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MSD Exhibit No. MSD 115F
2015 Rate Change Proceeding
WILLIAM STANNARD
Surrebuttal Testimony
Metropolitan St. Louis Sewer District
June 5, 2015
Page
Property Tax 2
Wastewater Financial Plan 2
Table - Wastewater Financial Plan 5
Billing 6
Surrebuftal Testimony of William Stannard, Raftelis June 5, 2015
1 PROPERTY TAX
2 Q1. Do you have an opinion on the District's proposed continued use of the property tax
3 based charges for funding the operation and maintenance of the public stormwater
4 system?
5 A. Yes. First the use of property taxes funding the costs of stormwater systems is a common
6 method used by cities and counties throughout the United States. Second, in terms of the
7 value of the service provided expressed in terms of protection of property, the use of
8 property taxes assess charges in proportion to the value of the property receiving the
9 service and achieves a nexus between the amount paid and the benefit received.
10 Considering fire protection as an analogy, the costs of fire protection are recovered
11 through property taxes with those taxes directly proportional to the assessed valuation of
12 the property receiving this service. As with many cost recovery structures the property
13 tax approach is not perfect, but given the level of stormwater service provided by MSD at
14 this time and anticipated during the period covered by the Rate Change Proposal, it is my
15 opinion that the proposed property tax -based funding is equitable.
16
17 WASTEWATER FINANCIAL PLAN
18 Q2. Based on question 1 on page 4 of Michael P. Gorman's Rebuttal Testimony, Exhibit
19 MIEC 102, there appears to be some confusion with regard to the wastewater
20 fmancial plan shown on Table 4-10 of Exhibit MSD-1. Can you provide
21 clarification of this matter?
22
23
24
2015 Rate Change Proceeding 2 Exhibit No. MSD 115F
Surrebuttal Testimony of William Stannard, Raftelis June 5, 2015
1 A. Yes, The process of developing the financial plan involved a comprehensive
2 identification and forecast of all of the District's revenue requirements (or expenditures),
3 including operation and maintenance costs, capital costs, debt service requirements,
4 reserve funding, and debt coverage requirements. The total revenue requirements needed
5 to meet the financial and management objectives of the system drive the total revenue
6 needed under the proposed rates. The wastewater financial plan set forth on Table 4-10 in
7 Exhibit MSD-1 presents the projected revenue to meet these requirements based upon
8 overall revenue increases that would be applied across-the-board to the approved fiscal
9 year (FY) 2016 rates. However, a critical step in the rate development process is to use
10 the cost of service process to allocate the total revenue requirements and calculate fair
11 and equitable rates.
12
13 It is common for utilities to perform cost of service analyses every 3-5 years to ensure
14 their charges are equitable, and apply uniform percentage increases in between those
15 years to meet the annual revenue needs. In the same manner, the District's total revenue
16 requirements for the test year of FY 2017, as presented in the financial plan, are used to
17 calculate fair and equitable rates according to cost of service principles. The following
18 table presents the wastewater financial plan reflecting the forecasted revenues based on
19 the recommended rates set forth in the MSD Rate Change Proposal. This information
20 was included in the Rate Model MSD Exhibit 79 under the tab "COS Financial Plan."
21 When using the proposed rates, the revenue in FY 2017 is approximately $289,000 less
22 (or 0.08%) than the amount presented in the Table 4-10 Wastewater Financial Plan. This
23 difference is caused by rounding the calculated rates to the nearest penny.
24
25
2015 Rate Change Proceeding 3 Exhibit No. MSD 115F
Surrebuttal Testimony of William Stannard, Raftelis June 5, 2015
1 The cost of service process ensures that each customer class will be charged an equitable
2 proportion of the total system costs. Aligning revenues with costs in the test year (FY
3 2017) is the reason for the difference in rates identified by Mr. Gorman. For example, the
4 approved compliance charges for FY 2016 are not adequate to provide sufficient
5 revenues to cover the costs associated with the compliance program. The proposed FY
6 2017 rates have been calculated to recover the full compliance costs.
7
8 It should be noted that rather than applying a straight across the board increase to each of
9 the components of the FY 2017 rate schedule, the District recognized that future year's
10 costs related to compliance and the industrial surcharge program would not increase at
11 the same rate as the overall revenue requirement which is more driven by the capital costs
12 associated with financing of the CIRP. Since the Compliance Charge and the Extra
13 Strength Surcharge are primarily related to operation and maintenance expenses, the
14 proposed rates for these two facets of the rate schedule have been increased at the same
15 rate as operation and maintenance expenses.
16
2015 Rate Change Proceeding
4 Exhibit No. MSD 115F
Surrebuttal Testimony of William Stannard, Raftelis
June 5, 2015
1
Wastewater Revenue
User charee Revenue
1. Base Charge Revenue
2. Non -Residential Compliance Marge Revenue
3. Extra Strength Surcharges
4. Metered Volume Charge Revenue
5. Unnratered Volume Charge Revenue
6. Low Income Credits
7. Subtotal: User Charge Revenue
QtherMiscellaneous Revenue
& Other Operating Revenue
9. Non -Operating Revenue
10. Connection Fee Revenue
11. Subtotal: Other Miscellaneous Revenue
12. Total: Wastewater Revenue
% Change
Wastewater Expenditures
ODeratiae Expenses
13. General Fund Operating ESpenses
14. Other Operating FSpenses
15. Subtotal: Operating Expenses
Pro ected
I'rnjccicd
FY2015
$ 83,077,264 $
3,759,829
6,755,989
155,251,967
32,565,398
(592,570)
FY2016
93,300,260
1,883,204
6,910,690
175,319,402
36,976,456
(798,032)
FY2017
$ 99,786,103 $
2,484,422
7,1917,072
195,443,831
37,478,139
(1,043,872)
FY2019
FY 2020
110,594,536 $ 122,622,610 $ 135,994,106
2,545,531 2,614,935 2,673,399
7,408,742 7,653,749 7,869,836
215,312,737 237,071,337 261,228,295
41,425,296 45,799,433 50,647,818
(1,376,659) (1,815,062) (2,393,993)
$ 280,817,877 $ 313,591,960 $ 341,338,696 $
$ 4,796,155 $
222,000
683,000
2,201,279 $
222,000
689,830
2,199,876 $
222,000
696,728
375,910,183 $ 413,947,001 $ 456,019,460
1,715,172 $
222,000
703,696
1,243,378 $
222,000
7117,733
730,516
222,000
717,840
$ 5,701,155 $ 3,113,109 $ 3,118,604 $ 2,640,867 $ 2,176,110 $ 1,670,356
$ 286,519,032 \ 316,705,089 ti 344,457,300 $ 378,551,050 $ 416,123,112 S 457,689,816
8.0% 10.5% 8.8% 9.9% 9.9% 10.0%
$ (159,600,965) $ (165,233,203) $ (167,339,596) $ (172,084,777) $ (178,190,448) $ (183,332,377)
(9,762,239) (13,248,062) (9,049,514) (8,017,590) (8,184,425) (9,759,494)
$ (169,363,203) $ (178,481,265) $ (176,389,110) $ (I80,102,367) $ (186,374,873) $ (193,091,871)
16. Net Revenue Available for Debt& Capital $ 117,155,828 $ 138,223,824 $ 168,068,189 $ 198,448,683 $ 229,748,238 $ 264,597,945
lignatraliarammana
Debt Service and Other Indebtedness
Senior Revenue Bond Debt Service (Accrued)
17. Existing $ (39,367,299)
18. Proposed -
19. Subtotal: Senior Revenue Bond Debt Servicc $ (39,367,299)
SRF & Direct Loan Debt Service (Accrued)
20. Edsting $ (25,295,222)
21. Proposed (835,678)
22. Subtotal: SRF &Direct Loan Debt Service $
23. Subtotal: Debt Service & Other Indebtedness $
24. Cash -Financed Capital(Paygo) $
25. Non -recurring Projects or Studies
26. Contributions to Reserves
27. Subtotal: Non -Operating Expenses
28. Total: Wastewater F. pentitures
Change
29. Annual Surplus/(Deficit) (1,2)
Combined Operating Reserve
30. Beginning Balance (3)
31. Ending Balance (3)
Actual Debt Service
32. Senior Revenue Bonds
33. SRF Loans
34. Total: Debt Service
Debt Service Coverage
35. Senior Revenue Bonds (4)
36. Total Debt (5)
(26,130,899)
(65,498,198)
(43,771,640)
(4,489,587)
$ (44,851,007) $
(4,844,021)
$ (49,695,028) $
$ (27,674,382) $
(3,029,860)
$ (30,704,242) $
$ (80,399,270) $
$ (43,884,789) $
(6,322,090)
(46,655,486)
(15,547,229)
(62,202,715)
(27,592,947)
(5,345,304)
(32,938,251)
(95,140,966)
(73,958,600)
(6,034,848)
$ (46,468,692) $ (46,476,019) $ (46,535,144)
(28,325,958) (43,336,844) (61,212,275)
$ (74,794,851) $ (89,812,863) $ (107,747,419)
(27,627,707)
$ (27,646,335) $ (27,664,083)
(7,172,641) (8,922,975) (10,691,793)
(34,800,348) $ (36,569,310)
(109,595,199) $ (126,362,173)
(85,033,814) $ (103,114,490)
(5,194,950) (5,101,732)
$ (38,355,876)
$ (146,103,295)
$ (114,196,780)
(5,281,442)
$ (113,759,425) $ (130,606,149) $ (175,134,414) $ (199,823,962) $ (234,598,395) $ (265,581,516)
$ (283,122,628) S (309,087,414) 5(351,523,525) $ (379,926,329) $ (420,973,268) $ (458,673,387)
12.7% 9.2% 13.7% 8.1% 10.8% 9.0%
$ 3,396,404 5 7,617,675 $ (7,066,225) $ (1,375,279) $ (4,850,157) $ (983,572)
$ 40,619,238 $ 44,015,642 " 51,633,317 $ 44,567,092
44,015,642 51,633,317 44,567,092 43,191,812
$ 38,344,215 $ 48,292,590 $ 61,058,590 $ 73,328,590
24,086,811 28,980,783 32,065,103 33,893,000
$ 43,191,812 $ 38,341,656
38,341,656 37,358,084
$ 88,174,340 $ 105,720,178
35,656,179 37,440,693
$ 62,431,026 $ 77,273,373 $ 93,123,693 5 107,221,590 $ 123,830,519 $ 143,160,871
3.06
2.86
2.75
2.71
2.61
250
1.88
1.79
1.80
1.85
1.86
1.85
(1) Negative number indicates a need to drawdown the opentting reserve.
(2) Comcrercial Paper and line of Credit Payment excluded fromcash surplus since payments are nude from Construction Fund.
(3) Includes funds set aside for a nininu moperating reserve equal to 60 days of operating expenses
(4) The Bond Ordinance requires net revenue to equal or exceed 1.25xactual senior lien debt service
(5) The Bond Ordinance requires net revenue to equal or exceed 1.15xtotal actual debt service
2015 Rate Change Proceeding 5
Exhibit No. MSD 115F
Surrebuttal Testimony of William Stannard, Raftelis June 5, 2015
1 BILLING
2 Q3. Do you believe that the proposed adjustment to the billing factors for unmetered
3 customers is fair and equitable?
4 A. Yes. The per fixture unit billable units that are currently used to charge non -metered
5 customers have remained unchanged for several decades. Over that same time, the
6 District's metered customers have exhibited reduced per capita flows as discussed in the
7 Rate Proposal. The reductions are from a number of factors including the increased
8 prevalence of low -flow fixtures and high efficiency appliances. As metered customers
9 have shown this trend, it follows that unmetered homes would exhibit similar changes in
10 consumption even though they are unmetered.
11
12 The District engaged Vertex to perform a detailed statistical analysis of metered and
13 unmetered customers. Using information from the District's billing system as well as
14 demographic data for metered and unmetered customers, Vertex imputed that a typical
15 unmetered household uses 6.9 hundred cubic feet (Ccf) per month. It is important to note
16 that this analysis did not simply assume that unmetered customers consume the same
17 quantity of water as the metered customers. Instead, the analysis attempted to correlate a
18 variety of demographic factors, including household size, income levels, education levels
19 of the heads of households, and the sex and marital status of the heads of households.
20
21 The average consumption of the District's metered residential customers is 6.3 Ccf. This
22 average consumption for the unmetered customers developed by Vertex is approximately
23 10% greater than that of the metered customers. Even though actual consumption data is
24 not available for the umnetered customers, it is reasonable to expect that unmetered
2015 Rate Change Proceeding
6 Exhibit No. MSD 115F
Surrebuttal Testimony of William Stannard, Raftelis June 5, 2015
1 customers will use more water than metered customers due to the lack of a direct pricing
2 signal tied to consumption. I and members of the Raftelis Financial Consultants team
3 reviewed the Vertex analysis and assessed the results in relationship to our experience
4 providing financial and rate consulting services to water and wastewater utilities
5 throughout the United States and Canada. It is our opinion that the revised water
6 consumption forecasts for the District's unmetered customers is reasonable and based on
7 best available data. Details of this analysis are contained in Appendix 7.1.4 of the Rate
8 Change Proposal.
9
10 Q4. Does this conclude your surrebuttal testimony?
11 A. Yes it does.
12
2015 Rate Change Proceeding 7 Exhibit No. MSD 115F