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MSD Exhibit No. MSD II5E
2015 Rate Change Proceeding
THERESA A. BELLVILLE
Surrebuttal Testimony
Metropolitan St. Louis Sewer District
June 5, 2015
Page
Wastewater 2
Stormwater 8
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5. 2015
I WASTEWATER
2 Q1. Does your analysis indicate that forecasts of improving general economic conditions
3 in the St. Louis area will result in increased numbers of accounts or billed usage?
4 A. No, our analysis does not find a correlation between positive economic forecasts and
5 changes in accounts or billed usage.
6
7 Michael Gorman in his testimony to the Rate Commission dated July 18, 2011, and
8 marked as Exhibit MIEC 29 in those rate commission proceedings, provided testimony
9 beginning on Page 7 of that document regarding a positive economic outlook as a reason
10 to hold customer and sales forecasts constant. He is making the same recommendation
11 regarding the District's Rate Change Proposal dated February 26, 2015, using positive
12 economic indicators (in the form of projected housing starts) again as his justification. In
13 Tables 4-2 and 4-3 of the Rate Change Proposal marked Exhibit MSD 1, it is clear that
14 customer accounts and volume sales declined from FY11 to FY14 despite the positive
15 economic outlook Michael Gorman quoted in support of his recommendation. Had the
16 District followed his recommendation to keep customer and sales projections at the 2011
17 level, the District would have suffered a $7 3 million greater deficit than was actually
18 experienced using the District's proposed usage levels. The District, using historical and
19 other factors during that previous rate case would have been within $2.0 million, or
20 0.73%, of the actual experience if the impacts of the FY14 commercial billing shortages
21 are taken into account. Since corrections for the commercial billing shortage were made
22 in FY15, they are outside of the four years as presented in MSD Exhibit 115E1.
23
24
2015 Rate Change Proceeding 2 Exhibit No. MSD 115E
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5, 2015
1 Also, specifically with respect to the housing starts information Michael Gorman uses for
2 the basis of his adjustment in his written testimony, it is important to note that the
3 housing start data he quoted is for the St. Louis, MO -IL Metropolitan Statistical Area
4 (MSA). As shown in Exhibit MSD 115E2, the St. Louis, MO -IL MSA includes 13
5 counties in Missouri and Illinois that are not part of MSD's service area. The Home
6 Builders Association of St. Louis & Eastern Missouri (HBA) publishes historical housing
7 permit information that shows permits for new family housing in St. Louis County and
8 City. Exhibit MSD 115E3, shows the numbers provided by HBA. It is important to
9 realize that while the number of housing permits issued increased year -over -year in some
10 instances, MSD experienced declines in both the number of customers and billed
11 volumes for those same years. This indicates no direct correlation exists between
12 housing starts and MSD customer and volume movements over that time period.
13
14 Q2. Have adjustments to the District's forecast of the bad debt provision been
15 recommended? If so, what was the basis for the adjustment?
16 A. Yes, Michael Gorman made a recommendation to reduce the District's forecasted bad
17 debt provision from 1.5% of user charges to 1.0% of user charges on page 21 of his
18 testimony, Exhibit MIEC 102. Mr. Gorman states that the basis for the adjustment would
19 be the District's historical average for the provision is 1.0%.
20
21 Q3. Do you agree with Michael Gorman's recommendation? Why or why not?
22 A. I do not agree with his recommendation. Mr. Gorman does not remove the one-time
23 change in methodology adjustment that occurred in FY14 from his calculation of the
24 average. Due to the change in calculation method, the District made a one-time credit
25 adjustment representing an accumulated estimate recorded in prior years of $9.8 million
2015 Rate Change Proceeding 3 Exhibit No. MSD 115E
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5, 2015
1 in FY14 as supported in appendix 7.3.1 of MSD1. Removing FY14 from the equation to
2 calculate the average, results in an average of 2.4% for FY11 to FY13. If FY14 was
3 included and the effects of the one-time adjustment of $9.8 million were removed, the
4 average would be 2.0%. The District does recognize and acknowledge that through a
5 more robust collection effort the bad debt provision as a percentage of sewer service
6 charge revenues is trending downward. It is for this reason that the District used 1.5% in
7 the rate modeling calculations rather than a higher historical average. The table below
8 illustrates these results.
9
From MSD Exhibit 840
FY10 FY11 FY12 FY13 FY14
42100- SSC Doubtful Accounts (10,574,682) (6,273,875) (7,052,648) (2,845,298) 7,080,659
42200- Misc SSC Doubtful Accounts 387,174 25,194 140,799 190,654 129,663
Total
(10,187,508) (6,248,681) [6,911,849) (2,654,644) 7,210.322
Calculation of Bad Debt as % of SSC Revenue .[.
SSC Revenue (Actuals from Budget
Books)
204,4.89,000 213,503,731 222,425,958 233,882,797 245,555,629
Bad Debt as a Percent of SSC Rev -5.0% -2.9% -3.1% -1.1%
Running Average Beginning in FY10 -4.0% -3.7% -3.0%
Running Average Beginning in FY11 -3.096 -2.4%
2.9%
-1.8%
Approximation of the calculation provided in Michael Gorman's testimony.
Calculation eliminating FY14 (due to true up for new calculation method). Note, that if FY14 was included in the average
01thgsa&pe. * f.:01:4Ateim004.0410,dbtg..4 it aMirat tile malfzairk w h(4 47,424444a642,4%.
10 Q4. Did Michael Gorman recommend a change to the District's projected late charge
11 revenues?
12 A. Yes, in his response beginning on page 21, line 24 of Exhibit MIEC 102 Mr. Gorman
13 recommended that the District should escalate late charge revenues at the same pace as
14 user charges.
15
16 Q5. Do you agree with Mr. Gorman's analysis? Why or why not?
17 A. I disagree with the premise that late charges are directly correlated with user charges.
2015 Rate Change Proceeding
4 Exhibit No. MSD 115E
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5, 2015
I Between FY10 and FY14, late charge revenue has decreased each year. See the table
2 below. During that same time period, the District raised sewer service charges each year.
3 So, in fact, there has been a negative correlation between user charge increases and late
4 fees over the past 5 years.
5
Metropolitan St. Louis Sewer District
Cost of Service and Financial Planning Model
Schedule 2-16(T): Projection of Total Other Operating Revenue
FY2010 FY2011 FY2012 FY2013 FY2014
Other Operating Revenue Actual Actual Actual Actual Actual
Billing Adiustment
1. Late Charges $ 4,725,609 $ 4,597,600 $3,341,665 $ 2,753,665 $2,589,722
6 Q6. Is there a relationship between bad debt provision and late charges?
7 A. Generally it is expected that late charges and the bad debt provision as a percentage of
8 sewer service charges will move in the same direction. This will not always hold true.
9 However, it is not logical to expect the bad debt provision as a percentage of sewer
10 service charges would decline (an indication of improved collection efforts) while
11 projecting late charges to increase (an indication of declining collection results) at a rate
12 of nearly 11 percent each year. Therefore, the two adjustments recommended by Michael
13 Gorman in his testimony related to bad debt provision and late charges are contradictory.
14
15 Q7. In Pam Lemoine's response to Question 31 of her Rebuttal Testimony, Exhibit
16 RC 101, she discusses the impact of future rates. Does MSD have any projections of
17 future rates beyond what is presented in the Rate Proposal?
18 A. The District has performed limited modeling of three different scenarios for a 16-year
19 period beginning with FY17. This is provided for information purposes only and is not
20 intended to indicate any plans for future funding but to show relative impacts of possible
21 funding scenarios on future rates.
2015 Rate Change Proceeding 5 Exhibit No. MSD 115E
2
3
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5, 2015
The graph below tracks the projected monthly wastewater bill for a residential metered
customer using 7 Ccf of water per month. As you will see, use of bonds through the next
two rate cycles provides a more gradual and smooth increase in rates.
Monthly Bill for 7 Ccf Residential Metered Customer
$110.00
$90.00
$70.00
$50.00
$30.00
A
a
ti
— Cash -Cash -Cash -Cash
—
_ # L5777
OM r2
Bond -Cash -Cash -Cash —Bond-Bond-Cash-Cash
4
5 The biggest difference makers in these scenarios are debt service and PAYGO funded
6 CIRP. MSD Exhibit 115E4 shows the breakdown of these components of the bill for a 7
7 Ccf Residential Metered customer.
8
9 The next graph shows the cumulative impact of the wastewater charges for a residential
10 metered customer using 7 Ccf of water per month. The cost to that typical customer for
11 wastewater service over the 16-year period is very similar in total across all three
12 scenarios. The cumulative wastewater bills range from $16,103 if bonds are used in the
13 first 8 years to $16,592 if no additional bond authorizations are granted. That is a
14 difference of $489, or 3%, over a 16-year period.
15
2015 Rate Change Proceeding 6 Exhibit No. MSD 115E
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5, 2015
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000 i
$4,000
$2,000 i
Cumulative Annual Bill by Funding Scenario for 7 Ccf Residential Metered Customer
lb IL
5
• Cash -Cash -Cash -Cash
■ Bond -Cash -Cash -Cash Bond -Bond -Cash -Cash
Below are major assumptions that should be understood when reviewing these long-term
projections.
A. These graphs are provided to give a long-term outlook for rates under three
different funding scenarios.
1. Cash financing (no bonds) for FY17 — FY32
2. Bond financing for FY17 — FY20 and cash financing for FY21 — FY32
3. Bond financing for FY17 — FY24 and cash financing for FY25 — FY32
B. Projections, especially those beyond FY20 will be revised for future rate cases
using all available information at that time which is pertinent to those estimates.
C. All CIRP spending in FY25 — FY32 is required to meet Consent Decree
requirements. Additional levels of CIRP spending for potential regulatory changes have
not been anticipated in these scenarios.
D. Inflation factors for FY24 were carried forward in FY25 FY32 without any
further analysis or attempt to take into account how they might change.
E. A cost of service study was not performed for any years beyond FY17.
Therefore, all rate increases in FY18 — FY32 are level across the different types of rates.
In other words, while the proposed rates are sufficient for cost recovery, some
components of the rate may be too high while others are too low.
2015 Rate Change Proceeding
7 Exhibit No. MSD 115E
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5, 2015
F. Incremental operating expenses beyond FY20 were not considered as part of this
2 extended projection.
3 G. These projections maintain the District's coverage ratio targets; however no
4 testing was done to ensure cash -on -hand targets were met in fiscal years FY25-FY32.
5 H. Staffing decreases due to reductions in program size are not included.
6
7 STORMWATER
8 Q8. Does the District's proposal properly reflect the timing of the increased revenue
9 from the proposed stormwater tax change?
10 A. Yes, the District's proposal does properly reflect the timing of the proposed stormwater
1 tax revenue. The timeline below illustrates how the District plans to collect an entire year
12 of the new tax revenue in FY17.
13
14
15
16
17
The Assessor's
office will
establish the fair Submit tax rates
market value of to City and Coiled tax
all real property County revenue (due
as of January 1, September 30, date December
2016 2016 31, 2016) in FY17
I • • • • 0
Vote on SW Tax Tax bills sent by Tax revenues
(at latest) August City and County - collected by the
2016 October 2016 Collector's of
(recognized Revenue sent to
revenue on MSD January
financial 2017
statements)
Q9. Has the Rate Commission previously received testimony that conflicts with the time
line you have used to illustrate when the District could begin to receive a full year of
tax revenue from the new stormwater tax?
2015 Rate Change Proceeding
8 Exhibit No. MSD 115E
Surrebuttal Testimony of Theresa A. Bellville, MSD June 5, 2015
1 A. Yes, in Question 38 of Pamela Lemoine's testimony, Exhibit RC 101, she states that,
2 "Because the County assesses taxes as of January 1 (calendar year), I believe the District
3 will receive revenue under the current tax structure for six months, and the proposed Tax
4 Change for six months."
5
6 Q10. How do you explain the difference between the testimony you just provided, in
7 Question 8, and that provided in Question 38 of Pamela Lemoine's testimony?
8 A. Although the District's fiscal year and the calendar year do not align, the District
9 provides the Assessors' offices with tax rates only once in a year, in September. These
10 taxes are then billed all in one month. In this case, that month is October 2016. October
11 2016 falls in the District's FY17. Therefore, all revenues billed in October 2016 will be
12 recognized by the District in FY17.
13
14 Q11. Does this conclude your surrebuttal testimony?
15 A. Yes it does.
16
2015 Rate Change Proceeding 9 Exhibit No. MSD 115E