HomeMy Public PortalAboutExhibit MSD 57 Transcript August 8, 2011 Technical Conference 1
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2 MEETING OF THE RATE COMMISSION
3 OF THE
4 METROPOLITAN ST. LOUIS SEWER DISTRICT
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7 2011 WASTEWATER RATE CHANGE PROCEEDING
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9 AUGUST 9, 2011
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1 APPEARANCES
2 RATE COMMISSION:
LEONARD TOENJES, CHAIRPERSON
3 JOHN STEIN, VICE-CHAIRPERSON
4 PAUL BROCKMANN
5 GEORGE TOMAZI
6 GLENN KOENEN
7 TOM POST
8 BRAD GOSS
9 ERIC SCHNEIDER
10 GEORGE LIYEOS
11 RALPH WAFER
12 NANCY BOWSER
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14 LEGAL COUNSEL ON BEHALF OF THE RATE COMMISSION:
15 LASHLY & BAER, P.C.
16 Mr. Robert P. Arnold
17 Ms. Lisa O. Stump
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19 ON BEHALF OF METROPOLITAN ST. LOUIS SEWER DISTRICT:
20 Ms. Susan M. Myers, General Counsel
21 Ms. Kristol L. Whatley, General Counsel
22 Ms. Janice M. Zimmerman, Director of Finance
23 Mr. Brian L. Hoelscher, Director of Engineering
24 Mr. Karl J. Tyminski, Secretary/Treasurer
25 Mr. Keith D. Barber, Black & Veatch
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1 ON BEHALF OF MISSOURI INDUSTRIAL ENERGY CONSUMERS:
BRYAN CAVE, LLP
2 Mr. John Kindschuh
BRUBAKER & ASSOCIATES
3 Mr. Michael P. Gorman
4 ON BEHALF OF BARNES-JEWISH HOSPITAL:
SANDBERG, PHOENIX & VON GONTARD, P.C.
5 By Ms. Lisa C. Langeneckert
6 DRAZEN CONSULTING GROUP, INC.
Ms. Billie S. LaConte
7 ON BEHALF OF AARP:
8 JOHN B. COFFMAN, LLC
9 Mr. John B. Coffman
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11 ON BEHALF OF ROBERT MUELLER:
12 Mr. Robert A. Mueller
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14 RAFTELIS FINANCIAL CONSULTANTS, INC.:
15 By Mr. William G. Stannard
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17 REPORTER:
18 MICHELLE L. PACHESA, RPR
19 CCR (MO) 853(g)
20 CSR (IL) 084-004163
21 MIDWEST LITIGATION SERVICES
22 711 North 11th Street
23 St. Louis, Missouri 63101
24 1.800.280.3376
25 mpachesa@midwestlitigation.com
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2 (PROCEEDINGS BEGAN AT APPROXIMATELY 9:01 a.m.)
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4 COMMISSIONER TOENJES: Okay. It is 9:01. I
5 apologize for being late. We will call the meeting of the
6 Rate Commission of the Metropolitan St. Louis Sewer
7 District to order. Ms. Bowser, will you take the roll.
8 COMMISSIONER BOWSER: Mr. Brockmann.
9 COMMISSIONER BROCKMANN: Present.
10 COMMISSIONER BOWSER: Ms. Casey. Mr. Goss.
11 COMMISSIONER GOSS: Present.
12 COMMISSIONER BOWSER: Mr. Koenen.
13 COMMISSIONER KOENEN: Present.
14 COMMISSIONER BOWSER: Mr. Liyeos.
15 COMMISSIONER LIYEOS: Present.
16 COMMISSIONER BOWSER: Mr. O'Connell.
17 Mr. Post.
18 COMMISSIONER POST: Present.
19 COMMISSIONER BOWSER: Mr. Schneider.
20 COMMISSIONER SCHNEIDER: Present.
21 COMMISSIONER BOWSER: Mr. Seidel. Mr. Stein.
22 COMMISSIONER STEIN: Present.
23 COMMISSIONER BOWSER: Mr. Toenjes.
24 COMMISSIONER TOENJES: Present.
25 COMMISSIONER BOWSER: Mr. Tomazi.
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1 COMMISSIONER TOMAZI: Present.
2 COMMISSIONER BOWSER: Mr. Wafer. We have a
3 quorum.
4 COMMISSIONER TOENJES: We have a quorum.
5 Thank you, Ms. Bowser. Two things I would like to say
6 before we get started. Number one, please put your cell
7 phones on vibrate or off or in your coffee. The second
8 thing is that, again, this proceeding is being recorded
9 this morning, so I ask everyone to be sure to use the
10 microphone when they are making a presentation or speaking.
11 My name is Len Toenjes, and I am the chairman
12 of the Rate Commission of the Metropolitan St. Louis Sewer
13 District and will serve as chair of this proceeding. You
14 already heard the names of those Rate Commissioners who are
15 present.
16 The Charter Plan of the district was approved
17 by the voters of St. Louis and St. Louis County at a
18 Special Election on February 9th, 1954 and amended at a
19 General Election on November 7th, 2000. The amendment to
20 the Charter Plan established the Rate Commission to review
21 and make recommendations to the District regarding changes
22 in wastewater rates, stormwater rates, and tax rates
23 proposed by the District. The Charter Plan requires the
24 Board of Trustees of the District to select organizations
25 to name delegates to the Rate Commission to ensure fair
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1 representation of all users of the District's services.
2 The Rate Commission representative
3 organizations are to represent commercial industrial users,
4 residential users, and other organizations interested in
5 the operation of the District, including organizations
6 focused on environmental issues, labor issues,
7 socioeconomic issues, community neighborhood organizations,
8 and other non-profit organizations.
9 The Rate Commission currently consists of
10 representatives of the Associated General Contractors of
11 St. Louis, Regional Chamber and Growth Association, the
12 Engineers' Club of St. Louis, League of Women Voters, the
13 Missouri Botanical Garden, the Human Development
14 Corporation of Metropolitan St. Louis, the Missouri
15 Industrial Energy Consumers, Home Builders Association of
16 Greater St. Louis, the St. Louis County Municipal League,
17 the St. Louis Council of Construction Consumers,
18 Cooperating School Districts, West County Chamber of
19 Commerce, St. Philip's Lutheran Church, the Greater St.
20 Louis Labor Council AFL-CIO, and the Missouri Coalition for
21 the Environment.
22 Upon receipt of a rate change notice from the
23 District, the Rate Commission is to recommend to the Board
24 of Trustees changes in wastewater, stormwater, or tax rates
25 necessary to pay interest in principal following due on
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1 bonds issued to finance assets of the District, the costs
2 of operation and maintenance, and such amounts as may be
3 required to cover emergencies and anticipated
4 delinquencies.
5 Further, any change in a rate recommended by
6 the Board of Trustees -- I'm sorry -- further, any change
7 in a rate recommendation to the Board of Trustees by the
8 Rate Commission is to be accompanied by a statement that
9 the proposed rate change, number one, is consistent with
10 statutory, constitutional, or common law as amended from
11 time to time. Number two, enhances the District's ability
12 to provide adequate sewer and drainage systems and
13 facilities or related services. Number three, is
14 consistent with and not in violation of any covenant or
15 provision relating to any outstanding bonds or indebtedness
16 of the District. Number four, does not impair the ability
17 of the District to comply with applicable federal or state
18 laws or regulations as amended from time to time. And
19 number five, imposes a fair and reasonable burden on all
20 classes of ratepayers.
21 The Rate Commission received a rate change
22 notice from the District on May 10th, 2011. The Rate
23 Commission must on or before September 6th, 2011 issue its
24 report on the proposed rate change notice to the Board of
25 Trustees of the District unless the Board of Trustees, upon
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1 application of the Rate Commission, extends the period of
2 time for the issuance of the Rate Commission report for an
3 additional 45-day period.
4 Under procedural rules adopted by the Rate
5 Commission on May 17th, 2011 any person affected by the
6 rate change proposal had an opportunity to submit an
7 application to intervene in these proceedings.
8 Applications to intervene have been filed by the Missouri
9 Industrial Energy Consumers, Covidien, Barnes-Jewish
10 Hospital, and Robert Mueller. These applications have been
11 granted.
12 On May 13th, 2011, the District submitted to
13 the Rate Commission prepared direct testimony of Jeffrey L.
14 Theerman, Susan M. Myers, Brian L. Hoelscher, Jonathon
15 Sprague, Janice M. Zimmerman, Karl J. Tyminski, and
16 Keith D. Barber. On May 26th, 2011 the Rate Commission
17 submitted its discovery requests to the District. On
18 June 7th, 2011, the District filed its responses. And on
19 June 10th, 2011, the District filed an amendment to its
20 responses.
21 On June 7th, 2011, the Intervener Missouri
22 Industrial Energy Consumers submitted its discovery request
23 to the District. On June 17th, 2011, the District filed
24 its responses. On June 10th, 2011, Interveners Missouri
25 Industrial Energy Consumers and Barnes-Jewish Hospital
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1 submitted a proposal to revise the Rate Commission's
2 procedural schedule. On June 29th, 2011, the proposal was
3 approved by the Metropolitan Sewer District's Board of
4 Trustees.
5 On June 13th, 2011, a technical conference was
6 held on the record regarding the rate setting documents and
7 the direct testimony filed with the Rate Commission by the
8 District. The purpose of the technical conference was to
9 provide -- pardon me one second -- the District with an
10 opportunity to answer questions propounded by members of
11 the Rate Commission, then by any Intervener, and finally by
12 Lashly and Baer, Legal Counsel to the Rate Commission.
13 On June 24th, 2011, the Rate Commission
14 submitted its second discovery request to the District. On
15 July 8th, 2011, the District filed its responses. On
16 July 1st, 2011, Intervener Missouri Industrial Energy
17 Consumers submitted its second discovery request to the
18 District. On July 11th, 2011, the District filed its
19 responses. And on July 12th, 2011, the District filed an
20 amendment to its responses.
21 On July 13th, 2011, Intervener Missouri
22 Industrial Energy Consumers submitted its third discovery
23 requested to the District. On July 20th, 2011, the
24 District filed its responses. On July 15th, 2011,
25 Intervener Robert A. Mueller submitted his discovery
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1 request to the District. On July 22nd, 2011, the District
2 filed its responses. On July 15th, 2011, Intervener
3 Barnes-Jewish Hospital submitted its discovery request to
4 the District. On July 25th, 2011, the District filed its
5 responses. And on August 1st, 2011, the District filed an
6 amendment to its responses.
7 On July 15th, 2011, the American Association
8 of Retired Persons and Consumers Council of Missouri filed
9 an application to intervene. And on August 2nd, 2011,
10 those applications were granted.
11 On July 18th, 2011, rebuttal testimony of
12 Michael P. Gorman was submitted by Intervener Missouri
13 Industrial Energy Consumers. On July 18th, 2011, rebuttal
14 testimony of William Stannard was submitted on behalf of
15 the Rate Commission. On July 18th, 2011, rebuttal
16 testimony of Billie LaConte was submitted on behalf of
17 Intervener Barnes-Jewish Hospital.
18 On July 20th, 2011, Interveners Missouri
19 Industrial Energy Consumers, Barnes-Jewish Hospital, and
20 Robert Mueller filed a motion to compel discovery responses
21 from the District. And on July 27th, 2011, the District
22 filed a response in opposition.
23 On July 22nd, 2011, Intervener Missouri
24 Industrial Energy Consumers submitted its fourth discovery
25 request to the District. And on July 28th, 2011, the
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1 District filed its responses.
2 On July 28th, 2011, the District submitted its
3 discovery request to the Rate Commission. On August 8th,
4 2011, Raftelis Financial Consultants, Inc., consultant to
5 the Rate Commission, will file a response.
6 On July 28th, 2011, the District submitted its
7 discovery request to Intervener Missouri Industrial Energy
8 Consumers. On August 8th, 2011, Brubaker and Associates,
9 Inc., consultant to the Missouri Industrial Energy
10 Consumers, will file its response.
11 On July 28th, 2011, the District submitted its
12 discovery request to Intervener Barnes-Jewish Hospital.
13 And on August 4th, 2011, Drazen Consulting Group, Inc.,
14 consultant to Barnes-Jewish Hospital, was granted an
15 extension until August 12th to file its response.
16 On August 2nd, 2011, the Rate Commission
17 directed the District to file an electronic copy of
18 formulas intact of the rate change proposal via electronic
19 report by August 10th, 2011.
20 This technical conference will be held on the
21 record regarding the rebuttal testimony. Each person
22 submitting rebuttal testimony shall answer questions
23 propounded by members of the Rate Commission, the District,
24 then of other Interveners, and finally by our Legal
25 Counsel.
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1 Following this technical conference, the
2 District, its consultants, the Interveners, and the Rate
3 Commission consultant may on or before August 19th submit
4 prepared surrebuttal testimony and schedules. Any
5 Intervener, Legal Counsel, and the consultant may on or
6 before August 23rd, 2011 submit prepared supplemental
7 testimony and schedules regarding the electronic report.
8 The District, any Intervener, Legal Counsel, and consultant
9 may on or before August 30th, 2011 submit prepared
10 responsive testimony and schedules regarding the
11 supplemental testimony.
12 A technical conference will be held on the
13 record on September 6th through the 8th 2011 regarding the
14 surrebuttal testimony, the supplemental testimony, and the
15 responsive testimony. At that technical conference, each
16 person submitting surrebuttal testimony, supplemental
17 testimony, and responsive testimony shall answer questions
18 propounded by members of the Rate Commission, then by the
19 District and the Interveners and finally by our Legal
20 Counsel.
21 A pre-hearing conference for the purpose of
22 identifying any issues raised by the rate setting documents
23 and the prepared testimony previously submitted will be
24 conducted on September 15th, 2011. Ratepayers who do not
25 wish to intervene will be permitted to participate in a
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1 series of on the record public hearings conducted in six
2 sessions beginning on August 16th, 2011 and concluding on
3 September 25th, 2011.
4 Who is here on behalf of Metropolitan
5 St. Louis Sewer District?
6 MS. MYERS: Susan Myers. And then I'll have a
7 number of people helping me with the questioning when we
8 get to that.
9 MS. ZIMMERMAN: Jan Zimmerman.
10 MS. WHATLEY: Kristol Whatley.
11 COMMISSIONER TOENJES: Who is here on behalf
12 of the Missouri Industrial Energy Consumers?
13 MR. KINDSCHUH: Good morning. This is John
14 Kindschuh with Bryan Cave here on behalf of the MIEC.
15 COMMISSIONER TOENJES: Who is here on behalf
16 of Covidien?
17 MR. KINDSCHUH: John Kindschuh with the MIEC.
18 Covidien is being represented by the MIEC in these
19 proceedings. And also, so the record clearly reflects,
20 Michael Gorman is also here on behalf of the MIEC. He is
21 our expert with Brubaker and Associates.
22 COMMISSIONER TOENJES: Who is here on behalf
23 of Barnes-Jewish Hospital?
24 MS. LANGENECKERT: Good morning. Lisa
25 Langeneckert appearing on behalf of Barnes-Jewish Hospital,
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1 and our expert witness, Billie LaConte, from Drazen
2 Consulting Group.
3 COMMISSIONER TOENJES: Sorry for
4 mispronouncing your name earlier.
5 Who is here on behalf of Robert Mueller?
6 MR. MUELLER: Present. I'm here.
7 COMMISSIONER TOENJES: This is a game I'm
8 playing with you all here.
9 Who is here on behalf of the American
10 Association of Retired Persons?
11 MR. COFFMAN: My name is John B. Coffman. I'm
12 representing AARP. And they prefer to simply go by AARP.
13 They've formally changed their name several years ago.
14 COMMISSIONER TOENJES: Thank you.
15 MR. COFFMAN: They no longer use the Retired
16 Persons part of the name.
17 COMMISSIONER TOENJES: Who is here on behalf
18 of the Consumers Council of Missouri?
19 MR. COFFMAN: John Coffman.
20 COMMISSIONER TOENJES: Also present are
21 William Stannard of Raftelis Financial Consultants,
22 consultant to the Rate Commission, and Lisa Stump and John
23 Fox Arnold of Lashly and Baer, Legal Counsel to the Rate
24 Commission.
25 Under the Rate Commission's operational rules,
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1 no person shall be required to answer questions for a total
2 period of more than three hours, and the time shall be
3 evenly divided among all the participants desiring to ask
4 questions. Following questions by members of the Rate
5 Commission, I will attempt to allocate the time equally
6 among the participants and our Legal Counsel.
7 To the extent that the District, one of the
8 Interveners, or Legal Counsel has not completed the
9 questions at the expiration of that person's allotted time
10 and to the extent that time remains, such person will be
11 permitted to propound additional questions until the three
12 hours has expired.
13 Mr. Arnold, are there any procedural matters
14 that we need to consider at this time?
15 MR. ARNOLD: Mr. Chairman, there are. If I
16 may -- thank you -- you'll recall that on August 2nd, the
17 Commission took some action with respect to what we call
18 the electronic report, and you heard the Chairman describe
19 some activities with respect to the electronic report,
20 which toward the tail end of last week I formalized in what
21 is called the Addenda to the Procedural Schedule. I
22 circulated the addenda to members of the Commission and to
23 Counsel.
24 And Counsel for the District called to my
25 attention that in addition to the supplemental testimony
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1 and the responsive testimony, which were considered in your
2 action last Tuesday morning, that there should be some
3 reply testimony, which the Chair referred to.
4 In order to clarify the record, I'm asking
5 that you consider a resolution adopting the addenda, which
6 I made available to you toward the tail end of last week.
7 Counsel for the District has called to my attention and was
8 made available to you that the electronic report would not
9 be filed as originally indicated but would be made
10 available pursuant to your resolution.
11 So I would request your consideration of a
12 resolution to adopt the addenda.
13 COMMISSIONER TOENJES: Are there any comments
14 from any of the Rate Commissioners concerning that addenda?
15 Mr. Arnold, should we be looking for a motion
16 at this point?
17 MR. ARNOLD: Please, sir.
18 COMMISSIONER WAFER: I move we adopt the
19 addenda.
20 COMMISSIONER STEIN: Second.
21 COMMISSIONER TOENJES: There's been a motion
22 made and second to adopt the addenda as presented by Legal
23 Counsel. Is there a discussion on the motion?
24 All in favor, signify by saying aye.
25 (ALL ANSWERED IN THE AFFIRMATIVE)
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1 COMMISSIONER TOENJES: Opposed?
2 Hearing none, the motion passes.
3 MR. ARNOLD: Thank you, Mr. Chairman. Friday
4 afternoon, Counsel for the District made available to me a
5 confidentiality and nondisclosure agreement proposed by the
6 District and Black and Veatch for the purpose of permitting
7 the Interveners and the Rate Commission's consultant to
8 consider under certain circumstances the electronic model.
9 Under the rules of the Commission, this
10 confidentiality agreement would be subject to approval by
11 the Chairman. When we spoke Friday afternoon, you
12 indicated that you would appreciate observations from the
13 Interveners and the Rate Commission consultant with respect
14 to the confidentiality and nondisclosure agreement, that
15 the approval of the document was subject only to your
16 unfettered, undisciplined discretion.
17 By your leave, would Counsel for the District
18 want to make any observations or comments now?
19 MS. MYERS: We have none at this time.
20 MR. ARNOLD: May I suggest, Mr. Chairman, that
21 you authorize me to circulate this among the Interveners
22 and the Rate Commission consultant and authorize them to
23 send any changes to me by the close of business tomorrow.
24 COMMISSIONER TOENJES: So done.
25 MR. ARNOLD: Thank you.
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1 COMMISSIONER TOENJES: Yes. I have one
2 question I need to ask you, Mr. Arnold, if you could come
3 forward for a second.
4 (THERE WAS AN OFF THE RECORD DISCUSSION HELD)
5 MS. MYERS: Commission, I do have one
6 question.
7 COMMISSIONER TOENJES: Yes, Ms. Myers.
8 MS. MYERS: According to the resolution, we
9 have until August 10th to comply with making the model
10 available. If -- if for some reason this option is not
11 approved and we don't find out until tomorrow afternoon,
12 which is the 9th, I don't know that we can actually comply
13 with the 10th. So I would just like for you to keep that
14 in mind when -- if -- if this option is not going to be
15 approvable by yourself, then we may need additional time to
16 come up with another option is all I'm saying.
17 COMMISSIONER TOENJES: Would -- would close of
18 business today provide that time?
19 MS. MYERS: Well, it -- we -- we don't
20 actually know, but, I mean, it does give us another day.
21 So I would just ask that we -- you know, that you all make
22 a decision as quickly as you can so we -- if we have to
23 switch gears, we have time to do that.
24 COMMISSIONER TOENJES: Well, since we are on a
25 compressed schedule, Mr. Arnold, I will ask folks to get
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1 their responses back today by close of business today so
2 that I can give you an answer before 10:00 a.m. tomorrow
3 morning.
4 MR. ARNOLD: Thank you, Mr. Chairman.
5 MS. MYERS: Thank you.
6 COMMISSIONER TOENJES: Thank you for your
7 comments.
8 Missouri Industrial Energy Consumers, are you
9 ready to present those persons for whom you filed
10 testimony?
11 MR. KINDSCHUH: Yes, Mr. Chairman, we are. We
12 offer the testimony of Mike Gorman from Brubaker and
13 Associates. Mike is available for questioning. Thank you
14 very much.
15 MR. GORMAN: Good morning.
16 COMMISSIONER TOENJES: Mr. Gorman, is the
17 testimony you are about to give the truth, the whole truth,
18 and nothing but the truth?
19 MR. GORMAN: Yes.
20 COMMISSIONER TOENJES: Thank you. Does any
21 member of the Rate Commission have questions for Mr. Gorman
22 at this time?
23 Hearing none. Ms. Myers, do you have any
24 questions of Mr. Gorman on behalf of the District?
25 MS. MYERS: We do. We have a line of
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1 questioning that I'm going to start asking the questions,
2 and then Keith Barber, our rate consultant, is going to ask
3 some additional questions. We're going to kind of go back
4 and forth.
5 COMMISSIONER TOENJES: Please proceed.
6 MS. MYERS: Thank you.
7 EXAMINATION
8 QUESTIONS BY MS. MYERS
9 Q. Good morning, Mr. Gorman.
10 A. Good morning.
11 Q. My line -- our line of questioning here has to
12 do with your rebuttal testimony. So I'm going to give you
13 the page we're talking about and try to give you a range of
14 lines so we know what part of the testimony we're actually
15 talking about. Okay?
16 A. All right.
17 Q. So on page 4, lines 10 through 13 of your
18 rebuttal testimony, you recommend that the Rate Commission
19 adopt a one-year revenue increase not exceeding 3 percent,
20 is that correct?
21 A. Yes.
22 Q. You also recommend that the Rate Commission
23 reject the 4.3 percent revenue increase which has already
24 been adopted and implemented, is that correct?
25 A. Yes.
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1 Q. Okay. Are you aware that the 4.3 percent
2 revenue increase is based on a $10 million annual increase
3 in revenues that you recommended during the 2008 technical
4 conferences?
5 A. Well, related to the first-year increase as
6 outlined in the MSD report, it was my understanding that
7 was part of the proposed change in rates the District is
8 seeking approval of in this case. If that has already been
9 approved, then I would withdraw that recommendation and
10 recommend that the Rate Commission not approve any increase
11 beyond that year.
12 Q. Are you also aware that the 2012 rates have
13 been in effect since July 1st of this calendar year?
14 A. Yes.
15 Q. So your proposal to reject the existing rates
16 for the current fiscal year and further reduce the revenue
17 with only a 3 percent increase, you're withdrawing that at
18 this time?
19 A. Well, if it's already been approved by the --
20 by the Board, then yes. My recommendation is to limit the
21 increase above approved rate increases based on legitimate
22 cost of service projections made in the Black and Veatch
23 cost of service study in this case.
24 Q. Okay. Regarding your one-year increase that
25 you proposed, have you analyzed the fact that if only a
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1 one-year increase is implemented, the ratepayers will be
2 faced with the following burdens: One, the rate -- the
3 one-year rate creates an impediment to financing the
4 District's programs?
5 A. Well, only if the District doesn't file
6 another rate increase application with full disclosure of
7 their cost of service in support of a rate increase that
8 would accomplish the objective of meeting the Capital
9 Improvement Program necessary to comply with federal
10 settlement agreements.
11 My recommendation deals with the lack of
12 transparency and disclosure in the current filing. I
13 have -- I'm not making a recommendation that the District
14 not be allowed to amend or file another rate case in
15 support of an increase that provides the transparency for a
16 full review of those costs and validation of the necessary
17 rate increase to support that CIP program.
18 Q. Did you also analyze the effect that the
19 rating agencies will view the community's unwillingness to
20 support the rate?
21 A. I considered that credit rating agencies
22 typically understand that there needs to be full
23 transparency in adjusting rates. That's necessary to
24 protect the public interest. My recommendation is not to
25 prevent the District from increasing rates that are
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1 necessary to support the CIP program. Rather, my
2 recommendation is to provide clear transparency in the cost
3 projections and the revenue projections underlying a need
4 for a rate increase. Once that transparent filing is made
5 and a rate increase is necessary, then I would recommend
6 the District implement that rate increase.
7 I want to make it clear. I'm not recommending
8 that rate increases that are necessary to support a
9 mandated CIP program not be implemented. Rather, my
10 recommendation is that in order to ensure that the rate
11 increases that are approved reflect the best information
12 available so all stakeholders in this process can make
13 informed decisions on what level of rate increase is
14 necessary.
15 I believe that MSD staff has failed to provide
16 that transparency in this case.
17 Q. Did you also analyze that an additional bonds
18 test will be required -- that an additional bonds test that
19 will be required can only use approved revenue?
20 A. I would stand by my previous answer. It's not
21 that a rate increase shouldn't be awarded if one is proven
22 to be needed. My recommendation is that if it's not proven
23 to be needed and it can't proven without the transparency
24 necessary for all stakeholders to do a detailed review of
25 the cost of service filing, then the rate increase should
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1 not be approved until that transparent filing and
2 demonstration of a need for a change in rates is made.
3 That may require an urgent refiling of this
4 case in order to ensure that additional bonds can be sold
5 to fund the mandated CIP program. But at this point, the
6 details underlying virtually every aspect of this have only
7 been shown at a very high level. Indeed, the CIP program,
8 at the time I reviewed this filing, was represented to be
9 consistent with the decree settlement, but there was no
10 proof that it -- that it was consistent with the timing and
11 the level of capital improvements necessary to comply with
12 that Consent Decree.
13 Q. Okay. Moving on to page 6 of your testimony,
14 lines 19 through 21, how do you support your contention
15 that the MSD service area continues to recover from global
16 economic recession?
17 A. Well, I base that on the filing and statements
18 made by the Federal Reserve Bank. And at the end of that
19 section of my testimony, I conclude that based on the
20 information I was able to derive from independent
21 economists that were reviewing the economic conditions of
22 the service area is not that the service area economy was
23 returning to normal economic activity. Rather, that the
24 service area economy is -- has bottomed out, and it doesn't
25 appear as though it's going to get any worse, and it is
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1 projected to start improving over time.
2 And that's my position, and that's why I
3 recommend that the Rate Commission reject the Black and
4 Veatch and MSD staff filing, that there continue to be
5 economic limitations and contraction in the service area
6 economy.
7 Q. Have you taken into account the probability of
8 a downgrade in the U.S. credit rating?
9 A. In terms of what?
10 Q. In terms of the way the credit rating is
11 nationally, how that could affect the service area, the MSD
12 service area?
13 A. Well, I don't think anybody could have
14 forecasted that Standard and Poor's would reduce the AAA
15 credit rating of the United States Government. It's never
16 been done before, and it was never anticipated to ever
17 occur. The consequences of that, I don't think anybody
18 could predict at this point.
19 The assessments I have read, again, from
20 independent economists, is that there may be limited impact
21 over the long-term of that downgrade. And they referenced
22 downgrades for the Canadian Government. They referenced
23 downgrades for other governments where the cost of
24 borrowing for the government may go up, but the economic
25 impact on those countries was smoothed out over time.
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1 Whether or not that would happen at the U.S., because I
2 believe the U.S. economic strength in the world is very
3 different than any other country, is yet to be seen.
4 Q. Have you taken into account the continued loss
5 of the MSD District area of large industrial users such as
6 Chrysler and Ford?
7 A. I reflected in my adjustments to the MSD's
8 staff's projections that those industrial losses wouldn't
9 come back. There is a -- there is a potential -- there's
10 certainly an opportunity that they could, and that would
11 result in higher sales at current rates than I included in
12 the forecast, but I did not include in that analysis that
13 those customers would come back online.
14 Q. Have you taken into account the efforts taken
15 by large industrial water users to decrease the amount of
16 water usage, which in turn increases the overall cost per
17 unit?
18 A. I did look at the potential impact on sales
19 due to conservation. I noted that the average use per
20 customer in prior years was very much higher -- very
21 higher -- or was larger than the average use per customer
22 reflected in the Black and Veatch projections for calendar
23 year 2011. I did not project an increase in that use per
24 customers to levels more in line with what the District had
25 seen in prior years.
27
1 So the use of calendar year 2011 as a
2 normalized estimate of what sales could be over the next
3 four years at current rates reflects economic distressed
4 service area and significant reductions to the average use
5 per customer consumption.
6 MS. MYERS: Okay. I'm going to turn the
7 questioning over to Keith Barber at this point.
8 EXAMINATION
9 QUESTIONS BY MR. BARBER
10 Q. Good morning.
11 A. Good morning.
12 Q. On page 7, lines 20 to 27, you quote they
13 reference from the report by the Federal Reserve Bank, is
14 that correct?
15 A. Yes.
16 Q. Is this quote your basis for determining that
17 the economy will expand in the future?
18 A. Well, it's -- it's a report that finds that in
19 the St. Louis District, the economy has expanded since
20 2010. At the end of that, it states that there's still
21 problems in the economy in the Metropolitan St. Louis area.
22 So that is the basis upon which I have assumed for the
23 purpose of the projection that the economy doesn't get
24 worse in the forecast period, but it doesn't get any
25 better.
28
1 Q. Is the reference you're citing commonly
2 referred to as the Beige Book?
3 A. Well, you know, I need to verify that this --
4 this was published by the St. Louis Federal Reserve, so I
5 don't know the if the Beige Book is -- I don't know.
6 Q. Well, is the report I'm holding in my hand
7 what you're referring to titled in its entirety, Summary of
8 Commentary on Current Economic Conditions by Federal
9 Reserve District?
10 MR. KINDSCHUH: Mr. Chair, before Mr. Gorman
11 answers that, could I request that Mr. Barber provide a
12 copy of that to Mr. Gorman to take a look at.
13 MR. BARBER: This is my one and only.
14 MS. MYERS: We will, but we only have one.
15 So, I mean, he can look at it, but he needs to give it back
16 to Keith for the questioning.
17 MR. KINDSCHUH: Understood.
18 A. Yes. This appears to be.
19 Q. (By Mr. Barber) And this report that you refer
20 to is for the Eighth District, which is represented by the
21 St. Louis branch of the Federal Reserve Bank?
22 A. Yes.
23 Q. And this district includes several states,
24 including Arkansas, portions of Illinois, Indiana, Kentucky
25 Mississippi, the west half of Missouri, and the west half
29
1 of Tennessee?
2 A. It included the portion of Missouri that
3 St. Louis resides.
4 Q. The west half of Missouri?
5 A. Eastern.
6 Q. East half of -- I'm sorry. I'm sorry. East
7 half of Missouri?
8 A. Yes.
9 Q. And that's a much bigger area than
10 Metropolitan St. Louis area?
11 A. It is. It's the tightest geographic region
12 for which the Federal Reserve was making economic
13 projections of the economic activity for the St. Louis
14 District.
15 Q. Did you realize that a footnote in this report
16 that you've attributed to the Federal Reserve Bank
17 indicates that it is a commentary on the views of Federal
18 Reserve officials and is actually based on integral
19 information collected by the Feds' 12 regional districts?
20 A. It is an independent assessment by economists
21 at the Federal Reserve. There is no guarantee of accuracy.
22 It is a projection of what the current economic condition
23 is and what they expect these economic conditions to change
24 over time. So there are -- I'm sure there are
25 qualifications because it is a projection of the activity
30
1 going forward.
2 Q. But it's essentially based on anecdotal
3 information, which is casual observations instead of
4 rigorous scientific analysis?
5 A. Well, I don't believe they qualified it in
6 those terms, but it's information that the Federal Reserve
7 believed to be reliable and published documents outlining
8 what economic activity would be for the -- for the Eighth
9 District.
10 Q. But that prior comment was from Wikipedia if
11 you want to look that up.
12 Is it true that the report is published eight
13 times per year?
14 A. I would have to verify that.
15 Q. Isn't it also true that each report comments
16 on the current economic conditions compared with the prior
17 report, which is only a few months away?
18 A. It is comparing from the prior report, yes.
19 Q. So is it your testimony that what occurred
20 over such a short period of time is expected to occur over
21 the next five years?
22 A. Well, it's -- it's an assessment of an
23 independent economist's outlook for economic activity in
24 the -- in the Eighth District, which includes the
25 Metropolitan St. Louis area.
31
1 Q. Did you notice that there was specific
2 comments related in this report to the St. Louis area
3 itself?
4 A. It was a very large report, yes.
5 Q. Well, wasn't it -- isn't it true that the
6 St. Louis portion of this report is only a few pages long?
7 A. There's -- there's quite a few areas in that
8 report, so.
9 Q. Okay.
10 A. I would have to verify that, but I presume
11 that's correct.
12 Q. I show four pages. Was there a reason that
13 you didn't, quote, reference this specifically to
14 St. Louis?
15 A. I was looking for a general trending outlook
16 published by those Federal Reserve economists.
17 Q. But isn't this report about the St. Louis area
18 itself and not the several state area?
19 A. I agree that any more specific assessments
20 they make on St. Louis is certainly worthwhile information.
21 Q. How does the excerpt you gave in your
22 testimony impact wastewater usage in the District's service
23 area?
24 A. I'm sorry?
25 Q. The comment that you made in your testimony,
32
1 how does that impact the wastewater usage in the District's
2 service area?
3 MR. KINDSCHUH: Well, could I ask for a
4 clarification, Mr. Barber? What comment are you referring
5 to in his testimony?
6 MR. BARBER: The one that -- the line of
7 questioning on page 7, lines 20 to 27.
8 MR. KINDSCHUH: Okay. Thank you.
9 A. Well, it was offered in support of my
10 recommendation to not assume a continued decline in the
11 number of customers and use per customer as captured in
12 your projections of revenue at current rates. Rather, I
13 assume that the 2011 revenue at current rates would remain
14 in effect throughout the forecast period. So it was used
15 to provide an independent economist's basis for testing
16 whether or not your projection for that revenue at current
17 rates would decline throughout the forecast period was a
18 reasonable assumption.
19 Q. (By Mr. Barber) But isn't this comment based on
20 only a change in a couple of months' time?
21 A. Well, since its last --
22 Q. That banks change over time?
23 A. Well, the comment reports on a change since
24 the last report, which is a general assessment that things
25 are not getting worse.
33
1 Q. So things aren't getting worse for a two-month
2 period, and that's going to continue for five years?
3 A. Well, you know, I'd remind you, Mr. Barber,
4 that you didn't look at any economic activity or reports at
5 all when I crossed you in this case. So my efforts were to
6 go to independent economists and see what projections they
7 were making. If prior reports by the Federal Reserve
8 suggests that economic conditions are worsening, then that
9 outlook could change over time.
10 So my belief is that getting the most recent
11 projection by the Federal Reserve economists on what
12 economic activities are now and what they're expected to be
13 going forward is the best estimate of what the economic
14 conditions will be going forward. If their opinions and
15 assessments are more optimistic this quarter than they had
16 been in prior quarters, then this quarter's might be the
17 most relevant information because it is based on the most
18 up-to-date information available.
19 That is the reason why I use the most recent
20 report from the Federal Reserve is because it captured the
21 most up-to-date information available to make assessments
22 of how well the economy is doing now and whether or not it
23 would get worse during the forecast period or whether or
24 not it's conservative to assume that it doesn't get any
25 worse, but yet, also doesn't get any better.
34
1 And that's the assumption that I thought was
2 most conservative and most accurate to use in the forecast
3 of the revenue at current rates in this cost of service
4 filing.
5 Q. Well, can you explain how a 19 percent decline
6 in St. Louis home sales equates to a -- is that -- is that
7 your testimony, that that's an indicator of growth, that
8 home sales have declined 19 percent in St. Louis, more than
9 any other area in the Eighth District?
10 A. It sounds to me like things have been pretty
11 bad in the St. Louis District. So the question, will that
12 decline continue is what I was seeking to determine based
13 on independent economists' projections, and it has been a
14 difficult economy in the Metropolitan St. Louis area and in
15 the Eighth District of the Federal Reserve.
16 But the economists at the Fed believe that
17 while it has been difficult, there are signs of
18 improvement, and there's certainly nothing in the Federal
19 Reserve report that I saw that would support the contention
20 that economic conditions will continue to get worse in this
21 metropolitan area as you assumed in your projections.
22 Q. Did you not read that permanence in St. Louis
23 decreased by 42 percent since the last report? Is that a
24 good indicator of growth?
25 A. That's one indicator that the economists took
35
1 into consideration --
2 Q. That's another indicator you left out of your
3 statement?
4 A. It's an indication -- an indicator that the
5 economists considered in arriving at their overall
6 assessment of economic activity in the Metropolitan
7 St. Louis area. The housing market has been difficult
8 selling new homes, but that is not necessarily the only
9 indicator that would be relevant in establishing the
10 economic activity going forward.
11 While consumers may not be buying new homes,
12 they're not necessarily selling their existing homes. They
13 may be buying other existing homes. All of that
14 information would be considered by economists, I believe,
15 in generally forming their outlooks for the economic
16 activity going forward.
17 Q. Well, the report also says that office vacancy
18 rates are increasing in St. Louis, but I see things
19 specific to St. Louis that are not indicating growth, but
20 you insist that the general statement about the entire
21 Eighth District is supporting your contention that growth
22 won't decline any further. How do you explain those
23 inconsistencies?
24 A. Can I see the statement you're referring to?
25 Q. It's your reference, Mr. Gorman.
36
1 MR. KINDSCHUH: Well, Mr. Barber, I would just
2 like to make a clarification. Mr. Gorman does not have a
3 copy of the document you have in front of him during this
4 line of inquiry.
5 MR. BARBER: He's reading it now.
6 MR. KINDSCHUH: Yes. Thank you.
7 MS. MYERS: Would you like for us to take a
8 break and get a copy?
9 COMMISSIONER TOENJES: Can you get it copied
10 without taking a break?
11 MS. MYERS: If we take a pause, I guess we can
12 get a copy.
13 MR. GORMAN: Well, do you want me to answer
14 the question, and then they can make copies of it, and we
15 can continue to move?
16 COMMISSIONER TOENJES: Yes. Please answer the
17 question, and then we will find some reproduction equipment
18 here.
19 A. Okay. The section of the report you're
20 referring to deals with only real estate and construction;
21 and in that report, it does indicate that homes sales were
22 down 11 percent in Louisville and Memphis and 19 percent in
23 St. Louis and Little Rock. Residential construction also
24 decreased.
25 However, in the section prior -- previous to
37
1 that, manufacturing and other business activity, it has
2 statements related to the manufacturing and non-residential
3 home sales market outlook. Consumer spending is also
4 discussed in this. Banking and finance. There are
5 portions of the economy that are weak. There are other
6 portions of the economy that aren't as weak.
7 All of those components of the economy are
8 considered by the economists, I believe, in forming their
9 outlook of what the overall economic activity in this
10 service area will be going forward. And again, I'm not
11 suggesting there's an optimistic outlook for the recovery
12 of the St. Louis economy over the next four years. Rather,
13 I'm refuting the contention that the economy will continue
14 to deteriorate throughout the four-year forecast period.
15 And I believe that assumption is generally
16 supported by this report, not all segments of the economy,
17 but the general economy together. The portion of the
18 report I quoted was a summary of all assessments of the
19 economy. The portions of the report which Mr. Barber is
20 questioning me on deals with certain segments of the
21 overall economy, not the overall economy, which I believe
22 is relevant in assessing the total customer mix of MSD and
23 other utilities in this area.
24 Q. I guess -- I guess the point I wanted to make,
25 Mr. Gorman, is that your statement was based on this large
38
1 Eighth District area, and the reference that I was
2 reporting on was specific to the St. Louis area, not all
3 these other states.
4 A. No, sir. That's not true. What you're
5 referencing is the real estate market in the St. Louis
6 District. You were not referring to manufacturing
7 activity. You were not referring to banking. You were not
8 referring to other aspects of the economy in the St. Louis
9 area. You were referring to the real estate market in the
10 St. Louis area which, according to that report, still looks
11 like it's going through some distressed conditions.
12 Q. (By Mr. Barber) Getting back to my original
13 question was, I asked you why you didn't refer to those
14 statements directly related to St. Louis?
15 A. And my original response was, is I was looking
16 for general statements which describe the entire economy,
17 not specific segments of the economy, and my quote was from
18 the economists and their general review of the entire
19 economy, not just the different business elements that
20 compose the economy.
21 Q. So you are still basing your outlook on a
22 report that covers, like, a two-month period?
23 A. Well, if you read the report that you just
24 handed me, some of the assessments compare 2011 projections
25 for 2010. The prior report may have been issued three
39
1 months earlier, but that doesn't change the outlook that
2 they're comparing year-over-year changes. All of those
3 figures you just read were year-over-year.
4 So it is the most recent report with the most
5 up-to-date information available to the Federal Reserve
6 economists in making projections of future economic
7 activity.
8 Q. Well, actually, the most recent report came
9 out in July, not June. But I won't -- I won't get into
10 that.
11 A. It was the most recent report that we were
12 able to pull down from the Federal Reserve web site at the
13 time we were on it.
14 Q. Well, again, this -- this report is for
15 several states. How does the report really impact the
16 St. Louis rates?
17 A. It provides some information that an
18 independent economist made on the economic activity of the
19 MSD service district.
20 Q. All right. Are you testifying that economists
21 made these reports when I just told you that the footnote
22 was talking about anecdotal information, where they
23 actually call people up and ask them how things are going?
24 I mean, what is the economists doing with this?
25 A. The Federal Reserve employs highly skilled
40
1 individuals to put these reports together. I'm calling
2 them economists because it's my belief that they are, but I
3 haven't verified that. There's certainly not unskilled
4 workers working at the Federal Reserve collecting data and
5 writing reports on the service area economy -- or the
6 Federal District economy.
7 Q. But you have no basis for that?
8 A. Well, I have not verified that, but I do know
9 by reading regularly Federal Reserve documents that the
10 Federal Reserve does employee highly-skilled economists and
11 other technical people to support their publications. So
12 it's my belief that that document is drafted by a -- by
13 somebody that has the skill set, something like an
14 economist, that makes them qualified to print relevant
15 information that is useful by the -- by the marketplace and
16 by other institutions within the economy to use to make
17 assessments of what the Federal Reserve believes will be
18 some information relevant in making assessments of the
19 economy going forward.
20 Q. On page 8, lines 17 and 18, is it your
21 recommendation that non-residential volume be held at 2011
22 level through 2016?
23 A. Yes.
24 Q. Have you performed any analysis to determine
25 how much of the historic decline in non-residential sales
41
1 volume was due to economic economy -- activity versus
2 continued conservation efforts?
3 A. I just generally reviewed the decline in sales
4 in your report and saw that there was a pretty significant
5 drop in usage and the number of customers in calendar year
6 2008 through 2011 and relative periods prior to that. So
7 it appeared that the economy did have a big impact on sales
8 for MSD during that time period. Consequently, I believe
9 it was reasonable to conclude that 2011 data, which I used,
10 still reflect the difficult economic environment in which
11 the MSD is operating.
12 Q. Are you aware that the total projected
13 decrease in non-residential contributed wastewater volume
14 from 2011 to 2016 is only 1.2 percent?
15 A. I'm sorry. Can you repeat that?
16 Q. Are you aware that the total projected
17 decrease in non-residential contributed wastewater volume
18 from 2011 to 2016 is only 1.2 percent?
19 A. In my report, it's flat sales, but I'll accept
20 your numbers, subject to check, for your report.
21 Q. On page 9, lines 1 to 2, if projected -- if a
22 projection of non-residential contributed wastewater
23 volumes assumes that -- and it says, quote, assumes that
24 economic conditions do not get worse but do not improve,
25 couldn't the projected 1.2 percent decline be considered
42
1 reasonable?
2 A. No.
3 Q. Why not?
4 A. Because it assumes it gets worse.
5 Q. 1.2 percent over a five-year period?
6 A. Yes. I mean, if you think that's unreasonably
7 small, then there's no reason to assume that it declines 1
8 percent. I believe that there's no basis to assume a
9 decline in sales based on the best information available,
10 which is 2011 data.
11 Q. And what's your basis for alleging it stays
12 flat?
13 A. All the information I just described, looking
14 at historical data for the -- for the number of customers
15 and the use per customer historically. It shows that 2011
16 was a very bad sales year for MSD. Assuming it gets worse,
17 it assumes that the economy has no improvement at all, so
18 it assumes that it gets marginally worse throughout that
19 forecast period.
20 Q. Okay. Going to page 8, lines 11 through 12,
21 you said -- you testified that, I would expect some decline
22 from that level largely due to conservation of customers.
23 A. Yeah. From the -- for the more normal use
24 periods in 2006 through 2008.
25 Q. So it's your testimony --
43
1 A. And that -- as I pointed out in that same
2 section of the testimony, what that -- or page 7 through
3 15, what the normal level of use was, and the normal
4 level -- the actual level of use in 2011 was significantly
5 below that recent historical use per customer.
6 Q. What evidence or data do you have to support
7 your contention that decline in sales caused by the
8 economic recession will be reversed over time?
9 A. It's an outlook by -- well, it an optimistic
10 hope that eventually St. Louis economy will recover along
11 with the rest of the economy. I believe that's the general
12 expectation. I believe that sales right now, the business
13 activity in St. Louis, is at a depressed level. It's my
14 hope it will increase, and I believe the Federal Reserve
15 projections suggests that there is reason to believe that
16 it will get better. And I believe that there is limited to
17 no information that supports the contention that it will
18 get worse in the years following 2011 -- in the few years
19 following 2011 than existed in the calendar year 2011, this
20 year.
21 Q. Is it your testimony that we need to comply
22 with the EPA based on your hope?
23 A. It's my contention that all assumptions that
24 you make in forecasting future sales levels should be
25 thoroughly investigated and supported with independent
44
1 assessments by economists and the best information
2 available. I don't believe you did that.
3 So what I attempted to do was use independent
4 forecasts and assessments made by credible agencies of the
5 United States Government, the Federal Reserve, which
6 supported the contention that things are pretty bad right
7 now, but it doesn't look like things are going to get
8 worse.
9 So it's good information to make a
10 conservative assessment of what future sales levels will
11 be. That's necessary in order to bring all the
12 stakeholders in balance in this case, including MSD's
13 obligations to make capital improvements to meet the
14 Consent Decree and the customer's right to just and
15 reasonable rates, which means you don't make assumptions to
16 simply inflate the claimed revenue deficiency to get as
17 much revenue as possible from retail customers.
18 There is no basis for your assumption, and I
19 tried to use a conservative, independent basis for my
20 assumption that things won't get worse but won't get
21 better.
22 Q. Well, it sounds to me like the difference
23 we're talking about is 1.2 percent over five years, is that
24 correct?
25 A. It is a little more than a million dollars of
45
1 revenue per year.
2 Q. Okay. Let's move on to talk about O&M,
3 page 10, lines 3 through 11. What's your basis for the
4 3.95 percent?
5 A. That was my calculation of the group -- the
6 overall O&M expense growth as reflected in your report.
7 Q. And how did you calculate that?
8 A. Referring to page -- or Table 3-11 at page
9 318, the O&M expense growth was based on the increase in
10 O&M expense from the calendar year 2011 through what you
11 projected from 2016, excluding the additional O&M. It went
12 from $134 million and some change in 2011 up to
13 $162 million in 2016. I calculated that annual percent
14 escalation to be about 3.95 -- 3.95 percent.
15 Q. Is that the average annual?
16 A. Yes.
17 Q. If the increases in the O&M were higher up
18 front, wouldn't due to compounding the increase in O&M be
19 greater?
20 A. It could be.
21 Q. And if -- if you would have taken the annual
22 increases from the report and made an adjustment of .75,
23 would you have gotten the same answer or an answer
24 different?
25 A. I would need to make that calculation.
46
1 Q. What makes you believe the MSD aggregate level
2 of O&M projections is unreasonable when the CPI for all
3 items over the past 12 months increased by 3.6 percent?
4 A. Well, I'm using a consensus economists'
5 projections of future inflation as measured by the CPI.
6 You know, if the -- I would have to look at the items
7 underlying the CPI projections you're referring to, but
8 there are publications that go out and survey literally
9 hundreds of professional economists that are in the
10 business of forecasting future economic activity in the
11 United States.
12 Those publications surveyed them on various
13 economic parameters and used the responses of those surveys
14 to develop a consensus of all those economists'
15 projections. That captures the broad array of expectations
16 of high inflation, low inflation, moderate inflation, and
17 everything in between, to come up with what the consensus
18 of those economists are projecting.
19 And I believe, again, that that's an
20 independent assessment of what future inflation will be
21 that is the best information available for forecasting a
22 balanced and evenhanded way of what future inflation would
23 be. Those economists are projecting an inflation rate over
24 the next four years of 2.25 percent. In the Black and
25 Veatch report, they were assuming a 3 percent inflation
47
1 outlook. Simply adjusted the escalation in O&M down to
2 what the consensus of professional independent economists
3 believe inflation will be over the next four years.
4 Q. You make a comment on page 11, lines 9 to 14,
5 about General Counsel expenses. Did you check with the
6 District about these costs?
7 A. At the time I was preparing my testimony,
8 because of the tight timeframe, I was not able to ask the
9 District to explain those increase in General Counsel
10 expenses. I knew they would have an opportunity to justify
11 them if they are reasonable, but the information I had at
12 the time I was preparing my testimony, without the time to
13 do further discovery on that issue, I believed it was
14 reasonable to bring them down to a level that's higher than
15 they were in the earlier years of the historical data
16 presented, but not assume the significant increase in
17 General Counsel expense going forward.
18 The best information I had available suggested
19 that those were not reasonable escalators, but I was not
20 able to explore those -- that line item of expense with the
21 District before I drafted my testimony.
22 Q. Didn't you put like four discovery requests in
23 place before your testimony was filed?
24 A. I'd have to check that. We -- we had
25 discovery rights, and as we went through this proceeding --
48
1 and I want to remind Mr. Barber that there was a very short
2 window that we were asked to look at this information and
3 identify issues that we thought were not justified. Had I
4 had more time, I could have issued discovery on that, but
5 if I would have done that before I filed testimony, I would
6 have missed the testimony filing date.
7 Should I have seen it earlier? I could have.
8 But for some reason, I was looking at so many different
9 issues, that that's one that didn't jump out at me. I
10 don't believe that was justified in their filing, and
11 because it wasn't, I didn't accept it as reasonable, so I
12 removed it. But if the District can justify it, then it
13 should be put back in.
14 Q. For the record, I'd like to say that my name
15 is pronounced Barber.
16 On Table 3-11, Line 17.
17 A. I'm sorry?
18 Q. Table 3-11 of the Rate Report.
19 A. Okay.
20 Q. Are you there?
21 A. Yes.
22 Q. What is your understanding of line 17,
23 additional O&M?
24 A. From what I read on footnote B is my
25 understanding of that line.
49
1 Q. Why did you move the additional O&M costs in
2 2015 and 2016 to cash financing of capital improvements?
3 A. Because it refers to capacity -- in footnote B
4 to Table 3-11, it reads, Anticipated regulatory projects.
5 These projects include the improved disinfection at the
6 Missouri Water -- Water Treatment Plant in 2013 and '14;
7 expansion of the Missouri River Wastewater Treatment Plant
8 in 2015; and Capacity, Management, Operation, and
9 Maintenance program activities related to anticipated
10 Consent Decree requirements in 2016.
11 That bullet suggested to me that some of that
12 O&M expense items were actually capital items and should be
13 treated as capital items.
14 Q. But aren't all those improvements that you
15 noted in the Capital Improvement Replacement Program?
16 A. Well, if they are, then they're double counted
17 in the O&M expense.
18 Q. As you build a facility, isn't it logical that
19 you have to start operating and maintaining it?
20 A. Yes.
21 Q. So isn't it reasonable to understand that the
22 additional O&M would be O&M related to the new facilities
23 being put in place by those capital improvements?
24 A. That's a possibility, yes. That would justify
25 it, but that's not what the footnote -- that's not
50
1 consistent with my interpretation of the footnote.
2 Q. Is it possible that your interpretation is
3 incorrect?
4 A. It's possible.
5 Q. Isn't it true that a lot of the O&M that is
6 capitalized is related to replacement of equipment?
7 A. Well, if it's replacement of equipment, it
8 should be capitalized, yes.
9 Q. How much -- how much normal annual equipment
10 replacement do you think is needed for a brand new
11 treatment facility?
12 A. Well, I don't know if it's all going to be
13 brand new treatment equipment to comply with that Consent
14 Decree, but whatever components in there that are related
15 to replacement of equipment should be capitalized.
16 Q. Isn't it true that by moving that amount of
17 O&M out of that additional O&M line, that you are
18 artificially increasing that service coverage?
19 A. Not if it's appropriate to move out of the O&M
20 line and down to the capital item line.
21 Q. Let's, for sake of argument, say that they are
22 all O&M expenses, would it not affect coverage if you move
23 that down below the net revenue line?
24 A. Yeah. And if they were all appropriate O&M, I
25 wouldn't recommend that they move down to the capital line.
51
1 That's an item that I found was not explained properly or
2 justified in the report, and it appeared to relate to
3 capital improvement items as well as additional O&M expense
4 activities.
5 Q. Well, for clarification, let's indicate that
6 footnote B is O&M related entirely; and if it was capital
7 improvements, can we assume that we would have put it in
8 the CIRP to begin with? Is that a reasonable assumption?
9 A. I'm questioning the reasonableness of a lot of
10 your assumptions, quite frankly, and you haven't justified
11 in your report that it is O&M and not capital items, which
12 is the purpose for that adjustment.
13 Q. Does it say additional O&M and capital items
14 in the line item?
15 A. It refers to capacity expansion of water
16 treatment plants and other items, which sound like capital
17 improvements.
18 Q. And they are capital improvements, and this is
19 the O&M related to it, as it says in the line item,
20 additional O&M. I mean, I guess we could have put
21 additional O&M related to new Capital Improvement Programs.
22 Would that help?
23 A. If you could justify that these are expense
24 items, then this adjustment would not be appropriate.
25 MS. MYERS: The District would ask to take a
52
1 five-minute break, if we could, and then we have a few more
2 questions to ask. I just need to confer with my client for
3 a second.
4 COMMISSIONER TOENJES: We'll take a break
5 until 10:20.
6 MS. MYERS: Thank you.
7 (THERE WAS A BREAK IN THE PROCEEDINGS FROM
8 APPROXIMATELY 10:14 a.m. TO 10:21 a.m.)
9 COMMISSIONER TOENJES: We shall reconvene the
10 Rate Commission, reconvening at 10:21. Ms. Myers, are you
11 ready to proceed?
12 MS. MYERS: We are ready. Thank you.
13 MR. TYMINSKI: Thank you. I'll be doing the
14 questioning for this next segment. This next segment
15 really relates to the use of the interest rate in the debt
16 service calculation for the bonds. Okay.
17 EXAMINATION
18 QUESTIONS BY MR. TYMINSKI
19 Q. So starting off with, Mr. Gorman, it is your
20 opinion -- or I believe it is your opinion -- that the
21 interest rate given by the District in the proposal for the
22 revenue bonds is substantially overstated.
23 A. Well, I believe the 5 and a half percent
24 interest rate is overstated, yes.
25 Q. What is the basis for your assumption that the
53
1 most current rates would be indicative of rates for the
2 period 2013 through 2016?
3 A. It is the best information available of what
4 your cost-to-debt is today. Projections of interest rates
5 suggest it might increase modestly over that time period,
6 but what I was attempting to do was respond to your
7 contention that the interest rate projections based on a
8 bond index with a 20 to 30-year maturity was a reasonable
9 benchmark to use to price those securities.
10 What I tried to do was look at what other
11 municipal bond issuers' bond ratings comparable to or
12 slightly below yours that have actually issued bonds for
13 over the last two years.
14 Q. Well, we'll get into that in just a second. I
15 have a series of questions to bring that issue forward.
16 Okay. Let's -- sticking to the issue of the actual rates
17 themselves, why do you have the opinion that a 4 percent
18 rate on revenue bonds will be carried into the future will
19 be a good rate? Aren't these -- isn't that an historically
20 low rate?
21 A. Not for municipal bond issuers, it's not. It
22 was issued during a period where Treasury securities were
23 unusually low, but municipal bond markets have been
24 somewhat distressed over the last few years, and it is not
25 unusually low relative to Treasury bond spreads during that
54
1 time period.
2 Q. Okay. What maturity did you use to come up
3 with the 4 percent? What -- what was the average maturity
4 you expect the District to issue?
5 A. The District says they're going to issue
6 30-year bonds.
7 Q. Okay. So you're saying the 4 percent is based
8 on 30-year bonds?
9 A. Well, it's based on tranches of -- well, the
10 District is also assuming, as I understand it, that there
11 will be principal and interest payments throughout that
12 30-year term. So the average maturity of the bond, while
13 it will be outstanding for 30 years at some level, the
14 actual face amount of the bond that is initially issued
15 will be paid down throughout that 30-year period.
16 So looking at the initial face value of the
17 bond, the average maturity of the bond will be different
18 than the total life of some portion of that bond issue that
19 will still be outstanding 29 years later. So the average
20 maturity is something closer to 15 to 20 years; whereas,
21 the initial assumption is that it would be paid down over
22 30 years.
23 Q. Okay. So the average -- the average maturity
24 over 15 to 20 years. Okay. Given -- given that -- given
25 that point and given that the District's Consent Decree is
55
1 a 23-year timeframe, wouldn't it be more appropriate to use
2 something between 23 and 30 years?
3 A. The longer the maturity of the bond, the
4 better off customers are. So you want to lengthen the
5 amortization schedule of the bond. But again, because you
6 will be paying principal throughout that amortization --
7 Q. Oh, that is -- because we're in agreement on
8 that. We're agreement on the longer -- the longer the
9 duration, the better off it is to the customers.
10 A. I'm not sure I understand your question.
11 Q. Okay. Well, no. You -- you answered the
12 question. Your answer was good. It was the longer the
13 duration, the better off it is to the customers. We're in
14 complete agreement on that issue.
15 A. Okay. But --
16 MR. KINDSCHUH: Just as a point of
17 clarification -- excuse me. Just as a point of
18 clarification, I just want to emphasize that Mr. Tyminski,
19 I believe, is asking the questions, and it seems like
20 there's a little bit of testimony that's being given by the
21 question-giver here, and I just want to raise that.
22 MR. TYMINSKI: Oh, okay.
23 MR. KINDSCHUH: Yeah. Just as a point of
24 caution.
25 A. Well, just as a -- just as a follow-up to
56
1 what, I guess, we're close to an agreement on is while you
2 want to lengthen the amortization schedule of those bonds,
3 you also want to minimize the interest rate you pay on the
4 bonds. To do so is to the benefit of the customers of MSD.
5 So accomplishing that objective, there can be
6 various ways of structuring that bond payment period,
7 including refinancing bonds to lengthen the ultimate period
8 over which customers will be paying down the face value of
9 those bonds.
10 There's -- there's significant constraints in
11 that because you have such a large Capital Improvement
12 Program in front of you. But to the -- to be clear on what
13 my point is, is the best interest of customers is to
14 minimize that that service cost they have to pay,
15 recognizing the constraints of MSD to fund this
16 extraordinarily large Capital Improvement Program.
17 Q. (By Mr. Tyminski) Continuing on then, it is
18 your -- is it your testimony that the Bond Buyer Index
19 reports on interest rates that mature over 25 years?
20 A. It is an index of interest rates on bonds that
21 mature in 25 years or longer, yes.
22 Q. Okay.
23 A. It doesn't recognize that the actual structure
24 of a bond that can be paid within that -- yeah. The Bond
25 Buyer Index, you make principal interest -- principal
57
1 payments in year 25.
2 Q. All right. Could you just read this into the
3 record. This is the Bond Buyer 25 -- the definition of the
4 Bond Buyer 25 Index.
5 A. It's an estimation of the yield that would be
6 offered on a 30-year revenue bond. The 25 issuers used in
7 the index cover a broad range of types of issues,
8 transportation, housing, hospital, water and sewer,
9 pollution control, et cetera, and vary in ratings from
10 Moody's of Baa1, I believe that should be, to capital -- to
11 Aaa and Standard and Poor's A to AAA, for a composite
12 rating of Moody's A1 or Standard and Poor's ratings of A+.
13 Q. Okay. And in your testimony, you indicate
14 that MSD misused this index. In your opinion, how did MSD
15 staff misuse the Bond Buyer Index given that definition?
16 A. Well, because MSD's model assumes that
17 principal and interest will be made each year throughout
18 the 30-year term. The Bond Buyer Index assumes that all
19 principal payments will be made in either 25 or 30 years.
20 So the face amount of the bonds will be outstanding for the
21 entire 25-year period. If that were the case, there would
22 be no principal interest during 25 years, but you would pay
23 a higher rate of interest because the bondholders would
24 have capital outstanding to the utility for a longer period
25 of time.
58
1 Consistent with what you modeled in your cost
2 of service study with annual payments of principal and
3 interest, the face amount of the bonds would be paid down
4 over time. And other utilities have done that, have had
5 more of a structured interest rate component of their bond
6 issues.
7 Whereas, the components of principal that will
8 be paid over the first five years might have an interest
9 rate of 1 percent; of 5 to 15 years, it might be something
10 a little high, 2 percent; and principal that will not be
11 paid for 25 years might be 5 percent. But the weighted
12 average of all of those tranches of that total bond issue
13 isn't the 25 to 30-year interest rate. It's the weighted
14 average of all of those tranche principal payment
15 obligation interest rates.
16 Q. Yeah.
17 A. So there will be some elements of a 5 percent
18 interest rate, I would assume, based on current market
19 conditions; but there will also be elements of a 1 percent
20 or 2 percent interest rates on some portion of that bond.
21 The weighted average of all of them would be, in my
22 estimation, about 4 percent based on what I've seen in the
23 marketplace.
24 Q. Okay. One last question on the -- on the
25 interest rates. Are you aware that MSD uses outside
59
1 resources to develop their interest rate forecast?
2 A. Well, if you did, you didn't provide that
3 information to me to determine whether or not your interest
4 rates are reasonable. Your responses to discovery
5 indicated you use this index, which is why I believe that
6 this index overstated the interest rate that you would
7 actually incur based on what I'm seeing in the market
8 today.
9 MR. TYMINSKI: Okay. Thank you.
10 EXAMINATION
11 QUESTIONS BY MS. ZIMMERMAN
12 Q. Good morning, Mr. Gorman.
13 A. Good morning.
14 Q. I just have a couple of questions concerning
15 page 16, line 3.
16 A. I'm there.
17 Q. It says in there that you state you do not
18 believe MSD's bad debt expense is reasonably correct.
19 A. Right. Correct.
20 Q. Can you explain -- and I'm going to refer to
21 your Exhibit MPG-3. Can you explain why you assumed that
22 the District's bad debt expense would drop from the
23 historical levels of 5 percent over the last three years to
24 3.18?
25 A. Well, over the last three years, we've been in
60
1 a recession. And again, it assumes that the current
2 economic activity that was experienced in those periods
3 would still impact your bad debt expense. It's my
4 understanding that MSD has implemented strategies to
5 enhance bad debt collections. And because of that, even
6 your projections indicated an improvement in the collection
7 of late bills due to the District. My adjustments use the
8 five-year period to determine a normalized level of bad
9 debt expense.
10 Essentially, if you consider the abnormally
11 high level of bad debt expense experienced over the last
12 few years with the level of bad debt expense that was
13 experienced before -- experienced before the recession hit,
14 then the average of those prerecession periods with the
15 recession period produces a normalized level of bad debt
16 expense as a percentage of total sales to ultimate
17 customer. That indicates a 3.8 percent of all revenue --
18 or all bills will ultimately result in bad debt expense to
19 the District.
20 That's much -- that's lower, not much lower,
21 but it is lower than what was actually experienced in 2009
22 and 2010. But again, there are -- there are several
23 reasons to support that belief. One is it's a normalized
24 level that reflects recession and prerecession conditions.
25 Two, it recognizes MSD has additional resources to help it
61
1 collect debts or bills that have not been paid. It should
2 reduce the amount of uncollectible expenses experienced in
3 the last few years. And three, again, it's a hope that
4 things don't get worse but might get better for the
5 District in the service area economy over time.
6 Q. Oh, okay. So you're saying you need -- you
7 used a normalized percentage of bad debt going back to 2006
8 through 2010?
9 A. Yes. If we're referring to schedule MPG-3,
10 looking at the historical average reflects an estimate of
11 the actual expense levels from '06 through 2010, an average
12 for that five-year period produces about a bad debt expense
13 of 3.18 percent.
14 Q. Is it true that in about 2009, the economy
15 pretty much tanked and people began having difficulty
16 paying their bills, not just MSD's, but others?
17 A. Well, it's -- actually, the recession started
18 in late 2007, got worse in 2008, and hopefully topped out
19 in 2009.
20 Q. But those --
21 A. It hasn't improved much since 2009, but it is
22 showing signs of improvement.
23 Q. Okay. So in 2009 and 2010, those are actual
24 bad debt expenses for the District?
25 A. As they are for '06, '07, and '08, yes.
62
1 Q. And you --
2 A. My understanding.
3 Q. And you have said that the economy isn't going
4 to get worse, but it's going to stay the same -- or it may
5 stay the same, so it's pretty constant is the assumption
6 you used?
7 A. Along with the understanding that you've
8 implemented methods and procedures to enhance your
9 collection of bad debt expense.
10 Q. Okay. So if the economy isn't going to change
11 much, then how do you justify dropping the 2011 bad debt
12 from an historical 5 percent to 3.18?
13 A. Well, I guess if you ignore the fact that MSD
14 staff has implemented procedures to enhance collection of
15 bad debt expense, you could assume that the worst year of
16 bad debt collection would remain in effect through the
17 forecast period; but because MSD staff has implemented
18 procedures to enhance bad debt collection, it's reasonable
19 to believe that the ratio of bad debt to total revenues
20 will decline throughout the forecast period.
21 Q. So would you agree that the 2011 5.1 percent
22 the District used is from an actual year which ended
23 June 30th?
24 A. I can't confirm that because I believe your
25 filing was made before the June 30th, 2011 time period.
63
1 Q. So you're saying you couldn't clarify the
2 5.1 percent?
3 A. I'm saying I can't tell you it's an actual
4 number.
5 Q. So you couldn't clarify that that's an actual
6 number?
7 A. Your filing was made before June 30th, 2011,
8 so it could not have possibly reflected actual numbers
9 through June 30th, 2011.
10 Q. And as you referenced, there was a substantial
11 period for discovery request?
12 A. There was a period for a discovery request.
13 Q. And that period continues?
14 A. I believe it does.
15 Q. And you received this report on April 27th?
16 MR. KINDSCHUH: Well, objection,
17 Ms. Zimmerman. This actual finalized report was not
18 distributed on April 27th.
19 MS. ZIMMERMAN: I understand, but it is in the
20 record that the District handed out the report to a group
21 of interveners on April 27th.
22 MR. KINDSCHUH: Well, absolutely. But I think
23 it's important to clarify it was a draft of the report.
24 The final report was issued to the Rate Commission, I
25 believe, it was on May 10th. Am I correct on that?
64
1 MS. ZIMMERMAN: It was, but it was explained
2 during that meeting that that was a near final and very
3 little changes were expected.
4 MR. KINDSCHUH: Sure. I just want to point
5 out that that was not the final report that was issued on
6 April 27th.
7 Q. (By Ms. Zimmerman) Okay. But the bulk of that
8 report, the core substance of that report, was contained in
9 that April 27th report.
10 A. Well, we have limited budget in this. I
11 waited until I got the May 10th final report before I
12 started reviewing these kinds of detail aspects of the cost
13 of service filing. It's just economically the best that
14 our clients can ask us to do, so we didn't do a very
15 detailed review of your preliminary report. We -- we dug
16 more into it after we got discovery to our basic questions
17 to start understanding some of the forecasting and the
18 actual historical data information that underlined the
19 historical basis for this report before we got into
20 detailed review of projections of what was -- what was
21 included in the report going forward.
22 So while we did get a -- I don't recall
23 getting the draft report, but I do recall working off the
24 May 10th report, and I do recall issuing discovery
25 requests, trying to get some basic information to
65
1 understand what you were going to include in the report.
2 These issues all were considered in helping us identify
3 what we believed to be weaknesses in the cost of service
4 projections.
5 All of it was complicated considerably
6 because, unlike in virtually every other rate case I've
7 worked in, we didn't get the electronic version of the cost
8 of service study, which slowed down our review in a very
9 significant way. We simply did the best we could.
10 Q. Well, let's go back to the 5 percent then.
11 And again, the question is, on what basis did you drop the
12 5 percent, which was an actual historical -- and even if it
13 wasn't projected, it's still within the range of 5 percent
14 going back to 2009 -- what was your reason for dropping it
15 from 5 percent to 3 percent -- and let me clarify --
16 because wouldn't it be true that if that beginning number
17 of bad debt was higher than 3 percent, the projected
18 outlook would also result in higher bad debt numbers
19 incorporated into the proposal?
20 A. I'm sorry. You really had two questions
21 there. Could you clarify which one you want me to answer?
22 Q. What was your basis for dropping the FY -- the
23 FY '11 bad debt to 3.18 percent when historical numbers
24 were hovering around 5?
25 A. The basis was looking at a normalized actual
66
1 historical bad debt percentage that the MSD actually
2 incurred over the period 2006 through 2010. Those were
3 actual numbers based on data I felt did reflect actual
4 customer behavior of the MSD during that time period.
5 Q. And '06 and '07, would it be a fair statement
6 to say that was prerecession?
7 A. Yes. I think I've already said that.
8 Q. And so you used in your historical average two
9 years that basically given the current economic conditions
10 were anomalies and should not have been included in that
11 average?
12 A. Two out of the five years reflect prerecession
13 numbers, that's correct, but it reflected all the
14 historical data included in the filing.
15 Q. But given the extraordinary circumstances,
16 wouldn't a more accurate basis for an average be the 2009
17 through 2011 number, which hovers around 5 percent?
18 A. Well, Ms. Zimmerman, I've already gone over
19 this once before. I looked at actual historical data to
20 come up with the 3.18 percent, and I also recognized that
21 the District has implemented procedures to reduce the
22 percentage of bad debt expense incurred during that
23 recession time period.
24 So the 5.1 percent wouldn't reflect the
25 procedures outlined in your report, which describe your
67
1 effort to enhance the collection of bad debt expense. So
2 it would be incorrect to use the highest number in that
3 data array because you've implemented procedures to improve
4 your bad debt collection.
5 Q. Well, I think, Mr. Gorman, I'm able to ask the
6 question one more time again because I don't think you
7 clearly answered it.
8 What is the basis for decreasing your bad debt
9 expense projection and assumption from an average of
10 5 percent over the last three years, which correctly
11 reflect the recession, to 3 percent --
12 MR. KINDSCHUH: Mr. --
13 Q. (By Ms. Zimmerman) -- as the starting point to
14 2011?
15 MR. KINDSCHUH: Mr. Chairman, I'm going to
16 object -- I'm going to respectfully object to this line of
17 questioning. Ms. Zimmerman has asked this question, and
18 Mr. Gorman has answered it, and I would ask that we move on
19 at this point.
20 MS. ZIMMERMAN: Mr. Chairman, I don't think
21 Mr. Gorman has specifically answered the question, but I'm
22 willing to continue.
23 COMMISSIONER TOENJES: Mr. Gorman, do you care
24 to comment or not?
25 MR. GORMAN: I've answered that question
68
1 several times. I mean, I'm happy to answer it again, but
2 I'm going to give the same answer.
3 MS. ZIMMERMAN: Okay. We can move on.
4 Q. (By Ms. Zimmerman) I think given the issues
5 that the District is facing in the proceedings so far,
6 would it be fair to say that the results of this proceeding
7 may result in some form of rate increases?
8 A. Based on my best effort to review the Black
9 and Veatch and MSD staff cost of service projections -- and
10 I want to qualify that because I was not able to do a
11 detailed review of allocations of the wastewater from total
12 system to determine whether or not there was adjustments
13 made which were not disclosed in the report but simply
14 accepting Table 3-13 and some of the supporting documents
15 used to help explain how you got to those numbers and
16 identifying specific issues as described in my testimony --
17 I believe that it is reasonable to conclude that a rate
18 increase is necessary over this time period.
19 Q. Thank you. If a rate increase is necessary in
20 some way, shape, or form, could you please explain based on
21 that 2011 assumption why more customers would be paying
22 fewer bills if the rates are going up?
23 A. Why customers would be paying fewer bills if
24 the rates were to go up?
25 Q. They would -- they would be unable a pay -- a
69
1 larger percentage of the population would be unable to pay
2 their bills with higher rates facing the District?
3 A. Well, the percentage of uncollectibles
4 wouldn't necessarily change, but the dollar of
5 uncollectibles would increase, and that's why it's
6 appropriate to use a percentage of total sales to estimate
7 what your uncollectible expense is.
8 Q. But we're talking --
9 A. Which is precisely what I did.
10 Q. But we're talking about bad debt.
11 A. Bad debt and uncollectibles, I use that
12 interchangeably.
13 Q. But bad debt would possibly go up if customers
14 aren't able to pay their bills if the recession continues?
15 A. Right.
16 MS. ZIMMERMAN: Thank you.
17 MS. MYERS: That concludes the questions from
18 the District.
19 COMMISSIONER TOENJES: Thank you.
20 Mr. Kindschuh, do you have any questions on behalf of
21 Covidien or any questions for the witness at this time?
22 MR. KINDSCHUH: I have a couple of questions
23 on behalf of both the MIEC and Covidien, if that's
24 acceptable to you, Mr. Chair.
25 COMMISSIONER TOENJES: Yes.
70
1 MR. KINDSCHUH: Great. Thank you.
2 EXAMINATION
3 QUESTIONS BY MR. KINDSCHUH
4 Q. Mr. Gorman, just a few questions to clarify
5 your testimony from earlier this morning. Ms. Myers had
6 directed you to page 4, lines 10 through 13 of your
7 testimony. And we'll wait for a minute so everyone can get
8 on the same page.
9 A. I'm there.
10 Q. Great. Just for clarification, why did you
11 make this Recommendation Number 1, which is outlined on
12 page 4, lines 10 through 13?
13 A. Well, I made Recommendation Number 1 because
14 2012 was the year that reflect the closest to actual data.
15 So because I was not able to confirm a lot of the
16 projections included in Table 3-11 of the Black and Veatch
17 report, which is Exhibit MSD1, I thought it appropriate to
18 limit the rate increase to information which reflects one
19 year of projections which is closest to actual data that
20 could be verified through accounting means.
21 It was my understanding at the time I did this
22 that they were requesting a 4.3 percent increase for the
23 year ending June 30th, 2012. If that increase had already
24 been approved, then my recommendation would not apply to
25 that year but would apply to subsequent years thereafter.
71
1 I believe that is appropriate because by
2 June 30th, 2012, MSD staff will have an opportunity to file
3 a fully transparent cost of service filing, which includes
4 spreadsheets which develop cost of service for the
5 wastewater utility in a way that stakeholders to this
6 proceeding, interveners in this proceeding, can validate
7 the accuracy of the allocations to the wastewater utility
8 from the total system and confirm that these numbers
9 actually have been developed in the way they are
10 represented to have been developed in this Exhibit 1. So
11 no increase would be approved until that demonstration has
12 been made.
13 Q. Thank you. And my final question, as you have
14 testified both in your rebuttal testimony as well as
15 earlier this morning, Mr. Barber and Black and Veatch have
16 made some assumptions that may or may not have been
17 adequately justified in the report issued as MSD-1. Could
18 you please elaborate further upon those?
19 A. Right. You know, there were assumptions
20 related to additional O&M expense related to new projects
21 coming online. Mr. Barber suggested that those were
22 actually O&M expenses that related to new capital items. I
23 couldn't validate that in the Black and Veatch report. So
24 my assumption was based on the footnote that it actually
25 did deal with some capital items related to some wastewater
72
1 treatment plants and some other capital items that may
2 relate to the Consent Decree. So I believed it was
3 appropriate to move those out of O&M and record those as
4 capital items.
5 You know, the level of sales of current
6 revenues, Mr. Barber didn't even look at economic
7 projections when he made the assumption that sales and
8 number of customers would continue to decline. Well, I
9 thought it was appropriate to get some independent
10 economists' projections on what would be appropriate.
11 I'm trying to get some independent basis to
12 determine whether or not the assumptions used in the
13 forecast are reasonable. I didn't accept the assumption,
14 which I didn't think had been adequately justified. If the
15 District can explain and justify some of these assumptions,
16 then I would be happy to revisit those, including the sale
17 of revenue at current rates, including additional O&M
18 expenses that may be related to additional capital items,
19 and including bad debt expense.
20 But I believe a normal -- a traditional method
21 of estimating bad debt expense is a normalized percentage
22 of total revenue. That -- that is generally the most
23 evenhanded method of estimating that item in rate cases,
24 and I've been doing rate cases for over 25 years. So
25 it's -- it's an issue that I am very familiar with.
73
1 To the extent they didn't justify what they're
2 proposing to do in their forecast, I proposed to make
3 adjustments to a level that is more reasonable and
4 traditional in terms of what is used to ensure that when
5 rates are adjusted, there's a fair balance between the
6 interest of the utility, the utility investors, in this
7 case their bondholders, and the utility customers.
8 There needs to be a balance in ensuring that
9 rate increases reflect reasonable and balanced assumptions
10 and not overly conservative assumptions which impose too
11 much of rate burden on customers, which will also
12 potentially eliminate management's need to aggressively
13 manage their system during the forecast period.
14 MR. KINDSCHUH: Thank you. Mr. Chair, the
15 MIEC and Covidien have no further questions at this time.
16 COMMISSIONER TOENJES: Thank you,
17 Mr. Kindschuh.
18 Ms. Langeneckert, do you have any questions on
19 behalf of Barnes-Jewish Hospital?
20 MS. LANGENECKERT: We do not.
21 COMMISSIONER TOENJES: Mr. Mueller, do you
22 have any questions of the witness at this time on behalf of
23 yourself?
24 MR. MUELLER: I do not.
25 COMMISSIONER TOENJES: Mr. Coffman, do you
74
1 have any questions on behalf of AARP or the Consumers
2 Council of Missouri?
3 MR. COFFMAN: Thank you. I do have a couple.
4 EXAMINATION
5 QUESTIONS BY MR. COFFMAN
6 Q. Mr. Gorman.
7 A. Good morning.
8 Q. Would it -- would it be fair to say that the
9 two areas for which you were cross-examined the most here
10 today by MSD regarding the revenue projections and also
11 uncollectible expense involve a disagreement regarding
12 projections of the future St. Louis economic outlook?
13 A. I'd say that's an important factor in making a
14 reasonable and balanced projection of those two items, yes.
15 So that seems to be a point of disagreement, yes.
16 Q. And generally speaking, do you have an opinion
17 about whether the proposed increase in MSD sewer rates
18 would have a detrimental impact on the St. Louis economy
19 itself?
20 A. Well, I hope not. I mean, the increase in
21 sewer rates are not only happening at MSD, but they're
22 happening virtually at every metropolitan area in the
23 country. I believe every metropolitan area of the country
24 is affording customers due consideration and ensuring that
25 their rates are no higher than they need to be in order to
75
1 comply with Capital Improvement Programs for other
2 wastewater systems which are obligated to meet
3 Environmental Protection Agency mandates.
4 So in this case, I believe it's necessary in
5 order to maintain a competitive position for the St. Louis
6 area to ensure that rates are set in a way that balances
7 the interest of the MSD, its bondholders, and MSD's
8 customers, and that's what I'm attempting to recommend to
9 the -- to the Rate Commission in these adjustments I've
10 made to the Black and Veatch cost of service study.
11 Q. If, in fact, the MSD projection for sales is
12 correct and if there's a continued decline in sales, would
13 an increase in wastewater rates based on that decline
14 result in a double whammy for the St. Louis area?
15 A. Well --
16 Q. That is, an increase in wastewater rates
17 higher than they otherwise would be during a time when the
18 economy is suffering?
19 A. It could happen either way. If the -- if the
20 economy recovers even modestly throughout the forecast
21 period, then MSD will collect more revenue at current rates
22 than what either I or Mr. Barber have projected.
23 Conversely, if it doesn't get better or it gets worse, then
24 they'll collect less revenue at the rates we're
25 recommending.
76
1 So the objective is to try to use a baseline
2 which reflects a conservative but a balanced outlook for
3 what sales will be.
4 Q. So do you see a potential detrimental impact
5 on the St. Louis economy if the rates are not set
6 accurately and if they overestimate the impact of potential
7 projected revenues?
8 A. Yeah. In all scenarios, competitive rate
9 structures which support the financial integrity of the
10 District are far better than higher rates which are set
11 based on overly conservative assumptions because that takes
12 money out of the economy, makes it more difficult for
13 households to pay their own bill, and do business with
14 other businesses in the St. Louis District, and it makes it
15 more difficult for businesses that do business nationally
16 or internationally to compete in their own marketplaces.
17 MR. COFFMAN: Okay. Thank you. That's all I
18 have.
19 COMMISSIONER TOENJES: Thank you, Mr. Coffman.
20 Mr. Arnold, do you have questions of the
21 witness on behalf of the Rate Commission?
22 MR. ARNOLD: No, sir.
23 COMMISSIONER TOENJES: Thank you. Does any
24 member of the Rate Commission have further questions for
25 this witness? Yes, Mr. Koenen.
77
1 EXAMINATION
2 QUESTIONS BY COMMISSIONER KOENEN
3 Q. Yes. Mr. Gorman, are other sewer systems such
4 as St. Louis, what sort of bad debt are they seeing right
5 now as far as percentage?
6 A. Well, it's -- you know, I'd have to -- I can
7 provide that for you. I don't have the number off the top
8 of my head, but a 3 percent bad debt expense is high for
9 many metropolitan areas, but it is generally tied to actual
10 historical customers habits. Some customers pay their
11 bills in good times and bad times. Other customers want to
12 pay their bills, but they can't because they don't have
13 jobs. Still some businesses maintain good relationships
14 with their suppliers, including the utilities, and pay
15 their bills during difficult times.
16 So it depends on the extent of the recession.
17 It depends on many factors underlying traditional customer
18 behavior. And it's best estimated by looking at actual
19 historical performance of the customers and then
20 recognizing changes that are undertaken in order to cure
21 the cost to the utility reflecting that cost incurred. So
22 a utility that properly manages itself will not simply
23 accept high levels of bad debt expense without attempting
24 to correct that.
25 Q. But traditionally it sounds like St. Louis MSD
78
1 is on the high end of average.
2 A. Yeah. I'm stating that based on memory.
3 Q. Right.
4 A. I haven't actually --
5 Q. I understand.
6 A. -- put those numbers together, but it does
7 appear to be high.
8 COMMISSIONER KOENEN: Thank you.
9 COMMISSIONER TOENJES: Yes, Mr. Tomazi.
10 EXAMINATION
11 QUESTIONS BY MR. TOMAZI
12 Q. I have just one comment and two quick
13 questions. First of all, did you mention early in your
14 testimony that you recognized that there is a Consent
15 Decree but that you have not had an opportunity to compare
16 that or look at that in comparison to the testimony that
17 you had previously presented or put together, is that
18 correct?
19 A. That's correct. The Consent Decree will
20 mandate a certain level of capital improvements, and I've
21 not validated the MSD staff's position that the capital
22 improvements included in this filing are consistent with
23 their obligations under the Consent Decree.
24 Q. This is a minor point, but did you not state
25 in your testimony that we cannot predict the downgrade of
79
1 the U.S. credit rating, that it has never happened before;
2 and yet, I think in the popular press, it says it hasn't
3 happened within 70 years, which may not be in your
4 lifetime, but it is in mine.
5 A. Well, I think as long as S&P, Standard and
6 Poor's, has been rating the U.S. Government, it's been a
7 AAA rating. So S&P's downgrade is a first.
8 Q. Well, I do recall having seen something in 70.
9 And finally, you mentioned early -- also early on, in fact,
10 maybe a couple of times, about transparency in the rate
11 forecast and rate adjustments. And could you briefly tell
12 me, A, specifically what we can do to improve the
13 transparency of rate adjustments; and B, if you asked any
14 questions through discovery that were not answered, would
15 you -- by the staff -- would you comment on those.
16 A. Well, our very first question to your staff,
17 to the MSD staff, was to provide Exhibit Number 1 in
18 electronic format with all formulas intact. That's a
19 standard question we make in every rate case we're in
20 because it allows us to accurately review how they made the
21 calculations which underline their cost of service filing.
22 We weren't looking for secret formulas or
23 methods Black and Veatch might be able to use to market
24 itself. We were only looking for how their forecasted
25 revenue requirements or cost of service in this case were
80
1 developed.
2 And following the electronic calculations, you
3 know, the Excel spreadsheets, which are included in its
4 Black and Veatch study. I know because I've looked three
5 different versions of them in other rate cases. There's
6 Excel spreadsheet basis for all these calculations. You
7 can go to each cell. You can validate exactly how the
8 number in that cell was calculated. You can follow it
9 through the historical data within the database. That
10 allows us to validate that these numbers were calculated in
11 the way the report says they were calculated.
12 The only alternative we would have to doing
13 that would be to replicate all of these numbers, and doing
14 that would be very time-consuming, take a very long time,
15 and cost a lot of money. So by not responding to our very
16 first data request, I believe it was, where we asked for
17 this spreadsheet on electronic format with formula intact,
18 that data request was not responded to.
19 Q. Did you not appear before this Rate Commission
20 as an expert witness maybe three years ago?
21 A. Yes, sir.
22 Q. And did you at that time ask for the
23 electronic records of the District?
24 A. I did not, no. At that time, the cost of
25 service study was not only wastewater, it was wastewater
81
1 and stormwater. So you could easily put together what
2 their cost of service filing said in relationship to the
3 total revenue.
4 This case is very different because it's only
5 a wastewater rate filing. Stormwater rates were assumed to
6 be the same. So the allocation of costs to wastewater from
7 total system is important in distinguishing whether or not
8 the additional revenues they were asking for were
9 appropriate in relation to total system revenues. So it's
10 a different rate filing in this case.
11 Second, there were three instances in the
12 last -- in approximately the last year where my firm has
13 been in rate cases with Black and Veatch on these models.
14 They provided the electronic versions of these cost of
15 service models in those rate cases. It helped us immensely
16 to quickly understand what was done in those rate filings.
17 We asked for the same thing here, and it wasn't provided.
18 So we knew they provided the electronic
19 versions of these in rate filings because we've been in
20 rate cases where we received them. We haven't disclosed
21 them. We've abided by the confidentiality agreement, other
22 than to acknowledge that they gave it to us. This rate
23 case is different than the last rate case because they're
24 carving out wastewater on a standalone basis. They didn't
25 do that in the last rate case.
82
1 COMMISSIONER TOMAZI: I have no further
2 questions.
3 COMMISSIONER TOENJES: Thank you, Mr. Tomazi.
4 Do any of the other Rate Commissioners have
5 additional questions? Mr. Goss.
6 EXAMINATION
7 QUESTIONS BY MR. GOSS
8 Q. Did you have an opportunity to review the
9 Consent Decree in any detail at all?
10 A. No.
11 Q. So you haven't been able to analyze the
12 changes that are proposed or the solutions proposed in the
13 Consent Decree as to their impact on the District as a
14 whole?
15 A. I have not reviewed the Consent Decree at this
16 point, no.
17 Q. Have you reached any conclusions about or have
18 any opinions about whether spreading those costs over the
19 entire district as opposed to creating subdistricts would
20 be appropriate?
21 A. Well, I very well may, yes. I need to look at
22 that. I have not looked at that aspect.
23 Q. The Consent Decree talks about a green
24 infrastructure program that MSD may be creating. Do you
25 have any knowledge of that?
83
1 A. Not at this point, no.
2 Q. And you've made the comment that this is --
3 that these cost increases are dealing with wastewater and
4 not dealing with stormwater issues at this point; and yet
5 the MSD, if I understand it right, the green infrastructure
6 program is talking about stormwater solutions and how in
7 connection with either redevelopment or new development
8 efforts, that stormwater will be addressed through those,
9 which it seems to me would fall in a different segment of
10 the industries in St. Louis disproportionately. Do you
11 have any opinion about that?
12 A. Well, let me clarify one thing. All Capital
13 Improvement Programs, including all Consent Decree mandated
14 Capital Improvement Programs, are being recovered through
15 wastewater rates. And my comment before is that there is
16 another revenue stream, the stormwater revenue, and
17 allocated costs of providing stormwater service are not
18 included in the wastewater cost of service case. But all
19 capital improvement costs are allocated to the wastewater
20 system in this rate filing. But I have not looked at that
21 issue that you're describing.
22 COMMISSIONER GOSS: Thank you.
23 COMMISSIONER TOENJES: Thank you, Mr. Goss.
24 Mr. Schneider.
25
84
1 EXAMINATION
2 QUESTIONS BY MR. SCHNEIDER
3 Q. Mr. Gorman, is it true that you received a
4 master's degree in Business Administration and Finance from
5 the University of Illinois of Springfield and you've taken
6 graduate courses in economics?
7 A. Well, it's true I have master's business
8 administration degree and my concentrated studies was
9 finance, and I have taken economics. U of I Springfield
10 does not have an MBA finance designation in the -- in my
11 graduating certificate.
12 Q. What level of graduate economics courses did
13 you take specifically?
14 A. Oh, going back 15 years, but it dealt a lot
15 with quantitative elements of economics, a lot of
16 regression studies, a lot of macroeconomic projections of
17 money supply, other elements of derivative type
18 instruments, financial instruments, over-the-counter
19 derivative instruments. A lot of it dealt with statistical
20 and mathematical-based assessments of economic principles
21 and/or financial derivative type products.
22 Q. Have you ever done macroeconomic projections
23 on metropolitan regions?
24 A. No.
25 Q. Have you used -- did you -- you cited the
85
1 Beige Book essentially for your economic projections for
2 the -- for the St. Louis region. Did you use any other
3 reports besides the Beige Book in your assessment here of
4 MSD's economics.
5 A. I found -- I did some research to get
6 information on economic projections in the St. Louis
7 region. The Beige Book or the Federal Reserve document I
8 relied on was one that had a general assessment of what
9 future economic activity would be.
10 I found other documents that talked about the
11 St. Louis region economy but didn't give a general
12 assessment of whether or not they thought things were
13 stabilizing or improving or what the outlook might be. So
14 it was one of the few documents that gave an opinion on
15 what the conditions would be -- what the -- what the
16 indicator suggested conditions would be going forward.
17 Q. So the Federal Reserve document is the only
18 document you found that had St. Louis specific information?
19 A. The only one I found, correct.
20 Q. That's right. And so -- and you didn't do any
21 independent analysis on your own with raw data on the
22 St. Louis -- for the St. Louis economic?
23 A. Well, I was looking for independent
24 economists' projections of this. I didn't think it would
25 carry as much weight as if I did it myself.
86
1 Q. Sure.
2 A. And also, I think since I'm in the business of
3 reviewing rate filings, my professional expertise deals
4 with cost of service. I was looking for somebody who's in
5 the business of making economic projections of economic
6 conditions, and economists employed by the Federal Reserve
7 is the type of individual that has that level of expertise.
8 So I was trying to gain projections by individuals that had
9 some competence and experience in making those types of
10 projections.
11 Q. Did you -- beyond the Beige report, did you
12 actually call anybody from the Federal Reserve and
13 interview them on those projections?
14 A. I didn't think that was necessary. I wasn't
15 attempting to influence anybody's projections. I wanted to
16 see what they were telling the marketplace.
17 Q. Okay. Did you ask any university professors
18 on the -- about the St. Louis economy?
19 A. I did not.
20 Q. The Federal Reserve -- I just want to make
21 sure I'm clear. The Federal Reserve report, you said the
22 St. Louis region was included in the Eighth District of
23 St. Louis, is that correct, or was a subset of what the
24 Federal Reserve reported --
25 A. It is --
87
1 Q. -- the region is?
2 A. The St. Louis region is included in that
3 District Eight.
4 Q. What are some other cities that are in that
5 Eighth District?
6 A. Well, I'd have to cite that. I'd have to get
7 the report to tell you. But it's clearly described in that
8 report that I cited in my testimony, and I'll be happy to
9 provide you a copy of it.
10 Q. I thought -- weren't you provided a copy of
11 the report before -- earlier today?
12 A. I gave it back.
13 Q. Oh, okay. I thought we did it at the break.
14 Does that document have what the other cities are in the
15 Eighth District or metropolitan regions?
16 A. You know, I'm sure it does define the region
17 that is covered by the Eighth District.
18 Q. All right. That's fine. I'll pass. Is the
19 MSD District bigger or smaller than the metropolitan region
20 described in the Federal Reserve report?
21 A. Smaller.
22 Q. And that is -- is it true the MSD section is
23 really St. Louis City/St. Louis County?
24 A. It's the region under which it falls. It's
25 all of the above is my understanding. The Metropolitan
88
1 St. Louis area is within the Eighth District.
2 Q. No. My question is the MSD District is
3 smaller than the -- is it -- I believe -- isn't it true
4 that St. Charles County is in the St. Louis Metropolitan
5 area would be in the St. Louis economic forecast but would
6 not be in the MSD District?
7 A. Correct.
8 Q. Okay. So any economic activity in St. Charles
9 County, Jefferson County, Franklin County would not be
10 economic activity that should be viable for -- or should be
11 used in an economic impact for the MSD District?
12 A. That's true. I mean, if the Federal Reserve
13 would make projections on MSD service territory, that would
14 be the best information, but that information wasn't
15 available, at least I was not able to get my hands on that
16 information.
17 Q. I gotcha. Would you say that Franklin County,
18 Jefferson County, and St. Charles County are growing at a
19 faster or slower rate than St. Louis City and St. Louis
20 County?
21 A. It wasn't in the report. I don't know.
22 Q. Okay. I want to move on to the Bond Buyer
23 Index here. That -- you said that MSD -- can you just
24 repeat your testimony of why MSD misused the Bond Buyer
25 Index in doing their 30-year bond issuance?
89
1 A. MSD is making projections of a 30-year bond
2 issue, and then they'll make principal and interest
3 payments each year over that 30-year period. When other
4 municipals have issued bonds, they price out different
5 components based on when the principal will be repaid. If
6 it were repaid over the next five years, the interest rate
7 is lower than principal that will not be repaid for 25 to
8 30 years.
9 The interest rate assumption used in the Black
10 and Veatch study assumed that all principal would be repaid
11 in a 25 to 30-year timeframe. But in the model, it was
12 actually assumed that principal would be paid each year
13 throughout the 30-year period.
14 So the assumption for annual principal and
15 interest payments implies that the -- there will be an
16 interest rate range in the bond issue ranging from -- from
17 what I've seen for other municipals -- from about 1 percent
18 up to around 5 percent. Five percent would be the longer
19 principal payment terms. The lower interest rate would
20 reflect the shorter, the sooner, principal payment terms.
21 For purposes of this study, I simply made an
22 estimate of what the average interest rate would be on the
23 entire bond issue, ranging somewhere between 1 percent and
24 5 percent or on the average about 4 percent because on a
25 levelized payment, most of the principal would be paid
90
1 later in the bond life.
2 COMMISSIONER SCHNEIDER: I just had one other
3 question.
4 COMMISSIONER TOENJES: Continue.
5 Q. (By Commissioner Schneider) I want to make sure
6 I hear it correctly here. You have not read the Consent
7 Decree that's been public?
8 A. Correct.
9 Q. Okay. So when you estimated the -- you have a
10 projected -- you -- in MPG Exhibit 1, you estimated kind of
11 a different rate of increases for the District, is that
12 correct?
13 A. Yes.
14 Q. Do you have the ability to say whether your
15 proposed MPG-1 would meet the demands of the Consent Decree
16 in terms of the timetable?
17 A. Well, it will meet the Capital Improvement
18 Program as reflected in the Black and Veatch study.
19 COMMISSIONER SCHNEIDER: Okay. Thank you.
20 A. With the adjustments that I described in the
21 testimony.
22 COMMISSIONER SCHNEIDER: Okay. That's it.
23 Thank you.
24 COMMISSIONER LIYEOS: Mr. Chairman.
25 COMMISSIONER TOENJES: Yes, Mr. Liyeos.
91
1 EXAMINATION
2 QUESTIONS BY COMMISSIONER LIYEOS
3 Q. A couple of questions in terms of the Black
4 and Veatch study. Just to clarify, was there an
5 explanation provided as to why it was not provided?
6 A. They claimed that the Black and Veatch
7 electronic version, the model, was sensitive, business
8 sensitive.
9 Q. So it was proprietary, and that's the reason
10 why it was withheld this time, whereas it was not withheld
11 on previous occasions?
12 A. Well, the explanation in this case is it is
13 business sensitive and they're not going to provide it.
14 Q. Okay. But you have the methodology that they
15 used in previous rate cases?
16 A. I could have replicated the model, yes.
17 Q. And that's -- that's what I'm getting at here
18 was, did you make an attempt to replicate it to see, you
19 know, if there is any variation that may jump out at you in
20 terms of what is being used here?
21 A. In the time allowed, I could not have
22 replicated every calculation. Given enough time, I could
23 have replicated the entire model.
24 Q. Okay.
25 A. There wasn't enough time. And, quite
92
1 honestly, my clients were not going to pay me to replicate
2 this model because it would be a very laborious, expensive
3 procedure to replicate this model. It was unnecessary, and
4 I could not have done it, even if my clients told me to go
5 ahead and do it.
6 COMMISSIONER LIYEOS: All right. Very good.
7 That's all I have.
8 A. Not with these time constraints.
9 COMMISSIONER TOENJES: Any further questions?
10 Mr. Brockmann.
11 EXAMINATION
12 QUESTIONS BY COMMISSIONER BROCKMANN
13 Q. Mr. Gorman, what's your perception of when MSD
14 began their enhanced debt collection procedures?
15 A. I'd have to review the report, but it's my
16 understanding they started this calendar year.
17 Q. This year, like so January of 2011?
18 A. I would have to review the report and inquire
19 that from MSD staff. It's my understanding that they're
20 making an effort to reduce -- to reduce the amount of
21 uncollectible expense with those enhanced measures.
22 Q. And so you feel that the data that they
23 provided did not reflect any of that previous enhanced
24 collection debt services previously?
25 A. Well, their forecast assumed no improvement at
93
1 all. So it -- as a matter of fact, it showed -- it assumed
2 closely that -- well, in the early years, they were showing
3 some improvement. Let me back up a little bit to make sure
4 I'm properly describing what they assumed.
5 They assumed that the debt collection would
6 improve in the early years of the forecast; and in those
7 early years of the forecast, my bad debt expense is
8 actually higher than what was included in the Black and
9 Veatch study. They assumed they stopped doing them in the
10 later years of the forecast. And then in those later years
11 of the forecast, my bad debt expense is less than what was
12 included in their forecast.
13 If you go to my Schedule MPG-3, you'll see
14 what adjustments were made to their bad debt expense. I
15 didn't make any adjustments in calendar year 2011. I
16 made -- I increased bad debt expense in calendar year 2012
17 by roughly $169,000. I started reducing bad debt expense
18 in 2013 because at that point, the debt enhancement --
19 collection enhancement procedures appeared to no longer be
20 working in the MSD's forecast.
21 So this adjustment really reflects calendar
22 years 2013 through 2016. No adjustment was made in 2011.
23 No adjustment was made in 2012. Actually, the adjustment
24 in 2012 increased the amount of uncollectible expense to
25 coincide with what that normalized uncollectible factor
94
1 would be.
2 COMMISSIONER BROCKMANN: Thank you.
3 COMMISSIONER TOENJES: Any questions from any
4 additional Rate Commissioners or any additional questions
5 by the Rate Commission?
6 EXAMINATION
7 QUESTIONS BY COMMISSIONER TOENJES
8 Q. I have one question, Mr. Gorman. Would it be
9 accurate to summarize that, in essence, as I see it, there
10 are four basic areas of disagreement: Future sales levels,
11 O&M growth, interest rate projections, and debt
12 collections?
13 A. Yes. With only one modification is the
14 escalation in O&M also had a concern with the additional
15 O&M expense in the later years.
16 Q. Yeah. I'm sorry. The additional...
17 A. O&M expense. So the O&M adjustments related
18 to the escalation and also the additional O&M expense
19 incurred in the later years, which I believe part of which
20 should be allocated to capital items and not -- it was
21 still left in my cash flow study and still included in the
22 cost of service filing, but it was treated as capital items
23 and not expense items.
24 So that didn't reduce their need for cash at
25 MSD, but it did move it from expense to capital items, and
95
1 that allowed that those expense -- that those capital items
2 then could be funded from net revenue and/or bond proceeds.
3 COMMISSIONER TOENJES: Thank you. Any further
4 questions?
5 Thank you. Thank you, Mr. Gorman.
6 MR. GORMAN: Thank you.
7 COMMISSIONER TOENJES: Ms. LaConte --
8 Ms. Langeneckert, are you ready to present your --
9 MS. LANGENECKERT: Yes, I am.
10 COMMISSIONER TOENJES: -- testimony at this
11 time?
12 Good morning, Ms. LaConte.
13 MS. LACONTE: Good morning.
14 COMMISSIONER TOENJES: Is the testimony you
15 are about to the give the truth, the whole truth, and
16 nothing but the truth?
17 MS. LACONTE: Yes, it is.
18 COMMISSIONER TOENJES: Thank you. Does any
19 member of the Rate Commission have questions for
20 Ms. LaConte at this time?
21 Hearing none. Ms. Myers, do you have any
22 questions of the witness on behalf of the District?
23 MS. MYERS: Yes, we do.
24 COMMISSIONER TOENJES: Please proceed.
25
96
1 EXAMINATION
2 QUESTIONS BY MS. MYERS
3 Q. Okay. Page 2, line 20, of your testimony that
4 you submitted, you say you were not able to verify the
5 necessity of the CIRP. I just would like to know, did you
6 attempt to use any of the documents produced by MSD to
7 verify that necessity?
8 A. Okay. What I read is you're saying it is not
9 possible to verify that the CIRP expenditures for which MSD
10 is requesting meet the requirements in the CD, is that what
11 you're referring to?
12 Q. Line 20, yes. Your --
13 A. Okay.
14 Q. Your testimony where you say you were unable
15 to verify the necessity of the CIRP.
16 A. I was unable to verify --
17 Q. I want to know what you base that testimony
18 on.
19 A. Okay. Well, it reads, I was not able to
20 verify that the CIRP expenditures for which MSD is
21 requesting funding meet the requirements in the CD. So I
22 was not able to review the Consent Decree and compare
23 what's in the Consent Decree to what is in your CIRP
24 requirements.
25 Q. Did you look at any other -- of the other
97
1 documents that MSD provided you?
2 A. I looked at the documents that you provided
3 that showed what your CIRP expenditures are.
4 Q. Did you look at the CIRP list of projects?
5 A. I reviewed it -- excuse me -- I reviewed that.
6 Q. Did you look at the detail sheet that outlined
7 the requirements that are in the Consent Decree?
8 A. I'm not sure what document you're referring
9 to.
10 Q. I don't remember which Exhibit Number it was.
11 MSD11-9 -- what did you -- if you'll just give us a second.
12 We're getting that.
13 Okay. What I'm going to hand you is
14 Exhibit MSD11A32, and what I'd like know is did you look at
15 this document when you made your testimony?
16 A. Yes. I reviewed this document.
17 Q. Okay. So you reviewed that document along
18 with MSD Exhibit 9B1? I'll hand that to you now.
19 A. Yes. I briefly reviewed 9B1.
20 Q. Okay. And in reference, you briefly reviewed
21 that document to make your statement that you were unable
22 to verify the necessity of the CIRP?
23 A. I have to correct you. I did not state that I
24 was not able to verify the necessity of the CIRP. I was
25 stating that I was not able to verify that the CIP -- CIRP
98
1 expenditures for which you're requesting funding meet the
2 requirements in the CD.
3 Q. Okay. And why were you not able to do that
4 with the two exhibits in front of you?
5 A. Because I haven't seen the Consent Decree.
6 Q. But doesn't Exhibit 11, the first one I handed
7 you, provide you an outline of what's in the Consent
8 Decree?
9 A. It provides an outline. It doesn't give the
10 detail.
11 Q. Okay. Moving on to page 3, lines 6 and 7, can
12 you please explain which of the assumptions used in the
13 rate proposal you found to be unrealistic?
14 A. Well, if you look at page 9 of my testimony, I
15 stated that the O&M costs for fiscal year 2013 I thought
16 was overstated.
17 Q. And what did you base that statement on?
18 A. Well, I reviewed the documents that MSD
19 provided showing what the actual O&M was for the past few
20 years compared to what you're forecasting. I can't
21 remember the exact exhibit number, but I can provide that
22 to you later.
23 Q. Okay. And which of those assumptions that you
24 stated in lines 6 and 7 resulted in higher than necessary
25 revenue, in your opinion?
99
1 A. Well, in my opinion, some of the growth rates
2 you used for some of your O&M expenses are higher than
3 necessary. I think that, in my opinion, the forecast usage
4 in customer accounts that you used are lower than
5 necessary, which results in higher than necessary revenues,
6 and that the growth rate used for some of the CIRP projects
7 is higher than necessary, which results in higher than
8 necessary revenues.
9 Q. Is that -- is that it?
10 A. Finally, I would say that the assumption that
11 you continue the defined contribution pension plan so that
12 the defined benefit plan results in higher than necessary
13 revenues.
14 Q. And what is the basis for that statement,
15 those statements, regarding those areas you just explained
16 to us?
17 A. Okay. Well, for the first statement regarding
18 the O&M costs, as I stated before, I referred to an exhibit
19 that MSD provided that showed the actual O&M costs over the
20 past few years and is compared to what your forecast is.
21 MSD stated in the previous rate hearing in June that your
22 revenue forecast did not include your switch to the defined
23 contribution from a defined benefit plan.
24 I looked at one of MSD's exhibits, 11A34, that
25 shows the actual 2011 wastewater revenues, which were
100
1 higher than what was forecast. And then based on
2 statements made by MSD personnel, I believe that some of
3 the CIRP projects, the costs for those, are lower than what
4 is forecast and also that the O&M increase you used for
5 that is higher than necessary.
6 Q. Okay. Moving on to page 6, lines 12 through
7 15, you list values for planned appropriations and actual
8 expenditures. Is it appropriate to compare those two types
9 of numbers?
10 A. I think it's appropriate to look at what MSD
11 forecast it would spend in 2008 and compare what you
12 actually spent.
13 Q. Is that the purpose of your comparison there?
14 A. Yes. The purpose of my comparison is to show
15 that you spent $140 million more than what you forecast at
16 the time of your latest rate case.
17 Q. Page 7, lines 4 through 6, your statement in
18 lines 4 through 6 regarding Mr. Hoelscher's testimony, is
19 it accurate to say that that does not incorporate his
20 entire response?
21 A. Yes.
22 Q. Okay. When, in fact, what Mr. Hoelscher said,
23 that if costs were less than anticipated, projects would be
24 moved up from later years, which would result in an
25 immediate benefit to the ratepayers, is that accurate?
101
1 A. I'd have to look at the request, but based on
2 what you said, I'd say that's accurate.
3 Q. Okay. But in your testimony, you recommend
4 that MSD reevaluate the estimated costs to incorporate
5 lower CIRP costs due to economic conditions.
6 A. Yes.
7 Q. So doesn't that approach result in MSD not
8 taking advantage of the ability to do more work at lower
9 costs, which is what Mr. Hoelscher's testimony represents
10 that the District has done over the past several years and
11 would continue to do?
12 A. Well, I don't know -- Mr. Hoelscher stated
13 that. I don't know if it's true, that having more money
14 available results in lower costs of the projects.
15 Q. But do you have any basis to not believe what
16 Mr. Hoelscher is saying in his testimony?
17 A. My opinion is based on what the MSD's
18 required -- what CIRP projects are required to meet the CD
19 and what money they need from their customers to meet those
20 requirements. I think it's fair to the customers that MSD
21 should only collect what is needed at the time to complete
22 the projects that they need within the time period.
23 Q. So are you stating if MSD has the ability to
24 get additional projects done and save the ratepayers in the
25 long run, we shouldn't take advantage of that?
102
1 A. Well, it depends on what the dollar amount is.
2 If you're talking about hundreds of millions of dollars
3 that you have extra, I don't think it's fair to the
4 customers to make them pay now rather than later.
5 Q. So what is your basis -- what is that
6 statement based upon, the $100 million range you just said?
7 A. Well, if you look at page 6, I showed that in
8 2008 during your rate -- in that rate proposal, you
9 forecast $647.5 million in CIRP projects. In your response
10 to the Rate Commission request 1-23, it shows that your
11 actual CIRP expenditures for that same time period were
12 787.5 or $140 million more.
13 MS. MYERS: I'm going to turn this over to
14 Brian Hoelscher.
15 EXAMINATION
16 QUESTIONS BY MR. HOELSCHER
17 Q. In your -- again, on page 6, lines 12 through
18 15, do you recognize that the $647.5 million forecast is
19 appropriations?
20 A. I'd have to go back and see exactly what --
21 where I found the 647.5, but I'm not sure if that was
22 appropriations or just what you were forecasting at the
23 time.
24 Q. It is forecasted appropriations. The number
25 that you're referring to on line 14 of 787.5 is actual
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1 expenditures -- I'm sorry. You -- you had stated those
2 were actual expenditures, correct?
3 A. Yes.
4 Q. Okay. If those expenditures were also from
5 appropriations made prior to the forecast period, would it
6 be fair to compare those two numbers?
7 A. I'm sorry. Can you restate that?
8 Q. Yes. If some of -- if some of the actual
9 expenditures were from appropriations prior to the 2007
10 through 2010 forecasted period, would that make it
11 reasonable to compare those two numbers to demonstrate
12 performance?
13 A. Perhaps not.
14 EXAMINATION
15 QUESTIONS BY MS. MYERS
16 Q. Okay. Page 9, lines 2 through 4, based on
17 your statements there on lines 2 through 4, would you
18 please list every component for which you find the assumed
19 inflation rate to be too high and why you think they're too
20 high?
21 A. I can't tell you that right now off the top of
22 my head. I can provide that to you at a later time.
23 MS. MYERS: The District has no further
24 questions.
25 COMMISSIONER TOENJES: Thank you.
104
1 Mr. Kindschuh, do you have questions on behalf of MIEC and
2 Covidien for the witness at this time?
3 MR. KINDSCHUH: No, we do not have any
4 questions at this time.
5 COMMISSIONER TOENJES: Ms. Langeneckert, do
6 you have any questions for the witness at this time?
7 MS. LANGENECKERT: Could I ask to reserve my
8 redirect until all the questions have been answered --
9 asked by all the other parties?
10 COMMISSIONER TOENJES: Yes.
11 MS. LANGENECKERT: Thank you.
12 COMMISSIONER TOENJES: Mr. Mueller -- well,
13 I'll tell you what. Let's -- for microphone expediency
14 here.
15 MR. COFFMAN: No questions here.
16 COMMISSIONER TOENJES: Mr. Coffman, no
17 questions.
18 MR. MUELLER: No questions.
19 COMMISSIONER TOENJES: No questions.
20 Mr. Arnold?
21 MR. ARNOLD: None.
22 COMMISSIONER TOENJES: No questions. And no
23 microphone either. Ms. Langeneckert?
24 MS. LANGENECKERT: No. Still none.
25 COMMISSIONER TOENJES: Do any of the Rate
105
1 Commissioners have any additional questions for this
2 witness?
3 COMMISSIONER LIYEOS: I have a question.
4 COMMISSIONER TOENJES: Mr. Liyeos.
5 EXAMINATION
6 QUESTIONS BY MR. LIYEOS
7 Q. Let's go back to 2013, the true project cost
8 was overstated with growth rate of being higher. You had
9 mentioned a couple of different things that comprised that.
10 Could you just quick summarize, I think there were four
11 things.
12 A. I'm sorry. Can you refer me to where you're
13 actually -- what line?
14 Q. You had mentioned that 2013 there was an
15 overstated growth rate, and what did that -- the true
16 project cost was overstated, I believe.
17 A. I think what you're referring to is I had
18 stated that what in 2008 the MSD forecast their CIRP
19 expenditures would be for the next -- I think from fiscal
20 year 2007 through fiscal year 2010?
21 Q. No. I'm talking about you had identified 2013
22 as a year that the overstated growth -- all right. Yes.
23 All right. We'll go to page 9, top of the page, line 1,
24 the O&M costs for fiscal year 2013 are forecast to increase
25 on an average 4.1 percent. You had -- you had mentioned
106
1 components of that. Let's just review the components real
2 quick.
3 A. Oh, some of the components that I identified
4 were personnel expenses.
5 Q. Correct.
6 A. And construction and engineering expenses.
7 Q. Those were the only two?
8 A. Those were the ones I listed. There is an MSD
9 exhibit that they provided that shows all of their expenses
10 and what the actual increases were and also what they
11 forecast them to be. I can provide that to you.
12 COMMISSIONER LIYEOS: Okay. I just want to
13 make sure that I've got it right in terms of what you're
14 stating.
15 Okay. That's all I've got. Thank you.
16 COMMISSIONER TOENJES: Any questions from any
17 other Rate Commissioners at this time?
18 COMMISSIONER SCHNEIDER: I do.
19 COMMISSIONER TOENJES: Mr. Schneider.
20 EXAMINATION
21 QUESTIONS BY COMMISSIONER SCHNEIDER
22 Q. I just want to make sure, have you -- you said
23 that -- in your testimony, you said that the rate increase
24 was unreasonable because the Consent Decree was not public.
25 The Consent Decree has been made public. Have you received
107
1 a copy of the Consent Decree.
2 A. I have not had a chance to review it at this
3 time.
4 Q. So your -- so your testimony has not changed
5 at this time, you still believe it's unreasonable because
6 you haven't seen the Consent Decree?
7 A. Well, I think my testimony says that not that
8 the rate increase is unreasonable, but I think that at this
9 time until we review the Consent Decree, that only an
10 increase for 2013 should be approved; and then once we can
11 all review the Consent Decree, then we can determine what
12 is the appropriate rate increase for MSD.
13 Q. Okay. And what's your proposed rate increase
14 for that one-year increase that you proposed?
15 A. I did not submit an actual rate increase. I
16 just suggested some changes that MSD should make.
17 COMMISSIONER SCHNEIDER: Okay. Thank you,
18 Len.
19 COMMISSIONER TOENJES: Thank you,
20 Mr. Schneider. Any questions -- any additional questions?
21 Thank you.
22 We will break at noon, but I think we will go
23 ahead and start with the testimony of Mr. Stannard in the
24 interim.
25 Mr. Stannard, is the testimony you are about
108
1 to give the truth, the whole truth, and nothing but the
2 truth?
3 MR. STANNARD: It is.
4 COMMISSIONER TOENJES: Does any member of the
5 Rate Commission have any questions for Mr. Stannard at this
6 time?
7 Hearing none. Ms. Myers, do you have any
8 questions for the witness at this time?
9 MS. MYERS: Yes, we do.
10 COMMISSIONER TOENJES: Please proceed.
11 EXAMINATION
12 QUESTIONS BY MS. MYERS
13 Q. Okay. Page 7, lines 19 through 29 in your
14 testimony, based on your experience, is the magnitude of
15 the District's CIRP program consistent with those of other
16 major wastewater systems throughout the United States?
17 A. As I indicate there, yes, it is.
18 Q. Okay. Page 8, lines 19 through 25, do you
19 believe that the District's proposed issuance of revenue
20 bonds and state revolving bonds to partially fund the CIRP
21 is a sound capital funding approach?
22 A. Yes, it is. It's the use of debt financing to
23 fund major Capital Improvement Programs is appropriate in
24 that it helps amortize the cost of those projects over a
25 period of time that's closer to their useful life.
109
1 Q. Okay. Is it -- in your opinion, is the 5 and
2 a half percent interest rate estimated for revenue bonds in
3 the proposal reasonable?
4 A. I would say that, yeah, it's -- given what
5 I've seen in the market and generally my approach in
6 examining and working in a forecast to determine what
7 should be included for the potential interest cost of
8 anticipated bond issues over several years -- particularly
9 in this case, over a four-year period -- I will take a look
10 at what the current trends in the market are, look at
11 schedules, the actual repayment schedules on bonds that are
12 being issued of similar -- similarly rated utility bonds,
13 principally water or wastewater revenue bonds. I will
14 reach out to financial advisors or individuals in the bond
15 underwriting community to develop -- to get a sense as to
16 the -- what they're seeing with regard to pricing of bonds.
17 But all that taken into account, the 5 and a
18 half percent is actually one that we're using in some other
19 cases, and most recently with Northeast Ohio Regional Sewer
20 District in Cleveland, who has a similar major Consent
21 Decree that they had just negotiated, working with their
22 underwriters, we used a 5 and a half percent 30-year term
23 bonds in the forecast of future bonds over the forecast
24 period over the next five years.
25 Q. So the 5 and a half percent interest rate in
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1 the MSD proposal is reasonable?
2 A. I think it's a reasonable rate just from the
3 standpoint of being conservative, the fact that we don't
4 know what interest rates are going to do. I would expect
5 if MSD sold bonds today, the average weighted cost of that
6 debt would be in the 4.1 to 4.2 percent, maybe a little bit
7 higher, depending on how the final structure is.
8 But given the -- just the general level of
9 fiscal activity in the United States and the risk
10 associated with higher rates out over the next four years
11 particularly, I think it's reasonable to be a bit more
12 conservative on what that future interest cost will be.
13 Q. Okay. Thank you. Page 9, lines 1 through 3,
14 in the event that an MSD bond authorization fails, in your
15 opinion, would the District have to dramatically increase
16 the rates to maintain our compliance with the Consent
17 Decree?
18 A. Yes, they will, because the -- if we're not
19 able to issue debt, we will still be required to meet the
20 requirements of the Consent Decree as well as the Clean
21 Water Act itself, which would require increased cash
22 financing of the CIRP.
23 Q. Have you received a copy of the Consent
24 Decree?
25 A. Yes, we received it when it was released.
111
1 Q. Okay. And have you had a chance to review
2 that document?
3 A. Not in detail yet. It's on my things to do
4 list. It's hard -- it was hard to put -- when I opened --
5 when I credit it off, it's hard to put it down though.
6 COMMISSIONER TOENJES: Join the club.
7 MS. MYERS: Okay.
8 MR. ARNOLD: Mr. Chairman, may I remind the
9 witness to remember Pinocchio.
10 Q. (By Ms. Myers) Page 11, lines 19 through 23, in
11 your opinion, is the District's forecast of continued
12 declines in contributed wastewater volumes reasonable?
13 A. Yes. In general, the forecast is a modest
14 decrease in customer wastewater volume or water consumption
15 that's used for billing of wastewater service. This is a
16 phenomenon that is facing utilities throughout the United
17 States and actually goes back much before the more recent
18 downturn in the economy.
19 The -- if we go back to about the mid-1980s
20 when the Energy Policy Act was enacted by -- well, passed
21 by Congress and signed into law, one of its requirements
22 was the conversion to low flow toilets. And since then --
23 and that really, to me, you know, is the springboard of
24 what created a new paradigm in how fixtures would be -- and
25 appliances -- plumbing fixtures and appliances would be
112
1 constructed in the United States and made available.
2 The toilets have gone from six or more gallons
3 per flush down to below one and a half gallons per flush.
4 Every appliance that is constructed now and provided to the
5 public now is high efficiency. And as a result, per capita
6 water consumption is declining significantly.
7 In looking at our National Water and
8 Wastewater Rate Survey going back to 1986 to 2010, per
9 capita water consumptions reported by the utilities that
10 responded, per capita consumption has gone from about
11 170 gallons per person per day down to around 100 to
12 105 gallons per person per day.
13 There may be some elements related to the
14 recent downturn in the economy; but at the same time, what
15 we've also seen is a change in our manufacturing industry.
16 We've seen really a decline in manufacturing across the
17 country and seeing a significant decrease in high water
18 using manufacturing. Again, impacting water and wastewater
19 utilities throughout the United States.
20 So all that said, I think the forecast that
21 MSD has proposed is reasonable. Hopefully it will --
22 things will bottom out and we won't see that continuation
23 in decline in consumption. But only time will tell. But
24 again, we -- we don't want to be too optimistic that
25 something will happen that if it doesn't, given that we'll
113
1 have a four-year rate in place and a requirement to meet
2 the Consent Decree, we want to make sure we stay in a
3 strong financial foundation for MSD.
4 Q. So MSD's forecast is consistent with other --
5 what's happening with other wastewater utilities throughout
6 the U.S.?
7 A. Yes, it is.
8 Q. Okay. Page 15 of your testimony, lines 10
9 through 25, based on your analysis of the District's
10 estimate of bad debt in the proposal, do you think that the
11 estimate is reasonable?
12 A. I'd say that, you know, rather than being
13 quite that firm and saying it's reasonable, I'd say it's
14 not unreasonable, which is kind of a weasely term. But
15 MSD's bad debt expenses are high, but they are somewhat --
16 and it's difficult to compare them just directly with other
17 wastewater utilities and say, well, gee, others are -- have
18 a lot better collection rate.
19 In most cases in the country, the wastewater
20 utilities are connected with the water utilities, and so a
21 lack of payment of a wastewater bill means water is turned
22 off. MSD is like a number of wastewater utilities that are
23 pure standalone and do their own billing, but there's not
24 very many of them. Our ability to encourage payment is
25 much more restrictive than being able to turn off the
114
1 water.
2 So the bad debt level is high, and it has
3 climbed with increase in rates as well as the downturn in
4 the economy. The key thing here is that with perhaps the
5 more aggressive and robust collection procedures and
6 processes that MSD has implemented -- implemented earlier
7 this year, that we will see a decrease in bad debt, but
8 it's too early to tell.
9 There's a -- the forecast does include
10 somewhat of improvement as related to that -- those
11 enhanced procedures; but I think for the next four years,
12 it's a reasonable forecast, and I would ask, as I recommend
13 in my testimony, that the staff report back regularly to
14 the Board of Trustees with regard to the progress that's
15 being made on the enhanced collection process and the
16 effectiveness of that process and that, of course, would
17 then be incorporated into the next rate filing, which I
18 have a feeling may happen at the end of the time period
19 that's being proposed here.
20 Q. So is it your opinion that if the District had
21 a bigger hammer such as shutoff or something like that,
22 that our bad debt collection would be better?
23 A. If we could turn water off, I would expect our
24 ability to secure payment from slow-paying customers would
25 improve significantly.
115
1 Q. Okay. Is it your opinion that the District's
2 bad debt estimates are conservative?
3 A. They do -- they start with the -- looking at
4 the last two to three years when the bad debt ratio popped
5 up a bit, up into the 4 to 5 percent range, and the
6 forecast is anticipating some improvement of that, but that
7 as rates continue to climb over the period, that it will
8 stay at about the same level.
9 So I'm not sure if -- it's -- if the economy
10 improves, perhaps they're a bit conservative, but until we
11 know what the success of the more robust collection process
12 will be, it's difficult to say.
13 Q. Okay. Is it your understanding that the other
14 experts in these proceedings have testified that the bad
15 debt estimates made by the District are overstated?
16 A. I've read their testimony and been here today
17 listening to it, their cross examination.
18 Q. So it's your understanding that they feel --
19 MR. ARNOLD: Mr. Chairman, I believe the
20 testimony and the documents speak for themselves.
21 Q. (By Ms. Myers) With that being said, can you
22 answer the question again?
23 A. Well, I think they've raised concerns based on
24 their analysis, and I believe that it might be appropriate
25 to forecast at a lower level than what MSD has proposed.
116
1 Q. So is it true that your testimony would not
2 support their conclusion?
3 A. I believe that -- I believe that the forecast
4 is reasonable.
5 Q. Okay. Page 16, lines 17 through 21, would you
6 agree that if the District is not able to obtain a revenue
7 bond authorization, that the only option available to the
8 District is to shift to the PAYGO approach?
9 A. It's the only -- it's the only one that I'm
10 aware of right now.
11 Q. So is it your recommendation on lines 17
12 through 21 of page 16, which states to the Rate Commission
13 that the District shift to 100 percent PAYGO approach
14 should the revenue bond authorization fail?
15 A. Yes. And then -- and subject to some of the
16 other recommendations that I have included in my testimony
17 with regard to financing policies and some elements related
18 to the resistance factor and the impact of the defined
19 contribution -- excuse me -- defined contribution pension
20 plan as part of that forecast, but it would be 100 percent
21 PAYGO.
22 MS. MYERS: Okay. The District has no further
23 questions.
24 COMMISSIONER TOENJES: Thank you. I suggest
25 that, Mr. Kindschuh, we will hold your questioning and the
117
1 questioning of the remainder of the interveners until after
2 lunch. We will adjourn until 1:15 p.m. Mr. Stein will
3 take over as Chair this afternoon at 1:15, and we will
4 stand adjourned and resume with Mr. Kindschuh's questioning
5 of Mr. Stannard at that time. Thank you.
6 (THERE WAS A BREAK IN THE PROCEEDINGS FROM
7 APPROXIMATELY 11:54 a.m. TO 1:19 p.m.)
8 COMMISSIONER STEIN: I'm going to reconvene
9 this Technical Conference of the MSD Rate Commission. My
10 name is Jack Stein. I'm the Vice Chair of the Rate
11 Commission, and I am filling in for Mr. Toenjes.
12 We are going to pick up where we left off this
13 morning. Mr. Stannard is still our witness at the moment.
14 And Mr. Kindschuh, I would ask you if you have any
15 questions on behalf of the MIEC or Covidien for
16 Mr. Stannard?
17 MR. KINDSCHUH: Mr. Chairman, thank you. We
18 do not at this time.
19 COMMISSIONER STEIN: All right. Thank you.
20 Ms. Langeneckert, do you have any questions on behalf of
21 BJC?
22 MS. LANGENECKERT: We do not.
23 COMMISSIONER STEIN: Thank you. Mr. Mueller
24 is not here. Mr. Coffman is not here. In that case,
25 Mr. Arnold, do you have any questions of Mr. Stannard on
118
1 behalf of the Rate Commission?
2 MR. ARNOLD: I do not.
3 COMMISSIONER STEIN: You do not. Do any
4 members of the Rate Commission have questions of
5 Mr. Stannard? Mr. Schneider.
6 COMMISSIONER SCHNEIDER: Thank you, Mr. Stein
7 I have a question for Mr. Stannard.
8 EXAMINATION
9 QUESTIONS BY MR. SCHNEIDER
10 Q. On page 6 of your testimony, you talk about
11 the finding fair and reasonable to you, so I wanted to get
12 a little more definition around this. You say that the
13 word fair means to you for those customer classes -- maybe
14 I'll wait until you get to -- are you at that part in your
15 testimony?
16 A. I have it.
17 Q. Okay. You say to be fair -- and I'm
18 summarizing here -- fair is for those customer classes to
19 be free from self-interest, prejudice, or favoritism. Can
20 you further define those words or what you meant by that?
21 A. That -- that customer classes will not be --
22 essentially get preferential treatment in terms of
23 discrimination with other classes, so that there is a fair
24 distribution of the cost for all customers.
25 Q. Would you say a subsidy of one class to
119
1 another, is that -- is that fair?
2 A. That's -- in a sense, that's what we're
3 looking at is that a subsidization of one class by another
4 class can present a problem that needs to be addressed.
5 Sometimes there might be an overarching public policy or,
6 you know, a determination that would say that we should
7 provide some short-term subsidy in a transition moving to
8 full cost of service depending on what the long-term goals
9 of the utility are.
10 In many cases, concerns about low income and
11 economically disadvantaged customers and how we can help
12 that group deal with paying for an essential service that
13 may require that group to be subsidized, but that would be
14 a public policy decision --
15 Q. Um-hmm.
16 A. -- that if that was -- as opposed to a subsidy
17 that was absent some direct decision being made with regard
18 to how we deal with certain classes of customers.
19 Q. Okay. Thank you. You talk -- I'm going to
20 the capital financing section in your testimony. On
21 question 24, that's on page 9 of your testimony, line 23,
22 you say the District's use of the plan appropriation in the
23 financing plan results in raising $35,279,700 more than is
24 expected to be expended during the rate change period.
25 Can you explain how you got to that
120
1 calculation and what it means?
2 A. That was based on Brian Hoelscher's response
3 to, I believe, our second -- it was our first or second --
4 I believe it was our second data request in asking for a
5 comparison of the encumbrance basis and the forecasting
6 encumbrances of the -- of the CIRP versus their plan for
7 cash outlay during the period. And so, you know, we know
8 the -- there are a number of projects that will be
9 multiyear projects, and so the encumbrance appropriation
10 basis would finance that multiyear project all in year one.
11 Q. Um-hmm.
12 A. Where if the cash was spread out over three
13 years, the cash forecast basis identifies what those
14 anticipated cash expenditures will be each year. So in the
15 case of the numbers that Mr. Hoelscher provided, that was
16 the difference between the accrual basis that was used in
17 the rate change proposal and what his forecast -- MSD's
18 engineers forecasts of what their cash requirements will be
19 over that same period.
20 Q. And is it your recommendation that the
21 District should move from an appropriations method to kind
22 of the cash financing method?
23 A. Yes, it is. And that is something that many
24 utilities around the country have struggled with in recent
25 years, and a number of clients that I've worked with, a
121
1 number of utilities that I've worked with, have made that
2 switch where historically they funded on a -- essentially
3 on an accrual basis, but they've made the decision to
4 switch to a cash basis to help because of the increase in
5 the number of multiyear projects that they're doing to
6 level out their cash -- their debt financing with their
7 cash obligations.
8 Q. Thank you. My next question concerns the
9 wastewater volume. On page 11, you agree with the
10 District's -- you found the District's continued declines
11 reasonable in terms of the reduction of wastewater volume.
12 On what basis did you make that conclusion?
13 A. Well, the -- a couple things. One, it's
14 typical -- I mean, one of the challenges in doing a -- a
15 municipal utility rate as opposed to an investor-owned
16 utility is the level of precision that we can have to work
17 from. Investor-owned utilities generally will -- their
18 rate cases are based on an historical test year. So its
19 actual results for a prior year adjusted for known and
20 measurable changes. So that level of precision is much
21 greater because you're working with actual numbers and
22 known and measurable changes to those numbers.
23 And then there is a profit margin that has
24 been built into that investor-owned utility's rate
25 structure that the shareholders of that utility bear some
122
1 risk with regard to changes that may happen subsequent to
2 the rate change.
3 In a municipal utility, we're working with
4 forecasts, what we think things will be and what we expect
5 costs to be in terms of the revenue requirements and then
6 the volumes of usage that we'll be able to apply in
7 calculation of the rate.
8 The historic way of examining that is to look
9 at, well, what's -- what's the most recent five years look
10 like; and MSD, like many utilities -- and actually,
11 MSD's -- you know, the downturn has been more recent
12 than -- in consumption than others. In Cleveland, for
13 example, they've been averaging 3 percent a year decline in
14 water consumption, and water volume is used for billing
15 wastewater service, for the last 10 or 12 years. So it's
16 been averaging a 3 percent decline every year like
17 clockwork. So the question is how much longer will that
18 go.
19 The other thing I relied on is just national
20 trends and looking at utilities around the country and what
21 that consumption level is doing around the country; and the
22 changes, as I mentioned this morning, the changes caused
23 by -- well, whether we call it conservation or the fact
24 that appliances and fixtures that we install in buildings
25 and residences and for manufacturing -- for businesses are
123
1 all high efficiency, and so that's reducing the
2 consumption.
3 So that -- that's what I've looked at, and I
4 didn't have any other information that would lead me to
5 believe that the relatively nominal decrease that Black and
6 Veatch has forecasted would be unreasonable. But -- and so
7 I think it's a reasonable forecast; but if they had
8 maintained it at 2011 levels, you know, that -- I wouldn't
9 be able to say that that was unreasonable either. So it --
10 but in general, it's a -- it's a pretty nominal decrease
11 over the four years.
12 Q. Um-hmm. I gotcha. So you mentioned the
13 Cleveland -- let me rephrase this. So in analyzing the
14 reasonableness, is there a document that you used to
15 compare the reasonableness with like other national volume?
16 You mentioned Cleveland. You mentioned your work on other
17 ones. Is there a book that you used to compare their
18 projections with other municipal metropolitan area volumes?
19 A. No. What I did was call on some recent
20 projects that we've been engaged with and more really ones
21 that I've been involved with.
22 Q. Okay.
23 A. Looking at what their data was indicating as
24 well.
25 Q. So it's from basically your personal research
124
1 and professional experience --
2 A. Yeah. Yes.
3 Q. -- in this area?
4 Did you include any other economic factors in
5 your thoughts of the reasonableness of the wastewater
6 volumes?
7 A. No, I did not.
8 Q. And then my final question is, there was a lot
9 of discussion this morning about the Buyer Bond Index and
10 the reasonableness of how they estimated the bond, and I
11 just kind of wondered if you could repeat your testimony
12 kind of in that area. If I understand correctly, you felt
13 that MSD was reasonable in their assumptions in how they
14 did the bond index, is that correct?
15 A. Well, if I could back up a little bit.
16 Q. Sure.
17 A. Yeah. The Bond Buyer Index is a -- is what it
18 is. It's an index. And it does provide information with
19 regard to what is happening with the trend in interest
20 rates. The -- as was discussed this morning during
21 Mr. Gorman's testimony, the Bond Buyer Index is a --
22 reflects for the Revenue Bond Index. It reflects for 25
23 issuers the interest rate of the long bond, the 30-year
24 bond.
25 So it's either -- if there is a 30-year bond
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1 at that point for that issuer, it's that rate; but it uses
2 an algorithm to project what that rate would be given
3 interest rate yield curves at the time they calculate that
4 index. That index, as I recall, last week was about
5 5.35 percent, which again represents the long bond.
6 The -- as I examine -- as we do similar types
7 of studies for other -- for our clients, we will, you know,
8 look at what their -- what their bonds are rated, take a
9 look at what the yield curves are on bonds that are being
10 sold, which is available information, and we'll talk to
11 their financial advisors and, if they have a bond
12 underwriter engaged, that underwriter with regard to the
13 interest rates.
14 The 5 and a half percent is actually the rate
15 that we used in a recent study for Northeast Ohio Regional
16 Sewer District that was -- we were provided that by their
17 financial advisor and underwriters to incorporate in our
18 study.
19 In -- you know, a couple things that go on in
20 forecasting that debt service. One is what the MSD has
21 done is essentially used a straight amortization, so 5 and
22 a half percent over 30 years, which assumes that there
23 would be level annual payments at an amortization rate over
24 the 30-year period as opposed to creating a yield curve and
25 a ladder that would be something that the underwriters
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1 would create.
2 So their approach -- you know, again, it's --
3 amortization is a pretty -- it's a common way to estimate
4 future debt service. The interest rate, 5 and a half
5 percent, when I look out that we're going to be -- we're
6 planning on issuing bonds throughout this period over the
7 next four years and to make sure that we have -- are
8 conservative enough that we will have adequate rates to be
9 able to cover the debt service on those bonds if rates
10 go -- if interest rates climb substantially.
11 Unfortunately, we don't know what interest
12 rates are going to do, and I'm not sure if there are any
13 economists or financial wizards out there that have been
14 able to tell us from week to week what's going to happen.
15 Q. Yeah. I just want to kind of clarify that
16 last sentence you just kind of said there. So you said the
17 rate proposal has kind of adequate coverage, where if rates
18 were to increase substantially, that there would be
19 adequate coverage, is that what you just said?
20 A. Yes. So that -- so that we wouldn't run into
21 a situation where interest rates were a lot higher than
22 what had been projected in the rates and calculated in the
23 rates, and that we would run into some financing issues
24 with regard to the ability to issue the level of bonds that
25 are necessary.
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1 COMMISSIONER SCHNEIDER: Okay. That's it,
2 Mr. Stein. Thank you.
3 COMMISSIONER STEIN: Are there other questions
4 from the Commissioners?
5 COMMISSIONER BROCKMANN: I have one.
6 COMMISSIONER STEIN: Mr. Brockmann.
7 EXAMINATION
8 QUESTIONS BY MR. BROCKMANN
9 Q. Earlier today there was testimony that implied
10 that possibly more projects could be accomplished than were
11 required because costs -- economic conditions construction
12 costs would be lower. So several weeks earlier, you had
13 indicated that at least we could get more projects done.
14 In your opinion, has the rate -- I'm sorry --
15 has MSD addressed this properly so that, in fact, that
16 would happen? And I'm asking this from the standpoint of
17 the cost of construction or inflation rates from
18 construction. Is that all doable if we can in four years
19 pay that in excess over what the rate approved? I realize
20 it would be just yearly, but if they had an excess just say
21 of 800 million more but they did more projects, which in a
22 sense is good, but from a ratepayer standpoint it maybe
23 wouldn't be good?
24 A. That -- yeah. It's an interesting -- it's an
25 interesting conundrum that MSD is in, like many wastewater
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1 utilities. You know, creating a rate proposal to provide
2 adequate revenues to fund the anticipated revenue
3 requirements of the utility and to provide adequate funding
4 and support for issuance of bonds to pay for Capital
5 Improvement Program projects.
6 So the CIRP has a substantial number of
7 projects that are planned. They -- we have not gotten into
8 the basis of those cost estimates on specific projects. We
9 are -- we are relying on the professional staff of MSD and
10 the professional engineers that they -- that are on the
11 staff as well as their consultants that they employ to
12 create estimates of what those costs will be in the future.
13 If the economy is such that construction
14 prices are lower than anticipated, they will be able to --
15 the cost of projects will be less. Then MSD would be
16 somewhat faced with the situation of, well, do we -- do we
17 issue fewer bonds to do the CIRP or do we adjust the CIRP
18 and increase the number of -- you know, move things that
19 were in the outer years up into the next four-year period.
20 And that's something that their management -- MSD's
21 management would -- and with the board -- have to address
22 and evaluate.
23 I believe Mr. Hoelscher's testimony last -- in
24 Technical Conference Number 1, he described that they do
25 have a list of projects -- because they know what the
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1 projects are in the CIRP beyond this rate period, and so
2 that there would be opportunities to -- if they had funding
3 to perhaps move some of those projects up into the -- into
4 the rate period without adversely impacting the financial
5 condition of the utility but then at the same time reducing
6 what the anticipated requirements would be in the next rate
7 proposal period.
8 So it's really -- they end up with a balancing
9 stage. Either -- if the cost of the project goes down and
10 we don't move -- accelerate projects, MSD would end up with
11 a larger fund balance in their capital program funds at the
12 end of the period, and then those funds would then be
13 available to fund the next tranche of CIRP projects, and it
14 would require less bonds to be issued.
15 So there would be -- eventually there will be
16 a benefit to the ratepayers if we can do more with the
17 money that we have, but it's not currently because we will
18 be setting the rates based on these projected requirements.
19 And if the -- if our costs go down or if our sales go up,
20 that will -- both of those things would improve the
21 financial condition of MSD and would provide additional
22 funding for the next rate proposal.
23 COMMISSIONER BROCKMANN: Thank you.
24 COMMISSIONER STEIN: Any other questions from
25 the Commissioners? Mr. Goss.
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1 EXAMINATION
2 QUESTIONS BY MR. GOSS
3 Q. I just had -- I had two. Did I understand you
4 to say you hadn't examined the cost estimates at all
5 from -- that MSD has provided?
6 A. Not on individual capital projects and how
7 they created those cost estimates and the basis for those
8 cost estimates, I have not done that.
9 Q. So you don't have any opinions as to whether
10 those cost estimates are reasonable or not?
11 A. I do not.
12 Q. And is there -- I don't recall seeing
13 anything. Maybe it's -- maybe it's there in the testimony
14 or what has been produced as to whether there's any program
15 that MSD has created to incentivize contractors to reduce
16 costs so that you end up with this happy circumstance of
17 having a surplus at the end?
18 A. I'm not aware of any programs that they have
19 or have not implemented.
20 COMMISSIONER GOSS: Okay. Thank you.
21 COMMISSIONER STEIN: Other questions?
22 Hearing none. Thank you, Mr. Stannard.
23 Are there any other matters before we adjourn?
24 One occurs to me that we have public hearings
25 coming up, and I hope everyone is aware of when and where
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1 those meetings are scheduled and you have made plans to
2 attend as many of those as you can.
3 Beyond that, we will adjourn until September
4 the 6th at the Maryland Heights Community Center, and I
5 presume that the District will get information out to us as
6 to the exact location of that meeting.
7 I would also -- I don't see Pam here, but I
8 would request that someone from the District get out an
9 e-mail this afternoon to the other members of the
10 Commission to let them know that we will not be meeting
11 tomorrow or Wednesday. Thank you.
12 COMMISSIONER BROCKMANN: I'll second the
13 motion to adjourn.
14 COMMISSIONER TOMAZI: Second.
15 COMMISSIONER STEIN: All those in favor?
16 (ALL ANSWERED IN THE AFFIRMATIVE)
17 COMMISSIONER STEIN: We are adjourned.
18 (PROCEEDINGS CONCLUDED AT APPROXIMATELY
19 1:47 p.m.)
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1 CERTIFICATE OF REPORTER
2
3 I, MICHELLE L. PACHESA, a Registered Professional
4 Reporter, Certified Court Reporter (MO), Certified Shorthand
5 Reporter (IL), and Notary Public within and for the State of
6 Missouri, do hereby certify that this record was taken by
7 stenographic means by me to the best of my ability and
8 thereafter reduced to print under my direction.
9 I further certify that I am neither attorney nor counsel
10 for nor related nor employed by any of the parties to the
11 action in which this record is taken; further, that I am not
12 a relative or employee of any attorney or counsel employed by
13 the parties hereto or financially interested in this action.
14
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16 ___________________________
17 Michelle L. Pachesa
18 Notary Public within and
19 for the State of Missouri
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