HomeMy Public PortalAboutExhibit MSD 88A - MSD's Response to MIEC's Fourth Discovery RequestExhibit MSD 88A
BEFORE THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
MSD'S RESPONSE TO THE FOURTH DISCOVERY REQUEST OF INTERVENORS
MISSOURI INDUSTRIAL ENERGY CONSUMERS
Metropolitan St. Louis Sewer District Response
ISSUE: WASTEWATER RATE CHANGE PROCEEDING
WITNESS: THE METROPOLITAN ST. LOUIS SEWER DISTRICT
SPONSORING PARTY: RATE COMMISSION
DATE PREPARED: JULY 3, 2019
Lashly & Baer, P.C.
714 Locust Street
St. Louis, Missouri 63101
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Exhibit MSD 88A
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 )
JUNE 24, 2019 FOURTH DISCOVERY REQUEST
OF INTERVENOR MISSOURI INDUSTRIAL ENERGY CONSUMERS
Metropolitan St. Louis Sewer District Response
Pursuant to § 7.28U and § 7.290 of the Charter Plan of The Metropolitan St. Louis Sewer District
(the "Charter Plan"), Restated Operational Rule 3(7) and Procedural Schedule § 16 and § 17 of
the Rate Commission of The Metropolitan St. Louis Sewer District ("Rate Commission"), The
Metropolitan St. Louis Sewer District ("District") hereby responds to the June 24, 2019 Fourth
Discovery Request of Missouri Industrial Energy Consumers ("MIEC") for additional
information and answers regarding the Rate Change Notice dated March 4, 2019 (the "Rate
Change Notice").
Exhibit MSD 88A
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
FOURTH DISCOVERY REQUESTS OF INTERVENOR
MISSOURI INDUSTRIAL ENERGY CONSUMERS
Pursuant to §§ 7.280 and 7.290 of the Charter Plan of The Metropolitan St. Louis Sewer
District (the "Charter Plan"), Operational Rule 3(5) and Procedural Schedule §§ 1, 17 and 18 of
the Rate Commission of the Metropolitan St. Louis Sewer District ("Rate Commission"),
Intervenor Missouri Industrial Energy Consumers ("MIEC") requests additional information and
answers from The Metropolitan St. Louis Sewer District ("District") regarding the Rate Change
Proposal dated March 4, 2019 (the "Rate Change Proposal").
The District is requested to amend or supplement the responses to this Discovery
Request, if the District obtains information upon the basis of which (a) the District knows that a
response was incorrect when made, or (b) the District knows that the response, though correct
when made, is no longer correct.
The following Discovery Requests are deemed continuing so as to require the District to
serve timely supplemental answers if the District obtains further information pertinent thereto
between the time the answers are served and the time of the Prehearing Conference.
Exhibit MSD 88A
FOURTH DISCOVERY REQUEST OF MIEC
REQUEST NO. 22: Referring to the `CIRP Dashboard' tab of Exhibit MSD
66C, please outline the differences between PFM's inputs and assumptions and MSD's
calculated inputs and assumptions when the entry in row 89 of the model is switched from
"PFM" to "Model" (for all columns). Please describe the purpose of differences in model inputs
and assumptions.
RESPONSE NO. 22: Exhibit MSD 66C is a version of Exhibit MSD 52 with all
tabs unlocked, as requested by the Rate Commission in Exhibit RC 66 - Rate Commission's
Fourth Discovery Request to MSD - April 11, 2019. The original Rate Model, Exhibit MSD 52,
was provided proactively on March 4, 2019 with the Rate Proposal. Both models function the
same way, were provided with all calculations and formulas intact, and will hereinafter be
referred to as "the model."
As provided the model contains the information used to put together the Rate Proposal.
It is a model built in Microsoft Excel by the District's Rate Consultant, Raftelis, for MSD. As an
Excel model, and a very large one, it has inherent limitations and not all functions of the model
are used by MSD. The model performs set calculations but usable outputs require informed
inputs, analysis, iterations, and more analysis. Some data is calculated separately and input into
the model, like the premium (received) and the principal and interest (paid) on bonds. That
information was provided by PFM, the District's financial advisor and an MSRB-Registered
Municipal Advisor. Row 89 of the `CIRP Dashboard' tab was set to "PFM" in the model
because that tells the model to use the bond premium, principal, and interest entered into the
cells in the `PFM Model ' tab which is where the data provided by PFM was entered. The yield
curve and coupon rate assumptions used to calculate the inputs were provided in detail, in
Exhibit MSD 78E - MSD Coupon and Yield Debt Assumptions as part of MSD 's response to
Exhibit MIEC 78 - MIEC's Third Discovery Request to MSD - May 16, 2019. Also in response to
that request, MSD provided Exhibit MSD 78F - Bond Calculation Model, with instructions, so
that a third party could calculate bond premium and principal and interest payments using their
own debt proceed, yield curve, and coupon rate assumptions. That information could then be
used to override PFM's numbers if the model user wanted to use different assumptions than
MSD used in its model, just as the Intervenor overrode other inputs and assumptions in its
version of the model.
Request No. 22 above implies that switching "PFM" to "Model" on row 89 will tell the
model to use "MSD calculated inputs and assumptions" but this is not accurate. MSD did not
use or plan to use or claim to use the "Model " function for the rate proposal period and did not
endorse or use bond yield and coupon rates other than those provided by PFM, it's Registered
Municipal Advisor. Since there was no intent to use the "Model" switch, MSD did not evaluate
or change any information that resided in fields related to the "Model" function. In short, the
calculations and formulas are intact and can be used but any premium related information in
the model attached to the "Model" switch were not used or endorsed by MSD to set proposed
rates. The model allows for a user with dfferent assumptions about yields to input different data
into these fields. MSD cannot be expected to know what assumptions a third party user will make
about market yields and bond premiums. The data that resided in the fields implied bond yields
much lower than MSD used in its model which results in much higher assumed premium
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Exhibit MSD 88A
amounts. This is easily checked by calculating premium as a percentage of the par amount of
bonds from the model using MSD's assumptions to the percentage listed in Row 93 of the `CIRP
Dashboard' tab which are the fields the model would look to for premium as a percent of par if
the field in Row 89 is flipped from "PFM" to "Model". Below is a comparison of the premium
as % of par calculated from MSD's proposal to the percentage listed in Row 93 of the `CIRP
Dashboard' tab.
Forecast
FY20
Proposed
FY21
Proposed
FY22
Proposed
FY23
Proposed
FY24
MSD Rate Proposal
6.4%
4.4%
3.6%
2.6%
. 2.6%
"Model" Switch - Row 93
9.0%
12.5%
12.5%
12.5%
12.5%
Difference in Premium
using MSD's Proposed
Debt Par Amount
$1.6 million
$10.3 million
$11.3 million
$25.1 million
$26.7 million
This is a difference of $75 million in assumed bond premium. If a third party user
intended to accept MSD interest rate assumptions but wanted to use a different par amount of
bonds issued, it should enter the premium as a percent of par calculated from MSD's Rate
Proposal into the cells in Row 93 of the "CIRP Dashboard" tab and then flip the "Model"
switch to get a reasonable proxy. The danger of assuming a high premium amount is that interest
rate increases result in lower premium received, leading to a shortfall in funding the CIRP and
potentially requiring delayed CIRP spending, higher debt issuances, and/or higher cash
spending. Prudent rate modeling should assume interest rate increases to protect CIRP funding,
debt coverage metrics, and liquidity.
REQUEST NO. 23: Please provide a copy of Exhibit MSD 66C (the unlocked
version of MSD's Rate Model) that includes only the following two changes to MSD's filed
wastewater revenue requirement, which were recommended by Mr. Gorman in his Surrebuttal
Testimony:
a. Update the model to reflect an overall PAYUU funding mix of 30% cash funding
and 70% debt funding rather than 60% and 40% proposed by the MSD.
b. Update the 'CIRP-Input' tab to reflect Mr. Gorman's proposed deferral of
$70 million of budgeted CIRP spending in each of FY23 and FY24 to FY25 and FY26, rather
than the annual FY23 and FY24 CRIP budget proposed by the MSD.
c. Identify all changes to the model to make these two changes in forecasting the
MSD revenue requirement, and
d. Provide the revised fmancial model used for this response with all formula and
calculations intact.
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Exhibit MSD 88A
RESPONSE NO. 23: To best understand the impact of the changes, it is helpful
to look at them individually before putting them together.
a. Exhibit MSD 88B is MSD 's model modified to reflect an overall PAYGO funding
mix of 30% cash funding and 70% debt funding. Forcing a 30% cash funding and 70% debt
funding mix results in higher rates than MSD proposed in its Rate Proposal because it results in
more debt and higher debt service costs. The higher costs are unnecessary and unfair. This is
easily illustrated by the dramatic and inefficient increase in the Operating Reserve balances.
MSD 's Rate Proposal projects Operating Reserve balances in the $40 million - $60 million
range. Using a 30% cash funding and 70% debt funding mix results in Operating Reserves
balances ranging from $136 million - $211 million for the proposal period The dfference is
cash that could and should be used to cash fund the CIRP and reduce the rate burden on
customers instead of sitting idle. The same result is evident in the Intervenor's model although
the rate impact is mitigated because it adopted lower debt service coverage targets than are
expected by investors and the rating agencies and it incorrectly assumes that MSD can delay $70
million of capital spending in both FY23 and FY24. Despite these changes the Intervenor's plan
projects Operating Reserve balances of $95 million - $111 million, reflecting an average of $55
million of cash above MSD's proposal that could be used to cash fund the CIRP and mitigate
rate increases. As discussed during these proceedings, MSD's overall 60 debt/40 cash funding
mix is the result of balancing reasonable rate increases with financial metrics and needs — the
funding mix needs to be an output of that balance and not a forced input into the model as the
Intervenor proposes. A summary of differences between MSD's Rate Proposal and a proposal
modified to force a CIRP funding mix of 30% cash funding and 70% debt funding are below:
,MSDAila pY,ol_
FY21 1 FY22 FY23 FY24
User Charge Revenue $453,279,370 i $471,198,143� $490,181,909 $510,108,517
2.8% 4.0% 4.0% . 4.1%
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T ical Sin _le Family Monthly Bill $56.63 $58.78 $61.02 $63.36
% increase 1.9% 3.896 3.8% 3.8%
$ 59,763,982 $ 41,538,195 i $ 49,345,499 I $ 49,871,963 '
% increase
Operating Reserves
De
r�
bt Sources / Capital Needs 50.8%52.1% 69.7% 69.8%
W SD.Rate Proposal Modiniled to 70 Debt/Cash alp pundi
FY21
FY22
FY23
FY24 1
User Charge Revenue
$ 458,562,706
$ 479,031,581
`
$ 500,624,771 ,
$ 523,170,315
% increase
4.0%
4.5% 4.5%
4.596
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Typical Single Family Monthly Bill
$57.27
$59.73
$62.29 1
$64.96
% increase
3.1%
4.3%
4.3% .
4.3%'
Operating Reserves
$ 135,843,048
$ 184,386,214
$ 201,537,569 1
$ 210,792,732
Debt Sources / Capital Needs
70.6%
70.6% 70.1%
69.4%i
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Exhibit MSD 88A
b. Exhibit MSD 88C is MSD's model modified to reflect deferral of $70 million of
budgeted CIRP spending in each of FY23 and FY24 to FY25 and FY26 As discussed throughout
these proceedings, though, MSD is unable to defer scheduled projects due to Consent Decree
schedules and deadlines. The only individual project large enough to have an impact like that
requested is the incinerator project for which MSD requested a Consent Decree amendment to
delay scheduled tunnel projects so that it could maintain compliance with air quality regulations
and mitigate the rate impact on customers. As background, 40 CFR Part 62 — Federal Plan
Requirements for Sewage Sludge Incineration Units Constructed on or Before October 14, 2010
(the SSI Rule) was finalized in June 2016. The finalization of the 2016 SSI Rule included a
provision that requires a permittee to replace their incinerators going forward if the cumulative
cost of improvements and repairs reaches 50% of the original installation costs. Because the
District's incinerators were built around 1970 and have undergone significant improvements
over the years, they are all at or above the 50% threshold. If we continue to operate the
incinerators, we could not perform any significant repairs without violating the new SSI Rule
and would be required to replace them. In February of 2017, we identified some new needed
repairs on the incinerators that if performed would trigger a violation of the law under the SSI
Rule. Looking forward, we knew we would have to start planning the replacement of the
incinerators because we cannot defer improvements any longer. We reported our situation to the
EPA. Because of the significant costs of replacing the incinerators and the affordability issue to
our rate payers if we added the incinerator replacement project on top of the then existing
Consent Decree schedule, we used a provision in our Consent Decree that allowed us to address
both issues. See Exhibit MSD 37A - Second Material Amendment to Consent Decree.
c. The changes are identified in Exhibit MSD 88D.
d. The modified financial model is provided as Exhibit MSD 88E. Modification of
the model as proposed by the Intervenor results in higher rates to ratepayers and significant
unnecessary and unfair idle cash balances as illustrated by the difference between the Operating
Reserve balances in MSD's Rate Proposal and those with the requested modifications. Higher
than necessary Operating Reserve balances signer cash that could be used to fund the CIRP,
reducing planned debt issuances. Reducing debt will lead to stronger coverage metrics at a
given level of rate increases or to lower rate increases at a given level of debt coverage. A
comparison of key metrics is below:
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Exhibit MSD 88A
Ra rrp
1! -
FY21 -
FY22 I FY23
FY24
User Charge Revenue
$ 453,279,370 °
$471,198,143 i $490,181,909
$ 510,108,517
% increase
2.8% �!�
4.0% 4.0%
I 4.1%
Typical Single Family Monthly Bill
$56.63 ;
$58.78 $61.02
$63.36
% increase
1.9%
3.8% "; 3.896
3.8%
l`
$ 49,871,963 1
0 erating Reserves
$ 59,763,982
$ 41,538,195 I $ 49,345,499
Debt Sources / Capital Needs
50.8%!
52.1%: 69.7% 69.8%
tirDelay$70MM aRP in P123i8► FY24 and for IO Debt/CashRPF
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FY21 i
FY22
FY23
FY24
$ 517,149,789
User Charge Revenue
$ 457,648,1831
$ 476,437,437 ,
,_
$ 496,294,856 R
% increase
3.8% `
4.1% 4 4.2%
4.2%
Typical Single Family Monthly Bill
$57.17 j
$59.42 I $61.77 p
$64.23
% increase
2.9%
3.9% i 4.0%
4.0%
Operating Reserves
$134,924,357J
$ 180,767,824 t $ 216,019,387 :
$ 248,647,586 r
Debt Sources / Capital Needs
71.2%
71.2%i 70.8%
70.1%r,
Respectfully submitted,
11/7"--"s")
Susan M. Myers, General Counsel
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
2350 Market Street
St. Louis, Missouri 63103
smyers@stlmsd.com
Tel: (314) 768-6366
Fax: (314) 768-6279
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Exhibit MSD 88A
CERTIFICATE OF SERVICE
The undersigned certifies that a copy of the foregoing was sent by electronic transmission
to Lisa O. Stump and Brian J. Malone, Lashly & Baer, P.C., Brandon W. Neuschafer and
Kamilah Jones, Bryan Cave Leighton Paisner on this 3rd day of July 2019.
Lisa O. Stump, Esq.
Lashly & Baer, P.C.
714 Locust Street
St. Louis, MO 63101
lostump@lashlybaer.com
Brian J. Malone, Esq.
Lashly & Baer, P.C.
714 Locust Street
St. Louis, MO 63101
bma1oneAlashlybaer.com
Brandon W. Neuschafer
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102
bwneuschafer@bc1plaw.com
Kamilah Jones
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102
kami. j ones@bclplaw. com
Susan M. Myers, General Counsel
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
2350 Market Street
St. Louis, Missouri 63103
smyers@stlmsd.com
Tel: (314) 768-6366
Fax: (314) 768-6279
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