HomeMy Public PortalAboutExhibit MSD 6 - 2007 RC Recommendation ReportExhibit MSD 6
RATE RECOMMENDATION REPORT
of
THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
to the
BOARD OF TRUSTEES OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
upon the
COMBINED WASTEWATER AND STORMWATER
RATE CHANGE PROPOSAL
AUGUST 13, 2007
THE RATE COM ISSION OF THE
ETROPOLITAN ST. LOUIS SE ER DISTRICT
August 13, 2007
Board of Trustees of the
Metropolitan St. Louis Sewer District
Dear Trustees:
I have been authorized and directed by the Rate Commission of the Metropolitan St.
Louis Sewer District to deliver to you the Rate Recommendation Report regarding the
Combined Wastewater and Stormwater Rate Change Proposal submitted to the Rate
Commission on March 2, 2007.
Accompanying the Report are the Minority Reports regarding (i) Pay -As -You -Go
Financing, in which Delegates Bowser, Reeves, Stein and Sullivan joined; (ii)
Resistance Factor, in which Delegates Allen, Bowser, Harris and Schoedel joined; (iii)
Stormwater Fees, in which Delegates Brockman, Harris and Stein joined, and in which
Delegate Ward joined in part; and (iv) Methods of Stormwater Control in which
Delegates Brockman, Harris and Ward joined; the Proceedings; and the Resolution
adopted by the Rate Commission on August 8, 2007.
The Proceedings of the Rate Commission at which the Rate Recommendation Report
was considered were held in accordance with all requirements of law and procedural
rules of the Rate Commission. The Rate Recommendation Report was approved at a
meeting on August 8, 2007, at which a quorum was present and acted throughout. The
Resolution is in full force and effect and has not been altered, amended, or repealed.
Very truly yours,
� V
Leonard Toenjes
cc: Mr. Jeffrey Theerman
Mr. Randy Hayman
RESOLUTION OF THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
APPROVING A RATE RECOMMENDATION REPORT ON
THE COMBINED WASTEWATER AND STORMWATER
RATE CHANGE AMENDMENT; AND RELATED MATTERS
WHEREAS, the Rate Commission of the Metropolitan St. Louis Sewer District (the
"District") is directed by § 7.040 of the Charter Plan, as approved and amended by the voters of the
City and County of St. Louis, to review and make recommendations to the Board of Trustees of the
District regarding proposed changes in wastewater rates, stormwater rates and tax rates or change in
the structure of any of the rates; and
WHEREAS, the District, on March 2, 2007, referred proposed rate changes in the wastewater
and stormwater rates for review by the Rate Commission; and
WHEREAS, any change in a rate recommended to the Board of Trustees by the Rate
Commission is to be accompanied by a statement complying with the provisions of §§ 7.040 and
7.270 of the Charter Plan; and
WHEREAS, in order to conduct its proceedings with utmost expedition consistent with
procedural fairness to the parties, the Rate Commission adopted Operational Rules on August 16,
2001, as amended on March 21, 2002, April 16, 2003, and March 2, 2007, and a Procedural
Schedule governing the proposed rate change on March 6, 2007, pursuant to § 7.280 of the Charter
Plan; and
WHEREAS, the Rate Commission received written testimony, exhibits, conducted technical
conferences and public hearings, received legal and other memoranda, and has conducted these
proceedings in a manner consistent with the requirements of the Charter Plan, the Operational Rules
and Procedural Schedule (the "Proceedings"); and
WHEREAS, the Rate Commission considered each of the facts and circumstances disclosed
during the Proceedings; and
WHEREAS, the Rate Commission has considered a statement specifically responsive to the
criteria and factors set forth in §§ 7.040 and 7.270 of the Charter Plan, (the "Rate Recommendation
Report") to the Board of Trustees.
NOW, THEREFORE, the Delegates of the Rate Commission do hereby resolve, deteiuiine
and order as follows:
Section 1. Findings. The Delegates of the Rate Commission hereby find and deteuniine
those matters set forth in the preambles hereof as fully and completely as if set out in full in this
Section 1.
1
Section 2. Charter Plan Requirements. The Delegates of the Rate Commission find and
determine that the Rate Recommendation Report in the form attached hereto as Exhibit "A"
considered at this meeting satisfies the requirements of the Charter Plan;
Section 3. Rate Recommendation Report. The Delegates of the Rate Commission hereby
approve the Rate Recommendation Report in the form attached hereto as Exhibit "A".
Section 4. Minority Reports. The Rate Commission hereby receives the Minority
Reports regarding (i) Pay -As -You -Go Financing, in which Delegates Bowser, Reeves, Stein and
Sullivan joined; (ii) Resistance Factor, in which Delegates Allen, Bowser, Harris and Schoedel
joined; (iii) Stonnwater Fees, in which Delegates Brockman, Harris and Stein joined, and in which
Delegate Ward joined in part; and (iv) Methods of Stonnwater Control in which Delegates
Brockman, Harris and Ward joined on behalf of the Rate Commission.
Section 5. Actions of Officers Authorized. The officers of the Rate Commission shall
be, and they hereby are, authorized and directed to deliver to the Board of Trustees of the
Metropolitan St. Louis Sewer District the Rate Recommendation Report and the Minority Reports
and to take such actions as they may deem necessary or advisable in order to carry out and perform
the purposes of this Resolution and to make ministerial alterations, changes or additions in the
foregoing documents herein approved, authorized and confirmed which they may approve and the
execution or taking of such action shall be conclusive evidence of such necessity or advisability.
Section 6. Severability. It is hereby declared to be the intention of the Rate Commission
that each and every part, section and subsection of this Resolution shall be separate and severable
from each and every other part, section and subsection hereof and that the Rate Commission intends
to adopt each said part, section and subsection separately and independently of any other part, section
and subsection. In the event that any part, section or subsection of this Resolution shall be
determined to be or to have been unlawful or unconstitutional, the remaining parts, sections and
subsections shall be and remain in full force and effect, unless the court making such finding shall
determine that the valid portions standing alone are incomplete and are incapable of being executed
in accordance with the intent of this Resolution.
Section 7. Governing Law. This Resolution shall be governed exclusively by and
construed in accordance with the applicable laws of the State of Missouri.
Section 8. No Personal Liability. No Delegate of the Rate Commission, officer, or agent
of the Rate Commission shall have any personal liability for acts taken in accordance with this
Resolution.
Section 9. Expenses. The Finance Committee is hereby authorized and directed to cause
to be paid all costs, expenses and fees incurred in connection with or incidental to this Resolution.
2
Section 10. Effective Date. This Resolution shall become effective immediately upon its
passage.
ADOPTED by the Delegates of the Rate Commission of the Metropolitan St. Louis Sewer
District this 8th day of August, 2007.
RATE COMMISSION OF THE METROPOLITAN
ST. LOUIS SEWER DISTRICT
[SEAL]
ATTEST:
3
TABLE OF CONTENTS
INTRODUCTION
First Factor: "Is consistent with constitutional, statutory or common law
as amended from time to time" 57
Second Factor: "Enhances the District's ability to provide adequate
sewer and drainage systems and facilities, or related services" 87
Third Factor: "Is consistent with and not in violation of any covenant or
provision relating to any outstanding bonds or indebtedness of the
District"
Fourth Factor: "Does not impair the ability of the District to comply with 92
applicable Federal or State laws or regulations as amended from time to
time"
Fifth Factor: "Imposes a fair and reasonable burden on all classes of 97
ratepayers" 110
MINORITY REPORTS 160
PROCEEDINGS INDEX 168
First Criteria: Whether the Rate Change Proposal is necessary to pay
interest and principal falling due on bonds issued to finance assets of
the District?
Second Criteria: Whether the Rate Change Proposal is necessary to pay 27
the costs of operation and maintenance? 39
Third Criteria: Whether the Rate Change Proposal is in such amounts as
may be required to cover emergencies and anticipated delinquencies? 46
FACTORS FOR RECOMMENDATION 56
EXECUTIVE SUMMARY 2
BACKGROUND 4
METROPOLITAN ST. LOUIS SEWER DISTRICT 9
9
THE RATE COMMISSION 0
APPOINTMENT 10
RATE COMMISSION'S OPERATIONAL RULES 11
15
RATE COMMISSION'S PROCEDURAL SCHEDULE
RATE COMMISSION'S PROCEEDINGS 15
16
PROPOSALS
The District's Proposal 21
Intervenor MIEC's Proposal 21
Intervenor MEG's Proposal 24
Intervenor AGC/SITE's Proposal 25
The Rate Consultant's Proposal 25
RATE COMMISSION RECOMMENDATION 25
CRITERIA FOR RECOMMENDATION 27 27
INTRODUCTION
The Combined Wastewater and Stormwater Rate Change Proposal of the
Metropolitan St. Louis Sewer District was presented to the Rate Commission on March
2, 2007.
The Rate Commission initiated certain proceedings in order to provide for the
advance submission of written testimony, the conduct of three technical conferences, a
prehearing conference, discovery procedures, a public hearing, and the filing of post -
hearing briefs with procedural fairness to the parties. See Charter Plan of the
Metropolitan St. Louis Sewer District (hereinafter "Charter Plan"), § 7.280. Missouri
Industrial Energy Consumers ("MIEC"); Monarch -Chesterfield Levee District, Howard
Bend Levee District, Earth City Levee District, Gary and Debra Hente, Riverport Farm
Partners, Stemme Family Partnership, Beachcraft Holdings, Jay Henges Real Estate
Trust, and Riverport Levee District (hereinafter known as the "Levee Districts"); the
Associated General Contractors ("AGC") of St. Louis; the SITE Improvement
Association; the Missouri Energy Group ("MEG"); and Michael Cohen intervened and
participated in these proceedings. The record of these proceedings is contained in
Volumes I through XIV, delivered with this Report. All of the written testimony, exhibits,
document requests and responses, transcripts of testimony, legal memoranda, and
other materials contained therein have been admitted into evidence and considered by
the Rate Commission Delegates for the purpose of making the findings and
determinations contained in this. Report. These proceedings (the "Proceedings") are
incorporated herein by reference.
2
The Rate Commission's report to the Board of Trustees of the District is due
within 120 days of receipt of the Rate Change Proposal, or June 29, 2007, unless the
Board of Trustees shall upon application of the Rate Commission extend the period for
one additional 45 -day period. The Rate Commission submitted a request for such an
extension on May 10, 2007, and on May 11, 2007, the Board of Trustees approved an
extension of the period to August 13, 2007. See Charter Plan, § 7.290(f).
This is the Report required by the Charter Plan and has been adopted by a
majority of the Rate Commission Delegates. See Charter Plan, § 7.280(f).
3
EXECUTIVE SUMMARY
The District's Proposal' which was presented to the Rate Commission on March
2, 2007 provides a Proposed Rate Change for a Combined Wastewater and Stormwater
Rate Change ("Rate Change Proposal"). The District proposes to finance $661 million
of additional investment in wastewater capital projects (the "Capital Investment and
Replacement Plan," or "CIRP") based on Pay -As -You -Go funding from wastewater and
stormwater rate increases.
The District is proposing Recommended Wastewater Rates as follows:
2011 2012
2008
2009
2010
Base Charge - $/Bill
Billing & Collection Charge
2.30 2.30
2.45
2.55
2.70
System Availability Charge
8.40 9.55
10.65
11.70
12.25
Total Base (Residential) Service
Charge
10.70
11.85
13.10
14.25
30.90
14.95
32.10
Compliance Charge - $/Bill (b)
27.40
28.40
29.65
Total Nonresidential Service Charge
38.10
40.25
42.75
45.15
2.59
47.05 _
2.73
Volume Charge
Metered - $/Ccf
1.88
2.13
2.37
Unmetered - $/Bill
1.69
6.32
5.27
5.27
1.78
6.67
5.56
5.56
Each Room
1.23
1.39
1.55
Each Water Closet
4.59
5.20
5.79
Each Bath
3.83
4.34
4.82
Each Separate Shower
3.83
4.34
4.82
Extra Strength Surcharges - $/ton (b)
Suspended Solids over 300 mg/I
218.90
220.54
239.59
260.17
270.74
BOD over 300 mg/I
529.90
601.02
659.66
722:36
361.18
752.92
376.46
COD over 600 mg/1
264.95
- 300.51
329.83
1 This summary of the Rate Setting Documents does not purport to be complete and
reference is made to the full text of the Rate Setting Documents or a complete recital of
the terms of the rate changes proposed by the District.
4
The District is proposing Stormwater Impervious Area Charges as follows:
2008
2009
2010
2011
2012
Projected stormwater service charge
per 100 square feet impervious area
(annualized rate — billable monthly)
Implemented December 1, 2007
$1.4400
$2.0758
$2.1935
$2.2495
$2.2865
Projected Monthly charge per 100
square feet impervious area
$0.1200
$0.1730
$0.1828
$0.1875
$0.1905
This impervious area based revenue is proposed funding for a basic level of
stormwater service throughout the District's entire service area. Basic service includes:
pipes and structure repair; inlet cleaning; removal of creek obstructions; concrete
channel cleaning and repair; and creek inspections.
The specific revenues and expenses reflected in this section also incorporate the
transition from property tax and wastewater rate revenues to an independent
stormwater revenue source for an enhanced level of stormwater services. This
transition is designed to provide funding for items such as maintenance of residential
detention basins; erosion control; construction of new storm water systems; creek
maintenance; and assistance with backyard ponding.
In addition to the recommendation for a stormwater impervious area charge,
there are also changes proposed for the Operation and Maintenance Capital
Improvement ("OMCI") revenues. OMCI projects will continue to be financed by OMCI
taxes and have been separately identified from those projects to be funded by
impervious area charges. The District is proposing reconfiguration of the existing 23
OMCI subdistricts into 5 watershed -based subdistricts as a means to provide enhanced
stormwater services as determined by a vote of each subdistrict's customers. The
5
proposed 5 -subdistrict reconfiguration would be delineated as follows: (i) Missouri
River; (ii) Coldwater Creek; (iii) Bissell; (iv) River Des Peres; and (v) Lower Meramec.
The tax levy and type of enhanced services will be determined by a vote of the
customers of each watershed. This proposed reconfiguration will result in an expansion
of the total area covered by subdistricts and provide the opportunity for more District
customers to obtain enhanced stormwater services by resident vote. It is assumed, for
rate modeling purposes, this reconfiguration and necessary votes would be completed
in the November 2007 election. The District intends to develop a priority project list for
each of the reconfigured OMC! subdistricts. Should voter approval not be received for a
given subdistrict, the previous OMCI subdistrict boundaries shall be retained and the
priority list revised accordingly.
Voter approval for enhanced stormwater services would be sought in the new
watershed subdistricts. The revenue reconfigured by the new watershed subdistricts is
as follows:
OMCI Revenue by
Watershed
Bissell Point Watershed
Coldwater Creek
Watershed
Lower Meramec Watershed
River Des Peres
Watershed
Missouri River Watershed
Total OMCI Revenue
2007 I 2008
Taxes of $0.04 to
$0.10/$100 Assessed
Value
714,300
1,882,300
717,900
1,913,900
2009
2010 j 2011 I 2012
Tax Rate $0.10 per $100 Assessed Value
4,006,800
2,064,200
4,112,000
2,118,400
238,900
5,590,700
251,700
5,758,700
4,502,700
8,928, 300
4,620,900
9,162,600
0
8,426,200
0
8,642,200
5,610,800
5,758,000
25,112,800 25,771,900
_ 4,219,900
2,174, 000
4,742,200
9,403,100
5,909,200
26,448,400
4,330,700
2,231,000
4,866,700
9,650,000
6,064,200
27,142, 600
The Rate Commission, after consideration of all of the facts and circumstances
disclosed in the Proceedings, finds and determines that the Rate Change Proposal is
necessary to pay (i) interest and principal falling due on bonds issued to finance assets
of the District; (ii) the costs of operation and maintenance; and (iii) such amounts as
6
may be required to cover emergencies and anticipated delinquencies. See Charter
Plan, § 7.040.
The Rate Commission, after consideration of all of the facts and circumstances
disclosed in the Proceedings, finds and determines that the Rate Change Proposal, and
all portions thereof: (i) is consistent with constitutional, statutory and common law as
amended from time to time; (ii) enhances the District's ability to provide adequate sewer
and drainage systems and facilities, or related services; (iii) is consistent with and not in
violation of any covenant or provision relating to any outstanding bonds or indebtedness
of the District; and (iv) does not impair the ability of the District to comply with applicable
Federal or State laws or regulations as amended from time to time.
The Rate Commission, after consideration of all the facts and circumstances
disclosed in the Proceedings, finds and determines that the Rate Change Proposal
does not impose a fair and reasonable burden on all classes of ratepayers because the
Proposal includes (1) a resistance factor; and (2) a charge for enhanced stormwater
services based on ad valorem tax rather than an impervious area charge.
The Rate Commission, after consideration of all facts and circumstances
disclosed in the Proceedings, finds and determines that the use of an impervious area
charge for all Stormwater Services imposes a fair and reasonable burden on all classes
of ratepayers, and the record in the Proceedings supports combining the charge for
both basic stormwater services and enhanced stormwater services into one stormwater
charge.
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Recommendation
The Rate Commission recommends the use of 100% Pay -As -You -Go funding as
set forth in the Rate Change Proposal. The Rate Commission recommends changes in
wastewater rates as set forth in the Proposal, with the exception of the resistance factor.
The Rate Commission recommends that the resistance factor be eliminated. With
respect to stormwater rates, the Rate Commission recommends the use of an
impervious area charge for all stormwater services, and that the charges for both basic
and enhanced services as defined in the Rate Change Proposal be combined into one
stormwater charge based on impervious area.
The Rate Change Proposal is for a term of five years, or until 2012. The Rate
Commission believes that the record in the Proceedings supports a finding that the
requested District's Phase lI $661 million Capital Improvement Replacement Program
will allow the District to meet the near term capital improvement needs until 2012.
However, the Rate Commission also believes that the record in the Proceedings
supports a finding that an additional rate change proposal and/or the issuance of debt
will be required prior to 2012 to fund any compliance required by settlement or court
order in the proceeding captioned United States of America and the State of Missouri v.
The Metropolitan St. Louis Sewer District.
8
BACKGROUND
Metropolitan St. Louis Sewer District
Article VI § 30(a) of the Missouri Constitution has authorized "The people of the
city of St. Louis and the people of the county of St. Louis . . . to establish a metropolitan
district or districts for the functional administration of services common to the area
included therein . . . ." Mo. Const. art. VI, § 30(a). At a special election on February 9,
1954, the freeholders adopted and the voters of the City of St. Louis and St. Louis
County approved the Charter Plan (as amended on November 7, 2000) creating the
Metropolitan St. Louis Sewer District ("District"). The Charter Plan establishing the
District has been held to be constitutional. State on inf. Dalton v. Metro. St. Louis
Sewer Dist., 275 S.W.2d 225 (Mo. 1955) (en banc).
The District is a body corporate, a municipal corporation, and a political
subdivision of the state, with power to . . . act as a public corporation within the purview
of the Plan, and shall have the powers, duties, and functions as herein described.
Charter Plan, § 1.010. The Missouri Constitution provides that upon the adoption of the
Charter Plan, it "shall become the organic law of the territory therein defined, and shall
take the place of and supersede all laws, charter provisions and ordinances inconsistent
therewith relating to said territory." Mo. Const. art. VI, § 30(b). As explained by the
Missouri Supreme Court, "[t]he apparent intent is to give the freeholders, with the
approval of the voters, power to do whatever the Legislature could ordinarily do with
respect to the creation, organization and authority of such a district." Dalton, 275
S.W.2d at 228.
9
As such, the Charter Plan is similar to legislation, and thus, the District has only
such powers as are delegated to it by the Charter Plan, or as may properly be implied
from the nature of the duties imposed. State on inf. McKittrick v. Wymore, 132 S.W.2d
979, 987-88 (Mo. 1939) (en banc).
To determine whether a certain action of the District is authorized by the Charter
Plan, it must be construed to further the intent of the voters. Centerre Bank of Crane v.
Dir. of Revenue, 744 S.W.2d 754, 759 (Mo. 1988) (en banc). Intent must be
ascertained by examining the plain language of the Charter Plan reviewed as a whole.
Staley v. Dir. of Revenue, 623 S.W.2d 246, 248 (Mo. 1981) (en banc).
It is clear that authorization was provided to residents in St. Louis City and
County to establish a metropolitan sewer district, Mo. Const. art. VI, § 30(a), and that
authorization was provided by the voters of St. Louis City and County to authorize the
activities which carry out the intent expressed and implied from the Charter Plan,
including the establishment of the Rate Commission.
The Rate Commission
The Rate Commission was established by the amendments to the Charter Plan
approved by the voters at a general election on November 7, 2000 to review and make
recommendations to the Board of Trustees regarding proposed changes in wastewater,
stormwater rates, and tax rates. Specifically, upon receipt of a Rate Change Notice
from the District, the Rate Commission is to recommend to the Board changes in a
wastewater, stormwater, or tax rate necessary to pay (i) interest and principal falling due
on bonds issued to finance assets of the District; (ii) the costs of operation and
10
maintenance; and (iii) such amounts as may be required to cover emergencies and
anticipated delinquencies. See Charter Plan, § 7.040.
Any change in a rate recommended to the Board by the Rate Commission
pursuant to § 7.270 of the Charter Plan is to be accompanied by a statement of the
Rate Commission that the proposed rate change (i) is consistent with constitutional,
statutory, or common law as amended from time to time; (ii) enhances the District's
ability to provide adequate sewer and drainage systems and facilities, or related
services; (iii) is consistent with and not in violation of any covenant or provision relating
to any outstanding bonds or indebtedness of the District; (iv) does not impair the ability
of the District to comply with applicable Federal or State laws or regulations as
amended from time to time; and (v) imposes a fair and reasonable burden on all classes
of ratepayers.
Appointment
On January 13, 2005, the District enacted Board Ordinance No. 11924, as
required by § 7.230 of the Charter Plan, and designated the Rate Commission
Representative Organizations. The Ordinance designated: Associated General
Contractors of St. Louis, Building & Construction Trades Council, The Engineers' Club
of St. Louis, FOCUS St. Louis, Home Builders Association of Greater St. Louis, The
Human Develop. Corp. of Metro. St. Louis, International Institute, League of Women
Voters, Missouri Botanical Garden, Missouri Industrial Energy Consumers, Regional
Chamber & Growth Association, Sierra Club, St. Louis Association of Realtors, St. Louis
Council of Construction Consumers, and St. Louis County Municipal League. Each of
these Organizations designated an individual to serve as a Rate Commission Delegate
11
and notified the Rate Commission. The Delegates currently comprising the Rate
Commission are:
DELEGATE REPRESENTING
Nancy Bowser League of Women Voters
Paul Brockmann Missouri Botanical Garden
Charles Davis St. Louis Association of Realtors
Evelio Sardina International Institute
Virginia Harris Sierra Club
William Allen Home Builders Association of Greater St. Louis
Daniel P. Murphy Building & Construction Trades Council
William Peick St. Louis Council of Construction Consumers
Willard Reeves The Human Develop. Corp. of Metro. St. Louis
Mike Schoedel St. Louis County Municipal League
John L. Stein Missouri Industrial Energy Consumers
Steven R. Sullivan Regional Chamber & Growth Association
Leonard Toenjes Associated General Contractors of St. Louis
George D. Tomazi The Engineers' Club of St. Louis
Richard Ward FOCUS St. Louis
Five Rate Commission Representative Organizations (Building & Construction
Trades Council, FOCUS St. Louis, Missouri Industrial Energy Consumers, Home
Builders Association of Greater St. Louis, and St. Louis County Municipal League) have
terms that expired January 31, 2007. The Board of Trustees has not designated
organizations to succeed such Rate Commission Representative Organizations.
Under the Charter Plan, the Board of Trustees is to identify the Rate Commission
Representative Organizations for a term of years determined by the Board. Charter
Plan, § 7.230. Each Rate Commission Representative Organization selected by the
12
Board of Trustees shall have the right to designate a Rate Commission Delegate to the
Rate Commission for a term of six years or the completion of any unexpired terms. Id. at
§ 7.240. This section continues, "Prior to the expiration of a Rate Commission
Representative Organization's term, the Board of Trustees shall designate
organizations within the District to succeed such Rate Commission Representative
Organization." Id. at § 7.240. Nothing bars a Rate Commission Organization from
being named to successive terms. Id.
The Charter Plan is silent as to whether the Rate Commissioner Organizations
and their delegates may hold over in their office if the Board does not designate
successor organizations prior to the expiration of their terms. The Missouri Constitution
provides, "subject to the right of resignation, all officers shall hold office for the term
thereof and until their successors are duly elected or appointed and qualified." Mo.
Const. art. VII, § 12. In general, this provision extends the term of an officer, permitting
an officer to continue to hold office for the term thereof and until his successor is duly
appointed and qualified. Moynihan v. Gunn, 204 S.W.3d 230, 235 (Mo. Ct. App. 2006).
Unless there is a law to the contrary, all appointed officers hold office during their official
terms and may hold over in office until their successor is appointed. Id.
In interpreting Section 12 of Article VII, the courts have recognized the
importance of the continuity of tenure. Id. at 236. The Missouri Supreme Court
declared:
[w]e believe the intent and purpose of Section 12 is to guarantee a
continuity of tenure, to make sure that the public, for whose benefit the
office has been created, will at all times have an incumbent perform the
duties thereof, to insure that the public interest will not suffer from the
neglect of duties which would result for want of an incumbent and that
public business will not be interrupted.
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Id.
In Langston v. Howell County, the Missouri Supreme Court held that the general
trend in this country is that "in the absence of an express or implied constitutional or
statutory provision to the contrary an officer is entitled to hold his office until his
successor is appointed or chosen and has qualified." 79 S.W.2d 99, 102 (Mo. 1935).
The courts have adopted the doctrine that "in the absence of express provision and
unless the legislative intent to the contrary is manifest, municipal officers hold over until
their successors are provided." Davenport v. Teeters, 315 S.W.2d 641, 644 (Mo. Ct.
App. 1958).
The Missouri courts have held that Section 12 of Article VII also applies to
municipal officers and officers of a political subdivision. Voss v. Davis, 418 S.W.2d
163,168 (Mo. 1967) (municipal officers); State ex rel. Byrd v. Knott, 75 S.W.2d 86, 90
(Mo. Ct. App. 1934) (officers of political subdivision held to be public officers).
Missouri also recognizes the validity of a de facto officer, which is one who has
the reputation or appearance of being the officer such person assumes to be but who, in
fact, under the law, has no right or title to the office such person assumes to hold. State
v. VanSickel, 675 S.W.2d 907, 912 (Mo. Ct. App. 1984) (quoting State ex rel. City of
Republic v. Smith, 139 S.W.2d 929, 933 (Mo. 1940)). The acts of an officer de facto are
valid so far as they concern the public or the rights of third persons who have an interest
in the things done. State v. Smith, 779, S.W.2d 241, 243 (Mo. 1989) (en banc).
In order to be an officer de facto, the officer holds office by some color of right or
title. VanSickel, 675 S.W.2d at 912. Where one is actually in possession of a public
office and discharges the duties thereof, the color of right which makes such person a
14
de facto officer may result from an election or appointment, holding over after the
expiration of a term, or by acquiescence by the public for such a length of time as to
raise the presumption of a colorable right to hold such office. Id.
The Rate Commissioners have been appointed under the color of a known
appointment, and are holding over after the expiration of a term.
On January 24, 2007, District legal counsel advised the Rate Commission
counsel of the District's opinion that current Rate Commission Representative
Organizations with expiring terms may continue to appoint delegates to serve on the
Rate Commission until the Board of Trustees appoints their successors.
Rate Commission's Operational Rules
On August 16, 2001, and under the authority of §§ 7.250 and 7.280(e) of the
Charter Plan, the Rate Commission adopted Operational Rules, Regulations and
Procedures as amended on March 21, 2002, April 16, 2003, and March 2, 2007, to
govern the activities of the Rate Commission.
Rate Commission's Procedural Schedule
On March 6, 2007, the Rate Commission, under the authority of § 7.280(e) of the
Plan and pursuant to § 3(3) of the Operational Rules, adopted .a Procedural Schedule
for the Consideration of a Combined Wastewater and Stormwater Rate Change Notice.
Under the Charter Plan, the Rate Commission must issue its Rate
Recommendation Report to the Board and the public no later than 120 days after
receipt of a Rate Change Notice. Charter Plan, § 7.280(f). As a result, the
Recommendation Report for the Combined Wastewater and Stormwater Rate Change
would be due June 29, 2007. Section 7.280(f), however, allows the Board, upon
15
application of the Rate Commission, to extend the period of time for the issuance of the
Rate Commission Report for one additional 45 day period. By correspondence dated
May 10, 2007, the Rate Commission made such application to the Board, asking the
deadline to be extended until August 13, 2007. The Board granted the request for an
extension on May 11, 2007, and the Rate Commission Report is now due August 13,
2007.
Rate Commission's Proceedings
Under procedural rules adopted by the Rate Commission, any person who would
be affected by the Wastewater and Stormwater Rate Change Proposal has an
opportunity to submit an application to intervene in the rate change proceedings.
Applications to intervene have been granted for: (i) Missouri Industrial Energy
Consumers ("MIEC"); (ii) Monarch -Chesterfield Levee District, Howard Bend Levee
District, Earth City Levee District, Gary and Debra Hente, Riverport Farm Partners,
Stemme Family Partnership, Beachcraft Holdings, Jay Henges Real Estate Trust, and
Riverport Levee District (hereinafter known as the "Levee Districts"); (iii) the Associated
General Contractors ("AGO") of St. Louis; (iv) the SITE Improvement Association; (v)
the Missouri Energy Group ("MEG"); and (vi) Michael Cohen.
On March 7, 2007, the District submitted to the Rate Commission prepared
Direct Testimony of Keith D. Barber, Randy L. Hayman, Brian L. Hoelscher, Steve
Sedgwick, David R. St. Pierre, Jeffrey L. Theerman, Karl J. Tyminski, and Janice M.
Zimmerman.
A Technical Conference was held on the record on April 19 and 20, 2007,
regarding the Rate Setting Documents and the Direct Testimony filed with the Rate
16
Commission by the District to provide the District an opportunity to answer questions
propounded by members of the Rate Commission; then by any Intervenor; and finally by
Lashly & Baer, Legal Counsel to the Rate Commission.
On May 2, 2007, MIEC filed the Rebuttal Testimony of Michael Gorman.
On May 2, 2007, the Levee Districts filed the Rebuttal Testimony of Robert C.
Butchko and Ryan Hodges.
On May 2, 2007, MEG filed the Rebuttal Testimony of Drazen Consulting Group.
On May 2, 2007, Michael Cohen filed the Rebuttal Testimony of Michael Cohen.
On May 2, 2007, the Rate Commission Consultant filed the Rebuttal Testimony
of William Stannard.
A Second Technical Conference was held on the record May 9, 2007 and May
10, 2007, regarding the Rebuttal Testimony, where each person submitting Rebuttal
Testimony answered questions propounded by members of the Rate Commission, the
District, other Intervenors, and Legal Counsel.
On May 23, 2007, the District submitted to the Rate Commission prepared
Surrebuttal Testimony of Jeffrey L. Theerman, Janice M. Zimmerman, Brian L.
Hoelscher, Karl J. Tyminski, Steve Sedgwick, and Keith D. Barber.
On May 23, 2007, MIEC filed the Surrebuttal Testimony of Michael Gorman.
A Third Technical Conference was held on the record on May 30, 2007,
regarding the Surrebuttal Testimony, where each person submitting Surrebuttal
Testimony answered questions propounded by members of the Rate Commission, the
District, other Intervenors, and Legal Counsel.
17
A Prehearing Conference for the purpose of identifying any issues raised by the
prepared testimony previously submitted was conducted on the record on June 11,
2007. A representative of each party submitting testimony was invited to participate in
the Prehearing Conference.
Each participant in the Prehearing Conference submitted on or before June 18,
2007, a prehearing conference report ("Prehearing Conference Report") describing the
issues raised by the Rate Setting Documents and the prepared testimony, together with
a brief description of such participant's position, if any, on each issue and the rationale
therefore.
On July 11, 2007, the District submitted its Response to AGC and SITE
Improvement Association's closing argument.
On July 11, 2007, MEG submitted its Response to AGC and SITE Improvement
Association's closing argument.
Numerous written discovery requests were made and responded to by the
various parties during the scope of the Proceedings. All such requests and responses
are included in the record to the Proceeding.
Ratepayers who did not wish to intervene were permitted to participate in a
series of on -the -record public hearings conducted in five sessions beginning on June 7,
2007, and concluding on June 14, 2007. A Public Notice regarding these Proceedings
was published in the St. Louis Post -Dispatch and in the St. Louis American. These
Notices contained the time, dates and location of each of these conferences and
hearings.
18
Public Notice regarding the Rate Change Proposal was published by the District
in the St. Louis American on March 15, 2007 and the St. Louis Business Journal on
March 16, 23, and 30, 2007. The Public Notice contained the time, dates and location
of each of the technical conferences and hearings.
Similarly, Public Notice regarding these Proceedings was published in the St.
Louis Post -Dispatch on June 1, 2007 by the Rate Commission. This Notice contained
the time, dates and location of each of the conferences and hearings.
An additional public hearing session was held on July 6, 2007 for the purpose of
(1) receiving into evidence any prepared testimony previously submitted to the
Commission subject to any valid objections, together with the discovery responses and
transcripts of the technical conferences; (2) permitting the Rate Commission members
or those designated by the Rate Commission to ask questions regarding any issue
addressed by the prepared testimony or any other element of the Proposed Rate
Change; and (3) permitting closing statements by the District, any person who has been
permitted to intervene, and Legal Counsel for the Rate Commission.
During the Proceedings, Exhibits and Discovery Requests and Discovery
Request Responses were introduced and on July 6, 2007, were admitted into evidence.
These documents, together with the transcripts of testimony, written testimony, and
certain other materials, are contained in Volumes I through XIV, and the Proceedings
Index may be found at the end of this Report.
The findings and determinations contained in this Report were considered at
public meetings of the Rate Commission on July 12, 19 and 25, 2007, and on August 8,
2007.
19
The Manual
Often in these Proceedings reference is made to "The Manual." "Financing and
Charges for Wastewater Systems" (2005) (the "Manual") was prepared in accordance
with recognized engineering principles and practices in general use by wastewater utility
management, municipal officials, engineers, accountants, and others concerned with
financing and establishing charges for wastewater service. It is a practice manual
prepared by the Financing and Charges for Wastewater Systems Task Force of the
Water Environment Federation. The 2005 Manual replaces and substantially expands
the previous 1984 guidance on wastewater utility financing. The Manual illustrates the
various ways of allocating costs and developing rates and charges that reasonably and
equitably reflect the cost of service.
20
PROPOSALS
The District's Proposal
The District's Proposal2, which was presented to the Rate Commission on March
2, 2007, provides a Proposed Rate Change for a Combined Wastewater and
Stormwater Rate Change ("Rate Change Proposal"). The District proposes to finance
$661 million of additional investment in wastewater capital projects (the "Capital
Investment and Replacement Plan," or "CIRP") based on Pay -As -You -Go funding from
wastewater and stormwater rate increases.
The District is proposing Recommended Wastewater Rates as follows:
2008
2009
2010
2011
2012
Base Charge - $/Bill
Billing & Collection Charge
2.30
2.30
2.45
2.55
2.70
S stem Availabilit Char e
8.40
9.55
_
10.65
11.70
12.25
Total Base (Residential) Service
Charge
10.70
11.85
13.10
14.25
14.95
Compliance Charge - $/Bill (b)
27.40
28.40
29.65_ 30.90
32.10
Total Nonresidential Service Charge
38.10
40.25
42.75
45.15
47.05
Volume Charge
Metered - $/Ccf
1.88
2.13
2.37
2.59
2.73
Unmetered - $/Bill
Each Room
1.23
1.39
1.55
1.69
1.78
Each Water Closet
4.59
5.20
5.79
6.32
6.67
Each Bath
3.83
4.34
4.82
5.27
5.56
Each Separate Shower
3.83
4.34
4.82
5.27
5.56
Extra Strength Surcharges - $/ton (b)
Suspended Solids over 300 mg/I
218.90
220.54
239.59
260.17
270.74
BOD over 300 mg/I
529.90
601.02
_
659.66
722.36
752.92
COD over 600 mg/I
264.95
300.51
329.83
361.18
376.46
2 This summary of the Rate Setting Documents does not purport to be complete and
reference is made to the full text of the Rate Setting Documents or a complete recital of
the terms of the rate changes proposed by the District.
21
The District is proposing Stormwater Impervious Area Charges as follows:
2008
2009
2010
2011
2012
Projected stormwater service charge
per 100 square feet impervious area
(annualized rate — billable monthly)
Implemented December 1, 2007
$1.4400
$2.0758
$2.1935
$2.2495
$2.2865
Projected Monthly charge per 100
square feet impervious area
$0.1200
$0.1730
$0.1828
$0.1875
$0.1905
This impervious area based revenue is proposed funding for a basic level of
stormwater service throughout the District's entire service area. Basic service includes:
pipes and structure repair; inlet cleaning; removal of creek obstructions; concrete
channel cleaning and repair; and creek inspections.
The specific revenues and expenses reflected in this section also incorporate the
transition from property tax and wastewater rate revenues to an independent
stormwater revenue source for an enhanced level of stormwater services. This
transition is designed to provide funding for items such as maintenance of residential
detention basins; erosion control; construction of new storm water systems; creek
maintenance; and assistance with backyard ponding.
In addition to the recommendation for a stormwater impervious area charge,
there are also changes proposed for the Operation and Maintenance Capital
Improvement ("OMCI") revenues. OMCI projects will continue to be financed by OMCI
taxes and have been separately identified from those projects to be funded by
impervious area charges. The District is proposing reconfiguration of the existing 23
OMCI subdistricts into 5 watershed -based subdistricts as a means to provide enhanced
stormwater services as determined by a vote of each subdistrict's customers. The
22
proposed 5 -subdistrict reconfiguration would be delineated as follows: (i) Missouri
River; (ii) Coldwater Creek; (iii) Bissell; (iv) River Des Peres; and (v) Lower Meramec.
The tax levy and type of enhanced services will be determined by a vote of the
customers of each watershed. This proposed reconfiguration will result in an expansion
of the total area covered by subdistricts and provide the opportunity for more District
customers to obtain enhanced stormwater services by resident vote. It is assumed, for
rate modeling purposes, this reconfiguration and necessary votes would be completed
in the November 2007 election. The District intends to develop a priority project list for
each of the reconfigured OMCI subdistricts. Should voter approval not be received for a
given subdistrict, the previous OMCI subdistrict boundaries shall be retained and the
priority list revised accordingly.
Voter approval for enhanced stormwater services would be sought in the new
watershed subdistricts. The revenue reconfigured by the new watershed subdistricts is
as follows:
OMCI Revenue by
Watershed
2007
2008
2009
2010
2011
2012
Taxes of $0.04 to
$0.10/$100 Assessed
Value
Tax Rate $0.10 per $100 Assessed Value
Bissell Point Watershed
714,300
717,900
4,006,800
4,112,000
4,219,900
4,330,700
Coldwater Creek
Watershed
1,882,300
1,913,900
2,064,200
2,118,400
_
2,174,000
2,231,000
Lower Meramec Watershed
238,900
251,700
4,502,700
4,620,900
4,742,200
4,866,700
River Des Peres
Watershed
5,590,700
5,758,700
8,928,300
9,162,600
9,403,100
9,650,000
Missouri River Watershed
0
0
5,610,800
5,758,000
5,909,200
6,064,200
Total OMCI Revenue
8,426,200 _
8,642,200 _
25,112,800
25,771,900
26,448,400
27,142,600
The District is proposing a Pay -As -You -Go Funding Shift as follows:
The District's Rate Change Proposal reflects a shift in funding approach from its
prior combined Pay -As -You -Go / Bond Financing Strategy to a 100% Pay -As -You -Go
basis. This shift is estimated to save the District approximately $400 million in avoided
23
debt service costs from the prior contemplated continued use of bond financing. This
strategic shift is also based on the following factors: (i) regulatory picture is incomplete;
(ii) saves bonding capacity for future needs; (iii) continues wastewater CIRP progress at
a tapered rate; (iv) maintains progress toward known regulatory goals; and (v) brings
the St. Louis area to appropriate rates in a cost efficient manner (i.e. avoids added debt
interest costs).
The District stated during the June 11, 2007 Prehearing Conference that in the
credit policy set forth in the District Rate Change Proposal, the credit policy should be
amended so that in paragraph 2, the second sentence be removed and the fourth
sentence be replaced with the following:
Second, as agreed upon by the District, any property that receives
stormwater service from another entity (i.e., Levee Districts) instead of
from the District shall be eligible for a credit based upon the cost for. the
District to provide that service. The amount of the credit in this case may
exceed 50% depending on the cost of the services involved in the credit
calculation.
See Ex. MSD #1, page 4-8, section 4.4.
Alternative Proposals
Intervenor MIEC'S Proposal
Rather than using 100% Pay -As -You -Go funding, Intervenor MIEC proposes that
the District issue $275 million in revenue bonds to fund approximately 45% of the Phase
II CIRP through the Rate Period and that the District's rates be increased by $10 million
for each of the five years in the Rate Period for a total increase of $50 million, which is
equivalent to annual rate increases of 4% to 5%. According to MIEC, the savings would
be approximately $65 million or an overall increase 20% lower than the revenue
24
increases in the District Proposal. It will also provide the District with a positive
cumulative cash balance of over $20 million at the end of the Phase II CIRP.
Intervenor MEG'S Proposal
Rather than using 100% Pay -As -You -Go funding, Intervenor MEG proposes that
the District issue revenue bonds to finance approximately 50% of the Phase II CIRP
during the Rate Period. Based on MEG's analyses, the District could either reduce the
proposed rate change to a single 13% increase in FY 2008, or as an alternative
increase the wastewater rates by 4% for each year through the Rate Period.
Intervenor AGC/SITE's Proposal
Intervenors AGC/SITE propose that the Rate Period be limited to three years.
Furthermore, AGC/SITE urges the use of some debt financing, rather than 100% Pay -
As -You -Go.
The Rate Consultant's Proposal
Rather than using 100% Pay -As -You -Go funding, the Rate Consultant first
proposes that the District finance approximately 50% of the Phase II CIRP with revenue
bonds. According to the Consultant, the District would issue $330,000,000 of revenue
bonds during the Rate Period and reduce the cash financing from the District's
proposed $616,897,000 to
304,846,000. This analysis also indicates that a single 9%
increase in rates in FY 2008 would be necessary. Use of revenue bonds to finance the
Phase II CIRP is dependent on voter authorization. Due to the inherent uncertainty of
receipt of voter authorization, the Consultant Proposal considers two alternative rate
proposals. The preferred alternative should reflect the use of revenue bonds to finance
approximately 50% of the Phase II CIRP. In case voter authorization to issue additional
25
bonds is not received, the second alternative should reflect the nearly 100% Pay -As -
You -Go financing of the Phase II CIRP used in the District Proposal.
26
RATE COMMISSION RECOMMENDATION
CRITERIA FOR RECOMMENDATION
The Rate Commission is to review and make recommendations to the Board of
Trustees of the District regarding proposed changes in wastewater, stormwater or tax
rates necessary to pay (i) interest and principal falling due on bonds issued to finance
assets of the District; (ii) the costs of operation and maintenance; and (iii) such amounts
as may be required to cover emergencies and anticipated delinquencies. See Charter
Plan, § 7.040.
First Criteria: Whether the Rate Change Proposal is necessary to pay
interest and principal falling due on bonds issued to finance assets of the
District?
The Charter Plan authorizes the following powers:
***
To provide for the borrowing of money in anticipation of the collection of
taxes and revenues for the fiscal year. The amount of such loans shall at
no time exceed ninety per cent of the estimated collectible taxes and
revenues for the year yet uncollected.
To meet the cost of acquiring, constructing, improving, or extending all or
any part of the sewer or drainage systems: (a) through the expenditure of
any funds available for that purpose; (b) through the issuance of bonds for
that purpose, payable from taxes to be levied and collected by the District;
(c) through the issuance of bonds for that purpose, payable from special
benefit assessments levied and collected by the District; (d) from the
proceeds of special benefit assessments or bills evidencing such
assessments; (e) from any other funds which may be obtained under any
law of the state or of the United States for that purpose; (f) from the
proceeds of revenue bonds, payable from the revenues to be derived from
the operation of sewerage and drainage facilities and systems of the
27
entire District . . as may be set forth in propositions submitted at
elections in the District . . . from time to time called and held to authorize
the issuance of such revenue bonds; or (g) from any combination of any
or all such methods of providing funds.
See Charter Plan, §§ 3.020 (14) and (15) (emphasis added).
The primary rule of statutory construction is to ascertain the intent from the
language used, to give effect to that intentif possible, and to consider the words used in
their plain and ordinary meaning. Hampton v. Hampton, 17 S.W.3d 599, 602 (Mo. Ct.
App. 2000). Under traditional rules of statutory construction, the word's dictionary
definition supplies its plain and ordinary meaning. Hoffman v. Van Pak Corp., 16
S.W.3d 684, 688 (Mo. Ct. App. 2000). The courts are without authority to read into a
statute an interpretation that is contrary to the intent made evident by giving the
language employed in the statute its plain and ordinary meaning. Mo. Dept. of Pub.
Safety v. Murr, 11 S.W.3d 91, 96 (Mo. Ct. App. 2000). Only when the statute is
ambiguous, or when it leads to an illogical result, may courts look past the plain and
ordinary meaning of the statute. Id. To determine if a statute is unambiguous, "the
standard is whether the statute's terms are plain and clear to one of ordinary
intelligence." Wolff Shoe Co. v. Dir. of Revenue, 762 S.W.2d 29, 31 (Mo. 1988) (en
banc).
The District's authority to issue general obligation or revenue bonds requires the
approval of the voters of the District. Specifically, the Charter Plan provides:
No general obligation bonds, except bonds for refunding, advance
refunding, extending, or unifying the whole or any part of valid bonded
indebtedness, shall be issued without the assent *of the voters of the
District . . . in the number required by Article VI, § 26(b) of the Constitution
of Missouri (as amended from time to time), voting at an election to be
28
held for that purpose. No revenue bonds payable from the revenues to be
derived from the operation of any or all sewer and drainage systems and
facilities of the District . . . except bonds for refunding, advance refunding,
extending, or unifying the whole or any part of revenue bonds, shall be
issued without the assent of a simple majority of the voters of the
District.. . voting at an election to be held for that purpose.
Notwithstanding anything herein to the contrary, the District is expressly
authorized to issue District -wide general obligation and revenue bonds.
See Charter Plan, § 7.170. Thus, under the Charter, the District may issue general
obligation bonds or revenue bonds only upon assent of the voters and in the case of
general obligation bonds, upon the majority described in Article VI, § 26(b) of the
Missouri Constitution.
Subject to these restrictions, the District has the authority to incur debt. The
Missouri Supreme Court has expressly recognized this authority, stating, "The other
powers objected to, namely, . . . incurring debts, . . . issuance of tax anticipation
warrants, . and issuance of bonds, . . . are essential powers of such district." State
on inf. Dalton v. Metro. St. Louis Sewer Dist., 275 S.W.2d 225, 231 (Mo. 1955) (en
bane). The court continued, "[w]ithout the power to incur debts and issue bonds,
adequate drains, sewers and disposal plants could not be constructed. However, in the
exercise of this power, the District is subject to the financial limitations imposed by the
Constitution on all government subdivisions." Id.
General Obligation Bonds
This decision in Dalton, as well as the provisions of § 7.170 of the Charter Plan
specifically acknowledge the limitations of Article VI, § 26 of the Missouri Constitution
requiring voter approval of any general obligation bond issue. The vote required by
Article VI, § 26(b) of the Missouri Constitution is four -sevenths at the general municipal
election day, primary or general elections and two-thirds at all other elections.
29
Further, the Charter Plan requires that:
Before any general obligation bonds are issued, the Board shall by
ordinance provide for the collection of an annual tax on all taxable tangible
property within the District or a subdistrict, as the case may be, sufficient
to pay the interest and the principal of such bonds as they fall due and to
retire the same within twenty years from the date contracted . . No
general obligation bonds shall be issued in an amount which together with
the existing indebtedness of the District . . . if any, exceeds in the
aggregate five per cent of the value of all taxable tangible property in the
District . . . as shown by the last completed assessment for state and
county purposes; provided, however, that no revenue bonds issued under
the provisions of this Plan shall constitute an indebtedness of the District
or a subdistrict, as the case may be, within the meaning of said limitation.
See Charter Plan, § 7.190.
Both the Charter Plan and Article VI, Section 26(b) of the Missouri Constitution
provide that the District may not issue general obligation bonds in an amount that,
together with the existing indebtedness of the District, exceeds five percent of the value
of taxable tangible property in the District.
According to the Collector's Office of St. Louis County, the assessed valuation of
taxable, tangible property in the District in St. Louis County is approximately $21.2
billion. The Deputy Assessor in St. Louis City has certified that the assessed valuation
of taxable, tangible property in the City is approximately $3.9 billion. As a result, five
percent of the value of taxable, tangible property in the District is $1.3 billion. Thus,
under the Charter Plan and the Missouri Constitution, the District may not issue general
obligation bonds in an amount that together with the existing indebtedness of the District
exceeds $1.3 billion. The District has no general obligation bonds currently outstanding.
30
Revenue Bonds
The Missouri courts have discussed the differences between general obligation
and revenue bonds on several occasions. As explained by the Missouri Supreme
Court:
General obligation bonds are just what the term implies: general
obligations of the governmental body issuing them. They place the
general credit of the sovereign behind them and are an indebtedness of
that sovereign within the meaning of Mo. Const. art. VI, § 26, restricting
the limits of debt which a county may incur. They require tax money to
service and retire them. Revenue bonds do not have these
characteristics. Their repayment is dependent upon revenue from the
facility which they are issued to create. They do not rely upon the general
credit or tax money of the sovereign and they are not indebtedness within
the limitations of the constitution.
Drey v. McNary, 529 S.W.2d 403, 408-09 (Mo. 1975) (en banc) (internal citations
omitted). See also Wunderlich v. City of St. Louis, 511 S.W.2d 753, 755 (revenue bonds
are not paid directly or indirectly by resort to taxation, and general obligation bonds are
payable by utilization of the full taxing power of the issuing entity).
As noted, the limitation contained in § 7.190 of the Charter Plan on the level of
general obligation bonds does not expressly apply to revenue bonds.
The Missouri Supreme Court has upheld the issuance of revenue bonds for the
operation and maintenance of a sewage system. See Oswald v. City of Blue Springs,
635 S.W.2d 332 (Mo. 1982) (en banc). In addition, the court specifically held that the
city issuing the bonds had the authority to raise water and sewage rates, not only to pay
principal and interest in revenue bonds issued for the purpose of construction of a water
treatment plant and water transmission lines, but also to meet the cost of maintenance
and operation of the physical plant itself. Id. at 333-34. Moreover, once the voters have
approved the bonds, such increases may be made without again submitting the increase
31
to the voters. Id. at 334. As explained by the court in response to the argument that the
increase violated the Hancock Amendment:
. . . logic demands the conclusion that the voters, by authorizing the Mayor
and Board of Aldermen to increase rates to repay principal and interest,
also authorized concomitant increases to pay for the costs of maintenance
and operation. It cannot be argued seriously that a majority of the voters
of the City approved the issuance of 19.1 million dollars of revenue bonds
and authorized the City to increase the rates charged to users to repay the
principal and interest on the bonds, yet did not authorize effectively an
increase in those rates to keep the physical plant maintained and in
working order. The promise to repay the bonded indebtedness would be
illusory without the promise to keep the facilities running. We shall not
impute such a futile and deceptive meaning upon a vote of the people of
Blue Springs.
Id.
This requirement is echoed in state statutes relating to sewerage systems.
It shall be the mandatory duty of any . . . sewer district which shall issue
revenue bonds . . . to fix and maintain rates and make and collect charges
for the use and services of the system for the benefit of which such
revenue bonds were issued, sufficient to pay the cost of maintenance and
operation thereof, to pay the principal of and the interest on all revenue
bonds or other obligations issued or incurred by such . . . sewer district
chargeable to the revenues of such system and to provide funds ample to
meet all valid and reasonable requirements of the ordinance or resolution
by which such revenue bonds have been issued.
Mo. Rev. Stat. § 250.120.1 (2000). Under the authority of this statute; once the voters
have approved revenue bonds, the District has the authority to raise rates to pay
principal and interest on the bonds and to meet the costs of maintenance and operation
of the facilities.
The District has issued and currently has outstanding $460 million in voter
approved revenue bonds for Phase I CIRP wastewater projects. Ex. MSD 17F,
Tyminski Direct Testimony, p. 5, I. 12-14. The District's debt service on outstanding or
proposed debt issues in an aggregate principal amount of $500 million is included in the
32
District's revenue requirements for wastewater. Ex. MSD 17F, Tyminski Direct
Testimony, p. 4, I. 22-23. No debt is currently outstanding for stormwater. Id. at p. 15, I.
10-22; Ex. MSD 17G, Sedgwick Direct Testimony, p. 18, I. 7-10.
The District's current bond obligations consist of the following: (i) the Metropolitan
St. Louis Sewer District Wastewater Systems Revenue Bond Series 2006C for
$60,000,000 issued November 16, 2006 pursuant to Bond Ordinance; and (ii) portions
of (a) Water Pollution Control and Drinking Water Revenue Bonds Series 2006B (State
Revolving Funds Program) for $22,105,000 issued November 1, 2006; (b) Water
Pollution Control and Drinking Water Revenue Bonds Series 2006A (State Revolving
Funds Program) for 587,505,000 issued April 1, 2006; (c) Water Pollution Control and
Drinking Water Revenue Bonds Series 2005A (State Revolving Funds Program) for
$53,060,000 issued May 1, 2005; (d) Water Pollution Control and Drinking Water
Revenue Bonds Series 2004B (State Revolving Funds Program) for $179,780,000
issued May 1, 2004; and (iii) Wastewater System Revenue Bonds Series 2004A for
$175,000,000 issued April 22, 2004 pursuant to Bond Ordinance. See Exs. MSD 8,
20C, 20D, 20E, 20F and 20G Bond Documents.
The District states that through Section 6.1 of its Master Bond Ordinance No.
11713 passed on April 22, 2004, it has obligated itself to fix, maintain and collect rates,
fees and other charges for services sufficient at all times to meet all operation and
maintenance expenses, accumulate a reasonable operating reserve, provide net
revenues of at least 125% of all debt service requirements, and accumulate funds
adequate to meet the cost of major renewals, replacement, repairs, additions,
betterments, and improvements to the system to keep the same in good operating
33
condition or as is required by any governmental agency having jurisdiction over the
System. Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 37, q.
59.
By 2012, $94 million in principal will have been paid down on the District's
outstanding bond obligations. The following schedule lists the original bond amounts,
the total amount of principal paid as of 2012 and the District's outstanding bond
obligations as of 2012.
Bond
Original Bond
District's
Total
Total
District's
Series
Amount
Original
Principal
Outstanding
Portion of
Portion of
Paid by
Bond Amount
Outstanding
Bond Amount
2012
in 2012
Bond Amount
in 2012
2006C
$60,000,000
$60,000,000
$0
$60,000,000
$60,000,000
2006A
$87,505,000
$42,715,000
$16,385,000
$71,120,000
$34,848,800
2006B
$22,105,000
$14,205,000
$4,065,000
$18,040,000
$11,545,600
2005A
$53,060,000
$6,800,000
$12,740,000
$40,320,000
$5,241,600
2004B
$179,780,000
$161,280,000
$46,830,000
$132,950,000
$119,655,000
2004A
$175,000,000
$175,000,000
$14,375,000
$160,625,000
$160,625,000
TOTAL
$460,000,000
$94,395,000
$391,916,000
See Exs. MSD 8, 20C, 20D, 20E, 20F and 20G Bond Documents.
Missouri State Revolving Fund
A number of the District bond obligations are funded through the Missouri State
Revolving Fund ("SRF") Leveraged Loan Program. The Missouri SRF Leveraged Loan
Program is a revolving fund established pursuant to the Federal Clean Water Act of
1987 (the "Act"). It was developed by the Environmental Improvement and Energy
34
Resources Authority ("EIERA") and the Missouri Department of Natural Resources (the
"Department") in cooperation with the Missouri Clean Water Commission (the
"Commission"), and provides subsidized low interest rate loans to qualifying applicants.
The Missouri SRF Leveraged Loan Program is a subsidized low interest loan
program. The District must issue general obligation or revenue bonds to secure the
debt. These bonds are purchased by and resold nationally by the EIERA. At present
the EIERA bonds are rated as AAA. Funds generated by the sale are deposited with a
trustee in the applicant's name and are used for construction. As construction costs are
incurred, state and federal funds are deposited into a reserve account in an amount
equal to 70% or more of the construction cost. Interest earned on the reserve is
credited to the interest portion of the debt service charge on the bonds thereby
providing the interest subsidy to the recipient. See Department's State Revolving Fund
Description.
The "Missouri Clean Water Law" is designed to meet the requirements of the Act.
Mo. Rev. Stat. § 644.011 (2000). It also establishes the Commission, which is required
to adopt rules and regulations to enforce the powers and duties of Chapter 644 and the
Act. Mo. Rev. Stat. §§ 644.021, 644.026 (2000). The Missouri Code of State
Regulations sets forth the general requirements for the implementation of Title VI of the
Act, which authorizes the administrator of the Environmental Protection Agency (the
"EPA") to make capitalization grants to states for financing SRF Programs. 10 CSR 20-
4.040. The SRF is the financial assistance program authorized by Title VI of the Act. In
Missouri, the SRF consists of the Water and Wastewater Loan Fund ("WWLF") and the
Water and Wastewater Revolving Loan Fund ("WWRLF") and those accounts secured
35
by funds from the WWLF and the WWRLF. 10 CSR 20-4.040(2) (P), I, (S). The SRF is
subject to the requirements, restrictions, and eligibilities placed on the SRF by the Act.
10 CSR 20-4.040(2) (P).
The Department may make direct loans by purchasing the general obligation
bonds, revenue bonds, short-term notes or other acceptable obligations of any qualified
applicant for the planning, design, and/or construction of an eligible project. 10 CSR 20-
4.041(1). Two types of loans are permitted under this regulation.
SRF direct loans are funded from SRF loan repayments of federal capitalization
grants. The Department purchases the revenue bonds, general obligation bonds, or
other acceptable debt obligations from the recipient no later than six months following
the initial operation of the facilities constructed by the project or by the closing deadline
contained in the construction loan agreement, whichever is earlier. In addition, the
Department may require the recipient to include those assurances and clauses in the
loan agreements and bond resolutions as deemed necessary to protect the interest of
the state. 10 CSR 20-4.041(8).
The leveraged loan program is financed through a combination of the WWLF or
the WWRLF administered by the Commission and funds made available from the
proceeds of revenue bonds issued by the EIERA or the recipient.
Under the leveraged loan program, the recipient must obtain construction funds
and any needed financing from EIERA. The recipient will receive a loan from the
WWLF or the WWRLF. The recipient will be required to place the proceeds of the
WWLF or WWRLF loan in a debt service reserve fund to secure the construction loan.
The interest earnings on the debt service reserve fund will provide a subsidy by paying
36
a portion of the interest costs of the EIERA bonds or notes used to provide the
construction loan. The principal amount of the WWLF or WWRLF loan will be repaid to
the WWLF or WWRLF. 10 CSR 20-4.042.
Repayment of principal and interest on the EIERA bonds or notes will be paid
from revenues of the user charge system or from another dedicated source of revenue
as may be designated in the applicable bond resolutions or loan agreements. 10 CSR
20.4.042(11)(B).
Financing of Phase II CIRP
The District's current estimated cost of the 20 -year CIRP is approximately $3.7
billion. Ex. MSD 17F, Tyminski Direct Testimony, p. 4, I. 6-7. The overall purpose of
the Phase II CIRP is to rehabilitate and upgrade the system to comply with existing and
anticipated state and federal requirements and to help improve system inadequacies.
Ex. MSD 17D, Hoelscher Direct Testimony, p. 2, I. 5-7.
If approved, the District's Rate Change Proposal will maintain a revenue bond
debt service coverage ratio in excess of 700% and a total debt service coverage ratio in
excess of 400% during the five year period FY 2008 — FY 2012, the period covered by
the proposed rate change (the "Rate Period"). Ex. MSD 1, CDM and Black & Veatch
"Wastewater and Stormwater Rate Proposal," Table 3-9 at p. 3-18 (Feb. 2007). This
ratio dramatically exceeds the typical industry debt service coverage ratios of 200% for
revenue bond debt and 180% for total debt. Ex. MSD 17D, Hoelscher Direct Testimony,
p. 2, I. 5-7.
For the five-year study period, the District proposes to cash fund a majority of the
wastewater capital improvements, or $616,897,000. Ex. L&B 37, Stannard Rebuttal
37
Testimony, p. 10, I. 2. The remainder of the funding will come from a $40,000,000
commercial paper issuance, $7,870,000 from grants and contributions, and $9,604,300
funded by interest earnings. Id. at I. 3. Under this plan, the District will fund 92% of the
Phase 11 CIRP from its operating revenues during the Rate Period.
The District's Rate Change Proposal includes rate adjustments in each of the
next five fiscal years. The percentage increases in rates shown on Table 3-9 of MSD
Exhibit #1 are: FY 2008 — 13%; FY 2009 — 12%; FY 2010 — 11%; FY 2011 — 9%; and
FY 2012 — 5%.
The District's proposed combined rate change totals 60.8% and is projected to
increase the District's revenues by $353,631,000 during the Rate Period. Id. Much of
the proposed revenue increase during the Rate Period is directly related to the cash
funding levels proposed for the Phase H CIRP. See Ex. MSD 1, Table 3-9, line 29. The
District proposes increasing its cash financing of the Phase II CIRP from $60,100,000 in
FY 2007 to $161,934,000 in FY 2012. Id. The total increase in cash financing during
the Rate Period is $316,397,000, or approximately 89.5% of the District's requested
revenue increase during the Rate Period.
Intervenors MIEC, MEG and the Rate Consultant each object to the proposal to
require current customers to fund 100% of Phase 11 CIRP and propose the use of debt
financing for approximately 50% of the Phase II CIRP. A more complete discussion of
these positions is contained at pp. 103-153, et seq., as part of the consideration of
whether the Rate Change Proposal is fair and reasonable to all classes of customers.
The Rate Commission believes that the record in this Proceeding supports a
finding that the Rate Change Proposal includes funds sufficient to pay the principal and
38
interest on the S500 million revenue bonds authorized by the voters to partially fund the
Phase I CIRP.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
Change Proposal includes funds necessary to pay interest and principal falling
due on bonds issued to finance assets of the District.
Second Criteria: Whether the Rate Change Proposal is necessary to pay
the costs of operation and maintenance?
The District's position is that some rate increase is needed to pay the increased
costs of operation and maintenance because total operation and maintenance
expenses have increased from $100,952,611 in 2002 to $116,146,531 in 2006 largely
due to increases in expenses associated with Engineering, Finance and the Water
Backup Program. Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater
Rate Proposal," at 2-2 (Feb. 2007). Future operation and maintenance expenses for the
District are projected to increase from $104,784,300 in 2007 to $127,593, 500 in 2012.
Id.
The District needs extensive repairs and improvements to its wastewater
infrastructure to reduce sanitary and combined sewer overflows and provide proper
treatment of all wastewater at or below the permitted National Pollutant Discharge
Elimination Systems limits. Ex. MSD 17H, Barber Direct Testimony, p. 3, I. 8. The Rate
Change Proposal will increase the District's revenues to provide funds for essential
39
repairs, replacements, improvements and expansion of the existing wastewater system.
Id. at I. 11.
The District has not raised rates since August 2003. Over the past ten years, the
District's Operations Department has reduced staff by 158 positions and reduced
overtime by 50%. Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p.
19, q. 44.
The District's Proposal includes the following inflation allowances for costs used
in the study report: Wages, Salaries and Overtime - 3.0%; Personnel Services and
Benefits — 4.0%; Group Insurance - 10.0%; Supplies, Chemicals, Utilities - 3.0%;
Contractual Services - 4.0%; Bond and Liability Insurance - 5.0%; Pension - 7.6%
(2008), 8.4% (2009), 9.3% (2010), 10.2% (2011), and 11.4% (2012).
A review of the U.S. Department of Labor Consumer Price Index Table for All
Urban Consumers in St. Louis, Missouri, from 1991 through 2006 demonstrates that the
consumer price index has increased 12% since the last rate increase. The inflation
allowances used in the rate study are reasonable. Ex. MSD 17C, Zimmerman Direct
Testimony, p. 6, I. 11.
GASB Statement 45
The District's Proposal includes funds for compliance with the Governmental
Accounting Standards Board (GASB) Statement No. 45, Accounting and Financing
Reporting by Employers for Postemployment Benefits Other Than Pensions, which
requires that government agencies alter the current method for recognition of the benefit
cost of "Other Post Employment Benefits" and requires, for reporting purposes, that the
expected cost of applicable benefits for all Plan participants be projected and
40
discounted to the measurement date. GASB Statement No. 45 (Aug. 2004) ("GASB
45").
Under GASB 45, post -employment healthcare benefits, including medical, dental,
vision, hearing and other health -related benefits, as well as other forms of post
employment benefits, including life insurance, disability, and long-term care (OPEB
Obligations) must be accounted for on government -wide financial statements using the
same accounting as has traditionally been used for pension benefits accounting. The
rationale is that the benefits received by retirees are similar to a pension benefit
because what the retiree actually receives is a form of deferred compensation that is
"earned" over the period of the employment. The effect of GASB 45 is to require the
accrual of OPEB Obligations over the working life of the employee.
Compliance with the requirements of GASB 45 will result in a change to the
District's government -wide financial statements. If the District funds its OPEB
Obligations on a pay-as-you-go method, its contribution will be less than the "annual
required contribution" (the "ARC"). The difference between the District's actual
contribution and the ARC must be reported on the government -wide financial statement
as a liability called the "Net OPEB Obligation."
There is a distinction in the method of accounting used for government -wide
financial statements and the method of accounting for individual governmental funds.
The government -wide financial statements report on the accrual basis. Individual
governmental funds may report on the modified accrual basis of accounting. At the fund
level, the District's OPEB Liabilities expenditures are recognized in the period in which
benefit payments are actually made. Thus, expenses are recognized when liabilities
41
are incurred. As a result, the governmental fund the District uses to record OPEB
Liabilities activity does not report liabilities for Net OPEB Obligations. Accordingly, the
effects of under -funding for GASB 45 purposes will be reflected only in the District's
government -wide financial statements, not in the specific government fund.
The District is required to comply with GASB 45 by June 30, 2008. Ex. MSD 42C,
Zimmerman Surrebuttal Testimony, p. 6, I. 17. In anticipation of this requirement, the
District has retained Milliman U.S.A. to provide actuarial services to the District and
determine the unfunded liability of post employment health benefits. Id. at p. 6, I. 18 — p.
7, I. 1. The District's Fiscal Year 2008 Budget used to develop the Rate Change
Proposal included a $6.4 million dollar annual allowance for OPEB. Id. at p. 7, I. 5-6.
The inclusion of such an allowance is contingent upon the implementation of a rate
increase and is therefore absent from the Fiscal Year 2008 Budget as submitted on
June 14, 2007. Id. at I. 9-12. The District will revise the 2008 Budget to reflect the
results of the current Rate Commission Proceedings and appropriate Board approval of
said results. Id. at I. 11-13. The GASB 45 allowance will be included in the revised
Fiscal Year 2008 Budget to the extent sustainability of any rate increase results from
these Proceedings and obtains Board approval. Id. at I. 13-15.
The major advantages of funding the post employment health benefits reserve
are that the long-term nature of the liability provides the District with the opportunity to
invest in higher earning assets and uses a higher discount rate for present value
calculation purposes, both of which result in a lower liability. Id. at I. 17-20. It is the
District's recommendation to the Board to begin funding the unfunded liability within the
five year Rate Change Proposal term, contingent upon the Board's approval of a
42
definitive GASB 45 funding approach. Ex. MSD 42C, Zimmerman Surrebuttal
Testimony, p. 8, I. 1-3. GASB 45 requires funding to reflect all prior years back to the
initial recognition of the liability. Id. at I. 4-5. Recognition of this liability for the District is
required by June 30, 2008. Id. at 1. 5-6. The GASB 45 funding in the District's Rate
Change Proposal represents the total five-year funding required and provides a
sufficient rate increase to support this recommended funding. Id. at I. 6-9.
The Rate Consultant expressed concern about the District's Proposal to fund a
health benefits reserve and charge rate payers to recover the cost of the annual reserve
contribution. Ex. MSD L, Transcript for Technical Conference May 9, 2007, p. 201, I. 7-
21. The Rate Consultant's concern is that the Board of Trustees has not made a
decision that the funds collected from the rate payers will be set aside in a restricted
account to fund the liability. Id. at p. 202, I. 1-9. It is the Rate Consultant's position that
even though GASB 45 does not require funding, it may be appropriate for the District to
set aside those monies in a restricted fund for future liabilities and implement a policy
stating that these amounts are going to be set aside in a restricted fund. Id. at I. 16-23.
The Rate Consultant proposes that the District's staff make an affirmative statement to
the Board of Trustees to recommend that these funds included in the rate increase be
set aside in a restricted fund to cover future potential liabilities. Id. at p. 203, I. 7-10; 20-
25.
During these Proceedings, the District committed to make a recommendation to
the Board of Trustees to comply with GASB 45. Ex. MSD L, Transcript for Technical
Conference May 9, 2007.
43
The Rate Commission believes that the record in this Proceeding supports a
finding that the District's proposal to set aside monies in a restricted fund to comply with
GASB 45 as provided in the Rate Change Proposal is necessary and reasonable.
Low Income Program
The District proposes to continue and expand its Low Income Program for low-
income residential customers as well as fixed -income seniors. Ex. MSD 0, Transcript
for Public Hearing June 7, 2007, p. 25, I. 4-14. Approximately 3,500 customers are
currently enrolled in the low-income assistance program. Ex. MSD N, Transcript for
Technical Conference May 30, 2007, p. 58, I. 9-22. Customers who are eligible for low-
income assistance receive a 50% reduction in their sewer bills. Id. at p. 59, I. 6-9. Such
discount has been factored into the District's Rate Change Proposal. Id.
It is District policy that approximately 50% of the wastewater charges for
residential customers as set out in Tables 3-17 and 3-18 of the "Wastewater and
Stormwater Rate Proposal" will be applicable to eligible low-income residential
customers. Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate
Proposal," at 3-39 (Feb. 2007). The Water Quality Act of 1987 states that:
A system of user charges which imposes a lower charge for low-
income residential users (as defined by the Administrator) shall be
deemed to be a user charge system meeting the requirements of
clause (A) of this paragraph if the administrator determines that
such system was adopted after public notice and hearing.
The District's first low-income rate was adopted by the Board of Trustees in 1993
by Ordinance 9031. Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater
Rate Proposal," at 3-39 (Feb. 2007). The District's current policy defines low-income
credit eligibility as residential customers that qualify for home energy assistance through
44
the state's Division of Family Services. Id. The District is currently developing eligibility
criteria which will expand the availability of low-income assistance to its residential
customers. Id. As of July 1, the District will be making the program available to all
District customers. Ex. MSD N, Transcript for Technical Conference May 30, 2007, p.
58, I. 9-22. The District is hoping to reach a goal over the next five to ten years of
23,000 low-income customers enrolled in the program. Id. at p. 60, I. 1-2.
The cost impact of the District's current low-income program on a typical single
family residential customer is expected to be about $0.11 per month in fiscal year 2008.
Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at
3-39 (Feb. 2007). The impact of the low income subsidy is calculated by dividing the
total revenue subsidy provided to low-income customers under the proposed rates by
the general service volume. Id. This impact is expected to increase in subsequent
years as the District continues to actively promote this program and increase the
number of qualified low-income customers. Id.
A comparison of allocated cost of service for the 2008 Test Year with wastewater
revenue under the proposed rates indicates revenues under the proposed rates will
adequately recover the total cost of service, and reasonably recover the allocated cost
of service from each customer class. Ex. MSD 1, CDM and Black & Veatch
"Wastewater and Stormwater Rate Proposal," at 3-39 (Feb. 2007). The variances in
revenue as a percent of cost of service from a full 100 percent cost recovery level are
due to the impact of the low-income assistance program and rounding of wastewater
charges. Id.
45
The Rate Commission believes that the record in this Proceeding supports a
finding that the continuation and expansion of the District's Low Income Program as
provided in the Rate Change Proposal is necessary and reasonable.
The Rate Commission believes that the record in this Proceeding supports a
finding that the Rate Change Proposal provides funds sufficient to pay the costs of
operation and maintenance for the near term or until 2012.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
Change Proposal provides funds necessary to pay the costs of operation and
maintenance.
Third Criteria: Whether the Rate Change Proposal is in such amounts as
may be required to cover emergencies and anticipated delinquencies?
Short -Term Debt
Under the authority of § 3.020(13) of the Charter Plan, the Board of Trustees has
specific authority to incur debt. If the debt is short term and does not exceed 90% of
annual revenues and does not affect the rate levied, no further action is required.
Specifically, § 3.020(14) of the Charter Plan provides:
To provide for the borrowing of money in anticipation of the collection of
taxes and revenues for the fiscal year. The amount of such loans shall at
no time exceed ninety per cent of the estimate collectible taxes and
revenues for the year yet uncollected. The Board shall determine by
ordinance the amount and terms of such loans, and the Executive Director
shall execute and issue warrants of the District for all money so borrowed
to the lenders thereof as evidence of such loans and of the terms of the
District's obligation to repay the same. Immediately before their delivery
to such lenders, such warrants shall be registered in the office of the
Director of Finance of the District and, upon delivery, shall also be
46
registered in the office of the Secretary -Treasurer of the District. Such
warrants so issued and registered in connection with such loans shall
have preferences and priority in payment from the date of their registration
by the Secretary -Treasurer over all warrants subsequently issued.
Charter Plan, § 3.020(14). Thus, the District has the authority to incur short term debt if
necessary to cover emergencies and anticipated delinquencies.
Enforcement of Bill Collection
Moreover, the District as a public sewer district created and authorized pursuant
to constitutional authority may discontinue service and place a lien upon a customer's
property for unpaid sewer charges. This lien will have priority and be enforced in the
same way as taxes are levied for state and county purposes. See Mo. Rev. Stat. §
249.255 (2001).
The District may "establish by ordinance a schedule or schedule of rates, rentals,
and other charges, to be collected from all the real property served by the sewer
facilities of the District . . . and to collect or enforce collection of all such charges." See
Charter Plan, § 3.020 (16).
In 1957, the Board of Trustees of the District adopted an Ordinance providing
that:
Whenever a sewer service charge has been delinquent for more than sixty
days the Executive Director may cause a notice of lien for non-payment
thereof to be filed in the Office of the Recorder of Deeds within and for the
City of St. Louis or St. Louis County, as the case may be. Such notice of
lien shall state the amount of the delinquent sewer service charge, and
shall properly describe the property against which such lien is asserted.
Upon the filing of such notice, such sewer service charge shall be and
become a lien upon the real property served to the amount of such
delinquent bill, and shall have priority over all other liens except taxes,
deeds of trust then of record, and prior judgments.
District Ordinance 138 (June 24, 1957).
47
The District has the authority to impose and enforce a lien upon the real property
of a customer for the failure to pay sewer charges which is not extinguished by
foreclosure of the property, but not the authority to give these liens priority over
prerecorded deeds of trust. See St. Louis Inv, Prop., Inc. v. Metro. St. Louis Sewer
Dist., 873 S.W.2d 303 (Mo. Ct. App. 1994). See also Gershman Inv. Corp. v. Duckett
Creek Sewer Dist., 851 S.W.2d 765, 769 (Mo. Ct. App. 1993).
The District's Proposal includes termination of stormwater support through its
wastewater rates, an increase from 45 to 60 days of operating and maintenance and
routine annual improvement expense, a billing lag adjustment and a new resistance
factor of 3%. The District's Proposal may as a result generate amounts greater than
those necessary to cover emergencies and anticipated delinquencies.
Stormwater Support
The District Proposal contemplates terminating the wastewater charge for
stormwater support beginning in FY 2009. Ex. MSD 1, CDM and Black & Veatch
"Wastewater and Stormwater Rate Proposal," at 4-1 (Feb. 2007).
Intervenor MEG suggests that the increase in stormwater rates will be particularly
difficult for schools, churches and synagogues and hospitals. Ex. MSD Q, Transcript for
Prehearing Conference June 11, 2007, p. 32, I. 12-14. MEG does not oppose a
separate stormwater charge and does not oppose the revenue requirement for the
stormwater utility that the District has proposed, yet believes that the District should
phase out the support of the stormwater utility over a five-year period starting in 2010
instead of an abrupt discontinuation and proposes that the phase -out be accomplished
without increasing rates to wastewater customers. Ex. MEG 58, MEG's Prehearing
48
Conference Report, p. 3. MEG observes that the cost of the phase -out can be partially
covered by applying the revenue collected for the billing lag expense and the resistance
factor expense, which the Rate Consultant estimated to be worth approximately $7.4
million in fiscal year 2008. Under MEG's proposal, the District would continue the full
stormwater subsidy for 2008 and 2009, and reduce the subsidy by 25% annually
thereafter.
The Rate Commission believes that the record in this Proceeding supports a
finding that the termination of the wastewater charge for stormwater support as
provided in the Rate Change Proposal is appropriate.
Working Capital/Operating Reserves
The District's Proposal provides an additional expenditure of $504,500 as
additional working capital. The District plans to increase its wastewater operating
reserve fund balance from 45 to 60 days of operating and maintenance and routine
annual improvement expense or to about 16.4% of annual operating expenses. Id.
Operating expense is equal to the sum of operation and maintenance expense and
normal annual capital improvements. Id. The District has recommended a working
capital allowance of 60 days in the Rate Change Proposal due to a significant portion of
the capital projects being financed on a Pay -As -You -Go basis, creating a greater need
for a cash buffer for timing issues. id.
The operating reserve is a balance maintained in the Revenue Fund of the
District to accommodate fluctuations in annual revenues and expenditures. Ex. MSD 1,
CDM and Black & Veatch, "Wastewater and Stormwater Proposal," at 3-14 (Feb. 2007).
Currently it is District policy, like other wastewater utilities, to bill in arrears for
49
wastewater services. Ex. MSD L, Transcript for Technical Conference May 9, 2007, p.
222, I. 10-13. The practice of billing in arrears results in less than a full 12 months of
billings under new rates in a given 12 -month period following the effective date of the
rate increase. Id. at I. 14-18. In order to cover the leads and lags of payments and
receipt of payments, the District maintains an operating reserve. The District is
increasing its operating reserve from 45 to 60 days in order to provide a sufficient
reserve reflective of the District's increasing CIRP, potential cost overruns, and cash
flow timing issues. Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 9, I. 18-20.
The existing revenue bond covenants require the District to maintain a minimum
balance in the Revenue Fund equal to the next 45 days of operation and maintenance
expense. Id. The operating reserve is projected to increase to $21,827,000 by the end
of 2012 through annual payments from revenues to maintain a 60 -day policy
requirement. Id. The difference between funding a 45 -day reserve and a 60 -day
reserve equates to an increase in the operating reserve in 2007 of $6.4 million and in
2012 an increase of $7.6 million. Ex. MSD 20, MSD Response to Lashly & Baer
Discovery Request, p. 13, q. 33.
The Rate Commission believes that the record in this Proceeding supports a
finding that the increase of additional working capital/operating reserve as provided in
the Rate Change Proposal is an appropriate technique to cover emergencies and
anticipated delinquencies.
Billing Lag
Currently it is District policy, like other wastewater utilities, to bill in arrears for
wastewater services. Ex. MSD L, Transcript for Technical Conference May 9, 2007, p.
50
222, I. 10-13. The District bills one month in arrears. Ex. MSD 0, Transcript for Public
Hearing June 7, 2007, p. 26, I. 7. The practice of billing in arrears results in less than a
full 12 months of billings under new rates in a given 12 -month period following the
effective date of the rate increase. Ex. L&B 37, Stannard Rebuttal Testimony, p. 22, I.
14-18.
The Rate Consultant believes the billing lag adjustment unnecessarily increases
the proposed wastewater rates and fails to recognize several components of the
proposed wastewater rate, including: (i) the maintenance of an operating reserve of
operation and maintenance expenses which has been increased from 45 to 60 days; (ii)
the use of the District Operating and Maintenance budget as the base for projection of
future expenditures; (iii) the failure to recognize that the District has spent less than
95% of its budget in each of the last five years; (iv) the use of the Phase II CIRP
expected appropriations rather than the expected expenditures; and (v) the failure to
recognize other available reserve fund balances. Ex. L&B 37, Stannard Rebuttal
Testimony, p. 8, I. 28 — p. 9, I. 20.
Eliminating the billing lag will decrease the 2008 Test Year wastewater revenue
requirements by approximately $1,228,200, which is approximately 9.4% of the
increased revenues proposed by the District for FY 2008. Ex. L&B 37, Stannard
Rebuttal Testimony, p. 9, 1. 10-14.
The District takes the position that although an operating reserve can be used to
temporarily adjust for a delay in accrued revenues, the reserve has to be replenished at
some point in time. Ex. MSD 52, District Prehearing Conference Report, p. 8.
Therefore, the District believes that the adjustment is required for multi -year planning
51
purposes. Id. Although there are delays in payments that could offset a billing lag
adjustment, there are also pre -payments required for major expenditures such as
insurance and bulk chemical purchases that counter potential delays in payments. Id.
According to the District, other reserves are not considered for the delay in revenue
receipts because they are dedicated by bond covenants or District policy for other
purposes such as maintaining a reserve for emergencies, meeting the revenue bond
reserve requirement, providing funds for the water backup insurance and
reimbursement program, and accruing principal and interest payments to the bond
holders. Id. Therefore, the reserves are not available for temporary revenue shortfalls.
Id.
The District has tightly managed its operating budget, maintaining spending 5%
below total appropriations for the past few years. Ex. MSD 17C, Zimmerman Direct
Testimony, p. 6, I. 2-3. While the District intends to continue strict management of its
resources, a continuation of this trend is not guaranteed, especially in light of pending
lawsuits that may require additional non -budgeted expenditures. Id. Any funds that
could be available at the end of the year because the District did not expend its entire
budget can be used to provide additional capital improvements. Id. at p. 8-9. However,
if it was arbitrarily assumed the District would continue to substantially underspend its
budget for rate design purposes and the District required its full budget amount or more,
then the proposed level of capital improvements would need to be reduced. Id. at p. 9.
The Rate Commission believes that the record in this Proceeding supports a
finding that the inclusion of a billing lag adjustment as provided in the Rate Change
52
Proposal is an appropriate technique to cover emergencies and anticipated
delinquencies.
Resistance Factor
A resistance factor recognizes that some metered customers can reasonably be
expected to react to the higher wastewater charges by cutting back on their level of
water use and thus wastewater service. Ex. MSD 17H, Barber Direct Testimony, p. 18,
I. 11.
Wastewater charges are typically designed for the full rate increase indicated but
with the expectation that actual revenue received will be less than projected billed
revenue due to the potential customer reactions described above. Id. at I. 13. The
resistance factor provides a compensating revenue adjustment for these potential
reactions. Id. at I. 15.
The District's Proposal includes a new 3.23% resistance factor for fiscal year
2008, reduced to 1.61% for fiscal year 2009 and zero thereafter to cover anticipated
delinquencies and any steps which may be taken by ratepayers (primarily commercial
and industrial) to self -treat waste or otherwise avoid certain of the District's strength
charges and reduce District revenues. Ex. MSD 1, CDM and Black and Veatch,
"Wastewater and Stormwater Proposal," at 1-5 (Feb. 2007).
The water and wastewater industry rate manuals recognize resistance to higher
rates as an important factor to be considered in rate design. Ex. MSD 52, District
Prehearing Conference Report, p. 10. For example, the 1984 wastewater rates manual
states:
One final consideration in rate design is customer resistance.
Resistance generally occurs when there has been a significant
53
increase in rates and a conscious effort is made by those using the
service to conserve. Although customer resistance does not
usually last long, it should be recognized as it can result in a
decrease in the level of revenue anticipated to be received from the
new rates. If wastewater charges are based on metered water use,
an increase in water rates may also adversely affect the
wastewater utility's revenue.
Financing and Charges for Wastewater Systems, published by the Water Environmental
Federation, p. 58 (1984). Therefore, the issue should not be whether or not to
recognize an allowance for customer resistance but rather how much resistance should
be included in the design of wastewater rates. Ex. MSD 52, District Prehearing
Conference Report, p. 10.
The Rate Consultant recommends elimination of any resistance factor.
According to the Rate Consultant, the use of resistance factor is an additional level of
expense that unnecessarily increases the proposed wastewater rates to a level higher
than necessary. Further, it is not appropriate to determine a resistance factor based
solely on billed wastewater usage, there are many other factors that affect billed
wastewater usage, including: (i) general economic conditions; (ii) water rates; and (iii)
environmental impacts. Ex. L&B 37, Stannard Rebuttal Testimony, p. 8, I. 15.
Eliminating the resistance factor will decrease the Test Year (FY 2008) wastewater
revenue requirements by approximately 5471,600, which is equivalent to the
$25,266,800 total increase in revenues from the rate increase, multiplied by the
resistance factor of 3.2%, multiplied by 7/12 to account for a December 1
implementation of the rates. Id. at I. 21.
The Rate Commission believes that the record in this Proceeding supports a
finding that the inclusion of a resistance factor adjustment as provided in the Rate
54
Change Proposal is an appropriate technique to cover emergencies and anticipated
delinquencies.
The Rate Commission believes that the record in this Proceeding supports a
finding that an increase of additional working capital/operating reserve, a new
resistance factor, and a new billing lag adjustment are appropriate techniques to cover
emergencies and anticipated delinquencies.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
Change Proposal is in such amounts as may be required to cover emergencies
and anticipated delinquencies.
55
FACTORS FOR RECOMMENDATION
Pursuant to § 7.270 of the Charter Plan, five factors are to be considered
governing the rate to be recommended to the Board of Trustees.
Any change in a Rate recommended to the Board by the Rate Commission in the
manner as described in this Article, shall be accompanied by a statement of the
Rate Commission that the proposed Rate change, and all portions thereof:
1) is consistent with constitutional, statutory or common law as amended
from time to time;
2) enhances the District's ability to provide adequate sewer and drainage
systems and facilities, or related services;
3) is consistent with and not in violation of any covenant or provision
relating to any outstanding bonds or indebtedness of the District;
4) does not impair the ability of the District to comply with applicable
Federal or State laws or regulations as amended from time to time; and
5) imposes a fair and reasonable burden on all classes of ratepayers.
Charter Plan, § 7.270. Any rate recommended by the Commission must, in the
statement to the Board of Trustees, address all five factors. The Charter does not
define the terms or phrases utilized as the criteria governing the rate. As such, to
interpret the meaning of words used in a statute, usually the words are attributed their
plain and ordinary meaning. Sermchief v. Gonzales, 660 S.W.2d 683, 688 (Mo. 1983)
(en banc). Similarly, an interpretation of words in their plain and ordinary meaning can
be performed on the words and phrases utilized in the Charter. The commonly
56
understood meaning of words is derived from the dictionary. Buechner v. Bond, 650
S.W.2d 611, 613 (Mo. 1983) (en banc).
First Factor: "Is consistent with constitutional, statutory or common law as
amended from time to time"
Webster's Dictionary defines "consistent" as "fixed, firm, solid; holding together."
Webster's Dictionary 390 (2d ed. 1979).
Black's Law Dictionary defines "constitutional law" as "the body of law deriving
from the U.S. Constitution and dealing primarily with governmental powers, civil rights,
and civil liberties." Black's Law Dictionary 331 (8th ed. 2004) see also Webster's
Dictionary 391 (2d ed. 1979) (constitutional is "of or pertaining to, or inherent in the
constitution of a person or a thing").
Next, "statutory law" is "the body of law derived from statutes rather than from
constitutional or judicial decisions." Black's Law Dictionary 1452 (8th ed. 2004) see also
Webster's Dictionary 1778 (2d ed. 1979) (statutory law is "fixed, authorized or
established by statute").
Further, according to Black's Law Dictionary, "common law," as distinguished
from statutory law created by the enactment of legislatures, is the body of law derived
from judicial decisions rather than from statutes or from constitutions. Black's Law
Dictionary 293 (8th ed. 2004).
With this, Missouri defines "common law" as:
The common law of England and all statutes and acts of parliament made
prior to the fourth year of the reign of James the First, of a general nature,
which are not local to that kingdom and not repugnant to or inconsistent
with the Constitution of the United States, the constitution of this state, or
the statute laws in force for the time being .
57
Mo. Rev. Stat. §1.010 (2000).
Finally, according Black's Law Dictionary the word "amend" means to change,
correct, or revise. Black's Law Dictionary 89 (8th ed. 2004) see also Webster's
Dictionary 57 (2d ed. 1979) (to amend means to change for the better; improve).
This first factor appears in identical fashion in § 7.300 of the Charter, which
indicates that the Board of Trustees shall accept a Rate Commission Report unless it
finds that the report "is contrary to constitutional, statutory or common law as amended
from time to time." Charter Plan, § 7.300(b)(1). However, this factor is not further
defined or explained.
As such, this factor must be interpreted in its plain and ordinary meaning
pursuant to the rules of statutory construction. Consequently, to interpret the phrase, "is
consistent with constitutional, statutory or common law as amended from time to time"
with respect to the Rate Commission's rate recommendation means to ensure that any
recommended rate comports with all existing and relevant federal and statutory
provisions.
The District is a body corporate, a municipal corporation, and a political
subdivision of the state, with power to act as a public corporation. Charter Plan,
§ 1.010.
Public Service Commission's jurisdiction, supervision, powers, and duties extend
to sewer systems, their operations, and to persons and corporations owning, leasing,
operating, or controlling them. Mo. Rev. Stat. § 386.250(4) (2000). However, municipal
corporations, such as the District, are not subject to the ratemaking process of the
Public Service Commission. Instead, courts of equity have equitable jurisdiction to
58
prevent municipal corporations from enforcing "charges that are clearly, palpably and
grossly unreasonable." Shepherd v. City of Wentzville, 645 S.W.2d 130, 133 (Mo. Ct.
App. 1982) (internal citation omitted).
Pursuant to the District's Charter, the District has the authority to propose or
recommend a change in wastewater rates, stormwater rates and tax rates or change
the structure of any of the foregoing. Charter Plan, § 7.280.
In State on inf. Dalton v. Metropolitan St. Louis Sewer District, the court found
that the original method of taxation adopted by the District was in violation of Article X,
Section 3 of the Missouri Constitution, which provides that "[t]axes . . . shall be uniform
upon the same class of subjects with the territorial limits of the authority levying the tax."
275 S.W.2d 225 (Mo. 1955) (en banc). The court held that this provision prohibited
taxing real estate and tangible personal property for the general purposes and general
obligations of the entire District at a different rate on its valuation in various parts of the
District. Id. Thus, the court found that the method used to tax under this plan was
unconstitutional because the property tax in the County was in excess of that in the City.
The court further held that the apportionment of the amounts to be collected for the
general purposes of the entire District between the City and the County without any
standards whatever would be invalid against Article X, Section 3. "Sec. 3, Art. X is a
recognition of the principle of equality and uniformity of taxation required by the equal
protection clause of the Fourteenth Amendment of the Federal Constitution which
'imposes a limitation upon all powers of the state which can touch the individual or his
property, including among them that of taxation.- Id. at 234 (internal citation omitted).
59
The court found that while a classification may be made in tax legislation, it must
be a reasonable classification and there can be no discrimination between taxable
subjects, including property that belongs to the same class. Id. Thus, it held that the
determination of property of the same value and in the same district based on whether it
is located in the city or the county is not a reasonable basis for classification for
taxation. Id. Finally, the court held that the District could make a valid apportionment
on the basis of assessed valuation which would produce a uniform tax on all tangible
property in the District. Thus, the Plan itself was not unconstitutional, just the method
used under this set of facts for apportioning the tax. Id. The District subsequently
corrected the matter.
Clean Water Act
Section 204(b) of the Water Pollution Control Act of 1972, as amended in 1977,
commonly known as the "Clean Water Act," specifies conditions relating to charges for
wastewater service.
Implementation of the Clean Water Act and approval of a system of user charges
by the Environmental Protection Agency (the "EPA") has generally resulted in a simple,
uniform, flat commodity or volumetric charges for all customers, regardless of billable
volume, effluent strengths, load factor, peaking characteristics, or other considerations.
Acceptable exceptions have included a surcharge system for high effluent strength
discharges and assignment of the cost of the industrial pretreatment program to the
participants.
60
The EPA has adopted rules and regulations regarding user charges. These rules
and regulations are incorporated in Part 35 of Title 40 of the Code of Federal
Regulations.
User Charges are those levied on users of a treatment works for their
proportionate shares of the cost of operation and maintenance (including interim
replacement) of the treatment works. Treatment works consist of all facilities used for
the collection, transmission, storage, treatment, and disposal of wastewater. If the
wastewater utility is to be eligible for federal grants, it must demonstrate compliance
with the following user charge requirements as part of the rate design process:
Rates must result in the distribution of the cost of operation and maintenance of
all treatment works within the grantee's jurisdiction. Distribution must be in
proportion to each user or user class contribution to the total wastewater loading
of the treatment works.
Rates must generate sufficient revenues to offset the cost of all treatment works
operation and maintenance expense.
Each user who discharges pollutants to the treatment works causing increased
costs will pay for such increased costs.
Grantee must apportion operation and maintenance costs associated with the
treatment and disposal of Ill to users on the basis of the allocation of all other
operations, or a system that includes consideration of flow volume of the users,
land area of the users, or the number of connections to the users.
While the Intervenors MIEC and MEG have asserted that the distribution of the
cost of operation and maintenance is not in proportion to each user class, no claim has
61
been made by MIEC, MEG or the Environmental Protection Agency that the current rate
model or the Rate Change Proposal is unlawful. Intervenors' claims regarding cost
allocation and recovery are therefore considered in the context of whether the Rate
Change Proposal imposes a fair and reasonable burden on all classes of ratepayers.
See p. 109 of this Report.
Hancock Amendment
Article X, § 22 of the Missouri Constitution (the "Hancock Amendment") prohibits
any political subdivision from levying any tax, license or fee, not authorized by law,
charter or self -enforcing provisions of the constitution without the approval of the
required majority of qualified voters. Mo. Const. art. X, § 22.
The Missouri Supreme Court has rejected the contention that all fees, whether
user fees or tax -fees, are subject to the Hancock Amendment. Keller v. Marion County
Ambulance Dist., 820 S.W.2d 301 (Mo. 1992) (en banc). See also Mullenix St. Charles
Prop., L.P. v. City of St. Charles, 983 S.W.2d 550, 561 (Mo. Ct. App. 1998) (Hancock
Amendment applies only to revenue increases that are in fact tax increases, whether
labeled as taxes, licenses, or fees). Revenue increases, which are in fact fees for
services rendered in connection with specific services, ordinarily are not taxes unless
the object of the requirement is to raise revenue to be paid into the general fund of
government. Mullinex St. Charles Prop., L.P., 983 S.W.2d at 561. "Fees or charges
prescribed by law to be paid by certain individuals to public officers for services
rendered in connection with a specific purpose ordinarily are not taxes . . . unless the
object of the requirement is to raise revenue to be paid into the general fund of the
62
government to defray customary governmental expenditures rather than compensation
of public officers for particular services rendered." Keller, 820 S.W.2d at 303-04.
In Keller, the court looked to the principles of statutory construction to give effect
to the intent of the voters who adopted the Hancock Amendment. Id. at 302. The court
determined that:
If the people of Missouri intended to prohibit localities from increasing a
source of revenue without voter approval, a general term like "revenue" or
"revenue increase" could have been used. Instead, the people of Missouri
characterized "fees" in § 22(a) as an alternative to a "tax." This
characterization suggests that what is prohibited are fee increases that are
taxes in everything but name. What is allowed are fee increases which
are "general and special revenues" but not a "tax."
Id. at 303.
In addition, the court articulated a five -factor test to be applied in determining
whether a revenue increase by a local government is an increase in a "tax, license or
fee" that requires voter approval under the Hancock Amendment:
1) When is the fee paid? — Fees paid subject to the Hancock Amendment
are likely to be paid on a periodic basis while fees not subject to the
Hancock Amendment are likely due to be paid only on or after a
provision of a good or service to the individual paying the fee.
2) Who pays the fee? — A fee subject to the Hancock Amendment is likely
to be blanket -billed to all or almost all of the residents of the political
subdivision while a fee not subject to the Hancock Amendment is likely
to be charged only to those who actually use the good or service for
which the fee is charged.
3) Is the amount of the fee to be paid affected by the level of goods or
services provided to the fee payer? — Fees subject to the Hancock
Amendment are less likely to depend on the level of goods or services
provided to the fee payer while fees not subject to the Hancock
Amendment are likely to be dependent on the level of goods or
services provided to the fee payer.
4) Is the government providing a service or good? — if the government is
providing a good or service, or permission to use government property,
63
the fee is less likely to be subject to the Hancock Amendment. If there
is not a good or service being provided or someone unconnected with
the government is providing the good or service, then any charge
required by and paid to a local government is probably subject to the
Hancock Amendment.
5) Has the activity historically and exclusively been provided by the
government? — If the government has historically and exclusively
provided the good, service, permission or activity, the fee is likely
subject to the Hancock Amendment. If the government has not
historically and exclusively provided the good, service, permission or
activity, then any charge is probably not subject to the Hancock
Amendment.
Keller, 820 S.W.2d at 311, n.10. The court has characterized these criteria as "helpful"
in "examining charges denominated as something other than a tax." Id. It has specified
that "no specific criterion is independently controlling; but rather, the criteria together
determine whether the charge is closer to being a `true' user fee or a tax denominated
as a fee." Id. In determining whether a fee is a user fee or a tax -fee, the court held that
the language of the Amendment required the "courts to examine the substance of a
charge, in accordance with this opinion, to determine if it is a tax without regard to the
label of the charge." Id, at 305. "Where an application of the Keller factors creates
genuine doubt as to whether the charges constitute a 'tax, license or fee' covered by the
Hancock Amendment, we resolve the uncertainty in favor of requiring voter approval."
Avanti Petroleum, Inc. v. St. Louis County, 974 S.W.2d 506, 511 (Mo. Ct. App. 1988).
This test has been consistently applied to determine whether revenue increases are
subject to the Hancock Amendment.
In Beatty v. Metropolitan St. Louis Sewer District, the Supreme Court found that
the District's fees were taxes and thus subject to voter approval under the Hancock
Amendment. 867 S.W.2d 217 (Mo. 1993) (en banc). In Beatty, the District imposed a
64
flat fee for sewer service for residential property. The amount of the fee remained the
same no matter how much waste a residential customer sent into the system.
Nonresidential customers paid a base charge plus a charge measured by the volume of
waste the property added to the system. Nearly all of the property owners within the
District received the District sewer charges. Failure to pay a sewer charge resulted in a
lien against real property by operation of law. The District issued revenue bonds and
increased its sewer charges to meet debt service on the bonds and to operate and
maintain the sewer system. The District imposed these increased charges without voter
approval. Id. at 281.
The court examined the Keller five -factor test to determine that the District
charges were taxes subject to the Hancock Amendment. In analyzing the first factor,
the court determined that it weighed in favor that the fee was a tax. It rejected the
District's argument that the sewer charges were payments for services rendered by the
District to the sewer customer and were thus goods or services under the first factor.
Rather, the court found that the first factor dealt with timing and since the fee was
imposed on and paid on a periodic — quarterly basis, it indicated that it was a tax. Id. at
220.
With respect to the second factor, the court found in favor of the District because
only those persons who actually use the District's service paid the charge. The court
recognized that only 9,000 of the 420,000 parcels of real estate were not subject to the
District charges, however, only those persons who actually received services paid the
fees.
65
For the third factor, whether the amount of fee is affected by the level of services
provided, the court rejected the District's argument that the third factor supported the
charges as fees rather than taxes. The District argued that its charges, though
admittedly uniform, reflected the estimated, average use of a residential customer and
thus the District's services as to nonresidential customers bore a direct relationship to
the amount of service received. Id. at 221. The court rejected the District's argument
because if it were correct, "every tax, license, or fee would appear more like a user fee
than an Article X, Section 22(a) tax. An economist could easily construct a model to
show that any fee government collects is based on the `estimated, annual' use of
governmental services by a taxpayer." Thus, the court concluded that the third factor
weighed in favor of the landowner. Id.
The court concluded that the District prevailed on the fourth factor because it
clearly provided a service in return for a direct payment, unlike a general tax, which is
paid without relation to any specific service provided by the government. Id. Finally, the
court concluded that the fifth factor was inconclusive given the mix of public and private
entities that have supplied sewer services historically. Id.
As a result, the court concluded that the application of the Keller test to the facts
of this case provided no clear answer as to the nature of the District charges.
Therefore, the court concluded that "[w]here, as here, genuine doubt exists as to the
nature of the charge imposed by local governmental, we resolve our uncertainty in favor
of the voter's right to exercise the guarantees they provided for themselves in the
constitution." Id. Thus, the District's charges were subject to Article X, Section 22 and
could not be increased without prior voter approval.
66
In Missouri Growth Association v. Metropolitan St. Louis Sewer District, the
Missouri Court of Appeals analyzed a 1993 Ordinance of the District to determine
whether the District's increased sewer service charge thereunder was a "user fee" and
thus not a "tax" subject to the constitutional amendment. 941 S.W.2d 615 (Mo. Ct. App.
1997). The court relied on the five -point Keller test to determine that the sewer charges
were not subject to the Hancock Amendment. In analyzing the first factor, the court
rejected the Association's argument that because the District's fee was charged
regularly, it was more like a tax than a fee. Id. at 623. The court found that the user
charges were charged monthly only after the sewer service was provided. "Although
this charge is billed periodically, payment is due only on or after provision of a good or
service, making it more like a user fee than a tax." Id.
The court found that the second factor indicated that the charges are fees rather
than taxes. Only those individuals who actually used the District's service paid the
charge. It found that "approximately 75,000 properties within the District's boundaries
do not receive sewer charge bills because they use septic tanks, the water is turned off,
or the buildings have either been torn down, unimproved, or have not yet been
constructed." Id. Thus, the service factor was resolved in favor of the District.
The court also found that factor three weighed in favor of the District. The court
concluded that the evidence indicated that unlike the 1992 residential user charges, the
District's 1993 user charges were not uniform flat charges. Rather the 1993 charges
were based on a new study that determined an individual customer's water usage.
"While all customers are charged 5.37 for billing and collection and
3.72 for system
availability, customers are also charged by individual consumption. Customers are
67
charged $.99 per 100 cubic feet of contributed wastewater volume." Id. at 623-24. The
court explained:
For customers who have water meters, the consumed volume is
determined by their metered water usage. However, under Ordinance No.
9029, if the customer proves that a portion of the water measured by the
meter does not enter the wastewater system, the District is authorized to
determine the percentage of the water shown by the water meter which
enters the District's wastewater system. For non -metered customers, the
consumed volume charge is determined by using water consumption
figures based on the number of rooms and fixtures on their property.
Under Ordinance No. 9029, however, a user of non -metered residential
property may request the installation of a meter. Furthermore, these two
methods of measuring wastewater usage for metered and non -metered
customers have both been specifically approved by the voters in the
District's Charter (Plan), Article 3 § 3.02(16).
Id.
Thus the court concluded that the sewer charge bore a direct relationship to the
services provided and factor three weighed in favor of the District. Id. at 624. The court
also concluded that the fourth factor weighed in favor of the District because the District
was providing a service, Id. Finally, it determined that the fifth factor of whether this
service was historically and exclusively been provided by the government remained
inconclusive. Id. Thus, since four out of five of the Keller factors weighed in favor of the
District, the court determined that the sewer charges were more classified as a user fee
and not a tax subject to the Hancock Amendment. Id.
In Missouri Growth and Beatty, the Court of Appeals in 1997 and the Supreme
Court in 1993 came to opposite conclusions regarding whether the District sewer fees
were taxes for the purposes of the Hancock Amendment. While both courts used the
Keller factors to determine whether the fees were subject to the Hancock Amendment,
the Court of Appeals in Missouri Growth distinguished Beatty by finding that the factual
68
circumstances related to the District user fees had changed. With respect to factors two
and four, both courts agreed that the fee was not a tax because only the residents that
used the service were charged and the District was providing a service. However, they
disagreed on the application of the first and third factors.
With respect to the first factor — fees subject to the Hancock Amendment are
likely due to be paid on a periodic basis while fees not subject to the Hancock
Amendment are likely due to be paid only on or after provision of a good or service to
the individual paying the fee - the court in Missouri Growth found that the District fees
were more like user fees than taxes. It determined that although the user fees were
billed periodically, the fee was paid "on or after the provision of the good or service."
Missouri Growth, 941 S.W.2d at 623. The court found that the 1993 user fees were
charged monthly "only after the sewer service [was] provided" making it more like a user
fee than a tax. Id.
In Beatty, the court had interpreted the first factor to be concerned with merely
timing and did not relate to whether the political subdivision provided a service but
rather the regularity with which the fee was paid. Beatty, 867 S.W.2d at 220. The
District argued that the charges were payments for services rendered to the sewer
customer but did not argue that they were paid only after the service was provided. The
court rejected the District's argument and found that because the fees were imposed on
a periodic quarterly basis, they were more like a tax than a user fee and thus subject to
the Hancock Amendment. Id.
With respect to the third factor — whether the amount of the fee to be paid is
affected by the level of goods or services provided to the fee payer — the Missouri Court
69
of Appeals in Missouri Growth found that the sewer charge bore a direct relationship to
the service provided and thus factor three weighed in favor of the District. The court
concluded that the evidence indicated that unlike the 1992 residential charges in Beatty,
the 1993 charges at issue in this case were not uniform flat charges. Rather they were
based on a new study that determined an individual customer's water usage. The fees
were based on the individual consumption and customers were charged $.99 per 100
cubic feet of contributed wastewater volume. Missouri Growth, 941 S.W.2d at 623-624.
In Beatty, the amount of the fee remained the same no matter how much waste a
residential customer sent into the system. The District argued that although the fee was
admittedly uniform, it reflected the estimated, average use a residential customer made
of the District's services and bore a direct relationship to the amount of service received.
Beatty, 867 S.W.2d at 221. The court rejected this argument because, if correct, every
tax, license, or fee would appear more like a user fee than an Article X, Section 22(a)
tax. Id.
The Missouri Court of Appeals distinguished the facts in Missouri Growth from
Beatty for factors one and three to find that the District fees were more like user fees
than taxes because the fees were paid on a monthly basis rather than a quarterly basis
and were paid only after the service was provided. It further found that there was a
direct relationship to the level of service or good provided by the District because the
fees were based on an individual customer's water usage. Thus, the fees charged in
Missouri Growth were more like user fees than taxes and therefore were not subject to
the Hancock Amendment.
70
In Ring v. Metropolitan St. Louis Sewer District, the Missouri Supreme Court
addressed the issue of whether a refund of monies could be made to taxpayers once an
ordinance is ruled unconstitutional for violating the Hancock Amendment. 969 S.W.2d
716 (Mo. 1998) (en banc). This case was a follow-up to the court's ruling in Beatty, 914
S.W.2d 791 (Mo. 1995) (en banc). In Beatty, although the Missouri Supreme Court
found that the District violated the Hancock Amendment by raising taxes without a vote
of the people, it held that only persons who actually sued to recover the increase in
wastewater fees could recover their overpayment. Beatty, however, left open the
question of whether a class action is the proper procedure by which the District
taxpayers who paid the unconstitutional wastewater fee increase could recover their
overpayment. Ring, 969 S.W.2d at 717.
Upon announcement of the decision in Beatty, a group of the District individual
and corporate wastewater fee payers filed a class action against the District "to enforce
Article X, Section 22(a) of the Missouri Constitution" and to obtain a declaration and
order "that each member of the class is entitled to prompt restitution of the amount by
which his or her payment of any . . . charges exceed the amount lawfully charged ..
[and for] attorney's fees and expenses and other appropriate relief." The general rule is
well -settled that a political subdivision need not refund a tax voluntarily paid, but illegally
collected. Id. at 718. Thus, in order for the District to be held liable to those who paid
the unconstitutional fee increase, there must be a waiver of sovereign immunity and the
persons claiming a refund or credit for illegally paid taxes must have complied with the
terms of the waiver of sovereign immunity or have paid the tax involuntarily. Plaintiffs'
71
petition did not assert that the members of the class paid the increased wastewater fee
involuntarily. Id.
The court assumed for the purpose of this opinion that Section 139.031 of the
Missouri Revised Statutes was the exclusive waiver of sovereign immunity. The District
argued that plaintiffs failed to protest their fee payments and did not commence an
action against the collector in a timely manner as required by Section 139.031.
Plaintiffs argued that the right to a money judgment was essential to enforce Article X,
Section 22(a) and that the court must infer or imply that Article X, Section 23 acts as a
waiver of sovereign immunity when a political subdivision collects a tax increase in
violation of Article X, Section 22(a). The court found that the enforcement of the right to
be free of increases in taxes that the voters do not approve in advance may be
accomplished in two ways:
First, taxpayers may seek an injunction to enjoin the collection of a tax
until its constitutionality is finally determined. Second, if a political
subdivision increases a tax in violation of [A]rticle X, [S]ection 22(a), and
collects that tax prior to a final, appellate, judicial opinion approving the
collection of the increase without voter approval, the constitutional right
established in [A]rticle X, [S]ection 22(a) may be enforced only by a timely
action to seek a refund of the amount of the unconstitutionally -imposed
increase.
Id. at 718-19. Although not deciding the case on the merits, the court held generally
that Article X, Section 23, operated as a waiver of sovereign immunity and permitted
taxpayers to seek a refund of increased taxes previously collected by a political
subdivision in violation of Article X, Section 22(a). Id. at 719.
Any rate increase resulting from revenue bond proposals would be approved by
the voters, and thus, clearly in compliance with the Hancock Amendment. The District's
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Rate Change Proposal, however, contains rate increases which will not be approved by
the voters.
Wastewater Rate Change Proposal
Wastewater revenues must be at least sufficient to finance the wastewater
utility's operation and maintenance expense, routine annual capital improvements, and
debt service costs on existing and proposed bonds and loans, while maintaining an
adequate operating reserve and complying with all revenue bond debt service coverage
requirements. Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater
Rate Proposal," at 3-16 (Feb. 2007). The District's current wastewater revenues are not
sufficient to meet these requirements. Id. Thus, the Rate Change Proposal projects the
increased revenue necessary for the next five years and has proposed rate increases to
meet these projections. The wastewater charges will include a base service charge in
addition to volume charges calculated per room, per bath, per separate shower and per
water closet. Id. at 3-38.
The Keller test is applicable to determine whether the wastewater rate increase is
a revenue increase that requires voter approval under the Hancock Amendment. The
current wastewater rate increase is factually similar to the rate increase in Missouri
Growth. Under the first factor of the Keller test, the wastewater charges are billed
monthly, after the sewer service has been provided. The Missouri Court of Appeals
found in Missouri Growth that the monthly wastewater charges were more like user fees
than taxes because customers were billed after the provision of a service. 941 S.W.2d
615, 623 (Mo. Ct. App. 1997).
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The second factor indicates that the wastewater charges are fees rather than
taxes. The courts in both Beatty and Missouri Growth found that only those individuals
who use the District's services pay the sewer charges. Properties within the District that
use septic tanks, have the water turned off, or have unimproved or unconstructed
buildings are not subject to the sewer charges. Thus, since only those property owners
that use the District's services are billed by the District, the second factor of Keller
indicates the sewer charges are not taxes subject to the Hancock Amendment.
The third factor of Keller also indicates that the wastewater charges are fees
rather than taxes. The amount of the fee is directly affected by the level of services
provided. For property with a water meter, the bill is calculated using a base charge in
addition to usage -based rates. For property without a water meter, the bill is calculated
using a base charge in addition to estimated usage -based rates based on the number of
rooms, baths, showers and water closets in a property. Each property may be subject
to a different sewer charge depending on usage. Ex. MSD 1, CDM and Black & Veatch,
"Wastewater and Stormwater Proposal," at 3-7 (Feb. 2007). This is very similar to the
charges in Missouri Growth, where customers were charged by individual consumption.
941 S.W.2d at 624. The court concluded that the sewer charge bore a direct
relationship to the services provided, so factor three weighed in favor of the charges not
requiring voter approval under the Hancock Amendment. Id.
The fourth factor is likely to weigh in favor of classifying the charges as a fee
rather than a tax subject to the Hancock Amendment. The courts in both Beatty and
Missouri Growth determined that the District provided a service in return for a direct
payment. The same reasoning applies to the current wastewater charges.
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Whether the fifth factor weighs in favor of the wastewater charges being subject
to the Hancock Amendment is less clear. Missouri courts have not definitively stated
whether sewer services are historically provided by the government. The courts in
Beatty and Missouri Growth both stated that the fifth factor was inconclusive due to the
mix of public and private entities that have provided sewer services in the past. The
Missouri Court of Appeals in Larson v. City of Sullivan determined that sewer services
were historically provided by the city. 92 S.W.3d 128, 133 (Mo. Ct. App. 2003). On the
other hand, in Mullinix St. Charles Properties v. City of St. Charles, the Missouri Court of
Appeals stated that water and sewer services had not been historically provided by the
government. 938 S.W.2d 550, 562 (Mo. Ct. App. 1998). Each jurisdiction is likely to
have a different determination, and the courts have been unable to determine a clear
decision for the fifth Keller factor for the St. Louis area.
Four out of five factors weigh toward the wastewater charges being classified as
fees that are not subject to the Hancock Amendment. Thus, no voter approval should
be required for this wastewater rate increase.
The Rate Commission believes that the record in this Proceeding supports a
finding that the wastewater rates in the Rate Change Proposal satisfy the requirements
of the Hancock Amendment, and thus, are consistent with constitutional, statutory, or
common law as amended from time to time.
Stormwater Rate Change Proposal
Basic Stormwater Services as described in the Rate Change Proposal should be
recovered by an impervious charge and Enhanced Stormwater Services should be
recovered through the taxing subdistrict methodology currently provided for in the
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District's Charter. Ex. MSD 52, District Prehearing Conference Report, p. 12. There are
two major reasons for this. First, there are basic stormwater services the District must
provide to maintain those stormwater facilities the District currently owns and to provide
the planning and regulatory functions required by the Charter and permit. Id. These
services are provided district -wide. In addition, there is a district -wide relationship
between impervious area and the cost to provide these services. Id.
Second, the District wants to offer the opportunity to its customers to fund
additional Enhanced Stormwater Services. Id. The type of Enhanced Stormwater
Services the District customers may want to consider vary greatly between watersheds
and are not consistent throughout the District. Id. The District believes the best way to
offer this opportunity is through the taxing subdistrict methodology provided for in the
District's Charter and currently in use today for these types of services throughout the
District. Id. The use of an impervious rate should not be considered because of the
varying service needs throughout the District and the tenuous relationship the cost of
these services have to the amount of impervious area within a portion of or the entire
service area. Id.
It is the Rate Consultant's position that unbundling the stormwater rate into the
components of Regulatory Compliance & Planning, Basic Stormwater Services, and
Enhanced Stormwater Services and the linking of the unbundled rate with the District's
geographic information system will enable the District to recognize the services
provided to its customers throughout the District. Unbundling the stormwater rate into
these components will improve the transparency of the credit policy and make the policy
more customer -friendly.
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The Regulatory Compliance & Planning and Basic Stormwater Services costs
are transparent and unbundled within the proposed rate design by virtue of the
allocation of the District's costs associated with the public stormwater system as follows:
Operation and Maintenance of the public stormwater system (39.18%); Administration
Management (25.86%); Engineering & Environmental Compliance (21.89%); Finance,
Support & Information Systems (i.e. billing services and mapping information) (13.08%);
Total Cost Allocation (100.00%). Ex. MSD 23J, Adjustments and Credit Policy
Modifications.
The Rate Commission believes that the record in this Proceeding supports a
finding that unbundled stormwater rates provide transparency.
Basic Services
The basic level of stormwater revenue requirements are composed of operation
and maintenance expenses, capital expenditures, and the funding of an operating
reserve. Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate
Proposal," at 4 - 5 (Feb. 2007). The proposed stormwater fees will provide sufficient
funding to support the projected basic stormwater program revenue requirements. Id. at
4-9 and 4-11. The fee will be calculated by multiplying a monthly charge, which will
range from $0.12 to $0.19 over the next five years, by each 100 square feet of
impervious area on each property. Id. General stormwater projects that will be funded
include stream flow gauges, streambank mitigation, urban stream stability and
watershed facility mapping. Id. at 4-5. It is the District's position that the proposed
stormwater rate, which analyzes the impervious area of each parcel of property and
charges for the handling of stormwater, accordingly constitutes a user fee. Id.
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The legal justification in support of the proposed impervious charge for
stormwater is analogous to the logic presented in Missouri Growth. For the most part,
the District's proposed stormwater rate is divided into two tiers consisting of an
operating component and an enhanced service level component. Id. The operating
component is based on the square footage measure of the impervious surface area of
each rate payer's property. Id. The District currently calculates the impervious area of
each property within its boundaries using aerial photographs and maps and other
methods. Id. The stormwater basic charge will be calculated by multiplying the square
footage amount of impervious area by a rate. Id.
The Keller test is applicable to determine whether the stormwater rate increase is
a revenue increase that requires voter approval under the Hancock Amendment. The
stormwater fees are billed periodically. The activities required to construct, operate and
maintain the general stormwater projects are continuous. The fees are therefore billed
after the stormwater service activities have been performed. Since the fees vary based
on the amount of contribution of stormwater to the system measured by impervious
area, the first factor indicates that the charge is a fee and not a tax.
The second factor relates to who pays the fee. A fee subject to the Hancock
Amendment is likely to be blanket -billed to all or almost all of the residents of the
political subdivision while a fee not subject to the Hancock Amendment is likely to be
charged only to those who actually use the good or service for which the fee is charged.
While every property in the District which has impervious area will be charged for
stormwater services, the District has adopted a policy which provides an opportunity for
certain property owners which receive no benefit from the District's stormwater system
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because the areas drain directly to the Mississippi, Meramec, or Missouri Rivers, or
other agencies currently maintain stormwater facilities within their boundaries (e.g., the
Chesterfield -Monarch Levee District, Howard Bend Levee District, and Earth City Levee
District) to receive credit. The District has indicated it intends to provide this credit
policy and process for such customers upon request. Such an approach supports the
District's position that the charge is a fee and not a tax.
The third factor indicates that the stormwater charges are fees not subject to the
Hancock Amendment. The stormwater charges are based on the District's established
rate multiplied by the quantity of impervious area on the property. Every property's
impervious area is assessed individually. This means the amount of the fee to be paid
is affected by the level of services provided to the fee payer since a person with more
impervious area creates more run-off, which demands a higher amount of the District's
stormwater services. This is an analogous test to that used in Missouri Growth, where
the sewer fees were based on the amount of water used and wastewater contributed.
An impervious area charge is not a flat fee like the charges in Beatty.
The fourth factor weighs in favor of classifying the stormwater charges as a fee
rather than a tax. The District is providing a service by handling stormwater in return for
a direct payment. Here, the District is providing operation and maintenance of the
stormwater system, as well as general stormwater projects. There is a service
provided, unlike a general tax, which is paid without relating to any specific service
provided by the government. All property owners will be receiving stormwater services,
and their charge will be based on the impervious area of their property, which relates to
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how much stormwater has to be processed from their property. The fourth factor
indicates the charges are fees not subject to the Hancock Amendment.
The fifth factor is inconclusive. Missouri courts have not considered whether
stormwater services are historically provided by the government. In Mullinix St. Charles
Properties v. City of St. Charles, the Missouri Court of Appeals stated that water and
sewer services had not been historically provided by the government. 938 S.W.2d 550,
562 (Mo. Ct. App. 1998).
The Rate Commission believes that the record in this Proceeding supports a
finding that the Basic Stormwater Charges in the Rate Change Proposal satisfy the
requirements of the Hancock Amendment, and thus, are consistent with constitutional,
statutory, or common law as amended from time to time.
Enhanced Services
District stormwater revenue is currently derived principally from ad valorem and
dedicated subdistrict ad valorem taxes known as Operation and Maintenance Capital
Improvement ("OMCI") taxes. Ex. MSD 1, CDM and Black & Veatch, "Wastewater and
Stormwater Rate Proposal," at 4-1 (Feb. 2007). OMCI taxes fund projects that benefit
specific geographic areas known as subdistricts. Id. at 4-2. The Rate Proposal states
that OMCI projects will continue to be financed by subdistrict specific OMCI taxes.
However, the Rate Proposal suggests providing customers with the opportunity to
obtain enhanced stormwater service through the reconfiguration of the current 23 OMCI
taxing subdistricts into five watershed based areas. Id. at 4-5. The reconfiguration will
require voter approval in each individual OMCI subdistrict. Id. The District will develop
a priority project list for each of the reconfigured OMCI subdistricts. Id. Should voter
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approval not be received for a given subdistrict, the previous OMCI subdistrict
boundaries will be retained and the priority list will be revised accordingly. Id. The
District assumes for the purposes of the Rate Change Proposal that each of the
reconfigured subdistricts will successfully approve a tax levy of $0.10 per $100 of
assessed value. Id. at 4-14.
The fees raised through the impervious charge will be used to address basic
maintenance and repairs inherent throughout the District associated with stormwater. Id.
Since certain problems such as bank erosions, and maintenance of basins might be
issues of special concern for a given area, through the enhanced service charge, the
residents in that area will be provided a chance to vote for the additional service levels
they want initiated by the District. Id. To facilitate this process, the District will be
divided into five major watersheds, each having separate property tax rates sufficient to
support the desired service level. Id.
The District's Rate Change Proposal proposes reconfiguring the existing 23
OMCI subdistricts into 5 watershed -based subdistricts as a means to provide enhanced
stormwater services as determined by a vote of each subdistrict's customers. The tax
levy and type of enhanced services will be determined by a vote of the customers of
each watershed.
The District's position relates to the differing levels of service desired
geographically within its service area. Ex. MSD 52, District Prehearing Conference
Report, p. 11. The fairness of the charge relates to the image conceived by the
customer of the benefit being received rather than the technical equitability of allocating
the costs. Id. It is the District's belief that conducting a public outreach/information
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program that identifies the specific and different services needed by each subdistrict
and by conducting a referendum within each subdistrict, consensus on the program's
funding and needs can be more equitably met. Id. It is therefore the District's position
that the current use of ad valorem subdistrict taxes as currently provided for in the
District's Charter be used to accomplish this acceptance, understanding and approval of
the required expenditures/charges for enhanced stormwater services. 1d.
The District refers to the charges for enhanced services as "taxes," which
requires a consideration of whether the OMCI taxes are taxes subject to the Hancock
Amendment. Id. at 4-12 and 4-14. As a preliminary matter, the Rate Change Proposal
anticipates that the taxes will require voter approval. Id. Thus, even if the OMCI taxes
are subject to the Hancock Amendment, the requirements of the Hancock Amendment
will be met by voters approving the tax levy.
The Rate Commission believes that the record in this Proceeding supports a
finding that the Enhanced Stormwater Charges in the Rate Change Proposal satisfy the
requirements of the Hancock Amendment, and thus, are consistent with constitutional,
statutory, or common law as amended from time to time.
Proposed Combined Basic and Enhanced Stormwater Charge
Under the Fifth Factor of this Report, the Rate Commission determines that the
record in this Proceeding does not support a finding that the ad valorem charge for
Enhanced Services is fair and reasonable. See p. 159. The Rate Commission further
finds that an impervious area charge for Enhanced Services is fair and reasonable, and
furthermore, that therefore combining the Basic Service Charge and Enhanced Service
Charge into one stormwater charge (the "Stormwater Charge") based on impervious
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area would result in rates that are fair and reasonable. See p. 159. It must be
determined whether such a Stormwater Charge based on impervious area, and not
subject to voter approval, would satisfy the requirements of the Hancock Amendment.
The combined Stormwater Charge which would result in one stormwater charge
would be treated similar to the current Basic Service charge in the Rate Change
Proposal and would be based on the square footage measure of the impervious surface
area of each ratepayer's property. The District currently calculates the impervious area
of each property within its boundaries by using aerial photographs and maps and other
methods. The Stormwater Charge will be calculated by multiplying the square footage
amount of impervious area by a rate.
The Keller test is applicable to determine whether the Stormwater Charge is a
revenue increase that requires voter approval under the Hancock Amendment. The
stormwater fees are billed periodically. The activities required to construct, operate and
maintain the general stormwater projects are continuous. The fees are therefore billed
after the stormwater service activities have been performed. Since the fees vary based
on the amount of contribution of stormwater to the system measured by impervious
area, the first factor indicates that the charge is a fee and not a tax.
The treatment of bank erosions, maintenance of basins and other issues of
special concern will be treated in the same fashion as wastewater issues and will be
constructed continuously. The fees would be billed after the services are performed
and will vary based on impervious area, and therefore, the first factor would support the
Stormwater Charge as a fee, not a tax.
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The second factor relates to who pays the fee. A fee subject to the Hancock
Amendment is likely to be blanket -billed to all or almost all of the residents of the
political subdivision while a fee not subject to the Hancock Amendment is likely to be
charged only to those who actually use the good or service for which the fee is charged.
While every property in the District which has impervious area is charged for stormwater
services, the District has adopted a policy as part of its Proposal which provides an
opportunity for certain property owners which receive no benefit from the District's
stormwater system because the areas drain directly to the Mississippi, Meramec, or
Missouri Rivers, or other agencies currently maintain stormwater facilities within their
boundaries (e.g., the Levee Districts) to receive credit. The District has indicated it
intends to provide this credit policy and process for such customers upon request. Such
an approach supports the District's position that the charge is a fee and not a tax.
The third factor indicates that the Stormwater Charges are fees not subject to the
Hancock Amendment. The Stormwater Charges are based on the District's established
rate multiplied by the quantity of impervious area on the property. Every property's
impervious area is assessed individually. This means the amount of the fee to be paid
is affected by the level of services provided to the fee payer since a person with more
impervious area creates more run-off, which demands a higher amount of the District's
stormwater services. This is an analogous test to that used in Missouri. Growth, where
the sewer fees were based on the amount of water used and wastewater contributed.
An impervious area charge is not a flat fee like the charges in Beatty.
The fourth factor weighs in favor of classifying the Stormwater Charges as a fee
rather than a tax. The District is providing a service by handling stormwater in return for
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a direct payment. Here, the District is providing operation and maintenance of the
stormwater system, as well as general stormwater projects. There is a service
provided, unlike a general tax, which is paid without relating to any specific service
provided by the government. All property owners will be receiving stormwater services,
and their charges will be based on the impervious area of their property, which relates
to how much stormwater has to be processed from their property.
The portion of the Stormwater Charge attributable to the specific projects also
clearly results from services provided. The property owner will be charged based on the
fact that a project is performed which relates to its property. The fourth factor indicates
the charges are fees not subject to the Hancock Amendment.
The fifth factor is inconclusive. Missouri courts have not considered whether
stormwater services are historically provided by the government. In Mullinix St. Charles
Properties v. City of St. Charles, the Missouri Court of Appeals stated that water and
sewer services had not been historically provided by the government. 938 S.W.2d 550,
562 (Mo. Ct. App. 1998).
The Rate Commission believes that the record in this Proceeding supports a
finding that the combined Stormwater Charge based upon an impervious area charge
satisfies the requirements of the Hancock Amendment, and thus, is consistent with
constitutional, statutory, or common law as amended from time to time.
Levee District
Portions of the District's service area receive no benefit from the District's
stormwater system because the areas drain directly to the Mississippi, Meramec, or
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Missouri Rivers, or other agencies currently maintain stormwater facilities within their
boundaries (e.g., the Levee Districts).
The District stated during the Prehearing Conference that in the credit policy set
forth in the District Rate Change Proposal, the credit policy should be amended so that
in paragraph 2, the second sentence be removed and the fourth sentence be replaced
with the following:
Second, as agreed upon by the District, any property that receives
stormwater service from another entity (i.e., Levee Districts) instead of
from the District shall be eligible for a credit based upon the cost for the
District to provide that service. The amount of the credit in this case may
exceed 50% depending on the cost of the services involved in the credit
calculation.
See Ex. MSD 1, page 4-8, section 4.4.
The Rate Commission believes that the record in this Proceeding supports a
finding that the implementation of the credit policy satisfies the requirements of the
Hancock Amendment.
The Intervenor Levee Districts argued that the stormwater charge does not
correspond to owners' use of the District's stormwater service, but rather represents a
general revenue -raising measure. Ex. MON 56, Levee District Prehearing Conference
Report, p. 5. As to the property owners in the Levee Districts, the proposed stormwater
charge constitutes a tax and thus any attempt to impose this charge without a public
vote violates Article X, Section 22 of the Missouri Constitution. Ex. MON 56, Levee
District Prehearing Conference Report, p. 6.
The negotiated intergovernmental agreements (the "Levee District Agreements")
to address this issue between the Levee Districts and the District weigh in favor of a fee
and not a tax. See Ex. MON 64, Proposed Intergovernmental Cooperation Agreement.
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The Rate Commission believes that the record in this Proceeding supports a
finding that the Levee District Agreements satisfy the requirements of the Hancock
Amendment.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
Change Proposal is consistent with constitutional, statutory or common law as
amended from time to time.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that a
combined Stormwater Charge based upon an impervious area charge is
consistent with constitutional, statutory or common law as amended from time to
time.
Second Factor: "Enhances the District's ability to provide adequate sewer
and drainage systems and facilities, or related services"
Black's Law Dictionary defines "enhanced" as "made greater; increased." Black's
Law Dictionary 570 (8th ed. 2004). See also Webster's Dictionary 603 (2d ed. 1979) (to
enhance means to rise, increase or make greater).
This second factor appears in part in Section 1.010 of the Charter and reads, "In
the interest of the public health and for the purpose of providing adequate sewer and
drainage facilities within the boundaries herein defined . . . there is hereby established a
metropolitan sewer district . . . ." Charter Plan, § 1.010 (emphasis added).
This second factor appears again in a similar fashion in Section 7.300 of the
Charter, which indicates that the Board of Trustees shall accept a Rate Commission
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Report unless it finds that the report "substantially impairs the District's ability to provide
adequate sewer and drainage systems and facilities or related services to the point
where public health or institutional safety may be jeopardized." Id. at § 7.300(b)(2).
Further, similar language can be found in the Operational Rules, Regulations and
Procedures of the Rate Commission whereby the District shall submit to each member
of the Commission information related to direct testimony that may explain "how the
Proposed Rate Change will enhance the District's ability to provide adequate sewer and
drainage systems and facilities, or related services:' Ex. L&B B, Operational Rules,
Regulations and Procedures of the Rate Commission of The Metropolitan St. Louis
Sewer District, § 3(2)(b) (2002).
However, while the language of this second factor appears throughout the
Charter and the Operational Rules, neither the phrase nor the terms therein are defined.
Consequently, this factor may be interpreted in accordance with its plain and ordinary
meaning. An analysis of this second factor in its plain and ordinary meaning which
reads, "enhances the District's ability to provide adequate sewer and drainage systems
and facilities or related ` services" would be to ensure that the proposed rate improves
the District's ability to provide adequate services and systems throughout the
metropolitan district.
The District's position is that some rate increase is needed to enhance the
District's ability to provide adequate sewer facilities and services. Phase II CIRP will
provide environmental compliance while maintaining affordable wastewater rates.
Intervenors MEG, MIEC, and the Rate Consultant agree that some rate increase is
needed to enhance the District's ability to provide adequate sewer facilities. Total
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operation and maintenance expenses have increased from
100,952,611 in 2002 to
5116,146,531 in 2006 largely due to increases in expenses associated with
Engineering, Finance and the Water Backup Program. Ex. MSD 1, CDM and Black &
Veatch "Wastewater and Stormwater Rate Proposal," at 2-2 (Feb. 2007). Future
operation and maintenance expenses for the District's wastewater operations are
projected to increase from $104,784,300 in 2007 to $127,593,500 in 2012. Id.
Operation and maintenance expenses for the District's stormwater system are projected
to increase from $29,681,000 in 2007 to $50,064,900 in 2012. Id.
The District needs extensive repairs and improvements to its wastewater
infrastructure to reduce sanitary and combined sewer overflows and provide proper
treatment of all wastewater at or below the permitted National Pollutant Discharge
Elimination Systems limits. Ex. MSD 17H, Barber Direct Testimony, p. 3, I. 8. The Rate
Change Proposal will increase the District's revenues to provide funds for essential
repairs, replacements, improvements and expansion of the existing wastewater system.
Id. at I. 11.
The Rate Change Proposal will not only enhance the District's ability to provide
adequate facilities, but is necessary. Ex. MSD 20, MSD Response to Lashly & Baer
Discovery Request, p. 18, q. 43. The wastewater portion of the Rate Change Proposal
provides needed revenues to continue making improvements to the system required to
meet State and Federal regulations as evidenced by the $3.7 billion of improvements
identified in 2002. Id. Addressing these regulatory issues will also allow the District to
address customer service issues associated with the lack of capacity in the separate
sanitary and combined sewer systems. Id.
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Since the annexation of the west and south county stormwater areas by the
District in the 1980's, the District has never put in place an adequate revenue source to
fund a responsible level of operation, maintenance, and renewal of the separate
stormwater system. Id. Of the stormwater complaints received by the District, 85% are
related to the condition of the primary stormwater facilities the District is currently
responsible for maintaining storm sewers, inlets, and manholes. Id. As a majority of
these facilities reach and exceed a normal 50 -year life span, the problem with the
system will become more acute and the issues faced by District rate -payers will become
more severe. Id. The longer the St. Louis area waits to implement an appropriate level
of base stormwater funding, the more expensive it will become to maintain and repair
the separate stormwater system. Id.
The District has not been adequately funded for stormwater or drainage system
services. Id. Stormwater services are provided on an as critical system — flood control
system on the Mississippi or River Des Peres — or emergency basis only. Id. In the
drainage system, there is virtually no preventative or rehabilitation work being
performed. Id. Every stormwater system component has a given life expectancy. Id.
The base funding should allow for a preventative stormwater effort that maintains the
existing drainage system. Id. The proposed base level will fund the District to rebuild
2% of the catch basin/inlet structures a year. Id. It will enable the District to clean and
investigate the stormwater system in a proactive manner and fund rehabilitation of
20,000 feet of pipe annually and also enable the District to provide solutions to the
majority of customer drainage issues. Id. Without the proposed stormwater rate, the
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District will be forced to defer stormwater maintenance and reduce current stormwater
service levels even further. Id.
The proposed impervious area based revenue funding is for basic levels of
stormwater service throughout the District's entire service area. Ex. MSD 1, CDM and
Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 1-5 (Feb. 2007). This
impervious area based revenue is proposed funding for a basic level of stormwater
service throughout the District's entire service area. Id. Basic service includes: pipes
and structure repair; inlet cleaning; removal of creek obstructions; concrete channel
cleaning and repair; and creek inspections. Id.
The specific revenues and expenses reflected in this section also incorporate the
transition from property tax and wastewater rate revenues to an independent
stormwater revenue source for an enhanced level of stormwater services. Id. This
transition is designed to provide funding for items such as maintenance of residential
detention basins; erosion control; construction of new storm water systems; creek
maintenance; and assistance with backyard ponding. Id.
While Intervenor Michael Cohen is in favor of the rate increases outlined by the
District, Intervenor asserts that the District has failed in the past to properly prioritize
and fund its projects. Ex. COHEN 55, Cohen Prehearing Conference Report.
Intervenor Cohen recommends that the Rate Commission require the District to properly
prioritize all projects and publicize those projects.
The Rate Commission believes that the record in this Proceeding supports a
proposal that the District maintain a procedure to provide clarity and transparency in its
prioritization of the CIRP, and that such prioritization be publicized.
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The Rate Commission believes that the record in this Proceeding supports a
finding that the Rate Change Proposal provides funds to enhance the District's ability to
provide adequate services until 2012.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
Change Proposal enhances the District's ability to provide adequate sewer and
drainage systems and facilities, or related services,
Third Factor: "Is consistent with and not in violation of any covenant or
provision relating to any outstanding bonds or indebtedness of the
District"
Webster's Dictionary defines the term "consistent" as "fixed, firm, solid; holding
together." Webster's Dictionary 390 (2d ed. 1979).
Further, a "violation" is "an infraction or a breach of the law; a transgression."
Black's Law Dictionary 1600 (8th ed. 2004). See also Webster's Dictionary 2040 (2d
ed. 1979) (a violation is a breach or infringement).
Language from this third factor can be found in § 7.300 of the Charter, which
indicates that the Board of Trustees shall accept a Rate Commission Report unless it
finds that the report "is contrary to or in violation of any covenant or provision relating to
any outstanding bonds or indebtedness of the District." Charter Plan, § 7.300(b)(3).
Further, this language appears in the Operational Rules, Regulations and
Procedures of the Rate Commission whereby the District shall submit to each member
of the Commission information related to direct testimony that may explain, "whether
and to what extent the Proposed Rate Change is necessary to enable the District to
comply with any covenant or provision relating to any outstanding bonds or
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indebtedness of the District, together with a specific quantification of the amount of the
Proposed Rate Change that is necessary for such purposes." Ex. L&B B, Operational
Rules, Regulations and Procedures of the Rate Commission of The Metropolitan St.
Louis Sewer District, § 3(2)(c) (2002).
Again, while this language appears in the Charter and the Operational Rules, it is
not defined or explained. As a result, an interpretation of this phrase in its plain and
ordinary meaning may be performed. An analysis of the language "is consistent with
and not in violation of any covenant or provision relating to any outstanding bonds or
indebtedness of the District" would require the rate commission to recommend a rate
only if it complies with any provisions relating to any outstanding bonds or indebtedness
that the District must honor.
The District currently has $460 million in voter approved revenue bonds for
Phase I CIRP wastewater projects. The District's current bond obligations consist of the
following: (i) the Metropolitan St. Louis Sewer District Wastewater Systems Revenue
Bond Series 2006C for $60,000,000 issued November 16, 2006 pursuant to Bond
Ordinance; and (ii) portions of (a) Water Pollution Control and Drinking Water Revenue
Bonds Series 2006B (State Revolving Funds Program) for $22,105,000 issued
November 1, 2006; (b) Water Pollution Control and Drinking Water Revenue Bonds
Series 2006A (State Revolving Funds Program) for $87,505,000 issued April 1, 2006;
(c) Water Pollution Control and Drinking Water Revenue Bonds Series 2005A (State
Revolving Funds Program) for $53,060,000 issued May 1, 2005; (d) Water Pollution
Control and Drinking Water Revenue Bonds Series 2004B (State Revolving Funds
Program) for $179,780,000 issued May 1, 2004; and (iii) Wastewater System Revenue
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Bonds Series 2004A for $175,000,000 issued April 22, 2004 pursuant to Bond
Ordinance. Ex. MSD 8, Bond Series 2006C; Ex. MSD 20C, Bond Document 2006B; Ex.
MSD 20D, Bond Document 2004B; Ex. MSD 20E, Bond Document 2006A; Ex. 20F
Bond Document, 2004A; and Ex. MSD 20G, Bond Document 2005A.
The Master Bond Ordinance for these obligations requires the District to maintain
a minimum balance in the Revenue Fund equal to the next 45 days of operation and
maintenance expense. Ex. MSD 1, CDM and Black & Veatch, "Wastewater and
Stormwater Proposal," at 3-14 (Feb. 2007). The District plans to maintain a wastewater
operating reserve fund balance equal to 60 days or about 16.4% of annual operating
expenses. Id. The operating reserve is projected to increase to $21,827,000 by the end
of 2012 through annual payments from revenues to maintain a 60 -day policy
requirement. Id.
Although the District has outstanding debt, it is relatively small in relation to
available net annual revenues and the District could meet its required minimum debt
service coverage requirements without a revenue increase during the six -year study
period. Ex. MSD 17H, Barber Direct Testimony, p. 3, I. 18.
The Master Bond Ordinance further requires the District to "maintain the System
in good repair and sound operating condition at all times." Id. at I. 21. The Master Bond
Ordinance requires the District to provide wastewater rates that are sufficient to pay all
operating and maintenance expenditures and provide net operating revenues together
with investment earnings that will at least equal 125% of the annual debt service
requirement on all senior bonds and at least equal 115% of the annual debt service
94
requirement on all outstanding bonds, loans and other obligations. Ex. MSD 17F,
Tyminski Direct Testimony, p. 2, I. 4-19.
The covenants also require the District to maintain a minimum balance in the
Revenue Fund equal to the next 45 days of operation and maintenance expense. The
District plans to maintain a wastewater operating reserve fund balance equal to 60 days
or about 16.4% of annual operating expenses. The operating reserve is projected to
increase to $21,827,000 by the end of 2012 through annual payments from revenues to
maintain a 60 -day policy requirement.
Under Section 6.1 of its Master Bond Ordinance No. 11713 passed on April 22,
2004, the District has obligated itself to fix, maintain and collect rates, fees and other
charges for services sufficient at all times to meet all operation and maintenance
expenses, accumulate a reasonable operating reserve, provide net revenues of at least
125% of all debt service requirements, and accumulate funds adequate to meet the cost
of major renewals, replacement, repairs, additions, betterments, and improvements to
the system to keep the same in good operating condition or as is required by any
governmental agency having jurisdiction over the System. Ex. MSD 20, MSD Response
to Lashly & Baer Discovery Request, p. 37 q. 59.
The Intervenors and the Rate Consultant to this Proceeding do not challenge the
assertion of the District that it is in compliance with these requirements.
The District has entered into a number of office equipment and technology leases
(collectively, the "Leases") over varying periods as follows:
95
MO Sec. of Vendor Name Lease Property Description Duration
State Filing of Lease
Date
10/08/2002 The CIT Group/Equipment KM2083STF System plus all Unknown
Financing, Inc. other types of office equipment
and products, computers,
security systems and other
commercial items of equipment
03/22/2004 Oce Financial Services, Equipment covered under: trial Unknown
Inc. agreement #33822, contract
#664766 and config #414663
11/14/2005 Clune & Company L.C.
DesignJet plus A -E size 36" Unknown
See Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 8, q. 14;
Missouri UCC Search completed May 11, 2007. None of these obligations limit the
District's ability to propose a rate increase and none include provisions requiring
compliance with negative covenants regarding rates.
The Rate Commission believes that the record in this Proceeding supports a
finding that the District is in compliance with the provisions of the covenants of the
Master Bond Ordinance and the Leases.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
Change Proposal is consistent with and not in violation of any covenant or
provision relating to any outstanding bonds or indebtedness of the District.
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Fourth Factor: "Does not impair the ability of the District to comply with
applicable Federal or State laws or regulations as amended from time to
time"
The dictionary definition of "impair" means "[t]o diminish the value of." Black's
Law Dictionary 767(8th ed. 2004). See also Webster's Dictionary 910 (2d ed. 1979) (to
impair means a diminution or decrease).
Further, "federal law" includes the United States Constitution, all federal statutes
and treaties promulgated by Congress, and all federal regulations promulgated by
federal agencies, and "state law" includes state constitutions, state statutes and
regulations, and the concept of state common law tort actions. Gorton v. American
Cyanamid Co., 533 N.W.2d 746 (Wis. 1995), cert. denied 516 U.S. 1067 (1996).
This fourth factor appears in a similar fashion in Section 7.300 of the Charter,
which indicates that the Board of Trustees of the District shall accept a Rate
Commission Report unless it finds that the report "fails to meet an existing or new
standard contained in applicable Federal or State laws or regulations as amended from
time to time." Charter Plan, § 7.300(b)(4).
Moreover, this language appears in the Operational Rules, Regulations and
Procedures of the Rate Commission whereby the District shall submit to each member
of the Commission information related to direct testimony that may explain "whether and
to what extent the proposed Rate Change is necessary to enable the District to comply
with applicable federal or State laws or regulations as amended from time to time . . . ."
Ex. L&B B, Operational Rules, Regulations and Procedures of the Rate Commission of
The Metropolitan St. Louis Sewer District, § 3(2)(d) (2002).
97
The language of this third factor appears again in both the Charter and
Operational Rules. However, this phrase is not defined or explained. As such, an
interpretation of the plain and ordinary meaning of the language "does not impair the
ability of the District to comply with applicable Federal or State laws or regulations"
would require the rate commission to propose a rate that complies with all relevant
federal, state, local laws and regulations.
Clean Water Act
Among the environmental laws enacted by Congress through which the
Environmental Protection Agency (the "EPA") carries out its efforts is the 1948 Federal
Water Pollution Control Act (also known as the "Clean Water Act"). The Clean Water
Act is the basic structure for regulating discharges of pollutants into waters of the United
States. The EPA may issue an order to any person or company who violates the Clean
Water Act. The order may impose a civil penalty plus recovery of any economic benefit
of noncompliance and may also require correction of the violation. Any person
discharging a pollutant into the waters of the United States must comply with the Clean
Water Act. Any "person" is defined as "an individual, corporation, partnership,
association, state, municipality, commission, or political subdivision of a state, or any
interstate body." Clean Water Act, Section 502; 33 U.S.G. § 1362.
Under Section 309 of the Clean Water Act, penalties for violating a permit or not
having a permit to discharge into waters of the United States may be up to $25,000 per
violation per day. Clean Water Act, Section 309; 33 U.S.C. § 1319. The Act provides
that when the Administrator of the EPA (the "Administrator"), authorized to administer
the Clean Water Act, finds a violation of the Act, he shall notify the person in alleged
98
violation and such State of the violation. Id. If the Administrator finds that the State's
failure to enforce permit conditions or the State has not commenced appropriate
enforcement actions, the Administrator shall issue an order requiring such person to
comply with such sections of the Act, or he shall bring a civil action. Id. A copy of any
order issued shall be sent by the Administrator to the State in which the violation
occurred and other affected States. Id.
The Administrator is authorized to commence a civil action for appropriate relief,
including a permanent or temporary injunction, for any violation for which he is
authorized to issue a compliance order under the Act. Id. Any action brought under
Section 309 of the Act shall be brought in the district court of the Untied States for the
district in which the defendant is located or resides or is doing business. Id.
Any person who negligently violates the Act or any permit condition issued by the
Administrator or by a State or negligently introduces any pollutant or hazardous
substance into a sewer system or publicly owned treatment works shall be punished by
a fine of not less than $2,500 nor more than $25,000 per day of the violation. Clean
Water Act, Section 309; 33 U.S.C. § 1319. Any person who knowingly violates the Act
or any permit condition or knowingly introduces pollutants into a sewer system or public
treatment works shall be punished by a fine of not less than $5,000 nor more than
$50,000 per day of violation. Id. Lastly, any organization that knowingly violates the Act
or any permit conditions shall, upon conviction, be subject to a fine of not more than
$1,000,000. Id.
Any person who violates the Act or any permit condition or violates an order
issued by the Administrator shall be subject to a civil penalty not to exceed $25,000 per
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day for each violation. Id. Before issuing an order assessing a civil penalty under the
Act, the Administrator shall provide public notice of and reasonable opportunity to
comment on the proposed issuance of such order. Id.
An order issued under Section 309 shall become final 30 days after its issuance
unless a petition for judicial review is filed or a hearing is requested. Id. If any person
fails to pay an assessment of a civil penalty after the order becomes final or after a court
in an action for judicial review has entered a final judgment in favor of the Administrator,
the Administrator shall request the Attorney General bring a civil action in an
appropriate district court to recover the amount assessed. Id.
The Missouri Department of Natural Resources
The "Missouri Clean Water Law" is designed to meet the requirements of the
Clean Water Act and establishes the Clean Water Commission of the State of Missouri
(the "Commission"), which is required to adopt rules and regulation to enforce the
powers and duties of Chapter 644 of the Missouri Revised Statutes. See Mo. Rev. Stat.
§§ 644.011 (2000), 644.021 (2004), 644.026 (2000). The Missouri Clean Water Law
provides discretionary authority to the Director of the Missouri Department of Natural
Resources (the "Director") with regard to enforcement. Mo. Rev. Stat. § 644.076 (Supp.
2006). The Director may cause investigations to be made upon the request of the
Commission or upon the receipt of information concerning alleged violations of any term
or condition of any permit. Mo. Rev. Stat. § 644.056.1 (2000).
The provisions prohibiting discharge are included in the "Statement of Policy"
only. Mo. Rev. Stat. § 644.011 (2000). It is the policy of the State of Missouri to provide
"that no waste be discharged into any waters of the state without first receiving the
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necessary treatment or other corrective action to protect the legitimate beneficial use of
such waters and meet the requirement of the Federal Water Pollution Control Act as
amended by [the Clean Water Act of 1977]." Id. While that may be the policy of the
State with respect to discharges, it is clear that the Director has discretion in
enforcement. Id.; Mo. Rev. Stat. § 644.016 (Supp. 2006). If, in the opinion of the
Director, the investigation discloses a violation, then the Director attempts to eliminate
the violation by conference, conciliation, or persuasion. Mo. Rev. Stat. § 644.056.2
(2000).
It is unlawful for any person to cause or permit any discharge of water
contaminants in Missouri in violation of the Missouri Clean Water Law. Mo. Rev. Stat. §
644.076 (Supp. 2006). Any "person" is defined as "any individual, partnership,
copartnership, firm, company, public or private corporation, association, joint stock
company, trust, estate, political subdivision, or any agency, board, department, or
bureau of the state or federal government, or any other legal entity whatever which is
recognized by law as subject of rights and duties." Mo. Rev. Stat. § 644.016(14) (Supp.
2006). In the event the Commission or the Director determines that any provisions of
the Missouri Clean Water Law, or permits issued by the Commission or Director, or any
other provision which the state is required to enforce pursuant to any federal water
pollution control act, is being or is in imminent danger of being violated, the Commission
or Director may cause a civil action to be instituted in any court of competent jurisdiction
for the injunctive relief to prevent any such violation or further violation or for the
assessment of a penalty not to exceed $10,000 per day for each day the violation
occurs. Mo. Rev. Stat. § 644.076 (Supp. 2006).
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A suit may be brought in any county where the defendant's principal place of
business is located or where the water contaminant or point source is located at the
time the violation occurred, by the Missouri Attorney General or a prosecuting attorney.
Id. Any offer of settlement to resolve a civil penalty shall be negotiated in good faith
through conference, conciliation and persuasion. Id. "Conference, conciliation and
persuasion" is:
A process of verbal or written communications consisting of meetings,
reports, correspondence or telephone conferences between authorized
representatives of the department and the alleged violator. The process
shall, at a minimum, consist of one offer to meet with the alleged violator
tendered by the department [of natural resources]. During any such
meeting, the department and the alleged violator shall negotiate in good
faith to eliminate the alleged violation and shall attempt to agree upon a
plan to achieve compliance.
Mo. Rev. Stat. § 644.016(3) (Supp. 2006).
In addition to any other remedy provided by law, upon determination by the
Director that a provision of the Missouri Clean Water Law has been violated, the
Director may issue an order addressing an administrative penalty upon the violator. Mo.
Rev. Stat. § 644.079 (2000); 10 C.S.R. 20-3.101. An administrative penalty shall not be
imposed until the Director has sought to resolve the violations through conference,
conciliation and persuasion and shall not be imposed for minor violations. Id. If the
violation is resolved through conference, conciliation and persuasion, no administrative
penalty shall be assessed unless the violation has caused, or has the potential to
cause, a risk to human health or to the environment, or has caused or has potential to
cause pollution, or was knowingly committed, or is defined by the EPA as other than
minor. Id. The amount of the administrative penalty assessed per day of the violation
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for each violation shall not exceed the amount of the civil penalty specified in Section
644.076 of the Missouri Revised Statutes. Id.
The District will spend approximately $960 million on major capital improvements
during the six -year period presented in the Rate study report. Ex. MSD 17D, Hoelscher
Direct Testimony, p. 3, I. 14. All of the Wastewater CIRP is required to comply with state
or federal requirements. Id. at p. 4, I. 1. All of the proposed capital improvement
projects are required to be constructed due to Federal and State environmental
regulations. Ex. MSD 17H, Barber Direct Testimony, p. 4, I. 6. The most notable
required improvement is the new Meramec Regional Wastewater Treatment Plant and
related facilities that were recently completed. Id. at I. 7. Without the implementation of
the Proposed Rate Change, the District will not be able to construct all of the federally
mandated programs. Ex. MSD 17D, Hoelscher Direct Testimony, p. 4, I. 6.
Delays in constructing the proposed projects will result in violation of existing
MDNR agreements, National Pollutant Discharge Elimination System Stormwater
("NPDES") permits, and regulatory (CSO) policy as well as other provision of the Clean
Water Act and anticipated policies (SSO, CMOM, etc.). Id. at I. 16. These delays could
result in fines and system failures resulting in excessive claims and settlement costs to
the District. Id. at I. 18. If the District fails to construct all of the federally mandated
capital improvement projects, the District would be exposed to significant fines at both
the federal and state levels. Ex. MSD 17B, Hayman Direct Testimony, p. 4, I. 21. The
Clean Water Act provides for penalties of up to $25,000 per violation per day. Id. at I.
22.
103
If the District fails to meet a deadline pursuant to the Baumgartner Settlement
Agreement between the District and the MDNR, the District could face daily fines up to
$10,000 per day for missed deadlines and/or violations associated with the terms of the
agreement. Id. at p.4-5, I. 24. Failure to meet the requirements imposed at the federal
and state levels would be extremely financially burdensome and could directly hamper
or even thwart the efforts of the District. Id. at p. 5, I. 10.
For the stormwater system, there are specific NPDES permit requirements. Ex.
MSD 17G, Sedgwick Direct Testimony, p. 3, I. 2. These requirements are estimated to
cost $23.55 million through 2012 (Line 10, Table 4-4 of the Rate Change Proposal) or
approximately ten percent of the proposed $239 million in stormwater impervious area
charges for that time period. Id. at I. 3. Included with these cost estimates are the
resources supplied by the District's Engineering Department personnel needed to meet
permit requirements. Id. at I. 6.
Pending Wastewater Enforcement Actions
In addition to the EPA and MDNR legal action against the District on the grounds
that alleged, unpermitted discharges of untreated wastewater from combined sewer
overflows (CSO's) and sanitary sewer overflows (SSO's) constitute violations of the
Clean Water Act, the EPA and the MDNR have initiated or threatened enforcement
Proceedings against several municipalities in Missouri regarding wastewater facilities.
Ex. MSD 20 Response to Lashly & Baer's Discovery Request, p. 43, q. 68.
Within the last 10 to 15 years, the EPA and MDNR have initiated enforcement
proceedings against Lebanon and Springfield, Missouri; threatened proceedings against
Independence, Kansas City and Moberly, Missouri; secured a consent decree against
104
Sedalia, Missouri; and negotiated permit compliance with Macon, Missouri, regarding
wastewater facilities. Ex. MSD 20, Response to Lashly & Baer's Discovery Request, p.
43, q. 68.
The District is unaware of any current or threatened enforcement proceedings of
the EPA or the MDNR regarding stormwater facilities within the State of Missouri.
Stormwater activities are being regulated through NPDES MS4 permits requiring plans
which will meet federal and state regulatory requirements. Ex. MSD 20 Response to
Lashly & Baer's Discovery Request, p. 44, q. 69.
The District was able to obtain comprehensive information regarding the
enforcement actions that have been initiated and are ongoing for all of the larger
wastewater facilities in the United States from the National Association of Clean Water
Agencies. There are more than 75 pending EPA wastewater enforcement actions
currently pending in the EPA Regional Offices; Region 1 (15); Region 2 (3); Region 3
(11); Region 4 (12); Region 5 (21); Region 6 (5); Region 7 (4); Region 8 (1); Region 9
(3); and Region 10 (1). Ex. MSD 20 Response to Lashly & Baer's Discovery Request,
p. 44, q. 70.
Since 2003 the District has met with the EPA and the Department of Justice. Id.
On August 20, 2004 and September 22, 2006 the District received Section 308 letters
from the EPA, which is an official request for information and documentation, focusing
on the District's CSO and SSO program. Id. The District provided a response to the
EPA and discussions continued regarding the District's alleged unpermitted discharges.
Id.
105
On April 13, 2007 the District received a Notice of Intent to Bring Civil Suit under
33 U.S.C. Section 1365 for Violations of the Clean Water Act. Ex. MSD 21B, Theerman
Direct Testimony Amendment, p. 1, I. 2. The intent to bring suit is based on the
Missouri Coalition for the Environment's belief that the District is not in compliance with
requirements to report overflow events if they are in the District's system. Id. at I. 11.
While the reporting of overflow events does not relate to the CIRP, the continued
existence of the overflows is related to the CIRP components such as planning, funding,
design and construction of projects in the CIRP. Id. at I. 13. The second issue in the
Notice relates to the requirements in the District's Bissell Point Treatment Plant and the
Lemay Treatment Plant NPDES permits where the District is required to provide an
update to the CSO Long Term Control Plan by August 2006. Id. at I. 16. The
development of the Long Term Control Plan is funded under the CIRP and ultimately
impacts $1 to $2 billion in CIRP infrastructure work that will be necessary in the
combined sewer system. Id. at I. 19. The District has provided an updated CSO Long
Term Control Plan development process in August 2006 as required. Id. at I. 21.
On June 11, 2007, the United States of America, acting at the request and on
behalf of the Administrator of the EPA, and the State of Missouri by the authority of the
Attorney General of Missouri, filed a claim in the United States District Court for the
Eastern District of Missouri against the Metropolitan St. Louis Sewer District, captioned
United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer
District, for injunctive relief and civil penalties alleging: unpermitted discharges from
combined sewer system; violation of the proper operation and maintenance condition in
the District's NPDES permits; violation of the backup power condition in the District's
106
NPDES permits; violation of the bypass prohibition condition in the District's NPDES
permits; violation of the noncompliance reporting condition in the District's NPDES
permits; failure to submit long term CSO control plan pursuant to Part D.1 of the
District's NPDES permits and CWA § 308 Request; and violation of the general criteria
special condition in the District's NPDES permits. In view of this claim, the District's
position is that the rate change proposal is necessary for it to comply with the Clean
Water Act.
It is the District's position that the pending lawsuits also indicate that now is
definitely not the time to reduce the proposed wastewater rates through the use of debt
for planned annual improvements as suggested by the Intervenors. Ex. MSD 52,
District's Prehearing Conference Report, p. 5. Doing so could be seen by the EPA and
the State of Missouri as an attempt by the District to renege on its prior plans to more
aggressively address its sewer overflow problems at a time when the regulatory
authorities want to further accelerate the District's CIRP. Id.
The Environmental Protection Agency Combined Sewer Overflow ("CSO")
Control Policy states that:
National Pollutant Discharge Elimination System authorities should ensure
the implementation of the minimum technology -based controls and
incorporate a schedule into an appropriate enforceable mechanism, with
appropriate milestone dates, to implement the required long-term CSO
control plan. Schedules for implementation of the long-term CSO control
plan may be phased based on the relative importance of adverse impacts
upon water quality standards and designated uses, and on a permittee's
financial capability. 40 CFR Part 122 [FRL- 4732-7 at 18688].
The Regional Counsel testified on June 14, 2007, that:
MSD has serious noncompliance problems with the Clean Water Act. The
EPA in partnership with the State of Missouri recently filed a lawsuit . . .
seeking a court order requiring MSD to cease violating the Clean Water
107
Act and to also construct in a more expeditious fashion a lot of
improvements that need to be made so they can come into compliance
with the Clean Water Act.
* * *
*
While we would have preferred not to have filed this lawsuit and endure
the expense of litigation, we felt that this was about the only way we're
going to be able to obtain an expeditious schedule when the MSD Board
proposed a rate that were on the basis of Pay -As -You -Go. Using that
methodology effectively means that the improvements that the Jan talked
about are going to take probably upwards of 40 years to get in place; and
while this is going on, violations of the Clean Water Act are going to
continue.
* * *
*
Up until February 2007, MSD's web site said the projects would be
completed in 20 years. ... That schedule has been removed, and new
schedules have been submitted extending the time to 40 plus years. This
is a long time to continue in violation of the Clean Water Act. EPA's top
priority for any schedule that we're able to negotiate for MSD would be
removal of these illegally constructed SSO's at the front end of the
schedule as soon as possible.
* * * *
The Pay -As -You -Go will not provide enough money for MSD to construct
the SSO's and other infrastructure projects previously mentioned on a
schedule which is appropriate and expeditious.... Under the Pay -As -
You -Go approach currently before you, EPA estimates MSD plans to
spend approximately $131 million per year over the next five years on
these capital improvement projects. At that rate, however, it will take more
than 40 years to complete the entire set of projects. That is not
acceptable.... MSD will need substantially more dollars on an annual
basis to expeditiously come into compliance with the Clean Water Act.
See Ex. EPA 59, EPA Testimony before the Rate Commission, p. 1 (June 14, 2007).
The District's Long -Term CSOISSO regulatory required control plans are
presently under development and have not been submitted to the regulators in final
form for approval. Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p.
35 q. 57. These control plans will not be in a form for submittal until well into the study
108
period in the case of CSO (2009). Id. Plans for some of the watersheds impacted by
SSOs will be completed during the study period (2009-2012) with others extending into
2013. Id. It is the District's intent to develop plans that are compliant with the
requirements of the Clean Water Act and the various specific Federal Standards,
Missouri Stormwater Regulations, District land disturbance permits and the St. Louis
Small MS4 phase II permit. Id. It should also be noted that the District will also be
responsible for compliance with regulations yet to be promulgated both during and
beyond the study period. Id.
The Rate Commission believes that the record in this Proceeding supports a
finding that the requested District's Phase II $661 million CIRP will allow the District to
meet the near term capital improvement needs until 2012.
The Rate Commission believes that the record in this Proceeding supports a
finding that an additional rate change proposal and/or the issuance of debt will be
required prior to 2012 to fund any compliance required by settlement or court order in
the proceeding captioned United States of America and the State of Missouri v. The
Metropolitan St. Louis Sewer District.
The Rate Commission, after consideration of all of the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
Change Proposal does not impair the ability of the District to comply with
applicable Federal and State laws or regulations as amended from time to time.
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Fifth Factor: "Imposes a fair and reasonable burden on all classes of
ratepayers"
According to Black's Law Dictionary, the term "fair" is defined as "impartial; just;
equitable; disinterested. Free of bias or prejudice." Black's Law Dictionary 673 (8th ed.
2004). See also Webster's Dictionary 658 (2d ed. 1979) (fair is honest, open, just and
equitable).
"Reasonable" is defined as, "fair, proper, or moderate under the circumstances."
Black's Law Dictionary, 1293 (8th ed. 2004). See also Webster's Dictionary 1502 (2d
ed. 1979) (reasonable is equitable, tolerable and not excessive).
Similar language of this fifth factor can be found in Section 7.300 of the Charter,
which indicates that the Board of Trustees shall accept a Rate Commission Report
unless it finds that the report "imposes an unfair or excessive burden on one or more
classes of ratepayers." Charter Plan, § 7.300(b)(5).
Further, this language appears in the Operational Rules, Regulations and
Procedures of the Rate Commission whereby the District shall submit to each member
of the Commission information related to direct testimony that may explain "why the
Proposed Rate Change is necessary, fair and reasonable" and "why the burden
imposed on each class of ratepayers by the Proposed Rate Change is fair and
reasonable, including whether and how cost of service considerations, cost causation
principles, customer impact data, economic development considerations, environmental
effects and other factors have not been factored into such determination." Operational
Rules, Regulations and Procedures of the Rate Commission of The Metropolitan St.
Louis Sewer District, §§ 3(2)(a) and 3(2)(e) (2002). However, neither of these
provisions are defined nor explained.
110
The District's rates and rate models have been exhaustively reviewed by the
courts in Ring v. Metropolitan St. Louis Sewer District, 969 S.W.2d 716 (Mo. 1998) (en
banc); Missouri Growth Association v. Metropolitan St. Louis Sewer District, 941 S.W.2d
615 (Mo. Ct. App. 1997); Beatty v. Metropolitan St. Louis Sewer District, 914 S.W.2d
791 (Mo. 1995) (en banc); and Beatty v. Metropolitan St. Louis Sewer District, 867
S.W.2d 217 (Mo. 1993) (en banc). But none of the cases have considered whether the
rates charged by the District are fair and reasonable.
On several occasions, Missouri courts have discussed whether a rate is fair or
reasonable in utility rates cases where a class of ratepayers alleged that the PSC
approved unlawfully discriminatory rates. For instance, in State of Missouri at the
Relation of Nancy Dyer and J. Raymond Dyer v. Public Service Commission, the PSC
approved a schedule of rates which allowed for higher percentage increases in electric
utility rates for residential and commercial customers than for industrial customers. 341
S.W.2d 795 (Mo. 1961). In this case, the rate for residential customers was increased
8.6% while the rate for industrial customers was increased 5.5%. Id. at 799. The PSC
found that the higher increase, imposed upon residential and commercial customers
rather than industrial customers, was due to larger capital expenditures such as the use
of air conditioning, installation for hundreds of miles of heavier wires and transformers,
and higher labor costs, incurred on behalf of the residential customers. Id. As such, the
court found that the rates were fair and no unlawful discrimination had occurred.
Several months later, the Missouri Supreme Court heard R.P. Smith, et al. v.
Public Service Commission. 351 S.W.2d 768 (Mo. 1961). In this case, the PSC
approved an order which allowed electric utility rates to be increased a greater
111
percentage for commercial than residential customers. Id. at 771. The Missouri
Supreme Court affirmed the PSC's order and found that the fact that there was a larger
increase applied to one class as opposed to another does not alone indicate that the
rate is unfair or unreasonable. Id. Further the Court found that there is no discrimination
where a reasonable classification has a direct correlation to the differences in the
situation of the customers or the furnishing of the services whereby valid reasons exist
to justify the imposition of varying rates. Id.
Factors which supported the differential increase included the fact that the
demand from industrial users is often high, the use is often occasional or inconsistent,
and the use is often for only a portion of the day or a short duration during the year. Id.
at 772. With this, the maintenance of the facilities to meet variable and often
demanding loads was unprofitable to the utility. Id. As such, the rates were increased
disproportionately to the disfavor of industrial customers to account for such costs. The
Court stated that because there was a larger increase applied to one class as opposed
to another does not alone indicate that the rate is unfair or unreasonable or that
discrimination occurred. Id. at 771. Further, the Court found that there is no
discrimination where a reasonable classification has a direct correlation to the
differences in the situations of the customers or the furnishing of the services whereby
valid reasons exist to justify the imposition of varying rates. Id. This
consequently, was held to be a reasonable one.
However, in State of Missouri, ex rel. DePaul Hospital School of Nursing v. Public
Service Commission, the Missouri Court of Appeals found the PSC's order approving a
rate to be unlawfully discriminatory. 464 S.W.2d 737, 740 (Mo. Ct. App. 1971). In this
increase,
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case, evidence was shown which demonstrated that the respondent was charged a
substantially higher rate for the operation of its nursing home than others similarly
situated who received a substantially lower rate, known as the hotel -motel rate. The
court followed the opinion of State ex rel. City of St. Louis v. Public Service Commission
which states, "[I]t was said that arbitrary discriminations alone are unjust, but if the
difference in rates be based upon a reasonable and fair difference in conditions which
justify a different rate, it is not unjust discrimination." Id. at 740 (citing State ex rel. City
of St. Louis v. Public Service Commission, 36 S.W.2d 947, 950 (Mo. 1931) (emphasis
added)).
In State of Missouri ex rel. City of Oak Grove, Missouri, et al. v. Public Service
Commission, the Missouri Court of Appeals found the PSC's order, which allowed a
telephone company to provide extended area service in one metropolitan area when it
was not provided in other suburban exchanges approximately the same distance from
the central exchange, to be "lawful and reasonable." 769 S.W.2d 139, 141 (Mo. Ct.
App. 1989). In this case, the court held that discrimination does not exist merely
because the distance between a central exchange and service complainant's exchange
is approximately the same. Id. at 143. The court reasoned that the PSC was entitled to
take into account factors such as population density and gross territory area when
making these determinations. Id.
The PSC regulates telephone and telegraph companies (Mo. Rev. Stat. §
392.200) and gas, electric, water, heating and sewer companies (Mo. Rev. Stat. §§
393.130, 393.140). Generally, the PSC uses the standard "just and reasonable" in
determining whether a proposed rate is valid.
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The standard of review for telephone and telegraph companies provides that "all
charges made and demanded by any telecommunications company for any service
rendered or to be rendered in connection therewith shall be lust and reasonable and not
more than allowed by law or by order to decision of the commission." Mo. Rev. Stat. §
392.200 (Supp. 2006) (emphasis added).
The standard of review for gas, electric, water and sewer corporations provides
that the PSC has the power to "determine and prescribe the lust and reasonable rates
and charges thereafter to be in force of the service to be furnished, notwithstanding that
a higher rate or charge has heretofore been authorized by statute, and the just and
reasonable acts and regulations to be done and observed." Mo. Rev. Stat. § 393.140
(2000) (emphasis added).
The PSC's role in the electric utility resource planning "shall be to provide the
public with energy services that are safe, reliable and efficient, at just and reasonable
rates, in a manner that serves the public interest." 4 CSR 240-22.010 (emphasis
added).
Whether a rate in effect at any given time is "just and reasonable" depends upon
many facts and only can be determined after a rather extended investigation and study.
Laclede Gas Co. v. Pub. Serv. Comm'n, 535 S.W.2d 561 (Mo. Ct. App. 1976). A
reasonable rate is a question of fact, calling for the exercise of common sense and
sound judgment, not bound by any hard and fast rule, nor limited to any general
formula. State ex rel. Southwestern Bell Tele. Co. v. Pub. Serv. Comm'n, 233 S.W.425,
431 (Mo. 1921) (en banc) (rv'd on other grounds).
No writer whose views on public utility rates command respect purports to
find a single yardstick by sole reference to which rates that are reasonable
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or socially desirable can be distinguished from rates that are unreasonable
or adverse to the public interest. A complex of tests of acceptability is
required, just as would be the case with the tests of a good automobile, a
good income-tax law, or a good poem.
See State ex rel. City of Lake Lotawana v. Pub. Serv. Comm'n, 732 S.W.2d 191, n.1
(Mo. Ct. App. 1987).
In Laclede Gas, the Missouri Court of Appeals analyzed the issue of just and
reasonable rates when the gas company argued that its existing approved rates were
so unreasonably low as to be confiscatory. 535 S.W.2d at 569. Laclede argued that
the rates must be sufficient to produce a fair return on the property. Id. The court
determined that "[e]very utility does have an undoubted constitutional right to such a fair
and reasonable return, and thus is a continuing right which does not cease after
beginning rates are initially determined." Id.
The court found that whether the rates in effect are just and reasonable depends
upon many facts and can only be determined after rather extended investigation and
study. Id. at 570.
The United States Supreme Court has analyzed the standard of "just and
reasonable rates" under the Natural Gas Act in two relevant cases. Fed. Power
Comm'n v. Nat. Gas Pipeline Co., 315 U.S. 575 (1942); Fed. Power Comm'n v. Hope
Nat. Gas Co., 320 U.S. 591 (1944). In Natural Gas Pipeline, the Court in determining
whether the rate was just and reasonable stated:
The Constitution does not bind rate -making bodies to the service of any
single formula or combination of formulas. Agencies to whom the
legislative power has been delegated are free, within the ambit of their
statutory authority, to make the pragmatic adjustments which may be
called for by particular circumstances. Once a fair hearing has been given,
proper findings made and other statutory requirements satisfied, the
courts cannot intervene in the absence of a clear showing that the limits of
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due process have been overstepped. If the commission's order, as
applied to the facts before it and viewed in its entirety, produces no
arbitrary result, our inquiry is at an end.
Id. at 586. It provided further guidance in Hope Natural Gas, when it stated that rates
cannot be made to depend upon the fair value, which is the end product of the process
of rate -making and not the starting point, when the value of the going enterprise
depends on earnings under whatever rates may be anticipated. 320 U.S. at 601. It
further provided that under the statutory standard that natural gas rates shall be "just
and reasonable," it is the result reached and not the method employed that is
controlling. Id. at 602. If the total effect of the natural gas rates fixed by the Federal
Power Commission cannot be said to be unjust and unreasonable, judicial inquiry under
the Natural Gas Act is at an end. Id.
In Reis v. Metropolitan St. Louis Sewer District, the Missouri Supreme Court
analyzed the common law doctrine that courts have the right to grant relief against the
"arbitrary exercise of a discretionary power by the legislative body of a municipality."
373 S.W.2d 22 (Mo. 1963). The court found that local legislative bodies, such as sewer
districts, are vested with a broad discretion which, absent an affirmative showing of
fraud, oppression or arbitrary action, is not subject to review by the courts. Id. at 27.
This discretion extends to a determination of the benefits to be derived from the project,
the expediency of the project, and the public necessity and wisdom of the improvement.
Id. at 28.
Article I, Section 2 of the Missouri Constitution, states:
That all constitutional government is intended to promote the general
welfare of the people; that all persons have a natural right to life, liberty,
the pursuit of happiness and the enjoyment of the gains of their own
industry; that all persons are created equal and are entitled to equal rights
116
and opportunity under the law; that to give security to these things is the
principal office of government, and that when government does not confer
this security, it fails in its chief design.
Mo. Const. art. I, § 2.
The court must initially determine whether a rate classification burdens a suspect
class or impinges upon a fundamental right and if neither is involved, the classification
will be sustained if it is rationally related to a legitimate interest. Batek v. Curators of
Univ. of Missouri, 920 S.W.2d 895, 898 (Mo. 1996) (en banc); Powell v. Am. Motors
Corp., 834 S.W.2d 184, 190 (Mo. 1992) (en banc). Fundamental rights include only the
basic liberties explicitly or implicitly guaranteed by the Constitution. Batek, 920 S.W.2d
at 898. Suspect classes, for purposes of an equal protection challenge, include those
classes based on race, national origin, or illegitimacy. Powell, 834 S.W.2d at 190. See
also Mullenix — St. Charles Prop. V. City of St. Charles, 983 S.W.2d 550, 559 (Mo. Ct.
App. 1999).
Since customers of the District are not members of a suspect class and cannot
claim their fundamental right of basic liberties has been denied, their equal protection
claims are subject to a minimum level of scrutiny. As a result, the disproportionate rates
will be sustained if they are rationally related to a legitimate interest.
Under the rational relationship analysis, a court will strike down the legislation
only if the challenger shows that the classification rests on grounds wholly irrelevant to
the achievement of the state's objective. Riche v. Dir. of Rev., 987 S.W.2d 331, 337
(Mo. 1999) (en banc). Even if legislative judgment is debatable, the equal protection
issue is settled on the side of validity. Mahoney v. Doerhoff Surgical Serv., Inc., 807
S.W.2d 503, 513 (Mo. 1991) (en banc). See also Mullenix, 983 S.W.2d at 559. The
rational basis test does not require that the legislative objective be compelling or the
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dilemma grave, nor that the legislature choose the best or the wisest means to achieve
its goals. Such arguments, no matter how plausible, are properly directed to the
legislature, not the court. Winston v. Reorganized Sch. Dist., R-2, 636 S.W.2d 324, 328
(Mo. 1982) (en banc).
Moreover, where a classification is challenged on equal protection grounds, there
is a presumption that the legislature acted within its constitutional power in spite of the
fact that the law might result in some inequality. Elliot v. Carnahan, 916 S.W.2d 239,
242 (Mo. Ct. App. 1995); Mahoney, 807 S.W.2d at 511 (statute is presumed to be
constitutional unless the statute clearly contravenes some constitutional provision). The
party challenging the classification bears the burden of showing it lacks a rational basis
and is purely arbitrary. Nguyen v. Nguyen, 882 S.W.2d 176, 177 (Mo. Ct. App. 1994).
Customers may allege that the District rates are assessed disproportionately
when compared to other customers and thus violate both the federal and state equal
protection clauses. Since there is no suspect class or fundamental right involved, these
customers bear the heavy burden of showing that the differential rates serve no rational
basis.
In State of Missouri ex rel. Missouri Water Company v. Public Service
Commission, the Court reversed the Public Service Commission's ("PSC") order that
fixed rates below those of the utility's request because the PSC gave no consideration
to the evidence presented regarding rate determination. 308 S.W.2d 704 (Mo. 1957).
The Court reasoned:
The reasonableness of rates charged by a public utility engaged in
intrastate activities, such as the appellant water company, must be
determined with due regard to the due process and equal
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protection clauses of both the federal and state constitutions and
the statutes of the state in which the utility operates.
Id. at 713-14. The Court further stated that "[i]t is the duty and the province of this court
to construe its own constitution and statutes in accord with their fair intent and
meaning." Id. at 716. The Court found that the PSC failed to make a fair and just rate
because it did not ascertain all of the relevant factors for consideration in making its
decision to impose the rate. Id. at 719.
Standing requires that a party seeking relief have a legally cognizable interest in
the subject matter and that such party has a threatened or actual injury. E. Mo.
Laborers Dist. Council v. St. Louis County, 781 S.W.2d 43, 46 (Mo. 1989) (en banc).
The right of a taxpayer, on behalf of such party and other taxpayers similarly situated, to
bring an action to enjoin the illegal expenditure of public funds cannot be questioned.
Id. However, the mere filing of a lawsuit does not automatically confer standing on a
taxpayer. Id. In Eastern Missouri Laborers, the court determined that:
In order to maintain a suit, taxpayers need not prove their taxes will
increase because of the alleged expenditure. The impact on the taxpayer
is presumed. A taxpayer who may be compelled to pay the assessment,
or who has contributed to the sum jeopardized, is considered to have
sufficient interest to enjoin the illegal act.
Id. Therefore, the court set up the following test to determine whether a taxpayer has
standing:
Absent fraud or other compelling circumstances, to have standing a
taxpayer must be able to demonstrate a direct expenditure of funds
generated through taxation, or an increased levy in taxes, or a pecuniary
loss attributable to the challenged transaction of a municipality.
Id. at 47. Thus, the court held that public policy demands a system of checks and
balances whereby taxpayers can hold public officials accountable for their acts. Id. The
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standing of a taxpayer to sue is not to enable a private redress, but to benefit the public.
Querry v. State Highway & Transp, Comm'n, 60 S.W.3d 630 (Mo. Ct. App. 2001).
Several courts have examined what constitutes a "direct expenditure of funds
generated through taxation." In O'Reilly v. City of Hazelwood, the Missouri Supreme
Court found that individuals had standing to sue because taxpayers merely had to show
that their taxes went or will go to public funds that have been or will be expended due to
the challenged action. 850 S.W.2d 96 (Mo. 1993) (en banc). In this case, taxpayers
challenged statutes authorizing annexation as unconstitutional and that the Board of
Elections improperly consolidated the vote totals of the annexation. Id. at 97. The court
found that it was clear that county funds were spent on the election and that if the
annexation proceeded, their taxes in the future would be spent by the city. Thus the
court found that taxpayers had standing because there was a direct expenditure of
taxpayer funds. Id.
In addition, the Missouri Court of Appeals upheld a citizen's right to challenge
certain rules and procedures of an administrative board in Duvall v. Coordinating Board
for Higher Education. 873 S.W.2d 856 (Mo. Ct. App. 1994). In this case, plaintiff
argued that the Coordinating Board's rules were invalid because it failed to file a notice
and publish rules according to state law. Id. at 857. Plaintiff argued that Missouri tax
funds were being used to carry out the policies, procedures and rules, which were
alleged to be illegal. Id. The court found that plaintiff had taxpayer standing because
"appellants merely must show that their taxes went or will go to public funds that have
been or will be expended due to the challenged action." Id. at 858. Thus, the court held
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that plaintiff had taxpayer standing to challenge the procedures and rules of the Board
because taxpayer funds were being expended to carry out the challenged action. Id.
Missouri courts, however, have not always held that persons have taxpayer
standing when a direct connection between the alleged illegality and the outlay of public
funds cannot be shown. See "Taxpayer Standing in Missouri", Thomas C. Albus, 54 J.
Mo.B. 199 (1998). In Finley v. Missouri Health Facilities Review Committee, the
Missouri Court of Appeals did not find taxpayer standing because the only funds
expended were general operating funds, which the committee would have expended
regardless of the challenged action. 904 S.W.2d 1 (Mo. Ct. App. 1995). Plaintiff, a
convalescent and retirement home, challenged the health facilities review committee's
issuance of a certificate of need, which allowed a nursing home in the same community
to replace intermediate care facility beds with skilled nursing facility beds. Id. at 2.
Plaintiff argued that it had taxpayer standing because it contributed to public funds used
to support the activities of the review committee. Id. at. 3. The court rejected plaintiff's
argument and found that it did not have taxpayer standing because the only expenses
which the committee incurred were general operating expenses, which would be
incurred regardless of the challenged action. Id. Thus, the court concluded that the
committee's action did not impact the direct expenditure of public funds of the nature
sufficient to establish taxpayer standing. Id.
Pay -As -You -Go Financing
The District's Rate Change Proposal includes rate adjustments in each of the
next five fiscal years. The percentage increases in rates shown on Table 3-9 of MSD
Exhibit #1 are: FY 2008 — 13%; FY 2009 — 12%; FY 2010 — 11%; FY 2011 — 9%; and
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FY 2012 — 5%. The District's proposed combined rate change totals 60.8% and is
projected to increase the District's revenues by $353,631,000 during the Rate Period.
Id. Much of the proposed revenue increase during the Rate Period is directly related to
the cash funding levels proposed for the Phase II CIRP. See Line 29 of Table 3-9 of
MSD Exhibit #1. The District proposes increasing its cash financing of the Phase II
CIRP from $60,100,000 in FY 2007 to $161,934,000 in FY 2012. Id. The total increase
in cash financing during the Rate Period is $316,397,000, or approximately 89.5% of the
District's requested revenue increase during the Rate Period.
The additional funds provided by the wastewater and stormwater rate increases
will go to fund capital improvement projects, as well as the cost of operation and
maintenance and to pay principal and interest on outstanding bonds. The primary
advantage to cash funding a large portion of the capital program, according to the
District, is that future rate payers will not be burdened with paying for the capital
improvements. Ex. L&B 37, Stannard Rebuttal Testimony, p.10, I. 14.
In its April 4, 2003 Wastewater Rate Increase Amendment, the District stated that
the use of a 100% Pay -As -You -Go funding strategy imprudently mismatches the
"funding of long-term capital projects with short-term dollars (i.e., the imposition of a
disproportionate cost burden on current ratepayers for future project benefits)." Ex. L&B
53, Lashly & Baer's Prehearing Conference Report, p. 9. Because of this, the District
proposed, the Rate Commission recommended, and the Board of Trustees adopted a
combined bond finance and Pay -As -You -Go funding approach for the Phase I CIRP. Id.
In the 2003 Rate Setting Proceedings, the District proposed to evenly fund the
three-year (2004-2006) $674 million CIRP program with a combination of debt and Pay -
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As -You -Go financing. Id. The District now proposes to fund 100% of the $671 million
Phase II CIRP Program with Pay -As -You -Go financing. Id.
The District estimates this shift to save approximately $400 million in avoided
debt service costs. This proposal is further based on: (i) an incomplete regulatory
picture; (ii) future bonding capacity needs; (iii) a tapered rate of wastewater Phase II
CIRP progress; and (iv) progress toward known regulatory goals at appropriate rates in
a cost efficient manner. Id.
The District provides additional reasons for the Pay -As -You -Go strategy. Ex.
MSD 17A, Theerman Direct Testimony, p. 5, I. 8. First, the District is still developing its
CSO Long Term Control Plan which, when complete, will provide the extent of the
controls required to meet the Federal CSO Policy. Id. Until this is completed and
approved, the expected cost of the CSO program will not be known. Id. at I. 10.
Second, the total amount of time regulators will allow for the completion of the work
regarding CSO and SSO abatement is also unknown. Id. at I. 12. Given these two
unknowns, the use of a financing instrument that has significant interest expense is
imprudent. Id. at I. 14.
The District currently has $800 million of remaining bond capacity to mitigate
future rate increases; however, the District wants to retain this bond capacity to address
future unknown factors. Id. at I. 16. Debt financing can be used prudently to meet
challenging regulatory compliance schedules when the cost of these schedules exceeds
the communities' ability to cash finance the improvements in the allotted timeline. Ex.
MSD 42B, Theerman Surrebuttal Testimony, p. 8, I. 11. The District believes that the
use of debt financing to keep rates unrealistically low does little to help ratepayers and
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ultimately limits the District's ability to achieve environmental goals and address
deteriorating infrastructure. Id. at p. 5, I. 8.
It is the Rate Consultant's opinion that the District should increase the use of long
term indebtedness to finance a portion of the CIRP for the wastewater system during
the five year period of Fiscal Year ending June 30, 2008 through Fiscal Year 2012, the
period covered by the District's Rate Change Proposal. Ex. L&B 37, Stannard Rebuttal
Testimony, p. 3, I. 7. Intervenors MIEC and MEG support the Rate Consultant's
recommendation to use bond funding rather than 100% Pay -As -You go to fund the
CIRP. Ex. MIEC 36, Gorman Rebuttal Testimony, p. 5-6, 1. 14; Ex. MEG 35, Drazen
Consulting Group Rebuttal Testimony, p. 9, I. 10. Mr. Michael Gorman testified that
Pay -As -You -Go under the District's Rate Change Proposal is not appropriate and would
unnecessarily increase rates to customers. Ex. MIEC 36, Gorman Rebuttal Testimony,
p. 9, I. 10. As debt service payments are made, the District's outstanding debt would
decrease; hence the District would be able to issue additional debt in the future. Id. at
p. 6, I. 4.
It is the position of Intervenor MIEC that the District's proposed 100% Pay -As -
You -Go plan is inconsistent with the District's own financial policy. Ex. MIEC 54, MIEC
Prehearing Conference Report, p. 2. Moreover, the District's proposed rate structure
will require current customers to fund 100% of Phase II CIRP. Id. at p. 3. The facilities
included in the Phase II CIRP will have economic useful lives in excess of 30 years. Id.
Thus, future generations of customers will not pay a portion of the Phase II CIRP costs,
even though those costs are incurred to provide them service. Id. The significant cost of
the Phase II CIRP should be funded with the use of debt financing and Pay -As -You -Go
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to help spread the cost of the CIRP over the entire useful lives of the CIRP projects and
protect the District's financial integrity. Id. MIEC proposes this balanced funding
structure to equally spread the CIRP cost among current and future ratepayers, and
ensure the District has access to debt capital now and in the future. Id.
Ms. Janice Zimmerman noted in her direct testimony that the use of debt
financing will spread the cost of major capital improvements over the life of the project
and thereby equitably spread the cost and benefit of the projects among current and
future ratepayers. Ex. MSD 17C, Zimmerman Direct Testimony, p. 8, I. 4-6. This policy
is equitable and consistent with the objective of keeping rates as low as possible. Ex.
MIEC 54, MIEC Prehearing Conference Report, p. 3.
However, it is clear that the use of indebtedness to finance major capital
improvements allows the District to leverage its revenue stream from rates and other
sources and more closely match the future benefit received from improvement with the
future cost or recovery of such improvements. Ex. MSD 17H, Barber Direct Testimony,
p. 20, I. 8-15.
The District prepared and submitted a comparison of projected revenue
increases under three alternative financing scenarios. Alternative I is based on Pay -As -
You -Go financing for the Rate Period which then switches to a 50% debt and 50% cash
financing for FY 2013 through 2026. See Table 3-9c of MSD Exhibit 42H. Alternative II
is based on 50% debt and 50% cash financing beginning in 2008 until total debt
reaches $1,000 per capita. Id. Alternative III is based on 50% debt and 50% cash
financing beginning in FY 2008 until total debt reaches $1,500 per capita. Id.
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It is MIEC's position that this study is flawed. Ex. MIEC 54, MIEC Prehearing
Conference Report, p. 7. First, MIEC asserts that the study fails to use future SRF
funding to help pay for future capital improvements. This type of funding is one of the
most economical. Further, companies which use this type of funding pay back the
principal associated with these loans more quickly, resulting in the ability to issue
additional debt. Ex. MIEC 54, MIEC Prehearing Conference Report, p. 7. MIEC also
believes that the District should have valued the alternative funding proposals on a net
present value rather than a cumulative revenue increase basis. Id.
The District has taken the position that it is only able to finance $1.4 billion of the
projected $3.7 billion CIRP program with the use of debt financing. Ex. MSD 17F,
Tyminski Direct Testimony, p. I. Given the fact that the District has already issued $500
million of debt financing leaves roughly $800 million of additional debt financing
capabilities. Id. This $1.4 billion figure is predicated on the use of a debt limitation figure
of $1,000 per capita. Ex. 42E, Tyminski Surrebuttal Testimony, p. 5, I. 10. The District's
$1,000 per capita figure is projected to be higher than the median per capita debt
figures of all Midwest wastewater utilities included in the survey. Id. at p. 5, I. 17 — p. 6, I.
1. See also Ex. MSD 42N, Fitch Ratings titled "2007 Median Ratios for Water and
Sewer Revenue Bonds — Retail Systems."
Intervenor MIEC disagrees. Ex. MIEC 54, MIEC Prehearing Conference Report,
p. 8. Mr. Tyminski references the 2007 Fitch Study to indicate that debt service
coverage ratios of the Midwest utilities group is considerably below 200%, indicating
that they cannot issue additional debt without the possibility of suffering a potential
credit adjustment. Id. It is MIEC's position that the District's current financial position is
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much stronger than the financial position of the Midwest utilities included in the Fitch
Study and since the District has a current debt service coverage ratio well above
industry benchmark levels it could retain a significantly higher debt per capital debt
figure than other Midwest utilities included in the Fitch Study. Id.
MIEC proposes an alternative rate proposal with a lower rate increase. MIEC
Prehearing Conference Report, p. 4. The alternative rate proposal is predicated on the
use of the District's historical funding approach of its CIRP. As shown on Schedule
MPG -1 of Mr. Gorman's rebuttal testimony, his strategy of funding the District's Phase II
CIRP with the use of 55% Pay -As -You -Go and 45% debt results in five yearly rate
increases of $10 million for a total five-year increase of $50 million. Ex. MIEC 36,
Gorman Rebuttal Testimony, Schedule MPG -1, p. 1. Based on the MIEC proposal, the
savings to ratepayers would be approximately $65 million or 20% lower than the
revenue increase proposed by the District. Ex. MIEC 54, MIEC Prehearing Conference
Report, p. 4. This approach also results in the District amassing a positive cumulative
cash balance of over $20 million at the end of the Phase II CIRP. Id. This positive cash
balance will help the District as it transitions into future phases of the CIRP. Id.
MIEC states that its proposed lower rate increase and partial bond funding of the
Phase II CIRP produces cash flow metrics that will provide full recovery of the District's
costs, allow it tomaintain adequate credit rating financial benchmarks, and thus ensure
the District maintains access to external capital under reasonable pricing and terms. Ex.
MIEC 54, MIEC Prehearing Conference Report, p. 5.
It is Intervenor MEG's position that the District's proposal to fund the majority of
its CIRP through Pay -As -You -Go would be an unfair and unreasonable burden on all
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classes of ratepayers by placing a great financial burden on the District's current
customers. Ex. MEG 35, Drazen Consulting Group Rebuttal Testimony, p. 9-17. A
complete Pay -As -You -Go approach to funding the CIRP will increase customers' rates
over 61 % over the five-year period. Ex. MEG 58, MEG Prehearing Conference Report,
p. 2. Furthermore, it will create an unreasonable burden on current customers because
it requires them to pay the full costs of assets that have a life span in excess of 30-
years. Id.
MEG proposes that the District should finance Phase II of the CIRP using 50%
debt financing and 50% Pay -As -You -Go funding. Id. The combination of debt and Pay -
As -You -Go funding will significantly reduce the wastewater rate increase and allow for a
better match of the costs of the new assets with the current users. Id. Furthermore, it is
consistent with the District's 2002 Finance Plan and its 2004 Debt Managements Policy.
Ex. MEG 35, Drazen Consulting Group Rebuttal Testimony, p. 9.
MEG proposes that the District issue revenue bonds to finance 50% of the Phase
II CIRP during the five-year rate period. Ex. MEG 58, MEG Prehearing Conference
Report, p. 2. In the alternative, MEG proposes a single 13% increase or five 4% annual
increases to fund the CIRP. Id. While either option is much more reasonable than the
District's proposal, MEG believes the latter — the series of five 4% increases — to be the
better option because it reduces rate shock, and provides the District with more cash in
2012 to fund the next phase of its CIRP. Ex. MEG 35, Drazen Consulting Group
Rebuttal Testimony, Schedules 2 and 3; Ex. MEG 58, MEG Prehearing Conference
Report, p. 2.
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It is the Rate Consultant's position that future generations of customers will not
pay a portion of the Phase II CIRP costs, even though those costs are incurred to
provide them service. Ex. L&B 53, Lashly & Baer's Prehearing Conference Report, p.
28. The Rate Consultant agrees with the position of Intervenors MEG and MIEC that a
significant amount of the Phase II CIRP should be funded with the use of 50% debt
financing and 50% Pay -A -You -go to help spread the cost over the entire useful lives of
the assets to protect the District's financial integrity. Id. It is the Rate Consultant's belief
that this balanced funding structure will more equally spread the Phase II CIRP cost
among current and future ratepayers, and ensure the District has access to debt capital
now and in the future. Id.
The Rate Consultant proposes the District debt finance approximately 50% of its
capital program, resulting in $330,000,000 of revenue bonds over the period of Fiscal
Year 2008 through Fiscal Year 2012. Id. at p. 12, I. 15. Section 7.170 of the Charter
Plan requires approval of a simple majority of the voters of the District to issue revenue
bonds. Id. at p. 10, I. 23. Due to the inherent uncertainty of receipt of voter
authorization, the Rate Consultant has proposed consideration of two alternative rate
proposals. Rate Consultant's and Legal Counsel's Prehearing Conference Report, p.
11. The preferred alternative should reflect use of revenue bonds to finance
approximately 50% of the Phase II CIRP. Id. In case voter authorization to issue
additional bonds is not received, the second alternative should reflect the nearly 100%
Pay -As -You -Go financing of the Phase II CIRP used in the District's Rate Change
Proposal. Id. The District has made no indication that it will issue revenue bonds to
fund any portion of the CIRP.
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There are several major disadvantages to cash funding such a large portion of
the CIRP as proposed by the District. The Rate Consultant's proposal states that the
primary disadvantage is that current wastewater rates will have to increase dramatically
in the near term to provide the $616,897,000 in revenues necessary over the five-year
period. Ex. L&B 37, Stannard Rebuttal Testimony, p. 11, I. 4. Cash funding of the
capital improvements which will be used and useful in serving customers for 30 or more
years does not provide for recovery of those capital costs from the customers who will
benefit in the future. Id. at I. 7. Finally, the District's cost of borrowing is much lower
than that of the majority of its customers. Id. at I. 10. The current interest rates for tax
exempt revenue bonds are in the range of 4.25% to 4.5%. Id. at I. 11.
Use of revenue bonds to finance the Phase II CIRP is dependent on voter
authorization. Due to the inherent uncertainty of receipt of voter authorization, the Rate
Consultant Proposal considers two alternative rate proposals. The preferred alternative
should reflect use of revenue bonds to finance approximately 50% of the Phase II CIRP.
In case voter authorization to issue additional bonds is not received, the second
alternative should reflect the nearly 100% Pay -As -You -Go financing of the Phase 11
CIRP used in the District Proposal.
The impact of debt financing on the projected rate increase during the Rate
Period is dramatic. The District's proposed nearly 100% cash financing of Phase 11
CIRP during the Rate Period requires an initial increase in rates of 60.8%. Rate
Consultant's and Legal Counsel's Prehearing Conference Report, p. 10. The District's
analysis is consistent with the analyses presented in the testimony submitted on behalf
of MIEC and MEG, as well as that submitted by the Rate Consultant, and shows that
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using debt to finance 50% of the Phase II CIRP during the Rate Period would reduce
the required rate increase from 60.8% to 14.1%. Id.
Intervenors MIEC and MEG, and the Rate Consultant question whether the
District's wastewater rates should be increased by 60.8% over the Rate Period to
enable the cash financing of 91.9% of the Phase II CIRP, or if an alternative Phase II
CIRP financing plan should be developed that includes issuance of revenue bonds to
finance approximately 50% of the Phase II CIRP over the Rate Period. Id.
The witnesses for MEG, MIEC, the Rate Consultant, as well as the District,
testified that debt financing of wastewater utility capital improvements is a common
practice throughout the United States. The use of long term tax exempt financing of
capital improvements such as those included in the Phase II CIRP: (i) allows the
amortization of the cost of those assets over a period that more closely aligns with the
expected useful lives; (ii) permits an acceleration of construction of those assets; and
(iii) helps support inter -generational equity in the wastewater rates.
AGC/SITE joins the other parties in support of a combination of debt and Pay -As -
You -Go financing for the much needed capital improvements. AGC/SITE Prehearing
Conference Report, p. 3. The District, the Rate Consultant, MIEC and MEG all support
the use of debt in their respective testimonies. Id. The important differences among the
parties on this issue are primarily in the timing of additional debt — with the result being
different rates. Id. Moreover, the rate differences will continue for many years into the
future. Id.
It is AGC/SITE's position to support the District's approach of reserving its debt
capacity for future use, particularly as it is likely to be an interim measure. Id. As the
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District has testified, it will be beneficial to resolve regulatory uncertainty before the
extent and timing of additional debt is determined. Id. While a lawsuit is seldom seen as
a positive development, the EPA and DNR action may at least lead to a clarification of
requirements for projects, funding, and rates. Id.
The District's long-term plan and finance policy does in fact provide a funding
balance of cash and debt financing; however, the District's policy does not require an
annual cash/debt balance of 50%/50%. Ex. MSD 42C, Zimmerman Surrebuttal
Testimony, p. 2, I. 1. The CIRP Phase I funding provided that a 60%/40% balance was
appropriate at the time. Id. at p. 2, I. 3. The Phase II CIRP outlined in the District's Rate
Change Proposal is intentionally designed to preserve available debt capacity and
funding flexibility until regulatory issues are resolved. Id. at p. 2, I. 5.
It is the District's position that the proposed plans by the Intervenors are flawed
because they assume the availability of additional debt that has not been considered by
District voters and has no guarantee of being approved by District voters. Ex. MSD 52,
District Prehearing Conference Report, p. 5. As presented in Exhibit No. MSD 42H, the
assumption of debt issued at the proposed levels suggested by two intervenors would
only delay the need to finance capital improvements on a Pay -As -You -Go basis by a
few years. Id. In these alternative intervenor scenarios, the District quickly reaches its
debt capacity with no remaining debt to meet potential spikes in the CIRP caused by an
accelerated CIRP schedule expected to be mandated by Federal and State authorities.
Id.
This shift estimated by the District to save approximately $400 million in avoided
debt service costs is based on: (i) an incomplete regulatory picture; (ii) future bonding
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capacity needs; (iii) a tapered rate of wastewater Phase II CIRP progress; and (iv)
progress toward known regulatory goals at appropriate rates in a cost efficient manner.
The District prepared and submitted Table 3-9c of MSD Exhibit 42H which
presents a comparison of projected revenue increases under three alternative financing
scenarios. Alternative I is based on Pay -As -You -Go financing for the Rate Period which
then switches to a 50% debt and 50% cash financing for FY 2013 through 2026.
Alternative II is based on 50% debt and 50% cash financing beginning in 2008 until total
debt reaches 51,000 per capita. Alternative III is based on 50% debt and 50% cash
financing beginning in FY 2008 until total debt reaches $1,500 per capita.
The District states that it is prudent to conserve its limited debt capacity for the
future when regulatory requirements are better defined. Rate Consultant's and Legal
Counsel's Prehearing Conference Report, p. 10. The District claims this alternative
funding approach will enable it to remain flexible until the real cost of the Phase II CIRP
is better known and defined. On June 11, 2007, the United States of America, acting at
the request and on behalf of the Administrator of the EPA, and the State of Missouri by
the authority of the Attorney General of Missouri, filed a claim in the United States
District Court for the Eastern District of Missouri against the Metropolitan St. Louis
Sewer District captioned United States of America and the State of Missouri v. The
Metropolitan St. Louis Sewer District for injunctive relief and civil penalties alleging:
unpermitted discharges from a combined sewer system; violation of the proper
operation and maintenance condition in the District's NPDES permits; violation of the
backup power condition in the District's NPDES permits; violation of the bypass
prohibition condition in the District's NPDES permits; violation of the noncompliance
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reporting condition in the District's NPDES permits; failure to submit a long term CSO
control plan pursuant to Part D.1 of the District's NPDES permits and CWA § 308
Request; and violation of the general criteria special condition in the District's NPDES
permits.
The District maintains that the filing of the lawsuit does not provide any additional
certainty regarding the regulatory requirements.
The District will consider issuing additional debt after 2012 to finance major
capital improvements. Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 2, I. 9.
However, at the present time, it is the District's position the proposed Pay -As -You -Go
financing plan presented in the Rate Change Proposal remains the best funding
approach for the near term Phase II CIRP until the plans for the combined and separate
sewer overflow abatement (CSO/SSO) are finalized and approved by regulators. Ex.
MSD 52, District Prehearing Conference Report, p. 5. The District continues to propose
a Pay -As -You -Go plan to finance the next five years of capital improvements while
holding its limited debt capacity in reserve for potential additional mandated
improvements which may now be required sooner then expected. Id. Therefore, the
main difference between the District's position on debt financing and that of the
Intervenors is just a matter of timing. Ex. MSD 42C, Zimmerman Surrebuttal Testimony,
p. 2, I. 12.
The District states that the proposed wastewater rates meet the user charge
requirements of the EPA concerning proportionate cost recovery by customer class and
the proposed wastewater bills for residential customers will not exceed the two percent
median household income affordability threshold. Ex. MSD N, Transcript for Technical
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Conference May 30, 2007, p. 57, I. 19. The District states that the proposed stormwater
rate change will provide greater proportionality between ratepayers as the current
common -to -all flat rate charge and system of ad valorem taxes for basic stormwater
services will be replaced by a stormwater user charge system directly related to
estimated amounts of stormwater runoff.
EPA measures a permittee's financial capability to implement Combined Sewer
Overflow (CSO) controls. The process reflects the experience of EPA in the Water
Quality Standards (WQS) program, Construction Grants program, State Revolving Fund
(SRF) program and the water enforcement program. Experience with these programs
provides the foundation upon which EPA has built the CSO financial capability
assessment approach. See CSO Guidance for Financial Capability Assessment and
Schedule Development (Feb. 1997); EPA 832-B-97-004 at p. 9.
The CSO financial capability assessment process also reflects the approach
taken by bond rating agencies and other investment industry firms to assess a
municipality's or wastewater utility's overall financial condition and credit capacity. The
bond rating agencies generally use the same types of financial information when they
evaluate specific bond issues. Rating agencies evaluate this information to determine
the overall financial health of an issuer and identify any factors that could make it
difficult for the permittee to repay its bonds. The approach developed for the CSO
financial capability assessment incorporates the principles used by the rating agencies.
Id. at p. 19.
The Residential Indicator measures the financial impact of the current and
proposed Wastewater Treatment (WWT) and CSO controls on residential users.
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Development of this indicator starts with the determination of the current and proposed
WWT and CSO control costs per household (CPH). The service area's CPH estimate
and the median household income (MHI) are used to calculate the Residential Indicator.
The Residential Indicator is compared to established financial impact ranges to
determine whether CSO controls will produce a possible high, mid -range or low
financial impact on the permittee's residential users. Worksheets are provided to aid in
developing the Residential Indicator. Id. at p. 12.
If the permittee's service area includes more than one jurisdiction, it may be
necessary to develop a weighted MHI for the entire service area. The Bureau of
Census's designated MHI areas generally encompass most permittee's service areas.
For this reason, the calculation of a weighted MHI usually will not be necessary to
reasonably represent the permittee's MHI. When a weighted MHI must be acquired, a
weight would be assigned to each jurisdiction to reflect its share of the total households.
Id. at p. 18.
The Residential Indicator will be used to help permittees, and EPA and state
NPDES authorities determine reasonable and workable long-term CSO control
schedules.
To assess the financial impact= CSO controls may have on the permittee's
residential users, the Residential Indicator is compared to the financial impact ranges
that reflect EPA's previous experience with water pollution control programs. These
ranges are as follows:
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Financial Impact
Residential Indicator (CPH as % MHI)
Low
Less than 1.0 Percent of MHI
Mid -Range
1.0 — 2.0 Percent of MHI
High
Greater than 2.0 Percent of MHI
When the Residential Indicator is less than 1.0 percent, between 1.0 and 2.0
percent, and greater than 2.0 percent, the financial impact on residential users to
implement the CSO controls will be characterized as "low," "mid -range," and "high,"
respectively. Permittees that have a low residential indicator score (less than 1.0) are
unlikely to be permitted longer implementation schedules. Id. at p. 19.
The proposed wastewater rates are determined based on cost of service
principals. Ex. MSD 17H, Barber Direct Testimony, p. 4, I. 15. The proposed
wastewater rates are below the 2 percent of median income guidelines suggested by
EPA and others. Id. at p. 31, I. 4. Under these guidelines, a wastewater change less
than $45.22 per month is deemed to be affordable for the St. Louis area. Id. at I. 5. This
value is based on the adjusted 1999 median household income reported by the 2000
Census Bureau for St. Louis. Id. at I. 6. Therefore, this amount is likely higher today
due to wage inflation. Id. at I. 8. The average 8 Ccf per month residential wastewater
bill for the 2008 Test Year is projected to be $25.74 after the proposed December 1,
2007 wastewater rate adjustment or about 1.1 percent of the 1999 median household
income for St. Louis ($27,132) if applied for a full year. Id.
The proposed wastewater rates meet the user charge requirements of the EPA
concerning proportionate cost recovery by customer class and the proposed wastewater
bills for residential customers will not exceed the two percent median household income
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affordability threshold. Ex. MSD N, Transcript for Technical Conference May 30, 2007,
p. 56, I. 15-19. The District is analyzing its Rate Change Proposal based on per capita
and as well as a comparison to an affordability benchmark, which right now per the EPA
is 2% of median household income. Id.
The Rate Commission believes that the record in this Proceeding supports a
finding that 100% Pay -As -You -Go financing for the Phase II CIRP in the Rate Change
Proposal imposes a fair and reasonable burden on all classes of ratepayers.
Billing Lag
Currently it is District policy, like other wastewater utilities, to bill in arrears for
wastewater services. Ex. MSD L, Transcript for Technical Conference May 9, 2007, p.
222, I. 10-13. The District bills one month in arrears. Ex. MSD 0, Transcript for Public
Hearing June 7, 2007, p. 26, I. 7. The practice of billing in arrears results in less than a
full 12 months of billings under new rates in a given 12 -month period following the
effective date of the rate increase. Ex. L&B 37, Stannard Rebuttal Testimony, p. 22, I.
14-18.
The Rate Consultant believes the billing lag adjustment unnecessarily increases
the proposed wastewater rates and fails to recognize several components of the
proposed wastewater rate, including: (i) the maintenance of an operating reserve of
operation and maintenance expense which has been increased from 45 to 60 days; (ii)
the use of the District Operating and Maintenance budget as the base for projection of
future expenditures; (iii) the failure to recognize that the District has spent less than
95% of its budget in each of the last five years; (iv) the use of the Phase II CIRP
expected appropriations rather than the expected expenditures; and (v) the failure to
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recognize other available reserve fund balances. Ex. L&B 37, Stannard Rebuttal
Testimony, p. 8, I. 28 — p. 9, I. 20.
Eliminating the billing lag will decrease the 2008 Test Year wastewater revenue
requirements by approximately $1,228,200, which is approximately 9.4% of the
increased revenues proposed by the District for FY 2008. Ex. L&B 53, Lashly & Baer's
Prehearing Conference Report, p. 14.
The District takes the position that although an operating reserve can be used to
temporarily adjust for a delay in accrued revenues, the reserve has to be replenished at
some point in time. Ex. MSD 52, District Prehearing Conference Report, p. 8.
Therefore, the District believes that the adjustment is required for multi -year planning
purposes. Id. Although there are delays in payments that could offset a billing lag
adjustment, there are also pre -payments required for major expenditures such as
insurance and bulk chemical purchases that counter potential delays in payments. Id.
According to the District, other reserves are not considered for the delay in revenue
receipts because they are dedicated by bond covenants or District policy for other
purposes such as maintaining a reserve for emergencies, meeting the revenue bond
reserve requirement, providing funds for the water backup insurance and
reimbursement program, and accruing principal and interest payments to the bond
holders. Id. Therefore, the reserves are not available for temporary revenue shortfalls.
Id.
The District has tightly managed its operating budget maintaining spending 5%
below total appropriations for the past few years. Ex. MSD 17C, Zimmerman Direct
Testimony, p. 6, I. 2-3. While the District intends to continue strict management of its
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resources, a continuation of this trend is not guaranteed, especially in light of pending
lawsuits that may require additional non -budgeted expenditures. Id. Any funds that
could be available at the end of the year because the District did not expend its entire
budget can be used to provide additional capital improvements. Id. at p. 8-9. However,
if it was arbitrarily assumed the District would continue to substantially underspend its
budget for rate design purposes and the District required its full budget amount or more,
then the proposed level of capital improvements would need to be reduced. Id. at p. 9.
The Rate Commission believes that the record in this Proceeding supports a
finding that inclusion of a billing lag in the Rate Change Proposal imposes a fair and
reasonable burden on all classes of ratepayers.
Resistance Factor
A resistance factor recognizes that some metered customers can reasonably be
expected to react to the higher wastewater charges by cutting back on their levels of
water use and thus wastewater service. Ex. MSD 17H, Barber Direct Testimony, p. 18,
I. 11. A resistance factor reduces the amount of revenues the District expects to
receive.
Wastewater charges are typically designed for the full rate increase indicated but
with the expectation that actual revenue received will be less than projected billed
revenue due to the potential customer reactions described above. Id. at 1. 13. The
resistance factor provides a compensating revenue adjustment for these potential
reactions. Id. at I. 15.
The District proposes a resistance factor equal to 3.23%o for 2008, reduced to
1.61% for 2009, and zero thereafter. Ex. MSD 1, CDM and Black & Veatch,
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"Wastewater and Stormwater Rate Proposal," at 1-5 (Feb. 2007). Thus, in 2008, the
District has reduced the amount of wastewater rate revenues it expects to receive by
3.23% or $808,600. Similarly, the resistance factor would reduce the amount of rate
revenues by 1.61% in 2009.
The Rate Consultant's Proposal recommends elimination of any resistance
factor. Ex. L&B 37, Stannard Rebuttal Testimony, p. 3, I. 7-31. According to the Rate
Consultant, the use of the resistance factor is an additional level of expense that
unnecessarily increases the proposed wastewater rates a level higher than necessary.
The Consultants do not believe that it is possible to accurately determine a resistance
factor based solely on billed wastewater usage. There are many other factors that
affect billed wastewater usage, including general economic conditions, water rates and
environmental impacts. Ex. L&B 37, Stannard Rebuttal Testimony, p. 8, I. 15.
Eliminating the resistance factor will decrease the Test Year (FY 2008) wastewater
revenue requirements by approximately $471,600, which is equivalent to the
$25,266,800 total increase in revenues from the rate increase, multiplied by the
resistance factor of 3.2%, multiplied by 7/12 to account for a December 1
implementation of the rates. Id. at I. 21.
The record in this Proceeding contains no evidence of any significant current
delinquencies among ratepayers due to resistance.
The Rate Commission believes that the record in this Proceeding supports a
finding that inclusion of a resistance factor in the Rate Change Proposal does not
impose a fair and reasonable burden on all classes of ratepayers.
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Infiltration/Inflow
Wastewater rates are allocated to customer classes in accordance with their
service requirements. Ex. MSD 20, MSD Response to Lashly & Baer Discovery
Request, p. 56, q. 82. All customers pay the cost to bill and collect revenue on an equal
per customer basis. Id. A large portion of the infiltration/inflow ("I/I") is also recovered
on the basis of customers with the remaining portion recovered on the basis of
contributed volume. Id. at p. 57, q. 82.
The cost of collecting, conveying and treating contributed normal strength
wastewater is recovered on the basis of volume so that each customer pays in
proportion to their use of the wastewater system. Id. Special costs to monitor
customers for the pretreatment program are only recovered from non-residential
customers since it is these customers that must be reviewed to find potential customers
required by the EPA to be monitored. Ex. MSD 20, MSD Response to Lashly & Baer
Discovery Request, p. 56, q. 82. Finally, any non-residential customer that contributes
high strength wastewater above the limits of normal strength wastewater is
appropriately charged for their excess strength wastewater loadings. Id.
The District's Proposal incorporates an I/I allocation of 40% recovery by the
system availability charge (number of customers) and 60% recovery by the volume
charge. Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate
Proposal," at 1-5 and 3-32 (Feb. 2007). Intervenor MIEC does not agree with the
District 40%/60% I/1 distribution. Ex. MIEC 36, Gorman Rebuttal Testimony, p. 15, I. 18.
I/1 flows are more closely related to the total lengthy and diameter of collection sewers in
the system, and these in turn are influenced by the number of customers connected to
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the District by these sewers. Id. at p. 16, I. 4. Intervenors propose to assign 50% of I/I
volumes in proportion to the number of customers in each class and the remaining 50%
in proportion to class contributed volumes. Id. at I. 12.
Further, Intervenor MIEC raises issues with the attribution of groundwater
infiltration and stormwater inflow (I/I) volumes to individual customer classes was
weighted on a basis of 60% billable class volumes and 40% customer count. According
to MIEC, this also results in an under -allocation of costs to the Single Family and Multi -
Family Residential classes and an over -allocation of costs to the Non -Residential
customer class. MIEC proposes to allocate I/1 costs 50% to volume and 50% to
customer count.
The District's 40%/60% Ill allocation stems from analysis of wet weather flow
contributions and costs in the 2005 "Wet Weather Flow Cost Allocation Study." Ex.
MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 1-5
(Feb. 2007). The District's allocation of Ill costs that recognizes both contributed
volume and the number of connections is stated in the Manual as one of the most
common approaches.
The Manual is a recognized industry standard for developing cost based
wastewater rates. With respect to the allocation of I/I, the Manual states:
To the extent that I/I entry points cannot be determined, their costs are a
general system problem that is probably best related to both customer
class flows and to the number of customers.... Additional customers
increase the land area and density of the collection system, increasing the
potential for I/I."
Id. at p. 43 (emphasis added). With respect to allocating the I/I costs, the Manual
continues by stating:
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In establishing I/I units of service by customer class, it is noted that such
costs are not directly related to wastewater volumes discharged by
customers. That is, the volume of contributed wastewater flow from an
individual customer is not a direct measure of that customer's potential
responsibility for 1/1. A more accurate theoretical measure of I/I
responsibility might involve consideration of the customer's property and
stormwater runoff potential, as well as sewer lateral leakage. Such
parameters, however, are not readily ascertainable as a basis of billing
customers for I/I costs. These considerations support allocation of I/I
responsibility to customer classes based on some measure that reflects
both the number and relative size of customers served.
Id. at p. 53. For example, the Manual notes two-thirds of the total I/1 could be allocated
in proportion to the number of customers, with the remaining one-third allocated on the
basis of volume. Id.
As requested by the 2003 Rate Commission, a study was conducted to
determine how the costs of infiltration/inflow should be allocated to customer classes.
In the absence of any other study, the District finds no reason to alter the 1/1 allocation
factors currently proposed for this rate Proceeding. Ex. MSD 62, MSD Final Closing
Arguments, p. 12.
The Rate Commission believes that the record in this Proceeding supports a
finding that inclusion of a 40% recovery by the system availability charge and 60%
recovery by the volume charge in the Rate Change Proposal imposes a fair and
reasonable burden on all classes of ratepayers.
Basic Stormwater Services Rates
The use of impervious area charges for the recovery of stormwater related costs
is becoming standard across the United States as it is generally recognized that
impervious area is a strong indicator of the potential demand that a property will place
on a utility for stormwater management. Ex. L&B 37, Stannard Rebuttal Testimony, p.
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13, I. 5. The concept of a stormwater impervious charge is not new. Id. Many courts
have held that stormwater charges are more in the nature of a user charge than a tax.
See, e.q., Sarasota County v. Sarasota Church of Christ, 667 So.2d 180 (Fla. 1995)
(holding that charges based on impervious surface area and property usage
classification is "not arbitrary and bears a reasonable relationship to the benefits
received"); McLeod v. Columbia County, 599 S.E.2d 152 (Ga. 2004) (impervious charge
"bears a reasonable relationship to the benefits received"); Twietmeyer v. City of
Hampton, 497 S.E.2d 858 (Va. 1998) (flat rate charges bore a "rational correlation to
the amount of stormwater runoff' because they differentiated between residential and
non-residential properties); City of Gainesville v. State of Florida, 8763 So.2d 138 (Fla.
2003) (series of flat rates based on impervious surface area is "reasonable").
The proposed basic stormwater rates use cost of service considerations in their
development by charging on the basis of impervious area which has a direct
relationship to the amount of runoff that is attributed to each property. Ex. MSD 20,
MSD Response to Lashly & Baer Discovery Request, p. 57, q. 82.
The cost for maintaining the stormwater system is directly related to the amount
of runoff contributed to the stormwater system. Neither the flat stormwater charge by
account or the current ad valorem taxes dedicated to stormwater operations has this
direct cost relationship. Ex. MSD 20, MSD Response to Lashly & Baer Discovery
Request, p. 57, q. 82. Provisions are also included in the stormwater rate structure to
provide credits to customers that can demonstrate a reduced or delayed runoff of
stormwater from their property to the stormwater system. Id.
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The proposed system of impervious area based stormwater charges will recover
costs from users in proportion to their actual impervious area. Id. at p. 57, q. 83. There
is a direct relationship between the rate charged and the contribution to need, due to
the proposed use of impervious area as the basis for the stormwater billing. Ex. MSD
17G, Sedgwick Direct Testimony, p. 3, I. 11. The use of impervious area in this case
has the highest degree of connectivity due to the use of individually calculated
impervious area. Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p.
57, q. 83. There is no distinction between classes, as each parcel is billable upon the
actual impervious area on the parcel. Id.
The Rate Commission believes that the record in this Proceeding supports a
finding that inclusion of an impervious charge for Basic Stormwater Services in the Rate
Change Proposal imposes a fair and reasonable burden on all classes of ratepayers.
Enhanced Stormwater Service Charges
The District's Rate Change Proposal proposes reconfiguring the existing 23
OMCI subdistricts into 5 watershed -based subdistricts as a means to provide Enhanced
Stormwater Services as determined by a vote of each subdistrict's customers. The tax
levy and type of enhanced services will be determined by a vote of the customers of
each watershed. Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater
Rate Proposal," at 1-3 (Feb. 2007).
The District's position of levying an ad valorem tax for Enhanced Services relates
to the differing levels of service desired geographically within its service area. Ex. MSD
52, District Prehearing Conference Report, p. 11. The fairness of the charge relates to
the image conceived by the customer of the benefit being received rather than the
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technical equitability of allocating the costs. Id. It is the District's belief that conducting a
public outreach/information program that identifies the specific and different services
needed by each subdistrict and by conducting a referendum within each subdistrict,
consensus on the program's funding and needs can be more equitably met. Id. It is
therefore the District's position that the current use of ad valorem subdistrict taxes as
currently provided for in the District's Charter be used to accomplish this acceptance,
understanding and approval of the required expenditures/charges for enhanced
stormwater services. Id.
It is the Rate Consultant's position that it would be appropriate to recover the cost
of any Enhanced Stormwater Services the District may provide to certain areas through
the same impervious area methodology used for Basic Services. Ex. L&B 53, Lashly &
Baer's Prehearing Conference Report, p. 30. Use of an impervious area charge will
allow the District to recover costs associated with Enhanced Stormwater Services from
those users within each of the proposed subdistricts based on their impervious area
rather than their assessed property valuation. Id. An impervious area charge will also
ensure recovery of enhanced stormwater costs from tax exempt properties and prevent
potential blurring and confusion of the user fee fundamentals associated with the
stormwater charge. Id.
The Rate Consultant believes the charge should be revenue neutral to the
District since it is only a matter of how costs will be recovered, not what costs will be
recovered. Id. The use of an impervious area charge would also provide the District
with a more stable revenue source throughout the course of the year since impervious
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area charges are billed and collected monthly, while ad valorem taxes subject to
assessment adjustments are only billed and collected annually. Id.
The District also believes all user fees, including the new impervious area user
charges for Basic Services, should be applied uniformly throughout the District and not
be subject to voter approval. Ex. MSD 52, District Prehearing Conference Report, p. 11.
Offering user charges for the enhanced services for voter approval could, in the minds
of some, blur a major distinction between user charges and taxes per the provisions of
the Hancock Amendment. Id. Moreover, the use of taxes for optional enhanced
stormwater services will also lessen the rate impact on tax-exempt property owners who
are hit substantially by the proposed stormwater impervious area charges. Id.
It is the District's position that the Basic Stormwater Services as described in the
Rate Change Proposal should be recovered by an impervious charge and Enhanced
Stormwater Services should be recovered through the taxing subdistrict methodology
currently provided for in the District's Charter. Ex. MSD 52, District Prehearing
Conference Report, p. 12. There are two major reasons for this. First, there are basic
stormwater services the District must provide to maintain those stormwater facilities the
District currently owns and to provide the planning and regulatory functions required by
the Charter and permit. Id. These services are provided district -wide. In addition, there
is a district -wide relationship between impervious area and the cost to provide these
services. Id.
Second, the District wants to offer the opportunity to its customers to fund
additional Enhanced Stormwater Services. Id. The District believes that the type of
enhanced stormwater services the District customers may want to consider vary greatly
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between watersheds and are not consistent throughout the District. Id. The District
believes the best way to offer this opportunity is through the taxing subdistrict
methodology provided for in the District's Charter and currently in use today for these
types of services throughout the District. Id. The District believes that the use of an
impervious rate should not be considered because of the varying service needs
throughout the District and the tenuous relationship the cost of these services have to
the amount of impervious area within a portion of or the entire service area. Id.
Intervenor MEG agrees with the District's Proposal that enhanced services be
collected through taxes. MEG observes that the imposition of an impervious area
charge for enhanced services upon not -for -profits (e.g., schools and churches), in
addition to the new impervious area for basic services, will create a significant hardship.
Ex. MEG 58, MEG Prehearing Conference Report, p. 3.
The Rate Commission believes that the record in this Proceeding supports a
finding that the use of an ad valorem tax for Enhanced Stormwater Services in the Rate
Change Proposal does not impose a fair and reasonable burden on all classes of
ratepayers.
The Rate Commission believes that the record in this Proceeding supports a
finding that the use of an impervious charge for Enhanced Stormwater Services
imposes a fair and reasonable burden on all classes of ratepayers.
The Rate Commission further believes that since the record in this Proceeding
supports a finding that the use of an impervious area charge for all Stormwater Services
imposes a fair and reasonable burden on all classes of ratepayers, the record in this
149
Proceeding supports combining the charge for both Basic Stormwater Services and
Enhanced Stormwater Services into one Stormwater Charge.
Five -Year Phasing of Stormwater Rates
MEG is not opposed to a separate stormwater charge and acknowledges that
the District is phasing in its full impervious surface charge over the period 2008 to 2012.
However, MEG believes that the sudden elimination of the District's wastewater rates
which currently support the District's stormwater costs will cause significant rate shock
to customers with large amounts of impervious surface area. Ex. MEG 58, MEG
Prehearing Conference Report, p. 3. MEG proposes that the change in funding
procedure would be less onerous if wastewater support of the stormwater rates were to
be phased out over a five-year period. Id. Under MEG's proposal, the wastewater rates
would continue to support the stormwater costs for 2008 and 2009 and thereafter the
subsidy would be reduced by 25% per year. Id.
The MEG proposed phase out would not require the District to raise wastewater
rates further. Ex. MEG 58, MEG Prehearing Conference Report, p. 3. It is MEG's
position that the extended subsidy can be achieved without increasing the rates to
wastewater customers and suggests diverting the GASB 45 allowance for funding other
post employment benefits and revenue adjustments due to billing lag expense and the
resistance factor expense. Id.
It is the District's position that extending the proposed wastewater subsidy would
increase wastewater rates and decrease stormwater rates for the transition period. Ex.
MSD 52, District Prehearing Conference Report, p. 12. The District plans to begin
funding its GASB 45 allowance out of annual revenues. Id. at 6. This issue is
150
considered settled by the District. Id. Ignoring this obligation would jeopardize the
District's bond ratings as supported by both the Fitch study and Standard and Poor's
rating agencies (see Exhibits No. MSD 52B & 52C). Id. at p. 12. Therefore, these
monies will not be available to extend the stormwater subsidy. Id. The allowances for
billing lag and customer resistance due to the higher rates are adjustments to expected
revenue receipts and need to be included in the revenue projections to avoid revenue
shortfalls. Id.
Therefore, potential use of the GASB 45 funding allowance and the two revenue
adjustments is not realistic. Id. The District's goal is to make both the wastewater and
stormwater utility self-supporting within a two-year period. Id. This term is considered
adequate to allow customers to adjust to the new stormwater user charge while
complying with the 2003 Rate Commission's recommendation to eliminate wastewater
revenue support of the District's stormwater program. Id. At the same time, the District
plans to eliminate the current $0.02 and $0.05 ad valorem taxes which will ease the rate
transition burden on all customers except the tax exempt customers. Id. It should be
noted, however, that the proposed ramp up of the stormwater rate reflects the timing
and approximate levels recommended to the District's Board of Trustees by a 2001
Citizen Task Force. Id. Members of this Task Force included representatives of the tax-
exempt customers within the District. Id.
MEG agrees with the District's Rate Change Proposal that enhanced services be
collected through taxes. Id. Therefore, MEG submits that a phase out of the
wastewater support of the stormwater rates as described above, together with collecting
costs for enhanced services through taxes, would allow the District to meet the
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stormwater costs outlined in its Proposal while still being a fair and reasonable burden
on all classes of ratepayers. Id at p. 3-4.
The Rate Commission believes that the record in this Proceeding supports a
finding that the wastewater rate support of stormwater charges be eliminated as
described in the Rate Change Proposal.
Levee District Intervenors
The Levee District Intervenors object to the District's proposed impervious
stormwater charge, specifically, the extension of the charge on property owners located
within the levee districts. Ex. MON 56, Levee District Prehearing Conference Report, p.
1. It is the Levee Districts' position that the proposed impervious charge bears no
proportional relationship to any services that the District provides to property owners
within the levee districts. Id. at p. 2. Instead, the charge results in the levee district
owners subsidizing services that the District is providing to other property within the
District's jurisdiction, while these same owners must also pay assessments to the levee
districts for stormwater services. Id.
The levee districts are districts created pursuant to Chapter 245 of the Missouri
Revised Statutes. Ex. MON 34A, Hodges Rebuttal Testimony, p. 2, I. 11. The statutes
authorized the districts to plan, construct, operate and maintain a flood protection and
stormwater drainage system. Id. at p. 2, I. 5-6. Pursuant to this authority, the levee
districts have constructed, operate and maintain flood protection and stormwater
management systems within their respective boundaries. Id. at p. 4, I. 6-15. The 500
year flood plains of Earth City, Riverport, Howard Bend and Chesterfield -Monarch
protect approximately 13,500 acres of ground. Id. at p. 3, I. 18-23. Pursuant to their
152
statutory authority, the levee districts impose assessments upon the property owners
within their boundaries to pay for this infrastructure. Id. at p. 5, I. 9 — p. 6, I. 2.
In contrast to most other areas served by the District, the stormwater from the
levee districts drains directly into the Missouri River and does not enter the District's
system. Ex. MON 34A, Hodges Rebuttal Testimony, p. 5, I. 1-8; Ex. MON 34, Butchko
Rebuttal Testimony, p. 2, I. 16 — p. 3, I. 16. The levee districts are also uniquely
situated with respect to stormwater in that, unlike other property owners within the
District's boundaries, the levee districts provide their own stormwater management and
planning within their boundaries. Ex. MON 34A, Hodges Rebuttal Testimony, p. 4, I. 6-
10; Ex. MON 34, Butchko Rebuttal Testimony, p. 2, I. 16 — p. 3, I. 16. The levee
districts prepare and implement their own master plans for stormwater functions. Ex.
MON 34A, Hodges Rebuttal Testimony, p. 5, I. 1-11. The levee districts periodically
inspect and maintain the stormwater infrastructure within their boundaries. Ex. MON
34A, Hodges Rebuttal Testimony, p. 5, I. 12 — p. 6, I. 13; Ex. MON 34, Butchko Rebuttal
Testimony, p. 15, I. 17-23.
It is the Levee Districts' position that they were unaware that the District has
provided a few minimal maintenance activities in the levee districts over the years, and
the levee districts would have performed these tasks had they been alerted to the
issues. Ex. MON 56, Levee District Prehearing Conference Report, p. 3. The levee
districts would prefer to undertake all this maintenance work themselves since the
stormwater systems are an integral part of the flood control plans for the area. Ex. MON
34A, Hodges Rebuttal Testimony, p. 8, I. 10-21; see also Ex. MON 44, Responses of
Levee District to Discovery Requests of AGC, Request No. 5.
153
The levee districts also review all development plans for new projects, or for
expansion of existing facilities within the districts, for compliance with the levee districts'
stormwater master plans in terms of both stormwater control and flood control. Ex.
MON 34A, Hodges Rebuttal Testimony, p. 6, I. 15-19; p. 7, I. 2-5; Ex. MON 34, Butchko
Rebuttal Testimony, p. 4, I. 1-9; see also Ex. MON 44, Responses of Levee District to
Discovery Requests of AGC, Request No. 5. The District defers to the levee districts'
engineers to review and comment upon stormwater issues for such developments. Ex.
MON 34A, Hodges Rebuttal Testimony, p. 7, I. 14-20. The District provides virtually no
operation, maintenance or planning functions within the levee districts, even in the
areas where the District claims it has accepted stormwater structures. Ex. MON 34,
Butchko Rebuttal Testimony, p. 5, I. 17 — p. 6, I. 12. The Levee Districts purport that the
District acknowledges that it has not accepted any infrastructure in some of the levee
districts. Ex. MSD J, Transcript for Technical Conference April 19, 2007, p. 23.
The District's proposed impervious charge "is designed to fund base services
that are uniform in nature district -wide, and specifically, its for the operation,
maintenance, renewal, and replacement of existing infrastructure; in addition to that,
certain regulatory required functions.. .." Id. at p. 22. The Levee District Intervenors
state that the evidence establishes that, at least with respect to the operation,
maintenance, renewal, and replacement of existing infrastructures, the services the
District will provide are not uniform within and outside of the levee districts. Ex. MON
56, Levee District Prehearing Conference Report, p. 4. The levee districts have
provided all these services within their boundaries and they intend to continue to
perform their statutory functions to maintain the stormwater facilities in their boundaries.
154
Ex. MON 34A, Hodges Rebuttal Testimony, p. 8, I. 7 — p. 9, I. 3; Ex. MON 34, Butchko
Rebuttal Testimony, p. 6, I. 15-22.
With respect to the regulatory services the District claims it will provide with
respect to water quality issues, the Levee Districts do not believe that there is any
relationship between the District's district -wide regulation of water quality and the
impervious area on individual tracts within the District's boundaries. Ex. MON 56, Levee
District Prehearing Conference Report, p. 4. Therefore, the Levee Districts do not
believe that these expenses should appropriately be included in the District's
impervious user charge. Ex. MON 56, Levee District Prehearing Conference Report, p.
4.
It is the Levee District Intervenor's position that under the District's proposal,
property owners within the levee districts will pay the same impervious rate charges as
all of the District's other customers who are receiving the full array of basic services
from the District. Ex. MON 34A, Hodges Rebuttal Testimony, p. 9, I. 4-14. The
increased fees will impose an excessive burden on property owners within the
boundaries of the levee districts, with no correlating increase in services. Ex. MON 34A,
Hodges Rebuttal Testimony, p. 9, I. 4-10; Ex. MON 34, Butchko Rebuttal Testimony, p.
8, I. 9-23. As a practical matter, the District's fee increase could also hamper the levee
districts' ability to fund necessary infrastructure improvements in the districts in the
future. Ex. MON 56, Levee District Prehearing Conference Report, p. 5. The owners in
the districts would likely oppose any future increases in charges for stormwater and
flood protection. Ex. MON 34A, Hodges Rebuttal Testimony, p. 9, 1. 20 — p. 1, I. 10.
155
Since there are portions of the District's service area where properties receive no
benefit of the stormwater system (i.e. they drain directly to the Mississippi, Meramec or
Missouri Rivers) or there are other agencies that provide stormwater service (e.g., the
Levee Districts), the District has indicated that they intend to provide a credit policy and
process for such customers if requested. Ex. L&B 37, Stannard Rebuttal Testimony, p.
15, I. 8. The proposed credits are available to both residential and non-residential
customers. Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate
Proposal" at 4-8 (Feb. 2007). The proposed credits are limited to 50% of the
impervious charge based on previous calculations. Id. Any property that drains into the
Mississippi, Missouri or Meramec Rivers would be eligible for this 50% credit. Id.
Second, any property that pays for stormwater service to another entity, such as
the Levee Districts, would be eligible for a credit based on a dollar for dollar reduction in
the District's charge. Id. The District and the Levee Districts are in the process of
developing an Inter -governmental Cooperation Agreement that may allow a negotiated
charge for each Levee District. Ex. MSD 42D, Hoelscher Surrebuttal Testimony, p. 7, I.
3. The Agreement would outline the relationship between the District and the Levee
Districts and assign specific responsibilities to each entity for stormwater-related
functions within the Levee Districts. Ex. MSD L, Transcript for Technical Conference
May 9, 2007, Hodges Testimony, p.41, I. 20 — p. 42, I. 1.
The Levee Districts provide that the basic proposal is that the Levee Districts
would be responsible for all stormwater functions within the districts. Ex. MON 56,
Levee District Prehearing Conference Report, p. 8. In return, the Levee Districts are
requesting complete exemption from the impervious user fee. Id. The Levee Districts
156
believe that this proposal is fair and reasonable, and comports with the Missouri
Constitution, in that the owners within the Levee Districts will not be users of the
District's services and thus should not pay the impervious user charge. Id. In addition,
the agreement will avoid duplication of services and clarify the respective roles of these
public entities with respect to stormwater management in these unique areas. Id.
With regard to the areas that may receive stormwater service from another entity
instead of the District, it will adjust its credit policy and calculate the actual cost of
services not provided by the District in determining the amount of credit available. See
Ex. MSD 1, page 4-8, section 4.4. An appropriate credit will be available for any
regulatory or planning activities, as approved by the District, which are performed by
another entity instead of the District. Ex. MSD 52, District Prehearing Conference
Report, p. 7. This will result in a possible credit based on the actual cost of the
services. Id.
In addition, certain properties are exempted from paying the impervious charges.
Ex. MSD 17G, Sedgwick Direct Testimony, p. 9, I. 9. Those parcels that are
specifically contained within public rights -of -way will not pay the impervious area
charge. Id. The principle for this exclusion is that these impervious areas are part of the
stormwater management network that conveys, transports, stores, treats, and
discharges to waters of the State. Id. at I. 10.
It is the Levee District Intervenors' position that the proposed Stormwater Credit
Policy (Section 4.4 of the District's Exhibit 1) does not remedy these deficiencies in the
proposal for the primary reason that it is a discretionary credit rather than an attempt to
tailor a rate that reflects the services, if any, the owners within the levee districts receive
157
from the District. Ex. MON 34, Butchko Rebuttal Testimony, p. 10, I. 17 — p. 11, I. 6.
The availability and the amount of the credit are discretionary, and each property owner
will have to pay the entire impervious rate charge and then apply for this discretionary
credit. Ex. MSD J, Transcript for Technical Conference April 19, 2007, p. 29-30.
Moreover, the credit is based upon the amount owners pay to the levee districts,
which will vary for reasons related solely to the levee districts' financing structures, so
that the amount the owners pay the District will bear no correlation to the services they
received from the District. Ex. MON 34, Butchko Rebuttal Testimony, p. 10, I. 17 — p.
12, I. 5. It is the Levee Districts' position that the proposed user fee to the owners within
the levee districts does not represent a fee that bears a direct relationship to the
services, if any, that the District is providing to owners in the Levee Districts. Ex. MON
56, Levee District Prehearing Conference Report, p. 7.
On July 12, 2007, the District and Levee Districts submitted, as an Exhibit to
these Proceedings, the Levee District Agreements purporting to resolve the issues with
the Rate Change Proposal raised by the Levee Districts in this Proceeding. See Ex.
MON 64. The Rate Commission recommends approval of the Levee District
Agreement.
The Rate Commission believes that the record in this Proceeding supports a
finding that the terms and conditions of the Levee District Agreement will result in rates
in the Rate Change Proposal that impose a fair and reasonable burden on the affected
classes of ratepayers.
The Rate Commission, after consideration of all the facts and
circumstances disclosed in the Proceedings, finds and determines that the Rate
158
Change Proposal does not impose a fair and reasonable burden on all classes of
ratepayers because the Proposal includes a (1) resistance factor; and (2) a charge
of Enhanced Stormwater Services based on ad valorem tax rather than
impervious area charge.
The Rate Commission, after consideration of all facts and circumstances
disclosed in the Proceedings, finds and determines that the elimination of the
resistance factor from the rates in the Rate Change Proposal results in rates for
Wastewater Services that impose a fair and reasonable burden on all classes of
ratepayers.
The Rate Commission, after consideration of all facts and circumstances
disclosed in the Proceedings, finds and determines that the use of an impervious
area charge for all Stormwater Services imposes a fair and reasonable burden on
all classes of ratepayers, and the record in the Proceedings supports combining
the charge for both Basic Stormwater Services and Enhanced Stormwater
Services into one Stormwater Charge.
159
MINORITY REPORTS
COMMISSIONERS BOWSER, REEVES, STEIN AND SULLIVAN SUBMIT THIS
MINORITY REPORT REGARDING PAY-AS-YOU-GO FINANCING
We must respectfully dissent from the majority decision that the Rate Change
Proposal for wastewater service is fair and reasonable under the guidelines of the
District Charter Plan. The proposal's failure to include any debt financing of the capital
improvement and replacement program denies District customers the opportunity to
reduce the steep increase in wastewater user fees projected under the Rate Change
Proposal. In addition, it is inconsistent with the District's capital plan which calls for 50-
50 funding of the capital expenditures, split between debt and current revenue. The
arguments advanced by the District represent a 180 degree reversal from the position
advanced just four years ago in the last rate proceeding.
It should be pointed out that all Intervenors who took a position on this issue
(MIEC, MEG, and AGC/SITE) along with the Rate Commission's Consultant agreed that
at least some portion of the capital plan should be financed with debt. The points they
made were:
0 The District has more than adequate capacity to issue more debt.
gi The financial policy of the District calls for a balanced mix of debt and
current revenue to fund capital improvements.
Use of debt would significantly reduce the rate of increase in user fees.
Use of debt appropriately shifts some of the burden of paying for very -
long -lived assets to future users who will benefit from these assets.
160
The District opines that "regulatory uncertainty" dictates that bonding capacity be
retained for possible large future capital needs. Was there not as much uncertainty, if
not more, in 2003 when the District embraced debt financing? The District has publicly
acknowledged estimates of $3.7 billion over the next two decades. The District
acknowledges that debt will be needed to fund some of this burden. If not now, when?
Why avoid giving the voters the opportunity to avail themselves of the same financing
vehicle many of them use to great benefit in purchasing their own homes? The market
for high quality municipal debt is solid. Will it be so in five or 10 years? What was
prudent about debt in 2003 that is not in 2007?
The District also expresses a concern that voters may not approve debt. While
this is correct it ignores the approach taken in the last proceeding providing a Pay -As -
You -Go fallback in the event of voter rejection of debt. Voters were perceptive enough
to see the value in debt financing when faced with the choice, as they routinely do in
school district and fire district financing elections. Experience shows that when the
District presents voters with genuine needs, communicates them effectively, and gives
them rational choices they will support debt issuance. Is there any reason not to give
the voters a choice?
It has also been suggested that the District "should not go to the well too often."
With a staggering capital improvement need, and EPA and DNR pressure to move more
aggressively on correcting discharge violations, the District has little choice but to use
any and all avenues to obtain funds. The benevolent federal and state grant programs
of the `60s and '70s are history. In our judgment going to the voters every five years is
not going to the voters too often, once again if the need is genuine and communicated
161
effectively. The voters are keenly aware of the threats to health and property of
allowing illegal discharges to continue.
We believe the District trustees should reject the Pay -As -You -Go approach,
enact an interim rate to support operations only until such time as a debt issue can be
put before the voters, give voters a choice of debt plus current revenue, versus current
revenue only, and aggressively communicate the District's need for a major long-term
capital improvement program to ensure compliance and protect community health.
162
COMMISSIONERS ALLEN, BOWSER, HARRIS AND SCHOEDEL SUBMIT THIS
MINORITY REPORT REGARDING RESISTANCE FACTOR
The District proposes a resistance factor equal to 3.23% for 2008, reduced to
1.61% for 2009, and zero thereafter to cover anticipated delinquencies and any steps
which may be taken by ratepayers (primarily commercial and industrial) to self -treat
waste or otherwise avoid certain of the District's strength charges and reduce District
revenues. Thus, in 2008, the District has reduced the amount of wastewater rate
revenues it expects to receive by 3.23% or $808,600. Similarly, the resistance factor
would reduce the amount of rate revenues by 1.61c/0 in 2009.
A resistance factor recognizes that some metered customers can reasonably be
expected to react to the higher wastewater charges by cutting back on their level of
water use and thus wastewater service.
Wastewater charges are typically designed for the full rate increase indicated but
with the expectation that actual revenue received will be less than projected billed
revenue due to the potential customer reactions described above. The resistance factor
provides a compensating revenue adjustment for these potential reactions.
The water and wastewater industry rate manuals recognize resistance to higher
rates as an important factor to be considered in rate design. Ex. MSD 52, District
Prehearing Conference Report, p. 10. For example, the 1984 wastewater rates manual
states:
One final consideration in rate design is customer resistance.
Resistance generally occurs when there has been a significant
increase in rates and a conscious effort is made by those using the
service to conserve. Although customer resistance does not
usually last long, it should be recognized as it can result in a
decrease in the level of revenue anticipated to be received from the
163
new rates. If wastewater charges are based on metered water use,
an increase in water rates may also adversely affect the
wastewater utility's revenue.
Financing and Charges for Wastewater Systems, published by the Water Environmental
Federation, p. 58 (1984). Therefore, the issue should not be whether or not to
recognize an allowance for customer resistance but how much resistance should be
included in the design of wastewater rates. Ex. MSD 52, District Prehearing Conference
Report, p. 10.
Results of a study requested by the 2003 Rate Commission recognized the
appropriateness of a resistance factor and quantifies the declining amounts for
consideration. The District believes that the study's indicated declining resistance factor
should be included in the District Proposal.
We believe that the District has demonstrated the need for a resistance factor
and that the inclusion of a resistance factor results in rates that impose a fair and
reasonable burden on all classes of ratepayers.
164
COMMISSIONERS BROCKMAN, HARRIS AND STEIN SUBMIT THIS
MINORITY REPORT REGARDING STORMWATER FEES
IN WHICH COMMISSIONER WARD JOINS IN PART
We believe the District should increase stormwater fees under the "Enhanced
Stormwater Services" category of the Commission's proposed "Combined Stormwater
fee system" more gradually than is envisaged in the Rate Commission's Report, so that
such fees would increase more slowly between the 8% increase proposed for 2008 and
the 53% increase proposed for 2012, in order to reduce rate shock.
We, together with Commissioner Ward, further believe that the District should not
construct projects or implement services under this "Enhanced" category until the
District has publicized its set of priorities for stormwater projects, has compiled its
recommended list of projects and services, has estimated their costs (along with the
proposed additional impervious area rates they would require), has publicized them,
and has held public hearings on them.
165
COMMISSIONERS BROCKMAN, HARRIS AND WARD SUBMIT THIS
MINORITY REPORT REGARDING METHODS OF STORMWATER CONTROL
We believe that the most natural, sustainable and environmentally friendly
methods of stormwater control should be designed by the District and recommended for
funding as part of the Stormwater Program.
166
Respectfully submitted, this 13th day of August, 2007, by the Rate Commission
of the Metropolitan St. Louis Sewer District.
William Allen
Nancy Bowser
Paul Brockmann
Charles Davis
Virginia Harris
Daniel P. Murphy
William Peick
Willard Reeves
LASHLY & BAER, P.C.
John Fox Arnold
Lisa O. Stump
Kathryn B. Forster
Courtney M. Brunsfeld
714 Locust Street
St. Louis, Missouri 63101
(314) 621-2939 — Telephone
(314) 621-6844 — Fax
Attorneys for The Rate Commission
of the Metropolitan St. Louis Sewer
District
Evelio Sardina
Mike Schoedel
John L. Stein
Steven R. Sullivan
Leonard Toenjes
George D. Tomazi
Richard Ward
OF COUNSEL
RAFTELIS FINANCIAL CONSULTANTS,
INC.
William Stannard
Thomas Beckley
3013 Main Street
Kansas City, Missouri 64108
(816) 285-9020 - Telephone
(816) 285-9021 — Fax
Rate Consultant for The Rate
Commission of the Metropolitan
St. Louis Sewer District
167
PROCEEDINGS INDEX
REPORT OF THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
TO THE BOARD OF TRUSTEES OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT UPON
THE COMBINED WASTEWATER AND STORMWATER
RATE CHANGE PROPOSAL
AUGUST 8, 2007
Exhibit Index/Document Title Tab
Number
Number
MSD 1 1. MSD Wastewater and Stormwater Rate Change Proposal document 1
2. Rate Change Notice Cover Letters from Jeff Theeinian:
MSD 1 A A. Cover Letter from J. Theeunan to BoT Chair 2
MSD 1B B. Cover Letter from J. Theerman to Rate Commission Chair
(Moved to MSD D) 3
MSD 1C 3. Rate Commission Exhibit Index (Moved to MSD E) 4
MSD 2 4. PowerPoint Rate Proposal presentation to MSD BoT January 11,
2007
5
MSD 3 5. Phase II CIRP Project List (2007 - 2012) 6
NA 6. Rate Model Workpapers 7
MSD 4 7. All Rate Model Tables 8
MSD 5 8. All Rate Model Formulas (compact disk) 9
9. CDM I&I Study Documents:
MSD 6 A. Rate Commission Requested Policy Analysis - January 2005 10
MSD 6A B. Wet Weather Flow Cost Allocation Study EXECUTIVE
SUMMARY - January 2005 11
MSD 6B C. Wet Weather Flow Cost Allocation Study - January 2005 12
MSD 6C D. PowerPoint Presentation: Wet Weather Flow Allocation Study
and Other Rate Commission Policy Issues 13
MSD 7 10. 2003 Rate Commission Recommendation Report (Prior
Deliberations) 14
MSD 8 11. Bond Feasibility Study - Revenue Bond Series 2006C (Most Recent)15
MSD 9 12. Bond Covenant Summary 16
Exhibit Index/Document Title Tab
Number Number
MSD 10 13. Rating Agency Summaries (As of Nov. 2006, Moody's; S&P; Fitch's) 17
14. FY07 Budget Documents:
MSD 11 A. Operating Budget Document 18
MSD 11A B. CIRP Budget Document 19
MSD 12 15. PowerPoint Rate Proposal Presentation to Rate Commission
March 2, 2007 20
MSD 13 16. Rate Proposal Group Meetings (Jeff Theerman) (Moved to MSD F) 21
L&B 14 17. Rate Commission Procedural Schedule (Moved to L&B A) 22
L&B 15 18. Rate Commission Operational Rules, Regulations and Procedures
(Moved to L&B B) 23
L&B 16 19. Public Notice (Moved to L&B C) 24
MSD 17 20. Direct Testimony Question Matrix 25
MSD 17A A. Direct Testimony: Jeffrey Theeiinan, MSD 26
MSD 17B B. Direct Testimony: Randy Hayman, MSD 27
MSD 17C C. Direct Testimony: Jan Zimmeunan, MSD 28
MSD 17D D. Direct Testimony: Brian Hoelscher, MSD 29
MSD 17E E. Direct Testimony: David St. Pierre, MSD 30
MSD 17F F. Direct Testimony: Karl Tyminski, MSD 31
MSD 17G G. Direct Testimony: Steve Sedgwick, CDM 32
MSD 17H H. Direct Testimony: Keith Barber, Black & Veatch 33
MSD 17I I. Faunal Submission Cover Memo to Nancy Bowser, RC Secretary 34
MSD 18 21. 2005 Stormwater Utility Survey 35
MSD 19 22. Rate Commission Exhibit Index — UPDATED (Moved to
MSD G) see Tab 284
L&B 20(1) 23. Discovery Request L&B 3/27/07 37
MSD 20 MSD Response to Discovery Request L&B 3/27/07 38
MSD 20A Exhibit Index MSD Response to Discovery Request 3/27/07 39
MSD 20B MSD Finance Plan 40
MSD 20C Bond Document 2006B 41
MSD 20D Bond Document 2004B 42
Exhibit
Number
Index/Document Title
Tab
Number
MSD 20E Bond Document 2006A 43
MSD 20F Bond Document 2004A 44
MSD 20G Bond Document 2005A 45
MSD 20H Gilmore & Bell Letter 46
MSD 20I Summary of Bond Covenants 47
MSD 20J MSD User Charge Rate Affordability Study 48
MSD 20K Rate Proposal - Alternative Scenarios with Additional Bonds 49
MSD 20L 06/07 Operations Budget-Monnie Projects 50
MSD 20M MDNR Clean Water State Revolving Fund Intended Use Plan, State
Grant and Loan Priority List and Program Application Font's &
Instructions 51
MSD 20N Flow Chart for the State Revolving Fund 52
MSD 200 Master Bond Certificate 53
MSD 20P 2007 Median Ratios for Water Sewer Revenue Bonds 54
MSD 20Q Fitch MSDF Debt Assumptions 55
MSD 20R Fitch Calculations 56
MSD 20S 1377th Meeting of the Board of Trustees Agenda 57
MSD 20T 1378th Journal Certification 58
MSD 20U 1389th Meeting of the Board of Trustees Agenda 59
MSD 20V 2507th Certified Resolution 60
MSD 20W CAFR 2005 61
MSD 20X CAFR 2006 62
MSD 20Y Ordinance 12221 63
MSD 20Z Certificate Ordinance 12221 64
MSD 20A1 Certified Resolution 2643 65
MSD 20A2 Stolliwater Utilities by States and Provinces 66
MSD 20A3 Representative Stoiuiwater Utility Experience 67
MSD 20A4 Storm Water Activities Funding Survey Results 68
MSD 20A5 Florida Stormwater Utility Rates 69
MSD 20A6 Stoiinwater Utility Rates in Iowa
70
Exhibit Index/Document Title Tab
Number Number
MSD 20A7 Stoiinwater Utility Rates in Tennessee 71
MSD 20A8 Stormwater Utility Rates in Illinois 72
MSD 20A9 Comparison of Wisconsin Stoiniwater Utilities 73
MSD 20A10 Monthly NC Stoiniwater Fees for an Average Single -Family
Detached Residential Unit 74
MSD 20A11 Table 2 University of South Carolina 75
MSD 20Al2 2005 Stormwater Utility Survey 76
MSD 20A13 Table 1 Summary of Municipal Stoiuiwater Fee Structures in Canada 77
MSD 20A14 Percent II Workpapers 78
MSD 20A15 Supporting Documents - City and County Assessors' Offices 79
MSD 20A16 Ordinance 9183 80
MSD 20A17 Ordinance 9030 81
MSD 20A18 Water Priority System 82
MSD 20A19 AMSA 1999 Financial Survey 83
MSD 20A20 MOU - Local 513; MOU - Local 2000 84
MSD 20A21 GASB 45 Projection 85
MSD 20A22 NACWA 86
MSD 20A23 Meramec Project March 31, 2003 87
MSD 20A24 Meramec Project June 30, 2003 88
MSD 20A25 Meramec Project October 31, 2003 89
MSD 20A26 Meramec Project February 29, 2004 90
MSD 20A27 Meramec Project June 30, 2004 91
MSD 20A28 Meramec Project March 31, 2005 92
MSD 20A29 Meramec Project December 31, 2005 93
MSD 20A30 Internal Audit Review Construction Review FY 2006 94
MSD 20A31 Delinquent Accounts and Billing Adjustments 95
MSD 20A32 Collections Perspective Aging of Sewer Service 96
MSD 20A33 Finance Activity Update FY07 2nd Quarter Perfoiuiance 97
MSD 20A34 Low Income Program Cost Analysis 98
MSD 20A35 Low Income Program Workpapers 99
Exhibit
Number
Index/Document Title
Tab
Number
MSD 20A36 EPA 122.26 100
MSD 20A37 EPA 122.32 101
MSD 20A38 EPA 122.33 102
MSD 20A39 EPA 122.34 103
MSD 20A40 EPA 122.41 104
MSD 20A41 EPA 122.41 105
MSD 20A42 CSR DNR 106
MSD 20A43 Missouri State Operating Peiulit MO -R100010 107
MSD 20A44 Missouri State Operating Peiu,it MO -R040005 108
MSD 20A45 St. Louis County Phase II Storm Water Management Plan 109
MSD 20A46 Federal CSO Policy 110
MSD 20A47 Revised Long -Term CSO Control Plan 111
MSD 20A48 Ordinance 11713 112
MSD 20A49 Lower Meramec Settlement Agreement with MDNR 113
MSD 20A50 Settlement Agreement dated July 29, 2002 114
MSD 20A51 Modification to July 29, 2002 Settlement Agreement 115
MSD 20A52 Significant Events NPDES Compliance 116
MSD 20A53 Major Challenges Regulatory Quality Control Compliance 117
MSD 20A54 Latest Draft of Proposed CMOM Rules 118
MSD 20A55 Guide of Evaluating Capacity, Management, Operation and
Maintenance Program (CMOM) 119
MSD 20A56 Stormwater Project Database 120
MSD 20A57 1993 Rate Report 121
MSD 20A58 New York City Water Board Water and Wastewater Rate Schedule 122
MSD 20A59 Ordinance 7543 123
MSD 20A60 Business Case (Operating Budget) 124
MSD 20A61 Stoiniwater User Charge Study August 2003 125
MSD 20A62 Stolinwater Advisory Committee Reports 126
MSD 20A63 Report from the Stoiniwater Advisory Committee 127
MSD 20A64 Certificate Stormwater Committee Minutes 128
Exhibit Index/Document Title Tab
Number Number
MSD 21 24. Amendment to Direct Testimony of Randy Hayman 129
MSD 21A Notice of Intent to Bring Civil Suit under 33 U.S.C. 1363 for
Violations of the Clean Water Act 130
MSD 21B Amendment to Direct Testimony of Jeff Theeiuian 131
MSD 21C Amended Direct Testimony Question Matrix 132
MSD 22 25. Affidavit - St. Louis Business Journal 133
MSD 22A The St. Louis American 3/15/07 134
MSD 22B St. Louis Post -Dispatch 135
MSD 22C Arch City Chronicle 136
MSD 22D St. Louis Chinese American News 137
MSD 22E Call Publishing Inc. 138
MSD 22F St. Louis American 3/29/07 139
MON 23(1) 26. Discovery Request Monarch -Chesterfield 4/11/07 140
MSD 23 MSD Response to Discovery Request Monarch -Chesterfield
4/11/07 141
MSD 23A Exhibit Index MSD Response to Discovery Request 4/11/07 142
MSD 23B Facility Map of Monarch -Chesterfield Levee District 143
MSD 23C Facility Map of Howard Bend Levee District 144
MSD 23D Facility Map of Earth City Levee; Facility Map of Riverport
Levee District 145
MSD 23E Work Order Listing 146
MSD 23F Ordinance 9030 (Certified) 147
MSD 23G MSD Dept. Direct Operating Cost Allocation Workpapers 148
MSD 23H Fin/IS Projected SW Operating Costs 149
Levee District 23I Adjustments and Credit Policy Modifications 150
MSD 23J 2003 & 2006 Credit Policy Support Allocations 151
MSD 23K SW Advisory Committee Report 152
MSD 23L SW Advisory Committee Composition 153
MSD 23M Amendment to MSD Response 4/23/07 to Discovery Request
Monarch 4/11/07 154
Exhibit
Number
MSD 24
AGC/SITE 25(1)
MSD 25
MEG 26(1)
MSD 26
MSD 26A
MSD 26B
MSD 26C
MSD 26D
AGC/SITE 27(1)
MSD 27
MSD 27A
MSD 27B -27B13
MSD 27C
MSD 27D
MSD 27E -27E11
MIEC 28(1)
MSD 28
MSD 28A
MSD 28B
MSD 28C -28C2
MSD 28D -28D4
MSD 28E
MSD 28F
MEG 29 (1)
MSD 29
Index/Document Title
Tab
Number
27. WEF Financing and Charges for Wastewater Systems 155
28. Discovery Request AGC/SITE 4/17/07 156
MSD Response to Discovery Request AGC/SITE 4/17/07 157
29. Discovery Request MEG 4/16/07 158
MSD Response to Discovery Request MEG 4/16/07 159
Exhibit Index MSD Response to Discovery Request 4/16/07 160
MSD 40 Year Preliminary User Charge Rate Projection 161
Debt Alternatives 162
Plant Flows 163
30. Second Discovery Request AGC/SITE 4/23/07 164
MSD Response to 2nd Discovery Request AGC/SITE 4/23/07 165
Exhibit Index MSD Response to 2nd Discovery Request
AGC/SITE 4/23/07
CDM Comparable Utilities Stormwater Credit Provision Historical
Data Reports [ 168A through N] 167/168
Amendment to MSD Response 5/1/07 to Discovery Request
AGC/SITE 4/23/07 169
Exhibit Index to MSD Amended Response to Discovery Request
4/23/07 170
Stoiiuwater Credit and Procedure Manuals [171A through M] 171
31. Discovery Request MIEC 4/23/07 172
MSD Response to Discovery Request MIEC 4/23/07 173
Exhibit Index MSD Response to Discovery Request MIEC 4/23/07 174
Rate Model Table K-3 175
FY03, FY04, & FY05 MSD Annual Reports [176A, B, C] 176
Debt Rating Support Documents 177
Fitch Median Ratios for Water and Sewer Revenue Bonds 178
Rate Commission 5 Year Plan 179
32. Second Discovery Request MEG 4/25/07 180
MSD Response to 2nd Discovery Request MEG 4/25/07 181
166
Exhibit
Number
MSD 29A
MSD 29B & 29B1
MSD 29C
MSD 29D
MSD 29E
MSD 29F
MSD 29G
L&B 30 (1)
MSD 30A
MSD 30B
MSD 30C
MSD 30D -30D13
MSD 30E
MSD 30F
MSD 30G -30G5
MSD 30H & 30H1
MSD 30I
MSD 30J
MSD 30K
MSD 30L
MSD 30M -30M5
MON 31(1)
MSD 31
MIEC 320)
Index/Document Title
Tab
Number
Exhibit Index MSD Response to 2nd Discovery Request
MEG 4/25/07 182
Exhibit # MSD 20J in Microsoft Excel electronic format 183
Table 3.7 [SEE Tab 218] 184
Dropped Projects 185
MSD BoT Finance Committee Minutes / PFM Draft Finance Plan 186
Financial Ratios 187
CIRP Project Average Depreciation Life 188
33. Second Discovery Request L&B 4/25/07MSD 30 189
MSD Response to 2nd Discovery Request L&B RC 4/25/07 190
Exhibit Index MSD Response to 2nd Discovery Request L&B
Rate Commission 4/25/07 191
CDM Resistance Factor Workpapers 192
MSD 2008 - 2012 Strategic Operating Plan 193
CDM Comparable Utilities Bad Debt Provision Historical Data
Reports [ 194A through 0] 194
Ordinance 9031 195
Ordinance 12356 196
Updated Treatment Plant Facility Plans 197
EPA Section 308 Letters 198
SKME Report (compact disk) 199
Ordinance 8656 200
Ordinance 9249 201
Ordinance 10007 202
MSD Wastewater Revenue Bonds, Series 2006C Closing Certificate
and Opinion of Counsel to the Board 203
34. Second Discovery Request Monarch 4/27/07 204
MSD Response to 2nd Discovery Request Monarch 4/27/07; and
MSD 31A — Amendment to Discovery Request Monarch 4/11/07 205
35. Second Discovery Request MIEC 4/30/07 206
Exhibit
Number
Index/Document Title
Tab
Number
MSD 32 MSD Response to 2nd Discovery Request MIEC 4/30/07 207
COHEN 33 36. Rebuttal - Testimony of Intervenor Michael Cohen 208
MON 34 37. Rebuttal - Monarch: Testimony of Robert G. I3utchko 209
MON 34A Testimony of Ryan Hodges 210
MEG 35 38. Rebuttal - MEG: Testimony of Drazen Consulting Group 211
MIEC 36 39. Rebuttal - MIEC - Testimony of Michael Goinian 212
L&B 37 40. Rebuttal - L&B - Testimony of William Stannard 213
L&B 37A William Stannard Bio 214
L&B 37B Resistance Factor Analysis 215
L&B 37C City of Portland Oregon Bond Series 2007 Series A 216
L&B 37D City Sewer Bond Ratings Upgraded 217
L&B 37E Table 3-7 218
MEG 38(1) 41. Third Discovery Request MEG 5/10/07 219
MSD 38 MSD Response to 3rd Discovery Request MEG 5/10/07 220
MSD 38A Exhibit Index MSD Response to 3rd Discovery Request
MEG 5/10/07 221
MSD 38B Rate Model Table G-15 222
AGC/SITE 39(1) 42. Third Discovery Request AGC/SITE 5/11/07 223
MSD 39 MSD Response to 3rd Discovery Request AGC/SITE 5/11/07 224
MSD 39A Exhibit Index MSD Response to 3rd Discovery Request
AGC/SITE 5/11/07 225
MSD 39B Charter (Plan) of the Metropolitan St. Louis Sewer District 226
MEG 40(1) 43. Fourth Discovery Request MEG 5/18/07 227
MSD 40 MSD Response to 4th Discovery Request MEG 5/18/07 228
MSD 40A Exhibit Index MSD Response to 4th Discovery Request
MEG 5/18/07 229
MSD 40B Estimated Stoiuiwater Charges 230
MSD 40D Amended Response to 4th Discovery Request MEG 5/18/07 231
MSD 40C Proposed Wastewater (WW) Rates Projection 232
L&B 41(1) 44. Third Discovery Request L&B 5/14/07 233
Exhibit
Number
MSD 41
MSD 41A
MSD 41B
MSD 42
MSD 42A
MSD 42B
MSD 42C
MSD 42D
MSD 42E
MSD 42F
MSD 42G
MSD 42H
MSD 42I
MSD 42J
MSD 42K
MSD 42L
MSD 42M
MSD 42N
MIhC 43
AGC/SITE 44(1)
MON 44
MON 44A
MON 44B
MON 44C
MSD 45
MSD 46
MSD 47
Index/Document Title
MSD Response to 3rd Discovery Request L&B 5/14/07
Exhibit Index MSD Response to 3rd Discovery Request Rate
Commission L&B 5/14/07
Comparative CIR.P Level
45. Surrebuttal Testimony Question Matrix
Foiuial Submittal Document of Surrebuttal Testimony
A. Testimony: Jeffrey Theeiivan, MSD
B. Testimony: Jan Zimmeunan, MSD
C. Testimony: Brian Hoelscher, MSD
D. Testimony: Karl Tyminski, MSD
E. Testimony: Steve Sedgwick, CDM
F. Testimony: Keith Barber, B&V
Financing Alternatives
B&V Drazen Surrebuttal Cost Analysis
Fitch Ratings 2005 Special Report
Standard & Poors 2004 Research Report
1984 Wastewater Rate Design Manual
M1 Water Rates Manual
2007 Median Bond Ratios
46. Surrebuttal - Michael Goiuian
47. Discovery Request AGC/SITE to Monarch -Chesterfield Levee
District 5/11/07
Response to AGC Discovery Request to Monarch -Chesterfield
Levee District
Earth City Levee District
Riverport Levee District
Howard Bend Levee District
48. Letter from John B. Askew EPA
49. Letter from Kurt U. Schaefer DNR
50. MSD Prehearing Conference Report Summary
Tab
Number
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
Exhibit Index/Document Title Tab
Number
Number
PEPPERDINE 48 51. Public Hearing 6/7/07 Fishpot Creek Photos —
Pepperdine Ct. together with
PEPPERDINE 49 52. Public Hearing 6/9/07 Pepperdine Ct. Videos (compact disk) 261/262
MEG 50 53. MEG Prehearing Conference Report Summary 263
L&B 51 54. L&B Prehearing Conference Report Summary 264
MSD 52 55. MSD Prehearing Conference Report 265
MSD 52A USA & The State of Missouri v. MSD 266
MSD 52B Fitch Ratings March 22, 2007 Report 267
MSD 52C S&P June 1, 2007 Report 268
L&B 53 56. L&B Prehearing Conference Report 269
MIEC 54 57. MIEC Prehearing Conference Report 270
COHEN 55 58. COHEN Prehearing Conference Report 271
MON 56 59. Monarch -Chesterfield Levee District Prehearing Conference Report 272
AGC/SITE 57 60. AGC/SITE Prehearing Conference Report 273
MEG 58 61. MEG Prehearing Conference Report 274
EPA 59 62. EPA Testimony before RC @ 6/14/07 Public Hearing 275
GRAND GLEN 60 63. Public Hearing 6/14/07 Grand Glen Document & Photos
(compact disk) 276
MSD 61 64. Final Exhibit Index Submittal June 26, 2007 277
MSD 62 65. MSD Final Closing Arguments 278
AGC/SITE 63 66. AGC/SITE Closing Argument 279
MON 64 67. Proposed Intergovernmental Cooperation Agreement between
MSD and Levee Districts 280
MSD 65 68. MSD Response to AGC/SITE Closing Arguments 281
MIEC 66 69. MEG Response to AGC/SITE Closing Arguments 282
MEG 67 70. MEG Response to AGC/SITE Closing Arguments 283
MSD 68 71. Adjusted FINAL Exhibit Index 284
Exhibit Index/Document Title Tab
Number Number
ADMINISTRATIVE DOCUMENT INDEX
Exhibit
Number Submittal Materials:
1 Rate Change Notice Cover Letters from Jeff Theeunan:
MSD 1B B. Cover Letter from J. Theeinian to Rate Commission Chair.... 285
MSD 1C 2. Rate Commission Exhibit Index See Tab 284
MSD 13 3. Rate Proposal Group Meetings (Jeff Theerman) 287
L&B 14 4. Rate Commission Procedural Schedule 22
L&B 15 5. Rate Commission Operational Rules, Regulations and Procedures 23
L&B 16 6. Public Notice See Tab 24
MSD 19 7. Rate Commission Exhibit Index — UPDATED See Tab 284
MSD H 8. 2007 Rate Deliberation Interveners 289
L&B I 9. Resolution of the Rate Commission (Executed) 290
MSD J 10. Transcript of Technical Conference April 19, 2007 291
MSD K 11. Transcript for Technical Conference April 20, 2007 292
MSD L 12. Transcript for Technical Conference May 9, 2007 293
MSD M 13. Transcript for Technical Conference May 10, 2007 294
MSD N 14. Transcript for Technical Conference May 30, 2007 295
MSD 0 15. Transcript Public Hearing June 7, 2007 296
MSD P 16. Transcript Public Hearing June 9, 2007 297
MSD Q 17. Transcript Pre -Hearing Conference June 11, 2007 298
MSD R 18. Transcript Public Hearing June 12, 2007 299
MSD S 19. Transcript Public Hearing June 13, 2007 300
MSD T 20. Transcript Public Hearing June 14, 2007 301
L&B U 21. Issues/Determinations/Checklist 302
MSD 69 MSD's 7-23-07 Rate Commission Deliberation Letter 303
MSD 70 Fiscal Impact of Single Impervious Stoiniwater Rate 304
MSD Fiscal Note Exhibit 1 and Exhibit 2 305
MEG 71 MEG Analysis 306