HomeMy Public PortalAboutExhibit MSD 55 - Surrebuttal Testimony of Marion Gee, MSDMSD Exhibit No. MSD 55
2018 Stormwater Rate Proceeding
MARION M. GEE
Surrebuttal Testimony
Metropolitan St. Louis Sewer District
May 25, 2018
Table of Contents
Page
Use of Debt to Fund the Capital Improvement and Replacement Program ................................. 1
Surrebuttal Testimony of Marion M. Gee, MSD May 25, 2018
2018 Stormwater Rate Proceeding 1 MSD Exhibit No. MSD 55
Use of Debt to Fund the Capital Improvement and Replacement Program 1
Q1. Should MSD be obligated to finance the improvements in the most economic way 2
that minimizes costs to customers. 3
A. Yes, in response to Michael Gorman’s rebuttal testimony, affordability is an important 4
component in MSD’s rate setting practice. MSD’s 2018 Stormwater Rate Proposal 5
minimizes costs to customers by spreading the cost of capital improvements over many 6
years and by using rate revenue to fund the projects. Debt funding would automatically 7
increase the overall cost of the program since all borrowed funds need to be paid back 8
with interest. The average residential ratepayer charge in MSD’s proposal is $2.25 per 9
month, an amount that keeps MSD’s total charges well within the Environmental 10
Protection Agency’s (EPA) metrics for affordability even when added to MSD’s 11
Wastewater User Charges. EPA considers rates to be affordable if they are less than 2% 12
of the median household income (MHI) for a utility’s service area. The 2% affordability 13
threshold for MSD’s service area was projected at approximately $1,180 for 2017. The 14
FY 19 wastewater rate plus the proposed $2.25 monthly stormwater capital rate along 15
with the existing stormwater taxes equal approximately $731.00. MSD uses debt 16
funding for a portion of its wastewater capital program because that program is much 17
larger and cash funding that program would create charges that threaten or exceed the 18
affordability limit. 19
Furthermore, the $2.25 per month rate does not include any funding for debt 20
service payments or for building the debt service coverage and capital reserves that 21
would be required to achieve the high credit rating needed to minimize the cost of capital. 22
Because the rate is so low to start, debt funding this program would have a limited impact 23
that would then be further offset by the need for additional capital to cover debt service 24
Surrebuttal Testimony of Marion M. Gee, MSD May 25, 2018
2018 Stormwater Rate Proceeding 2 MSD Exhibit No. MSD 55
and build an adequate reserve. Debt funding would also create a legally binding 1
agreement with certain restrictions that do not exist today that would eventually: 1) cause 2
the rate to exceed $2.25 per month for the typical ratepayer; 2) create the need to 3
continue to collect the rate beyond the construction timeline to service the debt; and 3) 4
absent any future rate increases, limit the amount of the rate revenue that can be used for 5
capital projects below the proposed amount, due to annual debt service requirements, thus 6
extending the timeline for completion of the projects. 7
Q2. Does MSD have proof that using bond funding for the capital improvements would 8
result in additional costs for customers or an impact on MSD’s credit ratings? 9
A. All bond funding must be paid back with interest so, by definition, bond funding results 10
in additional costs for customers. In regards to credit ratings, MSD provided copies of its 11
most recent credit rating reports (see Exhibits MSD 41B, 41C, and 41D). In these 12
reports, the rating agencies expressed concerns about existing debt burden ratios and the 13
potential deterioration of debt service coverage levels and indicated that the District’s 14
credit rating could be lowered if it is unable to meet the required financial metrics. As 15
previously stated in the response to Question 1, additional cost would be incurred to 16
ensure that adequate debt service coverage exists and an appropriate minimum fund 17
balance is maintained. 18
Q3. Does this conclude your surrebuttal testimony? 19
A. Yes. 20