Before the Minnesota Public Utilities Commission State of Minnesota. Docket No. E002/GR Exhibit (JJD-1) Property Taxes

Transcription

1 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Direct Testimony and Schedules James J. Duevel Before the Minnesota Public Utilities Commission State of Minnesota In the Matter of the Application of Northern States Power Company for Authority to Increase Rates for Electric Service in Minnesota Exhibit (JJD-1) Property Taxes November 4, 2013

2 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED TABLE OF CONTENTS I. Introduction 1 II Property Tax Expense 5 A. Forecast Methodology 5 B. Data Inputs 9 1. Plant 9 2. Net Operating Loss DOR Capitalization Rates DOR Weighting of Cost and Income Indicators of 11 Value 5. Local Tax Rates 12 III Property Tax Expense 15 A. Forecast Methodology 15 B. Refund Proposal 17 IV. Historical Analysis and Drivers 18 V. Conclusion 24 Schedules Statement of Qualifications Schedule NSPM Property Tax Schedule As Ordered and 2014 NSPM Property Tax Comparison Schedule NSPM Property Tax Schedule 4 Potential Update Schedule for 2014 Forecast Schedule 5 Projected 2014 Property Tax Capitalization Rate Calculation Schedule Tax Rate Comparison Schedule Tax Rate Comparison Schedule 8 i Duevel Direct

3 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED 2014 and 2015 NSPM Property Tax Comparison Schedule 9 Historic Property Tax from 2001 Schedule As Ordered and 2013 Current Forecast Comparison Schedule 11 Pre-filed Discovery Appendix A ii Duevel Direct

4 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED I. INTRODUCTION Q. PLEASE STATE YOUR NAME AND OCCUPATION. A. My name is James J. Duevel. I am Managing Director of Tax Services for Xcel Energy Services Inc. Q. PLEASE SUMMARIZE YOUR QUALIFICATIONS AND EXPERIENCE. A. I have over 30 years of corporate tax experience, including serving as tax director for the former Northern States Power Company and subsequently Xcel Energy Services Inc. since January In my current position, I oversee and manage the compliance, accounting, and planning responsibilities associated with Xcel Energy s income, property, and sales/use taxes. My resume is provided as Exhibit (JJD-1), Schedule 1. Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? A. I provide Northern States Power Company s (NSPM or the Company) 2014 property tax expense forecast. I also provide the 2015 property tax expense forecast that supports the Company s request to recover property taxes as part of its multi-year rate plan. Specifically, I discuss the methodology we use to forecast property taxes and the inputs we used to develop the 2014 and 2015 forecasts. I also provide a historical analysis of our property taxes. Q. WHAT IS THE COMPANY S FORECASTED 2014 PROPERTY TAX EXPENSE? A. Our 2014 electric and natural gas property taxes are forecasted to be $206.0 million on an NSPM total Company basis. The components of this forecast are shown in Table 1 below. Company witness Ms. Anne E. Heuer provides support for the 2014 Minnesota electric jurisdiction test year property tax 1 Duevel Direct

5 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED expense of approximately $149.2 million. Detailed calculations of the total Company 2014 property tax expense are provided in Exhibit (JJD-1), Schedule 2. Table 1 Forecasted 2014 Total Company Property Tax Expense Component Forecasted 2014 Expense ($ Million) Minnesota Taxing Jurisdiction $199.7 North Dakota Taxing Jurisdiction $3.0 South Dakota Taxing Jurisdiction $3.3 Total Company $206.0 Since Minnesota taxes account for almost 97 percent of the total Company property taxes, the discussion in my testimony focuses on the Minnesota taxing jurisdiction. In addition, the numbers I provide are for both electric and gas, consistent with how we estimate property taxes for financial statement purposes. Q. HOW DOES THE FORECASTED 2014 TOTAL COMPANY PROPERTY TAX EXPENSE COMPARE WITH THE 2013 TOTAL COMPANY PROPERTY TAXES INCLUDED IN THE COMMISSION S ORDER IN THE 2013 RATE CASE? A. The forecasted 2014 total Company property tax expense of $206.0 million is $16.5 million higher than the $189.5 million total Company 2013 property tax expense included in the Commission s Order in the Company s last electric rate case (Docket No. E002/GR ) (the 2013 rate case). As shown in Exhibit (JJD-1), Schedule 3, the Minnesota taxing jurisdiction accounts for virtually all of the increase between 2013 and 2014 property taxes. 2 Duevel Direct

6 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. DID THE COMPANY LEARN OF ADDITIONAL INFORMATION AFTER THE EVIDENTIARY HEARING IN THE 2013 RATE CASE REGARDING ITS 2013 PROPERTY TAX EXPENSE? A. Yes. In late June, 2013, the Minnesota Department of Revenue (DOR) finalized its computation of the Company s 2013 Apportionable Market Value. As discussed in more detail below, the final DOR valuation was lower than the valuation used to calculate the property tax expense in the 2013 rate case. Based on the lower DOR valuation and other factors discussed later in my testimony, we now forecast our 2013 total Company property tax expense for the state of Minnesota taxing jurisdiction to be $171.7 million. After including expected property taxes for the North Dakota and South Dakota taxing jurisdictions, our current forecast of 2013 total Company property taxes is $178.0 million. Q. DID THE COMPANY ADVOCATE FOR A LOWER DOR VALUATION? A. Yes. We have discussions and meet with the DOR each year to advance our positions relative to the DOR s valuation of our property. These activities are part of our ongoing efforts to advocate for a more reasonable valuation. In addition to meetings and discussions with the DOR regarding our annual valuations, our advocacy efforts have also included testifying before the Minnesota legislature regarding tax policy, litigating tax matters when appropriate, and participating in DOR administrative proceedings. Q. IS THE COMPANY SEEKING TO RECOVER PROPERTY TAXES AS PART OF ITS MULTI-YEAR RATE PLAN PROPOSAL? A. Yes. Our 2015 total Company property taxes are forecasted to be $221.4 million. The components of this forecast are shown in Table 2 below. Ms. 3 Duevel Direct

7 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Heuer provides support for the 2015 Minnesota electric jurisdiction test year property tax expense of approximately $156.5 million, and Company witness Mr. Christopher B. Clark explains why these costs are appropriately included in the multi-year rate plan. Detailed calculations of the total Company 2015 property tax expense are provided in Exhibit (JJD-1), Schedule 4. Table 2 Forecasted 2015 Total Company Property Tax Expense Component Forecasted 2014 Expense ($ Million) Minnesota Taxing Jurisdiction $214.9 North Dakota Taxing Jurisdiction $3.2 South Dakota Taxing Jurisdiction $3.3 Total Company $221.4 Q. IS THE COMPANY PROPOSING TO REFUND ANY OVER-RECOVERY OF 2015 PROPERTY TAXES AS PART OF ITS MULTI-YEAR RATE PLAN? A. Yes. Mr. Clark explains that the Company is proposing to treat its request for recovery of 2015 property taxes similar to its request to recover certain 2015 capital projects. This includes a proposal to refund to customers the difference between the final 2015 property tax expense for the Minnesota electric jurisdiction approved as part of this case and the Company s 2015 property tax expense for the Minnesota electric jurisdiction based on property tax expense recorded as of December 31, Q. HOW DOES THE 2015 FORECASTED TOTAL COMPANY PROPERTY TAX EXPENSE COMPARE WITH THE 2014 FORECASTED TOTAL COMPANY PROPERTY TAX EXPENSE? A. The 2015 forecasted total Company property tax expense of $221.4 million is $15.4 million higher than our forecasted 2014 total Company property tax 4 Duevel Direct

8 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED expense ($7.3 million for the Minnesota electric jurisdiction). As will be discussed in detail below, the entire forecasted increase is attributable to the Company s 2014 investments. Q. HOW IS YOUR TESTIMONY ORGANIZED? A. I present the remainder of my testimony in the following sections: Section II: 2014 Property Tax Expense; Section III: 2015 Property Tax Expense; Section IV: Historical Analysis and Drivers; and Section V: Conclusion. Q. DO YOU PROVIDE ANY ADDITIONAL INFORMATION RELATED TO PROPERTY TAXES? A. Yes. To prepare testimony for this case, we reviewed the discovery related to property taxes from the 2013 rate case. We incorporated some of this discovery into my testimony through expanded discussion and schedules. We are also providing additional information in the form of pre-filed discovery, which can be found in Appendix A to my testimony. Appendix A also provides an index of each information request from the 2013 rate case that I have incorporated into my testimony, schedules, or Appendix A. II PROPERTY TAX EXPENSE A. Forecast Methodology 5 Duevel Direct

9 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. PLEASE DESCRIBE HOW UTILITY PROPERTY IS VALUED AND TAXED IN MINNESOTA. A. Utility property taxes are based on the value of the Company s real and personal property, the class rate, and local tax rates. Most of our property is valued by the DOR as a unit, with land and certain buildings valued by local taxing jurisdictions. Our DOR unit value is apportioned to each local taxing jurisdiction. Local jurisdictions then combine the value of our locally assessed property with their apportioned share of the DOR value to set our overall market value. Our overall market value is multiplied by the applicable class rate to determine tax capacity, which is then multiplied by the local tax rate to arrive at our property tax liability. Q. GIVEN THIS PROCESS, HOW DOES THE COMPANY FORECAST ITS PROPERTY TAXES? A. We forecast property taxes using a fact-based, conservative methodology that incorporates a mix of historical (actual) and projected information. We only use projections when there is enough information to support a reasonable forecast. We also update our property tax forecasts to incorporate actual information as it becomes available throughout a given year. Q. WHAT DATA INPUTS DID THE COMPANY USE TO DEVELOP ITS 2014 PROPERTY TAX FORECAST? A. Our current 2014 property tax forecast is based on the data shown in Table 3 below. 6 Duevel Direct

10 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED 1 2 Table 3 Inputs to 2014 Property Tax Forecast Category Variable Data Inputs Investments DOR Valuation Inputs Effective Tax Rate Plant Net Operating Income DOR Capitalization Rates DOR Weighting of Indicators of Value Local Tax Rates Projected December 31, 2013 Plant Balances Actual 2011 and 2012, Projected 2013 Net Operating Income Projected 2014 DOR Capitalization Rates Default Weighting from Minn. R , subp Effective Rate Q. DID THE COMPANY USE SIMILAR VARIABLES IN ITS 2013 RATE CASE APPLICATION? A. Yes. We used the same variables in the 2013 rate case application and the data inputs used for each variable are similar to those used in the 2013 rate case. Q. ARE THESE DATA INPUTS THE BEST INFORMATION AVAILABLE AT THIS TIME FOR FORECASTING THE 2014 PROPERTY TAX EXPENSE? A. Yes. The information in Table 3 represents the best forecast information available at this time and results in a reasonable and sound forecast of the 2014 property tax expense. Q. WILL THE COMPANY UPDATE ITS INTERNAL 2014 PROPERTY TAX FORECAST AS THE YEAR DEVELOPS? A. Yes. As shown in Figure 1 below, we will receive information regarding our 2014 property taxes at several points throughout We use this information to update our internal forecasts throughout the year. 7 Duevel Direct

11 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED 1 2 Figure Property Tax Timeline Q. COULD THE COMPANY INCORPORATE THIS INFORMATION INTO ITS FORECASTS FOR THIS RATE CASE? A. Yes. We believe our current forecast is both reasonable and accurate. However, we acknowledge that incorporating actual data could improve the accuracy of our forecast of the 2014 property tax expense. If parties agree and the procedural schedules allows, we would be willing to incorporate actual 2014 data into our forecasts as the case develops. Q. HAS THE COMPANY INCORPORATED ACTUAL DATA INTO ITS FORECASTS IN PAST CASES? A. For some inputs, yes. In the 2013 rate case, the Company updated the DOR capitalization rate and local tax rate variables based on actual data. These updates were not opposed and were ultimately accepted by both the Administrative Law Judge and the Commission in that case. 8 Duevel Direct

12 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. WHAT VARIABLES COULD BE UPDATED WITH ACTUAL DATA IN THIS CASE? A. Depending on timing and the agreement of other parties, we may be able to update each key variable in the property tax forecast with actual information. Exhibit (JJD-1), Schedule 5 summarizes the sources and potential timing for these updates. Q. WOULD ANY OF THESE UPDATES CONSIST OF NEW PROPOSALS OR NEW COMPONENTS IN THE PROPERTY TAX CALCULATION? A. No. The updates would not include any new proposals or new components in the property tax calculation. Q. ARE THERE ADVANTAGES TO UPDATING FOR ACTUAL 2014 INFORMATION? A. Yes. While these updates can result in either increases or decreases, updating for actual 2014 information would result in a more accurate forecast. With the exception of tax rates, key inputs to the 2014 property tax forecast could be updated based on actual 2014-vintage information, depending on the procedural schedule. B. Data Inputs 1. Plant Q. WHAT PLANT DATA DID THE COMPANY USE IN ITS 2014 PROPERTY TAX FORECAST? A. Our current 2014 property tax forecast is based upon our current projection of December 31, 2013 plant balances. The Company s final 2014 property tax expense will be based on the final December 31, 2013 plant balances. 9 Duevel Direct

13 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. PLEASE DISCUSS THE UPDATED PLANT DATA THAT WILL BECOME AVAILABLE IN A. The Company will submit final December 31, 2013 plant data to the DOR in April The DOR then uses this data to calculate the Cost Indicator of Value, as described in Minn. R Net Operating Income Q. WHAT NET OPERATING INCOME DATA DID THE COMPANY USE IN ITS 2014 PROPERTY TAX FORECAST? A. Our current 2014 property tax forecast is based upon actual 2011 and 2012 net operating income and our current projection of 2013 net operating income. The Company s final 2014 property tax expense will be based upon actual 2011, 2012, and 2013 net operating income. Q. PLEASE DISCUSS THE UPDATED NET OPERATING INCOME DATA THAT WILL BECOME AVAILABLE IN A. The Company will submit actual, 2013 net operating income data to the DOR in April The DOR then uses this data to calculate the Income Indicator of Value, as described in Minn. R DOR Capitalization Rates Q. WHAT DOR CAPITALIZATION RATES DID THE COMPANY USE IN ITS 2014 PROPERTY TAX FORECAST? A. Our current 2014 property tax forecast is based on our projection of 2014 DOR capitalization rates. 1 We developed our projection by updating the DOR s actual 2013 capitalization rate calculations (which are based on The 2014 DOR s final capitalization rates will be based on a full year of 2013 data. 10 Duevel Direct

14 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED data) with six months of 2013 market interest rate information. This is the same capitalization rate projection methodology used in our last rate case. Based on data from the first six months of 2013, there is no material difference between the actual 2013 capitalization rates and the current projected 2014 capitalization rates. Exhibit (JJD-1), Schedule 6 shows our current projection of the 2014 DOR capitalization rates. Q. PLEASE DISCUSS THE UPDATED DOR CAPITALIZATION RATES THAT WILL BECOME AVAILABLE IN A. We expect to receive the 2014 DOR capitalization rates in April I note that we incorporated updated DOR capitalization rate data into our forecast as part of the 2013 rate case. Parties agreed the update was appropriate and both the Administrative Law Judge and the Commission incorporated the information into their respective decisions. 4. DOR Weighting of Cost and Income Indicators of Value Q. WHAT WEIGHTING OF THE COST AND INCOME INDICATORS OF VALUE DID THE COMPANY USE IN ITS 2014 PROPERTY TAX FORECAST? A. Our 2014 property tax forecast is based upon equal weightings of the Cost and Income Indicators of Value. This is consistent with the DOR s default weightings. Q. ARE THE WEIGHTINGS IN THE 2014 FORECAST DIFFERENT FROM THOSE USED IN THE COMPANY S CURRENT FORECAST OF 2013 PROPERTY TAXES? A. Yes. As discussed in more detail below, our current 2013 property tax forecast reflects the actual weightings of the Cost and Income Indicators of Value used by the DOR in our 2013 valuation. 11 Duevel Direct

15 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. IS IT APPROPRIATE TO USE THE 2013 FINAL WEIGHTINGS IN THE 2014 FORECAST? A. No. Minn. R is clear that the DOR must begin each year s valuation process using an equal weighting of the Cost and Income Indicators of Value. The rules are also clear that any deviation from the default weightings is fact specific and within the DOR s discretion. Using the default weightings is the most reasonable forecasting approach because any adjustments are dependent on the DOR s discretion and the facts of each annual valuation. Q. PLEASE DISCUSS THE DOR S ACTUAL 2014 WEIGHTINGS OF VALUE THAT WILL BECOME AVAILABLE IN A. The actual 2014 weightings will be available when we receive the DOR s Apportionable Market Value at the end of June Q. HAS THE COMPANY ESTIMATED THE IMPACT A DEVIATION FROM THE DEFAULT WEIGHTINGS WOULD HAVE ON THE 2014 EXPENSE? A. Yes. All else being equal, the 2014 total Company property tax expense for the Minnesota taxing jurisdiction decreases by approximately $3.5 million for every five percentage point increase in the weighting applied to the Income Indicator of Value. 5. Local Tax Rates Q. WHAT LOCAL TAX RATES DID THE COMPANY USE IN ITS 2014 PROPERTY TAX FORECAST? 12 Duevel Direct

16 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED A. Our current forecast of the 2014 property tax expense is based upon 2012 local tax rates. The local tax rates are mathematically converted into an effective tax rate. Q. WHY IS IT APPROPRIATE TO USE A 2012 EFFECTIVE TAX RATE TO DEVELOP THE 2014 TEST YEAR FORECAST? A. The 2012 effective tax rate is the most accurate tax rate data available at this time. Specifically, the effective tax rate used in the 2014 forecast is based upon 2012 Truth in Taxation Notices (TnTs) received in November and December of 2012 and 2012 property tax statements received in the Spring of Exhibit (JJD-1), Schedule 7 contains a detailed calculation of the 2012 Effective Tax Rate based on these two sources of data. The two sources produce relatively similar effective rates (3.5 percent versus 3.44 percent). Given recent upward trend in tax rates and the fact using historical data represents two years of lag in the tax rate variable, we believe using a 3.5 percent effective rate is appropriate at this time. Q. PLEASE DISCUSS THE 2013 TAX RATE DATA THAT WILL BECOME AVAILABLE IN A. As shown in Figure 1, above, we will receive the 2013 TnTs at the end of 2013 and the final 2013 property tax statements in the Spring of I note that we incorporated updated tax rate data into our forecast as part of the 2013 rate case. 13 Duevel Direct

17 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. IF PARTIES AGREED TO THIS UPDATE, HOW WOULD YOU CALCULATE THE 2013 EFFECTIVE TAX RATE DATA? A. If accepted by parties, we would calculate the effective tax rate based upon the 2013 TnTs, which is the same information we will use to close our 2013 books. In addition, we could examine the final 2013 property tax statements to assess whether there is a material difference between the total liability computed based on the effective rate derived from the TnTs and the total liability based on the property tax statements. If there is a material difference between the two, we could then incorporate the effective tax rate derived from the 2013 property tax statements into a revised forecast in this case. Q. ARE THE RATES INDICATED IN THE TNTS AND THE FINAL TAX STATEMENTS GENERALLY CONSISTENT? A. Yes. Exhibit (JJD-1), Schedule 8 compares the difference between effective rates derived from the TnTs and property tax statements for 2010, 2011, and Q. IN THE 2013 RATE CASE, THE COMPANY PROPOSED AN ADDITIONAL ADJUSTMENT TO 2013 TEST YEAR PROPERTY TAXES RELATED TO 2013 LOCAL TAX RATES. DO YOU ENVISION INCLUDING A SIMILAR ADJUSTMENT TO THE 2014 PROPERTY TAX FORECAST IN THIS CASE? A. No. Both the Commission and the Administrative Law Judge rejected a similar proposal in the 2013 rate case. 14 Duevel Direct

18 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED A. Forecast Methodology III PROPERTY TAX EXPENSE Q. DID THE COMPANY DEVELOP ITS 2015 PROPERTY TAX EXPENSE FORECAST USING THE SAME METHODOLOGY DISCUSSED ABOVE? A. Yes. The forecasts were developed using the same methodology. Additionally, as shown in the table below, the forecasts were developed using similar data inputs, with the only difference occurring in the plant and investment variables. Category Investments DOR Valuation Inputs Effective Tax Rate Table 4 Comparison of Inputs for 2014 and 2015 Property Tax Forecast Variable Plant Net Operating Income DOR Capitalization Rates DOR Weighting of Indicators of Value Data Inputs: 2014 Forecast Projected December 31, 2013 Plant Balances Actual 2011 and 2012, Projected 2013 Projected 2014 DOR Capitalization Rates Default Weighting from Minn. R , subp. 5 Data Inputs: 2015 Forecast Projected December 31, 2014 Plant Balances Actual 2012, Projected 2013 and 2014 Projected 2014 DOR Capitalization Rates Default Weighting from Minn. R , subp. 5 Local Tax Rates 2012 Effective Rate 2012 Effective Rate Q. ARE THESE DATA INPUTS THE BEST INFORMATION AVAILABLE AT THIS TIME FOR FORECASTING THE 2015 PROPERTY TAX EXPENSE? A. Yes. The information in Table 4 represents the best forecast information available at this time and results in a reasonable and sound forecast of the 2015 property tax expense. 15 Duevel Direct

19 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. PLEASE EXPLAIN WHY THE 2015 DATA INPUTS LISTED IN TABLE 4 FOR THE PLANT AND NET OPERATING INCOME VARIABLES RESULT IN A REASONABLE 2015 FORECAST. A. The Company s 2015 property tax expense will be based upon December 31, 2014 plant balances and 2012, 2013, and 2014 net operating income. Consistent with our overall methodology, our 2015 forecast is based on projected December 31, 2014 plant balances and projected 2013 and 2014 net income. These projections are appropriate because at this time we have enough information about these variables to develop a reasonable projection. Q. PLEASE EXPLAIN WHY THE 2015 DATA INPUTS LISTED IN TABLE 4 FOR THE DOR CAPITALIZATION RATE, DOR WEIGHTINGS, AND LOCAL TAX RATES VARIABLES RESULT IN A REASONABLE 2015 FORECAST. A. As discussed above, we base our forecasts on actual data and only incorporate projections when there is enough information to support a reasonable estimate. Currently, there is not enough data to support a change in the DOR capitalization rate, DOR weightings, or local tax rate variables between the 2014 and 2015 forecasts. Therefore, the data inputs listed in Table 4 represent the best information available at this time. Q. WOULD THE COMPANY BE WILLING TO UPDATE ITS 2015 PROPERTY TAX FORECAST IN ORDER TO INCORPORATE ACTUAL INFORMATION THAT WILL BECOME AVAILABLE AS THIS CASE PROCEEDS? A. Yes. We believe our current forecast of the 2015 property tax expense is both reasonable and accurate. We also acknowledge the forecast can be updated and improved as more actual data becomes available. If parties agree and the 16 Duevel Direct

20 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED procedural schedules allows, we would be willing to incorporate actual 2014 data into our forecasts as the case develops. Q. WHAT VARIABLES COULD BE UPDATED WITH ACTUAL DATA IN THIS CASE? A. Depending on timing and the agreement of other parties, we may be able to update several of the key variables in the 2015 property tax forecast. Exhibit (JJD-1), Schedule 5 summarizes the sources and potential timing for these updates. Q. WOULD IT BE APPROPRIATE TO UPDATE THE WEIGHTINGS IN THE 2015 PROPERTY TAX FORECAST BASED UPON THE DOR S FINAL 2014 WEIGHTINGS? A. No. As discussed in Section II.B.4. above, the default rule is to weigh the Cost Indicator of Value and the Income Indicator of Value equally. Any deviation from the default weighting is fact specific. Facts that influence the DOR s actual 2014 weightings do not control the actual 2015 weightings. Using the default weightings is the most reasonable approach because the weightings are dependent on the DOR s discretion and the facts of each annual valuation. B. Refund Proposal Q. PLEASE DISCUSS THE COMPANY S PROPERTY TAX REFUND PROPOSAL. A. The Commission has directed in its multi-year rate plan Order that any revenues collected that are associated with cancelled or postponed multi-year rate plan projects must be refunded to customers. We would propose to include a similar refund mechanism for 2015 property taxes. Specifically, we propose to refund to customers the difference between the final 2015 property tax expense for the Minnesota electric jurisdiction approved as part 17 Duevel Direct

21 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED of this case and the Company s 2015 property tax expense for the Minnesota electric jurisdiction based on property tax expense recorded on its books as of December 31, IV. HISTORICAL ANALYSIS AND DRIVERS Q. WHAT IS DRIVING THE INCREASE IN 2014 MINNESOTA PROPERTY TAXES FROM THE AMOUNT INCLUDED IN THE 2013 RATE CASE? A. As described above, the Company s property tax expense is a function of three primary variables: investments; DOR valuation inputs; and local property tax rates. The increase in our forecasted 2014 Minnesota taxing jurisdiction property tax expense from the amount included in the 2013 rate case is driven by the investment variable. For example, our 2014 property tax forecast includes over $1 billion in additional taxable property and over $23 million in additional net operating income. Exhibit (JJD-1), Schedule 3 compares our 2014 forecast to the 2013 property tax expense included in the Commission s Order in the 2013 rate case. Q. WHAT IS DRIVING THE INCREASE IN 2015 MINNESOTA PROPERTY TAXES? A. Like the change between 2013 and 2014, the increase in 2015 property taxes from 2014 levels is driven by the investment variable. Exhibit (JJD-1), Schedule 9 shows how our additional investments impact the 2015 forecast. 18 Duevel Direct

22 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. ARE THE INCREASES IN 2014 AND 2015 FORECASTED MINNESOTA PROPERTY TAXES CONSISTENT WITH PAST INCREASES IN MINNESOTA PROPERTY TAXES? A. Yes. As shown in the figure below, the Company s property taxes have increased significantly each year since Figure 2 NSPM Minnesota Taxing Jurisdiction Property Taxes Exhibit (JJD-1), Schedule 10 shows the Company s property taxes since Q. HOW DOES THE COMPANY S CURRENT 2013 TOTAL COMPANY PROPERTY TAX ESTIMATE FOR THE MINNESOTA TAXING JURISDICTION COMPARE TO THE AMOUNT OF MINNESOTA TAXING JURISDICTION PROPERTY TAXES INCLUDED IN THE COMMISSION S ORDER IN THE 2013 RATE CASE? 19 Duevel Direct

23 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED A. Our current estimate of 2013 total Company property taxes for the Minnesota taxing jurisdiction is approximately $11.7 million lower than the amount included in the Commission s Order. Exhibit (JJD-1), Schedule 11 compares our current estimate of 2013 total Company property taxes for the Minnesota taxing jurisdiction to the amount of 2013 total Company property taxes for the Minnesota taxing jurisdiction included in the Commission s Order in the 2013 rate case. Q. WHAT CONTRIBUTED TO THE DIFFERENCE BETWEEN THE AMOUNT OF TOTAL COMPANY PROPERTY TAXES FOR THE MINNESOTA TAXING JURISDICTION INCLUDED IN THE COMMISSION S ORDER AND THE COMPANY S CURRENT 2013 TOTAL COMPANY PROPERTY TAX ESTIMATE FOR THE MINNESOTA TAXING JURISDICTION? A. After the evidentiary hearing in the 2013 rate case we received the DOR s Apportionable Market Value which reflected: 1) the final 2013 DOR weightings for the cost and income indicators of value; and 2) the updated amounts of taxable CWIP and tax-exempt pollution control equipment included in our 2013 Utility Market Value Return filed with the DOR. In addition, our updated forecast includes the adjustment to account for anticipated increases in 2013 local tax rates compared to the amount included in our 2013 rate case. Q. HOW DO THE FINAL DOR WEIGHTINGS AND THE UPDATED AMOUNTS OF CWIP AND POLLUTION CONTROL EQUIPMENT AFFECT THE 2013 PROPERTY TAX FORECAST? A. The DOR incorporates its final weightings of the cost and income indicators of value and our updated CWIP and pollution control equipment values into 20 Duevel Direct

24 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED its final calculation of the Company s Apportionable Market Value. The DOR issued our 2013 Apportionable Market Value in late June The final DOR value was lower than the value used to forecast property taxes in the 2013 rate case, resulting in a lower forecast of 2013 property taxes for the Minnesota taxing jurisdiction. Q. WHY DID THE FINAL DOR WEIGHTINGS FOR 2013 CHANGE FROM THE DEFAULT WEIGHTINGS INCLUDED IN MINN. R SUBP. 5? A. The DOR is authorized to alter the default weightings. 2 We met with the DOR and advocated for increased weighting of the Income Indicator of Value. For 2013, the DOR adjusted the Company s weightings of the Cost Indicator of Value and the Income Indicator of Value to be 35 percent and 65 percent, respectively. This was a significant deviation from the default weightings, and, as shown in Table 5, below, a significant deviation from past practice. Table 5 Historical DOR Weightings of the Cost and Income Indicators of Value Year Electric Gas Cost Indicator Income Indicator Cost Indicator Income Indicator % 55% 45% 55% % 55% 50% 50% % 65% 50% 50% 2 Minn. R , subp. 4a, part B. 21 Duevel Direct

25 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. WHAT IS THE IMPACT OF THIS CHANGE? A. The DOR s adjustment to the relative weightings of the Cost and Income Indicators of Value lowers forecasted 2013 total Company property taxes for the Minnesota taxing jurisdiction by $12.8 million. Q. DOES THE COMPANY EXPECT SIMILAR WEIGHTINGS FOR 2014? A. At this time, we are unsure what the final 2014 weightings will be. As discussed above, we build our forecasts using the DOR s default position, and the 2013 weightings were a significant deviation from past practice. Q. IS THERE A WAY TO ENSURE CUSTOMERS SHARE IN ANY ADVANTAGEOUS CHANGES IN THE 2014 WEIGHTINGS? A. Yes. We are open to updating our forecasts during this case to reflect the DOR s actual 2014 weightings. In this way, customers could potentially benefit from our ongoing advocacy with the DOR. Q. PLEASE DISCUSS THE UPDATED AMOUNTS OF CWIP AND POLLUTION CONTROL EQUIPMENT INCLUDED IN THE DOR S CALCULATION OF 2013 APPORTIONABLE MARKET VALUE. A. As part of our annual obligation to provide the DOR with plant information, we filed our 2013 Utility Market Value Return in April The filing included updated calculations of December 31, 2012 taxable CWIP and taxexempt pollution control equipment balances. The update showed that there was less taxable CWIP and more tax-exempt pollution control equipment as of December 31, 2012 than was originally estimated in the 2013 rate case. These changes lowered forecasted 2013 total Company property taxes for the Minnesota taxing jurisdiction by $3.5 million. 22 Duevel Direct

26 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED Q. HOW DOES THE ANTICIPATED INCREASE IN 2013 LOCAL TAX RATES AFFECT COMPANY S CURRENT ESTIMATE OF 2013 PROPERTY TAXES? A. Incorporating an anticipated increase in 2013 property tax rates increases 2013 total Company property taxes for the Minnesota taxing jurisdiction by $4.6 million. Q. PLEASE COMPARE THE COMPANY S CURRENT ESTIMATE OF TOTAL COMPANY PROPERTY TAXES FOR THE MINNESOTA TAXING JURISDICTION TO 2012 ACTUALS AND THE AMOUNT OF PROPERTY TAXES FOR THE MINNESOTA TAXING JURISDICTION INCLUDED IN THE COMPANY S 2013 RATE CASE. A. Table 6 below compares the Company s current estimate of 2013 total Company property taxes for the Minnesota taxing jurisdiction to the 2013 property tax expense for the Minnesota taxing jurisdiction included in the Commission s Order in the 2013 rate case and the Company s actual 2012 property taxes for the Minnesota taxing jurisdiction. Table 6 Property Tax Comparison for the Minnesota Taxing Jurisdiction ($ Millions, Total Company) 2012 Actual 2013 Expense in 2013 Rate Case Current 2013 Forecast $162.0 $183.4 $171.7 Q. WHAT IS YOUR OVERALL CONCLUSION REGARDING THE DRIVERS OF THE 2014 AND 2015 PROPERTY TAX EXPENSE? A. Figure 2 above shows that the Company s property taxes have increased significantly each year since As a result of the Company s ongoing system investments, this trend continues into 2014 and Duevel Direct

27 PUBLIC DOCUMENT TRADE SECRET DATA EXCISED V. CONCLUSION Q. PLEASE SUMMARIZE YOUR TESTIMONY. A. The forecasted 2014 total Company property tax expense is $206.0 million, which is approximately a $16.5 million increase from the 2013 total Company property tax expense in the 2013 rate case. This increase is the result of our ongoing system investments and represents a continuation of recent increases in the Company s property taxes. Our forecasted 2015 total Company property tax expense is $221.4 million, which is a $15.4 million increase from our 2014 forecast. The increase in 2015 property taxes is due to additional 2014 investments. We also propose a refund mechanism for our 2015 property taxes as part of the Company s overall multi-year rate plan. Our 2014 and 2015 forecasts are reasonable and accurate and based on the most current information available. We recognize these forecasts could be updated based on additional information that will become available as this case proceeds. If parties agree it would be appropriate, we are open to presenting revised forecasts to incorporate the additional information that becomes available. This could lead to more accurate forecasts being included in rates, and thus a reasonable outcome for both customers and the Company. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes, it does. 24 Duevel Direct

28 Northern States Power Company Statement of Qualifications James J. Duevel Exhibit (JJD-1), Schedule 1 Page 1 of 1 Current Responsibilities Statement of Qualifications James J. Duevel As Managing Tax Director I oversee and manage the compliance, accounting, and planning responsibilities associated with Xcel Energy s income, property, and sales/use taxes. Experience 1992 Present Xcel Energy Inc./NSP Managing Director/Director, Tax Services Diversified Energies, Inc. Director, Corporate Taxes Touche Ross & Co. Various (up to Senior Tax Manager) Arthur Andersen & Co. Tax Staff, Senior Tax Staff Education 1984 Master of Business Taxation University of Minnesota 1979 Bachelor of Science Accounting University of Minnesota Certifications Certified Public Accountant Licensed to Practice in the State of Minnesota Professional Associations Edison Electric Institute Taxation Committee Tax Executives Institute American Institute of Certified Public Accountants Minnesota Society of Certified Public Accountants

29 Northern States Power Company Total Company Property Taxes Exhibit (JJD-1), Schedule 2 Page 1 of FTY Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31/13 Forecast 14,138,278,741 1,145,491,394 CWIP, 12/31/13 Forecast 1,034,395,612 16,703,381 Depreciation, 12/31/13 Forecast (5,728,453,987) (554,330,691) Cost Indicator of Value A $9,444,220,366 $607,864,084 Income Indicator 2011 NOI x 25% 116,728,618 10,353, NOI x 35% 161,077,414 10,999, Estimated NOI x 40% 192,440,800 12,938,800 NOI to Capitalize $470,246,832 $34,292,593 Capitalization Rate 7.50% 6.90% Income Indicator of Value B $6,269,957,759 $496,994,096 Apply Weightings 50/50 50/50 Cost Indicator $4,722,110,183 $303,932,042 Income Indicator $3,134,978,880 $248,497,048 Total System Unit Value C $7,857,089,063 $552,429,090 ALLOCATION OF SYSTEM VALUE MN Plant in Service 14,327,178,570 1,061,615,618 System Plant in Service 15,172,674,353 1,162,194,775 Plant Ratio x 90%-Elec / x 75%-Gas % % MN Gross Revenue 3,502,566, ,365,350 System Gross Revenue 3,859,467, ,544,697 Revenue Ratio x 10%-Elec / x 25%-Gas % % MN Allocated Value Percentage % % MN Allocated Value D $7,390,379,544 $501,193,060 Depreciable Plant Deductions 2,101,779,707 51,490,398 Land 124,159,218 3,027,835 CWIP 775,056,840 5,922,602 Other - Held for Future Use 0 0 Subtotal 3,000,995,765 60,440,835 Ratio - System Unit Value / Cost Indicator 83.19% 90.88% DEDUCTIONS TO MN ALLOCATED VALUE E $2,496,528,377 $54,928,631 Apportionable Market Value $4,893,851,168 $446,264,429 Effective Tax Rate 3.5% 3.5% FORECASTED PROPERTY TAX - Elec & Gas $171,284,791 $15,619,255 Rounded $171,300,000 $15,600,000 Total Electric & Gas $186,900,000 Locally Assessed $11,600,000 Wind Production $1,200,000 TOTAL MINNESOTA FORECASTED PROPERTY TAX $199,700,000 North Dakota & South Dakota Property Tax $6,300,000 TOTAL NSPM FORECASTED PROPERTY TAX $206,000,000

30 Northern States Power Company Support for the Calculation of Minnesota Apportionable Market Value Exhibit (JJD-1), Schedule 2 Page 2 of 3 A Minn. R , subp. 3 describes in part the cost indicator of value as: The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent.

31 Northern States Power Company Support for the Calculation of Minnesota Apportionable Market Value Exhibit (JJD-1), Schedule 2 Page 3 of 3 E Minn. R , subp. 1, explains the process for adjusting the valuation performed under Rule : After the Minnesota portion of the unit value of the utility company, except for electric cooperatives, is determined, any property which is non-formula-assessed or which is exempt from ad valorem tax, is deducted from the Minnesota portion of the unit value. Only that qualifying property located within the state of Minnesota may be excluded. Minn. R , subp. 2, describes the types of property excluded from the valuation performed under Rule : The following properties are valued by the local or county assessor and, therefore, the formula provided herein for the valuation of utility property is not applicable to such property: A. land; B. nonoperating property; and C. rights-of-way Minn. R , subp. 3, further explains the calculation of deduction to Minnesota value: The Minnesota portion of the unit value is reduced by the value included in the unit value of the company for land, rights-ofway, nonoperating property, and exempt property. This amount is calculated by determining the ratio of the unit value computed in part , subpart 5, to the cost less depreciation allowed in part , subpart 3. This ratio is multiplied by the cost less depreciation of the property to be deducted.

32 Northern States Power Company Total Company Property Taxes Exhibit (JJD-1), Schedule 3 Page 1 of FTY As Ordered 2014 FTY 2013 vs Electric Gas Electric Gas Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31/PY 12,904,361,703 1,125,208,603 14,138,278,741 1,145,491,394 1,233,917,038 20,282,791 CWIP, 12/31/PY 1,222,221,843 4,529,075 1,034,395,612 16,703,381 (187,826,231) 12,174,306 Depreciation, 12/31/PY (5,679,128,254) (541,740,349) (5,728,453,987) (554,330,691) (49,325,734) (12,590,342) Cost Indicator of Value A $8,447,455,292 $587,997,329 $9,444,220,366 $607,864, ,765,073 19,866,755 Income Indicator Year 1 NOI x 25% 97,810,799 10,066, ,728,618 10,353,986 18,917, ,224 Year 2 NOI x 35% 163,420,066 14,495, ,077,414 10,999,807 (2,342,652) (3,495,774) Year 3 NOI x 40% 179,489,200 15,820, ,440,800 12,938,800 12,951,600 (2,881,200) NOI to Capitalize $440,720,065 $40,382,342 $470,246,832 $34,292,593 29,526,767 (6,089,750) Capitalization Rate 7.50% 6.90% 7.50% 6.90% 0 0 Income Indicator of Value B $5,876,267,531 $585,251,336 $6,269,957,759 $496,994, ,690,229 (88,257,239) Apply Weightings 50/50 50/50 50/50 50/50 Cost Indicator $4,223,727,646 $293,998,665 $4,722,110,183 $303,932, ,382,537 9,933,377 Income Indicator $2,938,133,765 $292,625,668 $3,134,978,880 $248,497, ,845,114 (44,128,620) Total System Unit Value C $7,161,861,411 $586,624,332 $7,857,089,063 $552,429, ,227,651 (34,195,242) ALLOCATION OF SYSTEM VALUE MN Plant in Service 13,421,341,942 1,038,072,522 14,327,178,570 1,061,615, ,836,629 23,543,096 System Plant in Service 14,126,583,546 1,129,737,678 15,172,674,353 1,162,194,775 1,046,090,807 32,457,097 Plant Ratio x 90%-Elec / x 75%-Gas % % % % (0) (0) MN Gross Revenue 3,378,305, ,499,480 3,502,566, ,365, ,260,606 (121,134,130) System Gross Revenue 3,793,733, ,423,012 3,859,467, ,544,697 65,734,211 (131,878,315) Revenue Ratio x 10%-Elec / x 25%-Gas % % % % 0 (0) MN Allocated Value Percentage % % % % (0) (0) MN Allocated Value D $6,761,648,718 $535,542,963 $7,390,379,544 $501,193, ,730,826 (34,349,903) Depreciable Plant Deductions 1,913,370,355 55,194,699 2,101,779,707 51,490, ,409,352 (3,704,301) Land 113,841,860 3,047, ,159,218 3,027,835 10,317,358 (19,885) CWIP 691,632,607 1,811, ,056,840 5,922,602 83,424,233 4,110,972 Other - Held for Future Use 23,637, (23,637,820) 0 Subtotal 2,742,482,642 60,054,049 3,000,995,765 60,440, ,513, ,786 Ratio - System Unit Value / Cost Indicator 86.23% 99.06% 83.19% 90.88% (0) (0) DEDUCTIONS TO MN ALLOCATED VALUE E $2,364,842,782 $59,489,541 $2,496,528,377 $54,928, ,685,595 (4,560,910) Apportionable Market Value $4,396,805,936 $476,053,422 $4,893,851,168 $446,264, ,045,232 (29,788,993) Effective Tax Rate 3.5% 3.5% 3.5% 3.5% 0 0 FORECASTED PROPERTY TAX - Elec & Gas $153,888,208 $16,661,870 $171,284,791 $15,619,255 17,396,583 (1,042,615) Rounded $153,900,000 $16,700,000 $171,300,000 $15,600,000 17,400,000 (1,100,000) Total Electric & Gas $170,600,000 $186,900,000 16,300,000 Locally Assessed $11,600,000 $11,600,000 0 Wind Production $1,200,000 $1,200,000 0 TOTAL MINNESOTA FORECASTED PROPERTY TAX $183,400,000 $199,700,000 16,300,000 North Dakota & South Dakota Property Tax $6,100,000 $6,300, ,000 TOTAL NSPM FORECASTED PROPERTY TAX $189,500,000 $206,000,000 16,500,000 Reasons for Changes: Minnesota Income 5,000,000 Plant 11,300,000 16,300,000 South Dakota 200,000 Total Increase / (Decrease) 16,500,000

33 Northern States Power Company Support for the Calculation of Minnesota Apportionable Market Value Exhibit (JJD-1), Schedule 3 Page 2 of 3 A Minn. R , subp. 3 describes in part the cost indicator of value as: The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent.