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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