HomeMy Public PortalAboutExhibit MSD 3H - Direct Testimony, William Stannard, RFCMSD Exhibit No. MSD 3H
2015 Rate Change Proceeding
WILLIAM STANNARD
Direct Testimony
Metropolitan St. Louis Sewer District
February 26, 2015
Table of Contents
Page
Witness Background and Experience ........................................................................................... 1
General Matters ............................................................................................................................. 3
Major Wastewater Rate Changes .................................................................................................. 6
Wastewater Revenue ..................................................................................................................... 7
Wastewater Revenue Requirements ............................................................................................. 8
Wastewater Financial Plan .......................................................................................................... 11
Wastewater Cost of Service ........................................................................................................ 11
Wastewater Rate Adjustments .................................................................................................... 16
Major Stormwater Rate Changes ................................................................................................ 17
Stormwater Revenue ................................................................................................................... 17
Stormwater Revenue Requirements ............................................................................................ 18
Stormwater Financial Plan .......................................................................................................... 19
Rate Model .................................................................................................................................. 19
Direct Testimony of William Stannard, Raftelis February 26, 2015
Witness Background and Experience 1
Q1 Please state your name and business address. 2
A. My name is William Stannard and my business address is, 3013 Main Street, Kansas 3
City, Missouri, 64108, wstannard@raftelis.com 4
Q2. By whom are you employed and in what capacity. 5
A. I am President and Chief Executive Officer (CEO) of Raftelis Financial Consultants, Inc. 6
(RFC) and have 40 years of experience providing financial and management consulting 7
services to municipally owned utilities throughout the United States and Canada. RFC 8
was established in 1993 in Charlotte, North Carolina to provide environmental and 9
management consulting services to public and private sector clients. RFC is a national 10
leader in the development of water, wastewater, and stormwater rates and employs 50 11
consultants providing financial and management consulting services to municipal utilities 12
throughout the United States and Canada. As President and CEO of RFC I am 13
responsible for management, operation, economic and financial matters for our firm. I 14
have served as an expert witness in rate litigation matters in federal and state courts and 15
before arbitration panels and state public service commissions. 16
Q3. Please describe your educational background and work experience. 17
A. I obtained a Bachelor of Science, Business Administration and a Bachelor of Science, 18
Civil Engineering from Kansas State University in 1975. I joined RFC in 2002 after a 19
28-year consulting career at Black & Veatch where I was head of the firm’s management 20
consulting division. I have extensive experience in the development of ordinances and 21
financial procedures for complying with the Clean Water Act and the Safe Drinking 22
Water Act, comprehensive cost of service studies, bond feasibility reports, project 23
financial feasibility analyses, organizational and management reviews, and utility 24
2015 Rate Change Proceeding 1 MSD Exhibit No. MSD 3H
Direct Testimony of William Stannard, Raftelis February 26, 2015
competitiveness studies. During my career I have conducted more than 250 water, 1
wastewater, and stormwater financial planning, cost of service and rate studies. I have 2
also prepared more than 100 consulting engineers reports/financial feasibility studies in 3
support of more than $7 billion of water and wastewater revenue bonds. 4
Q4. Are you a registered Professional Engineer? 5
A. Yes, I am a registered Professional Engineer in the states of Kansas, Ohio, 6
Massachusetts, and Michigan. 7
Q5. Do you belong to any professional organizations or committees? 8
A. Yes. I am a member of the American Water Works Association where I serve as Chair of 9
AWWA's Management and Leadership Division, a Trustee of AWWA’s Technical & 10
Education Council, and a past-Chair of AWWA’s Finance, Accounting and Management 11
Controls Committee. I am a member of the Water Environment Federation where I 12
previously served as the Chair for the Task Force responsible for the development of the 13
Manual of Practice No. 27, Financing and Charges for Wastewater Systems. I also 14
authored a chapter entitled, "Selecting the Optimal Capital Financing Plan and Pricing 15
Structure," for the Fourth Edition of the industry guidebook, Water and Wastewater 16
Finance and Pricing: The Changing Landscape. I am an emeritus member of the 17
Kansas State University College of Engineering Advisory Council and have been listed 18
in Best Lawyers in America – Directory of Expert Witnesses and Who’s Who in Science 19
and Engineering. 20
Q6. Have you previously testified before the Rate Commission of the St. Louis 21
Metropolitan Sewer District? 22
A. Yes. I testified as the Rate Consultant to the Rate Commission in the 2007, 2008 and 23
2011 Rate Change Proceedings. 24
2015 Rate Change Proceeding 2 MSD Exhibit No. MSD 3H
Direct Testimony of William Stannard, Raftelis February 26, 2015
Q7. Please describe your role in this proceeding? 1
A. The scope of my assignment in this proceeding is as Project Director for RFC's assistance 2
to the District in preparing the Rate Change Proposal which recommends means of 3
financing MSD's wastewater and stormwater activities for fiscal years ending June 30, 4
2017 (FY17) through June 30, 2020 (FY20). As project Director, I provided leadership 5
and direction to our team of consultants engaged in this work for the District, as well as 6
technical advice during the conduct of our work. 7
8
General Matters 9
Q8. What requirements are you aware of that any proposed changes in wastewater, 10
stormwater or tax rates by the District must meet? 11
A. Pursuant to Section 7.040 of the Charter Plan of the District any proposed changes in 12
wastewater, stormwater or tax rates must be necessary to pay (i) interest and principal 13
due on bonds issued or to be issued to finance assets of the District, (ii) the costs of 14
operation and maintenance, and (iii) such other amounts as may be required to cover 15
emergencies and anticipated delinquencies. 16
Q9. How is it determined whether the District’s Rate Change Proposal is necessary? 17
A. This determination begins with the development of the District’s Comprehensive 18
Financial Plan which is a major component of the rate Change Proposal. As the rate 19
Consultant to the District, our work included the development of this Financial Plan in 20
collaboration with District Staff and the District’s other consultants. The forecasts set 21
forth in the Rate Change Proposal form the foundation of the level of revenues needed to 22
achieve the District’s operational and capital investment objectives. The Rate 23
Commission will examine the District’s projected revenue requirements to insure that 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
such revenue requirements are necessary and reasonable to meet the District’s near term 1
financial needs, that such revenue requirements do not overstate the District’s near term 2
financial needs, and that such revenue requirements are being recovered in a fair and 3
equitable manner. 4
Q10. What criteria are used to assess the Rate Change Proposal? 5
A. In accordance with Section 7.270 of the Charter Plan of the District, the Rate Change 6
Proposal, and all portions thereof, must: 7
(1) be consistent with constitutional, statutory or common law as amended from time to time; 8
(2) enhance the District’s ability to provide sewer and drainage systems and facilities, or 9
related services; 10
(3) be consistent with and not in violation of any covenant or provision relating to any 11
outstanding bonds or indebtedness of the District; 12
(4) not impair the ability of the District to comply with applicable Federal or State laws or 13
regulations as amended from time to time; and 14
(5) impose a fair and reasonable burden on all classes of ratepayers. 15
Q11. How should it be determined if the Rate Change Proposal is consistent with 16
constitutional, statutory or common law as amended from time to time? 17
A. In the past legal counsel has advised that issues concerning Charter Plan authority, 18
environmental laws and regulations, constitutional and statutory provisions and case law 19
should be evaluated. 20
Q12. How should it be determined whether the Rate Change Proposal enhances the 21
District’s ability to provide adequate sewer and drainage systems and facilities, or 22
related services? 23
A. The Rate Change Proposal should be assessed as to whether it enhances the District’s 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
ability to provide adequate sewer and drainage systems and facilities, or related services. 1
This can be done by examining the District’s submittal as well as the testimony filed in 2
support of the Rate Change Proposal by the District, the Rate Commission's Rate 3
Consultant testimony and advice as well as the testimony provided by interveners. 4
Q13. How should it be determined if the Rate Change Proposal is consistent with and not 5
in violation of any covenant or provision relating to any outstanding bonds or 6
indebtedness of the District? 7
A. Such a determination requires an analysis of covenants or provisions contained in the 8
resolutions or ordinances issuing any such outstanding bonds or indebtedness. It may be 9
determined that this condition is met by examining the District’s submittal as well as the 10
testimony filed in support of the Rate Change Proposal by the District. 11
Q14. How should it be determined whether the Rate Change Proposal impairs the ability 12
of the District to comply with applicable Federal or State laws or regulations as 13
amended from time to time? 14
A. It may be evaluated whether the Rate Change Proposal impairs the ability of the District 15
to comply with applicable Federal or State laws or regulations on the basis of testimony 16
provided by District staff and by others, including interveners. 17
Q15. How should it be determined if the Rate Change Proposal imposes a fair and 18
reasonable burden on all classes of ratepayers? 19
A. Whether the rate change imposes a fair and reasonable burden on all classes of ratepayers 20
may be determined by examining the Rate Change Proposal and the testimony filed in 21
support of the District's Rate Change Proposal as well as information provided by the 22
Commission's Rate Consultant, and other parties, including the interveners. 23
24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
Q16. In the context of utility rate setting, what do the words “fair and reasonable” mean 1
to you? 2
A. In the context of utility rate setting, the word “fair” means to me that rates recover 3
revenues from customer classes in relation to the costs incurred in providing utility 4
services to those customer classes and be free from self-interest, prejudice or favoritism. 5
In the context of utility rate setting, the word “reasonable” means to me that the revenue 6
requirements upon which the rates are based reflect an appropriate level of funding to 7
enable the utility to provide adequate and sustainable service and support the financial 8
health of the utility. 9
Q17. Do you believe the Rate Change Proposal meets these criteria? 10
A. Yes. 11
12
Major Wastewater Rate Changes 13
Q18. What are the major wastewater rate changes contained in the Rate Change 14
Proposal? 15
A. For wastewater we are proposing rates in FY17 that reflect the results of the cost of 16
service analysis for that year and which will be discussed later in my testimony. The 17
proposed waster rates for FY18 through FY20 are approximately 10.75%. The resultant 18
impacts vary among the various rate and charges of the District as determined in the cost 19
of service analysis and discussed later in my testimony. Overall the Rate Change 20
Proposal does not contain any changes to the current wastewater rate structure as was the 21
case with the 2012 Rate Change Proposal which included the implementation of a tiered 22
compliance charge. 23
24
2015 Rate Change Proceeding 6 MSD Exhibit No. MSD 3H
Direct Testimony of William Stannard, Raftelis February 26, 2015
Q19. What are the major drivers of the rate change? 1
A. The largest factor in the requested rate change is the District's CIRP expenditures, which 2
as discussed in the testimony of Richard Unverferth, are driven by the District's Consent 3
Decree requirements. The District intends to fund the CIRP to the extent possible with 4
debt while maintaining coverage requirements that will maintain their existing debt 5
rating, as discussed in the testimony of Tim Snoke and Bethany Pugh. To a lesser extent 6
the rate change is also a result of inflation in the operating and maintenance budget, 7
additional operating and maintenance expense, and a projected decrease in both 8
customers and contributed volumes over the period covered by the Rate Change 9
Proposal. 10
11
Wastewater Revenue 12
Q20. How was wastewater revenue projected in the Rate Change Proposal? 13
A. Projected wastewater revenue is based in part on an analysis performed by The Vertex 14
Group for the District and discussed in Appendices 8.1.2 and 8.1.3 of the Rate Change 15
Proposal that projects number of customers and contributed volumes over the period of 16
FY17 through FY20. The projected number of customers and contributed volumes 17
information is shown in the Rate Change Proposal in Table 5-2, which includes projected 18
accounts by customer class, and Table 5-3, which includes projected contributed volumes 19
by customer class. Based on this information projected revenues under the District’s 20
approved FY16 rates for the period of FY17 through FY20 is shown in Table 5-4 while 21
other revenues for the District are shown in Table 5-5. Table 5-5 was developed in 22
conjunction with District Staff based on past experience and projected trends of each 23
revenue line item. 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
Q21. Were any other changes made that affect the District's projected revenue? 1
A. The District bills unmetered customers, which consist of most residential customers in 2
the City of St. Louis, using attributes of their property. These attributes are each room, 3
each water closet, each bath and each separate shower. The usage assigned to each 4
attribute was determined several decades previously based on data provided by the City 5
of St. Louis used to bill these customers for their water consumption. It was determined 6
that these attributes and the usage associated with them should be reexamined, and 7
Vertex performed a statistical analysis as described in Appendix 7.1.4 that determined a 8
reduction of usage associated with unmetered customers attributes would be appropriate, 9
and that reduction has been implemented in the proposed FY17 rates in the Rate Change 10
Proposal. 11
Q22. What is your opinion of the forecast of customers and contributed volumes? 12
A. Based on my past experience with the District, my experience with other urban utilities 13
throughout the United States, and general trends in wastewater flows throughout the 14
United States I believe the forecasts are reasonable. 15
16
Wastewater Revenue Requirements 17
Q23. What are the components of the District’s wastewater revenue requirements? 18
A. The District’s wastewater revenue requirements arise from three basic needs, O&M 19
expense, capital expense, and funding of reserves. Capital expense can further be broken 20
down between debt service requirements, which is the payment of debt used to fund 21
capital projects, and use of internally generated funds or cash funded capital, which is 22
also sometimes referred to as PAYGO capital, short for Pay As You Go. 23
24
2015 Rate Change Proceeding 8 MSD Exhibit No. MSD 3H
Direct Testimony of William Stannard, Raftelis February 26, 2015
Q24. Do the wastewater expenses included any costs that should be allocated to 1
stormwater? 2
A. During the course of the analysis wastewater and stormwater costs are separated. For 3
O&M expense each item in the budget is allocated to wastewater or stormwater based on 4
an analysis of the activities of each department. In total this results in approximately 5
89% of O&M costs being allocated to wastewater and 11% of the O&M costs being 6
allocated to stormwater in FY17. 7
Q25. How are wastewater O&M expenses projected over the period of the Rate Change 8
Proposal? 9
A. The District Finance Staff under the direction of Janice Zimmerman identified 10
appropriate inflation factors for the various items in their budget. Appendix 8.1.1 11
provides a discussion of the major assumptions and how they were determined for 12
inflation. The inflation rates used are shown in the table below. 13
Cost Category FY16 FY17 FY18 FY19 FY20
General Inflation Rate 3.0% 1.9% 1.9% 2.0% 2.0%
Personnel 2.8% 3.1% 3.2% 3.1% 3.1%
Health Insurance 7.5% 9.5% 8.9% 8.0% 8.1%
Dental Insurance 6.8% 2.5% 6.1% 6.1% 6.1%
Vision 0.0% 0.0% 0.0% 0.0% 0.0%
Pension 3.2% 0.0% 0.0% 0.0% 0.0%
Electric 5.5% 5.5% 5.5% 5.5% 5.5%
Natural Gas 5.5% 5.5% 5.5% 5.5% 5.5%
Other Utilities 3.0% 3.0% 3.0% 3.0% 3.0%
Bond & Liability Insurance 5.0% 5.0% 5.0% 5.0% 5.0%
Ash Hauling 3.0% 3.0% 3.0% 3.0% 3.0%
Applying these inflation rates to the District's adopted FY15 budget results in the 14
projected wastewater O&M expense shown in Table 5-6 of the Rate Change Proposal. In 15
addition the District provided forecasts of additional O&M required beyond inflationary 16
increases, which is shown on Line 22 of Table 5-6. The Capital Funded in the O&M 17
Budget and Capitalized Internal Labor were provided by District Staff. 18
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Direct Testimony of William Stannard, Raftelis February 26, 2015
Q26. How are the District’s wastewater CIRP requirements projected over the period of 1
the Rate Change Proposal? 2
A. The District provided wastewater capital improvement and replacement program (CIRP) 3
requirements to be included in the financial planning and rate model. The figures 4
provided by the District include adjustments for the timing of the actual cash needs as 5
discussed in Appendix 8.1.6. The amount of the CIRP is inflated in FY17 through FY20 6
based on an analysis of regional Engineering News Record construction cost index data. 7
The resultant cash requirements for the CIRP are shown in Table 5-7 of the Rate Change 8
Proposal while additional detail on the District’s overall CIRP can be found in Appendix 9
8.2. 10
Q27. How does the District propose to fund the wastewater CIRP over the period of the 11
Rate Change Proposal? 12
A. The District and its financial advisor, PFM, provided a financing plan for the District’s 13
wastewater CIRP as discussed in the testimony of Bethany Pugh. A summary of the 14
overall mix of debt and cash is shown in Table 5-8 of the Rate Change Proposal. 15
Q28. How are the District’s wastewater debt service requirements determined in the Rate 16
Change Proposal? 17
A. Wastewater debt service requirements for all existing and proposed debt were provided 18
by the District’s financial advisor, PFM as discussed in the testimony of Bethany Pugh. 19
Q29. How are the District’s wastewater reserve requirements determined in the Rate 20
Change Proposal? 21
A. The District has a minimum operating reserve target equal to 60 days of annual operating 22
expenses. The existing revenue bond covenants require the District to maintain a 23
minimum balance equal to 45 days of operation and maintenance expense. The District 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
has determined that it is prudent to target a 60 day minimum which provides a buffer to 1
allow for potential timing issues involved with funding requirements, provide increased 2
operational flexibility, and helps support future bond ratings. 3
4
Wastewater Financial Plan 5
Q30. How are the overall wastewater revenue increases necessary over the Rate Change 6
Proposal period determined? 7
A. Based on the projected revenues under existing rates and the District’s revenue 8
requirements the financial planning and rate model can be used to determine the level of 9
wastewater revenue increases to meet the District’s financial objectives. Based on 10
discussions with District Staff as well as the District’s FA it was determined that the 11
driving factor in determining rate increases is the District’s desire to maintain a Senior 12
Debt Coverage level of 2.5, as discussed in the Testimony of Tim Snoke and Bethany 13
Pugh. Based on this goal and the desire to provide a smooth program of rate increases 14
over the Rate Change Proposal period it was determined that an annual average revenue 15
increase of approximately 10% will be necessary to meet the forecasted revenue 16
requirements. The District’s Wastewater Financial Plan is shown on Table 4-10. As can 17
be seen in Table 4-10 the District’s senior debt coverage level declines to 2.52 in FY20 18
with the proposed revenue increases. 19
20
Wastewater Cost of Service 21
Q31. What is a cost of service analysis? 22
A. The basic principle in a cost of service analysis is to achieve general fairness in the 23
recovery of costs from various classes of customers. The approach used in this Study is 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
based on the principles endorsed by the Water Environment Federation (WEF); which 1
allows the District to demonstrate rates have not been set in an arbitrary manner and one 2
class of customer is not subsidizing another to an unjustifiable extent, or in a manner that 3
is not approved and supported by the District. 4
Q31. What period was analyzed for the cost of service analysis? 5
A. A cost of service analysis typically identifies a single test year to be used as the basis of 6
the analysis. For this analysis the projected expenses for the first year of the Rate Change 7
Proposal period, FY17 are used. It is common for non-regulated utilities to use a 8
projected test year, as compared to regulated utilities which are often required by the 9
applicable regulatory body to use an historical test year with allowances for known and 10
measurable changes. 11
Q32. How are O&M costs assigned or distributed to functions in the cost of service 12
analysis? 13
A. The O&M costs were assigned or distributed to functional categories based on factors 14
developed with available data, District Staff, and generally accepted industry practices, 15
and were then reviewed to ensure the appropriate factors were applied. For example, 16
operating costs for the customer service center were assigned to customer service and 17
billing; costs for operating the treatment plants were assigned to treatment; and collection 18
costs were assigned and distributed between collection and conveyance. General and 19
administrative cost elements are allocated based on the weighted average allocation of the 20
direct costs. A summary of the functionalized O&M costs is shown in Table 4-11 of the 21
Rate Change Proposal. 22
23
24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
Q33. How are capital costs assigned or distributed to functions in the cost of service 1
analysis? 2
A. Capital costs (debt service requirements and rate-funded capital) are assigned or 3
distributed based on an analysis of the District’s fixed assets. The estimated test year 4
FY17 plant investment consists of plant in service as of June 30, 2016, and the estimated 5
costs of proposed capital improvements to be placed in service through the FY17 test 6
year. Total plant investment, on an original cost less accumulated depreciation basis, is 7
assigned to functional cost components reflecting the function of the assets.. Test year 8
plant investment in WW facilities on an original cost less depreciation value basis is 9
projected to total $2.84 billion in FY17. The functionalization of total plant investment is 10
also used as the basis to allocate total routine capital improvements. A summary of the 11
functionalized capital costs is shown in Table 4-11 of the Rate Change Proposal. 12
Q34. How are the functionalized costs then used in the cost of service analysis? 13
A. The functionalized costs are next allocated to their cost components in accordance with 14
how the facilities are designed. In this step of the cost of service process, costs are 15
apportioned to the functional cost drivers of: 16
• Volume - costs related to the volume of wastewater flow received by the wastewater 17
system such as the portion of the collection and conveyance systems necessary to handle 18
average volumes of the wastewater system. 19
• Capacity - costs related to the peak flow of the system, in other words facilities sized not 20
just to meet typical volumes, but peak volumes, including preliminary treatment at the 21
wastewater treatment plants as well as the portion of the collection and conveyance 22
systems necessary to meet peak flows. 23
24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
• Compliance - Cost associated with compliance for the District's pretreatment program for 1
commercial customers, specifically a portion of the costs of the Environmental 2
Compliance Division of the Engineering Department. 3
• Wastewater strength - Costs associated with treatment of the strength components of 4
wastewater flow, including primary and secondary treatment at the wastewater treatment 5
plants. 6
• Customer and billing - Costs associated with providing service to customers regardless of 7
their flows or other demands, including customer service and some regulatory services 8
he separation of costs into functional cost components provides a means for distributing 9
such costs to the various cost drivers on the basis of respective responsibilities for each 10
particular type of service. A summary of this analysis is shown in Table 4-12 of the Rate 11
Change Proposal. 12
Q36. How are the costs allocated to customer classes? 13
A. The total cost responsibility for each customer class is determined by developing 14
wastewater system unit costs of service for each cost component and applying these unit 15
costs to the respective service requirements of each customer class. In accomplishing this, 16
each customer class is allocated a share of volume, capacity, strength and customer costs 17
for which it is responsible. 18
The unit cost of service represent the cost of providing a unit of each cost component, 19
volume, capacity, strength, and customer and billing, to each customer regardless of their 20
other characteristics. Each customer class pays the same for each service they receive, 21
though they may receive different amounts of each service, which is the basis for 22
different costs by customer classes. In other words, differences in costs between 23
customers is based on a fair and equitable determination of the cost of providing specific 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
services and those differences in cost are a result in different levels of service and not 1
different pricing for the same service levels. 2
Customers are divided into customer classes that represent a particular type of service 3
requirement or load on the system. The residential customer class includes residents 4
living in single family and multi-family dwellings. The non-residential class includes all 5
customers not included in the residential class such as commercial, government, 6
industrial etc. Wastewater strengths in excess of the normal wastewater strength 7
thresholds, which are contributed by a portion of the non-residential class, are segregated 8
into a separate surcharge customer group. 9
The determination of customer class responsibility for costs of service requires that the 10
customer classes be allocated a portion of the volume, capacity, strength and customer 11
costs of service according to their respective service requirements. Service requirements 12
or units of service for the respective customer classes are shown in Table 5-15 of the Rate 13
Change Proposal. 14
Q36. How is the inflow/infiltration amount determined? 15
A. Infiltration/inflow (I/I) includes flow entering the sewer system from illegal roof and 16
foundation drains, groundwater infiltration through sewer service pipe and main joints 17
and stormwater runoff or inflow from the combined sewer system. We examined and 18
analyzed historic treatment plant and billed consumption data as well as recognizing the 19
District's improvements to the interceptors delivering wastewater to the treatment plants 20
and estimated that District-wide I/I is approximately 50% of the total wastewater flow 21
reaching the treatment plants on an annual basis. This is a decrease in the percentage of 22
I/I and reflects the improvements that the District has made in the interceptors 23
transporting flow to the wastewater treatment plants. 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
Q38. How is responsibility for I/I determined? 1
Each customer class should bear its proportionate share of the costs associated with I/I, as 2
the WW system must be adequate to convey and process the total wastewater flow. The 3
amount of I/I to be recovered directly from wastewater service charges is assigned to 4
customer classes on the premise that 40 percent of the total is distributed on the basis of 5
the number of customers within each class, with the remaining 60 percent allocated on 6
the basis of contributed wastewater volume. These percentages are based on independent 7
engineering studies completed in January 2005 by CDM and presented in the February 8
2007 Wastewater and Stormwater Rate Change Proposal. The results of this study were 9
reviewed and are still considered reasonable. This reallocation of I/I costs can be seen in 10
Table 5-17 of the Rate Change Proposal. 11
Q39. How do District’s existing rates compare to the cost of service analysis? 12
A. The results of the cost of service analysis are summarized in Table 5-18 and show the 13
amount that each class as a whole is being under-recovered by relative to the District’s 14
revenue requirements for FY17. While there are varying impacts among customer 15
classes, they do not vary significantly from the overall revenue increase of 10.75% which 16
indicates that on the whole there should not be significant differential impacts to 17
customers from the cost of service rate adjustments. 18
19
Wastewater Rate Adjustments 20
Q40. How are the cost of service rate adjustments determined? 21
A. Based on the units costs calculated in the cost of service analysis as shown on Table 5-16 22
of the Rate Change Proposal we can develop proposed rates that are cost of service based 23
and will provide an equitable recovery of costs from the District’s customer classes. 24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
These rates are presented in Table 5-19 of the Rate Change Proposal. 1
Q40. Are these proposed rates fair and equitable? 2
A. A comparison of the revenues generated under the proposed rates to the calculated cost of 3
service is shown in Table 4-21 of the Rate Change Proposal, and as is indicated by the 4
percent difference in the far right column, the proposed rates over- or under-recover the 5
allocated costs of each customer class by a relatively small amount, which is a strong 6
indication that they will yield a fair and equitable recovery of the District’s revenue 7
requirements from the various customer classes. 8
9
Major Stormwater Rate Changes 10
Q42. What are the major stormwater rate changes contained in the Rate Change 11
Proposal? 12
A. The Rate Change Proposal includes changes in the property tax levies charged by the 13
District, eliminating the differential rates charged to various properties across the District 14
and replacing them with a more uniform structure of tax levies. This details of this 15
change are discussed in the testimony of Brian Hoelscher. 16
17
Stormwater Revenue 18
Q43. How was stormwater revenue determined? 19
A. We worked with District Staff to analyze billing data, tax information, and other revenue 20
data to determine the amount of stormwater revenue generated under existing tax rates as 21
well as projected revenue under proposed tax rates. A summary of the stormwater 22
revenues is shown in Table 6-3 of the Rate Change Proposal. 23
24
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Direct Testimony of William Stannard, Raftelis February 26, 2015
Stormwater Revenue Requirements 1
Q44. What are the components of the District’s stormwater revenue requirements? 2
A. The District’s stormwater revenue requirements arise from three basic needs, O&M 3
expense, capital expense, and funding of reserves. Unlike the wastewater revenue 4
requirements, stormwater does not have any debt outstanding nor does the District intend 5
to issue any debt, so the capital expense revenue requirements arise only from capital 6
projects funded from cash (i.e., PAYGO). 7
Q45. How are stormwater O&M expenses projected over the period of the Rate Change 8
Proposal? 9
A. The District identified appropriate inflation factors for the various items in their budget, 10
as discussed in Appendix 8.1.1 as well as my answer to Question 23, which results in the 11
projected stormwater O&M expense shown in Table 6-2 of the Rate Change Proposal. In 12
addition the District provided forecasts of additional O&M required beyond inflationary 13
increases, which is shown on Line 23 of Table 6-2. The Capital Funded in the O&M 14
Budget and Capitalized Internal Labor were provided by District Staff. 15
Q46. How are the District’s stormwater CIRP requirements projected over the period of 16
the Rate Change Proposal? 17
A. The District provided stormwater capital improvement and replacement program (CIRP) 18
requirements to be included in the financial planning and rate model. The figures 19
provided by the District include adjustments for the timing of the actual cash needs as 20
discussed in Appendix 8.1.6. The amount of the CIRP is inflated in FY17 through FY20 21
based on an analysis of regional Engineering News Record construction cost index data. 22
A summary of the resultant cash requirements for the CIRP are shown in Figure 6-2. 23
24
2015 Rate Change Proceeding 18 MSD Exhibit No. MSD 3H
Direct Testimony of William Stannard, Raftelis February 26, 2015
Q47. How does the District propose to fund the stormwater CIRP over the period of the 1
Rate Change Proposal? 2
A. The District will fund the stormwater CIRP from cash generated through stormwater fees 3
and taxes. The District has indicated to me that they do not intend to issue debt to 4
finance the stormwater CIRP. 5
Q48. How are the District’s stormwater reserve requirements determined in the Rate 6
Change Proposal? 7
A. The District has a minimum operating reserve target equal to 240 days of annual 8
operating expenses. The 240 day minimum provides a buffer to allow for the timing of 9
tax receipts relative to its fiscal year period while protecting from potential timing issues 10
involved with funding requirements and providing operational flexibility. 11
12
Stormwater Financial Plan 13
Q49. Does the proposed tax levy provide sufficient funding for the stormwater utility? 14
A. Based on the projected levels of stormwater O&M expense, CIRP, and reserve 15
requirements, the District’s stormwater operations will have sufficient funding over the 16
forecast period as shown in Table 6-5 of the Rate Change Proposal. 17
18
Rate Model 19
Q50. Have you developed a rate model as the basis of the analysis you have described in 20
this testimony? 21
A. We have worked with MSD Finance Staff to develop a comprehensive financial 22
planning, cost of service and rate model that underpins the analyses described in my 23
testimony as well as throughout the Rate Change Proposal. The District is the owner of 24
2015 Rate Change Proceeding 19 MSD Exhibit No. MSD 3H
Direct Testimony of William Stannard, Raftelis February 26, 2015
that model and will be providing electronic versions of the model to the Rate 1
Commission as well as any intervener who requests it. 2
3
Q51. Does this conclude your direct testimony in this matter? 4
A. Yes 5
6
2015 Rate Change Proceeding 20 MSD Exhibit No. MSD 3H