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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