BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * *

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1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * RE: IN THE MATTER OF ADVICE ) LETTER NO. 1-ELECTRIC FILED BY ) PUBLIC SERVICE COMPANY OF ) DOCKET NO. AL- E COLORADO TO REVISE ITS COLORADO ) PUC NO. -ELECTRIC TARIFF TO ) IMPLEMENT A GENERAL RATE ) SCHEDULE ADJUSTMENT AND OTHER ) CHANGES EFFECTIVE DECEMBER, 0 ) DIRECT TESTIMONY AND EXHIBITS OF DEBORAH A. BLAIR ON BEHALF OF PUBLIC SERVICE COMPANY OF COLORADO November, 0

2 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * RE: IN THE MATTER OF ADVICE ) LETTER NO. 1-ELECTRIC FILED BY ) PUBLIC SERVICE COMPANY OF ) DOCKET NO. AL- E COLORADO TO REVISE ITS COLORADO ) PUC NO. -ELECTRIC TARIFF TO ) IMPLEMENT A GENERAL RATE ) SCHEDULE ADJUSTMENT AND OTHER ) CHANGES EFFECTIVE DECEMBER, 0 ) DIRECT TESTIMONY AND EXHIBITS OF DEBORAH A. BLAIR INDEX SECTION PAGE I. INTRODUCTION AND QUALIFICATIONS...1 II. SUMMARY OF TESTIMONY... III. TEST YEAR REVENUE DEFICIENCY... IV. SELECTION OF TEST YEAR AND OTHER DATA PROVIDED... V. TEST YEAR BUDGET DEVELOPMENT... VI. COST OF SERVICE STUDY...1 VII. RATE BASE...1 VIII. CASH WORKING CAPITAL... IX. COST OF FUEL AND PURCHASED POWER... X. PRODUCTION O&M EXPENSE ADJUSTMENTS...

3 XI. TRANSMISSION O&M EXPENSE ADJUSTMENTS... XII. REGIONAL MARKET O&M EXPENSE ADJUSTMENTS... XIII. DISTRIBUTION O&M EXPENSE ADJUSTMENTS... XIV. CUSTOMER OPERATIONS EXPENSE ADJUSTMENTS... XV. ADMINISTRATIVE & GENERAL EXPENSE ADJUSTMENTS...1 XVI. DEPRECIATION AND AMORTIZATION EXPENSE ADJUSTMENTS 0 XVII. TAXES OTHER THAN INCOME TAX EXPENSE ADJUSTMENTS... XVIII. INCOME TAX EXPENSE ADJUSTMENTS... XIX. GAIN ON SALE OF SO ALLOWANCES AND UTILITY PLANT... XX. XXI. AFUDC OFFSET TO EARNINGS... OTHER REVENUE ADJUSTMENTS... XXI. OIL AND GAS ROYALTY REVENUE...0 XXI. XXII. JURISDICTIONAL ALLOCATION... CAPITAL STRUCTURE ADJUSTMENTS... XXIII. REVENUE REQUIREMENTS AND EARNINGS DEFICIENCY... XXIV. FUNCTIONALIZED COST OF SERVICE... XXV. TRANSMISISON COST ADJUSTMENT MODIFICATIONS...

4 LIST OF EXHIBITS Exhibit No. DAB-1 Revenue Requirements Study for Public Service Company s Electric Department Based on the Forecasted Test Year 0 Exhibit No. DAB- Functionalized Cost of Service Study based on the Forecasted Test Year 0 Exhibit No. DAB- Revenue Requirements Study for Public Service Company s Electric Department Based on the Historic Test Year for the Months Ending June 0, 0 Exhibit No. DAB- Exhibit No. DAB- Exhibit No. DAB- Exhibit No. DAB- Exhibit No. DAB- Exhibit No. DAB- Exhibit No. DAB- Exhibit No. DAB- Exhibit No. DAB- HIGHLY CONFIDENTIAL Exhibit No. DAB- Exhibit No. DAB-1 Functionalized Cost of Service based on the Historic Test Year for the Months Ending June 0, 0 Comparison of the 0 Forecasted Test Year versus the cost of service supporting the Company s current base rates approved in Docket No. 0AL-E Comparison of the 0 Forecasted Test Year versus the Historic Test Year for the Months Ending June 0, 0 Regulatory Principles and Adjustments underlying the FTY and HTY SmartGridCity Plant Costs Lead-lag Study Summary that supports the Cash Working Capital Factors Used in the Cost of Service Study Detailed Lead-Lag Study Support, including CD-ROM of Revenue Lag detail CD-ROM Audit Trail Map Copies of Recoverable Advertisements for Months Ending June 0, 0 Gain on the Sale of the TSB Facility FILED UNDER SEAL Transmission Cost Adjustment Rider Calculations

5 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * RE: IN THE MATTER OF ADVICE ) LETTER NO. 1-ELECTRIC FILED BY ) PUBLIC SERVICE COMPANY OF ) DOCKET NO. AL- E COLORADO TO REVISE ITS COLORADO ) PUC NO. -ELECTRIC TARIFF TO ) IMPLEMENT A GENERAL RATE ) SCHEDULE ADJUSTMENT AND OTHER ) CHANGES EFFECTIVE DECEMBER, 0 ) DIRECT TESTIMONY AND EXHIBITS OF DEBORAH A. BLAIR 1 I. INTRODUCTION AND QUALIFICATIONS Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Deborah A. Blair. My business address is 0 Larimer Street, Suite 100, Denver, Colorado 00. Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? A. I am employed by Xcel Energy Services Inc. ( Service Company ), a whollyowned subsidiary of Xcel Energy Inc. ( Xcel Energy ), the parent company of Public Service Company of Colorado ( Public Service or Company ). The Service Company provides an array of support services for Public Service and the other utility subsidiaries of Xcel Energy. My job title is Director, Revenue Analysis in the Regulatory Department. Q. ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS DOCKET? A. I am appearing on behalf of Public Service.

6 Q. PLEASE BRIEFLY EXPLAIN YOUR DUTIES AND RESPONSIBILITIES. A. My duties and responsibilities include the determination of the overall revenue levels required by Public Service and Southwestern Public Service Company, another Xcel Energy regulated utility subsidiary. A statement of my education and relevant experience is set forth in Attachment A. II. SUMMARY OF TESTIMONY Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY? A. The purpose of my Direct Testimony is to present the electric department s revenue requirements study, also known as the cost of service study, which supports the required increase in base rate revenues the Company is requesting in this case. The overall retail revenue requirement is $1,,,01, based on a forecasted test year cost of service study for the twelve months ending December 1, 0. I will explain the rationale for, and effect of, many of the adjustments included in the cost of service study. The Company is proposing a General Rate Schedule Adjustment ( GRSA ) that will be in effect until final Phase II rates are approved by the Commission. I present the calculation of the GRSA that is based on the rate increase requested in this case. In addition, as agreed to as part of the settlement reached in the Company s last electric Phase I rate case, I present the electric department s revenue requirements study based on a historic test year ( HTY ) with pro forma adjustments as well as a deviations analysis showing the changes between the HTY and the FTY. The HTY cost of service presented is the months ending June 0, 0.

7 Finally, I also present the Company s proposed changes in the methodology used to calculate the Transmission Cost Adjustment ( TCA ). I provide testimony in support of these changes. Q. WHAT ARE THE CHANGES THE COMPANY IS PROPOSING IN THE WAY THE TRANSMISSION COST ADJUSTMENT RIDER IS CALCULATED? A. In this case, the Company is proposing a change in the way that the transmission net plant in-service component of the TCA is calculated. Specifically, to be consistent with the method the Company proposes to determine its base rates, the Company proposes that the net plant-in-service component of the TCA rate be based on incremental increase in the projected -month average plant in service balance ending with December 1 of the year in which the TCA is expected to be in effect, instead of the current method which is based on historic costs, as discussed later in my Direct Testimony. On November 1, 0, the Company made its normal TCA filing using the methodology approved by the Commission in Decision No. C0- to calculate the TCA rates to become effective January 1, 0, including a transmission net plant in-service component calculated based on the incremental increase in the -month transmission plant in service balance for the period ending December 1, 0 and the projected year-end CWIP balances as of December 1, 0. If the Commission approves base rates based on the 0 FTY cost of service filed in this case, the Company will revise the TCA effective on the same day that new rates take effect as a result of this rate case to remove the revenue requirement associated with the net

8 transmission plant in service component and any portion of the CWIP component associated with transmission plant projected to go into service during 0. The Company would then develop the TCA factor to take effect on January 1, 0 based on projected plant in-service balances for calendar 0 as compared to the plant in-service balances approved in this rate case. I provide additional information on the proposed changes to the TCA later in testimony, Q. ARE YOU SPONSORING ANY EXHIBITS AS PART OF YOUR DIRECT TESTIMONY? A. Yes, I am sponsoring Exhibit Nos. DAB-1 through DAB-1, which were prepared by me or under my direct supervision. Exhibit No. DAB-1 is the revenue requirements study for Public Service s electric department based on the forecasted test year 0. Exhibit No. DAB- is the functionalized revenue requirements study for the 0 FTY. Exhibit No. DAB- is the revenue requirements study base on the HTY for the months ending June 0, 0. Exhibit No. DAB- is the functionalized revenue requirements study for the HTY. Exhibit No. DAB- is a comparison of the 0 FTY versus the cost of service that is the basis of current base rates as approved by the Commission in Docket No. 0AL-E. Exhibit No. DAB- is a comparison of the 0 FTY versus the HTY for the months ending June 0, 0. Exhibit No. DAB- is a list of the regulatory principles and adjustments underlying the FTY and the HTY cost of service studies filed in this case. Exhibit No. DAB- shows the SmartGridCity plant costs included in the FTY cost of service. Exhibit No. DAB- is the lead-lag

9 study summary that supports the cash working capital factors used in the revenue requirements study. Exhibit No. DAB- is the detailed lead-lag study support, which includes a CD-ROM of the revenue lag. Exhibit No. DAB- (provided as a CD-ROM) is an Excel spreadsheet that includes the detailed 0 budget data used as inputs to the FTY COS as presented by the budget witnesses in this case. The data presented in Exhibit No. DAB-, referred to as the Audit Trail Map, can be filtered and summarized by FERC account and equals the expenses presented in the revenue requirements study. Exhibit No. DAB- is a copy of all the recoverable advertisements for the months ending June 0, 0. These advertisements are being provided in this case as examples of the types of advertisements the Company expects it will run in 0. Highly Confidential Exhibit No. DAB- is the calculation of the gain on the sale of the Technical Services Building ( TSB ). Exhibit No. DAB-1 is a calculation showing the revised TCA revenue requirement once new base rates take effect as a result of this case. Q. WHAT IS THE PURPOSE OF THE HISTORIC TEST YEAR THAT THE COMPANY IS PROVIDING IN THIS PROCEEDING? A. In the Settlement Agreement in the Company s last electric rate case, Docket No. 0AL-E, the Settling Parties recognized the Company expected to file a FTY in the next Phase 1 electric rate case. The Company agreed to provide an HTY cost of service and a deviations analysis similar to one of the exhibits entered into evidence in Docket No. 0AL-E (Hearing Exhibit No. 1) as part of its direct rate case filing. In Decision No. C0-1, mailed December

10 , 00, the Commission specifically approved this aspect of the Settlement Agreement, directing the Company to provide a comparison of any proposed FTY and HTY in the early stages of the Phase I proceeding. The Commission stated that this information should allow intervenors to better analyze the differences between an HTY and a FTY. The HTY cost of service is provided as Exhibit No. DAB-, and the explanation of drivers between the FTY and the HTY cost of service studies is provided as Exhibit No. DAB-. In addition, Exhibit DAB- compares the regulatory principles and adjustments underlying the FTY and the HTY cost of service studies. The HTY cost of service the Company has provided should assist the Commission and the intervenors in assessing the reasonableness of the Company s FTY cost of service. Q. WHAT IS A REVENUE REQUIREMENTS STUDY? A. A revenue requirements study also referred to as cost of service study or pro forma rate of return study examines all of the Company s investments, revenues, and expenses associated with providing electric utility service over a specific twelve-month period, or test year, with the goal of determining the Company s cost of providing service to its customers during the period of time in which new rates will be in effect. The revenue requirements study indicates the overall level of revenues necessary for the Company to earn its authorized return, which is used in setting the Company s base rates for service. In effect, the revenue requirement establishes a proxy for what the Company s cost of service will be in future periods when the new requested rates will be in effect.

11 III. TEST YEAR REVENUE DEFICIENCY Q. PLEASE SUMMARIZE THE RESULTS OF THE REVENUE REQUIREMENTS STUDY FOR 0. A. The study shows a total revenue requirement, excluding electric energy and electric purchased capacity costs collected in the Electric Commodity Adjustment ( ECA ) and the Purchased Capacity Cost Adjustment ( PCCA ), of $1,,,01. This is based on the proposed return on equity of.%, as recommended by Company witness Mr. Robert B. Hevert, and a capital structure of % equity, % debt, as recommended by Company witness Mr. George E. Tyson II. When compared to present revenue of $1,,0,, including the current GRSA of negative 0.0%, which was the result of removing a portion of SmartGridCity plant costs as directed by the Commission in Docket No. A-E, results in a base rate revenue increase of $1,0,1. This increase includes the shift of $0. million of costs associated with the Company s recent acquisition of two generation facilities from Calpine from the PCCA to base rates, the shift of $.1 million of transmission costs expected to be recovered in the TCA effective January 1, 0, and the roll-in of an additional $1. million of Demand Side Management ( DSM ) costs that the Company expects to incur in 0. Excluding the effects of the inclusion of the Calpine assets, the TCA costs, and the incremental increase in DSM, the Company is seeking a net increase in revenues of $11,0,.

12 Q. IS THE COMPANY PROPOSING ANY COST RECOVERY CHANGES THAT ARE REVENUE NEUTRAL TO THE CUSTOMERS? A. Yes. As indicated above, the Company is proposing several changes that have the effect of increasing the base rate revenue deficiency by an estimated $.1 million, but which are revenue neutral and do not reflect an overall increase in rates to our customers. These revenue neutral changes are the result of shifting the recovery of certain costs from rate riders to recovery through base rates. Q. PLEASE DESCRIBE THE REVENUE NEUTRAL COST RECOVERY CHANGES. A. As discussed by Company witnesses Ms. Karen T. Hyde and Ms. Priya N. Burkett, the Company is proposing changes to shift costs to base rates from three existing rate riders, the Demand Side Management Cost Adjustment ( DSMCA ), and the PCCA and the TCA. First, the Company has included in this case, $1. million of additional DSM costs above what is already included in base rates, for a total of electric DSM costs in base rates equal to $,,0. Currently, the Company is recovering $,,1 in DSM costs through its base rates. In this case, the Company proposes to increase the level of DSM costs being recovered through base rates to include the following costs: 1) the 0 DSM program costs of $,,, plus; ) the projected 0 Interruptible Service Option Credit ( ISOC ) costs of $,0,, plus; and ) the projected 0 third party demand response costs of $,00,00. This is summarized in Table 1 below: Table 1

13 Net Shift in Costs from DSM-Related Costs DSMCA to Base Rates 0 DSM program costs $,, 0 Interruptible Service Option Credit,0, 0 third party demand response,00,00 Total DSM-related costs in base rates $,,0 DSM costs currently in base rates $,,1 Net Increase in DSM-related costs $1,, 1 Beginning with the effective date of rates from this case, the Company will revise the DSMCA then in effect such that it will only include the incremental costs the Company incurs in connection with its DSM, ISOC, and third-party demand response programs above or below the new base level, plus any incentives earned by the Company, and the amortization of the DSM program costs incurred through 00 ( vintage DSM programs ). Second, the Company is proposing to move into base rates all of the costs associated with the assets acquired from Calpine, specifically the Blue Spruce and Rocky Mountain Energy Center generating units (the Calpine Assets ), most of which are currently being recovered from retail customers through the PCCA, as authorized by Commission Decision No. A-E, in Docket No. C-. The effect of moving the revenue requirement associated with the Calpine Assets into base rates is an increase of $0. 1 million. The Calpine Assets acquired include production-related assets, 1 1 transmission assets serving production (also known as Generator Step-Up assets), and other transmission assets.

14 Third, on November, 0, the Company filed to implement its annual TCA rider to recover the incremental costs in plant in-service and CWIP balances since the last rate case. The plant in-service balances included in the annual TCA rider are included in 0 rate base balances in the FTY cost of service presented in this case. The portion of the CWIP balances include in the annual TCA rider that are in-service in 0, are also included in the rate base balances in the FTY cost of service. Therefore, effective with the base rates from this case, the Company will reduce the TCA rider to remove these costs that are included in base rates from this case. The effect of moving these costs into base rates from the TCA is an increase of $.1 million. Q. AFTER TAKING INTO CONSIDERATION THE SHIFT OF DSM COSTS, CALPINE, AND TCA COSTS INTO BASE RATES, WHAT IS THE RESULTING NET INCREASE IN BASE REVENUES THE COMPANY IS REQUESTING IN THIS CASE? A. In summary, the Company is requesting a net $11. million base rate increase in this case from the level of base rate revenues approved in Docket No. 0AL- E, as shown in Table below:

15 Table Revenue Requirement per 0 Test Year Cost of Service $1,,,01 Less: Revenues Under Present Base Rates $1,,1,1-0.% GRSA Revenues (established in Dkt. A-E) (,1,0) Net Shift in DSM Costs from DSMCA to Base Rates (1,,) Shift of Calpine Assets from the PCCA to Base Rates (0,0,1) Shift of Transmission Costs from TCA to Base Rates (,0,) Net Increase $11,0, 1 1 IV. SELECTION OF TEST YEAR AND OTHER DATA PROVIDED Q. WHAT TEST YEAR HAS THE COMPANY CHOSEN FOR PURPOSES OF ITS REVENUE REQUIREMENTS STUDY IN THIS PROCEEDING? A. Calendar year 0 was selected as the test year for this filing. This is a projected test year using the Company s budget data. Q. PLEASE DESCRIBE WHAT DATA YOU USED TO PREPARE THE TEST YEAR IN THIS CASE. A. The test year was prepared using the Company s 0 budget data. Several Company witnesses (Messrs. Hess, Benson, Brossart, McCloskey, Moeller, Anderson, and Ms. Locker) have provided testimony supporting the Company s O&M budget for 0 and the capital budget assumptions that have been used by the capital asset accounting group headed by Ms. Perkett to develop the projected thirteen month average plant-in-service balances upon which we based the FTY rate base.

16 Q. HAVE YOU PREPARED ANY ADDITIONAL INFORMATION IN THIS CASE TO EXPLAIN THE PROJECTED TEST YEAR AND DEMONSTRATE ITS REASONABLENESS? A. Yes. I have prepared Exhibit No. DAB-, which compares the 0 FTY cost of service to the 00 settled hybrid cost of service that is the basis for the Company s current base rates as approved in the Company s last rate case in Docket No. 0AL-E ( the 00 Rate Case ). Company witness Ms. Karen Hyde provides an explanation of what factors are driving the increase in the cost of service from the 00 Rate Case to the FTY filed in this case. I have also prepared Exhibit No. DAB- comparing the costs in the FTY cost of service based on calendar year 0, provided as Exhibit No. DAB-1 and the HTY cost of service based on the months ending June 0, 0, provided as Exhibit No. DAB-. Exhibit No. DAB- further clarifies and explains the drivers for the increase in base rates we are seeking in this proceeding. Q. PLEASE SUMMARIZE THE RESULTS OF THE HTY REVENUE REQUIREMENTS STUDY. A. The HTY cost of service study shows a total revenue requirement for base rate revenues, excluding purchased electric energy and purchased capacity costs collected in the ECA and the PCCA, of $1,,,0. This is based on the proposed return on equity of.%, and a capital structure of % equity, % debt. When compared to present revenue of $1,1,,1, the result is a revenue increase of $01,,1. This increase includes the shift of $. million of costs associated with the Company s recent

17 acquisition of two generation facilities from Calpine from the PCCA to base rates, the shift of $.1 million of transmission costs expected to be recovered in the TCA effective January 1, 0, and the roll-in of an additional $1. million of Demand Side Management ( DSM ) costs that the Company expects to incur in 0. Excluding the effects of the inclusion of the Calpine assets, the TCA costs, and the incremental increase in DSM, the Company is seeking a net increase in revenues of $10,,. Q. WHAT ARE THE MAJOR DIFFERENCES BETWEEN THE 0 FTY AND THE HTY BASED ON THE MONTHS ENDING JUNE 0, 0 COST OF SERVICE STUDIES FILED IN THIS CASE? A. As the data shown on Exhibit No. DAB- illustrates, the revenue requirements calculated using the 0 FTY is lower than the revenue requirements calculated using the HTY based on the months ending June 0, 0. The FTY cost of service is lower than the HTY cost of service primarily due to lower rate base, offset by increases in O&M, depreciation expense and property taxes. The lower rate base is due to a larger ADIT credit in the FTY cost of service, associated with bonus tax depreciation V. TEST YEAR BUDGET DEVELOPMENT Q. BRIEFLY DESCRIBE HOW COSTS FOR THE COLORADO JURISDICTIONAL ELECTRIC OPERATIONS ARE DEVELOPED IN THE BUDGET PROCESS. A. Each business area is responsible for designating its budgeted O&M dollars in appropriate Federal Energy Regulatory Commission ( FERC ) accounts.

18 Accounting codes in the J.D. Edwards ( JDE ) general ledger accounting system determine the FERC account to which budgeted costs apply. Each JDE business unit accounting code contains the necessary information to determine the appropriate FERC account classification, including the allocation of common O&M expense accounts to the electric department. Costs originating in the Service Company are typically either directly assigned or allocated within the accounting system to the particular Xcel Energy public utility subsidiaries (e.g., the Company) and then further assigned or allocated to specific utility operations and jurisdiction. The Company has prepared an Audit trail map in the form of an Excel Spreadsheet (included electronically as Exhibit No. DAB-) that includes the detailed 0 O&M budget data and the months actuals ending June 0, as presented by the budget witnesses in this case. ( Audit Trail Map ). The Audit Trail Map includes the actuals and budgeted O&M expenses (as well as fuel handling, procurement, transportation costs, and cost of goods sold) by Business Area and can be summarized by FERC Account to match the FTY Cost of Service presented in Exhibit No. DAB-1. Q. DID THE COMPANY MAKE ANY ADJUSTMENTS TO THE BUDGET DATA IN ORDER TO DEVELOP THE INPUTS TO THE COST OF SERVICE PRESENTED IN THIS CASE? A. Yes. We have made several adjustments to the budget data to ensure that our FTY cost of service reflects the most up to date forecast of the costs the Company expects to incur during the period in which rates will be in effect. These adjustments were made because updated information became available 1

19 1 1 1 after the budget was finalized that materially impacted our FTY cost of service Specifically, the 0 FTY reflects the following changes since the 0 budget was finalized: 1) Zuni Unit was originally expected to be retired at the end of 0. The Company has changed the retirement date to December 01. ) Additional production maintenance expenses have been added to the 0 budget for minor overhauls at Comanche Unit 1 and the Pawnee generating station to improve reliability. This addition also brings production maintenance expense up to a more normal annual level. ) 0 expenses have been reduced for costs that will be spent in calendar year 0, instead of calendar year 0. ) 0 expenses have been reduced to reflect several management cost-savings initiatives initiated after the budget for 0 was finalized. I will discuss each of these adjustments in more detail later in my testimony. Company witness Ms. Amy L. Stitt provides additional information on the 0 expense reductions VI. COST OF SERVICE STUDY Q. DO YOU HAVE ANY PRELIMINARY COMMENTS BEFORE DISCUSSING THE COST OF SERVICE STUDY PRESENTED IN THIS CASE? A. Yes, I have several preliminary comments about the cost of service study presented in this case. First, the format of the cost of service studies presented in this case has been modified from what has been filed in previous rate cases. Several changes have been made. Specifically, the Company has 1

20 functionalized more costs than previously presented to be able to more accurately allocate these costs between the retail and the FERC jurisdictions. For example, the Accumulated Deferred Income Tax ( ADIT ) balances have been functionalized, and allocated to the retail and FERC jurisdictions based on functional allocation factors, e.g., transmission related ADIT is allocated based on the transmission demand allocator. Previously, ADIT balances were shown by FERC account and allocated to the retail and FERC jurisdictions based on Net Plant. We believe that the use of functional allocators more closely reflects cost causation in the case of ADIT balances. We have also reflected specific assignments to the retail or the FERC jurisdictions as additional line items in the cost of service study, instead of using two separate columns in the cost of service study to segregate these costs as we have done in the past. This change has simplified the presentation of the cost of service. Second, the cost of service studies presented in this case includes several new FERC accounts, as follows: FERC Account, Regulatory Assets has been added to rate base to account for the early plant retirements and additional plant removal costs associated with several of the Company s generating units. FERC Account, Regulatory Liabilities has been added to rate base as a placeholder, to account for future plant removal costs that may be potentially owing to customers related to the early plant retirements. FERC Account, Acquisition Adjustment and FERC Account, Amortization of Acquisition Adjustment have been added to rate base as 1

21 placeholders, in the event the Company is required by FERC to account for a portion of the cost related to the Calpine Assets as an acquisition adjustment. FERC Account 0 Amortization Expense related to acquisition adjustment. I will discuss these changes in the cost of service study in more detail later in my Direct Testimony. Q. HOW WAS THE COST OF SERVICE STUDY DEVELOPED FOR THIS CASE? A. As previously stated, the cost of service study calculates the base rate revenues required to recover the cost of providing utility service, otherwise known as the revenue requirement. The cost of service study is essentially a model that measures revenue, expense and investment levels, and the relationship among those factors. A number of rate case principles established in previous cases have been used to calculate the cost of service. To the extent that the cost of service study departs from principles applied in previous cases I have discussed the changes below or such proposed changes have been addressed by Ms. Hyde. The starting point in developing the study presented in this case is the 0 budget data, updated to reflect material changes in our projected costs as described above. We have then made additional adjustments to the budget data, analogous to the types of adjustments that we would make in developing a HTY cost of service from historic data, in order to derive the FTY costs. There 1

22 are three types of adjustments that have been made to the updated budget data: (1) accounting adjustments; () Commission-ordered adjustments; and () pro forma adjustments. The resulting required revenues computed by the model are then compared to the revenues the Company expects to collect during the test period, based on current rates applied to projected customers and sales, to determine any deficiency or excess. If present revenues are greater than the required revenues, the result indicates excess revenues and the need for a rate decrease. If present revenues are less than the required revenues a revenue deficiency results indicating the need for a rate increase. As noted above, the FTY cost of service is presented on Exhibit No. DAB-1, and the HTY cost of service is presented on Exhibit No. DAB-. For ease of reference I have included an Index of Schedules at the beginning of these Exhibits. The Schedules generally follow this order: Schedule 1 - Revenue Requirements Schedule Capital Structure Schedule Rate Base Schedule Income Statement Schedules and Jurisdictional Allocation Factors Schedules through 0 Per Book Supporting Numbers Schedule 1 Details of Adjustments Schedule through end Support for Adjustments, Direct Assignments and Present Revenue 1

23 Q. PLEASE DESCRIBE WHAT IS MEANT BY "ACCOUNTING ADJUSTMENTS." A. Accounting adjustments are made either to eliminate certain accounts or expenses that should not be included in the base rate calculation or to add accounts that should be included in the calculation. For example, fuel and purchased energy costs that are recovered through the ECA and the PCCA are removed. These costs are tracked and recovered through adjustment mechanisms, and are therefore excluded for purposes of determining the Company s base rates. Q. PLEASE DESCRIBE WHAT IS MEANT BY "COMMISSION-ORDERED ADJUSTMENTS." A. Commission-ordered adjustments are made to comply with rate recovery policies and principles established by the Commission pursuant to orders issued in prior Public Service rate proceedings. For example, advertising expenses incurred for marketing, promotional, community relations, image, and political purposes are costs that the Commission has specifically ordered be eliminated from the cost of service study in the past. If we ever wished to include such items in the cost of service, we would expressly request the Commission s authorization to do so. 1

24 Q. PLEASE DESCRIBE WHAT IS MEANT BY PRO FORMA ADJUSTMENTS. A. Pro forma adjustments are made to test year results in order for that period to be representative of future conditions. Adjustments are made for known and measurable changes occurring both in the test year (in-period adjustments) and outside the test year (out-of-period adjustments). Pro forma adjustments are typically made to a HTY cost of service in order to make the historic test year more representative of the costs the Company expects to incur during the period of time in which new rates will be in effect. There is less need to make such proforma adjustments when rates are being set on the basis of a FTY cost of service. Q. WHAT ADJUSTMENTS AND REGULATORY PRINCIPLES, AS ADOPTED IN THE COMPANY S PREVIOUS GENERAL RATE CASES, ARE INCORPORATED INTO THE FTY AND HTY COST OF SERVICE STUDIES PRESENTED IN THIS CASE? A. I have incorporated the following adjustments and regulatory principles, as previously established by the Commission in previous general rate cases, into both the HTY and FTY revenue requirements studies presented in Exhibit Nos. DAB-1 and DAB-. The inventory balances for the coal, oil and natural gas used to generate the electricity we deliver to our customers are calculated using the average of the twelve monthly average balances during the test year; 0

25 Specific assignment of plant to either the Colorado PUC jurisdiction or the FERC jurisdiction will use the month average balances; Intangible Plant in Service is functionalized; The unamortized negative acquisition adjustment resulting from the acquisition of certain assets from Colorado Ute Generation and Transmission Cooperative is included in rate base and is being amortized over the remaining life of the assets acquired; An adjustment is made to eliminate from plant in-service fifty percent of the investment in specific distribution substations serving Holy Cross Rural Electric Association; An adjustment is made to eliminate from plant in-service the amount of cost associated with the Pawnee turbine blade project that exceeded the Commission-ordered expenditure cap; Common plant is allocated to the electric department based on a study of all common plant assets and assigning an allocation method for each type of asset; Capital lease assets are not included in rate base; Pre-Funded Allowance for Funds Used During Construction ( Pre- Funded AFUDC ) associated with the Comanche project and the transmission assets recovered through the TCA is included in rate base; 1

26 Regulatory assets associated with the early retirements of the Cameo, Zuni and Arapahoe generating units are included in rate base; An adjustment is made to eliminate a portion of the materials and supplies inventory balance allocated to construction-related projects; Cash working capital components consist of electric fuel and purchased power costs, operation and maintenance expenses both directly incurred by the Company and charges from XES, paid time off, taxes other than income, federal and state income taxes, and franchise and sales taxes; Cash working capital factors are based on a lead-lag study; The prepaid pension asset is recognized in rate base on a pre-tax basis; Deductions from rate base include customer deposits, Qualifying Facilities ( QF ) deposits (net of accrued interest), and customer advances for construction; Full normalization is the method of accounting for income taxes; The accumulated deferred income tax reserve balance is a reduction to rate base, as opposed to a cost-free component in the capital structure. Adjustments to accumulated deferred income tax reserve include eliminating amounts associated with items that are not included in the cost of service, e.g., unbilled revenue, and deferred fuel;

27 Accumulated deferred income tax reserve balance will be offset with a deferred tax asset, if the Company is in a Net Operating Loss position when calculating current income tax; Retail base rate revenue does not include revenues expected to be billed through various recovery mechanisms: ECA, DSMCA, PCCA, TCA, and Renewable Energy Standard Adjustment ( RESA ). Any costs recovered through these recovery mechanisms are eliminated from the cost of service. Adjustments are made to Other Electric Revenue to exclude revenues related to rate refunds, Quality of Service bill credits, Joint Operating Agreement revenues, wholesale related transmission revenues, and discounts given to certain contract customers under C.R.S. 0--.()(a); Fuel expenses, purchased power energy and demand expenses, and purchased wheeling expenses are eliminated from the determination of revenue requirements; Include adjustments to operating and maintenance expense ( O&M expense ) for known and measurable changes occurring both in the test period (in-period adjustments), and outside the test period (out-of period adjustments); Out-of-period adjustments to O&M expense are generally not made for items expected to occur more than one year after the end of the test period;

28 O&M expense associated with incremental retail and wholesale sales are not included in the cost of service; Fifty percent of the retail jurisdiction portion of O&M expenses associated with the Company s energy trading activities are not included in the cost of service study; Interest on customer deposits is included in Customer Operations expense; DSM costs are included in base rates; Interest on QF deposits is included in Production O&M expense; Lease expense associated with the dark fiber is included in the cost of service; Advertising expenses related to marketing, promotion, community relations, image, and political ads are eliminated; Advertising expenses related to safety, conservation and customer programs are included in the cost of service; All lobbying expenses and donations are excluded from the cost of service; Executive long-term incentive pay is not included in the cost of service; Cost allocation between regulated and non-regulated business activities is based on the Cost Allocation and Assignment Manual and the Fully Distributed Cost Allocation Study filed in this case; Adjustments to depreciation and amortization expense are made to correspond with adjustments made to plant and accumulated

29 depreciation, or to exclude amounts not included in the cost of service calculation; Adjustments to payroll taxes are made to correspond to labor adjustments made to O&M expense; Current federal and state income taxes are calculated as follows: taxable income is determined by using the return on rate base, then synchronized interest expense is deducted and taxable additions/deductions are added, then state and federal income taxes are applied; Adjustments to current and deferred income tax expense are made to correspond with adjustments made to plant or to exclude amounts not included in the cost of service calculation; Income tax expenses are reduced for the Manufacturing Production Tax deduction; Gains on the disposition of emission credits due to the Department of Energy auction are included as a credit to the cost of service; The gain on the sale of steel railcars, net of actual one-time 00 costs, are amortized over ten years beginning January 1, 00; Adjustments are made to the capital structure to eliminate the following items: 1) notes payable/receivable with subsidiaries; ) investment in subsidiaries; ) subsidiary retained earnings; ) net non-utility plant; ) other investments at cost; ) other funds; and, ) other comprehensive income;

30 The cost of debt corresponds with the debt balances in the capital structure, and includes bond premiums or discounts, underwriting expenses, and other expenses of issue; The allocation between the retail and wholesale jurisdictions is performed on a line-by-line basis for both rate base and earnings, and based on the methodology last approved by the Colorado PUC; and Direct assignment of any cost of service item to either the retail or the wholesale jurisdiction is identified. I have prepared Exhibit No. DAB- that summarized the regulatory principles and adjustments included in the FTY and HTY cost of service studies presented in this case. Q. ARE THERE ANY REGULATORY PRINCIPLES THAT HAVE BEEN ADOPTED IN THE COMPANY S PREVIOUS GENERAL RATE CASES THAT ARE TREATED DIFFERENTLY IN THE FTY COST OF SERVICE THAN IN THE HTY COST OF SERVICE PRESENTED IN THIS CASE? A. Yes, there are three regulatory principles that have been adopted in the Company s previous general rate cases that are treated differently in the FTY cost of service than in the HTY cost of service, which are discussed in more detail later in my Direct Testimony. First, rate base in the FTY cost of service is calculated using a thirteen-month average balance method except for Cash Working Capital and fuel inventories. Rate base in the HTY cost of service is calculated using a year-end balance method. Second, the FTY cost of service does not include Construction Work in Progress ( CWIP ) balances in rate

31 base 1 ; however, CWIP is included in rate base in the HTY cost of service. As a result, several adjustments are included in the HTY cost of service that are not included in the FTY cost of service, including the following: Include an offsetting adjustment to earnings for AFUDC; The AFUDC addition to earnings is annualized because rate base was calculated using year-end balances; Include an adjustment to Accumulated Deferred Income Taxes and Deferred Income Tax expense associated with interest on CWIP; and, Contractor retentions were eliminated from the CWIP balance. Q. SUBSEQUENT TO THE 00 RATE CASE, IN DECISION NO. C-0, DOCKET NO. A-E, THE COMMISSION RULED THE COMPANY CAN ONLY RECOVER A PORTION OF ITS INVESTMENT IN THE SMARTGRIDCITY PROJECT. HOW HAS THE COMPANY TREATED ITS INVESTMENT IN THE SMARTGRIDCITY PROJECT IN THE COST OF SERVICE STUDIES PRESENTED IN THIS CASE? A. The Company has included its total investment in the SmartGridCity project in the cost of service studies presented in this case. The Company expects to file an application with the Colorado PUC in early December 0 requesting full recovery of the SmartGridCity project as it was allowed to do by Decision No. C-0. As discussed by Company witness Ms. Hyde, the Company has not made any adjustment to remove any SmartGridCity costs 1 Traditionally, CWIP has not been included in rate base in a FTY cost of service. However, in this case, the Company has included CWIP in rate base associated with specific projects associated with the implementation of the Clean Air Clean Jobs Act legislation.

32 1 1 from the cost of service studies presented in this case, subject to the final Commission determination in the new SmartGridCity case. The Company has identified the plant and plant-related costs associated with the SmartGridCity project in the FTY and HTY cost of service studies in this case. These costs have been directly assigned to the retail jurisdiction. In the event the Commission requires the Company to remove a portion of the SmartGridCity plant costs from the FTY cost of service study presented in this case, I have prepared a schedule that details the adjustments to plant and plant-related items, as shown on Exhibit No. DAB-. Q. IS THE COMPANY PROPOSING ANY CHANGES TO THE TREATMENT OF ANY OF ITS COSTS IN THIS PROCEEDING FROM THE WAY IT HAS TREATED SUCH COSTS IN THE COST OF SERVICE PREPARED FOR PRIOR RATE CASES? A. Yes. The FTY and HTY cost of service studies presented in this case reflect changes to the treatment of three items from the way these items have been 1 treated in prior cases. First, the Company is proposing a change in the treatment of the Southeast water rights recorded in FERC Account, Future Use Plant in this case, as discussed by Company witness Ms. Hyde. For the reasons she discusses in her testimony, the Company is proposing to amortize its investment in these assets over a four-year period and earn a return on the unamortized balance. Second, the Company did not make an adjustment to include oil and gas royalty revenues in the cost of service. I will discuss this change later in my Direct Testimony. Third, also as supported by

33 Ms. Hyde, the Company is proposing that it be allowed to include in rate base the unamortized balance of several regulatory assets and regulatory liabilities that are currently included on its balance sheet that the Company has included an amortization of these costs in the cost of service studies presented in this case. I have prepared a list of the amortizations include in the FTY cost of service, as shown on Exhibit No. DAB-1, Schedule. Q. HAVE THERE BEEN ANY COMMISSION DECISIONS OR APPLICATIONS FILED BY THE COMPANY SINCE THE LAST RATE CASE THAT IMPACT THE REVENUE REQUIREMENTS FILED IN THIS CASE? A. Yes. There have been five Commission decisions since the Company filed its 00 Rate Case that impact the revenue requirements filed in this case. In addition, there are three currently pending Applications and two Applications the Company expects to file before the end of the year that may also impact the revenue requirement filed in this case. I have listed the cases below: Docket No. M-E, Decision No. C-, mailed December 1, 0 In the matter of Commission consideration of Public Service s plan in compliance with House Bill -, Clean Air- Clean Jobs Act ; Docket No. A-, Decision No. C-, mailed November, 0 Application of Public Service Company of Colorado for Approval of the Acquisition of the Rocky Mountain Energy Center and Blue Spruce Energy Center Generation Facilities ( Calpine Assets ) and Grant of Certificates of Public Convenience and Necessity

34 ( CPCN ), and the Approval of Cost Recovery through the Purchased Capacity Cost Adjustment ; Docket No. 0A-0E, Recommended Decision No. R0-0, dated February, 00 - Application of Public Service for an order approving revisions to the Company s WindSource program (to include the recovery of Ponnequin Wind Assets in RESA); Docket No. A-E, Recommended Decision No. R-0, mailed July 1, 0 - Application of Public Service for Deferred Accounting Treatment for Certain Extraordinary Operations and Maintenance Expenditures Related to Mountain Pine Beetle Trees; Docket No. A-E Decision No. C-0, mailed February, 0, Application of Public Service for an order approving a SmartGridCity CPCN; Docket No. A-1EG - Application of Public Service for Approval of its 0-0 DSM Plan; Docket No. A-E Application of Public Service for approval of an Innovative Clean Technology ( ICT ) project consisting of a solarto-battery demonstration project at the Solar Technology Acceleration Center and for an order authorizing deferred accounting of all project costs; and; Docket No. A-E- Application of Public Service for approval of 0 Electric Resource Plan. 0

35 Docket No. XXA-XXXE an application for approval to recover the remaining investment in SmartGridCity. Docket No. XXA-XXXE an application for approval of deferred accounting treatment after January 1, 0 of any excess O&M expense associated with the extraordinary efforts to address the mountain pine beetle trees above what is included in base rates. Also, in June 0, the Company made a compliance filing with FERC in Docket No. EC-1-000, with the final accounting entries associated with the Calpine Assets. This case is currently pending as discussed by Company witness Ms. Karen Hyde, however, there could be a change in the way the Company is required to account for the acquisition of these assets. Q. HAS THE COMPANY MADE ANY NEW ADJUSTMENTS TO THE TEST PERIOD PRESENTED IN THIS CASE OTHER THAN THOSE APPROVED BY THE COMMISSION IN PRIOR RATE CASES? A. Yes. The Company is proposing several new adjustments to the test period data as well as applying new regulatory principles in this case. These items are discussed further in my testimony below VII. RATE BASE Q. WHAT METHOD OF DETERMINING RATE BASE HAVE YOU USED? A. The FTY cost of service rate base was calculated using a thirteen-month average balance methodology for all items except for the average fuel inventory balance, as described above, Cash Working Capital and accumulated deferred income taxes. Cash Working Capital is calculated 1

36 based on the test period operating expenses multiplied by a cash working capital factor based on a lead-lag study. The accumulated deferred income tax balance is calculated using the average of the beginning of year balance and the end of year balance (known as the BOY/EOY average method ). The Company does not book deferred income taxes monthly; it only records deferred taxes quarterly, so the monthly balances are not available. The BOY/EOY average method is a reasonable representation of the accumulated deferred income tax balances. The HTY cost of service rate base was calculated using a year-end balance methodology for all items except for the following: 1) fuel inventory was calculated using the average monthly balances; ) other inventory balances and non-plant rate base items were calculated using a thirteenmonth average balance methodology; and, ) Cash Working Capital was calculated using the same lead-lag factors as we have used in the FTY cost of service,, which are discussed later in my Direct Testimony. Q. IS THE USE OF YEAR-END RATE BASE A DEPARTURE FROM WHAT THE COMPANY HAS PRESENTED IN PREVIOUS RATE CASES? A. The use of year-end rate base when calculating an HTY cost of service is consistent with approach approved for Public Service for many years. It has only been since the Company s 00 Rate case that the Commission departed from this long-standing policy and approved rates based on thirteen month average plant in service balances. The Commission first adopted the use of year-end rate base in setting rates for Public Service s gas and electric

37 services in 1, Decision No., Investigation and Suspension ( I&S ) Docket No.. In every Public Service rate case for nearly three decades following that decision, the Commission continuously reaffirmed its policy of using year-end rate base for setting base rates for Public Service. It was not until Docket No. 0S-1EG ( 00 Rate Case ) that this changed, when the Commission approved a Settlement Agreement in which the settling parties agreed to use average rate base in developing the settled rates. The 00 Rate Case was a combination gas, electric and steam case, and was the Company s first electric rate case for nearly ten years since Docket No. S-001EG, which included several years of performance-based rate regulation resulting from the Company s merger with Southwestern Public Service Company. For the Company s gas business, however, the Commission continued to approve the use of year-end rate base, after a full hearing on the merits, in each of the Company s three gas-only rate cases in Docket Nos. S-0G, S-1G and 0S-G. Since the 00 Rate Case Settlement, all of the five separate gas and electric rate cases filed by Public Service have settled. As such, the Commission has not had the opportunity to consider and rule on the issue of average versus year-end rate base in a contested case. As is typical under rate case settlement agreements, the settling parties expressly agree that the provisions resolving issues in the determination of revenue requirements have no precedential effect in the Company s next rate case. Accordingly, based on the last Public Service rate case decided on the merits in Docket No. 00S-G,