HomeMy Public PortalAboutExhibit MSD 9F - Direct Testimony BarberLA &V A
Building a of difference.®
Table of Contents
MSD Exhibit No.9F
2011 Rate Change Proceeding
Keith D. Barber, P.E.
Direct Testimony
Black & Veatch
May 13, 2011
Page
Witness Background and Experience 1
Criteria Governing Rate Change 2
Major Rate Change Issues 4
Wastewater Revenue 7
Wastewater Revenue Requirements 13
Summary of Wastewater Revenue and Revenue Requirements 20
Wastewater Cost of Service and Cost of Service Allocations 23
Wastewater Rate Adjustments 36
Wastewater Revenue Recovery 41
Rate Model 42
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Witness Background and Experience
2 Q l . Please state your name, business address, and telephone number.
3 A. Keith D. Barber, 11401 Lamar Avenue, Overland Park, Kansas 66211-1508,
4 (913) 458-3675.
5 Q2. What is your occupation?
6 A. I am a Principal Consultant employed by Black & Veatch Management Consulting.
7 Q3. How long have you been associated with the firm of Black & Veatch?
8 A. I have been with Black & Veatch continuously since 1975.
9 Q4. What is your educational background?
10 A. I am a graduate of the University of Missouri - Rolla (now known as Missouri University
11 of Science & Technology) with an undergraduate degree in Civil Engineering. I received
12 my Master of Science degree in Civil Engineering from the University of Kansas.
13 Q5. Are you registered as a Professional Engineer?
14 A. Yes, I am a registered Professional Engineer in the state of Missouri.
15 Q6. What is your professional experience?
16 A. My initial assignments with Black & Veatch were on projects involving the design of
17 water and wastewater systems. Subsequently, I became associated with the Management
18 Consulting Division of Black & Veatch, where I have served clients in utility rate matters
19 for approximately 34 years. During this time, I have been involved in numerous costs of
20 service, rate design, bond feasibility, and financial consulting studies. Representative
21 projects to which I have been assigned as project engineer or project manager include
22 water and wastewater utility related projects in St. Louis and Kansas City, Missouri; Los
23 Angeles, and Coachella Valley Water District, California; Tulsa, Oklahoma; Topeka,
2011 Rate Change Proceeding 1 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Lawrence, Emporia, and Johnson County, Kansas; Cincinnati and Columbus, Ohio; Little
2 Rock, Arkansas; and Baton Rouge, Louisiana. I am the author of the rate model used to
3 formulate the Rate Proposal submitted to the Rate Commission for this proceeding.
4 Q7. What is your professional experience related to the Metropolitan St. Louis Sewer
5 District?
6 A. I have been assisting the District with the development of wastewater rates and other
7 financial related services on a continuing basis since 1979. I developed the District's first
8 computer based wastewater rate model during rate studies performed in 1981 and have
9 been involved in each subsequent update. I served as Project Manager on the current rate
10 study and drafted the May 2011 wastewater Rate Proposal (MSD Exhibit No. 1).
11 Criteria Governing Rate Change
12 Q8. Please explain why the Proposed Rate Change set forth in the Rate Change Notice is
13 necessary, fair and reasonable.
14 A. The Proposed Rate Change is necessary because the District must construct major capital
15 improvements to comply with federal and state regulations and currently does not have
16 adequate funds. It is fair and reasonable because it was developed in accordance with
17 industry standard cost allocation and rate design procedures outlined in the "Financing
18 and Charges for Wastewater Systems" manual prepared by the Water Environment
19 Federation (WEF). In addition, the methodology used to develop the Proposed Rate
20 Change is the same general methodology recognized in the prior rate proceedings and the
21 1993 Black & Veatch report titled "Final Report on Alternative Rate Structures for the
22 Metropolitan St. Louis Sewer District" that, when challenged, was ultimately upheld by
23 the Missouri Supreme Court.
2011 Rate Change Proceeding 2 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Q9. How will the Proposed Rate Change enhance the District's ability to provide adequate
2 sewer and drainage systems and facilities or related services?
3 A. The District needs extensive improvements to its wastewater infrastructure to reduce
4 sanitary and combined sewer overflows and provide proper treatment of all wastewater at
5 or below the permitted National Pollutant Discharge Elimination System (NPDES) limits.
6 The Proposed Rate Change will increase the District's wastewater revenues to provide
7 funds for essential repairs, replacements and improvements to the existing wastewater
8 system.
9 Q10. Is the Proposed Rate Change necessary to enable the District to comply with any
10 covenant or provision relating to any outstanding bonds or indebtedness of the District
11 and if so, to what extent or specific quantification of the amount of the Proposed Rate
12 Change is necessary for such purpose?
13 A. Yes, although the District could meet its required minimum debt service coverage
14 requirements on outstanding bonds and loans without additional revenue increases
15 through fiscal year 2015, additional revenue bonds are required to finance proposed
16 capital improvements which will significantly increase debt service. Projected net
17 revenue under the Board approved 2012 rates will not be able to provide minimum debt
18 service coverage levels on this increased debt after 2013. The Master Bond Ordinance
19 also requires the District to "maintain the System in good repair and sound operating
20 condition" at all times. The Proposed Rate Change is required to properly maintain the
21 system and provide adequate debt service coverage.
22 Q11. Is the Proposed Rate Change necessary to enable the District to comply with applicable
23 Federal or State laws or regulations as amended from time to time?
2011 Rate Change Proceeding 3 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 A. Yes, almost all of the proposed capital improvement projects are required to be
2 constructed due to Federal and State environmental regulations. The most notable
3 required improvements, as indicated by Table 3-8 of the Rate Proposal (MSD Exhibit No.
4 1), are those designed to eliminate sanitary sewer overflows. These scheduled
5 improvements account for almost 50 percent (Table 3-8, Line 3/Line 12) of all proposed
6 improvements during the six -year study period.
7 Q12. Is the burden imposed on each class of ratepayers by the Proposed Rate Change fair and
8 reasonable?
9 A. Yes, the proposed wastewater rates are deteiuiined based on cost of service principles. A
10 discussion of the cost of service allocation and rate design process begins on Page 3-20 of
11 the Rate Proposal (MSD Exhibit No. 1). In addition, the Rate Proposal presents an
12 expanded recovery mechanism for environmental compliance costs that more equitably
13 recovers these costs from non-residential customers.
14 Major Rate Change Issues
15 Q13. What major rate change issues are proposed to be considered in these proceedings?
16 A. The most significant wastewater issue in relation to the magnitude of the Proposed Rate
17 Change is the level of capital improvements required to meet anticipated scheduling
18 requirements of regulatory agencies. These improvements will require significant
19 increases in debt service payments and the need to obtain voter approval for nearly $1
20 billion of additional revenue bonds. The District is also proposing a change in the non -
21 residential environmental compliance charge from a uniform service charge applicable to
22 all non-residential customers to a five -tier system of service charges in order to more
23 equitably recovery these costs. This proposed change also reallocates some the District's
2011 Rate Change Proceeding 4 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Environmental Compliance Division costs, previously recovered only from non -
2 residential customers, to all customers to recognize environmental compliance activities
3 that benefit all customer classes.
4 Q14. Why is the District proposing to use debt to finance most of the capital improvements
5 needed to satisfy existing and anticipated regulatory requirements?
6 A. Affordability concerns voiced by stakeholder groups led to the pay-as-you-go
7 ("PAYGO") rates approved by the 2007 Rate Commission being lowered to reflect
8 partial debt financing of proposed capital improvements during the 2008 Rate
9 Commission proceedings. The lower rates, which includes those approved for 2012, and
10 a significant decrease in billable wastewater volume from 2006 to 2010 put the District in
11 a much less favorable financial condition to cash finance a larger portion of future
12 improvements. In addition, the proposed schedule of improvements required to address
13 sanitary and combined sewer overflow problems can only be met with debt while holding
14 future rate increases to residential customers at approximately 13 percent per year during
15 the study period.
16 Q15. What happens if the District is unable to obtain additional revenue bond authority from
17 the qualified voters in the District?
18 A. An alternative PAYGO revenue increase for 2013 has been developed for the Rate
19 Commission's consideration should the District not be able to obtain additional bond
20 authority prior to July 1, 2012, the start of the District's 2013 fiscal year. This alternative
21 scenario is discussed beginning on page 3-39 of the Rate Proposal (MSD Exhibit No. 1).
22 This alternative implements a 100 percent PAYGO funding structure which results in a
23 155 percent increase for an average monthly residential bill. This will increase the
2011 Rate Change Proceeding 5 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 $28.73 average residential bill under rates approved by the Board for fiscal year 2012 to
2 $73.35 as of July 1, 2012, the beginning of fiscal year 2013. This monthly bill is then
3 proposed to remain at approximately this level throughout the study period.
4 Q16. Why is the District proposing an expansion of its existing environmental compliance
5 charge from a uniform rate to a five tiered rate structure?
6 A. To more equitably recover costs incurred by the Environmental Compliance Division of
7 the Engineering Department. Some of these costs, such as stream monitoring and
8 regulatory affairs, benefit all District customers whereas other costs support specific
9 programs for various customer groups such as those for hauled waste customers and
10 excess strength sewered customers.
11 Q17. What is the basis for this proposed expansion to a 5 tier rate structure?
12 A. The five tier rate structure will more closely match costs to services provided to each of
13 five non-residential sub groups. The costs recognize non-residential customers not
14 subject to inspection with no sample points (Tier 1); and those subject to inspection with
15 no sample points (Tier 2), one sample point (Tier 3); two sample points (Tier 4) and three
16 or more sample points (Tier 5).
17 Q18. Is this expansion a fair and equitable method in which to recovery the District's
18 environmental compliance monitoring costs?
19 A. Yes, the new rate structure more equitably matches cost to actual services provided than
20 the existing unifoini compliance charge. In addition, other Environmental Compliance
21 Division costs are now allocated to functional cost components most related to the
22 services provided such that a portion of the Division's costs will be recovered from all
23 customers through the wastewater rate structure instead of only through the
2011 Rate Change Proceeding 6 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 environmental compliance charge.
2 Q19. What impact does the reallocation of a portion of the environmental compliance costs to
3 all customers have on a typical residential customer?
4 A. This reallocation would have a significant impact on residential bills if immediately
5 enacted. On July 1, 2011, the monthly uniform compliance charge for all non-residential
6 customers will increase to $31.95. The proposed use of a 5 tier rate structure will
7 decrease this charge for 94 percent of all non-residential customers that are reflected in
8 Tier 1 to $2.35 per month by fiscal year 2016. Environmental compliance charges for the
9 other four tiers are proposed to increase over the study period as shown in Table 3-21 of
10 the Rate Proposal (MSD Exhibit No. 1).
11 Q20. What other considerations have been factored into the Proposed Rate Change?
12 A. Revenue projections continue to allow for a one -month lag in the receipt of increased
13 revenue. Recognition of a customer resistance factor for future revenue increases, which
14 has been addressed in all prior Rate Commission proceedings, is not considered in the
15 development of proposed rates but is factored in to the alternative PAYGO rates should
16 the District not obtain approval for additional debt authorization. However, modest
17 adjustments are made to projected annual billed volume per customer account to reflect a
18 decreasing trend historically experienced by the District. In addition, balances available
19 for the CIRP have been increased to provide greater liquidity and maintain the District's
20 bond rating. These funds could be available to make up potential revenue shortfalls
21 caused by temporary customer resistance to the higher wastewater rates.
22 Wastewater Revenue
23 Q21. How is wastewater service charge revenue projected?
2011 Rate Change Proceeding 7 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 A. Wastewater service charge revenue is projected by applying the existing rate schedule to
2 the projected number of bills, projected wastewater volume, and projected extra -strength
3 surcharge loadings of each customer class.
4 Q22. How is the number of bills by customer class projected?
5 A. An analysis of the historic growth of bills for each customer class during the most recent
6 five-year period is used to estimate the average annual increase or decrease in bills that
7 can reasonably be expected over the next six years. This annual amount is incrementally
8 added to the most recent year's data to derive the projected number of bills for each
9 customer class. Table 3-1 of the Rate Proposal shows the historical and projected
10 number of wastewater customer accounts. Since all customer accounts are billed on a
11 monthly basis, the number of bills is equal to 12 times the number of accounts shown in
12 Table 3-1.
13 Q23. Is there more than one component of the monthly service charge applied to the projected
14 number of customers?
15 A. Yes, under the existing wastewater rate structure (Table 3-4 of the Rate Proposal), each
16 customer pays a billing and collection charge that recovers the average cost of billing and
17 collecting sewer charge revenues and a system availability charge that recovers a portion
18 of the costs attributable to treating infiltration/inflow. Non-residential customers also pay
19 a uniform compliance charge that recovers costs of the District's environmental
20 compliance program.
21 Q24. What portion of wastewater revenues is attributable to customer related service charges?
22 A. Approximately 32 percent of the District's total wastewater service charge revenue is
23 derived from the three customer related monthly service charges.
2011 Rate Change Proceeding 8 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Q25. What portion of wastewater revenues is attributable to volume charges?
2 A. Approximately 65 percent of the District's total wastewater service charge revenue is
3 derived from the metered and unmetered system of volume charges.
4 Q26. Is the remaining 3 percent of the District's total wastewater service charge revenue
5 attributable to extra -strength surcharge customers?
6 A. Yes
7 Q27. How was wastewater volume for metered customers projected?
8 A. An analysis of historic billed wastewater volume per bill was conducted to determine an
9 average volume per bill for each customer class. These average unit volumes were then
10 applied to the projected number of bills for each respective customer class to determine
11 projected billable wastewater volume by customer class. Projected residential unit
12 volumes are projected to slightly decrease over time but not as much as actually
13 experienced over the past five years. The historic decline in unit volumes may have been
14 due to installation of more efficient indoor water fixtures and water using appliances and
15 the loss of several large non-residential customers such as Ford and Chrysler for example.
16 Q28. How was wastewater volume for unmetered customers projected?
17 A. An analysis of the number of fixtures per bill by customer class over the past five years
18 was conducted to determine the average number of fixtures per bill for each customer
19 class. These unit fixtures were then applied to the projected number of bills for
20 unmetered customers to determine the projected number of fixtures. Established unit
21 volumes for each fixture were then applied to the respective fixtures to project billable
22 wastewater volume.
23 Q29. What were the unit volumes for each fixture and how were they determined?
2011 Rate Change Proceeding 9 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 A. Billable wastewater volume for unmetered residential customers is based on established
2 unit volumes of 16 gallons per day (gpd) for each room, 60 gpd for each water closet, and
3 50 gpd for each bath or separate shower. These unit volumes are based on the same
4 indoor water usage attributes previously used to develop water rates for unmetered water
5 customers in the City of St. Louis.
6 Q30. What have other utilities used as the basis for billing unmetered accounts?
7 A. The Black and Veatch 1993 rate study reviewed several other rate structures for
8 unmetered accounts. Most utilities serving unmetered properties charged some form of a
9 flat rate. The City of Denver applied a uniform volume charge to fixtures similar to what
10 was adopted by the District in 1993. Denver assigned volumes of 22 gpd for each room
11 up to 4 rooms with 4.8 gpd for each room over 4 rooms, 57.5 gpd for the first water closet
12 with 40 gpd assigned to each additional water closet, 45 gpd for the first bath with 30 gpd
13 for each additional bath, and 15 gpd for each water using device. The City of New York
14 currently applies a wastewater multiplier to water bills for unmetered customers. New
15 York's unmetered water rates are currently based on frontage, number of dwelling units
16 and number of fixtures. Therefore, wastewater bills for unmetered customers are also
17 based on a system of charges by fixture in addition to a base frontage fee. Using New
18 York's water rates to be effective July 1, 2011, the volume of wastewater associated with
19 fixtures can be estimated by dividing the unmetered annual charges for fixtures in excess
20 of those allowed in the base frontage fee (1 bath/shower, 1 water closet, and 1 dwelling
21 unit) by the metered volume charge of $2.95/Ccf. This calculation yields 64.4 gpd/bath
22 or separate shower and 43.0 gpd per additional water closet. This estimate assumes the
23 volume for the additional fixtures are the same or less than the volume allowances made
2011 Rate Change Proceeding 10 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 in the base frontage fee.
2 Q31. How was billable wastewater volume established?
3 A. For unmetered residential customers, the indoor fixture units and unit volumes were used
4 to determine billable wastewater volume as described above. For metered single family
5 and most multifamily residential customers, metered water use during the "Best Equated
6 Period" or winter period is used to estimate billable wastewater volume, since this period
7 is typically representative of indoor water use that is ultimately discharged to the sewer
8 system. Billable wastewater volumes for non-residential customers and some
9 multifamily residential customers are based on their total metered water use. Non -
10 residential customers that can prove a portion of their water use does not enter the sewer
11 system can request an appropriate reduction factor be applied to their actual metered
12 water use for purposes of establishing their billable wastewater volume.
13 Q32. What increase or decrease in total contributed wastewater was projected for the next six
14 years?
15 A. As shown in Table 3-2 of the Rate Proposal, billable wastewater volume from all
16 customer classes is projected to decrease due to decreasing customer accounts and
17 declining unit volumes Overall, total billable wastewater volume is projected to decrease
18 approximately 1.9 percent during the six -year study period from 2011 to 2016.
19 Q33. What, if any, increase in wastewater service charge revenue can be expected over the six
20 year study period?
21 A. Table 3-5 of the Rate Proposal presents a summary of historical and projected billed
22 wastewater service revenue under existing rates. As indicated, a modest decrease in
23 billed wastewater service revenue is expected during the study period based on
2011 Rate Change Proceeding 11 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 projections of accounts (Table 3-1), contributed wastewater volume (Table 3-2), and
2 extra -strength surcharge loadings as applied to the existing schedule of rates (Table 3-4).
3 The decrease in revenues is due to a combination of factors; among them is a projected
4 decrease in excess strength wastewater due to more extensive pretreatment programs, and
5 projected decreases in customer accounts and billed wastewater volume that is consistent
6 with historical trends.
7 Q34. What other revenues are available to meet part of the District's wastewater revenue
8 requirements?
9 A. Table 2-3 of the Rate Proposal shows a summary of historical other operating revenues.
10 These revenues are combined into four basic categories of wastewater billing
11 adjustments, provisions for bad debt, other fees, and miscellaneous revenue.
12 Q35. Are any of these revenue sources also available to the stormwater program?
13 A. Yes
14 Q36 How were these revenues allocated between the wastewater and stormwater programs?
15 A. Revenues were allocated to the respective wastewater and stormwater operations based
16 on staff input and the District's method to segment its financial statements as accepted by
17 its external auditors. The allocation percentage for each other source of revenue between
18 wastewater and stomiwater operations is presented in Table 2-4 of the Rate Proposal.
19 Q37. Does the City of Arnold, Missouri make annual principal and interest payments to the
20 District to secure a portion of the new Meramec Regional Wastewater Treatment plant
21 financed by the District?
22 A. Yes. The District is financing the City of Arnold for a share of capacity in the Lower
23 Meramec Regional Wastewater Treatment Plant. The original loan amount was $30
2011 Rate Change Proceeding 12 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 million and the City of Arnold will pay this amount back over a 30 year period at an
2 average annual interest rate of 4.35 percent.
3 Q38. Is the principal repayment portion of this debt considered a contribution in the Rate
4 Proposal?
5 A. Yes, it is included in Line 6 of Table 3-9 of the Rate Proposal.
6 Q39. Where is the interest portion of these payments shown in the rate study report?
7 A. The interest portion of their payment is shown on Line 13 of Table 3-11 of the Rate
8 Proposal.
9 Wastewater Revenue Requirements
10 Q40. What are wastewater revenue requirements?
11 A. Wastewater revenue requirements include (1) total wastewater related operation and
12 maintenance expenses; (2) expenditures for routine and major capital improvements met
13 directly from wastewater revenues; (3) total wastewater system debt service (consisting
14 of principal and interest payments); and (4) provision for an adequate operating reserve.
15 Q41. If stormwater operation and maintenance costs are not separately identified in the
16 District's budget how is the relative level of stoiiiiwater and wastewater costs
17 deteimmmined?
18 A. Supervisors within each Department reported estimates of how their staff generally
19 spends their time on an average basis. Other costs (general ledger accounts 200 — 400)
20 for all Departments except the District's Operations Department are generally assumed
21 proportional to personnel time and allocated on the same basis as labor costs. Power and
22 chemical costs are allocated separately for the Operations Department with all remaining
23 costs generally allocated in proportion to labor costs. In addition, segmented financial
2011 Rate Change Proceeding 13 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 statements for the twelve month period ending February 2011 were used to verify the
2 overall reasonableness of the budget allocations. Direct operating cost percentages for
3 wastewater and stormwater operations are presented in Table 2-2 of the Rate Proposal.
4 Indirect costs were assigned to the two respective utilities based on allocation of total
5 direct costs for personnel services, and all other operating costs exclusive of chemicals
6 and utilities.
7 Q42. How much of the District's operation and maintenance costs are attributable to the
8 wastewater program?
9 A. The allocation of costs for 2013 indicates that approximately 89 percent of the total
10 operation and maintenance costs are related to wastewater activities and the remaining 11
11 percent of costs are related to stormwater program activities.
12 Q43. Is this method of estimating wastewater related operation and maintenance costs different
13 than the prior rate study? If so, how?
14 A. No, total 2011 budget costs were first allocated between wastewater and stormwater
15 activities and then projected for the study period. However, the current stormwater
16 projections do not include allowances for enhanced services as they did in the 2007
17 study. The projected stormwater costs are also now limited by the amount of funds
18 projected to be available for stormwater activities.
19 Q44. What inflation rates were used to project operation and maintenance expense?
20 A. Cost increases due to inflation for both wastewater and stormwater projections are based
21 on the following annual percentage increases:
22 • Wages, Salaries and Overtime — 2011-2016 3.0%;
23 • Personnel Services and Benefits (a) - 2011 3.5%; 2012-2016 3.0%
2011 Rate Change Proceeding 14 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Group Insurance — 2011-2015 10%; 2016 6.0%
2 Supplies, including Chemicals — 2011 3.5%; 2012-2016 3%
3 Electric and Gas - 2011-2012 3.5%; 2013 3%; 2014-2016 5.5%
4 m Contractual Services- 2011-2012 3.5%; 2013 3%; 2014-2016 4.5%
5 Bond and Liability Insurance — 2011-2016 5%
6 Capital Outlay — 2011-2012 3.5%; 2013-2016 3.0%
7 Pension - 2011 8.4%; 2012 9.3%; 2013 10.2%; 2014 11.4%; 2015-2016: 5.0%
8 (a) Except group insurance and pension.
9 Allowances were also made in the projection of power and chemical costs to reflect
10 projected changes in billable wastewater volume. Projected wastewater operation and
11 maintenance costs are shown in Table 3-7 of the Rate Proposal.
12 Q45. How are capital costs met directly from revenues determined?
13 A. Routine capital improvement costs are met from annual revenues and are based on a
14 projection of the capital outlay expenditures budgeted for fiscal year 2011. Total
15 historical and projected routine capital improvement costs are shown on Line 22 in
16 Table 2-1 of the Rate Proposal. Routine capital costs projected for the wastewater utility
17 are shown on Line 22 of Table 3-7 and are approximately equal to 82 percent of total
18 routine capital costs for the 2013 test year. Other capital costs that are met from annual
19 revenues include the cash financed portion of major capital improvements. These costs
20 are typically based on funds available and the District's desired level of debt financing.
21 The proposed wastewater capital financing plan shown as Table 3-9 of the Rate Proposal
22 anticipates 17.5 percent of the major capital improvement costs for the six -year study
23 period will be met from annual wastewater revenues on a PAYGO basis.
2011 Rate Change Proceeding 15 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Q46. What is the source or basis for the Wastewater Capital Improvement and Replacement
2 Program expenditures shown in Table 3-8 of the Rate Proposal?
3 A. Costs and scheduling of the Wastewater Capital Improvement and Replacement Program
4 were obtained from projections provided by the District. The District anticipates it will
5 be required to make significant capital expenditures by defined milestone dates to be in
6 compliance with potential outcomes of the U.S. v. MSD litigation. Although anticipated
7 expenditure levels are represented as fixed, the District has scheduling flexibility of the
8 projects within each major category. Wastewater projects that may be funded by ad
9 valorem taxes are excluded from Table 3-8 of the Rate Proposal as these do not impact
10 the wastewater rate design process.
11 Q47. How does the District expect to finance its future major wastewater capital improvement
12 needs?
13 A. For the next six years, the District expects to finance future wastewater capital
14 improvements primarily from debt assuming voters will support an anticipated 2012 bond
15 authorization ballot initiative. Some improvements will be cash financed by annual
16 revenues.
17 Q48. What are the Wastewater Capital Improvements and Replacement Program financing
18 sources and uses of funds shown in the Rate Proposal?
19 A. The expected sources of funds include available funds on hand, revenue bonds and SRF
20 loans, annual revenues available for cash financing of improvements, contributions from
21 the City of Arnold, miscellaneous grants, and interest income earned on construction fund
22 balances. These funds are used to pay the costs of the Wastewater Capital Improvement
23 and Replacement Program, funding of the revenue bond reserve fund and the costs to
2011 Rate Change Proceeding 16 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 issue revenue bonds, SRF loans, and any commercial paper obligations.
2 Q49. What District funds are considered in the Rate Proposal's wastewater capital
3 improvement financing plan?
4 A Funds held in the Sanitary Replacement Fund, Improvement Fund and Emergency Fund
5 as well as monies transferred from the Wastewater Revenue Fund are considered in the
6 wastewater capital improvement financing plan shown as Table 3-9 of the Rate Proposal.
7 As previously indicated, the proposed rate change addresses the District's wastewater
8 rates only. As such, 110 Operation, Maintenance and Construction Improvement (OMCI)
9 funds are included in the wastewater capital improvement financing plan since these
10 funds are supported by ad valorem taxes from various subdistricts and dedicated to local
11 area projects
12 Q50. How was the initial fund balance deteiiiiined in Table 3-9 of the Rate Proposal?
13 A. The $92,977,300 beginning of fiscal year 2011 fund balance is equal to actual fund
14 balances at the end of fiscal year 2010 less encumbrances as reported by the District's
15 financial statements. The balance is composed of $86,493,000 from the Sanitary
16 Replacement Fund and $6,484,300 from Special Funds consisting of $411,000 of
17 Improvement Funds and a $6,073,300 Emergency reserve allowance. Other monies held
18 in Special Funds for Real Property Improvements and Alterations and for Water Backup
19 Insurance and Reimbursements are included as part of the District's operating funds.
20 Q51. How much of the wastewater capital improvements are expected to be debt financed?
21 A. The proposed capital financing plan anticipates 77.3 percent of the cost of major capital
22 improvements will be financed by revenue bonds and SRF loans over the six -year study
23 period.
2011 Rate Change Proceeding 17 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Q52. What criteria is used to establish the end of year balances shown in Table 3-9
2 A. End of year balances shown in Table 3-9 are designed to generally spend monies derived
3 from revenue bond proceeds and SRF loans first during the front-end of the study period
4 and allow cash transferred from operations to accumulate to levels judged sufficient by
5 the District's financial advisors. The indicated balances provide the District with greater
6 liquidity and should help maintain the District's bond rating.
7 Q53. Is municipal debt financing of major capital improvements a practical way of obtaining
8 funds?
9 A. Yes, this form of financing is commonly used by wastewater utilities. It spreads the
10 capital cost of long-term improvements over the life of the facilities and results in the
11 equitable allocation of these costs between existing and future users of the facilities. It
12 also allows wastewater rates to be more affordable in the near -term but results in
13 substantial additional costs to the rate payers over the long run than a PAYGO approach.
14 Q54. Will the District need to obtain voter approval to issue additional bonds?
15 A. Yes, the District will need approximately $1 billion of additional revenue bond
16 authorization to complete the projects scheduled for fiscal years 2013 through 2016.
17 Q55. If the proposed wastewater capital financing plan is adopted by the District, what level of
18 annual debt service payments can be expected?
19 A. Annual debt service payment will increase from $38.6 million in 2011 to $108.0 million
20 in 2016 under the current capital financing plan indicated in Table 3-9 of the Rate
21 Proposal. The total increase in debt service payments over the study period is $199
22 million.
23 Q56. How are the outstanding revenue bonds being repaid and what is the current ratio of net
2011 Rate Change Proceeding 18 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 revenue to annual debt service on these senior lien bonds?
2 A. Principal and interest payments on existing revenue bonds are being repaid by annual
3 wastewater system revenue as required by the bond covenants. The projected level of net
4 wastewater revenues (wastewater revenue less operation and maintenance expense)
5 decreases from about 4.2 times the 2011 annual debt service obligation on wastewater
6 revenue bonds to about 2.4 times the 2015 annual debt service obligation. This
7 significant decrease in debt service coverage is due to increases in net wastewater
8 revenues being out paced by annual increases in debt service costs. However, this
9 coverage level is well above the 1.25 minimum requirement specified by the District's
10 bond covenants.
11 Q57. What assumptions are made in the rate model about the issuance of any future revenue
12 bonds or other forms of debt?
13 A. Additional bond authorization of at least $945 million is assumed to be available within
14 the six -year study period. Future revenue bonds are assumed to have 30 -year terms and
15 an annual interest rate of 5.5 percent for fiscal years 2011 through 2016. Issuance costs
16 are estimated to be 1.4 percent of the principal amount and the anticipated bond reserve
17 requirement is assumed to be equal to the maximum annual principal and interest
18 payment. SRF loans are assumed to have an interest/administration fee of 2.5 percent
19 with 20 year maturities. Issuance costs are estimated to be 0.65 percent of the principal
20 amount. Commercial paper obligations are assumed to have an annual interest rate of 5.0
21 percent and an issuance cost of $25,000 per issue. However, commercial paper notes are
22 not expected to be issued during the study period. Targeted minimum debt service
23 coverage on senior and junior lien bonds is assumed to be 220 and 150 percent
2011 Rate Change Proceeding 19 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 respectively. This compares to bond covenant minimum debt service requirements of
2 125 and 115 percent above net annual revenues respectively.
3 Q58. What is an operating reserve?
4 A. It is monies set aside for the purpose of meeting operating expenses for a short time in the
5 event of a revenue shortfall.
6 Q59. What provision has been made for an operating reserve in the Rate Proposal?
7 A. The Rate Proposal assumes an operating reserve equal to 60 days of operating costs,
8 where operating costs include operation and maintenance expenses (general ledger
9 accounts 100 — 400) and routine annual capital costs (general ledger account 500).
10 Q60. Why is an allowance for routine annual capital costs in the operating reserve?
11 A. An allowance for capital outlays or routine annual capital costs is included because these
12 costs are also an annual operating expense that is met from annual revenues.
13 Summary of Wastewater Revenue and Revenue Requirements
14 61. What is the purpose of Table 3-11 of the Rate Proposal?
15 A. Table 3-11 compares wastewater revenue under existing rates with projected wastewater
16 revenue requirements and is used as the basis for deteiuiining the required revenue
17 increases.
18 Q62. What District funds are represented by Table 3-9?
19 A. Table 3-9 represents a composite of the District's Wastewater Revenue Fund, General
20 Fund, Real Property Improvements and Alterations Fund and the Water Backup
21 Insurance and Reimbursement Fund. Applicable funds are transferred to the Debt
22 Service Fund to accumulate monies required to meet semi-annual debt service
23 requirements and to the Sanitary Replacement Fund to cash finance a portion of
2011 Rate Change Proceeding 20 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 wastewater related improvements.
2 Q63. How was the initial fund balance in Table 3-11 determined?
3 A. The fund balance for the beginning of fiscal year 2011 is equal to the actual fund balance
4 at the end of fiscal year 2010 as reported by the District's financial statements. The
5 balance is composed of a portion of the General Fund and a portion of the Real Property
6 Improvements and Alterations Fund and all of the Water Backup Insurance and
7 Reimbursement Fund less monies held in an operating reserve for the wastewater utility.
8 Funds considered in the beginning of year fund balance for wastewater operations include
9 $10,803,000 of the General Fund, $2,407,900 of the Real Property Improvements and
10 Alterations Fund and $10,294,800 of the Water Backup Insurance and Reimbursement
11 Fund less a wastewater operating reserve of $21,808,800 for an unrestricted beginning of
12 year cash balance of $1,696,900.
13 Q64. What are the basic criteria used to develop the proposed revenue increases?
14 A. Revenue increases are generally set to meet cash requirements and to maintain specified
15 levels of debt service coverage. Currently, cash needs are the controlling factor for the
16 District, since debt service coverage is above the assumed targeted minimum amounts of
17 2.2 times senior bond debt service and 1.5 times total debt service. Cash must be
18 sufficient in each year of the study period to pay all revenue requirements, including
19 future cash financing of capital improvements. By District policy, it must also be
20 sufficient to provide an unrestricted end of year combined fund balance reserve of
21 approximately $5 million. This reserve excludes the wastewater operating reserve of
22 about $22 million that is funded by the deposits shown on Line 29 of Table 3-11.
23 Q65. Is a distinction made between wastewater revenue increases shown on Table 3-11 of the
2011 Rate Change Proceeding 21 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Rate Proposal and wastewater rate increases that directly impact average monthly
2 residential customer bills?
3 A. Yes, wastewater revenue increases shown in Table 3-11 indicate the amount of additional
4 revenue required to meet total wastewater revenue requirements without regard for how
5 that revenue level is achieved through the existing wastewater rate structure. Specific
6 wastewater rate increases can be higher or lower than the required revenue increase since
7 they can vary by individual charge components. For example, to equitably recover
8 wastewater costs of service, monthly wastewater service charges such as the base and/or
9 system availability charges may need more of an increase than volume charges and
10 volume charges may need more of an increase than extra -strength wastewater surcharges,
11 which may need more of an increase than the environmental compliance charge.
12 However, when applied to their respective units of service, the revenue produced by the
13 proposed wastewater rates will achieve the desired average increase in total system
14 revenue. For this Rate Proposal, wastewater revenue increases were targeted by the
15 District to produce increases in a typical residential bill of approximately 13 percent in
16 fiscal years 2013 through 2016. These increases meet all annual operating requirements
17 and provided cash financing of major capital improvements ranging from about $32 to
18 $56 million per year.
19 Q66. What is billing lag and has its impact been considered in the Rate Proposal?
20 A. Yes, billing lag is the delay in the receipt of increased revenues attributable to a rate
21 increase. A one month billing lag (1/12 or 8.3 percent) is assumed in the Rate Proposal.
22 Q67. Why are wastewater operating and capital financing requirements analyzed for a multi -
23 year study period, rather than for a single test year?
2011 Rate Change Proceeding 22 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 A. Wastewater revenues and revenue requirements are analyzed over a multi -year study
2 period, as shown in Table 3-11, to adequately plan for future costs. This allows the
3 gradual build up of revenues to meet the future known requirements while avoiding a
4 large single year increase and resulting rate shock that would be caused by not making
5 rate adjustments until absolutely needed.
6 Q68. What funds are related to interest earnings shown on Line 11 of Table 3-11?
7 A. This line represents interest earned on: (1) monthly deposits to the P&I fund to
8 accumulate monies to be paid semiannually to bondholders; (2) the District's wastewater
9 operating reserve; (3) funds used to satisfy a revenue bond reserve requirement; and (4)
10 funds encumbered but unspent in the General Fund.
11 Q69. What level of encumbrances is assumed to be available in the General Fund for interest
12 calculation purposes?
13 A. It is assumed that the District will have approximately $5 million of wastewater related
14 encumbered but unspent monies in the General Fund that can earn interest. As
15 encumbered funds are spent, they are assumed to be replaced by additional encumbrances
16 to maintain a $5 level of encumbrances.
17 Q70. Why is the District receiving interest income from the City of Arnold?
18 A. Interest income is received from the City of Arnold as part of their repayment of a $30
19 million loan to reserve capacity in the Lower Meramec Regional Wastewater Treatment
20 Plant.
21 Wastewater Cost of Service and Cost of Service Allocations
22 Q71. What is cost of service?
23 A. Cost of service is the total cost for a utility to provide services to its customers. Total
2011 Rate Change Proceeding 23 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 cost of service for the District's wastewater utility is equal to the total wastewater related
2 revenue requirements of the District. Cost of service to be recovered from wastewater
3 charges is equal to total wastewater revenue requirements less wastewater related other
4 revenues and adjustments, as summarized in Table 3-12 of the Rate Proposal.
5 Q72. How is cost of service to be recovered from wastewater charges, as presented in Table
6 3-12 of the Rate Proposal, determined?
7 A. The costs of service values shown in Table 3-12 are directly derived from the 2013
8 values shown in the comparison of projected wastewater revenue under existing rates
9 with projected revenue requirements table (Table 3-11) with the exception of the full year
10 rate adjustment shown on Line 14 of Table 3-12.
11 Q73. What is included in the rate adjustment?
12 A. The wastewater rate adjustment shown in Table 3-12 represents a one month billing lag
13 before actual receipt of increased revenues. If proposed test year rates are planned to be
14 increased a month or more after the beginning of the test year, an additional adjustment
15 for the number of months under the prior rates would also be recognized to reflect
16 increased revenue that would be realized if the proposed rates were effective for the
17 entire test year. These adjustments are required to design rates on a full year basis.
18 Q74. What is a cost of service study?
19 A. A cost of service study is a study that uses projected costs of a utility and the system's
20 total service requirements to develop rates for a future test year that will proportionately
21 recover costs by customer class.
22 Q75. Was a wastewater utility cost of service study prepared? If so, by whom?
23 A. Yes, a study was completed on May 5, 2011 and the results of this study are presented in
2011 Rate Change Proceeding 24 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 the Rate Proposal (MSD Exhibit No. 1) submitted on May 10, 2011. The wastewater
2 utility cost of service study was prepared by Black & Veatch Management Consulting
3 professionals.
4 Q76. Does Black & Veatch specialize in wastewater utility cost of service studies?
5 A. Yes, Black &Veatch Management Consulting has professionals who routinely conduct
6 such cost of service studies on a daily basis.
7 Q77. In performing the study in this case, did Black & Veatch become familiar with the
8 District's wastewater utility system and its costs?
9 A. Yes.
10 Q78. Please explain the general procedures used by Black & Veatch to develop cost of service
11 based wastewater rates.
12 A. We followed the cost of service allocation and rate design procedures recommended by
13 the Water Environment Federation (WEF), in its "Financing and Charges for Wastewater
14 Systems" manual. First, the total cost of service to be recovered from wastewater charges
15 was determined and then allocated to functional cost components. These allocated costs
16 were then allocated to individual user classes in accordance with their respective service
17 requirements. We then developed wastewater rates designed to recover these costs in an
18 equitable manner from each customer class and verified these rates by comparing the
19 revenue they are expected to produce with allocated costs of service by customer class.
20 Q79. What are the functional cost components that have been recognized?
21 A. Cost components related to wastewater volume, capacity or peak rates of flow,
22 wastewater strength consisting of biochemical oxygen demand (BOD) and suspended
23 solids, number of total customers and number of non-residential customers are
2011 Rate Change Proceeding 25 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
recognized in the Rate Proposal.
2 Q80. Please explain the general basis for allocating costs of service to functional cost
3 components.
4 A. Generally, operating costs are allocated to the function(s) primarily responsible for the
5 level of cost incurred, or, in the case of plant investment, to the principal component(s)
6 for which the investment was made. As a simple example, raw wastewater pumping and
7 preliminary treatment facilities must be designed to accommodate the maximum rate of
8 flow received by a treatment plant. Therefore, the costs or investment for these facilities
9 is allocated to the capacity cost component. Other expenses and other investments are
10 handled in much the same way. In some instances expenses are allocated to cost
11 functions on bases which only indirectly influence the magnitude of the expense. In
12 particular, individual components of administrative and general expense are allocated in
13 this manner.
14 Q81. What procedures were followed in the development of cost allocations?
15 A. Wastewater plant investment and capital costs are allocated to functional cost
16 components as shown in Table 3-13 of the Rate Proposal. The basis for the allocation of
17 wastewater operating and maintenance expense is shown in Table 3-14 and the actual
18 allocation of wastewater related operating and maintenance expense is shown in Table 3-
19 15 of the Rate Proposal.
20 Q82. How are wastewater treatment costs allocated to functional cost components?
21 A. Wastewater treatment costs are allocated to functional cost components based on a
22 detailed analysis of cost by treatment plant and plant component, i.e. pumping, aeration,
23 disinfection, sludge treatment, etc. Once costs are allocated to the various plant
2011 Rate Change Proceeding 26 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 components they can be allocated to functional cost components based on the primary
2 parameter that caused the expense to be incurred. For example, the costs related to
3 aeration are primarily caused by the level of BOD that needs to be reduced and are
4 allocated to the BOD cost component. Treatment costs reviewed includes personnel
5 services, utilities, chemicals, and other major cost categories.
6 Q83. Have customer classification factors been considered in the Rate Proposal?
7 A. Yes.
8 Q84. What factors are considered when establishing customer classes?
9 A. Customer classes are generally based on three factors: (1) general service requirements,
10 (2) customer usage characteristics, and (3) geographic location. General service
11 requirements typically exists between customers served on a retail basis and customers
12 served on a wholesale basis. In this situation, wholesale customers may own and operate
13 their own sewer collection system and are not responsible for the smaller mains serving
14 the utility's retail customers. Customer usage characteristics are typically recognized for
15 differences in wastewater strength such as high strength surcharges or for services
16 provided to specific customer classes but not all customer classes such as the District's
17 environmental compliance charge. Geographic location may also be a consideration for
18 utilities that incur higher costs due to remote locations or lower elevations of wholesale
19 customers served by the utility. Geographic location may also recognize differences in
20 ownership of the system through a higher rate of return from wholesale or non -owner
21 customers of the utility.
22 Q85. How are these factors recognized in the Rate Proposal?
23 A. All customers are served on a retail basis and have the same basic service requirements.
2011 Rate Change Proceeding 27 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Differences in customer usage characteristics are recognized between normal and high
2 strength customers and in the assignment of relative infiltration/inflow cost
3 responsibility. 1/I is allocated on both a customer and volume basis to spread costs
4 equitably between customer classes. Geographic location is not recognized in the Rate
5 Proposal
6 Q86. Why isn't geographic location a consideration in the Rate Proposal?
7 A. The District serves customers located in different watersheds having separate treatment
8 facilities. Recognition of location differences would be difficult to establish and would
9 result in differences in service charges for customers within the same customer class.
10 Such service charges would also be difficult to administer and be contrary to the
11 promotion of regional treatment plants where smaller plants are replaced by larger more
12 cost efficient regional plants such as the new Lower Meramec River Regional
13 Wastewater Treatment Plant.
14 Q87. Does the Financing and Charges for Wastewater Systems manual of practice produced by
15 WEF have any guidance concerning geographic location?
16 A. Yes, Page 125 of the WEF rates manual states: "when dealing with inside city or inside
17 district retail service, distance relative to the treatment plant[s] is not a consideration for
18 cost -of -service differentiation among customers or customer classes."
19 Q88. Does the District have any costs directly related to a specific customer class?
20 A. Yes, some non-residential customers require monitoring for specific pollutants identified
21 by the EPA. These costs are included in the environmental compliance section of
22 Engineering and assigned directly to the "Non -Residential Customers" cost component.
23 They are recovered as part of the compliance charge from all non-residential customers.
2011 Rate Change Proceeding 28 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Q89. How were the environmental compliance costs to be recovered from non-residential
2 customers determined?
3 A. These costs are incurred by the District for environmental compliance monitoring
4 activities. The costs are included in the Environmental Compliance Division which is
5 part of the Engineering Department. Cost estimates were developed by District Staff for
6 each service provided by the Environmental Compliance Division. Service activities
7 directly related to non-residential customers were allocated to the non-residential
8 customer class and used as the cost basis of the environmental compliance charge. All
9 other Environmental Compliance Division costs are allocated to the most representative
10 function cost components and recovered from all District customers through monthly
11 service and volume charges.
12 Q90. What activities are recovered by the proposed new system of environmental compliance
13 charges?
14 A. Costs directly related to pretreatment inspections and industrial discharge permits plus a
15 proportionate share of indirect costs provided within the Environmental Compliance
16 Division and by other Departments are allocated to non-residential customers only.
17 Q91. What environmental compliance activities are recovered through the basic rate structure
18 charged to all customers?
19 A. Costs for regulatory affairs are recovered by the service charges and costs for hauled
20 waste, surcharge program, by-pass investigations, return factor analyses, stream
21 monitoring and NPDES compliance are recovered from the volume and extra strength
22 surcharges after first allocating these costs to functional cost components.
23 Q92. How are those activities allocated to functional cost components so that they can be
2011 Rate Change Proceeding 29 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 recovered proportionately from customer classes?
2 A. Laboratory costs for hauled waste and surcharge program costs are allocated 50 percent
3 to suspended solids and 50 percent to BOD; by-pass investigations for sewer overflows
4 are allocated 100 percent to capacity; hauled waste permitting activities and return factor
5 analyses are allocated 100 percent to volume; stream monitoring is allocated 67 percent
6 to volume, 16 percent to suspended solids and 17 percent to BOD; regulatory affairs is
7 allocated to all customers, as previously noted; and NPDES compliance is allocated 10
8 percent to all customers and 30 percent each to volume, suspended solids and BOD.
9 Q93. Was this activity based allocation process used in prior studies?
10 A. No, all environmental compliance costs were solely allocated to the non-residential cost
11 component and recovered through a unifoiiii environmental compliance charge.
12 Q94. How are wastewater revenues that offset portions of the operation and maintenance
13 expenses allocated?
14 A. They are allocated to functional cost components on the same basis used to allocate their
15 corresponding costs.
16 Q95. How are wastewater capital costs allocated to functional cost components?
17 A. Wastewater capital costs, which include routine capital improvement expenditures, debt
18 service payments, and cash financing of major capital improvements are allocated on the
19 basis of net plant investment for the wastewater utility as shown on Table 3-13 of the
20 Rate Proposal. Net plant investment is defined as the original cost less accumulated
21 depreciation expense as of June 30, 2010, plus construction work in progress as of June
22 30, 2010 and the cost of all capital additions included in the major capital improvement
23 program that are expected to be in service by the test year. Investment is allocated to
2011 Rate Change Proceeding 30 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 functional cost components by plant facilities based on the parameter or parameters
2 having the most significant influence on the magnitude of the investment in each
3 respective facility. For example, the facilities and corresponding investment in the
4 collection system, consisting of mains and pump stations, are related to the maximum
5 rate of flow and is allocated to the wastewater system capacity cost component.
6 Q96. How were units of service shown in Table 3-16 developed?
7 A. Table 3-16 of the Rate Proposal summarizes the test year wastewater service
8 requirements for each cost function by customer class or units of service. Contributed
9 wastewater volume and number of bills shown in this table were projected based on
10 historic data maintained in the District's billing records, as previously described. Total
11 contributed wastewater volume is compared with the annual wastewater conveyed to the
12 treatment plants to determine the total amount of unbilled wastewater volume or volume
13 that can be attributed to infiltration/inflow. The average historical percentage of
14 infiltration/inflow volume over a five-year period is used to estimate the
15 infiltration/inflow volume for the test year. This volume is allocated to customer classes
16 on the premise that 40 percent of the volume is related to the number of bills and the
17 remaining 60 percent is related to the amount of contributed wastewater volume. These
18 customer and volume related infiltration/inflow percentages are based on independent
19 engineering studies completed in January 2005 by CDM and presented in the February
20 2007 Wastewater and Stoiniwater Rate Proposal. Contributed and infiltration/inflow
21 capacity factors are applied to the respective contributed and infiltration/inflow volumes
22 by customer class to determine the amount of capacity associated with each source of
23 wastewater. Average historical wastewater strength received at the treatment plants is
2011 Rate Change Proceeding 31 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 applied to the total test year volume to determine total system wastewater loadings for
2 BOD and suspended solids. Wastewater strength loadings attributable to extra -strength
3 customers and nominal allowance for loadings attributable to infiltration/inflow are
4 subtracted from the total system loadings to estimate the wastewater loadings and
5 strength related to normal or domestic strength wastewater. These contributed and
6 infiltration/inflow related strengths are applied to the respective contributed and
7 infiltration/inflow volumes allocated to each customer class to determine wastewater
8 strength loadings by customer class.
9 Q97. What percentage of total wastewater flow at the treatment plants is estimated to be related
10 to infiltration/inflow?
11 A. Approximately 55 percent.
12 Q98. How is this amount determined?
13 A. The unaccounted for volume received at the treatment plant or infiltration/inflow volume
14 is equal to the total wastewater volume received at the treatment plants less the amount of
15 wastewater actually billed by the District for the same period. The annual percentage
16 amount is equal to the infiltration/inflow volume divided by the total volume received by
17 the wastewater treatment plants and expressed as a percentage. The percentage used in
18 the Rate Proposal reflects the most recent five year average of these annual percentages.
19 Q99. Why has this percentage increased since the prior rate analysis?
20 A. The prior analysis indicated that infiltration/inflow volume was approximately 50 percent
21 of the total volume received at the treatment plants. The increase is believed to be
22 attributable to the District's continuing efforts to reduce sanitary sewer overflows and
23 combined sewer overflows.
2011 Rate Change Proceeding 32 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Q100. What capacity factors are used to determine capacity related units of service?
2 A. A 1.73 factor is used for contributed wastewater and a 4.19 factor is used for
3 infiltration/inflow volume.
4 Q101. How were these capacity factors determined?
5 A. These factors were determined based on prior analyses using data for peak dry weather
6 flow and peak wet weather flow compared to corresponding average wastewater flow and
7 average infiltration/inflow. The contributed wastewater capacity factor is equal to a peak
8 dry weather flow of 448 million gallons per day (mgd) less average annual
9 infiltration/inflow of 144 mgd divided by the average contributed wastewater flow of 176
10 mgd ([448 — 144] / 176 = 1.73). The infiltration/inflow capacity factor is equal to the
11 peak wet weather flow of 779 mgd less contributed wastewater flow divided by average
12 infiltration/inflow ([779 — 176] / 144 = 4.19).
13 Q102. What wastewater strengths are used for normal strength contributed wastewater and
14 infiltration/inflow?
15 A. Normal wastewater strength was determined to have 220 milligrams per liter (mg/1) of
16 suspended solids and 175 mg/1 of BOD based on recorded wastewater treatment plant
17 influent strengths, estimated surcharge loadings, and allowances of 100 mg/1 of
18 suspended solids and 10 mg/1 of BOD attributed to infiltration/inflow volume.
19 Q103. Are the bills shown for the All Customers cost component equal to 12 times the number
20 of accounts shown in Table 3-1?
21 A. No, because the District provides a low-income credit equal to 50 percent of the rate
22 applied to non low-income customers, only half of the bills for qualified low-income
23 customers are included in Table 3-16. This procedure allows for the direct calculation of
2011 Rate Change Proceeding 33 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 common service charges for all customers that can also be reduced by 50 percent to
2 determine the charge for low-income customers.
3 Q104. Why are equivalent bills now being used for non-residential customers instead of total
4 bills as used in prior studies?
5 A. The District is proposing an expanded environmental compliance charge rate structure.
6 Instead of a common environmental compliance charge applicable to all non-residential
7 customers, a five -tier system of charges is being proposed that will recover costs more
8 equitably among non-residential customers based on relative service requirements.
9 Q105. How are non-residential equivalent bills calculated?
10 A. Table 3-22 of the Rate Proposal shows the basic calculation methodology to determine
11 non-residential equivalent bills using data for 2010. Costs for environmental compliance
12 services are allocated to each of the five tiers based on the costs to serve customers in
13 each tier. Dividing these costs by the number of customers served in each tier determines
14 the charge for each tier that would have been applicable in 2010 had the proposed rate
15 structure been in effect. Expressing these unit costs relative to the unit cost for a Tier 1
16 customer derives cost ratio relationships of the higher tiers to Tier 1. To develop
17 equivalent bills for the 2013 test year and subsequent years, the 2010 distribution of
18 customers can be applied to the projected total number of non-residential bills and
19 multiplied by the respective cost ratio developed in Table 3-22 to estimate equivalent
20 bills for future years.
21 Q106. How is wastewater cost of service allocated to customer classes?
22 A. The allocated wastewater costs of service for each cost component are divided by the
23 applicable wastewater system's units of service (volume, capacity, wastewater strengths
2011 Rate Change Proceeding 34 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1
2
3
4
5
6
and number of customers) to determine unit costs of service for each functional cost
component. These unit costs of service are then applied to the respective test year units
of service applicable to each customer class to determine each class's share of allocated
cost of service. The allocation of wastewater costs to customer classes is shown in Table
3-17 of the Rate Proposal with the total customer class cost of service appearing in
Column 1.
7 Q107. How does the allocated wastewater costs of service for each customer class compare to
8 the 2013 test year wastewater revenues projected under existing and 2012 approved
9 wastewater rates?
10 A. The comparison of test year wastewater revenues under existing and approved 2012 rates
11 to the allocated cost of service for each customer class is shown in Table 3-18 of the Rate
12 Proposal. As shown by this table, adjustments in the wastewater rate schedule are
13 necessary to fairly recover the cost of providing wastewater service to the various
14 customer classes.
15 Q108. Which customer class requires the highest wastewater revenue adjustment?
16 A. For the 2013 test year, an overall full year wastewater revenue increase of 11.0 percent is
17 required, as indicated on Tables 3-11 and 3-18. The single family residential customer
18 class requires the highest wastewater revenue increase of 16.6 percent. The non -
19 residential class requires the lowest wastewater revenue increase of negative 0.9 percent,
20 primarily due to the reallocation of environmental compliance costs, and the multifamily
21 class requires a 15.7 percent increase, which is consistent with the increase required for
22 single family residential customers.
2011 Rate Change Proceeding 35 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 Wastewater Rate Adjustments
2 Q109. In your opinion, are the proposed wastewater rates reasonable and affordable for the
3 ratepayers?
4 A. Yes, the proposed wastewater rates are below the 2 percent of median income guidelines
5 suggested by EPA and others. Under these guidelines, a wastewater charge less than
6 $57.05 per month is deemed to be affordable for the St. Louis area. This value is based
7 on the adjusted 2009 median household income for the City of St. Louis as reported by
8 the Census Bureau through the American FactFinder. Therefore, this amount would
9 likely be higher in 2013 due to price inflation. The average 8 Ccf per month residential
10 wastewater bill for the 2013 test year is proposed to be $32.37 or about $389 per year.
11 Dividing this annual amount by the reported 2009 median household income of $34,227
12 for residents within the City of St. Louis derives an affordability ratio of 1.1 percent. In
13 comparison, the median household income for St. Louis County is reported to be $57,502
14 and the corresponding affordability ratio is 0.7 percent.
15 Q110. Have the cost of service based wastewater rates been designed to recover the cost of
16 providing wastewater service?
17 A. Yes.
18 Q111. How is the billing and collection charge determined?
19 A. Costs that are allocated to the "All Customer" cost component are divided by the number
20 of bills, as adjusted to allow for low-income credits, to determine the common billing and
21 collection charge.
22 Q112. How are bills adjusted?
23 A. Bills used for the All Customer cost component are equal to the total number of bills for
24 general service customers plus half the number of bills for qualified low-income
2011 Rate Change Proceeding 36 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 customers.
2 Q113. Why are the bills adjusted?
3 A. Bills are adjusted because the District maintains a low-income assistance program that
4 provides wastewater service to qualified low-income customers at half the cost of general
5 service customers. By using only half of the low-income bills, the cost per bill for
6 general service customers can be directly calculated with the required subsidy for low-
7 income customers. Since only half of the low-income bills are used in the wastewater
8 rate calculation, applying half of the indicated rate to all of the low-income bills will
9 produce the District's desired revenue from this group of customers.
10 Q114. How is the system availability charge calculated?
11 A. The system availability charge is calculated by dividing the infiltration/inflow costs
12 allocated to customers by the total adjusted number of bills. Using the adjusted number
13 of bills provides a wastewater rate applicable to general service customers that includes
14 the low-income adjustment as previously described.
15 Q115. How is the compliance charge calculated?
16 A. In the past, all costs allocated to the non-residential customer cost component were
17 divided by the number of non-residential bills to derive a uniform compliance charge
18 applicable to all non-residential customers. This Rate Proposal creates a five tier system
19 of charges to more equitably allocate costs to non-residential customers based on their
20 relative service requirements. The relative service requirements of each tier are related to
21 those for Tier 1 customers to derive non-residential equivalent bills. Dividing total
22 projected costs allocated to the non residential cost component by the corresponding
23 projected number of equivalent non-residential bills derives the charge applicable to Tier
2011 Rate Change Proceeding 37 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1
2
3
1 customers. Applying this charge to the relative cost ratios used to determine non-
residential equivalent bills determines the applicable compliance charge for the remaining
four tiers.
4 Q116. How is the volume charge calculated?
5 A. All volume related costs are divided by the equivalent billable wastewater volume to
6 determine the volume charge applicable to both metered and unmetered customers.
7 Volume related costs include direct volume and capacity costs, costs attributable to
8 normal wastewater strength and all costs related to the allocated volume portion of
9 infiltration/inflow.
10 Q117. What is meant by the term "equivalent billable wastewater volume"?
11 A. Like the adjusted number of bills, equivalent billable wastewater volume is used to adjust
12 for the District's low-income assistance policy. Equivalent billable wastewater volume is
13 equal to all of the billable wastewater volume for general service customers and half of
14 the billable wastewater volume attributable to qualified low-income customers.
15 Q118. How are the extra -strength wastewater surcharges calculated?
16 A. Costs allocated to each strength parameter are divided by the respective total system
17 strength loadings to determine unit costs per pound of each strength parameter. The
18 system unit costs are only applied to the wastewater contributed by non-residential
19 customers that have wastewater strength above the normal strength limits of 300 mg/1.
20 These unit costs are expressed on a cost per ton basis in the District's rate schedule.
21 Q119. Are these surcharge rates comparable to rates imposed by other large wastewater
22 utilities?
2011 Rate Change Proceeding 38 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 A. Yes, the current District rates are comparable with the surcharge rates currently charged
2 by Kansas City, Missouri (Ordinance 110167, effective May 1, 2011) with a BOD charge
3 slightly above and a suspended solids charge significantly below those applied by Kansas
4 City. Kansas City charges $0.297 per pound or $594 per ton for BOD and $0.181 per
5 pound or $362 per ton for suspended solids. These rates are applied to all loadings over
6 250 mg/1 instead of the 300 mg/1 threshold limit used by the District. Kansas City applies
7 a similar system of surcharges for outside city customers that are about 13 percent higher
8 than the inside city BOD and suspended solids rates listed above. It also applies an inside
9 city oil and grease surcharge rate of $0.114 per pound for oil and grease concentrations
10 greater than 30 mg/1 with a slightly higher rate for outside city customers.
11 Q120. What is the cost impact of the proposed wastewater rates on the typical unmetered single
12 family residential customer?
13 A. An analysis of unmetered customers conducted during the 1993 rate study indicated that
14 for a random sample of unmetered accounts, about 30 percent of the sample was
15 represented by accounts having 5 rooms, 1 water closet and 1 bath. The next largest
16 group of unmetered accounts, representing about 12 percent of the sample, had 6 rooms,
17 1 water closet, and 1 bath. The contributed wastewater volume associated with these two
18 groups is 7.7 Ccf and 8.4 Ccf respectively and the associated cost impact for wastewater
19 service is a $3.49 and $3.66 increase as presented in Table 5-5 of the Rate Proposal. This
20 is a 13.1 percent increase for the 5 room customers and a 12.4 percent increase for the 6
21 room customers. Both increases are above the wastewater system average increase of
22 11.0 percent. The primary reason for these above average wastewater rate increases is
2011 Rate Change Proceeding 39 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 due to the reallocation of environmental compliance costs that were formerly recovered
2 only by non-residential customers.
3 Q121. What is the cost impact on the typical metered single family residential customer?
4 A. The average billable wastewater volume for a single family residential customer is now
5 about 7 Ccf/month, whereas during the prior rate change proceedings it was 8 Ccf/month.
6 However, for comparison purposes, the 8 Ccf/month value is considered a typical
7 residential customer. The indicated $3.64 increase in the total monthly wastewater
8 charge for this volume, as shown in Table 5-5 of the Rate Proposal, represents a 12.7
9 percent increase over comparable charges under the approved 2012 wastewater rates.
10 Additional typical wastewater bill comparisons are shown in Tables 5-5 and 5-6 of the
11 Rate Proposal.
12 Q122. How do wastewater charges to typical residential customers under approved 2012 and
13 proposed 2013 wastewater rates compare with charges for similar service in other large
14 U. S. cities?
15 A. In 2010, Black & Veatch completed a water and wastewater rate survey of charges as of
16 June 30, 2009 for the 50 largest municipalities in the United States. At that time, the
17 District's wastewater rates were very close to the survey's average for residential
18 customers. Without adjusting for inflation, the District's proposed wastewater rates for
19 2013 would produce a typical residential wastewater bill that would be ranked as the 32❑d
20 lowest in the 2010 survey with 1 being the lowest typical residential wastewater bill and
21 50 being the highest residential wastewater bill. Annual surveys conducted by the
22 National Association of Clean Water Agencies (NACWA) of its national utility
23 membership indicate that the residential bills of District customers closely approximate
2011 Rate Change Proceeding 40 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
2
3
4
5
6
the historic national averages indicated by NACWA. Furthermore, NACWA's
projections through 2014 closely approximate those proposed by the wastewater rate
proposal as shown by Figure 5.1 in the Rate Proposal. Both surveys are available on the
Internet at the following site addresses:
http://www.nacwa.org/index.php?option=com_content&view=article&id=883 &catid=8&Itemid=7
http://www.bv. com/Downloads/ResourcesBrochures/rsrc_EMS_Top50RateSurvey.pdf
7 Wastewater Revenue Recovery
8 Q123. Are the proposed rates for wastewater service adequately designed to recover the cost of
9 service from customers?
10 A. Yes, as shown in Table 3-23 of the Rate Proposal, the proposed wastewater rates are
11 expected to recover 100.1 percent of total projected wastewater related costs to be
12 recovered by rates. The proposed 2013 wastewater rates do not recover 100 percent of
13 costs from each of the customer classes due to the planned phase -in of the proposed 5 -tier
14 environmental compliance charge. This is because the proposed rates are targeted to
15 meet cost of service requirements after a four-year transition period whereas the allocated
16 cost of service assumes an immediate transition to full cost of service in fiscal year 2013.
17 A comparison of the projected 2013 revenue under proposed rates shown in Column 1 of
18 Table 3-23 with the projected 2013 revenue under Board approved rates shown in
19 Column 3 of Table 3-18 indicates that to recover the system average revenue increase of
20 11 percent, the average single family residential customer will realize an increase in their
21 monthly bill of 12.4 percent multifamily customers a 13.4 percent increase and non -
22 residential customers, a 7.7 percent average increase over revenue produced by the
23 approved 2012 rates. The lower increase for non-residential customers is due to the
24 proposed reallocation of some specific Environmental Compliance Division costs from
2011 Rate Change Proceeding 41 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
2
3
4
only non-residential customers to all customers. Other factors affecting 100 percent cost
recovery by customer class include rounding of rates and the impact of the low-income
assistance program, which is considered in revenue under proposed rates but not in the
allocated costs of service.
5 Q124. Is the proposed level of wastewater revenues shown in the Rate Proposal reasonable and
6 necessary to meet the projected revenue requirements of the District's wastewater utility?
7 A. Yes, it is my opinion that it is.
8 Q125. Is the proposed level of wastewater revenue requirements equitably recovered from all
9 customer classes?
10 A. Yes, considering the transitioning to an expanded environmental rate structure and
11 recognizing that it is not practical to make this transition in a single year.
12 Rate Model
13 Q126. Did your firm develop a rate model that supports the wastewater Rate Proposal filed as
14 Exhibit No. MSD 1?
15 A. Yes we did.
16 Q127. Is a printout of the model's tables and formulas available for review?
17 A. Yes, hard copy printouts of the rate model tables and formulas, based on the proposed
18 financing plan of capital improvements, are available upon request as MSD Exhibit No. 4
19 and MSD Exhibit No. 5, respectively.
20 Q128. Why are some of the values shown in the model tables shaded?
21 A. Shaded values are generally those that are required to be entered by the model's user.
22 Non -shaded cells are generally formulas based on these input data or other values.
23 Q129. Some of the model's tables have BD -1, BD -2, etc. references. What do these mean?
2011 Rate Change Proceeding 42 MSD Exhibit No. 9F
Direct Testimony of Keith D. Barber, Black & Veatch May 13, 2011
1 A. They are references to Basic Data (BD) documents used by the model.
2 Q130. Letter and number designations like B-1 and C-3 appear near the top of many of the
3 printout pages. What do these designations mean?
4 A. These designations are page numbers. The letter represents a section of the calculation
5 book. For example, B represents the second section of the calculation book and C
6 represents the third calculation section and so on. The number represents a sequential
7 page number within each section. Therefore, if a column has a B-1 reference above it,
8 the column obtains its information from the first page of the B section in the calculation
9 book.
10
11 Q131. Does this conclude your prepared direct testimony in this matter?
12 A. Yes, it does.
2011 Rate Change Proceeding 43 MSD Exhibit No. 9F