HomeMy Public PortalAboutExhibit MSD 135 - MSD Prehearing Conference ReportExhibit MSD 135
BEFORE THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
JULY 10, 2015 PRE -HEARING CONFERENCE REPORT
OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT
ISSUE: WASTEWATER AND STORMWATER RATE
CHANGE PROCEEDING
WITNESS: METROPOLITAN ST. LOUIS SEWER DISTRICT
SPONSORING PARTY: METROPOLITAN ST. LOUIS SEWER DISTRICT
DATE PREPARED: JULY 8, 2015
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, Missouri 63103
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
JULY 10, 2015 PRE -HEARING CONFERENCE REPORT OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
Pursuant to §7.280 and §7.290 of the Charter Plan of the Metropolitan St. Louis Sewer
District (the "Charter Plan") and Operational Rule §3(9), the Metropolitan St. Louis Sewer
District ("District") hereby submits its Pre -hearing Conference Report (Exhibit MSD 135).
1
JULY 10, 2015 PRE -HEARING CONFERENCE REPORT
SUBMITTED BY THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
INTRODUCTION
The Metropolitan St. Louis Sewer District ("District") submitted the Wastewater and
Stormwater Rate Change Proposal notice to the Rate Commission on February 26, 2015. This is
the fifth rate change notice submitted by the District since the Rate Commission was formed, by
voter approval on November 7, 2000, pursuant to Section 7.040 of the District's amended
Charter Plan. Per the Rate Commission's Operational Rules, Regulations and Procedures, the
first of four technical conferences was held on April 8, 2015 to question District staff, Raftelis
Financial Consultants, Inc. ("RFC"), the District's rate consultant, and Public Financial
Management, Inc. ("PFM"), the District's financial advisor, about their respective submitted
direct testimony. The second technical conference was held on May 20, 2015 to allow
questioning by all parties of the rebuttal testimony submitted by interveners and the Rate
Commission's consultant. The interveners approved via the Rate Commission's application
process are as follows:
The Missouri Industrial Energy Consumers ("MIEC")
• Home Builders Association of St. Louis and Eastern Missouri ("HBA")
The third technical conference required by the Rate Commission's Operational Rules,
Regulations, and Procedures was held on June 17, 2015 to allow questioning of the surrebuttal
testimony submitted by District staff and the District's Rate Consultant. No other parties
submitted surrebuttal testimony. Parties were also given an opportunity to question intervener
HBA's witness, relative to his submitted rebuttal testimony, since he was not made available for
the technical conference held on May 20, 2015. A pre -hearing conference was held on June 26,
2015 in which all parties read a pre -hearing conference summary report. The District submitted
its summary as Exhibit MSD 131. On July 9, 2015 the District plans to file a response to
Exhibits HBA 132 and 133 which were admitted into the record on June 26, 2015.
2
PURPOSE
The purpose of this report is to identify and describe the various issues raised by the
prepared and oral testimony submitted during this rate change proceeding and present the
position of District staff relative to each issue. It should be noted, the positions outlined in this
report represent the opinions of District staff and do not represent acceptance or approval by the
District's Board of Trustees.
ISSUES
The Wastewater and Stormwater Rate Change Proposal ("Rate Proposal") submitted in
support of the FY2017 — FY2020 proposed rate change addresses several issues related to
wastewater and stormwater funding. During the discovery process, additional information
regarding these and other issues has been requested by the Rate Commission's consultant and
interveners. During the technical conferences all parties have testified to their specific issues that
directly and indirectly affect a rate change. Based on the rate proceedings to date, the District
believes that the pending issues to be considered by the Rate Commission are as follows:
1. Fair and Reasonableness of the Stormwater Proposal
2. There is No Equitable Reason to Apply a Stormwater Credit Program
3. The District's Forecasted Wastewater Revenues Do Tie to Rates and Cost of
Service
4. Economic Assumptions Used in Wastewater Rate Analysis
a. Waste Hauler Revenues
b. Utility Expense Escalator and User Volume
c. Positive Economic Forecast v Changes in Accounts or Billed Usage
d. Usage Per Customer
e. Bad Debt and Late Charge Revenues
5. Avoiding a Negative Credit Rating
ISSUE 1.: FAIR AND REASONABLENESS OF THE STORMWATER PROPOSAL
Intervener's Position - Issue 1
The interveners and the Rate Commission's Counsel are suggesting that the Stormwater
Rate Proposal as submitted by the District is not fair and reasonable on all classes of rate payers.
They claim this is due to the proposed use of ad valorem property taxes in lieu of some form of
voted on impervious fee to fund the Operation and Maintenance (O&M) of the Public Storm
Sewer System. In addition, Intervener HBA claims the impervious fee should also include a
credit system.
3
District's Position - Issue 1
MSD's Stormwater Rate Change proposal meets the criteria of Section 7.270(5), 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 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 interveners 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. While both methods have their pros and cons, MSD believes
this 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. This was for
the District and should be for the Rate Commission an important consideration in determining a
fair and reasonable burden.
During the Pre -Hearing Conference, Intervener HBA continued to try and make
assertions that the Rate Change Proposal is not fair and reasonable. On Exhibit MSD 134, page
71, line 25, they state "...seemingly no nexus between property value and storm water
service..." This statement is inaccurate as proven by Exhibit MSD 115F, the Surrebuttal
Testimony of William Stannard. In Mr. Stannard's answer to question 1 he specifically refers to
the exact services, O&M of the Public Stormwater System, that are being addressed in MSD's
Stormwater Rate Change Proposal. The HBA's assertion that "Mr. Stannard's positions are at
odds with both the Black and Veatch 2014 Storm Water Utility Survey, Exhibit MSD 84G, and
opinions of George Raftelis, the founder of the company" are inaccurate. The survey referenced
included stormwater systems that are an enterprise fund based operation of a municipality. It did
not include the majority of stormwater systems across the United States that are not separate
enterprise funded programs and are funded through the taxing authority of a government entity.
The intervener's continued discussion on page 72 of Exhibit MSD 134 again does not recognize
the difference in the services that were proposed eight years ago and those being proposed now.
The intervener then continues on about generalities of Storm Water Utilities without again
4
considering the exact circumstances related to MSD's Stormwater Rate Change Proposal. The
interveners have provided no evidence that establishes the District's Rate Change Proposal is not
fair and reasonable to all classes of rate payers.
ISSUE 2. THERE IS NO EQUITABLE REASON TO APPLY A STORMWATER
CREDIT PROGRAM
Intervener HBA's Position — Issue 2
The Intervener HBA has provided a substantial amount of additional supplemental
information after the third technical conference required by the Rate Commission's Operational
Rules, Regulations, and Procedures was held on June 17, 2015. This information is primarily
about federal programs supporting the use of green infrastructure and has no relevance to the
District's stormwater proposal. The HBA argues that reductions in runoff volume reduce the
amount of runoff requiring treatment; that increases in the quality of run-off allow the District to
more easily meet water quality standard requirements; that reducing the need for drainage
infrastructure thereby reduces the costs to the District; and the District could benefit from
potentially increasing tax revenues by encouraging best management practices (BMPs) that in
turn increase property values.
District's Position - Issue 2
MSD believes it is extremely important that the Rate Commission keep in mind what
service is being provided for in the proposed Stormwater Rate Change Proposal, the O&M of the
Public Stormwater System. We also strongly urge the rate Commission to consider whether
credit programs with no relation to the service being provided would result in a system that is
fair and reasonable for all classes of rate payers. If MSD were again submitting a Stormwater
Rate Change Proposal that addressed all of the services we proposed in 2007, we did in the past
and would again in the future consider many of the ideas that have been presented. However,
that is not the scope of services being considered in this Rate Change Proposal.
Although the Intervener's statements may be factual, when applied to comprehensive
stormwater programs including regulatory requirements or water quality issues, they are in no
way factual or relevant to the District's proposed District -wide 10 cent ad valorem property tax
to be used for the O&M of the Public Stormwater System. 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
5
this reason, costs for the O&M of the Public Stormwater System would simply require other
customers to subsidize the difference with no change in operational costs to the District.
The HBA also 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.
Intervener HBA submitted Exhibit HBA 133 very late in the proceedings, this document
is about protecting and restoring water quality. While MSD is in agreement with the
conclusions of these practices and uses them as appropriate, this document addresses an issue
that is NOT part of MSD's Stormwater Rate Change Proposal. These practices would have no
impact on the O&M of the Public Stormwater System. If credits were applied as was proposed
in testimony, costs would be transferred to other customers to address an additional regulatory
need that does not currently exist and does not address the cost to operate and maintain the
Public Stormwater System. MSD does not believe that it would be fair and equitable for some
rate payers to pay a higher portion of the cost of the O&M of the Public Stormwater System for
these requirements. Based on the logic of the intervener, it would be just as appropriate to apply
the credit to a customer's wastewater bill.
Intervener HBA also submitted Exhibit HBA 132 very late in the proceedings. This
document is about preventing pollutant runoff from happening. MSD again agrees with the
tenants of this document when addressing Stormwater Programs as a whole. However, tenants
need to be applied appropriately when addressing only a portion of a Stormwater Program. In
this case, the O&M of a Public Stormwater System when the balance of the Stormwater Program
is already funded through other funding sources. The Rate Commission also needs to consider
the differences in this document versus the actual situation in St. Louis. In Newton,
Massachusetts (Exhibit HBA 132, page 2), the Board of Alderman considered the cost of
revenue systems in choosing an appropriate method. MSD has noted similar types of
considerations in determining an appropriate method of collecting revenues (cost of system,
inability to include tax-exempt entities, state legislation reducing the number of customers
eligible to participate in providing revenue, deductibility of ad valorem property tax).
6
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 natural conditions to protect downstream
properties and streams. They are also required to install BMPs 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.
The HBA has no data to confirm, but argues 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.
Intervener HBA states "... 40 percent increase in fees." See Exhibit MSD 134 page 73,
line 23. MSD agrees that it has been using the cost of the previously proposed impervious fee
system. We used it because it is what is currently available and what we included for
comparison purposes in the Rate Change Proposal. MSD is well aware that there are many
systems available that could be less costly to implement. As presented in Rich Unverferth's
surrebuttal testimony (Exhibit MSD 115B) the estimated additional cost to annually manage the
previously proposed impervious fee structure versus MSD's proposed ad valorem tax is $1
million, or approximately 4% of proposed revenues. Assuming there is no difference in cost in
managing these systems, the difference in costs to MSD's customers would still be 40% less 4%,
or approximately 36%. In Exhibit MSD 134 page 75, line 10 thru page 78, line 7 Intervener
HBA states, "...lack of stormwater credit program." A properly crafted stormwater fee credit
program attempts to align credits with a reduction in cost incurred by the stormwater program
due to the BMPs or other related things a customer of the stormwater system implements. The
proposed credit program by the interveners will not do this.
MSD would again like to reiterate three points regarding statements made by the
interveners. First, MSD will never recommend that new development receive a credit for
meeting regulatory requirements that mitigate peak stormwater run-off and the impact of
7
stormwater pollutant run-off caused by those redevelopments. Second, the intervener has
claimed that credits are appropriate because they will enhance the District's ability to provide
service and reduce cost, yet the intervener has provided no evidence of what that enhancement
would be or what costs would be saved. MSD has rightly testified that there would be no change
in cost to the O&M of the Public Stormwater System. Keep in mind that green infrastructure is
designed for less than a one year storm whereas impactful rain events in the St. Louis area
consist of storms in the 15-25 year range minimum. Green infrastructure would not have a
measurable effect on the impact of these rain events. Finally, the misunderstanding of the
intervener is further shown by referencing grant programs related to our wastewater system, not
stormwater system, and recent storm flooding events reported in the Post -Dispatch which was
caused by a failure of the wastewater system. The Rate Commission needs to be mindful that the
service being addressed is the Operation and Maintenance of the Stormwater System, nothing
else. Also, the proposed stormwater services have no impact or relationship to our Consent
Decree obligations.
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
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 uniform O&M of the stormwater infrastructure district wide
is what needs immediate funding. Therefore, the Rate Change Proposal for Stormwater before
the Rate Commission 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, we will simply reiterate what has been
provided many times before in these proceedings, the stormwater tax being proposed is for
O&M of the Public Stormwater System, 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
8
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 uniform O&M, there is no equitable reason to apply a credit program. If we
did it would simply cause other customers to subsidize the cost for those receiving a credit with
no reduction in the O&M costs of the Public Stormwater System.
ISSUE 3.: THE DISTRICT'S FORECASTED WASTEWATER REVENUES DO TIE TO
RATES AND COST OF SERVICE
Intervener MIEC's Position — Issue 3
Intervener MIEC argues that the District has understated its forecasted revenues based
upon projections of a shrinking customer base, a decrease in waste water volumes and
understated future revenue. MIEC claims this results in unnecessarily increased rates imposed
on customers.
District's Position - Issue 3
The process of developing the financial plan involved a comprehensive identification and
forecast of all of the District's revenue requirements (or expenditures), including operation and
maintenance costs, capital costs, debt service requirements, reserve funding, and debt coverage
requirements. The total revenue requirements needed to meet the financial and management
objectives of the system drive the total revenue needed under the proposed rates. The wastewater
financial plan set forth on Table 4-10 in Exhibit MSD-1 presents the projected revenue to meet
these requirements based upon overall revenue increases that would be applied across-the-board
to the approved FY2016 rates. However, a critical step in the rate development process is to use
the cost of service process to allocate the total revenue requirements and calculate fair and
equitable rates.
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 FY2017, 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 FY2017 rate schedule, as proposed by the interveners, 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
9
the capital costs associated with financing of the CIRP. Since the Compliance Charge and the
Extra Strength Surcharge are primarily related to O&M expenses, the proposed rates for these
two facets of the rate schedule have been increased at the same rate as operation and
maintenance expenses. The District's forecasted revenues for FY2017-FY2020 are tied directly
to the proposed rates and cost of service as determined through careful development of the
financial plan. See Exhibit MSD 1 Table 4-10.
ISSUE 4.: ECONOMIC ASSUMPTIONS USED IN WASTEWATER RATE ANALYSIS
The interveners recommend that the Rate Commission accept various assumptions for
the Rate Proposal which the District considers overly optimistic. The District has made
reasonable assumptions related to the future of economic conditions and markets for its service
area. These assumptions were made relying on existing data and published indices to make
reasonable predictions which by the very nature of economic forecasts are uncertain and serve as
the foundation for the Rate Change Proposal which allows the District to meet its known and
anticipated regulatory reauirements_
The assumptions primarily advanced by the interveners fail to take into account the risks
associated with the present state of the economy and volatility of financial markets. If adopted
these assumptions could lead to under -funding of the regulatory required CIRP exposing the
District to the risk of increased cost of debt service, an additional Rate Commission process and
potential cost of stipulated penalties and legal actions. In a broad view, no person can precisely
predict economic trends, as such; future economic conditions will be a mixture of the
assumptions discussed during these proceedings.
In the aggregate, the interveners' economic assumptions represent an understatement of
the revenue required to compensate for the District's bad debt and its O&M costs while
concurrently overstating revenue generated by water usage. The consequence of these
assumptions would under -fund the CIRP and a level of District operations needed to comply
with the Consent Decree.
Comparatively, the District's economic aggregate assumptions better represent the
District's revenue needs than those of the interveners' and reduce risk. If economic realities
result in greater revenue than that projected by the District, this unexpected funding would be
used to either expedite work related to Consent Decree compliance or continue the stated
program with a reduced use of debt. This reduced use of bonds would make additional debt
available for projects in the future and it would lower future debt service costs and in turn lower
10
future rate increases. On the other hand if the interveners' assumptions prove to have understated
available revenues, the District may experience funding shortfalls. Such shortfalls would lead to
its inability to meet regulatory requirements and subject the District to stipulated penalties, fines
and other possible legal action.
The difference between the District's and the interveners' economic assumptions,
however, does not create significant changes in the proposed rates. Overall the ratepayer is better
served if the CIRP can be expedited with the use of marginal over -funding as opposed to under -
funding.
The District has made reasonable assumptions related to future economic conditions and
markets in the service area. The District has not been intentionally pessimistic in our
assumptions to create a large cushion. The goal of forecasting is to be as realistic as possible.
Therefore, the District's 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 needs for the next four
years.
The assumptions advanced thus far by the interveners 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 interveners' proposed assumptions from the FY2013-FY2016 rate
case, if MSD had adopted these assumptions it would have underfunded the required CIRP.
MSD has however, taken additional risks in the FY2017-FY2020 rate proposal when the risks
were reasonably manageable. Please reference MSD's Rate Change Proposal, Exhibit MSD 1,
appendix 7.1.5. In this appendix you will find that MSD is assuming cash needs of 86% of
planned appropriations of a given fiscal year. The remaining 14% of cash need is assumed to
occur in the following fiscal year. In addition an 8% liquidation of previous appropriations is
assumed to occur three fiscal years after the appropriation. This allows the cash needs in MSD's
proposal to match required revenues as closely as possible while still abiding by the fund
balance requirements of the Charter and results in annual revenue requests significantly lower
than in past proposals.
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. The District's proposed rates are based on the
District's cash revenue requirements. To the extent that the rates approved in this cycle turn out
11
to be higher than are needed they will establish a new baseline level of revenues, not revenue
requirements. The rate increases sought in the next Rate Proposal will then be lower because the
difference between the District's cash revenue requirements and the baseline level of revenues
will be lower. If in the aggregate MSD collects revenue in excess of its forecasts, the District
will move forward and expedite the 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.
The following economic assumptions will be discussed in detail.
a. Waste Hauler Revenues
b. Utility Expense Escalator and User Volume
c. Positive Economic Forecast v Changes in Accounts or Billed Usage
d. Usage Per Customer
e. Bad Debt and Late Charge Revenues
Intervener's Position - Issue 4a - Waste. Hauler Revenues
Intervener MIEC claims that MSD has understated its forecasted revenues from waste
hauler fees.
District's Position - Issue 4a - Waste Hauler Revenues
The District is expecting a significant difference in the waste hauler revenues projected
for FY2017-FY2020 versus the actual revenues received during the FY2010—FY2015 time -
frame. During the previous period of FY2010 and FY2011 the District was receiving
approximately $1.4 million annual revenue. In FY2012 the District experienced an approximate
30% decrease in revenue due to the opening of a private Waste Hauling Station within the St.
Louis area. In FY2013 the District saw an additional 40% drop in revenue with the full year of
operation of the private station to approximately $660,000. Also during 2013 the District ceased
accepting leachate flow from the Bridgeton Landfill directly to the collection system due to flow
characteristics causing violations at the District's Missouri River WWTP. This forced the
landfill to haul leachate from the landfill to the Bissell WWTP Hauled Waste Station where the
leachate could be treated effectively. This flow made up approximately 30% of revenue
received in FY2013. In FY2014 approximately 88% of hauled waste revenue was from the
Bridgeton Landfill, with 12% or approximately $550,000 being from other sources. Currently
12
during FY2015, the Bridgeton Landfill has put into place a leachate pre-treatment facility and
pumping facilities and is pumping flows to the District's collection system tributary to the
Bissell WWTP. During the first half of FY2015 and intermittently during the start-up of the
Bridgeton facilities the District continues to received hauled flows from the landfill, these flows
have accounted for approximately 78% of revenues received. This would project FY2015
revenues from other sources at approximately $650,000. Reviewing the last three fiscal years
since the opening of the private Waste Station and removing outside anomalies created by the
Bridgeton Landfill, revenues average approximately $620,000. Therefore, considering all of this
information the District believes its projection of $675,000 annually for the period FY2017-
FY2020 is appropriate.
Intervener's Position - Issue 4b - Utility Expense Escalator and User Volume
Intervener MIEC states 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 FY2014-FY2019. MIEC
claims that MSD has overstated its future O&M costs by proposing a 5.5% increase when it
actually should be a 3% increase every other year. MIEC claims their proposal is based upon
future projections by the utilities themselves.
District's Position - Issue 4b - Utility Expense Escalator and User Volume
The 3% utility expense escalation factor increase every other year, as proposed by the
interveners, assumes utility costs will rise even more slowly than Ameren is projecting its rate
base to rise. Intervener MIEC states 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 FY2014-FY2019, and its
rate case cycle (Exhibit MIEC 102 page 19; Exhibit MIEC 105F). However, a 3% utility
expense escalation factor increase every other year assumes utility costs will rise more slowly
than Ameren is projecting its rate base to rise. As shown in Exhibit MSD 115D1, the rate base
used to support Ameren's rate hikes since 2007 has increased approximately 20%, or an average
of about 2.3% per year, very similar to the rate base growth Ameren is projecting going forward.
The exhibit also shows that the rates charged to MSD have increased by a much more significant
amount, closer to 40% over that time or an average of more than 4% per year. There have been
six Ameren Missouri rate increases since the beginning of 2007 and the average rate hike has
13
exceeded 6% per occurrence.
Furthermore, the Ameren presentation and its public filings reveal other factors that
impact rate increases such as pension and OPEB costs, expenses related to changes in
depreciation rates, new amortization expenses (such as solar rebates), changes in the utility's
allowed return on equity, and rate relief for any customer which cost must be picked up by other
customers. Data shows that the rates charged by Ameren to MSD have increased by a much
more significant amount than Ameren's rate base increases alone can explain, a strong refute to
MIEC's position that expectations for electricity expenses should be tied to Ameren's rate base
investments.
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 (III), 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%.
First, III in our system accounts for approximately one half of the flow that is conveyed
and treated at our plants. Depending on rain and river levels, this could vary the average flow
through our plants up to 33% in a given year and makes comparing individual years impossible.
More importantly, because half the flow is I/I a 1% decline in customer volume would only
translate to a 0.5% reduction in volume and pumping.
The second impact on electrical usage vs. volume is the rate structure itself. Industrial
rate structures do not charge by direct kilowatt usage alone, but a combination of direct usage
charges and peak kilowatt usage charges. MSD's bills amount to about one half direct kilowatt
usage charges and one-half peak usage charges. Direct usage is reduced when customer volume
decreases, but peak usage is driven by storm events which max out flow and capacity, and this is
not reduced when customer volume decreases. Therefore because of rate structures themselves,
a 1% decline in flows only decreases the electric bills 0.5%.
When electric rate structure is combined with the I/I consideration, a 1% decline in
customer volume translates to a 0.5% reduction in average flows which translates to only a
0.25% reduction in average electricity costs.
The fmal consideration that negates any reduction in electricity costs with small
reductions in customer volume is the nature of the Consent Decree work itself. The focus of the
Consent Decree capital work is to eliminate and mitigate sewer overflows. While some of this
14
work focuses on reducing III, many of the projects will increase wet weather sewage capture and
conveyance to the plants. New relief sewer and reductions in bottle necks will increase sewer
flows to the plants during the fifty plus storm events per year. In addition to this improved
conveyance, many projects such as tanks and tunnels will increase the capture of sewage during
storms and convey it to plants in the days after a storm. This will increase the average flow to
the treatment plants for days following each storm. So while customer volume and dry weather
flow may be declining, wet weather capture and flows are increasing and will be prolonged.
This increase in wet weather capture nets out to an actual increase in daily flows to our plants
and thus more O&M pumping costs.
It should also be noted that the Rate Proposal is based on the District's FY2015 budget
that was approved in 2014 and, as presented in Exhibit MSD 108, Ameren had a rate increase
approved in April 2015 that should be reflected in the approved rates. This is not a speculative
rate increase, but one that was approved by the Missouri Public Service Commission during the
course of these proceedings that provided Ameren with a 3.5% increase in revenue. As shown
in Exhibit MSD 115B1 the impact on MSD is even greater than Ameren's overall increase, the
components of MSD's rates at Bissell and Lemay (the largest MSD consumers of electricity)
will increase about 5.0%.
While electricity is the largest utility cost for MSD, we expect that other utility costs will
also increase more than the interveners are projecting. Exhibit MIEC 105E, page 18, shows that
Laclede Group is targeting annual 4%-5% growth in a group of factors that includes Laclede
Gas Company's rate base. It also expects to spend approximately $1.5 billion of capital from
2015-2019, an increase of about 30% annually from pro forma 2014 levels (Exhibit MIEC 105E,
page 9).
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.
Intervener's Position - 4c - Positive Economic Forecast v Changes in Accounts or Billed
Usage
MIEC claims that the District's projection understates the number of customers and
volume of waste water to be treated in FY2017-FY2020, and that no real data was provided to
support the projection. This could not be further from the truth.
15
District's Position - 4c - Positive Economic Forecast v Changes in Accounts or Billed Usage
The District does not find a correlation between positive economic forecasts and changes
in accounts or billed usage. The interveners 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. In Michael Gorman's testimony to the Rate Commission dated July 18,
2011, and marked as Exhibit MIEC 29, he stated that a positive economic outlook is a reason to
hold customer and sales forecasts constant. In Tables 4-2 and 4-3 of the Rate Change Proposal
marked Exhibit MSD 1, it is clear that customer accounts and volume sales declined from
FY201-FY2014 despite the positive economic outlook Michael Gorman quoted in support of his
2011 recommendation. Had the Rate Commission followed the intervener'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
interveners. The District, using historical and other factors during that previous rate case would
have been within $2.0 million, or 0.73%, of the actual experience if the impacts of the FY2014
commercial billing shortages are taken into account. Since corrections for the commercial
billing shortage were made in FY2015, they are outside of the four years as presented in Exhibit
MSD 115E-1. 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.
Furthermore, the report that MIEC bases its claims on in this proceeding is not
representative of the District's service area. It includes 13 counties in Illinois and Missouri that
fall outside of the District's boundaries. A simple comparison of the most recent population
numbers in Exhibit MIEC 105C to those in the Rate Commission's Exhibits RC 129 and RC 130
also show that less than half of the population identified in MIEC's exhibit actually live inside
the District and that both the City and County are growing more slowly than counties outside of
the District. Also note that Exhibit RC 129, St. Louis County Quickfacts, from The United
States Census Bureau includes information about all of St. Louis County and is not
representative of MSD's municipal boundaries. Specifically, it includes about 15% of the
County that is not within MSD's municipal boundaries. This 15% of the County is possibly the
16
fastest growing population area in St. Louis County. Exhibit RC 130 is the same information
about the City of St. Louis. All of the City of St. Louis is in MSD's municipal boundaries and
the population decrease as shown is appropriate. The intervener's information is misleading and
does not represent what is happening within the District boundaries. On the other hand, the
assumptions made by the District are based upon historical data and other factors from previous
rate cases which have proven to be much more accurate than those recommended by the
interveners.
Intervener's Position - 4d - Usage Per Customer
Although Intervener MIEC stated in their Pre -Hearing Conference statement that they do
not disagree with MSD's assumption of a modest decrease over time in waste water volume
received from metered users, they went on to state that MSD's projections appear to be based on
assumptions without corresponding verification and costs of other operating data.
District's Position - 4d - 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.
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 per fixture
unit billable units that are currently used to charge non -metered customers have remained
unchanged for several decades. Over that same time, the District's metered customers have
exhibited reduced per capita flows as discussed in the Rate Proposal. The reductions are from a
number of factors including the increased prevalence of low -flow fixtures and high efficiency
appliances. As metered customers have shown this trend, it follows that unmetered homes would
exhibit similar changes in consumption even though they are unmetered.
The District engaged Vertex to perform a detailed statistical analysis of metered and
unmetered customers. Using information from the District's billing system as well as
demographic data for metered and unmetered customers, Vertex imputed "that a typical
unmetered household uses 6.9 hundred cubic feet (Ccf) per month. It is important to note that
this analysis did not simply assume that unmetered customers consume the same quantity of
17
water as the metered customers. Instead, the analysis attempted to correlate a variety of
demographic factors, including household size, income levels, education levels of the heads of
households, and the sex and marital status of the heads of households.
The average consumption of the District's metered residential customers is 6.3 Ccf. This
average consumption for the unmetered customers developed by Vertex is approximately 10%
greater than that of the metered customers. Even though actual consumption data is not
available for the nnmetered customers, it is reasonable to expect that unmetered customers will
use more water than metered customers due to the lack of a direct pricing signal tied to
consumption. RFC reviewed the Vertex analysis and assessed the results in relationship to their
experience providing financial and rate consulting services to water and wastewater utilities
throughout the United States and Canada It is RFC's opinion that the revised water
consumption forecast for the District's unmetered customers is reasonable and based on best
available data. The methodology presented provides an evaluation of the per fixture water usage
volume figures and results in a proposed 9% decrease in the per fixture water usage volumes.
This supports the District proposal. Details of this analysis are contained in Appendix 7.1.4 of
the Rate Change Proposal.
Intervener's Position - 4e - Bad Debt and Late Charge Revenues
The interveners 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% and claim the District's projected revenue from late charges should increase in
accordance with the increase in projected customer bills.
District's Position - 4e - Bad Debt and Late Charge Revenues
The District's assumption of 1.5% is based upon the fact that the District made a one-
time credit adjustment. Due to the change in calculation method, the one-time credit adjustment
represents an accumulated estimate recorded in prior years of $9.8 million in FY2014 as
supported in appendix 7.3.1 of MSD1. Removing FY2014 from the equation to calculate the
average, results in an average of 2.4% for FY2011-FY2013. If FY2014 was included and the
effects of the one-time adjustment of $9.8 million were removed, the average would be 2.0%.
See Exhibit MSD 840. The District does recognize and acknowledge 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.
18
The intervener'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 interveners related to bad debt
provision and late charges are contradictory.
ISSUE 5.: AVOIDING A NEGATIVE CREDIT RATING
Intervener's Position - Issue 5
Intervener MIEC states that MSD's proposal to more than triple internal PAYGO
funding will create unnecessary price pressures on its customers. MIEC recommends starting in
FY2020 to limit the amount of PAYGO to $100 million per year and additional debt should be
used to fund the peak of MSD's CIRP.
District's Position - Issue 5
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 interveners, 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 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.
Intervener MIEC correctly points out that their recommendation will allow MSD to
maintain more cash on hand than needed to meet its cash reserve target of 60 days (Exhibit
MIEC 102, page 8, lines 11-13), however, the rating agencies require a significantly higher
threshold for MSD to maintain its ratings. Fitch specifically notes that a reduction in liquidity
levels below historical norms would likely pressure the rating unless balanced with increased
19
debt service coverage (Exhibit MSD 50). Since we do not agree with intervener MIEC's
assumptions regarding utility escalation factors, customer accounts and volumes, and bad debt
reserves (as explained in this Prehearing Conference Report and the surrebuttal testimony of
Theresa Bellville, Exhibit MSD 115E, and Jonathon Sprague, Exhibit MSD 115C), we expect
that the lower rates proposed in the rebuttal testimony of Michael Gorman will lead to decreases
in both debt service coverage and in days cash on hand, pressuring MSD's ratings and cost of
borrowing.
In Exhibit MSD 134, page 90, line 6, the Rate Commission's counsel states "The EPA
considers a water and sewer bill in excess of two percent of median household income (MHI) as
a threshold beyond which a utility is described as heavily burdened." MSD cautions the Rate
Commission to assume that statements such as these are accurate. Based on recent framework
information provided by the EPA, water costs have never been included in the calculation for
costs compared to MHI and are not now. Also, the Rate Commission should consider that past
guidance from EPA has indicated that some communities with costs over 2% of MHI are
actually only medium burdened. The lines are not nearly as clearly drawn as this testimony
would have you believe. All factors concerning costs compared to MHI were considered and
discussed during Consent Decree negotiations with the EPA.
It is important to understand that rating agencies consider many factors when assigning
credit ratings but their rating reports on a specific issuer provide the clearest communication
available as to expectations, strengths, and concerns for a particular issuer. Appendix F in
Exhibit RC 90 reports median metrics for issuers at various rating levels (at that specific point in
time) but each issuer is unique. The median is the middle number in a range of values, a
statistical observation and not a recommendation or standard. Every issuer has metrics that fall
inside or outside the median for its rating category. Typically, weakness in an area needs to be
offset by strength in another. The criteria driving the ratings for MSD are outlined in its rating
agency reports (Exhibits MSD 48-50) so those provide the best information for the agencies'
views of strengths, weaknesses, and expectations. These were important components in the
creation of the District's financial plan.
20
CONCLUSION
In conclusion, the District believes the issues addressed in this report reflect the most
relevant and representative topics requiring consideration by the Rate Commission. The District
has submitted a substantial amount of testimony and documentation to support this Rate Change
Proposal. The MSD Charter standard is not for MSD to implement the most fair and reasonable
rate structure, just one that is fair and reasonable on classes of ratepayers. All evidence and
testimony provided by MSD, including the expert testimony by Mr. William Stannard and the
policy information provided by Mr. Brian Hoelscher, demonstrates that MSD's proposed
Stormwater Rate Change Proposal consisting of a District -wide 10 cent ad valorem property tax
to fund the O&M of the Public Stormwater System is fair and reasonable. MSD believes that
based upon all of the information provided during these proceedings that MSD's Rate Change
Proposal as submitted on February 26, 2015 is the most fair and reasonable proposal to be
brought to the voters of the District for consideration.
Respectfully submitted,
0:
usan M. Myers
METROPOLITAN ST. LOUIS SEWER DISTRICT
2350 Market Street
St. Louis, Missouri 63103
Tel: (314) 768-6366
Fax: (314) 768-6279
21
CERTIFICATE OF SERVICE
The undersigned certifies that a copy of the foregoing was sent by electronic transmission
to Janice Fenton, Office Associate Senior, Metropolitan St. Louis Sewer District; Lisa Stump,
Counsel for the Rate Commission; Brad Goss, Counsel for Intervener Home Builders
Association of St. Louis & Eastern Missouri; and Brandon Neuschafer, Counsel for Intervener
Missouri Industrial Energy Consumers on this 8th day of July, 2015.
Lisa O. Stump, Esq.
Lashly & Baer, P.C.
714 Locust Street
St. Louis, MO 63101
lostumn@lashlybaer.com
Mr. Brad Goss
Smith Amundsen, LLC
120 South Central Avenue, Suite 700
St. Louis, MO 63105-1794
bgoss(a,salawus.com
Brandon W. Neuschafer
Bryan Cave, LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
bwneuschafer@brvancave.com
Susan M. Myers, General Co
METROPOLITAN ST. LOUIS SEWER DISTRICT
2350 Market Street
St. Louis, Missouri 63103
smyers@stlmsd.com
Tel: (314) 768-6366
Fax: (314) 768-6279
sel
22