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

Transcription

1 Direct Testimony and Schedules Leanna M. Chapman Before the Minnesota Public Utilities Commission State of Minnesota In the Matter of the Application of Northern States Power Company for Authority to Increase Rates for Electric Service in Minnesota Exhibit (LMC-1) Property Taxes November 2, 2015

2 TABLE OF CONTENTS I. Introduction 1 II. Property Tax Expense Forecasts 9 A. Forecast Methodology 9 B. Data Inputs Plant Net Operating Income DOR Capitalization Rates DOR Weighting of Cost and Income Indicators of Value Local Tax Rates 17 III. Historical Analysis 18 IV. Conclusion 24 Schedules Statement of Qualifications Schedule 1 NSPM Property Taxes 2016 Schedule and 2016 NSPM Property Tax Comparison Schedule NSPM Property Tax Schedule and 2017 NSPM Property Tax Comparison Schedule NSPM Property Tax Schedule vs 2018 NSPM Property Tax Schedule Tax Rate Comparisons Historic Property Taxes from 2001 Schedule 8 Schedule 9 Pre-filed Discovery Appendix A i Chapman Direct

3 I. INTRODUCTION Q. PLEASE STATE YOUR NAME AND OCCUPATION. A. My name is Leanna M. Chapman. I am Manager of Tax Reporting for Xcel Energy Services Inc. Q. PLEASE SUMMARIZE YOUR QUALIFICATIONS AND EXPERIENCE. A. I have over 10 years of corporate tax experience, including serving as Manager of Tax Reporting for Xcel Energy Services Inc. In my current position, I oversee and manage the compliance, accounting, and planning responsibilities associated with Xcel Energy s property and sales/use taxes. A summary of my qualifications and experience is provided as Exhibit (LMC-1), Schedule 1. Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? A. I provide Northern States Power Company s (NSPM or the Company) property tax expense forecast for 2016, 2017, and 2018, the proposed multiyear rate plan period. Specifically, I discuss our overall forecast methodology and the inputs we used to develop the forecasts in each year. I also provide a discussion of how property taxes were treated in our last rate case, and historical information related to our property taxes. Q. BEFORE TURNING TO FORECAST DETAILS, PLEASE DISCUSS WHAT YOU BELIEVE THE GOAL IS IN DETERMINING THE APPROPRIATE LEVEL OF PROPERTY TAXES TO INCLUDE IN RATES. A. Property taxes are a necessary cost of providing service to our customers. While property taxes may fluctuate due to changes dictated by the Minnesota Department of Revenue (DOR) and changes in tax rates at the local level, 1 Chapman Direct

4 increases in our property taxes are largely due to investments in our system. As such, we believe rates should be set to allow the Company to recover this cost of service and at the same time ensure customers pay only actual property taxes incurred. Q. THAT SOUNDS STRAIGHTFORWARD. WHY HAVE PROPERTY TAXES BEEN AN ISSUE IN PREVIOUS RATE CASES? A. We believe there are two reasons property taxes have been an issue in our recent rate cases timing and forecast assumptions. First, the timing of a rate case does not generally match the timing of when we receive information that determines our final tax bill each year. Thus the Commission is required to make a decision about property taxes to be included in rates before we receive key pieces of information that can significantly affect the calculation namely, the final DOR valuation and local tax rates. Second, we acknowledge that in the past we have used a conservative approach in forecasting, and our property tax forecasts have been higher than actuals in a number of years. We understand this is a concern when we request that rates be set using a forecasted level of property taxes. Q. WHAT HAVE YOU DONE TO ADDRESS THESE ISSUES IN THIS CASE? A. We have attempted to resolve these issues first by using different inputs for some variables in our forecasting calculation. Using these inputs produces a lower property tax forecast compared to what it would have been using the approach we used in the past. Second, while we are requesting that the Commission approve these forecasted amounts for inclusion in rates, we are also proposing a true-up mechanism that will ensure customers pay only actual 2 Chapman Direct

5 property taxes incurred. In our most recent rate case, where actual property taxes were lower than what we had forecasted, we used a similar mechanism and we were able to reflect the lower actual property tax amounts through an interim rate refund and lower final rates. We believe this worked well in our last rate case, and we are proposing similar treatment of property taxes in this case. I provide further detail about what occurred and how property taxes were treated in our last rate case in Section III of my testimony. Q. WHAT ARE THE COMPANY S FORECASTED PROPERTY TAX EXPENSE AMOUNTS FOR THE MULTI-YEAR RATE PLAN PERIOD? A. Our total Company property tax forecasts, by state taxing jurisdiction, are shown in Table 1 below. For comparison purposes, Table 1 also shows our actual 2014 property taxes and our current 2015 forecast. Table 1 also provides this information at the Minnesota electric jurisdictional level. Company witnesses Ms. Anne E. Heuer and Mr. Charles R. Burdick provide support for the Minnesota electric jurisdiction property tax expense amounts. Detailed calculations of the total Company property tax expense for are provided in Exhibit (LMC-1), Schedules 2 through 7. Component Table 1 Forecasted NSPM Property Tax Expense ($ Million) 2014 Actual 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Minnesota Taxing Jurisdiction $179.9 $197.5 $225.8 $237.3 $245.6 North Dakota Taxing Jurisdiction $2.8 $3.2 $4.2 $5.1 $5.1 South Dakota Taxing Jurisdiction $3.5 $3.7 $3.8 $3.8 $3.8 Total Company $186.2 $204.4 $233.8 $246.2 $254.5 MN Electric Jurisdiction $133.9 $147.7 $168.3 $176.8 $ Chapman Direct

6 Since Minnesota taxes account for over 96 percent of the total Company property taxes, the discussion in my testimony focuses on the Minnesota taxing jurisdiction. In addition, unless noted otherwise, the numbers I provide are for both electric and gas, consistent with how we estimate property taxes for financial statement purposes. Q. YOU MENTIONED THESE FORECAST AMOUNTS WERE DEVELOPED USING A DIFFERENT APPROACH THAN THE COMPANY HAS USED IN PRIOR RATE CASES. PLEASE ELABORATE. A. While our overall forecasting approach is the same, based on our experience and comments of the Minnesota Department of Commerce (Department) in our last rate case, we are using different data inputs for some of the variables in our property tax forecast calculation. Specifically, our forecasts in this case reflect the most recent actual Minnesota DOR valuation inputs, which were finalized in July We believe making this change may resolve some of the issues that arose in our last rate case. Q. PLEASE DESCRIBE THIS CHANGE AND THE EFFECT IT HAS ON THE COMPANY S FORECASTED PROPERTY TAX EXPENSE IN THIS CASE. A. In prior rate cases, due to uncertainty about the DOR s position in our final valuation, we used a more conservative forecasting approach that reflected projected or default values for the DOR valuation inputs. While the DOR s final valuation remains uncertain from year to year, some of the valuation inputs appear to have stabilized. As a result, we believe forecasting property taxes using the actual DOR valuation inputs received in 2015 is appropriate. Using the most recent actual DOR valuation inputs reduces our forecasted property tax expense amounts in this case compared to what they would have 4 Chapman Direct

7 been under the more conservative approach we used in prior cases. Table 2 below shows our forecasted property tax expense in this case compared to what the amounts would have been had we continued to use the more conservative approach we used in prior cases. Table 2 Forecasted NSPM Property Tax Expense ($ Million) 2016 Forecast 2017 Forecast 2018 Forecast Forecast in Current Case $233.8 $246.2 $254.5 Forecast Under Method Used in Prior Case $245.1 $257.4 $267.3 Difference between Current and Prior Method ($11.3) ($11.2) ($12.8) I discuss the DOR valuation inputs further in Section II.B. of my testimony. In addition, I provide a historical analysis of our property taxes, including further discussion of the change in forecasting inputs since our last rate case, in Section III. Q. WHAT WAS THE COMMISSION S DECISION RELATED TO PROPERTY TAXES IN YOUR LAST RATE CASE? A. In our last rate case, Docket No. E002/GR , the Commission approved $137 million in property taxes for 2014, with an incremental amount of $4 million related to capital projects approved for recovery in the 2015 step year. The Commission also required an annual compliance filing to show actual property taxes and provide customer refunds if necessary. Our June 30, 2015 compliance filing in that docket showed final 2014 property taxes of $133.9 million, $3.1 million less than the amount approved in rates. Rather than providing a customer refund, the timing in that case allowed us to incorporate the lower 2014 property tax amount when implementing final 5 Chapman Direct

8 rates for 2014 and I provide additional discussion of our last case in Section III. Q. HOW DO THE FORECASTED PROPERTY TAX AMOUNTS COMPARE WITH THE LEVEL OF PROPERTY TAXES APPROVED BY THE COMMISSION AND INCLUDED IN RATES? A. Tables 3 and 4 below make two comparisons. First, Table 3 shows the property tax expense currently included in rates for 2014 and 2015 compared to the jurisdictionalized forecasted amounts. We note that the large increase (approximately $30 million) between 2015 and 2016 reflects the fact that only a small portion of our property taxes in 2015 (associated with the approved capital step projects for 2015) was approved for recovery in rates. Table 3 NSPM Jurisdictionalized Property Tax Expense ($ Million) 2014 In Rates 2015 In Rates 2016 Forecast 2017 Forecast 2018 Forecast Property Tax Expense $133.9 $137.9 $168.3 $176.8 $182.6 Increase over Previous Year $4 $30.4 $8.5 $5.8 Second, Table 4 shows our forecasts compared to 2014 actuals and our full, current 2015 forecasted amount. Compared to our current 2015 forecast, the increase in forecasted property tax expense in 2016 is $19.3 million on a jurisdictional basis. As shown in Exhibit (LMC-1), Schedule 3, the Minnesota taxing jurisdiction accounts for virtually all of the year-to-year increases in property taxes. 6 Chapman Direct

9 Table 4 NSPM Jurisdictionalized Property Tax Expense ($ Million) 2014 Actual 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Property Tax Expense $133.9 $147.7 $168.3 $176.8 $182.6 Increase over Previous Year $13.8 $20.6 $8.5 $5.8 Q. IS THE COMPANY SEEKING TO RECOVER PROPERTY TAXES AS PART OF ITS MULTI-YEAR RATE PLAN PROPOSAL? A. Yes. Company witness Ms. Anne E. Heuer has incorporated the 2016 forecasted amount into the 2016 revenue requirements, and Company witness Mr. Charles R. Burdick has incorporated the 2017 and 2018 forecasted amounts into the multi-year rate plan revenue requirements. As I mentioned earlier, we also propose an annual compliance filing and true-up that would allow rates to reflect actual property taxes for each year. Q. WHY IS THE COMPANY INCLUDING FORECASTED PROPERTY TAX AMOUNTS IN THE 2017 AND 2018 REVENUE REQUIREMENTS WHEN THE COMPANY IS PROPOSING TO USE ESCALATION INDICES TO ESTABLISH EXPENSE LEVELS FOR OTHER OPERATIONS AND MAINTENANCE (O&M) COSTS IN THE 2017 AND 2018 PLAN YEARS? A. Property taxes are essentially a capital related cost of service, and our investments are the biggest driver of increases in our property taxes. In fact, the only data inputs that change in forecasting property taxes for 2017 and 2018 in this case are the investment forecast components. Under this forecasting approach, the incremental increases in 2017 and 2018 can be attributed to our forecasted additional investment. Finally, we believe 7 Chapman Direct

10 including forecasted property tax amounts in rates for 2017 and 2018 is appropriate because we are also proposing a true-up mechanism that would reflect actual property taxes for each year. Q. PLEASE DESCRIBE THE COMPANY S PROPOSED TRUE-UP MECHANISM. A. Given the expected procedural schedule for this case, we believe it will be possible to reflect actual property taxes for 2016 in final rates, while 2017 and 2018 rates would include forecasted property tax amounts. We propose to submit annual compliance filings that will show actual property taxes for 2017 and 2018 once they are finalized. Any over-recovery could be refunded, or any under-recovery could be charged, through an appropriate mechanism at that time. I discuss our proposal for an annual compliance filing and true-up more specifically in Section II below, where I present the property tax information timeline in more detail. Q. IF SUCH A SYMMETRICAL TRUE-UP IS NOT ADOPTED, WHAT DO YOU RECOMMEND? A. For the reasons discussed in detail in my testimony, I believe a symmetrical true-up is reasonable and fair to both customers and the Company. However, if the Commission does not agree with that approach, I believe the forecasted property tax levels I have presented should be used for the purpose of setting rates. These forecasts represent the most accurate information available at this time. Q. HOW IS YOUR TESTIMONY ORGANIZED? A. I present the remainder of my testimony in the following sections: Section II: Property Tax Expense Forecasts; 8 Chapman Direct

11 Section III: Historical Analysis; and Section IV: Conclusion. Q. DO YOU PROVIDE ANY ADDITIONAL INFORMATION RELATED TO PROPERTY TAXES? A. Yes. Appendix A provides a list of relevant information requests from the and rate cases that I have already responded to in this case (with new time frames as appropriate to reflect the November 2, 2015 filing date of this case), indicating where the responsive information is included in my testimony or schedules, or if it is provided in Appendix A. II. PROPERTY TAX EXPENSE FORECASTS A. Forecast Methodology Q. PLEASE DESCRIBE HOW UTILITY PROPERTY IS VALUED AND TAXED IN MINNESOTA. A. Utility property taxes are based on the value of the Company s real and personal property, the class rate, and local tax rates. Most of our property is valued by the DOR as a unit, with land and certain buildings valued by local taxing jurisdictions. Our DOR unit value is apportioned to each local taxing jurisdiction. Local jurisdictions then combine the value of our locally assessed property with their apportioned share of the DOR value to set our overall market value. Our overall market value is multiplied by the applicable class rate to determine tax capacity, which is then multiplied by the local tax rate to arrive at our property tax liability. 9 Chapman Direct

12 Q. GIVEN THIS PROCESS, HOW DOES THE COMPANY FORECAST ITS PROPERTY TAXES? A. We forecast property taxes based on the same key variables used in prior rate cases, such as investments, DOR valuation inputs, and effective tax rate. We also propose to update our property tax forecasts to incorporate actual information on an annual basis. As I noted earlier, we propose to provide an annual compliance filing showing actual property taxes once finalized. This would be submitted in June of each year showing the actual property taxes for the prior year. Q. WHAT DATA INPUTS DID THE COMPANY USE TO DEVELOP ITS 2016 PROPERTY TAX FORECAST? A. Our current 2016 property tax forecast is based on the data shown in Table 5 below. Table 5 Inputs to 2016 Property Tax Forecast Category Variable Data Inputs Investments DOR Valuation Inputs Effective Tax Rate Q. DID THE COMPANY USE SIMILAR VARIABLES IN ITS 2014 RATE CASE APPLICATION? Plant Net Operating Income DOR Capitalization Rates DOR Weighting of Indicators of Value Local Tax Rates Projected December 31, 2015 Plant Balances Actual 2014 and Projected 2015 Net Operating Income Actual 2015 DOR Capitalization Rates (Received June 2015) Actual 2015 DOR Weighting (Received July 2015) 2014 Effective Rate (Received March and April 2015) A. Yes. We used the same variables in our last rate case application. 10 Chapman Direct

13 Q. YOU MENTIONED EARLIER THAT SOME OF THE DATA INPUTS USED IN THIS CASE HAVE CHANGED COMPARED TO THE LAST CASE. WHICH DATA INPUTS ARE DIFFERENT? A. Our forecast in this case reflects the most recent actual data and calculation methodologies from the DOR for three data inputs: Net Operating Income, DOR Capitalization Rates, and DOR Weighting of Indicators of Value. Our forecast also reflects the most recent effective tax rate. I will discuss details related to each of these in Section B below. Q. ARE THESE DATA INPUTS THE MOST APPROPRIATE TO USE IN FORECASTING THE 2016 PROPERTY TAX EXPENSE? A. Yes. The information in Table 5 represents the most current information available at this time and results in a reasonable and sound forecast of the 2016 property tax expense. Q. IN THIS CASE YOU PROVIDE PROPERTY TAX FORECASTS FOR 2017 AND 2018 AS WELL. WHICH OF THE DATA INPUTS CHANGE IN THE FORECAST CALCULATION FOR THOSE YEARS? A. The only data inputs that change in forecasting property taxes for 2017 and 2018 are the investment forecast component. We update these inputs because we have projected plant balances and net operating income projections for 2017 and 2018, and it is reasonable to update our forecast to include that information. The 2017 and 2018 forecasts, however, use the same DOR valuation inputs and effective tax rate shown in Table 5. The DOR and local taxing authorities control these variables and can make different decisions that affect these 11 Chapman Direct

14 inputs every year. As such, we do not forecast these inputs. We believe using the most recent, actual information available at this time, as shown in Table 5, is appropriate for our 2017 and 2018 forecasts. Q. YOU MENTIONED EARLIER THAT THE COMPANY UPDATES ITS INTERNAL PROPERTY TAX FORECASTS AS VARIOUS INFORMATION IS RECEIVED DURING THE YEAR. WHEN DOES THE COMPANY RECEIVE SUCH INFORMATION? A. Figure 1 below shows when we will receive information regarding our 2016 property taxes in 2016 and This schedule is the same every year, so can be applied to information we will receive related to 2017 and 2018 property taxes as well. Figure Property Tax Timeline Q. THE COMPANY HAS INCORPORATED SOME UPDATED INFORMATION INTO ITS FORECASTS AT VARIOUS TIMES DURING THE COURSE OF SOME PRIOR RATE CASE PROCEEDINGS. PLEASE EXPLAIN HOW THE COMPANY PROPOSES TO UPDATE ITS FORECASTS IN THIS CASE. A. We propose to submit updated information in an annual filing once property taxes for a given year are final. For example, our first update would be filed after we receive 2016 property tax statements in the spring of That 12 Chapman Direct

15 filing would include final property tax amounts for Given the expected schedule for this case, we believe the final 2016 property tax amounts could be incorporated into final rates, the same way we were able to incorporate final 2014 property taxes in our last rate case. Because we would have the updated actual 2016 DOR valuation inputs and actual effective tax rate at that time, we would also provide updated 2017 and 2018 forecasts in that filing to incorporate those inputs. We would file our next update after we receive final 2017 property tax information in the spring of Q. GIVEN THE PROCEDURAL TIMELINE FOR THIS CASE, WHAT LEVEL OF PROPERTY TAXES WOULD BE INCLUDED IN RATES FOR 2017 AND 2018? A. The level of property taxes included in rates for 2017 and 2018 would depend on the timing of the Commission s final decision in this case, but would use the forecasted property taxes based on the most recent data inputs available at the time the Commission makes its decision. In this case, we believe that could be the forecasts included in our spring 2017 compliance filing. Q. PLEASE EXPLAIN HOW YOUR PROPOSAL FOR AN ANNUAL COMPLIANCE FILING AND TRUE-UP MECHANISM WOULD WORK FOR 2017 AND 2018 PROPERTY TAXES. A. We propose to submit annual compliance filings that will show actual property taxes for 2017 and 2018 after we receive final property tax statements in the spring of the following years. Our compliance filings would show actual property taxes compared to the amount included in rates for the respective year. Any over-recovery could be refunded or symmetrically, any underrecovery could be charged through an appropriate mechanism at that time. 13 Chapman Direct

16 Q. IN YOUR LAST RATE CASE, THE COMMISSION APPROVED IN RATES A FORECASTED LEVEL OF PROPERTY TAXES FOR 2014 AND REQUIRED A CUSTOMER REFUND IF ACTUAL PROPERTY TAXES WERE LESS THAN FORECASTED. WHY DO YOU BELIEVE A TRUE-UP MECHANISM, RATHER THAN SIMPLY A REFUND PROVISION, IS APPROPRIATE IN THIS CASE? A. In the past, due to the uncertainty and year-to-year variability of some DOR valuation inputs, we used a more conservative forecasting approach. As a result, there were concerns about our property tax forecast being too high, which resulted in the property tax refund provision included in our last rate case. Since then, we have made changes to some of the data inputs used in our forecasts. Overall, these changes result in property tax forecasts in this case that are lower than what they would have been using the more conservative approach we used in the past. Because our property tax forecasts in this case are lower, and there is still uncertainty about final DOR valuations each year, final property taxes could be higher or lower than our forecasts. Thus, we believe a symmetrical true-up mechanism is appropriate in this case. A true-up mechanism that reflects actual property taxes in a given year either higher or lower than what is approved for inclusion in rates allows the Company to recovery this cost of providing service and at the same time ensures customers only pay actual property tax amounts for a given year. B. Data Inputs 1. Plant Q. WHAT PLANT DATA DID THE COMPANY USE IN ITS 2016, 2017 AND 2018 PROPERTY TAX FORECASTS? 14 Chapman Direct

17 A. Our current 2016 property tax forecast is based upon our current projection of December 31, 2015 plant balances. The Company s final 2016 property tax expense will be based on the final December 31, 2015 plant balances. Similarly, the 2017 and 2018 property tax forecasts are based upon our current projections of December 31, 2017 and 2018 plant balances, respectively, and final property taxes for those years will be based on the final plant balances as of December 31 each year. 2. Net Operating Income Q. WHAT NET OPERATING INCOME DATA DID THE COMPANY USE IN ITS 2016, 2017 AND 2018 PROPERTY TAX FORECASTS? A. Our current 2016 property tax forecast is based upon actual 2014 net operating income and our current projection of 2015 net operating income. The Company s final 2016 property tax expense will be based upon actual 2014 and 2015 net operating income. The calculation method for net operating income is dictated by the DOR. The DOR used a two-year weighted average method for 2015 property taxes, which was a deviation from the three-year weighted average method used in prior years and included in our forecast methodology in our last rate case. We use the two-year weighted method in our property tax forecasts. Our 2017 net operating income is based on projected 2015 and 2016 net operating income. Final 2017 net operating income will be based on actual 2015 and 2016 net operating income. 15 Chapman Direct

18 Following the same process, 2018 net operating income is based on projected 2016 and 2017 net operating income. Final 2018 net operating income will be based on actual 2016 and 2017 net operating income. 3. DOR Capitalization Rates Q. WHAT DOR CAPITALIZATION RATES DID THE COMPANY USE IN ITS 2016, 2017 AND 2018 PROPERTY TAX FORECASTS? A. Our 2016, 2017 and 2018 property tax forecasts are based on the most recent actual information available, which are the actual DOR capitalization rates we received in Final property taxes will be based on the DOR s final capitalization rates for each year. Use of the most recent actual DOR capitalization rates is a deviation from the methodology we employed in our last rate case, where we used a projected value for DOR capitalization rates. We believe use of the 2015 actual capitalization rates is appropriate because it is the most recent actual information available. 4. DOR Weighting of Cost and Income Indicators of Value Q. WHAT WEIGHTING OF THE COST AND INCOME INDICATORS OF VALUE DID THE COMPANY USE IN ITS 2016, 2017, AND 2018 PROPERTY TAX FORECASTS? A. Our 2016, 2017, and 2018 property tax forecasts are based on the most recent actual information available, which are the actual DOR weightings of the cost and income indicators of value we received in Final property taxes will be based on the DOR s weightings for each specific year. 16 Chapman Direct

19 Because the DOR reviews and may adjust these weightings every year, and prior years weightings do not dictate the DOR s decision in any year, in previous rate cases we incorporated the more conservative default equal weightings into our property tax forecast. Use of the most recent actual DOR weightings is a deviation from the methodology we employed in our last rate case. However, the DOR has deviated from the default weightings in recent years, and we believe using the most recent weightings provides a reasonable property tax forecast. We believe use of the 2015 actual weightings of the cost and income indicator of value is appropriate because it is the most recent actual information available. 5. Local Tax Rates Q. WHAT LOCAL TAX RATES DID THE COMPANY USE IN ITS 2016, 2017 AND 2018 PROPERTY TAX FORECAST? A. Our current forecast of the 2016, 2017 and 2018 property tax expense is based upon 2014 local tax rates. The local tax rates are mathematically converted into an effective tax rate as provided in Exhibit (LMC-1), Schedule 8. This is the most accurate recent tax rate data available at this time. Specifically, the effective tax rate used in our forecasts is based upon 2014 final tax statements received in March and April Final 2016, 2017 and 2018 property taxes will be based on the final statements received in March and April of the following year. III. HISTORICAL ANALYSIS Q. WHAT IS DRIVING THE INCREASE IN 2016 MINNESOTA PROPERTY TAXES FROM THE 2015 LEVELS? 17 Chapman Direct

20 A. As described above, the Company s property tax expense is a function of three primary variables: investments; DOR valuation inputs; and local property tax rates. The increase in our forecasted 2016 Minnesota taxing jurisdiction property tax expense is driven by the investment variable. For example, our 2016 property tax forecast includes over $1.3 billion in additional taxable property and over $55 million in additional net operating income. Schedule 3 compares our 2016 forecast to 2015 property tax expense. Q. WHAT IS DRIVING THE INCREASE IN 2017 AND 2018 MINNESOTA PROPERTY TAXES? A. Like the change between 2015 and 2016, the increase in 2017 and 2018 property taxes is driven by the investment variable. Schedules 5 and 7 show how our additional investments impact the 2017 and 2018 forecasts. Q. ARE THE FORECASTED INCREASES IN 2016, 2017 AND 2018 MINNESOTA PROPERTY TAXES CONSISTENT WITH PAST INCREASES IN MINNESOTA PROPERTY TAXES? A. Yes. As Minnesota taxes account for over 96 percent of total Company property taxes, Figure 2 below shows NSPM property taxes for the Minnesota taxing jurisdiction for 2001 through As shown, property taxes have increased significantly each year since Chapman Direct

21 ($ Millions) Figure 2 NSPM Minnesota Taxing Jurisdiction Property Taxes $250 $237 $245 $226 $200 $198 $180 $162 $166 $150 $124 $135 $105 $108 $111 $100 $50 $ * 2016* 2017* 2018* * Forecast Exhibit (LMC-1), Schedule 9 shows the Company s property taxes since Q. PROPERTY TAXES APPROVED BY THE COMMISSION FOR INCLUSION IN RATES WERE BASED ON A 2014 FORECASTED AMOUNT. PLEASE DISCUSS IN DETAIL WHAT OCCURRED IN THE LAST RATE CASE. A. Table 6 below shows the changes in our property tax forecast for 2014 during the course of our last rate case, and shows the final amounts approved by the Commission for 2014 and Chapman Direct

22 Table 6 Minnesota Electric Jurisdiction Property Taxes Docket No. E002/GR Initial Forecast $ Updated Forecast (DOR Valuation) $ Updated Forecast (Year End Tax Rates) $ Actual Amount (Final Tax Statements) $ Included In Rates $133.9 $137.9 In our last rate case, we proposed 2014 rates to include property tax amounts based on our 2014 forecast of $150 million on a Minnesota electric jurisdictional basis. The Company agreed to the Department s proposed $9 million reduction in 2014 property tax expense to $141 million, subject to a true-up capped at $145 million. In January 2015, we updated our 2014 test year property taxes to be $137 million based on Truth in Taxation notices received in December The Commission approved the $137 million to be included in 2014 rates, with an incremental increase of $4 million related to capital projects approved for recovery in the 2015 step year. The Commission also approved a refund mechanism if the amount on the final 2014 property tax statements were less than the amount included in rates. In that case, we would make ongoing annual refunds of the difference (on a Minnesota electric jurisdictional basis) until filing our next rate case. Final 2014 property taxes shown on the property tax statements in March 2015 were $133.9 million on a Minnesota electric jurisdictional basis, or $ Chapman Direct

23 million less than the amount reflected in rates. The decrease from the estimate based on December 2014 Truth in Taxation notices to the final property tax statements was due to a slight overall decrease in local tax rates, with changes to market value exclusions also having a very minor impact. In its June 30, 2015 compliance filing, the Company proposed to incorporate the lower amount into the 2014 and 2015 revenue requirement calculations, resulting in a slightly higher 2014 interim refund and through the setting of final rates, eliminating the need for a separate property tax refund. Q. WHAT DROVE THE $9 MILLION REDUCTION THE COMPANY AGREED TO IN THAT CASE? A. During the course of that proceeding, we received the final DOR valuation for 2014 which was lower than the value used to forecast property taxes in the 2014 rate case. The primary driver of that reduction was the final DOR weighting of the cost and income indicators of value. Rather than the 50/50 default weightings used in our forecast in that case, the DOR adjusted the Company s weightings of the cost indicator of value and the income indicator of value to be 35 percent and 65 percent, respectively. Q. DO YOU EXPECT A SIMILAR REDUCTION TO THE PROPERTY TAX FORECASTS PRESENTED IN THIS CASE? A. No. Our forecasts in this case are based on the most recent actual DOR weightings of 35 percent and 65 percent. Using this data input up front results in a lower property tax forecast. 21 Chapman Direct

24 Q. WHY DID YOU MAKE THE CHANGE USE THE MOST RECENT ACTUAL DOR WEIGHTINGS IN THIS CASE? A. The DOR is authorized to alter the default weightings. 1 We meet with the DOR each year and advocate for increased weighting of the income indicator of value. Table 7 below shows the final DOR weighting for the past five years. Although the DOR weightings can change every year, based on the recent stability of these inputs, we expect similar weightings going forward. Thus, we believe using the most recent actual weightings results in an accurate forecast. Table 7 Historical DOR Weightings of the Cost and Income Indicators of Value Q. IS THERE ANY OTHER CHANGE RELATED TO DOR VALUATION YOU WOULD LIKE TO HIGHLIGHT? A. Yes. For 2014, the DOR changed the way it calculates the Company s net operating income. Year Cost Indicator Electric Income Indicator % 55% % 55% % 65% % 65% % 65% 1 Minn. R , subp. 4a, part B. 22 Chapman Direct

25 Q. PLEASE DESCRIBE THIS CHANGE AND THE EFFECT IT HAS ON THE COMPANY S PROPERTY TAXES. A. Previously, the DOR calculated our net operating income (NOI) using a weighted three-year average, reflecting a 25/35/40 percent weighting with 40 percent weight being given to the most recent year. For 2014, the DOR used a weighted two-year average, reflecting a 40/60 percent weighting with 60 percent weight begin given to the most recent year. In our current period of high investment, use of the two-year average results in higher property taxes for the Company. Table 8 below shows the NOI calculations for the past five years. Table 8 Historical DOR Weightings of Net Operating Income Year Prior Year 1 Q. IS IT APPROPRIATE TO INCORPORATE THIS METHOD OF CALCULATION INTO COMPANY S PROPERTY TAX FORECASTS? Electric Prior Year 2 Prior Year % 35% 25% % 35% 25% % 35% 25% % 35% 25% % 40% 0% A. Yes. Using the DOR 2015 NOI calculation method reflects the most recent actual information available, and we expect the DOR will continue to use this method of calculation for the Company s NOI going forward. 23 Chapman Direct

26 IV. CONCLUSION Q. PLEASE SUMMARIZE YOUR TESTIMONY. A. The forecasted 2016, 2017 and 2018 total Company property tax expense is $233.7 million, $246.2 million and $254.0 million, respectively. Forecasted property taxes are increasing due to ongoing system investments and represent a continuation of recent increases. Our forecasts in this case reflect different data inputs for some variables, namely the actual DOR valuation inputs and local tax rates received in Using the most recent actual DOR valuation inputs reduces our forecasted property tax expense amounts in this case compared to what they would have been under the more conservative approach we used in prior cases. We believe using the actual 2015 DOR valuation inputs and local tax rates results in accurate forecasts. The Company is seeking recovery of property taxes as part of its multi-year rate plan, with rates that include forecasted property tax amounts. The Company is also proposing an annual compliance filing and true-up mechanism that would reflect actual property taxes in a given year. This approach would allow the Company to recovery this cost of providing service and at the same time ensure that customers only pay actual property tax amounts for a given year. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes, it does. 24 Chapman Direct

27 Exhibit (LMC-1), Schedule 1 Page 1 of 1 Statement of Qualifications Leanna M. Chapman Current Responsibilities As Manager, Tax Reporting, I oversee and manage the compliance, accounting, and planning responsibilities associated with Xcel Energy s property and sales/use taxes. Experience 2008 Present Xcel Energy Inc. Manager, Tax Reporting Deloitte & Touche LLP Lead Audit Senior Education 2003 Master of Accountancy University of South Dakota 2003 Bachelor of Science Business Administration University of South Dakota

28 Total Company Property Taxes Exhibit (LMC-1), Schedule 2 Page 1 of FTY Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31/15 Forecast 17,149,342,643 1,333,020,462 CWIP, 12/31/15 Forecast 607,258,386 11,349,113 Depreciation, 12/31/15 Forecast (6,114,339,627) (612,321,495) Cost Indicator of Value A $11,642,261,401 $732,048,080 Income Indicator 2013 NOI x 25% or 0% 0 10,353, NOI x 35% or 40% 199,663,578 16,353, Estimated NOI x 40% or 60% 341,821,336 20,096,800 NOI to Capitalize $541,484,914 $46,803,513 Capitalization Rate 7.40% 7.30% Income Indicator of Value B $7,317,363,697 $641,144,010 Apply Weightings 35/65 50/50 Cost Indicator $4,074,791,500 $366,024,000 Income Indicator $4,756,286,400 $320,572,000 Total System Unit Value C $8,831,077,900 $686,596,000 ALLOCATION OF SYSTEM VALUE MN Plant in Service 16,389,639,716 1,221,353,186 System Plant in Service 17,756,601,028 1,344,369,575 Plant Ratio x 90%-Elec / x 75%-Gas 83.07% 68.14% MN Gross Revenue 3,731,409, ,888,573 System Gross Revenue 4,239,532, ,665,589 Revenue Ratio x 10%-Elec / x 25%-Gas 8.80% 22.12% MN Allocated Value Percentage 91.87% 90.26% MN Allocated Value D $8,113,111,300 $619,721,500 Depreciable Plant Deductions 2,154,609,249 58,486,056 Land 180,216,966 3,393,588 CWIP 335,287,463 6,124,597 Other - Held for Future Use 0 0 Subtotal 2,670,113,678 68,004,241 Ratio - System Unit Value / Cost Indicator 75.85% 93.79% DEDUCTIONS TO MN ALLOCATED VALUE $2,025,281,200 $63,781,200 Sliding Scale Market Value Exclusion $200,000,000 $0 DEDUCT/EXCL TO MN ALLOCATED VALUE E $2,225,281,200 $63,781,200 Apportionable Market Value $5,887,830,100 $555,940,300 Effective Tax Rate 3.3% 3.3% FORECASTED PROPERTY TAX - Elec & Gas $194,298,393 $18,346,030 Rounded $194,300,000 $18,300,000 Total Electric & Gas $212,600,000 Locally Assessed $11,100,000 Wind Production $2,100,000 TOTAL MINNESOTA FORECASTED PROPERTY TAX $225,800,000 North Dakota & South Dakota Property Tax $8,000,000 TOTAL NSPM FORECASTED PROPERTY TAX $233,800,000

29 Exhibit (LMC-1), Schedule 2 Page 2 of 2 Support for the Calculation of Minnesota Apportionable Market Value A Minn. R , subp. 3 describes in part the cost indicator of value as: The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent. E Minn. R , subp. 1, explains the process for adjusting the valuation performed under Rule : After the Minnesota portion of the unit value of the utility company, except for electric cooperatives, is determined, any property which is non-formula-assessed or which is exempt from ad valorem tax, is deducted from the Minnesota portion of the unit value. Only that qualifying property located within the state of Minnesota may be excluded. Minn. R , subp. 2, describes the types of property excluded from the valuation performed under Rule : The following properties are valued by the local or county assessor and, therefore, the formula provided herein for the valuation of utility property is not applicable to such property: A. land; B. nonoperating property; and C. rights-of-way Minn. R , subp. 3, further explains the calculation of deduction to Minnesota value: The Minnesota portion of the unit value is reduced by the value included in the unit value of the company for land, rights-ofway, nonoperating property, and exempt property. This amount is calculated by determining the ratio of the unit value computed in part , subpart 5, to the cost less depreciation allowed in part , subpart 3. This ratio is multiplied by the cost less depreciation of the property to be deducted.

30 Total Company Property Taxes Northern States Power Company 2015 Accrual Forecast 2016 FTY 2015 vs Electric Gas Electric Gas Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31 15,489,122,573 1,240,775,385 17,149,342,643 1,333,020,462 1,660,220,070 92,245,077 CWIP, 12/31 906,506,966 9,776, ,258,386 11,349,113 (299,248,580) 1,572,873 Depreciation, 12/31 (6,009,343,119) (580,409,993) (6,114,339,627) (612,321,495) (104,996,508) (31,911,502) Cost Indicator of Value A $10,386,286,420 $670,141,632 $11,642,261,401 $732,048,080 1,255,974,981 61,906,448 Docket No. E002/GR Exhibit (LMC-1), Schedule 3 Page 1 of 2 Income Indicator Year 1 NOI x 25% or 0% 0 7,857, ,353, ,496,096 Year 2 NOI x 35% or 40% 186,782,982 14,494, ,663,578 16,353,612 12,880,596 1,859,270 Year 3 NOI x 40% or 60% 299,495,366 18,689, ,821,336 20,096,800 42,325,970 1,406,958 NOI to Capitalize $486,278,348 $41,041,188 $541,484,914 $46,803,513 55,206,565 5,762,325 Capitalization Rate 7.40% 7.30% 7.40% 7.30% 0 0 Income Indicator of Value B $6,571,329,032 $562,208,057 $7,317,363,697 $641,144, ,034,665 78,935,953 Apply Weightings 35/65 50/50 35/65 50/50 Cost Indicator $3,635,200,247 $335,070,816 $4,074,791,500 $366,024, ,591,253 30,953,184 Income Indicator $4,271,363,871 $281,104,028 $4,756,286,400 $320,572, ,922,529 39,467,972 Total System Unit Value C $7,906,564,118 $616,174,844 $8,831,077,900 $686,596, ,513,782 70,421,156 ALLOCATION OF SYSTEM VALUE MN Plant in Service 15,439,739,125 1,137,708,834 16,389,639,716 1,221,353, ,900,591 83,644,352 System Plant in Service 16,395,629,539 1,250,551,625 17,756,601,028 1,344,369,575 1,360,971,489 93,817,950 Plant Ratio x 90%-Elec / x 75%-Gas 84.75% 68.23% 83.07% 68.14% (0) (0) MN Gross Revenue 3,731,409, ,888,573 3,731,409, ,888, System Gross Revenue 4,239,532, ,665,589 4,239,532, ,665, Revenue Ratio x 10%-Elec / x 25%-Gas 8.80% 22.12% 8.80% 22.12% 0 0 MN Allocated Value Percentage 93.55% 90.35% 91.87% 90.26% (0) (0) MN Allocated Value D $7,396,590,700 $556,714,000 $8,113,111,300 $619,721, ,520,600 63,007,500 Depreciable Plant Deductions 2,043,407,958 57,553,575 2,154,609,249 58,486, ,201, ,481 Land 180,216,966 3,393, ,216,966 3,393, CWIP 512,862,889 5,413, ,287,463 6,124,597 (177,575,426) 711,038 Other - Held for Future Use Subtotal 2,736,487,813 66,360,722 2,670,113,678 68,004,241 (66,374,135) 1,643,519 Ratio - System Unit Value / Cost Indicator 76.13% 91.95% 75.85% 93.79% (0) 0 DEDUCTIONS TO MN ALLOCATED VALUE E $2,083,288,200 $61,018,700 $2,025,281,200 $63,781,200 (58,007,000) 2,762,500 Sliding Scale Market Value Exclusion $200,000,000 $0 $200,000,000 $0 0 0 DEDUCT/EXCL TO MN ALLOCATED VALUE $2,283,288,200 $61,018,700 $2,225,281,200 $63,781,200 (58,007,000) 2,762,500 Apportionable Market Value $5,113,302,500 $495,695,300 $5,887,830,100 $555,940, ,527,600 60,245,000 Effective Tax Rate 3.3% 3.3% 3.3% 3.3% 0 0 FORECASTED PROPERTY TAX - Elec & Gas $168,738,983 $16,357,945 $194,298,393 $18,346,030 25,559,411 1,988,085 Rounded $168,700,000 $16,400,000 $194,300,000 $18,300,000 25,600,000 1,900,000 Total Electric & Gas $185,100,000 $212,600,000 27,500,000 Locally Assessed $11,100,000 $11,100,000 0 Wind Production $1,300,000 $2,100, ,000 TOTAL MINNESOTA FORECASTED PROPERTY TAX $197,500,000 $225,800,000 28,300,000 North Dakota & South Dakota Property Tax $6,900,000 $8,000,000 1,100,000 TOTAL NSPM FORECASTED PROPERTY TAX $204,400,000 $233,800,000 29,400,000 Reasons for Changes: Minnesota Income 15,900,000 Plant 11,600,000 Renewables 800,000 28,300,000 North Dakota Renewables 1,000,000 South Dakota 100,000 Total Increase / (Decrease) 29,400,000

31 Support for the Calculation of Minnesota Apportionable Market Value Docket No. E002/GR Exhibit (LMC-1), Schedule 3 Page 2 of 2 A Minn. R , subp. 3 describes in part the cost indicator of value as: The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent. E Minn. R , subp. 1, explains the process for adjusting the valuation performed under Rule : After the Minnesota portion of the unit value of the utility company, except for electric cooperatives, is determined, any property which is non-formula-assessed or which is exempt from ad valorem tax, is deducted from the Minnesota portion of the unit value. Only that qualifying property located within the state of Minnesota may be excluded. Minn. R , subp. 2, describes the types of property excluded from the valuation performed under Rule : The following properties are valued by the local or county assessor and, therefore, the formula provided herein for the valuation of utility property is not applicable to such property: A. land; B. nonoperating property; and C. rights-of-way Minn. R , subp. 3, further explains the calculation of deduction to Minnesota value: The Minnesota portion of the unit value is reduced by the value included in the unit value of the company for land, rights-ofway, nonoperating property, and exempt property. This amount is calculated by determining the ratio of the unit value computed in part , subpart 5, to the cost less depreciation allowed in part , subpart 3. This ratio is multiplied by the cost less depreciation of the property to be deducted.

32 Total Company Property Taxes Exhibit (LMC-1), Schedule 4 Page 1 of FTY Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31/16 Forecast 18,077,601,803 1,414,976,000 CWIP, 12/31/16 Forecast 641,938,988 20,614,715 Depreciation, 12/31/16 Forecast (6,584,387,398) (650,588,733) Cost Indicator of Value A $12,135,153,393 $785,001,981 Income Indicator 2014 NOI x 25% or 0% 0 11,681, Estimated NOI x 35% or 40% 227,880,891 17,584, Estimated NOI x 40% or 60% 353,867,536 20,794,800 NOI to Capitalize $581,748,427 $50,060,651 Capitalization Rate 7.40% 7.30% Income Indicator of Value B $7,861,465,225 $685,762,346 Apply Weightings 35/65 50/50 Cost Indicator $4,247,303,700 $392,501,000 Income Indicator $5,109,952,400 $342,881,200 Total System Unit Value C $9,357,256,100 $735,382,200 ALLOCATION OF SYSTEM VALUE MN Plant in Service 17,052,029,276 1,304,046,987 System Plant in Service 18,719,540,791 1,435,590,715 Plant Ratio x 90%-Elec / x 75%-Gas 81.98% 68.13% MN Gross Revenue 3,731,409, ,888,573 System Gross Revenue 4,239,532, ,665,589 Revenue Ratio x 10%-Elec / x 25%-Gas 8.80% 22.12% MN Allocated Value Percentage 90.78% 90.25% MN Allocated Value D $8,494,517,100 $663,682,400 Depreciable Plant Deductions 2,128,999,255 58,442,685 Land 180,216,966 3,393,588 CWIP 413,394,202 9,602,678 Other - Held for Future Use 0 0 Subtotal 2,722,610,423 71,438,951 Ratio - System Unit Value / Cost Indicator 77.11% 93.68% DEDUCTIONS TO MN ALLOCATED VALUE $2,099,404,900 $66,924,000 Sliding Scale Market Value Exclusion $200,000,000 $0 DEDUCT/EXCL TO MN ALLOCATED VALUE E $2,299,404,900 $66,924,000 Apportionable Market Value $6,195,112,200 $596,758,400 Effective Tax Rate 3.3% 3.3% FORECASTED PROPERTY TAX - Elec & Gas $204,438,703 $19,693,027 Rounded $204,400,000 $19,700,000 Total Electric & Gas $224,100,000 Locally Assessed $11,100,000 Wind Production $2,100,000 TOTAL MINNESOTA FORECASTED PROPERTY TAX $237,300,000 North Dakota & South Dakota Property Tax $8,900,000

33 Support Northern for the States Calculation Power Company of Minnesota Apportionable Market Value A Minn. R , subp. 3 describes in part the cost indicator of value as: The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. Exhibit (LMC-1), Schedule 4 Page 2 of 2 B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent. E Minn. R , subp. 1, explains the process for adjusting the valuation performed under Rule : After the Minnesota portion of the unit value of the utility company, except for electric cooperatives, is determined, any property which is non-formula-assessed or which is exempt from ad valorem tax, is deducted from the Minnesota portion of the unit value. Only that qualifying property located within the state of Minnesota may be excluded. Minn. R , subp. 2, describes the types of property excluded from the valuation performed under Rule : The following properties are valued by the local or county assessor and, therefore, the formula provided herein for the valuation of utility property is not applicable to such property: A. land; B. nonoperating property; and C. rights-of-way Minn. R , subp. 3, further explains the calculation of deduction to Minnesota value: The Minnesota portion of the unit value is reduced by the value included in the unit value of the company for land, rightsof-way, nonoperating property, and exempt property. This amount is calculated by determining the ratio of the unit value computed in part , subpart 5, to the cost less depreciation allowed in part , subpart 3. This ratio is multiplied by the cost less depreciation of the property to be deducted.

34 Total Company Property Taxes Exhibit (LMC-1), Schedule 5 Page 1 of FTY 2017 FTY 2016 vs Electric Gas Electric Gas Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31 17,149,342,643 1,333,020,462 18,077,601,803 1,414,976, ,259,161 81,955,537 CWIP, 12/31 607,258,386 11,349, ,938,988 20,614,715 34,680,602 9,265,602 Depreciation, 12/31 (6,114,339,627) (612,321,495) (6,584,387,398) (650,588,733) (470,047,771) (38,267,238) Cost Indicator of Value A $11,642,261,401 $732,048,080 $12,135,153,393 $785,001, ,891,991 52,953,901 Income Indicator Year 1 NOI x 25% or 0% 0 10,353, ,681, ,328,050 Year 2 NOI x 35% or 40% 199,663,578 16,353, ,880,891 17,584,700 28,217,313 1,231,088 Year 3 NOI x 40% or 60% 341,821,336 20,096, ,867,536 20,794,800 12,046, ,000 NOI to Capitalize $541,484,914 $46,803,513 $581,748,427 $50,060,651 40,263,513 3,257,139 Capitalization Rate 7.40% 7.30% 7.40% 7.30% 0 0 Income Indicator of Value B $7,317,363,697 $641,144,010 $7,861,465,225 $685,762, ,101,528 44,618,336 Apply Weightings 35/65 50/50 35/65 50/50 Cost Indicator $4,074,791,500 $366,024,000 $4,247,303,700 $392,501, ,512,200 26,477,000 Income Indicator $4,756,286,400 $320,572,000 $5,109,952,400 $342,881, ,666,000 22,309,200 Total System Unit Value C $8,831,077,900 $686,596,000 $9,357,256,100 $735,382, ,178,200 48,786,200 ALLOCATION OF SYSTEM VALUE MN Plant in Service 16,389,639,716 1,221,353,186 17,052,029,276 1,304,046, ,389,559 82,693,801 System Plant in Service 17,756,601,028 1,344,369,575 18,719,540,791 1,435,590, ,939,763 91,221,139 Plant Ratio x 90%-Elec / x 75%-Gas 83.07% 68.14% 81.98% 68.13% (0) (0) MN Gross Revenue 3,731,409, ,888,573 3,731,409, ,888, System Gross Revenue 4,239,532, ,665,589 4,239,532, ,665, Revenue Ratio x 10%-Elec / x 25%-Gas 8.80% 22.12% 8.80% 22.12% 0 0 MN Allocated Value Percentage 91.87% 90.26% 90.78% 90.25% (0) (0) MN Allocated Value D $8,113,111,300 $619,721,500 $8,494,517,100 $663,682, ,405,800 43,960,900 Depreciable Plant Deductions 2,154,609,249 58,486,056 2,128,999,255 58,442,685 (25,609,994) (43,371) Land 180,216,966 3,393, ,216,966 3,393, CWIP 335,287,463 6,124, ,394,202 9,602,678 78,106,739 3,478,081 Other - Held for Future Use Subtotal 2,670,113,678 68,004,241 2,722,610,423 71,438,951 52,496,745 3,434,710 Ratio - System Unit Value / Cost Indicator 75.85% 93.79% 77.11% 93.68% 0 (0) DEDUCTIONS TO MN ALLOCATED VALUE E $2,025,281,200 $63,781,200 $2,099,404,900 $66,924,000 74,123,700 3,142,800 Sliding Scale Market Value Exclusion $200,000,000 $0 $200,000,000 $0 DEDUCT/EXCL TO MN ALLOCATED VALUE $2,225,281,200 $63,781,200 $2,299,404,900 $66,924,000 Apportionable Market Value $5,887,830,100 $555,940,300 $6,195,112,200 $596,758, ,282,100 40,818,100 Effective Tax Rate 3.3% 3.3% 3.3% 3.3% 0 0 FORECASTED PROPERTY TAX - Elec & Gas $194,298,393 $18,346,030 $204,438,703 $19,693,027 10,140,309 1,346,997 Rounded $194,300,000 $18,300,000 $204,400,000 $19,700,000 10,100,000 1,400,000 Total Electric & Gas $212,600,000 $224,100,000 11,500,000 Locally Assessed $11,100,000 $11,100,000 0 Wind Production $2,100,000 $2,100,000 0 TOTAL MINNESOTA FORECASTED PROPERTY TAX $225,800,000 $237,300,000 11,500,000 North Dakota & South Dakota Property Tax $8,000,000 $8,900, ,000 TOTAL NSPM FORECASTED PROPERTY TAX $233,800,000 $246,200,000 12,400,000

35 Support Northern for the States Calculation Power Company of Minnesota Apportionable Market Value A Minn. R , subp. 3 describes in part the cost indicator of value as: The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. Exhibit (LMC-1), Schedule 5 Page 2 of 2 B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. 2E+10 Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent. E Minn. R , subp. 1, explains the process for adjusting the valuation performed under Rule : After the Minnesota portion of the unit value of the utility company, except for electric cooperatives, is determined, any property which is non-formula-assessed or which is exempt from ad valorem tax, is deducted from the Minnesota portion of the unit value. Only that qualifying property located within the state of Minnesota may be excluded. Minn. R , subp. 2, describes the types of property excluded from the valuation performed under Rule : The following properties are valued by the local or county assessor and, therefore, the formula provided herein for the valuation of utility property is not applicable to such property: A. land; B. nonoperating property; and C. rights-of-way Minn. R , subp. 3, further explains the calculation of deduction to Minnesota value: The Minnesota portion of the unit value is reduced by the value included in the unit value of the company for land, rightsof-way, nonoperating property, and exempt property. This amount is calculated by determining the ratio of the unit value computed in part , subpart 5, to the cost less depreciation allowed in part , subpart 3. This ratio is multiplied by the cost less depreciation of the property to be deducted.

36 Total Company Property Taxes Exhibit (LMC-1), Schedule 6 Page 1 of FTY Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31/17 Forecast 18,694,700,292 1,500,020,607 CWIP, 12/31/17 Forecast 660,599,529 12,202,489 Depreciation, 12/31/17 Forecast (7,148,323,875) (691,224,911) Cost Indicator of Value A $12,206,975,946 $820,998,185 Income Indicator 2015 Estimated NOI x 25% or 0% 0 12,560, Estimated NOI x 35% or 40% 235,911,691 18,195, Estimated NOI x 40% or 60% 363,641,536 21,361,600 NOI to Capitalize $599,553,227 $52,117,550 Capitalization Rate 7.40% 7.30% Income Indicator of Value B $8,102,070,631 $713,939,041 Apply Weightings 35/65 50/50 Cost Indicator $4,272,441,600 $410,499,100 Income Indicator $5,266,345,900 $356,969,500 Total System Unit Value C $9,538,787,500 $767,468,600 ALLOCATION OF SYSTEM VALUE MN Plant in Service 17,663,129,512 1,371,876,203 System Plant in Service 19,355,299,821 1,512,223,096 Plant Ratio x 90%-Elec / x 75%-Gas 82.13% 68.04% MN Gross Revenue 3,731,409, ,888,573 System Gross Revenue 4,239,532, ,665,589 Revenue Ratio x 10%-Elec / x 25%-Gas 8.80% 22.12% MN Allocated Value Percentage 90.93% 90.16% MN Allocated Value D $8,673,619,500 $691,949,700 Depreciable Plant Deductions 2,067,670,058 58,345,100 Land 180,216,966 3,393,588 CWIP 389,141,987 2,707,893 Other - Held for Future Use 0 0 Subtotal 2,637,029,011 64,446,581 Ratio - System Unit Value / Cost Indicator 78.14% 93.48% DEDUCTIONS TO MN ALLOCATED VALUE $2,060,574,500 $60,244,700 Sliding Scale Market Value Exclusion $200,000,000 $0 DEDUCT/EXCL TO MN ALLOCATED VALUE E $2,260,574,500 $60,244,700 Apportionable Market Value $6,413,045,000 $631,705,000 Effective Tax Rate 3.3% 3.3% FORECASTED PROPERTY TAX - Elec & Gas $211,630,485 $20,846,265 Rounded $211,600,000 $20,800,000 Total Electric & Gas $232,400,000 Locally Assessed $11,100,000 Wind Production $2,100,000 TOTAL MINNESOTA FORECASTED PROPERTY TAX $245,600,000 North Dakota & South Dakota Property Tax $8,900,000

37 Support for the Calculation of Minnesota Apportionable Market Value A Minn. R , subp. 3 describes in part the cost indicator of value as: Exhibit (LMC-1), Schedule 6 Page 2 of 2 The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent. E Minn. R , subp. 1, explains the process for adjusting the valuation performed under Rule : After the Minnesota portion of the unit value of the utility company, except for electric cooperatives, is determined, any property which is non-formula-assessed or which is exempt from ad valorem tax, is deducted from the Minnesota portion of the unit value. Only that qualifying property located within the state of Minnesota may be excluded. Minn. R , subp. 2, describes the types of property excluded from the valuation performed under Rule : The following properties are valued by the local or county assessor and, therefore, the formula provided herein for the valuation of utility property is not applicable to such property: A. land; B. nonoperating property; and C. rights-of-way Minn. R , subp. 3, further explains the calculation of deduction to Minnesota value: The Minnesota portion of the unit value is reduced by the value included in the unit value of the company for land, rightsof-way, nonoperating property, and exempt property. This amount is calculated by determining the ratio of the unit value computed in part , subpart 5, to the cost less depreciation allowed in part , subpart 3. This ratio is multiplied by the cost less depreciation of the property to be deducted.

38 Total Company Property Taxes Exhibit (LMC-1), Schedule 7 Page 1 of FTY 2018 FTY 2017 vs Electric Gas Electric Gas Electric Gas SYSTEM UNIT VALUE CALCULATION Plant In Service, 12/31 18,077,601,803 1,414,976,000 18,694,700,292 1,500,020, ,098,489 85,044,608 CWIP, 12/31 641,938,988 20,614, ,599,529 12,202,489 18,660,541 (8,412,226) Depreciation, 12/31 (6,584,387,398) (650,588,733) (7,148,323,875) (691,224,911) (563,936,477) (40,636,177) Cost Indicator of Value A $12,135,153,393 $785,001,981 $12,206,975,946 $820,998,185 71,822,553 35,996,204 Income Indicator Year 1 NOI x 25% or 0% 0 11,681, ,560, ,349 Year 2 NOI x 35% or 40% 227,880,891 17,584, ,911,691 18,195,450 8,030, ,750 Year 3 NOI x 40% or 60% 353,867,536 20,794, ,641,536 21,361,600 9,774, ,800 NOI to Capitalize $581,748,427 $50,060,651 $599,553,227 $52,117,550 17,804,800 2,056,899 Capitalization Rate 7.40% 7.30% 7.40% 7.30% 0 0 Income Indicator of Value B $7,861,465,225 $685,762,346 $8,102,070,631 $713,939, ,605,405 28,176,695 Apply Weightings 35/65 50/50 35/65 50/50 Cost Indicator $4,247,303,700 $392,501,000 $4,272,441,600 $410,499,100 25,137,900 17,998,100 Income Indicator $5,109,952,400 $342,881,200 $5,266,345,900 $356,969, ,393,500 14,088,300 Total System Unit Value C $9,357,256,100 $735,382,200 $9,538,787,500 $767,468, ,531,400 32,086,400 ALLOCATION OF SYSTEM VALUE MN Plant in Service 17,052,029,276 1,304,046,987 17,663,129,512 1,371,876, ,100,237 67,829,216 System Plant in Service 18,719,540,791 1,435,590,715 19,355,299,821 1,512,223, ,759,030 76,632,382 Plant Ratio x 90%-Elec / x 75%-Gas 81.98% 68.13% 82.13% 68.04% 0 (0) MN Gross Revenue 3,731,409, ,888,573 3,731,409, ,888, System Gross Revenue 4,239,532, ,665,589 4,239,532, ,665, Revenue Ratio x 10%-Elec / x 25%-Gas 8.80% 22.12% 8.80% 22.12% 0 0 MN Allocated Value Percentage 90.78% 90.25% 90.93% 90.16% 0 (0) MN Allocated Value D $8,494,517,100 $663,682,400 $8,673,619,500 $691,949, ,102,400 28,267,300 Depreciable Plant Deductions 2,128,999,255 58,442,685 2,067,670,058 58,345,100 (61,329,197) (97,585) Land 180,216,966 3,393, ,216,966 3,393, CWIP 413,394,202 9,602, ,141,987 2,707,893 (24,252,215) (6,894,785) Other - Held for Future Use Subtotal 2,722,610,423 71,438,951 2,637,029,011 64,446,581 (85,581,412) (6,992,370) Ratio - System Unit Value / Cost Indicator 77.11% 93.68% 78.14% 93.48% 0 (0) DEDUCTIONS TO MN ALLOCATED VALUE E $2,099,404,900 $66,924,000 $2,060,574,500 $60,244,700 (38,830,400) (6,679,300) Sliding Scale Market Value Exclusion $200,000,000 $0 $200,000,000 $0 DEDUCT/EXCL TO MN ALLOCATED VALUE $2,299,404,900 $66,924,000 $2,260,574,500 $60,244,700 Apportionable Market Value $6,195,112,200 $596,758,400 $6,413,045,000 $631,705, ,932,800 34,946,600 Effective Tax Rate 3.3% 3.3% 3.3% 3.3% 0 0 FORECASTED PROPERTY TAX - Elec & Gas $204,438,703 $19,693,027 $211,630,485 $20,846,265 7,191,782 1,153,238 Rounded $204,400,000 $19,700,000 $211,600,000 $20,800,000 7,200,000 1,100,000 Total Electric & Gas $224,100,000 $232,400,000 8,300,000 Locally Assessed $11,100,000 $11,100,000 0 Wind Production $2,100,000 $2,100,000 0 TOTAL MINNESOTA FORECASTED PROPERTY TAX $237,300,000 $245,600,000 8,300,000 North Dakota & South Dakota Property Tax $8,900,000 $8,900,000 0 TOTAL NSPM FORECASTED PROPERTY TAX $246,200,000 $254,500,000 8,300,000

39 Support Northern for the States Calculation Power Company of Minnesota Apportionable Market Value A Minn. R , subp. 3 describes in part the cost indicator of value as: The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plant, plus the cost of improvements to the system plant, plus the original cost of all types of construction work in progress that are installed by the assessment date, plus the cost of property held for future use, plus the cost of contributions in aid of construction. Exhibit (LMC-1), Schedule 7 Page 2 of 2 B Minn. R , subp. 4, explains the process for calculating the income indicator of value: The income indicator of value is estimated by weighting the capitalized net operating earnings of the utility company for the most recent three years as follows: most recent year, 40 percent; previous year, 35 percent; and final year, 25 percent. Utilities may request the removal of nonrecurring items of income or expense. The commissioner must determine if removal of the item is appropriate. The net income is capitalized by applying a capitalization rate that is computed by using the band of investment method. This method considers: A. the capital structure of utilities; B. the cost of debt or interest rate; C. the yield on preferred stock of utilities; D. the yield on common stock of utilities; and E. the risk-free rate, relative risk, and risk premiums for public utility companies. Capitalization rates are computed each year for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. The rates are recalculated each year using the method described in this subpart. Minn. R , subp. 9 defines net operating earnings as follows: Net operating earnings means earnings from the system plant of the utility after the deduction of operating expenses, depreciation, and taxes, but before any deduction for interest. Minn. R , subp. 5, defines capitalization rate as: Capitalization rate means the relationship of income to capital investment or value, expressed as a percentage. C Minn. R , subp. 5, explains the process for calculating the system unit value: The unit value of the utility company is equal to the total of the weighted indicators of value. The total weighting must equal 100 percent. The default weightings of the indicators are: market indicator, 0 percent; cost indicator, 50 percent; income indicator, 50 percent. D Minn. R , subp. 2, explains the process for calculating the allocation of electric value attributable to Minnesota: The original cost of the utility property located in Minnesota divided by the total original cost of the property in all states of operation is weighted at 90 percent. Gross revenue derived from operations in Minnesota divided by gross operations revenue from all states is weighted at ten percent. Minn. R , subp. 3, explains the process for calculating the allocation of gas value attributable to Minnesota: The allocation of value of gas distribution companies must be made considering the same factors as are used to determine the allocation of value of electric companies. The weight given to the original cost factor is 75 percent, and gross revenue is weighted 25 percent. E Minn. R , subp. 1, explains the process for adjusting the valuation performed under Rule : After the Minnesota portion of the unit value of the utility company, except for electric cooperatives, is determined, any property which is non-formula-assessed or which is exempt from ad valorem tax, is deducted from the Minnesota portion of the unit value. Only that qualifying property located within the state of Minnesota may be excluded. Minn. R , subp. 2, describes the types of property excluded from the valuation performed under Rule : The following properties are valued by the local or county assessor and, therefore, the formula provided herein for the valuation of utility property is not applicable to such property: A. land; B. nonoperating property; and C. rights-of-way Minn. R , subp. 3, further explains the calculation of deduction to Minnesota value: The Minnesota portion of the unit value is reduced by the value included in the unit value of the company for land, rightsof-way, nonoperating property, and exempt property. This amount is calculated by determining the ratio of the unit value computed in part , subpart 5, to the cost less depreciation allowed in part , subpart 3. This ratio is multiplied by the cost less depreciation of the property to be deducted.

40 Exhibit (LMC-1), Schedule 8 Page 1 of 3 Northern States Power Company Minnesota Property Taxes 2012 Truth-in-Taxation Notices Property Tax Statements COUNTY Total Taxes Total Value Blended Rate Total Taxes Total Value Blended Rate Anoka 2,756,815 66,677, ,748,695 66,677, Becker 44,364 1,638, ,142 1,638, Beltrami 29, , , , Benton 1,455,672 35,264, ,483,052 35,264, Blue Earth 2,249,004 73,822, ,247,242 73,822, Brown 184,288 5,038, ,670 5,038, Carver 1,619,056 41,675, ,618,704 41,675, Cass 210,034 7,786, ,118 7,786, Chippewa 1,029,266 27,881, ,032,480 27,881, Chisago 3,427,080 74,348, ,423,370 79,746, Clay 292,658 11,289, ,984 11,302, Crow Wing 473,439 16,925, ,483 16,925, Dakota 12,260, ,956, ,227, ,942, Dodge 318,384 10,296, ,551 10,296, Douglas 150,104 4,464, ,707 4,924, Faribault 16, , , , Freeborn 30, , , , Goodhue 16,066, ,028, ,037, ,033, Hennepin 35,114, ,247, ,509, ,107, Houston 135,800 3,294, ,599 3,294, Hubbard 2, , , , Isanti 92,804 2,643, ,514 2,643, Itasca 189,846 6,689, ,572 6,689, Jackson 656,520 25,455, ,758 25,455, Kandiyohi 432,230 11,704, ,550 11,704, Koochiching 329,400 11,410, ,986 11,410, Lac qui Parle 1,000 45, ,000 45, Lake of the Woods 189,546 5,346, ,900 5,346, Le Sueur 301,760 9,804, ,016 9,804, Lincoln 776,608 28,101, ,268 30,017, Lyon 902,940 28,884, ,484 32,390, Martin 142,600 6,069, ,282 6,069, Mc Leod 248,168 5,894, ,228 5,894, Meeker 155,516 3,692, ,854 3,692, Morrison 8, , , , Mower 212,556 8,088, ,220 8,343, Murray 904,184 37,746, ,870 37,753, Nicollet 418,278 13,358, ,253 13,358, Nobles 1,491,672 57,343, ,476,796 57,786, Norman 13, , , , Olmstead 272,994 7,119, ,752 7,119, Pine 221,282 6,678, ,032 6,678, Pipestone 423,378 12,537, ,465 12,537, Polk 83,712 3,493, ,620 3,493, Pope 279,004 8,080, ,278 8,080, Ramsey 20,945, ,589, ,092, ,393, Redwood 82,390 2,263, ,436 2,263, Renville 632,706 20,017, ,534 20,045, Rice 1,889,746 52,391, ,887,280 52,388, Rock 38,736 1,637, ,910 1,637, Roseau 712,700 16,991, ,139 16,991, St. Louis 818,931 24,030, ,906 24,030, Scott 2,160,578 58,637, ,155,748 58,637, Sherburne 12,263, ,342, ,350, ,342, Sibley 274,487 6,723, ,476 6,723, Stearns 3,748, ,926, ,751, ,222, Steele 32, , , , Todd 52,024 1,485, ,916 1,485, Wabasha 379,220 10,631, ,557 10,631, Waseca 454,906 12,830, ,502 14,246, Washington 14,741, ,175, ,780, ,175, Watonwan 268,566 9,183, ,971 9,183, Wilkin 2,616 96, ,604 96, Winona 932,390 28,158, ,121 28,158, Wright 15,461, ,948, ,131, ,948, Yellow Medicine 137,236 4,685, ,306 4,685, Referendums Est 800,000 Reflected above Subtotal 163,444,428 4,667,701, ,884,643 4,679,091,

41 Exhibit (LMC-1), Schedule 8 Page 2 of 3 Northern States Power Company Minnesota Property Taxes 2013 Truth-in-Taxation Notices Property Tax Statements COUNTY Total Taxes Total Value Blended Rate Total Taxes Total Value Blended Rate Anoka 2,780,381 67,137, ,771,458 67,137, Becker 69,808 2,517, ,870 2,517, Beltrami 96,427 2,991, ,338 2,991, Benton 1,467,197 34,756, ,465,140 34,756, Blue Earth 2,139,351 74,761, ,224,040 74,761, Brown 171,281 4,952, ,929 4,952, Carver 1,647,335 42,517, ,657,258 42,517, Cass 190,897 7,786, ,704 9,806, Chippewa 984,496 28,106, ,138 28,106, Chisago 3,463,492 80,429, ,453,126 80,234, Clay 262,077 11,548, ,528 11,548, Crow Wing 479,927 17,130, ,947 17,130, Dakota 12,819, ,046, ,886, ,159, Dodge 384,668 10,264, ,026 10,264, Douglas 230,139 6,994, ,312 7,633, Faribault 14, , , , Freeborn 29, , , , Goodhue 16,156, ,202, ,066, ,515, Hennepin 35,392, ,908, ,095, ,908, Houston 150,218 3,337, ,258 3,337, Hubbard 53,326 1,968, ,776 1,968, Isanti 99,428 2,673, ,950 2,673, Itasca 194,241 6,689, ,062 7,949, Jackson 594,320 26,205, ,186 26,205, Kandiyohi 419,435 11,763, ,142 11,763, Koochiching 323,370 11,191, ,590 11,191, Lac qui Parle 1,002 45, , Lake of the Woods 182,330 5,244, ,788 5,244, Le Sueur 458,913 15,731, ,150 15,731, Lincoln 750,710 31,996, ,102 31,996, Lyon 933,407 36,491, ,190 36,491, Martin 131,356 6,060, ,892 6,060, Mc Leod 272,567 7,000, ,085 7,000, Meeker 164,064 4,149, ,214 4,149, Morrison 8, , , , Mower 214,813 9,531, ,436 9,531, Murray 788,922 37,197, ,294 37,197, Nicollet 418,667 13,507, ,637 13,507, Nobles 1,290,247 55,673, ,271,956 55,673, Norman 5, , , , Olmstead 276,307 7,568, ,025 7,568, Pine 225,184 6,700, ,126 6,700, Pipestone 420,183 13,871, ,967 13,871, Polk 71,306 3,523, ,236 3,523, Pope 270,117 8,311, ,958 8,311, Ramsey 22,226, ,362, ,242, ,362, Redwood 91,502 2,864, ,424 2,864, Renville 701,737 24,781, ,411 24,781, Rice 1,927,402 53,620, ,972,150 53,620, Rock 37,633 1,632, ,770 1,632, Roseau 716,102 17,586, ,960 17,586, St. Louis 853,658 25,072, ,364 25,346, Scott 2,232,715 60,496, ,230,428 60,496, Sherburne 12,449, ,521, ,256, ,521, Sibley 282,063 7,110, ,826 7,112, Stearns 4,135, ,660, ,116, ,713, Steele 60,741 1,653, ,738 1,653, Todd 99,810 2,962, ,452 2,962, Wabasha 418,158 11,898, ,906 11,898, Waseca 447,883 15,155, ,077 15,190, Washington 15,435, ,712, ,402, ,793, Watonwan 243,173 9,089, ,640 9,089, Wilkin 2,494 96, ,558 96, Winona 904,407 28,568, ,229 28,568, Wright 14,596, ,733, ,593, ,732, Yellow Medicine 134,096 5,028, ,476 5,028, Referendums Est 800,000 Reflected above Subtotal 166,296,296 4,738,969, ,053,268 4,744,565,

42 Exhibit (LMC-1), Schedule 8 Page 3 of 3 Northern States Power Company Minnesota Property Taxes 2014 Truth-in-Taxation Notices Property Tax Statements COUNTY Total Taxes Total Value Blended Rate Total Taxes Total Value Blended Rate Anoka 2,768,474 70,908, ,768,466 70,906, Becker 71,072 2,618, ,002 2,618, Beltrami 94,306 3,006, ,727 3,006, Benton 1,434,807 35,114, ,430,722 35,114, Blue Earth 2,249,768 77,861, ,256,325 77,861, Brown 223,928 7,324, ,609 7,324, Carver 1,847,165 50,031, ,834,244 50,031, Cass 245,932 9,918, ,146 9,918, Chippewa 1,042,028 30,523, ,039,926 30,523, Chisago 3,451,399 82,325, ,441,908 82,325, Clay 340,074 16,204, ,167 16,204, Crow Wing 486,044 17,427, ,324 17,427, Dakota 13,877, ,213, ,868, ,203, Dodge 404,990 10,472, ,854 10,431, Douglas 1,112,778 14,771, ,260 14,771, Faribault 17, , , , Freeborn 30, , , , Grant 20,524, ,984, ,533, ,650, Goodhue 51,414 2,096, ,730 2,096, Hennepin 35,713, ,723, ,632, ,971, Houston 138,097 3,428, ,358 3,428, Hubbard 53,712 1,993, ,970 1,993, Isanti 105,610 2,752, ,668 2,752, Itasca 243,455 7,965, ,740 7,965, Jackson 580,956 25,750, ,060 25,750, Kandiyohi 408,667 12,004, ,348 12,004, Koochiching 328,883 11,136, ,172 11,136, Lac qui Parle , , Lake of the Woods 181,897 5,218, ,342 5,218, Le Sueur 483,321 16,628, ,572 16,628, Lincoln 703,320 32,473, ,170 32,473, Lyon 1,026,102 40,856, ,019,614 40,856, Martin 138,530 6,420, ,430 6,420, Mc Leod 312,853 8,805, ,970 8,805, Meeker 182,261 4,671, ,290 4,620, Morrison 8, , , , Mower 217,332 9,831, ,740 9,831, Murray 722,508 37,244, ,596 37,244, Nicollet 428,243 13,879, ,293 13,879, Nobles 1,219,343 57,023, ,246,666 57,023, Norman 11, , , , Olmstead 312,624 8,823, ,579 8,363, Ottertail 228,500 6,920, ,540 6,920, Pine 225,486 6,615, ,826 6,615, Pipestone 383,733 13,764, ,256 13,764, Polk 62,714 3,601, ,704 3,601, Pope 277,983 8,639, ,570 8,639, Ramsey 22,163, ,801, ,344, ,801, Redwood 470,295 21,998, ,606 21,998, Renville 902,792 35,001, ,873 35,001, Rice 1,914,110 54,803, ,898,190 54,803, Rock 37,546 1,725, ,368 1,725, Roseau 708,856 17,479, ,521 17,479, St. Louis 972,176 28,484, ,888 28,484, Scott 3,044,900 87,310, ,041,068 87,310, Sherburne 12,339, ,198, ,299, ,161, Sibley 963,411 36,861, ,030,558 36,861, Stearns 4,595, ,552, ,599, ,552, Steele 32, , , , Todd 134,636 3,955, ,838 3,957, Wabasha 393,071 11,016, ,325 10,858, Waseca 470,819 14,313, ,545 14,313, Washington 15,456, ,370, ,370, ,667, Watonwan 262,446 9,675, ,384 9,675, Wilkin 56,315 2,405, ,478 2,405, Winona 879,006 28,267, ,460 28,267, Wright 18,520, ,883, ,496, ,883, Yellow Medicine 153,773 6,071, ,364 6,071, Referendums Est 500,000 Reflected above Subtotal 179,946,741 5,494,386, ,677,005 5,488,838,

43 Exhibit (LMC-1), Schedule 9 Page 1 of 1 Property Tax Expense ($ millions) Minnesota Electric Jurisdiction Year Minnesota North Dakota South Dakota Total NSPM NSPM Electric Included in Base Rates 2001 $112 $3 $3 $118 $107 $88 $104 $ $109 $3 $3 $115 $101 $84 $104 $ $107 $3 $3 $113 $99 $81 $104 $ $103 $3 $3 $109 $98 $80 $104 $ $103 $4 $3 $110 $97 $80 $104 $ $107 $4 $3 $114 $101 $82 $87 $ $105 $3 $3 $111 $97 $79 $87 $ $108 $3 $3 $114 $98 $79 $87 $ $111 $2 $3 $116 $103 $83 $77 $ $124 $3 $3 $130 $116 $94 $77 $ $135 $3 $3 $141 $124 $101 $100 $ $162 $3 $3 $168 $152 $125 $101 $ $166 $3 $3 $172 $153 $123 $138 $ $180 $3 $3 $186 $167 $134 $133 $ As Ordered* $138 $137 $1 2015E Current Forecast $197 $3 $4 $204 $186 $148 $147 $1 2016E Initial Filing $226 $4 $4 $234 $213 $168 $165 $3 2017E Initial Filing $237 $5 $4 $246 $224 $177 $172 $5 2018E Initial Filing $245 $5 $4 $254 $231 $183 $177 $6 Recovered in Riders

44 Docket No. E002/GR-15=826 Page 1 of 72 Property Taxes Pre-Filed Discovery Minnesota Electric Rate Case Index Case IR No. Description Addressed in 2016 TY Case DOC 138 A. Please reconcile the estimated market value from the old rate case schedule to the amounts shown in the current rate case schedule. Schedule DOC 138 B. Please footnote the source and provide the detailed calculation of each line item in the current rate case schedule for the year Appendix A, DOC DOC 138 C. A footnote on the current rate case schedule indicates that the capitalization rates are estimated. (1) Please provide the detailed calculation of the estimate. (2) Were the estimates made by the Department of Revenue (DOR) or Xcel Energy? (3) Please provide the actual capitalization rates for 2014 and D. Please identify the amount and provide the detailed calculation of the Minnesota jurisdictional test-year property tax in the current rate case. Testimony p. 16 Volume 4, Test Year Workpapers, P6. Property Tax DOC 138 E. Please provide the actual property tax expense for 2014 and Schedule DOC 138 F. Does Xcel have any plant or portion of plant that is non-regulated? If yes, how is the non-regulated plant handled for property taxes, including all calculations. Appendix A, MCC MCC 124 Please identify changes in property taxes from 2004 forward, please add columns; one identifying amounts in base rates or otherwise recovered and one for total taxes paid in each year. Please describe the assessment and levy systems to determine Xcel's property taxes within its service territory. Please describe the separate property tax treatment for buildings, equipment, land, structures, machinery, spent fuel, and any other major classes of property. Schedule 8 Appendix A, MCC 125 At what time during the year are property taxes determined, assessed and paid? To what jurisdictions are the payments made? MCC 126 For ratemaking purposes, are property taxes determined system-wide and then allocated to Xcel's regulatory jurisdictions, or are the property taxes determined separately and kept within each jurisdiction? Please explain. Testimony p. 12 Figure 1, p. 3 Table 1 Volume 4, Test Year Workpapers, P6. Property Tax MCC 127 Please provide total annual property taxes assessed and levied by taxing authorities for the 8-year period with 2016 estimated. Schedule MCC 128 What have been the principal reasons for any property tax increases? Are these trends likely to continue into 2016 and beyond? Please explain. Testimony p MCC 129 Please show property taxes to be paid in the 2016 test year separately for transmission plant, distribution plant, generation plant and combined total of all property taxes. Allocations and estimates are acceptable. Also provide property taxes each as a percent of net plant investment in each of the foregoing categories. Volume 4, Test Year Workpapers, P6. Property Tax XLI 103 Please provide a copy of the materials describing the Homestead Market Value Exclusion. Appendix A, XLI 104 Please state the local property tax rates before and after the Homestead Market Value Exclusion was enacted. Schedule XLI 106 Please provide a copy of Schedule 2 in electronic native (i.e., EXCEL or compatible) format with all formulas and links intact. Appendix A, XLI XLI 109 a. Please define the term Cost Indicator of Value. c. Please define the term NOI to Capitalize and explain how this term is measured. d. Please reconcile the 2016 Electric NOI to Capitalize with the proposed return presented in Exhibit AEH-1, Schedule 3. e. Please define the term Capitalization Rate. f. Please reconcile the Capitalization Rate with the proposed rate of return. g. Please explain how the deductions to MN Appendix A, 07 allocated value were determined. b. Please reconcile the 2016 Electric Cost Indicator of Value to the proposed plant investments/rate base presented in Exhibit AEH-1, Schedule 8. Appendix A, XLI 109 h. Please provide documentation supporting the effective tax rates. Schedule XLI 109 i. Please provide documentation supporting the locally assessed amounts. Appendix A, XLI XLI 110 j. Please provide work papers showing how the property tax reflected on this schedule was adjusted to the test year revenue requirement amount. Volume 4, Test Year Workpapers, P6. Property Tax Please provide the following actual information for the latest available year for each local tax jurisdiction that NSPM pays property tax: a. DOR apportioned unit value. b. Overall market value. c. Class rate. d. Tax rate. Appendix A, XLI 113 Concerning the test year property tax expense estimate: a. Please reconcile the following Electric amounts to the beginning 2016 test year amounts shown on Exhibit AEH-1, Schedule 4, page 2: i. Plant In-service ii. CWIP iii. Depreciation (Reserve) b. Please provide all work papers and sources used to determine the Electric inputs for the Deductions for MN Allocated Value items: i. Depreciable Plant Deductions ii. Land iii. CWIP c. Please provide all work papers and sources used to determine the inputs for and explain how these items were allocated to electric and gas: i. Locally Accessed ii. Wind Production Appendix A, DOC DOC DOC 198 Please footnote each line item in the above referenced Schedule 2 to source documentation in detailed workpapers that develop the line item, and provide the information or reference its location in the pre-filed documents. Appendix A, The following questions all relate to the calculation of property tax: A. Is it true, that for purposes of determining the net operating income (NOI) to capitalize, three years of income are considered: the most recent year weighted at 40 percent; the previous year weighted at 35 percent; and the final year weighted at 25 percent? B. If (A) above is true, please identify the specific years that were used in the development of the 2014 Testimony p. 15, test year property taxes in this proceeding; and indicate which of the years use actual data and which of the year s use forecast data. C. If (A) above is true, please identify the specific years that were used in the development of the 2013 test year property taxes in the Company s last electric rate proceeding, Docket No. E002/GR ; and indicate which of the year s use actual data and which of the years use forecast data. Subject: Property Tax Reference: Direct Testimony of James J. Duevel Exhibit (JJD-1), Schedule 2, Page 1 of 3 Exhibit (JJD-1), Schedule 8, Page 3 of 3 A. Please explain why the 3.30 percent rate (based on Truth-in-Taxation Notices) was used to estimate the 2016 Property Tax Rate when the average rate from the actual 2012 Property Tax Statements is 3.44 percent? Schedule DOC 2147 Subject: Property Tax. Reference: Direct Testimony of James J. Duevel at Pages Exhibit (JJD-1), Schedule 11, Page 1 of 3. Xcel s June 12, 2014 Response to MCC Information Request No. 248, Attachment A C. Please provide an estimate of the MN Jurisdictional Property Tax for a-b, d) N/A c) Schedule 8

45 Page 2 of 72 Case IR No MCC MCC 246 Property Taxes Pre-Filed Discovery Minnesota Electric Rate Case Index Description With respect to Property Taxes please provide: a) Amount claimed in the last rate case. b) Amount approved and in rate base from last rate case. c) Amounts actually paid for property taxes d) Please explain the assessment and appeal process. e) Identify if the amounts in c) include refunds or adjustments after appeals. f) Please identify refunds or adjustments by year (provide tax year appealed and year adjustment or refund was received separately). g) Please identify amount clamed in this rate case and identify if gross or net of expected appeals. With respect to any calculations, please provide Excel spreadsheet with formulae, also provide, total company and MN jurisdiction information. Referring to MCC -239 please provide the following on a "revised" Attachment A, two additional columns that identify: For years in which Xcel filed a rate case, tbe amount included in the initial filing for test year amount requested for recovery. Proposed tax assessments based on preliminary values issued by DOR, prior to appeal or informal adjustment "opportunity to discuss" (we are assuming "NSPM Electric" column is tbe actual tax paid (except when identified as testimony/order/filing)). Addressed in 2016 TY Case a-c) Schedule 8 d-g) Appendix A, 17 Appendix A, 18

46 Appendix A - 01 Page 3 of 72 Docket No. E002/GR Information Request No. DOC-138, Part F Question: Subject: Property Tax Reference: Exhibit (LMC-1), Schedule 2, Page 1 of 1 F. Does Xcel have any plant or portion of plant that is non-regulated? If yes, how is the non-regulated plant handled for property taxes, including all calculations. Response: F. Yes, the Company owns a steam line that connects the Sherco generation plant to an adjacent Liberty Paper facility. This steam line is non-regulated property. There are no property taxes corresponding to this non-regulated steam line because it is not treated as taxable property by either the MN DOR or local taxing jurisdictions. The non-regulated steam line falls outside the definition of operating property and is therefore not subject to valuation by the MN DOR for property tax purposes. The steam line is also not included in the calculation of local property taxes, because it is personal property, not real estate. Thus, there are no property taxes corresponding to this non-regulated steam line. Preparer: Title: Department: Leanna Chapman Manager Tax Reporting Tax Services

47 Appendix A, 02 Page 4 of 72 Docket No. E002/GR Information Request No. MCC-124 Question: Please describe the assessment and levy systems to determine Xcel's property taxes within its service territory. Please describe the separate property tax treatment for buildings, equipment, land, structures, machinery, spent fuel, and any other major classes of property. Response: A. Assessment and Levy Systems Minnesota The first step in the property tax process is determining the value of the Company s property. In Minnesota, different types of utility property are valued differently. Utility operating property is valued by the Minnesota Department of Revenue (DOR) using the formulas described in Minnesota Rule Non-operating property (e.g. offices, garages, warehouses, land, etc.) is valued by local assessors using traditional valuation techniques. The DOR also determines how much of the Company s total system value is attributable to Minnesota. 1 The Minnesota value is then apportioned to each county. 2 Counties add the portion apportioned to them with the property they assess themselves to arrive at our tax base within the jurisdiction. Finally, each jurisdiction applies its own individual property tax rate to our tax base to determine our property tax liability. Please see Minnesota Rules, Chapter 8100 for additional detail on the Minnesota property tax system. Also, Attachment A which is a MN House of Representatives Information Brief on Minnesota property taxation of electric utilities (dated October 2006) provides additional, conceptual, discussion of the Minnesota system. We caution, however, that the report in Attachment A does not reflect post-2006 legislative changes. North Dakota North Dakota Century Code explains how utility property is valued in that state. The assessment process in North Dakota is similar to the Minnesota process 1 Minn. R Minn. R

48 Appendix A, 02 Docket No. E002/GR Page 5 of 72 described above. Please see Chapter of the North Dakota Century Code for additional detail on the North Dakota property tax system. South Dakota South Dakota Codified Laws explains how utility property is valued in that state. The assessment process in South Dakota is similar to the Minnesota process described above. Please see Chapter of the South Dakota Codified Laws for additional detail on the South Dakota property tax system. B. Property Taxes by Property Type The table below details the Minnesota property tax treatment of different categories of utility property: Property Category Subject to Property Tax? Minnesota State Assessed or Locally Assessed? Buildings Yes Both Equipment Yes State Land Yes Locally Structures Yes State Machinery Yes State Spent Fuel (pad and casks) Yes State Preparer: Title: Department: Leanna Chapman Manager Tax Reporting Tax Services

49 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 6 of 72 INFORMATION BRIEF Minnesota House of Representatives Research Department 600 State Office Building St. Paul, MN Karen Baker, Legislative Analyst, Steve Hinze, Legislative Analyst, Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Updated to include laws enacted in the 2006 legislative session This information brief summarizes the current structure of electric utility property taxation. The brief covers the following topics: The characteristics of, methods for valuing, and property tax paid by the different types of electric utilities The special personal property tax exemptions granted by the legislature for electric utilities Sales tax exemptions for the construction of power plants The production tax that applies to wind energy conversion systems used as an electric power source Contents Introduction...2 Types of Electric Utilities...2 Determining a Utility s Value...4 New Rules for Determining a Utility s Value...5 Property Tax...5 Class Rate Schedule Major Property Types by Class...6 Statewide Utility Market Value and Property Taxes...7 Exemptions...8 Electric Utilities...8 Energy and Pollution Control Property...18 Wind Energy Conversion Systems...19 The Past: 1991 through 2003 Property Tax...19 The Present: 2004 and Thereafter, Wind Energy Production Tax (WEPT)...20 Production Incentives...22 This publication can be made available in alternative formats upon request. Please call (voice); or the Minnesota State Relay Service at (TTY) for assistance. Many House Research Department publications are also available on the Internet at:

50 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 7 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 2 Introduction Changes in the regulation and economics of the electric utility industry are making state and local utility taxes more important. These changes also raise policy questions about the way state and local governments tax utilities. For most of the 20th century, utilities operated as regulated monopolies: they were stable businesses that earned regulated and, more or less, guaranteed rates of return. Because regulations typically allowed property taxes to be recovered through the utility s rates, the level of taxes had little effect on the rate of return earned by the utility. Furthermore, utility taxes provided a convenient and stable way for state and local governments to raise generous amounts of revenue. Federal regulations, adopted in the 1990s, allowing competition in wholesale pricing of electric power has begun to change the economics of the industry. Some states have also begun to allow retail competition. If competitive market forces set utility prices, state and local taxes can affect the rate of return on and viability of utility investments. Utility consumers (especially large commercial and industrial customers) have become more aware of the effect of taxes on their utility bills and, along with the utilities, are seeking to reduce utility taxes, including property taxes. The Minnesota Legislature has made a variety of utility property tax changes in response to this changing environment. This information brief: Describes the various types of utilities and how Minnesota taxes utility property Discusses methods of valuing utility property Provides data on the total property taxes paid by utilities Lists exemptions and special provisions granted by the legislature over the last 20 years Describes the taxation of wind energy conversion systems, which was based on property through payable 2003 and, beginning in calendar year 2004, based on production Types of Electric Utilities Investor-owned utilities (IOUs) are private, for-profit corporations whose rates are regulated by the Minnesota Public Utilities Commission (PUC). The five IOUs that serve Minnesota (Xcel, Allete, Alliant, Ottertail, and Northwestern Wisconsin Electric) are vertically integrated utilities; the IOUs generate, transmit, and distribute their own electricity and may also buy power from wholesale producers. Property owned by these utilities is subject to property tax, unless specifically exempted.

51 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 8 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 3 Rural electric associations (co-ops) are nonprofit organizations whose rates are overseen by a board composed of co-op members. 1 Co-ops are not vertically integrated. There are two basic types of co-ops: Distribution cooperatives provide retail electric service directly to Minnesota consumers. There are about 40 distribution co-ops in Minnesota. The distribution co-ops pay a fee of 10 cents per customer in lieu of the property tax on their distribution lines located outside of incorporated areas. 2 This fee is collected by the Department of Revenue (DOR) and deposited in the general fund. For fiscal year 2005, the statewide total collections were about $48,000. Any of their distribution lines that are located within incorporated areas are subject to property tax; however, the majority of the lines are outside of incorporated areas and pay the in-lieu fee of 10 cents per customer. Co-op-owned substations are subject to property tax. Generation and transmission cooperatives generate and transmit electricity to distribution co-ops. There are six generation and transmission cooperatives that serve Minnesota distribution co-ops. 3 Generation and transmission cooperatives are generally subject to property taxation, unless specifically exempted. Municipal utilities (Munis) are public, nonprofit utilities overseen by local public utilities commissions or city councils. Munis are generally not vertically integrated. As with co-ops, there are two kinds of municipal utilities. Distribution Munis, like their cooperative counterparts, provide retail electric services to Minnesota consumers. There are about 125 distribution Munis in Minnesota. Municipal power agencies (MPAs) provide distribution Munis with generation and transmission services. There are six MPAs operating in Minnesota. 4 Both distribution Munis and MPAs are generally exempt from property tax, but an MPA pays inlieu payments to each taxing authority within whose taxing jurisdiction its property is situated. These in-lieu payments equal the amounts of taxes which would have been payable if its property were owned by a private person. Minn. Stat , subd. 20. Distribution Munis, while not subject to a specific statutory requirement to pay in-lieu taxes to taxing jurisdictions in which they operate, often do make contributions (monetary and otherwise) to their host city. 1 One distribution cooperative, Dakota Electric Association, has elected to be rate-regulated by the PUC. 2 Minn. Stat and The six G&T co-ops are: Basin Electric Power Association, Dairyland Power Cooperative, East River Electric Power Cooperative, L&O Power Cooperative, Minnkota Power Cooperative, and Great River. 4 The six MPAs are: Missouri River Energy Services, Heartland Consumer Power District, Southern Minnesota MPA, Central Minnesota MPA, Northern Minnesota MPA, and Minnesota MPA.

52 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 9 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 4 Independent power producers (IPPs) are nonutility power producers that generate electricity solely for sale at wholesale and have no transmission or distribution lines (e.g., NRG, Landfill Gas, Minnesota Methane, Gas Recovery, and American Transmission Company (LLC of Wisconsin Power)). IPPs are generally private corporations, subject to property tax (unless specifically exempted), but are treated as utilities for property tax purposes. Determining a Utility s Value Utilities are valued and assessed under a dual property tax system: 1) The Department of Revenue (DOR) values the property that constitutes the utility s operating property using the unit value system. The unit value method estimates the market value for the entity as an integrated whole, rather than valuing each part and parcel separately. The unit value is then apportioned among the jurisdictions where the property is located, based on a formula. 2) Local assessors value the utility s nonoperating property, which consists of all offices, garages, warehouses, and land. There are three approaches to valuing property cost, income, and sales (market). However, DOR uses only cost and income in establishing market values of electric utilities. Sales are considered, but are not used due to lack of data and other concerns. Prior to January 1, 2000, cost (less depreciation) was the only factor used in determining the value of co-ops. However, beginning with the 2000 assessment, a co-op could elect on the unitvalue basis or continue to be valued using cost (less depreciation) as the only factor. 5, 6 The current unit-value formula that DOR uses in determining the market value of the utility is: 0.75 x (the original cost 7 of the utility property less allowable depreciation 8 ), plus 0.25 x (the utility s capitalized income during the most recent three years 9 ) Given this approach, the property values of Minnesota electric utilities have remained relatively stable for property-tax purposes. Some states rely more heavily on utilities income-producing 5 Minnesota Rules, part , subpart 6, allows co-ops this option. 6 Cost is used as the factor in determining the market value of MPAs, since no MPA has elected the unit-value option. 7 In determining property values, DOR also includes improvements and the cost of construction in progress on the date of the assessment. 8 Minnesota Rules, part , subpart 3, limits electric companies allowable depreciation for propertytax purposes to 20 percent of the cost of the property, plus 50 percent of the excess amount (over the 20 percent). 9 The income component of the equation uses the utility s net income for the most recent three years weighted consecutively at 40 percent, 35 percent, and 25 percent, respectively, and applies at a capitalization rate. Minnesota Rules, part , subpart 5, defines the capitalization rate as the relationship of income to capital investment or value, expressed as a percentage.

53 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 10 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 5 ability to determine property values and consequently experience wider variations in their property valuations. DOR is in the process of adopting new administrative rules for determining a utility s valuations (see discussion below). DOR then determines what portion of an electric company s total property value is allocated to Minnesota using the following formula: Minnesota s share of total value = 0.90 x (original cost of utility property in Minnesota/total original cost of utility property in all states of operation) plus 0.10 x (gross operating revenue from Minnesota operations/gross operating revenue from all states) DOR then deducts from the Minnesota allocation the (1) utility nonoperating property (i.e., land, offices, garages, warehouses, etc.) and (2) rights-of-way, since these items are valued by local assessors. Lastly, the Minnesota portion of utility property is adjusted to exclude property statutorily exempt from Minnesota property taxes (e.g., pollution control equipment). New Rules for Determining a Utility s Value As a result of administration valuation appeals and tax court cases involving utilities, the Commissioner of Revenue is updating the administrative rules prescribing the method for the valuation and assessment of utility companies for property tax purposes. DOR hired an independent consultant to prepare a report on current rules. DOR staff have analyzed the consultant s report, received comments from other interested parties regarding the report, and held open forum meetings to receive comments on the report. An advisory committee was formed in the fall of 2005 to help DOR write suggested changes to the rules. The committee consists of seven members representing various types of utilities, seven members representing counties, and various DOR employees. The committee met several times, reviewed proposed changes to the rule, and provided the department with comments and suggestions with respect to both valuation policy and specific rule language. The rulemaking process is moving forward and the department s goal is to have a new rule in place for the 2007 assessment year. The department has also indicated that it may use the advisory committee to give advice on any suggested future rule amendments. Property Tax After DOR determines the market value of the utility s operating property, it certifies the value to the county auditor where the property is located, and the property becomes part of the local tax base. The county auditor applies the appropriate class rates to the market value. A listing of the major property classes and their respective class rates for taxes payable in 2006 is shown in the table

54 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 11 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 6 below. 10 These class rates apply statewide and are set by the legislature. The table also shows whether the state general tax and school operating referendum levies apply to the properties. Residential Homestead: Up to $500,000 market value Over $500,000 market value Class Rate Schedule Major Property Types by Class Taxes Payable 2006 Class Rate 1.0% 1.25 Subject to State Tax no no Subject to Operating (Excess Levy) Referenda 11 Apartments (4 or more units) 1.25 no yes yes yes Commercial-Industrial-Public Utility: 12 Up to $150,000 Over $150,000 Electric generation machinery Agricultural Land & Buildings Homestead: 13 Up to $600,000 market value Over $600,000 market value Nonhomestead yes yes no no no no yes yes yes no no no House Research Department Applying the appropriate class rate to the utility s market value yields the utility s net tax capacity. The utility s property tax is determined by multiplying its net tax capacity times: 1) the total local tax rate (i.e., the county, city/town, school district, and special taxing districts), plus 2) the statewide general tax rate (where applicable; see table above) For property taxes payable in 2006, the table on the following page shows the statewide utility market value by type of property and estimated property tax. Utility personal property is taxable as shown in the table, even though personal property (including both inventories and attached machinery) of nonutility businesses have been exempt since the early 1970s. 10 The table is a very abbreviated listing of the class rates. There are numerous subclasses of property and minor exceptions within the major classes. 11 School operating referendum levies (sometimes called excess levy referenda) and all county, city, and town referendum levies are levied on referendum market value. School debt levies are levied against all property based on net tax capacity. 12 A utility is allowed to receive the first-tier class rate (up to the $150,000 market value limit) on only one property per county. 13 House, garage, and one acre treated the same as residential homestead.

55 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 12 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 7 Type of Property Statewide Utility Market Value and Property Taxes by Type of Property 14 Taxes Payable in 2006 (all figures in millions) Market Value Amount Market Value % of Total Tax Amount Percent of Total Effective Tax Rate Land and buildings $ % $ % 3.3% Electric generation machinery 1, Other machinery 1, Transmission lines 15 1, Distribution lines Pipelines 1, Total $7, % $ % 3.1% House Research Department To put this in context with all property on a statewide basis for taxes payable in 2006: The total taxable market value of utility property ($7.3 billion) is about 1.6 percent of the total taxable market value of all property ($464 billion); The total utility property tax of $221 million is about 3.5 percent of the total tax on all property ($6,244 million). Thus, utility property taxes (3.5 percent) are more than twice the utility s property share of taxable market value (1.6 percent). 16 Utility property is not uniformly distributed throughout the state. Therefore, the proportion of taxable utility market value and tax within any particular taxing district to its total market value and tax varies dramatically within the state. Power line credit. Incentives for landowners to accept transmission lines on their property will likely be a legislative issue in the near future. A property tax credit enacted in 1980 to address this issue is worth noting, even though the total dollar amount of credits paid are small. The power line credit was established to reduce the property tax burden of those taxpayers whose properties have high-voltage electrical lines on them, as an incentive for taxpayers to accept 14 The market value and taxes in this category are for all utilities. Due to data constraints, it is not easy to separate the values and taxes by type of utility. However, electric utilities constitute over two-thirds of the total value of all utility property. 15 Includes value and tax amounts for transmission and distribution lines that are excluded from the general tax base in determining tax rates and are subject to the countywide tax rate. For taxes payable in 2004, these lines were valued at $195 million with a tax burden of $5.7 million. Minn. Stat , subd The comparable ratios for commercial/industrial (nonutility) are 31.3 percent taxes to 13.1 percent taxable market value.

56 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 13 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 8 these power lines. In order to qualify for the credit, the property must be crossed by a transmission line of 200KV or more, constructed after June 30, In 1981, utility companies made direct payments to qualifying property owners to compensate them for having these high voltage lines pass over their property. However, the direct payments were changed to property tax credits beginning with taxes payable in 1982/1983. For taxes payable in 2006, the total statewide power line property tax credit was only $81,900. Minn. Stat Exemptions In Minnesota, a utility s attached machinery and other personal property is taxable (i.e., transformers, turbines, etc.). 17, 18, 19 Over the past two decades, the legislature has granted many property tax exemptions for the attached machinery and other personal property at newly constructed facilities. These exemptions have been adopted in response to requests from companies proposing to build new electric generating facilities 20 in Minnesota (see list of exemptions made since 1994 below). With the precedent for these exemptions so well established, it is quite likely that this trend will continue for future proposed facilities. 21 Electric Utilities The following is a list of the proposed facilities for which their attached machinery and other personal property have been exempted from property taxation by the legislature in the past 20 years. As one can see, many exemptions have been enacted. No general exemption has ever been enacted for this type of property, although there has been discussion about enacting that type of legislation, instead of exempting the attached machinery and personal property one facility at a time. Some of the facilities have also been granted exemptions from sales tax for construction materials and supplies. These exemptions are shown as footnotes L.S. Power Plant: Exemption for a cogeneration system that used natural gas as a primary fuel. The exemption required that the plant be constructed before July 1, The plant was constructed in Cottage Grove and is operational. Laws 1994, ch Minn. Stat , subd Personal property of nonutility commercial and industrial businesses are exempt (i.e., inventories, tools, marchinery, etc.). 18 Companies in Minnesota that generate electric power for their own use, and not for resale, are exempt from taxation on the personal property used to generate the power. Minn. Stat Personal property used primarily for the abatement and control of air, water, or land pollution is exempt from property tax. Minn. Stat , subd These facilities have primarily been peaking and intermediate-load facilities. 21 Many assume that even if electric restructuring were to occur, transmissions and distribution lines would probably remain taxable because they are not subject to competition as are the actual generation facilities.

57 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 14 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page /2005 Market value exclusion for electric power generation efficiency: 1996: Exemption for facility that produces electricity at very high efficiency levels and has significantly lower pollution emissions than conventional power production facilities. It provides for a subtraction equal to 5 percent of market value of qualifying property for each percentage point that the facility is operating above 35 percent efficiency. Although this is a general exemption, it was designed for a specific company (Koch Refining; now called Flint Hills Resources) and project, which was to be a cogeneration facility. The required efficiency level could only be met by existing power production facilities in Minnesota by implementing significant and expensive changes to the facility. This provision is often referred to as the cogeneration provision, since at that time, those were the only types of facilities that could achieve the required efficiency. Laws 1996, ch Minn. Stat , subd : The 2005 Legislature modified the formula for determining a plant s efficiency for the market value exclusion; the new formula uses a ratio of energy output to energy input during normal base-load operation. The threshold for a generation facility to qualify for the sliding scale market value exclusion was increased from 35 percent to 40 percent, and the exclusion for each percentage point above the threshold was increased from 5 percent to 8 percent. This formula increase updates the sliding scale exclusion to today s efficiency standards, given the new technology now available. Laws 2005, ch. 151, art. 3, secs. 9 and 10. DOR has granted market value exclusions for a few facilities under this law. They are Xcel s Black Dog plant (Burnsville), Minnesota Power s plant at Potlatch (Cloquet/Carlton County), and two natural gas-fired peaking plants serving Dakota Electric (Hastings and Lakeville) owned by Energy Alternatives (wholly owned subsidiary of Dakota Electric) Biomass, waste wood: 22 Exemption for equipment that is part of a system that generates biomass electric energy and satisfies a portion of the Prairie Island biomass mandate on Xcel Energy in section 216B.2424, or a system that produces energy using waste wood. Exemption requires local approval of the governing bodies of each affected county, city/town, and school district. That approval may be rescinded by a later referendum if a petition is signed by 10 percent of 22 Minn. Stat. 297A.71, subd. 8. The 1997 Legislature also enacted a law that exempted the purchases of construction materials and supplies from the sales and use taxes imposed for a system that meets the requirements. This law was recodified in (Laws 1997, ch. 231, art. 7, sec. 27; Laws 2000, ch. 418, art. 1, sec. 15.)

58 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 15 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 10 the voters in the county voting in the last general election. Property exempted under this provision is limited to a maximum of five assessment years, beginning with the assessment year immediately following when the personal property is put into operation. No known facilities qualify for the exemption under this provision. Laws 1997, ch. 231, art. 2, sec. 8. Minn. Stat , subd Laskin Plant (St. Louis County): Provision has expired. Exemption for equipment of a facility with a capacity of 110 megawatts, whose operation was integral to the development and operation of a new, adjacent industrial park. Exemption required local approval from the governing bodies of the county, city/town, and school district. Approval could have been rescinded by a later referendum if a petition were signed by at least 10 percent of the number of persons voting in the county in the last general election. Exemption could not exceed five years beginning with the assessment year immediately following when the property was put into operation and expired thereafter. This exemption expired if the industrial park was not built by July 1, This exemption was enacted for a plant proposed for St. Louis County. However, no exemption was granted under this provision and it has expired. Laws 1997, ch. 231, art. 2, sec. 57 (never codified in Minnesota Statutes) Lakefield Junction (Martin County): Exemption for equipment of a peaking facility proposed to be constructed in Martin County that is part of a simple-cycle, combustion-turbine electric generation facility that exceeds 250 megawatts of installed capacity. The exemption required that construction of the facility begin after July 1, 1999, and before July 1, The plant is in operation and is owned by Great River Energy. Laws 1999, ch. 243, art. 5, sec. 3. Minn. Stat , subd Rapids Energy Center, Grand Rapids (Itasca County): Facility plans cancelled. Exemption for equipment of a facility if the electric generating facility was operational on January 2, 1999, and sold to a Minnesota electric utility. This was enacted for a plant proposed to be sold to Minnesota Power and expanded from 30 megawatts to 250 megawatts. Plans to build this facility were cancelled in August Laws 1999, ch. 243, art. 5, sec. 4. Minn. Stat , subd Direct-reduction steel mill: Exemption for equipment of an electric generating facility if the facility, when completed, has a capacity of at least 450 megawatts; is adjacent to a taconite mine direct-reduction steel mill; and supplies over 60 percent of its electricity generated in the prior

59 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 16 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 11 year to the adjacent direct-reduction plant and steel mill. No construction has begun on this facility. Laws 1999, ch. 243, art. 5, sec. 4. Minn. Stat , subd Pleasant Valley Station (Mower County): Exemption for equipment of an electric generation peaking facility, proposed to be constructed in Mower County by Great River Energy, that is a simple-cycle, combustion-turbine electric generation facility that exceeds 250 megawatts of installed capacity. Construction of this facility had to begin after January 1, 2000, and before January 1, This facility has been constructed and is in operation. Laws 2000, ch. 490, art. 5, sec. 4. Minn. Stat , subd /2003/2005 Fibro Minn (Swift County) : A personal property exemption was granted by the 2001 Legislature for a plant that was to be built in the city of Benson (Swift County). It was designed to generate power using poultry litter as a primary fuel source to satisfy a portion of the Prairie Island biomass mandate under section 216B Construction was to begin by December 31, Laws 2001, 1st spec. sess. ch. 5, art. 3, sec : The 2003 Legislature extended the construction date to December 31, Laws 2003, ch. 127, art. 2, sec : The 2005 Legislature extended the date by which construction must begin in order for a facility to qualify for a personal property tax exemption from December 31, 2003, to December 31, Laws 2005, ch. 151, art. 3, sec. 1. Minn. Stat , subd Waste tire cogeneration facility (Fillmore County): 24 Provision has expired. Exemption for equipment of an electric generating facility designed to use waste tires as a primary source and that was a cogeneration electric generating facility of 15 to 25 megawatts of installed capacity. 23 Minn. Stat. 297A.71, subd. 25. The 2001 Legislature enacted a law that exempted the purchases of construction materials and supplies from the sales and use taxes imposed for a system that uses poultry litter and other biomass electric generation facility. The expiration date was extended in 2005 and is effective for sales from June 30, 2001, to July 1, Laws 2001, ch. 5, art. 3, sec. 18; Laws 2000, ch. 151, art. 3, sec Minn. Stat. 297A.71, subd. 27. The 2001 Legislature also enacted a law that exempted the purchases of construction materials and supplies from the sales and use taxes imposed for a system that utilizes waste tires as a primary fuel in generating electricity. This provision has expired. Laws 2001, ch. 5, art. 3, sec. 69.

60 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 17 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 12 Construction of the facility had to begin after January 1, 2000, and before January 1, This exemption was enacted for a facility proposed to be located in the city of Preston (Fillmore County). This facility received its air permit from the MPCA in July 2003, but the developer withdrew the project. Laws 2001, 1st spec. sess., ch. 5, art. 3, sec. 19. Minn. Stat , subd /2006 Biomass electric generating facility : Exemption for equipment of an electric generating facility designed to utilize biomass as a primary fuel source. It must also be constructed for generating power that will be sold under a contract approved by the PUC, for a biomass mandate imposed under section 216B Although this exemption was written broadly to apply to any facility that met the criteria and for which construction began after January 1, 2000, and before December 31, 2002, only the St. Paul district energy facility qualified for the exemption. The plant is operated by Trigent Cinergy. Laws 2001, 1st spec. sess., ch. 5, art. 3, sec : The 2006 Legislature extended the construction date to December 31, 2005, to allow the Laurentian biomass facility (a joint project of the cities of Hibbing and Virginia) to qualify for the exemption. Laws 2006, ch. 259, art. 4, sec. 5. Minn. Stat , subd , /2003 Northom; Itasca Power Company 2001: Exemption for equipment of a new wood-burning biomass generation facility that satisfies a portion of the biomass mandate imposed on Xcel Energy (Northern States Power) in the Prairie Island legislation (1994 and 2003). The facility must have a generation capacity of between 10 and 20 megawatts; be located in a certain northern area; utilize biomass residue wood, sawdust, bark, chipped 25 Minn. Stat. 297A.71, subd. 27. The 2005 Legislature enacted a law that exempted the purchases of construction materials and supplies made by municipal joint powers to construct, expand, or improve electric generation facilities used to meet the biomass mandate. There is no expiration date for this provision. Laws 2005, ch. 3, art. 5, sec Minn. Stat. 297A.71, subd. 21. The 2000 Legislature enacted a law that exempted the purchases of construction materials and supplies from the sales and use taxes imposed for a system that utilizes residue wood, sawdust, bark, chipped wood or brush to generate electricity, uses a grate combination system, and has a gross capacity of 15 to 21 megawatts. This provision expired in July Laws 2000, ch. 418, art The exemption granted under this section is effective regardless of whether the facility is needed or selected to fulfill some portion of the biomass mandate.

61 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 18 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 13 wood, or brush as a primary fuel source; and be operational by December 31, Laws 2001, 1st spec. sess., ch. 5, art. 3, sec. 13. Minn. Stat. 216B.2424, subd. 5; 216B.1691, subd : The 2003 Legislature extended the operational date by an additional three years to December 31, Laws 2003, ch. 127, art. 2, sec. 31. Additionally, the legislature required Xcel Energy to enter into a power purchase agreement with this facility by January 1, 2004, for 10 to 20 megawatts of biomass energy and capacity at a price not to exceed $55 per megawatt-hour. Contract referred to the PUC; no facility yet under construction. Laws 2003, 1st spec. sess., ch Waseca County: Provision has expired. Exemption for equipment of a combined-cycle, natural gas turbine electric generation facility of between 43 and 46 megawatts of installed capacity. The facility had to utilize a combined-cycle gas turbine generator fueled by natural gas, be connected to an existing transmission line, be located on an underground natural gas storage aquifer, be designed as an intermediate load facility, and have received local approval from the governing body of the county for the exemption of personal property. Construction of the facility had to begin after January 1, 2002, and before January 1, Laws 2002, ch. 377, art. 4, sec. 7. Minn. Stat , subd Beltrami County: Exemption for equipment of a simple-cycle, combustion-turbine electric generation facility of more than 40 megawatts and less than 50 megawatts of installed capacity. The facility must utilize natural gas as a primary fuel; be located by certain natural gas pipelines and a transmission line; be designed to provide peaking, emergency backup, or contingency services; and satisfy a resource deficiency identified in an approved integrated resource plan filed under section 216B Construction of the facility had to begin after January 1, 2001, and before January 1, The plant is in operation and is owned by Ottertail Power. Laws 2002, ch. 377, art. 4, sec. 8. Minn. Stat , subd. 52.

62 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 19 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page /2003/2005/2006 Crown Hydro (Minneapolis) : A personal property exemption was granted by the 2002 Legislature for this plant that was to be built in the city of Minneapolis. It was a 3.2 megawatt, run-of-the-river hydroelectric generation facility. Construction was to begin by January 1, Laws 2002, ch. 377, art. 4, sec. 9. Minn. Stat , subd : The 2003 Legislature extended the construction date to January 1, Laws 2003, ch. 127, art. 2, sec : The 2005 Legislature provided an additional two years to January 1, 2007, and deleted the requirement that the generating facility be located on publicly owned land. Laws 2005, ch. 151, art. 3, sec : The 2006 Legislature extended the construction date to January 1, Laws 2006, ch. 259, art. 4, sec /2006 Rahr Malting (Shakopee/Scott County) 2002: Exemption for equipment of an electric generation facility that has a generation capacity of less than 25 megawatts. The facility must provide process heating needs in addition to electrical generation and utilize agricultural by-products from the malting process and other biomass fuels as its primary fuel source. Construction of the facility had to begin after January 1, 2002, and before January 1, Construction began in The facility was anticipated to be operational in about two years. Laws 2002, ch. 377, art. 4, sec. 10. Minn. Stat , subd : The 2006 Legislature extended the construction date to January 1, Laws 2006, ch. 259, art. 4, sec /2003/2006 Mesaba Energy Projects There are currently two proposed sites for the Mesaba Energy Project, in accordance with Minnesota Statutes, sections 116C.51-69, and Minnesota Rues, part 4400/1150, subpart 1.C. The West Range site is primarily located within the city limits of Taconite in Itasca County. The East Range site is primarily located within the city limits of Hoyt Lakes in St. Louis County. Minn. Stat , subd. 55; 216B.1694, subd Minn. Stat. 297A.71, subd. 33. The 2005 Legislature enacted a law that exempted the purchases of construction materials and supplies used or consumed in the construction of a hydroelectric generating facility for sales from December 31, 2004, to December 31, This was extended in Laws 2006, ch. 259, art. 3, sec. 2.

63 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 20 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page : Exemption for equipment of an electric generation facility sited on an energy park located on an active or former mining or industrial site within the taconite tax relief area. The facility had to have on-site access to existing railroad infrastructure and direct rail access to a Great Lakes port, sufficient private water resources on site, and be designed to host at least 500 megawatts of electric generation. Construction of the first 250 megawatts at the facility had to commence after January 1, 2002, and before January 1, This exemption was enacted for a facility proposed to be located in St. Louis County (the old LTV plant site). Construction of up to an additional 750 megawatts had to commence before January 1, Laws 2002, ch. 377, art. 4, sec : Legislation was enacted in 2003 providing a number of regulatory incentives for this energy project on the Iron Range. Laws 2003, 1st spec. sess., ch : No construction commenced under the 2001 or 2003 legislation. The 2006 legislation deleted the requirements that the facility be located on a mining or industrial site (though it still must be in the taconite tax relief area), have direct rail access to a Great Lakes port, and have sufficient private water resources on site. It modified the requirement for on-site access to railroad infrastructure to access to existing railroad infrastructure within less than three miles. Additionally, the 2006 legislation also required the facility: to be designated as an innovative energy project, to receive resolution approval from the governing body where the proposed facility is to be located, and to have an agreement with the host county, city/township, and school district for a payment in lieu of property taxes. These location requirements were broadened so that the site can be in either St. Louis or Itasca counties. The law also extended the construction commencement dates to after January 1, 2006, and before January 1, 2010, for the first 500 megawatts of the facility and before January 1, 2015, for the additional 750 megawatts. Laws 2006, ch. 259, art. 4, sec /2005 Calpine (Mankato/Blue Earth County) 2003: Exemption is for equipment of a combined-cycle, combustionturbine electric generation facility that exceeds 550 megawatts of installed capacity and designed to utilize natural gas as a primary fuel. The facility cannot be owned by a public utility as defined in section 216B.02, subdivision 4; must be located close to existing natural gas

64 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 21 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 16 pipeline and existing electrical transmission substation and outside the seven-county metro area; must be designed to provide energy and ancillary services; and have received a certificate of need under section 216B.243. Construction of the facility must begin after January 1, 2004, and before January 1, Construction of the facility has begun. Laws 2003, ch. 127, art. 2, sec. 8. Minn. Stat , subd : The 2005 Legislature reduced the plant s minimum size from 550 to 300 megawatts and allowed any expansion to be exempt without regard to when construction begins. Laws 2005, ch. 151, art. 3, sec Great River Energy (Rosemount/Dakota County): Exemption is for equipment of a combined-cycle, combustion-turbine electric generation facility that exceeds 150 megawatts of installed capacity and utilizes natural gas as a primary fuel. It must be owned by an electric generation and transmission cooperative; located close to natural gas pipelines and a high-voltage electric transmission line; designed to provide intermediate energy and ancillary services and received a certificate of need under section 216B.243, demonstrating demand for its capacity; and has received local approval from the county and city in which the site is located. The exemption will take effect only if the owner of the facility enters into agreements with the governing bodies of the county and the city where the facility is located (in the Dakota Electric service territory). The agreements may include a requirement that the facility pay a host fee to compensate the county and the city for hosting the facility. Construction of the facility must begin after January 1, 2004, and before January 1, Plans to build this facility were put on hold due to a multiyear power purchase agreement from another utility. Laws 2003, ch. 127, art. 2, sec. 9. Minn. Stat , subd Electric generation facility personal property (Cannon Falls/Goodhue County): Exemption is for equipment that is part of an existing simple-cycle, combustion-turbine electric generation facility that exceeds 290 megawatts of installed capacity. It must utilize natural gas as a primary fuel; be designed to provide peaking, emergency backup, or contingency services; and have received approval from the governing body of the county and city for the exemption. Construction of the facility must begin after January 1, 2005, and before January 1, Laws 2005, ch. 151, art. 3, sec. 4. Minn. Stat , subd. 68.

65 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 22 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page Electric generation facility personal property (Faribault/Rice County): Exemption is for equipment that is part of an electric generation facility that exceeds 150 megawatts of installed capacity. The facility must be designed as a combined-cycle facility, although initially it will be operated as a simple-cycle combustion turbine and utilize natural gas as a primary fuel. To qualify for the exemption, the municipal power agency (that will own and operate the facility) must agree to make payments in lieu of property taxes to the host city. Construction of facility must begin after January 1, 2004, and before January 1, Construction has begun on the facility. Laws 2005, ch. 151, art. 3, sec. 5. Minn. Stat , subd Electric generation facility personal property (Shakopee/Scott County): Exemption is for equipment that is part of an existing simplecycle, combustion-turbine electric generation facility that exceeds 300 megawatts of installed capacity. It must utilize natural gas as a primary fuel; be designed to provide peaking, emergency backup, or contingency services; and have received approval from the governing body of county and city for the exemption. Construction of facility expansion must begin after January 1, 2004, and before January 1, This exemption is for the new attached machinery and personal property for the expansion of an existing plant (Blue Lake) in Shakopee owned by Xcel Energy. Laws 2005, ch. 151, art. 3, sec. 6. Minn. Stat , subd Electric generation facility personal property (Cambridge/Isanti County): Exemption is for equipment that is part of a single-cycle, combustion-turbine electric generation facility that exceeds 150 megawatts of installed capacity. The facility must be designed to utilize natural gas as a primary fuel; provide peaking, emergency backup, or contingency services; and have received approval from the governing body of the county and the township for the exemption. Construction of the facility must begin after July 1, 2005, and before January 1, This exemption is for a proposed generating facility to be built by Great River Energy in the city of Cambridge (Isanti County). A certificate of need was issued in November 2005; construction should begin in April Laws 2005, ch. 151, art. 3, sec. 8. Minn. Stat , subd Electric generation facility personal property (Blooming Grove Township/Waseca County): Exemption is for equipment that is either

66 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 23 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 18 part of (1) a simple-cycle, combustion-turbine electric generation facility, or (2) a combined-cycle, combustion-turbine electric generation facility that does not exceed 325 megawatts of installed capacity. The facility must be designed as either a peaking or intermediate load facility, and must utilize either a simple-cycle or a combined-cycle combustion-turbine generator fueled by natural gas. The facility must have received approval from the governing body of the county for the exemption. Construction must begin after January 1, 2006, and before January 1, This facility/exemption replaces one proposed in 2002 for a facility that was never constructed. Laws 2005, ch. 151, art. 3, sec. 8. Minn. Stat , subd Biomass/Minneapolis Midtown Exchange: Exemption is for equipment that is part of an electric generation facility that generates up to 30 megawatts of installed capacity. The facility must be designed to utilize at least 90 percent waste biomass as a fuel, not be owned by a public utility, be located within a city of the first class, have its primary location at a former garbage transfer station, and be designed to have the capability to provide baseload energy and district heating. Construction of the facility must begin between January 1, 2004, and January 1, The proposed facility will be located in Minneapolis and will supply energy to the former Sears site (Midtown Exchange). Laws 2005, 1st spec. sess., ch. 3, art. 1, sec. 6. Minn. Stat , subd Electric generation facility personal property (Lower St. Anthony/Minneapolis): 29 Exemption is for equipment that is part of a 10.3-megawatt run-of-the-river hydroelectric generation facility. Construction must begin after April 30, 2006, and before January 1, Laws 2006, ch. 259, art. 4, sec. 9. Minn. Stat , subd. 84. Energy and Pollution Control Property In addition to the above exemptions, Minnesota also exempts some energy and pollution control equipment from property tax located at facilities that are otherwise subject to property taxes. The estimated market value exempted for these property types for the 2005 assessment was about $680 million. This exemption amount has remained relatively stable in recent years since no major generating facilities have been built. Most of the exemption is for pollution control equipment (some structures are also exempted). 29 The 2006 Legislature exempted from sales tax the materials and supplies used or consumed in the construction of a 10.3-megawatt hydroelectric generating facility in lower St. Anthony.

67 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 24 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 19 Wind Energy Conversion Systems The taxation of wind in Minnesota has been an important policy question as technology has advanced to make wind systems more economic to install. On the one hand, policymakers wanted to keep the tax on this source of energy low to promote this renewable resource. On the other hand, the areas of the state in which the wind resource is abundant are relatively poor in terms of tax capacity (little industry, etc.). The local government units in these areas want to tax wind energy systems to raise local revenues. Responding to this tension, the legislature has enacted numerous changes to the taxation of wind energy conversion systems ranging from a total exemption, through graduated property tax system, to the current production tax. The Past: 1991 through 2003 Property Tax The original law, enacted in 1991, exempted all wind energy conversion systems installed after January 1, 1991, that were used as an electric power source. Laws 1991, ch. 316, sec. 2. In the following years, numerous changes were made to the taxation or exemption of these systems based on the size of the system. The table below summarizes the tax status of each type of wind energy conversion system for taxes payable in Minn. Stat , subd. 2. Taxation of Wind Energy Conversion Systems; Taxes Payable 2003 Size of System Land Foundations and Support Pads Structures Small (less than 2 megawatts) Taxable Exempt Exempt Exempt Exempt Medium (more than 2 megawatts, but less than 12 megawatts) Large (more than 12 megawatts) Taxable Taxable Exempt for 5 years; 30% taxable thereafter Turbines, Blades, Transformers, and Equipment Taxable 25% taxable 25% taxable 25% taxable House Research Department Prior to the 2000 assessment, county assessors were responsible for valuing wind conversion systems. However, beginning with the 2000 assessment, the responsibility was transferred to DOR. Laws 2000, ch. 490, art. 5, sec. 15. Minn. Stat , subd. 3. This section has been repealed since the wind conversion systems are now exempt from property tax and are subject to an in-lieu production tax. Defining the Size of System Under this property tax structure, an important issue was how to define the size of the system. Since smaller units were taxed preferentially, wind developers attempted to make these projects seem smaller than they actually were. The 2001 Legislature reacted by specifying the total size of wind energy conversion systems for purposes of property taxation. These changes required combining the nameplate capacity of all wind energy conversion systems located within five

68 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 25 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 20 miles of each other, constructed in the same calendar year, and under the same ownership in determining if the system is a small-, medium-, or large-scale system. These changes applied to wind energy systems installed after January 1, The changes continue to apply to the wind energy production tax beginning in payable Laws 2001, 1st. spec. sess., ch. 5, art. 3, sec. 16. Minn. Stat , subd. 22. The 2006 Legislature expanded the definition of wind energy conversion systems to include substations used and owned by one or more wind energy conversion facilities. These substations will now be subject to production tax and exempt from property tax. Laws 2006, ch. 259, sec. 10. Minn. Stat , subd. 1. Payments in Lieu of Property Tax The 2001 Legislature also allowed a developer of a new or existing medium- or large-scale wind energy conversion system to negotiate with the city or town and the county where the system is located to establish a payment in lieu of property taxes on the property. The payment is to provide fees or compensation to the host jurisdictions to maintain public infrastructure and services. The payment-in-lieu agreement must be signed by the parties and filed with the Commissioner of Revenue and the county recorder. Upon execution and filing of the agreement, the personal property of the system is exempt from property tax. The exemption is effective for the same duration as the in-lieu payments are in effect. No known negotiations are in effect under this provision. Laws 2001, 1st spec. sess., ch. 5, art. 3, sec. 22. Minn. Stat This payment in lieu of property tax was modified to a payment in lieu of the production tax by the 2002 Legislature. Laws 2002, ch. 377, art. 4, sec. 12. Minn. Stat The Present: 2004 and Thereafter, Wind Energy Production Tax (WEPT) The local governments weren t satisfied with the changes made by the 2001 Legislature. They argued that an acceptable in-lieu payment would not be agreed upon and that the taxes based on property were not sufficient. After lengthy discussions, the legislature enacted a production tax in 2002 beginning with taxes payable in Laws 2002, ch. 377, art. 4, sec. 13. Minn. Stat , subd. 1. The new law imposes a production tax on the production of electricity from wind energy conversion systems in lieu of the property tax installed after January 1, However, the land on which the systems are located remains subject to property tax. Laws 2002, ch. 377, art. 4, sec. 6; further amended by Laws 2002, ch. 400, sec. 9. Minn. Stat , subd. 1. The production tax rates are based on the size of the wind energy conversion system. They are as follows: Large-scale systems (nameplate capacity of more than 12 megawatts) pay 0.12 cents per kilowatt-hour Medium-scale systems (nameplate capacity between two and 12 megawatts) pay cents per kilowatt-hour

69 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 26 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 21 Reporting Small-scale systems (nameplate capacity of two megawatts or less) pay cents per kilowatt-hour Exempt from the production tax: Very small conversion systems with a nameplate capacity of 0.25 megawatts or less and small-scale systems (two megawatts or less) owned by a political subdivision By February 1 of each year (beginning in 2005), the owner of the wind energy conversion system must file a report to DOR detailing the amount of electricity produced in the previous calendar year. (The filing date was March 1 for 2004, but the 2005 Legislature changed the date to February 1 to allow DOR and local governments more time for administrative and budget planning purposes.) The tax, based on the size of the wind conversion system, must be paid to the county on or before May 15 and October 15, and distributed along with the regular property tax settlements made by the county treasurer to the local governments. Tax Distribution For taxes payable in 2004 and 2005 the distribution of the WEPT revenues are based upon the local tax rates; i.e., the proportion that each of the local taxing jurisdiction s tax rates were to the total tax rate where the wind energy conversion system is located. The state is not included in the distribution of revenues. For taxes payable in 2006 and thereafter, the distribution of the WEPT will be fixed percentages: 80 percent to counties, 14 percent to cities/townships, and 6 percent to school districts. Laws 2005, ch. 151, art. 5, sec. 15. Minn. Stat , subd. 6. The amount of the production tax distributed in 2006 is almost $1.4 million. That tax is based on the calendar year 2005 wind energy production. A county-by-county breakdown of the total tax amount is shown on the following page.

70 Appendix A, 03 Docket No. E002/GR Information Request No. MCC-124, Attachment A Page 27 of 72 House Research Department Updated: October 2006 Primer on Minnesota s Property Taxation of Electric Utilities Page 22 Total Estimated Wind Production Tax by County Based on 2005 Production Tax, Due in 2006 (Total All Taxing Jurisdictions) Murray $448,483 Lincoln 409,973 Pipestone 403,557 Martin 31,589 Jackson 23,420 Mower 16,984 Dodge 13,185 Rock 5,632 Nobles 1,681 Clay 661 Rice 516 Sherburne 106 Total $1,355,787 Number of Systems There are 108 private wind energy projects in the state; 95 are categorized as small scale, seven are medium scale, and six are large scale (as of the summer of 2006). There are also five municipal wind energy systems (cities of Elk River, Marshall, and Moorhead, and the Southern Minnesota Municipal Power Agency and the Wisconsin Public Power Inc.). They are smallscale systems and are exempt because they are publicly owned. The majority of the systems are located in southwest Minnesota. Since the tax on these systems is now a production tax, their market value is unknown. Production Incentives The legislature provided production incentives to wind facilities under two megawatts. The incentive is equal to 1.5 cents per kilowatt-hour if the facility is developed prior to January 2005; or 1 to 1.5 cents per kilowatt-hour if developed after that date. $9.4 million is available annually for this incentive through Laws 2005, 1st spec. sess., ch. 1, art. 4, secs. 14 and 51. Minn. Stat. 116C.779, subd. 2; 216C.41, subd. 2. The 2003 legislation required Xcel Energy to deploy 300 megawatts of wind energy capacity in the state by 2010, in addition to the 825 megawatts the utility is already committed to deploy. Laws 2003, 1st spec. sess., ch. 11. Minn. Stat. 216B.1691, subd. 6. For more information about property taxes and electric utilities, visit our web site,

71 Page 28 of 72 Appendix A, 04 Docket No. E002/GR Information Request No. XLI-103 Question: The XLI 100 series relates to the testimony of Leanna Chapman. Please provide a copy of the materials describing the Homestead Market Value Exclusion. Response: Please see Attachment A. Preparer: Title: Department: Leanna Chapman Manager Tax Reporting Tax Services

72 Appendix A, 05 Docket No. E002/GR Information Request No. XLI-103, Attachment A Page 29 of 72 Understanding Recent Changes in Homestead Benefits For Property Tax Purposes What Changed? The 2011 Legislature repealed the Homestead Market Value Credit, (the homestead credit), and replaced it with a new Homestead Market Value Exclusion. The last year of the credit is for property taxes paid in 2011 and the exclusion begins for property taxes payable in What is a credit? A credit is a reduction in the amount of taxes due. What is an exclusion? An exclusion is a reduction in the amount of value subject to tax. The old law with the credit was as simple as: X Y = Z If your initial tax was X, and your credit was Y, then the tax you had to pay was Z. Under the new law, an exclusion changes the initial tax amount (X), and with the credit gone, the new initial tax becomes the final tax (X = Z). HOW DO HOMESTEAD BENEFITS CHANGE? Under the old law, the credit itself equaled the homestead benefit, and its calculation depended only on the value of the homestead. Because the credit was subtracted from the initial tax amount, the credit affected each taxpayer independently. Under the new law, the exclusion is still calculated using the value of the homestead, but the tax benefit depends on a variety of factors other than homestead value. Because the exclusion is a reduction in the value subject to tax, it also affects tax rates and the taxes of all properties. WHY IS THIS CHANGE COMMONLY RESULTING IN TAX INCREASES? There are four reasons why the change commonly results in increases: 1) State money is no longer reducing total taxes. For 2012, the state was projected to pay approximately $260 million of local taxes through the credit program. With the change, there will be no state paid credit and the entire local property tax levy will be paid by taxpayers. 2) The reduction in taxable value increases tax rates. With the total taxable value being reduced by the exclusion, raising the same total levy as the prior year requires a higher rate. 3) The reduction in taxable value shifts the relative burdens of who pays. With homestead values reduced, other property types (and homes with higher values) pay a larger share of the tax. 4) The exclusion provides less benefit in low tax rate areas than the credit. The computation of the exclusion and credit amounts are roughly comparable where the tax rate is close to the state average, but in lower tax rate areas the excluded value provides less benefit. High rate areas may see greater benefit. Minnesota Revenue, Understanding Recent Changes in Homestead Benefits 1

73 Appendix A, 05 Docket No. E002/GR Information Request No. XLI-103, Attachment A Page 30 of 72 COMPUTATION OF CREDIT AND EXCLUSION AMOUNTS Even though the tax benefits of the credit and the exclusion are not equal, the calculation of the exclusion amount is similar to the calculation of the former credit. Both reach their maximum at $76,000 of market value ($304 for the credit; $30,400 for the exclusion). Both reduce to $0 at about $414,000 of market value. Example: A house valued at $116,000. Credit = (0.4% x $76,000) ($40,000 x 0.09%) = $304 $36 = $268 AVERAGE TAX RATE ILLUSTRATION Old Law: New Law: Credit Exclusion Estimated Market Value $116,000 $116,000 Exclusion $0 $26,800 Taxable Market Value $116,000 $89,200 Class Rate 1% 1% Net Tax Capacity $1,160 $892 Tax Rate % % Gross Tax $1,227 $989 Credit $268 $0 Net Tax $959 $989 LOW TAX RATE ILLUSTRATION Tax Rate % % Gross Tax $736 $594 Credit $268 $0 Net Tax $468 $594 Exclusion = (40% x $76,000) ($40,000 x 9%) = $30,400 $3,600 = $26,800 WANT MORE DETAILS? CONSIDER THIS THEORETICAL ILLUSTRATION Similarly computed amounts do not yield equal benefits: NOTE: This illustration does not reflect an actual location. Credit = 0.4% of the first $76,000, minus 0.09% of the value over $76,000. Exclusion = 40% of the first $76,000, minus 9% of the value over $76,000. Let s say you live in a house valued at $116,000. Under the old law the full value was taxed, but the new exclusion lowers the taxable value. Different classes of property are taxed at different levels. The first $500,000 of homestead value has a rate of 1%. (Higher value has a rate of 1.25%.) Net tax capacity is a term describing the taxable value after class rates are applied. Again, this is lower under the new law due to the exclusion. Tax rates increase because the exclusion shrinks the taxable value. This illustration shows statewide average rates before and after the change. The gross tax under the old law was higher because there was no exclusion, but the credit reduced the net tax. Under the new law the gross and net are the same. Here the increase is modest, but Tax rates affect the relative strength of the exclusion because multiplying excluded value by a low rate is less beneficial than multiplying it by a high rate. So, under a low tax rate example, the increase in tax is more extreme. WHAT ELSE AFFECTS MY TAXES (IN ADDITION TO THE HOMESTEAD BENEFIT)? Local levy decisions, including the effects of changes in state aid and local budget priorities. Market forces can affect property taxes in two ways: The value of your property may increase or decrease. The value of other properties may increase or decrease and change the share that your property is of the total tax base, whether your property s value changed or not. Various other changes (the classification or your property, eligibility for other benefits, and miscellaneous law changes) may also affect property taxes. Minnesota Revenue, Understanding Recent Changes in Homestead Benefits 2