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1 DOCKET NO. 00 APPLICATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY FOR AUTHORITY TO CHANGE RATES AND TO RECONCILE FUEL AND PURCHASED POWER COSTS FOR THE PERIOD JULY 1, 01 THROUGH JUNE 0, 01 PUBLIC UTILITY COMMISSION OF TEXAS DIRECT TESTIMONY of RICHARD D. STARKWEATHER on behalf of SOUTHWESTERN PUBLIC SERVICE COMPANY (filename: StarkweatherRRDirect.doc) Table of Contents GLOSSARY OF ACRONYMS AND DEFINED TERMS... LIST OF ATTACHMENTS... I. WITNESS IDENTIFICATION AND QUALIFICATIONS... II. ASSIGNMENT AND SUMMARY OF TESTIMONY AND CONCLUSIONS... III. ANALYTICAL APPROACH... IV. RETAIL PRICING BENCHMARK RESULTS... 1 V. O&M BENCHMARK RESULTS... A. TOTAL COMPANY AND PRODUCTION BENCHMARKS... B. TRANSMISSION O&M EXPENSE BENCHMARKS... C. DISTRIBUTION O&M EXPENSE BENCHMARKS... D. CUSTOMER OPERATIONS O&M EXPENSE BENCHMARKS... 0 VI. CAPITAL INVESTMENT BENCHMARK RESULTS... VII. CONCLUSIONS... AFFIDAVIT... Starkweather Direct Revenue Requirement Page 1 RR1 - of 00

2 GLOSSARY OF ACRONYMS AND DEFINED TERMS Acronym/Defined Term A&G Commission EEI ERCOT FERC kwh MWh O&M ScottMadden SNL SPS USOA Xcel Energy Meaning Administrative and General Public Utility Commission of Texas Edison Electric Institute Electric Reliability Council of Texas Federal Energy Regulatory Commission kilowatt-hour Megawatt-hour Operation and Maintenance ScottMadden, Inc. SNL Financial Southwestern Public Service Company, a New Mexico corporation Uniform System of Accounts Xcel Energy Inc. Starkweather Direct Revenue Requirement Page RR1 - of 00

3 LIST OF ATTACHMENTS Attachment RDS-RR-1 RDS-RR- RDS-RR- RDS-RR- Description Resume of Richard D. Starkweather (Filename: RDS-RR-1.docx) Companies Included in the (Filename: RDS-RR-.xlsx) Retail Pricing and O&M Benchmarking Analysis (Provided in Native Format on CD Only) (Filename: RDS-RR-.xlsx) Capital Additions Benchmarking Analysis (Provided in Native Format on CD Only) (Filename: RDS-RR-.xlsx) Starkweather Direct Revenue Requirement Page RR1 - of 00

4 DIRECT TESTIMONY OF RICHARD D. STARKWEATHER I. WITNESS IDENTIFICATION AND QUALIFICATIONS Q. Please state your name and business address. A. My name is Richard D. Starkweather. My business address is Glenwood Avenue, Suite 0, Raleigh, North Carolina, 0. Q. On whose behalf are you testifying in this proceeding? A. I am testifying on behalf of Southwestern Public Service Company ( SPS ), a New Mexico Corporation and 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 a Partner with ScottMadden, Inc. ( ScottMadden ) and lead ScottMadden s regulatory practice. Q. Please briefly outline your responsibilities as Partner. A. As a partner with ScottMadden, I provide direction for all work conducted by ScottMadden consultants, and I am accountable for the overall quality of analyses and deliverables developed on behalf of clients such as SPS. 1 Xcel Energy is the parent company of the following four wholly owned utility operating companies: Northern States Power Company, a Minnesota corporation; Northern States Power Company, a Wisconsin corporation; Public Service Company of Colorado, a Colorado corporation; and SPS. Xcel Energy s natural gas pipeline subsidiary is WestGas InterState, Inc. Starkweather Direct Revenue Requirement Page RR1 - of 00

5 Q. Please describe ScottMadden s consulting practice and the services it provides. A. Founded in 1, ScottMadden is a management consulting firm with three primary practice areas: Energy, Clean Tech & Sustainability, and Corporate & Shared Services. We deliver a broad array of consulting services, ranging from strategic planning through implementation, across many industries, business units, and functions. Since our inception, we have been energy consultants, and have served more than 00 clients, including 0 of the top 0 energy utilities. We have performed more than,00 projects across every energy utility business unit and every function. Q. Please summarize your educational background. A. I graduated from Northwestern University with a Bachelor of Science degree in Mechanical Engineering in 1 and then received my Master of Business Administration degree from the University of Chicago Graduate School of Business in 10. Q. Please summarize your professional experience. A. I began my career with Exxon Chemical Americas as a Forecast Coordinator for the Bayway Chemical Plant in Linden, New Jersey. My responsibilities there included the coordination of the annual operating budget for all of the departments at the plant. I began my consulting career in 1, and other than three years in the managed healthcare industry and three years working for Edison International, I have been a management consultant for my entire professional career. I started working for Touche Ross & Co. in 1, which then became Starkweather Direct Revenue Requirement Page RR1 - of 00

6 Deloitte & Touche after the merger with Deloitte, Haskins & Sells in 1, and joined ScottMadden in 1. Since the early s, I have specialized in the public utility industry and have completed numerous consulting engagements for electric and gas utilities. My areas of expertise include strategic and business planning, budgeting and forecasting, regulatory compliance, rate case support, organization design and restructuring, and operations improvement and process redesign. Additional details regarding my educational background and professional experience can be found in Attachment RDS-RR-1. Q. Do you have prior experience in performing benchmarking comparisons of utility operations and costs? A. Yes. I have performed numerous benchmarking comparisons of financial and operations performance metrics, capital additions, and operation and maintenance ( O&M ) costs, for both electric and gas utilities. Q. Have you previously filed testimony at any regulatory authorities? A. Yes. I filed testimony at the Public Utility Commission of Texas ( Commission ) in Docket No. 0, SPS s last rate case, on the same topics I address in this testimony. I also filed testimony at the New Mexico Public Regulation Commission in Case No UT, on behalf of Public Service Company of New Mexico, regarding its capital and O&M budgeting processes Starkweather Direct Revenue Requirement Page RR1-0 of 00

7 II. ASSIGNMENT AND SUMMARY OF TESTIMONY AND CONCLUSIONS Q. What is your assignment in this proceeding? A. The Commission requires transmission and distribution utilities within the Electric Reliability Council of Texas ( ERCOT ) to file benchmark data to support the recovery of affiliate costs. Even though SPS is a vertically integrated utility outside of ERCOT, and thus not subject to these filing requirements, in previous rate cases SPS has voluntarily supplied affiliate information and benchmark data as prescribed for the ERCOT transmission and distribution utilities. Because of the difficulty in gathering benchmark data for each category of affiliate expense, the benchmark data typically provided by SPS in the past has been based on total SPS costs, which include affiliate costs. The purpose of my testimony is to describe the benchmarking analysis completed by ScottMadden on behalf of SPS. I also provide my perspectives on SPS s relative performance, compared to other utilities in Texas and across the United States, on a variety of retail pricing, O&M expense, and capital additions metrics for different areas of utility operations. My analysis uses publically available data taken from Federal Energy Regulatory Commission ( FERC ) Form 1 reports filed by individual utilities with the FERC. The Commission s rules also indicates that the Commission shall consider the quality of the electric utility s services, utility s management, and the efficiency of the utility s operations in determining an appropriate rate of return. P.U.C. SUBST. R..1(C)(1)(B). Starkweather Direct Revenue Requirement Page RR1-1 of 000

8 My testimony includes my conclusions regarding SPS s utility operations based on the benchmarking analysis. Q. Please summarize the conclusions you have reached as a result of your analysis. A. Based on my analysis, I conclude that during the period 00 through 01 SPS has been, and continues to be, efficient and cost-effective compared to its national and Texas peer group companies. In particular: SPS s overall average retail prices, and average prices for the residential, commercial, and industrial customer classes, were consistently at or below the top quartile for both the Texas and national peer groups throughout the 00 through 01 period. This means that SPS has been extremely effective at managing its capital and O&M costs such that it is one of the least expensive utilities providing retail electric service in the country. On nearly every O&M expense measure, SPS s O&M costs were at or below the median for both the national and Texas peer groups and in many cases the top quartile during the 00 to 01 period. This indicates that SPS has aggressively managed its O&M costs over the past five years. With few exceptions, SPS s production, transmission, and distribution capital additions as a percent of total plant and as a percent of annual depreciation expense were consistently at or near the median for the national and Texas peer groups during the 00 to 0 time period. This means that SPS has been replacing assets at a level that addresses annual wear and tear consistent with its national and Texas peer groups. FERC Form 1s for the previous calendar year are required to be filed on or before April 1 th of the following year. For example, the FERC Form 1 for 01 will be filed by April 1, 01. Thus, 01 data was the most recent FERC Form 1 data available through SNL Financial for purposes of this testimony. Starkweather Direct Revenue Requirement Page RR1 - of 001

9 III. ANALYTICAL APPROACH Q. Please describe the nature of the analysis that you performed. A. I evaluated a number of retail pricing, O&M cost, and capital additions metrics for different areas of SPS s operations to assess the efficiency of SPS s operations and quality of management. For each metric, I benchmarked SPS s relative performance to other utilities in Texas and the United States. Q. Please describe what you mean by benchmarking. A. Benchmarking is a commonly used methodology for comparing a utility s performance in a specific area (e.g., cost or productivity) to that of other similar utilities, or peers. Process benchmarking is often used by companies to evaluate various aspects of their operational or management processes in relation to best practices, usually within their own industry sector. Performance benchmarking is used to quantitatively compare a company s results for a particular financial or operational measure against the results for a group of peers. Q. How should the results of this benchmarking study be interpreted? A. Favorable benchmarking results for a utility, particularly over time, can be an indicator that the utility s underlying management processes and actions regarding the area being analyzed have been effective. Where benchmarking results indicate that performance levels are unfavorable, additional analysis can be conducted to determine the causes of the performance gap. Q. What are the typical sources of benchmarking data? A. Data used for benchmarking usually comes from publicly available data sources or through proprietary surveys and research. For utilities, publically available data can be obtained through required regulatory filings with the FERC (e.g., FERC Starkweather Direct Revenue Requirement Page RR1 - of 00

10 Form 1 reports). This data can be gathered individually or through service providers that compile and sell this information in a variety of formats. The benefit of FERC Form 1 data is that the information can be traced back to a specific filing and company. This provides for a consistent, objective, and independent data source that allows for the inclusion of specific companies in a peer group by compiling the associated data from each company. Factors that can impact the validity of a benchmarking analysis include the comparability of the data inputs used in the benchmark calculations and the comparability of the companies used in the peer groups. It is not uncommon for different utilities to track and report operating statistics and/or costs in different ways or to interpret reporting requirements differently even when complying with standardized reporting formats such as those required by the FERC Uniform System of Accounts ( USOA ). As a result, care must be exercised when selecting data sources for benchmarking analyses. Q. What was the source for the data used in this benchmarking analysis? A. The operational and financial data used in my benchmarking analysis was obtained from publicly available FERC Form 1 filings made by regulated energy and utility companies for the period 00 through 01 (although for certain capital investment metrics, data back to 00 was compiled). FERC Form 1 data is among the most complete and reliable data on operating statistics available to the public concerning individual electric utilities. The data source utilized for the FERC Form 1 data is SNL Financial ( SNL ), a well-respected industry information and research firm covering a Starkweather Direct Revenue Requirement Page RR1 - of 00

11 number of business sectors including electric utilities. SNL collects, standardizes, and disseminates a wide variety of electric utility operating and financial statistics including FERC Form 1 data. SNL replicates all of the major schedules of the FERC Form 1 for every filer and provides query tools to easily pull the information into spreadsheets for analysis, comparison, and benchmarking purposes. Q. What criteria did you utilize to select the companies making up the national and Texas peer groups? A. As described earlier, the quality, or relevance, of any particular benchmarking study is largely dependent on the characteristics, or similarities, of the companies populating the peer groups. When conducting a benchmarking analysis, one wants the peer groups populated with companies with similar characteristics to ensure reliable results. Restructuring of the industry has resulted in a variety of operating models (e.g., generation only, transmission only, etc.), ownership (e.g., municipals, cooperatives, investor-owned utilities, etc.), and corporate structures (e.g., holding company, service company affiliates, etc.). SPS is a vertically integrated, investor-owned utility with generation, transmission, and distribution assets serving a predominantly retail end-use customer base. Given these challenges, ScottMadden employed the following process in the selection of peer group companies to help ensure similarities in characteristics of the national and Texas peer groups to SPS: 1. A list of electric utilities and their parent companies was obtained from the Edison Electric Institute ( EEI ). Starkweather Direct Revenue Requirement Page RR1 - of 00

12 A list of all companies filing FERC Form 1 reports over the period 00 through 01 was obtained by querying the current SNL FERC Form 1 Regulated Energy Companies dataset.. The SNL list was compared to the EEI list to identify and eliminate all non-operating parent or holding companies. The resulting list formed the basis for the initial FERC Form 1 data query from SNL. Electric plant, operating data, O&M expense, and system peak and transmission line data was compiled for each company and presented in FERC Form 1 schedule format for each of the years 00 through 01 (although for electric plant, data was compiled back to 00).. Peer group selection criteria were defined for the national and Texas peer groups. Criteria for inclusion in the SPS national and Texas peer groups included: a. The company must be regulated and provide electric service (directly or indirectly) to retail end-use customers. This criterion eliminated generation-only companies, transmission-only companies, and generation and transmission-only companies; however, transmission and distribution companies are included in the peer groups. b. The company must be of sufficient size to warrant comparison. For the purposes of this effort, we eliminated all companies with less than,000 customers. c. The company must have comparative FERC Form 1 data to enable the development of the metrics used in the benchmarking analysis. Q. What Texas peer group and national peer group companies were identified as a result of your analysis? A. The Texas peer group companies selected consist of: AEP Texas Central Company AEP Texas North Company CenterPoint Energy Houston Electric El Paso Electric Company Entergy Texas, Inc. Oncor Electric Delivery Company Sharyland Utilities, L.P. Southwestern Electric Power Company Starkweather Direct Revenue Requirement Page 1 RR1 - of 00

13 Southwestern Public Service Company Texas-New Mexico Power Company There were 1 utility companies included in the national peer group (see Attachment RDS-RR- for a list of these companies). Q. What performance metrics were evaluated in your analysis? A. SPS performance was benchmarked from three perspectives: average retail electricity prices, O&M expenses, and capital additions. Industry standard benchmarks were utilized within each of these categories. Average Retail Electricity Prices Retail pricing benchmarks (overall and by customer class for industrial, commercial, and residential customers) show the average price received by a utility for every kilowatt-hour ( kwh ) sold. Over time, such measures are good indicators of revenue stability and can also highlight year-to-year changes in customer mix and energy usage patterns. The specific pricing benchmarks included in my analysis are as follows: Total Retail Revenues Cents per kwh Sold Residential Revenues Cents per kwh Sold Commercial Revenues Cents per kwh Sold Industrial Revenues Cents per kwh Sold O&M Expenses O&M expense benchmarks are good indicators of relative process and cost efficiencies between peer group companies, including labor productivity. The specific O&M expense benchmarks included in my analysis are as follows: The native format of my Retail Pricing and O&M Benchmarking Analysis is provided on a CD as Attachment RDS-RR-. The native format of my Capital Additions Benchmarking Analysis is provided on a CD as Attachment RDS-RR-. Starkweather Direct Revenue Requirement Page 1 RR1 - of 00

14 Total O&M $ per Megawatt-hour ( MWh ) Sold Total Non-Fuel O&M $ per MWh Sold Non-Fuel Production O&M $ per MWh Generated Transmission O&M $ per MWh Transmitted (with and without FERC account costs) Transmission O&M $ per Pole Mile (with and without FERC account costs) Distribution O&M $ per MWh Sold Distribution O&M $ per Customer Customer Accounts, Customer Service and Informational Expense, and Sales Expense O&M $ per MWh Sold Customer Accounts, Customer Service and Informational Expense, and Sales Expense O&M $ per Customer Administrative and General ( A&G ) O&M $ per MWh Sold A&G O&M $ per Customer A&G O&M $ as a Percent of Total Revenues Capital Additions Capital additions benchmarks for each peer group were analyzed on an annual and three-year rolling average basis to minimize the effects of individual years where extraordinary capital additions may have occurred. The specific capital benchmarks included in my analysis are as follows: Total Plant Additions as a Percent of Total Plant Total Plant Additions as a Percent of Annual Depreciation Expense Production Plant Additions as a Percent of Production Plant Production Plant Additions as a Percent of Production Depreciation Expense Transmission Plant Additions as a Percent of Transmission Plant Transmission Plant Additions as a Percent of Transmission Depreciation Expense Distribution Plant Additions as a Percent of Distribution Plant Distribution Plant Additions as a Percent of Distribution Depreciation Expense Starkweather Direct Revenue Requirement Page 1 RR1 - of 00

15 General Plant Additions as a Percent of General Plant General Plant Additions as a Percent of General Plant Depreciation Expense Q. Before you provide the results of your benchmarking analysis, can you provide general guidance as to how the results should be interpreted? A. Yes. When conducting this type of benchmarking analysis, we will typically compare the relative performance of the company under review (in this case SPS) with the peer group quartiles of the various benchmark metrics (i.e., top quartile, median, and bottom quartile). For revenue and O&M expense measures, lower is generally better, meaning lower rates for customers or lower internal costs to provide electric service. However, for capital additions, being above or below a particular quartile is not necessarily a good or bad thing. It may simply indicate that a particular utility is making investments in facilities at a particular point in time, where other members of the peer group are planning such investments at another point in time. I discuss the results in greater detail later in my testimony, but having this framework in mind should allow the reader to more easily understand the relevance of the benchmarking results for SPS. Starkweather Direct Revenue Requirement Page 1 RR1 - of 00

16 IV. RETAIL PRICING BENCHMARK RESULTS Q. Why did you benchmark SPS s average annual retail price per kwh to the national and Texas peer groups? A. The average price paid (or received) per kwh for electric service is a widely used benchmarking metric and reflects three primary factors: (1) actual fixed and variable prices, () customer usage patterns, and () customer mix. The average price paid per kwh is often a good measure of the overall cost effectiveness of a company in delivering electric service. This is especially true for companies in which the average price per kwh has remained relatively stable over a period of years. Q. What pricing metrics did you evaluate in your analysis? A. I compared the average prices paid by residential, commercial, and industrial customers with the median value of the Texas and national peer groups. For purposes of this analysis, the average price paid per kwh equals annual retail revenues (from sales to ultimate consumers) divided by kwh sales, both in total and for each customer class. The pricing comparisons are reflected in Figures RDS-RR-1 through RDS-RR- described in the paragraphs that follow. Q. What overall conclusions do you draw from your analysis of SPS s average pricing? A. SPS s overall average retail prices, and average prices for the residential, commercial, and industrial customer classes, are consistently at or below the top quartile for both the Texas and national peer groups throughout the 00 through 01 period. This means that SPS has been extremely effective at managing its Starkweather Direct Revenue Requirement Page 1 RR1-0 of 00

17 capital and O&M costs such that it is one of the least expensive utilities providing retail electric service in the country. Q. Please describe the results of your pricing analysis. A. It should first be noted that the transmission and distribution utilities in Texas have transmission and distribution assets only and provide "wires" service directly to end-use retail customers of deregulated retail companies operating in Texas. As a result, the average retail prices paid for electricity for these transmission and distribution utilities do not fully reflect the cost of providing retail electric services to customers. These companies were therefore excluded from the Texas and national peer groups for the purposes of the retail pricing benchmarking analysis. As shown in Figure RDS-RR-1 below, in 01 SPS s total average price for electricity sold to retail customers was. cents per kwh, approximately percent below the national median and 1 percent below the Texas median. SPS s total average price for retail electricity has remained consistently in the top quartile for the national and Texas peer groups throughout the 00 to 01 time period. AEP Texas Central Company, AEP Texas North Company, CenterPoint Energy Houston Electric, Oncor Electric Delivery Company, and Texas-New Mexico Power Company. Starkweather Direct Revenue Requirement Page 1 RR1-1 of 0000

18 Figure RDS-RR-1: Total Retail Revenues Cents per kwh Sold Total Retail Revenues per kwh Sold Total Retail Revenues per kwh Sold SPS Q1 Q Q SPS Q1 Q Q 1 1 I also compared SPS s 01 average price per kwh for each major customer class relative to the total average retail price. Figure RDS-RR- depicts the results of this analysis. Figure RDS-RR-: Average Price Per kwh by Customer Class and as a Percent of Total Average Retail Price SPS Texas Median National Median 01 Average Price Per kwh (cents per kwh) Total Retail Sales..0. Residential Sales...01 Commercial Sales... Industrial Sales Average Price per kwh as a Percent of Total Average Retail Price Residential Sales 1% 1% 1% Commercial Sales % 0% % Industrial Sales % % % The residential class average price paid is more than 1. times that of the total average price for electricity sold. This is higher than the average residential class prices for the Texas and national median groups. The primary driver behind this difference is customer mix (see Figure RDS-RR- below). The residential class was the largest of SPS s customer groups in 01 in terms of customers ( percent), but represented only 1 percent of SPS retail energy sales in 01. Starkweather Direct Revenue Requirement Page 1 RR1 - of 0001

19 1 Industrial and commercial energy usage, with their associated lower prices, represented about percent of SPS retail sales in 01, causing the relatively low total average retail price for SPS. Figure RDS-RR-: SPS Customer Class Characteristics Percent of 01 Total Annual Operating Revenues $000 Residential 0, % Commercial 1, % Industrial,0 % Total Other Sales 0,1 % Total Retail Revenues 1,0,1 0% Annual Usage MWh Sold Residential,1, 1% Commercial,0, % Industrial,00, % Total Other Sales, % Total Retail MWh Sales 1,,0 0% Average Customers Per Month Residential, % Commercial,0 0% Industrial 1 0% Total Other Sales, % Total Number of Customers, 0% Q. Please describe the results of your pricing analysis on a residential basis. A. As shown in Figure RDS-RR-, in 01, SPS s total average residential retail rate was. cents per kwh. As shown in Figure RDS-RR-, SPS s average residential retail prices have consistently been at or below the top quartile for the national and Texas peer groups over the 00 through 01 period. This means that SPS is among the least expensive utilities providing residential electric service in the country. Starkweather Direct Revenue Requirement Page 1 RR1 - of 000

20 Figure RDS-RR-: Total Residential Revenues per kwh Sold Residential Revenues per kwh Sold Residential Revenues per kwh Sold SPS Q1 Q Q SPS Q1 Q Q Q. Please describe the results of your pricing analysis for Commercial customers. A. As shown in Figure RDS-RR-, in 01, SPS s total average commercial retail rate, on a cents per kwh basis, was. cents per kwh. As shown in Figure RDS-RR-, SPS s average commercial electricity prices have been at or below the top quartile for the national and Texas peer groups since 00. Figure RDS-RR-: Total Commercial Revenues per kwh Sold Commercial Revenues per kwh Sold Commercial Revenues per kwh Sold SPS Q1 Q Q SPS Q1 Q Q 1 1 Q. Please describe the results of your pricing analysis for Industrial customers. A. As shown in Figure RDS-RR-, in 01, SPS s total average commercial retail rate, on a cents per kwh basis, was.1 cents per kwh. As shown in Figure Starkweather Direct Revenue Requirement Page 0 RR1 - of 000

21 RDS-RR-, SPS s industrial rates have been well below the top quartile for the national peer group and the Texas peer group since 00. Figure RDS-RR-: Total Industrial Revenues per kwh Sold Industrial Revenues per kwh Sold Industrial Revenues per kwh Sold SPS Q1 Q Q SPS Q1 Q Q Starkweather Direct Revenue Requirement Page 1 RR1 - of 000

22 V. O&M BENCHMARK RESULTS Q. Please describe the analysis and metrics you used to benchmark SPS's O&M expenses against those of its Texas and national peers. A. I analyzed the following key metrics of O&M expenses across both national and Texas-only peer groups: Total O&M Expense ($/MWh Sold) Total Non-Fuel O&M ($/MWh Sold) Total Non-Fuel Production O&M ($/MWh Generated) Production, transmission, distribution, customer accounts, customer service and information, sales, and A&G expenses, when compared to generation output, transmission throughput, transmission line miles, sales volume, or average number of customers, provide measures commonly used to evaluate the performance of different utilities. We selected USOA-defined functional categories of costs representative of the broad areas of utility operations being evaluated as the numerator for each metric (for example, total distribution O&M expenses), then matched the cost category being evaluated with an appropriate cost driver or drivers in the denominator (for example, total retail sales or the average number of customers), to provide a perspective on SPS s relative efficiency in each area of operations when compared to relevant industry peer groups. The investor-owned utilities that operate in ERCOT have divested their generating assets and retail operations (AEP Texas Central Company, AEP Texas North Company, CenterPoint Energy Houston Electric, Oncor Electric Delivery Company, and Texas-New Mexico Power Company). As a result, only certain Starkweather Direct Revenue Requirement Page RR1 - of 000

23 O&M metrics apply for these companies in the national and Texas peer group comparisons. Q. What overall conclusions did you draw from your analysis of SPS s operating and maintenance expenses? A. On nearly every O&M expense measure, SPS s O&M costs were at or below the median for both the national and Texas peer groups and in many cases the top quartile during the 00 to 01 period. This indicates that SPS has aggressively managed its O&M costs over the past five years. A. Total Company and Production Benchmarks Q. Please describe your analysis of SPS's total company O&M and production O&M expense. A. I put together three charts depicting total O&M costs: total O&M per MWh sold; total non-fuel O&M per MWh sold; and non-fuel production O&M per MWh generated. These are depicted in Figures RDS-RR- through RDS-RR-. Q. Please describe the results of your analysis of SPS's total O&M costs with those of its Texas and national peer groups. A. As shown in Figure RDS-RR- below, SPS s total O&M expense per MWh sold was below the national median in 00 and 0 and slightly above the national median in 0 before returning to second quartile in 01. Relative to other Texas utilities, SPS s total O&M costs have been between the median and the top quartile since 00. Starkweather Direct Revenue Requirement Page RR1 - of 000

24 Figure RDS-RR-: Total O&M $ Per MWh Sold $0.00 Total O&M $ Per MWh Sold $.00 Total O&M $ Per MWh Sold $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 SPS Q1 Q Q SPS Q1 Q Q Q. Please describe the results of your analysis of SPS's total O&M less fuel and purchased power costs with those of its Texas and national peer groups. A. As shown in Figure RDS-RR- below, SPS s total non-fuel O&M expenses per MWh sold have been below the national peer group top quartile since 00 and slightly above the Texas peer group top quartile throughout the 00 to 01 period. Total non-fuel O&M costs are a good representation of how efficiently a utility operates and maintains its assets on a daily basis. Figure RDS-RR-: Total Non-Fuel O&M $ Per MWh Sold $.00 Total Non-Fuel O&M $ Per MWh Sold $.00 Total Non-Fuel O&M $ Per MWh Sold $0.00 $0.00 $.00 $.00 $0.00 $0.00 $1.00 $1.00 $.00 $.00 SPS Q1 Q Q SPS Q1 Q Q Starkweather Direct Revenue Requirement Page RR1 - of 000

25 Q. Please describe the results of your analysis of SPS's non-fuel production O&M expense with those of its Texas and national peer groups. A. As shown in Figure RDS-RR- below, SPS s non-fuel production costs are among the lowest in the nation and better than the top quartile of the Texas peer group. Like total non-fuel O&M, non-fuel production O&M costs are a good representation of how efficiently a utility operates and maintains its generation assets on a daily basis. Figure RDS-RR-: Non-Fuel Production O&M $ Per MWh Generated $0.00 Non-Fuel Production O&M $/MWh Generated $0.00 Non-Fuel Production O&M $/MWh Generated $1.00 $1.00 $.00 $.00 $.00 $.00 $0.00 $0.00 SPS Q1 Q Q SPS Q1 Q Q B. Transmission O&M Expense Benchmarks Q. Please describe your overall analysis of SPS's transmission O&M expense. A. I put together four charts depicting the benchmarking of transmission O&M expenses: (1) total transmission expense per MWh transmitted, with and without the inclusion of FERC Account ; and () total transmission expense per pole mile, with and without the inclusion of FERC Account. The results are depicted in Figures RDS-RR- through RDS-RR-1 below. Starkweather Direct Revenue Requirement Page RR1 - of 000

26 Q. Please describe the results of your analysis of SPS's transmission expense on an MWh transmitted basis. A. As shown in Figure RDS-RR- below, SPS s transmission O&M per MWh transmitted has been slightly above the national group median since 00 and at or slightly above the Texas peer group top quartile over the same time period. Figure RDS-RR-: Transmission O&M $ Per MWh Transmitted $.00 Transmission O&M $ Per MWh Transmitted $.00 Transmission O&M $ Per MWh Transmitted $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 $1.00 $1.00 $0.00 $0.00 SPS Q1 Q Q SPS Q1 Q Q FERC Account is entitled Transmission of electricity by others (Major only). This account includes amounts payable to others for the transmission of electricity over transmission facilities owned by others. The costs included in FERC Account can vary widely by utility depending on the amount of wholesale purchases and sales of electricity by that utility. When benchmarking transmission O&M expenses, we often exclude FERC Account from our analysis, as elimination of this account from total transmission O&M expense provides a better measure of the utilities internal transmission costs. As shown in Figure RDS-RR- below, net of FERC Account, SPS s transmission O&M per MWh transmitted was at or near the national and Texas peer group top quartiles during the 00 to 01 time period. Starkweather Direct Revenue Requirement Page RR1-0 of 000

27 Figure RDS-RR-: Transmission O&M (net of ) $ Per MWh Transmitted Trans O&M (net of ) $ Per MWh Transmitted Trans O&M (net of ) $ Per MWh Transmitted $1.0 $1.0 $1. $1. $1.00 $1.00 $0. $0. $0.0 $0.0 $0. $0. SPS Q1 Q Q SPS Q1 Q Q Q. Please describe the results of your analysis of SPS's transmission O&M expense on a per pole mile basis. A. As shown in Figure RDS-RR-1 below, SPS s transmission O&M expense per pole mile has been below the median of both the national and Texas peer group throughout the 00 to 01 period. Figure RDS-RR-1: Transmission O&M $ Per Pole Mile $0,000 Transmission O&M $ Per Pole Mile $0,000 Transmission O&M $ Per Pole Mile $,000 $,000 $0,000 $0,000 $,000 $,000 $0,000 $0,000 $1,000 $1,000 $,000 $,000 $,000 $,000 $0 $0 SPS Q1 Q Q SPS Q1 Q Q 1 As shown in Figure RDS-1 below, net of FERC account, SPS s transmission O&M per pole mile has been in the top quartile of both the national and Texas peer groups throughout the 00 to 01 period. Starkweather Direct Revenue Requirement Page RR1-1 of 00

28 Figure RDS-RR-1: Transmission O&M (net of ) $ Per Pole Mile $1,000 Trans O&M (net of ) $ Per Pole Mile $1,000 Trans O&M (net of ) $ Per Pole Mile $1,00 $1,00 $,000 $,000 $,00 $,00 $,000 $,000 $,00 $,00 $0 $0 SPS Q1 Q Q SPS Q1 Q Q 1 C. Distribution O&M Expense Benchmarks Q. Please describe your analysis of SPS' distribution O&M expense. A. I put together two charts depicting the benchmarking of distribution O&M expenses: total distribution O&M expense per MWh sold and total distribution O&M expense per customer. These are depicted in Figures RDS-RR-1 through RDS-RR-1 below. Q. Please describe the results of your analysis of SPS's distribution O&M expense on the basis of MWh sales. A. As shown in Figure RDS-RR-1, SPS is solidly in the top quartile for distribution O&M regardless of peer group throughout the 00 to 01 period. Starkweather Direct Revenue Requirement Page RR1 - of 00

29 $.00 $.00 $.00 $.00 $.00 $1.00 Figure RDS-RR-1: Distribution O&M $ Per MWh Sold Distribution O&M $ Per MWh Sold $.00 $.00 $.00 $.00 $.00 $1.00 Distribution O&M $ Per MWh Sold $0.00 $0.00 SPS Q1 Q Q SPS Q1 Q Q Q. Please describe the results of your analysis of SPS's distribution O&M expense on the basis of number of customers. A. As shown in Figure RDS-RR-1, SPS s distribution O&M expense per customer was consistently at or near the top quartile of the national peer group through 0, and the Texas peer group through 00. The significant increase in SPS s distribution O&M expense per customer in 0 is due to the loss of more than,000 retail customers resulting from the sale of the Lubbock distribution facilities in October 0. In 01, SPS s distribution O&M expense per 1 1 $.00 customer was below the median for the national peer group and at the median for the Texas peer group. Figure RDS-RR-1: Distribution O&M $ Per Customer Distribution O&M $ Per Customer $.00 Distribution O&M $ Per Customer $1.00 $1.00 $0.00 $0.00 $.00 $.00 $0.00 $ SPS Q1 Q Q SPS Q1 Q Q Starkweather Direct Revenue Requirement Page RR1 - of 001

30 D. Customer Operations O&M Expense Benchmarks Q. Please describe your analysis of SPS's customer operations O&M expense. A. In my analysis, I defined customer operations expenses to include: Customer Accounts, Customer Service and Informational Expense, and Sales Expense, as defined by the FERC USOA. I put together two charts depicting the benchmarking of customer operations O&M expenses: total customer operations O&M expense per MWh sold and total customer operations expense per customer. These are depicted in Figures RDS-RR-1 through RDS-RR-1 below. Q. Please describe the results of your analysis of SPS's customer operations O&M expense on the basis of MWh sales. A. As shown in Figure RDS-RR-1, customer operations O&M expense per MWh for SPS compares well with the national and Texas peer groups. SPS s customer operations O&M expense per MWh sold has been in the top quartile of the national peer group, and at or near the median of the Texas peer group, throughout the 00 to 01 time period. Figure RDS-RR-1: Customer Operations O&M $ Per MWh Sold $.00 Customer Operations O&M $/MWh Sold $.00 Customer Operations O&M $/MWh Sold $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 $1.00 $1.00 $0.00 $ SPS Q1 Q Q SPS Q1 Q Q Starkweather Direct Revenue Requirement Page 0 RR1 - of 001

31 Q. Please describe the results of your analysis of SPS's customer operations O&M expense on a per customer basis. A. As shown in Figure RDS-RR-1, SPS s customer operations O&M expense per customer has been at or near the national peer group median throughout the 00 to 01 period, but was in the fourth quartile of the Texas peer group for 0 and 0 before returning to the third quartile in 01. Figure RDS-RR-1: Customer Operations O&M $ Per Customer $1.00 Customer Opera ons O&M $/Customer Na onal Peer Group $1.00 Customer Opera ons O&M $/Customer $0.00 $0.00 $.00 $.00 $0.00 $0.00 $.00 SPS Q1 Q Q $.00 SPS Q1 Q Q Q. Why are SPS s Customer Operations O&M Expense per MWh Sold benchmark results versus the Texas peer group so different from the Customers Operations O&M Expense per Customer results? A. The average energy consumption of SPS customers differs substantially from the average consumption of customers for the other utilities in the Texas peer group. For example, SPS s residential customers, on average, consume less electricity than the residential customers of the other utilities in Texas. In contrast, SPS s industrial customers consume much more electricity than the industrial customers of other Texas utilities. These differences in customer class usage result in the costs per customer benchmarks being skewed when compared to the Texas peer Starkweather Direct Revenue Requirement Page 1 RR1 - of 001

32 1 1 group. However, the customer operations costs per MWh benchmarks show SPS as either comparable or better than the Texas peer group. Q. Please describe your analysis of SPS's A&G O&M expense. A. I put together three charts depicting the benchmarking of A&G O&M expenses: (1) A&G O&M expense per MWh sold; () A&G O&M expense per customer; and () A&G O&M expense as a percent of revenues. These are depicted in Figures RDS-RR-1 through RDS-RR-0 below. Q. Please describe the results of your analysis of SPS's A&G O&M expense per MWh sold. A. As shown in Figure RDS-RR-1, SPS compares favorably versus the national peer group with results at or near the top quartile from 00 to 01. SPS s A&G O&M expense per MWh sold was at or near the median of the Texas peer group during this same period. 1 1 $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 Figure RDS-RR-1: A&G O&M $ Per MWh Sold Total A&G O&M $ Per MWh Sold SPS Q1 Q Q $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 $.00 Total A&G O&M $ Per MWh Sold SPS Q1 Q Q Q. Please describe the results of your analysis of SPS's A&G O&M expense on the basis of customers. A. As shown in Figure RDS-RR-1, SPS does not compare as favorably when A&G O&M expense is compared to the peer groups on a per customer basis. SPS Starkweather Direct Revenue Requirement Page RR1 - of 001

33 remains in the third quartile versus the national peer group, but moves from the third to the fourth quartile against the Texas peer group. The reason for the difference between the costs per MWh sold results versus the costs per customer results was described earlier in my testimony. Figure RDS-RR-1: A&G O&M $ Per Customer $0.00 Total A&G O&M $ Per Customer Na onal Peer Group $0.00 Total A&G O&M $ Per Customer $.00 $.00 $00.00 $00.00 $1.00 $1.00 $.00 $.00 $1.00 $1.00 $0.00 $0.00 $.00 SPS Q1 Q Q $.00 SPS Q1 Q Q 1 1 Q. Please describe the results of your analysis of SPS's A&G O&M expense as a percent of revenues. A. As shown in Figure RDS-RR-0, SPS s A&G O&M expense as a percent of revenues compares very favorably to both peer groups. Throughout the 00 to 01 period, SPS s A&G costs as a percent of revenues was in the top quartile for both peer groups. Figure RDS-0: A&G O&M as a Percent of Revenues 1.0% Total A&G O&M $ as % of Revenues 1.0% Total A&G O&M $ as % of Revenues 0.% 0.% 0.% 0.% 0.% 0.% 0.% 0.% 1 SPS Q1 Q Q SPS Q1 Q Q Starkweather Direct Revenue Requirement Page RR1 - of 001

34 VI. CAPITAL INVESTMENT BENCHMARK RESULTS Q. Please describe the analysis and metrics you used to benchmark SPS s capital additions against those of its Texas and national peers. A. For total plant and each major plant category (production, transmission, distribution, and general plant), I analyzed annual plant additions as a percentage of total plant and as a percentage of annual depreciation expense. The capital additions analysis as a percentage of total plant provides insights into utility investment levels in plant replacements over time. The analysis of additions as a percentage of depreciation expense highlights areas where companies may not be replacing assets at a level that keeps up with annual wear and tear though it should be noted that for most utilities annual capital additions will fluctuate year to year due to the timing of new additions as well as changes in the mix of capital projects between functional areas. I also analyzed plant additions as a percentage of total plant averaged over a three-year period of time. The three-year average effectively smooths out the normal swings in plant additions from year-to-year. Q. Why did you compare SPS s capital additions to the median levels for the national and Texas peer groups? A. As I noted earlier in my testimony, when conducting benchmarking analyses, for revenue and O&M expense measures, lower is generally better, meaning lower rates for customers or lower internal costs to provide electric service. However, for capital additions, being above or below a particular quartile is not necessarily a good or bad thing. It may simply indicate that a particular utility is making investments in facilities at a particular point in time, where other members of the peer group are planning such investments at another point in time. Therefore, for Starkweather Direct Revenue Requirement Page RR1 - of 001

35 the purposes of this capital addition benchmarking analysis, we simply compared SPS to the median peer group benchmark results. Q. What overall conclusions do you draw from your analysis of SPS s capital additions? A. With few exceptions, SPS s production, transmission, and distribution capital additions as a percent of total plant and as a percent of annual depreciation expense were consistently at or near the median for the national and Texas peer groups during the 00 to 0 time period. This means that SPS has been replacing assets at a level that reasonably addresses annual wear and tear consistent with its national and Texas peer groups. The addition of Jones Generating Station Unit to the generating fleet, necessary improvements to the transmission system to interconnect new generation resources, and to the distribution system to connect new customers, and maintain reliability and improve load serving capability, contributed to a greater than average increase in investment levels in 0, before returning to near median levels in 01. Q. Please describe the results of your analysis of SPS's annual plant additions for the period as compared to those of its Texas and national peers. A. As shown in Figure RDS-RR-1, SPS s total capital additions as a percent of total plant investment have increased steadily between 00 and 01. This indicates that SPS has been making investments in various major plant categories over the last few years. Starkweather Direct Revenue Requirement Page RR1 - of 001

36 Figure RDS-RR-1: Total Additions as a Percent of Total Plant.0% Total Additions as % of Total Plant.0% Total Additions as % of Total Plant.0%.0%.0%.0%.0%.0%.0%.0% SPS Median SPS Median When analyzing capital additions, particularly for a single utility, it is normal to see significant changes in capital additions year to year. To smooth these annual fluctuations, and to help identify investment trends, we typically analyze capital additions by looking at a rolling three-year average of capital additions by functional area. Figure RDS-RR-, below, shows that SPS s three-year average total capital additions as a percent of total plant investment have increased steadily between 00 and 01. The national and Texas peer group trends have been flat over this same time period. Major capital investments tend to be discrete additions at particular points in time. However, median values of the peer groups average the results of several individual utilities, which smooths out these results. Figure RDS-RR-: -Year Average Additions as a Percent of Total Plant 1.0%.0%.0%.0%.0%.0%.0% 1.0% -Year Average Additions as % of Total Plant SPS Median.0%.0%.0%.0%.0%.0%.0% 1.0% -Year Average Additions as % of Total Plant SPS Median Starkweather Direct Revenue Requirement Page RR1-0 of 001

37 1 Q. Please describe the results of your analysis of SPS's annual plant additions relative to total depreciation expense. A. As shown in Figure RDS-RR-, SPS increased its rate of capital spending on plant additions from 00 to 01. The level of annual capital additions for the peer groups (approximately 00 percent of annual depreciation) indicates that utility companies in general are adding to their infrastructure at a rate faster than would be required to simply replace aging assets. SPS s capital additions levels have been consistent with these national and Texas peer group trends, except in 0. The increase in 0 for SPS is due to the addition of Jones and the additional investments in transmission and distribution assets described earlier in my testimony. Figure RDS-RR-: Total Additions as a Percent of Depreciation % Total Addi ons as % of Deprecia on Na onal Peer Group SPS Median % Total Addi ons as % of Deprecia on SPS Median Q. Please describe your analysis of SPS's production investment additions relative to those of the Texas and national peer groups. A. I put together three charts depicting my analysis of SPS's annual production plant investments: (1) production plant additions as a percentage of total production plant; () annual plant additions averaged over three years as percentage of Starkweather Direct Revenue Requirement Page RR1-1 of 000

38 1 production plant; and () production plant additions as percentage of depreciation expense. These are depicted in Figures RDS-RR- through RDS-RR-. Q. Please describe the results of your analysis of SPS's production plant additions for the period as compared to those of its Texas and national peers. A. As shown in Figures RDS-RR- and RDS-RR-, the level of SPS production plant capital additions has been at or below the national and Texas peer group medians over the 00 through 01 time period, with the exception of 0. The increase in production plant additions in 0 was due to the addition of Jones Generating Station Unit to the generation fleet. Figure RDS-RR-: Production Plant Additions as a Percent of Total Plant.0%.0%.0%.0%.0%.0%.0% 1.0% Production Additions as % of Production Plant.0%.0%.0%.0%.0%.0%.0% 1.0% Production Additions as % of Production Plant 1 SPS Median SPS Median Starkweather Direct Revenue Requirement Page RR1 - of 001

39 Figure RDS-RR-: -Year Average Production Plant Additions as a Percent of Total Plant -Year Avge Production Additions as % of Plant -Year Avge Productions Additions as % of Plant.0%.0%.0%.0%.0%.0%.0%.0%.0%.0%.0%.0%.0%.0% 1.0% 1.0% SPS Median SPS Median 1 Q. Please describe the results of your analysis of SPS's production plant additions relative to total production depreciation expense. A. As shown in Figure RDS-RR-, the level of SPS s production plant additions has been approximately 0 percent of annual depreciation expense. This seems to indicate a stable asset replacement strategy in other words, invest sufficient capital to cover annual depreciation expense every year. However, in 0 one can again see the impact of the Jones addition to the generating fleet. Figure RDS-RR-: Production Plant Adds as a Percent of Depreciation Expense Production Additions as % of Depreciation Production Additions as % of Depreciation %.0% 1 SPS Median SPS Median Starkweather Direct Revenue Requirement Page RR1 - of 00

40 Q. Please describe your analysis of SPS's transmission investment additions relative to those of the Texas and national peer groups. A. I put together three charts depicting my analysis of SPS's annual transmission plant investments: (1) transmission plant additions as a percentage of total transmission plant; () annual plant additions averaged over three years as a percentage of transmission plant; and () transmission plant additions as a percentage of depreciation expense. These are depicted in Figures RDS-RR- through RDS-RR-. Q. Please describe the results of your analysis of SPS's transmission plant additions for the period as compared to those of the Texas and national peers. A. As shown in Figures RDS-RR- and RDS-RR-, SPS s transmission capital additions have been steadily increasing since 00. Transmission capital additions in 01 represented almost 1% of total transmission plant. The increase in transmission plant additions by SPS over the 00 to 01 time period was primarily due to the expansion, upgrading, and refurbishment of transmission system infrastructure to: (1) interconnect new generation resources; () maintain reliability; and () improve load-serving capability, as discussed further by SPS witness John S. Fulton in his Revenue Requirement phase testimony. Starkweather Direct Revenue Requirement Page 0 RR1 - of 00

41 Figure RDS-RR-: Transmission Plant Additions as a Percent of Total Plant 1.0% 1.0% 1.0%.0%.0%.0%.0%.0% Trans Additions as % of Transmission Plant 1.0% 1.0% 1.0%.0%.0%.0%.0%.0% Trans Additions as % of Transmission Plant SPS Median SPS Median Figure RDS-RR-: -Year Average Transmission Plant Additions as a Percent of Total Plant.0% -Year Avge Transmission Additions as % of Plant.0% -Year Avge Transmission Additions as % of Plant.0%.0%.0%.0%.0%.0%.0%.0% SPS Median SPS Median Q. Please describe the results of your analysis of SPS's transmission plant additions relative to transmission depreciation expense. A. As shown in Figure RDS-RR-, the level of SPS s transmission plant additions has significantly exceeded annual depreciation expense every year since 00. The national peer group median levels have been between 00 percent and 00 percent of depreciation, consistent with the continued industry focus on transmission expansion. In Texas, the peer group median has been more than 00 percent of depreciation in four of the last five years reflecting the active transmission expansion efforts in the state to support renewable energy resources. Starkweather Direct Revenue Requirement Page 1 RR1 - of 00

42 Figure RDS-RR-: Transmission Plant Adds as a Percent of Depreciation Expense 0 Transmission Additions as % of Depreciation 0 Transmission Additions as % of Depreciation SPS Median SPS Median Q. Please describe your analysis of SPS's distribution investment additions relative to those of the Texas and national peer groups. A. I put together three charts depicting my analysis of SPS's annual distribution plant investments: (1) distribution plant additions as a percentage of total distribution plant; () annual plant additions averaged over three years as a percentage of distribution plant; and () distribution plant additions as a percentage of depreciation expense. These are depicted in Figures RDS-RR-0 through RDS- RR-. Q. Please describe the results of your analysis of SPS's distribution plant additions for the period as compared to those of its Texas and national peers. A. As shown in Figures RDS-RR-0 and RDS-RR-1, SPS s distribution capital additions have also been increasing since 00. Between 00 and 00, SPS s distribution capital additions were below the national and Texas peer group medians. However, since 00 distribution capital additions have been above the medians for both peer groups. Distribution additions for upgrades to, and Starkweather Direct Revenue Requirement Page RR1 - of 00

43 expansion of, the electric distribution system (including distribution lines, transformers, capacitors, meters, and distribution substation infrastructure) to connect new customers, maintain reliability, increase feeder and substation capacity, and improve load serving capability also contributed to these increased investment levels, as discussed further by SPS witness Kelly A. Bloch. Results for SPS in 01 are at or below the median for both the national and Texas peer groups. On a three-year rolling average basis, SPS s distribution capital additions as a percent of total distribution plant have been at or near the Texas peer group median. Figure RDS-RR-0: Distribution Plant Additions as a Percent of Total Plant.0% Distribution Adds as % of Distribution Plant.0% Distribution Adds as % of Distribution Plant.0%.0%.0%.0%.0%.0%.0%.0%.0%.0%.0%.0% 1.0% 1.0% 1 SPS Median SPS Median 1 1 Figure RDS-RR-1: -Year Average Distribution Plant Additions as a Percent of Total Plant.0% -Year Avge Distribution Additions as % of Plant.0% -Year Avge Distribution Additions as % of Plant.0%.0%.0%.0%.0%.0%.0%.0%.0%.0% 1.0% 1.0% 1 SPS Median SPS Median Starkweather Direct Revenue Requirement Page RR1 - of 00

44 1 1 1 Q. Please describe the results of your analysis of SPS's distribution plant additions relative to distribution depreciation expense. A. As shown in Figure RDS-RR-, SPS increased its rate of capital spending on distribution plant additions from 00 to 01. The level of annual capital additions for the peer groups (between percent and 00 percent of annual depreciation) again indicates that utility companies in general are adding to their infrastructure at a rate faster than would be required to simply replace aging assets. SPS s distribution capital additions levels have been consistent with these national and Texas peer group trends, except in 0. The increase in 0 is a result of upgrades to SPS s electric distribution system to connect new customers, maintain reliability, increase feeder and substation capacity, and improve load serving capability. Figure RDS-RR-: Distribution Plant Additions as a Percent of Depreciation Expense 0 Distribution Additions as % of Depreciation 0 Distribution Additions as % of Depreciation 0 0.0%.0% 1 SPS Median SPS Median Q. Please describe your analysis of SPS's general plant investment additions relative to those of the Texas and national peer groups. A. I put together three charts depicting my analysis of SPS's annual general plant investments: (1) general plant additions as a percentage of total general plant; () Starkweather Direct Revenue Requirement Page RR1 - of 00

45 annual plant additions averaged over three years as percentage of general plant; and () general plant additions as percentage of depreciation expense. These are depicted in Figures RDS-RR- through RDS-RR-. Q. Please describe the results of your analysis of SPS's general plant additions for the period as a percentage of total general plant as compared to those of its Texas and national peers. A. As shown in Figures RDS-RR- and RDS-RR-, SPS general plant additions have been trending upward since 00. On a three-year rolling average basis, SPS general plant additions as a percent of total general plant were consistent with national and Texas peer group medians from 00 through 0. However, 0 general plant additions were. percent of total general plant balances, compared to about 1 percent for the national peer group median and 1percent for the Texas peer group median. In 01, general plant additions were 0. percent of total general plant balances, compared to about 1 percent for the national peer group median and 1 percent for the Texas peer group median. The increase in general plant additions by SPS versus the national and Texas peer group medians was primarily due to the replacement of the microwave radio system, and new transmission and distribution fleet purchases, as discussed further by SPS witnesses Ms. Bloch, Mr. Fulton (in the Revenue Requirement phase), and David Harkness. Starkweather Direct Revenue Requirement Page RR1 - of 00

46 Figure RDS-RR-: General Plant Additions as a Percent of Total General Plant General Plant Additions as % of General Plant General Plant Additions as % of General Plant.0%.0% 1.0% 1.0%.0%.0%.0%.0% SPS Median SPS Median Figure RDS-RR-: -Year Average General Plant Additions as a Percent of General Plant 1.0% -Year Avge Gen'l Plt Adds as % of General Plant 1.0% -Year Avge Gen'l Plt Adds as % of General Plant.0%.0%.0%.0%.0%.0%.0%.0%.0%.0% SPS Median SPS Median Q. Please describe the results of your analysis of SPS's general plant additions relative to general plant depreciation expense. A. As shown in Figure RDS-RR-, the level of annual capital additions for the peer groups (between 1 percent and 1 percent of annual depreciation between 00 and 01) shows utility general plant investment levels greater than would be required to simply replace aging assets. SPS s general plant additions have been consistent with these peer group trends from 00-0 with 01 being higher than the medians. Starkweather Direct Revenue Requirement Page RR1-00 of 00

47 Figure RDS-RR-: General Plant Additions as a Percent of Depreciation Expense 0 General Plant Additions as % of Depreciation 0 General Plant Additions as % of Depreciation 0 0.0%.0% SPS Median SPS Median Starkweather Direct Revenue Requirement Page RR1-01 of 000

48 VII. CONCLUSIONS Q. Were Attachments RDS-RR-1 through RDS-RR- prepared by you or under your direct supervision and control? A. Yes. Q. Does this conclude your pre-filed direct testimony? A. Yes. Starkweather Direct Revenue Requirement Page RR1-0 of 001

49 RR1-0 of 00

50 Attachment RDS-RR-1 Page 1 of Docket No. 00 Resume of: Richard D. Starkweather, CMVP Partner Summary Rick Starkweather has been a management consultant for almost years and leads ScottMadden s regulatory practice. His areas of expertise include strategic and business planning, budgeting and forecasting, regulatory compliance, rate case support, and organizational and operations improvement. Prior to joining ScottMadden, Rick was a consultant with Deloitte Consulting. He also has experience in the healthcare and chemical industries and helped lead the start up of two companies. Rick received a B.S. in mechanical engineering from Northwestern University and an M.B.A. from the University of Chicago Graduate School of Business. He is a Certified Measurement and Verification Professional (CMVP) through the Association of Energy Engineers. Areas of Specialization Operations improvement and process redesign Energy regulation and rate case support Strategy development Business planning and budgeting Organization design and restructuring Recent Articles and Speeches PRC 00: Violation Analysis and Common Compliance Gaps. EUCI PRC-00 Conference. October 01 The Impact of Regulation Simply More (and More) Restrictions on Our Business or Does It Also Provide Strategic Opportunities? EEI Strategic Issues Roundtable. October 01 Rate Case Preparation and Management. EEI/AGA Advanced Public Utility Accounting Course. September 01 Rate Case 1: A Case Study. AGA/EEI Finance & Accounting for Non-Financial Utility Professionals. September 01 Representative Assignments Directed a project for a southeastern utility to improve the speed and accuracy of the ratemaking process by identifying improvements to the development of revenues and billing determinants for rate filings, enhancing information reporting and analytics, and automating the process through potential technology solutions Conducted a review of a utility s transmission cost recovery, mercury emissions reduction, environmental, and conservation improvement rate riders. Scope of review included the processes for budgeting and forecasting cash flows for eligible projects and the tracking of projected cash flows for each project through the company s budgeting and fixed-asset accounting systems and the revenue requirements calculations supporting the riders Developed statistical sampling methodologies to test gas main extension and new service capital projects for a midwestern gas utility. Defined the population of all projects, identified sample projects, compiled necessary documentation to assess tariff compliance for these RR1-0 of 00

51 Attachment RDS-RR-1 Page of Docket No. 00 Resume of: Richard D. Starkweather, CMVP Partner projects, and developed rate-base adjustments to address uncollected contributions in aid of construction based on sample results Completed an assessment of a new general ledger system for a regional electric and gas utility in light of a pending rate case. Analyses included historical O&M trends and a detailed year-to-year FERC account variance analysis to support pre-filed testimony Conducted an assessment of the capital budgeting and reporting processes of a combination gas/electric utility migrating to a future test year in several jurisdictions. Developed recommendations and process improvement initiatives to improve accuracy of in-service dates and overall forecast accuracy, resulting in better rate case assumptions, improved budget and forecast data, and more accurate accounting data Provided support for a retail electric rate case for a super-regional utility, including the completion of various analyses to support anticipated intervener data requests, as well as the development of rebuttal testimony Provided support for a retail rate case for a midwestern gas utility, including the development of a comprehensive merger synergy tracking analysis, as well as the completion of a sample audit of new service installations to ensure tariff compliance Representative Assignments (Cont d) Validated the achievement of annual merger synergy targets for a combination utility to support its retail rate case filings. Quantified savings levels by line item consistent with original multi-year savings model and drafted supporting direct testimony Developed enhancements to capital and O&M budgeting processes for an electric utility to support a potential future test year rate case filing. Additional documentation templates were also developed to support the required financial schedules Directed an assessment of a southwestern utility s capital and O&M budgeting processes to support a future test year filing. Additional capital and O&M documentation templates were developed to support the filing Completed a risk assessment of various components of an electric utility s rate case filing, including capital additions and capital estimating standards. Also analyzed year-to-year O&M variances to identify significant test-period revenue drivers Assisted a utility in the Midwest in its response to commission inquiries about affiliate interest issues, cost separation methodologies, and the rationale for proposed increases in the company s cost-of-service filing. Developed detailed documentation and supporting work paper templates for capital and O&M budgets, facilitated template completion by the business units, sample-tested capital budget items to ensure adequate separation of regulated and non-regulated projects, and assisted in submitting the new filing Developed an audit plan and project management protocols for a midwestern combination electric and gas utility to guide the development of all regulatory filings in the Company s various jurisdictions. Scope included the development of detailed process maps for each rate RR1-0 of 00

52 Attachment RDS-RR-1 Page of Docket No. 00 Resume of: Richard D. Starkweather, CMVP Partner filing process, the identification of data input, consistency, and reliability risks, and the identification of appropriate preventive and detective audit controls Completed a detailed distribution benchmarking study for a mid-atlantic electric utility to support the definition of annual performance goals and budgeting targets Performed an analysis of A&G cost-reduction opportunities for a federal power authority. The analysis disaggregated A&G costs by FERC function and cost type where appropriate and identified key cost drivers by function and type. Identified business unit and FERC account cost categories with greatest potential for cost reduction and then recommended initiatives and specific opportunities to decrease costs in these areas Completed a comprehensive benchmarking analysis for a southwestern electric utility. Recommended appropriate operational and financial metrics for each functional area Professional History SCOTTMADDEN, INC., Raleigh, North Carolina Partner (00 Present) Director (1 00) DELOITTE CONSULTING, Los Angeles, California Senior Manager (1 1) EDISON EV, Los Angeles, California (A Subsidiary of EDISON INTERNATIONAL) Senior Manager/Director, Finance and Administration (1 1) EDISON INTERNATIONAL (formerly SCEcorp), Rosemead, California Strategic Projects Manager, Corporate Development (1 1) DELOITTE & TOUCHE, Dallas, Texas Senior Manager ( 1) Manager (1 ) HEALTH ECONOMICS CORPORATION, Dallas, Texas (A Subsidiary of HALLIBURTON COMPANY) Vice President (1 1) TOUCHE ROSS & CO., Detroit, Michigan Senior Consultant (1 1) Associate Consultant (1 1) EXXON CHEMICAL AMERICAS, Linden, New Jersey Plant Analyst (1 1) Forecast Coordinator (10 1) RR1-0 of 00

53 Attachment RDS-RR- Page 1 of Docket No. 00 SOUTHWESTERN PUBLIC SERVICE COMPANY COMPANIES INCLUDED IN THE NATIONAL PEER GROUP LINE NO. Listing Company Information Company ID Company Name Electric? Yes/No Gas Distribution? Yes/No Electric Generation? Yes/No Electric Transmission? Yes/No 1 00 Southwestern Public Service Company Yes No Yes Yes Yes 0 AEP Texas Central Company Yes No No Yes Yes 00 AEP Texas North Company Yes No Yes Yes Yes 01 Alabama Power Company Yes NA Yes Yes Yes 01 Alaska Electric Light and Power Company Yes No Yes Yes Yes 0 ALLETE (Minnesota Power) Yes No Yes Yes Yes Ameren Illinois Company Yes Yes No Yes Yes 00 Central Illinois Light Company Yes Yes Yes No Yes 00 Central Illinois Public Service Company Yes Yes No No Yes 0 Appalachian Power Company Yes No Yes Yes Yes 0 Arizona Public Service Company Yes No Yes Yes Yes 1 0 Atlantic City Electric Company Yes No No Yes Yes 1 00 Avista Corporation Yes Yes Yes Yes Yes 1 00 Baltimore Gas and Electric Company Yes Yes No Yes Yes 1 00 Bangor Hydro Electric Company Yes No Yes Yes Yes 1 0 Black Hills Power, Inc. Yes No Yes Yes Yes KCP&L Greater Missouri Operations Company Yes NA Yes Yes Yes Duke Energy Progress, Inc. Yes No Yes Yes Yes 1 00 CenterPoint Energy Houston Electric, LLC Yes No No Yes Yes 0 00 Central Hudson Gas & Electric Corporation Yes Yes Yes Yes Yes 1 0 Central Maine Power Company Yes No No Yes Yes 0 Central Vermont Public Service Corporation Yes No Yes Yes Yes 01 Cheyenne Light, Fuel and Power Company Yes Yes Yes Yes Yes 0 Cleco Power LLC Yes No Yes Yes Yes 0 Cleveland Electric Illuminating Company Yes No No Yes Yes 0 Columbus Southern Power Company Yes NA Yes No Yes 000 Commonwealth Edison Company Yes No No Yes Yes 0 Connecticut Light and Power Company Yes No No Yes Yes 000 Consolidated Edison Company of New York, Inc. Yes Yes Yes Yes Yes Consumers Energy Company Yes Yes Yes No Yes 1 0 Dayton Power and Light Company Yes No Yes Yes Yes 00 Delmarva Power & Light Company Yes Yes No Yes Yes 00 DTE Electric Company Yes No Yes Yes Yes 000 Duke Energy Carolinas, LLC Yes No Yes Yes Yes 0 Duke Energy Indiana, Inc. Yes No Yes Yes Yes 0 Duke Energy Kentucky, Inc. Yes Yes Yes Yes Yes 00 Duke Energy Ohio, Inc. Yes Yes Yes Yes Yes 000 Duquesne Light Company Yes No No Yes Yes 0 El Paso Electric Company Yes No Yes Yes Yes 0 00 Empire District Electric Company Yes Yes Yes Yes Yes 1 0 Entergy Arkansas, Inc. Yes No Yes Yes Yes 00 Entergy Gulf States Louisiana, L.L.C. Yes Yes Yes Yes Yes Entergy Texas, Inc. Yes No Yes Yes Yes Entergy Louisiana, LLC Yes No Yes Yes Yes 001 Entergy Mississippi, Inc. Yes No Yes Yes Yes 00 Entergy New Orleans, Inc. Yes Yes Yes Yes Yes 000 Fitchburg Gas and Electric Light Company Yes Yes No Yes Yes 0 Florida Power & Light Company Yes No Yes Yes Yes 0 Duke Energy Florida, Inc. Yes No Yes Yes Yes 0 00 Florida Public Utilities Company Yes Yes No Yes Yes Georgia Power Company Yes NA Yes Yes Yes 0 Sharyland Utilities, L.P. Yes No No Yes Yes 00 Granite State Electric Company Yes No No No Yes 0 Green Mountain Power Corporation Yes No Yes Yes Yes 0000 Gulf Power Company Yes No Yes Yes Yes 00 Hawaii Electric Light Company, Inc. Yes No Yes Yes Yes 0001 Hawaiian Electric Company, Inc. Yes No Yes Yes Yes 000 Idaho Power Co. Yes No Yes Yes Yes 000 Indiana Michigan Power Company Yes No Yes Yes Yes 0 00 Indiana-Kentucky Electric Corporation Yes No No Yes No 1 0 Indianapolis Power & Light Company Yes No Yes Yes Yes 00 Interstate Power and Light Company Yes Yes Yes No Yes 000 Jersey Central Power & Light Company Yes No Yes Yes Yes 0 Kansas City Power & Light Company Yes No Yes Yes Yes 00 Kansas Gas and Electric Company Yes No Yes Yes Yes 000 Kentucky Power Company Yes No Yes Yes Yes 0 Kentucky Utilities Company Yes No Yes Yes Yes Electric Distribution? Yes/No RR1-0 of 00

54 Attachment RDS-RR- Page of Docket No. 00 SOUTHWESTERN PUBLIC SERVICE COMPANY COMPANIES INCLUDED IN THE NATIONAL PEER GROUP LINE NO. Listing Company Information Company ID Company Name Electric? Yes/No Gas Distribution? Yes/No Electric Generation? Yes/No Electric Transmission? Yes/No 00 Kingsport Power Company Yes No No Yes Yes 000 Louisville Gas and Electric Company Yes Yes Yes Yes Yes 0 00 Madison Gas and Electric Company Yes Yes Yes No Yes Maine Public Service Company Yes No No Yes Yes 000 Massachusetts Electric Company Yes No Yes Yes Yes 01 Maui Electric Company, Limited Yes No Yes Yes Yes 0 MDU Resources Group, Inc. Yes Yes Yes Yes Yes 000 Metropolitan Edison Company Yes No No Yes Yes 001 MidAmerican Energy Company Yes Yes Yes Yes Yes 00 Mississippi Power Company Yes No Yes Yes Yes 00 Monongahela Power Company Yes No Yes Yes Yes 0 Nantucket Electric Co. Yes No No No Yes Narragansett Electric Company Yes Yes No Yes Yes National Grid USA Yes Yes Yes Yes Yes 01 Nevada Power Company Yes No Yes Yes Yes 00 New York State Electric & Gas Corporation Yes Yes Yes Yes Yes 001 Niagara Mohawk Power Corporation Yes Yes No Yes Yes 010 Northern Indiana Public Service Company Yes Yes Yes Yes Yes 0 Northern States Power Company - MN Yes Yes Yes Yes Yes 01 Northern States Power Company - WI Yes Yes Yes Yes Yes 0 Northwestern Wisconsin Electric Company Yes No Yes Yes Yes 00 NSTAR Electric Company Yes Yes No Yes Yes Ohio Edison Company Yes No Yes Yes Yes Ohio Power Company Yes No Yes Yes Yes 001 Oklahoma Gas and Electric Company Yes No Yes Yes Yes 00 Oncor Electric Delivery Company LLC Yes No No Yes Yes 00 Orange and Rockland Utilities, Inc. Yes Yes No Yes Yes 001 Pacific Gas and Electric Company Yes Yes Yes Yes Yes 001 PacifiCorp Yes No Yes Yes Yes 0 PECO Energy Company Yes Yes No Yes Yes 001 Pennsylvania Electric Company Yes No No Yes Yes 01 Pennsylvania Power Company Yes No No Yes Yes Portland General Electric Company Yes No Yes Yes Yes Potomac Edison Company Yes No No Yes Yes 01 Potomac Electric Power Company Yes No No Yes Yes 001 PPL Electric Utilities Corporation Yes No No Yes Yes 00 Public Service Company of Colorado Yes Yes Yes Yes Yes 00 Public Service Company of New Hampshire Yes No Yes Yes Yes 00 Public Service Company of New Mexico Yes No Yes Yes Yes 00 Public Service Company of Oklahoma Yes No Yes Yes Yes 00 Public Service Electric and Gas Company Yes Yes Yes Yes Yes 0 Puget Sound Energy, Inc. Yes Yes Yes Yes Yes 0 00 Rochester Gas and Electric Corporation Yes Yes Yes Yes Yes 1 00 Rockland Electric Company Yes No No Yes Yes 00 San Diego Gas & Electric Co. Yes Yes Yes Yes Yes 00 Sierra Pacific Power Company Yes Yes Yes Yes Yes 00 South Carolina Electric & Gas Co. Yes Yes Yes Yes Yes 000 Southern California Edison Co. Yes No Yes Yes Yes 00 Southern Indiana Gas and Electric Company, Inc. Yes Yes Yes Yes Yes 00 Southwestern Electric Power Company Yes No Yes Yes Yes 01 Superior Water, Light and Power Company Yes Yes No Yes Yes 01 Tampa Electric Company Yes Yes Yes Yes Yes 00 Texas-New Mexico Power Company Yes No No Yes Yes 00 Toledo Edison Company Yes No Yes Yes Yes Tucson Electric Power Company Yes No Yes Yes Yes 1 0 UGI Utilities, Inc. Yes Yes No Yes Yes 1 0 Union Electric Company Yes Yes Yes Yes Yes 1 00 United Illuminating Company Yes No Yes Yes Yes 1 01 Unitil Energy Systems, Inc. Yes No No Yes Yes 1 0 UNS Electric, Inc. Yes No Yes Yes Yes 1 01 Upper Peninsula Power Company Yes No Yes No Yes 1 00 Virginia Electric and Power Company Yes No Yes Yes Yes 00 West Penn Power Company Yes No No Yes Yes 0 Westar Energy (KPL) Yes No Yes Yes Yes 1 00 Western Massachusetts Electric Company Yes No Yes Yes Yes 1 0 Wheeling Power Company Yes No No Yes Yes 1 0 Wisconsin Electric Power Company Yes Yes Yes Yes Yes Electric Distribution? Yes/No RR1-0 of 00

55 Attachment RDS-RR- Page of Docket No. 00 SOUTHWESTERN PUBLIC SERVICE COMPANY COMPANIES INCLUDED IN THE NATIONAL PEER GROUP LINE NO. Listing Company Information Company ID Company Name Electric? Yes/No Gas Distribution? Yes/No Electric Generation? Yes/No Electric Transmission? Yes/No 1 00 Wisconsin Power and Light Company Yes Yes Yes Yes Yes 1 0 Wisconsin Public Service Corporation Yes Yes Yes Yes Yes Otter Tail Corporation Yes No Yes Yes Yes Electric Distribution? Yes/No RR1-0 of 00

56 Attachment RDS-RR-(CD) Page 1 of 1 Docket No. 00 Retail Pricing and O&M Benchmarking Analysis (Provided in Native Format on CD Only) Attach CD for RDS-RR- (CD) RR1 - of 00

57 Attachment RDS-RR-(CD) Page 1 of 1 Docket No. 00 Capital Additions Benchmarking Analysis (Provided in Native Format on CD Only) Attach CD for RDS-RR- (CD) RR1 - of 000