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HomeMy Public PortalAboutExhibit MSD 60A Surrebuttal Testimony of Jeffrey L Theerman P EBEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT AUGUST 19, 2011 SUBMITTAL OF SURREBUTTAL TESTIMONY OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT ISSUE: WASTEWATER RATE CHANGE PROPOSAL WITNESS: JEFFREY L. THEERMAN, P.E. SPONSORING PARTY: METROPOLITAN ST. LOUIS SEWER DISTRICT DATE PREPARED: August 19, 2011 Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, Missouri 63103   Exhibit MSD 60A Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ Q1. Mr. Theerman can you please explain the necessity of the District’s 1 implementation of the Consent Decree which has been filed as Exhibit 49A? 2 A. The District has agreed to a Consent Decree with an estimated cost of $4.7 billion in 3 2010 dollars. MSD chose to avoid further litigation in favor of making the necessary 4 infrastructure investments to comply with the Clean Water Act (“CWA”). We 5 believed that litigating the suit to finality would not yield a better outcome than we 6 achieved in the settlement agreement. When the Consent Decree becomes final 7 there are significant penalties for failure to achieve requirements in the timeframes 8 specified. Ultimately failing to move forward with the terms of the settlement would 9 lead to intervention by the Federal District Court. EPA and the Department of Justice would be strong proponents of this. There is little doubt that the Courts will ultimately intercede and force compliance with the settlement terms. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 In addition to the legal aspects, failing to implement the Consent Decree would carry a large burden in other areas. Bond rating agencies would be very likely to react negatively to this lack of response. We view preserving The District’s current excellent bond rating as a high priority for the region. Failing to move forward in raising rates and implementation of the program in defiance of the settlement is likely to cause such a down grade. In the long run the Court could force compliance and this could happen with a less favorable bond rating. The image of the region is another consideration. At present, St. Louis is similar to a number of other cities grappling with sewer infrastructure issues. All have large - 1 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ programs and all will have rapidly rising user fees. A region that elects to ignore their Consent Decree risks being labeled as one that does not care about the well being of its environment and its citizens. As St. Louis continues to try to attract prospective employers and residents this could be detrimental to the community’s efforts in that regard. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 In essence, the Consent Decree with its costs and schedule can be viewed in a number of different ways. An environmental perspective is that sewer overflows which dump sewage into urban streams is unacceptable and should not be a long term strategy for a modern metropolitan area in the United States. CSO, SSO and basement backups should be addressed expeditiously and simultaneously with other sources of water pollution. An economic perspective includes thinking about the impact of infrastructure re- investment to assure the vitality of the metropolitan area to the benefit of its residents and businesses. This large public works program will create jobs, returning dollars to the community several times over. These programs can also create synergies with other public and private improvements over several decades. A pragmatic view of the Consent Decree takes the perspective that the Federal government has the ability to force the infrastructure rehabilitation required by the Consent Decree. St. Louis does, however, have a choice. These are, keep control of the program and make it as efficient as possible seeking the synergies mentioned - 2 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ above or refuse to comply and suffer the consequences as the EPA makes an example of the region to assure that no other city takes a similar approach. 1 2 3 10 11 12 13 14 15 16 17 18 19 21 22 Q2. Are action items identified in the Consent Decree the only costs reflected in 4 the District’s Rate Proposal? 5 A. No. In addition to the requirements of the Consent Decree there are other 6 environmental requirements that are funded through the proposed rate increases. 7 Required improvements in wastewater treatment plant performance and capacity are 8 not specifically prescribed in the Consent Decree but will be enforceable under 9 environmental regulations. For example, treatment plant effluent disinfection is a requirement for all MSD treatment plants as specified in their operating permits and must be implemented by the end of calendar year 2013. These requirements will increase operating costs as described in Jon Sprague’s testimony. Major plant expansions at Bissell Point, Lemay, and Coldwater Creek facilities occurred in the mid 1980’s through early 1990’s. Systems installed 20-25 years ago have now reached the age where they will sustain higher maintenance costs related to asset renewal. This renewal is done through plant maintenance activities and generally does not rise to the definition of a capitalized project. Q3. Mr. Theerman there is a section that starts on page 64 in the Consent 20 Decree, Exhibit 49A, titled Stipulated Penalties, can you explain how that section affects the implementation of the improvements mandated by the CD? - 3 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ A. Yes. All wet weather Consent Decrees are structured with stipulated penalties to 1 assure that if a city fails to comply with the terms of the agreement the penalties are 2 already in place and Court approved. In MSD’s case we were able to reach 3 agreement on a set of stipulated penalties that afford a realistic approach to 4 penalties as the program progresses but only if the program stays on track with a 5 number of important requirements. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 For example, as long as MSD continues to perform its operation and maintenance related requirements as prescribed in the Consent Decree it is not subject to stipulated penalties for sanitary sewer overflows or basement backups which will inevitably continue to occur during certain rain events. However, if the District falls behind and does not perform these maintenance activities as required, MSD may be subject to stipulated penalties. In addition to that, the District may also be exposed to stipulated penalties for any sanitary sewer overflow or basement backup which subsequently occurs. As there are nearly 200 constructed overflow locations and the potential for a large number of basement backups in extreme events this is a significant risk. As these stipulated penalties can amount to thousands of dollars per day per violation it is very important that we assure that the prescribed maintenance activities stay on schedule. Cutting resources in these areas could consequently result in high fines if we fall behind. The Consent Decree also includes stipulated penalties for failure to submit timely and complete documents such as engineering - 4 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ 1 2 3 4 5 6 7 8 9 11 13 14 15 16 17 18 19 20 22 planning reports that will drive the projects; progress reports on the completion of remedial requirements like construction projects identified in the long term control plan and SSO master plan, overflows from the separate and combined system which are not permitted like those previously discussed, and for failing to meet the requirements of supplemental environmental projects. Essentially all Consent Decree stipulated penalties are structured in a similar way. Continued progress as defined in the Consent Decree is what protects the District from these fines when violations inevitably occur as the program continues to take shape. Q4. How do the stipulated penalties that could be assessed relate to the current 10 rate proposal? A. MSD is expected to make progress and revenue must be established to support the 12 Consent Decree schedule. MSD understands it has an obligation to the community to be efficient and use revenue generated by the proposed rate increases wisely. However, putting too fine a point on funding Consent Decree required initiatives, including internal operations and maintenance activities carries the risk of under funding the programs that get the work done and thereby subjecting the District to significant stipulated penalties. It could lead to the very definition of being penny wise and pound foolish. Q5. What circumstances will the District see if the Rate Commission 21 recommends rates that push necessary CIRP projects into the future? - 5 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ A. The proposed CIRP projects scheduled to satisfy the Consent Decree fall into three 1 categories, projects already identified in the CSO long term control plan, SSO 2 removal projects which already have conceptual solutions determined and are ready 3 for design, and SSO removal projects that are still in the preliminary engineering 4 stage. Keep in mind there is more to the Consent Decree than just CIRP projects 5 although they represent the bulk of its estimated cost. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 The project list for the next four years includes some of each category but consists primarily of constructed SSO projects which are now ready for design. This is because the Consent Decree is structured with removal of constructed SSOs as a top priority. The District has until 2023 to remove 85% of the constructed SSOs. The remaining 15% can be removed after 2023 if the District justifies the technical basis for the needed additional time. Some SSO removal is being designed and/or constructed as early action projects to assure compliance with the 2023 milestone. The schedule for the removal of all remaining known constructed SSOs will be set by a SSO master plan to be submitted to EPA by the end of 2013. This will be an aggressive schedule which will be challenging in later years. We believe MSD can successfully meet the requirements listed above but only if it has the resources to effectively utilize the time allowed by the EPA in the most optimal way. It is important to understand there is a continuum of projects over the entire duration of the Consent Decree. There is no slack period in the next 23 years to play catch- up on projects. Constructed SSO removal is front loaded due their high priority and - 6 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ somewhat shorter required schedule for removal. While some CSO projects can occur early, the most expensive and highest risk CSO projects require considerable engineering development before construction. The project development of the CSO tunnels will occur while the majority of the SSO removal is accomplished. This allows the capital intensive CSO tunnel construction to be scheduled later in the program along with the few remaining SSOs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 23 Delaying projects squeezes the SSO removals closer to the 2023 deadline and increases the risk of not allowing enough time to get all the work completed. Keep in mind that in many cases solutions have yet to be designed so the schedule in later years is uncertain. Delaying projects also subjects their costs to greater inflation risk. It is hard to imagine a better environment for low construction pricing than currently exists. The District’s Rate Proposal is designed to execute projects that are ready to move forward and providing the necessary resources to continue the process of developing and designing the projects that will be built in the future. Delaying funding and therefore projects has the effect of stacking the SSO and CSO programs on top of each other to a larger degree than is prudent. In essence, it shortens the compliance schedule we have negotiated. We believe it will increase project bond rating risk, construction costs, and the likelihood of failing to comply with the Consent Decree. Q6. Mr. Theerman the District’s proposal has been criticized in these 22 proceedings as being too conservative or have too pessimistic of an outlook - 7 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ on the economic condition and future of the District’s service area, can you 1 please explain how the Rate Commission should view such criticism? 2 A. First, I’d say that I don’t believe the District has been pessimistic or overly 3 conservative, I think we have used reasonable assumptions to make predictions that 4 nobody can be sure about. There is a considerable amount of surrebuttal testimony 5 about the assumptions contained in the District’s Rate Proposal, but in a more broad 6 view, the outcome of these assumptions will probably be a mixed bag with some 7 proving to be conservative and others overly optimistic. If in the aggregate we 8 collect too much revenue, the District will move forward and expedite the Consent 9 Decree compliance related work or continuing the stated program with reduced use of debt, which would then be available for other projects in future years. It has the effect of paying the Consent Decree forward and would be reflected appropriately in the next rate change proposal. If the assumptions prove to be conservative in the aggregate, the District will have reduced revenue that will require a deviation from the currently proposed program and place the District in the untenable situation I previously discussed. This situation is one in which projects are pushed back in the schedule resulting in additional regulatory compliance and cost risks. 10 11 12 13 14 15 16 17 18 19 20 21 22 There is a belief by some that the District could merely return with another interim rate proposal in event of a revenue shortfall. This would be an option in the case of a large shortfall. However, more modest shortfalls would likely not be completely clear until well into the rate cycle. With the cost and required lead time of creating a - 8 - Surrebuttal Testimony of Jeffrey L. Theerman, P.E. Exhibit MSD 60A___ - 9 - 1 2 3 10 11 12 13 14 Rate Proposal and convening the Rate Commission, this may not, in reality, be a practical option. Q7. Is there anything else that the Rate Commission should consider when 4 dealing with the issue of analyzing the economic outlook for the duration of 5 the proposed rate change proposal? 6 A. Yes, the MSD Rate Proposal has been deliberately paired down from 5 years to 4 7 years, making this the shortest time horizon of any of the rate cases the Commission 8 has reviewed. This allows the District to make rate proposals with better information 9 and less long term assumptions. We believe four year rate cycles provide the best combination of a medium term rate commitment, an issue of concern to bond rating agencies, and a time horizon that affords greater ability to recognize and adjust to trends which will affect the program. Q8. Does this complete your surrebuttal testimony today? 15 A. Yes. 16