HomeMy Public PortalAboutExhibit MSD 91 Transcript September 7, 2011 Surrebuttal TestimonyExhibit MSD 91
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MEETING OF THE RATE COMMISSION
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METROPOLITAN ST. LOUIS SEWER DISTRICT
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SURREBUTTAL TESTIMONY
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SEPTEMBER 7, 2011 -DAY 2
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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
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MR. MICHAEL GORMAN:
13 Questioning by:
Mr. Arnold: 100
14 Mr. Chairman: 116
15 MS. BILLIE LACONTE:
Questioning by:
16 Mr. Mueller: 120
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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
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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
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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.
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1 MR. CHAIRMAN: As I understand it,
2 those questions were based on the testimony
3 that was submitted. Is that accurate?
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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
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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,
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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
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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,
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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
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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
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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
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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
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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
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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.
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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"
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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.
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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
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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.
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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
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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
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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
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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
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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?
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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
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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
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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?
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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 --
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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
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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,
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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
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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
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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
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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.
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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
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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
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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
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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?
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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
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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.
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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,
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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,
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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.
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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.
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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
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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
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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
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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.
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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?
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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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.
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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.)
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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
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