Southwestern Public Service Company Transmission Formula Rate 2013 True-up Golden Spread Electric Cooperative, Inc. Information Request No. 1 July 28, 2014 1. For 2013, provide a detailed description of SPS s accounting for expenses associated with Southwest Power Pool market operations, including the accounts in which such expenses are recorded. To the extent any of such expenses are recorded in Accounts 560-574, provide a detailed explanation of the basis for such recordation and the amount by account associated with such expenses booked to those accounts. The Southwest Power Pool ( SPP ) recovers its administrative costs through Schedule 1A to the SPP Open Access Transmission Tariff. FERC requires that SPP separate these administrative costs among three categories: (i) Scheduling, System Control and Dispatching Services, Reliability Planning and Standards Development Services, and Market Facilitation, Monitoring and Compliance Services. For 2013, SPP Schedule 1A charges are recorded to the below FERC accounts. 561.40 Scheduling, System Control and Dispatching Services $ 3,841,903.53 561.80 Reliability Planning and Standards Development Services $ 1,910,734.72 575.70 Market Facilitation, Monitoring and Compliance Services $ 5,846,943.21 The Market Operations portion requested in the question is recorded in FERC Account No. 575.70. FERC Account No. 575.70 is not included in the formula to begin with while Account Nos. 561.40 and 561.80 are excluded from the formula on Worksheet G. Therefore, none of these costs are included in the annual transmission revenue requirement. Prepared by: Jennifer Pytlik, Sarah Herman, Murray Chapman 1
2. Confirm that SPS did not have in transmission-related Asset Retirement Obligations ( ARO ) booked in 2013. To the extent SPS did have AROs booked to transmission in 2013, provide the amounts by account. As seen on pages 206-207 of SPS s 2013 FERC Form No. 1, SPS recorded an ARO of $25,029 during the year to Account 359.1 Asset Retirement Costs for Transmission Plant. This amount was excluded on Worksheet D.1 because ARO s are subtracted from the plant balances. Therefore, the ARO is not included in Rate Base. Prepared by: Andy Sawyer, Murray Chapman 2
3. With reference to SPS s 2013 FERC Form No. 1 ( FF1 ), Note pp. 450.2 and 450.3 for p. 219, provide the following: a. A detailed explanation of what constitutes Non-Legal ARO Balances as listed on p. 450.3; b. A detailed explanation as to how there can be an accumulated depreciation reserve balance for transmission plant to the extent there are no AROs booked to transmission plant; c. A detailed explanation of the derivation of the negative $32,688,077 Non-Legal ARO Balance for Transmission shown on p. 450.3; d. A detailed explanation as to whether, and if so why, the negative $32,688,077 Non- Legal ARO Balance for Transmission shown on p. 450.3 is reflected in the $261,598,801 accumulated depreciation reserve balance for transmission shown in Section B on p. 450.2; and e. To the extent the negative $32,688,077 Non-Legal ARO Balance for Transmission shown on p. 450.3 is reflected in the $261,598,801 accumulated depreciation reserve balance for Transmission shown in Section B on p. 450.2, the amount of such accumulated depreciation reserve without the negative $32,688,077 Non-Legal ARO Balance. There are two accounting methods that the Company uses to record removal recovery for its assets. The regulatory accounting method includes the estimated cost of total removal in its depreciation rates. The financial accounting method is established by the FASB and only covers legally obligated removal. To prevent overlap of these two methods in the financial statements, the Company balances these two methods with regulatory assets and liabilities. The depreciation rate recovers the net salvage (a net of estimated gross salvage less the estimated cost of removal) as well as the original cost of the asset. When the depreciation rate is multiplied by the original cost of the asset, the resulting depreciation expense includes a component for future removal. For rate making, the accumulated depreciation includes the recovery to date for both the original cost and the future removal costs. For financial presentation for GAAP, this removal component of accumulated depreciation cannot be shown in property, plant, and equipment. It must be shown in regulatory liabilities, or under the title Non-Legal AROs. The FASB issued SFAS No. 143 (codified as ASC 410) Accounting for Asset Retirement Obligations. Conceptually, an Asset Retirement Obligation (or ARO) is a liability which is set up for the eventual, legally obligated portion of disposal of an asset. If there is a 3
legal obligation to dispose of a portion of the asset, this portion of the total removal cost is estimated and ARO accounting is established. a. Non-Legal ARO Balances on SPS s 2013 FERC Form No. 1 ( FF1 ), Note pp. 450.2 and 450.3 for p. 219 represent the amount of accumulated costs for removal (regulatory method) which have been recorded as a component of depreciation expense less any amounts previously spent on asset removal. b. The depreciation rate includes a net salvage rate which is the net of gross salvage less cost of removal. The balance is present when there is a negative net salvage component (cost of removal is greater than gross salvage) in the approved depreciation rates. A net salvage of 0% could be comprised of 10% gross salvage less 10% cost of removal or any other combination thereof that net to zero. If the net salvage rate is negative, a portion of depreciation expense is booked to the regulatory liability. If it is positive or zero, no portion of the depreciation expense is diverted to the regulatory liability. Even though depreciation expense is not diverted to the regulatory liability because the net salvage rate was positive or zero, the actual removal costs spent are charged to the regulatory liability. c. The accumulated Non-Legal ARO Balance for Transmission of negative $32,688,077 represents the net balance of all accrued costs for removal (under approved depreciation rates) less any costs spent on removal. The negative amount indicates that SPS has incurred costs for the removal of its transmission assets greater than the portion of depreciation that has been diverted to the regulatory liability. However, the depreciation recovery for this actual removal cost is included in the accumulated depreciation. The accumulated depreciation and the Non-Legal ARO balance is netted together for rate base calculation. d. See the response to subpart (c) above and (e) below. e. As described above, the accumulated depreciation balance for rate making includes the recovery to date for the original cost and the net salvage component. The original cost recovery less a net salvage component (when the net salvage rate is positive or zero) is included in accumulated depreciation. The recovery for the net salvage component (when the net salvage rate is negative) less any actual removal cost incurred is included in the Non-Legal ARO balance. Both of these balances are accumulated depreciation for rate making purposes. In this case, accumulated depreciation is $294,286,878 and the Non-Legal ARO balance is ($32,688,077) for a total rate base accumulated depreciation reserve of $261,598,801. Prepared by: Andy Sawyer 4
4. With reference to SPS s 2013 FERC Form No. 1 ( FF1 ), Note pp. 450.2 and 450.3 for p. 219, provide the following: a. A detailed explanation of why the Non-Legal ARO Balances for General Plant as listed on p. 450.3 is negative $848,941; b. A detailed explanation as to how there can be a negative accumulated depreciation reserve balance for transmission plant to the extent there are no AROs booked to transmission plant; c. A detailed explanation of the derivation of the negative $848,941 Non-Legal ARO Balance for General Plant shown on p. 450.3; d. A detailed explanation as to whether, and if so why, the negative $848,941 Non-Legal ARO Balance for General Plant shown on p. 450.3 is reflected in the $119,910,140 accumulated depreciation reserve balance for transmission shown in Section B on p. 450.2; and e. To the extent the negative Non-Legal ARO Balance for General Plant shown on p. 450.3 is reflected in the $119,910,140 accumulated depreciation reserve balance for General Plant shown in Section B on p. 450.2, the amount of such accumulated depreciation without the negative $848,941 Non-Legal ARO Balance. Please see the Company s response to the previous question for general background on ARO accounting. a. Please see the Company s response to the previous question, subpart a. b. Please see the Company s response to the previous question, subpart b. c. The accumulated Non-Legal ARO Balance for General Plant of negative $848,941 represents the net balance of all accrued costs for removal (under approved depreciation rates) less any costs spent on removal. The negative amount indicates that SPS has incurred costs for the removal of its general plant assets greater than the portion of depreciation that has been diverted to the regulatory liability. However, the depreciation recovery for this actual removal cost is included in the accumulated depreciation. The accumulated depreciation and the Non-Legal ARO balance is netted together for rate base calculation. d. See the response to subpart (c) above and (e) below. e. As described above, the accumulated depreciation balance for rate making includes the recovery to date for the original cost and the net salvage component. The original cost recovery less a net salvage component (when the net salvage rate is positive or zero) is included in accumulated depreciation. The recovery for the net salvage component (when the net salvage rate is negative) less any actual removal cost incurred is included in the Non-Legal ARO balance. Both of these balances are accumulated depreciation for rate making purposes. In this case, accumulated depreciation is $120,759,081 and the Non-Legal ARO balance is ($848,941) for a total rate base accumulated depreciation reserve of $119,910,140. Prepared by: Andy Sawyer 5
5. With reference to the 2013 sale by SPS of certain transmission facilities to Sharyland, provide the following: a. The final detailed accounting entries made to record the sale, including but not limited to entries related to gross plant, associated accumulated depreciation reserve, the gross (i.e., before income taxes) and net (i.e., after incomes taxes) gains on the sale of the assets, regulatory liabilities, ; b. With reference to SPS s 2013 FF1, Note p. 450.1 for pp. 204-207, specifically the material related to p. 204 (sic actually 207), l. 58, col. (f), a detailed explanation of the statement: Regulatory liabilities were recorded for jurisdictional gain sharing of $7,154,496 ; c. Support documents showing the calculation of the $7,154,496 in regulatory liabilities; d. A detailed description of the nature of the two Other Regulatory Liabilities shown for the Sharyland Asset Sale in SPS s 2013 FF1 on p. 278.1 and support documents showing the calculation of each; e. A copy of all pertinent Texas and New Mexico commission orders addressing the ratemaking treatment of the any gain on the asset sale to Sharyland, including but not limited to orders in the two cited dockets on p. 278.1; and f. To the extent SPS for retail ratemaking purposes, in either or both Texas and New Mexico, is deferring and amortizing the gain on the asset sale to Sharyland, a detailed description of such ratemaking treatment(s), including but not limited to the amount(s) of the total amortization, the period of the amortization(s) and all other relevant information associated with such treatment(s). a. Please see Exhibit A to this response for the detailed accounting transactions which were filed with the Commission on June 25, 2014. b. Please see Exhibit B to this response for the detailed calculation of how the $7,154,496 regulatory liability was calculated. A full summary of the effects of the Sharyland asset sale are presented in Exhibit A to this response and on Note p. 450.1 for p. 278.1 of SPS s 2013 FERC Form No. 1. The calculation of the pre-tax gain is: Cash proceeds, Less net book value of the assets sold, Less estimated removal costs, Less the net book value of the remaining transmission line segments being retired or written down, Less estimated costs to remove certain autotransformers, Less other costs of the sale transaction. As part of the regulatory approval process for the sale agreement, SPS agreed to share certain proceeds of the gain with Texas and New Mexico retail customers. FERC did 6
not request a portion of the sale be shared with its wholesale customers. Per the terms of the agreement with Texas, SPS is required to share approximately 60 percent of the gain attributable to the Texas jurisdiction with those retail customers subject to a trueup in 2014. At December 31, 2013, the estimated Texas jurisdiction assigned gain was $9,573,072 of which approximately 60 percent or $5,743,843 is to be shared with ratepayers as a regulatory liability. Per the terms of the agreement with New Mexico, SPS is required to share approximately 45 percent of the gain attributable to the New Mexico jurisdiction with those retail customers. At December 31, 2013, the estimated New Mexico jurisdiction assigned gain was $3,123,486 of which approximately 45 percent or $1,410,653 is to be shared with ratepayers as a regulatory liability. c. See the response to subpart (b) above. d. See the response to subpart (b) above. e. Please see Exhibit C to this response for a compilation of copies of the requested orders and recommended decisions. Due to the voluminous nature and file size of Exhibit C, SPS is not including it in the email service. However, Exhibit C will be posted along with the response and the other Exhibits on the websites. f. Pursuant to the Final Order Partially Adopting Recommended Decision in NMPRC Case No. 13-00140-UT, SPS will amortize the $3,123,486 pre-tax gain on the asset sale to Sharyland Distribution & Transmission Services, LLC ( Sharyland ) over a two year period. The gain on sale was treated as a revenue credit in SPS s cost of service in NMPRC Case No. 12-00350-UT, SPS s most recent base rate case with the amortization period beginning April 5, 2014, the date new rates resulting from the case went into effect. Under the Stipulation in PUCT Docket No. 41430, the estimated dollar amount of the net pre-tax gain on sale to be provided to SPS s Texas retail customers was $5,687,752. SPS provided 90% of that estimated amount, or $5,110,877 to its Texas retail customers through bill credits during its February 2014 billing month. After the actual dollar amounts are available to replace the estimated dollars, SPS will file a true-up to refund the difference between the $5,110,887 and the final, actual dollar amount owed to SPS s Texas retail customers. After the true-up occurs, any difference between the balance owed to each rate class as shown in the true-up filing and the amount actually refunded to that rate class will be reflected in SPS s cumulative monthly deferred fuel-cost balances by rate class. Prepared by: Brooke Trammell, Andy Sawyer, Merry Davis 7
6. With reference to SPS s 2013 True-up, Supporting Documentation, p. 18, provide the following with regard to the $66,770 of Account 454 revenues: a. A detailed explanation of the nature of such transmission-related revenues; and b. A detailed explanation as to why such revenues were not treated as revenue credits in the 2013 True-up, Worksheet B. a. 1) American Tower - Lease Renewal for Communications Tower Equipment located at the SPS Coulter Substation $13,899. 2) Estacado Cattle - Lease payment for lease of grass on property owned by SPS in Lubbock County held for a power plant site $36,310. 3) State of Texas, Texas Parks & Wildlife - Space Lease on a communications tower located in Hale County, Texas $149. 4) Cielo Wind Services - Permit payment for a permit to cross an SPS electric transmission line - (Crossing Agreement) $500. 5) ONEOK WESTEX - Payment for a gas line lease on SPS property at the Harrington Generation Plant north of Amarillo $500. 6) Santo Petroleum - Surface Permit to conduct Seismic activity on SPS owned property in Lubbock County, Texas $15,318. These payments sum to $66,677. As shown on Supporting Documentation, p. 18, these payments net of the $48 accounting correction and the $141 State of New Mexico cash deposit equals the $66,770. b. Looking at the payments that make up the various checks and land leases, it appears items 1, 3, and 4 should be revenue credited. The other items are not transmission related and thus are not revenue credited in the transmission formula. The impact of the additional revenue credits is a decrease of $14,548 to the Under Recovery. Prepared by Sean Frederiksen, Murray Chapman, Kevin Lewis 8
7. Provide the amount of SPS s 2013 Post-Retirement Benefits Other Than Pensions ( PBOP ) contributions to an external funded trust. To the extent such contributions are less than the fixed PBOP amount set forth in the transmission formula rate, explain in detail why such under-contribution does not violate the Commission s Post-Employment Benefits Other Than Pensions Statement of Policy issued in Docket No. PL93-1-000. In 1992, the Commission issued a Statement of Policy advising utility companies of its intent to permit the recovery of prudently incurred PBOP costs, provided that the following conditions were met: (1) The company must agree to make cash deposits to an irrevocable external trust fund equal to the annual test period allowance for the cost of such benefits; and (2) the company must maximize the use of income tax deductions for contributions to the trust fund. In 2013, SPS disclosed the following amounts in its annual 10-K report: Net Periodic Postretirement Benefit Cost of $47,000 (page 54); and Change in Fair Value of Plan Assets - Employer Contributions of $134,000 (page 53). SPS takes a tax deduction for its employer contributions up to the deductible limit. Any contributions not deductible in the current year are carried over to subsequent years. The contributions in 2013 were less than the fixed PBOP amount set forth in the transmission formula rate. However, as explained above the Commission s requirements under its Pensions Statement of Policy are not linked to the level of PBOP in the formula rate. Prepared by: Todd Degrugillier, Wes Berger 9
8. Confirm that the Investment Tax Credit value on Worksheet J, l. 66 of the 2013 True-up should be $340,664. Yes, the Investment Tax Credit value on Worksheet J, 1.66 should be $340,664. See 08-2014 Attachment O SPS 2013 Formula Rate True-up Rv1.xls, Worksheet J, TOTI. The impact is an increase to the Under Recovery of $12,431. Prepared by: Murray Chapman 10
9. With reference to Worksheet J of the 2013 True-up and SPS s 2013 FF1, pp. 262-263.1 there are property taxes recorded in 2013 for both 2012 and 2013. The FF1, pp. 262-263.1 is based on property tax payments made in calendar year 2013. Some 2012 property taxes payments were paid in 2013. In Texas most of the 2012 property tax was paid in January 2013. In October 2013 property tax was paid only those Texas jurisdictions that provide a discount if paid in October. SPS chooses the two payment method allowed in New Mexico for property tax. The second half of 2012 property tax was paid in May 2013. The first half of 2013 property tax was paid in December 2013. Oklahoma counties were late in delivering the 2012 property tax bills to taxpayers. As a result the payment due date was changed to January 2013. The 2013 property tax was paid in December 2013. Prepared by: Paul Simon 11
10. Provide SPS s expected PBOP accruals for the years 2014-2018. The table below shows the forecasted SPS total company PBOP accruals for 2014-2018. A negative accrual below represents a reduction to cost (negative expense), while a positive accrual represents an increase to cost (positive expense). 2014 2015 2016 2017 2018 SPS PBOP Total Cost $(151,000) $(86,000) $(22,000) $45,000 $105,000 Prepared by: Todd Degrugillier 12
11. With reference to the 2013 True-up, Worksheet E, provide for each of the following Account 190 items a detailed explanation and supporting documentation showing the determinations of the amounts shown for each: a. Basis Difference CIAC Elec Transmission; b. Basis Difference CIAC Elec General; and c. Federal Only NOL Operating. a. Basis Difference CIAC reflects the Accumulated Deferred Income Taxes (ADIT) booked to FERC Acct. 190 resulting from the book/tax basis difference associated with Contributions in Aid of Construction (CIAC). For book purposes, monies that utilities collect from developers or customers to finance the expansion or improvement of company facilities (i.e., CIAC s) reduce book investment by the amount contributed. For book purposes, CIAC s reduce book basis plant. Per IRS Code Sec. 61, gross income includes monies received from customers or potential customers for the expansion or improvement of company facilities (i.e., CIAC s). For tax purposes, CIAC s increase both taxable income and tax basis plant. Including CIAC s in taxable income require the Company to prepay the current tax associated with CIAC s while at the same time creating an offsetting deferred tax asset booked to FERC Acct. 190 that will be reversed over time as the Company claims tax depreciation on the CIAC. (Please see Exhibit A to this response, which shows the calculation of the 2013 average ADIT balance for FERC Acct. 190 Basis Difference CIAC Electric Transmission of $8,659,202.) Note: An exception exits to exclude those CIAC s from taxable income if the monies received are for the public benefit (not to the benefit of a particular customer). Thus, the Company reviews CIAC s on an annual basis to determine both taxable and non-taxable CIAC s. The ADIT balance in FERC Acct. 190 Basis Difference - CIAC Electric Transmission reflects taxable CIAC s only. b. Please see the above response to 11a for a detailed explanation of the CIAC s. (Please see Exhibit B to this response, which shows the calculation of the 2013 average ADIT balance for FERC Acct. 190 Basis Difference CIAC Electric General of $35,245.) c. The Federal Only NOL Operating is the deferred tax asset related to the operating portion of SPS s federal net operating loss (NOL) carryforward. Specifically, SPS files its federal income tax return as part of the Xcel Energy group. In years when both SPS and consolidated Xcel Energy are in taxable losses, SPS is allocated a portion 13
of the consolidated Xcel Energy NOL carryforward based on SPS s share of loss in each year. The $57,670,896 reported in column C of Worksheet E is the average of SPS s operating NOL carryforwards at December 31, 2012 and December 31, 2013. These carryforwards related to NOLs for 2011 and/or 2013 were as follows: A B NOL Carryforward NOL Carryforward balance at balance at Average = December 31, 2012 December 31, 2013 (A + B) / 2 Tax Year 2011 $163,279,317 $152,531,744 Tax Year 2012 0 0 Tax Year 2013 (estimate) 0 13,736,914 Total Pretax NOL Carryforward $163,279,317 $166,268,658 Tax-Affected at 35% $57,147,761 $58,194,030 $57,670,896 Because the taxable losses for tax years 2011 and 2013 were driven by the additional deductions related to bonus depreciation, the corresponding NOLs were largely accounted for in operating deferred taxes. The Federal Only NOL Operating is allocated based on bonus deprecation by function on Worksheet E, Rate Base Adjustment. However, when preparing this response, it was determined that the December 31, 2013 ending balance of $58,194,030 was allocated rather than the average of the Beginning of Year/End of Year amount of $57,670,896. See 08-2014 Attachment O SPS 2013 Formula Rate True-up Rv1.xls, Worksheet E, Rate Base Adjustment. The impact of this correction is an increase to the Under Recovery of $596. Prepared by: Ryan Merrell, Murray Chapman 14