HomeMy Public PortalAboutExhibit L&B 30 RC Rebuttal Testimony (Bill Stannard) 071811Exhibit
BEFORE THE RATE COMIVIISSION
OF THE
ST. LOUIS METROPOLITAN SEWER DISTRICT
WITNESS: William G. Stannard, PE
Raftelis Financial Consultants, Inc.
SPONSORING PARTIES: Rate Commission of the St. Louis
Metropolitan Sewer District
DATE PREPARED: July 18, 2011
Raftelis Financial Consultants, Inc.
3013 Main Street
Kansas City, MO 64108
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 INTRODUCTION
2 Q1. Please state your name and business address.
3 A. My name is William Stannard and my business address is, 3013 Main Street, Kansas
4 City, Missouri, 64108.
5
6 Q2. By whom are you employed and in what capacity.
7 A. I am the President of Raftelis Financial Consultants, Inc. ("RFC"), a consulting fine
8 specializing in the areas of water, wastewater, and stormwater finance and pricing. RFC
9 was established in 1993 in Charlotte, North Carolina to provide financial and
10 management consulting services to public and private sector clients. RFC is a national
11 leader in the development of water, wastewater, and stormwater rates. As President of
12 RFC, I am responsible for leading the Firm in business development and production of
13 work products for clients. In addition, I serve as Project Director on engagements with a
14 wide variety of clients.
15
16 Q3. Please describe your educational background and work experience.
17 A. I obtained a Bachelor of Science, Business Administration and a Bachelor of Science,
18 Civil Engineering from Kansas State University in 1975. I joined Raftelis Financial
19 Consultants in 2002 after a 28 -year consulting career at Black & Veatch where I was
20 head of the firm's management consulting division. I have extensive experience in the
21 development of ordinances and financial procedures for complying with the Clean Water
22 Act and the Safe Drinking Water Act, comprehensive cost of service studies, bond
23 feasibility reports, project financial feasibility analyses, organizational and management
24 reviews, and utility competitiveness studies. During my career I have conducted more
25 than 300 water, wastewater, and stormwater financial planning, cost of service and rate
26 studies. I have also prepared more than 90 consulting engineers reports/financial
27 feasibility studies in support of more than $6 billion of water and wastewater revenue
28 bonds. My curriculum vitae is included as Exhibit L&B 21A to my testimony.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Q4. Are you a registered Professional Engineer?
2 A. Yes, I am a registered Professional Engineer in the states of Kansas, Ohio,
3 Massachusetts, and Michigan.
4
5 Q5. Do you belong to any professional organizations or committees?
6 A. Yes. I am a member of the American Water Works Association where I serve as a
7 trustee to the Management and Leadership Division and past Chair of the Finance,
8 Accounting and Management Controls Committee. I am a member of the Water
9 Environment Federation where I previously served as the Chair for the Task Force
10 responsible for the development of the Manual of Practice No. 27, Financing and
11 Charges for Wastewater Systems. I also serve as my Firm's representative to the
12 National Association of Clean Water Agencies (NACWA) and I am member of
13 NACWA's Utility Management and Stormwater Committees.
14
15 Q6. Have you previously testified before the Rate Commission of the St. Louis
16 Metropolitan Sewer District?
17 A. Yes. I testified as the Rate Consultant to the Rate Commission in the 2007 and 2008
18 Rate Change Proceedings.
19
20. Q7. Please describe your role in this proceeding?
21 A. The scope of my assignment in this proceeding includes review -the District's 2011 rate
22 change proposal, assist the Rate Commission's legal counsel in preparing data requests to
23 gain a better understanding of the District's rate change proposal, review the District's
24 responses to those data requests, advise the Rate Commission on cost of service and rate
25 setting practices, assist legal counsel in the examination of witnesses, and to prepare
26 testimony and exhibits setting forth my findings and recommendations.
27
28 The scope of my assignment was limited to relying on statements, data, information and
29 reports provided by the District and its consultants and advisors as well as data and;
30 information obtained in the public domain.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1
2 Q8. Please summarize your fmdings and recommendations to the Commission in this
3 proceeding.
4 A. The following is a summary of my findings and recommendations in this proceeding.
5 First, I concur and support the District's proposal to seek authorization from the voters
6 within the District to issue additional bonds to finance the CIRP during the period FY
7 2013 through FY 2016.
8
9 Second, I recommend that the District examine its capital financing policies related to
10 funding of multi -year capital projects on an appropriation basis. The District currently
11 appropriates the full amount of projects when they are started rather than on a cash
12 expenditure basis, resulting in the raising of bond funds with the associated impacts on
13 the District's wastewater rates earlier than is necessary to pay for these projects.
14
15 Third, the District's rate proposal includes assumptions related to the forecast of
16 employee pension costs which impact the level of the forecasted revenue requirements
17 used to calculate the proposed wastewater rates and which do not incorporate the recent
18 modifications to the District's pension plan which are expected to lower the District's
19 pension obligations. I recommend that the rate Commission direct the District to update
20 its rate change proposal to properly reflect the expected positive effect of the recent
21 changes to the employee pension program.
22
23 Fourth, the District's rate proposal includes assumptions related to the costs of bad debt
24 expenses which impact the District's revenue requirements from rates. The District has
25 recently focused on improving its collections, which is reflected in the rate proposal
26 through modest reductions in the forecasted bad debt expense. I recommend that the
27 District provide periodic and regular updates of the status and effectiveness of the bad
28 debt recovery efforts to the MSD Board of Trustees and the Rate Commission.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Fifth, if the voters fail to approve the District's planned request for authority to issue
2 additional revenue bonds, the District's Rate Plan noted in section 3-10 of the 2012 Rate
3 Change Proposal should be adopted by the Board of Trustees with: my recommendation
4 to update the revenue requirements to reflect the impact of the new pension program, my
5 recommended modify the District's capital financing policies and the CIRP financing
6 plan; and, the exclusion of a resistance factor in the calculations, as was done in the 2007
7 and 2008 Rate Change Proposals
8
9 Details supporting these findings and recommendations will be presented later in my
10 testimony.
11
12 GENERAL MATTERS
13
14 Q9. What is the role of the Rate Commission in this proceeding?
15 A. Pursuant to Section 7.040 of the Charter Plan of the District, the role of the Rate
16 Commission is to review and make recommendations to the District's Board of
17 Trustees regarding proposed changes in wastewater, stormwater or tax rates necessary
18 to pay: (i) interest and principal due on bonds issued or to be issued to finance assets
19 of the District; (ii) the costs of operation and maintenance; and (iii) such other
20 amounts as may be required to cover emergencies and anticipated delinquencies.
21
22 Q10. How should the Commission determine whether the District's rate change proposal
23 is necessary?
24 A. The Commission should examine the District's projected revenue requirements to
25 insure that such revenue requirements are necessary and reasonable to meet the
26 District's near term financial needs, that such revenue requirements do not overstate
27 the District's near term financial needs, and that such revenue requirements are being
28 recovered in a fair and equitable manner.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Q11. What criteria must the Commission base its recommendation?
2 A. In accordance with Section 7.270 of the Charter Plan of the District, any proposed
3 rate change, and all portions thereof, recommended by the Commission must:
4 (1) be consistent with constitutional, statutory or common law as amended from time to
5 time;
6 (2) enhance the District's ability to provide sewer and drainage systems and facilities, or
7 related services;
8 (3) be consistent with and not in violation of any covenant or provision relating to any
9 outstanding bonds or indebtedness of the District;
10 (4) not impair the ability of the District to comply with applicable Federal or State laws
11 or regulations as amended from time to time; and
12 (5) impose a fair and reasonable burden on all classes of ratepayers.
13
14 Q12. How should the Commission determine if the rate change proposal is consistent with
15 constitutional, statutory or common law as amended from time to time?
16 A. Legal counsel advises that issues concerning Charter Plan authority, environmental
17 improvement agency regulations, constitutional and statutory provisions and case law
18 should be evaluated.
19
20 Q13. How should the Commission determine whether the rate change proposal enhances
21 the District's ability to provide adequate sewer and drainage systems and facilities,
22 or related services?
23 A. The Commission should determine if the District's proposal enhances its ability to
24 provide adequate sewer and drainage systems and facilities, or related services by
25 examining the District's submittal as well as the testimony of its staff and other
26 interveners.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Q14. How should the Commission determine if the rate change proposal is consistent with
2 and not in violation of any covenant or provision relating to any outstanding bonds
3 or indebtedness of the District?
4 A. Such a determination requires an analysis of covenants or provisions contained in the
5 resolutions or ordinances issuing any such outstanding bonds or indebtedness. The
6 Commission can deteinuine that this condition is meant by examining the District's
7 submittal as well as the testimony of its staff.
8
9 Q15. How should the Commission determine whether the rate change proposal impairs
10 the ability of the District to comply with applicable Federal or State laws or
11 regulations as amended from time to time?
12 A. The Commission should determine whether the rate change proposed impairs the ability
13 of the District to comply with applicable Federal or State laws or regulations on the basis
14 of testimony provided by District staff and by others, including interveners. In this
15 proceeding, the District has indicated that some portions of planned and future CIRP
16 projects are required to meet regulatory requirements.
17
18 Q16. How should the Commission determine if the rate change proposal imposes a fair
19 and reasonable burden on all classes of ratepayers?
20 A. The Commission should determine whether the rate change imposes a fair and reasonable
21 burden on all classes of ratepayers by examining the District's submittal and the
22 testimony of its staff as well as information provided by representatives of the
23 Commission, such as myself, and other parties, including the interveners.
24
25 Q17. In the context of utility rate setting, what do the words "fair and reasonable" mean
26 to you?
27 A. In the context of utility rate setting, the word "fair" means to me that rates recover
28 revenues from customer classes in relation to the costs incurred in providing utility
29 services to those customer classes and be free from self-interest, prejudice or favoritism.
30 In the context of utility rate setting, the word "reasonable" means to me that the revenue
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 requirements upon which the rates are based reflect an appropriate level of funding to
2 enable the utility to provide adequate and sustainable service and support the financial
3 health of the utility.
4
5 CAPITAL FINANCING
6
7 Q18. How much has the District propose to be expended on wastewater capital
8 improvements in its rate change proposal?
9 A. The District indicates that there will be $1,006,878,000 in major capital improvements
10 and $10,608,500 in routine annual improvements for the wastewater system for the
11 period of FY 2013 through FY 2016. In addition, the District is facing significant
12 additional capital investment beyond FY 2016 necessary to comply with the Federal
13 Clean Water Act and the associated regulations promulgated by the United States
14 Environmental Protection Agency. Based on the testimony of MSD witnesses during the
15 First Technical Conference, the timing and magnitude of the expenditures necessary to
16 comply with these regulations has been agreed to in the District's proposed Consent
17 Order with the Environmental Protection Agency.
18
19 Q19. Based on your experience with other large wastewater utilities do you have an
20 opinion regarding the reasonableness of the District's CIRP?
21 Yes, I do. I have worked for a number of large wastewater systems throughout the
22 United States including the Detroit Water and Sewerage Department, the Northeast Ohio
23 Regional Sewer Department, the City of Baltimore, the Allegheny County Sanitary
24 District, and the City of Kansas City, Missouri. Each of these wastewater utilities is or
25 has faced significant capital expenditures to comply with consent orders regarding
26 combined sewer overflows (CSO) and sanitary sewer overflows (SSO). Based on the
27 infonnation provided to date by the District, the CIRPP and the long term control plan is
28 consistent with those of other major wastewater systems throughout the United States and
29 is a reasonable approach to achieving compliance with the federal Clean Water Act.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Q20. How has the District proposed to fund the wastewater capital improvements?
2 A. For the period of FY 2012 through FY 2016 the District proposes to issue $805,000,000
3 of revenue bonds and $140,000,000 of State Revolving Loan Bonds. In addition the
4 District forecasts receiving $3,111,700 from Grants & Contributions and the remainder of
5 the wastewater capital improvements, approximately $159,102,000, will be financed
6 from current revenues and interest income (i.e., cash financing or Pay Go).
7
8 Q21. May the District issue long term indebtedness to fmance capital improvements?
9 A. The District has the authority to issue debt under Section 3.020(13) of its Charter Plan.
10 This authority is limited though; the Charter Plan requires that general obligation bonds
11 may not be issued without the voter approval required by Article VI, Section 26(b) of the
12 Constitution of Missouri. Section 7.170 of the District's Charter Plan requires approval
13 of a simple majority of the voters of the District to issue revenue bonds. Most recently, on
14 August 5, 2008 the District received approval from voters to issue $275,000,000 in debt
15 to finance capital improvement projects. Prior to that, on February 3, 2004, The District
16 received approval from voters to issue $500,000,000 in debt to finance capital
17 improvement projects.
18
19 Q22. Do you agree with the District's plan of finance for its Capital Improvement and
20 Replacement Program ("CIRP")?
21 A. Yes, I believe that the proposed issuance of revenue bonds and state revolving loan bonds
22 to fund the majority of the CIRP is a sound capital financing approach. The District's
23 proposed financing plan, assuming that the voters authorize the District to issue
24 additional bonds, will help minimize the impact of the CIRP on wastewater rates during
25 the next four years.
26
27 Q23. How will the District fmance the CIRP if the voters fail to approve the issuance of
28 additional revenue bonds?
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 A. If the District fails to obtain voter authorization for issuance of additional revenue bonds, it
2 will be necessary for the District to cash finance all of the CIRP during the period FY
3 2012 through FY 2016 as set forth in section 3-10 of the 2012 Rate Proposal.
4
5 Q24. How does the District account for fmancing the CIRP in the Rate Proposal?
6
7 A. The District has indicated that it encumbers the entire cost of projects in the CIRP in the
8 year they are started, and those amounts are fully funded at that time with bond proceeds,
9 cash or other financing contained in the CIRP financing plan shown Table 3-9 of the Rate
10 Proposal. This funding approach results in the District acquiring tens of millions of
11 dollars of capital funding earlier than is necessary to actually pay for projects. This is a
12 result of the fact that many CIRP projects require multiple years for study, design and
13 construction and that expected actual expenditures will occur over an extended period of
14 time. The District's estimate of the variance between CIRP expenditures and the
15 amounts that would be appropriated is provided in the District's response to Question 13
16 of the Rate Commission's Second Discovery Request and contained in Exhibit MSD
17 18A. In that response Brian Hoelscher, MSD Director of Engineering states, "The
18 variance between the proposed CIRP appropriations and cash expenditures for each year
19 of the Rate Change Proposal (Exhibit MSD 1) is provided on Line 14 of the comparative
20 summary. The level of the annual variance fluctuates between fiscal years. FY13 and FY
21 15 variances indicate cash expenses are $57,256,700 and $16,364,000 less than
22 appropriations, respectively. The variance for FY14 and FY16, however are $4,540,000
23 and $33,801,800 over appropriations, respectively." The District's use of the planned
24 appropriations in the financing plan results in raising $35,279,700 more than is expected
25 to be expended during the rate change period.
26
27 Q25. Do you have other concerns about the District's proposed financing plan for the
28 CIRP?
29 A. In addition to the proposed financing plan which uses the CIRP appropriations instead of
30 the cash expenditure requirements, the MSD rate proposal includes some substantial
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 additional funds which result in sizeable capital fund balances at the end of FY 2016.
2 Schedule G-16 of Exhibit MSD 4A presents a summary of the forecasted fund balances
3 associated with the District's rate proposal. The forecasted balance in the Capital Fund of
4 $37,998,600 and an additional balance of $50,000,000 is forecasted for what is described
5 as the Reserve for Capital Improvement Encumbrances. This total of $87,998,600 is
6 substantial and could be reduced through lower planned bond issues during the period
7 covered by the District rate proposal.
8
9
10 Q26. What do you suggest the District should do to address this issues you raise regarding
11 the District's CIRP financing plan?
12 A. The negative variances in the estimated cash expenditures and appropriations in the CIRP
13 during the four years covered by the District's rate change proposal as described by Mr.
14 Hoelscher total more than $35,279,700. When added to the District's forecast of the
15 Capital Fund balance plus the amount identified for the Reserve for Capital Improvement
16 Encumbrances, the District's rate change proposal will generate more than $123, 000,000
17 more than is expected to be expended. Many large wastewater systems I have worked
18 with have moved from financing their capital improvement programs on an appropriation
19 basis to a cash expenditure basis to help mitigate the associated rate increases and to
20 recognize that capital project schedules often take longer than initially anticipated.
21 Wastewater systems that have gone to a cash expenditure basis for their capital
22 improvement financing include the Detroit Water and Sewerage Department, the City of
23 Baltimore and the Northeast Ohio Regional Serer District. It is my opinion that the
24 District should examine its capital funding policies and procedures and fund projects
25 annually for the expected expense. Based on our discussions with the Rate
26 Commission's legal counsel, we believe that such a policy would be consistent with the
27 District's balanced budget mandate as contained in Section 7.130 of the Charter Plan of
28 the District. As such, I recommend that the District modify their CIRP financing plan to
29 reflect their projected expenditure schedule and to provide a more reasonable fund
30 balance in the $25,000,000 to $35,000,000 range.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1
2 WASTEWATER RATES
3
4 Q27. As part of your review of the District rate change proposal did you analyze the
5 District's forecast of contributed wastewater volumes?
6 A. The forecast of contributed and billed wastewater volumes is an integral part of
7 developing proposed wastewater rates. As is common with all wastewater utilities, the
8 District bases its bills to its customers principally on metered water consumption. About
9 20% of the District's customers do not have water meters (single family and multifamily
10 residential customers) and are billed on the basis of the number of rooms, water closets,
11 baths, and separate showers. The District's historical and projected contributed
12 wastewater volume is shown in Table 3-2 of Exhibit MSD 1. As shown on that table, the
13 District has experience a decline in contributed wastewater volume since FY 2006 and is
14 forecasting a slight decline during the forecast period FY 2011 through FY 2015 and then
15 stabilizes.
16
17 Q28. Based on your experience as a wastewater rate consultant do you have an opinion
18 regarding the District's forecast of contributed wastewater volume?
19 A. Yes, I do. The District's experience of declining contributed wastewater volumes is
20 consistent with wastewater utilities throughout the United States. This decline is due to
21 several factors, including conservation awareness by customers, enhanced efficiency of
22 appliances and plumbing fixtures, and the recent economic slowdown. In my opinion, the
23 District's forecast of continued declines in contributed wastewater volumes is reasonable.
24
25 Q28 Does the District's rate change proposal include estimated costs related to its
26 obligations for employee pensions?
27 A. Yes, it does. As set forth in schedule D-19 of Exhibit MSD 4A, the District's rate proposal
28 includes forecasted costs for Pension Contributions of $9.506.000 in Fiscal Year 2013
29 growing to $11,675,200 in Fiscal Year 2016.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Q30. What is the basis for the forecasted employee pension costs you describe in Q29?
2 A. The forecast of future operation and maintenance expenses including costs for employee
3 pension costs are estimated in the District's rate change proposal by applying various
4 escalation rates for continued cost inflation to the District's Fiscal Year 2011 Operating
5 Budget.
6
7 Q31. What is your concern with the forecast of future pension costs?
8 A. In response to the Rate Commission's Second Discovery Request of June 24, 2011, the
9 District filed its response on July 8, 2011 as Exhibit MSD 18A. In response to Question
10 1(e), Jan Zimmerman, MSD Director of Finance, states "The 2011 Operating Budget was
11 prepared prior to the changes in the District's plan from a defined benefit to a defined
12 contribution plan and does not reflect the associated impacts." During the First Technical
13 Conference, Ms. Zimmerman testified that the change in the pension plan was enacted in
14 order to reduce the District's pension costs. The data provided to date does not include
15 the expected future reductions in the District's pension costs as a result of the change to
16 the defined contribution plan and as such, I am not able to estimate the impact this will
17 have on the District's pension costs during the period covered by the District's rate
18 change proposal. It is my recommendation that the effect of this change in the District
19 pension plan be incorporated into the District's rate model and the rate change proposal
20 be adjusted as appropriate.
21
22 Q32. Did the District's rate change proposal address any concerns you had raised in the
23 2007 and 2008 Rate Change Proceedings?
24 A. The District's current rate change proposal incorporated changes that addressed some
25 concerns I had raised during the District's 2007 and 2008 rate change proceedings, in
26 particular the resistance factor has been eliminated from the District's preferred Rate
27 Recommendation (though not the alternative recommendation, as will be discussed later)
28 and the growth of the low income assistance program is more limited over the period of
29 the Rate Change Proposal.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Q33. Did you examine the District's proposed operating and maintenance expense
2 escalation factors?
3 A. The District's projected operating and maintenance expense escalation rates were a
4 particular area of concern that I examined. The District's rate change proposal
5 summarizes the projected escalation rates on page 2-3. I have prepared a comparison of
6 the projected rates shown on that page to the District's actual experience over the period
7 of FY 2006 through FY 2010 and it is shown in Exhibit Rate Commission 1B. I must
8 note that the figures included in Exhibit Rate Commission 1B were taken from Schedule
9 D-7 of Exhibit MSD 4A. These figures differ substantially from the information
10 contained in MSD response to question 1(c) of the Rate commissions Second Discovery
11 Request, Exhibit MSD 18A. These variances will require further explanation by MSD.
12 In examining the comparison Exhibit Rate Commission 1B a few items stand out:
13
14 Personnel Services and Benefits and Group Insurance. The actual results appear
15 skewed due to a shift in costs from one to the other, so it appears that it would be
16 reasonable to examine these on a combined basis. On a combined basis these two items
17 increased at a rate of .98% in FY 2006 through FY 2010, but the District is projecting
18 they will increase at a rate of 4.56% to 6.52% over their forecast period. In examining
19 the District's exhibits in more detail this increase appears to be in part due to OPEB
20 expenses, which are being escalated by 10% a year, though that escalation rate is not
21 listed on page 2-3 of the District's rate proposal, Exhibit MSD 1. The escalation rate
22 does appear to be shown in the summary of inflation factors in rows 13 through 31 of the
23 WWOM worksheet in Exhibit MSD 4a, but it does not correctly reference the 130 code
24 used for this item later in the same exhibit, it is lumped together with the 122 coded
25 Group Insurance in the summary. While my experience with other large wastewater
26 utilities would lead me to believe that the District's proposed higher escalation rates are
27 not unreasonable, the lack of consistency in historic costs and the lack of transparency in
28 the District's model make it difficult for me to be comfortable with them.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1 Electric and Gas. The other category where the District's projected inflation is
2 noticeably greater than the historic actuals is electric and gas. Historically all utilities
3 (which includes the categories water and all other utilities as well) have increased by
4 .90% while the District is projecting that gas and electric, which are a majority of all
5 utility costs, will increase by 3.5% in FY2012, 3.0% in FY2013, and 5.5% in FY2014
6 through FY2016. MSD has not provided any reference to planned rate increase from
7 their electric and gas providers, nor have they provided any information regarding
8 negotiation of longer term electric power contracts. While my experience leads me to
9 believe an escalation rate as high as 5.5% is not unreasonable given the uncertainty of
10 future costs for production and delivery of electric power, it is not clear why the projected
11 inflation rate fluctuates during the forecast period.
12
13 The other categories generally have proposed escalation rates lower than the changes in
14 historic costs since FY 2006. No specific historic costs could be identified for the Bond
15 and Liability Insurance cost category even though it is one of nine categories included in
16 the District's Rate Proposal. Based on our examination of Exhibits MSD 4a and MSD 5 it
17 does not appear that this inflation rate is actually used. However, I cannot be sure of this
18 because the District has only provided these Exhibits in hard copy format and not a fully
19 functioning electronic format, as has been requested by the Rate Commission and several
20 interveners. Inclusions of what appears to be superfluous information in the MSD rate
21 proposal and the District's refusal to provide a functioning electronic model limits our
22 ability to conduct an efficient review of the District's rate proposal more. In the future, I
23 recommend that MSD and its legal counsel work with their rate consultant to craft a
24 mechanism to enable sharing of the electronic version of the rate model including use of
25 a confidentiality agreement with parties who would be provided the electronic version of
26 the model. Another option would be for the rate consultant to redact any proprietary
27 items which have not been provided in Exhibits MSD 4a and MSD 5.
28
29 Q34. Did you examine the impact of the District's bad debt collection efforts?
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Metropolitan St. Louis Sewer District
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William Stannard Testimony
A.
Exhibit
The District has indicated that they have recently focused on improving collection of bad
debt. Related to this, they have included assumptions related to bad debt collection in the
financing plan, specifically they have projected bad debt collections will improve by
$4,000,000 in FY 2012 and $2,500,000 in subsequent years, which results in a total of
$10,000,000 in additional collections over the period of FY 2013 through FY 2016. Net
of this improvement, it is still projected that there will be $42,929,300 of bad debt over
the period of FY 2013 through FY 2016.
Q35. Do you believe that the District's estimate of bad debt is reasonable?
A. As was described by MSD witness Jan Zimmerman during Technical Conference 1 of this
proceeding, MSD has a high level of unpaid wastewater bills. Collection efforts are
hampered due to MSD's limited ability to incent prompt payment. Wastewater utilities
that are either combined with a water utility or where the local water utility provides
billing services are often times able to use shutting off of water service as the primary
action to secure payment. Some wastewater utilities that have this ability include,
Louisville MSD, Cincinnati MSD, and Northeast Ohio Regional Sewer District. Without
this mechanism, the District has recently initiated an enhance collection process for
delinquent accounts. Because the District's efforts to improve bad debt collection have
just begun, I cannot assess the reasonableness of the projected improvement, and
therefore the overall bad debt expense. The MSD rate proposal includes an estimated
modest improvement in collection from delinquent accounts, but continues a continued
increase in the bad debt amounts of $8,998,500 in FY 2013 to $12,613,400 in FY 2016. .
Recognizing MSD's history of bad debt and the short time that the new collection
program has been in place, the MSD rate proposal is conservative in its forecasts of
future bad debts and I do not believe that these estimates are unreasonable.
Q36. What do you suggest the Rate Commission do regarding bad debt?
A. It is my opinion that the Rate Commission should recommend to the District Board of
Trustees that District staff provide periodic reports on the new collection programs and
their effectiveness.
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Metropolitan St. Louis Sewer District
MSD 2011 Rate Proposal
William Stannard Testimony
Exhibit
1
2 Q37. Will the District's rate change proposal help achieve adequate fund balances for
3 MSD during the rate proposal period?
4 A. Yes. Available cash fund balances are an important element of a wastewater utility to
5 ensure adequate working capital and funds for unanticipated events. Schedule G-16 of
6 Exhibit MSD 4A presents the forecasted fund balance summary. The MSD rate proposal
7 forecasts that at the end of FY 2016 there will be a balance of $5,018,200 in the
8 Operating Fund plus $28,414,500 in the Operating Reserve, for a total of $33,432,700.
9 In terms of days of operation and maintenance expenses, this total is equivalent to about
10 75 days and a number that is consistent with the targets of other wastewater utilities and
11 the metrics used by the bond rating agencies.
12
13 FAILURE OF VOTER AUTHORIZATION OF ADDITIONAL REVENUE BONDS
14
15 Q38. What is your recommendation if the District's voters do not authorize the issuance
16 of additional revenue bonds?
17 A. If the voters reject the District's request for authority to issue additional revenue bonds, the
18 District's Rate Plan noted in section 3-10 of the 2012 Rate Change Proposal should be
19 adopted by the Board of Trustees with: My recommended changes to the capital
20 financing policies; and, the exclusion of a resistance factor in the calculations, as was
21 done in the 2007 and 2008 Rate Change Proposals.
22
23 Q39. Does this conclude your testimony?
24 A. Yes.
16
Technical Specialties
> Cost of Service and Rate Studies
> Financial Planning Studies
> Valuation and Acquisitions
> Bond Forecasts and Examinations
> Regionalization Studies
> Strategic Planning
> Management Policy and Practice
> Environmental Finance & Accounting
Professional History
> Raftelis Financial Consultants, Inc.: Pres-
ident (2009 -present)
> Raftelis Financial Consultants, Inc.: Vice
President & Chief Operating Officer
(2002-2008)
> Black & Veatch: Senior Vice President
(1996-2002); Vice President (1992-
1996); Project Manager (1982-1992);
Assistant Project Manager (1980-1982);
Staff Consultant (1975-1980)
Education
> Bachelor of Science in Business Admin-
istration - Kansas State University (1975)
> Bachelor of Science in Civil Engineering
- Kansas State University (1975)
Professional Registrations
> Registered Professional Engineer in KS,
OH, MA, MI
Professional Memberships
> American Society of Civil Engineers
> American Water Works Association:
Chair, Financial Accounting and Mana-
gerial Controls Committee
> Water Environment Federation: Past Chair,
Task Force on Wastewater Charges
> Listed in Best Lawyers in America - Di-
rectory of Expert Witnesses
> Listed in Who's Who in Science and En-
gineering
> Kansas State University College of Engi-
neering Advisory Council emeritus member
RF
RAFTELIS FINANCIAL
CONSULTANTS, INC.
1031 S. Caldwell Street, Suite 100
Charlotte, NC 28203
p: 704.373.1199 If: 704.373.1113
www.raftelis.com
William Stannard, PE
President
Raftelis Financial Consultants, Inc.
Stannard Testimony Exhibit A
Profile
Mr. Stannard joined RFC in 2002 following 27 years of consulting
with a major engineering, consulting and construction company
headquartered in Kansas City, Missouri. At that company Mr. Stan-
nard served as the head of its management consulting division, which
assisted investor and municipally owned utilities with managerial,
operational, and financial challenges. His experience includes devel-
opment of ordinances and financial procedures for complying with
the Clean Water Act and the Safe Drinking Water Act, comprehen-
sive cost of service studies, bond feasibility reports, project financial
feasibility analyses, organizational and management reviews, and util-
ity competitiveness studies. Mr. Stannard has prepared more than 90
consulting engineers reports/financial feasibility studies in support
of more than $6 billion of water and wastewater revenue bonds. As
President of RFC, Mr. Stannard is responsible for leading the Firm's
staff in business development and production of work for clients. In
addition, Mr. Stannard serves as Principal in Charge and Manager on
numerous client engagements.
A listing of the clients he has served during his career includes:
Alabama
> Birmingham Water Works Board
> Jasper Water Board
> Jefferson County Wastewater
Arizona
> City of Phoenix
> Pima County
California
> City of Los Angeles Bureau of Sanitation
> City of Los Angeles Department of Water and Power
> Metropolitan Water District of Southern California (Los Angeles)
> City of San Diego
> City of San Francisco Public Utilities Commission
> Armor Foods — Turlock, CA
Colorado
> Town of Grand Lake
> Littleton Sewer Rate Coalition
William Stannard 01
Illinois
> City of Peoria
> City of Carbondale
> Northwest Water Commission
District of Columbia
> DC Water and Sewer Authority
Georgia
> City ofAtlanta
> City of Columbus
> Gwinnett County
Indiana
> City of Bloomington
> City of Columbus
> City of Evansville
> Indianapolis Water Company
Kansas
> City of Olathe
> City of Wichita
> City of Valley Center
Kentucky
> Boone County Water District
> Hardin County Water District No. 1
> Lexington -Fayette Urban County Government
Louisiana
> New Orleans Sewerage and Water Board
Maryland
> City of Baltimore
> Howard County
> Washington Suburban Sanitary Commission
> Massachusetts
> Massachusetts Water Resources Authority
> Merrimack Paper Company — Lawrence, MA
> City of Saugus
> Michigan
> Bay County
> City of Detroit
> City of Flat Rock
> City of Flint
> City of Grand Rapids
> City of Holland
> City of ICalamazoo
> City of Lansing
> Macomb County
> Oakland County
> City of Saginaw
> City of Warren
> City of Wyoming
Mississippi
> CityofJackson
Missouri
> City of Columbia
> City of Kansas City
> City of Jefferson
> City of Lee's Summit
> City of North Kansas City
> City of St. Joseph
> St. Louis Metropolitan Sewer District
Montana
> County Water District of Billings Heights
> New Jersey
> Seton Leather Company — Newark, NJ
New Mexico
> City of Hobbs
Nevada
City of Henderson
New York
> City of New York
North Carolina
> Orange County Water and Sewer Authority
> City of Winston-Salem
Ohio
> City of Cincinnati
> Cincinnati Metropolitan Sewer District
> CityofLakewood
> City of Loveland
> Northeast Ohio Regional Sewer District
> City of Mason
> City of Middletown
William Stannard 02
Oregon
> City of Portland
Pennsylvania
> Alleghany County Sanitary Authority
> City of Philadelphia
South Carolina
> City of Charleston
Texas
> City of Arlington
> City of Austin
> City of Dallas
> City ofDenton
> City of Houston
> City of San Antonio
> Tarrant Regional Water District
Virginia
> Arlington County
> Chesterfield County
> Loudoun County
> City of Portsmouth
> City of Richmond
> City of Suffolk
Washington
> City of Seattle
> Commonwealth of Puerto Rico
> Puerto Rico Water and Sewer Authority
> International
> Bangkok — Trade Development Agency
> Cairo - USAid
> Lima, Peru — World Bank
> Oman
Federal
> United States Navy
Expert Witness and Litigation Support
Experience
Litigation Support
City of Detroit, Michigan Water and Sewerage Board
United States District Court, Eastern District of Michigan
Mr. Stannard testified on behalf of the City of Detroit
and its Water and Sewerage D epartment regarding its
wastewater rates charged to its wholesale wastewater cus-
tomers and its industrial retail customers on multiple oc-
casions during the period 1977 through 1996. During
this period, Mr. Stannard testified on twelve occasions in
depositions and in hearings in Federal Court. In addition
to his testimony Mr. Stannard was directly involved in
the negotiation of four rate settlement agreements be-
tween the City of Detroit and the wholesale customers.
Oakland County Michigan Circuit Court
Mr. Stannard testified on behalf of the City of Detroit in
support of the City's water rates charged to the City of
Novi, Michigan. The Trial Court found in favor of the
City of Detroit citing Mr. Stannard's testimony as a fun-
damental basis for the decision.
Kalamazoo, Michigan
Kalamazoo County, Michigan Circuit Court
Mr. Stannard testified as an expert witness in support of
the City in a wastewater rate dispute with its wholesale
customers. Mr. Stannard's testimony was provided in
deposition conducted by the plaintiff's attorney and
helped facilitate a settlement agreement between the
parties establishing a process and methodology for de-
termination of future wastewater rates.
Holland, Michigan
Arbitration between the City of Holland and the City of
Zeeland
Mr. Stannard served as an expert witness on behalf of the
City of Holland, Michigan in its arbitration on water
rates with the City of Zeeland, Michigan. His testimony
was provided in depositions and during the arbitration
hearings. The findings of the arbitration panel were prin-
cipally in support of the City of Holland's water rates.
William Stannard 03
Bay City, Michigan
Water Rate Arbitration between the City of Bay City and its
wholesale customers Bay County and Hampton Township
Mr. Stannard served as an arbitrator representing Bay
County and Hampton Township in a challenge of the
City of Bay City's wholesale water rates. The challenges
to the water rates focused on the determination of the
City's revenue requirements to be recovered from the
water rates and the application of the "utility basis" in the
determination of the wholesale cost of service. The neu-
tral arbitrator agreed with the arguments presented by
Mr. Stannard and found in favor of Bay County and
Hampton Township.
Newark, New Jersey
Essex County New Jersey Circuit Court
Mr. Stannard served as an expert witness for the Seton
Leather Company in a suit challenging the equity of the
City of Newark's wastewater rates. Mr. Stannard testified
in deposition and during the Trial Court hearing on this
matter. At the conclusion of the trial the Judge found in
favor of Seton leather recognizing the testimony of Mr.
Stannard as a substantial basis for his decision. The City
of Newark appealed the decision to the New Jersey Su-
preme Court who ruled in favor of the City due to the
effect that implementing the Trial Court's decision
would have on the residential customers of the City.
Lawrence, Massachusetts
Essex County Massachusetts District Court
Mr. Stannard served as an expert witness on behalf of the
Merrimack Paper Company challenging the wastewater
rates enacted by the City of Lawrence, Massachusetts.
Mr. Stannard testified in deposition and in the hearing
setting forth the results of his analyses and his opinions
regarding the equity and fairness of the City's wastewater
rates in relation to generally accepted wastewater rate
making principles and industry standards. The District
Court ruled in favor of the City which prompted Mer-
rimack Paper to Appeal to the Commonwealth Supreme
Court. Once the appeal was accepted for hearing by the
Supreme Court the City agreed to enter into a settle-
ment with Merrimack paper.
Billings, Montana
Water Rate Arbitration between the Billings Heights
Water District and the City of Billings, Montana
This matter started as a suit filed by the Billings Heights
Water District against the City of Billings challenging
water rates that had been adopted by the City. Mr. Stan-
nard was retained as an expert witness on behalf of the
District and presented testimony in deposition. After
the parties had deposed the experts, the Trial Judge
worked ith them to enter into a new contract that pro-
vided for arbitration to settle disputes. The City then re-
vised its water rates incorporating many of the issues
raised by mr. Stannard but still left other items with
which the District disagreed. The case then moved to ar-
bitration which was conducted as "baseball" arbitration
with a single arbitrator rather than three. Mr. Stannard
testified in the arbitration hearing presenting his analyses
and opinions regarding the rate issues. The Arbitrator
concurred with many of Mr. Stannard's issues and opin-
ions, but due to the nature of baseball arbitration the ul-
timate finding favored the City.
Public Service Commission Appearances
Indiana Regulatory Commission
Bloomington, Indiana. Mr. Stannard served as expert
rate consultant on six separate water rate cases before the
Commission. Three of the cases were across the board
adjustments to the rate structure based on the overall
revenue requirement for the water utility. The other
three cases included detailed cost of service and rate de-
sign determinations.
Columbus, Indiana. Mr. Stannard served as the expert
rate consultant on two water rate cases before the Indi-
ana Utility regulatory Commission on behalf of the City
of Columbus. The first case included a comprehensive
cost of service study and rate design and the second case
was based solely on development of proposed revenue
requirements.
Evanston, Indiana. Mr. Stannard served as the expert
rate consultant on behalf of the City of Evanston on two
water rate cases heard by the Indiana Utility Regulatory
Commission. Both cases included development of test
year revenue requirements, comprehensive cost of serv-
ice analyses and rate design.
Kentucky Public Service Commission
Boone County Kentucky Water District. Mr. Stannard
testified as an expert water rate consultant on behalf of
William Stannard 04
Boone County before the Kentucky Public Service
Commission in support of the Water District's proposed
water impact fees. The Commission approved the Dis-
trict's application for implementation of these fees.
Publications/Presentations
> "Effective Utility Management — From Princioples to
Practice," presented at the NACWA Winter Confer-
ence, February 2010.
> Co-author of the Comprehensive Guide to Water and
Wastewater Finance and Pricing, 3rd Edition, 2005.
> "2004 National Water and Wastewater Rate Survey
Results," presented at the Kansas AWWA Annual
Conference, September 15, 2005.
> "Do Your Utility Rates Support Your Business Objec-
tives," presented at the WEF/AWWA Joint Manage-
ment Conference, March 16, 2004.
> "The Changing Water Utility," presented at the Fall
Conference of the Western Coalition of Arid States,
October 31, 2003.
> "Holland, Michigan v Zeeland, Michigan — A Case
Study in Arbitration," presented at the AWWA Annu-
al Conference, June 2002.
> "We're Number One: A Rating System for Municipal
Utilities," presented at the WEFTEC Conference,
October 1998
> "Mapping the Future — Cincinnati Water Works' Stra-
tegic Planning Process," presented at the AWWA An-
nual Conference, June 1998.
> "Who's Number One: A Competitiveness Index for
Water Utilities," presented at the AWWA Annual
Conference, June 1998.
> "Transferable Project Development Models: Water &
Wastewater," Moderated panel discussion at the Na-
tional Council for Public/Private Partnership's Annu-
al Conference, September 1998.
> "Financing Stormwater Management Systems," pre-
sented at the County Engineer's Association of Mary-
land Fall Conference, September 1994.
> "Financing Environmental Projects," presented at the
Utility Conference sponsored by the Indiana CPA
Society, June 1992.
William Stannard 05
Stannard Testimony Exhibit B
Actual (MSD Exhibit 4a)
Annualized Change
FY 2006 -FY 2010
Inflation Rat es - Page 2-3 of Rate Change Proposal
Categories - Page 2-3 of Rate Change Proposal
FY 2006
FY 2010
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
Wages, Salaries and Overtime
$ 44,367,951
$ 56,929,098
6 .43 %
3 .00 %
3.00%
3.00%
3.00%
3.00 %
Personnel Services and Benefits
$ 19,007,991
$ 14,153,258
-7 .11%
3 .00 %
3.00%
3.00%
3 .00%
3.00 %
Gro up Insurance
$ 478,633
$ 6,109,597
89.02%
10.00 %
10.00%
10 .00%
10.00%
6.00 %
Combined Personnel Services and Benefits and Group Insurance (1)
$ 19,486,624
$ 20,262,855
0 .98%
6 .18%
6.29%
6.41 %
6 .52%
4.56%
Supplies, including Chemicals
$ 8,461,666
$13,575,914
12.55%
3 .00%
3.00%
3 .00%
3.00%
3 .00%
Electric and Gas (2)
$ 11,731,566
$ 12,160,588
0 .90%
3 .50 %
3.00%
5.50%
5.50%
5 .50 %
Contractual Serv ices
$ 25,643,837
$ 33,096,070
6 .59%
3 .00%
3 .00%
3.00%
3 .00%
3 .00%
Bond and Liability Insurance
3.00 %
3 .00 %
3.00%
3 .00%
3.00 %
Capital Outlay
$ 2,641,300
$ 3,016,623
3.38 %
3 .50 %
3.00%
3.00%
3 .00%
3 .00 %
Pension
$ 216,243
$ 8,299,006
148 .90%
9 .30%
10.20%
11.40%
5 .00 %
5.00 %
(1) Co mbined Personnel Services and Benefits and Group Insurance inflation rates calculated from rows 465 and 467 of WWOM she et of Exhibit 4a
(2) Actuals include water and all o ther utilities in addition to electric and gas