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Exhibit MIEC 98 - Prehearing Conference Report of Intervenor Missouri Industrial Energy CoExhibit MIEC 98 2019 Wastewater Rate Proceeding (3) is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; (4) 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 (5) imposes a fair and reasonable burden on all classes of ratepayers. Of these five factors, the MIEC asserts that MSD's proposed rate increase does not meet the fifth criteria because MSD's Rate Proposal seeks revenue in excess of that required and allocates certain costs of service in a manner that is neither fair nor reasonable. Regrettably, MSD's rate proposal does not impose a fair and reasonable burden on all classes of ratepayers because it: • is based on project timing that results in an unnecessary spike in spending in FYs 2023 and 2024, when projects from these years could be pushed to FYs 2025 and 2026 in order to smooth out the rate spike; • sets the minimum debt service coverage ratio higher than necessary to protect MSD's credit rating; • targets an average debt service coverage ratio that is higher than necessary to protect MSD's credit rating; • shifts too much of the CIRP funding burden to PAYGO (equity) funding, rather than remaining closer to the historical debt/equity funding mix; • fails to properly analyze and allocate the cost of service associated with infiltration and inflow; and • imposes a rate shocking increase in extra strength surcharges, which surcharges are not even justified in the first place. As described more fully herein and in MIEC's testimony, MIEC has proposed modifications to the Rate Proposal which it believes, often supported by the testimony of the Rate Commission and MSD experts, is fair and reasonable to all classes of ratepayers. 2 2019 Wastewater Rate Proceeding II. Shifting $70 million in CIRP spending from each of 2023 and 2024 to 2025 and 2026 would help smooth out rates and reduce rate increases, and MSD's failure to consider the same is neither fair nor reasonable to customers A significant concern is the spike in the CIRP spend forecasted by MSD for the FY 2023 and 2024 timeframes, which is followed by significant decreases in spend in the following years. This spike is illustrated in Figure SR-12: an c 0 2 $500.0 $450.0 $400.0 $350.0 $300.0 $250.0 $200.0 $150.0 $100.0 $50.0 $0.0 FIGURE SR-1 Capital Investment and Replacement Plan Need MSD Proposed and MIEC Levelized FY21 to FY24 CIRP 1iiiiiill tip' Os"tia 1h 10 11 ti tic ti0 tit titi ti1, ,La 'L`� 'LSO 'L1 'L� FJ FA F, FJ , Fi F, Fi , , , , FA , 4. FA , Source: Exhibit MSD 52 - St. Louis MSD Rate Financial Plan Model FY21-24. The red bars reflect MSD's CIRP spending estimates of approximately $450 million in each of FY 2023 and FY 2024, followed by precipitous decreases to approximately $270 million in FY 2025 and $120 million in FY 2026. MIEC's position is that MSD should take actions necessary to level out this spending by shifting projects, where possible, from FYs 2023 and 2024 to FYs 2025 and 2026. Importantly, if MSD were able to shift approximately $70 million in projects in each of these two years, it could have the impact of reducing the amount of revenue to be collected in the form of customer 2 Surrebuttal Testimony of Michael Gorman, Exhibit MIEC 83, at p. 4. 3 2019 Wastewater Rate Proceeding rates by approximately $20 million per year in FY 2023 and FY 2024.3 It could also result in MSD being required to take on less debt in this timeframe, perhaps as much as $59 million.4 This shift in spend is reflected by the rectangular boxes in the relevant years in Figure SR-1 above. MIEC is not asserting that any of the projects do not need to be completed.5 Rather, MIEC's argument is purely based on managing the timing of the CIRP projects in a manner that minimizes the impact on the customer. MSD is also not focused only on one or two projects, such as the incinerator bed projects. There are hundreds of projects that are being undertaken during the CIRP period, and it doesn't take many smaller projects being shifted to create a real impact on ratepayer. MSD's refusal to undertake any additional analysis on this issue is inexplicable and is neither fair nor reasonable to any class of ratepayers. Customers deserve to be protected in this process, and wastewater rate increases that can be avoided or deferred will protect and benefit customers. MIEC is also not asserting that MSD should not comply with deadlines for completing projects that are established by law. To the contrary, MIEC supports MSD's obligation to meet these regulatory and consent decree obligations. However, MIEC does believe that MSD has not adequately established that many of its purported deadlines are indeed required by law.6 For example, MSD asserts that it is obligated to complete the incinerator projects by FY 2026, and cites the Second Material Amendment to the Consent Decree ("Second Amendment") in support.? However, the Second Amendment merely cites a recital noting that the replacement 3 Testimony of Michael Gorman, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at pp. 164-64. Note that this analysis uses MIEC's proposed debt/equity mix of 70%/30%. If MSD's proposed debt/equity mix of 60/40 is utilized, the $40 million number would be higher. 4 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at pp. 5-6. 5 For example, Mr. Unverferth's testimony was consistently focused on the fact that if MSD did not undertake certain projects, it would be out of compliance. Testimony of Richard Unverferth, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 34. Not undertaking a project is very different that shifting the timeline of a project where possible. 6 If need be, nothing precludes MSD from going back to EPA to adjust timelines. By amending the consent decree, EPA has already demonstrated that rates and customer impact are issues that they take into account to modify project timing. MIEC is confident that there is still room to move timelines without EPA approval, but this option should not be taken off the table. Testimony of Richard Unverferth, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 18; Second Material Amendment to the Consent Decree, Exhibit MSD 37A, at p. 3. 4 2019 Wastewater Rate Proceeding will occur in FY 2021 through FY 2026, a date identified by MSD.8 Nothing in the Consent Decree or the Second Amendment imposes any timing requirements with respect to .the incinerator projects or imposes any penalties on MSD for not completing the projects by the end of FY 2026, nor has MSD pointed to any such language. The record also shows that EPA may agree to a delay in the timeline if doing so benefits customers via reduced rates. This is the objective here. MSD has failed to provide clear evidence that it cannot find this amount of projects to shift, in large part because MSD doesn't appear to have performed any additional analysis beyond its original timeline establishment.9 Even Ms. Young's very cursory analysis of MSD's timelines, which did not even pressure test the timelines established by MSD, gets us over 20% of the way there by identifying approximately $30 million worth of projects that can likely be shifted:1° Young Analysis with Information from Exhibit MSD 78B Project Number Budget Amount Financial Year Commence Construction Placement In Service" 12088 20,000 30,000 FY21 FY23 2/16/2026 2/6/2028 11833 2,065,000 FY24 12/7/2027 5/25/2030 12334 16,000,000 10,500,000 FY23 FY24 4/21/2027 7/4/2030 12350 20,000 45,000 FY21 FY23 2/17/2027 _ 2/6/2029 Additional projects that may be subject to timeline adjustment include: • With respect to the Bissel and Lemay incinerator projects (which will result in hundreds of millions of dollars of expenditures), not only has MSD failed to identify any concrete legal obligation for its purported FY 2026 deadline for these projects, but MSD has failed s Second Material Amendment to the Consent Decree; Exhibit MSD 37A at 3. 9 Surrebuttal Testimony of Michael Gorman. Exhibit 83, at p. 2. 1° Surrebuttal Testimony of Nicole Young, Exhibit 82, at pp. 6-7. 11 "Placement in Service" is MSD's apparent terminology in these tables for when the consent decree requires placement in service. Testimony of Richard Unverferth, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at pp. 27-28. The consent decree itself, however, does not appear to contain this level of specificity. 5 2019 Wastewater Rate Proceeding to provide any substantiation for its assertion that the projects (or portions thereof) cannot be shifted within the FY 2021 to FY 2026 timeframe. All MSD has done is provide basic information on project status through FY 2024 and provided conclusory testimony about being unable to shift the timelines.12 • Exhibit 78B contains a list of CIRP projects for FY 2021 through FY 2024. Even this non -exhaustive review indicates that many projects hit MSD's budget and/or have construction often years before the "placement in service" date, or MSD has not provided a compliance date: Select CIRP Entries and Data from Exhibit MSD 78B Project Number Budget Amount Financial Year Commence Construction Placement in Service13 11847 6,000,000 3,200,000 FY22 FY23 9/8/2023 6/9/2027 12139 10,000,000 6,000,000 FY23 FY24 Part of ongoing CSO Long Term Control Plan Compliance Work Part of ongoing CSO Long Term Control Plan Compliance Work 12140 18,000,000 12,000,000 FY23 FY24 Part of ongoing CSO Long Term Control Plan Compliance Work Part of ongoing CSO Long Term Control Plan Compliance Work 12141 2,358,000 FY23 Part of ongoing CSO Long Term Control Plan Compliance Work Part of ongoing CSO Long Term Control Plan Compliance Work 11146 5,000,000 5,000,000 FY23 FY24 Part of ongoing Green Infrastructure Compliance Work Part of ongoing Green Infrastructure Compliance Work 13078 1,000,000 1,000,000 FY23 FY24 Part of ongoing Green Infrastructure Compliance Work Part of ongoing Green Infrastructure Compliance Work 12264 1,033,000 FY23 2/17/2023 5/7/2025 12338 205,000 FY23 2/16/206 11/8/2027 12345 253,000 FY23 2/17/2024 8/5/2026 12486 5,000,000 FY24 None identified None identified 12357 487,000 FY23 2/17/2023 2/1/2026 12360 2,935,000 FY24 5/5/2025 7/24/2027 12 Wastewater CIRP Project List FY21-24 Amended May 21, 2019 Regulatory related projects that are not CD related, Exhibit MSD 78D. 13 "Placement in Service" is MSD's terminology for when the consent decree requires placement in service. Testimony of Richard Unverferth, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at pp. 27-28. 6 2019 Wastewater Rate Proceeding 12212 3,520,000 FY23 10/23/2022 1/5/2026 12217 842,000 FY24 4/16/2025 1/6/2027 12242 1,213,000 FY24 10/23/2024 7/15/2026 12249 4,000,000 FY24 10/13/2025 12/26/2026 12276 2,465,000 FY23 4/26/2025 1/11/2028 • Exhibit 78C contains $7 million worth of projects in the FY 2023 and FY 2024 timeframe that are neither regulatory nor consent decree related. MSD should carefully consider whether any of these projects can be shifted to a later timeframe. • Exhibit 78D contains several regulatory -related projects in the FY 2023 and FY 2024 timeframe for which MSD has not identified a compliance date, suggesting that there is the possibility for adjusting timelines. These include: Select CIRP Entries and Data from Exhibit MSD 78D Project Number Budget Amount Financial Year Date Regulatory but not CD 13221 420,000 FY 23, FY 24 Part of ongoing NPDES compliance work 12997 3,000,000 FY23 Not applicable 12998 3,000,000 FY24 Not applicable 13153 3,628,000 FY23 Part of ongoing NPDES compliance work 13185 7,200,000 FY23 Not applicable Obviously not all of these projects can be moved, but in the interest of ensuring that the proposed rates are fair and reasonable to all classes of customers, it is also fair and reasonable to require MSD to undertake a detailed analysis with the goal of shifting project timelines where possible. III. To reduce the impact of rate increases on customers, MSD should retain debt service coverage and debt -equity ratios more consistent with historical ratios MIEC has proposed several significant revisions to MSD's rate model. First, MIEC recommends a more reasonable pace of CIRP spending, as discussed above. Second, MIEC recommends that MSD retain its current minimum debt service coverage ("DSC") of 1.6x instead of targeting a higher DSC. MIEC's changes to MSD's rate model produce an earned DSC for total debt of 1.7x to 1.9x. Third, MIEC proposes that MIEC shift its current debt/equity funding mix of 75% debt and 25% equity to 70% debt and 30% equity, as opposed to MSD's 7 2019 Wastewater Rate Proceeding proposed mix of 60% debt and 40% equity, which results in higher rates on customers. MIEC's recommendations on DSC and debt -equity mix are much more consistent with MSD's long- standing financial approach.14 A. MSD has set its debt service coverage ratio at an amount that exceeds what is necessary to preserve credit ratings and results in overcollection from customers Debt service coverage is the ratio of available cash to debt servicing costs. In other words, to maintain a DSC of 1.6x where debt service costs are $1 million per year, one would be required to maintain available cash of $1.6 million. The higher the DSC, the more cash that must be maintained on hand. In the context of a utility, that means the more revenue that must be collected in the form of customer rates. Proper DSC management is a "critical consumer protection measure" to help "manage cost of service so as to produce just and reasonable wastewater rates to MSD customers."15 MSD has historically set DSC minimum at 1.6x. but because of MSD's history of consistent overstatement of its revenue requirements,16 MSD's actual earned DSC in 2015-2018 has been 1.9x to 2.1x.17 MSD's current proposal is to increase the minimum DSC to 1.8x,18 which, if historical overcollection practices continue to occur, could result in an even higher earned DSC.19 Indeed, MSD's model estimates a DSC of 2.23x in FY 2020 and a DSC of 2.10x 14 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at 14. 15 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 2. 16 "MSD acknowledged that its forecasted cost of service in setting rates in the last rate cycle exceeded its actual cost. As described at pages 10 and 11 of my rebuttal testimony, MSD witness Marion Gee states that MSD overstated operating expenses in its 2015 rate model by about $43.2 million, and overstated debt service costs by approximately $26.9 million." Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 11. 17 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at pp. 2, 10-1. 18 Direct Testimony of Bethany Pugh, Exhibit MSD 3G, at p. 5. 19 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 11. 8 2019 Wastewater Rate Proceeding in FY 2021.2° MSD's financial policy produces a much more expensive DSC than that used to set wastewater revenue requirements in rates in prior proceedings.21 MIEC's proposal would be to retain the 1.6x minimum DSC ratio, but based on the entirety of MSD's proposal, earned DSC would start this rate cycle at about 1.9x and end at about 1.7x.22 MSD's primary concern with the proposal to stay the course is an assertion that the minimum DSC must be raised to 1.8x in order to protect MSD's credit ratings.23 For the reasons outlined herein, this concern is unwarranted. Initially, MIEC agrees with MIEC's goal of protecting its credit ratings, as there is a positive impact on customer rates in the form of lower debt service costs. However, MSD must carefully balance its approach so that it is not overly conservative in protecting its credit ratings, which results in rates that are unfair and unnecessarily high. MIEC agrees that a reassessment of the DSC and funding mix are warranted, but MIEC does not agree that a shift in DSC is necessary. MSD's concern over credit rating appears to stem from one comment in the 2017 Fitch report that references a projected 1.9x DSC for FYs 2018-2020, and states "Fitch's rating incorporates the slightly weaker DSC, although any deterioration in fmancial performance beyond projected levels would be expected to result in negative rating action."24 Initially, note that the Fitch report was talking about the DSC for FYs 2018-2020, not FYs 2021-2024, which are at issue in this rate cycle. Second, focusing on this single line ignores the other positive comments about MSD's credit rating outlook made by the ratings agencies, including Fitch.25 Standard and Poor's, for example, commented positively about a total debt service no less than 1.6x26 and several commented positively about reserve balances and the historical debt/equity 20 MSD Rate Proposal, Exhibit MSD 1, at ES-3. 21 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 10. 22 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 14. 23 MSD's proposal establishes a senior DSC at a minimum of 2.5x and an overall DSC minimum at 1.8x. In this testimony, MIEC is concerned with the overall DSC. 24 Fitch Rating Report 2017, Exhibit MSD 40. ?5 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at pp. 12-14. 26 Standard and Poor's Rating Report 2017, Exhibit 38, at p. 3. 9 2019 Wastewater Rate Proceeding mix. Third, MSD could help its rating position by improving revenue stability (for example, through a change in the I/I allocation that is discussed below). which additional stability would be viewed positively by the credit rating agencies.27 But most importantly, MSD's current ratios have been and continue to be successful in supporting and preserving credit ratings.28 MSD's concern about credit ratings is unfounded. Significantly, Ms. Lemoine testified that MIEC's proposal, while resulting in a lower DSC than MSD's proposal (and thus being more cognizant of customer rates), is not materially different than MSD's proposa1.29 In the end, "[t]here is simply no sound basis to increase rates to wastewater customers to accomplish an increase in the DSC, when all the evidence in this case shows that the rate -setting practice used to set rates for MSD over the last two rate cycles, and actual earned DSC have supported its very strong investment grade bond rating."3° B. Concurrently, MSD should utilize a debt/equity ratio closer to 70% debt/30% equity in order to prevent overcollection from customers In conjunction with the change in DSC proposed by MIEC, MIEC proposes that the debt to equity funding mix be adjusted from 60% debt/40% equity proposed by MSD to 70% debt/30% equity.31 This equity component is the amount collected from customers, also known as PAYGO. This shift in debt/equity allocation is necessary to preserve the earned DSC ratio identified above, and helps minimize the impact of the rate proposal on MSD's customers.32 It is also more consistent with both MSD's historical 75%/25% debt -equity split33 and, as pointed out by Ms. Lemoine, "with the 25% to 30% cash financing of capital that is deemed an industry 27 Testimony of Tim Snoke, Technical Conference for Surrebnuttal Testimony, Exhibit MSD 91, at p. 139. 28 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 8. 29 Surrebuttal Testimony of Pamela Lemoine, Exhibit 79, at p. 4. 3o Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 11. 31 Testimony of Michael Gorman, Technical Conference on Rebuttal Testimony, Exhibit 79, at p. 40; Direct Testimony of Bethany Pugh, Exhibit MSD 3G, at p. 4. 32 Testimony of Michael Gorman, Technical Conference on Rebuttal Testimony, Exhibit 79, at p. 3. 33 Surrebuttal Testimony of Michael Gorman, Exhibit 83, at p. 7. 10 2019 Wastewater Rate Proceeding accepted best practice and is practice in other peer utilities."34 Indeed. it is more consistent with these precedents than is MSD's proposal of 40% equity funding (and more consistent with the Fitch credit rating report35) MSD's argument against MIEC's proposal to shift the debt/equity allocation is that the shift results in excessive operating reserve margins.36 In that case, MSD can remedy this issue by simply better managing its spending and the pace at which it issues debt than would be possible within MSD's rate model. C. MIEC's modeled rates produce a fair and reasonable burden on customers that better reflects a concern for customer rate increases At the Prehearing Conference on July 12, 2019, Commissioner Mahfood requested more information regarding the impact of MIEC's proposal on rates. Attached at Appendix A are three tables reflecting revenue modeling of MIEC's proposal. Table 1 shows the proposed revenue requirements and rate increases under MSD's proposal and Table 2 shows MIEC's proposed revenue requirements and rate increases. As one can see, MIEC's proposal results in an annual revenue requirement of approximately $495 million at the end of the rate period, or FY 2024. This is an increase of $58 million from MSD's FY 2020 revenue requirement. This is a reduction of $21 million from MSD's proposed FY 2024 revenue requirement. Table 3 shows MIEC's proposed revenue requirements and rate increases as modeled by MSD in Exhibit MSD 88E. MSD's modeling of MIEC's proposal also results in an annual revenue requirement of approximately $495 million in FY 2024. With respect to the impact of MIEC's proposal on rates, MIEC directs the Rate Commission to its responses to the First Discovery Requests of the Rate Commission.37 In Exhibit 90B to that response, MIEC provided tables showing the rate impact. For the ease of reference, those tables are included with this report at Appendix B. 34 Rebuttal Testimony of Pamela Lemoine, Exhibit 70, at p. 14. 35 Fitch Rating Report 2017, Exhibit MSD 40 ("Approximately 74% of the plan from fiscal 2018 through fiscal 2020 is expected to be funded from existing and planned debt.") 36 Exhibit MSD 88A, Response No. 23. 37 Missouri Industrial Energy Consumers' Responses to the First Discovery Request of the Rate Commission, Exhibit MIEC 90A, at question 2. 11 2019 Wastewater Rate Proceeding Very importantly, MSD's own modeling of MIEC's position produces a waste water revenue requirement at the end of the rate period that is very similar to MIEC's position, as shown on Appendix A. It must also be noted. though, that MSD's claimed flaws in MIEC's study38 contradict the clear instructions for the rate model provided to the Rate Commission.39 MSD's allegations and testimony contradict those instructions. MSD essentially asserted that MSD's rate model could not work independently of the hardline debt projections inputs to the rate model that were provided by PFM.40 These assertions are not credible, and effectively mean MSD provided a rate model that did not comply with the Rate Commission's request for a working model. IV. MSD's allocation of infiltration and inflow cost of service is neither fair nor reasonable to all classes of customers The proper allocation of costs associated with infiltration and inflow ("I/I") has been a significant issue in this proceeding. At its essence, I/I is water that enters the system through sources other than direct discharge from a home or business, e.g., through sewer service pipe and main joints, stormwater runoff or inflow from the combined sewer system, illegal roof and foundation drains, etc.41 I/I is inherently a function of the size of the system, including factors such as linear feet of piping, number of manholes and pipe joints, cracks that allow leaks, etc.,42 and thus is more closely connected to the size of the collection infrastructure system necessary to 38 MSD's Response to MIEC's Fourth Discovery Requests, Exhibit MSD 88A, at Response No. 22. 39 Rate Model Guide, Exhibit MSD 53. The Rate Model Guide states, "Throughout the model, cells that are shaded in blue indicate locations for controls and/or inputs." The Guide continues, "The Model is set up with debt projections provided by PFM. When changing CIRP Financing, it is important to first switch the entry in row 89 from "PFM" to "Model" (this activates the debt calculation module in the Model). Users can then adjust bond issuance amounts and financing assumptions (term, rate, etc.)." 4° Testimony of Tim Snoke, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at pp. 142-43. 41 Direct Testimony of William Stannard, Exhibit MSD 3H, at p. 6. 42 Black and Veatch, High Level Infiltration and Inflow Analysis for Cost Allocation Purposes performed for the CWA Authority of Indianapolis (June 21, 2018), Exh MIEC 90B, at p. 3. 12 2019 Wastewater Rate Proceeding accommodate the number of customers than it is the volume of permitted discharge from those customers.43 MSD recovers the costs associated with treating I/I amongst its customers by allocating 40% of the total cost of service equally amongst customers, and allocating the remaining 60% to customers based on the volume of wastewater they discharge.44 This allocation is based on MSD's interpretation of a 2005 Wet Weather Flow Cost Allocation study performed by CDM.45 The study, which is based on data gathered years prior to its issuance and does not itself propose the allocation used by MSD,46 was used by MSD in the 2007 Rate Proposal to devise the 40% customer/60% volume allocation.47 In the 2007 rate proceeding, MIEC identified that MSD's allocation analysis was unsupported: The very rudimentary discussion of these percents on Pages 3-32 states that they were developed to recognize that 50% of flows received at MSD's treatment plants is due to I/I. However, the discussion does not offer a rationale for the need to develop these percents, or why these specific percents are reasonable allocators of I/I cost responsibility. As stated on Page 3-30 of the Rate Proposal, I/I "...includes flow entering the sewer 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." From this discussion, it is clear that I/I flows are opportunistic, in that they find their way into the collection system through illegal connections or defects in pipes, joints or manholes. I/I flows are thus independent of the volumes of contributed flows discharged into the system by MSD's customers. Put another way, contributed flows exert no influence on the volume of groundwater infiltration or stormwater flows that enter MSD's collection system. I/I flows are more closely related to the total length and diameter of collection 43 Testimony of Michael Gorman, Technical Conference for Rebuttal Testimony, Exhibit 79, at pp. 51-52. 44 Rate Change Proposal, Exhibit MSD 1, at p. 4-31. 45 Id.; MSD's Response to the First Discovery Requests of Intervenor MIEC, Exhibit 65A. at p. 3. 46 See, e.g., Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 92. 4' Page 3-32 of 2007 Rate Proposal, Exhibit 65C. 13 2019 Wastewater Rate Proceeding sewers in the system, and these in turn are influenced by the number of customers connected to MSD by these sewers.48 Nonetheless, MSD still asserts that the I/I allocation devised by MSD in 2007 and based on data that is nearly twenty years old is fair and reasonable, despite the fact that MSD's consultant has advised MSD that it needs to be updated.49 Despite the age and outdated nature of the data and MSD's analysis, the testimony elicited by Commissioner Goss reveals that MSD simply did not conduct any new or additional analysis to support the I/I allocation it has proposed in this proceeding.5° We have new, meaningful, impactful information since MSD originally devised its I/I allocation twelve years ago: • MSD entered into the consent decree with EPA in 2012, pursuant to which MSD is in the middle of implementing billions of dollars -worth of system upgrades that significantly change the nature and design of the entire sewer system. All parties agree on this fact.51 By the end of FY 2019, approximately $1.7 billion will have already been spent to modify the MSD sewer collection and treatment system,52 which amount does not include money spent on non -consent decree system maintenance and upgrades. • As indicated by Ms. Kumar, there could be many changes in the "significant" passage of time since CDM's study and MSD's analysis, including changes in 48 See Appendix C, Rebuttal Testimony of Michael Gorman, at pp. 15-16. 49 Testimony of William Stannard, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 88. 5o Testimony of William Stannard, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at pp. 86-94. The reason for this is apparently because of the "effort and time" required to conduct such a study and analysis. Id. at p. 92. 51 See, e.g., Testimony of William Stannard, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at pp. 93-94. 52 MSD Rate Proposal, Exhibit 1, at p. 4-15. 14 2019 Wastewater Rate Proceeding service, in service area, number of connections, and modifications to UI capture, which indicate that the allocation is no longer supported.53 • MSD's data reflects that the system is very different. At the time the current I/I allocation was generated, MSD indicated that 50% of the wastewater volume entering the treatment plants was UI.54 Now, MSD calculates that number at 59%, nearly 20% higher than in 2007.55 This fact alone indicates that the current collection system is very different than it was 12 years. • Information from peer sewer districts, as described below. A comparison to other sewer districts is both instructive and warranted. As Ms. Kumar testified, MSD is allocating a "higher proportion of the I&I cost to the volume component than is more commonly seen in peer utility cost allocation practices and in the example guidelines provided in the [Wet Weather Financing and Cost Recovery in the Wastewater Financing and Charges, Manual of Practice 27 (2018)]."56 Mr. Gorman's rebuttal testimony (which was based on the recent analysis conducted for the Indianapolis sewer system by Black and Veatch) identified ten other sewer utilities and their allocations, which generally allocate along a 67% customer/33% volume basis.57 Indianapolis and Cincinnati allocated 75% to customers, while Kansas City allocated 40% to customers. Notably, Indianapolis' allocation is based on much more recent data and analysis of that system — an actual study, as opposed to a consultant recommendation or policy.58 53 Testimony of Prabha Kumar; Technical Conference for Rebuttal Testimony, Exhibit MSD 79, at p. 110. 54 Testimony of William Stannard, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 72 (referencing 2007 Rate Proposal I/I calculation in the 2007 Rate Proposal, Exhibit 65C). 55 MSD Rate Proposal, Exhibit MSD 1, at p. 4-31. 56 Rebuttal Testimony of Prabha Kumar, Exhibit 71, at pp. 7-8; Testimony of Prabha Kumar; Technical Conference for Rebuttal Testimony. Exhibit MSD 79, at p. 111 (identifying a general practice of a 67% customer/33% volume allocation). 57 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 73, at p. 26; Black and Veatch, High Level Infiltration and Inflow Analysis for Cost Allocation Purposes performed for the CWA Authority of Indianapolis (June 21, 2018), Exhibit MIEC 90B, at pp. 9-10. 58 Black and Veatch, High Level Infiltration and Inflow Analysis for Cost Allocation Purposes performed for the CWA Authority of Indianapolis (June 21, 2018), Exhibit MIEC 90B. 15 2019 Wastewater Rate Proceeding MIEC has conducted a comparison of key statistics regarding the St. Louis, Kansas City, Indianapolis and St. Joseph systems, which is attached hereto as Appendix D. As reflected in the comparison, the St. Louis system is significantly larger than Kansas City59 and Indianapolis in all respects, but most notably in terms of square miles, number of customer accounts, and mileage of sewer mains — the exact types of factors that are a function of number of customers tied into the system, not volume of permitted discharge. It was only at the Prehearing Conference on July 12, 2019, that MSD finally agreed that it needed to and would update the underlying data and allocation. However, even if MSD's newfound willingness to do a new study and I/I analysis results in an allocation change in four years, the current allocation has an impact on customers now and must still be addressed now. As MSD has repeatedly argued with respect to its credit rating, it has an obligation to consider and address new and changing information on an ongoing basis to ensure that it is properly determining revenue requirements and setting customer rates. MIEC agrees, and that argument is no less meaningful in this context than it is with respect to MSD's credit ratings. Based on the foregoing, MIEC has proposed that MSD utilize a 50% customer/50% volume allocation for I/I costs for this rate proposal. A 50%/50% allocation is more reflective of the causes of I/I and the very large nature St. Louis sewer system. It is also more consistent with MSD peer systems, many of whom (like Indianapolis) have based their determinations on more recent data and analysis. Importantly, Mr. Stannard equated the validity and thus the fairness and reasonableness — of both a 50%/50% split and at 40%/60% split.60 It also helps mitigate any concern that the customer classes that discharge higher volumes of wastewater are subsidizing the other customer classes with higher numbers of connections to the wastewater system. Finally, given the value of MSD's credit rating, it would provide greater revenue stability than a 59 Mr. Stannard opined that the Kansas City system was comparable to the St. Louis system, but he did not know, and thuse could not take into account, the most relevant I/I statistics like mileage of piping, age of system, number of connections, etc. Testimony of William Stannard, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 69. Thus, his opinion on this issue was not properly informed. Mr. Stannard also did not consider other systems identified in MIEC's testimony. Id. at p. 70. 60 Testimony of William Stannard, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 83. 16 2019 Wastewater Rate Proceeding variable volume -based charge, which would be seen favorably by credit agencies.61 This is an important benefit of MIEC's proposal as MSD continues to add debt to the system. V. MSD's proposed rate -shocking increases in extra strength surcharges are unsupported MSD has proposed to increase the surcharge associated with extra strength discharges of total suspended solids ("TSS") and biochemical oxygen demand ("BOD") by 10.6% and 26.7%, respectively.62 This proposal is based on a faulty premise and results in rate shock, and MIEC and the Rate Commission experts agree that an across the board increase in rates is more appropriate. MSD asserts that this extra strength surcharge increase is necessary because the cost of service associated with the treatment of BOD and TSS increased in the last rate cycle beyond what was predicted by MSD.63 However, this analysis is flawed. MSD's expert had significant difficulty in explaining the rationale behind this enormous surcharge increase. MSD appeared to make a last-ditch effort to justify the surcharge increase by referencing plant depreciation expenses for equipment associated with treatment of BOD and TSS.64 This premise is erroneous, though, because depreciation plays no role from the cost of service associated with that cost of service that is to be allocated.65 Additionally, any higher costs are the result of an improvement in operating efficiency that were designed to reduce the costs of disposa1,66 which benefits all classes of customers because all classes of customers discharge BOD and TSS. The capital expenditures are not 61 Testimony of Michael Gorman, Technical Conference for Rebuttal Testimony, Exhibit 79, at 76; Testimony of Tim Snoke, Technical Conference for Surrebuttal Testimony. Exhibit MSD 91, at 139. 62 Rate Proposal, Exhibit MSD 1, at 4-39; Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 73, at p. 29. 63 Direct Testimony of Thomas Beckley, Exhibit MSD 3I, at p. 11. 64 Testimony of Thomas Beckley, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 59. 65 Testimony of Michael P. Gorman. Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 180. 66 Testimony of Michael P. Gorman, Technical Conference for Rebuttal Testimony, Exhibit MSD 79, at p. 37-38. 17 2019 Wastewater Rate Proceeding directly related to an increase in the cost of treating wastewater with BOD and TSS strengths in excess of the normal loadings.67 Furthermore, the extra strength surcharges that MSD has proposed would result in rate shock for the subject customers. The Rate Commission's experts and even MSD's expert agree with this position.68 As a result, despite MSD's proposed rate shocking increase in extra strength surcharge in a single year is not fair and reasonable, but this can be remedied. The Rate Commission consultants and MIEC agree that any surcharges should be phased in and that MSD should implement an across the board increase which reflects the overall increase required for system- wide revenues in each year.69 Such an approach would be fair and reasonable, as it would help avoid rate shock and would more appropriately allocate the costs of any capital improvements that benefit all discharging customers. Even Mr. Beckley concurred that an across the board increase would be a fair and reasonable approach.70 VI. MSD's rate proposal is neither fair nor reasonable for all classes of customers and should be modified accordingly The Rate Commission has successfully curbed MSD's rates in previous proceedings, while leaving MSD in a position to fully recover its cost of service and fund its targeted capital improvements at a level that allows it to have been on target and under budget to date. The benefits to MSD's customers are significant, and rejecting unjustified and unnecessary increases in wastewater rates should remain a high priority of this Rate Commission. 67 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 73, at 29. 68 Rebuttal Testimony of Prabha N. Kumar, Exhibit 71, p. 6 (the surcharges "pose[] a potential for `rate shock' for some customers"); Testimony of Thomas Beckley, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 60 (identifying that rate shock is often expressed as double digit increases). 69 Rebuttal Testimony of Prabha N. Kumar, Exhibit 71, p. 9, Testimony of Prabha Kumar; Technical Conference for Rebuttal Testimony, Exhibit MSD 79, at p. 114; Surrebuttal Testimony of Pamela Lemoine, Exhibit RC 81, p. 5. 70 Testimony of Thomas Beckley, Technical Conference for Surrebuttal Testimony, Exhibit MSD 91, at p. 67. 18 2019 Wastewater Rate Proceeding The evidence presented in this rate case demonstrates that MSD is has not adequately designed its revenue requirements and has improperly allocated costs of service associated with I/I and extra strength surcharges. As such, it does not meet the Charter Plan criteria because it does not impose a fair and reasonable burden on all classes of ratepayers. In order to make the proposed rates fair and reasonable, and to help ensure adequate revenue in the future to provide sufficient services and meet legal obligations, MIEC's recommendations should be implemented. Respectfully submitted, Dated: July 19, 2019 BRY WAVE LLP B( -11Fr4r-- Brandon W. Neuschafer, #53232 Kamilah Jones, #71025 211 N. Broadway, Suite 3600 St. Louis, Missouri 63102 Telephone: (314) 259-2317 (Brandon) Telephone: (314) 259-2151 (Kamilah) Facsimile: (314) 259-2020 bwneuschafer@bc1plaw.com kami.jones@belplaw.com ATTORNEYS FOR THE MIEC 19 2019 Wastewater Rate Proceeding CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to the following 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 Ms. Lisa O. Stump Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 lostump@lashlybaer.com Mr. Brian J. Malone Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 bmalone@lashlybaer.com (g-24/1/403e 20 Appendix A to MIEC's Prehearing Conference Report 2019 Metropolitan Sewer District Wastewater Rate Case Proceeding Rate Comparison Workpaper TABLE 1 MSD Proposed Annual Rate Increases (Exhibit MSD 1 - Table ES-21 Proposed Annual Increase Approved Proposed Amount Percent Line Description FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 1 Revenue Requirement (millions) $ 437.20 $495.29 $497.13 $489.57 $516.69 $ 58.09 $ 1.84 $ (7.56) $27.12 13.3% 0.4% -1.5% 5.5% Base Charge ($/Bill) 2 Billing & Collection $ 7.38 $ 5.11 $ 5.31 $ 5.51 $ 5.72 $ (2.27) $ 0.20 $ 0.20 $ 0.21 -30.8% 3 System Availability 18.97 21.40 22.21 23.05 23.92 2.43 0.81 0.84 0.87 12.8% 3.8% 4 Total Base Charge (Residential) 26.35 26.51 27.52 28.56 29.64 0.16 1.01 1.04 1.08 0.6% 3.8% Compliance Charge ($/Bill)' 5 Tier 1 6 Tier 2 7 Tier 3 8 Tier 4 9 Tier 5 Total Non -Residential Service Charge2 10 Tier 1 11 Tier 2 12 Tier 3 13 Tier 4 14 Tier 5 3.9% 3.8% 3.8% 3.8% 3.8% 3.8% 3.8% $ 3.14 $ 4.44 $ 4.55 $ 4.71 $ 4.85 $ 1.30 $ 0.11 $ 0.16 $ 0.14 41.4% 2.5% 3.5% 3.0% 62.61 62.16 63.64 65.80 67.67 (0.45) 1.48 2.16 1.87 -0.7% 2.4% 3.4% 2.8% 137.75 133.20 136.37 140.99 144.98 (4.55) 3.17 4.62 3.99 -3.3% 2.4% 3.4% 2.8% 203.49 177.60 181.83 187.98 193.30 (25.89) 4.23 6.15 5.32 -12.7% 2.4% 3.4% 2.8% 266.10 222.00 227.29 234.98 241.63 (44.10) 5.29 7.69 6.65 -16.6% 2.4% 3.4% 2.8% $ 29.49 $ 30.95 $ 32.07 $ 33.27 $ 34.49 $ 1.46 $ 1.12 $ 1.20 $ 1.22 5.0% 3.6% 3.7% 88.96 88.67 91.16 94.36 97.31 (0.29) 2.49 3.20 2.95 -0.3% 2.8% 3.5% 164.10 159.71 163.89 169.55 174.62 (4.39) 4.18 5.66 5.07 -2.7% 2.6% 3.5% 229.84 204.11 209.35 216.54 222.94 (25.73) 5.24 7.19 6.40 -11.2% 2.6% 3.4% 292.45 248.51 254.81 263.54 271.27 (43.94) 6.30 8.73 7.73 -15.0% 2.5% 3.4% 3.7% 3.1% 3.0% 3.0% 2.9% Volume Charge 15 Metered - $/Ccf $ 4.87 $ 5.02 $ 5.21 $ 5.41 $ 5.62 $ 0.15 $ 0.19 $ 0.20 $ 0.21 3.1% 3.8% 3.8% 3.9% 16 Unmetered ($/Bill per fixture 17 Per Room 2.89 2.97 3.09 3.21 3.34 0.08 0.12 0.12 0.13 2.8% 4.0% 3.9% 4.0% 18 Per Water Closet 10.72 11.07 11.49 11.93 12.38 0.35 0.42 0.44 0.45 3.3% 3.8% 3.8% 3.8% 19 Per Bath 8.93 9.23 9.58 9.94 10.32 0.30 0.35 0.36 0.38 3.4% 3.8% 3.8% 3.8% 20 Per Separate Shower 8.93 9.23 9.58 9.94 10.32 0.30 0.35 0.36 0.38 3.4% 3.8% 3.8% 3.8% Extra Strength Surcharges ($/ton)' 16 Suspended Solids > 300 mg/I $ 283.87 $314.00 $321.47 $332.35 $341.76 $ 30.13 $ 7.47 $10.88 $ 9.41 10.6% 2.4% 3.4% 2.8% 17 BOD > 300 mg/I 708.56 898.00 919.37 950.46 977.36 189.44 21.37 31.09 26.90 26.7% 2.4% 3.4% 2.8% 18 COD > 600 mg/I 354.30 449.00 459.69 475.24 488.69 94.70 10.69 15.55 13.45 26.7% 2.4% 3.4% 2.8% ccf = hundred cubic feet (approx. 748 gallons) mg/I = milligram per liter 'Applicable only to non-residential customers. 2Total Base Charge plus Tiered Compliance Charge. Rate Comparison Workpaper TABLE 2 MIEC Proposed Annual Rate Increases at Gorman Surrebuttal Revenue Requirement Proposed Annual Increase Approved Proposed Amount Percent Line Description FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 1 Revenue Requirement (millions) $ 437.20 $443.05 $454.68 $472.48 $495.77 $ 5.85 $11.63 $17.80 $23.28 1.3% 2.6% 3.9% 4.9% Base Charge ($/Bill) 2 Billing & Collection $ 7.38 $ 5.11 $ 5.31 $ 5.51 $ 5.72 $ (2.27) $ 0.20 $ 0.20 $ 0.21 -30.8% 3.9% 3 System Availability 18.97 21.40 22.21 23.05 23.92 2.43 0.81 0.84 0.87 12.8% 3.8% 4 Total Base Charge (Residential) 26.35 26.51 27.52 28.56 29.64 0.16 1.01 1.04 1.08 0.6% 3.8% Compliance Charge ($/Bill)' 5 Tier 1 6 Tier 2 7 Tier 3 8 Tier 4 9 Tier 5 Total Non -Residential Service Charge2 10 Tier 1 11 Tier 2 12 Tier 3 13 Tier 4 14 Tier 5 $ 3.14 $ 4.44 $ 4.55 $ 4.71 $ 4.85 $ 1.30 $ 0.11 $ 0.16 $ 0.14 41.4% 2.5% 62.61 62.16 63.64 65.80 67.67 (0.45) 1.48 2.16 1.87 -0.7% 2.4% 137.75 133.20 136.37 140.99 144.98 (4.55) 3.17 4.62 3.99 -3.3% 2.4% 203.49 177.60 181.83 187.98 193.30 (25.89) 4.23 6.15 5.32 -12.7% 2.4% 266.10 222.00 227.29 234.98 241.63 (44.10) 5.29 7.69 6.65 -16.6% 2.4% $ 29.49 $ 30.95 $ 32.07 $ 33.27 $ 34.49 $ 1.46 $ 1.12 $ 1.20 $ 1.22 88.96 88.67 91.16 94.36 97.31 (0.29) 2.49 3.20 2.95 164.10 159.71 163.89 169.55 174.62 (4.39) 4.18 5.66 5.07 229.84 204.11 209.35 216.54 222.94 (25.73) 5.24 7.19 6.40 292.45 248.51 254.81 263.54 271.27 (43.94) 6.30 8.73 7.73 5.0% -0.3% -2.7% -11.2% -15.0% 3.6% 2.8% 2.6% 2.6% 2.5% 3.8% 3.8% 3.8% 3.5% 3.4% 3.4% 3.4% 3.4% 3.7% 3.5% 3.5% 3.4% 3.4% 3.8% 3.8% 3.8% 3.0% 2.8% 2.8% 2.8% 2.8% 3.7% 3.1% 3.0% 3.0% 2.9% Volume Charge 15 Metered - $/Ccf $ 4.87 $ 4.74 $ 4.83 $ 5.01 $ 5.27 $ (0.13) $ 0.09 $ 0.19 $ 0.26 -2.7% 1.8% 3.8% 5.2% 16 Unmetered ($/Bill per fixture 17 Per Room 2.89 2.82 2.89 3.01 3.18 (0.07) 0.06 0.12 0.17 -2.3% 2.3% 4.3% 5.7% 18 Per Water Closet 10.72 10.47 10.71 11.17 11.81 (0.25) 0.24 0.46 0.64 -2.3% 2.3% 4.3% 5.7% 19 Per Bath 8.93 8.73 8.93 9.31 9.84 (0.20) 0.20 0.39 0.53 -2.3% 2.3% 4.3% 5.7% 20 Per Separate Shower 8.93 8.72 8.91 9.29 9.81 (0.21) 0.19 0.38 0.52 -2.4% 2.2% 4.2% 5.6% Extra Strength Surcharges ($/ton)' 16 Suspended Solids > 300 mg/I $ 283.87 $280.08 $289.31 $304.76 $325.31 $ (3.79) $ 9.23 $15.45 $20.55 -1.3% 17 BOD > 300 mg/I 708.56 699.11 722.16 760.70 811.97 (9.45) 23.05 38.54 51.28 -1.3% 18 COD > 600 mg/I 354.30 349.51 361.03 380.38 406.11 (4.79) 11.53 19.35 25.73 -1.4% ccf = hundred cubic feet (approx. 748 gallons) mg/I = milligram per liter 'Applicable only to non-residential customers. 2Total Base Charge plus Tiered Compliance Charge. 3.3% 3.3% 3.3% 5.3% 5.3% 5.4% 6.7% 6.7% 6.8% Rate Comparison Workpaper Line Description TABLE 3 MIEC Proposed Annual Rate Increases as Modeled by MSD in Exhibit MSD 88E Approved FY 2020 1 Revenue Requirement (millions) $ 437.20 Base Charge ($/Bill) 2 Billing & Collection 3 System Availability 4 Total Base Charge (Residential) Compliance Charge ($/Bilp' 5 Tier 1 6 Tier 2 7 Tier 3 8 Tier 4 9 Tier 5 Total Non -Residential Service Charge2 10 Tier 1 11 Tier 2 12 Tier 3 13 Tier 4 14 Tier 5 Volume Charge 15 Metered - $/Ccf 16 Unmetered ($/Bill per fixture 17 Per Room 18 Per Water Closet 19 Per Bath 20 Per Separate Shower Extra Strength Surcharges ($/ton)' 16 Suspended Solids > 300 mg/I 17 BOD > 300 mg/I 18 COD > 600 mg/I $ 7.38 18.97 26.35 $ 3.14 62.61 137.75 203.49 266.10 $ 29.49 88.96 164.10 229.84 292.45 $ 4.87 2.89 10.72 8.93 8.93 $ 283.87 708.56 354.30 Proposed Proposed Annual Increase Amount Percent FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 $424.50 $439.05 $470.38 $494.68 $ 5.11 21.40 26.51 $ 5.31 22.21 27.52 $ 5.51 23.05 28.56 $ 5.72 23.92 29.64 $ 4.44 $ 4.55 $ 4.71 $ 4.85 62.16 63.64 65.80 67.67 133.20 136.37 140.99 144.98 177.60 181.83 187.98 193.30 222.00 227.29 234.98 241.63 $ 30.95 88.67 159.71 204.11 248.51 $ 32.07 91.16 163.89 209.35 254.81 $ 33.27 94.36 169.55 216.54 263.54 $ 4.44 $ 4.58 $ 4.98 2.65 9.82 8.18 8.17 2.74 10.16 8.46 8.45 2.99 11.10 9.25 9.23 $ 34.49 97.31 174.62 222.94 271.27 $(12.70) $14.55 $31.33 $24.30 -2.9% 3.4% $ (2.27) 2.43 0.16 $ 0.20 0.81 1.01 $ 1.30 $ 0.11 (0.45) 1.48 (4.55) 3.17 (25.89) 4.23 (44.10) 5.29 $ 1.46 $ (0.29) (4.39) (25.73) (43.94) 1.12 2.49 4.18 5.24 6.30 $ 0.20 0.84 1.04 $ 0.16 2.16 4.62 6.15 7.69 $ 1.20 3.20 5.66 7.19 8.73 $ 0.21 0.87 1.08 $ 0.14 1.87 3.99 5.32 6.65 $ 1.22 2.95 5.07 6.40 7.73 -30.8% 12.8% 0.6% 41.4% -0.7% - 3.3% -12.7% -16.6% 5.0% -0.3% -2.7% -11.2% -15.0% 3.9% 3.8% 3.8% 2.5% 2.4% 2.4% 2.4% 2.4% 3.6% 2.8% 2.6% 2.6% 2.5% $ 5.25 $ (0.43) $ 0.13 $ 0.40 $ 0.28 -8.8% 3.0% 3.17 11.77 9.81 9.78 $262.51 $274.33 $302.72 $324.25 655.25 684.75 755.61 809.32 327.58 342.33 377.84 404.78 ccf = hundred cubic feet (approx. 748 gallons) mg/I = milligram per liter 'Applicable only to non-residential customers. 2Total Base Charge plus Tiered Compliance Charge. (0.24) (0.90) (0.75) (0.76) 0.09 0.34 0.29 0.28 0.25 0.94 0.79 0.78 0.18 0.67 0.56 0.55 $ (21.36) $11.82 $28.39 $21.53 (53.31) 29.51 70.86 53.71 (26.72) 14.75 35.50 26.95 -8.4% -8.4% - 8.4% -8.5% -7.5% - 7.5% -7.5% 3.5% 3.5% 3.5% 7.1% 3.8% 3.8% 3.8% 3.5% 3.4% 3.4% 3.4% 3.4% 3.7% 3.5% 3.5% 3.4% 3.4% 5.2% 3.8% 3.8% 3.8% 3.0% 2.8% 2.8% 2.8% 2.8% 3.7% 3.1% 3.0% 3.0% 2.9% 8.8% 5.5% 9.3% 6.0% 9.3% 6.0% 6.1% 3.4% 9.2% 6.0% 9.3% 4.5% 10.4% 4.5% 10.3% 4.5% 10.4% 7.1% 7.1% 7.1% Appendix B to MIEC's Prehearing Conference Report 2019 Metropolitan Sewer District Wastewater Rate Case Proceeding Table 5-1 Typical Wastewater Bills per MIEC Historical Information Approved Projected F1' 2017 Wastewater Bills Single Family Residential (Metered) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Annual Increase FY 2021 Fl 2022 Fl- 2023 Fl 2024 1. 1 ccf per month $ 23.05 $ 25.49 $ 28.23 $ 31.22 $ 31.25 $ 32.35 $ 33.57 $ 34.91 0.1 % 3.5% 3.8% 4.0% 2. 5 ccf per month $ 37.41 $ 41.37 $ 45.83 $ 50.70 $ 50.21 $ 51.67 $ 53.61 $ 55.99 -1.0% 2.9% 3.8% 4.4% 3. 6 ccf per month $ 41.00 $ 45.34 $ 50.23 $ 55.57 $ 54.95 $ 56.50 $ 58.62 $ 61.26 -1.1% 2.8% 3.8% 4.5% ('bane. - !t; . I s' -I 4. 10 ccf per month $ 55.36 $ 61.22 $ 67.83 $ 75.05 $ 73.91 $ 75.82 $ 78.66 $ 82.34 -1.5% 2.6% 3.7% 4.7% 5. 15 ccf per month $ 73.31 $ 81.07 $ 89.83 $ 99.40 $ 97.61 $ 99.97 $ 103.71 $ 108.69 -1.8% 2.4% 3.7% 4.8% 6. 20 ccf per month $ 91.26 $ 100.92 $ 111.83 $ 123.75 $ 121.31 $ 124.12 $ 128.76 $ 135.04 -2.0% 2.3% 3.7% 4.9% Multi-Famdv Residential (Metered) 7. 20 ccf per month $ 91.26 $ 100.92 $ 111.83 $ 123.75 $ 121.31 $ 124.12 $ 128.76 $ 135.04 -2.0% 2.3% 8. 40 ccf per month $ 163.06 $ 180.32 $ 199.83 $ 221.15 $ 216.11 $ 220.72 $ 228.96 $ 240.44 -2.3% 2.1% 9. 60 ccf per month $ 234.86 $ 259.72 $ 287.83 $ 318.55 $ 310.91 $ 317.32 $ 329.16 $ 345.84 -2.4% 2.1% 3.7% 3.7% 3.7% 4.9% 5.0% 5.1% Non -Residential (Normal Strengh Wastewater) 10. 70 ccf per month $ 273.62 $ 302.37 $ 334.88 $ 370.39 $ 362.75 $ 370.17 $ 383.97 $ 403.39 -2.1% 2.0% 3.7% 5.1% 11. 100 ccf per month $ 381.32 $ 421.47 $ 466.88 $ 516.49 $ 504.95 $ 515.07 $ 534.27 $ 561.49 -2.2% 2.0% 3.7% 5.1% 12. 160 ccf per month $ 596.72 $ 659.67 $ 730.88 $ 808.69 $ 789.35 $ 804.87 $ 834.87 $ 877.69 -2.4% 2.0% 3.7% 5.1% Non -Residential ( Excess Strength Wastewater) 13. 70 ccf per month $ 465.30 $ 499.64 $ 538.43 $ 579.43 $ 564.95 $ 577.85 $ 600.16 $ 628.82 -2.5% 2.3% 3.9% 4.8% 14. 100 ccf per month $ 595.90 $ 642.26 $ 694.64 $ 750.34 $ 731.63 $ 748.04 $ 777.10 $ 815.35 -2.5% 2.2% 3.9% 4.9% 15. 160 ccf per month $ 834.20 $ 903.98 $ 982.86 $ 1,067.35 $ 1,040.51 $ 1,063.12 $ 1,104.33 $ 1,159.98 -2.5% 2.2% 3.9% 5.0% Table 5-1 Typical Wastewater Bills As Filed Historical Information Approved Projected FY 2017 Wastewater Bills Sinule Family Residential (Metered) FY 2018 FY 2019 FY 2020 FY' 2021 FY 2022 FY 2023 FY 2024 1. 1 ccf per month $ 23.05 $ 25.49 $ 28.23 $ 31.22 $ 31.53 $ 32.73 $ 33.97 $ 35.26 2. 5 ccf per month $ 37.41 $ 41.37 $ 45.83 $ 50.70 $ 51.61 $ 53.57 $ 55.61 $ 57.74 3. 6 ccf per month $ 41.00 $ 45.34 $ 50.23 $ 55.57 $ 56.63 $ 58.78 $ 61.02 $ 63.36 :.s°_ 4 10 ccf per month $ 55.36 $ 61,22 $ 67.83 $ 75.05 $ 76.71 $ 79.62 $ 82.66 $ 85.84 5. 15 ccf per month $ 73.31 $ 81.07 $ 89.83 $ 99.40 $ 101.81 $ 105.67 $ 109.71 $ 113.94 6. 20 ccf per month $ 91.26 $ 100.92 $ 111.83 $ 123.75 $ 126.91 $ 131.72 $ 136.76 $ 142.04 Multi -Family Residential tMeeered) 7. 20 ccf per month $ 91.26 $ 100.92 $ 111.83 $ 123.75 $ 126.91 $ 131.72 $ 136.76 $ 142.04 8. 40 ccf per month $ 163.06 $ 180.32 $ 199.83 $ 221.15 $ 227.31 $ 235.92 $ 244.96 $ 254.44 9. 60 ccf per month $ 234.86 $ 259.72 $ 287.83 $ 318.55 $ 327.71 $ 340.12 $ 353.16 $ 366.84 Non -Residential (Normal Strenuth Wastewater) 10. 70 ccf per month $ 273.62 $ 302.37 $ 334.88 $ 370.39 $ 382.35 $ 396.77 $ 411.97 $ 427.89 11. 100 ccf per month $ 381.32 $ 421.47 $ 466.88 $ 516.49 $ 532.95 $ 553.07 $ 574.27 $ 596.49 12. 160 ccf per month $ 596.72 $ 659.67 $ 730.88 $ 808.69 $ 834.15 $ 865.67 $ 898.87 $ 933.69 Non -Residential (Excess Strenuth Wastewater) 13. 70 ccf per month $ 465.30 $ 499.64 $ 538.43 $ 579.43 $ 602.01 $ 621.65 $ 644.46 $ 666.95 14. 100 ccf per month $ 595.90 $ 642.26 $ 694.64 $ 750.34 $ 782.91 $ 808.97 $ 838.83 $ 868.53 15. 160 ccf per month $ 834.20 $ 903.98 $ 982.86 $ 1,067.35 $ 1,114.41 $ 1,152.60 $ 1,195.50 $ 1,238.71 Annual Increase FY 2021 F1' 2022 Fl 2023 I 1 2024 1.0% 3.8% 3.8% 3.8% 1.8% 3.8% 3.8% 3.8% 1.9% 3.8% 3.8% 3.8% 2.2% 3.8% 3.8% 3.8% 2.4% 3.8% 3.8% 3.9% 2.6% 3.8% 3.8% 3.9% 2.6% 3.8% 3.8% 3.9% 2.8% 3.8% 3.8% 3.9% 2.9% 3.8% 3.8% 3.9% 3.2% 3.8% 3.8% 3.9% 3.2% 3.8% 3.8% 3.9% 3.1% 3.8% 3.8% 3.9% 3.9% 3.3% 3.7% 3.5% 4.3% 3.3% 3.7% 3.5% 4.4% 3.4% 3.7% 3.6% Table 5-1 Difference between Typical Wastewater Bills per MIEC and Typical Wastewater Bills As Filed Historical Information Approved Projected F1' 2017 Wastewater Bills Single Family Residential (Metered) Fl 2018 Fl 2019 Fl 2020 F1'2021 Fl" 2022 F1' 2023 FN. 2024 1. 1 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 -$ 0.28 -$ 0.38 -$ 0.40 -$ 0.35 2. 5 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 -$ 5.60 -$ 7.60 -$ 8.00 -$ 7.00 3. 6 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 4. 10 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 -$ 16.80 -$ 22.80 -$ 24.00 -$ 21.00 5. 15 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 6. 20 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 -$ 44.80 -$ 60.80 -$ 64.00 -$ 56.00 Multi -Family Residential (Metered) 7. 20 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 8. 40 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 9. 60 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Non -Residential (Normal Strength Wastewater) 10. 70 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 11. 100 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 12. 160 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Non -Residential (Excess Strength Wastewater) 13. 70 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 14. 100 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 15. 160 ccf per month $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Table 5-1 Percent Difference between Typical Wastewater Bills per MIEC and Typical Wastewater Bills As Filed Historical Information Approved I Projected F1' 2017 Wastewater Bills Single Family Residential (Metered) Fl 2018 F1' 2019 Fl 2020 Fl 2021 FY 2022 Fl 2023 Fl 2024 1. 1 ccf per month 0.0% 0.0% 0.0% 0.0% -0.9% -1.2% -1.2% -1.0% 2. 5 ccf per month 0.0% 0.0% 0.0% 0.0% -35.3% -46.2% -46.8% -39.4% 3. 6 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 4. 10 ccf per month 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5. 15 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 6. 20 ccf per month 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Multi -Family Residential (Metered) 7. 20 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 8. 40 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 9. 60 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Non -Residential (Normal Strength Wastewater) 10. 70 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 11. 100 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 12. 160 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Non -Residential (Excess Strength WastoNater) 13. 70 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 14. 100 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 15. 160 ccf per month #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! Appendix C to MIEC's Prehearing Conference Report 2019 Metropolitan Sewer District Wastewater Rate Case Proceeding Exhibit No. Issue: Witness: Type of Exhibit: Sponsoring Party: Date Testimony Prepared: Before the Combined Wastewater and Stormwater Rate Change Proceeding Michael Gorman Rebuttal Testimony Missouri Industrial Energy Consumers May 2, 2007 Rate Commission of the Metropolitan St. Louis Sewer District Combined Wastewater and Stormwater Rate Change Notice Rebuttal Testimony of Michael Gorman On behalf of Missouri Industrial Energy Consumers May 2, 2007 Project 8775 BRUBAKER & ASSOCIATES, INC. ST. Louis, MO 63141-2000 Before the Rate Commission of the Metropolitan St. Louis Sewer District For Consideration of a Combined Wastewater and Stormwater Rate Change Notice STATE OF MISSOURI ) SS COUNTY OF ST. LOUIS ) Affidavit of Michael Gorman Michael Gorman, being first duly sworn, on his oath states: 1. My name is Michael Gorman. I am a consultant with Brubaker & Associates, Inc., having its principal place of business at 1215 Fern Ridge Parkway, Suite 208, St. Louis, MO 63141-2000. We have been retained by the Missouri Industrial Energy Consumers in this proceeding on their behalf. 2. Attached hereto and made a part hereof for all purposes are my rebuttal testimony and schedules which were prepared in written form for introduction into evidence in the Combined Wastewater and Stormwater Rate Change Proceeding. 3. I hereby swear and affirm that my testimony and schee Ies are true, correct and complete to the best of my knowledge and belief. .� %1.J• MichaGorman Subscribed and sworn before this 2nd day of May, 2007. TAMMY S. KLOSSNER Notary Public - Notary Seal STATE OF MISSOURI St. Charles County My Commission Expires; Mar. 14, 2011 Commission # 07024862 My Commission expires on March 14, 2011. O4w111_Ai 1,11 J� A.,JJ11;;;, Notary PutLlic BRUBAKER & ASSOCIATES, INC. Before the Rate Commission of the Metropolitan St. Louis Sewer District For Consideration of a Combined Wastewater and Stormwater Rate Change Notice Rebuttal Testimony of Michael Gorman 1 Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 2 A My name is Michael Gorman and my business address is 1215 Fern Ridge Parkway, 3 Suite 208, St. Louis, MO 63141-2000. 4 Q WHAT IS YOUR OCCUPATION? 5 A I am an energy advisor and a consultant in the field of public utility regulation and a 6 managing principal in the firm of BAI (Brubaker & Associates, Inc.). 7 Q PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND EXPER- 8 IENCE, 9 A These are set forth in Appendix A to my testimony. 10 Q ON WHOSE BEHALF ARE YOU APPEARING IN THIS PROCEEDING? 11 A I am appearing on behalf of the Missouri Industrial Energy Consumers (MIEC), a 12 group of the Metropolitan St. Louis Sewer District's (MSD or District) large industrial 13 customers including Anheuser-Busch, Boeing, DaimlerChrysler, GKN Aerospace, Michael Gorman Page 1 BRUBAKER & ASSOCIATES, INC. 1 Hussmann, J.W. Aluminum, Monsanto, Pfizer, Procter & Gamble, Precoat Metals and 2 Nestle Purina. 3 Q WHAT IS THE PURPOSE OF YOUR TESTIMONY? 4 A I will respond to the District's proposed wastewater rate increase in this proceeding. 5 Specifically, I address the District's claimed revenue requirement deficiency. In 6 addition, I also address the District's proposed allocation and rate design to collect 7 any revenue deficiency approved in this proceeding. 8 Q PLEASE SUMMARIZE YOUR WASTEWATER REVENUE REQUIREMENT 9 FINDINGS AND RECOMMENDATIONS IN THIS PROCEEDING. 10 A My recommendations are as follows: 11 1. I recommend the rejection of the District's proposal to increase wastewater 12 revenues by $115.5 million through the five-year rate plan. 13 2. I recommend the District's wastewater revenues be increased by $10 million 14 each year over the period 2008-2012, which will increase wastewater 15 revenues over the five-year rate plan period by $50 million. 16 3. My proposed lower revenue increase will support the District's operating 17 expenses, debt service and planned major and routine capital expenditure 18 program, if the District utilizes and follows its own financial policy in funding its 19 Major capital improvements with approximately 55% pay-as-you-go rate 20 revenue and 45% bond funding. 21 4. My proposed wastewater revenue plan will meet the current financial policy of 22 the District, and significantly mitigate the wastewater rate increase in this 23 proceeding. 24 In summary, my proposed alternative rate plan will mitigate customers' rate 25 increase obligations by spreading the cost of Major capital improvements over more 26 generations of ratepayers that will benefit from the capital investments. In addition, it 27 will provide adequate rate revenue to the District, and support current and additional Michael Gorman Page 2 BRUBAKER & ASSOCIATES, INC. 1 District debt at a cash coverage level that will enable it to maintain strong financial 2 integrity and access to capital. 3 Further, I recommend the rejection of the District's proposed rate plan 4 because it does not minimize customers' rates, is inconsistent with its own financial 5 policy, and will not result in rates to the current generation of customers that are just 6 and reasonable. Indeed, the District's rate plan will unnecessarily increase current 7 ratepayers' rates in order to fully fund capital improvements that will largely benefit 8 many generations of future customers. Because of this, I believe the District's rate 9 plan discriminates against current customers by inflating current prices to the benefit 10 of future customers, and therefore is not reasonable and should be rejected. 11 Q PLEASE SUMMARIZE YOUR FINDINGS AND RECOMMENDATIONS OF THE 12 DISTRICT'S PROPOSED WASTEWATER COST OF SERVICE AND RATE 13 DESIGN STUDIES. 14 A The District's cost of service study is flawed because it does not include a customer 15 functional cost component. Further, the District allocates too much of infiltration and 16 inflow (I/1) costs to volume functions, and under -allocates I/I cost to customer 17 functions. Correction of these measures will result in a more reasonable allocation of 18 the revenue deficiency in this proceeding, and ensure that rates to all District 19 customers represent the District's cost to provide service and which are just and 20 reasonable. Michael Gorman Page 3 BRUBAKER & ASSOCIATES, INC. 1 District's Revenue Requirement 2 Q PLEASE OUTLINE THE DISTRICT'S PROPOSED REVENUE DEFICIENCY CLAIM 3 IN THIS PROCEEDING. 4 A The District proposes to increase wastewater rates by 59% to cover a claimed 5 revenue deficiency of $115.5 million. The driver of this revenue deficiency is the 6 District's proposed "pay-as-you-go" program to fund 100% of its planned Major capital 7 improvement program plus its routine annual capital improvements. 8 Q IS THE DISTRICT'S WASTEWATER REVENUE REQUIREMENT FUNDING 9 PROPOSAL REASONABLE IN THIS PROCEEDING? 10 A No. The District's proposed wastewater revenue increase is not reasonable. The 11 District's plan is not consistent with its own financial policy to fund Major capital 12 improvements with 50% pay-as-you-go rate revenue and 50% bond funding. As a 13 result, the District's proposal inflates its cost of service in this proceeding, and will 14 charge discriminatory rates to current customers that are not just and reasonable. 15 Q WHAT REASONS HAS THE DISTRICT OFFERED IN SUPPORT OF ITS PAY-AS- 16 YOU -GO PROGRAM FUNDING OF PHASE II MAJOR CAPITAL EXPENDITURES 17 RATHER THAN A BALANCED MIX OF PAY-AS-YOU-GO AND DEBT 18 FINANCING? 19 A Explanations for the proposed pay-as-you-go financing were offered by District 20 witnesses Jeffrey Theerman and Karl Tyminski. 21 Mr. Theerman stated there are three reasons the District chose to propose a 22 100% pay-as-you-go financing for Major capital improvements. First, he states that 23 the District is still developing its Combined Sewer Overflows (CSO) long-term control Michael Gorman Page 4 BRUBAKER & ASSOCIATES, INC. 1 program and the total cost of this CSO program is not yet known. Second, the 2 compliance time to meet new regulation has not yet been set by regulators for the 3 CSO and Sanitary Sewer Overflows (SSO) abatements. Third, he states the District 4 has $800 million of remaining bond capacity to mitigate future rate increases. 5 Because of this he concludes, the District may need that bond capacity to address 6 future unknown factors. Thus, he recommends against debt funding in this case. 7 Mr. Tyminski identified two reasons in support of the 100% pay-as-you-go 8 funding option. First, he also recognizes the uncertainty of the regulatory compliance 9 time frame of the abatement programs. His second rationale concerned the nature of 10 the Capital Improvement and Replacement Program (CIRP) and possibility of a 11 sudden rate increase that would plateau at a higher rate level for a number of years. 12 Q DO THE DISTRICT WITNESSES PROVIDE ADEQUATE SUPPORT FOR ITS PAY- 13 AS -YOU -GO PROGRAM? 14 A No. Uncertain regulatory timing of compliance factors does not excuse an 15 inappropriate and excessive rate recommendation in this proceeding. The District 16 has adequate funding capacity to finance a reasonable proportion of its Major capital 17 improvements with debt financing. The District simply is ignoring its own reasonable 18 policy of funding 50% of these capital improvements with current rate revenue on a 19 pay-as-you-go basis, and to mitigate rate increases by funding the remaining 50% 20 with bond funding. 21 Further, the District's proposal to "save" its bond capacity is at very best 22 speculative, and at very worst results in discriminatory pricing to today's customers. 23 The District's ability to issue additional debt is largely driven by the District's success 24 in maintaining competitive rate structure. To the extent the District can increase rates Michael Gorman Page 5 BRUBAKER & ASSOCIATES, INC. 1 to fund additional debt service cost and provide adequate coverage to maintain the 2 financial integrity of the District, it is reasonable to expect that the District would be 3 able to issue debt in future periods to fund needed capital improvements. 4 Further, as debt service payments are made, the District's outstanding debt 5 will decrease over time. Hence, the District would be able to issue additional debt in 6 the future, and still possibly stay within its general threshold of limiting debt issuances 7 to $1,000 per capita. Further, the $1,000 per capita threshold could reasonably be 8 adjusted over time as inflation changes the relative disposable income of the per 9 capita served by the District, thus increasing the affordable debt Toad of the District. 10 It is simply not reasonable for the District to forego a lower cost funding option 11 in this case, for the highly uncertain and speculative conclusion that the District may 12 need to save bond funding capacity for future periods. 13 Q HAS MSD SUPPORTED THE USE OF BOND FUNDING TO MITIGATE RATE 14 IMPACT IN PREVIOUS RATE PROCEEDINGS? 15 A Yes. In MSD's April 4, 2003 Wastewater Rate Increase Amendment (Exhibit MSD 7), 16 Page 2 bullet 2, states that the use of a (100%) pay-as-you-go funding strategy 17 imprudently mismatches the "funding of long-term capital projects with short-term 18 dollars (i.e., the imposition of a disproportionate cost burden on current ratepayers for 19 future project benefits)." In that proceeding, the District proposed the use of debt to 20 mitigate the rate impact of the proposed capital expenditures and equitably spread 21 the capital cost over customers that receive service from its capital assets. Michael Gorman Page 6 BRUBAKER & ASSOCIATES, INC. 1 Q DID ANY OF THE DISTRICT WITNESSES RECOGNIZE THE CREATION OF RATE 2 EQUITY THROUGH THE USE OF DEBT FUNDING OF MAJOR CAPITAL 3 IMPROVEMENT PROGRAMS? 4 A Yes. District witness Janice Zimmerman noted that use of municipal debt financing 5 will spread the cost of Major capital improvements over the life of the project and 6 thereby more equitably spread the cost and benefit of the projects among current and 7 future ratepayers (Page 8). 8 Q DID THE DISTRICT DEMONSTRATE THAT IT GAVE ADEQUATE 9 CONSIDERATION TO RATE INTEGRITY THROUGH ITS PROPOSED FUNDING 10 MECHANISM FOR MAJOR CAPITAL EXPENDITURE PROGRAMS? 11 A No. The District's own testimony indicates that it did not consider economic 12 development and rate integrity in forming its proposed funding mechanism in this 13 case. Line 11, page 4 of Ms. Zimmerman's testimony states that "economic 14 development considerations have not been factored into the proposed rate changes 15 in regard to attracting businesses through any potential reduced wastewater and 16 stormwater rates or any other financial consideration by the District." 17 Q WHY DO YOU BELIEVE THE DISTRICT'S PROPOSED RATE PLAN WOULD 18 CHARGE CURRENT CUSTOMERS DISCRIMINATORY RATES? 19 A The District's proposed rate plan will inflate current customers' rates to pay 100% of 20 Major capital improvements. Those capital improvements will provide service to 21 many future generations of customers. Hence, requiring current customers to pay 22 100% of these costs discriminates prices to current customers to benefit future 23 customers. Michael Gorman Page 7 BRUBAKER & ASSOCIATES, INC. 1 Q WHY DO YOU BELIEVE THE DISTRICT'S PROPOSED FUNDING PLAN IS 2 INCONSISTENT WITH ITS OWN FINANCIAL POLICIES? 3 A The District's Secretary/Treasurer Karl Tyminski, and the District's Director of Finance 4 Janice Zimmerman, provided insights into the District's proposed financing 5 6 7 8 9 10 11 mechanisms. I believe that the funding mechanisms advocated by these witnesses are reasonable, however they are not being followed in this proposed rate plan. Specifically, on Page 4, Mr. Tyminski states that he believes the District should maintain a 50/50 ratio of debt and pay-as-you-go financing. He also estimates what he believes to be a reasonable maximum debt load based on $1,000 per capita debt obligation of the District's customers. This implies a total debt ceiling of around $1.4 billion. 12 Q DOES THE DISTRICT'S PROPOSED RATE PLAN PRODUCE EXCESSIVE RATE 13 BURDENS ON CURRENT CUSTOMERS? 14 A Yes. This is evident simply by a review of the District's proposal for current 15 customers to pay for Major capital improvements that will provide service to many 16 future generations of customers. This is also evident by a review of the debt service 17 coverage ratios implied by the District's proposals. As discussed in more detail 18 below, a debt service coverage of revenue bond debt of 200% and total debt of 180% 19 will provide adequate financial standing for the utility. However, in its rate proposal, 20 the District is showing revenue bond debt service coverage in excess of 700% and 21 total debt coverage in excess of 400% during the proposed five-year rate plan. (CDM 22 and Black & Veatch Wastewater and Stormwater Rate Proposal, Exhibit MSD 1 at 23 318). Michael Gorman Page 8 BRUBAKER & ASSOCIATES, INC. 1 2 3 This excessive revenue coverage of debt service costs illustrates that the rate proposal does not balance the need to minimize the rate increase to District customers with the need to fund Major capital improvements planned by the District. 4 Alternative Wastewater Revenue Increase Proposal 5 Q PLEASE DESCRIBE YOUR PROPOSED ALTERNATIVE WASTEWATER 6 REVENUE REQUIREMENT. 7 A I recommend rates be adjusted to produce $10 million of annual revenue increases 8 over the period 2008-2012. This amount of annual revenue increases will adequately 9 fund the District's proposed Phase II Major capital expenditure program by financing 10 roughly 55% of the planned Major capital expenditures from 2008-2012 with pay-as- 11 you -go financing and the remaining 45% with additional revenue bond debt financing. 12 Q WHY DO YOU BELIEVE YOUR PROPOSED WASTEWATER REVENUE 13 REQUIREMENT WILL SUPPORT STRONG COVERAGE OF THE DISTRICT'S 14 DEBT OBLIGATIONS AND SUPPORT ITS FINANCIAL INTEGRITY? 15 A District witness Karl Tyminski testified that a revenue bond debt service coverage 16 ratio of at least 200%, and 180% of total debt service would be viewed favorably by 17 the bond markets (Direct at 5). 18 Under my alternate revenue plan, the projected debt service coverage ratio, 19 including $275 million of new revenue bond debt to fund roughly 45% of the Phase II 20 Major capital programs, would be well over 200%. Indeed, as shown on my Schedule 21 MPG-1, line 21, the debt service coverage ratio under my proposal would exceed Michael Gorman Page 9 BRUBAKER & ASSOCIATES, INC. 1 400% for revenue bonds, and 280% for total debt service coverage, during the rate 2 plan period. 3 As such, my proposed alternative revenue plan/funding plan would minimize 4 customer rates while maintaining the financial integrity and ability of the District to 5 access debt markets to fund future capital improvements. 6 Q WHAT WOULD BE THE SAVINGS TO THE DISTRICT'S CUSTOMERS UNDER 7 YOUR PROPOSAL RELATIVE TO THE DISTRICTS RATE PROPOSAL? 8 A The savings to customers would be fully realized by the fifth year of the rate plan. At 9 that time, rates would be approximately $65 million lower than the District's proposal, 10 or approximately 20% lower than the revenue increase proposed by the District.' 11 Allocation of Costs to Customer Classes 12 Q HAVE YOU REVIEWED MSD'S WASTEWATER RATE PROPOSAL, DATED 13 FEBRUARY 2007, (EXHIBIT MSD 1) AND THE DIRECT TESTIMONY OF MR. 14 KEITH BARBER THAT DISCUSSES THIS PROPOSAL (EXHIBIT MSD 17H)? 15 A Yes, I have. Among other things, MSD's Rate Proposal presents a fully allocated 16 cost of service study that assigns MSD's claimed operating and capital costs for 17 Fiscal Year 2008 to individual customer classes. This study provides the basis for the 18 wastewater rates MSD is proposing in this proceeding. Mr. Barber's testimony 19 discusses the various procedures used to allocate the costs and the resulting rates. ' District wastewater proposed revenues in 2012 would be $307.5 million, and under my alternative plan the District's recovery would be $256.3 million. Michael Gorman Page 10 BRUBAKER & ASSOCIATES, INC. 1 Q BASED ON YOUR REVIEW, DO YOU BELIEVE THE ALLOCATION OF COSTS IN 2 THE RATE PROPOSAL IS REASONABLE? 3 A No, I do not. First, I believe the functionalization of investment and other capital costs 4 in Table 3-11 of the Rate Proposal is deficient, in that it fails to include a customer 5 component. Second, the attribution of groundwater infiltration and stormwater inflow 6 volumes to individual customer classes in Table 3-14 is weighted 60% on the basis of 7 billable class volumes (contributed flows), and only 40% on the basis of customer 8 count. 9 Both of these factors result in the under -allocation of costs to the Single 10 Family and Multi -Family Residential classes and a corresponding over -allocation of 11 costs to the Non -Residential class. As a result, the rates proposed by MSD, which 12 are based on its study, under -collect costs from the first two classes and over -collect 13 costs from the Non -Residential class. 14 I will discuss the elements of each of these items below. 15 Functionalization of Capital Costs 16 Q PLEASE EXPLAIN WHY MSD'S FUNCTIONALIZATION OF CAPITAL COSTS IS 17 DEFICIENT. 18 A One of the first steps in conducting a cost of service study is to functionalize utility 19 plant into categories that correspond to the imposition of costs by customers on the 20 utility. In the case of a wastewater utility, the usual cost categories are: 21 1. Average wastewater volumes (both contributed and infiltration/inflow); 22 2. Capacity to accept and treat peak rates of flow; Michael Gorman Page 11 BRUBAKER & ASSOCIATES, INC. 1 2 3 4 5 6 3. The treatment of suspended solids and biological oxygen demand (SS and BOD); and 4. The number of customers served by the utility. MSD functionalizes its utility plant in service in Table 3-11. The functional cost categories shown in that table include Volume, Capacity, Suspended Solids and BOD. However, the Customer function is completely ignored. 7 Q WHY IS IT UNREASONABLE TO IGNORE THE CUSTOMER COST FUNCTION? 8 A Sanitary sewers serve to connect each customer to MSD's wastewater collection 9 system. Thus, each customer imposes a degree of capital and operating cost on 10 MSD simply by virtue of being connected to the system. 11 Q HOW CAN THE DISTRICT'S COST STUDY BE CORRECTED TO REFLECT A 12 CUSTOMER COST COMPONENT? 13 A On Table 3-11 100% of collection system plant investment is assigned to the capacity 14 cost function. For MSD, collection system plant consists of sanitary sewers, 15 combined sewers, and pumping stations. Sanitary sewers and combined sewers 16 must be sized to accept and transport peak rates of flow, and it is thus appropriate to 17 recognize a capacity dimension to their investment cost. In order to correct the 18 District's cost study, a reasonable amount of the collection system should be 19 allocated to a customer component, in order to properly reflect that its collection 20 system investment and operating cost in part is based on the number of customers 21 connected to the system. Michael Gorman Page 12 BRUBAKER & ASSOCIATES, INC. 1 Q CAN YOU CITE ANY OBJECTIVE AUTHORITY THAT PRESENTS THE 2 FUNCTIONALIZATION OF SANITARY SEWERS TO THE CUSTOMER COST 3 CATEGORY? 4 A Yes, I can. Financing and Charges for Wastewater Systems, published by the Water 5 Environment Federation in 1984, provides a discussion and examples of wastewater 6 utility cost allocation. Mr. Barber also refers to this publication on Page 2 of his direct 7 testimony as one that outlines "...industry standard cost allocation and rate design 8 procedures...." 9 Examples of cost allocation procedures are found in Appendix D of this 10 publication (Pages 75 through 88). The text on Page 76 states as follows: 11 The investment in lateral sewers, local collector sewers, and manholes 12 is basically proportional to the physical size of the wastewater system 13 and is sometimes allocated to the customer cost component. 14 Accordingly, the examples of cost functionalization and classification in Tables 15 D.1, D.2 and D.3 show that the plant investment, depreciation expense and O&M 16 costs associated with local collection sewers are reasonably and properly assigned to 17 the customer cost function. 18 Q DOES MSD'S RATE PROPOSAL RECOGNIZE THE CUSTOMER FUNCTION AS A 19 LEGITIMATE COST CAUSATION ELEMENT ELSEWHERE IN ITS ALLOCATION 20 OF COSTS? 21 A Yes, it does. Portions of certain O&M expenses, including Engineering, Operations 22 Support, Finance and Information Systems are assigned to the Customer cost 23 function in Tables 3-12 and 3-13. Michael Gorman Page 13 BRUBAKER & ASSOCIATES, INC. 1 Q DOES MSD'S FAILURE TO RECOGNIZE THE CUSTOMER COST FUNCTION 2 HAVE A SIGNIFICANT IMPACT ON THE RESULTS OF ITS WASTEWATER COST 3 OF SERVICE STUDY? 4 A Yes, it does. First, note in Table 3-11 that MSD projects its investment in sanitary 5 sewers for 2008 to be $688.2 million, out of an estimated total plant investment of 6 $1.42 billion. Thus, sanitary sewer investment is the largest single item of 7 investment, constituting 47.2% of the total. Even a relatively small change in the 8 assignment of sanitary sewer -related investment will have marked impact on the 9 outcome of capital costs allocated to individual customer classes in MSD's model. 10 Second, MSD's claimed replacement and capital investment costs are 11 subsequently allocated to customer classes in proportion to the functionalization of its 12 capital costs. This is shown in Table 3-15. MSD's claimed revenue requirement for 13 the 2008 Fiscal Year is $219.6 million. Of this amount, MSD is requesting 14 $93.4 million, or 42.5% of the total, for net replacements and net capital additions. 15 Again, it is clear that even a relatively small change in the allocation of this level of 16 replacement and capital investment costs will alter the final allocation of costs to 17 individual customer classes. 18 Q ARE YOU PROPOSING TO CORRECT THE DISTRICT COST STUDY TO 19 INCLUDE A CUSTOMER COST FUNCTION? 20 A Yes. I propose to allocate 50% of the collection system cost to a customer 21 component. Allocating 50% of the collection cost that is customer related is 22 conservative in that the example in Appendix D of Financing and Wastewater 23 Charges cited above shows an allocation of 100% of these costs to the customer 24 function, and is also reasonably consistent with the District's sanitary sewer Michael Gorman Page 14 BRUBAKER & ASSOCIATES, INC. 1 investment as a percentage of total plant. For these reasons, this allocation of a 2 percentage of the collection plant to a customer related cost function is reasonable. 3 Attribution of Infiltration and Inflow Volumes to Customer Classes 4 Q HAVE YOU REVIEWED THE CALCULATION OF WASTEWATER UNITS OF 5 SERVICE IN TABLE 3-14 OF THE RATE PROPOSAL? 6 A Yes, I have. Column (2) of that table assigns groundwater infiltration and stormwater 7 inflow volumes (I/1) to MSD's customer classes. Page 3-32 of the Rate Proposal 8 states that " 40 percent of the total is distributed on the basis of the number of 9 customers within each class, with the remaining 60 percent allocated on the basis of 10 contributed wastewater volume." 11 The very rudimentary discussion of these percents on Pages 3-32 states that 12 they were developed to recognize that 50% of flows received at MSD's treatment 13 plants is due to I/1. However, the discussion does not offer a rationale for the need to 14 develop these percents, or why these specific percents are reasonable allocators of 15 I/1 cost responsibility. 16 Q DO YOU BELIEVE THAT THIS 40% CUSTOMER / 60% CONTRIBUTED VOLUME 17 DISTRIBUTION IS REASONABLE? 18 A No, I do not. As stated on Page 3-30 of the Rate Proposal, I/1 "...includes flow 19 entering the sewer system from illegal roof and foundation drains, groundwater 20 infiltration through sewer service pipe and main joints, and stormwater runoff or inflow 21 from the combined sewer system." From this discussion, it is clear that I/1 flows are 22 opportunistic, in that they find their way into the collection system through illegal Michael Gorman Page 15 BRUBAKER & ASSOCIATES, INC. 1 2 3 4 5 6 7 8 9 connections or defects in pipes, joints or manholes. I/1 flows are thus independent of the volumes of contributed flows discharged into the system by MSD's customers. Put another way, contributed flows exert no influence on the volume of groundwater infiltration or stormwater flows that enter MSD's collection system. I/1 flows are more closely related to the total length and diameter of collection sewers in the system, and these in turn are influenced by the number of customers connected to MSD by these sewers. For this reason, I would assign a larger proportion of I/1 flows to customer classes in proportion to the number of customers in each class. 10 Q ARE YOU PROPOSING TO CORRECT THE DISTRICT'S COST STUDY TO 11 REFLECT REASONABLE CUSTOMER I/1 VOLUME ALLOCATION? 12 A Yes. To be conservative, I propose to assign 50% of I/1 volumes in proportion to the 13 number of customers in each class, and the remaining 50% in proportion to class 14 contributed volumes. 15 Q WHAT IS THE EFFECT ON CUSTOMER CLASS COST ALLOCATION FROM THE 16 CHANGES TO MSD'S MODEL THAT YOU RECOMMEND? 17 A Schedules MPG-2 and MPG-3 show a comparison between MSD's cost allocation 18 and the results of my corrections to its model. I am using MSD's revenue 19 requirement only for comparison purposes. My cost study shows that the Residential 20 Single Family class should receive a 27.8% increase at MSD's proposed revenue 21 requirement, and that Multi Family and Non -Residential customers should receive 22 rate decreases of 0.7% and 1.9% respectively. However, to avoid rate shock, and to 23 reflect that it is not appropriate for some classes to get a decrease when overall Michael Gorman Page 16 BRUBAKER & ASSOCIATES, INC. 1 revenues are being increased, I recommend that the Single Family class receive an 2 increase of 1.3 times the system average increase approved by the Rate Commission 3 in this proceeding. 4 Q DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 5 A Yes, it does. Michael Gorman Page 17 BRUBAKER & ASSOCIATES, INC. Appendix A Qualifications of Michael Gorman 1 Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 2 A Michael P. Gorman. My business mailing address is P. O. Box 412000, 1215 Fern 3 Ridge Parkway, Suite 208, St. Louis, Missouri 63141-2000. 4 Q PLEASE STATE YOUR OCCUPATION. 5 A I am a consultant in the field of public utility regulation and a managing principal with 6 Brubaker & Associates, Inc., energy, economic and regulatory consultants. 7 Q PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND WORK 8 EXPERIENCE. 9 A In 1983 I received a Bachelors of Science Degree in Electrical Engineering from 10 Southern Illinois University, and in 1986, I received a Masters Degree in Business 11 Administration with a concentration in Finance from the University of Illinois at 12 Springfield. I have also completed several graduate level economics courses. 13 In August of 1983, I accepted an analyst position with the Illinois Commerce 14 Commission (ICC). In this position, I performed a variety of analyses for both formal 15 and informal investigations before the ICC, including: marginal cost of energy, central 16 dispatch, avoided cost of energy, annual system production costs, and working 17 capital. In October of 1986, I was promoted to the position of Senior Analyst. In this 18 position, I assumed the additional responsibilities of technical leader on projects, and 19 my areas of responsibility were expanded to include utility financial modeling and 20 financial analyses. Appendix A Michael Gorman Page 18 BRUBAKER & ASSOCIATES, INC. 1 In 1987, I was promoted to Director of the Financial Analysis Department. In 2 this position, I was responsible for all financial analyses conducted by the staff. 3 Among other things, I conducted analyses and sponsored testimony before the ICC 4 on rate of return, financial integrity, financial modeling and related issues. I also 5 supervised the development of all Staff analyses and testimony on these same 6 issues. In addition, I supervised the Staff's review and recommendations to the 7 Commission concerning utility plans to issue debt and equity securities. 8 In August of 1989, I accepted a position with Merrill -Lynch as a financial 9 consultant. After receiving all required securities licenses, I worked with individual 10 investors and small businesses in evaluating and selecting investments suitable to 11 their requirements. 12 In September of 1990, I accepted a position with Drazen-Brubaker & 13 Associates, Inc. In April 1995 the firm of Brubaker & Associates, Inc. (BAI) was 14 formed. It includes most of the former DBA principals and Staff. Since 1990, I have 15 performed various analyses and sponsored testimony on cost of capital, cost/benefits 16 of utility mergers and acquisitions, utility reorganizations, level of operating expenses 17 and rate base, cost of service studies, and analyses relating industrial jobs and 18 economic development. I also participated in a study used to revise the financial 19 policy for the municipal utility in Kansas City, Kansas. 20 At BAI, I also have extensive experience working with large energy users to 21 distribute and critically evaluate responses to requests for proposals (RFPs) for 22 electric, steam, and gas energy supply from competitive energy suppliers. These 23 analyses include the evaluation of gas supply and delivery charges, cogeneration 24 and/or combined cycle unit feasibility studies, and the evaluation of third -party 25 asset/supply management agreements. I have also analyzed commodity pricing Appendix A Michael Gorman Page 19 BRUBAKER & ASSOCIATES, INC. 1 2 3 4 indices and forward pricing methods for third party supply agreements. Continuing, I have also conducted regional electric market price forecasts. In addition to our main office in St. Louis, the firm also has branch offices in Phoenix, Arizona; Corpus Christi, Texas; and Plano, Texas. 5 Q HAVE YOU EVER TESTIFIED BEFORE A REGULATORY BODY? 6 A Yes. I have sponsored testimony on cost of capital, revenue requirements, cost of 7 service and other issues before the regulatory commissions in Arizona, California, 8 Delaware, Georgia, Illinois, Indiana, Iowa, Louisiana, Michigan, Missouri, New 9 Mexico, New Jersey, Oklahoma, Oregon, Tennessee, Texas, Utah, Vermont, 10 Washington, West Virginia, Wisconsin, Wyoming, and before the provincial regulatory 11 boards in Alberta and Nova Scotia, Canada. I have also sponsored testimony before 12 the Board of Public Utilities in Kansas City, Kansas; presented rate setting position 13 reports to the regulatory board of the municipal utility in Austin, Texas, and Salt River 14 Project, Arizona, on behalf of industrial customers; and negotiated rate disputes for 15 industrial customers of the Municipal Electric Authority of Georgia in the LaGrange, 16 Georgia district. 17 Q PLEASE DESCRIBE ANY PROFESSIONAL REGISTRATIONS OR 18 ORGANIZATIONS TO WHICH YOU BELONG. 19 A I earned the designation of Chartered Financial Analyst (CFA) from the Charter 20 Financial Analyst Institute. The CFA charter was awarded after successfully 21 completing three examinations which covered the subject areas of financial 22 accounting, economics, fixed income and equity valuation and professional and 23 ethical conduct. I am a member of CFA's Financial Analyst Society. \\Huey\Shares\PLDocs\SDW\8775\Testimony - BAI\111685.doc Appendix A Michael Gorman Page 20 BRUBAKER & ASSOCIATES, INC. Line Description METROPOLITAN ST. LOUIS SEWER DISTRICT WASTEWATER PROJECTED REVENUE REQUIREMENT - REVISED METHOD 2007 2008 2009 2010 2011 2012 Total 1 Revenue Under Existing Rates 2 Other Revenue 3 Interest from $275 million debt issuance 4 Total Revenue before proposed increase 5 Total Additional Revenue 6 Proposed Annual Increase $ 7 Total Revenue $ (a) (b) $ 195,104,100 $ 194,360,300 $ 13, 270, 500 13, 697, 900 11,103,125 208,374,600 219,161, 325 10,000,000 (c) 193,728,400 $ 14,140,700 9,466,875 217,335,975 20,000,000 (d) 193,146,000 $ 14,164.200 7,012,500 214,322,700 30,000,000 (e) 192,563,600 $ 14,194,700 3,506,250 210.264,550 40,000,000 (f) (g) 192,028,700 14.255,800 206, 284, 500 50,000,000 10, 000,000 10,000,000 10,000,000 10,000,000 10,000,000 50,000,000 8 O&M Expense 9 Stormwater Support Program 10 Addition to Operating Reserve 11 Routine Annual Improvements 12 Existing Debt Service 13 New Debt Service 14 Cash Financing of Major Improvements 15 Total 16 Net Cash Surplus/Deficiency Cumulative Cash Balance 17 Beginning of Year Balance 18 End of Year Balance 19 SRF Loans 20 Existing Senior Bond Debt Service Expense 21 New Senior Bond Debt Service Expense 22 Total Revenue Bond Service Coverage 23 Bond Ordinance Revenue Bond Coverage 24 Bond Community Targeted Revenue Debt Coverage 25 Total Revenue Bond Service Coverage 26 Bond Community Targeted Total Debt Coverage 208,374,600 $ 104,784,300 19,223,100 2,366,700 6,148, 800 22,946,300 60,100,000 215,569,200 (7,194,600) $ 229,161,325 $ 110,913,400 10,799,000 1,302,500 6,394,600 26,842,700 16,717,308 51,096,000 224,065,508 5,095,817 $ 237,335,975 $ 114,654,700 6,536,500 29,347,600 16,717,308 67,692,000 234,948,108 2,387,867 $ 244,322,700 $ 119,058,500 2,619,600 29,158,400 16,717,308 74,689,000 250,264,550 $ 123,379,800 2,698,200 29,521,700 16,717,308 68,986,000 242,242,808 241,303,008 2,079,892 8,961,542 $ 256,284,500 127, 593, 500 2,779,100 29, 493,100 16,717,308 79,434,000 256,017,008 267,492 S $ 9.274,400 $ 2,079,800 $ 2,079,800 $ 7,175,617 $ 7,175,617 $ 9,563,484 $ 9,563,484 $ 11,643,376 $ 11.643,376 $ 20,604,917 $ 20,604,917 20,872,409 10,481,200 10,874,100 11,906,500 12,517,600 16, 717, 308 12,645,900 12,489,900 16,717, 308 14,260,900 12,523,100 16,717,308 14, 801,200 12,660,200 16,717,308 14,659,300 12,782,400 16,717,308 775.9% 125% 200% 367.5% 125% 200% 420.0% 125% 200% 428.4% 125% 200% 431.9% 125% 200% 436.2% 125% 200% 395.1 % 261.2% 293.1% 288.0% 287.2% 291.4% 180% Source: Wastewater and Stormwater Rate Proposal, Exhibit #MSD-1, Table 3-9 180 % 180% 180% 180% 180% 401,997,000 Schedule MPG-1 Page 1 of 2 METROPOLITAN ST. LOUIS SEWER DISTRICT CAPITAL IMPROVEMENTS TO BE FUNDED WITH NEW DEBT ISSUANCE Cash Financing of Major Improvements Allocation of New Debt Funds Amount to be financed with new debt issue 2007 2008 2009 2010 2011 2012 Total Excl 07 $60,100,000 $64,846,000 S106,192,000 5132,439,000 $151,486,000 $161,934,000 S616,897,000 0.0% 5.0% 14.0% 21.0% 30.0% 30.0% 100.0% $0 $13,750,000 S38,500,000 $57,750,000 S82,500,000 S82,500,000 S275,000,000 Total revenue bond issuance amount $275,000,000 Assumed bond issuance costs (2% of net amount) $5,500,000 Total Bond Issuance Amount Total Term of Issuance Assumed Interest Rate Calculated Annual Debt Service Expense Total Bond Issuance Amount Projected Debt Used From $275 Million Issuance Amount subject to interest $280, 500, 000 30 4.25% From Technical Conference $16,717,308 Assumed Interest Rate 4.25% Interest Earned on Investment of Proceeds $275,000,000 $261,250,000 $222,750,000 $165,000,000 S82,500,000 $0 513,750,000 $38,500,000 $57,750,000 $82,500,000 $82,500,000 $0 $261,250,000 $222,750,000 S165,000,000 $82,500,000 S0 $0 $11,103,125 $9,466,875 $7,012,500 $3,506,250 $0 $0 Schedule MPG-1 Page 2 of 2 Line No METROPOLITAN ST. LOUIS SEWER DISTRICT Table 3-16 Comparison of Wastewater Cost of Service with Revenue Under Existing Rates Test Year 2008 Customer Class Metered Customers 1 Single Family 2 Multifamily 3 Non -Residential 4 Total Unmetered Customers 5 Single Family 6 Multifamily 7 Total Total System 8 Single Family 9 Multifamily 10 Non -Residential 11 Total District Allocated Cost of Service 89,885,000 21,675,400 74,343,400 185,903,800 21,216,800 12,506,700 33,723,500 111,101,800 34,182,100 74,343,400 219,627,300 Revenue Under Existing Rates 77,853,000 20,330,400 66,435,400 164,618,800 18,318,700 11,422,800 29,741,500 96,171,700 31,753,200 66,435,400 194,360,300 Source: CDM and Black & Veatch Wastewater and Stormwater Rate Proposal, Exhibit MSD 1 Indicated Revenue Increase % 15.5% 6.6% 11.9% 12.9% 15.8% 9.5% 13.4% 15.5% 7.6% 11.9% 13.0% Schedule MPG-2 Line No METROPOLITAN ST. LOUIS SEWER DISTRICT Table 3-16 Comparison of Wastewater Cost of Service with Revenue Under Existing Rates Test Year 2008 Customer Class Metered Customers 1 Single Family 2 Multifamily 3 Non -Residential 4 Total Unmetered Customers 5 Single Family 6 Multifamily 7 Total Total System 8 Single Family 9 Multifamily 10 Non -Residential 11 Total District COS - Adjustments - Adjusted Allocated Cost of Service 100,302,800 19,307,200 65,142,000 184,752,000 22,637,200 12,238,100 34,875,300 122,940,000 31,545,300 65,142,000 219,627,300 Revenue Under Existing Rates 77,853,000 20,330,400 66,435,400 164,618,800 18,318,700 11,422,800 29,741,500 96,171,700 31,753,200 66,435,400 194,360,300 CDM and Black & Veatch Wastewater and Stormwater Rate Proposal, Exhibit MSD 1 1) 50%/50% Collection System Customer/Capacity 2) 1/1 50%/50% Customers and Volume Indicated Revenue Increase °/ 28.8% -5.0% -1.9% 12.2% 23.6% 7.1% 17.3% 27.8% -0.7% -1.9% 13.0% Schedule MPG-3 Appendix D to MIEC's Prehearing Conference Report 2019 Metropolitan Sewer District Wastewater Rate Case Proceeding Comparison Workpaper Metropolitan St. Louis Sewer District Description Comparison of Wastewater Systems MSD KC Water CWA Authority St. Louis, MO Kansas City, MO Indianapolis, IN St. Joseph, MO (1) (2) (3) (4) System Size (Square Miles) 520 320 278 45 Population 1,300,000 478,000 800,000 76,809 Number of Accounts 426,000 166,000 242,000 26,281 Miles of Sewer Mains 9,400 2,709 3,033 406 # of Wastewater Treatment Plants 7 6 2 1 I/1 Allocation 40% / 60% 40% / 60% 75% / 25% 60% / 40% Sources: Most recent Comprehensive Annua, Financial Report (CAFR) and utility websites.