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Regulatory and Rate Matters | 9 Months Ended
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Sep. 30, 2011
Regulatory and Rate Matters |
Regulatory and Rate Matters | Regulatory and Rate Matters Information concerning regulatory and rate matters is contained in Note 17 of Notes to Consolidated Financial Statements in the 2010 Annual Reports on Form 10-K. PNMR First Choice Request for ERCOT Alternative Dispute Resolution In June 2008, First Choice filed a request for alternative dispute resolution with ERCOT alleging that ERCOT incorrectly applied its protocols with respect to congestion management during the first quarter of 2008. First Choice requested that ERCOT resolve the dispute by restating certain elements of its first quarter 2008 congestion management data and by refunding to First Choice allegedly overstated congestion management charges. The amount at issue in First Choice's claim can only be determined by running ERCOT market models with corrected inputs but First Choice believes that the amount is significant. ERCOT protocols provide that ERCOT will notify potentially impacted market participants and subsequently consider the merits of First Choice's allegations. In September 2011, ERCOT forwarded information on its actions which is under review. PNMR is unable to predict the outcome of this matter. However, this matter was terminated prior to closing of the sale of First Choice (see Note 16). PNM Emergency FPPAC In 2008, the NMPRC authorized PNM to implement an Emergency FPPAC from June 2, 2008 through June 30, 2009. The NMPRC order approving the Emergency FPPAC also provided that if PNM's base load generating units did not operate at or above a specified capacity factor and PNM was required to obtain replacement power to serve jurisdictional customers, PNM would be required to make a filing with the NMPRC seeking approval of the replacement power costs. In its required filing, PNM stated that the costs of the replacement power amounting to $8.0 million were prudently incurred and made a motion that they be approved. The NMPRC staff opposed PNM's motion and recommended that PNM be required to refund the amount collected. Auditors selected by the NMPRC found that PNM was prudent in operating its base load units and in securing replacement power but had not obtained prior NMPRC approval in the manner required by the NMPRC order. PNM continues to assert that its recovery of replacement power costs was proper and did not violate the NMPRC's order. The NMPRC has not ruled on this matter. Under the terms of the stipulation in the 2010 Electric Rate Case discussed below as approved by the NMPRC, the parties to the stipulation, including the NMPRC staff, will jointly request that the NMPRC take no further action in this matter and close the docket. PNM anticipates this filing will be made in the fourth quarter of 2011. PNM is unable to predict the outcome of this matter. Renewable Portfolio Standard The REA was enacted to encourage the development of renewable energy in New Mexico. The act establishes a mandatory RPS requiring a utility to acquire a renewable energy portfolio equal to 5% of retail electric sales by January 1, 2006, increasing to 10% by 2011, 15% by 2015, and 20% by 2020. The NMPRC requires renewable energy portfolios to be “fully diversified” beginning in 2011 when no less than 20% of the renewable portfolio requirement must be met by wind energy, no less than 20% by solar energy, no less than 10% by other renewable technologies, and no less than 1.5% by distributed generation. The act provides for streamlined proceedings for approval of utilities' renewable energy procurement plans, assures utilities recovery of costs incurred consistent with approved procurement plans and requires the NMPRC to establish a RCT for the procurement of renewable resources to prevent excessive costs being added to rates. The NMPRC has established a RCT for 2011 of 2% of all customers' aggregated overall annual electric charges that increases by 0.25% annually until reaching 3% in 2015. In August 2010, the NMPRC partially approved PNM's revised 2010 procurement plan, including PNM's investment in 22 MW of solar PV facilities at various PNM sites and the construction of a solar-storage demonstration project. The NMPRC capped recoverable costs at a maximum of $107.7 million. Under the REA, costs incurred pursuant to and consistent with an approved procurement plan are deemed to be reasonable and recoverable in the ratemaking process. Construction of these facilities is underway, the first 17 MW of solar PV and the solar-storage demonstration project were in service at October 31, 2011, and PNM anticipates that the remaining 5 MW of solar PV will be in service by December 31, 2011. PNM anticipates requesting recovery of these costs from customers through a rate rider. See 2010 Electric Rate Case below. On July 1, 2010, PNM filed its renewable energy procurement plan for 2011. The 2011 plan proposed the procurement of 250,000 MWh of RECs from another New Mexico public utility for compliance with the renewable portfolio standard in 2011. On October 5, 2010, the NMPRC issued an order rejecting PNM's plan for 2011 as incomplete because certain planning assumptions used in the plan were found to be outdated, and ordered PNM to file a new plan within 60 days. On December 6, 2010, PNM filed a revised 2011 plan that proposed procurement of 423,860 MWh of wind generated RECs, but not the associated energy, from various bidders selected through a RFP process at a total cost of up to $5.5 million. The RECs would be retired for RPS compliance for 2011. The plan, as amended, requested a variance from the diversity requirements for solar and certain “other resources” for 2011 based on the RCT and availability constraints. A public hearing on the plan was held in April 2011. On June 2, 2011, the NMPRC issued an order that rejected PNM's proposal to procure wind RECs and directed PNM to use its best efforts to procure wind energy and associated RECs for 2011 compliance. The NMPRC granted PNM a variance from the resource diversity requirement conditioned upon PNM including in its 2012 procurement plan a proposal that would meet the diversity requirements by April 5, 2013. On July 1, 2011, PNM filed a motion for rehearing based on the NMPRC's disapproval of the use of RECs to meet the RPS requirements, the requirement that PNM meet the diversity requirements without explicit recognition of potential RCT constraints, the failure of the final order to adopt language concerning the relationship of the billing system modifications to the third party provider amendments to the Public Utility Act, and other matters. The NMPRC staff and NMIEC also filed motions for rehearing on the issue of the use of RECs for RPS compliance. On September 1, 2011, the NMPRC affirmed its order concerning cost recovery of the billing system modifications and its disapproval of the proposed REC purchase, and confirmed that the resource diversity requirements were subject to the reasonable cost threshold. On September 14, 2011, PNM filed a motion for expedited clarification of the order or in the alternative for approval of the procurement of additional wind resources. On October 3, 2011, NMIEC filed an appeal of the NMPRC's orders in the New Mexico Supreme Court. On October 11, 2011, the NMPRC denied PNM's request for clarification of the order and directed PNM to proceed with the procurement described in its request through the remainder of 2011 unless the NMPRC staff filed in opposition by October 20, 2011. On October 14, 2011, PNM filed a motion for stay of the NMPRC's orders, which the NMPRC denied on October 20, 2011. A stay motion by NMIEC is still pending. On October 17, 2011, the NMPRC staff filed an objection to the procurement and requested that the NMPRC issue an order finding that the procurement was not in the public interest. On October 27, 2011, the NMPRC issued an order rejecting the NMPRC staff's objection and directing PNM to procure the wind energy identified in its September 14, 2011 request. On October 28, 2011, PNM filed a motion in the New Mexico Supreme Court to become a party to the appeal previously filed by NMIEC. PNM cannot predict the outcome of this matter. On July 1, 2011, PNM filed its Renewable Energy Portfolio Procurement Plan for 2012. The plan requests a variance from the RPS due to RCT limitations and also requests a variance from the RCT to allow PNM to continue to procure RECs from retail customers under PNM's Solar REC Incentive Program and to procure a small number of RECs from a hydroelectric resource to be developed by the City of Santa Fe. The plan is diversity compliant based on the reduced RPS, except for non-wind/non-solar resources, which are not currently available. In addition to the proposed procurements and requested variances, the plan describes two other portfolios: one that would be fully compliant with the RPS and a second that would comply with both the full RPS and the diversity requirements for wind, solar, and distributed generation. Each of these portfolios is more costly than PNM's proposed portfolio and the plan did not request approval of them since they would exceed the RCT. Several intervenors and the NMPRC staff filed testimony in opposition to the manner in which PNM calculated the effect of the RCT and to other portions of the plan. A hearing was held in October 2011. PNM cannot predict the outcome of this matter. NMPRC Rulemaking on Disincentives/Incentives to Energy Efficiency Programs The NMPRC approved amendments to its energy efficiency rule on April 8, 2010 to be effective May 3, 2010. The amended rule allowed utilities to collect rate adders of $0.01 per KWh for lifetime energy savings and $10 per kilowatt for demand savings related to energy efficiency (collectively, the "interim adder") and demand response programs beginning in 2010. The amended rule also required investor-owned electric utilities to make filings by July 1, 2010 that proposed rate design and ratemaking measures to remove regulatory disincentives or barriers to achieve energy efficiency savings. PNM included its proposals in the 2010 Electric Rate Case described below. In the approved stipulation in the 2010 Electric Rate Case, PNM agreed that any such disincentives would be deemed addressed under the new rates allowed under the stipulation. Under the amended rule, after such measures became effective, the rate adder for energy saving was reduced to $0.005 per KWh (collectively, the "reduced adder"). The NMAG and NMIEC appealed the NMPRC order adopting the amended rule to the New Mexico Supreme Court, which issued an opinion on July 27, 2011 that annulled and vacated the NMPRC's order adopting the amended rule and remanded the matter to the NMPRC. PNM cannot predict the ultimate outcome of this matter. On May 5, 2010, PNM filed proposed tariffs under the amended rule to recover a disincentive/incentive adder related to 2010 efficiency programs. PNM proposed to recover $6.2 million over a twelve-month period following NMPRC approval. The staff of the NMPRC filed testimony recommending the recovery of not more than $4.2 million. Following a hearing, the NMPRC issued an order authorizing recovery of $4.2 million over 12 months. PNM implemented a rate rider to recover the $4.2 million adder on December 29, 2010. The final order on the PNM 2010 Energy Efficiency Application described below extended the recovery period from 12 months to 18 months. As a result of the Supreme Court decision issued on July 27, 2011 PNM filed revised tariffs and ceased collecting this adder on August 21, 2011. Of the $4.2 million authorized for recovery, approximately $2.6 million had been collected through August 20, 2011. A NMPRC order on August 16, 2011 initiated an investigation to determine whether PNM should be required to refund any adder revenues that had been collected under the amended rule. The Hearing Examiner in the case arising from the reconciliation of 2010 program costs (see 2010 Energy Efficiency Application below) recommended that PNM not be required to refund any of the $2.6 million of 2010 adder revenue that had been collected as of August 21, 2011. The NMPRC issued an order on November 1, 2011 that generally approved the Hearing Examiner's recommended decision that PNM not be required to refund any of the interim adder revenue collected as of August 20, 2011, but left open the possibility that it may order a refund of interim adder revenue related to any disallowed program costs. On November 3, 2011, the NMPRC issued an order that allows for continuation of collection of reduced adder revenues. PNM cannot predict the outcome of this matter. 2010 Energy Efficiency Application On September 15, 2010, PNM filed an energy efficiency program application for programs to be offered beginning July 1, 2011. PNM requested revisions to existing programs, revisions of estimates of participation and expenditure levels, approval of revised program cost recovery tariff riders, and approval of disincentive/incentive adders for 2011 energy efficiency and demand response programs. The total amount that PNM proposed to recover through the tariff riders was $32.9 million, which included the 2010 disincentive/incentive adder discussed above. Based on testimony filed by other parties, PNM accepted certain modifications to the plan, which resulted in a revised proposed recovery amount of $31.4 million. Following a hearing, the NMPRC issued a final order on June 23, 2011 that rejected the proposed plan modifications and ordered modifications to some programs in the original plan. The final order also adopted a recommendation by the NMPRC staff that the incentive adder rates of $0.005 per kWh and $10 per KW proposed by PNM be reduced to $0.002 per kWh and $4 per kW. The final order deferred consideration of certain issues relating to the recovery of past program costs, including whether PNM's demand response programs comply with statutory requirements, to a separate proceeding on PNM's 2010 Annual Electric Energy Efficiency Report. The final order approved a rider recovery amount of $22.8 million, including $17.1 million in program costs, $3.8 million for 2011 disincentive/incentive adders, and $1.9 million for 2010 disincentive/inventive adders that were not collected as of July 27, 2011, the effective date for the new rider rate approved by the NMPRC. The new rider rate of 3.018% was effective with bills rendered July 27, 2011. PNM filed a new rider effective August 21, 2011 that incorporated the higher rates approved in the 2010 Electric Rate case and eliminated recovery of the remaining 2010 disincentive/incentive adder revenues of $1.6 million and the 2011 disincentive adder revenue of $2.5 million consistent with the Supreme Court decision in the appeal of the disincentive rulemaking discussed above. The new rider rate is 2.262%. On April 1, 2011, PNM filed a reconciliation of energy efficiency program costs and collections as of December 31, 2010. Included in this filing was an adjustment of the adder amount to reflect the measured and verified savings for 2010 program participation in its 2010 Annual Electric Energy Efficiency Report, also filed April 1, 2011. PNM proposed an adjustment to the energy efficiency rider to recover an under-collected balance of $2.6 million. The new energy efficiency rider rate, adjusted for the under collected program costs and adjusted savings, would be increased from 2.441% to 2.839%. After suspending the proposed adjusted rates the NMPRC concluded that some of the program costs exceeded approved budgets and determined that an evidentiary hearing should be held to consider whether PNM should be permitted to recover over-budget program costs and certain adder amounts and whether sanctions should be imposed on PNM. In June 2011, PNM and the NMPRC staff reached an agreement on issues raised by the reconciliation filing and the suspension order under which PNM would be permitted recovery of substantially all of its program costs and would not be subject to any sanctions. PNM and the NMPRC staff filed testimony supporting the agreement. No party filed testimony in opposition. In a hearing held in July 2011, the Hearing Examiner questioned the reconciliation of 2009 Energy Efficiency Plan costs and identified costs of approximately $1.4 million, which may have exceeded NMPRC-approved budgets by more than 25% and for which NMPRC approval should have been obtained. The Hearing Examiner issued a recommended decision on October 3, 2011 that PNM should make permanent its suspension of the 2010 disincentive/incentive adder and that recovery of under-collected past program costs should be reduced to $2.4 million to account for the $0.3 million by which PNM's spending for its residential load management program exceeded 125% of the approved budget for program year 2009. PNM and another party filed exceptions to the recommended decision disallowing the $0.3 million and to other recommendations on October 13, 2011. The NMPRC issued a final order on November 1, 2011 that approved recovery of substantially all of the under-collected program costs through December 31, 2010, provided that PNM makes a compliance filing demonstrating the cost-effectiveness of one of the programs. Investigation on Establishing a Policy Linking Utility Earnings to Quality of Customer Service On May 28, 2009, the NMPRC ordered an investigation to consider the development of a service quality incentive mechanism for utilities in New Mexico, including PNM. The parties were to look at quality of service mechanisms established in other NMPRC orders, as well as the mechanisms that have been implemented in other states. Following a workshop process, the Hearing Examiner filed a report concluding that present circumstances do not warrant the implementation of a performance based ratemaking mechanism to either reward or penalize utilities for quality of service. Instead, the report recommended that utilities be required to file certain customer service reports annually for a three-year period commencing in 2011. The NMPRC issued an order on March 24, 2011 requiring utilities to file annually reports as recommended in the Hearing Examiner's report. These reports are to be filed annually by June 30 of 2011, 2012, and 2013. PNM made its first annual compliance filing on June 24, 2011. Rates for Former TNMP Customers in New Mexico PNM serves the former New Mexico customers of TNMP (“TNMP-NM” or “PNM South”) under rates approved by the NMPRC in its order approving PNMR's acquisition of TNMP. Under that order, rates charged to TNMP-NM customers were set through December 31, 2010. In January 2009, the NMPRC directed PNM to estimate the revenue requirement increase that would be reflected in a TNMP-NM rate application for rates effective January 2011. PNM estimated that the rate increase could be between 40% and 56% depending on fuel costs. In April 2009, the NMPRC directed PNM, the NMPRC staff, and other parties to attempt to reach consensus on ways to mitigate the impact of this potential rate increase and appointed a mediator. Mediation did not result in an agreement. On May 25, 2010, the NMPRC issued an order directing PNM and the NMPRC staff to file testimony addressing certain matters related to cost allocation. A hearing was held in December 2010. In April 2011, the NMPRC issued an order that consolidated this case with the pending 2010 Electric Rate Case discussed below. The NMPRC's order in the 2010 Electric Rate Case discussed below allows PNM to serve former TNMP customers in New Mexico under the same tariffs, including the FPPAC, that are applicable to all of PNM's other retail customers in New Mexico. 2010 Electric Rate Case PNM filed its 2010 Electric Rate Case application with the NMPRC on June 1, 2010 for rate increases for all PNM retail customers to be effective April 1, 2011. The application proposed separate rate increases for those customers served by PNM (“PNM North”) prior to its acquisition of TNMP and for the customers formerly served by TNMP (“PNM South”). The proposed total increase of $165.2 million represented a 22% increase for PNM North and a 20% increase for PNM South. The filed revenue requirements were based on a future test period ending December 31, 2011. PNM proposed to implement the increase in two phases. Phase 1 would have become effective April 1, 2011 (PNM North: $111.1 million, 16%; PNM South: $8.7 million, 14%), and Phase 2 would have become effective January 1, 2012 (PNM North: $41.7 million, 6%; PNM South: $3.6 million, 6%). PNM also proposed to implement a FPPAC for PNM South. This was the first rate case filing in New Mexico proposing a future test year consistent with recent amendments to the Public Utility Act. The NMPRC initially suspended the rates until April 1, 2011, which date was later extended. In October 2010, PNM began meeting with the NMPRC staff and other parties to discuss settlement. On February 3, 2011, PNM, NMPRC staff, NMAG, NMIEC, ABCWUA, Buckman Direct Diversion Board, and the City of Alamogordo, New Mexico entered into a stipulation that, if approved by the NMPRC, would have resolved all issues in the 2010 Electric Rate Case and provided a rate path for PNM through December 31, 2013. Other parties filed statements opposing the stipulation. This stipulation, which reflected some aspects of a future test year, was subject to approval of the NMPRC. The stipulation would have allowed PNM to increase rates by $45.0 million immediately following approval and by an additional $40.0 million beginning January 1, 2012. The proposed rates were designed so that PNM North customers and PNM South customers would have the same percentage increase. The PNM South customers would also be covered by the same FPPAC that is utilized for the PNM North customers. In addition, subject to further NMPRC approvals, PNM would be able to recover the costs associated with NMPRC approved renewable energy procurement plans through a rate rider beginning July 1, 2012 or twelve months after the effective date of the new electric rates and would also be able to implement a separate rate rider in 2013 to recover up to an additional $20.0 million to cover changes in plant-related rate base between June 30, 2010 and December 31, 2012. PNM's next general rate adjustment could not go into effect before January 1, 2014, except that PNM could file for recovery of costs to comply with any federal or state environmental law or requirement effective after June 30, 2010. In addition, the stipulation would limit the amount that could be recovered on an annual basis for fuel costs, renewable energy costs, and energy efficiency costs during the period covered by the stipulation. Recovery of costs in excess of the limits would be deferred for collection, without carrying costs, to future periods. If the stipulation was approved, PNM would forego collection of $10.0 million of the under-collected amount in the FPPAC balancing account as a regulatory disallowance. On March 17, 2011, PNM filed a request for interim rates to go into effect on May 15, 2011, which was denied by the NMPRC. A public hearing on the stipulation was held in May 2011. The hearing examiner issued a Certification of the Stipulation on June 21, 2011. The Hearing Examiner recommended approval of most of the terms of the stipulation, including the $85.0 million rate increase, the implementation of the increase in two phases, the moratorium on rate changes through December 31, 2013 the application of PNM North rate schedules to all New Mexico customers, and approval of a consolidated fuel clause. The Hearing Examiner, however, recommended disapproval of the capital additions rider and the proposed residential rate design. PNM and other parties filed exceptions to the Certification of the Stipulation. On August 8, 2011, the NMPRC issued a final order that provides for a $72.1 million rate increase, rejects the capital additions rider, changes the residential rate design, and adopts, approves, and accepts the stipulation with other modifications. PNM and other parties to the stipulation filed an amended stipulation on August 11, 2011 that conforms to the modifications contained in the NMPRC's August 8, 2011 order. No party requested rehearing of the order. The amended stipulation allows PNM to file a new rate case for rates to be effective July 1, 2013. PNM implemented the new rates on August 21, 2011. As a result of the above, PNM recorded a pre-tax loss for the $10.0 million of fuel costs discussed above that will not be recovered through the FPPAC. In addition, PNM recorded a pre-tax loss aggregating $7.5 million for costs that will not be recovered in rates approved by the NMPRC order. These costs primarily relate to rate case expenses for the 2010 Electric Rate Case, expenses related to an audit of fuel and purchased power costs, loss on debt re-acquired in previous years, and the 2010 settlement of claims against DOE related to spent nuclear fuel at PVNGS. These amounts were recorded as of June 30, 2011 and are reflected as regulatory disallowances on PNM's Condensed Consolidated Statement of Earnings. 2011 Integrated Resource Plan NMPRC rules require that investor owned utilities file an IRP every three years. The IRP is required to cover a 20 year planning period and must contain an action plan covering the first four years of that period. In its most recent IRP, which was filed on July 18, 2011, PNM indicated that it planned to meet its anticipated load growth through a combination of new natural gas-fired generating plants, renewable energy resources, load management, and energy efficiency programs. However, PNM has not entered into any commitments regarding these plans beyond what is otherwise described herein. As required by NMPRC rules, PNM utilized a public advisory group process during the development of the 2011 IRP. Two protests were filed to the IRP requesting rejection of the plan. The NMPRC assigned the case to a Hearing Examiner and designated a mediator in the event that at least two parties request mediation. PNM is unable to predict the outcome of this matter. Transmission Rate Case On October 27, 2010, PNM filed a notice with FERC to increase its wholesale electric transmission revenues by $11.1 million annually and revise certain Open Access Transmission Tariff provisions and bi-lateral contractual terms. If approved, the rate increase would apply to all of PNM's wholesale electric transmission service customers, which include other utilities, electric co-operatives, and entities that use PNM's transmission system to transmit power at the wholesale level. The proposed rate increase would not impact PNM's retail customers. On December 29, 2010, FERC issued an order accepting PNM's filing and suspending the proposed tariff revisions for five months. The proposed rates were implemented on June 1, 2011, subject to refund. PNM and other parties to the case have engaged in settlement discussions and will continue the negotiation process under the settlement judge procedures, but due to an impasse in regards to settlement negotiations, the settlement judge issued an order in August 2011 designating an ALJ, establishing procedural time standards, and terminating settlement judge procedures. The hearing for this proceeding is scheduled to commence on April 4, 2012. PNM is unable to predict the outcome of this proceeding. Firm Requirements Rate Case On September 15, 2011, PNM filed an amended sales agreement between PNM and Navopache Electric Cooperative, Inc. (“NEC”) with FERC. The agreement proposes a cost of service based rate for the partial requirements electric service and ancillary services PNM provides to NEC, which would result in an annual increase of $8.7 million (39.8%) over rates PNM currently charges NEC. PNM also proposes a FPPAC and full recovery of certain third-party transmission charges PNM incurs to serve NEC. The proposed effective date is November 14, 2011. NEC has filed a protest to PNM's filing with FERC. PNM is unable to predict the outcome of this proceeding. TNMP TNMP Competitive Transition Charge True-Up Proceeding The purpose of the true-up proceeding was to quantify and reconcile the amount of stranded costs that TNMP may recover, as a CTC, from its transmission and distribution customers. A 2004 PUCT decision established $87.3 million as TNMP's stranded costs. TNMP and other parties made a series of appeals on the ruling. On June 24, 2011, the Texas Supreme Court denied all petitions for review pending in the case. The decision rejects the argument that TNMP's stranded cost balance should be zero. It also denied TNMP's request to remand the case in order to present further evidence of stranded costs that the PUCT previously refused to consider. TNMP filed a motion for rehearing on July 11, 2011 requesting the Texas Supreme Court to reconsider its decision on TNMP's request to present additional stranded costs. No other party filed a motion for rehearing. The Texas Supreme Court denied the motion for rehearing on August 12, 2011 concluding this matter. Interest Rate Compliance Tariff Following a revision of the interest rate on TNMP's CTC, TNMP filed a compliance tariff to implement the new 8.31% rate. TNMP's filing proposed to put the new rates into effect on February 1, 2008. Intervenors asserted objections to the compliance filing. PUCT staff urged that the PUCT make the new rate effective as of December 27, 2007 when the PUCT's order establishing the correct rate became final. After regulatory proceedings, the PUCT issued an order making the new rate retroactive to July 20, 2006. TNMP filed an appeal of this order in the District Court in Austin, Texas. A hearing was held on June 17, 2010. On June 28, 2010, the District Court reversed the PUCT decision and remanded the matter back to the PUCT for a determination that is not retroactive. The PUCT and other parties appealed the decision to the Texas 3 rd Court of Appeals and presented oral argument on March 23, 2011. On May 12, 2011, the 3 rd Court of Appeals issued its opinion reversing the District Court and reaffirming the PUCT's decision. TNMP filed its petition for review with the Texas Supreme Court on July 29, 2011. Responses from opposing parties are to be filed by November 9, 2011. TNMP is unable to predict if the Texas Supreme Court will review the decision or the ultimate outcome of this matter. However, due to the new retroactive ratemaking theory contained in the Texas 3 rd Court of Appeals opinion, TNMP recorded a regulatory disallowance of $3.9 million, before income taxes, in the three months ended June 30, 2011 to reflect the impact of applying the 8.31% rate retroactively. Advanced Meter System Deployment and Surcharge Request On May 26, 2010, TNMP filed a request with the PUCT to approve TNMP's proposed advanced meter deployment. The filing also requested a surcharge to collect $157.9 million in costs over 12 years, including recovery of capital expenditures of $70.6 million. Due to changes in the tax law, TNMP filed supplemental testimony on February 16, 2011 to reflect the effects of the bonus depreciation, a new WACC, and other changes. The filing amended the requested surcharge to collect $126.1 million, including capital expenditures of $70.2 million incurred through 2015. On May 18, 2011, the parties announced a settlement that permits TNMP to collect the costs of a $113.3 million advanced meter deployment. The settlement approves a lower cost deployment due principally to the removal of an outage management system from TNMP's proposal. The settlement was approved by the PUCT on July 8, 2011. TNMP began collecting the surcharge on August 11, 2011 in order to collect a total of $113.3 million in costs over 12 years. Deployment of advanced meters began in September 2011. 2010 Rate Case On August 26, 2010, TNMP filed with the PUCT for a $20.1 million increase in revenues, requesting that new rates go into effect on October 1, 2010. In its request, TNMP also asked for permission to update its catastrophe reserve fund that would be utilized to pay for a utility system's costs in recovering from natural disasters and acts of terrorism. Additionally, TNMP requested a rate rider to recover costs to storm harden its system. On November 8, 2010, the presiding ALJ severed the rate case expense issues into a separate proceeding. In December 2010, the parties announced to the ALJ that a settlement had been reached in the case and a stipulation supporting the settlement was filed. The settlement provided for a revenue requirement increase of $10.25 million, a return on equity of 10.125%, and a hypothetical 55%/45% debt-equity capital structure. The PUCT approved the settlement on January 27, 2011. TNMP implemented the new rates on February 1, 2011. 2010 Rate Case Expense Proceeding The determination of the amount of reasonable rate case expenses incurred by TNMP and other parties in TNMP's 2010 Rate Case was severed into a separate proceeding. On January 26, 2011, the ALJ set a procedural schedule requiring the parties who participated in the 2010 rate case to file testimony supporting their respective incurred expenses. The parties agreed to a settlement of the case, which was approved by the PUCT on May 26, 2011. TNMP began collecting $2.8 million over three years on July 1, 2011. Remand of ERCOT Transmission Rates for 1999 and 2000 Following a variety of appeals, the ERCOT transmission rates approved in 1999 and 2000 were recently remanded back to the PUCT. The issues relevant to TNMP are addressed in three separate dockets, but those proceedings are expected to be heard jointly. These dockets concern the recalculation of rates for the fourth quarter of 1999 and all of 2000 to correct over-payments made by certain market participants and the recovery of additional, undetermined transmission costs by City Public Service Board of San Antonio ("CPS"). On October 5, 2011, TNMP joined in a non-unanimous settlement of the issues relating to resettlement of the last four months of 1999. CPS is the sole opposing party. The settlement would resolve all issues except CPS's claim that it can file a transmission rate case in 2011 to determine its actual rates for the fourth quarter of 1999 and all of 2000. As that claim is pending in a separate docket, the settlement does not prejudice CPS' right to pursue the claim in the pending proceeding. TNMP would receive $1.6 million under the settlement, if approved. However, whether such funds would have to be passed on to customers would be determined in TNMP's next transmission cost recovery factor filing. TNMP cannot predict the ultimate outcome of this matter. Energy Efficiency On April 29, 2011, TNMP filed an application for approval of its 2012 energy efficiency programs and requested recovery through an energy efficiency cost recovery factor. TNMP estimates the costs of its 2012 energy efficiency programs to be $4.4 million and requests to collect this amount based on a per customer charge over 12 months. Additionally, as permitted by the PUCT rules, TNMP's request includes a bonus collection amount of $0.3 million due to the fact that its 2010 energy efficiency programs exceeded the performance goals set by the PUCT. On June 23, 2011, the PUCT issued a supplemental preliminary order clarifying that certain costs totaling $0.4 million that, due to a PUCT rule change, TNMP expects to incur during its current 2011 program should be considered in its energy efficiency 2012 filing and not in the current proceeding. On August 2, 2011, TNMP and the other parties announced a settlement of the material issues in this matter. The settlement allows TNMP to collect the $0.3 million bonus for 2010 and estimated 2012 program costs of $3.4 million and sets, for good cause, TNMP's 2012 demand savings goal at 4.8 MW instead of the 5.9 MW goal that would otherwise apply. The settlement does not alter the current PUCT energy efficiency rules permitting recovery of any under-collection that might exist after the 2012 program year. TNMP received a final order on September 13, 2011 that approved the settlement in whole, except a minor amount for under-recovery of administrative costs from the 2010 energy efficiency expenses. TNMP's new rates will be effective January 1, 2012. Periodic Rate Adjustment On May 28, 2011, the Governor of Texas signed Senate Bill 1693, which will allow for an annual periodic rate adjustment to reflect changes in investments in distribution assets. To implement the new statute, the PUCT opened a rule-making proceeding. A proposed rule was published by the PUCT in the Texas Register on July 22, 2011. Comments to the new rule were filed in August 2011. A public hearing was held on August 15, 2011. The PUCT approved a new rule on September 27, 2011. The rule allows ERCOT distribution utilities to only file for a periodic rate adjustment during the period April 1 through April 8 of each year and requires the PUCT to deny an electric utility's application for a periodic rate adjustment if the electric utility is earning more than its authorized rate of return using weather-normalized data.

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