HomeMy Public PortalAboutExhibit L&B 97 Prehearing Conference Summary Report 092811BEFORE THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
PREHEARING CONFERENCE SUMMARY
OF RAFTELIS FINANCIAL CONSULTANTS, INC.,
CONSULTANT, AND LASHLY & BAER, P.C.,
LEGAL COUNSEL TO THE RATE COMMISSION
Raftelis Financial Consultants, Inc. and Lashly & Baer, P.C., as Consultant and Legal
Counsel, respectively, to the Rate Commission of the Metropolitan St. Louis Sewer District,
respectfully submit this Prehearing Conference Summary regarding the outstanding issues in the
Wastewater Rate Change Proposal submitted to the Rate Commission by the Metropolitan St.
Louis Sewer District (the "District") on May 10, 2011.
BACKGROUND
The District's Proposed Rate Change Proposal for a Wastewater Rate Change (the
"District Rate Change Proposal") proposes the use of $945,000,000 in bond financing and
$171,000,000 in cash financing to fund its Capital Improvement and Repairs Program (CIRP)
through FY 2016 to provide the funds needed to comply with regulatory requirements relating to
deficiencies in the District's wastewater system, including sewers, pump stations, and treatment
plants, and to satisfy the requirements of the Consent Decree.
The District proposes to finance the required capital improvements by a combination of
wastewater user charge revenues, available fund balances, revenue bond proceeds, Missouri
Clean Water State Revolving Fund loan proceeds, potential commercial paper proceeds, grants
and contributions, other operating revenues, and interest income. In the event that the voters of
the District do not approve bond financing for the CIRP in order to comply with the terms of the
Consent Decree, the District proposes cash financing.
The District's position is that the District Rate Change Proposal is necessary for it to
comply with the Clean Water Act and with the Consent Decree. A "Detail Sheet" submitted to
the Board of Trustees on June 9, 2011, purports to describe the major Consent Decree
components and includes a 23 -year schedule to achieve compliance with the Clean Water Act.
The District estimates the capital program required to achieve compliance with the Consent
Decree will cost $4.7 billion in 2011 dollars, including certain remaining master planning work,
as well as design and construction of remedial measures required to achieve compliance;
implementation of the District's CSO Long Term Control Plan recently approved by the State of
Missouri; use of green infrastructure in abating CSO discharges; a Capacity, Management,
Operations and Maintenance program designed to manage the collection system and progress
reporting.
Under the Charter, and in its Report, the Rate Commission will have eight different
factors to consider. This 2011 Wastewater Rate Change case comes down mainly to one factor:
Does the District Wastewater Rate Change Proposal impose a fair and reasonable burden on all
classes of ratepayers? Various elements affect the District's proposal. The testimony from the
Rate Consultant and Intervenors raises the issue of whether, when all these elements are
considered together, the District is being overly conservative on the various elements which
together lead to a larger Rate Change Proposal than may actually be necessary.
CIRP FINANCING
a. Appropriation versus Cash Flow Basis
The District Rate Change Proposal was developed on an appropriation basis. As such,
the contract price of a project is assumed appropriated at the time the contract is awarded. The
actual expenditure of these appropriations occurs over the life of the project. Whether
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unexpended or unencumbered, the funds will not have been applied to the CIRP and the impeded
cost of the 40% unexpended portion has resulted in a charge borne by the ratepayers. A
comparison of a cash flow basis rather than the current appropriation basis shows that the
District will appropriate over the period from fiscal years 2013 to 2016 (after adjusting from
inflation) an excess of nearly $44 million.
Intervenor Barnes Jewish Hospital ("BJH") suggests that cash expenditure is more
accurate than appropriation method and results in somewhat lower increases. If the District uses
a cash expenditure basis, its proposed rate increase for the rate period could be lowered by 3%
per year.
b. Structuring of Debt Service
The District's Rate Change Proposal contemplates equal payments of principal and
interest. Historically, however, and based on testimony at the Surrebuttal Technical Conference,
the District's financial advisor testified that there will in fact be some years of interest payments
only, before the principal begins. The Rate Consultant believes that therefore, there could be a
restructuring of debt in the proposal, so that there are lower rates in the next two years.
OPERATION AND MAINTENANCE
Factors related to the District's personnel costs and benefits for which the District is
projecting a significant increase over the forecast period raise concern. Specifically, although
testimony indicated that the increase was due in part to Other Post —Employment Benefit
expenses, this does not appear to be included in the District Rate Change Proposal. The Rate
Consultant believes the District should relook at this. In addition, there is the issue regarding the
District's change in pension plan. Although Ms. Zimmerman testified that the change in the
pension plan was adopted to reduce the District's pension costs, this does not appear in the
District Rate Change Proposal. The Rate Consultant believes that the effect of the change in the
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pension plan should be incorporated into the District's rate model and the District Rate Change
Proposal adjusted as appropriate.
There has also been concern raised regarding the pay increases for employees included in
the District Rate Change Proposal. An examination of the agreements with its employees reveals
that the District does not have a contractual obligation to increase the pay of its employees. St.
Louis City and St. Louis County have had pay freezes, while District employees continued with
pay increases.
Both the Intervenors Missouri Industrial Energy Consumers ("MIEC") and BJH have
proposed that alternative interest rates be utilized. While the Rate Consultant agrees that there
should be transparency regarding the District's choice of interest rates, the Consultant has not
proposed a certain rate. The Consultant believes that the District should review and look closer at
its choice of rates and provide more transparency. For example, the District's projected inflation
for electric and gas is noticeably greater than historic levels. The Rate Consultant testified that
the District has not provided any reference to planned rate increase from their electric and gas
providers, nor has it provided any information regarding negotiation of longer term electric
power contracts.
QUALIFYING FOR CREDIT RATING
The District Rate Change Proposal is designed to generate debt service coverage for
proposed revenue bonds consistent with rating agencies' expectations for "AA" rated large
metropolitan wastewater systems. In addition, the District is seeking to maintain a strong
liquidity position. The District's coverage ratios generally exceed the medians contained in the
January 18, 2011 Fitch 2001 Water and Wastewater Medians. Thus, it ought to be determined
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whether the ratios are higher than necessary, thereby resulting in rates than are higher than
required.
CONCLUSION
All of these factors, as well as those mentioned by the Intervenors, bear upon whether the
District Rate Change Proposal is fair and reasonable. If, in fact, there is an issue that the size of
the rate increase is so unreasonable as to be excessive, under a recent case interpreting the
Hancock Amendment, the District Rate Change Proposal could face Hancock Amendment
issues. In Arbor Investment Co. LLC v. City of Hermann, a case decided by the Missouri
Supreme Court in May 2011 involving the City of Hermann, the court discussed the situation of
whether the charge are so excessive as to be effectively unrelated to the service provided. The
court notes that "If the fee is so exorbitant that it cannot be said to bear a reasonable relationship
to the service, at least that excess amount cannot be said to be paid for the service itself." This
would affect the factor asking whether the District Rate Change Proposal is in compliance with
existing law.
Respectfully Submitted,
Lisa O. Stump
LASHLY & BAER, P.C.
714 Locust Street
St. Louis, Missouri 63101
Tel: (314) 621-2939
Fax: (314) 621-6844
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CERTIFICATE OF SERVICE
The undersigned certifies that on the 28th day of September, 2011:
An electronic copy of the foregoing instrument was e -mailed to the Secretary of the Rate
Commission c/o 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
robowser@swbell.net
At the request of the 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 e -mailed to:
DISTRICT LEGAL COUNSEL: Susan Myers, Esq.
General Counsel
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, Missouri 63103
smyers@stlmsd.com
RATE COMMISSION CONSULTANT: Mr. William G. Stannard
President
Raftelis Financial Consultants, Inc.
3013 Main Street
Kansas City, Missouri 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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ROBERT A. MUELLER:
BARNES JEWISH HOSPITAL:
MISSOURI INDUSTRIAL ENERGY
CONSUMERS:
AARP AND CONSUMERS COUNCIL OF
MISSOURI:
Mr. Robert A. Mueller
16 Ladue Crest Lane
St. Louis, MO 63124
ramreco@sbcglobal.net
Lisa C. Langeneckert, Esq.
Sandberg, Phoenix & von Gontard, P.C.
600 Washington Avenue, 15th Floor
St. Louis, MO 63101-1313
llangeneckert@sandbergphoenix.com
John R. Kindschuh, Esq.
Bryan Cave, LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
Telephone: 314-259-2313
john.kindschuh@bryancave.com
and
Diana M. Vuylsteke, Esq.
Bryan Cave, LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
dmvuylsteke@bryancave.com
John B. Coffman, Esq.
John B. Coffman, LLC
871 Tuxedo Blvd.
St. Louis, MO 63119
john@j ohncoffman.net
Lisa O. Stump
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