Exhibit MSD 80E - Surrebuttal Testimony Bethany Pugh, PFM
MSD Exhibit No. MSD 80E
2019 Rate Change Proceeding
BETHANY PUGH
Surrebuttal Testimony
Metropolitan St. Louis Sewer District
June 3, 2019
Table of Contents
Page
Financing Plan Interest Rate Assumptions ................................................................................... 1
Surrebuttal Testimony of Bethany Pugh, PFM June 3, 2019
2019 Rate Change Proceeding MSD Exhibit No. MSD 80E 1
Financing Plan Interest Rate Assumptions 1
Q1. What notable distinctions exists between the debt assumptions PFM developed that 2
is incorporated in MSD’s rate proposal and the assumptions identified in Mr. 3
Gorman’s surrebuttal testimony. 4
A. Tim Snoke’s surrebuttal testimony (MSD Exhibit No. MSD80F) highlights many 5
distinctions in Mr. Gorman’s suggested debt assumptions, relative to those developed by 6
PFM and included in the MSD proposal. An additional assumption I would like to 7
highlight relates to the MSD proposal’s use of the Municipal Market Data (“MMD”) 8
benchmark yield curve, with the addition of a credit spread, to establish revenue bond 9
borrowing rates. Our scale reflects (as does the MMD) individual coupons and yields for 10
each maturity—reflecting distinct principal amortization payments—in years one through 11
thirty. Because the yield curve is upward sloping to account for the time value of money 12
and the inherent additional risk associated with longer-term maturities, the yield on bonds 13
in earlier years will be less than the yield for bonds maturing in later years. The 14
relationship between, coupon, yield and term impact the potential premium generated for 15
a given maturity. Consequently, assuming an upward sloping yield curve, as MSD’s 16
proposal does, relative to a flat yield assumption implied by Mr. Gorman’s rebuttal 17
testimony creates additional variation in premium generation assumptions and therefore 18
the amount of proceeds generated in the MSD rate proposal relative to Mr. Gorman’s 19
analysis. 20
Q2. Is it appropriate to incorporate an interest rate cushion to allow for the potential for 21
increased interest rates in the MSD model, based on your experience? 22
A. Yes. As Mr. Snoke and Mr. Gorman note, interest rates are impossible to predict in the 23
Surrebuttal Testimony of Bethany Pugh, PFM June 3, 2019
2019 Rate Change Proceeding MSD Exhibit No. MSD 80E 2
long-term. However, theoretically, an upward sloping yield curve, as MMD currently 1
reflects, indicates market expectations for interest rates to rise in the future. 2
Consequently, it is prudent to assume a rise in interest rates to ensure adequate revenues 3
in a multi-year financial plan and rate setting process. Furthermore, I have worked on 4
financial planning models for a number of public utilities, and have always recommended 5
and/or included either an above market interest rate assumption or current market rates 6
with an interest rate cushion for entities that set rates for multiple years at a time. 7
Q3. Does this conclude your testimony? 8
A. Yes. 9