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Home My Public Portal AboutExhibit MIEC 89 Supplemental Testimony (Michael P Gorman) BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2011 WASTEWATER RATE CHANGE PROCEEDING Supplemental Testimony and Schedules of Michael P. Gorman On behalf of Missouri Industrial Energy Consumers Project 9456 September 16, 2011 Exhibit No.: Witness: Type of Exhibit: Sponsoring Party: Date Testimony Prepared: Michael P. Gorman Supplemental Testimony Missouri Industrial Energy Consumers September 16, 2011 CHESTERFIELD, MO 63017 BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST.LOUIS SEWER DISTRICT 2011 WASTEWATER RATE CHANGE PROCEEDING STATE OF MISSOURI SS COUNTY OF ST.LOUIS 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 supplemental 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. / Michael P.Gorman Subscribed and sworn to before me this 16th day of September,2011. TAMMY S.KLOSSNER NotarY Public·Notary Seal STATE OF MISSOURI St.Charles County My Commission Expires:Mar.14.2015 Commission #11024862 Notary Pub IC BRUBAKER &ASSOCIATES,INC. Michael P. Gorman Page 1 BRUBAKER & ASSOCIATES, INC. BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2011 WASTEWATER RATE CHANGE PROCEEDING Supplemental 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 ARE YOU THE SAME MICHAEL P. GORMAN WHO PREVIOUSLY FILED 4 TESTIMONY IN THIS PROCEEDING? 5 A Yes. 6 Q WHAT IS THE PURPOSE OF THIS SUPPLEMENTAL TESTIMONY? 7 A Brubaker & Associates, Inc. (“BAI”), on behalf of the Missouri Industrial Energy 8 Consumers (“MIEC”), has reviewed the detailed electronic model underlying Exhibit 9 MSD 1, the Black & Veatch (“B&V”) cost of service study. 10 Q PLEASE OUTLINE YOUR FINDINGS FOR REVIEW OF THE ELECTRONIC 11 MODEL. 12 A BAI has done a fairly comprehensive review of the calculations contained in the B&V 13 model. However, a more detailed comprehensive review would have been made had 14 the electronic model been provided to BAI for a full evaluation at the beginning of this 15 Michael P. Gorman Page 2 BRUBAKER & ASSOCIATES, INC. rate proceeding. Time constraints, and the limited time available to actually review 1 the model, prevented BAI from doing our normal thorough review. 2 Q DID BAI IDENTIFY ANY CONCERNS WITH THE MODEL? 3 A Yes. BAI has completed its review and has identified at least one area of concern. 4 Specifically, the model includes a projection for bad debt expense which was created 5 in a way that appears to be in conflict with the description in Exhibit MSD 1. 6 Specifically, MSD’s report states as follows in paragraph 2.2: 7 2.2 Other Operating Revenue 8 Historical and projected other revenue is presented in Table 2-3 for the 9 District’s combined wastewater and stormwater operations. All of 10 these revenues are used to partially or fully offset related operating 11 costs. Billing adjustment revenue, such as late fees, refunds, lien 12 interest and other adjustments are expected to remain generally stable 13 throughout the study period. The provision for bad debt has 14 historically increased but is expected to temporarily decline in the next 15 two years due to more comprehensive use of collection agencies and 16 law firms to collect prior years’ past due amounts. This declining trend 17 is expected to reverse as wastewater rates continue to increase. 18 (Exhibit MSD 1, page 2-5, emphasis added). 19 The actual modeling of bad debt expense is not consistent with this claim for a 20 projected two-year decline in bad debt expense. B&V modeled a $4 million decrease 21 to bad debt expense in 2012 and a $1.5 million increase in bad debt expense in 2013. 22 This increase in bad debt expense in 2013 appears to contradict the B&V report claim 23 of a two-year decline to this expense. Rather, the model only reflected a one-year 24 declining trend with an offset trend in 2013. 25 This may have simply been a modeling error that was not detected because 26 the model details were not fully disclosed until now, nor checked by any other party 27 besides B&V. 28 Michael P. Gorman Page 3 BRUBAKER & ASSOCIATES, INC. Q WHAT WOULD HAVE BEEN THE IMPACT ON THE UNCOLLECTIBLE EXPENSE 1 HAD MSD STAFF MODELED THE 2013 BAD DEBT EXPENSE AS A REDUCTION 2 TO THE EXPENSE RATHER THAN AN INCREASE TO THE EXPENSE? 3 A This is shown on my Supplemental Schedule MPG-1. As shown on that schedule, if 4 MSD Staff would have reflected the $1.5 million adjustment as a second year 5 expense reduction in 2013, then the resulting bad debt expense that would have 6 been built into the B&V model would have been in line with what I believe is a more 7 reasonable bad debt expense projection through the rate forecast period. 8 Q DID YOU IDENTIFY ANY OTHER ERRORS OR DISCREPANCIES IN THE B&V 9 MODEL? 10 A No, but again, BAI did not perform the type of detailed review of all aspects of the 11 model that it would have otherwise performed had this model been provided in 12 electronic format to BAI upfront, and provided BAI more time to do a detailed review 13 of the model. 14 Q CAN YOU TELL US WHAT LEVEL OF RATE INCREASE WOULD BE 15 APPROPRIATE IF YOUR PROPOSED ADJUSTMENTS WERE MADE TO THE 16 B&V COST OF SERVICE MODEL? 17 A Yes. This is shown on my Supplemental Schedule MPG-2. On this schedule, I made 18 the following adjustments to the B&V cost of service model: 19 1. I corrected the bad debt expense in 2013 reflecting the expense changed to be a 20 reduction to the expense and not an increase, consistent with the language in the 21 Exhibit MSD 1 write-up. 22 2. I reduced the 30-year bond debt interest expense to 4.65%, which was the 23 highest interest rate projections that MSD Staff was able to provide any evidence 24 for in this case. Note, that this debt interest expense will still overstate the debt 25 service cost on new revenue bond issuances during the forecast period. This 26 Michael P. Gorman Page 4 BRUBAKER & ASSOCIATES, INC. debt interest expense reflects an interest rate for the new revenue bond 1 issuances that would reflect no principal payments during the forecast period. 2 The B&V model included this interest expense and principal payments during the 3 forecast period. 4 3. I reduced the base inflation factor used in the O&M escalation factors to 2.25% 5 from 3% as reflected in the B&V model. This was discussed in my rebuttal 6 testimony. See M. Gorman Rebuttal Testimony, p. 10. 7 4. I reduced the capital improvement program (“CIP”) budget by approximately 10% 8 to reflect the reduction in CIP provided in the current outline of the Consent 9 Decree mandates, rather than the overstated amounts included in the B&V model. 10 As noted in my previous testimony, MSD Staff overstated the amount of CIPs 11 necessary to comply with the Consent Decree over the next four years. See M. 12 Gorman Surrebuttal Testimony, pp. 16-19. 13 As shown on the attached Supplemental Schedule MPG-2, with these 14 adjustments, MSD’s claimed annual revenue increase will decline from its proposed 15 levels of 11.0% in 2013, 12.0% in 2014, 12.0% in 2015, and 12.0% in 2016 to a 16 levelized annual revenue increase amount of 9.6% in each of the four rate years 17 2013-2016. This reduces MSD Staff’s proposed increase of over 60% 18 ($128.8 million) through 2016 down to 49% ($105.6 million). As such, this continues 19 to support my recommendation to the Rate Commission that the MSD Staff’s 20 proposed level of rate increase is excessive and should be reduced downward. 21 Q DOES THIS CONCLUDE YOUR SUPPLEMENTAL TESTIMONY? 22 A Yes, it does. 23 \\doc\shares\prolawdocs\sdw\9456\testimony-bai\204780.doc LineDescription2011201220132014201520161Bad Debt Provision1(10,910,900)$ (6,820,800)$ (8,998,500)$ (10,055,400)$ (11,262,000)$ (12,613,400)$ 2Bad Debt Provision2(10,910,900)$ (6,820,800)$ (5,998,500)$ (6,703,000)$ (7,507,400)$ (8,408,300)$ MIEC Proposed in Rebuttal:3Bad Debt Provision3(10,910,900)$ (6,989,944)$ (7,552,910)$ (8,299,442)$ (9,129,384)$ (10,042,323)$ _________Sources:1MSD Exhibit 1, Table 3-6, at line 22Corrected Adjustment to Black & Veatch Cost of Service Model, Table 3-63Gorman Rebuttal Testimony, Schedule MPG-3, at line 6Fiscal Year Ending June 30, MSD Proposed:MSD Corrected:Comparison of Bad Debt ProvisionsMetropolitan St. Louis Sewer DistrictSupplemental Schedule MPG-1 Metropolitan St.Louis Sewer District Gorman Adjusted Black &Veatch Cost of Service Model,Table 3-11 B I c I D I E I F I G I H I 1·I J I K 652 Table 3-11 653 Comparison of Proiected Wastewater Revenue Under Existing 654 Rates With Proiected Revenue Requirements 655 I I I ..§§.Line Fiscal YenrEnding June 30• 658 No:Description 2011 2012 2013 2014-2015 2016 660 $$$$$$ 661 662 1 Revcmuc Under ExistiDg Rates (a)213,795,600 213,795,600 213,795,600 213,795,600 213,795,600 213,795,600 663 Additional Revenue ReQUired 664 Fiscal Revenue Months 665 Year lncreose Eff""tj"e 667 2011·0.0"/0 12 0 0 0 0 0 0 668 2 2012 4.3%12 8,427,100 9,193,200 9,193,200 9,193,200 ·9,193200 669 3 2013 9.6%.12 19,623,000 21,4Q6,900 21,406,900 21,406,900 670 4 2014 f~%12 21,506,800 23,462,000 23,462,000 671 5 2015 9.w..12 23,571,500 25,714,300 672 6 2016 9.6%.'12 25,834.300 674 7 Total Additional Revenue 0 8,427,100 28,816,200 52,106,900 77,633,600 105,610,700 676 8 Total Service ~ReveniIe 213,795,600 222,222,700 242,611.800 265,902,500 .29l429,2oo 319,406,300 677 Ad Valorem Tax Revenue (GO Bonds)0 0 0 0 0 0 678 9 Other OperatingRevenue (750,500)3,382,400 4,323,000 3,833,300 3,137,900 2,353,100 679 10 Cormection Fee Revenue 1,250,000 1,288,000 1,327,000 1,367,000 1,408,000 1.450,000 680 11 Interest Income -Reserve Funds 888,800 946,900 1,136,500 1,379,200 1,600,400 1,788,600 681 12 Interest Income -Operations 30,800 69,500 144,800 242,000 324,000 367,300 682 13 Interest Income -Arnold 650,700 631.000 610,500 589,100 566,800 543,600 684 i4 Subtotal OtherRevenue 2,069,800 6,317,800 7,541.800 7,410,600 7,037,100 6,502,600 686 15 Total Revenue 215,865,400 228,540,500 250,153,600 273,313,100 298,466,300 325,908,900 687 I 688 16 ODeration and Maintenance Ex leIlSe 134,394,800 137,827,000 143,454,500 .148,827,900 152,398,900 156,512,400 689 17 Additional O&M (b)0 0 108,400 2,067,300 7,112,800 .7,494,100 690 Storrnwater Pro=SUlJI)Ort 0 0 0 0 0 0 692 18 Net Revenue 81,47Q,6OO 90,713,500 106,590,700 122,417,900 138,954,600 161,902,400 693 694 Debt Service 695 19 ExistinJ,:Senior Revenue Bonds 19,290,600 19,415,200 19,550,800 19,686,000 19,8~,4OO 19,973,200 696 20 Proposed Senior Revenue Bonds 0 1,833,900 16,370,900 28,554,400 39,800,700 48,547,800 697 Application ofBond Reserves 0 0 0 0 0 0 699 21 Total Senior Revenue Bonds 19,290,600 21,249,100 35,921,700 48,24Q,4OO 59,635,100 68,521,000 700 22 Existing State Revolving Fund Loans (c)19,113,700 21,311,100 21,401,300 21,483,500 21,355,600 21,728,600 701 23 Proposed State :Revolving FundlOODS (c)0 1,711,000 4,062,800 6,307,900 8,553,000 10.797,800 703 24 Total Stale Revolvinl>:FundLoans 19113,700 23,022,100 25,464,100 27,791,400 29,908,600 32,526,400 704-25 Commercial Paper 0 0 0 0 0 0 705 General Obligation Bonds 0 0 0 0 0 0 706 Short-term Debt Service 0 (> 708 26 Total Debt Service 38,404,300 44,271,200 61,385,800 76,031,800 89,543,700 101,047,400 709 I 710 27 Routine Annnal Improvements 2,378,600 2,444100 2,499,000 2,555,100 2,612,500 2,671,200 711 28 Cosh Financing ofMajor Improvements 37,250,000 38,438,000 31,677,000 33,267,000 38,308,000 55,850,000 712 29 Additions to Ooeratine:Reserve 674,500 575,000 951,900 1,214,500 1.425,900 748,500 713 I 714 30 Net Annnal Balance (d)2,763,200 4,985,200 10,077,000 9,349,500 7,064,500 1,585,300 715 I 716 31 Beginnirig ofYear Balance (e)1,696,900 4,460,100 9,445,300 19,522,300 28,871,800 35,936,300 717 32 End ofYear Balance (e)4,46Q,100 9,445,300 19,522,300 28,871,800 35,936,300 37,521,600 718 I 719 Actual Debt Service (f) 720 33 Senior Bonds 19,270,300 20,136,900 26,876,900 40,565,600 52,551,200 63,002,900 721 34 SRFLoans 18,292,600 20,732,600 24,398,500 26,593,900 29,039,400 31,063,200 722 Debt Service Coverae:e .. 723 35 Revenue Bonds (11;)4.23 x 4.50 x 397x 3.02 x 2.64 x 2.57 x 724 36 Total Debt (b)2.17 x 2.22 x 2.08 x 1.82 x 1.700 x L72x- 726 (a)Revenue undcr ex:istingW3SteWllterrates effective July I,2010. 727 (b)O&M costs related to anticioated regulatOry proiects.These llIOieets include improved disinfection at the Missouri River WWTP 728 in 2013 and 2014;expansion ofthe Missouri River WWTP in 2015;and CapacitY,Management,)perntiOD,andMaintenance (CMOM) 729 llfogIam activities related to anticipated Consent Decree reQUirements in2016. 730 (c)Debt serviceori State Revolvinl>:Fund (SRF)Loans are net ofthe state's interest subsidy. 731 (d)Negative balances indicate need to dmwdown available fund balance.I 732 e)Does not include:fimds set aside for <i minimum ooerating noserve e<IUa1 to 60 days ofoperating expenses. 733 (f)Pavrnent to Bondholders per Table 3-10,uaid through Sinlt:irm Fund.I 73-+g)The Bond Ordinance requires net revenue to e<IUa1 or exceed 1.25x actual senior lien debt service. 735 (b)The Bond Ordinance IeQUires net revenue to e<IUa1 or exceed 1.15xtotal aCtual debt service. 736 I I I I Supplemental Schedule MPG-2