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Home My Public Portal AboutExhibit MSD 8 - 2008 Rate Commission Recommendation ReportExhibit MSD 8 RESOLUTION OF THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEW R DISTRICT APPROVING A RATE RECOMMENDATIOfii REPORT ON THE COMBINED WASTEWATER AND glORMWATER RATE CHANGE; AND RELATED MATTE .7 WHEREAS, the Rate Commission of the Metropolitan St. Louis Sewer District (the "District") is directed by § 7.040 of the Charter Plan, as approved and amended by the voters of the City and County of St. Louis, to review and make recommendations to the Board of Trustees of the District regarding proposed changes in wastewater rates, stoiinwater rates and tax rates or change in the structure of any of the rates; and WHEREAS, the District, on January 18, 2008, referred proposed rate changes in the wastewater and stormwater rates for review by the Rate Commission; and WHEREAS, any change in a rate recommended to the Board of Trustees by the Rate Commission is to be accompanied by a statement complying with the provisions of §§ 7.040 and 7.270 of the Charter Plan; and WHEREAS, in order to conduct its proceedings with utmost expedition consistent with procedural fairness to the parties, the Rate Commission adopted amendments to its Operational Rules and a Procedural Schedule governing the proposed rate change on January 18, 2008, pursuant to § 7.280 of the Charter Plan; and WHEREAS, the Rate Commission received written testimony, exhibits, conducted technical conferences and public hearings, received legal and other memoranda, and has conducted these proceedings in a manner consistent with the requirements of the Charter Plan, the Operational Rules and Procedural Schedule (the "Proceedings"); and WHEREAS, the Rate Commission considered each of the facts and circumstances disclosed during the Proceedings; and WHEREAS, the Rate Commission has considered a statement specifically responsive to the criteria and factors set forth in § § 7.040 and 7.270 of the Charter Plan, (the "Rate Recommendation Report") to the Board of Trustees. NOW, THEREFORE, the Delegates of the Rate Commission do hereby resolve, determine and order as follows: Section 1. Findings. The Delegates of the Rate Commission hereby find and determine those matters set forth in the preambles hereof as fully and completely as if set out in full in this Section 1. 1 THE `:ATE CO ISSION O THE ETROPO ITA ST. OUIS SE DISTRICT April 1, 2008 Board of Trustees of the Metropolitan St. Louis Sewer District Dear Trustees: I have been authorized and directed by the Rate Commission of the Metropolitan St. Louis Sewer District to deliver to you the Rate Recommendation Report regarding the Combined Wastewater and Stormwater Rate Change Proposal submitted to the Rate Commission on January 18, 2008. Accompanying the Report are the Minority Report regarding Bond Funding, in which Delegates Brockmann, Harris and Toenjes joined; the Proceedings; and the Resolution adopted by the Rate Commission on March 21, 2008. The Proceedings of the Rate Commission at which the Rate Recommendation Report was considered were held in accordance with all requirements of law and procedural rules of the Rate Commission. The Rate Recommendation Report was approved at a meeting on March 21, 2008, at which a quorum was present and acted throughout. The Resolution is in full force and effect and has not been altered, amended, or repealed. Very truly yours, Leonard Toenjes cc: Mr. Jeffrey Theerman Mr. Randy Hayman Section 2. Charter Plan Requirements. The Delegates of the Rate Commission find and determine that the Rate Recommendation Report in the foiiii attached hereto as Exhibit "A" considered at this meeting satisfies the requirements of the Charter Plan. Section 3. Rate Recommendation Report. The Delegates of the Rate Commission hereby approve the Rate Recommendation Report in the folic.' attached hereto as Exhibit "A". Section 4. Minority Reports. The Rate Commission hereby receives the Minority Report regarding bond funding submitted by Commissioners Brockmann, Harris and Toenjes. Section 5. Actions of Officers Authorized. The officers of the Rate Commission shall be, and they hereby are, authorized and directed to deliver to the Board of Trustees of the Metropolitan St. Louis Sewer District the Rate Recommendation Report and the Minority Report and to take such actions as they may deem necessary or advisable in order to carry out and perfoiiii the purposes of this Resolution and to make ministerial alterations, changes or additions in the foregoing documents herein approved, authorized and confirmed which they may approve and the execution or taking of such action shall be conclusive evidence of such necessity or advisability. Section 6. Severability. It is hereby declared to be the intention of the Rate Commission that each and every part, section and subsection of this Resolution shall be separate and severable from each and every other part, section and subsection hereof and that the Rate Commission intends to adopt each said part, section and subsection separately and independently of any other part, section and subsection. In the event that any part, section or subsection of this Resolution shall be deteiuiined to be or to have been unlawful or unconstitutional, the remaining parts, sections and subsections shall be and remain in full force and effect, unless the court making such finding shall determine that the valid portions standing alone are incomplete and are incapable of being executed in accordance with the intent of this Resolution. Section 7. Governing Law. This Resolution shall be governed exclusively by and construed in accordance with the applicable laws of the State of Missouri. Section 8. agent of the Rate this Resolution. Section 9. cause to be paid Resolution. No Personal Liability. No Delegate of the Rate Commission, officer, or Commission shall have any personal liability for acts taken in accordance with Expenses. The Finance Committee is hereby authorized and directed to all costs, expenses and fees incurred in connection with or incidental to this Section 10. Effective Date. This Resolution shall become effective immediately upon its passage. 2 ADOPTED by the Delegates of the Rate Commission of the Metropolitan St. Louis Sewer District this 215t day of March, 2008. [SEAL] ATTEST: Its Secretary RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT By: Its 3 Third Criteria: Whether the Rate Change Proposal is in such amounts as 48 may be required to cover emergencies and anticipated delinquencies? 57 FACTORS FOR RECOMMENDATION 68 First Factor: "Is consistent with constitutional, statutory or common law as amended from time to time" 69 Second Factor: "Enhances the District's ability to provide adequate sewer and drainage systems and facilities, or related services" 95 Third Factor: "Is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District" Fourth Factor: "Does not impair the ability of the District to comply with 101 applicable Federal or State laws or regulations as amended from time to time" TABLE OF CONTENTS INTRODUCTION EXECUTIVE SUMMARY 2 4 BACKGROUND 1 METROPOLITAN ST. LOUIS SEWER DISTRICT 11 THE RATE COMMISSION 11 APPOINTMENT 12 RATE COMMISSION'S OPERATIONAL RULES 17 RATE COMMISSION'S PROCEDURAL SCHEDULE 17 17 RATE COMMISSION'S PROCEEDINGS PROPOSALS 18 The District's Proposal 22 The Rate Consultant's Proposal 28 RATE COMMISSION RECOMMENDATION 38 30 CRITERIA FOR RECOMMENDATION 30 First Criteria: Whether the Rate Change Proposal is necessary to pay interest and principal falling due on bonds issued to finance assets of the District? Second Criteria: Whether the Rate Change Proposal is necessary to pay 30 the costs of operation and maintenance? 108 MINORITY REPORTS 121 PROCEEDINGS INDEX 180 183 Fifth Factor: "Imposes a fair and reasonable burden on all classes of ratepayers" INTRODUCTION The Combined Wastewater and Stormwater Rate Change Proposal of the Metropolitan St. Louis Sewer District was first presented to the Rate Commission on March 2, 2007 (the "2007 Proceedings"). The Rate Commission initiated certain proceedings in order to provide for the advance submission of written testimony, the conduct of three technical conferences, a prehearing conference, discovery procedures, a public hearing, and the filing of post - hearing briefs with procedural fairness to the parties. See Charter Plan of the Metropolitan St. Louis Sewer District (hereinafter "Charter Plan"), § 7.280. Missouri Industrial Energy Consumers ("MIEC"); Monarch -Chesterfield Levee District, Howard Bend Levee District, Earth City Levee District, Gary and Debra Hente, Riverport Farm Partners, Stemme Family Partnership, Beachcraft Holdings, Jay Henges Real Estate Trust, and Riverport Levee District (hereinafter known as the "Levee Districts"); the Associated General Contractors ("AGC") of St. Louis; the SITE Improvement Association; the Missouri Energy Group ("MEG"); and Michael Cohen intervened and participated in the 2007 Proceedings. The record of the 2007 Proceedings was contained in Volumes I through XIV, delivered with the 2007 Report. All of the written testimony, exhibits, document requests and responses, transcripts of testimony, legal memoranda, and other materials contained therein have been admitted into evidence and considered by the Rate Commission Delegates for the purpose of making the findings and determinations contained in the 2007 Report. On January 18, 2008, the Commission received from the District a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Proposed 2 Rate Change") and certain accompanying documents (the "Rate Setting Documents"). The Proposed Rate Change is in response to substantial comments from advocacy groups as presented to the Board of Trustees after the Rate Commission's 2007 Report. The Proposed Rate Change provides for a mixture of debt and cash financing in order to lower wastewater rates and fund the CIRP as recommended in the Rate Commission's 2007 Report. The wastewater rates in the Proposed Rate Change are contingent upon the approval of additional revenue bond authority by the voters. The Proposed Rate Change also includes an adjustment to stormwater rates to lessen the short-term impact of the transition to an impervious -based stormwater rate structure. The stormwater rate increases in the Proposed Rate Change are extended from a period of five years, as proposed in the 2007 Rate Change, to seven years. The District has requested that the Rate Recommendation Report and Exhibits from the 2007 Proceedings and related to the actions of the Metropolitan St. Louis Sewer District's Board of Trustees prior to January 18, 2008, be admitted as supporting material to the Rate Change Notice for purposes of this Proceeding (the "2008 Proceedings") and filed as the Exhibit Index from the 2007 Proceedings as Exhibit MSD 2.3b to this Proceeding. The 2007 Proceedings are incorporated herein by reference. Exhibits for the 2007 Proceedings will bear the prefix "2007" and Exhibits for this Proceeding will bear the prefix "2008." This is the Report required by the Charter Plan and has been adopted by a majority of the Rate Commission Delegates. See Charter Plan, § 7.280(f). 3 EXECUTIVE SUMMARY The 2007 Proposal The District's 2007 Proposall which was presented to the Rate Commission on March 2, 2007, provided a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Rate Change Proposal"). The District proposed to finance $661 million of additional investment in wastewater capital projects (the "Capital Investment and Replacement Plan," or "CIRP") based on Pay -As -You -Go funding from wastewater and stormwater rate increases. The District's 2007 Recommended Wastewater Rates were as follows: 2008 Base Charge - $/Bill Billing & Collection Charge System Availability Charge Total Base (Residential) Service Charge 2.30 8.40 2009 2010 2.30 9.55 Compliance Charge - $/Bill (b)_. Total Nonresidential Service Charge Volume Charge 10.70 11.85 2.45 10.65 13.10 27.40 28.40 38.10 40.25 29.65 42.75 Metered - $ICcf Unmetered - $/Bill Each Room Each Water Closet Each Bath Each Separate Shower 1.88 1.23 4.59 3.83 2.13 1.39 5.20 4.34 Extra Strength Surcharges - $/ton (b) Suspended Solids over 300 mg/I BOD over 300 mg/I COD over 600 mg/I 3.83 4.34 2.37 1.55 5.79 4.82 4.82 218.90 529.90 264.95 220.54 601.02 300.51 239.59 659.66 329.83 2011 2012 2.55 2.70 11.70 12.25 14.25 14.95 30.90 32.10 45.15 47.05 2.59 2.73 1.69 1.78 6.32 6.67 5.27 5.56 5.27 5.56 260.17 270.74 722.36 752.92 361.18 376.46 1 This summary of the Rate Setting Documents does not purport to be complete and reference is made to the full text of the Rate Setting Documents or a complete recital of the terms of the rate changes proposed by the District. 4 The District proposed Stormwater Impervious Area Charges as follows: 2008 2009 2010 2011 2012 Projected stormwater service charge per 100 square feet impervious area (annualized rate — billable monthly) Implemented December 1, 2007 $1.4400 $2.0758 $2.1935 $2.2495 $2.2865 Projected Monthly charge per 100 square feet impervious area $0.1200 $0.1730 _ $0.1828 $0.1875 $0.1905 This impervious area based revenue was proposed to fund a basic level of stormwater service throughout the District's entire service area. Basic service included: pipes and structure repair; inlet cleaning; removal of creek obstructions; concrete channel cleaning and repair; and creek inspections. The specific revenues and expenses also incorporated the transition from property tax and wastewater rate revenues to an independent stormwater revenue source for an enhanced level of stormwater services. This transition was designed to provide funding for items such as maintenance of residential detention basins; erosion control; construction of new stormwater systems; creek maintenance; and assistance with backyard ponding. In addition to the recommendation for a stormwater impervious area charge, there were also changes proposed for the Operation and Maintenance Capital Improvement ("OMCI") revenues. OMCI projects would have continued to be financed by OMCI taxes and be separately identified from those projects to be funded by impervious area charges. In the 2007 Proceedings, the District proposed reconfiguration of the existing 23 OMCI subdistricts into five watershed -based subdistricts as a means to provide enhanced stormwater services as determined by a vote of each subdistrict's customers. The proposed five -subdistrict reconfiguration was to be delineated as 5 follows: (i) Missouri River; (ii) Coldwater Creek; (iii) Bissell; (iv) River Des Peres; and (v) Lower Meramec. The tax levy and type of enhanced services were to be determined by a vote of the customers of each watershed. This proposed reconfiguration would have resulted in an expansion of the total area covered by subdistricts and provided the opportunity for more District customers to obtain enhanced stormwater services by resident vote. It was assumed, for rate modeling purposes, that this reconfiguration and necessary votes would be completed in the November 2007 election. The District intended to develop a priority project list for each of the reconfigured OMCI subdistricts. If voter approval was not received for a given subdistrict, the previous OMCI subdistrict boundaries were to be retained and the priority list revised accordingly. In the 2007 Proceedings, the District sought to obtain voter approval for enhanced stormwater services in the new watershed subdistricts. The revenue reconfigured by the new watershed subdistricts would have been as follows: OMCI Revenue by Watershed Bissell Point Watershed Coldwater Creek Watershed Lower Meramec Watershed River Des Peres Watershed Missouri River Watershed Total OMCI Revenue 2007 I 2008 Taxes of $0.04 to $0.10/$100 Assessed Value 714,300 1,882,300 717,900 1,913,900 2009 2010 I 2011 1 2012 Tax Rate $0.10 per $100 Assessed Value 4,006,800 2,064,200 4,112,000 2,118,400 4,219,900 2,174,000 4,330,700 2,231,000 238,900 5,590,700 0 8,426,200 251,700 5,758,700 0 8,642,200 4,502,700 8,928,300 5,610,800 25,112,800 4,620,900 9,162,600 5,758,000 25,771,900 4,742,200 9,403,100 5,909,200 26,448,400 4,866,700 9,650,000 6,064,200 27,142,600 The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2007 Proceedings, found and determined that the Rate Change Proposal was necessary to pay interest and principal falling due on bonds issued to finance assets of the District; the costs of operation and maintenance; and such 6 amounts as may be required to cover emergencies and anticipated delinquencies. See Charter Plan, § 7.040. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2007 Proceedings, found and determined that the Rate Change Proposal, and all portions thereof were consistent with constitutional, statutory and common law as amended from time to time; enhanced the District's ability to provide adequate sewer and drainage systems and facilities, or related services; was consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; and did not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time. The Rate Commission, after consideration of all the facts and circumstances disclosed in the 2007 Proceedings, found and determined that the Rate Change Proposal did not impose a fair and reasonable burden on all classes of ratepayers because the Proposal included a resistance factor and a charge for enhanced stormwater services based on ad valorem tax rather than an impervious area charge. The Rate Commission, after consideration of all facts and circumstances disclosed in the 2007 Proceedings, found and determined that the use of an impervious area charge for all Stormwater Services imposed a fair and reasonable burden on all classes of ratepayers, and the record in the 2007 Proceedings supported combining the charge for both basic stormwater services and enhanced stormwater services into one stormwater charge. 7 The 2008 Proposal The 2008 Proposed Rate Change is in response to substantial comments from advocacy groups as presented to the Board of Trustees after the Rate Commission's 2007 Report. The Proposed Rate Change provides for a mixture of debt and cash financing in order to lower wastewater rates and fund the CIRP as recommended in the Rate Commission's 2007 Report. The District is proposing Recommended Wastewater Rates as follows: TABLE C Impact on Wastewater Rates January 18, 2o05 Indicates change from prior Proposal. Appendix Reference -Sections III, IV, V; Table 3- WASTEWATER RATES Service Charges -$ Bill Volume Charges Extra Strength Surcharges Residenaal Unmete ed -51/3111 Suspended - $/ton Rate Proposals Discusud 44,7---',. - '"' Base Residential Non Residential Compliance Total Non Residential , Metered . Nut Each Room Each Water Closet Each Bath Each Separate Shower : Solids • over 300 mph BOO over COD over • ;-'. ' ' ' ' ' ' ' Alt I Rate -, -7'''' '''''''''' `44,77.77. :.c. -7,...7,..,,,,,77,77,, 300 mg/I 600 mod : Commission Recommendation Report 8/13/07: FY07 ProPcSed E1ective: 1211/07 I 7/1/08 I 7/1/09 I 7/1/10 V 7/1/11 An It BoT introduced 10n 5 7.90 10.70 11.85 13.10 1425 14.95 $ 12.55 27.35 2035. 29.65 30.90 32.10 4 20.45 38.05 4020 42.75 45.15 47.05 4. . = $ 1,81 7 1.88. ' 2.13. 237 7 2.59 2.73 $ 1,18 1.23 1.39 1.55 1.69 1.78 $ 4,42 4.59 5,20 5.79 6.32 6.67 $ 3,69 3.83 4,34 4.82 5.27 5.56 5 3.69 283 4.34 4,82 5.27 5.56 77..77 4,747 .i .. / $ 218.90 1 218.90 t: 220.22 3 239.58 t 260.16 1 270.74 $ 461.44 529.56 600/8 659.84 722,40 $ 230.72 264.78 300.28 329,84 361.20 1107 FY07 A_eloP0ed 12/13107 > FYos (Effective 1/1/08) $ 7.90 10.70 5 12.555 27,40 20.45 38,10 $ 1.8.1 1,88 $ 1.18 1.23 $ 4.42 4.59 5 3.69 3.83 $ 3.69 3.83 1 5 218.90 ; 218.90 752.92 5 461.44 529,56 376.46 5 230.72 264,78 A8III: MS13 Tote Adoated I Mind 7/1/08 Madre Propeeed In Rate 7/1/09 Rale amendment Fele 7/1/10 '7/1/11 Rate Change Notice 11.85 13.10 1425 14.95 28,35 29.65 30.90 32.10 4020 42.75 45.15 47.05 2.13 2.37 2.59 1 2.73 1.39 1.55 1.69 1.78 5.20 5.79 6.32 6.67 4.34 4.82 5.27 5.56 4.34 4.82 5.27 5.56 220.22 ' 239.58 , 260.16 ' 270.74 60076 659.84 722.40 752.92 300.38 329.84. 361.20 1/18/08 Rates asaumit =cm tul Band Election FY07 Adopted 12/13/07 e FY08 (Effective 1/1 /06( Proposed Effective: No change. i 7/1/09 I 7/1/10 V 711/11 5 7.90 10.70 10.70 10,90 11.40 11.85 5. 12.555 27.40 27.40 29,65 30.85 21.95 20.45 38.10 38.10 4055 47.25 43.80 $ 1.871 1.88 1.89 1.92 2,02 4 2.11 s 1.18 1.23 1.23 1.25 1,32 1.38 5 442 4.59 4.59 4.69 4.93 515 $ 3,69 3.83 3.83 3.91 4,11 4.30 5 3.69 .f. 3.83 3.83. 3.91 4.11 4.30 £• s 21a.so ' 218.90 t 218.90 . 218.90. t 222.62 '7 231.35 s 461.44 529.56 529.56 551.52 596.72 376.46- $ 230.72 264.78 264.78 275.76 2.98.36 _ 620.14 310.07 8 The District is proposing Stormwater Impervious Area Charges as follows: TABLE D Impact on Stormwater Rates January 18, 2008 Appendix Reference =Indicates change from prior Proposal.. Sections Ill, IV, V; Table 5-8 Rate Proposals Discussed Flat Charge Monthly Charge Taxes (per $1OO.Assessed Value) Ad Vatorum Taxes Subdistrict Taxes Stormwater Impervious Charge (per 104 Sq. Feet): Alt I: Rate Commission Recotntnendation Report 8113/07 FY07 Proposed Effective: 12/1/07 FY08 7/1/08 FY09 7/1/09 FY10 7/1/10 FY11 V 711111 FY12 Alt II: BoT introduced 10/11/07 FY07 Adopted 12/13/07 > FY08 (Effective 3/1/08) Effective: 111/09 FY09 1/1/10 FY10 1/1/11 FY11 1/1/12 FY12 1/1/13 FY13 1/1/14 FY14 Alt III: N}SD Rate Rate Change Notice 1/18108 FY07 Adopted 12/13/07 > FY08 (Effective 3/1/08) Effective: 1/1/09 FY09 111/10 FY10 1/1/11 FY11 1/1/12 FY12 1/1/13 FY13 111/14 FY14 $ 0.24 (Ends 11,10108) 0.24 0.24 (Ends 2129(04) 0.24 $. 0.24 (Ends 2229/ae). 0.24 (a) 0.07 0.07 (a) $ 0,07 0.07 (a) $ 0.07 0.07 0.10 (a) $ 0.10 (a) 0.10 $ 0.12 0.27 0.28 0.28' 0.29 0.12 0.17 0.20 ,P 023 =' 0.25 :3 0.27 0.28 (c) 0.12 0.14 0.17 0.22? 0.26 0.28 0.29 (a) Funding from Ad Valorum-and Subdistrict (OMCI) Taxes are rep aced by one impervious -based Stormwater Rate by 2009, (b) Implementation of Impervious -based. Stormwater Rate extended from 5 to 7 years. (c) Stormwater Rate lowered in short4erm through use of extended wastewater subsidy, RECOMMENDATION The 2007 Proceedings In the 2007 Proceedings, the Rate Commission recommended the use of 100% Pay -As -You -Go funding as set forth in the Rate Change Proposal. The Rate Commission recommended changes in wastewater rates as set forth in the Proposed Rate Change, with the exception of the resistance factor. The Rate Commission recommended that the resistance factor be eliminated. With respect to stormwater rates, the Rate Commission recommended the use of an impervious area charge for all stormwater services, and that the charges for both basic and enhanced services as defined in the Rate Change Proposal be combined into one stormwater charge based on impervious area. The 2007 Rate Change Proposal was for a term of five years, or until 2012. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the requested District's Phase II $661 million Capital Improvement Replacement Program ("CIRP") would allow the District to meet the near -term capital improvement needs until 2012. However, the Rate Commission also believed that the record in the 2007 Proceedings supported a finding that an additional rate change proposal and/or the issuance of debt would be required prior to 2012 to fund any compliance required by settlement or court order in the proceeding captioned United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer District. The 2008 Proceedings The 2008 Proposed Rate Change provides for a mixture of debt and cash financing in order to lower wastewater rates and fund the CIRP. The wastewater rates in the Proposed Rate Change are contingent upon the approval of additional revenue 10 bond authority by the voters. The Proposed Rate Change also includes an adjustment to stormwater rates to lessen the short-term impact of the transition to an impervious - based stormwater rate structure. The stormwater rate increases in the 2008 Proposed Rate Change are extended from a five-year period, as proposed in the 2007 Rate Change, to seven years. BACKGROUND Metropolitan St. Louis Sewer District Article VI § 30(a) of the Missouri Constitution has authorized "The people of the city of St. Louis and the people of the county of St. Louis ... to establish a metropolitan district or districts for the functional administration of services common to the area included therein ...." Mo. Const. art. VI, § 30(a). At a special election on February 9, 1954, the freeholders adopted and the voters of the City of St. Louis and St. Louis County approved the Charter Plan (as amended on November 7, 2000) creating the Metropolitan St. Louis Sewer District ("District"). The Charter Plan establishing the District has been held to be constitutional. State on inf. Dalton v. Metro. St. Louis Sewer Dist., 275 S.W.2d 225 (Mo. 1955) (en banc). The District is a body corporate, a municipal corporation, and a political subdivision of the state, with power to ... act as a public corporation within the purview of the Plan, and shall have the powers, duties, and functions as herein described. Charter Plan, § 1.010. The Missouri Constitution provides that upon the adoption of the Charter Plan, it "shall become the organic law of the territory therein defined, and shall take the place of and supersede all laws, charter provisions and ordinances inconsistent therewith relating to said territory." Mo. Const. art. VI, § 30(b). As explained by the Missouri Supreme Court, "[t]he apparent intent is to give the freeholders, with the 11 approval of the voters, power to do whatever the Legislature could ordinarily do with respect to the creation, organization and authority of such a district." Dalton, 275 S.W.2d at 228. As such, the Charter Plan is similar to legislation, and thus, the District has only such powers as are delegated to it by the Charter Plan, or as may properly be implied from the nature of the duties imposed. State on inf. McKittrick v. Wymore, 132 S.W.2d 979, 987-88 (Mo. 1939) (en banc). To determine whether a certain action of the District is authorized by the Charter Plan, it must be construed to further the intent of the voters. Centerre Bank of Crane v. Dir. of Revenue, 744 S.W.2d 754, 759 (Mo. 1988) (en banc). Intent must be ascertained by examining the plain language of the Charter Plan reviewed as a whole. Staley v. Dir. of Revenue, 623 S.W.2d 246, 248 (Mo. 1981) (en banc). It is clear that authorization was provided to residents in St. Louis City and County to establish a metropolitan sewer district, Mo. Const. art. VI, § 30(a), and that authorization was provided by the voters of St. Louis City and County to authorize the activities which carry out the intent expressed and implied from the Charter Plan, including the establishment of the Rate Commission. The Rate Commission The Rate Commission was established by the amendments to the Charter Plan approved by the voters at a general election on November 7, 2000, to review and make recommendations to the Board of Trustees regarding proposed changes in wastewater, stormwater rates, and tax rates. Specifically, upon receipt of a Rate Change Notice from the District, the Rate Commission is to recommend to the Board changes in a 12 wastewater, stormwater, or tax rate necessary to pay (i) interest and principal falling due on bonds issued to finance assets of the District; (ii) the costs of operation and maintenance; and (iii) such amounts as may be required to cover emergencies and anticipated delinquencies. See Charter Plan, § 7.040. Any change in a rate recommended to the Board by the Rate Commission pursuant to § 7.270 of the Charter Plan is to be accompanied by a statement of the Rate Commission that the proposed rate change (i) is consistent with constitutional, statutory, or common law as amended from time to time; (ii) enhances the District's ability to provide adequate sewer and drainage systems and facilities, or related services; (iii) is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; (iv) does not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time; and (v) imposes a fair and reasonable burden on all classes of ratepayers. Appointment On January 13, 2005, the District enacted Board Ordinance No. 11924, as required by § 7.230 of the Charter Plan, and designated the Rate Commission Representative Organizations. The Ordinance designated: Associated General Contractors of St. Louis, Building & Construction Trades Council, The Engineers' Club of St. Louis, FOCUS St. Louis, Home Builders Association of Greater St. Louis, The Human Development Corporation of Metropolitan St. Louis, International Institute, League of Women Voters, Missouri Botanical Garden, Missouri Industrial Energy Consumers, Regional Chamber & Growth Association, Sierra Club, St. Louis 13 Association of Realtors, St. Louis Council of Construction Consumers, and St. Louis County Municipal League. Each of these Organizations designated an individual to serve as a Rate Commission Delegate and notified the Rate Commission. The Delegates currently comprising the Rate Commission are: DELEGATE Nancy Bowser Paul Brockmann Fred Kratky Evelio Sardina Virginia Harris William Allen Daniel P. Murphy William Peick Willard Reeves Mike Schoedel John L. Stein Steven R. Sullivan Leonard Toenjes George D. Tomazi Richard Ward REPRESENTING League of Women Voters Missouri Botanical Garden St. Louis Association of Realtors International Institute Sierra Club Home Builders Association of Greater St. Louis Building & Construction Trades Council St. Louis Council of Construction Consumers The Human Development Corporation of Metropolitan St. Louis St. Louis County Municipal League Missouri Industrial Energy Consumers Regional Chamber & Growth Association Associated General Contractors of St. Louis The Engineers' Club of St. Louis FOCUS St. Louis Five Rate Commission Representative Organizations (Building & Construction Trades Council, FOCUS St. Louis, Missouri Industrial Energy Consumers, Home Builders Association of Greater St. Louis, and St. Louis County Municipal League) have terms that expired January 31, 2007. The Board of Trustees has not designated organizations to succeed such Rate Commission Representative Organizations. 14 Under the Charter Plan, the Board of Trustees is to identify the Rate Commission Representative Organizations for a term of years determined by the Board. Charter Plan, § 7.230. Each Rate Commission Representative Organization selected by the Board of Trustees shall have the right to designate a Rate Commission Delegate to the Rate Commission for a term of six years or the completion of any unexpired terms. Id. at § 7.240. This section continues, "Prior to the expiration of a Rate Commission Representative Organization's term, the Board of Trustees shall designate organizations within the District to succeed such Rate Commission Representative Organization." Id. at § 7.240. Nothing bars a Rate Commission Organization from being named to successive terms. Id. The Charter Plan is silent as to whether the Rate Commission Organizations and their delegates may hold over in their office if the Board does not designate successor organizations prior to the expiration of their terms. The Missouri Constitution provides, "subject to the right of resignation, all officers shall hold office for the term thereof and until their successors are duly elected or appointed and qualified." Mo. Const. art. VII, § 12. In general, this provision extends the term of an officer, permitting an officer to continue to hold office for the term thereof and until his successor is duly appointed and qualified. Moynihan v. Gunn, 204 S.W.3d 230, 235 (Mo. Ct. App. 2006). Unless there is a law to the contrary, all appointed officers hold office during their official terms and may hold over in office until their successor is appointed. Id. In interpreting Section 12 of Article VII, the courts have recognized the importance of the continuity of tenure. Id. at 236. The Missouri Supreme Court declared: 15 [w]e believe the intent and purpose of Section 12 is to guarantee a continuity of tenure, to make sure that the public, for whose benefit the office has been created, will at all times have an incumbent perform the duties thereof, to insure that the public interest will not suffer from the neglect of duties which would result for want of an incumbent and that public business will not be interrupted. Id. In Langston v. Howell County, the Missouri Supreme Court held that the general trend in this country is that "in the absence of an express or implied constitutional or statutory provision to the contrary an officer is entitled to hold his office until his successor is appointed or chosen and has qualified." 79 S.W.2d 99, 102 (Mo. 1935). The courts have adopted the doctrine that "in the absence of express provision and unless the legislative intent to the contrary is manifest, municipal officers hold over until their successors are provided." Davenport v. Teeters, 315 S.W.2d 641, 644 (Mo. Ct. App. 1958). The Missouri courts have held that Section 12 of Article VII also applies to municipal officers and officers of a political subdivision. Voss v. Davis, 418 S.W.2d 163,168 (Mo. 1967) (municipal officers); State ex rel. Byrd v. Knott, 75 S.W.2d 86, 90 (Mo. Ct. App. 1934) (officers of political subdivision held to be public officers). Missouri also recognizes the validity of a de facto officer, which is one who has the reputation or appearance of being the officer such person assumes to be but who, in fact, under the law, has no right or title to the office such person assumes to hold. State v. VanSickel, 675 S.W.2d 907, 912 (Mo. Ct. App. 1984) (quoting State ex rel. City of Republic v. Smith, 139 S.W.2d 929, 933 (Mo. 1940)). The acts of a de facto officer are valid so far as they concern the public or the rights of third persons who have an interest in the things done. State v. Smith, 779, S.W.2d 241, 243 (Mo. 1989) (en banc). 16 In order to be a de facto officer, the officer holds office by some color of right or title. VanSickel, 675 S.W.2d at 912. Where one is actually in possession of a public office and discharges the duties thereof, the color of right which makes such person a de facto officer may result from an election or appointment, holding over after the expiration of a term, or by acquiescence by the public for such a length of time as to raise the presumption of a colorable right to hold such office. Id. The Rate Commissioners have been appointed under the color of a known appointment, and are holding over after the expiration of a term. On January 24, 2007, District legal counsel advised the Rate Commission counsel of the District's opinion that current Rate Commission Representative Organizations with expiring terms may continue to appoint delegates to serve on the Rate Commission until the Board of Trustees appoints their successors. Rate Commission's Operational Rules On August 16, 2001, and under the authority of §§ 7.250 and 7.280(e) of the Charter Plan, the Rate Commission adopted Operational Rules, Regulations and Procedures as amended on March 21, 2002, April 16, 2003, March 2, 2007, and January 18, 2008, to govern the activities of the Rate Commission. Rate Commission's Procedural Schedule On January 18, 2008, the Rate Commission, under the authority of § 7.280(e) of the Plan and pursuant to § 3(3) of the Operational Rules, adopted a Procedural Schedule for the Consideration of a Combined Wastewater and Stormwater Rate Change Notice. 17 Under procedural rules adopted by the Rate Commission on January 18, 2008, the Rate Commission intends to issue its report on the proposed Rate Change Notice to the Board of Trustees of the District on or about April 1, 2008. Rate Commission's Proceedings Under procedural rules adopted by the Rate Commission, any person who would be affected by the Wastewater and Stormwater Rate Change Proposal has an opportunity to submit an application to intervene in the rate change proceedings. Applications to intervene have been granted for the Missouri Energy Group ("MEG") and Missouri Industrial Energy Consumers ("MIEC"). On January 24, 2008, the District submitted to the Rate Commission prepared Direct Testimony of Jeffrey L. Theerman, Karl J. Tyminski, Janice M. Zimmerman, and Keith D. Barber. On February 8, 2008, the Rate Commission submitted its First Discovery Request to the District. On February 18, 2008, the District filed its Responses. A Technical Conference was held on the record on February 20, 2008, regarding the Rate Setting Documents and the Direct Testimony filed with the Rate Commission by the District to provide the District an opportunity to answer questions propounded by members of the Rate Commission; then by any Intervenor; and finally by Lashly & Baer, Legal Counsel to the Rate Commission. On February 25, 2008, MIEC filed the Rebuttal Testimony of Michael Gorman. On February 25, 2008, MEG filed the Rebuttal Testimony of Billie S. LaConte. On February 25, 2008, the Rate Commission filed the Rebuttal Testimony of William G. Stannard. 18 On February 25, 2008, the District filed an Amendment to the Direct Testimony of Jeff Theerman, Jan Zimmerman and Karl Tyminski. On February 27, 2008, the Rate Commission submitted its Second Discovery Request to the District. On March 10, 2008, the District filed its Responses. On March 12, 2008, the District filed its Amendment to its March 10, 2008 Responses. A Second Technical Conference was held on the record February 29, 2008, regarding the Rebuttal Testimony, where each person submitting Rebuttal Testimony answered questions propounded by members of the Rate Commission, the District, other Intervenors, and Legal Counsel. A Prehearing Conference for the purpose of identifying any issues raised by the prepared testimony previously submitted was conducted on the record on March 5, 2008. A representative of each party submitting testimony was invited to participate in the Prehearing Conference. Each participant in the Prehearing Conference submitted on or before March 12, 2008, a prehearing conference report ("Prehearing Conference Report") describing the issues raised by the Rate Setting Documents and the prepared testimony, together with a brief description of such participant's position, if any, on each issue and the rationale therefore. Ratepayers who did not wish to intervene were permitted to participate in a series of on -the -record public hearings conducted in four sessions which began on February 27, 2008, and concluded on March 15, 2008. A Public Notice regarding these Proceedings was published in the St. Louis Post -Dispatch and in the St. Louis 19 American. These Notices contained the time, date and location of each of these conferences and hearings. Public Notice regarding the Proposed Rate Change was published by the District in the St. Louis American on February 14, 2008, and the St. Louis Business Journal on February 8, 2008. The Public Notice contained the time, date and location of each of the technical conferences and hearings. Similarly, Public Notice regarding these Proceedings was published in the St. Louis Post -Dispatch on February 1, February 5, and February 12, 2008, and in the St. Louis American on February 7, February 14, and February 21, 2008, by the Rate Commission. This Notice contained the time, date and location of each of the conferences and hearings. During the 2007 Proceedings, Exhibits and Discovery Requests and Discovery Request Responses were introduced and on July 6, 2007, were admitted into evidence. These documents, together with the transcripts of testimony, written testimony, and certain other materials, were contained in Volumes I through XIV, and the 2007 Proceedings Index may be found at the end of this Report. See 2008 Ex. MSD 2.3b. During the 2008 Proceedings, Exhibits and Discovery Requests and Discovery Request Responses were introduced and on March 13, 2008, were admitted into evidence. These documents, together with the transcripts of testimony, written testimony, and certain other materials, are contained in Volumes I through IV, and the 2008 Proceedings Index may be found at the end of this Report. The findings and determinations contained in this Report were considered at public meetings of the Rate Commission on March 17 and March 21, 2008. 20 The Manual Often in these Proceedings reference is made to "The Manual." "Financing and Charges for Wastewater Systems" (2005) (the "Manual") was prepared in accordance with recognized engineering principles and practices in general use by wastewater utility management, municipal officials, engineers, accountants, and others concerned with financing and establishing charges for wastewater service. It is a practice manual prepared by the Financing and Charges for Wastewater Systems Task Force of the Water Environment Federation. The 2005 Manual replaces and substantially expands the previous 1984 guidance on wastewater utility financing. The Manual illustrates the various ways of allocating costs and developing rates and charges that reasonably and equitably reflect the cost of service. 21 PROPOSALS The District's 2007 Proposal The District's 2007 ProposaI2, which was presented to the Rate Commission on March 2, 2007, provided a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Rate Change Proposal"). The District proposed to finance $661 million of additional investment in wastewater capital projects (the "Capital Investment and Replacement Plan," or "CIRP") based on Pay -As -You -Go funding from wastewater and stormwater rate increases. The District proposed Recommended Wastewater Rates as follows: 2 2008 2009 2010 Base Charge - $/Bill Billing & Collection Charge 2.30 2.30 2.45 System Availability Charge 8.40 9.55 10.65 Total Base (Residential) Service Charge 10.70 11.85 13.10 Compliance Charge - $/Bill (b _ 27.40 28.40 29.65 Total Nonresidential Service Charge 38.10 40.25 42.75 Volume Charge Metered - $/Ccf 1.88 2.13 2.37 Unmetered - $/Bill Each Room 1.23 1.39 1.55 Each Water Closet 4.59 5.20 5.79 Each Bath 3.83 4.34 4.82 Each Separate Shower 3.83 4.34 4.82 Extra Strength Surcharges - $/ton (b) Suspended Solids over 300 mg/I 218.90 220.54 239.59 BOD over 300 mg/I 529.90 601.02 659.66 COD over 600 mg/I 264.95 _ 300.51 329.83 2011 20 2 2.55 11.70 14.25 2.70 12.25 14.95 30.90 45.15 32.10 47.05 2.59 1.69 6.32 5.27 5.27 2.73 1.78 6.67 5.56 5.56 260.17 722.36 361.18 270.74 752.92 376.46 2 This summary of the Rate Setting Documents does not purport to be complete and reference is made to the full text of the Rate Setting Documents or a complete recital of the terms of the rate changes proposed by the District. 22 The District proposed Stormwater Impervious Area Charges as follows: 2008 2009 2010 2011 2012 Projected stormwater service charge per 100 square feet impervious area (annualized rate — billable monthly) Implemented December 1, 2007 $1.4400 $2.0758 $2.1935 $2.2495 $2.2865 Projected Monthly charge per 100 square feet impervious area $0.1200 $0.1730 $0.1828 $0.1875 $0.1905 This impervious area based revenue was proposed to fund a basic level of stormwater service throughout the District's entire service area. Basic service included: pipes and structure repair; inlet cleaning; removal of creek obstructions; concrete channel cleaning and repair; and creek inspections. The specific revenues and expenses also incorporated the transition from property tax and wastewater rate revenues to an independent stormwater revenue source for an enhanced level of stormwater services. This transition was designed to provide funding for items such as maintenance of residential detention basins; erosion control; construction of new stormwater systems; creek maintenance; and assistance with backyard ponding. In addition to the recommendation for a stormwater impervious area charge, there were also changes proposed for the Operation and Maintenance Capital Improvement ("OMCI") revenues. OMCI projects would have continued to be financed by OMCI taxes and be separately identified from those projects to be funded by impervious area charges. The District proposed reconfiguration of the existing 23 OMCI subdistricts into five watershed -based subdistricts as a means to provide enhanced stormwater services as determined by a vote of each subdistrict's customers. The 23 proposed five -subdistrict reconfiguration was to be delineated as follows: (i) Missouri River; (ii) Coldwater Creek; (iii) Bissell; (iv) River Des Peres; and (v) Lower Meramec. The tax levy and type of enhanced services were to be determined by a vote of the customers of each watershed. This proposed reconfiguration would have resulted in an expansion of the total area covered by subdistricts and would have provided the opportunity for more District customers to obtain enhanced stormwater services by resident vote. It was assumed, for rate modeling purposes, that this reconfiguration and necessary votes would have been completed in the November 2007 election. The District intended to develop a priority project list for each of the reconfigured OMCI subdistricts. If voter approval was not received for a given subdistrict, the previous OMCI subdistrict boundaries were to be retained and the priority list revised accordingly. Voter approval for enhanced stormwater services would then be sought in the new watershed subdistricts. The revenue reconfigured by the new watershed subdistricts was as follows: OMCI Revenue by Watershed Bissell Point Watershed Coldwater Creek Watershed Lower Meramec Watershed River Des Peres Watershed Missouri River Watershed Total OMCI Revenue 2007 1 2008 Taxes of $0.04 to $0.10/$100 Assessed Value 714,300 1,882,300 717,900 1,913,900 2009 1 2010 1 2011 ( 2012 Tax Rate $0.10 per $100 Assessed Value 4,006,800 2,064,200 4,112,000 2,118,400 4,219,900 2,174, 000 4,330,700 2,231,000 238,900 5,590,700 251,700 5,758,700 4,502,700 8,928,300 4,620,900 9,162,600 4,742,200 9,403,100 4,866, 700 9,650,000 0 8,426,200 0 8,642,200 5,610,800 _ 25,112,800 5,758,000 25,771,900 5,909,200 26,448,400 6,064,200 27,142,600 The District's 2007 Rate Change Proposal reflected a shift in funding approach from its prior combined Pay -As -You -Go / Bond Financing Strategy to a 100% Pay -As - You -Go basis. This shift was estimated to save the District approximately $400 million in avoided debt service costs from the prior contemplated continued use of bond 24 financing. This strategic shift was also based on the following factors regulatory picture is incomplete; saves bonding capacity for future needs; continues wastewater CIRP progress at a tapered rate; maintains progress toward known regulatory goals; and brings the St. Louis area to appropriate rates in a cost efficient manner (i.e. avoids added debt interest costs). The District stated during the June 11, 2007 Prehearing Conference that in the credit policy set forth in the District Rate Change Proposal, the credit policy should be amended so that in paragraph 2, the second sentence be removed and the fourth sentence be replaced with the following: Second, as agreed upon by the District, any property that receives stormwater service from another entity (Le., Levee Districts) instead of from the District shall be eligible for a credit based upon the cost for the District to provide that service. The amount of the credit in this case may exceed 50% depending on the cost of the services involved in the credit calculation. See 2007 Ex. MSD 1, page 4-8, section 4.4. The District's 2008 Proposal On January 18, 2008, the Commission received from the District a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Proposed Rate Change") and certain accompanying documents (the "Rate Setting Documents"). The Proposed Rate Change is in response to substantial comment from advocacy groups as presented to the Board of Trustees after the Rate Commission's 2007 Report. Based on these customer concerns, this Proposed Rate Change provides for a mixture of $275 million debt and cash financing for the balance of the $661 million Phase II CIRP as recommended in the Rate Commission's 2007 Report in order to lower wastewater rates. The wastewater rates in the Proposed Rate Change are 25 contingent upon the approval of additional revenue bond authority by the voters. The Rate Change Proposal also includes an adjustment to stormwater rates to lessen the short-term impact of the transition to an impervious -based stormwater rate structure. The stormwater rate increases in the Proposed Rate Change are extended from a five- year period, as proposed in the 2007 Rate Change, to seven years. 2008 Ex. MSD 2.2. The District is proposing Recommended Wastewater Rates as follows: TABLE C Impact on Wastewater Rates January la, 2008 Indicates change from prior Proposal, Appendix Reference • Sections III, IV, V; Table 3-19 Rate Proposals Discussed WASTEWATER RATES Service Charges - 6/13111 Volume Charges Extra Strength Surcharges Residential Unmet ed -6/8111 Suspended -$tton Base Residentfal Non Residential Compliance Total Non Reseiential Metered 5/0c5 Each Room Each Water Closet Each Bath Each Separate Shower Solids over 300 BOD over COD over ' Aft I Rate rnorl 300 mg/I 600 man : Commission Recommendation Report 8/13167; FY07 Proposed Effective. 12/1/07 1 7/1/08 1 711/09 i 7/1/10 V 7/1/11 1Alt It: BO:Introduced 111/11/07 $ 7.90 10.70 11.85 13.10 1425 14.95 12,55 27.35 28.35 29.65 30.90 32.10 $ 2045 38.05 4020 42.75 45.15 47.05 , $ 121 1. 1.88 i.' 2.13 . 2.37 , 259 .% 2,71 $ 1.18 1.23 1.39 1.55 1,69 1.78 .$ 4.42 4.59 5.20 5.79 6.32 6,67 $ 3.69 3,83 4.34 4.82 5.27 5.56 $ 3.69 3.83 -; 4.34 ' 4.82 11 5.27 1 5.56 $ 218.90 218.90 220,22 239,58 260.16 270.74 $ 461,44 529.56 600.76 659.84 722,40 ;.' $ 230.72 ' 264.78 300.36 ,,,.. 329.84 , 361.20 FY07 Adopted 12/13/07 > FY08 (Effective 1/1/08) $ 7.90 10.70 11.85 13.10 1425 14.95 $ 12.55 27,40 28.35 29.65 30.90 32.10 5 20.45 35.10 4020 42.75 45.15 47.05 $ 1.81 : taa 2.13 2.37 2.59 2.73 $ 1.18 123 1.39 1.55 1.69 1.78 $ 4.42 4.59 5.20 5.73 6.32 6.67 $ 3.64 3.83 4.34 4.82 5.27 5.56 : 3.69 ::: 3,63 ' 4.34 :,-,. 4.82 5.27 1: 5.56 '..' 5 218.90 218.90 220Z2 239,58 260.16 270,74 752.92 $ 461.44 529,56 500.76 659.84 722.40 376.46 ., C1 S 230.72 . 264.78 301126 329.84 361,27/1/11 0 Alt 111: MSD T. bitAdopte:Itt Beni 7/1/08 Inkstivs Proposed InR. 'Min Rate AnwrIdment Fah 7/1/10 Rate Change Notice 1/18108 Bats...some socceseful Band Election FY07 Adopted 12/13/07 > FY08 (Effechve 1/1/08) Proposed Effective. No change> 1 711/09 1 711/10 V 7/1/11 5 7 90 10.70 10.70 10.90 11,40 11.85 5 12.55 27.40 27.40 29.65 30.85 31.95 S. 20.45 38_10 38.10 40.55 42.25 43.80 6 Lai 1.88 1,88 1.92 . 202 2.11 s 1.13 1.23 1.22 1.25 1.32 1.38 $ 4.42 4.59 4.59 4.69 4.93 5.15 5 3 69 3.83 3.83 3,91 4.11 4.30 $ 3.69 1 3.83 ,, 11 3.83 3,91 li 4.11 ' 4.30 1 5 218.90 218.90 216.90 218,90 22262 231,35 752.92 $ 461.44 529.56 529.56 551.52 596.72 376.46 S 230,72 264.78 264.78 275.76 298.36 620.14 310.07 26 The District is proposing Stormwater Impervious Area Charges as follows: TABLE D impact an Stormwater Rates January 18, 200a Indicates Change from prior Proposal. Appendix Reference - Sec tiions llt, IV, V; Table 5-8 Monthly Charge Stormwater Taxes (per $1.00 Assessed Value) Impervious Charge. Rate Proposals Discussed Flat Charge Ad Valorum. Taxes Subdistrict, Taxes (per lot. sq. Feet). Alt 1: Rate Commission Recommendation Report 8/13/07 FY07 Proposed Effective: 12/1107 FY08 j 7/1108 F'F09 j 7/1/09 FY10 7/1/10 FY11 V 7/1/11 FY12 $ 0124 (Ends 11 30/08) 0.24 - - - - (a) $ 0.07 0.07 - - - 5 0.10 - - - - 5 - f 0.12 027 0.28 0,28 0.29 :- Alt 11I: BoT Introduced 10/11J07 FY07 Adopted 12/13/07 > FY08 (Effective 3/1/0a) Effective, 1/1/09 FY09 1/1/10 FY10 111/11 FY11 1/1/12 FY12 1/1/13 FY13 1/1/14 FY14' $ 0.24 (Ends 2128/08) 0.24- - - - - (a) 5 0.07 0.07 - - - - - (a) $ 0,10 - - - - - 5 0.12 ,. 0.17 s 0.20 023-, 0.25. 0,27 0 29 r Alt III: MSD Rate Rate Change Notice 1/18/08 FY07 Adopted 12/13107 > FYOB (Effective 311/08) Effective:1/1/09 FY09 1/1/10 FY10 1/1/11 FY11. 1/1/12 FY12 1/1/13 FY13 1/1/14 FY14 $ 024 (Ends-.V29/08) 0.24 - - - - - - (a) 5 0.07 0.07 - - - - - (a) $ 0.10 - - - - - - - (c) $ 0.12 0.14 017 n 022 026 0.28 :y 0.29 (a) Funding from Ad Vatorum and Subdistrict (OMCI) Taxes are rep aced by one impervious -based Stormwater Rate by 2009, (b) Implementation of Impervious -based Stormwater Rate extended from 5 to 7 years. (c) Stormwater Rate lowered in short-term through use of extended wastewater subsidy, The District has requested that the Rate Recommendation Report and Exhibits regarding the Combined Wastewater and Stormwater Rate Change Recommendation of the Rate Commission dated August 13, 2007 (the "2007 Proceedings") and related to 27 the actions of the Metropolitan St. Louis Sewer District's Board of Trustees prior to January 18, 2008, be admitted as supporting material to the Rate Change Notice for purposes of this Proceeding (the "2008 Proceedings") and filed as the Exhibit Index from the 2007 Proceedings as Exhibit MSD 2.3b to this Proceeding. Exhibits for the 2007 Proceedings will bear the prefix "2007" and Exhibits for this Proceeding will bear the prefix "2008." Intervenor MIEC Intervenor Missouri Industrial Energy Consumers recommends that the Proposed Rate Change be adopted: however, the MIEC Consultant does not support the inclusion of a resistance factor in the wastewater revenue requirements. Intervenor MEG Intervenor Missouri Energy Group recommends that the Proposed Rate Change be adopted. The Rate Consultant's Proposal In the 2007 Proceedings, the Rate Consultant proposed that rather than using 100`)/0 Pay -As -You -Go funding, that the District finance approximately 50% of the Phase II CIRP with revenue bonds. According to the Consultant, the District would issue $330,000,000 of revenue bonds during the Rate Period and reduce the cash financing from the District's proposed $616,897,000 to $304,846,000. This analysis also indicated that a single 9% increase in rates in FY 2008 would be necessary. Use of revenue bonds to finance the Phase II CIRP was dependent on voter authorization. Due to the inherent uncertainty of receipt of voter authorization, the Consultant Proposal considered two alternative rate proposals. The preferred alternative reflected the use of 28 revenue bonds to finance approximately 50% of the Phase II CIRP. In case voter authorization to issue additional bonds was not received, the second alternative reflected the nearly 100% Pay -As -You -Go financing of the Phase II CIRP used in the 2007 District Proposal. In the 2008 Proceedings, the Rate Consultant concurs with the inclusion of $275 million in debt financing for the Phase II CIRP combined with the Proposed Rate Change. Because of the aggressive proposed expansion of the District's Low Income Assistance Program, the Rate Consultant recommends additional reporting and accounting relating to the funds allocated for the Program. Further, the Rate Consultant recommends that the District recalculate the wastewater rates to reflect the impact of the elimination of the resistance factor. Finally, since the District has not provided information on the nature and level of enhanced stormwater services, the Rate Consultant recommends that the impervious rate for enhanced services be assessed on a watershed basis to more closely reflect the District's costs of providing such services. 29 RATE COMMISSION RECOMMENDATION CRITERIA FOR RECOMMENDATION The Rate Commission is to review and make recommendations to the Board of Trustees of the District regarding proposed changes in wastewater, stormwater or tax rates necessary to pay interest and principal falling due on bonds issued to finance assets of the District; the costs of operation and maintenance; and such amounts as may be required to cover emergencies and anticipated delinquencies. See Charter Plan, § 7.040. First Criteria: Whether the Rate Change Proposal is necessary to pay interest and principal falling due on bonds issued to finance assets of the District? The Charter Plan authorizes the following powers: *** To provide for the borrowing of money in anticipation of the collection of taxes and revenues for the fiscal year. The amount of such loans shall at no time exceed ninety per cent of the estimated collectible taxes and revenues for the year yet uncollected. To meet the cost of acquiring, constructing, improving, or extending all or any part of the sewer or drainage systems: (a) through the expenditure of any funds available for that purpose; (b) through the issuance of bonds for that purpose, payable from taxes to be levied and collected by the District; (c) through the issuance of bonds for that purpose, payable from special benefit assessments levied and collected by the District; (d) from the proceeds of special benefit assessments or bills evidencing such assessments; (e) from any other funds which may be obtained under any law of the state or of the United States for that purpose; (f) from the proceeds of revenue bonds, payable from the revenues to be derived from the operation of sewerage and drainage facilities and systems of the entire District . . . as may be set forth in propositions submitted at elections in the District ... from time to time called and held to authorize 30 the issuance of such revenue bonds; or (g) from any combination of any or all such methods of providing funds. *** See Charter Plan, §§ 3.020 (14) and (15) (emphasis added). The primary rule of statutory construction is to ascertain the intent from the language used, to give effect to that intent if possible, and to consider the words used in their plain and ordinary meaning. Hampton v. Hampton, 17 S.W.3d 599, 602 (Mo. Ct. App. 2000). Under traditional rules of statutory construction, the word's dictionary definition supplies its plain and ordinary meaning. Hoffman v. Van Pak Corp., 16 S.W.3d 684, 688 (Mo. Ct. App. 2000). The courts are without authority to read into a statute an interpretation that is contrary to the intent made evident by giving the language employed in the statute its plain and ordinary meaning. Mo. Dept. of Pub. Safety v. Murr, 11 S.W.3d 91, 96 (Mo. Ct. App. 2000). Only when the statute is ambiguous, or when it leads to an illogical result, may courts look past the plain and ordinary meaning of the statute. Id. To determine if a statute is unambiguous, "the standard is whether the statute's terms are plain and clear to one of ordinary intelligence." Wolff Shoe Co. v. Dir. of Revenue, 762 S.W.2d 29, 31 (Mo. 1988) (en banc). The District's authority to issue general obligation or revenue bonds requires the approval of the voters of the District. Specifically, the Charter Plan provides: No general obligation bonds, except bonds for refunding, advance refunding, extending, or unifying the whole or any part of valid bonded indebtedness, shall be issued without the assent of the voters of the District ... in the number required by Article VI, § 26(b) of the Constitution of Missouri (as amended from time to time), voting at an election to be held for that purpose. No revenue bonds payable from the revenues to be derived from the operation of any or all sewer and drainage systems and 31 facilities of the District ... except bonds for refunding, advance refunding, extending, or unifying the whole or any part of revenue bonds, shall be issued without the assent of a simple majority of the voters of the District ... voting at an election to be held for that purpose. Notwithstanding anything herein to the contrary, the District is expressly authorized to issue District -wide general obligation and revenue bonds. See Charter Plan, § 7.170. Thus, under the Charter Plan, the District may issue general obligation bonds or revenue bonds only upon assent of the voters and in the case of general obligation bonds, upon the majority described in Article VI, § 26(b) of the Missouri Constitution. Subject to these restrictions, the District has the authority to incur debt. The Missouri Supreme Court has expressly recognized this authority, stating, "The other powers objected to, namely, . . . incurring debts, . . . issuance of tax anticipation warrants, ... and issuance of bonds, ... are essential powers of such district." State on inf. Dalton v. Metro. St. Louis Sewer Dist., 275 S.W.2d 225, 231 (Mo. 1955) (en banc). The court continued, "[wjithout the power to incur debts and issue bonds, adequate drains, sewers and disposal plants could not be constructed. However, in the exercise of this power, the District is subject to the financial limitations imposed by the Constitution on all government subdivisions." Id. General Obligation Bonds This decision in Dalton, as well as the provisions of § 7.170 of the Charter Plan, specifically acknowledge the limitations of Article VI, § 26 of the Missouri Constitution requiring voter approval of any general obligation bond issue. The vote required by Article VI, § 26(b) of the Missouri Constitution is four -sevenths at the general municipal election day, primary or general elections and two-thirds at all other elections. Further, the Charter Plan requires that: 32 Before any general obligation bonds are issued, the Board shall by ordinance provide for the collection of an annual tax on all taxable tangible property within the District or a subdistrict, as the case may be, sufficient to pay the interest and the principal of such bonds as they fall due and to retire the same within twenty years from the date contracted . . . No general obligation bonds shall be issued in an amount which together with the existing indebtedness of the District . . . if any, exceeds in the aggregate five per cent of the value of all taxable tangible property in the District . . . as shown by the last completed assessment for state and county purposes; provided, however, that no revenue bonds issued under the provisions of this Plan shall constitute an indebtedness of the District or a subdistrict, as the case may be, within the meaning of said limitation. See Charter Plan, § 7.190. Both the Charter Plan and Article VI, Section 26(b) of the Missouri Constitution provide that the District may not issue general obligation bonds in an amount that, together with the existing indebtedness of the District, exceeds five percent of the value of taxable tangible property in the District. According to the Collector's Office of St. Louis County, the assessed valuation of taxable, tangible property in the District in St. Louis County is approximately $21.2 billion. The Deputy Assessor in St. Louis City has certified that the assessed valuation of taxable, tangible property in the City is approximately $3.9 billion. As a result, five percent of the value of taxable, tangible property in the District is $1.3 billion. Thus, under the Charter Plan and the Missouri Constitution, the District may not issue general obligation bonds in an amount that together with the existing indebtedness of the District exceeds $1.3 billion. The District has no general obligation bonds currently outstanding. Revenue Bonds The Missouri courts have discussed the differences between general obligation and revenue bonds on several occasions. As explained by the Missouri Supreme Court: 33 General obligation bonds are just what the term implies: general obligations of the governmental body issuing them. They place the general credit of the sovereign behind them and are an indebtedness of that sovereign within the meaning of Mo. Const. art. VI, § 26, restricting the limits of debt which a county may incur. They require tax money to service and retire them. Revenue bonds do not have these characteristics. Their repayment is dependent upon revenue from the facility which they are issued to create. They do not rely upon the general credit or tax money of the sovereign and they are not indebtedness within the limitations of the constitution. Drey v. McNary, 529 S.W.2d 403, 408-09 (Mo. 1975) (en banc) (internal citations omitted). See also Wunderlich v. City of St. Louis, 511 S.W.2d 753, 755 (revenue bonds are not paid directly or indirectly by resort to taxation, and general obligation bonds are payable by utilization of the full taxing power of the issuing entity). As noted, the limitation contained in § 7.190 of the Charter Plan on the level of general obligation bonds does not expressly apply to revenue bonds. The Missouri Supreme Court has upheld the issuance of revenue bonds for the operation and maintenance of a sewage system. See Oswald v. City of Blue Springs, 635 S.W.2d 332 (Mo. 1982) (en banc). In addition, the court specifically held that the city issuing the bonds had the authority to raise water and sewage rates, not only to pay principal and interest in revenue bonds issued for the purpose of construction of a water treatment plant and water transmission lines, but also to meet the cost of maintenance and operation of the physical plant itself. Id. at 333-34. Moreover, once the voters have approved the bonds, such increases may be made without again submitting the increase to the voters. Id. at 334. As explained by the court in response to the argument that the increase violated the Hancock Amendment: ... logic demands the conclusion that the voters, by authorizing the Mayor and Board of Aldermen to increase rates to repay principal and interest, also authorized concomitant increases to pay for the costs of maintenance 34 Id. and operation. It cannot be argued seriously that a majority of the voters of the City approved the issuance of 19.1 million dollars of revenue bonds and authorized the City to increase the rates charged to users to repay the principal and interest on the bonds, yet did not authorize effectively an increase in those rates to keep the physical plant maintained and in working order. The promise to repay the bonded indebtedness would be illusory without the promise to keep the facilities running. We shall not impute such a futile and deceptive meaning upon a vote of the people of Blue Springs. This requirement is echoed in state statutes relating to sewerage systems. It shall be the mandatory duty of any ... sewer district which shall issue revenue bonds ... to fix and maintain rates and make and collect charges for the use and services of the system for the benefit of which such revenue bonds were issued, sufficient to pay the cost of maintenance and operation thereof, to pay the principal of and the interest on all revenue bonds or other obligations issued or incurred by such ... sewer district chargeable to the revenues of such system and to provide funds ample to meet all valid and reasonable requirements of the ordinance or resolution by which such revenue bonds have been issued. Mo. Rev. Stat. § 250.120.1 (2000). Under the authority of this statute, once the voters have approved revenue bonds, the District has the authority to raise rates to pay principal and interest on the bonds and to meet the costs of maintenance and operation of the facilities. The District has issued and currently has outstanding $460 million of $500 million in voter -approved revenue bonds for Phase I CIRP wastewater projects. 2007 Ex. MSD 17F, Tyminski Direct Testimony, p. 5, I. 12-14. The District's debt service on outstanding or proposed debt issued in an aggregate principal amount of $500 million is included in the District's revenue requirements for wastewater. 2007 Ex. MSD 17F, Tyminski Direct Testimony, p. 4, I. 22-23. No debt is currently outstanding for stormwater. Id. at p. 15, I. 10-22; 2007 Ex. MSD 17G, Sedgwick Direct Testimony, p. 35 18, I. 7-10. The Supreme Court has upheld the issuance of revenue bonds for the operation and maintenance of a sewage system finding that the voters, by authorizing the public agency to increase rates to repay principal and interest, also authorized concomitant increases to pay for the costs of maintenance and operation. See Oswald v. City of Blue Springs, 635 S.W.2d 332 (Mo. 1982) (en banc). The District's current bond obligations consist of the following: (i) the Metropolitan St. Louis Sewer District Wastewater Systems Revenue Bond Series 2006C for $60,000,000 issued November 16, 2006 pursuant to Bond Ordinance; and (ii) portions of (a) Water Pollution Control and Drinking Water Revenue Bonds Series 2006B (State Revolving Funds Program) for $22,105,000 issued November 1, 2006; (b) Water Pollution Control and Drinking Water Revenue Bonds Series 2006A (State Revolving Funds Program) for $87,505,000 issued April 1, 2006; (c) Water Pollution Control and Drinking Water Revenue Bonds Series 2005A (State Revolving Funds Program) for $53,060,000 issued May 1, 2005; (d) Water Pollution Control and Drinking Water Revenue Bonds Series 2004B (State Revolving Funds Program) for $179,780,000 issued May 1, 2004; and (iii) Wastewater System Revenue Bonds Series 2004A for $175,000,000 issued April 22, 2004 pursuant to Bond Ordinance. See 2007 Exs. MSD 8, 20C, 20D, 20E, 20F and 20G Bond Documents. The District states that pursuant to Section 6.1 of its Master Bond Ordinance No. 11713 passed on April 22, 2004, it has obligated itself to fix, maintain and collect rates, fees and other charges for services sufficient at all times to meet all operation and maintenance expenses, accumulate a reasonable operating reserve, provide net revenues of at least 125% of all debt service requirements, and accumulate funds 36 adequate to meet the cost of major renewals, replacement, repairs, additions, betterments, and improvements to the system to keep the same in good operating condition or as is required by any governmental agency having jurisdiction over the System. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 37, q. 59. By 2012, $94 million in principal will have been paid down on the District's outstanding bond obligations. The following schedule lists the original bond amounts, the total amount of principal paid as of 2012 and the District's outstanding bond obligations as of 2012. Bond Series Original Bond Amount District's Original Portion of Bond Amount Total Principal Paid by 2012 Total Outstanding Bond Amount in 2012 District's Portion of Outstanding Bond Amount in 2012 2006C $60,000,000 $60,000,000 $0 $60,000,000 $60,000,000 2006A $87,505,000 $42,715,000 $16,385,000 $71,120,000 $34,848,800 2006B $22,105,000 $14,205,000 $4,065,000 $18,040,000 $11,545,600 2005A $53,060,000 $6,800,000 $12,740,000 $40,320,000 $5,241,600 2004B $179,780,000 $161,280,000 $46,830,000 $132,950,000 $119,655,000 2004A $175,000,000 $175,000,000 $14,375,000 $160,625,000 $160,625,000 TOTAL $460,000,000 $94,395,000 $391,916,000 See 2007 Exs. MSD 8, 20C, 20D, 20E, 20F and 20G Bond Documents. Missouri State Revolving Fund A number of the District bond obligations are funded through the Missouri State Revolving Fund ("SRF") Leveraged Loan Program. The Missouri SRF Leveraged Loan 37 HE RAI E COMM]SS ON OF THE MET OPOLITAN ST. LOUIS SEWER DIST ICT April 1, 2008 Board of Trustees of the Metropolitan St. Louis Sewer District Dear Trustees: I have been authorized and directed by the Rate Commission of the Metropolitan St. Louis Sewer District to deliver to you the Rate Recommendation Report regarding the Combined Wastewater and Stormwater Rate Change Proposal submitted to the Rate Commission on January 18, 2008. Accompanying the Report are the Minority Report regarding Bond Funding, in which Delegates Brockmann, Harris and Toenjes joined; the Proceedings; and the Resolution adopted by the Rate Commission on March 21, 2008. The Proceedings of the Rate Commission at which the Rate Recommendation Report was considered were held in accordance with all requirements of law and procedural rules of the Rate Commission. The Rate Recommendation Report was approved at a meeting on March 21, 2008, at which a quorum was present and acted throughout. The Resolution is in full force and effect and has not been altered, amended, or repealed. Very truly yours, Leonard Toenjes cc: Mr. Jeffrey Theerman Mr. Randy Hayman APR 1 PH 4:27 RATE RECO ENDATION REPORT of THE TE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT to the BOARD OF TRUSTEES OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT upon the COMBINED WASTEWATER AND STORMWATER RATE CHANGE PROPOSAL MARCH 21, 2008 THE FATE CO ISSI O THE ETROPO ITAN ST. LOUIS SE = DISTRICT April 1, 2008 Board of Trustees of the Metropolitan St. Louis Sewer District Dear Trustees: I have been authorized and directed by the Rate Commission of the Metropolitan St. Louis Sewer District to deliver to you the Rate Recommendation Report regarding the Combined Wastewater and Stormwater Rate Change Proposal submitted to the Rate Commission on January 18, 2008. Accompanying the Report are the Minority Report regarding Bond Funding, in which Delegates Brockmann, Harris and Toenjes joined; the Proceedings; and the Resolution adopted by the Rate Commission on March 21, 2008. The Proceedings of the Rate Commission at which the Rate Recommendation Report was considered were held in accordance with all requirements of law and procedural rules of the Rate Commission. The Rate Recommendation Report was approved at a meeting on March 21, 2008, at which a quorum was present and acted throughout. The Resolution is in full force and effect and has not been altered, amended, or repealed. Very truly yours, Leonard Toenjes cc: Mr. Jeffrey Theerman Mr. Randy Hayman RESOLUTION OF THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEW`' DISTRICT APPROVING A RATE RECOMMENDATION REPORT ON THE COMBINED WASTEWATER AND TTORMWATER RATE CHANGE; AND RELATED MATTED WHEREAS, the Rate Commission of the Metropolitan St. Louis Sewer District (the "District") is directed by § 7.040 of the Charter Plan, as approved and amended by the voters of the City and County of St. Louis, to review and make recommendations to the Board of Trustees of the District regarding proposed changes in wastewater rates, stormwater rates and tax rates or change in the structure of any of the rates; and WHEREAS, the District, on January 18, 2008, referred proposed rate changes in the wastewater and stoiniwater rates for review by the Rate Commission; and WHEREAS, any change in a rate recommended to the Board of Trustees by the Rate Commission is to be accompanied by a statement complying with the provisions of §§ 7.040 and 7.270 of the Charter Plan; and WHEREAS, in order to conduct its proceedings with utmost expedition consistent with procedural fairness to the parties, the Rate Commission adopted amendments to its Operational Rules and a Procedural Schedule governing the proposed rate change on January 18, 2008, pursuant to § 7.280 of the Charter Plan; and WHEREAS, the Rate Commission received written testimony, exhibits, conducted technical conferences and public hearings, received legal and other memoranda, and has conducted these proceedings in a manner consistent with the requirements of the Charter Plan, the Operational Rules and Procedural Schedule (the "Proceedings"); and WHEREAS, the Rate Commission considered each of the facts and circumstances disclosed during the Proceedings; and WHEREAS, the Rate Commission has considered a statement specifically responsive to the criteria and factors set forth in §§ 7.040 and 7.270 of the Charter Plan, (the "Rate Recommendation Report") to the Board of Trustees. NOW, THEREFORE, the Delegates of the Rate Commission do hereby resolve, determine and order as follows: Section 1. Findings. The Delegates of the Rate Commission hereby find and deteii,iine those matters set forth in the preambles hereof as fully and completely as if set out in full in this Section 1. 1 Section 2. Charter Plan Requirements. The Delegates of the Rate Commission find and determine that the Rate Recommendation Report in the foilii attached hereto as Exhibit "A" considered at this meeting satisfies the requirements of the Charter Plan. Section 3. Rate Recommendation Report. The Delegates of the Rate Commission hereby approve the Rate Recommendation Report in the foiiii attached hereto as Exhibit "A" Section 4. Minority Reports. The Rate Commission hereby receives the Minority Report regarding bond funding submitted by Commissioners Brockmann, Harris and Toenjes. Section 5. Actions of Officers Authorized. The officers of the Rate Commission shall be, and they hereby are, authorized and directed to deliver to the Board of Trustees of the Metropolitan St. Louis Sewer District the Rate Recommendation Report and the Minority Report and to take such actions as they may deem necessary or advisable in order to carry out and perfoiiii the purposes of this Resolution and to make ministerial alterations, changes or additions in the foregoing documents herein approved, authorized and confirmed which they may approve and the execution or taking of such action shall be conclusive evidence of such necessity or advisability. Section 6. Severability. It is hereby declared to be the intention of the Rate Commission that each and every part, section and subsection of this Resolution shall be separate and severable from each and every other part, section and subsection hereof and that the Rate Commission intends to adopt each said part, section and subsection separately and independently of any other part, section and subsection. In the event that any part, section or subsection of this Resolution shall be determined to be or to have been unlawful or unconstitutional, the remaining parts, sections and subsections shall be and remain in full force and effect, unless the court making such finding shall detetiiiine that the valid portions standing alone are incomplete and are incapable of being executed in accordance with the intent of this Resolution. Section 7. Governing Law. This Resolution shall be governed exclusively by and construed in accordance with the applicable laws of the State of Missouri. Section 8. agent of the Rate this Resolution. 1 Section 9. cause to be paid Resolution. No Personal Liability. No Delegate of the Rate Commission, officer, or Commission shall have any personal liability for acts taken in accordance with Expenses. The Finance Committee is hereby authorized and directed to all costs, expenses and fees incurred in connection with or incidental to this Section 10. Effective Date. This Resolution shall become effective immediately upon its passage. 2 ADOPTED by the Delegates of the Rate Commission of the Metropolitan St. Louis Sewer District this 21st day of March, 2008. [SEAL] ATTEST: Its Secretary RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT 3 First Criteria: Whether the Rate Change Proposal is necessary to pay interest and principal falling due on bonds issued to finance assets of the District? Second Criteria: Whether the Rate Change Proposal is necessary to pay 30 the costs of operation and maintenance? 48 Third Criteria: Whether the Rate Change Proposal is in such amounts as may be required to cover emergencies and anticipated delinquencies? 57 FACTORS FOR RECOMMENDATION 68 EXECUTIVE SUMMARY 2 BACKGROUND 4 METROPOLITAN ST. LOUIS SEWER DISTRICT 11 THE RATE COMMISSION 11 APPOINTMENT 12 RATE COMMISSION'S OPERATIONAL RULES 17 17 RATE COMMISSION'S PROCEDURAL SCHEDULE RATE COMMISSION'S PROCEEDINGS 18 18 PROPOSALS The District's Proposal 22 The Rate Consultant's Proposal 28 28 RATE COMMISSION RECOMMENDATION 30 CRITERIA FOR RECOMMENDATION 30 30 First Factor: "Is consistent with constitutional, statutory or common law as amended from time to time" 69 Second Factor: "Enhances the District's ability to provide adequate sewer and drainage systems and facilities, or related services" 95 Third Factor: "Is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District" Fourth Factor: "Does not impair the ability of the District to comply with 101 applicable Federal or State laws or regulations as amended from time to time" TABLE OF CONTENTS INTRODUCTION 108 MINORITY REPORTS 121 PROCEEDINGS INDEX 180 183 Fifth Factor: "Imposes a fair and reasonable burden on all classes of ratepayers" INTRODUCTION The Combined Wastewater and Stormwater Rate Change Proposal of the Metropolitan St. Louis Sewer District was first presented to the Rate Commission on March 2, 2007 (the "2007 Proceedings"). The Rate Commission initiated certain proceedings in order to provide for the advance submission of written testimony, the conduct of three technical conferences, a prehearing conference, discovery procedures, a public hearing, and the filing of post - hearing briefs with procedural fairness to the parties. See Charter Plan of the Metropolitan St. Louis Sewer District (hereinafter "Charter Plan"), § 7.280. Missouri Industrial Energy Consumers ("MIEC"); Monarch -Chesterfield Levee District, Howard Bend Levee District, Earth City Levee District, Gary and Debra Hente, Riverport Farm Partners, Stemme Family Partnership, Beachcraft Holdings, Jay Henges Real Estate Trust, and Riverport Levee District (hereinafter known as the "Levee Districts"); the Associated General Contractors ("AGC") of St. Louis; the SITE Improvement Association; the Missouri Energy Group ("MEG"); and Michael Cohen intervened and participated in the 2007 Proceedings. The record of the 2007 Proceedings was contained in Volumes I through XIV, delivered with the 2007 Report. All of the written testimony, exhibits, document requests and responses, transcripts of testimony, legal memoranda, and other materials contained therein have been admitted into evidence and considered by the Rate Commission Delegates for the purpose of making the findings and determinations contained in the 2007 Report. On January 18, 2008, the Commission received from the District a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Proposed 2 Rate Change") and certain accompanying documents (the "Rate Setting Documents"). The Proposed Rate Change is in response to substantial comments from advocacy groups as presented to the Board of Trustees after the Rate Commission's 2007 Report. The Proposed Rate Change provides for a mixture of debt and cash financing in order to lower wastewater rates and fund the CIRP as recommended in the Rate Commission's 2007 Report. The wastewater rates in the Proposed Rate Change are contingent upon the approval of additional revenue bond authority by the voters. The Proposed Rate Change also includes an adjustment to stormwater rates to lessen the short-term impact of the transition to an impervious -based stormwater rate structure. The stormwater rate increases in the Proposed Rate Change are extended from a period of five years, as proposed in the 2007 Rate Change, to seven years. The District has requested that the Rate Recommendation Report and Exhibits from the 2007 Proceedings and related to the actions of the Metropolitan St. Louis Sewer District's Board of Trustees prior to January 18, 2008, be admitted as supporting material to the Rate Change Notice for purposes of this Proceeding (the "2008 Proceedings") and filed as the Exhibit Index from the 2007 Proceedings as Exhibit MSD 2.3b to this Proceeding. The 2007 Proceedings are incorporated herein by reference. Exhibits for the 2007 Proceedings will bear the prefix "2007" and Exhibits for this Proceeding will bear the prefix "2008." This is the Report required by the Charter Plan and has been adopted by a majority of the Rate Commission Delegates. See Charter Plan, § 7.280(f). 3 EXECUTIVE SUMMARY The 2007 Proposal The District's 2007 Proposall which was presented to the Rate Commission on March 2, 2007, provided a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Rate Change Proposal"). The District proposed to finance $661 million of additional investment in wastewater capital projects (the "Capital Investment and Replacement Plan," or "CIRP") based on Pay -As -You -Go funding from wastewater and stormwater rate increases. The District's 2007 Recommended Wastewater Rates were as follows: 2 2008 2009 2010 2011 2012 Base Charge - $/Bill Billing & Collection Charge 2.30 2.30 2.45 2.55 2.70 System Availability Charg_e 8.40 9.55 10.65 11.70 12.25 Total Base (Residential) Service Charge 10.70 11.85 13.10 14.25 14.95 Compliance Charge - $/Bill (b) 27.40 28.40 29.65 30.90 32.10 Total Nonresidential Service Charge 38.10 40.25 42.75 45.15 47.05 Volume Charge Metered - $/Ccf 1.88 2.13 2.37 2.59 2.73 Unmetered - $/Bill Each Room 1.23 1.39 1.55 1.69 1.78 Each Water Closet 4.59 5.20 5.79 6.32 6.67 Each Bath 3.83 4.34 4.82 5.27 5.56 Each Separate Shower 3.83 4.34 4.82 5.27 5.56 Extra Strength Surcharges - $/ton (b) Suspended Solids over 300 mg/I 218.90 220.54 239.59 260.17 270.74 BOD over 300 mg/I 529.90 601.02 659.66 722.36 752.92 COD over 600 mg/I 264.95 300.51 329.83 361.18 376.46 1 This summary of the Rate Setting Documents does not purport to be complete and reference is made to the full text of the Rate Setting Documents or a complete recital of the terms of the rate changes proposed by the District. 4 The District proposed Stormwater Impervious Area Charges as follows: 2008 2009 2010 2011 2012 Projected stormwater service charge per 100 square feet impervious area (annualized rate — billable monthly) Implemented December 1, 2007 $1.4400 $2.0758 $2.1935 $2.2495 $2.2865 Projected Monthly charge per 100 square feet impervious area $0.1200 $0.1730 $0.1828 $0.1875 $0.1905 This impervious area based revenue was proposed to fund a basic level of stormwater service throughout the District's entire service area. Basic service included: pipes and structure repair; inlet cleaning; removal of creek obstructions; concrete channel cleaning and repair; and creek inspections. The specific revenues and expenses also incorporated the transition from property tax and wastewater rate revenues to an independent stormwater revenue source for an enhanced level of stormwater services. This transition was designed to provide funding for items such as maintenance of residential detention basins; erosion control; construction of new stormwater systems; creek maintenance; and assistance with backyard ponding. In addition to the recommendation for a stormwater impervious area charge, there were also changes proposed for the Operation and Maintenance Capital Improvement ("OMCI") revenues. OMCI projects would have continued to be financed by OMCI taxes and be separately identified from those projects to be funded by impervious area charges. In the 2007 Proceedings, the District proposed reconfiguration of the existing 23 OMCI subdistricts into five watershed -based subdistricts as a means to provide enhanced stormwater services as determined by a vote of each subdistrict's customers. The proposed five -subdistrict reconfiguration was to be delineated as 5 follows: (i) Missouri River; (ii) Coldwater Creek; (iii) Bissell; (iv) River Des Peres; and (v) Lower Meramec. The tax levy and type of enhanced services were to be determined by a vote of the customers of each watershed. This proposed reconfiguration would have resulted in an expansion of the total area covered by subdistricts and provided the opportunity for more District customers to obtain enhanced stormwater services by resident vote. It was assumed, for rate modeling purposes, that this reconfiguration and necessary votes would be completed in the November 2007 election. The District intended to develop a priority project list for each of the reconfigured OMCI subdistricts. If voter approval was not received for a given subdistrict, the previous OMCI subdistrict boundaries were to be retained and the priority list revised accordingly. In the 2007 Proceedings, the District sought to obtain voter approval for enhanced stormwater services in the new watershed subdistricts. The revenue reconfigured by the new watershed subdistricts would have been as follows: OMCI Revenue by Watershed 2007 2008 2009 2010 2011 2012 Taxes of $0.04 to $0.10/$100 Assessed Value Tax Rate $0.10 per $100 Assessed Value Bissell Point Watershed 714,300 717,900 4,006,800 4,112,000 4,219,900 4,330,700 Coldwater Creek Watershed 1,882,300 1,913,900 2,064,200 2,118,400 2,174,000 2,231,000 Lower Meramec Watershed 238,900 251,700 4,502,700 4,620,900 4,742,200 4,866,700 River Des Peres Watershed 5,590,700 5,758,700 8,928,300 9,162,600 9,403,100 9,650,000 Missouri River Watershed 0 0 5,610,800 5,758,000 5,909,200 6,064,200 Total OMCI Revenue 8,426,200 8,642,200 25,112,800 25,771,900 26,448,400 27,142,600 The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2007 Proceedings, found and determined that the Rate Change Proposal was necessary to pay interest and principal falling due on bonds issued to finance assets of the District; the costs of operation and maintenance; and such 6 amounts as may be required to cover emergencies and anticipated delinquencies. See Charter Plan, § 7.040. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2007 Proceedings, found and determined that the Rate Change Proposal, and all portions thereof were consistent with constitutional, statutory and common law as amended from time to time; enhanced the District's ability to provide adequate sewer and drainage systems and facilities, or related services; was consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; and did not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time. The Rate Commission, after consideration of all the facts and circumstances disclosed in the 2007 Proceedings, found and determined that the Rate Change Proposal did not impose a fair and reasonable burden on all classes of ratepayers because the Proposal included a resistance factor and a charge for enhanced stormwater services based on ad valorem tax rather than an impervious area charge. The Rate Commission, after consideration of all facts and circumstances disclosed in the 2007 Proceedings, found and determined that the use of an impervious area charge for all Stormwater Services imposed a fair and reasonable burden on all classes of ratepayers, and the record in the 2007 Proceedings supported combining the charge for both basic stormwater services and enhanced stormwater services into one stormwater charge. 7 RECOMMENDATION The 2007 Proceedings In the 2007 Proceedings, the Rate Commission recommended the use of 100% Pay -As -You -Go funding as set forth in the Rate Change Proposal. The Rate Commission recommended changes in wastewater rates as set forth in the Proposed Rate Change, with the exception of the resistance factor. The Rate Commission recommended that the resistance factor be eliminated. With respect to stormwater rates, the Rate Commission recommended the use of an impervious area charge for all stormwater services, and that the charges for both basic and enhanced services as defined in the Rate Change Proposal be combined into one stormwater charge based on impervious area. The 2007 Rate Change Proposal was for a term of five years, or until 2012. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the requested District's Phase II $661 million Capital Improvement Replacement Program ("CIRP") would allow the District to meet the near -term capital improvement needs until 2012. However, the Rate Commission also believed that the record in the 2007 Proceedings supported a finding that an additional rate change proposal and/or the issuance of debt would be required prior to 2012 to fund any compliance required by settlement or court order in the proceeding captioned United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer District. The 2008 Proceedings The 2008 Proposed Rate Change provides for a mixture of debt and cash financing in order to lower wastewater rates and fund the CIRP. The wastewater rates in the Proposed Rate Change are contingent upon the approval of additional revenue 10 bond authority by the voters. The Proposed Rate Change also includes an adjustment to stormwater rates to lessen the short-term impact of the transition to an impervious - based stormwater rate structure. The stormwater rate increases in the 2008 Proposed Rate Change are extended from a five-year period, as proposed in the 2007 Rate Change, to seven years. BACKGROUND Metropolitan St. Louis Sewer District Article VI § 30(a) of the Missouri Constitution has authorized "The people of the city of St. Louis and the people of the county of St. Louis ... to establish a metropolitan district or districts for the functional administration of services common to the area included therein ...." Mo. Const. art. VI, § 30(a). At a special election on February 9, 1954, the freeholders adopted and the voters of the City of St. Louis and St. Louis County approved the Charter Plan (as amended on November 7, 2000) creating the Metropolitan St. Louis Sewer District ("District"). The Charter Plan establishing the District has been held to be constitutional. State on inf. Dalton v. Metro. St. Louis Sewer Dist., 275 S.W.2d 225 (Mo. 1955) (en banc). The District is a body corporate, a municipal corporation, and a political subdivision of the state, with power to ... act as a public corporation within the purview of the Plan, and shall have the powers, duties, and functions as herein described. Charter Plan, § 1.010. The Missouri Constitution provides that upon the adoption of the Charter Plan, it "shall become the organic law of the territory therein defined, and shall take the place of and supersede all laws, charter provisions and ordinances inconsistent therewith relating to said territory." Mo. Const. art. VI, § 30(b). As explained by the Missouri Supreme Court, "[t]he apparent intent is to give the freeholders, with the 11 approval of the voters, power to do whatever the Legislature could ordinarily do with respect to the creation, organization and authority of such a district." Dalton, 275 S.W.2d at 228. As such, the Charter Plan is similar to legislation, and thus, the District has only such powers as are delegated to it by the Charter Plan, or as may properly be implied from the nature of the duties imposed. State on inf. McKittrick v. Wymore, 132 S.W.2d 979, 987-88 (Mo. 1939) (en banc). To determine whether a certain action of the District is authorized by the Charter Plan, it must be construed to further the intent of the voters. Centerre Bank of Crane v. Dir. of Revenue, 744 S.W.2d 754, 759 (Mo. 1988) (en banc). Intent must be ascertained by examining the plain language of the Charter Plan reviewed as a whole. Staley v. Dir. of Revenue, 623 S.W.2d 246, 248 (Mo. 1981) (en banc). It is clear that authorization was provided to residents in St. Louis City and County to establish a metropolitan sewer district, Mo. Const. art. VI, § 30(a), and that authorization was provided by the voters of St. Louis City and County to authorize the activities which carry out the intent expressed and implied from the Charter Plan, including the establishment of the Rate Commission. The Rate Commission The Rate Commission was established by the amendments to the Charter Plan approved by the voters at a general election on November 7, 2000, to review and make recommendations to the Board of Trustees regarding proposed changes in wastewater, stormwater rates, and tax rates. Specifically, upon receipt of a Rate Change Notice from the District, the Rate Commission is to recommend to the Board changes in a 12 wastewater, stormwater, or tax rate necessary to pay (i) interest and principal falling due on bonds issued to finance assets of the District; (ii) the costs of operation and maintenance; and (iii) such amounts as may be required to cover emergencies and anticipated delinquencies. See Charter Plan, § 7.040. Any change in a rate recommended to the Board by the Rate Commission pursuant to § 7.270 of the Charter Plan is to be accompanied by a statement of the Rate Commission that the proposed rate change (i) is consistent with constitutional, statutory, or common law as amended from time to time; (ii) enhances the District's ability to provide adequate sewer and drainage systems and facilities, or related services; (iii) is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; (iv) does not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time; and (v) imposes a fair and reasonable burden on all classes of ratepayers. Appointment On January 13, 2005, the District enacted Board Ordinance No. 11924, as required by § 7.230 of the Charter Plan, and designated the Rate Commission Representative Organizations. The Ordinance designated: Associated General Contractors of St. Louis, Building & Construction Trades Council, The Engineers' Club of St. Louis, FOCUS St. Louis, Home Builders Association of Greater St. Louis, The Human Development Corporation of Metropolitan St. Louis, International Institute, League of Women Voters, Missouri Botanical Garden, Missouri Industrial Energy Consumers, Regional Chamber & Growth Association, Sierra Club, St. Louis 13 Association of Realtors, St. Louis Council of Construction Consumers, and St. Louis County Municipal League. Each of these Organizations designated an individual to serve as a Rate Commission Delegate and notified the Rate Commission. The Delegates currently comprising the Rate Commission are: DELEGATE Nancy Bowser Paul Brockmann Fred Kratky Evelio Sardina Virginia Harris William Allen Daniel P. Murphy William Peick Willard Reeves Mike Schoedel John L. Stein Steven R. Sullivan Leonard Toenjes George D. Tomazi Richard Ward REPRESENTING League of Women Voters Missouri Botanical Garden St. Louis Association of Realtors International Institute Sierra Club Home Builders Association of Greater St. Louis Building & Construction Trades Council St. Louis Council of Construction Consumers The Human Development Corporation of Metropolitan St. Louis St. Louis County Municipal League Missouri Industrial Energy Consumers Regional Chamber & Growth Association Associated General Contractors of St. Louis The Engineers' Club of St. Louis FOCUS St. Louis Five Rate Commission Representative Organizations (Building & Construction Trades Council, FOCUS St. Louis, Missouri Industrial Energy Consumers, Home Builders Association of Greater St. Louis, and St. Louis County Municipal League) have terms that expired January 31, 2007. The Board of Trustees has not designated organizations to succeed such Rate Commission Representative Organizations. 14 Under the Charter Plan, the Board of Trustees is to identify the Rate Commission Representative Organizations for a term of years determined by the Board. Charter Plan, § 7.230. Each Rate Commission Representative Organization selected by the Board of Trustees shall have the right to designate a Rate Commission Delegate to the Rate Commission for a term of six years or the completion of any unexpired terms. Id. at § 7.240. This section continues, "Prior to the expiration of a Rate Commission Representative Organization's term, the Board of Trustees shall designate organizations within the District to succeed such Rate Commission Representative Organization." Id. at § 7.240. Nothing bars a Rate Commission Organization from being named to successive terms. Id. The Charter Plan is silent as to whether the Rate Commission Organizations and their delegates may hold over in their office if the Board does not designate successor organizations prior to the expiration of their terms. The Missouri Constitution provides, "subject to the right of resignation, all officers shall hold office for the term thereof and until their successors are duly elected or appointed and qualified." Mo. Const. art. VII, § 12. In general, this provision extends the term of an officer, permitting an officer to continue to hold office for the term thereof and until his successor is duly appointed and qualified. Moynihan v. Gunn, 204 S.W.3d 230, 235 (Mo. Ct. App. 2006). Unless there is a law to the contrary, all appointed officers hold office during their official terms and may hold over in office until their successor is appointed. Id. In interpreting Section 12 of Article VII, the courts have recognized the importance of the continuity of tenure. Id. at 236. The Missouri Supreme Court declared: 15 [w]e believe the intent and purpose of Section 12 is to guarantee a continuity of tenure, to make sure that the public, for whose benefit the office has been created, will at all times have an incumbent perform the duties thereof, to insure that the public interest will not suffer from the neglect of duties which would result for want of an incumbent and that public business will not be interrupted. Id. In Langston v. Howell County, the Missouri Supreme Court held that the general trend in this country is that "in the absence of an express or implied constitutional or statutory provision to the contrary an officer is entitled to hold his office until his successor is appointed or chosen and has qualified." 79 S.W.2d 99, 102 (Mo. 1935). The courts have adopted the doctrine that "in the absence of express provision and unless the legislative intent to the contrary is manifest, municipal officers hold over until their successors are provided." Davenport v. Teeters, 315 S.W.2d 641, 644 (Mo. Ct. App. 1958). The Missouri courts have held that Section 12 of Article VII also applies to municipal officers and officers of a political subdivision. Voss v. Davis, 418 S.W.2d 163,168 (Mo. 1967) (municipal officers); State ex rel. Byrd v. Knott, 75 S.W.2d 86, 90 (Mo. Ct. App. 1934) (officers of political subdivision held to be public officers). Missouri also recognizes the validity of a de facto officer, which is one who has the reputation or appearance of being the officer such person assumes to be but who, in fact, under the law, has no right or title to the office such person assumes to hold. State v. VanSickel, 675 S.W.2d 907, 912 (Mo. Ct. App. 1984) (quoting State ex rel. City of Republic v. Smith, 139 S.W.2d 929, 933 (Mo. 1940)). The acts of a de facto officer are valid so far as they concern the public or the rights of third persons who have an interest in the things done. State v. Smith, 779, S.W.2d 241, 243 (Mo. 1989) (en banc). 16 In order to be a de facto officer, the officer holds office by some color of right or title. VanSickel, 675 S.W.2d at 912. Where one is actually in possession of a public office and discharges the duties thereof, the color of right which makes such person a de facto officer may result from an election or appointment, holding over after the expiration of a term, or by acquiescence by the public for such a length of time as to raise the presumption of a colorable right to hold such office. Id. The Rate Commissioners have been appointed under the color of a known appointment, and are holding over after the expiration of a term. On January 24, 2007, District legal counsel advised the Rate Commission counsel of the District's opinion that current Rate Commission Representative Organizations with expiring terms may continue to appoint delegates to serve on the Rate Commission until the Board of Trustees appoints their successors. Rate Commission's Operational Rules On August 16, 2001, and under the authority of §§ 7.250 and 7.280(e) of the Charter Plan, the Rate Commission adopted Operational Rules, Regulations and Procedures as amended on March 21, 2002, April 16, 2003, March 2, 2007, and January 18, 2008, to govern the activities of the Rate Commission. Rate Commission's Procedural Schedule On January 18, 2008, the Rate Commission, under the authority of § 7.280(e) of the Plan and pursuant to § 3(3) of the Operational Rules, adopted a Procedural Schedule for the Consideration of a Combined Wastewater and Stormwater Rate Change Notice. 17 Under procedural rules adopted by the Rate Commission on January 18, 2008, the Rate Commission intends to issue its report on the proposed Rate Change Notice to the Board of Trustees of the District on or about April 1, 2008. Rate Commission's Proceedings Under procedural rules adopted by the Rate Commission, any person who would be affected by the Wastewater and Stormwater Rate Change Proposal has an opportunity to submit an application to intervene in the rate change proceedings. Applications to intervene have been granted for the Missouri Energy Group ("MEG") and Missouri Industrial Energy Consumers ("MIEC"). On January 24, 2008, the District submitted to the Rate Commission prepared Direct Testimony of Jeffrey L. Theerman, Karl J. Tyminski, Janice M. Zimmerman, and Keith D. Barber. On February 8, 2008, the Rate Commission submitted its First Discovery Request to the District. On February 18, 2008, the District filed its Responses. A Technical Conference was held on the record on February 20, 2008, regarding the Rate Setting Documents and the Direct Testimony filed with the Rate Commission by the District to provide the District an opportunity to answer questions propounded by members of the Rate Commission; then by any Intervenor; and finally by Lashly & Baer, Legal Counsel to the Rate Commission. On February 25, 2008, MIEC filed the Rebuttal Testimony of Michael Gorman. On February 25, 2008, MEG filed the Rebuttal Testimony of Billie S. LaConte. On February 25, 2008, the Rate Commission filed the Rebuttal Testimony of William G. Stannard. 18 On February 25, 2008, the District filed an Amendment to the Direct Testimony of Jeff Theerman, Jan Zimmerman and Karl Tyminski. On February 27, 2008, the Rate Commission submitted its Second Discovery Request to the District. On March 10, 2008, the District filed its Responses. On March 12, 2008, the District filed its Amendment to its March 10, 2008 Responses. A Second Technical Conference was held on the record February 29, 2008, regarding the Rebuttal Testimony, where each person submitting Rebuttal Testimony answered questions propounded by members of the Rate Commission, the District, other Intervenors, and Legal Counsel. A Prehearing Conference for the purpose of identifying any issues raised by the prepared testimony previously submitted was conducted on the record on March 5, 2008. A representative of each party submitting testimony was invited to participate in the Prehearing Conference. Each participant in the Prehearing Conference submitted on or before March 12, 2008, a prehearing conference report ("Prehearing Conference Report") describing the issues raised by the Rate Setting Documents and the prepared testimony, together with a brief description of such participant's position, if any, on each issue and the rationale therefore. Ratepayers who did not wish to intervene were permitted to participate in a series of on -the -record public hearings conducted in four sessions which began on February 27, 2008, and concluded on March 15, 2008. A Public Notice regarding these Proceedings was published in the St. Louis Post -Dispatch and in the St. Louis 19 American. These Notices contained the time, date and location of each of these conferences and hearings. Public Notice regarding the Proposed Rate Change was published by the District in the St. Louis American on February 14, 2008, and the St. Louis Business Journal on February 8, 2008. The Public Notice contained the time, date and location of each of the technical conferences and hearings. Similarly, Public Notice regarding these Proceedings was published in the St. Louis Post -Dispatch on February 1, February 5, and February 12, 2008, and in the St. Louis American on February 7, February 14, and February 21, 2008, by the Rate Commission. This Notice contained the time, date and location of each of the conferences and hearings. During the 2007 Proceedings, Exhibits and Discovery Requests and Discovery Request Responses were introduced and on July 6, 2007, were admitted into evidence. These documents, together with the transcripts of testimony, written testimony, and certain other materials, were contained in Volumes I through XIV, and the 2007 Proceedings Index may be found at the end of this Report. See 2008 Ex. MSD 2.3b. During the 2008 Proceedings, Exhibits and Discovery Requests and Discovery Request Responses were introduced and on March 13, 2008, were admitted into evidence. These documents, together with the transcripts of testimony, written testimony, and certain other materials, are contained in Volumes I through IV, and the 2008 Proceedings Index may be found at the end of this Report. The findings and determinations contained in this Report were considered at public meetings of the Rate Commission on March 17 and March 21, 2008. 20 The Manual Often in these Proceedings reference is made to "The Manual." "Financing and Charges for Wastewater Systems" (2005) (the "Manual") was prepared in accordance with recognized engineering principles and practices in general use by wastewater utility management, municipal officials, engineers, accountants, and others concerned with financing and establishing charges for wastewater service. It is a practice manual prepared by the Financing and Charges for Wastewater Systems Task Force of the Water Environment Federation. The 2005 Manual replaces and substantially expands the previous 1984 guidance on wastewater utility financing. The Manual illustrates the various ways of allocating costs and developing rates and charges that reasonably and equitably reflect the cost of service. 21 PROPOSALS The District's 2007 Proposal The District's 2007 ProposaI2, which was presented to the Rate Commission on March 2, 2007, provided a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Rate Change Proposal"). The District proposed to finance $661 million of additional investment in wastewater capital projects (the "Capital Investment and Replacement Ran," or "CIRP") based on Pay -As -You -Go funding from wastewater and stormwater rate increases. The District proposed Recommended Wastewater Rates as follows: 2 2008 2009 2010 2011 Base Charge - $/Bill Billin. & Collection Charge 2.30 2.30 2.45 2.55 S stem Availabilit Charge 8.40 9.55 10.65 11.70 Total Base (Residential) Service Charlie 10.70 11.85 13.10 14.25 Com.liance Char.e - $/Bill b 27.40 28.40 29.65 30.90 Total Nonresidential Service Charge 38.10 40.25 42.75 45.15 Volume Charge Metered - $/Ccf 1.88 2.13 2.37 2.59 Unmetered - $/Bill Each Room 1.23 1.39 1.55 1.69 Each Water Closet 4.59 5.20 5.79 6.32 Each Bath 3.83 4.34 4.82 5.27 Each Sella ate Shower 3.83 4.34 4.82 5.27 Extra Strength Surcharges - $/ton b Sus.ended Solids over 300 m•/I 218.90 220.54 239.59 260.17 BOD over 300 m./I 529.90 601.02 659.66 722.36 COD over 600 mil/ I 264.95 300.51 329.83 361.18 2012 2.70 12.25 14.95 32.10 47.05 2.73 78 6.67 5.56 5.56 270.74 752.92 376.46 2 This summary of the Rate Setting Documents does not purport to be complete and reference is made to the full text of the Rate Setting Documents or a complete recital of the terms of the rate changes proposed by the District. 22 The District proposed Stormwater Impervious Area Charges as follows: 2008 2009 2010 2011 2012 Projected stormwater service charge per 100 square feet impervious area (annualized rate - billable monthly) Implemented December 1, 2007 $1.4400 $2.0758 $2.1935 $2.2495 $2.2865 Projected Monthly charge per 100 square feet impervious area $0.1200 $0.1730 $0.1828 $0.1875 $0.1905 This impervious area based revenue was proposed to fund a basic level of stormwater service throughout the District's entire service area. Basic service included: pipes and structure repair; inlet cleaning; removal of creek obstructions; concrete channel cleaning and repair; and creek inspections. The specific revenues and expenses also incorporated the transition from property tax and wastewater rate revenues to an independent stormwater revenue source for an enhanced level of stormwater services. This transition was designed to provide funding for items such as maintenance of residential detention basins; erosion control; construction of new stormwater systems; creek maintenance; and assistance with backyard ponding. In addition to the recommendation for a stormwater impervious area charge, there were also changes proposed for the Operation and Maintenance Capital Improvement (" OMCI") revenues. OMCI projects would have continued to be financed by OMCI taxes and be separately identified from those projects to be funded by impervious area charges. The District proposed reconfiguration of the existing 23 OMCI subdistricts into five watershed -based subdistricts as a means to provide enhanced stormwater services as determined by a vote of each subdistrict's customers. The 23 proposed five -subdistrict reconfiguration was to be delineated as follows: (i) Missouri River; (ii) Coldwater Creek; (iii) Bissell; (iv) River Des Peres; and (v) Lower Meramec. The tax levy and type of enhanced services were to be determined by a vote of the customers of each watershed. This proposed reconfiguration would have resulted in an expansion of the total area covered by subdistricts and would have provided the opportunity for more District customers to obtain enhanced stormwater services by resident vote. It was assumed, for rate modeling purposes, that this reconfiguration and necessary votes would have been completed in the November 2007 election. The District intended to develop a priority project list for each of the reconfigured OMCI subdistricts. If voter approval was not received for a given subdistrict, the previous OMCI subdistrict boundaries were to be retained and the priority list revised accordingly. Voter approval for enhanced stormwater services would then be sought in the new watershed subdistricts. The revenue reconfigured by the new watershed subdistricts was as follows: OMCI Revenue by Watershed 2007 I 2008 2009 I 2010 2011 I 2012 Taxes of $0.04 to $0.10/$100 Assessed Value Tax Rate $0.10 per $100 Assessed Value Bissell Point Watershed 714,300 717,900 4,006,800 4,112,000 4,219,900 4,330,700 Coldwater Creek Watershed 1,882,300 1,913,900 2,064,200 2,118,400 2,174,000 2,231,000 Lower Meramec Watershed 238,900 251,700 4,502,700 4,620,900 4,742,200 4,866,700 River Des Peres Watershed 5,590,700 5,758,700 8,928,300 9,162,600 9,403,100 9,650,000 Missouri River Watershed 0 0 5,610,800 5,758,000 5,909,200 6,064,200 Total OMCI Revenue 8,426,200 8,642,200 25,112,800 25,771,900 26,448,400 27,142,600 The District's 2007 Rate Change Proposal reflected a shift in funding approach from its prior combined Pay -As -You -Go / Bond Financing Strategy to a 100% Pay -As - You -Go basis. This shift was estimated to save the District approximately $400 million in avoided debt service costs from the prior contemplated continued use of bond 24 financing. This strategic shift was also based on the following factors regulatory picture is incomplete; saves bonding capacity for future needs; continues wastewater CIRP progress at a tapered rate; maintains progress toward known regulatory goals; and brings the St. Louis area to appropriate rates in a cost efficient manner (i.e. avoids added debt interest costs). The District stated during the June 11, 2007 Prehearing Conference that in the credit policy set forth in the District Rate Change Proposal, the credit policy should be amended so that in paragraph 2, the second sentence be removed and the fourth sentence be replaced with the following: Second, as agreed upon by the District, any property that receives stormwater service from another entity (i.e., Levee Districts) instead of from the District shall be eligible for a credit based upon the cost for the District to provide that service. The amount of the credit in this case may exceed 50% depending on the cost of the services involved in the credit calculation. See 2007 Ex. MSD 1, page 4-8, section 4.4. The District's 2008 Proposal On January 18, 2008, the Commission received from the District a Proposed Rate Change for a Combined Wastewater and Stormwater Rate Change ("Proposed Rate Change") and certain accompanying documents (the "Rate Setting Documents"). The Proposed Rate Change is in response to substantial comment from advocacy groups as presented to the Board of Trustees after the Rate Commission's 2007 Report. Based on these customer concerns, this Proposed Rate Change provides for a mixture of $275 million debt and cash financing for the balance of the $661 million Phase II CIRP as recommended in the Rate Commission's 2007 Report in order to lower wastewater rates. The wastewater rates in the Proposed Rate Change are 25 contingent upon the approval of additional revenue bond authority by the voters. The Rate Change Proposal also includes an adjustment to stormwater rates to lessen the short-term impact of the transition to an impervious -based stormwater rate structure. The stormwater rate increases in the Proposed Rate Change are extended from a five- year period, as proposed in the 2007 Rate Change, to seven years. 2008 Ex. MSD 2.2. The District is proposing Recommended Wastewater Rates as follows: TABLE C Impact on Wastewater Rates January 18, 2044 x Indicates change from plot Proposal. "1.1•.1.1.1,A nsoarence ...ecoons 01, IV, Y; Table 3-19 WASTEWATERRATES Service Charges - 3/8ill Volume Charges Extra Strength Surcharges • Unmete ed • SIMI Suspended Rate Proposals Discussed Residential Base Residential Non Residential Compliance Total Non Residential ' Metered , Reef Each Room Exh Water Closet Each Bath Each Set:lame: Shower Solids over 300 rogri BOO OM 300 COD over Alt!: Rate Commission man no mg4 ,T Recommendation Report 8113/07: FY07 Proposed Efleeltite: 12/1/07 i 7/1/08 i 771109 i VIM 0 V 7/1)11 AS it BoT Introduced $ 7.905 10.70 11.85 13.10 14.25 14,95 12,255 27.35 28.35 29.65 30,90 32,10 20,45 38.05 4020 42.75 45.15 47,05 $ 1.81 1.88 :' 2.13 . 2.37 2.59 2.71 $ 1.18 1,23 1.39 1.55 1.69 1.78 $ 4.42 4.59 5.20 5.79 6.32 6.67 $ 3,69 3,83 4.34 4.82 5.27 5.56 $ 3.69 : 3.83 1: 4.34 7 4.82 T 5.27 1 5,56 ;. $ 218.90 218.90 220.23 239,58 260.16 270.74 $ 461.44 529.56 600.76 659.84 722.40 752.92 $ 23672 264.78 300.38 j. 329.84 , 361.20 '.. 10/11/47 FY07 Adopted 12J13/07 T FY08 (Effective 1/1/08) $ 7.90 10,70 5 12.55 27.40 5 20.45 38.10 $ 1.81 - 1.88 $ 1.18 1.23 $ 4.42 4.59 5 3.69 3.83 4 3.69 i 3,E3 ' 5 218.90 218.90 5 461.44 529.56 376.46 5 230.72 , 264.78 Alt Ill: MSD To br Adapte48 Bond mos b845n Propomed Mims 7/1/09 ReteNnendment Fads VIA° '7/1/11 Rate Change 11.35 13,10 1425 14,95 28.35 29.65 30.90 32.10 40.20 42.75 45.15 47.05 2.13 2.37 2.59 2.73. 1.39 1.55 1,69 1.78 520 5.79 6.32 6.67 4.34 4.82 5.27 5.56 4.34 : 4.82 5.27 5.56 22022 23958 260.16 270.74 600.76 659.84 72240 752.92 300.38 329.64 361.20 Notice 1/18/08 Fatal assume wee.a6.4 8444 Eleclian FY07 Adopted 12/13/07 4 FY08 (686491mi/1/081 Proposed Effechve: No change> I 711/09 1 7/1/10 V 7/1 /11 1 7 90 1070 10.70 10.90 11.40 11.85 5 12.55 27.40 27.40 29.65 30.85 31.95 20.45 38.10 38.15 40.55 42.25 43.80 ' $ tat 1.88 1,88 1.92 2.02 2.11 $ 1,18 1.23 123 125 1.32 1.38 $ 4.42 4.69.3.83 4.59 4.69 4.93 5.15_ $ 369 3.83 191 4.11 4.30 i. 1 $ 3.69 - 3.83 ...., ' 183 3.91 .1, 4.11 ''' 4.30 , S 218.90 218.90 216.90 218.90 222 62 231.35 $ 461.44 529.56 529.56 551.52 596 72 620.14 376.46 $ 230.72 264.78 264.78 275.76 298.36 310.07 - 26 The District is proposing Stormwater Impervious Area Charges as follows: TABLE D Impact on Stormwater Rates January 18, 2008 Indicates change from prior Proposal. Appendix Reference -Sections III, IV, V; Table 5-8 Rate Proposals Discussed Flat Charge Monthly Charge Taxes (per S100 Assessed Value) Ad Valorum. Taxes Subdistrict: Taxes Stormwater Impervious Charge (per 100 Sq. Feet), Alt I: Rate Commission Recommendation Report 8/13/07 FY07 Proposed Effective: 12/1/07 FY08 7/1/08 FY09 7/1/09 FY10 1 711/10 FY11 V 7/1/11 FY12 Alt II:.BoT Introduced 10111/07 FY07 Adopted 12/13/07 > FY08, (Effective 3/1/0S) Effective: 1/1/09 FY09` 1/1/10 FY10` 1/1(11 FY11 1/1/12 FY12` 1/1/13 FY13 111/14 FY14 Alt 11I: MSD Rate Rate Change Notice 1/18/08 FY07 Adopted 12/13)07 > FY08 (Effective 3/1/084 Effeetive:1/1/09 FY09 1/1110 FY10 1/1/11 FY11. 1/1112 FY12 1/1/12 FY13 1/1114 FY14 $ 0.24 (Ends 1 40s0a) 0.24 0.24 (Ends 28/08). 0.24I 024 (Ends:2129/08) 0.241 (a) $ 0.07 0.07 (a) $ 0.07 0.07 S 0.10 (a) 0.10 (a) $ 0.10 $ $ 0.12 a; 0.27 r: 0.28 0.28 0.29i, 0.12 {` 0.17 T'S 0,20 0.23 0.26 0.27 0.29 0.12 0.14 0.17 0_22' 0.26. 028'" 0.29 • (a) Funding from, Ad Valorem and Subdistrict (OMCI) Taxes are rep aced by one impervious -based Stormwater Rate by 2009. (b) Implementation of Impervious -based Stormwater Rate extended from 5 to 7 years. (c) Stormwater Rate lowered in short-term through use of extended wastewater subsidy, The District has requested that the Rate Recommendation Report and Exhibits regarding the Combined Wastewater and Stormwater Rate Change Recommendation of the Rate Commission dated August 13, 2007 (the "2007 Proceedings") and related to 27 the actions of the Metropolitan St. Louis Sewer District's Board of Trustees prior to January 18, 2008, be admitted as supporting material to the Rate Change Notice for purposes of this Proceeding (the "2008 Proceedings") and filed as the Exhibit Index from the 2007 Proceedings as Exhibit MSD 2.3b to this Proceeding. Exhibits for the 2007 Proceedings will bear the prefix "2007" and Exhibits for this Proceeding will bear the prefix "2008." Intervenor MIEC Intervenor Missouri Industrial Energy Consumers recommends that the Proposed Rate Change be adopted: however, the MIEC Consultant does not support the inclusion of a resistance factor in the wastewater revenue requirements. Intervenor MEG Intervenor Missouri Energy Group recommends that the Proposed Rate Change be adopted. The Rate Consultant's Proposal In the 2007 Proceedings, the Rate Consultant proposed that rather than using 100% Pay -As -You -Go funding, that the District finance approximately 50% of the Phase II CIRP with revenue bonds. According to the Consultant, the District would issue $330,000,000 of revenue bonds during the Rate Period and reduce the cash financing from the District's proposed $616,897,000 to $304,846,000. This analysis also indicated that a single 9% increase in rates in FY 2008 would be necessary. Use of revenue bonds to finance the Phase II CIRP was dependent on voter authorization. Due to the inherent uncertainty of receipt of voter authorization, the Consultant Proposal considered two alternative rate proposals. The preferred alternative reflected the use of 28 revenue bonds to finance approximately 50% of the Phase II CIRP. In case voter authorization to issue additional bonds was not received, the second alternative reflected the nearly 100% Pay -As -You -Go financing of the Phase II CIRP used in the 2007 District Proposal. In the 2008 Proceedings, the Rate Consultant concurs with the inclusion of $275 million in debt financing for the Phase II CIRP combined with the Proposed Rate Change. Because of the aggressive proposed expansion of the District's Low Income Assistance Program, the Rate Consultant recommends additional reporting and accounting relating to the funds allocated for the Program. Further, the Rate Consultant recommends that the District recalculate the wastewater rates to reflect the impact of the elimination of the resistance factor. Finally, since the District has not provided information on the nature and level of enhanced stormwater services, the Rate Consultant recommends that the impervious rate for enhanced services be assessed on a watershed basis to more closely reflect the District's costs of providing such services. 29 RATE COMMISSION RECOMMENDATION CRITERIA FOR RECOMMENDATION The Rate Commission is to review and make recommendations to the Board of Trustees of the District regarding proposed changes in wastewater, stormwater or tax rates necessary to pay interest and principal falling due on bonds issued to finance assets of the District; the costs of operation and maintenance; and such amounts as may be required to cover emergencies and anticipated delinquencies. See Charter Plan, § 7.040. First Criteria: Whether the Rate Change Proposal is necessary to pay interest and principal falling due on bonds issued to finance assets of the District? The Charter Plan authorizes the following powers: To provide for the borrowing of money in anticipation of the collection of taxes and revenues for the fiscal year. The amount of such loans shall at no time exceed ninety per cent of the estimated collectible taxes and revenues for the year yet uncollected. To meet the cost of acquiring, constructing, improving, or extending all or any part of the sewer or drainage systems: (a) through the expenditure of any funds available for that purpose; (b) through the issuance of bonds for that purpose, payable from taxes to be levied and collected by the District; (c) through the issuance of bonds for that purpose, payable from special benefit assessments levied and collected by the District; (d) from the proceeds of special benefit assessments or bills evidencing such assessments; (e) from any other funds which may be obtained under any law of the state or of the United States for that purpose; (f) from the proceeds of revenue bonds, payable from the revenues to be derived from the operation of sewerage and drainage facilities and systems of the entire District . . . as may be set forth in propositions submitted at elections in the District ... from time to time called and held to authorize 30 the issuance of such revenue bonds; or (g) from any combination of any or all such methods of providing funds. See Charter Plan, §§ 3.020 (14) and (15) (emphasis added). The primary rule of statutory construction is to ascertain the intent from the language used, to give effect to that intent if possible, and to consider the words used in their plain and ordinary meaning. Hampton v. Hampton, 17 S.W.3d 599, 602 (Mo. Ct. App. 2000). Under traditional rules of statutory construction, the word's dictionary definition supplies its plain and ordinary meaning. Hoffman v. Van Pak Corp., 16 S.W.3d 684, 688 (Mo. Ct. App. 2000). The courts are without authority to read into a statute an interpretation that is contrary to the intent made evident by giving the language employed in the statute its plain and ordinary meaning. Mo. Dept. of Pub. Safety v. Murr, 11 S.W.3d 91, 96 (Mo. Ct. App. 2000).. Only when the statute is ambiguous, or when it leads to an illogical result, may courts look past the plain and ordinary meaning of the statute. Id. To determine if a statute is unambiguous, "the standard is whether the statute's terms are plain and clear to one of ordinary intelligence." Wolff Shoe Co. v. Dir. of Revenue, 762 S.W.2d 29, 31 (Mo. 1988) (en banc). The District's authority to issue general obligation or revenue bonds requires the approval of the voters of the District. Specifically, the Charter Plan provides: No general obligation bonds, except bonds for refunding, advance refunding, extending, or unifying the whole or any part of valid bonded indebtedness, shall be issued without the assent of the voters of the District ... in the number required by Article VI, § 26(b) of the Constitution of Missouri (as amended from time to time), voting at an election to be held for that purpose. No revenue bonds payable from the revenues to be derived from the operation of any or all sewer and drainage systems and 31 facilities of the District ... except bonds for refunding, advance refunding, extending, or unifying the whole or any part of revenue bonds, shall be issued without the assent of a simple majority of the voters of the District ... voting at an election to be held for that purpose. Notwithstanding anything herein to the contrary, the District is expressly authorized to issue District -wide general obligation and revenue bonds. See Charter Plan, § 7.170. Thus, under the Charter Plan, the District may issue general obligation bonds or revenue bonds only upon assent of the voters and in the case of general obligation bonds, upon the majority described in Article VI, § 26(b) of the Missouri Constitution. Subject to these restrictions, the District has the authority to incur debt. The Missouri Supreme Court has expressly recognized this authority, stating, "The other powers objected to, namely, . . . incurring debts, . . . issuance of tax anticipation warrants, ... and issuance of bonds, ... are essential powers of such district." State on inf. Dalton v. Metro. St. Louis Sewer Dist., 275 S.W.2d 225, 231 (Mo. 1955) (en banc). The court continued, "[w]ithout the power to incur debts and issue bonds, adequate drains, sewers and disposal plants could not be constructed. However, in the exercise of this power, the District is subject to the financial limitations imposed by the Constitution on all government subdivisions." Id. General Obligation Bonds This decision in Dalton, as well as the provisions of § 7.170 of the Charter Plan, specifically acknowledge the limitations of Article VI, § 26 of the Missouri Constitution requiring voter approval of any general obligation bond issue. The vote required by Article VI, § 26(b) of the Missouri Constitution is four -sevenths at the general municipal election day, primary or general elections and two-thirds at all other elections. Further, the Charter Plan requires that: 32 Before any general obligation bonds are issued, the Board shall by ordinance provide for the collection of an annual tax on all taxable tangible property within the District or a subdistrict, as the case may be, sufficient to pay the interest and the principal of such bonds as they fall due and to retire the same within twenty years from the date contracted . . . No general obligation bonds shall be issued in an amount which together with the existing indebtedness of the District . . . if any, exceeds in the aggregate five per cent of the value of all taxable tangible property in the District . . . as shown by the last completed assessment for state and county purposes; provided, however, that no revenue bonds issued under the provisions of this Plan shall constitute an indebtedness of the District or a subdistrict, as the case may be, within the meaning of said limitation. See Charter Plan,, § 7.190. Both the Charter Plan and Article VI, Section 26(b) of the Missouri Constitution provide that the District may not issue general obligation bonds in an amount that, together with the existing indebtedness of the District, exceeds five percent of the value of taxable tangible property in the District. According to the Collector's Office of St. Louis County, the assessed valuation of taxable, tangible property in the District in St. Louis County is approximately $21.2 billion. The Deputy Assessor in St. Louis City has certified that the assessed valuation of taxable, tangible property in the City is approximately $3.9 billion. As a result, five percent of the value of taxable, tangible property in the District is $1.3 billion. Thus, under the Charter Plan and the Missouri Constitution, the District may not issue general obligation bonds in an amount that together with the existing indebtedness of the District exceeds $1.3 billion. The District has no general obligation bonds currently outstanding. Revenue Bonds The Missouri courts have discussed the differences between general obligation and revenue bonds on several occasions. As explained by the Missouri Supreme Court: 33 General obligation bonds are just what the term implies: general obligations of the governmental body issuing them. They place the general credit of the sovereign behind them and are an indebtedness of that sovereign within the meaning of Mo. Const. art. VI, § 26, restricting the limits of debt which a county may incur. They require tax money to service and retire them. Revenue bonds do not have these characteristics. Their repayment is dependent upon revenue from the facility which they are issued to create. They do not rely upon the general credit or tax money of the sovereign and they are not indebtedness within the limitations of the constitution. Drey v. McNary, 529 S.W.2d 403, 408-09 (Mo. 1975) (en banc) (internal citations omitted). See also Wunderlich v. City of St. Louis, 511 S.W.2d 753, 755 (revenue bonds are not paid directly or indirectly by resort to taxation, and general obligation bonds are payable by utilization of the full taxing power of the issuing entity). As noted, the limitation contained in § 7.190 of the Charter Plan on the level of general obligation bonds does not expressly apply to revenue bonds. The Missouri Supreme Court has upheld the issuance of revenue bonds for the operation and maintenance of a sewage system. See Oswald v. City of Blue Springs, 635 S.W.2d 332 (Mo. 1982) (en banc). In addition, the court specifically held that the city issuing the bonds had the authority to raise water and sewage rates, not only to pay principal and interest in revenue bonds issued for the purpose of construction of a water treatment plant and water transmission lines, but also to meet the cost of maintenance and operation of the physical plant itself. Id. at 333-34. Moreover, once the voters have approved the bonds, such increases may be made without again submitting the increase to the voters. Id. at 334. As explained by the court in response to the argument that the increase violated the Hancock Amendment: . . logic demands the conclusion that the voters, by authorizing the Mayor and Board of Aldermen to increase rates to repay principal and interest, also authorized concomitant increases to pay for the costs of maintenance 34 Id. and operation. It cannot be argued seriously that a majority of the voters of the City approved the issuance of 19.1 million dollars of revenue bonds and authorized the City to increase the rates charged to users to repay the principal and interest on the bonds, yet did not authorize effectively an increase in those rates to keep the physical plant maintained and in working order. The promise to repay the bonded indebtedness would be illusory without the promise to keep the facilities running. We shall not impute such a futile and deceptive meaning upon a vote of the people of Blue Springs. This requirement is echoed in state statutes relating to sewerage systems. It shall be the mandatory duty of any ... sewer district which shall issue revenue bonds ... to fix and maintain rates and make and collect charges for the use and services of the system for the benefit of which such revenue bonds were issued, sufficient to pay the cost of maintenance and operation thereof, to pay the principal of and the interest on all revenue bonds or other obligations issued or incurred by such ... sewer district chargeable to the revenues of such system and to provide funds ample to meet all valid and reasonable requirements of the ordinance or resolution by which such revenue bonds have been issued. Mo. Rev. Stat. § 250.120.1 (2000). Under the authority of this statute, once the voters have approved revenue bonds, the District has the authority to raise rates to pay principal and interest on the bonds and to meet the costs of maintenance and operation of the facilities. The District has issued and currently has outstanding $460 million of $500 million in voter -approved revenue bonds for Phase I CIRP wastewater projects. 2007 Ex. MSD 17F, Tyminski Direct Testimony, p. 5, I. 12-14. The District's debt service on outstanding or proposed debt issued in an aggregate principal amount of $500 million is included in the District's revenue requirements for wastewater. 2007 Ex. MSD 17F, Tyminski Direct Testimony, p. 4, I. 22-23. No debt is currently outstanding for stormwater. Id. at p. 15, I. 10-22; 2007 Ex. MSD 17G, Sedgwick Direct Testimony, p. 35 18, I. 7-10. The Supreme Court has upheld the issuance of revenue bonds for the operation and maintenance of a sewage system finding that the voters, by authorizing the public agency to increase rates to repay principal and interest, also authorized concomitant increases to pay for the costs of maintenance and operation. See Oswald v. City of Blue Springs, 635 S.W.2d 332 (Mo. 1982) (en banc). The District's current bond obligations consist of the following: (i) the Metropolitan St. Louis Sewer District Wastewater Systems Revenue Bond Series 2006C for $60,000,000 issued November 16, 2006 pursuant to Bond Ordinance; and (ii) portions of (a) Water Pollution Control and Drinking Water Revenue Bonds Series 2006B (State Revolving Funds Program) for $22,105,000 issued November 1, 2006; (b) Water Pollution Control and Drinking Water Revenue Bonds Series 2006A (State Revolving Funds Program) for $87,505,000 issued April 1, 2006; (c) Water Pollution Control and Drinking Water Revenue Bonds Series 2005A (State Revolving Funds Program) for $53,060,000 issued May 1, 2005; (d) Water Pollution Control and Drinking Water Revenue Bonds Series 2004B (State Revolving Funds Program) for $179,780,000 issued May 1, 2004; and (iii) Wastewater System Revenue Bonds Series 2004A for $175,000,000 issued April 22, 2004 pursuant to Bond Ordinance. See 2007 Exs. MSD 8, 20C, 20D, 20E, 20F and 20G Bond Documents. The District states that pursuant to Section 6.1 of its Master Bond Ordinance No. 11713 passed on April 22, 2004, it has obligated itself to fix, maintain and collect rates, fees and other charges for services sufficient at all times to meet all operation and maintenance expenses, accumulate a reasonable operating reserve, provide net revenues of at least 125% of all debt service requirements, and accumulate funds 36 adequate to meet the cost of major renewals, replacement, repairs, additions, betterments, and improvements to the system to keep the same in good operating condition or as is required by any governmental agency having jurisdiction over the System. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 37, q. 59. By 2012, $94 million in principal will have been paid down on the District's outstanding bond obligations. The following schedule lists the original bond amounts, the total amount of principal paid as of 2012 and the District's outstanding bond obligations as of 2012. Bond Series Original Bond Amount District's Original Portion of Bond Amount Total Principal Paid by 2012 Total Outstanding Bond Amount in 2012 District's Portion of Outstanding Bond Amount in 2012 2006C $60,000,000 $60,000,000 $0 $60,000,000 $60,000,000 2006A $87,505,000 $42,715,000 $16,385,000 $71,120,000 $34,848,800 2006B $22,105,000 $14,205,000 $4,065,000 $18,040,000 $11,545,600 2005A $53,060,000 $6,800,000 $12,740,000 $40,320,000 $5,241,600 2004B $179,780,000 $161,280,000 $46,830,000 $132,950,000 $119,655,000 2004A $175,000,000 $175,000,000 $14,375,000 $160,625,000 $160,625,000 TOTAL $460,000,000 $94,395,000 $391,916,000 See 2007 Exs. MSD 8, 20C, 20D, 20E, 20F and 20G Bond Documents. Missouri State Revolving Fund A number of the District bond obligations are funded through the Missouri State Revolving Fund ("SRF") Leveraged Loan Program. The Missouri SRF Leveraged Loan 37 Program is a revolving fund established pursuant to the Federal Clean Water Act of 1987 (the "Act"). It was developed by the Environmental Improvement and Energy Resources Authority ("EIERA") and the Missouri Department of Natural Resources (the "Department") in cooperation with the Missouri Clean Water Commission (the "Commission"), and provides subsidized low interest rate loans to qualifying applicants. The Missouri SRF Leveraged Loan Program is a subsidized low interest loan program. The District must issue general obligation or revenue bonds to secure the debt. These bonds are purchased by and resold nationally by the EIERA. At present, the EIERA bonds are rated as AAA. Funds generated by the sale are deposited with a trustee in the applicant's name and are used for construction. As construction costs are incurred, state and federal funds are deposited into a reserve account in an amount equal to 70% or more of the construction cost. Interest earned on the reserve is credited to the interest portion of the debt service charge on the bonds, thereby providing the interest subsidy to the recipient. See Department's State Revolving Fund Description. The "Missouri Clean Water Law" is designed to meet the requirements of the Act. Mo. Rev. Stat. § 644.011 (2000). It also establishes the Commission, which is required to adopt rules and regulations to enforce the powers and duties of Chapter 644 and the Act. Mo. Rev. Stat. §§ 644.021, 644.026 (2000). The Missouri Code of State Regulations sets forth the general requirements for the implementation of Title VI of the Act, which authorizes the administrator of the Environmental Protection Agency (the "EPA") to make capitalization grants to states for financing SRF Programs. 10 CSR 20- 4.040. The SRF is the financial assistance program authorized by Title VI of the Act. In 38 Missouri, the SRF consists of the Water and Wastewater Loan Fund ("WWLF") and the Water and Wastewater Revolving Loan Fund ("WWRLF") and those accounts secured by funds from the WWLF and the WWRLF. 10 CSR 20-4.040(2) (P), I, (S). The SRF is subject to the requirements, restrictions, and eligibilities placed on the SRF by the Act. 10 CSR 20-4.040(2) (P). The Department may make direct loans by purchasing the general obligation bonds, revenue bonds, short-term notes or other acceptable obligations of any qualified applicant for the planning, design, and/or construction of an eligible project. 10 CSR 20- 4.041(1). Two types of loans are permitted under this regulation. SRF direct loans are funded from SRF loan repayments of federal capitalization grants. The Department purchases the revenue bonds, general obligation bonds, or other acceptable debt obligations from the recipient no later than six months following the initial operation of the facilities constructed by the project or by the closing deadline contained in the construction loan agreement, whichever is earlier. In addition, the Department may require the recipient to include those assurances and clauses in the loan agreements and bond resolutions as deemed necessary to protect the interest of the state. 10 CSR 20-4.041(8). The leveraged loan program is financed through a combination of the WWLF or the WWRLF administered by the Commission and funds made available from the proceeds of revenue bonds issued by the EIERA or the recipient. Under the leveraged loan program, the recipient must obtain construction funds and any needed financing from EIERA. The recipient will receive a loan from the WWLF or the WWRLF. The recipient will be required to place the proceeds of the 39 WWLF or WWRLF loan in a debt service reserve fund to secure the construction loan. The interest earnings on the debt service reserve fund will provide a subsidy by paying a portion of the interest costs of the EIERA bonds or notes used to provide the construction loan. The principal amount of the WWLF or WWRLF loan will be repaid to the WWLF or WWRLF. 10 CSR 20-4.042. Repayment of principal and interest on the EIERA bonds or notes will be paid from revenues of the user charge system or from another dedicated source of revenue as may be designated in the applicable bond resolutions or loan agreements. 10 CSR 20.4.042(11)(B). Financing of Phase II CIRP The District's current estimated cost of the 20-year CIRP is approximately $3.7 billion. 2007 Ex. MSD 17F, Tyminski Direct Testimony, p. 4, I. 6-7. The overall purpose of the Phase II CIRP is to rehabilitate and upgrade the system to comply with existing and anticipated state and federal requirements and to help improve system inadequacies. 2007 Ex. MSD 17D, Hoelscher Direct Testimony, p. 2, I. 5-7. The District's 2007 Rate Change Proposal would have maintained a revenue bond debt service coverage ratio in excess of 700% and a total debt service coverage ratio in excess of 400% during the five-year period FY 2008 — FY 2012, the period covered by the Proposed Rate Change (the "Rate Period"). 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," Table 3-9 at p. 3-18 (Feb. 2007). This ratio dramatically exceeded the typical industry debt service coverage ratios of 200% for revenue bond debt and 180% for total debt. 40 For the five-year study period, the District proposed to cash fund a majority of the wastewater capital improvements, or $616,897,000. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 10, I. 2. The remainder of the funding was to come from a $40,000,000 commercial paper issuance, $7,870,000 from grants and contributions, and $9,604,300 funded by interest earnings. Id. at I. 3. Under this plan, the District would have funded 92% of the Phase II CIRP from its operating revenues during the Rate Period. The District's 2007 Rate Change Proposal included rate adjustments in each of the next five fiscal years. The percentage increases in rates shown on Table 3-9 of MSD Exhibit 1 were: FY 2008 — 13%; FY 2009 — 12%; FY 2010 — 11%; FY 2011 — 9%; and FY2012-5%. The District's proposed 2007 combined rate change totaled 60.8% and was projected to increase the District's revenues by $353,631,000 during the Rate Period. Id. Much of the proposed revenue increase during the Rate Period was directly related to the cash funding levels proposed for the Phase II CIRP. See 2007 Ex. MSD 1, Table 3-9, line 29. The District proposed increasing its cash financing of the Phase 11 CIRP from $60,100,000 in FY 2007 to $161,934,000 in FY 2012. Id. The total increase in cash financing during the Rate Period was $316,397,000, or approximately 89.5% of the District's requested revenue increase during the Rate Period. Intervenors MIEC, MEG and the Rate Consultant each objected to the 2007 proposal to require current customers to fund 100% of Phase II CIRP and proposed the use of debt financing for approximately 50% of the Phase II CIRP. A more complete discussion of these positions is contained at pp. 139-142, as part of the consideration of 41 whether the 2007 Rate Change Proposal was fair and reasonable to all classes of customers. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the 2007 Rate Change Proposal included funds sufficient to pay the principal and interest on the $500 million revenue bonds authorized by the voters to partially fund the Phase I CIRP. Both the Charter Plan and the Missouri Constitution provide that the District may not issue general obligation bonds in an amount that together with the existing indebtedness of the District exceeds five percent of the value of taxable tangible property in the District. See Charter Plan §7.190; Mo. Const. art. VI, § 26(b). Currently, 5% of the value of taxable, tangible property in the District is $1.3 billion. Thus, the District may not issue general obligation bonds in an amount that together with the existing indebtedness of the District exceeds $1.3 billion. The Missouri Constitution and Charter Plan limitations on the level of general obligation bonds do not expressly apply to revenue bonds. Under the authority of Section 250.120 of the Missouri Revised Statutes, once the voters have approved revenue bonds, the District has authority to raise wastewater and stormwater rates to pay principal and interest on the bonds and to meet the costs of maintenance and operation of the facilities. Mo. Rev. Stat. § 250.120.1 (2000). The 2008 Proposed Rate Change includes the use of $275 million in bond financing and $366 million in PAYGO funding, or 46% debt and 54% cash financing, to finance the Phase II CIRP. 2008 Ex. MEG 2.14, Billie S. LaConte Rebuttal Testimony, lines 11-13 at p. 8. Such bonds are in addition to the existing District bonds of $500 42 million for a total of $775 million in bonds. 2008 Ex. MSD 2.2, Proposed Rate Change Document, p. 4. The impact of the use of such debt financing on the rates is as follows: reduction in wastewater rates; increase in debt service cost over the life of the bonds of $642 million; and reduction of the currently available debt capacity of the District from $900 million to $625 million. Id. In addition, the 2008 Proposed Rate Change contemplates that the voters must approve the use of debt, and the earliest date for such an election would be August 2008. Id. Table B of MSD Exhibit 2.2 compares the impact of the proposed additional use of bonds on the District's debt service cost. 2008 Ex. MSD 2.2, Proposed Rate Change Document, p. 11. The 2008 Proposal reflects an increase in total debt service costs as a $27 million increase from $163 million to $190 million over the five-year rate horizon of the Proposed Rate Change wastewater proposal; and a 60% or $640 million increase from $1.07 billion to $1.71 billion through 2026. 2008 Ex. MSD 2.2, Proposed Rate Change Document, p. 10. This incremental increase does not reflect the total debt service cost increase over the life of the assumed bonds which is projected to end in 2046. Id. The District's 2008 Proposed Rate Change for wastewater rates includes rate adjustments in each of the next five fiscal years, but significantly less than those resulting from the 2007 Proceedings. Id. Specifically, the Proposed Rate Change over the next five years will be approximately 25.6%, which is less than one-half of the 60% increase resulting from the 2007 Rate Change over the same time period. 2008 Ex. MIEC 2.12, Michael Gorman Rebuttal Testimony, p. 3, I. 25-28. 43 All parties to the 2008 Proceedings concur with the District's proposal to seek authorization from the voters within the District to issue additional bonds to finance the Phase II CIRP during the period FY 2009 through FY 2012. In the 2007 Proceedings, the witnesses for Intervenors MIEC and MEG, the Rate Consultant, as well as the District, testified that debt financing of wastewater utility capital improvements is a common practice throughout the United States. The use of long-term tax-exempt financing of capital improvements such as those included in the Phase II CIRP allows the amortization of the cost of those assets over a period that more closely aligns with the expected useful lives; permits an acceleration of construction of those assets; and helps support inter -generational equity in the wastewater rates. The District stated in its April 4, 2003 Wastewater Rate Increase Amendment that the use of a 100% PAYGO funding strategy imprudently mismatches the "funding of long-term capital projects with short-term dollars (i.e., the imposition of a disproportionate cost burden on current ratepayers for future project benefits)." Because of this, the District presented, the Rate Commission recommended, and the Board of Trustees adopted a combined bond financed and PAYGO funding approach for the Phase I CIRP. Specifically, in the 2003 Rate Setting Proceedings, the District proposed to evenly fund the three-year (2004-2006) $674 million program with a combination of debt and PAYGO financing. In the 2007 Proceedings, the District proposed to fund 100% of the Phase II CIRP with PAYGO financing. This was estimated by the District to save approximately $400 million in avoided debt service costs and was based on an incomplete regulatory 44 picture; future bonding capacity needs; a tapered rate of wastewater Phase II CIRP progress; and progress toward known regulatory goals at appropriate rates in a cost efficient manner. The 2007 Report concluded that the rates in the 2007 Proceedings met the criteria and factors for recommendation set forth in the Charter Plan. The Rate Setting Documents for the 2008 Proposed Rate Change state that its proposal to now include debt financing for the CIRP is in response to substantial comment from customer advocacy groups as presented to the Board of Trustees after acknowledgement of the 2007 Report. 2008 Ex. MSD 2.2, Proposed Rate Change Document, p. 4. The Rate Setting Documents contain a synopsis of Customer Advocacy Discussions from November 20, 2007, to January 16, 2008, regarding the concerns of the customer groups. id. at pp. 6-7 In its 2008 Discovery Responses, the District Consultant noted that the 2007 Proceedings resulted in increased wastewater revenues by 13%. 2008 Ex. MSD 2.10a, MSD Response to Lashly & Baer Discovery Request, p. 3, q. 1. This increase should produce additional revenues of $25 million per year, which by itself will exceed the estimated $20.5 million per year of additional debt by 2012 when the entire $275 million of debt has been issued. Id. In addition, the funds provided by the bonds to finance capital improvements will lessen the amount of cash financing of improvements which frees up revenues to pay for additional debt service. Id. Use of revenue bonds to finance the Phase 11 CIRP is dependent on voter authorization. In case voter authorization to issue additional bonds is not received, the 2008 Proposal includes the nearly 100% PAYGO financing of the Phase II CIRP as 45 adopted after the 2007 Proceedings. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 4. In the 2007 Proceedings, the District stated that it was prudent to conserve its limited debt capacity for the future when regulatory requirements were better defined. The District claimed this alternative funding approach would have enabled it to remain flexible until the real cost of the Phase II CIRP was better known and defined. In the 2007 Proceedings, the District stated that it was only able to finance $1.4 billion of the CIRP with the use of debt financing. 2007 MSD Ex. 17F, Tyminski Direct Testimony, lines 3-17 at p. 4. This $1.4 billion figure was predicated on the use of a debt limitation figure of $1,000 per capita. 2007 MSD Ex. 42E, Tyminski Surrebuttal Testimony, line 10 at p. 5. While the District's $1,000 per capita figure is higher than the median per capita debt figures of all Midwest wastewater utilities, the District's Debt Management Policy contains no restrictions on per capita debt. See 2008 MSD Ex. 2.10c, The District Debt Management Policy, Mar. 22, 2004; Id. at lines 17-23 at p. 5 and line 1 at p. 6; see also 2007 MSD Ex. 42N, Fitch Ratings title "2007 Median Ratios for Water and Sewer Revenue Bonds — Retail Systems." The District is not required to maintain a per capita debt figure at $1,000. The average Midwest ratio is between $900 and $1,000 per customer. 2008 MSD Ex. 2.10, Response to Rate Commission First Discovery Request, question 4(a) at p. 6. At a $775 million value of outstanding debt, the debt per customer ratio would be about double the Midwest average as disclosed in the Fitch Report. Id. The following table illustrates the outstanding debt amounts for the District and the per capita debt figures. Id. 46 Outstanding Bonds Est. Customers Debt/Customer Projected 775,000,000 430,000 $1,802 Current 460,000,000 430,000 $1,070 MSD 2007 Proposal 500,000,000 430,000 $1,163 While the District's proposed $1,000 per capita figure is slightly higher than the median per capita debt figure for the Midwest, the national median outstanding debt per utility customer is approximately $1,660. 2007 MSD Ex. 42N, Fitch Ratings title "2007 Median Ratios for Water and Sewer Revenue Bonds — Retail Systems." Utilities rated "AAA" have an average total outstanding long-term debt per customer of $1,738, with a projected five-year increase to $2,112. Id. Utilities rated "AA," like the District, have an average outstanding Tong -term debt per customer of $1,471 with a projected five-year increase to $2,346. Id. While the District's per capita debt figure is $100 higher than the Midwest average, the District is not required to maintain such a prudent per capita debt figure, and an increase in debt would create per capita debt figures more in line with the national average. The District's Finance Plan prepared by Columbia Capital Management states that striking the right balance between Pay -As -You -Go and bond financing involves keeping several goals in mind at the same time: minimizing the impact on ratepayers; achieving the targeted debt rating; and completing the required projects on schedule. 2007 Ex. MSD 20B at p. 39. The District's Debt Management Policy does not include a $1,000 per capita debt limitation. 2008 MSD Ex. 2.10c, Debt Policy. Further, the Policy provides that the mix of Pay -As -You -Go and debt financing should balance concerns regarding the 47 affordability of rates and charges as well as the impact of debt burden on MSD ratepayers. 2008 MSD Ex. 2.10c at p. 3. The Rate Commission believes that the record in this Proceeding supports a finding that the use of bond funding for $275 million of the $661 million CIRP satisfactorily balances the criteria set forth in the Debt Management Policy and the Finance Plan of the District. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2008 Proceedings, finds and determines that the 2008 Proposed Rate Change to partially fund Phase II of the CIRP with the use of 54% cash financing and 46% debt includes funds necessary to pay principal and interest on a $275 million revenue bond issue, and also includes funds necessary to pay the principal and interest on the $500 million revenue bond issue authorized in prior proceedings to partially finance Phase I of the CIRP. Alternatively, if no voter approval is obtained, the Rate Commission, after consideration of all of the facts and circumstances described in the 2008 Proceedings, finds and determines that the record in the 2008 Proceedings supports a finding that funding the Phase II CIRP through 100% Pay -As -You -Go financing as recommended in the 2007 Report will include funds necessary to pay the principal and interest on the $500 million revenue bond issue authorized in prior proceedings to partially finance Phase I of the CIRP. Second Criteria: Whether the Rate Change Proposal is necessary to pay the costs of operation and maintenance? 48 The District's position in the 2007 Proceedings was that some rate increase was needed to pay the increased costs of operation and maintenance because total operation and maintenance expenses increased from $100,952,611 in 2002 to $116,146,531 in 2006 largely due to increases in expenses associated with Engineering, Finance and the Water Backup Program. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 2-2 (Feb. 2007). Future operation and maintenance expenses for the District were projected to increase from $104,784,300 in 2007 to $127,593, 500 in 2012. Id. The District needs extensive repairs and improvements to its wastewater infrastructure to reduce sanitary and combined sewer overflows and provide proper treatment of all wastewater at or below the permitted National Pollutant Discharge Elimination Systems limits. 2007 Ex. MSD 17H, Barber Direct Testimony, p. 3, I. 8. The 2007 Rate Change Proposal would have increased the District's revenues to provide funds for essential repairs, replacements, improvements and expansion of the existing wastewater system. Id. at I. 11. Prior to the 2007 Rate Change Proposal, the District had not raised rates since August 2003. Over the past 10 years, the District's Operations Department has reduced staff by 158 positions and reduced overtime by 50%. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 19, q. 44. The District's 2007 Proposal included the following inflation allowances for costs used in the study report: Wages, Salaries and Overtime - 3.0%; Personnel Services and Benefits - 4.0%; Group Insurance - 10.0%; Supplies, Chemicals, Utilities - 3.0%; 49 Contractual Services - 4.0%; Bond and Liability Insurance - 5.0%; Pension - 7.6% (2008), 8.4% (2009), 9.3% (2010), 10.2% (2011), and 11.4% (2012). A review of the U.S. Department of Labor Consumer Price Index Table for All Urban Consumers in St. Louis, Missouri, from 1991 through 2006 demonstrated that the consumer price index has increased 12% since the last rate increase. The inflation allowances used in the rate study were reasonable. 2007 Ex. MSD 17C, Zimmerman Direct Testimony, p. 6, I. 11. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the 2007 Rate Change Proposal provided funds sufficient to pay the costs of operation and maintenance for the near term or until 2012. GASB Statement 45 The District's 2007 Proposal included funds for compliance with the Governmental Accounting Standards Board (GASB) Statement No. 45, Accounting and Financing Reporting by Employers for Postemployment Benefits Other Than Pensions, which requires that government agencies alter the current method for recognition of the benefit cost of "Other Post Employment Benefits" and requires, for reporting purposes, that the expected cost of applicable benefits for all Plan participants be projected and discounted to the measurement date. GASB Statement No. 45 (Aug. 2004) ("GASB 45"). Under GASB 45, post -employment healthcare benefits, including medical, dental, vision, hearing and other health -related benefits, as well as other forms of post - employment benefits, including life insurance, disability, and long-term care (OPEB Obligations) must be accounted for on government -wide financial statements using the 50 same accounting as has traditionally been used for pension benefits accounting. The rationale is that the benefits received by retirees are similar to a pension benefit because what the retiree actually receives is a form of deferred compensation that is "earned" over the period of the employment. The effect of GASB 45 is to require the accrual of OPEB Obligations over the working life of the employee. Compliance with the requirements of GASB 45 would result in a change to the District's government -wide financial statements. If the District funded its OPEB Obligations on a pay-as-you-go method, its contribution would be Tess than the "annual required contribution" (the "ARC"). The difference between the District's actual contribution and the ARC must be reported on the government -wide financial statement as a liability called the "Net OPEB Obligation." There is a distinction in the method of accounting used for government -wide financial statements and the method of accounting for individual governmental funds. The government -wide financial statements report on the accrual basis. Individual governmental funds may report on the modified accrual basis of accounting. At the fund level, the District's OPEB Liabilities expenditures are recognized in the period in which benefit payments are actually made. Thus, expenses are recognized when liabilities are incurred. As a result, the governmental fund the District uses to record OPEB Liabilities activity does not report liabilities for Net OPEB Obligations. Accordingly, the effects of under -funding for GASB 45 purposes will be reflected only in the District's government -wide financial statements, not in the specific government fund. The District is required to comply with GASB 45 by June 30, 2008. 2007 Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 6, I. 17. In anticipation of this 51 requirement, the District has retained Milliman U.S.A. to provide actuarial services to the District and determine the unfunded liability of post -employment health benefits. Id. at p. 6, I. 18 — p. 7, I. 1. The District's Fiscal Year 2008 Budget used to develop the 2007 Rate Change Proposal included a $6.4 million annual allowance for OPEB. Id. at p. 7, I. 5-6. The inclusion of such an allowance was contingent upon the implementation of a rate increase and was therefore absent from the Fiscal Year 2008 Budget as submitted on June 14, 2007. Id. at I. 9-12. The District would have revised the 2008 Budget to reflect the results of the 2007 Rate Commission Proceedings and appropriate Board approval of said results. Id. at I. 11-13. The GASB 45 allowance would have been included in the revised Fiscal Year 2008 Budget to the extent sustainability of any rate increase results from the 2007 Proceedings. Id. at I. 13-15. The major advantages of funding the post -employment health benefits reserve are that the long-term nature of the liability provides the District with the opportunity to invest in higher earning assets and uses a higher discount rate for present value calculation purposes, both of which result in a lower liability. Id. at I. 17-20. In the 2007 Proceedings, it was the District's recommendation to the Board to begin funding the unfunded liability within the five-year 2007 Rate Change Proposal term, contingent upon the Board's approval of a definitive GASB 45 funding approach. 2007 Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 8, I. 1-3. GASB 45 requires funding to reflect all prior years back to the initial recognition of the liability. Id. at I. 4-5. Recognition of this liability for the District is required by June 30, 2008. Id. at I. 5-6. The GASB 45 funding in the District's 2007 Rate Change Proposal represented the total five-year funding 52 required and provided a sufficient rate increase to support the recommended funding. Id. at I. 6-9. The Rate Consultant expressed concern about the District's 2007 Proposal to fund a health benefits reserve and charge rate payers to recover the cost of the annual reserve contribution. 2007 Ex. MSD L, Transcript for Technical Conference May 9, 2007, p. 201, I. 7-21. The Rate Consultant's concern in the 2007 Proceedings was that the Board of Trustees had not made a decision that the funds collected from the ratepayers would be set aside in a restricted account to fund the liability. Id. at p. 202, I. 1-9. It was the Rate Consultant's position that even though GASB 45 does not require funding, it may be appropriate for the District to set aside those monies in a restricted fund for future liabilities and implement a policy stating that these amounts are going to be set aside in a restricted fund. Id. at I. 16-23. The Rate Consultant proposed that the District's staff make an affirmative statement to the Board of Trustees to recommend that these funds included in the rate increase be set aside in a restricted fund to cover future potential liabilities. Id. at p. 203, I. 7-10; 20-25. During the 2007 Proceedings, the District committed to make a recommendation to the Board of Trustees to comply with GASB 45. 2007 Ex. MSD L, Transcript for Technical Conference May 9, 2007. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the District's proposal to set aside monies in a restricted fund to comply with GASB 45 as provided in the 2007 Rate Change Proposal was necessary and reasonable. 53 Low Income Program In the 2007 Proceedings, the District proposed to continue and expand its Low Income Program for low-income residential customers as well as fixed -income seniors. 2007 Ex. MSD 0, Transcript for Public Hearing June 7, 2007, p. 25, I. 4-14. Approximately 3,500 customers are currently enrolled in the low-income assistance program. 2007 Ex. MSD N, Transcript for Technical Conference May 30, 2007, p. 58, I. 9-22. Customers who are eligible for low-income assistance receive a 50% reduction in their sewer bills. Id. at p. 59, I. 6-9. Such discount has been factored into the District's Rate Change Proposal. Id. It is District policy that approximately 50% of the wastewater charges for residential customers as set out in Tables 3-17 and 3-18 of the "Wastewater and Stormwater Rate Proposal" would be applicable to eligible low-income residential customers. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 3-39 (Feb. 2007). The Water Quality Act of 1987 states that: A system of user charges which imposes a lower charge for low- income residential users (as defined by the Administrator) shall be deemed to be a user charge system meeting the requirements of clause (A) of this paragraph if the administrator determines that such system was adopted after public notice and hearing. The District's first low-income rate was adopted by the Board of Trustees in 1993 by Ordinance 9031. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 3-39 (Feb. 2007). The District's current policy defines low-income credit eligibility as residential customers that qualify for home energy assistance through the state's Division of Family Services. Id. The District is currently developing eligibility criteria which will expand the availability of low-income assistance 54 to its residential customers. Id. On July 1, 2007, the District made the program available to all District customers. 2007 Ex. MSD N, Transcript for Technical Conference May 30, 2007, p. 58, I. 9-22. The District is hoping to reach a goal over the next five to 10 years of 23,000 low-income customers enrolled in the program. 2007 Ex. MSD N, Transcript for Technical Conference May 30, 2007, p. 60, I. 1-2. The cost impact of the District's current low-income program on a typical single family residential customer was expected to be about $0.11 per month in fiscal year 2008. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 3-39 (Feb. 2007). The impact of the low income subsidy is calculated by dividing the total revenue subsidy provided to low-income customers under the proposed rates by the general service volume. Id. This impact is expected to increase in subsequent years as the District continues to actively promote this program and increase the number of qualified low-income customers. Id. A comparison of allocated cost of service for the 2008 Test Year with wastewater revenue under the proposed rates indicated revenues under the 2007 proposed rates would have adequately recovered the total cost of service, and reasonably recover the allocated cost of service from each customer class. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 3-39 (Feb. 2007). The variances in revenue as a percent of cost of service from a full 100 percent cost recovery level were due to the impact of the low-income assistance program and rounding of wastewater charges. Id. In the 2008 Proceedings, the District testified that it expects to initiate steps to expand participation in the low-income program from 820 customers as of December 55 2007 to 14,240 by the end of fiscal year 2012. 2008 Ex. L&B 2.13, Rate Commission 1, Stannard Rebuttal Testimony, p. 9, I. 5-7. As part of the Program, customers that qualify will have their wastewater bills reduced by 50%. Id. at I. 7-8. The District has included the cost of the Program in the proposed rates. The District projects the annual cost of the Program as follows: $691,955 (FY 2009); $1,144,516 (FY 2010); $1,816,035 (FY 2011); and $2,534,409 (FY 2012). 2008 Ex. L&B 2.13, Rate Commission 1, Stannard Rebuttal Testimony, p. 9, I. 17-22. The parties to the 2008 Proceedings support the District's proposed expansion of its Program and the inclusion of the cost of the Program in the Proposed Rate Change. However, because of the aggressive expansion of the Program, the Rate Consultant recommends that 1) the District provide periodic updates of the status of the Program to the Commission, and 2) if the Program does not meet its expectations, the funds represented by the difference in the projected cost of the Program in the Rate Change Proposal and the actual cost of the Program be reserved and earmarked for the Program. 2008 Ex. L&B 2.13, Stannard Rebuttal Testimony, p. 10, I. 11-18. At the February 29, 2008 Technical Conference, Ms. Zimmerman testified that these recommendation are acceptable to the District. 2008 Ex. MSD 3.3b, Technical Conference Transcript (Feb. 29, 2007), p. 28-29. At the Prehearing Conference, the District stated that it would provide the Rate Commission with an annual accounting of Low Income Assistance enrollees; provide the differential between the actual and projected number of enrollees; provide an estimate of the dollars associated with this differential; and escrow these dollars against future increases should the actual number 56 of enrollees fall below projected levels. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 6. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the continuation and expansion of the District's Low Income Program as provided in the Rate Change Proposal was necessary and reasonable. No party has raised an issue in the 2008 Proceedings challenging that the District Rate Change Proposal is necessary to pay the costs of operation and maintenance and such amounts as may be required to cover emergencies and anticipated delinquencies. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2008 Proceedings, finds and determines that the 2008 Rate Change Proposal provides funds necessary to pay the costs of operation and maintenance. Third Criteria: Whether the Rate Change Proposal is in such amounts as may be required to cover emergencies and anticipated delinquencies? Short -Term Debt Under the authority of § 3.020(13) of the Charter Plan, the Board of Trustees has specific authority to incur debt. If the debt is short term and does not exceed 90% of annual revenues and does not affect the rate levied, no further action is required. Specifically, § 3.020(14) of the Charter Plan provides: To provide for the borrowing of money in anticipation of the collection of taxes and revenues for the fiscal year. The amount of such loans shall at no time exceed ninety per cent of the estimate collectible taxes and revenues for the year yet uncollected. The Board shall determine by 57 ordinance the amount and terms of such loans, and the Executive Director shall execute and issue warrants of the District for all money so borrowed to the lenders thereof as evidence of such loans and of the terms of the District's obligation to repay the same. Immediately before their delivery to such lenders, such warrants shall be registered in the office of the Director of Finance of the District and, upon delivery, shall also be registered in the office of the Secretary -Treasurer of the District. Such warrants so issued and registered in connection with such loans shall have preferences and priority in payment from the date of their registration by the Secretary -Treasurer over all warrants subsequently issued. Charter Plan, § 3.020(14). Thus, the District has the authority to incur short-term debt if necessary to cover emergencies and anticipated delinquencies. Enforcement of Bill Collection Moreover, the District, as a public sewer district created and authorized pursuant to constitutional authority, may discontinue service and place a lien upon a customer's property for unpaid sewer charges. This lien will have priority and be enforced in the same way as taxes are levied for state and county purposes. See Mo. Rev. Stat. § 249.255 (2001). The District may "establish by ordinance a schedule or schedule of rates, rentals, and other charges, to be collected from all the real property served by the sewer facilities of the District ... and to collect or enforce collection of all such charges." See Charter Plan, § 3.020 (16). In 1957, the Board of Trustees of the District adopted an Ordinance providing that: Whenever a sewer service charge has been delinquent for more than sixty days the Executive Director may cause a notice of lien for non-payment thereof to be filed in the Office of the Recorder of Deeds within and for the City of St. Louis or St. Louis County, as the case may be. Such notice of lien shall state the amount of the delinquent sewer service charge, and shall properly describe the property against which such lien is asserted. Upon the filing of such notice, such sewer service charge shall be and 58 become a lien upon the real property served to the amount of such delinquent bill, and shall have priority over all other liens except taxes, deeds of trust then of record, and prior judgments. District Ordinance 138 (June 24, 1957). The District has the authority to impose and enforce a lien upon the real property of a customer for the failure to pay sewer charges, which is not extinguished by foreclosure of the property, but not the authority to give these liens priority over prerecorded deeds of trust. See St. Louis Inv. Prop., Inc. v. Metro. St. Louis Sewer Dist., 873 S.W.2d 303 (Mo. Ct. App. 1994). See also Gershman Inv. Corp. v. Duckett Creek Sewer Dist., 851 S.W.2d 765, 769 (Mo. Ct. App. 1993). The District's 2007 Proposal included termination of stormwater support through its wastewater rates, an increase from 45 to 60 days of operating and maintenance and routine annual improvement expense, a billing lag adjustment and a new resistance factor of 3%. The District's 2007 Proposal may have as a result generated amounts greater than those necessary to cover emergencies and anticipated delinquencies. Stormwater Support The District's 2007 Proposal contemplated terminating the wastewater charge for stormwater support beginning in FY 2009. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 4-1 (Feb. 2007). Intervenor MEG suggested that the increase in stormwater rates would be particularly difficult for schools, churches and synagogues, and hospitals. 2007 Ex. MSD Q, Transcript for Prehearing Conference June 11, 2007, p. 32, I. 12-14. MEG did not oppose a separate stormwater charge and did not oppose the revenue requirement for the stormwater utility that the District had proposed, yet believed that the District 59 should have phased out the support of the stormwater utility over a five-year period starting in 2010 instead of an abrupt discontinuation and proposed that the phase -out be accomplished without increasing rates to wastewater customers. 2007 Ex. MEG 58, MEG's Prehearing Conference Report, p. 3. MEG observed that the cost of the phase- out could be partially covered by applying the revenue collected for the billing lag expense and the resistance factor expense, which the Rate Consultant estimated to be worth approximately $7.4 million in fiscal year 2008. Under MEG's proposal, the District would have continued the full stormwater subsidy for 2008 and 2009, and reduced the subsidy by 25% annually thereafter. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the termination of the wastewater charge for stormwater support as provided in the 2008 Rate Change Proposal was appropriate. Working Capital/Operating Reserves The District's 2007 Proposal provided an additional expenditure of $504,500 as additional working capital. 2007 Ex. MSD 1, MSD Wastewater and Stormwater Rate Change Proposal. The District planned to increase its wastewater operating reserve fund balance from 45 to 60 days of operating and maintenance and routine annual improvement expense to about 16.4% of annual operating expenses. Id. Operating expense is equal to the sum of operation and maintenance expense and normal annual capital improvements. Id. The District had recommended a working capital allowance of 60 days in the 2007 Rate Change Proposal due to a significant portion of the capital projects being financed on a Pay -As -You -Go basis, creating a greater need for a cash buffer for timing issues. Id. 60 The operating reserve is a balance maintained in the Revenue Fund of the District to accommodate fluctuations in annual revenues and expenditures. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Proposal," at 3-14 (Feb. 2007). Currently it is District policy, like other wastewater utilities, to bill in arrears for wastewater services. 2007 Ex. MSD L, Transcript for Technical Conference May 9, 2007, p. 222, I. 10-13. The practice of billing in arrears results in Tess than a full 12 months of billings under new rates in a given 12-month period following the effective date of the rate increase. Id. at I. 14-18. In order to cover the leads and lags of payments and receipt of payments, the District maintains an operating reserve. In the 2007 Proceedings, the District proposed increasing its operating reserve from 45 to 60 days in order to provide a sufficient reserve reflective of the District's increasing CIRP, potential cost overruns, and cash flow timing issues. 2007 Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 9, I. 18-20. The existing revenue bond covenants require the District to maintain a minimum balance in the Revenue Fund equal to the next 45 days of operation and maintenance expense. 1d. The operating reserve was projected to increase to $21,827,000 by the end of 2012 through annual payments from revenues to maintain a 60-day policy requirement. Id. The difference between funding a 45-day reserve and a 60-day reserve equated to an increase in the operating reserve in 2007 of $6.4 million and in 2012 an increase of $7.6 million. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 13, q. 33. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the increase of additional working capital/operating reserve as 61 provided in the 2007 Rate Change Proposal was an appropriate technique to cover emergencies and anticipated delinquencies. Billing Lag Currently it is District policy, like other wastewater utilities, to bill in arrears for wastewater services. 2007 Ex. MSD L, Transcript for Technical Conference May 9, 2007, p. 222, I. 10-13. The District bills one month in arrears. 2007 Ex. MSD 0, Transcript for Public Hearing June 7, 2007, p. 26, I. 7. The practice of billing in arrears results in Tess than a full 12 months of billings under new rates in a given 12-month period following the effective date of the rate increase. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 22, I. 14-18. In the 2007 Proceedings, the Rate Consultant believed that the billing lag adjustment unnecessarily increased the proposed wastewater rates and failed to recognize several components of the proposed wastewater rate, including the maintenance of an operating reserve of operation and maintenance expenses which has been increased from 45 to 60 days; the use of the District Operating and Maintenance budget as the base for projection of future expenditures; the failure to recognize that the District has spent Tess than 95% of its budget in each of the last five years; the use of the Phase 11 CIRP expected appropriations rather than the expected expenditures; and the failure to recognize other available reserve fund balances. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 8, 1. 28 — p. 9, I. 20. It was proposed that eliminating the billing lag would decrease the 2008 Test Year wastewater revenue requirements by approximately $1,228,200, which was 62 approximately 9.4% of the increased revenues proposed by the District for FY 2008. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 9, I. 10-14. The District took the position that although an operating reserve could be used to temporarily adjust for a delay in accrued revenues, the reserve had to be replenished at some point in time. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 8. Therefore, the District believed that the adjustment was required for multi -year planning purposes. Id. Although there are delays in payments that could offset a billing lag adjustment, there are also pre -payments required for major expenditures such as insurance and bulk chemical purchases that counter potential delays in payments. Id. According to the District, other reserves are not considered for the delay in revenue receipts because they are dedicated by bond covenants or District policy for other purposes such as maintaining a reserve for emergencies, meeting the revenue bond reserve requirement, providing funds for the water backup insurance and reimbursement program, and accruing principal and interest payments to the bond holders. Id. Therefore, the reserves are not available for temporary revenue shortfalls. Id. The District has tightly managed its operating budget, maintaining spending 5% below total appropriations for the past few years. 2007 Ex. MSD 17C, Zimmerman Direct Testimony, p. 6, I. 2-3. While the District intended to continue strict management of its resources, a continuation of this trend was not guaranteed, especially in light of pending lawsuits that may have required additional non -budgeted expenditures. Id. Any funds that were available at the end of 2007, because the District did not expend its entire budget, could have been used to provide additional capital improvements. Id. at 63 p. 8-9. However, if it was arbitrarily assumed the District would continue to substantially underspend its budget for rate design purposes and the District required its full budget amount or more, then the proposed level of capital improvements would need to be reduced. Id. at p. 9. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the inclusion of a billing lag adjustment as provided in the Rate Change Proposal was an appropriate technique to cover emergencies and anticipated delinquencies. Resistance Factor A resistance factor recognizes that some metered customers can reasonably be expected to react to the higher wastewater charges by cutting back on their level of water use and thus wastewater service. 2007 Ex. MSD 17H, Barber Direct Testimony, p.18,I.11. Wastewater charges are typically designed for the full rate increase indicated but with the expectation that actual revenue received will be less than projected billed revenue due to the potential customer reactions described above. Id. at I. 13. The resistance factor provides a compensating revenue adjustment for these potential reactions. Id. at I. 15. The District's 2007 Proposal included a new 3.23% resistance factor for fiscal year 2008, reduced to 1.61 % for fiscal year 2009 and zero thereafter to cover anticipated delinquencies and any steps which may be taken by ratepayers (primarily commercial and industrial) to self -treat waste or otherwise avoid certain of the District's 64 strength charges and reduce District revenues. 2007 Ex. MSD 1, CDM and Black and Veatch, "Wastewater and Stormwater Proposal," at 1-5 (Feb. 2007). The water and wastewater industry rate manuals recognize resistance to higher rates as an important factor to be considered in rate design. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 10. For example, the 1984 wastewater rates manual states: One final consideration in rate design is customer resistance. Resistance generally occurs when there has been a significant increase in rates and a conscious effort is made by those using the service to conserve. Although customer resistance does not usually last long, it should be recognized as it can result in a decrease in the level of revenue anticipated to be received from the new rates. If wastewater charges are based on metered water use, an increase in water rates may also adversely affect the wastewater utility's revenue. Financing and Charges for Wastewater Systems, published by the Water Environmental Federation, p. 58 (1984). Therefore, in the 2007 Proceedings, the issue was not whether or not to recognize an allowance for customer resistance but rather how much resistance should be included in the design of wastewater rates. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 10. In the 2007 Proceedings, the Rate Consultant recommended elimination of any resistance factor. According to the Rate Consultant, the use of a resistance factor was an additional level of expense that unnecessarily increased the proposed wastewater rates to a level higher than necessary. Further, it is not appropriate to determine a resistance factor based solely on billed wastewater usage because there are many other factors that affect billed wastewater usage, including general economic conditions; water rates; and environmental impacts. 2007 Ex. L&B 37, Stannard Rebuttal 65 Testimony, p. 8, I. 15. Eliminating the resistance factor would have decreased the Test Year (FY 2008) wastewater revenue requirements by approximately $471,600, which would have been equivalent to the $25,266,800 total increase in revenues from the rate increase, multiplied by the resistance factor of 3.2%, multiplied by 7/12 to account for a December 1 implementation of the proposed rates. Id. at I. 21. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the inclusion of a resistance factor adjustment as provided in the 2007 Rate Change Proposal was an appropriate technique to cover emergencies and anticipated delinquencies. In this Proceeding, the District has proposed to eliminate the resistance factor presented in the 2007 Proceedings. 2008 Ex. MSD 2.11a, Amended Direct Testimony of Keith Barber, p. 8, I. 13-14. The District agrees with the treatment of the resistance factor as recommended by the Rate Commission in the 2007 Proceedings and as further stated by the Rate Commission, Rate Consultant and Intervenor MIEC during the 2008 Proceedings. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 7. The elimination of the resistance factor without an assumed recovery of the associated revenue results in a lowering of the wastewater rate and average monthly single family bill for fiscal year 2008 only. 2008 Ex. MSD 2.11a, Amended Direct Testimony of Keith Barber, p. 8, I. 22-24. The associated reduction in revenue, however, has a cumulative effect resulting in a total cumulative reduction over the five-year horizon of the Rate Change Proposal of $3,975,000. Id. at p. 8-9, I. 24-4. The District considers the continuation of this one-year reduction over the five-year horizon of the Rate Change Proposal as having an unrealistic, negative impact on the District. Id. at p. 9, L. 5-7. 66 The revenue associated with the recommended elimination of the resistance factor was intended to be absorbed by the District rather than recovered from the wastewater rate. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 7. Per the 2008 Proceedings' testimony by the Rate Commission's Rate Consultant and Intervenor MIEC, these revenues have been removed from the District's fund balance thereby eliminating recovery from the wastewater rate. Id. The 2008 Proceedings Rate Model Tables in Exhibit MSD 2.16e provide the pertinent revised tables from the District's rate model showing the recommended application of the resistance factor. Id. These tables indicate that the wastewater rates and the level of customer bills did not change due to the small percentage these dollars represent relative to the District's total revenue requirement. Id. Neither the intervenors nor the Rate Consultant has raised an issue in the 2008 Proceedings challenging that the Proposed Rate Change is necessary to pay the costs of operation and maintenance and such amounts as may be required to cover emergencies and anticipated delinquencies. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2008 Proceedings, finds and determines that the 2008 Proposed Rate Change is in such amounts as may be required to cover emergencies and anticipated delinquencies. 67 FACTORS FOR RECOMMENDATION Pursuant to § 7.270 of the Charter Plan, five factors are to be considered governing the rate to be recommended to the Board of Trustees. Any change in a Rate recommended to the Board by the Rate Commission in the manner as described in this Article, shall be accompanied by a statement of the Rate Commission that the proposed Rate change, and all portions thereof: 1) is consistent with constitutional, statutory or common law as amended from time to time; 2) enhances the District's ability to provide adequate sewer and drainage systems and facilities, or related services; 3) is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District; 4) does not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time; and 5) imposes a fair and reasonable burden on all classes of ratepayers. Charter Plan, § 7.270. Any rate recommended by the Commission must, in the statement to the Board of Trustees, address all five factors. The Charter Plan does not define the terms or phrases utilized as the criteria governing the rate. As such, to interpret the meaning of words used in a statute, usually the words are attributed their plain and ordinary meaning. Sermchief v. Gonzales, 660 S.W.2d 683, 688 (Mo. 1983) (en banc). Similarly, an interpretation of words in their plain and ordinary meaning can be performed on the words and phrases utilized in the Charter Plan. The commonly 68 understood meaning of words is derived from the dictionary. Buechner v. Bond, 650 S.W.2d 611, 613 (Mo. 1983) (en banc). First Factor: "Is consistent with constitutional, statutory or common law as amended from time to time" Webster's Dictionary defines "consistent" as "fixed, firm, solid; holding together." Webster's Dictionary 390 (2d ed. 1979). Black's Law Dictionary defines "constitutional law" as "the body of law deriving from the U.S. Constitution and dealing primarily with governmental powers, civil rights, and civil liberties." Black's Law Dictionary 331 (8th ed. 2004); see also Webster's Dictionary 391 (2d ed. 1979) (constitutional is "of or pertaining to, or inherent in the constitution of a person or a thing"). Next, "statutory law" is "the body of law derived from statutes rather than from constitutional or judicial decisions." Black's Law Dictionary 1452 (8th ed. 2004); see also Webster's Dictionary 1778 (2d ed. 1979) (statutory law is "fixed, authorized or established by statute"). Further, according to Black's Law Dictionary, "common law," as distinguished from statutory law created by the enactment of legislatures, is the body of law derived from judicial decisions rather than from statutes or from constitutions. Black's Law Dictionary 293 (8th ed. 2004). With this, Missouri defines "common law" as: The common law of England and all statutes and acts of parliament made prior to the fourth year of the reign of James the First, of a general nature, which are not local to that kingdom and not repugnant to or inconsistent with the Constitution of the United States, the constitution of this state, or the statute laws in force for the time being .. 69 Mo. Rev. Stat. §1.010 (2000). Finally, according Black's Law Dictionary, the word "amend" means to change, correct, or revise. Black's Law Dictionary 89 (8th ed. 2004); see also Webster's Dictionary 57 (2d ed. 1979) (to amend means to change for the better; improve). This first factor appears in identical fashion in § 7.300 of the Charter Plan, which indicates that the Board of Trustees shall accept a Rate Commission Report unless it finds that the report "is contrary to constitutional, statutory or common law as amended from time to time." Charter Plan, § 7.300(b)(1). However, this factor is not further defined or explained. As such, this factor must be interpreted in its plain and ordinary meaning pursuant to the rules of statutory construction. Consequently, to interpret the phrase, "is consistent with constitutional, statutory or common law as amended from time to time" with respect to the Rate Commission's rate recommendation means to ensure that any recommended rate comports with all existing and relevant federal and statutory provisions. The District is a body corporate, a municipal corporation, and a political subdivision of the state, with power to act as a public corporation. Charter Plan, § 1.010. The Public Service Commission's jurisdiction, supervision, powers, and duties extend to sewer systems, their operations, and to persons and corporations owning, leasing, operating, or controlling them. Mo. Rev. Stat. § 386.250(4) (2000). However, municipal corporations, such as the District, are not subject to the ratemaking process of the Public Service Commission. Instead, courts of equity have equitable jurisdiction 70 to prevent municipal corporations from enforcing "charges that are clearly, palpably and grossly unreasonable." Shepherd v. City of Wentzville, 645 S.W.2d 130, 133 (Mo. Ct. App. 1982) (internal citation omitted). Pursuant to the District's Charter Plan, the District has the authority to propose or recommend a change in wastewater rates, stormwater rates and tax rates or change the structure of any of the foregoing. Charter Plan, § 7.280. In State on inf. Dalton v. Metropolitan St. Louis Sewer District, the court found that the original method of taxation adopted by the District was in violation of Article X, Section 3 of the Missouri Constitution, which provides that "[t]axes . shall be uniform upon the same class of subjects with the territorial limits of the authority levying the tax." 275 S.W.2d 225 (Mo. 1955) (en bane). The court held that this provision prohibited taxing real estate and tangible personal property for the general purposes and general obligations of the entire District at a different rate on its valuation in various parts of the District. Id. Thus, the court found that the method used to tax under this plan was unconstitutional because the property tax in the County was in excess of that in the City. The court further held that the apportionment of the amounts to be collected for the general purposes of the entire District between the City and the County without any standards whatever would be invalid against Article X, Section 3. "Sec. 3, Art. X is a recognition of the principle of equality and uniformity of taxation required by the equal protection clause of the Fourteenth Amendment of the Federal Constitution which 'imposes a limitation upon all powers of the state which can touch the individual or his property, including among them that of taxation."' Id. at 234 (internal citation omitted). 71 The court found that while a classification may be made in tax legislation, it must be a reasonable classification and there can be no discrimination between taxable subjects, including property that belongs to the same class. Id. Thus, it held that the determination of property of the same value and in the same district based on whether it is located in the city or the county is not a reasonable basis for classification for taxation. Id. Finally, the court held that the District could make a valid apportionment on the basis of assessed valuation which would produce a uniform tax on all tangible property in the District. Thus, the Plan itself was not unconstitutional, just the method used under this set of facts for apportioning the tax. Id. The District subsequently corrected the matter. Clean Water Act Section 204(b) of the Water Pollution Control Act of 1972, as amended in 1977, commonly known as the "Clean Water Act," specifies conditions relating to charges for wastewater service. Implementation of the Clean Water Act and approval of a system of user charges by the Environmental Protection Agency (the "EPA") has generally resulted in a simple, uniform, flat commodity or volumetric charges for all customers, regardless of billable volume, effluent strengths, Toad factor, peaking characteristics, or other considerations. Acceptable exceptions have included a surcharge system for high effluent strength discharges and assignment of the cost of the industrial pretreatment program to the participants. 72 The EPA has adopted rules and regulations regarding user charges. These rules and regulations are incorporated in Part 35 of Title 40 of the Code of Federal Regulations. User Charges are those levied on users of a treatment works for their proportionate shares of the cost of operation and maintenance (including interim replacement) of the treatment works. Treatment works consist of all facilities used for the collection, transmission, storage, treatment, and disposal of wastewater. If the wastewater utility is to be eligible for federal grants, it must demonstrate compliance with the following user charge requirements as part of the rate design process: Rates must result in the distribution of the cost of operation and maintenance of all treatment works within the grantee's jurisdiction. Distribution must be in proportion to each user or user class contribution to the total wastewater loading of the treatment works. Rates must generate sufficient revenues to offset the cost of all treatment works operation and maintenance expense. Each user who discharges pollutants to the treatment works causing increased costs will pay for such increased costs. Grantee must apportion operation and maintenance costs associated with the treatment and disposal of Ill to users on the basis of the allocation of all other operations, or a system that includes consideration of flow volume of the users, land area of the users, or the number of connections to the users. In the 2007 Proceedings, Intervenors MIEC and MEG asserted that the distribution of the cost of operation and maintenance was not in proportion to each user class; 73 however, no claim was been made by MIEC, MEG or the Environmental Protection Agency that the current rate model or the 2007 Rate Change Proposal was unlawful. Intervenors' claims regarding cost allocation and recovery were therefore considered in the context of whether the 2007 Rate Change Proposal imposed a fair and reasonable burden on all classes of ratepayers. See p. 121 of this Report. The District's position in the 2008 Proceedings is that the 2008 Proposed Rate Change is necessary for it to comply with the Clean Water Act. On June 11, 2007, the United States of America, acting at the request and on behalf of the Administrator of the United States Environmental Protection Agency, and the State of Missouri by the authority of the Attorney General of Missouri, filed a claim in the United States District Court for the Eastern District of Missouri against the Metropolitan St. Louis Sewer District captioned United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer District, for injunctive relief and civil penalties alleging: unpermitted discharges from combined sewer system; violation of the proper operation and maintenance condition in the District's NPDES permits; violation of the backup power condition in the District's NPDES permits; violation of the bypass prohibition condition in the District's NPDES permits; violation of the noncompliance reporting condition in the District's NPDES permits; failure to submit long term CSO control plan pursuant to Part D.1 of the District's NPDES permits and CWA § 308 Request; and violation of the general criteria special condition in the District's NPDES permits. The Rate Consultant and Intervenors MIEC and MEG have not filed testimony with respect to this issue. 74 Hancock Amendment Article X, § 22 of the Missouri Constitution (the "Hancock Amendment") prohibits any political subdivision from levying any tax, license or fee, not authorized by law, charter or self -enforcing provisions of the constitution without the approval of the required majority of qualified voters. Mo. Const. art. X, § 22. The Missouri Supreme Court has rejected the contention that all fees, whether user fees or tax fees, are subject to the Hancock Amendment. Keller v. Marion County Ambulance Dist., 820 S.W.2d 301 (Mo. 1992) (en banc). See also Mullenix St. Charles Prop., L.P. v. City of St. Charles, 983 S.W.2d 550, 561 (Mo. Ct. App. 1998) (Hancock Amendment applies only to revenue increases that are in fact tax increases, whether labeled as taxes, licenses, or fees). Revenue increases, which are in fact fees for services rendered in connection with specific services, ordinarily are not taxes unless the object of the requirement is to raise revenue to be paid into the general fund of government. Mullenix St. Charles Prop., L.P., 983 S.W.2d at 561. "Fees or charges prescribed by law to be paid by certain individuals to public officers for services rendered in connection with a specific purpose ordinarily are not taxes ... unless the object of the requirement is to raise revenue to be paid into the general fund of the government to defray customary governmental expenditures rather than compensation of public officers for particular services rendered." Keller, 820 S.W.2d at 303-04. In Keller, the court looked to the principles of statutory construction to give effect to the intent of the voters who adopted the Hancock Amendment. Id. at 302. The court determined that: If the people of Missouri intended to prohibit localities from increasing a source of revenue without voter approval, a general term like "revenue" or 75 "revenue increase" could have been used. Instead, the people of Missouri characterized "fees" in § 22(a) as an alternative to a "tax." This characterization suggests that what is prohibited are fee increases that are taxes in everything but name. What is allowed are fee increases which are "general and special revenues" but not a "tax.". Id. at 303. In addition, the court articulated a five -factor test to be applied in determining whether a revenue increase by a local government is an increase in a "tax, license or fee" that requires voter approval under the Hancock Amendment: 1) When is the fee paid? — Fees paid subject to the Hancock Amendment are likely to be paid on a periodic basis while fees not subject to the Hancock Amendment are likely due to be paid only on or after a provision of a good or service to the individual paying the fee. 2) Who pays the fee? — A fee subject to the Hancock Amendment is likely to be blanket -billed to all or almost all of the residents of the political subdivision while a fee not subject to the Hancock Amendment is likely to be charged only to those who actually use the good or service for which the fee is charged. 3) Is the amount of the fee to be paid affected by the level of goods or services provided to the fee payer? — Fees subject to the Hancock Amendment are Tess likely to depend on the level of goods or services provided to the fee payer while fees not subject to the Hancock Amendment are likely to be dependent on the level of goods or services provided to the fee payer. 4) Is the government providing a service or good? — if the government is providing a good or service, or permission to use government property, the fee is less likely to be subject to the Hancock Amendment. If there is not a good or service being provided or someone unconnected with the government is providing the good or service, then any charge required by and paid to a local government is probably subject to the Hancock Amendment. 5) Has the activity historically and exclusively been provided by the government? — If the government has historically and exclusively provided the good, service, permission or activity, the fee is likely subject to the Hancock Amendment. If the government has not historically and exclusively provided the good, service, permission or 76 activity, then any charge is probably not subject to the Hancock Amendment. Keller, 820 S.W.2d at 311, n.10. The court has characterized these criteria as "helpful" in "examining charges denominated as something other than a tax." Id. It has specified that "no specific criterion is independently controlling; but rather, the criteria together determine whether the charge is closer to being a `true' user fee or a tax denominated as a fee." Id. In determining whether a fee is a user fee or a tax fee, the court held that the language of the Amendment required the "courts to examine the substance of a charge, in accordance with this opinion, to determine if it is a tax without regard to the label of the charge." Id. at 305. "Where an application of the Keller factors creates genuine doubt as to whether the charges constitute a 'tax, license or fee' covered by the Hancock Amendment, we resolve the uncertainty in favor of requiring voter approval." Avanti Petroleum, Inc. v. St. Louis County, 974 S.W.2d 506, 511 (Mo. Ct. App. 1988). This test has been consistently applied to determine whether revenue increases are subject to the Hancock Amendment. In Beatty v. Metropolitan St. Louis Sewer District, the Supreme Court found that the District's fees were taxes and thus subject to voter approval under the Hancock Amendment. 867 S.W.2d 217 (Mo. 1993) (en banc). In Beatty, the District imposed a flat fee for sewer service for residential property. The amount of the fee remained the same no matter how much waste a residential customer sent into the system. Nonresidential customers paid a base charge plus a charge measured by the volume of waste the property added to the system. Nearly all of the property owners within the District received the District sewer charges. Failure to pay a sewer charge resulted in a lien against real property by operation of law. The District issued revenue bonds and 77 increased its sewer charges to meet debt service on the bonds and to operate and maintain the sewer system. The District imposed these increased charges without voter approval. Id. at 281. The court examined the Keller five -factor test to determine that the District charges were taxes subject to the Hancock Amendment. In analyzing the first factor, the court determined that it weighed in favor that the fee was a tax. It rejected the District's argument that the sewer charges were payments for services rendered by the District to the sewer customer and were thus goods or services under the first factor. Rather, the court found that the first factor dealt with timing and since the fee was imposed on and paid on a periodic — quarterly basis, it indicated that it was a tax. Id. at 220. With respect to the second factor, the court found in favor of the District because only those persons who actually use the District's service paid the charge. The court recognized that only 9,000 of the 420,000 parcels of real estate were not subject to the District charges; however, only those persons who actually received services paid the fees. For the third factor, whether the amount of fee is affected by the level of services provided, the court rejected the District's argument that the third factor supported the charges as fees rather than taxes. The District argued that its charges, though admittedly uniform, reflected the estimated, average use of a residential customer and thus the District's services as to nonresidential customers bore a direct relationship to the amount of service received. Id. at 221. The court rejected the District's argument because if it were correct, "every tax, license, or fee would appear more like a user fee 78 than an Article X, Section 22(a) tax. An economist could easily construct a model to show that any fee government collects is based on the 'estimated, annual' use of governmental services by a taxpayer." Thus, the court concluded that the third factor weighed in favor of the landowner. Id. The court concluded that the District prevailed on the fourth factor because it clearly provided a service in return for a direct payment, unlike a general tax, which is paid without relation to any specific service provided by the government. Id. Finally, the court concluded that the fifth factor was inconclusive given the mix of public and private entities that have supplied sewer services historically. Id. As a result, the court concluded that the application of the Keller test to the facts of this case provided no clear answer as to the nature of the District charges. Therefore, the court concluded that "[w]here, as here, genuine doubt exists as to the nature of the charge imposed by local governmental, we resolve our uncertainty in favor of the voter's right to exercise the guarantees they provided for themselvesin the constitution." Id. Thus, the District's charges were subject to Article X, Section 22 and could not be increased without prior voter approval. In Missouri Growth Association v. Metropolitan St. Louis Sewer District, the Missouri Court of Appeals analyzed a 1993 Ordinance of the District to determine whether the District's increased sewer service charge thereunder was a "user fee" and thus not a "tax" subject to the constitutional amendment. 941 S.W.2d 615 (Mo. Ct. App. 1997). The court relied on the five -point Keller test to determine that the sewer charges were not subject to the Hancock Amendment. In analyzing the first factor, the court rejected the Association's argument that because the District's fee was charged 79 regularly, it was more like a tax than a fee. Id. at 623. The court found that the user charges were charged monthly only after the sewer service was provided. "Although this charge is billed periodically, payment is due only on or after provision of a good or service, making it more like a user fee than a tax." Id. The court found that the second factor indicated that the charges are fees rather than taxes. Only those individuals who actually used the District's service paid the charge. It found that "approximately 75,000 properties within the District's boundaries do not receive sewer charge bills because they use septic tanks, the water is turned off, or the buildings have either been torn down, unimproved, or have not yet been constructed." Id. Thus, the service factor was resolved in favor of the District. The court also found that factor three weighed in favor of the District. The court concluded that the evidence indicated that unlike the 1992 residential user charges, the District's 1993 user charges were not uniform flat charges. Rather the 1993 charges were based on a new study that determined an individual customer's water usage. "While all customers are charged $.37 for billing and collection and $3.72 for system availability, customers are also charged by individual consumption. Customers are charged $.99 per 100 cubic feet of contributed wastewater volume." Id. at 623-24. The court explained: For customers who have water meters, the consumed volume is determined by their metered water usage. However, under Ordinance No. 9029, if the customer proves that a portion of the water measured by the meter does not enter the wastewater system, the District is authorized to determine the percentage of the water shown by the water meter which enters the District's wastewater system. For non -metered customers, the consumed volume charge is determined by using water consumption figures based on the number of rooms and fixtures on their property. Under Ordinance No. 9029, however, a user of non -metered residential property may request the installation of a meter. Furthermore, these two 80 methods of measuring wastewater usage for metered and non -metered customers have both been specifically approved by the voters in the District's Charter (Plan), Article 3 § 3.02(16). Id. Thus the court concluded that the sewer charge bore a direct relationship to the services provided and factor three weighed in favor of the District. Id. at 624. The court also concluded that the fourth factor weighed in favor of the District because the District was providing a service. Id. Finally, it determined that the fifth factor of whether this service was historically and exclusively provided by the government remained inconclusive. Id. Thus, since four out of five of the Keller factors weighed in favor of the District, the court determined that the sewer charges were more classified as a user fee and not a tax subject to the Hancock Amendment. Id. In Missouri Growth and Beatty, the Court of Appeals in 1997 and the Supreme Court in 1993 came to opposite conclusions regarding whether the District sewer fees were taxes for the purposes of the Hancock Amendment. While both courts used the Keller factors to determine whether the fees were subject to the Hancock Amendment, the Court of Appeals in Missouri Growth distinguished Beatty by finding that the factual circumstances related to the District user fees had changed. With respect to factors two and four, both courts agreed that the fee was not a tax because only the residents that used the service were charged and the District was providing a service. However, they disagreed on the application of the first and third factors. With respect to the first factor — fees subject to the Hancock Amendment are likely due to be paid on a periodic basis while fees not subject to the Hancock Amendment are likely due to be paid only on or after provision of a good or service to 81 the individual paying the fee - the court in Missouri Growth found that the District fees were more like user fees than taxes. It determined that although the user fees were billed periodically, the fee was paid "on or after the provision of the good or service." Missouri Growth, 941 S.W.2d at 623. The court found that the 1993 user fees were charged monthly "only after the sewer service [was] provided" making it more like a user fee than a tax. Id. In Beatty, the court had interpreted the first factor to be concerned with merely timing and did not relate to whether the political subdivision provided a service but rather the regularity with which the fee was paid. Beatty, 867 S.W.2d at 220. The District argued that the charges were payments for services rendered to the sewer customer but did not argue that they were paid only after the service was provided. The court rejected the District's argument and found that because the fees were imposed on a periodic quarterly basis, they were more like a tax than a user fee and thus subject to the Hancock Amendment. Id. With respect to the third factor — whether the amount of the fee to be paid is affected by the level of goods or services provided to the fee payer — the Missouri Court of Appeals in Missouri Growth found that the sewer charge bore a direct relationship to the service provided and thus factor three weighed in favor of the District. The court concluded that the evidence indicated that unlike the 1992 residential charges in Beatty, the 1993 charges at issue in this case were not uniform flat charges. Rather they were based on a new study that determined an individual customer's water usage. The fees were based on the individual consumption and customers were charged $.99 per 100 cubic feet of contributed wastewater volume. Missouri Growth, 941 S.W.2d at 623-624. 82 In Beatty, the amount of the fee remained the same no matter how much waste a residential customer sent into the system. The District argued that although the fee was admittedly uniform, it reflected the estimated, average use a residential customer made of the District's services and bore a direct relationship to the amount of service received. Beatty, 867 S.W.2d at 221. The court rejected this argument because, if correct, every tax, license, or fee would appear more like a user fee than an Article X, Section 22(a) tax. Id. The Missouri Court of Appeals distinguished the facts in Missouri Growth from Beatty for factors one and three to find that the District fees were more like user fees than taxes because the fees were paid on a monthly basis rather than a quarterly basis and were paid only after the service was provided. It further found that there was a direct relationship to the level of service or good provided by the District because the fees were based on an individual customer's water usage. Thus, the fees charged in Missouri Growth were more like user fees than taxes and therefore were not subject to the Hancock Amendment. In Ring v. Metropolitan St. Louis. Sewer District, the Missouri Supreme Court addressed the issue of whether a refund of monies could be made to taxpayers once an ordinance is ruled unconstitutional for violating the Hancock Amendment. 969 S.W.2d 716 (Mo. 1998) (en banc). This case was a follow-up to the court's ruling in Beatty, 914 S.W.2d 791 (Mo. 1995) (en banc). In Beatty, although the Missouri Supreme Court found that the District violated the Hancock Amendment by raising taxes without a vote of the people, it held that only persons who actually sued to recover the increase in wastewater fees could recover their overpayment. Beatty, however, left open the 83 question of whether a class action is the proper procedure by which the District taxpayers who paid the unconstitutional wastewater fee increase could recover their overpayment. Ring, 969 S.W.2d at 717. Upon announcement of the decision in Beatty, a group of the District individual and corporate wastewater fee payers filed a class action against the District "to enforce Article X, Section 22(a) of the Missouri Constitution" and to obtain a declaration and order "that each member of the class is entitled to prompt restitution of the amount by which his or her payment of any ... charges exceed the amount lawfully charged .. [and for] attorney's fees and expenses and other appropriate relief." The general rule is well -settled that a political subdivision need not refund a tax voluntarily paid, but illegally collected. Id. at 718. Thus, in order for the District to be held liable to those who paid the unconstitutional fee increase, there must be a waiver of sovereign immunity and the persons claiming a refund or credit for illegally paid taxes must have complied with the terms of the waiver of sovereign immunity or have paid the tax involuntarily. Plaintiffs' petition did not assert that the members of the class paid the increased wastewater fee involuntarily. Id. The court assumed for the purpose of this opinion that Section 139.031 of the Missouri Revised Statutes was the exclusive waiver of sovereign immunity. The District argued that plaintiffs failed to protest their fee payments and did not commence an action against the collector in a timely manner as required by Section 139.031. Plaintiffs argued that the right to a money judgment was essential to enforce Article X, Section 22(a) and that the court must infer or imply that Article X, Section 23 acts as a waiver of sovereign immunity when a political subdivision collects a tax increase in 84 violation of Article X, Section 22(a). The court found that the enforcement of the right to be free of increases in taxes that the voters do not approve in advance may be accomplished in two ways: First, taxpayers may seek an injunction to enjoin the collection of a tax until its constitutionality is finally determined. Second, if a political subdivision increases a tax in violation of [A]rticle X, [S]ection 22(a), and collects that tax prior to a final, appellate, judicial opinion approving the collection of the increase without voter approval, the constitutional right established in [A]rticle X, [S]ection 22(a) may be enforced only by a timely action to seek a refund of the amount of the unconstitutionally -imposed increase. Id. at 718-19. Although not deciding the case on the merits, the court held generally that Article X, Section 23, operated as a waiver of sovereign immunity and permitted taxpayers to seek a refund of increased taxes previously collected by a political subdivision in violation of Article X, Section 22(a). Id. at 719. Any rate increase resulting from revenue bond proposals would be approved by the voters, and thus, is clearly in compliance with the Hancock Amendment. The District's 2007 Rate Change Proposal contained rate increases that would not be approved by the voters. Wastewater Rate Change Proposal Wastewater revenues must be at least sufficient to finance the wastewater utility's operation and maintenance expense, routine annual capital improvements, and debt service costs on existing and proposed bonds and loans, while maintaining an adequate operating reserve and complying with all revenue bond debt service coverage requirements. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 3-16 (Feb. 2007). The District's current wastewater revenues are not sufficient to meet these requirements. Id. Thus, the 2007 Rate 85 Change Proposal projected the increased revenue necessary for the next five years and proposed rate increases to meet these projections. The proposed 2007 wastewater charges included a base service charge in addition to volume charges calculated per room, per bath, per separate shower and per water closet. Id. at 3-38. The Keller test was applicable to determine whether the proposed 2007 wastewater rate increase was a revenue increase that required voter approval under the Hancock Amendment. The proposed 2007 wastewater rate increase was factually similar to the rate increase in Missouri Growth. Under the first factor of the Keller test, the wastewater charges were to be billed monthly, after the sewer service was provided. The Missouri Court of Appeals found in Missouri Growth that the monthly wastewater charges were more like user fees than taxes because customers were billed after the provision of a service. 941 S.W.2d 615, 623 (Mo. Ct. App. 1997). The second factor indicated that the proposed 2007 wastewater charges were fees rather than taxes. The courts in both Beatty and Missouri Growth found that only those individuals who use the District's services pay the sewer charges. Properties within the District that use septic tanks, have the water turned off, or have unimproved or unconstructed buildings are not subject to the sewer charges. Thus, since only those property owners that use the District's services are billed by the District, the second factor of Keller indicated that the proposed 2007 sewer charges were not taxes subject to the Hancock Amendment. The third factor of Keller also indicated that the proposed 2007 wastewater charges were fees rather than taxes. The amount of the fee was to be directly affected by the level of services provided. For property with a water meter, the bill would have 86 been calculated using a base charge in addition to usage -based rates. For property without a water meter, the bill would have been calculated using a base charge in addition to estimated usage -based rates based on the number of rooms, baths, showers and water closets in a property. Each property may have been subject to a different sewer charge depending on usage. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Proposal," at 3-7 (Feb. 2007). This was very similar to the charges in Missouri Growth, where customers were charged by individual consumption. 941 S.W.2d at 624. The court concluded that the sewer charge bore a direct relationship to the services provided, so factor three weighed in favor of the charges not requiring voter approval under the Hancock Amendment. Id. The fourth factor was likely to weigh in favor of classifying the charges as a fee rather than a tax subject to the Hancock Amendment. The courts in both Beatty and Missouri Growth determined that the District provided a service in return for a direct payment. The same reasoning applied to the proposed 2007 wastewater charges. Whether the fifth factor weighed in favor of the wastewater charges being subject to the Hancock Amendment was less clear. Missouri courts have not definitively stated whether sewer services are historically provided by the government. The courts in Beatty and Missouri Growth both stated that the fifth factor was inconclusive due to the mix of public and private entities that have provided sewer services in the past. The Missouri Court of Appeals in Larson v. City of Sullivan determined that sewer services were historically provided by the city. 92 S.W.3d 128, 133 (Mo. Ct. App. 2003). On the other hand, in Mullenix St. Charles Properties v. City of St. Charles, the Missouri Court of Appeals stated that water and sewer services had not been historically provided by 87 the government. 983 S.W.2d 550, 562 (Mo. Ct. App. 1998). Each jurisdiction is likely to have a different determination, and the courts have been unable to determine a clear decision for the fifth Keller factor for the St. Louis area. Four out of five factors weighed toward the proposed 2007 wastewater charges being classified as fees that were not subject to the Hancock Amendment. Thus, no voter approval would have been required for the proposed 2007 wastewater rate increase. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the wastewater rates in the 2007 Rate Change Proposal satisfied the requirements of the Hancock Amendment, and thus, were consistent with constitutional, statutory, or common law as amended from time to time. Stormwater Rate Change Proposal In the 2007 Proceedings, the District proposed the concept of distinct funding sources for what was previously presented as Basic and Enhanced Stormwater Services. 2007 Ex. MSD 1. Basic Stormwater Services as described in the 2007 Rate Change Proposal were to be recovered by an impervious charge and Enhanced Stormwater Services were to be recovered through the taxing subdistrict methodology provided for in the District's Charter Plan. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 12. This proposal was abandoned in the 2008 Proceedings and replaced with the proposal that a single impervious charge should fund all stormwater services. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 5. The Board has already approved the first year stormwater increase based on a single impervious rate. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 5. It is the District's 88 position in the 2008 Proceedings that the impervious stormwater charge should not vary by watershed district. 2008 Ex. MSD 2.18i MSD Second partial Response to Lashly & Baer Discovery Request, p. 9, q. 10(b). The 2008 Proposed Rate Change states that an impervious area charge would be imposed for all stormwater services. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 3. No vote will be taken to impose the stormwater impervious area charge. It must be determined whether such a stormwater charge based on impervious area, and not subject to voter approval, would satisfy the requirements of the Hancock Amendment. The legal justification in support of the proposed impervious charge for stormwater is analogous to the logic presented in Missouri Growth. The operating component is based on the square footage measure of the impervious surface area of each ratepayer's property. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 4-5 (Feb. 2007). The District currently calculates the impervious area of each property within its boundaries using aerial photographs and maps and other methods. Id. The stormwater charge will be calculated by multiplying the square footage amount of impervious area by a rate. Id. It is the District's position that the proposed stormwater rate, which analyzes the impervious area of each parcel of property and charges for the handling of stormwater, accordingly constitutes a user fee. Id. The Keller test is applicable to determine whether the proposed 2008 Stormwater Charge is a revenue increase that requires voter approval under the Hancock 89 Amendment. The stormwater fees are billed periodically. The activities required to construct, operate and maintain the general stormwater projects are continuous. The fees are therefore billed after the stormwater service activities have been performed. Since the fees vary based on the amount of contribution of stormwater to the system measured by impervious area, the first factor indicates that the charge is a fee and not a tax. The treatment of bank erosions, maintenance of basins and other issues of special concern will be treated in the same fashion as wastewater issues and will be constructed continuously. The fees would be billed after the services are performed and will vary based on impervious area, and therefore, the first factor supports the proposed 2008 Stormwater Charge as a fee, not a tax. The second factor relates to who pays the fee. A fee subject to the Hancock Amendment is likely to be blanket -billed to all or almost all of the residents of the political subdivision while a fee not subject to the Hancock Amendment is likely to be charged only to those who actually use the good or service for which the fee is charged. While every property in the District which has impervious area will be charged for stormwater services, the District has adopted a policy which provides an opportunity for certain property owners which receive no benefit from the District's stormwater system because the areas drain directly to the Mississippi, Meramec, or Missouri Rivers, or other agencies currently maintain stormwater facilities within their boundaries (e.g., the Chesterfield -Monarch Levee District, Howard Bend Levee District, and Earth City Levee District) to receive credit. The District has indicated it intends to provide this credit 90 policy and process for such customers upon request. Such an approach supports the District's position that the charge is a fee and not a tax. The third factor indicates that the stormwater charges are fees not subject to the Hancock Amendment. The stormwater charges are based on the District's established rate multiplied by the quantity of impervious area on the property. Each property's impervious area is assessed individually. This means the amount of the fee to be paid is affected by the level of services provided to the fee payer since a person with more impervious area creates more run-off, which demands a higher amount of the District's stormwater services. This is an analogous test to that used in Missouri Growth, where the sewer fees were based on the amount of water used and wastewater contributed. An impervious area charge is not a flat fee like the charges in Beatty. The fourth factor weighs in favor of classifying the stormwater charges as a fee rather than a tax. The District is providing a service by handling stormwater in return for a direct payment. Here, the District is providing operation and maintenance of the stormwater system, as well as general stormwater projects. There is a service provided, unlike a general tax, which is paid without relating to any specific service provided by the government. All property owners will be receiving stormwater services, and their charge will be based on the impervious area of their property, which relates to how much stormwater has to be processed from their property. The portion of the Stormwater Charge attributable to the specific projects also clearly results from services provided. The property owner will be charged based on the fact that a project is performed which relates to its property. 91 Many courts have held that stormwater charges are more in the nature of a user charge than a tax. In Twietmeyer v. City of Hampton, the court held that an ordinance imposing a higher fee for stormwater services on non-residential property than on residential property was neither unreasonable nor based on some factor other than the amount of contribution to stormwater runoff. 497 S.E.2d 858, 860 (Va. 1998). The court held that the fee was tied directly to the administration of stormwater management and is not meant to raise general revenue, thus, the stormwater management fee is a regulation, not a tax. Id. at 861 citing City of Virginia Beach v. Virginia Restaurant Assoc., 341 S.E.2d 198, 200 (Va. 1986); See also Weber City Sanitation Commission v. Craft, 87 S.E.2d 153, 160 (Va. 1955) (holding that a charge for use and service of water system is not a tax). Similarly, the court in McLeod v. Columbia County held that the stormwater service charge was a fee and not a tax. 599 S.E.2d 152, 154 (Ga. 2004). The court held that the trend in most jurisdictions is to uphold fees that confer intangible benefits on both those who are assessed and those who are not. Id. at 155. This trend extends to stormwater cases, where charges have been sustained as fees and not taxes because of the indirect benefits to those assessed. Id. The fourth factor indicates the charges are fees not subject to the Hancock Amendment. The fifth factor is inconclusive. Missouri courts have not considered whether stormwater services are historically provided by the government. In Mullenix St. Charles Properties v. City of St. Charles, the Missouri Court of Appeals stated that 92 water and sewer services had not been historically provided by the government. 983 S.W.2d 550, 562 (Mo. Ct. App. 1998). At the February 29, 2008 Technical Conference, Mr. Theerman testified that although there will be one impervious charge, the District will be accountable to all ratepayers and that although the projects will not be uniform across the District, the intent of the District is that projects be implemented districtwide as is the case with wastewater projects. 2008 Ex. MSD 3.3b, Transcript of Technical Conference, (Feb. 29, 2008), p. 36, I. 2-9. The Rate Commission believes that upon the termination of the watershed district ad valorem taxes and after consultation with ratepayers, the provision of equivalent stormwater services and projects throughout the District balanced as to cost and benefit will be analogous to the provision of wastewater services and projects throughout a District -wide system which will meet the analysis required by the Hancock Amendment. The Rate Commission believes that the record in the 2008 Proceedings supports a finding that a combined stormwater charge based upon an impervious area charge satisfies the requirements of the Hancock Amendment and thus is consistent with constitutional, statutory or common law, as amended from time to time. Levee District Portions of the District's service area receive no benefit from the District's stormwater system because the areas drain directly to the Mississippi, Meramec, or Missouri Rivers, or other agencies currently maintain stormwater facilities within their boundaries (e.g., the Levee Districts). 93 The District stated during the 2007 Prehearing Conference that in the credit policy set forth in the District Rate Change Proposal, the credit policy should be amended so that in paragraph 2, the second sentence be removed and the fourth sentence be replaced with the following: Second, as agreed upon by the District, any property that receives stormwater service from another entity (Le., Levee Districts) instead of from the District shall be eligible for a credit based upon the cost for the District to provide that service. The amount of the credit in this case may exceed 50% depending on the cost of the services involved in the credit calculation. See 2007 Ex. MSD 1, page 4-8, section 4.4. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the implementation of the credit policy satisfied the requirements of the Hancock Amendment. In the 2007 Proceedings, Intervenor Levee Districts argued that the stormwater charge did not correspond to owners' use of the District's stormwater service, but rather represented a general revenue -raising measure. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 5. As to the property owners in the Levee Districts, the proposed stormwater charge constituted a tax and thus any attempt to impose this charge without a public vote would have violated Article X, Section 22 of the Missouri Constitution. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 6. The negotiated intergovernmental agreements (the "Levee District Agreements") addressed this issue between the Levee Districts and the District weighing in favor of a fee and not a tax. 2007 See Ex. MON 64, Proposed Intergovernmental Cooperation Agreement. 94 The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the Levee District Agreements satisfied the requirements of the Hancock Amendment. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2008 Proceedings, finds and determines that the 2008 Proposed Rate Change is consistent with constitutional, statutory or common law as amended from time to time. Second Factor: "Enhances the District's ability to provide adequate sewer and drainage systems and facilities, or related services" Black's Law Dictionary defines "enhanced" as "made greater; increased." Black's Law Dictionary 570 (8th ed. 2004). See also Webster's Dictionary 603 (2d ed. 1979) (to enhance means to rise, increase or make greater). This second factor appears in part in Section 1.010 of the Charter Plan and reads, "In the interest of the public health and for the purpose of providing adequate sewer and drainage facilities within the boundaries herein defined ... there is hereby established a metropolitan sewer district ...." Charter Plan, § 1.010 (emphasis added). This second factor appears again in a similar fashion in Section 7.300 of the Charter Plan, which indicates that the Board of Trustees shall accept a Rate Commission Report unless it finds that the report "substantially impairs the District's ability to provide adequate sewer and drainage systems and facilities or related services to the point where public health or institutional safety may be jeopardized." Id. at § 7.300(b)(2). 95 Further, similar language can be found in the Operational Rules, Regulations and Procedures of the Rate Commission whereby the District shall submit to each member of the Commission information related to direct testimony that may explain "how the Proposed Rate Change will enhance the District's ability to provide adequate sewer and drainage systems and facilities, or related services." 2007 Ex. L&B B, Operational Rules, Regulations and Procedures of the Rate Commission of The Metropolitan St. Louis Sewer District, § 3(2)(b) (2002). However, while the language of this second factor appears throughout the Charter Plan and the Operational Rules, neither the phrase nor the terms therein are defined. Consequently, this factor may be interpreted in accordance with its plain and ordinary meaning. An analysis of this second factor in its plain and ordinary meaning which reads, "enhances the District's ability to provide adequate sewer and drainage systems and facilities or related services" would be to ensure that the proposed rate improves the District's ability to provide adequate services and systems throughout the metropolitan district. The District's position in the 2007 Proceedings was that some rate increase was needed to enhance the District's ability to provide adequate sewer facilities and services. Phase II CIRP would provide environmental compliance while maintaining affordable wastewater rates. In the 2007 Proceedings, Intervenors MEG, MIEC, and the Rate Consultant agreed that some rate increase was needed to enhance the District's ability to provide adequate sewer facilities. Total operation and maintenance expenses increased from $100,952,611 in 2002 to $116,146,531 in 2006 largely due to increases in expenses associated with Engineering, Finance and the Water Backup 96 Program. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 2-2 (Feb. 2007). Future operation and maintenance expenses for the District's wastewater operations were projected to increase from $104,784,300 in 2007 to $127,593,500 in 2012. Id. Operation and maintenance expenses for the District's stormwater system were projected to increase from $29,681,000 in 2007 to $50,064,900 in 2012. Id. The District needs extensive repairs and improvements to its wastewater infrastructure to reduce sanitary and combined sewer overflows and provide proper treatment of all wastewater at or below the permitted National Pollutant Discharge Elimination Systems limits. 2007 Ex. MSD 17H, Barber Direct Testimony, p. 3, I. 8. The 2007 Rate Change Proposal would have increased the District's revenues to provide funds for essential repairs, replacements, improvements and expansion of the existing wastewater system. Id. at I. 11. In the 2007 Proceedings, it was the District's opinion that the 2007 Rate Change Proposal would have not only enhanced the District's ability to provide adequate facilities, but was also necessary. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 18, q. 43. The wastewater portion of the 2007 Rate Change Proposal provided needed revenues to continue making improvements to the system required to meet State and Federal regulations as evidenced by the $3.7 billion of improvements identified in 2002. Id. Addressing these regulatory issues would have also allowed the District to address customer service issues associated with the lack of capacity in the separate sanitary and combined sewer systems. Id. 97 Since the annexation of the west and south county stormwater areas by the District in the 1980's, the District has never put in place an adequate revenue source to fund a responsible level of operation, maintenance, and renewal of the separate stormwater system. Id. Of the stormwater complaints received by the District, 85% are related to the condition of the primary stormwater facilities. The District is currently responsible for maintaining storm sewers, inlets, and manholes. Id. As a majority of these facilities reach and exceed a normal 50-year life span, the problem with the system will become more acute and the issues faced by District ratepayers will become more severe. Id. The longer the St. Louis area waits to implement an appropriate level of base stormwater funding, the more expensive it will become to maintain and repair the separate stormwater system. Id. The District has not been adequately funded for stormwater or drainage system services. Id. Stormwater services are provided on an as -critical system — flood control system on the Mississippi or River Des Peres — or emergency basis only. Id. In the drainage system, there is virtually no preventative or rehabilitation work being performed. Id. Every stormwater system component has a given life expectancy. Id. The base funding should allow for a preventative stormwater effort that maintains the existing drainage system. Id. In the 2007 Proceedings, the proposed base level would have funded the District to rebuild 2% of the catch basin/inlet structures a year. Id. It would have enabled the District to clean and investigate the stormwater system in a proactive manner and fund rehabilitation of 20,000 feet of pipe annually and also enable the District to provide solutions to the majority of customer drainage issues. Id. In the 2007 Proceedings, the District determined that without the proposed stormwater rate, 98 the District would be forced to defer stormwater maintenance and reduce current stormwater service levels even further. Id. In the 2007 Proceedings, the proposed impervious area based revenue funding was for basic levels of stormwater service throughout the District's entire service area. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 1-5 (Feb. 2007). The impervious area based revenue was proposed funding for a basic level of stormwater service throughout the District's entire service area. Id. Basic service was to include: pipes and structure repair; inlet cleaning; removal of creek obstructions; concrete channel cleaning and repair; and creek inspections. Id. The specific revenues and expenses reflected in this section also incorporated the transition from property tax and wastewater rate revenues to an independent stormwater revenue source for an enhanced level of stormwater services. Id. This transition was designed to provide funding for items such as maintenance of residential detention basins; erosion control; construction of new stormwater systems; creek maintenance; and assistance with backyard ponding. Id. In the 2007 Proceedings, Intervenor Michael Cohen was in favor of the rate increases outlined by the District; however, Intervenor asserted that the District had failed in the past to properly prioritize and fund its projects. 2007 Ex. COHEN 55, Cohen Prehearing Conference Report. Intervenor Cohen recommended that the Rate Commission require the District to properly prioritize all projects and publicize those projects. 99 The Rate Commission believed that the record in the 2007 Proceedings supported a proposal that the District maintain a procedure to provide clarity and transparency in its prioritization of the CIRP, and that such prioritization be publicized. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the 2007 Rate Change Proposal provided funds to enhance the District's ability to provide adequate services until 2012. In the 2007 Proceedings, the District stated that the proposed Phase II CIRP would provide environmental compliance while maintaining affordable wastewater rates. In addition, the proposed new stormwater rate structure would provide funds for basic stormwater services without further support from the wastewater utility while eliminating the small flat rate stormwater charge and ad valorem taxes currently used for stormwater purposes. Intervenors MEG, MIEC, and the Rate Consultant agree that some rate increase is needed to enhance the District's ability to provide adequate sewer facilities and services. Total operation and maintenance expenses increased from $100,952,611 in 2002 to $116,146,531 in 2006 largely due to increases in expenses associated with Engineering, Finance and the Water Backup Program. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal," at 2-2 (Feb. 2007). Future operation and maintenance expenses for the District's wastewater operations were projected to increase from $104,784,300 in 2007 to $127,593, 500 in 2012.Id. Operation and maintenance expenses for the District's stormwater system were projected to increase from $29,681,000 in 2007 to $50,064,900 in 2012. Id. 100 The District needs extensive repairs and improvements to its wastewater infrastructure to reduce sanitary and combined sewer overflows and provide proper treatment of all wastewater at or below the permitted National Pollutant Discharge Elimination Systems limits. The 2008 Rate Proposal will increase the District's revenues to provide funds for essential repairs, replacements, improvements and expansion of the existing wastewater system. No additional testimony on this factor was provided in the 2008 Proceedings. The Rate Commission, after consideration of the record in the 2008 Proceedings, finds and determines that the 2008 Proposed Rate Change enhances the District's ability to provide adequate sewer and drainage systems and facilities, or related services. Third Factor: "Is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District" Webster's Dictionary defines the term "consistent" as "fixed, firm, solid; holding together." Webster's Dictionary 390 (2d ed. 1979). Further, a "violation" is "an infraction or a breach of the law; a transgression." Black's Law Dictionary 1600 (8th ed. 2004). See also Webster's Dictionary 2040 (2d ed. 1979) (a violation is a breach or infringement). Language from this third factor can be found in § 7.300 of the Charter Plan, which indicates that the Board of Trustees shall accept a Rate Commission Report unless it finds that the report "is contrary to or in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District." Charter Plan, § 7.300(b)(3). 101 Further, this language appears in the Operational Rules, Regulations and Procedures of the Rate Commission whereby the District shall submit to each member of the Commission information related to direct testimony that may explain, "whether and to what extent the Proposed Rate Change is necessary to enable the District to comply with any covenant or provision relating to any outstanding bonds or indebtedness of the District, together with a specific quantification of the amount of the Proposed Rate Change that is necessary for such purposes." Ex. L&B B, Operational Rules, Regulations and Procedures of the Rate Commission of The Metropolitan St. Louis Sewer District, § 3(2)(c) (2002). Again, while this language appears in the Charter Plan and the Operational Rules, it is not defined or explained. As a result, an interpretation of this phrase in its plain and ordinary meaning may be performed. An analysis of the language "is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District" would require the Rate Commission to recommend a rate only if it complies with any provisions relating to any outstanding bonds or indebtedness that the District must honor. The District currently has outstanding $460 million of $500 million of voter - approved revenue bonds for Phase I CIRP wastewater projects. The District's current bond obligations consist of the following: (i) the Metropolitan St. Louis Sewer District Wastewater Systems Revenue Bond Series 2006C for $60,000,000 issued November 16, 2006, pursuant to Bond Ordinance; and (ii) portions of (a) Water Pollution Control and Drinking Water Revenue Bonds Series 2006B (State Revolving Funds Program) for $22,105,000 issued November 1, 2006; (b) Water Pollution Control and Drinking Water 102 Revenue Bonds Series 2006A (State Revolving Funds Program) for $87,505,000 issued April 1, 2006; (c) Water Pollution Control and Drinking Water Revenue Bonds Series 2005A (State Revolving Funds Program) for $53,060,000 issued May 1, 2005; (d) Water Pollution Control and Drinking Water Revenue Bonds Series 2004B (State Revolving Funds Program) for $179,780,000 issued May 1, 2004; and (iii) Wastewater System Revenue Bonds Series 2004A for $175,000,000 issued April 22, 2004 pursuant to Bond Ordinance. 2007 Ex. MSD 8, Bond Series 2006C; 2007 Ex. MSD 20C, Bond Document 2006B; 2007 Ex. MSD 20D, Bond Document 2004B; 2007 Ex. MSD 20E, Bond Document 2006A; 2007 Ex. 20F Bond Document, 2004A; and 2007 Ex. MSD 20G, Bond Document 2005A. The Master Bond Ordinance for these obligations requires the District to maintain a minimum balance in the Revenue Fund equal to the next 45 days of operation and maintenance expense. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Proposal," at 3-14 (Feb. 2007). In the 2007 Proceedings, the District planned to maintain a wastewater operating reserve fund balance equal to 60 days or about 16.4% of annual operating expenses. Id. The operating reserve was projected to increase to $21,827,000 by the end of 2012 through annual payments from revenues to maintain a 60-day policy requirement. Id. Although the District has outstanding debt, it is relatively small in relation to available net annual revenues and the District could meet its required minimum debt service coverage requirements without a revenue increase during the proposed 2007 six -year study period. 2007 Ex. MSD 17H, Barber Direct Testimony, p. 3, I. 18. 103 The Master Bond Ordinance further requires the District to "maintain the System in good repair and sound operating condition at all times." Id. at I. 21. The Master Bond Ordinance requires the District to provide wastewater rates that are sufficient to pay all operating and maintenance expenditures and provide net operating revenues together with investment earnings that will at least equal 125% of the annual debt service requirement on all senior bonds and at least equal 115% of the annual debt service requirement on all outstanding bonds, loans and other obligations. 2007 Ex. MSD 17F, Tyminski Direct Testimony, p. 2, I. 4-19. The covenants also require the District to maintain a minimum balance in the Revenue Fund equal to the next 45 days of operation and maintenance expense. In the 2007 Proceedings, the District planned to maintain a wastewater operating reserve fund balance equal to 60 days or about 16.4% of annual operating expenses. The operating reserve was projected to increase to $21,827,000 by the end of 2012 through annual payments from revenues to maintain a 60-day policy requirement. Under Section 6.1 of its Master Bond Ordinance No. 11713 passed on April 22, 2004, the District has obligated itself to fix, maintain and collect rates, fees and other charges for services sufficient at all times to meet all operation and maintenance expenses, accumulate a reasonable operating reserve, provide net revenues of at least 125% of all debt service requirements, and accumulate funds adequate to meet the cost of major renewals, replacement, repairs, additions, betterments, and improvements to the system to keep the same in good operating condition or as is required by any governmental agency having jurisdiction over the System. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 37 q. 59. 104 In the 2007 Proceedings, the Intervenors and the Rate Consultant to the 2007 Proceedings did not challenge the assertion of the District that it was in compliance with these requirements. The District has entered into a number of office equipment and technology leases (collectively, the "Leases") over varying periods as follows: MO Sec. of Vendor Name State Filing Date Lease Property Description Duration of Lease 10/08/2002 The CIT Group/Equipment KM2083STF System plus all Unknown Financing, Inc. other types of office equipment and products, computers, security systems and other commercial items of equipment 03/22/2004 Oce Financial Services, Equipment covered under: trial Unknown Inc. agreement #33822, contract #664766 and config #414663 11/14/2005 Clune & Company L.C. DesignJet plus A-E size 36" Unknown See 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 8, q. 14; Missouri UCC Search completed May 11, 2007. None of these obligations limit the District's ability to propose a rate increase and none include provisions requiring compliance with negative covenants regarding rates. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the District was in compliance with the provisions of the covenants of the Master Bond Ordinance and the Leases. The District stated that it is only able to finance $1.4 billion of the CIRP with the use of debt financing. 2007 Ex. MSD 17F, Tyminski Direct Testimony, lines 3-17 at p. 4. 105 This $1.4 billion figure is predicated on the use of a debt Iimitation figure of $1,000 per capita. 2007 Ex. MSD 42E, Tyminski Surrebuttal Testimony, line 10 at p. 5. The District is not required by its Debt Management Policy to maintain a per capita debt figure of $1,000. 2008 Ex. MSD 2.10c, Debt Policy. While the District's proposed $1,000 per capita figure is slightly higher than the median per capita debt figure for the Midwest, the national median outstanding debt per utility customer is approximately $1,660. 2007 Ex. MSD 42N, Fitch Ratings title "2007 Median Ratios for Water and Sewer Revenue Bonds — Retail Systems." Utilities rated "AAA" have an average total outstanding long-term debt per customer of $1,738, with a projected five-year increase to $2,112. Id. Utilities rated "AA," like the District, have an average outstanding Tong -term debt per customer of $1,471 with a projected five-year increase to $2,346. Id. Standard & Poor's has rated the District Wastewater System Revenue Bonds AA/Stable. Standard & Poor's long-term issuer credit rating is "a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations." See Standard & Poor's Rating Definitions (Dec. 11, 2006), p. 7; 2007. This rating focuses on the obligor's capacity and willingness to meet its financial commitment as they come due. An obligor rated AA has a very strong capacity to meet its financial commitments. Id. at 8. It differs from the highest -rated obligors only to a small degree. Debt factors are examined for overall debt levels and historical and projected debt service coverage. Standard & Poor's focus is the adequacy of a cushion to ensure uninterrupted payment. Standard & Poor's Public Finance Criteria, General Government Utilities — Water and Sewer Ratings (2005), p. 108. In the 2008 Rebuttal Testimony 106 from MIEC, Mr. Gorman stated that the District's revenue bonds' Indenture requires a minimum debt service coverage (DSC) of 1.25X. 2008 Ex. MSD 2.12, Michael Gorman Rebuttal Testimony, p. 4, I. 10-22. The rates in the 2008 Proceedings will produce DSC of 6.2X to 8.8X of revenue bonds during the five-year rate period. Id.; See also 2007 Ex. MSD 2.34, Table 3-9. On a total debt basis, including revenue bonds and state revolving loans, the District's total DSC is still well over 3.0X during the entire rate forecast period. 2008 Ex. MSD 2.12, Michael Gorman Rebuttal Testimony, p. 4, I. 15- 17. Mr. Gorman testified that utilities are able to maintain strong investment grade bond ratings by charging rates that produce total DSC of 2.0X and in some cases even less. Id. at I. 18-20. The District's projected DSC is considerably stronger than this minimum coverage, and is a strong indication that the District's investment grade rating will be maintained. Id. at I. 20-22. The District stated in the 2007 Proceedings that the District should maintain a 50/50 ratio of debt to PAYGO funding and that in order to maintain such a ratio, the District's debt should not exceed 50% of the Combined Phase I and Phase I1 CIRP. 2007 Ex. MSD 17F, Karl Tyminski Direct Testimony, p. 4, I. 4-17. The total Phase I and Phase II CIRP is $1.15 billion, of which $775 million or 67% will be bond financed. 2008 Ex. MSD 2.10a, MSD Response to Lashly & Baer Discovery Request, p. 5, q. 3. In the 2008 Proceedings, Karl Tyminski of the District testified that a departure from a 50/50 debt to PAYGO ratio will require discussion with the rating agencies and possibly subject the District to a downgrade of the existing bonds. 2008 Ex. MSD 2.10a, p. 5. Mr. Tyminski testified that from a purely intuitive basis, a 67% debt to PAYGO coverage 107 ratio will result in a weaker coverage ratio and will afford the District less flexibility to meet emergencies. Id. at q. 3(a). The Rate Consultant and Intervenors MIEC and MEG do not challenge the assertion of the District that the 2008 Proposed Rate Change is in compliance with these criteria. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2008 Proceedings, finds and determines that the 2008 Proposed Rate Change is consistent with and not in violation of any covenant or provision relating to any outstanding bonds or indebtedness of the District. Fourth Factor: "Does not impair the ability of the District to comply with applicable Federal or State laws or regulations as amended from time to time" The dictionary definition of "impair" means "[t]o diminish the value of." Black's Law Dictionary 767 (8th ed. 2004). See also Webster's Dictionary 910 (2d ed. 1979) (to impair means a diminution or decrease). Further, "federal law" includes the United States Constitution, all federal statutes and treaties promulgated by Congress, and all federal regulations promulgated by federal agencies, and "state law" includes state constitutions, state statutes and regulations, and the concept of state common law tort actions. Gorton v. American Cyanamid Co., 533 N.W.2d 746 (Wis. 1995), cert. denied 516 U.S. 1067 (1996). This fourth factor appears in a similar fashion in Section 7.300 of the Charter Plan, which indicates that the Board of Trustees of the District shall accept a Rate 108 Commission Report unless it finds that the report "fails to meet an existing or new standard contained in applicable Federal or State laws or regulations as amended from time to time." Charter Plan, § 7.300(b)(4). Moreover, this language appears in the Operational Rules, Regulations and Procedures of the Rate Commission whereby the District shall submit to each member of the Commission information related to direct testimony that may explain "whether and to what extent the Proposed Rate Change is necessary to enable the District to comply with applicable federal or State laws or regulations as amended from time to time ...." Ex. L&B B, Operational Rules, Regulations and Procedures of the Rate Commission of The Metropolitan St. Louis Sewer District, § 3(2)(d) (2002). The language of this third factor appears again in both the Charter Plan and Operational Rules. However, this phrase is not defined or explained. As such, an interpretation of the plain and ordinary meaning of the language "does not impair the ability of the District to comply with applicable Federal or State laws or regulations" would require the Rate Commission to propose a rate that complies with all relevant federal, state, local laws and regulations. Clean Water Act Among the environmental laws enacted by Congress through which the Environmental Protection Agency (the "EPA") carries out its efforts is the 1948 Federal Water Pollution Control Act (also known as the "Clean Water Act"). The Clean Water Act is the basic structure for regulating discharges of pollutants into waters of the United States. The EPA may issue an order to any person or company who violates the Clean Water Act. The order may impose a civil penalty plus recovery of any economic benefit 109 of noncompliance and may also require correction of the violation. Any person discharging a pollutant into the waters of the United States must comply with the Clean Water Act. Any "person" is defined as "an individual, corporation, partnership, association, state, municipality, commission, or political subdivision of a state, or any interstate body." Clean Water Act, Section 502; 33 U.S.C. § 1362. Under Section 309 of the Clean Water Act, penalties for violating a permit or not having a permit to discharge into waters of the United States may be up to $25,000 per violation per day. Clean Water Act, Section 309; 33 U.S.C. § 1319. The Act provides that when the Administrator of the EPA (the "Administrator"), authorized to administer the Clean Water Act, finds a violation of the Act, he shall notify the person in alleged violation and such State of the violation. Id. If the Administrator finds that the State's failure to enforce permit conditions or the State has not commenced appropriate enforcement actions, the Administrator shall issue an order requiring such person to comply with such sections of the Act, or he shall bring a civil action. Id. A copy of any order issued shall be sent by the Administrator to the State in which the violation occurred and other affected States. Id. The Administrator is authorized to commence a civil action for appropriate relief, including a permanent or temporary injunction, for any violation for which he is authorized to issue a compliance order under the Act. Id. Any action brought under Section 309 of the Act shall be brought in the district court of the United States for the district in which the defendant is located or resides or is doing business. Id. Any person who negligently violates the Act or any permit condition issued by the Administrator or by a State or negligently introduces any pollutant or hazardous 110 substance into a sewer system or publicly owned treatment works shall be punished by a fine of not Tess than $2,500 nor more than $25,000 per day of the violation. Clean Water Act, Section 309; 33 U.S.C. § 1319. Any person who knowingly violates the Act or any permit condition or knowingly introduces pollutants into a sewer system or public treatment works shall be punished by a fine of not less than $5,000 nor more than $50,000 per day of violation. Id. Lastly, any organization that knowingly violates the Act or any permit conditions shall, upon conviction, be subject to a fine of not more than $1,000,000. Id. Any person who violates the Act or any permit condition or violates an order issued by the Administrator shall be subject to a civil penalty not to exceed $25,000 per day for each violation. Id. Before issuing an order assessing a civil penalty under the Act, the Administrator shall provide public notice of and reasonable opportunity to comment on the proposed issuance of such order. Id. An order issued under Section 309 shall become final 30 days after its issuance unless a petition for judicial review is filed or a hearing is requested. Id. If any person fails to pay an assessment of a civil penalty after the order becomes final or after a court in an action for judicial review has entered a final judgment in favor of the Administrator, the Administrator shall request the Attorney General bring a civil action in an appropriate district court to recover the amount assessed. Id. The Missouri Department of Natural Resources The "Missouri Clean Water Law" is designed to meet the requirements of the Clean Water Act and establishes the Clean Water Commission of the State of Missouri (the "Commission"), which is required to adopt rules and regulation to enforce the 111 powers and duties of Chapter 644 of the Missouri Revised Statutes. See Mo. Rev. Stat. §§ 644.011 (2000), 644.021 (2004), 644.026 (2000). The Missouri Clean Water Law provides discretionary authority to the Director of the Missouri Department of Natural Resources (the "Director") with regard to enforcement. Mo. Rev. Stat. § 644.076 (Supp. 2006). The Director may cause investigations to be made upon the request of the Commission or upon the receipt of information concerning alleged violations of any term or condition of any permit. Mo. Rev. Stat. § 644.056.1 (2000). The provisions prohibiting discharge are included in the "Statement of Policy" only. Mo. Rev. Stat. § 644.011 (2000). It is the policy of the State of Missouri to provide "that no waste be discharged into any waters of the state without first receiving the necessary treatment or other corrective action to protect the legitimate beneficial use of such waters and meet the requirement of the Federal Water Pollution Control Act as amended by [the Clean Water Act of 1977]." Id. While that may be the policy of the State with respect to discharges, it is clear that the Director has discretion in enforcement. Id.; Mo. Rev. Stat. § 644.016 (Supp. 2006). If, in the opinion of the Director, the investigation discloses a violation, then the Director attempts to eliminate the violation by conference, conciliation, or persuasion. Mo. Rev. Stat. § 644.056.2 (2000). It is unlawful for any person to cause or permit any discharge of water contaminants in Missouri in violation of the Missouri Clean Water Law. Mo. Rev. Stat. § 644.076 (Supp. 2006). Any "person" is defined as "any individual, partnership, copartnership, firm, company, public or private corporation, association, joint stock company, trust, estate, political subdivision, or any agency, board, department, or 112 bureau of the state or federal government, or any other legal entity whatever which is recognized by law as subject of rights and duties." Mo. Rev. Stat. § 644.016(14) (Supp. 2006). In the event the Commission or the Director determines that any provisions of the Missouri Clean Water Law, or permits issued by the Commission or Director, or any other provision which the state is required to enforce pursuant to any federal water pollution control act, is being or is in imminent danger of being violated, the Commission or Director may cause a civil action to be instituted in any court of competent jurisdiction for the injunctive relief to prevent any such violation or further violation or for the assessment of a penalty not to exceed $10,000 per day for each day the violation occurs. Mo. Rev. Stat. § 644.076 (Supp. 2006). A suit may be brought in any county where the defendant's principal place of business is located or where the water contaminant or point source is located at the time the violation occurred, by the Missouri Attorney General or a prosecuting attorney. Id. Any offer of settlement to resolve a civil penalty shall be negotiated in good faith through conference, conciliation and persuasion. Id. "Conference, conciliation and persuasion" is: A process of verbal or written communications consisting of meetings, reports, correspondence or telephone conferences between authorized representatives of the department and the alleged violator. The process shall, at a minimum, consist of one offer to meet with the alleged violator tendered by the department [of natural resources]. During any such meeting, the department and the alleged violator shall negotiate in good faith to eliminate the alleged violation and shall attempt to agree upon a plan to achieve compliance. Mo. Rev. Stat. § 644.016(3) (Supp. 2006). In addition to any other remedy provided by law, upon determination by the Director that a provision of the Missouri Clean Water Law has been violated, the 113 Director may issue an order addressing an administrative penalty upon the violator. Mo. Rev. Stat. § 644.079 (2000); 10 C.S.R. 20-3.101. An administrative penalty shall not be imposed until the Director has sought to resolve the violations through conference, conciliation and persuasion and shall not be imposed for minor violations. Id. If the violation is resolved through conference, conciliation and persuasion, no administrative penalty shall be assessed unless the violation has caused, or has the potential to cause, a risk to human health or to the environment, or has caused or has potential to cause pollution, or was knowingly committed, or is defined by the EPA as other than minor. Id. The amount of the administrative penalty assessed per day of the violation for each violation shall not exceed the amount of the civil penalty specified in Section 644.076 of the Missouri Revised Statutes. Id. In the 2007 Proceedings, the District stated that it would spend approximately $960 million on major capital improvements during the six -year period presented in the Rate Study Report. 2007 Ex. MSD 17D, Hoelscher Direct Testimony, p. 3, I. 14. All of the Wastewater CIRP is required to comply with state or federal requirements. Id. at p. 4, I. 1. All of the proposed capital improvement projects are required to be constructed pursuant to Federal and State environmental regulations. 2007 Ex. MSD 17H, Barber Direct Testimony, p. 4, I. 6. In the 2007 Proceedings, the most notable required improvement was the recently completed Meramec Regional Wastewater Treatment Plant and related facilities. Id. at I. 7. Without the implementation of the 2007 Proposed Rate Change, the District would not be able to construct all of the federally mandated programs. 2007 Ex. MSD 17D, Hoelscher Direct Testimony, p. 4, I. 6. 114 Delays in constructing the proposed projects would result in violation of existing MDNR agreements, National Pollutant Discharge Elimination System Stormwater ("NPDES") permits, and regulatory (CSO) policy as well as other provisions of the Clean Water Act and anticipated policies (SSO, CMOM, etc.). Id. at I. 16. These delays could result in fines and system failures resulting in excessive claims and settlement costs to the District. Id. at I. 18. If the District fails to construct all of the federally mandated capital improvement projects, the District would be exposed to significant fines at both the federal and state levels. 2007 Ex. MSD 17B, Hayman Direct Testimony, p. 4, I. 21. The Clean Water Act provides for penalties of up to $25,000 per violation per day. Id. at I. 22. During the 2007 Proceedings, the District stated that if it failed to meet a deadline pursuant to the Baumgartner Settlement Agreement between the District and the MDNR, the District could face daily fines up to $10,000 per day for missed deadlines and/or violations associated with the terms of the agreement. Id. at p.4-5, I. 24. Failure to meet the requirements imposed at the federal and state levels would be extremely financially burdensome and could directly hamper or even thwart the efforts of the District. Id. at p. 5, I. 10. The 2007 Proceedings indicated there were specific NPDES permit requirements needed for the stormwater system. 2007 Ex. MSD 17G, Sedgwick Direct Testimony, p. 3, I. 2. These requirements were estimated to cost $23.55 million through 2012 (Line 10, Table 4-4 of the Rate Change Proposal) or approximately 10 percent of the proposed $239 million in stormwater impervious area charges for that time period. Id. at 115 I. 3. Included with these cost estimates were the resources supplied by the District's Engineering Department personnel needed to meet permit requirements. Id. at I. 6. The District's position in the 2008 Proceedings is that the 2008 Proposed Rate Change is necessary for it to comply with the Clean Water Act. The Rate Consultant and Intervenors MIEC and MEG have not filed testimony with respect to this issue. Pending Wastewater Enforcement Actions In addition to the EPA and MDNR legal action against the District on the grounds that alleged, unpermitted discharges of untreated wastewater from combined sewer overflows (CSO's) and sanitary sewer overflows (SSO's) constitute violations of the Clean Water Act, the EPA and the MDNR have initiated or threatened enforcement proceedings against several municipalities in Missouri regarding wastewater facilities. 2007 Ex. MSD 20, Response to Lashly & Baer's Discovery Request, p. 43, q. 68. Within the last 10 to 15 years, the EPA and MDNR have initiated enforcement proceedings against Lebanon and Springfield, Missouri; threatened proceedings against Independence, Kansas City and Moberly, Missouri; secured a consent decree against Sedalia, Missouri; and negotiated permit compliance with Macon, Missouri, regarding wastewater facilities. 2007 Ex. MSD 20, Response to Lashly & Baer's Discovery Request, p. 43, q. 68. The District is unaware of any current or threatened enforcement proceedings of the EPA or the MDNR regarding stormwater facilities within the State of Missouri. Stormwater activities are being regulated through NPDES MS4 permits requiring plans 116 which will meet federal and state regulatory requirements. 2007 Ex. MSD 20, Response to Lashly & Baer's Discovery Request, p. 44, q. 69. The District was able to obtain comprehensive information regarding the enforcement actions that have been initiated and are ongoing for all of the larger wastewater facilities in the United States from the National Association of Clean Water Agencies. There are more than 75 pending EPA wastewater enforcement actions currently pending in the EPA Regional Offices; Region 1 (15); Region 2 (3); Region 3 (11); Region 4 (12); Region 5 (21); Region 6 (5); Region 7 (4); Region 8 (1); Region 9 (3); and Region 10 (1). 2007 Ex. MSD 20, Response to Lashly & Baer's Discovery Request, p. 44, q. 70. Since 2003 the District has met with the EPA and the Department of Justice. Id. On August 20, 2004, and September 22, 2006, the District received Section 308 letters from the EPA, which is an official request for information and documentation, focusing on the District's CSO and SSO program. Id. The District provided a response to the EPA and discussions continued regarding the District's alleged unpermitted discharges. Id. On April 13, 2007, the District received a Notice of Intent to Bring Civil Suit under 33 U.S.C. Section 1365 for Violations of the Clean Water Act. 2007 Ex. MSD 21B, Theerman Direct Testimony Amendment, p. 1, I. 2. The intent to bring suit was based on the Missouri Coalition for the Environment's belief that the District was not in compliance with requirements to report overflow events if they are in the District's system. Id. at I. 11. While the reporting of overflow events does not relate to the CIRP, the continued existence of the overflows is related to the CIRP components such as 117 planning, funding, design and construction of projects in the CIRP. Id. at I. 13. The second issue in the Notice relates to the requirements in the District's Bissell Point Treatment Plant and the Lemay Treatment Plant NPDES permits where the District is required to provide an update to the CSO Long Term Control Plan by August 2006. Id. at I. 16. The development of the Long Term Control Plan is funded under the CIRP and ultimately impacts $1 to $2 billion in CIRP infrastructure work that will be necessary in the combined sewer system. Id. at I. 19. The District has provided an updated CSO Long Term Control Plan development process in August 2006 as required. Id. at I. 21. On June 11, 2007, the United States of America, acting at the request and on behalf of the Administrator of the EPA, and the State of Missouri by the authority of the Attorney General of Missouri, filed a claim in the United States District Court for the Eastern District of Missouri against the Metropolitan St. Louis Sewer District, captioned United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer District, for injunctive relief and civil penalties alleging unpermitted discharges from combined sewer system; violation of the proper operation and maintenance condition in the District's NPDES permits; violation of the backup power condition in the District's NPDES permits; violation of the bypass prohibition condition in the District's NPDES permits; violation of the noncompliance reporting condition in the District's NPDES permits; failure to submit long-term CSO control plan pursuant to Part D.1 of the District's NPDES permits and CWA § 308 Request; and violation of the general criteria special condition in the District's NPDES permits. 2008 Ex. MSD 2.10h-2.10h.22 Claims, Answers and Pleadings filed — U.S. and State MO v. MSD. In view of this 118 claim, the District's position is that the Proposed Rate Change is necessary for it to comply with the Clean Water Act. In the 2007 Proceedings, it was the District's position that the pending lawsuits indicated that it was definitely not the time to reduce the proposed wastewater rates through the use of debt for planned annual improvements as suggested by the Intervenors. 2007 Ex. MSD 52, District's Prehearing Conference Report, p. 5. Doing so would be seen by the EPA and the State of Missouri as an attempt by the District to renege on its prior plans to more aggressively address its sewer overflow problems at a time when the regulatory authorities want to further accelerate the District's CIRP. Id. The Environmental Protection Agency Combined Sewer Overflow ("CSO") Control Policy states that: National Pollutant Discharge Elimination System authorities should ensure the implementation of the minimum technology -based controls and incorporate a schedule into an appropriate enforceable mechanism, with appropriate milestone dates, to implement the required long-term CSO control plan. Schedules for implementation of the long-term CSO control plan may be phased based on the relative importance of adverse impacts upon water quality standards and designated uses, and on a permittee's financial capability. 40 CFR Part 122 [FRL- 4732-7 at 18688]. The Regional Counsel testified on June 14, 2007, that: MSD has serious noncompliance problems with the Clean Water Act. The EPA in partnership with the State of Missouri recently filed a lawsuit .. . seeking a court order requiring MSD to cease violating the Clean Water Act and to also construct in a more expeditious fashion a lot of improvements that need to be made so they can come into compliance with the Clean Water Act. While we would have preferred not to have filed this lawsuit and endure the expense of litigation, we felt that this was about the only way we're going to be able to obtain an expeditious schedule when the MSD Board proposed a rate that were on the basis of Pay -As -You -Go. Using that 119 methodology effectively means that the improvements that the Jan talked about are going to take probably upwards of 40 years to get in place; and while this is going on, violations of the Clean Water Act are going to continue. Up until February 2007, MSD's web site said the projects would be completed in 20 years.... That schedule has been removed, and new schedules have been submitted extending the time to 40 plus years. This is a long time to continue in violation of the Clean Water Act. EPA's top priority for any schedule that we're able to negotiate for MSD would be removal of these illegally constructed SSO's at the front end of the schedule as soon as possible. The Pay -As -You -Go will not provide enough money for MSD to construct the SSO's and other infrastructure projects previously mentioned on a schedule which is appropriate and expeditious.... Under the Pay -As - You -Go approach currently before you, EPA estimates MSD plans to spend approximately $131 million per year over the next five years on these capital improvement projects. At that rate, however, it will take more than 40 years to complete the entire set of projects. That is not acceptable.... MSD will need substantially more dollars on an annual basis to expeditiously come into compliance with the Clean Water Act. See 2007 Ex. EPA 59, EPA Testimony before the Rate Commission, p. 1 (June 14, 2007). In the 2007 Proceedings, the District indicated that the District's Long -Term CSO/SSO regulatory required control plans were under development and had not been submitted to the regulators in final form for approval. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 35 q. 57. These control plans would not be in a form for submittal until well into the study period in the case of CSO (2009). Id. Plans for some of the watersheds impacted by SSOs would be completed during the study period (2009-2012) with others extending into 2013. Id. It was the District's intent to develop plans that were compliant with the requirements of the Clean Water Act and the 120 various specific Federal Standards, Missouri Stormwater Regulations, District land disturbance permits and the St. Louis Small MS4 phase II permit. Id. It should also be noted that the District would also be responsible for compliance with regulations yet to be promulgated both during and beyond the study period. Id. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the requested District's Phase II $661 million CIRP would allow the District to meet the near term capital improvement needs until 2012. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that an additional rate change proposal and/or the issuance of debt would be required prior to 2012 to fund any compliance required by settlement or court order in the proceeding captioned United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer District. The Rate Commission, after consideration of all of the facts and circumstances disclosed in the 2008 Proceedings, finds and determines that the 2008 Proposed Rate Change does not impair the ability of the District to comply with applicable Federal and State laws or regulations as amended from time to time. Fifth Factor: "Imposes a fair and reasonable burden on all classes of ratepayers" According to Black's Law Dictionary, the term "fair" is defined as "impartial; just; equitable; disinterested. Free of bias or prejudice." Black's Law Dictionary 673 (8th ed. 2004). See also Webster's Dictionary 658 (2d ed. 1979) (fair is honest, open, just and equitable). 121 "Reasonable" is defined as, "fair, proper, or moderate under the circumstances." Black's Law Dictionary 1293 (8th ed. 2004). See also Webster's Dictionary 1502 (2d ed. 1979) (reasonable is equitable, tolerable and not excessive). Similar language of this fifth factor can be found in Section 7.300 of the Charter Plan, which indicates that the Board of Trustees shall accept a Rate Commission Report unless it finds that the report "imposes an unfair or excessive burden on one or more classes of ratepayers." Charter Plan, § 7.300(b)(5). Further, this language appears in the Operational Rules, Regulations and Procedures of the Rate Commission whereby the District shall submit to each member of the Commission information related to direct testimony that may explain "why the Proposed Rate Change is necessary, fair and reasonable" and "why the burden imposed on each class of ratepayers by the Proposed Rate Change is fair and reasonable, including whether and how cost of service considerations, cost causation principles, customer impact data, economic development considerations, environmental effects and other factors have not been factored into such determination." Operational Rules, Regulations and Procedures of the Rate Commission of The Metropolitan St. Louis Sewer District, §§ 3(2)(a) and 3(2)(e) (2002). However, neither of these provisions is defined nor explained. The District's rates and rate models have been exhaustively reviewed by the courts in Ring v. Metropolitan St. Louis Sewer District, 969 S.W.2d 716 (Mo. 1998) (en banc); Missouri Growth Association v. Metropolitan St. Louis Sewer District, 941 S.W.2d 615 (Mo. Ct. App. 1997); Beatty v. Metropolitan St. Louis Sewer District, 914 S.W.2d 791 (Mo. 1995) (en banc); and Beatty v. Metropolitan St. Louis Sewer District, 867 122 S.W.2d 217 (Mo. 1993) (en banc). But none of the cases have considered whether the rates charged by the District are fair and reasonable. On several occasions, Missouri courts have discussed whether a rate is fair or reasonable in utility rates cases where a class of ratepayers alleged that the PSC approved unlawfully discriminatory rates. For instance, in State of Missouri at the Relation of Nancy Dyer and J. Raymond Dyer v. Public Service Commission, the PSC approved a schedule of rates which allowed for higher percentage increases in electric utility rates for residential and commercial customers than for industrial customers. 341 S.W.2d 795 (Mo. 1961). In this case, the rate for residential customers was increased 8.6 '% while the rate for industrial customers was increased 5.5%. id. at 799. The PSC found that the higher increase, imposed upon residential and commercial customers rather than industrial customers, was due to larger capital expenditures such as the use of air conditioning, installation for hundreds of miles of heavier wires and transformers, and higher labor costs, incurred on behalf of the residential customers. Id. As such, the court found that the rates were fair and no unlawful discrimination had occurred. Several months later, the Missouri Supreme Court heard R.P. Smith, et al. v. Public Service Commission, 351 S.W.2d 768 (Mo. 1961). In this case, the PSC approved an order which allowed electric utility rates to be increased a greater percentage for commercial than residential customers. Id. at 771. The Missouri Supreme Court affirmed the PSC's order and found that the fact that there was a larger increase applied to one class as opposed to another does not alone indicate that the rate is unfair or unreasonable. Id. Further the Court found that there is no discrimination where a reasonable classification has a direct correlation to the differences in the 123 situation of the customers or the furnishing of the services whereby valid reasons exist to justify the imposition of varying rates. Id. Factors which supported the differential increase included the fact that the demand from industrial users is often high, the use is often occasional or inconsistent, and the use is often for only a portion of the day or a short duration during the year. Id. at 772. With this, the maintenance of the facilities to meet variable and often demanding Toads was unprofitable to the utility. Id. As such, the rates were increased disproportionately to the disfavor of industrial customers to account for such costs. The Court stated that because there was a larger increase applied to one class as opposed to another does not alone indicate that the rate is unfair or unreasonable or that discrimination occurred. Id. at 771. Further, the Court found that there is no discrimination where a reasonable classification has a direct correlation to the differences in the situations of the customers or the furnishing of the services whereby valid reasons exist to justify the imposition of varying rates. Id. This increase, consequently, was held to be a reasonable one. However, in State of Missouri, ex rel. DePaul Hospital School of Nursing v. Public Service Commission, the Missouri Court of Appeals found the PSC's order approving a rate to be unlawfully discriminatory. 464 S.W.2d 737, 740 (Mo. Ct. App. 1971). In this case, evidence was shown which demonstrated that the respondent was charged a substantially higher rate for the operation of its nursing home than others similarly situated who received a substantially lower rate, known as the hotel -motel rate. The court followed the opinion of State ex rel. City of St. Louis v. Public Service Commission which states, "[I]t was said that arbitrary discriminations alone are unjust, but if the 124 difference in rates be based upon a reasonable and fair difference in conditions which justify a different rate, it is not unjust discrimination." Id. at 740 (citing State ex rel. City of St. Louis v. Public Service Commission, 36 S.W.2d 947, 950 (Mo. 1931) (emphasis added)). In State of Missouri ex rel. City of Oak Grove, Missouri, et al. v. Public Service Commission, the Missouri Court of Appeals found the PSC's order, which allowed a telephone company to provide extended area service in one metropolitan area when it was not provided in other suburban exchanges approximately the same distance from the central exchange, to be "lawful and reasonable." 769 S.W.2d 139, 141 (Mo. Ct. App. 1989). In this case, the court held that discrimination does not exist merely because the distance between a central exchange and service complainant's exchange is approximately the same. Id. at 143. The court reasoned that the PSC was entitled to take into account factors such as population density and gross territory area when making these determinations. Id. The PSC regulates telephone and telegraph companies (Mo. Rev. Stat. § 392.200) and gas, electric, water, heating and sewer companies (Mo. Rev. Stat. §§ 393.130, 393.140). Generally, the PSC uses the standard "just and reasonable" in determining whether a proposed rate is valid. The standard of review for telephone and telegraph companies provides that "all charges made and demanded by any telecommunications company for any service rendered or to be rendered in connection therewith shall be just and reasonable and not more than allowed by law or by order to decision of the commission." Mo. Rev. Stat. § 392.200 (Supp. 2006) (emphasis added). 125 The standard of review for gas, electric, water and sewer corporations provides that the PSC has the power to "determine and prescribe the just and reasonable rates and charges thereafter to be in force of the service to be furnished, notwithstanding that a higher rate or charge has heretofore been authorized by statute, and the just and reasonable acts and regulations to be done and observed." Mo. Rev. Stat. § 393.140 (2000) (emphasis added). The PSC's role in the electric utility resource planning "shall be to provide the public with energy services that are safe, reliable and efficient, at just and reasonable rates, in a manner that serves the public interest." 4 CSR 240-22.010 (emphasis added). Whether a rate in effect at any given time is "just and reasonable" depends upon many facts and only can be determined after a rather extended investigation and study. Laclede Gas Co. v. Pub. Serv. Comm'n, 535 S.W.2d 561 (Mo. Ct. App. 1976). A reasonable rate is a question of fact, calling for the exercise of common sense and sound judgment, not bound by any hard and fast rule, nor limited to any general formula. State ex rel. Southwestern Bell Tele. Co. v. Pub. Serv. Comm'n, 233 S.W.425, 431 (Mo. 1921) (en banc) (rv'd on other grounds). No writer whose views on public utility rates command respect purports to find a single yardstick by sole reference to which rates that are reasonable or socially desirable can be distinguished from rates that are unreasonable or adverse to the public interest. A complex of tests of acceptability is required, just as would be the case with the tests of a good automobile, a good income-tax law, or a good poem. See State ex rel. City of Lake Lotawana v. Pub. Serv. Comm'n, 732 S.W.2d 191, n.1 (Mo. Ct. App. 1987). 126 In Laclede Gas, the Missouri Court of Appeals analyzed the issue of just and reasonable rates when the gas company argued that its existing approved rates were so unreasonably low as to be confiscatory. 535 S.W.2d at 569. Laclede argued that the rates must be sufficient to produce a fair return on the property. Id. The court determined that "[e]very utility does have an undoubted constitutional right to such a fair and reasonable return, and thus is a continuing right which does not cease after beginning rates are initially determined." Id. The court found that whether the rates in effect are just and reasonable depends upon many facts and can only be determined after rather extended investigation and study. Id. at 570. The United States Supreme Court has analyzed the standard of "just and reasonable rates" under the Natural Gas Act in two relevant cases. Fed. Power Comm'n v. Nat. Gas Pipeline Co., 315 U.S. 575 (1942); Fed. Power Comm'n v. Hope Nat. Gas Co., 320 U.S. 591 (1944). In Natural Gas Pipeline, the Court in determining whether the rate was just and reasonable stated: The Constitution does not bind rate -making bodies to the service of any single formula or combination of formulas. Agencies to whom the legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the commission's order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end. Id. at 586. It provided further guidance in Hope Natural Gas, when it stated that rates cannot be made to depend upon the fair value, which is the end product of the process of rate -making and not the starting point, when the value of the going enterprise 127 depends on earnings under whatever rates may be anticipated. 320 U.S. at 601. It further provided that under the statutory standard that natural gas rates shall be "just and reasonable," it is the result reached and not the method employed that is controlling. Id. at 602. If the total effect of the natural gas rates fixed by the Federal Power Commission cannot be said to be unjust and unreasonable, judicial inquiry under the Natural Gas Act is at an end. Id. In Reis v. Metropolitan St. Louis Sewer District, the Missouri Supreme Court analyzed the common law doctrine that courts have the right to grant relief against the "arbitrary exercise of a discretionary power by the legislative body of a municipality." 373 S.W.2d 22 (Mo. 1963). The court found that local legislative bodies, such as sewer districts, are vested with a broad discretion which, absent an affirmative showing of fraud, oppression or arbitrary action, is not subject to review by the courts. Id. at 27. This discretion extends to a determination of the benefits to be derived from the project, the expediency of the project, and the public necessity and wisdom of the improvement. Id. at 28. Article I, Section 2 of the Missouri Constitution, states: That all constitutional government is intended to promote the general welfare of the people; that all persons have a natural right to life, liberty, the pursuit of happiness and the enjoyment of the gains of their own industry; that all persons are created equal and are entitled to equal rights and opportunity under the law; that to give security to these things is the principal office of government, and that when government does not confer this security, it fails in its chief design. Mo. Const. art. I, § 2. The court must initially determine whether a rate classification burdens a suspect class or impinges upon a fundamental right and if neither is involved, the classification will be sustained if it is rationally related to a legitimate interest. Batek v. Curators of 128 Univ. of Missouri, 920 S.W.2d 895, 898 (Mo. 1996) (en banc); Powell v. Am. Motors Corp., 834 S.W.2d 184, 190 (Mo. 1992) (en banc). Fundamental rights include only the basic liberties explicitly or implicitly guaranteed by the Constitution. Batek, 920 S.W.2d at 898. Suspect classes, for purposes of an equal protection challenge, include those classes based on race, national origin, or illegitimacy. Powell, 834 S.W.2d at 190. See also Mullenix — St. Charles Prop. V. City of St. Charles, 983 S.W.2d 550, 559 (Mo. Ct. App. 1999). Since customers of the District are not members of a suspect class and cannot claim their fundamental right of basic liberties has been denied, their equal protection claims are subject to a minimum level of scrutiny. As a result, the disproportionate rates will be sustained if they are rationally related to a legitimate interest. Under the rational relationship analysis, a court will strike down the legislation only if the challenger shows that the classification rests on grounds wholly irrelevant to the achievement of the state's objective. Riche v. Dir. of Rev., 987 S.W.2d 331, 337 (Mo. 1999) (en banc). Even if legislative judgment is debatable, the equal protection issue is settled on the side of validity. Mahoney v. Doerhoff Surgical Serv., Inc., 807 S.W.2d 503, 513 (Mo. 1991) (en banc). See also Mullenix, 983 S.W.2d at 559. The rational basis test does not require that the legislative objective be compelling or the dilemma grave, nor that the legislature choose the best or the wisest means to achieve its goals. Such arguments, no matter how plausible, are properly directed to the legislature, not the court. Winston v. Reorganized Sch. Dist., R-2, 636 S.W.2d 324, 328 (Mo. 1982) (en banc). 129 Moreover, where a classification is challenged on equal protection grounds, there is a presumption that the legislature acted within its constitutional power in spite of the fact that the law might result in some inequality. Elliot v. Carnahan, 916 S.W.2d 239, 242 (Mo. Ct. App. 1995); Mahoney, 807 S.W.2d at 511 (statute is presumed to be constitutional unless the statute clearly contravenes some constitutional provision). The party challenging the classification bears the burden of showing it lacks a rational basis and is purely arbitrary. Nguyen v. Now/en, 882 S.W.2d 176, 177 (Mo. Ct. App. 1994). Customers may allege that the District rates are assessed disproportionately when compared to other customers and thus violate both the federal and state equal protection clauses. Since there is no suspect class or fundamental right involved, these customers bear the heavy burden of showing that the differential rates serve no rational basis. In State of Missouri ex rel. Missouri Water Company v. Public . Service Commission, the Court reversed the PSC's order that fixed rates below those of the utility's request because the PSC gave no consideration to the evidence presented regarding rate determination. 308 S.W.2d 704 (Mo. 1957). The Court reasoned: The reasonableness of rates charged by a public utility engaged in intrastate activities, such as the appellant water company, must be determined with due regard to the due process and equal protection clauses of both the federal and state constitutions and the statutes of the state in which the utility operates. Id. at 713-14. The Court further stated that "[i]t is the duty and the province of this court to construe its own constitution and statutes in accord with their fair intent and meaning." Id. at 716. The Court found that the PSC failed to make a fair and just rate 130 because it did not ascertain all of the relevant factors for consideration in making its decision to impose the rate. Id. at 719. Standing requires that a party seeking relief have a legally cognizable interest in the subject matter and that such party has a threatened or actual injury. E. Mo. Laborers Dist. Council v. St. Louis County, 781 S.W.2d 43, 46 (Mo. 1989) (en banc). The right of a taxpayer, on behalf of such party and other taxpayers similarly situated, to bring an action to enjoin the illegal expenditure of public funds cannot be questioned. Id. However, the mere filing of a lawsuit does not automatically confer standing on a taxpayer. Id. In Eastern Missouri Laborers, the court determined that: In order to maintain a suit, taxpayers need not prove their taxes will increase because of the alleged expenditure. The impact on the taxpayer is presumed. A taxpayer who may be compelled to pay the assessment, or who has contributed to the sum jeopardized, is considered to have sufficient interest to enjoin the illegal act. Id. Therefore, the court set up the following test to determine whether a taxpayer has standing: Absent fraud or other compelling circumstances, to have standing a taxpayer must be able to demonstrate a direct expenditure of funds generated through taxation, or an increased levy in taxes, or a pecuniary loss attributable to the challenged transaction of a municipality. Id. at 47. Thus, the court held that public policy demands a system of checks and balances whereby taxpayers can hold public officials accountable for their acts. Id. The standing of a taxpayer to sue is not to enable a private redress, but to benefit the public. Querry v. State Highway & Transp. Comm'n, 60 S.W.3d 630 (Mo. Ct. App. 2001). Several courts have examined what constitutes a "direct expenditure of funds generated through taxation." In O'Reilly v. City of Hazelwood, the Missouri Supreme Court found that individuals had standing to sue because taxpayers merely had to show 131 that their taxes went or will go to public funds that have been or will be expended due to the challenged action. 850 S.W.2d 96 (Mo. 1993) (en banc). In this case, taxpayers challenged statutes authorizing annexation as unconstitutional and that the Board of Elections improperly consolidated the vote totals of the annexation. Id. at 97. The court found that it was clear that county funds were spent on the election and that if the annexation proceeded, their taxes in the future would be spent by the city. Thus the court found that taxpayers had standing because there was a direct expenditure of taxpayer funds. Id. In addition, the Missouri Court of Appeals upheld a citizen's right to challenge certain rules and procedures of an administrative board in Duvall v. Coordinating Board for Higher Education, 873 S.W.2d 856 (Mo. Ct. App. 1994). In this case, plaintiff argued that the Coordinating Board's rules were invalid because it failed to file a notice and publish rules according to state law. Id. at 857. Plaintiff argued that Missouri tax funds were being used to carry out the policies, procedures and rules, which were alleged to be illegal. Id. The court found that plaintiff had taxpayer standing because "appellants merely must show that their taxes went or will go to public funds that have been or will be expended due to the challenged action." Id. at 858. Thus, the court held that plaintiff had taxpayer standing to challenge the procedures and rules of the Board because taxpayer funds were being expended to carry out the challenged action. Id. Missouri courts, however, have not always held that persons have taxpayer standing when a direct connection between the alleged illegality and the outlay of public funds cannot be shown. See "Taxpayer Standing in Missouri", Thomas C. Albus, 54 J. Mo.B. 199 (1998). In Finley v. Missouri Health Facilities Review Committee, the 132 Missouri Court of Appeals did not find taxpayer standing because the only funds expended were general operating funds, which the committee would have expended regardless of the challenged action. 904 S.W.2d 1 (Mo. Ct. App. 1995). Plaintiff, a convalescent and retirement home, challenged the health facilities review committee's issuance of a certificate of need, which allowed a nursing home in the same community to replace intermediate care facility beds with skilled nursing facility beds. Id. at 2. Plaintiff argued that it had taxpayer standing because it contributed to public funds used to support the activities of the review committee. Id. at. 3. The court rejected plaintiff's argument and found that it did not have taxpayer standing because the only expenses which the committee incurred were general operating expenses, which would be incurred regardless of the challenged action. Id. Thus, the court concluded that the committee's action did not impact the direct expenditure of public funds of the nature sufficient to establish taxpayer standing. id. In the 2007 Proceedings, the District's Rate Change Proposal included rate adjustments in each of the preceding five fiscal years. The percentage increases in rates shown on Table 3-9 of 2007 MSD Exhibit 1 were: FY 2008 — 13%; FY 2009 — 12%; FY 2010 — 11 %; FY 2011 — 9%; and FY 2012 — 5%. The District's proposed combined rate change totaled 60.8% and was projected to increase the District's revenues by $353,631,000 during the Rate Period. Id. Much of the proposed revenue increase during the Rate Period was directly related to the cash funding levels proposed for the Phase II CIRP. See Line 29 of Table 3-9 of 2007 MSD Exhibit 1. The District proposed increasing its cash financing of the Phase II CIRP from $60,100,000 in FY 2007 to $161,934,000 in FY 2012. Id. The total proposed increase in cash financing 133 during the Rate Period was $316,397,000, or approximately 89.5% of the District's requested revenue increase during the Rate Period. The additional funds provided by the wastewater and stormwater rate increases would have gone to fund capital improvement projects, as well as the cost of operation and maintenance and to pay principal and interest on outstanding bonds. The primary advantage to cash funding a large portion of the capital program, according to the District, was that future ratepayers would not have been burdened with paying for the capital improvements. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p.10, I. 14. In its April 4, 2003 Wastewater Rate Increase Amendment, the District stated that the use of a 100% Pay -As -You -Go funding strategy imprudently mismatched the "funding of long-term capital projects with short-term dollars (Le., the imposition of a disproportionate cost burden on current ratepayers for future project benefits)." 2007 Ex. L&B 53, Lashly & Baer's Prehearing Conference Report, p. 9. Because of this, the District proposed, the Rate Commission recommended, and the Board of Trustees adopted a combined bond finance and Pay -As -You -Go funding approach for the Phase I CIRP. Id. In the 2003 Rate Setting Proceedings, the District proposed to evenly fund the three-year (2004-2006) $674 million CIRP program with a combination of debt and Pay - As -You -Go financing. Id. In the 2007 Proceedings, the District proposed to fund 100% of the $671 million Phase II CIRP Program with Pay -As -You -Go financing. Id. The District estimated that this shift would have saved approximately $400 million in avoided debt service costs. The proposal was further based on an incomplete regulatory picture; future bonding capacity needs; a tapered rate of wastewater Phase II 134 CIRP progress; and progress toward known regulatory goals at appropriate rates in a cost efficient manner. Id. The District provided additional reasons for the Pay -As -You -Go strategy. 2007 Ex. MSD 17A, Theerman Direct Testimony, p. 5, I. 8. First, the District was still developing its CSO Long Term Control Plan which, when complete, would provide the extent of the controls required to meet the Federal CSO Policy. Id. Until this was completed and approved, the expected cost of the CSO program would not have been known. Id. at I. 10. Second, the total amount of time regulators would allow for the completion of the work regarding CSO and SSO abatement was also unknown. Id. at I. 12. Given these two unknowns, the use of a financing instrument that had significant interest expense was imprudent. Id. at I. 14. The District currently has $800 million of remaining bond capacity to mitigate future rate increases; however, in the 2007 Proceedings, the District wanted to retain this bond capacity to address future unknown factors. Id. at I. 16. The District stated that debt financing could have been used prudently to meet challenging regulatory compliance schedules when the cost of these schedules exceeded the communities' ability to cash finance the improvements in the allotted timeline. 2007 Ex. MSD 42B, Theerman Surrebuttal Testimony, p. 8, I. 11. The District believed that the use of debt financing to keep rates unrealistically low would do little to help ratepayers and would have ultimately limited the District's ability to achieve environmental goals and address deteriorating infrastructure. Id. at p. 5, I. 8. In the 2007 Proceedings, it was the Rate Consultant's opinion that the District should increase the use of long-term indebtedness to finance a portion of the Phase II 135 CIRP for the wastewater system during the five-year period of Fiscal Year ending June 30, 2008 through Fiscal Year 2012, the period covered by the District's Rate Change Proposal. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 3, I. 7. Intervenors MIEC and MEG supported the Rate Consultant's recommendation to use bond funding rather than 100% Pay -As -You -Go to fund the CIRP. 2007 Ex. MIEC 36, Gorman Rebuttal Testimony, p. 5-6, I. 14; 2007 Ex. MEG 35, Drazen Consulting Group Rebuttal Testimony, p. 9, I. 10. Mr. Gorman testified that Pay -As -You -Go under the District's 2007 Rate Change Proposal was not appropriate and would have unnecessarily increased rates to customers. 2007 Ex. MIEC 36, Gorman Rebuttal Testimony, p. 9, I. 10. As debt service payments were made, the District's outstanding debt would have decreased; hence the District would have been able to issue additional debt in the future. Id. at p. 6, I. 4. In the 2007 Proceedings, it was the position of Intervenor MIEC that the District's proposed 100% Pay -As -You -Go plan was inconsistent with the District's own financial policy. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 2. Moreover, the District's proposed rate structure would have required current customers to fund 100% of Phase II CIRP. Id. at p. 3. The facilities included in the Phase II CIRP would have had economic useful lives in excess of 30 years. Id. Thus, future generations of customers would not have paid a portion of the Phase II CIRP costs, even though those costs were incurred to provide them service. Id. In the 2007 Proceedings, it was Intervenor MIEC's opinion that the significant cost of the Phase II CIRP should be funded with the use of debt financing and Pay -As -You -Go to help spread the cost of the CIRP over the entire useful lives of the CIRP projects and protect the District's financial 136 integrity. Id. MIEC proposed this balanced funding structure to equally spread the CIRP cost among current and future ratepayers, and to ensure that the District had access to debt capital then and in the future. Id. During the 2007 Proceedings, Ms. Janice Zimmerman noted in her direct testimony that the use of debt financing would spread the cost of major capital improvements over the life of the project and thereby equitably spread the cost and benefit of the projects among current and future ratepayers. 2007 Ex. MSD 17C, Zimmerman Direct Testimony, p. 8, I. 4-6. This policy was equitable and consistent with the objective of keeping rates as low as possible. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 3. However, it was clear that the use of indebtedness to finance major capital improvements allowed the District to leverage its revenue stream from rates and other sources and more closely match the future benefit received from improvement with the future cost or recovery of such improvements. 2007 Ex. MSD 17H, Barber Direct Testimony, p. 20, I. 8-15. In the 2007 Proceedings, the District prepared and submitted a comparison of projected revenue increases under three alternative financing scenarios. Alternative I was based on Pay -As -You -Go financing for the Rate Period which then switched to a 50% debt and 50% cash financing for FY 2013 through 2026. See Table 3-9c of 2007 MSD Exhibit 42H. Alternative 11 was based on 50% debt and 50% cash financing beginning in 2008 until total debt reached $1,000 per capita. Id. Alternative III was based on 50% debt and 50% cash financing beginning in FY 2008 until total debt reached $1,500 per capita. Id. 137 It was MIEC's position that this study was flawed. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 7. First, MIEC asserted that the study failed to use future SRF funding to help pay for future capital improvements. This type of funding was one of the most economical. Further, companies which use this type of funding pay back the principal associated with these loans more quickly, resulting in the ability to issue additional debt. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 7. MIEC also believed that the District would have valued the alternative funding proposals on a net present value rather than a cumulative revenue increase basis. Id. The District took the position that it was only able to finance $1.4 billion of the projected $3.7 billion CIRP program with the use of debt financing. 2007 Ex. MSD 17F, Tyminski Direct Testimony, p. I. Given the fact that the District had already issued $500 million of debt financing would leave roughly $800 million of additional debt financing capabilities. Id. This $1.4 billion figure was predicated on the use of a debt limitation figure of $1,000 per capita. 2007 Ex. 42E, Tyminski Surrebuttal Testimony, p. 5, I. 10. The District's $1,000 per capita figure was projected to be higher than the median per capita debt figures of all Midwest wastewater utilities included in the survey. Id. at p. 5, I. 17 — p. 6, I. 1. See also 2007 Ex. MSD 42N, Fitch Ratings titled "2007 Median Ratios for Water and Sewer Revenue Bonds — Retail Systems." Intervenor MIEC disagreed. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 8. Mr. Tyminski referenced the 2007 Fitch Study to indicate that debt service coverage ratios of the Midwest utilities group was considerably below 200%, indicating that they could not issue additional debt without the possibility of suffering a potential credit adjustment. Id. It was MIEC's position that the District's current financial position 138 was much stronger than the financial position of the Midwest utilities included in the Fitch Study and since the District had a current debt service coverage ratio well above industry benchmark levels, it could have retained a significantly higher debt per capital debt figure than other Midwest utilities included in the Fitch Study. Id. In the 2007 Proceedings, MIEC proposed an alternative rate proposal with a lower rate increase. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 4. The alternative rate proposal was predicated on the use of the District's historical funding approach of its CIRP. As shown on Schedule MPG-1 of Mr. Gorman's rebuttal testimony, his strategy of funding the District's Phase II CIRP with the use of 55% Pay - As -You -Go and 45% debt resulted in five yearly rate increases of $10 million for a total five-year increase of $50 million. 2007 Ex. MIEC 36, Gorman Rebuttal Testimony, Schedule MPG-1, p. 1. Based on the MIEC proposal, the savings to ratepayers would have been approximately $65 million or 20% lower than the revenue increase proposed by the District. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 4. This approach would also have resulted in the District amassing a positive cumulative cash balance of over $20 million at the end of the Phase II CIRP. Id. This positive cash balance would have helped the District as it transitioned into future phases of the CIRP. Id. MIEC stated that its proposed lower rate increase and partial bond funding of the Phase II CIRP would produce cash flow metrics that would provide full recovery of the District's costs, allow it to maintain adequate credit rating financial benchmarks, and thus ensure the District maintained access to external capital under reasonable pricing and terms. 2007 Ex. MIEC 54, MIEC Prehearing Conference Report, p. 5. 139 In the 2007 Proceedings, it was Intervenor MEG's position that the District's proposal to fund the majority of its CIRP through Pay -As -You -Go would be an unfair and unreasonable burden on all classes of ratepayers by placing a great financial burden on the District's current customers. 2007 Ex. MEG 35, Drazen Consulting Group Rebuttal Testimony, p. 9-17. A complete Pay -As -You -Go approach to funding the CIRP would have increased customers' rates over 6 1 % over the five-year period. 2007 Ex. MEG 58, MEG Prehearing Conference Report, p. 2. Furthermore, it would have created an unreasonable burden on current customers because it would have required them to pay the full costs of assets that have a life span in excess of 30 years. Id. In the 2007 Proceedings, MEG proposed that the District should have financed Phase II of the CIRP using 50% debt financing and 50% Pay -As -You -Go funding. Id. The combination of debt and Pay -As -You -Go funding would have significantly reduced the wastewater rate increase and allowed for a better match of the costs of the new assets with the current users. Id. Furthermore, it was consistent with the District's 2002 Finance Plan and its 2004 Debt Managements Policy. 2007 Ex. MEG 35, Drazen Consulting Group Rebuttal Testimony, p. 9. MEG proposed that the District should have issued revenue bonds to finance 50% of the Phase II CIRP during the five-year rate period. 2007 Ex. MEG 58, MEG Prehearing Conference Report, p. 2. In the alternative, MEG proposed a single 13% increase or five 4% annual increases to fund the CIRP. Id. While either option was much more reasonable than the District's 2007 proposal, MEG believed the latter — the series of five 4% increases — would have been the better option because it would have reduced rate shock, and provided the District with more cash in 2012 to fund the next 140 phase of its CIRP. 2007 Ex. MEG 35, Drazen Consulting Group Rebuttal Testimony, Schedules 2 and 3; 2007 Ex. MEG 58, MEG Prehearing Conference Report, p. 2. In the 2007 Proceedings, it was the Rate Consultant's position that future generations of customers would not pay a portion of the Phase II CIRP costs, even though those costs were incurred to provide them service. 2007 Ex. L&B 53, Lashly & Baer's Prehearing Conference Report, p. 28. The Rate Consultant agreed with the position of Intervenors MEG and MIEC that a significant amount of the Phase II CIRP should have been funded with the use of 50% debt financing and 50% Pay -A -You -Go to help spread the cost over the entire useful lives of the assets to protect the District's financial integrity. Id. It was the Rate Consultant's belief that this balanced funding structure would have more equally spread the Phase II CIRP cost among current and future ratepayers, and ensured the District would have access to debt capital now and in the future. Id. The Rate Consultant proposed that the District debt finance approximately 50% of its capital program, resulting in $330,000,000 of revenue bonds over the period of Fiscal Year 2008 through Fiscal Year 2012. Id. at p. 12, I. 15. Section 7.170 of the Charter Plan required approval of a simple majority of the voters of the District to issue revenue bonds. Idat p. 10, I. 23. Due to the inherent uncertainty of receipt of voter authorization, the Rate Consultant proposed consideration of two alternative rate proposals. 2007 Ex. L&B 53, Rate Consultant's and Legal Counsel's Prehearing Conference Report, p. 11. The preferred alternative reflected use of revenue bonds to finance approximately 50% of the Phase II CIRP. Id. In case voter authorization to issue additional bonds was not received, the second alternative reflected the nearly 141 100% Pay -As -You -Go financing of the Phase II CIRP used in the District's Rate Change Proposal. Id. In the 2007 Proceedings, the District made no indication that it would issue revenue bonds to fund any portion of the CIRP. During the 2007 Proceedings, it was made apparent that there were several major disadvantages to cash funding such a large portion of the CIRP as proposed by the District. The Rate Consultant's proposal stated that the primary disadvantage was that current wastewater rates would have had to increase dramatically in the near term to provide the $616,897,000 in revenues necessary over the five-year period. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 11, I. 4. Cash funding of the capital improvements which would have been used and useful in serving customers for 30 or more years did not provide for recovery of those capital costs from the customers who would have benefited in the future. Id. at I. 7. Finally, the District's cost of borrowing was much lower than that of the majority of its customers. Id. at I. 10. The interest rates for tax-exempt revenue bonds during the 2007 Proceedings were in the range of 4.25% to 4.5%. Id. at I. 11. The impact of debt financing on the projected rate increase during the 2007 Rate Period would have been dramatic. The District's proposed nearly 100% cash financing of Phase II CIRP during the Rate Period would have required an initial increase in rates of 60.8%. 2007 Ex. L&B 53, Rate Consultant's and Legal Counsel's Prehearing Conference Report, p. 10. The District's analysis was consistent with the analyses presented in the testimony submitted on behalf of MIEC and MEG, as well as that submitted by the Rate Consultant, and showed that using debt to finance 50% of the 142 Phase II CIRP during the Rate Period would have reduced the required rate increase from 60.8% to 14.1%. Id. During the 2007 Proceedings, Intervenors MIEC and MEG, and the Rate Consultant questioned whether the District's wastewater rates should be increased by 60.8% over the Rate Period to enable the cash financing of 91.9% of the Phase II CIRP, or if an alternative Phase II CIRP financing plan should be developed that included issuance of revenue bonds to finance approximately 50% of the Phase II CIRP over the Rate Period. Id. The witnesses for MEG, MIEC, the Rate Consultant, as well as the District, testified that debt financing of wastewater utility capital improvements was a common practice throughout the United States. The use of long-term tax-exempt financing of capital improvements such as those included in the Phase II CIRP allows the amortization of the cost of those assets over a period that more closely aligns with the expected useful lives; permits an acceleration of construction of those assets; and helps support inter -generational equity in the wastewater rates. AGC/SITE joined the other parties in the 2007 Proceedings in support of a combination of debt and Pay -As -You -Go financing for the much needed capital improvements. 2007 AGC/SITE Prehearing Conference Report, p. 3. The District, the Rate Consultant, MIEC and MEG all supported the use of debt in their respective testimonies. Id. The important differences among the parties on this issue were primarily in the timing of additional debt — with the result being different rates. Id. Moreover, the rate differences would have continued for many years into the future. Id. 143 It was AGC/SITE's position to support the District's approach of reserving its debt capacity for future use, particularly as it was likely to be an interim measure. Id. As the District testified, it would have been beneficial to resolve regulatory uncertainty before the extent and timing of additional debt was determined. Id. While a lawsuit is seldom seen as a positive development, the EPA and DNR action may have lead to a clarification of requirements for projects, funding, and rates. Id. In the 2007 Proceedings, the District's long-term plan and finance policy did in fact provide a funding balance of cash and debt financing; however, the District's policy did not require an annual cash/debt balance of 50%/50%. 2007 Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 2, I. 1. The Phase I CIRP funding provided that a 60%/40% balance was appropriate at the time. Id, at p. 2, I. 3. The Phase II CIRP outlined in the District's 2007 Rate Change Proposal was intentionally designed to preserve available debt capacity and funding flexibility until regulatory issues were resolved. Id. at p. 2, I. 5. It was the District's position that the proposed plans by the Intervenors were flawed because they assumed the availability of additional debt that had not been considered by District voters and had no guarantee of being approved by District voters. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 5. As presented in Exhibit MSD 42H, the assumption of debt issued at the proposed levels suggested by two Intervenors would have only delayed the need to finance capital improvements on a Pay -As -You -Go basis by a few years. Id. In these alternative intervenor scenarios, the District would have quickly reached its debt capacity with no remaining debt to meet 144 potential spikes in the CIRP caused by an accelerated CIRP schedule expected to be mandated by Federal and State authorities. ld. This shift estimated by the District to save approximately $400 million in avoided debt service costs was based on an incomplete regulatory picture; future bonding capacity needs; a tapered rate of wastewater Phase II CIRP progress; and progress toward known regulatory goals at appropriate rates in a cost-efficient manner. The District prepared and submitted Table 3-9c of 2007 MSD Exhibit 42H which presented a comparison of projected revenue increases under three alternative financing scenarios. Alternative I was based on Pay -As -You -Go financing for the Rate Period which then switched to a 50% debt and 50% cash financing for FY 2013 through 2026. Alternative II was based on 50% debt and 50% cash financing beginning in 2008 until total debt reached $1,000 per capita. Alternative III was based on 50% debt and 50% cash financing beginning in FY 2008 until total debt reached $1,500 per capita. In the 2007 Proceedings, the District stated that it was prudent to conserve its limited debt capacity for the future when regulatory requirements were better defined. 2007 Rate Consultant's and Legal Counsel's Prehearing Conference Report, p. 10. The District claimed this alternative funding approach would have enabled it to remain flexible until the real cost of the Phase 11 CIRP is better known and defined. On June `11, 2007, the United States of America, acting at the request and on behalf of the Administrator of the EPA, and the State of Missouri by the authority of the Attorney General of Missouri, filed a claim in the United States District Court for the Eastern District of Missouri against the Metropolitan St. Louis Sewer District captioned United States of America and the State of Missouri v. The Metropolitan St. Louis Sewer 145 District for injunctive relief and civil penalties alleging unpermitted discharges from a combined sewer system; violation of the proper operation and maintenance condition in the District's NPDES permits; violation of the backup power condition in the District's NPDES permits; violation of the bypass prohibition condition in the District's NPDES permits; violation of the noncompliance reporting condition in the District's NPDES permits; failure to submit a long-term CSO control plan pursuant to Part D.1 of the District's NPDES permits and CWA § 308 Request; and violation of the general criteria special condition in the District's NPDES permits. The District maintained that the filing of the lawsuit did not provide any additional certainty regarding the regulatory requirements. The District would have considered issuing additional debt after 2012 to finance major capital improvements. 2007 Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 2, I. 9. However, during the 2007 Proceedings, it was the District's position that the proposed Pay -As -You -Go financing plan presented in the Rate Change Proposal remained the best funding approach for the near term Phase II CIRP until the plans for the combined and separate sewer overflow abatement (CSOISSO) were finalized and approved by regulators. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 5. The District continued to propose a Pay -As -You -Go plan to finance the next five years of capital improvements while holding its limited debt capacity in reserve for potential additional mandated improvements which may have been be required sooner then expected. Id. Therefore, the main difference between the District's position on debt financing and that of the Intervenors was just a matter of timing. 2007 Ex. MSD 42C, Zimmerman Surrebuttal Testimony, p. 2, I. 12. 146 The District stated that the proposed wastewater rates meet the user charge requirements of the EPA concerning proportionate cost recovery by customer class and the proposed wastewater bills for residential customers will not exceed the two percent median household income affordability threshold. Ex. MSD N, Transcript for Technical Conference May 30, 2007, p. 57, I. 19. EPA measures a permittee's financial capability to implement Combined Sewer Overflow (CSO) controls. The process reflects the experience of EPA in the Water Quality Standards (WQS) program, Construction Grants program, State Revolving Fund (SRF) program and the water enforcement program. Experience with these programs provides the foundation upon which EPA has built the CSO financial capability assessment approach. See CSO Guidance for Financial Capability Assessment and Schedule Development (Feb. 1997); EPA 832-B-97-004 at p. 9. The CSO financial capability assessment process also reflects the approach taken by bond rating agencies and other investment industry firms to assess a municipality's or wastewater utility's overall financial condition and credit capacity. The bond rating agencies generally use the same types of financial information when they evaluate specific bond issues. Rating agencies evaluate this information to determine the overall financial health of an issuer and identify any factors that could make it difficult for the permittee to repay its bonds. The approach developed for the CSO financial capability assessment incorporates the principles used by the rating agencies. Id. at p. 19. The Residential Indicator measures the financial impact of the current and proposed Wastewater Treatment (WWT) and CSO controls on residential users. 147 Development of this indicator starts with the determination of the current and proposed WWT and CSO control costs per household (CPH). The service area's CPH estimate and the median household income (MHI) are used to calculate the Residential Indicator. The Residential Indicator is compared to established financial impact ranges to determine whether CSO controls will produce a possible high, mid -range or low financial impact on the permittee's residential users. Worksheets are provided to aid in developing the Residential Indicator. Id. at p. 12. If the permittee's service area includes more than one jurisdiction, it may be necessary to develop a weighted MHI for the entire service area. The Bureau of Census's designated MHI areas generally encompass most permittee's service areas. For this reason, the calculation of a weighted MHI usually will not be necessary to reasonably represent the permittee's MHI. When a weighted MHI must be acquired, a weight would be assigned to each jurisdiction to reflect its share of the total households. Id. at p. 18. The Residential Indicator will be used to help permittees, and EPA and state NPDES authorities determine reasonable and workable long-term CSO control schedules. To assess the financial impact CSO controls may have on the permittee's residential users, the Residential Indicator is compared to the financial impact ranges that reflect EPA's previous experience with water pollution control programs. These ranges are as follows: 148 Financial Impact Residential Indicator (CPH as % MHI) Low Less than 1.0 Percent of MHI Mid -Range 1.0 — 2.0 Percent of MHI High Greater than 2.0 Percent of MHI When the Residential Indicator is Tess than 1.0 percent, between 1.0 and 2.0 percent, and greater than 2.0 percent, the financial impact on residential users to implement the CSO controls will be characterized as "low," "mid -range," and "high," respectively. Permittees that have a low residential indicator score (less than 1.0) are unlikely to be permitted longer implementation schedules. Idat p. 19. The 2007 proposed wastewater rates were determined based on cost of service principals. 2007 Ex. MSD 17H, Barber Direct Testimony, p. 4, I. 15. The proposed wastewater rates were below the two percent of median income guidelines suggested by EPA and others. Id. at p. 31, I. 4. Under these guidelines, a wastewater change Tess than $45.22 per month was deemed to be affordable for the St. Louis area. Id. at I. 5. This value was based on the adjusted 1999 median household income reported by the 2000 Census Bureau for St. Louis. Id. at I. 6. Therefore, this amount is likely higher today due to wage inflation. Id. at I. 8. The average 8 Ccf per month residential wastewater bill for the 2008 Test Year was projected to be $25.74 after the proposed December 1, 2007 wastewater rate adjustment or about 1.1 percent of the 1999 median household income for St. Louis ($27,132) if applied for a full year. Id. The 2007 proposed wastewater rates met the user charge requirements of the EPA concerning proportionate cost recovery by customer class and the proposed wastewater bills for residential customers would not have exceeded the two percent 149 median household income affordability threshold. 2007 Ex. MSD N, Transcript for Technical Conference May 30, 2007, p. 56, I. 15-19. The District was analyzing its 2007 Rate Change Proposal based on per capita and as well as a comparison to an affordability benchmark which in 2007, per the EPA, was 2% of median household income. Id. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that 100% Pay -As -You -Go financing for the Phase II CIRP in the 2007 Rate Change Proposal imposed a fair and reasonable burden on all classes of ratepayers. The District stated that the proposed stormwater rate change would have provided greater proportionality between ratepayers as the current common -to -all flat rate charge and system of ad valorem taxes for basic stormwater services would have been replaced by a stormwater user charge system directly related to estimated amounts of stormwater runoff. 2007 Ex. MSD 20 MSD Response to Lashly & Baer Discovery Request. In the 2007 Proceedings, the District stated that the proposed wastewater rates met the user charge requirements of the EPA concerning proportionate cost recovery by customer class and the proposed wastewater bills for residential customers will not exceed the two percent median household income affordability threshold. 2007 Ex. MSD 17C, Zimmerman Direct Testimony, (Mar. 7, 2007), p. 4, I. 4-9; 2007 Ex. MSD N, Transcript of Technical Conference, (May 30, 2007), p. 57, I. 15-19. In the 2008 Proceedings, the District asserts that the use of debt is reasonable because it, like the rates proposed in the 2007 Proceedings, results in wastewater charges that are 150 affordable per EPA guidelines. 2008 Ex. MSD 2.6g, Barber Direct Testimony, p. 8-9, I. 2008 Ex. MSD 2.10a, MSD Response to Lashly & Baer Discovery Request, p. 14-15, q. 11(c). In the 2007 Proceedings, the District stated that the proposed stormwater rate change would have provided greater proportionality between ratepayers as the current common -to -all fiat rate charge and system of ad valorem taxes for basic stormwater services would have been replaced by a stormwater user charge system directly related to estimated amounts of stormwater runoff. In 2008, there is a $13 million increase to stormwater as a result of the extension of the wastewater subsidiary from two years as in the 2007 Proposal, to three years in the current Proposed Rate Change. The 2008 Proposed Rate Change includes the use of $275 million in bond financing and about $366 million in Pay -As -You -Go funding, or 46% debt and 54% cash financing. The use of voter -approved revenue bonds and the Missouri State Revolving Fund to the maximum feasible extent to fund the CIRP reduces the size of the Proposed Rate Change and allocates the costs of the capital improvements among future ratepayers who will benefit from such capital improvements. The District has always planned on using its full debt capacity to finance requirement improvements. In the 2007 Proceedings, the District proposed to initially finance improvements under a Pay -As -You -Go plan due to limited debt capacity and uncertainty of the level of additional improvement costs which may be required by regulatory authorities. Under the 2007 Proposal, the ratepayers would have paid higher rates initially to give the District the flexibility to use its debt capacity to help finance subsequent large capital expenditures and thus reduce the requirement for future 151 wastewater rate increases. The main goal of that Tong -term plan was to put the District in a position where it could have strategically used its limited debt to meet peaks in future capital financing requirements and have a sufficient level of annual revenues by 2026 to reinvest in the system on a sustainable annual basis without reliance on debt to finance the perpetual renewal and replacement of infrastructure. The District states that current use of debt financing instead of in the future has an immediate benefit in lower wastewater rates but may impact flexibility to debt finance future capital improvements. 2008 Ex. MSD 2.10a, MSD Response to Lashly & Baer Discovery Request, p. 17, q. 12(a). If debt capacity is exhausted, wastewater rates will need to be increased to finance future improvements and meet increased debt service requirements. Therefore, under the 2008 Proposed Rate Change, current ratepayers pay Tess now with the potential of paying more in the future while under the 2007 Proposal, ratepayers paid more now with the potential for future ratepayers paying less. The Rate Commission believes that the record in the 2008 Proceedings supports a finding that a mixture of $275 million debt and cash financing for the balance of the $661 million Phase II CIRP will result in a fair and reasonable burden on all classes of ratepayers. Billing Lag Currently it is District policy, like other wastewater utilities, to bill in arrears for wastewater services. 2007 Ex. MSD L, Transcript for Technical Conference May 9, 2007, p. 222, I. 10-13. The District bills one month in arrears. 2007 Ex. MSD 0, Transcript for Public Hearing June 7, 2007, p. 26, I. 7. The practice of billing in arrears results in less than a full 12 months of billings under new rates in a given 12-month 152 period following the effective date of the rate increase. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 22, I. 14-18. In the 2007 Proceedings, the Rate Consultant believed that the billing lag adjustment unnecessarily increased the proposed wastewater rates and failed to recognize several components of the proposed wastewater rate, including the maintenance of an operating reserve of operation and maintenance expenses which has been increased from 45 to 60 days; the use of the District Operating and Maintenance budget as the base for projection of future expenditures; the failure to recognize that the District has spent less than 95% of its budget in each of the last five years; the use of the Phase II CIRP expected appropriations rather than the expected expenditures; and the failure to recognize other available reserve fund balances. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 8, I. 28 — p. 9, I. 20. It was proposed that eliminating the billing lag would decrease the 2008 Test Year wastewater revenue requirements by approximately $1,228,200, which was approximately 9.4% of the increased revenues proposed by the District for FY 2008. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 9, I. 10-14. The District took the position that although an operating reserve could be used to temporarily adjust for a delay in accrued revenues, the reserve had to be replenished at some point in time. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 8. Therefore, the District believed that the adjustment was required for multi -year planning purposes. Id. Although there are delays in payments that could offset a billing lag adjustment, there are also pre -payments required for major expenditures such as insurance and bulk chemical purchases that counter potential delays in payments. Id. 153 According to the District, other reserves are not considered for the delay in revenue receipts because they are dedicated by bond covenants or District policy for other purposes such as maintaining a reserve for emergencies, meeting the revenue bond reserve requirement, providing funds for the water backup insurance and reimbursement program, and accruing principal and interest payments to the bond holders. Id. Therefore, the reserves are not available for temporary revenue shortfalls. Id. The District has tightly managed its operating budget, maintaining spending 5% below total appropriations for the past few years. 2007 Ex. MSD 17C, Zimmerman Direct Testimony, p. 6, I. 2-3. While the District intended to continue strict management of its resources, a continuation of this trend was not guaranteed, especially in light of pending lawsuits that may have required additional non -budgeted expenditures. Id. Any funds that were available at the end of 2007 because the District did not expend its entire budget could have been used to provide additional capital improvements. Id. at p. 8-9. However, if it was arbitrarily assumed the District would continue to substantially underspend its budget for rate design purposes and the District required its full budget amount or more, then the proposed level of capital improvements would need to be reduced. Id. at p. 9. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that inclusion of a billing lag in the 2007 Rate Change Proposal imposed a fair and reasonable burden on all classes of ratepayers. 154 Resistance Factor A resistance factor recognizes that some metered customers can reasonably be expected to react to the higher wastewater charges by cutting back on their levels of water use and thus wastewater service. 2007 Ex. MSD 17H, Barber Direct Testimony, p. 18, I. 11. A resistance factor reduces the amount of revenues the District expects to receive. Wastewater charges are typically designed for the full rate increase indicated but with the expectation that actual revenue received will be less than projected billed revenue due to the potential customer reactions described above. Id. at I. 13. The resistance factor provides a compensating revenue adjustment for these potential reactions. Id. at I. 15. In the 2007 Proceedings, the District proposed a resistance factor equal to 3.23% for 2008, reduced to 1.61% for 2009, and zero thereafter. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 1-5 (Feb. 2007). Thus, by 2008, the District would have reduced the amount of wastewater rate revenues it expects to receive by 3.23% or $808,600. Similarly, the resistance factor would have reduced the amount of rate revenues by 1.61% in 2009. The Rate Consultant's Proposal recommended elimination of any resistance factor. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 3, I. 7-31. According to the Rate Consultant, the use of the resistance factor was an additional level of expense that unnecessarily increased the proposed wastewater rates a level higher than necessary. The Consultants did not believe that it was possible to accurately determine a resistance factor based solely on billed wastewater usage. There were many other 155 factors that affect billed wastewater usage, including general economic conditions, water rates and environmental impacts. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 8, I. 15. Eliminating the resistance factor would decrease the Test Year (FY 2008) wastewater revenue requirements by approximately $471,600, which would have been equivalent to the $25,266,800 total increase in revenues from the rate increase, multiplied by the resistance factor of 3.2%, multiplied by 7/12 to account for a December 1 implementation of the proposed rates. Id. at I. 21. The record in the 2007 Proceedings contained no evidence of any significant current delinquencies among ratepayers due to resistance. According to the District, industry rate manuals recognize resistance to higher rates as a factor to be considered in rate design. Results of a study requested by the 2003 Rate Commission recognized the appropriateness of a resistance factor and quantifies the declining amounts for consideration. In the 2007 Proceedings, the District believed that the study's indicated declining resistance factor should have been included in the 2007 Rate Change Proposal. The Rate Consultant argued that the use of the resistance factor was an additional level of expense that unnecessarily increased the proposed wastewater rates to a level higher than necessary. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 3, I. 7-31. Further, it was not appropriate to determine a resistance factor based solely on billed wastewater usage because there were many other factors that affect billed wastewater usage, including general economic conditions, water rates, and environmental impacts. Id. At p. 8, 1.15 156 In the 2007 Rate Commission Report, the Rate Commission found that the inclusion of a resistance factor in that Rate Change Proposal did not impose a fair and reasonable burden on all classes of ratepayers. Based upon the Rate Commission's 2007 Report, the District eliminated the resistance factor as a level of expense in the 2008 Proposed Rate Change. However, the rates themselves do not reflect the elimination of the resistance factor. The Rate Consultant recommends that the District calculate the wastewater rates using the District Rate Model to reflect the impact of elimination of the resistance factor as recommended by the Rate Commission in its 2007 Report. 2008 Ex. L&B 2.13, Stannard Rebuttal Testimony, p. 11, I. 2-5. The MIEC Consultant also disagrees with the District's treatment of the resistance factor in the Rate Change Proposal. In his additional testimony, Mr. Barber stated that including the elimination of the resistance factor in the rate change model would impact the average monthly single family residential bill by approximately 5¢ or .2%. 2008 Ex. MSD 2.11 a, MSD Amended Direct Testimony, p. 8, I. 13-17. The revenue reduction associated with the resistance factor amounts to total revenue reduction in 2008 of $472,000. Id. at p. 8, I. 24, p. 9, I. 1-2. At the Prehearing Conference, the District stated that it misunderstood the Rate Commission's Recommendation in the 2007 Report, and it would remove the revenues resulting from the elimination of the resistance factor from the District's fund balance. 2008 Ex. MSD 3.3c, Prehearing Conference Report, p. 13, I. 6-12. The District set up tables in its Prehearing Conference Report demonstrating the impact of this adjustment on wastewater rates and customer bills. See 2008 Ex. MSD 2.19e, Rate Model Tables. The District stated that these tables will indicate that the wastewater rates and level of 157 customer bills did not change due to the small percentage these dollars represent relative to the District's total revenue requirement. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 7. The Rate Commission believes that the record in the 2008 Proceedings supports a finding that the elimination of the resistance factor will result in a fair and reasonable burden on all classes of ratepayers. Infiltration/Inflow Wastewater rates are allocated to customer classes in accordance with their service requirements. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 56, q. 82. All customers pay the cost to bill and collect revenue on an equal per customer basis. Id. A large portion of the infiltration/inflow ("I/I") is also recovered on the basis of customers with the remaining portion recovered on the basis of contributed volume. Id, at p. 57, q. 82. The cost of collecting, conveying and treating contributed normal strength wastewater is recovered on the basis of volume so that each customer pays in proportion to their use of the wastewater system. Id. Special costs to monitor customers for the pretreatment program are only recovered from non-residential customers since it is these customers that must be reviewed to find potential customers required by the EPA to be monitored. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 56, q. 82. Finally, any non-residential customer that contributes high strength wastewater above the limits of normal strength wastewater is appropriately charged for their excess strength wastewater loadings. Id. 158 The District's 2007 Proposal incorporated an I/1 allocation of 40% recovery by the system availability charge (number of customers) and 60% recovery by the volume charge. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 1-5 and 3-32 (Feb. 2007). Intervenor MIEC did not agree with the District 40%/60% I/1 distribution. 2007 Ex. MIEC 36, Gorman Rebuttal Testimony, p. 15, 1. 18. I/1 flows are more closely related to the total length and diameter of collection sewers in the system, and these in turn are influenced by the number of customers connected to the District by these sewers. Id. at p. 16, 1. 4. Intervenors proposed to assign 50% of 1/1 volumes in proportion to the number of customers in each class and the remaining 50% in proportion to class contributed volumes. Id. at I. 12. Further, Intervenor MIEC raised issues with the attribution of groundwater infiltration and stormwater inflow (I/1) volumes to individual customer classes weighted on a basis of 60% billable class volumes and 40% customer count. According to MIEC, this also resulted in an under -allocation of costs to the Single Family and Multi -Family Residential classes and an over -allocation of costs to the Non -Residential customer class. MIEC proposed to allocate I/1 costs 50% to volume and 50% to customer count. The District's 40%/60% I/1 allocation stemmed from analysis of wet weather flow contributions and costs in the 2005 "Wet Weather Flow Cost Allocation Study." 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 1-5 (Feb. 2007). The District's allocation of I/1 costs that recognized both contributed volume and the number of connections was stated in the Manual as one of the most common approaches. 159 The Manual is a recognized industry standard for developing cost based wastewater rates. With respect to the allocation of 1/I, the Manual states: To the extent that I/1 entry points cannot be determined, their costs are a general system problem that is probably best related to both customer class flows and to the number of customers.... Additional customers increase the land area and density of the collection system, increasing the potential for I/l." Id. at p. 43 (emphasis added). With respect to allocating the I/I costs, the Manual continues by stating: In establishing I/1 units of service by customer class, it is noted that such costs are not directly related to wastewater volumes discharged by customers. That is, the volume of contributed wastewater flow from an individual customer is not a direct measure of that customer's potential responsibility for I/1. A more accurate theoretical measure of I/1 responsibility might involve consideration of the customer's property and stormwater runoff potential, as well as sewer lateral leakage. Such parameters, however, are not readily ascertainable as a basis of billing customers for I/1 costs. These considerations support allocation of I/1 responsibility to customer classes based on some measure that reflects both the number and relative size of customers served. Id. at p. 53. For example, the Manual notes two-thirds of the total I/1 could be allocated in proportion to the number of customers, with the remaining one-third allocated on the basis of volume. Id. As requested by the 2003 Rate Commission, a study was conducted to determine how the costs of infiltration/inflow should be allocated to customer classes. In the absence of any other study, the District found no reason to alter the I/1 allocation factors proposed for the 2007 Proceedings. 2007 Ex. MSD 62, MSD Final Closing Arguments, p. 12. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that inclusion of a 40% recovery by the system availability charge 160 and 60% recovery by the volume charge in the Rate Change Proposal imposed a fair and reasonable burden on all classes of ratepayers. Basic Stormwater Services Rates The use of impervious area charges for the recovery of stormwater related costs is becoming standard across the United States as it is generally recognized that impervious area is a strong indicator of the potential demand that a property will place on a utility for stormwater management. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 13, I. 5. The concept of a stormwater impervious charge is not new. Id. Many courts have held that stormwater charges are more in the nature of a user charge than a tax. See, e.g., Sarasota County v. Sarasota Church of Christ, 667 So.2d 180 (Fla. 1995) (holding that charges based on impervious surface area and property usage classification is "not arbitrary and bears a reasonable relationship to the benefits received"); McLeod v. Columbia County, 599 S.E.2d 152 (Ga. 2004) (impervious charge "bears a reasonable relationship to the benefits received"); Twietmever v. City of Hampton, 497 S.E.2d 858 (Va. 1998) (flat rate charges bore a "rational correlation to the amount of stormwater runoff' because they differentiated between residential and non-residential properties); City of Gainesville v. State of Florida, 8763 So.2d 138 (Fla. 2003) (series of flat rates based on impervious surface area is "reasonable"). In the 2007 Proceedings, the District proposed basic stormwater rates use cost of service considerations in their development by charging on the basis of impervious area which had a direct relationship to the amount of runoff that was attributed to each property. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 57, q. 82. 161 The cost for maintaining the stormwater system was directly related to the amount of runoff contributed to the stormwater system. Neither the flat stormwater charge by account or the ad valorem taxes dedicated to stormwater operations had this direct cost relationship. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 57, q. 82. Provisions were also included in the stormwater rate structure to provide credits to customers that could demonstrate a reduced or delayed runoff of stormwater from their property to the stormwater system. Id. The proposed system of impervious area based stormwater charges would have been recovered costs from users in proportion to their actual impervious area. Idat p. 57, q. 83. In the 2007 Proceedings, there was a direct relationship between the rate charged and the contribution to need, due to the proposed use of impervious area as the basis for the stormwater billing. 2007 Ex. MSD 17G, Sedgwick Direct Testimony, p. 3, I. 11. The use of impervious area in this case had the highest degree of connectivity due to the use of individually calculated impervious area. 2007 Ex. MSD 20, MSD Response to Lashly & Baer Discovery Request, p. 57, q. 83. There was no distinction between classes, as each parcel was billable upon the actual impervious area on the parcel. Id. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that inclusion of an impervious charge for Basic Stormwater Services in the Rate Change Proposal imposed a fair and reasonable burden on all classes of ratepayers. Wastewater revenues have long supported a part of the stormwater cost of service. In the 2007 Proceedings, the District proposed to terminate this support 162 beginning in FY2009. With the 2008 Rate Change, the Proposed Rate Change includes an extension of the wastewater subsidy funding of the stormwater program from two to three years; and an extension of the full implementation of the stormwater program by two years to FY 2014. 2008 Ex. MSD 2.2, Proposed Rate Change Document, p. 2; 2008 Ex. L&B 2.13, Stannard Rebuttal Testimony, p. 11, I. 20-21. The subsidy is eliminated by July 1, 2011. The extension results in $13 million increase in the total subsidy from $30 million to $43 million over the five years of the wastewater rate proposal. 2008 Ex. MSD 2.2, Proposed Rate Change Document, p. 9. The 2008 Rate Change Proposal also includes an extension of the full implementation of the stormwater program by two years to FY 2014. The stormwater rate increases in the Proposed Rate Change are extended from a five-year period, as proposed in the 2007 Report, to seven years. 2008 Ex. MSD 2.2, Proposed Rate Change Document, p. 10. The District's Consultant testified that the stormwater revenue requirements were reduced in conjunction with covered stormwater support into 2010, to shift projected capital projects into the future, and to lessen the immediate impact of the proposed stormwater user charges on customers. 2008 Ex. MSD 2.6g, Keith Barber Direct Testimony, p. 9, I. 10-17. In its Discovery Responses, the District states that it does not intend to defer any stormwater capital projects when viewed from a total program perspective. 2008 Ex. MSD 2.18i, MSD Second Partial Response to Lashly & Baer Discovery Request, p. 3, q. 2. The shift in stormwater revenues to the later part of the seven-year program shifts 163 the timing of the project construction but does not result in any deferral of capital projects in total. Id. No party objects to the District's proposed delay for its stormwater program and the two-year extension of support of the stormwater program by the wastewater rates. The Rate Commission believes that the record in the 2008 Proceedings supports a finding that the two-year extension of support of the stormwater program by the wastewater rates will result in a fair and reasonable burden on all classes of ratepayers. Enhanced Stormwater Service Charges The District's 2007 Rate Change Proposal proposed reconfiguring the existing 23 OMCI subdistricts into five watershed -based subdistricts as a means to provide Enhanced Stormwater Services as determined by a vote of each subdistrict's customers. The tax levy and type of enhanced services would have been determined by a vote of the customers of each watershed. 2007 Ex. MSD 1, CDM and Black & Veatch, "Wastewater and Stormwater Rate Proposal," at 1-3 (Feb. 2007). The District's position of levying an ad valorem tax for Enhanced Services related to the differing levels of service desired geographically within its service area. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 11. The fairness of the charge related to the image conceived by the customer of the benefit being received rather than the technical equitability of allocating the costs. Id. It was the District's belief that conducting a public outreach/information program that identified the specific and different services needed by each subdistrict and by conducting a referendum within each subdistrict, consensus on the program's funding and needs could have been more equitably met. Id. It was therefore the District's position that the use of ad valorem 164 subdistrict taxes as currently provided for in the District's Charter Plan be used to accomplish this acceptance, understanding and approval of the required expenditures/charges for enhanced stormwater services. Id. In the 2007 Proceedings, it was the Rate Consultant's position that it would be appropriate to recover the cost of any Enhanced Stormwater Services the District may provide to certain areas through the same impervious area methodology used for Basic Services. 2007 Ex. L&B 53, Lashly & Baer's Prehearing Conference Report, p. 30. Use of an impervious area charge would have allowed the District to recover costs associated with Enhanced Stormwater Services from those users within each of the proposed subdistricts based on their impervious area rather than their assessed property valuation. Id. An impervious area charge would have also ensured recovery of enhanced stormwater costs from tax-exempt properties and prevent potential blurring and confusion of the user fee fundamentals associated with the stormwater charge. Id. The Rate Consultant believed the charge should have been revenue neutral to the District since it was only a matter of how costs would have been recovered, not what costs were actually recovered. Id. The use of an impervious area charge would also provided the District with a more stable revenue source throughout the course of the year since impervious area charges would have been billed and collected monthly, while ad valorem taxes subject to assessment adjustments would have only been billed and collected annually. Id. The District also believed all user fees, including the new impervious area user charges for Basic Services, should have been applied uniformly throughout the District and not be subject to voter approval. 2007 Ex. MSD 52, District Prehearing Conference 165 Report, p. 11. Offering user charges for the enhanced services for voter approval could have, in the minds of some, blurred a major distinction between user charges and taxes per the provisions of the Hancock Amendment. Id. Moreover, the use of taxes for optional enhanced stormwater services would have also lessened the rate impact on tax-exempt property owners who are hit substantially by the proposed stormwater impervious area charges. Id. In the 2007 Proceedings, it was the District's`position that the Basic Stormwater Services as described in the 2007 Rate Change Proposal should have been recovered by an impervious charge and Enhanced Stormwater Services should have been recovered through the taxing subdistrict methodology currently provided for in the District's Charter Plan. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 12. There were two major reasons for this. First, there were basic stormwater services that the District must have provided to maintain those stormwater facilities the District owns and to provide the planning and regulatory functions required by the Charter Plan and permit. Id. These services are provided district -wide. In addition, there was a district - wide relationship between impervious area and the cost to provide these services. Id. Second, the District wanted to offer the opportunity to its customers to fund additional Enhanced Stormwater Services. Id. The District believed that the type of enhanced stormwater services the District customers may have wanted to consider varied greatly between watersheds and are not consistent throughout the District. Id. The District believed the best way to offer this opportunity was through the taxing subdistrict methodology provided for in the District's Charter Plan and currently in use today for these types of services throughout the District. Id. The District believed that 166 the use of an impervious rate should not have been considered because of the varying service needs throughout the District and the tenuous relationship the cost of these services have to the amount of impervious area within a portion of the entire service area. Id. Intervenor MEG agreed with the District's Proposal that enhanced services should have been collected through taxes. MEG observed that the imposition of an impervious area charge for enhanced services upon not -for -profits (e.g., schools and churches), in addition to the new impervious area for basic services, would have created a significant hardship. 2007 Ex. MEG 58, MEG Prehearing Conference Report, P. 3. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the use of an ad valorem tax for Enhanced Stormwater Services in the Rate Change Proposal did not impose a fair and reasonable burden on all classes of ratepayers. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the use of an impervious charge for Enhanced Stormwater Services imposed a fair and reasonable burden on all classes of ratepayers. The Rate Commission further believed that since the record in the 2007 Proceedings supported a finding that the use of an impervious area charge for all Stormwater Services imposed a fair and reasonable burden on all classes of ratepayers, that the record in the 2007 Proceedings also supported combining the charge for both Basic Stormwater Services and Enhanced Stormwater Services into one Stormwater Charge. 167 In the 2008 Proceedings, the use of the impervious area charge for stormwater services will allow the District to recover costs associated with enhanced stormwater services based on their impervious area rather than their assessed property valuation as mutually proposed. An impervious area charge will also ensure recovery of enhanced stormwater costs from tax-exempt properties and prevent potential blurring and confusion of the user fee analysis associated with the stormwater charge. Just as the District has determined that impervious area charges are a more equitable manner to recover revenue requirements for basic stormwater service, in the 2007 Report, the Rate Commission recommended that it would be appropriate to recover the cost of any enhanced service the District may provide to certain areas through the same impervious area methodology. The 2008 Proposed Rate Change for stormwater includes one impervious area charge for all services to be paid by all customers. For FY 2008, the rate is $1.44/100 sq. ft, with an increase to $1.68/100 sq. ft in FY 2009, and smaller increases thereafter. 2008 Ex. MSD 2.2, Proposed Rate Change Document. The Rate Consultant recommends that the impervious rate for what was referred to in the 2007 Proceedings as "enhanced services" be assessed on a watershed district basis to more closely reflect the District's cost of providing such services. 2008 Ex. 3.3, Transcript of Technical Conference (Feb. 20, 2008), p. 19, I. 23-25, p. 20, I. 1-7. The Rate Consultant testified that his concern is with the unknowns concerning the nature and locations of the projects, whether they will be uniform across the District, and how the projects will be chosen. Id. 168 The Rate Consultant's testimony was prior to the Rate Commission's Second Discovery Request. The Responses clarify that the District will begin a customer input process in July 2008 to solicit ratepayer comment and prioritize stormwater services to specific areas with the District. Further, at the February 29, 2008 Technical Conference, and subsequent to the Rate Consultant's testimony, Mr. Theemian testified that although there will be one impervious charge, the District will be accountable to all ratepayers and that although the projects will not be uniform across the District, the intent of the District is that projects be implemented districtwide. 2008 Ex. MSD 3.3b, Technical Conference Transcript (Feb. 29, 2008), p. 39, I. 11-22. At the Prehearing Conference, the District stated that all stormwater services will be funded by an impervious area rate, and the use of the terms "basic" and "enhanced" are for internal purposes for stormwater planning only, and are not intended to define District projects or funding sources. 2008 Ex. MSD 2.19a, MSD Prehearing Conference Report, p. 6. The Rate Commission believes that the record in the 2008 Proceedings supports a finding that the funding of all stormwater services by an impervious area rate will result in a fair and reasonable burden on all classes of ratepayers. Seven -Year Phasing of Stormwater Rates In the 2007 Proceedings, MEG was not opposed to a separate stormwater charge and acknowledged that the District would have been phasing in its full impervious surface charge over the period 2008 to 2012. However, MEG believed that the sudden elimination of the District's wastewater rates which at that time supported the District's stormwater costs would have caused significant rate shock to customers 169 with large amounts of impervious surface area. 2007 Ex. MEG 58, MEG Prehearing Conference Report, p. 3. MEG proposed that the change in funding procedure would have been less onerous if wastewater support of the stormwater rates was phased out over a five-year period. Id. Under MEG's proposal, the wastewater rates would have continued to support the stormwater costs for 2008 and 2009 and thereafter the subsidy would have been reduced by 25% per year. Id. MEG's proposed phase -out would not have required the District to raise wastewater rates further. 2007 Ex. MEG 58, MEG Prehearing Conference Report, p. 3. It was MEG's position that the extended subsidy could have been achieved without increasing the rates to wastewater customers and suggested diverting the GASB 45 allowance for funding other post -employment benefits and revenue adjustments due to billing lag expense and the resistance factor expense. Id. It was the District's position that extending the proposed wastewater subsidy would have increased wastewater rates and decreased stormwater rates for the transition period. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 12. The District planned to begin funding its GASB 45 allowance out of annual revenues. Id. at 6. This issue was considered settled by the District. Id. Ignoring this obligation would have jeopardized the District's bond ratings as supported by both the Fitch study and Standard and Poor's rating agencies (see Exhibits No. MSD 52B & 52C). Id. at p. 12. Therefore, these monies would not have been available to extend the stormwater subsidy. Id. The allowances for billing lag and customer resistance due to the higher rates were adjustments to expected revenue receipts and needed to be included in the revenue projections to avoid revenue shortfalls. Id. 170 Therefore, potential use of the GASB 45 funding allowance and the two revenue adjustments was not realistic. Id. The District's goal was to make both the wastewater and stormwater utility self-supporting within a two-year period. Id. This term was considered adequate to allow customers to adjust to the new stormwater user charge while complying with the 2003 Rate Commission's recommendation to eliminate wastewater revenue support of the District's stormwater program. Id. At the same time, the District planned to eliminate the current $0.02 and $0.05 ad valorem taxes which would have eased the rate transition burden on all customers except the tax-exempt customers. Id. It should be noted, however, that the 2007 proposed ramp -up of the stormwater rate reflected the timing and approximate levels recommended to the District's Board of Trustees by a 2001 Citizen Task Force. Id. Members of this Task Force included representatives of the tax-exempt customers within the District. Id. MEG agreed with the District's 2007 Rate Change Proposal that enhanced services should have been collected through taxes. Id. Therefore, MEG submitted that a phase out of the wastewater support of the stormwater rates as described above, together with collecting costs for enhanced services through taxes, would have allowed the District to meet the stormwater costs outlined in its 2007 Proposal while still being a fair and reasonable burden on all classes of ratepayers. Id. at p. 3-4. The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the wastewater rate support of stormwater charges be eliminated as described in the Rate Change Proposal. 171 The Rate Commission believes that the record in the 2008 Proceedings supports a finding that the seven-year phasing of stormwater rates will result in a fair and reasonable burden on all classes of ratepayers. Levee District Intervenors In the 2007 Proceedings, the Levee District Intervenors objected to the District's proposed impervious stormwater charge, specifically, the extension of the charge on property owners located within the Levee Districts. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 1. It was the Levee Districts' position that the proposed impervious charge bore no proportional relationship to any services that the District provided to property owners within the Levee Districts. Id. at p. 2. Instead, the charge would have resulted in the Levee Districts' owners subsidizing services that the District would be providing to other property within the District's jurisdiction, while these same owners would also pay assessments to the Levee Districts for stormwater services. Id. The Levee Districts are districts created pursuant to Chapter 245 of the Missouri Revised Statutes. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 2, I. 11. The statutes authorized the districts to plan, construct, operate and maintain a flood protection and stormwater drainage system. Id. at p. 2, I. 5-6. Pursuant to this authority, the Levee Districts have constructed, operate and maintain flood protection and stormwater management systems within their respective boundaries. Id. at p. 4, I. 6-15. The 500-year flood plains of Earth City, Riverport, Howard Bend and Chesterfield - Monarch protect approximately 13,500 acres of ground. Id. at p. 3, I. 18-23. Pursuant to 172 their statutory authority, the Levee Districts impose assessments upon the property owners within their boundaries to pay for this infrastructure. Id. at p. 5, I. 9 — p. 6, I. 2. In contrast to most other areas served by the District, the stormwater from the Levee Districts drains directly into the Missouri River and does not enter the District's system. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 5, I. 1-8; Ex. MON 34, Butchko Rebuttal Testimony, p. 2, I. 16 — p. 3, I. 16. The Levee Districts are also uniquely situated with respect to stormwater in that, unlike other property owners within the District's boundaries, the Levee Districts provide their own stormwater management and planning within their boundaries. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 4, I. 6-10; 2007 Ex. MON 34, Butchko Rebuttal Testimony, p. 2, I. 16 — p. 3, I. 16. The Levee Districts prepare and implement their own master plans for stormwater functions. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 5, I. 1-11. The Levee Districts periodically inspect and maintain the stormwater infrastructure within their boundaries. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 5, I. 12 — p. 6, I. 13; 2007 Ex. MON 34, Butchko Rebuttal Testimony, p. 15, I. 17-23. It was the Levee Districts' position that they were unaware that the District had provided a few minimal maintenance activities in the Levee Districts over the years, and the Levee Districts would have performed these tasks had they been alerted to the issues. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 3. The Levee Districts would have preferred to undertake all this maintenance work themselves since the stormwater systems are an integral part of the flood control plans for the area. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 8, I. 10-21; see also 2007 Ex. MON 44, Responses of Levee District to Discovery Requests of AGC, Request No. 5. 173 The Levee Districts also review all development plans for new projects, or for expansion of existing facilities within the districts, for compliance with the Levee Districts' stormwater master plans in terms of both stormwater control and flood control. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 6, I. 15-19; p. 7, I. 2-5; 2007 Ex. MON 34, Butchko Rebuttal Testimony, p. 4, I. 1-9; see also 2007 Ex. MON 44, Responses of Levee District to Discovery Requests of AGC, Request No. 5. The District deferred to the Levee Districts' engineers to review and comment upon stormwater issues for such developments. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 7, I. 14-20. The District provided virtually no operation, maintenance or planning functions within the Levee Districts, even in the areas where the District claims it has accepted stormwater structures. 2007 Ex. MON 34, Butchko Rebuttal Testimony, p. 5, I. 17 - p. 6, I. 12. The Levee Districts purport that the District acknowledged that it had not accepted any infrastructure in some of the Levee Districts. 2007 Ex. MSD J, Transcript for Technical Conference April 19, 2007, p. 23. The District's proposed impervious charge was "designed to fund base services that are uniform in nature district -wide, and specifically, for the operation, maintenance, renewal, and replacement of existing infrastructure; in addition to that, certain regulatory required functions...." Id. at p. 22. The Levee District Intervenors stated that the evidence established that, at least with respect to the operation, maintenance, renewal, and replacement of existing infrastructures, the services the District would have provided were not uniform within and outside of the Levee Districts. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 4. The Levee Districts had provided all these services within their boundaries and they intended to continue to perform their 174 statutory functions to maintain the stormwater facilities in their boundaries. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 8, I. 7 — p. 9, I. 3; 2007 Ex. MON 34, Butchko Rebuttal Testimony, p. 6, I. 15-22. With respect to the regulatory services the District claimed it would provide with respect to water quality issues, the Levee Districts did not believe that there was any relationship between the District's district -wide regulation of water quality and the impervious area on individual tracts within the District's boundaries. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 4. Therefore, the Levee Districts did not believe that these expenses should have been appropriately included in the District's impervious user charge. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 4. It was the Levee District Intervenor's position that under the District's 2007 Proposal, property owners within the Levee Districts would pay the same impervious rate charges as all of the District's other customers who were receiving the full array of basic services from the District. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 9, I. 4-14. The increased fees would have imposed an excessive burden on property owners within the boundaries of the Levee Districts, with no correlating increase in services. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 9, I. 4-10; Ex. MON 34, Butchko Rebuttal Testimony, p. 8, I. 9-23. As a practical matter, the District's fee increase could have also hampered the Levee Districts' ability to fund necessary infrastructure improvements in the Levee Districts in the future. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 5. The owners in the Levee Districts 175 would likely oppose any future increases in charges for stormwater and flood protection. 2007 Ex. MON 34A, Hodges Rebuttal Testimony, p. 9, I. 20 — p. 1, I. 10. Since there were portions of the District's service area where properties receive no benefit of the stormwater system (i.e. they drain directly to the Mississippi, Meramec or Missouri Rivers) or there were other agencies that provide stormwater service (e.g., the Levee Districts), the District indicated that they intended to provide a credit policy and process for such customers if requested. 2007 Ex. L&B 37, Stannard Rebuttal Testimony, p. 15, 1. 8. The proposed credits were available to both residential and non- residential customers. 2007 Ex. MSD 1, CDM and Black & Veatch "Wastewater and Stormwater Rate Proposal" at 4-8 (Feb. 2007). The proposed credits were limited to 50% of the impervious charge based on previous calculations. Id. Any property that drains into the Mississippi, Missouri or Meramec Rivers would have been eligible for this 50% credit. Id. Second, any property that paid for stormwater service to another entity, such as the Levee Districts, would have been eligible for a credit based on a dollar -for -dollar reduction in the District's charge. Id. The District and the Levee Districts developed an Intergovernmental Cooperation Agreement that allowed a negotiated charge for each Levee District. 2007 Ex. MSD 42D, Hoelscher Surrebuttal Testimony, p. 7, I. 3. The Agreement outlined the relationship between the District and the Levee Districts and assigned specific responsibilities to each entity for stormwater-related functions within the Levee Districts. 2007 Ex. MSD L, Transcript for Technical Conference May 9, 2007, Hodges Testimony, p.41, I. 20 — p. 42, I. 1; 2008 Ex. MSD 2.18b-2.18g, Intergovernmental Cooperation Agreements. 176 The Levee Districts provided that the basic proposal was that the Levee Districts would be responsible for all stormwater functions within the districts. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 8. In return, the Levee Districts requested complete exemption from the impervious user fee. Id. The Levee Districts believed that this proposal was fair and reasonable, and comports with the Missouri Constitution, in that the owners within the Levee Districts would not be users of the District's services and thus would not pay the impervious user charge. Id. In addition, the agreement would avoid duplication of services and clarify the respective roles of these public entities with respect to stormwater management in these unique areas. Id. With regard to the areas that may receive stormwater service from another entity instead of the District, it would adjust its credit policy and calculate the actual cost of services not provided by the District in determining the amount of credit available. See 2007 Ex. MSD 1, page 4-8, section 4.4. An appropriate credit would be available for any regulatory or planning activities, as approved by the District, which were performed by another entity instead of the District. 2007 Ex. MSD 52, District Prehearing Conference Report, p. 7. This would result in a possible credit based on the actual cost of the services. Id. In addition, certain properties were exempted from paying the impervious charges. 2007 Ex. MSD 17G, Sedgwick Direct Testimony, p.. 9, I. 9. Those parcels that were specifically contained within public rights -of -way would not pay the impervious area charge. Id. The principle for this exclusion was that these impervious areas are part of the stormwater management network that conveys, transports, stores, treats, and discharges to waters of the State. Id. at I. 10. 177 In the 2007 Proceedings, it was the Levee District Intervenors' position that the proposed Stormwater Credit Policy (Section 4.4 of the District's Exhibit 1) does not remedy these deficiencies in the proposal for the primary reason that it is a discretionary credit rather than an attempt to tailor a rate that reflects the services, if any, the owners within the Levee Districts receive from the District. 2007 Ex. MON 34, Butchko Rebuttal Testimony, p. 10, I. 17 p. 11, I. 6. The availability and the amount of the credit were discretionary, and each property owner would have to pay the entire impervious rate charge and then apply for this discretionary credit. 2007 Ex. MSD J, Transcript for Technical Conference April 19, 2007, p. 29-30. Moreover, the credit was based upon the amount owners pay to the levee districts, which would vary for reasons related solely to the Levee Districts' financing structures, so that the amount the owners pay the District would bear no correlation to the services they received from the District. 2007 Ex. MON 34, Butchko Rebuttal Testimony, p. 10, I. 17 — p. 12, I. 5. It was the Levee Districts' position that the proposed user fee to the owners within the Levee Districts did not represent a fee that bears a direct relationship to the services, if any, that the District was providing to owners in the Levee Districts. 2007 Ex. MON 56, Levee District Prehearing Conference Report, p. 7. On July 12, 2007, the District and Levee Districts submitted, as an Exhibit to the 2007 Proceedings, the Levee District Agreements purporting to resolve the issues with the Rate Change Proposal raised by the Levee Districts in the 2007 Proceedings. See 2007 Ex. MON 64. The Rate Commission recommended approval of the Levee District Agreement. 178 The Rate Commission believed that the record in the 2007 Proceedings supported a finding that the terms and conditions of the Levee District Agreement would result in rates in the 2007 Rate Change Proposal that imposed a fair and reasonable burden on the affected classes of ratepayers. The Rate Commission, after consideration of all facts and circumstances disclosed in the 2008 Proceedings, finds and determines that the 2008 Proposed Rate Change imposes a fair and reasonable burden on all classes of ratepayers. 179 MINORITY REPORTS COMMISSIONERS BROCKMANN, HARRIS AND TOENJES SUBMIT THIS MINORITY REPORT REGARDING BOND FUNDING In the 2007 Rate Case, serious consideration was given to the Pay -As -You -Go option as compared to the bonding option. Late in the deliberation process, legal action against MSD was initiated by the EPA. A majority of the Rate Commissioners agreed at that time that the most appropriate course of action was to fully fund these much needed improvements as soon as possible while retaining critical future bonding capacity at a very high level, awaiting the outcome of the litigation. The uncertainty of the amount of investment that may be required as an outcome of the litigation in combination with the uncertainty of voter approval of any such additional bonding capacity are two great unknown factors. Fully funding the improvements needed currently by utilizing the Pay -As -You -Go option is the prudent action to take in the face of this looming large investment. District customers have been paying below average wastewater and stormwater rates for many years and enjoying high quality service. In some ways, these low rates have resulted in the current non-compliance with federal regulations. Increasing to a rate structure that fully funds the services and necessary improvements to meet current environmental standards is prudent and fair. Deferring these expenses to future generations through bonding at this time will only temporarily postpone the time when all District customers will be faced with much higher rates, possibly imposed by EPA or the courts. In addition, utilizing bonding at this time will result in some $400 million of unfunded projects due to bond interest to retire the bonds. 180 For these reasons, we believe that the current rate proposal with the utilization of bond financing does impair the ability of the District to comply with applicable federal or state laws or regulations as amended from time to time. 181 Respectfully submitted, this 21st day of March, 2008, by the Rate Commission of the Metropolitan St. Louis Sewer District. William Allen Nancy Bowser Paul Brockmann Charles Davis Virginia Harris Daniel P. Murphy William Peick Willard Reeves LASHLY & BAER, P.C. John Fax Arnold Lisa O. Stump Kathryn B. Forster 714 Locust Street St. Louis, Missouri 63101 (314) 621-2939 — Telephone (314) 621-6844 — Fax Attorneys for The Rate Commission of the Metropolitan St. Louis Sewer District Evelio Sardina Mike Schoedel John L. Stein Steven R. Sullivan Leonard Toenjes George D. Tomazi Richard Ward OF COUNSEL RAFTELIS FINANCIAL CONSULTANTS, INC. William Stannard Thomas Beckley 3013 Main Street Kansas City, Missouri 64108 (816) 285-9020 — Telephone (816) 285-9021 — Fax Rate Consultant for The Rate Commission of the Metropolitan St. Louis Sewer District 182 PROCEEDINGS INDEX REPORT OF THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT TO THE BOARD OF TRUSTEES OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT UPON THE COMBINED WASTEWATER AND STORMWATER RATE CHANGE PROPOSAL March 21, 2008 Exhibit Index/Document Title Tab Number Number MSD 2.1 Proposed Rate Change Transmittal Letter from Jeff Theerman to Board of Trustees 1 MSD 2.1 a Proposed Rate Change Transmittal Letter from Jeff Theerman To Rate Commission 2 MSD 2.2 Proposed Rate Change Document dated January 18, 2008 3 MSD 2.3 Proposed Rate Change Appendix 4 MSD 2.3a Table of Contents to Appendix MSD 2.3b Section I of Appendix -Exhibit Index to Deliberations ending August 13, 2007 MSD 2.3c Section II of Appendix -Journal of District Board action pertinent to the Proposed Rate Change MSD 2.3d Section III of Appendix -Rate Tables ALT I — Rate Commission Recommendation Report August 13, 2007 MSD 2.3e Section IV of Appendix -Rate Tables ALT II — Rate Change Introduced By District Board October 11, 2007 MSD 2.3f Section V of Appendix -Rate Tables ALT III — MSD Proposed Rate Change January 18, 2008 MSD 2.4 MSD Audited Financial Statement as of June 30, 2007 5 MSD 2.5 MSD Comprehensive Annual Financial Report (CAFR) as of June 30, 2007 6 MSD 2.6 Direct Testimony of Jeffrey Theerman, MSD 7 MSD 2.6a Table: Wastewater Program Capital Financing 8 MSD 2.6b Direct Testimony of Karl Tyminski, MSD 9 MSD 2.6c Direct Testimony of Janice Zimmerman, MSD 10 MSD 2.6d Table: Impact of Impervious Stormwater Rate — Major Customers 11 183 Exhibit Number MSD 2.6e MSD 2.6f MSD 2.6g MSD 2.6h MSD 2.6i MIEC 2.7 MEG 2.8 L&B 2.9 MSD 2.10 MSD 2.10a MSD 2.10b- MSD 2.10b.45 MSD 2.10c MSD 2.10d MSD 2.10e MSD 2.10e.1 MSD 2.10e.2 MSD 2.10e.3 MSD 2.10e.4 MSD 2.10e.5 MSD 2.10f MSD 2.10f.1 MSD 2.10h- MSD 2.10h.22 MSD 2.10i MSD 2.11 Index/Document Title Number Tab Table: Impact of Impervious Stormwater Rate — Hospital & Churches 12 Summary of Revisions Since Prior Proposed Rate Change 13 Direct Testimony of Keith Barber, Black & Veatch 14 Table: Typical Metered Low -Income Residential Bills 15 Table: Proposed New $275 Million Debt issuance 16 Application to Intervene MIEC 17 Application to Intervene MEG 18 First Discovery Request of the Rate Commission to MSD dated February 8, 2008 19 Cover letter with MSD Responses to Rate Commission's First Discovery Request dated February 18, 2008 20 MSD Responses to Rate Commission's First Discovery Request dated February 18, 2008 21 Rate Change Development Materials 22 Debt Management Policy approved by MSD Board on April 1, 2004 Customer Advocacy Groups Public Comments from November 10, 2007 MSD Board Meeting 24 MSD Low Income Program Brochure 25 MSD Customer Rate Brochure 26 MSD Low Income Program Newspaper Advertisement._ ..... ....... 27 MSD Metered and Unmetered Customer Rate Brochure 28 MSD Low Income Program Projection 29 MSD Low Income Quarterly Updated — MSD Board Finance Committee dated February 12, 2008 30 EPA letter dated October 3, 2006 to MSD 31 MoDNR letter dated November 9, 1993 to MSD 32 USA and State of Missouri v. MSD-Claims answers and pleadings filed 33 2006 US Census Data for City of St. Louis 34 Cover letter with MSD Amendment to Direct Testimony filed on February 25, 2008 35 184 23 Exhibit Index/Document Title Tab Number Number MSD 2.11a MSD Amendment to Direct Testimony filed on February 25, 200836 MSD 2.11b Low Income Assistance Program (LIAP) Implementation Plan 37 MIEC 2.12 Rebuttal Testimony of Michael Gorman filed on behalf of MIEC on February 25, 2008 38 L&B 2.13 Rebuttal Testimony of William Stannard filed on behalf of the Rate Commission on February 25, 2008 39 MEG 2.14 Rebuttal Testimony of Billie LaConte filed on behalf of MEG on February 25, 2008 40 L&B 2.15 Second Discovery Request of the Rate Commission to MSD dated February 27, 2008 41 MSD 2.16 MSD Prehearing Conference Summary dated March 5, 2008 42 MSD 2.17 Lashly & Baer, P.C. and Raftelis Financial Consultants, Inc.'s Prehearing Conference Summary dated March 5, 2008 43 MSD 2.18 Cover letter with MSD Partial Responses to Rate Commission's Second Discovery Request dated March 5, 2008 44 MSD 2.18a MSD Partial Responses to Rate Commission's Second Discovery Request dated March 5, 2008 45 MSD 2.18b Intergovernmental Cooperation Agreement between MSD and Earth City Levee District 46 MSD 2.18c Intergovernmental Cooperation Agreement between MSD and Howard Bend Levee District 47 MSD 2.18d Intergovernmental Cooperation Agreement between MSD and Riverport Levee District 48 MSD 2.18e Intergovernmental Cooperation Agreement between MSD and Monarch -Chesterfield Levee District 49 MSD 2.18f Intergovernmental Cooperation Agreement between MSD and Missouri Bottoms Levee District -Hazelwood Subdistrict 50 MSD 2.18g Intergovernmental Cooperation Agreement between MSD and Missouri Bottoms Levee District -Bridgeton Subdistrict 51 MSD 2.18h Cover letter with MSD Partial Responses to Rate Commission's Second Discovery Request dated March 10, 2008 52 MSD 2.18i MSD Partial Responses to Rate Commission's Second Discovery Request dated March 10, 2008 53 MSD 2.18j MSD Rate Statistical Summary by Utility/Bill Class 54 MSD 2.19 Cover letter with MSD Prehearing Conference Report dated March 12, 2008 55 185 Exhibit Index/Document Title Tab Number Number MSD 2.19a MSD Prehearing Conference Report dated March 12, 2008 56 MSD 2.19b Table: Impact on Average Monthly Bills Residential and Multi -Family Customers 57 MSD 2.19c Table: Impact on Average Monthly Bills Non -Residential and Extra Strength Customers 58 MSD 2.19d MSD Response to 2007 Exhibit 20 59 MSD 2.19e Rate Model Tables 60 MSD 2.20 Cover Letter with MSD Amended Response to Rate Commission's Second Discovery Request dated March 12, 2008 61 MSD 2.20a MSD Amended Response to Rate Commission's Second Discovery Request dated March 12, 2008 62 MSD 2.20b 2002 AMSA Financial Survey 63 MSD 2.21 MSD Final Closing Arguments dated March 13, 2008 64 MEG 2.22 Intervenor MEG Prehearing Conference Report dated March 12, 2008 65 MIEC 2.23 Intervenor MIEC Prehearing Conference Report dated March 12, 2008 66 L&B 2.24 Raftelis Financial Consultants and Lashly & Baer's Prehearing Conference Report dated March 12, 2008 67 MIEC 2.25 Intervenor MIEC Closing Statement 68 MSD 3.1 Rate Commission Submittal Exhibit Index 69 MSD 3.2 Cover Letter with MSD Direct Testimony dated January 24, 2008 70 MSD 3.3 Transcript dated February 20, 2008 - Technical Conference for Direct Testimony 71 MSD 3.3a Transcript dated February 27, 2008 — Public Hearing 72 MSD 3.3b Transcript dated February 29, 2008 — Technical Conference for Rebuttal Testimony 73 MSD 3.3c Transcript dated March 5, 2008 — Prehearing Conference 74 MSD 3.3d Transcript dated March 10, 2008 — Public Hearing 75 MSD 3.3e Transcript dated March 13, 2008 — Public Hearing 76 MSD 3.3f Transcript dated March 15, 2008 — Public Hearing 77 186