HomeMy Public PortalAboutExhibit MIEC 99 MIEC Prehearing Position Statement 0928112011 Wastewater Rate Change Proceeding
Position Statement for Prehearing Conference on September 28, 2011
Missouri Industrial Energy Consumers
The Missouri Industrial Energy Consumers ("MIEC"), pursuant to Section 8 of the
Procedural Rules and Section 3(9) of the Operating Rules, provides its current position regarding
Metropolitan St. Louis Sewer District's ("MSD") proposed rate increase as submitted by MSD Staff
on May 10, 2011 in this statement.
Significantly, as Mr. Arnold and Ms. Stump have advised you, the Rate Commission (the
"Commission") must make sure that MSD's proposed rate increase meets all of the five factors
outlined in Section 7.270 of the Charter. The fifth criteria requires that MSD's proposed rate
increase "imposes a fair and reasonable burden on all classes of ratepayers."' As discussed in detail
in the MIEC's testimony and during the technical conferences, the MIEC asserts that MSD's
proposed rate increase does not meet the fifth criteria because MSD's proposed rate increase
requires ratepayers to pay for expenses that are both unjustified and excessive.
The MIEC recommends that the Commission should only award a one year (or two year, at
the most) rate increase of 9.6% in this proceeding. MSD's estimated costs for FY 2013 from July 1,
2012 to June 30, 2013 are reasonably measureable. The capital improvement program ("GIP") costs
are not known at this time, especially since MSD has yet to prepare a Sanitary Sewer Overflow
Control Master Plan ("SSO Plan") that needs to be submitted to EPA by December 31, 2013.2
Moreover, considering the current economic conditions, the levels of bad debt expense and the
amount of customer sales are relatively unknown at this time.
If in fact the Commission recommends a four year plan despite the MIEC's concerns, the
MIEC recommends that the Rate Commission modify MSD's proposed rate increase to reduce the
proposed increase of over 60%, or $128.8 million dollars, to 49%, or $105.6 million dollars, for the
next four years. In other words, the MIEC recommends that the proposed adjustments result in a
series of increases of 9.6% in each of the four rate years instead of the 11% or 12% percent
increases that MSD originally contemplated.
The evidence presented in this rate case demonstrates that MSD is overstating its cost of
service over the forecast period and its proposed rate increase is materially higher than necessary.
The MIEC has identified a number of key areas that MSD has made unreasonable cost projections.
Together, these unreasonable cost projections produce approximately a $23 million overstatement to
MSD annual costs of service to 2016, the end of the rate forecast period. So, it is imperative to
think of each of the following five adjustments as essential pieces that need to be removed from
MSD's inflated proposal to ensure that MSD's proposed rate increase imposes a fair and reasonable
burden on the ratepayers. Note that the MIEC has not recommended to adjust necessary capital or
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3
See MSD Charter, §7.270(5).
http://wcvw.stlinsd.com/portal/p1s/portal/!PORTAL.iasxpob page.show? docnaine=342404.PDF
See MSD Exhibit 49A, Final Consent Decree, ¶23, p. 25.
See Exhibit 1\IIEC 89, Michael Gorman's Supplemental Testimony, p. 4, lns. 18 - 19.
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expense items in its modifications to MSD's proposed rate increase. All of the MIEC's adjustments
relate to producing a balanced and fair estimate of MSD's costs needed to accomplish the CIP and
operations included in the four year rate plan. The MIEC's adjustments reduce MSD's rate proposal
to produce a fair and reasonable burden on all ratepayers while expecting effective cost management
from MSD.
Let me briefly describe the five adjustments.
• Adjustment No. 1: Economic Activity in MSD's Service Area Should Remain Constant.
There is no support for MSD's position that MSD's customer base will continue to decline
from a depressed 2011 level. As discussed at length in testimony and during the technical
conferences, MSD did not take into consideration economic activities for non-residential
customer growth and sales volume during the forecast period.4 A conservative estimate of
actual future sales levels is to hold the 2011 sales levels constant.' Unlike MSD's
assumption, the MIEC's position is supported by independent and reliable sources.6 The
total impact of this adjustment is over $1 million per year in revenue at the current rates.'
• Adjustment No. 2: MSD's O&M Expense Should be Reduced. MSD makes an
unsupported assumption (with no justification at all) that its Operations & Maintenance
("O&M") expense should include an annual base inflation factor of 3%. As supported by
independent sources, MSD's assumption is incorrect and should be reduced to 2.25%.8 The
total impact from this reduction is a decline in projected O&M expense levels from
approximately $16 million for four years.' Moreover, MSD unnecessarily increased the
General Counsel expense, and if the General Counsel expense grows at a rate of general
inflation, this adjustment further reduces MSD's projected O&M expenses by $6.3 million."'
• Adjustment No. 3: MSD's Revenue Bond Interest Rate Should be Reduced. MSD projects
that it will issue over $857 million of incremental revenue bonds to finance the capital
improvement projects. MSD assumes that the revenue bond issuances will be amortized
over 30 years at an interest rate of 5.5%, and as discussed in testimony and during the
conferences, this number is substantially overstated." The MIEC recommends reducing the
4 See Exhibit MIEC 29, Michael Gorman's Rebuttal Testimony, p. 7, Ins. 8 — 11; see also Exhibit MSD 17, Transcript
of Direct Testimony Technical Conference, pg. 206, lns. 13-25 and pg. 207, lns. 1 — 14.
5 See Exhibit BJH 88, Billie LaConte's Supplemental Testimony, p. 2, lns. 7 — 14; see also Exhibit MIEC 29, Michael
Gorman's Rebuttal Testimony, p. 8, lns. 20 — 22.
6 See Exhibit MIEC 29, Michael Gorman's Rebuttal Testimony, p. 7, lns. 18 — 27 and p. 8, lns. 1 — 6; see also Exhibit
MIEC 63, Michael Gorman's Surrebuttal Testimony, p. 11, ins. 1 — 22.
7 See Exhibit MIEC 63, Michael Gorman's Surrebuttal Testimony, p. 12, in. 4.
8 See Exhibit MIEC 29, Michael Gorman's Rebuttal Testimony, p. 10, lns. 1 — 16.
9 See id., at p. 10, lns. 16 —18.
t0 See id., at p. 10, lns. 21 — 23 and p. 11, lns. 1 —14.
11 See Exhibit MIEC 29, Michael Gorman's Rebuttal Testimony, p. 14, lns. 3 — 17; see also Exhibit MIEC 63, Michael
Gorman's Surrebuttal Testimony, p. 7, lns. 3 — 22, and p. 8, lns. 1 — 29, and p. 9, Ins. 1 — 5.
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30 -year bond debt interest expense to 4.65%, which was the highest interest rate projection
that MSD was able to provide any evidence to support in this proceeding.12 Importantly, if
accepted by the Commission, this debt interest expense of 4.65% will still overstate the debt
service cost on new revenue bond issuances during the forecast period.13
• Adjustment No. 4: MSD's Bad Debt Expense is Substantially Overstated. Bad debt
expense should reflect the normalized historical levels of customers' failure to pay their bills.
From the period 2006 to 2010, MSD's actual bad debt expense is represented with a factor
of approximately 3.18% of actual total wastewater revenue billings.14 MSD's expense is
based on a highly abnormal factor of 3.96%. The MIEC recommends using a normal factor
of 3.18% (a number still much higher than other Missouri utility companies) to reflect
historical actual debt expense, a new enhanced collection procedure now implemented by
MSD to improve the abnormal level of debt expense experienced in the economic recession,
and the projection that the economy will improve over the next four years while rates are in
effect.15 Moreover, as the MIEC's review of the electronic model uncovered, MSD should
have reflected a decrease (instead of an increase) in the bad debt expense in 2013.16
• Adjustment No. 5: MSD's Uncertain Cost Estimates for the CIP Should be Reduced by
10%. MSD's CIP budget should be reduced by approximately 10% to adjust for the fact
that MSD's estimates of the CIP are highly uncertain and the current cost projections are not
reliable. There is considerable uncertainty with MSD's budget. For example, as Mr. Brian
Hoelscher stated in his testimony, because of the economic conditions, MSD received bids
for capital work that "in some cases was 40% below traditional costs.i17 Therefore,
additional funds were available which were used to complete contingency projects beyond
the original program budget.18 In light of this situation, it is clear that MSD is overstating its
budget for projects, sometimes up to 40%. In short, ratepayers have already paid more for
projects that, in actuality, cost much less. Importantly, the inflation expense for the CIP is
excessive and unjustified for the four year period.19 Due to the uncertainty of the CIP
program, the budget, and the associated inflation with the CIP, it is prudent to reduce the
CIP estimated expense by 10%.
12 See Exhibit MIEC 89, Michael Gorman's Supplemental Testimony, p. 3, lns. 23 — 25.
13 See id., at p. 3, lns. 25 — 26, and p. 4, lns. 1 — 4.
14 See Exhibit MIEC 29, Michael Gorman's Rebuttal Testimony, p. 16, lns. 5 - 7.
15 See Exhibit MIEC 63, Michael Gorman's Surrebuttal Testimony, p. 13, lns. 15 — 24, and p. 14, lns. 1 —10.
16 See Exhibit MIEC 89, Michael Gorman's Supplemental Testimony, p. 2, lns. 3 — 28, and p. 3, lns. 1 — 8.
17 See Exhibit MSD 9B, Brian Hoelscher's Direct Testimony, p. 5, lns. 11 —13.
18 See id., at p. 5, lns. 13 —14.
19 See Exhibit MSD 94B, Brian Hoelscher's Responsive Testimony, p. 1, lns. 13 — 15 and p. 2, lns. 3 — 7. Curiously,
as discussed in the Supplemental and Responsive Testimony Conference on September 26, 2011, the inflation
expense for the CIP did not appear in Exhibit MSD 50A, the list of CIP projects required under the Consent
Decree.
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In addition to the five adjustments listed above, the MIEC supports the conclusions of
William Stannard, the Commission's expert, regarding reducing MSD's proposal to correct the
power expense escalators and the increases in pension expenses 21 The MIEC also supports the
conclusions of Billie LaConte, Barnes Jewish Hospital's expert, as articulated in her supplemental
testimony regarding, among other things, operating costs, pension costs, and use of the cash
expenditure method.'
The MIEC recommends a one year (or two year, at the most) rate increase of 9.6% covering
FY2013 from July 1, 2012 to June 30, 2013. MSD's failure to timely disclose information required in
the Consent Decree settlement document and its failure to disclose the details underlying the Black
& Veatch electronic model clearly raise questions with regarding to the accuracy of MSD's entire
filing.22 Based upon these transparency issues alone, the Commission could recommend a one year
rate increase in this proceeding. Moreover, the Consent Decree requires that MSD shall submit to
EPA a SSO Plan by December 31, 2013.23 The SSO Plan is approximately 55%, or $485 million
dollars, of the total proposed CIP for the rate period.24 The SSO Plan will provide a schedule of
specific projects for the elimination of many overflows; however, according to Mr. Brian Hoelscher
during the surrebuttal technical conference, a draft of the SSO Plan is not available.25 It is unfair and
places an unreasonable burden on MSD's ratepayers for the Board of Trustees to approve of rate
increases based upon an SSO Plan which has not reviewed by the Commission, much less drafted.
By including overstated cost estimates in its rate proposal, MSD will have a reduced
incentive to manage costs. This is unacceptable, especially considering that businesses and
residential customers alike should not be responsible for paying for MSD's managerial oversight. If
sewer rates spike dramatically, especially in this economic climate, businesses could re-evaluate their
decision to maintain offices and plants in the St. Louis area. The Commission should be very
sensitive to the fact that increasing MSD's rates to generate unnecessary revenue could be disastrous
for the sustainability of commerce in our city.
In conclusion, MSD's proposed rate increase does not impose a fair and reasonable burden
on all classes of ratepayers because the increase is excessive. The MIEC respectfully requests that
the Commission recommend only a one year (or two year, at the most) 9.6% rate increase from
July 1, 2012 to June 30, 2013, thereby providing MSD with an opportunity to develop the SSO Plan
and provide the Commission with more certainty as to the projects required in FY2014 - 2016.
Despite the MIEC's concerns, if the Rate Commission recommends a four year plan, then the
MIEC urges the Commission recommend that the rate increase be adjusted to 9.6% per year for the
next four years, totaling $105.6 million dollars. This adjustment will remedy the $23 million dollar
20 See Exhibit MIEC 63, Michael Gorman's Surrebuttal Testimony, p. 15, lns. 18 — 22, and p. 16, lns. 1-5; see also
Exhibit L&B 30, William Stannard's Rebuttal Testimony, pp. 11 —14.
21 See Exhibit BJH 88, Billie LaConte's Supplemental Testimony, p. 2, lns. 7 — 20 and p. 3, lns. 1 —16.
22 See, e.g., Exhibit MIEC 29, Michael Gorman's Rebuttal Testimony, p. 2, lns. 13 — 29 and p. 3, lns. 1 — 25; see also
Exhibit MIEC 63, Michael Gorman's Surrebuttal Testimony, p. 19, lns. 5 — 8.
23 See MSD Exhibit 49A, Final Consent Decree, ¶23, p. 25.
24 See Exhibit BJH 88, Billie LaConte's Supplemental Testimony, p. 4, lns. 8 - 10.
25 See Exhibit MSD 90, Surrebuttal Testimony Technical Conference Transcript, p. 193, lns. 8 — 21.
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overstatement to MSD annual costs of service to 2016, the end of the rate forecast period. This
proposal takes into the account the numerous — and significant — adjustments that the MIEC has
proven to be necessary to make the rate proposal reasonable.
Thank you for your time and consideration. The MIEC appreciates your commitment to
ensuring that MSD's proposed rate increase imposes a fair and reasonable burden on all classes of
ratepayers. Thank you for your service.
Sincerely,
DianaVuylsteke
John R. Kindschuh
Bryan Cave LLP
Attorneys for Missouri Industrial Energy
Consumers
Dated: September 28, 2011
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