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HomeMy Public PortalAboutExhibit MSD 91 Transcript September 7, 2011 Surrebuttal TestimonyExhibit MSD 91 98869 msd heading 09 07 11 1 2 3 4 5 6 7 8 9 MEETING OF THE RATE COMMISSION 10 OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT 11 SURREBUTTAL TESTIMONY 12 SEPTEMBER 7, 2011 -DAY 2 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 1 98869 msd heading 09 07 11 2 1 INDEX WITNESSES: PG. 2 MR. JOHN SPRAGUE: Questioning by: 3 Mr. Myers: 5 Mr. Arnold: 14 4 Mr. Koenen: 18 Mr. Brockmann: 19 5 Mr. Stein: 20 Mr. Tomazi: 24 6 Mr. Chairman: 27 Mr. Brockmann: 30 7 Mr. Arnold: 30 8 MR. JEFF THEERMAN: Questioning by: 9 Mr. Kindschuh: 33 Mr. Mueller: 40 10 Mr. Coffman: 61 Mr. Arnold: 67 11 Mr. Brockmann: 79 Mr. Goss: 89 12 MR. MICHAEL GORMAN: 13 Questioning by: Mr. Arnold: 100 14 Mr. Chairman: 116 15 MS. BILLIE LACONTE: Questioning by: 16 Mr. Mueller: 120 17 18 19 20 21 22 23 24 25 Page 2 98869 msd heading 09 07 11 3 1 MR. CHAIRMAN: Good morning. 2 Being 9 o'clock, we will call the meeting of 3 the Rate Commission that involves St. Louis 4 Sewer District to order for a continuation of 5 our wastewater rate change proceedings from 6 yesterday, September 6. 7 We will start with a roll call. 8 Ms. Bowser, would you take the roll. 9 MS. BOWSER: Mr. Coffman. 10 MR. COFFMAN: Here. 11 MS. BOWSER: Mr. Goss; Mr. Koenen. 12 MR. KOENEN: Here. 13 MS. BOWSER: Mr. Liyeos; 14 Mr. O'Connell. 15 MR. O'CONNELL: Here. 16 MS. BOWSER: Mr. Post (phonetic); 17 Mr. Schneider; Mr. Seidel; Mr. Stein. 18 MR. STEIN: Present. Mr. Toenjes. 19 MR. TOENJES: Here. 20 MS. BOWSER: Mr. Tomazi. 21 MR. TOMAZI: Here. 22 MS. BOWSER: Mr. Wafers. 23 MR. WAFERS: Here. 24 MR. CHAIRMAN: We have a quorum. 25 Thank you. My thanks to Mr. Stein for 0 Page 3 98869 msd heading 09 07 11 4 1 chairing the conference yesterday in my 2 absence. I understand that we continued 3 testimony of Mr. Hoelscher, and ms. Myers, 4 are you ready to call your next witness? 5 MS. MYERS: We are. Our Indices 6 next witness will be John Sprague, the 7 Director of operations. 8 John Sprague, having been duly 9 sworn, testified as follows: 10 MR. CHAIRMAN: Thank you. 11 Mr. Kindschuh, do you have any questions on 12 behalf of Missouri Industrial Energy 13 consumers? 14 MR. KINDSCHUH: No, we do not, 15 Mr. Chairman. 16 MR. CHAIRMAN: Thank you, and I'm 17 assuming that also applies to Covidien? 18 MR. KINDSCHUH: Yes, that is 19 correct. Ms. Langeneckert, do you have 20 questions of the witness? 21 MS. LANGENECKERT: MJH has no 22 questions of Mr. Sprague. 23 MR. CHAIRMAN: Mr. Mueller. 24 MR. MUELLER: I have no questions. 25 MR. CHAIRMAN: I do not see Page 4 98869 msd heading 09 07 11 5 1 Mr. Coffman here. Ms. Myers, do you have any 2 questions of the District? 3 MS. MYERS: Yes. The District has 4 a few questions for John. 5 QUESTIONING BY MS. MYERS: 6 Q. John, yesterday we heard some 7 questions regarding salary increases in the 8 labor agreements over 2008, 2009, 2010. 9 Could you please clarify those labor 10 agreements and how the salary increases had 11 been determined? 12 MR. ARNOLD: Mr. Chairman, I hate 13 to be a skunk at the picnic, but I thought 14 that our examination of these witnesses was 15 limited to the testimony in which they had 16 tendered for this Technical Conference. 17 MR. CHAIRMAN: That is accurate, 18 Mr. Arnold. Thank you for raising that 19 issue. 20 MS. MYERS: What I was trying to 21 do is -- those questions were asked of the 22 wrong witness yesterday, and I was trying to 23 provide some clarification for the Rate 24 Commission, and the Intervenors on the 25 correct answers to those questions. 0 Page 5 98869 msd heading 09 07 11 6 1 MR. CHAIRMAN: As I understand it, 2 those questions were based on the testimony 3 that was submitted. Is that accurate? 4 MS. MYERS: Right, and John does 5 have testimony in his surrebuttal regarding 6 the efficiencies of the operations 7 department, and that's what this -- and the 8 labor agreements -- and that's what this 9 stems around. 10 MR. CHAIRMAN: Mr. Arnold? 11 MR. ARNOLD: What a slender reed. 12 Let's go ahead. 13 MR. CHAIRMAN: We will endeavor to 14 confine the questions to the content at hand. 15 MS. MYERS: We will. Thank you. 16 John, go ahead and proceed. 17 MR. CHAIRMAN: And the answers. 18 MR. ARNOLD: Excuse me, and I have 19 already forgotten the question. 20 (At which point, the previous 21 question was repeated by the court reporter.) 22 MR. SPRAGUE: Yeah. First, I guess 23 give a few clarifications. Labor agreements 24 and the MOU's we referred to yesterday are 25 negotiated as part of the responsibilities of Page 6 98869 msd heading 09 07 11 7 1 operations, so as director of operations, I 2 negotiate the labor agreements, along with 3 the director of HR, and so the 2007 through 4 2008, '09 and `10 and the '11, '12, `13, I 5 was in those negotiations. Yesterday when we 6 heard the 2007, 2008, 2009 and `10 has four 7 percent increases for the -- as part of the 8 MOU as a labor agreement, and then we honored 9 those agreements because we had a contract, 10 but there's a little more that went into 11 those agreements that was on the surface. If 12 you remember, the era we were in in 2007 when 13 those labor negotiations were negotiated, 14 those were the booming years, 2004, `05, `06. 15 we had come off a labor agreement that was 16 only three percent a year when the industry, 17 in general, was getting about four percent 18 because the economy was booming, so we 19 entered that 2007 negotiations with the labor 20 agreement feeling that they had been 21 shortchanged in the last three years, but 22 still we negotiated that four percent. The 23 agreement that was on the table was a 24 three -and -a -half, three -and -a -half, 25 three -and -a -half, or this four percent, 0 Page 7 98869 msd heading 09 07 11 8 1 which, on the surface, appeared to be four 2 percent, which it was, but at the same time 3 there was other concessions that went into 4 that. In 2008, '09 and -10, to get that four 5 percent, four percent, four percent, we knew 6 we were looking and forecasting the needs of 7 the District because our labor force had an 8 average tenure of over 20 years, and we 9 anticipated a lot of retirements in the 10 coming years. we knew we had a lot of labor 11 turnover, and when we negotiated that four 12 percent, it came at the cost of a few other 13 concessions that we, one, froze the hiring 14 salary through new employees. In the new 15 schedule, there used to be only three steps. 16 That's when you hired in and six months later 17 you got a raise. One year after that you 18 became top of the scale, so a year and a half 19 you got hired in and became top of the scale. 20 with the new agreement with the four 21 percents, we froze the starting salary, and 22 that's since we added three more steps, so 23 when the new hire comes in, they come in at 24 the bottom of the scale, and at the end of 25 the three years, we take them four -and -a -half 0 Page 8 98869 msd heading 09 07 11 9 1 years to come in at step one. Six months 2 later, step two, and then every year after 3 that step three, four, five, and six, so we 4 went from having three steps to six steps to 5 that agreement, so even though we have four 6 percent, with the turnover, the new hires are 7 taking longer to climb the scale and starting 8 at a lower salary. If you looked at our 9 turnover, that average salary increase came 10 to about more like 3.4 percent because it 11 takes longer to come up through the scale. 12 Additionally, on the A schedule 13 and c schedule, we froze the salary ranges, 14 so even though we had four percent through 15 the pool negotiated there, the top of the 16 salary range was frozen, so if you hit the 17 top of your scale, you would not get a raise. 18 So we froze, you know, while it appears on 19 the surface, at a four percent salary 20 agreements, like I said, there were changes 21 and went in and mitigated the effects of 22 those salary increases, so we went 3.4 cost 23 of the District, and the B schedule and the A 24 and the c, we had frozen salary ranges as 25 well, so you could move through the range, Page 9 98869 msd heading 09 07 11 10 1 but if you hit the top, you did not get a 2 raise. 3 Additionally, what's not reflected 4 in there is, like I said, all salary 5 increases also are merit -based, so if you get 6 a B schedule, it's not automatic. You have 7 to be proficient overall to get a salary 8 increase, and the same in A schedule and C 9 schedule, so if you have a "needs 10 improvement" overall on your performance 11 review, you did not qualify for a raise, and 12 additionally, on c and A, depending on how 13 well you performed, if you exceeded 14 expectations, you could get the four percent, 15 but if you just met the expectations, it 16 wasn't necessarily a four percent. Same as C 17 schedule as well, so while we heard the 18 discussion it was a four percent 19 across -the --board increase, we really didn't 20 have that effect on the District. 21 Additionally, now in 2008, 2009, 22 2010, or actually it was 2007, 2008, 2009, 23 the raises were given. In 2007, of course, 24 the economy was booming, and that raise was 25 given as negotiated and in 2008, June of Page 10 98869 msd heading 09 07 11 11 1 2008, we gave that raise as well. You have 2 to remember, the market didn't crash until 3 more like September of 2008, so we gave the 4 raises at the start of the fiscal year in 5 July, so in July, everything was going well, 6 and we gave that four percent raise again in 7 2008. In 2009, clearly, the economy had 8 tanked, and we were having some of the issues 9 that were going on in society. we did have 10 discussions on that that year on whether it 11 was right to give that four percent raise 12 that year. we had discussions with the 13 Board. we had the third year of the 14 agreement in place and had a lot of 15 discussion, should we trim it back, like z 16 say, as the Board has the right to do, but 17 ultimately, it felt like let's honor the 18 agreement because we were going into a year 19 with the new labor agreement that was going 20 to be negotiated in 2010, so we felt like, if 21 we gave a four percent this year, we will go 22 into the negotiations mandating that year one 23 and that new negotiations 2010, `11, `12 had 24 to be a zero percent. Additionally, so 25 that's what we did. we honored the 2009 Page 11 98869 msd heading 09 07 11 12 1 salary increase, even though the economy was 2 bad, knowing that we would take a hard stance 3 in the labor agreement going into 2010 when 4 we had the salary freeze, so we had zero 5 percent raise increase that year. 6 Additionally, we talked about that 7 2010, -11, `12, we got that part of that 8 negotiation also changing the pension plans, 9 so we made some big changes for the District 10 for the long-term liability that year. we 11 got the concession zero percent that first 12 year, along with the change in the pension 13 plan from that defined benefit, defined 14 contribution. 15 so that's just a little more 16 explanation into what it appeared to be, a 17 little bit behind that. 18 Q. John, does the Consent Decree contain 19 a component of compliance for operations and 20 maintenance? 21 A. Yeah. The operating budget, as we go 22 forward, obviously, if you saw the Consent 23 Decree, there's large components of section G 24 there under the CMOM sections for operations 25 and maintenance of our collection systems and Page 12 98869 msd heading 09 07 11 13 1 pump stations, so clearly, there's a lot of 2 requirements there. It requires a lot of 3 resources, but those resources are budgeted 4 in the operations budget. The operations 5 budget was factored around the work required 6 in the Consent Decree. Like I said, it was a 7 large component of that, so to meet those 8 requirements. 9 Q. And that work that is required in the 10 Consent Decree, are the requirements laid out 11 in the Consent Decree, or will we get a 12 clearer vision in the future of what those 13 requirements will be? 14 A. In the consent Decree, those 15 requirements are defined. They don't change. 16 There is one change 10 years down the road, 17 but it doesn't matter if it's year one, two, 18 three, or four. The requirements are the 19 same. I have to clean the sewer, have to 20 clean the clay pipes on a five-year cycle, 21 other clay pipes on a 10 -year cycle, have to 22 inspect the manholes, and all the different 23 requirements, and those don't change from 24 year to year. It is as clear now as they 25 will be in year two, three, four, or five Page 13 98869 msd heading 09 07 11 14 1 ongoing for 23 years in the Consent Decree. 2 Q. Thank you. I have no further 3 questions. 4 MR. CHAIRMAN: Mr. Arnold, do you 5 have questions for the current witness? 6 MR. ARNOLD: I do, Mr. Chairman. 7 MR. CHAIRMAN: Please proceed. 8 QUESTIONING BY MR. ARNOLD: 9 Q. Mr. Sprague, were you present 10 yesterday when Ms. Zimmerman responded to my 11 questions about compensation? 12 A. Yes, I was. 13 Q. Did you hear my questions and hear 14 her answers? 15 A. Yes, I did. 16 Q. Is it your position that, under the 17 memorandum of the agreement the Board of 18 Trustees has no right to adjust compensation 19 of its employees during the term of the 20 agreement? 21 A. Could you restate that? I'm not sure 22 I understand. No. I believe the MLU allows 23 them the discretion to honor the agreement or 24 not. 25 Q. My notes are inexact. I'm a terrible Page 14 98869 msd heading 09 07 11 15 1 note taker when I'm examining a witness, but 2 my notes and my recollection is that 3 ms. zimmerman did not testify that there was 4 a four percent across-the-board increase. 5 what she testified to was that there was a 6 four percent increase in compensation during 7 the period which we were discussing. Is that 8 your recollection? 9 A. I don't know the answer to that. My 10 recollection isn't that clear. 11 Q. You mentioned the steps which the 12 Board of Trustees has taken with respect to 13 the pension plan. Have you had an 14 opportunity to examine the -- and I don't 15 have them here, ms. Myers, the exhibits 16 supplied by the District in its direct 17 testimony that there is virtually no change 18 in cost of the contributed pension going 19 forward, as opposed to the deferred plan 20 today? 21 A. I did look at documents provided by 22 the District. My recollection was there was 23 a lot of difference in the short term, but as 24 time went on, the new contribution plan saved 25 money. Page 15 98869 msd heading 09 07 11 16 1 Q. Well, unfortunately, the material 2 available to the Commission only runs until 3 2016, and there did not appear to be any 4 significant change in cost of the pension 5 comparing old and new. Was your 6 information -- did your information contain 7 years beyond 2016? 8 A. I don't know the answer to that. I 9 just remember looking at some graphs. 10 Q. Mr. Sprague, may we turn to your 11 surrebuttal testimony, page five. 12 A. All right. 13 Q. Begin line two at the right-hand 14 margin. Could you read the next two 15 sentences? 16 A. Starting at the end of line two did 17 you say? 18 Q. Yes, sir. 19 A. "In 2007, the District analyzed the 20 cost of contracting continued full metering 21 work, and decided to in -source this work. 22 This move was done successfully and resulted 23 in $2.5 million savings annually versus 24 contracted work." 25 Q. Thank you. When you say "in -source" 0 Page 16 98869 msd heading 09 07 11 17 1 that means you brought it in house as 2 distinguished from contracting it? 3 A. That's correct. 4 Q. And on what basis have you concluded 5 that the $2.5 million savings is annual? 6 A. As I recall, the contracted work, the 7 contract for flow meter use was, 8 approximately, $5 million a year, and we set 9 up a separate division within operations for 10 the flow meter group, so it had its own 11 budget, and that budget is on the order of $2 12 million a year, which would net, 13 approximately, $3 million, but we had a 14 little bit of a transition where we were 15 paying the flow meter company, transitioning 16 out some of the data analysis work, and I 17 believe that was on the order of $500,000 18 this coming year, so based on the $500,000 19 continued services we were getting from them, 20 and the $2 million budget, versus the old 21 budget of $5 million, it deemed $2.5 million 22 savings. 23 Q. And that is for each year from 2007 24 to date? 25 A. No. I wouldn't say that's each year. 0 Page 17 98869 msd heading 09 07 11 18 1 That's definitely the savings now. 2007, 2 2008 were transition years where we started 3 bringing the flow metering in house, and the 4 savings contracted a million of that in 2007, 5 so I don't have the exact numbers, but I 6 would say that ranged from about $2 million 7 in 2007 to two -and -a -half right now. 8 Q. Thank you. Mr. Chairman, I have no 9 further questions. 10 MR. CHAIRMAN: Thank you, 11 Mr. Arnold. Does any member of the Rate 12 Commission have questions for this witness? 13 QUESTIONING BY MR. KOENEN: 14 Q. Good morning. You probably are 15 already working on the FY -13 budget. Do you 16 anticipate your labor costs will be higher in 17 FY `13 than this year? 18 A. I'm not working on the FY -13 budget. 19 we will start developing that probably around 20 October, November. However, I don't 21 anticipate -- there might be a few positions 22 I might ask for, but I don't anticipate the 23 budget being significantly different for 24 labor. 25 Q. And when are your next round of major U Page 18 98869 msd heading 09 07 11 19 1 labor negotiations coming up? 2 A. we have one more year in the labor 3 agreement, so it will start spring of -- is 4 that next year already? Let me think this 5 through. Next spring we will start 6 negotiations, spring of 2012. 7 Q. So there will be an adjusted labor 8 agreement during the course of the rate 9 increase we are looking at? 10 A. Yes. 11 Q. Thank you, Mr. Chairman. 12 MR. CHAIRMAN: Additional 13 questions? Mr. Brockmann. 14 QUESTIONING BY MR. BROCKMANN: 15 Q. Following up yesterday -- correct me 16 if I'm wrong -- but we heard that the 17 agreements with the labor do allow for no 18 increases. Is that correct? Is that what we 19 heard yesterday? 20 A. I don't know, exactly. I can't 21 recall exactly what you heard. Labor 22 agreements are three years at a time. we 23 make contracts, but there's provision in the 24 MLU's that I think the Board has more 25 discretion of approving that. Page 19 98869 msd heading 09 07 11 20 1 Q. So it is in the contract that the 2 Board has the discretion, but then, to use 3 your words here this morning, you said the 4 -09 discussions held with the Board, 5 apparently, there's an implication when you 6 negotiate these contracts and what the 7 expected increases are over I assume that 8 three-year period, and you used the words 9 "honored the negotiated increase." Is that 10 correct? 11 A. That's correct. 12 MR. CHAIRMAN: Thank you. 13 Mr. Stein. 14 QUESTIONING BY MR. STEIN: 15 Q. Mr. Sprague, in the last rate case 16 when we approved, and the trustee's approved 17 a storm water rate, which was subsequently 18 challenged in court, but before the challenge 19 occurred, did you add staff for the storm 20 water program? 21 A. Yes, we did. 22 Q. what has happened to those staff 23 positions now that the storm water rate is 24 being held in abeyance? 25 A. This will be a little bit more Page 20 0 98869 msd heading 09 07 11 1 lengthy, but originally, the storm water case 2 increased my position accounts. Around 40 or 3 50 positions were approved with the storm 4 water rates. Because of the uncertainty, 5 once the lawsuit was challenged, we never 6 finished hiring all those folks. we did hire 7 a number of staff to increase storm water 8 service. Because of the lawsuit, we stopped 9 hiring staff because of the uncertainty, so I 10 never hired the last 15 or 20 people. I 11 think I ended up with probably an increase of 12 staff, give or take, of around 30 people. 13 once we lost the storm water lawsuit, we 14 reduced that -- hiring freeze. If you recall 15 some of the testimony in 2010, since that 16 time, through attrition, or through a lot of 17 allowing people in the collection department 18 to move over into mechanics and treatment 19 plant training, so we lost people. Through 20 attrition, in essence, we lost another 20 21 some odd of those positions, so for the most 22 part, I ended up losing most of those folks 23 through attrition or not hiring them in the 24 first place. with the Consent Decree 25 negotiations, there's a mix of forces, and Page 21 21 98869 msd heading 09 07 11 22 1 the few others were left were absorbed more 2 for the cleaning program to meet the Consent 3 Decree requirements, so at the end of last 4 year, I bought three new TV trucks to meet 5 the requirements of CCTV, and some of those 6 mix of the staff was adjusted a few extra 7 bodies to meet CMOM requirements for the 8 upcoming requirements for the upcoming 9 Consent Decree. 10 Q. So my arithmetic may be wrong. You 11 still have 15 people who were hired to work 12 on storm water who has not been reassigned to 13 those positions? 14 A. No. And I don't know the exact 15 number. You bring up a valid point, but my 16 estimate would be it would be under 10, be 10 17 or under because I know that I am down over 18 40 positions. That's a good point. A couple 19 things went on. The other thing we did was 20 transition work from outside to inside. I 21 forgot. So I would probably put -- that 10 22 is probably actually zero. So I have lost 40 23 positions over the course of the last 18 24 months, and additionally, I had forgotten 25 this point, but when I hired those CCTV Page 22 98869 msd heading 09 07 11 23 1 trucks, part of what we done in the past is 2 we contracted CCTV work, and some I and I 3 work, inflow and infiltration, so I took six 4 crew members and made three I and I 5 investigation crews, so the six of those 6 people were switched over to doing i and I 7 reports, which we are transitioning in house 8 from the contracted side of the work. 9 Additionally, those CCTV trucks 10 that I bought was taken away to support the 11 CMOM, but also supposed to in -source some of 12 that CCTV work that is being contracted, as 13 well, through other companies, so between the 14 CCTV work and the i and I work, we were 15 in -sourcing as well. That takes up those 16 extra bodies. 17 Q. Just one other question. Not all of 18 us are up to speed on all the technical 19 abbreviations. Can you tell us what "CMOM" 20 stands for? 21 A. I apologize. CMOM stands for 22 capacity management operations and 23 maintenance, so really the crux of it is that 24 you should maximize the capacity of your 25 system through maintaining, through proper Page 23 98869 msd heading 09 07 11 24 1 operations and maintenance, so things like 2 cleaning, TV, and inspecting and rehabbing it 3 to make sure that the capacity is maximized, 4 and you are keeping it in proper working 5 order, so you maximize the ability to collect 6 and minimize overflows, so capacity 7 management of operations and management. 8 CCTV, obviously, that stands for closed 9 circuit TV work, so we have robotic cameras 10 through the sewers and inspect the condition 11 of the sewers. we tape that, and then based 12 on the condition, we can go and do the 13 appropriate rehab or cleaning or repair work 14 that's necessary. 15 Q. Thank you. 16 MR. CHAIRMAN: Any further 17 questions for the Rate commission? Mr. 18 Tomazi. 19 QUESTIONING BY MR. TOMAZI: 20 Q. Mr. Sprague, a couple of things. In 21 documents that I have read regarding 22 operations, the disinfectant procedure comes 23 up on several occasions. The first question 24 is, is that a regulatory mandated 25 application? Page 24 98869 msd heading 09 07 11 25 1 A. Yes. 2 Q. And how long has that been into 3 effect? Two years or twenty-two years? 4 A. No. It came in with our last set of 5 permits that the plants gave us. The last 6 time they were doing that was somewhere a few 7 years back, and z don't know the exact year 8 that they came into requirement, but a few 9 years back they gave you ample time for 10 planning, but in the last, say, four years 11 that has come about as a mandate, and the 12 lower Meramec plant has to be in place by 13 March of 2012, the other plants by December 14 of 2013. 15 Q. Does this affect some or all of your 16 treatment plants? 17 A. Yes. Grand Lay (phonetic) already 18 had disinfections, so Grand Lay and Fenton 19 plants and Meramec already had disinfection, 20 so of the seven plants, five are getting 21 disinfection added. 22 Q. Can you give us a rough approximation 23 of what just the disinfectant procedure alone 24 costs a year or how its grown over the last 25 four years? You know, is this a $10,000 a 0 Page 25 98869 msd heading 09 07 11 26 1 year item or is this a $500,000 a year item? 2 A. It's higher than both those numbers. 3 if you look at the additional 0 and m listed 4 in our submittal, that was 1 believe table 3 5 dash 11 of our rate proposal, line 17 shows 6 additional 0 and M. Predominantly, that 7 additional 0 and m was all to cover the cost 8 of disinfection, and you will see that, over 9 the course of the Rate commission, that jumps 10 up into the $7 million a year range. Not all 11 of that is the direct cost of disinfection, 12 meaning -- disinfection takes two forms, 13 either uv disinfection, ultraviolet rays 14 using tubes with ultraviolet emissions that 15 disinfect it, and then using the high 16 electricity use and then a lot of maintenance 17 for the bulbs and replacing the bulbs, so all 18 that cost is there. The other way, 19 basically, is chlorine products, sodium 20 hydrochloride. That's going to take large 21 tanks and disinfection pumps and feeding the 22 chlorine in, so large chemical costs in some 23 of those applications, so that cost of 24 maintaining the systems, the electricity, the 25 chemicals, the additional bonding that is Page 26 98869 msd heading 09 07 11 27 1 needed to maintain those would be in the 2 order of $7 million a year. 3 Q. $7 million a year? 4 A. Once it's in full effect, yes. 5 Q. Are there any other comparable kinds 6 of regulations that have come along in the 7 last four years that have affected your 8 operations of maintenance anywhere near that 9 level? 10 A. Not that I can recall, no. 11 Q. Thank you. 12 MR. CHAIRMAN: Any other questions 13 by other Rate Commissioners? I will ask one 14 or two questions, Mr. Sprague. 15 QUESTIONING BY MR. CHAIRMAN: 16 Q. Since we are into the topic of the 17 percentage increases, four percent is not 18 four percent, right? Four percent is 3.4 19 percent? 20 A. Obviously, four percent is on the top 21 of the scales, but with the turnover, the 22 calculated role cost was probably in the 23 order of 3.4. 24 Q. So that was the actual impact of cost 25 to the District? Page 27 98869 msd heading 09 07 11 28 1 A. Over the long run. 2 Q. okay. 3 A. Probably in the short term it wasn't, 4 but as you turn over staff, the lower 5 starting salary, the longer steps, the freeze 6 are higher end of our salaries. In the long 7 term, that limits the earning potential of 8 employees, limited the pension potential and 9 is based for the rest of us. The B schedule 10 is spread out in how long it takes to get to 11 the top of the scale. 12 Q. so that includes both the employees 13 who are part of the collective bargaining 14 agreement and the employees who are not part 15 of the collective bargaining agreement? 16 A. That's correct. 17 Q. what happened to the people who are 18 not part of the collective bargaining 19 agreement? 20 A. whether you are part of it or not, 21 the same rules apply. They apply across the 22 District, whether you belong to the union or 23 not. 24 Q. As I recall, the current rate case 25 has a three percent per year -- Page 28 98869 msd heading 09 07 11 29 1 A. The current rate case was zero, 2 two -and -a -half, and three for 2010, -11, and 3 '12. 4 Q. You think that's reflective of the 5 era we are in? 6 A. Well, I can't project the future 7 year. The zero is definitely appropriate for 8 2010. Inflation was 3.6 percent this past 9 year. Certainly, the economy continues to 10 struggle with the gas prices and everything 11 else. Going to two -and -a -half, I don't feel 12 it's out of line. Going forward, it's hard 13 to say. It depends on what the economy does. 14 Q. what can we expect that real number 15 to be? If four percent was 3.4, what do we 16 think three percent really is? 17 A. There is no changes in the scales, no 18 changes in the way you step through the 19 progression. on this one, the concession was 20 zero percent in 2010, and, obviously, a 21 change in our pension plan going forward to 22 make our costs more predictable and more 23 contained, but those costs would be zero, 24 two -and -a -half, and three. 25 MR. CHAIRMAN: Thank you. Any Page 29 98869 msd heading 09 07 11 30 1 Rate Commissioners have any further 2 questions? 3 QUESTIONING BY MR. BROCKMANN: 4 Q. I have one more. Just to clarify, 5 yesterday you said that the current pension 6 plans for existing employees stay in place 7 and the defined benefit plans are only for 8 new employees. Is that correct? 9 A. That's correct. 10 Q. And have you looked at what would 11 happen if you froze it even for existing 12 employees and put everybody on the new 13 defined benefit? 14 A. No. 15 Q. Thank you. 16 MR. CHAIRMAN: Let me just clarify. 17 The new plan is a defined contribution plan, 18 correct? 19 MR. SPRAGUE: That's correct. 20 Took effect January -- 21 MR. CHAIRMAN: That's fine. I 22 just wanted to make sure. Mr. Arnold. 23 FURTHER QUESTIONING BY MR. ARNOLD: 24 Q. Mr. Chairman, in hopes that we need 25 not stretch this out too long, Mr. Sprague, 0 Page 30 98869 msd heading 09 07 11 31 1 have you had an opportunity to review the 2 response which the District made to the Rate 3 Commission's third discovery request? 4 MS. MYERS: What exhibit number is 5 that? 6 MR. ARNOLD: 62-A. 7 MS. MYERS: Hang on just a minute. 8 MR. ARNOLD: While you are 9 looking, pick up MSD 1. 10 MS. MYERS: What was the other 11 exhibit, John? 12 MR. CHAIRMAN: MSD-1. 13 MR. SPRAGUE: would you repeat 14 your question? 15 MR. ARNOLD: 16 Q. Have you had an opportunity to review 17 the responses which the District made to our 18 request? 19 A. i have looked through them, yes. 20 Q. May I call your attention to page 11, 21 the top of the page, question four, Roman 22 numeral 1. And if I may read the historical 23 annual percentage increases 2006 through 24 2011, and then I will skip to wages, salaries 25 and overtime. And I would ask you to look at 0 Page 31 98869 msd heading 09 07 11 32 1 FY `06, -07, `08, -09, -10. Is it fair to 2 say that those numbers are larger than any of 3 the numbers which you have just testified? 4 A. That's fair to say. 5 Q. Now, may I call your attention to 6 page -- I guess it's two dash three MSD-l. 7 Table -- it's not table 23. It's page two 8 dash three. 9 A. All right. 10 Q. And by way of identification, at the 11 top of the page, it has on the right-hand 12 side a cost impact chart. we are on the same 13 page? 14 A. Yes. 15 Q. All right. And under the chart and 16 under the narrative to the left, the 17 following sentence appears, "The escalation 18 factors used in the projections shown in 19 table two dash one are as follows." And then 20 would you read to me what wages, salaries, 21 and overtime is? 22 A. Wages, salaries, and overtime 2011 23 through 2016, three percent. 24 Q. Thank you, Mr. Sprague. 25 MR. CHAIRMAN: Further questions 0 Page 32 98869 msd heading 09 07 11 33 1 for the witness at this time? Thank you, 2 Mr. Sprague. 3 MS. MYERS: The District's next 4 witness is Jeff Theerman, MSD Executive 5 Director. 6 Jeff Theerman, having been duly 7 sworn, testified as follows: 8 MR. CHAIRMAN: Thank you. Does any 9 member of the Rate commission have questions 10 for the witness at this time? 11 Hearing none, Mr. Kindschuh, do 12 you have questions for the witness? 13 MR. KINDSCHUH: Yes, we do, 14 Mr. Chairman. 15 MR. CHAIRMAN: Please proceed on 16 behalf of MIEC and Covidien. 17 QUESTIONING BY MR. KINDSCHUH: 18 Q. Good morning, Mr. Theerman. 19 A. Goo morning. 20 Q. If I could ask you to turn to page 21 three of your surrebuttal testimony, I have a 22 few questions regarding question No. 2. Are 23 you there? 24 A. I am there. 25 Q. Great. The question was, "Are action 0 Page 33 98869 msd heading 09 07 11 34 1 items identified in the Consent Decree the 2 only costs reflected in this District's rate 3 proposal?" under line six, you answer "No." 4 could = ask you to read the sentence that 5 begins in line eight into the record for this 6 question? 7 A. "Required improvements in wastewater 8 treatment plant performance and capacity are 9 not, specifically, described in the Consent 10 Decree, but will be enforced under 11 environmental regulations." 12 Q. could you please list all of the 13 required improvements under the wastewater 14 treatment plant performance and capacity that 15 are funded through the proposed rate 16 increase, but are not listed in the consent 17 Decree? 18 A. That refers to wastewater treatment 19 plant disinfection. You have to add the 20 regulation requiring the District to complete 21 the construction of disinfection facilities 22 are at five out of seven treatment plants, 23 and for all, but one, that is a deadline of 24 December 31, 2013, and that's what John 25 Sprague was testifying to a minute ago. Page 34 98869 msd heading 09 07 11 35 1 Q. okay. And what are the specific costs 2 associated with this required improvement of 3 wastewater treatment plant performance 4 capacity? 5 A. That's identified in the rate 6 proposal as o and M. I don't have the costs 7 off the top of my head, but we have 8 identified our estimate of those operating 9 costs, and John testified to that earlier. 10 Q. Are there any additional costs that 11 Mr. Sprague perhaps overlooked or forgot in 12 his testimony? 13 A. Any additional costs of -- 14 Q. Regarding the wastewater treatment 15 plant. 16 A. well, we have done our best to 17 identify what we believe the operating costs 18 would be of the treatment plant or rate 19 proposal in the various plants. we don't 20 have perfect clarity about future regulatory 21 requirements. I mean, that's never the case. 22 Just as in the last rate proposal we didn't 23 understand the disinfection that would be 24 required. This proposal, there may be 25 something that comes down the pike that we Page 35 98869 msd heading 09 07 11 36 1 haven't identified, but we have attempted to 2 identify the operating costs of the plants in 3 o and m or additional o and m in the rate 4 proposal. 5 Q. Okay. And those costs are found in 6 Exhibit 1 of the initial rate proposal? 7 A. That's correct. 8 Q. Thank you. The next line of 9 questions involves some testimony on page 10 five, specifically, lines 15 through 18. 11 Mr. Theerman, when you have located that, if 12 I could ask you to read the sentence 13 beginning with "However" from lines 15 14 through 18 into the record. 15 A. "However, putting too fine a point on 16 funding the Consent Decree requires 17 initiatives, including internal operation, 18 maintenance activities. It carries the risk 19 of under thumbing the programs that will get 20 the work done and thereby subjecting the 21 District to significant stipulated 22 penalties." 23 Q. what is the extra cushion that you 24 were recommending adding to MSD's rates in 25 this proposal to fund the Consent Decree's Page 36 98869 msd heading 09 07 11 37 1 required initiatives? 2 A. I am not abdicating any additional 3 cushion. We made a rate proposal we believe 4 will satisfy the requirements of the Consent 5 Decree. 6 Q. Does MSD's proposal build in a 7 cushion for 0 and M activities? 8 A. we have made what we believe to be 9 reasonable assumptions, and I propose the 10 rate case will, in our minds, satisfy the 11 requirements of the Consent Decree, but we 12 haven't built in a cushion, if you will. My 13 point in that statement was that not being 14 able to hit targets carries significant 15 penalties, and that's identified in the 16 Consent Decree in paragraph 91-A, B, C, D, 17 and E, and I believe it needs pointed out the 18 stipulated penalties are constructed in a way 19 that, as long as the District stays on 20 schedule, we face no penalties, but if we get 21 off schedule, A, we not only will be 22 penalized for missing schedule, but we will 23 be penalized for overflows that can occur 24 after that point, and the schedule in the 25 Consent Decree details all that, so my point Page 37 98869 msd heading 09 07 11 38 1 in that statement has to do with trimming 2 what our rate proposal was and being 3 thoughtful about that because of the 4 implications of the Consent Decree stipulated 5 penalties. 6 Q. You had mentioned stipulated 7 penalties. Is MSD building in any cushion 8 because of the threat of penalties in this 9 Consent Decree? 10 A. we crafted a program that we believe 11 we can satisfy without incurring stipulated 12 penalties. our goal is not to have 13 stipulated penalties. what we are pointing 14 out, though, is the schedule is critical to 15 avoiding stipulated penalties. 16 Q. So MSD is not building in any cushion 17 to deal with the threat of stipulated 18 penalties? 19 A. No, sir. No, we are not. 20 Q. Thank you. Is it possible that more 21 aggressive cost management of controllable 22 costs than what's reflected in the rate model 23 could produce more funds to meet those 24 uncontrollable cost increases? 25 A. would you repeat that? Page 38 98869 msd heading 09 07 11 39 1 (At which point, the prior 2 question was read by the court reporter.) 3 MR. THEERMAN: which 4 uncontrollable cost increases are we speaking 5 of? 6 MR. KINDSCHUH CONTINUES: 7 Q. I'm thinking more holistically, 8 Mr. Theerman. 9 A. Sure. Can we manage costs, sure and 10 the District has a long history of managing 11 costs. we have been managing costs 12 aggressively for over 10 years. The number 13 of people that worked for MSD in 1999 was 990 14 employees. we are below that today. since 15 that time, we have cut our management team by 16 about 50 percent. Since that time, we have 17 cut our number of senior leaderships by about 18 50 percent. we have a long history of trying 19 to drive for the most efficient operation as 20 we can. Is there more to do? Sure. we can 21 continue to do that. John spoke about some 22 of that earlier in his testimony trying to 23 in -source things we can be more cost 24 effective about than others. And we are not 25 stopping, so I think the District, over the Page 39 98869 msd heading 09 07 11 40 1 last 10 years, is an example of trying to do 2 that, trying to drive for lower costs in 3 management. My team understands that, for 4 example, a new position isn't an easy thing 5 to get out of Jeff Theerman. It takes a 6 business case development. That's something 7 you don't see very much. The business case 8 has to show the pluses and minuses and what 9 the dollar ramifications are of any new 10 position, additional position, so cost 11 containment, better efficiencies, better 12 management isn't anything new at MSD. 13 Q. Thank you very much. we have no 14 further questions. 15 MR. CHAIRMAN: Thank you, 16 Mr. Kindschuh. Ms. Langeneckert, do you have 17 questions of the witness? 18 ms. LANGENECKERT: We do not. 19 MR. CHAIRMAN: Mr. Mueller? 20 MR. MUELLER: Yes, I do. 21 MR. CHAIRMAN: Please proceed, Mr. 22 Mueller. 23 QUESTIONING BY MR. MUELLER: 24 Q. Good morning, Mr. Theerman. 25 A. Good morning. 0 Page 40 98869 msd heading 09 07 11 41 1 Q. I haven't said much in these 2 proceedings. 1 would like to take some time 3 with you now to go over some aspects of the 4 Consent Decree which I have read, and I'm 5 doing this for my own clarification and 6 hopefully for the clarification of others. 7 on page three of 93 of the Consent 8 Decree. 9 A. seems like I have it memorized, but I 10 don't. 11 Q. I'm sure you have got this section 12 memorized. "whereas MSD has spent $2.1 13 billion over the last 20 years in upgrading 14 its combined separate sewer system, 15 including, but not limited to, eliminating 16 constructed sanitary sewer overflows, which 17 MSD inherited or constructed prior to the 18 1990's in an effort to prevent building 19 backups." In view of the fact that MSD has 20 spent $2.1 billion in attempting to eliminate 21 the combined and separate sewer system 22 overflows, what, in your mind, was the basis 23 for EPA'S litigation against MSD if, in fact, 24 in the Consent Decree they admit that you 25 were already attempting to do this, Page 41 98869 msd heading 09 07 11 42 1 accomplished and solve this problem over the 2 past 20 years with the expenditure of $2.1 3 billion? 4 A. Well, I don't pretend to understand 5 all of the inner workings of EPA, but my 6 belief is that EPA has an enforcement 7 strategy that's national with respect to 8 sso's and Cso compliance, and their 9 perspective is that all major wastewater 10 utilities need to be under court enforceable 11 compliance schedules that take the form of 12 Consent Decree, so the fact that we have 13 spent $2.1 billion, eliminated over 300 14 overflows was a good fact, but not the issue 15 with respect to the complaint that was filed 16 against us. The complaint was filed against 17 us because of the remaining sso's and the 18 need to execute a long-term control plan and 19 the need, in their minds, and certainly, an 20 important fact was the prevalence of chronic 21 basement backups, so your good deeds in the 22 past don't carry very far. There is still 23 work to be done, in their minds. 24 Q. was it due to the fact that you 25 weren't working fast enough for them? I Page 42 98869 msd heading 09 07 11 43 1 mean, it seems to me that the work was 2 underway, that you were attempting to satisfy 3 and comply. I don't understand why this 4 necessitated a lawsuit. Maybe a speedup 5 schedule, maybe some discussions along those 6 lines, but for the life of me, I don't 7 understand why we had to go to the level of 8 this Consent Decree, which is an unbelievably 9 burdensome and heavily penalized document for 10 the District, and for, ultimately, to rate 11 payers. 12 A. I submit that your statement isn't 13 anything that hasn't been said in 25 other 14 municipalities that have entered on Consent 15 Decrees for the very same things. 16 Nationally, the industry is advocating that 17 this enforcement strategy is flawed. There 18 are better ways to get at this. I certainly 19 have been a part of that speaking with EPA 20 and through the National Association of Clean 21 water trying to bring a better approach than 22 simply suing all the cities into submission. 23 That being the case, at this point, NOKWA 24 (phonetic), the National League of Cities, 25 u.s. Conference of mayors, in spite of their 0 Page 43 98869 msd heading 09 07 11 44 1 efforts, have not changed the approach that 2 EPA and DOJ are taking. Is it not being done 3 fast enough? I think, in the minds of the 4 regulatory agency, the clean water Act has 5 been around a long time and wastewater 6 utilities have historically underfunded their 7 programs and have not charged what it will 8 take to provide services, and that's 9 certainly the case in St. Louis, and the 10 problems we are talking about, to a 11 significant degree, are about 0 and m and 12 system rehabilitation, and so, in their 13 minds, yes, it's taking too long. It needs 14 to be done faster. It needs to be done with 15 an enforceable schedule. I will tell you 16 that one of the difficulties we had for four 17 years of negotiating was our rates. $28 a 18 month, it was hard to make a case that we 19 were doing everything we could. A lot pay 20 significantly more. 21 Q. Thank you. on that same paragraph, 22 it says that MSD's work to eliminate all 23 overflow points is continuing with funding 24 from $775 million in revenue bonds in the 25 first phase of a multibillion dollar capital 0 Page 44 98869 msd heading 09 07 11 45 1 improvement program. Is that something that 2 is in place now or is that something that we 3 are talking about coming in place, the $775 4 million? It says, "The work is continuing." 5 it sounds like that money is already in 6 place. Are those bonds that have been sold 7 or is that money that's coming in from rate 8 increases in the past? what is the status of 9 that? I don't understand. 10 A. That refers to two bond 11 authorizations the District was able to get 12 the voters to agree to, and those are 13 actually proposals that went through this 14 Rate commission. 2004 we got approval for 15 $500 million of revenue bonds and executed 16 all those bonds. Those have built some of 17 the improvements that are referred to in that 18 $2.1 billion figure. In 2008, we had another 19 rate case involved $275 million in revenue 20 bonds. Not all of those authorized bonds 21 have been sold, yet, but they will be over 22 the coming year, so that is referring to 23 really the past history of the District's 24 revenue bond initiatives. 25 Q. so this is a further expression in Page 45 98869 msd heading 09 07 11 46 1 this Consent Decree of your ongoing work to 2 comply with EPA regulations? 3 A. Yeah. we thought it was important 4 for -- the "whereas" section of the decree 5 will at least tell part of our story that MSD 6 hasn't been sitting on its hands. It's been 7 trying to build improvements and avoid this 8 kind of enforcement action. A lot of work 9 has been done. A lot more needs to be done. 10 Q. Thank you. In the next paragraph, 11 the next "whereas," it indicates that "while 12 MSD relies primarily on user fees, it plans 13 to pursue a combination of additional 14 available funding sources, including, but not 15 limited, to state assistance, federal 16 assistance, bonding and other, any other 17 public and private financing to assist in 18 implementation of such improvements." Can 19 you outline for me any of these other 20 additional available funding sources that may 21 be tapped into to assist in paying for this 22 project? 23 A. well, certainly the SRF, the state 24 Revolving Loan Fund. That's a program MSD 25 has used extensively. we the major user of Page 46 98869 msd heading 09 07 11 47 1 SRF's in the state of Missouri, and we have 2 taken advantage of that program to the tune 3 of interest rates that are below two percent 4 for a number of loans. The problem is that 5 this is a program that is funded federally 6 through EPA's budget, and that is subject to 7 sort of the whims of the budget process of 8 D.C., so sometimes there's more money. 9 sometimes there's less. As all communities 10 in Missouri face the requirement for 11 upgrading facilities. There's more demand on 12 the SRF. So MSD will not reap as much of our 13 money as it has in the past. That's the 14 tangible example in that language. There are 15 a lot of initiatives today to try and fund 16 infrastructure improvements. This is not a 17 problem in St. Louis. There's -- we have 18 been working again in D.C. on a trust fund 19 for water infrastructure, and there is a 20 trust fund for transportation. There's a 21 trust fund for air traffic, our air travel. 22 water infrastructure, in our minds, needs a 23 trust fund of its own separately funded, 24 separate from the budget process that can 25 help fund loans and grants. we haven't been U Page 47 98869 msd heading 09 07 11 48 1 able to get that through congress, yet. 2 There's a lot of talk about infrastructure 3 bank to try and fund infrastructure 4 improvements. water needs to be a part of 5 that conversation. The early days of the 6 Clean water Act were loaded with grant money. 7 MSD took advantage of that grant money. we 8 maximized the use of that grant money. Those 9 days are gone. You are not going to see 10 grants out of the federal government. Brian 11 Hoelscher testified about the $11 million 12 grant we got for the lower Meramec plant. 13 That was an aberration. You don't see $11 14 million coming out of D.C. for wastewater 15 anymore. That was through a lot of work and 16 a lot of help from local legislators at the 17 time, so z mean there's a lot of efforts out 18 there to bolster that. The only real example 19 today is the SRF. 20 Q. Thank you. That same section goes on 21 to say that "The parties have agreed to a 22 program that MSD will implement to eliminate 23 or reduce its overflow sources on a schedule 24 that recognizes the financial capabilities of 25 its rate payers." will you tell me what that 0 Page 48 98869 msd heading 09 07 11 49 1 program is that recognizes the financial 2 capabilities of its rate payers? 3 A. well, when we get into negotiations 4 with EPA and X07 you often get embroiled in 5 conversations about affordability. And this 6 language was we done certainly like all the 7 language that's in this document. we 8 attempted to reach a settlement. This will 9 stretch the financial capabilities of many of 10 our customers in this program. But what we 11 tried to do was get a schedule that was long, 12 and allowed us the ability to run a program 13 we had been running. Largely, we have a 14 settlement here that is our program and keep 15 control of it, so that we can do our best to 16 reduce costs and control costs over time. 17 Now, the trouble with anything of this kind 18 of duration is it's all subject to 19 assumptions, and now there's all kinds of 20 things that could happen economically like 21 the last few years that really throw a wrench 22 into trying to deliver this program in 23 23 years, but, again, our starting point of 24 middle $20 dollar a month sewer bills didn't 25 afford us a real strong position to be able Page 49 98869 msd heading 09 07 11 1 to talk about affordability, at least in the 2 short term. 3 Q. So, basically, what we have here is 4 an unfunded mandate by the EPA that falls on 5 the rate payers, for the most part. There is 6 -- what you're telling me is that there are a 7 lot of plans and efforts to raise money on a 8 national level, but that, at this particular 9 time, there's nothing in the way of state or 10 federal assistance that's available in any 11 significant form to contribute to this 12 project? 13 A. That's true. All communities facing 14 this kind of mandate will fund their programs 15 99.9 percent locally. The efforts in D.C., 16 if they were, if all of our dreams were met 17 would still be 99.9 percent locally funded. 18 Q. Tomorrow night the President is going 19 to give a speech on infrastructure, at least 20 that's the rumor. will MSS be prepared to 21 participate in any opportunities that might 22 surface in those discussions and in that 23 presentation tomorrow? 24 A. Yes. I will give you an example. 25 There was a lot of talk about the stimulus Page 50 50 98869 msd heading 09 07 11 51 1 package, $800 billion. I can tell you that, 2 normally, "infrastructure" is a code word for 3 transportation. There's infrastructure, and 4 there's infrastructure, and some are more 5 equal than others, and out of $800 billion 6 there were $4 billion allotted to wastewater 7 in the nation. Missouri's cut of that was 8 $108 million dollars, so a lot of your 9 numbers that are thrown around nationally 10 don't turn into big numbers at home. MSD got 11 $3 million of grants and got about $8 million 12 of low interest loans out of the stimulus. 13 The gold ring for the stimulus wasn't 14 stimulus. It was the fact that all the other 15 communities in Missouri flocked to stimulus 16 and that freed up $100 million of SRF 17 low -interest loans that we took advantage of, 18 and at that time we were in a position to 19 tell the state of Missouri, "Don't let any of 20 this money leave the state. we can use it 21 all. we have projects shovel ready on the 22 shelf ready to go and we can use it all." 23 Now, our ability to execute contracts depends 24 on there being planning and being design, and 25 projects ready to go, and the amount of work 0 Page 51 98869 msd heading 09 07 11 52 1 we can do at any given time is subject to our 2 ability to have that work planned out and 3 ready to go. If Barrack obama tomorrow night 4 said there's another $800 billion of 5 infrastructure, St. Louis is in a position to 6 raise its hand and do a lot of work with it. 7 Q. Good. I hope that happens. On page 8 two -- 9 A. Of the Consent Decree? 10 Q. -- of the Consent Decree, the bottom 11 of the page it says, "whereas, on October 29, 12 2009, the EPA issued a determination that new 13 or revised water quality standards are needed 14 to protect for recreational uses for the 15 segment of the Mississippi River flowing from 16 river mile 189.2 to river mile 160.6, to 17 which MSD's CSO outfalls discharge." In the 18 midst of your negotiations with the EPA on 19 this Consent Decree, does this tell me that 20 the EPA unilaterally decided to change the 21 rules and to further impose requirements on 22 MSD with regard to this section of the 23 Mississippi River, and one other thing. 24 Maybe you can tell us what the current status 25 of this EPA determination is. I mean, is it 0 Page 52 98869 msd heading 09 07 11 53 1 in place or is it -- 2 A. okay. Let me give you the status 3 first and tell you how it fits into this 4 decree because the water quality 5 determination of the Mississippi River 6 presently doesn't impact us in this decree, 7 but what's going on in the Mississippi River 8 can trigger changes in this decree that are 9 significant. For six years, MSD has been 10 advocating that the Mississippi River and 11 these mile markers are north River Front 12 Park, north side of the chain of Rocks water 13 plant, down the Meramec River, so it's the 14 segment right at St. Louis, and for the last 15 six years, MSD has advocated that the correct 16 water standard in the Mississippi River is a 17 boating standard. The state of Missouri 18 ratified that to the clean water Commission 19 in 2005. It has been a boating standard 20 since that time. we performed scientific 21 analysis called use of Attainability 22 Analysis. Those are provisions in the Clean 23 water Act to help determine how water is 24 used, what it its uses are, what its uses can 25 be, and we have done that really continuously 0 Page 53 98869 msd heading 09 07 11 54 1 since that time. In 2009, the EPA issued a 2 directive to the state of Missouri that a 3 boating standard was inappropriate, and it 4 should be a swimming standard, and instructed 5 EPA to work through the development of water 6 quality standards protected as swimming for 7 that reach of the Mississippi River. we have 8 continued to provide additional information 9 to the state of Missouri to attempt to 10 demonstrate to them that they got it right, 11 that boating is the appropriate use of the 12 Mississippi. I won't go into a litany about 13 all the reasons, but the potential impact to 14 MSS because of the combined sewer overflows 15 on the Mississippi river is an additional $2 16 billion. we identified work in the 17 development of our long term control plan 18 that, as part of that, it's about $1.5 19 billion in the form of an additional tunnel 20 system to try to intercept these combined 21 sewer overflows, and in our public outreach 22 effort through the development of a long term 23 control plan, we heard a lot of the public, 24 help for the Mississippi River in a different 25 way, and that is to deal with SSO's, Cso's in Page 54 98869 msd heading 09 07 11 55 1 the central part of the city and the river 2 Des Peres, Mellon Creek, throughout the 3 county because every drop of water in 4 st. Louis ultimately gets in the Mississippi 5 River and do green infrastructure 6 improvements as detailed in the plan to try 7 to get at Mississippi River CSo's. That was 8 a much more cost-effective approach to try to 9 get to CSo's. The imposition of the swimming 10 standard on this reach of the Mississippi 11 River will bring back into the question the 12 development of a long-term control plan, and 13 there's language in here that if the water 14 quality standards in this reach change and 15 they are reflected in our operating permits, 16 MSD will have to redo its long-term control 17 plan reflecting that. what form that takes, 18 I can't tell you that. But this is an 19 ongoing issue. As we speak, the state of 20 Missouri is addressing this issue in 21 Jefferson city. we have people there right 22 now hearing what the outcome is. we think 23 it's going to stay a boating standard. That 24 probably isn't the end of the story. EPA may 25 not take that, accept that, and we may still Page 55 98869 msd heading 09 07 11 56 1 be talking about this, but the ramifications 2 of this are later in the decree, the 3 reopener, if you will, if these standards 4 change, and we have to go back to the drawing 5 board on a long-term control plan. 6 Q. So all of these discussions with 7 regard to funding and future planning, it 8 almost seems as though we are operating on 9 the basis of a moving target here. MSD 10 attempts to satisfy current EPA regulations, 11 and during your negotiations, EPA undertakes 12 to modify those water quality standards, and 13 what assurance do we have in the future that 14 there won't be significant modifications to 15 these standards that will further undermine 16 all of the work that's going on here with 17 regard to trying to satisfy EPA's 18 requirements with regard to the Mississippi 19 River? 20 A. well, we have no assurance. In fact, 21 it's a virtual certainty that rules will 22 change as time goes on. There have been many 23 years since the creation of the clean water 24 Act. So it's a virtual certainty over the 25 next 23 years some of the rules are going to Page 56 98869 msd heading 09 07 11 57 1 change. Because of the broadness of what's 2 in this Consent Decree, some of those rules 3 will impact this long term. 4 Q. so all of this discussion with regard 5 to how much money is needed is, as of this 6 point in time, down the road a year or two or 7 three or five, this could all change, and we 8 will be back at this over and over again to 9 comply with this moving target? 10 A. Yeah, and i think I will point out 11 that we didn't do this without some realistic 12 view of that. There are rules that we can 13 anticipate, but there are rules we can't, so 14 for example, in some of our economic work, we 15 were looking at what happens if nutrient 16 standards become required on the Mississippi 17 River, and the other treatment plants? what 18 will the cost of that be and how would that 19 factor in? There's a new rule that will 20 impact the incinerators at Bissell and 21 Le may. we had intended on making 22 investments in incinerators or the solvents 23 portion of our facilities in about 10 years. 24 That will accelerate that. we are presently 25 involved in a challenge to that rule with a 0 Page 57 98869 msd heading 09 07 11 58 1 bunch of utilities because we don't think 2 it's appropriate, so when you start talking 3 about multiple decades, you try and lay out 4 what you think will happen. I don't have any 5 ability to know for sure or there's probably 6 things we don't even know today that become 7 regulations during that 23 -year period. 8 Q. And I understand that, and it bothers 9 me, and it should bother the rate payers in 10 the sense that we just can't seem to satisfy 11 or settle or agree on a set of rules that we 12 can live with for some period of time in 13 terms of knowing how much we are going to 14 have to spend to comply with these 15 regulations. Mr. Tomazi brought up the 16 disinfection programs, and this is something 17 that's relatively new. we have primary, 18 secondary, tertiary treatments and now a 19 disinfection program, and a disinfection 20 program that is I think you pointed out or 21 maybe Mr. Sprague pointed out requires 22 chlorination, and then, before that discharge 23 can take place, you must remove the chlorine 24 from the water so as not to dump that off 25 into the river with the chlorine still in it, Page 58 98869 msd heading 09 07 11 59 1 and this is part of the disinfection program, 2 so it seems that there's always another layer 3 of treatment that can be added that further 4 impacts the rate payers and the cost related 5 to operating the Metropolitan Sewer District? 6 A. we have been advocating that there 7 needs to be a different approach. There's 8 never going to be enough money and we better 9 start prioritizing our water quality 10 investments to get to the highest benefit out 11 of the money we spend on water quality. The 12 regulatory paradigm right now isn't that way. 13 Everything that is in the clean water Act is 14 priority. They don't draw distinctions 15 between one area or one other area, so we -- 16 a lot of utilities have been advocating that 17 there needs to be a prioritization approach 18 because there isn't going to be any money. 19 one thing about disinfection, we tried to go 20 with ultraviolet because it has the benefit 21 of not having to dechlorinate. when you use 22 hydrochloride, you have to dechlorinate 23 because the chlorine residuals, themselves, 24 are a problem in the environment. There are 25 some of our treatment plants that do not lend 0 Page 59 98869 msd heading 09 07 11 60 1 themselves to ultraviolet disinfection, and 2 therefore, we use hydrochloride in those 3 cases, but there was a lot of study going on 4 before we decided which way we wanted to go 5 with these facilities. 6 MR. MUELLER: Mr. Chairman, I have 7 a lot more questions. 8 (At which point, a 10 -minute break 9 was taken.) 10 MR. CHAIRMAN: Mr. Mueller, will 11 you care to resume your questioning of 12 Mr. Theerman? 13 MR. MUELLER: Yes, Mr. Chairman. 14 I only have one last question. 15 MR. MUELLER CONTINUES: 16 Q. I notice that in the Consent Decree 17 you and ms. Myers signed the Consent Decree 18 on behalf of MSD. Can you tell me why the 19 member, a chairman or member of the Board of 20 Trustees of MSD were not required to sign 21 this Consent Decree? what is the practice 22 with regard to major agreements like this 23 that impose serious consequences on a 24 district? I don't mean to impugn your 25 position, but it just seems to me that I Page 60 98869 msd heading 09 07 11 61 1 would like to see the Board of Trustees' 2 fingerprints on this thing. 3 A. I would gladly have given that 4 distinction to someone else. The Board of 5 Trustees did take action. They executed -- I 6 don't recall if it was an ordinance or 7 resolution, but in June, they approved this 8 settlement and authorized me -- actually, 9 instructed me -- to execute, so I did the 10 signing of this, along with Susan, on their 11 behalf. They actually did an action that put 12 their fingerprints on it, if you will, and to 13 be honest, I wouldn't have it any other way. 14 MR. MUELLER: I have no further 15 questions. 16 MR. CHAIRMAN: Thank you, Mr. 17 Mueller. Mr. Coffman, do you have questions 18 for the witness? 19 QUESTIONING BY MR. COFFMAN: 20 Q. Yes thank you. Can you see me here? 21 A. I can. 22 Q. Let me direct you to your testimony, 23 your surrebuttal testimony on pages seven and 24 eight where you discuss the assumptions about 25 the future economic conditions. I assume you 0 Page 61 98869 msd heading 09 07 11 62 1 would agree with me that, when you make 2 assumptions or guesses about economic 3 conditions that you're more likely to be 4 right in a short term than the long term? 5 A. Yes. 6 Q. And you proceed on page eight to 7 discuss what might happen if the assumptions 8 are wrong, and they are proven to be 9 conservative, and you worry that this might 10 put the District in a difficult situation, 11 and that an interim rate, in the middle of 12 the rate plan, might be difficult or 13 inadequate. Is that fair? 14 A. Yes. 15 Q. If MSD were to approve a shorter term 16 rate plan than the one proposed, it would be 17 less likely you would run into that type of 18 shortfall dilemma, correct? 19 A. well, you have the -- on the plus 20 side, you have less time for the assumptions 21 to become skewed and be wrong. on the 22 negative side, you have what Jeanne vanda 23 testified to yesterday, the way the rating 24 agencies look at it, and you also have the 25 cost of Rate Commission process. I mean, we Page 62 98869 msd heading 09 07 11 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0 have been talking about efficiencies. A Rate Commission process isn't cheap, either. Not including the MSD internal costs. They can approach $800,000, so trying to balance a reasonable rate setting horizon with the cost of actually doing it. Q. would there not be synergy in the rate case process given that a lot of groundwork has already been done projecting what would need to be done over a longer term, even if the rate plan were only for one or two years? A. Again, when you look at our rate case at four years, there's not a lot of additional clarity that comes into play until we deliver an sso master plan in 2013 and EPA approves it. We are working on projects. I mean, I detailed in my testimony the three kinds of projects. There's Cso, projects that are in the long-term control plan that need to be designed. There's sso projects that need to be designed, and there's sso projects that are still in the process of preliminary engineering work, and until that document is complete, and it is approved, we Page 63 98869 msd heading 09 07 11 64 1 are kind of in this continuum. That's why 2 that four-year rate case makes sense because 3 it gets us from where we are today to the 4 delivery and approval of that plan, which 5 then gives you a lot more clarity about what 6 that program looks like going forward. By 7 cutting it in half, I think there may be a 8 perception by some in a two-year or one-year 9 that you gain a lot of clarity, and to be 10 honest, I don't see it that way. It just 11 seems to me that you have additional costs of 12 another rate case, but you -- and you may 13 encounter the risk of the rating agencies not 14 viewing it as a commitment by the 15 stakeholders and the District, and you don't 16 have a regulatory certainty because you 17 haven't gotten on the point of delivering and 18 getting one approved, so no, I don't agree. 19 Q. Let me ask you a couple questions 20 about environmental regulatory certainty. I 21 believe you just, earlier in answering some 22 questions, acknowledged that clean water Act 23 regulations are subject to constant change? 24 A. Yes. 25 Q. And wouldn't it be more likely that Page 64 98869 msd heading 09 07 11 65 1 change in the clean water Act regulations 2 would change over a longer term rate plan 3 than a shorter term rate plan? 4 A. well, sure. The shorter the rate 5 plan, the less likely that you will see a 6 regulatory change that impacts you. 7 Q. Let me just state where I'm coming 8 from. My clients have seen a lot of 9 regulatory claims in the electric utility 10 industry, for instance. Electric utilities 11 will convince rate public utility commissions 12 to approve rate increases based on certain 13 clean Air Act regulations, only then to 14 convince EPA to extend, delay, or waive those 15 regulations, but the rates don't go down. 16 The rates that customers are paying stay up 17 there, and it's this experience that makes my 18 clients a little weary of long-term plans 19 based on environmental regulatory mandates. 20 so, you know, would you not agree with me 21 that it's possible given that we were seeing 22 the Obama Administration propose some sort of 23 retreat from clean air regulations that it's 24 possible that the clean water air regulations 25 might be extended or delayed over the next Page 65 98869 msd heading 09 07 11 66 1 five years in a way that impacts what the 2 Metropolitan Sewer District has to do? 3 A. Based on my experience, I say that's 4 extremely unlikely. 5 Q. would you agree with me that, under 6 the terms of the proposed Consent Decree, 7 that the specificity about exactly what 8 projects will be done is greater in the first 9 year or so than in the later years of the 10 document? 11 A. we structured it that way. Early 12 action projects were desired by the 13 regulators. You see that in the decree, and 14 those are projects that are already funded by 15 the prior rate case, so the rate change 16 proposal that's in front of the Commission 17 isn't required to fund those early actions, 18 and we negotiated it that way. we didn't 19 feel that we could agree to early action that 20 was predicated on funding yet to be had, so 21 that was a negotiated position we took. we 22 can do early action. we simply have the 23 funding. That's what you see there. what 24 happened subsequent to that requires 25 additional engineering work. That's why you Page 66 98869 msd heading 09 07 11 67 1 see that requirement not hard -coated, which 2 SSo's coming out, but rather the delivery of 3 an sso master plan in 2013. 4 Q. That's all I have. Thank you very 5 much. 6 MR. CHAIRMAN: Thank you, 7 Mr. Coffman. Ms. Myers, do you have 8 questions of the question? 9 MS. MYERS: We have no questions 10 at this time. 11 MR. CHAIRMAN: Mr. Arnold, do you 12 have questions of the witness? 13 QUESTIONING BY MR. ARNOLD: 14 Q. Thank you, Mr. Chairman, I do. 15 Mr. Theerman, may we remain on page eight 16 or -- yes, page eight. On line eight, 17 beginning toward the right-hand margin, the 18 sentence begins, "If in the aggregate." 19 Could you read your testimony from there to 20 the end of the paragraph? 21 A. "If in the aggregate we collect too 22 much revenue, the District will move forward 23 an expedited Consent Decree compliance 24 related work or continue the stated program 25 with reduced use of debt, which would then be Page 67 98869 msd heading 09 07 11 68 1 available for other projects in the future. 2 it has the effect of paying that Consent 3 Decree forward and would be reflected 4 appropriately in the next rate change 5 proposal. If the assumptions prove to be 6 conservative in the aggregate, the District 7 will have reduced revenue that will require 8 the deviation from the currently proposed 9 program and place the District in the 10 attainable situation I previously discussed. 11 This situation is one in which projects are 12 pushed back in the schedule resulting in 13 additional regulatory compliance and cost 14 risks." 15 Q. Thank you. Mr. Theerman, I represent 16 to you that table 1 dash 1, on page 1 dash 9 17 of MSD-1 provides a schedule of single family 18 residential monthly bills from 2012 to 2016. 19 In 2012, it's $28.97. In 2013, it's $32.61. 20 -14 is $36.95. 2015 is $41.80. And 2016 is 21 $47.29. Mr. Theerman, I represent to you 22 that in Exhibit MSD 11-C, which is the Fitch 23 ratings 2011 water and wastewater medians, on 24 Appendix E at page 13, the individual water 25 wastewater utility average monthly Page 68 98869 msd heading 09 07 11 69 1 residential bill for 2011 is $35. Is it your 2 testimony that paying forward the Consent 3 Decree or reducing the interest rate changes 4 in post 2017 is fair and reasonable to the 5 rate payers in 2013, `14, -15 and `16? 6 A. Yes. 7 Q. During this period of economic 8 stress. 9 A. A key aspect of the program is doing 10 the projects efficiently -- 11 Q. Forgive me. Go on, but how about 12 beginning with a yes or a no. 13 A. I thought I said, "Yes." 14 Q. I'm sorry. 15 A. In my view, we are talking about the 16 sort of fringes of this, the assumptions we 17 will make. we are not talking about a 18 billion dollars of improvements that have 19 been asked to be made. we are talking about 20 some of the things that consumed a fair 21 amount of discussion in the Rate Commission 22 proceedings with respect to whether we are 23 choosing the right interest rate, the right 24 inflation rates, those kinds of things, so in 25 my view, if we are able to do the program Page 69 98869 msd heading 09 07 11 70 1 more expeditiously because costs are good, 2 and we have the dollars to do it, or if we 3 are able to defer the issuance of debt 4 because it's not the right time, and we have 5 the cash to do it, instead of issuing the 6 debt, those are all things that ultimately 7 will help the rate payer down the road, and 8 keep in mind, I am testifying based upon sort 9 of the constraints I just mentioned. These 10 are not the things that move the dollars 11 around in huge ways comparably with the rest 12 of the proposal. These are the assumptions 13 that we have been talking about i guess in 14 detail. 15 Q. So using your assumptions and not 16 referring to -- what did you say? Huge 17 dollars in the aggregate? 18 A. Well, again, my testimony is about 19 the assumptions that have been part of what's 20 been discussed, so is it -- is a bond 21 interest rate five -and -a -half percent or is 22 it five? or is it four and a half? Those 23 don't end up moving the big picture around a 24 great deal. Is the inflation going to be 25 three percent or four percent? Those 0 Page 70 98869 msd heading 09 07 11 71 1 assumptions don't move the picture around a 2 great deal for the period of time we are 3 talking about. so, my testimony here on page 4 eight is about that loads assumptions, and 5 the fact that, if we are right, we will be 6 right on. If we are wrong, one way or the 7 other, we may be a little short. we may be a 8 little better off in terms of revenue, and if 9 we are, how we intend to operate. 10 Q. Is that your testimony with respect 11 to whether you use cash flow or appropriation 12 methods to fund projects, because that ends 13 up pushing to 2017 if your estimates are 14 correct about $44 million? 15 A. we have done it both ways. we are at 16 liberty to do it both ways. It's not a 17 violation of the charter to do it one way or 18 the other. It is consistent to do it one way 19 or the other. I think it's my view that 20 that's not what I was talking about in this 21 testimony as far as assumptions are going, 22 and I just add that that approach shifting 23 from appropriation base to cash flow helps in 24 the first rate case, and then, after that, 25 you're covering costs you initiated in the Page 71 98869 msd heading 09 07 11 72 1 prior rate case and the next one and carrying 2 costs on to the one beyond that, so it is a 3 one-time change in the way rates will rise 4 for this proposal if we -- if the Rate 5 Commission elects to go with the cash 6 approach. It doesn't change every rate case 7 from here on out because you are going to 8 have a continuing workload. 9 Q. Thank you, sir. Thank you, 10 Mr. Chairman. 11 MR. CHAIRMAN: Thank you, 12 Mr. Arnold. Do any members of the Rate 13 Commission have questions for Mr. Theerman? 14 Mr. Tomazi. Then Mr. Stein. 15 MR. TOMAZI: This is actually not a 16 question, Mr. Theerman, but this is a 17 response to a question, but a comment was 18 raised by Mr. Mueller that you so 19 appropriately answered with respect to the 20 EPA, why they filed a lawsuit at that time. 21 But I recall very vividly back in July of '08 22 attending the public hearing at Herbert 23 Hoover Boy's club, and the then head of the 24 Missouri Department of Natural Resources was 25 there. It was someone I had met a number of Page 72 98869 msd heading 09 07 11 73 1 years before and would become well 2 acquainted. But he commented to me -- this 3 is after the EPA lawsuit had been filed -- 4 that the Missouri Department of Natural 5 Resources does not want to join in that 6 lawsuit, that they were working -- they felt 7 they were working sufficiently with the -- 8 with MSD to institute a program that was 9 manageable and doable and affordable he said, 10 but the EPA decided they were going to go 11 ahead on their own, but because of the 12 constraints and because of the ties between 13 Missouri and the federal government, the EPA 14 was then forced to -- the Missouri Department 15 of Natural Resources was forced to join that 16 lawsuit. 17 MR. CHAIRMAN: Mr. Stein. 18 QUESTIONING BY MR. STEIN: 19 Q. Mr. Theerman, I would like to ask a 20 few questions related to the Consent Decree. 21 I believe that the Consent Decree requires 22 MSD to implement certain number of projects 23 related to green infrastructure. 24 A. Yes. 25 Q. Is that correct? Can you -- this is 0 Page 73 98869 msd heading 09 07 11 74 1 a multipart question. Can you tell us how 2 you define "green infrastructure," how much 3 capital you are being required to invest, and 4 thirdly, is this considered to be normal 5 engineering, generally accepted an 6 engineering practice, or is it more of the 7 external -- 8 A. well, first of all, green 9 infrastructure is an approach that's being 10 employed in a number of cities in an attempt 11 to hold rain water back from the combined 12 sewer system and can also be employed in 13 separate storm water systems to address storm 14 water issues, but in this context it's about 15 combined sewer system. when we developed our 16 long-term control plan, it became obvious 17 that trying to address the Mississippi River, 18 direct its chart LSO's, was going to be very 19 expensive, and the public really weighed in 20 on that during our public participation 21 process. we identified a program of 22 investing $100 million on green 23 infrastructure in the combined area that 24 discharges directly to the Mississippi River. 25 The other combined areas were being addressed Page 74 98869 msd heading 09 07 11 75 1 in the gray infrastructure parts of the 2 combined sewer overflow plan, and the reason 3 we did that was because that is the area of 4 our combined sewer system that is most likely 5 to change dramatically over the coming 6 several decades. A lot of land -- there's a 7 lot of land owned by the city of St. Louis 8 that's been turned over for nonpayment of 9 taxes, a lot of opportunity for redevelopment 10 to occur over a prolonged period of time. So 11 rather than invest another billion and a half 12 or more in another tunnel system, we proposed 13 attempting to use green infrastructure to 14 reduce combined sewer discharge of the 15 Mississippi River over the duration of this 16 program. Is it a well understood engineering 17 approach? Well, it's becoming better 18 understood. Lots of programs are including 19 green infrastructure improvements in their 20 CSO programs. Kansas City and Cleveland are 21 two examples. It is experimental and 22 primarily not on the micro -scale. You can 23 identify what kind of results you will get 24 for various types of green infrastructure, 25 and I guess I should elaborate a little bit. Page 75 98869 msd heading 09 07 11 76 1 Green infrastructure can be anything from 2 porous pavements that reduce runoff, to rain 3 gardens, to vegetated swales, to sort of the 4 more normal kind of approaches where you're 5 using storm water attenuation basins that 6 hold water back and allow them to infiltrate 7 into the ground, all the way to green roofs 8 where you have a vegetative cover over the 9 top of a building. Blue roofs where you are 10 basically storing water in pools on top of 11 the building. It's a very broad topic. EPA 12 likes to see green infrastructure employed in 13 these agreements. we wanted to employ green 14 infrastructure in a way that made sense and 15 was in line with what we understood about 16 what the program costs were going to be, and 17 the need to do something about the city that 18 didn't cost a billion and a half dollars. So 19 we have instituted a pilot program now. It's 20 a $3 million pilot approved by the regulators 21 where we are spending $3 million to sort of 22 test the principals of a flowing green 23 infrastructure on vacant land on the north 24 side. we will end up doing a report that's 25 required in the CD on the effects and the 0 Page 76 98869 msd heading 09 07 11 77 1 results that will then guide the expenditures 2 in the next $97 million. we are going about 3 it the right way. I think some cities sort 4 of use infrastructure as a magic bullet that 5 will solve all the, problems and the engineer 6 in me says there are no magic bullets, and 7 you have to be very careful about that kind 8 of experiment. 9 Q. If the $3 million experiment is not 10 successful -- we would hope it would be -- 11 but if you go to EPA and say, "Our $3 million 12 experiment is not encouraging," are they 13 going to require you to continue to spend the 14 other $97 million, or are they going to go 15 back and suggest that you spend another $1 16 billion to do something else? How much of a 17 risk do we have out there on that? 18 A. well, you know, throughout the 19 document, there are places where you get 20 regulatory approval. There's lots of them. 21 Those are the places where there's 22 uncertainty. You think you have got an 23 agreement, but have you to get through the 24 approval process. I think what we are going 25 to find is a mix of things. Some green Page 77 98869 msd heading 09 07 11 78 1 infrastructure alternatives aren't going to 2 work very well. Some will work well, but 3 they have logistical problems that get in the 4 way of them being effective. who owns it? 5 who takes care of it? That kind of stuff. 6 some will be effective. And it may be that 7 we find the lot -by -lot approach isn't 8 particularly effective, and there are $100 9 million or $97 million that remains that 10 really needs to be invested in different 11 ways. Maybe it needs to invested on pavement 12 elimination or large-scale attenuation. I 13 don't think it's going to be 100 percent 14 failure pilot where we just come away with 15 nothing. I think it's going to end up 16 guiding us to the right ways to spend the 17 money to really get results. If you look 18 beyond the decree, I have told the staff 19 nobody is going to be around that's here 20 today, but I mean, beyond the decree, there 21 may be a revisiting of the CSO's in the 22 Mississippi. I wouldn't be at all surprised 23 if, at some point in the future, that has to 24 be looked at again, but we didn't think we 25 could do it now. It didn't make sense to do Page 78 98869 msd heading 09 07 11 79 1 it economically, and there was an opportunity 2 to try and do a better way or a different way 3 trying to see what kind of results we got. 4 MR. CHAIRMAN: Mr. Brockmann. 5 QUESTIONING BY MR. BROCKMANN: 6 Q. Jeff, could you explain to me -- I'm 7 still I'm going back to the disinfectant 8 charges, and you don't have to be fully 9 compliant until 2013, so the $7 million that 10 Mr. Sprague mentioned, is that cost of 11 implementation and ongoing costs, or is that 12 just -- is there implementation costs in 13 there, and after you reach 2013, is that $7 14 million number going to drop for the 15 disinfectant operations? 16 A. I'm not as familiar as John is about 17 the 0 and M numbers, but I believe the $7 18 million in 0 and M costs are for running UV 19 and hydrochloride systems at the plant. 20 That's an annualized number. Now, 21 disinfection in Missouri is a seasonal 22 activity. You disinfect from April 1 to I 23 think end of October, and so the first year 24 will be a quarter year expenditure, and then, 25 after that, you start seeing annual costs, 0 Page 79 98869 msd heading 09 07 11 80 1 but that $7 million figure is an estimate of 2 the annualized operating costs of those 3 systems of five plants. 4 Q. After 2013 or now? 5 A. After we turn them on, and actually, 6 we won't turn them on until -- one plant 7 started up earlier than the 2013 date, but 8 the others would start up in the spring of 9 14. 10 Q. So $7 million is in your current 11 budget, and it won't increase after that? 12 A. $7 million would be in our future 13 budget, and it will increase, without a 14 doubt, because uv systems are heavily 15 dependent on electric rates and hydrochloride 16 systems are heavily dependent on chlorine 17 costs and sodium bisulfate costs, so there's 18 this doubt there those numbers will go up. 19 Q. when did combined sanitary sewer 20 overflows become a big industry buzz word? 21 mean, obviously, we have had them for a long 22 time, but when did that really become 23 critical and everyone was concerned about 24 that? 25 A. EPA started promulgating the rules Page 80 98869 msd heading 09 07 11 81 1 and requirements in the 90's. The early 90's 2 is when it sort of started, but most large 3 metropolitan areas are still grappling with 4 them. 5 Q. Not to point a finger at you or any 6 of your staff, but then, on page three of 7 this Consent Decree, it does imply that you 8 inherited them, but it also goes on to say 9 that perhaps some of them were constructed 10 require to the 1990's. Is that a fair 11 statement as it relates to MSD? 12 A. where are you? 13 Q. I'm on the bottom of page three. I 14 don't have it right in front of me. It's one 15 of the "whereas." It says that it implies, 16 inherited, or that perhaps some combined 17 sanitary sewer overflows constructed prior to 18 the 1990's. It might be higher on the page. 19 It's at the top of the page. Is that a true 20 statement that perhaps MSD, themselves, did 21 construct some prior to the 1990's? 22 A. well, all the combined sewer 23 overflows were constructed prior to 1990's. 24 Q. okay. I'm just trying to 25 differentiate between "inherited" versus Page 81 98869 msd heading 09 07 11 82 1 "constructed." It says, "inherited or 2 constructed." 3 A. I'm not finding where you are. I 4 want to make sure I -- 5 Q. on the very top of page three the 6 first "whereas." 7 A. where it says MSD has spent $2.1 8 billion? 9 Q. Correct. 10 A. okay. "Now, including, but not 11 limited, to eliminating constructed sanitary 12 sewer overflows, which MSD inherited or 13 constructed prior to the 1990's." That's not 14 combined sewer overflows. Those are separate 15 sanitary sewer overflows in a separated 16 system. 17 Q. okay. 18 A. And just real briefly, prior to 1956 19 MSD wasn't in operation, and there were 20 constructed sanitary sewer overflow systems 21 in existence at that time, and they were, in 22 essence, people had basement backups, and 23 whoever was running that part of the system 24 went and knocked a hole in the structure, and 25 it had a lot of overflow rather than let it 0 Page 82 98869 msd heading 09 07 11 83 1 back up in the basements. MSD continued that 2 practice up until about 1990 and since that 3 time we haven't added any. we have been 4 trying to eliminate them, but, see, that 5 is -- that's a separate system issue. 6 Q. okay. Talking about the EPA in the 7 Consent Decree and the implication was that 8 they did this, in part, because our rates are 9 low here in st. Louis. Also, this Consent 10 Decree did happen during the economy, but I 11 still struggle with at least a question of 12 how EPA can look at it and say that we need 13 to do so much more than, obviously, what this 14 rate increase is going to do when you compare 15 that we have a fewer number of rate payers 16 per miles of pipe compared to Los Angeles, 17 and you also list cost of living, and all 18 those other factors. From your perspective 19 -- I realize you're not EPA, but from your 20 perspective, how do they justify that? 21 A I don't believe EPA sued MSD because 22 our rates are low. I said that part -- it 23 was difficult negotiating because our rates 24 were low. They sued MSD and 25 other cities. 25 It's in my original testimony because they Page 83 98869 msd heading 09 07 11 84 1 have a perspective that they are doing 2 enforcement action because municipal entities 3 do not have the testable fortitude to raise 4 rates without enforcement action. I think 5 that is definitely their perspective. So in 6 my mind, rates only play into the equation 7 when they get to be arduous and their 8 definition of "arduous" is probably not 9 necessarily the one that everyone would agree 10 to in this room. 11 Q. Outfalls from the Mississippi, are 12 there any businesses that have outfall 13 discharges into the Mississippi that do not 14 use your sewer system? 15 A. I believe the only remaining 16 treatment facility within the MSD District is 17 a small subdivision treatment plant up on the 18 very north side of the county I don't think 19 there are -- I'm not aware of any industrial 20 facilities that are doing direct discharge. 21 I may be wrong. 22 Q. what has the EPA done to address 23 outfall discharges on the opposite side of 24 the river from this Consent Decree? 25 A. Once upon a time, when I worked for 0 Page 84 98869 msd heading 09 07 11 85 1 Illinois EPA, I knew more about the east 2 side. I really don't remember now what 3 all -- I suspect they have a combined system, 4 but I don't know whether they have a 5 long-term control plan. American Bottoms is 6 the largest facility over there, and that's a 7 separate system I think. 8 Q. Typically, when a new subdivision or 9 anything is built, the infrastructure is 10 included in the cost by that contractor, that 11 developer, and then you then adopt those 12 systems. Is that correct? 13 A. Yes. 14 Q. what happens when there's new highway 15 construction, all the new sewers are part of 16 that construction project, paid by the 17 municipality or MODOT or whatever. Is that 18 correct? 19 A. with the highway, you are talking 20 about storm water systems, and the highway 21 department typically ends up owning the 22 infrastructure that's immediately in 23 conjunction with the highway improvement. It 24 may ultimately flow to us. 25 Q. Are there any construction projects 0 Page 85 98869 msd heading 09 07 11 86 1 that are not in your operating -- let me back 2 up. Is there anything construction projects 3 where you have to modify your existing 4 sanitary or storm sewer system, but are not 5 required to do so because of age or things 6 like that for which you have to pay for? 7 A. Are there any -- I'm sorry. 8 Q. so for example. Correct me if I'm 9 wrong. Now I'm going to go -- typically, 10 when a subdivision is built, you adopt those 11 sewers after a contractor, but electric is 12 put in at no cost to the contractor. That's 13 paid by the rate payers I believe. I could 14 be wrong about that. 15 A. The sewer infrastructure storm and 16 wastewater is put in the ground by the 17 developer and dedicated to MSD to continue 18 operating. 19 Q. But are there construction projects 20 by municipalities or others where you have to 21 modify the storm sewer or the sanitary sewer, 22 and that's a cost you have to bear, but it 23 was not a cost that you would have had to do 24 because of any preexisting conditions that 25 were bad or past or things like that? 0 Page 86 98869 msd heading 09 07 11 87 1 A. 1 don't recall any. We typically 2 require the developer -- and that's a broad 3 term. It could be a municipality or 4 developer to incur the costs if modification 5 becomes necessary. 6 Q. How much does MSD spend annually on 7 lobbying costs? 8 A. State and federal, about -- 1 think, 9 between the two, it's in the order of 10 $120,000 a year. 11 Q. Does that include -- you mentioned 12 earlier consortium challenges. Does that 13 include that number, too? 14 A. No. That's being done through the 15 National Association of Clean Water Agencies. 16 Q. So you don't have -- MSD does not 17 contribute money other than annual fees to 18 that? 19 A. Those who are involved in the 20 challenge have contributed money to that 21 effort. 22 Q. So you do participate in some 23 separate funds for that? 24 A. For that particular effort, yeah. 25 Q. Are there any others, besides that 0 Page 87 98869 msd heading 09 07 11 88 1 particular item? Are there others? 2 A. we are involved with some other 3 utilities in the state on water quality, sand 4 appreciation in the state of Missouri, and I 5 think that's all I can recall. That's all I 6 recall. 7 Q. I'm just curious. one other thing I 8 saw in the news yesterday that apparently the 9 Homebuilders Association and some others in 10 St. Louis are not happy with the Maryland 11 Manual that you have adopted. I'm just 12 curious about your thoughts on that. 13 A. well, the Maryland Manual is about 14 Phase 2 storm water improvements, and, yes, 15 there are those that don't like our 16 employment of the Maryland manual. I think 17 the District is trying to find the right mix 18 of standards for our region. Part of the 19 criticism of the Maryland Manual is we are 20 not in Maryland. There's different ideologic 21 issues between here and there, and I think we 22 are trying to account for those, but storm 23 water is not wastewater. There's ongoing 24 changes in the regulation. It's not going to 25 get easier. It's going to get more 0 Page 88 98869 msd heading 09 07 11 89 1 stringent. 2 MR. CHAIRMAN: Mr. Goss. 3 QUESTIONING BY MR. GOSS: 4 Q. You had talked about the swimming 5 versus boating standards in the Mississippi 6 River. Do agricultural activities impact the 7 attainability of either of those standards 8 and is that an impact on MSD to a lot of 9 these requirements? 10 A. Agricultural runoff contributes to 11 bacterial impacts on the river, so from a 12 bacterial perspective, agriculture plays a 13 role, but the reason the Mississippi River 14 isn't swimmable really has very little to do 15 with bacteria. It has an awful lot to do 16 with the hydrologic modification that's 17 occurred. I'm talking about a 28 -mile reach 18 now and the fact that 100,000 barges go by 19 there every year. It is the busiest inland 20 port in the country. The Coast Guard, as an 21 example, are teaching people, if you fall off 22 a barge, or off of a boat, to swim to the 23 middle of the river and go downstream and 24 hope somebody picks you up because swimming 25 to shore is a death sentence. You get swept Page 89 98869 msd heading 09 07 11 90 1 under barges, snagged by the debris in the 2 river, so we have been making arguments for 3 six years, not really about bacteria, but 4 about what everybody in St. Louis already 5 knows. There's a lot of places to swim and 6 the Mississippi River is not really a very 7 good one. They spend multiple billions of 8 dollars trying to make it swimmable. we are 9 going to spend a lot of money, and we are not 10 going to make it swimmable because what makes 11 it unsafe to swim really has very little to 12 do with MSD. It has a great deal to do with 13 the modifications that have gone on in the 14 river. 15 Q. so is this standard something that's 16 mandated by the Consent Decree or something 17 that you are able to negotiate with the EPA? 18 A. It is not mandated by the decree. It 19 is addressed in the decree if the standards 20 change because that has implications in our 21 long-term control plan for the Cso's with 22 combined sewer overflows, so we try to be 23 very careful about not mixing the two to the 24 extent that we could. A boating standard is 25 what we advocated, and what is in place. EPA Page 90 98869 msd heading 09 07 11 91 1 doesn't see it that way, largely because the 2 goals of clean water Act is fishable, 3 swimmable, so what was referenced by 4 Mr. Mueller and in the decree is a 5 determination EPA made in October of 2009 6 basically telling the state their boating 7 standard was inappropriate, and it should 8 become a swimming standard, and we are still 9 attempting to keep it appropriately, at least 10 as we see it appropriately, as a boating 11 standard, but if it does change, it has 12 implications if our long-term control plan. 13 Q. so there are additional costs 14 associated? 15 A. Could be. 16 Q. we heard a couple months ago the 17 state hasn't joint the Consent Decree or 18 settled. Has that status changed? 19 A. No, it has not. 20 Q. Are there discussions ongoing to 21 attempt to get the state to join the decree? 22 A. No, there are not. 23 Q. Is there a reason for that? 24 A. I'm going to take a second to think 25 carefully about my response. we attempted to 0 Page 91 98869 msd heading 09 07 11 92 1 find a way past their reluctance to sign. In 2 the final months of the negotiation, there 3 are things I know from statements they made 4 in mediation that I can't relate, and quite 5 frankly, there's things about their position 6 I don't understand, but the attempts were 7 made -- were made earlier to try to find a 8 way to go. Because they remain a regulatory 9 body, there were certainly advantages to the 10 district in having the state included in the 11 total agreement. 12 Q. we heard from Mr. Tomazi that the 13 state was the reluctant warrior in all the 14 litigation. Kicking and screaming, some 15 words to that effect I guess, and yet, now, 16 if I'm hearing you right, they're wanting to 17 settle, so I'm confused. 18 A. I can try. The minor standard of the 19 clean water Act is if the federal government 20 files suit the state is given a choice. It 21 can be a plaintiff or a defendant, and that 22 was the choice they had to make. They chose 23 to be a plaintiff along with the federal 24 government. They participated along with the 25 other parties in the whole four years of 0 Page 92 98869 msd heading 09 07 11 93 1 mediation and now they have reached a 2 position that isn't fully understood. 3 Q. So that means the litigation 4 continues until they either decide to dismiss 5 the litigation or the court dismisses it for 6 them for failure to prosecute the litigation, 7 so I'm confused by what's going to happen 8 then. 9 A. I'm not entirely confident on what's 10 going to happen, either. I think the parties 11 that have signed believe that the settlement 12 addresses everything in the complaint and 13 that it should be able to become a final 14 matter through the courts. It's going to, in 15 our minds, be left up to the judge how to 16 deal with what you're speaking of if you have 17 a plaintiff that's not settling and how that 18 plays out. 19 Q. would the District be in a position 20 to move for summary judgment after the 21 Consent Decree is adopted or accepted by the 22 parties to it, if, indeed, that resolves all 23 issues? 24 MS. MYERS: At this time the case 25 has been stayed through the entering -- or 0 Page 93 98869 msd heading 09 07 11 94 1 lodging and entering of the Consent Decree, 2 so the legal strategies that we look at and 3 decide to take when necessary are still being 4 developed. 5 MR. GOSS: That's a polite way of 6 saying you can't answer that question, but as 7 long as we are on the same page, that works. 8 ms. MYERS: The litigation of the 9 case is still in a stayed position because of 10 the mediation. I mentioned the mediation 11 agreement, confidentiality agreement, the 12 other day. well, that's the reason that's 13 still in place because the judge keeps 14 extending the stay. 15 MR. GOSS: I understand. Thank 16 you. 17 MR. CHAIRMAN: Mr. Arnold. 18 MR. ARNOLD: May I inquire with 19 ms. Myers? Under the Consent Decree, does the 20 court retain jurisdiction for the period 21 of -- I'm sorry -- for the term of the 22 Consent Decree? 23 MS. MYERS: Yes. 24 MR. ARNOLD: When the District 25 filed counterclaims in this litigation, were Page 94 98869 msd heading 09 07 11 95 1 the counterclaims filed among others against 2 the state? 3 MS. MYERS: There were 4 counterclaims filed pursuant to the federal 5 litigation that pertained to the state, yes. 6 MR. ARNOLD: Are those 7 counterclaims still pending? 8 MS. MYERS: Some counterclaims 9 have been dismissed because they were not 10 right by the time they were filed, and there 11 are counterclaims that remain. 12 MR. ARNOLD: Is that responsive to 13 your question? 14 MR. GOSS CONTINUES: 15 Q. Yes. one other question. Yesterday 16 there was some testimony from questions that 17 Mr. Arnold was asking about -- I may phrase 18 this wrong, so correct me if I do -- about 19 limiting appropriations each year to what 20 should be required for the project, as 21 opposed to appropriating the entire amount. 22 Do you recall that testimony? 23 A. I do. 24 Q. If I recall, the answers were I 25 believe that there was $35 million per year. Page 95 98869 msd heading 09 07 11 96 1 Do you recall that? 2 A. Yes. It's been in that MSD standard 3 and it pertains to this rate case. Because 4 it's continuing, you don't reap that every 5 time because project costs will go into the 6 next rate case. 7 Q. Do you have an opinion on whether it 8 would be appropriate and useful to limit 9 those appropriations in that manner to 10 achieve those savings? 11 A. As I mentioned before, we have done 12 that before. we do it on very large 13 projects. I think the primary heartburn for 14 the District is a logistical one, sort of the 15 tracking of hundreds of projects and trying 16 to make sure they are always on top of 17 things, but I wouldn't say it's 18 inappropriate. 19 Q. I have heard testimony in different 20 issues in the case, which quite frankly, to 21 me, seemed like we were really down in the 22 weeds, and there wasn't a lot of money that 23 was at stake. This one strikes me as that's 24 a lot of money, even in the context of this 25 rate, which is a lot of money. Page 96 98869 msd heading 09 07 11 97 1 A. I wouldn't argue to the contrary. 2 $35 million is a lot of money. 3 Q. So that's what's worth spending time 4 on figuring out those logistics because 5 that's $35 million that could potentially be 6 put to use to help achieve compliance in the 7 most cost effective way. Do you have any 8 opinions about that? 9 A. well, I don't disagree that $35 10 million is a lot of money. 11 Q. Is it doable? 12 A. Is it doable? 13 Q. Or just too darn difficult that you 14 can't do it? 15 A. There are no governance issues that 16 prevent us from doing it what way. we would 17 have a logistical burden to try to figure out 18 how to deal with just the number of projects 19 and when we will have to return to the Board 20 to get subsequent appropriation, but that 21 isn't necessarily an insurmountable thing. 22 Is it doable? Yeah. I think we can do it. 23 Q. Is the manner in you go to the Board 24 to get appropriations something that could be 25 adjusted, so that those appropriations could 0 Page 97 98869 msd heading 09 07 11 98 1 be authorized in a more efficient manner? 2 A. some of the way we have to operate 3 with board approvals is hard -coated into the 4 charter. It would take us to do some looking 5 to decide if there's a streamlined approach 6 that would fit well. we have some charter 7 amendments right now that the Board is 8 considering. It takes voter approval to 9 change the charter, but at this time I'm not 10 sure I could assess whether there's a more 11 streamlined or efficient way of dealing with 12 it, but that really I think is our only major 13 concern with the proposal. 14 Q. Moving forward with those charter 15 amendments, are you willing to consider a 16 certain amendment with regard to this issue? 17 A. certainly, it would be something the 18 staff could recommend to the Board. 19 Q. I understand. I'm not asking about 20 the staff. 21 A. sure, an efficient approach to 22 operating the district is always -- 23 Q. You already addressed that earlier? 24 A. Right. 25 Q. Thank you. Page 98 98869 msd heading 09 07 11 99 1 MR. CHAIRMAN: Further questions 2 from any of the Rate Commissioners for 3 Mr. Theerman? 4 Hearing none, thank you, Mr. 5 Theerman. We will take a five-minute 6 stand-up break and ask Mr. Gorman to start at 7 11:30. 8 (At which point, a brief break was 9 taken.) 10 MR. CHAIRMAN: We will resume our 11 surrebuttal testimony at this time. Mr. 12 Michael Gorman and Ms. Billie LaConte have 13 also filed surrebuttal testimony, so we will 14 assume, Mr. Gorman, that you are ready on 15 behalf of the Intervenors to testify. 16 MR. GORMAN: I am. 17 MR. CHAIRMAN: Ms. Myers, do you 18 have questions for Mr. Gorman? 19 MS. MYERS: I do not at this time. 20 Could I reserve the right to ask him some 21 follow-up questions after everyone else? 22 MR. CHAIRMAN: After Mr. Coffman 23 completes, you will have a chance to ask 24 questions after Mr. Coffman and before 25 Mr. Arnold. Page 99 98869 msd heading 09 07 11 100 1 MS. MYERS: Thank you. 2 MR. CHAIRMAN: Mr. Kindschuh, do 3 you have any questions? 4 MR. KINDSCHUH: I also will 5 reserve my right. 6 MR. CHAIRMAN: Ms. Langeneckert? 7 MS. LANGENECKERT: I have no 8 questions. 9 MR. CHAIRMAN: Mr. Mueller? 10 MR. MUELLER: I have no questions. 11 MR. CHAIRMAN: Mr. Coffman? 12 MR. COFFMAN: No questions. 13 MS. MYERS: I don't have any 14 questions. Thank you. 15 MR. CHAIRMAN: Mr. Arnold, do you 16 have questions of the witness? 17 MR. ARNOLD: Yes, sir. 18 MR. CHAIRMAN: Please proceed. 19 QUESTIONING BY MR. ARNOLD: 20 Q. Good morning, Mr. Gorman. 21 A. Good morning. 22 Q. Turning to page four of your 23 testimony, if you simply review your question 24 and your answer, my question is, is it your 25 opinion that cost increases are the only 0 Page 100 98869 msd heading 09 07 11 101 1 reason the District may under recover its 2 costs? 3 A. Well, revenue collections could 4 result in other recovery costs. 5 Q. Are the District's revenues generally 6 driven by usage? 7 A. Yes. 8 Q. And that usage of water? 9 A. Right. 10 Q. Turning to page seven, the question 11 beginning on line 14, and your response which 12 carries over a little bit to the next page. 13 If you would review that, please. 14 A. Okay. 15 Q. Is it your testimony that interest 16 rate spread in the third quarter of 2011 will 17 predict interest rates in the third quarter 18 of 2013? 19 A. well, no. It's my testimony that, as 20 treasury bond yields increase, that's likely 21 going to reflect the strengthening of the 22 economy, and as the economy strengthens, then 23 the spread between municipal bond yields will 24 contract a more normal level relative to the 25 treasury bond yields. As a result, the 0 Page 101 98869 msd heading 09 07 11 102 1 treasury bond interest rates increase over 2 time. That's not a strong indication that 3 municipal bond interest rates will also 4 increase. 5 Q. So do you have an opinion upon the 6 impact of interest rates if the wastewater 7 revenues do not support the covenants in 8 which the District has been engaged over 9 these bond issues or that these wastewater 10 revenues fail to support the benchmarks of 11 the rating agencies? 12 A. Well, the revenues should support the 13 covenants in the bond venture, which would 14 allow the District to issue additional bonds. 15 Maintaining strong credit metrics is also 16 necessary in order to maintain a strong 17 investment grade bond rating, which will help 18 ensure the District's ability to sell bonds 19 at favorable interest rates. 20 Q. And do you have an opinion if the 21 wastewater revenues were reduced, and the 22 rating agency benchmarks were not met, that 23 this would result in a lower rating for the 24 District's bonds? 25 A. It could, but if the reasons that the U Page 102 98869 msd heading 09 07 11 103 1 metrics were eroded were outside the control 2 of MSD management, that could certainly be a 3 factor that is considered in another rate 4 change proceeding in order to adjust rates 5 that do maintain average coverage ratio to 6 maintain the credit rating of the District. 7 Q. so turning to page nine, the question 8 beginning at line seven and your answer, I 9 wonder if you would read that aloud. 10 A. "At the August 8, 2011, hearing 11 Mr. Stannard testified that MSD's staff's 12 reflection of a one percent decline in sales 13 from calendar year 2011 was conservative and 14 acceptable." 15 Q. And your response? 16 A. "Mr. Stannard made reference to the 17 decline in use per customer and economic 18 conditions. However, he, like Mr. Barber, 19 provided little to no support for his 20 positions." 21 Q. And you have footnoted your answer, 22 and it's a little six. To what does the 23 little six refer? 24 A. MSD Exhibit 57, August 8, 2011, 25 transcript, page 123. Page 103 98869 msd heading 09 07 11 104 1 Q. Mr. Gorman, in preparation for your 2 testimony, did you read Mr. Stannard's 3 rebuttal testimony? 4 A. Yes. 5 Q. I'm going to read from page 11 of 6 Mr. Stannard's testimony, question 28, "Based 7 on your experience as a wastewater rate 8 consultant, do you have an opinion regarding 9 the District's forecast of contributing 10 wastewater volumes?" Answer, "Yes, I do. 11 The District's experience of declining 12 contributed wastewater volumes is consistent 13 with wastewater utilities throughout the 14 united States. This decline is due to 15 several factors, including conversation 16 awareness by customers, and hence, efficiency 17 of appliances and plumbing fixtures and the 18 recent economic slowdown. In my opinion, the 19 District's forecast of continued declines and 20 contributing wastewater volumes is 21 reasonable." when you review the August 8 22 Technical conference, and you refer to page 23 123, did you happen to review Mr. Stannard's 24 testimony in response to a question by 25 ms. Myers on page 111? Page 104 98869 msd heading 09 07 11 105 1 A. Well, I did review his testimony, and 2 concerning those factors, I address those in 3 the testimony as well. with the economic 4 conditions have resulted in an abnormally 5 significant decline in the number of 6 customers, and a sharp drop in the use per 7 customer. I don't think that sharp drop in 8 the use per customer was driven by 9 conservation efforts. I think it was driven 10 by the economic. As to whether or not the 11 continued drop in use per customer will occur 12 relative to 2011 levels I believe is 13 unlikely. 2011 use per customer was at a 14 relatively low level. when that assumption 15 level is adjusted to more normal economic 16 conditions, it likely will increase. when 17 the economy recovers, then I would expect 18 customers' discretionary investment in water 19 conservation equipment will again be made, 20 start to be made once again, and that will 21 drive that number down relative to a more 22 normalized 2011 level. I don't think it's 23 reasonable to assume that the depressed 2011 24 use per customer will decline throughout the 25 forecast period. Page 105 98869 msd heading 09 07 11 106 1 Q. I have handed your counsel my copy of 2 the transcript from the August 8 Technical 3 conference. i would ask him to turn to page 4 111, and either he, or you, may follow along 5 while I read. Question by ms. Myers, "In 6 your opinion" -- to Mr. Stannard -- "is the 7 District's forecast of continued declines to 8 contributed wastewater volumes reasonable?" 9 Answer, "Yes. In general, the forecast is a 10 modest decrease in customer wastewater 11 volumes or water consumptions that's used for 12 billing and wastewater service. This is a 13 phenomenon that is facing utilities 14 throughout the united states, and actually 15 goes back much before the more recent down 16 turning in the economy. The" -- pause -- "if 17 we go back to about the mid 1980's when the 18 Energy Policy Act was enacted" -- pause -- 19 "passed by congress and signed into law, one 20 of the requirements was the conversion to 21 low -flow toilets. Since then, and that 22 really, to me, you notice the springboard for 23 what created a paradigm in what our fixtures 24 would be and appliances, plumbing fixtures 25 and appliances would be constructed in the 0 Page 106 98869 msd heading 09 07 11 107 1 united states and made available." 2 Mr. stannard goes on to the bottom of page 12 3 and over to page 113 describing some of those 4 federal initiatives. were you aware of this 5 when you prepared your testimony? 6 A. I was, and I responded to these 7 factors and explaining why I think their 8 projected decline from 2011 is not 9 reasonable. I don't think it's reasonable to 10 assume that these discretionary investments 11 and water conservation equipment is going to 12 be done by customers that don't have jobs. 13 It's a discretionary investment. They are 14 not going to make it when they don't have to 15 make it. when the economy improves, and they 16 have jobs again, sales will increase. The 17 discretionary investments of consumers will 18 again start to take root, and that will drive 19 down the use per customer, but I believe that 20 the 2011 use per customer is relatively 21 depressed. Therefore, I don't think it's 22 reasonable to expect use per customer at that 23 level to continue to go down. They will 24 first recover and then -- 25 Q. Mr. Gorman, I am going to distribute 0 Page 107 98869 msd heading 09 07 11 108 1 to you and your counsel, members of the 2 Commission and to as many other interested 3 parties as I have copies, a document that I 4 would ask ms. Myers what our next exhibit 5 number might be? 6 MS. MYERS: 80. 7 MR. ARNOLD: It will be Exhibit 8 LMB-80. Mr. Gorman, this is a document 9 prepared by American Water regarding 10 declining residential water usage, and I call 11 to your attention, specifically, to the 12 schedule -- the pages are not numbered, but I 13 believe it's page three, and it's figure 14 three. It's captioned Flow Rates for 15 Different Appliances. The left hand column 16 is Type of Use. The next column is 17 Pre -Regulatory Flow, and then you have the 18 New Regulatory standards, which includes the 19 maximum, the federal standard and the 20 effective year, and what I would like to do, 21 if I may, is refer to the type of use and 22 then the year in which the new standard 23 became effective. Toilets, 1994: clothes 24 washers, 2011: showers, 1994; faucets, 1994; 25 dishwashers, 2010. Now, is it your testimony Page 108 98869 msd heading 09 07 11 109 1 that, when I replace my shower head and I'm 2 out of work, that I have to replace my shower 3 head, I won't buy an energy efficient shower 4 head. 5 A. It's my testimony that you are only 6 going to replace your shower head if you have 7 to replace your shower head under depressed 8 economic conditions. If, on the other hand, 9 assuming you don't have a job. on the other 10 hand, if you have a job, and there's a more 11 efficient shower head to be purchased, you 12 might make that discretionary investment, and 13 by doing that, you would make your water 14 consumption more efficient. Use per customer 15 would decline, but the idea that customers 16 will make these discretionary investments 17 during distressed economic times seems highly 18 unlikely. Rather, it seems more likely that 19 normal use per customer will recover to more 20 normal economic times after which consumers 21 will again start making these discretionary 22 investments in these water, more efficient 23 water appliances. 24 Q. As we have just learned, some of 25 these new standards took place in the mid Page 109 98869 msd heading 09 07 11 110 1 90's. Do you have an opinion as to whether 2 the period 2002 to 2007 was normal, a normal 3 economic time? 4 A. I did not dispute the declining trend 5 during that time period. My only dispute is 6 from depressed 2011 levels the trend will 7 continue downward from there, or instead, 8 will it improve to a more normal level, and 9 then that trend will again start to carry on 10 in the way it has in the past. 11 Q. I'm going to make this -- this is 12 LMB-81? 13 MS. MYERS: Correct. 14 MR. ARNOLD: 15 Q. I will represent to all in this hall 16 that I will recreate this document revised so 17 it has a heading, and it's a little more 18 useful than is currently the case. 19 Mr. Gorman, the data for 2001 through 2005 20 comes from MSD Exhibit 4. The information 21 from 2001 to 2005 came from the prior rate 22 filing and figures for 2006 to 2010 came from 23 the current rate filing. In each case, it's 24 Exhibit 4. Well, part of Exhibit 4. In 25 preparation of your testimony, did you review Page 110 98869 msd heading 09 07 11 111 1 the figures between 2001 and 2010 for total 2 contributed wastewater volume? 3 A. It's from the last rate filing. I 4 imagine I looked at it in the last rate 5 filing, but the date I relied on in this case 6 was based on the date of filing in this case, 7 and that would include the current wastewater 8 usage data, as well as number of customers 9 that's contained in this rate filing, and 10 that would reflect 2006 through 2010 actual 11 numbers. 12 Q. Looking at LMB-81, for most years, 13 the actual total contributed wastewater 14 volume declined from 2001 to 2010. I'm 15 reading this directly, only one year in which 16 there was an increase, and there are only a 17 couple of years in which the increase was 18 less than two percent. Now, this is the case 19 for 2002 to 2006, which was pre -fourth 20 quarter 2007 when the economy fell apart. Is 21 it your testimony that these declines are not 22 predictive of what might continue in a period 23 of economic stress in which we now find 24 ourselves? 25 A. well, I don't think this trend helps Page 111 98869 msd heading 09 07 11 112 1 explain that question. Rather, I think you 2 need to look at volumes on a per -customer 3 basis. They will determine whether or not 4 the previous customers are on decline in 5 trend. So this data is incomplete. The 6 complete data that I showed in surrebuttal 7 Schedule G-4, page one and page two for 8 single family, and page two for multifamily 9 and then page three for nonresidential 10 family, and on those schedules, I took the 11 contributed volume of the MSD, divided by 12 number of customers that it applied to, and 13 measured the use per customer over time, and 14 it showed a very large drop in use per 15 customer for the period 2006 through 2010 to 16 the point where use per customer in 2010 was 17 around 82 CCF per customer. whereas it had 18 been in the range of 86 to 92 CCF per 19 customer in the 2006-2007 time period, so the 20 drop from '08 to 2010 was much larger than 21 the drop from '06 to '07. That suggested to 22 me that residential customers' use during the 23 recessionary period was a sharper drop than 24 it was prior to the recessionary period. 25 consequently, I thought it was conservative Page 112 0 98869 msd heading 09 07 11 1 to simply assume that that relatively low use 2 per customer would be held constant 3 throughout the forecast period. I thought it 4 was conservative because I thought the more 5 likely scenario is that first use per 6 customer would recover as the economy 7 recovers, and then the trend to decline in 8 use per customer would start once customers 9 started making these discretionary investment 10 in water conservation equipment. 11 (A brief break was taken to change 12 the CD.) 13 MR. CHAIRMAN: Mr. Arnold, please 14 resume. 15 MR. ARNOLD CONTINUES: Thank you, 16 Mr. chairman. 17 Q. Mr. Gorman, if I understood your 18 testimony just a moment ago, your 19 calculations are usage per customer, single 20 family, multifamily and nonresidential on a 21 per capita basis. Is that correct? 22 A. Per customer basis. 23 Q. I'm sorry, per customer basis. Thank 24 you. why, in your opinion, is that a more 25 valid analysis than the total wastewater Page 113 113 98869 msd heading 09 07 11 1 volume? 2 A. well, the total wastewater volume can 3 be impacted by the number of customers, so if 4 you are losing customers, that will cause a 5 decline in volume. It can also be impacted 6 by use per customer, so looking at the trend 7 in estimating the amount of volume sales on a 8 per customer basis captures both expected use 9 per customer and number of customers. 10 Q. Thank you, sir. Turning to your bad 11 debt expense schedule, I have written over 12 the page number. Page 14. Looking at table 13 one, bad debt expense is a percentage of 14 total sales revenue, and you describe 15 Missouri American water, Laclede Gas and 16 Ameren, Missouri. Is this Missouri American 17 water an investor owned or a municipal 18 operation? 19 A. Investor owned. 20 Q. How about Laclede Gas? 21 A. Investor owned. 22 Q. How about Ameren Missouri? 23 A. Investor owned. 24 Q. Does Missouri American water have the 25 ability to shut off the water for failure to Page 114 114 98869 msd heading 09 07 11 1 pay the bills? 2 A. I think there are constraints on 3 that, but generally, yes. 4 Q. How about Laclede Gas? 5 A. There are constraints on that, also, 6 but generally, they are. During non -cold 7 weather events, it can. 8 Q. How about Ameren Missouri? 9 A. The same. There are constraints, but 10 under certain times of the year, yes. 11 Q. Now, when you describe the 12 restraints, it's my understanding that 13 dependent upon income and weather, there are 14 no restraints on the ability of these three 15 utilities to shut off their service. Is that 16 correct? 17 A. Correct. That's my understanding. 18 Q. May the District shut off the 19 wastewater operation? 20 A. No. 21 Q. Thank you, Mr. Chairman. Thank you, 22 Mr. Gorman. 23 MR. CHAIRMAN: Do any members of 24 the Rate Commission have questions for the 25 current witness? Page 115 115 98869 msd heading 09 07 11 1 QUESTIONING BY MR. CHAIRMAN: 2 Q. Mr. Gorman, I will ask one question. 3 Yesterday we got into a lengthy discussion 4 about the whole financial picture and the 5 spread and all that, obviously. I think -- 6 and you don't have to answer this, if you 7 don't want to. I guess one of the concerns I 8 have in this rate case is where we will be at 9 the conclusion of this rate case going 10 forward with the remainder of the work that 11 needs to be done, if we are setting ourselves 12 up for a high level of indebtedness that may 13 be a case of can abuse that we are kicking 14 the can down the road again. I wonder, since 15 you have spent some time looking forward at 16 what we are seeing in the next three or four 17 or five years, maybe it's in some of the 18 testimony you provided; maybe it isn't, but I 19 guess I would be curious of what your take 20 would be of where we will be at the 21 conclusion of this rate case as far as what 22 we may be thinking about for the next Rate 23 commission. 24 A. In terms of 25 Q. Just in terms of overall ability to Page 116 116 98869 msd heading 09 07 11 1 either raise rates, perform work or issue 2 more debt. 3 A. well, it is my intention to measure 4 rate increases that will not only recover 5 reasonable projections of cost, reasonable 6 projections of revenue of current rates, but 7 to also produce coverage, projected 8 outstanding debt that will maintain 9 investment grade bond rate for the District 10 and in almost all markets, almost all 11 markets, the District will have access to 12 external debt capital. The markets that will 13 not likely have access would be the kind of 14 market we saw in 2008 and 2009 where the 15 markets had almost been completely shut down. 16 with exception for those types of market 17 events, which seem to happen once every 100 18 years, the MSD should be able to fund these 19 required capital improvement programs with a 20 mix of rate revenue funding and debt funding, 21 which is in line with what they are 22 requesting to do in this rate proposal. 23 After they start getting to the middle, 24 towards the end of this very large capital 25 improvement program, I see the coverage of Page 117 117 0 98869 msd heading 09 07 11 1 debt interest that service obligations 2 increasing to a level that may start to pay 3 for all the capital improvements on a 4 pay-as-you-go basis, so in other words, after 5 they get about halfway there, approximately, 6 I would expect the cash revenue funding of 7 the capital improvement program to be a much 8 larger percent of capital improvements at the 9 end of the program than it will be at the 10 beginning of the program. That will 11 accomplish two things. First, it maintains 12 strong credit metrics, debt service coverage 13 ratios. It maintains investment grade bond 14 rating, and second, it helps spread the cost 15 of this capital improvement program out of 16 customers that will benefit from the program, 17 and the price all those customers will pay 18 will be in proportion from the services they 19 receive from the District. So my intention 20 is to design a rate program that both that 21 meets the multiple -prong test of minimizing 22 the rate increase while meeting reasonable 23 projections of operating expenses while 24 funding the necessary capital improvement 25 programs in a way that maintains the Page 118 118 0 98869 msd heading 09 07 11 1 financial integrity of the District and their 2 strong investment grade bond rating but at 3 the lowest possible cost to customers. 4 Q. And you sort of see the full chrome 5 of where that balance between the additional 6 debt issuance and pay -go being increased 7 somewhere about halfway through the program? 8 A. I haven't taken the projections out 9 that way, but we are certainly moving in that 10 direction. Their current debt service 11 coverage is $38 million, have very strong 12 coverage of that. Including the state 13 Revolving facilities, it's about two times 14 coverage. when you double the amount of -- 15 more than double the amount of debt during a 16 forecast period, coverage stays at about 1.7 17 times our proposal, so it's still pretty 18 close to two times, but the dollar amount of 19 that coverage represents how much capital is 20 available, great revenue capital that 21 available to the District to fund capital 22 improvements, so as your debt service 23 increases, and you maintain that coverage 24 about the same, then the dollar amount of 25 that coverage of that service is what's Page 119 119 98869 msd heading 09 07 11 1 available for rate revenue funding and 2 capital programs, so you increase rate 3 revenue funding contributions as we go down 4 the road. 5 Q. Thank you. 6 MR. CHAIRMAN: Questions by the 7 other Rate Commissioners? Thank you, Mr. 8 Gorman. 9 ms. Billie LaConte has also filed 10 surrebuttal testimony. Are you ready to 11 present with that witness? 12 MS. MYERS: We are. 13 Billie LaConte, having first been 14 duly sworn, testified as follows: 15 MR. CHAIRMAN: Does any member of 16 the Rate Commission have any questions for 17 the witness at this time? Ms. Myers, do you 18 have questions for the witness at this time? 19 MS. MYERS: The District does not. 20 MR. CHAIRMAN: Thank you. 21 Mr. Kindschuh? 22 MR. KINDSCHUH: I do not. 23 MR. CHAIRMAN: Mr. Mueller? 24 QUESTIONING BY MR. MUELLER: 25 Q. Yes, I do have a question. You were Page 120 120 98869 msd heading 09 07 11 1 able to examine the Electronic Model with all 2 of the programs intact. Is that correct, or 3 a portion of it? 4 A. I did last week for a few hours. 5 Q. Could you give me and the members of 6 the commission a reading on or a take on what 7 your findings were, having reviewed that 8 model? 9 MS. MYERS: Excuse me. I would 10 like to object to this, respectively. I 11 mean, we have time set aside later in 12 September for the testimony about the model, 13 and this is about surrebuttal today, so I 14 would like to limit those questions to the 15 future hearing regarding the model. 16 MR. CHAIRMAN: Given that there 17 will be an opportunity to field that question 18 later, we will field that question later, so 19 if you will hold that question in abeyance, 20 Mr. Mueller, we will address that during that 21 time. 22 MR. MUELLER: Thank you. I have 23 no further questions then. 24 MR. COFFMAN: No questions. 25 MR. CHAIRMAN: Mr. Arnold. Page 121 121 98869 msd heading 09 07 11 1 MR. ARNOLD: No questions. 2 MR. CHAIRMAN: Does any member of 3 the Rate Commission have any further 4 questions for the witness? 5 Hearing none, since the last page 6 of my script has been misplaced, I am now 7 freelancing. I would like to thank all of 8 the members of the Rate Commission for their 9 time. I would like to thank all the 10 Intervenors for their time and interest. I'd 11 like to thank MSD staff for their input, and 12 we will stand adjourned until the date on our 13 new approved schedule which is -- 14 MS. STAMP: september 26. 15 MR. CHAIRMAN: september 26. Has 16 the location been set? 17 MS. STAMP: we haven't set the 18 room, but it will be at MSD. There is the 19 public hearing first in the morning, and then 20 the Technical conference will start as soon 21 as that public hearing is over. 22 MR. CHAIRMAN: Thank you. we stand 23 adjourned. 24 (At which point, the hearing was 25 adjourned at 12:10 p.m.) Page 122 122 0 98869 msd heading 09 07 11 1 STATE OF ILLINOIS) 2 COUNTY OF MCLEAN )SS 3 1, Holly A. Schmid, a Notary 4 Public in and for the county of McLean, DO 5 HEREBY CERTIFY that pursuant to agreement 6 between counsel there appeared before me on 7 September 7, 2011, at the office of the 8 Maryland Heights Recreation center in 9 Maryland Heights, Missouri, the above hearing 10 touching upon the matter in controversy 11 aforesaid was taken by me in shorthand and 12 afterwards transcribed upon the typewriter 13 and said hearing is herewith returned. 14 15 16 17 18 HOLLY A. SCHMID 19 Notary Public -- CSR 20 084-98-254587 21 22 23 24 25 Page 123 123