HomeMy Public PortalAboutExhibit MIEC 29 MIEC Rebuttal Testimony (Michael P. Gorman) 071811
BEFORE THE
RATE COMMISSION OF
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
2011 WASTEWATER RATE CHANGE PROCEEDING
Rebuttal Testimony and Schedules of
Michael P. Gorman
On behalf of
Missouri Industrial Energy Consumers
Project 9456
July 18, 2011
Exhibit No.:
Witness:
Type of Exhibit:
Sponsoring Party:
Date Testimony Prepared:
Michael P. Gorman
Rebuttal Testimony
Missouri Industrial Energy Consumers
July 18, 2011
CHESTERFIELD, MO 63017
BEFORE THE
RATE COMMISSION OF
THE METROPOLITAN ST.LOUIS SEWER DISTRICT
2011 WASTEWATER RATE CHANGE PROCEEDING
STATE OF MISSOURI
COUNTY OF ST.LOUIS
)
)
)
SS
MARIA E.DECKER
Notary Public -Notary Seal
STATE OF MISSOURI
St.Louis City
My Commission Expires:May 5,2013
Commission #09706793
Affidavit of Michael P.Gorman
Michael P.Gorman,being first duly sworn,on his oath states:
1.My name is Michael P.Gorman.I am a consultant with Brubaker &Associates,
Inc.,having its principal place of business at 16690 Swingley Ridge Road,Suite 140,
Chesterfield,Missouri 63017.We have been retained by the Missouri Industrial Energy
Consumers in this proceeding on their behalf.
2.Attached hereto and made a part hereof for all purposes are my rebuttal
testimony and schedules which were prepared in written form for introduction into evidence in
the Rate Commission of the Metropolitan St.Louis Sewer District's 2011 wastewater rate
change proceeding.
3.I hereby swear and affirm that the testimony and schedules are true and correct
and that they show the matters and things that they purport to show.
Subscribed and sworn to before me this 15th day of July,2011.
Nt!t~l.O+z-
BRUBAKER &ASSOCIATES,INC.
Michael Gorman
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BRUBAKER & ASSOCIATES, INC.
BEFORE THE
RATE COMMISSION OF
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
2011 WASTEWATER RATE CHANGE PROCEEDING
Rebuttal Testimony of Michael P. Gorman
Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 1
A Michael P. Gorman. My business address is 16690 Swingley Ridge Road, Suite 140, 2
Chesterfield, MO 63017. 3
Q WHAT IS YOUR OCCUPATION? 4
A I am a consultant in the field of public utility regulation and a Managing Principal of 5
Brubaker & Associates, Inc., energy, economic and regulatory consultants. 6
Q PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND EXPERIENCE. 7
A This information is included in Appendix A to my testimony. 8
Q ON WHOSE BEHALF ARE YOU APPEARING IN THIS PROCEEDING? 9
A I am appearing on behalf of the Missouri Industrial Energy Consumers (“MIEC”), a 10
group of large industrial customers of the Metropolitan St. Louis Sewer District 11
(“MSD” or “District”). 12
Q WHAT IS THE PURPOSE OF YOUR TESTIMONY? 13
A I will respond to MSD Staff’s proposal for a series of wastewater rate increases 14
covering the period 2012 through 2016. As outlined in MSD’s direct testimony and as 15
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supported in a study by Black & Veatch included in MSD Staff’s filing as Exhibit MSD 1
1, Staff proposes a series of rate increases of 4.3% in 2012, 11.0% in 2013, 12.0% in 2
2014, 12.0% in 2015 and 12.0% again in 2016. The effect of the MSD Staff proposal 3
will increase MSD’s wastewater revenue by $128.9 million, or 60.3% over wastewater 4
rates in effect in calendar year 2011. 5
MSD Staff’s proposal is premised on the assumption that the voters will 6
approve an increase in its authority to issue incremental debt levels. Currently, MSD 7
has authority to issue up to $775 million of debt. MSD Staff proposes to go to the 8
public for approval to increase its debt issuance authority by nearly $1 billion before 9
fiscal year 2013. In the event voters do not approve MSD’s ability to issue 10
incremental debt levels, its alternative rate proposal will increase wastewater rates by 11
160% over the period ending 2016. 12
Q DO YOU HAVE ANY PRELIMINARY FINDINGS AND RECOMMENDATIONS 13
CONCERNING MSD STAFF’S PRESENTATION AND RECOMMENDATIONS IN 14
THIS PROCEEDING? 15
A Yes. I believe there are material deficiencies in MSD’s presentation in this case 16
which create significant uncertainty of the validity of MSD Staff’s proposed rate 17
increase. The deficient aspects of MSD Staff’s filing include the following: 18
1. MSD Staff will not provide a copy of its June 2011 Consent Decree settlement 19
with the U.S. Environmental Protection Agency (“EPA”). MSD Staff 20
maintained this Consent Decree settlement is confidential and cannot yet be 21
disclosed. The primary factor underlying the enormous proposed increase in 22
MSD’s rates over the next five years is MSD Staff’s claim that the Capital 23
Improvement Program (“CIP”) is needed to comply with the Consent Decree. 24
MSD Staff has not outlined how its CIP through 2016 would be impacted 25
absent the Consent Decree. MSD Staff simply asserts that the CIP would 26
eventually be needed anyway. However, without disclosure of the Consent 27
Decree settlement, the timing of the proposed CIP over the next five years or 28
much longer, is at very best an estimate, and the underlying proposed rate 29
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increase to support this CIP has not been shown to be reasonable or 1
necessary. 2
2. MSD Staff will not provide a working copy of its rate calculations underlying its 3
Exhibit MSD 1, which is a cost of service study provided by its rate consultant, 4
Black & Veatch. Black & Veatch has refused to disclose, in electronic format, 5
its cost of service study, claiming it is a proprietary work product. This cost of 6
service study includes an enormous number of calculations underlying the 7
allocation of costs between stormwater and wastewater, escalation of 8
Operation and Maintenance (“O&M”) expenses, other revenue allocations and 9
projections, and calculation and escalation of MSD’s identified CIP. This data 10
is the heart of MSD Staff’s proposal for a multi-year rate increase in this case. 11
With the very short time period customers of MSD were given to 12
evaluate this rate filing, and MSD’s refusal to provide electronic copies of 13
Black & Veatch’s documents to allow for an expeditious and thorough review 14
of the underlying cost of service data, I cannot attest to the full accuracy nor 15
reasonableness of Black & Veatch’s projections. 16
The very foundation for MSD Staff’s recommendation for a rate increase 17
cannot be verified, or shown to be just and reasonable. Therefore, the Rate 18
Commission should make strong recommendations to the Trustees of the MSD Board 19
in order to prevent such lack of transparency and disclosure of critical information in 20
future rate proceedings. Further, I recommend the Rate Commission insist that it be 21
mandated on MSD Staff, in order to protect ratepayers, that all Consent Decree 22
settlement material and supporting rate and cost of service analyses be made 23
available to intervening parties and the Rate Commission before a change in rates is 24
approved in this proceeding. 25
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Q IN LIGHT OF MSD STAFF’S FAILURE TO DISCLOSE INFORMATION REQUIRED 1
IN THE JUNE 2011 CONSENT DECREE SETTLEMENT, AND TO DISCLOSE THE 2
DETAILS UNDERLYING THE BLACK & VEATCH CALCULATION AND 3
ALLOCATION OF THE CLAIMED REVENUE DEFICIENCY, WHAT POSITION DO 4
YOU RECOMMEND THE RATE COMMISSION TAKE TO THE MSD TRUSTEES? 5
A I recommend the Rate Commission protect the ratepayers’ interest against MSD Staff 6
imposing unreasonable or excessive rates on its service territory. Because relevant 7
and material information has not been disclosed, I recommend the Rate Commission 8
take the following positions: 9
1. It should recommend that the MSD Trustees approve no more than a 10
one-year rate increase in this proceeding. As outlined below, MSD Staff’s 11
estimated first year rate increase of 4.3% should be rejected and a rate 12
increase not exceeding 3.0% should be adopted. 13
2. The Rate Commission should recommend that the Trustees direct MSD Staff 14
to hire a rate consultant that will provide full disclosure of all projections of 15
revenue requirement and allocation for wastewater and stormwater sewer 16
operations, and provide complete transparency to all interested parties in all 17
rate proceedings where rate changes will be suggested. To the extent the 18
consultant hired by MSD Staff requires a protective document on any 19
proprietary spreadsheet database, the Rate Commission could direct MSD 20
Staff to use a traditional confidentiality agreement used by the Missouri Public 21
Service Commission in order to protect the propriety of any confidential 22
document or work product. 23
Review of MSD Staff’s Five-Year Rate Increase Plan 24
Q NOTWITHSTANDING THE ABOVE, DO YOU HAVE ANY CONCERNS WITH 25
MSD’S PROJECTED COST OF SERVICE INCREASES UNDERLYING ITS 26
PROPOSED FIVE-YEAR RATE PLAN? 27
A Yes. MSD Staff’s proposal for rate increases of over 60% is substantially overstated 28
as filed by Black & Veatch. Indeed, a list of the items which overstate the increase in 29
rates proposed by the Staff is summarized as follows: 30
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1. MSD Staff has substantially underestimated the amount of revenue at current 1
rates. 2
2. MSD Staff unreasonably escalates O&M expense. 3
3. MSD Staff’s projections for the interest rates on new municipal revenue bond 4
issuances through 2016 are higher than recent actual revenue bond interest 5
costs for municipal utilities with comparable bond ratings to that of MSD. 6
4. MSD Staff substantially overestimates bad debt expense. 7
Q PLEASE SUMMARIZE YOUR PROPOSED ADJUSTMENTS TO THE BLACK & 8
VEATCH COST OF SERVICE STUDY IN THIS PROCEEDING. 9
A As shown in the attached Schedule MPG-1, my proposed adjustments reduce MSD 10
Staff’s proposed increase of over 60% ($128.8 million) through 2016 down to 47.6% 11
($101.8 million). On a year-by-year basis my proposed adjustments result in a series 12
of increases of 3.0% in 2012, 8.5% in 2013, and 10.0% in 2014, 10.0% in 2015, and 13
10.0% in 2016. However, as discussed above, absent the detail in the Consent 14
Decree settlement, the timing and necessity of the outer year rate increases are 15
questionable. Based on the material provided, the adjustments to MSD’s filing 16
include the following: 17
1. More reasonable estimates of revenues at current rates. 18
2. A projection of O&M inflation that reflects consensus economists’ future 19
inflation projections, rather than MSD Staff’s arbitrary inflation assumptions. 20
3. Limited new O&M increases in 2015 and 2016 until these costs are more 21
certain and known to exist, or have been shown to be expense levels and not 22
capital items. 23
4. An estimate of interest rates on new revenue bond issuances that is in line 24
with actual interest rates incurred by other municipal utility issuers over the 25
last 12 months, with similar bond ratings to MSD. 26
5. A consistent projection of bad debt expense tied to historical uncollectible 27
levels. 28
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Each of these adjustments will be described in detail below. Note, there may 1
be other adjustments to MSD’s cost of service that will be proposed by other parties 2
that need to be included. However, due to time constraints and limited access to 3
critical supporting data, I am not in a position to endorse any aspect of MSD’s or 4
Black & Veatch’s work, but only am commenting on specific adjustments which I 5
believe are needed, at a minimum, to eliminate the overstatement to MSD’s future 6
cost of service. 7
Revenue Analysis 8
Q PLEASE DESCRIBE HOW MSD STAFF PROJECTED THE AMOUNT OF 9
REVENUE PRODUCED AT MSD’S CURRENT WASTEWATER RATES. 10
A In Table 3-1, at page 3-2 of Exhibit MSD 1, MSD Staff and Black & Veatch show a 11
projection of customer accounts for the historical period 2006 through 2010, and 12
projection for calendar years 2011 through 2016. On this schedule, non-residential 13
customers in 2006 through 2008, a period preceding the 2008-2009 U.S. economic 14
recession, were consistently in the range of 25,583 customers to 25,712 customers. 15
Those non-residential customer counts dropped significantly during the U.S. 16
economic recession, in calendar year 2010, to 25,165 customers, a 1.6% drop in 17
customer count. 18
Under MSD Staff’s projections, the number of non-residential customers are 19
projected to continue to decline during the forecast period even as the MSD service 20
area continues to recover from the global economic recession. 21
The volume projections underlying the MSD Staff study show a dramatic 22
decrease in non-residential customer sales volume. As shown on Table 3-2 at page 23
3-3 of Exhibit MSD 1, volume sales of non-residential customers dropped dramatically 24
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from the historical pre-recession period of 2006 through 2008, down through the 1
beginning of calendar year 2011. During this time, sales for non-residential 2
customers dropped from in excess of 30 million CCF down to approximately 3
23 million CCF, a 23% reduction in volume. 4
Q DID MSD STAFF OR BLACK & VEATCH PERFORM AN ECONOMIC 5
EVALUATION OF PROJECTIONS FOR ECONOMIC ACTIVITY IN THE MSD 6
SERVICE TERRITORY FOR THE FORECASTED PERIOD? 7
A No. Indeed, Black & Veatch witness Mr. Keith Barber specifically stated that he did 8
not take into consideration economic activities in his forecast for non-residential 9
customer growth and sales volumes during the forecast period. (See Exhibit MSD 17, 10
Transcript, at pg. 206, lns. 13 – 25 and pg. 207, lns. 1 - 14). As such, the Black & 11
Veatch and MSD Staff projections reflect a decline to the economically depressed 12
service territory sales levels throughout the forecast period. This dramatically 13
pessimistic outlook has not been supported by either Black & Veatch or MSD Staff. 14
Q DO THE ECONOMIC PROJECTIONS FOR MSD’S SERVICE TERRITORY 15
SUPPORT SUCH A PESSIMISTIC OUTLOOK FOR ECONOMIC ACTIVITY IN 16
MSD’S SERVICE TERRITORY? 17
A No. Indeed, the Federal Reserve Bank made the following general summary about 18
the service territory in and around St. Louis, MSD’s service territory: 19
The economy of the Eighth District has continued to expand at a 20
moderate pace since our previous report. Manufacturing activity has 21
continued to increase since the previous report, while activity in the 22
services sector has declined. Retail sales increased in April and early 23
May over year-earlier levels. Similarly, auto sales increased over the 24
same period. Residential real estate activity has continued to decline, 25
and commercial and industrial real estate market conditions have been 26
mixed. Overall lending at a sample of large District banks saw little 27
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change during the first quarter of 2011 compared with the fourth 1
quarter of 2010.1 2
As outlined above, while MSD’s St. Louis service territory was hit hard by the 3
U.S. recession, the area economy has stabilized and has arguably started to show 4
signs of improvement. This is in stark contrast to Black & Veatch’s and MSD Staff’s 5
projected outlook for a continued decline in service area economic activity. 6
Q COULD THE REDUCED SALES BE ATTRIBUTABLE TO CONSERVATION BY 7
NON-RESIDENTIAL CUSTOMERS? 8
A Yes, and that would largely describe declines in sales on a per customer basis from 9
the pre-recession period in 2006 through 2008. During those time periods, MSD 10
sales at a more normalized level were in excess of 30 million CCF per year. I would 11
expect some decline from that level largely due to conservation of customers; 12
however, sales that were caused by the economic recession (customer counts and 13
volume) would likely be reversed over time. This should stabilize sales volumes and 14
customer counts. 15
Q WHAT DO YOU RECOMMEND? 16
A I recommend that the depressed sales levels in calendar year 2011 be held constant 17
through 2016. MSD Staff’s projections for a continued decline in sales from a 18
depressed 2011 level are not reasonable nor supported. 19
Holding 2011 sales levels is a conservative estimate of actual future sales 20
levels out over the next five years, because sales could recover (increase) to 21
pre-recession levels, as non-residential customers are added back to the MSD 22
1“Summary of Commentary on Current Economic Conditions by Federal Reserve District,”
May 2011, emphasis added.
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system. Using 2011 customers and sales as a forecast, implicitly assumes that 1
economic conditions do not get worse, but do not improve. 2
Operating Expense Escalation 3
Q PLEASE DESCRIBE HOW MSD STAFF PROJECTED MSD’S OPERATING 4
EXPENSES THROUGH CALENDAR YEAR 2016. 5
A MSD Staff makes various assumptions concerning the escalation of many of its O&M 6
expense levels and details these assumptions at pages 2-2 and 2-3 of its Exhibit 7
MSD 1. Specifically stated, the underlying projections for its O&M expense 8
categories include an annual inflation rate projection of 3%. 9
This inflation rate, along with some detailed projections of other expense 10
categories, was used by MSD Staff and Black & Veatch to project MSD’s expense 11
levels through the 2016 forecast period. As shown on Exhibit MSD 1, Table 3-11, 12
page 3-18, excluding the additional O&M expense category, the aggregate O&M 13
expense escalation from calendar year 2011 through 2016 is 3.95%. 14
Q DO YOU BELIEVE THIS AGGREGATE LEVEL OF O&M EXPENSE 15
PROJECTIONS IS REASONABLE? 16
A No. Just focusing on the inflation outlook, MSD Staff’s projection of future O&M 17
expense escalation is overstated because it does not accurately reflect a reasonable 18
outlook for future inflation. 19
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Q HOW DID YOU DETERMINE THAT THE INFLATION ASSUMPTION UNDERLYING 1
MSD’S O&M EXPENSE FACTORS IS OVERSTATED? 2
A The Blue Chip Economic Indicators publishes a survey of professional economists’ 3
projections of inflation and other macroeconomic factors. The consensus of 4
economists projects the U.S. economy inflation outlooks as measured by the GDP 5
price deflator will grow at approximately 2.1% through calendar year 2017. 6
Consumer Price Index (“CPI”) inflation, which is largely driven by medical expenses, 7
will grow on average 2.4%. Relying on this GDP price deflator and CPI price deflator, 8
a very broad measure of inflation out over the next few years would be approximately 9
2.25% ((2.1% + 2.4%) ÷ 2). As such, MSD’s assumed price inflation of 3% is 10
overstated by 0.75 percentage points. 11
Q HOW WOULD THE O&M EXPENSE BE AFFECTED BY ADJUSTING THE 12
ESCALATION IN THE INFLATION RATE? 13
A Adjusting the escalation in O&M expense from a 3% inflation outlook down to a 14
2.25% inflation outlook lowers the escalation rate by roughly 0.75%. This reduces the 15
MSD Staff composite O&M escalation from 3.95% down to 3.20%. The total impact 16
from this reduction is a decline in projected O&M expense levels of approximately 17
$16 million between the five-year period 2012 through 2016. 18
Q ARE THERE OTHER SPECIFIC CATEGORIES OF O&M EXPENSE WHICH YOU 19
BELIEVE HAVE NOT BEEN ADEQUATELY JUSTIFIED BY MSD STAFF? 20
A Yes. The detail underlying the cost items is shown on Table 2.1 of the MSD report at 21
page 2-2. One item includes General Counsel Expense. General Counsel Expense 22
has increased from approximately $1.5 million in 2006, up to $3.6 million by 2010. 23
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During this time period, MSD was negotiating with the EPA for compliance with 1
regulations, which now have in part been encapsulated in the June 2011 EPA 2
Consent Decree settlement. As such, the expenses associated with litigating the 3
EPA Consent Decree should not be repeated going forward. Nevertheless, MSD’s 4
projections show a substantial increase in General Counsel Expense in calendar 5
years 2011 through 2016. While I assume there likely will be litigation expenses 6
associated with maintaining compliance with the Consent Decree, MSD has not 7
provided adequate justification for assuming it will grow substantially from the 2009-8
2011 time period. I believe it is not appropriate to assume that General Counsel 9
Expense will increase by over a million dollars in 2012 relative to 2011. Instead, I 10
recommend eliminating the increase from 2011 to 2012, and grow General Counsel 11
Expense at the rate of general inflation during the remaining time period. This 12
adjustment further reduces MSD’s projected O&M expense levels by $6.3 million 13
between the five-year period 2012 through 2016. 14
Q DO YOU HAVE ANY OTHER CONCERNS WITH MSD STAFF’S O&M EXPENSE 15
PROJECTIONS? 16
A Yes. MSD Staff includes “additional O&M” expenses during calendar years 2013 17
through 2016. In 2015 and 2016, MSD Staff shows an increase of O&M expense of 18
over $5 million and footnotes it as necessary improvement for disinfections at the 19
Missouri WWTP, and capacity management operation and maintenance programs 20
activities related to anticipated Consent Decree requirements in 2016. (See Exhibit 21
MSD 1, Table 3-7, page 3-12, footnote (f).) 22
MSD’s financial reports show that it routinely moves items from O&M expense 23
categories to capital categories. MSD Staff data does not show that it made this 24
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transfer in its projected cost of service study. Therefore, these O&M expense items, 1
which will later be transferred to capital items, should be recovered by net revenue or 2
bond funding, and not be recovered as an operating expense of MSD. 3
MSD Staff has not adequately shown that these increases in O&M expenses 4
are not CIP components, and should be paid from net revenues or bond proceeds. 5
Without more detail underlying these expense projection increases, I recommend that 6
they be removed from MSD’s projected expense levels and instead be recovered 7
through cash funded projects or bond proceeds. 8
Q CAN YOU PLEASE EXPLAIN HOW YOU ADJUSTED THE O&M EXPENSES 9
INCLUDED IN THE MSD STAFF AND BLACK & VEATCH COST OF SERVICE 10
MODEL? 11
A Yes. As discussed above, I made the following adjustments to O&M expense levels: 12
1. I reduced the General Counsel Expense to reflect the decline in this level of 13
expense in calendar year 2012. This lowered MSD’s projected O&M expense 14
levels by $6.3 million between the five-year period 2012 through 2016. 15
2. I reduced the escalation of expense as outlined in the report from 3.95% down 16
to 3.20%. This lowered MSD’s projected O&M expense levels by 17
approximately $16 million between the five-year period 2012 through 2016. 18
3. Finally, I reduced the amount of “other” O&M expenses in calendar years 19
2015 and 2016 by reducing the increase in additional O&M expense for water 20
treatment plant expansion down to cash financing of CIP program obligations. 21
While this did not change the overall cash obligations of MSD, I removed it 22
from an expense-related category to a cash financed-related category. 23
These expense adjustments are shown on attached Schedule MPG-1. 24
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Revenue Bond Interest Rate 1
Q PLEASE DESCRIBE THE ISSUE YOU HAVE WITH MSD STAFF’S PROJECTED 2
DEBT SERVICE COSTS ASSOCIATED WITH THE ISSUANCE OF ADDITIONAL 3
REVENUE BONDS DURING THE FORECAST PERIOD. 4
A MSD is projecting over $1.38 billion of capital improvements during the period 2011 5
through 2016. To fund this amount, MSD is projecting it will issue over $857 million of 6
incremental revenue bonds, and $217 million of state revolving loan proceeds. 7
MSD’s assumption for the revenue bond issuances are that they will be amortized 8
over 30 years at an interest rate of 5.5%. MSD’s assumption for the state revolving 9
loans is an interest rate of 2.5%, and an amortization period of 20 years. 10
Q DO YOU TAKE ISSUE WITH THE UNDERLYING ASSUMPTIONS MSD STAFF 11
HAS MADE FOR THE PRICING OF THESE DEBT INSTRUMENTS? 12
A I do not take issue with their assumptions underlying the state revolving facilities; 13
however, I believe that the interest rate for the revenue bonds is substantially 14
overstated. 15
Q WHY DO YOU BELIEVE THAT THE REVENUE BOND INTEREST RATE 16
ASSUMPTION OF 5.5% IS SUBSTANTIALLY OVERSTATED? 17
A MSD currently has bond ratings from Standard & Poor’s and Moody’s of “AA” and 18
“Aa,” respectively. These are two high quality bond issuances. Therefore, the 19
interest rates available to MSD should reflect the more creditworthy municipal issuers 20
in today’s credit market. It is important to note that the credit standing of MSD is 21
derived in part by the rates paid by wastewater and stormwater customers. Hence, 22
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assumptions used to develop changes to future rates should give MSD customers full 1
benefit of the strong credit standing these customers have helped support. 2
Q HAVE OTHER MUNICIPAL UTILITIES WITH CREDIT RATING SIMILAR TO MSD 3
ISSUED REVENUE BONDS RECENTLY? 4
A Yes. I have identified actual bond issuances by municipal utility companies for 5
revenue bonds in support of municipal utility CIPs. I did this since the beginning of 6
calendar year 2010. It is worthy of note, that during this time period the municipal 7
bond market was largely still depressed, caused by the financial crisis that occurred in 8
calendar year 2008, with the bankruptcy of Lehman Brothers. My research revealed 9
that recently, similar credit rated municipal utility companies have issued revenue 10
bonds with interest rates varying within the maturity schedule ranging from 1.5% to 11
5%. The weighted average of the bond interest rates is typically about 4%. 12
Based on this information, a reasonable interest rate assumption for MSD’s 13
revenue bond issuances is that the interest rates for different tranches of those bonds 14
will range between 1.5% and 5% under today’s current market conditions. The 15
weighted average or cost of service of these bonds reflected in the MSD forecast is 16
then reasonably approximated using a 4% interest rate. 17
Q HOW DID MSD STAFF/BLACK & VEATCH SUPPORT ITS RESERVE BOND 18
INTEREST RATE? 19
A As stated in response to MIEC 1-35, MSD relied on an historical 20-year average 20
revenue bond rate from the “Bond Buyer 25-Year Revenue Bond Index.” 21
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Q IS THIS AN ACCURATE APPROACH TO ESTIMATING CURRENT AND FUTURE 1
REVENUE BOND INTEREST RATES? 2
A No. The Bond Buyer Index simply reports interest rates on bonds that will mature in 3
25 years. Revenue bond projections made by Black & Veatch assume an 4
amortization paydown schedule of bonds over the next 30 years. This means that 5
there will be various tranches of interest rates within these 30-year bond issuances. 6
The interest rate tranches will range from a low of around 1%, up to a high of around 7
5% to 5.5% as projected by MSD Staff. However, the entire principal amount of the 8
underlying bond will not be priced at 5.5% as MSD Staff erroneously assumes. 9
Therefore, MSD Staff has misused this Bond Buyer Index to try to demonstrate an 10
accurate estimate of what the interest rate will be on those 30-year bond issuances. 11
Q PLEASE DESCRIBE THE ADJUSTMENT YOU HAVE MADE TO MSD’S 12
ESTIMATED DEBT SERVICE EXPENSE. 13
A I started with the amount of revenue bond proceeds used to fund CIP as shown on 14
Exhibit MSD 1, MSD Table 3-9, page 3-15, line 2. To this amount, as shown on 15
Schedule MPG-2, I increased it to reflect a 3% issuance expense, and then 16
developed an annual debt service cost assuming a 30-year amortization, and a 17
weighted average debt interest expense of 4%. I then developed a cumulative 18
increase in debt service for these new revenue bond issues. As shown on Schedule 19
MPG-1, line 20, this had the effect of repricing the debt service cost included by Black 20
& Veatch and MSD Staff in its cost of service study. 21
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Bad Debt Expense 1
Q DO YOU BELIEVE THAT MSD’S BAD DEBT EXPENSE IS REASONABLE? 2
A No. Bad debt expense should reflect normalized historical levels of customers’ failure 3
to pay their bills. As such, it is appropriate to develop a bad debt expense as a 4
percentage of total bill collections based on historical records of MSD. During the 5
period 2006 through 2010, actual bad debt expense is represented with a factor of 6
approximately 3.18% of actual total wastewater revenue billings. 7
Applying this bad debt factor to the projected revenue requirements of MSD 8
over the next four years shows that MSD is substantially overstating its amount of bad 9
debt expense. Indeed, MSD’s overstatement of bad debt expense ranges from 10
$1.4 million to $2.6 million as set forth in Schedule MPG-3. This adjustment 11
increases the “Other Operating Revenue” line (line 9) shown on Schedule MPG-1. 12
Cost of Service Study 13
Q DID BLACK & VEATCH PERFORM A CLASS COST OF SERVICE STUDY IN 14
SUPPORT OF ITS CHANGE IN WASTEWATER RATES FOR MSD? 15
A Yes. Black & Veatch performed a class cost of service study, in which it found that 16
residential customers’ rates are priced below MSD’s cost of service, and 17
non-residential customers’ rates are priced above MSD’s cost of service. 18
Q DID MSD STAFF FOLLOW THE BLACK & VEATCH COST OF SERVICE 19
RESULTS IN ITS PROPOSED CHANGE IN RATES IN THIS PROCEEDING? 20
A Generally, yes. MSD Staff is proposing a gradual movement to cost of service in this 21
case. 22
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Q DO YOU RECOMMEND ANY ADJUSTMENT TO THE GRADUAL MOVEMENT TO 1
COST OF SERVICE? 2
A No. 3
Q DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY? 4
A Yes, it does. 5
Appendix A
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Qualifications of Michael Gorman
Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 1
A Michael Gorman. My business address is 16690 Swingley Ridge Road, Suite 140, 2
Chesterfield, MO 63017. 3
Q PLEASE STATE YOUR OCCUPATION. 4
A I am a consultant in the field of public utility regulation and a Managing Principal with 5
Brubaker & Associates, Inc., energy, economic and regulatory consultants. 6
Q PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND WORK 7
EXPERIENCE. 8
A In 1983 I received a Bachelors of Science Degree in Electrical Engineering from 9
Southern Illinois University, and in 1986, I received a Masters Degree in Business 10
Administration with a concentration in Finance from the University of Illinois at 11
Springfield. I have also completed several graduate level economics courses. 12
In August of 1983, I accepted an analyst position with the Illinois Commerce 13
Commission (“ICC”). In this position, I performed a variety of analyses for both formal 14
and informal investigations before the ICC, including: marginal cost of energy, central 15
dispatch, avoided cost of energy, annual system production costs, and working 16
capital. In October of 1986, I was promoted to the position of Senior Analyst. In this 17
position, I assumed the additional responsibilities of technical leader on projects, and 18
my areas of responsibility were expanded to include utility financial modeling and 19
financial analyses. 20
Appendix A
Michael Gorman
Page 2
BRUBAKER & ASSOCIATES, INC.
In 1987, I was promoted to Director of the Financial Analysis Department. In 1
this position, I was responsible for all financial analyses conducted by the staff. 2
Among other things, I conducted analyses and sponsored testimony before the ICC 3
on rate of return, financial integrity, financial modeling and related issues. I also 4
supervised the development of all Staff analyses and testimony on these same 5
issues. In addition, I supervised the Staff's review and recommendations to the 6
Commission concerning utility plans to issue debt and equity securities. 7
In August of 1989, I accepted a position with Merrill-Lynch as a financial 8
consultant. After receiving all required securities licenses, I worked with individual 9
investors and small businesses in evaluating and selecting investments suitable to 10
their requirements. 11
In September of 1990, I accepted a position with Drazen-Brubaker & 12
Associates, Inc. (“DBA”). In April 1995, the firm of Brubaker & Associates, Inc. (“BAI”) 13
was formed. It includes most of the former DBA principals and Staff. Since 1990, I 14
have performed various analyses and sponsored testimony on cost of capital, 15
cost/benefits of utility mergers and acquisitions, utility reorganizations, level of 16
operating expenses and rate base, cost of service studies, and analyses relating 17
industrial jobs and economic development. I also participated in a study used to 18
revise the financial policy for the municipal utility in Kansas City, Kansas. 19
At BAI, I also have extensive experience working with large energy users to 20
distribute and critically evaluate responses to requests for proposals (“RFPs”) for 21
electric, steam, and gas energy supply from competitive energy suppliers. These 22
analyses include the evaluation of gas supply and delivery charges, cogeneration 23
and/or combined cycle unit feasibility studies, and the evaluation of third-party 24
asset/supply management agreements. I have participated in rate cases on rate 25
Appendix A
Michael Gorman
Page 3
BRUBAKER & ASSOCIATES, INC.
design and class cost of service for electric, natural gas, water and wastewater 1
utilities. I have also analyzed commodity pricing indices and forward pricing methods 2
for third party supply agreements, and have also conducted regional electric market 3
price forecasts. 4
In addition to our main office in St. Louis, the firm also has branch offices in 5
Phoenix, Arizona and Corpus Christi, Texas. 6
Q HAVE YOU EVER TESTIFIED BEFORE A REGULATORY BODY? 7
A Yes. I have sponsored testimony on cost of capital, revenue requirements, cost of 8
service and other issues before the Federal Energy Regulatory Commission and 9
numerous state regulatory commissions including: Arkansas, Arizona, California, 10
Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, 11
Louisiana, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, North 12
Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Vermont, 13
Virginia, Washington, West Virginia, Wisconsin, Wyoming, and before the provincial 14
regulatory boards in Alberta and Nova Scotia, Canada. I have also sponsored 15
testimony before the Board of Public Utilities in Kansas City, Kansas; presented rate 16
setting position reports to the regulatory board of the municipal utility in Austin, Texas, 17
and Salt River Project, Arizona, on behalf of industrial customers; and negotiated rate 18
disputes for industrial customers of the Municipal Electric Authority of Georgia in the 19
LaGrange, Georgia district. 20
Appendix A
Michael Gorman
Page 4
BRUBAKER & ASSOCIATES, INC.
Q PLEASE DESCRIBE ANY PROFESSIONAL REGISTRATIONS OR 1
ORGANIZATIONS TO WHICH YOU BELONG. 2
A I earned the designation of Chartered Financial Analyst (“CFA”) from the CFA 3
Institute. The CFA charter was awarded after successfully completing three 4
examinations which covered the subject areas of financial accounting, economics, 5
fixed income and equity valuation and professional and ethical conduct. I am a 6
member of the CFA Institute’s Financial Analyst Society. 7
\\doc\shares\prolawdocs\sdw\9456\testimony - bai\201258.doc
2013-2016 2011-2016LineDescription2011201220132014201520164-Year Total6-Year Total$$$$$$$$1 Revenue Under Existing Rates213,795,600 213,795,600 213,795,600 213,795,600 213,795,600 213,795,600 855,182,400 1,282,773,600 Fiscal Revenue Months YearIncreaseEffective2 20123.0%12 5,879,400 6,413,900 6,413,900 6,413,900 6,413,900 25,655,600 31,535,000 3 20138.5%12 17,158,000 18,717,800 18,717,800 18,717,800 73,311,400 73,311,400 4 201410.0%1221,901,700 23,892,700 23,892,700 69,687,100 69,687,100 5 201510.0%1224,091,800 26,282,000 50,373,800 50,373,800 6 201610.0%1226,501,000 26,501,000 26,501,000 7 Total Additional Revenue- 5,879,400 23,571,900 47,033,400 73,116,200 101,807,400 245,528,900 251,408,300 8 Total Service Charge Revenue213,795,600 219,675,000 237,367,500 260,829,000 286,911,800 315,603,000 1,100,711,300 1,534,181,900 9 Other Operating Revenue(750,500) 3,213,300 2,716,700 2,051,400 1,308,100 486,400 6,562,600 9,025,400 10 Connection Fee Revenue1,250,000 1,288,000 1,327,000 1,367,000 1,408,000 1,450,000 5,552,000 8,090,000 11 Interest Income - Reserve Funds888,800 964,300 1,196,600 1,486,600 1,753,500 1,969,100 6,405,800 8,258,900 12 Interest Income - Operations30,800 47,300 50,100 50,500 50,500 50,200 201,300 279,400 13 Interest Income - Arnold650,700 631,000 610,500 589,100 566,800 543,600 2,310,000 3,591,700 14 Subtotal Other Revenue2,069,800 6,143,900 5,900,900 5,544,600 5,086,900 4,499,300 21,031,700 29,245,400 15 Total Revenues215,865,400 225,818,900 243,268,400 266,373,600 291,998,700 320,102,300 1,121,743,000 1,563,427,300 16 Operation & Maint. Expense134,394,800 137,573,600 141,973,900 146,453,500 151,081,200 155,857,000 595,365,600 867,334,000 17Addt'l O&M- - 112,400 2,159,800 2,228,900 2,300,200 6,801,300 6,801,300 18 Net Revenue81,470,600 88,245,300 101,182,100 117,760,300 138,688,600 161,945,100 519,576,100 689,292,000 Debt Service19 Existing Senior Revenue Bonds19,290,600 19,415,200 19,550,800 19,686,000 19,834,400 19,973,200 79,044,400 117,750,200 20 Proposed Senior Revenue Bonds- 3,082,800 17,898,300 30,639,600 42,492,000 50,788,700 141,818,600 144,901,400 21 Total Senior Revenue Bonds19,290,600 22,498,000 37,449,100 50,325,600 62,326,400 70,761,900 220,863,000 262,651,600 22 Existing State Revolving Fund Loans19,113,700 21,311,100 21,401,300 21,483,500 21,355,600 21,728,600 85,969,000 126,393,800 23 Proposed State Revolving Fund Loans- 1,711,000 4,062,800 6,307,900 8,553,000 10,797,800 29,721,500 31,432,500 24 Total State Revolving Fund Loans19,113,700 23,022,100 25,464,100 27,791,400 29,908,600 32,526,400 115,690,500 157,826,300 25 Commercial Paper- - - - - - - - 26 Total Debt Service38,404,300 45,520,100 62,913,200 78,117,000 92,235,000 103,288,300 336,553,500 420,477,900 27 Routine Annual Improvements2,378,600 2,461,900 2,535,700 2,611,800 2,690,100 2,770,900 10,608,500 15,449,000 28 Cash Financing of Major Improvements37,250,000 38,438,000 31,677,000 33,267,000 43,563,200 61,492,300 169,999,500 245,687,500 29 Additions to Operating Reserves674,500 738,500 1,126,200 1,418,000 1,673,900 974,600 5,192,700 6,605,700 30 Net Annual Balance2,763,200 1,086,800 2,930,000 2,346,500 (1,473,600) (6,581,000) (2,778,100) 1,071,900 31 Beginning of Year Balance1,696,900 4,460,100 5,546,900 8,476,900 10,823,400 9,349,800 34,197,000 40,354,000 32 End of Year Balance4,460,100 5,546,900 8,476,900 10,823,400 9,349,800 2,768,800 31,418,900 41,425,900 Actual Debt Services33 Senior Bonds19,290,600 20,894,300 29,973,550 43,887,350 56,326,000 66,544,150 196,731,050 236,915,950 34 SRF Loans 19,113,700 21,067,900 24,243,100 26,627,750 28,850,000 31,217,500 110,938,350 151,119,950 Debt Service Coverage35 Revenue Bonds4.22x4.22x3.38x2.68x2.46x2.43x2.64x2.91x36 Total Debt2.12x2.10x1.87x1.67x1.63x1.66x1.69x1.78xMetropolitan St. Louis Sewer District Adjusted Wastewater Rate ProposalFiscal Year Ending June 30, Additional Revenue Required:Schedule MPG-1
Metropolitan St. Louis Sewer District
Adjusted Revenue Bond Debt Service Calculation
Assumptions:
Interest rate 4.00%
Term - yrs 30
Issue Cost 3.00%
Bond Issuance
Net Bond (Including Annual
Line Year Proceeds Issuance Cost)Debt Service
(1)(2)(3)
1 2012 52,020,000$ 53,580,600$ $3,082,810
2 2013 250,000,000$ 257,500,000$ $14,815,502
3 2014 215,000,000$ 221,450,000$ $12,741,332
4 2015 200,000,000$ 206,000,000$ $11,852,402
5 2016 140,000,000$ 144,200,000$ $8,296,681
Cumulative
6 2012 $3,082,800
7 2013 $17,898,300
8 2014 $30,639,600
9 2015 $42,492,000
10 2016 $50,788,700
Schedule MPG-2
HistoricalLineDescription20062007200820092010Average201120122013201420152016$$$$$ $$$$$$1 Bad Debt Provision 3,160,972 4,193,703 5,161,982 9,678,495 10,187,508 6,476,532 10,910,900 6,820,800 8,998,500 10,055,400 11,262,000 12,613,400 2 Wastewater Service Revenue 197,604,224 193,056,700 203,634,800 208,074,800 205,747,784 201,623,662 213,795,600 219,675,000 237,367,500 260,829,000 286,911,800 315,603,000 3 Bad Debt Percent of Service Revenues 1.60% 2.17% 2.53% 4.65% 4.95% 3.18% 5.10% 3.10% 3.79% 3.86% 3.93% 4.00%BAI Proposed:4 Wastewater Service Revenue213,795,600 219,675,000 237,367,500 260,829,000 286,911,800 315,603,000 5 Bad Debt Percent of Service Revenues3.18% 3.18% 3.18% 3.18% 3.18% 3.18%6 Bad Debt Provision10,910,900 6,989,944 7,552,910 8,299,442 9,129,384 10,042,323 7Adjustment- 169,144 (1,445,590) (1,755,958) (2,132,616) (2,571,077) HistoricalForecastedMetropolitan St. Louis Sewer DistrictHistorical Bad Debt Percent of Service Revenues AdjustmentSchedule MPG-3