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MSD Exhibit No. MSD 115D
2015 Rate Change Proceeding
TIM R. SNOKE
Surrebuttal Testimony
Metropolitan St. Louis Sewer District
June 5, 2015
Page
Utility Expense Escalation Factor 2
Necessary Credit Strength 3
Surrebuttal Testimony of Tim R. Snoke, MSD June 5, 2015
1 UTILITY EXPENSE ESCALATION FACTOR
2 Q1. Is a utility expense escalation factor of 3.0% every other year, as proposed by
3 Michael Gorman in his rebuttal testimony (Exhibit MIEC 102, pg. 20), supported by
4 projected future increases in Ameren Missouri's and Laclede Gas Company's rate
5 base?
6 A. No, it is not. Mr. Gorman states that MSD's utility expense annual escalation factor
7 should generally coincide with outlooks by utility companies of the services they will
8 provide. He states that Ameren Missouri's projected growth in its cost of service is
9 largely tied to its rate base investments, which Ameren projects to grow at a CAGR of
10 2.0% from FY14-FY19, and its rate case cycle (Exhibit MIEC 102, pg19; Exhibit MIEC
11 105F). However, a 3% utility expense escalation factor increase every other year
12 assumes utility costs will rise more slowly than Ameren is projecting its rate base to rise.
13 As shown in Exhibit MSD 115D1, the rate base used to support Ameren's rate hikes
14 since 2007 has increased approximately 20%, or an average of about 2.3% per year. The
15 exhibit also shows that the rates charged to MSD have increased by a much more
16 significant amount - closer to 40% over that time, an average of more than 4% per year.
17 There have been six Ameren Missouri rate increases since the beginning of 2007 and the
18 average rate hike has exceeded 6% per occurrence.
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20 Furthermore, the Ameren presentation and its public filings reveal other factors that
21 impact rate increases such as pension and OPEB costs, expenses related to changes in
22 depreciation rates, new amortization expenses (such as solar rebates), changes in the
23 utility's allowed return on equity, and rate relief for any customer which cost must be
24 picked up by other customers.
2015 Rate Change Proceeding
2 Exhibit No. MSD 115D
Surrebuttal Testimony of Tim R. Snoke, MSD June 5, 2015
While electricity is the largest utility cost for MSD, we also expect that other utility costs
2 will also increase more than Mr. Gorman is projecting. Exhibit MIEC 105E, pages 9 and
3 18, shows that Laclede Group is targeting annual 4-5% growth in a group of factors that
4 includes Laclede Gas Company's rate base (pg. 18). It also expects to spend
5 approximately $1.5 billion of capital from 2015-2019, an increase of about 30% annually
6 from pro forma 2014 levels (pg. 9).
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In conclusion, the District continues to believe that its recommendation of a 5.5% annual
utility expense escalation factor is reasonable. We also believe that the District's
proposal is better supported by the outlooks and expectations of the utilities in question
than the alternative proposed by intervener MIEC.
13 NECESSARY CREDIT STRENGTH
14 Q2. Do you agree with Mr. Gorman's assessment that his proposed revised rates will
15 support MSD's current credit ratings (Exhibit MIEC 102, pg.8, lines 13 — pg. 9, line
16 2) and "... the CIRP program can be supported with larger amounts of debt and
17 still meet the fmancial and credit rating targets needed to maintain strong credit
18 standing of MSD." (Exhibit MSD 102, pg. 18, lines 3-5)?
19 A. Based on the positions taken by the credit rating agencies, my experience with rating
20 agency actions, and consultation with MSD's financial advisor, I believe that reductions
21 to proposed revenues and/or increases in future debt service costs could reasonably lead
22 to lower credit ratings. We have specifically chosen a mix of debt/PAYGO financing and
23 a cash balance target that we believe is consistent with maintaining current ratings.
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2015 Rate Change Proceeding 3 Exhibit No. MSD 115D
Surrebuttal Testimony of Tim R. Snoke, MSD June 5, 2015
1 Mr. Gorman correctly points out that his recommendation will allow MSD to maintain
2 more cash on hand than needed to meet its cash reserve target of 60 days (Exhibit MIEC
3 102, pg. 8, lines 11-13), however, the rating agencies require a significantly higher
4 threshold for MSD to maintain its ratings. Fitch specifically notes that a reduction in
5 liquidity levels below historical norms would likely pressure the rating unless balanced
6 with increased debt service coverage (Exhibit MSD 50). Since we do not agree with
7 intervener MIEC's assumptions regarding utility escalation factors, customer accounts
8 and volumes, and bad debt reserves (as explained in this surrebuttal testimony and that of
9 Theresa Bellville, Exhibit MSD 115E, and Jonathon Sprague, Exhibit MSD 115C), I
10 expect that the lower rates proposed in the rebuttal testimony of Michael Gorman will
11 lead to decreases in both debt service coverage and in days cash on hand, pressuring
12 MSD's ratings and cost of borrowing.
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14 Q3. Does that conclude your surrebuttal testimony?
15 A. Yes it does.
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2015 Rate Change Proceeding 4 Exhibit No. MSD 115D