HomeMy Public PortalAboutExhibit RC 136 - Rate Commission Prehearing Conference ReportBEFORE THE RATE COMMISSION OF THE
METROPOLITAN ST. LOUIS SEWER DISTRICT
For Consideration of the February 26, 2015
Wastewater and Stormwater Rate Change
Proposal by the Rate Commission of the
Metropolitan St. Louis Sewer District
PREHEARING CONFERENCE REPORT OF
BLACK & VEATCH, RATE CONSULTANT,
AND LASHLY & BAER, P.C.,
LEGAL COUNSEL TO THE RATE COMMISSION
Black & Veatch and Lashly & Baer, P.C., as Rate Consultant and Legal Counsel,
respectively, to the Rate Commission of the Metropolitan St. Louis Sewer District ("Rate
Commission"), respectfully submit this Prehearing Conference Report regarding the Wastewater
and Stormwater Rate Change Proposal ("Rate Change Proposal") submitted to the Rate
Commission by the Metropolitan St. Louis Sewer District (the "District") on February 26, 2015,
Ex. MSD 1.
The Rate Commission is to determine whether the Rate Change Proposal and any
Alternative Proposal meets the criteria for recommendation contained in §§ 7.040 and 7.270 of
the Charter Plan.
The Prehearing Conference Report is to identify, define, resolve or settle the issues raised
by the prepared testimony and to describe the participant's position, if any, on each of the criteria
and factors for recommendation.
THE DISTRICT RATE CHANGE PROPOSAL
The District proposes (i) the use of $900,000,000 in bond financing and $440,000,000 in
cash financing to fund its Capital Improvement and Replacement Program ("CIRP") through
FY2020; to provide the funds needed to comply with regulatory requirements relating to
deficiencies in the District's wastewater system, including sewers, pump stations, and treatment
plants; and to satisfy certain requirements of the Consent Decree between the District and the
Environmental Protection Agency ("EPA"); and (ii) the use of a District -wide tax structure to
replace the multi -layered subdistrict taxes now assessed on the real estate value of ratepayers'
property to cover the cost of stormwater maintenance services, capital projects and associated
Operations and Maintenance.1
It is the District's position that the Rate Change Proposal has been carefully developed
and the Rate Change Proposal meets the requirements of the Charter. See Ex. MSD 131.
STANDARD FOR RECOMMENDATION
Upon receipt of a Rate Change Notice from the District, the Rate Commission is to
recommend to the District's Board changes in a 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
1 The Rate Change Proposal relies upon certain assumptions with respect to conditions, events,
and circumstances that may occur in the future. Although considered reasonable, some of these
anticipated conditions, events and circumstances may not occur resulting in potential
differences in revenues and costs than currently projected.
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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.
The Prehearing Conference Report is to identify, define, resolve or settle the issues raised
by the prepared testimony and to describe the participant's position, if any, on each of the criteria
and factors for recommendation.
The issues raised by the prepared testimony relate primarily to the criteria set forth in
Section 7.270(v) of the Charter — whether the Rate Change Proposal imposes a fair and
reasonable burden on all classes of ratepayers.
The Rate Commission, in its Rate Recommendation Report, will be required to provide
affirmative support that its rate recommendation meets each of the criteria. Although the issues
herein are discussed in the context of compliance with Section 7.270(v), the issues may also
affect the discussion of compliance with the other factors and criteria in Sections 7.040 and
7.270.2
WASTEWATER RATE CHANGE PROPOSAL
The District proposes to finance the required wastewater capital improvements by a
combination of wastewater user charge revenues, available fund balances, revenue bond
proceeds, Missouri Clean Water State Revolving Fund loan proceeds, grants and contributions,
other operating revenues, and interest income. The impact of the Rate Change Proposal on
wastewater rates if principally funded by bond financing is set forth in Table 4-23 of Exhibit
MSD 1. In the event that the voters of the District do not approve $900 million in bond
2 For example, if the Rate Commission finds that the rates in the Rate Change Proposal are so
unfair and unreasonable as to be excessive, there may be an issue under the Missouri
Constitution thereby affecting whether the Rate Change Proposal is consistent with existing law.
Section 7.270(i).
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financing for a portion of the CIRP, the District proposes cash financing in order to comply with
the terms of the Consent Decree. Ex. MSD 1, Section 4.11. The financial analysis supporting
the development of the alternative cash financing rate is contained in Table 4-24 in Ex. MSD 1.
Table 6-2 in the Rate Change Proposal presents projected wastewater bills based on the
authorization of $900 million in revenue bonds. Ex. MSD 1. The typical customer bill of 7 ccf
per month is shown on line 3, with the annual percentage change on line 4. Table 4-25 presents
the same information with the assumption of no further bond authorization. Id.
Financing Method
Revenue Bonds. The District's CIRP projects are primarily funded by the issuance of
senior revenue bonds and State Revolving Fund loans while the smaller remaining work are
cash -funded basis (Pay As You Go). Debt financing of the majority of the CIRP allows the
financing burden to be appropriately shared by both present and future users benefiting from the
wastewater system improvements. Capital improvements routinely incurred each year as
determined by the District's comprehensive asset management program are more appropriately
financed with Pay As You Go revenue generated from annual wastewater service revenue. Ex.
MSD 1, § 4.6.1; Direct Testimony of Tim R. Snoke, Ex. MSD 3E, p. 3,11. 10-12; p. 4,11. 1-24.
Under the Rate Change Proposal, new senior revenue bonds with a total par value of
$1.07 billion and $180 million in additional State Revolving Fund loans are expected to be
issued between FY2015 and FY2020 to provide funding for the CIRP. At the end of FY2016, it
is estimated the District will have issued approximately 70% of its current debt authorization of
$945 million. This will require the District to obtain voter approval for authorization of $900
million of additional debt financing prior to FY2018. The District plans to take advantage of the
State Revolving Fund loan program but expects to be limited to $25 million each year from
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FY2017 through FY2020. In total, cash financing (Pay As You Go funding) is expected to fund
26.3% of the total CIRP between FY2015 and FY2020. Ex. MSD 1, Section 4.6.1.
The District anticipates receiving grants and contributions of $3.5 million between
FY2015 and FY2020. Id.
The projected amortization of future revenue bond issues determined by PFM, the
District's financial advisor, is based on current market conditions and certain assumptions
regarding future market conditions. Proposed revenue bond issues will be governed by
supplemental bond ordinances incorporating the bond covenants set forth in the Master Bond
Ordinance. Generally, future senior revenue bonds are assumed to have a 30-year term and
annual coupon rates between 5.0% and 5.5%. Future State Revolving Fund loans issued to fund
the CIRP are expected to have 20-year terms and a net effective annual interest and
administration cost of about 3% per year. In addition to the interest cost of future debt, the
District will incur issuance costs with each senior revenue bond issue and State Revolving Fund
loan, and be required to maintain a debt service reserve fund for the senior revenue bonds. A
Debt Service Reserve Fund will be established in an amount equal to the lesser of (i) the
maximum amount of principal or an interest due in any District fiscal year on all outstanding
senior revenue bonds; (ii) 125% of the average annual debt service on outstanding senior
revenue bonds; or (iii) an amount not in excess of 10% of the par value of the outstanding
senior revenue bonds. See Ex. MSD 1, § 4.6.2.
Based on these assumptions, the total annual debt service during the forecast period for
existing debt and future proposed debt is expected to increase from $65.5 million in FY2015 to
$146.1 million in FY2020. Id.
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It is the District's position that the Rate Change Proposal is necessary to reflect: (i) the
level of cash balances and resulting bond coverage ratios required through FY2020 to minimize
a possible deterioration in the District's bond rating; (ii) the generation of sufficient revenue to
fund the CIRP required to address the Consent Decree; and (iii) the District's debt service
obligations.
Pay As You Go Funding. Intervenor Missouri Industrial Energy Consumers ("MIEC")
recommends a modification to the amount of cash or Pay As You Go funding for the District's
CIRP during the four-year period FY2020-FY2023 which represents four of the highest
projected capital spend years in the Consent Decree compliance period, and MIEC recommends
increasing the amount of CIRP funded by debt to at least 80% which is higher than the District
target of 75% debt. MIEC's position is that after the FY2020-FY2023 peak period CIRP, it
would be reasonable to set the Pay As You Go percentage based on what is required to produce
target debt service coverage ratios and manage rate impacts. Ex. MIEC 102, Rebuttal Testimony
of Michael P. Gorman, p. 5, 11. 11-21; Ex. MSD 121, Testimony of Michael P. Gorman, Second
Technical Conference, p. 35,11. 16-25; p. 36,11. 1-25; p. 37; 11. 1-25; p. 38,11. 1-8.
Based on MIEC' s revised cost of service and financial outlook, the District will maintain
total debt service coverage of at least 1.8x, and senior debt coverage exceeding 2.45x. Further,
the District will always maintain considerably more cash on hand than needed to meet 60 days of
next year's Operation and Maintenance expenses and the cash reserve target for the District.
With these credit metrics, the proposed revised rates will support the District's Aa1/AAA/AA+
bond ratings from Moody's, Standard & Poor's, and Fitch, respectively, and continued access to
low cost revenue bond funds needed to support the District's major CIRP user rates. Id. at p. 8,
11. 9-13.
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The Rate Consultant to the Rate Commission believes that the District's policy of 30%
cash financing provides for a reasonable mix of cash and debt financing, and is consistent with
the policies of other similar utilities. Ex. RC 101, Rebuttal Testimony of Pamela R. Lemoine, p.
9, 11. 9-14; p. 10, 11. 12-22. The Rate Consultant believes that the District's policy to maintain
senior debt service coverage of 2.5 times or greater and total debt service coverage of 1.6 times
or greater is a valid and important metric, particularly in light of the District's current and
anticipated future heavy debt profile. Id. at p. 19,11. 10-12.
Intervenor Home Builders Association of St. Louis & Eastern Missouri ("HBA") has not
filed testimony with respect to this issue.
Debt Level. The Rate Consultant observes that the Rate Change Proposal requires
substantial additional debt to be incurred over a short period of time, with continued issuance of
debt in FY2021 through FY2024 and beyond in order to continue to fund the projects required by
the Consent Decree. As a result, the District's total outstanding debt, as outlined in the District's
Rate Model (Ex. MSD 79), is expected to increase from $1,126,611,100 in FY2015 to
$2,821,292,412, an increase of 250 percent over the nine-year period. See Ex. PRL 2. This
results in an overall Debt Per Capita level that increases from $854 in FY2015 to $2,139 in
FY2024. Bond rating agencies consider the overall debt burden of a utility as one of several
factors when determining a utility's debt rating. While no single criteria drives a utility's credit
rating, the Rate Consultant testified that the high level of debt required by the District to
complete the CIRP is a concern. Ex. RC 101, Rebuttal Testimony of Pamela R. Lemoine at p.
11,11. 10-24; p. 12,11. 1-2.
The Rate Consultant expresses concern that annual debt service, as a percent of the
District's total operating budget (Operation and Maintenance expenses plus Debt Service,
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excluding cash financed capital), is projected to increase from 27.9 percent in FY2015 to 50.3
percent in FY2024, as shown in Exhibit PRL3. The higher the District's debt service
requirements, the less ability it has in reducing costs if revenues decline. Additionally, it is more
difficult to maintain desired debt service coverage levels. Based on the District's debt service
schedule for existing and proposed debt issuances through FY2024, as summarized in the
District's Rate Model, the level of annual debt service is not anticipated to drop substantially
until many years after FY2024, which means that additional bond issuances to finance the
remainder of the CIRP will result in a further increase in the overall debt burden of the District.
Ex. RC 101, Rebuttal Testimony of Pamela R. Lemoine, at p. 12,11.4-11; p. 13,11. 1-6.
Intervenors MIEC and HBA have not filed testimony with respect to this issue.
Operation and Maintenance
The District's ratepayers are classified into three customer classes: single family, multi-
family and non-residential. The District's wastewater revenue reflects the assessment of the
specific rate components for each customer class. See Ex. MSD 1, § 4.2.
The historical and projected average numbers of wastewater customers served by the
District are provided in Figure 4-1 and Table 4-2 of Exhibit MSD 1. The projected change in
the number of customers is based on a 10-year average historical trend using a US Census
based cohort -component methodology. As indicated in Table 4-2, the number of total customer
accounts declined by an average of 0.26% annually between FY2011 and FY2014. Based on
this trend, the number of customer accounts is projected by the District to decline by 0.1 %
annually throughout the forecast. Id.
Contributed Volume. Billed wastewater volume is the estimated amount of water
volume contributed to the sewer system by District customers. This volume is measured on
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either a metered or unmetered basis. The amount of contributed wastewater volume from
metered customers is measured in Ccfs (100 cubic feet). The volume from unmetered
residential customers is determined based upon estimates of indoor water usage per fixture and
the number of rooms within these properties. See Ex. MSD 1, § 4.3.
Billable wastewater volumes for all metered residential customers are determined based
on water used during the period best equated to contributed wastewater volume. The District
defines its best equated period as a 90 to 92-day period of water usage between November and
April of the preceding winter period. Id.
The contributed wastewater volume of all non-residential customers is measured on a
metered basis and billed based on actual quarterly usage less applicable exemption allowances
for any water that does not enter the sewer system. Metered multi -family customers are either
billed based on actual annual water usage or the average annual water usage established during
the best equated period, depending on the billing method selected by each multi -family
customer. The selected billing basis is permanent and cannot be changed. Id.
The projections of contributed volumes are based on the historical trends in billed
volumes and number of customers per customer class. Since FY2006, the District has
experienced annual reductions in total billed volumes of approximately 3.0%, which is a
cumulative 24% reduction. The decrease in billed wastewater volume is due in part to
conservation measures, increased efficiency of appliances and fixtures and the impact of the
national economy. Future billable wastewater volumes are expected to gradually decrease from
FY2015 volumes by an overall average of 0.91 % annually. Id.
The results of the District analysis outlined in Appendix 7.1.2 provide the basis for the
District's projected contributed wastewater volume by customer class, as summarized in Table 4-
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3 of the Rate Change Proposal. The analysis reflects the fact that the District has experienced
declining wastewater volume that is expected to continue throughout the Rate Change Proposal
period MSD 1, Appendix 7.1.3, Graph 1.1 MSD Projected Usage.
The District's experience of declining contributed wastewater volume per customer is
consistent with wastewater utilities across the United States. This decline is due to several
factors, including enhanced efficiency of appliances and plumbing fixtures, economic conditions,
and general awareness regarding the efficient use of water conservation. The Rate Consultant
believes that the District's forecast of continued decline in wastewater volume throughout the
Rate Change Proposal period is reasonable. Ex. RC 101, Rebuttal Testimony of Pamela R.
Lemoine at p. 15,11. 13-20.
Intervenor MIEC, however, believes that the District's proposed increases in its
wastewater rates are unreasonable, in part because the District appears to have made an error in
recording the wastewater user charges listed in its Rate Change Proposal and the wastewater
user charges used to produce its Wastewater Financial Plan forecast because the proposed
wastewater user charges shown in Exhibit MSD 1, Table ES-2 are higher than the rates used in
the financial plan. A comparison of the wastewater user charges listed in Exhibit MSD 1, Table
ES-2 and those used to forecast wastewater revenue in MSD's financial plan is shown on
Schedule MPG-1.
It is Intervenor MIEC's view that the District's proposed wastewater charges are
unreasonable because they are based on imbalanced or unreasonable assumptions. The District
financial forecast summarized on Table 4-10, page 4-22 of Exhibit MSD 1 understates revenue at
current rates because it reflects a decrease in number of customer accounts, and an unreasonably
large projected continued decline to volume use per customer concerning wastewater volume
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sales. This wastewater volume sales understatement also results in an inflated wastewater
volume charge because the District is proposing to spread its cost of service over an
unreasonably low estimate of its wastewater volume sales. See Ex. MIEC 102, Rebuttal
Testimony of Michael P. Gorman, p 4,11. 1-14; p. 5,11. 1-10. See also Ex. MSD 121, Testimony
of Michael P. Gorman during Second Technical Conference, p. 29, 11. 2-25; p. 30, 11. 1-12.
Compare Ex. MSD 127, Testimony of Teresa Bellville, Third Technical Conference, p. 96, 11.
17-25 top. 101.
The Rate Consultant testified that the District's experience of declining contributed
wastewater volume (per customer) is consistent with wastewater utilities across the United
States. This decline is due to several factors, including enhanced efficiency of appliances and
plumbing fixtures, economic conditions, and general awareness regarding the efficient use of
water (conservation). Based upon Ms. Lemoine's review, it is the Rate Consultant's opinion that
the District's forecast of continued decline in wastewater volume throughout the Rate Proposal
period is reasonable. Id. at p. 15,11. 13-20.
Intervenor MIEC expresses concern regarding the District's projections which shift more
wastewater cost allotted on volume to metered customers from nonmetered customers. The shift
could result in the District collecting more revenue if its projection of volume to metered
customers in St. Louis County understated accurate meter billable volume. By understating
billable metered customers, the District has the opportunity to collect more waste water revenue
over the forecasted period. In contrast, by understanding the amount of volume for nonmetered
customers in the City of St. Louis, the District does not have the same opportunities as
nonmetered customers are charged a fixed rate. Nonmetered customers are not impacted by
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actual waste water volume. Ex. MSD 121, Testimony of Michael P. Gorman, Second Technical
Conference, p. 43,11. 15-25; p. 44,11. 1-20.
Intervenor HBA and the Rate Consultant have not filed testimony with respect to this
issue.
Bad Debt Allowances. The District issues a monthly bill to approximately 424,000
commercial and residential accounts. The bill has a Wastewater User Charge which includes a
base charge and a volume charge based on either the amount of water used at an address or, if
no water meter is in use, the number of rooms, baths water closets, and showers in the building.
Commercial properties are also billed a Compliance Charge based on the type of wastewater
discharged to the public sewer system. The District policy to bill customers for services
provided in the previous month can be found in the Wastewater User Charge Ordinance which
is included in Exhibit MSD 19, page 348; section 6.
Since June 30, 2014, the District has determined the Bad Debt Reserve by using billed
revenue to record the reserve. The District changed the allowance calculation using 2.15% of
the wastewater sewer service billed revenue. The collection trend demonstrated that 98% of the
billings were collected within five years. Id.
The District made an adjustment for years 2006 through June 2014 billing cycle using
2.15% for the billings on wastewater sewer service charges. In addition, for the years 1981 to
2005, the District chose to record the uncollected balance which was less than the 2.15%.3 See
Ex. MSD 1, Appendix § 7.3. The District's actual bad debt expense, write-offs, year-end
3 In FY2020, the Stoiiiiwater service charge will be adjusted using the same process to calculate
the reserve balance. This adjustment is planned to be made in December FY2015. See Ex. MSD
1, Appendix § 7.3.
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balances, actual expenses, delinquency aging, and Remediation Plan for FY2010-FY2014 is
shown on Ex. MSD 840.
Intervenor MIEC observes that historically, the District's bad debt provision has been
approximately equal to 1.0% of its wastewater usage charges. For the forecast period, however,
the District assumed that the bad debt provision as a percentage of wastewater charges would
increase to 1.5%. This significantly increases the bad debt provision. Intervenor MIEC
recommends maintaining the bad debt provision equal to 1.0% of wastewater bills, consistent
with historical actual costs. Id. at p. 6,11. 1-12.
The District, however, inflated the Bad Debt Reserve not on a historical basis. It did so
because it did not consider a Resistance Factor. The financial advisors of the District did not
recommend use of a Resistance Factor. Rather, it recommended application of a Bad Debt
provision of 1.5% to future revenue projections so that higher cash balances would be
maintained to enhance the District's bond rating. Ex. MSD 3G, Direct Testimony of Teresa A.
Bellville, p. 5,11.2-5.
Intervenor HBA and the Rate Consultant have not filed testimony with respect to this
issue.
Utility Costs. Inflation assumptions are used in the Rate Model to account for
anticipated price increases for the goods and services for operating and maintenance expenses
as well as the construction, improvement, and replacement program expenses. Ex. MSD 1,
Appendix 7.1.1; Direct Testimony of Teresa A. Bellville, Ex. MSD 3G, p. 7,11. 7-9. Appendix
7.1.1 of the Rate Change Proposal, Exhibit MSD 1, describes the sources for developing the
inflation assumptions. Most accounts were inflated using the Core PCE Price Index as
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published by the Congressional Budget Office's The Budget and Economic Outlook: 2014 to
2024.
It is Intervenor MIEC's opinion that the utility expense escalation rate of 5.5% a year
should be decreased to 3.0% every two years, starting in FY2016 and utility expense escalation
rate be based on Ameren Missouri's projected increase in its electric utility rates, and consider
offsets to utility expense caused by declining volume sales by the District. This adjustment also
recognizes utilities' typical adjusted prices over two years rather than every year. Ex. MIEC
102, Rebuttal Testimony of Michael P. Gorman at p. 7,11. 1-12.
Intervenor HBA and the Rate Consultant have not filed testimony with respect to this
issue.
Late Charges. Intervenor MIEC believes the District's projected revenue from Late
Charges should increase in accordance with the increase in its projected customer bills. The Late
Charge rate is based on the principal amount of late payments. The District's projected
escalation of its Late Charge Revenue was revised from 1.0% per year as proposed by the
District up to the projected increase in its proposed wastewater user charges over the forecast
period. Ex. MIEC 102, Rebuttal Testimony of Michael P. Gorman, at p. 6, 11. 13-18. Compare
Ex. MSD 127, Testimony of Teresa Bellville regarding bad debt and collection process, pp. 93-
94.
Waste Hauler Permit Revenue. Intervenor MIEC believes Waste Hauler Permit revenues
from the District's projected level of $670,000 per year over the forecast period should be
increased to $1 4 million —the average of the actual amount of other revenues incurred during
2010-2015 (excluding 2014 because it appeared to be an outlier year). Id. at p. 6, 11. 19-24.
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Affordability. The alternative rates to finance the entire CIRP are presented by Table 4-7
of Ex. MSD 1, Rate Change Proposal. The resulting rate components change to those shown in
Table 4.24 of Ex. MSD 1, Rate Change Proposal. This change results in a 9.8% increase in the
FY2017 average single family residential monthly bill, a 65.0% increase in FY2018, a 13.1 %
increase in FY2019 and a 15.0% increase in FY2020. The typical single family customer bill
throughout the Rate Change Proposal timeframe is presented in Figure 4-9 of Ex. MSD 1, and
shows the impact of not using debt financing for the CIRP beyond what has already been
authorized. See also Ex. MSD 96, Transcript for Technical Conference for Direct Testimony,
April 8, 2015; Testimony of Brian Hoelscher, p. 32,11.20-25; p. 33,1. 1.
The US Census Bureau reports that the Median Household Income (MHI) for St. Louis
City (2009-2013) is $34,582 and St. Louis County (2009-2013) is $58,910. Approximately 21%
of MSD customers live in the City of St. Louis and 79% live in the County of St. Louis. These
data correspond to a weighted average MHI of $53,801 for the MSD service area. Assuming no
increase in these MHI values, the wastewater bills as a percentage of MHI on July 1, 2017,
would be 1.11% if the $900 million bonds were authorized and 1.65% without bond
authorization. Ex. MSD 99A, Response to Question 16 of the Fourth Discovery Request of the
Rate Commission.
The District states that the average wastewater bill as a percentage of MHI on June 30,
2020 (a) is 1.36% if the $900 million bonds were authorized; and (b) 2.14% if the $900 million
bonds were not authorized. See Ex. MSD 114A, Response to Question 5 of the Fifth Discovery
Request of the Rate Commission.
Exhibit PRL4 summarizes the projected annual bill for an average residential customer
(7 CCF/month). Based on the weighted median household income for the Service Area, as
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estimated by the District, an average residential customer is anticipated to pay 1.36 percent of
Median Household Income (MHI) by FY2020, and just over 2 percent by FY2024. As a frame
of reference, the EPA considers 2 percent of MHI as a threshold beyond which it considers a
utility "heavily burdened." In addition, the anticipated double digit increases in all but one year
result in a cumulative increase of 88.1 percent at the end of the Rate Change Proposal Period
(FY2020), and nearly 181 percent by FY2024. This rate of increase can be expected to be
difficult for low income and lower middle class income families to absorb.
The Rate Consultant testified that while certain low income customers will have access to
the District's Customer Assistance Program, customers who are not eligible for the program will
have difficulty paying their bills over time, as overall rates and monthly bills increase. Ex. RC
101, Rebuttal Testimony of Pamela R. Lemoine, at p. 17,11. 12-18; p. 18,11.2-8.
Intervenors MIEC and HBA have not filed testimony on this issue.
STORMWATER RATE CHANGE PROPOSAL
District stormwater revenue is now derived principally from subdistrict ad valorem
taxes. Existing stormwater rates and taxes levied by the District are presented in Table 5-1 of
Exhibit MSD 1. Stormwater revenues consist of monthly flat rate user charges and ad valorem
taxes for District -wide stormwater costs as well as other subdistrict specific taxes which fund
capital projects and Operations and Maintenance activities specific to each subdistrict's service
area. On March 8, 1988, the voters approved stormwater service charge's pursuant to
Ordinance No. 7358, adopted December 23, 1987. In addition, flat rate charges of $0.24 per
month for residential and non-residential properties and $0.18 per unit for multi -residential
were also approved. Ex. MSD 1, § 5.2.
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The application of stormwater ad valorem taxes varies by service area. All customers
are charged the flat rate user charges. All property in the District service area is charged
$0.0197 per $100 of assessed value District -wide tax. Only customers within the District's
original service area are charged the additional $0.0682 stormwater Operations and
Maintenance tax. Operations, Maintenance and Capital Improvement taxes are levied for
specific subdistricts within the original service area and range from $0.05 to $0.10 per $100 of
assessed property value. Id. Ex. MSD 3C, Direct Testimony of Richard L. Unverferth, p. 8, 11.
4-14.
The District is proposing to seek voter approval to assess a District -wide stormwater tax
of $0.10 per $100 of assessed property value. As part of the new stormwater tax:
• The Operation and Maintenance Tax will be eliminated;
• The subdistrict specific Operations, Maintenance and Capital Improvements
taxes will be eliminated;
• The flat rate charges will be eliminated; and
• The ad valorem tax of $0.197 per assessed valuation will remain in place to
provide the District with the necessary funding to meet regulatory requirements.
A new stormwater District -wide Tax of $0.10 per $100 assessed valuation will provide the
District with the necessary funding to meet the operating requirements of the expanded service
levels. See Ex. MSD 1, § 5.4.
The District has since rewritten Section 5.4 of the Rate Change Proposal, Proposed
Funding Methods, p. 5-9, Ex. MSD 1, to clarify the administrative approach associated with
setting the Operations, Maintenance and Capital Improvements tax rate to zero dollars:
Meeting the proposed increased level of SW service beginning in FY17 requires
that the District develop a more equitable and consolidated SW charge. The
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District is proposing to seek voter approval to assess a District -wide SW tax to
replace the current SW O&M Tax and flat rate charges. The proposed District -
wide tax rate is $0.10 per $100 of assessed property value. The subdistrict
specific OMCI taxes will be set to $0.00 as part of this Rate Proposal as well;
however, the regulatory tax will remain in place. Charging this new SW District -
wide Tax will provide the District will the necessary funding to meet the
operating requirements of the expanded service levels. Additionally, this
proposed structure will eliminate the disjointed revenue sources and provide a
funding source that allows for a cohesive plan across the entire District.
Ex. MSD 114A, Response to Question 6 of the Fifth Discovery Request of the Rate Commission.
In the 2007 Rate Change Proposal, the District recommended a new stormwater fee be
implemented to provide sufficient funding to support the projected basic stormwater program
revenue requirements based upon charging individual customers an established rate times the
quantity of impervious area on their property. Impervious area was initially determined from
1996 aerial photography and updated from 2000 aerial photography. See Ex. MSD 5, Section
4.5, p. 4-9. In addition to the recommendation for a stormwater impervious area charge, there
were also changes proposed for the Operation and Maintenance and Capital Improvement
revenues. Operation and Maintenance and Capital Improvement projects were planned to
continue to be financed by taxes. The District also proposed a reconfiguration of the existing
23 Operation and Maintenance and Capital Improvement 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 District currently believes that an ad valorem property tax used to operate and
maintain the public stormwater system within its municipal boundaries is fair and equitable
because (i) the use of property taxes to fund services and the maintenance of infrastructure is
allowed under the Missouri Constitution and is used by District and other municipal entities in
the area to pay for these kinds of services; (ii) the use of an impervious area method would cost
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the ratepayers approximately $950 thousand/per year more to operate and maintain than an ad
valorem taxing method; and (iii) the use of an impervious area method may result in fewer
people participating in funding these services compared to an ad valorem taxing method based
on recent Missouri Supreme Court decisions and state legislation. Ex. MSD 100A, Response to
Question 7 of First Discovery Request of Home Builders Association.
The Raftelis publication "Expanding Financing and Pricing Concepts into Stormwater" of
Water & Wastewater Finance and Pricing, Fourth Edition, Copyright 2015, states that the most
appropriate stormwater rate structure links demand for service to the rate structure. Total runoff
volume, a cost causation factor, is influenced by size of the parcel, vegetation, slope, soils, and
the amount of roof top and pavement (impervious area where water cannot readily percolate into
the earth). These influence the estimable runoff volume and thus the demand from the property.
The paramount variable is the amount of the impervious area. Impervious area rate structures
have been used very frequently to date by jurisdictions because an impervious area basis reflects
cost drivers, it is very fair, and is relatively easy to understand. Ex. MSD 127, Testimony of
William Stannard, Third Technical Conference, pp. 105-110. The District's Consultant testified
that a critical step in the rate development process is to use the cost of service process to allocate
the total revenue requirements and calculate fair and equitable rates. Ex. MSD 127, Testimony
of William Stannard, Third Technical Conference, p. 114,11. 7-10.
The District believes that the use of a voted on impervious fee would result in up to a
40% increase in cost to MSD's customers for the same level of service and fewer customers
participating in the funding of the program due to current State Statute and possible future State
legislation when compared to the proposed "ten cent" ad valorem tax, for the same level of
services. MSD Ex. 131.
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Intervenor MIEC believes that imposing stormwater charges in a way that better reflects
the District's actual cost of providing stormwater service is a more equitable and balanced
method for charging for these infrastructure development and maintenance costs. Ex. MIEC
102, Rebuttal Testimony of Michael P. Gorman, p. 24,11. 17-19. The District's proposal to
impose a uniform tax based on property value across its District has no cost -causation basis, and
therefore does not equitably spread its proposed stormwater costs across its customers within its
service territory. Id., 11. 20-22.
The Rate Consultant believes that the proposed Stormwater Tax will charge customers
based on the value of the property, which has no relation to the property's burden on the
stormwater system. Under the proposed Stormwater Rate Change Proposal, two single family
properties with the same square footage of impervious area and lot size, in different parts of the
County, will pay a different amount for stormwater service, due only to a difference in property
value and not due to the level of service received. Ex. RC 101, Rebuttal Testimony of Pamela R.
Lemoine at p. 20,11.4-10.
Intervenor HBA does not believe the concept of an ad valorem property tax can be
implemented in a manner that is fair and equitable when there is seemingly no nexus between
property value and the stormwater services provided by the District. See Ex. HBA 124C.
Further, the proposed Stormwater Rate Change Proposal provides no credit for those ratepayers
who install stormwater remediation and quality control devices, all of which may reduce
Operations and Maintenance costs for the District, and certainly further the objectives of the
EPA consent decree by reducing the quantity, and improving the quality of stormwater runoff
within the District. Id.
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Intervenor HBA notes that the inequity of the ad valorem tax is further illustrated by the
disparate impact that the proposed tax will have upon residential District ratepayers. The current
proposal raises taxes in the City of St. Louis (see Ex. MSD 1, page 5-4, shown in yellow; see
also Customer Rate Impacts "City and Near County," p. 6-7), whose population is least able to
sustain a tax increase, while reducing taxes in that part of St. Louis County lying east of I-270,
an area including Ladue, Huntleigh, Country Life Acres, Des Peres, Kirkwood, Webster Groves
and other affluent communities that are most able to pay a tax increase (see Ex. MSD 1, page 5-
4, shown in green; see also Customer Rate Impacts "OMCI Districts," p. 6-7).
Intervenor HBA believes that without considering impervious area or a credit -based
program related to stormwater quantity and quality, the District's Stormwater Rate Change
Proposal is not equitable. Charging customers solely on the basis of their property value has no
relation to the property's burden on the District's stormwater system. Ex. HBA 102, Rebuttal
Testimony of Michael Boerding at 11. 96-102. Compare Ex. MSD 127, Testimony of Richard
Unverferth, Third Technical Conference, pp. 63-65.
Intervenor HBA provided testimony that by encouraging developers and individual
property owners to exceed current regulations and take an active role in stormwater management,
the District is likely to see several benefits, including: (i) reductions in runoff volume reducing
the amount of runoff requiring treatment; (ii) increases in the quality of runoff allowing the
District to more easily meet water quality standard requirements; (iii) reducing the need for
drainage infrastructure thereby reducing costs; and (iv) potentially increasing tax revenues by
encouraging rain gardens and similar Best Management Practices that often appeal to many
home owners and can increase property values. See Ex. HBA 124, Affidavit of Emily Schwartze
Post, dated June 15, 2015.
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Operation and Maintenance and Capital Improvement Subdistricts. Ordinance No.
13856, adopted June 12, 2014, approved the current tax rates for general administration for
regulatory compliance, operation and maintenance of existing public stormwater facilities, and
for the Operation and Maintenance and Capital Improvement subdistricts.
Stormwater improvement projects identified within the Rate Change Proposal and within
the Red, Yellow, or Green Zones (described in Figure 5-1 of Ex. MSD 1) were prioritized by the
District by planning the projects with the highest benefit cost ratio project within each Zone
independently based on funding availability. Generally the projects identified in Green and
Yellow zones have equal benefit cost ratios. Generally the projects within the Red Zone have a
higher cost benefit ratio than those being done in the Green and Yellow zones. There are no
projects to be completed in the Red zone with a lower benefit cost ratio than the Green and
Yellow zones. Ex. MSD 114A, Response to Questions 1 and 2 of the Fifth Discovery Response
of the Rate Commission; Ex. MSD 127, Testimony of Richard Unverferth, Third Technical
Conference, pp. 74-84.
District legal counsel summarized at the Prehearing Conference:
... the stormwater tax being proposed is for O&M of the infrastructure, the
previous impervious fee was funding for ALL stormwater services, which
included O&M, capital work and regulatory requirements. As stated previously,
the regulatory requirements or water quality issues related to the stormwater
program are currently fully funded by an existing "two cent" ad valorem property
tax, which at this time we are not proposing to change. Capital work, in certain
areas of the District, will be funded with remaining OMCI funds. If in the future
there are additional regulatory requirements placed on the District or our
customers decide they want to fund additional capital work district wide, then we
will come back to the Rate Commission with a proposal to meet those needs. But
for now, we are proposing to fund O&M of the infrastructure district wide with an
ad valorem tax.
Ex. MSD 131.
22
Intervenor MIEC believes that a stormwater capital charge should not be uniform across
the District and that to the extent the District is modernizing stormwater services in some areas
and developing infrastructure for others for the first time in other areas, these other areas should
pay for the stormwater service infrastructure. Since areas of the service territory which have
more modern stormwater systems have already incurred the cost of those systems, they should
not be required to subsidize the District's cost of providing the same service to other areas. This
cross -subsidization within the service territory is simply imbalanced and should not be allowed.
Ex. MIEC 102, Rebuttal Testimony of Michael Gorman, p. 24,11. 8-16.
Further, Intervenor MIEC believes that the stormwater capital charge should not be
uniform across all of the District's service area to the extent the District is modernizing storm
water service in some areas and developing infrastructure for other areas for the first time. These
other areas should pay for storm water service infrastructure. Other areas of service territory,
which had more modern stormwater system have already incurred the cost of those systems and
should not be required to subsidize the District cost of providing the same service to other
customers. Ex. MSD 171, Testimony of Michael P. Gorman, Second Technical Conference, p.
48, 11. 12-24. The uniform assessment proposed to be levied would result in ratepayers who have
already paid for their capital improvement subsidizing capital improvements in an area where the
ratepayers have not done so. Id. p. 50,11. 12-17.
Intervenor HBA and the Rate Consultant have not filed testimony on this issue.
EFFECT OF ZWEIG
In 2007, the District recommended and subsequently implemented a fee based on
impervious area. In Zweig v. Metropolitan St. Louis Sewer District, 412 S.W.3d 223 (Mo. bane
2013), the Missouri Supreme Court held that the District violated Article X, Section 22(a) of the
Missouri Constitution (commonly known as the "Hancock Amendment") by implementing the
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new stormwater charge based on impervious area without voter approval. Although the current
2015 Rate Proposal includes a stormwater ad valorem tax levy that the District will take to the
voters, questions have been raised as to whether an ad valorem tax is fair and reasonable under
the Charter Plan, or alternatively, whether an impervious charge would better meet this standard.
An impervious charge cannot be considered without discussing the opinion of the Missouri
Supreme Court in Zweig.
The Zweig case considers only whether the District's previous impervious area charge
violated the Hancock Amendment because it was imposed without voter approval. Zweig,
however, does indicate that there is no in-between from a "user fee" and a "tax" — a user fee is
not required to be approved under Hancock because it is not a tax; a charge is required to be
approved under Hancock if it is a tax. To the Missouri Supreme Court, the stormwater charge is
in fact a tax even though based on impervious area.
The Zweig decision also makes a reference to the method for calculating the stormwater
charge which raises a concern as to whether such a calculation is permissible under Missouri
law. Specifically, the court explains that the District's ability to fund its activities is limited and
quotes Article VI, Section 30(b) of the Missouri Constitution, as follows: "The plan shall provide
for the assessment and taxation of real estate ... giving due regard to other provisions of this
constitution." Zweig, 412 S.W.3d at 229. The court states in a footnote: "Ratepayers do not
challenge MSD's authority to levy the stormwater user charge under the Plan or section 30(b) of
the constitution. The only claim in this case — and the only issue decided here — is whether
section 22(a) prohibits MSD from levying this stormwater user charge without prior voter
approval." Id. at n.2.
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This footnote raises some concerns that if faced with a challenge, the court could in fact
hold that the District lacks the authority to levy an impervious area stormwater charge. This is
based on various provisions of the Missouri Constitution that limit the calculation of property
taxes.
It is not clear whether the Missouri Supreme Court in the Zweig footnote was actually
alluding to the possibility that the stormwater charge is unauthorized under the Missouri
Constitution. However, given the court's characterization of the stormwater charge as a property
tax, there is a concern that the stormwater charge is based on the amount of impervious area, not
on value of the property as required by Article X, Section 4(b) of the Missouri Constitution. As
stated recently by the Missouri Supreme Court, Article X, Section 4(b) of the Missouri
Constitution, along with Mo. Rev. Stat. § 137.115, "require that real property in Missouri be
taxed according to its true value in money." Snider v. Casino Aztar/Aztar Missouri Gaming
Corp., 156 S.W.3d 341, 348 (Mo. bane 2005). By eliminating the value factor from the property
-tax, there is a risk that, if faced with a challenge, the court could hold any such District charge
constitutionally invalid.
The District has not provided detailed testimony or memoranda concerning the legal
issues related to Zweig, however, District legal counsel comments at the Prehearing Conference:
Ms. Bowser: You're saying that the Court case leads you to believe that
the impervious fee would be challenged again, am I correct?
Ms. Myers: What we're saying is that in our opinion the Supreme Court
did not give real clear direction. What they did give us direction on was the
impervious fee that we were trying to implement at the time it needed to be voted
on. We don't feel that they went as far to say that that actual fee was a tax.
Ms. Bowser: But the impression you feel at this time an ad valorem tax
will not be challenged or less likely to be challenged?
Ms. Myers: Correct.
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Ms. Bowser: Is there a specific part of the constitution that you are citing
to make that determination?
Ms. Myers: Yes, in one of my testimonies or on maybe a discovery
request, I went through what we feel gives you authority to tax it has to do with
our charter. It has to do with the constitution, and has to do with tax laws. And I
believe one of the rate commission's discovery request. I don't remember which
one.
Ex. MSD 134.
Intervenors MIEC and HBA and the Rate Consultant support the use of an impervious
area fee as fair and reasonable, without regard to any legal analysis as to risks under Zweig.
Respectfully submitted,
LASHLY 8 BAER, P.C.
By
Lisa O. Stump
John Fox Arnold
714 Locust Street
St. Louis, Missouri 63101
Tel: 314-621-2939
Fax: 314-621-6844
Email: lostump@lashlybaer.com
BLACK & VEATCH
Pamela R. Lemoine
16305 Swingley Ridge Road, Suite 230
Chesterfield, MO 63017
Tel: 636-536-5813
Fax: 913-458-3579
Email: LemoinePR@bv.com
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CERTIFICATE OF SERVICE
The undersigned certifies that a copy of the foregoing was sent by electronic transmission
to Janice Fenton, Office Associate Senior, Metropolitan St. Louis Sewer District; Susan Myers,
Counsel for the Metropolitan St. Louis Sewer District; Brad Goss, Counsel for Intervenor Home
Builders Association of St. Louis & Eastern Missouri; and Brandon Neuschafer and Diana
Vuylsteke, Counsel for Intervenor Missouri Industrial Energy Consumers on this 8th day of July,
2015.
Ms. Janice Fenton
Office Associate Senior
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
JFENTON@stlmsd.com
Ms. Susan Myers
General Counsel
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
smyers@stlmsd.com
Mr. Brad Goss
Smith Amundsen, LLC
120 South Central Avenue, Suite 700
St. Louis, MO 63105-1794
bgoss@salawus.com
Mr. Brandon W. Neuschafer
Ms. Diana M. Vuylsteke
Bryan Cave LLP
211 N. Broadway, Suite 3600
St. Louis, MO 63102
bwneuschafer@bryancave.com
dmvuylsteke@bryancave.com
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