Loading...
Exhibit MIEC 73 - Rebuttal Testimony, Michael P. Gorman BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT Wastewater Rate Change Proceeding - 2019 Rebuttal Testimony of Michael P. Gorman On behalf of Missouri Industrial Energy Consumers April 23, 2019 Project 10765 Exhibit No.: Witness: Type of Exhibit: Sponsoring Party: Date Testimony Prepared: Michael P. Gorman Rebuttal Testimony Missouri Industrial Energy Consumers April 23, 2019 Michael P. Gorman Table of Contents BRUBAKER & ASSOCIATES, INC. BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT WASTEWATER RATE CHANGE PROCEEDING - 2019 Table of Contents to the Rebuttal Testimony of Michael P. Gorman Page I. SUMMARY .............................................................................................................................. 2  I.A. Wastewater Revenue Requirement ................................................................................. 2  I.B. Proposed Wastewater Rates ........................................................................................... 4  II. WASTEWATER REVENUE REQUIREMENT ........................................................................ 7  II.A. CIRP Funding Financial Policy ....................................................................................... 7  II.B. New AA Bond Interest Rate .......................................................................................... 13  II.C. CIRP Annual Spend ..................................................................................................... 15  II.D.  Estimated Adjustment to MSD’s Revenue Requirement with These Adjustments ....... 17  III. WASTEWATER RATE DESIGN ........................................................................................... 18  IV. WASTEWATER COST OF SERVICE STUDY ..................................................................... 21  IV.A. Allocation of I/I ............................................................................................................. 22  IV.B. Extra Strength Surcharges .......................................................................................... 28  QUALIFICATIONS OF MICHAEL P. GORMAN ........................................................... Appendix A Schedule MPG-1 through Schedule MPG-6 Michael P. Gorman Page 1 BRUBAKER & ASSOCIATES, INC. BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT WASTEWATER RATE CHANGE PROCEEDING - 2019 Rebuttal Testimony of Michael P. Gorman Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 1 A Michael P. Gorman. My business address is 16690 Swingley Ridge Road, Suite 140, 2 Chesterfield, MO 63017. 3 Q WHAT IS YOUR OCCUPATION? 4 A I am a consultant in the field of public utility regulation and a Managing Principal of 5 Brubaker & Associates, Inc., energy, economic and regulatory consultants. 6 Q PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND EXPERIENCE. 7 A This information is included in Appendix A to this testimony. 8 Q ON WHOSE BEHALF ARE YOU APPEARING IN THIS PROCEEDING? 9 A I am appearing on behalf of the Missouri Industrial Energy Consumers (“MIEC”), a 10 group of large industrial customers of the Metropolitan St. Louis Sewer District 11 (“MSD” or “District”). 12 Michael P. Gorman Page 2 BRUBAKER & ASSOCIATES, INC. I. SUMMARY 1 Q PLEASE SUMMARIZE YOUR RECOMMENDATIONS AND FINDINGS. 2 A In my testimony I will recommend adjustments to the District’s proposal to increase its 3 wastewater revenue over its fiscal years (“FY”) 2021 through 2024. Second, I will 4 comment on the reasonable adjustments to its wastewater rates to reflect a need for 5 an increase in wastewater revenue, and to reflect its cost of providing service to its 6 various customer classes. 7 I.A. Wastewater Revenue Requirement 8 Q PLEASE SUMMARIZE YOUR FINDINGS AND CONCLUSIONS RELATED TO THE 9 DISTRICT’S ESTIMATED WASTEWATER REVENUE DEFICIENCY. 10 A As outlined in Table 1 below, the District is proposing to increase wastewater revenue 11 by about $69 million during the FY 2021 through FY 2024 period (to $510 million from 12 $440 million). The District’s estimated increase per year (Column 1), along with my 13 estimated adjustment (Column 2), is shown below in Table 1. 14 TABLE 1 Annual Revenue Req. (Millions) Description MSD Proposed Adjusted (1) (2) Approved Rates FY 2020 $441 $441 Forecast Rates FY 2021 $453 $441 FY 2022 $471 $450 FY 2023 $490 $465 FY 2024 $510 $486 FY 2020-2024 $69 $45 ________________ Schedule MPG-1. Michael P. Gorman Page 3 BRUBAKER & ASSOCIATES, INC. As shown in Table 1 above, my adjustments reduce MSD’s proposed revenue 1 increase by about $24 million by FY 2024. 2 Q PLEASE DESCRIBE THE ADJUSTMENTS YOU MADE TO MSD’S FORECASTED 3 WASTEWATER REVENUE REQUIREMENT OVER THE FY 2021 THROUGH 4 FY 2024 PERIOD. 5 A I largely adopt MSD’s revenue requirement model but with only three adjustments. 6 The adjustments include the following: 7 1. I revised the model to maintain the previously Board-approved financial 8 policy used to set MSD’s revenue requirement. This includes a Capital 9 Improvement and Replacement Program (“CIRP”) funding mix of 75% 10 debt/25% equity (or Pay-As-You-Go ("PAYGO") financing), and a debt 11 service coverage (“DSC”) ratio of no less than 1.6x. MSD proposes to 12 revise this financial policy in this case to reflect a 60/40 debt and equity 13 financing mix and a minimum DSC of 1.8x. 14 I reject MSD’s proposed changes to its financial policy because the 15 changes are not needed to support its bond rating and maintain its access 16 to capital under reasonable terms and prices, but the proposed financial 17 policy change will unnecessarily increase wastewater prices to MSD’s 18 customers. Because reasonable prices are necessary to maintain MSD’s 19 credit standing, I believe the proposed revision to the financial policy is not 20 reasonable or justified. 21 2. I adjusted MSD’s projected interest rates on new tax exempt wastewater 22 utility revenue bonds with an AA rating. MSD assumed a 5% bond interest 23 rate. Current interest rates for these securities range from 2.5% to 3%, 24 and projected interest rates show a relatively flat interest rate outlook by 25 independent economists relative to current levels. I am proposing to use a 26 3% AA revenue bond interest rate as a conservative estimate of MSD’s 27 interest rates on new AA rated utility revenue bond issues. I made no 28 other changes to MSD’s Proposed System Indebtedness assumptions. 29 3. In order to follow the previously approved financial policy that MSD has 30 used to set rates, and maintain adequate DSC ratios, I set a wastewater 31 revenue requirement reflecting approximately a 70% bond funding and 32 30% PAYGO rate funding. This higher level of PAYGO was necessary in 33 order to meet the target DSC ratio over the forecast period. 34 4. I modified the proposed annual CIRP budget in calendar years 2023 and 35 2024. MSD’s projections show an increase in annual CIRP spending in 36 FY 2023 and FY 2024 of around $70 million in these two years relative to 37 Michael P. Gorman Page 4 BRUBAKER & ASSOCIATES, INC. FY 2021-2022. MSD’s projections show a material decrease in CIRP in 1 the years FY 2025-FY 2028. 2 A review of MSD’s projected CIRP spending in FY 2023 and FY 2024 3 shows certain projects that can be deferred to a future period. Adjusting 4 the CIRP annual spend in FY 2023/2024 allows for a more levelized level 5 of CIRP annual spending over the period FY 2021 through FY 2024, that 6 will continue in FY 2025 through FY 2028. In other words, this adjustment 7 creates more of a uniform levelized annual CIRP spending over the period 8 of FY 2021 through FY 2028. 9 MSD’s proposal for a significant spike in CIRP spending in FY 2023 and 10 FY 2024 creates an unjustified need to increase wastewater rates in FY 11 2023 and FY 2024. The unnecessary wastewater rate increase can be 12 mitigated by deferring discretionary CIRP projects out over a few years. 13 Each of these adjustments will be described and supported below. My 14 adjustments were made to Exhibit MSD 52, St. Louis MSD Rate Financial Plan Model 15 FY21-24, following the instructions provided in Exhibit MSD 53, Rate Model Guide. 16 I.B. Proposed Wastewater Rates 17 Q PLEASE SUMMARIZE MSD’S PROPOSED WASTEWATER RATE1 INCREASE 18 PROPOSAL. 19 A MSD is proposing four consecutive increases to its wastewater service charges at the 20 beginning of Fiscal Years (“FY”) 2021 through FY 2024. The District is proposing 21 these rate increases in order to fund a four-year wastewater CIRP of approximately 22 $1.5 billion. This CIRP is part of a larger CIRP needed to comply with a Consent 23 Decree (“CD”) settlement with the U.S. Environmental Protection Agency (“EPA”). 24 The wastewater user charges MSD proposes the Rate Commission approve 25 are listed in Exhibit MSD 1 at page ES-4. These proposed wastewater user charges 26 are included in the “Proposed” columns for FY21 through FY24 and are summarized 27 in my Table 2 below. 28 1The terms “wastewater rates” and “wastewater user charges” are used interchangeably throughout this testimony. Michael P. Gorman Page 5 BRUBAKER & ASSOCIATES, INC. Q ARE YOU PROPOSING ANY CHANGES TO MSD’S PROPOSED WASTEWATER 1 RATES OVER THE FORECAST REVENUE REQUIREMENT PERIOD? 2 A Yes. I identified several concerns I have with MSD’s cost of service model used to 3 develop its proposed wastewater rates. 4 First, in its proof of revenue, MSD did not use the rates it identified as 5 proposed wastewater rates during the forecast period. Rather, it used a different set 6 of rates than its revenue proof model. This revenue proof model then was used to 7 identify the amount of rate increase needed to adjust current revenues to the 8 forecasted revenue requirement. Adjusting this revenue proof model to reflect MSD’s 9 Approved Line Description FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 FY 2021 FY 2022 FY 2023 FY 2024 Base Charge ($/Bill) 1 Billing & Collection 7.38$ 5.11$ 5.31$ 5.51$ 5.72$ (2.27)$ 0.20$ 0.20$ 0.21$ -30.8% 3.9% 3.8% 3.8% 2 System Availability 18.97 21.40 22.21 23.05 23.92 2.43 0.81 0.84 0.87 12.8% 3.8% 3.8% 3.8% 3 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% 3.8% 3.8% Compliance Charge ($/Bill)1 4Tier 1 3.14$ 4.44$ 4.55$ 4.71$ 4.85$ 1.30$ 0.11$ 0.16$ 0.14$ 41.4% 2.5% 3.5% 3.0% 5 Tier 2 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% 6 Tier 3 137.75 133.20 136.37 140.99 144.98 (4.55) 3.17 4.62 3.99 -3.3% 2.4% 3.4% 2.8% 7 Tier 4 203.49 177.60 181.83 187.98 193.30 (25.89) 4.23 6.15 5.32 -12.7% 2.4% 3.4% 2.8% 8 Tier 5 266.10 222.00 227.29 234.98 241.63 (44.10) 5.29 7.69 6.65 -16.6% 2.4% 3.4% 2.8% Total Non-Residential Service Charge2 9 Tier 1 29.49$ 30.95$ 32.07$ 33.27$ 34.49$ 1.46$ 1.12$ 1.20$ 1.22$ 5.0% 3.6% 3.7% 3.7% 10 Tier 2 88.96 88.67 91.16 94.36 97.31 (0.29) 2.49 3.20 2.95 -0.3% 2.8% 3.5% 3.1% 11 Tier 3 164.10 159.71 163.89 169.55 174.62 (4.39) 4.18 5.66 5.07 -2.7% 2.6% 3.5% 3.0% 12 Tier 4 229.84 204.11 209.35 216.54 222.94 (25.73) 5.24 7.19 6.40 -11.2% 2.6% 3.4% 3.0% 13 Tier 5 292.45 248.51 254.81 263.54 271.27 (43.94) 6.30 8.73 7.73 -15.0% 2.5% 3.4% 2.9% Volume Charge 14 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% 15 Unmetered ($/Bill per fixture 16 Per Room 2.89 2.97 3.09 3.21 3.34 0.08 0.12 0.12 0.13 2.8% 4.0% 3.9% 4.0% 17 Per Water Closet 10.72 11.07 11.49 11.93 12.38 0.35 0.42 0.44 0.45 3.3% 3.8% 3.8% 3.8% 18 Per Bath 8.93 9.23 9.58 9.94 10.32 0.30 0.35 0.36 0.38 3.4% 3.8% 3.8% 3.8% 19 Per Separate Shower 8.93 9.23 9.58 9.94 10.32 0.30 0.35 0.36 0.38 3.4% 3.8% 3.8% 3.8% Extra Strength Surcharges ($/ton)1 15 Suspended Solids > 300 mg/l 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% 16 BOD > 300 mg/l 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% 17 COD > 600 mg/l 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/l = milligram per liter 1Applicable only to non-residential customers. 2Total Base Charge plus Tiered Compliance Charge. Proposed Percent TABLE 2 MSD Proposed Annual Rate Increases (With Bond Financing) Proposed Annual Increase Amount Michael P. Gorman Page 6 BRUBAKER & ASSOCIATES, INC. proposed wastewater rates increases the amount of revenue that would be generated 1 under MSD’s proposed wastewater rates. 2 Second, I proposed adjustments to MSD’s cost of service that more accurately 3 reflect MSD’s cost of service. MSD inappropriately allocated over 60% of the cost 4 associated with infiltration and inflow (“I/I”) on a throughput or volume basis. I have 5 several disagreements I have with MSD on I/I cost classification. Allocating 60% of 6 collector system infrastructure costs on the basis of volume does not accurately 7 describe how capacity on the collector system is designed in order to accommodate 8 both wastewater and I/I flow. Further, the length of the collector system, number of 9 manholes and lift stations, and other points of water infiltration are directly related to 10 the number of customers on the system and the length of collector system necessary 11 to connect these customers to the system. For all these reasons, I/I costs are more 12 accurately reflected as 50% customer and 50% throughput, but more accurately, the 13 percentage of I/I costs allocated on customer should be much higher than 50%. 14 However, for the sake of limiting the issues in this case, I am using a conservative 15 classification of I/I costs of 50% customer and 50% volume. 16 With these adjustments to the class cost of service study, I am proposing a 17 modification to the District’s wastewater rate design to incorporate more revenue 18 collections in fixed monthly charges and less in volumetric charges. An additional 19 benefit of this rate design is that it will produce more stable and predictable revenue 20 collections for MSD, which will support its increasing debt load at its current strong 21 AA-rated credit rating. 22 The wastewater rates that accomplish these objectives are shown below in 23 Table 3. 24 Michael P. Gorman Page 7 BRUBAKER & ASSOCIATES, INC. II. WASTEWATER REVENUE REQUIREMENT 1 II.A. CIRP Funding Financial Policy 2 Q HAS MSD PROPOSED TO REVISE ITS FINANCIAL POLICY PREVIOUSLY USED 3 TO ESTABLISH ITS REVENUE REQUIREMENT IN SETTING WASTEWATER 4 RATES? 5 A Yes. MSD witness Bethany Pugh describes the District’s proposed new financial 6 policy for its Capital Investment and Replacement Program (“CIRP”). Ms. Pugh 7 states that previously, the District developed a revenue requirement using a CIRP 8 funding policy of 75% debt and 25% PAYGO (equity) funding from the period 2004 9 through 2018. 10 Approved 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 Base Charge ($/Bill) 1 Billing & Collection 7.38$ 5.11$ 5.31$ 5.51$ 5.72$ (2.27)$ 0.20$ 0.20$ 0.21$ -30.8% 3.9% 3.8% 3.8% 2 System Availability 18.97 21.40 22.21 23.05 23.92 2.43 0.81 0.84 0.87 12.8% 3.8% 3.8% 3.8% 3 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% 3.8% 3.8% Compliance Charge ($/Bill)1 4Tier 1 3.14$ 4.44$ 4.55$ 4.71$ 4.85$ 1.30$ 0.11$ 0.16$ 0.14$ 41.4% 2.5% 3.5% 3.0% 5 Tier 2 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% 6 Tier 3 137.75 133.20 136.37 140.99 144.98 (4.55) 3.17 4.62 3.99 -3.3% 2.4% 3.4% 2.8% 7 Tier 4 203.49 177.60 181.83 187.98 193.30 (25.89) 4.23 6.15 5.32 -12.7% 2.4% 3.4% 2.8% 8 Tier 5 266.10 222.00 227.29 234.98 241.63 (44.10) 5.29 7.69 6.65 -16.6% 2.4% 3.4% 2.8% Total Non-Residential Service Charge2 9 Tier 1 29.49$ 30.95$ 32.07$ 33.27$ 34.49$ 1.46$ 1.12$ 1.20$ 1.22$ 5.0% 3.6% 3.7% 3.7% 10 Tier 2 88.96 88.67 91.16 94.36 97.31 (0.29) 2.49 3.20 2.95 -0.3% 2.8% 3.5% 3.1% 11 Tier 3 164.10 159.71 163.89 169.55 174.62 (4.39) 4.18 5.66 5.07 -2.7% 2.6% 3.5% 3.0% 12 Tier 4 229.84 204.11 209.35 216.54 222.94 (25.73) 5.24 7.19 6.40 -11.2% 2.6% 3.4% 3.0% 13 Tier 5 292.45 248.51 254.81 263.54 271.27 (43.94) 6.30 8.73 7.73 -15.0% 2.5% 3.4% 2.9% Volume Charge 14 Metered - $/Ccf 4.87$ 4.70$ 4.75$ 4.90$ 5.11$ (0.17)$ 0.05$ 0.14$ 0.22$ -3.5% 1.1% 3.0% 4.4% 15 Unmetered ($/Bill per fixture 16 Per Room 2.89 2.79 2.83 2.93 3.07 (0.10) 0.04 0.10 0.14 -3.6% 1.5% 3.5% 4.9% 17 Per Water Closet 10.72 10.41 10.57 10.94 11.48 (0.31) 0.16 0.37 0.54 -2.8% 1.5% 3.5% 4.9% 18 Per Bath 8.93 8.69 8.82 9.13 9.57 (0.24) 0.13 0.31 0.45 -2.7% 1.5% 3.5% 4.9% 19 Per Separate Shower 8.93 8.69 8.82 9.13 9.57 (0.24) 0.13 0.31 0.45 -2.7% 1.5% 3.5% 4.9% Extra Strength Surcharges ($/ton)1 15 Suspended Solids > 300 mg/l 283.87$ 277.81$ 284.81$ 297.73$ 315.43$ (6.06)$ 7.00$ 12.92$ 17.70$ -2.1% 2.5% 4.5% 5.9% 16 BOD > 300 mg/l 708.56 693.41 710.89 743.16 787.34 (15.15) 17.48 32.26 44.18 -2.1% 2.5% 4.5% 5.9% 17 COD > 600 mg/l 354.30 346.71 355.45 371.58 393.67 (7.59) 8.74 16.13 22.09 -2.1% 2.5% 4.5% 5.9% ccf = hundred cubic feet (approx. 748 gallons) mg/l = milligram per liter 1Applicable only to non-residential customers. 2Total Base Charge plus Tiered Compliance Charge. TABLE 3 MIEC Proposed Annual Rate Increases (With Bond Financing) Proposed Annual Increase Proposed Amount Percent Michael P. Gorman Page 8 BRUBAKER & ASSOCIATES, INC. For this filing, the District proposes to modify that funding policy to 60% debt 1 and 40% PAYGO financing.2 Ms. Pugh also states that the District proposes to 2 establish a revenue requirement with a targeted “minimum” DSC ratio of total debt of 3 1.8x, with a range of 2.1x to 1.8x.3 In MSD’s last rate case, its DSC target fell 4 between 1.6x and 1.8x. 5 Q HOW DID MSD DESCRIBE ITS FINANCIAL POLICY IN ITS LAST TWO RATE 6 FILINGS? 7 A In its 2007 filing, MSD proposed a 100% PAYGO financing. In his Direct Testimony, 8 MSD then Treasurer Karl Tyminski recommended an all equity financing program 9 because of the uncertainty of the CIRP and pace of annual spending, and that use of 10 debt financing would ultimately increase the cost to customers of the CIRP program in 11 the long run.4 MIEC objected to MSD's proposal because of the impact 100% 12 PAYGO financing would have on wastewater rates. The Rate Commission 13 temporarily approved MSD's proposal for rates that would be in effect for 2008 and 14 then reviewed alternative PAYGO approaches during 2008.5 The Rate Commission 15 and eventually the Executive Board rejected MSD Staff’s proposal for 100% rate 16 revenue funding, and instead adopted a prudent funding mix of approximately 75% 17 debt and 25% PAYGO or equity financing. As outlined in current MSD financial 18 witness Bethany Pugh’s testimony at 4, this financing mix has been largely used by 19 MSD from FY 2004 through FY 2018.6 20 2Exhibit MSD 3G, Bethany Pugh Direct Testimony, page 4, lines 7-16. 3Id. at 5. 42011 Rate Change Proceeding, MSD Exhibit No. 9E, Direct Testimony of Karl J. Tyminski, May 11, 2011, at 3. 5 2011 Wastewater Rate Proposal, Exhibit MSD 1. 6Exhibit MSD 3G, Bethany Pugh Direct Testimony, at 4, lines 12 and 13. Michael P. Gorman Page 9 BRUBAKER & ASSOCIATES, INC. With respect to targeted DSC ratio, in the 2011 and 2015 rate filings, MSD 1 witnesses described the targeted DSC ratio needed to maintain an AA bond rating. 2 In MSD’s 2015 rate case, Bethany Pugh described the District’s financial plan 3 in the past case as she does in this case. However, in the 2015 rate case, Ms. Pugh 4 stated that the District developed “financial obligations to maintain AA- category credit 5 ratings”7 and described the targeted DSC ratio as: 6 Based on the District’s historical performance and expected 7 required coverage to maintain ratings in the AA-category, 8 senior lien bonds have a projected minimum coverage target of 9 2.50X while the minimum total coverage (including senior lien 10 bonds and subordinate SRF obligations) is targeted at 1.60X.8 11 In MSD’s 2011 rate case, its Treasurer, Karl Tyminski, described the District’s 12 projected DSC as “District’s senior lien bond debt service coverage is projected at 13 234 percent in FY 16 of the proposed rate change cycle while total debt service 14 coverage is projected at 166 percent.”9 On a total maximum DSC, Mr. Tyminski 15 projected a total maximum DSC of 1.4x. 16 In this proceeding, Ms. Pugh explains that the District had previously used a 17 funding mix of 75% debt and 25% equity to fund its CIRP for FY 2004 through 18 FY 2018.10 However, the District is now proposing to change its policy in this 19 proceeding to fund CIRP using a mix of 60% debt and 40% equity. Further, Ms. Pugh 20 also proposes to increase the target DSC ratio to a minimum on total debt of 1.8x, 21 from 1.6x in MSD’s last two rate proceedings.11 22 72015 Rate Change Proceeding, MSD Exhibit No. MSD 3F, Direct Testimony of Bethany Pugh, February 26, 2015, at 5. 8Id. 92011 Rate Change Proceeding, MSD Exhibit No. 9E, Direct Testimony of Karl J. Tyminski, May 11, 2011, at 2. 10Exhibit MSD 3G, Bethany Pugh Direct Testimony, at 4, lines 12 and 13. 11Id. at 4-5. Michael P. Gorman Page 10 BRUBAKER & ASSOCIATES, INC. Importantly, Ms. Pugh simply has not provided any evidence that there is a 1 need to change the financing policy that MSD has previously used to measure a 2 wastewater revenue requirement. Therefore, I propose to use the same financial 3 policy that has previously been used to measure MSD’s revenue requirement, and 4 has supported its AA bond rating. 5 Q HAVE THE RATE-SETTING POLICIES OF MSD SUPPORTED ITS AA BOND 6 RATING? 7 A Yes. Ms. Pugh notes in her testimony in this case, the Rate Commission’s financial 8 policies have supported MSD’s AA bond rating. Ms. Pugh goes over credit rating 9 agencies’ reports from Moody’s, Standard & Poor’s (“S&P”) and Fitch, the three 10 primary credit rating agencies assessing corporate debt and municipal debt including 11 that issued by MSD. All those credit rating agencies have found previous rate 12 decisions for MSD have been supportive of its credit rating, and provide a reasonable 13 opportunity to recover its costs including its significant capital costs associated with 14 CIRP. More importantly, these credit rating agencies also assess the credit standing 15 of the utility by considering not only the financial metrics of the utility, but whether or 16 not the customers of the utility can afford to pay their bills. That is, as part of the 17 credit rating process, credit rating agencies consider rate affordability. 18 I would note that in MSD’s last rate case, its earned DSC was much higher 19 than the target DSC used for ratemaking purposes. MSD explained that rate 20 projections used in 2015 over-recovered its cost of service. Specifically, MSD 21 witness Marion Gee states that MSD’s updated revenue requirement forecast 22 compared to the 2015 rate model, resulted in an understatement of other revenue by 23 approximately $9.7 million, overstatement of operating expenses by around 24 Michael P. Gorman Page 11 BRUBAKER & ASSOCIATES, INC. $43.2 million, and an overstatement of debt service expenses by approximately 1 $26.9 million.12 By understating miscellaneous revenues, and overstating operating 2 expenses and debt service costs, MSD’s actual earned DSC was much higher than 3 that used to set rates. The Rate Commission should again be careful to ensure that 4 MSD is not again overstating operating expenses and debt service costs, and 5 understating revenue collections from non-wastewater service charges. 6 Q IS SETTING REASONABLE WASTEWATER RATES IMPORTANT FOR 7 MAINTAINING MSD’S BOND RATING? 8 A Yes. Credit rating agencies are keenly concerned about the utility’s ability to recover 9 its cost of service from its ratepayers. This requires some expectation that ratepayers 10 can afford to pay the utility’s bills. Indeed, the credit reports referenced by MSD 11 consultant Bethany Pugh and the benchmark factors by S&P, Moody’s and Fitch all 12 include rate affordability factors such as debt per customer, and comparisons of the 13 utility bill to the income of customers of the utility. 14 Q HAS MSD PROPOSED TO SET WASTEWATER RATES WITH A FINANCIAL 15 POLICY THAT WAS DIFFERENT THAN THAT USED IN ITS LAST TWO RATE 16 CASES? 17 A Yes. However, the Rate Commission rejected a more expensive financial policy 18 proposed by MSD in a 2007 rate case. In that wastewater rate case, MSD proposed 19 100% PAYGO financing because of the uncertainty about future CIRP annual spend, 20 and a perspective that debt financing would help cushion the initial rate shock, but 21 12Exhibit MSD 3E, Direct Testimony of Marion Gee, at 6-7. Michael P. Gorman Page 12 BRUBAKER & ASSOCIATES, INC. would ultimately cost more in the long run.13 Importantly, the Rate Commission 1 rejected that proposed financial mix, and approved setting wastewater revenue 2 requirements using a 75% debt and 25% funding mix in that proceeding and the next 3 two cases. I would also note that contrary to MSD’s assertions in that case, 4 wastewater rates are considerably lower today than they would have been had 5 MSD’s proposed 100% more expensive financial policy been adopted in that 6 proceeding. This history I believe supports my recommendation to the Rate 7 Commission to not accept MSD’s proposed modification to the financial policy that 8 has been used to set wastewater revenue requirements in MSD’s last three rate 9 cases, and has been supported by credit analysts in maintaining MSD’s current 10 investment grade AA bond rating, despite an increasing level of MSD debt needed to 11 support its very large CIRP program. 12 Q IS A CHANGE IN MSD’S FINANCIAL POLICY NEEDED TO REFLECT AN 13 INCREASING LEVEL OF DEBT? 14 A No. I encourage the Rate Commission to consider that MSD’s CIRP program is 15 approaching the end of the EPA Consent Decree capital spending. MSD’s 16 projections in this case, as described below, show a significant decline in CIRP 17 spending after the end of this rate period, FY 2024. MSD’s rates currently will be set 18 to recover in excess of $100 million of annual CIRP funding as PAYGO financing. 19 This level of PAYGO funding is necessary in order to maintain a DSC ratio of at least 20 1.6x. Going forward, the DSC ratio will set the level of PAYGO funding, and because 21 CIRP spending will start to wind down over the next five to ten years, MSD will 22 eventually begin recovering nearly all of its CIRP annual spend with PAYGO funding. 23 13MSD Treasurer Karl Tyminski, March 7, 2007 testimony at 3. Michael P. Gorman Page 13 BRUBAKER & ASSOCIATES, INC. At that point in time, MSD will start to pay down its level of debt, will maintain an 1 adequate DSC ratio of at least 1.6x, and will accomplish this strengthening of its 2 balance sheet and maintenance of strong investment grade credit standing but at the 3 most reasonable wastewater rate levels possible. 4 II.B. New AA Bond Interest Rate 5 Q ARE THERE ANY OTHER ISSUES ASSOCIATED WITH MSD’S FORECAST 6 ABOUT WHICH YOU WOULD LIKE TO COMMENT? 7 A Yes. I also believe that MSD’s projected new bond funding interest rate projections 8 are unreasonable. MSD witness Tim Snoke outlines an overwhelming support by 9 MSD customers to mitigate rate increases by using a balanced funding of debt and 10 equity capital to support MSD’s CIRP program. In projecting future debt issues, Mr. 11 Snoke has projected a 5% interest rate for a 30-year AA municipal water revenue 12 bond, and a 3% projected interest rate for state revolving fund loans.14 13 These projected interest rates simply are not reasonable. As shown in the 14 table below, AA-rated municipal debt for water and wastewater systems has been 15 consistently at 3% or less during 2018. 16 14Exhibit MSD 3F, Direct Testimony of Tim Snoke, at 7-9. Michael P. Gorman Page 14 BRUBAKER & ASSOCIATES, INC. Also, historically AA municipal rated debt interest rates have tracked that of 1 30-year Treasury securities. However, as also shown in Table 3 above, independent 2 economists’ projections of Treasury bond yields out over the next three years indicate 3 a relatively flat interest rate curve. Current 30-year Treasury bonds are around 3%, 4 and projections over the next several years are 3.0% to 3.2%. Current utility revenue 5 bonds with an AA rating are around 2.5%. It is possible that MSD may be able to 6 issue new debt at around a 2.5% interest rate. However, it could be as high as 3%. 7 Therefore, I recommend a more conservative estimate of the interest cost on new 8 bond issues to be 3%, rather than the 5% proposed by MSD. 9 I also believe that the state revolving fund loan rate of 3% may be overstated 10 because these loans typically are cheaper than that of AA-rated utility revenue bonds. 11 However, I will leave this interest rate alone simply to be conservative in trying to 12 capture what MSD’s future interest rates will be on new bond issuances. 13 Historical Range Projected Range Last Six Months Current 2Q 2019-3Q 2020 (Low-Max)1 (4/17/19)2 (Low-Max)3 30-Year Treasury Securities 2.4% - 3.4% 3.0% 3.0%-3.2% Water/Sewer AA Revenue Bonds 2.5% - 3.3% 2.5% - Sources: 1 The Value Line Investment Survey, Selection & Opinion , Various Reports. 2 The Value Line Investment Survey, Selection & Opinion , April 26, 2019. 3 Blue Chip Financial Forecasts , April 1, 2019. TABLE 4 Treasury and Water/Sewer Bond Yields Description Michael P. Gorman Page 15 BRUBAKER & ASSOCIATES, INC. II.C. CIRP Annual Spend 1 Q HAVE YOU REVIEWED MSD’S PROPOSED ANNUAL SPEND FOR CIRP OVER 2 THE FORECAST PERIOD? 3 A Yes. I actually looked at its annual spend over the period FY 2020 through FY 2028. 4 This level of spend is outlined in Figure 1 below. 5 6 As shown in Figure 1 above, MSD’s annual spend in most years is around 7 $350 million to $370 million. However, in FY 2023 and FY 2024 it increases to over 8 $420 million. This temporary increase in annual CIRP spending has a significant 9 impact on MSD’s estimated revenue requirement in FY 2023 and FY 2024. 10 The annual level of MSD’s projected CIRP capital spending is outlined on my 11 Schedule MPG-2. 12 Source: Adjusted Exhibit MSD 52 - St. Louis MSD Rate Financial Plan Model FY21-24. MSD Proposed vs. MIEC Proposed Figure 1 CIRP Need $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 MillionsMIEC Proposed MSD Proposed Michael P. Gorman Page 16 BRUBAKER & ASSOCIATES, INC. The proposed adjustment to the annual level of CIRP spending shown in 1 Figure 1, attempts to levelize MSD’s annual CIRP spending over the FY 2021 through 2 FY 2024 period, and allow for an increased level of spending in FY 2025 through FY 3 2028. This is designed to mitigate impacts on MSD’s wastewater revenue 4 requirement, and keep wastewater rates as competitive as possible. Further, MSD’s 5 CIRP programs I believe include several projects which provide MSD the discretion to 6 defer these projects out beyond the FY 2021 through FY 2024 period, in order to 7 accomplish this more levelized level of annual CIRP capital spend. 8 Q PLEASE DESCRIBE WHY YOU BELIEVE MSD’S CIRP CAPITAL BUDGET 9 SHOWS PROJECTS THAT PROVIDE MSD THE DISCRETION TO DEFER SOME 10 CAPITAL SPENDING CURRENTLY PLANNED FOR FY 2023 AND FY 2024 TO 11 PERIODS A FEW YEARS LATER. 12 A No. certain major capital investments in FY 2023, and FY 2024 more specifically, 13 have not been shown to be needed for the EPA Consent Decree or any other way 14 that MSD does not have the discretion to levelize these over the entire forecast 15 period. 16 As shown on my Schedule MPG-3, I have outlined the District’s CIRP 17 programs for the 2021 through 2024 period. While there are several programs that 18 have not been identified as critical to be made during this time period, it also 19 demonstrates that there are several very large capital programs that could be 20 deferred for a few years, in an effort to produce an annual level of CIRP spending 21 during the forecast period and several years immediately following it. Certain 22 examples include: 23 Michael P. Gorman Page 17 BRUBAKER & ASSOCIATES, INC. 1. Wastewater solids combustion boiler, 1 2. Wastewater plant repair, and 2 3. Capacity Expansion. 3 Q PLEASE EXPLAIN WHY LEVELIZING THE ANNUAL CIRP CAPITAL SPEND CAN 4 MITIGATE THE IMPACT ON CUSTOMERS’ RATES. 5 A Customers are funding the CIRP program with a combination of debt funding and rate 6 revenue funding. Over time, customers’ rates accomplish the dual objective of 7 providing approximately $100 million per year of rate revenue funding, paying MSD’s 8 debt service cost, which in turn reduces approximately $50 million per year of 9 embedded debt principal payments. 10 By managing the level of CIRP spending to a levelized annual amount, MSD 11 can fund a large percentage of CIRP with rate revenue without unnecessary rate 12 increases, and still produce strong credit rating metrics, liquidity metrics, and 13 customer to debt affordability metrics. 14 II.D. Estimated Adjustment to MSD’s 15 Revenue Requirement with These Adjustments 16 Q HOW WOULD MSD’S REVENUE REQUIREMENT OVER THE FY 2021 THROUGH 17 FY 2024 PERIOD BE IMPACTED BY IMPLEMENTING ANY ADJUSTMENTS TO 18 ITS COST OF SERVICE AS YOU HAVE OUTLINED ABOVE? 19 A MSD’s proposed revenue requirement is shown on Schedule MPG-1, page 1. A 20 revised revenue requirement for wastewater operations reflecting these adjustments 21 to MSD’s cost of service is summarized on my Schedule MPG-1, page 2. As shown 22 on this Schedule MPG-1, I modified the revenue requirement development by 23 Michael P. Gorman Page 18 BRUBAKER & ASSOCIATES, INC. maintaining the existing financial policy setting rates to produce at least a DSC ratio 1 of 1.6x, while still meeting the other financial liquidity and customer debt parameters 2 to maintain MSD’s credit standing, using a more realistic estimate of the interest costs 3 on new AA-rated utility revenue bond issues, and spreading the CIRP capital spend 4 to a more levelized amount in order to mitigate impact on customers’ rates, needed to 5 allow MSD the opportunity to build this CIRP program in a more balanced and 6 responsible manner. The resulting revenue requirement indicated on this schedule is 7 summarized in Table 1 above. Schedule MPG-1, page 3, shows the remaining 8 Revenue Bond Authorization under each scenario. 9 Q WHAT IS THE IMPACT OF THE REVISED REVENUE REQUIREMENT ON KEY 10 RATING AGENCY METRICS? 11 A MSD includes a selection of Key Rating Agency Metrics in its Rate Model. My 12 Schedule MPG-4 summarizes several key metrics between MSD’s proposal and my 13 adjusted revenue requirement. As shown on this schedule, the resulting DSC ratio, 14 liquidity measures (cash on hand), and debt to customer all are in line with credit 15 rating agency benchmarks that have previously supported MSD’s current AA rated 16 investment bond rating. 17 III. WASTEWATER RATE DESIGN 18 Q DID YOU REVIEW MSD’S PROPOSED NEW WASTEWATER RATES TO 19 RECOVER ITS CLAIMED WASTEWATER REVENUE REQUIREMENT? 20 A Yes. The District’s model included a tab which was titled “Revenue Proof.” I 21 reviewed this tab to assess whether or not the District’s proposed rates produce the 22 revenue requirement based on the billing unit tab (Demand Projection). This 23 Michael P. Gorman Page 19 BRUBAKER & ASSOCIATES, INC. comparison is necessary to have confidence that MSD’s proposed wastewater rates 1 produce the revenue requirement it asserts that it needs to recover its cost of service. 2 Q WHAT DID YOU FIND? 3 A The District’s model includes an error. Specifically, the District’s proposed rates are 4 different than the rates included in the revenue proof tab. Indeed, the District’s 5 proposed rates appear to include reductions in certain rate elements rather than 6 increases in all the rates in order to recover the revenue requirement. The rates 7 included in the revenue proof do reflect increases in all these service rates, and 8 appear to more accurately reflect the rates MSD Staff is intending to implement in 9 order to recover its projected revenue requirement. 10 Q DO YOU BELIEVE THAT THE RATES INCLUDED IN THE REVENUE PROOF TAB 11 ARE REASONABLE FOR RECOVERING MSD’S REVENUE REQUIREMENT 12 OVER THE FORECAST PERIOD? 13 A I do not. As noted above, I believe MSD is overstating the revenue requirement 14 needed to fully recover its CIRP funding, and reasonable projections of operating 15 expenses over this time period. For this reason, I propose revisions to these rates. 16 Q IN REVIEWING THE DISTRICT REVENUE PROOF, AND USING THE PROPOSED 17 RATES IN LIEU OF THE RATES IN THAT TAB, DID THE DISTRICT 18 ACCURATELY MEASURE THE AMOUNT OF REVENUE AT CURRENT RATES? 19 A No. The District understated the amount of wastewater revenue it would receive 20 based on its proposed rates by approximately $180,000 to $300,000 per year. 21 Michael P. Gorman Page 20 BRUBAKER & ASSOCIATES, INC. Q HOW DO YOU PROPOSE TO REVISE MSD’S WASTEWATER RATES TO 1 RECOVER THIS LOWER REVENUE REQUIREMENT? 2 A I propose to adjust rates to produce a reasonable recovery of costs of providing 3 service to the various rate classes. Toward this objective, I will comment on one 4 aspect of MSD’s cost of service study which I think places too much cost in the 5 volumetric charges. As outlined below, MSD proposes to allocate I/I costs as 6 approximately 60% volumetric and 40% customer related. I believe it is not 7 appropriate to allocate 60% of I/I costs on volume. Specifically, as noted by MSD, I/I 8 costs are incurred based on customer connections, and leaky collector systems, 9 manholes and pumping stations. As such, the actual collection system is driven by 10 both number and location of customers on the system and volumetric throughput. As 11 such, I recommend allocating I/I costs on the basis of 50% customer and 50% 12 volume. 13 Making these corrections to the District’s cost of service study clearly shows 14 that an increase in the fixed charges for MSD wastewater service is justified. 15 Q WILL THERE BE OTHER BENEFITS OF INCREASING FIXED CHARGES MORE 16 THAN VOLUMETRIC CHARGES IN DESIGNING MSD’S RATES? 17 A Yes. Fixed charges are more stable than are volumetric charges. Hence, increasing 18 MSD’s revenue collections through fixed charges will stabilize its revenue collection 19 and help support stronger predictable revenue stream, which will support its bond 20 rating. This rate design aspect to stabilize revenue collection will help support a 21 strong investment grade bond rating for MSD, while it increases its outstanding debt 22 used to support its CIRP program. 23 Michael P. Gorman Page 21 BRUBAKER & ASSOCIATES, INC. I show the difference between the variability in number of customers and 1 volumetric charges on my Schedule MPG-5. As shown on this schedule, MSD’s 2 number of customers simply has been increasing and relatively steady over the last 3 three years. However, volumetric charges can vary significantly from year to year. 4 Recovering significant amounts of revenue based on volumetric charges will create 5 more volatility in revenue collection, and weaken MSD’s ability to fully recover its cost 6 of service. Again, this can have a detrimental impact on its bond rating. 7 Q HOW DO YOU PROPOSE TO ADJUST MSD’S WASTEWATER RATES IN ORDER 8 TO RECOVER YOUR ESTIMATED REVENUE REQUIREMENT? 9 A I develop this on my Schedule MPG-6. As shown on that schedule, I use MSD’s 10 proposed meter charges, and system assessment charges. Because I am proposing 11 to collect less revenue, I have reduced MSD’s projected volumetric charges and extra 12 strength surcharges. Both volume and extra strength surcharges can vary over time. 13 As shown on my Schedule MPG-6, a revised proof of revenue shows that 14 these revised rates will recover my estimate of MSD’s revenue requirement over the 15 period FY 2021 through FY 2024. 16 IV. WASTEWATER COST OF SERVICE STUDY 17 Q HAVE YOU REVIEWED MSD’S COST OF SERVICE STUDY? 18 A Yes. Mr. Thomas Beckley sponsors MSD’s cost of service study. MSD relied on the 19 cost of service allocation methodology recommended by the Water Environment 20 Federation (“WEF”). 21 Michael P. Gorman Page 22 BRUBAKER & ASSOCIATES, INC. Q IS MSD’S COST OF SERVICE STUDY REASONABLE? 1 A I generally support the methodology used in MSD’s class cost of service study in this 2 proceeding, but have concerns with the allocation of I/I costs, and the allocation of 3 capital costs to the Extra Strength Surcharges. 4 IV.A. Allocation of I/I 5 Q WHAT ARE I/I COSTS? 6 A At page 6 of his testimony, Mr. William Stannard explains that I/I is water entering the 7 wastewater system from illegal roof and foundation drains, groundwater infiltration 8 through sewer service pipe and main joints, and stormwater runoff or inflow from the 9 combined sewer system. Mr. Stannard notes that I/I occurs in all wastewater 10 collection and treatment systems. I/I is typically allocated across rate classes based 11 on number of customers and contributed volumes. MSD proposes to assume that 12 40% of I/I costs are related to number of customers and 60% of I/I costs are related to 13 contributed customer volumes. 14 Q WHAT PORTION OF THE TOTAL WASTEWATER VOLUME TREATED BY MSD IS 15 I/I? 16 A At page 7, Mr. Stannard notes that district-wide I/I is about 59% of the total 17 wastewater flow reaching the treatment plants each year. This is an increase from 18 the amount of I/I identified in MSD’s 2015 rate filing, in which I/I represented 50% of 19 the total wastewater flow each year.15 20 15 Exhibit MSD 3H, page 7. Michael P. Gorman Page 23 BRUBAKER & ASSOCIATES, INC. Q DOES THE WEF MANUAL DESCRIBE HOW I/I COSTS SHOULD BE TREATED IN 1 A COST OF SERVICE STUDY? 2 A Not specifically. However, the Manual does clearly describe that I/I costs are not 3 directly related to service volumes. Rather, the Manual recognizes that I/I costs are 4 more of a function of the length and age of the infrastructure, and the geographic 5 area served. At page 130, the Manual states as follows: 6 Infiltration and inflow costs pose a special challenge in wastewater 7 ratemaking because these costs are not a consequence of directly 8 measurable service demands by utility customers. Groundwater 9 levels, age of pipe, and soil conditions may influence the amount of I/I 10 that enters the system from different basins. Administering a system 11 of wastewater charges that differs by drainage basin, age of pipe, or 12 soil conditions would be difficult and costly. Therefore, cost allocation 13 approaches must be based on factors that estimate service 14 requirements to equitably distribute I/I cost responsibilities.16 15 The Manual goes on to identify allocation options including: contributed 16 wastewater volumes, number of customers, land area, and property valuations. 17 Q HOW DID MSD DETERMINE THAT 40% OF I/I COSTS ARE RELATED TO THE 18 NUMBER OF CUSTOMERS AND 60% OF I/I COSTS ARE RELATED TO 19 CONTRIBUTED VOLUMES? 20 A In May 2003, the Rate Commission recommended that MSD conduct a study to 21 determine the most accurate allocation and cost recovery method for I/I operation 22 costs, and requested that the results presented to the Rate Commission before any 23 future rate change submittals.17 In 2005, MSD hired CDM to conduct an independent 24 engineering study to determine an appropriate basis for the allocation of I/I. The 25 2005 CDM study was provided in response to data request MIEC 1-1, as Exhibit MSD 26 65B. As described in the study, CDM concluded that a 37% customer / 63% volume 27 16WEF Manual of Practice No. 27 at 130 (emphasis added). 17 Exhibit MSD 65B, 2005 CDM Study at page 1-1. Michael P. Gorman Page 24 BRUBAKER & ASSOCIATES, INC. allocation was appropriate. MSD claims that there are no known changes in the 1 system that would significantly change this assumption.18 2 Q DO YOU BELIEVE THAT MSD’S PROPOSED ALLOCATION OF I/I COSTS IS 3 REASONABLE? 4 A No. This study utilized data from 2001 – 2003, and contrary to MSD’s claim there 5 have been significant changes to MSD’s system since this study was completed. In 6 particular, MSD has made substantial improvements to its wastewater system to 7 comply with the requirements of the Consent Decree. 8 Additionally, I/I costs are largely created through the collection infrastructure 9 and geographic area, length of pipe, number of lift stations and infrastructure age. It 10 would be more appropriate to utilize an I/I allocation that is more heavily weighted 11 toward the number of customers on the system. 12 Q CAN YOU DESCRIBE HOW MSD’S INFRASTRUCTURE AND GEOGRAPHIC 13 REACH CONTRIBUTE TO I/I? 14 A MSD provides wastewater collection and treatment service to over 1.3 million retail 15 customers in 520 square miles.19 As of August 2016, MSD owned and maintained 16 9,517 miles of collection and trunk sewers and force mains, sized from six inches to 17 29 feet in diameter.20 Further, sewers maintained by MSD range in age from a couple 18 years old to more than 150 years old.21 19 The geographic diversity and the significant length of pipe are large factors in 20 determining the amounts of I/I costs that MSD incurs. As such, I/I costs have little to 21 18 Exhibit MSD 1, page 4-31. 19 MSD Website at https://www.stlmsd.com/our-organization 20 Id. 21 Id. Michael P. Gorman Page 25 BRUBAKER & ASSOCIATES, INC. do with customers’ contributed volume, and are largely driven by MSD’s geographic 1 footprint and substantial length of collector mains. 2 Q ARE YOU AWARE OF ANY WASTEWATER UTILITIES THAT HAVE RECENTLY 3 STUDIED THE ALLOCATION OF I/I ON THEIR WASTEWATER SYSTEM? 4 A Yes. Citizens Wastewater Authority (“CWA”) in Indiana recently completed a study to 5 determine what portion of I/I costs are customer related, and what portion should be 6 allocated on the basis of volume. In the past, CWA has allocated I/I using a two-7 thirds customer and one-third volume allocator. Prior to its most recent rate case, 8 CWA hired Black and Veatch to determine whether a modification to its allocation of 9 I/I was appropriate. 10 Black & Veatch calculated the I/I volumes that would be allocated to the 11 industrial class using six different methods that considered several elements such as 12 length and diameter of mains, number of connections, contributed volumes, land use, 13 and a system size differential. Black & Veatch then took an average of the I/I 14 volumes allocated to the Industrial class under each analysis, and determined that 15 the average was best approximated by a 75% customer / 25% volume allocation 16 factor. However, the methods contemplated by the study showed that the customer 17 related percentage of I/I could range from 55% to 88%.22 18 22 Cause No. 45151, Direct Testimony of Prabha N. Kumar, Attachment PNK-7. Michael P. Gorman Page 26 BRUBAKER & ASSOCIATES, INC. Q WAS CWA’S STUDY OF I/I CONDUCTED AFTER ITS INFRASTRUCTURE HAD 1 BEEN MODERNIZED AND IMPROVED TO COMPLY WITH ITS CONSENT 2 DECREE? 3 A Yes. Like MSD, CWA has made significant improvements to its wastewater collection 4 system and treatment plants to modernize its infrastructure and to comply with the 5 requirements of its Consent Decree. 6 Q HOW DO OTHER WASTEWATER UTILITIES ALLOCATE I/I? 7 A As part of its study for CWA, Black and Veatch queried its project managers to create 8 a summary of the I/I allocation basis used by some other wastewater utilities. The 9 table below has been reproduced from the CWA study.23 10 TABLE 5 I/I Allocation Basis Used by Other Utilities Line Utility / Community Customer Volume 1 St. Joseph, MO 60.0% 40.0% 2 Kansas City, MO 40.0% 60.0% 3 Metropolitan Sewerage District of Greater Cincinnati 75.0% 25.0% 4 Allegheny County Sanitary Authority (ALCOSAN) 66.7% 33.3% 5 Shreveport, LA 66.7% 33.3% 6 Charleston, SC 66.7% 33.3% 7 Columbus, OH 0.0% 100.0% 8 Washington Suburban Sanitary Commission 50.0% 50.0% 9 Philadelphia Water Department 15.0% 85.0% 10 Citizens Wastewater Authority 75.0% 25.0% 23 Id. at Table 10. Michael P. Gorman Page 27 BRUBAKER & ASSOCIATES, INC. As shown in Table 5 above, the majority (seven of the ten) utilities allocate at 1 least 50% of I/I on the basis of the number of the customers in each rate class. 2 Q WHY WOULD ALLOCATING I/I COSTS ON 40% CUSTOMER AND 60% VOLUME 3 NOT PRODUCE A BALANCED ALLOCATION OF I/I COSTS? 4 A MSD’s wastewater collector system encompasses a large geographic area, and over 5 9,000 miles of collector mains, some in need of modernization or repair. I/I costs are 6 caused by the infrastructure size and material. The retail customers’ contributions to 7 the wastewater water volumes have little to no impact on I/I costs. As such, 60% of 8 the allocation on volume is not balanced. 9 Furthermore, customers cannot reduce their amount of I/I collections by 10 reducing their wastewater flow. Indeed, I/I costs in the wastewater system are simply 11 unrelated to customers’ wastewater flows, making a volume heavy allocation 12 inappropriate. 13 Q DOES THE ALLOCATION OF I/I HAVE A SIGNIFICANT IMPACT ON MSD’S COST 14 OF SERVICE RESULTS? 15 A Yes. Even a small change in the allocation of I/I can have a large impact on the cost 16 of service results. To illustrate this sensitivity, I have modified MSD’s cost of service 17 study to reflect a 50% customer / 50% volume allocation of I/I as well as a 75% 18 customer /25% volume allocation, and compared those results to CWA’s proposed 19 40% customer / 60% volume allocation. The results are presented below in Table 6. 20 Michael P. Gorman Page 28 BRUBAKER & ASSOCIATES, INC. Q WHAT IS YOUR RECOMMENDED ALLOCATION OF I/I? 1 A I recommend an allocation of I/I using a 50% customer / 50% volume allocator. The 2 allocation of I/I costs should be heavily weighted on the number of customers, and 3 only minimally weighted on contributed volumes. The number and location of 4 customers is the best cost-causation factor which describes I/I costs. 5 IV.B. Extra Strength Surcharges 6 Q PLEASE DESCRIBE THE WASTEWATER EXTRA STRENGTH SURCHARGES. 7 A The extra strength surcharges are related to Biochemical Oxygen Demand (“BOD”), 8 Chemical Oxygen Demand (“COD”), and Total Suspended Solids (“TSS”). As 9 discussed at page 10 of Mr. Beckley’s testimony, wastewater strengths in excess of 10 the normal wastewater strength threshold, which are contributed by non-residential 11 customers, are segregated into a separate surcharge customers group. 12 Revenue at Approved Line Customer Class FY20 Rates Amount Percent Amount Percent Amount Percent 1 Single Family 238,942,441$ 4,480,554$ 1.88% 15,985,249$ 6.7% 44,746,986$ 18.7% 2 Multi-Family 74,724,241 1,935,205 2.59% (1,068,768) -1.4% (8,578,699) -11.5% 3 Non-Residential 125,680,754 5,077,361 4.04% (3,423,362) -2.7% (24,675,168) -19.6% 4 Total System 439,347,436$ 11,493,119$ 2.62% 11,493,119$ 2.6% 11,493,119$ 2.6% Source 1 Exhibit MSD 52, COS-Results, Excel rows 96-98, column K - column L. 2 Result of changing the allocation of I/I in rows 418 and 419 of Exhibit MSD 52, Demand-Input tab. TABLE 6 Cost of Service Results Under Various I/I Allocations to Reach COSto Reach COSto Reach COS Increase / DecreaseIncrease / DecreaseIncrease / Decrease 40% Customer 60% Volume1 50% Customer 50% Volume1,2 75% Customer 25% Volume1,2 Michael P. Gorman Page 29 BRUBAKER & ASSOCIATES, INC. Q DOES MSD’S COST OF SERVICE STUDY SHOW THAT AN ABOVE SYSTEM 1 AVERAGE INCREASE IS WARRANTED FOR THE EXTRA STRENGTH 2 SURCHARGES? 3 A Yes. MSD’s cost of service shows that the BOD rate needs to increase by 26.7%, 4 and TSS needs to increase by 10.6% to reach cost of service in FY21. MSD states 5 that the increase is primarily due to the fact that the capital cost allocated to these 6 functional categories increased by approximately 70% from FY17 to the test year of 7 FY21, while the units of service for BOD and COD decreased by 7% and TSS 8 decreased by 5% over the same time period.24 9 Q IS THIS INCREASE REASONABLE? 10 A No. MSD’s capital expenditures related to BOD and TSS are primarily associated 11 with the improvement of operating efficiency of wastewater treatment plants because 12 these improvements are expected to reduce the cost of waste disposal.25 The capital 13 expenditures associated with these improvements are not directly related to an 14 increase in the cost of treating wastewater with BOD and TSS strengths in excess of 15 the normal loadings. 16 Q DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY? 17 A Yes. 18 24Direct Testimony of Thomas Beckley at 11. 25Exhibit MSD 3C, Direct Testimony of Richard Unverferth, at 2. Michael P. Gorman Appendix A Page 1 BRUBAKER & ASSOCIATES, INC. Qualifications of Michael P. Gorman Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 1 A Michael P. Gorman. My business address is 16690 Swingley Ridge Road, Suite 140, 2 Chesterfield, MO 63017. 3 Q PLEASE STATE YOUR OCCUPATION. 4 A I am a consultant in the field of public utility regulation and a Managing Principal with 5 the firm of Brubaker & Associates, Inc. (“BAI”), energy, economic and regulatory 6 consultants. 7 Q PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND WORK 8 EXPERIENCE. 9 A In 1983 I received a Bachelor of Science Degree in Electrical Engineering from 10 Southern Illinois University, and in 1986, I received a Master’s 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. 21 Michael P. Gorman Appendix A Page 2 BRUBAKER & ASSOCIATES, INC. In 1987, I was promoted to Director of the Financial Analysis Department. In 1 this position, I was responsible for all financial analyses conducted by the Staff. 2 Among other things, I conducted analyses and sponsored testimony before the ICC 3 on rate of return, financial integrity, financial modeling and related issues. I also 4 supervised the development of all Staff analyses and testimony on these same 5 issues. In addition, I supervised the Staff's review and recommendations to the 6 Commission concerning utility plans to issue debt and equity securities. 7 In August of 1989, I accepted a position with Merrill-Lynch as a financial 8 consultant. After receiving all required securities licenses, I worked with individual 9 investors and small businesses in evaluating and selecting investments suitable to 10 their requirements. 11 In September of 1990, I accepted a position with Drazen-Brubaker & 12 Associates, Inc. (“DBA”). In April 1995, the firm of Brubaker & Associates, Inc. was 13 formed. It includes most of the former DBA principals and Staff. Since 1990, I have 14 performed various analyses and sponsored testimony on cost of capital, cost/benefits 15 of utility mergers and acquisitions, utility reorganizations, level of operating expenses 16 and rate base, cost of service studies, and analyses relating to industrial jobs and 17 economic development. I also participated in a study used to revise the financial 18 policy for the municipal utility in Kansas City, Kansas. 19 At BAI, I also have extensive experience working with large energy users to 20 distribute and critically evaluate responses to requests for proposals (“RFPs”) for 21 electric, steam, and gas energy supply from competitive energy suppliers. These 22 analyses include the evaluation of gas supply and delivery charges, cogeneration 23 and/or combined cycle unit feasibility studies, and the evaluation of third-party 24 asset/supply management agreements. I have participated in rate cases on rate 25 Michael P. Gorman Appendix A Page 3 BRUBAKER & ASSOCIATES, INC. design and class cost of service for electric, natural gas, water and wastewater 1 utilities. I have also analyzed commodity pricing indices and forward pricing methods 2 for third party supply agreements, and have also conducted regional electric market 3 price forecasts. 4 In addition to our main office in St. Louis, the firm also has branch offices in 5 Phoenix, Arizona and Corpus Christi, Texas. 6 Q HAVE YOU EVER TESTIFIED BEFORE A REGULATORY BODY? 7 A Yes. I have sponsored testimony on cost of capital, revenue requirements, cost of 8 service and other issues before the Federal Energy Regulatory Commission and 9 numerous state regulatory commissions including: Arkansas, Arizona, California, 10 Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, 11 Louisiana, Michigan, Mississippi, Missouri, Montana, New Jersey, New Mexico, New 12 York, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, 13 Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming, and before 14 the provincial regulatory boards in Alberta and Nova Scotia, Canada. I have also 15 sponsored testimony before the Board of Public Utilities in Kansas City, Kansas; 16 presented rate setting position reports to the regulatory board of the municipal utility 17 in Austin, Texas, and Salt River Project, Arizona, on behalf of industrial customers; 18 and negotiated rate disputes for industrial customers of the Municipal Electric 19 Authority of Georgia in the LaGrange, Georgia district. 20 Michael P. Gorman Appendix A Page 4 BRUBAKER & ASSOCIATES, INC. Q PLEASE DESCRIBE ANY PROFESSIONAL REGISTRATIONS OR 1 ORGANIZATIONS TO WHICH YOU BELONG. 2 A I earned the designation of Chartered Financial Analyst (“CFA”) from the CFA 3 Institute. The CFA charter was awarded after successfully completing three 4 examinations which covered the subject areas of financial accounting, economics, 5 fixed income and equity valuation and professional and ethical conduct. I am a 6 member of the CFA Institute’s Financial Analyst Society. 7 \\consultbai.local\documents\ProlawDocs\SDW\10765\365868.docx Metropolitan St. Louis Sewer DistrictRevenue RequirementMSD ProposedFY 2019FY 2020FY 2021FY 2022FY 2023FY 2024FY 2025FY 2026FY 2027FY 2028Wastewater Revenue Requirements FY 2019FY 2020FY 2021FY 2022FY 2023FY 2024FY 2025FY 2026FY 2027FY 2028General Fund Operating ExpensesBoard of Trustees 6,100$ 6,168$ 6,241$ 6,315$ 6,391$ 6,469$ 6,548$ 6,629$ 6,711$ 6,795$ Rate Commission 595,508 11,910 12,483 12,745 649,773 13,286 13,565 13,850 14,141 14,438 Civil Service Commission 10,000 10,200 10,414 10,633 10,856 11,084 11,317 11,555 11,797 12,045 Secretary - Treasurer 3,304,917 2,125,419 3,432,757 2,242,021 2,303,325 2,366,763 2,432,432 2,500,437 2,570,886 2,643,896 Executive Director 3,918,653 4,005,345 4,114,866 4,228,192 4,345,574 4,467,200 4,593,271 4,723,997 4,859,605 5,000,331 General Counsel 3,151,595 3,219,012 3,299,245 3,381,910 3,467,139 3,555,032 3,645,697 3,739,247 3,835,801 3,935,484 Office of Human Resources 8,386,447 8,573,158 8,962,983 9,376,205 9,814,565 10,279,839 10,773,936 11,298,912 11,856,979 12,450,517 Engineering 15,102,179 15,856,139 14,487,758 15,021,115 15,583,578 16,176,924 16,803,050 17,463,986 18,161,897 18,899,101 Finance 21,226,078 21,666,097 22,186,775 22,722,245 23,273,323 23,840,609 24,424,735 25,026,367 25,646,206 26,284,993 Information Systems 15,495,944 15,881,698 16,345,457 16,825,262 17,321,964 17,836,267 18,368,912 18,920,676 19,492,379 20,084,880 OperationsCollection System 25,344,511 25,910,957 26,840,257 27,814,917 28,838,960 29,915,312 31,047,095 32,237,641 33,490,508 34,809,499 Pump Stations 12,198,324 12,405,110 12,757,148 13,121,895 13,500,102 13,892,391 14,299,426 14,721,903 15,160,562 15,616,187 Wastewater Treatment 44,878,243 45,701,793 46,993,748 48,331,879 49,719,067 51,157,612 52,649,951 54,198,664 55,806,486 57,476,316 Support 13,139,533 13,422,376 13,776,374 14,142,272 14,520,838 14,912,635 15,318,263 15,738,352 16,173,572 16,624,633 Subtotal: Operations95,560,611$ 97,440,236$ 100,367,527$ 103,410,963$ 106,578,966$ 109,877,951$ 113,314,734$ 116,896,559$ 120,631,128$ 124,526,635$ Subtotal: General Fund Operating Expenses166,758,032$ 168,795,383$ 173,226,505$ 177,237,606$ 183,355,453$ 188,431,423$ 194,388,197$ 200,602,214$ 207,087,529$ 213,859,116$ % Change 12.4% 1.2% 2.6% 2.3% 3.5% 2.8% 3.2% 3.2% 3.2% 3.3%Other Operating ExpensesWater Backup Program 4,425,300$ 4,513,806$ 4,608,596$ 4,705,376$ 4,804,189$ 4,905,077$ 5,008,084$ 5,113,254$ 5,220,632$ 5,330,265$ General Insurance Fund 6,089,400 6,217,173 6,356,013 6,498,044 6,643,340 6,791,979 6,944,043 7,099,611 7,258,770 7,421,604 Capital Funded in O&M Budget 10,329,182 10,367,686 10,546,625 11,014,582 11,825,835 11,578,670 11,601,087 12,244,337 12,914,863 12,816,556 Capitalized Internal Labor (9,903,814) (10,200,928) (8,758,000) (9,020,740) (9,291,362) (9,570,103) (9,857,206) (10,152,922) (10,457,510) (10,771,235) Additional O&M - 1,011,603 5,451,900 1,617,068 1,480,080 1,536,790 1,596,375 1,659,012 1,724,892 1,794,215 Subtotal: Other Operating Expenses10,940,068$ 11,909,340$ 18,205,135$ 14,814,330$ 15,462,081$ 15,242,414$ 15,292,383$ 15,963,293$ 16,661,647$ 16,591,405$ % Change -19.7% 8.9% 52.9% -18.6% 4.4% -1.4% 0.3% 4.4% 4.4% -0.4%Non-Operating ExpensesAnnual Debt ServiceRevenue Bond Debt Service (Accrued)Existing Bonds 77,962,008$ 78,123,917$ 78,198,040$ 77,923,075$ 78,185,172$ 78,085,875$ 78,646,087$ 81,717,837$ 84,009,170$ 84,635,795$ Proposed Bonds - 1,768,719 7,752,066 16,336,137 28,971,401 46,983,372 61,867,795 64,163,048 64,162,756 65,435,648 Subtotal: Revenue Bond Debt Service77,962,008$ 79,892,637$ 85,950,106$ 94,259,211$ 107,156,573$ 125,069,246$ 140,513,881$ 145,880,885$ 148,171,927$ 150,071,443$ SRF & Direct Loan Debt Service (Accrued)Existing Bonds 37,673,555$ 37,741,217$ 37,911,613$ 39,182,514$ 39,176,322$ 39,257,083$ 37,619,627$ 32,630,516$ 25,817,459$ 24,740,530$ Proposed Bonds - 4,037,431 6,550,664 8,600,935 10,644,268 12,688,281 14,267,544 15,519,470 15,508,077 15,496,555 Subtotal: SRF & Direct Loan Debt Service37,673,555$ 41,778,648$ 44,462,277$ 47,783,449$ 49,820,590$ 51,945,363$ 51,887,171$ 48,149,986$ 41,325,536$ 40,237,085$ Subtotal: Total Debt Service115,635,563$ 121,671,285$ 130,412,383$ 142,042,661$ 156,977,164$ 177,014,609$ 192,401,052$ 194,030,871$ 189,497,462$ 190,308,528$ % Change 10.1% 5.2% 7.2% 8.9% 10.5% 12.8% 8.7% 0.8% -2.3% 0.4%Routine Annual Capital Improvements 6,904,316$ 7,042,403$ 7,190,293$ 7,341,289$ 7,495,456$ 7,652,861$ 7,813,571$ 7,977,656$ 8,145,187$ 8,316,236$ Cash Financing of Major Capital Improvements 120,000,000 121,366,038 160,289,651 149,123,366 119,588,335 121,390,975 146,601,316 93,730,933 164,082,056 257,155,186 Non-Recurring Projects & Studies 5,382,019 6,417,237 5,966,508 6,570,748 6,691,362 6,953,319 7,179,219 7,401,775 7,283,748 7,462,160 Transfer to/(from) WW Operating Reserve - - - - - - - - - - Subtotal: Non-Operating Expenses247,921,899$ 256,496,963$ 303,858,836$ 305,078,065$ 290,752,318$ 313,011,765$ 353,995,158$ 303,141,234$ 369,008,453$ 463,242,110$ % Change 28.4% 3.5% 18.5% 0.4% -4.7% 7.7% 13.1% -14.4% 21.7% 25.5%Total: Annual Wastewater Revenue Requirements425,619,998$ 437,201,686$ 495,290,475$ 497,130,001$ 489,569,852$ 516,685,601$ 563,675,738$ 519,706,741$ 592,757,629$ 693,692,631$ % Change 19.9% 2.7% 13.3% 0.4% -1.5% 5.5% 9.1% -7.8% 14.1% 17.0%Debt Service Coverage Senior Revenue Bonds3.00 3.39 3.19 3.09 2.86 2.57 2.50 2.50 2.58 2.68 Total Debt2.03 2.23 2.10 2.05 1.94 1.81 1.82 1.85 1.98 2.10Schedule MPG-1Page 1 of 3 Metropolitan St. Louis Sewer DistrictRevenue RequirementMIEC AdjustedFY 2019FY 2020FY 2021FY 2022FY 2023FY 2024FY 2025FY 2026FY 2027FY 2028Wastewater Revenue Requirements FY 2019FY 2020FY 2021FY 2022FY 2023FY 2024FY 2025FY 2026FY 2027FY 2028General Fund Operating ExpensesBoard of Trustees 6,100$ 6,168$ 6,241$ 6,315$ 6,391$ 6,469$ 6,548$ 6,629$ 6,711$ 6,795$ Rate Commission 595,508 11,910 12,483 12,745 649,773 13,286 13,565 13,850 14,141 14,438 Civil Service Commission 10,000 10,200 10,414 10,633 10,856 11,084 11,317 11,555 11,797 12,045 Secretary - Treasurer 3,304,917 2,125,419 3,432,757 2,242,021 2,303,325 2,366,763 2,432,432 2,500,437 2,570,886 2,643,896 Executive Director 3,918,653 4,005,345 4,114,866 4,228,192 4,345,574 4,467,200 4,593,271 4,723,997 4,859,605 5,000,331 General Counsel 3,151,595 3,219,012 3,299,245 3,381,910 3,467,139 3,555,032 3,645,697 3,739,247 3,835,801 3,935,484 Office of Human Resources 8,386,447 8,573,158 8,962,983 9,376,205 9,814,565 10,279,839 10,773,936 11,298,912 11,856,979 12,450,517 Engineering 15,102,179 15,856,139 14,487,758 15,021,115 15,583,578 16,176,924 16,803,050 17,463,986 18,161,897 18,899,101 Finance 21,226,078 21,666,097 22,186,775 22,722,245 23,273,323 23,840,609 24,424,735 25,026,367 25,646,206 26,284,993 Information Systems 15,495,944 15,881,698 16,345,457 16,825,262 17,321,964 17,836,267 18,368,912 18,920,676 19,492,379 20,084,880 OperationsCollection System 25,344,511 25,910,957 26,840,257 27,814,917 28,838,960 29,915,312 31,047,095 32,237,641 33,490,508 34,809,499 Pump Stations 12,198,324 12,405,110 12,757,148 13,121,895 13,500,102 13,892,391 14,299,426 14,721,903 15,160,562 15,616,187 Wastewater Treatment 44,878,243 45,701,793 46,993,748 48,331,879 49,719,067 51,157,612 52,649,951 54,198,664 55,806,486 57,476,316 Support 13,139,533 13,422,376 13,776,374 14,142,272 14,520,838 14,912,635 15,318,263 15,738,352 16,173,572 16,624,633 Subtotal: Operations95,560,611$ 97,440,236$ 100,367,527$ 103,410,963$ 106,578,966$ 109,877,951$ 113,314,734$ 116,896,559$ 120,631,128$ 124,526,635$ Subtotal: General Fund Operating Expenses166,758,032$ 168,795,383$ 173,226,505$ 177,237,606$ 183,355,453$ 188,431,423$ 194,388,197$ 200,602,214$ 207,087,529$ 213,859,116$ % Change 12.4% 1.2% 2.6% 2.3% 3.5% 2.8% 3.2% 3.2% 3.2% 3.3%Other Operating ExpensesWater Backup Program 4,425,300$ 4,513,806$ 4,608,596$ 4,705,376$ 4,804,189$ 4,905,077$ 5,008,084$ 5,113,254$ 5,220,632$ 5,330,265$ General Insurance Fund 6,089,400 6,217,173 6,356,013 6,498,044 6,643,340 6,791,979 6,944,043 7,099,611 7,258,770 7,421,604 Capital Funded in O&M Budget 10,329,182 10,367,686 10,546,625 11,014,582 11,825,835 11,578,670 11,601,087 12,244,337 12,914,863 12,816,556 Capitalized Internal Labor (9,903,814) (10,200,928) (8,758,000) (9,020,740) (9,291,362) (9,570,103) (9,857,206) (10,152,922) (10,457,510) (10,771,235) Additional O&M - 1,011,603 5,451,900 1,617,068 1,480,080 1,536,790 1,596,375 1,659,012 1,724,892 1,794,215 Subtotal: Other Operating Expenses10,940,068$ 11,909,340$ 18,205,135$ 14,814,330$ 15,462,081$ 15,242,414$ 15,292,383$ 15,963,293$ 16,661,647$ 16,591,405$ % Change -19.7% 8.9% 52.9% -18.6% 4.4% -1.4% 0.3% 4.4% 4.4% -0.4%Non-Operating ExpensesAnnual Debt ServiceRevenue Bond Debt Service (Accrued)Existing Bonds 77,962,008$ 78,123,917$ 78,198,040$ 77,923,075$ 78,185,172$ 78,085,875$ 78,646,087$ 81,717,837$ 84,009,170$ 84,635,795$ Proposed Bonds - 2,014,921 8,725,314 17,083,799 26,334,781 36,583,020 44,718,336 47,036,119 47,036,119 48,305,218 Subtotal: Revenue Bond Debt Service77,962,008$ 80,138,838$ 86,923,354$ 95,006,874$ 104,519,953$ 114,668,894$ 123,364,423$ 128,753,956$ 131,045,289$ 132,941,013$ SRF & Direct Loan Debt Service (Accrued)Existing Bonds 37,673,555$ 37,741,217$ 37,911,613$ 39,182,514$ 39,176,322$ 39,257,083$ 37,619,627$ 32,630,516$ 25,817,459$ 24,740,530$ Proposed Bonds - 2,602,484 6,310,922 8,539,747 10,779,222 13,029,447 15,386,867 16,571,503 16,492,057 16,410,339 Subtotal: SRF & Direct Loan Debt Service37,673,555$ 40,343,701$ 44,222,535$ 47,722,261$ 49,955,544$ 52,286,529$ 53,006,493$ 49,202,019$ 42,309,517$ 41,150,869$ Subtotal: Total Debt Service115,635,563$ 120,482,539$ 131,145,889$ 142,729,134$ 154,475,497$ 166,955,423$ 176,370,916$ 177,955,975$ 173,354,805$ 174,091,882$ % Change 10.1% 4.2% 8.9% 8.8% 8.2% 8.1% 5.6% 0.9% -2.6% 0.4%Routine Annual Capital Improvements 6,904,316$ 7,042,403$ 7,190,293$ 7,341,289$ 7,495,456$ 7,652,861$ 7,813,571$ 7,977,656$ 8,145,187$ 8,316,236$ Cash Financing of Major Capital Improvements 120,000,000 121,366,038 104,916,862 101,291,343 97,758,835 100,467,975 146,988,416 163,030,933 232,682,056 256,455,186 Non-Recurring Projects & Studies 5,382,019 6,417,237 5,966,508 6,570,748 6,691,362 6,953,319 7,179,219 7,401,775 7,283,748 7,462,160 Transfer to/(from) WW Operating Reserve - - - - - - - - - - Subtotal: Non-Operating Expenses247,921,899$ 255,308,217$ 249,219,552$ 257,932,515$ 266,421,151$ 282,029,579$ 338,352,122$ 356,366,338$ 421,465,796$ 446,325,464$ % Change 28.4% 3.0% -2.4% 3.5% 3.3% 5.9% 20.0% 5.3% 18.3% 5.9%Total: Annual Wastewater Revenue Requirements425,619,998$ 436,012,939$ 440,651,192$ 449,984,451$ 465,238,685$ 485,703,415$ 548,032,702$ 572,931,845$ 645,214,972$ 676,775,985$ % Change 19.9% 2.4% 1.1% 2.1% 3.4% 4.4% 12.8% 4.5% 12.6% 4.9%Debt Service Coverage Senior Revenue Bonds3.00 3.37 2.91 2.84 2.70 2.58 2.66 2.65 2.71 2.81 Total Debt2.03 2.29 1.94 1.91 1.83 1.78 1.85 1.88 2.01 2.13Schedule MPG-1Page 2 of 3 Bond RemainingAdditional Bond RemainingAdditionalLineIssuesAuthorizationAuthorizationIssuesAuthorizationAuthorization(1) (2) (3) (1) (2) (3)1 FY2015 $0.00 $518.00 $0.00 $518.002 FY2016 $150.00 $368.00 $900.00 $150.00 $368.00 $900.003 FY2017 $150.00 $1,118.00 $150.00 $1,118.004 FY2018 $0.00 $747.50 $0.00 $747.505 FY2019 $72.65 $674.85 $72.65 $674.856 FY2020 $135.09 $539.76 $133.75 $541.107 FY2021 $158.33 $381.43 $197.48 $343.638 FY2022 $158.30 $223.14 $500.00 $191.72 $151.91 $500.009 FY2023 $285.81 $437.33 $220.84 $431.0810 FY2024 $301.81 $135.52 $235.60 $195.4811 FY2025 $135.49 $0.03 $136.70 $58.7912 FY2026 $0.00 $0.03 $0.00 $58.7913 FY2027 $0.00 $0.03 $0.00 $58.7914 FY2028 $0.00 $0.03 $0.00 $58.79Source:Exhibit MSD 52 - St. Louis MSD Rate Financial Plan Model FY21-24, 'CIRP' tab.DescriptionMetropolitan St. Louis Sewer DistrictRevenue Bond AuthorizationMSD Proposed MIEC ProposedSchedule MPG-1Page 3 of 3 MSD 4-Yr Rate Line Proposed Adjustment Annual Cycle (1) (2) (3) (4) 1 $119.18 $119.18 N/A 2 $184.45 $184.45 3 $215.86 $215.86 4 $171.93 $171.93 5 $257.72 $257.72 $829.96 6 $258.33 $258.33 7 $280.70 $280.70 8 $327.46 $327.46 9 $372.40 $372.40 $1,238.90 10 $359.36 $359.36 11 $350.84 $350.84 12 $447.54 ($70.00) $377.54 13 $459.12 ($70.00) $389.12 $1,476.87 14 $322.13 $0.00 $322.13 15 $118.45 $70.00 $188.45 16 $188.04 $70.00 $258.04 17 $282.87 $282.87 $1,051.49 18 $1,616.87 $1,476.87 19 $2,168.99 $2,168.99 Source: Exhibit MSD 52 - St. Louis MSD Rate Financial Plan Model FY21-24, 'CIRP- Input' tab. FY 2027 FY 2028 FY21 - FY24 Total FY21 - FY28 Total FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2023 FY 2024 FY 2025 FY 2026 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Year Metropolitan St. Louis Sewer District CIRP Annual Need ($ Millions) MIEC Proposed Schedule MPG-2 Line Year Asset Management - CapacityAsset Management - Renewal CityshedCombined Sewer Overflow Districtwide OtherSanitary Sewer OverflowTreatment Plants Subtotal(1) (2) (3) (4) (5) (6) (7) (8) (9)1 FY 2012 $9.9 $0.0 $0.0 $3.1 $0.0 $0.0 $23.5 $82.7 $119.22 FY 2013 $0.0 $15.3 $14.8 $37.8 $15.7 $0.0 $72.7 $28.2 $184.53 FY 2014 $1.8 $37.1 $14.9 $43.5 $6.9 $0.5 $101.5 $9.7 $215.94 FY 2015 $29.2 $18.9 $5.8 $10.0 $0.3 $0.0 $98.2 $9.6 $171.95 FY 2016 $49.7 $27.1 $0.9 $27.5 $6.0 $0.6 $138.8 $7.1 $257.76 FY 2017 $51.1 $19.0 $7.5 $58.8 $8.8 $0.6 $107.9 $4.8 $258.37 FY 2018 $45.9 $22.1 $11.5 $50.2 $9.0 $0.8 $126.3 $14.8 $280.78 FY 2019 $51.9 $32.1 $12.5 $28.8 $10.3 $0.1 $179.6 $12.1 $327.59 FY 2020 $48.1 $50.4 $25.4 $38.3 $13.1 ($0.0) $175.3 $21.9 $372.410 FY 2021 $97.4 $28.0 $22.3 $36.8 $14.1 ($0.1) $133.0 $27.8 $359.411 FY 2022 $156.7 $23.0 $24.4 $8.9 $14.3 ($0.0) $70.4 $53.0 $350.812 FY 2023 $120.6 $16.3 $16.0 $38.6 $15.6 ($0.0) $77.1 $163.4 $447.513 FY 2024 $102.7 $35.9 $12.3 $30.5 $15.7 $0.0 $37.1 $225.0 $459.114 FY 2025 $27.2 $28.8 $20.2 $15.7 $15.0 $0.0 $17.1 $198.2 $322.115 FY 2026 $8.4 $31.9 $1.3 $16.1 $14.7 $0.0 $12.2 $33.8 $118.416 FY 2027 $14.5 $34.9 ($1.2) $98.2 $16.9 $0.0 $16.8 $7.9 $188.017 FY 2028 $10.6 $39.7 $18.4 $168.7 $16.2 $0.0 $22.1 $7.2 $282.918 FY21 - FY24 Total $477.5 $103.2 $75.0 $114.8 $59.8 ($0.1) $317.6 $469.2 $1,616.919 FY21 - FY28 Total $440.9 $210.4 $91.4 $376.6 $108.4 ($0.0) $252.8 $688.5 $2,169.0Source: Exhibit MSD 52 - St. Louis MSD Rate Financial Plan Model FY21-24.Metropolitan St. Louis Sewer DistrictMSD Proposed: Base Scenario($ Millions)Capital Investment and Replacement Plan NeedSchedule MPG-3Page 1 of 2 Project Number FY 21FY 22FY 23FY 24Total Scope of Work 12170 $2,324,000 $0 $0 $7,138,000 $9,462,000 Decommission and abandon existing Fenton WWTF.12255 $2,500,000 $33,300,000 $32,550,000 $21,950,000 $90,300,000 Expand the existing WWTF to increase capacity for additional flow, and upgrade the facility to enable accommodation of potential nutrient removal requirements.12548 $600,000 $2,400,000 $0 $0 $3,000,000 Repair sluice gates and components, and concrete.12552 $900,000 $3,480,000 $0 $0 $4,380,000 Replace aeration control piping, and construct improvements to boskers switch track.12565 $3,000,000 $2,050,000$111,000,000 $165,000,000$281,050,000 Construct fluidized bed incinerators at the Bissell and Lemay Wastewater Treatment Facilities, to include redundant sludge acceptance systems and solids handling system improvements.12566 $14,700,000 $8,500,000 $0 $0 $23,200,000 Replace trickling filter media on six filters at the Bissell Plant.12826 $1,300,000 $0 $0 $0 $1,300,000 Replace clarifier equipment at 4 clarifiers.13153 $910,000 $0 $3,628,000 $0 $4,538,000 Construct concrete repairs, replace secondary clarifier duct bank, and renew 4 grit tanks.13185 $0 $0 $7,200,000 $0 $7,200,000 Design sludge transfer forcemains and related pump stations from the Grand Glaize and Lower Meramec Plant Facilities, to enable incineration of waste at the Lemay WWTF without trucking.13220 $500,000 $0 $0 $0 $500,000 Rebuild fine screens.13221 $0 $0 $100,000 $320,000 $420,000 Repair spalled and cracked concrete.13222 $0 $1,100,000 $0 $0 $1,100,000 Replace two membrane gas storage covers for the anaerobic digesters.13223 $400,000 $0 $0 $0 $400,000 Replace the service water piping in the digester and secondary tunnels.13224 $0 $0 $0 $350,000 $350,000 Provide construction management and inspection services for the sludge transfer forcemains to be constructed from the Grand Glaize WWTF to the Fenton WWTF tunnel intake, and from the Lower Meramec WWTF to the Lemay WWTF.Proposed Total $27,134,000 $50,830,000 $154,478,000 $194,758,000 $427,200,000Source: Exhibit MSD 56B - Wastewater CIRP Project List, FY21-24Metropolitan St. Louis Sewer DistrictWastewater Treatment Plant CIRP Projects - Proposed BudgetBudget AmountSchedule MPG‐3Page 2 of 2 LineFY2019FY2020FY2021FY2022FY2023FY2024StrongMidWeakSource(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)MSD ProposedDebt Service Coverage11 Senior Revenue Bonds 3.00 3.39 3.19 3.09 2.86 2.57 > 2.7x 2.2x < 1.8x Fitch Medians2 Total Debt 2.03 2.23 2.10 2.05 1.94 1.81 > 2.4x 2.0x < 1.6x Fitch Medians3Debt to Plant (Equity)270% 66% 64% 62% 64% 64% 23.5% 33.0% 44.0% S&P Key Measures4Outstanding Debt per Customer3$3,966 $4,160 $4,399 $4,626 $5,139 $5,674 < $1,500 $1,800 > $2,100 Fitch Criteria5Average Bill as % of MHI41.10% 1.20% 1.22% 1.26% 1.29% 1.33% < 0.6% 0.8% > 1.0% Fitch CriteriaCIRP Financing56 Percent Debt Financed 61% 63% 49% 50% 68% 70% < 50% 75% > 90% Fitch Criteria7 Percent Cash Financed 37% 33% 45% 43% 27% 27%8 Percent Other 2% 3% 6% 6% 4% 3%MIEC AdjustedDebt Service Coverage19 Senior Revenue Bonds 3.00 3.37 2.91 2.84 2.70 2.58 > 2.7x 2.2x < 1.8x Fitch Medians10 Total Debt 2.03 2.29 1.94 1.91 1.83 1.78 > 2.4x 2.0x < 1.6x Fitch Medians11Debt to Plant (Equity)270% 66% 65% 64% 64% 64% 23.5% 33.0% 44.0% S&P Key Measures12Outstanding Debt per Customer3$3,966 $4,156 $4,485 $4,784 $5,134 $5,499 < $1,500 $1,800 > $2,100 Fitch Criteria13Average Bill as % of MHI41.10% 1.20% 1.16% 1.19% 1.23% 1.26% < 0.6% 0.8% > 1.0% Fitch CriteriaCIRP Financing514 Percent Debt Financed 61% 63% 64% 64% 68% 71% < 50% 75% > 90% Fitch Criteria15 Percent Cash Financed 37% 33% 30% 30% 27% 26%16 Percent Other 2% 3% 6% 6% 5% 3%Sources:Exhibit MSD 52 - St. Louis MSD Rate Financial Plan Model FY21-24.1 'Financial Plan' tab.2 Total Debt ('Debt' tab) divided by Total Plant and CIRP CWIP ('Plant' tab).3 Total Debt ('Debt' tab) divided by Total Customers ('Demand Projection' tab).4 Average Residential Bill at 6 ccf per month ('Impacts' tab) times 12 divided by the Median Household Income (MHI).5 'CIRP' tab.DescriptionMetropolitan St. Louis Sewer DistrictKey Rating Agency MetricsBenchmarksApproved ProposedSchedule MPG-4 20102011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024Line Description ActualActualActualActualActualActualActualActualActualProjectedProjectedProjectedProjectedProjectedProjected1Number of Customer Accounts1427,020 425,600 423,900 423,100 424,500 423,000 424,700 425,000 426,600 427,077 427,555 428,035 428,517 429,000 429,483 2 Annual Percent Change -0.3% -0.4% -0.2% 0.3% -0.4% 0.4% 0.1% 0.4% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%3Annual Use per Customer (CCF)2169.5 166.3 162.2 159.9 156.1 152.2 146.0 143.8 142.9 142.8 142.8 142.8 142.9 142.9 143.04 Annual Percent Change -1.9% -2.5% -1.4% -2.3% -2.5% -4.1% -1.5% -0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1%Sources1Exhibit MSD 52, MSD Financial Plan Model, Demand Projection tab, Excel row 29, columns R - AE.2Exhibit MSD 52, MSD Financial Plan Model, Demand Projection tab, Excel row 146, columns R - AE divided by Line 1.Metropolitan St. Louis Sewer DistrictComparison of Number of Customer Accounts to the Annual Use Per CustomerSchedule MPG-5 ApprovedProposed#Type of ChargeFY 2020FY 2021FY 2022FY 2023FY 2024FY 2021FY 2022FY 2023FY 2024FY 2021FY 2022FY 2023FY 2024Effective Date7/1/2019 7/1/2020 7/1/2021 7/1/2022 7/1/2023Base Charge ($/Bill)1. Billing & Collection Charge $ 7.38 $ 5.11 $ 5.31 $ 5.51 $ 5.722. System Availability Charge $ 18.97$ 21.40$ 22.21$ 23.05$ 23.923. Total: Base Charge $ 26.35 $ 26.51 $ 27.52 $ 28.56 $ 29.64 4,841,255 4,847,608 4,853,974 4,860,352 128,341,670$ 133,406,172$ 138,629,497$ 144,060,833$ Compliance Charge ($/Bill) (a)4. Tier 1 $ 3.14 $ 4.44 $ 4.55 $ 4.71 $ 4.85 277,701 277,146 276,592 276,038 8,594,846$ 8,888,072$ 9,202,216$ 9,520,551$ 5. Tier 2 $ 62.61 $ 62.16 $ 63.64 $ 65.80 $ 67.67 2,369 2,364 2,360 2,355 210,059$ 215,502$ 222,690$ 229,165$ 6. Tier 3 $ 137.75 $ 133.20 $ 136.37 $ 140.99 $ 144.98 6,914 6,900 6,886 6,873 1,104,235$ 1,130,841$ 1,167,521$ 1,200,163$ 7. Tier 4 $ 203.49 $ 177.60 $ 181.83 $ 187.98 $ 193.30 2,027 2,023 2,019 2,015 413,731$ 423,515$ 437,194$ 449,224$ 8. Tier 5 $ 266.10 $ 222.00 $ 227.29 $ 234.98 $ 241.63 1,213 1,211 1,208 1,206 301,443$ 308,575$ 318,356$ 327,152$ 9. Total Non-Residential Service Charge (b) $ 29.49 $ 30.95 $ 32.07 $ 33.27 $ 34.49Volume Charge10. Metered ($/ccf) $ 4.87 $ 4.70 $ 4.75 $ 4.90 $ 5.11 51,223,740 51,331,265 51,451,311 51,583,892 240,754,594$ 243,871,655$ 251,897,015$ 263,649,002$ Unmetered ($/Bill per fixture)11. Per Room $ 2.89 $ 2.79 $ 2.83 $ 2.93 $ 3.07 6,271,843 6,258,233 6,244,667 6,231,143 17,474,486$ 17,700,966$ 18,283,717$ 19,136,979$ 12. Per Water Closet $ 10.72 $ 10.41 $ 10.57 $ 10.94 $ 11.48 1,585,462 1,582,017 1,578,583 1,575,160 16,511,873$ 16,725,830$ 17,276,426$ 18,082,632$ 13. Per Bath $ 8.93 $ 8.69 $ 8.82 $ 9.13 $ 9.57 1,320,941 1,317,899 1,314,867 1,311,845 11,472,632$ 11,619,777$ 12,000,724$ 12,559,103$ 14. Per Separate Shower $ 8.93 $ 8.69 $ 8.82 $ 9.13 $ 9.57 159,329 159,092 158,856 158,620 1,383,804$ 1,402,697$ 1,449,871$ 1,518,567$ Extra Strength Surcharges ($/ton) (a)15. Suspended Solids over 300 mg/l $ 283.87 $ 277.81 $ 284.81 $ 297.73 $ 315.43 5,602 5,535 5,469 5,403 1,556,264$ 1,576,413$ 1,628,289$ 1,704,256$ 16. Biochemical Oxygen Demand over 300 mg/l $ 708.56 $ 693.41 $ 710.89 $ 743.16 $ 787.34 5,017 4,957 4,898 4,839 3,478,858$ 3,523,903$ 3,639,992$ 3,809,945$ 17. Chemical Oxygen Demand over 600 mg/l $ 354.30 $ 346.71 $ 355.45 $ 371.58 $ 393.67 1,922 1,899 1,876 1,853 666,371$ 674,994$ 697,083$ 729,472$ ccf = hundred cubic feet (approx. 748 gallons)mg/l = milligram per liter(a) Applicable only to non-residential customers.(b) Total for base service charge and Tier 1 compliance (line 3 + line 4)Total Rate Revenues432,264,866$ 441,468,914$ 456,850,592$ 476,977,044$ Low Income & Arnold WTHeld at MSD Proposed(688,255)$ (637,707)$ (578,146)$ (508,326)$ Adjustments to Revenue (Bad Debt/Billing Adj.)Held at MSD Proposed1,156,457$ 1,447,174$ 1,770,993$ 2,131,148$ Misc. RevenueHeld at MSD Proposed7,918,125$ 7,706,071$ 7,195,247$ 7,103,549$ Total Revenues440,651,192$ 449,984,451$ 465,238,685$ 485,703,415$ MIEC Revenue Requirement440,651,192$ 449,984,451$ 465,238,685$ 485,703,415$ Differ -$ -$ -$ -$ Billing Units - Demand Projection TabAnnual RevenuesMetropolitan St. Louis Sewer DistrictMIEC Proposed RatesSchedule MPG-6 Wastewater Rate Change Proceeding - 2019 1 BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT For Consideration of a Wastewater ) Rate Change Proposal By the Rate ) Commission of the Metropolitan ) St. Louis Sewer District ) REBUTTAL TESTIMONY SUBMITTED BY INTERVENOR MISSOURI INDUSTRIAL ENERGY CONSUMERS Pursuant to Section 3(8) of the Operational Rules, Regulations and Procedures of the Rate Commission of the Metropolitan St. Louis Sewer District, Intervenor Missouri Industrial Energy Consumers submits the attached written testimony prepared by Mr. Michael P. Gorman. Respectfully submitted, BRYAN CAVE LEIGHTON PAISNER LLP By: 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@bclplaw.com kami.jones@bclplaw.com ATTORNEY FOR THE MIEC Dated: April 23, 2019 Wastewater Rate Change Proceeding - 2019 2 CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to the following on this 23rd day of April, 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 /s/ Brandon W. Neuschafer