEB costs. 31. H. Craig Romer Discusses the reasonableness of coal-related costs included in base rates. Jackson Direct - Revenue Requirement Page 25 RR 1-25 of

5 Witness Area of Testimony 32. Tim Kawakami Discusses the administration of SPS's power purchase agreements ("PPAs"). Identifies the capacity-related PPA costs incurred in the Test Year and adjustments to the Test Year costs. 33. William Grant Discusses the SPP, the functions SPP provides to SPS, and the fees incurred by SPS in connection with SPP operations. 34. Ruth M. Sakya Discusses: (1) deferred energy efficiency ("EE") asset, which is recovered over 10 years; (2) the EE Tracker balance from 1/1/10-2/15/11; and (3) the request to move labor from base rates into the EECRF; (4) the request to move the Saver's Switch program into EECRF; and (5) the resultant revised revenue requirement for the EECRF in Addresses: (1) the costs incurred during the Test Year for SPS's remaining load management program, the Interruptible Credit Option; and (2) the pro-forma adjustments made to Test Year expenses for these programs. Supports: (1) the balance of the REC Tracker, a regulatory asset that tracks costs associated with acquiring, retiring, selling, and transferring RECs generated on or after January 1, 2010 through June 30, 2013; (2) the ongoing retirement expenses associated with SPS's compliance with the State of Texas's Goal for Renewable Energy; and (3) SPS's proposed method to credit REC sales revenues. Describes the expenses and revenues related to wheeling, and supports the pro-forma adjustments to these expenses and revenues. Jackson Direct - Revenue Requirement Page 26 RR1-26 of

6 Witness Area of Testimony 35. Kathy McNulty Kropp Presents SPS's total company and Texas retail jurisdictional revenue requirement and sponsors various schedules that support those revenue requirements. Discusses the various components of the cost of service and the adjustments made to those components, including rate base, operating revenues, fuel expense, operation and maintenance expense administrative and general expense, taxes other than income taxes, income tax expense, and capital structure. Presents the base line revenue requirement components for the Transmission Cost Recovery Factor ("TCRF"), Distribution Cost Recovery Factor ("DCRF"), Power Cost Recovery Factor ("PCRF"), and the pension and OPEB expense tracker. Addresses the jurisdictional and functional allocation used in this proceeding. Jackson Direct - Revenue Requirement Page 27 RR1-27 of

7 1 IV. SPS OVERVIEW 2 Q. Please generally describe SPS. 3 A. Headquartered in Amarillo, Texas, SPS is a fully integrated generation, 4 transmission, and distribution electric utility that serves approximately 376,000 5 customers in a 52,000 square-mile area of the Panhandle and the South Plains of 6 Texas, and eastern and southern New Mexico. SPS's service area extends 7 approximately 400 miles from north to south and 200 miles from east to west. 8 SPS is uniquely located relative to the electrical grids of North America. 9 It is a member of the SPP RTO and is synchronously connected to the eastern 10 grid through interconnections with Mid-Kansas Electric Company, Public 11 Service Company of Oklahoma (an American Electric Power ("AEP") 12 company), Sunflower Electric Power Corporation, and Texas North Company 13 (another AEP company). The three primary interconnections with the SPP are a kilovolt ("kv") transmission power line to Elk City, Oklahoma; a 345 kv 15 transmission power line to Oklaunion, Texas; and a 345 kv transmission power 16 line between Amarillo and Holcomb, Kansas. SPS is also connected to the 17 western grid through three-high voltage direct-current ("HVDC") back-to-back 18 converters, or DC ties: (1) through interconnections with Public Service 19 Company of New Mexico ("PNM") at Clovis, New Mexico; (2) through 20 interconnections with El Paso Electric Company ("EPE") and PNM at Artesia, 21 New Mexico; and (3) through interconnections with PSCo at Lamar, Colorado. 22 Although SPS operates adjacent to the ERCOT grid, it has no direct Jackson Direct - Revenue Requirement Page 28 RR1-28 of

8 1 interconnections with ERCOT transmission owners. Attachment AKJ-RR-2 is a 2 map of SPS's high-voltage transmission system. 3 Q. Please generally describe SPS's customer base. 4 A. The Texas retail jurisdiction is SPS's single largest regulatory jurisdiction. SPS 5 also serves retail customers in a large portion of eastern and southeastern New 6 Mexico. SPS's service territory in both Texas and New Mexico is primarily 7 agricultural, with large areas of oil and gas production. The agricultural areas 8 are mostly irrigated by pumping from natural underground water supplies. 9 There is also a large investment in cattle feeding and, more recently, dairy 10 operations in the service territory. Recently, the SPS service area has 11 experienced significant growth in the oil and gas industries, and SPS has been 12 expanding its infrastructure to serve these customers. The mix of Texas retail 13 electric kwh sales during the Test Year is shown in Table AKJ-RR-3: Table AKJ-RR-3 Class Sales Percentage Residential 17.23% Small General Service 2.70% Secondary General 14.74% Primary General 16.00% Large General Service-Transmission 45.78% Small Municipal and Schools 0.12% Large Municipal 1.43% Large Schools 1.31% Street and Area Lighting 0.69% Jackson Direct - Revenue Requirement Page 29 RR1-29 of

9 1 Wholesale sales have historically been a significant business segment for 2 SPS. Because SPS operates in interstate commerce, SPS's wholesale sales and 3 the transmission of wholesale power are regulated by the FERC pursuant to the 4 Federal Power Act. SPS sells firm and economy wholesale power in interstate 5 commerce to rural electric cooperatives, municipal utilities, and other utilities 6 within and outside of SPS's control area. Some of SPS's larger wholesale 7 customers are located in Texas and serve Texas citizens. These wholesale 8- customers currently are Golden Spread, West Texas Municipal Power Agency 9 ("WTMPA"), and Sharyland, although Sharyland will cease being an SPS 10 wholesale customer at the end of SPS also sells wholesale power to four 11 electric cooperatives in eastern New Mexico: 12 Central Valley Electric Cooperative, Inc. ("Central Valley"); 13 Farmers' Electric Cooperative, Inc. ("Farmers"'); 14 Lea County Electric Cooperative, Inc. ("Lea County"); and 15 Roosevelt County Electric Cooperative, Inc. ("Roosevelt") 16 (collectively, the "Eastern New Mexico Cooperatives"). 17 In this testimony, I will refer to those four cooperatives collectively as the Eastern 18 New Mexico Cooperatives. 19 Q. Please briefly describe the history of SPS. 20 A. SPS was founded in New Mexico in the early 1900s. In the 1940s, it merged 21 with other operating companies through a plan of integration and simplification 22 approved by the Securities and Exchange Commission under the Public Utility 23 Holding Company Act of Between the 1940s and 1990s, SPS undertook 24 several other mergers and acquisitions. In 1997, through a business Jackson Direct - Revenue Requirement Page 30 RR1-30 of

10 1 combination reviewed by the Commission, SPS and PSCo formed a holding 2 company called New Century Energies, Inc. ("NCE"), and SPS became an 3 affiliate of PSCo. In 2000, NCE merged with Northern States Power Company 4 to form Xcel Energy, and SPS and PSCo became sister operating company 5 affiliates with NSPM and NSPW. 6 Q. Please describe SPS's load and generating resources. 7 A. SPS's generation peak in the Test Year was 5,210 MW. In the Test Year, 8 coal-fired. plants produced 43.32% percent of the megawatt-hours generated and 9 purchased to meet system needs. SPS currently has an installed net generation 10 capacity of 4,330 MW, with 48 percent of this capacity in coal-fired plants and percent in plants utilizing other fuels, primarily natural gas. SPS purchases MW of firm power and energy from Borger Energy Associates, a qualifying 13 facility ("QF"). The purchased power contract under which SPS purchases that 14 firm power and energy was certified by the Commission in Docket No SPS also purchased firm power and energy under long-term contracts from the 16 following generators as of the end of the Test Year as shown in Table 17 AKJ-RR-4. Table AKJ-RR-4 Seller Purchased Capacity (MW) Calpine 200 Orion Engineered Carbons QF 15 Lea Power Partners 532 Lubbock Power and Light 221 Sid Richardson QF 9 Jackson Direct - Revenue Requirement Page 31 RRl - 31 of

11 1 In addition, SPS will begin purchasing 100 MW of capacity from Golden Spread 2 in SPS witness Tim Kawakami discusses that and other contracts in his 3 Fuel Reconciliation and Revenue Requirement testimonies. 4 SPS has also been very active in renewable energy development along 5 with its Xcel Energy affiliates. According to the American Wind Energy 6 Association, Xcel Energy has been the largest purchaser of wind energy in the 7 country for several years, and it recently became one of the top purchasers of 8 solar energy in the United States. Table AKJ-RR-5 lists each renewable 9 generator with whom SPS has a long-term PPA, the location of the generating 10 facility, the nameplate capacity of the facility, and the year in which SPS began 11 (or will begin) purchasing energy from that facility. Table AKJ-RR-5 Facility Location Nameplate Capacity Year Llano Estacado Whitedeer, Texas Cap Rock Tucumcari, New Mexico San Juan Elida, New Mexico Wildorado Amarillo, Texas Sun Edison Clovis, New Mexico Spinning Spur Amarillo, Texas In addition, SPS currently purchases energy at avoided costs from numerous QF 13 wind generation facilities in the Texas Panhandle. Counting both the energy 14 purchased through PPAs and the energy received from QFs, SPS now purchases 15 over 722 MW of wind energy for its customers. SPS expects wind generation Jackson Direct -Revenue Requirement Page 32 RRl - 32 of

12 1 connected in the SPS balancing authority to increase to more than 1,300 MW 2 when the Spinning Spur facility begins commercial operation in December Q. Please provide an overview of Xcel Energy. 5 A. Xcel Energy is an integrated electric and gas utility holding company composed 6 principally of four operating utility companies: SPS, PSCo, NSPM, and NSPW. 7 Xcel Energy's operations are vertically integrated in all eight states where it 8 provides electric service.7 Xcel Energy has divested its unregulated generation 9 and almost all of its non-utility businesses and re-focused its corporate priorities 10 on the gas and electric utility business and our utility customers. During the 11 Test Year and several years prior to that, the core utility business has 12 represented 99% of Xcel Energy's total operating revenue. 13 Q. What is the outlook for SPS over the next five years ( )? 14 A. As I mentioned previously and as SPS witness George Tyson discusses in his 15 testimony, SPS is in the midst of a significant capital spending cycle that will 16 continue at least through the next five years. In Table AKJ-RR-6, I lay out the 17 actual capital expenditures since 2007 and the projected capital expenditures 18 through ' The eight states are: Texas, New Mexico, Colorado, Michigan, Minnesota, North Dakota, South Dakota, and Wisconsin. Jackson Direct - Revenue Requirement Page 33 RRI - 33 of

13 Calendar Year Table AKJ-RR-6 Capital Expenditures ($millions) 2008 (actual) (actual) (actual) (actual) (estimated) (estimated) (estimated) (estimated) (estimated) (estimated) As this table shows, SPS has experienced a significant and sustained 3 increase in capital spending since In fact, the average actual or estimated 4 expenditure for the period from 2008 through 2012 is $283 million, whereas the 5 average planned expenditure amount for the five-year period from 2013 through is $368 million. That means SPS's average annual spending will increase 7 by $73 million, a 30.04% increase over the previous period. This type of 8 investment will compel SPS to go to the marketplace with greater frequency to 9 attract the financing required to fund its capital investments. 10 Q. What is driving the capital expenditures set forth in Table AKJ-RR-6? 11 A. As a public utility, SPS is required to provide safe, reliable service to all retail 12 customers in its service territory. The projected capital expenditures are being 13 incurred to address items such as: (1) mandatory environmental standards; (2) Jackson Direct -Revenue Requirement Page 34 RRI - 34 of

14 1 replacement, improvement, and expansion of the SPS transmission and 2 distribution systems for increased reliability and the growing customer base in 3 SPS's balancing authority; and (3) the construction of new generation facilities 4 to serve SPS's customers. 5 Q. How does SPS intend to address these occurring and upcoming capital 6 expenditures? 7 A. SPS will continue to seek constructive rate relief from the Commission in future 8 rate cases, as it is doing in this case and it has done in its previous rate cases. 9 For example, even before the date the rates from this rate case go into effect, 10 SPS expects to close more than $175 million of new investment to plant in 11 service. Thus, SPS expects to file another rate case in November 2013 and 12 potentially annually thereafter in order to manage the capital investment cycle it 13 finds itself operating in at this time. 14 In the interim between this case and the next one, SPS intends to utilize 15 the regulatory mechanisms at its disposal to "close the gap" on capital 16 investments that are in service prior to the next rate case. Those regulatory 17 mechanisms include a TCRF for any incremental transmission investment and 18 any qualifying incremental SPP expenses. SPS also intends to file a DCRF as 19 necessary to recover any incremental distribution investment and expenses. 20 Q. Please discuss the consequences if SPS is not granted the rate relief 21 necessary to maintain a healthy financial position. 22 A. The most immediate consequence is that SPS's borrowing costs will rise. As 23 Mr. Tyson discusses in his testimony, one of the three major rating agencies, Jackson Direct -Revenue Requirement Page 35 RR1-35 of

15 1 Moody's Investors Service, recently downgraded SPS's senior unsecured credit 2 rating because of the large capital expenditures on the horizon and the 3 regulatory lag that is inherent in the Texas ratemaking process. Another of the 4 rating agencies, Fitch Ratings, currently has a negative outlook on SPS's credit 5 rating. Thus, if SPS does not obtain a constructive outcome from this case, its 6 corporate credit ratings will almost certainly decline, leading to a higher cost of 7 debt. That higher cost of debt will ultimately be passed on to ratepayers in the 8 form of a higher rate of return. 9 A more long-term consequence is that SPS will not be able to attract the 10 equity capital it needs to make infrastructure improvements. From an equity 11 investor's perspective, it makes no sense to invest in a company whose actual 12 earned returns lag behind the returns of comparable companies. And if equity 13 capital becomes scarce and debt capital becomes prohibitively expensive, SPS 14 will have no choice but to forego a number of capital improvement projects. 15 Thus, it is in the interests of both SPS and its retail customers for the 16 Commission to grant the rate relief requested in this case. Jackson Direct - Revenue Requirement Page 36 RR1-36 of

16 1 V. INCLUSION OF NEW INVESTMENT IN RATE BASE 2 Q. Does SPS seek to include any new production or production-related facilities 3 in rate base in this case? 4 A. Yes. SPS is seeking to include in rate base $207 million (total company) in new 5 production or production-related facilities, of which approximately $83.5 million 6 was incurred to construct the Jones 3 Unit, a 169 MW gas-fired generating facility 7 located at the Jones Generating Station. The Jones 3 Unit began commercial 8 operation in June For more detail about the need for the Jones 3 Unit and 9 the prudence of SPS's investment in that and other production related facilities, 10 please refer to the testimony of Alan Davidson and Bennie Weeks. 11 Q. Is SPS in the process of constructing any other production-related facilities? 12 A. Yes. SPS is currently constructing Jones Unit 4, which is located near Lubbock, 13 Texas, and the Quay County Station, which is located in Tucumcari, New 14 Mexico, but SPS is not seeking to include those generating facilities in rate base 15 in this docket. Although SPS expects both facilities to begin commercial 16 operation prior to the summer of 2013, it is not practical to include them in rate 17 base as post-test-year adjustments because they do not meet the criteria in P.U.C. 18 SUBST. R (c)(2)(F)(i)(Il). SPS will instead file a base rate case after those 19 facilities are placed in service. 20 Q. Is SPS seeking to include any new transmission investment- in rate base? 21 A. Yes. SPS is seeking to include approximately $291 million of new transmission 22 investment in rate base. The major transmission projects giving rise to those costs 23 are set forth in Table AKJ-RR-7: Jackson Direct- Revenue Requirement Page 3T RRl - 37 of

17 Table AKJ-RR-7 Project Cost Commercial Operation Date Moore Cty to Hitchland 230 kv $36 million May 2012 Channing Transmission Project $46.1 million May 2012 Hitchland Interchange $25 million April 2011 Eagle Creek 115kV Line $21.5 million June 2011 Randall to Kress Reconductor $18.1 million April John Fulton describes the need for these and other transmission projects and the 2 prudence of SPS's investment in these projects. 3 Q. Is SPS seeking to include any new distribution investment in rate base? 4 A. Yes. SPS is seeking to include $135 million of distribution investment in rate 5 base. Gary Lakey describes the need for the distribution projects and the 6 prudence of SPS's investment in those projects. 7 Q. Is SPS seeking to include any other investment in rate base? 8 A. Yes. SPS is seeking to include approximately $60 million in property services, 9 general electric and business systems capital investment. The investment in 10 property services is supported by SPS witness Cathy J. Hart. The business 11 systems investments are supported by David C. Harkness. Each business area has 12 some capital investment classified as general electric, and therefore each area 13 supports its own general electric investment. Jackson Direct -Revenue Requirement Page 38 RRl - 38 of

18 1 VI. TREATMENT OF FRANCHISE FEES 2 Q. What are municipal franchise fees? 3 A. Franchise fees are imposed, either by ordinance or contract, on a public utility 4 by a municipality for the right to use the municipality's rights-of-way, including 5 its streets and alleyways. The use of these streets and alleys is predominantly 6 for the installation of distribution facilities to serve local customers, not overall 7 system customers. A franchise fee is not a tax, but has been more appropriately 8 viewed as a rental charge. SPS's franchise agreements currently include fees 9 ranging from two to five percent. Many of SPS's franchise agreements have 10 terms of less than 20 years, with some of the more recent agreements having 11 terms of three to five years. 12 Q. How are municipal franchise fees currently recovered? 13 A. Under the current method of collecting franchise fees, an overall franchise fee 14 equivalent to 2-3 percent (depending on the franchise agreement) of gross 15 revenues is included in base rates and paid by all of SPS's Texas retail 16 customers except for the Large General Service-Transmission customers located 17 outside the municipalities. The incremental franchise fees above the first percent are collected from only those customers located within the particular 19 franchise jurisdiction. The parties in Docket No agreed to that recovery 20 mechanism, and the Commission approved it in the final order. 21 Q. Does the current method of collection raise any concerns for SPS? 22 A. Yes. As noted earlier, SPS recovers a portion of the franchise fees through base 23 rates, which do not vary according to the price of fuel. Franchise fees, however, Jackson Direct - Revenue Requirement Page 39 RR1-39 of

19 1 are based on total revenues, which do vary with the price of fuel. Thus, if fuel 2 costs fall after the Commission sets base rates, SPS will recover in base rates 3 more franchise fee revenue than it pays to cities. On the other hand, if fuel costs 4 rise after the Commission sets base rates, SPS will recover in base rates less 5 franchise fee revenue than it pays to the cities. Thus, the current method of 6 recovering franchise fees creates risk for both SPS and the Texas retail 7 ratepayers as it places the risk of over- or under-recovery on factors that are 8 largely beyond SPS's control. 9 Q. Is SPS proposing in this proceeding to modify the way it recovers franchise 10 fees from Texas retail customers? 11 A. No. Although SPS would be amenable to an approach that allows the total 12 franchise fee paid to a particular franchising jurisdiction to be collected from the 13 specific customers in the respective jurisdiction where the fee is assessed, SPS 14 recognizes a balance should be struck between the ideal solution for the utility 15 and the interests of its various classes of customers. Therefore, SPS is not 16 proposing to move to that methodology in this case. 17 Q. Is SPS proposing to change any aspect of the municipal franchise fee 18 recovery? 19 A. Yes. SPS is proposing to begin recovering municipal franchise fees associated 20 with certain miscellaneous service charges. Because franchise fees are assessed 21 on gross revenues, SPS is typically required to pay franchise fees based on all 22 revenues, not just base revenues or fuel revenues. Accordingly, the cities that 23 are renewing franchise fee agreements with SPS have begun demanding that Jackson Direct - Revenue Requirement Page 40 RRl - 40 of

20 1 SPS pay franchise fees on the revenues associated with miscellaneous service 2 charges. Therefore, SPS is proposing to include miscellaneous revenues 3 associated with service charges limited to (a) returned check charges, (b) 4 reconnection charges after a disconnection for non-payment, (c) restoration of 5 service after a tampering or unsafe situation disconnection, and (d) charges 6 related to meter tampering. 7 Q. Since SPS's last base rate case, has the Commission addressed the issue of 8 how municipal franchise fees should be assessed? 9 A. Yes. On September 14, 2012 the Commission issued its Final Order in the 10 Docket No , the most recent base rate case of Entergy Texas. In that 11 order, the Commission concluded that: 12 (1) all municipal franchise fee charges should be included in base rates; 13 (2) the municipal franchise fees should be allocated to the rate classes based 14 on each class's in-city energy usage (kwh); and 15 (3) after the costs had been allocated to the classes, all members of the class 16 (regardless of in-city or outside-city designation) should pay their share 17 of the fee. 18 Q. Should the Commission follow the Entergy method of allocating franchise 19 fees in SPS's service area? 20 A. No. SPS's proposed method for allocating franchise fees is a better outcome 21 than that approved in the Entergy Texas case for several reasons: 22 (1) SPS has 79 cities and municipalities that independently establish their 23 municipal franchise fees, with each ranging from a low of 2% to a high Jackson Direct - Revenue Requirement Page 41 RR 1-41 of

21 of 5% of total electric revenues.8 If SPS were to include all franchise fees in base rates, customers located in cities with low franchise fee rates would be subsidizing customers in cities with high franchise fee rates. (2) SPS's proposal is a more equitable balance of risk between customers and SPS for changes in fuel prices. As discussed earlier, if all franchise fees were included in base rates, either the customers or SPS would be disadvantaged when fuel prices rose or fell. Therefore, it is a more equitable balance for customers and SPS to have a portion of the franchise fees in base and the remainder to be applied through a direct surcharge to those customers in the city. (3) SPS has been using the current method for recovering franchise fees since at least 1993, and the parties in SPS's rate cases since then have agreed to that method. (4) Many of SPS's cities have agreed to the current method in their franchise agreements, and it would upset settled expectations to change that method. 17 Q. If the Commission decides to include all franchise fee expenses in the retail 18 base rate cost of service, what level should be included in base rates? 19 A. Ms. McNulty Kropp discusses the level of franchise fees that would be included 20 in the cost of service if the Commission concludes that all franchise fees should 21 be in base rates. However, SPS maintains that such an approach would be 22 inequitable for both customers and the utility for the reasons discussed earlier. 8 Attachment AKJ-RR-3 lists the municipalities in SPS's service area and the franchise fee percentages assessed by those municipalities. Jackson Direct -Revenue Requirement Page 42 RR1-42 of

22 1 VII. FAIR SHARE RECOMMENDATION 2 Q. What is the purpose of this part of your testimony? 3 A. The purpose of this part of my testimony is to present and explain SPS's 4 recommendation regarding the "fair share" adjustment of the CTSA under PURA (a), which provides as follows: 6 Unless it is shown to the satisfaction of the regulatory authority 7 that it was reasonable to choose not to consolidate returns, an 8 electric utility's income taxes shall be computed as though a 9 consolidated return had been filed and the utility had realized its 10 fair share of the savings resulting from that return, if: (1) the utility is a member of an affiliated group eligible to file a 13 consolidated income tax return; and (2) it is advantageous to the utility to do so Q. Is SPS a member of an affiliated group eligible to file a consolidated income 18 tax return? 19 A. Yes. SPS is a member of the Xcel Energy consolidated group, which files a 20 consolidated federal income tax return. Therefore, PURA requires that 21 SPS's fair share of the savings resulting from a consolidated tax return be 22 reflected in income tax expense. 23 Q. Are you the primary SPS witness on this CTSA issue? 24 A. No. SPS's primary witness on this issue is Christopher A. Arend, who discusses 25 the CTSA issue in detail. I will not repeat Mr. Arend's testimony, but I will 26 explain SPS's recommendation using Mir. Arend's testimony as background and 27 foundation. Jackson Direct-Revenue Requirement Page 43 RR1-43 of

23 1 Q. Does PURA define what a "fair share" of consolidated tax savings is? 2 A. No. The Legislature left it to the Commission to determine how to calculate a 3 utility's fair share of savings resulting from a consolidated tax return. Therefore, 4 as the Texas Supreme Court has recognized, the Commission has a considerable 5 amount of discretion in determining what a utility's fair share of tax savings is.9 6 Q. Are you asking the Commission to apply that discretion in this case to 7 determine SPS's fair share of consolidated tax savings? 8 A. Yes. The exercise of discretion is 'particularly important in this case because a 9 rigid application of the "interest credit" calculation methodology that the 10 Commission has used in some prior cases would result in far more than a fair 11 share of consolidated tax savings being deducted from SPS's rates. 12 Q. What would a fair share of tax savings be? 13 A. I recommend that the revenue requirement in this case be reduced by $1.2 million, 14 which is half the amount calculated by Mr. Arend in his modified CTSA 15 methodology. 16 Q. What would the CTSA be if the Commission's typical 15-year cumulative 17 calculation were utilized? 18 A. Mr. Arend also applied the Commission's typical 15-year cumulative calculation, 19 which would result in a revenue reduction of approximately $10.6 million. 9 See Public Utility Comm 'n v. GTE-SW, Inc., 901 S.W.2d 401, 410 (Tex. 2010) (stating that the Legislature granted broad discretion to the Commission in determining a fair share of consolidated tax savings). Jackson Direct - Revenue Requirement Page 44 RRl - 44 of

24 I Q. Please explain the basis for your recommendation that the fair share CTSA 2 should be $1.2 million? 3 A. If the Commission's typical 15-year cumulative calculation were to be 4 implemented in this case, it would not result in a "fair share" of the tax savings 5 being allocated to customers because, as Mr. Arend's testimony shows: (1) the 6 typical cumulative methodology would attribute to SPS's income tax savings that 7 cannot be obtained from SPS income under federal income tax law; (2) the total 8 rate reductions imposed over the 15-year period of the interest credit calculation 9 would include almost all of the total tax savings resulting from the stock loss 10 incurred as a result of the NRG Energy, Inc. stock loss, which was incurred 11 entirely by the Xcel Energy shareholders; and (3) the typical cumulative 12 methodology would attribute to SPS's income value in obtaining tax savings for 13 some other losses, even though that income was not needed to obtain tax savings 14 from those losses. In contrast, if the Commission were to adopt SPS's proposed 15 methodology, the CSTA calculation would conform with the requirements of the 16 federal income tax law, adhere to the Commission's precedent regarding the "but 17 for" criteria of providing a tax shield when income from consolidated groups 18 could offset all of those groups' tax losses, and exclude the shareholder-borne 19 stock loss resulting from the reorganization of NRG Energy, Inc., a former Xcel 20. Energy subsidiary. 21 Q. What other considerations support the fair share that you recommend? 22 A. Both shareholders and customers are needed in order for SPS to have any taxable 23 income that can generate tax savings from tax losses. Without the investments Jackson Direct-Revenue Requirement Page 45 RR1-45 of

25 I made by shareholders, SPS would be unable to provide service and would have no 2 income that could be used to obtain tax savings. Customers provide the revenue 3 that leads to taxable income. It is therefore reasonable and practical to determine 4 that the adjusted CTSA amount be split down the middle with 50 percent to 5 investors and 50 percent to customers to achieve an ultimate fair share 6 apportionment. Jackson Direct - Revenue Requirement Page 46 RR 1-46 of

26 1 VIII. EFFECT OF CHANGES IN WHOLESALE SALES VOLUMES 2 Q. Does SPS currently sell power to wholesale customers? 3 A. Yes. As I noted earlier in my testimony, for many years SPS has sold wholesale 4 power to a number of rural electric cooperatives, municipal utilities, and other 5 entities, including Golden Spread, Sharyland, WTMPA, and the Eastern New 6 Mexico Cooperatives through power sales agreements ("PSA"). In recent years, 7 however, SPS has reduced its wholesale sales obligations by declining to renew 8 system-average based rate contracts that are scheduled to expire, or by negotiating 9 RPSAs that provide for incremental step-downs of sales volumes over time. It is 10 important to note, however, that SPS can sell to wholesale customers as long as 11 those sales are priced at least at incremental costs, instead of system-average 12 costs. 13 Q. Please briefly explain what drove the change in philosophy regarding sales to 14 wholesale customers. 15 A. In late 2004, six electric cooperatives-four Eastern New Mexico Cooperatives, 16 Golden Spread, and Lyntegar Electric Cooperative, Inc. jointly filed a complaint 17 against SPS at FERC alleging that they had first call on SPS's lower cost 18 electricity over SPS's other wholesale customers such as PNM and EPE.Io 19 Subsequent to the joint complaint, a retail customer intervened and alleged the 20 same complaint regarding its first right as a retail customer over the complainants. 21 Ultimately the disputes between the complainants and SPS pending at FERC were 10 Federal Energy Regulatory Comm'n, Golden Spread Electric Cooperative, Inc., Docket No. EL Jackson Direct -Revenue Requirement Page 47 RR1-47 of

27 I resolved through a series of settlements concluding in These settlements 2 included the execution of RPSA contracts with Golden Spread and the Eastern 3 New Mexico Cooperatives. 4 In addition, as part of a settlement in Docket No , SPS agreed to 5 restrictions on its ability to sell electricity to its wholesale customers at system 6 average costs. These restrictions were implemented through limiting costs that 7 SPS could recover from its Texas retail customers. Similarly, an order by the 8 NMPRC in Case No UT set forth retail rate making principles related 9 to the treatment of wholesale sales. These principles were identified to limit the 10 total amount of wholesale sales SPS could make at system-average rates with 11 declining amounts over time. 12 Q. Please describe how the RPSAs reduce SPS's wholesale obligations over time. 13 A. The executed RPSAs ramp down wholesale contracts by phases rather than 14 enforcing an abrupt termination of previously existing PSAs. This methodology 15 enables SPS to better manage the retail load needs over time versus significant 16 and abrupt decreases. 17 For example, if a utility were to have 1,000 MW of retail load and MW of wholesale load, it would have to have at least 1,500 MW of generation to 19 serve that load. If the 500 MW wholesale load departed abruptly, the utility and 20 its retail customers would bear the cost of the excess generation until such time 21 that the load grew or the generation retired. However, if the wholesale load 22 departure were ramped down in a more gradual manner, that would be a much Jackson Direct -Revenue Requirement Page 48 RR1-48 of

28 I less difficult scenario to manage and more equitable for the utility's remaining 2 customers. 3 The ramp-down approach is the methodology that SPS has enacted 4 through the executed RPSAs. Table AKJ-RR-8 below details the ramp-downs 5 contemplated in the RPSAs. Table AKJ-RR-8 Year RPSA Ramp-Down 2012 Golden Spread - 25 MW Eastern New Mexico Coops - 91 MW 2015 Golden Spread MW 2017 Golden Spread MW Eastern New Mexico Coops - 70 to 80 MW 2019 Golden Spread RPSA expiration MW 6 Q. In Table AKJ-RR-8, you show some RPSA contract ramp-downs occurring 7 in Have these ramp-downs been taken into account in any of the 8 previous allocators in past rate cases? 9. A. No. The 2012 impacts of the RPSA contracts, which went into effect prior to the 10 end of the Test Year, will be included in this case and the adjustment to the 11 production allocators going forward. 12 Q. Please list the PSAs that SPS will allow to expire and their termination dates. 13 A. Table AKJ-RR-9 below shows the PSAs with wholesale customers that will be 14 terminated upon their expiration by year. Jackson Direct - Revenue Requirement Page 49 RRl - 49 of

29 Table AKJ-RR-9 Year Wholesale PSA Expiration 2013 Sharyland (December 31, 2013) 2019 WTMPA (May 31, 2019) 2021 Tri County Electric Cooperative (May 31, 2021) I Q. Do the reduced wholesale sales obligations affect the jurisdictional 2 allocations of costs and revenues? 3 A. Yes. As the level of wholesale sales at system average rates decline, the 4 jurisdictional allocators need to be adjusted so that a larger portion of the 5 embedded costs are assigned to the Texas and New Mexico retail jurisdictions. 6 Mr. Luth quantifies the new allocators that take into account not only the ramp- 7 downs that have occurred in 2012, but also the Sharyland contract expiration. Ms. 8 McNulty Kropp applies those allocators to the revenue requirement in this case. 9 Q. Are all of the ratemaking effects associated with the expiration of the PSAs 10 or the ramp-downs in the RPSAs relatively the same? 11 A. No. The effect on the production allocators is similar, but the impact on the 12 transmission allocators is dependent on the contract. For all of the contracts that 13 are either expiring or have ramp-down steps, the effects on the production 14 allocators will be the same-they will reduce both the wholesale kw and kwh to 15 which production costs are allocated-although the effect will vary by the size of 16 the contractual obligation. In contrast, only the expiration of the Sharyland 17 contract will have an effect on the transmission demand allocators, because all of Jackson Direct - Revenue Requirement Page 50 RRI - 50 of

30 1 the other system-average rate wholesale customers are expected to remain 2 transmission customers for their full load. Therefore, there is no effect on the 3 transmission allocator expected with the RPSA ramp-down or PSA termination 4 for wholesale customers other than Sharyland. 5 Q. When will the Sharyland PSA expire? 6 A. As of midnight December 31, 2013, Sharyland will no longer take energy from 7 SPS. In fact, it will be completely disconnected from the SPS transmission 8 system and will move 100% of its load obligation into the ERCOT electrical grid. 9 As noted earlier, unlike other PSA expirations and RPSA ramp-downs, the 10 expiration of the Sharyland PSA will affect not only the production allocators but I 1 also the transmission allocators. 12 Q. Why is SPS requesting that the production and transmission allocators be 13 adjusted in this case for the effects of the Sharyland PSA expiration? 14 A. SPS expects the rates determined in this case to be in effect for a number of 15 months after the Sharyland departure is complete. Therefore, it is appropriate for 16 SPS to adjust the allocators in this case. Furthermore, the expiration of these 17 various PSAs without renewal and the ramp-downs included in the RPSAs have 18 been found to be in the public interest.11 This public interest determination was 19 based upon the theory that SPS's customers currently enjoy a low-cost system due 20 to the significantly depreciated generation assets. If SPS were to continue serving 11 See, e.g., Application of Southwestern Public Service Company for (1) Authority to Change Rates, (2) Reconciliation of Its Fuel Costs for 2004 and 2005, (3) Authority to Revise the Semi-Annual Formulae Originally Approved in Docket No Used to Adjust Its Fuel Factors, and (4) Related Relief, Docket No , Final Order at 20 (Jul. 27, 2007). Jackson Direct - Revenue Requirement Page 51 RR1-51 of

31 1 non-native load customers (those that have a choice of provider) at system- 2 average rates, the captive native load customers (those without a choice of 3 provider) would experience an increase in their system-average rates when 4 additional generation was added to meet not only the needs of the native load 5 customers but also the non-native load customers. 6 Q. Will Sharyland continue to make payments to SPS for energy and capacity 7 prior to the expiration of its PSA in 2013? 8 A. Yes, Sharyland will continue to make payments to SPS for the energy it consumes 9 and the capacity it demands on SPS's systems through the expiration of its PSA in SPS is proposing in this case to credit those payments to customers through 11 the fuel cost mechanism. The credit would occur from the effective date of the 12 new rates set in this case through Sharyland's departure from the SPS system for 13 ERCOT, expected to be the end of SPS witness Michael Mally details how 14 the fuel credit will be effectuated. 15 Q. Has SPS used this methodology in the past for contracts that were to expire 16 during the period rates are to be in effect? 17 A. Yes. Intervenors and SPS -agreed in Docket Nos and that the EPE 18 and PNM contracts, which were expiring, were to be treated in this manner. 19 Q. Does Sharyland intend to use 100% of its contracted amounts up to and until 20 midnight December 31, 2013? 21 A. No. Sharyland plans to electrically move its load into ERCOT in multiple phases 22 in 2013 in order to meet the 150 MW purchase cap, and to reliably complete the 23 tasks it has throughout the year to move its load from the SPP grid to the ERCOT Jackson Direct - Revenue Requirement Page 52 RRl - 52 of

32 I grid. Because the exact timing and magnitude of this transition are unknown, the 2 proposed fuel credit methodology will allocate the Texas retail share of the 3 benefit of these sales to the Texas retail customers. 4 Q. Returning now to RPSAs in general, if the parties to the RPSAs wish to 5 purchase more power than that required under the RPSAs, can they do so? 6 A. Yes, but any additional power is priced at least at incremental cost, rather than 7 system-average cost. And, in fact, that is what one of the cooperatives, Farmers' 8 has done. It has arranged to purchase 4 MW of power from SPS at incremental 9 cost during the summer peak season for the next two years. 10 Q. Does SPS propose to include that 4 MW in the wholesale jurisdiction for 11 purposes of calculating the 12 coincident peak that is used for cost 12 allocation? 13 A. No. It would be inappropriate to assign system average costs to the 4 MW 14 Farmers' sale, which would occur if it were included in the wholesale jurisdiction 15 demand allocators. All energy purchased under the 4 MW Farmers' sale is priced 16 at incremental cost. Further, this incremental cost is deducted (i.e. removed) from 17 SPS's system fuel cost to ensure other customers are not negatively impacted, 18 similar to the manner iricremental costs associated with economy sales are 19 removed from fuel costs. Therefore, the appropriate regulatory treatment for the 20 non-fuel revenue received by SPS under the 4 MW Farmers' sale is to include a 21 revenue credit to base rates. Ms. McNulty Kropp reflects the revenue credit 22 associated with the Farmers' sale in her cost of service. Jackson Direct - Revenue Requirement Page 53 RR1-53 of

33 1 Q. Are there any other wholesale contract changes or additions? 2 A. Yes. As agreed to in the RPSAs with the Eastern New Mexico Cooperatives, SPS 3 was to establish tariffs and rates with the Eastern New Mexico Cooperatives for 4 backup service and planning reserve service. Effective June 1, 2012, SPS has 5 established these service contracts with Central Valley, Farmers', and Roosevelt. 6 Q. How is SPS proposing to share revenues as a result of these service 7 contracts? 8 A. For capacity revenues, SPS is proposing to provide credits through base rates. 9 For energy sales, SPS will not flow through any credits to fuel, but will instead 10 remove the incremental fuel cost for any of these energy sales prior to allocating 11 fuel costs among jurisdictions. Ms. McNulty Kropp discusses in her testimony 12 how this will be effectuated. Jackson Direct - Revenue Requirement Page 54 RRI - 54 of

34 1 IX. PSCo LAMAR TIE LINE 2 Q. Please give a brief background on the PSCo Lamar Tie Line. 3 A. The Lamar Tie Line interconnects the PSCo and SPS systems with two 345 kv 4 transmission lines. The first line starts at SPS's Potter County Interchange near 5 Amarillo, Texas, and terminates at the Finney County Switching Station, near 6 Holcomb, Kansas. The second line starts at PSCo's Lamar Substation near 7 Lamar, Colorado and terminates at Finney County Switching Station. A 210 MW 8 HVDC back-to-back converter station exists at Lamar Substation to provide the 9 connection between the Western Electric Coordinating Council and the SPP 10 systems. As part of a settlement in the FERC merger approval proceedings, the 11 Lamar Tie Line was originally constructed and placed in service in Its 12 purpose is to provide for load diversity between the PSCo and SPS systems. 13 Q. What is load diversity? 14 A. Load diversity is the difference between the coincident demand and the non- 15 coincident demands of two or more electric loads. Load diversity occurs between 16 multiple electric customers in any power system and between multiple classes of 17 customers. It also exists between multiple power systems. 18 The load diversity between two power systems may be significantly 19 influenced by differences in the make-up of customers (e.g., residential, 20 commercial, industrial, and agricultural), by geography, climate, and by other 21 factors. In addition, diversity may arise where two power systems are in different 22 time zones. Jackson Direct- Revenue Requirement Page 55 RR1-55 of