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HomeMy Public PortalAboutExhibit RC 70 - Rate Commission's Prehearing Conference ReportBEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT For Consideration of the February 26, 2018 ) Stormwater Rate Change ) Proposal by the Rate Commission of the ) Metropolitan St. Louis Sewer District ) PREHEARING CONFERENCE REPORT OF BLACK & VEATCH, RATE CONSULTANT, AND LASHLY & BAER, P.C., LEGAL COUNSEL TO THE RATE COMMISSION Black & Veatch and Lashly & Baer, P.C., as Rate Consultant and Legal Counsel, respectively, to the Rate Commission of the Metropolitan St. Louis Sewer District (“Rate Commission”), respectfully submit this Prehearing Conference Report regarding the Stormwater Rate Change Proposal (“Rate Change Proposal”) submitted to the Rate Commission by the Metropolitan St. Louis Sewer District (the “District”) on February 26, 2018, Ex. MSD 1. The Rate Commission is to determine whether the Rate Change Proposal or any Alternative Proposal meets the criteria for recommendation contained in §§ 7.040 and 7.270 of the Charter Plan. The Prehearing Conference Report is to identify, define, resolve or settle the issues raised by the prepared testimony and to describe the participant’s position, if any, on each of the criteria and factors for recommendation. THE DISTRICT RATE CHANGE PROPOSAL District stormwater revenue is now derived principally from: (1) the District’s 2-cent property tax used to fund stormwater regulatory services; and (2) the District’s 10-cent property tax used to fund stormwater operation and maintenance services (funded through Prop S). Ex. 2 MSD 30A. There is currently no dedicated funding source for stormwater capital improvements within the District. See Ex. MSD 1, p. 3-1. The District proposes to add an impervious area-based Stormwater Capital Rate to fund capital improvements needed throughout the District’s service area. The District estimates its capital improvement needs to be funded by the Stormwater Capital Rate at approximately $562 million. See Ex. MSD 25, p. 5. The Stormwater Capital Rate would generate approximately $30 million annually to finance these capital improvements.1 See Ex. MSD 1, p. 3-3. The Rate Change Proposal would not utilize debt financing. See Ex. MSD 1, p. 3-2. The Stormwater Capital Rate would charge ratepayers per Equivalent Residential Units (“ERUs”) of impervious area (“IA”). An ERU is calculated to be 2,600 square feet of IA. See Ex. MSD 1, p. 4-6. The Rate Change Proposal would assess a monthly rate of $2.25 per ERU. See Ex. MSD 1, p. 4-6. Residential property will be divided into four tiers based on the amount of IA. Most residential property will fall into Tier 2 (2,001-3,600 sq. ft. of IA) and will be charged $2.25 per month (for 1 ERU) when the rate is fully implemented. Residential property in Tier 1 (200-2,000 sq. ft. of IA) will be charged $1.42 per month (0.63 ERUs). Residential property in Tier 3 (3,601-6,000 sq. ft. of IA) will be charged $3.74 per month (1.66 ERUs). Residential property in Tier 4 (more than 6,000 sq. ft. of IA) will be charged $6.84 per month (3.04 ERUs). See Ex. MSD 1, p. 4-6. A credit program would be available to residential property owners implementing best management practices (“BMPs”) such as rain gardens or cisterns. See Ex. MSD 1, p. 4-7. Non-residential properties will be charged per each ERU of IA on the 1 The Rate Change Proposal relies upon certain assumptions with respect to conditions, events, and circumstances that may occur in the future. Although considered reasonable, some of these anticipated conditions, events and circumstances may not occur resulting in potential differences in revenues and costs than currently projected. 3 property. See Ex. MSD 1, p. 4-6. A credit program will also be available for non-residential ratepayers. See Ex. MSD 1, p. 4-7. The District proposes to charge the Stormwater Capital Rate to non-profit and governmental entities since it considers the Stormwater Capital Rate to be a “rate” or “charge” pursuant to § 3.020(16) of the Charter Plan. See Ex. MSD 4, p. 7. The District intends to seek voter approval for the Stormwater Capital Rate. See Ex. MSD 1, p. 3-3. It is the District’s position that the Rate Change Proposal has been carefully developed and the Rate Change Proposal meets the requirements of the Charter. See Ex. MSD 64. STANDARD FOR RECOMMENDATION Upon receipt of a Rate Change Notice from the District, the Rate Commission is to recommend to the District’s Board changes in a wastewater, stormwater, or tax rate necessary to pay: (i) interest and principal falling due on bonds issued to finance assets of the District; (ii) the costs of operation and maintenance; and (iii) such amounts as may be required to cover emergencies and anticipated delinquencies. See Ex. MSD 4, p. 18, Charter Plan, § 7.040. Any change in a rate recommended to the Board by the Rate Commission pursuant to § 7.270 of the Charter Plan is to be accompanied by a statement of the Rate Commission that the proposed rate change: (i) is consistent with constitutional, statutory, or common law as amended from time to time; (ii) enhances the District’s ability to provide adequate sewer and drainage systems and facilities, or related services; (iii) is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; (iv) does not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time; and (v) imposes a fair and reasonable burden on all classes of ratepayers. See Ex. MSD 4, p. 24. 4 The Prehearing Conference Report is to identify, define, resolve or settle the issues raised by the prepared testimony and to describe the participant’s position, if any, on each of the criteria and factors for recommendation. See Ex. MSD 28, p. 8. The issues raised by the prepared testimony relate primarily to the criteria set forth in § 7.270(v) of the Charter Plan – whether the Rate Change Proposal imposes a fair and reasonable burden on all classes of ratepayers. The Rate Commission, in its Rate Recommendation Report, will be required to provide affirmative support that its rate recommendation meets each of the criteria. Although the issues herein are discussed in the context of compliance with § 7.270(v), the issues may also affect the discussion of compliance with the other factors and criteria in §§ 7.040 and 7.270. CIRP PROGRAM Scope of Program The District estimates its capital improvement needs to be funded by the Stormwater Capital Rate at approximately $562 million. See Ex. MSD 25, p. 5. The Stormwater Capital Rate would generate approximately $30 million annually to finance these capital improvements. See Ex. MSD 1, at p. 3-3. The District states that the Stormwater Capital Improvement and Replacement Program (“CIRP”) is prudent and reasonable. See Ex. MSD 54, p. 1, ll. 2-5. The District has an obligation and authority to address stormwater flooding and erosion, and the public expects it. See Ex. MSD 56 p. 1, ll. 4-12. The District receives hundreds of calls annually related to flooding and erosion issues. Id. The District asserts it has put sufficient planning in the CIRP to justify the $30 million annually. See Ex. MSD 3E, p. 7, ll. 6-7. 5 Intervenor Missouri Industrial Energy Consumers (“MIEC”) provided testimony that there is inadequate planning to justify $30 million per year of revenue collection from customers because the projects are, at the very best, a preliminary list of projects that may benefit the stormwater erosion and collection objectives of the District. See Ex. MSD 52, p. 15, ll. 6-11. MIEC’s expert, Michael P. Gorman, testified that: “I don’t believe the detailed engineering has been conducted to create what would normally be a reasonable budget estimate that is appropriate for either setting rates or asking bondholders to fund.” Id. at p. 16, ll. 7-10; see also p. 28, ll. 1-6 (“[I]f they want customers to pay for the projects then they have to show which projects need to be completed and why they need to be completed, and to get bond funding they would have to make that demonstration to the bondholders, so I think the customers should get the same protections”). Rate Consultant Nicole Young disagrees with MIEC. Ms. Young testified that the District has done sufficient, reasonable planning. See Ex. MSD 52, p. 98, ll. 2-14. Some of the Rate Commissioners raised the question as to whether in fact the $562 million is enough. In the Technical Conference, Commissioner Palans noted the City of Ladue estimated the scope of stormwater projects within its boundaries at 55 projects totaling $113 million. See Ex. MSD 65, p. 33, ll. 14-20. “So my little municipality identified about 2 percent of the number of projects that the District identified and our cost to remediate those projects is about 20 percent of what the District identified to remediate within a 520-square mile area.” Id. at ll. 21-25. The District has testified that it is a reasonable start, and they considered what they believed the voters could tolerate. See Ex. MSD 52, p. 45, ll. 14-18. Rate Consultant Pam Lemoine testified that the District is one of the largest stormwater service areas in the country, and so the magnitude of the issues that it is going to have to address 6 is large. See Ex. MSD 52, p. 52, ll. 23-25; p. 53, ll. 1. “Certainly if the fees were higher and they could fund more projects sooner, the program could be addressed more quickly…. I think it’s definitely a step in the right direction to be able to start to address these issues that haven’t been funded in the past. And again, it becomes a balancing act of customer affordability and the need to address the issues.” Id. at p. 53, ll. 1-7. Use of Debt The Rate Proposal for the Stormwater Capital Rate does not contemplate the use of any debt. See Ex. MSD 1, pp. 3-2; see also Ex. MSD 3D, p. 6, ll. 2; Ex. MSD 3E, p.6, ll. 16-18; Ex. MSD 30B, p. 15 (Request No. 54). The District testified that it believes it should make improvements in the most affordable way possible. Debt funding will automatically increase costs; average ratepayer will pay $2.25 per month, well within EPA metrics for affordability. See Ex. MSD 55, p. 1, ll. 12-16. Moreover, because the rate is so low, any debt funding would have a limited impact. See Ex. MSD 55, p. 1, ll. 23-24. If debt financing were used, the District would have to collect rate revenue beyond the construction timeline. See MSD Ex. 55, p. 2, ll. 3-4. The District also expressed concern about whether and to what extent debt may be needed in future rate proceedings. See Ex. MSD 52, p. 68, ll. 1-19. Moreover, if the District considered debt financing, it would be precluded from issuing tax-exempt bonds to finance certain projects and thus that debt financing of capital projects is ultimately more expensive for consumers. See Ex. MSD 30B (Request No. 44). The District does not claim the Stormwater Capital Rate cannot be funded by bonds, just that some projects cannot be funded with tax-exempt bonds because the District may not own certain assets upon 7 completion, and that it would drive rates higher. See Ex. MSD 41A (Request 1d); Ex. MSD 45, p. 5, ll. 19-22; p. 6, ll. 1-16). It is MIEC’s position that the District should be considering debt, but MIEC does not make a proposal as to how much. Id. at p. 14. MIEC admits that the District will be required to take on significant additional debt as part of Consent Decree, thus, “it should be a prudent level of bond and rate revenue funding.” See Ex. MSD 52, p. 40, ll. 9-10. “Consideration should be impact on debt – the structure of any bond rating, so that would require consideration of debt service coverage, which is a credit rating factor…. It should also consider affordability by customers in terms of issuing bonds for the stormwater, recognizing additional bonds for the wastewater consent decree program.” Id. at ll. 10-18. The Rate Consultant supports the District’s decision not to issue debt. See Ex. MSD 52, p. 69, ll. 1-3. The Rate Consultant testified that “you have to look at the nature of the projects, will the utility have an asset on their books as a result of that project, as well as the program as a whole, when you’re investing a lot of money on a year-to-year basis.” Id. at p. 68, ll. 8-12. Improvements on Private Property The District testified that it is appropriate to make stormwater improvements on public and private property. See Ex. MSD 50A (Request No. 2). Article 3, § 3.020(2) of the Charter Plan authorizes MSD to operate stormwater drains, provide effective means of insuring the area within the District has adequate sanitary and stormwater drainage. See Ex. MSD 4, pp. 4-5. Projects on private property can be done, consistent with the Charter Plan, requiring easements in favor of the District. See Ex. MSD 50A (Request No. 2). The District is not prohibited by any policy from constructing improvements or repairs on private property, provided easement or property rights exist. See Ex. MSD 50A (Request No. 2). The District states that if it would be 8 unable to obtain those [property] rights for a project, the District would not undertake that project. Id. (Request No. 3); see also Ex. MSD Exhibit 41 (75% will be assets owned by MSD). Intervenor MIEC’s expert, Michael P. Gorman, testified that MSD cannot make improvements on private property. According to Mr. Gorman, MSD’s own policy states that it will only make investments in the public stormwater system or infrastructure that is located in easement where MSD has right to access or is property owned by MSD. See Ex. MSD 52, p. 12, ll. 20-25; p. 13, ll. 1-3. “It’s also consistent with standard practices for utilities that they don’t make investments on private property.” Id. at ll. 22-23. Mr. Gorman believes that remediation does not add value to the community as a whole “because there hasn’t been explicit identification of projects and description of the benefits that those projects create.” Id. at p. 14, ll. 19-22. However, Mr. Gorman did not believe that it is possible that a project can be done on private property and still be within the public interest. Id. at p. 13, ll. 16-23. The Rate Consultant agrees with the District that certain projects could and should be constructed on private property. Ms. Lemoine explained, “[i]f the capital program is addressing erosion and flooding issues that are, you know, even where they’re on a private property for instance in the example of a stream erosion, that runoff is occurring and that erosion is occurring due to runoff through that watershed, and so in that regard that’s benefitting the entire watershed area and the service area.” See Ex. MSD 52, p. 62, ll. 19-25. By addressing a lot of these problems, it will also help with water quality type aspects that are required to be managed throughout the service area. Id. at p. 63, ll.1-3. There are projects which benefit the region as a whole “in order to manage that runoff and as well as the quality-related issues, so the quality of that runoff as it enters other receiving streams.” Id. at p. 66, ll. 21-24. 9 Prioritization / Cost-Sharing Arrangements The Stormwater Capital Rate would fund projects listed in the CIRP. See Ex. MSD 1, p. 4-2. Projects in the CIRP have been identified based on historical records, previous engineering studies, and customer complaints about flooding and erosion. See Ex. MSD 1, p. 6-9; see also Ex. MSD 17; Ex. MSD 30L. Projects are scheduled to build the highest priority projects first. See MSD Ex. 1, p. 6-10. Types of stormwater flooding problems, in order of severity, include structure flooding, roadway flooding, and yard flooding. See Ex. MSD 30B, p. 5 (Response No. 12). Types of erosion problems, in order of severity, include stream erosion threatening a structure, stream erosion threatening a road, and yard erosion. Id. A cost/benefit ratio is calculated to determine project priority ranking. Id. at Response No. 13. Benefit points are totaled for a project, and the points are divided by the cost of the project. Id. A project with 100 benefit points divided by $100,000 in costs would have a priority ranking of 1.00. Id. The District utilizes a Prioritization Worksheet (see Ex. MSD 30K) and Guidelines for use of the worksheet (see Ex. MSD 30J). Some of the Rate Commissioners questioned the District witnesses as to whether the District should consider incentivizing contributions by third-parties by adjusting a project’s priority when a third party (the Missouri Department of Transportation, a municipality, or some other entity) contributes funding. See Ex. MSD 65, pp. 43-53. Some Commissioners expressed concern that $562 million may not be sufficient to address the District’s stormwater needs and that third-party contributions should be incentivized by moving up projects in the CIRP when third-party funds are contributed. Id. The District’s position is that the Stormwater Capital Rate would impose a fair and reasonable burden on all classes of ratepayers, as required by § 7.240 of the Charter Plan. See 10 Ex. MSD 36, p. 195, ll. 14-19. The District intends to be receptive to cost-sharing arrangements with third parties to finance capital improvement projects. See Ex. MSD 65, p 53, ll. 13-21; see also Ex. MSD 54, p. 3, ll. 4-15. However, to ensure that the Stormwater Capital Rate is fair and equitable, the District will not alter its cost/benefit analysis, or adjust a project’s prioritization based on the contribution of third-party funds. See Ex. MSD 65, pp. 50, ll. 18-25; p. 51, l. 1. This is to ensure that wealthier communities or entities cannot increase their chosen project’s priority at the expense of a project in a community which does not have access to third-party funding. See Ex. MSD 65, p. 58, ll. 8-18. “With prior approval the District will reimburse the municipality for construction costs after completion of the project. Participation in this process allows the municipality to have control of the project, defray District costs, but does not impact the District’s priority or schedule to complete the project. This process eliminates discrimination of those municipalities with limited or insufficient stormwater funding.” See MSD Ex. 30B, p. 13 (Response No. 45). “MSD has always been receptive to teaming with other entities in the full or partial outside funding of stormwater capital projects. Examples include individuals, municipalities or private companies completely funding their project or using partial funding from MSD to execute their projects.” See MSD Ex. 54, p. 3, ll. 4-8. “In calculating the cost of a project in determining the benefit-cost ratio, cost shall always be the cost to complete the project, regardless of the source of funding. This process insures that the value of the stormwater capital dollars from all rate payers will be weighed equally and not be influenced by the ability of a third party source to provide additional funding to the process.” Id. at p. 3, ll. 11-15. Intervenor MIEC supports the use of third-party funding for projects in the CIRP, but did not state a position with regard to whether a third party’s contributions to a project should affect that project’s priority. See Ex. MIEC 45, p. 8, ll. 5-13. After projects “have been clearly 11 identified and the benefits of those projects have been estimated, then it would be appropriate for the district to consider sharing the cost of those projects or requiring – attempting to require other parties to fund the project themselves.” See Ex. MSD 52, p. 25, ll. 14-22. As discussed, MIEC objects to the District utilizing funds derived from the Stormwater Capital Rate for projects on private property. See Ex. MIEC 45, p. 2, ll. 7-14. In that regard, MIEC favors private contributions to projects in the CIRP in part because it believes that the District should not be funding projects on private property in the first place. Id. “And I believe there is just a fairness standpoint that if private property owner or municipalities or primary beneficiaries, and MSD is a stakeholder in that process also, it might be appropriate for a partnership to move forward with the project or there might be instance where MSD really shouldn’t have to pick up any part of the cost.” See MSD Ex. 52, p. 26, ll. 10-16. “MSD still has obligations to efficiently and prudently manage how it spends that money [from the Stormwater Capital Rate] and that would include considering whether or not there are other stakeholders that should contribute to the cost of those projects.” Id. at p. 27, ll. 1-5. Rate Consultant Nicole Young believes that the prioritization system, and the District’s position with regard to third-party funding, is appropriate. See Ex. RC 44, p. 5, Q11.; see also Ex. MSD 52, p. 87. “As a civil engineer, … we are concerned with equity when it comes to the overall provision of service to the community. So we want to make sure that because one community has the privilege of additional funds, that their projects are not moved up in the schedule ….” Id. at p. 91, ll. 10-15. “The cost is not reduced [by third-party funding]. The cost remains the same. The source of the funds changes.” Id. at p. 94, ll. 3-4. Contributions by third parties “would be fair as long as it didn’t change the prioritization of the projects.” Id. at 92, ll. 23-24. 12 METHODOLOGY OF STORMWATER CAPITAL RATE Use of Impervious Area All parties agree that the use of an impervious area charge is fair and reasonable. See Ex. MSD 10, p. 126; see also Ex. RC 43, p. 4, Q9A3. However, as noted, under the Charter Plan, the proposed rate change must also be consistent with the law. See Ex. MSD 4, p. 24; Charter Plan, § 7.270. The District testified that a stormwater capital rate based on impervious area is consistent with the law. See Ex. MSD 3B, p. 1, ll. 25; p. 5, ll. 9-11. In 2007, the District recommended and subsequently implemented a stormwater fee (not the capital rate) based on impervious area. In Zweig v. Metropolitan St. Louis Sewer District, 412 S.W.3d 223 (Mo. banc 2013), the Missouri Supreme Court held that the District violated Art. X, § 22(a) of the Missouri Constitution (commonly known as the “Hancock Amendment”) by implementing the new stormwater charge based on impervious area without voter approval. The Zweig decision also makes a reference to the District’s authority to use an impervious area method for calculating the stormwater charge. Specifically, the court explains that the District’s ability to fund its activities is limited and quotes Art. VI, § 30(b) of the Missouri Constitution, as follows: “The plan shall provide for the assessment and taxation of real estate … giving due regard to other provisions of this constitution.” Zweig, 412 S.W.3d at 229. The court states in a footnote: “Ratepayers do not challenge MSD’s authority to levy the stormwater user charge under the Plan or section 30(b) of the constitution. The only claim in this case – and the only issue decided here – is whether section 22(a) prohibits MSD from levying this stormwater user charge without prior voter approval.” Id. at n.2. It is not clear whether the Missouri Supreme Court in the Zweig footnote was actually alluding to the possibility that a stormwater charge based on impervious area (and regardless of 13 Hancock) is unauthorized under the Missouri Constitution. However, there exists at least a concern that a court could consider any stormwater charge based on the amount of impervious area, and not on the value of the property, to be noncompliant with Art. X, § 4(b) of the Missouri Constitution.2 The District asserts it has the authority to impose a Stormwater Capital Rate based on impervious area in this situation because the charge is a “rate.” See Ex. MSD 36, p. 84, ll. 20-22. The District has stated it has a legal opinion from outside legal counsel indicating the Stormwater Capital Rate based on impervious area is consistent with constitutional and statutory law. See Ex. MSD 36, p. 83, ll. 6-15. Intervenor MIEC and the Rate Consultant have not filed testimony with respect to this issue. Rate Imposed on Governmental and Nonprofit Property Owners The District proposes to charge the Stormwater Capital Rate on property owned by non- profit and governmental entities since it considers the Stormwater Capital Rate to be a “rate” or “charge” pursuant to § 3.020(16) of the Charter Plan. See Ex. MSD 4, p. 7. Article X, § 6 of the Missouri Constitution provides that “[a]ll property, real and personal, of the state, counties and other political subdivisions … shall be exempt from taxation; … and all property, real and personal, not held for private or corporate profit and used exclusively for religious worship, for schools and colleges, for purposes purely charitable, for agricultural and horticultural societies, or for veterans’ organizations may be exempted from taxation by general law.” Emphasis added. The General Assembly has exercised the authority 2 Article X, Section 4(b) of the Missouri Constitution, along with Mo. Rev. Stat. § 137.115, “require that real property in Missouri be taxed according to its true value in money.” Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d 341, 348 (Mo. banc 2005). 14 granted by Art. X, § 6 by enacting Mo. Rev. Stat. § 137.100(5), which provides that “[a]ll property, real and personal, actually and regularly used exclusively for … purposes purely charitable and not held for private or corporate profit,” shall be “exempt from taxation for state, county or local purposes.” In discussing this issue, the District General Counsel, Susan Myers, noted that a court would likely attempt to harmonize the provisions of the State Constitution with MSD’s Charter Plan. See Ex. MSD 3B, p. 3, ll. 1-13. Therefore, it could be a reasonable interpretation that MSD’s authority to tax is limited by the provisions of Article X of the Constitution exempting governmental property from taxation. Myers’ testimony argues that, even if a court concludes that the Stormwater Capital Rate is a tax from which governmental entities are exempt, nonprofits would still be subject to the rate. Myers reasons that while the tax exemption for governmental bodies derives from the Missouri Constitution, the tax exemption for nonprofits is statutory. “The exemption from taxation for non-profit entities is not constitutional, but rather is statutory in nature, so it can be superseded if it is inconsistent with the Charter.” See Ex. MSD 3B, p. 3, ll. 7-9. In fact, Ms. Myers testified that there is a three-part rationale for charging the Stormwater Capital Rate to governmental, non-profit, and other tax-exempt entities. First, the Stormwater Capital Rate can be properly interpreted as not being a property tax or any other form of tax, but instead is a charge or “rate” authorized by the Charter Plan, thus non-profit and governmental entities would not be exempt from paying the rate. The constitutional and statutory exemptions for governmental and non-profit entities apply to ad valorem property taxes. The Stormwater Capital Rate is not in any way based on the value of property, so it is not an ad valorem tax, and thus the tax exemptions should not apply to the Stormwater Capital Rate. The Charter Plan 15 expressly allows the District to collect revenue through ad valorem property taxes, special assessments, and rates and charges. The Stormwater Capital Rate is plainly a rate or charge that is authorized by the Charter and is not a special assessment or ad valorem tax. Therefore, this Stormwater Capital Rate can be charged to all customers “whether public or private” in the District pursuant to the express terms of the Charter § 3.020(16). The District testified that it has a legal opinion supporting its authority to impose the Stormwater Capital Rate on all types of property. See Ex. MSD 30B, p. 6 (Response No. 17). The District also submitted a memorandum summarizing that legal opinion. See Ex. MSD 30Q. Intervenor MIEC and the Rate Consultant did not file testimony with regard to this issue. Effect of Mo. Rev. Stat. § 204.700 Missouri Revised Statute § 204.700 provided that “[n]o person who owns real property that is used for residential purposes within the boundaries of any district created under Section 30 of Article VI of the Missouri Constitution shall be assessed any fee, charge, or tax for storm water management services if the district does not directly provide sanitary sewer services to such property and if the storm water runoff from such person’s property does not flow, or is not otherwise conveyed, to a sewer maintained by such district.” If this statute is applicable to the Stormwater Capital Rate, then the rate would not in fact be consistent with Statutory law. Susan Myers, District General Counsel, testifies that this section is an unconstitutional special law in violation of Art. III, § 40(30) of the Missouri Constitution, that House Bill 661 violates the single-subject provision (Art. III, § 23, Mo. Const.), and is inconsistent with the Charter Plan, and thus preempted. See Ex. MSD 3B, p. 4, ll. 7-14. The District also testified that they had an opinion from an outside law firm supporting this position. See Ex. MSD 30B, p. 6, (Response No. 17). 16 Intervenor MIEC and the Rate Consultant support the use of impervious area charges as fair and reasonable without any regard to these legal issues. Consideration of Compacted Dirt/Vacant Properties The District proposes to charge the Stormwater Capital Rate to all owners of real property with impervious surface, even if those owners do not currently receive a wastewater bill from the District. See Ex. MSD 1, p. 6-18. These properties include properties served by a septic tank, park properties without wastewater facilities, farm properties, and parking lots. See Ex. MSD 37A, Q10, pp. 7-8. The District projects that approximately 40,000 ratepayers will be stormwater-only accounts. See Ex. MSD 31A, Q17, p. 5. Residential property that is vacant will be charged the Stormwater Capital Rate. See Ex. MSD 36, p. 201, ll. 8-13. Unimproved property with insignificant (under 200 square feet) of impervious area would not be charged the Stormwater Capital Rate. See Ex. MSD 36, p. 201, ll. 18-25; p. 202, ll. 1-7. District Consultant Henrietta Locklear testified that including vacant (unoccupied but with impervious area) property is common practice, as is excluding property with little or no impervious area. See Ex. MSD 36, p. 217, ll. 15-25; p. 218, ll. 1-2. It is the District’s position that the Stormwater Capital Rate will not be varied or adjusted based on the character of the soil (e.g., compacted soil which absorbs less water than typical soil). “Whether property is native or previously developed is irrelevant for a proposed Stormwater Capital Rate. The billing is based upon the impervious surfaces within a property identified and measured from aerial photography.” See Ex. MSD 37A, Q28, p. 14-15. Henrietta Locklear testified on behalf of the District that adjusting a charge based on the character of the soil was impractical. “Such an approach would be complex, time-consuming, and more prone to errors because of the greater work to classify areas on properties. Overall it would be more 17 expensive to administer relative to the common approach of classifying area as either pervious or impervious.” See Ex. MSD 57, p. 1, ll. 9-12. “Assessing whether a specific lot had ‘compacted soil’ or some other condition that made it less pervious than other similar vacant lots would be time-consuming and expensive, particularly in comparison with administration of an impervious area rate structure…. [I]t is fair and appropriate that properties without impervious area are not assessed the fee.” Id. at ll. 18-24. The Rate Consultant disagrees. Ms. Lemoine testified that parcels which were formerly improved “may have surfaces including compacted dirt, that restrict infiltration and therefore still contribute stormwater runoff.” See Ex. RC 43, Q20, p. 10. “Excluding these types of improved vacant land parcels completely from stormwater billing could potentially impact equity of cost recovery, as these types of improved vacant land also contribute some level of stormwater runoff, especially during high intensity wet weather events …. [T]he District could have considered estimating an effective impervious area by applying a reasonable low runoff factor to the parcel lot size.” Id. “There are utilities who assess an effective impervious area based on a runoff factor for properties such as vacant properties that have compacted soil and things, so even if they don’t have impervious area, if the soil is compacted from previous development where it, in effect, is not pervious area … compared to, say, a natural state, that utilities do indeed implement that.” See Ex. MSD 52, p. 64, ll. 10-17. Intervenor MIEC did not directly take a position on whether an individualized assessment of the runoff from a particular parcel based on the character of the soil. However, counsel for MIEC inquired of Ms. Locklear as to how conducting an individualized assessment could be more “error-prone” as Ms. Locklear testified. MIEC Counsel asked: “[i]f the baseline is we use aerial photography to determine perviousness or amount of area, how it can be more error-prone 18 to actually go out and visit the property or perhaps walk the property, take measurements of the property?” See Ex. MSD 65, p. 111, ll. 5-9. Counsel for MIEC advocated for an “appeals process whereby a property-specific inspection can occur and you can go out and gather additional data about that specific parcel of property.” Id. at p. 112, ll. 8-11. Ms. Locklear agreed that such a process would be effective, and that “the District made accommodation for that type of individualized reconsideration in the previous charge that was implemented and would or could do something similar in this case as well under an impervious area of rate structure.” Id. at p. 112, ll. 15-20. Incentive Programs The District proposes to provide an incentive program for residential and non-residential ratepayers. For residential ratepayers, the District will provide a credit of 50% of the average residential bill over a 10-year period for those ratepayers who implement Best Management Practices (“BMPs”) such as rain gardens or cisterns. See Ex. MSD 1, p. 4-7. Non-residential ratepayers will be eligible for a 50% credit for impervious area tributary to Volume Reducing Green Infrastructure, and for detention basins meeting the current channel protection criteria. Id. This will be a renewable 5-year credit. Id. The District will also provide credits for green roofs and pervious pavement, for ratepayers whose impervious area is less than 15% of the gross surface area for a parcel or contiguous parcels, and for ratepayers whose stormwater drains directly to a large river. See Ex. MSD 1, p. 4-8. The District estimates that the annual cost of the credit programs will be approximately $467,000.00. See Ex. MSD 3D, ll. 19-20. It is the District’s position that the credit programs are adequate and reasonable, in that they give a credit to those who choose to construct and maintain green infrastructure without compromising the financing of projects in the CIRP. See MSD Ex. 64, p. 5. Ms. Locklear 19 testified that “[m]ost utilities offer credits as part of a rate system…. MSD’s proposed credit and incentive program is within industry norms for such programs with respect to its major features.” See Ex. MSD 3F, p. 3, ll. 13-16. The District does not intend to inspect BMPs and will “assume[] that most BMPs will remain in place and functional until such time as the BMP fails or is removed by the property owner.”3 See Ex. MSD 37A, Q15, p. 9. The District determined that an upfront 50% credit of $135.00 for residential ratepayers was preferable as opposed to reducing a ratepayer’s bill by 50% (which would reduce their bill by $1.12 in most cases). See Ex. MSD 37A, Q16, pp. 9-10. The District determined that “an ongoing credit program would involve costs to track and manage the credit program, plus efforts to continue to ensure the effectiveness of the creditable practice. The District chose not to create a burdensome program unsupported by revenue or otherwise offset by the benefits received.” See Ex. MSD 37A, Q5, p. 6. The District intends to inspect facilities on non-residential properties which receive incentives on a three to five-year schedule. See Ex. MSD 36, p. 101, ll. 7-15. The District intends for the credit program to “provide some nominal benefit to property owners to provide BMPs without compromising the CIRP.” See Ex. MSD 64, p. 5. The concern with making the credit larger is that BMPs provide limited benefits and increasing the size of the credit results in less available revenue to construct projects in the CIRP. Id. Intervenor MIEC has not stated a position with regard to the adequacy of the credit programs. Rate Consultant Pam Lemoine testified that “[g]iven the small monthly fee, the Residential Incentive program as currently proposed may not provide adequate incentive for customers to deploy and maintain BMPs. The Commercial Incentive Program criteria appears 3 The District has published a BMP toolbox identifying volume reducing BMPs. See Ex. MSD 37A Q14, p. 9. 20 reasonable.” See Ex. RC 43, p. 5, Q9A4. Ms. Lemoine stated that “there appears to be no consideration for increasing participation in credit program over time, or any meaningful adjustment for appeals…. Therefore, it is possible that the District could expect lower revenues than that projected, and if the impact of the credit program is not incorporated into the billing units, the impact on revenues would be significant ….” Id. p. 9, Q19A. Ms. Lemoine further stated that the “credit program provides customers that have onsite stormwater Best Management Practices (BMPs) that mitigate stormwater runoff an opportunity for ongoing reduction to their bill. This enhances the equity of cost recovery. The maximum level of credit presented in the District’s rate proposal of 50 percent is within the range commonly used by stormwater utilities with similar programs.” Id. at p. 10, Q21A. Ms. Lemoine testified that the credit program for non-residential customers, however, is unlikely to achieve a reduction in effective impervious area. “Because the proposed Stormwater Capital Rate is so low, it is unlikely that a credit program will greatly incentivize customers to incur the up-front capital costs required to design and implement stormwater BMPs, if the properties already do not have those.” Id., Q22A. Similarly, with regard to the residential credit program, the “magnitude of this incentive will likely not be sufficient for a residential property owner to install stormwater BMPs.” Id., p. 11, Q23A. Additionally, the use of an upfront credit, as opposed to an ongoing credit, provides no ability for the District to revoke a credit for BMPs that are no longer functioning. Id. Ms. Lemoine noted that the some “utilities have implemented grant programs to provide financial support for the installation of approved features, such as rain gardens, that help mitigate stormwater runoff contribution.” Id., Q24A. “The District could consider a similar program, funded annually on a first come, first served basis, ….” Id., pgs. 11-12, Q25A. “By providing a 21 grant that offsets a greater portion of the up-front costs associated with implementing a BMP such as a raingarden, it could provide a greater incentive to manage stormwater runoff from eligible BMPs.” However, such a program “would reduce the funding available for the capital projects ….” Id., p. 12, Q30A. Ms. Lemoine testified that “as a general rule, the level of incentive that’s going to be provided by the credit programs is going to be limited just due to the nature of the low fee in the first place. Even with 100 percent credit, because the fee is so low, the utility is going to be limited in incentivizing folks to do things.” See Ex. MSD 52, p. 47, ll. 5- 10. Rate Consultant Nicole Young also testified that the “credit programs provide some nominal benefit to property owners to provide BMPs without compromising the CIRP. I believe this is a reasonable approach to provide some benefit to BMPs while maintaining the integrity of accomplishing the CIRP.” See Ex. RC 44, p. 6, Q12A. Ms. Young added that “[w]hile it is beneficial to install BMPs, MSD needs to collect the funds in order to build the stormwater infrastructure or undertake buyouts included in the CIRP. Increasing incentives or credits may increase BMPs, without actually achieving a reduction in effective impervious area where needed. Additionally, BMPs are expensive to build and maintain. In my experience, the amount of incentive or credit that would need to be provided to gain interest from residential or commercial property owners would need to equal the cost to the property owner to inspire participation that is not regulated, to gain a green certification, or altruistic.” Id. The District has not proposed allowing subdivisions and/or homeowners associations to be eligible for credits to maintain BMPs which serve their residents. Commissioner Goss asked Richard Unverferth whether the District would give consideration to permitting homeowners 22 associations to “pool” their credit. Mr. Unverferth testified that “we probably could explore that a little farther than has been done.” See Ex. MSD 65, p. 98, ll. 3-4. The District provided examples of other credit programs utilized by stormwater utilities throughout the nation. See Ex. MSD 37E – Baltimore Single Family Property Credits Guidance; see also Ex. MSD 37E-1 – Baltimore Non-Single Family Property Credits Guidance; Ex. MSD 37E-2 – Northeast Ohio Stormwater Fee Credit Policy Manual; Ex. MSD 37E-3 – Raleigh Rainwater Rewards Credit Program; Ex. MSD 37E-4 – Raleigh Stormwater Quality Cost Share Policy Revised; Ex. MSD 37E-5 – Raleigh Stormwater Utility Fee and Rate Information; Ex. MSD 37E-6 – Raleigh Stormwater Utility Credit and Adjustment Manual; Ex. MSD 37E-7, Realize Rain Gardens Rochester Cost Share Grant; and Ex. MSD 37E-8 – Rochester, MN Rain Gardens Grant Program. Henrietta Locklear testified that the Northeast Ohio Stormwater program provides for commonly-owned impervious area (such as those owned by subdivisions or homeowners associations) to be eligible for a credit. See Ex. MSD 36, p. 217, ll. 6-10. Under the Northeast Ohio policy, homeowners or condominium associations are eligible for stormwater quality credits of up to 25%, and up to 75%, in certain circumstances. See Ex MSD 37E-2, p. 4. 23 Respectfully submitted, LASHLY & BAER, P.C. By /s/ Lisa O. Stump Lisa O. Stump Brian J. Malone 714 Locust Street St. Louis, Missouri 63101 Tel: 314-621-2939 Fax: 314-621-6844 Email: lostump@lashlybaer.com BLACK & VEATCH Pamela R. Lemoine 16305 Swingley Ridge Road, Suite 230 Chesterfield, MO 63017 Tel: 636-536-5813 Fax: 913-458-3579 Email: LemoinePR@bv.com 24 CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to Janice Fenton, Office Associate Senior, Metropolitan St. Louis Sewer District; Susan Myers, Counsel for the Metropolitan St. Louis Sewer District; and Brandon Neuschafer, Counsel for Intervenor Missouri Industrial Energy Consumers on this 28th day of June, 2018. Ms. Janice Fenton Office Associate Senior Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103 JFENTON@stlmsd.com Ms. Susan Myers General Counsel Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103 smyers@stlmsd.com Mr. Brandon W. Neuschafer Bryan Cave LLP 211 N. Broadway, Suite 3600 St. Louis, MO 63102 bwneuschafer@bryancave.com /s/ Lisa O. Stump Lisa O. Stump