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1 DOCKET NO. APPLICATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY FOR AUTHORITY TO CHANGE RATES PUBLIC UTILITY COMMISSION OF TEXAS DIRECT TESTIMONY of ARTHUR P. FREITAS on behalf of SOUTHWESTERN PUBLIC SERVICE COMPANY (Filename: FreitasRRDirect.doc) Table of Contents GLOSSARY OF ACRONYMS AND DEFINED TERMS... LIST OF ATTACHMENTS... I. WITNESS IDENTIFICATION AND QUALIFICATIONS... II. ASSIGNMENT AND SUMMARY OF TESTIMONY... III. TRANSMISSION EXPENSE UNDER FERC-APPROVED TARIFFS... A. SCHEDULE 1 EXPENSE... B. SCHEDULE 1-A EXPENSE... 1 C. SCHEDULE EXPENSE... 1 D. SCHEDULE AND SCHEDULE EXPENSE... 1 E. SCHEDULE EXPENSE... 1 F. SCHEDULE EXPENSE... 1 G. SCHEDULE 1 EXPENSE... 1 H. OTHER OATT-RELATED EXPENSES... 1 IV. TRANSMISSION REVENUES UNDER THE SPP OATT... 1 A. SCHEDULE 1 REVENUES... 1 B. SCHEDULE REVENUES... C. SCHEDULE AND SCHEDULE REVENUES... D. SCHEDULE REVENUES... E. SCHEDULE REVENUES... V. CALCULATION OF SCHEDULE EXPENSES AND REVENUES... A. METHODOLOGY FOR CALCULATING SCHEDULE EXPENSES AND REVENUES... B. ADJUSTMENTS TO SCHEDULE REVENUES... 0 VI. CONCLUSION... 1 AFFIDAVIT... Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 01

2 GLOSSARY OF ACRONYMS AND DEFINED TERMS Acronym/Defined Term ATRR Commission CP BPU DC DCRF FERC HVDC kv Lamar DC Tie MWh NPCC NTC OATT Operating Companies PCRF PNM PSCo ROE RRR Meaning Annual Transmission Revenue Requirement Public Utility Commission of Texas Coincident Peak Base Plan Upgrades Direct Current Distribution Cost Recovery Factor Federal Energy Regulatory Commission High-Voltage Direct-Current Kilovolt Interconnect with PSCo at Lamar, Colorado Megawatt-hour Net Plant Carrying Charge Notification to Construct Open Access Transmission Tariff Northern States Power Company, a Minnesota corporation; Northern States Power Company, a Wisconsin corporation; PSCo; and SPS Purchased Power Capacity Cost Recovery Factor Public Service Company of New Mexico Public Service Company of Colorado, a Colorado corporation Return on Equity Revenue Requirement and Rates Freitas Direct Revenue Requirement Page RR1 - Page of 01

3 Acronym/Defined Term SPP SPS TCRF Total Company or total company Tri-County Meaning Southwest Power Pool Southwestern Public Service Company, a New Mexico corporation Transmission Cost Recovery Factor Total SPS before any jurisdictional allocation Tri-County Electric Cooperative, Inc. Test Year July 1, 01 through June 0, 01 WACC Xcel Energy XES Weighted Average Cost of Capital Xcel Energy Inc. Xcel Energy Services Inc. Freitas Direct Revenue Requirement Page RR1 - Page of 01

4 LIST OF ATTACHMENTS Attachment APF-RR-1 APF-RR- APF-RR- Description Walk-forward of Regional Market and Wheeling Expenses (Filename: APF-RR-1.xls) Walk-forward of Wheeling Revenues (Filename: APF-RR-.xls) Workpapers (Filename: APF-RR-.pdf) Freitas Direct Revenue Requirement Page RR1 - Page of 01

5 DIRECT TESTIMONY OF ARTHUR P. FREITAS I. WITNESS IDENTIFICATION AND QUALIFICATIONS Q. Please state your name and business address. A. My name is Arthur P. Freitas. My business address is 100 Larimer Street, Denver, Colorado 00. Q. On whose behalf are you testifying in this proceeding? A. I am filing testimony on behalf of Southwestern Public Service Company ( SPS ), ), a New Mexico corporation and wholly-owned electric utility subsidiary of Xcel Energy Inc. ( Xcel Energy ). Xcel Energy is a registered holding company that owns several electric and natural gas utility operating companies. 1 Q. By whom are you employed and in what position? A. I am employed by Xcel Energy Services Inc. ( XES ), the service company subsidiary of Xcel Energy, as Principal Rate Analyst. Q. Please briefly describe your duties as Principal Rate Analyst for XES. A. I provide project supervision and technical expertise for jurisdictional cost of service studies, revenue requirement determinations, and related projects for the Operating Companies. 1 Xcel Energy is the parent company of four wholly-owned electric utility operating companies: Northern States Power Company, a Minnesota corporation; Northern States Power Company, a Wisconsin corporation; Public Service Company of Colorado ( PSCo ), a Colorado corporation; and SPS (collectively, the Operating Companies ). Xcel Energy s natural gas pipeline subsidiary is WestGas InterState, Inc. Xcel Energy also has two transmission-only operating companies, Xcel Energy Southwest Transmission Company, LLC and Xcel Energy Transmission Development Company, LLC, which are regulated by the Federal Energy Regulatory Commission ( FERC ). Freitas Direct Revenue Requirement Page RR1 - Page of 00

6 Q. Please describe your educational background. A. I graduated from Marquette University with a Bachelor s degree in Business Administration in 1. Q. What is your professional experience? A. I worked for Boston Gas Company from 1 through 000 as a rate analyst. In 000, I began working for a consulting group, La Capra Associates. While at La Capra Associates, I gained a broad range of experience and expertise that encompassed utility functions from system planning through retail ratemaking. I performed analyses on a range of topics that included retail cost allocation and rate design, electricity market design and analysis, power market forecasting, and integrated resource planning. I have significant experience involving the regulatory process. In a number of states, I have participated in the regulatory process on behalf of both the regulated utilities and interested stakeholders. The issues explored include cost allocation and retail rate design, integrated resource planning, resource acquisition, transmission system expansion, and renewable energy policy. Over the course of my involvement in numerous regulatory proceedings, I have drafted and reviewed pre-filed testimony, developed and responded to discovery, and conducted analyses on issues relevant to the proceeding to support the testimony of expert witnesses. I joined XES in 0. Q. Have you testified before any regulatory authorities? A. Yes. I testified before the Massachusetts Department of Public Utilities on behalf of Blackstone Gas Company with respect to cost allocation, demand forecasting, and supply procurement issues. I submitted pre-filed testimony to the Public Freitas Direct Revenue Requirement Page RR1 - Page of 01

7 Utility Commission of Texas ( Commission ) on behalf of SPS in Docket No. 00, SPS s last base rate case, regarding transmission-related costs incurred under FERC-approved tariffs, as well as the baselines for the Transmission Cost Recovery Factor ( TCRF ), the Distribution Cost Recovery Factor ( DCRF ), and the Purchased Power Capacity Cost Recovery Factor ( PCRF ). In addition, I submitted pre-filed testimony to the Commission in Docket No. 0 regarding the TCRF revenue requirement. Finally, I have submitted pre-filed testimony to the New Hampshire Public Utilities Commission on behalf of the Office of Consumer Advocate regarding cost allocation. Freitas Direct Revenue Requirement Page RR1 - Page of 0

8 II. ASSIGNMENT AND SUMMARY OF TESTIMONY Q. What is your assignment in this testimony? A. In this testimony, I describe the expenses charged to SPS by the Southwest Power Pool ( SPP ) and other utilities under the applicable Open Access Transmission Tariff ( OATT ), including the known and measurable adjustments that SPS has made to those expenses. I also describe the revenues that SPS receives for the services it provides as a transmission owner under the SPP OATT and the Xcel Energy OATT, as well as the known and measurable adjustments that SPS has made to those revenues. In addition, I provide a detailed explanation of how Schedule expenses and revenues are calculated, and I explain why it is necessary to adjust the return component for Schedule revenues to ensure that the FERC jurisdictional amounts match the Texas retail jurisdictional amounts. Q. Please summarize your testimony. A. During the Test Year, which is the twelve-month period from July 1, 01 through June 0, 01 ( Test Year ), SPS incurred $,,0. of transmission-related expenses arising under the OATTs of SPP, Xcel Energy, and Public Service Company of New Mexico ( PNM ), all of which have been approved by FERC. I have adjusted those Test Year expenses by $(,1,) to account for known and measurable changes that will occur after the Test Year, 0 including the termination of the PNM contract. After accounting for the 1 adjustments, the Test Year amount of transmission-related expense under FERC-approved tariffs is $,1,. Freitas Direct Revenue Requirement Page RR1 - Page of 0

9 In addition, SPS received $1,, of revenues under the SPP OATT during the Test Year. I have adjusted those revenues by $1,, to account for the known and measurable adjustments that will occur after the Test Year, which yields a total of $,01, in revenues that are included in the cost of service as an offset against SPS s revenue requirement. Finally, I recommend that the Schedule revenues received by SPS be adjusted to ensure that the return on equity ( ROE ) reflected in those revenues match the ROE used for the Texas retail jurisdiction. Using the FERC-approved ROE to calculate revenue credits will result in Texas retail customers receiving credit for more than they have paid when the FERC-approved ROE is higher than the Texas retail ROE. On the other hand, when the Texas retail ROE is higher than the FERC-approved ROE, Texas retail customers will receive less in revenue credits than they have paid as part of their cost of service. Equalizing the ROEs for the Schedule charges, revenue credits, and rate base items will protect both SPS and its customers. Q. Do you testify in any other part of this rate case? A. Yes. In the Rate Design phase of this case, I testify regarding the TCRF baseline, the DCRF baseline, and the PCRF baseline. Freitas Direct Revenue Requirement Page RR1 - Page of 0

10 III. TRANSMISSION EXPENSE UNDER FERC-APPROVED TARIFFS Q. What topics do you address in this section of your testimony? A. I discuss the transmission-related expense that SPS incurs under FERC-approved tariffs, including the SPP OATT, the Xcel Energy OATT, and the PNM OATT. SPS witness William A. Grant establishes the reasonableness and necessity of those expenses, whereas I quantify the Test Year amounts, including the known and measurable adjustments. Q. What types of transmission-related expense is SPS seeking Commission approval to recover in this case? A. SPS seeks Commission approval to recover the following types of transmissionrelated expense incurred under the SPP OATT: Schedule 1 Scheduling, System Control and Dispatch Service; Schedule 1-A Tariff Administration Service; Schedule Reactive Supply and Voltage Control from Generation; Schedule Long-Term Firm and Short-Term Firm Point-to-Point Transmission Service; Schedule Non-Firm Point-to-Point Transmission Service; Schedule Network Integration Transmission Service; Schedule Base Plan Zonal Charge and Region-Wide Charge; and 0 1 Schedule 1 FERC Assessment Charge. In addition, SPS seeks approval of the expense it incurs under the Xcel Energy OATT for the purchase of capacity across the Lamar Direct Current ( DC ) Tie Schedules,, and relate only to wholesale transactions, and therefore the expenses are all assigned to the wholesale jurisdiction. Schedule relates to the SPP Integrated Marketplace, the costs of which are recovered through fuel and purchased power expense instead of through base rates. Freitas Direct Revenue Requirement Page RR1 - Page of 0

11 that is jointly owned by SPS and PSCo. I will discuss each type of expense in the following subsections of my testimony. A. Schedule 1 Expense Q. What service is provided under Schedule 1 of the SPP OATT? A. Schedule 1 service, which is called Scheduling, System Control and Dispatch Service, is required to schedule the movement of power through, out of, or into a control area. Mr. Grant discusses Schedule 1 further in his testimony Q. What amount of Schedule 1 expense did SPS incur in the Test Year? A. SPS incurred $0,0 of Schedule 1 expense in the Test Year on a total company basis. The Schedule 1 expense, which is recorded in FERC Account, appears on page, line 1 of my Attachment APF-RR-1. Q. Is SPS proposing to adjust the amount of Schedule 1 expense? A. Yes. SPS is proposing to reduce the Schedule 1 Test Year expense by $, total SPS before any jurisdictional allocation ( total company ) to account for 1 1 wholesale-related expenses. Attachment APF-RR-1. That adjustment appears on page, line 1 of Q. What is the total amount that SPS seeks to recover as Schedule 1 costs? A. SPS seeks Commission approval to recover $,0 (total company) of Schedule 1 expense. Control Area is defined in the SPP OATT as an electric power system or combination of electric power systems to which a common automatic generation control scheme is applied in order to: (1) match, at all times, the power output of the generators within the electric power system(s) and capacity and energy purchased from entities outside the electric power system(s), with the load within the electric power system(s); () maintain scheduled interchange with other Control Areas, within the limits of Good Utility Practice; () maintain the frequency of the electric power system(s) within reasonable limits in accordance with Good Utility Practice; and () provide sufficient generating capacity to maintain operating reserves in accordance with Good Utility Practice. Freitas Direct Revenue Requirement Page RR1 - Page of 0

12 B. Schedule 1-A Expense Q. What service is provided under Schedule 1-A of the SPP OATT? A. Schedule 1-A governs Tariff Administration Service, which is a charge applied to all transmission service under the SPP OATT to cover SPP s expenses related to its administration of the OATT. Schedule 1-A charges are recorded in three different FERC Accounts Account 1., Account 1., and Account. Q. How are the Schedule 1-A fees determined? A. The SPP Board of Directors sets an annual rate per megawatt per hour for Schedule 1-A service. As further discussed by Mr. Grant, for 01, the rate has been set at $0. per megawatt per hour ( MWh ). The SPP minutes reflecting the Board s decision are included in my workpapers. Q. What amount of Schedule 1-A expense did SPS incur in the Test Year? A. SPS incurred $,, of Schedule 1-A expense in the Test Year on a total company basis. The Test Year expense appears on page 1, line 1 of Attachment APF-RR-1. Q. Is SPS proposing to adjust the amount of Schedule 1-A expense? A. Yes. First, SPS has eliminated $,,1 of Schedule 1-A expenses related to wholesale load. Next, SPS is proposing to increase the Schedule 1-A Test Year expense by $,1 (total company) to account for the increase in the fee approved by the SPP Board of Directors for 01. Please refer to page 1, lines - of Attachment APF-RR-1. Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

13 Q. What Schedule 1-A fees has SPS included in the cost of service? A. After eliminating wholesale-related expenses and including the known and measurable adjustment attributable to the SPP Board s decision to raise the rate to $0./MWh, the Test Year Schedule 1-A expense that SPS seeks to recover is $,,1 on a total company basis. That amount appears on page 1, line of Attachment APF-RR-1. C. Schedule Expense Q. What service is provided under Schedule of the SPP OATT? A. Schedule is labeled Reactive Supply and Voltage Control from Generation or other Sources Service. It is essentially a charge paid by transmission customers to generators for reactive power, which is needed to maintain transmission system voltages within generally accepted limits. Schedule charges are recorded in FERC Account. Mr. Grant discusses Schedule further in his testimony. Q. How are the Schedule charges determined? A. The Schedule fees are set forth in the SPP OATT. Q. What amount of Schedule expense did SPS incur in the Test Year? A. SPS incurred $, of Schedule expense in the Test Year on a total company basis. The Test Year expense appears on page, line of Attachment APF-RR-1. Q. Is SPS proposing to adjust the amount of Schedule expense? A. Yes. SPS is proposing to reduce the Schedule Test Year expense by $, (total company) to account for wholesale-related expenses. Please refer to page, line of Attachment APF-RR-1. Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

14 Q. What Schedule fees has SPS included in the cost of service? A. After eliminating the wholesale-related expenses, the Test Year Schedule expense that SPS seeks to recover is $0, on a total company basis. That amount appears on page, line of Attachment APF-RR-1. D. Schedule and Schedule Expense Q. Please describe the Schedule and Schedule expense. A. Transmission customers take long-term firm and short-term firm point-to-point transmission service under Schedule. In contrast, Schedule governs non-firm point-to-point transmission service. Both types of expenses are recorded in FERC Account. Q. How are the Schedule and Schedule charges determined? A. The Schedule and Schedule charges are approved by FERC based on the transmission owner s formula rate filing. Q. What amounts of Schedule and Schedule expense did SPS incur in the Test Year? A. SPS incurred $,00 of Schedule and Schedule expense in the Test Year on a total company basis. The Test Year expense amounts appear on page, line of Attachment APF-RR-1. Q. Is SPS proposing to adjust the amounts of Schedule and Schedule expense? A. No. Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

15 E. Schedule Expense Q. What service is provided under Schedule of the SPP OATT? A. Schedule is Network Integration Transmission Service. It allows a transmission customer to move power from generation anywhere on the network to load anywhere on the network. Schedule charges are recorded in FERC Account. Q. How are the Schedule charges determined? A. The Schedule charges are approved by FERC based on the transmission owner s formula rate filing. Notably, however, SPS s retail customers are not charged for network service provided across SPS s grid. The only Schedule charges allocated to SPS retail customers are those attributable to network service across another transmission owner s system located within the SPS zone. Q. What amount of Schedule expense did SPS incur in the Test Year? A. SPS incurred $,,0 of Schedule expense in the Test Year on a total company basis. This includes charges related to SPS s wholesale customers as well as for service across Lea County s network. The Test Year expense appears on page, line of Attachment APF-RR-1. Q. Is SPS proposing to adjust the amount of Schedule expense? A. Yes. SPS is proposing to reduce the Schedule Test Year expense by $,10, (total company) to eliminate wholesale-related expenses. In addition, FERC recently concluded that Tri-County Electric Cooperative, Inc. ( Tri-County ) is not entitled to recover Schedule revenues from SPS, and therefore SPS is making a known and measurable adjustment to eliminate the Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 00

16 Tri-County amounts paid during the Test Year. Please refer to page, line of Attachment APF-RR-1. Q. What Schedule fees has SPS included in the cost of service? A. After including the known and measurable adjustments, the Test Year Schedule expense that SPS seeks to recover is $, on a total company basis. That amount appears on page, line of Attachment APF-RR-1. F. Schedule Expense Q. What are Schedule expenses? A. Schedule expenses are amounts charged to SPS under the SPP OATT for Base Plan Upgrade ( BPU ) projects, which are transmission improvement projects that SPP has studied and approved. Because the process by which Schedule expenses and revenues are calculated is more complicated than the processes for calculating other OATT-related costs, I will discuss the method for calculating the Schedule expenses and revenues in a separate section of this testimony, Section V. In this subsection, I will simply describe the Test Year expense amounts and the adjustments to those amounts. Q. What amount of Schedule expense did SPS incur in the Test Year? A. SPS incurred $,, of Schedule expense in the Test Year on a total company basis. The Test Year expense appears on page, line of Attachment APF-RR-1. Q. Is SPS proposing to adjust the amount of Schedule expense? A. Yes. As discussed in more detail in Section V, SPS is proposing to increase the Schedule Test Year expense by $,,0 (total company) to reflect the Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 01

17 expense set forth in the October 01 Revenue Requirement and Rates ( RRR ) file published by SPP. That amount also reflects an adjustment to ensure that the ROEs are the same for the wholesale and Texas retail amounts, which I will discuss in more detail below. Please refer to page, line of Attachment APF-RR-1 for the adjustment. Q. What Schedule fees has SPS included in the cost of service? A. The Schedule expense that SPS seeks to recover is $,,0 on a total company basis. That amount appears on page, line of Attachment APF-RR-1. G. Schedule 1 Expense Q. What service is provided under Schedule 1 of the SPP OATT? A. Schedule 1 addresses the FERC Assessment Charge, which is an amount that FERC assesses to SPP and other Regional Transmission Organizations to pay for FERC s operating costs. SPP passes the Schedule 1 cost on to its members. Q. How are the Schedule 1 charges determined? A. Each public utility is assessed Schedule 1 charges based on the actual MWh of energy transmitted in interstate commerce during a calendar year, as reported on FERC Form. The Schedule 1 charge is an estimated amount that is trued up in subsequent years when the actual cost is known. Schedule 1 charges are recorded in FERC Account. Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

18 Q. What amount of Schedule 1 expense did SPS incur in the Test Year? A. SPS incurred $1,, of Schedule 1 expense in the Test Year on a total company basis. The Test Year expense appears on page, line of Attachment APF-RR-1. Q. Is SPS proposing to adjust the amount of Schedule 1 expense? A. Yes. SPS is proposing to increase the Schedule 1 Test Year expense by $, (total company) to eliminate wholesale-related amounts charged during the Test Year. Please refer to page, line of Attachment APF-RR-1. Q. What Schedule 1 fees has SPS included in the cost of service? A. After eliminating the wholesale-related expenses, the Test Year Schedule 1 expense that SPS seeks to recover is $1,,1 on a total company basis. That amount appears on page, line of Attachment APF-RR-1. H. Other OATT-Related Expenses Q. Is SPS seeking recovery of transmission-related expenses in addition to those set forth in the SPP OATT schedules? A. Yes. As noted earlier, SPS incurred costs during the Test Year for transmission capacity across the Lamar Tie. Those costs are calculated in accordance with the Xcel Energy OATT. SPS also incurred miscellaneous costs recorded in FERC 1 Account, including the SPP membership fees. Finally, SPS incurred 0 1 $,, of costs during the Test Year in connection with a transmission reservation across the PNM system, but that reservation has expired, so SPS is proposing to make a known and measurable adjustment to eliminate the costs Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

19 attributable to the PNM reservation. Attachment APF-RR-1. Please refer to page, lines -1 of Q. What was the Test Year expense for the reservation across the Lamar Tie? A. The Test Year amount for the Lamar Tie reservation was $,,1, as shown on page, line 1 of Attachment APF-RR-1. The Lamar Tie reservation cost is recorded in FERC Account. Q. Is SPS proposing any known and measurable adjustments to the Lamar Tie cost? A. Yes. Starting January 1, 01, the amount charged by PSCo will increase because of changes in PSCo s formula rate, which occur annually under the terms of PSCo s FERC-approved formula rate. SPS seeks to include the 01 amount in its cost of service, as shown on page, line 1 of Attachment APF-RR-1. Q. Is the additional cost of the Lamar Tie amount known and measurable? A. Yes. On October 1, 01, in accordance with the terms of PSCo s FERC-approved formula rate implementation procedures, PSCo posted the rates it proposes to charge for transmission service beginning January 1, 01. The megawatts to which the rate will be applied are fixed by contract. Therefore, the incremental amount that SPS will have to pay for the reservation in the Test Year is known and measurable. Q. What other miscellaneous costs has SPS included in the cost of service? A. SPS included $1,1 for miscellaneous costs, including the SPP membership fee and other assorted charges. Attachment APF-RR-1. Those charges appear on page, line 1 of Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

20 1 Q. What is the total amount of non-spp transmission costs that has SPS included in the cost of service? A. After including the known and measurable adjustments attributable to the termination of the PNM reservation, to the increase in the PSCo formula rate, and to the miscellaneous costs, the Test Year non-spp transmission-related expense that SPS seeks to recover is $,,1 on a total company basis. That amount is the total of the amounts on page, lines 1 and 1 of Attachment APF-RR-1. Q. Are there any other costs that SPS has incurred that are detailed on Attachment APF-RR-1? A. Yes. SPS incurred $0,0 of meter and facilities charges during the Test Year. These are related to SPS s wholesale customers and are not included in the cost of service. Freitas Direct Revenue Requirement Page 0 RR1 - Page 0 of 0

21 IV. TRANSMISSION REVENUES UNDER THE SPP OATT Q. What topic do you address in this section of your testimony? A. I discuss the types of revenues that SPS receives for the services that it provides under the SPP OATT. Q. What SPP OATT schedules allow SPS to recover revenues from transmission customers? A. SPS receives revenues under the following schedules: 1 1 Schedule 1 Scheduling, System Control and Dispatch Service; Schedule Reactive Supply and Voltage Control from Generation; Schedule Long-Term Firm and Short-Term Firm Point-to-Point Transmission Service; Schedule Non-Firm Point-to-Point Transmission Service; Schedule Network Integration Transmission Service; Schedule Base Plan Zonal Charge and Region-Wide Charge. These revenues are recorded in subaccounts under FERC Account.1. A. Schedule 1 Revenues Q. Does SPS receive revenues under Schedule 1 of the SPP OATT? A. Yes. When SPS provides services that allow the movement of power through, out of, or into a control area, SPS is entitled to receive Schedule 1 revenues. Q. What amount of Schedule 1 revenues did SPS receive in the Test Year? A. SPS received $,0,0 of Schedule 1 revenue in the Test Year on a total company basis. The Schedule 1 revenues, which are recorded in FERC Account SPS also receives revenues under Schedules,, and, but all of those revenues are directly assigned to the wholesale jurisdiction. Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

22 .1 and.1, appear on page 1, lines and 1 of my Attachment APF-RR-. Q. Is SPS proposing to adjust the amount of Schedule 1 revenue? A. Yes. SPS is proposing to reduce the Schedule 1 Test Year revenue by $,1 (total company) to account for out-of-period adjustments. appears on page 1, line of Attachment APF-RR-. That adjustment Q. What is the total amount of Schedule 1 revenues included in the cost of service? A. After accounting for the out-of-period adjustments, the total amount of Schedule 1 revenues is $1,, (total company). B. Schedule Revenues Q. What service is provided under Schedule of the SPP OATT? A. As noted earlier, Schedule charges are paid by transmission customers to generators for reactive power, which is needed to maintain transmission system voltages within generally accepted limits. Schedule revenues are recorded in FERC Account.1. Q. How are the Schedule revenues determined? A. The Schedule revenues are determined in accordance with the rate and formula that is set forth in Schedule of the SPP OATT. Q. What amount of Schedule revenues did SPS receive in the Test Year? A. SPS received $,1 of Schedule revenues in the Test Year on a total company basis. The Test Year expense appears on page 1, line of Attachment APF-RR-. Freitas Direct Revenue Requirement Page RR1 - Page of 0

23 Q. Is SPS proposing to adjust the amount of Schedule expense? A. No. C. Schedule and Schedule Revenues Q. What service does SPS provide under Schedule and Schedule? A. SPS provides long-term firm and short-term firm point-to-point transmission service under Schedule. SPS provides non-firm point-to-point transmission service under Schedule. Both types of revenues are recorded in FERC Accounts.0,.0, and.0. Q. How are the Schedule and Schedule charges determined? A. The Schedule and Schedule charges are approved by FERC based on SPS s formula rate filing. Q. What amount of Schedule and Schedule revenues did SPS receive in the Test Year? A. SPS received $,0, of Schedule revenues in the Test Year on a total company basis, and it received $, of Schedule revenues on a total company basis. The Test Year revenues for Schedule and Schedule appear on page 1, lines 1 and of Attachment APF-RR-1. Q. Is SPS proposing to adjust the amounts of Schedule and Schedule expense? A. Yes. SPS s FERC-approved formula rates for point-to-point service under Schedules and will increase on January 1, 01. SPS is proposing to increase the amount of revenues to account for the increased formula rate. Freitas Direct Revenue Requirement Page RR1 - Page of 0

24 Q. Is the adjustment known and measurable? A. The increase to the rate is certainly known and measurable because SPS has already posted the proposed rates under the terms of its FERC-approved formula rate implementation procedures. SPS does not currently know the quantity of point-to-point service it will have in 01, but it has used the Test Year amount as a reasonable proxy. Q. What is the total amount of Schedule and Schedule revenues included in the cost of service? A. After accounting for the known and measurable changes to the formula rate, the total amount of Schedule and Schedule revenues is $,, (total 1 company). APF-RR-. That amount appears on page 1, lines 1 and of Attachment The point-to-point portion of the revenues is credited to each jurisdiction SPS serves (Texas retail, New Mexico retail, and FERC) based upon a 1-Coincident Peak ( CP ) transmission demand allocator to match how investment costs are allocated to each jurisdiction. D. Schedule Revenues Q. What service is provided under Schedule of the SPP OATT? A. As noted earlier, the Schedule Network Integration Transmission Service allows a transmission customer to move power from generation anywhere on the network to load anywhere on the network. Schedule revenues are recorded in FERC Account.0. Freitas Direct Revenue Requirement Page RR1 - Page of 0

25 1 1 Q. Is SPS proposing to include any Schedule revenues in the cost of service? A. No. Although SPS receives Schedule revenues for the wholesale portion of the network service, the entire wholesale load is included in the denominator of the jurisdictional allocator, and therefore the Schedule revenues are all allocated to the wholesale jurisdiction. And as I discussed earlier, SPS s retail customers are not charged for network service across the SPS transmission system. E. Schedule Revenues Q. Does SPS receive Schedule revenues? A. Yes. I will explain in the next section of my testimony how the Schedule revenues are calculated. Q. What amount of Schedule revenues did SPS receive in the Test Year? A. SPS received $0,,1 of Schedule revenue in the Test Year on a total company basis, of which $,0, was from Network Integration customers 1 and $,0, was from point-to-point customers. The Test Year revenue appears on page 1, lines and 1 of Attachment APF-RR-. Q. Is SPS proposing to adjust the amount of Schedule revenue? A. SPS is not proposing to adjust the Schedule revenues from point-to-point customers. However, SPS is proposing to increase the Schedule Test Year revenue by $,,1 (total company) to reflect the revenues set forth in the 0 October 01 RRR file published by SPP. SPS is also proposing to adjust the 1 Schedule revenue amount to ensure that the ROE reflected in the revenues matches the ROE used for the transmission-related expenses. I will discuss both Freitas Direct Revenue Requirement Page RR1 - Page of 00

26 adjustments in more detail in the next section. Please refer to page 1, line 1 of Attachment APF-RR-1 for the adjustments. Q. What Schedule revenues has SPS included in the cost of service? A. The Schedule revenue that SPS proposes to include is $,0, on a total company basis. That amount appears on page 1, lines -1 of Attachment APF-RR-1. Freitas Direct Revenue Requirement Page RR1 - Page of 01

27 V. CALCULATION OF SCHEDULE EXPENSES AND REVENUES Q. What topic do you discuss in this section of your testimony? A. I explain in more detail how the Schedule expenses and revenues are calculated. As noted in the prior sections of this testimony, the methodology for calculating Schedule expenses and revenues is complicated, and it is therefore necessary to explain those calculations in more detail. In addition, I explain the adjustments I have made to the Schedule revenues. Q. What is Schedule? A. As explained earlier, Schedule is the portion of the SPP OATT that addresses charges and revenues for BPU projects, which are transmission improvement projects that SPP has studied and approved. SPP documents its approval of a particular BPU project by issuing a Notification to Construct ( NTC ), which authorizes the transmission owner to whom the NTC is issued to begin constructing the project. Q. Where are BPU projects built? A. BPU projects can be built anywhere in the SPP footprint, which covers all or part of nine states: Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, and Texas. That entire footprint is typically referred to as the SPP Region. Q. Is the SPP Region subdivided into smaller units? A. Yes. The SPP Region is composed of 1 zones that largely correspond to the service areas of major utilities within the SPP Region. For example, the SPS service area is Zone of the SPP. Freitas Direct Revenue Requirement Page RR1 - Page of 0

28 1 1 Q. What are the sources of Schedule charges that SPS receives from SPP? A. SPS receives Schedule charges resulting from BPU projects it constructs in the SPS Zone, as well as a share of the BPU project charges allocated region-wide. The latter component of Schedule charges includes costs for BPU projects built by all transmission owners that have region-wide recovery, including SPS. Q. What are the sources of Schedule revenues that SPS receives from SPP? A. SPS receives Schedule revenues for only the BPU projects it constructs and owns. Depending on the cost allocation methodology of a given BPU project, the Schedule revenues are received from SPS Zone transmission customers, all transmission customers in SPP (including SPS), or a combination of both. A. Methodology for Calculating Schedule Expenses and Revenues Q. How is the revenue requirement applicable to a BPU project calculated? A. Each transmission owner that constructs a BPU project calculates an Annual 1 Transmission Revenue Requirement ( ATRR ) for the project. The ATRR for each project is then allocated to the transmission owner s zone, to the SPP Region, or partially to both, depending on when SPP issued the NTC for the project and the size of the project. Q. Can you illustrate how the calculation and cost allocation process works? A. Yes. In Figure APF-RR-1 below, I provide an example in which an SPSconstructed transmission project costs $0 million, and SPS has an NPCC of % for the project. That produces an ATRR for the project of $ million per For example, SPS uses a Net Plant Carrying Charge ( NPCC ), which is a percentage derived from its FERC-approved rate formula, and it multiplies that NPCC by the project s capital cost and then adds in depreciation expense. To simplify these examples, depreciation expense is assumed to be part of the NPCC. Freitas Direct Revenue Requirement Page RR1 - Page of 0

29 year, which is then allocated entirely to the SPS Zone, entirely to the SPP Region, or partially to both. Figure APF-RR-1 SPS Zone BPU Project Cost $0MM X NPCC = ATRR % $MM SPP Region-Wide Q. How are costs allocated for BPU projects? A. The way in which the costs for BPU projects have been shared has evolved over time: For projects approved by SPP before 00, the transmission owner that constructed the project was allocated all of the costs of the project For projects approved by SPP from 00 through June 1, 0, transmission owners serving end-use customers in the zone in which the project was built were allocated two-thirds of the cost based on a megawatt-mile and usage basis, and the remaining third of the cost was shared among all transmission customers in the SPP region. This allocation method is referred to as Original Base Plan Funding For projects approved by SPP after June 1, 0, costs are allocated in accordance with the Highway/Byway method, which assigns costs according to the size of the project: o For a project of 00 kilovolts ( kv ) or more, the costs are allocated 0% to the SPP Region; o For a project of 0- kv, % of the costs are allocated to the SPP Region and % of the costs are allocated to the zone in which the project is located; and o For projects less than 0 kv, the costs are allocated entirely to the zone in which the project is located. Freitas Direct Revenue Requirement Page RR1 - Page of 0

30 1 1 Q. Has SPP used any other cost allocation methods for BPU projects? A. Yes. In 00, the SPP stakeholders approved the Balanced Portfolio initiative to develop a group of economic transmission upgrades that would benefit the entire SPP Region. Under that method, all kv transmission projects identified by SPP for construction were funded regionally, with the allocation of costs based on a cost-benefit analysis. The benefits are analyzed zone by zone to ensure that every zone shows benefits greater than or equal to the costs. If a particular zone s benefits are less than its costs, that zone receives transfer payments to bring the zone back to a one-to-one cost-benefit ratio. Q. When costs are allocated on a region-wide basis, how is each transmission zone s share of the costs calculated? A. SPP allocates costs to the 1 zones using each zone s load ratio share of the entire SPP Region load, which SPP calculates using the average 1 CP demand from the 1 prior calendar year. For example, based on the 1-CP demand for calendar year , the SPS Zone has approximately 1% of the average peak demand in the SPP Region, so the SPS Zone is allocated 1% of the region-wide costs. The load ratio share does not change each year for purposes of allocating the Balanced Portfolio Transfer Payments. SPS s load ratio share is frozen at an.% level for Balanced Portfolio Transfer Payments. SPS s 1-CP demand for calendar year 01 was 1.0%. For the sake of simplicity in these examples, I will round the amount down to 1%, but the actual amounts included in the cost of service are calculated using the 1.0 percentage. Freitas Direct Revenue Requirement Page 0 RR1 - Page 0 of 0

31 Q. Based on those allocation methods, please summarize the cost responsibility of customers in the SPS Zone. A. As shown in Figure APF-RR- below, transmission customers in the SPS Zone pay 0% of the Schedule costs charged to the SPS Zone, and they pay 1% of the Schedule costs allocated region-wide. Figure APF-RR- SPS Zone 0% BPU Project Cost $0MM X NPCC = ATRR % $MM Total SPS Zone Schedule Charges SPP Region-Wide 1% Q. With that background, can you provide examples of how the cost allocation process would work for specific types of projects? A. Yes. Suppose that SPS constructed a kv BPU transmission project in the SPS Zone that cost $0 million, and the ATRR calculated using SPS s FERC- 1 approved formula rate was $ million. Because the Highway/Byway method allocates the costs of kv projects on a region-wide basis, the $ million ATRR of the project would be allocated to the entire SPP Region, which means that transmission customers in the SPS Zone (and their end-use customers) would ultimately end up paying approximately 1% or $1. million of the project s ATRR in a particular year. Transmission customers in other SPP zones would pay the other %. The ATRR for each BPU project is calculated on Worksheet P of Attachment O to the Xcel Energy OATT. The return is based on the FERC-approved WACC. Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

32 Figure APF-RR- kv BPU Project Cost $0MM X NPCC = ATRR % $MM $0MM $MM SPS Zone $0MM SPP Region-Wide $MM $0MM (0%) $1.MM (1%) $.MM (%) Total SPS Zone $1.MM All Other Zones $.MM Now suppose instead that SPS built a 0 kv project in the SPS Zone that cost $0 million and had a $ million ATRR. Under the Highway/Byway method of cost allocation, % (i.e., $. million) of the project s ATRR would be allocated to transmission customers in the SPS Zone, and % ($. million) of the ATRR would be allocated to the entire SPP Region. Because the SPS Zone has a load ratio share of 1%, the transmission customers in the SPS Zone also would be allocated 1% of the $. million, which is $,000. Thus, the total amount of the ATRR allocated to the SPS Zone would be $.1 million ($. million + $,000 = $.1 million.) Those are the Schedule charges assessed to transmission customers in the SPS Zone. Transmission customers in other zones of the SPP Region would be responsible for paying the other $. million, as shown in Figure APF-RR-. These amounts are rounded. The actual amount allocated to the SPS Zone would be slightly less because two-thirds is.%, not %. Freitas Direct Revenue Requirement Page RR1 - Page of 0

33 Figure APF-RR- 0kV BPU Project Cost $0MM X NPCC = ATRR % $MM $.MM (%) $.MM (%) SPS Zone $.MM SPP Region-Wide $.MM $.MM (0%) $,000 (1%) $.1MM (%) Total SPS Zone $.1MM All Other Zones $.1MM Q. Does that mean only $.1 million of the $ million goes into the SPS cost of service for purposes of Texas retail ratemaking? A. Ultimately, yes, but SPP does not initially net Schedule charges payable by SPS and Schedule charges payable to SPS, so there are several steps required to get to the net $.1 million amount that is included in the retail cost of service. Using the same example of SPS building a 0 kv BPU project that costs $0 million with a $ million ATRR, the sequence is as follows: The $0 million is added to SPS s net rate base, and SPS calculates a return of and on the full rate base, of which Texas retail customers are 1 allocated their jurisdictional share. 1 Suppose, for the sake of simplicity, that the $0 million BPU project was SPS s only asset in rate base, and thus the entire rate base was $0 million. Further suppose that the return of and on that rate base using the Commission-approved WACC is %, 1 which produces a revenue requirement of $ million. SPS s retail 1 SPS has three jurisdictions: Texas retail; New Mexico retail; and FERC. Costs incurred by SPS must be allocated to those jurisdictions consistent with cost-causative methods, but for the sake of simplicity, this example assumes that SPS has only a Texas retail jurisdiction. Freitas Direct Revenue Requirement Page RR1 - Page of 0

34 customers are responsible for paying rates designed to recover the $ million. Table APF-RR-1 BPU plant in rate base $0 million WACC x % Revenue requirement impact = $ million As explained earlier, the ATRR under Schedule is $ million, and the amount allocated to the SPS Zone is $.1 million. That amount is also assessed to Texas retail customers, for a total cost of service of $1.1 million, and SPS pays the $.1 million to SPP. 1 The $. million allocated region-wide is charged to other transmission customers in the SPP Region, and those customers pay that amount to SPP. Table APF-RR- Rate base component of cost of service Schedule charges to SPS Zone Total cost of service for SPS customers $ million +.1 million = $1.1 million After receiving amounts attributable to the BPU project in the SPS Zone from both SPS and transmission customers in other zones, SPP holds $ million. Because SPS built that project, SPP pays SPS not only the $.1 million that SPP received from SPS, but also the $. million that SPP 1 This example omits consideration of other expenses such as operation and maintenance costs. Freitas Direct Revenue Requirement Page RR1 - Page of 0

35 received from the transmission customers in other zones, for a total revenue credit of $ million. Table APF-RR- Total cost of service (including both rate base and Schedule components Credit attributable to payments from SPS Zone Credit attributable to payments from other zones Net cost of service $1.1 million - $.1 million - $. million $.1 million Because SPS s retail customers paid $1.1 million but SPS receives $ million in revenue credits from SPP, the final Texas retail revenue requirement for transmission-related plant is $.1 million, which is the share of the BPU project that is allocated through the SPP Schedule transmission cost allocation process. 1 Q. Does the process work the same for a situation in which the BPU project is an addition to an existing rate base? A. Yes. SPS s rate base contains significantly more plant than just the one transmission project set forth in the example above, but the methodology works the same when the BPU project is an addition to an existing rate base. Suppose that SPS has $00 million of existing rate base plus the $0 million BPU project for a total transmission rate base of $1 billion. Assuming the same cost of capital as the example above, the sequence would be as follows: 1 This example assumes the FERC-approved WACC and the Texas Commission-approved WACC are the same. That is not the case, which requires an adjustment to be made. I will explain below why an adjustment to the Schedule revenue credit is necessary. Freitas Direct Revenue Requirement Page RR1 - Page of 00

36 The $0 million is added to SPS s existing rate base of $00 million, and SPS calculates a return of and on the full rate base of $1 billion, of which Texas retail customers are allocated their jurisdictional share. Table APF-RR- BPU plant in rate base $1 billion WACC x % Revenue requirement impact = $0 million Similar to the earlier example, the ATRR under Schedule is $ million, and the amount allocated to the SPS zone is $.1 million. That amount is also assessed to Texas retail customers, for a total cost of service of $.1 million, and SPS pays the $.1 million to SPP. 1 The 1 $. million allocated region-wide is charged to other transmission customers in the SPP Region, and those customers pay that amount to SPP. Table APF-RR- Rate base component of cost of service Schedule charges to SPS Zone Total cost of service for SPS customers $0 million +.1 million = $.1 million 1 1 The SPP then pays SPS not only the $.1 million that SPP received from SPS, but also the $. million that SPP received from other transmission 1 customers, for a total revenue credit of $ million. Because SPS 1 This example omits consideration of other expenses such as operation and maintenance costs. Freitas Direct Revenue Requirement Page RR1 - Page of 01

37 originally paid only $.1 million for its zonal share of the BPU project and it receives $ million from SPP as a revenue credit, SPS ends up paying $.1 million of the ATRR of the BPU project in its zone. Because SPS s retail cost of service is $.1 million but SPS receives $ million in revenue credits from SPP, the final Texas retail revenue requirement for transmission-related plant is $.1 million, which is the $0 million revenue requirement on the existing transmission rate base ($00 million x %) plus SPS s share of the BPU project charged through Schedule ($.1 million). Table APF-RR- Total cost of service (including both rate base and Schedule components Credit attributable to payments from SPS Zone Credit attributable to payments from other zones Net cost of service $.1 million - $.1 million - $. million $.1 million 1 1 Q. Are the same methods of calculating the ATRR and allocating costs used for other transmission owners in the SPP? A. Yes. The same basic methodology applies to transmission owners in other SPP 1 zones. Each transmission owner has either a FERC-approved transmission formula or a FERC-approved transmission revenue requirement. SPP takes each transmission owner s revenue requirement for all of its BPU projects and allocates those costs to the transmission owner s zonal revenue requirement or to the region-wide revenue requirement. The zonal revenue requirement is paid by Freitas Direct Revenue Requirement Page RR1 - Page of 0

38 the transmission customers in that zone, whereas the region-wide revenue requirement is charged to all transmission customers in the SPP according to their load ratio share. As noted earlier, SPS s load ratio share is approximately 1%. Q. Turning now from the examples to SPS s actual requested amount of Schedule expenses, please explain how you calculated those expenses. A. The Schedule expenses included in the cost of service are based on the RRR file SPP published on its website, effective October 1, 01. Q. Why was the October RRR file used in the development of Schedule expenses? A. As explained by SPS witnesses Deborah A. Blair and Lisa H. Perkett, SPS has included in the cost of service an adjustment for plant in service through December 1, 01. A large portion of this plant is related to transmission projects that have regional cost recovery. In order to properly credit Texas retail customers with the revenues SPS will receive for regionally cost shared projects, I used the October RRR file, which calculates the revenue requirement for projects in service through December 1, 01. Q. Is that the only adjustment you made to Schedule expenses? A. No, I also adjusted the ROE used to calculate the revenue requirement for SPS s projects to reflect the ROE utilized in the cost of service. Q. Please explain why you adjusted the ROE to reflect the Texas retail ROE used in the cost of service. A. The ROE used in the SPS transmission formula rate is currently the subject of a complaint at FERC under Section 0 of the Federal Power Act. The pending Freitas Direct Revenue Requirement Page RR1 - Page of 0

39 1 1 Q Section 0 complaint is a single-issue complaint on just the ROE. No other aspects of the transmission formula are at issue. At this point in the proceeding, the final ROE is not known. If the ROE that is finally approved by FERC is greater than the ROE approved by the Texas Commission in this case, Texas customers will end up benefiting at the expense of SPS. However, if the ROE approved by FERC for use in the transmission formula is lower than the ROE approved by the Texas Commission in this case, SPS will benefit at the expense of Texas retail customers. Given the uncertainty in the ROE in both the transmission formula and this case, I have made an adjustment to prevent either SPS or its Texas customers from benefiting or being harmed by the final approved ROE. Please describe the adjustment you made to prevent either SPS or its Texas customers from benefiting or being harmed by the final approved ROE A. I calculated the adjustment by calculating the revenue requirement for SPS s BPU projects at the ROE included in this case rather than the currently FERC approved but contested ROE. The adjustment insulates both SPS and its Texas customers from adverse outcomes related to the final ROE that is approved by either FERC or the Texas Commission. Q. How will calculating the revenue requirement on SPS s BPU projects using the Texas retail ROE prevent adverse outcomes for either SPS or its Texas customers? A. Since the issue stems from the calculation of SPS s BPU revenue requirement, I discuss in the next section the exact mechanics that bring about the potential Freitas Direct Revenue Requirement Page RR1 - Page of 0

40 adverse outcomes and how setting the ROEs to the same number addresses the problem. However, as I mentioned above, Schedule expenses that SPS is charged by SPP arise from the BPU revenue requirements of all transmission owners in SPP, including SPS. Therefore, any issue that impacts the calculation of SPS s BPU revenue requirement will then flow through and affect the Schedule expense that SPS is charged. B. Adjustments to Schedule Revenues Q. Please explain now how you calculated the amount of Schedule revenues to be included in the cost of service. A. Worksheet P of SPS s transmission formula rate calculates the revenue requirements for SPS s BPU projects. The revenue requirement calculated on Worksheet P becomes Schedule revenues. To calculate the Schedule revenues included in the cost of service, I started with SPS s 01 transmission formula rate annual update, which is posted on Xcel Energy s website, and I made one adjustment. The revenue requirements on Worksheet P in this file are also included in the October 01 RRR file, which is the basis for the Schedule expenses included in the cost of service. I adjusted the ROE in the 01 FERCapproved transmission formula rate from the ROE currently in effect but under dispute, to the proposed.% ROE included in the cost of service. This recalculated the Worksheet P revenue requirement for all SPS BPU projects. The new total revenue requirement is what I included in the cost of service for Schedule revenues. Freitas Direct Revenue Requirement Page 0 RR1 - Page 0 of 0

41 Q. Are Schedule revenues simply the mirror image of Schedule charges? A. Partly yes and partly no. In contrast to Schedule charges, which can come from projects across the SPP Region in accordance with the SPP OATT costsharing mechanisms I discussed earlier, revenue credits arise only in connection with BPU projects constructed by SPS in the SPS Zone. Thus, for the Schedule expenses collected from SPS Zone customers, the Schedule revenues are the mirror image of the Schedule expenses, and the Schedule expenses that SPS Zone customers pay to SPP are returned dollar-for-dollar to SPS retail customers in the form of Schedule revenues as reimbursement for the BPU project costs that Texas retail customers have borne through retail base rates. In contrast, the Schedule revenues that SPS receives from other zones in SPP do not relate in any way to the Schedule expenses paid to all other zones through the Schedule region-wide charge. Q. Please explain what you mean when you say the costs of BPU projects in the SPS Zone have been borne through retail rates. A. Costs for BPU projects in the SPS Zone are calculated on two parallel tracks. On one track, the BPU project s cost is included in rate base for purposes of calculating SPS s Texas retail rates, and a return of and on that investment is included in Texas retail rates. Thus, Texas retail customers pay for BPU projects through base rates. On the second track, the ATRR of that same BPU project is calculated using SPS s FERC-approved formula rate, and that ATRR is included in the Schedule charges that SPS must pay to SPP. Thus, before revenue credits are Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

42 considered, it appears that SPS s Texas retail customers are being charged twice for the same BPU project. Q. Can you provide an example of the parallel track? A. Yes. I will return again to the example I used earlier, in which a BPU project constructed in the SPS Zone costs $0 million. Instead of using a 0 kv project, however, I will start with a kv project, which is simpler to understand because it is allocated 0% to the SPS Zone. For the Texas retail track, the $0 million cost of the BPU project must be multiplied by the Commission-approved WACC to determine the return on investment for purposes of the Texas retail jurisdiction. Assuming that WACC is %, Texas retail customers pay $.0 million in their base rates as the return on the BPU project. 1 On the second track, the project s cost must be multiplied by the FERCapproved WACC to determine the revenue requirement associated with the project. Utilizing the revenue requirement calculated in SPS s transmission formula, SPP determines the Schedule charges associated with the project. 1 That FERC-approved WACC for SPS is currently.0%, but for consistency with the earlier examples I will assume it is %. Thus, the Schedule charge attributable to the $0 million project is $ million, which SPS must pay to 1 There must also be a return of the investment (i.e., depreciation) and the recovery of taxes, but for purposes of this example it is assumed that those are the same for both the Texas retail and the Schedule calculations. 1 Like the Schedule expenses, the Schedule revenue credits are calculated using Attachment H to the SPP OATT. Freitas Direct Revenue Requirement Page RR1 - Page of 0

43 SPP, and Texas customers are charged the $ million. 1 As these examples 1 1 show, Texas customers have paid twice for the same project they paid $.0 million as part of their Texas retail base rates, and they paid $ million as part of Schedule charges. Q. Is there a mechanism to remedy this double-charging? A. Yes. SPS s customers are reimbursed for the amount they pay in Schedule charges by receiving Schedule revenues from SPP. In the above example involving a kv BPU project, Texas retail customers would pay $ million of Schedule expenses to SPP, and they would receive $ million in Schedule revenues. Because those amounts exactly offset, the SPS Texas retail customers end up paying only the $.0 million return that was calculated using the Texas WACC. Figure APF- shows how this transaction occurs: Figure APF- kv BPU Project Cost $0MM X NPCC = ATRR % $MM $MM (0%) $0MM (0%) SPS Zone $MM SPP Region-Wide $0MM $MM (0%) Total SPS Zone Sch Exp $MM $MM Sch Rev SPS 1 As with the earlier examples, this example ignores the jurisdictional allocation among Texas retail, New Mexico retail, and the wholesale jurisdiction because the principle is the same regardless of whether the amounts are jurisdictionalized. For the sake of simplicity, this example also ignores that Golden Spread would be allocated part of the cost because it is a transmission customer in the SPS Zone. Freitas Direct Revenue Requirement Page RR1 - Page of 0

44 Q. Why does SPP charge the Schedule expense and then return that amount through Schedule credits, rather than just netting the amounts and charging only the difference? A. In effect, SPP acts as a settlement clearinghouse for the Schedule charges and revenues, and for purposes of the invoice that SPP sends to SPS, the amounts are netted. But the settlement statement that SPP provides to SPS shows the entire calculation of the Schedule expenses and Schedule revenues, even if they offset each other. That method is more transparent and easier to audit because it allows transmission owners to see the components of their final bill. It also allows transmission owners to record the revenues and expenses in more detail. Q. When SPS includes the BPU project costs in rate base but then gives revenue credits to Texas retail customers, are both SPS and Texas retail customers made whole? A. No. There is a mismatch. Q. Please explain the mismatch that you are referring to. A. The Texas retail portion of the plant balance of the BPU projects is included in SPS s Texas retail rate base and earns a return at the Texas retail WACC. As noted earlier, Texas retail customers also pay a portion of the Schedule charges attributable to each BPU project in the SPS Zone, but for BPU projects of 0 kv or higher, they do not pay all of the Schedule charges attributable to those projects. Depending on the size of the project, customers in other zones may pay as much as % of the costs of a BPU project in the SPS Zone. SPP then takes the Schedule charges collected from customers in the SPS Zone, as well as the Freitas Direct Revenue Requirement Page RR1 - Page of 0

45 1 1 Schedule charges collected from customers in other zones, and it pays those amounts to SPS as Schedule revenues. The question then becomes whether to credit all of those Schedule revenues to Texas retail customers, or whether to make an adjustment to avoid a mismatch. For the portion of the Schedule charges paid by transmission customers in the SPS Zone, there is no mismatch. They pay Schedule charges at the FERC-approved WACC, and they receive that same amount of Schedule revenues back at the same WACC. Instead, the mismatch occurs with respect to the Schedule charges paid by transmission customers in other zones. Although the revenues received from those customers are in theory supposed to reimburse SPS s retail customers for the portion of BPU projects included in rate base, the revenue credits are higher than the amounts paid by the Texas retail customers if the FERC-approved 1 WACC is currently higher than the Commission-approved WACC. Thus, if Texas retail customers receive the full amount of the revenue credit, they end up paying less than the Commission-approved WACC. Q. Please provide an example of how that occurs. A. I will start with a simple example to illustrate the mismatch, and then I will provide an example that is more closely related to the facts of this case. For the simplified example, assume the following: 1 SPS has only two jurisdictions Texas retail and FERC; Costs and revenues are allocated 0% to Texas retail and 0% to FERC; Texas retail has a % WACC and FERC has a % WACC; and The total cost of the BPU projects in a given period is $0. Freitas Direct Revenue Requirement Page RR1 - Page of 00

46 Under these facts, SPS s revenue requirement for the $0 of capital investment would be $.0: Table APF-R Jurisdiction Cost Allocation WACC Return Texas Retail $0 0%.00% $.0 FERC $0 0%.00% $.00 Total $.0 Thus, in this example, SPS needs to recover $.0 from its Texas retail customers and $.00 from its FERC jurisdictional customers. But if SPS s Texas retail customers are credited with the actual revenues received from FERC jurisdictional customers, they receive $.00, and it reduces the effective amount they have contributed to only $.00. The combination of the $.00 from FERC jurisdictional customers and the $.00 from Texas retail customers totals $.00, which is 0 cents short of the $.0 overall return SPS is entitled to receive. In essence, SPS receives the.0% return for all of its 1 investment, even though it is entitled to a.0% return. And Texas retail customers end up under-paying for the BPU project because even though the Commission-approved WACC is %, they are paying only % (% x $0 x. = $.00) for the portion allocated to other zones. Q. Now please provide an example that is tied more closely to the facts of this case. A. I will return to the example of a 0 kv BPU project constructed by SPS, which means that % of the cost is allocated to the SPS Zone and % of the cost is 0 allocated to other zones in the SPP Region. In the prior examples, the 1 FERC-approved WACC and the Commission-approved WACC have been Freitas Direct Revenue Requirement Page RR1 - Page of 01

47 assumed to be the same. However, in this example, the Commission-approved WACC is assumed to be.0% and the FERC-approved WACC continues to be assumed at.0%. On the Texas retail track, the $0 million cost of the project is multiplied by the Commission-approved.0% WACC, which means that Texas retail customers pay $.0 million in their base rates as the return on the BPU project. On the Schedule track, SPS s customers are charged % of the $ million ATRR, which is $. million, along with 1% of the region-wide costs which is an additional $0. million. Thus, as noted earlier in my Figure APF-R, the Schedule charge paid by SPS s customers in connection with this project is $.1 million. 1 The remaining $. million is paid by other transmission customers in the SPP Region. The next step is to calculate revenue credits. For the portion of the ATRR attributable to the SPS Zone, SPS would have paid $.1 million to SPP and would receive $.1 million from SPP, so SPS and its customers would be whole with respect to that amount. But if all of the Schedule revenues received from other zones are credited to Texas retail customers, those customers end up with a windfall because of the difference between the FERC-approved WACC and the 1 Commission-approved WACC. In the above example, SPS s Texas retail 0 1 customers paid $ million in base rates as the return on the project, but SPS received $ million in revenue credits. If all of those revenue credits are given 1 $ million x. = $. million; $. million x 1% = $,000; $. million + $,000 = $.1 million. Freitas Direct Revenue Requirement Page RR1 - Page of 0

48 to Texas retail customers, those customers receive $1.0 million more than they paid, and SPS receives $1.0 million less in return. In effect, giving the entire revenue credit to Texas retail customers lowers the % WACC approved by FERC to the.0% approved by the Commission because SPS ultimately earns only the amount recovered in Texas retail rates for all of its investment, even that allocated to the wholesale jurisdiction. It also lowers the effective WACC paid by Texas retail customers from.0% to.0% because those customers receive back $1.0 million more in revenue credits than they paid in retail rates. 0 Q. Is there a way to avoid this result? A. Yes. The Worksheet P revenue requirement should be calculated using the Texas retail ROE, instead of the FERC-approved ROE. Then utilizing the adjusted Worksheet P revenue requirements in the October RRR file reflects the revised BPU revenue requirements in the Schedule expenses included in the cost of service. That is the simplest way to make both Texas customers and SPS whole. Q. Please explain how that would make both SPS and its customers whole. A. Returning to the example of a 0 kv BPU project with a cost of $0 million, SPS s customers pay $.0 million in base rates on the Texas retail track. For the Schedule track, which has a.0% WACC, the ATRR is $ million. SPS zonal customers thus pay $.1 million of that amount, and transmission customers in other zones of the SPP Region pay the remaining $. million, for a total of $ million in Schedule expenses paid to SPP. 0 $.0 million $1.0 million = $.0 million. Freitas Direct Revenue Requirement Page RR1 - Page of 0

49 Insofar as the revenue credits are concerned, the SPS zonal portion would still be calculated at the FERC-approved WACC under SPS s proposal. Thus, the Texas retail customers would receive $.1 million in revenue credits, which makes them whole for the Schedule expenses they have paid. But for the Schedule expenses paid by transmission customers in other zones, SPS s retail customers need only $1. million to be made whole. That is, if the $.1 million that is returned to them is added to $1. million received from customers in other zones, SPS s retail customers will receive $.0 million, which is exactly the amount they paid for the BPU project on base rates. It also makes SPS whole because it receives the jurisdictional portion of $.0 million from Texas retail customers, and it receives an additional amount of return from the customers in other zones to make it whole for the FERC-approved rate of return. Q. Could SPS s proposed adjustment work to the benefit of Texas retail customers as well? A. Yes. If the FERC ROE were to fall below the Texas ROE, it would be SPS that would benefit from the mismatched ROEs. With the currently pending Section 0 complaint on the ROE in SPS s transmission formula, there is a very real possibility of the ROE approved by FERC ending up lower than the Texas jurisdictional ROE. In that instance, Texas retail customers would end up disadvantaged as they are receiving less in revenue credit than the cost embedded in retail rates. Freitas Direct Revenue Requirement Page RR1 - Page of 0

50 Q. What do you recommend with respect to the calculation of Schedule revenues? A. I recommend that the Commission approve SPS s proposal to eliminate the regulatory risk to both SPS and Texas customers by utilizing the proposed ROE in this case to calculate the Schedule revenue credit included in the cost of service. Freitas Direct Revenue Requirement Page 0 RR1 - Page 0 of 0

51 VI. CONCLUSION Q. Were Attachments APF-RR-1 through APF-RR- prepared by you or under your direct supervision and control? A. Yes. Q. Does this conclude your pre-filed direct testimony? A. Yes. Freitas Direct Revenue Requirement Page 1 RR1 - Page 1 of 0

52 0

53 Attachment APF-RR-1 Page 1 of Docket No. Southwestern Public Service Company Walk-forward of Regional Market and Wheeling Expenses At June 0, 01 Walk-forward of Schedule 1-A Expenses FERC Account Line No Description Total 1 Per Book Schedule 1-A Expenses $,0, $,0, $,0, $,, Eliminate Wholesale Related $ (1,0,) $ (0,00) $ (1,0,00) $ (,,1) Adjust for New Rate $ 1,00 $ 1, $, $,1 Proposed Schedule 1-A Expenses $,0, $ 1,, $,, $,,1 RR1 - Page of 0

54 Attachment APF-RR-1 Page of Docket No. Southwestern Public Service Company Walk-forward of Regional Market and Wheeling Expenses At June 0, 01 Line No. Description Per Book Eliminate Eliminate Include Eliminate Lamar Include Reclassify Eliminate Reclassify Proposed Wholesale Schedule Schedule Schedule DC Tie Schedule Expenses Lea County & Tri County Lea County (Oct 01 Att H) Imbalance Penalty PNM SPP Membership Retail Rate Change Total SPS Zone Distribution Transmission Fee Total Adjustments 1 Schedule 1 $ 0,0 $ (,) $ (,) $,0 Schedule, (,) (,) 0, Schedule, (,) (,) - Schedule 0, (0,) (0,) - Schedule,1 (,1) (,1) - Schedule &,00 -,00 Schedule,,0 (,10,) (1,,),000 () (,0,1), Schedule,, (1,,) (,,),,0,,0,,0 Schedule 1 1,,,, 1,,1 Facilities Charges, (,) (,) - Meter Charges,1 (,1) (,1) - 1 Lamar DC Tie,,1 0,1 0,1,,0 1 PNM Contract,, (,,) (,,) - 1 Misc,,0,0 1,1 1 1 Total $,00,0 $ (1,,) $ (1,,) $,000 $ (,,) $ 0,1 $,,0 $ () $ (,,) $,0 $ (,) $,,0 Wheeling Expenses RR1 - Page of 0

55 Attachment APF-RR- Page 1 of 1 Docket No. Southwestern Public Service Company Walk-forward of Wheeling Revenue At June 0, 01 RR1 - Page of 00 Eliminate Eliminate Eliminate Adjust PTP Adjust PTP Eliminate Include Proposed FERC Wholesale Sch 1 Sch 1 Revenue for Revenue for Test Year Pro forma Wheeling Prior Period Account Per Book Revenue Resettlement Line No Description Accrual Rate Change Resettlement Schedule Schedule Revenue Notes 1 RTO PTP Firm Revenues 0 $ (,0,) $ (,1) $ 1, $ (,1,) Tariff-Base Non-Firm PTP 0 (,) (,) (1,0) Network Transmission Revenue 0 (0,,0) 0,,0 - Contracts Transmission Revenue 0 (,) (,) Assigned to Wholesale Sch 1 Sys Ctrl Disp Serv Revenue 1 (,0,01),0,0 (1,0,) Sch Ret Supp Voltage Ctr Revenue 1 (,1) (,1) Sch Reg Freq Rspon Rv 1 (0,) (0,) Assigned to Wholesale Sch Oper Rsv Spinning Revenue (1,00) (1,00) Assigned to Wholesale Sch Oper Rsv Sup Rev (0,) (0,) Assigned to Wholesale Offsystem Transmission Wheeling,0 (,0) - Schedule Base Plan Revenues - PTP (,0,) (,0,) 1 Schedule 1 Network Sys Cntrl Dispatch Srvc Revenue 1 (,0) (,0) 1 Schedule Network Base Plan Revenues (,0,),0, (,0,1) (,0,1) 1 Total $ (1,,) $ 0,, $,0 $,0 $ (,0) $ 1, $,0, $ (,0,1) $ (,01,)

56 Attachment APF-RR- Page 1 of 1 Docket No. PUCT DOCKET NO. Workpapers for Arthur P. Freitas APF-RR- (CD) RR1 - Page of 01