DOCKET NO. 42004 APPLICATION OF SOUTHWESTERN
PUBLIC SERVICE COMPANY FOR AUTHORITY TO CHANGE RATES AND TO RECONCILE FUEL AND PURCHASED POWER COSTS FOR
THE PERIOD JULY 1, 2012
THROUGH JUNE 30, 2013 § § § § § § §
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... 2
LIST OF ATTACHMENTS ... 3
I. WITNESS IDENTIFICATION AND QUALIFICATIONS ... 4
II. ASSIGNMENT AND SUMMARY OF TESTIMONY AND CONCLUSIONS... 7
III. ANALYTICAL APPROACH ... 9
IV. RETAIL PRICING BENCHMARK RESULTS ... 16
V. O&M BENCHMARK RESULTS ... 22
A. TOTAL COMPANY AND PRODUCTION BENCHMARKS ... 23
B. TRANSMISSION O&MEXPENSE BENCHMARKS ... 25
C. DISTRIBUTION O&MEXPENSE BENCHMARKS ... 28
D. CUSTOMER OPERATIONS O&MEXPENSE BENCHMARKS ... 30
VI. CAPITAL INVESTMENT BENCHMARK RESULTS ... 34
VII. CONCLUSIONS... 48
GLOSSARY OF ACRONYMS AND DEFINED TERMS
Acronym/Defined Term Meaning
A&G Administrative and General
Commission Public Utility Commission of Texas
EEI Edison Electric Institute
ERCOT Electric Reliability Council of Texas
FERC Federal Energy Regulatory Commission
kWh kilowatt-hour
MWh Megawatt-hour
O&M Operation and Maintenance
ScottMadden ScottMadden, Inc.
SNL SNL Financial
SPS Southwestern Public Service Company, a New
Mexico corporation
USOA Uniform System of Accounts
LIST OF ATTACHMENTS
Attachment Description
RDS-RR-1 Resume of Richard D. Starkweather
(Filename: RDS-RR-1.docx)
RDS-RR-2 Companies Included in the National Peer Group (Filename: RDS-RR-2.xlsx)
RDS-RR-3 Retail Pricing and O&M Benchmarking Analysis (Provided in Native Format on CD Only)
(Filename: RDS-RR-3.xlsx)
RDS-RR-4 Capital Additions Benchmarking Analysis
(Provided in Native Format on CD Only) (Filename: RDS-RR-4.xlsx)
DIRECT TESTIMONY OF
RICHARD D. STARKWEATHER
I. WITNESS IDENTIFICATION AND QUALIFICATIONS
1
Q. Please state your name and business address.
2
A. My name is Richard D. Starkweather. My business address is 2626 Glenwood 3
Avenue, Suite 480, Raleigh, North Carolina, 27608. 4
Q. On whose behalf are you testifying in this proceeding?
5
A. I am testifying on behalf of Southwestern Public Service Company (“SPS”), a 6
New Mexico Corporation and electric utility subsidiary of Xcel Energy Inc. 7
(“Xcel Energy”). Xcel Energy is a registered holding company that owns several 8
electric and natural gas utility operating companies.1
9
Q. By whom are you employed and in what position?
10
A. I am a Partner with ScottMadden, Inc. (“ScottMadden’) and lead ScottMadden’s 11
regulatory practice. 12
Q. Please briefly outline your responsibilities as Partner.
13
A. As a partner with ScottMadden, I provide direction for all work conducted by 14
ScottMadden consultants, and I am accountable for the overall quality of analyses 15
and deliverables developed on behalf of clients such as SPS. 16
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.
Q. Please describe ScottMadden’s consulting practice and the services it
1
provides.
2
A. Founded in 1983, ScottMadden is a management consulting firm with three 3
primary practice areas: Energy, Clean Tech & Sustainability, and Corporate & 4
Shared Services. We deliver a broad array of consulting services, ranging from 5
strategic planning through implementation, across many industries, business units, 6
and functions. Since our inception, we have been energy consultants, and have 7
served more than 300 clients, including 20 of the top 20 energy utilities. We have 8
performed more than 2,400 projects across every energy utility business unit and 9
every function. 10
Q. Please summarize your educational background.
11
A. I graduated from Northwestern University with a Bachelor of Science degree in 12
Mechanical Engineering in 1978 and then received my Master of Business 13
Administration degree from the University of Chicago Graduate School of 14
Business in 1980. 15
Q. Please summarize your professional experience.
16
A. I began my career with Exxon Chemical Americas as a Forecast Coordinator for 17
the Bayway Chemical Plant in Linden, New Jersey. My responsibilities there 18
included the coordination of the annual operating budget for all of the 19
departments at the plant. I began my consulting career in 1982, and other than 20
three years in the managed healthcare industry and three years working for Edison 21
International, I have been a management consultant for my entire professional 22
career. I started working for Touche Ross & Co. in 1982, which then became 23
Deloitte & Touche after the merger with Deloitte, Haskins & Sells in 1989, and 1
joined ScottMadden in 1999. 2
Since the early 1990s, I have specialized in the public utility industry and 3
have completed numerous consulting engagements for electric and gas utilities. 4
My areas of expertise include strategic and business planning, budgeting and 5
forecasting, regulatory compliance, rate case support, organization design and 6
restructuring, and operations improvement and process redesign. Additional 7
details regarding my educational background and professional experience can be 8
found in Attachment RDS-RR-1. 9
Q. Do you have prior experience in performing benchmarking comparisons of
10
utility operations and costs?
11
A. Yes. I have performed numerous benchmarking comparisons of financial and 12
operations performance metrics, capital additions, and operation and maintenance 13
(“O&M”) costs, for both electric and gas utilities. 14
Q. Have you previously filed testimony at any regulatory authorities?
15
A. Yes. I filed testimony at the Public Utility Commission of Texas ( “Commission”) 16
in Docket No. 40824, SPS’s last rate case, on the same topics I address in this 17
testimony. I also filed testimony at the New Mexico Public Regulation 18
Commission in Case No. 10-00086-UT, on behalf of Public Service Company of 19
New Mexico, regarding its capital and O&M budgeting processes 20
II. ASSIGNMENT AND SUMMARY OF TESTIMONY AND
1
CONCLUSIONS
2
Q. What is your assignment in this proceeding?
3
A. The Commission requires transmission and distribution utilities within the 4
Electric Reliability Council of Texas (“ERCOT”) to file benchmark data to 5
support the recovery of affiliate costs. Even though SPS is a vertically integrated 6
utility outside of ERCOT, and thus not subject to these filing requirements, in 7
previous rate cases SPS has voluntarily supplied affiliate information and 8
benchmark data as prescribed for the ERCOT transmission and distribution 9
utilities. Because of the difficulty in gathering benchmark data for each category 10
of affiliate expense, the benchmark data typically provided by SPS in the past has 11
been based on total SPS costs, which include affiliate costs. 12
The purpose of my testimony is to describe the benchmarking analysis 13
completed by ScottMadden on behalf of SPS. I also provide my perspectives on 14
SPS’s relative performance, compared to other utilities in Texas and across the 15
United States, on a variety of retail pricing, O&M expense, and capital additions 16
metrics for different areas of utility operations. My analysis uses publically 17
available data taken from Federal Energy Regulatory Commission (“FERC”) 18
Form 1 reports filed by individual utilities with the FERC. 19
The Commission’s rules also indicates that the Commission shall consider 20
the quality of the electric utility’s services, utility’s management, and the 21
efficiency of the utility’s operations in determining an appropriate rate of return.2 22
My testimony includes my conclusions regarding SPS’s utility operations based 1
on the benchmarking analysis. 2
Q. Please summarize the conclusions you have reached as a result of your
3
analysis.
4
A. Based on my analysis, I conclude that during the period 2008 through 20123 SPS 5
has been, and continues to be, efficient and cost-effective compared to its national 6
and Texas peer group companies. In particular: 7
• SPS’s overall average retail prices, and average prices for the residential, 8
commercial, and industrial customer classes, were consistently at or below 9
the top quartile for both the Texas and national peer groups throughout the 10
2008 through 2012 period. This means that SPS has been extremely 11
effective at managing its capital and O&M costs such that it is one of the 12
least expensive utilities providing retail electric service in the country. 13
• On nearly every O&M expense measure, SPS’s O&M costs were at or 14
below the median for both the national and Texas peer groups and in many 15
cases the top quartile during the 2008 to 2012 period. This indicates that 16
SPS has aggressively managed its O&M costs over the past five years. 17
• With few exceptions, SPS’s production, transmission, and distribution 18
capital additions as a percent of total plant and as a percent of annual 19
depreciation expense were consistently at or near the median for the 20
national and Texas peer groups during the 2008 to 2010 time period. This 21
means that SPS has been replacing assets at a level that addresses annual 22
wear and tear consistent with its national and Texas peer groups. 23
3 FERC Form 1s for the previous calendar year are required to be filed on or before April 18th of
the following year. For example, the FERC Form 1 for 2013 will be filed by April 18, 2014. Thus, 2012 data was the most recent FERC Form 1 data available through SNL Financial for purposes of this testimony.
III. ANALYTICAL APPROACH
1
Q. Please describe the nature of the analysis that you performed.
2
A. I evaluated a number of retail pricing, O&M cost, and capital additions metrics 3
for different areas of SPS’s operations to assess the efficiency of SPS’s operations 4
and quality of management. For each metric, I benchmarked SPS’s relative 5
performance to other utilities in Texas and the United States. 6
Q. Please describe what you mean by “benchmarking.”
7
A. Benchmarking is a commonly used methodology for comparing a utility’s 8
performance in a specific area (e.g., cost or productivity) to that of other similar 9
utilities, or peers. Process benchmarking is often used by companies to evaluate 10
various aspects of their operational or management processes in relation to best 11
practices, usually within their own industry sector. Performance benchmarking is 12
used to quantitatively compare a company’s results for a particular financial or 13
operational measure against the results for a group of peers. 14
Q. How should the results of this benchmarking study be interpreted?
15
A. Favorable benchmarking results for a utility, particularly over time, can be an 16
indicator that the utility’s underlying management processes and actions 17
regarding the area being analyzed have been effective. Where benchmarking 18
results indicate that performance levels are unfavorable, additional analysis can be 19
conducted to determine the causes of the performance gap. 20
Q. What are the typical sources of benchmarking data?
21
A. Data used for benchmarking usually comes from publicly available data sources 22
or through proprietary surveys and research. For utilities, publically available data 23
can be obtained through required regulatory filings with the FERC (e.g., FERC 24
Form 1 reports). This data can be gathered individually or through service 1
providers that compile and sell this information in a variety of formats. The 2
benefit of FERC Form 1 data is that the information can be traced back to a 3
specific filing and company. This provides for a consistent, objective, and 4
independent data source that allows for the inclusion of specific companies in a 5
peer group by compiling the associated data from each company. 6
Factors that can impact the validity of a benchmarking analysis include the 7
comparability of the data inputs used in the benchmark calculations and the 8
comparability of the companies used in the peer groups. It is not uncommon for 9
different utilities to track and report operating statistics and/or costs in different 10
ways—or to interpret reporting requirements differently—even when complying 11
with standardized reporting formats such as those required by the FERC Uniform 12
System of Accounts (“USOA”). As a result, care must be exercised when 13
selecting data sources for benchmarking analyses. 14
Q. What was the source for the data used in this benchmarking analysis?
15
A. The operational and financial data used in my benchmarking analysis was 16
obtained from publicly available FERC Form 1 filings made by regulated energy 17
and utility companies for the period 2008 through 2012 (although for certain 18
capital investment metrics, data back to 2006 was compiled). FERC Form 1 data 19
is among the most complete and reliable data on operating statistics available to 20
the public concerning individual electric utilities. 21
The data source utilized for the FERC Form 1 data is SNL Financial 22
(“SNL”), a well-respected industry information and research firm covering a 23
number of business sectors including electric utilities. SNL collects, standardizes, 1
and disseminates a wide variety of electric utility operating and financial statistics 2
including FERC Form 1 data. SNL replicates all of the major schedules of the 3
FERC Form 1 for every filer and provides query tools to easily pull the 4
information into spreadsheets for analysis, comparison, and benchmarking 5
purposes. 6
Q. What criteria did you utilize to select the companies making up the national
7
and Texas peer groups?
8
A. As described earlier, the quality, or relevance, of any particular benchmarking 9
study is largely dependent on the characteristics, or similarities, of the companies 10
populating the peer groups. When conducting a benchmarking analysis, one wants 11
the peer groups populated with companies with similar characteristics to ensure 12
reliable results. Restructuring of the industry has resulted in a variety of operating 13
models (e.g., generation only, transmission only, etc.), ownership (e.g., 14
municipals, cooperatives, investor-owned utilities, etc.), and corporate structures 15
(e.g., holding company, service company affiliates, etc.). SPS is a vertically 16
integrated, investor-owned utility with generation, transmission, and distribution 17
assets serving a predominantly retail end-use customer base. Given these 18
challenges, ScottMadden employed the following process in the selection of peer 19
group companies to help ensure similarities in characteristics of the national and 20
Texas peer groups to SPS: 21
1. A list of electric utilities and their parent companies was obtained 22
from the Edison Electric Institute (“EEI”). 23
2. A list of all companies filing FERC Form 1 reports over the period 1
2008 through 2012 was obtained by querying the current SNL 2
FERC Form 1 Regulated Energy Companies dataset. 3
3. The SNL list was compared to the EEI list to identify and eliminate 4
all non-operating parent or holding companies. The resulting list 5
formed the basis for the initial FERC Form 1 data query from 6
SNL. Electric plant, operating data, O&M expense, and system 7
peak and transmission line data was compiled for each company 8
and presented in FERC Form 1 schedule format for each of the 9
years 2008 through 2012 (although for electric plant, data was 10
compiled back to 2006). 11
4. Peer group selection criteria were defined for the national and 12
Texas peer groups. Criteria for inclusion in the SPS national and 13
Texas peer groups included: 14
a. The company must be regulated and provide electric service 15
(directly or indirectly) to retail end-use customers. This 16
criterion eliminated generation-only companies, 17
transmission-only companies, and generation and 18
transmission-only companies; however, transmission and 19
distribution companies are included in the peer groups. 20
b. The company must be of sufficient size to warrant 21
comparison. For the purposes of this effort, we eliminated all 22
companies with less than 10,000 customers. 23
c. The company must have comparative FERC Form 1 data to 24
enable the development of the metrics used in the 25
benchmarking analysis. 26
Q. What Texas peer group and national peer group companies were identified
27
as a result of your analysis?
28
A. The Texas peer group companies selected consist of: 29
• AEP Texas Central Company 30
• AEP Texas North Company 31
• CenterPoint Energy Houston Electric 32
• El Paso Electric Company 33
• Entergy Texas, Inc. 34
• Oncor Electric Delivery Company 35
• Sharyland Utilities, L.P. 36
• Southwestern Electric Power Company 37
• Southwestern Public Service Company 1
• Texas-New Mexico Power Company 2
There were 137 utility companies included in the national peer group (see 3
Attachment RDS-RR-2 for a list of these companies). 4
Q. What performance metrics were evaluated in your analysis?
5
A. SPS performance was benchmarked from three perspectives: average retail 6
electricity prices, O&M expenses, and capital additions. Industry standard 7
benchmarks were utilized within each of these categories.4
8
Average Retail Electricity Prices 9
Retail pricing benchmarks (overall and by customer class for industrial, 10
commercial, and residential customers) show the average price received by a 11
utility for every kilowatt-hour (“kWh”) sold. Over time, such measures are good 12
indicators of revenue stability and can also highlight year-to-year changes in 13
customer mix and energy usage patterns. The specific pricing benchmarks 14
included in my analysis are as follows: 15
• Total Retail Revenues Cents per kWh Sold 16
• Residential Revenues Cents per kWh Sold 17
• Commercial Revenues Cents per kWh Sold 18
• Industrial Revenues Cents per kWh Sold 19
O&M Expenses 20
O&M expense benchmarks are good indicators of relative process and cost 21
efficiencies between peer group companies, including labor productivity. The 22
specific O&M expense benchmarks included in my analysis are as follows: 23
4 The native format of my Retail Pricing and O&M Benchmarking Analysis is provided on a CD
as Attachment RDS-RR-3. The native format of my Capital Additions Benchmarking Analysis is provided on a CD as Attachment RDS-RR-4.
• Total O&M $ per Megawatt-hour (“MWh”) Sold 1
• Total Non-Fuel O&M $ per MWh Sold 2
• Non-Fuel Production O&M $ per MWh Generated 3
• Transmission O&M $ per MWh Transmitted (with and without 4
FERC account 565 costs) 5
• Transmission O&M $ per Pole Mile (with and without FERC 6
account 565 costs) 7
• Distribution O&M $ per MWh Sold 8
• Distribution O&M $ per Customer 9
• Customer Accounts, Customer Service and Informational Expense, 10
and Sales Expense O&M $ per MWh Sold 11
• Customer Accounts, Customer Service and Informational Expense, 12
and Sales Expense O&M $ per Customer 13
• Administrative and General (“A&G”) O&M $ per MWh Sold 14
• A&G O&M $ per Customer 15
• A&G O&M $ as a Percent of Total Revenues 16
Capital Additions 17
Capital additions benchmarks for each peer group were analyzed on an annual and 18
three-year rolling average basis to minimize the effects of individual years where 19
extraordinary capital additions may have occurred. The specific capital 20
benchmarks included in my analysis are as follows: 21
• Total Plant Additions as a Percent of Total Plant 22
• Total Plant Additions as a Percent of Annual Depreciation Expense 23
• Production Plant Additions as a Percent of Production Plant 24
• Production Plant Additions as a Percent of Production 25
Depreciation Expense 26
• Transmission Plant Additions as a Percent of Transmission Plant 27
• Transmission Plant Additions as a Percent of Transmission 28
Depreciation Expense 29
• Distribution Plant Additions as a Percent of Distribution Plant 30
• Distribution Plant Additions as a Percent of Distribution 31
Depreciation Expense 32
• General Plant Additions as a Percent of General Plant 1
• General Plant Additions as a Percent of General Plant Depreciation 2
Expense 3
Q. Before you provide the results of your benchmarking analysis, can you
4
provide general guidance as to how the results should be interpreted?
5
A. Yes. When conducting this type of benchmarking analysis, we will typically 6
compare the relative performance of the company under review (in this case SPS) 7
with the peer group quartiles of the various benchmark metrics (i.e., top quartile, 8
median, and bottom quartile). For revenue and O&M expense measures, lower is 9
generally better, meaning lower rates for customers or lower internal costs to 10
provide electric service. 11
However, for capital additions, being above or below a particular quartile 12
is not necessarily a good or bad thing. It may simply indicate that a particular 13
utility is making investments in facilities at a particular point in time, where other 14
members of the peer group are planning such investments at another point in time. 15
I discuss the results in greater detail later in my testimony, but having this 16
framework in mind should allow the reader to more easily understand the 17
relevance of the benchmarking results for SPS. 18
IV. RETAIL PRICING BENCHMARK RESULTS
1
Q. Why did you benchmark SPS’s average annual retail price per kWh to the
2
national and Texas peer groups?
3
A. The average price paid (or received) per kWh for electric service is a widely used 4
benchmarking metric and reflects three primary factors: (1) actual fixed and 5
variable prices, (2) customer usage patterns, and (3) customer mix. The average 6
price paid per kWh is often a good measure of the overall cost effectiveness of a 7
company in delivering electric service. This is especially true for companies in 8
which the average price per kWh has remained relatively stable over a period of 9
years. 10
Q. What pricing metrics did you evaluate in your analysis?
11
A. I compared the average prices paid by residential, commercial, and industrial 12
customers with the median value of the Texas and national peer groups. For 13
purposes of this analysis, the average price paid per kWh equals annual retail 14
revenues (from sales to ultimate consumers) divided by kWh sales, both in total 15
and for each customer class. The pricing comparisons are reflected in Figures 16
RDS-RR-1 through RDS-RR-6 described in the paragraphs that follow. 17
Q. What overall conclusions do you draw from your analysis of SPS’s average
18
pricing?
19
A. SPS’s overall average retail prices, and average prices for the residential, 20
commercial, and industrial customer classes, are consistently at or below the top 21
quartile for both the Texas and national peer groups throughout the 2008 through 22
2012 period. This means that SPS has been extremely effective at managing its 23
capital and O&M costs such that it is one of the least expensive utilities providing 1
retail electric service in the country. 2
Q. Please describe the results of your pricing analysis.
3
A. It should first be noted that the transmission and distribution utilities in Texas 4
have transmission and distribution assets only and provide "wires" service directly 5
to end-use retail customers of deregulated retail companies operating in Texas. As 6
a result, the average retail prices paid for electricity for these transmission and 7
distribution utilities do not fully reflect the cost of providing retail electric 8
services to customers. These companies5 were therefore excluded from the Texas
9
and national peer groups for the purposes of the retail pricing benchmarking 10
analysis. 11
As shown in Figure RDS-RR-1 below, in 2012 SPS’s total average price 12
for electricity sold to retail customers was 5.64 cents per kWh, approximately 36 13
percent below the national median and 17 percent below the Texas median. SPS’s 14
total average price for retail electricity has remained consistently in the top 15
quartile for the national and Texas peer groups throughout the 2008 to 2012 time 16
period. 17
5 AEP Texas Central Company, AEP Texas North Company, CenterPoint Energy Houston
Figure RDS-RR-1: Total Retail Revenues Cents per kWh Sold 1 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 2008 2009 2010 2011 2012
Total Retail Revenues ¢ per kWh Sold
National Peer Group
SPS Q1 Q2 Q3 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 2008 2009 2010 2011 2012
Total Retail Revenues ¢ per kWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
2
I also compared SPS’s 2012 average price per kWh for each major customer class 3
relative to the total average retail price. Figure RDS-RR-2 depicts the results of 4
this analysis. 5
Figure RDS-RR-2: Average Price Per kWh by Customer Class
6
and as a Percent of Total Average Retail Price
7
SPS Texas
Median
National Median 2012 Average Price Per kWh (cents per kWh)
Total Retail Sales 5.64 6.80 8.88
Residential Sales 8.74 8.98 11.01
Commercial Sales 6.68 6.77 8.48
Industrial Sales 3.91 5.00 6.07
Average Price per kWh as a Percent of Total Average Retail Price
Residential Sales 155% 132% 124%
Commercial Sales 119% 100% 96%
Industrial Sales 69% 73% 68%
The residential class average price paid is more than 1.5 times that of the total 8
average price for electricity sold. This is higher than the average residential class 9
prices for the Texas and national median groups. The primary driver behind this 10
difference is customer mix (see Figure RDS-RR-3 below). The residential class 11
was the largest of SPS’s customer groups in 2012 in terms of customers 12
(79 percent), but represented only 19 percent of SPS retail energy sales in 2012. 13
Industrial and commercial energy usage, with their associated lower prices, 1
represented about 77 percent of SPS retail sales in 2012, causing the relatively 2
low total average retail price for SPS. 3
Figure RDS-RR-3: SPS Customer Class Characteristics
4
2012
Percent of Total Annual Operating Revenues – $000
Residential 309,474 28%
Commercial 314,526 28%
Industrial 379,540 34%
Total Other Sales 40,431 4%
Total Retail Revenues 1,043,971 100%
Annual Usage – MWh Sold
Residential 3,541,729 19%
Commercial 4,708,432 25%
Industrial 9,700,726 52%
Total Other Sales 575,483 3%
Total Retail MWh Sales 18,526,370 100%
Average Customers Per Month
Residential 297,769 79%
Commercial 74,205 20%
Industrial 198 0%
Total Other Sales 6,226 2%
Total Number of Customers 378,398 100%
5
Q. Please describe the results of your pricing analysis on a residential basis.
6
A. As shown in Figure RDS-RR-2, in 2012, SPS’s total average residential retail rate 7
was 8.74 cents per kWh. As shown in Figure RDS-RR-4, SPS’s average 8
residential retail prices have consistently been at or below the top quartile for the 9
national and Texas peer groups over the 2008 through 2012 period. This means 10
that SPS is among the least expensive utilities providing residential electric 11
service in the country. 12
Figure RDS-RR-4: Total Residential Revenues ¢ per kWh Sold 1 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 2008 2009 2010 2011 2012
Residential Revenues ¢ per kWh Sold
National Peer Group
SPS Q1 Q2 Q3 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 2008 2009 2010 2011 2012
Residential Revenues ¢ per kWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
2
Q. Please describe the results of your pricing analysis for Commercial
3
customers.
4
A. As shown in Figure RDS-RR-2, in 2012, SPS’s total average commercial retail 5
rate, on a cents per kWh basis, was 6.68 cents per kWh. As shown in Figure 6
RDS-RR-5, SPS’s average commercial electricity prices have been at or below 7
the top quartile for the national and Texas peer groups since 2009. 8
Figure RDS-RR-5: Total Commercial Revenues ¢ per kWh Sold
9 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 2008 2009 2010 2011 2012
Commercial Revenues ¢ per kWh Sold
National Peer Group
SPS Q1 Q2 Q3 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 2008 2009 2010 2011 2012
Commercial Revenues ¢ per kWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
10
Q. Please describe the results of your pricing analysis for Industrial customers.
11
A. As shown in Figure RDS-RR-2, in 2012, SPS’s total average commercial retail 12
rate, on a cents per kWh basis, was 3.91 cents per kWh. As shown in Figure 13
RDS-RR-6, SPS’s industrial rates have been well below the top quartile for the 1
national peer group and the Texas peer group since 2009. 2
Figure RDS-RR-6: Total Industrial Revenues ¢ per kWh Sold
3 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 2008 2009 2010 2011 2012
Industrial Revenues ¢ per kWh Sold
National Peer Group
SPS Q1 Q2 Q3 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 2008 2009 2010 2011 2012
Industrial Revenues ¢ per kWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
V. O&M BENCHMARK RESULTS
1
Q. Please describe the analysis and metrics you used to benchmark SPS's O&M
2
expenses against those of its Texas and national peers.
3
A. I analyzed the following key metrics of O&M expenses across both national and 4
Texas-only peer groups: 5
• Total O&M Expense ($/MWh Sold) 6
• Total Non-Fuel O&M ($/MWh Sold) 7
• Total Non-Fuel Production O&M ($/MWh Generated) 8
Production, transmission, distribution, customer accounts, customer 9
service and information, sales, and A&G expenses, when compared to generation 10
output, transmission throughput, transmission line miles, sales volume, or average 11
number of customers, provide measures commonly used to evaluate the 12
performance of different utilities. 13
We selected USOA-defined functional categories of costs representative 14
of the broad areas of utility operations being evaluated as the numerator for each 15
metric (for example, total distribution O&M expenses), then matched the cost 16
category being evaluated with an appropriate cost driver or drivers in the 17
denominator (for example, total retail sales or the average number of customers), 18
to provide a perspective on SPS’s relative efficiency in each area of operations 19
when compared to relevant industry peer groups. 20
The investor-owned utilities that operate in ERCOT have divested their 21
generating assets and retail operations (AEP Texas Central Company, AEP Texas 22
North Company, CenterPoint Energy Houston Electric, Oncor Electric Delivery 23
Company, and Texas-New Mexico Power Company). As a result, only certain 24
O&M metrics apply for these companies in the national and Texas peer group 1
comparisons. 2
Q. What overall conclusions did you draw from your analysis of SPS’s
3
operating and maintenance expenses?
4
A. On nearly every O&M expense measure, SPS’s O&M costs were at or below the 5
median for both the national and Texas peer groups and in many cases the top 6
quartile during the 2008 to 2012 period. This indicates that SPS has aggressively 7
managed its O&M costs over the past five years. 8
A.
Total Company and Production Benchmarks
9
Q. Please describe your analysis of SPS's total company O&M and production
10
O&M expense.
11
A. I put together three charts depicting total O&M costs: total O&M per MWh sold; 12
total non-fuel O&M per MWh sold; and non-fuel production O&M per MWh 13
generated. These are depicted in Figures RDS-RR-7 through RDS-RR-9. 14
Q. Please describe the results of your analysis of SPS's total O&M costs with
15
those of its Texas and national peer groups.
16
A. As shown in Figure RDS-RR-7 below, SPS’s total O&M expense per MWh sold 17
was below the national median in 2009 and 2010 and slightly above the national 18
median in 2011 before returning to second quartile in 2012. Relative to other 19
Texas utilities, SPS’s total O&M costs have been between the median and the top 20
quartile since 2009. 21
Figure RDS-RR-7: Total O&M $ Per MWh Sold 1 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00 $110.00 2008 2009 2010 2011 2012
Total O&M $ Per MWh Sold
National Peer Group
SPS Q1 Q2 Q3 $50.00 $60.00 $70.00 $80.00 $90.00 $100.00 $110.00 $120.00 2008 2009 2010 2011 2012
Total O&M $ Per MWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
2
Q. Please describe the results of your analysis of SPS's total O&M less fuel and
3
purchased power costs with those of its Texas and national peer groups.
4
A. As shown in Figure RDS-RR-8 below, SPS’s total non-fuel O&M expenses per 5
MWh sold have been below the national peer group top quartile since 2008 and 6
slightly above the Texas peer group top quartile throughout the 2008 to 2012 7
period. Total non-fuel O&M costs are a good representation of how efficiently a 8
utility operates and maintains its assets on a daily basis. 9
Figure RDS-RR-8: Total Non-Fuel O&M $ Per MWh Sold
10 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 2008 2009 2010 2011 2012
Total Non-Fuel O&M $ Per MWh Sold
National Peer Group
SPS Q1 Q2 Q3 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 2008 2009 2010 2011 2012
Total Non-Fuel O&M $ Per MWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
Q. Please describe the results of your analysis of SPS's non-fuel production
1
O&M expense with those of its Texas and national peer groups.
2
A. As shown in Figure RDS-RR-9 below, SPS’s non-fuel production costs are 3
among the lowest in the nation and better than the top quartile of the Texas peer 4
group. Like total non-fuel O&M, non-fuel production O&M costs are a good 5
representation of how efficiently a utility operates and maintains its generation 6
assets on a daily basis. 7
Figure RDS-RR-9: Non-Fuel Production O&M $ Per MWh Generated
8 $0.00 $5.00 $10.00 $15.00 $20.00 2008 2009 2010 2011 2012
Non-Fuel Production O&M $/MWh Generated
National Peer Group
SPS Q1 Q2 Q3 $0.00 $5.00 $10.00 $15.00 $20.00 2008 2009 2010 2011 2012
Non-Fuel Production O&M $/MWh Generated
Texas Peer Group
SPS Q1 Q2 Q3
9
B.
Transmission O&M Expense Benchmarks
10
Q. Please describe your overall analysis of SPS's transmission O&M expense.
11
A. I put together four charts depicting the benchmarking of transmission O&M 12
expenses: (1) total transmission expense per MWh transmitted, with and without 13
the inclusion of FERC Account 565; and (2) total transmission expense per pole 14
mile, with and without the inclusion of FERC Account 565. The results are 15
depicted in Figures RDS-RR-10 through RDS-RR-13 below. 16
Q. Please describe the results of your analysis of SPS's transmission expense on
1
an MWh transmitted basis.
2
A. As shown in Figure RDS-RR-10 below, SPS’s transmission O&M per MWh 3
transmitted has been slightly above the national group median since 2008 and at 4
or slightly above the Texas peer group top quartile over the same time period. 5
Figure RDS-RR-10: Transmission O&M $ Per MWh Transmitted
6 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 2008 2009 2010 2011 2012
Transmission O&M $ Per MWh Transmitted
National Peer Group
SPS Q1 Q2 Q3 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 2008 2009 2010 2011 2012
Transmission O&M $ Per MWh Transmitted
Texas Peer Group
SPS Q1 Q2 Q3
7
FERC Account 565 is entitled “Transmission of electricity by others 8
(Major only)”. This account includes amounts payable to others for the 9
transmission of electricity over transmission facilities owned by others. The costs 10
included in FERC Account 565 can vary widely by utility depending on the 11
amount of wholesale purchases and sales of electricity by that utility. When 12
benchmarking transmission O&M expenses, we often exclude FERC Account 565 13
from our analysis, as elimination of this account from total transmission O&M 14
expense provides a better measure of the utilities’ internal transmission costs. 15
As shown in Figure RDS-RR-11 below, net of FERC Account 565, SPS’s 16
transmission O&M per MWh transmitted was at or near the national and Texas 17
peer group top quartiles during the 2008 to 2012 time period. 18
Figure RDS-RR-11: Transmission O&M (net of 565) $ Per MWh Transmitted 1 $0.25 $0.50 $0.75 $1.00 $1.25 $1.50 2008 2009 2010 2011 2012
Trans O&M (net of 565) $ Per MWh Transmitted
National Peer Group
SPS Q1 Q2 Q3 $0.25 $0.50 $0.75 $1.00 $1.25 $1.50 2008 2009 2010 2011 2012
Trans O&M (net of 565) $ Per MWh Transmitted
Texas Peer Group
SPS Q1 Q2 Q3
2
Q. Please describe the results of your analysis of SPS's transmission O&M
3
expense on a per pole mile basis.
4
A. As shown in Figure RDS-RR-12 below, SPS’s transmission O&M expense per 5
pole mile has been below the median of both the national and Texas peer group 6
throughout the 2008 to 2012 period. 7
Figure RDS-RR-12: Transmission O&M $ Per Pole Mile
8 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 2008 2009 2010 2011 2012
Transmission O&M $ Per Pole Mile
National Peer Group
SPS Q1 Q2 Q3 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 2008 2009 2010 2011 2012
Transmission O&M $ Per Pole Mile
Texas Peer Group
SPS Q1 Q2 Q3
9
As shown in Figure RDS-13 below, net of FERC account 565, SPS’s transmission 10
O&M per pole mile has been in the top quartile of both the national and Texas 11
peer groups throughout the 2008 to 2012 period. 12
Figure RDS-RR-13: Transmission O&M (net of 565) $ Per Pole Mile 1 $0 $2,500 $5,000 $7,500 $10,000 $12,500 $15,000 2008 2009 2010 2011 2012
Trans O&M (net of 565) $ Per Pole Mile
National Peer Group
SPS Q1 Q2 Q3 $0 $2,500 $5,000 $7,500 $10,000 $12,500 $15,000 2008 2009 2010 2011 2012
Trans O&M (net of 565) $ Per Pole Mile
Texas Peer Group
SPS Q1 Q2 Q3
2
C.
Distribution O&M Expense Benchmarks
3
Q. Please describe your analysis of SPS' distribution O&M expense.
4
A. I put together two charts depicting the benchmarking of distribution O&M 5
expenses: total distribution O&M expense per MWh sold and total distribution 6
O&M expense per customer. These are depicted in Figures RDS-RR-14 through 7
RDS-RR-15 below. 8
Q. Please describe the results of your analysis of SPS's distribution O&M
9
expense on the basis of MWh sales.
10
A. As shown in Figure RDS-RR-14, SPS is solidly in the top quartile for distribution 11
O&M regardless of peer group throughout the 2008 to 2012 period. 12
Figure RDS-RR-14: Distribution O&M $ Per MWh Sold 1 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 2008 2009 2010 2011 2012
Distribution O&M $ Per MWh Sold
National Peer Group
SPS Q1 Q2 Q3 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 2008 2009 2010 2011 2012
Distribution O&M $ Per MWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
2
Q. Please describe the results of your analysis of SPS's distribution O&M
3
expense on the basis of number of customers.
4
A. As shown in Figure RDS-RR-15, SPS’s distribution O&M expense per customer 5
was consistently at or near the top quartile of the national peer group through 6
2010, and the Texas peer group through 2009. The significant increase in SPS’s 7
distribution O&M expense per customer in 2011 is due to the loss of more than 8
34,000 retail customers resulting from the sale of the Lubbock distribution 9
facilities in October 2010. In 2012, SPS’s distribution O&M expense per 10
customer was below the median for the national peer group and at the median for 11
the Texas peer group. 12
Figure RDS-RR-15: Distribution O&M $ Per Customer
13 $50.00 $75.00 $100.00 $125.00 $150.00 2008 2009 2010 2011 2012
Distribution O&M $ Per Customer
National Peer Group
SPS Q1 Q2 Q3 $50.00 $75.00 $100.00 $125.00 $150.00 2008 2009 2010 2011 2012
Distribution O&M $ Per Customer
Texas Peer Group
SPS Q1 Q2 Q3
D.
Customer Operations O&M Expense Benchmarks
1
Q. Please describe your analysis of SPS's customer operations O&M expense.
2
A. In my analysis, I defined “customer operations” expenses to include: Customer 3
Accounts, Customer Service and Informational Expense, and Sales Expense, as 4
defined by the FERC USOA. I put together two charts depicting the 5
benchmarking of customer operations O&M expenses: total customer operations 6
O&M expense per MWh sold and total customer operations expense per 7
customer. These are depicted in Figures RDS-RR-16 through RDS-RR-17 below. 8
Q. Please describe the results of your analysis of SPS's customer operations
9
O&M expense on the basis of MWh sales.
10
A. As shown in Figure RDS-RR-16, customer operations O&M expense per MWh 11
for SPS compares well with the national and Texas peer groups. SPS’s customer 12
operations O&M expense per MWh sold has been in the top quartile of the 13
national peer group, and at or near the median of the Texas peer group, 14
throughout the 2008 to 2012 time period. 15
Figure RDS-RR-16: Customer Operations O&M $ Per MWh Sold
16 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 2008 2009 2010 2011 2012
Customer Operations O&M $/MWh Sold
National Peer Group
SPS Q1 Q2 Q3 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 2008 2009 2010 2011 2012
Customer Operations O&M $/MWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
Q. Please describe the results of your analysis of SPS's customer operations
1
O&M expense on a per customer basis.
2
A. As shown in Figure RDS-RR-17, SPS’s customer operations O&M expense per 3
customer has been at or near the national peer group median throughout the 2008 4
to 2012 period, but was in the fourth quartile of the Texas peer group for 2010 5
and 2011 before returning to the third quartile in 2012. 6
Figure RDS-RR-17: Customer Operations O&M $ Per Customer
7 $25.00 $50.00 $75.00 $100.00 $125.00 2008 2009 2010 2011 2012
Customer Opera ons O&M $/Customer
Na onal Peer Group
SPS Q1 Q2 Q3 $25.00 $50.00 $75.00 $100.00 $125.00 2008 2009 2010 2011 2012
Customer Opera ons O&M $/Customer
Texas Peer Group
SPS Q1 Q2 Q3 8
Q. Why are SPS’s Customer Operations O&M Expense per MWh Sold
9
benchmark results versus the Texas peer group so different from the
10
Customers Operations O&M Expense per Customer results?
11
A. The average energy consumption of SPS customers differs substantially from the 12
average consumption of customers for the other utilities in the Texas peer group. 13
For example, SPS’s residential customers, on average, consume less electricity 14
than the residential customers of the other utilities in Texas. In contrast, SPS’s 15
industrial customers consume much more electricity than the industrial customers 16
of other Texas utilities. These differences in customer class usage result in the 17
costs per customer benchmarks being skewed when compared to the Texas peer 18
group. However, the customer operations costs per MWh benchmarks show SPS 1
as either comparable or better than the Texas peer group. 2
Q. Please describe your analysis of SPS's A&G O&M expense.
3
A. I put together three charts depicting the benchmarking of A&G O&M expenses: 4
(1) A&G O&M expense per MWh sold; (2) A&G O&M expense per customer; 5
and (3) A&G O&M expense as a percent of revenues. These are depicted in 6
Figures RDS-RR-18 through RDS-RR-20 below. 7
Q. Please describe the results of your analysis of SPS's A&G O&M expense per
8
MWh sold.
9
A. As shown in Figure RDS-RR-18, SPS compares favorably versus the national 10
peer group with results at or near the top quartile from 2008 to 2012. SPS’s A&G 11
O&M expense per MWh sold was at or near the median of the Texas peer group 12
during this same period. 13
Figure RDS-RR-18: A&G O&M $ Per MWh Sold
14 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 2008 2009 2010 2011 2012
Total A&G O&M $ Per MWh Sold
National Peer Group
SPS Q1 Q2 Q3 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 2008 2009 2010 2011 2012
Total A&G O&M $ Per MWh Sold
Texas Peer Group
SPS Q1 Q2 Q3
15
Q. Please describe the results of your analysis of SPS's A&G O&M expense on
16
the basis of customers.
17
A. As shown in Figure RDS-RR-19, SPS does not compare as favorably when A&G 18
O&M expense is compared to the peer groups on a per customer basis. SPS 19
remains in the third quartile versus the national peer group, but moves from the 1
third to the fourth quartile against the Texas peer group. The reason for the 2
difference between the costs per MWh sold results versus the costs per customer 3
results was described earlier in my testimony. 4
Figure RDS-RR-19: A&G O&M $ Per Customer
5 $75.00 $100.00 $125.00 $150.00 $175.00 $200.00 $225.00 $250.00 2008 2009 2010 2011 2012
Total A&G O&M $ Per Customer
Na onal Peer Group
SPS Q1 Q2 Q3 $75.00 $100.00 $125.00 $150.00 $175.00 $200.00 $225.00 $250.00 2008 2009 2010 2011 2012
Total A&G O&M $ Per Customer
Texas Peer Group
SPS Q1 Q2 Q3 6
Q. Please describe the results of your analysis of SPS's A&G O&M expense as a
7
percent of revenues.
8
A. As shown in Figure RDS-RR-20, SPS’s A&G O&M expense as a percent of 9
revenues compares very favorably to both peer groups. Throughout the 2008 to 10
2012 period, SPS’s A&G costs as a percent of revenues was in the top quartile for 11
both peer groups. 12
Figure RDS-20: A&G O&M as a Percent of Revenues
13 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 2008 2009 2010 2011 2012
Total A&G O&M $ as % of Revenues
National Peer Group
SPS Q1 Q2 Q3 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 2008 2009 2010 2011 2012
Total A&G O&M $ as % of Revenues
Texas Peer Group
SPS Q1 Q2 Q3
VI. CAPITAL INVESTMENT BENCHMARK RESULTS
1
Q. Please describe the analysis and metrics you used to benchmark SPS’s
2
capital additions against those of its Texas and national peers.
3
A. For total plant and each major plant category (production, transmission, 4
distribution, and general plant), I analyzed annual plant additions as a percentage 5
of total plant and as a percentage of annual depreciation expense. The capital 6
additions analysis as a percentage of total plant provides insights into utility 7
investment levels in plant replacements over time. The analysis of additions as a 8
percentage of depreciation expense highlights areas where companies may not be 9
replacing assets at a level that “keeps up” with annual wear and tear—though it 10
should be noted that for most utilities annual capital additions will fluctuate year 11
to year due to the timing of new additions as well as changes in the mix of capital 12
projects between functional areas. I also analyzed plant additions as a percentage 13
of total plant averaged over a three-year period of time. The three-year average 14
effectively smooths out the normal swings in plant additions from year-to-year. 15
Q. Why did you compare SPS’s capital additions to the median levels for the
16
national and Texas peer groups?
17
A. As I noted earlier in my testimony, when conducting benchmarking analyses, for 18
revenue and O&M expense measures, lower is generally better, meaning lower 19
rates for customers or lower internal costs to provide electric service. However, 20
for capital additions, being above or below a particular quartile is not necessarily 21
a good or bad thing. It may simply indicate that a particular utility is making 22
investments in facilities at a particular point in time, where other members of the 23
peer group are planning such investments at another point in time. Therefore, for 24
the purposes of this capital addition benchmarking analysis, we simply compared 1
SPS to the median peer group benchmark results. 2
Q. What overall conclusions do you draw from your analysis of SPS’s capital
3
additions?
4
A. With few exceptions, SPS’s production, transmission, and distribution capital 5
additions as a percent of total plant and as a percent of annual depreciation 6
expense were consistently at or near the median for the national and Texas peer 7
groups during the 2008 to 2010 time period. This means that SPS has been 8
replacing assets at a level that reasonably addresses annual wear and tear 9
consistent with its national and Texas peer groups. The addition of Jones 10
Generating Station Unit 3 to the generating fleet, necessary improvements to the 11
transmission system to interconnect new generation resources, and to the 12
distribution system to connect new customers, and maintain reliability and 13
improve load serving capability, contributed to a greater than average increase in 14
investment levels in 2011, before returning to near median levels in 2012. 15
Q. Please describe the results of your analysis of SPS's annual plant additions
16
for the period 2008–2012 as compared to those of its Texas and national
17
peers.
18
A. As shown in Figure RDS-RR-21, SPS’s total capital additions as a percent of total 19
plant investment have increased steadily between 2008 and 2012. This indicates 20
that SPS has been making investments in various major plant categories over the 21
last few years. 22
Figure RDS-RR-21: Total Additions as a Percent of Total Plant 1 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 2008 2009 2010 2011 2012
Total Additions as % of Total Plant
National Peer Group
SPS Median 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 2008 2009 2010 2011 2012
Total Additions as % of Total Plant
Texas Peer Group
SPS Median
2
When analyzing capital additions, particularly for a single utility, it is normal to 3
see significant changes in capital additions year to year. To “smooth” these annual 4
fluctuations, and to help identify investment trends, we typically analyze capital 5
additions by looking at a rolling three-year average of capital additions by 6
functional area. Figure RDS-RR-22, below, shows that SPS’s three-year average 7
total capital additions as a percent of total plant investment have increased 8
steadily between 2008 and 2012. The national and Texas peer group trends have 9
been flat over this same time period. Major capital investments tend to be discrete 10
additions at particular points in time. However, median values of the peer groups 11
“average” the results of several individual utilities, which smooths out these 12
results. 13
Figure RDS-RR-22: 3-Year Average Additions as a Percent of Total Plant
14 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012
3-Year Average Additions as % of Total Plant
National Peer Group
SPS Median 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012
3-Year Average Additions as % of Total Plant
Texas Peer Group
SPS Median
Q. Please describe the results of your analysis of SPS's annual plant additions
1
relative to total depreciation expense.
2
A. As shown in Figure RDS-RR-23, SPS increased its rate of capital spending on 3
plant additions from 2008 to 2012. The level of annual capital additions for the 4
peer groups (approximately 200 percent of annual depreciation) indicates that 5
utility companies in general are adding to their infrastructure at a rate faster than 6
would be required to simply replace aging assets. SPS’s capital additions levels 7
have been consistent with these national and Texas peer group trends, except in 8
2011. The increase in 2011 for SPS is due to the addition of Jones 3 and the 9
additional investments in transmission and distribution assets described earlier in 10
my testimony. 11
Figure RDS-RR-23: Total Additions as a Percent of Depreciation
12 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% 400.0% 2008 2009 2010 2011 2012
Total Addi ons as % of Deprecia on
Na onal Peer Group
SPS Median 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% 400.0% 2008 2009 2010 2011 2012
Total Addi ons as % of Deprecia on
Texas Peer Group
SPS Median 13
Q. Please describe your analysis of SPS's production investment additions
14
relative to those of the Texas and national peer groups.
15
A. I put together three charts depicting my analysis of SPS's annual production plant 16
investments: (1) production plant additions as a percentage of total production 17
plant; (2) annual plant additions averaged over three years as percentage of 18
production plant; and (3) production plant additions as percentage of depreciation 1
expense. These are depicted in Figures RDS-RR-24 through RDS-RR-26. 2
Q. Please describe the results of your analysis of SPS's production plant
3
additions for the period 2008–2012 as compared to those of its Texas and
4
national peers.
5
A. As shown in Figures RDS-RR-24 and RDS-RR-25, the level of SPS production 6
plant capital additions has been at or below the national and Texas peer group 7
medians over the 2008 through 2012 time period, with the exception of 2011. The 8
increase in production plant additions in 2011 was due to the addition of Jones 9
Generating Station Unit 3 to the generation fleet. 10
Figure RDS-RR-24: Production Plant Additions as a
11
Percent of Total Plant
12 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012
Production Additions as % of Production Plant
National Peer Group
SPS Median 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012
Production Additions as % of Production Plant
Texas Peer Group
SPS Median
Figure RDS-RR-25: 3-Year Average Production Plant
1
Additions as a Percent of Total Plant
2 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012
3-Year Avge Production Additions as % of Plant
National Peer Group
SPS Median 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012
3-Year Avge Productions Additions as % of Plant
Texas Peer Group
SPS Median
3
Q. Please describe the results of your analysis of SPS's production plant
4
additions relative to total production depreciation expense.
5
A. As shown in Figure RDS-RR-26, the level of SPS’s production plant additions 6
has been approximately 100 percent of annual depreciation expense. This seems 7
to indicate a stable asset replacement strategy—in other words, invest sufficient 8
capital to cover annual depreciation expense every year. However, in 2011 one 9
can again see the impact of the Jones 3 addition to the generating fleet. 10
Figure RDS-RR-26: Production Plant Adds as a Percent of
11 Depreciation Expense 12 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% 2008 2009 2010 2011 2012
Production Additions as % of Depreciation
National Peer Group
SPS Median 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% 2008 2009 2010 2011 2012
Production Additions as % of Depreciation
Texas Peer Group
SPS Median
Q. Please describe your analysis of SPS's transmission investment additions
1
relative to those of the Texas and national peer groups.
2
A. I put together three charts depicting my analysis of SPS's annual transmission 3
plant investments: (1) transmission plant additions as a percentage of total 4
transmission plant; (2) annual plant additions averaged over three years as a 5
percentage of transmission plant; and (3) transmission plant additions as a 6
percentage of depreciation expense. These are depicted in Figures RDS-RR-27 7
through RDS-RR-29. 8
Q. Please describe the results of your analysis of SPS's transmission plant
9
additions for the period 2008–2012 as compared to those of the Texas and
10
national peers.
11
A. As shown in Figures RDS-RR-27 and RDS-RR-28, SPS’s transmission capital 12
additions have been steadily increasing since 2008. Transmission capital additions 13
in 2012 represented almost 14% of total transmission plant. The increase in 14
transmission plant additions by SPS over the 2008 to 2012 time period was 15
primarily due to the expansion, upgrading, and refurbishment of transmission 16
system infrastructure to: (1) interconnect new generation resources; (2) maintain 17
reliability; and (3) improve load-serving capability, as discussed further by SPS 18
witness John S. Fulton in his Revenue Requirement phase testimony. 19
Figure RDS-RR-27: Transmission Plant Additions as a Percent 1 of Total Plant 2 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 2008 2009 2010 2011 2012
Trans Additions as % of Transmission Plant
National Peer Group
SPS Median 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 2008 2009 2010 2011 2012
Trans Additions as % of Transmission Plant
Texas Peer Group
SPS Median
3
Figure RDS-RR-28: 3-Year Average Transmission Plant
4
Additions as a Percent of Total Plant
5 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 2008 2009 2010 2011 2012
3-Year Avge Transmission Additions as % of Plant
National Peer Group
SPS Median 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 2008 2009 2010 2011 2012
3-Year Avge Transmission Additions as % of Plant
Texas Peer Group
SPS Median
6
Q. Please describe the results of your analysis of SPS's transmission plant
7
additions relative to transmission depreciation expense.
8
A. As shown in Figure RDS-RR-29, the level of SPS’s transmission plant additions 9
has significantly exceeded annual depreciation expense every year since 2008. 10
The national peer group median levels have been between 200 percent and 300 11
percent of depreciation, consistent with the continued industry focus on 12
transmission expansion. In Texas, the peer group median has been more than 300 13
percent of depreciation in four of the last five years—reflecting the active 14
transmission expansion efforts in the state to support renewable energy resources. 15
Figure RDS-RR-29:
1
Transmission Plant Adds as a Percent of Depreciation Expense
2 0.0% 100.0% 200.0% 300.0% 400.0% 500.0% 600.0% 700.0% 2008 2009 2010 2011 2012
Transmission Additions as % of Depreciation
National Peer Group
SPS Median 0.0% 100.0% 200.0% 300.0% 400.0% 500.0% 600.0% 700.0% 2008 2009 2010 2011 2012
Transmission Additions as % of Depreciation
Texas Peer Group
SPS Median
3
Q. Please describe your analysis of SPS's distribution investment additions
4
relative to those of the Texas and national peer groups.
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A. I put together three charts depicting my analysis of SPS's annual distribution plant 6
investments: (1) distribution plant additions as a percentage of total distribution 7
plant; (2) annual plant additions averaged over three years as a percentage of 8
distribution plant; and (3) distribution plant additions as a percentage of 9
depreciation expense. These are depicted in Figures RR-30 through RDS-10
RR-32. 11
Q. Please describe the results of your analysis of SPS's distribution plant
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additions for the period 2008–2012 as compared to those of its Texas and
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national peers.
14
A. As shown in Figures RDS-RR-30 and RDS-RR-31, SPS’s distribution capital 15
additions have also been increasing since 2008. Between 2008 and 2009, SPS’s 16
distribution capital additions were below the national and Texas peer group 17
medians. However, since 2009 distribution capital additions have been above the 18
medians for both peer groups. Distribution additions for upgrades to, and 19
