HomeMy Public PortalAboutExhibit MSD 98 Prehearing Conference Summary of MSD 092811EXHIBIT MSD 98
BEFORE THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
SEPTEMBER 28, 2011 PREHEARING CONFERENCE SUMMARY
OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT
ISSUE: WASTEWATER RATE CHANGE PROPOSAL
WITNESS: METROPOLITAN ST. LOUIS SEWER DISTRICT
SPONSORING PARTY: METROPOLITAN ST. LOUIS SEWER DISTRICT
DATE PREPARED: September 28, 2011
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, Missouri 63103
3661274.3
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EXHIBIT MSD 98
BEFORE THE RATE COMMISSION
OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT
For Consideration of a Wastewater
Rate Change Proposal by the Rate
Commission of the Metropolitan
St. Louis Sewer District
SEPTEMBER 28, 2011 PREHEARING CONFERENCE SUMMARY OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
Pursuant to §§ 7.280 and 7.290 of the Charter Plan of the Metropolitan St. Louis Sewer District
(the "Charter Plan"), the Metropolitan St. Louis Sewer District ("District") hereby submits its
Prehearing Conference Summary (Exhibit MSD 98)
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Susan Myers, General Counse
METROPOLITAN ST. LOUIS SEWER DISTRICT
2350 Market Street
St. Louis, Missouri 63103
smyers@stlmsd.com
Tel: (314) 768-6200
Fax: (314) 768-6372
3661274.3
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THE DISTRICT'S
PREHEARING CONFERENCE SUMMARY
September 28, 2011
Good Morning, my name is Susan Myers and I am the General Counsel for the
Metropolitan St. Louis Sewer District. I will provide the District's summary statement regarding
the proceedings to date and our wastewater rate proposal. Stormwater services are not included
in this rate proposal. The District's Rate Proposal submitted on May 10, 2011 complies with all
the required criteria contained in Section 7.270 of the MSD Charter governing a rate change.
This has previously been demonstrated by the testimony of several District witnesses.
Section 7.270, paragraph 1, of the Charter requires the proposed rate change to be
consistent with constitutional, statutory, or common law as amended from time to time. The
District's Rate Proposal complies with this criterion.
Section 7.270, paragraph 2, of the Charter states: Will the proposed rate change enhance
the District's ability to provide adequate sewer and drainage systems and facilities or related
services? Based on the Rate Proposal submitted by the District and witness testimony the
answer to this question is, Yes. The main driver for the proposed rate change is the Capital
Improvement and Replacement Program (CIRP) which will move the District's wastewater
system towards environmental compliance. These improvements are proposed to be financed
with a combination of cash financing and debt.
Section 7.270, paragraph 3, of the Charter states: Is the proposed rate change consistent
with and not in violation of any covenant or provision relating to any outstanding bonds or
indebtedness of the District? The answer to that question is yes. This proposal is structured in
accordance with the District's Master Bond Ordinance.
Section 7.270, paragraph 4, of the Charter states: The proposed rate change must not
impair the ability of the District to comply with applicable Federal or State laws or regulations as
amended from time to time. The District's proposed rate change will not impair, but rather
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supports, the District's ability to comply with applicable Federal and State laws and regulations
and meet the requirements outlined in the Consent Decree.
Section 7.270, paragraph 5, of the Charter states: Does the proposed rate change impose
a fair and reasonable burden on all classes of ratepayers? Yes, the proposed rate change retains
the same general methodology used in the past with respect to the wastewater rate structure. The
compliance charge has been modified to more equitably distribute the cost of monitoring and
sampling of commercial customer discharges. This wastewater rate structure has been in place
since 1993, approved by Missouri courts, and has been approved as fair and equitable in all prior
Rate Commission and Board of Trustee determinations since 2000.
During these rate proceedings, there has been disagreement on several issues that affect
revenue requirements and cost allocations. The District's position on each of these issues is
summarized below.
ISSUE 1— LESS THAN A FOUR (4) -YEAR RATE CHANGE
A less than four (4) year rate change, is clearly an issue of great concern to the District.
The current MSD Rate Proposal has been deliberately pared down from 5 years to 4 years. This
will allow the District to make a rate proposal with better information and less long term
assumptions than with a 5 year rate proposals. Given the conditions in the Consent Decree a four
year rate cycle provides the optimal combination of clarity of the CIRP and regulatory
requirements. This approach affords the District a greater ability to recognize and adjust to
trends which will affect future rate proposals. The four year rate cycle also facilitates the ability
to project compliance with the 2004 Master Bond Ordinance Additional Bonds test and forecast
adequate debt coverage for outstanding and planned bonds. It also demonstrates sound security
and a positive credit consideration for bond investors. Additionally, it will also optimize the
public funds spent on additional rate cases.
Unlike the shorter rate proposal recommended by several intervenors, the current rate
proposal period of FY 2013-2016 enhances the District's ability to meet the milestones contained
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in the Consent Decree. The duration of the proposed rate proposal coincides exactly with
expected approval of The Sanitary Sewer Overflow (SSO) Control Master Plan, an important
piece of information that will guide future schedule and funding requirements. The SSO Control
Master Plan is required to be submitted by December 31, 2013. Assuming one year for
regulatory review, and MSD response to comments before approval by the EPA, MSD estimates
that the information will become final in December 2014. At that time MSD will begin
development of its next rate proposal, which will include this additional information. A one year
rate proposal would only result in MSD bringing back to the Rate Commission next year a
proposed FY 2013-2016 project list with the same projects as are currently listed for this rate
proposal.
The current rate proposal promotes a positive perception of the District's financial
standing. A shorter rate proposal affects the bond rating agencies' perception of the District in
the following ways. First, once rating levels are established, the rating analysts look for
consistency in financial performance moving forward. The outcome of the rate setting
proceedings will also signal to the rating agencies the commitment of a key stakeholder to
supporting MSD's ability to meet its obligations under the Consent Decree. Secondly, the effect
of a less than four year rate change would significantly impact the District's revenue by reducing
the amount available from bond funding.
The commission should also note that a less than four year rate change cycle most likely
hinders the Rate Commission from complying with sections 7.270(2), (3)&(4) of the Charter
and would also come at a significant cost to the District's rate payers. Traditionally the rate case
expense to the rate payers has been approximately $800,000 in contracted expenses, not
including costs of staff time.
ISSUE 2 — AVOIDING A NEGETIVE CREDIT ACTION
The Rate Proposal's effect on the District's bond ratings and the ability to maintain a
target of "AA" credit rating are of great concern to the District. The District's position is that a
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minimal acceptable investment grade bond rating as recommended by at least one of the
intervenors could severely restrict the District's access to funding. This restricted access to
funding translates to tens of millions of dollars of extra debt service costs for the District's
ratepayers. Under certain financial conditions even lower investment grade bond ratings may not
provide access to credit. It is in the best interest of the District's ratepayers to maintain a target
of an "AA" credit rating. The willingness of the District to impose adequate and timely
adjustments to rates and charges and to fund capital replacements to maintain the utility is
essential.
ISSUE 3 — NECESSITY OF CIRP AND FUNDING
The District believes it is important that the Rate Commission understand the necessity of
the CIRP. This Rate Proposal and CIRP have been carefully developed and if recommended
allow the Rate Commission to meet the requirements of Sections 7.270(2) & (4) of the MSD
Charter. The CIRP is necessary to meet the requirements in the Consent Decree. If the Consent
Decree requirements are not met, the District will be subject to the cost of stipulated penalties as
outline in the Consent Decree. As long as MSD continues to meet its requirements as prescribed
in the Consent Decree it will not incur the additional cost of stipulated penalties.
It is important to understand that there is a continuum of projects over the entire duration
of the Consent Decree. There is no slack period in the next 23 years to play catch-up on projects.
Constructed SSO removal is front-end loaded in the Consent Decree due to their high priority
and the fact that they are prohibited by the Clean Water Act. The District's Rate Proposal is
designed to execute projects that are ready to move forward and provide the necessary resources
to continue the process of developing and designing the projects that will be built in the future.
Delaying the funding of the CIRP will, in effect, shorten the compliance schedule that has been
negotiated with the regulatory agencies.
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ISSUE 4 — ANNUAL CASH VERSUS PROJECT APPROPRIATION FUNDING
The cash funding methodology if adopted would provide a one time shift in cost between
the proposed rate cycle and a future rate cycle. This represents a one time deferment of costs to
the next rate case. MSD's current method for managing the capital improvement program was
put in place approximately 10 years ago. This method has been very successful and has given us
the ability to be very flexible in addressing changes and challenges to delivery of the capital
program. By using this process and by constantly monitoring the anticipated fund balance that is
available for capital projects, MSD has been able to deliver an aggressive capital program on
schedule and under budget.
For the future, MSD has made adjustments to the delivery model to meet schedule
requirements associated with the Consent Decree. These primarily consist of taking full
advantage of qualified consulting engineer resources available within the St. Louis area to ensure
the Consent Decree milestones are met. Switching from project appropriation to annual cash
funding would eliminate one potential tool for MSD to use in delivering the most cost effective
overall program possible.
ISSUE 5 — ECONOMIC ASSUMPTIONS
The District has made reasonable assumptions related to the future of economic
conditions and markets for its service area. These assumptions were made while relying on
existing data, analytical predictions and indices to make reasonable predictions which by the
very nature of economic forecasts are uncertain. These assumptions serve as the foundation
which allows the District to meet its known and anticipated regulatory requirements.
The assumptions advanced thus far by many of the intervenors fail to take into account
the risks associated with the present state of the economy and volatility of financial markets. If
adopted these assumptions could lead to underfunding of the regulatorily required CIRP,
exposing the District to risk of increased costs from underfunding of Consent Decree driven
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O&M and CIRP costs; increased cost of debt services, cost of potential stipulated penalties, and
potential legal actions.
In a broad view, given that no person can precisely predict future economic trends a
mixture of conservative and optimistic economic assumptions, as discussed during these
proceedings, will represent reality. If in the aggregate we collect revenue in excess of its
forecasts, the District will move forward and expedite the Consent Decree compliance related
work or continue the stated program with reduced use of debt, which would then allow additional
debt to be available for other projects in future years. On the other hand, if the assumptions
prove to have over -stated available revenues in the aggregate, the District may have revenue
shortfalls leading to inabilities to meet regulatory requirements and subjecting the District to
stipulated penalties, fines and other possible legal action. Overall the ratepayer is better served if
the capitol program is slightly overfunded as opposed to underfunded.
ECONOMIC ASSUMPTION — BOND INTEREST RATES/DEBT SERVICE
The District structured the current Rate Proposal increases over the four year period to
generate minimum levels of debt coverage. The District assumed a 5.5 % interest rate for all
bonds anticipated to be issued over the four years of the Rate Proposal. The District's total
outstanding debt consists of 100% revenue bonds. In our next discussions with the rating
agencies it will be very important for MSD to provide projections of the impact on debt coverage
of issuance of all authorized bonds. Not reflecting reasonable market risk will then result in
lower debt coverage and may impair MSD's ability to maintain the current ratings.
ECONOMIC ASSUMPTION — BAD DEBT
The District has reasonably assumed the bad debt provision would increase steadily over
the four year Rate Proposal period as rate increases overtake the efficiency of the enhanced
collection efforts. It is important when examining MSD's bad debt provision to consider that it
does not have the ability to incent payment through shut off of water services. Service shut off is
the strongest collection tool available to water utilities. The District's lack of this tool must be
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considered as recognized by the Rate Commission's consultant Bill Stannard in his direct
testimony. Without the ability to shut off water service there is no way to shut off sewer service
without causing health and safety issues for the community and incurring a great cost. The rate
proposal assumes the level of the bad debt provision will decrease in FY12 & FY13 due to the
initial impact of the more aggressive collection efforts implemented in FY11. While the
enhanced collection efforts will be in place in an attempt to address delinquent customer bills
through FY16, it is anticipated that bad debt will rise later in the rate cycle due to the impact of
the proposed rate increases.
ECONOMIC ASSUMPTION — INFLATION RATES
MSD's O&M expense inflation rates are based on a composite of inflation indices
specific to the type of cost. The inflation assumptions used for contractual services, machinery
and equipment parts, chemical supplies, operational construction and building costs and energy
costs are based on indices more closely related to these expenses than the CPI -U used by
intervenor MIEC. Several O&M expenses are unrelated to inflation and are based on short-term
historical trends for investment market conditions. The District's use of more closely correlated
indices and projections provide a reasonable assumption as to the future O&M inflation expense.
ECONOMIC ASSUMPTION — WATER USAGE LEVELS/BILLED VOLUME
As part of this Rate Proposal, the District has provided appropriate assumptions for the
future billed volume and water usage. The assumptions are based on two factors. First it is well
documented that nationwide water consumption rates are decreasing and secondly water
conservation efforts for both residential and non-residential efforts is a major factor which
contributes to a steady decline in billed volume for water usage at water and wastewater utilities
nationwide. The Rate Commission should appropriately consider this trend and adopt the
assumption given by the District in its Rate Proposal.
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ISSUE 6 — ALTERNATIVE RATES
Voter authorization is needed in order for the District to issue the $945 million in revenue
bonds contained in the Rate Proposal to fund the next four years of the CIRP. An authorization
election is proposed for Spring 2012. The District's proposal includes an alternative wastewater
rate option designed to replace the bond funding with a 100% cash, or PAYGO, revenue stream
should the voters fail to pass the needed authorization. The alternative wastewater rates would
result in an average residential monthly bill of $74.40 versus $47.05 in FY16 under the proposed
four year rate plan. MSD's proposed use of bonds places less of a burden on ratepayers than the
100% PAYGO alternative while providing the revenue needed for the District to meet its
Consent Decree obligations. The District's Rate Proposal requests that the Rate Commission
recommend this alternative set of rate increase to be enacted should the voter authorization of
bonds fail.
This concludes the District's official summary statement. A copy of our statement will be
filed by 5:00 PM today.
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EXHIBIT MSD 98
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on the 28th day of September, 2011:
An electronic copy of the foregoing instrument was emailed to the Secretary of the Rate
Commission do jfenton@stlmsd.com
SECRETARY OF RATE COMMISSION: Ms. Nancy Bowser
Secretary of Rate Commission
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103-2555
robowser@swbell.net
At the request of Rate Commission Counsel, one paper original and associated Exhibits
are held at the Rate Commission office for Commissioner review.
An electronic copy of the foregoing instrument was emailed to:
RATE COMMISSION LEGAL
COUNSEL:
Lisa O. Stump, Esq.
Lashly & Baer, P.C.
714 Locust Street
St. Louis, MO 63101
lostump@lashlybaer.com
RATE COMMISSION CONSULTANT: Mr. William Stannard
President
Raftelis Financial Consultants, Inc.
3013 Main Street
Kansas City, MO 64108
wstannard@raftelis.com
COVIDIEN:
Mr. Randy Meyer
Utility Manager
Covidien
3600 North 2nd Street
St. Louis, MO 63147
Randy.Meyer@covidien@com
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EXHIBIT MSD 98
ROBERT A. MUELLER: Mr. Robert A. Mueller
16 Ladue Crest Lane
St. Louis, MO 63124
ramreco@sbcglobal.net
BARNES JEWISH HOSPITAL: Ms. Lisa Langeneckert
Sandberg, Phoenix and VonGontard P.C.
One City Centre, Suite 1500
St. Louis, MO 63101
langeneckert@sandbergphoenix.com
MISSOURI INDUSTRIAL ENERGY John Kindschuh, Esq.
CONSUMERS: Bryan Cave, LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
John.kindschuhAbryancave. corn
Diana M. Vuylesteke, Esq.
Bryan Cave, LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
dmvuylestekea,bryancave.com
AARP & CONSUMERS COUNCIL OF
MISSOURI:
John B. Coffman, Esq.
John B. Coffman, LLC
871 Tuxedo blvd.
St. Louis, MO 63119
j ohnnj ohncoffman.net
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Susan Myers, General Counsel
METROPOLITAN ST. LOUIS SEWER DISTRICT
2350 Market Street
St. Louis, Missouri 63103
Email: smyers@stlmsd.com
Tel: (314) 768-6200
Fax: (314) 768-6372
3661274.3 4