HomeMy Public PortalAboutExhibit RC 97 - Rate Commission Prehearing Conference Report1
BEFORE THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
For Consideration of a )
Wastewater Rate Change )
Proposal by the Rate Commission of the )
Metropolitan St. Louis Sewer District )
PREHEARING CONFERENCE REPORT OF
BLACK & VEATCH, RATE CONSULTANT,
AND LASHLY & BAER, P.C.,
LEGAL COUNSEL TO THE RATE COMMISSION
Black & Veatch and Lashly & Baer, P.C., as Rate Consultant and Legal Counsel,
respectively, to the Rate Commission of the Metropolitan St. Louis Sewer Distri ct (“Rate
Commission”), respectfully submit this Prehearing Conference Report regarding the Wastewater
Rate Change Proposal (“Rate Change Proposal”) submitted to the Rate Commission by the
Metropolitan St. Louis Sewer District (the “District”) on March 4, 2019, Ex. MSD 1.
The Rate Commission is to determine whether the Rate Change Proposal or any
Alternative Proposal meets the criteria for recommendation contained in §§ 7.040 and 7.270 of
the Charter Plan.
The Prehearing Conference Report is to identify, define, resolve or settle the issues raised
by the prepared testimony and to describe the participant’s position, if any, on each of the criteria
and factors for recommendation.
THE DISTRICT RATE CHANGE PROPOSAL
The District’s Proposed Rate Change Proposal for a Wastewater Rate Change proposes a
rate increase to generate an approximately 3.6% increase in revenues to finance approximately
$1.58 billion in needed improvements during FY 2021 through FY 2024. See Ex. MSD 1, pgs.
ES-1 – ES-2. The District’s Capital Improvement and Replacement Program (the “CIRP”) is the
Exhibit RC 97
2
primary driver of the District’s financial plan, representing approximately two-thirds of
anticipated expenditures during the rate cycle. See Ex. MSD 1, p. 4-15. The largest components
of the CIRP over this period will be capital investment related to capacity improvements in the
wastewater system, and sewage sludge incineration. Id. The CIRP includes improvements
necessary to comply with the Consent Decree, with permit and regulatory requirements outside
of the Consent Decree, and with asset management renewal at the treatment plants. Id.
The District proposes to finance these improvements by a combination of rate revenue
and debt financing.1 See Ex. MSD 1, p. 4-16. The District intends to use approximately $587
million in rate revenue (approximately 37% of the total CIRP) with the remainder of the CIRP
financed by a combination of grants, loans from the state revolving fund, and existing and
additional bonding authority. See Ex. MSD 1, p. 4-17. A typical metered residential customer
contributing 6 CCF of wastewater each month will experience a rate increase of approximately
3.3% each year from FY 2021 through FY 2024. See Ex. MSD 1, p. ES-5. The District intends to
seek voter authorization prior to FY 2022 for an additional $500 million of additional wastewater
revenue bonds. See Ex. MSD 1, p. ES-2. If the voters do not approve additional bonding
authority, the District will need to finance the CIRP with 100% cash financing once its existing
bonding authorization has been depleted. See Ex. MSD 1, p. 6-1. Rates would increase by
approximately 15% in FY 2022, by 17% in FY 2023, and by 13% in FY 2024 if voters do not
approve additional bonding authority. Id.
It is the District’s position that the Rate Change Proposal and the CIRP have been
carefully developed and that the Rate Change Proposal complies with the District ’s Charter Plan.
1 The Rate Change Proposal relies upon certain assumptions with respect to conditions, events, and
circumstances that may occur in the future. Although considered reasonable, some of these anticipated
conditions, events and circumstances may not occur resulting in potential differences in revenues and costs
than currently projected.
3
The District states that the CIRP is necessary to meet the requirements of the Consent Decree, as
amended, as well as other regulatory requirements.
STANDARD FOR RECOMMENDATION
Upon receipt of a Rate Change Notice from the District, the Rate Commission is to
recommend to the District’s Board changes in a wastewater, stormwater, or tax rate necessary to
pay: (i) interest and principal falling due on bonds issued to finance assets of the District; (ii) the
costs of operation and maintenance; and (iii) such amounts as may be required to cover
emergencies and anticipated delinquencies. See Charter Plan, § 7.040.
Any change in a rate recommended to the Board by the Rate Commission pursuant to
§ 7.270 of the Charter Plan is to be accompanied by a statement of the Rate Commission that the
proposed rate change: (i) is consistent with constitutional, statutory, or common law as amended
from time to time; (ii) enhances the District’s ability to provide adequate sewer and drainage
systems and facilities, or related services; (iii) is consistent with and not in violation of any
covenant or provision relating to any outstanding bonds or indebtedness of the District; (iv) does
not impair the ability of the District to comply with applicable Federal or State laws or
regulations as amended from time to time; and (v) imposes a fair and reasonable burden on all
classes of ratepayers. See Charter Plan, § 7.270.
The Prehearing Conference Report is to identify, define, resolve or settle the issues raised
by the prepared testimony and to describe the participant’s position, if any, on each of the criteria
and factors for recommendation. See Ex. RC 60, p. 8.
The issues raised by the prepared testimony relate primarily to the criteria set forth in
§ 7.270(v) of the Charter Plan – whether the Rate Change Proposal imposes a fair and reasonable
burden on all classes of ratepayers.
4
The Rate Commission, in its Rate Recommendation Report, will be required to provide
affirmative support that its rate recommendation meets each of the criteria. Although the issues
herein are discussed primarily in the context of compliance with § 7.270(v), the issues may also
affect the discussion of compliance with the other factors and criteria in §§ 7.040 and 7.270.
CASH/DEBT RATIO
The District’s Rate Change Proposal provides that the CIRP will be funded through a
ratio of approximately 40% rate revenue and 60% debt. See Ex. MSD 3F, p. 3, ll. 15-17.
Intervenor Missouri Industrial Energy Consumers (“MIEC”) presented the testimony of
Michael Gorman, who stated that the proposed 40/60 cash/debt ratio relies too heavily on rate
revenue and that the District should consider a funding policy closer to 25% cash and 75% debt.
See Ex. MSD 91, pg. 192, ll. 7-10. Mr. Gorman stated that “previously, the District developed a
revenue requirement using a CIRP funding policy of 75% debt and 25% PAYGO (equity)
funding from the period 2004 through 2018.” See Ex. MIEC 73, p. 7, ll. 6-10. Mr. Gorman noted
that the Rate Commission approved a 25/75% ratio in the 2007 rate proceedings. See Ex. MIEC
73, pgs. 11-12, ll. 18-21, 1-12. Mr. Gorman testified at the technical conference that a 30/70
cash/debt ratio would be appropriate here. See Ex. MSD 79, p. 39, ll. 12-18.
The District maintains there is no formal financial policy for debt/cash funding of the
CIRP. Mr. Snoke testified, “The roughly 60/40 Debt/PAYGO funding of the CIRP in MSD’s
proposal is an outcome of the many factors being balanced to fully fund MSD Operations and the
CIRP in a way that minimizes rate increases and adheres to MSD actual financial policies, like
holding a minimum Operating Reserve of 60 days.” See Ex. MSD 80F, p. 5, ll. 9-20. “The mix
has ranged from 80/20 some years to approximately 70/30 over the last wastewater rate process,
averaging 75/25 over time, but it is not correct to say that 75/25 is a formal policy. Overall
wastewater user charges for this cycle are actually projected to be lower with the 60/40
5
debt/PAYGO mix than they would be with the historical average of 75/25 due to the higher
projected debt service, and resulting DSC ratios, associated with a 75% debt/25% PAYGO mix.”
Id.
Bethany Pugh testified on behalf of the District that the “financial planning model
assumed the District managed its financial obligations to maintain AA category credit ratings.”
Based on these parameters, we then analyzed the District’s historical ratio of debt to cash
funding for CIRP (75%/25% debt to equity from FY2004-FY2018) and attempted to maintain a
ratio consistent with this, in light of future CIRP funding needs and revenue increase parameters.
As a result the debt to cash ratio for the rate period FY2021-FY2024 is approximately 60% debt
to 40% cash. This ratio includes both revenue bonds and any state revolving fund (‘SRF’)
obligations of the District.” See Ex. MSD 3G, p. 4, ll. 7-16.
It is the position of the Rate Consultant that the District’s proposed 40/60 cash/debt ratio
is “reasonable and cost effective.” See Ex. MSD 79, p. 78, ll. 14-20. “[A]t this point in time for
the District, debt service coverage really is driving the financial plan, not the cash debt mix. The
cash debt mix is an outcome of achieving the debt service coverage that’s required in light of the
currently CIRP funding level.” See Ex. MSD 79, p. 78, ll. 5-10. Rate Consultant Pamela
Lemoine acknowledged that “[t]he District’s current Rate Proposal provides for cash financing
of approximately 37%, which exceeds the District’s historical cash versus debt funding mix of
25%/75%,” however, the District’s proposed use of 37% cash financing “is consistent with the
25% to 30% cash financing of capital that is deemed an industry accepted best practice and is in
practice in other peer utilities.” See Ex. RC 70, pgs. 13-14, ll. 22-23, 1-4.
DEBT SERVICE COVERAGE
The District’s debt agreements require a minimum senior bond debt coverage (“DSC”)
ratio of 1.25x and a minimum total bond debt coverage ratio of 1.15x. See Ex. MSD 3F, p. 7, ll.
6
17-24. To maintain the District’s high credit ratings, the Rate Change Proposal has been set to
achieve a minimum DSC of 2.5x for senior bonds and 1.8x for total bonds. Id.
Intervenor MIEC proposes that the District target DSC coverage of approximately 1.6x,
which would be in line with the District’s 2011 and 2015 rate proceedings. See Ex. MIEC 73, p.
9, ll. 17-22. MIEC notes that in the District’s “last rate case, its earned DSC was much higher
than the target DSC used for ratemaking purposes. MSD explained that rate projections used in
2015 over-recovered its cost of service…. By understating miscellaneous revenues, and
overstating operating expenses and debt service costs, MSD’s actual earned DSC was much
higher than that used to set rates. The Rate Commission should again be careful to ensure that
MSD is not again overstating operating expenses and debt service costs, and understating
revenue collections from non-wastewater service charges.” See Ex. MIEC 73, pgs. 10-11, ll. 19-
24, 1-6.
It is the position of the Rate Consultant that MIEC’s position would place MSD at risk of
a rating downgrade. “Furthermore, based upon a review of Mr. Gorman’s rate model, while he
has testified that MSD’s policies should be adjusted to those used in prior rate proposals, his
financial plan results in debt service coverage that is not materially different than MSD’s
proposal, at 1.76x at the end of FY 2024, as compared to MSD’s rate model of 1.81x. In
addition, the reduction in cash financing compared to MSD’s proposal appears to be primarily
the result of the assumed lower interest rates on projected bonds.” See Ex. RC 81, p. 3, ll. 9-16.
The Rate Consultant testified that the current policy of 1.8x is consistent with what rating
agencies have indicated they expect to see. “Specifically, Moody’s considers debt service
coverage of 1.7x – 2.0x to be consistent with Aa rated utilities. Fitch indicated in its report
related to MSD’s 2017 rating that MSD would be at risk of a downgrade if debt service coverage
7
fell below what they are expecting. In their report they indicated that MSD’s debt service
coverage was solid at 1.8x in 2017 and was projected at 1.9x in FY 2019-20. Fitch further stated
that ‘any deterioration in financial performance beyond the projected levels would be expected to
result in a negative rating action.’” See Ex. RC 81, p. 4, ll. 9-16.
The Rate Consultant further testified that “[w]hile MSD’s debt service coverage policy in
the past was 1.6x, it is appropriate for utilities to regularly evaluate financial policies to reflect
current conditions and rating agency expectations. As utilities become more heavily debt
burdened, rating agencies will expect to see the growth in outstanding debt mitigated to the
extent possible with reasonable debt service coverage, which will provide cash for cash financing
a portion of the capital program.” Id., ll. 2-7. Ms. Lemoine noted that the 2.5x and 1.8x ratios
were valid and important metrics, particularly in light of the District’s current and anticipated
future heavy debt profile. See Ex. RC 70, p. 21, ll. 2-4.
GRADUALISM IN RATE INCREASES
The Rate Consultant expressed concern that “the District is projecting a potential rate
increase of 7.2% in FY 2025 to maintain minimum policy levels. This increase is nearly double
the indicated annual rate increases for FY 2021 through FY 2024.” See Ex. RC 70, p. 15, ll. 7-9.
The Rate Consultant believes that this type of a higher increase right at the beginning of the next
rate setting period could cause bill impact volatility, and that a series of annual revenue
adjustments in FY 2021 through FY 2024 that mitigates such a sudden higher spike in revenue
adjustments, becoming necessary in FY 2025, should be considered. See Ex. RC 70, p. 7, ll. 15-
18. Ms. Lemoine noted that costs and interests rates for this rate cycle have been lower than what
was anticipated during the last rate proceeding, but does not agree with the District that this
means it will happen again in the future. See Ex. MSD 79, p. 84, ll. 2-5, 11-22.
8
The District’s position is that the “rate increases shown for FY25 are for illustrative
purposes only,” which Ms. Lemoine acknowledged. See Ex. MSD 79, p. 83, ll. 8-10. Marion Gee
testified on behalf of the District that “[t]he raw data used to calculate the projected rate increase
in FY 2025 has not been subjected to the same level of scrutiny and analysis that was conducted
to calculate rates during FY 2021 thru FY 2024. Also, given the District’s history of projected
rate increases beyond previously proposed four-year rate cycles being less than expected, it
would be prudent to not increase rates in the current four year cycle to mitigate a potential spike
in rates in FY 2025.” See Ex. MSD 80D, p. 3, ll. 60-64.
MIEC does not specifically take a position on the gradualism of rate increases, but
generally proposes additional debt financing to reduce the need for revenue derived from higher
rates. MIEC’s “proposed adjustment to the annual level of CIRP spending shown in Figure 1,
attempts to levelize MSD’s annual CIRP spending over the FY 2021 through FY 2024 period,
and allow for an increased level of spending in FY 2025 through FY 2028. This is designed to
mitigate impacts on MSD’s wastewater revenue requirement, and keep wastewater rates as
competitive as possible.” See Ex. MIEC 73, p. 16, ll. 1-5.
INFILTRATION/INFLOW (“I/I”)
Infiltration and Inflow (“I/I”) is water entering the wastewater system from illegal roof
and foundation drains, groundwater infiltration through sewer service pipe and main joints, and
stormwater runoff or inflow from the combined sewer system. See Ex. MSD 3H, p. 6, ll. 14-16.
The District cited to a 2005 study by CDM to determine that 40 percent of the total I/I is related
to individual customers and 60 percent is related to the District’s collection system infrastructure.
See Ex. MSD 3H, p. 8, ll. 2-12. William Stannard testified on behalf of the District that “the
amount of I/I costs to be recovered directly from wastewater service charges is assigned to
customer classes on the premise that 40 percent of the total cost is distributed on the basis of the
9
number of customers within each class, with the remaining 60 percent allocated on the basis of
contributed wastewater volume. These percentage allocations were adopted in the District ’s 2007
Wastewater and Stormwater Rate Change Proposal and have been used ever since.” Id.
MIEC objects to the District’s allocation of 40% customers /60% volume, and maintains
the percentages should be 50%/50%. Michael Gorman testified on behalf of MIEC that “I
believe it is not appropriate to allocate 60% of I/I costs on volume. Specifically, as noted by
MSD, I/I costs are incurred based on customer connections, and leaky collector systems,
manholes and pumping stations. As such, the actual collection system is driven by both number
and location of customers on the system and volumetric throughput. As such, I recommend
allocating I/I costs on the basis of 50% customer and 50% volume.” See Ex. MIEC 73, p. 20, ll.
7-13. MIEC notes that the study relied upon by the District relied upon data from 2001-2003, and
that “there have been significant changes to MSD’s system since this study was completed. In
particular, MSD has made substantial improvements to its wastewater system to comply with the
requirements of the Consent Decree. Additionally, I/I costs are largely created through the
collection infrastructure and geographic area, length of pipe, number of lift stations and
infrastructure age. It would be more appropriate to utilize an I/I allocation that is more heavily
weighted toward the number of customers on the system.” See Ex. MIEC 73, p. 24, ll. 5-12.
“Increasing the customer-related component of I/I supports recovering more I/I costs through the
fixed customer charges.” See Ex. MIEC 90A, p. 2.
It is the Rate Consultant’s position that “the District’s allocation of costs such as I&I
costs between customer and volume has the potential to impose a higher level of cost
responsibility on classes with higher wastewater flow volumes….” See Ex. RC 71, p. 6, ll. 4-8.
With regard to the 2005 study relied upon by the District, “it is not clear to which specific
10
section of that report or to which specific conclusion in that report the District attributes these
allocation factors. It is also not clear what specific assumptions used in that report the District
deems still valid for this current allocation.” Id., ll.14-17. Pamela Lemoine testified at a technical
conference that “there is no specific hard engineered way to determine an allocation of I&I.
That’s why we see a range in the industry.” See Ex. MSD 79, p. 90, ll. 23-25.
In his surrebuttal testimony, William Stannard testified that “[e]ven though I agree with
some of the comments expressed by the Rate Commission’s Consultant and the Intervenor that
the analyses used to estimate the causes and responsibility for I/I occurring within the MSD
wastewater collection system may change over time, I believe that the [40% customer / 60%
volume] allocation used remains reasonable. I believe that it is important to note that the nature
of wastewater collection systems and the wide range of causes for the level of I/I do not provide
a foundation for an engineering analysis of sufficient detail to support an exact determination of
relative responsibility for I/I. As such the allocation factors used by rate consultants throughout
the United States and incorporated within guidance documents are typically based on judgement
more so than engineering analyses and testing.” See Ex. MSD 80C, p. 1, ll. 6-15. He noted that
Kansas City uses the proposed 40% customer / 60% volume I/I ratio that the District proposes in
the Rate Change Proposal. Kansas City is “a similar utility in terms of geographic location,
topography, climate, and size of service area.” Id., ll. 20-21.
CIRP
The CIRP provides a listing, schedule, and cost of needed repairs, additions, and
improvements to the wastewater system to maintain the system in operating order and to ensure
the system operates in a manner that complies with all State and Federal Regulatory
requirements and the Consent Decree. See Ex. MSD 3C, p. 2, ll. 3-6. “The CIRP is needed to
provide the project identification, planned fiscal year and anticipated annual costs associated
11
with system improvements. This will then provide the basis for required annual revenue and
resources needed to plan, design, and construct these improvements.” Id., ll. 8-11. The
Wastewater CIRP for this rate cycle is set forth in Appendix 7.2.2 of Ex. MSD 1, p gs. 7-18 – 7-
90. The CIRP consists of approximately $1.6 billion in improvements during the rate cycle, FY
2021 through FY 2024. Id., ll. 15.
It is the District’s position that the projects in the CIRP are required to comply with the
Consent Decree or other regulatory requirements and therefore necessary for the District to
comply with state and federal law. “The wastewater CIRP is primarily composed of projects
required to comply with the [Consent Decree] or other regulatory requirements. There are asset
management related projects planned that are not specifically listed in the [Consent Decree] or
required to meet regulations. These projects typically upgrade and renew wastewater assets or
support systems to prevent failure and improve operational efficiencies. Without upgrades and
system renewal there is inherent risk of system failure.” See Ex. MSD 3C, p. 2, ll. 18-23.
MIEC proposes to defer some projects in the CIRP, which it claims can be done without
jeopardizing compliance with the Consent Decree or other regulations. “[C]ertain major capital
investments in FY 2023, and FY 2024 more specifically, have not been shown to be needed for
the EPA Consent Decree or any other way that MSD does not have the discretion to levelize
these over the entire forecast period.” Ex. MIEC 73, p. 16, ll. 13-16. “[T]here are several very
large capital programs that could be deferred for a few years, in an effort to produce an annual
level of CIRP spending during the forecast period and several years immediately following it.”
See Ex. MIEC 73, p. 16, ll. 20-22.
MIEC proposes adjusting the amount of CIRP spending in FY 2023 and FY 2024 by $70
million for each year, and increase the proposed spending in FY 2025 and FY 2026 by the same
12
amount. See Ex. MIEC 83, pgs. 4-5, ll. 11-14, 1-2. “The actual selection of which projects could
be deferred can be left up to MSD Staff, which can be managed in a way which meets its
Consent Decree (‘CD’) obligations, other regulatory obligations, and manage impacts on
wastewater rates.” See Ex. MIEC 83, p. 5., ll. 5-7. MIEC suggests that the District negotiate an
amendment to the Consent Decree to permit it to move projects out of the CIRP. “[I]t might be
possible to negotiate an extension in the permitting with the EPA to allow them a little more
flexibility to try to spread out this annual level of CIRP spending.” See Ex. MSD 91, p. 164, ll.
1-4.
The District asserts that it lacks discretion to move projects out of the CIRP without
jeopardizing compliance with the Consent Decree or other regulations. The Fluidized Bed
Incinerator projects, which MIEC proposed to move out of the CIRP, could not be removed from
the CIRP without jeopardizing the District’s NPDES permits. See Ex. MSD 80A, p. 1, ll. 9-24.
“The Bissell and Lemay Fluidized Bed Incinerators project replaces incinerators ori ginally
constructed in the 1970s. The operation of these incinerators is regulated by USEPA and
MDNR.” Id., ll. 26-28. “The District’s second material amendment to the Consent Decree was
negotiated to financially accommodate the construction of new fluidized bed incinerators, by
delaying a number of major Consent Decree tunnel projects. This Consent Decree amendment
states ‘the Parties agree that this proposed Amendment is necessary because MSD currently
incinerates 68,000 tons of sewage sludge annually, utilizing multiple hearth incinerators. The
Federal Plan Requirements for Sewage Sludge Incineration Units Constructed on or before
October 14, 2010 … require MSD to replace its multiple hearth incinerators. The replacement of
these incinerators will occur in fiscal years 2021-2026 timeframe and is estimated to cost
approximately $360 million in 2017 dollars.’ Construction funding for this project is budgeted in
13
FY 2023, 2024, and 2025. The FY 2025 budget funds construction work that will extend into FY
2026. The District has no discretion to delay this project.” See Ex. MSD 80A, p. 2, ll. 33-45.
Richard Unverferth testified on behalf of the District that 76.7% of the projects in the
CIRP are required for the CIRP, 22.4% of projects are required to meet othe r regulatory
requirements, and only 0.9% are not required for either. See Ex. MSD 80A, p. 4, ll. 89-90.
It is the position of the Rate Consultant that the projects within the CIRP are appropriate.
See Ex. RC 82, p. 6, ll. 3-4. Regarding the 0.9% of projects not required for the Consent Decree
or other regulatory requirements, these projects are comprised of the “the Floodwall ORS pump
station system, which is the main system that protects the City of St. Louis from flooding. The
Floodwall ORS system is over 50 years old, which is the end of its useful life. The risk of
moving these asset management projects further into the schedule exceeds the cost-benefit of the
1% reduction in the CIRP.” Id., ll. 11-15. Nicole Young of Lion CSG testified that “there appear
to be four projects that could be moved from the FY 2021 through FY 2024 CIRP into a future
budget cycle. These projects are 12088, 11833, 12334, and 12350 [listed in Appendix 7.2.2 of
Ex. MSD 1, pgs. 7-18 – 7-90]. MSD may have reasons, beyond regulatory deadlines, for pulling
these projects forward into this CIRP. Project 12350 appears to have a related pump station
project in FY 2021 through FY 2024 CIRP, so it may be more cost-effective to build these at the
same time. Project 12334 is a phased project, which may need to be adjusted for the schedule of
the overall project. The four projects in question amount to less than 2% of the CIRP.” See Ex.
RC 82, p. 7, ll. 4-11.
Ms. Young testified that the District’s cost estimates are reasonable. “MSD provided
several documents in Exhibits MSD 77B, 77C, and 77D to demonstrate the methodology, unit
costs, and process that the District uses in developing CIRP cost estimates. Exhibit MSD 77B
14
provides a thorough review of the best practices used in developing CIRP-level cost estimates,
with Appendix E through Appendix J providing the metrics that are used in CIRP level
estimating projects…. The process and documentation demonstrate good practice in engineering
cost estimating. MSD has a good and thorough process for their CIRP cost estimating
procedure.” See Ex. RC 82, pgs. 7-8, ll. 21-23, 1-11.
To move projects out of the CIRP, Ms. Young testified that “[t]here’s very little room
other than the incinerator project or the consent decree projects to move the CIRP projects
around, so it has to be either the incinerator project or the consent decree projects that would be
moved.” See Ex. MSD 91, p. 216, ll. 13-17.
Susan Myers noted that “MSD committed to EPA to follow the law and replace the
incinerators beginning construction in 2023 as a condition of a [Consent Decree] amendment.”
See Ex. MSD 92, p. 1. In sum, the District’s position is that moving projects out of the CIRP
would require either: (a) negotiating an additional amendment to the Consent Decree; or (b)
moving the Fluidized Bed Incinerator projects out of the CIRP, though the District had
negotiated with the EPA for the Second Amendment to the Consent Decree (See Ex. 37A, p.4)
for the express purpose of undertaking the Fluidized Bed Incinerator projects.
EXTRA STRENGTH SURCHARGES
The Rate Change Proposal proposes significant increases in extra strength surcharge
rates. Tom Beckley testified on behalf of the District that such increases are warranted because
“[t]he cost of service analysis indicates a significant increase in the surcharge rates for BOD
[Biochemical Oxygen Demand], COD [Chemical Oxygen Demand], and TSS [Total Suspended
Solids]. This increase is caused by several factors, most significant is that the capital cost
allocated to these functional categories increased by approximately 70% from FY 2017 to the
test year of FY 2021 while units of service for BOD and COD decreased by 7% and TSS
15
decreased by 5% over the same time period. In total, these factors result in the increase in the
rates that is larger than other rate components.” See Ex. MSD 3I, p. 11, ll. 1-8.
Under the Rate Change Proposal, in FY 2021, the TSS surcharge would increase by 11%,
the BOD surcharge would increase by 27%, and the COD surcharge will increase substantiall y.
See Ex. MSD 61A, Q3; See also Ex. MSD 1, p. 4-37, Table 4-18.
It is MIEC’s position that the sharp increase in extra strength surcharge is unreasonable.
Michael Gorman testified, “MSD states that the increase is primarily due to the fact that the
capital cost allocated to these functional categories increased by approximately 70% from FY17
to the test year of FY21, while the units of service for BOD and COD decreased by 7% and TSS
decreased by 5% over the same time period.” See Ex. MIEC 73 p. 29, ll. 4-9. Gorman further
testified that “MSD’s capital expenditures related to BOD and TSS are primarily associated with
the improvement of operating efficiency of wastewater treatment plants because these
improvements are expected to reduce the cost of waste disposal. The capital expenditures
associated with these improvements are not directly related to an increase in the cost of treating
wastewater with BOD and TSS strengths in excess of the normal loadings.” Id., ll. 11-16.
It is the Rate Consultant’s position that to mitigate any potential rate shock on Surcharge
customers, the District should consider phasing in to cost of service over at least a two-year time
period. “Subsequent to the ‘phase-in’ period, the District should also consider increasing all
rates, including surcharge rates, during FY 2022 through FY 2024 based on an ‘across the board’
increase approach. The across the board annual increase should be based on the overall system-
wide revenue increase required.” See Ex. RC 71, p. 5, ll. 13-18. “The results of the cost of
service analysis therefore indicate increases in both TSS and BOD rates that are higher the
average system revenue increase. In FY 2022 through FY 2024, the District is again proposing
16
Surcharge rates increase at a level equivalent to the overall projected increase in just the O&M
expenses, and not at a level that is aligned with the overall system-wide revenue increase.” See
Ex. RC 71, pgs. 8-9, ll. 21-23, 1-2. “Due to the significant increase in both TSS and BOD rates in
FY 2021, the District should consider ‘phasing-in’ the Surcharge rates over at least a two-year
period. In addition, rather than increasing Surcharge rates in FY 2022 through FY 2024 based on
the calculated increase in O&M, the District should consider increasing Surcharge rates in a
more traditional ‘across the board’ manner, reflecting the overall increase required for system
wide rate revenues in each year.” See Ex. RC 71, p. 9, ll. 4-9.
Tom Beckley testified on behalf of the District that while, in concept, an across the board
approach could be preferable, “the problem is it ignores the fact that the proposed increase is
necessary because these rates were increased at less than an ‘across the board increase’ for fiscal
years 2018, 2019, and 2020 based on what turned out to be an inaccurate assumption that the
change in these rates would be driven by operation and maintenance expense more than capital.
In other words these customers have received the benefit of what turned out to be an inaccurate
assumption for those three years. It should be noted that while an across the board increase for
the years 2018, 2019, 2020 would have been closer to the currently proposed rates it too would
have been inaccurate and would have increased surcharge rates more than is now necessary, by
approximately 13% for TSS and 4% for BOD.” See Ex. MSD 80B, p. 1, ll. 6-15. Mr. Beckley
disagreed with MIEC’s contention that the District’s proposed capital expenditures are not
directly related to the costs of treating wastewater with higher BOD and TSS than normal
wastewater. See Ex. MSD 80B, pgs. 1-2, ll. 23-24, 1.
17
Respectfully submitted,
LASHLY & BAER, P.C.
By /s/ Lisa O. Stump
Lisa O. Stump
Brian J. Malone
714 Locust Street
St. Louis, Missouri 63101
Tel: 314-621-2939
Fax: 314-621-6844
Email: lostump@lashlybaer.com
Email: bmalone@lashlybaer.com
BLACK & VEATCH
Pamela R. Lemoine
16305 Swingley Ridge Road, Suite 230
Chesterfield, MO 63017
Tel: 636-536-5813
Fax: 913-458-3579
Email: LemoinePR@bv.com
18
CERTIFICATE OF SERVICE
The undersigned certifies that a copy of the foregoing was sent by electronic transmission
to Janice Fenton, Office Associate Senior, Metropolitan St. Louis Sewer District; Susan Myers,
Counsel for the Metropolitan St. Louis Sewer District; and Brandon Neuschafer, Counsel for
Intervenor Missouri Industrial Energy Consumers on this 19th day of July, 2019.
Ms. Janice Fenton
Office Associate Senior
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
JFENTON@stlmsd.com
Ms. Susan Myers
General Counsel
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
smyers@stlmsd.com
Mr. Brandon W. Neuschafer
Bryan Cave LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
bwneuschafer@bryancave.com
/s/ Lisa O. Stump
Lisa O. Stump