HomeMy Public PortalAboutExhibit MIEC 137 - Missouri Industrial Energy Consumers Prehearing Conference ReportWastewater and Stormwater Rate Change Proceeding — 2015
Prehearing Conference Report of Intervenor MIEC
BEFORE THE RATE COMMISSION
OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT
For Consideration of a Wastewater
and Stormwater Rate Change Proposal
by the Rate Commission of the Metropolitan
St. Louis Sewer District
PREHEARING CONFERENCE REPORT OF
INTERVENOR MISSOURI INDUSTRIAL ENERGY CONSUMERS
Pursuant to § 7.280 of the Charter Plan of the Metropolitan St. Louis Sewer District (the
"Charter Plan"), Operational Rule 3(9) and Procedural Schedule § 8 of the Rate Commission of
the Metropolitan St. Louis Sewer District ("Rate Commission"), the Intervenor Missouri
Industrial Energy Consumers ("MIEC") hereby submits this Prehearing Conference Report.
I. Background
The Metropolitan Sewer District ("MSD" or the "District") is proposing four consecutive
increases to its wastewater service charges at the beginning of fiscal years 2017 through 2020.
MSD is proposing these rate increases in order to fund a four-year wastewater Capital
Improvement and Replacement Program ("CIRP") of approximately $1.5 billion. This program
is part of a larger CIRP needed to comply with a Consent Decree entered into with the U.S.
Environmental Protection Agency ("EPA").
MSD projects the wastewater user charges necessary to produce adequate rate revenue
funding in order to fund this CIRP with increased senior revenue bonds, and state revolving
funds proceeds, and approximately 72.4% debt and 27.6% other funding sources, including
current rate revenue (i.e., "PAYGO") funding. MSD's projections also reflect forecasts for
changes in billing units, number of customers, reductions in other revenue sources, and large
escalation in operation and maintenance ("O&M") expenses. Assuming the bond proposal
outlined by MSD is passed by the voters, MSD estimates that it will require "increases in
revenues averaging 9.8% each year of the Rate Proposal period."'
1 MSD Rate Change Proposal, Exhibit MSD 1, p. ES-4.
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MSD has also proposed significant changes to its stormwater charge, which would entail
seeking voter approval to implement a District -wide stormwater tax, based on assessed property
values, to largely replace the current stormwater rate structure.
After a careful analysis of the data and projections presented by MSD, as well as data and
projections from sources independent of MSD and MIEC, it is clear that MSD has understated its
anticipated revenue, which leads to an unjustified increase in rates on its customer base. MIEC
is thus recommending modifications to MSD's rate model to more accurately reflect MSD's
actual revenues. MIEC is also recommending adjustments to MSD's projected O&M costs,
which adjustments more closely reflect MSD's utility providers' own projections of cost
increases. Finally, MIEC is proposing modifications to MSD's proposed PAYGO structure to
help alleviate the significant rate increase burden on MSD's customers.
II. The Public Benefits Greatly From the Rate Commission's Careful Scrutiny of
MSD's Proposal
The record in this case shows that over at least the last two cases, MSD has consistently
overstated the level of wastewater user charges needed to recover its cost of service and fund the
capital expenditures needed to comply with the Consent Decree. The Rate Commission reduced
the District's proposed wastewater surcharge by 5% to 10% in MSD's last two wastewater rate
proceedings.2 Despite this meaningful correction to MSD's requested wastewater user charges,
MSD acknowledged that it has been able to comply with the requirements of the Consent
Decree, and is in fact "on schedule and under budget."3
In its arguments before the Rate Commission, MSD claims that if it overstates its revenue
requirement in this case, it will simply have more funding for its CIRP.4 The shortcoming of this
argument, however, is that it illustrates MSD's insensitivity to setting prices at a level that ensure
customers pay rates that are no higher than necessary to fund reasonable and prudent operating
costs and to fund this extraordinary CIRP program in a timely and economic manner consistent
with MSD's budgeted requirements. To receive rate revenue funding in excess of what is
necessary during the next four years will cause unjust and unreasonable rate burdens on
2 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 102, p. 9 and Schedule MPG-3.
3 Testimony of Susan Myers, MSD General Counsel, at the April 8, 2015, First Technical Conference,
Exhibit MSD 96, p. 12, lines 14-17.
4 MSD's Prehearing Conference Summary, Exhibit MSD 131, p. 7.
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customers. Moreover, it sets an artificially high baseline for the next MSD rate proposal in four
years.
Further, MSD's willingness to inflate the revenue requirement eliminates its incentive to
aggressively manage its cost of providing service and aggressively manage its CIRP program.
The Rate Commission should insist that MSD set the bar high enough to ensure that it will
aggressively manage its costs and CIRP program.
Accordingly, it is the Rate Commission's obligation to help protect customers from the
District's insensitivity to maintaining a competitive price structure. Just as in the previous rate
proceedings, MSD's customers are completely dependent on the Rate Commission's need to
exercise its authority to recommend reductions in the excessive increases in wastewater rates
proposed by MSD.
III. MSD's Overly -Conservative Rate Proposal Will Result in an Unnecessarily Drastic
Rate Increase on Customers
The Rate Commission must ensure that MSD's proposed rate increase meets all of the
five factors outlined in Section 7.270 of MSD's Charter. Specifically, the Commission must find
that MSD's proposed rate change, and all portions thereof, meet the following five criteria:
(1) is consistent with constitutional, statutory or common law as amended from time
to time;
(2) enhances the District's ability to provide adequate sewer and drainage systems
and facilities, or related services;
(3) is consistent with and not in violation of any covenant or provision relating to any
outstanding bonds or indebtedness of the District;
(4) does not impair the ability of the District to comply with applicable Federal or
State laws or regulations as amended from time to time; and
(5) imposes a fair and reasonable burden on all classes of ratepayers.
Of these five factors, the MIEC asserts that MSD's proposed rate increase does not meet
the fifth criteria because MSD's proposed rate increase requires ratepayers to pay rates that are
both unjustified and excessive. As articulated by the parties to this proceeding, the "fair and
reasonable" factor is the key consideration for the Rate Commission in this proceeding.5
However, MIEC also believes that setting appropriate, non -excessive rates now will help ensure
that MSD can satisfy other factors now and in the future, namely the ability to provide "adequate
5 MSD's Prehearing Conference Summary, Exhibit MSD 131, p. 2.
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sewer ... systems and facilities" and "the ability ... to comply with applicable Federal or State
laws or regulations ...."
A. MSD's Proposed Wastewater User Charge Increases are Overstated, and
Should Be Reduced
The evidence introduced in this proceeding shows that MSD has again understated its
revenue streams, which leads to a request for user charges that are unnecessarily inflated by
nearly ten percent. First, MSD has substantially underestimated "Other Revenues" in its forecast
by understating non wastewater user surcharge sources of revenue. These Other Revenues
sources include MSD's waste hauler fees/permits, its bad debt provisions, and its late charge
penalties. By substantially understating these Other Revenue sources, MSD is falsely creating a
need for an additional increase in wastewater revenue to replace these other water revenue
sources. Second, MSD has substantially understated the volumes of wastewater received from
unmetered customers, as well as the total projected number of customers, which results in an
unnecessary increase in proposed rates on the customer base.
1. MSD Understates its Other Revenue Associated with Waste Hauler
Permit Fees by More Than 50%
As shown in Exhibit MSD 1, MSD has consistently generated about $2.2 million per year
in waste hauler revenue fees from FY2013 — FY2015.6 In the MSD forecast, however, it projects
these revenues to decline to $675,000 per year during FY2017 — FY2020.7 MSD's
understatement of these revenues has not been fully supported by the District. MSD suggests
that the competition for waste hauler fees increased in FY2012.8 However, despite this increased
competition for non-MSD-related waste hauler services, the license, permits and other fees
generated did not decline nearly as much as projected by MSD. Indeed, as stated by MSD,
FY2014 saw a significant increase in the "Other Fees" portion of its operating revenue (of which
waste hauler permit fees is a part) "due primarily to an increase in waste haul permits."9 The
collection during this fiscal year alone was more than the total amount MSD estimates to collect
during the four years from FY2017-FY2020. Accordingly, MIEC proposes to increase these
6 MSD Rate Change Proposal, Exhibit MSD 1, p. 4-11, line 4, which contains actual numbers for FY
2013 and FY 2014, and a budgeted number for FY 2015.
MSD Rate Change Proposal, Exhibit MSD 1, p. 4-11.
8 Surrebuttal Testimony of Richard Unverferth, Exhibit MSD 115B, p. 2.
9 MSD's Comprehensive Annual Financial Report for the Fiscal Year Ending June 30, 2014, Exhibit
MSD 25, p. 9;
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waste hauler permit fee revenues from $675,000 per year as projected by MSD up to $1 4 million
per year, a number more in line with historical averages.1°
2. MSD Understates its Other Revenue Associated with Bad Debt
MSD's proposal utilizes a bad debt provision of 1.5% of the wastewater rates during the
forecast period.11 However, its actual collections during the period FY2010 — FY2014 show that
this bad debt provision has declined to 1%, a number which MSD attributes to the success of bad
debt collection programs that it intends to continue.12 One percent should be included in the
forecast, not MSD's unsupported 1.5%. Because bad debt is recognized as a negative against
Other Revenue sources in MSD's forecasting, adjusting the bad debt provision to reflect
historical numbers results in the addition of nearly $2 0 million per year on average to MSD's
Other Revenues.
3. MSD Understates its Other Revenue Associated with Late Payment
Penalty Charges
MSD has also understated the amount of revenue it will collect through late payment
penalty charges to customers. Late payment charges are based on a penalty applied to the unpaid
bill.13 As MSD's rates increase, the amount of unpaid bills will increase, and the late charge
penalty will increase in line with MSD's wastewater rates.14 Correcting MSD's projection of
late charge penalty revenues will increase Other Revenues by approximately $3.5 million per
year on average during the forecast period.
4. MSD Has Understated the Number of Customers and Projected
Volume of Sales for Non -Metered Customers in its Forecast
As it did with certain sources of Other Revenue, MSD has underestimated the number of
customers and the volume of wastewater for unmetered customers during the forecast period.
The result of this underestimation is additional unnecessary increase in the wastewater user
charges.
a. MSD Understates the Project Volume of Wastewater Received
from Non -Metered Customers
1° Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 102, p. 6.
11 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 102, p. 6; MSD Rate Change Proposal,
Exhibit MSD 1, p. 4-11.
12 Testimony of Theresa A. Belleville at the Third Technical Conference, Exhibit MSD 127, pp. 94-95.
13 Testimony of Theresa A. Belleville at the Third Technical Conference, Exhibit MSD 127, pp. 95-96.
14 Testimony of Theresa A. Belleville at the Third Technical Conference, Exhibit MSD 127, pp. 95-96.
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MSD assumes, without corresponding verification in costs or other operating data, that
the volume used by unmetered customers will materially decline almost 10% in FY2017 relative
to FY2016.15 MSD indicates that this anomalous decrease is the result of a recalibration of the
amount of flows per attribute, and referenced calculations that purport to support this
recalibration.16
Puzzlingly, MSD has made no effort to actually measure wastewater volume from
unmetered customers to determine if its projections are accurate.17 MSD's projected decline in
unmetered customer sales is based on its consultant's assumptions regarding what they believe
unmetered volume sales to customers should be. However, that consultant doesn't appear to
have tested MSD's actual volume treatments, volume flow in its water treatment process, or
water collection process. There is simply no operational data to support the assumptions made
by MSD.
In fact, MSD's projection for reduced volume sales to unmetered customers is
inconsistent with City of St. Louis Water Divisions projections for water sales to unmetered
customers, which has a direct correlation to the amount of wastewater discharged by these
unmetered customers.18 As previously outlined in detailed by MIEC, the Water Division's data
indicates that water use by unmetered customers has been flat or increasing over the period 2012
— 2014,19 which refutes the basis for MSD's revised attribute calculations.
MIEC also notes that MSD did not make any adjustments in O&M expenses, such as
utility or chemical treatment costs, that should accompany such a significant decrease in
wastewater volumes.20 MSD simply cannot have it both ways — a reduction in volume sales, but
no reduction in the cost of pumping and treating the reduced volume.
There is no dramatic decline in water sales to unmetered customers and the assumptions
are simply faulty and unreliable. Accordingly, MIEC recommends revising MSD's proposed
15 MSD Rate Change Proposal, Exhibit MSD 1, p. 4-7, line 6.
16 Testimony of Brian Hoelscher, Third Technical Conference, MSD Exhibit 127, p. 32, lines 8-18; MSD
Rate Proposal, Exhibit MSD 1, Appendix 7.1.4.
17 Testimony of Brian Hoelscher, Third Technical Conference, MSD Exhibit 127, p. 32, lines 3-7.
18 MIEC's Responses to MSD's First Discovery Requests, Exhibit MIEC 105A, pp. 3, 6.
19 MIEC's Responses to MSD's First Discovery Requests, Exhibit MIEC 105A, pp. 3, 6, Attachment 3.
20 MIEC's Responses to MSD's First Discovery Requests, Exhibit MIEC 105A, pp. 3, 6.
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wastewater volume associated with unmetered customers with a linear decline that more closely
reflects actual sales.21
b. MSD Understates the Total Number of Customers
MSD's projections for a decline in number of customers over the forecast period is also
unreliable. MSD's number of customers did decline up through FY2013, although the decline in
FY2013 was about half of the decline in FY 2012.22 Then, in FY2014, the number of customers
in the system actually increased by a relatively significant amount.23 This increase is consistent
with an increasing number of construction permits issued by MSD. In FY2010, MSD issued 763
new permits.24 By FY2014, this number had increased to 1764 new permits.25 This data actually
illustrates that as of FY2014, MSD is adding more customers than it is losing. Therefore, its
projection for the continuing decline in number of wastewater accounts simply does not reflect
improving ea°onomic conditions in its service territory. 26
Independent economic projections have a very positive outlook for MSD service territory
during the forecast period. For example, projections for new housing starts shows an expected
significant improvement in new housing developments in MSD's service territory over the
forecast period. Single and multi -family housing starts are projected to be at more than twice the
rate during the forecast period than that realized over the last five years.27 This projection by an
21 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 102, pp. 13-14.
22 MSD Rate Change Proposal, Exhibit MSD 1, p. 4-4, Table 4-2.
23 MSD Rate Change Proposal, Exhibit MSD 1, p. 4-4, Table 4-2.
24 Comprehensive Annual Financial Report for Fiscal Year Ending June 30, 2010, MSD Exhibit 21, p. 5.
25 Comprehensive Annual Financial Report for Fiscal Year Ending June 30, 2014, MSD Exhibit 25, p. vii.
26 MSD has challenged MIEC's projections in the 2011 rate case as being less accurate than MSD's own
projections for volume sales and number of customers. However, MSD's analysis supporting this was
flawed. When corrected, it shows that MIEC's projections in the last case are more accurate than the
District's. MSD witness Theresa Bellville compared MSD's projections and MIEC's projections in the
2011 case to MSD's actual sales during this time period. She concluded that MIEC's projections
exceeded actual levels, when MIEC is more in line with the actual levels. However, Ms. Bellville relied
on MSD's data for FY2014 volumetric sales, even though MSD itself concluded that that year's sales data
were flawed because of a change in billing practices by Missouri -American Water Company. If Ms.
Bellville's analysis is corrected, and FY2014 volumetric sales are corrected to reflect MSD's actual sales
level as proxied by FY2015, then Ms. Bellville's analysis shows that MIEC's projections in the last case
more accurately reflected MSD's actual volumetric sales during the period FY2011-FY2014. In contrast,
MSD's projections are only accurate if you do not adjust for the FY2014 sales, which MSD itself
acknowledges are flawed and inaccurate.
27 MIEC's Response to MSD's First Discovery Requests, Exhibit MIEC 105A, p. 2 and Attachment 2.
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independent economic service supports the use of a conservative projection of MSD's number of
sewer accounts during the forecast period. A projection of no change over the forecast period, as
proposed by MIEC, is very conservative.
B. MSD Overstates its O&M Expense Escalation as a Result of Overstating
Projected Utility Costs
MSD's Rate Proposal assumed a 5.5% increase in utility prices over the forecast period.28
However, MSD's assumptions for this 5% are based on changes in electric utility rates that have
occurred over the last five years, which included a period of significant capital expenditures by
Ameren Missouri.29
MIEC, on the other hand, relied on projections by MSD's actual electric and natural gas
service providers in arriving at a much lower escalation of electric and natural gas service
prices.30 Based on Ameren Missouri's own projections, Ameren Missouri projects a cost
increase of 2% per year during the term of the Rate Proposal, which will be much lower than the
cost increases that have occurred over the last 10 years.31 This is due to a more modest capital
program by Ameren Missouri and an appreciable reduction in the level of rate increases
necessary to support its more modest capital program.
MIEC estimates that a reasonable increase in utility prices is more in line with 3% every
other year. This estimate is more consistent with utility service projections for rate cost changes
during the forecast period. MSD's reliance on only historical data, without considering utilities'
own projections of changes in cost and rates, simply is not complete.
C. MSD's PAYGO Should be Modified During the Start of its Capital Program
Peak
MSD is proposing to increase its internal PAYGO from $20 million to $40 million
(approved in the FY2011 — FY2014 rate case) up to $70 million to $114 million during the
forecast period FY2017 — FY2020. MSD's proposal for an increase of over three times of
internal PAYGO funding would create unnecessary price pressure on its customers.32
28 Surrebuttal Testimony of Tim R. Snoke, Exhibit MSD 115D, p. 3, lines 8-9.
29 Surrebuttal Testimony of Tim R. Snoke, Exhibit MSD 115D, p. 2, lines 13-18.
3° Gorman Rebuttal Testimony, p. 19, line 14, through p. 20, line 2.
31 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 102, p. 19, lines 17-19; Responses of MIEC
to MSD's First Discovery Requests, Exhibit MIEC 105A, Attachment 4.
32 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 102, p. 17.
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Starting in FY2020, MIEC recommends that the amount of PAYGO funding be limited to
$100 million per year, and additional debt should be used to fund the peak of MSD's planned
capital program.33 MIEC acknowledges that soon after FY2020, the amount of PAYGO funding
is going to be dictated by meeting debt service coverage requirements, and out -of -target level of
internal funding as a percentage of capital spend.
IV. MIEC's Adjustments to MSD's Rate Proposal Would Help Ensure a Fair and
Equitable Rate
The evidence presented in this rate case demonstrates that MSD is overstating its cost of
service over the forecast period and its proposed rate increase is materially higher than
necessary. MIEC has identified several key areas where MSD has made unreasonable cost
projections, which have the effect of imposing a burden on ratepayers that is neither fair nor
reasonable.
Based on the foregoing, combined with the testimony and evidence introduced in this
proceeding, MIEC proposes the following adjustments to MSD's Rate Proposal:34
1. Increase in Other Revenue sources of the following: (a) increase waste hauler
permit fee revenues from $675,000 per year as projected by MSD up to $1.4
million per year; (b) maintain a bad debt provisions of 1%, which is reflective of
current historical averages; and (c) modify Other Revenue associated with late
charges to be in line with wastewater user charges over the forecast period.
2. MIEC recommends revising MSD's proposed wastewater volume associated with
unmetered customers with a linear decline that more closely reflects actual sales.
MIEC also recommends that MSD project its number of customers to remain flat
over the relevant period, a conservative projection considering data suggesting a
potential increase in the total number of customers.
3 Starting in FY2020, the amount of PAYGO funding be limited to $100 million
per year, and additional debt should be used to fund the peak of MSD's planned
capital program.
4. Use of a reasonable yet conservative increase in utility costs of 3% every other
year during this Rate Proposal period.
33 Rebuttal Testimony of Michael P. Gorman, Exhibit MIEC 102, p. 17.
34 The actual changes to the rate model suggested by MIEC are outlined in the Rebuttal Testimony of
Michael P. Gorman, Exhibit MIEC 102, Schedule MPG-4.
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The net effect of the adjustment proposed by MIEC is a wastewater rate structure that
results in rates that are roughly 10% lower than the rates proposed by MSD. This reduction is
consistent with Rate Commission recommendations in past proceedings, yet still provides MSD
the capital it needs to undertake the CIRP and the incentive to appropriately manage the funds
received from ratepayers.
MIEC recognizes that MSD and the Rate Commission are rightfully concerned about
MSD's credit metrics and maintaining its current bond ratings. If MIEC's proposed
modifications to MSD's Rate Proposal are adopted, based on our revised cost of service and
financial outlook, MSD will maintain total debt service coverage of at least 1.8x, and senior debt
coverage always exceeding 2.45x. Further, MSD will always maintain considerably more cash
on hand than needed to meet 60 days of next year's O&M expenses and cash reserve target for
MSD. With these credit metrics, MIEC's proposed revised rates will support MSD's
Aa1/AAA/AA+ bond ratings from Moody's, S & P and Fitch, respectively, as well as continued
access to low cost revenue bond funds that are needed to support MSD's major CIRP program.
V. MSD's Proposed Stormwater Tax Based on Assessed Property Values is Neither
Fair nor Equitable
MIEC does not believe that a stormwater rate structure based on a tax on assessed
property value is fair or equitable. In large part, this is because assessed property values bear no
causal relation to the costs incurred by the stormwater service provider. This issue has been
addressed in detail by Intervenor Home Builders Association and by the Rate Commission's own
counsel, as well as by MIEC in its own filings, and MIEC urges the Rate Commission to reject
MSD's proposed uniform rate of property value stormwater tax. Rather, MIEC believes MSD
should either retain its current stormwater charges and tax structure, or seek voter approval for an
impervious area -based proposal that does have a strong connection to cost -causation.
VI. Conclusion
MSD's proposed rate increase understates revenue, overstates costs, and results in
excessive wastewater rates. As such, it does not meet the Charter Plan criteria because it does
not impose a fair and reasonable burden on all classes of ratepayers. In order to make the
proposed rates fair and reasonable, and to help ensure adequate revenue in the future to provide
sufficient services and meet legal obligations, MSD's proposed wastewater rates should be
reduced.
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The Rate Commission has successfully reduced MSD's rates in previous proceedings,
while leaving MSD in a position to fully recover its cost of service and fund its targeted capital
improvements, at a level that allows it to have been on target and under budget to date. The
benefits to MSD's customers are significant, and rejecting unjustified and unnecessary increases
in wastewater rates should remain a high priority of this Rate Commission.
Based on MIEC's filing in this case, we believe MIEC's wastewater rates should be
approximately 10% lower than the MSD Staff has recommended. This proposal takes into the
account the numerous — and significant — adjustments that the MIEC has proven to be necessary
to make the Rate Proposal reasonable.
Thank you for your time and consideration. We are grateful for your service and for
ensuring that the obligations under the Charter are met with respect to MSD's 2014 Rate
Proposal.
Dated: July 8, 2015
Respectfully submitted,
BRYAN CAVE LLP
By:
Di a M. Vuylsteke, #42419
Br don W. Neuschafer, #53232
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102
Telephone: (314) 259-2543 (Diana)
Telephone: (314) 259-2317 (Brandon)
Facsimile: (314) 259-2020
dmvuylsteke@bryancave.com
bwneuschafer@bryancave.com
ATTORNEYS FOR MIEC
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CERTIFICATE OF SERVICE
The undersigned certifies that a copy of the foregoing was sent by electronic transmission
to the following on this 8th day of July, 2015.
Ms. Janice Fenton
Office Associate Senior
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
jfenton@stlmsd.com
Ms. Susan Myers
General Counsel
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
smyers@stlmsd.com
Mr. John Fox Arnold
Lashly & Baer, P.C.
714 Locust Street
St. Louis, MO 63101
jfarnold@lashlybaer.com
Ms. Lisa O. Stump
Lashly & Baer, P.C.
714 Locust Street
St. Louis, MO 63101
lostump@lashlybaer.com
Mr. Brad Goss
Smith Amundsen, LLC
120 South Central Avenue, Suite 700
St. Louis, MO 63105-1794
bgoss@salawus.com
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