Loading...
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 1 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) a /77hp-)--, 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 2 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 -1- 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 -2- 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 -3- 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. - 4 - 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 -5- 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 -s- 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. -7- 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. -s- 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 3661274.3 3 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 //1,1)6,,IA in'tip 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