HomeMy Public PortalAboutExhibit BJH 64 Surrebuttal Testimony (Billie LaConte)Exhibit No.: BJH 64
Issues: Rate Increase/CIRP/Consent Decree
Witness: Billie S. LaConte
Sponsoring Party: Barnes -Jewish Hospital
Type of Exhibit: Surrebuttal Testimony
Case No.:
Date Testimony Prepared: August 19, 2011
Metropolitan St. Louis Sewer District
2011 Wastewater Rate Change Proceeding
Before the
MSD Rate Commission
Surrebuttal Testimony of
Billie S. LaConte
on Behalf of
Barnes -Jewish Hospital
DRAZEN CONSULTING GROUP
Energy & Regulatory Economics
Project No. 101479
August 19, 2011
Metropolitan St. Louis Sewer District
MSD Rate Commission
2011 Wastewater Rate Change Proceeding
Affidavit of Billie S. LaConte
STATE OF MISSOURI )
COUNTY OF ST. LOUIS)
Billie S. LaConte, being of lawful age and duly affirmed, states the following:
1. My name is Billie S. LaConte. I am a consultant in the field of public utility economics
and regulation and a member of Drazen Consulting Group, Inc.
2. Attached hereto and made a part hereof for all purposes is my Surrebuttal
Testimony consisting of Pages 1 through 6 and Schedules BSL-1 through BSL-5, filed
on behalf of the Barnes -Jewish Hospital.
3. I have reviewed the attached Surrebuttal Testimony and schedules and hereby
affirm that my testimony is true and correct to the best of my knowledge and belief.
Billie S. LaConte
Duly affirmed before me this 19th day of August, 2011.
SHERYL M. FENELON
My Comoission Eimires
m6,2015
St Louis County
Commission 811514106
My commission expires on July 6, 2015.
Notary Public
1 Metropolitan St. Louis Sewer District
2
3
MSD Rate Commission
2011 Wastewater Rate Change Proceeding
4 Surrebuttal Testimony of Billie S. LaConte
5 Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
6 A Billie S. LaConte, 8000 Maryland Avenue, Suite 1210, St. Louis, Missouri 63105.
7 Q ARE YOU THE SAME BILLIE S. LACONTE THAT FILED REBUTTAL TESTIMONY IN THIS
8 PROCEEDING?
9 A Yes.
10 Q WHAT IS THE PURPOSE OF YOUR SURREBUTTAL TESTIMONY IN THIS PROCEEDING?
11 A I shall discuss the Consent Decree and how it relates to MSD's proposed CIRP program
12 and MSD's rate proposal.
13 Q WHAT ARE YOUR COMMENTS REGARDING THE CONSENT DECREE?
14 A The infrastructure improvements and upgrades that MSD must complete to comply with
15 the Consent Decree (CD) cost less than the Capital Improvement and Replacement
16 Program (CIRP) amount that MSD claims it needs. The CD requires approximately
17 $884.7 million of investment, whereas MSD claims it needs $1.0 billion to meet the CD
18 requirements.
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Drazen Consulting Group, Inc.
1 Q PLEASE EXPLAIN.
2 A MSD Exhibit 49A is the Final MSD Consent Decree. It discusses "the infrastructure
3 improvements and upgrades required to eliminate or reduce overflows from Combined
4 and Separate Sewer Systems in order to improve water quality and protect human
5 health and the environment." MSD Exhibit 50, described as the Supplemental Response
6 to the Second Discovery Request of the Missouri Industrial Energy Consumers, includes
7 an attachment, Exhibit 50A, that "is a detailed list of projects which are anticipated to
8 be a part of the current Rate Proposal. Exhibit MSD 50A may be used to link the CD to
9 rate proposal table 3-8, page 3-14, line 12 and table 3-9, page 3-15, line 9 of the Rate
10 Proposal." MSD Exhibit 50A lists each project, by fiscal year, along with the cost of each
11 project. The total is $884.7 million, whereas MSD Exhibit 1, Table 3-8, Page 3-14 and
12 Table 3-9, Page 3-15 shows a total cost of $1.0 billion for the same time period.
13 Q WHY DO THESE FIGURES DIFFER?
14 A MSD uses an "appropriation method" to fund its capital projects instead of a cash
15 expenditures method. This results in an extra $34 million over the rate proposal period
16 (FY2013-FY2016) (Exhibit MSD 18A4 "Cash Flow vs. Appropriation").
17 Q ARE THE FIGURES IN MSD EXHIBIT 50A THE SAME AS THOSE PROVIDED IN MSD
18 EXHIBIT 9B1?
19 A Yes. However, at the time that MSD Exhibit 9B1 was provided, intervenors and the Rate
20 Commission did not have access to the Consent Decree and, therefore, were not able to
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Drazen Consulting Group, Inc.
1 confirm whether the CIRP in the rate proposal matched the requirements of the
2 Consent Decree.
3 Q WHAT IS THE BENEFIT OF USING THE "CASH METHOD" INSTEAD OF THE
4 "APPROPRIATION METHOD?"
5 A It is more accurate and results in somewhat lower increases. As Rate Commission
6 witness William Stannard stated in his rebuttal testimony, "many large wastewater
7 systems I have worked with have moved from financing their capital improvement
8 programs on an appropriation basis to a cash expenditure basis to help mitigate the
9 associated rate increases and to recognize that capital project schedules often take
10 longer than initially anticipated" (Rebuttal Testimony of William Stannard, Page 10,
11 Lines 17-20).
12 Q WHAT ASSUMPTIONS DOES MSD MAKE REGARDING THE TIMING OF CAPITAL
13 EXPENDITURES?
14 A The footnote on MSD Exhibit 18A41 shows MSD's proposed CIRP on a cash flow basis
15 versus appropriation. The footnote states that "Projects over 12 months are assumed
16 to have 60 percent of the costs expended in the first fiscal year with the remaining 40
17 percent spent in the following fiscal year." MSD assumes that its capital projects will be
18 completed within two years, which results in customers paying more up -front for capital
19 projects that may not be completed during the specified years and/or rate period.
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Drazen Consulting Group, Inc.
1 Q DO YOU RECOMMEND THAT MSD SWITCH TO A CASH EXPENDITURE BASIS?
2 A Yes. If MSD uses a cash expenditure basis, its proposed rate increases for the rate
3 period could be lowered by 3% per year.
4 Q HOW DID YOU DETERMINE THIS?
5 A Using data that is available, I analyzed MSD's rate proposal and calculated the needed
6 rate increases to meet MSD's operating costs, maintain appropriate fund balances and
7 meet debt payment ratios.
8 Q DID YOU DO THIS USING MSD'S RATE MODEL?
9 A No. MSD's consultant (Black & Veatch) will not make its model available for analysis by
10 others. Even MSD does not have access to the model. This makes it very difficult to
11 check its accuracy. MSD and the intervenors were not able to reach agreement on the
12 confidentiality agreement related to accessing the rate model. Therefore, I prepared
13 and used a model that I created.
14 Q WHAT ASSUMPTIONS DID YOU USE?
15 A The assumptions I used are:
16 • MSD's customer count and usage would remain the same throughout the
17 rate period. (MSD assumed that customer accounts would decline by 0.2%
18 over the rate period and that usage would decline by 1.9% over the rate
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Drazen Consulting Group, Inc.
1 period. MSD Exhibit 1, Table 3-1 and Table 3-2, respectively.) MSD Exhibit
2 11A34 shows that actual FY2011 customers and usage increased by 0.3% and
3 2.3%, respectively, over forecast 2011. Based on this data, assuming no
4 growth is a conservative estimate;
5 • Operating costs would increase 2.3% per year, excluding Rate Commission
6 costs, Additional Operating and Maintenance costs, and Civil Service
7 Commission costs, which remain the same as proposed in MSD's Rate
8 Proposal. This is based on Exhibit 18G titled "MSD's Inflation Trend
9 Analysis," which shows the average Consumer Price Index (CPI) from FY2006-
10 FY2012 as 2.3%;
11 • I used a cash expenditure method to estimate the annual CIRP costs, based
12 on Exhibit MSD 50A and an inflation allowance of 1.5% (using 2010 $). The
13 inflation allowance is lower than the CPI rate to reflect that some of the bids
14 for capital work may come in below traditional costs;
15 • Based on the lower CIRP requirements, I lowered the revenue bond issuance
16 from $805 million to $727 million over the rate period and maintained the
17 State Revolving Loan proceeds as shown in MSD's Rate Proposal; and
18 • I used a bad debt expense escalator of 3% per year instead of MSD's 32% for
19 FY2013 and 12% for FY2014-FY2016. This is based on the assumption that
20 MSD's improved collection methods will mitigate somewhat the effect of the
21 rate increases on bad debt expense.
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Drazen Consulting Group, Inc.
1 Q WHAT RATE INCREASES WOULD MSD NEED USING YOUR ASSUMPTIONS?
2 A MSD would need to increase rates by 8.5%, per year, for the rate period FY2013-FY2016.
3 MSD has proposed 11%-12% annual increases. Schedules BSL1-BSL5 provide the
4 detailed calculations.
5 Q SHOULD MSD USE YOUR MODEL TO DETERMINE THE APPROPRIATE RATE INCREASES?
6 A MSD should use the Black and Veatch Model with my inputs to determine the
7 appropriate rate increases. The model I used is an analysis to show that MSD, by
8 switching to a cash expenditure basis and modifying its growth assumptions and
9 inflation assumptions, could implement lower rate increases over the rate period while
10 still meeting the requirements of the CD.
11 Q DOES THAT CONCLUDE YOUR SURREBUTTAL TESTIMONY?
12 A Yes.
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Drazen Consulting Group, Inc.
Schedule BSL-1
Comparison of Projected Wastewater Revenue Under Existing Rates w/ Projected Revenue Requirements
Line Description
2011 2012 2013 2014 2015 2016
1 Revenue using current rates 213,795.6 213,795.6 213,795.6 213,795.6 213,795.6 213,795.6
Additional revenue required
2 2012 4.3% 9,193.2 9,193.2 9,193.2 9,193.2 9,193.2
3 2013 8.5% 18,954.0 18,954.0 18,954.0 18,954.0
4 2014 8.5% 20,565.1 20,565.1 20,565.1
5 2015 8.5% 22,313.2 22,313.2
6 2016 8.5% 24,209.8
7 Total additional revenue 9,193.2 28,147.3 48,712.4 71,025.6 95,235.4
8 Total service charge revenue 213,795.6 222,988.8 241,942.9 262,508.0 284,821.2 309,031.0
9 Other operating revenue (750.5) 3,382.4 3,244.2 3,114.6 2,984.2 2,851.8
10 Connection fee revenue 1,250.0 1,288.0 1,327.0 1,367.0 1,408.0 1,450.0
11 Interest income reserve funds 888.8 964.3 1,196.6 1,486.6 1,753.5 1,969.1
12 Interest income operations 30.8 47.3 50.1 50.5 50.5 50.2
13 Interest income Arnold 650.7 631.0 610.5 589.1 566.8 543.6
14 Subtotal other revenue 2,069.8 6,313.0 6,428.4 6,607.8 6,763.0 6,864.7
15 Total revenue 215,865.4 229,301.8 248,371.2 269,115.8 291,584.2 315,895.7
16 Operation and maintenance expense 134,394.8 138,803.8 141,996.2 145,262.1 149,078.2 152,021.2
17 Additional 0 & M - 112.4 2,159.8 7,484.1 7,942.5
18 Net revenue 81,470.6 90,498.0 106,262.6 121,693.9 135,021.9 155,932.0
Debt Service
19 Existing senior revenue bonds 19,291 19,291 19,551 19,686 19,834 19,973
20 Proposed senior revenue bonds 3,579 19,061 32,134 44,656 53,601
21 Total senior revenue bonds 19,291 22,870 38,611 51,820 64,491 73,574
22
23 Existing state revolving fund loans 19,114 21,311 21,401 21,484 21,356 21,729
24 Proposed state revolving fund loans 1,711 4,063 6,308 8,553 10,798
25 Total state revolving fund loans 19,114 23,022 25,464 27,791 29,909 32,526
26 Commercial paper - - - - -
27 Total debt service 38,404 45,892 64,075 79,611 94,399 106,100
28 Routine annual improvements 2,379 2,462 2,519 2,576 2,636 2,696
29 Cash financing of major improvements 37,250 38,438 31,677 33,267 38,308 55,850
30 Additions to operating reserve 675 739 1,126 1,418 1,674 975
31 Net annual balance 2,763.2 2,967.6 6,865.5 4,821.6 (1,994.8) (9,689.3)
32 Beginning of year balance 1,696.9 4,460.1 7,427.7 14,293.2 19,114.8 17,120.0
33 End of year balance 4,460.1 7,427.7 14,293.2 19,114.8 17,120.0 7,430.7
Actual debt service
34 Senior bonds 19,291 22,870 38,611 51,820 64,491 73,574
35 SRF loans 19,114 23,022 25,464 27,791 29,909 32,526
36 Debt service coverage
37 Revenue bonds 1.25x 4.22 3.96 2.75 2.35 2.09 2.12
38 Total debt 1.15x 2.12 1.97 1.66 1.53 1.43 1.47
Schedule BSL-2
Wastewater Capital Improvement and Replacement Program
(S000)
Line Description
Inflation rate: 1.5% 2013-2016
2011 2012 2013 2014 2015 2016 Total
Sanitary Sewer Overflow Control
1 Design 12,410 707 43,478 39,184 40,969 16,859 140,491
2 Construction 54,931 17,570 76,387 66,346 106,710 130,016 379,458
3 Subtotal 67,341 18,277 119,865 105,530 147,679 146,874 519,949
Combined Sewer Overflow Control
4 Design 13,415 5,131 23,266 11,675 15,782 15,636 66,360
5 Construction 2,142 14,336 38,082 47,131 12,575 112,124
6 Subtotal 13,415 7,273 37,603 49,757 62,913 28,211 178,484
System Projects
7 Cityshed Improvements 6,283 - 19,651 11,144 7,972 7,107 45,875
8 Asset Management 15,697 22,562 57,068 49,584 24,939 33,880 165,471
9 B & C System - - 3,934 4,389 - 8,323
10 Subtotal 21,980 22,562 80,653 65,117 32,911 40,988 219,669
11 Wastewater Treatment 55,487 79,200 33,317 265 1,616 35,199
12 Total (inflated cash expense) 158,223 127,312 271,438 220,669 245,119 216,073 953,300
Exhibit 50A 2013-2016
Sanitary Sewer Overflow Control 2012 * 2013 2014 2015 2016 Total
Design 686 41,579 36,919 38,030 15,418 131,946
Construction 17,054 73,050 62,510 99,055 118,905 353,519
Subtotal 17,741 114,629 99,429 137,085 134,323 485,465
Combined Sewer Overflow Control
Design 4,981 22,250 11,000 14,650 14,300 62,200
Construction 2,079 13,710 35,880 43,750 11,500 104,840
Subtotal 7,060 35,960 46,880 58,400 25,800 167,040
System Proiects
Cityshed Improvements 18,793 10,500 7,400 6,500 43,193
Asset Management 21,900 54,575 46,717 23,150 30,985 155,427
B & C System - - - - -
Wastewater treatment 76,876 31,862 250 1,500 33,612
Total 123,577 255,819 203,776 227,535 197,608 884,737
* 2012 figures are from MSD Exhibit 1, Table 3-8, adjusted to reflect 1.5% inflation, assuming MSD used 3% inflation.
Schedule BSL-3
Wastewater Capital Impr ovem ent Program Financi ng
Table 3-9
Line Description 2011 2012 2013 2014 2015 2016 2013-2016
So urce of Funds
1 Beginning of Year Balance 92,977 .3 8,668.6 7,841.3 11,451.2 34,013.6 29,647.0
2 Revenue Bond Proceeds - 52,020 .0 225,000.0 190,000 .0 182,000 .0 130,000 .0 727,000 .0
3 State Revolving Loan Proceeds 37,000 .0 39,999.3 35,000 .0 35,000.0 35,000.0 35,000 .0 140,000.0
4 Commercial Paper - - - - -
5 Cash Financing of Co nstruction 37,250 38,438 31,677 33 ,267 38,308 55,850 159,102.0
6 Grants & Contributions a) 455 475 1,495 516 539 562 3,111.7
7 Interest Income b) 2,769 2,121 2,735 2,409 2,204 1,832 9,180 .0
8 Total Funds Available 170,451.0 141,721 .2 303,748 .2 272,643 .5 292,064.2 252,890.9 1,038,393.7
77,474
Application of Funds
9 Major Capital Improvements
10 Impro vement Fund Projects c)
11 Issuance Costs d)
12 Revenue Bond Reserve Fund e)
13 Total
14 End of Year Balance
158,223.0 127,312 .3 271,438 .4 220,669 .4 245,119 .3 216,072 .9 953,300 .0
1,265.0 2,000.0 2,000 .0 2,000 .0 2,000.0 2,000 .0 8,000.0
552.2 988 .3 3,377.5 2,887.5 2,775.5 2,047.5 11,088.0
1,742. 2 3,579 .3 15,481.1 13,073 .0 12,522 .5 8,944.7 50,021.2
161,782.4 133,879.9 292,297.0 238,629.9 262,417.3 229,065.0 1,022,409.2
8,668. 60 7,841.33 11,451 .21 34,013.64 29,646.95 23,825.84 15,984 .51
Notes:
a) Same as MSD Exhibit 1, table 3-9, line 6.
b) Same as MSD Exhibit 1, table 3-9, line 7. Notes from MSD Exhibit state that interest is 1% of the average of the beginning and end year fund balances;
was not able to match MSD's figures based on this description, therefore used same figures.
c) Used same figures as in MSD Exhibit 1, Table 3-9, line 10.
d) Calculated using MSD description in MSD Exhibit 1, Table 3-9, footnote c.
e) Represent 6.88% of revenue bo nd pro ceeds, line 2.
Schedule BSL-4
Projected Wastewater Operating Expense ($000)
Inflation rate: 2 .3%
Increase 2012-2106
Line Description
2011 2012 2013 2014 2015 2016
1 Bo ard of trustees $2.4 $2 .5 $2 .6 $2.6 $2.7 $2 .7 0.2 9 .5 %
2 Rate co mmission 423 .8 9.4 9.7 10 .1 485.6 11 .1 1.7 18 .1%
3 Civil se rv ice co mmission 7 .8 7 .8 7.8 7 .8 7 .8 7 .8 0.0%
4 Secretary -treasures 1,613 .7 1,674.9 1,713 .4 1,752 .8 1,793 .1 1,834.4 159 .5 9.5 %
5 Executive director 712 .4 739 .6 756.6 774 .0 791.8 810 .0 70 .4 9.5 %
6 General co unsel 4,116 .8 4 ,265 .3 4,363 .4 4,463.8 4,566.4 4,671.5 406.2 9.5%
7 Office of human resources 9,847.6 10,303.0 10,540.0 10,782.4 11,030 .4 11,284.1 981 .1 9.5 %
8 Engineering 18,206 .4 18 ,992 .3 19,429 .1 19,876.0 20,333 .1 20,800 .8 1,808 .5 9 .5%
Operations
9 Collectio n system $19,579.2 $20,401.2 20,870.4 21,350.4 21,841.5 22,343.9 $1,942 .7 9 .5%
10 Pump stations 7,931 .3 8,210.8 8,399 .6 8,592 .8 8,790 .5 8,992 .7 781.9 9 .5%
11 Wastewater treatme nt 35,427 .5 36,664 .6 37,507.9 38,370 .6 39,253.1 40,155.9 3,491.3 9 .5%
12 Support 7,265.0 7,534.8 7,708.1 7,885.4 8,066.8 8,252.3 717 .5 9 .5%
13 Total $70,203.0 $72,811.4 $74,486.1 $76,199 .2 $77,951.8 $79,744 .7 6,933 .3 9.5%
14 Finance
15 Information systems
16 Subtotal (general fund)
17 Water backup pro gram
18 Real property fund
19 Subto tal O&M
20 Additional O&M (exp. Reg. projects)
21 To tal O & M
22 Routine annual improv ements
23 To tal Operating Expense
$15,885. 7 $15,985 .7 16,353 .4 16,729 .5 17,114.3 17,507.9 $1,522.2
8,470.5 8,780.1 8,982.0 9,188.6 9,400 .0 9,616.2 836.1
$129,490. 1 $133,572.0 $136,644.1 $139,786 .9 $143,477.1 $146,291 .2 $12,719 .2
$4,000. 0 $4,300. 0 4,398.9 4,500 .1 4,603 .6 4,709.5 $409 .5
904. 7 931.8 953.2 975 .2 997.6 1,020 .5 88 .7
$134,394.8 $138,803. 8 $141,996.2 $145,262.1 $149,078.2 $152,021 .2 $13,217.4
9.5%
9 .5%
9 .5%
9.5%
9.5%
9 .5%
112. 4 2,159 .8 7,484 .1 7,942 .5 $7,942.5 N/A
$134,394.8 $138,803.8 $142,108. 6 $147,421.9 $156,562.3 $159,963 .7 $21,159.9 15.2%
2,378.6 $2,461.9 2,518.5 2,576. 4 2,635 .7 2,696 .3 $234 .4 9 .5%
$136,773. 4 $141,265.7 $144,627. 1 $149,998. 4 $159,198 .0 $162,660 .0 $21,394.3 15 .1%
Schedule BSL-5
Wastewater Other Operating Revenue
Billing adjustment
Bad debt provision
Other fees
Construction inspection fees
Waste hauler permits
All other fees
Subto tal
Miscellaneous revenue
Total other operating revenue
Connection fee revenue
Total other revenu e
2011
2012
2013
2014
2015
2016
4,556,700 4,538,700 4,535,500 4,545,600 4 ,559,000 4,575,100
(10,910,900) (6,820,800) (7,025,424) (7,236,187) (7,453,272) (7,676,870)
100,000
1,450,000
482,500
103,000
1,457,300
497,100
106,100
1,464, 600
512,100
2,032,500 2,057,400 2,082,800
3,571,200 3,607,100 3,651,300
(750,500) 3,382,400 3,244,176
1,250,000 1,288,000 1,327,000
109,300
1,471,900
527,500
2,108,700
3,696,500
3,114,613
1,367,000
112,600
1,479,300
543 ,300
116,000
1,486,700
559,600
2,135,200 2,162,300
3,743,300 3,791,300
2,984,228 2,851,830
1,408,000 1,450,000
499,500 4,670,400 4,571,176 4,481,613 4,392,228 4,301,830