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HomeMy Public PortalAboutExhibit MSD 131 - Prehearing Conference Summary of MSDTHE DISTRICT’S PREHEARING CONFERENCE SUMMARY June 26, 2015 Good Morning, my name is Susan Myers and I am the General Counsel for the Metropolitan St. Louis Sewer District. I will provide the District’s summary statement regarding the proceedings to date. The District's Rate Change Proposal submitted on February 26, 2015 complies with all of the required criteria contained in Section 7.270 of the MSD Charter. This has previously been demonstrated by the testimony of the District’s witnesses and exhibits. There seems to be little or no disagreement regarding criteria one through four for both the Stormwater Rate Change and the Wastewater Rate Change proposal. With that in mind I will address those criteria briefly and then discuss criteria five in detail. Section 7.270, paragraph 1, of the Charter requires the proposed rate change to be consistent with constitutional, statutory, or common law as amended from time to time. The proposed Stormwater Rate Change complies with this criterion and will be taken to the voters to be voted on in FY2016. The proposed Wastewater Rate Change complies with this criterion and will follow the methodology approved by the Missouri courts and the procedures outlined in the MSD Charter. Section 7.270, paragraph 2, of the Charter states: Will the proposed rate change enhance the District's ability to provide adequate sewer and drainage systems and facilities or related services? Based on the Rate Change Proposal submitted by the District and witness testimony the answer to this question is, yes. The main driver for MSD’s Rate Proposal for Stormwater is to provide a funding source, via a ten cent ad valorem property tax, for Operation and Maintenance (O&M) of the Public Stormwater System District-Wide. Any minimal funds that may be available after accounting for O&M of the Public Stormwater System District-Wide will be used for capital projects to address stormwater problems not involving the infrastructure, such as stormwater flooding and erosion. MSD’s Rate Change Proposal for Wastewater is to provide - 1 - a funding source, financed with a combination of cash financing and debt, to support the Capital Improvement and Replacement Program (CIRP) which will move the district's wastewater system towards environmental compliance. Section 7.270, paragraph 3, of the Charter states: Is the proposed rate change consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District? The answer is yes. Regarding the Rate Change Proposal for Stormwater, the District is not proposing the use of bonds or other indebtedness. Therefore, the proposed rate change will not violate any covenants or provisions of the existing bonds or indebtedness. The Rate Change Proposal for Wastewater is consistent with all outstanding bonds and indebtedness and will not cause the District to violate any of those provisions or covenants. Section 7.270, paragraph 4, of the Charter states: The proposed rate change must not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time. The District’s Rate Change Proposal for both Stormwater and Wastewater will not impair but rather will support the District's ability to comply with applicable Federal and State laws and regulations. The Rate Change Proposal for Wastewater specifically provides the ability for the District to meet the requirements outlined in the Consent Decree. The “hot topic” during these rate proceedings has been does MSD’s Rate Change Proposal impose a fair and reasonable burden on all classes of ratepayers. MSD has determined that it does. In Section 7.270, paragraph 5, of the Charter it states: Does the proposed rate change impose a fair and reasonable burden on all classes of ratepayers? In my discussion below I will address how MSD’s Stormwater Rate Change proposal meets the criteria of Section 7.270(5), the disagreement between the parties, and MSD’s position regarding the stormwater funding structure being proposed. Then I will discuss how MSD’s Wastewater Rate Change proposal meets Section 7.270(5) of the Charter. As discussed in Brian Hoelscher’s and William Stannard’s testimony, numerous discovery responses and the supplemental information provided by the District, the District has - 2 - shown that the proposed rate change consisting of a District-wide 10 cent ad valorem property tax to be used for the O&M of the Public Stormwater System imposes a fair and reasonable burden on all classes of ratepayers. Because of the proposals being made by some of the Intervenors involved in this case, the discussion of fair and reasonable has not centered on just whether MSD’s proposal is fair and reasonable as MSD feels it has proven, but invariably has resulted in a comparison between MSD’s Stormwater Proposal of a 10 cent ad valorem property tax and the use of a voted on impervious fee. MSD feels that discussion is important in deciding what is fair and reasonable. Specifically, for the Rate Change Proposal for Stormwater MSD believes that the use of a voted on impervious fee would result in up to a 40% increase in cost to MSD’s customers for the same level of service and fewer customers participating in the funding of the program due to current State Statute and possible future State legislation when compared to the proposed “ten cent” ad valorem tax, for the same level of services. This was for the District and should be for the Rate Commission an important consideration in determining a fair and reasonable burden. It appears from the testimony and information provided during these proceedings that there is a lack of understanding of the proposal placed before the Rate Commission for consideration. Using the following information for illustration purposes, MSD believes that the best method to clear up any misunderstandings is to again address each of the four statements made in both the Supplemental Supporting Evidence provided with Exhibit HBA 124 and the Memorandum of Considerations filed as HBA Exhibit 124C. In statement number one the HBA states that reductions in runoff volume reduce the amount of runoff requiring treatment. This is not accurate, MSD does not currently treat stormwater run-off as part of our O& M of the Public Stormwater System responsibilities, therefore, we do not incur any costs for that activity. By allowing a credit for this reason, costs for the O&M of the Public Stormwater System would simply require other customers to pay the difference with no change in operational costs to the District. - 3 - In statement number two the HBA states that increases in the quality of run-off allow the District to more easily meet water quality standard requirements. This is an accurate statement, although the Rate Proposal being considered by the Rate Commission is only for the O&M of the Public Stormwater System. Water quality issues related to the stormwater program are currently fully funded by an existing two cent ad valorem property tax. No proposed change in the rate or structure of this two cent tax is being considered and therefore has not been presented to the Rate Commission for consideration. In statement number 3 the HBA states, that reducing the need for drainage infrastructure thereby reduces the costs to the District. This statement seems to imply that a reduction in stormwater volume reduces the cost for the O&M of the Public Stormwater System. Because MSD’s Public Stormwater System works almost exclusively on gravity and because MSD does not treat stormwater, reduction in flow does not reduce the District’s cost to operate and maintain the infrastructure. Developers are required to provide detention as part of their development to ensure that they do not increase peak flows above existing conditions to protect downstream properties and streams. They are also required to install Best Management Practices to mitigate the pollutant load caused by these developments. However again, allowing a credit when there is no change in cost to the District for the O&M of the Public Stormwater System would just transfer costs to other customers with no change in operational costs to the District. In statement number 4 the HBA claims that the District could benefit from potentially increasing tax revenues by encouraging BMPs that in turn increase property values. MSD has seen no evidence that this is the case. We have experienced instances where property owners find green infrastructure a plus and other occasions where property owners find green infrastructure a detriment to their property. After a lengthy court battle over the impervious stormwater fee implemented in 2008, the District is faced with an immediate need of getting a stormwater funding source in place. Upon - 4 - evaluation of the current funding sources it was determined that the regulatory requirements or water quality issues related to the stormwater program are currently fully funded by an existing “two cent” ad valorem property tax, and capital work can continue in those areas of the District that currently have OMCI funds. So O&M of the infrastructure district wide is what needs immediate funding. Therefore, the Rate Change Proposal for Stormwater before you today is primarily for the O&M of the Public Stormwater System District wide. During these proceedings there has been a lot of confusion about why the District did not propose an impervious fee similar to that implemented in 2008 and why we did not propose a stormwater credit like we did in 2008. To try and clarify, I will simply reiterate what has been provided many times before in these proceedings, the stormwater tax being proposed is for O&M of the infrastructure, the previous impervious fee was funding for ALL stormwater services, which included O&M, capital work and regulatory requirements. As stated previously, the regulatory requirements or water quality issues related to the stormwater program are currently fully funded by an existing “two cent” ad valorem property tax, which at this time we are not proposing to change. Capital work, in certain areas of the District, will be funded with remaining OMCI funds. If in the future there are additional regulatory requirements placed on the District or our customers decide they want to fund additional capital work district wide, then we will come back to the Rate Commission with a proposal to meet those needs. But for now, we are proposing to fund O&M of the infrastructure district wide with an ad valorem tax. When funding O&M, there is no equitable reason to apply a credit program. If we did it would simply cause other customers to pay the difference for those receiving a credit with no reduction in the O&M costs of the Public Stormwater System. For the proposed wastewater rate change, the District has shown that the proposed rate change imposes a fair and reasonable burden on all classes of ratepayers. MSD has retained the same general methodology used in the past. This rate structure has been in place since 1993, has been upheld by the Missouri courts, and has been approved as fair and equitable in all prior Rate - 5 - Recommendation Reports and Board of Trustee determinations. During these rate proceedings, there have been disagreements on several issues that affect revenue requirements and cost allocations regarding the proposed Wastewater Rate Change. I will summarize the District's position on each of these issues. ISSUE 1 – REVENUES DO TIE TO RATES AND COST OF SERVICE It is common for utilities to perform cost of service analyses every three to five years to ensure their charges are equitable, and apply uniform percentage increases in between those years to meet the annual revenue needs. In the same manner, the District’s total revenue requirements for the test year of FY 2017, as presented in the financial plan, are used to calculate fair and equitable rates according to cost of service principles. The cost of service process ensures that each customer class will be charged an equitable proportion of the total system costs. It should be noted that rather than applying a straight across the board increase to each of the components of the FY 2017 rate schedule, as proposed by the Intervenors, the District recognized that future years’ costs related to compliance and the industrial surcharge program would not increase at the same rate as the overall revenue requirement which is more driven by the capital costs associated with financing of the CIRP. Since the Compliance Charge and the Extra Strength Surcharge are primarily related to operation and maintenance expenses, the proposed rates for these two facets of the rate schedule have been increased at the same rate as operation and maintenance expenses. ISSUE 2 – ECONOMIC ASSUMPTIONS USED IN THE WASTEWATER RATE ANALYSIS The District has made reasonable assumptions related to the future of economic conditions and markets in the service area. These assumptions were made while relying on existing data, analytical predictions and indices to make reasonable predictions which by the very nature of economic forecasts are uncertain. The District’s assumptions are supported by data and serve as the foundation which allows the District to meet its known and anticipated - 6 - needs for the next four years. The assumptions advanced thus far by the Intervenors fail to take into account the risks associated with the present state of the economy and volatility of financial markets. As provided in testimony regarding the Intervenors’ proposed assumptions from the previous rate case, if MSD had adopted these assumptions it would have underfunded the required CIRP. In a broad view, given that no person can precisely predict future economic trends, it is likely that some mixture of conservative and optimistic economic assumptions as discussed during these proceedings will represent reality. If in the aggregate MSD collects revenue in excess of its forecasts, the District will move forward and expedite the Federal Consent Decree compliance related work or continue the stated program with reduced use of debt, which would then allow additional debt to be available for other projects in future years. On the other hand, if the assumptions prove to have over-stated available revenues in the aggregate, the District may have revenue shortfalls leading to inabilities to meet regulatory requirements and subjecting the District to stipulated penalties, fines and other possible legal action. Overall the ratepayer is better served if the capital program is slightly overfunded as opposed to underfunded. ECONOMIC ASSUMPTION – WASTE HAULER REVENUES During the previous rate period the District experienced a decrease in hauled waste revenue due to the opening of a private Waste Hauling Station within the St. Louis area and the Bridgeton Landfill discharging directly to the MSD collection system. In FY2013 - FY2014 Bridgeton Landfill hauled waste made up approximately 30% - 88% of MSD’s hauled waste revenue. Currently during FY 2015, the Bridgeton Landfill has put into place a leachate pre- treatment facility and pumping facilities and is pumping flows directly to the District’s collection system tributary to the Bissell WWTP. Taking all of this into account the District feels its projection for hauled waste revenue is appropriate. - 7 - ECONOMIC ASSUMPTION – UTILITY EXPENSE ESCALATOR AND USER VOLUME The Intervenors state that MSD’s utility expense annual escalation factor should generally coincide with outlooks by utility companies of the services they will provide. They state that Ameren Missouri’s projected growth in its cost of service is largely tied to its rate base investments, which Ameren projects to grow at a CAGR of 2.0% from FY14-FY19. However, the 3% utility expense escalation factor increase every other year, as proposed by the Intervenors, assumes utility costs will rise even more slowly than Ameren is projecting its rate base to rise. Data shows that the rates charged by Ameren to MSD have increased by a much more significant amount, an average of more than 4% per year or approximately double the rate of growth of Ameren’s rate base. There have been six Ameren Missouri rate increases since the beginning of 2007 and the average rate hike has exceeded 6% per occurrence. As indicated in MSD’s testimony, one cannot assume that a 1% decline in sewer volumes would equate to a 1% reduction in electricity usage. There are a number of factors including Infiltration and Inflow (I/I), electricity rate structure and Consent Decree project work that impact the relationship between MSD’s customer volume and electricity usage. MSD has considered all of these factors when it assumed a utility expense annual escalation factor of 5.5%. While electricity is the largest utility cost for MSD, we also expect that other utility costs will also increase more than projected by the Intervenors. 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 the Intervenors. ECONOMIC ASSUMPTION – POSITIVE ECONOMIC FORECAST v CHANGES IN ACCOUNTS OR BILLED USAGE The District does not find a correlation between positive economic forecasts and changes - 8 - in accounts or billed usage. The Intervenors are making the same assumption argument in 2015 that they made in 2011, regarding a positive economic outlook as a reason to hold customer and sales forecasts constant. The data provided in this Rate Change Proposal makes it clear that customer accounts and volume sales declined from FY11 to FY14 despite the positive economic outlook. Had the Rate Commission followed the Intervenor’s recommendation in 2011, to keep customer and sales projections at the 2011 level, the District would have suffered a $7.3 million greater deficit than was actually experienced using the District’s proposed usage levels. The assumptions made by the District using historical data and other factors from previous rate cases have proven to be much more accurate than those recommended by the Intervenors. It is important to realize that while the number of housing permits issued increased year-over-year in some instances, MSD experienced declines in both the number of customers and billed volumes for those same years. This indicates no direct correlation exists between housing starts and MSD customer and volume movements over that time period. ECONOMIC ASSUMPTION – USAGE PER CUSTOMER As part of this Rate Proposal, the District has provided appropriate assumptions for the future billed volume and water usage. The assumptions are based on two factors. First, it is well documented that nationwide water consumption rates are decreasing and secondly, water conservation efforts for both residential and non-residential users is a major factor which contributes to a steady decline in billed volume for water usage at water and wastewater utilities nationwide. The Rate Commission should appropriately consider this trend and adopt the assumption provided by the District in its Rate Change Proposal. The Intervenors claim that MSD is significantly overstating the decline in unmetered wastewater volumes and encourages the Rate Commission to carefully consider the accuracy of MSD’s volume projections. A significant amount of data was developed and has been provided by the District in Appendix 7.1.3 of the Rate Change Proposal to support our volume projections. The methodology presented provides an evaluation of the per fixture water usage volume figures - 9 - and results in a proposed 9% decrease in the per fixture water usage volumes. This supports the District proposal. ECONOMIC ASSUMPTION – BAD DEBT AND LATE CHARGE REVENUES The Intervenors recommend that the District reduce the forecasted bad debt provision from 1.5% of user charges to 1.0% of user charges based upon the District’s historical average being 1.0%. The District’s assumption of 1.5% is based upon the fact that the District made a one-time credit adjustment. The District also recognizes that through a more robust collection effort the bad debt provision as a percentage of sewer service charge revenues is trending downward. It is for this reason that the District used 1.5% in the rate modeling calculations rather than a higher historical average. The Intervenor’s assumption is the District’s projected revenue from Late Charges should increase in accordance with the increase in projected customer bills. The District’s assumption is based upon the general expectation that late charges and the bad debt provision as a percentage of sewer service charges will move in the same direction. This will not always hold true. However, it is not logical to expect the bad debt provision as a percentage of sewer service charges would decline (an indication of improved collection efforts) while projecting late charges to increase (an indication of declining collection results) at a rate of nearly 11 % each year. Therefore, the two adjustments recommended by the Intervenors related to bad debt provision and late charges are contradictory. ISSUE 3 – AVOIDING A NEGATIVE CREDIT RATING The Rate Proposal’s effect on the District’s bond ratings and the ability to maintain a target of “AA” credit rating are of great concern to the District. The District’s position is that larger amounts of debt, as supported by at least one of the Intervenors, could increase the District’s cost of funding and/or restrict the District’s access to funding. This could translate to tens of millions of dollars of extra debt service costs for the District’s ratepayers or threaten the District’s capital plan timeline. Based on the positions taken by the credit rating agencies in the past, the - 10 - District’s experience with rating agency actions, and consultation with MSD’s financial advisor, we believe that reductions to proposed revenues and/or increases in future debt service costs could reasonably lead to lower credit ratings. We have specifically chosen a mix of debt/PAYGO financing and a cash balance target that we believe is consistent with maintaining current ratings. This concludes the District's official summary statement. A copy of our statement will be filed as Exhibit MSD 131. Thank You - 11 -